WAVETECH ENTERPRISES, LLC
Private Account Management Services
Newsletter Issued 09-09-05:
By: John T. Moir
Chief Editor: Sara E. Collier
Position overview . . .
Our previous newsletter, dated August 10th 2005, forecasted a DOW trading range for the month between 10,075 and 10,720. The actual DOW range was narrower, between 10,349 and 10719, but accurate in determining the upper price point. The US dollar was anticipated to remain within a large trading range, between euro fx equivalent of $1.19 and $1.25. This proved to be partially accurate, with the US dollar finding continued support, and an actual range for the month between euro fx equivalent of $1.2144 and $1.2490.
The US Treasuries were forecasted to resume their bullish trend, bottoming in price and peaking in yield, just two days before the release of our August 2005 newsletter, as signs would start to reappear that the US economy is beginning to slow. Our technical wave pattern analysis was very accurate, with the actual bottom occurring on the forecasted day, and proceeding to rally in price and decline in yield for the entire month.
Looking forward . . .
There has been a rapid rise in mortgage-related loans, jumping to a formidable 62% of total bank credit. This means that banks now have huge exposure to the real-estate bubble and are occupying a position to absorb the full jolt of the “fallout”, as we put it, when and if the bubble should burst.
While banks have been increasing their exposure to real estate to an unsustainable degree, they have been setting aside a continually decreasing proportion of reserves against possible losses — declining from a FDIC Bank Loan Loss Reserve Ratio of 2.8 in 1987 to below 1.2 presently. This is a troubling discovery for the US economy and financial system, being uniquely exposed to one region — real estate. But the prevailing discovery is that there is no cushion for losses. Consumers and their bankers have grown so confident that the Fed will arrest any asset decline that they have sought maximum exposure — resulting in minimum protection.
After a brief period of conservatism induced by the dot-com crash, consumers have eagerly gone back to viewing cash as trash and housing as savings. Meanwhile, the bank-loan-loss reserves have sunk to their lowest level in 18 years. There are strong hints — as outlined within our August 2005 newsletter — that the housing market is already starting to burst, leading us to conclude that the road ahead is surely to become a very bumpy one. The absence of any sort of cushion will begin to affect the US economy and the financial sector in undesirable ways.
Long-term conclusions and current month expectations . . .
We see a variety of factors suggesting that the consumer, while not yet exhausted, is slowly but surely moving in that direction. While it is premature to declare the American consumer is “shopped out,” we suspect it is now quite late in this so-called recovery cycle. Barring a significant improvement in economic fortunes, including robust job creation and increased personal-income levels, this exhaustion now looks all but inevitable.
High energy prices still affect spending, despite the same economists telling us how much smaller energy is as a percentage of Gross Domestic Product (GDP) than in the 1970s. How bad are the gas pains? Well, if the increase in drivers using credit cards to manage gas expenditures is any indication, it has become pretty bad.
Weak back-to-school sales are another sign of personal spending slowing, being reported as a “temporary dip”, due to high energy prices. A recent survey showed that 59% of households are reducing their discretionary spending on clothing, shoes, jewelry and consumer electronics, as well as restaurants, spa and beauty services, and other nonessentials.
The recent drop in consumer confidence also appears to be energy related. The danger is that persistently low confidence undermines consumer spending. Furthermore, it is not just the Wal-Mart or Costco shoppers who will feel the pinch; even high-end consumer electronic sales are expected to dip in the near future.
We estimate that energy prices combined with the end of the easy refinancing money, will be a serious one-two punch. Add to that the big expenditures for discounted GM vehicles, and the US consumer could become wobbly at best. The key: The holiday shopping season. If it is more difficult for retailers than expected, we will have unequivocal confirmation that the US consumers have finally exhausted themselves.
The DOW, with the anticipated slowing of the US economy should continue the topping process with a trading range for the month between 10,180 and 10,700. Our wave pattern technical analysis of the DOW and the other major indices remains bearish and appears to be completing a major topping-in-price process. This process can sometimes be prolonged, as various stimulative techniques, while temporary, are used to sustain a stock market advance. However, it appears those means of stimulation of have been exhausted, allowing for a resumption in the primary stock market decline. There remains formidable support for the DOW at 10,000 and a breach of this level should confirm a long-term decline for all of the major stock indices.
The US dollar is forecasted to remain within a large trading range for the month between euro fx equivalent of $1.20 and $1.26. The twin deficits, consisting of the rising trade imbalance and the growing current-account deficit, remain major deterrents for a sustained US dollar advance. Therefore, we remain neutral for the time being until our technical analysis of the US dollar and the various foreign currencies tell us otherwise.
The US Treasuries appear to remain in a bullish technical pattern, where sustained high-level energy prices are more of a tax on the US economy then concerns of renewed inflation. We believe that the Federal Reserve will suspend raising the fed funds rate in the near future, as the US economy begins to significantly slow. The next Federal Open Market Committee (FOMC) meeting could see the Fed adjust their remarks regarding inflation, leading the bond market to starting factoring in future cuts to the prevailing fed funds rate.
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: Stephanie Pomboy of MacroMavens, National Retail Federation, Opinion Research Corporation cited survey by ICSC.org, Oxford Analytica.
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.