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Archive for the ‘Don Coxe’ Category

La commedia e finita?

Don Coxe, the Canadian investment strategist, whose monthly publication Basic Points is required reading for anyone who follows financial markets, has a wonderfully mordant turn of phrase which from time to time he uses to devestating effect in illuminating current issues. This is Don on the Eurozone crisis, as seen from four thousand miles across the pond:

We remain of the view that no new promises, no new money creation, no new bailouts, and no new debts will resolve the basic problem – that only a few eurozone members have soundly functioning, globally competitive economies. That these nations should continue to subsidise their dysfunctional co-believers in Europeanism would be OK if it were not inflicting such damage on so many millions of unemployed young people, let alone the global capital markets and the global economy. During the last two years, the rest of the world has watched with growing impatience as leaders strutted and fretted their hour upon the stage and then, in many cases, were heard no more, becuase their own voters, in an overdue spasm of good sense, rejected them. There is an Orwellian aspect to the emerging nomenclature of the emerging institutions in this process of illusions and disilusions. The latest bailout banking entity is called The European Stability Mechanism, which is eurospeak for a lender that allows deadbeats to get even more hopelessly indebted in the name of stability”.

According to the most recent estimate I have seen, Europe’s leaders have so far “invested” something like three trillion euros, in loans, bailout funds, transfer payments etc, to try and keep the Eurozone going in its current 17-member format – and the results to date have been dismal. Now, with the region slipping into recession, and Spain hovering on the brink of joining Greece, Portugal, Ireland and Cyprus in requiring a sovereign bailout to avoid bankruptcy, they are gearing up to throw even more money at the problem. Don’s view is that “the euroelites should have declared La commedia e finita and rung down the curtain two trillion euros or so ago”. Future historians, I fear, will have little option but to pass a similar verdict.

Written by Jonathan Davis

August 9, 2012 at 9:23 AM

Posted in Don Coxe, Eurozone

Strange and wondrous times

In my latest Financial Times column, I argue that current market conditions are fascinating, but inherently unstable, because the Federal Reserve’s monetary policies have removed the traditional anchors on which investment decisions are traditionally made.  By chance I notice that Bill Mott of Psigma Investment Management, who has been managing equities even longer than I have been following the markets, has come out with a similar line of argument.

You can read all my FT columns and Spectator articles in an archive on the Independent Investor website. Here is a short extract from the latest one, which starts by recalling that even golden decades like the 1990s were punctuated by a succession of crises. I am also attaching a copy of Bill’s latest comments, which should be read in the light of the current fascinating stand-off between Ireland and the EU over how best to resolve its deepening banking problems, which I imagine will continue to weigh heavily on market performance for a while.

The striking thing about recalling these past episodes is that it is possible to make a plausible case that we could see an imitation rerun of nearly all of them in due course.  That the euro is ultimately vulnerable to fragmentation needs no elaboration, given the market’s run at Greek and now Irish debt. Some form of 1994-style rout in the bond market seems unavoidable in the next few years. The risk of a fresh market-induced disruption in emerging markets too, although it is almost certainly some way away, is also growing by the day.

The problem for investors is not that these risks are in any way concealed from view – in fact the more visible they are, the less of a concern – but that some tried and tested tools to analyse the right course through them are lacking. The consequence of the deliberate monetary stimulus now being masterminded by the Federal Reserve, and imitated in other places, is not just that it is distorting asset prices, but that it is also rendering useless the traditional anchors on which valuations and investment choices are based. Read the rest of this entry »

Written by Jonathan Davis

November 17, 2010 at 4:45 PM

Notes and Quotes

Here are some comments that have caught my eye in the last few days (a regular feature on this blog).

From Don Coxe, long time Canadian market strategist and commodity fund manager, in his always excellent Basic Points monthly strategy report, noting IBM’s recent offering of a three-year bond yielding (remarkably) less than 1%:

When a $1.5 billion offering of a single “A” three-year corporate bond with a 1% coupon is over-subscribed and routinely trades above-par in the after market, any talk of near-term inflation must be coming from the under-informed or the perilously paranoid.

Read the rest of this entry »

Written by Jonathan Davis

September 18, 2010 at 12:09 PM

May Can Be The Cruellest Month Too

MAY TURNED OUT to be one of the worst months on record for world equity markets, reports Andrew Lapthorne, the head number-cruncher and quant in Soc Gen Asset Management’s award-winning strategy team. The MSCI World Index dropped almost 10% in dollar terms, making it the worst May for this index since it began in 1970, and the worst monthly performance since February 2009, which turned out to be the final death throes of the great credit crisis bear market, the darkest hour before the dawn.

The worst country casualties, unsurprisingly, included the Eurozone countries whose debt problems have been so much in the headlines; Greece down 19%, Ireland 13% and Spain 11% in local currency terms. It turns out however that the falls in Asia were much greater: China’s Shanghai B market was down 16% and the Nikkei 225 down over 11%. The best performing markets year to date, as at the start of the month, more surprisingly, are mid and small cap stocks. Both the Russell 2000 and the FTSE 250 are still ahead year to date.

What is easily overlooked, of course, as with any short term data set, is that the recent falls in equity markets followed an exceptionally long and sustained period of market gains from February to April, with the S&P 500 rising for something like ten consecutive weeks, a most unusual trend. To use the jargon of the technical analysts, markets had become highly oversold. To that extent May’s falls were no more than a necessary and overdue correction.

However it seems clear that, just as Anthony Bolton predicted six months ago, equities are likely to be pushing against headwinds for some weeks yet. News will continue to be dominated by crises of one sort or another. The earnings upgrades that have helped to drive the markets higher are petering out. Valuations appear to have priced in a lot of future recovery already, with the MSCI World index trading on a p/e of 13 and a dividend yield of 2.7%.

Nevertheless the scale and strength economic recovery around the world continues to impress seasoned market-watchers. Few fund managers have navigated the crisis of the last three years better than Jonathan Ruffer and his team at Ruffer Investment Management. To quote a recent note of theirs: “One of the by-products of the tumultuous events and the private sector bail-outs of the last two years has been a massive transfer of risk from the private to the public sectors”.

“In part it is precisely this factor which has enabled equity markets over the past year to display a raffish insouciance in the face of so many outstanding problems and risks; with risk being largely socialized and a negligible cost of money, the measures that the corporate sector has taken in terms of inventory liquidation, labour shedding and capital spending cuts means that its present rude financial health stands in stark contrast to the groaning public sector deficits on view across the globe”.

They go on: “While we never try to time markets, it does not seem outlandish to say that the next few months will see risk assets move into the departure lounge from the ‘sweet spot’. Improving economic conditions, which we fully expect, will bring into sharper relief the need for ‘exit strategies’, with a likely reduction in liquidity available for investment in financial assets”.

“Further sovereign bond crises, accompanied by default risk, may erode the valuation basis for equities. Meanwhile, even if the UK is an acute case, inflation is regularly outpacing forecasts and will prove indeed to be part of the solution. After the relative ease of the last twelve months, protecting capital and generating real returns is about to start getting more difficult again”. We shall see.

A LOT of headlines have been generated by the European School of Management’s report into hedge funds.  The main findings are that hedge fund investors chase recent past performance and merrily buy into investment styles that have been working well recently regardless of the huge differentials in risk that different styles entail. 

The researcher, assistant professor Guillermo Baquero, concludes: “These results raise serious concerns about investors’ ability to make the right allocation choices and suggest that increasing investor protection and curbing unnecessary risks and speculative activity of hedge funds should be a priority for regulators”. 

I am not so interested in the regulatory issues. It has always been my view that hedge funds are not appropriate for retail investors, and should remain what they once were, namely largely unregulated vehicles for professionals and consenting wealthy adults. There is plenty of evidence to suggest that a small minority of hedge funds, if you are lucky enough to find the ones with real talent, are proven and consistent wealth-generators.

The majority, however, charge too much for what they in practice deliver, and their risk profile is skewed far too heavily in favour of the managers to make them prudent investments for most investors. Illiquidity too can be a problem, as became all too evident during the credit crisis. It is no real surprise that there has been a lot of pushback on the level of fees since the crisis. To blame them for causing the crisis is quite wrong however.

What these new research findings do show clearly, as many of us have long suspected, is that hedge fund investors are really no different from investors in general. They may be richer, and more sophisticated in other ways, but at heart they make just the same old mistakes – too greedy for results, too short term, too hyper-active, too blind to risk.

A SURVEY by the Association of Investment Companies names the top 20 investment trusts of the last decade, as measured (a) by their absolute returns and (b) by the consistency of their performance. Top of the list on both scores, gratifyingly, comes a trust that I own, Blackrock World Mining, which has returned an impressive 811% over the past decade and outperformed the average investment trust in eight of those ten years.

It is followed in the rankings by Fidelity European Values (once run by Anthony Bolton, but for most of the period in question by his successor Tim McCarron) and HgCapital, the private equity fund that spun out of Mercury Asset Management some years ago. (This is another fund which I happen to own, having bought some shares last year). The table of supporting data is worth looking at, although purists would argue that it suffers from taking no account of risk, gearing or volatility. A table of risk-adjusted returns would show some significant differences, as indeed would a table constructed on the same basis 12 months ago.

As a long term investor in investment trusts, the main message that I take from the survey is that identifying the big long term themes in the investment world and letting them run their course through a shrewdly managed, low cost vehicle is a much easier way to make money than furiously trying to pick winners over shorter periods of time.  Blackrock World Mining is a play on the commodity cycle. A good number of the other trusts on the list are essentially beneficiaries of emerging markets in one form or another, which has been the other big story of the past decade.  In a decade when the equity markets have produced little return overall, it is also noticeable how well some smaller company funds have continued to do.

AT A ROUND TABLE discussion I chaired for Spectator Business magazine last week, to be published shortly, a key theme on which all the participants agreed was the need for the new coalition government not to make a mess of the recovery by bungling the proposed Capital Gains Tax changes. As it happens, there is a powerful blast on the subject in this week’s Spectator from Art Laffer, inventor of the notorious Laffer curve. Economists may not be able to agree whether or not the Laffer curve is valid, but the general conclusion seems compelling to me. The way that the government crafts its CGT proposals is going to be a critical test of how far the new Government is hampered by the need to make concessions on tax to its own coalition partners.

THE THOUGHTS of Canadian investment strategist and commodity bull Don Coxe on the markets (from a recent conference call with clients): “No new bear market — we are going to have a correction here, but the global economy is still growing, but not as fast as the optimists would have hoped, and I don’t believe we can have a true bear market as long as liquidity is being supplied by the central banks at virtually zero cost. So much of that liquidity was misallocated before, but gradually as the economy grows it will be able to absorb it in actually productive activity”. I hope Don is right. Marc Faber dug out this apt quote from the US founding father Thomas Jefferson for his most recent monthly market commentary: “I predict future happiness for Americans if they can prevent the government from wasting the labours of the people under the pretext of taking care of them”.

Written by Jonathan Davis

June 7, 2010 at 8:31 AM

Praise for the Commentariat

The global financial crisis is throwing up some wonderful material from what I like to call the market commentariat – those whose job is to pronounce on the market’s movements and advise on what investors should do about it. We are living through a quite remarkable period in financial history, and it is good to see that some commentators are up to the enormity of the issues involved.

Here are three examples that have caught my eye in the last few days.

First up is Don Coxe, now thankfully back in action after a short interregnum with his monthly commentary Basic Points (always required reading). He quotes Robert Reich, Clinton’s Labour Secretary, “one of the nation’s smartest liberals”, who described President Obama’s stimulus plan with characteristic clarity: “Obama has repealed the Reagan Revolution”. And then added this tart comment: “Problem: the Reagan Revolution was the best thing that has happened to equity investors since World War II”.

“The long Reagan boom that came after the last Mama Bear market so energised the markets and the economy that the S&P trebled in five years, and laid the foundations for 900% returns over fifteen years. We shall not see its like again. The entrepreneurial spirit that Reagan praised and unleashed with tax cuts and deregulation is now the object of Obama’s obloquy and Obama’s program of huge tax boosts, denial of secret ballots in union organisational efforts and massive costs to fight global warming argue for, not a Thatcherite, but at best a Belgian economic recovery”.

Don’s current investment conclusions can be summed up like this:

  • Gold as a core holding;
  • Canadian and Australian dollars for choice amongst currencies;
  • Fertiliser, seed and farm equipment stocks by mid-year (watch out for the continuing absence of sunspots, a key Coxe theory to justify investing in grains);
  • The debt of good companies rather than the equity (at least for now).

“A wondrous buying opportunity” may emerge in stocks if the S&P 500 index breaks down heavily again, which he seems to think is the most likely outcome.

Someone also passed on to me this concise summary, from the same side of the political spectrum, of comments made by the veteran natural resources investor Doug Casey at a recent conference:

“The US is going to default on its debt through inflation. Obama has a really high IQ but is unable to foresee the consequences of his actions. 9 trillion dollars deficit divided by 300 million, that’s about $30,000 per person and all that money is directed to the State. Government is the Predator and you are the Prey. Yes, I pay taxes in this country but it is for the same reason that I give my wallet to the average mugger at gunpoint”.

Finally I also enjoyed an excoriating attack on Gordon Brown in The Times of London by Matthew Parris, a onetime centrist Tory MP turned pundit. It is impossible to underestimate the extent of the mess to which policymakers and bankers in harness have brought the UK. George Soros says it is possible we may end up in the arms of the IMF once more, as we did in 1976. Exaggerated? Perhaps -but not, I fear, impossible.

Written by Jonathan Davis

March 31, 2009 at 12:39 PM