Replies to post #11347 on SEASONALITY STOCK REPORTS

[flota]

Don Coxe
> January 27, 2005
> Chicago
>
> Chart: TS Oil Index
>
>
> Thank you all for tuning in to the call which comes to you from
> Chicago. The chart that we faxed out was of the TS Oil Index
> showing you how over the last two years we've just had this
> sustained upward growth. The question is, will this year be like
> its' predecessors? So this call is tied in to the next issue of
> Basic Points which will be going to press on Monday. And I really
> want to unfold with you that I think the oil story is going to
take
> a twist this year that although I've referred to it lightly in
> previous calls, I think will become a major one, which is, that
this
> is going to be a year in which the Alberta oil sands are going to
> become a concern for the whole world.
>
> So for those of you who don't listen to the whole call, my message
> is that I believe that everybody, investors of all classes, should
> have significant exposure to the Alberta oil sands stocks.
There's
> only three pure plays there, which is Suncor, Western Oil Sands
and
> the Canadian Oil Sands units, which are a royalty trust. And
Suncor
> is the one that everybody knows about. Suncor's had the bad luck
to
> have yet another fire – this one's a bad one – and the word is it
> may cut off half of their production for this year.
>
> But then there's all these other stocks that you can get exposure
in
> varying percentage weights, which includes the Superior Oil's and
> the Nexen's and the Shell Canada's of this world. And
PetroCanada,
> they all have varying degrees of leverage per share.
>
> But the background to this is that I believe that at the highest
> levels, which is Washington, the Kremlin, Beijing, that what we're
> getting is an understanding that the oil situation is not going to
> get better. The risks are very high and that the great powers
have
> to make arrangements to protect their position in oil.
>
> In the case of Beijing, the situation is potentially serious
because
> they're relying right now on the Middle East. And there's no
> question that if the Iraqi Experiment fails - and I say
experiment,
> it could fail – that things could get a lot worse in the Gulf
states
> region. Those are very fragile sheikdoms. Osama bin Laden in his
> latest rants has been focusing more attention on Saudi Arabia than
> he has on the United States or Europe.
>
> And so I think that at the strategic level, that what we have is a
> situation where we're going to have an attempt to line up
> participation in what is the largest amount of proven reserves,
> proven, probable and possible, highly possible, reserves that
there
> are in the safe world. The largest deposits still are in the
> Orinoco Basin of Venezuela, the same kind of stuff that's
expensive
> to develop, but given the political risk problems now of major
> investments in Venezuela, they are not a reliable source of
> development.
>
> So what we have in Alberta then is a combination of a very
reliable
> politically area of the world. We have that the provincial
> government is going out, Ralph Cline and his friends have been to
> China, they now have their own representative in Washington and
> they're trying to get more capital for further development of the
> oil sands.
>
> But, now with the Chinese coming in there and trying to get
control
> of the pipeline to Prince Rupert for their own tankers, this
changes
> the geopolitics of the region. Then we add in to it the problems
of
> the big oil companies with their reserve life indices because
> they're, they had bet their chips on things getting better in
Russia
> and what Putin has made clear is that deals that were negotiated
> before he came to power can be torn up. And what this has done is
> put at risk major investments such as BP's TKN investment and
> ExxonMobil's Lee Raymond has announced that given the changes in
> Russia that he's no longer confident about committing his
> stockholders money there.
>
> So what I think is that we're going to see more concern about
these
> reserves than we have ever seen before. And what it means is that
> the kind of performance that you've seen lately in Canadian Oil
> Sands Trust which has been spectacular in the market, may just be
a
> precursor of what's to come. Suncor's stock, if it weren't for
the
> fire, would also have been on fire this year.
>
> Now, what we've discussed in Basic Points is that Bush's entire
> foreign policy which really matters, is based on an Asia-centric
> foreign policy because the kinds of concerns that he sees going
> forward which are the nuclear development, including missiles, of
> North Korea, the Taiwan Straits issue between Taiwan and China.
>
> These are things where he really needs to get friends and
relations
> and he's very much aware of the problems that Putin faces in
Russia
> and that although the Western press makes out that Putin's
terrorist
> problems are due largely to his own repression of what the
> Communists used to call wars of national liberation, there's no
> doubt about large scale involvement of Jihadists. And sometime
over
> the next twenty years, according to the President of Romania,
> Russia's going to be 20% Islamic.
>
> So, all of this, from the standpoint of what Bush's priorities
are,
> which is that the United States cannot be at risk from a madman in
> Korea with nuclear-tipped missiles and winning the war on terror
> means he's got to focus on Asia. And then you have this major
> development then of China being, with help from India, having
> changed the entire balance of pricing and power across the range
of
> the major commodities.
>
> Bush has a commodities background. He may not be an expert in
much
> else in the business world, but he sure knows about the triple
> waterfall crash of oil and about where the oil is in the world.
So
> I've discussed this…this will be the longest issue of Basic Points
> we've ever published. And, so this is sort of an executive
summary
> which is that it all leads down to looking at the reserve life
> indexes of your portfolio and that the Alberta oil sands stocks
are
> the most efficient way to expand your reserve life index.
>
> I'm not predicting from that that that means that oil prices are
> going back up to $55 this year. I'm not saying they won't. But,
I
> think that we're looking at a situation where strategic buyers
which
> is China and Big Oil, may want to make a move this year, or if
not,
> next year into the Alberta oil sands. And Washington's made it
> clear that it would not look on a Chinese arrangement of taking
oil
> from the oil sands with favor.
>
> The United States has for the last two years of the Bush
> administration referred to these properties and how they protect
the
> US longer range interests. So we could be seeing then a situation
> in which some unpleasant words would be said. And all of this
means
> that from the standpoint of an investor, you don't get too many
> opportunities to invest in something where what you can say is
that
> very mighty forces may be at work.
>
> This is not speculating on a merger in the telecommunications
> industry or a merger in the mining industry. This is talking
about
> a resource which is becoming so vital in longer range strategic
> calculations of the great powers and of the big oil companies that
I
> think it's going to be revalued. Because nothing like this could
be
> achieved on any reasonable basis in the near-term by big oil
because
> of the risks in the Mideast, the fact that OPEC countries won't
let
> them develop crude and because Putin has changed the rules of the
> game in Russia and it's not really clear what he's going to do
from
> here.
>
> The only big oil company which has gone ahead with a deal with
> Putin is Conoco Phillips, they're going to own 20% of Lukoil,
which
> has already made a significant increase in their reserves. But
it's
> interesting, that was a deal that they struck in August with Putin
> in his dacha in Ukraine by the way, it was Russia of course
because
> of the Crimea. And they had this phony auction in October where
the
> auction was open for one minute and there was no other bidders
> except Conoco Phillips. The other big oil companies may not be
> comfortable with that kind of arrangement.
>
> And so, this may sound like a lot of talk about a few stocks, but
it
> ties in of course to the overall sense that we're going to, in the
> second half of this decade, see more and more emphasis on
acquiring
> control of resource deposits that have long lives. Oil is number
> one on the list, but I think the same thing is going to happen in
> the mining industry because China and then India are going to
> say "Look, we're in effect setting the prices for these
commodities
> and if you Western Capitalist investors are content to still value
> them on the basis of their short-term cash flows, we can out bid
you
> for those. We've got the money and we'll buy them ourselves".
>
> Well, that's some background then to what you're going to be
reading
> in Basic Points.
>
> Now, to talk further about what's going on in the marketplace.
>
> This year has started badly in the stock market. We've had three
> down weeks for the Dow. This looked the week it was going to turn
> around, but today the Dow has been a disappointment lead by a big
> drop in Caterpillar which is down and earlier in the day, the Dow
> was the only major index that was down and the S&P, the NASDAQ
were
> still up. But what we're getting is this pattern again of really,
> really good strength in the morning followed by weakening in the
> afternoon and several days when all the weakness has occurred in
the
> last hour of trading.
>
> That is a bad sign.
>
> So I think we have to allow for the possibility that January is
> going to be a really lousy month. Now, it's true that the January
> performance is not a sure performance for the rest of the year,
> there've been some good exceptions to that, 1994 being one, but in
> general you can say that a good January ordinarily, like two years
> out of three, is a good signal for the rest of the year.
>
> So, we're not going to get that. Why?
>
> Well, I believe that the reason we're not going to get it, the
rally
> that we had late last year was lead by NASDAQ over the Dow and
also –
> on the basis of quality – the worst quality stocks against the
best
> quality stocks. So, that's not the kind of rally that you can
> believe in.
>
> And so, what I was hoping for this year, if we were going to have
a
> good year for the stock market was a year in which the big cap
> stocks would do well, we've had six years in a row where small cap
> has outperformed, and that among the big cap stocks, the high
> quality stocks would perform well, because this was the time of
year
> where ordinarily there'd be big cash inflows to mutual funds in
this
> country.
>
> Well it turns out we've had an outflow year-to-date from mutual
> funds investing in US equities but we've had money going into
> foreign equities.
>
> Now that's a real surprise. Now, gosh knows, those of you who've
> been listening to this call for the last few years know that
that's
> been my advice for Americans, to move their money abroad. But,
the
> Rule of Page One is such that if all of a sudden this becomes a
> concept and then we have Davos out there, where according to the
> headlines, everybody is talking about the drooping or plunging
> Dollar. That same Rule of Page One says that maybe the Dollar
bear
> market – which is one of the reasons why the small investors, the
> mutual fund investors are moving their money abroad – maybe that
> Dollar bear market is due for a big pause.
>
> Now this has been a very, very good month for the Dollar. We're
at
> one thirty and a third on the Euro, well that's down over five
cents
> from the high on the Euro. That's a big, big move and to have it
in
> three weeks. So, that leads to the question, is there a solid
> reason behind this? And I did a conference call yesterday with a
> Canadian client with a lot of help from Doug Porter who is Senior
> Economist with Nesbitt Burns for those of you on the call who
don't
> know his work and he's been on this story, for which I express
> gratitude, and we spent three quarters of an hour talking about
the
> implication of this investment act which is going to be bringing
> back, somewhere, depending on your guess, three hundred to three
> hundred fifty billion dollars of profits American multinationals
> have abroad.
>
> Up until now, the situation has been if they brought the money in
> they'd pay full corporate tax. But they've got a short holiday
> which will mean they only pay five and a quarter percent tax. And
> the purposes for this are to get money to invest in the United
> States to create jobs here at home.
>
> And so, the real purpose of course was that they had to find some
> way of dealing with the Europeans that won a WTO suit on the
> technique that they had for getting around the tax disadvantage of
> American companies by creating these overseas sales companies.
That
> was found to be an unfair subsidy under WTO and the Europeans were
> imposing a terrible penalty on the US for that. So that was the
> real purpose for it, but as usual, when you put together a bill in
> Congress, you get all sorts of goodies, included in it.
>
> Now, since this is very important for the question of our Dollar
> bear market thesis and in a way then for the overall stock market,
I
> think it happens that today there's a very good article in the
Wall
> Street Journal about it, which I'll direct your attention to,
which
> discusses some of the things that we talked about on the
conference
> call yesterday, but what I'd like to do is quickly tell those of
you
> who are saying "Well, the sheer scale of this is such that we're
> bound to have the Dollar rallying strongly on a sustained basis",
> the doubts that I expressed then, I still have.
>
> First of all, that the companies with the most free cash abroad
are
> the big pharmaceutical companies and they have that money in
Puerto
> Rico, because that `s a virtually tax-exempt area and that's
> recognized by the US government. So that's why you have huge
> operations of all the drug companies in Puerto Rico. And they
tend
> to generate lots of cash because of their margins and that money
is
> kept in Puerto Rico. If they repatriate it to the US they have to
> pay corporate tax.
>
> So, Johnson and Johnson has already set up a big tax reserve for
all
> of the money they're bringing in, about eleven billion dollars I
> believe. And when you start multiplying this for the other drug
> companies, we're talking about a lot of money. And it's easy to
> come up with a list that gets us past the two hundred billion
mark,
> which, look that's more than one third of the current account
> deficit for the year.
>
> So that's a big argument in favor of the Dollar. If that money
> right now is in other currencies and is being converted into
> Dollars. And that's the big question that nobody knows. I'm
> convinced that in the case of the pharmaceutical companies, that
> money's been sitting in Eurodollar deposits. So the fact that
it's
> going to be moved in to the US, changes US monetary aggregates,
but
> it doesn't change the supply of Dollars in the world and therefore
> it's currency neutral.
>
> For companies operating around the world, the multinationals,
these
> currency deposits they have would be reflective of their local
> demands. If you're a multinational company with operations in
> Belgium or Germany, why you're not going to have American cash
> except for the inventory you're going to move of commodities, but
to
> meet your day to day needs you're going to have it denominated in
> Euros. And if you're in Asia you've got local currency needs.
>
> So I find it very hard to believe that anything where you've had a
> huge accumulation of profits will not have gone into Eurodollars
> already if they're planning on holding it there, but that the day
to
> day money will be in the local currency. So I think you're going
to
> take a haircut from these amounts for that.
>
> The other thing that arose in the discussions is what we could
> potentially see is US companies that don't have a lot of cash but
do
> have a lot of profits in a country, they're going to have to
borrow
> to generate the cash to ship to the headquarters in the United
> States to claim benefit of this. And then the question will be,
> since those assets are on their balance sheet now in foreign
> currencies, when they convert those into Dollars as a result of
> borrowing, that does produce upward pressure on the Dollar.
>
> So, we get it down to then, the subset of foreign multinationals
who
> want to repatriate money rather than leaving it abroad because of
> growth abroad and the money, if it's in cash now, how much of it
is
> needed to provide for local operations in which case it's likely
to
> be in foreign currencies. And how much of this cash accumulated
> over a long period of time and is tied to commodities in which
case
> it's already in Dollars?
>
> So, I guess as a result of that I'm not prepared to recommend any
> change in the Dollar strategy. I think we're still in a position
> where the Dollar bear market is with us and that's clearly having
an
> effect now on the stock market. And not just because of Americans
> but I suspect that because of foreigners.
>
> But, because of the Rule of Page One, given the Davos thing and
the
> unanimity apparently that was being expressed there, I'm inclined
to
> think that the current Dollar rally could go a little further
which
> means that the pullback that we've seen in gold could be
extended.
> But I'm not changing my view that you should have significant
> exposure betting against the Dollar.
>
> So I'm never willing to abandon what I think is one of my major
> longer term things on the basis of a short-term move. In other
> words, what I'm saying is that I don't believe that even this
> American jobs creation statute is going to change the direction of
> the Dollar for more than a brief term. The fundamentals are still
> there, the US needs to devalue and that means Americans are still
> wise to move money abroad.
>
> Finally, with regard to the metals component of our story, you may
> recall that it was about this time last year that a whole new
> cottage industry emerged which predicted a crash in China and was
> telling people to get out of commodity stocks and boy were they
> successful. They took Inco down by a third, took Phelps Dodge
down
> by a third, because the word was, there was going to be a crash in
> China or at the very least they were going to cut the growth rate
> down to levels that were going to really hurt commodity prices.
>
> And we were beset for months by a whole bunch of people that we've
> never heard of before who gave us authoritative analyses of what
was
> going in China. And they were unanimous in predicting that
China's
> economy was going to slow down and or crash. Well, we go the GDP
> numbers for the fourth quarter in China, nine and a half percent,
> which means they're nine and a half percent for the year and they
> were nine point three percent the year before.
>
> Some slowdown, some crash. No surprise that the key commodities
are
> higher than they were when we were being told to get out of them
> because the commodity rally was over.
>
> So, I'm not saying China won't slow down, but we're now at the
stage
> where the second derivative from these numbers, there will be so
> much demand for oil and copper and nickel and lead and zinc and
> aluminum that these stocks still look extremely cheap.
>
> So, the cottage industry, I presume won't go away. But when we
> reach the stage where there are as many Wall Street people who are
> experts on China's crash as there were who had any knowledge of
the
> base metals stocks, I thought it was an overdone situation,
>
> So for those of you who had the courage to hang tough with me
during
> those bad months through until June, congratulations because it's
> worked out for you and I think this year should be another good
one.
>
> So that's it, any questions?
>
> --
>
> 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://www.jonesheward.com/Commentary/p_Commentary.aspx