BASIC POINTS INVESTMENT RECOMMENDATIONS
INVESTMENT RECOMMENDATIONS
1. The fi nancial crisis is not centered in stock markets. Its primary locus is
in fi nancial derivatives, and in their impact on the stock prices of leading
banks. Until the downward drift of bank stocks and the upward drift of
derivative debt yields is reversed, the stock market will continue to slide.
Keep overall equity exposure to minimums, and emphasize quality.
2. Bond investors face two risks: infl ation and credit. Nominal Treasury
bond yields are far too low, and quality corporates are too rare—with 71%
of corporate debt junk-rated. Buy infl ation-hedged sovereign bonds—
preferably in major foreign currencies. Simplicity is Good: avoid complex
products that are subject to drastic rating writedowns.
3. Commodity stocks are at risk to the extent that the fi nancial frauds and
foolishness are able to abort the global economic recovery. A US recession
would be good news only for gold stocks. It would be bad news for base
metal and steel stocks, and negative news for oil stocks. Agricultural stocks
should not be hurt, except that major bear raids will likely spew blood
broadly across stock markets.
4. Any panic-driven selloffs in commodity stocks is unlikely to take them
off the top performers lists for more than a few weeks. They are not just
fair-weather friends. Not only are most of the majors very cheap on a
forward-earnings basis, but mining and oil companies which ordinarily
search for resources in remote regions will take advantage of selloffs to
acquire reserves in politically-safe regions at bargain cost. Coming out the
other side of this slowdown, these stocks will experience big increases in
their absolute and relative P/Es. Some day, a big SWF is going to decide
that bailing out banks isn’t as profi table as owning matchless reserves of
minerals.
5. Food price infl ation should strengthen through the year. It could be
offset by broad price declines across the US economy as it struggles with
recession, but it is becoming imbedded in the global economy, and will
be a challenge for many years. It will produce a full-blown crisis when a
major crop failure occurs.
6. The Canadian dollar trades right around parity. It might not climb sharply
higher if a US recession is confi rmed, because of the impact on the
industrial sector and tourism. It remains a fundamentally strong currency,
and the greenback remains a fundamentally weak currency. Canadian
borrowers should borrow in greenbacks.
7. Gold’s move has been dramatic, but retail investors in North America and
Europe have not yet shown signs of true gold fever. That means there is
still substantial upside. Soaring silver and platinum prices confi rm that this
gold move is no mere spastic twitch. The expression “As good as gold” in
reference to Treasurys and other US debt instruments should be restricted
to use as a warm-up joke at investment policy meetings.
8. Defense stocks have solidly outperformed the S&P for most of the Bush
presidency. Iraq and Afghanistan have run down a wide range of Pentagon
inventories and a new generation of fi ghter jets cannot be postponed
much longer. No matter who wins the Presidency, these companies should
continue to prosper.
9. Sovereign Wealth Funds have been buying US banks. Wall Street cites these
purchases as evidence of great value in bank stocks. For nations which
are overweight Treasurys in their holdings and underweight infl uence in
American politics, swapping Treasurys for bank equities and convertibles
makes sense. That does not necessarily mean that the stocks are great
value for investors who cannot get other—unspecifi ed—returns on their
investments.
10. Use panic days to strengthen your equity portfolio, buying the agricultural,
gold, and oil stocks you will want to own after the bear retreats to his
cave—and selling stocks that are too dependent on US consumers. Retain
your quality base metal stocks: they may well be taken out by other mining
companies, or a Sovereign Wealth Fund.
11. The US smallcap bear market may be overshooting because investors
haven’t analyzed the likely improved competitive positions of companies
whose principal competitors were bought by Private Equity or are Canadian
or European companies hurt by the weakening dollar.
12. Be like all wise cottage owners: Protect your possessions from Rats.
