don coxe

 

Below is the latest basic points from the commodity expert, Don Coxe of BMO. We highlights his conclusions from his May ‘Basic points’ letter, and embedded the full document in scribd:

1. We renew our recommendation to hold a close-to-normal exposure to

equities relative to fixed income, emphasizing dividend and commodity

stocks, with a special allocation to gold and gold stocks. This week’s

admission by Germany that some higher rate of inflation is warranted

means that money-printing will eventually return in force.

2. Within the bond component, maintain an exposure to Quality High-Yield

bonds to protect overall portfolio income. In general, bonds other than

TIPS are unattractive at today’s record-low yields.

3. The Fed has a license to print money that all other central bankers can

only envy, and the Bank of Canada doesn’t really need one. So North

America will not be driven into recession even if the euro plunges into

the Mediterranean.

Overweight North American stocks and bonds relative to Eurozone

securities.

4. The shares of the US Main Street banks, whose business models are based

on serving consumers and small and medium-sized businesses, have been

on a tear for six months. Wall Street banks have massive exposure to the

euro. They claim they have it under control, an assurance they have given

before every disaster.

When investing in US bank stocks, investors should buy shares only in

the banks they know and respect. That kind of caution obviously doesn’t

apply to investing in Canadian bank stocks.

5. Continue to invest in companies oriented toward China.

China is gradually morphing into a normal, consumer-oriented economy.

Soon China will even begin to resemble us demographically: BCA Research

predicts that the demographic peak for the working population is only

three years away and China’s demographic profile will deteriorate rapidly

thereafter. However, because China’s banks are government-controlled,

rather than, like big US banks, government-financed, when they bungle

badly, there should be no banking crisis in China such as we have

experienced in the US and Europe. Another important difference: under

Obama, the national debt is up $4 trillion, whereas in China, the foreign

exchange reserves have risen $2.5 trillion in this century. China’s economy

will continue to outperform all the other large economies of the world.

Almost none of the people who would have had you believe Chinese banks

were going broke warned you about American banks that did go broke.

6. Even if you reject our counsel to invest in quality gold mining stocks, don’t

divest yourself of your gold. The central bankers are not only printing the

reasons to buy gold, but they are buying lots for themselves. You cannot

imitate the printing presses, but you can imitate their asset purchases.

7. Commodity stocks: We believe the worldwide campaigns of self-styled

do-gooding tax-exempts and over-rich people against mining and oil

companies are major contributors to their low stock market valuations.

There is not going to be a global depression—and people will still need

foods and fuels—and even some base metals. Invest according to the

behavior and consumption patterns of billions of people, not according

to the predilections of a few thousand rich parlor pinks.

8. We continue to believe that agriculture is currently, on a risk-adjusted basis,

the best sector for commodity stock investors. Yes, the US may be about

to produce its biggest harvests of corn and winter wheat in the nation’s

history, but there will ultimately be buyers for every bushel at prices

profitable for the overwhelming majority of North American farmers.

9. BHP and Exxon were among the mighty companies to buy big into

natural gas too soon. What was once the preserve of colorful speculators

like Chesapeake’s Aubrey McClendon is about to be rationalized because

drilling to produce $2 gas is an act of charity for the economy—and one

of the biggest contributors to US economic growth—and to the low level

of US inflation. We have probably seen the low price for natgas, but any

sign that it is headed toward profitable territory will mean that already identified prospects will be drilled. It’s too late to sell natgas stocks, but

too early to buy the pure plays.

10. The Canadian oil sands stocks hold reserves on majestic scale. Only some

of the potash mines of Saskatchewan have such lengthy durations. They

are currently in the gunsights of politicians and environmentalists who

want to prove they can, by working together, abort the birth of the new

Saudi Arabia. Unless the world has gone mad, the oil sands companies

will be allowed to prosper, from now until long after most of the world’s

currently known oilfields have been exhausted. Any serious long-term

investor should have significant exposure to these companies.

Don Coxe Basic Points May 2012 (1)