January 30, 2004

January 30, 2004

Hey Gang, to no surprise there is a decline taking place in foreign currencies, metals and stock prices.

In our opinion, with the Democratic primary season upon us, the Republicans will be under attack. We expect the Republicans will be forced to defend the huge budget deficits they are running, and other issues impacting the country. From this political gamesmanship could come a lot of negative news. This could lead to a volatile stock market all year, but especially over the next several weeks.

We expect the stock market to decline in the first few months of the year as people come to the conclusion that the economy is growing, and that this growth will eventually lead to higher interest rates. We see many stocks as fully priced, and we will only be buying those which we believe have excellent growth prospects and are selling at a low valuations. We intend to use this period of market decline to add to good quality companies.

In taking a look at the current rise in the dollar and the decline in foreign currencies, the precious metals and the base metals, some observers are beginning to write that the dollar may have seen its lows and begun a major reversal. While we do not deny that anything is possible, we do not believe that long-term dollar strength is the likely outcome. May we draw your attention to the fact that in the middle of 2003, the major currencies (for purposes of this example, we will use the Euro) declined for nearly three months and fell by over 9% versus the dollar. According to the charts, the correction began in mid June and ended in early September. After this two and a half month decline, the Euro had fallen from over 1.19 in early June to under 1.08.

Let us examine what fundamental news led to this mid-year dollar rally. Did the budget, trade or current accounts deficits get any smaller? Did the U.S. decide to cut future expenditures in any major area of its spending? Did U.S. interest rates rise while other countries experience constant or declining rates, thus making US paper more attractive versus its peers on a yield basis? The answer to all these questions is, no.

The dollar rallied because it had fallen quite a lot and was technically oversold and ready for a rise. I make this point to explain that, there are no one way streets in the markets. We believe that in the short run, investments can move up and down, but in the intermediate and longer run, fundamentals usually determine the direction.

After the dollar rally ended in early September 2003, another decline for the dollar ensued. This decline for the dollar ran from September 2003 to early January 2004. This decline took the Euro from just under 1.08 to nearly 1.29; a rise in the value of the Euro of nearly 20%.

Now in January 2004, we are having another rally in the dollar. Investment vehicles which usually move counter to the dollar have started to pull back. The vehicles I speak of are the major foreign currencies, the precious metals, and the base metals. We do not find this strange or unexpected. Just as it was last year, we do not see any fundamental change in the US balance of trade, payments or in the U.S. current account. US interest rates are still the same and foreign interest rates have not declined. In other words, there appears to be no fundamental reason for this correction.

It is the nature of markets to fluctuate and the wise investor or trader uses this to their advantage, buying fundamentally strong industries and companies when they are out of favor and taking profits when they rise. We, at Guild Investment Management, Inc. intend to do the same.

We are fortunate to be heading into this correction holding high cash balances that we will be investing as good values arise.