On October 20, 1987, I was just 31 years old and in the brokerage business a whopping three years. I was working for a NYSE member form at the time and had just been promoted to Head of Investment Strategy a few months earlier. Back in August, I had written to our clients and in my newsletter that I envisioned a stock market crash. By October 19^th, one had occurred.

I remember walking into our office in Eatontown NJ very early the morning of the 20^th. The mood was grim and fear of a further meltdown was widespread. For whatever reason(s), I decided to state that the worse was over and we could see a new, all-time high within a couple of years. I still recall the universal disbelief that such a feat could take place given what had just occurred.

Nothing has come close to that dismal feeling of hopelessness for a market in all the market swoons since then until yesterday. Total despair regarding mining and exploration stocks is widespread. This group had already been in a horrific bear market before gold and silver crater late last week and yesterday.

While I’ve 26 years more experience and at least 40lbs more body weight, I feel the same towards mining and exploration stocks as I did the market in general back on October 20, 1987. I just can’t conceive them going extinct as the prices and mood in that sector seems to be doing today. It’s total speculation (and remember Wall Street created the word speculation so it didn’t have to say gambling, but speculation and gambling are the same and one must be financially and mentally prepared to lose part or all of their capital), but the time has come to scream out to the overwhelming bearish conditions in this sector this.

You can literally throw a dart at most producers and many of the juniors (including Grandich Publication clients). Unfortunately for me, I’m out of darts (cash). For those that aren’t, I don’t think there can prove to be a better speculating opportunity in the last 30 years than right now! The fact that 99.9% will either disagree or unable to bring themselves to act, is the nail in the coffin. If I’m wrong, trust me, it will be my coffin being nailed.

With the S&P 500 hitting an all-time high, stocks have been stealing the headlines. But behind the scenes, there is a market that is just as hot. 

And when this market accelerates as it did in early 2008, prices can easily jump 50% in a few months. Take a look at the big move below.

This is a chart of West Texas Intermediate [WTI] crude oil prices. Crude oil just logged its best five-day run in eight months, trading near the key $100 level.

That bullish movement has been driven by big institutional investors sending capital into commodities, with hedge and fund managers increasing their net long positions across a basket of 18 U.S. futures and options markets by 10% in the week ended March 26. That mirrors a larger trend, with bets on commodities up 67% in the past three weeks, the biggest gain since May 2009. And one of the biggest destinations of those bets is into crude.

That’s because peak consumption in the spring and summer is right around the corner, and the smart money is betting prices will move higher. With monetary stimulation from the central banks of the world fueling potential inflation, the stage is set for crude to make another run to its all-time high above $147 per barrel this summer.

Buying a crude-oil exchange-traded fund such as Powershares DB Oil (NYSE: DBO) is a good way to profit from rising oil prices, as demonstrated in the chart above. But there’s a better way: Buyshares in exploration and production (E&P) companies that own and extract the commodity from the ground. [These are the special kinds of stocks and opportunities that my colleague Nathan Slaughter looks for in his Junior Resource Advisor newsletter.]

Exploration companies provide unparalleled leverage to crude prices, reaping huge gains in sales andearnings when prices surge higher.

But the group has been under pressure in the past two years after energy stocks collapsed in the spring of 2011. That has E&P stocks trading at record low valuations and carrying big-time dividend yields.

Here are seven E&P stocks with yields up to 9%.

From this group, I like Breitburn Energy Partners (Nasdaq: BBEP)because of its outsized dividend yield, and Atlas Resource Partners (NYSE: ARP) because of its earnings power.

Breitburn Energy Partners
Breitburn explores and produces oil in Texas, California, Wyoming, Indiana and Kentucky. The company also explores for natural gas, providing additional leverage to another growing segment of the global energy market.

Despite the S&P 500’s big gains in the past two years, Breitburn’s shares are down 7% during the same period. No doubt that has a lot to do with crude trading mostly sideways and natural gas falling sharply. But with both markets on the mend, higher crude and gas prices would be a boon to the company.

Analysts are looking for earnings per share [EPS] of 86 cents in 2013 and 96 cents in 2014. That has shares trading with a forward price-to-earnings (P/E) ratio of 23, a slight premium to its peer average of 19. But when you add in the dividend yield of 9.4%, Breitburn offers strong growth and income.

Atlas Resource Partners
Atlas Resource Partners explores and produces with interests in some of the biggest and most lucrative energy properties in the country. That includes assets in the Barnett and Marcellus shale plays, two of the largest shale formations in the country. Atlas has also been struggling, with shares down 17% in the past year.

But with analysts expecting EPS of $1.15 in 2013 and $1.61 in 2014, that has sweetened the valuation picture considerably. As it stands, Atlas’s forward P/E of 21 is a sharp discount to its 10-year average of 33. And when you throw in a hefty dividend yield of 8%, there is compelling value and income to be had.

Risks to Consider: Oil E&P stocks are some of the most sensitive energy stocks in the market. Any signs of slower GDP growth or weakness in the global economy will weigh on the group heavily.

Crude just logged its best five-day run in eight months. That’s a bullish signal heading into spring and summer, which are peak seasons for consumption. These seven E&P stocks stand to benefit the most from higher crude prices, but the group still trades at historically low valuations after falling sharply in the past two years. My favorites are Breitburn Energy Partners because of its outsize dividend yield and Atlas Resource Partners because of its bullish earnings growth projection.

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The regular readers of this newsletter will know that I have been bullish on the markets for some time, but that is changing. The S&P 500 reached an all time intra-day high on April 10th, but the rally may not last long and could possibly top out at the end of April or the beginning of May, as it has done in the last two years.

We are in the process of completing a three-peat – a strong market in the first four months of the year with the defensive sectors outperforming the cyclical sectors, for a third year in a row. We all know what happened in the last two summers. It has been interesting to note how many commentators have been on TV talking about how the defensive sectors have been outperforming the cyclicals and that this is bearish for the markets. I have discussed this phenomenon over the last three years, in the beginning part of each year. There is no question that it general, when the defensive sectors outperform, the market is becoming more conservative. This is true at any time of the year.

Seasonal analysis not only provides insight into the sectors of the market that are poised to outperform, but it also provides valuable information on the health of the market. When sectors of the market do not perform as expected, by following their seasonal trends, astute seasonal investors can use the information to determine if the market is poised for a rally, or setting up for a correction. In my April market video I discuss the phenomenon of the defensive sectors outperforming at the beginning of the year and state that is a concern and indicates a possible market correction, but we cannot tell if the correction is going to be next week or in the near future. In other words, defensive sector outperformance cannot be used as a timing indicator to make a portfolio decision. Nevertheless, it is valuable in raising concern to possible unfolding events.

Over the last two years and this year, at the beginning of the year, the defensive sectors have outperformed when the cyclical sectors typically outperform. So what is the big deal? The market is telling investors that the big money is “scared” as it is seeking safety at a time of the year when it would typically be chasing beta. The market cannot proceed higher over the long-term on the back of the defensive sectors alone. One of two events must happen: either a rotation out of the defensive sectors into the cyclical sectors must take place, which will keep the market moving higher, or the market must correct.

So what should we expect? How do the seasonal trends help us at this point? Currently, the cyclicals have had a couple of days of strong performance, outperforming the defensive sectors. This is very typical in the month of April (see the Thackray Sector Thermometer, Thackray’s 2013 Investor’s Guide, page 42). It is very possible that we will see a continuation of this trend in the next couple of weeks, which would not be out of the ordinary. If the defensive sectors gain control once again at this time, it would be indicating that a correction is close at hand. If the cyclicals continue to outperform, it would be a signal that the market still has a bit of life left and might rally into May.

Should we expect a massive rotation from the defensive sectors to the cyclical sectors over the next few months – NO. Although anything is possible, the seasonal trends do not support a sustained rotation into the cyclical sectors past the first week in May. In fact, if the cyclicals do outperform in the next few weeks, when they start to roll over, it will probably be a sign that the market is setting up for a correction. Investors beware. 

Those who understand its ‘post-capitalist’ rules will prosper

In 1993, management guru Peter Drucker published a short book entitled Post-Capitalist Society.  Despite the fact that the Internet was still in its pre-browser infancy, Drucker identified that developed-world economies were entering a new knowledge-based era– as opposed to the preceding industrial-based era, which represented just as big a leap from the agrarian-based one it had superseded.

Drucker used the term post-capitalist not to suggest the emergence of a new “ism” beyond the free market, but to describe a new economic order that was no longer defined by the adversarial classes of labor and the owners of capital. Now that knowledge has trumped financial capital and labor alike, the new classes are knowledge workers and service workers.

As for the role of capital, Drucker wryly points out that by Marx’s definition of socialist paradise – that the workers owned the means of production (in the 19^th century, that meant mines, factories and tools) – America is a workers’ paradise, because a significant percentage of stocks and bonds were owned by pension funds indirectly owned by the workers.

In the two decades since 1993, privately owned and managed 401K retirement funds have added to the pool of worker-owned financial capital.

Drucker’s main point is that the role of finance and capital is not the same in a knowledge economy as it was in a capital-intensive industrial economy that needed massive sums of bank credit to expand production.

How much bank financing did Apple, Oracle, Microsoft, or Google require to expand?  Investment banks reaped huge profits in taking these fast-growing knowledge companies public, but these tech companies’ need for financial capital was met with relatively modest venture-capital investments raised from pools of individuals.

That the dominant knowledge-based corporations had little need for bank capital illustrates the diminished role for finance capital in a knowledge economy.  (This also explains the explosive rise in the 1990s and 2000s of financialization; i.e., excessive debt, risk, leverage, and moral hazard.  Commercial and investment banks needed new profit sources to exploit, as traditional commercial lending was no longer profitable enough.)

In a knowledge economy, the primary asset – knowledge – is “owned” by the worker and cannot be taken from him/her.  Knowledge is a form of mobile human capital.

In Drucker’s view, knowledge, not industry or finance, is now the dominant basis of wealth creation, and this transformation requires new social structures.  The old industrial-era worldview of “labor versus capital” no longer describes the key social relations or realities of the knowledge economy.

The transition from the industrial economy to the knowledge economy is the modern-day equivalent of the Industrial Revolution, which transformed an agrarian social order to an industrial one of factories, workers, and large-scale concentrations of capital and wealth.  These major transitions are disruptive and unpredictable, as the existing social and financial orders are replaced by new, rapidly evolving arrangements.  As Drucker put it, the person coming of age at the end of the transitional period cannot imagine the life led by his/her grandparents– the dominant social organizations that everyone previously took for granted have changed.

Following in the footsteps of historian Fernand Braudel, Drucker identifies four key transitions in the global economy:  in the 1300s, from a feudal, agrarian economy to modern capitalism and the nation-state; in the late 1700s and 1800s, the Industrial Revolution of steam power and factories; in the 20^th century, a Productivity Revolution as management of work and processes boosted the productivity of labor, transforming the proletariat class into the middle class; and since the 1990s, the emergence of the Knowledge Economy.

In Drucker’s analysis, these fast-spreading economic revolutions trigger equally profound political and social dynamics. The dominant social structures that we take for granted – labor and capital, and the nation-state – are not immutable; rather, they are the modern-day equivalent of the late-1200s feudal society that seemed permanent to those who had known nothing else but that was already being dismantled and replaced by the Renaissance-era development of modern capitalism.

From this perspective, the nation-state is no longer indispensable to the knowledge economy, and as a result, Drucker foresaw the emergence of new social structures would arise and co-exist with the nation-state.

Drucker summed up the difference between what many term a post-industrial economy and what he calls a knowledge economy this way: “That knowledge has become the resource rather than a resource is what makes our society ‘post-capitalist.’  This fact changes – fundamentally – the structure of society.  The means of production is and will be knowledge.”

Knowledge and Management

As we might expect from an author who spent his career studying management, Drucker sees the Management Revolution that began around 1950 as a key dynamic in the knowledge economy.  The lessons in management learned from the unprecedented expansion of U.S. production in World War II were codified and applied to post-war industry, most famously in Japan.

This is the third phase of knowledge being applied to production.  In the Industrial Revolution, knowledge was applied to tools and products.  In the second phase, knowledge was applied to work flow and processes, enabling the Productivity Revolution that greatly boosted workers’ productivity and wages.  The third phase is the application of knowledge to knowledge itself, or what Drucker terms the Management Revolution, which has seen the emergence and dominance of a professional managerial class, not just in the private sector but in the non-profit and government sectors.

The nature of knowledge has changed, in Drucker’s analysis, from a luxury that afforded the Elite opportunities for self-development, to applied knowledge.  In the present era, the conventional liberal-arts university education produces generalists; i.e., a class of educated people.  In terms of generating results in the world outside the person, knowledge must be effectively organized into specialized disciplines that incorporate methodologies that can be taught and applied across a spectrum of people and tasks.

Drucker characterizes this as the movement from knowledge (generalized) to knowledges (applied, specialized).  Organizations can then focus this methodical knowledge on accomplishing a specific, defined task or mission.

Though it may seem incredulous to us, Drucker observes that the current meaning of “organization” was not listed in the authoritative Oxford dictionary of 1950. While social groups and organizations have existed for as long as humanity itself, Drucker distinguishes between the traditional “conserving institutions” of family, community, and society, and the destabilizing post-capitalist “society of organizations” that is adapted for constant change.

Organizations require management, and in the knowledge economy, that means managing change and helping the organization learn how to innovate.  Innovation can no longer be left to chance; it must be organized as a systematic process.

Without a systematic process of constant innovation, organizations will become obsolete.

Drucker takes this process of innovation one step further and concludes that this requires decentralization, as this is the only means to reach decisions quickly based on performance, and proximity to markets, technology, and the environment.

Though he doesn’t state it directly, this means that the highly centralized sectors of the economy, from finance to government, will be disrupted by a rapidly evolving, decentralized “society of organizations.”

What Work Will Be In Demand (and What Won’t) in the Future?

So if this is the nature of the new economy, what type of worker will be most in demand?

Will your current industry, job, or skill set be as relevant? Are there steps you can start taking now to defend or increase your future market value?

In Part II: Positioning Yourself to Prosper in the Post-Capitalist Economy, we examine what impact these transformational forces will have on us as individuals, households, and communities, and how we can best prepare for the fast-evolving knowledge economy.

The global economy has only experienced three major transformations in the past 1,000 years, and arguably, we are living through the fourth. Those who understand the nature of this transition and position themselves intelligently will be disproportionately better off – a topic covered fully in my earlier report on The Future of Work.

Click here to read Part II of this report (free executive summary; enrollment required for full access).

Last week’s chart illustrated how the US stock market (as measured by the S&P 500) has outperformed other major international stock markets since the financial crisis. For some further perspective on the post-financial crisis rally, today’s chart illustrates how much of the downturn that occurred as a result of the financial crisis has been retraced by each of the five major US stock market indexes. For example, the S&P 500 peaked at 1,565.15 back in October 9, 2007 and troughed at 676.53 back on March 9, 2009. The most recent close for the S&P 500 is 1,570.25 — it has retraced 100.6% of its financial crisis bear market decline. As today’s chart illustrates, each of these five major stock market indices has recouped all losses incurred during the financial crisis (i.e. all are above 100% on today’s chart). However, it has been the often overlooked S&P 400 (mid-cap stocks) that has been the star performer. The S&P 400 has recouped over 140% of its financial crisis decline — a very impressive performance.

Notes:
Where should you invest? The answer may surprise you. Find out right now with the exclusive & Barron’s recommended charts of Chart of the Day Plus.

Quote of the Day
“Over every mountain there is a path, although it may not be seen from the valley.” – Theodore Roethke

Events of the Day
April 08, 2013 – NCAA men’s basketball championship
April 09, 2013 – NCAA women’s basketball championship
April 11, 2013 – Masters golf tournament begins (ends April 14th)
April 15, 2013 – Personal income taxes due (US) – Pulitzer Prizes announced – Boston Marathon

Stocks of the Day
— Find out which stocks investors are focused on with the most active stocks today.
— Which stocks are making big money? Find out with the biggest stock gainers today.
— What are the largest companies? Find out with the largest companies by market cap.
— Which stocks are the biggest dividend payers? Find out with the highest dividend paying stocks.
— You can also quickly review the performance, dividend yield and market capitalization for each of the Dow Jones Industrial Average Companies as well as for each of the S&P 500 Companies.

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