Although we have anx­iously awaited a new issue of Basic Points from Don­ald Coxe, since he announced his depar­ture from BMO in Decem­ber, he has con­tin­ued to make him­self avail­able via con­fer­ence calls. Among other things, Mr. Coxe did men­tion that there would be an issue this month. Here, how­ever, is the full tran­script of the Feb­ru­ary 6, 2009 con­fer­ence call, that we have pro­duced for your review:

Don­ald Coxe, Feb­ru­ary 6, 2009, 10:00 a.m. — Con­fer­ence Call Transcript

The chart we sent out is the rel­a­tive strength of the Reuters Jef­feries CRB Index to the SP500.
The tagline was, "Have com­modi­ties started to outperform?"

There's a lot in this chart and I want to take you through the story, where we've got just hor­ren­dous eco­nomic news. We've gone from the bad, to the ter­ri­ble, to the scary, to the absolutely hor­ren­dous with both Canada and the US, announc­ing the worst job, losses either on record, or back to the mid­dle of the 70s. And yet, we've got the stock mar­ket up, the TED spread nar­row­ing, the VIX nar­row­ing, and the BKX is strongly out­per­form­ing the S&P today.

So we've got very mixed num­bers. if you're look­ing at it from an economist's stand­point, the world is just spi­ralling down­ward to dis­as­ter. But the com­mod­ity story is grad­u­ally chang­ing, and remem­ber as you can see from the chart, the rel­a­tive strength off the CRB futures to the S&P was a ter­rific fore­caster of what eco­nomic news was coming.

Com­modi­ties col­lapsed really before we had the col­lapse in the S&P, and one very brief spike, and then going down to a new low which was reached at the begin­ning of Decem­ber. We've been just grad­u­ally work­ing a lit­tle bit higher. Now you may say, well this is really strug­gling to find some­thing good out there but theres much more than just this.

As you know, I've always put great strength on look­ing at Investors Busi­ness Daily Reports on their 197 stock groups that are traded in the US mar­ket. Now Remem­ber, these aren't just US stocks, these are stocks that trade on US stock exchanges, and over the years, I have found this to be one the most help­ful tools in get­ting an idea of the way in which the mar­ket is deal­ing with its views of the future, as opposed to the eco­nomic num­bers which basi­cally reflect what is hap­pen­ing right now. When there's a diver­gence between the two, quite often it turns out that the per­for­mance of the equity groups in the IBD was a bet­ter fore­caster than any of the eco­nomic fore­casts that were out there.

Now this isn't a one hun­dred per­center, but its a very good indi­ca­tion and over the last few weeks, ie. since this new year began, there's been a huge change in the makeup of the IBD list of 197 groups. As we look at it this morn­ing, I rec­om­mend that you all use this: page B2 of the IBD, andif we look at it this morn­ing, this is the rel­a­tive ranks over the last 6 months, so there­fore you don't get an instant change. This is not an extremely short-term index; this shows you that over the last 6 months which stock groups have done best, and what's really cru­cial is to see how they've changed their rank­ing because they show them, right now, three weeks ago, 6 weeks ago, and then way back; and what we see here is the num­ber 1 ranked group in the whole group is metal ores, gold and sil­ver, and they've got sev­eral sto­ries in today's IBD about var­i­ous gold min­ing stocks and how well they're doing.

That's the num­ber one group. Now, in the top twenty, and they always have a box around the top twenty group, we've had a big, big change in the last few weeks. We now have a total of 5 groups, which are com­mod­ity related which are ranked in the top twenty for per­for­mance over the last 6 months. #13; I've just come back from speak­ing to big group of gro­cery and whole­sale con­fer­ence in Nevada, and the #13 group is retail and whole­sale food. #17 is oil and gas trans­ports and pipelines; #18 is oil and gas refin­ing and mar­ket­ing; #21, just off the bot­tom of that, food, flour and grain; #23, food prepa­ra­tion; #26, oil and gas, inter­na­tional explo­ration and pro­duc­tion; and, not doing as well, but not off the bot­tom of the chart, are Banks, North East, at #47; Banks, South­east at #52, Finance, Sav­ings and Loan #56, and mov­ing up in just 3 weeks, from 165th rank to #66 is the fer­til­izer stocks. And, once again today, fer­til­izer stocks are strong, in fact, the agri­cul­tur­als are very very strong today.

The impor­tance from our stand­point of this is that the view out there within the com­mod­ity indus­tries about the out­look is chang­ing even while the eco­nomic num­bers just get worse and worse and worse. And I've got to take you back to what hap­pened back in the 70s, because this is almost eery as to how much this is the way things were in '74, '75, One of the sta­tis­tics pub­lished about the unem­ploy­ment num­bers was that these were the worst unem­ploy­ment num­bers since 1975 in the US and Canada, they're the worst on record. And Canada, of course, has great com­mod­ity ori­en­ta­tion in its econ­omy. The unem­ploy­ment num­bers tend to be coin­ci­dent to lag­ging num­bers, and the unem­ploy­ment num­bers will con­tinue to get bad and worse.

Why is the stock mar­ket over­all so strong? Well, this vir­tu­ally guar­an­tees that the stim­u­lus pack­age will get passed. Now I'm deeply dis­ap­pointed in how the stim­u­lus pack­age has turned out. its turned out to be a grab bag of a whole bunch of lib­eral wish­list pro­grams they fig­ured they could never get passed through Con­gress under ordi­nary cir­cum­stances but by labelling them as stim­u­lus ther're going to be able to get them through.

Rahm Emanuel, who's the head hon­cho, next to Obama, in the White House said, "It would be a shame to waste the worst finan­cial cri­sis since the Great Depression."

So, what we've got here is a wolf in sheep's cloth­ing, but at least we've got activ­ity. And, the evi­dence on the finan­cial side is that the mas­sive re-liquifications that are being done by the Fed, and then the var­i­ous bailout pro­grams are hav­ing their effect, because the TED spread is way down at 92.50, and the VIX index is also way down. Either the stock mar­ket is deal­ing with a total unre­al­ity, or there's already a change out there.

One of the sur­prises has been the strong per­for­mance of the base met­als recently, and that's because both China and Korea have announce that they're going to be buy­ing base met­als to build into their national reserves. Korea is very frank about it because they want to pro­tect mar­gins of their indus­tries against what they see is stronger demand later in the year.

Now this is a sort of a Sov­er­eign Wealth Fund type deal, when com­mod­ity import­ing coun­tries use their reserves to buy in cheap raw mate­ri­als to pro­tect their goods pro­duc­ing indus­tries, but its inter­est­ing that it came on the same day this week. And this is a sign in the key Asian economies, that as bad as things are for them, their export num­bers are ter­ri­ble and all these things that we know about, and the Baltic Dry Index has dou­bled since being down 99%. Den­nis Gart­man remarks today in his great letter.

Does this just mean that we're going down along with the eco­nomic num­bers, or is the world chang­ing? Its been out the­sis that the com­modi­ties stocks would start to out­per­form before the stock mar­ket really had reached a rec­og­niz­able bot­tom. And that was on the basis that they were the strongest groups going into the down­turn, they were the group that led the down­turn, and there­fore what you want is to see whether that was that the whole story had changed, the whole story of com­modi­ties as an asset class, and that that was over. Or whether this was, as it was back in 1974 and 1975, a great pause in a much big­ger trend. We, of course, are of the sec­ond view.

This is a pause, a dra­matic pause, in a much big­ger trend, and as you can also see from the chart, what hap­pened with the com­modi­ties, was the real col­lapse occured as the bank­ing cri­sis really got out of con­trol, and we went to the low, where the CRB futures at the 1st of Decem­ber, when the whole pic­ture of the bank­ing indus­try was really grim. This was a low on rel­a­tive strength for them after the stock mar­ket had already reached its Novem­ber low, so again, its a rel­a­tive strength reading.

The fact that all com­mod­ity stock groups have been strong lately is in itself a really impres­sive sign of either, total un-reality out there, or that the mar­ket is sens­ing a big change in the wind. As I look at my screen here of all the com­mod­ity stocks, every sin­gle agri­cul­tural stock isi up except one. The oil stocks are some­what mixed, although oil prices are down. The group is about flat. And of course the pre­cious met­als stocks notwith­stand­ing that gold is paus­ing in here as a group are up, but the base met­als stocks are all up, all up sub­stan­tial amounts.

This again is like 1975, and I beleive that what we're see­ing here is a recog­ni­tion that finan­cial assets are going to have trou­ble doing as well as hard assets, because the sheer scale of the refla­tion, is so dra­matic, far beyond any­thing that was done. Back in the 70s we had infla­tion­ary mon­e­tary poli­cies which made things worse, but we didn's have the deriv­a­tives there back then dri­ving things. It was actu­ally mon­e­tary growth which sig­nalled to peo­ple that mon­e­tary growth was too much, and that we're going to have more infla­tion. And Gold is giv­ing the sig­nal, com­ing off $38 on what was going to be its even­tual run up to $825–850, much later.

For investors, this dra­matic out­per­for­mance, a one-month date, its just been amaz­ing to these stocks, the last month, I mean we're talk­ing of dou­ble digit returns for a great num­ber of com­mod­ity stocks no mat­ter which group you're look­ing at. That's why, of course, the IBD Stock Index shift. Because this is after all, you know, the stock mar­ket has been a really bad place to be, the worst Jan­u­ary on record. The worst for the S&P on record and so the con­ven­tional strate­gists have gone back to the fore­cast­ing abil­ity of the S&P in Jan­u­ary and pre­dict­ing that this could be a year as bad or worst than last year. I'm not going to make an over­all stock mar­ket fore­cast here; that will come later. But when you look that while the stock mar­ket was going down, that all of a sud­den the most beaten up group is start­ing to per­form very strongly, what it is is a fun­da­men­tal change, I believe, in direc­tion, and there­fore, our favourite group is going to con­tinue to give good rel­a­tive strength.

Now of course, rel­a­tive strength can still be a neg­a­tive if the stock mar­ket breaks through to new lows. I can't talk right now about the alpha that you've got, but I can point out that despite all the prob­lems we've had, we still have a gigan­tic con­tango in oil. Now this is being treated by most observers as a sign of weak­ness. Again, I go back to the 70s. What hap­pened was oil swung into con­tango, and stayed there year after year. It hasn't been in con­tango on a sus­tained basis, except dur­ing the period which ran for about 18 months ear­lier in this decade, when oil demand kept run­ning ahead of sup­ply, and grad­u­ally, peo­ple saw this hap­pen­ing, and bought out the futures curve far­ther, but we swung back into back­war­da­tion, and now we're in this sus­tained con­tango. At meet­ings with clients in Las Vegas, the oil con­tango was for them, and this is the gro­cery indus­try, this is a big part of their costs, they kept say­ing, " What does this mean? Why is it that oil prices even a few months out are way ahead, let alone, years out?"

My view is that this is an expres­sion of the rel­a­tive will­ing­ness of pro­duc­ers to sell for­ward, as against the will­ing­ness of con­sumers to lock in prices that they feel they can live with. And so we've got a gigan­tic rebal­anc­ing and hedg­ing game going on here, and I don't think much of this is spec­u­la­tive activ­ity. I think the spec­u­la­tive activ­ity got excreted from the sys­tem by the col­lapse of the hedge funds, and par­tic­u­larly after the col­lapse of Lehman, which locked in $65-billion of hedge fund assets, so that the big debate that we were hav­ing last spring was that oil break­ing through a $100 was purely a spec­u­la­tive thing, and not reflect­ing real­ity. It turned out there was more spec­u­la­tion than even I under­stood. But, we cer­tainly knocked that out because the big play­ers have been dec­i­mated. This of course also spreads out into the val­u­a­tions of the pri­vate equity com­pa­nies which have been sort of the worst area of the finan­cial mar­ket recently, apart from the Wall Street banks.

There's these cur­rents around here which indi­cate that there's grad­u­ally a belief sys­tem that although China and India and Korea and these economies which were the dri­vers of the com­mod­ity bull mar­ket, are slow­ing down, and are hav­ing trou­bles. At the con­fer­ence, the first speaker in the panel in the morn­ing, who is a guy loaded with data; he's from First Data. He was just back from China; he said that unem­ploy­ment rate is sky­rock­et­ing over there, the gov­ern­ment is des­per­ate and they're pulling out all the stops. What we know is this is a very respon­sive com­mand and con­trolled econ­omy and there­fore they still have the liq­uid assets. Remem­ber, they got a 40% sav­ings rate in China, so those sav­ings can be moved out into the econ­omy. Where as opposed to the US, our sav­ings rate has just finally crept above the zero rate.

If in fact then, these big economies are not going to col­lapse along with the OECD, then its a very clear cut case as to which asset class is going to do bet­ter than the other. That's the hard asset class. Bbut what's also fas­ci­nat­ing is the change in the prices of the grains rel­a­tive to other com­modi­ties. And, thats at a time when the USDA keeps increas­ing its esti­mates of the reserves on hand of the grains. i.e. we're get­ting bear­ish news on the grains from the USDA, very dis­con­cert­ingly bad news, in fact, as they've cal­cu­lated that par­tic­u­larly in the case of corn, how much isi on hand, and it turns out to be more, and the rea­son for that is the bank­ruptcy of these ethanol com­pa­nies, the Verasun's of the world. So. of course, ethanol based con­sump­tion of corn has col­lapsed. But when you look out fur­ther out on the futures curve, what you see is strength, and then you come down on to the sta­tis­tic that nobody wants to talk about, which is the sun spots and the weather.

Well, the weather data, you can pick your sto­ries as you want. As I was fly­ing out there, to Las Vegas, sit­ting watch­ing CNN in the ter­mi­nal, they had a great scene in Trafal­gar Square, which was totally buried in snow, and they had kids rolling in the snow. The only other active peo­ple in the square other than the kids play­ing in the snow, were a group of war pro­test­ers. it was explained to us that they're paid for being there. Once again another snow storm has hit Eng­land. Now this isn't Jan­u­ary, or Decem­ber, its February.

The sunspots have still not come back. Right up to date, we're still get­ting very low sunspot aciv­ity. In another 6 weeks, my back of the enve­lope cal­cu­la­tion works it out, if they don't come back, we will have the longest sus­tained low sunspot activ­ity, in about 2 cen­turies. At some point, this is going to start attract­ing atten­tion from the peo­ple out there who are telling us that the only we have to fear is global warm­ing and of course, nat­u­rally, in this col­lec­tion of lib­eral wish­lists that are going to get voted through the sen­ate. There's huge amounts of money to deal with Global Warm­ing. And, this will another case I believe where the lib­er­als' agenda will be based on the­o­ries that are being exploded before our very eyes about the real­ity. If the cor­re­la­tions of past his­tory work, then we've got a very late plant­ing sea­son com­ing up at the very least and so we start to count the time because if the sunspots haven't returned by May, then based on cor­re­la­tions dat­ing back to 1804 when the astronomer Royal, William Her­schel, one of the great­est astronomers of all time, saw the cor­re­la­tion of sunspots and the price of wheat, then we're going to have a shock to the global sys­tem, and I believe that that much his­tory should be respected.

While I was on vaca­tion, I read a His­tory of Scot­land, and one of the small sto­ries was explain­ing why Scot­land got taken over by Britain at the end of the 17th cen­tury. The biggest rea­son was 6 straight years of crop fail­ure. Now this was the years of the 'Maun­der Min­i­mum,' in terms of sunspots, the low­est sunspot activ­ity for which we have proven records, because they only, started keep­ing the sunspot data with the time of Galileo; and of course, Scot­land is very far north, and the effect of cool­ing nat­u­rally is felt the fur­ther far north you are from the equa­tor you are, because the trop­i­cal zones are such a huge per­cent­age of the actual face of the Earth, because of the width of the Earth, the zones, that as you move fur­ther north, you get cooler tem­per­a­tures, then the effect of any reduc­tion of solar energy is felt much more pow­er­fully. In other words the fur­ther north you are, the more dam­age is done from cool­ing on crop production.

That's why it is that Brazil can con­tinue to have ter­rific pro­duc­tion of soy­beans because they're so close to the equa­tor, in their main pro­duc­tion zones. But what hap­pened in Scot­land, was that although crops were erratic, poor to mar­gin­ally good at times in Eng­land, they were much bet­ter than in Scot­land, because there, they had late Springs, and dev­as­tat­ing frosts.

Now will all this repeat itself? The sci­en­tific com­mu­nity says 'no.' There's a cor­re­la­tion that you can show, but they can't show how it works. But as an his­to­rian, I have to tell you that I still believe this could prove to be one of the biggest sto­ries of the year, but nobody's talk­ing about it.

There­fore, if you're buy­ing into the agri­cul­tural stocks, you don't need to feel that you're tak­ing a bet on this, because the mar­ket is already tak­ing a big bet on it; Not so. There's just nobody out there except the Farmer's Almanac, by the way, that said it was going to be a bad plant­ing spring, because of sunspots. You may say, "Come on, you can't cite the Farmer's Almanac." Well, the Farmer's Almanac has man­aged to stay in busi­ness as long as it has by using the cli­mat­a­log­i­cal data and they were quite can­did about it, that it was because of sunspots, or the lack thereof. So that's the only sup­port there is at the moment that I'm aware of for our thesis.

So what you should do now, in terms of your over­all equity expo­sure, the fact remains that the big stock indices are still weighted to the econ­omy stocks and the finan­cial stocks. The finan­cials have a much lower weight than they had before, but within the finan­cials, and that's why I talked about these regional banks, I believe that what we're going to see is con­tin­ued great rel­a­tive strength of the bank banks; the regional banks, those who actu­ally know their cus­tomers, and do tra­di­tional bank­ing, as opposed to the invest­ment banks, and the glam­orous Wall Street types who dis­si­pated their stock­hold­ers' equity by lev­er­ing up with the colat­er­al­ized debt oblig­a­tions and all those other mon­strous prod­ucts that they didn't under­stand. They ceased to be bankers, and became pack­agers of toxic waste which was re-labelled as great food.

So if we sep­a­rate out from this the highly pub­li­cized banks which are on life sup­port sys­tems sup­plied by Wash­ing­ton, then I believe that there's still enough rel­a­tive strength being shown there that the econ­omy is suf­fer­ing, but just because Citibank and these other banks are down 80% or 90%, you shouldn't say that that means the bank­ing indus­try is down 80% or 90%.

So the econ­omy is going to be a series of sto­ries here and there, and I don't believe we're going to get eco­nomic num­bers for some time, which are going to be the kind of things that are going to be stock mar­ket friendly, so I can't make out at the moment a case for increased equity expo­sure. I can sim­ply reit­er­ate that within the equity group the sig­nals that we're get­ting are that the com­modi­ties sell­off on rel­a­tive strength is over, and that the fun­da­men­tals are that peo­ple are going to be start­ing to look fur­ther out. The stock mar­ket is sup­posed to be a fore­cast­ing tool. What they're say­ing is that these refla­tions are even­tu­ally going to work enough so that the world will not go down the tubes, and there will be demand for hard assets. That's the story of the 70s, and its going to come back in some­what dif­fer­ent form, its going to be a shock to the stock mar­ket, its going to be a shock, cer­tainly to the intel­lec­tu­als and the oth­ers in con­trol of the media, but I do believe that this implies that the TSE will once again out­per­form the S&P this year and there­fore, that the worst is over, that you pick your spots.

Now as far as weight­ings, we are com­ing out with an issue of Basic Points this month, and we will be pub­lish­ing revised rec­om­mended weight­ings in the com­mod­ity groups. I'm at a bit of a dis­da­van­tage here, because I've got to; I know that the num­ber of peo­ple on the call is a frac­tion of the num­ber of peo­ple who read Basic Points, but I can sim­ply tell you that I believe that we're get­ting the sig­nals already from what stock groups are doing as to where your empha­sis should be. So I rec­om­mend that you check those out and that that be part of your guide as you're fig­ur­ing out you're going to be allo­cat­ing your cap­i­tal or for those who are think­ing of things like RRSP sea­son in Canada, and haven't given up the faith on stocks, which stocks it is you want to buy now to put in your RRSP. Not that you're plan­ning to go back and look at it 90 days from now to see how its done.

The fact remains that the bil­lion peo­ple that we've added to the world's con­sump­tion side, haven't all turned poor, just because of all the unem­ploy­ment in the US. So its still going to be a tough win­ter and a tough spring, but I think that the world of the future is start­ing to show itself and our job is to try to pre­dict the future rather than get­ting to mired down in the gloom right now.

Remem­ber the same econ­o­mists were telling us things can only get worse. As recently as last June were pre­dict­ing 2–3% eco­nomic growth. Now they're say­ing there's no hope, and I'm not ridi­cul­ing the econ­o­mists, because there are a few of them like Nouriel Roubini, who cor­rectly called it. David Rosen­berg did a great job. But the eco­nomic con­sen­sus just sud­denly changed and that's why we had this V-shaped col­lapse which came as fast as the col­lapse came the last time in 1974. And at the worst in 1974, the mul­ti­ple on the Dow got down to 6 (times). I don't think that we're going to see that this time, but it means that you've got to be cau­tious about hav­ing said that there's def­i­nitely been a bot­tom in the S&P and the Dow. But I do believe we've seen the bot­tom for the com­mod­ity stocks as a group. That's it.

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Comments

2 Responses to “Donald Coxe: Have Commodities Started to Outperform?”

1. Don Mc Gregor Says:
   February 11th, 2009 at 12:57 pm

   Inter­est­ing inter­pre­ta­tion of his­tor­i­cal data.

   In times of high high high infla­tion you bet­ter have some­thing of worth. Com­modi­ties, gold, oil etc are all worth something.

   Dol­lars on the other hand are only worth what we agree that they are worth. Pump too many out the door and they become common.

2. John Reid Says:
   February 11th, 2009 at 1:54 pm

   Always enjoy Don's comments/expertise