Is It Time to Buy Oil/Gas Exploration ETFs?

I don't know when "the bottom" will occur. It may have already occurred on September 18 with the 1156 close. It may be further down the path at S&P 1100, marking the territory of an average bear market decline. In fact, it could go lower than that... nobody knows.

Here's something that I do know, however. For all of the chatter...

"Worst Financial Crisis Since the Great Depression!"
"Aren't These Unchartered Waters?"
"This Time It's Different."

...the financial markets will recover.

Indeed, people are scared to death. But they were scared to death in the aftermath of Black Monday in 1987. They were scared to death by the 20% decline following the S&L legislated bailout in 1989. They were scared to death by the poor performing 70s, and the Business Week cover blunder in 1979, "The Death of Equities." (Stocks went on a two-decade romp shortly thereafter.)

Do not misunderstand. I do not believe in holding-n-hoping. We raised a great deal of cash through the use of stop-losses. We do not believe in holding all assets to the bear's bottom. (Review the "Wisdom of Avoiding the Big Loss.")

Yet the cash that you raise for greater bear market protection must have a purpose. And it shouldn't be for puffing up the mattress.

Stocks recover from all bear markets. It'll recover from today's challenges as well. And it'll catch most people by surprise when it does.

Why should it come as a surprise when we know that stocks and bonds go through cycles? Why should it come as a shock when we know that the bigger they are, the harder they fall... and the harder they fall, the bigger they bounce?

It's surprising because people live in the fearful, worrisome moment. History doesn't serve as comfort, and future uncertainty is terrifying.

But smarter investors say... now wait a minute. Oil drillers are 30% off of their highs. They're highly profitable companies. The country is demanding that both candidates recognize the need to drill for more oil and gas. We still need the stuff to function as a society. What about SPDR Oil and Gas Exploration (XOP)?

Call me crazy, but if Warren Buffett buys an energy company (Constellation) that, in part, explores, produces, manages and transports natural gas, our need for energy will not disappear entirely. SPDR Oil and Gas Exploration (XOP) goes after these large-cap drillers.

If you're worried about windfall profit taxes levied on Big Oil, you might shift to some of the smaller companies that might receive incentives rather than disincentives. PowerShares Dynamic Energy Exploration and Production (PXE) is geared towards small- and mid-sized companies… not "Big Oil." PXE represents smaller companies that have attractive price-to-book and attractive price-to-earnings.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Shiv Kapoor:]

In my view the energy opportunity will not lie in the O&G E&P side. This segment has greatly outperformed the SP500 since 1981. Now, the importance of E&P has reduced vastly since national oil companies will not give E&P partners the same kind of deals which were available in the years gone past. In the past, the E&P providers were able to secure highly advantageous deals mainly because they owned or controlled much of the people, property, intellectual property and capital required to succeed in the industry. Today, national E&P companies can secure equipment from service providers such as RIG, PDE, DO and IP from service providers such as SLB, HAL, BHI, BJS. The opportunity will lie in the service providers, many of who have greatly under-performed the SP500 since 1981 (i.e. valuation still has a way to go before one can start getting uncomfortable about bubble formation).

2008 Sep 24 09:20 AM

[Jake2:]

Come on, Gary, talk to us about John (yawn) McCain again.

2008 Sep 25 02:57 PM