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May 4, 2004

May 4, 2004

This short note is a summary of some of our long-term opinions. This is not necessarily an indicator of actions we plan to take immediately.

LONG-TERM OPINIONS

The U.S. will remain very active in the Middle East. Stabilizing Afghanistan, Iraq and possibly other countries is viewed as necessary in order to ensure an energy supply to the U.S. and its allies until alternative energy sources are developed.

This means that we should prepare for more wars and more bloodshed in the Middle East for the next several years. Oil may go to $55 per barrel.

Gold could go much higher in coming years due to the continued fighting and higher oil prices.

The U.S. has not solved any of the problems that have led to the dollar’s decline throughout 2003. In the last few months, the dollar has risen slightly against a basket of world currencies. We do not expect this rise to last. Longer term we expect the U.S. dollar to continue to fall against major European and Asian currencies. [Note: This is a slightly more bullish view of currencies than we had in our last memo.]

The expected deceleration of growth in China has led to a rapid and severe decline in industrial metals and economically sensitive stocks in the U.S. and in countries in East Asia and Southeast Asia. These stocks will probably continue to underperform the broad market until the economists can determine the degree and timing of the slowdown in China.

We expect the U.S. market to rally into late 2004 and then begin a decline. The U.S. is currently enjoying the peak of its economic growth rate and an economic slowdown, or possibly a recession, could begin in the U.S. in 2005 or 2006.

Over the next few years, we do not expect that jobs will be created on a large scale in the U.S. due to numerous factors. We do not propose that GDP will not grow. It should grow throughout 2004 and probably 2005, but the economy has changed in fundamental ways that make rapid job growth less likely.

STOCK STRATEGY

U.S. stocks may peak in late 2004. Buy U.S. and Canadian energy stocks now and on dips.

Avoid base metal and semiconductor stocks. Short sellers can sell them short. [Note: This is a reversal of our previous view]

In the U.S., focus on fast growing companies with low P/E ratios.

Japan is beginning an economic recovery that will have fits and starts but will increase stock market values for several years. Japan may have a market correction as fear spreads about China’s growth rate slowing down. We expect, China’s GDP growth to slow to about 4% from the recent 9% rate, but it will not go negative.

Russia will be greatly benefited by higher energy prices and by the coming upward valuation of their oil reserves by as much as 50%.

India should grow in excess of 4% or 5% for a prolonged period of time. Look for growth in Indian stocks and buy on the dips. We like energy stocks, outsourcing plays and banks.