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Fiscal Cliff 2013: For Energy Investors It's Going to Be Like Fishing in a Barrel

There are 26 trading days and counting until the U.S. reaches the fiscal cliff.

That's how many trading sessions remain before massive (and automatic) tax increases and expenditure cuts take effect.

And in the roll up to this non event(more in a moment), oil prices and energy shares have been hit hard. But as you'll see, it won't be for much longer.

To put some sanity into this overwrought conversation here are three key points up front.

First, the cliff will never take place. Pundits are treating this like some definitive confirmation of a Mayan prophecy.

CNN has what amounts to a daily "cliff dive," giving us the next eagerly awaited pearl of wisdom on yet another calamity to befall if the mess hits. And CNBC is handing out "Rise Above" buttons with great fanfare to oblige politicos to move away from partisan rancor.

Great! The three-piece suits inside the Beltway would never have figured out what needed to be done without a button. They all know they will kick something (a can, an accounting device, a legislative reprieve) further along before the deadline hits.

This is a grand nonevent; it will never take place, especially after the election we just experienced.

With an impending budgetary crisis looming, the Senate Republican leadership put defeating Obama as their number one goal (a "let's show everybody that the real issues are less important than politics" approach if there ever was one).

They lost.

On the other side of the aisle, the Democratic leadership cast the situation as a "saving of the American dream," after failing to curb an unemployment trend or reassure small business about prospects.

They lost.

So here we are back where we started before the costliest campaign season Americans have ever witnessed.

Except, this time, something big has changed. And it's all because of the electorate.

All of the posturing is done. All of the TV ads are history. And all the consultants have been paid. Yet nothing has changed. There are no further excuses. If there is one thing the electorate said loud and clear two weeks ago, it is this.

Blaming the other guy isn't working.

Congress and the White House have that message. Both parties will now learn how to play together. The nation has no further interest in hissy fits, temper tantrums, or time outs. We may not like all of what is coming, but these folks will finally earn their salaries.

Second, at the first indication of a settlement, this over-emotional roller coaster the market has been riding will straighten out – and start moving up. We are seeing some initial indications that the primary decline is flattening out. Volatility remains high, and there is a double whammy enticing investors to sell.

On the one hand, if you believe the cliff is going to happen and taxes on dividends are going up, selling winners now makes sense to save on what you pay to dear Uncle Sam after the fact.

On the other, if the dreaded fall occurs, stocks are going to take another major hit. That becomes a second pressure to sell, this time just about any stock whether in the red or the black right now.

All of this is resulting in a seriously oversold market. When the cliff is averted a bit more than a month from now, an image of fish and barrels comes to mind.

Fiscal Cliff Fallout: Energy Shares to Rebound

Leading me to the third and most encouraging point.

With the up-and-down cycles we have witnessed over the last 18 months, an overriding trend has emerged. A pronounced move down in the market as a whole has usually resulted in energy share prices falling faster.

But when the recovery occurs, energy not only leads shares up but by a stronger rate than the initial descent. With both the Energy Advantage and Energy Inner Circle Portfolios, when the dust has cleared from a move down followed by a move up, investors have actually witnessed overall gains.

[Editor's Note: To learn exactly how energy investors are seeing these gains and what Kent's recommends right now, click here now.]

The recovery hitting, therefore, will primarily benefit the energy sector, as it has in each of the recent examples. But it will do so with higher returns than the market as a whole.

There is a simple encompassing reason as to why.

All of the hand wringing currently taking place centers on the economic impact of the cliff hitting – lost employment, contracting business investment, diminishing tax revenues, a declining ability of government expenditures to jump start designated market sectors.

All of these essentially end up being moves down on the demand side of the equation. Thereupon, the conclusion is that everything from industrial production, through gasoline usage to retail sales will be affected, with energy need declining as a result.

This flows from the simple pervasive position held by energy and its usage throughout the economy.

Once the curve starts rising, so does the perceived energy requirements.

And, as investors, we will be off to the races.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. Dave Paoloni | November 21, 2012

    This may be heresy but what if this "Fiscal cliff" is the the only way we can bring the nation's finances back into some sembalnce of balance.

  2. RJD | November 21, 2012

    It's not heresy Dave, it is a reasonable answer. We're getting the same bums rush we got with the stimulus in 2009…the world will end without it and will be nirvana if it passes….yeah, right. The fact is going over the cliff will raise taxes to Clinton levels…this will certainly slow growth and not produce the revenues expected, but is not the end of the world. The bright side is there are some fairly deep spending cuts which make an attempt to trim the bloated budget. On the other hand, if a compromise is reached, it is likely to be tax increases with anti-supply side effects that will produce even less revenue than expected, much smaller spending cuts, and a huge deficit funded by printing money. Plus a huge raise in the debt ceiling so the spending binge can go on another 3 years. So the great compromise is higher taxes, minimal cuts and huge deficits funded by printing money…is that what we want? Would the economy really be better off with this than the cliff? I doubt it.

  3. Robert Sands | November 21, 2012

    Abstraction (the future) will always loose to concrete thinking (the present). Just watch children and adolescents. Abstraction is how we can see the future. Concrete is the NOW demanding immediate action. Delay of gratification is done through abstraction as to the reason for the delay. Whether the metaphor is "Slippery slope" or "Frog in heating water" or "poisoning the well" or others, these are all abstractions. Most people are stuck in "concrete operations" and cannot abstract. They run their lives off immediacy and are not able to act to pursue a vision that is far off and seen as "Theory". So any political solution will focus on the immediate and not the future. Remember, half the population has an IQ 100 or lower.

    So we are following the "course of human nature". The formation of the Republic was a magnificent structural abstraction that has been eroded and appears broken in favor of democracy in the pursuit of short term interests through political dogfights for immediate gain. The exact political solution to the "fiscal cliff" will not change the trajectory nor will it repair the breached structure of the Republic. So adapt like we have been doing for thousands of years. It is something to behold.

  4. Dom Brunone | November 21, 2012

    Look, we go off the cliff, everyone's tax goes to pre-Clinton levels (without the lower spending of the Clinton-Gingrich era) the military is cut (Democratic dream since Iraq & Afghan winding down) and one month later Obama proposes a tax bill that cuts taxes for those making less that $250K…he gets the credit for cutting taxes, the Repubs cannot argue with the cuts, and Obama claims he saved the world. Pretty obvious to me.

  5. KA | November 22, 2012

    I work in the oil and gas sector and thought it would be foolish to invest in the same sector, based on past experience. However, I am re-thinking that strategy, and others. Investing in oil when oil cratered would have lost me money, but not as much loss as I experienced as when I was (and still am) divested. Similarly, I considered metals too volatile to place a lot of my portfolio in, but a long term look at metals shows that not only would I have been ahead, the trajectory has not changed much in the last 20 years. Even Helen Keller can see that this administration is anti-business and that the next 4 years has, at best, a static prospect for business. As an investor I have only one goal; make money. I don't care where. In this economy it appears that making money will mean oil and gas, as well as metals. Even gold seems to be a wiser investment now than GM. Am I wrong in that thinking?

  6. d a profitt | November 24, 2012

    You wrote "On the one hand, if you believe the cliff is going to happen and taxes on dividends are going up, selling winners now makes sense to save on what you pay to dear Uncle Sam after the fact."

    Kind of makes no senses to sell a winner and pay taxes on the gain because the tax on dividends might go up. It might make sense if the tax rate on capital gain is going up, but only if I planned to sell that security in the near future anyway.

  7. Ivory Dorsey | December 1, 2012

    "Between the great things we can’t do and the little things we won’t do, the danger is that we’ll do nothing. The world is blessed most by those who do things, not by those who merely talk about doing them…. “Open my eyes, that I may see.” How could God fail to bless someone with such an attitude?" Bob Gass

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