Private Account Wealth Management Services
Newsletter Issued 07- 14- 08:
By: John T. Moir
Chief Editor: Clare Mc Kendrick

Position overview . . .

Our previous newsletter, dated June 10th, stated that the stock market appeared to be resuming a broad bear market decline, and we forecasted a DOW trading range for the month between 11,300 and 12,625. The actual result saw the DOW, along with the other major stock indices, resume the decline, producing a DOW trading range for the month between 11,287 and 12,610 — a very accurate forecast.

The US dollar was projected to remain under pressure, due to the unsuccessful attempts by the Federal Reserve to stimulate the US economy, and we anticipated a euro fx equivalent trading range for the month between $1.53 and $1.58. We saw the US dollar continue to decline, with a euro fx equivalent trading range for the month between $1.5266 and $1.5730 — a very accurate forecast.

The US treasuries were expected to be price-supported, as they remain a safe-heaven during these uncertain economic conditions, and we projected a peak-yield for the US 10-year Note at 4.05%. The final result saw the US treasuries exposed to both inflation concerns, putting pressure on prices, and safe-heaven price-supporting as well, causing the US 10-year Note to have a yield range for the month between 3.90% and 4.24% — a somewhat accurate forecast.

Looking forward . . .

We feel that the global bear market in equities, triggered by the US subprime credit mess, is now entering its next phase. A phase that will see the emerging markets transformed into submerging markets, an unwelcome change that will encompass the larger markets as well as a full complement of the smaller ones.

Emerging markets are an accident no longer waiting to happen, but very much in progress, while the severity of a further decline may vary, they are all vulnerable. The concept of global economic decoupling, in the months ahead, will be thoroughly exposed as a naive fantasy.

This occurrence can be blamed on the misguided monetary policies that tied the developing countries’ currencies to the US dollar and prevented them from controlling their interest rates. Inflationary pressures were mightily increased in the developing world, thanks to the Federal Reserves serial rate slashing in its effort to stave off a cataclysmic credit crisis collapse. Negative real interest rates and burgeoning money are destine to stoke overheated economies and propel inflation to still higher levels.

Efforts to keep the masses calm in the face of rapidly rising food and energy prices have proved costly and counterproductive, yielding shortages in gasoline, diesel fuel and food, which is what governments universally do when they find themselves in a pickle. Price controls are being pretty much abandoned, which, in the short run, is sure to mean more inflation.

There is no way out for developing nations, but to adopt more stringent monetary polices, which means higher interest rates and stronger currencies and, inevitably, a sharp economic slowdown.

Investors who have been counting on more of a vigorous earnings growth that attracted them to emerging markets in the first places are in for a very big disappointment — such expectations will be crushed. The great unwinding of emerging markets has just begun with much more carnage still forthcoming.

The vicious cycle unfolding in the financial markets within developing countries will bring pain aplenty, producing lower multiples on lower earnings.

The prospect of a global shakeout does not exactly remove our own concerns, since there is a big chunk of US corporate profits that flows in from the rest of the world, making our markets vulnerable to further deterioration as well.

The Federal Reserve is using its megaphone to battle inflation, because it would rather not use its rate-setting tool, when the prospects for the US economy are so weak. It runs the risk of losing its credibility as an inflation-fighter, if does not follow up it tough talk with some action. The European Central Rank, which tacked on another 25 basis points (0.25%) to its benchmark rate on July 3rd, is adding pressure; the euro fx has appreciated 85% against the US dollar since 2001. The Federal Reserve has created its own “perfect storm” — raise rates and slow the US economy even further or lower rates and ignite additional inflation concerns, while causing the US dollar to continue its decline.


A squeeze on tax revenues could force local leaders to cut more jobs, now at 45,000 and counting, which could add to the nation’s economic woes.

The latest hit to the US economy could come from state houses and city halls across the nation, which are in their worst budget crisis in years.

States, cities and towns have already laid off tens of thousands of government employees, with falling revenues from sales and income taxes, with property-tax declines still looming. There will be many more job cuts in the future, as public officials struggle to balance their budgets.

All but four states have begun their new fiscal year on July 1st, which means that tough decisions will have to be made very soon. Those expected job and spending cutbacks by local governments could be a major drag on the overall us economy.

There are 29 states, including California, Florida and Ohio, that are facing a combined budget shortfall of at least $48 billion in the fiscal year that just started on July 1st.

Spending is estimated to be up 1% in all 50 states, which would be the third lowest increase in the past three decades.

There are nearly 20 million state and local government employees in the United States, so a 1% decline in employment at cities, towns, schools and states would result in a job loss of almost 200,000 people, a much larger amount than we have seen from battered sectors such as automakers or home builders in the past two years.

Hiring freezes and early retirement packages are now common, even in states, towns and cities not yet laying off people. The biggest cost they face is related to personnel, which is due for further downsizing.

Tennessee plans to cut 2,000 positions, or about 5% of the state’s work force. New Jersey is looking at cutting 3,000 jobs, while Ohio may trim 2,700 positions.

Many of the local governments facing the biggest squeeze are in Michigan and Ohio, which already have the weakest local economies, causing the unemployment situation in those hard-hit areas to worsen further.

Local governments are faced with a downturn in tax revenues at the same time that there is greater demand for many of the provided social services. Many local governments, furthermore, are also grappling with much higher expenses due to rising fuel prices.

The housing bust is causing the biggest problems. The 2001 recession was tough for state and local governments, because even after the economy started to pick-up, job losses continued for nearly two years, but property tax revenues increased during that downturn, as home prices and housing construction boomed.

Sales taxes, income taxes and property taxes each make up roughly a third of the tax collections from state and local governments.

This local government budget crisis is likely to be more severe, because the bust in home building and the decline in home prices will cut into property tax collections, and it will probably get worse before it gets better — even if the national economy starts to show signs of improvement.

Reason being, income and property taxes are likely to see declines lag the current slowdown, with sales tax declines being an early sign of a weakening economy.

The drop in income taxes from job losses this year might not hit government revenue until next year, while a drop in property taxes from a house being sold in the foreclosure process might not be felt in property taxes collections for more than a year.

Still, the problems are already serious enough to cause widespread budget concerns and repeated downward revisions in spending plans. Some budgets were out of balance almost immediately upon being introduced for consideration.

The city of Vallejo, California filed for bankruptcy on May 30th, due to a ballooning budget deficit, from soaring employee costs and declining tax revenue. Labor contracts with the city’s unions were part of the problem, but the city’s plunging real estate also was a factor.

Home values in Vallejo are down 24% year-over-year, and 91% of homeowners who bought in the past two years have mortgages larger than their home’s value.

This San Francisco suburb is not a unique situation to the region, even though Vallejo’s housing problems are an extreme example. We feel the hit to property taxes, which lay ahead for many cities, could make this local government budget crisis the worst in nearly 30 years.

This is more bad news for an overall economy already fighting enough headwinds, which could further prolong any form of recovery.

Long-term conclusions and current month expectations . . .

Investors are still possessed by the notion that the big risk is missing the next move up rather than avoiding another bad pummeling. As a result, investors greet almost every piece of equivocal news as bullish and, until it whacks them in the side of their head, tend to ignore the bearish stuff — like fresh daily evidence that the credit crisis still is with us and still fraught with pain.

The dubious combination of the temporary stimulus of the tax rebates and inflation that is helping to kite, however selectively, retail-sales volume, has for the moment revived investor spirits. At the same time, the consumer is plainly hurting from the tightening squeeze of skimpy income and stingy hiring, on the one hand, and on the other, the remorseless inflation that is daily causing consumers so much angst.

The longer investors refuse to face up to the bitter truth about the economy, the credit mess, the shambles that is housing, contracting corporate profits and the shaky underpinning of the market, the worse the shock when the day of reckoning comes. We sincerely hope we are wrong, but are convinced that we are not incorrect in our assessment in anyway. The major stock indices could continue to remain under pressure for these reasons and others, and we are projecting a DOW trading range for the month between 10,200 and 11,450.

Fannie Mae and Freddie Mac were launched as publicly traded entities to facilitate the credit and capital required to sustain the housing boom and serve a dual mission: provide liquidity in the mortgage market and maximize profits for shareholders, all beyond the regulation of the Securities and Exchange Commission (SEC).

Such a structure was an invitation for outrageous leverage and the invitation was eagerly and expansively taken up. Freddie and Fannie, essentially, went on to underwrite the entire mortgage market, packaging and guaranteeing mortgages, creating securities to peddle the world over, and the two proceeded to borrow money on an enormous scale to buy mortgages, underpinning the market.

Everyone got rich: Homeowners saw the prices of their houses spiral upward. Banks and central banks enjoyed slightly higher yields without presumably incurring greater risk, and Freddie and Fannie, as well as their managers, reaped stupendous profits.

Then, the roof fell in on housing and the good times started to come to a close for Fannie and Freddie. Today, together, they own or guarantee 45% of all US mortgages, or a cool $4.8 trillion worth. They currently have mortgages with face values of $1.7 trillion, supported by assets of about $70 billion in core capital. They are leveraged, on a combined basis, of 24-to-1, but when you include their off-balance sheet guarantees, that figure balloons to 68-to-1. It would only take a modest decline in the value of those mortgages to wipe out Fannie and Freddie’s equity.

Foreclosures and delinquencies, generally, are mounting relentlessly, with the prices of houses have already fallen some 15% and an unprecedented 10% of homes built after 2000 stand vacant. We would venture that a sizable slice of the Fannie and Freddie’s mortgage books — as much as 25% to 40% — may be under water, even without further disarray in housing and mortgages, which certainly seems in the cards.

This past Friday, the Fed let it be known that it will prime the pump, if necessary to keep Fannie and Freddie afloat, after the concerns of a run on the pairs stocks and grave implications for the financial markets here and everywhere.

We are concerned that the same trick that calmed investors after the collapse of Bear Stearns and settled the markets for a few months, might not work this time around. We feel the securities of US mortgages, against which a large part of the world’s financial assets are leveraged, have significantly and permanently declined in price.

Congress will not bail out Fannie’s and Freddie’s shareholders, even if they decides to assume their liabilities, to prevent an unprecedented global calamity. These concerns could cause yields to rise for the entire US treasury yield curve, as the uncertainty of Fannies and Freddie’s ability to guarantee the various mortgages remain, but in the near-term, they will likely be price-supported as a safe-heaven, with the US 10-year Note having a peak-yield for the month at 4.00%.

The US dollar appears to be resuming the downtrend, after a period of consolidation from an oversold condition, and we are projected a euro fx equivalent trading range for the month between $1.56 and $1.60. There remains a significant amount of support for the US dollar at euro fx equivalent of $1.60, so it will be interesting to see if it can hold this key level in the months ahead or decisively fall below it.

FOOTNOTE: The release of this month’s newsletter was postponed, to the financial benefit of investors utilizing our Private Account Wealth Management Services, through these “ideal economic cycle entrances.” 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.


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 their funds Online.

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These services are ideal for individuals, trusts, foundations and privately held corporations that 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.

Call the number provided below or e-mail us today and we would be happy to provide further clarification, if there are any questions regarding the information discussed within this newsletter or our unique Private Account Wealth management Services.


John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
E-mail: JOHNTMOIR@aol.com

Acknowledgements: Federal Data, The American Federation of State, County and Municipal Employees, Bob Brusca, Economist with FAO Economics, Center on Budget and Policy Priorities (CBPP) (a liberal think tank), The National Association of State Budget Offices, Robin Prunty, Senior Director in the public finance department for Standard & Poors ( credit rating agency), zillow.com, S. Dewey Keesler with SDK Capital, Jay Diamond with Annaly Capital Management.

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