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FEBRUARY 27, 2007

FEBRUARY 27, 2007

Beginning in April or May, after it is realized that there is consistently increasing demand and production is not going to be as big as predicted, oil will rise. Investors are finally becoming aware that the non OPEC oil producers were telling, what Jim Sinclair refers to as, “whoppers” about the amount oil they could produce.

Oil stocks have been declining for several months, and the trend appears to be changing for the better companies. Further, after the seasonal period of low demand, while consumers shift from the winter heating season to the summer cooling season, we expect a demand increase and a rise in the price of oil.

CHINA AND THEIR SPARE $ 350 BILLION

Cheng Swei is the vice chairman of China’s National People’s Congress. On March 8 2007, he became another of the Chinese financial elite to state that he agreed with the International Monetary Fund that China only needs to keep “at the ready” about $650 million of its over $1 trillion in reserves. These reserves have grown at the rate of about $200 billion per year and will continue to grow at least that fast in our opinion.

Mr. Cheng believes that the country should use the remaining $350 plus billion, plus the supplemental $200 billion each year more efficiently. Today, March 20th, Zhou Xiaochuan, the head of China’s central bank said that the Chinese would stop accumulating foreign exchange reserves; another confirmation of the same message.

What does that mean? Let’s look at the example of the respected Singapore Investment Corp. This is the organization that manages Singapore’s foreign exchange in stocks, bonds and property worldwide. Singapore has shown themselves to be a prudent, honest and solidly managed country. In contrast, China’s ambition, corruption, and favoritism are well known globally.

HOW WILL CHINA SPEND IT? WILL THE FUND BE A FORCE TO CREATE ASSET BUBBLES?

It has not been disclosed how China will invest their hoard but we can assume the following areas will get a good sum of the massive $350 billion. By the way, $350 billion could swamp most investment markets with its pure size. Even a few billion is more than the market capitalization of the entire stock markets for many countries. This fund could have big effects and yes, could create big bubbles.

OUR GUESS WHERE IT WILL BE INVESTED

1. To obtain raw materials. The fund will invest directly in assets [mines, oil fields etc], and in companies in the developing world which can supply raw materials to allow China to continue their rapid growth. We believe Africa and South America will be prime areas of focus. We are looking at public mining companies with most of their assets in Africa that have world class deposits for base and precious metals.
2. To gain access to new commercial technologies. The funds could go into the stocks of companies who can supply technology and services to further the growth of the Chinese economic machine.
3. To gain access to new military technologies. The funds could be invested in companies who have technologies and services or materials which will further China’s military might.
4. To gain political influence. The funds could go to countries and companies where political benefit to China will ensue. Political benefit will include geographic, ideological and number of people benefiting from China’s largess (for example military bases near important geographic locations or near major resources).

CHINA WILL USE THIS MONEY AS ANOTHER LEVER OF POWER AND TO ESTABLISH THEMSELVES AS THE MAJOR WORLD POWER IN COMING DECADES

In other words, the new Chinese fund will function like a development bank; handing out money in exchange for economic benefits, political alliances and military power.

This is the exact same thing that the British and Americans each did in their days as the world’s most dominant nation. This is another of the many reasons why China will become the world’s primary economic and military power in coming decades. China’s ascent to power and influence is something that we have discussed in these memos many times over the last few years.

THE YEN CARRY TRADE….STILL SCARING WORLD STOCK MARKETS

The value of the Yen to the US dollar continues to fluctuate, with the yen growing gradually stronger. The U.S. stock market seems to be trading minute for minute, in lock step with the yen, and that is why it has been so volatile. The U.S. stock market is rallying when the yen falls, and declining when the yen rises in price against the dollar. The same thing happened last year when t he yen rallied from 119 to 109 yen per dollar. The U.S. market, the Chinese, the Indian and many other world markets took it on the chin and fell. A few weeks later, they began to rally strongly when they realized that the yen rally was temporary and the carry trade had not been disturbed.

We believe the same effect will take place this year and we will use market declines as buying opportunities and we have been repeatedly saying.

Fear still dominates, and should continue to do so for a few more weeks until the yen carry trade rumor dies and people realize once again, that the world will remain awash in liquidity. With liquidity everywhere, owning good stocks in growing economies and owning gold is a very wise course of action.

SUMMARY

As China will be buying less foreign currencies and more assets, this will be bad for the dollar and low yielding currencies like the Euro, but better for the high yielding currencies like the British Pound.

China will buy more resources directly. This will be good for African economies, as more of Africa’s underutilized resources will be developed. Within the developed economies, China will continue to buy companies and thus acquire assets of mining and oil companies worldwide.

OUR STRATEGY

We continue to like alternative energy and energy in locations with high demand like Asia. We continue to believe that India, China and Singapore offer good growth. Companies in aerospace and rail transportation can do well, as can base metals and precious metals. Precious metals benefit from a weaker dollar and a wealth effect in the emerging world where the ownership of precious metals is a part of most every portfolio.

Within the developed countries transportation, water resources and financial services are very attractive industries. Take a look at investment banking. The major investment banks have six business areas that are all booming simultaneously; mergers and acquisitions, wealth management, investment banking, trading, lending and transaction clearing. Simultaneously, the investment banks are expanding into Europe and Asia where they are developing new customers and investment products.

The pullback we have seen in the past few weeks was expected and we have been building a buy list to use when good values to develop during the decline.

Best wishes to you all.