May 2001 Newsletter
Issue Five, Volume Two

THE UGLY, NAKED TRUTH

By Mike Gasior

I figure with a newsletter title like "The Ugly, Naked Truth" readers might actually let their imaginations run away with them about what the subject truly is. Sadly, there will be relatively little ACTUAL nudity contained in this edition and the focus will be on the naked truth of recent economic data instead.

Those of you who either read these rambles of mine on any regular basis, or attend my seminars will vouch for the fact that I try to strive for directness in all I do. I spend life trying to cut through the superfluous noise that overwhelms our everyday in an attempt to uncover whatever truth might lie beneath. This focus of mine gives way to this month's newsletter edition. I would like to find some common sense in all the current economic noise we are being overwhelmed by.

First there are a couple of quick issues that deserve a moment's attention.

T+1 IS 36 MONTHS AWAY

That line alone should be enough to strike plenty of fear into your heart without me going any further. I have been the Paul Revere of T+1 for over two years, but I am still finding WAY too much apathy on this topic. Lots of companies are still barely looking at revamping their systems to comply with this change and it is particularly bad on the "buy side".

In the name of brevity, let me make a VERY concise list of things that cannot be forgotten about this subject:

--The United States will be going to a one business day settlement cycle in June 2004. There will be no extensions. There will be no reprieve. Period. Paragraph.

--All the securities systems you currently have in place MUST be replaced before June 2004. Period. Paragraph.

--Certain building blocks, necessary to facilitate STP (Straight Through Processing), will need to be in place before the end of 2002 so that testing may begin by early 2003. If you have no idea what the heck I even said there, then you should be dialing 911......unless, of course, you don't have any responsibility for securities processing or accounting.

--With the economy slowing down and layoffs and cutbacks looming, there will be increased pressure to eliminate staff and projects. Don't make T+1 one of them.

--If you are not fully prepared by 2003, my feeling is that you will not make it and drastic measures will be necessary. These drastic measures would likely include either letting yourself be acquired by someone, acquiring someone else, or going out of business. None of these seem outwardly appealing to me.

--Just in case you have decided to gamble the future of your enterprise on your software vendor being ready, don't EVER drop the subject with them. You should mention T+1 during every phone call and in every meeting with them and ask what they are doing to be ready. If this conversation seems to annoy them you should be asking yourself what that might mean. If this conversation seems to REALLY annoy them, please mention my name.

I'll drop the subject for right now, but you should not.

THIS SENATOR JEFFORDS THING

I'm sorry for being unable to mention this seemingly very political topic, but it sets a new example for how low the U.S. political system can fall. Plus there seems to be something ugly to be found under every stone you turn over in this latest fiasco. I don't want to make a single political statement here, but I do want to point out some interesting problems.

--First of all, our friend Senator Jeffords claims to be jumping from the Republican Party due to ideological differences with President Bush. Well, Bush's positions are pretty much exactly what they were back in November when he was running for office and Jeffords was taking massive sums of money from the Republican National Committee as well as the Vermont Republicans. My question for him would be "Why would you take all their money if you didn't agree with their platform?" followed by "Why don't you give ALL these people their money back?" I think this would be an interesting situation for a politician to be in. Since we say that politicians are bought and sold; if I had been a contributor to his campaign, then I did not receive what I paid for. Perhaps all these contributors are due a refund.

--What in the heck was the White House thinking in this entire matter? You already have a senator who you are having a difficult time with so you decide to NOT invite him to a ceremony in honor of a "teacher of the year" from Vermont? ARE YOU, kidding? Anyone would be PO'ed and you couldn't blame them. Being a political bully is fine when you have been swept to victory by a huge margin, but this was obviously not the case. A little less arrogance would have gone a long way here. Frankly, I am REALLY surprised.

--Tom Daschle is going to have to cool it with all of his shrill complaining and take on the responsibility of the leader of the Senate now. I got a little sick of seeing him in front of a microphone proclaiming every idea the White House would put forward as "the stupidest idea ever". I have always hated people like that because of something my Grandfather would always tell me as a kid; "Mikey, if you're not part of the solution then you must be part of the problem." He didn't make up this line, but he drilled it into my head. If Daschle keeps up this attitude, he is only going to give Bush something to point toward in 2004 and ask what the Democrats were doing about the economy, the energy situation and much more. Now they have share responsibility for whatever happens.

Personally I am sort of happy about the return of gridlock in Washington. Generally speaking, the less agenda that politicians are able to push forward, the better it is for the citizens. Sorry, if that seems to be a very jaded observation, but welcome to my world.

THE UGLY, NAKED TRUTH

The truth just seems so clear to me right now that I cannot stop myself from sharing these thoughts with you. Especially when I looked back on some of the predictions I made in my December newsletter only 6 months ago.

"Fed Funds - 4.5%" --The Fed Funds rate was 6.5% when I wrote that and it is currently 4.25%. This means it has dropped even further than I thought it would.

"The Economy - Slowing further, potential recession occurring by 2nd quarter 2001" --This seems right on the money.

"Oil Prices - Begin rising again in early 2001" --Enough said.

"Unemployment - Creeping up modestly" --Already underway.

"Real Estate - Softening all year" --Some markets are bleeding badly already.

"Tiger Woods - Two more majors in 2001 including his 2nd Masters" --I am just plain SCARY!!!

Those of you who are now going back to re-read my December newsletter, please remind yourself that 2001 is not yet over; especially with my stock market predictions. I still have another six months.

I am of the opinion that the economy is in much more dire condition than many people are currently prepared to admit. And I do NOT buy into the notion that a recovery is already underway. I also believe that the recent stock market rebound has no legs and it will not hold. Now let me make my case for both opinions.

THE ECONOMY

Many observers of the economy believe that we are already near the bottom of what they hope will be a very typical "v-shaped" recovery. My opinion is that the economy will worsen further before the recovery begins and here is my list of reasons why.

--FED ACTIONS: The actions currently being taken by Alan Greenspan and the Federal Reserve are almost without precedent. Never in my entire professional life (nor the professional life of anyone reading this) has there been an easing of monetary policy like we have just witnessed in the past four and a half months. If you were to base your opinion of the economy on the behavior of Alan Greenspan, then you should be scared to death because he seems to be quite scared himself. In a speech just a few days ago he went as far as to admit that he doesn't think the economy is out of the woods yet and that further action might be necessary. His actions and language should give someone the impression that the economy is actually off the tracks right now.

--CONSUMER BEHAVIOR: The consumer continues on a buying spree that is both troubling and difficult to understand. They clearly cannot afford this binge, which has been underway since the mid 90's, but they act undeterred in the face of lots of bad news. My opinion is that the consumer cannot continue to spend at their current level and when the spending ultimately slows, so will the economy.

--CONSUMER DEBT: This topic dovetails into my opinion about consumer spending. The level of consumer installment debt has reached all-time record levels: higher than it has EVER been before. Some people would try to argue away that previous statistics are meaningless because the economy itself has never been this large either, so it shouldn't surprise us that debt has increased in lock step with the economy. They will also try to tell us that many of these people pay off those credit cards every single month so that makes my point invalid. What these people cannot argue away is the amount of people's disposable income, which now goes to installment debt servicing. That number has just reached all-time record levels of around 14.4% of disposable income. You will also find that delinquencies on FHA mortgages jumped to 10.5% in the last quarter of 2000 and the number of people borrowing from their 401K plans is rising rapidly too. Ever more troubling was the increase of personal bankruptcies from about 800,000 in 1994 to a record 1,410,000 in 1998 and the number has pretty much remained at exactly that level. Isn't it kind of troubling that we would have record bankruptcies at a time of record economic boom? Well it troubles me.

--NEGATIVE WEALTH EFFECT: American households LOST wealth during 2000 for the first time in over 50 years and their already weak savings rate plummeted below zero for the first time in over 70 years. A professor at NYU who has studied the Federal Reserve's 1998 Survey of Consumer Finances found that the median net worth of U.S. households was $60,700 in 1998. That's only $2300 more than what the number was in 1989. When you subtract equity in their main residence, their net worth falls to $17,800. Then you have to think about the fact that the top 20% of households owns 91% of all the wealth, which leaves the other 80% to split up the remaining 9%. The picture I am trying to paint here, is that people and economists were trying to explain that although Americans weren't saving much money, it was okay because of all the gains they were enjoying in the stock market. Well, the Federal Reserve data found that only 49% of American households owned stock, either directly, or through mutual funds or 401K plans. That left 51% with no stock whatsoever. In summary, what we have is an aging population racing toward retirement age with very little wealth, basically no savings, questionable Social Security and a ton of debt.

--UNEMPLOYMENT: People are quick to say that the Dot.com boom has burst and the layoffs caused by this are already done with. This is an easy way to look at the unemployment situation, but the next wave of layoffs will come from the traditional "bricks and mortar" companies who completely bought into this "New Economy" back in 1998 and 1999 and built distribution channels pretty much in parallel to the existing channels that they already had. As this retrenchment begins, the unemployment situation will worsen and the economy slows further.

--THE OTHER WORLD ECONOMIES: Back in 1998 the United States provided the engine to help pull the rest of the world out of a very difficult time in economic history. This time the other world economies are not in a position to help pull us out of the ditch we have driven into. Asia continues to be very weak and Europe seems to be slowing ever more than we are. We can only hope that we don't all drag each other down to even lower levels of growth.

As you look at my reasons, you notice that I don't base my opinions on a single scenario, but rather many facts. This seems so obvious to me that I don't even know how I could possibly end up wrong on this one. It actually feels like my NASDAQ call of last March where I didn't think it could go any other way than down.

THE STOCK MARKET REBOUND

I mentioned last month that the current rally was nothing more than a classic "bear trap". Even someone as jaded as myself about recent stock market valuations would have to agree that the market was severely oversold after the shakeout of the past year and it was due for a rally. However, this is all it is, a rally and nothing more. This is by no means the beginning of a "new" bull market or some sort of throwback to the "roaring 90's". Here is why:

--The current consensus on Wall Street is that the earnings on the S&P 500 will increase about 15% this year. This is part of the basis for what has driven the indexes to their current levels. I see no chance of these companies meeting expectations and as earnings disappointments begin, the market will once again begin to slip.

--We are coming off a period in history where we enjoyed five years of 25% gains in the stock market. Never before had we enjoyed more than two years of 20% gains. When you go back and consider my comments about the savings rate and the aging of the population, this might point toward a change of attitude about the stock market. No longer can you look at the stock market as the endless profit machine. Many people nearing retirement will stay closer to fixed income at this point. Simply stated, there will be fewer people rushing blindly into the stock market now. Once burned, twice shy.

--The only thing working against me is the old motto "Don't fight the Fed". The current Federal Reserve actions would seem to be very market-friendly moves. I feel that the changes have not gotten much traction so far and that Greenspan believes the economy is still in a tremendous stall, thus his comments about the economy "not being out of the woods". You cannot argue that the Fed dropping rates so dramatically and this pending tax cut aren't good for the economy. It is good, but it's my feeling that it won't be enough this time.

With all that said, I am sticking to my December feelings about the stock market. The Dow Jones will finish below 10,000 and the NASDAQ below 2,000 by year-end. I don't foresee any bloodbath, but a protracted sideways/downward move that will drag on for several years. My comments over a year ago were that almost any other asset class will outperform stocks in the coming years and I continue those feelings.

GRAND CAYMAN AND BERMUDA

The Grand Cayman and Bermuda programs are final and posted on the website. I am extremely excited about them and the Cayman programs are booking up rapidly.

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 specific topic relating to the financial markets. This translates into 10 completely different days of training; all which qualify for significant professional education credits.

The Cayman programs will be held at the terrific Hyatt Regency Grand Cayman Resort and the Bermuda week will be held at Fairmont Southampton Princess Hotel. Both are excellent resorts and have wonderful conference facilities.

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

http://www.afs-seminars.com

Copyright 2001, Michael Gasior. All Rights Reserved

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