WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 11-13-06:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated October 10th, forecasted that the current DOW advance had grown very mature in amplitude and was poised to resume the downward trend, with a expected trading range for the month between 11,550 and 11,880. The actual result produced an elevated range, between 11,653 and 12,167, due to the strong third quarter earnings’ reports being released during the period. The gradual ascent, with continued negative technical divergences, further confirms that the current stock market advance is coming close to end.
The US treasuries was anticipated to decline in price and rise in yield, as inflation concerns reappeared during the month. The US treasury 10-year Note was projected to have a low-yield of 4.55%, which proved to be the case, as the yield range was between 4.55% and 4.82% through this specified period.
The US dollar was expected to remain with a large trading range, between euro fx equivalent of $1.23 and $1.28. The global markets are still uncertain of the US dollar’s long-term trend, which has been trading within a constricted range for the past six months. The actual US dollar one-month trading range was narrower than anticipated, between euro fx equivalent of $1.2527 and $1.2816, as US and foreign investors are still reluctant to commit to a definitive longer-term direction, one way or the other.
Looking forward . . .
The calendar year for mutual funds ended on October 31st, which caused fund managers to deploy most of their available cash, trying to keep their performance up with the stock market. These fund managers were indiscriminately buying anything as long as it was an equity, artificially supporting the major stock indices. The stock market further continued within a narrow elevated range until the results for the mid-term election, held on November 7th, were released.
The mid-term election produced a renewed Democratic control of both the House and Senate, which will affect a number of issues going forward. The president’s power to negotiate free-trade agreements without congressional review — known as Trade Promotion Authority — expires in July 2007 and is unlikely to be renewed with the Democrats controlling both houses of Congress. The growing US trade protectionism against America’s major trade partners, notably China, whose massive trade surplus with the US remains a sore point on Capitol Hill. Also, the Democrats will likely institute more investment protectionism or at least more restrictions on foreign direct investment in the United States.
It is important for US investors to remember that foreigners presently own nearly 43% of US marketable treasuries, 32% of outstanding US corporate bonds, about 16.5% of US government agency bonds and just more than 16% of US equities. That is part and parcel of the staggering $4.3 trillion foreign investors have plowed into US securities, since the beginning of this decade. Therefore, foreigners can effectively influence the value of the US dollar, in either a positive or negative way, with the continued accumulation or the liquidation of their various US dollar holdings.
OTHER GROWING BUBBLES POISED TO BURST:
The growing housing bubble is definitely one to worry about, but there are four other bubbles that also deserve our attention., which are: a stock-market bubble, a foreigner-supported-US dollar bubble, a consumer-debt bubble and a US-debt bubble. When the five collide in a huge combined bubble, the air will rush out of the pumped-up US economy, deflating the average American’s assets and standard of living.
The US is repeating errors of the Nixon era, including massive government deficit, under-funded entitlements, and an unpopular war that the government simply cannot fund with higher taxes or special bonds. The growing global demand for commodities could still lead to inflation, whether due to energy costs, unfunded deficits or US dollar-currency risks.
The current stock market bubble is a reflection of “monetary inflation” rather than future earnings, which will result in the major stock indices retreating to a more normal trend-line level of support.
Long-term conclusions and current month expectations . . .
The technology bubble dominated the market in the year 2000, while we are now dealing with the bursting of the housing bubble. In each occurrence the stock market moved to new highs, while technical divergences did not and presently do not confirm the market strength.
A clearance of these divergences would make a case for an extended market advance, but the longer these divergences exist, the increased likelihood of a stock market decline. We also continue to monitor various commodity prices for a confirmed breakout or a collapse as another sign of pending economic strength or weakness. The DOW is anticipated to resume the downward declining trend, due to these prolonged and continued divergences, with a trading range for the month between 11,600 and 12,200.
The latest housing data show year-over-year price declines for the first time in over a decade. The recent decline in mortgage rates may slow the level of deterioration, but the housing bubble still has further room to unwind itself. The effects of the bursting housing bubble has not yet completely filtered themselves into the US economy. It would be very bullish, if the underpinnings of the stock market strengthened, so that these divergences could be corrected; however, until that happens, extreme caution is suggested.
We feel the US treasuries are overvalued at current price levels and are poised to decline in price and rise in yield, at least for the near-term. The very low yield at quarter-end simply cannot be fundamentally or technically justified. Fixed-income investors were not satisfied with the notion of a holding-steady Fed funds rate, as the third quarter commenced, and started to position for a lower funds rate. In the third quarter, US treasury note yields fell by approximately 50 basis points (half of one percentage point), ending the quarter fully priced for a rate cut.
The US treasury market was not the only market to rally in the third quarter; stock indices also achieved gains, while spread sectors in the fixed-income universe performed quite well.
The ability of the US treasury market to sustain current price levels is wishful thinking, if inflation concerns continue to emerge, as expected by the Federal Reserve. The US treasury 10-year note is forecasted to have a low-yield for the month, at 4.55%, which was also the case this past month, in October. Inflation pressures still readily exist, justifying a decline in price and an advance in yield. The US treasuries are currently trading within a yield range, between 4.55% and 4.80%, for the 10-year Note. A definitive yield move outside this defined range would confirm either a resumption in the US treasury advance or decline in price, at least for the near-term.
The US dollar for the past six months has remained within a broad and defined trading range. Foreigners, with their vast US holdings, are uncertain if they would like to either add to or reduce their current position, which were outlined earlier within this newsletter. We expect the narrow trading range to continue for the month, between a euro fx equivalent of $1.25 and $1.29. The growing US trade imbalance and current-account deficit would normally cause the US dollar to decline in value, to reduce the imbalance with other countries. However, the US dollar has continued to be supported, possibly due to its global demand as the currency-of-choice. A more defined longer-term trend for the US dollar could be established, with a strong move outside the current six-month trading range, existing between euro fx equivalent of $1.23 and $1.30.
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, Investment Strategies Group and Bank of America, Sadoff Investment Management, Dwight Asset Management, and America’s Bubble Economy by David Wiedemer, Robert Wiedemer, Cindy Spitzer and Eric Jansen.
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.