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GOOD DAYS AHEAD

GOOD DAYS AHEAD

JAPAN: GOOD DAYS AHEAD; THE CHINESE ENERGY GRAB & GOLD AT 17-YEAR HIGH

This is a memo on Japan, energy and gold. I know I have been writing a lot lately, as a result of the fact that new investment opportunities are emerging, in my opinion.

GLOBAL COMMODITIES AND OIL

I have long been saying that the Chinese were making a land grab for energy and other resources. However, I did not realize the depth of their desperation to acquire oil assets until I saw them go into Ecuador, where through a front company called Andes Petroleum, they bought En Cana’s Ecuadorian assets. This happened not long after the Ecuadorian government promised rebels a big financial windfall, which will have to come from the hide of the oil companies in the country.

It is truly amazing to me that China would buy such troubled assets at a relatively high price. They may feel that their political clout is very large, even in the domestic politics of Ecuador. More likely however, they know that in order to keep the machine of growth in China humming, they must take big risks to acquire adequate raw materials. In any case, no one believes anymore that new oil discoveries will be as large as consumption. So, the asset acquisition grab continues.

This event makes me ever more bullish on the price of oil, which I have said in the past will eventually go to $ 100 per barrel. I still believe that oil will go to $100 per barrel. When I first made the prediction, no major financial organization agreed with me. Today, Goldman Sachs has come out in agreement, and as the price continues to rise, more will join the party. It is our hope that the price rise will be gradual and not too sharp.

JAPAN IS LIFTING ITSELF OUT OF A PROLONGED SLUMP AND ENTERING INTO A NEW PHASE OF GROWTH

We own Japanese stocks for our clients and are buying more. We have written about Japan many times in the past few years, and now we are able to unequivocally endorse the future for the Japanese economy and the Japanese stock market. Mr. Koizumi’s resounding victory at the polls last week, and his immediate assertion that he will once again introduce legislation to break up the Post Office into parts, is a major success and a major event that heralds the beginning of renewed economic growth for Japan. The winners are the Japanese people and the foreign investors who are now sinking billions into Japan with renewed vigor. The losers are the old power brokers and the rural towns where large sums have been spent on gleaming roads (that no one travels on) and bridges to small hamlets (where few occupants reside). The patronage and vote gathering influences of the Post Office will be diminished and the financial markets of Japan will be greatly freed up.

Over the past few years, Japan has begun to clean up their banking crisis and will now spin off from the Post Office the world’s largest bank and the world’s largest insurance company (which had been part of the post office). More remains to be done, but a big impediment to change has been removed with the replacement of the LDP old guard with the new guard headed by Koizumi.

We see finance, large building construction and capital goods manufacturers as beneficiaries. Japanese brokerage firms will now sell mutual funds to the customers of the Post Office. Many new office buildings may be built after 15 years of very limited building construction. Finally, the Japanese capital stock is about 5 years older on average compared to the U.S. capital stock, and we think a great deal of money will be spent on building business infrastructure in Japan. The Japanese will primarily build new plants to assemble products shipped from China.

GOLD HAS RISEN TO A 17-YEAR HIGH. WE HAVE HELD AND CONTINUE TO HOLD GOLD SHARES. WE MAY TAKE PARTIAL PROFITS AS THE PRICE CONTINUES TO SURGE

A combination of many variables has produced a 17-year high on the price of gold, and our gold shares are enjoying the moment. We firmly believe that gold will continue to rise over the long term. This will be due to a confluence of factors, including the huge deficits in the U.S., wild growth in global liquidity from Asia, Europe and North America, along with a realization that the housing bubble may be peaking, which is leading savvy investors to spend some of their housing profits acquiring commodities, especially gold. We are taking some profits on a part of our gold positions. However, we are continuing to hold the majority of our positions.

RECENTLY READ BOOK

In Search of Respect, by Phillipe Bourgouis- The book is by a sociologist who lived in Spanish Harlem and researched the street and drug subcultures for 4+ years. It is a fascinating story of how his contacts think, and why they behave the way they do.

SUMMARY

For years, we have held and continue to hold energy and gold as the major parts of our portfolios, and we have been adding to Japan for some time. In our opinion, foreign currencies, especially the Canadian dollar, will continue to rise versus the U.S. currency. Secondary areas of interest include India and small-cap companies in the U.S. and Europe.