“For mere vengeance I would do nothing. This nation is too great to look for mere revenge. But for the security of the future, I would do everything.”

– James Abram Garfield

Given the three dollar per gallon gas prices we saw earlier this year, who would have thought we would ever see a gallon of gas under two dollars? It was only two months ago that the price of oil was over seventy-eight dollars a barrel. In a little more than sixty days, the price of oil is down more than twenty percent. There are some reasons for this including: Crude stock inventories at their highest level in fourteen years, weaker demand growth and the lack of a major hurricane. The biggest reason for the drop is Chevron’s massive oil find five miles deep in the Gulf of Mexico. This will eventually add fifteen billion barrels of oil to the global supply. Just imagine what would happen to the price of oil if Congress allowed drilling in Anwar and off the East coast of Florida (Cuba, with the help of China, is planning on drilling for some of this oil anyway). Not only would this help our economy, but it would also strike a major blow to terrorism.

In the last two weeks we have seen the two major villains of terrorism and socialism come to the United Nations to speak, namely, “The Joker” – Hugo Chavez – and “The Riddler” – Mahmoud Ahmadinejad. These two leaders are using their respective countries’ vast oil supplies to obtain power for themselves, not to help their own economies or people. Below are some interesting economic facts about these countries as reported by “The World Fact Book”:

The Joker is using Venezuela’s resources to help destabilize South America by giving oil to Cuba, financially supporting both Bolivia’s new socialist leader Evo Morales and Mexico’s opposition party and selling cheap gas to poor New York City residents. The Riddler is using Iran’s oil to financially support Hezbollah, insurgent groups in Iraq and his own nuclear vision to hasten the return of the 12th Imam. Both countries get more than 50% of their revenue from oil. What a vicious circle – use your oil to create havoc around the world which increases the price of oil which in turn gives you more money to create more havoc around the world. All this does is make these individuals more powerful around the globe!

The best way to fight these thugs is by causing strife within their country, not with military power. Both leaders are growing in world power while destroying their own economies and people. The recent drop in oil prices means that these leaders will see a drop in revenue of at least ten percent (more than fifty percent of these two countries revenue is generated by oil sales multiplied by twenty percent drop in oil prices). This will force them to have to make a choice between reducing their own funding for their global ambitions or reducing what money is used for their own populous. Our guess is that their people will suffer rather than their quest for power. If oil prices drop more, this will cause more suffering for the citizens of these countries. This may give us the best shot in ridding the world of these two tyrants by having their own people rise up against them.

So how do we start taking away the money they are using to destabilize the world? Answer: find other energy sources. Obviously, consuming less oil and being wise about our use of energy is a first step. However, we don’t want to cripple our economy in the process and this may not have an immediate impact. The Chevron oil find does. Allowing drilling in Anwar and off the East coast of Florida would also have an immediate impact. This is not the complete answer, but it will give us time to develop other sources of energy (bio, wind, hydrogen, etc.).

Current Strategy

Our investment model has been very successful over the years in overweighting investment styles before they come in favor (Small Company stocks in 2000, International stocks at the end of 1998, High Yield bonds in 2002 to name a few). Our model has indicated over the last several months that growth stocks are undervalued. We have gradually increased our exposure to this area over the last fifteen months and now have a significant overweight in growth stocks. The current market conditions bode very well for growth stocks to outperform other sectors of the equity market. Below are the reasons for this optimism:

• Large cap. growth stocks are cheap on a historical basis compared to value and small company stocks.
• We believe the Federal Reserve is done raising interest rates and may even cut them sometime next year. It is at this time in the interest rate cycle when growth stocks have historically outperformed.
• Money coming out of real estate and energy stocks will need to be invested somewhere. We believe that money will make it into the stock market and , more importantly, into growth stocks.
• Falling energy prices will help the economy and allow growth companies to grow even faster than expected.