WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 11-20- 09:
By: John T. Moir
Position overview . . .
Our previous newsletter, dated October 19th, stated that the DOW could remain, once again, within an “elevated period of consolidation” during the course of the month, with an anticipated trading range between 9,400 and 10,800. The actual result was the DOW did remain elevated, but with a narrower trading range than projected, between 9,430 and 10,117.
We stated that the sliding US dollar is encouraging producers of various commodities that trade in US dollars to raise prices as a hedge against the lower currency. Furthermore, we felt that the US dollar weakness could persist, at least for the near-term, and projected a euro fx equivalent trading range for the month between $1.45 and $1.52. The actual result saw the US dollar remain, as expected, under pressure, with a euro fx equivalent trading range for the month between $1.450 and $1.508.
The various US treasuries were anticipated to decline further in price, inversely causing yields to rise, due to the US dollar weakness, and projected a US 10-year Note base-yield of 3.10% or higher, during the course of the month. The actual result saw the US treasuries decline in price, with yields inversely rising, producing a US 10-year Note yield-range for the month between 3.10% and 3.58%.
Looking forward . . .
Banks have taken some lumps since the economy turned negative, but some pundits believe their biggest headaches are yet to come. The pace at which US commercial banks are adding to their loan loss reserves has slowed this year, while loans continue to go bad at a brisk pace.
Some pundits warn that banks are not socking away enough for a rainier day, despite the optimism of lenders. The disconnect is particularly acute in commercial real estate, where lenders are facing a surge of defaults on commercial mortgages and construction loans made when prices were much higher and demand for space much stronger.
Banks have been recognizing commercial real estate losses slowly, even though an accelerated level of defaults is expected to start next year, and remain elevated for several years to come.
These defaults are not the only problem, as there remain ill-defined or inconsistent applied rules for valuing securities and handling loan modifications, making it hard to determine the true health of all banks.
The risk is that this year’s recovery could turn out to be a false dawn, delivering another blow to investor trust — not to mention people’s retirement accounts. The credibility of the banking system could take another step back, since everyone expected the peak in losses has already occurred, but it is impossible to know for sure the true overall state of these banks without a apples-to-apples comparison.
Banks have been swimming in losses since the collapse of the credit markets in mid-2007, which sapped demand for all sorts of goods and services. Loans written off as uncollectible hit their highest level on record in the second quarter of this year. Loan loss reserves are also at a peak, since the government started keeping track in 1984.
Taking losses on souring loans and troubled assets eats into profits, which tends to drive down share prices and executives’ pay. The losses also erode capital, reducing lendable funds and forcing banks to raise new money by selling stock or businesses.
Banks are therefore eager to stretch their losses across as long a period as possible. Regulators are willing to go along, up to a point, since being faced with a triple-digit bank-failure count and trying to manage hundreds of troubled lenders.
Accounting rule makers, in April 2009, gave banks more leeway in valuing hard-to-trade securities, which has led to current discussions over when banks will have to bring some off balance-sheet assets and liabilities back in house.
This sort of political forbearance is the lowest-cost way of stopping the train wreck, as the banks wanted that April 2009 change very badly, and we can assume they wanted it for a reason.
The risk, of course, is that deferring the reckoning can create a bigger problem later, and there are many who believe this is the case with most banks.
Non-performing and restructured assets grew six times as fast as loan reserves over the past year, while reserve building as a proportion of new troubled loans tapered off after peaking in the fourth quarter 2008. This pattern suggests that banks are behind the curve in providing for troubled loans.
Plenty of trouble is ahead, as prices on apartment, industrial, office and warehouse properties dropped between 30% to 50% over the past year, when marked to market. Banks should have booked losses on around $110 billion of defaulted commercial real estate and construction loans, but so far they have taken their medicine in only about a third of those cases.
That means that banks could face a backlog of $70 billion or so on defaulted but unreserved loans, as we head into the teeth of a major down cycle in commercial real estate — where the bulk of bubble-era loans are due to be repaid or refinanced over the next several years. About $1.4 trillion of the outstanding $3 trillion in mortgage debt is slated to mature in the near future, and we would estimate another $500 to $750 million in defaults. Maturing debt will have a tough time finding lenders, and debt that has been or will be marked to market could render many banks insolvent, since much of the debt is worth half or even less of par value.
Regional and community banks, rather than the giant TARP-taking entities, will bear the brunt of this onslaught of defaults. Banks with between $100 million and $10 billion in assets have almost $900 billion of commercial real estate exposure, which is three times their capital. This further confirms that we are closer to the beginning of this major problem rather the end.
Publicly disclosed financial reports have been showing a slowdown in the growth of early-stage delinquencies, those in which borrowers are a month or two behind on their bills. Investors have been encouraged by this trend, because the worst losses could be behind for the banks, but as mentioned, regulatory filings by the same banks often paint a less upbeat picture.
Non-performing asset levels were 17% higher in regulatory filings than in public statements, based on the second-quarter data for the top 25 banks and thrifts by assets — suggesting that some big banks are understating problem loans as they go through the restructuring process.
This category of troubled debt restructuring’s is likely where these banks are handling various loan modifications and other changes. This unpublicized category doubled over the past year, as banks extended loan maturities and cut interest rates or loan balances, particularly on troubled residential loans.
Institutions account for restructured loans in different ways, which could mean some bank investors are in for a surprise down the road as many restructured loans go sour. The main issue is that the accounting for loan modifications is not transparent, and makes delinquency data appear better on the surface.
Long-term conclusions and current month expectations . . .
The third quarter corporate earnings are probably as good as they can get, and from here forward, cost savings are slated to diminish and revenues will be the key to profits continued progress. Companies have cut labor costs by an unprecedented $327 billion over the past year, or more than 25 percent, while corporate earnings, during this span, still fell a whopping $177 billion.
Consumer spending would have to climb more than 3%, now shrinking by 0.3% from last year, in order for revenues to match that cost savings. This would be quite a feat, given 10% unemployment, a reluctance by consumers to go deeper into hock, and the fact that rising food as well as energy prices are gobbling up a near-record slice of household budgets.
The bullish pundits are counting on the public sector to replace vanishing labor income in the private sector. This assumption might not seem such a wild hope at first glance, since the government has been the one and only source of job creation over the past decade. It has swelled the ranks of the gainfully employed by a cool two million, compared to the private sector which has shed 588,000 during the same past decade.
The real trouble is that 1.95 million of those two million slots were filled by state and local governments. These divisions of government will likely not have the funds to go on a hiring binge, with their tax receipts suffering a steep decline. Indeed, the state and local combo have already had to shave 179,000 workers over the past 12 months — a dismal picture that seems to have eluded the bullish pundit’s attention, at least for the near-term.
Market bipolarity, intended or not, may be heightened by the massive, concentrated Quantitative Easing (QE) by central banks, as well as fiscal largesse, instead of a middle-way that allows fundamentals to flow. Heightened volatility is likely, even with central banks various attempts to control the market movements to less then what occurred this past winter. This continued QE could cause the DOW to remain within an “elevated period of consolidations,” at least for the near-term, with a anticipated trading range for the month between 9,650 and 10,850.
Currency-debacle risk can no longer be treated with benign neglect by central banks nor segregated in portfolios. This concern and others could cause the US dollar to remain under pressure, at least for the near-term, with a projected euro fx equivalent trading range for the month between $1.46 and $1.53. The lack of near-term confidence in the US dollar could also cause the US treasuries to remain under price pressure, with an expected base-yield for the US 10-year Note of 3.30% or higher, during the course of the month. Active and flexible wealth management services will be essential through these unique and changing economic climates, as outlined below.
FOOTNOTE: The release of this month’s newsletter was postponed, to the financial benefit of investors utilizing our Private Account Wealth Management Services. Our unique and flexible management services are further explained below — for those investors interested in seeing their wealth continue to grow, in either a rising or declining stock, bond or real estate market environment.
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 nine 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, Paul Miller, Analyst, with FBR Capital Markets, Federal Reserve Bank of St. Louis, Wayne Landsman, Accounting Professor at the University of North Carolina, Keefe, Bruyette & Woods (KBW), Moody’s/REAL, Foresight Analytics, MacroMavens by Stephanie Pomboy, Subodh Kumar with Subodh Kumar & Associates, Randy Zisler with Zisler Capital Associates, California State Controller’s Office.
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.