Latest from Coxe:
Don Coxe
November 19, 2004
Chicago
Chart: Japanese Yen
Comment: “Is The Great Symbiosis Dead?”
Highlights
Last Basic Points suggested that the only way out for the US to solve its problems was to devalue the Dollar. Since then, the USD story has moved to Page One. That raises the question if the big moves in currencies and gold is a bubble. I think not.
The theme of the USD being in a long-term bear market has been in place since 2002, it was a matter of timing as to when we get to the next phase. The Yen breaking 105 is a historic occurrence, without intervention.
Has the world really changed? Is the USD in a free market/free fall? The arguments against that:
- G20 meeting in Berlin, currencies aren’t on the docket although the finance people are there
- Japan may not have wanted to go in to the meeting with the Yen pegged.
- Dollar/Yen relationship now is very close to where it was when the USD took off against the continental currencies and the Canadian Dollar, Aus. Dollar, NZ Dollar and the Rand, in 1995. Appreciation of the USD against the Yen has only had a minor effect on the Japanese trade deficit.
- Move in the Canadian Loon has only just begun in terms of what’s need to get the US/Canada trade back in to balance. How long that will take, I don’t know. Forecast is for par, close to the all-time peak, required to get the US back in to shape.
Greenspan made a long speech on the USD. Financing the US current account deficit has been pretty easy to date but it could become more difficult. Doesn’t really rebut the administration’s position on the USD – a strong dollar whose value will be set by the market (an oxymoronic approach).
The strong Dollar policy was a great piece of marketing that helped attract foreign investment to the US, but it killed millions of American jobs. The next issue of Basic Points develops these themes in more detail.
From an investment standpoint, the groups that we’ve been talking about continue to do well. IBD ranking (197 groups), Canadian inter-listed O&G stocks rank #8. Gold and Silver stocks are #16, ahead of metal ores group (PD, Inco, etc.). A first decile performance by the base metal group and strong first decile performances by the O&G producers and the PM stocks.
These stocks sold off in January but we stuck to our positions and now they have recovered. We haven’t changed our views, we have only changed our emphasis that new money to be put into the group should be put into gold. That is not changing. Gold stocks have had a lovely run over the last couple of weeks but there’s still lots more to go here because this really is a group for American investors to build internal protection in their portfolio against the falling Dollar.
Lots of questions about the new ETF and lots of interest in it. The only reason I don’t recommend it is because I am not clear on how it’s going to be taxed. Don’t see it as a security, but not sure about that. I like the leverage of reserves in the ground that aren’t hedged, so sticking with the big, strong, liquid gold stocks (PDG, GLG, NEM).
These stocks are going to get driven to valuations that will make your head spin.
But it’s simply because, for a lot of investors it’s the best way they can play the falling Dollar.
The gold stocks have been rising along with the rest of the market but at some point we are going to get a parting of the ways between the golds and the rest of the market and I think the golds will continue to move up but this melt-up that we’re seeing in the stock market up until this morning at least, with the rest of the stock market, particularly the tech stocks doing so well, I’m very skeptical of this because of my oft-repeated fears that we’re going to see a slowdown which is…you know, based on historical evidence, when you’ve had a huge increase in oil prices, although there’s a lag time to it, what you get is a slowing of the economy.
That is one of the things working against the US economy now. Even though the Dollar has been falling the US trade deficit has widened because we have not had what we need which is the surge in capital investment to create goods that will replace imports and to manufacture goods to be sold abroad. US businesses are not convinced that this is still a country to invest in. And we’ve still got the healthcare problem.
Nice move in the dividend paying stocks also. Bush re-election affirms that this is a good strategy. More and more people buying stock in their retirement portfolios which mean that people are becoming more like partners of the businesses, like Warren Buffet. People are less prone to short-term volatility and give tremendous support to a stock.
Finally, the question of whether we should be in stocks at all right now. As long as you’re in the stocks that either still benefit from the growth that there is, which includes the oils and the base metals which tied to the Chinese growth which is still going to continue albeit at a reduced level, then what you’re not doing is taking a big bet on growth that may not come.
Five months straight of the leading economic indicators falling are a strong sign that a downturn is coming and that is not what you want to see when the market is making new highs.
The Dollar problems are going to start showing up in the relative performance of US vs. European stocks. Global investors want to own assets in a strong currency and are less concerned with growth prospects.
For those who say you shouldn’t be speculating in currencies, that it’s a mug’s game and you should just be looking at the fundamentals of stocks, let me explain that it’s very, very important that you get it right. If you were a European-based money manager from 1995 to 2002 when the Dollar rose about 40% against European currencies, if you didn’t have full weight in the US or overweight, you lost business. Because your competitors were able to get huge returns even if they were lousy stock pickers in the US. Similarly, we go to a situation where the Dollar is falling, then if you’re overweight the US, you’d better have fabulous stock picking skills, because you’re going to be showing poor returns.
The basic investment challenge is going to be different in this decade, because in the last decade for Americans the fact that their currency was going up meant that the P/E ratio in their market rose relative to other markets and they did well. For investors abroad who invest in US stocks, the rising USD gave them a huge bonus or even a bonanza in returns. Well now, it’s going the other way. So therefore what we have to do is get back to what companies are actually worth, you have to look at how they get their earnings, how much of it comes from other parts of the world. It is a more complicated story.
This is a different decade. It’s different in the currencies and of course it’s different in where most of the money is being made which is in the raw materials as opposed to finished goods.
We have changed three of the fundamental conditions of the 1990’s as to where you made your money. In the 1990’s, if you didn’t have a good exposure in tech stocks, you underperformed. If you didn’t have a great exposure to the American Dollar, you underperformed. And if you didn’t have a very small position in raw materials, you underperformed. That’s all changed. And yet what we still have is people who go back to what they say is history which tells them what they should be doing now.
So the currency story is just part of the fact that we’re in a very different world for investing.
--
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.
Don Coxe Weekly Conference Call – Current
jonesheward.com
Basic Points – Archive
Basic Points is a monthly publication of opinions, estimates and projections prepared by Don Coxe of Harris Investment Management, Inc. (HIM) and BMO Harris Investment Management Inc.:
harrisnesbitt.com |
