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June 1, 2004

June 1, 2004

SAUDI ARABIA AND THE FUTURE OF THE WORLD ECONOMY

Four attacks by Al Qaeda on Saudi Arabian soil against Saudi interests within five weeks is of great concern to me and should be to all investors.

In our opinion there are three problematic issues in Saudi Arabia. First, it is well know that the majority of Saudis are unhappy with the current economic situation in Saudi Arabia. Secondly, it is also well known that within Saudi Arabia there is strong support for Wahabi fundamentalist Islam. Thirdly, within the Saudi royal family there is a battle for control of the Kingdom. King Fahd has been incapacitated since 1995, and at his death a new king will succeed him. The question is from which one of two major camps in the Saudi Royal family will the new ruler be chosen.

The kingdom is currently being managed by Crown Prince Abdullah. Abdullah is committed to stamping out terrorism within its borders. However, important elements of the Royal family are ambivalent about terrorism and Al Qaeda, which claims to be supported by Wahabist teachings. There are powerful Saudi princes who are at the least ambivalent about Al Qaeda and who have supported it in the past. The power struggle between these factions is aggravating the ability of the Saudi bureaucracy to deal with the terrorism issue.

We do not know how it will turn out. For now, oil prices at $42 per barrel are an obvious reflection of the world’s insecurity about the availability of Saudi oil in the future.

ENERGY SHARES

We continue to hold energy shares and would like to increase our holdings. We have been waiting for the seasonal weakness that usually accompanies spring and summer weather to buy natural gas and oil producers as they decline. Even though oil has been hitting new highs, some energy shares have moved slightly lower and we continue to be patient and wait for more opportunities in this area.

U.S. SHARES

Growth at a reasonable price is found here and there and we are continuing to dig for values, some are to be found but not a huge number. In general many U.S. stocks remain overvalued and we see opportunities on the short side for those clients who are so inclined.

CURRENCIES

A continued growth in the budget and trade deficits has stopped the three month rally in the U.S. dollar. The dollar was also rising based upon a hope that U.S. interest rates would rise to make them more comparable to European interest rates. A recent rise in interest rates in Great Britain put an end to this fantasy.

The U.S. dollar has once again begun to trend lower and with good reason. We here in the U.S. must borrow hundreds of billions of them each year to continue to operate our government and fund our military and social programs.

As investors we see a lot of attraction in the British Pound and the Euro and our accounts all hold these currencies. We hold them in the form of cash or in the form of short-term (meaning two or three year) government debt instruments denominated in Euros or in British Pounds.

PRECIOUS METALS

Precious metals often move in opposition to the price of the U.S. dollar, (as the dollar falls precious metals rise). During this cycle there are many cross currents impacting the price of precious metals. These cross currents consist of the traditional disinformation promulgated by governments (e.g., Saudi Arabia saying that they would sell their gold if the price would not fall substantially if they put it on the market), to new technical panics set off by major hedgers and gold banks who are short the metal, and have been defending their short position by attacking the price to scare speculators into selling. For precious metals markets, this is an old game. However, in the current cycle, the players are much bigger and much better financed.

With both oil prices rising and the dollar declining we expect that precious metals will rise. As my friend Jim Sinclair has articulately pointed out, the trend in gold is up for the foreseeable future as the dollar declines.

JAPAN AND CHINA

We have been interested in Japan as their thirteen year long bear market has come to a close, and the banking industry is being restructured to conform to international norms. Our interest in Japan has been tempered by the impact of a Chinese slowdown and higher oil prices may have on Japan. Japan is dependent on China for much of its growth. We do not know if China will slow down a little or a lot. We do believe however, that as long as the world economy is growing, China will grow much faster than other countries. We do not plan to reinvest in China until we see the magnitude of the slowdown that the government has engineered.

INDIA

India is, in our opinion, the only country that can grow at a rate comparable to China. Recently, India has created certain problems for itself by including a communist coalition in the new parliamentary majority.

The verbal diatribes of communists and other leftist members of the coalition may effect foreign investment and thus slow economic growth. Higher oil prices may have some modest impact on Indian growth, but we still like India as a long-term play on a reforming economy. Within India we believe that banks and energy are the most attractive sectors.

SUMMARY

In summary, it is difficult to predict how world economic growth will develop over the longer term. In the near term, growth in most of the world may be pretty good. However, growth over the next two or three years is necessary for stock market appreciation. The trick is to determine which countries can keep growth intact as the Middle East may be melting down and China may be slowing down.

Oil prices alone cannot stop global economic growth unless they rise a great deal. However, political instability associated with rising oil prices can create fear in market participants who can abort the stock market rally process globally.

Because politically unstable times are likely to continue for at least the next two months we are holding Euros, British Pounds and energy stocks as the primary components of client portfolios. We also hold some precious metals and low P/E growth stocks in the U.S.

We continue to monitor Japan, China and India and may reenter these markets if good values develop.