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WE BEG TO DIFFER

WE BEG TO DIFFER

This has been a summer of intensive research. Two of us just returned from a major energy conference in Denver where we met with the managements of at least 20 companies. This week one of our analyst/consultants will be visiting six companies in Canada. We are now preparing for the fall conference season where we will be seeing many companies from a variety of industries at conferences throughout North America and Europe. In addition, there is a steady flow of company’s managements coming by our offices to tell their stories.

GLOBAL ECONOMICS

People are scared. Fear abounds about the shape of the global economy over the next one or two years. Many are afraid of a global meltdown led by a decline in real estate values and consumer spending in the U.S.

WE BEG TO DIFFER

Let us review the situation and make our case for a slowing but substantially growing world economy for the next 12 months.

1. The current real estate slowdown in the U.S. is not news to us. We predicted it in these pages over a year and one half ago and we told our readers at that time that it was forthcoming. We were even quoted in the press (Barron’s) about these views.
2. As we have been saying, the U.S. economy is no longer the dominant influence on the world economy. At one time it was. However, today there are many important parts to the world economy and none of them are dominant. The U.S., Europe (including Eastern Europe and Russia), Japan, China, India, non Japan Asia and Brazil are all important parts of the world economic machine.
3. World economic statistics outside of Europe, North America and Japan are not complete and thus they understate the magnitude of local economic activity. For example, many economists point out that China has not included, until very recently, the economic input from consumer spending. Even today, the Chinese data substantially understates their consumer spending.
4. We do not doubt that U.S. economic growth will slow, and that U.S. GDP will grow at a lower rate in the later half of 2006 and in 2007.
5. This does not mean that world economic growth will collapse and lead to a worldwide recession. In fact, we look for continued worldwide growth, at a rate in excess of the 20 year average over the next 12 months.
6. We argue that growth in China, non Japan Asia, India and Brazil will prop up U.S., Japanese and European growth. To say it plainly, we expect no economic meltdown even in the mature economies like the U.S., Japan and Europe.

BETWEEN NOW AND OCTOBER

Markets are strongly influenced by seasonable variables. September and early October have historically been very poor months for stocks with bottoms often occurring in mid-October. For gold, August or September is often the time of year where the metal bottoms.

World markets will continue to be volatile. After October we look for better times ahead.

The Indian and Chinese markets have had pullbacks from their highs, and are building bases. Japan has recovered from its earlier pullback. The period of volatility will end by October and we expect better performance for many markets after that time. We see the opportunities in the U.S. as marginal, but see many other countries as more attractive.

CURRENCIES

We believe that the U.S. dollar will fall in coming months and years. Part of our investment strategy is to hold non U.S. currencies to avoid this decline and thus enhance our client’s performance. Our favorites (in alphabetical order) are the Australian, British, Canadian and Euro.

GOLD AND OIL

Gold and oil continue to be attractive for the long run.

As you may be aware the Continuous Commodity Index hit a 25 year high this month. This index is a basket of raw commodities prices combined into one composite index. Many traders in stocks, commodities and other markets watch this index in order to monitor the inflationary outlook for world economies. This is one reason that we are confident that inflation and not deflation is the most likely scenario globally. Further, the influence of outsourcing, which has kept inflation under wraps for years, may be waning somewhat. Nations still have that old standby of rigging the price indices in their countries to understate inflation. Some things never change.

WE CONTINUE TO BELIEVE THAT THE GROWTH OF WORLD LIQUIDITY WILL KEEP CERTAIN MARKETS MOVING UPWARD

Liquidity is being created very fast in most of the world, even if the liquidity pump is slowing in the U.S.

We remain confident that in the long run inflation will return in a big and noticeable way. In the mean time, the weak dollar and rising liquidity available to buy commodities will generally keep commodities prices (gold and oil specifically) strong.

ONE VERY DESIRABLE SIDE EFFECT OF THE WORLD VOLATILITY IN THE LAST FEW MONTHS

We have been able to find excellent companies in energy, gold, and in common stocks in several countries which have become very cheap and are quite attractive for purchase. We will be purchasing them in the coming weeks as the volatility continues. When the markets realize that: 1) the U.S. Federal reserve is quite political, and 2) that the world economy is stronger than the U.S. economy, they will seek out the beneficiaries of these trends.

SUMMARY

The current period is giving us a rest before the next move up in markets we favor which should begin later in the year.

Volatile markets mean good prices for the gold and oil shares and low priced fast growing companies from several countries that we want to buy.

Later this year, maybe in November, the dollar should fall, gold and oil should rise and many beaten down stocks that we are, and will be accumulating, will once again come into favor. It is a global market. The economic growth will be global, and not exclusively U.S. centric. Accordingly, investment opportunities will be global, and not exclusively U.S. centric.

Thanks for listening.