FSO Editorials

THE DOLLAR'S INABILITY TO RALLY,
EVEN WITH RATES RISING
Not a Good Sign for the Dollar
by Monty Guild with Tony Danaher
Guild Investment Management, Inc.
June 25, 2007

The continued rise in the currencies and a continued decline in the U.S. dollar even in the months after a big rally in foreign currencies, normally even an extremely unattractive investment gets some rally after a big decline. So far, the U.S. dollar has not had much of a rally.

We have been bearish on the U.S. dollar for years. That has been a correct approach, and we remain bearish on the U.S. dollar for the long term. We are however surprised at how friendless the dollar is these days. We had not expected it to be so obviously friendless at this juncture. Even the worst stock or currency usually rallies up after a decline. Maybe the dollar will, but the time for it to do so is running out.

INDIA GROWING AT ABOUT AS FAST AS CHINA......WE CONTINUE TO LIKE INDIA

India has always had the potential to grow as fast as China, but the poor infrastructure and the government filled with many corrupt civil servants had slowed the growth rate.

Now corporate organizations have gone ahead and built much of their own infrastructure, and Prime Minister Singh has shown himself to be a wise and honest leader. Let us hope that the huge potential that the subcontinent has will be realized in the coming decades. We believe that it will. Like oil and foreign currencies India has provided good profits for us and we see more in the future. We have been bullish on India and remain bullish on India for the long term.

INVESTMENT THEMES REVISITED

Our investment themes remain the same. To refresh your memory they are as follows:

� Growth of China, India and the Asian region creates investment opportunity in these markets.

� Energy demand will continue to grow. Supply is not growing, hence energy prices will rise.

� Non U.S. dollar based currencies will continue to appreciate.

� Demand for global financial services will grow rapidly.

� Industrial metals and precious metals will be needed to further global growth. Supply is stagnant and demand is rising, hence prices will rise.

� Transportation equipment is important for this growth to continue.

They have been the same for some time, and this sameness would be boring except for the fact that all of the themes are producing profits, and profits tend to decrease boredom. So, we are enjoying the lack of boredom from the same themes.

GLOBAL ENERGY DEMAND

Last week, the Wall Street Journal had a good article about some of the arguments that we have been belaboring for several years.

1. Global energy demand is strong even at prices approaching $70 per barrel.

2. Global energy demand is accelerating. It is growing at twice the rate of 2006.

3. Global GDP is expected to grow at about 5% in 2007 and 2008 according to the International Monetary Fund. So, of course energy demand will grow by about 2% a year. How do you grow your economy without growing energy consumption? It is hard to do. 2% increases in energy demand per annum is not an outrageous amount. However, 2% increases in energy demand is a problem.

GLOBAL ENERGY SUPPLY

Many, many people have now joined us in our once controversial thesis that new energy will be found, but that THE COST OF THE NEW ENERGY WILL BE MUCH HIGHER PER BARREL THAN HAS BEEN THE CASE HISTORICALLY.

People used to think we could find a lot of new energy as cheaply as we have historically. New energy sources are being found, but they are proving to be harder to access and more expensive to produce.

Sure, we can make oil from coal, we can make gasoline from ethanol, we can develop the oil sands in northern Canada, and we can drill for oil deep under the sea all over the globe. These are some relatively recent approaches for solving the world's oil and gasoline needs.

All of these approaches will produce oil but at what price? The answer: a lot higher than the current price of $70 dollars a barrel.

Several years ago, we predicted that oil would hit $50 per barrel in 2005. People scoffed at that ludicrous notion. It turned out that we were too conservative; oil exceeded $50 per barrel in 2004. Then we predicted that oil would go to $100 per barrel by 2008.........We continue to believe that that prediction may well turn out to be correct.

ENERGY SUMMARY

Oil started 2002 at about $20 a barrel. Then, in less than three years it went to over $50 per barrel. This created a psychological shock for governments and consumers and they began to conserve. Gradually, they got used to $50 plus oil and began to consume more. At the same time, the world economy was accelerating and creating more demand for energy. Now at close to $70 per barrel demand is increasing at above 2% per year and supply is increasing by less. LET�S GET USED TO HIGHER OIL PRICES.....THEY�RE HERE TO STAY.

DEMAND FOR SEISMIC STUDIES THAT ARE USED TO DETERMINE THE AVAILABILITY OF HYDROCARBONS WILL GROW FAST FOR ANOTHER DECADE

In the 1980's, as a reaction to the rapid increases in energy prices during the 1970's, major oil companies spent a lot of money on seismic studies. This is a system of using technology to estimate and evaluate the pools of energy beneath the Earth�s surface to determine which pools of energy could be produced economically. Seismic studies helped evaluate the finding and drilling costs and minimized the cost associated with finding failed wells or dry holes.

After oil prices stopped rising, major oil companies continued to spend on seismic for a few years, but they stopped when the oil price began to fall. It has been about twenty five years since this major spending on gathering seismic data ended. Since then the seismic industry has improved their technology, and they now have very good product generically known as 3D seismic. Today, there is a huge pent up demand caused by the lack of data gathered in the last two decades.

Main Points

� Offshore, not much seismic has been shot in quite a while.

� Most new oil and gas fields of major size will be found offshore.

� Offshore wells, especially in water over 300 feet, are very expensive to drill.

� Thus, the need for seismic is great. The industry is ready to move into a new growth phase for both onshore and offshore wells.

We have taken a good look at the seismic industry, especially the offshore seismic contractors, and equipment suppliers. We will be gradually adding some of these stocks to our portfolios with a view that their earnings will grow steadily for years to come.

© 2007 Monty Guild & Tony Danaher

Contact Information

Guild Investment Management, Inc.
guild investment management inc.
12400 Wilshire Blvd. Suite 1080 Los Angeles, CA 90025
(310) 826-8600 Tel (310) 826-8611 Fax
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