I’ve seen my fare share of “brilliant” ideas to lower the gas prices in the United States. Stage a one-day protest against buying gasoline, shift all business to one gas company in order to bankrupt another or maybe we could even tax the big oil companies into submission?

Now that the U.S. Presidential race is down to two candidates, Barack Obama and John McCain, our energy policy has become one of the most pressing issues… even outweighing the economic state and the war in Iraq. For this reason, I feel that it is time to get you all up to par on the truth about crude. These downright foolish ideas to artificially lower prices will never work; I’ll get you “in the know” on why prices are the way they are, and what we can/can’t to do fix it.

Why Are Gas Prices So High?

In short, gas prices are high because of two driving factors: high demand and increased speculation. The energy bubble that existed in the first half of 2008 has since popped, but prices are still pretty high at the pump. This holds true mainly because of a jet lag in the pipeline. Essentially, there are several steps in the oil-production business. You need to explore, find, drill, refine, transport and sell. That’s a lot for a few trips to the grocery store, eh?

There is a rumor floating around that gasoline prices actually bump up faster than they go down. I’m not trying to completely disprove this, but it is a bit ridiculous to think that despite anti-trust policies… all the nations gas stations have some secret agreement to raise prices at the same time at the same rate. Otherwise, if one seller kept prices low, you better believe that they’d get all the business. One thing I will explain further down is that the oil & gas companies are actually losing money and profit margins are dwindling.

How about speculation? While this is debatable, I feel that throughout the first half of the year… investors were gambling excessively on the futures in oil, which will drive the actual price of crude upward. I suppose that the Securities and Exchange Commission (SEC) could have made longs on oil illegal, but other than that there’s just not a lot you can do. Surely, if investors are feeling that demand is soaring while supply is crunching… things are going to get interesting. This isn’t so much anyone’s fault as it is a problem with the way we trade to make money on the open markets. But as you’ll soon find out… the heart of the problem is a bit closer to home.

Who’s At Fault?

Exploration and Production Companies
Obviously, somebody has to do the dirty work to go out and actively find oil and natural gas reserves that we can unlock later for production. Are Exploration and Production (E&P) companies making money? Yes. Are they making excessive amounts? Absolutely not. Let me explain.

One thing that people fail to realize is that these E&P companies deserve to profit, and aren’t making money hand over fist. If you want proof, let’s just look at the profit margins to find out how profitable their ventures are versus other companies:

• EnCana (NYSE: ECA) – 13.16%
• Apache (NYSE: APA) – 33.01%
• Anadarko (NYSE: APC) – 9.64%
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• Microsoft (NYSE: MSFT) – 29.26%
• Intuitive Surgical (NYSE: ISRSG) – 24.68%
• Goldman Sachs (NYSE: GS) – 23.68%

Crude Oil Refiners
You might be thinking that the companies that come in and refine the oil for commercial use would be making big profits… but this couldn’t be further from the truth. In fact, the majority of these companies have been eaten up by their reliance on the spot price of oil. Since all of their business relies on obtaining crude oil from someone else, they have very small guns to flex in the face of the E&P companies.

The oil refiners have some of the smallest margins in the business, and add the least to the bottom line. The crack spread, aka the margins refiners make, is absolutely free falling… as major refiners like Valero Energy (NYSE: VLO) and Tesero (NYSE: TSO) have seen their stocks dumped 50%+ in the face of a broader energy rally.

Gas Stations
Since most Americans aren’t aware of anything but the gas pump, a lot of people assume that this is where their money is going down the drain. In actuality, the gas station business is in one of the worst states as they, like the oil refiners, have almost no control over pricing initiatives. Over 1,000 gasoline stations closed down last year, and many were actually losing money every time you came to the pump in order to stay competitive.

The gas station business is so unprofitable, that major integrated oil companies like Exxon Mobile (NYSE: XOM) and ConocoPhillips (NYSE: COP) are closing thousands of branches a piece… basically cutting and running from the horrible markets where consumers complain despite the fact that station owners no longer make money.

The Government
Not so fast! Sure, a lot of us have figured out that the government has instated a gas tax… but this really doesn’t effect the price you pay at the pump. Why? The current gasoline tax has an indirect effect because of the drilling policies that are in place. What would be a lot more effective (in my opinion) would be to open up all the U.S. territory for drilling. This would discount the futures back to the present and have an immediate impact on the price of gas.

The People
So now we work down to the actual reason gasoline is so high… you. Yes, the United States demands more gas than any other nation in the world, and we just can’t get enough. Once you get down to it, it really is as simple as reducing demand. Clearly, once average gasoline prices hit a high of $4.11, we’ve been under $4 from then on out. This is mainly because Americans started driving less once prices got out of control… and it worked. Reduce demand for the commodity, reduce the price. No one-day protests. No shifty business ideas to “force” companies into cutting rates more. It’s a question of conserving what we have and being less reliant on crude oil.

The Solution

We’ve found the problem haven’t we? Nowhere along the oil & gas production line do we see excessive gains being taken off the table. In fact, it’s been just the opposite! Just take a look at the 1-year stock charts for Exxon Mobile, Chevron or ConocoPhillips! You can say that one of these companies is making $1000 a minute… but when you are the biggest company in the world like Exxon, it’s hard not to. The fact remains that demand and the low crack spread have companies across the board reeling.

Are we doomed then? I don’t think so. Throughout time, our government has found ways to innovate and react to shortages on the market. I truly believe that it is not the government that will solve this, but the free markets and the intuition of the worldwide intellect that is working around the clock on a solution. Maybe it will be the Pickens Plan, with natural gas as a headline alternative, or maybe it will be the flaunted alternative energy sources of solar, wind and clean coal. Perhaps we even find a way to use nuclear technology, the most effective (but dirty) production means, in an innovative way.

In the meantime, we can fix the problem by using alternatives to driving and demanding oil. America alone uses about 1.3 trillion gallons of gas per year. Other countries like India use about 1/20th of that! True, America is a nation that was literally founded on the use of petroleum… and you’d be surprised to realize that the amount used per capita is currently about half of what it was in the 1980s. That being said, prices probably will rise from here… but this isn’t a problem we can’t fix.

-Jimvesting

Disclaimer: Many of these investing ideas brought to you by BullishBankers.com

Another late link love post? No excuses here! I was out all weekend from Friday to Sunday at beautiful Penn State University for the annual Arts Fest. It was a pretty sudden move on my behalf, but any time I can get back to visit friends at college is a plus in my mind.

I try to maintain daily posting, but sometimes it’s just not in the card. Many bloggers advocate writing a stock-hold of posts and saving them as drafts so that you can fill blank days with pre-designed articles. I probably spend about twice as much time per post as your typical blogger though, so setting aside 7-8 hours for three good posts isn’t worth my while. It’s never a smart idea to post for the sake of posting, so I decided to take a break. On to a new week, fully refreshed, and ready to go. Let’s uncover some of the best posts for the week ending July 12, 2008.

• The University Kid – How To Tell When Someone Is Faking It
• Ades Blog – Firefox Plugin: Gmail Multi-Account Switcher
• Affiliate Confession – Facebook Ads are a Disappointment
• Zac Johnson – Where Top Affiliate Challenge Went Wrong
• Stephan Miller – I Wanna Be an Ass Hat SEO, Please

In all honesty, this is one of the best week of posts I have seen and I really enjoyed a lot of them. Jason from The University Kid went over how to analyze a blog to see if they are faking any stats. Affiliate Confession went over the pitfalls of Facebook ads. Zac Johnson had a smart post on the big “Top Affiliate Challenge” competition’s downturn. I caught a hysterical response post from Stephan Miller about my black hat seo techniques post, and even a cool FireFox plugin from Ades Blog.

Stock Market
The roller coaster 2008 stock market continues with the close of another week in the red. This time around, things were caused mostly by Freddie Mac and Fannie Mae, two firms that have faced major concern over a government bailout despite the constant assurance that they are accurately capitalized. On the breaking news front, the Federal Reserve has spelled out a Fannie-Freddie rescue net plan that would kick in liquidity in the event that things take another turn for the worse.

Pending home sales came in at 4.7% below April’s levels, which was a bit worse than expected. However, many are using this opportunity to claim that the housing market has bottomed out and is in repair mode as things improve. Other than the housing market, we had some slightly positive news regarding an improving trade deficit. This week, expect to hear about the PPI and CPI inflation report as a big week in earnings releases kicks off when we hear from the likes of Microsoft, Google and Coca Cola. This week could set an overall tempo for the rest of the summer!

Blogosphere
As I went through some of the better posts of the week, I continue to support the claim that things are improving as the summer progresses and people get more settled in to their roles as bloggers. Despite the fact that this fool keeps leaving you unexpectedly for breaks (haha), it would appear that the Top Affiliate Challenge and Blogging Idol competitions have largely blown over as people turn toward self-improvement.

Speaking of the Blogging Idol competition, have you seen my recent rant post about how the contest is unfairly biased?! Or how about my run-down of the method I used to successfully execute the classic “link bait” article. Hey, it got me tons of attention, links back, conversation, traffic and almost 70 comments. I like to see a break away from the standard tutorial posts every now and then, and I feel that a quick lesson in orderly debating can serve you well. Definitely have a look at the two when you get the chance.

The Week In Focus
This week, I’m going to be putting out a small contest. And by small, I mean that I’m giving away another Flip Mino video camera to the winner. Sound fair to you!? Not to distract from content (as I constantly protest), I intend on publishing a money making method or two that should offer you the chance to boost your stats and income. We’re in the thick of summer, so why not earn some extra spending cash to get out and about every now and then!

-Jimvesting

In a shaky stock market environment, there is no better place to turn than the defense contractors. Leading the S&P index by about 20% in 2008 (the 8th straight year of better relative performance), the so-called “big five” have their work cut out for them in 2008 and beyond. It is pretty much a foregone conclusion that defense spending will increase this year.

With high global threat levels, the United States defense budget has historically increased regardless of the presidential party in power. Don’t listen to the fools that tell you a democrat president will cut the defense budget, that is simply not true. The funding put into homeland security as well as our defense budget is set to increase (President Bush recently introduced a $3.1 trillion dollar budget) regardless of the War on Terror’s outcome, and the big five defense firms are set to benefit.

There are pros and cons to each of the main defense contractors, but I want to defend the notion that they are all winners in this environment. Which companies? I am talking about United Technologies, Lockheed Martin, General Dynamics, Raytheon and Northrop-Grumman.

United Technologies (NYSE: UTX)
UTX is the largest of the Defense companies, and offers a favorable mix of risk-reward at this point. A widely expected healthy first quarter could be a huge catalyst for the rest of the year. United Technologies does everything from industrial turbine engines to elevators, and it is this diversity that really makes them the General Electric of defense contractors. The weak dollar actually bolsters a potential earnings beat (+15%) for 2008, despite a rocky economy, because European sales account for about 25% of United Technologies’ total.

Many investors have voiced concern over the recent announcement to acquire Diebold. I believe that speculation since the bid isn’t likely to be hostile and the relative size of the expense is small on UTX’s books. Other potential risks include a weakening in commercial construction markets and a slowing residential construction recovery, but I think that a strong aerospace backlog along with a geographic diversity balances their resume enough to ensure a strong year under even the worst conditions.

Lockheed Martin (NYSE: LMT)
Lockheed Martin is the kind of company that never gives you the value you want, but always performs with off the charts fundamentals and margins. I think a lot of analysts with HOLD ratings on the firm are underestimating LMT’s ability to drive profit out of even the bleakest of market conditions. This company has the most risk behind a 2009 administration changeover, but the threat posed is hyped beyond what will actually happen in my honest opinion.

Truth be told, I’d rather have you in a different defense contractor in the short term, but LMT’s performance is truly remarkable and I still have a BUY on these perennial EPS outperformers. They were up 32.8% during the last 2001 recession, and are poised to outperform the market again in 2008. What’s more, their 10-year annualized return is up at 7.3%. What I am trying to say is, Lockheed Martin is historically one of the top performers in a recession, and this go-round shouldn’t be any different.

General Dynamics (NYSE: GD)
General Dynamics is poised to be the largest holding in the Nittany Lion Fund, LLC., and I am generally stoked about their prospects for the year. GD has a leading market position in the areas essential to the U.S. military and has a strong track record of generating capital under every market condition imaginable.

The new Gulfstream G650 aircraft, from the leading unit of GD Aerospace, has really improved on fuel efficiency and speed (among other things) and I feel like the long-awaited release could really benefit sales. This is pretty much the world to GD, and offers a huge amount of visibility with low risk. Other than this, I continue to recommend General Dynamics because of their “no surprises” business model that continues to perform well, offering beatable 2008 EPS guidance and great long term prospects, that guarantees a safe investment.

Raytheon (NYSE: RTN)
RTN is really a conviction buy in the fact that they have an increasing foreign exposure, above average cash flow and a recession-proof portfolio. A lot of investors have Raytheon as the #1 defense company stock for 2008, and I really can’t argue with them. I do not like the fact that this company is overly tied to the Bush Administration, and would be effected slightly by a reduced US presence in Iraq or a more pro-China President (because of arms supplies to Taiwan). However, you need to consider that the defense budget is relatively stable.

Raytheon is set to benefit from some big contracts in homeland and border security, such as a $5+ billion Saudi middle east border contract and the ability to capitalize on cyber security after acquiring Oakley. Strong foreign orders and redeployment of cash should drive Raytheon into a profitable 2008/2009, and I stand by the hype.

Northrop-Grumman (NYSE: NOC)
All the buzz over Northrop-Grumman has been the contract win over Boeing to supply a new tanker worth a potential $35 billion. Despite Boeing’s dispute, NOC will more than likely come out with the win on this one. Regardless, I feel that the bigger development is Northrop’s “Guardian System,” a missile-jamming “pod” that can be attached to aircraft to prevent them from getting shot down in hostile flight areas. Before this system was released on March 26th, it was widely expected to favor Raytheon and BAE Systems… I think this can be a huge driver for NOC that has really gone unnoticed in the market.

Northrop is a steady performer at an attractive price. With a PEG at 0.88 and a Beta at just 0.38, they seem to be ripe for investment. Not only are the valued well, but they have that low debt that we love (debt/equity is just 0.23). The numbers are good, they are getting contracts nobody thought they would get, and they carry low risk in a poor market environment. NOC is good.

The power behind defense in a down market is the ability to lock in contracts, backed by a rising national defense budget, for the long term. The big five all have their advantages, and I would expect most of them to capitalize regardless of what twists and turns are in store for the rest of the market. Sometimes, the best offense is a good defense!

-Jimvesting

When you consider a stock in the utilities sector of the market, I’m sure you are thinking about safety and income, not so much about over-sized gains. As a rule of thumb, these big players won’t be outperforming in a bull market… but in today’s uncertainty, why not trust an established utilities contractor with locked-in contracts?

What makes utilities companies so much different from your typical stock is in the way they are regulated. They are essentially allowed to hold monopolies in a free market system, which makes for a big advantage in troubled times. The problem now seems to be with federal interference. The U.S. Energy bill signed back in December of 2007 has really struck a chord with bitter utilities companies, and they sometimes struggle to expand in hard times. Regardless, we like the hedged exposure many have to oil and natural gas markets . Let’s pick up some great utilities stocks!

Electric Utilities – Exelon (NYSE: EXC)
If you are going to own an electrical utility company, I think the one for you is Exelon. Electrical companies like Exelon, despite the recent energy bill, may soon find themselves in the spotlight if legislature restricting carbon emissions progresses further. Most analysts covering the stock will tell you that the firm is undervalued with respects to their potential upside from such a move. I give you a price target of $88.20 versus their current trading under $80, but I think you can grab them closer to $75 .

Other than carbon emission speculation, EXC has a lot more going for them. Commodity prices for coal and gas have improved after increased profitability at nuclear plants. Also, Exelon has seen better than expected capacity prices at its big Chicago plant. These guys really haven’t fallen off the map as their competitors have, down just over 2% on the year (and enjoying a 2.7% dividend yield!).

What exactly does Exelon do? Well for starters, they are known for being the premier provider of nuclear energy in the U.S. People are turning to nuclear technology in order to save themselves from the increasing expenses in gas and coal, and EXC is sitting back with a grin . Bottom line: These guys are too cheap, despite not getting hit this year. Try Exelon for some solid growth in 2008.

Industrial Utilities and Power – PPL Corp. (NYSE: PPL)
Deutsche Bank says PPL is “sitting pretty within the diversified utilites.” Clearly, there is no arguing this case. Catching them around $45 where they are now is a steal on this domestic utilities powerhouse that I set a 12-month target at $60. They have been brought down somewhat unfairly by the broader economy, despite putting out earnings that beat expectations and slightly bumping guidance into the future . I think that people fail to realize that power is generally more resistant to the market than is currently implied.

PPL’s exposure to a tightening power market is definitely a good thing for business. They have systematically generated some risk-adjusted returns for shareholders, and are really taking every expansion, sale and upgrade in the most cautious light as possible.. which has turned out to be a huge advantage. They are working on expanding their nuclear plants (like that in Susquehanna), and have been flying under the radar for too long. You need to keep a keen eye on PPL with constant barrages of political contracts, but its hard to mess with a 2.90% dividend yield, a beta under 0.5, double-digit margin growth and returns above the industry across the board .

Water Utilities – SABESP (NYSE: SBS)
If I had to go one place in 2008 for stock market success, it would be Brazil. So why not take one of the safest plays (utilities stock) in one of the fastest growing markets? Companhia de Saneamento Basico do Estado de Sao Paulo (whew… I’ll just call ‘em SABESP again ) is just the international player we want in a diversified portfolio. SBS is a sewage company. To put it simply, a thriving economy like Brazil is going to leave a lot of sewage behind… and SBS basically has their work cut out for them. It’s really that simple!

These guys are winners. Plain and simple. Down just 0.7% for the year (I consider that a win), they have really been waiting to break back into their classic upswing. SABESP provides water to more than 25 million people in 367 Brazilian cities, and they are DIRT CHEAP compared to their peers. I mean c’mon… a P/E of 0.7 versus an industry 22.66?! Get out of here . If you can bring me a company that is international, undervalued (like nuts), carries a 53.57% gross margin and hasn’t been killed in 2008 as of yet… more power to you. I’m sticking with the utility with the long name, SBS .

Electric and Gas Utilities – MDU Resources Group (NYSE: MDU)
Montana-Dakota Utilities should be a buy on everyones list. They’ve won the hearts of Wall Street investors (10 buys, 1 hold, 0 sells)… now let them win yours! If you are interested in catching some of the Natural Gas & Oil action, MDU has a safe correlation to the commodities. Their operations in Natural Gas & Oil, Electric & Gas, Construction Services and Pipeline & Energy came in higher than expected, with their laggards found in the construction materials & mining segment. I see nat gas & oil alone driving earnings beyond their low-end guidance in 2008, but they could be hurt by residential construction. You should still be buying them, but just with a more cautious eye.

MDU Resources Grp. ended 2007 on a high note, and have taken a hit in 2008. However, they have continued to surpass earnings expectations and I feel that they will recover their losses in the short term and continue to impress in the long term. With a number of key acquisitions that have just been completed, MDU has taken their lumps and is ready to perform. The stock price continues to intrigue me at $25 versus my target set at $33. I think that following the economic stimulus plan, you can expect for lots of money to be thrown at previously unappreciated old-timer public works projects like those found under MDU. They haven’t ignored the strong pull of “green technology,” and really seem ready to break from an unfortunate downtrend. Consider them in your research.

That’s a wrap for the utilities sector. These stocks can add a huge layer of safety to any investment portfolio. While they might not have much in the way of sex-appeal, in a recession… you need some trustworthy under-the-radar successes like EXC, PPL, SBS and MDU. You need to be careful that you don’t catch them in the middle of a legislative disputes (happen somewhat often in the industry), so remember to do your homework.. and invest smart!

-Jimvesting

If you are looking for extraordinary growth coupled with market-risk levels, you want telecommunication stocks in 2008! The industry as a whole has been one of the strongest performers to date, and it is generally somewhat recession proof (people always want to talk!). Catalysts for the long-term include explosive growth in emerging mobile markets, increasing demand for bandwidth (speed), and a large-scale shift from copper wiring to fiber and broadband wireless. The bulls are out, lets grab some value.

Telecom Services – AT&T (NYSE: T)
Wireless momentum continues to power the market in 2008, and AT&T is right there leading the pack with over 65 million subscribers in the United States. They met expectations in their forth-quarter earnings call (that’s the 11th straight quarter of double-digit growth in earnings), but the really important news here is that wireless results were above expectations and guidance for 2008 was reaffirmed. I think AT&T has what it takes to lead the market into the mobile age of technology. Already, we have seen 57.5% year-over-year growth in wireless data revenues, driven by this increasing adoption of smart phones and 3G wireless devices. Essentially, computers are becoming smaller, and I think that these iPhones and Blackberrys are simply early models of the personal computers of the future.

What’s wrong with Verizon (NYSE: VZ)? I really can’t say, as it is a bit of a crap shoot at this point. I’d have to give the edge to AT&T because of their proven ability to grow earnings despite being so large, and their willingness to open networks toward new computing technology. What really pushes T over the edge for me is its steady 4.5% dividend yield, earnings visibility, growing wireless business, favorable balance sheet, long-term strategy and strategic acquisitions (successful acquisition of BellSouth in 2007). You can look toward their IP-services and whatnot… but you want AT&T for their superior wireless dominance in 2008.

Telecom Services – Millicom (NYSE: MICC)
Once again, Millicom blew away expectations by producing an amazing 3.4 million net subscribers and 41% revenue growth in the forth quarter alone. This company is on cloud nine right now, and while margins were slightly below expectations… guess what… they were 40.0%. Essentially, what Millicom is doing is bringing wireless technology to places that are underdeveloped. They charge by the second, rather than minute, to increase their value to thrifty subscribers and are very active in emerging markets. I am confident in their growth, and Millicom is my Telecom stock for 2008.

MICC is going to kick off 1Q08 with a bang due to their 4Q recorded net-add increase. Broken down by region: Central America growth should drive from new 3G technology and higher-quality customers, African markets have seen dramatic margin increases with new subscribers, Columbia has been negatively impacted by connection fees but should rebound nicely and Asian market investments should continue to propel strength in this key market. MICC is impressive across the board, and their huge international exposure should prove beneficial in 2008.

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