Buy the Next Oil Bottom

Written By Christian DeHaemer

Posted August 11, 2011

1. China Has Largest Exports Ever

For the past year, the dominant story from China was one of over-building, high inflation, and the imminent collapse of a real estate bubble. So far, that bearish scenario hasn’t transpired (though inflation is up a modest 6.75%).

News yesterday showed China continues to grow through exports. From Dow News Wire:

China reported faster-than-expected growth in exports, imports and its trade surplus in July. China’s trade surplus rose sharply to USD 31.48 billion in July from USD 22.27 billion in June and USD 28.7 billion in the same month a year ago.

Exports rose 20.4 per cent year-on-year in July to reach USD 175.128 billion, a new record, China’s General Administration of Customs (GAC) said.

Imports also increased by 2.9 per cent to USD 143.64 billion in July. China’s imports had registered a growth rate of 19.3 per cent in June.

People have been talking about China blowing up for the past 15 years…

Wake me up when it happens.

2. U.S. Companies Have Biggest Quarterly Profit Ever

According to the Commerce Department, American businesses earned profits at an annual rate of $1.659 trillion in the third quarter. That is the highest figure recorded since the government began keeping track more than 60 years ago.

3. Productivity Has Fallen for Two Quarters

The Labor Department has reported increased labor cost reduced the productivity of U.S. businesses in the second quarter. Revised first-quarter figures were cut to show a decline.

Second-quarter output fell by a 0.3% annual rate on a seasonally adjusted basis. It fell because the number of hours that employees worked rose faster than the amount of goods and services generated.

The quantity of goods and services produced grew at an annual rate of 1.8% in the second quarter. In the manufacturing sector — the strongest segment of the U.S. economy over the past two years — the difference was even greater: Output edged up 0.6% while hours worked jumped 2.6%.

So, what can cause companies that are making record profits and work hours to lose productivity?

You might suggest workers are burnt out and can no longer complete the available workload. As a business owner, you hire in this circumstance.

4. Fed Will Hold Rates Low for Two Years

The Federal Reserve finally did something right yesterday. That is, they did nothing.

Well, they did say they would hold rates low for the next two years. A friend of mine told me this morning that he got a twenty-year mortgage for 3.85%.

Since 1981, interest rates have been dropping. There is no hyperinflation. Low rates for the foreseeable future is bullish for business.

5. No More Big Ticket Government Programs

The rise of the Tea Party will ensure there won’t be another Obamacare or anything remotely like it. Holding the status quo’s feet to the fire over the debt ceiling and the subsequent downgrading of U.S. debt means politicians can’t just spend money without consequence.

Without government programs lumbering down the pipe, companies can plan for the future.

6. Oil Reserves Fell

Our nation’s crude oil and gasoline supplies went down last week. The dipstick showed a loss.

According to the Energy Department, “Crude supplies dropped by 5.2 million barrels, or 1.5 percent, to 349.8 million barrels, which is 1.5 percent below year-ago levels. Gasoline supplies fell by 1.6 million barrels, or 0.7 percent, to 213.6 million barrels.”

Although they also reported demand for gasoline over the four weeks ended August 5 was 3.4 percent lower than a year earlier, averaging 9.1 million barrels a day. It is interesting that demand has fallen and supplies are down…

Texas crude jumped 4.35% on the news to $82.75. Brent crude was up to $104.75 a barrel.

Oil has fallen more than 20 percent this month, a big haircut no matter which asset you’re looking at.

Building Your Buy List

Over the next four to six weeks, you should start adding companies like ExxonMobil (XOM), which has a P/E of 9.25 and pays a 2.70% dividend, to your list. Buy under $60. It’s now at $70.

BP Plc (BP) has a P/E of 6.26 and pays a 2.20% dividend. Buy under $30; it’s now at $39.

And if you can pick up Petroleo Brasileiro (PBR) under $20, I would strongly suggest buying a lot of it. It now trades at $27.62, but is heading lower with little support.

 pbr wed aug 10

The business headwinds are less than they have been for three years.

This month, the market will digest the debt problems that everyone knew about before the S&P downgrade.

The general consensus is bearish. Stocks are selling off.

The consensus is always wrong.


Oil stocks may fall another 20% to 30%. When they do, you can get huge quality stocks like PBR at a 60% discount — and nearly triple your money when they go back up.

There are many indicators that say the worst is over just when the herd has run out of patience. This is a perfect scenario…

Just don’t forget to buy when the time is ripe.


 chris sig

Christian DeHaemer
Editor, Energy and Capital

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