March 2003 Newsletter
Issue Three, Volume Four

WHEN THE ONLY CONSTANT IS CHANGE

By Mike Gasior

As much as my title for this edition sounds as though I am going directly into the current war being staged in Iraq, I am honestly going to try hard to totally avoid the subject except for the impact on the economies of the world and the financial markets. My viewpoints about the current conflict are of no consequence and people the world over are already being peppered with opinions from every direction so the addition of mine to the fray is of little value right now. One thing I will not do, however, is make any apologies for being an American, nor will I back down to any of the various a-holes who send me trite emails thinking they are somehow clever.

This is an email I received right after last month's newsletter that sums up tidily the spirit of these notes:

"Ignorant Americans and unfortunately an ignorant Gasior

Mike it's safe to say that if Americans had a decent education system, you and the rest of the ingrates in the US would realize that without France, there would be no USA.

Read some history books and realize that France supplied the weapons, financing, and troops to help defeat the English and their colonial rule of what is now called the United States of America."

Needless to say, I like when people open conversations by calling me ignorant since this is always touching. Especially to someone like me who held American's feet to the fire many times in the past four years of writing this publication.

What was funnier to read was the lack of a "decent education system" in the U.S. Given the fact that the finest students in every country of the world flock to the United States to attend Yale, Harvard, Stanford, Columbia and many other of the planets best Universities; but I digress.

The fact is that I most certainly HAVE read many history books and I needn't be reminded of France helping the revolutionaries in the Colonies defeat France's mortal enemy Britain over 230 years ago. If there was any debt owed to France by America, it was paid back with MASSIVE compound interest during the century just passed.

I also am familiar with the weapons the French help provide to the Colonists back in 1776, but I am much more concerned about the weapons that France may have supplied to Iraq in the past 12 years since the first Gulf War. I am also interested in the GPS jamming equipment and night-vision gear that the Iraqi military acquired from Russia in the past several years. If anyone thinks for one second that France or Russia were in opposition to military efforts in Iraq because of humanitarian reasons is a fool and I would like them to unsubscribe to this newsletter immediately. I said I would concentrate on business, and that is the exact reason these countries opted out. Did anyone notice that Russia's protests became louder the moment we found their GPS jamming equipment on multiple rooftops in Baghdad?

I said I wanted to put the spotlight on business and not the politics of war, so let me regain my focus here. In 2001 and 2002 France had approximately $705 million U.S. worth of import trade to Iraq (660 million Euro) and we will soon find out the types of goods that were bought by Iraq beside tractors.

For someone recently accused of not knowing much about history let me give everyone a brief lesson of some history you may not know. Back in 1981 when a group of Israeli F-16 fighter jets took off and flew low into Iraqi airspace (led by hero Ilan Ramon, who died in the Space Shuttle disaster recently) they were on a mission to blow up a nuclear reactor before Saddam Hussein could fuel it and begin the atomic reaction. While some might ask where was the "imminent" threat to Israel back then in 1981, I wonder how you destroy an operating nuclear reactor without creating an environmental disaster of global proportion. The lesson I need to teach here is that the reactor those Israeli jets destroyed that morning in 1981 was sold to Saddam Hussein by France. If Iraq truly has any nuclear capacity today, it is likely thank in large part to our friends in France.

So truthfully I am not out to bash France, or anyone else for that matter, but I always make my case with facts and the background for my opinions. I'd prefer you do the same if you decide to write me instead of some trivial two-sentence email.

Although this is an old adage, I apply this to many aspects of life, and I'll apply it to the current situation in the world. You read into it whatever YOU think it means and try not to be concerned what I think.

People break pretty cleanly into three distinct groups:

--People who make things happen
--People who watch what happens
--People who ask, "what happened"

Without sounding overtly patriotic at this moment, I do not believe that reasonable people can think that the United States is the "bad guy" and that Saddam Hussein is the "good guy". Without expressing a particular viewpoint about this current conflict, I refuse to believe that the United States is anything but a force of good around the world, and all petty jealousies aside, I don't believe the world views us that way either. Why do tens of thousands of people every single year swim the Rio Grande, sail in death trap boats only to jump off and try to swim ashore, fly into JFK after destroying their documents in the lavatory if this isn't the place the represents what is good about the world where they can pursue their own personal freedoms? I don't need to answer since the answer is clear.

You all knew my deep feelings after September 11th and I haven't forgotten that day. After spending St. Patrick's day in New York City a week ago with thousands and thousands of drunks in funny hats, I couldn't help but marvel that there has not been a SINGLE life lost due to terrorism in the U.S. since 9/11. That is actually shocking when you think about how easy it would seem to accomplish given the freedoms and openness of this society to this very day.

If you've joined the group of people who have forgotten the 3,000 people of 80 countries who lost their lives 18 months ago, visit this link. Give it a couple minutes to load.

http://www.politicsandprotest.com/

Now onto the issues at hand.

THE ECONOMY AS A WHOLE

The economy as a whole is in a difficult place, and that is not just the United States, but also extends to Europe and Asia as well. The war will provide no stimulus either and I cannot forecast any improvement as far out as I am willing to make predictions.

So that might seem somewhat glum, but I have been warning my readers for over two years of the continuing slide in most economic indicators and overall the situation is still deteriorating rather than recovering. I forecasted a recession a year before anyone else was mentioning one and I warned you that the supposed "recovery" was nothing but an illusion.

The second phase of the recession in the United States that began almost two years ago will be worse than the first phase. And while America may very well be coming down with a fairly bad cold, many parts of Europe and Asia will soon be hospitalized with pneumonia.

American consumers are carrying crushing loads of debt and are cutting back further on their discretionary spending every month. It was just announced that credit card delinquencies have reached the highest level since the American Bankers Association began keeping this statistic. Furthermore, the increased cost of petroleum products recently only served to hit these consumers as yet another tax to their incomes to reduce spending even further. Many of the EU economies are in similar or worse shape, with the current situation in Germany reaching almost crisis proportions. Most of Asia will suffer along with us, and while Japan is already bleeding profusely, you should watch China very closely since they sell 40% of everything they make to the U.S. Any slowdown in spending will likely be quite painful to the Chinese economy.

Although difficult to quantify at this early a juncture, the injuries recently sustained to the relationships between the U.S. and France/Germany/China will no doubt have an impact on everyone involved. It is just difficult to estimate the damage and anyone who claims to know is likely trying to fool you, or themselves. Suffice it to say, that all parties will suffer, with possibly France and Germany suffering the most.

So here are my short-term feelings:

--U.S. and global unemployment will continue to rise through the end of the year.

--The U.S. economy will soon show no growth whatsoever, and perhaps late in 2003 or early 2004 actually show evidence of shrinking.

--The Federal Government, state governments and local governments are all suffering serious budget shortfalls, which will result in reductions in spending (read layoffs) and increased taxes in many locations. This is akin to pouring gasoline on a smoldering fire.

This is the time to safely batten down the hatches in port and leave the sailing for a nicer, sunnier day. I've been telling readers for years now to save for that rainy day. Well...it's beginning to pour.

THE STOCK MARKET

The recent rally in the U.S. and other stock markets will almost certainly prove to be fools gold. There is "no there there" and overall stocks continue to be overpriced at current levels to say nothing for the likelihood of earnings declines.

This continues to be an opportunity for younger people to keep accumulating stocks for retirement plans with horizons out beyond 15 to 20 years. While there are almost always a couple of decent companies whose stock might fair well even in this horrible period, I would save that sort of guesswork and luck to picking the teams for the Final Four in the NCAA tournament and keep your money somewhere more safe. I would not personally be the buyer of stocks anytime in the near future for short term investing. Too much risk for not nearly enough reward opportunity.

THE BOND MARKET

As much as people may not be able to believe that rates could go lower, I believe strongly that you will see them decline somewhat more as the flight to safety and quality continues. The ten-year Treasury Note is still nearly 4.00% and still provides more value than people want to consider. Those of you who have been reading this newsletter for the past few years should begin writing me a thank you note for the advice I gave almost 18 months ago to buy the 10-year Notes when they were yielding 5.50%. Now I'm telling you that 4.00% still looks pretty good. Consider the fact that if you invest $10,000 in them right now and reinvest the coupon payments you're investment will have grown to nearly $15,000 ten years from now. Frankly I doubt that many other possible current investment opportunities will offer you anywhere near that kind of return, with nothing said about the safety of your money.

THE REAL ESTATE MARKET

It was in August of 2002 when I wrote that my feelings about the U.S. residential real estate had reached the same level of absurdity that I had felt when the NASDAQ had struck 5,000. I said that I would not buy real estate for any other reason than shelter and that I felt the U.S. would suffer a national decline in value in the neighborhood of 20%.

Just over six months later the evidence is beginning to pour in that the decline is clearly underway. The Commerce Department just released data that new home sales had declined 8.1% in February compared to a 1.1% GAIN that Wall Street was expecting. There was also a decline in applications for mortgages, although this is likely related to a small rise in rates, which would curtail refinancing applications.

Real estate is the scariest market to me at the moment and you will be the first to know the moment I change my mind. Other than the absolute need for shelter, I would not be the buyer of residential real estate right now, and I certainly would not overextend myself.

THE DERIVATIVES MARKET

Normally I wouldn't address this marketplace, but recent comments from Warren Buffet cause me to step in with a few words. Mr. Buffet made statements recently that he is very concerned with the current level and even gave me a couple of quotes, which I have already managed to use plenty of times:

"In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit."

"Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions... 'Mark-to-market' then turned out to be truly 'mark-to-myth.'"

With the notional value of derivatives worldwide now reportedly in excess of $100 TRILLION U.S., I would never deny that there isn't opportunity for some sort of disaster occurring. Life seldom goes as planned, and an insolvency at one of the major derivative counterparties would definitely send a shockwave of epic proportion through the world's financial markets that might decimate many other counterparties as the ripple effect takes hold. While this is difficult to imagine, I always admit that anything is possible and I'll give Warren that benefit of the doubt.

Overall, however, I take the position that derivatives have helped to spread risk over more parties and that can only serve to reduce global financial risk overall, and have not increased risk.

When Berkshire Hathaway acquired General Re they also acquired in the neighborhood of 14,000 derivative contracts as well. I would suspect that these contracts are reasonably routine, pedestrian products and that Warren is now displeased with his limited ability to get "out" of many of them. Basically, I would assume that Warren is now "talking his position" and that since he would normally never be a user of derivative products, he now finds himself "stuck" with these and he's a little aggravated and annoyed about it.

So while there are certainly risks inherent in the marketplace due to the credit quality of counterparties I always have to chime in when I think the baby is being thrown out with the bath water. If I don't like four-wheel drive, then it would be foolish for me to buy a Chevy Suburban and complain later about what features came with it. If I didn't want to become the counterparty to 14,000 derivative contracts I shouldn't have bought a reinsurance company that was exactly that.

Buyer's remorse and sour grapes are unbecoming on almost anyone, including the esteemed Mr. Buffet.

THREE ABSOLUTE FINAL WORDS ON EMINEM

Academy Award Winner.

UPCOMING SEMINARS

I just wanted to remind everyone that I will be in Manhattan on April 23rd, 24th and 25th presenting our three-day program, Introduction to Securities & Markets. The seminar runs from 9:00 until 4:00 all three days and will be held at The Madison Towers Hotel on the corner of 38th Street and Madison Avenue. The seminar has become a core curriculum class for many companies and I would love to see you next month. You can register by calling my office at (860)347-6568 or you can visit the website at the following address:

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

Your organization can offer the program in-house for your own personnel and my office will send me out with as few as 10 people participating.

We will also be announcing the Grand Cayman programs next week so watch the website and your mailbox closely for further information on that.

YOUR MARCH BRAINTEASER

This brainteaser requires you to stay calm and work through it. There seems to be some sort of trick involved, but the truth is that the answer is more straightforward than you might expect. Good luck.

"If you had started counting on January 1st, 2001 how long would it take you to count 1 billion orally if you could count 200 every minute and were given a day off every four years?"

If you want to check how you did with your answer, just go to the following URL:

http://www.afs-seminars.com/brainteaser_Mar2003.html

http://www.afs-seminars.com

Copyright 2003, Michael Gasior. All Rights Reserved.

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