Latest Letter: Global Macro Roundtable Letter No. 2/07

by Randolph Buss and Clif Droke

Content of Global Macro Roundtable Letter :
Welcome Introduction
Some Market Concerns
Carry Trade Thoughts
ECB Outlook
EU Energy Targets - Renewables
Market well on its way toward recovery
Semiconductor Stocks
Will Nanotech stocks outperform in 2007-2008?
GMR Portfolio
Central Bank Outlook

Welcome Introduction

Dear Readers,

For those new readers, welcome to our second edition of the Global Macro Roundtable (GMR). The GMR is conceived as a "real world" newsletter written by market analysts and not by unknown editors doing research for others. As opposed to a number of newsletters, we are not journalists doing some investing, but rather investors (and speculators) who like to write and share our market thoughts.

A Better Way to a Global Portfolio

The GMR provides up-to-date analysis and gives the reader a variety of opinions on the investment markets and sectors. We are not here to massage our egos rather we are here to provide our readers with real-world research and investment opportunities, maybe even contradicting analysis at times. Additionally, it has been historically proven that a diversification of funds into a global portfolio is less volatile and more lucrative than simply holding a limited asset class or market or currency. Regarding our market thoughts, we believe diverse opinions are healthy and beneficial as it implies creative and independent thinking, and that is exactly what investors need to make their decisions - we take a straightforward approach and tell you how we see it.

What can you expect?

Although this is just our second GMR, we anticipate in the future to bring in guest analysts alongside our own analysis and to provide you with even more analysis and opinion. Likewise, our upcoming portfolio will provide you with ideas and investment opportunities on a global outlook across a number of sectors. We will also be informing you periodically of any other special offers which we are currently planning and to make these available to the GMR readership.

In conclusion, we are excited about the GMR and its ability to address diverse opinions and investment opportunities and likewise we look forward to your feedback and participation.

Some Market Concerns

I've been sitting in my office recently, smoking my pipe occasionally, mumbling to myself and scratching my chin - I'm not senile yet though. In fact, dear readers, I'm going to give you the straight medicine - I am concerned. I just had a full check-up and my blood levels were all good - not bad for a middle-aged writer and market observer scurrying over piles upon piles of economic reports these last 7 or 8 days. The market check-up is not looking so good : it comes down to a foggy picture with a negative bias. As opposed to Clif I am a bit less optimistic as to the US housing outlook but that is just one concern. Others lurk. As can be seen right, lately the consumer index has taken a hit and gone far into negative territory while the green up-trendline has been broken. This is not to say that the US consumer per se has started a full retreat but it certainly is a MAJOR warning sign that the housing market has certainly shaken overall confidence - and what are markets about? - psychology. Today we see a new wave of lost confidence in late asian markets triggering a spill over into the European and US markets by the perceived weakness of US subprime mortgage lenders and markets continue down. This is not really news as the "unwinding" has been happening in waves but now it has been saddled upon more negative psychology along with sell triggers in black-box computer trading to create a frenzy of worry as to the underlying market fundamentals. It is likely that after a consolidation from the previous drop new lows will be tested in the coming weeks. The question I have is not so much whether this correction is over but rather if it is a "sustainable" correction. What do I mean? I mean that an equity market so intent upon a bullish bias for so long has come to the point where a market adjustment was necessary to wash out some of the weaker players as a 5yr. global liquidity ponzi scheme cannot forever ratchet up higher yields. But with global liquidity still quite abundant even with sustained tightening among central banks it must be questioned whether the markets will get a more robust washout or the markets will simply settle in from a lower correction without any major underlying behavioural or structural changes. It is doubtful whether large financial institutions are willing or even able to unravel complex investment instruments. Investment strategies combined with human tinkering (e.g. complex non-transparent ponzis and or high-risk yield strategies) is what may be the fundamental underlying RISK and not simply a percentage of mortgages not being repaid or defaulted upon.

So while the housing market has yet to test the July 2006 low in the chart (HGX) I believe we will see further downside to the 210-200 levels and expect a test of the July 2006 upcoming - possibly within the next 8-10 weeks.

In an interesting comment on Bloomberg by an economist, it was reiterated that "sub" prime means exactly that … sub standard. In the $8 trillion dollar mortgage market approx. 10% is listed as subprime (see graphic farther down), ie. it is not necessarily an unknown entity. The more interesting question is whether a "sector" event like US subprime mortgage financing becomes a more problematic "macro" event for the world economy. The logic would point to a "no" yet I remain worried by the possibility of contracted US growth due to consumer fears of the subprime issue (psychology) + historical issues shown in the chart below whereby the red box remains unknown and the fact that year on year earnings growth is set to contract more markedly as witnessed by the table below for the S&P 500. These factors combined with the fact that centralbanks around the world continue their monetary tightening across the board. The bottom-line is that a contracting monetary base (less liquidity RELATIVELY speaking, i.e. relative to what it has been considered "normal" these last years) combined with consumer fears on the back of mortgage defaults and the incumbent worries of the equity markets are facilitating a deflationary backdrop. Greenspan was not necessarily wrong in his comments that the markets are at or near the end of a cycle(s) - liquidity cycle, earnings cycle and housing cycle.

What does this mean? It means that although the Fed may continue to speak of a "sector" event not threatening the underlying "strong" fundamentals of the US economy, they are seriously worried as to the psychological nature of its impact on the markets - they may control monetary policy but they do not control psychological perception, human fears nor do they really have complete transparency as to the risks associated with the stream of mortgage lenders whose subprime percentages have now reached 20+% in 2005 and 2006 of all mortgages lent. With housing "overhang" now totaling near 8 months of supply it must certainly be questioned how mortgage equity withdrawals (MEWs) could sustain consumers with ever increasing amounts of spending money while home prices are bound to fall in price - the simple answer is, they can't. On top of that, banks will now be less likely to give credit more freely. No, I say we are in for a correction and the Fed will adjust their FOMC statements accordingly. Let us summarize the main points :

1. Subprime mortgage credit sector is weak and will likely fall further
2. Housing starts have dropped dramatically
3. Housing oversupply points to falling prices ; consumers "feel" poorer : bearish
4. Banks will likely tighten lending credentials : bearish
5. We are now late in various cycles - central bank liquidity, earnings, housing
6. Yield curves remain inverted (FFR or 3 mth. Treasury bill verses long)
7. Real GDP has again been adjusted downward to just above 2%
8. Capital spending has contracted in the last 3 quarters : bearish
9. US manufacturing plunged 5.6% in January : bearish
10. US Trade (im)Balance has now reached 8.2%
11. Rising labour costs and downward pressure on profit margins : bearish
12. Consumer credit is slowing substantially indicating consumer caution : bearish
13. More lender risks lie around the corner - Fed may want to support via interest rate cuts
14. And finally, when all officialdom from Bernanke to Paulson to various Fed governors protest that "all is well", "there is sufficient liquidity in the system" and "steady growth" then I begin to wonder if the rule of thumb "only believe in something when it has been officially denied at the highest levels". These officials are denying that there may be more to go in this market correction…

Going forward it is now my conviction that the Fed will be required to introduce more conciliatory language regarding the market outlook, and if as Greenspan stated the various cycles are ending, then likely it is now time the Fed return to a more preemptive loosening of monetary policy in order to provide "support" to the markets. As shown in the last GMR, the likelihood of the Fed holding rates was reduced but since then the markets have dropped substantially hence it is now even more likely that by Q3 07 the Fed will need to drop rates again and by year-end or Q1 08 we forecast here a rate of 4.50 to 4.75.

Carry Trade Thoughts

I still do not see or believe - even with all the media hype of "the carry trade is over" - that this is really the case. The facts speak differently. Sure, there has been some unwinding but when looking at the index we certainly would need more of a drop to convince me that the carry trade is really about to capitulate in full. From SG we get the following :

The issue regarding the carry trade is quite simple. If ongoing market turmoil, volatility and weakness prevail then it is likely a continued unwinding of risk will continue and mark a turning point in the weak Jap. Yen. Until now, as shown above in the JPY chart, it has rebounded somewhat from the recent low in 2007 but to imply that the JPY is now on the road to recovery there must still be considerable gains. This just in from Bloomberg this morning during my final edit :

"The yen dropped against the U.S. and New Zealand dollars as a rebound in global stock markets gave investors more confidence to buy higher-yielding assets with funds borrowed in Japan.

The yen weakened versus 12 of the 16 most-active currencies on speculation investors will resume so-called carry trades. New Zealand's central bank Governor Alan Bollard suggested rates may have to rise from 7.50 percent, increasing the premium over Japan's 0.5 percent overnight rate.

"With the recovery in equity markets, investors are taking on risk," said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd.

"They see Japan's large rate differential with other nations and are selling yen." …. The yen may decline to 120 against the dollar by the end of March, Umemoto said.

ECB Outlook

Although the EU markets have been caught up in the recent market correction, the Euro has in fact gained in recent weeks. As was mentioned above, what do US subprime mortgages have to do with the european economy ? Not a lot probably but it's about perception and psychology. Trade between the US and Euroland is a large block and should weakness spill over into the US then of course european exporters are at a double disadvantage of weak US consumption and potentially a stronger Euro.

The current spotlight in the eurozone remains strongly on the ECB and their outlook on the economy. With growth now seen to be on par with that of the US, the Euro economy looks stronger than we had in the past expected.

In most of the majoreconomic surveys, Euroland businesses see stronger manufacturing and continued strength in exports especially to the expanded EU states, Russia and Asia. Likewise with falling or stabilizing unemployment figures, there is an inclination at this point to give EU business the benefit of the doubt concerning stronger growth. And this is what the ECB and Trichet are pointing to.

With their recent, and expected, rate increase by 25 bp to 3.75%, the ECB is falling in line with expectations especially with respect to their hardline on inflation, some have even now called the ECB the "new Bundesbank" referring to Germany's Bundesbank in the glory days of a strong Deutsche Mark.

As can be shown above, the ECB must now be nearing its rate hike regime in accordance with the Taylor rule thereby suggesting also, as with the Fed, that we are now late in the monetary tightening cycle whereby, admittedly, the ECB and other central banks have been trailing the US Fed.

At the last ECB meeting, Trichet had dropped a number of statements pointing that rates would likely need to continue higher for now by stating that :

"After today's increase, given the favourable economic environment, our monetary policy continues to be on the accommodative side, with the key ECB interest rates moderate, money and credit growth vigorous, and liquidity in the euro area ample by all plausible measures. Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted."

It remains yet to be seen however how the ECB might react to the equity market correction of the last few weeks. An article by Matthew Lynn at Bloomberg stated that in a global correction risk-averse investors could potentially repatriate any risk back to their "home currency" thus increasing the EUR. But then again, if that hypothesis were to hold, the USD must also gain in relative terms. Nevertheless, a doubly tightening - a rate increase plus a strengthening EUR might be just a bit too much medicine for the eurozone economies. I suspect the ECB will do nothing in terms of rate movement for at least another few months into the summer timeframe before determining how far equity market corrections have run and whether the EUR has gained substantial strength by moving over the recent 1.34 high of December 2006.

The chance has increased, albeit minimally thus far, that the ECB will not raise rates, the question is only how much. Currently we project that the ECB will make good on its promise to raise once again and maintain their bias towards tighter monetary policy but thereafter we foresee a steadying rate of 4% by year end in line with a weakening US economy.

EU Energy Targets - Renewables

Just this past week, the EU has raised its target of alternative / renewable energy (wind, solar, biomass) to 20% by 2020. This portends a mass of new investment into leading companies, of which Germany, leads in many areas. The most interesting point in this matter is that the targets are binding and obligatory. What that exactly means in reality is probably an open political point, ie. how to enforce such a target, but at least the targets have now been set.

• By 2020, CO2 emissions across Europe are to be cut by 20 percent as compared to 1990 emissions.


• Renewable energy sources are to make up 20 percent of the EU's energy mix by 2020 -- up from their current 6.5 percent share.

The foundation has now been politically laid for companies and entrepreneurs to invest into this sector. This certainly opens the door for investors to accompany this sector along the entire spectrum. It is likely still too early to know exactly how this sector will develop since without monetary subvention from the EU many industries still cannot compete one on one with conventional fossil fuels, like gas or oil or coal in terms of production costs per megawatt. In addition, will the renewable energy market remain a "EU subsidy child" or will other world markets start to discover the need for cleaner energy ? Here a recent citing from Der Spiegel :

It's unclear, though, whether the rest of the world will really be influenced by the European climate agreement. Certainly the biggest culprits don't feel any moral pressure to change their ways. The change in tone in the US government has to do mainly with national security: America hopes to decrease its dependence on the conflict regions of the Middle East. China and India meanwhile continue to reject voluntary reductions in emissions, claiming that their economies need a fair shot at growth.

What does this mean? It means that EU companies and industries associated with renewable and alternative energy are set for a leap forward as long as the political will remains firmly at their backs. Morgan Stanley has recently stated they see growth rates of 50% or more in the solar sector. It also has means that investors now take far less risk in these sectors. And finally, it likely means that the EU may have an advantage in exporting their advance environmental technology to other parts of the globe. I suspect Silicon Valley and its high-tech entrepreneurs will not be far behind them in the future. In that respect I totally agree with Clif about the nanotechnology sector (see section below) …. The combining of renewable energy methods and nanotechnology to solve a number of energy and environmental related problems.

So far, some of the best performing companies in Europe have been in the solar and wind sectors. Here a sampling :

We will continue to concentrate on this sector in the coming 12 months and give more specific recommendations along with, as promised, some recommendations in the Russian resource sector.

Market well on its way toward recovery

Here we are more than a week following last week's selling panic and stocks have held up well in the aftermath. The tape action of the past week shows strong underlying support and a drastically improving internal condition in the wake of the mini-crash. Yet the tape also shows that the market has its work cut out for it in the short term and the bottoming process isn't over yet.

The advance/decline volume ratio on Tuesday, March 6, was simply fantastic. It was something we haven't seen in a long while and I take it as a bullish indication. Interestingly, Investor's Business Daily and some other financial publications characterized Tuesday's (Mar. 6) recovery rally as occurring on "light volume." This simply isn't true as the *ratio* of buying to selling volume was extremely high and even total volume, while not as high as previous days, was still fairly high compared to the 52-week average. The bottom line is that the trading volume on Tuesday's rally was in line with what one would expect to see in the early stages of a meaningful bottoming process.

The latest AAII investor sentiment poll came out on Thursday, Mar. 8, and presented a picture of investors still scared over last week's decline. It showed the highest disparity in favor of the bears since Nov. 1, 2006, which marked a short-term turning point in the market from down to up. The percentage of bullish investors was reported by AAII this week at only 36%, the lowest reading since last summer. Meanwhile the bearish percentage was reported at 45%, the highest reading since last November. This is taken as a sign the market's "Wall of Worry" is still intact and is positive from a contrarian standpoint.

The foreign stock markets have been the major focus of the financial press since the late February panic sell-off. As we've discussed before, even-related market panics always tend to bottom quickly and go on to recover their losses, often making new highs in the process when all is said and done. While there may be an exception to this rule, off the top of my head I can't remember a single exception. This holds true for any financial market.

Two weeks have passed since the panic selling, which started when Cheng Siwei, Vice Chairman of China's highest legislative body, made negative comments about the Chinese stock market. "We must force the children out," were his words in reference to his statement that 70 percent of China's domestically traded companies were worthless and should be de-listed. That remark sent China's stock market tumbling, along with a host of other foreign markets, spilling over into U.S. equities.

Yet here we are two weeks later and already China's Shanghai Composite Index (SSE) has recovered most of its losses and is just below the historic 3,000 level where it stood in late February, once again proving that panic- and event-driven sell-offs rarely last very long. The words spoken by Cheng Siwei, regardless of the veracity of his statement, were just words and did nothing to change the fundamental or even the momentum backdrop to China's stock market. That's why the recovery was so quick.

Here at home the panic selling in the S&P on Feb. 27 is being called a "phantom crash" by some since it technically came out of nowhere. The market technical and fundamental backdrop was in fine shape preceding the crash and there was no major cycle peak or bottom, either. Granted, you could make a case that short-term investor psychology at that time was too bullish, thus making the market vulnerable to a correction. But the severity of that correction in terms of time was unaccounted for by technical explanations alone. It was, plain and simple, a reactionary panic.

Speaking of market psychology, the main psychology indicators are in a super-oversold position right now following the panic decline. Some indicators have reached their biggest oversold reading in years, including the Total Put/Call Ratio, which recently exceeded the super-oversold reading from last July's intermediate-term bottom. Market psychology is sending a strong buy signal right now that's hard to ignore.

In the past few reports we've taken a look at some of the market's main psychology indicators, most of which are flashing major buy signals in the wake of last week's decline. One of the newer psychology indicators currently flashing a buy signal includes the Leveraged Fund Ratio, which combines the total funds committed to the bull and bear market ETFs and mutual funds offered by Rydex and Proshares (see chart below). This indicator is giving its strongest reading to date going back to 2005. In previous years it gave strong buy signals by indicating that too many investors were initiating short positions in the ETFs and mutual funds and of course when this happens the market inevitably reverses to the frustrate the sellers. Previous buy signals in this indicator were made April 2005 (major interim market low), October 2005 (another major low), June-July 2006 (major low), and now. In fact, the current reading of this indicator has reached the lowest level since August 2004, which at that time preceded a 200-point rally in the S&P 500.

The ARMS Index recently hit one of the biggest, if not *the* biggest, oversold extremes in its history, including the wake of the 1987 stock market crash. The Volatility Index (VIX) has hit its highest reading since the major market low of last June. AAII Investor sentiment last Thursday (Mar. 8) hit its lowest oversold reading of the year to date and one of the lowest since last June. The ISEE Sentiment Index has hit its most oversold reading since last October, which began an extended rally for the S&P 500. No matter how you dissect the put/call data you come up with major buy signals based on investor psychology alone.

The net reading of the market's psychology and internal indicators is that while the bottoming/consolidation process isn't over yet, the market is well on its way toward recovery. Money supply creation also continues to improve and this is helping to pave the way for an improving stock market outlook. Notice the latest yearly percentage change chart for MZM money supply (below). This is a major improvement from last year and it should translate into a bullish outlook for growth stocks as well as general economic improvement.

On the pop culture front, a motion picture described as "bloody" by the New York Times raked in an estimated $70 million in ticket sales this past week to become Hollywood's biggest hit at the present. The move "300" is based on Frank Miller's graphic novel about the Battle of Thermopylae in 480 B.C. It's a little hard to miss the graphic symbolism the film portrays and online media outlets were featuring promotional scenes from the film depicting a screaming and bloodied soldier with a sword in his hand. For years we've argued that the old Wall Street saying, "Buy when there's blood in the streets," can be applied literally as well as metaphorically. At past market bottoms we've brought to your attention blood-related themes (cultural, military, political, economic) that marked major lows in mass psychology and in turn presaged upward turns in the stock market. Could this be the latest sign that mass psychology has hit a major low with a stock market turnaround to follow? You already know that we believe the market indicators, and especially the psychology indicators, are flashing buy signals. We feel that the surge in popularity of the movie "300" is just one more indicator pointing to an internal low being in place.

A word on insider buying is in order. According to Scott Gambill of Emergent Financial, insider buying among the Russell 3000 stocks has spiked following the late February sell-off. Insider buying has been running at its highest level since the June 2006 market bottom following the recent panic decline. This is very significant and suggests a worthwhile broad market rally is likely to commence soon.

Semiconductor Stocks

The Semiconductor Index (SOXX) rose nearly 1% on Monday, Mar. 12, to close at just below the 480 level. The semiconductor stocks have shown some of the best relative strength to the S&P since the panic selling of two weeks ago and are showing some promise. The SOXX is only about 10 points away from making a new 10-week high and some of the actively traded individual stocks in this sector have shown great promise recently.

Let's review some of the individual semiconductor stocks in our portfolio. Cypress Semiconductor (CY, $19.77) has risen over $3 from our bullish review in November when the semis were still basing and is currently testing its late February high at the $20 level. It should be able to overcome this high and keep its uptrend intact. Traders should book some profits at this time and raise protective stops to slightly under $18 on a closing basis.

Texas Instruments (TXN, $32.64) was also judged to have a bullish outlook not long ago in this report and has since broken out to resolve its 3-month congestion pattern and looks to be headed up for a test of its late September high at the $34 level. Look to take some profits as this level is approached and raise stops along the way.

Another strong momentum stock in the semiconductor sector is FEI Corp. (FEIC, $34.19) which should be able to continue its uptrend despite the distended appearance of its daily chart. Traders can use a pullback to purchase shares in FEIC, which also has strong earnings growth and a high short interest (currently 9.30% of shares outstanding).

Last month we added to our recommended buys among the semiconductor stocks Silicon Motion Technology (SIMO, $22.68) which we wrote could be purchased down to the $19.00 area just under the 30-day moving average intersection. SIMO has strong upside momentum and a bullish chart pattern as well as strong earnings momentum. It should be able to key off further strength in the semiconductor sector as discussed previously.

Will Nanotech stocks outperform in 2007-2008?

During 2004-2006 the Federal Reserve has pursued a tight money policy. The consistent hikes in the Fed Funds interest rate have been too numerous to count. At the same time the interest rate was rising the broad money supply (as measured by 3-year MZM annualized growth) was dropping like a rock when measured from a rate of change basis. The results of this policy weren't altogether unpredictable, especially as this tightening bias bottomed out with the recent bottom in the 8-year cycle. Gold and silver fell hard during the 8-year bottom and in recognition of this monetary tightness, along with other major commodities including oil. Now even the "natural" rate of interest is dropping and can be seen in the decline in the 10-year Treasury yield. This drop has produced, temporarily, an inverted yield curve as if to accentuate the fact the Fed went too far in its tightening campaign.

The market for tech stocks really wants to break out and runaway on the upside but has been prevented by the stubborn actions (or inaction) of the Fed. The big question confronting the financial world today is "Can the U.S. economy bear any further increase in the interest rate, i.e., any further monetary tightness?" The simple answer to that question is "no!" The second question that follows the first is, "Can a sustainable and meaningful bull market in stocks begin without first an increase in money supply and lowering of interest rates?" Again the answer is "no." The final question, which we'll ask of the market itself, is, "Will the Fed continue its recent loosening of money supply in a way that will favor the stock market?" The answer, according to my interpretation of the market, is "yes!"

In the paragraphs that follow we'll be examining the areas that should be the primary beneficiaries of a rejuvenated bull market when the Fed opens wide the monetary floodgate beginning sometime in the fourth quarter of 2006. Our primary focus will be on technology which will mean we'll be paying more attention to the NASDAQ sector more than ever. Commodities and resource stocks had their run in the 2002-2006 era, but tech companies will once again steal the spotlight in 2007 and beyond. There are a couple of major sectors within the broad technology complex that are sure to command the attention of a growing number of "smart money" investors and traders. Beginning now and in the coming weeks we'll start focusing on these areas and pave the groundwork for what promises to be a year of worthwhile gains in our newly constituted tech portfolios.

The two areas within the technology sphere that should witness quantum leaps of progress in the months and years to come are semiconductors and nanotechnology. There is even a close correlation between the two industries and I expect investor interest to be roughly divided between them at first. It's the latter area, however, that is poised to experience the most explosive growth. Nanotechnology is the wave of the future and according to the most respected experts in this burgeoning field, 2007 will be the "coming out year" for nanotech.

If we're going to proceed along what should be an exceedingly profitable investment path, let's begin with the basics of what exactly nanotechnology encompasses. The word nanotechnology itself dates back to 1987 and "nano" refers to a billionth along the scale (compared to "micro" which refers to millionth). Thus nanotechnology involves the ever-shrinking nature of technology to a progressively smaller scale. The word nanotechnology has been defined by one industry expert as "the art and science of manipulating and rearranging individual atoms and molecules to create useful materials, devices, and systems." In nanotechnology matter is manipulated at the atomic level that employs a "bottom up" approach rather than the standard "top down" approach of normal manufacturing processes.

One instance of how nanotechnology is already being integrated into everyday manufacturing processes is the clothing retailer Eddie Bauer, which uses embedded nanoparticles to create stain-repellent khakis. The computer and semiconductor industries are already feeling the effects of nanotech, and in the coming 2-3 years will see nanotechnology transform the auto and aerospace industries. You may have seen the TV commercials for the new dent-resistant bumpers used on cars that are made of nanocomposites that are 60 percent lighter than the material used in traditional bumpers and twice as resistant to denting and scratching. As the authors Jack Uldrich and Deb Newberry state in their best-selling book "The Next Big Thing is Really Small (How Nanotechnology Will Change the Future of Your Business), nanotech is truly the "Next Frontier." (Note: We highly recommend that anyone interested in learning more about the coming nanotech revolution from a layman's perspective read this book by Ulrich and Newberry, as the book serves as an excellent primer to the field).

As Josh Wolfe of the NanoTech Report has said : "Nanotechnology is unstoppable. There's no question that the technology and products already in the nanotech pipeline will change our world and the way we live. There's no question that we are still in the infancy stage of a tech revolution unlike any we've ever witnessed. There's no question that everything - and I do mean everything - will soon change. Clothing. Food. Cars. Housing. Medicine. Computers. Cell phones. Even the water we drink and the air we breathe!"

Among the key players in the emerging nanotech industry are several publicly traded companies, some of which are highly recognized by investors. Others are small and have not yet appeared on the investment radar screen but will do so in 2007-2008. Some of these big players are old line manufacturing concerns like IBM, GE, DuPont, Corning, Hewlett Packard, and even that old, tired stalwart GM. But among the younger concerns that have an interest in nanotechnology in at least one or more segments of their existing businesses are Coherent, ANSYS Inc., Asml Holdings, Alteon Inc., and Motorola. And even the even newer kids on the block are nanotech-focused businesses like Nanophase Technologies (NANX), Nanogen (NGEN), and Nanometrics Inc. (NANO). In the coming weeks and months we'll be examining some of these companies that exhibit intermediate-to-long-term promise.

Author and nanotech investor Darrell Brookstein believes that nothing will rival the coming nanotech bull market. He writes, "Nanotechnology is an enabling and disruptive technology. It is a revolution in the same way the Industrial Revolution was a revolution. Its tentacles will reach into and touch every aspect of our lives, culture and economy. Nanotechnology will be under the surface of nearly every industry, and it will destroy companies and possibly whole industries that fail to focus on it or to acquire companies that do." He further stated his belief that the "internet boom was a small burst compared to what the nanotech boom will look like," a sentiment I agree with, and adds that the Nanotechnology Revolution "will set off a series of rolling booms and busts that will last decades and literally destroy untold businesses - disrupting and leapfrogging technologies that, only a few years earlier, were considered cutting edge."

Respected market analyst Don Hays likes to say: "The next few years are going to witness a massive and wonderful build-out phase of the Technology Revolution." This build-out phase will become apparent in 2007 and by 2009 will be undeniable to every observer, including the casual ones. Nanotechnology will be the at the crest of the impending tech bull market by then and I want us all to be able to benefit from it every step along the way. To that end I"ll be devoting an increasing amount of space to the nanotech, semiconductor and related sectors from henceforth. It is my conviction that beginning now and heading into 2007 the leadership baton will pass (is passing) from commodity and old-line industries to technology once again, just as it did in the mid 1990s. Then, as now, technology was coming off a major longer-term "oversold" extreme and fundamental undervaluation. It was largely ignored by the investment herd as well as the herd's spokesman, the financial press. But by the late '90s no one could ignore the Internet-led technology bull market. I envision this time around the technology bull market will be a nanotech-led one and we may even see a nanotech/semiconductor stock bubble rivaling that of the Internet bubble of nearly 10 years ago. But whatever the case, the future of the Technology Revolution begins now!

GMR Portfolio

Central Bank Outlook

Best regards from the GMR,

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