Private Account Wealth Management Services
Newsletter Issued 09-08-06:
By: John T. Moir
Chief Editor: Sara E. Collier

Position overview . . .

Our previous newsletter, dated August 11th, forecasted that DOW would resume its bearish stock market decline, with a trading range for the month between 10,550 and 11,345. The actual result produced a narrower trading range during the month, between 11,042 and 11,405. The light summer-time volume was probably the reason for the narrower trading range and the lack of stock market advance or decline.

The US dollar was anticipated to remain within a large trading range for the month, between euro fx equivalent $1.25 and $1.30, as the long-term direction remains uncertain. The actual range proved to be narrower than forecasted, between euro fx equivalent $1.2737 and $1.2961, partially due to the light global currency volume.

The US treasuries were expected to rally in price and decline in yield during the month, due to the slowing economy, with a forecasted 10-year Note peak yield at 4.98%. This proved to be very accurate as the entire yield curve rallied in price and declined in yield, with the 10-year Note having a peak yield at 5.00% and declining to 4.73%. The Fed’s decision to pause on further interest rate hikes and negative economic data supported the rally in price and decline in yields for the US treasuries.

Looking forward . . .

Housing starts fell by a larger than expected 2.5% in July to 1.80 million units annualized. The July decline was the fifth this year, bringing starts activity to the lowest level in almost two years and confirming a definite slowing trend. The more stable and important single dwelling category slid 2.3% in the month, taking activity 16.5% below year-ago levels. The generally volatile multi-unit component, which has served as support so far this year, declined 3.4% on the month.

It is now quite obvious that starts activity is slowing in response to persistent Fed tightening over the past two years, and slowing job growth that moderated sales and left builders with outsized inventories. Looking longer-term, building permits — an indicator of future housing — also plunged an unexpectedly large 6.5%, implying that more bad news on the housing front is on the way. The National Association of Home Builders’ housing index results for August also pointed to more woes for home builders, as the index plummeted to a 15-year low, with the steepest descent on record occurring in the past year. Mortgage applications also are clearly supporting the underlying downtrend.

The employment report for August, released this past Friday, showed a total of 128,000 new non-farm payroll jobs and the last two months’ numbers being revised upward by only 18,000. The number of new jobs added were in line with the pundits consensus of 125,000 new slots. The unemployment rate was down a notch to 4.7%, but the decline was fractional, not substantive. Moreover, the rate moves upward to 5.7%, if you count all of the people who would like a job but cannot find one, which might be a more accurate measure of unemployment.

Performance of the goods-producing sector, where the pay tends to be higher and benefits more prevalent, was limp, only chipping in a meager 10,000 of the 128,000 payroll additions. The remainder were accounted for within the service sector, with a majority of those from lower-paying segments of the economy, like bars and restaurants, health care generally and hospitals in particular. Teachers being hired for the new year also helped improve the total addition of new jobs.

When you add up the cyclically sensitive sectors in the employment report — manufacturing, construction, retail/wholesale trade, transportation services and mining — the result is a loss of 4,000 jobs. The diffusion index in the factory sector — a good indication of how widespread or narrow improvement is — plunged to a nine-month low of 44.6, from 50.6 in July, and is down a stunning 16 points in the past two months.

The August jobs report was neither anemic or robust, not the kind of information to brighten the consumers mood. The average hourly earnings edged upward a mere 0.1%; however, July’s gain was revised to 0.5% — bringing the average for June and July to that level as well. The yearly gain in nominal earnings — before adjustment for inflation — remained at 3.9%, the highest since mid-2001, with earnings strong in the services sector and weak in manufacturing.

Workers are denied the luxury of stripping out food and energy cost from their monthly bills, even though Wall Street economists are always focusing on the “core” prices that exclude virtually everything that is actually going up. The rise in worker wages has been barely matching the so-called “real” inflation rate.

This unimposing employment report will likely encourage the Fed to be more gentle on further interest rate hikes. The forward-looking components within the report for retail, temporary employment and a shorter workweek point to a flat to slowing job market in the coming months.

We are suspicious that Corporate profits are starting to lose momentum as well, with the official estimate of second-quarter profits up a relatively paltry 3% before taxes. There have been pauses in the extraordinary rise in profits over the past five years, but may be peaking for this cycle. If so, the Fed would likely not only pause in raising rates but actually stop altogether. The end of the great boom in profits could supply quite a jolt to the stock market.


To date, Congress has allocated more than $300 billion, in 2005 dollars, to Iraq-specific war efforts versus the White House/Defense Department planner’s rough early estimate around $50 billion. Merely presenting the cost to the fiscal position as the cost of a war is a significant understatement of the overall “cost of conflict.”

Direct costs in addition to those related to the budget include, but are not limited to, lost civilian productivity from the displacement of National Guard and Reserve troops, deaths, injuries and physical damage in Iraq caused by the war.

We can estimate the costs of Americans injured in Iraq by using injury data from the Defense Department and wages by occupation and industry data provided by the Labor Department. The nearly 18,000 US troops wounded so far add up to approximately $23 billion. We estimate that displaced Reservists had average annual incomes of $33,000 prior to being deployed. The cost to the US economy of their lost civilian productivity is about $4 billion per year.

It remains unclear on how the war will progress in the coming months or years; however, using a 5% discount rate, we would estimate — based upon US troops strength and budget allocations — that the cost of the war from now through 2015 would be more than $360 billion to the United States. Obviously, against those costs are the avoided expense of not needing to enforce United Nation sanctions over the next decade ($80 billion) and the value of Iraqi lives spared, since Saddam Hussein is no longer in power.

Long-term conclusions and current month expectations . . .

It is important to point out the conspicuous irregularities with our policy-makers. The Fed is sweating the return of inflation precisely as liquidity is finally beginning to recede and asset prices deflate. This is exactly what they did in 2000, when the Fed got all excited over inflation that spring and decided to kick things up a notch, tightening 50 basis points (0.50%) in May. We now know the bubble had started to burst two months earlier, with the benefit of hindsight. These similar conditions further confirm that the major stock indices are in the process of topping in price and starting to resume the bearish downtrend. We would anticipate the DOW to have a trading range for the month between 10,700 and 11,490, as the major stock indices resume the stock market decline, due to the receding liquidity and the slowing US economy.

The US dollar still remains within a large trading range, even with the growing twin deficits — trade imbalance and current-account deficit. We feel the US dollar will continue within a trading range for the month, between euro fx equivalent of $1.25 and $1.30. However, a decisive move, either above resistance (ceiling) or below support (floor), should cause the US dollar to rally significantly or resume its long-term decline.

The Federal Reserve will be gathering on September 20th for their Federal Open Market Committee meeting (FOMC) and will likely hold the fed funds rate steady at 5.25%. Some members of the Federal Reserve Board believe that the current inflation rate of 4.1% should be driven lower to around 1.5% by continuing to raise the prevailing fed funds rate, while others believe such an action would propel the US economy into a recession. We believe the Fed is walking a very fine line and should avoid trying to drive inflation lower and instead be prepared to prevent the next recession, due to a slowing US economy. The US treasuries could remain within a large trading range this month, in order to remove the current overbought condition produced from last months strong rally in price and decline in yield. We anticipate the US treasury 10-year Note to have a yield range for the month between 4.70% and 5.00%


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 Wavetech Enterprises’ 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 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.

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: Federal Data, Stephanie Pomboy of MacroMavens, BMO Nesbitt Burns, The Milken Institute Economic Review, Defense Department, Warwick McKibbin and Andrew Stoeckel of the Brookings Institute, Congressional Budget Office (CBO), David Rosenberg, Economist, Philippa Dunne and Doug Henwood of the Liscio Report.

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