ENERGY INDUSTRY OUTLOOK

INDEPENDENT EXPLORATION AND PRODUCTION
Exploration and production stocks (as measured by the XLE) rose 5.5% in the December quarter on the heels of a 15% rise in crude oil prices. The performance of the XLE was slightly below the 6.5% gain in the S&P Index over the same time period. Oil prices have soared above the $60 per barrel price moving outside our forecasted trading range of $45-$55 per barrel. We would attribute the move to strong economic conditions spurred by a tax cut and cold temperatures. Interstingly, the oil futures market did not move with spot prices. One needs only look to end-of-the-summer future contracts to see prices back in the fifties and only two years out to see prices back in the forties. Clearly the market does not expect higher prices to last, which dovetails with our belief that domestic producers will respond to higher prices quickly by increasing drilling efforts. We are warming up to the group but continue to maintain a cautiois outlook at this point. We favor companies that maintain strong balance sheets, have a large hedge position, and operate in regions with low operating costs.

METALS AND MINING INDUSTRY OUTLOOK

METALS AND MINING INDUSTRY OUTLOOK
Mining companies (as measured by the XME) rose 15.2% in the December quarter. The jump came despite relatively benign movement in gold prices (up 1.9%) and silver prices (0.7%). Most of the increase came in the second half of the quarter with the XME bottoming out on November 14th, down 5.8% before beginning a 19.6% tear to finish off the quarter. We do not have a good explanation for the strength in the always- volatile XME index. We suspect the move may reflect investor speculation and discomfort with equity markets reaching new highs. Interestingly, the bull run in mining stocks has continued into 2018. The XME rose 3.2% in the first week of the year in response to a 1.4% increase in gold prices and a 1.9% increase in silver prices. The move is not unusual as the XME has risen in four of the last five Januaries.

The strength in the second half of the December quarter may be in response to investors anticipating a continuation of the trend. We continue to have a favorable viewpoint of the precious metal mining sector based on the belief that strong economic condicons will increase the demand for gold and silver and equity market strength will encourage investors to look to the commodices market to park money. We believe 6,0x decreased exploracon and drilling in recent years will limit the amount of new supply brought to the market resulting in higher gold and silver prices. We favor companies that are cash flow positive but also have assets under control that they can exploit should prices rise.