Booyah to Ya

Executive Summary
The Dow hit 10,000 this week, which is an attainment generating modest levels of
celebration and psychological relief for money managers. One well-known market
booster proclaimed that “the crash is over.” We are not sure what that statement means,
however, after a 7-month, 54% rally. If it is supposed to mean ‘all clear,’ we disagree.

The more important theme for us is the one we mentioned last week, namely the shift of
the global center of gravity from the West to the East. According to Stephen Green, the
CEO of HSBC, it is happening at a much faster pace than previously thought. If this is
truly a secular trend, and we think it is, it means not following the booyah crowd.

Accordingly, we profile PetroChina (PTR), which is now trading at 2007 prices. We

also like AsiaInfo Holdings (ASIA), a fast moving stock with a good company behind it.

The Best 4 Quants Model Portfolio finished last week at +2.2% vs. the S&P's +4.5%. So
far this week the Best 4 Quants Model Portfolio has a return of +1.4% vs. the S&P's
+2.3%. Since Inception 3/14/2003 the model has a return of +272.7% vs. the S&P 500’s
+31.6%. The Best 4 Quants Model has seven picks this week: SYNT, AVA, AMED,
PPD, MAXY, WCC, RS.

For those who do not follow the Best 4 Quants model portfolio, we offer our TSR Timing
Model as general guidance on the relative safety of the current market. The timing model
remains at +200% invested.

Detail

Professionals train themselves to think contrary to the crowd, turning bullish at lows and
bearish at highs. Seven months ago in our daily Pro edition we speculated that the Dow
could rally to 9600. In retrospect we were a tad conservative, although at the time you
might have thought us crazy, as investors were experiencing the second serious market
crash of the decade.

Professionals also attempt to stay with the trend…or the bounce, as the case may be. This
is a somewhat contrary imperative to the one stated above, which is what makes
investing as much an art as a science. Since mid-March we have maintained our bullish
bias as the market rallied strongly in the second and third quarters. Although the Dow
surpassed 10,000 this week, we are not yet ready to call the final top, although we could
be very close. One reason the markets may continue a bit higher has to do with the
shrinking greenback.

The Incredible Shrinking Dollar

Have you thanked the lowly dollar lately? One reason the market is melting higher is that
the dollar fell to 52-week lows this week. The dollar has plunged 15% since the March
low, providing a hefty tailwind for this rally, because as the dollar declines, dollar
denominated assets, including equities, increase in price. Additionally, a weak dollar is
good for multinationals, because it makes U.S. products more affordable in foreign
markets. Therefore, a weak dollar further benefits the large-cap indices such as the S&P
500 and the Dow, since the companies in those indices generate almost 50% of revenue
abroad.

Although the rally off the March low has been steep and steady, it does not reflect
increasing stock-love on Main Street. Trading volume has been relatively low. During
the month of August, for example, investors allocated capital to bonds 10:1 over stocks.
Why? Bear markets that shave 50% off one’s portfolio in 18 months undermine trust for
some investors. According to studies of investor behavior, the newly risk averse
investors sell into the weakness and will not re-enter the market ever again.
Consequently, equity aversion will quicken the pace that boomers naturally disinvest as
they attempt to secure their retirement assets from volatility so they can sleep at night.

A Big Anti-Booyah to Ya!

There also appears to be a great deal of skepticism about this rally, which is another
reason we think the rally will continue a little further. Bull markets tend to end when
investors get complacent or euphoric. Euphoria is unlikely, at this time, however, at least
on Main Street.

We won’t get euphoria, since participation in the rally is only modest, but we do expect
to see the skeptics reviled in the financial media. This past week cautious investors who
have moved to the sidelines were berated by Jim Cramer of Mad Money. He gave the
bears and the skeptical boomers a tongue lashing and asserted cryptically, “the crash is
over.”

Bears are taking a beating in the media. In an interview this week, perma-bear David Tice
opined that the Dow will bottom when it gets to book value, which is about 3100. The
reporter who was assigned to interview Tice was so astonished at the call that he could
not resist treating the forecast as though it had no more legitimacy than a joke. Our long-
term target, which we expect to reach in 2012, is Dow 3800, and that is no joke. If the
Dow actually gets there, we predict that Cramer will be off the air and the word ‘booyah’
will become a term of derision.

Cramer’s new book, “Getting Back to Even,” sums up the hopes and dreams of many
investors, but a rally back to former highs is not likely in our opinion. Cramer urges
readers to buy more and trade more, but we suggest that you take the opposite tactic and
sell some of your legacy holdings into the current strength, lightening up just in case we
are in a secular bear market similar to post-bubble Japan.

Go East
If you share our long-term concerns, you are in good company. A report from economists
at HSBC, a globally-oriented bank that we respect, is now predicting the end of the era of
U.S. economic supremacy. We identified this theme several years ago and have named it
the Sunset of the West; the HSBC economists are forecasting the “demise of the West,”
which is unusual hyperbole for bankers. We don’t think the West will kick the bucket
anytime soon, but we agree with Mohamed El Erian, co-CEO at PIMCO, that things are
unlikely to get back to the old normal.

HSBC’s CEO, Stephen Green, notes that the wealth shift to the East is taking place
“more rapidly than anyone would have thought.” One can see that in the relative strength
of global bourses. Of the 82 country indices tracked by Bloomberg, 60 have beaten the
S&P 500 this year. Measuring performance from the March low, the S&P 500 is in 39th
place.

For evidence of the eastward migration of capital, keep an eye out for stories such as this
one. A consortium led by private equity firm Kohlberg Kravis Roberts will be investing
$160 million in a Chinese leasing company similar to GE Capital or GMAC that lends to
small and medium-size businesses. The story is significant on two counts.

First, China does not have a history of supporting capitalism or entrepreneurship, as the
government prefers to keep capital flowing primarily to state-owned entities. That is
slowly starting to change. The government now realizes that it needs a truly robust
economy to survive and prosper in a world in which the U.S. is consuming less.

Second, foreign capital is eager to fill the financing gap in China and the deals will be
sweet. Investors will get ownership stakes in fast-growing companies with strategic first-
mover advantages in huge markets. If HSBC’s Green is correct that the global capital
flows are now reversing, the funding of China’s entrepreneurial class will be a
tremendous secular growth story that will last a decade or two. Maybe longer.

Legendary commodity investor Jim Rogers thinks that one could reasonably stay bullish
on China for the next 90 years because the Chinese want to emulate the Western lifestyle,
they are more eager to work, better at saving, and lastly, Rogers rates them as “among the
best capitalists in the world.” There are two ways to invest: with the state run enterprises
and with the independent entrepreneurs. We offer profiles of both types below.

PetroChina (PTR) P/E 36, Market Cap $241 billion

Imagine for a moment that in a dream you, an investor, travel to a country somewhere far
far away where you are looking for opportunities. You notice that there are only two
integrated oil companies in the entire country. No more are allowed to operate, so these
two do not have to worry about competition. It’s live and let live.

In your dream, you hear that the prices these two companies can charge for their products
have been regulated by the government, like utilities, but this regulatory restraint is
gradually being lifted. Moreover, it is apparent that the duopoly has access to virtually
unlimited amounts of capital for expansion and acquisition because they are deemed vital
to the national security of this foreign land.
Lastly, you notice that while the country has historically been reliant on bicycles and
scooters for much of its urban transportation needs, a growing middle class is now
starting to discover the joys of driving nice cars. You realize that the demand for
automobiles is so great that the country has leapfrogged to become the world’s largest car
maker almost overnight.

Then imagine you wake up and the dream is real. Of course, the country is China and the
company we are focusing on is PetroChina, half of the duopoly. The last time we featured
PTR, back in May of 2007, shares were trading at $121. Controversy was swirling around
the company then due to China's support of the government of Sudan, which was
responsible for genocide in Darfur. There were concerns that Warren Buffett was going
to divest his shares and he did, when they were trading around $150. He made about
700% on his investment, but he could have had a 13-bagger had he held for another 9
months. Shares soared to $260 despite the controversy.

In the quarterly report where he discusses the divestiture, Buffett does not mention the
political issue and simply comments that Berkshire had been able to purchase shares at a
discount, they benefited from excellent management and from crude oil appreciation and
they had subsequently reached fair value. Crude oil was trading just about where it is now
when Buffett sold and PTR is in the same range also.

PTR’s fundamentals are improving. The company is benefiting from the highest cash
flow in the industry for downstream operations due to the relaxation of government price
controls on refined products. Meanwhile, international expansion is proceeding at a rapid
pace as China has been on an energy acquisition binge. The country is a net importer of
energy, bringing in huge quantities of coal, liquefied natural gas and crude oil. To
guarantee continuity of the supply chain, it is now buying interests in major deposits of
oil and gas and foreign refineries.

PTR will be developing the super-giant Rumaila field in Iraq. PetroChina International
Investment, a wholly-owned subsidiary, will acquire a 60% stake in privately held
Athabasca Oil Sands Corp’s Mackay River and Dover projects. PTR has recently built a
$4 billion refining and chemical complex in the western part of the country. The refinery,
which processes high-sulfur crude oil, will generate approximately $9 billion in annual
revenue and will allow China to economically refine crude imported from Russia and
Kazakhstan.

PetroChina has proved developed and undeveloped reserves of 10.5 billion barrels of
crude oil and 60 trillion cubic feet of natural gas inside China. Internationally, PTR owns
645 million barrels of crude oil and almost 1 trillion cubic feet of natural gas. Inside
China, PTR has more than 8,500 miles of natural gas pipeline, two dozen refineries, 11
chemical plants and 15,000 gas stations.

Despite the global downturn, China is growing GDP at 7-8%. According to The
Economist, China’s capital spending is a whopping 44% of its GDP. The country is
preparing for tomorrow and for the rest of the century. Shares are selling for 2007 prices
and we recommend them as a long-term hold.

AsiaInfo Holdings (ASIA) P/E 49, Market Cap $1 billion

Investing in secular growth stories is a low risk, high reward enterprise, if you can find
them. We think the wireless telecom buildout and modernization in China is just such a
story. So does Dell, Apple and other western technology leaders, who would love to have
a piece of the action. But it seems that the Chinese government favors its own.

Last year China Mobile (CHL), with more than 470 million subscribers, started its 3G
rollout and has recently announced a number of new partnerships. One of them, with
computer giant Lenovo, will develop a Chinese operating system based on Google’s
Android software.

AsiaInfo is a domestic Chinese software company that has an alliance with Lenovo.
ASIA offers a host of key software suites to enhance network infrastructure and mobile
applications for Chinese telecom carriers. AsiaInfo has been selected to provide
networking equipment to eleven China Mobile subsidiaries in support of the TD-SCDMA
rollout. The new 3G system will support wireless broadband service, mobile video,
wireless billing and more. ASIA has already been working with China Mobile for several
years, providing some of the foundational software back in 2007.

The Chinese mobile internet market is forecast to grow more than 250% in 2009.
Spending on wireless infrastructure equipment in China is expected to rise to more than
$6 billion in 2009, up 13% year over year, while spending in other parts of the world is
likely to decrease about 4% to $40 billion due to budgetary concerns.

In the most recent quarter, AsiaInfo grew earnings 92% on a 39% pop in revenues.
Institutional ownership is surging, which supports long-term share price appreciation.
Management owns about 20% of the company and ASIA has no significant debt. We
think shares will eventually recoup former highs, which would be more than a 200% gain
from current levels.