Donald Coxe’s Investment Recommendations (September 2008)

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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 on the right side of the “big picture” investment outlook more often than most over the years.


Donald’s monthly investment report, entitled “Basic Points” (subtitled “Can’t anybody here play the game” for the September 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. The two most important forces in equity markets since July 13th have been powerful strength in financial stocks and pathetic weakness in commodity stocks. Since they have been inversely correlated for more than a year, investors should assume that the commodity stock bear market will continue until the financials roll over. The F&F bailout is merely the second act in a tragedy that has an unknowable number of acts to come.

2. When the financials do roll over, gold and gold mining stocks should move swiftly back into favor. Inflation remains above central bank target levels in the US – and in many other countries across the world. And any return to pronounced weakness among the bank stocks will be strongly bullish for gold.

3. With OPEC’s token production cut failing to impress the markets, oil prices will fall further. It won’t take more than a few days of even 750,000 b/d of production above consumption to drive oil prices down. Conversely, any outbreak of civil strife in Nigeria that affects offshore production could have a sudden upward price impact. We expect oil to trade in a range of roughly $80 a barrel to roughly $130 a barrel next year, but we have no great confidence in that forecast. We are more confident in predicting $150 oil within the next three years, as the next global economic recovery unfolds.

4. Barring an early killing frost, this year’s US corn group will be a barn-buster. What next? Corn is in modest contango for the next two years’ crops. Because contangos are so unusual these days, and because grains have such high producer/consumer participation across the curve, this is to us a sign that farmers and users are believers that high corn prices are here to stay. That means the fertilizer, seed and equipment stocks are cheaper now, relative to forward corn prices, than at almost any time in the past four years.

5. The pullback in oil prices and the dramatic bank rescues should have been enough to send the S&P back into bullish mode. It needs to break 1310 on the upside to take away its bearish condition.

6. The real yield on the Treasury 10-year is now a negative 145 bp. On a two-year hold, this means there could be more endogenous risk in nominal bonds than in most blue-chip non-financial stocks. The rush out of TIPs into Treasurys is doubtless driven by the unwinding of F&F exposures, but the long Treasurys are now seriously overvalued.

7. The biggest near-term upward surprise in commodity prices could be natural gas if (1) the sunspots don’t reappear, and (2) the historic correlations of gas to oil reassert themselves.

8. The Canadian dollar is being hit by the commodity price plunges, deterioration in the trade account, the worsening economic outlook in Central Canada, and the uncertain outlook in the October election. Whether Tories or Liberals win in Ottawa, Canada’s fiscal situation will continue to be superb compared to the US, particularly if Obama wins. We remain very positive on the loonie as an alternative to the greenback.

9. US election campaigns can be excuses for bold acts by foreign adventurers. Although President Bush was a non-person at the Republicans’ Convention after he gave his brief speech by satellite, he’s going to be President for four more months. The world should hope that rogue states think about that before deciding that Washington will be too distracted by the election to do anything about a surprise attack or invasion.

10. We have no clear idea how long it will be before we can look back to today’s prices for commodity stocks and say, “Wow! I wish I’d loaded up then!” We remain certain that day is coming.

Please click here for the full report (edited from the BMO Week in Review).

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5 comments to Donald Coxe’s Investment Recommendations (September 2008)

  • Frank Wordick

    According to Sedacca’s recent offering, based on historical charts of other bubbles, the target for oil is around $15 a barrel. Oil price pullbacks and a couple quasibank rescues are not enough to save the market. There is a glut in natural gas. How can its price go higher? If we are in recession or going to go into one — and commodity prices as for gold and oil seem to be signalling this, then how can it be that commodity prices are cheap, esp. after the recent big run-up? Frankly, I don’t see anything brilliant in Coxe’s offerings. Take a look at his picture and ask yourself “Is this man excited about something?”

  • Prieur – thanks. A nice summary and a cohesive outlook. The oil is consistent with a lot of stuff and my own view as, IMHO, we’re facing a permanent S/D imbalance that will worsen as existing fields age rapidly and under-investment in new exploration and production falls below replacement because of geo-political barriers. Futher and worse many of the alternative fuels, e.g oil sands, wind, etc. are uneconomic in the $80-100 range if you chat with the experts which gets us to ’70s redux. We know what we should do but the will will fail on short-term complacencies. A fine dynamic balance that OPEC in general and Saudia Arabia in particular has been managing well for decades; that is keep oil on the S/D balance so that prices are as high as tolerable without triggering major investments in switching. Don’t let it fall farther than you can help opportunistically given growing world demand; or looking back a few years compressing world demand. Without a major series of national commitments to alternatives that’ll be our world. And lest we forget switching would required 30 years, $Bs of investment and still leave the world dependent on the ME for 30% of its’ energy requirements anyway.

  • All of that said there are couple of points which I question, not least the inverse relationship between financials and commodities. Again IMHO we’re crossing several major structural tipping points and an attitudinal one. While US GDP appeared impressive on a YoY basis growth was 2.5% and 2.2% for real GDP. Netting out trade (Gross Domestic Purchases)the figures are 1.1% and 0.4%. We crossed a tipping point into a more severe downturn as the recent employment and REAL retail sales data indicate.
    The US markets have recovered after every major intervention this year but this time it ground to a halt rather quickly as faith and hope in nearing the end of the de-leveraging and fundamental repair of the sector would be over quickly is turning to a more realistic grasp of the depth and seriousness of the problems. As LEH/MER/AIG are about to tell us.
    What resulted in what at the time I labeled bear rallies was the outlook that didn’t see these deeper problems. The failures to re-rally indicate to me that we may be in the process of a major attitude adjustment. As a recent front-page WSJ article (actually several) AND a recent Economist article on the profit outlook showed. This is the first time the MSM has written so well and comprehensively on points I’ve believed in for some months. Can we consider that de facto evidence that we’re moving beyond Stage 1 Denial to Stage 2 Acceptance ?
    If so that bodes poorly for the markets.

  • “When the financials do roll over, gold and gold mining stocks should move swiftly back into favor. Inflation remains above central bank target levels in the US – and in many other countries across the world. And any return to pronounced weakness among the bank stocks will be strongly bullish for gold”

    This is the part where I totaly desagree. Inflation is a lagger measure of the economy and simply because of that Gold, Oil and all other commodities aren´t going to recover until the economy stops plunging.

    Best Regards,

    Dax Speculator

  • I have a high degree of certainty that oil is going up not down. If expectations are for a renewed economy, what do think will power that economy? Certainly not corn! By September 2009 we should have a bubble market in both commodities and stocks, so they can crash together….


    Eduardo Mirahyes

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