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DON'T BE A LOSER By Mike Gasior Immediately I need to shed light on what outwardly seems like a tremendously harsh title for this month's edition. Although I am viewed by many people as being a bit abrupt, I wasn't offering some sort of unfriendly advice to my readers. I was simply trying to help them better understand the economy in which they will be living in for the foreseeable future. I'll get to specific thoughts on that matter soon enough. Beyond giving advice to potential losers, there is also a lot going on with regard to tax cuts, impending war and an acceleration in hedge funds blowing themselves up and these are all worthwhile topics of conversation as well. I'll try to offer my thoughts, and maybe some clarity on these subjects too. So let me get started since it seems as though it will be a busy newsletter this month. IRAQ I truthfully don't have a lot to say on this topic, but there are a few realizations I have arrived at in the past few weeks I feel like sharing. I'll do my best to stick to the things I know for a fact. Fact One: There is no way that the United States and at least Great Britain don't attack Iraq. An attack is an absolute certainty and the only issue is when it occurs. If the United States and Britain were to disassemble over 250,000 troops and all their equipment and leave the area, Saddam Hussein and Al-Qaida are suddenly 10 feet tall and would literally become God-like figures to their followers for having stood up to the superpowers and stared them down. This cannot and will not be allowed to occur. Fact Two: Contrary to the ranting of Ted Kennedy and other idiots, George Bush and Tony Blair clearly have evidence of very bad things that I (and perhaps even the esteemed Senator Kennedy) don't know about. I still find myself screaming at the television when I hear politicians, who certainly know better, ask publicly why the President and Prime Minister don't share all their Top Secret intelligence with reporters so we would all know what Iraq is doing. This level of stupidity seems extreme even by political standards. It is also difficult to share this intelligence information with the U.N. inspectors since this would point Iraq directly to the sources by which intelligence is gathered. This is another thing that cannot, and will not, happen. Fact Three: I have thought long and hard about this and I feel that this whole Iraq situation is a lose/lose/lose prospect for George Bush and Tony Blair. The entire thing could very well blow up in their face and cost them both very heavily from a political point of view, with very little or nothing to be gained even if a war goes well. All I had to consider to establish this as fact is that if it were a politically expedient thing to do, or good for poll numbers, Bill Clinton would have attacked Iraq instantly. Enough said. As long as there is uncertainty about Iraq we will continue to experience the higher petroleum costs that exist right now for an extended period of time. This will have an even further dampening effect on the economy since every dollar increase in oil prices for consumers is one less dollar they can spend on goods and services. This causes even slower sales and lower sales for corporations. Corporations are also subject to the increased cost of oil, which will force them to raise prices or accept lower profit margins. None of this bodes well for the economy. I've given thought to possible non-military solutions and there are a couple of decent ideas that have come to mind for me. The first idea is for the U.S. to flood Iraq's airwaves with the Donahue Show from MSNBC. Although we might be accused by other countries for using "a weapon of mass destruction" against the enemy, I am certain any long-term broadcast of this program would lead to mass suicides as well as a quantum reduction in the viewers' mental capacities. There has also been heavy discussion regarding Saddam Hussein going into exile but no one seems to know where he might be welcome to live. My idea is that Saddam move in with either Susan Sarandon or Sean Penn and maybe even better, BOTH OF THEM. We could get an apartment where the three of them could live and film a new reality TV show called "Saddam and Friends" sort of like The Osbornes. Or maybe just move Saddam to Hollywood in general since he seems to be quite the popular figure there. I have the feeling he would almost immediately be the lead candidate for president of the Screen Actors Guild. THE TAX CUTS In a nutshell, I'm lukewarm to the President's tax cut plan and the Democrat's plan is just stupid. One thing I totally agree with is the elimination of double taxation of dividends. The whole concept of the government taxing income twice has always struck me as corrupt and borderline evil whether you're talking dividends or the ridiculous situation with estate taxes. Whenever you can get the government out of people's pockets, the better I generally like it. So basically, I tend to favor tax cuts of any kind. If you just think about the tax cut offered by the President, it would amount to a reduction of $670 billion in taxes over the next 10 years. On the face of things it certainly sounds like a lot of money will be pumped back into the economy and would help the economy back onto it's feet. What one has to remember though is the immense size of the U.S. economy, which currently hovers at basically $10 trillion per year. Over a 10 year period without the economy growing at all we're talking about $100 trillion during that time period. To save you from doing the math I've done the calculation for you so let's go slow here. This whole tax cut means a total injection of money totaling .67% of the economy. To put that in perspective I'll frame it this way; If you were making $50,000 per year and I gave you a raise of .67% your new income level would now be $50,335 per year. This doesn't seem too bad but with the increased cost of oil along with the rapid increases in State and local taxes, not much of that $335 will actually be left to spend on goods and services. I don't deny that it is a stimulus for the economy. The thing that can probably be safely assumed is that the federal government will NOT reduce spending in an amount equal to the tax cut, and will certainly increase it instead. This means the $670 billion will be added directly to the U.S. national debt. Not even counting the current and projected deficit in the budget, the tax cut alone will increase the national debt over 11%. This is something I would personally rather avoid. With regard to the Democrat's feeble tax cut plan, it always makes for a good sound bite to criticize the proposed tax plan for "favoring only the rich" and follow that by mentioning how they would prefer that the tax cut "favor average Americans". The trouble with their logic is that "average Americans" don't really pay all that much in the way of taxes. While the amount they pay may seem like plenty to them, in the aggregate it isn't all that much. I'm personally sick of politicians waging class warfare every time a tax cut is proposed, but the inescapable facts of life with taxes are as follows:
So how much of a tax break can possibly be given to the bottom 50% of taxpayers if they are only paying 5% of all taxes? Since it would be difficult to reduce the taxes of people who don't really pay any, perhaps we can just begin taking money away from the top 50% and just give it to the bottom 50%!! If this actually sounds like an excellent idea to you, I want to make it clear that I'm not trying to make this sound like I am taking the credit for thinking of it. Proper credit should go to the person who thought of the idea, and his name is Karl Marx. I believe he called his idea Socialism. KEEP YOUR EYES ON THE HEDGE FUNDS I can honestly say that my exposure to the hedge fund industry is fairly extensive and hedge funds themselves, hedge fund administrators, accountants and auditors, as well as the brokers have all been my clients for many years. The worry I have for this industry right now is not an attempt to bite one of the hands that feed me, but an honest assessment of risk which concerns me. Since my audience often contains the accountants and auditors who sign off on the financials of these hedge funds there needs to be an increased diligence with regard to oversight of the funds in the current environment. The first sign of worry for me was when Gotham Partners Management sent a letter to their investors on December 27th, letting them know they would be closing down two funds with a value of about $300 million and the rumor was also that major losses may also be announced. The Gotham funds were fairly high-flying funds for the later part of the 1990's and the closing of them was pretty unexpected. During the first week of January it took an order from a New York State Supreme Court judge for the Lipper Convertibles Fund to pay out the majority of remaining investor monies after the investors sued the fund for their cash. Last year two funds run by the former Deputy Mayor of New York, Ken Lipper were forced to reduce the value of their portfolios by over $300 million after suffering huge losses in the convertibles market. Then, just last week a $300 million fund called the Eifuku Master Fund which was managed out of Japan lost ALL of it's $300 million value in only seven days and investors are now left with a total loss. More troubling than losing all that money in only seven days (although it is pretty easy when using 300% leverage as this fund was) is that the fund actually posted a 76% gain in 2002 and then doesn't even survive the first month of 2003. Although precise numbers are difficult to come by I have read that around 14% of ALL hedge funds closed up shop last year, which were around 750 of them. The reason for this is fairly simple and easy to explain. Hedge funds charge a management fee very much like mutual funds do, but that fee basically covers operating expenses and is not where the "big money" lies for the hedge fund manager. Very unlike mutual funds, hedge fund managers share in the profits when the fund is profitable with the most common split being 80% of profits going to investors and 20% to the fund manager. Obviously, in a market as difficult as the one we're currently experiencing there is very little easy money to be made and you should expect to see hedge funds continue to close down. Unfortunately, you may also see more circumstances like the fund that lost all investors money in seven days because they were taking extraordinary risks and perhaps using unacceptable amounts of leverage in order to eke out profits of any kind. Just remember who warned you. DON'T BE A LOSER After my predictions in last month's edition of the newsletter that the economy would weaken further, the stock market would decline again for the fourth straight year and real estate would be the next collapse, lots of people wrote and asked simply what they were supposed to do in an environment like that. You are now living in a moment of history that many have not lived in before, so people are confused. There are those moments in history where there is lots of money to be made and lots of low hanging fruit to be harvested and those were certainly the 1990's. There are also those times like the period from 1960 to 1975 where the stock markets produced almost no gains at all and not many asset classes posted significant increases in value. My feeling is that we are going to be stuck in a trough like that for a protracted period, which is why investor psychology will need to different than it has been the previous 15 years. My advice is abrupt and simple and bears the constant theme that you should try VERY hard not to be a loser in this environment. I will repeat for you the old adage that it's not important what you make but more important what you keep. So here are some basic ideas:
I have been telling readers and participants in my seminars this for several years now but the U.S. stands a reasonable chance of swinging into a deflationary cycle and I actually believe it is currently underway. If this actually occurs, every dollar that you manage not to lose will offer increased buying power since the price of many things will begin to decline. What will be important is to not have your dollars invested in things that are going down in value as well. So please believe me that I am not trying to be negative, nor am I wishing bad things upon people and the economy. I'm simply worried and don't want bad things to happen to people when it can be avoided, and I've sadly been a little too on-the-mark with some of my predictions in recent years. So let the deluge of "you suck" e-mail begin once again. SPEAKING OF HOW MUCH I SUCK I definitely get the impression that many of you think I exaggerate the amount of "you suck" e-mail I actually receive so I figure I'd share a couple recent comments with you. "Common advice to writers is "Find your own voice." You are obviously a savvy analyst and a thoughtful prognosticator, so why do you chose to present yourself as a street corner kid from Chicago? You can hire someone to edit your material and remove the excess wordiness, but please stop cheapening your opinions with childish suggestions to vomit, etc. It's difficult for your peers to respect your information when you do not respect yourself." Well it has been said that I write like I speak and I am actually paid quite well to speak for literally days on end. Perhaps that explains the wordiness. With the respect to my childish suggestions, the exact suggestion was that the person should CHOKE on their vomit. I find life comes down to the little details. In the area of respect, I got respect for myself real good and I figure my peers got respect for me real good too. The most vociferous comments were reserved for my comments about rapper Eminem. I'll give you a couple samples. "Second, I suggest Mr. Gasior reevaluate his thinking regarding Eminem. Bill O'Reilly recently noted that anyone who is swallowing Eminem's anarchist, hatred filled swill will have no opportunity in the job market. This will particularly effect minorities and those with less education. As a woman, (Mr. Gasior) does not mention if his child is a daughter or son, he perhaps needs to listen to the track in which Eminem spends several minutes strangling his wife with highly explicit sounds of the strangulation going on in the background. This is violent pornography and should be called nothing less. To lend it any credence whatsoever should give rise to Mr. Gasior asking himself if he would like to have his daughter dating someone who is a devotee of Eminem. It also does not bode well for the levels of violence against women which are already abomidable." "I almost subscribed to your newsletter UNTIL I read your claim that you worship the rapper eminem. That rapper instigates violence in others - YOU are pathetic to adore him and I will NOT ever read anything you write again." For the sake of review, my exact praise was this; "Believe it or not, I just love The Eminem Show by our friend Marshall Mathers. While I have to admit that by the time affluent, middle-aged white guys like me are enjoying his album his 15 minutes of fame must be ending, this guy is an amazing songwriter" So clearly there was no mention of "worship" here, nor did I endorse violence against woman or anybody else. I simply wish some people would get a life and find something important to worry about other than this sort of nonsense. These are simply songs and this guy is simply a songwriter for God's sake and I cannot believe there is a reference to someone being an Eminem "devotee". Didn't people used to call them fans? I refuse to believe that a song, poem, movie, television show, painting or any other form of art can cause somebody to commit an act of violence since the person committing the act must already clearly have a screw loose. So perhaps the people who wrote me with the comments about Eminem will be kind enough to write me again and invite us all to the book burning party they plan to hold. THE FIRST BRAINTEASER OF 2003 I haven't given many brainteasers where there was no need for mathematics in the solution but this is one of them. All you need is raw intellectual horsepower, so here goes. You're trying to get to Truthtown. You come to a fork in the road. One road leads to Truthtown (where everyone tells the truth), the other to Liartown (where everyone lies). At the fork is a man from one of those towns, but which one? You get to ask him one question to discover the way. What's the question? For the answer just follow this URL: http://www.afs-seminars.com/brainteaser_Jan2003.html 2003 SEMINAR SCHEDULE I am very excited about the slate of seminars I will be offering throughout the United States as well as Bermuda and Grand Cayman this year. I will once again be in midtown Manhattan for the New York courses, as well as Hartford, Boston, Chicago and Los Angeles. Particularly interesting is my newest offering call "Managing Portfolio Managers" which provides three days of insights for anyone who needs to better supervise, audit, hire or control portfolio managers. I will offer this program in New York, Bermuda and Grand Cayman. The full slate of programs I will offer in 2003 are as follows:
Finally, the investment glossary and links page are among the best I have ever found on the Internet and I hope you will use these resources to help you out during the workday. You can also view all past issues of this newsletter by visiting the site. The web address is: We also still have some time available if you would like to host any of our seminars in-house for 10 or more of your people. If you would like more information on this, or would like a hard copy of our 2003 schedule mailed or faxed to you, please call my office at (860)347-6568. I wish you all the happiest, healthiest and most profitable New Year! Hope to see you soon. Copyright 2002, Michael Gasior. All Rights Reserved. |
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January
2003 Newsletter
