Donald Coxe – Investment Recommendations (November 2009)
The November edition of Donald Coxe’s Basic Points research report (subtitled “The Power of Zero”) has just been published. His investment recommendations, as summarized in this document, are listed in the paragraphs below, but I do recommend you also read the full report at the bottom of the post. (Also note that Donald’s weekly webcasts can be accessed from the sidebar of the Investment Postcards site.)
1. Remain underweighted in US equities-as a percentage of total equities within global portfolios, and as a percentage of assets in US balanced portfolios. Underweight US bonds in global portfolios.
The Obama long-term financial projections for the US are high risk and unsustainable. Forthcoming elections-or a currency crisis-could induce some discipline, but within the OECD, the US should probably no longer be accorded top ranking for bonds and stocks.
2. Within the US market, underweight US economy-related stocks and overweight stocks tied to global economic activity.
Watch the performance of the KRE compared to both the BKX and S&P. As long as the KRE underperforms both of these indices, US-economy-related stocks remain suspect.
3. Overweight Emerged Markets (such as China, Brazil, India, and Korea) within global and international equity portfolios.
These markets should no longer be routinely discounted heavily for political risk or accounting practices relative to the US. The credibility gap has narrowed in the past year.
China continues to report robust economic activity and skeptics continue to proclaim-as they have for years-that it’s unsustainable. The time to sell China, and, for that matter, base metal and energy stocks, is when the last remaining Sino-skeptic has become unemployed.
4. Overweight the precious metal miners relative to bullion or the ETFs.
The time to overweight the ETF is when precious metal prices have entered corrections.
The XAU and other gold stock indices have underperformed bullion for the past two months because of a succession of bad news announcements for such heavyweights as Barrick, Kinross and Agnico-Eagle. True, we can’t be sure there won’t be more reports of disappointing execution among the miners, but they have the reserves in the ground, and the best of them have “unhedged reserves in politically-secure areas of the world”. Investors who believe current prices could hold should do NAV calculations on the miners based on current gold and silver prices, and they will see excellent opportunities in the stocks.
5. Overweight the leading agricultural stocks. The farm equipment, seed and fertilizer stocks are core investments for the next cycle.
With one of the coldest and wettest Octobers on record, Midwest farmers’ crops at October-end were overdrenched, overdue and overrun with blights and moulds. Recent warmer and dryer weather has improved yields, and the heaters are working overtime to dry out what has been harvested-and corn and soybean prices have pulled back slightly from their recent highs.
Global carryovers will not increase this year, which means world food “surpluses” remain precarious-as evidenced by the sharp run-up in rice.
6. The base metals stocks have been the global commodity stars. The best stock market values now could be in the small-caps that are long on ore and short-or nil-in earnings.
In retrospect, we should have recommended overweighting in this sector, but we were spooked by the collapse of the Baltic Dry Index and its subsequent failure to rally-and the relatively high levels of inventory on the LME. It appears that China has used some of its surplus dollars to get China overstocked on metals.
7. Overweight Canadian oil sands stocks within equity portfolios.
The Canadian oil sands stocks continue to suffer bad press among the defenders of the planet about alleged environmental misdeeds and risks. Each dead duck listed in shocked reports sent across the world has been worth millions in reduced market cap for the companies. (The actual total number killed in this supposed replay of the Exxon Valdes is what a few hunting parties would collectively bag on a good weekend.) A major Canadian institution recently joined this parade of the super-chic by publishing a supposedly unbiased study on oilsands emissions that was prepared by two of that nation’s pre-eminent greenhouse gasbags. The institution could have achieved the same results by retaining Gore-but Gore costs more. Treat those fashionable emissions with caution-and treat your portfolio to oil sands stocks.
8. Overweight Canada in both equity and fi xed income portfolios, and remain long the loon against the greenback.
In recent global rankings, Canada ranked #1 in the G-7 for its central bank, its private banks, and its Minister of Finance (who is the longest-serving in the G-7-a remarkable feat for a minister in a minority government). The principal knock on Canada is that it is dull. Dull has become the new shiny.
9. In balanced portfolios with an equity bias, do not hold high Cash exposures. Hold long-duration, high-quality bonds.
If this rebound becomes a sustained boom, you will lose-rather modestly-on this exposure, but your equity holdings will appreciate substantially, and you will be a net winner. If it becomes a bust, you will win on the bonds, thereby reducing your overall portfolio loss. Long bonds now reduce short-term cyclical risk. As of October, speculators were hugely short 30-year and 10-year Treasurys and hugely long 2-year Notes-consistent with a bullish call on stocks and the economy. If that call swings to bearish, there will be a rush to the long end.
The full report follows below.
Source: Scribd, November 2009.
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