June 2002 Newsletter
Issue Six, Volume Three

THE MID-YEAR REPORT

By Mike Gasior

First let me begin by announcing that I have finally moved the administration of this publication to a server with the adequate horsepower to handle a subscriber list the size of this one. Close to half a million people worldwide receive this newsletter monthly and the equipment that I was using was no longer up to the task. It's my hope that there will be fewer glitches; namely some members of the mailing list not getting their copy, or duplicate mailings to the same address.

Always remember you can view any previous newsletter by visiting:

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

MY MID-YEAR REPORT CARD

The financial markets have been the cause of much insomnia for investors since last month's edition of this publication and I figure some people may want to hear my viewpoint of what may come next. Perhaps the best way to approach this would be to revisit some of my forecasts from December 2001 and see how things have fared so far.

PREDICTION - Dow Jones Industrials - Lower than it is right now. If you make me pick a number, I'll say under 9,000, which would be a 10% decline from here.

MID-YEAR RESULTS - Dow Jones Industrials - 9,243.26

The truth of the matter is that even back in December I was honestly more pessimistic than my prediction of 9,000 reflected. While I'm totally confident that I will ultimately be correct, my feelings are that I'm likely going to be WAY right on this one. To frame my feelings another way, I would honestly be shocked if the Dow made it to 8,000 by year-end but not overly surprised to see it somewhere near 8,500. Stocks are still way too rich by any historic standard and this current decline is nowhere near its end.

I keep hearing the talking head stooges on television discussing "capitulation" and how we are nearly there. Please remember me telling you this, but we won't have reached the bottom of this current trend until General Electric has changed CNBC's format from finance to "The Cat Grooming Channel". That's when you'll know that investors have thrown in the towel on stocks.

PREDICTION - NASDAQ - Somewhere around 1,750, also a little over 10% lower.

MID-YEAR RESULTS - NASDAQ 1,463.21

As much as some of you are going to completely hate hearing this AGAIN, here are the words I wrote in the March 2000 newsletter, which is now 27 months ago:

"--Value does matter."
"--The stock market still goes down. We just haven't seen it in a long time."
"--There are lots of people managing money who haven't 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. Right there with the tulip bulb craze of the 1600's in Holland. The U.S. stock market of the 1850's. The Florida real estate market of the mid-1920's. The U.S. stock market of the 1920's. And the Japanese stock market of the 1980's."
"--In the end there will be no money made by investors in ANY of the current crop of Internet companies. None. Not even if you manage to pick the handful of companies that survive the next decade."
"--Of the Internet "pure plays" trading right now, probably 90% of them will not exist in five years."
"--Over the next ten years nearly any other asset category will outperform stocks."

After reading my own words again I can't help but wonder how it is that I don't even charge you for this damn newsletter. I got plenty of "you suck" e-mail after that March 2000 edition, but sadly I think there is still some downside left on the NASDAQ. I've already hit my prediction, but I think we have some chance of seeing 1,250 in this index by January.

PREDICTION - Ten-Year Treasury Note - 4.75%

MID-YEAR RESULTS - Ten-Year Treasury Note - 4.82%

My overall feeling about rates is that they will trend downward somewhat more during the next six months but not all that much. My 4.75% forecast seems reasonable.

PREDICTION - Fed Funds - 2.00%

MID-YEAR RESULTS - Fed Funds - 1.75%

The Federal Reserve has stood firm and has not changed anything so far this year. My target of 2.00% was based on my feeling that the economy might begin a recovery during the second half of 2002 and that the Fed would intervene to keep growth from picking up too quickly. My current feeling is that the Fed will not touch rates at all through year-end so I'll wind up missing this one.

PREDICTION - Yield Curve - Finally beginning to flatten as long term yields drop

MID-YEAR RESULTS - Yield Curve - Still pretty steep but has flattened somewhat

It appears that long-term investors still expect some moderate inflation during their holding period and it is difficult to forecast very far into the future. I see basically no inflation whatsoever during the next two to three years and I fear some possible deflation. Until other investors begin to feel the same way, the yield curve will pretty much retain its current shape.

PREDICTION - 30-Year Mortgage Rates - 6.00%

MID-YEAR RESULTS - 30-Year Mortgage Rates - 6.42%

Rates have dropped since my prediction and I continue to think I have a shot at be right on this one. It has been this rate dropping which has fueled the recent upsurge in the U.S. housing market. While I do believe that mortgage rates will continue to go lower, I don't think the price increases in the housing sector are sustainable and we may soon see property values begin to ebb away.

PREDICTION - The Economy - Continuing to worsen into the second quarter for the U.S. and beyond that timeframe in many other parts of the world. Any recovery at all in 2002 will occur very late in the year.

MID-YEAR RESULTS - The Economy - First quarter was still slow but the second quarter signaled a recovery to some people.

I personally feel the only thing that gave hope to the economy in the second quarter were the rising housing values due to the falling interest rates. My worry continues to be that homeowners are using their mortgage as a way of extracting equity from their homes and that this only compounds my fears about personal debt. Consumers continue to spend at breakneck levels and this is also unsustainable. My firm belief at the moment is that we are heading directly toward a double-dip recession with the second dip beginning sometime before year-end. I also think the second dip may be somewhat worse than the first.

PREDICTION - Real Estate - Continued softening

MID-YEAR RESULTS - Real Estate - Residential quite strong/Commercial softening

Housing has never been as expensive as it is right now with regard to the percentage of income necessary to pay for it. We are right near historical highs and you can almost sense the word about to come up again...unsustainable. The cost of housing cannot extend out to infinity and the current residential real estate markets reminds me too much of the Northeast and California bubble of the late 1980's. The biggest concern here is that if you kick out the only leg holding up the economy right now, we could wind up with a bruising second dip of this recession and two generations of people who will have gotten screwed in the stock market AND the real estate market. We haven't had a group like that since the Great Depression and very few of them are alive to teach us anything. Luckily you have your buddy Mike to tell you about it.

PREDICTION - Oil Prices - Continuing to decline as the global recession worsens and demand for petroleum slows. OPEC will try to support prices but members will break from the group due to the economy.

MID-YEAR RESULTS - Oil Prices - Rose somewhat during first quarter and peaked in April and are in a slight decline.

OPEC has managed to keep it's membership in line and this has held prices at fairly high levels. In my eyes there are three things lurking that could cause prices to further decline. One would be OPEC being unable to keep the cartel intact especially if there is some sudden, further deterioration of the political climate in the Middle East. Two could be the continued increase of oil production in Russia and the other former Soviet Bloc countries. These economies are all starved for cash and their new "best friend", the U.S., would love to help them to tap their reserves. Three would be the world sliding back towards recession and the overall demand for oil dropping. All three things occurring would obviously be quite dramatic.

PREDICTION - Unemployment - Spikes higher in early 2002 and finishes the year somewhere above 6.50%.

MID-YEAR RESULTS - Unemployment - Only slightly higher than 2001 year-end

Of course, June statistics have not been released yet but the expectation is that unemployment will rise somewhat although it should only be near 6.00%. My prediction of 6.50% will likely be too high, but I continue to expect the situation to worsen.

PREDICTION - U.S. Inflation - A negative number.

MID-YEAR RESULTS - U.S. Inflation - Slightly positive

This was my most pessimistic forecast, but it may work out that I'm closer than many might have thought. No matter what, I cannot imagine anything in excess of 1.00% for the year. Stay tuned.

PREDICTION - Tiger Woods - Two majors, which will include his third Masters and the British Open at Muirfield. Also watch for John Daly to win something important this year.

MID-YEAR RESULTS - Tiger Woods - Two majors!! Including his third Masters. I suppose now if he wins three majors including the British Open you people will try to convince me that I got this one wrong. I truthfully think he's going to walk away with the British Open by a wide margin and will ultimately fail to finish off the Grand Slam by missing the title at the PGA Championships. It will still make for terrific sports theater. And John Daly is having his best year in many, including a win this year. Perhaps Tiger's loss at the PGA will be John's gain?

A VERY TROUBLING SITUATION

I fancy myself many things, including political scientist and student of the human condition. Recent research and stories I have read regarding a current trend in China has me tremendously concerned.

Most people are aware that the Chinese government made it law in 1979 that couples were allowed to have only one child. Like many societies worldwide, the Chinese tend to favor boy over girl babies for a multitude of reasons. This governmental policy has created a situation in China that may cause a legion of social and political troubles in that region during the coming 20 years.

After the most recent census conducted in China in 2000, the discovery was made that the ratio of boys born to girls born had reached 116.9 boys born to 100 girls. In the poor region of the Hubei Province the ratio has gotten to a startling 130.3 boys for every 100 girls. For the purposes of comparison, the ratio in the United States was 104.8 boys per 100 girls during 2000.

What this all leads to is a terrifying imbalance in the population as these groups approach the age where they would normally meet and marry their mate. The estimates about this imbalance range from the very conservative 29 million to a more realistic 40 million Chinese men who will NEVER be able to meet anyone to marry due to these very simple mathematics. Worse still is that many other countries within that region of the world are suffering similar imbalances. Here is the current "surplus" of men expected by 2020 in several countries:

China - 40,600,000
India - 37,100,000
Bangladesh - 3,500,000
Pakistan - 3,300,000
Afghanistan - 800,000
Taiwan - 600,000
Nepal - 600,000

If you are wondering why in the heck you should care about such a thing, then you have never spent any time around a bunch of young, single men who are unable to locate a girlfriend or wife. There is just too much energy and testosterone to sit around idle and play cards. These men are also likely to be the social outcasts who are too poor, ugly, unlucky or stupid to hook up with one of the highly sought after women. If you can imagine that they might be a little irritable and angry then you understand the basis for my concern.

Similar situations have occurred throughout history before and governments scramble to quell the unrest before civil war breaks out. The methods that these governments use are surprisingly standard and predictable:

1) Start a war. During the Middle Ages Portugal found themselves in similar situation and sent all the unmarried, landless men off to North Africa to plunder and conquer during the Crusades. If anyone thinks this tension between India and Pakistan is going to just go away, then they are simply kidding themselves. Some sort of major conflict will grow increasingly inevitable, as years pass and it now appears that any such conflict may very well be a nuclear one.

2) Impose some sort of martial law. It unlikely that the government will allow any situation to become more unstable and will clamp down on any uprising with an iron fist. The idea that any of the countries listed above will become wonderful, peaceful democracies is an unlikely daydream.

3) Begin massive public works projects away from the majority of the population. China has already begun some huge programs in the vast Western region in an effort to keep these single men busy and away from anywhere they might start trouble.

4) Make them all police officers. This idea is along the same idea as the public works projects, but instead these men can be used to crush any uprising or social unrest. China is already well into making this a reality in the recent growth of the People's Armed Police, which is a paramilitary group used to react to riots or other disturbances. This strategy goes part and parcel with the prospect of martial law.

The United States and Europe have been spoiled with prosperity and peace for decades and the prospect of continued unrest around the world might be unsettling but it will continue. Worst of all is that many of these countries view us as immoral and their enemy, which could mean we may end up a target of their rage when they seek someone to blame for their misfortune. At the very least it is something to keep careful watch of.

ENRON, TYCO, WORLDCOM AND XEROX

I'm just so totally sick of these stories and I'm even more sick of people being "shocked" by these revelations. I'm going to save LOTS of space here and simply ask you to follow this link and read the words I wrote in April of 2000. Then you can ask yourself why you people don't send me tons of money for writing this newsletter.

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

WHY I HATE POLITICAL CORRECTNESS WITH ALL MY HEART

Some of you probably figure I'm going to bring up the Pledge of Allegiance story here, but I'm not.

I read in the news this past week that Oddsocks Productions in London, England has decided to rename its touring production "The Bellringer of Notre Dame" after discussions with a disability adviser raised the possibility of offending people with spina bifida or the disfiguring scoliosis of the spine.

Come on!! Are you kidding me now? This story is over 170 years old and NOW someone wants to remove the "hunchback" name from it? God, I am soooo sick of this kind of crap. People really need to reach out with both hands and get a grip.

THE TOUGHEST BRAIN TEASER YET!

For those of you who didn't write for the answer to last month's question, the boy left for his fishing trip with $90.

This question is extremely simple and there are no tricks.

"Why are manhole covers round?"

There you have it...five words total. If you can't figure it out, simply click on the following link for the answer. Don't give up too easily though. This is a really good question.

http://www.afs-seminars.com/brainteaser_June2002.html

WEEKLONG PROGRAMS IN HARTFORD, CHICAGO, LOS ANGELES, GRAND CAYMAN 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/cayman.html

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

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

http://www.afs-seminars.com

Copyright 2002, Michael Gasior. All Rights Reserved.

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