Don Coxe...Extremely interesting investment "food for thought" once again from a "big picture" guy.
Nesbitt Burns Institutional Client Conference Call for December 9, 2005
Don Coxe
Times Square - New York
Chart: Japanese Yen
http://stockcharts.com/h-sc/ui?symbol=$XJY&period=DAILY&start=1998-01-01&end=2005-12-09&....
Thank you for tuning in to the call, which comes to you today from the BMO offices in Times Square, New York. I’m on one side of Times Square and the NASDAQ headquarters are on the other side and it’s unlikely that the twain shall meet.
The chart that we faxed out was of the Yen and we’ve dated it back to the beginning of what I think of as The Great Symbiosis, which was back in October of 1998. And the chart shows you the gigantic rally in the Yen that occurred and how suddenly it occurred when China forced Japan to undo its stealth devaluation of the Yen and it set up a new currency regime, which I regard as the basic global underpinning of the financial system.
That apparently did temporarily unravel only when the depths of deflation of Japan let the Yen fall back in to the mid-1.30’s, but once we came through the global recession, as you’ll notice, the Yen traded up and it was in the range that China said was appropriate for it for its relation to the Renminbi.
It’s very difficult to prove that an agreement actually exists. It’s certainly never been declared publicly. But, under what we describe as this Beijing-Tokyo axis, approximately one and one-third trillion of Treasuries and US mortgage-backeds have been bought by the two central banks to protect their relationship to each other and to prevent the Dollar from going down more than it actually did. And so, I look on that as the safety net underneath the global financial system, and particularly under the Dollar.
Now, what is more than mildly disconcerting is this drop in the Yen that started, as you see, in April of this year, and accelerated in recent weeks. And as a by-product of this accelerating drop in the Yen, what we’ve got is a breakout in gold through $500 an ounce, we’re up at $525.
There seems to now be widespread agreement that what’s driving this is Japanese individual investors trying to get out of their own currency and they aren’t particularly keen on going into the Dollar. And this has been given new life this week when the central bank of South Korea surprised people by raising their rate up to 3 ¾%. And of course the Bank of Japan rate is essentially zero.
So that what is unfolding here is the Japanese individual investors – and the Japanese of course have a famously high savings rate – are now taking the view that if the Bank of Japan doesn’t raise interest rates even when you have the Nikkei surging up to a multi-year high – that magic 15,000 level – and with signs of economic growth in Japan, not great but good compared to the past and with the banking system no longer a disaster notwithstanding this hilarious story yesterday about the sale of a share of stock that was supposed to go at 617,000 Yen per share and instead they sold 617,000 shares at 1 Yen. And it’s cost Mitsuo bank up to now, $223 million dollars and it’s going to cost them a lot more.
But apart from this kind of thing, the banking system in Japan seems to be relatively well-healed from its desperate position of the 1990’s. So why is the Yen collapsing? And what is the point at which China forces a halt or openly challenges Japan on what amounts to a stealth devaluation?
Now, this is a very serious story. Because if the open spat between Japan and China, which has been accelerating in recent months, if it gets into something worse and we’ve got this Asian conference coming up where China has made it clear that it doesn’t really want to deal with Japan. They’ve turned down opportunities for meetings between Hu Jintao and Koizumi. We’ve got an emergence here of something which is beyond the bad relations that have characterized this Japanese-Chinese relationship for the last couple of years.
Now, as you know, I’ve taken an optimistic view of this, that Koizumi was negotiating a tricky path between the unregenerate nationalists and die-hards like Shinto Ishihara, who’s the mayor of Tokyo prefecture and others within his own party and he’s clearly been one side of The Great Symbiosis relationship, because the buying of Treasuries to manage this relationship, most of it has been done, of course, since the bear market of the Dollar which began on February 1st, 2002. So if you look at that chart, what you see was this was a period of time when he orchestrated a rise in the value of the Yen to satisfy China and did it at a time when he was buying all these Treasuries. He was doing more than his share of supporting that relationship.
So it’s puzzling, in a way, to see that they are prepared to let this relationship deteriorate. Now, we’ve had a couple of geopolitical incidents, once where there was a Chinese submarine in Japanese waters and this open battle over the rights to oil and gas in the straits between the two countries, but I guess I was of the view that cooler heads would prevail on both sides, that it was convenient for both Chinese and Japanese leaders to let unpleasantries be aired in public but that nothing serious would come from this. This was just a way of letting steam blow off from their own nationalists.
Well, it’s always difficult if you unleash an essentially racism and nationalism, it’s always difficult to rein it in when you think it’s reaching the toxic stage. And what alarms me, frankly, is looking at this chart, 1.22 on the Yen was the level that the Chinese indicated to the 325 international banks that bailed out Indonesia in August and September and October of 1998, 1.22 was what they said was the minimum level that they would accept for the Yen. Well, Japan, as you can see from the chart, drove the Yen almost to par on the Dollar.
So now, we’re trading at 1.20 – 1.21 range on the Yen, which is uncomfortably close to 1.22, which is the line in the sand which Japan drew seven years and two months ago. So, I don’t know whether China has revised its range for the Yen, this is all conjecture. It’s conjecture based on external evidence and extrinsic evidence as opposed to any statements or policy bulletins.
But the reason I’ve chosen to draw it to everybody’s attention, is that this fall in the Yen is a major global development. It’s clearly behind this breakout in gold. It’s probably contributing that 18-year high in silver and it’s one of those things that could destabilize the system.
Everything’s going well otherwise, I would have to say. Admittedly, the Dow is down year-to-date and the S&P is only up 3% year-to-date, but we’ve talked about that before that we didn’t expect anything from the US stock market this year. But it’s quite a different thing to say that you expect some cataclysmic global event of the kind of thing that could disembowel a stock market.
I’m not saying I’m predicting that, but at the meetings I’ve been having in Boston and New York with institutional investors, regularly I get asked “Well, what could go wrong? What wakes you up at night?” And I answer all of these with “Well, if the Yen breaks down.” And defining what a breakdown is, is probably as difficult as defining what a nervous breakdown is. But I would just say that a Yen breakdown is to whatever level it is where China overtly misbehaves.
And since the effect of all this is that the two parties to the arrangement, if they break up the relationship, neither one of them would then buy Treasuries. Then the reason this would become such a big development is we’ve had this rally in the Dollar this year, from 1.30 on the Euro to 1.17 and initially, actually drove the Canadian Dollar down through eighty cents although it’s given up all of those gains.
So the Dollar index has been stronger this year certainly than I expected. And the question going into next year, now that Warren Buffett has taken a hit on his short on the Euro, is will the Dollar bear market resume? Is gold telling us that the next currency to fall after the Yen falls, is the Dollar itself? If so, then we’re not just talking about five hundred dollars for gold, we’re talking about something much more. And we’re talking about a rise in US interest rates, we’re talking about a US economic slowdown. In other words, there’s a lot of things that happen if the Dollar breaks down, because it doesn’t have its safety net anymore.
So, I’m just putting this, really, on the list of things for clients to watch. Because, again in discussions with the institutional investors I’ve been seeing, this had sort of been down low on the list of things they were watching. And the Rule of Page Sixteen is, of course, you don’t invest on the basis of a story that’s on page one, you invest on the basis of a story that’s on page sixteen, which is on its way to page one.
The page one story right now is almost unalloyed joy for I think most of the investors on this phone call. Because those of you who’ve been following our work this year have to be extremely pleased with how well you’ve done. And now, everybody’s aware of the fact that we’ve got sixty dollars for oil, we’ve got fourteen to fifteen dollars for natural gas, that we have multi-year highs for copper, lead, zinc, aluminum and that this week on the stock exchange here at New York, we had new highs for a whole raft of base metal stocks, gold stocks and oil stocks and yesterday, we had an all-time high for Suncor. There seems to be more interest developing in the oil sands stocks, I’ve certainly detected that in my meetings with clients down here. And this week Canadian Oil Sands stock went through the hundred and thirty level, nice rally there.
So, the kinds of stocks that we have been recommending to clients over the months, what’s interesting is that everything is in gear now. At various times during the year we had oil strong or we had base metals strong and not oil. And we had both base metals and oil strong but not gold. And so, for those of you who have kept the faith, as you’re coming up to December 31st, this could be a consummation devoutly to be wished in terms of relative performance, in which everything would close the year near its high for the year. Which would make us all look very smart indeed but would mean probably just that there was serendipity at work.
Well, what could go wrong in the future is, we know that there’s a tendency that whatever is strongest in November, December, sells off in January. I’ve been going back over this year’s issues of Basic Points because we do a year-end edition where we re-issue the entire year’s issues of Basic Points in one book form. And re-reading what we’ve published, of course naturally produces some pains, as one realizes rhetorical flourishes that were excess and enthusiastic calls that got overstated.
But what’s pretty clear is at no time did we even dare to suggest that everything would come together like trained pigs, as what’s been happening the last few weeks in the market. And that we could end the year at a high, which would give us these tremendous year-over-year performance numbers.
So this does suggest that investors are starting to gain a greater appreciation for commodity stocks as an asset class. And the case that we made last week at the CFA Institute meeting in Boston and that we were making in all of these meetings with clients in Boston and here in Manhattan and just reiterating that and some of you would have heard it on an earlier conference call this week, is just a couple of points. First of all, this is the first economic cycle in two hundred years where at the margin, the incremental unit of demand doesn’t come from the industrial world, that is, the OECD…it comes from China and India.
Now what’s unique about two hundred years? Well Chris Patton, the EU Commissioner and who was the Administrator of Hong Kong when it got subsumed into the maw of China, points out that in the last two thousand years, for eighteen hundred of those years China’s GDP was the biggest in the world. So it’s only two centuries where it wasn’t. And as he said, we’re in catch-up mode and we’re going to be there fairly soon, where China will once again be the biggest. And by the middle of this century we could have the GDP of China and India collectively greater than that of the whole rest of the world put together.
As investors, what you try to find is mispricing. And the commodity stocks – and I’m going to leave the golds aside in this, it’s a special case – but the mines and the oils trade at a substantial discount in the price/earnings ratio to the rest of the stock market, even though they’re earnings gains have been far above that of the rest of the stock market.
For example, in the third quarter, S&P earnings up 16%, but if you take out the oil stocks, earnings were up only 11%. So you’ve got 10% of the weight of the S&P driving the index. And yet, the stocks in that group trade at a discount and they are somewhat friendless in terms of buy recommendations from the big names and shills and mountebanks that are found in this city in such profusion.
Well, if you accept that, at the margin, now, on a global basis the global economy is being driven by the purchases from China and India, then it’s of course a question of what it is that they buy. Well, India’s imports of oil are up 35% so far this year. Now, they aren’t big, but what is clear is relative to the Indian GDP, their purchases are rising at a rate where they get more and more intense in relation to total GDP and they are now at the margin influencing world oil prices. Up until then it was just China alone that was driving Russian oil from twenty bucks to fifty bucks. With that kind of help and with this as being a compounding effect, it’s pretty hard to make any case that we’re going to see thirty-five dollar oil without a full-scale global recession in which China and India are also involved.
It’s that kind of bedrock thinking, which in talking to accounts they’ve found interesting. Because there’s an automatic tendency when you’ve had three years of far above stock market performance with your group, that you’re looking for a time to take money off the table on the basis that it won’t last. But if you take, in effect, the conclusion of the Chris Patton view, then we are in the early stages of the adjustment, where the action will be in those groups that are driven by the consumption patterns of China and India.
And all we can see out there, as far as the oil stocks are concerned, we’ve had six straight years of declining reserve life indices for Big Oil, this will be the seventh. The areas where Big Oil said they could add to production which were, in the past, Russia and Venezuela, they’ve taken them off the table.
The next area where Lee Raymond of ExxonMobil said “Well, we will go and produce more oil from” was Angola. Not a good week for Lee Raymond. Because Angola came out and said we’re not going to nationalize the fields that ExxonMobil and BP and Total are actually producing from, but we’re going to take away their exploration licenses which cover a big part of the ocean and where the seismic work has been done and it looks highly prospective. And this was an area that Big Oil was counting on to protect its sagging reserve life index.
And when Angola then rubs salt in the wounds of Big Oil by saying China will be picking up some of these exploration leases, it illustrates that not only does Big Oil have trouble in its relationship to OPEC, but we’ve now got this hungry new force, which is the second biggest oil importer in the world, with enormous cash flows, that is pursuing opportunities around the globe and trying to drive Big Oil out of its position in them.
The Angola story is particularly amusing because as the Angolan government noted, the deal that they got with Angola was done at the time there was a civil war and they backed the right side in the civil war. This is the kind of thing that oil companies have been doing for ninety years. They’re good at it. Sometimes they get it wrong, but in general it’s something that goes with the territory. You can’t be a CEO of Big Oil without looking at some rather dubious governments around the world and doing deals with those that you think are going to win out.
Well, they did this deal, but it was a separated deal, which was actual producing fields from exploration leases. So what the Angolan government, now that the civil war is long over is saying, okay, it was a deal that worked out well for you on that but we’re not going to let you have a right to at your own pace develop everything that we have in the ocean out here. We’re going to let other people in. In other words, we believe in a free market for our resources.
More or less the same attitude Ralph Klein of Alberta took when some untoward comments came out of Washington after it was announced that Enbridge was, in conjunction with the Chinese government was going to build a pipeline straight west from Fort McMurray to Kitimat, BC for the Chinese tankers to pick up oil. And when the comment made out of Washington was “Well, we always understood that any oil produced in Alberta that was surplus to Canadian demand, we had first call on, Ralph Klein’s first comment was “We believe in a free market for our oil and we’ll do the deal where we can and the Chinese are very interested.”
So that here you have the dynamics of it. Seven straight years of declining reserve life index and instead of it just being us and OPEC, now it’s us OPEC and China and India. In other words, for the available resources out there, the competition is getting fierce.
So that’s why Big Oil just keeps accumulating cash. They accumulated a hundred billion last year. They were at a hundred and ten billion as of third quarter end, despite big stock buybacks. And their return on equity is falling because of having all this cash. And in effect, they’re all dressed up with no place to go except northern Alberta. And we still believe that will happen once the ambiguities or otherwise of the SEC rules on accounting for Alberta oil sands reserves get resolved.
You know, the dimensions of this can be put another way. Which is, if you take out OPEC and what they have and if you then take out Russia and you take out Venezuela and then you assume a price of, say, forty-five bucks a barrel, for oil, a case can be made for the idea that the Alberta oil sands would constitute over half of the reserves of the rest of the world that isn’t covered under these various headings. That’s a rough guesstimate but it gives you some idea that Big Oil, which is accumulating four percent interest on this gigantic cash hoard and watching the value of reserves in the ground go up, at some point they’re going to jump.
So, this all started with the drop in the Yen, but what it illustrates is that it moves very quickly in this world from a currency to commodities – in this case, gold and silver - and then when we look at commodities we see why it is that they’re outperforming all currencies and all bond markets and all stock markets and it comes back to what we began with. This is the first economic cycle in two centuries where, at the margin, the incremental unit of demand comes from China and India.
It’s a new ball game out there. It’s a worldwide ball game. And fortunately, those of you who are faithful on these calls enjoy this kind of ball game and it ain’t in the ninth inning.
That’s it. Any questions?
Caller 1: This Yen situation and the Japanese attitude which…is a bit perplexing because it seems to me that there’s a special relationship between Japan and the US and it’s hard to imagine the Japanese not stepping in to buy Treasuries eventually and to follow any, you know, be obedient to the US as they been, I think, in the past. So, is that now what’s changing? And second of all, would there not be…you know, it’s not in anyone’s interest as we can see, which is also perplexing in this situation for there to be a deterioration, but is it just a fear perhaps of where China is perceived to be going and the Japanese getting very concerned about it? Is this a way to thwart their progress?
Don Coxe: Thank you for articulately expressing some of the reasons why I watch this chart deteriorating without suggesting it deserved the special attention. It was just when we decisively broke 1.20 that I began to worry that maybe this was unraveling. It has been suggested to me in a couple of meetings down here that maybe the Japanese-US relationship has, in fact, been redefined and that the people in the Bush administration would not be unhappy with a Dollar devaluation, which would occur if The Great Symbiosis unraveled.
That they are so frightened by the protectionism that’s unfolding in Congress that if the Dollar were to fall to 1.40 on the Euro and par on the Canadian Dollar, for example, and that this would force in effect an upward revaluation of the Renminbi, that this wouldn’t be something that would produce great hand-wringing. And if it came at a time of a slowing US economy anyway, alright, then although it would mean higher US interest rates than they would be normally, it wouldn’t mean like, 7% Treasury rates, because you wouldn’t have the base rate at that level.
So, if you’re being really Machiavellian here and you said, supposing the Bushies concluded that next year US economic growth was going to fall to 2%, because of the tightening that’s already been done by the Fed and also because of high energy prices. And so, therefore, what that would do is stop the Fed from raising beyond, say, the 4 ½ level on the Fed funds rate and then if the economy was slowing down the Fed would pretty soon start to cut rates.
And that would be a good time for a currency to be devalued as a means of heading off something awful in an election year where, for example, we’ve got Senator Schumer from this state, who’s still got this bill out there for 27 1/2 % tariffs on China if they don’t do something about their currency value. And so it could be that in fact, the Bushies are prepared to face a devaluation.
And it’s, you know…David Hale, years ago made an observation that all major devaluations of the US Dollar have been done with a Texan either in the White House or Secretary of the Treasury. And it dates back to the basic division of the United States historically, between the commodity-producing South and the financial and manufacturing North. And that the strong Dollar was something that Wall Street liked, whereas the cotton-producing and agricultural and oil-producing South liked a weak Dollar.
So although this is a lot of hypothesis, what you’ve got to say is, if this does unravel, I agree with you, it wouldn’t unravel without some discussions between Koizumi and Bush. Because too much is at stake. And so this could be part of a much bigger story next year.
Thank you. Any other questions?
Caller 2: If there is a revaluation in the foreign exchange relationship, is that going to imply then a pretty significant improvement in the US trade deficit?
Don Coxe: Well, the way it works is a J-curve, as they call it. The first effect after you devalue is the value of imports rises and prices for these things have been set, there’s deals that have been out there and it takes at least six to nine months before things improve and then they can improve quite dramatically.
Again, let’s talk about the Canada-US trade relationship. If the Canadian Dollar went to 1.10 US, the effect on the auto industry, for example, in Ontario would be devastating, but they wouldn’t all come at once because there’s longer-term contracts. But what would be clear is there would be no new auto plants located in Ontario. And you’d already start to see some bleeding away of parts contracts and so forth. So, some people might laugh at something that big, but I just remind you that the last time that we had a non-inflationary bull market in the metals like we’re having right now, Canadian Dollar was 1.04 US.
Now, that’s not a direct chain of causality, but it illustrates that you can have circumstances like this occur. So, we’ve got a large part of the Canadian manufacturing sector which is there because of two kinds of protection. One was an undervalued Canadian Dollar and the other is, all the healthcare subsidies provided by the taxpayers to the workers in these sectors.
Well, the healthcare subsidies aren’t going to go away, but if the Canadian Dollar rises through par US, some major adjustments would be made. And, yes, it would be somewhat negative for commodity producers, because they’ve got their costs in Canadian Dollars and their output in US Dollars, but it would be much more devastating for the manufacturing sector in Canada than it would be for the commodity-producing sector. Thank you.
Caller 1 (follow-up): Don, do you think in a major devaluation, would the US stock market outperform as we’ve seen…one of the characteristics that we’ve seen over the last few years, where currencies devalue, the stock markets have done particularly well. However, in the US that hasn’t always historically been the case. What do you think of that?
Don Coxe: I can tell you that in the stage that it was perceived that the US Dollar was going to be devalued that the US stock market would sharply underperform. Because global investors like to show that they have assets in strong currencies on their balance sheets and because the price/earnings ratios of strong currency countries are higher than the price/earnings ratios of weak currency countries. So, there’s an adjustment process, but then the market starts to distinguish between those companies that suddenly start to gain decisively from it.
For example, if you look at company such as Stryker, a health services company which has big exposure to Europe through an acquisition they did a few years ago in Germany, the market would immediately so, oh, their earnings are going to go up substantially because they have all these earnings in Euros. And so the market would start to make those kinds of adjustments. But in terms of, for example, what the global markets would pay for US financial stocks, their price/earnings ratios would fall until the market discovered at what level the currency had bottomed out.
But what you get, I can predict, is entire forests disappearing to produce the paper for all the analyses that would come to tell you how you would adjust to a devaluation of the Dollar. And that may yet happen. But I’m not predicting any of this, remember, I’m saying that I’m putting people on alert that what we find each year is that something that was strong one year got changed the next year. And this movement in the Yen is more than mildly disconcerting and the fact that it’s already had this impact on gold, there may be more to come. Thank you.
Caller 3: Along those lines of the impact of declining currencies on markets, it’s interesting that the Nikkei has had such a strong run even though the Yen has been falling through the floor.
Don Coxe: Yeah, and what it shows for example, is US investors who bought the Japanese market at the beginning of the year and were confident that Japan was going to outperform the US, more than half the tremendous gains on Japan have been wiped out for them because of the devaluation of the Yen. Now you’re still much better off in the Nikkei than you’ve been in the Dow or NASDAQ or the S&P, but you’re absolutely right about the effect of currency devaluation on an external investor.
The reason, one of the reasons the Nikkei has been so strong in recent weeks is it’s been lead by the manufacturing stocks that are deemed to have the greatest gains in earnings as a result of this. I mean Toyota has listed some gigantic amount of extra earnings it gets for each one point move in the Yen. Sony, which has been in trouble on all sorts of fronts, their earnings benefit from this.
So, what’s happened is that the Japanese banks which lead the gigantic rally earlier in the year, they clearly don’t benefit from this. So what’s happening is investors have been plowing into machinery, manufacturing, steel stocks, things like that which were doing well anyway and were tied in to growth in China, but they do much better because of the falling Yen.
So, then when you come up with the overall index like this, because of the weight of the machinery and manufacturing stocks, the Nikkei moves. But where the growth in the Nikkei is coming has changed over the last five months, somewhat along the lines of the chart that you’re looking at. So at the moment, the steels, the auto companies, the Sony’s, these companies are leading the Nikkei lately. They weren’t the leaders in coming off the bottom, it was the financial institutions. Thank you.
Caller 4: For quite a while I’ve heard you talk about investing in Suncor and Canadian Oil Sands and the prospect of them being taken out by one of the US majors. I’ve never heard you actually give a price. In Dollar terms, you’ve got [Canadian Oil Sands] at a buck thirty two [$132.00] and Suncor at seventy-four dollars, where would you say is fair value there, if the US were to take them out, as you say, six, seven months from now?
Don Coxe: Well, I have not flatly predicted that US companies would take them out, what I said is, I don’t see any obvious other strategies for Big Oil. And that includes not just the big US companies, but the foreign ones, except to come into the oil sands. A long-term strategy would be that they could try to acquire leases and build their own, but the costs of creating new oil sands projects are so expensive, relative to the existing projects which are of course the Syncrude project, Suncor and the Athabasca project. But building something in northern Alberta now is much more expensive because anybody who can swing a hammer and not hit his thumb one time out of three is now a high-class carpenter and is paid much more money than doctors are paid in most parts of the world.
So, it’s much more expensive. And it seems to me that if you’ve got money burning a hole in your balance sheet like these companies and you are alarmed that you can’t get your P/E ratio up, no matter how much your profits are up and no matter how much you buy back stock, that this is the most obvious strategy for you to employ.
But, I cannot certainly suggest and I wouldn’t want anybody to think I could, name the price at which they would be bought. Personally, I own all of these shares. I don’t own them because I’m waiting for a takeover, in that sense. Frankly, I’d be quite delighted to be left owning these shares until I die and until my children die so my grandchildren could own them because that’s the kind of life of the reserves. I just don’t think that that’s the way it’s going to work out.
I think that the reserve life index of Big Oil is such an overarching challenge to the petroleum industry of the world, that they’ve got to address it. And so I’m saying that if you have, on the one hand, almost unimaginably large amounts of money and you have a serious problem that management cannot solve any other way, which is its price/earnings ratio and rewarding its stockholders and if you have on the other side, assets which Canadians historically have chosen to value as if they were simply producing assets.
I mean, the fact that Suncor’s P/E ratio next year is only about two points higher than the P/E ratio for Apache and Anadarko, means that North American investors are not valuing stocks the way we say they should be valued, which is the value of unhedged reserves in the ground in politically secure areas of the world. They’re valuing them on a price to cash flow basis.
So, here you’ve got Suncor – I’m just using that as an example – with roughly four times the reserve life index of Apache or Anadarko, who are fine companies, and it’s not selling at a gigantic premium to them. So it may be that if the stock market won’t do this rationally, Big Oil will solve the problem for it.
My suggestion for it is, that the stock market should solve it by revaluing them. That’s what I told the CFA conference. This whole concept of secure areas of the world is so crucial. For example, looking at the mining industry, we’ve got a Peruvian election coming up now early next year where there’s a possibility of somebody backed by Chavez who could become the new President of Peru. Well, Peru is the number four producing copper area of the world. And it’s privately-owned copper companies. All of a sudden, the risk index for reserves of copper in Peru could be altered dramatically, as to what they are now.
So, we come back to Alberta, where this isn’t going to happen where you’re going to have some foam-flecked Castro-ite nationalist who’d be looting your assets. So, to have them in Alberta, with that kind of geographic location and zero political risk, seems to me there’s going to be a premium applied on that. And I’m not suggesting that’s the reason to buy the stocks. I’m suggesting they are cheap, cheap, cheap, relative to other producing oil and gas companies. Okay?
Caller 4: Okay, I still wouldn’t mind an actual figure. If you were sitting behind the desk of the Suncor CEO and someone said I’ll cut you a check for X number of dollars, you know, where do you accept it?
Don Coxe: Even if I had a faint idea of what price would be acceptable to Rick George of Suncor, I would never be so imprudent as to suggest it on a call like this. So, my thought is, the best thing is for investors to drive up Suncor’s P/E ratio relative to that of other oil and gas companies and the market can take care of itself and we wouldn’t have to go through all this. Thank you.
Caller 5: My question for you would be, what would be your answer to a skeptic such as, let’s say, Imperial Oil’s CEO which stated this week earlier about the dangers in Canadian oil sands. Thank you.
Don Coxe: What dangers in Canadian oil sands did he cite? I didn’t see that story.
Caller 5: About the huge input of money building these upgraders, up at Fort MacMurray.
Don Coxe: Oh, yeah. Well, there’s no question that when you’re dealing with a non-stop boom, this is something that raises fears in an industry. But remember, that the Big Oil – and Imperial Oil is part of the biggest oil company, ExxonMobil – Lee Raymond has consistently said that oil prices are not going to stay above $45 a barrel. And as a matter of fact, he said we wouldn’t even get there.
And so, it is more or less, public policy of the Exxon organization to say these prices are too high, they could fall and anybody who’s coming in to our territory here and is going to build facilities is probably wasting their money. I am not challenging their good faith, I’m saying that they’ve been pretty consistent in saying oil prices are going to fall back. They’ve also been pretty consistent in pouring money into an area which is producing gigantic returns because of high oil prices. And there could be a modest disconnect between these two acts, one of which is spending money and doing things and producing profits and the other is issuing press releases, but I leave that up to you to decide.
Thank you all for tuning in to the call, we’ll talk to you next week from back in Chicago.
Don Coxe Profile from the BMO websites:
Donald G. M. Coxe is Chairman and Chief Strategist of Harris Investment Management, and Chairman of Jones Heward Investments. Mr. Coxe has 27 years experience in institutional investing, including a decade as CEO of a Canadian investment counseling firm and six years on Wall Street as a 'sell-side' portfolio strategist advising institutional investors. In addition, Mr. Coxe has experience with pension fund planning, including liability analysis, and tactical asset allocation. His educational background includes an undergraduate degree from the University of Toronto and a law degree from Osgoode Hall Law School. Don joined Harris in September, 1993.
Don Coxe Weekly Conference Call – Current
http://bmoharrisprivatebanking.com/webcast.asp
Basic Points – Archive
Basic Points is a monthly publication of opinions, estimates and projections prepared by Don Coxe of Harris Investment Management, Inc. (HIM) and BMO Harris Investment Management Inc.:
http://www.harrisnesbitt.com/bresource/basicpoint/default.asp
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