Latest from Coxe:
Don Coxe
November 12, 2004
San Francisco
stockcharts.com[w,a]daclyyay[pc50!c100][vc60][iUb14!La12,26,9]&pref=G
Chart: US Dollar Index
Comment: “When The Eyes Stop Watching Oil, They Will Start Watching Currencies”
Highlights
Definition of Rule of Page 16
Currencies not a Page 1 story, oil is still the Page 1 story
Oil is now free-trading, driven by supply and demand
Conflicting stories on oil, president of Totale expects $30 oil next year, the US Energy Agency is using an average price of $42. Coxe thinks $35-40 is the range, assuming slower global economic growth. Partly due to higher oil. Partly due to structural problems in US economy.
Major adjustment of global currencies next year. Economic recovery has matured, we have adjusted to higher oil prices. Slowing of global economic growth next year, easing in the price of oil. Oil stocks are not pricing $35-40 oil (they are still undervalued).
New money commodity investment should not go into oil, not at the top of the list but do not scale back, stay overweight, they are still cheap. Concentrate on where the best near-term values are. It’s gold, because of the Dollar.
20,000 listeners on the call now, they are looking at adding a chart mechanism.
US Dollar Index – pretty serious sell-off year-to-date. Massive support up until May due to The Great Symbiosis described in an earlier issue of Basic Points (US, China and Japan). South Korea has been intervening lately, bought $2 billion in Treasuries. What was interesting was their justification. They said that their currency has appreciated excessively compared to other currencies in the region.
Significance of the story is that as the Dollar gets devalued, each country is going to look at their own position in this and how it’s effected. Next issue of Basic Points, Coxe will address the effect on US trading partners on coming devaluation over the next 12-18 months. That thought process is already proceeding in these other countries.
If Japan and China cut back their USD support, what will cause the next move down in the USD is something like this sequence of events:
- Decisive break through 1.30 on the Euro, we’ve already got the decisive break on gold through 430 and the CAD through .80, a matter of when, not if. Euro is the only major alternative to the Euro. Don is focusing on the minutiae because that is what the currency traders are watching. Break points DO matter. TA works better than anything else on currencies. Will central banks intervene when 1.30 is broken? French central bank may be posturing to rally other CB’s to intervene, Coxe thinks he will fail if that is indeed what they are doing. Delaying the inevitable.
- China continues to grow in a way that supports the base metal side of things. Those who got shaken out in the Spring, look at what’s happened to FCX and PD now. PD close to an all-time high. Easy to write it off as related to the Chilean strike. In base metals, in 1 ½ years, we have drained the inventories of the five key industrial metals from the LME, COMEX and Shanghai, while prices were up 50%. Wiped out years of inventories and drove prices up. Supply and demand are out of balance. China’s growth rate can use more than 100% of current production. Further pressures are anticipated. Commodity prices are set at the margin and tiny developments are having outsized price impacts.
- Gold emphasis now due to expectation that currencies story is going to move to Page 1, even if briefly. Most Americans don’t think the USD story is an important one. They don’t travel outside the country much, don’t think of USD as something that can be severely at risk. One of his clients in SF made the case that there is really no alternative to the USD. Everyone wants to own Dollar securities. This is such a widely held view that it is difficult to get Americans to focus on this story.
- Not the case in Europe, this is a major concern in the press there. They are attuned to the developing risks here. If you were based in Switzerland or Europe from 1995-2002, you got 45% returns on US stocks even if the stocks were flat (due to currency difference), so fabulous returns based on currency moves. Global investors are very concerned that easy money is being taken away and they could lose vast amounts even if US markets go up.
- As it sinks in on US investors, they will start to realize that something big is happening here and will start to think about how to play it. This will be the focus of the next issue of Basic Points. DC does not think anything can be done to prevent it [the fall in the USD]. There are still big doubts about this based on what he hears in client meetings. The only way it can be proved is if it actually happens. It has taken ½ trillion to prop up the USD at a time when the economy has been outperforming. What will it takes if the economy slows?
- Boom in asset-backed securities was written up in the Wall St. Journal, the latest hot thing. Consumers are finding home equity loans as being a good alternative to credit card debt but this represents past spending, where will the next consumers come from?
- Gold is getting near a 16-year high again and that is signaling a change in the direction of the winds.
Build into your portfolio sufficient inverse correlations, so that you don’t just have a one way bet on further economic growth. The most cost efficient way to do that is with the gold mining stocks. Build in some protection into your portfolio.
Wall Street Journal has had the wrong view forever on the USD. [They had an editorial this week attacking devaluation]. WSJ is being carried away with an outdated ideology.
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Q&A
Q: Should Canadians own Euro bonds?
A: DC doesn’t understand why Canadians own European bond funds in their RSPs. Many of those funds are heavily involved in US bond markets. That’s a one way ticket to poverty. If you want foreign bonds, but Euro-denominated bonds. Canadian bonds are about as attractive as any in the world. Stay right at home.
Q: Historical correlation between commodities and LT bonds in the US has been strong, if we are in a new commodities bull, won’t interest rates move shortly?
A: Thesis for past couple of years is that China is driving inflation in commodity prices but is simultaneously preventing inflation in finished goods. China is creating housing bubble in North America by buying Treasury bonds which keep interest rates at levels that make homeowners willing to trade up and apartment dwellers willing to buy homes. US has outsourced its raw materials pricing, its finished good pricing and home pricing to China. This is all at the margin, but its enough.
Clearly we will have higher US interest rates at some point but driven less by commodities, but because we don’t have massive intervention. LT bonds are not a great asset unless you assume global economic growth and that the level of intervention cannot increase and will probably be cut back. LT bonds are only good if you are postulating a recession, that would be devastating for the USD making intervention very expensive.
Commodities will have a better year next year than they had last year, except for oil.
Q: USD decline is a benefit to US exporters. Food production companies are a gorgeous hiding place that can’t be beaten up by foreigners. Comments?
A: DC has been speaking to many people in the food industry on this trip to SF and they agree with this view that food is a wonderful industry to be in, in this currency environment. US competitive position vs. Brazil is improved by decline in USD. Huge changes in revenue streams and competitiveness. He has not addressed this in the calls because of the large numbers of stocks in the sector. Look at the small cap stocks in the sector, they stand to win big. This is a big story, one that he has not touched on.
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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.
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