Investing Daily

Make no mistake about it: The stock market is in a precarious position right now. There are legitimate fears that our credit and financial systems will go from clogged to downright frozen and that more large US companies will end up bankrupt.

Whether you approve of the proposed financial stabilization plan or oppose it wholeheartedly, hope that a plan will be passed is the only thing keeping the market from a far deeper decline right now.

Widespread panic over the potential for financial meltdown has dominated the market for energy-related stocks, just as for almost every other imaginable sector. Many stocks in my coverage universe are seeing extreme, high-volume selling pressure based primarily on deleveraging; institutional players are selling off stocks indiscriminately to raise cash.

Clearly this hasn’t been good news short term. But there’s a silver lining amid the current crisis: Historically, the greatest opportunities on Wall Street arise from bouts of panic such as we’re seeing today.

Baron Rothschild, a British financier in the 18th and early 19th centuries, is credited with advising investors to “buy when there’s blood in the streets, even if the blood is your own.” That basic advice remains just as true today as it was more than 200 years ago. Investors who bought US stocks after the 1987 stock market crash or who purchased Russian equities and bonds after that nation’s 1998 debt default have been rewarded with manifold gains.

Although it’s next-to-impossible to time the exact low, panic is running at extreme levels, and it’s now time for investors to start looking to buy high-quality names in the energy patch at bargain-basement valuations that are unlikely to persist for long. Investors are literally throwing the babies out with the bathwater and totally ignoring fundamental drivers. In short: I believe the current environment is shaping up to be a historic opportunity in the group.

Here’s how I’m playing the current environment in my paid publication, The Energy Strategist. In the last issue, I offered a list of ten stocks to buy now. These are among my highest-confidence, most defensive names. I’m also looking for signs of stabilization in the broader financial markets so we can jump into the sector more aggressively. I believe that moment is no more than a few weeks away and, quite possibly, days away.

This opportunity rests on two key pillars: the long-term case for rising energy prices remains intact and valuations for many of the best-positioned stocks in my coverage universe rest near multi-year lows.

As to the first point, the fundamentals for energy prices continue to look positive. Crude oil prices have pulled back from $147 per barrel, and concerns over rising energy prices have taken a backseat to Presidential politics, the economy and the latest news on the Paulson plan.

But don’t get complacent. The world’s energy problems haven’t been solved--not even close to it. The rally in crude in recent years has primarily been a function of rising demand from the developing world and an inability to ramp up supplies enough to meet that demand.

The US and many emerging economies are weak, and crude oil demand is falling; in the US alone, demand is down close to 1 million barrels per day this year. Even though the rate of that drop has moderated, US demand for crude in 2008 and, quite likely, 2009 will be lower. In fact, it’s been my belief since the beginning of this year that the US is--or will soon be--in a recession. Check out the chart below for a closer look.

This is a chart of the year-over-year change in the US leading economic indicators. The LEI summarizes the performance of a composite of 10 different key economic indicators. The list includes housing starts, consumer expectations, jobless claims and even the performance of the US stock market.

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We have 11 energy stocks that are pumping out big profits for investors, even in the midst of the Wall Street’s crisis.

In fact, my readers have already seen average profits of 60% from these picks this year, and the best is still ahead of us, but you must act now.

Go here and I’ll give you all the details about these 11 moneymakers.

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The LEI is a simple measure of economic health. As you can see from the chart above, the current reading is -3.3 percent; each time the indicator has fallen to this level in the past, the US has been in a recession.

Falling US oil demand and a weak US economy have offset continued strong growth in oil demand from emerging markets, helping to bring down oil prices.

But, crude oil supply and inventory data continues to point to suggest a tight global market. Consider that US gasoline inventories now sit at the lowest level since 1967. Granted, some of this is due to hurricane activity in the Gulf; however, there have been other nasty hurricanes affecting the Gulf over the past 31 years without gasoline inventories dropping to this level.

Meanwhile, non-OPEC (Organization of the Petroleum Exporting Countries) oil production continues to disappoint. Check out the chart below.

This chart shows International Energy Agency (IEA) estimates for 2008 non-OPEC production growth over the past year. Simply put, one year ago, the IEA was looking for non-OPEC countries to see production growth over 1 million barrels per day this year. As of the latest estimate, the IEA is looking for less than 275,000 barrels per day.

Bottom line: A drop in US and developed world oil demand has provided the world--at most--a 12- to 18-month reprieve from $200-per-barrel oil. I suspect oil prices will remain subdued near term amid weak data on US demand, but the long-term bull market remains very much intact. 

Meanwhile, valuations for many of the companies and sectors I follow are depressed. As noted earlier, this is largely the result of the financial crisis, not a deterioration of fundamentals.

A perfect example is the oil services segment. Check out the chart below.

This chart shows the price-to-cashflow ratio for the Philadelphia Oil Services Index (OSX), an index containing 15 major oil services and contract drilling firms. Long-time readers know that the oil and gas services group is one of my favorite sub-sectors in the energy patch. This is the group most levered to my “end of easy oil thesis.”

Simply put, the world’s large onshore oil reserves are mature and face declining production. Increasingly, producers are now targeting more complex and tough-to-produce fields such as those located in deepwater, in the Arctic or unconventional reserves. In other words, the easy oil is running out, and producers are going after the more difficult fields. Producing more complex fields spells higher demand for oilfield services.

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This is your golden opportunity. We have an energy company that is about to make a huge development announcement that will send its stock to the moon.

Follow this link to get in before the rest of the world finds out.

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Even better, most complex international oil projects, such as those in deepwater, will go ahead whether oil is trading at $70 per barrel or $170 per barrel. Many of the best-placed services firms will not see a huge slowdown if oil prices fall into the $70- to $80-per-barrel range.

At the same time, the chart above shows that the OSX is trading at levels unseen since 2002. This suggests that the Oil Services Index is already priced at levels more consistent with crude in the $60- to $70-per-barrel range; the OSX is trading at a discount due to the financial panic currently gripping the market, not the fundamentals of the group.

Valuations approached current levels in 2002 and again in early 2007. Both occasions proved to be outstanding opportunities to buy into the group. A similar situation is brewing today.

Whether John McCain wins the White House and expands domestic oil exploration or Barack Obama becomes the first African-American president and spends billions to build a green future, energy will be the focal point of the next administration’s efforts.

I’ll be leading KCI Communications’ first-ever interactive energy summit Oct. 15, 2008, at 2 pm ET. Join me for my webinar, “Power Up Your Portfolio with Energy,” by registering at www.kci-com.com/webinar.

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat of the federal government.

Join me and my colleagues Neil George and Roger Conrad for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to www.moneyshow.com or call 800-970-4355 and refer to priority code 011361 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.