WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 06-08-06:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our recent newsletter, dated May 10th, forecasted that the DOW, along with the other major stock indices, was continuing its topping-in-price process and was being artificially supported by above expectations earnings’ reports. We projected a DOW trading range for the month between 11,125 and 11,670, which proved to be very accurate, as the DOW peaked in price on the day of the newsletter’s release and proceeded lower. The actual DOW descending trading range was slightly wider, between 11,030 and 11,670, further confirming the resumption in the bearish stock market decline.
The US dollar was anticipated to have formidable support at the euro fx equivalent of $1.30, with a forecasted trading range for the month between euro fx equivalent of $1.25 and $1.30. The actual result saw the US dollar hold this key support level and produced a narrower than expected trading range, between the euro fx equivalent of $1.2717 and $1.2963. Pundits continue to forecast for a resumption in the US dollar weakness, but our technical analysis causes us to think, at least for near-term, otherwise — expecting a US dollar based rally. The ever growing twin deficits (US trade imbalance and current-account deficit) are strong fundamental reasons for a continued US dollar decline, but it has widely been publicized and factored into the marketplace. Counter trend movements are quite common, when fundamental information becomes overly accepted within the global landscape.
The US treasuries were projected to hold their peak yields and price bottoms for the month, more specifically the US 10-year Note at 5.15%, as the US economy begins to slow. We expected the US treasuries to start factoring-in the possibility of a pause in future interest rate hikes at the upcoming Federal Open Market Committee Meeting (FOMC). This proved to be accurate as the peak yield for the US 10-year Note was exactly at 5.15% and had a range for the month between 5.03% and 5.15%. The US dollar also helped to price support the US treasuries, as foreign central banks transferred funds to purchase US dollars and intern various US treasury positions.
Looking forward . . .
The Bureau of Labor Statistics released the latest employment report last Friday, with an increase in non-farm payroll of 75,000, far below the consensus for nearly 200,000 new jobs. The manufacturer sector lost another 14,000 jobs, continuing it’s consecutive monthly decline. The unemployment rate dropped slightly from 4.8% to 4.7%, but was the only bright spot of the entire report, which further confirmed that the US economy is beginning to slow.
The release of the employment report produced a bond market price-rally, slashing the likelihood of further interest hikes at the anticipated 25 basis point (0.25%) increment level. The implied chances for these additional rate increases were reduced from 75% to 40% at the upcoming FOMC meeting. The Federal Reserve is carefully trying to find a level of equilibrium for interest rates without dramatically affecting US economic growth.
The Federal Reserve is also aware of the lagged effect of monetary policy on homeowners with adjustable-rate mortgages: About 25% of all mortgages will be adjusted upward in the next 24 months, with some of the increases in monthly payments approaching 50%. This will likely force some homeowners into foreclosure, and crimp spending for the rest. The number of foreclosures has already begun to climb — 68% increase last month compared to the same period in the prior year — and this trend could accelerate as more adjustable-rate mortgage payments rise. It is unsure the full extend of this growing problem, but a sustained level of high interest rates will not make it any smaller.
Long-term conclusions and current month expectations . . .
The DOW, along with the other major stock indices, have started to trend lower, possibly confirming the resumption in the primary bearish stock market trend. There are building technical signs that the bear market decline is underway, and could be further acknowledged with the breach of key supporting price levels resting below. We are forecasting for the month a DOW trading range between 10,600 and 11,285, presuming the assumption of a continued stock market decline. Volatility is also starting to increase, which could amplify the monthly trading ranges for the DOW and the other major stock indices, as conflicting positions are initiated by both bullish and bearish investors.
Many consumers continue to spend beyond their means and will ultimately capitulate — forced to tighten their proverbial belts. There are many sectors that will be strongly affected as consumers reduce their level of spending, which partially include retailers, autos and home builders. The level of spending could also be curtailed due to the increased level of mortgage payments for those with adjustable-rate loans. The US consumer represent nearly 70% of the US Gross Domestic Product (GDP) level of growth, which will be affected in the months ahead.
We feel that the US treasuries will continue to rally in price and decline in yield, as the US driven consumer economy begins to slow. The US treasury 10-year Note should have a peak yield for the month at 5.11% and will in all likelihood finish this period with a yield below 5%. The Federal Reserve will be meeting for their FOMC meeting on June 29th and 30th and will likely decide to “pause” on further interest rate hikes to the prevailing fed funds rate, currently at 5.00%. The question will remain within the Federal Reserves mind is if they have gone too far in raising interest rates, knowing that it takes over six months for adjustments in rates to affect the overall US economy in a positive or negative way.
The US dollar is technically poised for a rally in price and we are therefore forecasting a trading range for the month between euro fx equivalent of $1.26 and $1.30. A rally in the US dollar will put pressure on the various commodity prices and favor foreign investment into our US treasuries. The full extend of the US dollar rally remains uncertain, but should be much more clearly understood in the coming months, as the rotation and the various daily movements assist in our technical analysis
We encourage investors to seek out a management service that can generate a positive rate of return through these rising or declining stock, bond and/or real estate market periods, as outlined within the “Suggest Investment Allocations” section of this newsletter. This type of management service will assist investors with a more stable rates of return on investment through advancing, stagnating or declining US economic growth. We also live in a world with global economies that affect the US markets in many different ways; therefore, it remains prudent to have an active as well as flexible management service to maximize those desired rates of return — accomplishing investor’s long-term investment objectives.
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 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.
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, Financial Commentator.
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.