All three major indexes posted weekly declines. The Nasdaq Composite was the biggest loser, down 2.1 percent. The S&P 500 lost 1.3 percent, and the Dow Jones Industrial Average declined 0.5 percent. It was also a brutal first half. The Dow slipped 14.4 percent, the Nasdaq gave up 13.8 percent and the S&P 500 shed 12.8 percent.

That’s not a good start to the year. And although there’s no reason to believe we’ll be clocking out on the GDP in the second half, the numbers seem to point to at least equilibrium.

Factory orders rose a greater-than-expected 0.6 percent in May, though it was the weakest showing in three months despite an increase in commercial aircraft demand. Oil prices helped prop orders up though, as the increased cost of refined products boosted the cost of the finished goods. Despite the weak showing, the Institute of Supply Management’s (ISM) manufacturing gauge finally moved into positive territory this month, rising to 50.2, which indicates very modest growth in the sector and its first positive reading since January.

The ISM’s gauge of the service sector moved into contractionary territory for the first time this year, however, falling from 51.7 to 48.2, which isn’t good news since the services sector makes up almost 90 percent of our economy. As usual, the bad news is largely blamed on rising energy costs and falling consumer demand.

According to the Labor Dept, the US shed 62,000 jobs in the month of June, with the largest losses in construction and temporary labor. Both make sense, given the fact that single-family construction remains at the lowest levels seen in years, and businesses are reluctant to increase staffing levels in the face of economic weakness. Still, the jobs report wasn’t nearly as bad as expected, with the overall unemployment rate holding steady at 5.5 percent, giving the markets a bit of buoyancy today.

Construction spending continued to decline, falling a further 0.4 percent in May. The number could have been worse, but as has been the case in prior months, nonresidential construction has been propping the overall reading up, eking out a 0.2 percent gain in the same month.

Mortgage applications came off their year-to-date low last week, up 3.6 percent as interests fell. Thirty-year fixed-rate mortgage rates fell to an average 6.33 percent from 6.39 percent, 15-year rates were down to 5.9 percent from 5.95 percent and one-year adjustable rate mortgages (ARM) rose to 7.14 percent from 7.09 percent.

Jobless claims spiked last week, breaking 400,000 for the second time this downturn. Initial claims rose by 16,000, coming in at 404,000 and hitting a three-month high. That pushed the four-week moving average of claims sharply higher to 390,500. Continuing claims fell however, down by 19,000, with 3.116 million workers continuing to collect benefits. However, the four-week moving average continued to edge higher, up to 3.111 million, its highest level since February 2004.

For some light pre-Fourth reading, Elliott Gue discussed how and why energy sector stocks grow at different rights, regardless of whether oil prices are skyrocketing or not, in a recent issue of The Energy Letter. Some food for thought as you drive to the holiday picnics.

With oil cruising above $140 per barrel and natural gas at its highest levels since late 2005, it’s hard to imagine that there could be any energy-related sectors that aren’t flying higher.

But that’s not the case. As I have often noted, the energy sector isn’t a homogenous group; not all sub-sectors of the industry move in the same direction at the same time. And not all energy-related groups actually follow crude oil.

These fundamental distinctions are all-too-often ignored. Consider 2007, the best year out of the past five years for energy related stocks. The Philadelphia Oil Services Index returned an impressive 51.5 percent for the year. However, not all oil services and drilling stocks performed well last year; for example, BJ Services and Nabors Industries fell 17 and 8 percent, respectively.

The reason for that poor performance: BJ Services and Nabors both have significant leverage to the North American drilling market and, in particular, drilling for natural gas in the US and Canada. With natural gas prices weak for most of 2007, drilling activity remained depressed and firms such as BJ Services and Nabors sold off even as internationally levered services names soared to new all-time highs.

Another example of this sort of divergence is the coal market. July of last year most US coal mining firms got hit hard, even though energy stocks in general continued to perform well. Stocks such as Peabody Energy and Arch Coal were trading at–or near–multi-year lows.

These sorts of divergences and inconsistencies often conceal great opportunities for investors. Although I certainly believe in playing strong sectors, investors can also benefit from sifting through the bargain rack, looking for weak sectors with emerging catalysts for a turnaround. In The Energy Strategist, I always keep an eye on value-oriented sectors as well as tracking the high-flyers.

Coal and natural gas offer a perfect example of this sort of value play in action; the potential for returns are archived in this newsletter. I discussed the outlook for the US coal miners at great length last summer. See TEL, July 27, 2007, Coal Earnings.

In that issue, I acknowledged the issues facing the US coal mining firms; these headwinds included glutted coal inventories in the US and cost inflation. But I also highlighted two major points that I believed most investors had been ignoring: falling coal production in the eastern US and a rapidly strengthening coal export market.

Both factors have been key drivers of the coal bull market over the past nine months. Eastern coal production was troubled late last year because of more stringent mine regulations; many higher-cost mines in Appalachia were shuttered.

And, even more important, the export market is truly booming. US coal exports rose to 59.2 million short tons in 2007, up from 49.6 million in 2006. And according to current EIA projections, exports should top 76 million tons this year; judging from bullish comments from many of the big miners, this projection looks conservative.

As these factors became more apparent, coal stocks went from being among the worst sectors in the energy patch a year ago to being among the best performers this summer. Arch and Peabody, the two largest US miners, are both up more than 80 percent since I penned that issue last July.

And as noted above, natural gas levered stocks also under performed for much of last year. I highlighted Nabors Industries as a potential value/turnaround play late last summer. (See TEL, Aug. 10, 2007, Opportunities Knock Again). I won’t belabor the point by reviewing the investment case for Nabors at the time; those interested can check out the issue for details.

To make a long story short: after some initial volatility, the Nabors play worked out and the stock is up 63 percent since early August 2007.

Certainly, I don’t always call stocks correctly, and I have made plenty of mistakes in both TEL and TES. Also, sometimes buying turnaround plays takes patience. It took four months before the Nabors recommendation began to work for us. However, these two examples highlight the potential rewards of keeping an eye on beaten up sub-sectors in the energy patch.

For the complete article and some interesting graphs, go to http://www.kciinvesting.com/articles/9008/1/Energy-Sector-Stocks-Grow-At-Different-Rates/Page1.html.

Speaking Engagements

Be sure to wear a flower in your hair when you venture west to San Francisco. My colleagues Neil George, Roger Conrad and Elliott Gue will be heading to “The City” Aug. 7-10, 2008, for the San Francisco Money Show.

Neil, Roger and Elliott will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.

Click here or call 800-970-4355 and refer to priority code 011470 to attend as our guest.

Also, be sure to check out our blog, At These Levels, for more noteworthy stories.

Special Invitation

We have a special invitation for our readers. KCI Communications, Inc., publisher of Growth Engines, is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.