WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 01-13-07:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our previous newsletter, dated December 13th, anticipated that the DOW would continue its topping-in-price process, and forecasted a trading range for the month between 11,700 and 12,370. The actual result saw the DOW continue its ascension during the month, with a trading range between 12,090 and 12,529. The formidable corporate insider sellers collectively sold 55 shares for every one they bought, over $20 billion worth of stock, but the DOW and the other major stock indices still continued their slow rally in price, mainly due to exchange-traded funds (ETF’s).
New issuance of ETF shares weighed in at a massive $54 billion, for this past year, where they must first buy the underlying assets, primarily stocks, in order to issue shares. That demand, all by itself, was enough to keep the stock market elevated for this past year, especially the last six months.
The US dollar was forecasted to be supported, at least for the near-term, with a larger-than-normal trading range for the month, between euro fx equivalent of $1.28 and $1.34. The actual trading range proved to be narrower than anticipated, between euro fx equivalent of $1.3152 and $1.3399, due to reduced Holiday trading volume. The US dollar continues to be technically supported, due to its demand as the global currency of choice and increased concerns over higher interest rates.
The US treasury 10-year note was forecasted to have a peak yield of 4.55% during the month, as the US treasuries remain under pricing pressures, resulting in higher yields. The actual US treasury 10-year note yield-range was between 4.42% and 4.69%. Increased wage pressures and a tight employment situation has caused the prices of bonds to decline, and subsequently yields to rise.
Looking forward . . .
The recent announcement to increase US troops by 22,000 to Iraq could cast a long shadow over the US financial markets, and trigger the following results:
1.) An unexpected jump in oil prices. The consensus is that a barrel of oil could cost, on average, $60 to $65 this year; however, this “troop surge” could push oil prices closer to $70 per barrel in the near term, knocking the wind out of the financial markets and global economy.
2.) An increase in the cost of waging war. It could set an annual record for war-related expenditures and push total war expenses for fiscal 2007 to nearly $170 billion, 45% more than Congress approved in 2006, if a recent request by the Pentagon for $100 billion is authorized.
3.) An exodus out of US dollars. It is entirely possible that this “troop surge” could trigger a backlash against the US dollar. Petroleum related states like the United Arab Emirates have recently announced its intention to diversify out of the US dollar — possibly leading to its decline.
4.) An even deeper divide between the Republicans and Democrats. Bipartisan differences over Iraq could affect other issues like trade relations with China, energy polices and health-care reform.
5.) A slip in US consumer confidence. Americans desire less, not more involvement in Iraq. The war in Iraq could prove to be an important swing variable, when it comes to US consumer sentiment.
The troop increase could become one of the fundamental catalyst to propel the major stock indices lower.
The Federal Open Market Committee (FOMC), on December 12th, held its target overnight interest rates steady at 5.25%, only changing its statement slightly — to reflect “substantial” cooling in housing and acknowledge that recent economic indicators have been “mixed.”
The bond market continues to price in about 75 basis points (0.75%) of rate cuts next year, according to the trading behavior of the US treasuries and the shape of the yield curve.
Has the bond market ever been incorrect on the direction of short-term rates before? The answer is yes, and it occurred during this cycle, but in the opposite direction. The fed-funds rate had been cut to 1.75% from 6.5% in 2001. By March 2002, however, the two-year US treasury note’s yield rose 200 basis points (2.00%) above the 1.75% fed-funds target, which meant the US treasury market was pricing in between 150 to 175 basis points (1.50% to 1.75%) of rate hikes during the next two years. Instead, the Fed dropped rates by 50 basis points (0.50%) in November 2002, as the recovery seemed to stall, and, then, dropped rates another 25 basis points (0.25%) in June 2003, to lean against what it believed to be a low-probability/high-risk deflationary event. The bond market proved to be incorrect.
Long-term conclusions and current month expectations . . .
We believe the bond market in 2007 could prove to be an inverse reflection of 2002: Growth will not stall as the bond market believes, inflation likely will not be as benign as bond investors have priced-in, and excess liquidity will almost surely have to be addressed with higher short-term rates at some point in the future. We would expect the US 10-year note to have a peak yield for the month at 4.60%, as increased wage pressures and a tight employment situation continue to support higher interest rates.
A nation’s rising trade deficit ultimately causes its currency to fall, as the money supplied to the rest of the world exceeds demand. As imports become more expensive, due to the falling currency, fewer are bought; at the same time, the nation’s exports increase as its goods are now cheaper to the outside world.
A falling currency brings the nation’s trade deficit back toward a balance. One might guess that the falling US dollar is curing the trade deficit, which is not the case. The decline in oil prices, between August and October of 2006 of $10.65, caused the US trade deficit to decline by $9.6 billion of which $8.2 billion was directly related to lower oil prices. The recent sharp decline in oil prices will further reduce the US trade deficit as well, at least for the near-term.
The US trade deficit is more likely to increase and resume the US dollar decline, as oil prices could remain elevated in the coming months. However, for the near-term, the US dollar could technically extend its current advance, with a euro fx equivalent trading range for the month, between $1.25 and $1.33.
There is another signs that the speculative level in the marketplace is rising, with the Big Board margin debt now approaching its 2000 bubble peak. These complacent investors are also participating in naked put selling options, with the hopes that the stock market never goes down. These unlimited risk options were especially popular in 1987, until the crash of that October, which resulted in the sellers of these options losing more than their original investment. They were also popular during the 1990’s, as tech companies sometimes made more by selling puts on their own stock than they did producing new nifty gadgets.
These definitive signs, which have occurred at previous stock market peaks, give us further evidence that a top-in-price for the major stock indices is very close. Our technical indicators are also confirming the fundamental catalyst that we should resume the stock marker decline in the not-too-distant future. We would anticipate the DOW to have a trading range for the month, between 12,050 and 12,580, as the US economy slows with elevated concerns of inflation — possibly resulting in stagflation, at least for the near-term.
SUGGESTED INVESTMENT ALLOCATIONS:
1. A 75% to 85% allocation of their taxable ordinary funds and/or tax-deferred funds into a conservative as well as flexible investment strategy using various no-load index mutual funds and exchange traded funds (ETF’s) offered through our Wavetech Enterprises’ Private Account Wealth Management Services. The minimum investment criteria are determined after reviewing the investor’s current assets and fund allocations. These services are ideal for individuals, trusts, foundations and privately held corporations that have large stock, bond and/or real estate holdings and are seeking an active management service to generate a long-term average rate of return on investment between 15% to 20% per year (after fees) through either a rising or declining stock, bond or real estate market.
2. A 15% to 25% allocation toward cash, Treasury bills, CDs or money market funds with short maturities which will allow investors to rollover these instruments and obtain a higher level of return as interest rates move higher.
If there are any questions regarding the information discussed within this newsletter, the investment allocations mentioned above or our unique management service, please call the number provided below or e-mail us and we would be happy to provide further clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Investment Strategies by Bank of America, CrossCurrents commentary by Alan Newman, MKM Partners, Gold Stock Analyst, Inc..
Note: These newsletters have no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. These newsletters are issued for informational purposes and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. These newsletters are based on information obtained from sources believed to be reliable, but are not guaranteed to be accurate, nor are they a complete statement or summary of the securities, markets or developments referred to in the various newsletters. Recipients should not regard these newsletters as a substitute for the exercise of their own judgment. Any options or opinions expressed in these newsletters are subject to change without any notice and the Wavetech Enterprises, LLC newsletters are not under any obligation to update or keep current the information contained within. Past performance is not necessarily indicative of future results. Wavetech Enterprises, LLC and its newsletters accept no liability for any loss or damage of any kind arising out of the use of any or all parts of these newsletters.