The October edition of Donald Coxe’s Basic Points research report (subtitled “Two Days After Hallowe’ en”) arrived in my inbox a few days late, but nevertheless still makes for good reading. His investment recommendations, as summarized in this document, are listed in the paragraphs below, but I do recommend you also read the full report at the bottom of the post. (Also note that Donald’s weekly webcasts can be accessed from the sidebar of the Investment Postcards site.)
1. This stock market rally has legs, primarily because of the likelihood of rapid liquidity expansions within the OECD in the near-term.
Nimble short-term traders can make some good returns at times of rapid liquidity expansion, even though the fundamentals of the US economy remain unattractive for most equity groups.
The S&P’s 17.8 multiple argues that next year’s US GDP growth would need to reach 3.5%–4% to deliver great returns from here. That economic performance would be a welcome surprise – something akin to discovering that The Tooth Fairy lives.
2. The transformation of the Chairmanships of important House of Representatives committees from business-bashers and take-no-prisoner-Greens to moderate, capitalist-oriented politicians will be salutary for US stocks and the economy. The market is already pricing this switch in, and it is unclear whether the political component of the rally will continue after Hallowe’en.
Expect few or no major new initiatives. As a general rule, gridlock is usually good for the economy and the stock market. (There are studies that show that an astounding percentage of S&P gains come when Congress is not in session.)
3. The next downleg of the dollar bear market has begun. When the Fed, the Administration, Congress, and most of the business community are cheering it on, this downleg could be impressive. The Canadian dollar’s attractions remain.
4. In general, Canadian financial assets – apart from some life insurance companies – continue to look more attractive than US financial assets. The Bank of Canada has distanced itself from the Fed’s financial heroin policies; from a balance sheet perspective, Canadian banks as a group are healthy huskies compared to the scrawny coyote image of the American banks; the next phase of unlocking Canada’s oil (in shale) has just begun, and the reserves are enormous.
5. Until the BKX and KRE show sustained strength relative to the S&P, underweight US equities.
6. Within bond portfolios, above-benchmark durations remain attractive as long as the US economy struggles and the Fed is seen prone to Quantitative Easing.
7. Within balanced portfolios, very long duration Treasurys and/or Canadas make sense as risk offsets to equity exposures.
8. Within the commodity stock group, continue to emphasize the Precious Metals and Agriculture stocks.
If a Potash takeover deal is approved, ensure that your portfolio maintains a strong weighting in the fertilizer group. Potash Corporation’s reserves compared to other companies’ are as Michael Jordan is to the average NBA player. But there are other well-endowed and well-managed fertilizer companies. We recommend you emphasize the companies that are strongest in potash and phosphorus production, and not the nitrogen levered producers – as long as the natural gas glut continues.
9. The election should destroy Henry Waxman’s ability to threaten the Alberta oil sands producers. Increase your exposure to the leading producers.
10. The gold rally can cool out without being snuffed out. Stripped of all the complexities, four-digit gold is basically a bet against the governments and economies of the G-7. Your gold holdings provide insurance that will be the more needed the higher stock prices rise.
Source: Scribd, November 2010.
