Peter Grandich, creator and producer of The Grandich Letter for a quarter century, allied himself with AGORACOM in October, bringing his well-known and oft-quoted commentaries to a far wider audience than his subscriber base and financial media such as The Wall Street Journal, Marketwatch, CNN, GlobeInvestor, Financial Post and BNN.

Breaking away briefly from his recent blogging, the veteran Wall Street watcher and investment adviser tells The Energy Report readers what he likes looking forward—oil (between $35 and $40) and gold (at up to $1,000). Also high on his list: uranium and Canadian banks.

The Energy Report: Judging from opinions you’ve expressed in recent newsletters and blogs, you clearly believe we will be testing the November lows during the first quarter this year. What is some of the logic behind why you think that will happen?

Peter Grandich: My belief has been that if and when the U.S. stock market bottoms, along with the economy it will be an L-shaped bottom, not the V that so many on Wall Street keep talking about. The problems that brought us here persist. In fact, they’ve gotten worse over time, which gives me even more reason to believe that we’re going to bottom eventually but not go far off that bottom once we do. The logical viewpoint for us to take at this point is to look for a market to make at least a double bottom, if you don’t believe it’s a V bottom. Obviously, if it’s a V, you only have one time you’re at that low.

The November lows are, I suspect—as I’ve said recently—are not a question of “if” but “when.” A strong bounce is likely to come off that because the remaining bulls who aren’t totally bloodied would look and hope for that to be an opportunity to get more long if they’re not already 100% long.

The view we’ll have to take after that is watch the bounce, see what kind of type of volume and breadth it has. The problem with rallies we’ve had all through this decline is that neither their volume nor breadth has been half as strong as in the declines; that is always an earmark that the bear market is continuing and that rally is a countertrend. So that’s another thing to look for when and if we catch those lows.

TER: You mentioned that maybe we should be looking for a double bottom. If we go back and re-test the November lows, is that our double bottom? Or would you expect to go through the November low?

PG: I still suspect we’re going to go through it, but we have to be able to change our views as the markets change. The only way bouncing off that bottom and then turning up past 9000 on the Dow—that would be the only technical factor that would suggest to me that the bear market was over. My feeling is that even if we do hold that November low, we are going to have a very long trading range on the Dow of somewhere between 7500 and the 9000 that we rallied to twice the last year but have failed to go through.

Rather than trying to catch a falling sword and usually getting their hands sliced by it, quite frankly I think what’s best for investors would be to be certain or fairly certain that a bottom is put in and miss the first 10% or 20% to the upside. I think if and when we do break out above those numbers, we’ll also be hearing things on the economic side getting better.

Now, that’s not my bet right now, but I think you always have to have a plan to possibly change your view and be set for it if certain things happen. My most likely scenario continues to be that this economy will be very weak throughout 2009, and not just the first half that the bulls keep talking about. And we don’t have any real hope of a sustained equity bull market at least until 2010 at the earliest.

TER: Your writing is bullish on oil, though.

PG: Yes. We suggest that people contain any oil purchases between $35 and $40—not above $40 at this point in time. Oil longer term is far more likely to be higher than that level than equities looking out the same timeframe. As bearish as oil looks right now in the demand destruction, we’re also having development destruction, which happens very fast. We have argued for almost four years that the peak oil theory, which many people latched onto during the last dramatic rise, couldn’t come into play without another recession and without what has been taking place in the oil market recently. As we get into the next economic recovery, which I think will be more a world recovery versus a U.S. recovery, the peak oil argument could have a more pronounced effect on the oil price. That’s particularly true in light of the fact that this decline has caused just about everybody to stop any real new exploration and hold off where expectations of oil were high, such as the tar sands in Canada.

So, if people are still willing to look out three to five years versus three to five days, I think oil is a better risk-reward at this point than the U.S. equity market.

TER: Are you talking about buying oil as a commodity or purchasing oil equities?

PG: Both. Without having to trade actual futures—where most people shouldn’t be to begin with—we now have the ability to track the commodity prices through Exchange Traded Funds. They don’t track them exactly; they also have some repricing effects so that even though oil may not go down, the ETF can lose some value. Still, it’s a better way of tracking the actual commodity than through an oil stock.

What I do like especially about ETFs now is the ability to have a bunch of oil stocks within them. No-load funds are still a good way to go with equities for those who are very long-term oriented. But ETFs are a better vehicle for investors because you can buy and sell as many times as you want during the day, not just get the end-of-the-day price when you sell your mutual fund. Both are useful. But either way, I think you need to track the actual commodity as well as oil stocks.

TER: If we’re looking at a very long-term L-shape bottom to the market, no-loaded funds aren’t expected to give any returns for several years.

PG: I think oil can separate itself; we saw that back in the ’80s, especially the early ’80s when the market was pretty flat, but because oil rose from $10 to $30, oil stocks did quite well. Again, I don’t think there will be much gain in the overall equity market no matter what sector you’re in outside of things related to precious metals. But I do believe that oil is a better risk-reward than the general equity market, certainly for the foreseeable future.

TER: Do you see anything else you like?

PG: One of the first things I’m looking to do once I believe markets have bottomed is to buy Canadian banks. Of all the banking systems around the world, the Canadian banks (outside of Toronto Dominion) is the only group of banks that didn’t get heavily involved in all the CDS markets and all these derivatives.

So the Canadian banking system is one of the places I think will be fairly safe to enter once the equity market has bottomed. They’re on my shopping list right now to eventually look at, but I think they will continue to decline somewhat until the markets themselves bottom.

TER: We’re also looking at the Canadian currency coming into parity with the U.S. dollar as a potential play. Why wouldn’t you buy the Canadian banks and absorb some of your downside risk with the currency trade?

PG: That is a possibility, but I’m not trying to catch everything. I don’t think the Canadian dollar is about to rise dramatically but over the next 12-24 months I do believe it can be at parity again. First of all, Canada has done what America should have done for the last 20 years. In the ’90s, Canada began to recognize that their fiscal house was not only getting out of order but getting terribly out of order. And they paid it down to where they put this fiscal house back in order.

Second, if you’re a believer like me that oil and other commodities will have their day eventually, the Canadian economy is still driven a lot by commodities.

Thirdly, if you look at the recent announcement when the Bank of Canada lowered interest rates, their forecast on inflation was very low, but they see growth of something like 3% in 2010. If they’re correct, with such low inflation but great growth, money will flow into their currency. The U.S. dollar has had a little bit of a rally simply because so many people are repatriating their investments where they were short dollars and long other equities, and hedge funds. That’s what’s currently holding up the U.S. dollar.

The Canadian economy has a much brighter future than the U.S. economy. I really wish I was a Canadian citizen not just because I love Canada itself but I don’t think they’re going to come close to facing the difficulties and the financial worries that the Americans have.  Continued...