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How to Find Energy Company Value<br /> in a Schizophrenic Market

by Dr. Kent Moors | published August 12th, 2011

As we wind up the week, the market remains highly volatile today. But the reason for that chaos seems to be shifting from U.S. debt concerns back to the condition of credit in Europe.

Debt contagion in Western Europe has been the primary reason for market dives this week. The focus is now the condition of European banks – a disquieting shift when you remember the cause of the market slide beginning in late 2008…

Then, the credit crunch was enveloping economies worldwide. Banks could not get overnight funds from other banks, so access to business loans dried up, and the prospects of deep recession (or worse) led the worries in the U.S. and Europe.

At least the banking system is much better off this time around (even though financial institutions continue to withhold trillions of dollars from the flow of credit).

Now comes word that French banks may have the same endemic problems already identified in their counterparts elsewhere in Western Europe. If the trouble is real – and actions by Asian banks overnight yesterday do render credence to it – that will guarantee further turbulence in trading markets.

So much for Standard & Poor’s example of France as the model for setting the U.S. debt house in order.

Actually, why anybody still lends any credence to these fiscal alchemists on sovereign debt matters is beyond me. The sub-prime collateral mortgage obligation catastrophe indicates they are not so hot on the private issuance side, either. Ultimately, whether the debt bubble is buried in commercial bank ledgers or in the public budget does not change the issue. It will have the same net effect when it bursts – disaster.

We should demand some accountability for rating agencies to understand what they are reviewing and forecasting. Otherwise, I would be about as successful with a Ouija Board.

One other matter before I stop kicking this dead horse…

This Time, Not All Boats Will Rise Together

Even getting the causal sequence right in explaining how we reached this point says little about what comes next.

European banks are already leveraged to a much greater extent than their American equivalents and have a wider exposure to investments in the private sector. Any banking sector – but especially the European one – relies upon the interbank lending mechanisms. When the flow of money freezes up, so does the sector as a whole (as we saw in 2008).

Of course, the turbulence is now likely to go either up or down, as evidenced by the wide gyrations of the last week. But we can hardly base an investment strategy on the roll of dice. Rather, it needs to consider the following.

The U.S. equity market is beginning to insulate itself from the widening debt problems in Europe.

Such insulation is partial at best, but it does augur a more sector-specific view of expected stock performance. There are certainly still American-only economic weaknesses to consider. Yet, there is little there that is not already out on the table.

This is going to be one recovery that does not raise all boats equally.

Which (finally) brings me to the subject for today’s column…

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