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The Energy Overview
Friday, May 05, 2006

The oil market has been quite volatile as of late as they quickly rose to $75 and then subsequently fell closing today below $70. It seems that gasoline inventories have been drawn down at a much slower pace than many believed that they would, thus resulting in the fall in the futures market. Many are stating that we will see $100 oil before we ever see $30 oil again, and we agree. Even with the recent fall in prices, nearly 10% at this point, we believe that it is just a short term pullback in a bull market. For oil to ever see $30 again we would have to see a huge drop in demand which even if the market did, it is our opinion that at this stage in China and India’s economic growth we would not see that large of a drop because they would simply absorb the excess capacity. The other event that could cause oil prices to fall in a dramatic fashion would be a huge 180 degree shift in American foreign policy. This is not likely to change in our opinion as George W. still has two more years in office and the Middle East is still a hot bed of controversy. Iran will not be attacked in the next year and maybe not for two more. Now if America attacks Iran, oil will shoot up to $100 and if they do not, then Iran will develop their nuclear capabilities and once they do we will see $100 oil. So either way we will see $100 oil because attacking Iran takes their 4 million barrels per day off-line, and if we do not attack them it will make the world that much more of a scarier place. Pretty much we are “damned if we do, damned if we don’t.” However, once oil reaches $100 per barrel the United States has literally trillions of barrels of oil locked up in oil shale out in Colorado and Utah. This price makes producing this oil shale more than economical, and will then help bring down the price, but these are all forward looking statements. We say stick with uranium as it will go up due to the increase in demand for this resource as oil increases as will the other natural energy resources. Uranium should see higher demand growth than the rest of its peers due to the fact that each pound can make more power than any other material. Our point is that a $100 barrel of oil is exponentially more expensive than a $100 pound of uranium due to the fact that the pound of uranium can produce so much more power.

Our previous thoughts on preserving our US Dollars through the investment of foreign uranium producers seem to be paying off quite nicely. We notice that Australia has continued to raise interest rates in an effort to keep their property market in Sydney as well as other parts of the country from experiencing a total implosion. These rate hikes should continue as the mining sector (all commodities for that matter) heats up and more money is thrown in that direction. The Canadian Dollar is doing nicely as well as it has recently gotten to the 9/10 mark of a US Dollar. Both of these currencies are rising against the US $ just as the Fed is raising rates! What is more is that the media is reporting that Bernanke is going to continue to raise rates in the near future as the deficits (either one) continue to rise. This is bearish for the US $, and seems to support our hypothesis stated in previous writings. Also keep in mind that as the US $ is the currency in which the world’s resources are priced, so as it falls the prices for these resources go up. So maybe this is another reason that commodities are up (oil included!!!) and Americans will just have to adjust to being forced to paying more $ which the world seems to be recognizing that maybe there are extremely too many out there. Also important to note with Chinese salaries going up is the definition of inflation…too many dollars chasing too few goods-which is what is happening in the commodities markets with the Chinese and Americans (and to a lesser degree India) competing for the same products. For those sophisticated investors (or maybe it would be best to describe them as COURAGEOUS) maybe shorting bonds would be a decent play, this is not a recommendation, just one of our ideas at this point because we are still very bullish on “The Uranium Movement” and believe that is where we should be allocating our capital.

Canalaska (CVV) recently announced that they were listing on the Frankfurt open market exchange. This makes us think that management is feeling very good about the results coming out, otherwise they would not be adding a new listing (note how close that it is to when they expect to be releasing drill results). Also Canwest (CWPC) our oil sands play which has treated us very well will be taking part in a conference sponsored by Raymond James on May 9. Should the company’s biggest cheerleader show up, OilsandsQuest CEO, show up for this conference there should be some fireworks. Maybe even the announcement of their 2nd phase of drilling, which could potentially add 2 points onto this stock the day of considering that they would be announcing this news at the same time they were talking to many analysts who still have not caught on to this hidden gem in the oil sands because they are on the other side of the border. It seems whoever operates in Saskatchewan, not by the name of Cameco, is neglected by the large US investor base no matter what key industry they are in.

To finish up we would like to focus on our reasons for focusing on the small resource stocks and not focusing on “the undervalued blue chips”. Although we agree that many are greatly run and have also grown their profits handsomely, we believe that these stocks are staying put, relatively (they may go up but inflation should wipe out much of those gains in our opinion). We think that investors paid up so much for these stocks during the Internet Boom that even though they have come down to this level you must also remember that their revenue growth has come down to this level as well. Investors pay up for growth, and if they are looking at a smaller time frame, then their premium will not be as high as if they were looking five years into the future. Many of our friends have asked us about Cisco and Intel as well as General Electric. If you want a dividend, cash intensive business or a maker of a quickly commoditizing business, then one of these stocks might just be for you, if not go for growth. Remember these resource stocks may seem scary, but they have real assets and real demand as the world becomes enlightened and begins to build the future energy sources which will require a steady flow of uranium. Diversification is never a bad thing and we encourage it, however “The Uranium Movement” is what we are currently focusing on and shall continue to focus on until we believe that there are other better investing opportunities out there.

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