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by Joseph Dancy, LSGI Advisors, Inc.

Adjunct Professor, SMU School of Law
September 8, 2005

If you examine the advanced economies in the world most have one thing in common: a functioning stock market that allocates capital to companies in attractive business sectors. Unfortunately, the stock markets are not always as efficient as they should be. For example, as the demand for energy and basic materials rose impressively over the last decade with the globalization of the economy, the markets did not look especially favorably on investments in these areas compared to the technology sector.

We have had more than a decade of under-investment in the energy and basic material sectors, and the demand growth has begun to outstrip the ability of the sector to supply consumer's needs. When this occurs prices naturally trend upward.

Over the next decade we think massive amounts of capital will be needed in the energy and basic materials sectors as the world attempts to increase global productive capacity to meet the needs of rapidly growing countries such as China and India � and the millions of citizens that are attempting to attain a �middle-class� lifestyle.

We think Hurricane Katrina was the catalyst that will ignite a long term interest in the energy sector. Many investors who here-to-date have expected energy prices to fall back to levels seen in the 1990's will be surprised at the durability of energy price levels. If we are correct in our analysis we are in the second inning of a nine inning game � and we expect the interest in the energy sector to continue to expand in the investment community.

Supply and demand issues for crude oil, natural gas, and coal should keep prices firm for at least a year - most likely much longer. The following developments last month reinforce our bullish outlook:

Our portfolio remains over-weighted in energy related stocks. We maintain our positions � and added to several of them last month. Our thinking from an investment manager standpoint might be explained by the following observations:

© 2005 Joseph Dancy

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