WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 05-10-06:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated April 10th, anticipated a DOW trading range for the month between 10,680 and 11,270. The actual result, due in part to the strong first quarter earnings’ reports, saw the DOW trade between 11,039 and 11,417. There remain divergences within the stock market, with some major indices being supported, while others are already showing signs of long-term weaknesses. The DOW was elevated above our projected trading range, as investors have shifted toward the largest capitalized stocks, seeking a continued advancement in price.
The US dollar was forecasted to resume it’s bearish decline in value and anticipated a euro fx equivalent trading range for the month between $1.19 and $1.24. This proved to be fairly accurate, as the US dollar did resume a decline in value, but slide further than forecasted — between euro fx equivalent of $1.2115 and $1.2675.
The US treasuries were forecasted to offer an attractive yield, more specifically, for the 10-year note at 5% and anticipated yields for the entire interest rate curve may be close to peaking. The actual result saw the US treasury 10-year note continue it’s decline in price and rise in yield during the month, with a peak interest yield rate of 5.11%. There remains some inflation pressures that are causing the US treasuries to factor-in further interest rate hikes, for the prevailing fed funds rate, to above the newly raised level of 5% that occurred at today’s Federal Open Market Committee Meeting (FOMC).
Looking forward . . .
There has been an alarming increase in mortgage loans in foreclosure, encompassing the month of February, up 68% from the year-earlier period. Foreclosures are still relatively low by historical standards, but the trend is directionally discomforting.
The National Association of Realtors, not surprisingly, has seen their membership grow by nearly 40% over the past three years. They recently offered its full-year forecast, calling for a 6% decline in existing-home turnover and a 11% drop in new-home purchases. This would qualify as the hoped-for slowdown in the housing sector, where an insistent minority predict the dreaded implosion in home values.
There is probably no group of people wishing more urgently for a cool-down, but not a collapse in the housing, then Ben Bernanke and the other Federal Reserve policy setters — unless you count the millions of investors who believe the Fed owes them an end to the nearly two years of rate increases.
The Fed has quite a conundrum. On one hand, the policy setters understand that high rates act with a lag, and the ascent in long-rates will likely assist their own efforts to slow the US economy. That argues for a pause in the tightening campaign in the near future.
Yet the still-tightening labor market, the elevated commodity markets and the prospects for higher materials prices passing through to general inflation suggest possibly erring on the side of tighter money.
However, then again, on the other hand, going to far, suffocating the housing market, pressuring the stock market and consumers spending could invoke those downside economic risks that do not seem to be bother Fed officials these days. We would surmise that Ben Bernanke is currently thinking “Don’t go too far, but go far enough, but don’t go too far.”
This sentiment of not going too far is clearly a concern with the release of the employment situation last Friday. Non-farm payrolls increased by 138,000 in April, the smallest rise since last October. The actual increase was only two-thirds the size of the consensus of various economists, despite the introduction of the new forecasting tools, such as derivative contracts based on the employment report or a tally from the company that cuts millions of paychecks.
Month-to-month changes do not tell much about any statistical series, but the last three months’ payroll increase have averaged 179,000, down from 217,000 in the preceding three-month period. There appear to be growing signs of stagflation in the data, which showed rising earnings along with slower jobs growth.
Average hourly earnings were up 0.5% last month and are running at 0.4% a month so far in 2006, for about a 5% annual rate. The employment-cost index for the first quarter shows total compensation expenses to be held in check, due to the slowdown in benefits costs. The explanation may lie in the weaker-than-expected earnings for corporations trying to squeeze insurers to keep health-care costs contained. The questions still remains, how much more can be wrung from an already tight and rigid stone — the corporate bottom line.
The combination of weakening employment gains and rising wage pressures present a sharp challenge for the Federal Reserve. Released statements following the May 10th FOMC meeting, during which the fed funds rate was increased by 25 basis points (0.25%) to 5%, were inconclusive. There remains the uncertainty on if there would be additional rate hikes or when the Federal Reserve would either pause or suspend future interest rate adjustments. Ben Bernanke does not want to reveal his future movements for interest rates without evaluating additional forthcoming economic data, where as the former Federal Reserve Chairman, Alan Greenspan, would sometimes elude to his possible future direction — allowing the US treasuries to make a smoother transition prior to the actual occurrence.
Long-term conclusions and current month expectations . . .
Investor-sentiment measures, as they pertain to the US dollar, have been uncharacteristically conflicting and inconclusive for most of this year, indicating uncertainty on the future direction for the greenback. However, the US dollar could be establishing, at its current level, a possible longer-term inflection point.
More recently, these sentiments measures have started to come back into sync and suggest that the US dollar’s recent decline is likely to continue for the near-term. Yet, this decline should ultimately lead into a much larger rally in the greenback. The US dollar could find formidable support, through this decline, at the euro fx equivalent of $1.30, which it has nearly reached. We are anticipating the US dollar to be supported this month with a euro fx equivalent trading range between $1.25 and $1.30. There are also a number of technical divergences that are amplifying our conclusion for a longer-term rally in the US dollar, which could be more clearly confirmed in the coming months.
The DOW is still continuing it’s topping-in-price process, even though it did advance further this past month. The stock market as a whole was artificially supported with the better-than-expected first quarter earnings’ reports. We have nearly reached the conclusion of this quarterly reporting period, which could see the DOW and the other major stock indices resume their primary bearish trends. We would anticipate a DOW trading range for the month between 11,125 and 11,670, as stocks start to price-adjust for a slower US economy.
The US treasuries may have seen their peak in yield, more specifically for the 10-year note at 5.15%, just prior to the employment report released last Friday. The entire interest rate yield curve has already factored-in a 75% chance that the Federal Reserve will raise the prevailing fed funds rate by another 25% basis points (0.25%) to 5.25% at their next FOMC meeting on June 28-29. However, we feel that Federal Reserves next move on interest rates will be to either take a pause on any future rate hikes or actually cut the fed funds rate. The US economy has reached a climatic peak of price perfection and a maximum level unsustainable growth, which is due to slow in the months ahead, resulting in the reversal of the existing Federal Reserve Interest Rate Policy — from raising to actually cutting the prevailing fed funds rate.
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, RealtyTrac, National Association of Realtors, Philippa Dunne and Doug Henwood of the Liscio Report.
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.