Don Coxe Investment Recommendations April 2008
INVESTMENT RECOMMENDATIONS
1. In long-only equity portfolios, continue to underweight Wall Street banks
and others that have been reporting high exposure to perfumed products
of indeterminable value, including those which last year revealed—under
duress—high exposure to SIVs. Within the financials, emphasize those
whose loan losses are of the traditional, cyclical variety—not in derivatives
or in untraditional banking businesses. Good banks that have stuck to
their knitting—and whose CEOs compensation has suffered along with
their stock prices—should be retained.
2. In long/short portfolios, be long commodity stocks and short bank stocks
that make headlines for untraditional losses. That trade hasn’t been
working lately, but it remains an overall portfolio risk-reducer. The list of
banks that have shown great skill and profitability by going heavily into
new kinds of products and new kinds of accounting is roughly as long
as the list of major copper, oil and gas producers that profited by selling
heavily forward.
3. A financial-led bear market within a financial-led recession can be
particularly perilous if central banks run out of ways to reflate the
system—and surprisingly benign if the central banks’ rescues remain
timely. To date, the central banks have been up to the job—if propping
up a badly-behaving financial sector is a key component of their job
descriptions. Result: the overall stock market has outperformed our
expectations. We still don’t like the risk/reward ratio.
4. Dividends become more attractive as central banks cut rates. The problem
for investors is that many of “The Great Dividend-Paying Stocks” are
financials that have been reporting ghastly blunders. In many cases, their
payout ratios have climbed far above the 50% threshold that has made
these stocks better investments than bonds. Opportunities remain—and
dividends may be the only positive return most US stocks will deliver this
year.
5. Although North American consumers have yet to see the cost pass-through
in major foodstuffs of $6 corn and $8 wheat, it will come sooner or later.
Based on past periods of food inflation, one of the first consumer cutbacks
is on eating out. Restaurant stocks are especially unappetizing when food
costs soar out of control.
6. Gold has pulled back from its high because the dollar stopped falling
and the bank bailouts seem to be working. Remain overweight gold as a
clear-cut hedge against further bad news on both those fronts.
7. The Canadian dollar decoupled from the euro, failing to rally to new
peaks—which makes little sense to us. US clients should continue to use
Canadian government bonds and Canadian short-term investments as
alternatives to Treasurys and US cash.
8. Within the commodity group, continue to accumulate the leading
agricultural stocks. Given the spectacular performance of the fertilizer
stocks, the best bargains currently on offer are in the farm machinery
companies. The global food crisis will almost surely cripple the opposition
to GM seeds, which means the seed stocks have great upside room.
9. Within debt portfolios, continue to emphasize inflation-hedge bonds—
preferably in strong currencies. Treasurys remain overvalued, despite the
recent strong run-up in yields from barely-observable levels.
