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OIL PRICES FALL

OIL PRICES FALL

We hope that the New Year finds you healthy and happy. We outlined our investment strategy for 2007 in our last memo. Since then a few important events have taken place, and although our strategy has not changed, we wanted to share with you our opinions about the longer term impact of these events on the global markets.

OIL PRICES FALL

As we mentioned in our last memo, we are not terribly bearish on oil prices and although oil stocks may be ok in 2007 we see more attractive places to put money. Clearly, the markets have agreed. We have seen a decline in energy shares in the last two weeks.

Global demand for oil remains strong even though we have seen a very big decline in the war premium. In our opinion, the premium that the markets placed on the price of oil due to the threat of a major war or disruption of supply in the Mid East was about $20 per barrel throughout 2006.

Clearly, the markets believe that the probability of a conflict with Iran has been lessened by President Bush’s political unpopularity, and the Democratic Party’s control of the U.S. Congress. Thus, the risk premium has declined from about $20 per barrel in 2006 to less than $10 per barrel today.

SUPPLY OF ENERGY

Although the decline in the price of oil is probably overdone in the near term, we are noticing some substantial changes in the supply side for energy. For the last several years, there has been a global increase in energy exploration. For example, Russia, which is not a member of OPEC, has greatly increased production from its vast energy resources.

While global demand for energy is high, there is also the continuing trend towards substitution as there are increasing alternative energy options for oil. This has been complemented by the fact that high prices have engendered some conservation.

LOWER ENERGY PRICES ARE GOOD FOR GLOBAL ECONOMIC GROWTH

Most economists agree that if oil prices hold in the $50 to $60 range in 2007, the world economy will be benefited. A price in this range would cause inflation to moderate and energy importing economies to grow faster than planned. Simultaneously, energy based economies would still enjoy substantial prosperity. At these levels, global oil prices would be high enough to engender continued substitution and continued exploration simultaneously.

The net of these events would be positive and would allow long-term demand increases and a good supply response to coexist with fewer dislocations and price spikes in the future.

Of course, we can expect to see big price increases in the case of a major military or political event worldwide. An ideal situation would be to have oil to average between $50 and $60 in 2007, with no collapse, disruption or fear driven price spike.

AREAS OF OPPORTUNITY

Clearly, a moderating energy price background is bullish for equities in all energy consuming nations as it diminishes inflationary pressures. For this reason, we do not see a rise in the inflation rate in 2007 and thus, we see the likelihood of a flat or declining interest rate environment in the developed and much of the developing world. This is good for the currencies of nations who import energy, while it is slightly negative for the currencies of countries which export energy.

ASIAN ECONOMIES EXPORT TO THE ENTIRE WORLD

We expect continued strong economic growth for the world in 2007. Contrary to popular myth, the non-Japanese Asian countries export more to China, and almost the same amount to Europe as they do to the U.S. Further, Japan and the rest of the world are growing importers of Asian goods. Today only 16.5 % of Asian (ex-Japan) exports are to the U.S.

We all know that many Asian countries are growing fast. What we also know is that their stock markets are volatile. In our opinion, the best strategy is to wait for a good correction in China, India, Japan and elsewhere before adding to positions. We have a long list of companies that qualify as fast-growing and also sell at reasonable prices that we plan to buy when the corrections occur.

Less inflation will be good for many companies in the developed world as well, and will be good for currencies of oil importing regions like Europe and the U.K.

THE U.S. CONTINUES TO ACT IN A FISCALLY IRRESPONSIBLE MANNER

The growth of the triple deficits (balance of payments, balance of trade, and budget) continues unabated. This is not good for the future of the U.S. currency. This is good for foreign currencies and precious metals which act as currency when governments ignore their responsibilities.

IN SPITE OF THIS CONCERN, WE REMAIN OPTOMISTIC ABOUT ECONOMIC GROWTH WORLDWIDE

We remain optimistic about opportunities in U.S. stocks, European stocks and Asian stocks. We are in a once in two hundred year cycle of nation building and economic expansion for the world. The last time so much wealth was created was during the industrial revolution of Europe and North America. Today, we are in a new industrial revolution for Asia and other parts of the developing world.

We remain optimistic about the prospects for a long cycle of growth in the world economy. We are probably about 5 years into a growth cycle which may continue for more than 20 years, and possibly for much longer. During this cycle there will be ups and downs, but the long-term trend will be upward. The world of 2050 will be one in which a great deal of global economic progress will have been made, if the world can keep a few basic principles in mind.

Now that we have put you all to sleep with this memo, we will close this memo and discuss those principles in another note.

Thanks for listening and warm wishes for a healthy happy and prosperous 2007.