July 2002 Newsletter
Issue Seven, Volume Three

NEVER A DULL MOMENT

By Mike Gasior

A very dear friend of mine wrote to me after last month's newsletter to tell me these exact words:

"You will not get more readers if you keep shoving in their faces how right you were and how poor they are."

The truth is I have tried to make mention at every opportunity that as much as my predictions might seem dire and scary, I am never actually hoping that the markets will decline. All I have ever truthfully hoped for was that people would at least consider the possibility of market declines when making their
investment decisions. For those expressed purposes, I will try to contain anything which might make it sound like I am gloating and try to make more clear my feelings and worries about the markets and the economy at large.

If you want to read some scary stuff I have written in the past, just follow this link and read what I wrote in April of 2000:

http://www.afs-seminars.com/newsletter_Apr_2000.html

I was in the middle of preparing a speech I was to give to the CFA Society in Grand Cayman who had asked me to speak regarding the future of the accounting and analyst professions. Knowing that I had covered this sort of thing previously prompted me to review some of my own past newsletters. After reading my own words of more than 27 months ago, I still wonder HOW it is that I send you people this thing every month for free. Go read it for yourself and ask how the mainstream media just caught up with these topics recently. They have either had their head stuck in the sand, or perhaps stuck up somewhere else...but I digress.

JUST A WORD ON THE RECENT MARKET

I'll sum up the current rally in the U.S. and Euro stock markets with a single word: sucker.

If anyone truthfully believes that the decline in these stock markets is over you are not only sadly mistaken, but also perhaps delusional. After any parabolic decline in a market like we have seen recently, bottoms are never achieved with a "v" shaped bottom where the market suddenly reverses and rallies. The spectacle we have just witnessed in the U.S. and Euro markets will require somewhere between a five to seven month bottoming period where stock values churn near the lows before any rally of significance can begin. The current rally is happening for the sole purpose of luring the last few people who have not had their kneecaps shattered into the markets for a final bloodletting. I truthfully think the Dow Jones Industrials will drop below 7,000 or further before a bottoming period can begin.

The Asian markets on the other hand, are a train wreck lead by the Japanese indexes. The Nikkei 225 Index recently broke below the 10,000 level for the first time in 17 years and the bloodshed in Japan shows no sign of letting up. The government debt of Japan was recently downgraded two ratings categories by Moodys to a level barely above "junk" status. These recent turns of events will only aggravate the attempt of the rest of the world's economies to keep from falling back into a recession. This brings me to my next topic.

THE DOUBLE DIP IS ALMOST UPON US

Seven out of the last eleven U.S. recessions have been double dip versions and I have felt since the first reports that the most recent recession had supposedly ended were much too premature. I personally saw very little actual strength in the North American and European economies and I felt that it was too expeditious to believe that we would escape with as little pain as the recent recessions dished out. The only actual strength in the U.S. economy of late has been the housing market and those industries related to it. Many other people are suddenly taking my position that the U.S. housing market has reached a near bubble status and that property values may decline soon. If you wonder what might cause such a thing, then I suggest that even a minor increase in unemployment might be all the catalyst necessary to get things rolling. This simplified reason that I firmly believe that housing values will begin to drop is because housing has NEVER cost as much as it does right now in terms of
disposable income. Never. This is clearly unsustainable and the markets will correct this soon enough.

My logic is always simple and rooted in common sense when it regards the economy. As the father of a four year old, people are always keen to ask me about saving for college and how college tuitions have been increasing at twice the level of inflation. While I have been saving for my daughter's college for years before she was even born I have never worried, but I would also remind people that tuitions could not continue to increase at that sort of rate. When people would then ask me why they couldn't, I would simply answer that if they did we would quickly reach a point where no one would be able to afford college anymore. The situation is unsustainable.

Even though interest rates have declined to nearly 40 year lows, consumers, corporations and governments are struggling under record levels of debt. Just the other day Moodys announced that there had been 89 defaults of corporate debt so far this year causing losses of $64 billion for the investors in those bonds. This is a 16% increase over last year, which was the worst year in history.

Also, please remember that stock market investors have lost somewhere in the neighborhood of $7 trillion in wealth because of the stock market decline. You can be very certain that this will affect their spending habits in a substantial way and this could begin to show up in economic statistics very soon. A telltale sign may already have shown up with the Federal Reserve changing their bias to a possible reduction in interest rates. This is certainly not indicative of a healthy and surging economy. Please be very, very careful here.

WHAT TO DO WITH YOUR MONEY?

First let me make one thing PERFECTLY clear. This is by no means advice with regard to what you should do with even ten cents of your money, and if you follow any part of these ideas PLEASE lose my phone number. I didn't honestly care for giving investment advice when that's what I got paid to do, and I don't like it now either. With that said, here are at least my feelings about various asset classes.

I still think that the 10 Year Treasury Note that is yielding around 4.50% is a tremendous value. With a minimal reinvestment rate, a $10,000 investment in these will result in you having $15,000 ten years from now. I find it very difficult to believe that a similar $10,000 investment in the stock market will offer a comparable return.

There are also terrific values to be had in the mortgage and asset backed securities markets with some very high quality products offering returns of 30-40% better than comparable Treasuries. For U.S. tax paying investors the yield on very high quality municipal bonds are hovering barely under what Treasuries are paying.

The list of things I would not own for any reason right now:

--Stocks
--Lower quality corporate bonds
--Real estate
--Commodities
--Anything "collectible"

For at least the next five years and perhaps ten, the stock market is going to offer you nothing but ulcers.

BUT...if you are 35 years old or younger, you might have the opportunity of a lifetime if you were to shovel ALL the money you can afford into the stock market starting immediately. You should even hope I'm right and that it returns nothing for the next decade; that will allow you to build a MASSIVE position at these depressed prices which might perfectly position you for your retirement which is sadly 25 or more years away. You may actually wind up feeling very lucky indeed. Just don't forget to send me a thank you note then.

AOL/TIME WARNER AND QWEST

I truthfully don't have much to say here, as hard to believe as that may be. I warned in past months that we would have more of these types of accounting surprises and I promise you right now that we aren't done yet. There will be more ugly surprises by some pretty big companies in the coming months before this is over. Enough said.

MARTHA STEWART

As much as it would please me to see our friend Martha in some prison fatigues sometime very, very soon...she is not even going to be charged with any crime and most certainly won't do any time.

I openly admit that I can't stand this woman and this is due to a four-hour airline trip where I sat across the aisle from her. It was during those four hours where I learned the reason why you aren't allowed to bring guns on airplanes because I most certainly would have shot her. While I admit that everyone is entitled to a bad day, the way I saw her treat people was beyond my comprehension.

Regardless of my opinion of her, the entire issue relating to her supposed insider trading of ImClone stock is strictly a "he said, she said" situation. And neither he (ImClone CEO Sam Waksal) nor she (Martha herself) is going to confess to a bloody thing here. So simply stated, the government has nothing whatsoever to go on here with regard to evidence and you will see nothing come of this story.

The only damage will be to Martha's already rotten reputation, and truthfully, who cares anyway.

WATER, WATER EVERYWHERE

But not a drop to drink.

I warned you people almost two years ago about the impending crisis regarding the world's supply of drinkable water and recent news stories have accelerated my concerns. This situation is identical to my opinions about the markets and economy because the current situation is simply unsustainable.

While over 75% of the world's surface may be covered by water, the undeniable truths are the following statistics:

--98% of the world's water is salt water
--2% of the world's water is fresh water (the majority of this is in glaciers
and the polar ice caps)
--.3% of the world's water is actually drinkable

The story that sent me back to thinking about this topic was that Tampa, Florida is building a desalinization plant which will convert between 25 and 27 million gallons a day of ocean water into fresh, drinkable water. I truthfully expected for it to take much longer than the year 2002 for a major U.S. city to be pursuing what is such a desperate move to assure itself of fresh water. Plus, there are increasing battles between cities, states and countries with regard to who owns the "rights" to certain rivers, lakes and aquifers. I'm not sure if there is any sort of investment play here, but perhaps this is something you could tune your own personal radar to listen more closely for.

THE MOST CURRENT SIGNS OF THE APOCALYPSE

--A jury in New York recently awarded a woman $14.1 million in damages for injuries she suffered when she laid across a subway track in an effort to kill herself. The judge later lowered the award to $9.9 million because in his estimation, the whole thing was 30% the fault of the woman.

--A woman in Scotland recently got an award of $25,000 because she bruised her fingernail fastening her seatbelt of the train she was the driver of, and her fingernail later fell off.

--A Mr. Edward O. Green arrived at the police station in LaPorte, Indiana to bail out a friend who was in jail and was quickly arrested himself. A police officer asked him to take a seat and Mr. Green, who appeared fairly drunk, quickly fell asleep and began to snore. When the cops approached Mr. Green to
awaken him they noticed several small plastic bags in his mouth, which would later prove to be filled with cocaine. And you wonder why some people are criminals.

--And finally, an inmate in Kingman, Arizona was killed when he slipped in his cell on his own feces, which he had expelled on the floor in protest, striking his head on the floor and dying.

THIS MONTH'S BRAINTEASER

While this question may seem directly out of a high school math class, it's still requires enough brain power to illuminate a small light bulb. Let's see how you do.

Question: The New Haven Flyer leaves the station at 60 mph. After three hours, the Grand Central Steamer leaves the same station at 75 mph, moving in the same direction on an adjacent track. Both trains depart the station at milepost 0 (zero). At which milepost will the Steamer draw even with the Flyer

Don't be a weasel and just go to the link listed below which just gives you the answer. Give it the old college try and compute the answer yourself. It will put a little hair on your chest. If you've given plenty of thought and want to check if your answer is correct, or you are just a lazy slob, just click on the following link and find the answer:

http://www.afs-seminars.com/brainteaser_July2002.html

Good luck and God speed.

WEEKLONG PROGRAMS IN LOS ANGELES AND BERMUDA

We are trying something in the U.S. this year that we have been doing for many years offshore, and that is hosting a weeklong series of programs where each day is dedicated to a single topic. Each subject is very timely given the current conditions of the market and I have been extremely excited about the response. I will personally be conducting each and every session and I would love to see
you and your colleagues in attendance.

For more information on course content or to register, please visit:

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

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

I hope you liked this edition and keep your eyes open for next month's issue.

http://www.afs-seminars.com

Copyright 2002, Michael Gasior. All Rights Reserved.

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