Investment Postcards from Cape Town

Of all the market commentators I regularly quote on this blog, Donald Coxe, Global Portfolio strategist of BMO Financial Group, has turned out to be one of the most popular. And rightly so, as Donald has been remarkably right on the “big picture” investment outlook for many years.

His weekly webcast appears in the sidebar of this site, and has turned out to be a big hit as a result of its insightful and entertaining analysis of financial markets. (To hear the commentary, simply go to “Donald Coxe’s Weekly Webcast” and click on the photograph.)

Donald’s monthly investment report, entitled “Basic Points” (subtitled “Goodbye, Global Savings Glut: Hello, Food & Fuel Inflation” for the June/July 2008 edition) has just been published and I deemed it opportune to share some of his words of wisdom with you in the paragraphs below (courtesy of Commodity News and Mining Stocks).

1. This is a Bear market on Wall Street. Like other bear markets, it is being led by the financial stocks. Until they start to outperform on relative strength, the market’s primary trend is down.

2. Canada went to another new high last week. This year will be the seventh straight year that Toronto has outperformed New York. At some point, those Canadian investors who, afflicted with the national inferiority complex, are so eager to sell Canadian stocks to buy the big US names discussed on CNBC will realize just how expensive their bad habit really is.

3. One reason for Canada’s outperformance is that Canadian bank stocks have been so strong compared to their US counterparts. A decade ago, the price to book comparisons favored US banks. In recent years, it has been “No Contest”. As of last month (according to the great Hugh Brown), the ratio favoring Canadian banks over US banks went to a new high. That means, for Americans, if you must own banks, go North.

4. Gold gives three signals: inverse performance to the dollar, an inflation call and a warning if a financial crisis impends. Gold shot through $1,000 an ounce at the time of the Bear Stearns vaporization: many investors (including us) thought the Bear was, with Goldman, one of the two well managed investment banks, so its demise meant further collapses. When Bernanke managed to avert further crashes, gold retreated to $850. It is once again signaling that there is stormy weather ahead on Wall Street, just as there is stormy weather on the plains.

5. That stormy weather across the Midwest keeps destroying crops and sending grain and soybean prices skyward. Remain overweight the fertilizer, farm equipment, and seed stocks. They are no longer cheap, but, unlike most other equity groups, they offer powerful earnings growth stories - even if the US and Europe go into recessions.

6. Remain overweight the oil and gas stocks. We think the upside potential for natural gas now exceeds that of oil, which is vulnerable to a downside correction, particularly if Congress passes a law that forces pension funds to disinvest in commodities. We still think that is unlikely, because it would not only be bone-headed, but it would set a terrible precedent, and would undermine the basic theory underlying ERISA.

7. The mounting propaganda campaign against the Alberta oil sands could inflict real harm. We do not recommend that clients invest in companies that are still far from production, but do recommend that clients stay overweight the producers. If the US actually decides to ban imports of Alberta synthetic oil, then their production will be sent to China. Americans would then be even more dependent on Venezuela, Nigeria, and the Gulf states.

8. Although the US economy is weak, we do not believe that the US bond market is attractive. We think the major central banks will be forced to tighten policy. Canada has already shown that it is leery of further easing; the ECB and the Bank of England will soon be tightening. If Bernanke keeps focusing on saving Wall Street’s worst, then US inflation will climb faster and the dollar will sink faster.

9. The economies offering good economic growth and good demographic growth are all outside the OECD. Most of their stock markets soared last year and have gone into a funk this year. We worry that food inflation, coupled with high energy prices, will pose great challenges to some of the rising stars internationally. In particular, we are concerned about India, which is most vulnerable among the large economies if severe weather should trigger $9 corn and wheat. Brazil is the major emerging economy whose stock market has remained strong, and that actually benefits from crop failures abroad.

Please click here for the full report.

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