WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 01- 21- 09:
By: John T. Moir
Position overview . . .
Our previous newsletter, dated December 15th, stated that US money-center banks and financial institutions, using the spirit and intent of the accounting reform act, Sarbanes-Oxley, became gigantic hedge funds, leveraged 25-to-30 to 1 on net tangible assets. The deleveraging process could continue for awhile and force the stock market to remain under pressure; however, in the near-term, the stock market is due for a period of consolidation, before continuing the decline. We anticipated the DOW to have a trading range between 8,100 and 10,250, as the major stock indices remove the oversold condition that exists in the marketplace. The actual result did see a period of consolidation, but with a narrower DOW trading range than expected, between 8,118 and 9,026.
We stated that the Federal Reserve’s balance sheet has expanded by $1.3 trillion in the past year. The US Treasury has backed banks and money-market funds, has taken in the government-sponsored mortgage companies and is toying with bailing out the big auto makers. Eventually, this monetary expansion will push prices higher; however, in the near-term, the US Treasury suggests prices will decline before they expand. The break-even inflation rate between inflation-protected US Treasury Notes and fix-rate US Treasury notes is nearly minus 0.5% for the next five years. We further stated that investors should brace for transitory deflation in the continued near future that will give way to inflation for the long-term. The near-term result could see the US treasuries be price supported, with the US 10-year Note having a peak yield for the month of 3.25%. The actual result was as forecasted, with the US treasuries being price-supported, causing yields to inversely decline, producing a 10-year Note yield-range for the month between 2.55% and 3.26% — a very accurate forecast.
We anticipated that the US dollar, at least for the near-term, could decline in value. We projected a euro fx equivalent trading range for the month between $1.26 and $1.43, as the Federal Reserve, through their Federal Open Market Committee Meeting (FOMC) was likely to cut the prevailing fed funds rate by 50 basis points (0.50%) to a new level of 0.50%. This could cause the US dollar to decline in value, as the US would now offer the one of the lowest loan rates in the world. We could see the US dollar carry-trade in the future, instead of the yen carry-trade, which has been used for the past decade. The actual result saw the euro fx equivalent produce a trading range between $1.2605 and $1.4590, and the FOMC cut the prevailing fed funds rate by 75 basis points (0.75%) to new level of 0.25% — a very accurate forecast.
Looking forward . . .
Most people, including consumers, investors, CEO’s and even economists, are way too optimistic. Even many of those who have come to recognize how the credit crunch has hurt the economy fail to grasp that the damage to the economy will rapidly accelerate the financial crisis.
Corporate profits will suffer some powerful strains. The inevitable rise in personal savings, will create negative economic pressures, and cause a reduction of hundreds of billions in corporate profits this year and more in the years to come. Non-residential investment will shrink by at least $350 billion over the next two years, while residential investment, weak as it has been, is slated to drop another $50 to $75 billion, with no real recovery in housing likely in the foreseeable future.
We expect a swing from the $57 billion in third-quarter non-farm inventories to a severe negative number that will knock another $200 billion off corporate profits. The flow of dividends, which is a principal source of profits, are drying up by at least $100 billion.
We would estimate that even if another $850 billion of stimulus is passed by Congress and spent quickly — $200 billion, perhaps this year, $350 billion in 2010 and $300 billion in 2011 — the recession will likely run for several more years and require another big infusion next year before the economy can begin to show signs of improvement.
Corporate profits and stock prices are inextricably bound together will invariably support our long-term forecast of a prolonged bear market for the US and global stock markets.
Non-farm employment fell by 524,000 jobs in December, while the already dismal numbers for October and November were revised down by an additional 154,000. The speed and breadth of the deterioration in the US economy since September are staggering, with credit markets still in a dysfunctional state and any fiscal-stimulus package months away from being agreed upon, let alone implemented.
The unemployment rate bolted upward to 7.2%, from 6.8%, as the household survey of last month’s job loss topped 800,000. The U-6, which gives a very wide view of the ranks of the involuntarily idled, climbed to a new high of 13.5%, up from 12.6% in November and 8.7% in December 2007.
The Bureau of Labor Statistics (BLS) are still valiantly creating jobs, even while real live employers are busily handing out pink slips. Thus, through the magic of the infamous birth/death model that reports to capture employment trends at the new and deceased companies that its regular surveys miss, no fewer than 70,000 jobs were created out of thin air in December. These revisions and mythical contributions suggest the real number of lost payroll slots in December was closer to 750,000 than the headline figure of 524,000.
More than 25% of total labor compensation now comes from bonuses, commissions, and stock options, compared with 5% during the last serious recession in the early 1980’s. The hit to this more flexible work-based income will be a mere $180 billion this year, enough to shave 2 1/4 percentage points off Gross Domestic Product (GDP).
The outlook for the US economy is growing increasingly bleak. Labor-market conditions will continue deteriorating through 2009, even with passage of a large stimulus, with jobless rate likely rising into early 2010.
Bank lending historically and appropriately contracts in a recession. The odd and untold truth is that bank loans have actually been expanding in this one. This is not necessarily good news, while perhaps surprising. The raw fuel for new bank lending must come from increased savings, not government-injected capital, and the largest source of consumer-credit funding is the secondary market.
A vibrant and confident secondary market will be a more critical support than the banking system, whenever the economy is poised for recovery. Credit supports growth by financing demand, but history suggests demand starts on it own. Bank loans outstanding either declined or stopped growing, during four of the last five recessions. The current recession has seen bank loans expanding by 8% — in sharp contrast to the last real-estate-induced recession, in 1990.
Long-term conclusions and current month expectations . . .
The new US President arrives at the White House with an ambitious agenda, but with the global economy undergoing a brutal financial deleveraging, he and his international counterparts are in for a world of pain. The US domestic policy, President Obama’s first budget deficit, could easily exceed $1.5 trillion. Various bailout packages and fiscal-stimulus plans will push up spending, while the economic contraction will lead to lower tax receipts. State governments are lining up for federal aid and private pension funds will be next in line. The Federal Deposit Insurance Corporation (FDIC), dealing with the mortgage mess, will no doubt need a healthy injection of capital from Uncle Sam.
Meanwhile, developing economies allowed themselves to become dangerously export-dependent, while tying their currencies to the US dollar and building mountains of excess savings. That growth model is crumbling fast as global demand is plummeting, and if too many of these emerging markets go down, the International Monetary Fund (IMF) lacks the necessary resources to mount rescue operations. For perspective: Austrian banks’ emerging-market financial exposure exceeds $290 billion; Austria’s Gross Domestic Product (GDP) is only $370 billion. These issues, along with others, could support the US dollar, at least for the near-term, between euro fx equivalent of $1.25 and $1.37.
The silver lining is that the world does not lack capital, which is simply sitting on the sidelines, including $6 trillion in global money-market funds. Some of these money-market funds are invested within US treasuries, which have been price-supported recently, but that could change, as funds are reallocated to different investment vehicles. This could cause the US 10-year Note to have a base-yield for the month of 2.58%, since, as US treasury prices decline, yields inversely rise. The faster President Obama and his counterparts can fashion credible financial reforms, while preserving capital and trade flows, the sooner that capital will re-engage.
Most Americans see the corporate income tax as a way that corporations bear the cost of government services, but corporations treat the tax as a cost of business, which is passed on to consumers in the form of higher prices — to workers in the form of lower wages, and to shareholders in the form of lower dividends. Hence, corporations do not pay taxes, people do.
We propose the elimination of the corporate income tax, and the only problem with this suggestion is the revenue loss, since the federal revenue, from 2000 to present, has averaged $229 billion a year. The only way of making up these revenues would be to increase personal income taxes, and the Bush tax cuts are due to expire in 2010, so that tax increase would replace most of the lost revenue from the corporate income tax. It is estimated that only the top 5% of taxpayers would face higher taxes, and the remaining 95% of taxpayers would reap the benefits of eliminating the corporate income tax with no increase in their tax burden.
There would be $229 billion of normal federal revenue redistributed to consumers in the form of lower prices, to workers in the form of higher wages, to workers through new jobs resulting from more profits and investment, and to shareholders in the form of capital gains and higher dividends.
The US would have the lowest corporate tax in the world, which would attract both US and foreign firms to invest in the United States. The economic distortion of the corporate income tax would be removed, as would the corrupting influence of the corporate income tax on politics.
In Summary, eliminating the corporate income tax would constitute real change for America, for the economy and for the world. It would provide tax reform, not tax redistribution; reduce corruption, not encourage it; provide long-term solutions, not short-term fixes; attract new capital and investment into the US; and increase jobs, raise wages and lower prices.
Americans are tired of Wall Street and Washington working together at the expense of Main Street. President Obama should seize the opportunity to provide America with much-needed corporate and economic reform.
The US stock market remains within an oversold condition and is continuing with its period of consolidation, before resuming the decline within the long-term bear market. We are projected a DOW trading range for the month between 7,900 and 9,600, as the various stimulus packages being proposed and implemented could assist in removing some of the bearish tone and the oversold environment that currently exist within the marketplace.
FOOTNOTE: The release of this month’s newsletter was postponed, to the financial benefit of investors utilizing our Private Account Wealth Management Services. Our unique and flexible management services are further explained below — for those investors interested in seeing their wealth continue to grow, in either a rising or declining stock, bond or real estate market environment.
PRIVATE ACCOUNT WEALTH MANAGEMENT SERVICES:
We, at Wavetech Enterprises, LLC, offer our Private Account Wealth Management Services, which is a conservative, flexible, and actively managed investment strategy. Investor’s ordinary and/or tax-deferred funds remain securely in their name at major financial institutions and/or brokerage firms, while we manage them Online.
Our wealth management services outperforms others, since we use a unique and proprietary culmination of the following: fundamental analysis of relative valuations, technical analysis of the changing market conditions, evaluations of various economic business cycles, diagnosing sector market psychology, and strategic investment selections with appropriate 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.
We operate within the “Exemption from Registration” provision provided by the Code of Federal Regulations (CFR) Title 15, Chapter 2D, Subchapter 2D, Subchapter II, Section 80b-3. This provision allows investment firms to grow their business prior to registration, and the large expenses associated with such a process. Investors’ funds remain securely in their name at major brokerage firms and/or banks, while, we, at Wavetech Enterprises, LLC., manage the funds “Online.”
We are pleased to provide a letter written by Attorney, Steven Stucker, regarding the “Exemption from Registration” provision, who has also been aware of our wealth management services, as well as our operating procedures, for more than nine years. Investors are more than welcome to telephone him directly at 775-884-1979 to discuss this provided letter as well as our unique Private Account Wealth Management Services in further detail.
INVESTORS, take action NOW to maintain, keep, protect and grow what wealth you have with our unique Private Account Wealth Management services. What more can we do and/or offer to help you preserve as well as grow your wealth toward achieving both your short and long-term investment objectives? Call us today at 775-841-9400.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Levy Forecasts by brothers Jay and David Levy, Richard Moody with Mission Residential, Robert Albertson and Catherine Xiao with Sandler O,Neill, David Smick with Foreign Policy, Bryan Taylor, Chief Economist with Global Financial Data, David Rosenberg with Merrill Lynch.
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.