Certainly, the market’s recent dramatic swings have scrambled the heads of many investors. Mostly, it’s been a nasty slide down — a history-making drop that has caused a lot of agitation and remorse. Many investors are giving up. “I just don’t have the stomach for it anymore,” a semi-retired computer programmer told the Wall Street Journal, as he moved his remaining assets into T-bills.

I share the computer programmer’s frustration and anxiety. But now is the time to really pay attention. The stock market’s history-making drop may be creating some equally historic buying opportunities.

This bear market has few precedents. Really, you have to look back to the 1930s to find anything like it. According to Barron’s, at the S&P 500’s late-November lows, the blue chip index had given back a decade worth of gains. And even after the market’s recent rebound, 2008 would still be the worst year for stocks since 1931, when they dropped 53%. In the whole of the 20th century, no decline has exceeded 50%, save for the 1929-32 bear market.

Other tidbits of interest from Barron’s: The current bear market is 284 days old. We are down almost exactly as much after 284 days as the 1929-32 and 1937-38 bear markets were after 284 days. Whether our bear market looks ultimately more like 1929-32 or 1937-38 is an open question, of course. The former went on to post a total loss of 86% top to bottom. The latter, though, rallied and made up 50% of the losses in the next six months. Another hopeful message: The average time to recoup a bear market loss has been 22 months, excluding the 1929-32 collapse. As with the big crash, so with the rebound — it will come when people least expect it.

Resource stocks look like they’ve already had their 1929-32 style crash in just the last few months. Many resource names plummeted 80% or worse from top to bottom. Even companies that looked like they were in decent financial shape only a few months ago are now scrambling to raise liquidity and stave off a financial crisis.

It reminds me of what Joe Scaminace, the CEO of OM Group (OMG:nyse), said during the company’s latest conference call: “We believe very strongly that the battle will be won and lost on the balance sheet in this environment.” I agree with him. A strong balance sheet means that financially, you are in control of your own destiny. It means you don’t need to raise money, nor do you have a looming debt coming due soon. It means you’re going to be a survivor. It’s going to come down to the survivors. The upside could be spectacular on the other side for them.

OM Group is among those with no net debt and plenty of excess cash. It’s also immensely profitable, even at these lower commodity prices. The long-term demand for cobalt-needy products, such as rechargeable batteries, provides a bright looking future (particularly as it relates to vehicles). Not without peril, of course, but I’d rather face those perils with financial strength of the kind OM has than weaker, more speculative ventures.

I also like companies like Ameron Intl. (AMN:nyse) and Contango Oil & Gas (MCF:amex), both of which have plenty of excess cash and no net debt.

Balance sheets contain the kinds of critical details people tend to ignore when times are good. But if ever there were a time to focus on balance sheet strength, it is now!

“A period of prosperity contains the seeds of its own destruction,” observed that storied investor, Phil Carret, in his book The Art of Speculation (1930). “Businessmen forget the painstaking care by which they have built up their enterprises and commit themselves to reckless plans of expansion.”

This financial calamity we’re going through now will lead to the demise of those who were reckless and stretched too thin. The benefits will ultimately accrue to those who kept a little something in reserve for just such a rainy day.

One stock in particular I would encourage you to give another look: Texas Pacific Land Trust (TPL:nyse). On Friday, it slipped below $20 per share. Texas Pacific Land Trust owns nearly a million acres of land. At Friday’s valuation, the market value of the whole company is about $200 million. The implied valuation is about $200 per acre. I don’t know that the company has ever sold acres for less than an average price of $200 per acre in the last several years. Last year, the average sale was $1,244 per acre. In the last quarter, ending Sept. 30, the company sold land at an average price of $400 per acre.

It’s hard to say what all the land is worth. The company opportunistically sells pieces over time and uses the proceeds to buy back stock. So as long as it nets more than the $200 per acre in implied value, shareholders win. So far, it’s done that easily.

Of course, that’s not all there is to this company. The company also owns a number of oil and gas royalties. In the last quarter alone, the trust generated $4.6 million in royalty income. This is nearly pure profit. The company has practically no expenses. In fact, it pays more in federal income taxes. My initial estimate put the oil and gas royalties at $20 per share, assuming oil at $70 and natural gas at $7. There is a lot of margin of safety in these royalties alone, even at currently depressed prices.

And finally, what’s great about this old trust is that it’s practically immune to the whole economic crisis. It does not have to sell land. It can sit on it and wait it out. The trust has been around since 1888. It will get through this.

Texas Pacific Land Trust is a low-risk business and a great long-term holding. Today’s market gives you a chance to add to your holdings at very attractive prices. And that, I suppose, is one thing we can be thankful for in all this mess.

Source: Anti-Depression Remedies

The biggest change in the American economy over the last few decades has been the transition from making things to making loans. We Americans abandoned the manufacturing industries that once powered our economy and devoted ourselves to merely financial activities. We became experts in “financial origami.” Precisely when and why this happened will be something for historians to debate. But sometime in the 1990s, the percentage of corporate profits from finance surpassed that from manufacturing.

The gap between the two has only grown wider ever since. Before the recent credit crisis hit, profits from financial firms made up nearly half of total corporate profits in the U.S. Only 10% came from the manufacturing sector! As recently as the mid-1960s, these percentages were the other way around.

Eventually America’s over-reliance of financial gimmickry, rather than traditional commerce, left our economy exposed to a serious shock. The shock has arrived. But every crisis brings opportunity. In the current crisis one, investors will go back to investing in simpler, more durable things (at least until forgetfulness kicks in). The focus will shift to things we need, rather than things we want. For instance, investing in a company that supplies grains to hungry people looks like a better bet than investing in one that sells mortgages to people who can’t afford them.

To a smaller degree, we had a similar crisis in the 1970s, Kevin Phillips tells us in his new book, Bad Money. Mortgage debt doubled from 1960-70. Then the stock market crashed, losing 36% of its value from 1969-70. Hedge funds blew up. The top 28 funds lost 70% of their assets, and about 100 brokerage and financial firms disappeared – by either acquisition or outright failure. Seems a lot like the headlines of the present day, does it not?

The 1970s also had two major oil price spikes. The first in 1973-74 and the second in 1979-80. We’ve already had one oil spike now, if a second one arrives in the next few years, it could push prices through $200 a barrel.

That’s because the global oil industry has not been re-investing very actively in developing new production. America’s neglect of “making things” is very evident in the oil business. Phillips says the U.S. has a “dated, ghost-of-glories past petroleum infrastructure.” He writes that the major oil companies “are wealthy, but aging behemoths, hard-pressed to maintain production levels, despite large exploration outlays, and no longer enjoying access to overseas oil fields they once commanded.”

Exxon Mobil, once the largest oil company in the world, now ranks 25th by booked oil reserves. The top 10 are all state-owned national oil companies (NOCs). The top 13 NOCs own four-fifths of the world’s known oil reserves. They don’t share them cheaply.

A look at where we get our oil is not encouraging. Most of these sources of supply are not particularly reliable. As Phillips opines (the table below comes from his book): “Of the eight principal 2007 suppliers of petroleum to the United States as of August, only one, Canada, could be called secure and reliable.” Mexico seems secure, but exports have been falling since 2004, as Mexican production has fallen. It could become an insignificant source of oil by 2012.

And we are not alone in competing for these oil reserves. China became a net oil exporter in 1993, and its appetite grows every year. It is now the world’s second largest consumer of oil, behind only the U.S. China actually imports more oil from Saudi Arabia than the U.S. This partnership is not surprising, given the dynamics of the New Silk Road.

The “New Silk Road” is a term I use for the boom in trade between countries from the Middle East to China. In matters of energy, you see a lot of deals inked on the New Silk Road. Saudi Arabia and China get together regularly like newfound pals. Sinopec, a Chinese oil company, recently got the OK to explore the Saudis’ Empty Quarter for oil and gas. Saudi Aramco, the big oil company, put $750 million toward a huge plant in China.

Just as interesting to me is what I like to call the “New Burma Road” – after the road of World War II fame that linked China and India via Burma. The New Burma Road identifies the booming trade between India and China. As Phillips writes, “China has already made a six-lane highway out of its portion of the road from Chinese Kunming to India’s state of Assam… The demographics of a Sino-Indian entente would make it especially momentous.”

Yeah, I’d say so, given the strengthened ties between more than 2 billion people.

As you know, there is an awful lot going on in the world today, and it’s all far more complex than I can get into here. But this is where we are, in brief: The U.S. economy faces a crisis in its biggest sector – finance. The neglect of making things is finally taking its toll, a fact most apparent in the oil and gas world, but also apparent in infrastructure across the spectrum. And the world is less U.S.-centric than it has been in a long time. We see this, too, in the oil and gas sector and in the flurry of deal making along the New Silk Road (and its “momentous” segment, the New Burma Road.)

The implication of this post-finance U.S. economy is a theme we’ll explore more in this letter. As an early conclusion, though, I believe the spread between finance and manufacturing has reached millennial extremes, like a rubber band at its limits. Now begins the snap back.

Now begins the time to invest in companies that make things. Many of these companies operate in the oil services industry, and many of them are EXTREMELY cheap right now. T-3 Energy Services (Nasdaq: TTES. $16.53) and Contango Oil & Gas (NYSE: MCF. $38.50) illustrate the point. Both are “old economy” companies that provide essential products. Both are selling for less than six times earnings. I’ll provide complete details in tomorrow’s Rude Awakening.

Source: Down, But Not Out