The Lawrence Investment Group June 3, 2005 update:  European socialists vote down pan European constitution What does the victory for protectionist socialists who have rejected capitalism with the recent votes in France and the Netherlands mean to the private investor? France has voted to continue its protectionist policies and preserve its 35 hour work week, its socialistic work and benefit rules and its 10% to 15% unemployment which they saw threatened by European countries with lower costs and capitalistic policies. France and the Netherlands have voted to return to the 20th century economies which have so badly failed in the eastern block during the last century. The U.S. dollar has strengthened on the news and the fear that the euro may indeed be threatened. The Euro will survive and we will not return to the likes of the franc and the lira. What has happened is the level of uncertainty in the pan European economic future has increased significantly and as we all know, investors do not like uncertainty. What this all means is there will be and increased flight of capital investment to less instability. The only place for that to go is into the U.S. markets for equities and bonds. With growth rates twice that of Europe at 3.6%, tame inflation and near full employment (many argue that full employment is 95% and today’s unemployment rate of 5.1% is essentially there) and jobs growing at two million a year, there just is no better place else in the world to invest. The increased flow of capital into the U. S. markets can only mean growth in prices as more dollars compete for the same investments. Stocks that should do best are those fortune 500 names which are tier one, quality stocks that are also well known to Europeans. Recommendations would be Schlumberger Ltd (SLB) in the oil service industry, BP PLC in the major integrated oil & gas industry and large U.S. based companies who have more than 50% of their sales overseas. Look at companies like Gillette (G) and Colgate Palmolive (CL) to meet those criteria. There are many more such companies and as always, pick the quality of the company first but then look for those who are well known in Europe and around the world. Good growth lies for those who do their homework.

The Lawrence Investment Group June 17, 2005 update: Beware of the Housing Bubble! Brief update: For those who invested in the stocks recommended in the 3 June, 2005, letter, it has been a good two weeks (or fortnight for some). Schlumberger Ltd (SLB) leads the way with an 8.5% gain in two weeks for an annual return of 221% followed by BP PLC (BP) with 3.4% in two weeks. The other two (G, CL) are down a bit with an overall gain for the basket of 3%. Recall the intent was to play the folly of the Europeans and these are still good calls for that play. A better call is to double down on SLB which still has a long run ahead; and I, personally, have embraced COP even though it does not have the word British in its title; it just rocks. Beware of the Housing Bubble! You cannot turn on the financial news, the local news, or even read a local paper without hearing the warnings: “Beware of the Housing Bubble.” It seems it must be a plague which is about to overcome us all. Many homeowners have chosen low cost, high risk loans that may suddenly rise causing imminent disaster. Many speculators have purchased second homes only to rent them out or flip them as prices escalate. With all of these warnings of certain disaster, what is an investor to do? Buy the homebuilders! So many naysayers cannot be right! It is not too late to get on board! For example, look at The St. Joe Co (JOE) that has had a dramatic run; but, look where it is going. They only own 825,000 acres of land in the fastest growing state of Florida. JOE is really a land bank whose assets are growing every day. (biz.yahoo.com/bw/050606/65732.html?.v=1) Then, there is KB Home (KBH) who only has a four year supply of land at current demand rates. Toll Brothers Inc (TOL) hammers estimates and loves California Dreaming. These home builders/ land bank companies are a must for a growth portfolio. Fear of the bubble must be put in perspective as these stocks scream to be owned. The internet bubble was a house of cards with good ideas pumped out of proportion with hot air to the bursting point. There was no substance inside; but, rather, the expectation that a Cisco-like company would love the idea and acquire the company without regard to cost. Valuations soared by momentum and greed until the balloons burst; the house of cards collapsed; and we all live in fear of the next bubble. The housing “bubble” is based on content and hard assets rather than hot air. If interest rates go up, some homeowners will be pinched by higher rates and Wal-Mart sales may suffer. As it gets worse Target and Home Depot may be affected; but, the economy will not spiral down or collapse. Some homes may decrease in value temporarily, but owners will still have their homes. Contrast that to the internet bubble where the assets went away forever. The most likely bubble burst in the housing market is a decrease in the rate of increase. And, oh yes, would it be great to own a land bank as the growing population renews its demand for the American Dream of home ownership? Good growth lies for those who do their homework.

The Lawrence Investment Group August 1, 2005 update: Playing in the Oil Patch! Brief update: For those who invested in the stocks recommended in the 3 June, 2005, letter, it has been a good two months. Schlumberger Ltd (SLB) leads the way with an 18% gain in two months for an annual return of 108% followed by British Petroleum PLC (BP) with 12.27% in the same period. The other two, Gillette (G) and Colgate-Palmolive (CL), are up 2.24% and 9.1%, respectively. Recall the intent was to play the folly of the Europeans; and these are still good calls for that play, with the exception of Gillette who goes away in a takeover by P&G. And, since 17 June, the homebuilders have cooled off slightly. However, our friends, St. Joseph (JOE), KB Homes (KBH) and Toll Brothers (TOL), managed 1.3%, 6%, 6% gains; not bad for a six week period. Homebuilders have room to run as wallboard and concrete sales are currently at all time highs. I bet those materials end up in pricey new homes still in high demand. Finally, Conoco Phillips (COP) managed 5.9% as oil stocks continue to rock. Playing in the Oil Patch! With oil patch stock names like Exxon Mobil (XOM), Conoco Phillips (COP), Schlumberger Ltd. (SLB) and Halliburton (HAL) up 15%, 48%, 30%, and 50%, year to date, what is an investor to do to grow a net worth in this environment? It is all about inventory and how inventory is reported. In general, one can measure inventory in at least three different ways. First, and the one we hear every week in the oil products inventory report, is gross inventory, as in “crude oil inventories grew by more than 200,000 barrels last week while gasoline inventories fell by 4 million barrels.” What does that mean? Unfortunately, it is meaningless until put into context, yet the market makes big moves on these weekly numbers. The most common way to wrap meaning around gross inventory numbers is to compare them to past numbers. Gross inventories last week or last month or last year were X and now they are 110% of X; so, things must be good. This is a very false conclusion. To put some context on gross inventory numbers, we get to the second way of measuring inventories by comparing it to past consumption, resulting in a measurement referred to as Days On Hand -– trailing, DOHt. If, in the first half of this year, we (the world) consumed 4 million barrels of gasoline a week, then, the 4 million barrels of gasoline inventory change would be measured as seven days of inventory. This puts meaning to the gross numbers as we can measure inventory or inventory changes in days, weeks, or months of inventory. The problem with this metric is it is backward-looking in that it measures inventory based on historical consumption. It is kind of like driving a train from the caboose; you get a very good view of where we have been; but, you have no vision of where we are going. Therefore, we must move to the third way of measuring inventories which is referred to as Days On Hand – forward, DOHf. This method compares gross inventory to future consumption rates and, thus, is the only true measure of current inventory. In the previous DOHt example, the 4 million barrel change in gasoline inventory was measured as one week of inventory. If current or future consumption is 8 million barrels a week, then the same gross inventory change of 4 million barrels is only 3.5 days of inventory. This is a real metric that empowers us to do real analysis. We can look at inventories in DOHf and compare them to the same metric from last month or last year and immediately see if we have more or less real inventory. Four million barrels of inventory change could be 10 DOHf last year, 7 DOHf last month, and 4 DOHf today; and, we would be in much worse shape today with the same or greater gross inventory than in the past. The problem with this metric is we must predict the future consumption rate and errors in that prediction have caused massive inventory problems for many businesses in the past. The government and economists are working hard to determine the true current and future petroleum consumption rates. I do not know what they are but with explosive growth in China, India and the rest of the world, forward looking demand is much greater than past demand. Gross inventories that were adequate a year ago are dangerously low today and prices must remain high. I apologize for the lengthy tutorial but it all goes to say that there is plenty of life and growth left in the oil patch. The inventories measured in DOHf are at historical lows and large integrated oil companies like XOM and COP will have great earnings; but, growth will be somewhat limited by fixed reserves and refinery constraints. Therefore, the best plays are in the oil drilling and oil service companies where all must go to grow their production and replenish reserves. My favorites remain Schlumberger (SLB) which is a true oil service play and Halliburton (HAL) which includes its large construction business. As an aside, when hurricanes threaten gulf oil platforms, all oil stocks retreat; yet, it is clear that SLB and HAL will grow even faster if rigs are damaged. Get long on oil service and drilling stocks; and, you will continue to love playing in the oil patch.

The Lawrence Investment Group November 21, 2005 update: Get on board for year end. Brief update: For those who invested in the stocks recommended in the 3 June, 2005, letter, it has been a good six months. Schlumberger Ltd (SLB) leads the way with a 35% gain, and British Petroleum PLC (BP) had10.4% in the same period. Gillette (G) is of course gone and you cashed out while Colgate-Palmolive (CL) is up 12.9 %. Since 17 June, the homebuilders have cooled off as we all wait for the elusive bubble which will never come; I hope you cashed out at the highs. Finally, Conoco Phillips (COP) managed 6% as oil stocks have cooled some. On August first, I talked about SLB and suggested a double down was in order; I hope you did because the next time this stock sees $70 (the 3 June entry price) will be after the 2 for 1 split in mid next year. Get on board for year end: There is just way too much good news in the economy to hold back the bull run for the next six weeks. The fed keeps trying to cool if off with interest rate hikes to no avail. Long term rates refuse to rise as the Chinese and others continue to buy our debt. The explosive growth in the Asian economies has created a level of wealth not seen before. With the unstable and often corrupt state of the banks, financial institutions, and governments in much of Asia, it is no wonder that fortunes made in that economy have flowed to the most stable investment environment in the world: the good old USA. With all that cash seeking safety in a flight to quality, the fed does not stand a chance of killing this bull in the next several quarters. Long term interest rates are determined by supply and demand (sounds like my oil patch story) and the fed cannot quench the demand from foreign investors. So what looks good for the remainder of this year? I continue to like oil and oil services for steady but less explosive growth. No, they will not perform as they have year to date but will continue a handsome return. I especially like SLB the best for the reasons previously discussed including its results after several hurricanes. Recall, you go to SLB when you need to invest in the infrastructure to secure more oil. In the Q3 conference call, the CEO could not have been more bullish. Let me paraphrase what I heard without the political correctness of the CEO: Orders have never been stronger; competition is not a problem; customers come to us because they know we can deliver; customers are offering long term commitments; I can sell my service to the highest bidder; I turn down business to have capacity for the best customers; I see double digit growth for the rest of the decade. Caution, that was a paraphrase but a darn good one. Buy in on any pull back and stay long beyond next years’ split. Of course we must be diversified and I will talk more about that in my investment style editions coming up. This year, I have stayed long in United Health Care (UNH), Boeing (BA) and Wells Fargo (WFC) among others. UNH is up 38.6% ytd and is a play on health care costs and the aging baby boomers. Their primary business is cost containment and they are the provider of choice for AARP and several government programs. There are many biomedical funds that have a very hard time making money but must be invested in medical stocks. Many fund managers anchor those funds with UNH to provide secure, non-volatile growth. The result is more money flowing into UNH and a rising stock price. Stay long. I diversified into Boeing when I lost faith in automobile makers and heavy industry and it is up 34.3% ytd. They have a new CEO and are winning business with their new Dreamliner which is smaller and more versatile than the new super jumbo offering from Air Bus of Europe. In the last week, BA announced an expanded version of their 747 for those nay-sayers who think Air Bus is right; and this weekend Boeing announced another big order for forty-two 777s from the United Arab Emirates. Most thought that order would be split with Air Bus. And, the Arabs have real money unlike most aircraft purchases which are heavily financed. The pending military appropriations bill has an amendment that says the Air Force tanker program must go to a US company; if that sticks, another big BA win. Stay long I like Wells Fargo even though their ytd performance is near flat. It has had a great run for the last two months and pays a 3.3% dividend. Take a look. General Electric (GE) should have a good run through year end but I do not own it as a stock because it is a major core holding of some of my mutual funds. Remember, to diversify you must know what stocks are major holdings of your funds. Do your homework. Finally, I just must talk about Advanced Micro Devices (AMD). I never include it in these letters because of my history and holdings in the company; but several of you have asked. In the first week of October, I recommended to three of you that you buy AMD if it pulled back to $21. In mid October, it retrenched below $21 twice and those who got in are up 28.6% in about six weeks. I look for some steady movement with resistance at $29. I do see mid $30s by mid next year; but this stock is always volatile. Their products are more superior to Intel than even the press and analysts would have us believe. Intel will not catch up in performance per watt in this decade; but they are an awesome marketing machine. AMD takes market share; Dell gets on-board; and earnings approach $2 per share by this time next year. Enter with caution and use risk money. Good growth lies for those who do their homework.