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[Excerpted from Bill Cara's Week in Review]

This was a strange week where U.S .equity markets fared badly, except for Friday’s closing half-hour. The German and UK markets, which closed up on Friday, missed the full extent of the late session rally in the U.S., and so closed down on the week.

The U.S. retail stores sales data was terrible. Traders are not thinking mañana; they sold Consumer Discretionary stocks (NYSEARCA:XLY) down -8.8%. Bankers too were being squeezed as T-Bill yields dropped almost to zero (annual yield of +0.22%). People fall into two camps: (i) no money, or (ii) unwilling to risk the money they do have.

There was an interesting discussion this weekend I took note of:

[Don Coxe interview in Nov 10 Barron’s] “Stocks are cheap but they can get cheaper; we know that. We got back to the Dow having a multiple of 5.9 in December of '74, which was the foundation of Warren Buffett's wealth because he started buying at that level. The Dow isn't anywhere near 5.9 (its multiple last week was 11), but some of my favorite stocks are trading at lower P/Es than that. I can tell you they are the fertilizer, oil and agricultural companies.”

“When I came back from a trip two years ago, I said the biggest commodity story is going to be food, bigger than the other ones. It is high-protein food. The way to play that is through the fertilizer stocks, the genetically modified seed stocks and the farm-equipment stocks.”

My response: Other analysts have also compared this market to 1974 P/Es. It is a different situation entirely. The stagflation in the 1970s was much higher, with bank rates often in the mid-teens, and it sucked the P/Es right out of the market. I have no clue why analysts don't look at the data… But, I do like Don's picks.

Apparently, Don (the BMO strategist) likes, in order: (1) agriculture, (2) gold, (3) energy.

I do agree with his picks. But I also believe the broad market P/Es are right where they should be in a long-term cycle bottom phase. Also, it’s the cash flow per share multiple that is more important today, as cash is king.

There are so many junior oil and gas companies that are selling at minuscule cash flow multiples, and have very low debt service costs. Obviously, if the companies are in North America, they have no trouble selling their products. As traders start to take on more risk, the junior energy stocks will soar.

And I agree that food is going to be in huge demand, which makes the need for fertilizer a given. In China for instance, I think the government has committed to a policy of moving hundreds of millions of people from their tiny farms to homes in the city, which will help (i) create a broader-based consumer economy, and (ii) organize the development of large farms like in the U.S., which are far more efficient. That policy will help the fertilizer companies and the manufacturers of farm machinery.

As for gold, I see that governments around the world have been working out economic rescue programs. The problem there is that money doesn’t come on trees. It’s expensive. You can print it from paper from trees, but the cost in devaluation of what it represents is very high. Nobody more than Americans are committed to these bailout programs. So, ultimately the winners will be those who avoid bonds and who buy physical commodities and gold.

So, I do think Don Coxe is making mostly accurate statements.

Source: The Winners Will Be Those Who Look to Gold and Commodities