Donald Coxe: $1,100 Gold is a Warning Sign

Friday, November 13th, 2009

In his November 6, 2009 weekly conference call, Don Coxe of Coxe Advisors discussed gold, the economy and commodities.

Coxe says that there are a host of reasons for the recent outperformance of gold, the least of which is the crumbling dollar. As long as interest rates are at zero, the carry trade in the US dollar will continue to flush liquidity into the markets and into gold, and as that involves shorting the dollar the dollar will continue to slump.

It also means that all assets could blow off together should there be any reversal in monetary policy resulting in a rate hike. That may still be a while coming as central bankers have stated a willingness to wait until next summer to revisit rates.

On a supportive note for gold, India and Sri Lanka have bought much of the IMF’s 430-tonne overhang of gold inventory, and China is said to be buying the rest.

However, Coxe says, don’t be fooled by the fact that gold and equities are doing well at the same time. The rise and outperformance in gold is also due to the appetite of large investors betting on long term prospects for inflation, now.

Good economic news from around the world last week, as well as promising news from the US, is a serious threat to the economy, the market. We had very positive news, for example, coming from India and China that growth would be better than expected, and their commodity demand continues to be sustainable. In the US, while capacity utilization still remains slack, wage demands have remained stable. Unemployment in the 10% range may be understated by the BLS though because of the way they account for part-time employment, says Coxe. Do-over economists have stated that unemployment could be 16-20%. The BLS has quietly said that there could be inflation in food prices.

Coxe said, “Those of us who accept David Dodge’s view that this has been a rebound, and not yet a recovery; a rebound from a dramatically oversold territory where it looked liked the world was coming to an end, to some optimism that things were going to get better, and pricing in how good things would be, then what it does, is put enormous pressure on central banks not to feed inflationary fears.”

“What we learned from the 70s, is once the inflationary fears start to work into peoples decisions, then all sorts of non-economic decisions are made which makes the inflation forces develop a life of their own. Specifically, changes in inventory policies, such as people buying now, rather than later, because they expect the price to go up, those kinds of things.”

“One of the things central bankers learned is that they must move before the surveys of inflation expectations start to show a sustained rise. Its when people predict that there’s nowhere for inflation to go but up, and its going up, that then its very difficult to hold off the inflation that occurs. What you have to do then [central banks] is dramatically raise rates.”

“So, we’ve seen those go past 20% in the US before, and those inflation expectations got crushed, and in the process the economy got crushed too.”

Good economic news from around the world, and domestically is actually bad news for investors and for the economy, as it means that we could end up in a situation similar to the mid-1970s when we had high unemployment coupled with interest rate hikes. If interest rates remain zero for too long, then the problem may end up being bubble-like economic conditions artificially enhanced by zero interest dollars, and could cause a central bank move swiftly, then, to reign in overheated conditions.

$1,100 gold is a sign that this could be happening. Coxe says that if commodity demand continues to strengthen and wage demands prove to be stickier than expected, the combination could be very bad as it would intensify inflation, and cause policymakers to raise rates at a time when there is high unemployment. That will choke off the fragile recovery and it will choke off the easy money.

Either way, Coxe says that you want to be in gold. You’re better off in gold has it will hold its value better than other “risk” assets. $1,100 gold is a warning sign; not a sign of a really good bullish environment to be investing in. Coxe finishes by saying, “Its the outperformance of gold that should give investors pause.”

Coxe goes out of his way to make sure he’s understood that commodity ETFs that invest in commodity futures are not a effective way to partake in the commodity trade, because of contango/backwardation effects. One way to go, and he makes his disclosures, as advisors is to the way of Coxe Commodity Strategy Fund, and otherwise, via the stocks of the commodities producers as he has discussed on a regular basis in the past.

Coxe also discussed crops, saying that while the warmer November weather was good for farmers, and crop prices came off as a result, they still had not accounted for crop blight.

Tags: Bank Move, Bls, Capacity Utilization, Carry Trade, China, Commodities, Conference Call, David Dodge, Don Coxe, Donald Coxe, Economic Conditions, Economic News, Emerging Markets, ETF, Food prices, Gold, Imf, India, Interest Rate Hikes, liquidity, Mid 1970s, Monetary Policy, Outperformance, Overhang, Part Time Employment, Positive News, Rate Hike, Term Prospects, Wage Demands, Warning Sign
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Donald Coxe: A Difference of Opinion on the Stimulus Program? (February 13, 2009)

Monday, February 16th, 2009

Donald Coxe, Chief Investment Strategist, Coxe Advisors LLC’s, weekly conference call is an excellent source of outlook and insight from one of the market’s foremost thinkers.

GreenLightAdvisor.com has transcribed the February 13, 2009 call in its entirety for your review:

Donald Coxe, February 13, 2009
Thank you all for tuning in to the call that comes to you from Chicago.

The chart that we faxed out; we actually faxed out two of them this time; both of them were from election day, November 4, 2008. The Dow Jones Industrials and Gold. And our question that we asked rhetorically was:

“A difference of opinion on the Obama Program?”

When we’re in a situation where the only thing that seems to be working out big time for investors is Gold, then this is hardly a time when the illuminati in Washington are going to be very happy about what’s going on. So I want to begin by saying that the question about gold’s move is in itself something that we’ve got to analyze because its so powerful. And, Part of me says that now that there’s all of this enthusiasm and all the advertisements that I’m seeing on television from people that I wouldn’t want to spend an evening with are saying that you gotta buy gold. This is very reminiscent of the 1979-1980, which was the time that gold peaked in its triple waterfall situation. I don’t think that we’re anywhere near a top on gold but it still is something in effect where at least if you see it being discussed publicly, its by people who are mildly unsavory.

Well you can’t get this kind of move only from the mildly unsavory. And the question is, is the sustained selloff in the stock market at a time we’ve had a sustained rally in gold are they coming up with different interpretations on the Obama program. I think it is entirely credible to make out a case for buying gold on the basis that the program will work. Because if the program works, then what we’re going to have is an economic recovery, but given the sheer scale of what they’re pumping into the economy, and the debt that’s building up, then it’s going to be a 70s style economy in the sense that inflation rates are going to rise from a deflationary type situation, into a postive level and its everybody’s best guess as to whether that level is going to be painful or not, but its the kind of thing that would support the financial asset that benefits most from inflationary expectations.

On the other hand, you talk to people about it and what they’re saying is ‘no’, that these two charts are showing you the same thing, which is fear. That they don’t believe that the program is going to work; that its just going to make things worse, and therefore they’re fleeing out of assets denominated in paper money of all kinds and going into gold. And apparently the justification for that is particularly that the big Swiss banks are seeing is that their high net worth clients are taking out safety deposit boxes and putting gold bullion into them and not the kind of small wafers that are being peddled on television by these somewhat conspiratorial types.

Far be it for me to make the case for gold on the basis that the system is going to collapse. But on the other hand, if you get that value out of gold while still saying that there’s a better part of it I think then that’s a better story to have and one that I as a strategist who doesn’t like to predict armageddon can believe in. Besides which, there’s lots of evidence out there that armageddon is not the new consensus.

What we know from the 70s is that if you have a recession at a time of fast money supply growth that what happens is that the stock groups that tend to do best during the recession and to lead you out of the recession tend to be commodities. So the commodities stocks of course, were just hammered after the ‘midnight massacre’ of July 13, 2008 which is what really launched deflation in the world. But what’s interesting is what’s happened to them since then in relative strength. We come back to my old faithful of the IBD’s 197 industry subgroup rankings and what changes there are in that from week to week. This week, if we take the top 21 stock groups, we see that 7 of them, that is one-third of them are commodity groups led, of course, once again, by metals, ores, gold and silver; they’ve been at the top for some time. But we’ve got food flour and grain; we’ve got oil and gas transport pipeline, we’ve got oil and gas refining and marketing, I feel very good about the fact that pure refiners have done so well, I can tell you. Food, miscellaneous preparation, retail, wholesale food; and Oil and Gas, International Exploration and Production interestingly enough.

So, what that tells me is that this is the kind of swing at a time when everything looked bad, back in 1974, and by the way, things looked much worse then than they do now, in 1974. We were down to a 6 mulitple on the Dow. And the belief in equities as an asset class was being abandoned on all sides and unemployment was double digit levels and governments were falling; things were much much worse then. But, what you could see was the relative strength of the commodity groups, including, by the way, the supermarkets back then, which is interesting, because the supermarkets are doing well now. So, I would therefore like to take the view that what signals we’re getting for the market are that the market like all the pundits, isn’t sure that this $2-trillion that’s being thrown at the system is going to work. But the belief is if it does work, we’re going to have a greater demand for scarce assets, and that everybody recognizes that the huge selloff that we’ve had in commodities and commodities stocks means that scarcities could come back pretty quickly. And that’s exactly what happened in the 70s.

Now, I’m quite sure there’s a lot of you out there saying ‘you keep talking about the 70s, and its a different world.’ It is in many respects, but only in one, I think, that’s really crucial, and that is on the real estate side. Because back then what we had was the baby boomers were university graduates having to live with their parents or grandparents because there were no houses available for them. There was a housing shortage because of course, there was no way they could expand the housing market fast enough to take cognizance of the huge number of baby boomers coming out of high schools, community colleges, and universities; well we havn;t anything like that this time, because of the birth dearth that began back then. What we have is a situation where the housing supply was built on the assumption that things would be the same as they had been every other cycle and of course they aren’t the same, and they will never be the same the next 50 years. So that’s the big difference. We have demographic deflation across the industrial world and in that sense, what it means is that there is one asset class which cannot behave as it did back then. And back then, house prices, although it took them a while to start moving up, even though we had inflation, they did. In any case, you didn’t lose money on housing back then.

But as for the stock groups, what’s interesting is that despite what we have as this ‘pitiest’ price for West Texas Intermediate (WTI) of $35 bucks a barrel, what we see is that it seems to be the most artificial of prices because nothing else that you see on the screen relates to it. Oil for delivery in December is $53. Now I have never seen anything like that. I mean, imagine, a 50% premium for ten months. So this relates to the whole question that a battle is going on between Brent and WTI, and Dennis Gartman, and as usual, Dennis is the best at analyzing these things; he’s saying that the WTI contract is now just plain silly. Because it relates to such a tiny amount of oil, and the only place in the world where oil is in oversupply is in Cushing, Oklahoma. Well, if we look at other oil prices then, what we’re seeing is that despite the huge economic slowdown in the world, that we’ve got oil for delivery in December 2010, that we can believe these parts of the WTI contract because they are not related to storage problems around Cushing. These are way out on the (futures) curve and we’re looking at $60 oil out then.

I think that the fact that the oil stocks, despite the fact that spot WTI has gone to a new low, the oil stocks are actually starting to perform better, is people’s recognition that with the cutbacks that OPEC has already delivered and then the evidence that US consumption hasn’t fallen by 5%, 6%, or  7% as people thought; those statistics were clouded by what the retail gasoline sales were; and of course, what they did, because retail gasoline was down by 50%, was in trying to adjust for this after you took out state taxes and all these things, people got wrong what the actual volumes there were. So what we see is that the actual demand for oil in the world has not fallen off a cliff. Yes, the demand for industrial goods and consumer goods and ? and things like that has fallen of a cliff. But certainly not for most commodities, and particularly, not for oil. And with the move that we’re getting in the fertilizers, and I’d just like to mention once again, the value of the IBD survey, because way down, you get way down the list, number 56 on the list, and you see chemicals and fertilzers [12:23] but that this week and three weeks ago they were down in the depths at 154 and the charts show you that there has been a huge change in attitude towards the fertilizers and indeed towards the agricultural stocks generally.

Now, that’s not because I think the world has embraced our view of the strong possibility that the two centuries of global warming have come to an end, and that we might be entering a period of global cooling which would dramatically affect the outlook for crops in the northern hemisphere. No, I think its simply once again the recognition that although demand is reduced somewhat for key grains and feedgrains as a result of the economic slowdown, that it has not collapsed and the carry overs even though they’re bigger than they were a year ago, are not so great as to suggest that the prices farmers are going to get for their grain are going to be profitable. Yes, spot corn is $3.66, but the new corn that hasn’t been planted yet, which will be delivered in December is $4.07, and corn for the next year after that is $4.25. These are prices, that if you’re a farmer who does a good job producing it, could make a lot of money on it, despite the collapse in demand for ethanol. So, what I’m basically saying is that we already have two commodity groups which in the last few weeks have been moving up strongly, and they’re basically saying that you don’t have to take a bet on how the Obama program works out, as to whether or not this recession is going to drag out a couple more years. You can make money here.

In other words, the savagery with which all commodities and commodity stocks sold off during the collapse, particularly after the Lehman bankruptcy; that is behind us, and now investors are starting to look at what the world will be like if the program succeeds or if it fails, and at the moment, they’re not prepared to take bets, big bets on the program succeeding. Now, one of the reasons they’re not prepared to take big bets is because of the poor performance of the bank stocks. And, I’ve told you over and over again, and I’ll tell you again, that a bear market which begins with a breakdown in the financials doesn’t end until the financials outperform. And, we had that brief period of outperformance, but it was only, as we saw, by the kind of stuff that Alex Rodriguez was consuming. In this case it was financial steroids.

After the Midnight Massacre, when they made it illegal to sell short the bank stocks and also forced the hedgies to unwind their shorts on what they had, it was a situation where the bank stocks rallied to huge premium relative to the performance of the S&P 500, and after that was taken away, which, it was taken away after the end of September, they collapsed on relative strength, and they have not been able to rally from this huge discount on relative strength since then. So, as much as I would like to be able to say that we know that the worst is behind us for the broad stock market and the economy, I can’t say it until the bank stocks find a way of rallying.

I watched President Obama’s first press conference, and once again was very impressed with this man. He is articulate, he’s cool, he’s smoothe, he’s the real deal. However, we already knew that the stimulus proposal that he was endorsing had been drafted by Nancy Pelosi and friends; Barney Frank and people like that in the House. And therefore [16:30] what it was, was long on a far-left liberal wishlist items that they could never have gotten through Congress on their own, and short on genuine stimulus, such as tax cuts, or on the infrastructure type deals that everybody thought they were going to be emphasize, including $4-billion for ACORN; I mean, that is just staggering to me, that they would do that. ACORN is being charged and being investigated for vote fraud in quite a few states, and they also were also leading the pressure on the mortgage lenders to make 100% loans to Latinos and African-Americans on the interest of social justice. So, I mean, the idea that these people who are going to be able to use the money to get lawyers to defend them against vote fraud charges. That takes chutzpah, to include that in the National Stimulus Bill.

But that’s only $4-billion out of $800-billion, but the problem that happened and why the market has sold off since then is the recognition that what we were told was going to be targeted and temporary is anything but. Its all sorts of global-warming type programs, and things that again, maybe depending on your viewpoint, just fine ways to spend the taxpayer’s money, but we don’t need to work hard to figure out ways to spend the taxpayers’ money on a massive deficit. What we need is to do things that get people working.

Now its true, that Keynes famously said its better to pay somebody to dig holes and to fill them in, than not to have any activity at all. And so, what one can probably say about the rest of this bill is that even if you don;t think that a lot of the things they want to do are worth doing, as long as they do them soon, then probably there’s an advantage in doing them. The problem is that these will be built in as permanent new government programs which means that trying to deal with the deficit thereafter, will be a challenge beyond the best designs of Larry Summers.

But that’s way out in the future. Let’s talk about whether right now this is going to work. And once again, we have some evidence to the effect that things are getting better. Money supply growth right through the curve is now moving rapidly, and yes, its true that velocity has collapsed, but the experience of past recessions is, that you first of all grow the money supply, and then eventually, sometimes grudgingly, the velocity comes back, and when that does, then what you can get is a much faster recovery than any of the economists have forecast. I mean, it does turn around pretty rapidly.

So, in this case, we’ve not only got the remarkable stimulus from the central banks, which should start showing up, across the whole OECD in terms of money supply growth, but in addition, what we have is the bailouts in the banking system, and, again, you can argue wtih why this or that institution is getting help, and this or that institution is not; that’s not really important. What is important is that they are helping financial institutions and as long as they help the ones that can actually do something useful, then I’m not going to be too upset if they help those that don’t deserve to be helped, namely the big Wall Street banks. Those banks got into trouble because they gave up the business of banking for the business of gambling and speculation in order to create huge bonuses for the insider. There is no case other than counterparty risk case for throwing money at them.

What you need to do is give money to the banks that actually talk to customers face-to-face and do business with them face-to-face about their real needs, their loans, their letters of credit for trade, all of these things. And we had a period when the letters of credit had dried up all over the place across the world, because banks weren’t doing this. You couldn’t find anybody, because this is a low margin deal and there was a state of panic. What’s interesting is that trade does seem to be coming back. We’ve had a more than a doubling of the Baltic Dry Index; now I know that this is from an absolutely miniscule level - it was down 98%. But we’ve also got numbers coming out of China indicating that this is one place where they’ve managed to get both the money supply growing, and the velocity growing. So once again, these guys who say they follow the dictates of Mao, but not of capitalism, are doing a better job on applying Friedman and Keynes, than any of the governments in the so-called capitalist world.

But if you’re a commodity stock investor you actually care more about what’s happening in China, than what’s happening in Chicago. So, i think that you can make the case that the stock market is giving you signals that the economic recovery globally is going to come later in the year, but it will be led by the usual suspects in this decade, namely China and India, because India, although its not growing as fast as it was, is still growing, and they are also very aggressive about monetary expansion and assistance to financial institutions. So, I think, for those of you who have cash, and courage, that, and maybe that have read some of those individuals who are saying that we’re already in a depression and the only thing to be in is either cash or selling short, if you don’t share that stijian gloom, then you just look at the signals coming out of the IBD itself, as to which stock groups have moved from being blasted, to being in favour, and you can see a lot of stock charts indicating that the market is telling you who is going to lead us out of this. And that’s a road map that’s very useful.

Now all of this is going to be discussed in much greater detail in Basic Points which I’m pleased to say comes out at the end of next week, but we’re working on it now so we’re back in harness as it were. I’ll end by pointing out that, again, looking at this list what we see is that oddity that if you don’t look at the big moneycentre banks, which are still in ghaslty shape as their relative strength goes, there down at the bottom of the IBD list, but what you see is that regional banks, NorthEast, Midwest, Southeast, these banks that are banks and don’t create collateralized debt obligations, these stock groups are outperforming. There is one other group that’s come up strongly in the list, and I’m not sure that I can tell you what it means, but funeral services is another booming business and maybe this is a good time to stop and take your questions, because maybe I’m putting too much emphasis on which stock groups are attracting attention .

Let me sum it up by saying, I believe that going to the great economists of the past, that even if so much of what’s being done here is being done with bad motives, and its being given to bad people, its better probably than doing nothing, and by the way, I sort of admired Obama’s chutzpah is saying that the opposition were the Republicans who weren’t voting for this confection of Nancy Pelosi and left-wing of the party were in favour of doing nothing. It wasn’t the case at all. It was that they wanted to have tax cuts and targeted programs which was what had been promised three weeks before. I think, take the political debate out of it. This is the administration that won the election. These are the ones that are in power, there’s no point going off and insulting and what is likely here, is that we’re going to get a turn. Ans so, with that I believe that you follow the signals themselves and the groups that outperforming right now are likely to be the groups that will be outperforming 6 months from now. That’s the way it was in the 70s and as I say the only difference between now and the 70s is about an asset class that you’re not going to get much enthusiasm right now anyway, which is real estate. That’s it. Any questions?

(27:07 End of prepared portion)

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Donald Coxe: Have Commodities Started to Outperform?

Wednesday, February 11th, 2009

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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