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THE DOLLAR’S INABILITY TO RALLY, EVEN WITH RATES RISING- NOT A GOOD SIGN FOR THE DOLLAR

THE DOLLAR’S INABILITY TO RALLY, EVEN WITH RATES RISING- NOT A GOOD SIGN FOR THE DOLLAR

A lot of recent news is about economic events.

If you live outside the U.S. the news is about the fast economic growth your region and country are enjoying, and about the good economic times the public is experiencing. Asia is growing very rapidly.  Europe, Latin America, Australia and Canada are growing nicely.  Even Japan is picking up after a very long slow period.

Only the U.S. economy has been slowing.  If you live in the U.S. the news is about the subprime crisis or housing demand falling or other potentially bad economic happenings. We agree that parts of the U.S. economy have problems; home building, retail, restaurants and a few other sectors.  However, many parts of the U.S. economy are booming; commodities, energy, capital goods, farming, transportation products and basic materials among others.

WORLD ECONOMY….GROWING VERY FAST

I could cite a lot of statistics but suffice it to say Asia is booming.  Europe is growing and so are Latin America, Australia and Canada. Of the major countries only the U.S. is sluggish.

The world economy is growing and growing very fast.  In our opinion it is not time to fear.  It is time to "seize the day", "make hay when the sun shines" and all of those trite but true sayings that have persisted because they correctly describe an era of opportunity.  If there is a cloud on the horizon it is the potential for inflation, not the problem of slowing growth.

THE CONVENTIONAL WISDOM

The conventional wisdom is that the U.S. will be unattractive for investment during the summer due to rising interest rates, the subprime mortgage crisis and the fact that the stocks have risen enough in the last few years.  Many in the U.S. think that if the U.S. market is unattractive, then the world must be unattractive.

NOTHING COULD BE FARTHER FROM THE TRUTH
We do not watch markets per se but rather we watch economies and the growth of sectors of the world and national economies.

It is clear that globally, many economic sectors are in stunningly good shape. Basic materials, energy, industrial products, farm products, commodities, transportation products and defense products are in demand worldwide.

There are many opportunities in the countries that are growing rapidly throughout Asia, Australia, Canada and Eastern Europe.

CURRENCIES

The dollar is going to start to decline in the not too distant future and we continue to favor other currencies than the U.S. dollar.
ENERGY
A FEW OBVIOUS POINTS ON ENERGY
1. OIL WILL NEVER BE CHEAP AGAIN.
2. GLOBAL DEMAND increases about 2% per year.  OPEC SUPPLY falls about 1% per year.  Non OPEC suppliers make up the difference.  The question is how much do non OPEC suppliers have and how much are they willing to sell to others?  We believe they will hoard more and more of their production, further exacerbating the oil price increase.
3. ETHANOL WILL NOT HELP IN A BIG WAY.
Ethanol is a political carrot thrown to the farm lobby.  Ethanol will increase farmers’ income by transferring money from all the other citizens to the farmers’ pockets.  As we have written in the past, it will be ineffectual and very costly on several levels.  For ethanol to have any impact on oil demand and help lower energy prices, the amount of corn and other materials required for cellulosic production would cause food prices to rise.
4. SOLAR AND WIND WILL PROVIDE SOME ENERGY SUPPLY.  However, believe it or not, most of our power when the oil runs out will come from nuclear and coal.
5.  There is the possibility that solar panels can be made more effective allowing solar to play a bigger role.

OIL AT $100

1. We still believe that oil will go to $100 over time.  If we get some explosion in the Middle East or an expansion of the continued problems in Nigeria, it could be at $100 in 2008.
2. Today, oil is harder to find, demand is increasing and supply is diminishing; thus, the price is rising.

OIL SERVICE COMPANIES

We favor those companies who are OUTSIDE THE U.S. AND IN DEEP WATER, where the biggest demand will be in coming years.
We own deep water drillers, floating production, storage and offloading companies who operate offshore facilities and we own high tech seismic companies serving the deep water market.

Recent declines in the price of some oil service companies and deep drillers are a good buying opportunity in our opinion.

METALS

Fear has spread that a slower U.S. economy will cause demand for gold and base metals to diminish.
We could not disagree more.  The dominant variable impacting the price of gold and base metals is global economic growth.  Gold goes up when the global economy grows because more people get wealthy and use gold in jewelry and for hoarding (to protect themselves from the insecurity presented by certain government behaviors).  Confiscation of assets, uncertain economic outlook and weak currencies are among the many potential government created problems.
IN OUR OPINION….OPPORTUNITIES ABOUND

We see many opportunities in the areas of our focus.  We will use all declines as buying opportunities, and we believe that the next few years will continue to provide good profits in these areas just as the last few years have.

We are concerned about inflation over the longer term. Historically, inflation is good for metals, energy and also for foreign nations that have low production costs and can pass along price increases.

Therefore, most of our favorites benefit today and will continue to benefit if inflation arises.


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