Don Coxe: Risk of Stagflationary Bond Bear Has Arrived (Latest Investment Recommendations)

It's been a longtime since we checked in on market strategist Don Coxe. He publishes the 'Basic Points' each month and his latest rendition is entitled "Slouching Towards Stagflation?"

At the end of his commentary, Coxe lays out his latest investment recommendations, including a market weight position in Japan. Just this morning we touched on how investment manager Ruffer is seemingly overweight Japan.

Here are Coxe's latest recommendations:

1. His main advice ties into the title of his commentary regarding stagflation. Coxe writes, "Just because Stagflation of Seventies proportions is only a remote possibility doesn't mean that meaningful stagflation-style damage won't be inflicted on bond portfolios - particularly those denominated in currencies of grossly overindebted countries. We think the risk of a real stagflationary bond bear has now arrived, and have therefore reduced recommended bond durations. Unless the stagflation risks recedes, we shall be reducing those durations further in coming months. So should you."

This is a big talking point because Warren Buffett himself has reduced the duration of Berkshire Hathaway's bond portfolio as well. There is a slight difference in the reasoning, though, as Buffett was concerned about inflation whereas Coxe is concerned about stagflation.

2. Cease underweighting Japan and move to market weight (with special attention to buying global brands).

3. Underweight European financials and euro-denominated debt. Emphasize exposure to Swiss francs and Canadian dollars.

4. Overweight precious metals in commodity-focused portfolios and include exposure in balanced portfolios.

5. "Agricultural stocks remain the commodities group with the best balance of risk and reward among all the possible outcomes of the current crises in the Mediterranean region and the Arabian peninsula."

6. Overweight the oil sands companies and emphasize coal and oil names in North American energy portfolios. Fellow market strategist Jeff Saut of Raymond James was also out singing the praises of the oil sands this week. Industrial clients, Coxe says, should hedge against remote risk of catastrophe in the Middle East by purchasing far out of the money calls on crude oil.

7. Overweight offshore oil companies that "do not face continued litigation risk from Macondo." This means avoid the likes of BP (BP), Transocean (RIG), Anadarko Petroleum (APC), Halliburton (HAL), etc.

8. Continue to avoid uranium stocks (Cameco (CCJ) is a major player there).

9. Pay heed to food and fuel inflation, which are working together to dent consumers' discretionary incomes.

10. Underweight base metal stocks despite their near-term benefit of rebuilding in Japan.


For more insight from strategists, check out their market commentary we've posted up recently.

Don Coxe's Basic Points April 2010: A Slow Boat to China

Market Strategist Don Coxe is out with the latest edition of his Basic Points publication. His commentary entitled, 'A slow boat to China' focuses on his latest view on the markets and how he would position portfolios accordingly. As we've covered before, Coxe has been a long-time commodity and agriculture bull so it should come as no surprise that many of his recommendations center around that theme. To get a better idea as to the rationale behind a bullish agriculture bet, we recommend heading to hedge fund Passport Capital's case for agriculture.

Turning to Coxe's most recent market commentary, we see some of his main viewpoints summarized below:

- Underweight integrated oil companies ('big oil' stocks like Exxon Mobil, Chevron, etc).
- Increase equity exposure via mining stocks.
- Overweight oil producers and underweight gas producers.
- Continue to overweight oil sands companies.
- If running a US based portfolio, focus on cyclical equities.
- Within agriculture, add to companies in the equipment and logistics.
- Overweight precious metals (gold & silver).
- If you're investing in bonds, focus on Canadian bonds if you're Canadian and TIPs if you're American.

Lastly, he also lays out some ideas to 'hedge' yourself against a possible double-dip recession after the market stops receiving its heroin fix from Ben Bernanke. If you are holding high exposure to cyclicals, Coxe argues to hold some long-duration bonds as a hedge. We've obviously simplified his viewpoints here so of course read Donald Coxe's April set of Basic Points in its entirety below:



You can directly download a .pdf here.

Overall, it seems Coxe remains a staunch commodity bull, or dare we say super-bull. For a technical look at how some of his favorite commodities have been trading as of late, check out an analysis of gold as well as an analysis of crude oil.

Don Coxe's Basic Points: December 2009

Thanks to zero hedge for posting up Don Coxe's Basic Points for December 2009. He is a strategist for BMO Capital Markets and has been a big proponent of the agriculture and commodities trade, much like fellow ag-bull Jim Rogers.

We've covered a solid question and answer session with Coxe but haven't posted much else of him so it's about time we played some catch-up. Here is Coxe's Basic Points for this month (Email readers come to MarketFolly to read them):




For related reading, we highly recommend hedge fund Passport Capital's case for agriculture as well as Jim Rogers' thoughts on commodities and agriculture.

Don Coxe's Basic Points - September 2009 Market Commentary

Market strategist Don Coxe is back with his 'Basic Points' for September 2009 and we have embedded them below. Alternatively, you can download the .pdf here. We've typically covered Coxe's commentary in months prior but after a brief hiatus on our part, we're back with his latest edition. If you're interested in his past work as well, you can view his June commentary here and an excellent question and answer session with Coxe himself.

If you're not familiar with Coxe, he's a market strategist and has quite a large following due to his opinions and forecasting. He currently likes commodities, precious metals and the like. He is an agriculture bull and actually shares a lot of views with that of legendary investor Jim Rogers (we've covered Rogers' market thoughts in the past as well).

RSS& Email readers: come to the blog to view the embedded document.

Don Coxe Basic Points Sept 2009

Don Coxe Basic Points June 2009 Newsletter

After posting up market strategist Don Coxe's 'Basic Points' newsletter for April, and for March as well, we're back with his June edition. If you're unfamiliar with Coxe, he's a noted market commentator and has a very large following due to the many good points he often brings up. Coxe is an agricultural bull and has additionally focused a lot on commodities. In fact, Coxe shares a lot of views with noted investor Jim Rogers (whose portfolio we've also covered). For more of Coxe's thoughts, you can check out his question & answer session here.

Here's the slidedeck (RSS & Email readers will need to come to the blog to view it):

Publish at Scribd or explore others: Finance Non-fiction money bush

Donald Coxe: Basic Points April 2009 Market Commentary

Hot off our post with market strategist Don Coxe's 'Basic Points' newsletter for March, we're here with his April edition. If you're unfamiliar with Coxe, he's a noted market commentator and has a very large following due to the many good points he often brings up. Coxe is an agricultural bull and has additionally focused a lot on commodities. In fact, Coxe shares a lot of views with noted investor Jim Rogers (whose portfolio we've also covered on the blog here). We've also covered Coxe's recent question & answer session here if you want some more insight as to his thought process and investment theses.

The entire Basic Points presentation is presented below in slide-deck form, but for those of you who want a quick summary and the highlights, here's what you need to know:

Coxe still believes that commodities will be the true winners and will outperform on a relative basis. While he is bullish on the commods, he has been disappointed by the performance in gold due to the sales by the IMF, the strong dollar, and the banking crisis as there is a flight to safety. Coxe still feels that inflationary fears will return at some point, at which Gold will return to its solid position. He also mentions copper specifically, noting the massive run-up it has seen recently. And, he cautions investors from adding to base metals here, as the economy still has real problems ahead and these metals are due for a pullback. We here at Market Folly have highlighted this very issue of base metals as a leading indicator. We've said all along that copper is due for a pullback and it is what happens after that pullback that will truly tell us if the economy is beginning to show some signs of stabilization.

Coxe also cautions investors that they'll have plenty of opportunities to buy American equities and to not rush the process. His best advice is to slowly accumulate positions in the names you want to own when a bull market returns. The sudden "return of optimism" in the markets is premature by his accounts and we still have some problems to work off before we can truly recover. Along this line of thought, he warns investors from being enticed by long-term bonds and their steep yield curves. While these instruments may be havens of safety for now, those who avoid the yields now will benefit from performance later on down the road. This is along the lines of what Jim Rogers has said as well, as he wants to be short the long-term treasuries again at some point, which we noted when we summarized Rogers' recent portfolio. (Rogers also shares some of Coxe's other viewpoints, including his bullish prospects on agriculture). While Coxe is cautious on the economy in the near-term, he notes that when that recovery does take place, he is seeing signs that technology and commodities will be the new leaders.

In terms of specific sectors, Coxe also focuses in on refiners (and also the Oil Sands plays) as he feels the refiners can do well in the current environment where Americans are driving a little less. His argument for the oil sands is that you are essentially buying production of oil from the year 2020 at very cheap levels and they will make great long-term investments.

Overall, Coxe is sticking with many of his main investment theses and just elaborating on what he is seeing in the current market environment. And now to the actual slide deck of Coxe's April 2009 edition of Basic Points:

(RSS & Email readers may need to come to the blog to view the slide-deck)

Publish at Scribd or explore others:

Don Coxe Question & Answer Session

Recently, Donald Coxe sat down with The Globe and Mail's new section 'Globe Investor' and answered reader submitted questions. Since we've covered some of Coxe's thoughts in the past, we thought it would be prudent to let readers become more acquainted with him.

If you're unfamiliar with Coxe, he is the former global strategist for BMO Financial Group and writes a monthly journal entitled 'Basic Points.' (We recently posted up his March 2009 Basic Points). He likes to invest in stories that are "on Page Sixteen of publications" rather than the front-page story, under the assumption that the story in question could very well become the front-page story, allowing you to ride the wave. Coxe is an agricultural bull and has additionally focused a lot on commodities. In fact, Coxe shares a lot of views with noted investor Jim Rogers (whose portfolio we've also covered on the blog here).

Coxe brought up some interesting insight in his Q&A session:

"Question: Why will printing more money be inflationary in a deflationary environment? In the past year the world has lost an immense amount of wealth, tens of trillions of dollars. If governments print money, to start replacing that which has been lost, why is this inflationary to the currency printed? If there is an enormous hole in the ground, and governments are just starting to fill it up again, why will money lost its value?

Don Coxe: Inflation is primarily a transactional issue, although it usually eventually translates into asset pricing of assets deemed to be hedges against inflation. In the 70s, there was a deep recession, accompanied by high inflation because of excess monetary expansion at a time of soaring food and fuel prices. It could happen again.

Question: With reference to his famous quote “never invest in a page 1 story, invest in a page 16 story” why did he go against his own counsel with an IPO largely based on food/fertilizer stocks in May, 2008 – AT THE TOP OF THE MANIA – when food riot stories were plastered all over page 1?

Don Coxe: Good question. It took us some months to get the prospectus cleared so the timing was clearly suboptimal. That said, because we kept large amounts of cash and only deployed it over 8 months, we’ve got a portfolio that should perform well over the time horizon we chose: five years.

Question: We are getting very diverse opinions lately on the direction of gold, I’m starting to wonder if the opinions are based people’s own self interest. On one hand we hear that gold prices are going down because gold, being a safe haven, as the markets improve investors are pulling their money out of gold and driving down the price. Also as the US markets improve the US dollar will rise and drive down the price of gold even further. On the other hand we hear that because the US government has embarked on a plan of quantitive easing this will eventually result in inflation, devaluing the dollar and rising the price of gold. We hear gold future prices anywhere from $700 to $2000. Can you give us your opinion.

Don Coxe: Gold is buffeted by the economic and demographic deflations on the one hand, rising financial risk and humungous monetary expansions on the other. We see it gradually taking a large role in global monetary policies---which implies significantly higher prices. Its haven aspects show up in day-to-day trading: gold tends to climb when broad stock indices are weakening.

Question: Bond Markets are anticipating severe recessionary conditions. What areas would seem to offer the best opportunities at present?

Don Coxe: Bond markets are sharply divergent from equity markets in recent weeks. Such disjunctions in the past have more often than not validated the bondbuyers’ views. If that isn’t the case this time, it will probably be because of stagflationary conditions.

Question: Today copper inventories at the LME went up 2300 tons, while the price of copper went up .07 cents. How can copper continue to go up in the face of a global recession?. Is this short covering, or real demand for copper from China or elsewhere??

Don Coxe: I am skeptical of copper’s surge at a time that other non-food commodities—notably oil—are so weak. It wasn’t that long ago that Japanese traders tried to corner copper—with disastrous results. That said, China’s stimulus package seems to be working, which means there’s real demand out there. I like the food commodities better.

Question: What is your view on silver bullion vis-a-vis gold bullion? Thanks

Don Coxe: I haven’t been a real bull on silver since we cashed out my son’s hoard of silver coins at the peak of the silver mania. It’s not truly a monetary metal, and it tarnishes, which means it isn’t a pure precious metal—and its main industrial use was photography, which has been rendered obsolete by technology. Gold is the pure play, but it will doubtless drag silver along. I like simple concepts."

As you can see, Coxe continues to be a long-term (5 years) bull on commodities and on agriculture in particular. We've only highlighted a few of the questions from the session, so make sure you check out the entire transcript at Globe Investor.

Don Coxe's Basic Points March 2009 Edition

Wanted to post up the great commentary of Don Coxe. Here is his latest 'Basic Points' for March 2009. Make sure to also check out our post on Coxe's bullishness on agriculture. (Rss & Email readers may need to come to the blog to read the slideshow).

Publish at Scribd or explore others: Finance Business & Law basic points don coxe

Don Coxe's Latest Thoughts: Bullish on Agriculture & Food

Investment Strategist Don Coxe is recently out with his thoughts about the markets. His insight can be summed up as such:

Bullish on: Agriculture, China, India, & Inflation (i.e. he expects it)

Next great investment: Food

Basically, he harps on the 'emerging markets' adage, but notes that China and India's standard of living is rising. And, his theory is that once they taste such a lifestyle, they won't want to return to old ways and the culture will shift to consuming more food. Overall, increasing population and increased ways of living require more food, healthier food, etc. (Hence, his bullishness towards food and agriculture). If you agree with Coxe, you can use the ETF: DBA (agriculture) to play the inflationary commodity and food thesis longer-term.

And, in terms of agriculture specifically, Potash (POT) is a solid play due to its dominant market share on the nutrient. Even as demand for the nutrient has decreased (slowed global growth), prices haven't fallen off a cliff like oil. So, when demand does kick back up, these producers should have some form of pricing power once they work off supply build up. We've seen numerous hedge funds pick up POT lately, including George Soros. Check out our in-depth look at Potash for more analysis and info.

Keep in mind though, that such plays could take a long while to unfold. If you conclude that inflation is in the future, then Coxe's thoughts could be right on the money. For what it's worth, Jim Rogers and George Soros are both bullish on agriculture as well. Our stop was triggered on our Potash position way back at $160 as per our post, and we have yet to revisit the name which now trades around $80, or 6x earnings. While the story is still attractive fundamentally long-term, signs of improving technicals (chart) would be needed. Or, perhaps some return of global economic activity and a hint of inflation would do. Regardless, the funds have been buying recently, as noted in our hedge fund portfolio tracking series.

We'd agree with Coxe in that inflationary pressures are set to show up at some point. And as such, we advocated shorting long-dated treasuries (see our rationale). The question is, when does inflation hit? One could be waiting for a while. And, there is the slight possibility that it could also just never show up (stranger things have happened). Obviously, if such inflation does occur, it will show up in commodities first and Coxe makes a good point there. In short, Coxe seems to agree with Rogers and Soros on a number of issues and it will be interesting to see things play out.

You can read Coxe's thoughts here.

Donald Coxe Market Thoughts

Donald Coxe of BMO Financial Group (their Global Portfolio Strategist) is out with his Basic Points of September 2008. Donald has repeatedly been right on with his thoughts regarding the macro investment outlook side of things. If for some reason you've never heard of him, then here's your chance to check him out now. The piece in its entirety is linked below (which I highly recommend reading). But, since everyone is pressed for time these days, Prieur du Plessis has done an excellent job of summarizing Don's thoughts. Below is Prieur's summary of Don Coxe's thoughts:

1. The two most important forces in equity markets since July 13th have been powerful strength in financial stocks and pathetic weakness in commodity stocks. Since they have been inversely correlated for more than a year, investors should assume that the commodity stock bear market will continue until the financials roll over. The F&F bailout is merely the second act in a tragedy that has an unknowable number of acts to come.

2. When the financials do roll over, gold and gold mining stocks should move swiftly back into favor. Inflation remains above central bank target levels in the US – and in many other countries across the world. And any return to pronounced weakness among the bank stocks will be strongly bullish for gold.

3. With OPEC’s token production cut failing to impress the markets, oil prices will fall further. It won’t take more than a few days of even 750,000 b/d of production above consumption to drive oil prices down. Conversely, any outbreak of civil strife in Nigeria that affects offshore production could have a sudden upward price impact. We expect oil to trade in a range of roughly $80 a barrel to roughly $130 a barrel next year, but we have no great confidence in that forecast. We are more confident in predicting $150 oil within the next three years, as the next global economic recovery unfolds.

4. Barring an early killing frost, this year’s US corn group will be a barn-buster. What next? Corn is in modest contango for the next two years’ crops. Because contangos are so unusual these days, and because grains have such high producer/consumer participation across the curve, this is to us a sign that farmers and users are believers that high corn prices are here to stay. That means the fertilizer, seed and equipment stocks are cheaper now, relative to forward corn prices, than at almost any time in the past four years.

5. The pullback in oil prices and the dramatic bank rescues should have been enough to send the S&P back into bullish mode. It needs to break 1310 on the upside to take away its bearish condition.

6. The real yield on the Treasury 10-year is now a negative 145 bp. On a two-year hold, this means there could be more endogenous risk in nominal bonds than in most blue-chip non-financial stocks. The rush out of TIPs into Treasurys is doubtless driven by the unwinding of F&F exposures, but the long Treasurys are now seriously overvalued.

7. The biggest near-term upward surprise in commodity prices could be natural gas if (1) the sunspots don’t reappear, and (2) the historic correlations of gas to oil reassert themselves.

8. The Canadian dollar is being hit by the commodity price plunges, deterioration in the trade account, the worsening economic outlook in Central Canada, and the uncertain outlook in the October election. Whether Tories or Liberals win in Ottawa, Canada’s fiscal situation will continue to be superb compared to the US, particularly if Obama wins. We remain very positive on the loonie as an alternative to the greenback.

9. US election campaigns can be excuses for bold acts by foreign adventurers. Although President Bush was a non-person at the Republicans’ Convention after he gave his brief speech by satellite, he’s going to be President for four more months. The world should hope that rogue states think about that before deciding that Washington will be too distracted by the election to do anything about a surprise attack or invasion.

10. We have no clear idea how long it will be before we can look back to today’s prices for commodity stocks and say, “Wow! I wish I’d loaded up then!” We remain certain that day is coming.

A big thank you to Prieur du Plessis over at investmentpostcards.com for presenting such a succinct summary of Coxe's thoughts. And, I highly recommend taking the time to read Mr. Coxe's entire piece as found in his .pdf file, which you can download here. Lastly, another thank you goes out to Commodity News and Mining Stocks for originally posting up the link.