January 2005 Newsletter
Issue One, Volume Six

IT'S ABOUT THE GDP STUPID!

By Mike Gasior

By now, if there is any reputation I carry, hopefully it is that of a long-term, macro type of thinker. I took some deserved and good-natured ribbing about some of last year's predictions, but I will stand my ground that I have been correct overall about most things the past 5 years or so. None of my thoughts are ever meant to be "trade-able", and perhaps that is what disappoints many people. They wish there was some short-term way to make money in the markets, but the majority of people who claim to offer such advice are usually wrong, and often snake oil salesmen. My observations are meant more as a longer-term roadmap to guide people throughout their extended lifespan, and are largely based on massive, undeniable trends. This is the focus of this month. There will also be a quick trip backward to re-visit comments that were made by me four and five years ago to see how some of them have panned out. I hope it will make you listen to the evening news with a very different ear and eye for some of the machinations occurring in Washington now, and for the next several years. For it is right now that will map how the next 30 or 40 years plays out in the U.S., and unavoidably, by many other places in the world.

AN IMPORTANT ANNOUNCEMENT

A friend from Grand Cayman wrote to me and let me know that the dates we had chosen for the rescheduling of our "Providing Services to the Hedge Fund Industry" conference included a Cayman holiday. (Discovery Day - Monday, May 16, 2005)

Thanks to that "heads up" we have now scheduled these sessions for:

May 18th, 19th and 20th, 2005

You can view the complete information about this terrific program, including the course schedule at the following link:

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

As it stands right now, we still are planning on using the Hyatt Regency Grand Cayman Resort, but I have also been included in some Cayman gossip that they may not be ready for re-opening by May. Should that prove to be the case, we will simply move the program to another hotel that can accommodate us. I will keep you informed and please pass along this information should you know people planning to attend.

THE NEW VIDEO COMMENTARY IS ON THE WEBSITE

As promised, this month’s video delves into common stock and the stock market. I am really enjoying the idea of covering a different investment market each month and I’m hoping that these will provide viewer with at least a little insight into these products.

You can view both high-speed and dial-up speed versions of the video by going to the homepage and clicking the applicable link next to the television:

http://www.afs-seminars.com

THE REALLY BIG PICTURE

Before I try to shed light on the epic battle over who will control more of GDP that is currently raging in Washington, D.C., I must make you read some comments I made in years past, and I will allow you to judge for yourself whether or not my comments have proven insightful:

***************************************************** (Segment from April 2000 Newsletter)

I CAN'T HELP THIS...SORRY

On March 24th I sent 150,000 people around the world the March edition of this Newsletter. On that day the NASDAQ Composite Index traded up to 5,078.86 which was basically it's all-time record high. This afternoon, Friday April 14, 2000 the NASDAQ Composite Index closed at 3,321.27. Well, well, well....

Now I promise you that I am not going to rub everyone's nose in anything since this could all turn around on a dime and still make me look like a huge idiot. All I want to do is remind you of a couple of my comments from a few weeks ago and then I'll drop it. Or at least drop it for this month.

--"Over the next ten years nearly any other asset category will outperform stocks."

--"The stock market still goes down. We just haven't seen it in a while."

--"There are lots of people managing money who haven't got a clue what a bloodbath looks like."

--"In as little as 10 years, college professors will be talking about this period of U.S. stock market history as one of the 'classic' speculative bubbles."

--"Of the Internet 'pure plays' trading right now, probably 90% of them will not exist in five years."

I stand by all of those statements I made last month with both feet. However I do want everyone clear on another point: As much as it seemed as though the stock market was scaring me, I was neither hoping it would go down, nor was I wishing it would go down. It's going to be bad for the economy. It's going to be bad for your business. It will be bad for MY business. Basically, it's going to be bad.

So here is my update for anyone who cares what I'm thinking now.

--We have another quick 1000 points of downward movement coming on the NASDAQ. A lot of those points might be lost Monday morning as you're reading this.

--It might be a long, long time before you see 5,000 on the NASDAQ again. For example, if you are currently in first grade, it might be sometime not long after your high school graduation. Sorry for that.

--And finally, if you think the worst is over, you're wrong. There's still plenty of time to get out and much more blood to be shed here. Sorry, sorry, sorry.

I am not lying to you when I tell you that I am currently listening to both CNBC and CNN right this very second as they cover the "Market Collapse". They are interviewing the "man on the street" about their thoughts about the market now, and their predictions for Monday morning. Over and over I hear them say, "this isn't the beginning of a bear market" and that Monday will be "a buying opportunity". The only thought I can have is that they are "like pigs led to the slaughter". And since very few of these "men on the street" have been around this whole stock market thing for very long, I will remind them of an age old axiom of Wall Street they may never have heard: "Bulls make money. Bears make money. Pigs get slaughtered." Perhaps these are words to live by at the moment.

***************************************************** (Segment from June 2000 Newsletter)

Thank you all for the continuing deluge of notes both pro and con about this newsletter. Although I must accuse some of you of trying a bit too hard to get your quote into some future issue. Honestly, I don't even give you guys credit by name when I use one of your comments for God's sake. So I am a bit taken aback at the lengths to which some will go to get a mention. It does, however, explain that small segment of society which is showcased on the "Jerry Springer" show. Luckily 99.9999% of my audience is sane (at least outwardly) and the remaining fraction of a percent should never be too far away from their next Thorazine milkshake.

Imagine me having to endure this conversation:

Reader: "Mike, your opinion of the whole NASDAQ thing is ridiculous."

Mike: "Ridiculous? Why?"

Reader: "Because it's got to keep going up."

Mike: "It's 'got to'?"

Reader: "Sure. Where else are people going to be put their money? Plus, there is all that 401K money pouring into the market which is going to drive the indexes up for years to come."

Mike: "And then what's going to happen?"

Reader: "When?"

Mike: "After all those 'years to come'?"

Reader: "What do you mean?"

Mike: "I mean, after all that 401K money stops pouring into the market."

Reader: "Why would it stop?"

Mike: "Well you mentioned the indexes going up for 'years to come'. I'm asking you when you think that's going to stop."

Reader: "It's not going to."

Mike: "So when does the market finally come down?"

Reader: "It doesn't."

Mike: "Ever?"

Reader: "Well, not ever. Just not soon."

Mike: "But someday it will?"

Reader: "Sure. Maybe. Someday."

Mike: "But don't some of these valuations worry you?"

Reader: "Value doesn't help you pick stocks anymore. Value doesn't matter and it's overrated. This is the New Economy and older people like yourself look at things that are obsolete now."

Mike: "Older people??!! And what sorts of things are you talking about that we shouldn't be looking at anymore?"

Reader: "Like earnings and assets and stuff like that. This is the New Economy and Old Economy stock market data is a thing of the past. You have to forget all that stuff you learned and study the new measures. I still can't believe how much people still care about Alan Greenspan and Warren Buffet. These guys are dinosaurs. Even that George Soros guy. His days are over."

Mike: "Like what new measures should us dinosaurs being looking at?"

Reader: "Revenues. Hits. Stickiness. That sort of stuff."

Mike: "Can I pay my debt service with website hits?"

Reader: "What?"

Mike: "Can I meet my payroll with stickiness?"

Reader: "Umm. No."

Mike: "Can the New Economy fly me to LAX or build me a sexy red convertible with leather interior?"

Reader: "Of course not."

Mike: "Doesn't any of that bother you?"

Reader: "Should it?"

Mike: "Oh dear God....."

If you happen to think even a single word of that conversation is fiction, I can completely assure you IT IS NOT. Well this is what it's like to be me. I'm beginning to feel like that kid in the movie The Sixth Sense. Why does everything seem to be making itself available for me to see, and no one else seems to be seeing it; "I see dead companies".

************************************************* (Segment from November 2000 Newsletter)

IN SUMMARY

Bonds will outperform stocks for the next few years. I think maybe as many as ten years.

The NASDAQ has another 700 points to lose...at least.

*********************** (Segment from January 2001 Newsletter Titled "HEDGE FUND TIME AGAIN?")

The other factor that might make hedge funds superior to mutual funds and other vehicles is that they have tremendous flexibility in what they can invest in, as opposed to the mutual funds, which often must be managed via strict guidelines. For example, if I'm allowed to short sell it enables me to make money even during declining markets. This might prove a huge advantage for quite a while going forward. Some month soon I'll spend a little time discussing particular hedge fund styles of management.

There are lots of factors that can contribute to this, and why I think that hedge funds might prove a superior harbor for money in the coming few years.

****************************************************** (Segment from May 2001 Newsletter)

THE STOCK MARKET REBOUND

I mentioned last month that the current rally was nothing more than a classic "bear trap". Even someone as jaded as myself about recent stock market valuations would have to agree that the market was severely oversold after the shakeout of the past year and it was due for a rally. However, this is all it is, a rally and nothing more. This is by no means the beginning of a "new" bull market or some sort of throwback to the "roaring 90's". Here is why:

--The current consensus on Wall Street is that the earnings on the S&P 500 will increase about 15% this year. This is part of the basis for what has driven the indexes to their current levels. I see no chance of these companies meeting expectations and as earnings disappointments begin, the market will once again begin to slip.

--We are coming off a period in history where we enjoyed five years of 25% gains in the stock market. Never before had we enjoyed more than two years of 20% gains. When you go back and consider my comments about the savings rate and the aging of the population, this might point toward a change of attitude about the stock market. No longer can you look at the stock market as the endless profit machine. Many people nearing retirement will stay closer to fixed income at this point. Simply stated, there will be fewer people rushing blindly into the stock market now. Once burned, twice shy.

--The only thing working against me is the old motto "Don't fight the Fed". The current Federal Reserve actions would seem to be very market-friendly moves. I feel that the changes have not gotten much traction so far and that Greenspan believes the economy is still in a tremendous stall, thus his comments about the economy "not being out of the woods". You cannot argue that the Fed dropping rates so dramatically and this pending tax cut aren't good for the economy. It is good, but it's my feeling that it won't be enough this time.

With all that said, I am sticking to my December feelings about the stock market. The Dow Jones will finish below 10,000 and the NASDAQ below 2,000 by year-end. I don't foresee any bloodbath, but a protracted sideways/downward move that will drag on for several years. My comments over a year ago were that almost any other asset class will outperform stocks in the coming years and I continue those feelings.

************************************************************************************

NOW ON WITH THE SHOW FOR THIS MONTH

While I was wrong with my prediction in December of 2003 that the stock market would go down, the fact of the matter is that it didn't go up. I also said that interest rates might be a little lower, and they were a little bit lower. Just for the record, that is still my feeling.

--The stock market will continue in this sideways trough movement for another 5 to 10 years, banging between 5,000 and 10,000 in the Dow.

--Interest rates will remain fairly low for an extended period of time, pending some unexpected, but major occurrence that neither myself, nor anyone else can currently predict.

BIG PICTURE ON CURRENT WASHINGTON POLITICS

Too many Americans, and too many people in general think that "politics" is the foolishness we witnessed this past November. Just a bunch of Swift Boat commercials and phony documents on CBS trying to get someone elected who has no vision for the future. Please believe me when I tell you, that BOTH sides had vivid visions of the future and that war is raging on Capitol Hill this very moment for the direction of the next 30 or 40 years.

This war is a combination of many different battles, and is acrimonious because the two sides could not be more opposed in their views of what legacy they will leave from their time in office. I want to share these things with you, so that when you listen to the news, you will process the information in a very different way than you currently do. Let me frame the core basis of this struggle.

THE BATTLE OVER GDP

First and foremost, I don't know enough about President Bush's plan to allow younger workers to put some of their Social Security contribution into an investment type account, and frankly, I don't know if he really knows much about it either. What I do know is what such accounts would accomplish, which is moving some monies out of the hands of the government and into the hands (read control) of individuals. Similarly, he is pushing very hard for more tax cutting and to make the 2001 and 2003 tax cuts permanent. This would also funnel money away from the government and toward the control of the individual. If you observe the macro nature of almost all of Bush's economic initiatives, you will consistently see the theme of giving a larger share of Gross Domestic Product (GDP) to the people, and reducing the government's share.

This is the epic battle and struggle that we will bear witness to for the next four years and it is enormously simple:

--Who will gain more control of GDP in the coming years, the government or the individual?

Many workers today are already contributing to 401K plans and other self-directed retirement programs; as well as accessing other means of accumulating significant wealth during their lifetimes (home ownership, Roth IRA's, 529 college savings accounts, etc.). If the Bush plan for Social Security were to pan out, this would only add to the tremendous momentum toward making people less and less dependant on the government, government programs and their employers, for their future and safety.

Whether the other side will ever admit it or not, their vision is absolutely to move the United States toward a Western-European, welfare state model. They believe deeply in a progressive tax environment that redistributes wealth from one segment of the population to other segments by increasing tax rates on people with higher incomes to help support those with lower incomes. Just this past weekend John Kerry was on with Tim Russert pushing for a rollback of the tax cuts given to wealthier Americans to pay for a Social Security fix, rather than admit that the program is flawed. He was also talking about government programs to pay for the un-insured and expanding Medicare coverage. Well clearly, these things will cost money, which the government would need to extract from the economy at large and into government coffers. This sets the stage for the war over who will control how money will be spent in the future. Will it be the government or will it be the private sector.

This battle is an epic one, because if Bush can push through even some of these initiatives, it might be difficult to impossible for a President Hillary, or any future politician to put this toothpaste back into the tube. The more of GDP that's controlled by individuals and not the government will make any future move toward a welfare type state difficult to accomplish. Just as today's politicians are currently struggling to change various programs whose beginnings date back to the 1930's through 1960's.

As many of you know I do have very strong opinions and one of them happens to be regarding Social Security. I dedicated nearly a whole newsletter to the topic less than a year ago so I won't re-make my case here. The simple fact is that the program is doomed for failure and absolutely will be actuarially unsound in the very near future. Anyone who makes claims that there is no "crisis" is a fool, liar, or both.

Now welcome to my nightmare. The congressman who actually represents me in Connecticut's 2nd District is a Republican by the name of Rob Simmons. I even voted for Mr. Simmons just two months ago and he wasted no time in making me completely regret that decision.

Congressman Simmons was recently quoted as saying that he wasn't all that concerned about Social Security going bankrupt in 2042 because "I will be dead by then". Well Mr. Simmons was born in 1943 and it is a reasonable bet that he will indeed be dead prior to his 99th birthday. Sadly, for any of his constituents who are 20 years old or younger right now, this bankruptcy will occur right before they would have become eligible for benefits. What a shame for them I suppose. Perhaps Congressman Simmons could speed his death up to as soon as possible so we could replace him with someone who cares about future generations and the future of this country. Obviously I can't call Mr. Simmons a liar since he was clearly stating his truthful feelings. Without equivocation I can deftly brand him a fool and many other expletives I will forego due to email "content filters" used by many of my reader's employers.

SUMMARY

--The debate over every single initiative regarding governmental economic policy will ultimately boil down to this battle over who controls GDP, even though neither side will ever admit it.

--The momentum is substantial for moving GDP from the hands of the government into the hands of individuals and that momentum should continue for several more years. Americans will, for better or worse, increasingly become the stewards of their future and less dependant upon the government or their employer for their economic security. This will prove very good for many and quite bad for some.

--Some sort of reform of Social Security is likely, and it will likely be inadequate and immaterial. The crisis will continue to loom with future retirees simply getting a stay of execution while remaining on death row.

MICHAEL JACKSON

I’ve been prone to make comments on both music and social issues, and I can’t help myself from making one on this Michael Jackson trial.

Although I’m concerned what it might imply about my personality I have to admit that the O.J. Simpson trial made for good television viewing. I’m stuck in a lot of hotel rooms throughout the year and I can only watch so many Seinfeld reruns a week, so if nothing else the Simpson trial was at least new programming every day.

This Michael Jackson thing is a very different matter, and every time I see this freak on TV, my skin crawls. To a certain degree you have to feel sorry for the tragic turn (downward spiral might be a better description) that his life has taken, but I don’t have the slightest interest in hearing even one detail about what takes place during this trial. The whole thought of what happened between him and these kids is foul and disgusting and I dread the fact that this hideous spectacle is now going to eat up thousands of hours of television programming for months and months.

So that’s my two cents. I wish Americans and the world would collectively turn their heads away from looking at this car crash and then, perhaps, the media would search for alternatives.

MY FIRST SESSIONS OF THE YEAR

I am very pleased with the programs I am opening the year with and that I will be in New York, Chicago and Los Angeles so early. If you or your colleagues might benefit from any of the following programs, clicking on the corresponding link will give you complete course details and you can also register on-line:

--Introduction to Securities & Markets http://www.afs-seminars.com/introsec.html

--Swaps & Swap Derivatives http://www.afs-seminars.com/swap.html

--Securities Operations, Processing & Accounting http://www.afs-seminars.com/securities-operations.html

--Hedge Funds http://www.afs-seminars.com/hedge.html

There are also still dates available in 2005 if your organization would like to have me come in-house to present any of our sessions, or a program of custom topics of your choice. This can be done for groups as small as 10 and a phone call to my offices at (860)347-6568 will provide you with complete details.

BRAINTEASER

For a change of pace, this month's brainteaser combines a probability situation combined with the prospect of an ex-wife getting to shoot her ex-husband. How can a question be better than that? Just stay calm and think things through to get your answer.

Once you can stand the suspense any longer you can view the solution at the URL below:

"Henry has been caught stealing cattle, and is brought in to town for justice. The judge is his ex-wife Gretchen, who wants to show him some sympathy, but the law clearly calls for two shots to be taken at Henry from close range. To make things a little better for Henry, Gretchen tells him she will place two bullets into a six-chambered revolver in successive order. She will spin the chamber, close it, and take one shot. If Henry is still alive, she will then either take another shot, or spin the chamber again before shooting.

Henry is a bit incredulous that his own ex-wife would carry out the punishment, and a bit sad that she was always such a rule follower. He steels himself as Gretchen loads the chambers, spins the revolver, and pulls the trigger. Whew! It was blank. Then Gretchen asks, "Do you want me to pull the trigger again, or should I spin the chamber a second time before pulling the trigger?"

What should Henry choose?"

http://www.afs-seminars.com/brainteaser_Jan2005.html

And the answer to LAST month's brainteaser is:

We have to be careful what we are adding together. Originally, they paid $30, they each received back $1, thus they now have only paid $27. Of this $27, $25 went to the manager for the room and $2 went to the bellboy.

http://www.afs-seminars.com

Copyright 2005, Michael Gasior. All Rights Reserved.

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