Of all the market commentators I regularly quote on this blog, Donald Coxe, Global Portfolio strategist of BMO Financial Group, has turned out to be one of the most popular. And rightly so, as Donald has been on the right side of the “big picture” investment outlook more often than most over the years.

His weekly webcast appears in the sidebar of this site, and has turned out to be a big hit as a result of its insightful and entertaining analysis of financial markets. (To hear the commentary, simply go to “Donald Coxe’s Weekly Webcast” and click on the photograph.)

Donald’s monthly investment report, entitled “Basic Points” (subtitled “The Devils & The Deep Blue Sea” for the August 2008 edition) has just been published and I deemed it opportune to share some of his words of wisdom with you in the paragraphs below (courtesy of Commodity News and Mining Stocks).

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 that 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 have not fully been 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 above-average 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 had 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.

Please click here for the full report (edited from the BMO Week in Review).

Last 5 posts by Prieur du Plessis

• Donald Coxe – Investment Recommendations (November 2008) - November 19th, 2008
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