August 2006 Issue

Walk, Don’t Run…

No guitar-based rock and roll band of the late 1950s and early 1960s could possibly go on stage without airtight versions of (1) The Champs’ “Tequila,” (2)
Link Wray and his Ray Men’s “Rumble,” (3) The Fireballs’ “Torquay,” and (4) The Ventures’ “Walk, Don’t
Run” (first charted 7/18/60). And through the years, none has endured better than “Walk, Don’t Run.” Oddly enough, this seminal
rock and roll classic, with its timeless four-note A/G/F/E hook, did not start life in the R&R genre.

Working with Benny

“Walk, Don’t Run” was written by legendary jazz guitarist Johnny Smith. Smith was well-known back in the early 1950s as guitarist
with the Benny Goodman Orchestra. In 1952, J.S. signed with Roost Records and struck gold immediately with his “Moonlight in Vermont” with
Stan Getz. Down Beat voted it Jazz Record of the Year. Smith’s “Walk, Don’t Run” was originally issued in 1954 on In
a Sentimental Mood—a Roost Records’ 10″ LP. All in all, it was a pretty mellow incubator for “Walk, Don’t Run,” a
tune that to this day shines like a neon light in the rock and roll lexicon.

My Big Idea

If you have been with me for long, you know about my Big Idea kicking off in 2008 with (1) the next U.S. presidential election, (2) the proposed Olympics
in China, (3) the first wave of the 76 million baby boomers retiring, (4) the emergence of the new very light jets (VLJs), and (5) broad-scale penetration
of Korean-like high-speed broadband. Talk about dynamic systems. The starting point of a dynamic system (the butterfly effect) is an initial condition.
The end point is the equilibrium state. In between are the transient states. And it is the in-between, transient states that we will be observing with
my Big Idea and its various components starting in 2008. The action will be frenetic.

Simple Is Sophisticated

Let’s look at the implications for a 76-million-strong tidal wave of retirees. To retire in comfort, each one of the 76 million baby boomers will
need an objective, reasoned game plan ideally crafted using common sense, logic, and preparation. The potential complexity of a lifetime financial plan
is, for most investors, frightening to comprehend. I propose a Ventures/Johnny Smith “Walk, Don’t Run” approach as you start out. Take
it slow and easy. Keep things simple. Remember my lead Simple Is Sophisticated? Have patience as you plot your course, and be diligent in the
homework you absolutely must do.

Outliving Your Money

You will need help! A financially comfortable retirement that could last a number of decades requires an understanding of compound interest and its
nasty little relative that I call reverse compound interest. The composition of your investment portfolio, including risk parameters (almost always forgotten
or misunderstood), is an issue of intense importance. But first are two equally important issues I urge every retiree, not just baby boomers, to ponder.
In order to not outlive your money, you need to consider the advisability of
(1) retiring later than planned today, and (2) dramatically slashing monthly cash outflows in retirement. Money you have today is high-powered money—it
is money that, if invested, could work for you for decades. Most of you are going to want to hold off drawing down your nest egg for as long as possible.
The best and easiest way to cut your withdrawal needs is to slash your spending. Right away, this means
(1) no mortgage, and (2) no car payments or debt payments of any variety, including credit cards.

Moving to a warm climate that will be less taxing both mentally and fiscally is an option I advise. In 1992, Debbie and I became Florida residents,
and we have not once regretted this decision. And, yes, I know from loads of experience that hurricanes (I advise high ground) are a first-order pain
both mentally and financially. But wherever you live, unpleasant natural events are likely to be part of the equation.

Retirement Arithmetic

If you are not yet retired, I’d like you to consider hanging around until they kick you out, so to say. Why is the one-two punch of slashing spending
and hanging around so terribly important for you? You don’t want to outlive your money.

Now let’s look at the arithmetic of a financially secure and comfortable retirement. First, we start with a portfolio balance of 50% stocks and
50% bonds. Chart #52 in my Economic Analysis supplement shows that a 50/50 mix offers a nice defense against down years. Negative returns are killers
for compound interest. We assume an average annual long-term total return for stocks of 8.8%, and a 5.9% return for bonds (all explained at www.youngresearch.com).
We also assume a 9% standard deviation. And we build in a 0.80% annual allowance for a registered investment advisor fee. If your portfolio is valued
at $1 million or more, the tax-deductible value of a registered investment advisor is a low-impact cost for the order, discipline, and attention to detail
a professional investment staff can bring to the table for you.

It takes a certain set of skills in life to amass after-tax net earnings of $1 million or more, but it takes a much different set of skills to navigate
the emotionally charged and treacherous waters of mathematically adroit, counterbalanced portfolio composition. The odds of producing risk-adjusted total
returns that beat a pro at any task long-term simply are not real good. Ever tried giving your car a tune-up? Probably not, and for good reason if car
tune-ups are not your practiced expertise. Trust me, rustling around with Value Line over the weekend or sitting in front of your computer screen for
some broker’s free research are not likely to produce pleasing results. And as to the emotionalism of investing, I can only tell you the process
wreaks havoc on the portfolios of even the most astute non-professional investors.

Inflation Is a Killer

OK then, Young Research has assembled a series of benchmarks with which to establish the probability that any investor will outlive his money. We test
many different withdrawal rates over an array of time periods. Initially we build in a 3% inflation contractor (the value of your portfolio contracts
in terms of buying power by the net effect of inflation compounding). We use 3% for the first 15 years of a retirement, 2% for the next 10 years, and
1% thereafter. These are not inflation forecasts. Our numbers are really modest purchasing power deflators. As an investor ages, we assume that spending
will naturally decline. We also assume, perhaps wrongly, that our investor will have substantial medical coverage so that portfolio cash flow aimed at
medical expenses is not burdensome. As we all know, this situation itself will take some doing.

A Giver and a Taker

How much can you draw from a portfolio that works under my assumptions? Our arithmetic assumes that one retires at 65 and lives to be 100. More of us
will live to be 100 than you would think. That’s a 35-year retirement. If your parents both lived to 81, I’d wait until you were 65 ½ (as
in my case) to take your Social Security. I receive about $2,050/month, get 25% withheld for Fed tax, and—get this—still have to feed about
$6,000/year into the government sinkhole because I am still working. I am both a giver and a taker. Go figure. If one or both of your parents passed
on before age 81, I’d start drawing your most meager Social Security at 62 ½.

Scenario I

Let’s assume you want to leave to a beneficiary your total initial portfolio in trust. By drawing 6% on your portfolio, you have only a 21% chance
of maintaining the full principal of your portfolio. By cutting your annual draw to 5%, your chances improve, but only to a still-not-red-hot
43%. At a 4% draw, your probability hits 70%. And at 3%, you have a 91% shot. To maintain purchasing power, there is zero rationale for a withdrawal
above 4%. In Scenario I, I’d like you to think real hard about slashing your cash outgo to allow a draw of only 3%.

Scenario II

My second scenario allows you to consume 80% of your principal in order to leave 20% to a beneficiary. At a draw of 6%, you have a 29% probability of
success. Not so good. At a 5% draw, you get a still-not-peachy 56%. At a 4% draw, your probability jumps to an acceptable 83%. And at an annual draw
of 3%, you have a 98% chance of success. You are in great shape.

4% Draw Is Max

Most investors, then, should not plan on drawing more than 4% from a retirement portfolio. I pray you see why with increased clarity.

Retire in Florida

Gainesville/Micanopy (population 600) is a sleeper. Hurricanes do swing through, but the damage is mild compared to coastal regions of Florida. I’d
have no concerns. Gainesville is home to the first-rate U. of Florida, lots of good medical services, and a jet port of sorts. The airport will improve
over time, as Gainesville continues to attract the astute, like your venerable self. I like that you can easily and quickly Harley over to Daytona for
Bike Week or a redneck car race. Daytona does have big beaches, slate-hard as they may be. And did I mention that you may want to bring your own food,
as Daytona is virtually bereft of pleasing dining destinations?

Housing prices are reasonable in Gainesville. Pleasant three- and four-bedroom homes on wooded lots run between $200,000 and $375,000. As to health
care, Alachua County is home to world-class medical care. The county ranks #1 in Florida for all types of health professionals per 10,000 population.

North Florida Regional Hospital is one of only nine hospitals in America to rank as one of America’s top 100 hospitals for six years running.
Sands Health Care, affiliated with the U. of Florida Health Science Center, is rated as one of the premier health systems in the southeast. It draws
patients nationally for highly specialized complex care. The Sands Children’s Hospital at U.F. is among the largest children’s hospitals
in the state.

Nice Climate

Gainesville’s climate is moderate. In January, expect a high of 67 degrees, a low of 42, an average of 54, and 3 ½ inches of rainfall.
In August, look for a high of 90, a low of 70, an average of 80, and 6 ¾ rainfall. If you take a scouting trip to the Gainesville area, leave
time to head to northwest Florida. Stay at St. Joe’s marvelous WaterColor. Check out the neat restaurant scene on 30-A. Criolla’s in the
cool Grayton Beach is a top pick. In the Gainesville area, stay at Herlong House in the neat little antiquing town of Micanopy (1-800-437-5664). Micanopy
is off the beaten path and from a bygone era. Ask the owners about the close-by chef-owned pizzeria probably on US 441. We had a lot of fun at this most
informal little spot.

Rough Waters Still Ahead

In the May newsletter, in the section “Rough Waters Ahead,” I told you to expect higher interest rates as we approach hurricane season in
a June non-presidential election year and that this would not be a great scenario for the summer or fall. And how have things gone? Not so hot. Let’s
take a look. NASDAQ is down YTD. S&P 500 is down YTD. In fact, the 21st century to date has been quite hostile to most investors. Since year-end
1999, the S&P 500 is down 15%. The NASDAQ is down 47%. The Dow, by contrast, is down by only 4%—not a great showing—but blue-chips have
indeed offered some refuge. In that you know what I own, you know I have done real well this century regardless of the markets. And you have had the
same chance I’ve had as I invest only in names from these pages. Last year, Young Research’s in-house Retirement Compounders list (unaudited)
was up 9.5%, versus 1.9% for the Dow. This year, it’s up 5.4%, versus 3.7% for the Dow.

An Inflection Point

I’ve written to you often to be wary in hurricane season, especially when interest rates were advancing in a non-presidential election year. Well,
just this scenario is in place as I write. By late in the year, unless interest rates rise far enough to choke economic growth, the weather should clear.
Before reading further, turn to your enclosed Economic Analysis. Read over my Big Picture and look at my four featured charts. Conditions are setting
up for a slowdown in economic activity. That is, we are now at an inflection point that could go either way. I have analyzed economic cycles for over
four decades, and I can tell you that it’s time to get concerned. Should the U.S. economy fall into recession, you will see stocks a lot lower
than they are today. The good news is that, should rates drop next year, fixed-income would take on new allure. I want you to continue to keep your fixed-income
durations short. I’ve been writing about Vanguard’s Short-Term Investment-Grade. It’s up YTD and offers a safe harbor in the
current rough waters. I also like the short-duration Vanguard GNMA. It’s down a little YTD, but no big deal. When all the numbers are in,
it should still show a positive year-to-year total return for the year.

On the common stock front, stick largely with dividend-paying blue-chips. More on specific stocks later.

Keep your overall strategy much as I’ve written about all year, which includes lightening up on the natural resources front (e.g., gold), as I
outlined last month. Don’t abandon your natural resources names; rather, sell half your position to reduce your exposure. There will be a good
point to rebuild positions next year.

Politics and the Stock Market

My four tables show how the economy has done in each of the four years of the presidential cycle. Based upon what I’ve explained about the presidential
election cycle, it should come as no surprise to you that GDP growth is best in the year before a presidential election and next best in a presidential
election year.

The name of the game is politics—pure and simple. A number of items stand out in the roster of recent developments. On the values front is the
burning of the American flag. Last year, the House voted 286–130 that “the Congress shall have power to prohibit the physical desecration
of the flag of the U.S.” The two-thirds vote needed to take the amendment to the states was achieved. The Senate, by a single vote, has rejected
the amendment. The vote was 66–34, and 67 votes were needed. A single Republican, Lincoln Chafee (up for re-election), voted no with, among others,
Democrats Clinton, Kennedy, Kerry, Lautenberg, Leahy, and Levin. Voters have some obvious choices based on this vote.

In a Kerry Fog

Next up, the Iraq issue. Only 13 senators voted for a Kerry/Feingold proposal to redeploy American combat troops out of Iraq by July 2007. Joining fog-shrouded
Senators Kerry and Feingold were, among others, Senators Boxer, Kennedy, Lautenberg, and Leahy. Once again, voters have been given a nice checklist.

The House passed an estate tax compromise (I still don’t like it) by a 269–156 vote. The Senate still cannot get a vote to resolve the issue.
Stalling the vote is the same crowd who would cut and run in Iraq and approve burning the American flag. It’s time for a house cleaning.

A Liberal Utopia

On the Supreme Court front, I’ve written that President Bush needs one or two more appointments to establish a comforting conservative base. If
you read the results of the free speech vote, you will get a good feeling for the relevance of the high court. In a 6–3 ruling, the Supreme Court
voted to knock out Vermont’s limits on political contributions. As the WSJ reported, “Befitting a liberal utopia, Vermont had tried
to purge all money from politics in 1997 by passing a law that placed a spending cap of $300,000 on gubernatorial candidates.” Voting against,
as expected, were Justices Ginsburg, Souter, and Stevens. For what is supposed to be an objective body, it’s amazing how often a careful study
of a given case will predict the voting outcome with some regularity. One of the more important aspects of the presidency is the ability to nominate
Supreme Court justices. More than ever, American voters will be pondering the Supreme Court nomination issue when voting for president and most likely
the Senate and House as well.

More Castle Doctrine States

Another interesting item involves the Second Amendment. A number of states have recently voted for a Castle Doctrine (following Florida’s model).
Castle Doctrine, as America’s 1st Freedom writes, “…simply places into laws what is a fundamental right: self-defense. If
a person is in a place he or she has a right to be—in the front yard, on the road, working in their office, strolling in the park—and is
confronted by an armed predator, he or she can respond in force in defense of their lives.” Aside from Florida, Castle Doctrine is now law in
Alabama, Arizona, Georgia, Idaho, Indiana, Kentucky, Mississippi, and South Dakota. And Alaska, Arkansas, Michigan, Minnesota, Missouri, New Hampshire,
Ohio, and South Carolina are all on track to join the Castle Doctrine era.

UN’s Global Gun Ban Goal

Given the above, a whole lot of Second Amendment-supporting Americans have a right to be in an uproar by what is going on in the UN. The UN selected
July 4th to conduct on U.S. soil its largest-ever global gun ban conference. The NRA’s executive VP writes, “The global gun ban treaty is
a ticking time bomb—just a pen stroke away from UN gun laws being enforced in the U.S. Any anti-gun president—say, an H. Clinton—could
call the UN document an ‘agreement’ instead of a treaty and bypass needing two-thirds of the U.S. Senate for ratification. This is exactly
what Bill Clinton did to get the North America Free Trade Agreement (NAFTA), which Congress passed with simple majorities.”

Dump Class Actions

Once again we have a politically polarizing issue here that will draw heated response. It will be easy for voters to see which of this fall’s
candidates—and for that matter the upcoming 2008 presidential candidates—are in favor of family values, including the Second Amendment and
related conservative flash points like (1) nominating conservative justices,
(2) cutting taxes and overhauling the tax system with a move to a consumption tax, and (3) overhauling our legal system by axing class action suits and
punitive damages, and moving to a loser-pays system. The financial markets love the free market model and react poorly to the opposite. We’ll get
a preview of the 2008 presidential election climate with this fall’s off-year elections.

The US$ and Gold

As my chart shows, in the early 1970s, foreigners held little U.S. debt as a percent of GDP. Today, the foreign debt totals a shocking 17% of GDP. This
is a whole lot of overhang when you consider the consequences if foreigners decide they no longer have faith in the US$. Don’t forget, the dollar
has no intrinsic value. Since 1971, it has not been backed by gold. It’s hard to look at the $800+ billion external trade deficit and our internal
budget deficit that equals 3.6% of GDP and not be deeply concerned about the health of the US$.

Out-of-Control Entitlements Spending

Our fiscal house is not in order, and there is no rationalizing this fact away. Who is at fault here? Our elected leaders in the Senate and the House,
along with the president, establish the ground rules. We are not being represented well—not well at all. Spending across the board is out of control.
We need tax and legal system reform as well as a mandated balanced budget. We need professional management of the country, not a condition where each
party votes pretty much along party lines with the primary motivation re-election.

A New Ballgame for Gold

Alternatives to the US$ are a must for all investors. With the 20-year bull market in bonds now history, I once again like gold. And I like foreign
currencies backed by sensible government policies and finances. Switzerland runs a current account balance and, while it runs a modest internal budget
deficit, the deficit runs only 0.2% of GDP. My chart tracks the Swiss franc/U.S. exchange rate and a purchasing power parity track using consumer prices.
As you can see, over the last three decades, it has been pretty much downhill for the US$ with some periodic rebounds, as in the early 1980s and the
late 1990s into the start of the new century. In both cases, the US$ rose well above fundamental value, and the Swiss franc was cheapened beyond our
measure of economic value.

PPP Sets the Course

Purchasing power parity is not a great predictive tool, but it does set down a nice value track. It clearly indicates those periods when any currency
measured gets out of line versus another currency, just as my chart on the Swiss franc has shown. Today, the Swiss franc is in line with its economic
value. And given the relative position of the Swiss external and internal accounts versus the U.S. position, it’s not hard to make a good case
for the Swiss franc and a sour case for the U.S. currency. In past issues, I’ve outlined my preferred strategy for investing in Switzerland and
the Swiss franc, which involves a Swiss banking relationship and a personal visit to establish your account.

Gold on the Cheap

Gold has corrected sharply, and it’s easy to ask what is wrong with gold. The short answer is nothing. Gold, copper, and aluminum all set interim
peaks in the middle of May. Since then, each is off by 20% to 25%. Given the magnitude of the speculation involved in all three, the temporary
declines are not surprising. As the charts in my Economic Analysis show, copper is still way overpriced, while gold and aluminum are undervalued.

Johnson Matthey reports that an official at the Beijing Gold Economy Development Resource Center has called for China to raise the position of gold
in its reserves to 3%–5% from 1.3% today. Such a move would entail the purchase of 1,900 tons of gold, equivalent to gobbling up nine months of
global mine production.

$5,000/Ounce Gold?

During the last big gold market in the 1970s, gold ran over $800, peaking early in the 1980s. Look at my World Currency Reserves/Gold Reserves Chart
(#24). Track back to 1980. The theoretical value of gold back then was only $400/oz. Today, we’re looking over $5,000/oz. My theoretical price
is not a forecast. It simply matches gold one-for-one with currency reserves. At such a level, world currency reserves would be 100% backed by gold.
Is this a reasonable assumption? In normal times, probably not. Today, given the potential for a significant drop in the US$, it’s a horse of a
different color. The US$ is the world’s reserve currency. Will the dollar maintain this status in the future given our prolific domestic spending
and monster of a current account deficit? I’m not sure. Regardless of gold’s theoretical price, gold is indeed an international monetary
asset, or it would not be held by central banks. Were gold not of real value as a monetary asset, there would be no need for Fort Knox. Politicians worldwide
want no part of gold and certainly not as a backer for currency. Such a link hinders spending. And the academic community goes bonkers any time the subject
of gold as money comes up. The anti-gold lobby is both big and vocal. Fine, but it’s worth noting that no currency in history has stood the test
of time.

Red Barry & Tim Holt

When I was growing up in Cleveland, Ohio, my brother and I would pay 10 cents to go see those great old Red Barry, Tim Holt, Roy Rogers, Bob Steele,
and Cisco Kid movies. Today, you pay $6 to $10, depending on where you live. Don’t tell me gold has no monetary value. Our fiat currency has been
debased beyond recognition. Going back to the gold standard, passing a constitutional balanced budget amendment, throwing out our insane progressive
tax system and replacing it with a consumption tax, and passing a constitutional amendment to rework our legal system would put our country on solid
footing literally overnight. But can you imagine the field day the politicians, lawyers, academics, Rolling Stone, and The New York Times would
have with this foursome?

In that my resolutions do not seem to be front and center with today’s crowd of elected faces, I’ll continue to buy gold and advise you
to buy gold. Add to your Vanguard Precious Metals & Mining (closed to those who missed the boat). Buy and add to American Century Global
Gold (I recently took a large position) and StreetTracks Gold Shares. StreetTracks is an exchange-traded bullion fund (ETF).

Today, total gold in the trust equals $6.2 billion. The gold that underlies Gold Shares is held in the form of allocated $400/oz London good delivery
bars in the London vaults of HSBC Bank USA. The custody methods are essentially no different from those that have operated without a problem in the London
market for centuries. The trust’s independent trustees can visit and inspect the gold twice per year and the auditor can visit and inspect the
gold during the audit. The trust updates weekly the gold bar numbers on its website (streettracksgoldshares.com). The trust’s website shows
actual pictures of the physical gold bars held in the vault in trust for the benefit of gold shareholders.

I don’t buy gold with the idea of trading or selling. If you take a more active approach, I’d hold your gold in your IRA, as the shares
are taxed as a collectible. Here we’re looking at your highest tax bracket if you hold for less than one year and the 28% collectibles rate if
you hold longer.

My Newmont/gold chart shows you the relationship between shares and metal in terms of two standard deviations. When the ratio peaks, it shows that shares
are expensive relative to the metal itself. Bottoms such as occurred in the late 1990s and early this century indicate that the shares are about as cheap
as they will ever get versus the metal. Today, it’s a toss-up. As such, I’d be a 50/50 buyer of shares and metal.

Fixed-Income

All conservative investors should have between 30% and 75% of their portfolio in fixed-income. At our family investment management company, we recently
added GE Capital’s new preferred (no symbol yet) to our list. The yield is now about 6.45%. The issue is rated AAA/AAA and is cumulative. Add this
ultra blue-chip high-yielder to your IRA or in a portfolio providing current income in retirement. I’d also add the Royal Bank of Scotland (NYSE:
RBSprQ) (A1/A), yielding about 6.75%.

Full-Faith-and-Credit Pledge

My strongly advised Vanguard Short-Term Investment-Grade is one of the few fixed-income funds up YTD. The reason is the short 1.7-year duration.
I also continue on strongly with GNMA, yielding 5.24% with a modest 4.4% duration. Remember, while the fund itself does not carry the government’s
full-faith-and-credit pledge, the underlying GNMAs, unlike other agencies, do carry the ultra blue-chip pledge. No retirement fund should be without
a cornerstone holding in this fund.

Monster Master List Mutual Funds

All of my own big equity fund positions are up YTD, and you may well be on the same train with me. For most investors, however, it’s not been
a great year. For you, if you have acted in a timely fashion, it has been a lot different story. Where to invest new money today? #1: American Century
Global Gold, #2: StreetTracks Gold Shares, #3: Vanguard Precious Metals & Mining, #4: Dow Diamonds, #5: BlackRock Enhanced Dividend Achievers
Trust, #6: BlackRock Global Opportunities Equity Trust (#5 and #6 boost yield by writing covered calls on the portfolio). Use these last two
funds in your IRA.

Third Avenue Real Estate Value has re-opened. I’m not adding here.

Monster Master List Stocks

Harley-Davidson (NYSE: HDI): I’m on the sidelines. And I’m thinking I’d like to see Harley become a private company again.
Northern dealers are up to their gills in 2006 bikes, and the 2007s hit showrooms in mid-July. The mammoth Boston Harley-Davidson dealership has over
100 2006s on the floor advertised at “blowout” prices. Dealers are selling below MSRP and advertising the fact hard. Harley is going to
have to revise its aggressive earnings projections. When this happens, the stock will get croaked, just as St. Joe (NYSE: JOE) will get killed
if a big hurricane hits the WaterColor area this summer. So far, I’m not hearing much buzz on the 2007 Harleys. And believe me, the new EPA regulations
are a potential time bomb in Harleyland.

Phelps Dodge is not on my Monster Master List today because I don’t like copper, even post a 25% crack. P.D. is looking to buy Inco (NYSE:
N) and Falconbridge (NYSE: FAL) at the top of a cycle and load up with debt in the process. No thanks.

Boeing (NYSE: BA): The more I read, the more I think the euro folk are screwing up the Airbus (Boeing’s arch-competitor) deal. Love Boeing
here. Buy it.

Pfizer: Not on my Monster Master List now because I have reservations about statin drugs. Pfizer did $12.5 billion in revenues in Lipitor in 2005 and
it’s running full-page color ads in the WSJ portraying Dr. Robert Jarvik, inventor of the artificial heart, flogging Lipitor. I’m
real uneasy here!

Alcoa (NYSE: AA) has the look of a takeover candidate. As my Chart #34 shows, aluminum is cheap versus copper. Buy AA.

Microsoft (NASDAQ: MSFT): Bye Bill. Hi Ray. Still Steve. I’ll hang for now.

Berkshire Hathaway (NYSE: BRKb): Is Warren Buffett’s money off to Bill Gates’ foundation significant to Berkshire? Hard to think
it’s a plus, but I’ll stick around here also.

Johnson & Johnson (NYSE: JNJ): The company is paying $16.6 billion to Pfizer for a nice portfolio of stable brands, including Listerine,
Visine, and Lubriderm. PFE can now spend additional huge sums promoting drugs that give me pause. J&J is your play.

Disney (NYSE: DIS) and Marvel (NYSE: MVL): A hyped WSJ feature dumped on Marvel because hot-shot Avi Arad is leaving. On the other
hand, the Journal pumped up Disney on the opening of Cars. (A) I don’t think the Arad departure is as black a day for Marvel as painted.
And (B) I don’t think a $62 million first-week opening was as super-duper as the WSJ made out. Despite the above, I still like both stocks.

Stable, blue-chip, dividend-paying Dow stocks Citigroup (NYSE: C), American Express (NYSE: AXP), and General Electric (NYSE: GE)
are all in my Top 10 and I love all three. Buy them.

Hot Spots

We can stop Iran’s nuclear charge dead in its tracks by quarantining Iranian gasoline imports. Due to severe mismanagement of its domestic energy
supply, Iran is highly dependent on foreign gasoline. Quarantine would cripple Iran’s economy in a matter of weeks, leading almost certainly to
widespread rioting in the streets and chaos.

China is also a hot spot on two fronts: domestic growth and its military buildup. Based on year/year 30% fixed asset growth, it now looks as if China’s
economy will grow by 10% in 2006. Demand for bank loans is red hot, and China’s banking system is already larded with mountains of bad loans. Overheating
and a potential financial system blow-up lie ahead (probably post-2008). As China’s economic growth hits the boil, its expansive military buildup
is causing increasing concern at the Pentagon. There is no question that China is gearing up to further intimidate Taiwan. China already has nearly 800
short-range missiles within range of Taiwan. Gordon G. Chang, writing in Foreign Affairs, notes, “The consensus to engage China is breaking
down as Beijing is increasingly perceived as more assertive than cooperative. China’s proliferation of nuclear weapons technology, its diplomatic
and material support of unsavory regimes, and its pursuit of outlandish territorial claims could bring it into conflict with the very countries that
have so far patiently engaged it.”

China and Taiwan: No Thanks

I do not advise investing in either China or Taiwan. To participate in the region’s growth, I prefer the relative safety of iShares for Australia, Hong Kong,
and Singapore. As summer gets into full swing, gold and blue-chips are my focus for you. If you are light on either of these, it’s time
to build positions now. Think blue and gold. Make your calls.

This issue is dedicated to the memory of Hammond B3 legend Billy Preston (the “Fifth Beatle”) and to Chuck Tharp, a founding member and
the original vocalist of The Fireballs. And I’ve selected “Torquay II” by The Fireballs as the official Simple Is Sophisticated theme
song for Intelligence Report. It is to be found on the album Best of the Fireballs—The Original Norman Petty Masters (ACEA-CDCHD
418).

Make it a good month.

Warm regards,

Richard C. Young

P.S.: Over four decades after their founding, The Ventures—with original members Bob Bogle, Don Wilson, and Nokie Edwards—are still going
strong. The Ventures have sold over 90 million albums and shamelessly have not been inducted into the R&R Hall of Fame. The Fireballs, under the
leadership of George Tomsco (creator of “Torquay,” “Torquay II,” and “Bulldog”), along with founding member Stan
Lark, continue to hold forth. From the start, Chuck Rio, Dave Burgess, and The Champs were a studio band with “Tequila” and had only a short
career. And the great Link Wray of “Rumble” fame has passed on.

I’m excited. Each month I include a mention or two on a musical theme. This month, I am excited to announce that one lucky Intelligence Report subscriber
will win 150 CDs personally selected by me in my JukeBox Sweepstakes. Included are Johnny Smith’s “Walk, Don’t Run,” The Ventures’ “Walk,
Don’t Run,” The Best of the Fireballs, including “Torquay,” “Torquay II,” and “Bulldog,” and The
Best of the Champs, including “Tequila.” We spend so much time talking investments that it is time to take a break and have some fun—some
musical fun. Enclosed you will find my special insert giving you info on my first-ever musical sweepstakes. Good luck to each of you, and don’t
forget to go to www.youngresearch.com for my ’50s and ’60s Jukebox R&B Top 100.

P.P.S.: Next month, my resolution to the mess in Iraq, a lot more on gold, and an updated look at the potential for a U.S. recession. Also, the surprising
link between the money supply, interest rates, inflation, and the economy. And I’ll update you on the “crash state” in the U.S. real
estate market. Also, my perhaps surprising view on the new strength of independent mutual fund directors and the course I believe the fund industry should
take in the future.

Richard C. Young’s Intelligence Report® (ISSN 0884-3031) is published monthly by Phillips Investment Resources, LLC, 9420 Key West Ave., Rockville, MD 20850. Please write or call if you have any questions. Phone: 301/424-3700 or 800/301-8968. E-mail: service@intelligencereport.com. Web address: . Editor: Richard C. Young; Group Publisher: Michael Bell; Chairman: Thomas L. Phillips; Associate Editor: Deborah L. Young; Marketing Manager: Jim Brinkhoff; President: John J. Coyle; Research Director: Jeremy Jones, CFA; Sr. Managing Editor: Shannon Miller; Business Manager: Thomas C. Burne; Research Associate: Rebecca L. Young; Editorial Assistant: Danielle Hart; Sr. Vice President: Christopher Marett; Subscriptions: $249 per year. © 2006 by Phillips Investment Resources, LLC, Founding Member of the Newsletter Publishers Association of America. Photocopying, reproduction or quotation strictly prohibited without the written permission of the publisher. While the information provided is based upon sources believed to be reliable, its accuracy cannot be guaranteed, nor can the publication be considered liable for the investment performance of any securities or strategies mentioned. Subscribers should review the full disclaimer and securities holdings disclosure policy at /disclosure.php or call 800/219-8592 for a mailed copy. Periodicals postage rates paid at Rockville, MD, and at additional mailing offices. Postmaster: Send address changes to Richard C. Young’s Intelligence Report, Phillips Investment Resources, LLC, 2420A Gehman Lane, Lancaster, PA 17602.