Model Portfolio timbo56:SSOF1

Well, it happens sometimes. There are the long term trends, and then there are occasionally violent pullbacks from those long term trends. We are now in the midst of a violent short term pull back. I remain confident that the long term trends will reassert themselves. These pullbacks are very difficult to predict, and one must generally just try to ride them out, although it is not easy, and I do worry that my investors may be getting quite impatient and distressed.

But let us take a look at what the long term trends are, and what the implications of those long term trends are. Here are the really important trends that I see, over the next 10 years:

1. Economic growth in China, India, Vietnam, Brazil and Eastern Europe.
2. Population growth in Saudi Arabia and many other oil exporting countries.
3. Gradual topping out of the world's petroleum production.
4. Reduction of U.S. trade deficit.

None of these long term trends has changed. There is a fifth trend that has changed dramatically in the last 2 years and that is a gradual decline in U.S. production of natural gas. We have now figured out how to harvest natural gas from shale deposits far more efficiently than before. This has made a huge difference to our natural gas current production and future prognosis. Could the same thing happen with petroleum? It seems unlikely.

Because the long term trends have not changed, I'm not changing my investment philosophy. I know it has been difficult. But these short term violent pull backs are very unpredictable. And they run along an unpredictable course.

I also feel that the demand for natural gas will increase, as it is substituted for expensive petroleum in a number of different areas. Also, at the current prices I would certainly not presume that production will increase. Harvesting natural gas from shale is expensive, and these prices will not support the sort of strong and dedicated effort that has caused production to rise dramatically. The rate of increase from the Barnett Shale, underneath Ft. Worth Texas, will slow. Other shales are not as good sources as the Barnett Shale is. And conventional gas production is declining. So I think the low prices will effect both the supply side and the demand side of the natural gas equation.

With respect to petroleum, give me a break. Inventories are still quite low, and they have fallen over the last year. At these prices demand will return, not only in the US, but in the areas where demand has been growing so quickly. If inventories were above the levels of last year I could see the price decline that we have seen. I don't know what tomorrow's inventory readings will show, but it just seems that there is not really that much petroleum and product in storage and this will over time, tend to support prices.

And with gold, the growing wealth of China is going to eventually cause prices to rise. We are starting the buildup to Chinese Lunar New Year. Eventually that will have an effect. I hope it is soon.

Investors' perception of the steel industry will never cease to amaze me. The level of negativity is just astounding. Nobody believes in steel. But steel production is necessary to support the production of fossil fuels and to support an American industrial resurgence that must happen if we are to reduce the trade deficit that must be reduced.

So call me stubborn, and I do regret the losses in this very, very difficult quarter. But the long term trends are on our side, and they are powerful and will make a difference.

Tim