Dubai is part of the United Arab Emirates, seven countries that act as a confederation of states with a combined population of 2.5 million people and is the size of Maine. Located on the Arabian Peninsula, the UAE extends along part of the Gulf of Oman and the southern coast of the Persian Gulf. Most of the land is barren and sandy.

Originally, the land was inhabited by seafaring people who converted to Islam in the 7th Century. The United Arab Emirates Federation was formed after British withdrawal from the Persian Gulf in 1971, with the seven “Trucial States” – Abu Dhabi, Dubai, Sharjah, Ajman, Fujairah, Ras al-Khaimah and Umm Al Quwain. In addition to the Federal Prime Minister and President, each emirate has a separate ruler who oversees the local government.

Princeton Professor Burton Malkiel famously articulated in his seminal book, Random Walk Down Wall Street, two investment ideologies – the “Firm Foundation” theory and the “Castle in the Air” theory. The Firm Foundation theory basically says that you should invest based on the actual real value of what you’re investing in – sensible enough. The Castle in the Air theory, ironically practiced by John Maynard Keynes, says that you should invest in response to what the crowds are doing and riding the waves of what is “hot.”

Which camp is Dubai in? Probably both.

By now, everybody has seen or heard of some of the sensational developments in this tiny country of 1.5 million residents; 25% of all the world cranes are in Dubai, the largest mall on the planet which includes an indoor ski slope, “The Burj” that when completed will be the largest building in the world; the fact that by 2012, more skyscrapers will be located in Dubai than Manhattan, etc... My 15-year old daughter wanted to know if I had been to the Burj Al Arab, the sailboat-shaped “seven star” hotel or the man-made Palm Islands, both of which have come to symbolize the “anything-is-possible” attitude of this city-state; similar to how the Statue of Liberty that represents freedom and hope in NYC’s harbor.

The Burj

The look and feel of Dubai reminds me of a cross between the impressive organization of Singapore and the energy of Shanghai. It’s beautiful with white-sanded beaches along the entire country and has as clear and blue water as I’ve seen anywhere.

Like “the 49ers” seeking gold in California, nobody is in Dubai coincidently, but the people I met were extraordinarily gracious with their time and insights. Despite stereotypes I had heard about Middle Easterners’ concept of time and punctuality, every meeting we had started and stopped on schedule.

The grand architect of today’s Dubai is Sheikh Mohammed. Being somewhat skeptical about people who inherit their authority from coming out of the right womb, I was surprised and impressed by the universal respect and admiration the Sheikh garners from a wide array of people I met with; in some ways, a Middle Eastern version of Lee Kuan Yew of Singapore. As Mohammed Al-Shroogi who leads Citigroup’s (NYSE: C, $26.39) operations for the Middle East told me, “the Sheikh’s vision powers the boundary-less possibilities for the future.” The Sheik had told another of my hosts that “yes, the bubble has been created and it had burst, positively affecting the rest of the region.”

Tom Volpe, formally of the investment bank that bore his name, is now CEO of the Dubai Group, one of the Sheikhs investment arms. Tom said that being in Dubai is like “drinking out of a fire hose,” with the opportunities that are seen being “unbelievable.”

The cover story for last week’s Economist, “The Rise of the Gulf”, wrote about the geological serendipity of having 41% of the world’s hydrocarbons (oil and new participant gas) in the region – which is true. Interestingly, however, Dubai itself has essentially zero oil and gas but it has positioned itself as the economic and social center for the region. The “network effect” is essentially the core economic principle at work – the advantage that Dubai achieves over other alternatives exponentially increases with each new participant.

The Dubai Financial Market – 25% owned by NASDAQ – is a modern exchange, aggressively seeking to be the go-to exchange for regional IPOs between London and Hong Kong. Currently, the Dubai International Airport is the largest in the region with 34 million passengers annually. But to accommodate the boom, the new $100 billion Dubai Airport being built is expecting 100 million passengers a year – making it the largest in the world.

Emirates Airlines, which this week reported a 35% increase in profits to $1 billion despite ongoing jet fuel cost increases, is an extremely civilized way to fly; in the caliber of Virgin and Singapore Airlines. With Dubai being approximately 6 hours away from London, 6 hours from Moscow, 3 hours from Mumbai, and 7 hours from Hong Kong, it is geographically an ideal location to be at the center of what’s going on globally.

A monorail system is under construction to alleviate the horrendous traffic but as the “look at the glass half-full,” optimism of Dubaians say, “bad traffic is the symbol of a great city like London, New York, Hong Kong, Shanghai, etc.”

At one point, Bahrain was projected to be the financial center of the region but Dubai is now headquarters for all key players including Citigroup, HSBC (NYSE: HBC, $87.67) Goldman Sachs (NYSE: GS, $200.27), Morgan Stanley (NYSE: MS, $50.31), Credit Suisse (NYSE: CS, $55.49), etc.

While historically the wealth in the region has placed its assets in banks in the United States and Switzerland, 9/11 created a mindset to keep the money closer to home. A huge, almost unbelievable advantage is that there are no taxes on interest income, wages or capital gains. The magic of compound interest will have a material impact to the wealth of participants and a powerful incentive to do business and reside in these areas.

Saudi Arabia is a different animal altogether but fascinating nonetheless. The kingdom of Saudi Arabia came to existence in 1932 after a 30-year campaign by Abdulaziz Al Saud to unify the disparate people of the Arabian Peninsula and form a single nation. In 1933, the new sovereign Saudi Arabia signed the concession agreement opening up the kingdom to oil exploration and forming Saudi Aramco with John Rockefeller.

Flying into Ryadh, the capital of Saudi Arabia with 5 million of the country’s 25 million people, was an instantaneous switch from the comparatively cosmopolitan Dubai. Security was tight everywhere, with women covering their entire head and body with an ibayah and everything shutting down five times a day to pray to Mecca.

The head of the Kingdom of Saudi Arabia is King Abullah who succeeded to the throne on August 1, 2005 following his half-brother King Fahd’s death. Under King Abdullah, Saudi Arabia has aggressively focused on the elimination of terrorists and “modernizing” Saudi society and its economy.

Part of this is seen by Saudi Arabia joining the World Trade Organization in 2005 and steps taken to open up the stock market to foreigners. Foreign investment in the kingdom is expected to be $1 trillion over the next 10 years.

Also noteworthy of Saudi’s desire to be a global force into the future is the development of six economic cities modeled after Dubai’s very successful sector cities. “A new age city being built today for tomorrow’s Saudi citizens” – this project is a multi-stage development, and with an investment of $26.6 billion. Emaar properties, the premier real estate developer based in Dubai, is the master developer of King Abdullah’s city.

My guide for the week was my partner Eric Wilson who had worked for the Saudi International Bank (JV with J.P. Morgan) during the 1980s. I started calling Eric “the Ambassador” partially because we had dinner with the United States Ambassador for Saudi Arabia Ford Fraker who had hired Eric and partly because Eric knew everybody who was anybody. We met with the CFO of Saudi Arabia Basic Industry Company – SABIC - which is the largest petrochemical company in the world (and trying to be very green!). We also met with the number two person at the Saudi Central Bank - the Saudi Arabian Monetary Agency.

My main takeaways from the time in Saudi Arabia are that: 1) the country is misunderstood. 2) it is the land of opportunity 3). Saudi Arabia is opening up in a big way 4) with 25% of the worlds oil reserves, $100 + oil prices and $1 billion of cash flow a DAY, Saudi Arabia is going to be a major global economic powerhouse for the foreseeable future.

Also, announced earlier this year was that Saudi Arabia was going to start its own Sovereign Fund (learned that’s a bad word by the way), with an initial investment of $6 billion. Given the fact the Saudi Governments budget is driven by $45 a barrel assumptions, it’s likely the Saudi Fund will rapidly join the status of its neighbors in the Sovereign Fund Olympics led by the $1 trillion Abu Dhabi fund.

As it’s our mission to identify and invest in the “stars of tomorrow” – the most important emerging growth companies in the world – it’s inconceivable that the MENA (Middle East/North African Region) won’t be one of the most fertile areas to hunt on the planet.

With $100 oil prices, McKinsey calculates the region will generate $9 trillion in petrol dollars between now and 2020. The top 150 public companies have already achieved an average of 35% EPS growth and a 21% ROE over the past five years, according to Citigroup.

Oil and a young and increasingly well educated population will fuel accelerated growth within the region without the drag of an aging population as most western countries face looking to the future.

The MENA regional stock exchanges are all in the process of modernizing-with increased ability for foreigners to invest and with better transparency. Clearly Dubai aspires to be the leading light and this movement and we believe it will be. Rising capital inflows, greater market participation and liquidity are all promises to be a boon for the region for many years to come.

Themes that are clearly going to be winners include infrastructure to support the incredible growth the region is going to receive, including construction, transportation and telecommunications (and WATER!!!). Other themes that have tailwinds include the banking, wealth management and fertilization. Also, with per capita income already at high levels and going higher, global brands like Apple (NASDAQ: AAPL, $180.94), Nike (NYSE: NKE, $67.66), and Starbucks (NASDAQ: SBUX, $16.46) will find anxious consumers for their products. Below is a chart of some leading companies in the MENA Region.

Buy Dubai!!!