So what do we retail investors do now?

Gut wrenching volatility in the markets due to gut-less politicians has left investors dazed – do we still buy the dips or this 2008 all over again?

I was a buyer on Thursday and Friday of my favourite oil producers and energy services companies.  I see this steep market downturn as a crescendo of fear that had been building up in the markets over politics mostly – NOT as any kind of actual drastic economic downturn.

Now, I didn’t waste all my bullets as I may be able to buy them lower in the next month, i.e. there could be a reset of valuations (Lord, please let there be a reset so we can get on with making money again!) but the many investors with lots of cash around would welcome that.

And the reality is that in my specialized sector, junior oil and gas valuations were already hit so hard in June that many of the stocks that I follow barely moved, telling me the reset in this sector is almost complete.

I’ll tell you more about these purchases in a minute.

But first, I see that the economic numbers – especially when you look globally – are not that bad.

Credit Suisse reports that global emerging markets  now account for 49% of global GDP – and with estimated trend growth of 9%, 7.5% and 4% in China, India and Brazil, those three economies alone would add 1.8 percentage points to global GDP if they grow at trend.

You don’t read stuff like that in our financial pages.  Our financial media is very biased towards shrill negative US and European bad news.  (And most news reporters have never spent any time in business, doing real business – never forget that as you read the media.  They are unionized staff who have not been trained to think like entrepreneurs so they don’t see solutions, only problems.  My degree is journalism ;-).)

US GDP is still positive, and most forecasters are now just calling for reduced growth, not recession.  Of course, there could be another recession in the US, though I think investors will do better than workers as this will guarantee North American interest rates stay at zero for another 18 months.  The market loves cheap money as much or more than a strong economy, and this will fuel stock market participation.

I think it will also help fuel corporate growth, and here’s why – now corporate debt is more attractive than sovereign debt.  So cheap corporate debt – already very cheap with 10 year + notes going out at 3% – will continue to allow whatever low cost growth consumer spending will support.

This mini-crash was mostly due to investors’ uncertainty that political leadership and un-elected autocrats could contain the European debt problem. (Being a politician isn’t easy as you are elected on your integrity (or your party leader’s integrity) but your job is to be a professional compromiser.  Whether it’s getting a business deal done or passing laws, you have to compromise with the other side to get a win-win.  But the people who elected you don’t see you that way.  When was the last time you saw an election sign saying “I’ll compromise for you!”).

I find it funny that the common man has reduced his credit and increased his savings over the last three years (especially in the US), but big banks have continued to lend weak states like Greece et al hundreds of millions or billions of dollars.  They remain vulnerable to collapse and as a result will likely have to reduce lending to their customers even more.

A perfect example of this is The Royal Bank of Scotland (RBS), whose collapse in 2008 sent junior market darling but heavily indebted Oilexco (a $20 stock at the time) into bankruptcy.  Greece owes RBS just under US$1 billion.

This reduced bank lending in the coming year will reduce consumer spending, but it won’t kill it.  I believe a good chunk of that is now priced into the market (worst case we’re at 9x PE for the S&P 500, now is 11.7x).

To me, worst case is that austerity measures in the western world remain a drag on overall equities for several years – but emerging markets continue to be strong, which will keep the oil price at a level that will reward growth in both producers energy services companies.

The market just wants clarity.  Short term, it doesn’t even care if it’s the perfect solution.  It knows everybody has to take a haircut on this debt, so just tell us the number for each party and let’s get back to business.  The global economic backdrop is strong enough that I believe these political crises that spill into the stock market are buying opportunities – though I confess I’m a lot more selective than I was six months ago.

I see two possibilities out of this week’s drama, and both are positive for investors who bought stock the last two days.  One is that the European debt problem here is so big and so immediate and so PUBLIC that some kind of concrete, credible action will be taken to resolve the issue.  That would create a positive shift in market sentiment, even if it meant significant short term economic pain.

But some kind of action must be taken now, and even if it’s NOT completely credible, I see that action (Italian PM Berlusconi’s promise of a balanced budget and tackling welfare and labour reform would count as this) being rewarded by the market.
This would mean the index charts will look like a bouncing ball from these levels, and you use these instances to buy stock in your favourite companies.

So let’s talk about my favourite companies – what did I buy this week?

I bought two types of stocks.  One was energy services – these are the companies that do the drilling, the fracking, supply most of the hardware that producers need.  The global shift to shale oil and gas production and horizontal drilling is still in its infancy.  In North America it’s really only become mainstream in the last 5-7 years.

And the energy services sector is still catching up to producers’ demand for their products and services. Calfrac (CFW-TSX) is one of Canada’s largest fracking companies, (but was NOT a company I bought or own), and they announced their Q2 numbers this week and they beat The Street’s consensus cash flow by 74%!  Canadian brokerage firm Raymond James says Calfrac is growing its capacity 48% this year – the demand is so strong for fracking by the energy producers. Their main growth was in the US, in the face of a very weak US economy.  That’s very bullish for the sector. Service companies also have pricing power – sometimes by as much as 5% per quarter Raymond James said in a report earlier this year.

The technology innovation that is coming out of the energy services sector — steadily — is astounding.  There are companies that have technologies or tools that can get more oil and gas out of the ground or reduce time and costs, which increase profits and stock prices for producers.

These companies have huge sales backlogs now, and strong pricing power.  Even if oil goes to $50/barrel (which it’s not, it’s going higher folks), the demand for these innovative services would not decrease.

The second type of stock I bought has yield.  Both producers and service companies pay dividends, and with all this negative economic chatter, I believe interest rates will stay near zero for another two years, insulating yield stocks.  Many dividend stocks dropped 10%-20% in intraday swings, and I was able to scoop up a juicy 10% yield! I missed another because I couldn’t end my phone call at the time!  Even big companies like Pembina Pipelines (PPL-TSX) had a 20% swing Friday.

The market may not have bottomed yet. Interbank lending rates are spiking (the TED spread) and PE levels for the S&P 500 are still, at 11.7x, above what they are at market bottoms (8-9x).  Political indecision in Europe and the US could endure.

But this is not 2008.  And there are great companies growing quickly with HIGH profit margins that went on sale this week which I believe I will profit from handsomely in the coming quarters.

-Keith

P.S.  In my newest video, I explain why the Global Shale Revolution has the new energy services sector booming… and why energy services stocks aren’t actually dependent on the price of oil or gas to deliver huge profits for investors (unlike most oil & gas stocks). Click here to watch.