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Don Coxe
December 29, 2004
Chicago
Highlights
Next call will be in mid-January.
“The next five years are going to be a period of time in which we are going to have a huge change – even from today’s levels – in
- the weighting of US stocks in global indices
- the weighting of US bonds in the global bond market
- the weighting of Canadian stocks in the MSCI Global Index
- the weighting of commodity stocks in the S&P, the TSX and the MSCI Global Index, and
- the weighting of GDP as between the United States and other countries of the world, United States share of global GDP is going to fall.
And so, that trend obviously has begun, but what you need to know, in my view, is that the process which began, roughly at the time of the advent of the new millennium, that this process is just going to gain strength through the rest of this decade.
We’ve got a good precedent for that. What made money for you in the first half of the 1970’s, made money for you in the second half. What made money for you in the first half of the 1980’s, made money for you in the second half. What made money for you in the first half of the 1990’s, made money for you in spades and IMAX in the second half.”
“My bet is that the trends of this decade, which are that China and India become an increasing part of the global economy and define the way the global economy evolves to a degree that is amazing for emerging markets – that trend will just accelerate. That the US Dollar bear market will come to an end sometime in the second half of this decade. And the only question is whether it ends with a bang or a whimper. And so therefore the first caveat that I have for you for this coming year is the weather forecast is for pacific calm but with at least a 10 percent chance of a Tsunami.”
“This is a case – notwithstanding all that you read – where there is no way that the US can deal with the kinds of strains that are going to be put on the Treasury in the next ten years, let alone the next twenty years, without getting its external accounts into balance. And this is a case where it can’t be done with the currency at these levels for the reasons discussed at such lengths in those last three issues of Basic Points for this year.”
“I am quite serious about the viewpoint that what we are arguing in Basic Points is something that is going to take many years to work through. And that doesn’t mean that there aren’t trading opportunities within it, that doesn’t mean there aren’t ups and downs. As a matter of fact, there’s going to be bigger ups and downs then are being projected by the VIX index which is near an all-time low and that’s the one that does volatility on the S&P 500.”
”I can’t stress too much that the kinds of themes we’re talking about here are just not the kinds of things that are short-term market cycles. The transfer of power across the Pacific where we replace as the driving force of the market a few hundred stock option billionaires with the efforts of hundreds of millions of people who are attaining middle class status which means they need their society to provide them with goods made of metals and goods that consume energy.
This trend is the biggest in all of human history, in terms of the sheer scale and therefore it’s not something that, you know, is going to play out over a few weeks or a few months.
This is a truly epochal event.
And so, therefore, you can know about it as something to be frightened about or as to say ‘This is my chance to participate in one of the great developments of all human history, which happens to also be a great investment concept.’
And so if you aren’t there for the next few years, you will have missed it.
You will have missed it two ways. First, of course, the capital gains and the growth in income that occur in the commodity stocks in this period of time. But frankly, I believe that a large number of the kind of stocks whose charts we’ve shown in Basic Points will not be publicly traded securities by the end of this decade and probably a lot sooner.
Because, there is no reason, from the standpoint of the Chinese, to continue building up the foreign exchange reserves in Dollars and just holding Treasuries as a way of doing it. If they want to hold Dollar-denominated securities they’re better off to hold Phelps Dodge and the Alberta oil sands stocks and Inco than they are to hold Treasuries. Much better investments. And if they insist on being in Dollars, well they can do it.”
[Comments on Putin, Russia, next Basic Points will update The Dragon & The Bear theme]
“I’m not suggesting that we’re going to drive the multiple on Inco to 71 times earnings which is what was done to Intel. I cite those, perhaps, because of their proximity in the stock exchange charts. But rather, what you’ve got to realize, is that this is still a group that’s underowned and underappreciated for all the reasons we’ve discussed so often, which is, that the analysts who kept their jobs on the streets were those who were most cautious and because of this obesity index which is, that you lose money investing in a group where the weight of analysts is heavy in relation to that group in the market. We still have more semiconductor analysts in the Wall Street firms than commodity analysts of all kinds and that includes oil.
So what we still have is a situation of all these smart people, engineers and MBAs, telling you to buy the tech stocks and talking in terms of a commodity bubble.
2004 was a year where it was confidently predicted by a new industry which was the industry of Chinese experts who told us China was going to crash. Well, it looks now that China GDP growth rate is going to come in at 9%, which means it’s down a little bit from 2003, but it’s still by most standards a pretty good year. And it’s been a pretty good year for those who’ve stayed invested in the big commodity stocks, where it was effectively China’s activity that kept those prices high.”
The one commodity stock group that did not go up this year was the gold stocks and the big reason for that is the insurance aspect of gold and gold-mining stocks turned out not to be needed because starting in August what we had was a good strong market rally worldwide, and it was lead by the tech group. So, I can tell you that that’s not the kind of environment where gold stocks are going to outperform.
So those of you who kept gold mining insurance through the year as recommended strongly by me, turned out you were paying an insurance premium in short-term market performance. I suspect that 2005 is going to be a year in which you will be able to make a claim on that policy. I suspect that simply because the complacency levels being at record levels, something will go wrong.
So, my forecast then for 2005 is that we’ve got the makings of a really good global economy. Because one of the nice aspects of the US Dollar declining is that you get rapid growth in emerging markets as a group because they all tend to have Dollar-denominated debt and they also are commodity oriented and of course I don’t have to reiterate that it’s a great time to be producing commodities.
So, what you get then is the global economy expansion is lead by the emerging markets and there are so many of them, world trade expands, and there’s lots of opportunities for investors in that kind of environment.
Meanwhile, as the Dollar goes down, what happens is Europeans become wealthier and what we’re going to see next year is takeovers of US companies by European based companies where they get out of their own region where they’ve got terrible demography and they still have all the red tape and all the problems of trying to grow in Europe and where they buy into the faster economic growth in the United States. And although US growth next year, it’s hard for me to imagine it will be as strong as it’s been this year, given that the oil price increase has yet to work its way through the US economy, still, interest rates and inflation are still so low in the US and we don’t have anything like an inverted yield curve. So based on history it’s hard to say that this is a year in which the US is going to pay for its profligacy and its other sins.
[Discussion of Tsunami situation. Coxe posits the notion of something like that occurring on the West Coast of the US and what that would mean for the insurance industry.]
Let me wrap this up by saying that this will continue to be a year in which the Canadian stocks and Canadian bonds continue to outperform US stocks and bonds. And that within the Canadian market, the income producing stocks which means the trusts and the financial stocks will continue to do very well
And I suspect this is the year when the base metal stocks will start to catch up on the oil stocks.
As to the price of oil, $35-45 seems reasonable but that doesn’t mean that we couldn’t have swings, widely, in each direction. When supply and demand are so closely in balance it means that an extra 500,000 barrels a day one way or the other whether a good event or a bad event, can produce a big price swing.
But, we’re having to live with something that none of us have had experience with, which is living with a world where oil prices are set by supply and demand. And that means, as we know, any market which is driven by supply and demand can behave in fashions that at times seem irrational or ridiculous, but that’s the way markets are.
So what you do than is you value these stocks, as I say, on their reserves, not on their near term earnings. And don’t get distracted by near-term swings in the price of the commodities. Over the next year and over the next five years, the prices of oil and the metals are going higher and that’s really all you need to know to build your portfolio successfully in the year 2005.
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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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