The news from Europe continues to drive global equity markets. Stocks posted a near-record rally in October, as EU policymakers appeared to finally make headway on a temporary fix for the sovereign-debt woes afflicting the Club Med nations of Greece, Italy and Spain. But investors had little for which to be thankful heading into the US Thanksgiving holiday; renewed uncertainty about the EU’s ability to stem the ongoing credit crisis has weighed heavily on sentiment.

This exhausting pattern of massive risk-on rallies followed by steep risk-off trades has dominated the market since mid-2011. Few stocks have been immune to this seesaw action.

The results of Germany’s Nov. 23 bond auction also suggest that investors worry that the Continent’s largest economy and most fiscally sound nation isn’t immune to the ongoing sovereign-debt crisis. Germany failed to attract bids on 35 percent of the 10-year bonds made available for sale. But there’s a silver lining to this distressing news: With Germany feeling the pain, the potential that EU policymakers will reach a deal to support fiscally weak member-states increases considerably.

But the doom and gloom in Europe has overshadowed a number of encouraging developments stateside, where the latest economic data points continue to impress. The Conference Board’s Index of Leading Economic Indicators, for example, in October climbed at the fastest pace since Fenruary, a sign that the US economy should continue to expand into early 2012.

Although the US Bureau of Economic Analysis lowered its estimate of third-quarter gross domestic product to 2 percent, this revision stemmed primarily from faster-than-expected reductions to business inventories. Inventory building in the fourth quarter and early 2012 should boost economic growth.

Meanwhile, that the “supercommittee” failed to produce a plan to reduce the federal deficit shouldn’t come as a shock: Few expected a group comprising the most liberal Democrats and conservative Republicans to cook up a compromise on taxes and government spending. This failure shouldn’t rattle investors.

The spread between the price of West Texas Intermediate crude oil and Brent crude oil has also narrowed somewhat–a major positive for US-focused producers and, eventually, for investor sentiment toward energy stocks.

Once EU policymakers get their act together and agree upon a plan to address the sovereign-debt crisis afflicting fiscally weak member-states, the strengthening US economy and the growing likelihood that China will adopt pro-growth fiscal and monetary policies should send stocks higher, with growth-oriented names leading the way.

In the meantime, investors should follow our three-pronged approach to navigating volatile markets. This strategy involves buying energy-focused master limited partnerships (MLP), US oil and gas royalty trusts and other high-yielding fare that offer defensive characteristics. Opportunistic investors should also take advantage of the market’s recent pullback to buy growth names with long-term upside. We prefer oil services names, which stand to reap the rewards of the end of easy oil. Investors should also consider holding a few hedges–the two short positions in my Best Buys list are excellent options.

In this issue, we examine the traps and treasures that await income investors in the energy patch, with a focus on oil and gas royalty trusts and the tanker industry. We discussed the basics of royalty trusts at length in The Yield Issue.

In This Issue

The Stories

1. US oil and gas trusts often offer high yields, but investors must understand how these trusts are structured and the quality of their underlying assets to separate the winners from the losers. See Royalty Trusts: Buys and Sells.

2. With the tanker market swimming in excess capacity, the industry will continue to suffer from declining ship values and day-rates that are well-below the levels needed for many independent owners to turn a profit. The tanker stocks in the model Portfolios are well-positioned to weather the storm, but these picks have become deep-value plays for aggressive investors and shouldn’t be regarded as a stable source of income. See In the Tank.

3. The market for vessels that carry liquefied natural gas has been the lone bright spot in the seaborne-transport industry this year, thanks to a tightening supply-demand balance and rising day-rates. See Gassed Up.

4. Want to know which stocks to buy now? Check out Elliott’s Best Buys.

The Stocks

Whiting USA Trust I (NYSE: WHX)–SELL in Energy Watch List
VOC Energy Trust (NYSE: VOC)–Buy < 20 in Energy Watch List
Chesapeake Granite Wash Trust (NYSE: CHKR)–Buy < 22 in Growth Portfolio
SandRidge Permian Trust (NYSE: PER)–Buy < 22 in Growth Portfolio
Knightsbridge Tankers (NSDQ: VLCCF)–Buy < 19 in Aggressive Portfolio
Nordic American Tanker Shipping (NYSE: NAT)–Hold in Growth Portfolio
Teekay LNG Partners LP (NYSE: TGP)–Buy < 41 in Conservative Portfolio