Investment recommendations for troubled times

1.

Remain heavily underweight banks, particularly investment banks that have displayed monumental stupidity. Do not assume that a change at the top will automatically convert them into temples of wisdom (unless it is accompanied by demands for the departing to repay bonuses based on bets that turned out disastrously). Better to assume that, like subprime-based DOs, there are layers of rot that can make the entire product dangerous to your financial health.

2.

Remain overweight Emerging Markets, emphasizing those that are oil, gas, and/or food exporters.

3.

Soaring food costs threaten stability for some Third World economies. We have been ardently endorsing India since we returned from our leave of absence a year ago. We are now more cautious, because a weak monsoon could be politically and economically destabilizing at a time of $4 corn and $10 wheat.

4.

Remain heavily overweight gold – both stocks and the ETF. Gold is almost as good a protection against banking problems as SKF – the UltraShort Financials ETF – a security which may not be a suitable investment in some portfolios.

5.

We continue to believe that the Agricultural stocks are the pre-eminent investment class of our time. Farm incomes are rising rapidly and, in the US, farms and farm land are the real estate assets that are rising in value and are virtually immune to foreclosures. That means the leading Ag companies have great pricing power and minimal credit problems. We now hear suggestions that because food inflation has finally made it to the cover of The Economist, it is time to start moving toward the exits. Not so: We think that fine cover story could be the atonement – At Last! – for the magazine’s famous 1999 cover: $5 Oil.

6.

Remain overweight oil and gas producers, including the Alberta oil sands producing companies. As disappointed as we are with the new royalty schemes in that province, Alberta certainly remains more attractive than Nigeria or Angola – and much more attractive than Russia, Kazakhstan or Venezuela.

7.

We think it is time to begin accumulating the refiners that are equipped to handle heavy high-sulfur crude. The collapse of the crack spread has savaged refiners’ earnings, but that will eventually rebound. The Saudis have virtually turned out the Light, and less and less of the oil that the Gulf states will be lifting will be of the most desirable grades.

8.

Retain the base metal stocks that have long-life unhedged reserves in secure areas. Even if there is a global recession caused by global collapses of subprime paper and LBO loans, it will not be deep enough to drive base metal prices back to 2004 levels – but would be worrisome enough to push further mine development even farther into the future.

9.

When borrowing, borrow where possible in dollars. When investing, invest where possible in other currencies.

10.

Stagflation is a bad backdrop for bonds – and for non-commodity stocks. The central bankers could have headed it off had Wall Street behaved with a modicum of morality, but the Fed and its brethren are forced into sustained reflation because of the global solvency crisis. Corporate earnings for most sectors will not meet current optimistic Street forecasts, and rising inflation will reduce the market’s P/E.