February 2003 Newsletter
Issue Two, Volume Four

AWASH IN OIL?

By Mike Gasior

For this edition of my newsletter I made one promise to myself and that was to try and find things to be positive about. In these difficult times, that is easier said than done. I received quite a hodgepodge of notes after last month and they covered a bunch of different topics. A troubling thing for me to report is that after a careful recount (with no hanging chads), I ended up getting 22 notes regarding my thoughts about Eminem for every 1 note referencing Iraq. We would probably have to surmise from this statistical information that people really need to focus on some issues of actual importance. I'll take the opportunity to try and force that issue right here and right now.

While I was sitting in yet another airport last night trying to get home I attempted to assemble my thoughts and ideas before sitting down to begin writing. One topic that came into my head and caused a fairly passionate monologue to occur within myself was the current situation with Iraq, the U.N., NATO as well as North Korea and a dozen other "hot spots" in foreign affairs. The impact of all these things on the economy are already reasonably obvious to even the most apathetic layperson. Natural gas just jumped almost 40% in price and many cities around the U.S. are coping with gasoline prices above $2.00 per gallon. I saw a price chart the other day for crude oil and I could have sworn that I was looking at an Internet stock from the 1990's.

These increases in price are going to dig deep into the pockets of consumers and provide a tremendous drag on the economy for the foreseeable future, so whenever I hear talk of a recovery happening sometime soon I have to shake my head in disbelief. The question you have to ask yourself is where are consumers going to get the money necessary to spend the U.S. out of the inevitable recession I've been warning you about for over three years now? These consumers are already carrying a crushing load of debt on their backs and I would expect them to be somewhat gun shy about taking on even more. Many of them are losing their jobs, or are at least worried about losing their jobs. With the Federal, State and local governments all suffering from their own huge budget crisis, we can be reasonably certain of tax increases all round. With these various governments also carrying crushing loads of debt we cannot expect them to begin spending new money on projects that could stimulate the economy. And let's not forget that U.S. corporations more than doubled their debt load to over $4.6 trillion between 1995 and 2001.

I tell you these things not to bum you out, but to make people take an honest assessment of the current conditions and manage their life and finances accordingly. I already gave plenty of advice last month that people should try VERY hard in this environment not to lose money or their jobs. This is the time to go buy that roll of duct tape and use it to secure your money to something solid so you won't lose any of it.

Although I have plenty of strong feelings with regard to Iraq, I honestly want to avoid getting into that topic except for the economic impact of it. I listened and damn near cried watching one of Iraq's premier nuclear scientists speak on 60 Minutes this past Sunday about how he was tortured and imprisoned for years for refusing to Saddam's face to help build an atomic weapon back in 1979. Even though it was difficult to hear I wasn't so deeply upset about the torture and plight of the scientist. I was upset when he described the most horrific memory of his torture, which was listening to the screams of children being tortured to elicit information or confessions from their fathers. Anyone who has children would get sickening chills listening to him tell this story. Then, the very next night I saw Rosie O'Donnell on the finally cancelled Phil Donahue show on MSNBC. I heard her lecturing that the first tenet of all religions is "though shalt not kill". I couldn't help but be angry because I knew her words were being directed toward Tony Blair and George Bush and not Saddam Hussein. You have to wonder the last time Blair or Bush ordered the torture and killing of any U.K., U.S. or any other children. Perhaps Rosie should crawl back under whatever rock she's been under since committing professional suicide and take Phil Donahue with her into the television dustbin.

The only other comment I can make is that France has me pretty agitated and Andy Rooney did an excellent piece about them last week. I agree totally with Mr. Rooney that it is certainly debatable whether or not the United States should attack Iraq and commit themselves to this war. Time will tell. But I also agreed with Mr. Rooney that France has no business saying a word about the matter and has an infinite amount of nerve for not siding with the U.S. since the only reason they even exist today is thanks to thousands and thousands of U.S. troops who lost their lives liberating France multiple times in the past 100 years. Whether or not the French want to admit it, if it were not for the United States, France would be speaking German right now and there would be a Nazi flag flying from the top of the Eiffel Tower. I'm just totally sick of these type of total ingrates and I only wish I bought any French products at all so I could immediately stop doing it. But I digress...

MORE OIL THAN WE KNOW WHAT TO DO WITH?

If you are like me, you probably remember learning in school that oil was created hundreds of thousands of years ago when all sorts of plant life and dinosaurs were covered by a layers of mud and sediment, which over the years became rock and the plants and animals became oil thus the name, "fossil fuel". Truthfully, until just recently it was my perception that this was a scientific fact and not just the most popular theory about where oil came from. Now there is increasing evidence that the old dinosaur theory is total bunk and there may be much more oil buried under the surface of the earth than anyone could have ever imagined. Maybe even an endless supply of oil. Pretty interesting stuff, huh?

We have all been put under the impression that the world's oil reserves are rapidly being depleted and immediate conservation needs to begin before every drop is gone. In the mid-1990's the estimate of the world's oil reserves (oil still beneath the surface of the earth) was 890 billion barrels. Would it surprise you to hear that the current estimate is now in excess of 1.1 trillion barrels and this represents a 23.5% increase in only seven years? I can already hear the angry words being written to me accusing me of being in the pocket of the big oil companies who undoubtedly have given me this sort of propaganda to distribute to my readers, but take it easy on the e-mail for a second. I got the statistic I just referenced not from any oil company, but from the U.S. Geological Survey. They actually estimate that these reserves may grow to an excess of 3 trillion barrels worldwide, and the reason for this increase is a new theory taking hold that plants and dinosaurs have nothing to do with creating oil. The new theory is that oil is instead created in a bountiful way from a chemical reaction between carbon and hydrogen deep beneath the earth's surface and more oil is being produced every day.

The latest major evidence of this theory is emerging from an area off the coast of Vietnam in an oil field called the Bach Ho, or White Tiger field. Without giving you a horrible lesson about geology, let me explain that deep under the earth's surface lies a layer of rock known as "basement rock" which is so far down that it has never, ever been near the surface and has never seen the light of day and contains no fossils whatsoever. This is pertinent to our conversation because this White Tiger oil field pumped 338,000 barrels of oil a day out of the ground last year and 90% of that production was pumped directly out of basement rock. It is also estimated that the White Tiger oilfield has reserves in excess of 600 million barrels all by themselves.

Of course, to much of the geological community this whole theory amounts to blasphemy and the idea that oil is anything other than a fossil fuel is ludicrous. They would want you to explain how the organic, fossil contents of modern oil can be explained if the fossils didn't actually create the oil. Proponents of this new theory argue that because oil tends to be pumped from comparatively shallow depths, that these fossil based particles actually contaminate the oil as it is pushed upward through the basement rock into the sedimentary rock that once resided on the earth's surface. To provide even further evidence that no fossil remains are necessary to produce oil, scientists who back this new theory that primitive hydrocarbons like methane exist in the atmospheres of Jupiter, Saturn and other planets who were certainly never the home of any dinosaurs or plant life.

Truthfully, this theory is mostly upsetting to U.S. scientists since Chinese, Vietnamese and Russian scientists have been toying with this thought for quite some time now, with the Russian research going back nearly 100 years.

I find this whole thing extremely exciting not because I want everyone to go out and buy a gas guzzling SUV, but because it is always fascinating to see a scientific theory that has been put forward as fact for around 150 years perhaps being on it's way to wherever the earth is flat theory that the is kept. And to think there have been moments where I felt I wasn't living in a very exciting period of history. Shame on me.

MORE COOL STUFF ON A LIGHTER NOTE

If you haven't been paying any attention, you may not have heard that the music industry is in very serious trouble and that people are already beginning to predict the extinction of the audio CD. Global music sales peaked back in 1994 at around $40 billion U.S. and have been dropping steadily since then, including another 9% in the most recent 12 months. The record companies say that almost all of this decline can be blamed on Internet piracy where people can "share" digital files of an artists music and save the file to either the hard drive of their computer or burn a CD for portable use.

Although the industry was finally able to effectively shut down the biggest file sharing website, Napster, the genie was totally out of the bottle and sites began to pop up all over the Internet to replace what was lost be these "file sharers".

Just recently I read an interesting account of a huge album release from none other than our friend Eminem. His CD "The Eminem Show" was scheduled to be released in May of 2002 (and would go on to sell 7.6 million copies and was the biggest album of last year) with tremendous anticipation by fans to hear some of the new tracks.

Three weeks before the album release tracks from the CD suddenly began showing up on some of the more popular file sharing sites like Morpheus MusicCity, KaZaA and others, which in this age of piracy is not surprising. The problem with the tracks was that there were problems with the tracks. For example, on the first single released "Without Me" the track was not the complete song, but was instead a couple second loop of the song spliced to repeat itself over and over like an album with the needle stuck in a scratch. Some of the other songs sounded like they'd been recorded in a swimming pool.

Before too long rumors and conspiracy theories began to circulate that it was Eminem's label, Interscope Records, who had planted all the bogus files in an effort to clog downloader's hard drives and CDs with useless and annoying sounds. After a short while Interscope confirmed that they had indeed hired a firm to plant the dummy songs and a brand new era in the war against piracy had begun. I find it extremely cool that even record companies now have to resort to covert operations when waging war.

I'm not trying to sound as though I'm "for" the big money music companies and the artists and "against" the pimply faced 14 year old trying to score some free stuff. All I am saying is that this battle is going to rage fiercely until some sort of permanent change occurs in the music business. The industry has already tried to introduce CDs which cannot be duplicated, but I am told by some of my pimply faced friends that all one needs to do to defeat the anti-copy feature is color the edge of the CD with a felt tipped pen and voila...totally duplicatable.

I continue to own a vinyl album collection which totals in the hundreds, or perhaps over a thousand and I am loath to give them up. I have also made the investment in hundreds of CDs and although I can be sentimental for my vinyl, I did and do appreciate the ease of use that CDs offered. What I wonder about is the "new" technology that will replace the CD and what that technology is going to cost me. I was already somewhat forced to duplicate a lot of the music I owned on vinyl with the CD equivalent. Will I now be forced to own The White Album in yet another format, and how much is this going to cost me? And will it actually improve my experience enough to make the cost worth it? I suppose we'll all find out the answers to these questions in the next few years.

THREE FINAL WORDS FROM ME ON EMINEM

Academy Award Nominee.

THE MAILBAG

As I've shared with you previously, I get hundreds and sometimes thousands of notes after each month's newsletter depending upon how aggravated I've managed to make my readers. The questions that always make me the most uncomfortable are the ones that ask fairly personal advice since I didn't really even enjoy giving this kind of advice even when that's what I got paid for.

I've attached a couple of notes that typify the kinds of questions I get asked. I'll let you read them and then I will sort of reply to them.

"I am currently 34 years old and have been putting in as much money as I can to the stock market thru my 401(k) while it is down. I am in this for the long-term. Then I read your newsletter and you keep advising not to have your money there."

"At both seminars I attended, I asked you during breaks, if someone my age (24 yrs old) should be dumping their 401k money into the most aggressive investment choices possible. Both times, you resoundingly suggested to dump as much money as I could in equities, and I agreed with you. Currently my investment choices are split between a Growth Equity fund and an Indexed S&P 500 fund. I do not look at this money, and I will not look at it for at least 30 years. However, based on the tone of some of your newsletters, it sounds like now you would advise me differently. You often write along the lines of, "Don't lose money in stocks," and this makes me think that even in my situation (24 yrs old), I should change my investments to more conservative choices. Please let me know if you believe I should continue to invest my 401k contribution aggressively, and if so, is there anything that could happen (besides getting older) that would lead you to advise differently? I know you do not like to give financial advice, which is why it pains me to ask you that, but I would really appreciate your opinion (even a quick line in a newsletter would serve me well)."

I said I will "sort of" reply to these notes because I will not, and can not give advice of such a personal nature. What I will do instead is tell you my feelings about the markets and the economy and what I might do if I were a certain age. NONE of this is to be construed as advice or suggestions for you to follow since you should clearly make your own decisions. If you DO decide to take any of my advice PLEASE lose my address and phone number.

Here are my feelings about various markets and the economy:

--The economy never actually recovered from the recession of two years ago and is currently slipping into a much worse phase than the previous one.

--The U.S. stock market will vacillate between around 4,000 and 10,000 as measured by the Dow Jones Industrials for the next 7 to 10 years. Other world stock markets will fare no better, and many of the European markets will do much worse.

--The U.S. residential real estate market will begin a long, slow decline in value that will ultimately shave about 20% off current values on a national basis. Some markets will decline less and others more than this national number.

--Interest rates will be stuck near these low levels for at least the next several years. Rates could go somewhat higher sometime in the not so distant future, but these rises will be unsustainable. These low rates will also exist throughout Europe and Asia.

So those are the viewpoints on which I would make the following decisions if I was me.

--If I were 25 years old I would be shoveling EVERY single dollar I could afford (and then a few dollars I couldn't afford) into stock based mutual funds within my retirement account. Although my short-term view of stock values is negative, this is the opportunity of a lifetime for me to build a MASSIVE position in stocks for the next time we enjoy a cyclical bull market. I would also consider myself lucky that I couldn't afford housing so I will dodge the coming real estate decline. Lastly, I would begin building my savings outside of my retirement account so I had at least 3 months, and hopefully 6 months of my living expenses in some liquid, secure account that pays a fairly low rate.

--If I were 35 years old, I would do all the same things I listed above, but since I already own a house I would sit tight and ride out the storm. I would take advantage of the lower interest rates to refinance my mortgage, BUT use the monthly savings not for the purchase of some stupid junk but to set aside savings of some kind, perhaps for the college education of my kids in a 529 college savings account.

--If I were 45 years old and still had all of my retirement savings in stocks I would likely have to sit tight with my losses at this point. Selling now would be foolhardy and only lock in the losses I've suffered. I still have around 20 years until my standard retirement so perhaps the stock market might work out for me just in a nick of time. If I had all of my retirement savings in a bond fund during the run-up in stocks during the 1990's, I might be tempted now to move some of the money out of bonds and into some stocks at these cheaper prices. For me an aggressive amount would be no more than 25% of the account value. Same advice as the 35 year old regarding my housing and refinancing my mortgage. I would also reititerate the same advice about putting aside some savings.

--As a 55 year old or someone older there really isn't much I can do since my retirement is almost upon me and it is futile to sell off my stocks now that the horse is out of the barn. The sad truth is that the stock market might never recover in time for my retirement and any fixed investments aren't paying enough to make selling the stocks worth it. There isn't much sense selling my house right now because I have to live somewhere and my future retirement home will likely decline in value in tandem with my current home so no real loss is suffered here. All I can do now is wish that I hadn't put so much of my retirement assets into stocks so close to retirement.

So there is what various age Mikes would do for himself. If you can glean anything from all that which offers insight into your own situation, I could not be happier.

FROM THE BIZARRE SIDE OF TOWN

This is the kind of story you'd swear I'm just making up for this newsletter, but I'd encourage you to check it out should you doubt me.

It seems that a couple of zookeepers from a little town north of Cologne, Germany were recently arrested and charged with killing, barbequing and then eating some animals from the children's petting zoo. According to the reports they managed to chow down on five Tibetan mountain chickens and two Cameroonian sheep. The report didn't say whether or not the zookeepers shared any of the grub with the kids who visit the zoo.

DERIVATIVES SEMINARS IN NEW YORK

I just wanted to remind everyone that I will be in Manhattan on March 17th and 18th presenting our two-day program on Derivatives. The seminar runs from 9:00 until 4:00 both days and will be held at The Madison Towers Hotel on the corner of 38th Street and Madison Avenue. If you ever wanted to learn more about these complex instruments I would love to see you next month. You can register by calling my office at (860)347-6568 or you can visit the website at the following address:

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

Your organization can offer the program in-house for your own personnel and my office will send me out with as few as 10 people participating.

YOUR FEBRUARY BRAINTEASER

This one took me FOREVER to figure out and then when I did I was agitated since it seemed so easy after you knew the logic. Give yourself a decent shot at getting the answer before you go look on the website. Here goes:

A Cryptogram: Below is a sentence in which one set of letters is substituted for another. The words are in their right order, with a space after each.

ML MK RYL SRSKSXA LQXL X AMLLAZ NQXHU XRF NQZZHOSARZKK YOLZR UXRSOXNLSHZK MLK YVR MUUZFMXLZ HZVXHFK.

If you truly can't figure out what the sentence is when the letters are substituted, go to this link and see for yourself.

http://www.afs-seminars.com/brainteaser_Feb2003.html

NEXT MONTH

I figure it is about time we spend a month looking at all the world economies. Of course I'll also discuss anything else that becomes newsworthy in the meantime.

http://www.afs-seminars.com

Copyright 2003, Michael Gasior. All Rights Reserved.

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