Don Coxe
If Don Coxe is losing any sleep over this week's sudden pullback in commodity prices, he's not showing it. As the portfolio manager of the Coxe Commodity Strategy Fund sees it, any drop in prices presents a buying opportunity in a long-running bull market. But Mr. Coxe, who is one of the world's best known commodity bulls, is concerned about whether huge inflows into commodity ETFs could eventually fuel a vicious selloff - and for the first time in a decade, he's turning sour on India's growth prospects.
Mr. Coxe joined Globe Investor for a live online Q&A Tuesday with our readers. The following is a full transcript:
10:56 Darcy Keith - Good morning everyone and welcome to this live discussion with Don Coxe.
11:00 [Comment From Don Coxe]/b>
Good morning everyone.
11:02 Darcy Keith - I'm Darcy Keith, a web editor here at the Globe, and looking forward to this two-hour discussion. We got lots of ground to cover. Thanks for joining us Don. Just to start things off, Goldman yesterday issued a report suggesting commodities, especially oil, may be getting overvalued and suggested investors take profits. What are your feelings on this Don?
11:04 [Comment From Don Coxe]/b>
There's no doubt that the extremely low short term interest rates mean that lots of loose cash is floating around the world. But there's also no doubt that the Mideast crises and the shortages of key commodities are major factors in the performance of commodities and commodity stocks
11:07 [Comment From JP Taillon ]/b>
Hi Mr. Coxe, I was going to wait a little bit before asking this but you did touch on the subject. When assessing the current run in commodities, what proportion would you say is driven by releveraging of investors vs actual growth and supply issues especially in ags and softs?
11:08 [Comment From Jeremy Clarkson ]/b>
Isn't the Mideast crisis also a short-term factor?
11:11 [Comment From Don Coxe]/b>
At any given time, it's hard to say what are the most important factors in commodity pricing and the behavior of stocks. We know that the FAO says tht global food prices are now at or near all-time highs and those prices imperil economies and governments in many third world countries. The crop carryovers are so close to multi-decade lows at a time that many millions of people in emerging economies are increasing the protein contents of their diets. That is a potentially explosive situation. As for oil the spread between WTI and Brent means that demand for light, sweet crudes is outpacing the supplies--at least in the short term. Then when you add in rising inflation rates across the whole world, you have a situaton eerily reminiscent of the 1970s
11:12 [Comment From Don Coxe]/b>
The Mideast crisis looks to be more than a short-term factor as the governments fall and there are no clear-cut successors who offer the kind of freedom and tolerance that the dreamy demonstrators sought. Best guess is that we're going to be living in a crisis or near-crisis atmosphere for many months--if not years.
11:13 Darcy Keith - A few questions now directly related to ag, our featured topic for last month's Investor All-Stars package:
11:14 [Comment From Tony ]/b>
What are the best Canadian instruments to invest in Ag?
11:14 [Comment From Mark ]/b>
In your opinion, what is the best investment in the fertilizer sector for 2011? I am looking benefit from the expected rise in crop prices through nutrients, and was wondering whether a diversified company such as Agrium is best option, or whether you had specific pure-plays in mind (ex. PCS, CF-Industries)... Thank you.
11:15 [Comment From Don Coxe]/b>
There are many alternatives, but securities compliance rules forbid me from making stock-specific recommendations. The last time we had grain prices at these levels there were fewer alternatives, and no ETFs, so investors have excellent choices and thats something I applaud
11:17 Darcy Keith - Without naming specific stocks Don, do you have any specific investment vehicle recommendations, ETFs perhaps? I know MOO has done quite well over the last couple of years
11:17 [Comment From Don Coxe]/b>
As noted above, I cant name a best pick. But the list of well-financed and operated fertilizer companies is short and the only real complexity in evaluation comes with the gradual unwinding of the Mosaic distributions and alignments. The other choice is between emphasis on potash and phosphorus and emphasis on nitrogen. Nitrogen isnt needed for soy, but is needed in size for corn
11:18 [Comment From John H ]/b>
Don, I wonder how much current copper price is due to speculation? What impact of the 20% copper price increase to the world economy will be?
11:18 [Comment From Don Coxe]/b>
MOO is a great success and its backed by smarrt people I've known for years. The advantage for investors is that its one-stop shopping at modest cost
11:21 [Comment From Don Coxe]/b>
I don't think the price rise in coper is a serious constraint on global growlh. china has stockpiled copper to smooth out performance of its industries and its also trying to slow down its breakneck growth as evienced by its modest trade deficit in Q1. Japan is going to be buying humungous amounts of copper in the first p[hase of its reconstruction, but thereafter, the Japanese will be recovering copper from the scrap in the debris. Copper is more an evidence of activity than a constraint
11:22 [Comment From Guest ]/b>
hoarding of base metals has been noted by China, is this too the reason for silver's assention?
11:24 [Comment From Don Coxe]/b>
Ive addressed copper. China has for more than a year been developing internal marketing of silver and gold to small investors through its banking system and that process isnt hoarding--its stimulating demand from people worried that their currency is in effect dependent on Ben Bernankes monetarypolicies and that is hardly reassuring to those who recall that when Mao took over, he looted all the gold in people's bank accounts, replacing it with currency with his face
11:26 Darcy Keith - Don, currency obviously is a big concern for investors. Where do you see the loonie going from here? And, we also have this question from Eugene:
11:26 [Comment From Eugene ]/b>
Do you think a strong canadian dollar can seriously hurt returns from investing in the ag sectors as commodities producers are strong exporters?
11:30 [Comment From Don Coxe]/b>
Learn to live with a lustrous loonie. Yes, if the loon's value relative to the greenback rises a fast or faster than commoditty prices, then thats bad news for Canadians. But commodity prices have the potential to rise far beyond what could happen to the loon it global growth remain strong enough to draw down commodity inventoriess. The biggest wlld card, other than global growth, is weather in key grain growing regions. I reside in the Upper Midwest and the whole world is now watching anxiously to see whether this growing season is a succes. If it disappoints as it did last year, we'll have the highest grain prices in history--in US dollar and loonie terms
11:30 [Comment From R. Saint-Cyr ]/b>
With worlwide population to grow from 7B to 9B in the next 35 years?, would you say any pullbacks in price of ag etf's would be a buying opportunity - and would fertile land be an even better investment vehicle?
11:33 [Comment From Don Coxe]/b>
What is important for performance of grain ETFs isn't long-term demographics, but the increase in protein consumption of current populations as they move toward diets approximating those in the advanced economies. At least two hundred million people are now dining far better than they did evn a decade ago and that--plus the disastrous biofuel policies of the US and Europe--drives grain prices
11:35 Darcy Keith - Would some alternative investments in the ag sector be advised then - such as buying fertile land, etc?
11:38 [Comment From Don Coxe]/b>
Fertile land is obviously rising in value, but like real estate generaly its location location location. What weve seen in recent years is that El Ninos and La Ninas produce major weather pattern changes and the rains may be excessive or almost nonexistent in a given location--and that affects the value of cropland at least in the short term
11:38 [Comment From Joe Vechter ]/b>
Sir - food price increases and scarcity are a major factor in historical turning points. For stability, the world needs lower or stable prices. How do you see us achieving that? Or are we in for a period of prolonged instability?
11:42 [Comment From Don Coxe]/b>
Great question! History is replete with horror stories arising from food crop failures and political implosions. The 70s were chaotic and inflationary mostly because of soaring food prices, although too many people blamed OPEC and the Arabs for rising oil prices as the main ingredient in stagflation. Many of those blame assignments were almost racist and I'd hate to see anytning like that come back. What we face now is a combination of political instability in key oil region at a time of record food prices and that is an extremelt uncomfortable situation for global stability
11:43 [Comment From Guest ]/b>
With all the turmoil in MENA - Europe and the QE-II - Japan that is going on are you scarred that the global economy can return to recession and that we see the markets and metals sector go down 20 to 30 percent ?
11:45 [Comment From Don Coxe]/b>
It is true that we are living through a concatenation of front page bad news stories. Economic progress needs a fair degree of political stability and that doesn't seem to be on offer at the moment. However, to date, even the Japanese disaster doesnt look like an event that couold derail the global economic recovery. But each new crisis while its predecessor shocks remain unresolved raise questions about the durability of economic progress.
11:46 Darcy Keith - Don, I'd like just for a moment to discuss The Coxe Commodity Strategy closed end fund. It's been climbing steadily for a while and is now close to the IPO price in 2008 of $10. But it took a huge tumble after its premier. If you could re-live the past, would you have done things differently in terms of the timing or composition of it? Do you feel this was one of the biggest mistakes of your money management career?
11:53 [Comment From Don Coxe]/b>
Good question. We knew commodity prices were elevated but we also knew that as long as the global economy kept growing, commodity prices would keep rising. We were worried about the banking system, but we underestimated just how rotten it turned out to be. The collapse of that Fund's price wasnt due to the busting of a commodity bubble but the bursting of a banking bubble that turned out to involve the US and Europe. I spent a weekend with a group of central bankers just at the time the Fund was in distribution and, although they were from six different countries, not one thought that there was a financial crisis on the horizon. Had I known how bad the banks were in the industrial world outside Canada, I'd certainly not have suggested people but equities of any kind. I thought that the authorities would be able to manage the implosion of a few banks--but it turned out that hundreds were in trouble. Even the Basel Committee didnt foresee anything of the magnitude that occurred. The mania was in the financial communities--not the commodity markets. But the real got destroyed by the unreality of the biggest banks and the failure of central banks to intervene in their colledtive follies in time to prevent disaster.
11:55 Darcy Keith - Thanks Don. Now, here's Nel with a question related to future risks that could impact commodities.
11:55 [Comment From Nel ]/b>
Do you have a list of early warning signs you look at that would lead you to become bearish on commodities?
12:00 [Comment From Don Coxe]/b>
From the bitter experience I discussed in repsonse to the previous question, I'd say that this time I'll spend more time following the financial institutions' problems because the supply/demand situation for most commodities is still favorable for strong performnce of commodity stocks. What we also learned from the Crash was that Gold was the best-performing commodity and it went to a new high while much of the world was in recession and central banks were still pumping furiously to prevent a depression. I'm not sayng that all commodities are roughly selling in line with demand. I'm saying that a financial crisis is horrendous news for most commmodities other than precious metals. In fact, because investors saw how fast the precious metals recovered and entered major bull markets, if another recession looms, we could see major new highs for the major alternatives to paper money--which will be utterly discredited by a new crash
12:02 Darcy Keith - And, related to that, we've had quite of few questions today on where you see precious metals heading. Any specific forecasts you can share on gold and silver?
12:06 [Comment From Don Coxe]/b>
What is unfolding is a gradual loss of faith in paper money in much of the world. The epicenter of the current bull market for gold and silver is the eurozone. the euro is the only paper money in history that has no specific backing by a government, a tax system an army or a navy. It is the first currency to be issued not by a government but a theory. So the underpinning for themonetary metals is the continued deterioration in the fundamentals of the PIIGS in the eurozone, and of the banks across the eurozone which lent egregiouos amounts to the PIIGS. Ireland was bailed out mostly to save banks in europe, not because of a deep love for the Irish people. So investors need to have exposure to the historic stores of value now that the central banks and governments in so many countries are being discredited by events.
12:07 Darcy Keith - A couple related questions:
12:07 [Comment From Guest ]/b>
How are gold and silver prices performing YTD relative to mining equities that produce them? Should I consider investing in the commodity itself or the mining companies?
12:07 [Comment From Richard ]/b>
Hi Don, gold stocks have been lagging gold prices - why is there such a disconnect between them and spot gold?
12:10 [Comment From Don Coxe]/b>
Thlose are great questions. We have long argued that the great gold miners are better investments than bullion because the value of their unhedged reserves in the ground in politically secure areas of the world climbs with each new crisis that drives precious metals higher. It hasn't worked out recently, because investors are wondering whether the companies will be able to replace their production with orebodies that will be as profitable as those they're ming now. We believe that the companies have responded to this seeming disconnect and respect the managements of some of the leading companies which are building shareholder value even though so many investors are ignoring it.
12:10 [Comment From Jon ]/b>
Hi Don, Thanks for being here. Commodities are in a rout today- it really looks overblown (eg fabricated) Any thoughts?
12:15 [Comment From Don Coxe]/b>
That is, of course, a case of exquisite timing: the G&M booked me for a colloquium on a bad day for stocks generally and a particularly bad day for commodities and commodity stocks. Apart from that feature, I'd just say that, as a portfolio manager, I enjoy days like these because they give us buying opportunities. The commodity bull market is so pervasive across commodity classes that it's not going to end suddenly as long as the global economy is still progressing. The grain bull market could take a pause if the US crops get planted on schedule. That happened last year and grain prices slumped because it looked as if there'd be barnbursting yields. Instead, per-hectare production of the key grains was deeply disappointing and we had a roaring bull market. Will that happen again? Who knows? But even if we have tremendous yields, the carryover will still mean that, to coin a phrase, the world will be living hand to mouth
12:17 Darcy Keith - Amazing timing indeed! We've had a few questions on what your outlook is on commodities may mean for the railroads. Here's one:
12:17 [Comment From Larry S ]/b>
Please comment on railroads as an investment for Ag sector.
12:21 [Comment From Don Coxe]/b>
I like the railroad stocks, but can't buy them for the Fund. Warren Buffett bought BNSF which makes its money heavily from coal and grains--but he wont buy commodity stocks because they're too cyclical! Indeed, as the debate about exports of Canadian oil sands production to the US rages, the question of commodity transportation is becoming a hotter topic. The rails have done a great job of consolidation: we see that as we fly in or out of Chicago and see the massive rail yards--even though the number of rail companies has dwindled sharply. Canadians can be justly proud of their railway companies.
12:21 [Comment From Dave Lemons ]/b>
Don: I have benefited from your thoughts in Basic Points for years and I understand your present concentrations. Are there any other industries/sectors that hold page 16 stories, or fit mold where "people that know it best, love it least because they've been hurt the most?" Thanks
12:24 [Comment From Don Coxe]/b>
Thanks for those words. Perhaps it's because I was so shellshocked by the Crash in 2008, I'm digging persistently this time for the financial stories that will either signal that times will bet better--or much, much worse. Perhaps it's cussedness, but I've taken Japanese stocks off my "Dont' Buy" list where they've been for nearly two decades. I think this could be the bottom of the Japanese Triple Waterfall Crash, just as 9/11 turned out to be the bottom of the Comodity Triple Waterfall Crash that began in 1980.
12:25 [Comment From Guest ]/b>
Don hi, what is your view on the Uranium stocks like CCO and UUU in the light of the Japan crisis ?
12:28 [Comment From Don Coxe]/b>
The obvious answer is that the Japanese crisis will derail the progress being made in so many countries to build nuclear power plants. There are those who say that because it's so obvious these stocks are bargains, because there are all those existing plants that will need refueling. Problem: the damage done to the industry's credibility from a front-page horror story that keeps maintaining its front-page status is bound to be long-lasting. I'm a supporter of nuclear power for all the obvious reasons, but this is no time to let one's personal predilections get in the way of a truly massive problem. Look what happened to Angela Merkel in normally sensible Germany!
12:29 [Comment From Ahmed Khalifa ]/b>
Don, you are known for your excellent outlook on the Macro level, so , what do you think of the Chinese/Indian/Brazil Growth picture? Can they continue to grow while the US is heading into what seem to be deteriorating picture ?
12:29 [Comment From Don Coxe]/b>
As a follow-on, I think uranium will eventually become scarce again as projects for new mines get canceled. But not tomorrow
12:32 [Comment From Don Coxe]/b>
I remain a bull on China. I am now, for the first time in a decade, getting concerned about India as its poisonous politics and corruption interfere with what is otherwise an inspiring story or human progress. Brazil's politics are also taking a slight turn for the worse, but it remains a great growth story. The warning is that Brazil's stock market was up only 1% last year because the soaring Real has crimped profits in many sectors---just as a $1.15 loonie would be terrible news for much of the Canadian economy.
12:33 [Comment From AL Rosen ]/b>
What is the effect of the large hedge funds moving in and out of higher risk sectors in de-stabalizing the mkts ?
12:36 [Comment From Don Coxe]
What we have learned is that the fast-frequency traders can blow stock markets apart for a few minutes and shock investors. But as for hedge funds getting into or out of commodities, they can distort returns but not change the fundamentals. Right now, for example, there are no bears on silver and the bull population is at a record. That can imply a correction, but will not change the basic bullish fundamentals of silver as long as central banks are seen to be printing too much money and politicians are seen to be giving away too much money
12:36 [Comment From Pete G ]/b>
Looking at commodity stocks in general, and energy stocks in particular, do you favor large or small caps?
12:38 [Comment From Don Coxe]/b>
We like the oil producers more than the large integrated stocks--Exxon Mobil being a rpime example. But large cap producers and large cap service companies offer real attractions because they combined the qualities of management and technology in service of reducing scarcity of oil.
12:39 [Comment From D. Harrington ]/b>
Mr. Coxe, On a go forward basis can you comment on what you see happening with the US dollar?
12:39 [Comment From Don Coxe]/b>
If the greenback's recent chart were at the end of a hospital bed, you'd be ordering flowers.
12:42 [Comment From Richard ]/b>
Hi Don, in a recent article, you said 10 year yields in the States might double in the next few years. Would'nt it slow the economy and give us an even better entry point to invest in commodities?
12:42 [Comment From Don Coxe]/b>
You have put your finger on a truly fundamental question.
12:44 [Comment From Don Coxe]/b>
Let me add to that. As of this morning, 3 month money in the US was 4%. rates have to go up and then what? However, there has hever been an economic recovery with rates as low as now, so presumably most companies and most consumers could live with reasonable rates
12:45 [Comment From Don Coxe]/b>
OOPS: three month money was at four one-hundredths of a percent--an all-time low
12:47 Darcy Keith - Here's a question on a commodity too often forgotten:
12:47 [Comment From Guest ]/b>
Mr Coxe can you please comment specifically on cotton? what are your views on cotto over the next 12 months? Thanks.
12:50 [Comment From Don Coxe]/b>
Cotton's performance has been truly amazing--and it's alreadyhaving an inflationary impact on clothing prices. The big questions are: what will Pakistan's crop be? and How much corn acreage in the South will be planted in cotton instead? I dont know the answer to either of those questions, but am impressed that cotton is now selling at its highest price since the end of the Civil War.
12:50 [Comment From Brent ]/b>
Are you concerned at all with the success of commodity ETF's that we will get big volatility to the downside when we get into weak periods. I look at the GLD (and the other gold ETF's) and wonder if these will get dumped in periods of gold weakness and cause exaggerated moves to the downside.
12:54 [Comment From Don Coxe]/b>
I ponder that question from time to time, because I'm always uncomfortable when there's a potentially big factor out there that had NEVER occurred before. I'm an historian by background and I search for precedents. So those novel instruments that have atttracted so much money could prove to be the starrting point for the next commoditty bear market. However, they have drawn so much money that would otherwise have gone into the shares of commodity producers that the stocks just might hold up far better than the ETFs. Let's revisit that one when the next serious correction occurs, because a lot of MBA and PhD theses will be written about it.
12:54 [Comment From Guest ]/b>
how do you get around the contango or backwardation of the ETF's in the market place?
12:56 [Comment From Don Coxe]/b>
Anyone who invests--and stays invested--in the oil commodity roll products must either be a masochist or someone who'd be better off buying lottery tickets--where the chances of wining are better
12:58 Darcy Keith - We're nearly running out of time....Don, I'd like to just follow up with you on today's market situation. Commodities are hurting today and Goldman is reportedly advising clients no longer to take positions in Canadian stocks because of their heavy weight in commodities. Do you think this is just a blip here or the start of something more serious in terms of a correction in the big commodities? And what's your view on the Canadian equity market right now?
1:01 [Comment From Don Coxe]/b>
The only good reason for disinvesting in Canadian stocks right now is the assumption that the next government will include NDP participation. I have a lot of respect for Goldman, but my views on commodities very frequently have diverged from theirs during the long commodity bull market. They naturally like to suggest trades where people switch from owning a winner to buying a loser that might be changing its spots. That's not my game--and it very often has been a very bad call.
1:02 Darcy Keith - Thanks Don. Just a couple quick comments now from participants:
1:02 [Comment From Walter Schwager ]/b>
I would like to thank Don Coxe for his excellent, erudite and literate guidance through the world of commodities. I made so much money off his advice I probably owe him at least a couple of crates of Dom Perignon!
1:02 [Comment From Deborah ]/b>
I must thank you, I have learned more about how the economy works from your calls and Basic Points than anywhere else.
1:02 Darcy Keith - Don, any final thoughts you'd like to leave with our audience?
1:04 [Comment From Don Coxe]/b>
I'd like to thank those kind people and the others who have stuck with me over the years--and those who joined in today. the best part of my career has been getting associations with people whoe are prepared to take the time to try to think below the ripples on the surface of the markets and the economy. There are lots of them and I'm grateful to them all . Don
1:05 Darcy Keith - Thanks Don, this has been a very interesting discussion - and so well timed! My apologies to those questions we didn't have time to answer - we certainly had no shortage of them.
1:05 Darcy Keith - Just as a reminder, this live discussion is part of our Investor All-Stars series, which every month focuses on a specific sector and identifies the best performing analysts and fund managers.
1:05 Darcy Keith - Last month we took a look at ag
1:05 Darcy Keith - And, just released today, is our base metals package of stories.
1:06 Darcy Keith - Thank you again Don - and to all for joining us today!