Investors tend to think rosy thoughts when times are good, yet they are quick to expect the worst. The fact is that most investors get things wrong.

Are oil operations in Iraq safe in the absence of a U.S. military presence?

Concerns over limited future oil production in the Middle East point to the growing importance of domestic energy production. The Obama administration, just like every administration before it, appears adamant that domestic energy production must grow.

While there remain concerns about the future of offshore oil exploration in the wake of the BP (NYSE: BP) disaster, land-based drilling for oil and natural gas is a sector likely to see continued growth.

One standout contender is Patterson UTI Energy (Nasdaq: PTEN), a Texas-based company that drills onshore wells for other companies that explore for oil and natural gas.

Today we'll look at Helix Energy Solutions Group (NYSE: HLX), a contracting company that provides services to offshore energy companies. Helix Energy Solutions Group isn't a dividend payer like Carbo Ceramics, but it's attractive for an entirely different reason - its services should help get America's deepwater drilling in the Gulf of Mexico back on track following the 2010 oil spill by BP (NYSE: BP).

The tragedy in Japan points to the negative potential impact of living in the nuclear age: dangerous byproducts from energy production, such as radiation. But it's not just a reactor meltdown in Japan that needs to be monitored - there are also many types of routine waste generated today in the U.S. that need to be properly disposed of.

The global marketplace is littered with oily rags. All that’s needed is a spark.

And while some people may look back at the Japanese earthquake as “the cause” that initiated a sell-off of stocks, bonds and commodities, it’s simply a catalyst.

Just about every asset class out there has ramped higher, and while the move higher fits neatly into my thesis of inflated commodity prices, no bull market goes straight up forever.

So this sell-off (if it does indeed begin now) should offer us a chance to average into commodity assets at more attractive prices.

I’ve made this same statement before, if you recall. I predicted the possibility that Ben Bernanke’s announcement of Quantitative Easing 2 could disappoint.

I’m also of the opinion that a lack of continued liquidity after QE2 expires in June could cause a similar across the board correction.

But this type of natural disaster, where hundreds of thousands, if not millions of Japanese institutions, individuals, government bodies and investors will have to raise cash, and quick, could be the major catalyst that surprises the market to the downside.

Oil companies that face potential supply disruptions won't be the best performers as oil prices move higher. Instead, smaller companies that can leverage higher prices will be the best bets.

Welcome back old friend - volatility.

After a massive run in stocks, a day when the major indices all rallied more than one percent, and BP PLC (NYSE: BP) stated it is restoring its dividend, traders are throwing around support and resistance levels on major indices as if they were discussing the weather. And people who work far outside the investment world are joining in as well.

If the oil market was a scientific experiment, then it just found a catalyst.

Regardless of the cause of strife in Egypt - whether it’s higher food prices, or perceived government corruption, ticked off Egyptians or just boredom, we know from past results that trouble in the Middle East tends to boost oil prices.

On the other hand we have a variety of factors that just scream for higher prices. Some folks blame greedy speculators for higher commodity prices, oil especially.

Speculators play a valuable role in any marketplace, and while we all might shake our fists at the greedy speculators who allegedly drove oil prices to $147 a barrel back in 2008, I don’t remember anyone sending out thank you notes and fruit baskets to those same speculators when prices snapped back to $35 a barrel.

Today there are two huge trends that are about to benefit one small sector more than any other.

First I’ll tell you the trends so you can connect the dots - and I’ll give you one way to invest.

The first trend is somewhat well-known. It goes like this: when interest rates in the United States begin to rise, the Japanese stock market tends to outperform.

You can see this trend in action in the somewhat complicated table below:

OPEC meets in Ecuador this week. And with oil's recent advance to $90 a barrel coinciding with an increase in consumer spending, the main topic of conversation for OPEC officials will be whether to increase supply to offset rising oil prices.

 Saudi Arabia's oil minister is on record as saying that the acceptable price range for oil is $70-$90 a barrel. But influential investment bank Goldman Sachs is predicting that oil prices will average $100 a barrel in 2011.

 That forecast, however, may be too low. Some expect oil to reach $120 in 2011.

Ever since the Gulf of Mexico oil spill, BP has been very quiet about where it is drilling for oil. But the announcement that BP is raising cash by selling its stake Pan American Energy for $7 billion means that the damaged company is ready to start developing new oil fields.

This time, however, BP will not be drilling in deepwater. Instead, BP plans to produce 60,000 barrels a day from its partnership in a land-based Canadian oil field.

New technology has led to a renaissance of North American oil production. One such oil rich area stretches from Wyoming, through North Dakota and into Canada. Known as the Williston Basin, this geological formation includes the Bakken Oil Pool, which has at least 5 billion barrels of reserves.

Buying shares of BP wasn’t the popular trade. It was the opposite of the comfortable move to make at the time. I know I felt icky and weird even talking about it. I was one of very few prognosticators making the same recommendation.

And right now, I wouldn’t call BP a buy.

In fact, I wouldn’t recommend buying shares of any of the “blue-chip” oil companies right now. Even though some of them are trading at relatively cheap valuations, they’ve all had an amazing run over the past four to six months.

Today, oil is selling at its 52 week highs.

But one of my favorite ways to invest in rising oil prices is still only slightly more expensive than it was four months ago.

There's a lot of buzz in the oil markets these days, and while we've been kind of lulled into complacency with oil in the $75-$80/barrel range, this situation won't last forever.

It might not even last for long, and right now there's a unique opportunity to buy a highly specialized mid-cap oil company. I'll get to this company in a bit...

In the meantime, the United States currently has one of the largest stockpiles of oil it's ever had, with over 1.13 billion barrels of petroleum inventory - or about 60 days worth of supply at current rates of consumption.

The news immediately caused oil futures to dip - briefly below $75 a barrel.

That'sabout the average price for 2010, year to date:

The most important thing for your investments isn't gold or the dollar, or the consumer price index or Treasuries or even the stock market.

It's energy. More specifically, it's crude oil. Oil absolutely dwarfs everything else.

As I wrote back on June 3:

"...in April of this year, a new daily volume record was set on the Intercontinental Exchange (ICE) for West Texas Intermediate Crude (WTIC) contracts - with an astounding mark of 464,381 contracts traded in just that one day. Each contract trades 1,000 barrels of oil.

With oil prices around $84 that day, each contract was worth about $84,000. So, it means that over $38 billion worth of oil contracts traded hands in that one day alone.

The parade of positive earnings reports marches on. The number of companies in the S&P 500 that are beating expectations continues to run at a better than 70% clip.

It's interesting how sentiment was so conflicted coming into 2Q earnings season. We discussed at length here in Daily Profit how analysts had lowered estimates and investors appeared to be expecting earnings growth to slow.

At the same time, there were virtually no pre-announcements that earnings would miss. And investors then, like now, were having a hard time getting bullish on the stock market.

Positive results for second quarter earnings have pushed the S&P 500 to the support/resistance point at 1,115 yesterday. And it looks as though that level will fall easily today.

FedEx (NYSE:FDX) doesn't report until September 16, but the company was kind enough to raise its earnings guidance yesterday, and that helped encourage investors that the global economy is improving.

Shipping stocks are always a good measure of economic activity. When business is growing, more packages are sent and shippers do well. And so, along with recent positive results from UPS (NYSE:UPS), FedEx's preannouncement is great news.

Before European regulators released the results of the banking "stress tests", which were designed to test whether Euro-zone banks were healthy enough to withstand economic shocks, Goldman Sachs (NYSE:GS) estimated that European banks probably needed to raise somewhere in the neighborhood of 38 billion euros to shore up their balance sheets and offset non-performing loans.

Barclay's went for a much more expensive neighborhood, at 85 billion euros.

So it might have seemed like good news when European bank regulators announced that only 7 of the 98 banks that received stress tests came up with failing grades. What's more, it would only take 3.5 billion euros to change those "Fs" to "Ds" or "Cs".

It looks as though the tone of earnings season has taken a bullish turn. Weak earnings from banks, along with a couple revenue misses had investors on edge.

But yesterday's decidedly positive results from Caterpillar (NYSE:CAT), 3M (NYSE:MMM) and UPS (NYSE:UPS) sparked a big rally. And positive earnings from Microsoft (Nasdaq:MSFT), Verizon (NYSE:VZ) and Ford (NYSE:F) look like they will extend the rally.

Bloomberg reports that 85% of S&P 500 companies that have reported have beaten earnings estimates.

Citigroup (NYSE:C) and Bank of America (NYSE:BAC) both posted disappointing earnings this morning. Both banks beat quarterly earnings estimates. But revenues were weak.

Despite record low interest rates, loan demand is not improving, and may even be getting worse.

Even Google (Nasdaq:GOOG) was unable to put up good enough numbers to sustain its valuation.

Today I want to talk about why I think the next couple weeks will be your last opportunity to buy inexpensive oil stocks this summer, and possibly all year.

The reason? Seasonality. Oil prices tend to hit their yearly highs in the third quarter. That's largely due to increased demand from millions of Americans and Europeans driving more for their summer vacations.

This tendency seems to fly in the face of one of those investor "rules" we've all heard a million times before: past performance does not guarantee future results.

It's a mantra for mutual fund managers, financial advisers and newsletter editors. It has an almost Shakespearean meter to it, and if you say it enough you become numb to opportunities on the basis that all of the information you have is from the past - and therefore, unhelpful when it comes to making decisions about the future.

It finally happened. Yesterday, BP (NYSE:BP) announced that it would suspend its dividend for the remainder of 2010. After that, it will probably depend on how much the oil spill costs as to whether, and at what rate, the dividend is reinstated.

Cost estimates for the spill are rising. One analyst was out with a $63 billion estimate. That’s based on the $7,942 a barrel Exxon paid for clean up and fines for the Valdez spill. To put things in perspective, the Valdez leaked 257,000 barrels of oil. BP’s Gulf of Mexico spill is expected to reach 5.3 million barrels.

BP has annual cash flow around $30 billion. It will also have to lower spending and sell off some assets. And it will hit the bond market to raise cash.

Last night, President Obama delivered his first speech in the Oval Office. I’m guessing he chose the Oval Office to give his speech about the BP (NYSE: BP) oil spill because he hoped to evoke a sense of authority and intimacy for such an important and prickly topic.

After nearly two months of oil spilling into the Gulf of Mexico, this speech felt a bit flat. I think Obama might now realize that his skill in delivering powerful, inspiring platitude-filled speeches about America and hope and change, etc. doesn’t really transfer to the somber task of discussing plans for oil spill cleanup and reparation.

Full disclosure: I didn’t vote for the guy and while he’s certainly an accomplished speaker and quite possibly a perfect politician, I think his ideas about energy policy are completely useless if not outright wrong.

Forget last night’s disappointing speech for a second - here’s a quote from Obama after he received the Democrat Party’s nomination for Presidential candidacy:

One month ago, I wrote about the sudden downtrend in oil prices. Of course at that point BP Plc (NYSE: BP) had already been in the news for a few weeks thanks to the oil spill in the Gulf of Mexico. At the same time, the broad market was still reeling from the near -1,000 point flash crash.

Out of all this bad news it seemed as though oil stocks were among the worst hit.

I also predicted that prices might drop lower. I wrote:

“This 13 company index could test the year-to-date lows of 990 – but there are also the sub-800 lows of just over a year ago to contend with as well. I won’t pretend to know which lows the index will test, but I’ll look for any reversal at these key numbers as a time to buy.”

Since then, this index blew by the 990 level, and fell even further, down another 12% since May 10:

These past two weeks have been incredibly hectic for oil companies.  The biggest oil players all jockeyed for remaining oil scraps - in three separate locations.  I'd be remiss not to mention these oil stories even if there weren't any small cap investment implications - but there are, and I'll get to them in a minute.   

To be brief: 

On March 4, Exxon (NYSE: XOM), Shell (NYSE: RDS) and BP PLC (NYSE: BP) finalized contracts with the Iraqi government to start bringing oil to market from Iraq's massive Rumaila oil fields - the world's third largest. The deal is worth a total of nearly $5 billion per year for these three companies alone.   

Then on March 11 (last Thursday), British oil giant BP completed a deal that will give the company access to some of Brazil's massive offshore oil fields.  These fields were discovered in 2007, and represent some 5 billion to 8 billion barrels of oil. That’s a boatload of oil. In fact, it's the biggest oil discovery in the western hemisphere since 1976. And combined with the growth in Colombia’s oil industry over the last decade, the Brazilian oil fields help to solidify Latin America as a major global player for the indefinite future.   

Investors saw lots of red in today’s trading session as regional manufacturing data suggested that economy is not picking up as much as had been hoped. Most economists had expected gains in the New York Fed’s manufacturing index but were instead treated to numbers indicating that the factory sector shrank at a more severe rate than expected.

A stronger U.S. dollar pulled oil below $70 away from its eight month high.

As of press time, 3:30 P.M. Eastern, the Dow was down -194.75 to 8,604.50; the Nasdaq was down -46.29 to 1,812.51, and the S&P 500 was down -23.25 at 922.96.

The Russell 2000 Index, comprised of the top 2,000 small-cap stocks, was down 16.77 at 510.06.

Bucking the downward trend today was pharma and financials. Two of the top percentage gainers were JazzPharma (Nasdaq:JAZZ) up 69.7% on positive news about it fibromyalgia drug and MAP Pharma (Nasdaq:MAPP) up 11.89%. MAPP has been on a tear since late May when it shot up to $11.39 from $3.15.

Other small-caps showing leadership today include QEP (Nasdaq:QEPC) up 39.07%, Tongxin Intl (Nasdaq:TXICU) up 24.75%, and two financials, American Capital (Nasdaq:ACAS) up 14.67% and New Century Bancorp (Nasdaq:NCBC) up 14.83%.

Small-cap decliners were lead by Oil-Dri Corp. of America (NYSE:ODC) down 23.24% following Friday’s news that it will lose its largest customer in the cat litter retail segment. Other leading decliners include Virgin Mobile USA (NYSE:VM) down 16.98%, book retailer Borders Group (NYSE:BGP) down 13.16%, and Integrated Electrical Services (Nasdaq:IESC) down 17.64%.

*****Summer doesn’t officially start for a few more days. Tell that to the parents who are now getting their kids off to camp or getting ready for vacation. For the standard two-income household, living easy in summertime is just a memory.

Including today, we have just 12 more trading days until the end of June and the end of the second quarter. I suspect we will have seen the highs for stock prices by then. That is, if we haven’t seen them already.

Oil backed off recent highs on Friday. And that’s likely to continue. Oil was too cheap at $33 a barrel. But $73 is too high, at least for now while much of the developed world is still mired in an economic downturn. We know demand is still weak. And we know there are looming supply issues when demand picks back up. However, the issue right now is the economy.

*****Oil has been rallying as the news cycle has been relentlessly optimistic about an imminent economic recovery. In fact, many leading economists expect U.S. GDP to actually grow in the third quarter.

Oil stocks that we’ve been following have been on a tear the market bottom, including Graham Corp. (AMEX:GHM) up 81%; Brigham Exploration (Nasdaq:BEXP) up 239%; Gulfport Energy Corp. (Nasdaq:GPOR) up 326%. Even the majors like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), BP (NYSE:BP), and ConocoPhillips (NYSE:COP) are bringing investors some decent returns, though not as great as small-cap stocks in the same sector.

Investors have bought the rumor of economic recovery. We’ll see how they respond to the news. I’ll be watching oil as the leading indicator for economic expectations.

Right now, it seems like stock prices have priced in a modest recovery. And if investors perceive that there’s not much upside left for stock prices, it would makes sense to trim exposure, take profits, or however you want to put it.

*****We’ve seen anecdotal evidence that investors are moving funds out of the stocks that have led the market higher. Technology has been having trouble making headway. And we’ve seen strength in healthcare and consumer staple stocks. Plus, the Volatility Index (VIX), which measures the cost of put options (which rise in value as stocks or indices fall, thereby giving investors downside protection) has been on the rise.

This suggests that investors are preparing for a downside move for stock prices, or, at the very least, protecting gains they have made.

*****On Mondays, I’m going to start offering a look at the economic data coming out during the week ahead. This week is a bit unusual as all the economic data is out on Tuesday. Tomorrow we get Housing Starts, Building Permits and the Producer Price Index (PPI).

Of course, consumers will focus on the housing numbers. But I’d expect any numbers will be interpreted with optimism. Investors seem to understand that the bottoming process for the housing market will be volatile and that wild swings in the data should be expected.

In my opinion, the PPI is the one to watch. The U.S. dollar rallied a bit last week, but there’s no doubt that massive Treasury bond sales have investors worried about a weaker dollar the potential for inflation to pick up. Add to that improving retail sales numbers, helped by higher gasoline prices, and you have the potential for a higher-than-expected PPI reading. Needless to say, that would not be good for stocks.

I’ll talk to you tomorrow.

Ian Wyatt

P.S. You’ll recall from Friday’s issue we start sharing charting analysis from TradeMaster’s technical analyst, Jason Cimpl. If you didn’t have a chance to catch, here’s the link. You’ll get his take on this week’s market direction. Since this is a new feature for Daily Profit I’d greatly appreciate receiving any feedback from you on it.

With a high strength-to-weight ratio, titanium may be the element investors need to up the robustness of their holdings.

Rising demand has caused titanium prices to more than double over the past three years and shares of titanium producers have flourished, especially in the case of Dynamic Materials Corporation (Nasdaq:BOOM) and Brush Engineered Materials Inc. (NYSE:BW). These companies meld titanium with less expensive metals to create so-called clad metals offering titanium’s strength and corrosion-resistance at a more affordable price. 

Once thought exotic, titanium is now frequently sought by engineers in the energy, chemical, industrial and electronics industries because stricter emissions standards have forced industry players to raise processing temperatures and use corrosion-resistant metals in equipment designs. In addition to being corrosion-resistant, titanium is as strong as steel, about 45% lighter and offers superior thermal and conductive qualities. Clad metals also allow manufacturers to maintain delivery schedules when titanium is in short supply since less prime metal is used.

Dynamic Materials is the world’s leading provider of explosion-clad metal plating. This process uses an explosive charge to bond metals that can not be joined by welding. Clad metal plates consist of a thin layer of corrosion-resistant metal (such as titanium) bonded with a thicker, less expensive base metal such as carbon steel. Rising capital investment and equipment demand in the energy, refining, mineral processing . . .

Clearly the wind is at the back of alternative energy shares. With electricity prices rising, crude oil soaring and the threat of global warming a near daily headline, the climate is right for companies in the solar business. And why not? Solar energy is inexhaustible, pollution free and helps create local energy independence.

Congress and state governments have become believers; a bill passed by the House this August requires electric utilities to increase the percentage of electricity they produce from renewable resources to 15% by 2020 from 2.75% in 2010. Solar is expected to be a big beneficiary.

In August 2006, California signed into law the "Million Roofs Solar Bill" with the objective of having one million California homes heated and lighted by solar within a decade. By offering economic incentives for installation, the bill aims to increase the use of solar power 30-fold and cut the cost of solar power to consumers in half. By 2011, builders must also make solar panels as accessible of an option for new home buyers as if they were high-end countertops.

With this type of legislative backdrop, the future for solar companies is bright. One of the likely beneficiaries is Ascent Solar Technologies, Inc. (Nasdaq: ASTI).

Ascent was spun-off from ITN Energy Systems in July 2004 and had its IPO in July 2006. ITN, which was founded in 1994 by Dr. Mohar Mistra, a former research whiz at defense contractor Martin Marietta, was created to commercialize innovative technology. Ascent is ITN's forth spin-off.

If you've ever filled up your gas tank, ordered a meal at a fast-food drive-through or even bought a vehicle from an automotive dealership, chances are you have unwittingly contributed to the success of a little-known small cap.
 
The reason: LSI Industries Inc. (Nasdaq: LYTS), based in Cincinnati, Ohio, supplies indoor and outdoor lighting fixtures, signage, menu boards, LED displays, digital billboards and sports screens to the petroleum/convenience store, multi-site retail (including automobile dealerships, restaurants and national chain stores) and the commercial and industrial lighting markets.

LSI's client list reads like a veritable Who's Who in big business: Ford Motor Company (NYSE: F), General Motors Corporation (NYSE: GM), DaimlerChrysler AG (NYSE: DAI), Exxon Mobil Corporation (NYSE: XOM), BP plc (NYSE: BP), Chevron Corp. (NYSE: CVX), ConocoPhillips (NYSE: COP), McDonalds Corp. (NYSE: MCD), Burger King Corporation (NYSE: BKC), Wal-Mart Stores, Inc. (NYSE: WMT), Best Buy Co. Inc. (NYSE: BBY), CVS Pharmacies, Inc. (NYSE: CVS), Target Stores (NYSE: TGT)...the list goes on.

LSI's creations do the seldom-thought-of, but highly important job of providing essential illumination for businesses and strategic visibility for their products and services. Some of the company's more popular specialty designs are custom backlit menu boards, indoor and outdoor signs and graphics, decorative light fixtures, solid-state LED displays, and most recently, digital billboards.
 
Since having its stock downgraded to "sell" from "hold" by Matric USA analyst Daniel Scalzi on June 22 (after which the stock tumbled from more than $18 a share to $16.40), the visual image-solutions company has been lighting up far more than the usual. In late June, following news that the rollout of re-imaging programs by several large clients would boost the company's fourth-quarter and fiscal year results beyond expectations, LSI began grabbing attention, in a good way.

The stock price of Retalix Ltd. (Nasdaq: RTLX), which supplies software for retailers, fuel stations and foodservice organizations, has been rising like the price of gasoline at the beginning of a warm summer season.

Since the beginning of the year, its stock has risen 37%, from about $16 at the end of December to around $22 today. On May 21, Retalix announced earnings that handily beat analysts’ expectations, and the stock was pushed up nearly 8% in two days, from $20.80 to $22.40.

But don’t get too excited yet. Those numbers reflect a partial recovery from a dismal 2006. And a closer look at its most recent earnings statement suggests that it still isn’t fully back in the express lane.

Retalix started out as a supplier of software for point-of-sale (POS) systems for retailers. Its software is used in POS platforms from companies such as International Business Machines Corp. (NYSE: IBM) and NCR Corp. (NYSE: NCR), although those companies also compete with Retalix with their own software. The Israel-based company sells products in more than 50 countries, and is operating in over 16,000 grocery stores in the United States and 42,000 worldwide. Its customers include The Kroger Co. (NYSE: KR), Costco Wholesale Corp. (Nasdaq: COST), Super-Sol Ltd. (Israel’s largest grocery retailer) and BP plc’s (NYSE: BP) chain of gas-and-convenience stores.

A couple years ago, Retalix started expanding into other software solutions for its niche markets. It made a couple acquisitions to move into back-office software to help manage inventories, customer relationships and supplier relationships, among other things. A warehouse management system, for example, is more efficient if it can easily synch up inventory numbers as POS terminals record a new sale.

The company is also helping to bring grocers into the Internet age. A Retalix subsidiary, StoreNext Retail Technologies, provides hosted electronic payment systems to independent grocers. In early May, StoreNext announced a collaboration with Earthlink, Inc. (Nasdaq: ELNK) subsidiary New Edge Networks, allowing StoreNext to resell New Edge’s broadband networking and internet services to North American grocery stores. 

Although much attention has focused on the strong performance of the major oil companies, far less has been reported about a related sector benefiting from rising energy demand - oilfield services providers. These companies provide technologies for drilling wells and boosting production. Demand for their services is cyclically linked to oil industry capital spending, which tends to be less volatile than oil prices.  

Energy prices remain near historic highs in 2007 as a result of global economic growth, rising demand from China and India, supply disruptions and political tensions in parts of Africa and the Middle East and a shortage of refinery capacity. 

High energy prices are fueling record levels of exploration and production spending. British Petroleum will increase capital spending to $18 billion in 2007 and targets annual production growth through 2012.  ExxonMobil increased spending to $20 billion in 2006 and plans to maintain capital spending in that range for several years. Chevron increased capital spending 50% in 2006 to $16.6 billion and plans to increase 2007 spending to $19.6 billion.