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SUMMER READING By Mike Gasior Given that we are solidly in the middle of summertime, and light reading is usually what people prefer, I have decided to make this month's edition as concise and to-the-point as possible. That doesn't mean it won't be loaded with fabulous prose and extremely valuable ideas, actually quite the contrary is true. My plan is simply to take more of a machine gun type of approach. THE NEW VIDEO CLIP I think you will enjoy the newest video clip, which is already uploaded onto the home page and ready for your inspection. I have chosen to address one of my favorite topics, Derivatives, with a discussion about put options and three very different ideas for using them. I think you will enjoy the conversation and I even get to poke fun at John Kerry and Michael Bloomberg too. You can view the clip by visiting the homepage at: THE CHANCE OF A LIFETIME FOR TWO GENERATIONS Clearly I can often be a bit of a crank and can even seem overly cynical at times. Someone reading this newsletter on a regular basis might be lead to believe that I find there are no appealing investment opportunities out there right now. So perhaps you will be very surprised to hear me beginning to sound the whistle for both generations X and Y to begin boarding the stock market train. It is my own personal belief that if you are under 40 years old (and even more so if you are sub 30) that you will have the opportunity to arrive into your retirement years in an absolutely HUGE way financially if you begin playing your cards correctly right now. Many members of my seminar audiences who are in their 20's lament how miserable the stock market has been of late, and how unenthused they feel about their 401K along with their general financial future. Overall, the stock market has spent nearly the last four years moving sideways and the housing market has left them totally in the dust, just as they were getting to the position of wanting to acquire their own place. Prior to me giving any ideas about what someone might want to consider doing with the stock or real estate markets, let me first share with you two very strong beliefs of mine: Number One - I think that the U.S. stock market is already four years into a 12 to 15 year period where it will continually move sideways. For an example of what I am talking about, try to find a chart for the Dow Jones that will illustrate the years 1964 to 1982. You will quickly see that the Dow Jones rattled between 500 and 1,000 over those 18 years. Most people would have a hard time believing it, but the market closed out the year 1981 at almost exactly the same level (less than one Dow Jones point) where it had finished out 1964. I currently expect that you will see the Dow Jones trading between 5,000 and 10,000 for the next decade. Number Two - This recent run-up in residential real estate values is already extremely fragile and is unsustainable as proven by the release of June housing starts. Most analysts expected a few percentage point increase in starts, and instead got an 8.5% decline. This was thanks to a very small increase in mortgage interest rates from May into early June. I did some extremely rudimentary research of my own on this subject and found the following to be true economically: --If 100 people can afford a $300,000 priced home with a 6% 30 year mortgage, the number of people who can still afford the same priced home with a 7% mortgage quickly drops to 28 people. In any supply and demand marketplace, this paints a horrifying picture of what might happen to prices with even a modest rise in rates, never mind a precipitous rise. So those are two of my core beliefs that are the foundation of what is about to come next. Please keep in mind that this is NOT any sort of advice about what anyone should do. I didn't particularly like giving personal financial advice when I was getting paid to do it, much less do it for free. Let's just say, if I was under 40 years old, and with even more aggression, under 30 years old, I would likely be doing the following: --Pouring every dollar humanly possible into my 401K plan and putting it into a stock mutual fund that I thought was appropriate for me. I personally like well-run, low expense ratio index funds for this purpose, but everyone has to make a choice that they feel comfortable with. Whatever fund you chose, I would plan to keep depositing into the same exact fund for the next 10 years at absolute minimum and perhaps longer, barring any adverse changes to the fund's philosophy or performance among its peers. I would like to see someone putting 10% of their pre-tax income into their 401K and then hopefully also getting some employer matching funds too. If you say that putting 10% of your pay into your retirement plan would not allow you to live the lifestyle you are currently living, then you already cannot afford that lifestyle and it is time to cut back on something. You will never win the argument with me that the BMW lease is more important than your future. I have found that we have become a society that has a hard time saying "no" to ourselves, and that thought process has to stop soon. So be a leader and set an example. --Don't worry that housing prices have passed you by, because they will start coming back your direction soon. The past five years have converted more renters to owners than in any other five-year period in U.S. history, and this has left a glut of apartments available. So make yourself a deal on a good lease. With the prospect of a decline in property values you do not want to enter the most leveraged investment of your life. At most you will be putting up only 20% of the purchase price, or worse, you will be using one of these frightening new mortgages that allow nearly no money down. Do some research on what happened to housing prices in New England, New York, New Jersey and California in the late 1980's for a better understanding of what I am talking about. I bought my first house in 1986 in Connecticut with 20% down and it ultimately took me over 10 years to get out of that house even, having spent a good part of a decade in a "negative equity" position besides. Do yourself a favor by learning your lesson from me, and the millions of others who shared my experience by avoiding it. Doing so will help accelerate your own financial successes. You may hear me talk in the future about how the stock market might go lower from this current level (as soon as a few paragraphs from now) but this should not affect your consistent pouring of new money into equity mutual funds. As pessimistic as I can sound at any given moment, I would be completely SHOCKED if the Dow Jones Industrials wasn't at least 40,000 and perhaps 50,000 by the time 2025 or 2030 rolls around. As impressive as that might sound, that isn't even that amazing of a move upward given the market moving from 1,000 to 11,000 between 1982 and 2000. And if I'm right, you'll feel like a total fool for nickel and diming around right now. If you knew the Dow was going to be above 40,000 when it was time for you to retire, you'll be wishing you'd shoveled every possible dollar in when it was at 5,000 or 7,000 or 10,000. Don't split hairs and don't try to time the market either, but instead just stay the course and you should arrive into your "Golden Years" (God...I hate that expression) in "Fat City" (an expression I like very much). THE MICROSOFT STORY I will be first to admit that I firmly believed that Microsoft would not pay out a special dividend like the one they just announced, even though I always thought that they ought to. I've watched the $56 billion in cash accumulating over the past seven years or so and often wondered what they might do with the money. There were several lawsuits that had been pending, along with the anti-trust complaints from the U.S. and Europe that needed to be resolved, which I think postponed the decision until now. There has already been plenty written about this story, but I wanted to share a few of the smaller gems I read about this story: --Bill Gates will get the biggest single dividend check come November totaling $3.3 billion. He stated that he would donate the entire amount to the Bill and Melinda Gates Foundation, which will bring the foundation to $30 billion in total size. More impressive is that their foundation will then be about 3 times the size of the next largest foundation in the United States. --Had Bill and Melinda chosen to keep the money for themselves, rather than give it to charity, they would have owed the Internal Revenue Service $495,000,000 in incomes taxes based on the new 15% tax rate for dividends. What is fun to consider is the amount of money that the government will NOT be getting would have been enough to pay the combined salaries of 435 members of Congress, 100 Senators, 9 Justices of the Supreme Court and the President and Vice President for a little over FIVE YEARS! --As hard to fathom as this is, Microsoft will continue to accumulate more new cash at the rate of about $1 billion a month. --With the increase of their standard monthly dividend, Bill Gates will receive $180 million MORE each year than he was at the old dividend rate. --Microsoft just began paying a regular dividend fairly recently, but with the new increase, they will become the 10th highest paying company in the S&P 500. There are plenty of things about Microsoft one can marvel at, but I couldn't help but share these few morsels with you. A SNOTTY NOTE AND A MID-YEAR REVIEW I got the following email from a gentleman named John, who is an AVP of Internal Audit at a large, east coast insurance company: "not too good for 2004 predictions" This was precisely what he wrote me, and the lack of capitalization or punctuation is his. A grand total of 32 characters and spaces. I mention this because the automated signature that was included in the email that gave his name, title, department and phone numbers contained 104 characters and spaces, but I digress. Frankly, I hadn't given any thought to how I was doing on my predictions for 2004, so John's note made me review my forecasts. Let me share the predictions and my candid, mid-year assessments with you. PREDICTIONS FOR 2004 Dow Jones - Under 9,000 (The Dow is currently around 9,962 I still think I might be correct on this one. And as the Soup Nazi might say...NEXT!) NASDAQ - Under 1,800 (The NASDAQ is already down to 1,849 and I think I'll be a lock for this one. NO SOUP FOR YOU!) Ten-Year Treasury Note - 3.75% (The yield on the 10-year treasury is around 4.32% and has been dropping. I may miss on this one, but I'd still bet that it might be under 4.00% at year-end and there weren't a lot of people last December, or even now forecasting that.) Fed Funds Rate - 1.00% with no action at all by the Fed. (Well the Fed did just recently raise rates and I disagreed with them on that. While I may be wrong on this prediction already, I predict the Fed will ultimately be more wrong than me by choking off what is already a VERY tepid recovery.) Yield Curve - Still quite flat, but with overall lower rates. (Well the curve IS flatter than it was, but I'm currently wrong on the "overall lower rates" part. I will stand by the flatter prediction and that rates will finish this year not remarkably changed from last year-end. I will remind you that in a survey of 56 economists this past January, 54 of them forecast that rates would move higher this year. YOU remind yourself who was saying that it wouldn't be true.) 30-Year Mortgage Rates - 5.00% (The rate on 30 year mortgages currently hovers around 5.50% and I've got six more months to have this work out. I'm not sweating this one either.) The Economy - Slowing gradually with no more than 2.5% to 3.0% growth at best. (Evidence is beginning to pile up that things are already slowing down, whether or not Chairman Greenspan wants to admit it during his recent testimony to Congress. This might be the prediction I will end up most correct about.) Real Estate - Both commercial and residential real estate experiencing continued softening. (Housing Starts in June posted an unexpected 8.5% decline and commercial markets are still soft, especially apartment buildings. I don't feel I've missed this one.) Oil Prices - Relatively little change up or down. (Crude oil prices finished last year around $37.00 per barrel and currently are just above $41.00. I believe oil will very likely finish this year very close to last year's closing price, but there certainly has been plenty of volatility in the meantime. I'll let you grade me on this one.) U.S. Unemployment - Rising to around 6.5% by year-end. (The June number was 5.6% and has dropped somewhat since I made this prediction. Since I don't buy into this economic recovery, then I cannot be bullish on employment either. To get any significant earnings growth in the third and fourth quarter companies are going to have to reduce some sort of expense, and I think this will be the area. So while I may look wrong on this one right now, I may have just been a little early.) U.S. Inflation - Low, with no more than 1.5% CPI. (I'm pretty on target here and don't expect I'll be very far off when we look at this again in January. See you then.) Tiger Woods - Two Majors (The Masters and U.S. Open) (What a train wreck this one turned into. Johnny Miller has written recently that we very well might have already seen the apex of Tiger's career, with his best behind him. It is difficult to watch him seem so mortal after watching how head-and-shoulders above the rest of the field he was. And he doesn't need any advice from me about anything, but if he REALLY thinks he's close to having things fixed, he is definitely surrounding himself with too many "yes men". Do yourself a favor Tiger, and swallow your pride and send the Gulfstream to pick up Butch Harmon wherever he is and bring him to you ASAP. In the meantime, I honestly never liked Phil Mickelson in the past, but with all his recent success I don't know why I disliked him. He seems exceedingly nice, generous and quite thankful and I now find him the most refreshing thing that golf has offered in a long time. Bravo Phil.) Me - Better prediction results for next year's edition. (Maybe this one will work out too. We'll see. So I don't know what crawled up my friend John's behind, but I don't honestly think I'm doing all that badly.) A FAMILIAR STORYLINE I wrote in this newsletter over three and a half years ago about the electricity crisis in California. You can view that particular edition by clicking: http://www.afs-seminars.com/newsletter_Jan_2001.html There were a few interesting facts I uncovered back then about what had contributed to what took place in California. Here is what I wrote back then:
With is in mind, I read an interesting article recently that reminded me of the situation in California almost four years ago.
The only point I seek to make is that Americans want ample, affordable
and dependable electricity, but they don't want any new power plants
or transmission lines built in their backyard. I don't intend to lecture anyone or admonish Americans, but I'll repeat the saying I trotted out 42 months ago, and that is "you made your bed and now you can lie in it." This situation also plays perfectly into the hands of the oil companies, since they basically can sell ALL the product that their refineries produce. Any slight increase in demand is likely to immediately increase prices, which probably is fine with them too. So I thought I'd just share the facts with you and let you draw some of your own conclusions too. It would seem the future certainly has to hold increasing energy costs. How could it not? AN ABSOLUTELY JAW DROPPING CONCERT TO SHARE WITH YOU I wrote a little bit back in March about a guitar solo I had seen Prince perform during the Rock & Roll Hall of Fame induction ceremonies earlier this year, and how I was blown away by his amazing guitar abilities. Well, now I have a few more words to share about Prince after seeing him perform live at the Continental Airlines Arena a week ago in New Jersey. From the eighth row I was extremely fortunate to experience a concert by what is, without doubt, one of the greatest live acts I have personally witnessed, and I have seen literally every major act of the past 30 years except Elvis and the Beatles. There was no mention on the ticket about an opening act, but the evening immediately was off to a roaring start when Morris Day and the Time got things smoking right out of the box. While I am not quite as big a fan of the Time as Jay and Silent Bob, I have enjoyed their music for a long time and spent the entire set on my feet. Of course they saved "Jungle Love" for last, and then NOBODY was left sitting. When Prince finally came on stage, one word immediately came into my head, and the word was "tight". Prince himself is not only among the finest musical minds and musicians ever (yes...including Mozart, Lennon and McCartney and anyone else you'd like to suggest) but he surrounds himself with the finest musicians imaginable. His voice was vivid, his showmanship outstanding and every song sounded better than you remembered it. For a measure of how good he really is, imagine (if you haven't also seen him in concert) sitting down on a stool and playing a six-song acoustic set, which is precisely what he did mid-concert. Just Prince and his acoustic guitar alone, and the arena continued rocking with very few people in their seats. Now try to imagine Michael Jackson, Madonna or Britney Spears doing the same and you see my point. Sure, there were plenty of dance moves, but not a single one interfered with, or tried to replace actual music. Actually, I found it ironic when I heard that Britney Spears was canceling her summer tour because of a knee injury since I couldn't understand how that would affect her lip syncing. To sum this up, Prince still has many stops left on this current tour and you could do many worse things this summer than seeing one of his shows. One final thing on Ms. Spears though. I was having a conversation about Britney when the person I was talking to suddenly said something I thought was sort of a harsh at the time, which was that Britney's family should take whatever steps necessary to get the girl into a mental institution as soon as possible. After I considered some of her behaviors in the past year, maybe this was a lot better observation than I had first thought and not particularly harsh at all. PROVIDING SERVICES TO THE HEDGE FUND INDUSTRY I am very excited about the response we are having to this brand new program, and both the Cayman and Bermuda sessions are filling quickly. If you or your colleagues wish to attend I encourage you to register soon while space is still available. Both hotels have a limited room space available for us which will restrict our group size. If you think this seminar might benefit you or your organization, you can view the complete course content, session schedule, and even register by clicking on the following links: Grand Cayman - September 27, 28 and 29, 2004 http://www.afs-seminars.com/cayman.html Bermuda - October 12, 13 and 14, 2004 http://www.afs-seminars.com/bermuda.html I look forward to seeing you there. YOUR MONTHLY BRAIN TEASER While not quite as easy as last month, this month's brainteaser is also pretty easy, but I still warn you not to take it too lightly. I will tell you there is no goofy math involved, but mostly common sense, although we all know that can be in short supply during the summer months. Give yourself a few minutes before bailing out and going to peek at the answer. Here is this month's brainteaser: "You are checking into a hotel that has rooms numbered from 100 to 550. The front desk clerk assigns you a room at random. What are the odds of you being given a room that begins with either 1, 2 or 3, and ends with either 4, 5 or 6." http://www.afs-seminars.com/brainteaser_July2004.html And the answer to LAST month's brainteaser is: "Mary. Go back and double check the question." Copyright 2004, Michael Gasior. All Rights Reserved. |
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July
2004 Newsletter
