Don Coxe INVESTMENT RECOMMENDATIONS
1. The two most important forces in equity markets since July 13th have been
powerful strength in financial stocks and pathetic weakness in commodity
stocks. Since they have been inversely correlated for more than a year,
investors should assume that the commodity stock bear market will
continue until the financials roll over. The F&F bailout is merely the second
act in a tragedy that has an unknowable number of acts to come.
2. When the financials do roll over, gold and gold mining stocks should
move swiftly back into favor. Inflation remains above central bank target
levels in the US—and in many other countries across the world. And any
return to pronounced weakness among the bank stocks will be strongly
bullish for gold.
3. With OPEC’s token production cut failing to impress the markets, oil prices
will fall further. It won’t take more than a few days of even 750,000 b/d of
production above consumption to drive oil prices down. Conversely, any
outbreak of civil strife in Nigeria that affects offshore production could
have a sudden upward price impact. We expect oil to trade in a range of
roughly $80 a barrel to roughly $130 a barrel next year, but we have no
great confidence in that forecast. We are more confident in predicting
$150 oil within the next three years, as the next global economic recovery
unfolds.
4. Barring an early killing frost, this year’s US corn group will be a barnbuster.
What next? Corn is in modest contango for the next two years’
crops. Because contangos are so unusual these days, and because grains
have such high producer/consumer participation across the curve, this
is to us a sign that farmers and users are believers that high corn prices
are here to stay. That means the fertilizer, seed and equipment stocks are
cheaper now, relative to forward corn prices, than at almost any time in
the past four years.
5. The pullback in oil prices and the dramatic bank rescues should have been
enough to send the S&P back into bullish mode. It needs to break 1310
on the upside to take away its bearish condition.
6. The real yield on the Treasury 10-year is now a negative 145 bp. On a
two-year hold, this means there could be more endogenous risk in nominal
bonds than in most blue-chip non-financial stocks. The rush out of TIPs
into Treasurys is doubtless driven by the unwinding of F&F exposures, but
the long Treasurys are now seriously overvalued.
7. The biggest near-term upward surprise in commodity prices could
be natural gas if (1) the sunspots don’t reappear, and (2) the historic
correlations of gas to oil reassert themselves.
8. The Canadian dollar is being hit by the commodity price plunges,
deterioration in the trade account, the worsening economic outlook
in Central Canada, and the uncertain outlook in the October election.
Whether Tories or Liberals win in Ottawa, Canada’s fiscal situation will
continue to be superb compared to the US, particularly if Obama wins. We
remain very positive on the loonie as an alternative to the greenback.
9. US election campaigns can be excuses for bold acts by foreign adventurers.
Although President Bush was a non-person at the Republicans’ Convention
after he gave his brief speech by satellite, he’s going to be President for four
more months. The world should hope that rogue states think about that
before deciding that Washington will be too distracted by the election to
do anything about a surprise attack or invasion.
10. We have no clear idea how long it will be before we can look back to
today’s prices for commodity stocks and say, “Wow! I wish I’d loaded up
then!” We remain certain that day is coming.
