Game plan: Energy

I have become more positive in the past 10 days on the prospects for energy companies. We sold much of our energy earlier in the year for clients into what we perceived to be a huge speculative bubble. We are now more interested in investments in these sectors. I'll give you some of the following reasons why:

1. Oil's close to 60% decline in value probably reflects current demand destruction and the slowing worldwide economy.

2. There is much evidence that indicates that oil production worldwide has peaked. At the very least oil production in the areas of the world where it is easiest to find has peaked.

3. There is no magic bullet that automatically & immediately switches oil consumption to other forms of energy.

4. Some facts from seeking alpha. The US imports 70% of its oil, consumes 25% of worldwide oil supply, and has only 3% of the world's oil reserves. Thus our demand for oil is not going to go away. http://seekingalpha.com/article/102003-cheap-crude-a-flash-in-the-oil-pan?source=yahoo.

5. Like everything else these stocks have been crushed and likely reflect attractive values at these levels.

6. Money flow analysis indicates these companies have reached levels where they are likely to find at least near term support.

7. We are currently underweight energy in most client accounts.

8. Most important from our analysis, the oil companies themselves generally pay decent dividends which at current levels are quite attractive relative to other investments in our opinion. In short in the oil companies themselves you are being paid to wait. {Please note that oil service companies generally don't pay the same kind of dividends}.

Certain negatives {That come to mind right off the top of my head}.

1. Oil is a favorite political whipping boy and will likely receive less protection from the likely coming democratic administration. For example they could still be subject to some sort of "windfall profits tax" by Congress.

2. These stocks will decline if oil prices decline further.

3. Much of the oil found today is in places that don't like us very much or like private enterprise very much.

4. The inability to find many more oil fields of size over time could over time eat into the profit margins of both oil & oil service companies.

5. Any of the above could affect the dividend paying ability of these companies.

*Currently long various ETFs related to energy for various client accounts based on what we perceive to be their risk/reward parameters. Also long certain legacy energy stocks for various client accounts.

**This is an example of the investment approach that we take for our clients after understanding their unique risk/reward profile. This is simply our analysis and opinion. We do not recommend or suggest similar investments for casual readers of this blog without: Understanding for yourself if this kind of investment fits your own investment profile. Or without you discussing this type of investment with your own investment advisor. This should not be construed as a recommendation to buy or sell any security of any kind in any investment time frame. We assume no responsibility for individuals or institutions who might make an investment decision based in any manner on our investment analysis.