December 2004 Newsletter
Issue Twelve, Volume Five

TUNING OUT ALL THE NOISE

By Mike Gasior

As I've become older, grumpier, more jaded and cynical (as if that was possible), one skill that I have managed to hone to a razors edge is the ability to tune out all the static and noise and focus on what is important. The year just past seemed worse than many in recent memory. Martha Stewart. Scott Peterson. Michael Jackson. The seemingly endless Presidential campaign and election. President Reagan's death and funeral. The Iraq war. Arafat dies. The train bombings in Madrid. The debate over gay marriage. The hurricanes that battered the Caribbean and Florida. The "curse of the Bambino" is finally over. Steroid use in baseball and the Olympics. Oil prices shooting skyward.

Clearly there were even more "major" stories I could have listed also, but for a change of pace I have chosen brevity as part of my New Year's resolution. Surely, some of the stories were interesting, others salacious, and even a few of them actually important. My goal for this month is to fine-tune your focus on the stories and the issues that will actually impact your life in the year 2005 and beyond.

Of course, we will also need to take a look back to my predictions for 2004 and how I fared. Although it was far from a stellar performance, I feel I held my own, especially considering how far fetched my viewpoints seemed a year ago. There were six speeches I gave last January where I knew the only reason I had been invited was simply because I was the ONLY person who didn't think interest rates would rise during 2004. I will also be sharing with you my thoughts on what might be coming in 2005.

One thing I am excited to announce is a new format for my video commentary, which is available on the website every month. It occurred to me that since I am, essentially and at heart, a teacher, that I should dedicate each month's commentary to helping teach people things that they might not have known about the economy and the financial markets. Sort of mini-seminars for those who have never been able to attend one of my "live" sessions. The menu of topics for the coming year will be as follows:

January - Economics 101
February - Common Stock and Stock Market
March - Preferred Stock
April - Warrants and Rights
May - The Bond Markets
June - The U.S. Treasury Market
July - Corporate Bonds
August - Municipal Bonds
September - The Derivatives Market
October - Options, Caps and Floors
November - Futures and Forwards
December - Swaps

Besides just sharing the fundamentals of these subjects with everyone, I will also try to add any current trends along with my own two cents. You can view any of these commentaries by visiting the homepage and looking for the television set on the right hand side.

http://www.afs-seminars.com

Finally, most of my 2005 seminar schedule is complete and on the website. We are still finalizing the Bermuda sessions, which will take place the week of September 12th and the facilities for Schedule "D" 2005, but all other program dates are currently available at:

http://www.afs-seminars.com/schedule.html

Now let's get on with information that might actually affect your life.

THE U.S. GOVERNMENT BUDGET DEFICIT AND LIABILITY SITUATION

I dedicated and entire newsletter a few months back to make everyone aware of the dire situation being faced by the United States government in the next 4 to 8 years, so I will be brief here and just relate the major points.

The Federal budget deficit is projected by the White House (likely the most optimistic number) to be approximately $550 billion for fiscal 2005. This will cause the U.S. national debt to exceed $8 trillion by year-end.

A larger cause of concern is the unfounded liability caused by Social Security, Medicare, federal pensions and an assortment of other promises made by the U.S. Government that they have never put money aside for. This unfunded liability is $46 trillion in 2004 dollars and rising daily.

Many local and state governments find themselves in smaller, but similar situations as the Federal government.

Here is what I can predict with enormous accuracy:

--Taxes will begin an aggressive move upward in the very near future on almost every conceivable level. This is unavoidable.

--Benefits paid on Social Security, Medicare, Medicaid and some government pensions will be reduced. This is also unavoidable.

Here are some other possible scenarios that are more difficult to predict:

--The value of the U.S. Dollar will probably remain weak for some time, but hard to determine how much weaker it can become. There is at least a reasonable chance of another 25% decline against other major world currencies.

--If the dollar DOES become much weaker, it could begin an outflow of investment from the U.S. since non-Dollar investors would become less and less willing to absorb such currency exposure.

--Should the Japanese and Chinese began to repatriate some or lots of their investment back to their respective economies (these two countries hold in excess of 35% of all outstanding U.S. debt), this would dramatically reduce the demand for U.S. Treasuries at exactly the time that supply is increasing due to financing the budget deficit. With reduced demand, and increased supply, the price of Treasury securities drop and interest rates rise.

--Since the single biggest, one-line item in the U.S. Federal Budget is interest on the national debt, every 1/100th of a percent increase in interest rates raises on this amount of debt will cost the U.S. Government an additional $800,000,000 in interest. I reported previously that the U.S. has moved in recent years to borrowing with shorter and shorter maturities with less than 20% of all outstanding U.S. Government debt over 10 years to maturity. Any sudden and sharp increase in medium to long interest rates will instantly begin to impact the U.S. budget deficit and exasperate an already tenuous situation.

--With any rise in U.S. Treasury interest rates, there will be an immediate increase in the rates paid by homeowners, developers and corporations, which would assuredly dampen the economy further.

Now, one must consider that the series of most previous scenarios are by and large interwoven, and to some degree, a true domino effect that would begin with either a further decline in the dollar, or loss of confidence in the fiscal management of the U.S. economy. Should either event gain momentum, the other events would then cascade without much doubt and bring the U.S. economy to an ugly grinding halt.

On the brighter side, as glum as the prospects seems in the U.S., the prospects in many other parts of the world are equally glum or worse. That creates less of a vacuum capable of sucking investment out of the U.S. the other markets.

As an aside, I just read an interesting story about how many of the world's major drug dealers have been moving their own currency transactions from the dollar to the Euro. Some of the reason has been the decline of the dollar, but another important factor was the decision of the European Central Bank to begin issuing Euros in 200 and 500 Euro denominations. At the current exchange rate, that would make a 500 Euro bill worth $682 U.S., which will mean much lighter briefcases full of cash for the world's drug traffickers.

The things for you to listen for on a nightly basis will be any continued decline in the dollar, or an exploding deficit for the U.S. government. Either one could serve as a trigger to unleash the other events.

ANY ECONOMIC GROWTH WILL BE HARD FOUGHT

Beginning in early 2001 and continuing into late 2003, you bore witness to the largest amount of economic stimulus ever poured into the U.S. economy in history.

You had the Federal Reserve cutting interest rates an unprecedented 13 times, bringing rates to 40 year lows, and causing extremely scary bubbles in both the current stock and real estate markets.

Depending upon who you ask, he U.S. government also did its share with between $5 trillion and $8 trillion of tax cutting. And their public relations department did a fabulous job of getting the message out that Uncle Sam wanted you to take those savings immediately to Wal-Mart or a jet-ski store and blow your new found cash on any possible sort of junk. Although it is an extremely sad statistic, it will likely come as no surprise to anyone that the United States national savings rate was 0.3% as of last month. Please keep in mind, however, the 0.3% number is not a monthly amount. Americans save a total of $.03 for every $10.00 of disposable income each year. Obviously, without severely ramping up their already insatiable appetite for debt, one has a difficult time imagining Americans on any sort of drunken spending spree in 2005.

Things look no better in most other parts of the world either, and the weak dollar has put a very large crimp in the economies of many other countries.

It seems clear to this writer that job growth, GDP growth and earnings growth will be, at the very least, slow this year, or maybe worse than slow.

CHINA IS HURTING NOW TOO

In the past few years China has served as a tremendous engine for economic growth around the world, and also as a catalyst for Western countries to become more competitive and efficient. Now, China is suffering from the growing pains that accompany any economy that was exploding at the rate theirs was.

The central bank of China has recently tightened its monetary policy in an effort to slow the economy down, and the Chinese are facing their own Social Security problems, as well as an earnest credit bubble of their own. Some of my favorite quotes have referred to the Chinese banking system as an emerging market banking system on steroids. I also saw a recent report from Merrill Lynch what estimates that perhaps 45% of ALL bank loans in China are currently non-performing.

Don't be misled into thinking that China will suddenly evaporate from the global economic landscape, or suddenly become a non-entity as a global competitor. The Chinese government is not even that veiled in hiding their ultimate goal, which is to lead the world economically, athletically, militarily and every other measurable way and they certainly have enough people and resources to compete in that regard. Always remember that if you tell someone from China that they are "one in a million", that means there are 1,300 other people in China EXACTLY like them and it is unlikely to be a compliment.

China is simply going through a gathering period while they digest all that has happened in the previous decade. It may also mean they will be less formidable bidders for raw materials than in recent years. Keep this in mind as we segue to the next topic.

THE EMERGENCE OF HEDGE FUNDS AS GLOBAL PLAYERS

When I was presenting my "Providing Services to the Hedge Fund Industry" seminar in Bermuda this past September, two statistics were released that I found both impressive and troubling.

The first was that the hedge fund industry now has comfortably over $1 trillion in assets under management. Considering another fact, which is that an estimated 75% of hedge funds use at least some leverage, this adds up to a considerable force in the world's financial markets.

The second statistic that really floored me, was that approximately 17% to 22% of ALL volume on the New York Stock Exchange could now be attributed to hedge fund activity. That's 17% to 22% of almost $50 billion of trading volume DAILY! Most definitely nothing that can be sneezed at.

Now let me make an earnest effort to impress you, and in turn perhaps allow you to impress your friends and colleagues. We are all aware of the recent run-up in the price of many commodities in the past year, most notably oil. Many observers, including this one, attributed this commodity inflation to rising Chinese demand due to their exploding economy.

Well, very contrary to this widely held belief, the actual marginal buyer of many of these commodities, and thus the price setter, has been hedge funds. And their appetite extended beyond just commodities and into currencies OTHER than the U.S. Dollar.

In summary, what I have found is that there is widespread, and perhaps rampant speculation in many commodities and currencies, which has caused a misperception that there are shortages in many of these markets, or overstate the displeasure people may have with the U.S. Dollar.

So I do not believe that the price of oil or other commodity prices can maintain current levels and we may even witness collapsing prices in some segments. While my personal opinion is that the U.S. budget and economic are serious causes for concern, I now believe that this hedge fund activity has magnified the dollar's decline.

Hedge funds now have lots of money that they tend to throw around much faster than other types of money managers, and it is their job to perceive what trends might be forming and then stay ahead of them. My suggestion is that they had cause to believe that China's growth would continue, and that the U.S. dollar would weaken. At this point they may have overplayed their hand and the time will shortly come when they will fold the cards and play a new set. This bodes well for reduced commodity inflation or a dollar panic.

SIGNIFIGANT CHANGES IN STORE FOR CORPORATE PENSIONS

This is a complicated issue, but one I feel is too important not to address.

There is a landmark change about to occur as the U.S. accounting policymaker FASB (Financial Accounting Standards Board) will be bringing the U.S. accounting rule FAS 87 more closely in alignment with the international accounting rule IAS (International Accounting Standard) 19.

Now before your eyes begin to glaze over, let give a simple explanation to set up the idea in your head.

Currently, corporations are allowed to look at how well funded their pension plans are by looking at the value of their assets of the period of several years. You'll hear this process simply referred to as "smoothing". While there is certainly a legitimate argument for this smoothing, since a pension plan is a long-term endeavor, the worry is that the smoothing may help allow under funded pensions to fly under the radar for too long.

If FASB moves to a standard like IAS 17 (and Britain already has) it will allow for less smoothing and will instantly reveal the more volatile and under funded plans.

What kinds of pension plans might show up as under funded and volatile? Since the stock market does tend to offer the largest returns over long periods of time, many plans are large investors in common stock. But stocks are fairly volatile and aren't producing the kinds of returns they used to.

The trend I predict is a move by these corporate pensions to alter their portfolios makeup; lightening their holdings of common stock, and moving an increased percentage of their assets into corporate bonds.

There might have been a time when they would have favored Treasury Bonds, but nearly four years have passed since the government issued 30-year bonds and the 10-year notes are not long enough maturity/duration to match their pension liabilities.

So I can imagine there being a significant appetite by these pensions for longer-term corporate debt. Just ten years ago private pension owned 10% of all outstanding corporate debt. By 2003 that share had been reduced by half to only 5%. This decline is a trend you will see reverse sometime very soon.

GREENSPAN IS LEAVING

Many Americans know that Alan Greenspan is the Chairman of the Federal Reserve, but not enough Americans know that HE is far more important to the economy on a daily basis than whoever occupies the White House or the halls of congress.

I tend to share stories with my readers months and months before the mainstream media shares them with you, and this will be another one of those times.

Alan Greenspan faces mandatory retirement in January of 2006.

So while many, many people have their shorts in a knot over whom George Bush might nominate to the Supreme Court, only a tiny fraction of the population cares at all whom Bush might nominate to replace Alan Greenspan.

While I certainly cannot discount the importance of decisions made by the Supreme Court, I can guarantee you that actions taken by the Federal Reserve impact many more Americans on a daily basis.

What most people don't know, is that what has made Greenspan so successful is that he doesn't rely on typical economic modeling to help guide him in monetary decisions made by the Federal Reserve. His belief is that unexpected anomalies in the increasingly complex world economy tend to make many models ultimately wrong, no matter how complicated they may be. While he has been hugely successful at running the Federal Reserve during his 18-year tenure, his idiosyncratic nature creates a difficult vacuum for anyone else to fill as Chair since there is no standard process that is in place for someone else to follow. Very much like the "gut" feelings that made Warren Buffet and Peter Lynch such successful investors, it is often difficult or impossible to replicate their methods. It would be the equivalent of me asking Picasso; "Teach me how to paint like YOU do."

So who is on the list of possible replacements?

>From what I have been reading, the list is fairly short.

One name being thrown around by many people is Martin S. Feldstein, who is a prolific author and a former adviser to President Reagan who is now a professor at Harvard University and president of the National Bureau of Economic Research in Cambridge, Massachusetts. While Feldstein is imminently qualified and a wonderful candidate, he is already 65 years old, and extremely independent in his thinking, which may not sit well with Bush.

A lot of people I have spoken with think that the top candidate might be R. Glenn Hubbard, who is 46 years old, and was a chief architect of President Bush's tax cutting packages of 2001 and 2003. Hubbard is the dean of Columbia University's School of Business and many of his beliefs dovetail very nicely into Bush's thoughts on tax cutting and other matters. If I were a betting man, I would be giving Mr. Hubbard very nice odds.

Much has changed at the Federal Reserve during Alan Greenspan's tenure that is not known by the mainstream public. That legacy will remain largely in place. One high profile example is that under Greenspan's predecessor at the Fed, Paul Volker, the Federal Reserve would never announce publicly any changes they had made to interest rates, leaving Wall Street to figure it out on their own after the fact. Now, Americans expect an announcement within a short period of time after the decision has been made.

While I have had my differences with Chairman Greenspan during the course of his time at the helm, it is difficult to argue with the results. He's been steering an extremely large boat in very challenging waters for 18 years and it's never ended up on the rocks. In fact, the worst the economy has been during his entire time has probably been mediocre, and the rest of the time fairly robust. The world has been lucky to have him on watch all this time.

In about 10 months the mainstream media will likely begins THEIR speculation about who might get this nomination. Just remember who told you first.

JUST SOME COMMENTS ON THE PAST PRESIDENTIAL CAMPAIGN

Many of you can speculate what my political leanings are from comments I may occasionally make in this newsletter. The interesting thing is that I get letters from both sides whenever I make arguments run counter to someone's particular stance. Frankly, politics has become essentially a spectator sport for me and little else. Politicians of all denominations baffle and befuddle me, and more often aggravate me as well.

There are a million interesting lessons to be learned from the turn of events this past November. Many can be born out of an examination of the statistics. While the approach may outwardly appear boring, please remember my nature as a dyed-in-the-wool economist is to try to support my theory with any available facts.

Now, the last thing I feel like doing honestly, is giving any advice or guidance to the Democratic Party, but let me frame what is to follow with a very famous quote from an even more famous Democrat; Will Rogers.

"I'm not a member of any organized political party. I'm a Democrat."

This statement sets a very clear tone for what the Democratic Party must make clear if they are ever to become a major national party again. Already, infighting and bickering is what is dominating whatever discussion is taking place among members. This only furthers the increasing perception problem among voters that the Democratic Party stands for nothing in particular.

Simply stating that George Bush stinks and you're against anything he's for isn't standing for something. I was sitting in front of the television sometime after midnight on election night, flipping between four networks wishing someone would call Ohio so I could go to sleep knowing the result. During my channel flipping I had stopped on CNN and was watching the Crossfire crew. Not surprisingly James Carville and Paul Begala were looking pretty gloomy for what were becoming obvious reasons.

Now James Carville can drive me plenty crazy sometimes, but the guy's an advocate, and any politician anywhere wishes they had someone like Carville watching their back for them. Carville is also quite good at summing up a situation with an elegant economy of words. When it was fairly apparent that John Kerry was going to lose somewhat handily, he observed the following, which I will paraphrase:

--We ran a good candidate. The party was more unified than ever. We raised more money than ever. We're in the middle of an unpopular war. The economy is stinky. We won all three debates. And we still lost. We had better go back the drawing board and completely re-examine what we're doing.

No doubt James Carville has plenty of influence within the Democratic Party, but so far, his prophetic words of wisdom have gone unheeded and now the party seems to be fracturing into even smaller interest groups.

Before he even won his first primary, I predicted in this newsletter that there was no way John Kerry would ever beat George Bush. Contrary to whatever you might think, that prediction was not in any way, shape, or form a political statement. It was a statement of common sense and practical knowledge of the diversion the Democratic Party from what the mainstream of voters is seeking. Imagine this:

--Of the 28 states with the lowest per-capita income, George Bush carried 26 of those states. It bears noticing that these were the states that were once the bastion of the Democrats and not those rich Republicans.

--The Democratic presidential candidate hasn't won 50% of national vote since 1976. They haven't won the majority of the white vote since 1964. In the last six congressional elections they haven't won 48.5% of the national vote.

What the Democratic Party needs to define is what the party stands for. Before the election, people were asked if they trusted George Bush to handle the economy and 51% said "no". That's a pretty horrible number for an incumbent president. But when the same group was asked if they trusted John Kerry to handle the economy, 53% said "no". Another question was if they would trust John Kerry with domestic issues, 41% said "no". George Bush got an identical 41%. In the economic situation that existed during this campaign, Kerry should have disemboweled Bush, but those poll numbers suggest that voters had no real idea what Kerry's ideas were. They were consistently told about the plan, the plan, the plan. But they were never told what the plan was.

So my advice to the Democratic Party is this:

--Don't delude yourself that the election was close, and if you'd only had a little better candidate it would have made all the difference. That simply isn't true and will prevent you from making the changes necessary to reverse these trends. John Kerry was a perfectly fine candidate who worked extremely hard and ran an outstanding campaign. The problems lie deeper and will require deep examination to find solutions.

--Stop being such crybabies and so shrill. Although Alec Baldwin, Christie Brinkley, Whoopie Goldberg, Al Franken and an assortment of other fools swore they would move to Europe if Bush won, I feel fairly certain Alec and friends are still swilling champagne and sucking down goose liver in Beverly Hills and South Hampton. It makes the party look foolish and like sore losers. Of course, you won't find me saying anything bad toward Bruce Springsteen since he is The Boss, and one of my musical heroes. Plus, this really was his first public foray into politics and everyone deserves a second chance in this great country of ours.

--I predicted over three years ago that Hillary Clinton would be the nominee in 2008. There were even a few moments earlier this year that caused me to think she might jump into the fray this year, but she exhibited more wisdom than me on that point. While she is clearly a varsity player and as credentialed as anyone the Democratic Party can offer, she can't win. She simply cannot beat any likely candidate the Republican Party is likely to field, due to that darn Red State/Blue State map. Its makeup this November was almost EXACTLY the same as it looked in November 2000 and probably exactly how it will look in November of 2008. With a fundamental change in party direction and a Bill Clinton type of candidate, the tides might begin to change. So while I still firmly believe that Hillary is the probable 2008 nominee, her candidacy is doomed already.

So there are my observations on the election past, and now maybe we can all enjoy four years of mostly silence, especially on my part.

SOME LIGHTER FARE

--Turkey will no longer be the bastion of millionaires and billionaires. Since January 1st, Turkey's government has dropped six zeros from the national currency and Turkey will lose the dubious distinction of have the largest denomination of currency in circulation, the 20,000,000 Lira note, which on December 31, 2004 was equal to about $15 U.S. The exchange rate on the last day of the year was 1,350,000 Turkish Lira per $1.00 U.S. Imagine going to the ATM machine.

--The magazine "Modern Drunkard", which is available in many bookstores across the United States for $4.50, and can be had for free in many bars, reached a circulation of 50,000 in 2004. Publisher Kelly Rich, who freely admits he is an alcoholic, thinks that alcohol is a boon to mankind and that drunks are an oppressed minority. Not surprisingly, Mr. Rich and the magazine make their home in Denver, which Men's Health magazine rates as the most intoxicated in the United States.

--At an Australian airport a passenger about to go through security decided to throw a potentially embarrassing item into the trash before going through the x-ray machine. When security heard a vibrating sound coming from the wastebasket they issued a security alert and began actions to shut down the airport, when the discarder came forward to lay claim to the "adult novelty device".

--In China, 9 out of 10 people who call a suicide prevention hotline are greeted with an "all representatives are busy right now" message and put onto hold.

--On a train in England in 2004, the conductor carefully removed, punched and returned the ticket of a passenger who had died.

--In Norway last year, a man was acquitted of raping a woman who was asleep, by claiming that he ALSO was sleeping at the time.

THE RESULTS ARE IN

Now I will face the music and see how I did on my predictions for 2004.

PREDICTION - Dow Jones - Under 9,000

RESULTS - Dow Jones - 10,783.01

While this one really didn't work out very well for me, I do take some heart in the fact that the Dow was only up a little over 200 points for the year since so many people had predicted a fairly bullish result for 2004. I was in a fairly small minority of people expecting a decline, so the fact that the market didn't really go up either constitutes a small victory for me.

PREDICTION - NASDAQ - Under 1,800

RESULTS - NASDAQ - 2,175.44

Clearly this was a tad bit worse than my Dow prediction, but not horrible, since the NASDAQ only rose about 175 points when so many thought it would rise a lot more. But while I wasn't horribly wrong, I was still wrong.

PREDICTION - Ten-Year Treasury Note - 3.75%

RESULTS - Ten-Year Treasury Note - 4.21%

On this one I have to stand up for myself. At the EXACT time I was predicting the yield on this Treasury would drop, a survey was taken of 56 of the leading economists at Wall Street's biggest brokers and banks. Of them, 54 predicted that yields would RISE during 2004. So I was in the extreme minority in predicting a yield decline. And one more thing here; the yield on the 10 year Note finished last year at 4.27%, so the yield DID drop by six basis points, but not as much as I'd predicted. Having been viewed as very far off in left field, I'm fairly proud of myself here.

PREDICTION - Fed Funds Rate - 1.00% with no action at all by the Fed.

RESULTS - Fed Funds Rate - 2.25% with plenty of action by the Fed

With the exception of my Tiger Woods prediction, this one is my biggest stinker. There is no substantive argument I can make to twist this into even a partial victory, although this is one of those moments where I take exception with actions taken by Alan Greenspan. While there seemed to be some commodity inflation, as well as some growth occurring in the economy, my own feeling was that any recovery that was happening was tepid at best. Already the Fed has reduced its growth estimates for 2005, which gives some credence to my assertion that any tightening by the Fed might serve to dampen any recovery that was underway, and that is the stance I have maintained and still do.

PREDICTION - Yield Curve - Still quite flat, but with overall lower rates.

RESULTS - Yield Curve - Actually MUCH flatter overall, but all lower rates.

The yield curve is much flatter than it was a year ago, but the majority of the reason why was the Fed driving up the shorter end. The ten-year Treasury DID drop in yield by those six basis points, but action by the Fed that I didn't predict made me look right on this one.

PREDICTION - 30-Year Mortgage Rates - 5.00%

RESULTS - 30-Year Mortgage Rates - 5.37%

I will definitely tell you one thing here, and I'm not trying to brag either. You would have been HARD pressed to find ANYONE predicting that this rate would be anywhere near 5.00% last year-end. So I was off by 37 basis points, but I take this as a complete feather in my cap.

PREDICTION - The Economy - Slowing gradually with no more than 2.5% to 3.0% growth at best.

RESULTS - The Economy - Picked up a little bit, but only about 3.3% growth.

I am honestly surprised the economy showed as much strength as it did, even with the enormous amount of stimulus that was poured into it between 2001 and 2003. Making predictions on the economy has been a much more dicey proposition in recent years, and although it doesn't seem as though I was very far off in my prediction, I still feel like a failure here and that I was fundamentally wrong.

PREDICTION - Real Estate - Both commercial and residential real estate experiencing continued softening.

RESULTS - Real Estate - Commercial softened fractionally, and residential held up well until the fourth quarter.

All I will say here is that I continue my stand that real estate (especially residential). It is extremely overvalued and a continued concern to me. I'll say that I was sorta right on this forecast, but whatever softening that occurred was NOTHING compared to what I believe is still in the cards. Tune in again next year and we'll see.

PREDICTION - Oil Prices - Relatively little change up or down.

RESULTS - Oil Prices - Crude prices rose almost $9.00 per barrel.

As much as this appears to be my biggest disaster, my confidence remains intact since predicting oil prices is generally the stupidest one to try forecasting. When you consider all the factors that can dramatically effect the price (demand, supply, politics, war, terrorism and so forth) anyone making an accurate prediction was probably just lucky, unless they put forward the REASONS behind their prediction to allow you to test the veracity of WHY prices moved the way they foresaw. So sure, I was off here, but I was as blind and without a cane as everyone else.

PREDICTION - U.S. Unemployment - Rising to around 6.5% by year-end.

RESULTS - U.S. Unemployment - About 5.5% as of year-end.

Well, this one dovetailed into my prediction of a slower economy, so when I was off on my economic growth prediction even by that small amount, I was a guaranteed loser on this one as well. The essence of this forecast was that unemployment would rise, when in truth it fell a teeny bit. Another clunker here.

PREDICTION - U.S. Inflation - Low, with no more than 1.5% CPI.

RESULTS - U.S. Inflation - Medium at almost 4.00%.

This particular prediction makes me mad because oil prices alone blew a complete hole in my prediction. To make my point directly I will tell you that if oil prices had finished 2004 right where they'd finished in 2003, I would be RIGHT ON the money with this one. But, the increased cost of oil and its rippling effect ruined me on this one.

PREDICTION - Tiger Woods - Two Majors (The Masters and U.S. Open)

RESULTS - Tiger Woods - He sucks.

I'm totally off the Tiger Woods bandwagon and will no longer even make predictions about him except this next one. I'll bet you he doesn't win more than four more majors in his entire life, and there is a damn good chance he might win two or less. Now, his wife is completely lovely and his bank account is even better looking, so I don't feel particularly bad for him. I'm just sick of him making me look bad...although he may make me look stupid one more time due to the predictions I just made.

PREDICTION - Me - Better prediction results for next year's edition.

RESULTS - Me - I suck too.

No predictions about myself either. I'm as big a disappointment as Tiger Woods.

PREDICTIONS FOR 2005

Dow Jones - Unchanged at, or below 10,500. Definitely not higher.

NASDAQ - Unchanged at, or below 2,175. Definitely not higher.

Ten-Year Treasury Note - Unchanged at 4.25%% or lower. Not higher.

Fed Funds Rate - 2.75% with the Fed tightening two more times in 2005.

Yield Curve -Becoming even more flat.

30-Year Mortgage Rates - 5.50% or below. Definitely not higher.

The Economy - Slowing gradually with no more than 3.0% to 3.25% growth.

Real Estate - Both commercial and residential real estate experiencing continued softening with potential for melting down.

Oil Prices - Should drop to the $35 per barrel range.

U.S. Unemployment -Largely unchanged at 5.5%.

U.S. Inflation - Low, with no more than 2.0% CPI.

YOUR YEAR-END BRAINTEASER

I was glad to hear from so many people who enjoyed the couple of musical trivia brainteasers from recent months, and I also heard from a few people who lamented the absence of the mathematical questions.

Well here is a cute one that panders to no particular audience, and I enjoyed myself. Give yourself a decent shot at thinking it through before turning into a weenie and peeking at the answer.

"Three people check into a hotel. They pay $30 to the manager and go to their room. The manager suddenly remembers that the room rate is $25 and gives $5 to the bellboy to return to the people. On the way to the room the bellboy reasons that $5 would be difficult to share among three people so he pockets $2 and gives $1 to each person. Now each person paid £10 and got back $1. So they paid $9 each, totaling $27. The bellboy has $2, totaling $29. Where is the missing $1?"

You can view the solution at this URL:

http://www.afs-seminars.com/brainteaser_December2004.html

And the answer to LAST month's brainteaser is:

The answer to the first question is:

Barbara Steisand at #8. For a complete listiing of the best selling artists click:

http://www.riaa.com/gp/bestsellers/topartists.asp

The answer to the second question is:

Shania Twain's album "Come On Over" at #9. For a complete list of the best selling albums of all time click:

http://www.riaa.com/gp/bestsellers/topalbums.asp

http://www.afs-seminars.com

Copyright 2004, Michael Gasior. All Rights Reserved.

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