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May 28, 2004

May 28, 2004

Hello. I hope all is well and this finds you enjoying the improved weather. In Los Angeles, the May weather has been good, but the worldwide market weather has been bad. Fear has arisen to send emerging markets much lower and much of Asia, including Japan, joined them in declining.

Simultaneously, base metals, precious metals, U.S. and global cyclical and technology stocks were all declining until a small rally has developed in the last few days. For the past few weeks, we have been going through the carnage to see if any values have developed.

CYCLICAL STOCKS

Cyclical stocks, including high technology companies, base metals, and major industrial organizations in the U.S. and abroad have been aggressively sold by investors on fears that higher interest rates and oil prices, as well as a projected slowdown in China, would negatively impact their earnings. This decline may have been overdone. We would not be surprised to see these stocks get a rally, but longer term we remain skeptical about the duration of this economic recovery, and thus the duration of their rally.

We believe that the U.S. economy will grow throughout 2004 and much of 2005, but we anticipate a recession in 2006. The entire value of these types of stocks depends upon how early their eventual slowdown in earnings growth is discounted by the market.

ENERGY STOCKS

Oil prices have recently approached $42 per barrel, which is a 27-year high. However, energy stocks have lagged in the last couple of weeks as investors continue to doubt that these oil prices are sustainable.

These prices are probably not sustainable over the next few weeks but they may be low compared to the prices that oil will reach in the next few years. Accordingly, we plan to use the next few weeks as an opportunity to purchase some of those natural gas and oil producers which have been experiencing declines in a doubting market.

JAPAN

We had been bullish on Japan and were wrong about the market. Although we remain optimistic that Japan has begun to solve many of its banking problems and that Japan’s economy is growing very nicely, the high oil prices have caused a large correction in Japanese stocks. After a 13 year bear market, the Japanese stock market began to rise again in the last year. Many companies in Japan are still very undervalued from a long-term perspective.

How fast Japan’s economy grows is partly a function of oil prices (which can have a strong dampening effect on the Japanese economy), and the rate of growth in China. We are watching Japan from the sidelines and will measure the degree of oil price risk and wait to see if the Chinese economy ever slows down to determine when and if to enter Japan again. Japan’s growing exports to China have been instrumental in pulling Japan out of their long bear market. A slowdown in China would hurt Japan.

MANY STOCKS ARE MORE ATTRACTIVE DUE TO THE MARKET DECLINE OF THE LAST FEW WEEKS

We have identified many stocks in the US and abroad which are now more attractive due to the panic and market declines of the last few weeks.

We are GARP investors (Growth At a Reasonable Price). Most people categorize GARP investors as value investors. Value investor is another name for cheapskate. Value investors prefer to buy when others are selling and good values can be found. Some value investors buy assets or book value and wait for the company to be bought out or liquidated. Our style of value investing is to buy companies that are growing, but for some reason have been beaten down, or companies whose growth has yet to be recognized by the market.

We prefer to concentrate on companies that can realize their value in a year or two. We protect against declines by liquidating the companies that have fallen by a predetermined percentage from the highest point that they have reached since our purchase.

Today, we see values in some cyclical companies including base metals and precious metals, in banks outside of the U.S. and in energy assets in U.S., Canada and in other parts of the world.

CURRENCIES
It is clear to us that the rally in U.S. dollar, which lasted for a couple of months, has run its course. We have reestablished our long positions in the Euro and British Pound and we believe that they will rise substantially versus the dollar over the next few months, and possibly even for the next few years. The U.S. has done nothing to deal with the current large and growing budget deficit and accordingly the dollar will depreciate in our opinion.

In Summary, we believe that many values exist in stocks and currencies, and we are buying selectively.

This short note will be followed soon by a more extensive communication. In the meantime, best regards to all.