Of all the market commentators I regularly quote on this blog, Donald Coxe, Global Portfolio strategist of BMO Financial Group, has turned out to be one of the most popular. And rightly so, as Donald has been on the right side of the “big picture” investment outlook more often than most over the years.
His weekly webcast appears in the sidebar of my site, and has turned out to be a big hit as a result of its insightful and entertaining analysis of financial markets. (To hear the commentary, simply go to “Donald Coxe’s Weekly Webcast” and click on the photograph.)
Donald’s monthly investment report, entitled “Basic Points” (subtitled “Can’t anybody here play the game” for the September 2008 edition) has just been published and I deemed it opportune to share some of his words of wisdom with you in the paragraphs below (courtesy of Commodity News and Mining Stocks).
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 barn-buster. 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.