September 2001 Newsletter
Issue Nine, Volume Two

THE RISE OF A NEW ERA

By Mike Gasior

There are times when I have a difficult time writing this newsletter. Most times it occurs because I feel there is no pressing or compelling stories that I feel inclined to study and report. Other times I just feel tired or overwhelmed and writing it is just another responsibility staring me in the face. This time, however, I cannot imagine that anything I might have to say carries any importance given the events of September 11th. But I have some things to share and I will try to get to the point.

I want to thank every, single one of you who sent me a note of encouragement or called my office to inquire about my safety. I want you all to know that I not only read them all, but also saved them to be read again someday. I received notes from literally every corner of the earth. They came not only from friends I have known for years but also from people who have just read my newsletters quietly and have never felt the urge to write me before. The events of September 11th were beyond surreal and struck me more deeply then I would have expected. Hearing from so many of you helped me a lot and I just wanted to say “thank you”.

I have just returned from teaching a class in Newark, NJ this past week; which originally was supposed to have been held two blocks from the World Trade Center. Several times during the week I gave thought to jumping onto the PATH train and taking it into Manhattan to look at the destruction myself, firsthand. I managed to talk myself out of going every time because I just didn’t want to see it with my own eyes. As if, if I didn’t see those magnificent towers lying in that pile of rubble, then maybe they weren’t really down. I reminded myself of my old dog Teddie, who, if I were calling him to come to me would turn his back to me and look away. I know he figured that if he couldn’t see me, then maybe I couldn’t see him. Just like Teddie, maybe if I didn’t see the destruction with my own eyes, then maybe I could still carry the old image around in my head forever and that nothing has changed at all. Wouldn’t that be nice.

A NEW ERA

I’m not going to spend any time here repeating things I said to you in last month’s newsletter. I will simply summarize what I told you before the world changed before our eyes. The economy was in much worse condition than anyone was reporting or believing and that I thought it was only going to get worse. I still believe that and recent events will only serve to make the situation even worse.

Here is the updated situation:

--Corporate earnings were already in trouble and will now decline much further than anyone is currently predicting. --Unemployment is climbing rapidly and reached a nine-year high this past week. This trend will continue for the foreseeable future. --The dollar continues to be strong versus other currencies, which will make it difficult for U.S. companies to compete abroad or on their own soil. This will continue to dampen sales.

It is the opinion of this writer that we are already at the beginning of a recession and that it is much too early to begin to predict when it might end. Anyone who ventures to make such a prediction is dead wrong or a fool. Perhaps both. If I were forced to make any prediction at all, I would be prepared for at least several ugly years while we digest the overindulgences of the 1990’s. If were sitting on a couple of barstools next to one another shooting the breeze and you asked me what I thought was REALLY going to happen; I would tell you that we are likely in for at least a decade of ugliness.

There is a book I think many of you would benefit from reading; “The Great Boom Ahead” is written Harry Dent, Jr. I read this book nearly a decade ago and Mr. Dent made his case using demographic realities that the Dow Jones Industrials would go above 10,000 and that would enjoy EXACTLY the success that we had in the 1990’s. Reading his words, now in retrospect, makes him seem like some sort of psychic. He was scary accurate in his predictions, but he claimed that demographics can help you predict with tremendous precision the spending patterns of people. If you look at the “Baby Boom” generation, they were in the biggest spending period of their lifetime during the 1990’s.

With the leading edge of the “Baby Boom” reaching 56 next year, they would have already begun reducing their spending patterns as they approach their retirement. When you add the destruction the stock market has caused their retirement plans to the psychological damage caused by the terrorist attacks, I can only imagine their spending will decline at an even steeper rate. Mr. Dent thought the economy would begin to stall heavily about six years, but now I wonder if the slide might begin earlier. This will only accelerate the contraction of the economy in the coming years and reverberate throughout the world economies.

We should remember that that the Federal Reserve had dropped interest rates seven times this year before September 11th, these actions seem to have had zero effect on peoples spending habits. A lot may be learned from looking at Japan whose interest rates hover at effectively zero and whose economy only continues to worsen. This means it is completely possible to reach a point where consumers refuse to spend no matter HOW cheap it is to borrow money. Fear is a very consuming emotion.

If I can do any coaching here, it would be to remind everyone that it is times like these that build character in people and organizations. During economic times like we enjoyed during the 1990’s nearly everyone does well and nearly everyone is confident. Both individuals and corporations piled on record levels of debt. Some of that spending will prove to have been foolish but those debts still have to be repaid. That might cause the failure of both individuals and those corporations, but also the rise of the prudent and competitive ones. Difficult times offer the chance to succeed and excel when weaker competitors fold and fail and I have always personally looked forward to these sorts of challenges.

To use a golf analogy, easy golf courses make it possible for everyone to compete in a tournament with the likes of a Tiger Woods. But if you look at the leader board at the Major tournaments you will notice that the names listed there are usually those considered the worlds best. The finest golfers prefer the difficult conditions because it offers them the ability to distance themselves from the average. All I am suggesting is that the stage is being set for those who want to excel to do exactly that. Everyone is going to have to lift their level of effort in order to succeed and there will be no room for the average because they will simply be left behind.

YOU WON’T BELIEVE WHAT I SAY NOW

I’m looking at the stock market.

No, I’m not buying any stocks, but I have actually begun to look at the possibility of moving money into equities when they get a little cheaper.

Before disaster struck that morning on September 11th, I was teaching a seminar for a client in Massachusetts when it began to dawn on me that stocks were beginning to look cheap enough to start watching. Things have changed since I hatched these thoughts, but I will continue to keep my eye on the situation. I just thought my retirement was too close (about 20 years from now) and that the market decline and recovery would likely not occur within that timeframe. Now I am wondering if it might be different.

Here are some thoughts I need to lay out:

--The market is still too high by any historic standard and will decline further. The P/E ratio is still at a very high 22.7 times the earnings of the 30 stocks in the Dow Jones Industrial Average. The most recent ugly bear market was the 1973-1974 market where most major indexes declined 60%+, and at the bottom of that market the P/E ratio on that index was 7 times earnings. Applying that same rationale, you would have the Dow at around a level of 2,500 based on current corporate earnings. I have already stated my case for a reduction of those earnings. In truth, I don’t see that sort of extreme decline, but I won’t even begin to look until the Dow drops below 7,000. I would not be surprised, however, if you see the Dow near 5,000 sooner than you think. The Dow closed on Friday at 8,847.56.

The important thing to remember here is that your vision needs to remain long. There will always be that small group of people who make money trading stocks short term, but that has always been a suckers game. What I am saying is that if your horizon is in the neighborhood of 20 years or more before your retirement, you should be licking your chops at this current market.

I sit right on that 20 year bubble which makes my decision more delicate. If you are in your 20’s or 30’s, and even your early 40’s you might be getting the opportunity of your lifetime in the next few years. It still baffles me when I hear 25 year olds lamenting the state of the market since their retirement is so far away still that they can’t see it with a telescope. They should be hoping that the market stays crappy for at LEAST ten years so they can pile loads and loads of money into it while prices are cheap. This way they can be perfectly positioned for when the market ultimately recovers. Just like I was telling you for years that the market would decline because it always does; now I am now telling you that it will also recover and provide excellent returns because it always does. Just don’t try to pick where the bottom is. That’s the sucker’s tendency.

I don’t want anyone to think I’m avoiding saying it, and I find it difficult to be coy or delicate with it either, but if you are in your 50’s and continue to be invested 100% in stocks, the market will likely never recover for you to enjoy the retirement you expected. Giving any advice at this point is nearly impossible and there is no prudent advice to be shared. I cannot un-do your imprudent decision to remain invested in stocks so close to retirement and that WOULD have been the only good decision available. The choices that remain now are grim and to some degree are sickening. You can leave your money in a market I already predicted would go lower and might stay low for a long period. You can pull your money out of stocks and put it into some very low yielding fixed income instrument.

Perhaps the only practical investment at this point would be a time machine, which would allow you to go back in history and change past decisions. At this point, all of your decisions have been stripped from you and you must just await your future without any control or influence over it.

A COUPLE OF HISTORIC NOTES

September of 2001 will mark the first month since 1975 where there was not one single initial public offering (IPO) of stock. Not that this is that big of a deal but it is a pretty interesting event that has not occurred in 26 years.

More shocking and interesting than even Republicans and Democrats suddenly getting along were the talks between the New York Stock Exchange and the NASDAQ this past week. Wall Street can make for some pretty cutthroat and brutal enemies but some of the stories, which have related to me in the past week, have been both shocking and heartwarming. There are stories of brokerage firms offering each other temporary office space while more permanent solutions are sought. The American Stock Exchange remains closed but the NYSE has been trading their stocks for them and the Philadelphia Options Exchange has been trading their options.

We now hear that the NYSE and the NASDAQ have held high-level talks about trading each other’s stocks in the event of another disaster, which might close either of them. Considering how competitive the two have been with each other over the past two decades this was an amazing and telling change of course and speaks to the humanity of this situation. However cutthroat and heartless the world sometimes thinks Wall Street can be we also have houses filled with families, which becomes most important when tragedy strikes. Money is important, but money isn’t everything.

MY NEW YORK SEMINARS

I have been informed that the facility we use in Manhattan will not re-open this year and we have moved the remainder of our schedule to the Gateway Hilton Hotel in Newark, NJ. We have used this location in the past and the hotel is connected to Penn Station, is close to the Newark Airport, and is easily accessible by train or plane.

You can view the remaining New York schedule by visiting:

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

The series of seminars in Bermuda continue to fill up but there is still availability in most programs. Please call my office at (860) 347-6568 for more information or visit:

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

I hope to see you at one of these programs sometime soon.

http://www.afs-seminars.com

Copyright 2001, Michael Gasior. All Rights Reserved.

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