WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 02-15-11:
By: John T. Moir
Position overview . . .
Our previous newsletter, dated October 31st 2010, stated that the stock market could continue this counter trend rally, with a projected DOW trading range for the month 10,750 and 11,200. The actual result saw the DOW continue its melt-up advance, with a trading range for the month between 10,711 and 11,247.
The US treasuries were projected to come under price pressure, inversely moving yields higher, with a forecasted base-yield for the US 10-year Note at 2.50% or higher during the month. The actual result produced a wider range than anticipated, with the US 10-year Note having a yield range for the month between 2.33% and 2.72%.
We stated that the US dollar could remain in short supply, until the Federal Reserve fully adopts their version of Quantitative Easing (QE), causing it to appreciate through such a dismal financial situation, with a euro fx equivalent trading range for the month between $1.36 and $1.40. Reason being, the US dollar denominated assets remain the largest liquid investment in the world, and also because a large eurobond market simply does not exist. One must buy individual national debt, to invest in euro, which limits the possibilities. This forecast proved to be accurate, as the US dollar was supported, with a euro fx equivalent trading range for the month between $1.3662 and $1.4043.
Looking forward . . .
The rise in the cost of fuel and food, the stagnation of income and the negative wealth effect of a continued decline in home values strongly suggest discretionary spending, which so many pundits are counting on to spark a quickening of the slow recovery, is more than likely to disappoint, due to the continued deleveraging of household debt.
Moreover, Governments in the euro zone face the rather daunting necessity this year of borrowing close to a trillion euros, including refinancing sovereign obligation and issuing new debt to cover deficits. The European Central Bank itself has been weighing a request for more capital to cover possible weakness in its holdings of euro sovereign debt, and is already leveraged by more than 300 times the size of its underlying capital of slightly less than 6 billion euros. That makes the US Federal Reserve, which is leveraged something like eight times, look like the epitome of prudence.
Investors have been uneasily eyeing the rise of inflation in China, and are anticipating that Beijing would hike interest rates to contain the level of inflation, but it has not until recently. Reason being, profits margins for many businesses are razor thin, and an abrupt rate boost would mean appreciably higher debt-service costs, really cutting into the existing profits.
The big challenge confronting China, despite all of the global focus on inflation, can be found in the non-performing loan portfolios of its banks and kindred financial institutions. That enormous pile of deadbeat loans is the legacy of late 2008-2009 period, when exports dried up and the spooked rulers of the command economy ordered the banks to seriously step up their lending. The banks dutifully complied with an awesome $1 trillion in fresh lending.
Much of that huge mountain of loans has fallen into the non-performing category, which translates from the polite banking parlance into delinquency, big time. Beijing, to avoid a financial meltdown, will continue to raise capital-adequacy requirements substantially over the next few months, conceivably in incremental steps to cushion the pain. We would expect a large-scale shrinkage in lending, since Chinese banks will have trouble raising capital.
Chinese banks are not suffering from insufficient liquidity, but rather the danger to the country’s banking system is insolvency. Chinese banks rank highest in the current lineup of problem banks, followed by European banks next, then followed by US banks and Japanese banks probably holding down fourth place.
The Bureau of Labor Statistics recently released the January 2011 employment report, showing an unusually large drop in the unemployment rate, from 9.4% to 9.0%, and an increase in non-farm payrolls of only 36,000, compared with the consensus of between 140,000 to 150,000. The average workweek overall was off 0.1 hours, while the manufacturing workweek rose 0.1 hours.
Our preferred indicator of unemployment, U-6, which includes the underemployed as well, came in at 16.1%, which was the lowest in a couple years, but when removing the factored-in seasonal adjustment, U-6 weighed in at 17.3%.
The number of people who are without a job, but would like one, climbed by 431,000 in January, to a formidable 6.65 million. The unemployment rate would swell from 9% to 12.8%, if these folks were counted as part of the labor pool.
The actual labor force has contracted by a massive 504,000, and the participation rate continues to slide fully 20 months into the economic expansion — a surprising and alarming development. More specifically, the participation rate shrank from 64.7% in September of last year to 64.2% in January 2011.
This means that the participation rate is at a new low, since March 1984. Therefore, there is nothing that can really characterize the labor market as being anything remotely close to normal.
The household survey showed 117,000 new job additions, down from December’s number of 297,000, but on a positive note they were full-time jobs.
The manufacturing posted a hardy 49,000 new jobs in January and they were pretty well spread across the sector, but the weather took its toll on construction and transportation.
In summary, it seems strange that jobs are hard to come by, if we are supposedly in the advanced stages of a economic recovery. This could mean that it could take many years for true employment to reach pre-recessionary levels.
The municipal bond market has had many sellers and few buyers, causing a weak market to weaken further. We call this a negative feedback loop, and it recurs throughout the history of the securities market. January allegedly set a record for the largest outflows from municipal bond funds in a single week — $4 billion. It eclipsed the next-highest weekly amount of $3.1 billion.
What is important to note is that municipal bonds are largely owned by retail investors — as opposed to institutional investors, corporations, government-sponsored entities, pension funds, etc. Retail investors, with this assumption, are the primary owners of municipal funds, including mutual funds, closed-end and exchange-traded funds as well as tax-free money markets, which account for more than 70% of the total muni markets; insurance companies, 16%, commercial banks and savings institutions, another 8%.
Long-term conclusions and current month expectations . . .
There are two possible solutions for the euro-zone debt problem, with costs associated with either of them. They can simply devalue the euro to a level that allows the smaller countries to implement their austerity measures and deleverage in a less painful way. Or, the European Central Bank (ECB) can purchase the bonds of deeply indebted sovereigns in a more meaningful way.
Both scenarios should result in a stimulative impact to the euro zone that would be shared by all members, regardless of need. There are those that believe that the ECB should actually be removing stimulus from the larger countries, and the outcome of both of the choices would be to deliver easier monetary policy. Either policy choice, as a result, is likely to have inflationary consequences that would be harmful to all members. These choices, along with current economic conditions, could encourage the US dollar to be supported, at least for the near-term, with a projected euro fx equivalent trading range for the month between $1.31 and $1.38.
The problems, solutions, and structural inefficiencies of the common euro currency are only beginning to be questioned. The ECB policy of trying to create an artificial ceiling on sovereign yields is becoming very expensive, and can not be extended to all encumbered sovereigns. Austerity and high structural unemployment will eventually test the will of the people.
The US stock market has been showing signs of buyer exhaustion, and seemingly ripe for more than a minor correction. There is also a whiff of inflation in the air as interest rates have been working their way higher, with the long bond yielding 4.6%, quite a bump up from around 3.5% last summer. And of course, in the real world, prices at the pump and the check-out counter have continued their menacing rise. We are anticipating that the DOW could begin some form of correction this month or either be resuming the long-term bear market decline, with a projected trading range between 11,800 and 12,300. This stock market decline could cause the US treasuries to be a price-supported safe-heaven during the month, inversely producing lower yields, and we are therefore forecasting a peak-yield for the US 10-year Note at 3.75%.
Meanwhile, it has been quiet on the European front recently, but the European debt crisis has not gone away, nor has the potential for economic problems stemming from the turmoil in Egypt. The protesters may have left the streets, but there is still the potential to spread to nearby countries. Also, rising inflation fears in China, and China’s determination to slow its important global economy by raising interest rates to slow inflation has periodically had a negative effect on global markets. This problem has not gone away either, as China recently announced another rate hike. Inflation fears, resulting hikes in interest rates, and tightening of monetary policies have been spreading quickly, to Brazil, India, and emerging market economies — more than enough potential catalysts to produce either a correction or major stock market decline.
It is no surprise that those souls who still have a job and a house are spending something like $618 billion more than they make, digging deep into their savings to help bridge the gap. This is confirmed by the alarming downtrend in bank deposit growth over the last year, with deposits now growing at their slowest pace since the recession of 2000.
We are at the point in this economic cycle where either businesses begin expanding and start hiring, or we fall into the deep abyss. The middle-class earner is having a difficult time earning enough to keep up with living expenses and the creeping inflation that can be found almost everywhere one looks.
The earners will have very little money to spend on discretionary goodies, unless they get a raise or a second or third job. Meanwhile, the US Government’s spending spree has flushed the markets with money, but that money has not been going to the people who need it.
There continues to be global unrest, which begins among people who want to work and simply can not find work, which all rarely occurs in a thriving economy.
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 eleven 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, Ray Humphrey and Ray Uy with Hartford Financial Services Group, Harald Malmgren with Malmgren Global Fund, MacroMavens by Stephanie Pomboy, Anthony Parish Goodfield with DWS Investments/Deutsche Bank Group, David Rosenberg with Gluskin Sheffs, Doug Kass with Seabreeze Partners, The Option Queen by Jeanette Schwarz Young, Sy Harding’s Street Smart Report by Sy Harding.
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.