May 2005 Newsletter
Issue Five, Volume Six

THE TRUTH ABOUT OIL

By Mike Gasior

Over the years I have become accustomed to the fact that most humans seem unable to accept information or news they view as upsetting. No matter how much the facts might seem to vividly support the information, people will always find a way to rationalize their way to another potential outcome or scenario. I suspect this might be the case this month with several of the items I have decided to address in this edition of the newsletter. As usual, all I can ever ask anyone to do is keep an open mind and consider perhaps the less pleasant side of an argument. Then, of course, you can also write me a scathing email accusing me of some sort of serious mental deterioration.

First let me share with you a couple of quick announcements.

A CLEAR SIGN OF THE APOCALYPSE

As difficult as this was for me to actually wrap my head around and accept, yours truly has been given his own, internet based radio program that will premier July 6th on the VoiceAmerica Network.

The show will air live on Wednesdays at 8:00 p.m. Eastern Time (5:00 p.m. Pacific Time) and will be re-run on Thursday mornings at 8:00 a.m. Eastern Time (5:00 a.m. Pacific Time).

I wanted the show to be geared toward the institutional investor community and focused on topics facing the world's largest, most sophisticated investors. For that reason the show has been titled "Big Money with Mike Gasior" and I am in the process of lining up some exciting guests to cover a variety of timely issues. If you know anyone who you think might make an interesting guest for me, please drop me a note and let me know.

We will be taking phone calls during the program as well as answering emailed or instant messaged questions. I will also make certain that my next newsletter goes out prior to the first show with precise information explaining how to find the show on the internet. I'm so excited as the prospect of this being based on the world wide web because people will be able to listen anywhere on the globe where you can get connected to the web. I am also glad to say that I managed to negotiate ownership of the show's content and we will be posting copies of every program on the AFS Seminars website in MP3 format. That way all shows will be available anytime to be heard at your convenience.

OFFSHORE PROGRAMS FOR THE REMAINDER OF 2005

The "Providing Services to the Hedge Fund Industry" session that was held in Grand Cayman on May 18th, 19th and 20th was a terrific program and I was blessed with a large and interactive audience. It was very impressive how far the island has come since being struck by hurricane Ivan in September 2004. Given the devastation caused by Ivan, it is truly a testament to the dedication and fortitude of the people of the Cayman Islands; which is why the recovery has been so swift and why the Caymans remain such a desirable offshore jurisdiction.

Because the Hyatt on Grand Cayman had a limited size room available for the meeting last month we had to turn many people away who wanted to attend. For that reason, we have scheduled a second session on Grand Cayman for October 11th, 12th and 13th, 2005, which will also be held at the Hyatt. You can register for the program and view all the details by clicking the following link:

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

There has also been discussion about holding the "Providing Services to the Hedge Fund Industry" seminar in Nassau, Bahamas later in 2005 and I will keep you posted with details about any Bahamian session.

Finally, we have chosen two extremely timely sessions to be held in Bermuda during the week of September 12th.

On September 12th and 13th, 2005 I will presenting our very popular two-day program titled "Securities Operations, Processing & Accounting". This seminar was created to address securities operations, processing and accounting for both buy side and sell side participants in the financial marketplace. We begin with an examination of the types of organizations that make up the "market" and then review the major products and their related processing requirements. The transaction lifecycle is followed in its entirety from order management through portfolio management. A full description of the program can be viewed at:

http://www.afs-seminars.com/securities-operations.html

The session I will be presenting on September 14th and 15th, 2005 in Bermuda is brand new, and I created it because of all the recent news and controversy surrounding these complex investment vehicles. The program is titled "Structured Products and Derivatives" and will be an extremely athletic couple of days delving deeply into products like CMO's/CDO's/CBO's/CLO's/CMBS as well as the ever evolving universe of derivative products like swaps, options, futures and forwards. There will also be a special focus on the new wave of credit default and catastrophe products that have made many headlines recently. This seminar is for any staff member who must process, account for, or audit these challenging securities.

We are in the process of adding these sessions to our website and you can view the course content in the next week at the following link:

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

You may register via the website, or by calling my offices at (860)347-6568.

MY MAY VIDEO CLIP IS UP

The topic for this month's video clip is the market for U.S. Treasury Securities. Not only are Treasuries the single largest individual market for bonds, they are also the basis for comparison against which all other debt instruments are measured by traders around the world.

Since I was in Grand Cayman, I figured I might as well take advantage of the gorgeous backdrop to film the video. It will also mark the first one of these episodes with me wearing shorts.

At the beginning of the clip you will hear me plugging an EXTREMELY funny piece that had run on The Daily Show with Jon Stewart by correspondent Ed Helms about the Cayman Islands. The piece was officially titled "Gimme Shelter", but the effective title of the video was "Taxes are for Douche Bags", and the majority of it was filmed down in Grand Cayman with Mr. Helms and his guests. The titles effectively explain what the thrust of the video was about, but for whatever reason, Comedy Central has mysteriously removed it from their website although it seems every other video of the last years remains. I wanted to give you the link so you could go view it yourself, but unfortunately I can't anymore. I'll keep my eye on their website though, and keep you posted should they make it available for viewing once again.

In any event, you can still view both high-speed and low-speed versions of my May clip by visiting the homepage at the following link:

http://www.afs-seminars.com

GLOBAL OIL PRODUCTION IS ABOUT TO PEAK

It seems that I am making it a habit to smack readers in the forehead every month with snappy headlines that cut painfully to the point. This month that habit continues.

Although I have written many times over the past six years about the various conditions that are going to be very influential to oil prices, some of the research I have been reading lately shows that world oil production will likely peak either this year or next. After that, world oil production will begin to steadily decline and as this begins to happen, oil prices will begin to increase dramatically and the major, oil-consuming economies could potentially suffer devastating levels of inflation. When discussing this prospect with geologists and economists you will hear this situation described as "peak oil".

Discussion of this looming problem can be directly traced back to a geologist who worked for Shell Oil back in the 1950's by the name of M. King Hubbert. He wrote a report back in 1956 predicting that U.S. oil production would peak in 1970 that his peers in science dismissed as ridiculous. After all, in the decades leading up to Mr. Hubbert's report, there continued to be one massive oil field discovery after another and the prospect that U.S. oil production should ever decline was met with considerable skepticism, and his bosses at Shell begged him not to talk about his theories in public.

But America's oil production DID peak in 1970 and has been in steady decline every single year since then. Even the unexpected discovery of a 13 billion barrel reserve in Alaska's Prudhoe Bay (long after Mr. Hubbert made his prediction) has been unable to slow or reverse the trend.

His basic premise was that the largest oil reserves in the world are the easiest to discover and all were identified very early on in the search. While there are certainly many smaller pockets of oil scattered throughout the world, they are progressively more difficult and expensive to recover. Not to mention that world oil consumption has only continued to grow. We have right now reached a point where oil companies are extracting oil from the ground and we are consuming it at a much faster rate than new oil is being discovered.

Many people think that the price of gasoline at the pump right now is at historically high levels, which is not at all true. By any inflation-adjusted standard, gasoline and other fuel prices are still well below any sort of record high, and the prospect of $5.00 or $6.00 per gallon gas in the United States in the next few years is a completely probable situation. Since fuel prices affect literally every aspect and sector of the economy, you can easily imagine the crippling inflation that will result from such a scenario. Most of the major consumers of oil are now countries that do not produce enough oil domestically and must rely heavily on imported oil. These countries include the United States, China, Japan, India, France and Germany. The competition that will occur between these countries as they seek to align themselves politically with the oil producing countries will likely cause unavoidable global tensions that could conceivably cause substantial instability. That discussion is best left to some future newsletter.

In conversations I have with people about this topic, I get this sense that the belief is that Saudi Arabia, Russia, Venezuela and other oil producing countries could simply ratchet up their output to satisfy any shortfalls. The truth of the situation, however, is that all these countries are basically running all-out right now and have very little excess capacity left and no genuine prospect of substantially increasing output. I wrote a few months ago that the United States had not built a new oil refinery in 30 years and none are currently on the drawing board. Current refineries are running well over 90%+ capacity already. For these reasons, even the slightest interruption in the oil markets (hurricanes, wars, political squabbles) will instantly impact the price of oil. This resulting volatility will have a damaging effect on consumer sentiment and confidence.

Certainly there can be improvements in technology and conservation efforts that could smooth the transition from fossil fuels to alternative sources, and while many of these are viable alternatives, none of them are going to be ready in an adequately fast period of time. Since necessity is almost always the mother of invention, it won't be until the environment of higher priced oil appears permanent that consumers and governments will commit themselves to changing their lifestyles. At that point it should take the better part of a decade for the changes to truly begin to be implemented and take effect: Making for a pretty miserable decade.

What can you do to begin for the transition?

--Begin thinking about a more fuel-efficient car right now before everyone else is rushing to buy one. I heard stories of 3-year old hybrid cars selling on eBay for thousands over their original price when gas prices popped upward earlier this year. That sort of behavior is both hysterical and stupid. Since the life cycle of a U.S. automobile is currently 17 years, put yourself ahead of the curve and get yourself something more efficient now and take the money you immediately begin saving into your retirement account.

--Think about how you can begin conserving energy costs around the home with energy saving appliances and light bulbs whenever new ones are required anyway.

--When this all begins the major oil companies will appear as though they're printing money in their basements, so doing some research of your own, and picking a couple of the quality oil stocks out there, might be a good investment.

The summary is that oil and gas prices are never going down in a substantial way again, and you should consciously be keeping that in the back of your mind when you make personal and business decisions regarding energy. It might alter your approach and your actions more than you would suspect.

IRAN IS NEXT

Although my first love is all things financial and economic, I am always fascinated with the machinations of politics. I read an amazing amount of non-mainstream publications and am lucky to know people who know people, and the combination of these things leads me to issue this warning on the upcoming conflict with Iran.

While I think that many people in America and the world believe in the back of their minds that George W. Bush has intentions of a military strike against Iran, I would like to offer the idea that it is actually a certainty. The United States, either alone, or in concert with some support from Europe, will make a move against Iran in the next 24 months. Truthfully, any thought that is counter to that is somewhat naïve. Going into Iraq in the first place without planning to bring about "regime change" in Iran would have been the stupidest move the U.S. could have made.

Now you might be thinking that the idea of the U.S. attacking Iran next is some wild speculation on my part, but you would be quite wrong about that. There has already been considerable movement within Congress toward setting the stage for a regime change in Iran that is nearly identical to legislation that preceded the move against Iraq.

Back in 1998 when most people were focused on exactly what sorts of activities had transpired between Bill Clinton and Monica Lewisnky in the White House, there began a lobbying effort by some Washington D.C. heavyweights to begin an effort to remove Saddam Hussein. With connections to many in Congress, there was quickly introduced the "Iraq Liberation Act" that called on the United States to provide nearly $100 million to Iraqi dissidents for arms and other aid for the purposes of removing Saddam from power. The act also clearly stated that "the policy of the United States is to support efforts to remove the regime headed by Saddam Hussein."

Just last summer, Senator Rick Santorum cosponsored the "Iran Freedom and Support Act", which was loaded with language that mimicked much of the Iraq act of six years prior including the passage: "It should be the policy of the United States to support regime change for the Islamic Republic of Iran......The President is authorized to provide assistance to foreign and domestic pro-democracy groups opposed to the non-democratic Government of Iran." Along the way, State Department lead by Colin Powell, and moderate Senate Republicans like Dick Lugar objected to such strong language regarding regime change. But now with Powell gone from the administration and a Senate sporting a new group of tough former Congressional Republicans, the act seems likely to pass and authorize an immediate $10 million in funding for these activities.

Also, with the only major voices in the Bush administration who spoke loudly against the idea of moving against Iran, Colin Powell and Richard Armitage are now gone, and the stage is populated with people who are already posturing for action. Just in March, Secretary of State, Condoleezza Rice made sucking up type comments towards potential European allies that the United States shares "the desire of European governments to secure Iran's adherence to its obligations through peaceful and diplomatic means." Such a comment never passed the lips of Powell or Armitage, and it was also a fairly hollow statement since the administration is currently filled with people who favor much more aggressive action. Dick Cheney, Donald Rumsfeld and soon-to-be Ambassador to the United Nations, John Bolton, have all been fairly outspoken regarding the changes that are necessary in Iran. Vice President Cheney has even appointed his daughter Elizabeth to the State Department to head up democratization efforts in the country.

No matter how diplomatic Rice may sound publicly, even she has pointedly refused to rule out potential military strikes. A recent article in the New Yorker by Seymour Hersh reported that the U.S. is already conducting secret reconnaissance missions into Iran to identify possible nuclear, chemical and missile sites that might become future targets for commando raids or perhaps missile strikes. There have also been reports that there was a meeting last fall of "principals" at the White House, which included cabinet secretaries and other top officials, who concluded that a strategy of "deterrence and disruption" toward Tehran was being adopted. Undoubtedly this could mean many things including covert actions by Special Forces sabotaging some of the locations currently being identified with intelligence.

Since George W. Bush only has three years remaining as President and with no worries of ever running for office again, makes me believe that something is likely to happen fairly soon, perhaps sometime as soon as the next 18 to 24 months. It has also been apparent that Bush also can remain highly idealistic even when his views are not popular, which makes me even more certain that he will not leave office without addressing his "axis of evil" and making the world a better place in his opinion. Keep your ears open for mentions of Iran when you listen to the evening news and remember who told you about this.

SUNSCREEN CAUSES CANCER

Now I'm not trying to be flippant or irresponsible with the suggestion that sunscreen causes cancer, but four major, recent studies have shown that the vitamin D that the human body produces by being exposed to sunshine helps the body prevent cancer.

One study by Harvard University professor Dr. Edward Giovannucci proposes that the vitamin D produced by being exposed to sunshine might prevent 30 cancer deaths for every 1 death caused by the skin cancer caused by the sun exposure. His quote was that "The data are really quite remarkable."

Obviously too much sun is a bad thing, but even as a layman it strikes me odd that during my lifetime sunscreen use has exploded (I don't even remember there being sunscreen when I was a kid) and at the same time skin cancer occurrences exploded also. While there is talk of a hole in the ozone layer and such, doesn't it strike you as ridiculous that the ultra violet rays being produced by the sun, or being allowed through our atmosphere could possibly be that much stronger in just the past 30 years? Or could there be some other answer as suggested in these recent studies? Application of my own common sense to this situation leads me to think that there isn't that much more ultra violet radiation and that it may be, as my technology friends might say, "a user problem".

Just a thought I felt like sharing with you.

SAY WHAT?????

As a huge fan of music, and of the benefit concert LiveAid, I have been watching with interest as Sir Bob Geldof has been assembling a brand new concert for this summer called "Live8". This show will once again be held in both London and Philadelphia on July 2nd and Geldof is working to assemble an impressive lineup for both cities.

Imagine reading this completely REAL news story and this is the first paragraph:

"A bold plan by Irish rocker-turned-activist Bob Geldof for multi-city concerts to combat poverty in Africa ran into flak when it became clear how few black artists are involved. With the arguable exception of Mariah Carey, none of the headliners for the centrepiece Live8: The Long Walk to Justice concert at Hyde Park in London on July 2 are black."

That was contained in a story by Agence France-Presse on Wednesday, June 1st and had no byline. And people wonder why the media can drive me literally crazy.

BRAINTEASER

A lot of people seemed to enjoy my Michael Milken question of a couple of months ago and I thought I would follow with another investment/financial trivia topic.

Back on May 26th 1896, financial reporter Charles Dow started the Dow Jones Industrial Average, which compiled the prices of 12 stocks together to give readers an overview of the stock market. The original average began with the 12 companies and was reported at 40.94. Today the average contains 30 companies and closed at 10,460.97 on Friday, June 3rd, 2005.

This month's question is:

"What is the only company that has been a member of the Dow Jones Industrial Average since that very first day?"

Do your best not to be a big, fat cheater and then click the following link for the answer:

http://www.afs-seminars.com/brainteaser_May2005.html

And the answer to LAST month's brainteaser is:

Straighten

http://www.afs-seminars.com

Copyright 2005, Michael Gasior. All Rights Reserved.

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