Markets' Reactions
Friday, January 12, 2007

Everything happens for a reason, and although at first glance you may not understand as to the reason, or reasoning behind the action, there is always a reason. “Every action has an inversely related action,” is a favorite among high school science teachers, but this past night we were introduced to a new one. “When it comes to commodity, currency, and equity markets, the first bottom is never the last,” was the statement last night from our mentor, Mark A. Smith.

He was using this thought to explain that he believes that oil has not bottomed, but still has further to go. His argument has logic as he pointed out that oil has fallen below $60 and then $55 (which we must point out was everyone's pick for oil's support level...even OPEC's which could be a further indicator of this commodity's potential to fall further) and then even further to $52! So where is it going?

Well he seems to believe that oil is going below $50 and will settle at or near the $48 level. Simply put he believes that oil has fallen this far based on traders' beliefs that oil could not fall below $55, so they held waiting for a jump. That jump never came and we saw many people running for the exits as oil fell over $2 in one day (some of this was nervous selling, but we suspect much of it was due to margin call selling). In our experience, many positions do not see a bottom or top at nice round numbers such as 40 or 50, but rather at numbers like 41 or heck even 48.

Personally I can buy that oil is going to $48, because I believe that the price of oil HAS to go lower in order to whip the suppliers in-line. OPEC members have been cheating on their quotas (the ones that actually have the extra capacity to do so) and oversupplying the world's markets. Last year's surge in oil prices were not a result of demand surpassing supply, but rather the world's supply chain being drained and then forced to be quickly refilled as a result of the Hurricanes in the US Gulf. That is all, and prices will not exceed $70 any time soon, and most likely not in 2007. Should OPEC further ignore this supply/demand situation, oil could have much further south to head before it perks up again, however we hope that this is not the case.

So how is an oil investor to play this market? Well if you cannot grow your business through price increases in the commodity, you must increase it through your amount supplied. In amazing, and unpredictable super-spikes, anyone can make money...LOTS OF MONEY THAT IS (even if your output is decreasing, it is possible to increase profits so long as your increases in the product you sell rises faster than the decline in your production). However, when those markets begin to slow, or even turn negative, you must begin to invest in the true growth companies...ones adding to their output. We like BQI and LUPE.ST as our two favorite oil plays, although only one is a true oil play and that would be Lundin. Oilsands Quest is our oil sands play, which we admittedly like much more than Lundin. The reasoning behind this is due to Lundin's exposure to Sudan and America's seemingly increasing military activeness on the African continent. It is no secret that America is not happy with Sudan, and it can be argued that the American populace is even unhappier with the way Sudan has handled the Darfur situation. Our opinion is that it is a Sudanese situation, that must be dealt with between the opposing sides in Sudan. Although it is Islamic militiamen with supposedly no ties to the Sudan government, it is the current Sudanese government that shall pay the price if America decides to get involved. We find it quite strange we should ask a third world country to be able to control people within their borders, as well as those sneaking within their borders (who are the men causing these atrocities) when we cannot control our very own borders to the South. If the government was overthrown by the US, then big problems could follow for Lundin as their prized property is in Sudan and protected by Federal troops.

Both stocks possess a lot of risk, however we believe both have great management teams as well as great properties. Lundin shall come out of this downturn and move higher, but the one wild card is America's Democratic Party...Darfur is the type of situation the party loves to dedicate troops and military energy to, however the odds of this at this moment are very slim as the Democrats simply want to keep troops as close to home as possible and the American people would not tolerate overthrowing another regime at the moment.

BQI will be the highest rising oil/oil sands stock this year and we see the possibility of it rising all the way to $20. That is the best case scenario, but at $12 we still think that it can be one of the best, if not the best performer in this sector. At this point the stock has formed the base needed to run, and we are seeing that in its recent activity (notice that the volatility has increased and larger jumps and falls are becoming the norm). Take note also that the stock seems to be able to rise as oil, the commodity in which it hopes to someday sell, has fallen dramatically. Over this time oil has fallen by over $10 and BQI has risen nearly 10% (our period begins on 12/14/06). Once we bottom out with the price of oil, it will only be another catalyst in the rise of BQI's share price. BQI is up over 40% (up $1.50 from $3.50 on October 12, 2006 to around $5 now). These are only the early gains for those who were brave enough to purchase as the stock kept falling to lower and lower prices, but many shall reap the rewards for doing so.

We feel the need to point out that terrorism seems to be here for good. Many have realized, as the early American Revolutionaries did, that the only way to beat a world superpower is to fight it on a scale that it cannot compete on. This is a rude awakening for America as another Embassy was bombed today (early this morning) in what is being attributed as an act of terrorism. America is going to have to wake up and realize that they cannot protect each and every interest they have abroad and then begin an era where they place strategic assets closer to home or in friendly, more civilized nations, and that will be potentially a changing moment in time. Until then, we shall continue to invest in companies that will enable America to stand the test of terrorism (not time because all 'Golden Eras' eventually come to an end) before the masses realize this.

Oilsands Quest is one such company, as it will provide oil from one of the world's most stable countries to America. A premium will eventually be paid for these assets by either the Americans, Chinese, or Indians due to the changing geopolitical climate in our world today. What price we do not know, but if 2007 becomes a terror filled year in the Middle East, Africa, and Asia Minor, then these assets could be worth dramatically more when BQI begins to take on JV partners in the latter half of 2007. World events could force the large multinational oil companies into the bidding which could force the final price tag up dramatically.

As we close, we would like to point out that although there is no plan for how the JV projects shall be broken down, we believe that they will be there. The bitumen has not yet totally been discovered on a scale to supply the proposed projects, but we absolutely believe that the resource is there. We fully expect that this season's drilling results will mirror those of the past year's, and the stock price shall appreciate further than previously seen. To take from our mentor's words, and to add our own twist to it, “the first top in Oilsands Quest shares shall not be the last” for this year, so please hold through the first spike (although no on ever lost money by taking profits). As we have outlined in the above article, BQI will do its part to rise, which will be coupled with the rise in oil from its eventual lows and the rise in value of its oil sands leases due to geopolitical tensions throughout the world. Our price target is $10, even if oil falls to as low as $32 we shall stand by it, but if the stars align the stock could leap to $20 when all is said and done within this next year.