Oil has fallen quite a bit from its July highs and so have practically all the companies in the black crack sector. Despite the large money flows out of the Texas Tea space, one oil company in particular has been catching my eye lately, Diamond Offshore (DO) drilling. Diamond Offshore drilling is the second largest renter of offshore rigs, with 30 semisubmersible rigs, 15 jackup rigs and one drillship (currently working off the coast of Brazil).

I know what you are probably thinking, “Aren’t oil companies cutting back on exploration and drilling?” While oil companies are less eager to find oil with prices at 50 dollars a barrel then they were when prices were 150 dollars per barrel, Diamond Offshore drilling has managed to tie up most of their fleet for the next few years. As of September 2008, DO had 97% of its fleet booked for 2009 and 77% of its fleet booked for 2010. The company has 11.5 billion dollars in backlog which contract dates spanning until 2013.

Reasons to buy

Microsoft (MSFT) is a cash generating powerhouse. The company prints over a billion dollars of cash flow per month. Moreover, Microsoft has a ttm profit margin of 28%, an operating margin of 39%, and a return on equity of 54%.

In addition to those very attractive profitability ratios, Microsoft has very little chance of declaring bankruptcy in the foreseeable future – zero chance, in my opinion – which is very important given current market conditions. With a debt/equity ratio of .06 and a current ratio of 1.52, Microsoft is about as solvent as water! This software giant also has 20 billion in cash and only 2 billion in debt. The large cash position is great because it gives Microsoft the option to acquire other companies or buy back their stock at depressed levels. You always have other options, right?* Tell that to Jerry Yang!

"I hope we surprised you," said OPEC President Chakib Khelil after he announced yesterday that OPEC would cut production another 2.2 million barrels per day in light of falling oil prices and rapidly rising inventories. NOPE!

With oil below $40 OPEC is desperate. But unfortunately for them, and fortunately for the rest of us, the 13 country free trade hating cartel does not control enough of the world’s black crack to fix prices (they are missing the big bad Russian bear). Oil prices today are ruled by shifts on the demand curve, not shifts in the supply curve, and OPEC is powerless to control demand in the short term.

I can’t feel bad about buying CBI at these prices (6.79 as I write this).

Chicago Bridge and Iron (CBI) is an engineering, procurement and construction (EPC) company with a global presence. The company has about 17 k employees and essentially services customers in the hydrocarbon, power, water, and mining sectors. I know what you are thinking – construction? global? And you want to buy this thing! But before you throw this EPC into the trash, take a look at the numbers.

The global financial system is in a state of bedlam – just ask anyone whose 401k had WM, BSC, LEH, AIG, GM, or Citi (C) in it. And then there is the US, which has run historically large current account, trade and budget deficits over the last decade. One would think that the US with an estimated 2007 current account deficit of 731 billion, a trade deficit this year of about 700 billion and perhaps the first ever 1 trillion dollar government deficit next year, should be facing a run on its currency in the wake of this credit crunch. But in reality, quite the opposite is happening.

Why?

There is no doubt about it: Halliburton (HAL) has taken a beating in the last few months. In late August this oilfield services giant traded for about $45 but due to falling oil prices and an expected fall in North American drilling demand, HAL now trades for only about $19.

Now there are tons of reasons to be bearish about the oil services industry right now. The drop in crude will undoubtedly lower demand for HAL's product as oil exploration companies will spend less money on drilling. The global slowdown and OPEC's inability to stop falling oil prices are also worrisome for HAL. But I think this has all been priced into HAL and despite these risks I still see upside to old uncle HAL, especially if you have a long enough investment horizon.

With the financial markets in ruin, a lot of people today seem to be asking the same question –should I take my money out of the market? My answer – not unless you have some proprietary information as to why the market is currently overvalued (which you probably don’t). For the vast majority of people I would recommend staying in the market, but being defensive with your investments. If you pull your money out of the market, you are going to miss on the potential rally. In addition to that, the stock market has historically been a great place to combat inflation (when compares to the fixed income market). So my advice is simple – don’t pull out, diversify into uncorrelated assets.

It’s all about correlation

There was a lot of uproar back in March when the Fed arranged the deal for JPMorgan (JPM) to buy troubled investment bank Bear Sterns. The deal, which pissed off a lot of taxpayers, put up 30 billion taxpayer dollars to cover Bear’s risky investments losses.

More recently the Fed moved to bail out mortgage purchaser and guarantors Fannie Mae (FNM) and Freddie Mac (FRE) – yet let the fourth largest investment bank in the country, Lehman Brothers (LEH), fail. Now the Fed has arranged a two year, 85 billion dollar loan (of taxpayer money) to American International Group (AIG).

Or perhaps I should have titled this - I’m sorry I thought this was America. (Gold star for anyone who gets the reference.)

So for anyone who was not aware, 2008 is an election year. And I know what you are thinking – climate change, health care, education – yeah, yeah, yeah but how do the candidates' plans affect my taxes? In one line – McCain wants to cut everyone’s taxes (even corporations) and Obama wants to cut taxes on low and middle income people while raising taxes on the upper class and for capital gains (which affects you if you are reading this, unless you only have losing investments).

I get a lot of questions about bank stocks- have we seen a bottom? Is it safe to start nibbling? What bank is the cheapest? And while the financials are not my favorite sector right now, I think that if you have a longer term investment horizon, JPMorgan Chase (JPM) is the bank stock that should take a look at.

Just an aside – There seems to be a lot of confusion about what it means for a stock to be “cheap.” People often say things to me like – "but WaMu (WM) is trading at 4 dollars, don’t you think it is really cheap right now?” First of all, the nominal value of an individual stock has nothing to do with how cheap or expensive a stock is. This argument cannot even be made from a market cap perspective, as a lower share price does not mean a “smaller” company because the number of share outstanding varies greatly from stock to stock. If you are going to talk about how cheap a stock is, you need to base that argument on a comparable metric -such as P/E, fP/E, P/S, P/BV, ROE, etc. - and then look at that metric with regards to how risky the stock is. So the per share price has nothing to do with how “cheap” a stock is. I know why so many people think this; in the real world it is perfectly logical for someone to consider a pen that costs 4 dollars to be cheaper than one that costs 200 dollars. But that is the type if thinking that will get you in a lot of trouble in the investing world.

A very interesting ETF launched on August 25, 2008 – the Claymore/Delta Global Shipping Index ETF (SEA). This is the first ever ETF that tracks only companies involved in the global shipping industry. In case you are not familiar with ETFs- which you should be since I think they are one of the greatest things to happen to the investment world in the last 2 decades-  ETF stand for Exchange Traded Fund. These investment vehicles are traded just like stocks, and have very low expense ratios (and no loads).  Essentially, ETFs are indexes that track a basket of stocks while giving investors easy diversification and tax efficiency with very low fees.

SEA’s Specs

SEA is comprised of 30 securities, with a weighted average market cap of 2.9 billion and a weighted average P/E of 10.3. Popular names in the fund include such global shipping players as DRYSHIPS INC (DRYS) (2.48 %), FRONTLINE LTD (FRO) (3.91 %), EUROSEAS LTD (ESEA) (4.57 %), NAVIOS MARITIME HOLDINGS (NM) (4.21 %), and DIANA SHIPPING INC (DSX) (4.09 %). The fund also sports a very low expense cap of .65 percent. The top country weightings of the index are Greece – 35.3% (surprise, surprise), USA  - 19.08%, Bermuda – 15.37 % and Bahamas - 10.09%. The fund will also distribute a dividend( if there is any) on a quarterly basis.

If you have read the headlines of articles that many major market sites are putting out, you would probably think that the Russian Anti-Monopoly Service’s ruling was a negative thing for steelmaker Mechel (MTL). To name a few, here's Bloomberg's: “Mechel Told to Cut Prices Considerably After Probe”; Reuters': “Russia Punishes Mechel with Enforced Coal Price Cuts”;  and MSN Money's: “Russian Miner Found Guilty of Price Fixing".

Now these headlines are accurate, just very misleading. Yes Mechel was told to cut the prices on the coking coal it sold domestically (coking coal accounts for 8% of Mechel’s revenue), and yes Mechel was punished for its actions (about a 300 million dollar fine) – but the ruling was still very positive news for Mechel and anyone long the stock.

Yesterday, the Vedomosti newspaper reported that Mechel (MTL) and the Russian Anti-Monopoly Service had agreed that Mechel should cut its domestic coking coal prices by 8% and would take a fine of 7 or 8 % of revenue (coking coal only accounts for 8% of Mechel’s revenue).

So now to the question on everyone’s mind – is this good news for Mechel? My answer – yes! This is a great decision for the longs, as it shows that the investigation will not result in Mechel being carved for Putin’s cronies, but was rather an attempt to calm double digit Russian inflation.

TransGlobe Energy (TGA) has two things that I really like to see in a stock – a price floor based on the value of its current oil reserves and potential upside due to its exploration program.

The Floor

Mechel (MTL) is not for orphans and widows - that much is for sure. But if you can stomach some risk and if you have any money to speculate with, I think this is a great name to get into right now.

If you have never heard of Mechel, it is a vertically integrated steel and power producer in Russia. Recently, the company has been under fire from the Russian Anti-Monopoly Committee due to comments made by Putin. Essentially, Putin accused Mechel of selling their coking coal at inflated prices domestically and evading taxes.

One of my favorite investment axioms is “try to be fearful when others are greedy, and greedy when others are fearful.” Today you would be hard pressed to find a stock with more fear surrounding it than Russian Steelmaker Mechel (MTL).

The Fear

Mechel tumbled 38% on Thursday after Russia “Prime Minister” (more like ex–KGB autocrat) Vladimir Putin said that the Russian Anti Monopoly Service should pay special attention to the fact that Mechel (MTL) has been selling its raw materials for twice as much domestically. This is bad news for the company’s chief executive and main shareholder, billionaire Igor Zyuzin. Last time a billionaire who ran a “strategic” company (like Mechel) crossed Putin was in 2003. The guy was Mikhail Khodorkovsky, and he is now serving an 8 year sentence in Siberia for tax evasion. Burr.

I know what you are thinking – isn’t Dmitry Medvedev the president of Russia? Yes he is – but Putin is the dictator and the dictator always trumps any democratically elected president. (Incidentally you may remember Medvedev from his brief stint as Kermit the frog on the popular TV show The Muppets. A puppet – get it?)

The financials are in free fall, construction is stagnant, the airlines are trying not to crash and the automakers are hitting the skids – there is no denying the overall market really sucks right now. But, enough with the doomsday predictions and cough cough, the possibility that the US Government could lose its AAA credit rating! Let’s focus on what is working – deepwater drilling.

Oil at over $140 per barrel has opened up a lot of oil sources that, at lower oil prices, would not have been economically feasible. A lot of these reserves are deep underwater – like Petroleo Brasileiro's (PBR) Tupi field find. In order to get at these vast undersea reserves oil companies are going to need highly specialized rig equipment. That is why PBR recently contracted out 85% of the world’s offshore rigs, an event that drove up rig day rates.

The airlines are in trouble – no doubt about that. The airlines operating in the US are facing legacy costs in the form of pensions, rising fuel prices (fuel is 60% of operating costs for airlines), and a weakening consumer. Yes, things are bleak for the airlines of the United States, but I don’t buy the argument that things are as bleak for Boeing (BA). Ever since Goldman Sachs (GS) added BA to their conviction sell list on June 25, the stock has been in freefall – and at $65 I think it’s a darn good bargain.

Boeing is the world’s largest aerospace and defense company (second largest according to some sources). Moreover, Boeing operates in over 90 countries and is American’s largest exporter, according to Wikinvest.com. Boeing gets 50.3 % of its revenue from commercial airplane sales, 48.3% from integrated defense sales, and 1.2% from leasing small aircraft.

Late last week, the commodities saw a pullback due to the global gloom and doom theory posited by the paranoid and super risk averse. Due to this pullback, I think that a lot of the commodity names are looking very attractive right now, and I would recommend taking this opportunity to start/add to your positions in some of the big commodity names. One stock I feel is particularly attractive at these levels is Potash of Saskatchewan (POT). 

POT is the world’s largest producer of fertilizer and produces 23% of the world’s supply. Interestingly enough, the company also controls 55% of the world’s unused supply, which it has strategically kept offline in order to keep fertilizer prices high. Does that tactic sound familiar? It should – it’s what the Saudis are doing to oil. That is why I like to think of POT as the Saudi Arabia of fertilizer.