Don Coxe – Investment Recommendations (September 2011)
The September edition of Donald Coxe’s Basic Points research report (subtitled “The Deficient Frontier”) 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. If possible within your investment guidelines, avoid European bank stocks.
Deutsche Bank’s Josef Ackermann says that the situation for European banks resembles 2008. Such candor is commendable. The collapse of the risk-free sovereign rate of return for so many members of the eurozone means that total portfolio risks are high—and rising.
2. Avoid investing in US banks that have dubious balance sheets, that give top executives big stock option deals, and that squander Bernanke-supplied funds in stock buybacks.
American bank stocks’ performance has been deteriorating and now the tort lawyers have been freed to sue big banks—possibly for treble damages. This class of raptors has historically been the second biggest contributor to Democratic candidates, next only to trade unions.
3. We recommend that investors hold their current positions in Canadian oil sands stocks, but exercise caution about new commitments.
Perhaps the most important economic policy decision Obama will make this year is to decide on the Keystone XL Pipeline to carry Alberta oil sands oil to Oklahoma and Texas. Will he stand up to the enviro-fanatics? He has been disappointing them lately, and this might be the Big One he can give them. That perhaps 100,000 good-paying jobs are at stake might be enough to make him give the green light. Astonishingly, the world’s second or third largest oil reserves, within the boundaries of America’s neighbor and long-time ally, are now the subjects—temporarily, perhaps—of great political risk.
4. Maintain heavy weighting in precious metals, emphasizing gold stocks.
They have been good to you for ten years, and they should continue to be so.
5. Maintain heavy weighting in agricultural stocks.
They have (to us, at least) surprisingly high betas, but the endogenous risk in their earnings is well below that of most cyclical stocks—commodity and otherwise.
6. Retain strong exposure to US oil producers operating on land.
The spread between West Texas and Brent oil remains at levels that must be infuriating to European governments. So does the spread between US natural gas and European prices. Energy is, at the moment, the most conspicuous competitive advantage the US possesses. Paradoxically, it is the sector the Left reviles the most.
7. Prices of copper and iron ore remain at levels that appear to rule out any global economic slowdown. Strikes and floods have sustained base metal prices—but only demand can keep them at these levels. We don’t see that rescue on the horizon. Underweight base metals.
8. Bond investors should be sure that they are earning yields commensurate with the risks they are almost forced to assume at a time of surreal interest rates.
It is almost an Alice-in-Wonderland world when some prominent members of the asset class delivering the worst investment shocks—government bonds—can get away with paying record low rates to investors. Why subsidize poor economic management by lending governments money at risible interest rates? Better to rely on income from great corporations through dividends.
9. The Canadian dollar is suddenly looking weak.
Canadian economic performance is stuttering because of the slowdown in exports to the USA. Otherwise, Canada should remain, in our view, a haven country for investors.
Canadian banks remain vastly more attractive than their American or European brethren—even if that might not be saying very much.
Canadian government bonds are higher quality than Treasurys—and they offer slightly higher yields.
US corporate bonds look attractive relative to Treasurys—and a handful actually have higher ratings.
10. Bullet-proof dividend paying stocks with a record of sustained payout growth should be the core investment asset class for income-oriented investors, as long as central banks continue to suppress interest rates, and as long as the Deficient Frontier exists.
Earnings growth forecasts are worth less in a mini-stagflationary world. Take the money now, and quarterly thereafter, and don’t fret unduly about the relative price performance of your stockholdings.
Source: Scribd, September 20, 2011.
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