WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 06- 10- 08:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our recent newsletter, dated May 9th, stated that the sentiment for the stock market may have shifted, but skepticism, let alone profound bearishness, has not taken root. We further stated that some investors may be bullish because of the tax rebates or the delusion that the credit crunch is history, but that makes us all the more certain that we have not seen the last nor the worst of this bear market.
We forecasted that the DOW would decline during the course of the month, and projected a trading range between 11,950 and 13,150. The actual result saw the DOW decline as forecasted, but with a narrower trading range for the month, between 12,442 and 13,136.
The US treasuries were anticipated to be price-supported during the month, at least for the near-term, with a projected peak-yield for the 10-year Note of 3.90%. The actual result saw the US 10-year Note first being supported, but then begun to decline in price, as inflation pressures grew during the course of the month. The 10-year Note yield range for the month was actually between 3.74% and 4.09%.
We further projected that the US dollar would likely experience renewed pressure during the course of the month, with a euro fx equivalent trading range between $1.53 and $1.59. This proved to be a very accurate forecast, as further uncertainties pressured the US dollar, resulting in an actual euro fx equivalent trading range for the month between $1.5294 and $1.5773.
Looking forward . . .
The real consumer spending on durables and semi-durables contracted at a 2.4% annual rate in the first quarter of 2008, the biggest decline since a similar occurrence at the tail end of the 1990-1991 recession — and this downturn is just beginning.
The credit crunch has not eased anywhere near as much as the conventional wisdom believes, even though there has been a little respite in the level of credit availability. Loans still can be hard to come by, and as the Federal Deposit Insurance Corporation (FDIC) quarterly bulletin reports, the banks are still sweating it out, with charge-offs, rising loan delinquencies, and declining profit margins.
The stock market felt the full impact of the unemployment rate released this past Friday, as it leaped upward to 5.5% from 5% in April — the largest monthly rise in 22 years. The unemployment rate is a product of separate and often more volatile household survey, which showed a 285,000 drop in employment, a 577,000 rise in the labor force and hence an 861,000 leap in the number of unemployed.
The official non-farm payroll count was that 49,000 people lost their jobs, but, in fact, the true job-loss tally was far greater. The Bureau of Labor Statistics’ birth/death calculation, which we have discussed within previous monthly newsletters, is designed to include the employment effect of outfits that are too new to be captured by its regular survey. This birth/death concoction, last month, added 217,000 jobs, including, get this, 42,000 in construction. Four times as many folks actually lost their jobs, as the official count suggests, absent this fictitious birth/death calculation.
Continuing jobless claims, on a four-week moving average basis, are 582,000 and 23.2% higher than they were a year ago, indicative of considerably weaker labor-market conditions, since it indicates that those who are unemployed are finding it increasingly difficult to get re-employed.
Labor market data is important to the Federal Reserve’s judgement in gauging the broader US economy, and a major reason why we chose to discuss the various types of unemployment reports mentioned above.
THE NEXT BUILDING BUST — COMMERCIAL REAL ESTATE:
Nonresidential construction has held up as housing slumped, but a slowdown for offices, hotels and malls is looming, which could produce another jolt to the already sputtering US economy.
This sector of nonresidential construction, which includes office buildings, retail centers, hotels, and institutions such as schools, hospitals or government buildings, has remained strong through much of 2007. However, a combination of the economic slowdown and tighter credit appears to be putting the brakes on nonresidential projects. There are signs that the pipeline of new construction is about to dry up, even if work continues on those projects already underway.
Contractors show they are still quite busy, but their order books are shrinking and are starting to become worried. A slowdown in the entire construction market would be bad news for the overall US economy, since investment in nonresidential buildings added an average of $250 billion to the economy every year, from 1990 to present. A downturn is also expected to lead to the loss of many well-paying jobs in the months ahead.
Many economist feel a slowdown should be expected with a fall-off in nonresidential construction. Developers are beginning to pull back, with concerns about getting enough rental income and tenants to simply break even.
Some public infrastructure projects, such as highways and sewers, are being put on hold or slowed down, as local governments struggle with declining tax revenue and tight budgets.
The most recent report on nonresidential construction showed starts had remained strong through February of this year, then plunged 23% in March, which could be partly due to the credit crunch hitting commercial construction.
Hotel starts tumbled 67%, after the start of large hotel projects in Las Vegas and Atlantic City in February, while office construction was down 26% and store construction off 18%.
The tight lending environment will dampen the volume of commercial projects as 2008 goes on, with no signs of improving in the near future.
Another troubling sign is that the Architecture Billings Index, a widely respected leading indicator of commercial construction, has been in a free-fall for several months. It hit a record low in March and has fallen more than 20% in the past three months, signaling a prolonged decline throughout the entire commercial real estate sector — offices, retail, and hotels.
Some pundits are hopeful that the downturn will be limited, since office vacancy rates are relatively low, but high prices for many basic materials, such as steel and copper will keep projects on hold. A weak US dollar and strong demand for those products are keeping the prices elevated. Construction material costs have increased 5% to 8% over the past year — much faster that the rate of inflation.
Inflation is also making the market seem healthier on the surface, but higher material costs are masking the slump in nonresidential building, because construction is measured by the dollars spent on projects. In other words, fewer structures are getting built and are costing much more to complete.
The problems in the residential mortgage market seem to have spread to the nonresidential construction sector, even though there has not been a corresponding concern with rising defaults on those types of loans. Loan officer survey’s, conducted by the Federal Reserve, are showing a tightening of credit in commercial real estate.
The survey found that more than 65% of the loan officer respondents said that their lending standards in the sector have tightened “somewhat” and another 10% have tightened them considerably.
The degree of credit tightening going on within this sector is becoming very noticeable right now, and appears it may be freezing up along with the private mortgage-backed securities market.
Some builders and residential subcontractors last year were able to find jobs building offices, hotels and malls, due to the strength of nonresidential construction. Still, there has been an average of 32,000 jobs losses a month in the construction sector over the past 12 months, and a slowdown in commercial construction will lead to even more job losses.
Long-term conclusions and current month expectations . . .
A recent analysis of oil prices over the past 50 years, adjusted for the increase in the money supply as measured by a gauge known as M3, lays the blame for the surging petro prices squarely at the feet of the Federal Reserve.
The US Government is solely responsible for the increase in the oil price, by rapidly increasing the money supply and thereby decreasing the value of the US dollar. The recent doubling of oil in real terms since 2003 reflects market factors; however, the oil’s dizzying longer-term advance is almost completely contributed to the falling US dollar and the increase in money supply engineered by the Federal Reserve to stimulate the US economy.
The current US dollar/euro fx exchange rate, compared to what it would have been in January 1970, against a basket of the 12 currencies that comprised the euro fx, before its launch, draws an interesting conclusion.
The striking conclusion is that oil would probably be less than $10 a barrel, absent the US dollar long-term debasement, taking it back to long-ago levels. Something to think about the next time filling up at a gas station for more than $4.00 a gallon.
The US dollar is forecasted to remain under pressure, due to the Federal Reserve’s attempt to stimulate the US economy, and we are projecting a euro fx equivalent trading range for the month between $1.53 and $1.58. The past few months have seen the US dollars within a broad trading range, as a means to simply and gradually remove the oversold pressure that accumulated during the course of the decline this past year. We could resume the overall descent of the US dollar, with a close below the euro fx equivalent level of $1.60.
The stock market appears to be resuming its broad bear market decline, and we are forecasting a DOW trading range for the month between 11,300 and 12,625. The renewed concerns for the credit crunch spreading further into other unexpected sectors and the overall concerns for the US economy will further pressure the major stock indices lower.
The Federal Reserve is hesitate to lower the Fed funds rate much further, currently at 2%, with increased concerns over inflation and elevated commodity prices. However, renewed pressure on the stock market and a US economy possibly going into a deeper recession, could cause the Federal Reserve to change their stance. The US treasuries will likely be price-supported, as they remain a safe-haven, during these uncertain economic conditions, and we are forecasting a peak-yield during the course of the month for the 10-year Note at 4.05%.
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 their funds 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 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
Acknowledgements: Federal Data, Kenneth Simonson, Chief Economist with the Associated General Contractors of American, Jim Haughey, Chief Economist for Reed Construction Data, McGraw-Hill Construction, American Institute of Architects, David Seiders, Chief Economist of the National Association of Home Builders, Paul van Eeden, President of Cranberry Capital, David Rosenberg, Economist for Merrill Lynch, Liscio Report by Philippa Dunne and Doug Henwood, and Joshua Shapiro with Maria Fiorini Ramirez (MFR Inc.).
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.