WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 10-11-05:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our recent newsletter, dated September 9th, forecasted that the DOW would resume its primary bearish trend with a trading range for the month between 10,180 and 10,700. In reality, the DOW did indeed begin to trend lower with an actual albeit narrower range, between 10,350 and 10,701. The major stock indices appear to be losing their ability to advance and are starting to trend lower, seeking a level of proper valuation. The US dollar was anticipated to resume its advance, with a large trading range between the euro fx equivalent of $1.20 and $1.26. This projected range proved to be impeccably accurate, as the actual range was between the euro fx equivalent of $1.2028 and $1.2613.
The US treasuries were projected to resume their bullish trend, as they rise in prices and decline in yield. The bullish trend appears to remain intact, however, there was a retracement during the month, leading to a decline in price and rise in yield. The advancement of the US dollar and the continued increase in the open interest demand for US treasuries should propel them higher in price during the coming months. Therefore, we consider this retracement a minor correction in a primary bullish trend.
Looking forward . . .
Hurricanes Katrina and Rita have impacted a multi-state region, which means between 5% and 10% of the US Gross Domestic Product (GDP) was directly affected. For the fourth quarter of 2005 and the first quarter of 2006, we believe the real GDP growth rate will be under 2%, and may be flirting with a recession. The stimulus rebuilding effect will be minimal until mid-2006. We could start to see its positive side in the second quarter of 2006. However, the huge amount of money coming from the government will actually be spent very slowly, meaning there is a considerable amount of time between an appropriation and the actual payment to a contractor.
Non-energy corporate profits are headed lower for many sectors. The risk to financials is rising, and we would suggest that investors avoid bottom fishing, since they could be caught trying to catch a falling knife. High-energy costs are now embedded into at least next spring, and household natural gas and heating-oil bills will be major upward surprises. In addition to the well-realized higher gasoline prices, we estimate that US consumer’s personal energy bills have risen from 4% of disposable personal income in early 2004, to over 6% now. We also feel that this 6% level will persist well into next year. We are unable to find a shift of this magnitude, in such a short period of time, in recent history.
Some energy companies are going to report monster profits for the third quarter. Congress and State officials will launch calls for windfall profit taxes and prices controls, but if enacted, these constraints will only make a bad situation even worse.
High-priced oil will increasingly hurt more consumers, who will likely cut back on spending. Since consumers account for 70% of US economic growth and nine of the past 10 recessions have coincided with rising oil prices, it could also be the catalyst for an actual recession and affect the housing boom.
Long-term conclusions and current month expectations . . .
As the government’s debt grows and consumers increase their debt-service ratios, the question looms: How long can the spending continue without severe consequences?
A quick look at household debt-service payments as a percent of disposable income reveals that consumers are feeling a much harder pinch in the budget than they have during past recoveries. While rising home -price valuations may offset some of the uneasy feeling about these debt burdens, there is wide spread uncertainty about the exuberance in the real-estate market limits. For further details, we suggest reviewing our August 2005 newsletter with its special report titled: “Growing Evidence of a Major Housing Bubble.”
Mortgage-debt payments as a percent of disposable personal income have also risen sharply over the last two years. The last time such a ratio occurred was in the second quarter of 1991.
Increasing amounts of negative economic data associated with higher than normal energy costs are starting to eat away at this so-called expansion. The inventories of unsold homes are at a 17-year high, and foreclosures in the property sector leapt 4.8% this July — a monthly record year-to-date. Furthermore, existing and new home sales have been declining, with the red-hot condo market leading the drop. Additionally, over the past five years, net operating income of US apartment buildings declined an average of 14%, while the selling prices rose 40% over the same period, meaning, buyers have become overly aggressive, with the average holding period for all forms of commercial properties having fallen to only two years from more than five.
The US economic expansion was based on affordable oil and dependent on consumer spending. Borrowing against the soaring asset home value enhanced it further. The Federal Reserve, with its longest tightening cycle ever, raising the fed funds rate from 1% to 3.75% in four years and producing a flattening of the interest rate yield curve, about to invert, is driving the US economy towards its next recession.
How can stock prices rise when cash is so low? Best answer: They cannot. The mutual fund cash-to-assets ratio is as low as it has been at any time in history, which can only mean one thing: Fund managers are incredibly bullish. The last time they were this bullish, cash levels had fallen to 4%, in March 2000, which preceded a 50% decline in the S&P 500 Index. The only time the cash-to-assets ratio had fallen to similar levels was in December 1972, and the S&P 500 subsequently fell 45% thereafter. There is always the possibility that bullishness could run to an even a more insane extreme while taking cash levels still lower; however, the lower cash levels go, the more resistance should be expected to rising stock prices.
The DOW is anticipated this month to have an expanded trading range, due to the increased level of volatility, between 9,700 and 10,610. There is formidable support for the DOW at 10,000, but we feel there is a strong likelihood that this key level will be breached this month, leading to an accelerated decline to the next support level at 9,700. The release of third quarter earnings reports due during the month of October, below expectations, could be the fundamental catalyst for such a large decline.
The US dollar is projected to resume its advance, with a euro fx equivalent trading range between $1.175 and $1.22 this month. However, the ever-growing twin deficits — US trade imbalance and current-account deficit — could limit the level of ascension. The long-term primary trend for the US dollar remains uncertain, but should be better defined with our wave pattern technical analysis in the months to come.
The US treasuries appear to have completed their retracement in price and rise in yield on Friday, October 7th, and we are anticipating a resumption in the primary bullish trend for the entire yield curve. The advance should far exceed the correction during this past month, leading to new highs in prices and lows in yield. Economic data being released this month, showing reduced levels of productivity and employment growth could be the fundamental reason for such an advance.
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 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 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 35% 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: Crosscurrents, Cumberland Advisors, Blue Chip Economic Forecast, Marcus & Millchap.
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.