WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 03-09-05:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated February 9th 2005, projected a DOW trading range for the month between 10,350 and 10,750. The actual range proved to be higher, between 10,489 and 10,853, with investors margining their brokerage accounts to purchase even more stocks and various stock related mutual funds. Sentiment — which will be further discussed in the “Looking Forward” section of this newsletter — has shifted toward climatic peak levels, exceeding those reached at the previous major NASDAQ and DOW top in March and April 2000, respectively. The US dollar was expected to be supported, with a trading range during the month between euro fx equivalent of $1.25 and $1.29. In reality, the federal deficit and trade imbalance put additional pressure on the US dollar, resulting in a euro fx equivalent trading range between $1.2783 and $1.3301. It still remains possible that the US dollar has put in a near-term bottom, and should be able to determine a higher level of certainty in the next few months.
The US treasuries were forecasted to be supported in the longer maturities (10-year note to 30-year bond), but would remain under pressure for the shorter maturities (one-year treasury-bill through 5-year note). This projection proved to be partially accurate, with the shorter maturities remaining under pressure, as the Federal Reserve expectations of continued fed funds rate increases at a “measured pace.” The longer maturities initially rallied in price and declined in yield during the first-third of the month, but became pressured when the US treasury 10-year note auction was not well received on February 9th 2005. However, we feel the retracement in price and rise in yield for the remainder of the month within the longer dated paper was simply a correction within a primary bullish bond market. The entire yield curve is continuing to flatten as forecasted, with spread narrowing between the shorter and longer maturities. An inverted yield curve, like the US had in late 1999 and early 2000 (see February 2005 newsletter for a detail discussion in an inverted yield curve), would dramatically affect the US economy and the stock market as a whole.
Looking forward . . .
We have always been interested in what investors are actually doing, on a sentiment basis, compared to what they are saying on the premise that “talk is cheap.” As an investment manager using technical wave pattern analysis and various derived technical permutations, we are also interested in following margin accounts’ activities because they represent a class of investor that is usually wrong at definitive turning points. In the old days, we would have referred to them as boardroom speculators or boardroom traders, who were often guided by their brokers’ recommendations — commonly referred to today as financial consultants, financial advisors, financial sales representatives or estate planners.
As it turns out, by measuring margin accounts, you are measuring what speculators are doing and what brokers are doing. Because their fate is tied so much to the movement of the various markets, brokers turn out to be very depressed at the bottom and very euphoric at the top. At the top, the brokers think the extraordinarily high bonus they received last year is going to be the same bonus they will get for the next five years. At the bottom, one broker will say to the other, “Well, the market has gone down so much that I have just put out a goodbye list. The second broker says, “What is on your good buy list?” The first broker says, “Goodbye car, goodbye country club, goodbye vacation” and so forth.
According to a major wire house’s sampling, margin traders have been unusually heavy buyers of late. They have been unusually heavy buyers for 14 of the last 19 trading days and the last five days in a row. There appears to be no justifiable reason to make the numbers suspect, so the message is for real: Margin traders are unusually bullish on the stock market, which from a sentiment standpoint, is a fairly large negative.
Over the last 40 years, this is the first time to have such a long and heavy stretch of margin buyers. It would not be abnormal to get a cluster of two or maybe three days of heavy buying, but without this kind of consistency: 14 of 19 trading days of unusually heavy buying with purchases on the order of 2 or 2-1/2 to 1 ratio, which is extremely heavy. Normally buying will exceed selling by 30% or 40% on a heavy volume day. The last time we saw such margin account activity, but at a reduced level, was when the major stock market indices topped in March and April 2000. This sudden deviation from the norm displays further evidence that the major stock market indices are in the process of topping, which will be followed by a subsequent decline.
RETIRING BABY BOOMERS WILL AFFECT CONSUMER SPENDING:
During the next decade 40 million baby boomers will observe, if not celebrate, their 50th birthday. The prospect of so many aging boomers should concern us all because so few of them have sufficient savings or investments for their retirement years. The half-century milestone just might be the wake-up call that forces these boomers to start doing something about financing their golden years.
The danger to the US economy is that a significant portion of their baby boomers will start to do what any sensible person facing leaner times would do: cut expenditures and sell some assets. The negative affect to the two-thirds of the US economy, representing consumer spending, would be dramatic. And the key asset of these boomers, of course, would be their high-priced houses in the suburbs or major metropolitan areas. (See both the October 2004 and February 2005 Newsletters for further outlined evidence of a inevitable bursting of the housing bubble.)
These houses, which may have doubled in value over the past five years, would make sense to sell since the kids are either about to leave or have left the nest. They could move into a smaller condos and invest the difference in a conservative management service like the one mentioned in the “Suggested Investment Allocations” provided at the bottom of this newsletter.
The increased demand may be constructive for the low-priced condo market, but would suck the froth off the top of the lofty housing prices in many suburbs and major metropolitan areas.
To measure just how big an affect might be, we turn to the Bureau of Labor Statistics’ (BLS) annual consumer expenditure surveys. Those surveys measure just how much US households spend at each age and on what types of goods or services.
The most recent survey data, for 2003, allows us to compare per household spending for households where the average owner is 49 years old with the diminished spending for households whereas the average householder is 59 years old. By coincidence, the oldest baby boomer will turn 59 this year.
Keep in mind that the kids are leaving home, so there are fewer mouths to feed and not as many bodies that need clothing. These smaller and older households spend less because they are smaller and older, but they are also growing much faster than any other household age cohort.
The BLS reports that between 49 and 59 years of age, there is a drop of 20% in per household spending on apparel, a decline of 18% in spending on food away from home, and a decrease of 10% on food at home. The aggregate drop in spending on food and clothing alone is almost $30 billion. The negative affect to retail sales nationwide could further the consolidation of retailers.
Spending on owned dwellings also drops, by 15%. This is partly because households have moved to less expensive quarters, but also because some of the consumers have paid off all or most of their mortgages.
During the 10 years from ages 49 to 59, spending declines for all major categories except three: health care (up 22%), reading material (up 31%), and entertainment, which edges up slightly. The last category, entertainment, increases because older people who are nearing retirement spend more on recreational vehicles, fishing or hunting gear and other leisure goods.
We have mentioned twice that sensible consumers are: people who cut back on spending in order to save for their retirement and people who pay off their mortgages so as to reduce their living expenses. However, no one has accused baby boomers of being sensible consumers. This lack of sensibility could affect the US economy dramatically, as baby boomers are forced to make significant adjustments in order to finance their retirement years.
Long-term conclusions and current month expectations . . .
The DOW and the other major stock indices, for the reasons mentioned earlier, are in the process of cresting and putting in major tops. We are anticipating a trading range for the DOW between 10,400 and 10,984 during the month, as the rotation lower begins. We are entering a key technical cycle and economic business period, making the stock market vulnerable to a larger move downward. There appears to be key support for the DOW at 10,385 and an end-of-day close below this level would confirm a long-term stock market decline.
The US dollar is currently in a large trading range between euro fx equivalent of $1.29 and $1.35. We could remain within this range for several months before a definitive trend is established for the US dollar. This new trend will become more readily apparent as the technical wave patterns develop in the months ahead, since there still remains a chance that the US dollar has put in a near-term bottom at euro fx equivalent of $1.3678. However, the growing trade imbalance and current account deficit could put additional pressure on the US dollar, causing it to decline to new lows against the euro fx and the Japanese yen. But, with most major institutions and central banks worldwide already short, the US dollar against the euro fx and in some cases the yen, it remains possible that we could have seen a bottom at euro fx equivalent of $1.3678. The US dollar remains a global safe-heaven currency, even though it has gradually declined by over 30% in value over the past three years. A period of consolidation or a counter trend rally would be expected after such a large decline.
The longer maturity US treasuries have technically put in a near-term bottom in price and peak in yield today, even with the release of the strong employment number last Friday and the inflation-concerned beige book report today The consensus was for 300,000 new jobs and an unemployment rate of 5.2%. In reality, the actual non-farm payroll number was less than expected at 262,000 and the unemployment rate rose to 5.4%. The household survey, from which the jobless rate is derived, showed a 97,000 drop in employment, in contrast to the payroll gain from the separate survey of establishments. With benign levels of inflation, the US treasuries rose in price and declined in yield, especially for the longer dated paper such as the 30-year bond on Friday, but were placed under pressure today. It appears that the longer-dated maturities reached a level of capitulation (climatic selling pressure) today, which has normally confirmed a bottom in price and peak in yield. There is a growing probability that the Federal Reserve will start auctioning 30-year bonds once again, due to the rising federal deficit, which would result in increased demand for the longer maturities. The last time we had the 30-year bond included as part of the quarterly refunding auctions was when the US had a federal surplus; but, unfortunately, we once again have a federal deficit, which is growing rapidly and could reach $1 trillion in the next few years.
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 is determined after reviewing the investor’s current assets and fund allocations. This services is 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.
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.