Donald Coxe – Homeicide: The Crime of the Century
Donald Coxe’s monthly investment report, entitled “Basic Points” (subtitled “Homeicide: The Crime of the Century” for the October 2008 edition) has just been published. He is Global Portfolio strategist of BMO Financial Group and has over the years become known for his accurate analysis of the “big picture”.
1. Our recommended equity exposure is at or near minimum, depending on a client’s overall portfolio structure and risk tolerance. At 46% for pension funds, it is close to an absolute bottom level of 40%. At 20%, cash is at our maximum.
2. Long-term investors should not delay much longer in picking among the wounded commodity stocks on the market’s bloodied battlefield. The best of these companies are among the best the world has to offer, in terms of importance to the global economy, competitive position, balance sheets, cash flow, and management quality. At current prices, many of them sell for no more than a discounted value of their reserves in the ground, with no allowance for their balance sheet assets.
3. The agriculturals have been savaged to an astounding extent. The global food crisis has been put on hold, but it will only take one medium-sized crop failure to bring it back with even greater intensity. A relative handful of great companies has the facilities, technology, management, and distribution to mean the difference between widespread global starvation due to scarcity and excessive food prices, and enough protein production to meet the needs of a billion people escaping diets of rice bowls and bread.
4. The massacre of their stock prices means that these industries will not be able to expand their operations and create oversupplies of their products. That means they will make even higher profits in the next phase of this super-cycle.
5. One side effect of the “Midnight Massacre” is sharply lower US interest rates, due partly to the short-covering rally in the dollar and to the collapse in stock prices forcing asset reallocation. Those lower rates will mean that the millions of US mortgagors facing resets in the next twelve months should not be facing the kind of ghastly monthly carrying costs that the most bearish forecasters were predicting as little as five months ago.
6. Commodity prices fall during recessions – but the real value of great commodity stocks does not. Why? Because recessions are devastating to smaller, undercapitalized commodity producers, and they become easy pickings for the majors once they see light at the end of the tunnel. “There’s nothing surer, the rich get rich and the poor get poorer” was a depression song, but it will doubtless have relevance as the big commodity companies survey the landscape.
7. Gold and gold-mining shares remain the best way to reduce endogenous risk within an equity portfolio. Although inflation is bound to recede for at least a few months, the amount of stimulus being injected into the global system will prove highly intoxicating once the downturn bottoms out, and gold should move to new records.
8. This “largo” phase of the commodity sonata has more tragedy in it than we expected or, indeed than most symphonies (apart from Tchaikovsky’s) have in this movement. We should have alerted clients to the rapid deterioration in the fundamentals in the prior issue of Basic Points. We tried to make up for that default in our September 19th Conference Call, which not only advised significant cutback in equity exposure, and significant increase in cash, but also cut commodity stock exposure to energy and base-metals stocks in favor of the precious petals. We believe these rebalancings should be some consolation to investors in the risky times ahead.
9. The scale of debt build-up, the scale of the complexity of assets accumulated during the late stages of the bank mania, and the scale of deleveraging mean that the level of overall endogenous economic risk is truly unknowable. We know that, with the collapse of Lehman, many hedge funds have sustained big losses subject to what could be protracted legal proceedings. Those assets may have been sold or may be overhanging the market. Never before have so many politicians and so many bankers colluded to behave so badly. We still doubt that their malefactions have created a Mama Bear market, but we’ll probably know within weeks.
Please click here for the full report.
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Cost Benefit of Higher Lower Commodities (Bespoke Investment Group, 10/6/08)
Commodity Collapse (Bespoke Investment Group, 10/9/08)
Energy-Led Correction: Capitulation Selling Underway? (Green Light Advisor, 9/13/08)
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