WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 06-14-07:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our recent newsletter, dated May 8th, stated that the stock market was being artificially supported by various buyback’s of company shares, merger and acquisitions, and leveraged buyouts. We projected that the DOW would have a trading range for the month between 12,700 and 13,370. The continued flow of these various merger deals, and company stock repurchases produced an elevated trading range for the month, between 13,041 and 13,673.
The US treasuries were forecasted to decline in price and rise in yield, as concerns with inflation were projected to increase, with an anticipated base-support-yield on the US 10-year note at 4.62%. This proved to be very accurate, as the 10-year note declined in price during the course of the month, causing the yield to rise, resulting in a yield range between 4.62% and 4.89%.
The US dollar was projected to find technical support from an oversold condition, and was forecasted to rally during the course of the month, with a euro fx equivalent trading range between $1.34 and $1.37. This projection proved to be accurate, as the US treasuries declined in price, resulting in higher yields, helped entice a US dollar rally, with an actual euro fx equivalent trading range for the month between $1.3423 and $1.3694.
Looking forward . . .
The stock market seems more concerned about the rise of yields on US treasury securities to their highest level of more than a year, even as the cost of corporate borrowing has been scarcely affected as spreads — the risk premium on private securities over risk-less government paper — narrowed further.
The 10-year note yield tested this past Friday key resistance at 5.25%, before settling at 5.10%, a strong rise from the bottom set at 4.49% on March 7th. As the stock markets recovered, in the wake of the February 27th global sell off, bond yields moved steadily higher, as the odds of a Federal Reserve rate cut faded amid the buyout boom, which hardly indicates the need for even easier credit.
More worrisome than the rise in bond yields and inversely declining prices over the past few weeks is that it has put the 10-year US treasury yields up to its downward trend line, stretching all the way back to the historic peak of 15% in 1981. This is the most important trend line, probably for US treasuries, in the world for yields, with formidable resistance at the aforementioned 5.25%.
The administration and economists, fundamentally, stress that the “core rate” of inflation — excluding food and energy — is the most significant measure of inflation, and the 2.6% year-over-year would be acceptable. Consumers, however, must use food and energy, with gas rising from $1.99 a gallon at the end of last year to over $3.00 recently — a 50% increase. Food prices have been rising, milk most recently, as corn prices have risen because of ethanol production. Many other commodity prices have also risen. John Williams’ Shadow Government Statistics states that the Consumer Price Index (CPI) would be close to 10% now if the methodologies of 1980 were used — a big difference from the “acceptable” core rate” of inflation.
The rise in the US treasury yields have come in the face of the Fed’s favored inflation measure — the “core” personal consumption expenditure deflator, which excludes food and energy — falling within the perceived 1% to 2% comfort zone. Its year-on-year reading was 1.995% recently.
Yet the bond market could be sniffing something less benign for the future. The growth of the MZM money-supply measure has accelerated to a 12.8% annual rate in the past three months, lifting its year-on-year pace to 8.1%, with inflationary potential.
Home prices are declining nationally, which has not occurred since the Great Depression. Prices are struggling, no matter how it is measured or which index is followed. In the latest reporting period, the year-over-year median new and existing home sale prices are down 10.9% and 0.8%, respectively. The trade group representing real-estate agents is also forecasting falling prices.
Home prices had not received their due as an important measurement of the nation’s economic health, not before this turn in market events. The market of homes in many places has become illiquid with sellers in search of buyers, a market in search of a clearing price.
BLANK-CHECK COMPANIES SURPASS INITIAL PUBLIC OFFERINGS (IPO’s):
Buying stock at an initial public offering (IPO) is an act of faith, but investing in so-called blank-check companies — startups with no operating assets, products, or staff — is an act of blind faith.
Commonly known as SPAC’s (special purpose acquisition companies), blank-checks are essentially empty shells hoping to buy as-yet-known business with the proceeds from their initial public offerings of shares. It seems blank-check companies are the rage again, after being largely abandoned for almost two decades. In 2004, 13 of them went public, raising a total of $484 million, growing to 30 in 2005 and 40 last year, raising $2.1 billion and $3.4 billion, respectively. A record 17 went public in the first quarter of 2007, further testament to their increasing popularity. Once a deal is done, company directors, who routinely receive 20% of the public shares, are free to liquidate their holdings, usually following the six-month lock-up period.
Interest in SPAC’s is at an all-time high, despite having first-day returns averaging only 0.1%. The growth of the blank-check sector is now surpassing that of the overall IPO market, and time will tell if whether they will soon lose steam. For now, they remain among the fastest-growing trends on Wall Street.
Long-term conclusions and current month expectations . . .
As mentioned earlier, the recent rise in bond yields is threatening to pierce the downtrend line that goes all the way back to the early ‘Eighties, when the vigilantes sent long-term US treasuries to 15%.
Short-term T-bill yields have been falling, from over 5% to 4.80%, even as long-term bond yields have climbed from 4.5% in early March to nearly 5.25% today. There is significant chatter that China’s central bank may be shifting some of its enormous US treasury holdings from notes to bills. Inflation is the US treasuries worst enemy, sending their prices falling as yields rise. Moving funds into T-bills can help avoid a majority of price risk. Are the Chinese onto something, and will other countries with large US treasury holdings follow suit?
The US treasury 10-year note has formidable yield resistance at 5.25%, which it has been testing over the past few days. A decisive move above this key yield level, resulting in lower US 10-year note prices, will affect corporate earnings significantly going forward — raising operating and borrowing interest-related expenditures. We are anticipating a breach of this key 5.25% level on the 10-year note this month, as inflation fears continue to reemerge with a slowing US economy, resulting in stagflation.
There are an increasing number of technical divergences appearing within the major stock indices, which continue to confirm our belief that we are close to resuming a stock market decline. Therefore, we are projecting a DOW trading range for the month between 12,750 and 13,700. We should have a more definitive explanation in the coming months, if this decline is either a correction in a rising stock market or the beginning of a major bear market decline.
The US dollar is continuing to attract renewed interest, due to the rising yields of the various US treasuries. These higher yields make the US dollar more attractive in the global treasury markets, allowing it to rising in value. We are anticipating the US dollar to continue its advance this month, with a projected euro fx equivalent trading range between $1.31 and $1.36.
FOOTNOTE: The release of this month’s newsletter was postponed by one-week, to the financial benefit of investors utilizing our Private Account Wealth Management Services through these “ideal economic cycle entrances.” Our management services are further explained below within the “Suggested Investment Allocation” section of this newsletter.
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 Wavetech Enterprises’ 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, Natexis Bleichroeder, The DeVoe Report by Raymond F. DeVoe Jr., ISI Group, Annaly Capital Management, The Growth Report Business Financial Publishing by Shannon Roxborough.
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.