Don Coxe for this week
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TIME TO BUY CANADIAN
In this bear market, shopping at home makes sense. Except for tech stocks.
DONALD COXE
WHEN WILL IT END? I speak not of the reign of Jean Chretien, but of another long, tired run whose termination would evoke widespread cheering. The cub born in Nasdaq that grew into a global bear market has been bedeviling investors for 28 months. That makes it the longest since The Big One (1929-32).
The DNA of financial bears is programmed for producing pain, not longevity; financial bulls' DNA, in contrast, is programmed for producing excitement, pleasure and long life.
Bears being beastly, they discriminate: they are not equal opportunity predators. This bear has feasted primarily on technology-media-telecom (TMT) stocks, the kind that populate Nasdaq like locusts. His feeding has driven Nasdaq down more than 70 per cent. He also varies his diet with occasional courses of decaying and rancid non-Nasdaq flesh, diving into such foul fare as Enron and Tyco International.
Unlike his 1981-1982 predecessor, this is a deflationary bear who is accompanied by sharply lower interest rates. Investors fleeing from stocks to cash find that frightened central bankers have driven rates down to risible levels. (That earlier grizzly came at a time when those who fled to money market funds could earn 20 per cent or more. Today, no such luck.)
Like other scavenging predators, financial bears are useful. They dispose of messes and excesses created during the previous cycle. Since the tech bull market was the longest and biggest binge of the post-war era, the cleanup will take longer than usual. A reasonable forecast, based on past manias, is that Nasdaq won't reach a final bottom for years, probably in the 800 range compared to a peak of more than 5,000.
That long, hard decline is what happened to gold and oil stocks after they peaked in 1981 and 1982, respectively. They entered bear markets (both in absolute terms and compared to the S&P 500) that lasted until the millennium.
Although those who kept the faith in gold and oil didn't get to enjoy it, the greatest of all bull markets got underway just as yellow and black gold were beginning their long trips to the Slough of Investor Despond.
Something like that may be coming soon to global stock markets: tech stocks will, I believe, decouple from the rest of the market, permitting a new bull to be born. The TMTs will lose their status as the centerpieces of most market commentary, and will gradually be marginalized as investors flock to shares of companies that for so long suffered with the scornful label "Old Economy Stocks." Nearly everything old will be newly interesting again, while the "New Economy Stocks" will evolve from being painful to watch, and even more painful to hold, to being merely boring.
When will the new bull's birthday come?
No man knoweth when the hour cometh: the readiness is all. An investor who has fled the stock market, taking the pledge not to buy stocks again, should restate her pledge: "I will not buy tech stocks again." (Yes, some tech stocks will rally strongly, but looking for new investments in bear country is high-risk hiking. Seek rather in the sun-lit uplands populated by bulls and other congenial animals.)
Almost unnoticed amid the fury of the bear's assaults has been the sustained profusion of good economic news. Apart from the crises afflicting Argentina, Brazil and Turkey, the global economy is putting on a mildly impressive display. The snapback from the 2001 recession has not been thrilling, because that downturn was the mildest of the post-war era. (It didn't even qualify as a recession in Canada.) It is a measure of the gargantuan excesses of the technology industry that it could suffer such excruciating pain from an economic gastric episode that turned out to be the mere buildup to a belch.
Investors who move back into the market now will be rewarded. That doesn't mean the market can't fall further: it isn't cheap and there are undoubtedly more accounting scandals to be exposed. But a synchronized global economic recovery at a time of low inflation and low interest rates is a fine economic backdrop for equity investing.
As discussed in this space two months ago, the bear market for the American dollar is an important factor in the global investment scene. It explains why large-capitalization U.S. stocks in general have been hit hard: global investors are reducing their heavy exposure to the greenback, which means they're reducing their heavy exposure to large-cap U.S. stocks. (They don't own many small-caps.)
So it makes little sense to put large-cap U.S. stocks at the top of your shopping list. It also means you shouldn't concentrate on U.S. stocks period. The American dollar will continue to lose ground against the loonie, so you would have to make great U.S. stock picks to offset your currency losses. Better to buy European, Asian and Australian stocks.
Better yet: add to your Canadian equity holdings. Canada now boasts (would you believe?) one of the world's strongest currencies and one of the world's strongest economies. So shopping at home makes good sense. Concentrate on groups that benefit from the recovery -- oils, golds, hotels, base metals, papers, auto parts and banks.
For some reason, bear markets seem to be at their worst in September and October, so the worst ursine fury may still lie ahead.
But a new bull is on his way.
Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. His column appears every week.
dcoxe@macleans.ca
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