WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 07-31-10:
By: John T. Moir
Position overview . . .
Our previous newsletter, dated May 26th, stated that the DOW appears to have entered a period of broad consolidation from an overbought situation, which could produce a larger trading range during the course of the month, between 9,800 and 11,200. The actual result saw an expanding trading range for all of the major indices, with the DOW moving between 9,774 and 11,177.
The US treasuries were anticipated to be price-supported, inversely causing yields to decline, with a projected peak-yield for the US 10-year Note at 3.60% or lower. The actual result did see the US treasuries rallied in price, as a global safe-heaven, when the stock market came under pressure, producing a US 10-year Note yield range for the month between 3.09% and 3.71%.
The US dollar was forecasted to rise in value, with a projected euro fx equivalent trading range for the month between $1.21 and $1.32. This proved to be the case, as global concerns caused investors to flock to the US dollar, producing an actual euro fx equivalent trading range between $1.2127 and $1.3202.
Looking forward . . .
The developed world is choking on debt. The story’s are similar in the US, UK, Japan, Spain, Italy, France, Greece, and several other countries. The developed countries, of course, are not the world, even though Greece has the most total debt-to-gross-domestic-product (GDP) ratio of more than 800%, and the US comes in second at over 500% of debt-to-GDP. Spain actually has one of the lowest totals of debt-to-GDP, at 250%, even though there has been a lot of talk about their financial situation. Nevertheless, all of the numbers are massive, which means the bonds of these countries will eventually go the way of Greece — down substantially. It may not happen right away, but eventually something will give in these various countries what will cause the decline in their respective bond values.
The Cross-European contagion risk threatens the very existence of our banking system. European bank balance sheets are stuffed with non-performing loans that should have been written off in 2009. European regulators, however, allowed the banking industry not to come clean, in a repeat of the policy mistakes made by Japan in the 1990s.
Austerity measures will only exacerbate the banking-system problems, by leading the defaults in the massive private-sector debt of troubled countries. Attempts to use rapid and large fiscal retrenchment to avoid public-debt defaults virtually assure an escalation in private-debt defaults.
It is total debt that matters, not just public debt, something which European Union authorities seem to not yet grasp. In fact, the rapid rise in public debt in recent years is not so much the cause of this crisis as it is the result of excessive growth in private-sector debt over the last decade.
Greece and about 10 other euro-zone members desperately need a cheaper currency, but a falling euro does not necessarily do the trick, as much of Greece’s exports go to other euro-zone members. Alternatively, the Greeks may choose to go for an “internal devaluation” by cutting salaries on the order of 20% to 25%, but remember that people died in the streets of Athens following a decision to reduce salaries by 5%.
The National Association of Realtors Index of pending home resale’s dropped an awesome 30% in the latest reported month, proving that the roof is still falling in on housing, which certainly is not helping investor confidence. The huge shadow of unsold inventory is just one of the woes afflicting the real estate industry. There are five main sources of this unsold inventory, which are as follows: 1.) The eight million loans in some form of delinquency, default or foreclosure; 2.) The 100,000 to 125,000 new notices of default sent out monthly; 3.) Short Sales, with almost 30% of the 57 million homeowners with mortgages owing 95% or more on their house, which is a mega-threat; 4.) Loan modification defaults, which are estimated to occur at a 70% rate; and, 5.) Pent-up supply from people who have held off selling for three years as the market crashed,
The Federal Deposit Insurance Corporation (FDIC), before the financial crisis is unwound, expects to have taken over some 300 failed banks –draining the agency’s cash reserves, due to the rapid level of closures.
The FDIC must sell assets to continue the closings, and currently has about $37 billion of bad-bank assets to sell, but the stockpile would bring only 10 to 50 cents on the dollar.
The sale of US-guaranteed FDIC senior certificates have entered the FDIC’s Securitization Pilot Program. This enables the FDIC to push much of the losses off its books, thanks to the US guarantee of principal and interest, and the program starts with a $500 million issue.
The notes are back by loans that are bundled into agency-administered pools, and is where the losses are covered, but, ultimately, the losses could be absorbed by the US Government.
Some see the FDIC program as a way to avoid going before Congress to seek funds. The FDIC is really not selling the bad assets, but the equivalent of a Treasury bond without congressional approval. It hides the economic substance of what is really happening — an unlimited taxpayer bailout.
The FDIC contests the characterization, saying it does not expect a claim on the guarantee, because of an equity cushion to absorb the losses — using only performing mortgages in the pools. The agency further says a lot of resources stand between it and the taxpayers.
Long-term conclusions and current month expectations . . .
The real problem is that the economy remains mired in a debt-deflationary cycle from which the only way out is through paying down the debt. The process still has a long way to go, even after households have paid down debt for the seventh straight quarters through the first quarter of 2010. There has been a $374 billion reduction in household borrowing from its peak of $13.9 trillion in the second quarter of 2008, with most of the drop coming in mortgage debt.
The financial deleveraging has just begun, as seen by the under performance with financial stocks, which has started during the market’s current adjustment phase. The financial sector, of course, has enjoyed a profit rebound in recent quarters, which has powered its big rally from the crisis lows of March 2009, but the easy money, as the cliche goes, has been made. Much of that appears to have been due to the fact that banks are paying next to nothing on deposits and are able to generate much higher returns on government paper. The end of the implosion in credit quality has also helped support profits, but there has been a massive amount of wealth destruction. This implies that credit creation will remain weak and it will be difficult for the financial sector to re-expand.
There is no logical reason for the Fed to start tightening, as long as credit growth remains flaccid, hiring stays weak and inflation non-existent. It seems reasonable to have a US 10-year Note hovering around 3% and a long bond under 4%, with short-term rates (and inflation) maintaining around zero. The US treasuries, at least for the near-term, could come under slight price-pressure, causing yields to inversely rise, with a projected US 10-year Note base-yield of 2.90% or higher.
The towering debt will be the greatest impediment for consumers in resuming their free-spending ways. There is no way that households can seriously deleverage overnight. The task is truly humongous: To return to those pre-Greenspan days when the ratio of debt-to-income was about 65% would require debt to decline by $6.3 trillion or income to increase by $9 trillion — either option would be a very daunting task to achieve and maintain such an adjustment.
That would mean a massive reduction in spending, year in, year out, spread over six to ten years. There is virtually no chance of that happening, if only because the bottom 40% of households spend every last dollar they make — and then some — just to keep their heads above water.
It is estimated that there is $10.5 trillion is mortgage-related debt, of the total $14 trillion in household debt. Deleveraging need not entail the pesky inconvenience of foregoing consumption, as more homeowners will exploit this opportunity to accelerate balance-sheet repair.
It is unclear how much of a burden will be borne by banks via rising delinquencies, versus the overall economy through reduced spending. What is clear is that the low end of the income scale, with transfer payments such as unemployment benefits drying up and credit exceedingly tough to come by, already is feeling the hit.
There is also considerable distress among consumers, confirmed with the astonishing decline in bank deposits, which is clear evidence that they are starting to burn through cash, to either further deleverage or are simply running out of cash reserves.
Sovereign nations have spent their way out of the 2008 financial-market meltdown, leaving the public sector with unprecedented levels of debt, as mentioned above. Should the economy slow now, without the benefit of increased economic activity to help shore up public and private-sector balance sheets, there would be little dry powder left to help prod demand. It is like driving around on the only available spare tire, hoping to not get another flat — otherwise, then, being completely stuck.
The US dollar, at least for the near-term, could remain under price-pressure, with a euro fx equivalent trading range for the month between $1.24 and $1.34. This weaker US dollar could produce a counter trend bear market advance within the stock market, with a projected DOW trading range for the month between 9,700 and 10,800.
FOOTNOTE: The June 2010 newsletter was not released and the July 2010 newsletter postponed, to the financial benefit of investors utilizing our Private Account Wealth Management Services.
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 ten 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, Aden Forecast by Mary Anne and Pamela Aden, David Resler, Chief US Economist with Nomura Securities, BCA Daily Insights, a publication of the Bank Credit Analyst, Mark Boucher with MRG Institutional, Mark Hanson with Hanson Advisors, MacroMavens by Stephanie Pomboy, Jack Ablin with Harris Private Bank, William Black, a former thrift regulator, Federal Deposit Insurance Corporation (FDIC).
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.