By Gregory Dorsey and David Frazier
Emerging Investments

       The world became a less stable place after North Korea detonated what appeared to be a small nuclear device. We've long known the rogue national had the capability to build a bomb, but this is the first time it has demonstrated that capability. And the Stalinist state is now threatening to detonate more A-bombs and even talking of declaring war on the United States if we enforce the recently imposed U.N. sanctions against the country.
       For now, U.S. policy makers aren't too concerned North Korea will point nuclear-tipped missiles at the U.S., or even Seoul for that matter. Instead, they worry the North will pass this technology onto terrorists who have less to lose by using such a weapon. We view any such proliferation as unlikely. The so-called "Devine Leader" wants the world to continue to focus on North Korea in his attempt to extort even more concessions from the West.
       The bomb detonation came despite numerous warnings from various countries, including China - the one nation that has any leverage of the rogue state. Beijing has no desire to see the isolated nation collapse, as such an event would no doubt lead to millions of refugees pouring across the Yalu River into China. Still, Beijing is likely to go along with tougher sanctions. Military action however, isn't in the cards.
       It's hard not to make comparisons between the North Korean leader and a spoiled brat: The kid throws a temper tantrum in public whenever he wants things to go his way. In the past, this juvenile strategy has worked successfully as a means of extracting generous financial aid from the West. But the country has demonstrated its ready willingness to break its promises, such as its 1994 pledge not to develop nuclear weapons. As a result, neither the Bush presidency nor subsequent U.S. administrations are likely to give in to Kim Jong II's further outbursts.
       Long term, if North Korea presses ahead with its nuclear weapons program, we could see both Japan and South Korea develop offsetting weapons of their own. Military analysts believe Japan could bring much more powerful nuclear-tipped missiles on line in as little as 30 days. Moreover, newly installed Japanese Prime Minister Abe is no shrinking violet, ready to further assert his country's position on the world stage, thus making such a scenario extremely plausible.
       For investors, the implications of North Korea's actions are minimal. Gold, the world's favorite disaster hedge managed to climb only slightly on the news. Investors' other safe haven in times of trouble, the U.S. greenback, likewise only mustered a small gain following the test. We remain bullish on gold and bearish on the U.S. dollar, due to structural imbalances in our economy. Defense-related companies will continue to enjoy robust earnings growth but aren't poised to reap any near-term gains from North Korea's bold move. Chinese-listed shares, meanwhile, are acting as if it's business as usual with the Hang Seng index near all-time highs.
       Stock markets are outstanding discounting mechanisms, and right now they're telling us not to be overly concerned with recent events on the Korean peninsula. Meanwhile, economic activity throughout the rest of Asia remains robust, which bodes well for our recommended Energy holdings.

China Increases its Strategic Oil Reserves

       China's oil imports surged 24% during September, as compared to the same month a year ago, as the country continued filling 16 newly built strategic oil reserve tanks near Shanghai; total oil imports rose to 3.3 million barrels per day. China is in the process of building four more storage facilities, which are expected to be completed by 2008.
Up until now, China has generally held between only 10 and 30 days worth of strategic oil reserves. But with the country second only to the U.S. in daily oil consumption, demand there soaring, and its own oil production in decline, China views the construction of a state-controlled strategic reserve as a major national priority.
       Given its heady economic growth rate, China's thirst for oil will be hard to quench in the coming years, especially considering the world's limited ability to add to oil production capacity.
       For now, China is expected to stockpile the equivalent of one month of national consumption. More likely, though, the country will need to expand those reserves considerably. These developments add even more credence to our expectations for oil prices to soon resume their long-term up-trend."
       Editor's Note: David Frazier is Editor of Emerging Investments newsletter, P.O. Box 97, Williamsport, PA 17703, 1 year, 12 issues, $129. Gregory Dorsey is the Portfolio Editor. Visit the web site at www.emerginginvestments.com.