WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 03-16-07:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our previous newsletter, dated February 8th, anticipated that the DOW had reached extreme levels of buyer speculation, and was close to resuming the downtrend, with a forecasted trading range for the month between 12,150 and 12,700. This proved to be fairly accurate, as the decline did resume, and produced an actual trading range for the month between 12,086 and 12,796.
The US dollar was forecasted to be technically supported during the month, with an expected euro fx equivalent trading range between $1.26 and $1.31. The US dollar actually remained within an elevated and slightly narrower range than anticipated, even with the increased volatility within the stock market, resulting in a euro fx equivalent trading range between $1.2943 and $1.3269.
The US treasuries were projected to be price-supported, as the US economy slowed, with a forecasted 10-year Note yield range between 4.65% and 4.83%. This yield range proved to be very accurate, as economic data was released during the course of the month that cause the US treasuries to rally in price, and inversely decline in yield, producing a 10-year Note yield range between 4.52% and 4.82%.
Looking forward . . .
This past Friday’s report on February employment showed that 97,000 new jobs were added and released a slightly lower rate of unemployment. The report, on closer inspection, proved to be on the soft side, as reflected in the stock market response — moving initially higher, then closing lower to unchanged for the major stock indices.
The increase in new jobs, for one thing, was the smallest in over two years, and, for another, the down tick in unemployment to 4.5% from 4.6% was due to the sharp drop in the labor force, conceivably because job seekers were discouraged and simply stopped looking.
The weather likely had something to be with the loss of 62,000 construction jobs, but so obviously did the collapse in housing. Manufacturing employment remained dismal, losing 14,000 positions. Health care, bars and restaurants were the source of the big hires, as they have been in so many months, and accounted for over half of the improvement, with government chipping in most of the rest. Workers put in fewer hours, with average hourly earnings rising 0.4%.
There still remains a stagflationary feel about these numbers, since payroll growth averaged about 190,000 a month last year, and so far this year it is close to 122,000. These leading indicators are not suggesting an imminent acceleration, but we are still seeing strong wage gains.
The subprime market is overloaded with bad loans that have effectively smashed holes into the hull of this financial ship. It has been surprisingly easy for people buying a new house, to borrow hundreds of thousands of dollars by simply telling the bank how much money they make — without any proof. It is called a stated-income loan, but many in the industry call it a “liar loan” or “NINA” (no income, no asset verification). Forty percent of the subprime market, up to $500 billion, is made up of these loans, with perhaps half of the subprime mortgages having no income verification. Subprime mortgage companies are very thinly capitalized and highly leveraged. Twenty-one sizable subprime lenders have already shut down or filed for bankruptcy.
Globalization has changed everything, and may represent the most important theme of our times. Its impact is and will be felt across all aspects of life, business, and money.
Its impact, for the most part, has been for the collective good — increased market opportunities, lower cost of production are two perfect examples. However, the synchronized plunge on February 27th and subsequent declines, have revealed one facet of the downside risks of globalization: The free flow of capital and the interrelated nature of economies, which has produced years of prosperity, wreaked havoc on the financial markets recently.
The February 27th major sell off on Wall Street started with the Shanghai Index 8.8% drop, the biggest daily decline in a decade. However, it would be naive to believe that the only reason for the Chinese emerging market decline was simply an adjustment from an overbought market condition. Wall Street’s conviction of robust business spending and the absence of a spillover effect from the housing recession was tested that day, after the durable goods new orders figure was released — declining 7.8% in January.
The non-defense ex-aircraft capital-goods orders, a key barometer of business capital spending, declined 6% in January and fell into negative territory on a year-over-year basis for the first time since the 2003 Iraq invasion.
There are those that believe that the sharp decline in China’s benchmark stock index was on fears of increased margin requirements, which would have also adversely impacted the US and European markets.
What is a more likely reason is the growing recognition that inflation remains worrisome, that growth is slowing, and that the subprime mortgage housing debacle will no longer remain contained. Also, there are still other major US concerns: US banks are keeping less money in reserve; Default fears are draining subprime pools, adding pressure to prices; There remain uncertainties about the fallout of various bonds.
We tend to believe that the decaying economic fundamentals, along with a complacent market that is overbought, is more of a reason for a major adjustment. Moreover, the single biggest contributor to the US economy over the past four years, housing, is showing no signs of being anywhere near a preferable bottom. There will likely be a significant and prolonged technical deterioration, as more additional fundamental catalysts appear on the horizon in the coming months.
Long-term conclusions and current month expectations . . .
The market, in February, broke above our longer-term reversal trigger, then reversed back below its prior week’s level. It broke above this level for about six days, and in each of these past pattern occurrences has represented a market peak, since 1998. This technical pattern is further confirming our belief that the various stock indices are in the process of resuming a major decline. We would anticipate the DOW to have a trading range for the month between 11,600 and 12,350, as the downward trend in the major stock indices is continued.
This decline is not to be construed as a normal pullback in a bull market, but a significant change in the market climate. People’s investment patterns, along with interest rates and changing economic conditions, will all affect the future market environment and extenuate the stock market decline.
The baby boomers are going to dramatically affect the markets as well, and we would suggest to all investors to evaluate their stocks, mutual funds, retirement accounts, and all of their real estate holdings immediately. The “suggested investment allocations” provided further below would offer investors a means to generate a sensible rate of return on investment, with complete liquidity, in either a rising or declining stock or bond market.
The US dollar remains within a narrow range, as further economic data and a decisive direction for the twin deficits (current-account deficit and US trade imbalance) — increasing or decreasing — is required in order for the renewed trend to be established. We are forecasting a US dollar trading range for the month between euro fx equivalent of $1.290 and $1.3250. The growing twin deficits would normally affect the US dollar in an adverse way, which has not been the case. The US dollars current continued support could be because of two specific reasons: One, the US dollar remains the global currency of choice; Two, inflation concerns could be reappearing, which would enhance its value as interest rates rise.
The US treasuries are currently factoring in both concerns of rising inflation pressures as well as a slowing US economy. We would anticipate the US treasuries to remain price-supported, with a peak 10-year Note yield for the month of 4.60%, until further economic data confirms one way or another. Presently, stagflation — the slowing of the US economy with rising inflation pressures — remains a near-term concern.
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, Benson’s Economic & Market Trends, Stock Traders Daily by Thomas Kee Jr, Blue Marble Research, National Bank Financial, Ritholtz Research/Analytics, Liscio Report by Phillippa Dunne and Doug Henwood .
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.