WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 03- 10- 08:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our previous newsletter, dated February 7th, stated that the stock market was anticipated to remain under pressure, as further evidence unfolds confirming the deteriorating US economy. We projected a DOW trading range for the month between 11,520 and 12,775, as the stock market is in a well -established downtrend, with several sectors declining more than 20% from their peak price levels. The actual result for the month was a narrower range, with the DOW trading between 12,069 and 12,767. The major stock indices were apparently working off the oversold condition produced by the strong decline in the month of January 2008, resulting in a narrower range than expected, but with an accurately forecasted upper level price point.
The US dollar was projected to have possibly found near-term support, due to elevated levels of inflation, with a anticipated euro fx equivalent trading range for the month between $1.43 and $1.49. We further stated that the US dollar may have discovered support at euro fx equivalent of $1.50, which has been tested and held on several occasions. The actual result saw the US dollar initially trade within our expected range, but when it fell through the stated key support level of euro fx equivalent of $1.50, causing the US dollar to accelerate its decline and resume the downtrend. The euro fx equivalent trading range for the month was between $1.4445 and $1.5218, as the US dollar traded within our projected range, then broke lower.
The US treasuries was expected to be price-supported, as they continue to anticipate further slowing of the US economy, with a projected peak-yield for the US 10-year Note during the course of the month of 3.90%. This proved to be very accurate, as additional economic data released during the month further confirmed our beliefs, with the US 10-year Note being price-supported and a yield range between 3.57% and 3.92%..
Looking forward . . .
The Bureau of Labor Statistics, released this past Friday, the number for February’s employment and was a surprise only to the bulk of the Street’s economists — it was a very poor overall report.
Payrolls shrunk by a tidy 63,000, in contrast to the consensus expectations of 25,000 additional jobs. The private sector lost 101,000 jobs, and only by the grace of hiring by the federal and local governments was the loss shaved.
The birth/death concoction, once again, supposedly added 135,000 jobs, and we will assume that half of these mythical additions were real.
Manufacturing shed 52,000 jobs and construction lost 39,000. The old reliable’s of restaurants and health care added on 19,000 and 37,000 new positions, respectively. It appears that 75% of the employment gains over the past year have been in restaurants and health care — neither category typically abound with exceptionally high pay. The eateries, in particular, are going to be painfully effected by the rising costs and declining level of customers.
The unemployment rate ticked down, from 5.0% to 4.9%, but was due to a sharp contraction of the labor force, since would-be workers opted out because they can not find a job.
Housing foreclosures have risen up to an all-time high of 0.83% of all mortgages nationwide. Over 5.8% of homeowners are behind in their mortgage payments, the largest number in more than two decades. House prices have lost a staggering 8.9% in 2007 as a whole, and are still dropping.
The supply of unsold houses rose to four million, or to over 10 months’ worth of inventory. Homeowners’ equity fell below 50% for the first time since 1945, hitting a new low of 47.9%. Never before have banks and the other various lenders owned more of the average American’s house than the consumer does today.
Thrifts and savings outfits lost a cool $5.24 billion in the final quarter of 2007, as they posted big write downs.
The equity portfolios of the largest US pension plans shrunk by $110 billion in January 2008, illustrating that they should be considering a more flexible, active, and unique wealth management services for these changing economic conditions (see below).
THE COLLAPSING U.S. CREDIT MARKETS:
The US credit markets, the giant growth engine that powers the American economy, are collapsing with few credit sectors spared from damage, few investors escaping losses, and little hope of federal action that is quick or strong enough to make a major difference.
First and foremost, the fall of the nation’s three largest Bond Insurers is accelerating, with the collapse of the bond insurers’ triple-A ratings. Their whole reason to exist falls by the wayside, without the triple-A rating: They can not enhance the credit of bond issuers nor conduct any new business.
Financial Guarantee Insurance Co. (FGIC), the nation’s third largest, just lost its triple-A rating recently and Moody’s literally dropped its rating by a full six notches in one fell swoop. Moody’s, furthermore, warned that unless FGIC can raise the needed capital, it is ready to cut FGIC’s rating to slightly above junk rated status.
Moody’s, to underscore that it means business, has already downgraded FGIC’s senior debt to junk, threatening to drop it to a even deeper junk level status.
Ambac’s is struggling to maintain a triple-A rating, with cash infusions from a number of major banks, but could still be faced with spitting the company into two separate units — the desirable and the undesirable.
MBIA is also slated to lose its triple-A rating, even with the near-term cash injections from major banks to help temporary maintain the preferred top rated status.
All three of the largest bond insurers are engulfed in a mess and are trapped between two major business lines — their traditional business of insuring municipal bonds against default, which is supposedly still stable and their newer business of insuring mortgage as well as debt-backed securities, which is currently in complete disarray.
There are essentially four different pathways engulfed by the same forest fire to distinguish, and all four likely scenarios lead to the same result: Credit collapse.
The first scenario, which we have seen recently, is where bankers and other investors come through with capital infusions for the bond insurers, but could cause banks to take a bigger step closer toward insolvency, creating an even broader threat to the financial system. Reason being, the true liabilities of the bond insurers are incalculable, with the potential exposure to losses is virtually unlimited. The banks were already buckling under with their subprime mortgage loses before the newly discovered bond insurance crisis.
The second scenario is where the banks stay out, and the current downward spiral of the bond insurers continues unabated. MBIA, the last of the Big Three to be downgraded, loses it triple-A rating. FGIC is downgraded to junk; Ambac, to near junk level status — causing the $2.6 trillion municipal bond market to virtually disappear. The hundreds of thousands of municipal bonds that they cover are automatically downgraded, when the bond insurers are downgraded — a rating collapse that is so massive, it can shut off the credit spigot to all city and state governments, whether insured or not.
The third scenario is where the New York Governor, Eliot Spitzer — if he is not forced to resign, due to his questionable ethics — acts to takeover MBIA and Ambac, promptly spitting them in half and creating new companies for each. The pre-existing bond insurers, according to plan, are stuck holding the undesirable insurance business; the new companies would supposedly get the healthy insurance business. The existing bond insurers would be immediately downgraded to deep junk, and by all reasonable measures, they are insolvent from day one. Any floating ships still remaining in the market of mortgage and debt-backed securities would be sunk. The municipal bond markets would still be in trouble because the various municipal governments all over the country are suffering from falling property values and declining property tax revenues.
Spitzer, but if he is forced to resign, Lieutenant Governor, David Patterson, would not assist local governments with any long-term favors, by sacrificing mortgage securities for the sake of protecting municipal securities, since they depend on a healthy mortgage and real estate market to sustain their own finances. In other words, when mortgages and real estate go down, so do they as well.
The fourth scenario is where the federal government steps in to bail out the bond insurers — either with or without the plan Spitzer’s or Patterson proposed. The hope is that the good credit of the US Treasury would uplift the bad credit of the insurers. However, the precise opposite would happen, as the bad credit of the bond insurers — and their boundless exposure of defaulting mortgages — drags down the good credit of the US Treasury. The US treasury notes and bonds would fall in price, inversely causing their yields to rise, and, since, the 10-year US treasury Note yield are closely tied to the rates of 30-year fixed mortgages, rather than supporting the housing market, the federal government inadvertently drives it into a deeper hole with a spike in interest rates.
The sheer volume of mortgages outstanding in America is far bigger than the volume of US treasuries. Moreover, the US Treasury Department’s long-term credit is not exactly fool-proof, with the $150 billion being spent on the economic stimulus package, the inevitably huge federal deficits in a recession and the looming seas of red ink in Medicare.
The bottom line is that there is no scenario that ends in a soft landing for the bond insurers, because the underlying assets are rotten, the credit markets remain sour, and no type of bailout — public or private — can cover the unattractive stench.
The disasters in the subprime mortgage, Alt-A (intermediate quality) mortgages, prime mortgages, credit cards, auto loans and student loans are well understood and recognized, but there are five more credit sectors that are also falling victim to a collapse.
First, the nation’s largest mortgage insurers — responsible for protecting lenders and investors from defaults on millions of homes — are being ravaged by losses. MGIC Investment Corp., swamped with claims, recently posted a $1.47 billion loss. Triad Guaranty, a much smaller mortgage insurer, reported a $75 million loss.
Second, municipalities, public hospitals and other institutions have been slammed by the failure of nearly 1,000 auctions for their “auction-rate” securities. Their borrowing costs have tripled and quadrupled — to 15%, 20% even 30%, and survival money is simply drying up.
Third, low-rated corporate bonds, which had fueled a wave of leveraged corporate buyouts in recent years, are being abandoned by investors. Their prices are plunging to the lowest levels in history, with property and casualty insurers, among those loaded with corporate bonds, are sustaining substantial losses.
Fourth, more hedge funds are being affected. For example, CSO Partners has lost so much money and suffered such a massive run on its assets, its manager (Citigroup) was recently forced to shut the hedge fund’s door’s to further withdrawals by investors.
Fifth, commercial real estate credit is collapsing, as regional and super-regional banks are taking big hits, and life as well as health insurance companies are soon to follow.
Even some sectors of the short-term money markets are affected, with US treasury-only money funds being safe. Also, beware of market funds that put investor’s money in commercial paper, certificates of deposit (CD’s) and other non-US treasury instruments.
The share of structured investment vehicle (SIV) assets tied to subprime is just under 6%. Meanwhile, collateralized mortgage-backed securities (CMBS) account for 7.7% of SIV assets, credit cards 5.5% and collateralized-loan obligations (CLOs) 6.3%. As these segments of the credit market begin to sour and banks are forced to run through the SIV fire drill again — bringing more of this stuff onto balance sheets — the day they can return to the business of lending will be pushed further down the road.
The Fannie Mae and Freddie Mac, quasi-government mortgage dispensers, have booked business — loans carried on its balance sheet and mortgages it has guaranteed — to a cool 81 times Fannies net worth and 167 times Freddie’s.
Fannie is leveraged 20-to-1 and Freddie 30-to-1, even when using book value as measured by usual accounting standards. Any massive ballooning of loans such as envisioned by the bail-out brigade would affect those already formidable ratios — two and three times greater than those of the 20 largest US banks — and force them to scrape up copious amounts of capital. We regret to say that the efforts will not halt foreclosures or ease the plight of besieged homeowners, but instead such efforts are more likely to significantly worsen the housing situation by adding Fannie and Freddie to the casualty list.
This is no longer just one institution in trouble — like Long Term Credit Management, which threatened to shatter the financial markets in 1998. Nor is it just in one corner of the credit markets — like the near collapse of Penn Central Railroad and Chrysler in 1970, the collapse of Franklin National Bank in 1974, the junk bond debacle of 1989-1990, the Savings and Loan crisis of the 1980’s or the insurance company failures of the early 1990’s.
The credit collapse, for most Americans, will bring about a rapid transition that is both terrifying and traumatic — a shocking shift from growth to contraction, from reckless spending to forced thrift, and from wealth to poverty.
This has all the earmarks of a sweeping and devastating credit paralysis that threatens to end decades of US economic expansion. Our mission is to offer investors a means to avoid such an occurrence and to join the minority of foresighted individuals and business owners that are building their wealth through the worst of times, keeping it safe, and preparing for the future day when they can invest it in some of the greatest bargains of our time. We will survive as well as investors utilizing our Private Account Wealth Management Services, with its flexible and unique investment strategy, designed to generate above normal rates of return on investment in either a rising or declining stock, bond or real estate market.
Our investor’s goal, as well as our own, is to be one of the few who can accumulate a treasure-trove of liquid resources, and also join those with the courage as well as means to pick up the pieces later, trigger a lasting rally from the bottom, and ultimately help lead the United States on the path to a true recovery.
Long-term conclusions and current month expectations . . .
There is a rapid unfolding of negative events in the real economy which continue to outrun the expectations of the consensus observers. First, it was felt that the subprime-mortgage problem was small and therefore would be contained. Reality overtook that sanguine assessment last August 2007. Still it was assumed that the financial system could absorb the troubles. Then, we saw a succession of management failures among the most visible of our financial titans. Even that did not dissuade the majority from thinking the real economy was immune from these upsets, but the recent flow of data has knocked down that idea.
Bear markets nearly always come in three phases. The leadership (best-performing stocks), during the first phase narrows, while the broader market begins a slow decline. Examples of this type of leadership narrowing are the nifty-fifty in the early 1970’s, the mega-cap and dot-com technology stocks in 1999, and the technology and agricultural stock in 2007. The leadership, during the second phase turns down dramatically, while the broader market stabilizes or even recovers somewhat. This is typically when the value and contrarian approaches turn in their best performances relative to the indices. The third phase of the bear market, almost everyone is hurt, and it does not end until, as they say, there is blood in the streets.
The last such year was 2002, and now, unfortunately, proceeds from the sales of “leadership” stocks are not yet being reinvested into the broader market, but are simply being used to pay down debt. Yet, the low-multiple, large-cap stocks are falling more slowly than the high-tech and agricultural leadership of 2007. We expect international stocks to be the next shoe to drop — creating more proceeds with which to pay off debt and move back into safer domestic heavens. The DOW is projected to continue its bear market decline, with a trading range for the month between 10,880 and 12,350. The larger range is anticipated, since the DOW, along with the other major stock indices, have recently completed a period of consolidation — removing the oversold condition within the market place — and are now resuming the well-established downtrend.
More monetary accommodation is needed to slow the contraction, but it seems Fed Chairman, Ben Bernanke, wants to avoid being to accommodative. So, instead of getting in front of the problem, through larger drops in the fed-funds rate, Bernanke appears to be willing to wait until the slowdown is obvious enough to create a consensus among critics who seek a more restrictive Federal Reserve.
The Fed’s actions have failed to lift the economy and long-term borrowing rates have increased markedly from their January lows, and financial credit conditions are as tight as they were prior to this latest round of Fed easing. We expect the Federal Reserve to cut the prevailing fed-funds rate to 1.75% this year from the prevailing 3% today, but even that aggressively of a response is no quick cure, since the economic growth cannot resume until the banking system and the credit markets begin to function more normally. A spooked market craves more clarity about the collateral that backs bonds, and assurance about counter party risk in over-the-counter transactions. The US treasuries are expected to be price-supported, at least for the near-term, with the anticipation of further interest rate cuts by the Federal Reserve, resulting in a US 10-year Note peak-yield for the month of 3.65%.
Investors also fret about what lies ahead, with inflation now climbing faster than income. The Federal Reserve would have to tighten interest rates again, but harder, if it succeeds in averting a recession, producing the second worse downward lurch as in 1980 and 1982.
The recent jump in the producer price index (PPI) to 7.7% is quite alarming, because each time since 1947 that this index has crossed above 7%, it has continued to barrel higher, eventually reaching between 9.9% (in July 1948) and 19.5% (in November 1974). The Federal Reverse expects inflation to abate, and they will eventually be right, but only after it goes much higher first.
The consumer price index (CPI) was recently cited as rising 4.3%, as compared to the previous year, but when using the means of calculation prior to 1980, the CPI actually jumps to 11.8%. This level more effectively squares with the $106-a-barrel crude oil, not to mention upward leaps just this year from various commodities. Before 1980 and the fiddling with the CPI by the Bureau of Labor Statistics, it was based on a market basket of goods and services bought and used by the average American consumer — a measure of the cost of living closer to the truth than the adjusted numbers now in favor.
This recession is a much more different animal than the tame and docile ones we have seen in the past. Never have such broad and severe credit-quality problems preceded a recession. They normally cause burgeoning financial problems to intensify, not recede. Credit problems lag the business cycle, not the other way around.
We simply do not believe the popular notion that the economy will rebound smartly after only six months of negative growth. Instead, we feel the financial damage accompanying the recession will be unprecedented in modern history and the economic consequences undesirable.
Two unusual and unique factors hang over the stock market: First, there are four bubbles that are now imploding: housing, retail sales, industrial manufacturing commodities, and international markets; Second, even though the Fed has pushed interest rates dramatically lower — and will continue to do so — money and credit are actually tightening, not easing, and, in some areas, seizing up. These factors are also causing the US dollar to decline even further and could motivate foreigners to eventually start reducing their US dollar holdings. We are anticipating the US dollar to remain under pressure, with a euro fx equivalent trading range for the month between $1.51 and $1.57.
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.
Please call the number provided below or e-mail us and we would be happy to provide further clarification, if there are any questions regarding the information discussed within this newsletter or our unique wealth management services.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Larry Seibert and Ted Theodore with Avatar Associates, Weiss Research, Inc, Amy Abbey Robinson with Robinson & Wilkes, MacroMavens by Stephanie Pomboy, Office of Federal Housing Enterprise Oversight OFHEO), Jane Caron, Chief Economic Strategist with Dwight Asset Management, Charles Dumas, Economist with Lombard Street Research, Mercer, Jerome Levy Forecasting Center by Jay Levy and David Levy (father and son), John Williams with Shadow Government Statistics, Liscio Report by Phillippa Dunne and Doug Henwood, Bryan Michael and Ronald Sadoff with Sadoff Investment.
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.