Follow
Up on Author Donald Coxe
by Joseph Dancy,
LSGI Advisors, Inc.
Adjunct
Professor, SMU School of Law
October 1, 2004
FSO Readers -- I hope you have had a chance to read my book review of Donald Coxe's book, The NEW Reality of Wall Street. Jim Puplava interviewed him this past January and recommended the interview again this August while he was on vacation. Today, I had the opportunity to listen to Mr. Coxe in an interview with institutional investors. I would like to recommend this webcast to you, which can be found here.
Following are my summary notes:
Natural gas futures chart sent to clients for today’s commentary – natural gas is “the other energy problem” for the U.S. economy.
Chart Courtesy: TFC-Charts
The natural gas story is significant in many ways. The first cold front is on its way this week. The upward move this week on the natural gas futures contract was due to a long term winter forecast issued this week that called for cooler than normal temperatures. A very cool summer resulted in a lot of natural gas being placed in storage.
What is surprising is that the high level of drilling has not produced a lot of new natural gas reserves or production. We are at a ‘crossover’ now of what ‘high’ energy prices mean to inflation - possibly high energy prices might move the economy to deflation since domestic manufacturers must eat higher costs due to low cost imports.
Equity holders might want to have a different bond index than local indexes. What is clear is we are getting a ‘China effect’ on economies on a ‘grand scale’ – the manufacturing sector is deflationary but the commodities sector is highly inflationary. China exports lower the price of finished goods, lowers wage increases, and holds down capital spending.
Coxe suggests that optimistic economic forecasts must be scaled back. Groups that benefit from the “commodity effect” from China constitute only 10% of S&P index – but the remaining 90% of the companies have serious issues. Investors need to recognize the China impact – long term bonds are a low cost put on economic disappointment.
We are in the early phases of greatest commodity boom of all time – a gigantic transfer of wealth. Investment theme he suggests – buy stocks of companies that produce what China needs to import. Sell stocks of companies that produce with what China exports.
In political futures market, after the debates the “Bush premium” shrunk – which means the election might get tighter if the market indicates the reaction of likely voters. And that Kerry did well comparatively.
The American equity premium might be reduced by China’s entry into world economy. The U.S. was seen as attractive since it had high-growth technology stocks, the U.S. dollar was a very strong currency that helped returns, and the perception was the U.S. economy would grow faster than other economies.
In the last 7 years in the U.S. bonds have hugely outperformed stocks. This period includes the entire ‘triple waterfall’ period. This may be another reason to hold long bonds. Stock market still has a very high price/earnings ratio so future returns might be marginal due to valuation.
Some stock groups have had ‘spectacular returns’ – those stocks tied to commodities and the China effect have done very well. New highs have been heavily laden with commodities firms and defense groups. Defense expenditures will remain very high due to military demands.
If you take earnings in last 7 years – assumed rate of return on pensions has inflated earnings, and stock options also increased earnings – so earnings not reflected of ‘real world’ situation. And price/earnings ratios are in reality much higher than is being reported. Pension fund issues will become an issue over the next few years as they are not funded significantly enough to meet demands, and the returns have been very poor.
Russia is the only major oil producer that can increase production – and the President much approve all major deals it appears. Major firms that need to grow reserves will need to look seriously at Russia.
The other oil producers look either ‘cloudy’ or ‘scary’ – Nigeria looks like it is moving to civil war. Russia looks like it is stable at this point.
The world is changing - China and Russia will have more and more input into what type of economic returns countries in the world will obtain. This is not good for the equity investor.
© 2004 Joseph Dancy
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Joseph Dancy, Adjunct Professor
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