In Q1 2000 issues of Taipan, I refined this skeptical view of U.S. tech stocks with the "Year of the Dragon" thesis. According to the Chinese astrological calendar, "Dragon years often give rise to celebrations or festivals. These years are meant for those who dream of vast success and brilliant victory... Because of the essentially mythical nature of dragons, any gains reaped during this year may prove to be fleeting or largely unreal."

Consequently, I downgraded all U.S.-correlated recommendations to Holds in the April 2000 issue of Taipan.

Immediately following the publication of my article, U.S. tech stocks collapsed, the outrageous paper gains enjoyed by dot-com shareholders and leveraged daytraders vanished, and the King of the Carnival was burned in effigy. While most investors are still hemorrhaging from the April-May bloodbath, Taipan subscribers are raking in profits: my Taipan stock recommendations are up an average 68% year-to-date.

The Utility Index is currently trading at record highs. This is an unequivocally bullish sign for the broader market. Furthermore, over the last two decades, the Utility Index has tended to exhibit 14-16 month cycles. In other words, trends in the Utility Index tend to last for at least 14-16 months. The current bullish trend in the Utilities began in December 1999. There's a lot of time left for further strength in the Utility Index.

Wiseguys will tell you that the Utility Index doesn't matter anymore. Utilities are driven by electricity deregulation, not interest rate expectations. Sure. I'm delighted that market gurus despise one of the oldest and most reliable of technical indicators. If everybody watched the Utility Index like a hawk, it would have absolutely no predictive value.

The strength in the Utility Index and weakness in the XAU gold share index suggests that long-term interest rates will continue to decline (without undercutting the dollar). Since fiscal and monetary conditions are tight, this should come as no surprise. The Fed may have to cut rates next year.

The immediate beneficiary of a radical shift in interest rate expectations will be rate-sensitive sectors, including insurance. I am, therefore, building up positions in small-cap insurance companies that have large portfolios of
government bonds. In general, companies with crushing levels of bank debt should also benefit. I expect to cover some low-risk/high-return plays on a radical shift in interest rate expectations in future issues of Taipan.

There is an outside chance that a vicious circle could emerge in which the socialist government creates such dire economic conditions that the public backs even more extreme socialistic legislation, leading to even greater economic destruction.

Coincident with the destructive policy changes of the new government is the "double dip" in Southeast Asia. Thailand and South Korea are experiencing post-Asian crisis-restructuring hangovers that are hurting New Zealand exports. Japan's economy has also failed (so far) to come back from the dead. New Zealand needs a Pan-Asian boom to ramp up its exports.

As an agriculture- and basic industry-driven export economy, New Zealand is not directly benefiting from the global technology boom. While the genomics revolution offers the potential for countries like New Zealand to convert their sleepy, capital intensive industries (wool, fish, wine, lamb, etc.) into value-added, high tech, cash-generating powerhouses, the New Zealanders unfortunately share the biotech phobia of Australians, the British, and Continental Europeans.

The formula for comparing Lukoil Preferred ADR (LUKPY:OTC) to Lukoil common ADR (LUKOY:OTC) is 2 LUKPY = 1 LUKOY. You need to multiply LUKPY's price by 2 to compare it to LUKOY. LUKPY * 2 = US$48. LUKOY is currently trading at US$64. This means the current discount between Lukoil preferred and Lukoil common is 25%.

When I recommended LUKPY, the discount between preferred and common shares was a ridiculous 60%. As I predicted, the discount contracted as irrational Russophobia dissipated. While the discount has experienced a massive one-time contraction, there is still upside leverage to the preferred. If LUKOY rises 50% and the discount contracts by half to 12.5%, LUKPY would rally to US$42ñ75% above current levels. In addition, the preferred is likely to continue paying out superior cash dividends. 1H FY 00 financial results at the holding company level implies a fat US$2 per ADR dividend to preferred ADR holders.

The only big downside in owning the preferred instead of the common is the lack of voting rights. But in Russia voting rights mean almost nothing. Furthermore, the preferred stock will be converted into de facto common stock if Lukoil neglects to pay 10% of holding company operating profits to preferred shareholders.

There is a rumor that Lukoil management has been accumulating preferred shares. This might sound bullish, but you have to remember this is Russia: if Lukoil insiders control a supermajority of preferred stock, they could force a conversion of preferred into common at unfavorable terms. On the other hand, management may be buying to enrich their personal accounts with large preferred dividends.

I don't have enough space to reiterate the entire Lukoil story, but there is still tremendous value in the stock. At current levels, Lukoil is trading at 4x earnings — and remains one of the world's top ten oil companies in terms of reserves, production, and refining capacity.