Dox Coxe

Investment Recommendations

1. This is not the end of the commodity bull market. Bear
Stearns, F&F and other crises will one day seem trivial. The
new global middle class that is repricing commodities never
will.
2. Remain underweight the banks and financial stocks that
invested heavily in the asset classes that collectively created
a global financial crisis. Despite the frantic efforts of the
Fed and Treasury, new challenges appear each week. The
deleveraging process is accelerating. Those peddling bank
paper perversely insist that these writedowns and bailouts
are now so gigantic that a turning point is near. We think
serious investors should compare this sordid story to the
SARS epidemic: When the number of infected people was
rising sharply and rapidly, cautious flyers asked themselves,
“Is this trip necessary?”
3. We recommend that clients begin taking preliminary
positions in companies which stand to benefit most from the
possible onset of realism in US energy policies. When—not
if—offshore drilling finally gets the nod, the majors and
service companies should benefit enormously. Arctic drilling
could be next, from which some important Canadian
companies would benefit, although the technological
problems are formidable, and the pipeline issues are not fully
resolved.
4. As for corn ethanol, the producers have been lucky: they
benefited from $125 oil, which has largely offset $5.50
corn. They have also benefited from the plunge in natural
gas prices. As if those weren’t enough to save an industry
whose fundamentals had become so controversial, they
also benefited from the collapse of Doha, because the
embarrassing tariff against Brazilian sugar ethanol
survived.
5. Natural gas supplies have exceeded expectations because of
the Barnett Shale and coal bed methane booms, and because
this summer has not been as hot as had been feared. We
recommend the natural gas-oriented producers with aboveaverage
reserve life indices.
6. The fertilizer companies have delivered the most impressive
earnings gains of any commodity group. Nevertheless, their
share prices have fallen in recent weeks along with other
commodity groups on days when traders have been buying
banks and dumping commodities. They probably have
the most predictable earnings of all the major commodity
sectors, and should be cornerstones of any resource portfolio.
As for the bricks, they are the farm equipment companies.
The roof and windows are the logistic companies and seed
manufacturers.
7. The continuation of the wide spread between Libor and
the fed funds rate, despite the best efforts of Messrs.
Bernanke and Paulson, suggests that the real US economy
will begin to show serious strain because banks are cutting
back on making traditional loans—they have squandered
their resources in untraditional products they never really
understood. Hoarding liquidity is like hoarding corn or
wheat: it triggers shortages and punishes the weakest
consumers.
8. Gold remains the asset that offers unique risk reduction
features in equity and balanced portfolios. As to investment
strategies, the ETF outperforms during gold bullion selloffs,
but the stocks outperform when bullion rallies. We believe
investors should have exposure to both kinds of asset, but
leave the weighting to be resolved on individual portfolio
risk/reward considerations.
9. We keep reading forecasts predicting falling inflation and
gold prices because of a US recession, but insisting that the
recession will be neither deep nor long. Recession actually
proved to be an aphrodisiac for gold lovers in the Seventies:
Each of the recessions back then was accompanied by
higher inflation rates than almost any prominent economist
predicted. We do not expect a recession so deep that it will
stop the march to higher inflation, with the band music and
drum beats coming from the major emerging economies. We
remain negative on longer-term dollar-denominated nominal
bonds. We prefer mid-term, inflation-protected bonds in
strong currencies