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January 15, 2004

January 15, 2004

OVERVIEW
The US dollar has at last begun to rally. As you know we have been calling for the US dollar to decline for many months and the markets have rewarded our view. However, even in the midst of a long-term decline, it is normal and healthy for the dollar to rise periodically. We wrote in December that we expected a dollar rally possibly by the first of the year. The dollar rally began a week or two after January first.

Further, the correction that we have been expecting in the stocks of base metals, precious metals and growth companies has finally begun. After a long period of rising without any normal periods of decline, the non-US currency market is experiencing a normal correction. The inverse of this is that the US dollar is rising. In our opinion the dollar’s rise should last for a short period only. Do we think that the dollar’s rise is a problem? No. Do we think that the dollar’s rise is normal and healthy for the markets? Yes.

We are in fact thrilled to see that the dollar has temporarily stopped cascading lower versus most of the world’s major currencies. We believe that this period of dollar strength will be marked by declines in the prices for precious metal and base metal stocks and growth stocks. We believe that all of these groups; base metals, precious metals and growth stocks will be much higher before the year is over so we are using this opportunity to buy the stocks that we like at bargain prices.

Fortunately, we hold a large percentage of cash in our portfolios that we have raised in the last few weeks by taking profits when growth and base metals stocks were rocketing to new highs. Now we will buy back many of the same companies at a substantial discount from recent high prices

PRECIOUS METALS

Sellers and short sellers who are anxious to declare the rise in the price of gold over at $430 have lambasted precious metals stocks. We do not agree that it is over. We believe that the dollar correction will last for a few weeks and create about a 5% rally in the dollar.

Nothing has changed to make the dollar attractive. Yes, it has become cheaper but not, in our opinion, cheap enough. Within a few weeks or months we believe that the dollar will be at new low prices versus the major currencies and gold will be at new highs. We are thrilled to see some of our favorite precious metals companies at unreasonably low prices, and we are using the current decline as an opportunity to add to our positions.

BASE METALS

We continue to believe that steel, copper and nickel stocks have farther to go on the upside and we are buying them as they approach attractive price levels. Fundamentals for these metals are better than they have been in over a decade. At that time, the collapse of the former Soviet Union and a recession in the western world lead to a huge sell off of global metals inventories as the Soviets liquidated their immense stockpiles of raw materials.

Today, global inventories are at multi year lows and are falling. The world’s economy is expanding. The major mining and metal producing companies, be they Canadian, American, South American, African or Australian, are stretched to produce enough to meet current demand. Transportation is not always available at reasonable prices to deliver needed metals to customers.

The only concern that we have about base metals is their popularity with investment pundits. We have not been comfortable with the fact that others have jumped on the base metals bandwagon. However, we believe that the current price decline will turn some of the new arrivals from bulls to bears and create another buying opportunity for us.

GROWTH COMPANIES

A few days ago, growth stocks were as technically overbought as they have been for a long time. This is negative in the short run. Overbought growth stocks decline and create buying opportunities at lower prices. In the long run, an overbought reading by the technicians means that there is a lot of interest in the market from the buyers of stocks. This optimism from buyers is a good indicator of long-term demand for stocks. Within the growth stock arena we believe that technology, telecom and medical areas have the most promising growth characteristics.

CHINA AND INDIA

We are finally getting a price decline in some of the Indian technology companies that we research. Some of these are very fast growing companies, with transparent accounting policies, and dual listings in India and the west (usually New York or London). Because of their dual listings they are required to provide detailed financial information and be accountable to investors. Obviously we desire to find these characteristics in companies in which we invest. We may be investing in some of these in the near future.

Economic growth in India has been negatively impacted for decades by a complex socialistic licensing system, which controls many aspects of a privately owned company’s activity. In order to produce a new product and to do many other things this system imposes the need for licenses. This system is a huge source of political patronage. By slowing things down, bureaucrats are able to collect favors and more from those who need various types of permission. To further complicate things both the federal and state governments own large numbers of companies many of which are inefficient and to put it directly -corrupt. Recently, more privatizations of these companies have taken place than even the biggest optimists had thought possible. It is these privatizations which have encouraged Indian and foreign investors about the opportunity in India.

In China, the internet technology companies are rising from their recent slumber. We are carefully watching these companies, which we owned in 2003, for signs of new developments. We believe that in the near future some of the Chinese internet companies may be partnering with western internet companies to provide to the Chinese world many of the same retailing, auction and other commercial sites that are commonly found in the west. The Chinese internet companies are run by sophisticated western-educated entrepreneurs who have returned to China. They have sold stock in the west and now by partnering with western companies have availability to capital that they may need for growth and acquisitions. This gives them a competitive advantage over companies without ready access to capital.

The media recently has been full of stories about how the Chinese banking system has major bad debt problems and how hundreds of billions need to be invested in the major Chinese banks before they can come public in Europe and North America. The Chinese government has made no secret of their desire to raise capital for the Chinese banks in the west.

The problem is much deeper than most western observers realize. For many years the availability of credit from Chinese banks, in regions other than in the major cities, have been controlled by political operatives in the local area. These operatives are in a position to determine who will get loans and what the cost of those loans will be. Cynics believe that this is a major source of income for political operatives and that this corruption must be rooted out of the Chinese banking system before the banks ever become truly independent of federal government bailouts.

We have been investing globally for many years and we know how difficult it is to find companies in countries like China and India that are transparent in their financial dealings and which understand the western view of growth. These companies do exist, and with careful and persistent research, and constant oversight they can be profitable investments.

OTHER AREAS FOR INVESTMENT

We do not believe that transportation stocks or the shares of coal mining companies have fallen enough to be attractive. At some future time if they do decline we will carefully look into these two areas for investment ideas.

SUMMARY

Client accounts have cash reserves and we will be investing it in good companies as their shares decline during the current market correction.

We still like the same types of companies that we liked a few weeks ago. We are attracted to base metals where fundamental demand and supply characteristics argue for higher prices; we like precious metals which have been beaten down because of fears that gold will fall and stay down. We believe that gold may fall in the short run, but the fundamental factors, which lead to its recent rise, are still very much intact, and should lead gold higher in the months to come. We love finding growth stocks which can grow rapidly, yet still sport low P/E ratios. Recently we are finding some growth stocks that meet these requirements.

During the current pullback, Chinese and Indian shares are becoming more attractively priced and we are finding some attractive purchase candidates in other parts of Asia.