March 2001 Newsletter
Issue Three, Volume Two

A VERY BIG MONTH

By Mike Gasior

I probably shouldn't admit such things, but some months writing this newsletter is just another chore that I need to take care of sometime before midnight the last day of the month. Then there are those months that there seems to be a million things in the news, and on my mind that I can't wait to write about. Suffice it to say I am extremely excited about this one.

Here is a quick rundown of the topics I am going to cover:

--Anytime I receive a note that actually contains the words "You are definitely not as smart as you think you are" is deserving of a closer look. The trouble of course, is that I actually AM as smart as I think I am and I now feel obligated to prove it......again.
--As much as some of you dare me and beg me not to mention the stock market for at least one month, I would be remiss to not discuss it this month in particular.
--Somewhat related to the stock market situation are my views on America's huge current social experiment: the 401K phenomenon.
--On the heels of that, I want to comment on the behavior of "Ugly America" and I will once and for all.
--For those of you who recall my opinions of the California electricity situation, you might find even more interest in the coming water shortages the world will face in the coming years.
--Lastly, the programs I will be hosting in Grand Cayman and Bermuda are finally available on the website and the programs are very exciting for me to talk about.

So here goes.

I'M NOT AS SMART AS I THINK I AM??!!

Well them's fighting words for sure. I'm actually not aggravated in the least about this at all, but I have always just loved a good argument even if I don't come out on top. You had better bring your best facts with you and be prepared for a fight. I grew up in an arguing and fighting family; but nobody ever hated each other at the end. The joy was in the battle.

So since I intend to air this note, which was sent privately, my opponent in this will simply be referred to as Erin who is an Audit Senior at a large accounting firm. I will save you the part where I was dared to not mention the NASDAQ for a month and was observed as becoming more opinionated each month. Here is the unedited part where I was taken to task:

"Regarding stock options: I suggest you read the definition of an expense. There is no way stock options meet this definition. A company could issue a huge amount of options and at the end of the day, be better off (from the proceeds from the exercise price). Granted, shareholders' ownership would be diluted, but the company itself would be better off by having more cash. Net assets would have increased. The company would be bigger. How is that an expense? You are definitely not as smart as you think you are."

Well I think the easiest thing for me to do is address the barbs in order.

--With regard to my becoming more educated about what is, and what is not an expense, the only research I need to do is read the United States Tax Code, which clearly call these options an expense, and allows the companies to deduct them. Last year this deduction was 67% of ALL the earning of Dell, Sun Microsystems, Microsoft and Cisco as well as 57% of their operating cash flow. This allowed them to appear to have lower price/earnings ratios than other companies who don't base so much of their compensation on stock options. This allowed people to pay a lot more for them in the past few years than they should have. This allowed these poor investors to bleed out of every orifice of their body in the recent market. Quite frankly, I think the expense for investors in the stock of these five companies is roughly a little over $200 billion in the past 12 months. Perhaps my friend Erin should query these people if they think it was indeed an expense.
--Along the same vein, perhaps Erin missed the front-page story in the Wall Street Journal last October where Microsoft admits that it's stock option program will cost them in the neighborhood of $11 billion in CASH over the next 10 quarters. It seems that in order to be certain they would have adequate stock for their stock option program, Microsoft has been selling put options to investors, which enables these investors to "put" the stock to them (them being Microsoft) at prices ranging from $70 to $75. Of course, none of these investors were considering this when the stock was $115. But now the stock is $56 and Microsoft is preparing itself to write a check for $11 billion, which is roughly 40% of all the cash they have. Perhaps if Erin calls Bill Gates or Steve Ballmer, they might define this as an "expense".
--Shareholder equity IS diluted, also contributing to lower P/E ratios and more future bleeding. Enough said.
--The company would have more cash? Refer back to the Microsoft story.
--I'm not as smart as I think I am? Think again. I got smarts real good.

So keep those cards and letters coming. When I'm proved wrong, I am always first to admit it. When I think the facts are on my side, I can't help myself from arguing my point.

THE STOCK MARKET

Stock prices are down. I told you things were ridiculous a year ago. I told you stock might not regain their March 2000 levels for a decade. I am a year into being very right and that is the tip of the iceberg. I must comment here in the strongest language I can how much this decline has pained me even though it hasn't cost me a dollar. Any of you who have ever attended one of my classes know how much I care about you and your money. I never HOPED the market would decline. I simply FEARED the market would decline, and that people would be hurt by it. Now that my fears have been realized I can only try to keep some people from compounding mistakes by locking in losses. Thus, my following comments.

Stocks have a lot more to lose here, and I have massive worries for the economy overall. If you apply any normal bear market valuation to stocks the Dow would be at 5,000 and the NASDAQ would be at 1,000. These numbers are based on current trailing 12 months earnings, meaning the earnings companies enjoyed for the previous year. No one needs to be a rocket scientist to know that the newspaper is filled daily with companies reporting, or warning about, earnings disappointments. This could spell even deeper trouble. Sure, the NASDAQ is down 60% already and the damage might be getting close to being done. But the Dow is barely down 20%. If you watch the talking head stooges on TV, you will hear references to the 1973-74 bear market as a comparison to today's situation. Too often, they don't remind people that the Dow and S&P were down 60% back then. There was no comparable run-up in stock prices previous to that decline as there was this time. Not to mention that P/E ratios were not nearly as high back then either. To me, all of this taken together is too much to ignore and can only spell bad things for the stock markets.

Luckily most people don't understand the Federal Reserve well enough to be freaked out by their recent behavior. This economy must be in a vertical nosedive with pilot Alan Greenspan pulling back on the controls as hard as he possibly can to try to keep us from crashing. There has not been comparable behavior by the Fed during Greenspan's tenure and you need to go back almost exactly 20 years to Paul Volker to find such large, and rapid changes in rates. I think if most people understood how drastic 1.5% in movement during 2 months was, they would be snugging up their seat belts and reaching for their barf bags.

So sometime in the next 12 months, the Dow flirts below 7,000 and the NASDAQ goes below 1,500 sooner than that. The rest of the decline will take place more slowly after that.

AMERICA'S GREATEST SOCIAL EXPERIMENT

I'm going to be very brief here, but I really want you to print this out and put it away somewhere so you can read it years from now and remember that "I told you so".

Within the next few years we will sit back and ask ourselves "What in the hell were we thinking?" with regard to the idea that we ever let people manage their own retirement money. It certainly seemed like an empowering idea. Sadly, most people are going to retire with vastly less than they envisioned. This is a lock. You can take it to the bank.

All you need to see my rationale is to watch TV for a single day, or read a weeks worth of newspapers and magazines. The story I have seen HUNDREDS of times in the past few weeks is "What Should You Do Now" about your 401K or personal money. The answer is sadly simple; nothing. I have grown increasingly troubled by the behavior I have witnessed among the people who work for my client companies. I was surprised by how many people would check the status of their 401K or retirement money EVERY DAY! This is horrible. This is the LAST money people should be looking at every day, because whether they admit it or not, they spend that money in their minds. This is what has lead Americans to spend more money than they have made for the past three consecutive years.

I just read a study about a group of large 401K plans where money has been gushing out of stock funds and into fixed accounts and these people then locked in their losses. Some simple mathematics would show them that it might take between 30 and 40 years to regain the 60% they lost in the stock market. Think about that for a minute. The NASDAQ would have to rise 159% from where it is right now to regain it's high of just a year ago. At a 6% fixed rate you will need almost TWENTY YEARS to get back the money you've lost in the past 12 months. If reading that just made you nauseous, you probably never should have been in the stock market. If you are in your 50's, the retirement you expected for yourself might already be all over, and you may never, ever recover. These are sobering words, but they are very true.

The problem for individuals managing their own money is often that it is too personal for them, and for that reason, too emotional. I've spent my entire career around people and money, and one thing I can assure you is that losing money has the most unbelievably, ugly psychological effect on people that you could ever imagine.

We have pilots fly the planes. Dentists fix our teeth. Doctors do the surgery. And portfolio managers manage money with a detached, logical and calm approach. Usually with educations and backgrounds we can only envy. So while we don't ask to take the seat in the front of the 747, fill our own cavities, or remove our own spleens, it still astonishes me that we think we should manage our own retirements.

There is a reason that doctors are not allowed to operate on their own family; it's too emotional. It is too difficult to remain rational and calm. Well, welcome to the jungle of America's retirement future. It's going to be very different than many people imagined and it has already begun. How could losing $3 TRILLION of value be good for anyone's psyche?

UGLY AMERICA

I've been fortunate in my life to travel a lot, and I will always remember how shocked I was as a young man to find that much of the world didn't find America or Americans nearly as cool as we find ourselves.

The last few years we have been particularly obnoxious and a lot of the world really would like to see us go choke somewhere. I think it began for me when the U.S. men's 4X100 meter relay team decided to strip down after their victory and engage in a little "pose down" while wearing U.S. flags as capes. Had I not watched the entire broadcast I would have thought I just tuned in to some World Wrestling Federation programming. I was sitting in a room alone and felt embarrassed.

It's not a new thing to have everyone hate the richest guy on the block, but us rubbing it in everyone's noses doesn't help anything and we have been just brutal lately. The rest of the world looks at us and see nothing but selfish materialism, huge gulfs between rich and poor, cars that suck too much gas.

Well Americans should remember that 1.3 billion people on earth get by on LESS than $1 per day. This new age of technology and business has brought sweeping changes to countries around the world and it often wears an American face. Microsoft. McDonalds. Hollywood. Harvard and Yale. I just read that 85% of ALL the business generated on the Internet is from U.S. companies.

And how about then Secretary of State Madeline Albright calling us the "indispensable nation" and then adding "We stand taller, and we see further than other countries." Good grief is all I can say. What in the hell was she thinking, and is it any wonder why everyone hates us. Consider the following quotes.

French President Jacques Chirac remarked after an economic summit a couple of years ago: "We're nothing but extras in Clinton's marketing plan. They see us as crap. They take us for retarded."

Former Costa Rican President Oscar Arias Sanchez who owns a Nobel Peace Prize and whose kids went to Harvard and Boston College: "Quite often you do seem to act quite arrogantly....You want to tell the world what to do. You are like the Romans of the new millennium."

Russia and China are becoming friendly. Russia had agreed not to sell arms to Iran and decided to sell them anyway and has recently become chummy with Fidel Castro and Cuba once more. China now considers the United States its number one threat to its safety. A lot of our friends don't support the sanctions against Saddam Hussein anymore. Could you imagine a more diverse group of countries who all oppose our missile defense proposal than Canada, Germany, Russia and Singapore? Can't we all just get along??

But why should these countries listen to us? We push them to adopt American style economic reforms without giving a crap what it might do to their social situation. We lecture them how to run elections while ours look like a nightmare. I cringed every time I would see the front page of a foreign newspaper with someone holding up a dimpled chad to the light. We push this missile defense plan even though it clearly seems to be feeding an arms race around the world.

I can't believe I'm about to quote Bill Clinton without making extreme fun of the quote, but during his farewell speech he said, "Global poverty is a powder keg that could be ignited by our indifference."

For a change, I had to agree with him.

WELCOME TO THE WORLD OF PRIVATE WATER

Water already costs more than gasoline. The consumption of water is doubling every 20 years, which is twice the rate of the human population. Already, there are a billion people who lack access to fresh drinking water. If the recent trend continues, the demand for fresh water in the year 2025 will be 56% MORE than the amount of water that is available.

In the last couple of years companies like Enron, Monsanto, Bechtel and others have begun seeking control of the world's water supplies, trying to monopolize them as much as possible. This has already caught the attention of the World Bank which begun exploring policies about water privatization. Last year a supertanker actually filled itself with water from Lake Erie and brought the water to Southeast Asia.

So what are you to make of all this, or do about it? I'm not sure yet but I'm going to be watching this closely and I'll let you know. I can, however, tell you what Monsanto thinks about all this. They think they are going to have revenues of $420 million and earnings of $63 million in just seven years JUST from their water business in Mexico and India. They also believe it will be a multi-billion dollar market for them in the coming decades. Think that over too.

GRAND CAYMAN AND BERMUDA

The programs are final and posted on the website and I am extremely excited about them.

There will weeklong programs hosted by yours truly in Grand Cayman in July and Bermuda in November. Each day will be a seminar on a different topic relating to the financial markets. This translates into 10 completely different days of training all of which qualify for significant professional education credits.

For details please click the following links:

For Grand Cayman http://www.afs-seminars.com/cayman.html

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

I am also going to be in New York April 23rd and 24th for our Derivatives Seminar and in Hartford beginning April 26th for the Advanced Securities & Markets Seminar. There is still room in both of these programs. So if you would like to register please call my office at (860)347-6568 and they will be happy to get you signed up. You can also register via the website by visiting
http://www.afs-seminars.com/register.html

http://www.afs-seminars.com

Copyright 2001, Michael Gasior. All Rights Reserved

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