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.
