October 2001 Newsletter
Issue Ten, Volume Two

AND THE READERS SPEAK

By Mike Gasior

From time to time it becomes too difficult for me to avoid reacting to some of the e-mail I receive from the readers of this hideous newsletter. I honestly don't write this to aggravate anyone or to bum people out. I also don't expect to be correct about all of the things I foresee in the markets and the economy (although I end up correct a lot more than many of you wish I would be). All I am trying to engender is thoughtful debate and discussion and I feel I at least accomplish that.

So let me take the opportunity to share some of your viewpoints, and of course, my reaction to some of them. You can probably tell that this might be a lot of fun.

THE GOOD, THE BAD, AND THE UGLY

As much as I hate to admit it, the nasty notes I receive are often the most fun to get because some of these people genuinely have their noses out of joint. It seems that some of them must actually think I was speaking directly to them or something.

Some of them are eloquent and to the point:

"People are right Mike. You DO suck!"

Others seem more personally affected:

"Nothing like producing a newsletter that leaves us in utter despair. What are you trying to accomplish with this newsletter? What is your mission in life?"

Then there are the notes that make me laugh out loud, and then leave me feeling sorry for the poor dope that writes it like this one:

"A decade of ugliness? You are a fool. Please remove me from your mailing list."

Well at least he said "please" remove him, but I completely feel that the decade of ugliness prediction still carries a lot of weight. As this month's newsletter progresses you will hear me continue to reference the Japanese market and economy, which we share staking similarities to. The current Discount Rate in Japan (the rate at which the Central Bank lends to banks) hovers barely above zero and their economy only seems to worsen by the month. In the U.S. the Federal Reserve has dropped rate NINE TIMES this year with seemingly no effect whatsoever on the economy. I have even read in various media outlets that the expectation is that the Fed will cut rates again after their next two meetings, including .50% the next time. You have to ask yourself at what point this behavior begins to be counterintuitive and actually has the appearance of being hysterical. I personally believe it already does.

Then of course there are always the nitpickers who just can't give me any credit for anything. If these kind of people struck oil in their gardens, all you would hear them complaining about would be all their dead tomatoes:

"'Just don't try to pick where the bottom is. That's the sucker's tendency.' Isn't this exactly what you try to do with your newsletter? Am I confusing you with someone else? I thought your letter attempted to call the TOP. Stick with the demographics. I watched Harry Dent present his concept on PBS before he published his book. So I have been on the "page" for a while. Stick with the 2006-2007 time frame for a top."

Just a couple of things first of all. Replace "try" to pick the top with "DID" pick the top. I told you people the market had peaked the day that it peaked. I also said that the NASDAQ would not reach 5,000 again for 10 years and I'm now almost two years into being correct. I haven't yet called the bottom, but I clearly mentioned last month that I wouldn't think the Dow Jones was cheap enough until it fell below 7,000 and I am standing my ground on that.

Now as far as what "page" anyone is on, I happened to watch the same program on PBS with Harry Dent (many people do watch television after all, including myself) and people that attend my seminars know that I continue to recommend Harry Dent Jr.'s book "The Great Boom Ahead" which VERY accurately forecasted the economy we enjoyed in the 1990's. I really do love that book. But my friend Harry Dent did not envision the events occurring in the Asian and European economies, which represents a huge component of our economy today. Nor did he envision three Boeing jumbo aircraft hurtling themselves into the World Trade Center and Pentagon 7 weeks ago. Things change. Life changes. I will quote John Lennon for this point; "Life is what happens when you're busy making plans." The world has changed and we must adapt with it.

Not all of the notes are short however, and this following statement needs to be read very carefully as the reader makes her points:

"I enjoy receiving your newsletter. I would like to rebut some of the things you said in the last one. 1. Bear in mind that you have been in the business a long time, as I have, since 1982, but that entire time was a bull market. We had not seen the full cycle the market goes through till now. 2. The main determinate of levels of the market (P/E) is interest rates. The main determinate of interest rates is inflation. From that measure, the market level is well supported at higher P/E's than were present when rates were higher. As far as fear of higher inflation, that's fighting the last war, similar to people who went through the depression. Give me facts, not what if's. 3. The budget surplus, demographics, and other factors are still favorable for the market. I am not interested in an argument, not that I am anticipating one. I just had to respond to that last newsletter because it was so negative, and truly not warranted by the facts of the situation."

WHAT?!! There are just too many fires to put out here, so let me go one at a time.

1) I agree that we have not gone through the "full cycle" but I firmly believe we have gone through the full bull market phase. The only thing left to experience is the bear market portion of this cycle which is the "ugliness" I have predicted.

2) Second, interest rates can often have little, or no consequence on P/E ratios, which are driven by human perception of value. Some humans perceived that Yahoo stock was worth $400 at one point. Now they believe the value of that stock to be something a bit less than that. With regard to the interest rate reference, I just visited the website of the Federal Reserve and found that the 3 month T-Bill rate in February of 1972 was 3.20%. The 3-month T-Bill is currently yielding 2.00%, which I will admit is less. What IS significant, is that even after such a low rate in 1972, most major U.S. stock indexes declined 60% or more during a 15-month period in 1973-74. Interest rates often don't predict anything. Give you FACTS?? You fed me a bunch of theory and you want facts in return?? I once again offer Japan as a better road map of the route we may be currently traveling.

3) The budget surplus? What budget surplus? Isn't that already over? And the argument for demographics is a reasonably sound one, but I feel it might be difficult to gauge behavior in this new environment since predicting what humans will do is always a loser's game. Finally...you didn't want an argument and weren't anticipating one? I love arguments more than anything and am ALWAYS looking for one. I appreciate the opportunity to present a contrary viewpoint.

Some people give me some degree of credit, but some can't resist taking a little jab at me. I suppose I can't blame them. Here are a couple of notes like that:

"I wish I would have listened to you earlier. I have another option, I am going to find a part-time job and use the money I earn to make up for the losses."

"Many months earlier I had drafted a note to congratulate you on truly having called this bear market when very few others had (who would later claim so), but held back. Congratulations to you are certainly still appropriate, even though I twitched and bought Lucent around 11, I guess a bit too early?"

"Mike, You've mentioned the Japanese bear market several times. If you want to see the scary comparison charts, just go to this site": http://lowrisk.com/nasdaq-nikkei.htm

Then there are those who want a little more specific advice, which I always feel squeamish giving, since I never even liked doing that when I was getting paid for it. As much as I might have overall economic or market opinions, I try to avoid specific recommendations. But here are a couple more notes and some opinions of mine:

"Regarding your current prognostications, I was wondering if the govt. might try to inflate us out of the current problems? In that case, should precious metals and rare coins do well? I guess they would not do well if the dollar is held high and there is a depression?"

A couple things here. Number one, even as negative as I might sound sometimes I don't honestly foresee an actual depression in the classic sense. By "classic sense" I would mean like the one the U.S. suffered during the 1930's and the one that Japan is currently mired in. So PLEASE make sure I am on record here...NO DEPRESSION!

Secondly, do what Nancy Reagan said with regard to the rare coins and gold and "just say no". I'm never a fan of any of the bizarre investments like Beanie Babies, Pokeman, Superstars of NASCAR Collectible Plates or any of this other garbage. I would rather hear that you were burying money in mayonnaise jars in your yard since that would be a better investment.

There is a guy I used to play golf with now and then who would always be picking my brain about what he should put this $5000 he had inherited. I always hate giving this sort of advice, but tried to steer him toward some no-load, government mutual funds and even went as far as to bring him a prospectus of a fund I had some dough in and give him the 800 phone number to call and open an account. Months later I saw him and asked what he had ended up doing and he tells me that he bought a bag of semi-precious stones from some guy who called him on the phone. So here I spent countless hours of my golfing time genuinely trying to help this moron a little and he ends up buying a bag of friggin' rocks. I felt like slamming my 5 iron into his skull since it appeared he couldn't get any stupider. Thus, my reluctance to offering anyone advice, but you can add "bags of rocks" to my list in the previous paragraph.

"I have received your e-mails for a few months now, but I never read them because I assumed that it was self-marketing. Today, I read your most recent newsletter and I must admit, it is very thought provoking. Keep up the good work. We need a newsletter that provides "direction". Not sure if you are in the advise business, but with the economy "in a L shape" what do we do?"

Here the problem is the "L" shaped recession. We clearly have the potential for many asset classes to perform miserably. Since 1989 Japanese stock have declined 75 percent. Japanese real estate has declined between 50 and 70 percent. And the yield on two year Japanese government notes is currently.12% and the twenty year bonds offer you an even 2.00% yield. Worst of all, the Japanese economy shows absolutely no sign of improving anytime soon either. I find too many Americans tend to think that when other economies do poorly, it doesn't affect us at all. I always wonder who they think is buying so much of the things that American produces. To be frank (like I'm something other than that usually) pretty much every other economy in the world right now is in a worse place than we are.

It is going to take a while for the effects of September 11th to trickle into the economy, but today's GDP number showing the economy contracting at a .4% annual rate in the third quarter is only the tip of the iceberg. How will the slowdown in mail delivery impact business? How about the extra hour that everything single person wastes at the airport due to the new security measures? And I'm not complaining about the extra security as someone who flies over 100 days a year. All I'm saying is all those hours added together has got to have some massive impact on productivity. Not to mention how much less people are likely to spend on merchandise of all kinds. The cumulative impact of all these things is going to be enormous.

So here are my absolute raw viewpoints:

--I still don't like stocks. They are still much too high.
--Real estate will begin to erode soon. There are no economics to support any upside.
--U.S. Treasury securities offer too little yield in the short maturities.
--The 10-year Treasury Note at a 4.41 yield may end up looking like the smartest move ever.
--I still see amazingly attractive yields in the municipal market with many yields very near their Treasury equivalent.
--The Mortgage Backed Securities market is offering 200 to 250 basis point spreads above Treasuries and this strikes me as hard to pass up.
--Commodities will prove to offer little upside, and plenty of downside as industry slows a bit.
--I wouldn't touch any non-U.S. stock markets with a ten foot pole. Just not worth all the liquidity risk.

There you have it. Mike's opinion on damn near everything whether you gave a hoot or not. Now I give you this sweet note:

"I enjoy reading your newsletter every month. The last two have really captivated me. You seem to be softening around the edges. I hope it continues awhile. It is encouraging to hear you, of all people, encouraging those of us who have just reached 40 to stick it out in the market. It has been difficult at times to read your newsletters, knowing I have most of my retirement in mutual funds. It has been a grim year for people like me to watch our hard earned dollars dwindle (spiral at times)."

I meant everything I said in those two previous newsletters, but I'm hoping this current edition of newsletter doesn't eliminate the "softening around the edges" vibe too much. I just have to report the news as I see it, and it often looks pretty scary when I see it lately.

Lastly, let me share this wonderful note with all of you, since the advice it offers is worthwhile for everyone to hear. Especially with all that I have heard about some charities since the attacks of September 11th:

"Thanks so much for continuing the newsletters and getting your classes going again. I attended your introductory class in August and really thought it was great. I go to enough seminars and conferences to honestly say I really did enjoy it and took some valuable information from it. In all of the ugliness that is around us, the one thing, at least at our office that helps to motivate us and is keeping us incredibly busy is our relief fund that we are working on in collaboration with the United Way. Please mention in your classes, as people struggle to try to help and feel like they are making a difference to also be aware of those that take advantage in bad times. With so many charities and funds that all sound similar, make sure that before giving money, that they know if the org. or fund is legit. If it isn't well known, check it out with the Better Business Bureau, etc. Many people may do this anyway but right now not everyone is as rational as they may have been, just a word of advice. Thanks again and keep up the good work."

ONE LAST THING

Watching the news lately has begun to annoy me so I feel inclined to vent my feelings here with you.

It is beginning to bug me as I see the news media covering all the "horrible" things that the American military actions are having on Afghanistan and all the atrocities being suffered from their people. I am old enough to remember how the media covered Vietnam and I worry about the "Vietnamization" of this current action by us.

The next time the networks run some piece about "poor Afghanistan" I want them to immediately run the videotape of that plane hitting the tower I used to work in. This is not a war we chose, but it's a war we can't lose. They will not give up, nor will they ever stop so it's either them or us. A Taliban official said the other day that they have more young men willing to die killing us than we have young men who want to live. Well, I would like to see some severe adjustments made to that ratio. This is going to take some time, and our way of life is what is at stake. If anything, we may very well have to up the ante in this war we are waging.

BERMUDA

There is still room in many of the Bermuda programs, but please call my office at (860)347-6568 for any inquiry for the most up-to-date information.

You can view the course outlines at the following web address:

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

I hope to see many of you there.

http://www.afs-seminars.com

Copyright 2001, Michael Gasior. All Rights Reserved.

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