On January 28, I argued that the U.S. economy is still in the early recovery stage of the business cycle, and that you should overweight your portfolio toward the stocks that do best at this point in the cycle: “Sectors that do best are usually industrials, near the beginning of the stage; basic materials; and, near the end, energy.”

 The next stage for the U.S. economy is late recovery. “Sectors that have done well in this stage include energy and, near the end of the stage, consumer staples and services.” (For more on investing for the economic cycle see my post http://jubakpicks.com/2011/01/28/where-the-heck-are-we-in-the-economic-cycle-anyway-the-answer-is-important-in-deciding-what-sectors-to-overweight/ )

See any sector that those two stages have in common? So why not overweight energy right now? several readers asked. That way your portfolio can catch the sector’s outperformance at the end of the early recovery stage and the sector’s outperformance in the first part of the late recovery stage.

That’s an excellent idea. Just be careful what energy stock you pick. The sector is a little tricky to navigate right now. I’d favor being very selective on oil stocks—most of the international majors aren’t all that attractive currently. I’d favor oil equipment and service companies right now and small oil producers that are growing production and that look like acquisition candidates over the oil majors.

And I’m going to end this post with five picks of exactly those sorts. Read more

Oil drilling failure rate surges at the Western majors

It’s not a factor now in the climbing price of oil but the trend certainly doesn’t portend cheaper oil down the road. Or a rosy future for the Western oil giants.

In 2009 Chevron’s (CVX) drilling failure rate climbed to 35%. More than one-third of exploratory wells came up dry. That compares to a 10% failure rate in 2008.

And that’s by no means an isolated increase in the drilling failure rate. ConocoPhillips (COP) saw its failure rate climb to 43% in 2009 from 32% in 2008.

Higher failure rates mean that it gets more and more expensive to find new oil to replace what’s been pumped out of the ground. Chevron’s target is a modest 1% increase in oil and gas production this year. ConocoPhillips is forecasting a 2.7% drop in production in 2010.

The reasons for the climbing failure rate are pretty simple. Read more

ExxonMobil buys U.S. natural gas for $31 billion–I told you this was a big trend

ExxonMobil (XOM) will buy XTO Energy (XTO) for $31 billion in stock. (ExxonMobil will also assume $10 billion in XTO Energy debt.)

This acquisition is just the latest example of a shift among the international energy majors from exploration and development for oil in risky new geologies and tough climates to a concentration on predictable, low-production cost assets such as onshore U.S. reserves of natural gas locked up in shale formations such as the Barnett shale formation of Texas.

I flagged that trend for you in two posts earlier this month. You’ll find links to those columns later in this post. Read more

Up/down, buy/sell, gloom/boom: It’s not easy to be a long-term investor

Take the long view

The stock market is fixated on the short-term, we all know that. It’s an unusual occasion when stock analysts and investors look more than a few quarters ahead. That means stock prices often tend to respond to short-term news as if it were the only news.

And that means investors with a long-term view of companies and economic trends can often buy likely long-term winners while they are temporarily depressed by short-term news. This kind of long-term thinking in a short-term market is one of the best ways I know of for the average investor to beat the stock market indexes.

In pursuing that kind of strategy, however, too much caution is actually a bad thing. Let me explain—and give you some examples of stocks and sectors where taking the long view will pay off. Read more

Behind China’s buying spree in oil: fears of a falling dollar

What do you do if you’re sitting on reserves of $2 trillion and you’re afraid that a sinking U.S. dollar will erode the value of that pile of cash?

If you’re China, you buy things. Small things, naturally. $40 billion for oil drilling rights in tracts off Nigeria’s coast, for example. Another $40 billion in loans to Venezuela, Russia, and Brazil in exchange for future oil deliveries.

And you don’t really care too much if you overpay. Or at least if you overpay by the standards of international oil companies that are worried about making a positive return on their investment. If the value of the dollars in that national portfolio are worth less everyday, then you might even be willing to take a negative return on your oil investment just to get billions out of a bigger negative return position in the U.S. dollar.

Especially if, as history argues, the price of oil will go up as the value of the U.S. dollar sinks. (Oil is traded, so far at least, in U.S.dollars.) 

And if you believe, as many investors inside and outside China do, that the world’s supply of U.S. dollars is set to keep on growing, leading to further declines in its value, and the globe’s supply of easily discovered and produced oil will keep on shrinking, leading to further increases in its value.

This willingness to spend depreciating dollars today for appreciating oil tomorrow, though, is making it harder for publicly-owned, supposed-to-make-a-profit oil companies to gain the right to explore in the world’s most promising oil frontiers.

Look at what’s happening to Exxon-Mobil, (XOM) in Ghana, for example. Read more