However, at times periods of flux can prove challenging. The crystal ball is not cloudy but the market is excellent at teaching us that there are always reasons to be humble. As the ancients said, “pride cometh before the fall”.

The November elections approach in the U.S. Part of an investment manager’s job is to see that the possible outcomes of any major change like an election, new legislation, political risks and rewards are well thought out.

CASE 1:

What will happen is the Democrats make a moderately strong showing, and they win the House of Representatives but lose their bid to control the Senate?

In this case, the Democrats will have power to block but not really to create. This is the outcome most desired by Wall Street. Wall Street likes gridlock, and this would argue for the greatest amount of gridlock. The negative: the Democrats may still institute proceeding for impeachment of President Bush. This would not be viewed favorably by the U.S. stock market and would be negative for the U.S. dollar.

CASE 2:

What if the Democrats win both the House and the Senate by a substantial margin?

This will embolden their behavior. As a result, they will:

1. Bring impeachment proceedings against President Bush.

2. Try to create new legislation and dare the President to veto it.

1. We can expect more leniency toward Fannie Mae and Freddie Mac as cheap and available loans for housing will be high on the Democratic agenda.

2. Both Fannie Mae and Freddie Mac have shown themselves to be adroit politically. In my opinion, however, they have been irresponsible in their creation, management and accounting of derivatives.

3. We can expect research stocks connected with high tech gene mapping to do well as more money goes to the National Institutes of Health.

4. We can expect natural gas companies to get funding, and coal companies could be penalized as there will be lobbying for cleaner air.

We can expect a focus on alternative energy sources and new taxes on U.S. oil companies. This is bearish for U.S. oil stocks and bullish for Canadian and other foreign oil stocks.

1 YEAR OIL SERVICE HOLDERS TRUST CHART

Government money will be distributed to many alternative energy companies. I would not be surprised to see funding go to politically connected and often impractical energy solutions. Hopefully, some funding will find its way to some practical suggestions for energy independence. One thing is for sure. There will be a land grab for the money. And as always, much of it will go to politically powerful, but economically wasteful projects.

INDUSTRIES THAT WILL BE HURT BY A DEMOCRATIC VICTORY:

1. Drug companies, healthcare providers and some in the biotech industry. (Democrats and retirees want lower drug prices)

2. Tobacco companies.

3. Big companies in general. They will be targets of the ire of labor organizers connected to the Democrats.

1. A weaker dollar created by conflict in the U.S. political arena.

2. Investment capital will shift away from a country with more turmoil (the U.S.) towards countries with higher growth visibility.

3. We expect a continued decline in status for the U.S. over the worsening and increasingly expensive problems in Iraq and elsewhere in the world. Non-U.S. companies may benefit.

MONEY IS LEAVING THE MID-EAST AND RUSSIA IN FAVOR OF MORE INVESTING OUTIDE OF THESE PROSPEROUS COUNTRIES

Recent data shows that Middle Eastern oil money is heading to safer, more transparent and higher earning countries. The money is flowing fast to India, Europe and to stocks in global stock markets. It is increasingly apparent that Middle Eastern people are sending a very large percentage of their new wealth and some of their old wealth abroad. I believe many in the region are very pessimistic about the future of the current Pro-Western governments of Iraq, Saudi Arabia, Kuwait and other oil rich nations in the region.

I can understand their concern. If I was a wealthy Middle Easterner, I would definitely want to diversify my assets out of a highly vulnerable area. I would send my money to the stable and growing areas of the world. The stable areas are the U.S., Europe, and Japan.

The growing areas are India, China, Brazil and parts of Latin America.

I would not be bold enough to send money to Russia, even though they are growing, as I think they are reverting to the old model of Oligarchic power and political control.

OPEC countries in the Mid-East must keep oil prices high. The governments are buying the loyalty of their subjects with generous transfer payments. They need high oil prices to keep making the payments, as their efforts to expand production have not worked.

The pessimists say that in 20 years the entire Mid-East region may be ruled by fundamentalist rulers. Even if this does not happen, why not diversify much of your wealth abroad now, and return it to your home if things get better and more stable at a later date.

Russian money is finding its way outside of the country. It is mainly heading for Europe.

Headline from the New York Times October 20, 2006 front page:

“Foreign Groups in Russia Must Suspend Activities.” The article goes on to say, “Scores of foreign private organizations, including some that have been critical of the Kremlin, like Human Rights Watch and Amnesty International, were forced to cease their operations in Russia while the government considered whether to register them under a new law that has received sharp international criticism.”

SUMMARY

Money continues to be made in most world stock markets which have done very well for the last several weeks. We believe that this rally in most major markets will continue through the end of 2006.

Our strategy continues to be to hold value stocks in the U.S., Europe, India and China. These stocks are solid growing companies selling at valuations below those of their sector, or of the market as a whole.

We continue to believe that energy stocks, which have risen in the last few weeks, will continue to rise as the winter weather in the Northern Hemisphere sets in during the November to February time frame.

As often happens in September, precious metals stocks have begun to rally and we continue to believe that the rally will carry gold higher in coming weeks.