Don Coxe – Investment Recommendations (December 2010)

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The December edition of Donald Coxe’s Basic Points research report (subtitled “The eurodream becomes a nightmare”) 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. Continue to reduce endogenous portfolio risk by selling shares of banks that are not moving satisfactorily to write down or unload their toxic assets.

2. Big Canadian banks remain far less risky and better-managed than their American counterparts. However, Canada continues to experience a real estate bubble, and despite banks’ assurances that they aren’t at risk, when the bubble does burst, foreign investors will probably sell bank shares first and ask questions later.

3. That real estate bubble is one reason for caution on the Canadian currency. Although it remains fundamentally more attractive than the greenback, it may remain range bound near par. The second reason for concern is, as Canadian officials have been saying for months, the sharp differential in productivity performance between Canada and the US. The third is that, for the first time in living memory, Canadians’ per capita household debt matches Americans’.

4. The euro seems destined to fill one great global role: to make the dollar and the yen look reasonably safe by being shown to the world as the currency of bad people doing bad things in badly-run countries who rely on assistance and bailout from good people who do good things in well-run countries. The euro is, of course, the currency of some big, well-run economies characterized by hard work, thrift and global competitiveness. But those economies are going to have to prop up the others. Remember the plight of Atlas: stuck in the sea holding up the Iberian Peninsula.

5. Within commodity stock portfolios, the precious metals stocks reduce overall portfolio risk from both deflation and inflation. The risks of deflationary collapse are lower now than earlier in the year, but the fundamental problems within the financial system remain unresolved.

Keep your protection, albeit at a slightly lower level.

6. The collapse of the oil futures curve should be temporary. It has the effect of making investors less concerned about the duration of companies’ reserves, because their pricing is no longer attractive relative to spot prices.

We believe this is unlikely to last, and recommend you emphasize the long-duration producers – notably the Canadian oil sand companies.

7. Within the agriculture sector, emphasize the farm machinery stocks. Rarely have farmers had a better combination of profit motive and financial strength to bring them into showrooms.

8. Copper or iron ore? Which should you emphasize now? A strong case can be made for either, so we suggest you buy both. The awe-inspiring scale of iron ore expansions globally suggests that prices in the longer term will be under pressure. Copper production, on the other hand, is unlikely to leap ahead of demand.

9. We have had an unusually high volume of detailed forecasts of pending Chinese collapse, so the basic contrarian commodity story of Chinese growth supplying raw materials demand remains intact. As MacroMavens notes, China’s forex reserves have grown four times faster than its GDP in the past decade, while debts have grown faster than GDP in North America and Europe. The Chinese national piggy bank compared to America’s savings is a mastodon to a piglet. As long as the predictors of Chinadoom remain prominent, the upside for commodity investors remains intact.

Basic Points Dec 2010

Source: Scribd, December 15, 2010.

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