On Friday, legendary investor Warren Buffett penned an op-ed piece for The New York Times entitled “Buy American. I Am.” For those interested in reading the full text of that piece, I posted a link to the article on the blog At These Levels (www.attheselevels.com).

To summarize, Buffett revealed his one simple rule when buying stocks: “Be fearful when others are greedy and greedy when others are fearful.” He concludes that investors are, by and large, fearful at the current time, which makes it a good time to buy stocks. As a result, the portion of his entire net worth that’s not dedicated to philanthropy will soon be invested in US stocks.

Of course, Buffett does state that he can’t predict the short-term movements of the stock market and has no idea where stocks will be one month or one year from now. But he believes the market will move substantially higher long before the economy and market sentiments improve. He believes those who wait for all the rosy signs to appear and the sun to come out will miss the best buying opportunities.  

Despite these caveats, investors would do well to heed Buffett’s words. First, he is one of the most successful investors of all time. And second, Buffett has made only two other similar bullish calls on the US market–one in 1974 and another in 1979. Both calls proved remarkably prescient.

From a shorter-term perspective, I’ve been highlighting the factors I’m watching to identify a short-term low in the US market and energy stocks in general. Two of the indicators I’ve been watching most carefully are the S&P 100 Volatility Index (VIX) and the so-called “TED” spread; I offer a detailed explanation of both indicators in the most recent issue of TES “Energy Stocks Watch Washington.” I have also been following both indicators on an ongoing basis on At These Levels.

Suffice it to say that I’m seeing the signals I’ve been anticipating for several weeks. The VIX–a gauge of market fear levels–touched a high of more than 80 last week but has since reversed and is trading at closer to 50. Although that’s still an elevated reading, this spike and reversal is broadly consistent with prior market lows.

Meanwhile, the TED spread–an indicator of credit market stress–is now trading at its lowest level since September. This indicates that recent concerted government actions have begun to thaw the credit markets and encourage interbank lending.

I suspect we’ll continue to see some wild swings, especially in the days just before and after the US Presidential election. In addition, the US economy is still weak, and I suspect we won’t see any real recovery until at least the latter part of 2009. That economic rebound is unlikely to be V-shaped.

But the indicators I follow suggest that the fourth quarter rally I’ve been watching for is now underway. As I noted in the last issue of TES, this will benefit energy-related stocks, a group that’s currently largely pricing in recession-like conditions; valuations for many of my favorites are at the lowest levels in a decade.

In recent weeks, we’ve followed a relatively conservative strategy within TES, waiting for more concrete signs of market stabilization. As I’ve noted before, conservative doesn’t mean immune: We’ve still been hit hard by the recent market rout. The selling actually accelerated since Oct. 1, with oil reaching my $70 per barrel downside target far sooner than I had expected.

We’ve seen several stocks touch my recommended stop levels since August; although the fundamentals for most of these stocks remain solid, I purposely haven’t recommended reentering most given the unsteady market environment. Rather, I’ve been looking for signs of market stabilization and a turn to get more aggressive. This is it. Now’s the time for investors to get more aggressive, buying well-placed stocks in the group.

In tomorrow’s issue of TES, I’ll examine the fundamental outlook for many of the stocks that have recently reported earnings, including Schlumberger, Weatherford, Nabors and Peabody. To make a long story short, the credit crunch and global economic slowdown have had some impact on business conditions for most energy-related stocks, but those impacts have been more than factored into valuations.

For now, I’m recommending investors buy the seven stocks and three hedges recommended in the “Fresh Money Buys” highlighted in the last issue. Railroad Norfolk Southern, deepwater driller Seadrill and land driller Nabors all touched my recommended stop losses in the recent market panic.

I continue to see all three as fundamentally well-placed and likely to benefit from a fourth quarter rally; I’m recommending that subscribers who were stopped out take advantage of the weakness to buy back in at more favorable prices. Also, note the changes I’ve made to recommended stops for these stocks.

It’s also worth noting that deepwater driller Seadrill was particularly hard-hit last week despite a total lack of stock-specific news.

This is mainly related to some concerns specific to the Norwegian market. Given the Norwegian market’s large exposure to energy-related stocks, a good bit of institutional cash has been pulled out of this market in recent weeks; much of this is forced selling caused by investors’ redemptions. In addition, many Norwegian energy stocks, including Seadrill, carry relatively large debt burdens.

Finally, there is the issue of Total Return Swap (TRS) agreements. These are essentially derivative contracts that give the holder the ability to garner exposure to more shares in exchange for interest payments. These derivatives are common in Norway and with the recent selloff, holders of TRS securities have struggled to roll over these contracts. This has hit even Seadrill’s chairman John Fredrikson, Norway’s richest man. The effect is roughly equivalent to the margin selling seen in some US stocks such as Chesapeake Energy.

But the fundamentals remain strong and the selloff is an overreaction. Seadrill has already booked out its rigs under long-term deals primarily to cash-rich oil majors. This means that it has the cash flow to handle its debt burden. Meanwhile, a declining TED spread suggests that credit market concerns are beginning to recede–at least for now.

And, if anything, demand for Seadrill’s rigs is set to accelerate in coming years. The reason is that over the past few years, a number of smaller contract drilling firms have entered the market using debt to finance the purchase of rigs. In particular, Brazilian producer Petrobras had planned on rigs from some Brazilian startups to handle its work in promising deepwater fields. These startups will have trouble getting the funding they need; many have no current operations.

Meanwhile, Seadrill is a more established firm with several rigs already out on lease. Companies such as Seadrill and US competitor Transocean might soon have the opportunity to pick up lucrative contracts from startups that just couldn’t raise the cash they needed.

The stock did bounce back sharply yesterday as TRS and Norway cash crunch concerns receded. The recent selling has reflected the potential for share overhang from TRS deals. In addition, John Fredrikson and other major shareholders recently managed to roll over much of their TRS agreements through April of next year; this alleviates that near-term risk.

For now, I’ll give the stock the benefit of the doubt given its promising market position and the receding credit crunch globally. Seadrill’s rising free cash flow and dividend potential are two additional factors supporting the stock. I’ll continue to monitor the impact of derivative agreements and the cash crunch in Norway. I’ll send another flash alert if I see any reason for more concern.