Has your humble correspondent finally gone stark raving mad?

Has this summer's endless series of "mixed" (read as "mostly fabricated") economic reportage, bifurcated technical set-ups and volatile 100-point market swings that only yield flat share prices destroyed my ability to make sense of the markets?

Possibly, but if so, I'm not alone.

Wall Street's Growing Gap Between Hype...

A recent Bloomberg compilation of some 159,919 current ratings of stocks found that analysts are thoroughly convinced that corporate profits ought rise some 36% over the next quarter or so.

This is the highest such guesstimate since 1988!

Another report on my desk notes that these growth estimates have pushed that most venerable of leading value indicators, price versus forward earnings, to a 12-year low at 11.7.

One might easily imagine that these fellows are suggesting that we grab shares like they are going out of style. And one might easily be wrong.

...And Action

Those same analysts under Bloomberg's microscope who are lauding the profitability of Wall Street's "Fire Everyone" business model, are voting 2-to-1 against buying shares of same.

Indeed, for the first time since at least 1997, the report tells us, fewer than 29% of rated stocks are considered "buys." Another 54% are slated as "neutral," a status usually reserved companies that analysts privately hate, but don't care to trash out loud.

Like I said earlier, if I've gone mad, I certainly have lots of company.

21st-Century Schizoid Men?

If you were to ask Standard & Poor's senior index analyst, Howard Silverblatt, he would tell you that while all-time high projecting earnings would be nice, he "wouldn't bet on it."

ING's head of asset allocation, Paul Zemsky, tells us that when he chats with his team, they look at all those potential profits and that veritable mountain of cash on hand, and all they do is quibble about double-dip recessions.

Stifel Nicolaus' Meyer Shields goes even further. He simultaneously predicts that Warren Buffett's own Berkshire Hathaway's earnings will increase the most since the boom days of 2006 -- and is warning investors to sell shares because of the weakening economy.

There is a rather cynical reason for this 7-10 split between expectations and recommendations. Simply put, no one actually believes those "expectations of profits" will actually come to pass, but they don't particularly care to call their friends on Wall Street liars to their faces.

According to an April study out of McKinsey and Co. over the past 25 years, analysts estimates of profits by large come roughly double reality. And indeed, when you press most of these guys in private, they will tell you that all of Wall Street's probable profits depend entirely on economic presumptions that are increasingly proving false.

We're Certainly Spending...

Indeed, just last week we learned that the supposed GDP growth of the past few quarters might be nothing more than hope and a rounding error or two. In point of fact, the country may have never have actually recovered from the recession that began in December of 2007.

But all this is rather generalized talk, and I began today's column suggesting that you sell a specific category, retail stocks. And I made this suggestion in the face of an ostensible improvement in the sector's affairs.

According to the Commerce Department, Americans are spending at the fastest pace in some four months. If this headline were backed up by facts (as against mere statistics), it would certainly make me look mad indeed.

...But Are We Buying?

However, once again, it pays to view such figures in a realistic context. Yes, consumer spending "may" have grown 0.4% in July.

I put may in quotations like that because these reports have been sooo prone to downward revision once everyone's attention is elsewhere. But even if we take the gain at face value, it comes after April's loss of 0.1%, May's 0.1% gain and June's absolutely flat performance. In other words, the bar for "growth" has been set pretty damn low.

What's more, this gain in spending might not even represent an actual gain in folks' purchasing power, or maybe even in actual purchasing!

Theoretical Deflation -- Factual Inflation

Wages and salaries are supposed to have increased 0.3% in July. So right up front, we have a 0.1% shortfall. Factor in inflation, and the gap between income and spending is actually somewhat larger than that.

Despite all the talk these days of deflation, there was actually a 1% increase compared to June 2010 and a 1.5% increase in the cost of common items all in (including fuel and food) compared to July 2009. Factor that inflation into the picture, and the aforementioned "purchasing bump" is cut in half to a mere 0.2%.

And just to complete the picture, this shortfall is coming out of personal savings, which fell from 6.2% in June to 5.9% in July.

Golden Days for the Rich...

Very long story short: There is no nascent consumer boom happening here. Rather what we are seeing is yet another "bifurcation," a split in the country between those who really don't give a rat's patootie about such things as inflation or unemployment, and those who are getting increasingly concerned about "GD-II," aka the Great Depression of the 21st century.

I have two reports on my desk that typify the former side of this divide. One is from The New York Times, and frets that Volkswagen's buyout of Porsche will somehow rob the venerable sports-car maker of its exclusive cachet.

The second is out of The Wall Street Journal, and notes that 18.5% of homeowners who refinanced between January 2010 and June 2010 chose to increase their monthly outlay by as much as 50% so as to pay off their mortgages in 15 years rather than 30, garnering tens of thousands of dollars in long-term savings.

And Long Dark Nights for the Rest

On the other side of the divide, the Administrative Office of the U.S. Courts informs us that the 9% increase in filings between the first and second quarters of 2010 has pushed the U.S. bankruptcy rate to its highest point since 2005. Compare the 12 months ending June 30, 2010, to the previous 12 months, and you find that consumer bankruptcies are up a staggering 21%.

If you are looking for a more prosaic metric, you might care to compare the latest quarterly reports coming out of rival grocery chains, Whole Foods (WFMI:NASDAQ-GS) and Safeway (SWY:NYSE). The former brags of same-store sales gains of 8.8% while the latter is forced to admit to a 4.2% loss. As Safeway CEO Steven Burd puts it when he regards two plus years of economic troubles: "There are some people that still feel challenged and there are others that don't."

Unfortunately (or perhaps fortunately, depending on what side of that divide you are on), the retail world as a whole is far more dependent on Safeway's customers than Whole Foods. And as we have seen both demonstrated both historically and again in today's statistics, when those customers are "challenged," they take steps that cut deep into both sales and profits.

The Payoff

"All this," as Rex Stout was fond of writing, "is mere phenomena." When I look to such amalgamations of grocery joints as Standard & Poors' Consumer Staples SPDR (XLP:NYSE), I see the very same wise guys who are telling us of profits for quarters to come preparing to abandon shares willy-nilly.

A glance at the XLP's technical situation reveals the exact same set of sell signals that preceded their fall in September of 2008, including such ugly forms as a death cross on the upper chart, with both price and the 50-day average sitting below the 200-day average, and complete collapses on multiple lower chart corollary oscillators.

I say that this is "fortunate" for those with trading capital, because I see the opportunity to short the index to the tune of some 25% over the next few months. Option traders could of course quadruple that gain with properly selected put option contracts.

Another part of the reason I focus on these types of posts is that there’s a dearth of information for US investors on international stocks and their valuations.  Since I keep up on analysis of the Canadian equities markets, I’m happy to share with you what I’ve learned.  I’m not a financial advisor, however, so keep that in mind and use these as suggestions for further research only.

When I say “best,” I mean some mixture of both the largest, the companies with the most lucrative oil patch locations, and the stocks that are most often recommended by Canadian analysts specializing in this sector.   Also note that all of these are mature oil producers and they all pay dividends.  I’ve listed them here according to market cap.

Best Oil Stocks To Buy For 2011: Suncor (TSX: SU)

One analyst called this the “#2 go-to name” for foreign investors.  Suncor is another solid management team with steady, if not spectacular, growth prospects projected ahead.  They recently acquired Canada’s #2 gasoline company, Petro-Canada, which owned a large number of gas stations throughout the country. Market Cap: $55.3 billion.  Yield: 1.1%

Suncor Energy Inc. is a growing, integrated energy company, strategically focused on developing one of the world’s largest petroleum resource basins – Canada’s Athabasca oil sands.

In 1967, Suncor made history by tapping the oil sands to produce the first commercial barrel of synthetic crude oil. Since then, Suncor has grown to four major businesses with more than 5,000 employees.

• Near Fort McMurray, Alberta, Canada, Suncor extracts and upgrades oil sands into high-quality refinery feedstock and diesel fuel.

• In Western Canada, Suncor explores for, develops and produces natural gas.

• In Ontario, Suncor refines crude oil and markets a range of petroleum and petrochemical products, primarily under the Sunoco brand.

• In Colorado, Suncor’s downstream assets include a Commerce City-based refinery, crude oil pipeline systems and 43 retail stations branded as Phillips 66.

While we work to responsibly develop hydrocarbon resources, Suncor is also investing in clean, renewable energy sources. By 2008, Suncor plans to have four projects in operation with a total capacity of 147 megawatts of renewable energy as an alternative to hydrocarbon-fuelled generation. These projects are expected to offset the equivalent of approximately 270,000 tonnes of carbon dioxide annually. In Ontario, Suncor expects to complete construction in 2006 on a plant that will supply ethanol – a renewable energy source – for lower-emission blended fuels.

Suncor Energy (SU:TSX) is one of Canada's premier integrated energy companies. Suncor's operations include oil sands development and upgrading, conventional and offshore oil and gas production, petroleum refining and product marketing under the Petro-Canada brand (Annual Report 2009). Suncor's common shares are listed on the Toronto and New York Stock Exchanges.

Currently Suncor's stock price is trading close to its mid-point in the 52 week time range. It's last closing price was recorded at $34.32. It's 52 week low price was $27.44 and it's 52 week high price was $40.79.

Suncor Fundamental Valuation Metrics

All of Suncor's financial ratios other than the Return on Equity and Gross Profit Margin are lower than the industry average. Its operating performance measures are on par/better than some of its closest peers.

However, its relative valuation measures are higher than the industry average as illustrated below:

Suncor Valuation

Is the valuation justified?

Suncor has a strong recoverable resource base of 27 billion barrels of oil equivalent.

Suncor also has in place a debt retirement plan and is now in the process of divesting assets it inherited in the merger with Petro-Canada that do not support its core operations. The company expects to close most sales by the end of the year. The proceeds from these sales are expected to be around CAD $ billion 2 to 4 and are expected to be used in reducing the company's debt. Along these lines, Suncor recently announced that it has entered into an agreement to sell certain natural gas-heavy assets in west-central Alberta for C$235 million ($230 million) in cash.

With 84% of the value in Suncor coming from oil, rising oil prices are Suncor's strongest catalyst for growth. For the near future, the US Energy Information Administration forecasts oil price to average USD 80.06 in 2010 and USD 83.50 in 2011.

Best Oil Stocks To Buy For 2011: Encana (TSX: ECA)

Encana has been described as one of the “bluest of the blue-chips.”  Its focus is unconventional oil and gas with strengths in clean energy production, although it is weighted to natural gas.  However, it has the second-largest market cap of any Canadian oil company.  Market Cap: $45.4 billion.  Yield: 2.8%

EnCana is a leading oil and gas producer in North America, where the company's primary focus is on the development of resource plays and the in-situ recovery of oilsands bitumen.

Christina Lake In-situ oilsands, northeast Alberta, EnCana's largest potential oilsands project

Located in northeast Alberta about 120 kilometers south of Fort McMurray, Christina Lake has the potential to be EnCana's largest oilsands project. Pilot project work over the past five years has taken steam-assisted gravity drainage production, from six well pairs drilled into the McMurray formation, to a level that is expected to average 6,000 barrels of bitumen per day in 2006. A current expansion is expected to take production to about 18,000 barrels per day in 2008 and the project is targeted to grow to more than 250,000 barrels per day over the next decade.

With a reservoir thickness of up to 150 feet of oil-bearing sands, Christina Lake is estimated by EnCana to have an unbooked resource potential of about 1.8 billion barrels of oil. Foster Creek In-situ oilsands, northeast Alberta, commenced commercial operations in 2001. Foster Creek is the quintessential resource play — a high-quality, unconventional resource with large potential and scalable, repeatable operations that enable the company to incorporate technical advances.

Foster Creek produces from the McMurray formation of the Athabasca oilsands, and features a technology called steam-assisted gravity drainage (SAGD). We conducted a multi-year pilot project prior to starting commercial operations in 2001. In SAGD, horizontal wells are drilled in pairs — running parallel above one another about 17 feet apart. Steam is injected in the upper well to warm the bitumen and make it less viscous so it can drain to the lower production well bore. A critical SAGD thermal efficiency measure is the ratio between the quantity of steam injected and the quantity of oil produced. Our steam-oil ratio of 2.5 times is industry leading. With a high-quality reservoir and leading thermal efficiency, Foster Creek delivers excellent returns. Oil production averaged 29,019 bbls/d in 2005. In the fourth quarter of 2005, we completed the first stage of an expansion which added an additional 10,000 bbls/d of capacity. The second stage of the expansion, which is expected to add an additional 20,000 bbls/d of capacity, is expected to be completed around year-end 2006. In November of 2005, we announced that EnCana is developing plans to significantly expand production from its estimated 5 billion to 10 billion barrels of recoverable oilsands resources - assets that have the potential to reach a production rate of 500,000 bbls/d of oil per day in the next 10 years.

Imperial Oil Limited was incorporated under the laws of Canada in 1880. It is an integrated oil company. It is active in all phases of the petroleum industry in Canada, including the exploration for, and production and sale of, crude oil and natural gas. The Company's operations are conducted in three main segments: Upstream, Downstream and Chemical. Upstream operations include the exploration for, and production of, conventional crude oil, natural gas, upgraded crude oil and heavy oil. Downstream operations consist of the transportation, refining and blending of crude oil and refined products and the distribution and marketing thereof. The Chemical operations consist of the manufacturing and marketing of various petrochemicals. The Company owns and operates four refineries. Two of these, the Sarnia refinery and the Strathcona refinery, have lubricating oil production facilities. The Strathcona refinery processes Canadian crude oil, and the Dartmouth, Sarnia and Nanticoke refineries process a combination of Canadian and foreign crude oil. In addition to crude oil, the Company purchases finished products to supplement its refinery production. Crude oil from foreign sources is purchased by the Company at market prices mainly through Exxon Mobil Corporation. It owns and operates crude oil, natural gas liquids and products pipelines in Alberta, Manitoba and Ontario. Its known brand names are notably Esso and Mobil. The Company's Chemical operations manufacture and market ethylene, benzene, aromatic and aliphatic solvents, plasticizer intermediates and polyethylene resin. Its major petrochemical and polyethylene manufacturing operations are located in Sarnia, Ontario, adjacent to the Company's petroleum refinery. The Company's competitors include major integrated oil and gas companies and numerous other independent oil and gas companies. All phases of the Upstream, Downstream and Chemical businesses are subject to environmental regulation pursuant to a variety of Canadian federal, provincial and municipal laws and regulations, as well as international conventions.

IMO.TSX Revenue

As a value investing shop, we are interested in seeing how IMO.TSX's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 1.67x and the low end of the range at 1.09x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for IMO.TSX of 1.49x is somewhat above its historical average. As such, the current Price to Sales ratio suggests a neutral share price forecast. In order for us to become more positive about IMO.TSX we would need to see a drop in the Price to Sales ratio of 7% given current sales per share levels in order to return to its historical weighted average.

IMO.TSX Cash Earnings

Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. IMO.TSX is significantly above their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for IMO.TSX, the current level of Cash Earnings compared to its historical levels helps identify where IMO.TSX is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 17.13 and a historical low Cash Earnings per share ratio of 11.35, an investor can relate where value becomes optimal.

Just recall that when a stock's price, as in the cases of IMO.TSX, is significantly elevated to the level of Cash Earnings being generated, the market has already priced in much of that value. For example, the historical average for IMO.TSX's Price to Cash Earnings ratio is 35% below the current ratio of 19.28. That is not an insignificant amount, and diminishes our overall outlook on IMO.TSX. However, you need to review several areas of a company's potential, and as management would point out, one metric is not the end-all-be-all of any analysis.

IMO.TSX Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In IMO.TSX’s case, the estimated annual dividend is 0.40 resulting in a current dividend yield of 1.00%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from IMO.TSX against the historic high and low levels over the past 10 years. The highest dividend yield from IMO.TSX over this period was 2.47% while the lowest dividend yield was 0.61% With that range in mind, IMO.TSX’s current dividend yield is a full 35.24% below its median dividend yield historically. This is a negative from our perspective.

Best Oil Stocks To Buy For 2011:  Talisman Energy (TSX: TLM)

An independent company since 1992, Talisman is headquartered in Calgary, Alberta.  It has subsidiaries operating in the UK, Norway, Southeast Asia, and North Africa.  Talisman is another reputable big-cap, oil-weighted stock with gas exposure.  It’s also more likely to be a buyer rather than a target of a takeover.  Market Cap: $18.6 billion.  Yield: 1.2%

Talisman Energy Incis considered to operate in the Energy sector. They specifically operate in the Independent Oil & Gas business segment contained within the Oil & Gas - E&P industry.

Talisman Energy Inc. is a global, diversified, upstream oil and gas company, headquartered in Canada. Talisman's three main operating areas are North America, the North Sea and Southeast Asia. The Company also has a portfolio of international exploration opportunities. It is a Canadian-based independent oil and gas producers. Talisman's main business activities include exploration, development, production, transportation and marketing of crude oil, natural gas and natural gas liquids. It has a diversified, global portfolio of oil and gas assets. The Company believes this portfolio would provide growth from shale gas development in North America, project developments in Southeast Asia, and its international exploration portfolio. Talisman investigates strategic acquisitions, dispositions and other business opportunities on an ongoing basis, some of which may be material. The Company's activities are conducted in five geographic segments: North America, UK, Scandinavia, Southeast Asia, and Other. The North America segment includes operations in Canada and the United States. The Southeast Asia segment includes exploration and operations in Indonesia, Malaysia, Vietnam and Australia and exploration activities in Papua New Guinea. The Other segment includes operations in Algeria and exploration activities in Peru, Colombia and the Kurdistan region of northern Iraq.

TLM.TSX Revenue

Cash earnings is the most important factor in our analysis, but it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company's stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, TLM.TSX the high and low end of the Price to Sales per share ratios are 2.55x and 1.43x respectively.

Notice that TLM.TSX's current Price to Sales per share ratio is 2.55x, which is high enough compared with historical norms of TLM.TSX to cause some concern. The current Price to Sales per share is near the upper end of the historical range. In our eyes, this is a negative factor because it is more likely that it will return to the normal range than continue rising outside of the range. At current sales per share levels, we would need to see a decline in the Price to Sales ratio of 28% merely to return TLM.TSX to its historical average.

TLM.TSX Cash Earnings

Looking at TLM.TSX specifically in their Cash Earnings capabilities, Ockham views TLM.TSX as significantly above their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for TLM.TSX, the current level of Cash Earnings compared to its historical levels helps identify where TLM.TSX is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 16.60 and a historical low Cash Earnings per share ratio of 9.93, an investor can relate where value becomes optimal.

Just recall that when a stock's price, as in the cases of TLM.TSX, is significantly elevated to the level of Cash Earnings being generated, the market has already priced in much of that value. For example, the historical average for TLM.TSX's Price to Cash Earnings ratio is 204% below the current ratio of 40.37. That is not an insignificant amount, and diminishes our overall outlook on TLM.TSX. However, you need to review several areas of a company's potential, and as management would point out, one metric is not the end-all-be-all of any analysis.

TLM.TSX Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company's inherent expectations.

Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from TLM.TSX against the historic high and low levels over an available data range. Because TLM.TSX has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In TLM.TSX’s case, the estimated annual dividend is 0.24 producing a current dividend yield of 1.35%. The highest dividend yield from TLM.TSX in recent history was 2.42% while the lowest dividend yield was 0.54%. TLM.TSX is not making us feel all that confident when their current dividend yield is below the historical median by 9.08%.

Best Oil Stocks To Buy For 2011: Crescent Point Energy (TSX: CPG)

This is by far the hot Canadian oil stock right now, but for good reason.  Not only does it seem to have the best growth and production prospects over the next ten years, but it has the best location of reserves in both southwest and southeast Saskatchewan.  I have yet to see an analyst have anything negative to say about this company.  Take that for what it’s worth, but I’m just saying.  One factor to consider is its small market cap relative to others in the sector.  It also has an unusually high yield, perhaps owing to its recent conversion from income trust status. Market Cap: $5.7 billion.  Yield: 7.8%

Crescent Point Energy Corporationis considered to operate in the Energy sector. They specifically operate in the Independent Oil & Gas business segment contained within the Oil & Gas - E&P industry. Through Crescent Point Resources Ltd. and other subsidiaries, explores for, develops and produces oil and gas in western Canada.

CPG Revenue

As a value investing shop, we are interested in seeing how CPG's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 8 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 5.94x and the low end of the range at 3.30x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for CPG of 8.54x is well above its historical average. This means that CPG looks relatively expensive compared to its historical Price to Sales average, and thus it is more difficult to believe that there is significant price appreciation potential. In order for the stock to become more attractive, we would like to see a decline in the Price to Sales ratio of 84% just to return CPG to its historical average.

CPG Cash Earnings

Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. CPG is significantly above its historical average multiple of cash earnings as calculated by Ockham. Similar to our analysis of sales per share, Ockham looks at the last 8 years of cash earnings levels for CPG to identify where the current high and low price levels have been historically in relation to profit per share. Again, we utilize a weighted average methodology which relies more heavily on recent years of data. This weighted average framework provides us with an average high Price to Cash Earnings ratio per share of 18.82 and a 11.99 low over the same period.

Therefore, at the current price of 37.83 and a Price to Cash Earnings ratio of 4,770.83, CPG is significantly overvalued. This diminishes the attractiveness of CPG until we see either a significant increase in cash earnings or a decline in price. A decline of the Price to Cash Earnings ratio of 30869% is needed just to return to the historical cash earnings multiple.

CPG Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company's inherent expectations.

Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from CPG against the historic high and low levels over an available data range. Because CPG has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In CPG’s case, the estimated annual dividend is 2.76 producing a current dividend yield of 7.30%. The highest dividend yield from CPG in recent history was 14.40% while the lowest dividend yield was 0.00%. Therefore, the current dividend yield of CPG is above the historical median by 1.36%. This is definitely a positive in our view.

Best Oil Stocks To Buy For 2011: Canadian Natural Resources (TSX: CNQ)

Canadian Natural Resources, Ltd.is considered to operate in the Energy sector. They specifically operate in the Independent Oil & Gas business segment contained within the Oil & Gas - E&P industry.

Canadian Natural Resources Limited was incorporated under the laws of the Province of British Columbia on November 7, 1973 as AEX Minerals Corporation (N.P.L.) and on December 5, 1975 changed its name to Canadian Natural Resources Limited. It is a Canadian based senior independent energy company engaged in the acquisition, exploration, development, production, marketing and sale of crude oil, NGLs, and natural gas production. The Company's main core regions of operations are western Canada, the United Kingdom sector of the North Sea and Offshore West Africa. It initiates, operates and maintains a large working interest in a majority of the prospects in which it participates. It focuses on exploiting its core properties and actively maintaining cost controls. The Company's business approach is to maintain large project inventories and production diversification among each of the commodities it produces namely: natural gas, light/medium crude oil and NGLs, Pelican Lake crude oil (14-17º API oil, which receives medium quality crude netbacks due to lower production costs and lower royalty rates), primary heavy crude oil, thermal heavy crude oil and SCO. Its operations are centered on balanced product offerings, which together provide complementary infrastructure and balance throughout the business cycle. Virtually all of the Company's natural gas and NGLs production is located in the Canadian provinces of Alberta, British Columbia and Saskatchewan and is marketed in Canada and the United States.

CNQ Revenue

For a long time, value investors have used the current share price relative to sales per share levels as an important valuation tool. We utilize a historical weighted average methodology that treats recent years more importantly in the calculation. When looking at CNQ through this framework, we can see that our weighted average historical high and low Price to Sales per share ratios over the last 10 years are 3.07x and 1.31x respectively.

Utilizing this range we can see that CNQ’s current Price to Sales per share ratio of 2.83x is high enough compared with historical norms of CNQ to cause some concern. The current Price to Sales per share is near the upper end of the historical range. In our eyes, this is a negative factor because it is more likely that it will return to the normal range than continue rising outside of the range. At current sales per share levels, we would need to see a decline in the Price to Sales ratio of 28% merely to return CNQ to its historical average.

CNQ Cash Earnings

As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of CNQ, Ockham views their current Cash Earnings as significantly above their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for CNQ, the current level of Cash Earnings compared to its historical levels helps identify where CNQ is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 17.05 and a historical low Cash Earnings per share ratio of 7.30, an investor can relate where value becomes optimal.

So what does this tell us about CNQ in particular? Basically, we would value the current level of Cash Earnings per share (which is at 14.25) as significantly overvalued. Just by looking at the last closing price of CNQ, which was 32.47, we can see that compared to the historical high Price to Cash Earnings levels we calculated, the market has already rewarded CNQ with a higher stock price. So basically, we don't view this level of Cash Earnings or stock price as compatible with a long term value at this point. Just remember, that does not mean that CNQ may not have other merits with which to find a good investment opportunity, it just means that we would prefer to see either an increase in Cash Earnings or a decrease in stock price before we would become bullish on this metric.

CNQ Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company's inherent expectations.

Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from CNQ against the historic high and low levels over an available data range. Because CNQ has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In CNQ’s case, the estimated annual dividend is 0.23 producing a current dividend yield of 0.67%. The highest dividend yield from CNQ in recent history was 2.15% while the lowest dividend yield was 0.37%. With that range in mind, CNQ’s current dividend yield is a full 46.57% below its median dividend yield historically. This is a negative from our perspective.

Over in the developed West on the other hand, resignation and capitulation have not yet caught on. People still rage against the dying light of the Bubble Epoque and count on quantitative easing to get it going again.

In the US, half a million Americans filed for jobless benefits last week - the highest number in 9 months. At this point in a typical recovery, job growth should be strong. Instead, it is shockingly weak. As for house sales, the drop in July was the greatest one-month decrease since 1968. Again, the direction is all wrong. Housing led the US out of 7 of the last 8 recessions. Now, it is holding it back! One out of every 7 mortgages is delinquent or in foreclosure. The nation is on target to foreclose on more than a million houses this year - a new record.

So let us take up a serious question. If an economy cannot trot out of recession, what becomes of it? To Japan or not to Japan? There are so many economists voicing an opinion on the subject that if you spent 5 minutes listening to each one you would have to be an idiot. There are those who think Europe and America will follow in Japan's footsteps. And those who think it will not. Taking no chances, our Daily Reckoning has firmly held both opinions at one time or another.

The US is not Japan, say many. Japan's 20-year slump was made possible by three unique circumstances: deflation imported from China, falling commodity prices and a current account surplus. The US is confronted with the opposite situation: commodities prices are strong, its current account is in deficit, and China is raising prices. These differences will bring on a crisis Japan never had to face. Interest rates will rise. The dollar will fall. Unable to finance its deficits at low rates, the US will unable to stay on the road to Tokyo. Instead, it will soon be detoured to Buenos Aires. Or Harare. The resulting panic will have nothing in common with Japan's orderly ruination.

Those who think the US and Europe are following on Japan's heels have at least the flow of current news to support them. Japan fell into a slump. Rather than let its markets clear, its government supported zombie banks and businesses with money borrowed from the public. This effectively transferred the burden of debt from the private sector to the public sector, while holding the economy in a state of suspended animation for two decades. Meanwhile, Japan's people were getting older...more cautious...and more resigned to slippage.

This seems to be what is happening in America too. The private sector is de-leveraging. The latest report shows credit card debt at an 8-year low. Mortgage debt is dropping sharply too - thanks to defaults and foreclosures. Banks and private companies are stockpiling cash in anticipation of a cold winter. Households are playing it cool too.

Ben Bernanke must have gotten the message sometime between the 4th of July and the Assumption of the Virgin. On the 11th of August, the Fed announced another round of quantitative easing designed to fight against the decline. Of course, Japan tried quantitative easing too. It failed, just as monetary and fiscal stimulus had failed.

But who knows? Maybe the Japanese are just losers. They are the only people on earth to have atomic weapons dropped on them. Then again, that only seemed to encourage them. After 1945, the Japanese and the Germans picked themselves up and went from absolute ruin to become the world's most admired economies. Let us hope the authorities don't draw the obvious lesson: on the evidence, nuking may pack more stimulus punch than quantitative easing.

I’ll begin with the bad.

On Tuesday, drug giant Eli Lilly announced it was halting development of its late-stage Alzheimer’s drug, Semagacestat.

According to Lilly's press release: “Patients taking Semagacestat saw their cognition, or memory and reasoning skills, and their ability to complete daily living activities like getting dressed worsen ‘to a statistically significantly greater degree’ than patients taking a placebo.”

A Forbes report published yesterday — The Man Who Predicted Eli Lilly’s Alzheimer Failure — explains what may have went wrong:

Eli Lilly is one of numerous drug companies, including Pfizer, Elan, Bristol-Myers Squibb and others, who are betting that stopping production of amyloid clumps in the brains of Alzheimer’s patients will slow the disease. All along, a handful of researchers have predicted that amyloid-blocking drugs could actually make the disease worse. One critic is Mark Smith at Case-Western-Reserve University in Cleveland. He is on vacation abroad now, but here is what he said in 2008:

Others say the Alzheimer’s field has it backwards. Far from being harmful, amyloid is “actually a response to injury that the brain secretes to protect itself, like a scar,” argues Mark Smith, a neuroscientist at Case Western Reserve University. By removing it, “you will make the disease worse.” Amyloid deposits are often found near cerebral blood vessels, hinting that amyloid may act as a sealant for damaged blood vessels.

If you recognize the name Mark Smith, that’s because Dr. Smith joined Anavex’s scientific advisory board in February 2009.

And that brings us to the good news regarding a biotech stock we’ve covered in these very pages for the last couple years...

Last week, Anavex Life Sciences (AVXL-OTCBB) announced details of its upcoming Phase I/IIa clinical tests.

This development is a huge achievement for the company, and for its sigma receptor approach for treating and preventing Alzheimer’s.

The trial will take place in Germany, using human volunteers. Most of the data will be oriented toward safety, but some information about the effectiveness of the drug will also be generated via the IIa tests.

Anavex Chairman Dr. Cameron Durrant, who I spoke to, expects results to be available next year.

The companies involved are, specifically, Genesis BioPharma Group and ABX-CRO. Both companies are experienced in this field of research, and their methods are in compliance with FDA standards.

According to the Anavex announcement:

"Selecting Genesis and ABX-CRO to advance ANAVEX 2-73 to the clinical research phase is a major milestone for us," states Dr. Cameron Durrant, Executive Chairman of Anavex. "Both partner organizations have a strong track record of conducting and managing, successful pre-clinical and clinical studies in Alzheimer's disease, including regulatory approaches. Genesis' competence in constructing and managing a strong and well thought out study plan makes them an ideal partner for ANAVEX 2-73. Furthermore, we have been impressed with the expertise ABX-CRO has demonstrated in the conduct of Phase I/IIa studies and their excellent relationships with leading academic centers."

Phase I dosing of healthy human volunteers with ANAVEX 2-73 is scheduled to begin this year, followed by Phase IIa work in early 2011 which is expected to provide some initial patient efficacy data.

There are many reasons why I’m confident in Anavex's prospects.

One is that prior animal tests (on rats, mice, and dogs) of ANAVEX 2-73 showed real benefits at very low doses.

Obviously, a drug that works in extremely low doses provides far more dosing and testing options. With lower doses, safety issues are more easily addressed. Moreover, it means that costs are lower and margins are greater when a drug comes to market.

We have seen several Alzheimer’s clinical trial failures this year, with Medivation being the most visible.

This has increased the media and investor exposure to Anavex’s sigma receptor research, which is emerging as a revolutionary platform to treat Alzheimer’s, as well as other diseases like cancer.

This may be one reason why Avanex’s stock has not only been stable during this year’s market volatility, but is up dramatically for 2010.

Take a look:

I’ve recently spent a couple days talking and meeting with the scientific team of Anavex.

I will have a more thorough report for you in September.

In the meantime, Anavex is strong buy at current levels under $4 a share.

So relax, dear reader.

Analysts are talking about a "double dip." They're worried that the economy may slip back into recession in the fourth quarter.

There are signs of weakening. GDP growth figures are being revised downward. Consumers aren't spending. Banks aren't lending - except to the federal government. Mortgage payments are falling further behind - even with fixed mortgage interest rates at record lows.

So many people are out of work for such a long time that we're seeing more and more "Death of the American Dream" articles.

Even lawyers are out of work. Recent law school graduates say they can't find jobs.

And the president of all the Americans, Barack Obama, tells us not to "give in to fear."

"All we have to fear is fear itself," said Franklin D. Roosevelt. Yes, fear...and 25% unemployment...the Great Depression (made worse by Roosevelt's interventions)...a 27% decline in GDP...the Dust Bowl...the Wehrmacht...and the Imperial Japanese Army!

Obama might want to save the fear claptrap until Americans have something to worry about. So far, the correction has only taken 4% off America's GDP and only took the official unemployment rate to 10%. And consumer prices haven't actually gone negative - yet.

Don't trouble yourself about it. The economy is in a correction that began in '07 and hasn't stopped. It won't end until it has done its work. That will take time...maybe another 5 years. Maybe another 15 years.

Markets have to breathe in and breathe out. This market is exhaling. That's just the way it works.

A Wall Street Journal headline:

"Another threat to the economy: Boomers cutting back."

You see, dear readers, the financial press has no idea of what is really going on. Boomers are cutting back? Of course boomers are cutting back! They're getting ready for retirement. They need to save some money.

It was loony to think you could finance your retirement out of the increases in your house's value. Who were you going to sell the house to? Boomers were the biggest buyers of houses. When they turned into the biggest sellers, it was sure to cause trouble.

Besides, you gotta live somewhere.

Financing your retirement on hot stock market gains was a bit absurd too. Top stocks for 2010 go up...and down. There was never any guarantee that they would be up at a convenient moment...nor that they would stay up when the boomers all decided to cash out.

No, dear reader, you can never count on getting something for nothing. You can't expect to finance your retirement on money you didn't earn. Instead, you need real savings. Saved money. Money you didn't spend. Money set aside. Anything else is just hoping...wishing...praying you get lucky.

(Even real savings are not guaranteed. Your money can still be swept away by inflation.)

But the problem with the WSJ headline runs much deeper. Financial journalists don't understand what an economy is. Instead, they wallow in the same flattering claptrap as economists. They think the economy is something that is supposed to do their bidding. It's supposed to make us all rich, by growing constantly. If it isn't growing there must be something wrong with it. Something that needs to be fixed by the mechanics at the Fed and the Treasury.

You think the economy is "threatened" by boomers cutting back? Not the least bit. It's just breathing in and breathing out. What's the big deal?

But economists want to "do something." It's all very well when the boomers spend and the economy expands its broad chest. But when it exhales they rush to put a plastic bag over its head.

The idea of QE is that it permits a central bank to fund its government's deficit by printing money. The Fed prints money. It uses the new cash to buy US Treasury debt (or anything else, for that matter.) Result: more money in the system.

Maybe it is fear of inflation that is driving the dollar back down. Have you noticed that after all the "end of the euro" talk, the European currency is actually back to $1.32?

Stocks, too, may be reacting largely to fears of inflation. If you think higher rates of inflation are coming, owning a piece of a real business is surely better than holding cash. Cash (or bonds) can become totally worthless. A business - if it can survive the financial crisis - will still be worth something...and maybe even more than it was before.

But inflation is no sure thing - at least not anytime soon. The Fed increased the monetary foundation of the dollar-based world by $1.25 trillion when it bought up Wall Street's toxic debts. Still, for the most part, prices continued to fall.

How so? Because money wasn't changing hands...because people preferred to hold onto their cash rather than spend it. Which is what people do when they're worried about the future. Unless, that is, they're worried about inflation. Then, they spend money as fast as possible.

Therein lies a big conundrum for the Fed.

"Damn the risks of triggering a bit of inflation and some modest investment bubbles," says Barron's. "The alternatives are far worse."

But that's just the problem. The alternatives are not worse.

The Fed cannot really create a "bit of inflation"...not when the market is scared, and generally de-leveraging. People save. They buy US Treasury bonds. They watch their money and worry. The velocity of money slows, so that even if you add more money to the system, prices still do not rise.

It is like adding snow to the top of a mountain. As long as it remains cold, it just builds up. But when it melts...watch out!

There is nearly $60 trillion worth of dollar-denominated debt in the world. The value of that debt rests on the value of the money in which it is calibrated. As long as people think the dollar is more-or-less okay, they're willing to have and to hold US dollar debt. The snow stays where it is.

But what would happen if the Fed really did print $2 trillion? Maybe nothing. Or maybe something. Maybe something that was worse than the soft depression we're experiencing now - an avalanche or a flood.

People might suddenly want to get rid of dollars - in all forms. Then what? Consumer (and probably asset) prices would soar. Bonds would collapse. You could forget about financing any more deficits. Then, in order to restore faith in the dollar and the Fed's credibility, you'd have to do what Paul Volcker did in '79. You'd have to get ahead of the inflation rate, with Fed-imposed interest rates even higher than the CPI. Those rates would send the economy into a tailspin of de- leveraging, debt cancellation and depression. When Volcker did it, America had its worst recession since the Great Depression. And that was without quantitative easing, derivatives, subprime, trade deficits, trillion-dollar federal deficits, housing bubbles, or any of the other maladies we suffer today. The next downturn would be much, much worse.

In other words, the effect of printing trillions more dollars would probably be to cause an even deeper depression than the one the authorities think they are trying to avoid.

They won't do it...not yet.

And more thoughts...

Too much stuff.

People come to think what they must think when they must think it. With stagnant incomes, towering debts, and no real hope of increasing their purchasing power, they're beginning to think that they don't need so much stuff.

"Rethinking the pursuit of happiness in a recession," is a headline from The New York Times. The article talks about people who live quite happily and comfortably with little stuff and little income. One couple has an income of $24,000 per year - and no debt. They make a point of having 100 personal items - or less. They could earn more money, but they don't need to. Because they are no longer supporting so much stuff.

"The idea that you need to go bigger to be happy is false," says the woman in question.

"Studies of consumption and happiness show that people are happier when they spend money on experiences rather than material objects," says the Times.

And when people downsize their lives intentionally they end up with more time and money to spend on experiences - such as vacations. Or tennis lessons. Or reading a good book.

You take a vacation. Even if it isn't perfect, you tend to remember the good parts for a long time. An object, on the other hand, gives its satisfaction very quickly...and then becomes a source of expense and nuisance.

We spent the last week cleaning out the garage and the workshop.

"I just can't believe it. I mean, how fast things fill up. We bought this place 15 years ago. It was huge. It was empty. I thought we could fill it with junk for the rest of our lives. But now it's so full, we have to throw things out. Besides, I've had enough of this. I want to get rid of all this. From now on, I want to lead a simpler, more organized life."

Elizabeth seemed ready to take up the "less is more" chant herself.

"No, I don't necessarily want less... I want better. And that means being more choosy and getting rid of junk. We keep things for years and years thinking we'll need them. Then, we don't need them at all and have to throw them out."

Damien (our gardener) backed up a big wagon in front of the garage. Old paint cans. Bicycles with broken wheels. Pieces of steel. Cardboard boxes. A rusty barbecue. Everything went into the wagon.

"Wait...Damien...what's that you're throwing away...?"

Once he gets started, Damien is hard to stop. In his hands was an antique - a hoe-like metal object used for raking the coals out of a brick bread oven.

"Wait a minute...let's save that."

"Why, what good is it?"

"I don't know...it's an antique..."

"Well, if we wait long enough, everything will be an antique..."

"Good point." The hoe went into the wagon too.

Just the other day, Justice wrote to you as to how wheat futures seemed to be picking up the pace a bit. But that's not the only commodity that's kicking it these days. Coffee beans have been on a real "caffeine jag," gaining some 79% in 2010, with about 9% of that coming on in the last week or so.

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With raw goods costs rising like that, J.M. Smucker Co. (SJM:NYSE) has been forced to raise prices 9% on some of its popular U.S. brands, including Folgers, Millstone and Dunkin' Donuts. This hike follows close on the heels of a 4% increase last May. Tot it all up and your average mug of steaming java is up about 13% over the past few months.

It Isn't Demand

I can certainly see how this steamy little spiral got started, what with most all consumer stuffs and top stocks rising for the better part of the past 12 months.

Unfortunately, that last big push in prices had nothing to do with any sort of coffee-fueled shopping jags. I have on my desk in front of me the latest reportage on our current shopping - or perhaps I should say "not shopping" habits. And it seems that Americans have discovered the virtue of saving at the worst possible time.

• The Commerce Department notes that June Factory Orders came in off some 1.2%, the second declining month after nine months of gains.
• The National Association of Realtors frets that index of sales agreements fell 2.6% in June, confirming what I told you a week ago about the truly awful situation in housing.
• In fact, the whole previous quarter turned out rather wan, with GDP growth slowing from 3.7% per annum to 2.4% per annum.

The only thing that's up right now is the money we are not letting go of. All this talk of vanishing jobs and a meandering economy has induced us to jack our personal savings rate to just a whisker off a 12-month high at 6.4%.

Too Much Money!

This has produced a most interesting phenomenon. Remember a year or so ago, when American banks were all "stressed" out because they didn't have enough cash lying about? Well, now they are drowning in dollars. In fact, they really wish that folks would stop saving quite so much, because they really can't figure out anything profitable to do with it all.

One of the reports I have been perusing today comes out one of those little b-to-b journals, the National Mortgage News, wherein we can read as to how bankers are whining that they have cranked interest rates down to nearly nothing, taken toasters and the like off the table, and even taken to being downright rude to children with passbook accounts, and yet people still insist on showering them with money.

Problem is, there's a bit of a structural issue building up. The reason banks are paying out virtually no interest is because depositors are so nervous about the future, they are refusing to lock their money into longer-term devices, leaving the bankers uncertain as to how long they can hang onto this largesse.

"Just Not Prudent to Lend Right Now"

With that uncertainty hanging over them, the bankers complain that they just don't feel but so comfortable lending all this cash to anyone, and even though they aren't paying out any interest to speak of, they still have to print deposit slips and pay tellers to accept them.

To make matters worse, the new financial regs out of Washington mean that the banks can't leverage these deposits with exotic trading. And the new rules have also cut way back on those hidden fees and penalties that used to warm a banker's heart at night.

Not to worry: Washington claims to have a cure for the bankers' woes! I have heard that come the Federal Reserve's next policy meeting, they will rewrite their "hawkish" language.

No longer will the Fed warn that it will only keep rates near zero for the foreseeable future. Instead, we are told, they will strongly suggest a raft of additional measures to force even more capital onto a system that can't figure out what to do with the specie that is already sloshing about.

When the Dam Breaks

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Is it any wonder that the world is slowly backing away from the Greenback as a reserve currency? Take a gander at the chart for the US Dollar Index, and you can clearly see the dollar's 9% decline over the past 60 days compared to most any other salient currency.

One can only imagine how dollar investors, or perhaps I should say "dis-investors" will act as this overflow magnifies into a veritable flood of excess specie.

A Canoe, or Maybe Even a Speed Boat

We are occasionally accused of being god-awful pessimistic around here, always describing how the dam is about to break without offering much of a paddle.

So here is a boat, a paddle, and perhaps even a decent little outboard engine for you.

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This declining dollar trend is showing up clearly in the chart for the PowerShares DB US Dollar Index Bearish (UDN:NYSE), with buy signals showing up that match one for one against the signals that predicted the ETF's previous launch.

A simple investment in UDN shares ought to gain some 11% over the next few weeks, and perhaps even 20% or more over the coming months. While it may not be an FDIC-insured asset, it is offering a heck of a lot better return than any passbook account, or Treasury device.

And if you were inclined toward some speculative leverage, an appropriate call option might easily raise those gains upward toward 300%, which would certainly pay for your next cup of coffee.

Revenue is also set to surpass MSFT this year.

It's even more impressive when you consider the fact that Apple has done it with only 9% of the PC market they set out to take from Microsoft 25 years ago.

The performance of Apple stock over the past decade is enough to make you wish you'd sold your house and piled in. It's up 3500% from April 2003 levels, when it briefly traded in the mid $6s.

Check out this chart of Microsoft and Apple since 2002:

An impressive run. And there's no doubt that Apple is a great company with great gadgets.

But the firm's profitability is likely nearing a peak for this cycle.

iPhone dominance set to fade

The iPhone is Apple's undisputed cash cow, contributing around 40% of revenue in Q1 2010.

Profit margins are fat — around 60%, according to the New York Times. Those margins are boosted by a deal with desperate partner AT&T, who's willing to do just about anything to preserve market share (except improve their network, of course).

And so far, Apple has smoked every so-called "iPhone killer" to challenge their dominance.

But all that's about to change.

Apple has finally met its match with the new generation of Android-powered devices. An army of phones including Motorola's Droid X and HTC's Evo are starting to hit the market.

According to Bloomberg Businessweek, Android's share of the smartphone market is up from 1.6% last year to 9.6% today.

This new generation of phones will finally give the iPhone a run for its money. Motorola's Droid X, for example, has more computing power and a higher resolution camera. With an app network that can finally compete with Apple's, the stage is set.

But the biggest factor may be service partners. Verizon and Sprint are betting on phones powered by Google's Android operating system. They've managed to avoid a bidding war with AT&T over the iPhone, choosing instead to focus on building better networks. Now that Droid phones can compete, they're in a strong position.

Personally, I can't wait to ditch AT&T. The coverage is miserable, dropped calls are frequent, and mystery charges seem to pop up every month.

For example, a few years ago I looked at my AT&T bill and noticed a $5 late payment fee on the last five statements. Problem is, I use autopay. My credit card info was up to date. Yet they were autocharging my card two days late, every month, and assessing a late fee.

Nice try, scammers.

As soon as my iPhone contract runs out, I'll be switching to a Droid on Verizon or Sprint.

I'm not saying the iPhone is dead... There are millions of Apple fanboys out there who will never abandon their iPhones.

But the days when it was the only fun smartphone on the market are over.

Higher manufacturing costs going forward

Apple manufactures most of their products in China, where wages have risen 50% over the past five years. Ongoing labor shortages and unrest mean this trend isn't likely to change anytime soon.

And with the Chinese now allowing their currency to strengthen, it's only going to get worse.

Companies like Apple — who depend on cheap and efficient labor from China — will see their costs rise. Margins will be squeezed and quality may suffer if manufacturing is shifted to cheaper areas.

Priced for perfection

Like I said, Apple is a great company. I definitely wouldn't short it, but upside from here is limited.

The competition is finally catching up to them, and their costs are set to rise.

I'd much rather own Google or Motorola. For more on the bullish case on Google, here's an article I wrote a few weeks back.

Google is up 12% since, and I think it's got a lot more room to run.

Now you need to defend yourself from this collapse. Here's how you might start:

You can actually short the market in the exact same fashion as you might go long, by buying shares of a bearish ETF like ProShares Short S&P 500 (SH:NYSE), which gains roughly 95 cents for every dollar the market falls.

Another slightly more focused vehicle that should interest you would be ProShares Short Dow 30 Fund (DOG:NYSE), which aims to gain 95 cents for every dollar the Dow Industrials peels away.

You might amplify that gain by purchasing shares of ProShares UltraShort Dow 30 Fund (DXD:NYSE), which attempts to double up the gains offered by their "1X" fund, in essence bringing in a buck 90 or so for every dollar lost on the Dow.

Both these funds achieve much of their aims with select puts against various Dow ETFs and their constituent top stocks for 2011.

This is also a tactic that I vigorously pursue.

Three Option Tactics

Today the markets are as volatile and odd as I have ever seen them. One minute the market is discounting quarterly profits and peeling off 4%, 5%, even 6%. In fact, over the past few weeks, we have seen the market sell off on strong earnings reports just as often as they have accepted them as a reason to buy.

The next, top stocks for 2011 are trading up hundreds of points on phony government projections that can't possibly work. (As I sit to write to you today, I have a report out of Washington that claims in its headline that new home sales are "up" 24%. But when you break down the numbers, you find that they only got that figure by secretly downgrading the previous month. In fact, this headline disguises the worst June IN HISTORY!)

That's just a sample of the whipsawing and fog we have to deal with these days. If you want to survive, you have to look past the "reasons" for all these jumps and dips, and see them for what they are: the herd's wavelike cyclic processing of preexisting memes.

Here are three long-term option plays that look to take advantage of these waves.

No. 1: The Long Gold Bullish Wave

As I mentioned in my video, I anticipate that Washington will continue to pump dollars into the system in a Keynesian attempt to forestall a double-dip recession. While physical gold does offer some protection against dollar destruction, you can actually convert interest in gold into a dynamic leveraged asset via calls against the SPDR Gold Trust (GLD:NYSE).

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As you can see, the GDL is in the midst of a long rising wave that has already raised its price more than 50% since October 2008. However, price has recently fallen within the context of that long wave.

The next mid-term rising cycle should move GLD's share price through the midpoint of the long wave at $129.80 (+12.08%) and on to the wave's three-quarter line at $141.36 (+22.06%).

As I sit to write this report, GLD December 115 Calls (GLD1018L115) are trading for $6.65 with a posted delta of 0.6091.

My initial predicted move to GLD $129.80 should raise these calls as high as $15.17, for gains of 128.14%. Should we see the follow-on move to GLD $141.36, these calls might even hit $22.21 for a total gain of 234.02%.

I will be using today's price as a peg for future calculations. With that in mind, I recommend that you set an initial 40% trailing stop at $3.99. Don't forget to move this percentage-based stop up with each ensuing high.

No. 2: The Long Blue Chip Bearish Wave

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Here is a chart for the iShares S&P 100 Index ETF (OEF:NYSE). This ETF trades against the blue chips of the S&P 100 (OEX) in the same fashion as the Diamond Trust (DIA) works to the Dow 30 and the QQQQ plays on the Nasdaq.

As you can see, the mid-term contrarian bull cycle has just come to an end. Now the blue chips are once again moving in the same general direction as the overall long-term trend. Indeed, as price is currently well above that long-trend's mid point, we should see the rather dramatic downside corrections we have been experiencing continue with a vengeance.

I recommend purchasing OEF December 50 Puts (OEF1018X50), currently trading for $2.90 with a posted delta of 0.4138.

My predicted move to OEF $40.78 should raise these calls as high as $6.88, for gains of 137.12%.

Once again, I will be using today's price as a peg for future calculations. With that in mind, I recommend that you set an initial 40% trailing stop at $1.74. Don't forget to move this percentage-based stop up with each ensuing high.

No. 3: The Long Retail Bearish Wave

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Finally, we are looking at a chart for the Consumer Staples Select Sector SPDR (ETF) (XLP:NYSE). This ETF represents our country's entire grocery supply chain.

Once again, the mid-term contrarian bull cycle has come to an end. Now these purveyors of diapers and potato chips are all moving in the same general direction as the failing long-term trend. And we can expect the same the dramatic downside corrections.

I recommend purchasing XLP December 27 Puts (XLP1018X27), currently trading for $1.43 with a posted delta of 0.4006.

A 14% drop to XLP $23.38 should raise these calls as high as $2.97 for gains of 107.57%.

I will be using today's price as a peg for future calculations. With that in mind, I recommend that you set an initial 40% trailing stop at $0.85. And as always, don't forget to move this percentage-based stop up with each ensuing high.

• John Mauldin - Buy emerging markets, sell sovereign debt...but not now. Treasuries are going to go lower in the short term
• Andrew Lowenthal - John is 100% right: Rolling over US debt is going to be so much easier than what people think...it's too early to short Treasuries
• Eric Kraus - Buy resource producers in places where people are afraid to invest. Short finance sectors of developed countries
• Barry Ritholtz - Short the euro, long top stocks for 2016, when the next bull market begins
• Byron King - Sell the euro: It's doomed, just a question of time. Buy crude oil. There's just not enough of it. I'm long the Tea Party, too
• Doug Casey - I'm inclined to own a lot of gold, cattle and agricultural land...keep it simple. I would short the euro, yen and US stock market
• Gary Gibson - I own nothing. If I had anything, I would have dollars now, uranium later. Buy energy.
• Eric Fry - Short euro, long uranium
• Porter Stansberry - There are just too many good shorts. Short Treasuries, especially in US and Italy. Buy gold, silver, timber and super-high-quality blue chips when they yield 10% or more
• Chris Mayer - Short the state of California and Illinois. Long uranium and high-quality farmland.