Investment recommendations for troubled times

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I read a great many reports from investment strategists and other market gurus, but a firm favorite always remains Donald Coxe, Global Portfolio Strategist of BMO Financial Group. I largely share Donald’s investment recommendations as published in the December edition of Basic Points, entitled “Double, Double, Greed and Trouble, CDOs and Housing Bubble”, and have therefore thought it appropriate to republish these eloquently written paragraphs below.


Remain heavily underweight banks, particularly investment banks that have displayed monumental stupidity. Do not assume that a change at the top will automatically convert them into temples of wisdom (unless it is accompanied by demands for the departing to repay bonuses based on bets that turned out disastrously). Better to assume that, like subprime-based DOs, there are layers of rot that can make the entire product dangerous to your financial health.


Remain overweight Emerging Markets, emphasizing those that are oil, gas, and/or food exporters.


Soaring food costs threaten stability for some Third World economies. We have been ardently endorsing India since we returned from our leave of absence a year ago. We are now more cautious, because a weak monsoon could be politically and economically destabilizing at a time of $4 corn and $10 wheat.


Remain heavily overweight gold – both stocks and the ETF. Gold is almost as good a protection against banking problems as SKF – the UltraShort Financials ETF – a security which may not be a suitable investment in some portfolios.


We continue to believe that the Agricultural stocks are the pre-eminent investment class of our time. Farm incomes are rising rapidly and, in the US, farms and farm land are the real estate assets that are rising in value and are virtually immune to foreclosures. That means the leading Ag companies have great pricing power and minimal credit problems. We now hear suggestions that because food inflation has finally made it to the cover of The Economist, it is time to start moving toward the exits. Not so: We think that fine cover story could be the atonement – At Last! – for the magazine’s famous 1999 cover: $5 Oil.


Remain overweight oil and gas producers, including the Alberta oil sands producing companies. As disappointed as we are with the new royalty schemes in that province, Alberta certainly remains more attractive than Nigeria or Angola – and much more attractive than Russia, Kazakhstan or Venezuela.


We think it is time to begin accumulating the refiners that are equipped to handle heavy high-sulfur crude. The collapse of the crack spread has savaged refiners’ earnings, but that will eventually rebound. The Saudis have virtually turned out the Light, and less and less of the oil that the Gulf states will be lifting will be of the most desirable grades.


Retain the base metal stocks that have long-life unhedged reserves in secure areas. Even if there is a global recession caused by global collapses of subprime paper and LBO loans, it will not be deep enough to drive base metal prices back to 2004 levels – but would be worrisome enough to push further mine development even farther into the future.


When borrowing, borrow where possible in dollars. When investing, invest where possible in other currencies.


Stagflation is a bad backdrop for bonds – and for non-commodity stocks. The central bankers could have headed it off had Wall Street behaved with a modicum of morality, but the Fed and its brethren are forced into sustained reflation because of the global solvency crisis. Corporate earnings for most sectors will not meet current optimistic Street forecasts, and rising inflation will reduce the market’s P/E.

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Words from the wise for the week that was (Dec 17 – 23, 2007)

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The commentary for this week’s edition of “Words from the Wise” is somewhat abbreviated as I am trying to finish the report a bit earlier in order to join my family at our beach house at Gordon’s Bay (40 minutes from Cape Town) for a few days over the Christmas period.

I will nevertheless still be following the markets closely as the next few days could see interesting movements. It has been observed by the Stock Trader’s Almanac that “beginning just before or right after the market’s Christmas closing, we normally experience a brief, yet respectable, rally from the last five trading days of the year through the first two of the New Year.” The S&P 500 Index has averaged a 1.5% increase during this seven-day period since 1969 and it is referred to as the “Santa Claus Rally”. However, it is also pointed out by the Stock Trader’s Almanac that “when this reliable seasonality has failed to materialize, it has often been a harbinger of a sizable correction or a bear market in the coming year.” Hence the saying: “If Santa Claus should fail to call; bears may come to Broad & Wall.”

As we approach the end of an eventful 2007 it is appropriate to thank each of my subscribers and readers for your friendship and support in making Investment Postcards such a fulfilling experience. The New Year will bring a new-look blog with a host of exciting features, but more about that in early 2008.

This is also a time for treasuring friends, especially those that are far away. One such friend and business partner is John Mauldin, author of the hugely popular Thoughts from the Frontline weekly e-newsletter. John is also one of five nominees for Motley Fool’s Investor of the Year – along with the likes of Warren Buffett and Carl Icahn. Don’t let the name fool you – this is a serious award. If you have enjoyed and benefited from John’s tireless effort researching and writing his newsletter and books over the years, please consider voting for him by clicking here.

Here’s wishing you a great festive season full of fun, laughter and joy, and a wonderful 2008. (In the spirit of the festive season, click here for a good laugh to see what happens when an investment manager gets “elfed”.)

Before highlighting some of the thought-provoking quotes from market commentators, let’s briefly review the market’s actions on the basis of economic statistics and a performance chart.

The prevailing mood remained cautious despite massive injections of liquidity into money markets by the world’s central banks. Leading the pack was the European Central Bank (ECB), adding an unprecedented €501 billion of liquidity in its two-week operation.

Markets took some comfort from reports that Temasek, Singapore’s state investor, might buy a $5 billion stake in Merrill Lynch. This would be the fourth time in a month that a US financial institution had raised capital from a sovereign wealth fund.


DateTime (ET)StatisticForActualBriefing ForecastMarket Expects
Dec 178:30 AMCurrent AccountQ3-$178.5B-$183.0B
Dec 178:30 AMNY Empire State IndexDec10.320.021.0
Dec 179:00 AMNet Foreign PurchasesOct$114.0B
Dec 188:30 AMHousing StartsNov1170K1175K
Dec 188:30 AMBuilding PermitsNov1180K1150K
Dec 1910:30 AMCrude Inventories12/14-7586KNANA
Dec 208:30 AMGDP-FinalQ34.9%4.9%4.9%
Dec 208:30 AMChain Deflator-FinalQ31.0%0.9%0.9%
Dec 208:30 AMInitial Claims12/15346K335K335K
Dec 2010:00 AMLeading IndicatorsNov-0.4%-0.4%-0.3%
Dec 2012:00 PMPhiladelphia FedDec-
Dec 218:30 AMPersonal IncomeNov0.4%0.5%0.5%
Dec 218:30 AMPersonal SpendingNov1.1%0.6%0.7%
Dec 218:30 AMCore PCE InflationNov0.2%0.2%0.2%
Dec 2110:00 AMMich Sentiment-Rev.Dec75.574.574.5

Source: Yahoo Finance, December 21, 2007.

The next two weeks’ economic highlights, courtesy of Northern Trust, include the following: 

Durable Goods Orders (Dec. 27) Durable goods orders are predicted to have risen (+0.9%) after the three consecutive monthly drops. In particular, orders of aircraft may have risen after a reduction in October. A likely decline in bookings of defense items is included in the forecast. Consensus: +3.0% vs. -0.2% in October.

New Home Sales (Dec 28) – The consensus forecast is for a small drop in sales of new homes to 720 000 from 728 000 in November. Sales of new single-family homes are down 47.6% from their peak in July 2005. On a year-to-year basis sales of new single family homes were down nearly 23.0% in October. Consensus: 720 000 vs. 728 000 in October.

Existing Home Sales (Dec 31) Sales of existing single-family homes are down 31.0% from their peak in September 2005. The consensus is for a steady reading in November. Consensus: 4.97 million.

ISM Manufacturing Survey (Jan. 2) The Manufacturing ISM survey for December is predicted to fall to 50.3 form 50.8 in November. Indexes tracking new orders, production and employment should be market movers. The employment index fell to 47.8 in November. Consensus: 50.3 from 50.8.

Employment Situation (Jan. 4) Payroll employment in December is predicted to have risen 40,000 after a gain of 94 000 in November. The gradual upward trend of initial jobless claims suggests that hiring was probably slow in December. The unemployment rate should have risen to 4.8% in December following three monthly readings of 4.7%. Consensus: Payrolls +65 000 vs. +94 000 in November; unemployment rate – 4.8%.

Other reportsConsumer Confidence Index (Dec. 27), Chicago Purchasing Managers’ Index (Dec. 28), Construction Spending (Jan. 2), ISM Non-Manufacturing Survey, and Factory Orders (Jan. 3).

The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week. 


Source: Wall Street Journal Online, December 23, 2007.

Christmas Eve is still around the corner, but US stock markets were already in a festive mood towards the close of last week. Despite lingering worries about the US economy and the financial sector, stocks managed to finish a volatile week on a strong note. Small caps (+4.2% in the case of the Russell 2000 Index) charged ahead to pay heed to the so-called “January Effect” of small caps outperforming large caps from the middle of December through the end of January.

Despite the rally on Friday, European and Japanese stocks finished down on the week, whereas emerging markets were also taking a breather.

Central bank action eased money market pressures somewhat, resulting in lower one-month dollar, euro and sterling Libor rates. Despite kicking up a bit on Friday, government bond yields declined during the course of the week, benefitting from more safe-haven buying.

On the currency front, the US dollar was fairly stable against the euro, but recorded a four-month high against the British pound (on the back of expectations of further UK interest rate cuts) and a six-week high against the Japanese yen (as new carry trade positions were opened).

Commodities experienced an excellent week with gains on all fronts. Agricultural commodities surged on the back of tight supplies and strong demand from emerging countries. Solid demand from Asia also resulted in metals making headway, with copper (+4.8%) recovering from a nine-month low. Crude oil (+1.9%) and precious metals (gold +2.3%, platinum +3.7% and silver +3.6%) also performed strongly. The price of gold bullion looks set to record its first ever month-end close above $800.    

Now for some words (and graphs) from the investment wise that will hopefully assist to make sense of financial markets during and beyond the Christmas period, but firstly a cartoon.


Source: Jim Sinclair’s MineSet, December 16, 2007.

Eoin Treacy (Fullermoney): Sectoral performance for 2007
“Over the last year, the worst performing sectors have been Homebuilding (-60.69%) Thrifts & Mortgages (52.45%) Real Estate Management (-37.11%), Department Stores (-34.99%), Motorcycle Manufacturers i.e. Harley Davidson (51%) and Regional Banks (-31.2%) This is no secret and real estate related worries have dominated media coverage over the last year.

“However what is less well known is that of the S&P 500’s 147 sector indices, 85 are positive or unchanged for the year. Of these, 7 are up in excess of 50% year-to-date. These were Fertilizer & Agricultural Chemicals (+94.42%), Construction & Engineering (94.24%), Education Services (+84.89%), Coal and Con Fuel (+76.61%) Diversified Metals (71.97%), Internet Retail (64.89%) and Healthcare Services (51.21%. A number of these indices are consolidating their gains and need to sustain moves to new high ground to reaffirm their overall uptrends.

“In the coming year, we can probably expect banks to bottom out and they should perform better than they did this year. So I would be surprised to see them at the bottom of this list a year from now. However with the increase in interest in agriculture, the continued need for infrastructural improvements, not only in the USA, but globally, and the continued secular bull market in all commodities; it is difficult to imagine that the leaders for this year will not be in the upper quartile of performers again next year.”

Source: Eoin Treacy, Fullermoney, December 19, 2007.

Dick Green ( Earnings slowdown dissected

“There is a definite slowdown in aggregate earnings growth. The financial sector is the cause. Other sectors have yet to see a broad slowdown in earnings growth.

“The table below shows the trend in quarterly year-over-year operating earnings growth for the S&P 500 companies in aggregate for 2006 and estimates for the fourth quarter of this year and the first quarter of next year.


“There is a clear slowdown in profit growth starting in late 2006 and continuing into 2007. Then, of course, profits dropped sharply in the third quarter of this year, and another decline is expected for the fourth quarter. This is why the stock market has hit so much turbulence lately.

“The impact of the financial sector is huge. The drop in third quarter profits is entirely due to the financial sector. Excluding financials, profits were up 10.2% over the third quarter of 2007. The central issue in this debate is that which preoccupies the market – whether the problems in the financial sector (and the associated problems in the housing sector) will lead to a recession. If not, then investors will ultimately find good value among non-financial stocks that have maintained earnings growth.”

Source: Dick Green,, December 17, 2007.

Moody’s Survey of business confidence for world
“Global business sentiment is very weak and fragile. This is particularly true in the US where confidence slumped last week to its lowest level in the five years of this survey, and where it is now consistent with a contracting economy.  Expectations regarding the outlook through mid-2008 are particularly bleak, and responses regarding sales strength, inventory investment, and office space are also soft. Confidence is stronger outside the US, but it has notably weakened across the globe during the past month. While pricing pressures have risen with oil prices near $100 per barrel, they remain notably muted compared to the pressures that prevailed during previous oil price spurts.”

Source: Moody’s, December 17, 2007.

Continue reading Words from the wise for the week that was (Dec 17 – 23, 2007)

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China and the Arabian Peninsula as market stabilizers

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Why are stock markets not tanking against the background of the sub-prime meltdown and an increasing number of “experts” calling for a US recession? One explanation for this seeming anomaly has been offered by George Friedman, CEO of Stratfor. (Stratfor, short for Strategic Forecasting, focuses on analysis and forecasts of geopolitical, economic, security and public policy issues.)

Although one may quibble with some points, Friedman’s analysis is certainly thought-provoking and worthwhile spending a few minutes on.

“The most bizarre aspect of today’s global economy is what has not occurred. In 1979, oil prices soared to slightly more than $100 a barrel in current dollars, and they are approaching that historic high again. Meanwhile, the subprime meltdown continues to play out. Many financial institutions have been hurt, many individual lives have been shattered and many Wall Street operators once considered brilliant have been declared dunderheads.

“Despite all the predictions that the current situation is just the tip of the iceberg, however, the crisis is progressing in a fairly orderly fashion. Distinguish here between financial institutions, financial markets and the economy. People in the financial world tend to confuse the three. Some financial institutions are being hurt badly. Those experiencing the pain mistakenly think their suffering reflects the condition of the financial markets and economy. But the financial markets are managing, as is the economy.

“What we are seeing is the convergence of two massive forces. Oil prices, along with primary commodity prices in general, have soared. Also, one of the periodic financial bubbles – the subprime mortgage market – has burst. Either of these alone should have created global havoc. Neither has. The stock market has not plummeted. The Standard & Poor’s 500 fell from a high of about 1,565 in mid-October to a low of 1 400 on October 19. Since then, it has rebounded as high as 1 550. Given the media rhetoric and the heads rolling in the financial sector, we would expect to see devastating numbers. And yet, we are not.

“Nor are the numbers devastating in the bond markets. By definition, a liquidity crisis occurs when the money supply is too tight and demand is too great. In other words, a liquidity crisis would be reflected in high interest rates. That hasn’t happened. In fact, both short-term and, particularly, long-term interest rates have trended downward over the past weeks. It might be said that interest rates are low, but that lenders won’t lend. If so, that is sectoral and short-term at most. Low interest rates and no liquidity is an oxymoron.

“This is not the result of actions at the Federal Reserve. The Fed can influence short-term rates, but the longer the yield curve, the longer the payoff date on a loan or bond and the less impact the Fed has. Long-term rates reflect the current availability of money and expectations on interest rates in the future.

“In the US stock market – and world markets, for that matter – we have seen nothing like the devastation prophesied. As we have said in the past, the subprime crisis compared with the savings and loan crisis, for example, is by itself small potatoes. Sure, those financial houses that stocked up on the securitized mortgage debt are going to be hurt, but that does not translate into a geopolitical event, or even into a recession. Many people are arguing that we are only seeing the tip of the iceberg, and that defaults in other categories of the mortgage market coupled with declining housing markets will set off a devastating chain reaction.

“That may well be the case, though something weird is going on here. Given the broad belief that the subprime crisis is only the beginning of a general financial crisis, and that the economy will go into recession, we would have expected major market declines by now. Markets discount in anticipation of events, not after events have happened. Historically, market declines occur about six months before recessions begin. So far, however, the perceived liquidity crisis has not been reflected in higher long-term interest rates, and the perceived recession has not been reflected in a significant decline in the global equity markets.

“When we add in surging oil and commodity prices, we would have expected all hell to break loose in these markets. Certainly, the consequences of high commodity prices during the 1970s helped drive up interest rates as money was transferred to Third World countries that were selling commodities. As a result, the cost of money for modernizing aging industrial plants in the United States surged into double digits, while equity markets were unable to serve capital needs and remained flat.

“So what is going on?

Continue reading China and the Arabian Peninsula as market stabilizers

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Japanese sub-prime woes

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The following humorous sketch ended up in my inbox a few days ago:

“Following the problems in the sub-prime lending market in America and the run on Northern Rock in the UK, uncertainty has now hit Japan.

“In the last seven days, Origami Bank has folded, Sumo Bank has gone belly up and Bonsai Bank announced plans to cut some of its branches.

“Yesterday, it was announced that Karaoke Bank is up for sale and will likely go for a song, while today shares in Kamikaze Bank were suspended after they nose-dived.

“Furthermore, 500 staff at Karate Bank got the chop and analysts report that there is something fishy going on at Sushi Bank where it is feared that staff may get a raw deal … “

Source: Hat tip to the person who sent this to me, but I have been unable to ascertain the original source.

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