WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 11- 13- 08:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our previous newsletter, dated October 15th, stated that the deleveraging of the financial system is expected to continue for years, and new policy measures will slowly unclog the credit markets a bit. However, this just takes us to a consumer led economic slowdown and weak consumer spending, which appears to be taking hold this quarter for the first time in 17 years. We further stated that this would keep the major stock indices under pressure for the long-term and projected large DOW trading range for the month between 7,800 and 11,200. The actual result saw the DOW indeed remain under pressure, with a trading range for the month between 7,880 and 10,882 — a very accurate forecast.
We stated that the US treasuries could decline in price during the course of the month, as the various US bailout programs increase the supply of the issued treasury instruments to raise the needed cash for the various rescue plans, resulting in a low yield for the US 10-year Note at 3.75%. The actual result saw the US treasuries remain under price pressure, causing yields to rise, and produced a US 10-year Note yield range for the month between 3.53% and 4.64% — a very accurate forecast.
We anticipated that the US dollar may be close to a peak in price, due for a period of consolidation, and projected a euro fx equivalent trading range for the month between $1.32 and $1.41. The actual result saw the US dollar continue to rally in price, as it remained the favored currency with the global economies slowing, producing a euro fx equivalent trading range between $1.2523 and $1.4108 — a fairly accurate forecast.
Looking forward . . .
The Case-Shiller Home Price indexes dropped sharply in September, dashing hopes that home prices had begun to level out. Consumer Confidence, to add insult to injury, collapsed in October to the lowest level since records began being kept in 1967. The fraction of respondents who said jobs were harder to get in October jumped by the largest margin since May 1980.
Some of this data actually suggests that the fourth quarter could see the largest decline in real consumer spending since the deep recession of the mid-1970’s or early 1980’s. The housing market is likely to remain weak for an extended period of time, with home prices still high relative to rents/income, lending standards levitating, mortgages rates rising, the labor market weakening, and overall confidence in a free fall.
National inventory levels for new homes (including finished vacant and under construction) continue to decline, but finished vacant homes have yet to fall significantly, indicating that demand is still weak and pricing pressure will continue. Finished vacant-lot inventories are still rising, and further price declines as well as additional demand is needed to reduce these high levels of vacant-lot inventories. The finished vacant-home inventory levels needs to return to the normal number of months of unsold inventory for housing prices to stabilize.
The Bureau of Labor Statistics (BLS) released this past Friday the employment report, which showed a larger than expected payroll loss of 240,000. This figure does not even count the mythical jobs that padded the total by 71,000 via the infamous birth/death model. Also, the unemployment rate jumped to 6.5%, from 6.1%, the highest level since March 1994.
Moreover, the months of August and September were revised, and added a mere 179,000 lost jobs to the two-month total. In September alone, 284,000 jobs vanished, and so far this year, the job loss weighs in at a considerable 1.2 million.
The category that paints a clear picture of the true employment situation is dubbed U-6, and includes marginally attached workers, part-timers who can not find a full-time job and the officially unemployed. In October, that measure reached 11.8%, the highest since 1994, when it was first designed, compared with 7.9% a year ago.
It is quite a surprise that the yearly job losses in private services is 0.4% and matches the worst of the 1982 recession and exceeds the worst of the 1975 slump. The services has changed to where it is very cyclical, which was not the case in the past.
The job losses are thoroughly widespread, with only local government, health care and utilities adding jobs. We would assume, given the parlous conditions of the state and municipal economies, that these areas will be affected in the months ahead.
The one comforting thought about the October employment report is that it could have been a lot worst, but that could be the case in the coming months.
A BIGGER CRISIS TO FOLLOW:
There is a bigger economic disaster in the making, which relates to the 78 million baby-boomers eligible for Social Security and Medicare. A potential catastrophe awaits us once we survive our current crisis.
The US had $5.7 trillion in total debt, at the beginning of the year 2000, and just eight years into this new century that sum has nearly doubled, thanks to war costs, spending increases, expanded entitlement programs, and now a flurry of government bailouts and rescues.
This year is particularly bad, with the federal budget deficit for fiscal year 2008 hitting $455 billion, up from $162 billion last year. That figure does not include the cost of the Emergency Economic Stabilization Act of 2008, which has an initial price tag in the hundreds of billions of dollars. In fairness, some of that money presumably will come back to the US Treasury, since the new rescue-related sums will be used to acquire preferred stock, mortgages, and other assets that someday could be sold at a profit.
Yet any such calculations are penny ante compared with the fiscal disaster that is bearing down on the United States. It is no longer an event in the misty future, when some baby-boomers officially began to collect Social Security benefits, and will be followed by nearly 78 million more over the next 17 years.
The entitlements due from Social Security and Medicare present the US with the most frightening abyss. The costs of these current programs, along with other health-care expenditures, could bankrupt the United States. The abyss offers no assets, troubled or otherwise, to help deal with this ever growing long-term problem.
There have been some suggested less-than-revolutionary measures that could help, which include: budget savings that would accrue from repealing the Bush-era tax cuts, ending the Iraq war, or expanding the economy after the current downturn runs its course. We would not come close to addressing our federal financial problem, even if the economy were to grow at the level of 3.2% a year, as it did in the 1990’s, and these other savings were achieved during the same period.
We can not be complacent in the US, since the costs of these programs will start to threaten solvency in the next few years. The only way to get across the chasm is to begin making tough choices now to change our current course — any delay will make the problem even worse.
In fact, the deteriorating financial condition of the US federal government in the face of skyrocketing health-care costs and the baby-boom retirement could fairly be described as a super-subprime crisis — dwarf, in comparison, to what we are seeing now.
The US Government Accountability Office (GAO), noting that the federal balance sheet does not reflect the government’s huge unfunded promises in the nation’s social-insurance programs, estimated last year that the unfunded obligations for Medicare and Social Security alone totaled almost $41 trillion. That sum, equivalent to $350,000 per household, is the present-value shortfall between the growing cost of entitlements and the dedicated revenues intended to pay for them over the next 75 years.
We refer to this as a super-subprime, because, besides its gigantic scale, there are very disturbing similarities between the current mortgage-related crisis and the next potential disaster.
First, like the securitized investment vehicles that blew up, federal programs were launched without adequately thinking through who would bear the ultimate cost and related risk. Lawmakers have increased spending, expanded entitlement programs, while expecting future generations to pay the bill, just as originators of mortgages let themselves off the hook by unloading packages of dubious loans to others.
Second, just as a lack of transparency associated with US mortgage-backed securities resulted in big surprises, the nation’s huge off-balance-sheet obligations for Social Security and Medicare present a threat wrapped in camouflage. After all, the government’s trust funds do not really provide much security, since they do not hold anything but more government debt.
Third, in the same way that private sector “risk management” executives failed to prevent the subprime mortgage crisis, overseers in Congress and the executive branch have turned a blind eye to costs associated with various entitlement programs. A lack of statutory budget controls has led to a widening gap between the government’s revenue and costs, while lax regulation of banks fed the current subprime crisis.
At the heart of these problems is the US leaders’ collective failure to act in the face of known challenges, The United States has veered from its founding principles, which held to individual responsibility and accountability today in order to create more opportunity tomorrow. The concept of thrift and prudence were no less at the center of the American spirit than liberty and justice, when the US constitution was written 232 year ago.
Long-term conclusions and current month expectations . . .
The US consumer is reluctantly sharply cutting back on spending and this trend will likely continue, as they make a valiant effort to make up for the loss of $5 trillion in housing wealth. This could result in a major short-fall in demand over the next couple of years.
We could see a contraction in yearly consumption, to the tune of $700 billion, if US consumers were to return to normal postwar savings levels of 8%. This could result in the US Gross Domestic Product (GDP) dropping at a annual rate of 2% this quarter, 4% in the first quarter of 2009 and 3.3% for the second quarter of 2009. These estimates do not even take into consideration, housing, capital spending and corporate profits
We do not believe the 50 basis point (0.50%) cut in the prevailing fed funds rate will do anything for the US economy. Monetary policy has long and variably lagged, with the real fed funds rate now standing somewhere around negative 3.3% (1.0% fed funds rate, less 4.3% inflation as measured by the latest personal-consumption expenditure deflator). The Federal Reserve and US Treasury are in a kitchen-sink mode — anything is getting tossed at the crisis, whether or not it makes economic sense. This type of government effort will likely place additional price pressure on the various US treasuries during the course of the month, resulting in the US 10-year Note having a peak yield of 3.70%
President-elect Barack Obama will not chart a radical change is course direction, and might well be more fiscally conservative than many expect. His economic advisers, particularly Paul Volcker, are cautioning him to take this route, as markets may respond more positively to elimination of this one bit of uncertainty — seen as a precursor to a reviving economy. Normally, there would be a concern about a Democratic sweep of the White House and Congress; however, with the economy in a unquestionable ditch, strong and clear leadership is needed, and the markets may have less of an issue than usual with the Democrats in full control.
Furthermore, the new President-elect Obama will be confronted with a possible $750 billion federal budget deficit next year, unprecedented government ownership of banks and other financial firms, and an independent Federal Reserve that is already broadened its balance sheet to add support to the commercial-paper market, all financial firms and the economy at large. Fannie Mae and Freddie Mac are also now troubled adoptee’s of the state, and a new regulatory structure must be created.
Obama’s hands will be tied for some time, with this economic and fiscal backdrop. Any fiscal-stimulus package will be geared toward troubled-homeowner assistance and efforts to promote job creation. Tax increases will have to wait until an economic turnaround.
The US economy could get a modest boost from Obama’s proposed $175 billion economic stimulus plan to rebuild infrastructure and help municipal governments avoid budget cuts, but the questions still remains if the effort will long-term overall economic growth. These efforts could see the DOW remain within a large elevated trading range, during the course of the month, between 8,000 and 10,850, as the major stock indices consolidate before resuming the primary bear market downtrend.
The US dollar appears to remain the preferred global currency of choice, as economies slow all over the globe and various central banks cut their key lending rates; however, in the near term, it may be overbought and due for a period of consolidation. We are anticipating a broad US dollar trading range for the month between euro fx equivalent $1.24 and $1.32.
PRIVATE ACCOUNT WEALTH MANAGEMENT SERVICES:
We, at Wavetech Enterprises, LLC, offer our Private Account Wealth Management Services, which is a conservative, flexible, and actively managed investment strategy. Investor’s ordinary and/or tax-deferred funds remain securely in their name at major financial institutions and/or brokerage firms, while we manage them Online.
Our wealth management services outperforms others, since we use a unique and proprietary culmination of the following: fundamental analysis of relative valuations, technical analysis of the changing market conditions, evaluations of various economic business cycles, diagnosing sector market psychology, and strategic investment selections with appropriate 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.
We operate within the “Exemption from Registration” provision provided by the Code of Federal Regulations (CFR) Title 15, Chapter 2D, Subchapter 2D, Subchapter II, Section 80b-3. This provision allows investment firms to grow their business prior to registration, and the large expenses associated with such a process. Investors’ funds remain securely in their name at major brokerage firms and/or banks, while, we, at Wavetech Enterprises, LLC., manage the funds “Online.”
We are pleased to provide a letter written by Attorney, Steven Stucker, regarding the “Exemption from Registration” provision, who has also been aware of our wealth management services, as well as our operating procedures, for more than eight years. Investors are more than welcome to telephone him directly at 775-884-1979 to discuss this provided letter as well as our unique Private Account Wealth Management Services in further detail.
INVESTORS, take action NOW to maintain, keep, protect and grow what wealth you have with our unique Private Account Wealth Management services. What more can we do and/or offer to help you preserve as well as grow your wealth toward achieving both your short and long-term investment objectives? Call us today at 775-841-9400.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Dean Baker with the Center for Economics and Policy Research, US Government Accountability Office (GAO), David Rosenberg, Economist, with Merrill Lynch, David Walker, Former US Comptroller General, Richard Yamarone with Argus Research, Michael Darda with MKM Partners, Liscio Report by Philippa Dunne and Doug Henwood, Sherry Cooper with BMO Capital Markets, Albert Savastano and Bill Young with Fox-Pitt Cochran Caronia Waller.
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.