WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 11-12-04:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated October 12th, forecasted that the DOW would resume the bear market decline and anticipated a trading range for the month between 9,800 and 10,260. This proved to be very accurate, shown by our wave pattern technical analysis, with an actual DOW trading range for the month between 9,708 to 10,270. The process of completing the countertrend rally continues, with the DOW holding above it’s key support level of 9,800. We dipped below this level for two days during the month, and then proceeded to initiate another bear market rally. Furthermore, we projected that the US treasuries would continue to rally in price and decline in yield, but expressed concerns over the possibility of a correction or the commencement of “repricing” in the near term. We met our upper-end objective levels within the US treasury positions and made adjustments in anticipation of a decline in price on October 20th. Adjustments proved to be timely, as the US treasuries began to trend lower the following day, and continued downward for the remainder of the month.
We further stated, based on a 94% level of accuracy over the past 90 years, that if the DOW rallied from Labor Day to Election Day, the incumbent would win. Otherwise, a decline would produce a victory for the opposing party. Initially, the DOW declined for a majority of the two-month period, showing that the opposing party would win. However, 7 trading and 11 calendar days before Election Day, the DOW started to rally, producing a small positive position for the two-month period and predicting victory for the incumbent, as was the case. This 94% level of accuracy continued, even if the rally occurred in the last seven trading days before Election Day.
Last month, we also provided a detailed special report on the global housing bubble that could be in the process of bursting. Signs are continuing to appear, especially in different parts of the US, where developers are dropping their prices by as much as 25% to re-create demand for various housing projects. This situation is also becoming more readily apparent in parts of Europe and Australia with demand steadily evaporating. We also suggested that investors reduce their real estate holdings to no more than 25% of their total household wealth, from the current 50%, and divert those funds towards an active management service that can generate profits through either a rising or declining stock, bond, or real estate market.
Looking forward . . .
The Bureau of Labor Statistics (BLS) reported last Friday that non-payroll employment increased by 337,000, far exceeding the expectations of 150,000 new jobs. The strong report showed an average of 225,000 new jobs in the three months preceding October; a marked improvement over three-month gains in August and September. The unemployment rate has remained relatively unchanged at 5.5% for the past three months. However, we would estimate that between 100,000 to 150,000 of the new hires in October were due to the late-summer hurricanes, and expect this payroll number to be revised in the coming months.
The gains in payroll employment, over the past 12 months, have only averaged 170,000 new hires per month, which is due to the slow pace of economic growth. Based on recent figures, third quarter Gross Domestic Product (GDP) ran 3.9%, higher than the level in the same quarter a year ago. While that used to be fast enough for employment growth to go gangbusters, the acceleration in productivity growth has upped the ante to the point that 3.9% equals what 2.9% accomplished a year ago.
In fact, since businesses normally refrain from starting the hiring process until clear signs of economic expansion are apparent, the huge rebound in last year’s summer quarter may help explain the solid half-point decline in the unemployment rate — to 5.5% from 6% in October 2003. We would not expect another half-point decline, even if GDP growth continues to run at a 3.9% level.
We expect a consistent level of payroll employment in the coming months. Gains of 170,000 per month are reasonable, but a quarter-of-a million new jobs would be desirable for economic expansion. However, this would depend on sustained GDP growth, which may not be obtainable going forward.
The financial markets, which have funded the US twin deficits, may not cooperate with the Bush Administration’s plans in the months ahead. Indeed, even as the stock market rallied further this week, the US dollar continued to decline, with the euro fx hitting $1.30, the highest against the greenback since the common currency was introduced in 1999.
Along with the US dollar, another currency was plummeting to new lows — the Chinese renminbi. While China’s currency is pegged to the US dollar, that means it has been dragged lower against other currencies, such as the yen, the euro fx, the Korea won and the Australian dollar. To keep the renminbi stable against the US dollar, the Chinese monetary authorities have had to purchase US dollars, adding a massive $120 billion to their foreign-exchange reserves, which were invested in US treasury and agency securities.
China has been trying to rein in the credit expansion resulting from this inflow, most recently raising interest rates. China may be considering allowing the renminbi to appreciate, a long-sought goal of the US. However, we should be careful what we hope for, as that is our credit lifeline, which may be curbed if exchange rates adjust.
Eventually something has got to give. Clearly private capital is not coming to America in sufficient quantities to fund a current-account deficit at nearly 6% of GDP, which is made evident by the US dollar’s steady fall. That proverbial slide picked up speed after the election results were made clear.
It should be remembered that most of the major market breaks have begun in the currency market, with October 1987 being the most recent. Furthermore, markets tend to get jumpy when there is a new Fed Chairman getting on-the-job training. The last time that happened was when Greenspan arrived in 1987.
Many people today argue that the Reagan period proved deficits do not matter. Undeniably, back in the ‘Eighties, critics charged the twin deficits would wreck the economy — by driving the US dollar higher. What it actually provoked was a great vacuum sucking sound of capital being attracted from everywhere around the globe, in part by the economic boom being unleashed as a direct result of the tax cuts.
There was another part of the influx of investment: Valuations of US assets were at rock-bottom levels in the early stages of the bull markets in US treasuries that would extend nearly 20 years. Stocks sold at single-digit price-earnings multiples, and US bonds offered double-digit yields. As inflation and interest rates fell, capital gains followed.
Now valuations are anything but cheap and inflation, as well as interest rates, could be on the rise. Is it any wonder that it is getting more difficult to coax capital to come to the United States?
Therefore, we project that a typical balanced pension-fund portfolio is not likely to return any more than 4% a year over the next decade. Yet many pension funds are still assuming 8% returns, and individual investors are just as optimistic with a continued buy-and-hold investment strategy.
What we are likely to experience is something similar to the roller-coaster ride of the late ‘Sixties and early ‘Seventies where the DOW swung within a large trading range. That will require investors to take a very different technique for investing from the ‘Eighties and ‘Nineties, when a buy-and-hold investment strategy was the path to riches without effort. Active management will be needed to negotiate these kinds of swings, and we would recommend reviewing the “Suggested Investment Allocations” listed towards the end of this newsletter for strategies in these changing times.
Long-term conclusions and current month expectations . . .
In years past, the rise or decline of the US dollar has been a prelude to the eventual stock market direction. For the past week, we have had a divergence — with the stock market rallying as the US dollar has steadily declined. Other countries are obviously not pleased with the results of the US election and are expressing their concerns going forward by selling the US dollar. This lack of foreign confidence could continue for several years until the trade imbalance and current-account deficit are reduced to more manageable levels and the US dollar reaches an attractive level for global interest. This US dollar decline could reduce the foreign demand for US treasuries, causing them to decline in price and rise in yield. We expect them to remain under pressure in the near-term, but could revise this projection in the next few months.
We would conclude, due to the declining US dollar, that the rally within the major stock indices is solely produced by US investors. The divergence between the stock market and the US dollar will eventually be corrected, and we expect the stock market to resume the primary bearish trend next week. We appear to have reached a climatic peak of optimism for this countertrend rally today, with US investors expressing their delight in the election results, and are forecasting a DOW trading range for the month between 10,100 and 10,550. The DOW continues to have formidable support at 9,800, and we would expect an acceleration in the bear market decline, once the DOW has an end-of-the-day-close below this level for more than a one week period.
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 offered through our Private Account Wealth Management Services. The minimum investment criteria are 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 19% 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