Fishing for an Answer: Energy, Energy, Energy

The markets were so lousy in late June that I decided to take off for a few weeks of fly-fishing in Colorado. Alas, this year the rivers are still (it is already the 4th of July) blown out because of the huge winter snowpack. For me, this means fishing the high country lakes and streams. For a dry-fly fisherman like myself, this isn't an optimal situation. Regardless, Salida, CO always has a nice July 4th celebration and the brew fest Saturday is always a good time. So, life is good. Then, I made it back to civilization (and an internet connection) after a few weeks of stumbling around in the wilderness looking for hefty trout. I almost didn't want to check the markets. Then I thought, hey, maybe you were wrong and oil has come down. Wrong. New highs have been made in oil and the equity markets are selling off (again). Gee, what a surprise - NOT!

One thing camping and fishing in the wilderness does to a person is sharpen your senses. Your sense of smell and your awareness of your environment are heightened. You become keenly tuned in to sights and sounds. Perhaps this is simply a natural human reaction to being in an environment where lack of attention to detail could leave one in a compromising or potentially threatening situation. This is especially true if alone, which I am a majority of the time.

Likewise, the US individual investor finds him or herself in a wilderness environment - hostile and very dangerous for those not paying attention.  Most investment advisors are no help as they are still preaching broad diversification. I have already written on Seeking Alpha why diversification will be disastrous in the years to come and why investors should stay OUT of the S&P500 and US bonds. Hopefully many of most of you took my advice and got out of these investments. Likewise, the crew at CNBC are no help at all as they still back the Bush administration's insane economic and foreign policies and are in 'oil denial'. Yup, you're all alone in the investment wilderness...but, at least you have The Fitzman. I am here for you.

I have written many times on Seeking Alpha on why oil is, and will continue to be, the main investment consideration for decades to come. After being away from the markets for a couple weeks, with my heightened awareness for danger and attention to detail, I am more convinced than ever that I am correct about oil and the consequences to a US economy which imports a majority of its energy. OIl has gone up another $6 a barrel in the last couple weeks. The US and Israel have the war machine's propaganda department busy getting ready for the strike on Iran. Ludicrous as it sounds being there are still two unconstitutional (and un-won....) wars being fought at present, I think they'll do it. Will Bush and Cheney feel the need to do so before their term expires? What will be the consequences of a strike on Iran?

Currently, we have oil at $144/barrel and if ya think about it, we don't even have any real 'outages' other than the Nigerian shut-ins which have been par for the course the last few years. What if the Straits of Hormuz were shut down for a few days, weeks, or months? What would the price of oil do if Israel or the US bombed Iran?

One thing is crystal clear to me: oil, natural gas, and energy in general are the only investments that make sense to me these days. Strike that - add gold, commodities, and precious metals. But ball fans, that's it. Period. Get out of everything else. Do not diversify. Batten the hatches. It's gonna get much worse before it gets better. Why? I will tell you.

The *only* solution to the oil realities of today and for the foreseeable future, is a comprehensive long-term US energy policy.

As my faithful readers know, this energy policy of mine has been a work-in-progress. The latest additions have been for a 4-day workweek and to strengthen the US dollar (not by the rhetoric of the Fed chairman, but by deeds such as balancing the budget and axing Bush's insane tax policy). Yet, as I come back from a couple weeks in the woods, STILL there is no talk of such an energy policy. All I see is more discussion of windfall profits taxes and of course the 'big picture' guys like Bush and Cheney wanting to bomb another country to get access to the oil. In the meantime....oil is up to $144...and the US markets are heading down in a big way. The US dollar remains under pressure as 'old Europe' and other emerging country investors have figured out that the US is just all rhetoric when it comes to financial discipline. The Fed is hoping to print our way out of our oil driven financial deficit. Each time the price of a barrel goes up a dollar, Ben just rings up the printer and tells him to ship another batch of hundreds out the loading dock.

All of these things are to be expected. I recently submitted an op-ed to the WSJ about the energy policy I have developed. I explained the reasons why failure to enact such a policy will have dire consequences to the US economy, the US dollar, and US investors and why subsequently their subsciption numbers will go down. Nevertheless, they balked at publishing my energy policy and I am sure did not even read it. I got the automated email response back thanking me for my submission but sorry, we'll pass. Hey, no problem! It's your jobs that will be in jeopardy when the US economy and markets tank due to the price of oil. I was doing you a favor! But, you stick with your right-wing policy editorials and support of Bush's economic policies if it makes you feel better. I mean, who can argue with the stock market returns and strength of the US dollar during the Bush administration? What a brilliant success story! Yup, you guys at the Wall Street Journal stick with the winning strategy. Thank goodness for Seeking Alpha.

But I digress. As I was saying, all these issues and the politicians responses are to be expected. What I did not expect was to see the oil and energy stocks perform so lackadasically. What is up with Exxon (XOM), ConocoPhillips (COP), Chevron (CVX), Statoil Hydro (STO), Schlumberger (SLB) and all the rest? These stocks should be at least 25% higher than current levels. Are these stocks going to go down if Bush or the Israelis bomb Iran??! Seriously, what is going on here? COP is expected to earn close to $12/share this year and it is trading at $91 and change!? COP should be trading at a minimum of $125, and, I believe the multiples for oil and natural gas companies should be *expanding* not contracting! Put a PE of say 15 on COP, and you have a stock that should trade between $150 and $200 a share over the next 12 months. In other words, the current energy sell-off has been waaaay over done. Buy COP. Buy XOM. Buy CVX, SLB, STO, Nabors Industries (NBR), Petrobas (PBR), Total (TOT) and United States Oil Fund (USO). Buy natural gas stocks. Simply put: BUY ENERGY. If you don't like stocks or ETFs, buy Vanguard Energy [VGENX] or any  of my three favorite Fidelity Select Funds (Energy, Energy Services, and Natural Gas - FSENX, FSESX, and FSNGX respectively).

If you don't like energy (please see your therapist), then at least buy gold, precious metals, corn, and wheat. Buy DBC - the commodities ETF. Buy real assets. Your US dollar is under attack by policies which foster inflation and further US currency weakness.

I keep fishing for trout and for reasons why such obvious necessities, such as enacting a comprehensive long-term energy policy, seem to be so elusive. Many times in life, things just don't make sense, no matter how hard one tries to figure them out. So, just go with the flow. The flow these days is war over oil. People in power seem to have quite simply lost their minds and have the interests of the American middle class well down their 'to-do list'. For those of you who have money to invest - do so wisely or you'll lose it. It's an investment wilderness out there.

Meanwhile, just to show you that beautiful things still do exist in the world today, here is a picture of a native Colorado cutthroat from Trappers Lake. Until next time - good luck with your investments!

Disclosures: The author owns all of the suggested investments listed above. He did, however, release the fish back to Trappers Lake.

Comments

[Paul Killinger:]

Whether intentional or not, all this "scare talk" about bombing Iran only serves to drive oil prices ever higher. Why would we want to invade Iran for their oil...? We can BUY IT any day we want for increasingly worthless dollars!

2008 Jul 06 04:01 PM

[cynic69:]

Dear Mike - I know a reason not to invest in oil and gas. When the world falls into a serious recession oil will be a whole lot cheaper.

For you guys that want to drill, drill, drill, don't you realize that when the American owned oil companies pump crude out of the ground it dosen't belong to America or Americans. They will sell it to the highest bidder worldwide which will probably be some refinery in Japan, not in the US. There will not be enough to affect the global oil market so it will have zero effect on gasoline prices. Did you know that most of the oil from the North Slope is sold to Japan, not America?

2008 Jul 06 04:25 PM

[Urbane Gori...:]

"Congress will fix the loophole in the Commodity Futures Trading Act." - Congress can't seem to fix much of anything. They can't fix Medicare, Social Security, the wars in Iraq or Afghanistan, inflation, the subprime issue...

And when they do **fix** something, it always seems to have a defect... Think of the AMT which was not indexed to inflation. Or Social Security which was funded on air... Consider their present review of the Credit Card industry... Didn't they **fix** that several years ago...

And.. When was the last time that our administration really provided any programs supported by the public... Is there some real reason why we do not have a popular vote for President, rather than an electoral college? This issue has been up in front of Congress several times with no results. Do we as Americans really want to have the Telecoms furnishing any and all personal information to the FBI etc...What about illegal immigration???

Personally, I think I'd rather have them all head off to Crawford. TX and help "W" with his yard work.

I think it's time for a Federal level Initiative process as we have here in California. If the government can't do it, we the people should.

Thx jegan

2008 Jul 06 04:33 PM

[NOWHEREMAN:]

There is plenty of Oil, unfortunately the refineries to make it usable are in short supply.

The EPA and Environmentalists have gone out their way to make sure that Regs and Lawsuits prevent new refineries wherever they are attempted.

The Oil Companies spent Billions to acquire worthless leases. What good is a lease when before you can begin to drill, you are tied up in the Courts for years.

Frankly, I would sue the Government for Selling me something they knew the EPA would block.

Iran exports predominantly because they have no refining capacity for the garbage they produce. It goes where it can be refined or sits in tankers waiting for refining capacity for that grade to open up. It may as well sit underground.

We do not want the oil they have.

2008 Jul 06 04:33 PM

[Shaggieman:]

paultaut - I am thinking the Iranians have the tankers sitting there to block the straits with if necessary. They can maneuver them into position and sink them and then light the oil up. It will make one holy mess of the gulf as the Iranians are shrude opponents and should not be taken lightly. They invented the game of chess.

2008 Jul 06 05:01 PM

[Michael Fit...:]

shaggie: yes, i do think the end of 15% cap gains will cause a selloff, and that is part of what you are seeing now in the markets.
that said, i keep going back to my US dollar issue. what good does it do to have all these nice tax cuts when my dollar has gone down 50%? it's gotta lead to US inflation, a still weaker US dollar, and a lowering of Americans standard of living. as i have said before, if devaluing the currency was a good thing to do, Weimar Germany would be running the world today. but alas, they are out of business...

pursley: your first comment to my article was "everything you know about oil is wrong". your very last comment was "the price (of oil) is high because of political reasons." you're wrong on the first, and partly wrong on the second. i'm not arguing your abiotic ideology, what i am arguing is that you insinuate because oil is abiotic that this fact alone means it is plentiful and abundant and cheap. what i am saying is that the reality of oil today simply doesn't back your opinion. you keep pointing to brazil and other new finds, but you don't seem to understand current depletion rates of existing fields. further, if you don't think GM cancelling Hummer production doesn't have something to do with oil (geology), you should reconsider. i suggest you get off the abiotic horse you are riding, and just look at worldwide production (supply) numbers versus worldwide demand. who gives a damn if oil is "abiotic", dinosauric, or shoots out of a mule's ass? the issue is simply worldwide deman versus worldwide supply, and that is the central problem going forward. billions of indians will be trading in their bicycles for automobiles at the same time that supply wont keep up with demand. period. you seem to argue this basic fact with me, yet the price of oil keeps going up, we keep getting into oil wars, and all this abundant oil you seem to think is available just doesn't seem to bring the price down. why is that? are you blaming it all on the "evil speculators"?


studio: thx, and i believe you are correct. nothing they can or will do in the trading pits will stop oil's price rise. oil futures contracts are being traded on supply/demand fundamentals plus a war premium due to the fear of yet another US oil grab.

paulk: talk to the bush PR folks about the scare talk. israel too. i don't originate it, i just ask - isn't this the same kinda stuff we heard before iraq? we don't want iranian energy? pah-leeeze paul. we would love to get our oil majors into iran (btw, just as they are about to sign contracts for iraqi oil production ... heh heh heh) and pump up their ailing infrastructure and double production. but, the jewel of iran is their natural gas and their ability to supply china and india with it. you don't think bush and cheney would love to get their hands on that? well, i disagree. the bigger question is this: how long will russia and china stand by and watch the US plunder the middle east's energy assets? THAT is the question going forward...

gale: i've heard that reason before, but i don't agree. here's why: even now, US gasoline (oil) demand is falling, yet all the slack is quickly picked up by india and china. now, if the whole world goes into a deep dark recession, i agree oil will drop. that said, as soon as oil becomes cheap again, the economies will begin to grow again and the price will rise. long term, the only threat to continued oil price appreciation, in my opinion is:
1) a replacement for the gasoline powered internal combustion engine in all respects (range, refueling, etc.)
2) comprehensive world-wide energy policies taking advantage of 1) above.
we're so far from that reality that, like i say, i can't find reasons to invest in anything but energy. i think we're hosed for at least a decade or two.

as for drilling a couple things here:
1) it is much more environmentally friendly than it used to be. no major spills or leaks during katrina & rita. that is amazing!
2) we are sending out $800 billion a year out of the country on our oil imports and this is a major reason for dollar weakness (the other of course being the spend crazy republican led congress). we must begin to cobble down this outflow of dollars and secure our own energy. we'll never be self-sufficient, but jeez, 65%?? danger will robinson...danger....

egan: funny comment on yard work. as maureen dowd said in her book, there is a big difference between texans who HAVE to clear brush and those that do it for fun.

paultaut: the reason you are not seeing more refineries being built, in my opinion are two-fold:
1) margins will be tighter in the future as the political backlash against pump prices will be embarassing to the oil companies
2) why build more refineries if there is serious doubt as to where the oil will come from to push through them? as of last week, the refinery utilization numbers were under 90%. this is the time of year where they could be in the upper 90's if there was a need. there isn't.

now, it may be true that iranian oil isn't the most desirable. but don't let this fool you into thinking western know-how couldn't go into iran and make serious moula off iranian hydrocarbons. again, i disagree with those of you who think we don't want iranian energy. i think the bush/cheney boys are absolutely salivating over it. what more could they want than the nuclear excuse to get it??

2008 Jul 06 05:26 PM

[Michael Fit...:]

shaggie: your tax question deserved a more thorough answer, and i have thought about this alot. why is it that the cap gains tax rate has to be the same regardless of income? in other words, wouldn't it make sense to have me pay a 15% cap gains tax if i sold some COP (since i am middle income and out of a job) and have a hedge fund manager who records a $225 million dollar cap gain pay say 25%? i mean, he can afford it right? we balance our budget, we strengthen the dollar, and the hedge fund manager will actually be better off in the long run because his country and currency are strong. a graduated capital gains tax based on income and/or size of the capital gain itself makes alot of sense to me. common sense.

2008 Jul 06 06:09 PM

[john s. gordon:]

ref. MBA president (installed on a 5/4 vote by the ronald reagan supreme court) : does anyone know how much $ were lost by the stockholders of harken energy while george dubya was nominally a member of the board of directors but was actually off in alabama political-campaigning for one of his buddies.?
> jack

2008 Jul 06 06:54 PM

[Brian Pursley:]

Fitz: In response to "the issue is simply worldwide deman versus worldwide supply, and that is the central problem going forward. billions of indians will be trading in their bicycles for automobiles at the same time that supply wont keep up with demand. period. you seem to argue this basic fact with me, yet the price of oil keeps going up, we keep getting into oil wars, and all this abundant oil you seem to think is available just doesn't seem to bring the price down. why is that? are you blaming it all on the 'evil speculators'?"

I agree with what you say about supply and demand. I do not blame specualtors: www.bloomberg.com/apps...

I blame Congress and the biogenic "fossil fuel" cult. Supply is low because of Congress and the biogenic fossil fuel cult. Drilling is currently illegal on over 10,000 miles of US coastline. And America hasn't built a new refinery since the 1970s.

Hydrocarbons are infinite. Over 300 trillion barrels on Titan: www.nasa.gov/centers/j...

2008 Jul 06 09:14 PM

[Michael Fit...:]

pursley: oil on the moons of saturn?? more irrelevant abiotic oil bs...

2008 Jul 07 12:50 AM

[insideoil:]

Just reverse the extract below. As US interest rates are dropped to pay for previous bouts of money printing, oil prices go up as supply/demand fundamentals provide fruitfull ground for speculators to hold onto the "real" value of their money.

"The US dollar remains under pressure as 'old Europe' and other emerging country investors have figured out that the US is just all rhetoric when it comes to financial discipline. The Fed is hoping to print our way out of our oil driven financial deficit. Each time the price of a barrel goes up a dollar, Ben just rings up the printer and tells him to ship another batch of hundreds out the loading dock."

Maybe the US needs to realise no-one else is coming to play with them this time. They would all rather burn in hell, and take their chances on their own. It must be really bad for that to happen - one would think. The solution has to be that the US raises interest rates - burns its banks, but gets the oil price to fall to at least tolerable levels for the world as a whole.

2008 Jul 07 01:22 AM

[optionsgirl:]

No doubt a standoff with Iran would disrupt supplies in the middle east. Remember the 8 year war between Iraq and Iran? The Saudis, UAE can get oil out of the region with their own pipelines. I just don't believe that the Republicans will start another war a few months before the election ( although that would probably cinch Obama to become another one term democratic president--how could he possibly "change" the world if he inherits 3 wars?) I'm long Crude .long gold, long nat gas, long sugar( as a possible short term biofuel play- it will probably rise fast if oil spikes) and hedged like crazy.

2008 Jul 07 02:53 AM

[optionsgirl:]

Fitzman: Your tax answer was very interesting. Personally, I believe in a flat tax based on consumption. If everything else (investments, business) could be kept by the wealth creators, our economy would be a lot stronger. Wealth creators create jobs and opportunities, and everyone consumes.
And no, I am not a libertarian, just an old fashioned republican who does not believe in fiat currency-currency should be backed by gold and silver, and believes in private ownership and a small federal government. I only hope that the next generation will live to see a time when the IRS is disbanded.I am saddened to see the ilk of both candidates and their parties. They certainly don't represent me.

2008 Jul 07 03:15 AM

[Mmarrkk:]

Fitz: I agree with some of your theory and a good portion of your energy policy. However, you and I are on different planets when it comes to tax policy and the whole "ye who has a bunch should pay more" stuff! And in case you haven't noticed, the Dem's have been in charge of the House for going on 2 years now, so your blame of the Republicans is a bit off. Yes they have spent too much. But in many cases they have had to modify policies and plans to get Democrats on board. And they have a few "Repub's" that are more like you...liberals like Olympia Snowe and her ilk who really should just change parties. Since the Dem's have been in power in the House for almost 2 years, I'm still waiting to see something/anything they have done! Of course, I'm really really glad they haven't gotten anything done because everything they talk about is a disaster for the country and for me.

2008 Jul 07 09:22 AM

[svkoho:]

Mike Fitzsimmons is one of 5 or 10 people worth reading on a regular basis as is Jim Kingsdale on energy ideas. I made the move to energy stocks after reading Matt Simmons book in 2005 and haven't looked back since. I also totally agree with his heretical idea of avoiding "diversification" which has been the holy grail of investment advisers for the last umpteen decades. It has been good advice of course for decades but if you buy Mikes idea that the paradigm is changing then it may behoove you to give up the old ways. I certainly have embraced his ideas and did so 3 years ago and I understand that Mike may be wrong on his concepts and his timing but the investment returns using this perspective have been pretty impressive. I don't expect returns going forward to match my numbers of the past 3 years but returns on most US stock categories have been abysmal for the last decade. The s&p has given you less than 4% annualized and if you take into account that measly 4 % matched against the decline of the dollar, you have had real negative returns. Unless there is a sea change in our national energy policy, our goofy Fed, our budget and trade deficit nightmare, our unfunded health and pension debacles and the incomprehensible ability of our economists to see the obvious, there is little hope for our economy, the dollar or the US markets outside of energy related companies. Really folks, it doesn't take a lot of smarts to figure this out and it still amazes me how many yammering bobbleheads still don't get it. Eventually of course they will and will pile into these stocks driving up valuations.

2008 Jul 07 10:43 AM

[svkoho:]

Mike Fitzsimmons is one of 5 or 10 people worth reading on a regular basis as is Jim Kingsdale on energy ideas. I made the move to energy stocks after reading Matt Simmons book in 2005 and haven't looked back since. I also totally agree with his heretical idea of avoiding "diversification" which has been the holy grail of investment advisers for the last umpteen decades. It has been good advice of course for decades but if you buy Mikes idea that the paradigm is changing then it may behoove you to give up the old ways. I certainly have embraced his ideas and did so 3 years ago and I understand that Mike may be wrong on his concepts and his timing but the investment returns using this perspective have been pretty impressive. I don't expect returns going forward to match my numbers of the past 3 years but returns on most US stock categories have been abysmal for the last decade. The s&p has given you less than 4% annualized and if you take into account that measly 4 % matched against the decline of the dollar, you have had real negative returns. Unless there is a sea change in our national energy policy, our goofy Fed, our budget and trade deficit nightmare, our unfunded health and pension debacles and the incomprehensible ability of our economists to see the obvious, there is little hope for our economy, the dollar or the US markets outside of energy related companies. Really folks, it doesn't take a lot of smarts to figure this out and it still amazes me how many yammering bobbleheads still don't get it. Eventually of course they will and will pile into these stocks driving up valuations.

2008 Jul 07 10:46 AM

[Michael Fit...:]

optionsgirl: ok, so we are making some common headway on taxes because i too would like a flat tax. however, the financial hole we are in now is so large, i don't see how we get out of it without raising taxes on the super rich to a much higher level. btw, when i say super-rich, i am talking about the people with tens of millions of dollars. sometimes i think americans with a couple million think they are "super rich" when in fact, a million bucks sure aint what it used to be. btw, alot of middle east oil still runs through the straits of hormuz..despite the pipelines. i am an "old fashioned republicans" too, problem is there is nothing "conservative" about the group in charge. it is, without a doubt, THE most radical presidency in the over 200 year history of the USA.

Mmmmark: well, sorry you dont like the tax policies i support. i guess you'll take your extra tax breaks, watch the US dollar sink further, and think you are getting ahead (?). what's your net worth? reason i ask, the people i want to tax further are the ultra rich. many Americans think they are in this class, when they really aren't. btw, most of the most harmful financial policies of the Bush administration were passed during his first term, when republicans owned both the house and the senate. tax breaks while at "war" is just insanity run amuck, and the value of the US dollar is evidence of that fact. remember, it was clinton that balanced the budget after the last "republican" bush blew out the deficit. speaking of disasters, which you apparently believe are democratic in nature, let's look at the bush record of 8 years:
1) largest fiscal decificits in history
2) US dollar drops over 50%
3) inflation roaring
4) government lies about inflation rate to keep I-bond, and COL increases under control or deficits go higher
5) an S&P500 that has gone NO-where
6) sub-prime fraud while Fed looks the other way
7) Fed takes over *publicly traded* bear stearns

what is so great about this republican record? it's almost as though people are blinded by their ideology these days. i am not sure i could have done any more damage to the strength and welfare of the US if i had TRIED. of course, those of us who believe that the Bush's are British aristocracy and the British's aim of weakening the US so they can swoop in and divide up the spoils will understand that all this WAS done on purpose. but that is a whole nother story for which, i am sure, people will think i am nutz (despite the inconvenient facts of skull & bones and that bush's father was knighted by queen elizabeth and is a british subject).

cal48: thanks for the kind words (i'll send the check later). good luck with your investments. btw, with respect to timing, i have been on this path since about the time bush was elected - i was just late discovering SeekingAlpha. seriously though, you only needed to post it once :)

2008 Jul 07 11:31 AM

[Michael Fit...:]

insideoil: whoops, forgot to address your comment. the problem is the Fed cannot raise interest rates because of the sub-prime debacle and the over-leveraged US consumer. see, that's the box the housing "problem" has put the Fed in and why we've only seen rhetoric out of Paulsen and Bernanke. If they raised rates adequately to keep inflation low and to support the US dollar, the US economic house of cards would fall. that is why i am so confident on the investments in oil, gold, and commodities in general. the US dollar is simply not the world's reserve currency (even though it is still the currency for which oil and many other commmodities are traded the world over). the world currency is now a barrel of oil, and will be for the foreseeable future (IMHO). thx.

2008 Jul 07 11:35 AM

[fireball:]

i would not blame the republicans or the democrats. blame both. bitch about bush and iraq all you want. his daddy and that congress put us in a state of war. clinton sat in the office for 8 years and fired about fifty million worth of missles at the desert once. surely if he was better than his good friends the bushes he would have tried to sign a peace treaty. and how many congresses left us in a state of war? whoever wins should appoint hillary as the minister of futures trading. she must really have a knack for it. our country will be overflowing with wealth. i cannot decide which liar makes me sicker obama yo mama or mccain the pain. wake up realise that these are all peas from the same pod. when they say they want to help you grab your wallet and your loved ones and duck.

2008 Jul 09 07:22 PM

[fireball:]

oh yeah almost forgot buy some gold and silver.

2008 Jul 09 07:23 PM