WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 06-08-05:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our recent newsletter, dated May 10th, forecasted a DOW trading for the month between 9,800 and 10,410. We further expected the DOW to breach the formidable support at 10,000 and continue lower, which, however, was not the case, with the actual DOW trading range hovering between 10,075 and 10,560. The range was larger than expected, as investors purchased stocks in the hope that lower interest rates would spur larger profit margins for publicly traded companies. This, in all likelihood, will not be the result, since the US economy remains within a jobless recovery, as shown within the latest employment report released last Friday. This report is further discussed in greater detail later within the newsletter.
The US treasuries were anticipated to continue rising in price and declining in yield, upon its completion of a consolidation period. This proved to be very accurate for the entire yield curve, as economic data was released during the course of the month, confirming that the US economy was starting to slow, with no apparent signs of rising inflation.
The US dollar was forecasted to be at a pinnacle turning point, where if it rose above the euro fx equivalent of $1.27, it could rapidly rise, putting pressure on both European and Asian currencies. This forecast proved to be timely and extremely accurate, with the US dollar surging during the course of the month and the euro fx equivalent declining to $1.2299. Central banks throughout the world were forced to buy US dollars and sell their foreign holdings to offset their short US dollar positions — bolstering the US dollar and producing a strong rally in price. The extent of the US dollar rally remains uncertain, but should be supported at least for the near future.
Looking forward . . .
The May Institute of Supply Management (ISM) Index –a manufacturing-sector measure — was 51.4, compared with a Wall Street forecast of 52.5, and the lowest reading in 23 months, since June 2003 — at a time when markets were worried about deflation risks, after the so-called end of the war with Iraq. May weakness in the ISM Index was broad-based, as all five components of the index declined on a month-over-month basis — led by employment (to 48.8 from 52.3), new orders (to 51.7 from 53.7), production (to 54.9 from 56.7) and deliveries (to 50.5 from 51.5). Inventories showed the smallest decline, to 47.8 from 47.9, confirming the reduced level of new product demand. The prices-paid index is at its lowest reading in 20 months, which is affecting corporate profit margins and long-term growth potentials.
Thus, as Fed officials have recently guided, inflation pressures through the supply chain appear to be moderating, and Fed officials expect that those pressures are well contained, and will dampen over the next 12 to 18 months — resulting in a year-over-year inflation-growth profile that is declining from September 2005 to September 2006. The impression of the ISM recent report is that the US economy is NOT in a soft patch, but rather the economy is in a soft landing.
The depth of this soft landing could be much more severe than the Fed’s conservative forecast, when paired with the weak employment report released just last Friday. This May report, provided by the Department of Labor, anticipated 180,000 to 200,000 additions to the payrolls, but in fact only received 78,000. May’s non-farm payroll gain was the smallest since August of 2003, and it makes the 274,000 rise in April appear to be exactly what we suspected it was — an aberration. Hours worked contracted and most sectors of the economy failed to contribute in any meaningful way in the meager improvement. All told, private services accounted for only 59,000 of those 78,000 new jobs and, of those, 20,000 came from construction. 26,000 jobs were from the usual largely lower-paying health-care positions.
Meanwhile, manufacturing extended its losing streak for the third month in a row, dropping 7,000 jobs. Factory employment remains a formidable 3.2 million below its peak in March 1998 peak. The dreadful combination of outsourcing and hiring phobia in the US, aided by rising productivity, continues to wreak havoc with what used to be an important component of the job scene.
The unemployment rate slipped to 5.1%, from 5.2%, thanks mostly to the Department of Labor statisticians’ habit of rounding numbers. In truth, the jobless rate, ex-rounding, fell not by 0.1%, but actually by 0.23%.
In conclusion, if you compare this so-called recovery with any other measured and comparable upturn, this still remains a jobless recovery. The US economy is still losing steam, and the Fed is edging toward rethinking its approach on interest rates going forward — from rising to once again cutting the prevailing Fed funds rate.
COMPANY STOCK BUYBACKS HAVE PROVEN UNPRODUCTIVE:
It is perceived that one might expect an automatic shot in the arm to companies that are planning to repurchase shares, with stock buyback announcements at record levels. But this assumption is far from the actual result, according to new data released.
This new data is showing that Standard & Poor’s 500 companies’ spending on buybacks over the past 10 years determined that shareholders who choose not to sell their shares simply gained no benefit from holding on. Contrary to traditional expectations, buybacks do not necessarily reduce the number of shares in a company, because companies often issue shares from options and acquisitions at the same time that they buy in shares. Moreover, buybacks often occur when the market is high, because they tend to coincide with economic tops, when companies have lots of unutilized cash.
Although companies often buy back stock when they have lots of cash, when the stock still implies very heavy levels of growth — then buying is perhaps occurring while fully priced.
This updated data could have implications for the market, given that stock buyback announcements were recently reported running at a record level for the first quarter of this year. Further repurchases will not accomplish very much in fixing the market’s fundamental problems.
In conclusion, we would suggest that these companies invest in new projects with their cash hoard to ensure earnings growth instead of stock repurchases.
Long-term conclusions and current month expectations . . .
The sharp rally within the US dollar also helped propel the US treasuries higher over the past two months, and leads us to believe that we could be due for a period of consolidation. The US treasuries long-term trend still appears to be higher in price and lower in yield for the entire curve (1-year treasury bill through 30-year bond), but our technical wave pattern analysis indicates that we could see some form of re-tracing prior to resuming its primary trend. This could also apply to the US dollar, with the euro fx equivalent currently at $1.23, retesting the key technical level of $1.27. The long-term trend for the US dollar could be higher and would be confirmed with a close above euro fx equivalent of $1.22, which may be reached in the next few months.
We still feel that the DOW and the other stock indices are in the process of completing a major topping technical wave pattern, and are forecasting a DOW trading range for the month between 10,000 and 10,590. The DOW appears to have formidable support at 10,000, but we anticipate breaching this key level within the next few months, leading to a quick decline to DOW 9,750. The long-term bearish stock market trend for all of the major stock indices will be confirmed with an end-of-the-day close below DOW 9,750 and an acceleration in the decline. Therefore, we encourage investors to consider an investment strategy that can generate a positive rate of return in either a rising or declining stock, bond or real estate market, as suggested below.
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 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 who have liquidated large stock, bond and/or real estate holdings and are seeking an active management service to generate a positive rate of return between 12% to 35% 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, Rochdale Research, TrimTabs Research, Liscio Report.
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.