WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 09-08-04:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated August 11th, forecasted that the DOW would have a trading range for the month between 9,200 and 9,950. The DOW continued to hold the formidable level of 9,800 and produced a countertrend rally, resulting in a trading range for the month between 9,783 and 10,196. The various stock indices are in the process of rotating downward and this adjustment takes time to complete, which was longer than expected. We further anticipated that the US treasuries would continue to rally in price and decline in yield, even with the Fed raising the prevailing Fed Funds rate by 25 basis points (0.25%). This proved to be accurate as weak economic data released during the month caused the advancement to continue, surprising most pundits.
Looking forward . . .
The August payroll expanded by 144,000 with the expectations of 150,000 new jobs, and the July total was revised upward to 73,000 (from 32,000). Manufacturing showed another gain — this one worth 22,000 jobs — although, as the Labor Department cautioned, it owed mostly to auto workers being called back to the assembly lines after Detroit’s bigger-than-usual retooling shutdowns the previous month. Yearly wage growth continues to lag behind inflation even with a decent rise in hourly wages growth this past month.
True, the unemployment rate declined to 5.4% from 5.5%, but only because enough people — more than 150,000 of them — stopped looking for jobs to shrink the overall labor force. The diffusion index, which gives you an idea of how widespread the improvement in jobs is, slipped. Moreover, our favorite measure of unemployment, which is much more inclusive than the standard measure, remained the same at 9.5%.
The household employment survey, which has managed to show big advances for some months, in August, betrayed its admires by showing only 25,000 new jobs.
Including last month, the number of payroll additions this year totals some 1.7 million. Trouble is, as the folks at the Labor Department feel constrained to point out, 885,000 of those came from the employment spike in March, April and May. Since then, the economy has averaged only 104,000 new jobs a month.
Furthermore, the August report showed the increase in the average duration of unemployment (19 weeks versus July’s 18.6) and the rise in the proportion of the jobless who have been seeking work for 15 weeks or longer, to 36.2% from 35.3%.
We feel that the report is probably enough of a deterrent for the Fed — when they meet on September 21st for their Federal Open Market Committee (FOMC) meeting — to prevent them from hiking rates again. But we also feel that if Alan Greenspan, Chairman of the Federal Reserve, and his fellow members had not spend so much time expressing their optimism over the economy and the need to “normalize rates,” they would have likely viewed the August employment data more as a “cause for a pause” than a “strike for a hike.”
This so-called recovery, by any reasonable measure, suffers from “extraordinary deficiencies.” Among them: annualized growth in Gross Domestic Product (GDP) has averaged 3.4% over the first 10 quarters of the upturn, far below the 5% norm of the previous six business cycles.
Payroll employment is up on average only 0.1% over the past 10 quarters, compared with the 2.7% of the past six recoveries. Real wage and salary disbursements — the essence of the economy’s organic, or internal, income-generating capacity — has averaged only 0.8% rise over the past 10 quarters, versus 3.9% in the like period of the previous six recoveries.
In addition, the Federal Budget is wildly out of control, having swung in three short years from surplus to deficit by six percentage points of GDP. This substantial change has become one of the catalysts in pushing the net national savings rate down to its all-time low of 0.4% of GDP in early 2003. The savings-starved US has had to import foreign savings to keep its economy growing, and that has caused the current-account deficit to a record 5.1% of GDP.
This has all created a vulnerable and exceedingly low-quality recovery in the US. We have always maintained that the current recovery has been largely a false one — unduly influenced by excess of fiscal and monetary stimulus.
Current month expectations . . .
We feel the recent rally from DOW 9,800 to 10,370 was simply another countertrend rally, and are looking for a resumption in the bear market trend tomorrow. Our technical wave pattern analysis anticipates a trading range for the DOW during the month between 10,370 and 9,800. We would expect an acceleration in the decline, should the DOW successfully trade below 9,800 on an end-of-the-day closing basis. This level has served as formidable support for the DOW and would become resistance once effective breached.
The US treasuries should continue to be supported and rally in price for the next few months, but this positions could change depending on the amplitude of the advance and upcoming economic events. Sustained high crude oil price levels could cause our position to change, even though no apparent concerns of inflation presently exist.
A bubble, which in all likelihood has already begun bursting within the stock market, is usually created when Federal Reserve policy is too loose and a boom in a new technology or innovation captures the public eye. A certain sector — in this case it was technology (especially telecom and the Internet) — trades out of control. This creates artificial wealth and demand in the economy. When the bubble bursts, this wealth cannot come back. It is like trying to blow up a balloon with a hole in it. This is why Fed interest rate cuts after a bubble has burst simply do not work.
Economic and market trends affect politics and not the other way around. Therefore, do not fight the primary bear market trend and do not expect that your favorite political party can fight it, either.
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 offered through our Private Account Wealth Management Services. The minimum investment criteria is determined after reviewing the investor’s current assets and fund allocations. This services is ideal for individuals and privately held corporations who have liquidated large stock, bond and/or real estate holdings and are seeking an investment vehicle to generate a positive rate of return between 12% to 19% 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: US Labor Department.