WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 03-14-06:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated February 9th, forecasted that the DOW would have a trading range for the month between 10,560 and 10,970, and could be range-bound until some decisive fundamental data drives the stock market as a whole to lower price levels. The actual DOW result proved to be slightly elevated and range-bound between 10,737 and 11,159. There are growing divergences among the major stock indices, further confirming that the resumption in the bearish stock market decline is close to continuing.
The US dollar was anticipated to remain within a trading range, between euro fx equivalent of $1.17 and $1.215, with concerns over the growing US trade imbalance and current-account deficit could place renewed pressure on the currency. This forecast proved to be fairly accurate, as the US dollar remained within a narrow trading range, between euro fx equivalent of $1.1847 and $1.2135. There remain technical uncertainties if the US dollar can gain additional confidence to continue it’s advance or if the weight of the growing twin deficits will pressure the US dollar to resume a long-term decline.
The US treasuries were forecasted to rally in price and decline in yield after the completion of the quarterly refunding auction, with a peak yield for the 10-year US Treasury Note for the month at 4.56%. The actual result saw the US treasuries remain within a tight yield range, with the 10-year Note yield remaining between 4.53% and 4.61%. Yields were slightly elevated during the month, as concerns over inflation raised the expectations for additional fed fund interest rate adjustments upward at the next Federal Open Market Committee Meeting (FOMC) in late March and possibly in June as well.
Looking forward . . .
Some contrarians might be tempted to consider purchasing homebuilding shares, with the steep sell-off and the hype surrounding a growing US housing bubble. We would suggest not being lured back into this sector.
Expectations normally track prices. In other words, sentiment towards a particular sector tends to be highly correlated with what it has done recently. We are lead to a contrarian outlook, when price and sentiment diverge.
In the case of the home builders sector, the truly contrarian time to own this sector was the October 2004 to August 2005 period, when rising relative strength was met with a heavy levels of skepticism.
The current level of buying into the latest pullback of this sector looks more like a consensus than it does a contrarian. Speculation has been running high the past few months, suggesting that more than just a few investors believe that the latest drop is just another pullback in the home builders sector. This is not the sort of mind set we look for when contemplating a new entry into a particular sector. Continued lower prices should scare investors, and if they do not, look for even lower prices.
CHINA HAS BECOME A NET EXPORTER OF VEHICLES:
China Association of Automobiles Manufactures reports that vehicle exports from the mainland last year surpassed vehicle imports for the first time, turning China into a net vehicle exporter (based on units), far sooner and faster than most had previously imagined. Vehicle exports from China have soared over the past few years, rising to nearly 172,000 units in 2005, a seventeen-fold increase from the start of the decade. Vehicle imports also grew substantially over the same period, but dipped last year to 161,000 on account of surging domestic vehicle capacity.
China’s vehicle exports compete on price and are primarily destined for the smaller markets of the Middle East, where they remain a net importer of vehicles based on value. The low cost Chinese vehicle exports to Syria, for instance, are not worth nearly as much as China’s high-priced imports of BMW’s or Mercedes from Germany.
All of this underscores China’s rising competency in an industry long dominated by the US , Europe and Japan.
Long-term conclusions and current month expectations . . .
Household-spending growth historically has dominated capital-spending growth as compared with corporate profit growth. If history is any guide, a slowdown in household spending growth in 2006 is likely to lead to a slowdown in capital-spending growth.
A foundation has been formed for a renewed bond market rally, due to the yield spread between the 10-year inflation-indexed US treasuries and the conventional 10-year US treasuries. This yield spread has fallen sharply over the past week by 9 basis points (0.09%), from 2.62% to 2.53%, due to the worldwide decline in commodity prices. This 2.62% yield spread level was last seen in April 2005, just prior to a strong advance in bond prices and declining yields for the entire conventional US treasury yield curve.
The yield spread, which reflects market expectations for the consumer-price index over the next 10 years, was as low as 2.29% at the end of December 2005, and has been creeping upward on continued gains in commodity prices and signs of economic growth. However, rising global interest rates have been taking their toll on commodities, resulting in their recent decline and reduced concerns over inflation. Therefore, it appears that the 10-year note has established a peak yield for the month at 4.75%, and we are anticipating a rally in price, resulting in a decline in yield for the entire curve.
The stock market is continuing it’s topping process (peaking in price values for the various stock indices), and are starting to develop distinctive divergences. These conflicting levels of price advancements among the major stock indices were last seen in March 2000, just prior to the beginning of the major stock market decline. Therefore, we would anticipate that the DOW will have a trading range for the month between 10,560 and 11,165. We could remain within a narrow trading range until a number of fundamental catalysts caused the DOW to resume it’s bearish trend and breach key support levels at 10,500 and 10,000.
The US dollar remains with a narrow trading range, but currency valuation pressures are building, with the growing US trade imbalance and current-account deficit. Therefore, we are anticipating a resumption in the long-term US dollar decline, with a trading range for the month between euro fx equivalent of $1.19 and $1.23. The large twin deficits, now representing nearly 7% of the US Gross Domestic Product (GDP), can be reduced by a weaker US dollar, making US products and investments more attractive for foreign purchasers. The US dollar remains the world currency of choice, but eventually could come under pressure, as these twin deficits affect global economies and foreign importers ability to purchase US products at competitive prices.
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, The Econtrarian by Northern Trust, Behavioral Brief by Leuthold Weeden Institutional Research, Investment Strategies by Banc of America, TIPS Send Key Signal by Miller Tabak,.
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.