The Rude Awakening
Wall Street, New York
Thursday, July 20, 2006

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• Criss-crossing missiles in the middle east fail to
  boost confidence in oil stocks,
  
  
• When is it the right time to buy the dips?
  
  
• Just 10 days left for Reserve membership, the markets
  hit the cover off the ball and plenty more...

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[Joel's Note: Yesterday we issued an investment alert from
our fellow researchers over at the Taipan Group. It's a
tiny $4 defense stock that they are predicting will
skyrocket as tensions heat up over in the Middle East.

Here at the Rude Awakening, we pay more attention to what
the geopolitical volatility does to oil prices (as Eric
explains below) than the effect it has on defense stocks.

Still, if the folks over at Taipan are right, this little
number could shoot up quite significantly...they reckon
about 658%. As things turn from bad to worse over in the
world's oil patch, you might do well to check out this
report they've prepared on it. Read it here:

Middle East Alert
http://www.isecureonline.com/reports/GRR/EGRRG736/ 

--- Final 10 Days ---

The Agora Financial Reserve Is Open...for 10 more days.

The Agora Financial Reserve is open...join now and get all
of our top research - for life. Make sure you secure your
membership soon...this offer is only good until midnight on
July 30, 2006. Click on the link below for a letter from
the Reserve Founder:

Agora Financial Reserve - Open Until July 30

http://www.isecureonline.com/Reports/AFR/EAFRG716
 
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Wall Street's Woeful Wisdom
By Eric J. Fry

China is exploding; the Middle East is imploding; oil must
be a "buy"...at least on dips. And if oil is a "buy," oil
stocks must also be a "buy"...at least on dips.
Unfortunately, this sort of deductive reasoning has
produced lackluster results of late. Near-record oil prices
have failed to inspire much enthusiasm for oil stocks.

Within this curious ennui toward oil stocks, we think we
perceive a buying opportunity. But be forewarned, most of
the sophisticated minds that populate Wall Street would
disagree. Skepticism toward oil stocks remains as much a
Wall Street hallmark as the "casual Friday" or the "glass
ceiling."

Wall Street analysts have been woefully underestimating the
earnings potential of the oil sector ever since the oil
bull market began. Eventually, such skepticism might
produce an accurate forecast. But probably not while
missiles are criss-crossing the Israeli-Lebanon border, nor
while the Chinese economy is posting double-digit GDP
growth.

During the second quarter of this year, the Chinese economy
expanded by a whopping 11.3%, the fastest pace in more than
a decade. After releasing this amazing statistic Monday,
the Chinese government promised to clamp down on lending
and investment, just like it promised to do after the first
quarter's strong GDP report.

But clearly, talking the talk is not the same thing as
walking the walk. It's true that the Chinese central bank
has already raised interest rates once this year, while
also urging banks to rein in their lending somewhat. But
one itty-bitty rate hike could not possibly slow the
hulking Chinese economy.

For perspective, recall that the U.S. Federal Reserve has
hiked interest rates 17 straight times since June 2004. And
yet, the U.S. economy continues to chug along. If 17 rate
hikes did not bring the slower-growing U.S. economy to its
knees, will one rate hike impede the potent Chinese
economy?

We are dubious.

China's economy has grown 10-fold since Deng Xiaoping began
free-market reforms in 1978, leapfrogging over the U.K.
into the number four spot worldwide. Not surprisingly,
China has become an increasingly voracious consumer of
crude oil. The country's rapidly industrializing economy
consumes about 7 million barrels a day, second only to
America's 22 million barrel-a-day oil habit.

Undoubtedly, the boom-bust Chinese economy will suffer a
slowdown sometime in the future. But as booms follow busts,
the country's oil consumption is sure to increase
inexorably. And of course, China is not the only consumer
of crude oil. The rest of the world is burning through 8%
more oil today than it did in 2003 – an amount equal to 6
million barrels a day.

Chinese demand growth, therefore, is just one part of the
demands that Wall Street analysts chronically
underestimate. On the other side of the ledger, the fresh
hostilities in Israel represent just one component of the
supply risks that Wall Street analysts also underestimate.

Perhaps that's why they spent most of the last three years
underestimating oil company earnings. Early in 2005, for
example, Wall Street expected ExxonMobil to earn $4.20 a
share, while predicting that the oil giant's earnings would
FALL to $4.02 a share in 2006, and fall again to $3.95 a
share in 2007.

But so far, the energy markets have refused to accommodate
Wall Street's downbeat outlook.

ExxonMobil earned $5.35 a share last year, and is on track
to book another big boost in profits this year. The current
consensus estimate for Exxon's 2006 earnings is $6.17 a
share – more than 50% above the earnings that Wall Street
expected just 16 months earlier.

Ever since crude oil first broke above $35 a barrel in
early 2003, Wall Street's finest have been continuously
chasing and revising their errant earnings estimates. And
even now, despite being dead-wrong for several years, Wall
Street stubbornly clings to its skeptical forecasts. The
consensus expects Exxon earnings to FALL to $5.75 by 2008.

Perhaps, as the oil skeptics seem to imagine, the Chinese
economy will lurch to a halt, while peace suddenly breaks
out in the Middle East. But in a world of scarce oil
reserves, the bull market in crude deserves the benefit of
any doubt...especially when the doubt issues from Wall and
Broad.

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And the Markets...