Donald Coxe’s investment recommendations – April 2008
Donald Coxe, Global Portfolio Strategist of BMO Financial Group, is one of a select group of analysts that have been remarkably right on the macro investment outlook for many years. My market views, in general, concur with Donald’s investment recommendations as published in the April edition of Basic Points – The Hinge of History (Part 2) (courtesy of GreenLightAdvisor). I have therefore deemed it opportune to share his words of wisdom with you in the paragraphs below, especially also in the light of the difficult juncture in financial markets.
1. In long-only equity portfolios, continue to underweight Wall Street banks and others that have been reporting high exposure to perfumed products of indeterminable value, including those which last year revealed – under duress – high exposure to SIVs. Within the financials, emphasize those whose loan losses are of the traditional, cyclical variety – not in derivatives or in untraditional banking businesses. Good banks that have stuck to their knitting – and whose CEOs’ compensation has suffered along with their stock prices –should be retained.
2. In long/short portfolios, be long commodity stocks and short bank stocks that make headlines for untraditional losses. That trade hasn’t been working lately, but it remains an overall portfolio risk-reducer. The list of banks that have shown great skill and profitability by going heavily into new kinds of products and new kinds of accounting is roughly as long as the list of major copper, oil and gas producers that profited by selling heavily forward.
3. A financial-led bear market within a financial-led recession can be particularly perilous if central banks run out of ways to reflate the system – and surprisingly benign if the central banks’ rescues remain timely. To date, the central banks have been up to the job – if propping up a badly-behaving financial sector is a key component of their job descriptions. Result: the overall stock market has outperformed our expectations. We still don’t like the risk/reward ratio.
4. Dividends become more attractive as central banks cut rates. The problem for investors is that many of “The Great Dividend-Paying Stocks” are financials that have been reporting ghastly blunders. In many cases, their payout ratios have climbed far above the 50% threshold that has made these stocks better investments than bonds. Opportunities remain – and dividends may be the only positive return most US stocks will deliver this year.
5. Although North American consumers have yet to see the cost pass-through in major foodstuffs of $6 corn and $8 wheat, it will come sooner or later. Based on past periods of food inflation, one of the first consumer cutbacks is on eating out. Restaurant stocks are especially unappetizing when food costs soar out of control.
6. Gold has pulled back from its high because the dollar stopped falling and the bank bail-outs seem to be working. Remain overweight gold as a clear-cut hedge against further bad news on both those fronts.
7. The Canadian dollar decoupled from the euro, failing to rally to new peaks – which makes little sense to us. US clients should continue to use Canadian government bonds and Canadian short-term investments as alternatives to Treasurys and US cash.
8. Within the commodity group, continue to accumulate the leading agricultural stocks. Given the spectacular performance of the fertilizer stocks, the best bargains currently on offer are in the farm machinery companies. The global food crisis will almost surely cripple the opposition to GM seeds, which means the seed stocks have great upside room.
9. Within debt portfolios, continue to emphasize inflation-hedge bonds – preferably in strong currencies. Treasurys remain overvalued, despite the recent strong run-up in yields from barely observable levels.
Please also listen to Donald’s webcast, providing a weekly update on the “big picture” investment scene. Simply click on his image in the right-hand sidebar to access the webcast.
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