Donald Coxe’s investment recommendations (May 2008)
Donald Coxe, Global Portfolio Strategist of BMO Financial Group, has just published the May issue of Basic Points – Traders of the Lost Ark (courtesy of GreenLightAdvisor). This report is a firm favorite with investors as Donald has established a great “big picture” track record and built a large following over the years. His eloquently phrased investment recommendations are particularly insightful and are repeated in the paragraphs below in an attempt to make sense of the troubled times encountered by financial markets.
1. Assume that the leading US forecasters on the US economy will be cutting back on their economic and earnings forecasts. You could be pleasantly surprised, but you’ll more likely feel the other kind of pleasure – the sensation of being right.
2. Assume that the leading global forecasters will be cutting back on their economic and earnings forecasts. The actual outcomes will no doubt vary widely, but enough to challenge the performances of global stock indices.
3. Until US financial stocks stop declining, rallies in the S&P or Nasdaq are selling opportunities. If the US banks still have problems when they can pledge their otherwise-unmarketable merchandise to borrow T-Bills, then those problems aren’t going away in a hurry. If the BKX Index breaks 75, assume that the bad news is about to become much worse.
4. Gold and gold stocks become more attractive each week that global food and fuel costs rise along with writedowns on bank balance sheets.
5. Natural gas prices have benefited from the unusually cold winter in the Northern Hemisphere. They could be hurt if the cooling continues through July – when air-conditioning demand peaks. Nevertheless, we believe the natural-gas-oriented stocks are fundamentally attractive.
6. The dollar failed to rise significantly even as US stocks were rallying and economic forecasters were declaring that the worst of the housing problems were over. If it goes to a new low, it will drive even more global investment funds into commodities and/or commodity stocks.
7. Wheat is the only grain to have experienced a dramatic rise and fall – a short squeeze rally, followed by a collapse – amid evidence of a huge winter wheat crop. Otherwise, the grains and oilseeds have been well behaved, within strong uptrends. Build exposure to the leading agricultural stocks.
8. The risks to global economic growth from stagflationary food and fuel conditions continue to increase. The commodity class whose outlook is most negatively affected by such perceptions is the base metal and steel group. We believe those stocks are the only truly vulnerable commodity sector for the balance of this year – barring a sudden, Black Swan-style, reversal in oil.
9. We didn’t expect to see spot oil at $133. Nor did we expect the oil futures curve to move – albeit briefly – into contango. As this is written, oil for delivery in 2016 trades slightly above spot crude. If this move towards contango accelerates, expect response from the Fed and the ECB. Within the oil group, emphasize producers with long-lived reserves, and underweight the Big Oil companies that are failing to replace their production.
10. The only thing more bearish for nominal bond portfolios than a central bank that doesn’t fight inflation is a central bank that suddenly discovers it must stop inflation in its tracks. That’s what happened when Paul Volcker took charge after the ghastly mistakes of his predecessors. We will become interested in nominal long-term bonds again when Bernanke & Co. drive short rates strongly higher. In the meantime, investors should emphasize real return bonds.
Please also listen to Donald’s webcast, providing a weekly update on the outlook for investment markets. Simply click on his image in the right-hand sidebar to access the webcast.
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