November 2003 Newsletter
Issue Eleven, Volume Four

HOW REAL IS THE RECOVERY

By Mike Gasior

There has been a literal rash of good economic reports during the past two weeks and there is no way for me to ignore it. This should by no means imply that I believe that things are truly as robust as the numbers might indicate. Things did certainly improve during the third quarter and they actually improved more than a poll of economists predicted earlier this year (you will recall me poking fun at their predictions). My problem is that this recovery remains a jobless one, and also a fragile, tenuous one. I truthfully hope I am proven wrong, but I need to point out once again the fundamental issues that I believe have to remain an impediment to a more broadly based recovery. Let me make my case.

THE STOCK MARKET DOESN’T BELIEVE IT

The Dow Jones Industrials remain at around 9,700 and does not show any real indication that it might make an earnest move at 10,000. There is that school of people that believe that the stock market tends to be a leading indicator for the economy, and the Dow rallied a furious 2,000 points from March to September. Ever since September the market has just been banging between 9,500 and 9,800 creating a horrible technical top. The NASDAQ chart looks even more miserable.

The day the news came out that the U.S. economy grew at over an 8% annual rate in the 3rd quarter, the stock market brushed the news aside like a mosquitoes, barely registering a gain. I have always personally felt that stock investors tend to be an optimistic bunch by nature. Wouldn’t you think that an economy that was growing at 8%, and at the fastest rate in almost 20 years would be an invitation to rally? Me too. But the market is actually lower now than when that news came out. I submit this as circumstantial evidence that stock investors don’t buy the idea that this recovery is real and robust and that the rally from March to September was in anticipation of the 3rd quarter spurt.

If the market does not rally soon, bringing the Dow to somewhere near 10,000, you will see a fairly quick decline in stock prices with the Dow dropping to its first level of support of around 9,000 quickly. The 9,000 level of support is a weak one and if the market doesn’t get a toehold there, the next stop will be around 7,500, which will also be reached in a hurry.

THE BOND MARKET DOESN’T BELIEVE IT

The yield on the 10 Year Treasury Note is currently around 4.32%. This implies that the investors buying these securities anticipate an effective rate of inflation of between about zero and 1.3% over the next decade. Wouldn’t you think that if these investors actually believed for a moment that the economy was growing at 8% annually, they would demand a higher return on their money than a little over four percent?? Does that make any sense to you?

Of course it doesn’t, and the bond market doesn’t believe for a moment that the recovery is as good as advertised. The yield on that 10 Year Treasury I reference is lower now than it was in August when many people agreed with me that the economy was in the toilet. Does that make any sense either?

Remember this equation:

Growing Economy = Increased Inflation Threat = Higher Interest Rates

With that equation in mind, why would rates be lower now than they were BEFORE the announcement of 8% annual growth? Please notice that I’m not giving you any of these answers because I don’t need to. You can see too well the picture your answers paint and common sense usually wins out in the end. Things can become irrational for short periods of time, but these situations always self-correct.

EMPLOYERS DON’T BELIEVE IT

Where are all the jobs?

If employers really believed for one second that we were entering the fastest growing economy in 20 years, wouldn’t you think they’d begin staffing for it?

I read a story just over a week ago that Verizon was trying to reduce staff levels by offering an early retirement package to employees and they expected as many as 12,000 people might take “the deal”. Well over 10% of Verizon’s total work force took the deal and the number was almost double what the company expected totaling 21,600 employees. A closer study of the story doesn’t lend itself to the employees thinking they could easily find other jobs of they took the early retirement. It was just that the offer Verizon put on the table was too sweet to pass up, and many employees also worried their jobs could wind up being eliminated WITHOUT any sort of “package” if they stuck around.

I will admit that the employment issue is where I can be proved wrong about this recovery. If you see unemployment falling and job creation increasing in the coming few quarters, then I will be eating crow. Until I see that occur, I’ll continue to be skeptical.

CONSUMERS DON’T BELIEVE IT

Although consumer confidence has risen somewhat, and the holiday shopping season seems off to a raucous beginning, there is more below the surface.

Several large surveys of consumers showed that although they were feeling more confident about the prospects for the economy at large, the consensus was that they were planning to spend less during for the holidays this year. In some of the surveys, quite a bit less.

This basically means that the respondents to the polls entered two different votes.

One vote was a lip service answer to a voice on the telephone about how they felt about the economy as a whole. As Americans tend to be an optimistic lot, they told the voice that they thought things were improving.

The other vote was the ballot they planned to cast with retailers using their checkbooks in the next month or so. With this election they were being quite a bit more cautious.

So you know all the sayings I’m going to invoke here:

“Money talks, %$@#*^$! walks”

“Talk is cheap”

“Put up, or shut up”

I won’t go on, but you get my drift. If consumers really thought a recovery was underway they would likely be spending MORE money than last year, not less. Case closed.

IN SUMMARY

--Stock investors don’t believe in this recovery
--Bond investors don’t believe in this recovery
--Employers don’t believe in this recovery
--Consumers don’t believe in this recovery

Now I will accept that ALL those listed above WANT to believe the recovery is underway. Just like I would like to be better looking and have Hugh Hefner’s lifestyle, but these are unlikely to happen.

Clearly there are politicians watching this situation closely. If this economy IS actually rallying the Democrats running for President can loosen their belts, put their heads between their legs and kiss their a**es goodbye. I’ll receive mountains of hate mail if I were to imply that these candidates were actually hoping the economy would tank, but what do you think they want? President Bush will be lucky if the economy holds for him for another year, but the Fed and the government has pumped unprecedented and unheard amounts of stimulus into the economy over the past two and a half years. There had to be some impact sooner or later, and it has finally arrived. Now the question will be whether it has enough legs to carry the 2004 election. I give it even money.

A PERSONAL OBSERVATION ON A SIMILAR NOTE

I have spent the past 14 years training the staffs of the world’s largest financial institutions and the past 12 months have once again shown me corporate behavior that I find worrisome.

Our year was only somewhat slower than usual, but that was largely due to a very weak first quarter when Wall Street retreated in every way possible to contain costs. The other three quarters were equal or better than average for us.

Now the sort of training that we supply is very technical in nature and is in many ways “mission critical” for my clients. I have been reading articles recently that talk about how corporate training of their employees may be off as much as 20% to 25% this year. That troubled me very much and should trouble the managements of many companies very much. Let me tell you why.

Just two weeks ago, Monster.com (the huge job and resume website) did a survey asking about how “satisfied” people were with their jobs.

A ll I need to share with you is a simple statistic; 82% of people surveyed said they were unhappy in their current position and if the job market improves that they will be looking to leave their current employer.

Now I probably shouldn’t even be mentioning this situation since my company will be getting hired plenty to train all these new employees when the current employees leave for the new positions.

Let me just share with you my personal observation about the horrible cycle that occurs at my clients who are the world’s largest brokerage firms, insurance companies, pension funds, mutual fund companies, accounting/audit firms and software companies:

Phase One – Economy is good and company adds new employees.

Phase Two – Economy slows down and costs are cut. Training is first to go.

Phase Three – Because some employee doesn’t understand a complex financial instrument or transaction, some sort of accounting/operational/reporting error occurs costing the company millions and millions of dollars.

Phase Four – Management screams “How could this happen?! Why did no one understand this and how could we have screwed up this bad?! Why don’t we have any training?!”

Phase Five – Mike’s phone rings.

Phase Six – Mike trains everybody.

Phase Seven – Start again at Phase One.

I’m not trying to lecture anybody here, and truthfully I’m plenty busy every single year. It just bugs me that the human learning curve seems to remain tabletop flat; and I see these organizations go through the same pattern again and again.

The lesson to be learned from the Monster.com survey is that employees are pretty ticked off at the moment and are going to quit the first chance they get. The first ones who are going to quit are the ones in the jobs that are most difficult to fill because employers expect lots of technical knowledge and long hours at low pay for these jobs. Maybe showing these people that they were cared about and they had some trajectory for their career might make them feel wanted.

We are currently somewhere in the middle of Phase Three and heading for Phase Four. Remember the most important investment you can make in the service economy in which we now live is in human capital. As the bumper sticker says, “If you think education is expensive, try ignorance”.

BERMUDA WAS IMPRESSIVE

I have a relationship with Bermuda that spans almost 20 years and I was extremely concerned after hurricane Fabian hit them a few months ago. Hurricanes don’t get much bigger than Fabian and I was truthfully shocked at how resilient the island has been considering the massive amount of force that was levied against them back in early September.

I have spent hundreds of days in Bermuda and know nearly every inch of the island at this point. On the taxi ride to my hotel from the airport I was looking everywhere to witness for myself the evidence of the destruction Fabian caused.

Much to my surprise, there wasn’t that much to see. Sure, there was still plenty of property damage that will take some time to repair, and there are leaves that will need to grow back, but the island looks good. I stayed at Elbow Beach and did a close-up survey of the Sonesta, and although some of the damage was very extensive, repairs are already underway and everyone’s mood is optimistic and hopeful.

I love Bermuda and I wish that tourism there were increasing rather than the long decline I have witnessed for over a decade now. I have seen a group of truly huge hotels close since I have been visiting: The Bermudiana Hotel, The Belmont, Castle Harbour and Club Med to name the big ones. There is talk of reopening a couple of them with some hotel rooms, but the movement is slow. I still tell lots of people every year to go visit Bermuda, since the island is beautiful, the people are wonderful and there is some terrific golf for those inclined to play. Needless to say, people visiting need someplace to stay and it seems like there are fewer hotel rooms in Bermuda every day.

SPEAKING AND CONSULTING

My office receives phone calls regularly asking whether or not Mike would be willing to be a speaker for a function they are holding, or if I would ever be willing to provide consulting services on a project.

The simple answer is always yes. I love speaking to groups and can occasionally even be amusing and insightful. I am also an outstanding scramble partner for golf outings and my tennis game is still sharp for a guy my age should you desire a ringer doubles partner.

Anyway, should you ever wish to have me speak to your group or provide consulting services, just call my office at (860)347-6568 and inquire. My day job causes my schedule to be extremely full (2004 is 85% booked already) but if my schedule allows me extracurricular activities I am always game.

MIKE’S TOP TEN MUSIC DVD’S

I spend somewhere around 100 days per year on airplanes and in airports and no one has appreciated the introduction of DVD players as standard on laptop computers more than me. The problem I have with watching movies on my laptop is the constant stream of interruptions from loudspeakers and flight attendants so my standard fare while I’m traveling has become music DVD’s, particularly concert videos. Anyone who has read this newsletter knows I am a huge music fan and with the holiday season upon us, perhaps my list might serve as a guide for any music fans you might be shopping for.

Please remember that this Top Ten list is totally subjective and leans toward my taste in music, but every single DVD on this list is fantastic. I personally own somewhere around 50 music based videos, and all ten of these are fantastic.

1) “The Who & Special Guests Live at Royal Albert Hall”

This is easily my favorite without a real contender. I saw The Who live about a year after this video was shot and this DVD totally captures the live experience. If you have a good home theater system you will find the surround sound mix in 6:1 mind blowing. When I want to show off my theater system, this DVD is my reference disc. Play tracks eight through ten (Magic Bus, Who Are You and Baba O’Riley) as loud as you can without getting arrested or making your ears bleed. Your musical experience does not get better than this without having to leave you house.

2) “Bruce Springsteen & The E Street Band – Live in New York City”

I am a huge Springsteen fan and this DVD was Bruce’s live concert that was recorded for HBO and then released on video with all the material not included in the HBO special on a second disc. The camera work is outstanding and the surround sound mix is first class. My reference track is on disc two: Light of Day. You watch this song and ask yourself what artists coming up today are going to fill the shoes of the people on stage there in Madison Square Garden. Springsteen was always one of the best live acts EVER, but watching this group play that song shows why.

3) “The Kids are Alright – The Who”

I know it’s my second Who video in the top three, but this was JUST released a couple of months ago and a “must own” for any Who fans, or even fans of music from that period. It is mostly documentary with lots of performances thrown in. You will never make a mistake adding this to your collection. I had forgotten what a character Keith Moon was in the music industry, and what good friends he was with Ringo Starr. This perhaps helps explain why Ringo’s son, Zak Starkey, who has been The Who’s drummer during the past decade.

4) “The Concert for New York City”

Until some marketing moron over at MTV finally figures out that they should release Live Aid on DVD almost 20 years after the concert occurred, The Concert for New York City is the ultimate in benefit concert videos. The camera work and sound is first class, and you have an amazing variety of fabulous artists offering terrific performances. If you were only going to own one music DVD, I would suggest this one before the top three on my list for the shear volume of enjoyment. The concert runs almost 5 hours long and provides lots of value. This concert is in my travel bag on every trip.

5) “The Last Waltz”

This was a documentary shot by Martin Scorsese back in 1978 of The Band’s final concert at the Winterland Theater and I have watched this film at minimum of 40 times. I love The Band in their own right, and the list of musicians who showed up to play with them that night is jaw dropping. It will also provide you with an education of music in the 1960’s and 1970’s that will make you sound so smart you should send me a thank you card. Tell me what other concerts offer you this list of performers: Bob Dylan, Eric Clapton, Neil Young, Joni Mitchell, Muddy Waters, Van Morrison, Neil Diamond, Emmylou Harris, Ronnie Hawkins, Paul Butterfield, Dr. John and brief appearances by Ringo and Ron Wood. You gotta own this one.

6) “Led Zeppelin”

I’ve already recommended this DVD in a previous newsletter so I won’t repeat myself here. I will remind you to watch John Bonham’s drum solo on Moby Dick on disc one. Very impressive indeed.

7) “The Rolling Stones – Gimme Shelter”

The first DVD I ever bought of any kind. It is also the best music documentary you will ever see, as it chronicles the end of The Stones 1969 tour that ended with the concert at Altamont Speedway. If you remember, this is the concert where The Stones hired the Hells Angels to be security and they ended up stabbing a guy to death right in front of the stage. A famous quote from Mick Jagger is that “the only guy who enjoyed Altamont less than me was the guy who got stabbed”. This film was originally shot in 16mm and was totally remastered by the Criterion Group in New York, which in my opinion is the finest restorer of movies in the business today. Their version of “This is Spinal Tap” still sells for over $100 on eBay all the time. Even the sound mix on Gimme Shelter is an amazing story since Criterion did not use the original tracks from the film for Altamont, but instead they discovered some tapes that were created by someone who plugged their recorder into The Grateful Dead’s soundboard (which The Dead always allowed people to do at concerts). Another must see on my list.

8) “James Taylor – Pull Over”

I saw James Taylor this past year at The Greek Theater in LA and this concert DVD is basically the exact same show. Of course it is not an eardrum shattering experience like a few others on my list, but pour yourself a glass of Merlot and sit back and enjoy the most professional musicianship you will ever see. Absolutely outstanding.

9) “Jennifer Lopez – Let’s Get Loud”

Okay…I know this one seems pretty far out of character for me, but hear me out. I will admit the only reason I bought this was because I found it on clearance in a shop in O’Hare while I was on my way to catch my connection, and I figured “how bad can it be” for $7.99. Well much to my surprise I found the concert totally enjoyable. Lopez may be many things (quite lovely being among them) but one thing she isn’t is stupid. This was the first live musical performance she had ever had and she surrounded herself with the finest musicians money could hire. She put herself in an amazingly friendly venue in Puerto Rico. And countless hours and hours of rehearsal were logged by her, her band and her dancers. The result is an amazingly upbeat, professional show that will put you in a good mood no matter how you’re feeling. If you see it cheap enough you should definitely add it to your collection.

10) “The Eagles – Hell Freezes Over”

This concert shows up on lots of lists and I enjoy it too. There is nothing mind blowing about it, other than a demonstration of the most seamless and professional musicianship you can experience, which is what age and experience brings. This crew of middle-aged guys look like they could all work in your local bank branch, but the depth and breadth of talent with their instruments and vocal abilities is seldom seen. Time for another glass of Merlot.

A GOOD BRAIN TEASER THIS MONTH WITHOUT THE MATH

I have worried that all my supposedly tougher brainteasers have been mathematically based so I want to change that for this month in deference to my arithmetically challenged friends. I think you’ll find this fairly tough as well as simple and elegant

Here is this month's brain teaser:

“Find a six letter word made up of only the following four letters: O N I P”

As always, give yourself a decent chance at figuring it out on your own before being a weasel and peeking at the answer. You can view the solution at this URL:

http://www.afs-seminars.com/brainteaser_Nov2003.html

And the answer to LAST month's brain teaser is:

The first 1,000 pages of Dr. Cohen’s treatise use (9 X 1) + (90 X 2) + (900 X 3) + 4 = 2,893 digits.

Therefore 1,000 + n, the number of pages in the treatise, with 0 < n < 9,000, will use 2,893 + 4n digits. This latter number will be a multiple of the number of pages in the treatise if, for some positive integer k, 2,893 +4n = k(1,000 + n): that is, if n = (2,893 – 1,000k)/(k – 4) is a positive integer. This only occurs when k = 3, in which case n = 107. Thus, the number of pages in Dr. Cohen’s treatise is 1,000 + 107 = 1,107.

NEXT MONTH

Well next month we will review how I fared with my predictions from a year ago. I will also share some of my visions for 2004.

http://www.afs-seminars.com

Copyright 2003, Michael Gasior. All Rights Reserved.

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