Signs of life

Summer’s over. That means the markets have become increasingly volatile now that all the Wall Street types are back at their desks.

Why? Because all the traders are figuring out how to make bonuses for Christmas and to be able to take their winter vacations to Aspen, or Grenoble or the Virgin Islands.

Traders are not like you and me. They make money whether the markets are going up or going down.

Volume and volatility play right into their hands.

Recently, the money has been pretty easy. You just buy a bunch of a select few blue chip U.S. firms and let the profits roll in. Not because the companies are increasing in value or making more sales, but because share buybacks are increasing stock prices.

This system has worked very well for a number of years, as long as interest rates were nearly zero in the U.S., and the dollar was strong.

But now the Federal Reserve is looking to raise rates. And the European Central Bank (ECB) has chosen not to add even more liquidity into its frail banking system. This is a systemic shock and is already leading to a significant surge in volatility.

And few markets are more volatile than the energy patch.

But there are some encouraging signs that we may be headed out of the troubles the sector has faced for the past couple years.

No news is worse for stocks than bad news. And we’re starting to see stories that seem bad but show that at least markets are moving again.

For example, there have been some developments in the past couple weeks that show the sector at least has a pulse:

• Shell sold $425 million in Gulf of Mexico assets.
• Enbridge scrapped a $2 billion pipeline plan in the Bakken Shale.
• Saudi Arabia once again became the world’s top oil producer.
• North Sea oil production is being cut.
• New oil discoveries are at a 70-year low.

Yes, these seem dire and they are in a general sense. But they also show signs of new growth. Someone will buy Shell’s assets. Enbridge scrapped its pipeline for a merger. The Saudis are No. 1 again, which means they’ll look to lower production again which will raise oil prices above $50 (where U.S. explorers can keep producing and keep jobs). And if people are taking rigs offline, it means inventories will be reduced and prices will start to rise.

There’s also the merger side of this. You generally see merger activity ramp up when companies see the market bottoming and can scoop up assets at a significant discount. Stronger players eat weaker ones and help pull the industry out of the doldrums.

• Total bought 200,000 shale acres from Chesapeake Energy
• Enbridge and Spectra Energy announced a $28 billion merger.
• Anadarko buys Lucius offshore stake from Freeport MacMoRan for $2 billion.
• Warren Buffett buys another 3 million shares of Phillips 66, upping his ownership to 15 percent.

Action is percolating in the oil patch once again… but it’s not time to dive in yet.

It’s still a “quality” market. If you want to establish positions in great pipeline companies, big oil majors, and solid utilities (they trade a lot of natural gas) this is a good time for long-term money.

Otherwise, you’re better off waiting until some of the interest rate and economic volatility subsides.

For example, if the Fed raises rates and sends the U.S. economy into a recession, oil stocks will be hurt by falling oil prices. That will delay the upside in the sector, but the big companies will best manage that short- to intermediate-term risk.

If you’re not going to buy quality oil patch stocks, don’t buy yet.

And if you’re worried about what another recession will do to you and yours, you should get a copy of this special report that will protect you and your wealth and family.

— GS Early

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