WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 10-10-07:
By: John T. Moir
Chief Editor: Clare Mc Kendrick
Position overview . . .
Our recent newsletter, dated September 10th, anticipated that the Federal Reserve would cut the prevailing fed funds rate, which could stimulate the stock market briefly, through an initial level of euphoria, before resuming a decline to lower levels. We projected a DOW trading range for the month between 12,200 and 13,500, non-inclusive of the immeasurable initial euphoria from the cut in the fed funds rate on September 18th. The actual DOW trading range for the month was elevated, between 13,022 and 13,924, due to stock market not anticipated a 50 basis point cut (0.50%) in the fed funds rate, instead of the expected 25 basis points (0.25%) reduction, which lead to a celebratory advance. History has shown, which we will outline later within this month’s newsletter, that the long-term stock market response to interest rate cuts is not always a positive one.
The US dollar was forecasted to have a euro fx equivalent trading range for the month between $1.34 and $1.38, with some anticipated technical support. However, we further stated that the expected cut in the fed funds rate could cause foreign countries to lose confidence in the US dollar, resulting in it’s decline even further, to new lows. This additional assessment and words of caution were accurate, because right after the Federal Reserve cut the prevailing fed funds rate, the US dollar broke to new lows, producing an actual euro fx equivalent trading range for the month between $1.3561 and $1.4298, breaching the key US dollar support level at euro fx equivalent of $1.38.
The US treasuries were forecasted to find yield support for the 10-year note at 4.60%, as prices could come under pressure, if the US dollar broke to new lows. The US treasuries initially rallied in price after the Federal Reserve cut the fed funds rate, but later retreated due to the weakening US dollar, resulting in an actual 10-year note yield range for the month between 4.32% to 4.67%.
Looking forward . . .
There was modest grounds for celebration, as last Fridays employment report expanded by 110,000 new payroll jobs, especially after the gloomy August tally of 4,000 fewer jobs (revised to a 89,000 gain; July enjoyed a revised boost as well).
The phantom additions, courtesy of the infamous birth/death concoction, devised supposedly to catch the effect on employment of new businesses and decreased ones, were small, bumping up the total by only 17,000. Average hourly earnings rose a heartening 0.4%. The Federal Reserve Chairman, Ben Bernanke, may not view it as heartening, but that is what happens when the only people you talk to are hedge fund managers and market strategists.
The employment numbers certainly did not merit all that much celebration, on closer scrutiny, but if investors are willing to cheer huge write-downs, why not a fairly weak employment report? This is apart from the up-tick in the unemployment rate to 4.7%.
For one thing, the private employment sector was more or less stagnant. The big gainers were once again the health care, bars and restaurants, which hire freely and pay rather skimpily. They chipped in more than half the overall rise. The US government weighed in with 37,000 jobs, and was responsible for just about all the upward revision to the July and August totals.
Manufacturing continued to shed jobs rather vigorously, with some 60,000 positions getting dismissed over the past two months alone. There were fewer retail hires and, unsurprisingly, pink slips were the order of the day in building materials and finance (mortgages businesses and write-downs). Temporary positions downsized by a hefty 20,000, which can be construed as a bad indicator for job gains in the future.
This employment report, along with last months, appears to have a pre-recessionary look to them, for the reasons mentioned above.
Investors believe that the Federal Reserve cutting the prevailing fed funds rate on September 18th by 50 basis points (0.50%) to 4.75%, with additional rate cuts to follow, will support the US economy and the stock market, but history says otherwise.
History, in fact shows that rate cuts have not made a bit of difference as far as stimulating the much-needed consumer to spend, the creditor to lend or the corporation to borrow.
Take, for example, the fact that during the period between 1984 and 1992, the Federal Reserve slashed rates from 11.75% to 3.00%, a severe cut that did nothing to prevent the worst stock market collapse since the Great Depression in October 1987, resulting in record-high unemployment, a debilitating savings and loan crisis, slow Gross Domestic Product (GDP), and economic recession.
Similarly, a Federal Reserve rate cut from 6.5% to 1.25% from 2000 to 2002 proved ineffective against the longest stock market decline since the Great Depression, the tech-bubble bursting, and a brief economic recession.
These actions by the Central Banks showing once and for all the inability of the Fed to pump life back into the market with a succession of rate cuts.
Also, it is important to note as well that from June 2004 to June 2006, the Federal Reserve raised rates from a half-century low of 1% to 5.25%,which was an equally futile effort to tighten the spigot of easy money and remove the froth from the bubbling housing market before it burst.
Blind faith in the Fed’s power to support the US economy and stock market has dangerous consequences, namely, that investors do not see what is directly in front of them before it is too late. .
Long-term conclusions and current month expectations . . .
The excessive rate cut on September 18th put in place by the Federal Reserve is having disastrous consequences worldwide for the US dollar. The currency is declining versus just about every known counterpart, certainly down against the euro fx, but also declining versus the Canadian dollar, the Turkish Lira, the Saudi rial and any number of other Third World currencies. Venezuela, in a typical move, is no longer willing to accept US dollars for oil payments. The US dollar may have found some near-term technical support, but the question remains, will it hold? We are forecasting the US dollar to have a euro fx equivalent trading range for the month between $1.39 and $1.43, as the it tries to establish either a new broad trading range or a near-term bottom.
Interest rates are up across the board in the bond market, and there are indications of outright sales of US treasuries now underway by foreigners, not just the Japanese and the Chinese. This level of selling could intensify, if the yield on the US treasury 10-year note moves above 4.65%, caused by a weaker US dollar, but we feel this key yield level will hold, at least for the near-term, with US treasury prices being supported.
The fact is that the Fed has stimulated a full-blown financial crisis, because of the upcoming 2008 presidential election year and there is a need for the Federal Reserve Chairman, Ben Bernanke, to pay back his handlers. The Fed Chairman must now start to think about the country, and the Federal Reserve must protect the US dollar.
The much celebrated move by the Fed, cutting the fed funds rate 50 basis points, created no new liquidity, no new reserves, and no new purchasing power. Therefore, it is unlikely this will result in any material improvements in the solvency of the mortgage market.
Market-controlled interest rates rose, while Fed-controlled interest rates dropped. US treasury yields increased at nearly all maturities, as did mortgage rates, including the 30-years. The only relief to borrowers was on rates tied to the London inter bank (Libor) offered rate, which actually fell. However, the drop was matched by a reduction in deposit rates, so any relief to borrowers with rates tied to Libor came entirely at the expense of savers. There is no credible mechanism of which Fed actions actually control the US economy.
The worst is far from over, since we have not truly begun to feel the full effect of the demise of the subprime mortgages, the damage visited on the global credit markets and the unrealized disaster that is housing.
The vicious cycle in housing — falling prices feed into rising defaults; lenders respond by scaling back; the borrowing squeeze crimps home ownership, and the resulting drop in prices feeds back into yet lower prices — still has a lot further to run. We envision a cumulative price decline of 15% this year and next, with home prices in some regional markets tumbling by 30%.
The full impact on the economy and the consumer of the crumbling housing market is destined to become painfully visible as the months wear on, coupled with the surging inflation in food, energy and just about every other existential necessity. These conditions are quite visible to everyone except the Federal Reserve, which is eroding confidence and otherwise affecting the public psyche as well as taking a toll on corporate profits.
The early returns show third quarter earnings of the companies in the Standard & Poor’s 500 index are running 2.2% behind last year’s comparable results, and the final tally is likely to show a feeble 1.7% rise. The profits, in the same quarter in 2006, were up a resounding 20%.
Currently, the analytical sages are predicting a smart 11.2% gain in S&P 500 earnings in the fourth quarter. These overly strong estimates will lead the stock market to additional selling pressure, as reality sets in, with actual corporate earnings falling short of the current optimistic expectations. The DOW has likely finished its euphoric response to the cut in the fed funds rate, and could begin to decline as various earnings’ reports disappoint, leading to a trading range for the month between 12,900 and 14,175.
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 their funds Online.
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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.
Please call the number provided below or e-mail us and we would be happy to provide further clarification, if there are any questions regarding the information discussed within this newsletter or our unique wealth management services.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, The Financial Forecast by Nico Isaac, Richard X. Bove with Punk Ziegel & Co., John Hussman with Soho Capital, Liscio Report by Philippa Danne and Doug Henwood, Thomson Financial.
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