BMO CM Basic Points April 2009

Basic Points
Where Will America Go to Grow?
April 21, 2009
Published by Coxe Advisors LLC
Distributed by BMO Capital Markets

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Company Name Stock Ticker Disclosures Company Name Stock Ticker Disclosures
Aluminum Corporation of China ACH Freddie Mac FRE
American International Group AIG 3,4 Goldman Sachs GS
Anadarko Petroleum APC Google GOOG 2
Apple Computer AAPL 2 Imperial Oil IMO
Bank of America BAC Microsoft MSFT 2
BHP Billiton BHP Morgan Stanley MS 3,4
Canadian Oil Sands COS.UN 1 Potash POT 1
Citigroup C 3,4 Research In Motion RIMM 1,2
Companhia Vale do Rio Doce RIO Rio Tinto RIO
ConocoPhillips COP Suncor SU 1,3,4
ExxonMobil XOM Wells Fargo WFC
Fannie Mae FNM
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Don Coxe
THE COXE STRATEGY JOURNAL
April 21, 2009
published by
Coxe Advisors LLC
Chicago, IL
April 21, 2009
Author: Don Coxe 312-461-5365

DC@CoxeAdvisors.com
Editor: Angela Trudeau 604-929-8791

AT@CoxeAdvisors.com
Coxe Advisors LLC. www.CoxeAdvisors.com

190 South LaSalle Street, 4th Floor
Chicago, Illinois USA 60603
OVERVIEW
The economic news in North America and Europe is as bad as the most pessimistic
bears predicted, and seems to get worse each month.
Yet New York and most global stock markets have been rallying powerfully. The
S&P’s six-week Spring rally was a percentage record-breaker.
Equity investors who have been rushing back into the market point to the stock
market’s historic pattern of bottoming just before the recession does, and rallying
while the recession fades. Pollsters report that investors are now more optimistic
than at any time since Lehman’s collapse.
President Obama, who became Fear-Merchant-in-Chief to overtake and win

against McCain, and stayed in that role until his “Stimulus Package” passed, then
appropriately became Cheerleader-in-Chief. More than 60% of voters support him
and want to believe in his newfound optimism. Many are doubtless putting their
money where his mouth is.
We have been arguing that those investors who didn’t sell last fall shouldn’t give
up now.
Although we have reluctantly come to believe that the President’s “Stimulus

Package” may vie with the AAA Mortgage CDO for the title of most mislabeled
financial offering of our time, we retain our confidence in Ben Bernanke, and still
hope that the gargantuan liquidity injections from the Fed and most other major
central banks will be enough to refloat the sinking US and global economies.
This month we revisit that counsel from a different perspective. All past bear
markets and recessions were nearing their ends when some sector or sectors of
the stock market and the economy began to take off, eventually providing the
leadership—and muscle—the overall economy needed to get growing again. In
other words, shrewd equity investors who took a bet on buying stocks, primarily
because they saw opportunities for outsized profit gains in those industries, not
only got their timing right, but outperformed for years.
We are leaving last month’s Recommended Asset Mix unchanged. Cautious though
we are, we are not re-issuing April’s time-tested advice for equity investors—“Sell
in May and go away.” Although we suspect that an increasing number of voters
will become less credulous about the relevance of President Obama’s policies to
the realities of the nation’s present and future challenges in coming months, we
doubt that the downside from here is either deep enough or certain enough to
validate a timing-based sale now.
April 1
2 April THE COXE STRATEGY JOURNAL
Is the stock market a good predictor of 1) the timing of the next recovery and (2)
the nature of that recovery?
The answer to (1) is Yes, but it usually takes a few false rallies before it gets its
forecast right. The trick for investors is in figuring out whether this rally is the right
one, or just another “Come on in, the water’s fine!” call that fails to warn of the
sustained profusion of sharks. The trick for investors
is in figuring out
The market’s record in answering (2) is considerably better. In fact, it’s been whether this rally is
spot-on since 1974. the right one...
The story line for each new economic and financial cycle included some new
winners and some new losers in its plot. Those shifts in shares of GDP and corporate
profits gave each new cycle its stamp.
The stock market senses these shifts before they become vindicated by financial
performance. While the bad news from big companies in high-profile industries
dominate Page One, on Page Sixteen are brief accounts of the improving outlook
for companies in industries whose growth should be particularly robust in the next
cycle.
Here’s how that process worked in the recessions we’ve lived through:
Apart from Japan’s demographically-driven Triple Waterfall Crash that begin in

1990, there have been three recession-powered Mama Bears since World War
II.
As the Mama Bear Market of 1973-74 was bottoming out in late November,
mining and oil stocks were moving up, led by gold miners. Those stars through
the gloom of what was then the worst bear market since the Depression became
investors’ favorites through the turbulent ups and downs of the rest of the decade,
prospering through the ensuing stagflation that crippled the economies of the
industrial world.
Their powerful outperformance would turn out to be the up-leg to a Triple

Waterfall Crash that would begin when stagflation was terminated by Volcker
and Reagan, launching a sustained disinflationary bull market that was wondrous
for virtually every stock group except commodities.
By February 1976, the S&P had climbed by a third from its December ’74 low,
but its returns thereafter to the end of the decade were substantially below Cash.
But the returns to holders of gold, silver and oil stocks remained great.
April 3
However, to stay on the winning side, they had to cash out those profits in 1980,
because a two-decade inflation-hedge Triple Waterfall collapse was dawning.
The winning trade became shorting gold and silver, and going long T-Bonds.
Then came the brutal Mama Bear Market of 1981-82, with the S&P down 48%.
As it was beginning to bottom out, defense stocks began to surge in response
The winning trade to the Reagan arms build-up, and high-grade consumer stocks began to show
became shorting gold... improving relative strength, as investors concluded that a powerful economic
recovery was inevitable once Volcker declared victory over inflation and 16%
interest rates were no more. The leaders in those industries led the bull market
that began August 13, 1982, as the Dow finally burst through 1,000 to stay—and
then kept rising, interrupted briefly by the Greenspan Baby Bear Crash of
1987.
Coming out of that Baby Bear, bank and brokerage stocks led, correctly
anticipating further Fed easing and a continuation of the Reagan boom.
The recession of 1990 that doomed the Presidency of the first George Bush
ended as a major new bull market in technology stocks was beginning. What
would later send it to previously-unimaginable valuation peaks was Greenspan’s
panicky flooding of the economy with liquidity after the Long-Term Capital
crash in 1998, and the appearance of Y2K Terror in 1999.
The most recent Papa Bear market arrived in 2000, forecasting the recession
that hit seven months later just as Bush was elected.
The Commodity Triple Waterfall Crash that had begun in 1980 finally ended
just as 9/11 proclaimed a new kind of war. The drastically-reduced population
of Defense stocks joined the ranks of US stock market leaders again. Base metal
stocks bottomed out right after 9/11, as some shrewd investors realized that the
metal miners’ miseries (which had been more severe than the suffering in other
commodity groups) had been, in significant measure, due to the major event
of 11/9—the day in 1989 when the Berlin Wall fell, signifying the coming end
of the Cold War. Since military procurement spending had, during the Reagan
buildup, been the major source of non-cyclical metal demand, the coming of
peace was terrible news for copper, zinc, nickel, aluminum and steel. Once the
USSR imploded, the great Gulag mines and other metal production facilities
across Russia’s 11 time zones suddenly faced zero demand from the military,
which had been more than 35% of Soviet GDP. (The Left—in the US and
across the world—had been reviling America for spending 6% of its GDP on
Defense, but studiously averted its gaze from the epicenter of Socialism, where
the USSR armament spending was six times that percentage of GDP.) Many of

the mines that managed to stay in production after Communism’s crash became
formidable price competitors with capitalist companies by making desperate
deals with Marc Rich to sell their output in world markets.
We proclaimed in February 2002, that what would become “The Greatest

Commodity Bull Market of All Time”—a new super-cycle—had already begun.
By that time, oil and mining stocks were already on wheels. The problem for The US had discovered
most US investors was that there were almost no US gold or base metal stocks a new export industry
left, and nearly all of the S&P’s commodity capitalization was represented by to participate in the
the big integrated oil stocks. As splendid as these stocks would be in coming global trade boom—
years, none of them had what would become the defining characteristic of value Wall Street-created
in this decade—long-duration reserves in politically-secure regions of the world. derivatives.
(Indeed, a painful percentage of Exxon Mobil’s and ConocoPhillips’ reserves
were located in Russia, and had to be written down as the KGB came back from
the dead to become Russia’s new ruling class, and began settling old capitalist
scores on terms to their liking.)
Yes, there were a few US agriculture-related stocks in the S&P, but it would be
four years before grain prices entered major rallies, sending the seed, fertilizer
and farm equipment stocks into powerful bull markets.
However, the force that propelled the Dow and S&P to new peaks was the astounding
rally in financial stocks. The US had discovered a new export industry to participate
in the global trade boom—Wall Street-created derivatives. The sharp increase in
jobs in this new export sector made up for the jobs lost to foreign competitors in
the goods-producing industries. By 2006, 41% of US corporate profits were being
booked by banks, brokers, mortgage companies, insurers, hedge funds, and private
equity firms. (The financial sector’s share of profits was in the 20% range during
the 1970s and 80s and the 25% range during most of the 1990s.)
Congress’s vast interventions into the housing market to promote trillions in

mortgage lending to impecunious individuals, (with emphasis on non-Asian
minorities having low or no credit ratings) was fueled by Wall Street’s record
panoply of unconscionable excesses. Washington and Wall Street justified
themselves to critics of the debasement of mortgage-lending principles as being
high-minded donors of The American Dream to the unjustly disadvantaged. The
array of new products rewarded politicians connected with Fannie Mae and Freddie
Mac (F&F) who promoted them, the Street that fashioned them, and investors who
rushed for the higher interest rates on these pseudo-scientific confections. Step
right up! Everybody wins!
April 5
Without the surging growth in newly-spawned CDOs and CDSes, and their bastard
brethren, the US economy and US stocks might have passed a placid decade. There
would have been no recession, because economic growth would probably have
been just enough to keep unemployment from rising to worrisome levels, and there
would have been, apart from LBO loans, no big bankruptcies that would threaten
...the financial and the financial system.
housing booms were But the financial and housing booms were “such stuff as dreams are made on.” The
“such stuff as dreams real growth in economic activity was mostly elsewhere. For the first time, global
are made on.” economic growth and trade driven by booms in China and India far outpaced US
GDP growth. The US trade deficit kept climbing, as US factories’ share of US
consumption kept falling. The outsourcing of US production for US consumers to
producers in China, Taiwan and South Korea swelled global figures at the expense
of US jobs and US GDP.
US-oriented equity investors were missing out on the fundamentally-driven booms

across the Pacific:
Toronto Stock Exchange (TSX Composite)
January 1, 2002 to June 30, 2008
15500
14500
14010.39
13500
12500
11500
10500
9500
8500
7500
6500
5500
Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08
Australian Stock Exchange Index (ASX200)

7000
6500
6000
5500
5000 5082.1
4500
4000
3500
3000
2500

Shanghai Stock Exchange (SSE Composite)
6500
5500
4500
3500
2669.89
2500
1500
500
South Korea Stock Exchange (KOSPI Composite)

2100
1900
1700
1577.9
1500
1300
1100
900
700
500
Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08
Taiwan Stock Exchange (TWSE)

9500
8500
7500 7228.41
6500
5500
4500
3500
April 7
As Larry Summers observed in his speech to the Washington Economic Club

on April 9th, we now know that US economic growth in the late 1990s and this
decade was heavily dependent on bubbles—first technology and then financial.
(He was Chairman of Clinton’s Council of Economic Advisers, and neither he
nor Alan Greenspan warned America of the tech bubble. He was also one of the
...many of the bank most powerful promoters of the campaign to repeal Glass-Steagall, which led to
stock rallies smell creation of the new investment banks, such as Bank of America, which sought—for
suspiciously like dead a while successfully—to take market share from the long-standing investment
cat bounces rather than banks, Goldman, Bear Stearns, Lehman and Morgan Stanley, and became major
cool-eyed appraisals of factors in the second bubble.) His successors in the White House—and Alan
tomorrow’s economy. Greenspan—may have learned something from the 1990s, because they made
strong efforts to rein in F&F as far back as 2004, but were blocked by Congress,
led by Barney Frank and Chris Dodd. Chuck Grassley, ranking Republican on the
Senate Finance Committee, offered only token help to the White House in the efforts
to avert the looming disasters for F&F. (Grassley was back in the news recently
with his recommendation for AIG: amid the rage about the bonuses, he displayed
characteristic Senatorial wisdom and restraint: he stated that the problem would be
solved if the AIG executives committed suicide to atone for their “crimes.”)
Since the S&P’s record run-up from its March 9th low was led by the financials
and homebuilders, it might appear—based on the relative strength performance in
earlier bear markets—that investors now believe the next recovery will be like its
predecessor, meaning that Wall Street is headed back to global pre-eminence.
However, many of the bank stock rallies smell suspiciously like dead cat bounces
rather than cool-eyed appraisals of tomorrow’s economy.
Those who believe that the banks and homebuilders are about to return to previous
levels of financial strength and profitability should be barred from managing
their own—let alone anyone else’s—money. Before there can be tempting
rewards for the two industries that together created the financial crisis, there will
be payback time. (Not that most of their loans will be paid back.) Much of the
trillions of taxpayer money propping up those industries will have to be written
down and refinanced before either the stockholders or CEOs are enriched anew.

Moreover, star investment bankers in the big, bloodied firms which have been
the biggest recipients of TARP funds have been migrating en masse to brand-new
boutiques which seek to grab market share in advisory fees from the big banks.
Citi is little more likely to return to its former glory than Pompeii. As for Vikram
Pandit, the only way he’ll make the kind of money he was being paid is to win
a Mega Millions lottery. (The odds of winning over the years by buying lottery Citi is little more likely
tickets week after week may well exceed those from buying CDOs at face value to return to its former
week after week.) glory than Pompeii.
We doubt that the stock market has fully priced in the doleful data about household
wealth destruction. Last week, The Financial Times reported a McKinsey Global
Institute study that reminds us of the scale of the challenge. “From 2003 until the
third quarter of 2008, US households sucked $2,300 billion of equity from their
dwellings. About $890 billion was used for personal consumption or for home
improvements—a sum exceeding the Obama Administration’s emergency stimulus
package….Since its peak in 2007, household net worth has fallen by $13 trillion,
almost equivalent to one year of US output.”
It could be a long slog back to traditional American consumer exuberance.
We remain of the view that this bear market, like all other financially-driven
bears, can only end when financial stocks have not only stopped falling, but have
demonstrated sustained relative strength. No economic recovery and no true
bull market will arrive until the financials are strong enough to make a positive
contribution to the economy and to financial market activity. In past cycles, the bank
stocks came back from disaster largely on their own—and those recoveries helped
kick-start recoveries in the stock market and the economy. This time, the shares of
the big banks collectively have bounced back big, but only because of trillions of
subsidies in various forms from the taxpayers and the Fed. Although neither their
stock prices nor their CEOs’ compensation will once again attain the stratospheric
levels they achieved in this decade, they must cease to be voracious consumers of
taxpayer funds before the stock market can believe in their sustainability and the
real economy reasserts itself.
Which other equity groups are showing good relative strength?
Most prominent are two sectors which are heavily-levered to growth in world
trade—technology and commodities.
April 9
Relative Strength of Technology and Basic Materials to S&P:

These two groups have not traded together historically, because their basic business
models are opposed. Basic materials companies’ earnings gains have historically
been based on rising price levels for units of output of commodities whose
reserves are limited and whose supply cannot be expanded rapidly. Conversely,
Technology and Basic tech companies’ earnings have been based on rapid growth in output of units of
Materials...have not products whose prices are under near-continuous downward pressure from global
traded together competition.
historically, because
their basic business So why should they trade together now and into the next recovery?
models are opposed.
Nasdaq 100 relative to S&P 500
November 1, 2008 to April 20, 2009
120
115
111.99
110
105
100
95
90
3-Nov 23-Nov 13-Dec 2-Jan 22-Jan 11-Feb 3-Mar 23-Mar 12-Apr
BHP BIlliton (BHP-NYSE) relative to S&P 500

150
140
130 131.16
120
110
100
90
80

CVRD (RIO-NYSE) relative to S&P 500
150
140
130 129.45
120
110
100
90
80
Potash Corp. (POT-NYSE) relative to S&P 500

140
130
120
113.96
110
100
90
80
70
60
Imperial Oil (IMO-NYSE) relative to S&P 500

135
125
116.59
115
105
95
85
April 11
Suncor Energy Inc. (SU-TSX) relative to S&P 500

155
145
135
...the leading info-tech 125

115 117.69
companies are, more
than most other major 105
American industries, 95
now tied directly into 85
growth of economies 75
abroad. 3-Nov 23-Nov 13-Dec 2-Jan 22-Jan 11-Feb 3-Mar 23-Mar 12-Apr
Probably because the leading info-tech companies are, more than most other
major American industries, now tied directly into growth of economies abroad.
The overinvestment in productive capacity that helped trigger the Triple Waterfall
collapse has been largely worked off through obsolescence. Now, the same new
Third World middle class which created the commodities boom is also the driving
force behind the growth in sales of cell phones and other tech hardware, along with
the supporting software. Nasdaq’s Big Ten info-tech companies now derive most
of their earnings from industrial and commercial expansion abroad.
However, Nasdaq is still in the mid-stage of its Triple Waterfall, which means
shakeouts of weaker companies will continue, and margins of the stronger
companies will be under sustained pressure; it can rise significantly, but will not
return to its peak. That doesn’t mean there won’t be some strong rallies, and that
some superlative performers won’t be great investments in absolute and relative
terms for the next recovery. But among tech’s brightest stars, such as Research in
Motion and Apple, the only certitude is that the more success they achieve, the
more certain is new—and potentially tougher—competition. Even Google may not
be immune to new challenges to its dominance. Microsoft, the PC monopolist, is a
special case, but the fact that it trades at a mere nine or ten times earnings suggests
that investors have begun to worry that the next generation of handheld devices
may hold something it has not had to face: real competition.

For mining and oil companies, the big challenges aren’t from other companies or
from new technologies, but from (1) the current doubts on global demand for the
materials they produce, and (2) from the difficulties they face in increasing—or
even replacing—current production from the shrinking supply of economic
reserves in politically-secure regions of the world.
The agricultural companies are another kind of scarcity story. They sell to millions We believe the next
of consumers whose ability and willingness to pay for their products comes economic cycle, like
from the global demand and pricing of their crops. The companies’ perils come its predecessor, will be
from protectionism and politics: Their opponents are the NGOs, politicians, and driven primarily by how
celebrities such as Prince Charles [who seems to devote himself to making even much growth in global
confirmed monarchists wonder whether republicanism is worth a second look]. trade exceeds actual
These new reactionaries yearn to bring back the days of quaint, small, mixed farms global GDP growth.
producing a variety of crops fertilized with manure, when farmyards were noisily
and odoriferously alive with chickens, pigs and cows.
What does the powerful relative strength of the shares of tech and commodity
companies tell us about the US economic outlook?
We believe the next economic cycle, like its predecessor, will be driven primarily by
how much growth in global trade exceeds actual global GDP growth. Therefore,
the non-agricultural US economy and the major US stock indices will be global
underperformers.
The Collapse in Global Trade

In The New York Times last week, (“World Trade Shrinks”, April 11, 2009) Floyd
Norris updated the alarming statistics on global trade. Using data from 15 major
global economies, he showed how powerful was the growth in trade in this
decade—and how horribly it has plummeted since mid-2008.
For the group, total exports from those countries grew from 2002 until mid-2008
at double-digit rates, frequently reaching the 20% range, and dipping below 10%
for only a few months.
Then it fell off a cliff.
April 13
The data for year-over-year percentage decline of exports in February are of

Draculate horror proportions:
China – 41%
Taiwan – 41%
Japan – 38%
The CRB fell faster in Canada – 33%
late 2008 than during France – 33%
the onset of the Germany – 32%
Great Depression. Britain – 32%
Brazil – 25%
USA – 22%
India – 22%
Note that this list is not distorted by the collapse in oil prices. Only one oil-exporting
nation—Canada—is included, and Canada is an industrialized nation. Therefore,
the potent pummeling to those other economies’ exports far offsets the benefits to
their trade balance and consumers’ living costs from the plunge in oil prices.
Norris quotes Barry Eichengreen of the University of California, who says trade is
collapsing more severely than in 1929-30.
With global trade so sickly, most commodity producers should, in theory, have
outlooks appropriate for a factory whose biggest profits last year came from
producing McCain-Palin buttons.
There is no questioning the savagery of the impact on the prices of their output:
RJ-CRB Futures Index

January 1, 2007 to December 31, 2008
500
450
400
350
300
250
229.54
200
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
The CRB fell faster in late 2008 than during the onset of the Great Depression.

So why have commodity stocks been outperforming major stock markets—and
commodity prices—for the past six months?
Several factors are worth considering:
1. Commodities and commodity stocks kept rising for eight months after the
Dow and S&P had entered their bear markets. As the last-remaining profitable ...monetary expansion
asset class for long-only hedge funds and other levered players, they doubtless [in the 1970s] was
attracted a disproportionately-large percentage of fast money before “The tortoise-paced
Midnight Massacre of July 13th” triggered panic liquidation. Perhaps long-term compared to even a
investors were waiting until the effects of the Lehman bankruptcy on the $65 dull month for the
billion of hedge fund assets had been worked off and now believe the commodity Bernanke Fed...
stock hammering was overdone.
2. The unprecedented scale of reliquification and bailouts from Washington,

London and Europe argues that this will continue to a recession—not a
Depression. Although the economic forecasters who have the responsibility
for proclaiming the beginning and end of recessions informed the world late
last year that the US recession had begun in December 2007, the vertiginous
plunge in the global economy was anticipated by only a handful of long-time
bears. The power and suddenness of the collapse made at least a few long-term
investors conclude that the global economy might also snap back quicker than
the born-again bearish consensus is predicting. Therefore, commodity prices
should turn upward before most experts become convinced the economy has
touched bottom.
3. “Quantitative Easing” became the new term for monetary policies in Washington
and abroad. Many sophisticated investors consider this a euphemism for
seriously inflationary monetary growth. The last time excessive monetary
growth was launched to fight a global recession came in the 1970s. Although
the rapid monetary expansion then was tortoise-paced compared to even a dull
month for the Bernanke Fed, it unleashed stagflation, majestic gold and silver
Triple Waterfall run-ups, and years of outperformance by commodity stocks.
Why couldn’t commodity investments be even bigger winners this time?
April 15
4. Last year’s plunge in raw materials prices triggered panicky production

cutbacks and major slashes in exploration and development in the mining and
oil industries. It didn’t take long for analysts to crawl out from under their
desks and opine publicly that commodity prices could go back quite swiftly to
their former peaks once the global recession ended. Example: Daniel Yergin’s
The G-20 Meeting in Cambridge Energy Research Associates, which had persistently underestimated
London did more than oil price gains from 2003 through 2008, recently raised its estimates for oil
repeat pious platitudes prices sharply for the next decade, because of the abandonment or delay of so
against protectionism... many big-ticket oil projects.
5. High-profile bids for commodity production assets emerged amid the carnage.
Most notable was Chinalco’s bid for Rio Tinto facilities in Australia, which
investors believe has Beijing’s backing. Since these bids came at a time that
China announced it was rebuilding its “strategic” reserves of oil, foods and
metals, investors began to reconsider analysts’ forecasts for Depression-style
collapses in raw materials prices.
6. Remarkably, the strong commodity stock performance came against the

backdrop of the strongest rally in the value of the dollar in this decade. Almost
every commodity investor knows that, for decades, the most reliable of inverse
correlations has been of the performance of commodities compared with the
dollar. Commodity stocks should therefore have continued to lead the stock
market down noisily, instead of quietly rallying. What happens to commodity
stocks when the dollar bear re-emerges?
7. As one country after another fell into recession, various gloomsters began
predicting a full-scale retreat from free trade to protectionism. Although
President Obama, goaded by a reactionary Democratic Congress, has on occasion
been a publicized sinner on trade, and has thereby provided convenient excuses
for backsliding among such long-time agnostics on free trade as France, the
percentage of global trade subject to outright protectionism remains (rather
surprisingly) quite small. The G-20 Meeting in London did more than repeat
pious platitudes against protectionism: it lined up huge financing for Third
World economies in order to arrest the decline in global trade. Those of us those
who think the recession should be over within a year predicate this vestigial
optimism on the hope that protectionism will not gain a renewed stranglehold
on the global economy.
8. Adding these considerations up, this looks like a good time to search for values
among the raw materials producers.

We realize that readers may be smiling: we’ve had such a lengthy love affair with
commodities, were suddenly and furiously rebuffed, and yet we’re eager to come
back for more?
Answer: we “fell in love” with commodities because we believed that China and
India would, in the coming decades, regain their multi-century status as the world’s
largest economies. That means their demand for raw materials will put continuous, China’s stimulus
powerful pressure on global commodity supplies. We aren’t economists, and hadn’t program...
anticipated the sudden onset of the worst recession since the Depression. On the unlike Obama’s,
assumption that this downturn will end, then the commodity story will be more is the real thing—
relevant than ever. Moreover, we have growing doubts that the US economy will targeted and temporary
regain its characteristic global leadership, so most US stocks lack the attractive
long-term fundamentals of the leading commodity stocks.
There remains the question whether “wishing makes it so.” If stock market prices
are firm, and shares of basic materials companies are outperforming, does that
mean the global recession’s lifetime, in comparative terms, now approximates
that of a Somali pirate who grabs a breath of fresh air while SEAL snipers are
watching?
More than one economist has cited the powerful stock market rally—and
particularly the outperformance of bank stocks—as a good reason to believe the
recession will end sooner, rather than later. They point out that rising stock prices
lead to rising levels of equity offerings—the first step in redressing the perilous
position of global debt to global equity. Goldman is, once again, out in front, with
a $5 billion equity sale that could permit the firm to repay its TARP financing (and
free the firm to pay its top performers what it thinks they’re worth—a privilege not
available to banks subsisting on government financing).
Some economists have begun to cite the good performance of commodities as

evidence that the collapse in global trade may be over, and that an economic
pickup could occur within a few months. In particular, reports that China’s stimulus
program (which, unlike Obama’s, is the real thing—targeted and temporary) is
already working, have sent buyers into metals futures and metals stocks.
History says that the stock market could be somewhat premature about the
timing of the upturn in global trade, but has not erred in its choice of stock
market leadership in the next economic cycle.
So the next thing for investors to ponder is…
April 17
Which Sectors Will Be Hiring Heavily When the US Recession Ends?

GDP is simply output per worker multiplied by the number of workers, minus the
trade deficit. So which sectors will soon be hiring again?
1. Can State and Local Governments Create New Jobs?

California, a particularly During this decade, state and local governments’ budgets soared along with real
conspicuous profligate, estate prices. Employees’ unions had little difficulty extracting hefty increases
is asking for a federal in wages and benefits. In particular, many states found that an excellent way to
rescue, and the line disguise the generosity of their sweetheart union contracts was to increase pension
forms to the left. and other retiree benefits that would not show up in actual spending until later.
(Illinois is now $50 billion in debt, and its biggest problem is its underfunded
pension and retiree health benefits. Because so many collective bargaining
agreements provide for retirement at young ages, Medicare is not an offset for
ballooning health costs.)
Now, the many loose-spending states and municipalities are finding that those years
of boosting expenditures even beyond the bubble-driven increases in property taxes
have them in a bind. California, a particularly conspicuous profligate, is asking for
a federal rescue, and the line forms to the left.
So states and municipalities are raising taxes, asking employees to work four
days a week for several months, and, in some cases, threatening to open the jails,
even for felons convicted of violent crimes. (This latter stratagem seems to be a
new version of the justly cherished “Washington Monument” strategy. When a
Republican President threatened to impose deep cuts on the budget sent up by
a Democratic Congress, the immediate response within the bureaucracy was to
recommend shutting down the Washington Monument.)
Last week, Moody’s downgraded the debt of nearly all states and municipalities,
citing serious deficits almost everywhere.
Municipalities already face taxpayer wrath because the house values they use for
today’s property tax bills come from those golden days when everybody knew that
house prices never go down. Most states and municipalities are constitutionally
forbidden to budget for deficits. Raising taxes now will not only trigger ratepayer
fury, but will, according to published calculations, seriously offset the Obama
“stimulus package.”
Therefore, looking to the early years of the next cycle, we believe that states
and municipalities will not be contributing to the solution of the unemployment
problem by rapid rebuilding of their staff complements.

Doubtless, one of their responses to budget crises will be to cut payrolls by
offering incentives for earlier retirement. Since state and local pension plans in
the aggregate are already Cadillacs compared with the Chevrolet models in private
plans in the aggregate, enriching benefits can only cut current costs by degrading
states’ balance sheets even further. The next actuarial valuations of their plans will
hit future state budgets hard. We now understand
True, states will be boosting spending on infrastructure without imposing extra the Audacity of Hype—
taxes on their residents using Congressionally-generated funds. But the states only when that hype comes
function as pass-throughs on federally-funded projects, and those funds do nothing from the Ruling Class.
for states’ straitened finances. The “Stimulus Package” may only offset the cutbacks
on roads and bridges financed locally. So far this year, state and municipal highway
contract projects offered for bidding are down 24%.
Conclusion: the sector that was a significant help to the economy in recent decades
by its steady gains in middle class payroll employment is already becoming a drag
and threatens, in some cases, to become an anchor. (California is now experiencing
out-migration, as businesses and individuals flee to states with sounder fiscal
situations and lower taxes. What was once the nation’s leader in attracting
inward migration has joined such other high-tax population losers as New York,
Pennsylvania and Illinois. But the national economy cannot move forward based
on the relatively sound finances of Utah, Idaho and Wyoming.)
2. All Those Beautiful Jobs From “Clean” Energy
The Obama budget calls for hundreds of billions in government spending on

alternative fuels and other forms of “clean” energy.
This will be financed, in part, by “cap and trade” taxes on carbon-generated energy,
such as coal, oil, and natural gas-generated electricity.
When the President spoke to the press after meeting with his economic team, he
spoke of some optimistic signs in the economy. Specifically, he cited new jobs in
alternative and clean energy. These jobs are already coming, he said, as we reduce
our dependence on foreign oil.
He naturally made no mention of the thousands of jobs lost in the oil and gas
industry because of low current prices for natural gas, and because he overruled
Bush’s repeal of the ban on offshore drilling for oil and gas. (We had predicted last
year that offshore exploration would be a key growth sector for the US economy
during the recession and well into the next cycle. We had not expected ideology
to triumph over pragmatism during an economic crisis. We now understand the
Audacity of Hype—when that hype comes from the Ruling Class.)
April 19
When Congressional Republicans suddenly found last summer that they had a
hot political issue in offshore drilling, and chanted “Drill, baby, drill!” at their
convention, it looked for a few weeks as if liberal elitists were at bay. Nancy Pelosi
managed to prevent a vote in Congress on repealing the ban on offshore drilling.
When she was challenged, she replied, “I’m just trying to save the planet.”
...oil, a commodity Joe Biden contributed his characteristic wisdom to the debate. He said the oil
that has a deeply industry “wants to rape the Continental Shelf.”
Texan taint.
That the oil and gas drilling industry is losing tens of thousands of workers doesn’t
seem to upset the latte liberals as long as people in white coats get more jobs in
non-profit institutions in the North and on the Coasts doing research on schemes to
replace oil, a commodity that has a deeply Texan taint.
In assessing the Obama budget, it becomes immediately clear that the full-scale
fight against global warming is The Cause scheduled to (1) create new jobs and new
investment to stimulate the economy, (2) give Washington new, permanent control
over a wide range of private sector capital investment programs, including mining,
refining, the design of automobiles, setting energy-saving design specifications
for buildings, and intervening in banking to promote financing for fashionable
projects, (3) win friends in Europe to get help for America’s military operations
abroad, so that fighting the Taliban will not prove to be Obama’s millstone, as
Iraq was for Bush, and, (4) generate automatic, gigantic stealth tax revenues that
operate independently of annual budget reviews….all while saving the planet (and
its polluting people) from otherwise-inevitable catastrophe.
The driving force behind this program came from a long-awaited excuse for
expansion of federal power over the economy: the Environmental Protection
Administration last week decreed that Carbon Dioxide is a pollutant. That puts it
right up there with Chlorine Gas, Sulphur Dioxide, Hydrogen Sulphide, Ozone,
and other products of industrial and transportation activity that have long been
subject to regulation because of their serious impact on human and plant health.
Fighting air and water pollution is a cause we can all support. We were among the
many Canadians who, for years, tried to get American Presidents and Congresses
to take Acid Rain seriously. Living in Southern Ontario, we were downwind from
numerous toxic coal-fired electricity plants that were having devastating impact
on our hardwood forests. (Because of the location of the plants and wind patterns,
Canadian forests suffered more than American forests, so it was hard to get
Congressional attention to “a Canadian problem.” Eventually, real progress was
made, and Ontario’s forests recovered. So we believe strongly in using the power
of the state to protect the air we breathe and the water we drink.)

But putting Carbon Dioxide—part of the air we actually and naturally breathe in
and, with extra CO2 —out—on the same list with those industrial-generated toxins?
Isn’t that somewhat like amending an anti-noise bylaw aimed at motorcycles and
huge trucks to include a potent penalty for belching?
The Obama Answer: We—and the planet—are doomed unless we cut back on
CO2. That is now the unanimous opinion of all respectable scientists, as proven The roughly 1.2
by decades of data showing escalating global temperatures. The Nobel Prize billion citizens of the
Committee ended what was left in the debate by awarding its Peace Prize to Al industrialized countries
Gore. are expected (under
Kyoto) to reduce their
“The time has come,” the leader said, emissions. The other 5
“To talk of warming things: billion, including China
Let Business pay a climate tax and India…aren’t…
And folks, by using things
That make the sea grow boiling hot,
As CO2 takes wings”.
James Hackett, Anadarko’s CEO, has had the guts to emerge from the oil industry’s
foxhole on this topic, inviting enemy fire. He says the global warming-driven policy
of preventing development of US oil and gas in favor of massive spending on research
in wind and other alternatives, backed by hundreds of billions in taxes on businesses
and consumers through “cap and trade” schemes will cripple the US economy in two
ways: it will prevent the creation of hundreds of thousands of good-paying jobs in the
oil exploration and development sectors, and will impose huge burdens on America’s
industrial economy, at a time China and other nations will be merrily adding new
oil and coal-fired plants, generating low-cost electricity to make their factories even
more competitive. (In three years, China constructs as many megawatts of cheap
[3 cents per kwh] coal-fired electrical generation as the US has in operation, and a
new plant starts adding to global pollution every week.)
Peter Huber, writing in City Journal notes, “The roughly 1.2 billion citizens of the
industrialized countries are expected (under Kyoto) to reduce their emissions. The
other 5 billion, including China and India…aren’t…. Windmills are now 50-storey
skyscrapers. Yet one windmill generates a piddling 2 to 3 megawatts; Google is
building 100 megawatt server farms. Meeting New York City’s energy demand
would require 13,000 of those skyscrapers spinning at top speed, which would
require scattering about 50,000 of them across the state to make sure you always
hit enough windy spots…Even if solar cells themselves were free, solar power
would remain very expensive because of the huge structures and support systems
required to extract large amounts of electricity from a source so weak that it takes
hours to deliver a tan.”
April 21
Such science-based objections cut no ice in the crusade to impose on the economy
a whole new structure of controls, subsidies and taxes to offset a global climate
change on which scientists disagree.
Last week, the President rejected the growing demands to postpone “cap and trade”
until the economy recovers. He reiterated his conviction—that drew such cheers
Since the cooling began, across Europe—that fighting global warming is our top priority, and must not be
the global warmists delayed.
have retitled their cause
“Climate Change.” The air war is on, and it threatens to make the Battle of Britain look like a quaint
exercise.
A few observations:
1. As the Cato Institute noted in a full-page ad, President Obama was just plain
wrong when he asserted the science of global warming was beyond debate. The
ad was signed by 116 scientists from around the world. (http://www.cato.org/
special/climatechange/)
2. The cooling that has already occurred in this decade has driven global
temperatures down to 1980s levels.
3. As many climatologists admit, the long-term temperature statistics showing

rising temperatures in the world’s cities have an inherent bias: urban records
tend to be based on data from airports, and the more tarmac is created, and the
more grass disappears, the more heat is generated. Moreover, Michael Crichton
demonstrated, long-term data from weather stations located far from major cities
generally failed to confirm the temperature increases shown for cities.
4. Finally, we have many centuries of data to show a close correlation between

sunspot activity and recorded temperatures. The correlation is so close that
even a one-year cessation of rapid activity has generally shown cooling effects
globally. As scientists have routinely noted, in the 25 years leading up to this
decade, we experienced the most intense, sustained sunspot activity for which
we have records—and global temperatures rose. In the past two years, we
have experienced the lowest level of sunspot activity in nearly a century—and
temperatures have fallen sharply—and North Pole ice coverage has climbed
dramatically.
Since we have been commenting on this for nearly two years, we obviously have
staked out our claim for what we call history-based skepticism about a popular
new theory. Since the cooling began, the global warmists have retitled their cause
“Climate Change.”

We agree with that: all the records show that the world’s climate is in constant
change. Greenland was a grape-growing region a thousand years ago. “Saving
the planet” is a quixotic rallying cry if it means trying to keep Earth’s climate
and topography frozen to Sixties levels, no more than saving Earth’s Art means
banning all post-Sixties music and art.
Freeman Dyson, of the Institute for Advanced Study in Princeton, was the subject ...all the records
of a recent cover story in The New York Times Magazine. He has a long career as a show that the
distinguished scientist routinely active in liberal causes, so his vehement rejection world’s climate is in
of the global warming thesis has attracted considerable attention from leaders in constant change.
both sides of the debate. In a recent essay, he writes about the prospects of a “New
ice-age…the burial of half of North America and half of Europe under massive ice
sheets. We know that there is a natural cycle that has been operating for the last
eight hundred thousand years. The length of the cycle is a hundred thousand years.
In each hundred-thousand year period there is an ice-age that lasts about ninety
thousand years and a warm interglacial period that lasts about ten thousand years.
We are at the present in a warm period that began twelve thousand years ago so the
onset of the next ice-age is overdue…..Do our human activities in general, and our
burning of fossil fuels in particular, make the onset of the next ice-age more likely
or less likely?”
Dr. Dyson deals with a threat to humanity—but not to the planet—that is more
predictable than global warming. We cite him only to point out how little about the
earth’s climate future truly serious scientists know.
The sunspot debate deals with data for the last 800 years—a twinkling of the
geological eye. Nevertheless, sunspots could prove to be of significance for a five-to-
fifteen year time horizon, which is why we discuss them in an investment journal.
As the sunspots became “nonespots” and stories of extra-cold weather became

commonplace, we have heard from more and more clients, “Why don’t more
scientists agree with you, since your evidence is based on incontestable data over
many centuries, and theirs is based on computer models of recent decades and
projections into the future?”
The biggest reason is that even those scientists who admit that the evidence of
correlation between global temperatures and sunspot activity is powerful, they feel
they cannot accept it as conclusive because the relationship could, in theory come
purely from coincidence.
April 23
That’s why we were so interested last week in reading the report of an interview
with Harvard (and Smithsonian) astrophysicist Dr. Willie Soon. (http://www.
thecrimson.com/article.aspx?ref=527650)
In brief, he says high levels of sunspot activity—such as the earth experienced

during the past century—increase the volume of water vapor, the greatest of all
...skepticism is in order. greenhouse gases, warming the earth in two ways: First, when vapor condenses,
it increases cloud cover and that prevents terrestrial heat from escaping into the
atmosphere. Secondly, it also increases the density of ultra-high cirrus clouds (5-8
km) that prevent heat from escaping into space.
He concludes, if sunspots don’t return by year-end, global warming scientists will

probably be forced to recalculate their forecasts.
Don’t bet on that triumph for science-based science. Al Gore has another mega-
money-making book coming, and that means nearly all the media and politicians
will be warning of warming. Moreover, the United Nations has scheduled a
December conference in Copenhagen on the global warming crisis. Like the
UN’s sequel to the Durban anti-Israeli bashfest, there can be little doubt about the
conclusions from that cool Yule Conclave of the Correct.
Are the American Banks Really Back On Track?

The Bank stocks led the market coming off the March low, helped by good news.
Those rallies made it look as if happy days were here again.
But skepticism is in order.
KBW Bank Stock (Large Cap) Index (BKX)

January 1, 2007 to April 20, 2009
130
110
90
70
50
30 31.48
10
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09

SPDR KBW Regional Banking Index (KRE)
60
50
40 ...“toxic assets”
have become
30
“legacy assets”...
20 20.06
10
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Goldman’s profit announcements last week suggest that at least one of the biggest
of what used to be “pure investment banks” is back in business. They help explain
why Goldman stunned the markets last month by financing a Japanese theme
park.
That Goldman plans to repay its $10 billion TARP financing so it can resume its
bonus-based compensation system is superficially reassuring. But even if it does
pay back the loans, it will continue to benefit big from Washington aid because
its deposits and short-term borrowings remain government-backed. It was a big
winner at taxpayer expense when AIG paid 100% of its CDS liabilities. All that
glitters on the Street is not Goldman, but it didn’t take long to return to regain its
shiny status.
Wells Fargo’s pre-announcement the previous week was superbly timed to send
bank and other stocks sharply higher. However, most of those splendid profits
came from fees for refinancing mortgages at the new, low rates. We can only
assume that these mortgages were not among those that were poisoning its balance
sheet, and were in fact among the best loans on its books. (We note that, among
the long list of neologisms the imaginative Administration has been introducing,
“toxic assets” have become “legacy assets,” and “Deficit Budgets” have become
“Investments.”) The rebranding of financially friendless CDOs as “legacies” will,
in theory, make them treasures the private sector will eagerly buy. Legacies used
to be real assets that got taxed on death. Now they include the “assets” which have
been killing banks.
The still-huge spreads in the corporate debt market are attracting more commentary
from equity strategists. Why are stocks so robust, led by the new vigor of the
banks, when the corporate debt markets remain tuberculous?
April 25
Our first decade of portfolio experience came from managing balanced funds,
so we quickly learned to watch for conflicting signals from the two main asset
classes—bonds and stocks. Through the turmoil of the Seventies, and the Reagan
rallies, whenever bonds looked sicklier than stocks, it almost always turned out
that the bond-buyers were smarter than their equity counterparts.
The displacement of That relative performance of classes of professional investors continued through
true bond investors the intervening decades. Then came the explosion of Collateralized Debt Swaps,
by CDS bettors is which attracted new breeds of bettors on corporate credit, who could place their
hardly healthy... bets—not to hedge their exposure to the underlying bonds—but to profit within
a market dominated by other non-owners of the bonds. Alan Greenspan was a
cheerleader for this “innovation,” partly because the inflow of speculative capital
helped to narrow bond spreads. No longer were real bondholders the price-setters
in the markets. Result: the historic reliability of signals from the cash bond markets
was weakened. With the collapses of Lehman and AIG, the CDS market took on a
tortured life of its own. That has meant the bondholders are moving back into their
historic price-setting roles. We suspect that, at a time that most equity investors are
focused on subprime CDOs and the day-to-day data from the housing market, the
sickly performance of Collateralized Loan Obligations and of tradable corporate
bonds hasn’t been attracting the attention we believe such debt instruments
deserve.
The displacement of true bond investors by CDS bettors is hardly healthy: it is

as if the Super Bowl were automatically awarded to the favorite of Las Vegas
oddsmakers, thereby saving all the costs and potential player injuries from playing
the game.
What about TARP, PPIP, and the other programs to clean up bank balance sheets?
We note with dismay that the two PPIP auctions to date have almost been
non-events: the first was smaller than investors hoped, and the second was truly
trivial. We were told in private conversations with some attendees at James Grant’s
splendid Conference in New York this month that the reason hedge funds and other
players haven’t jumped in is because of Congress’s dirty display of “Pitchfork
Politics.” One firm that was readying itself to bid called the Treasury Department
for assurance that, if it profited greatly from its bet, it wouldn’t be nailed by a
Congressional clawback of its “obscene” profits from a deal that was so heavily
levered with taxpayer funds. The mere thought of being humiliated on TV by
an angry mob of Congresspersons or Senators was enough to make the investor
extremely cautious. Whoever answered the phone at Treasury told the caller to
wait on the phone for a minute while he checked. He got back to the investor to
state, “I think you can feel safe about it.” That wasn’t good enough for the investor,
so he passed.

We watched the scenes on TV of Acorn’s busload of protestors that toured the
homes in Connecticut of the AIG bonus recipients, stuffing insulting messages
in mailboxes and screaming threats on front doorsteps. (Acorn, which was
a conspicuous promoter of subprime loans to non-Asian minorities, and the
nationwide leader among “community groups” that rounded up inner-city voters
for Democrats, triggering vote-fraud challenges in several states is, according to ...equity investors
reports among the recipients of funds from the Obama stimulus program to assist who did not buy at
“community groups.” Great OKs for funding from Acorns grow?) the March bottom
Those weeks of banana-republic-style ochlocratic excesses on Capitol Hill may should resist the
be fading among some voters’ memories. But in the beleaguered investment temptation to rush
community, the memory could prove indelible. back into US stocks.
We do not blame President Obama or Secretary Geithner, who conducted

themselves with distinction under extreme duress. In particular, Mr. Geithner
displayed in interviews on the Sunday talk shows the kind of cool professionalism
and knowledge that showed why the President was so eager to not only recruit him,
but then to stand by him during the embarrassment of the unfolding stories of his
years of tax evasions.
However, it remains unclear whether the daily scenes of rage from Barney Frank
and his ilk have permanently poisoned the programs that were the Administration’s
best hope for resolving the financial crisis.
We hope for the healing of time. But financial markets may not show sustained
patience.
By far the most encouraging sign in the financial data is the rapid escalation in
the growth of M-2, which suggests that not all the monetary creation and federal
bailout money is being vaporized by toxic assets, or remaining immured in the
banking system as ornaments on otherwise ugly balance sheets.
We thought of The Cabaret song in the tawdry Berlin nightclub at the dawn
of the Hitler era, “Money Makes the World Go Round.” It was a sadly ironic
number reflecting the weltanschauung of that tragic era. A few years after the
monetary madness of the Weimar era, Hjalmar Schacht had restored value to the
Deutschemark, but the Depression meant that the money did not in fact move
around and neither did the economy. As dubious as we may be about the Treasury
measures and the Obama “Stimulus Package,” we take consolation in this shard of
evidence that what the Fed is doing may actually be working.
The stock market has certainly taken notice of this “green shoot” of the green
stuff.
After a record rally, we think equity investors who did not buy at the March bottom
should resist the temptation to rush back into US stocks.
April 27
The Importance of the Durability of the Oil Contango

Crude Oil Spot
150
130
Are [oil] futures prices
sheer speculation, or 110
are they the collective 90
best judgment of
70
those who have the
most at stake? 50 48.35
30
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Crude Oil Futures (at April 20, 2009)

June 2009 to December 2016
85
77.48
75
65
55
45
Jun-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec -16
Oil stocks tend to trade off spot prices.
But, as clients are well aware, we have consistently advised investors to rank
producers based on the value of unhedged reserves in the ground (or undersea)
in politically-secure regions of the world. Why, for example, should Suncor and
Canadian Oil Sands, who have reserves lasting through this century, trade on the
basis of today’s spot prices?
Are those futures prices sheer speculation, or are they the collective best judgment
of those who have the most at stake?

We believe that those distant month contracts primarily reflect the intersection of
the beliefs of major producers and consumers about oil’s future. The population
of oil speculators has shrunk drastically since “The Midnight Massacre.” What
is particularly interesting about the steep slope of the contango is (1) that the
producers, at a time of tremendous stress on their budgets, have not rushed en
masse to drive down the prices of “out months” to lock in such attractive prices, The population of oil
and (2) that consumers are willing to pay up so consistently for futures contracts speculators has shrunk
to assure themselves of supply at prices they are willing to include in their own drastically since “The
long-term business forecasts. Midnight Massacre.”
As important as those concepts are, there is another aspect to the oil futures curve:
as long as oil stays in such sharp contango, investors in most commodity funds will
find to their surprise that their holdings of barrels of oil are shrinking, month by
month when oil enters its next sustained bull market.
Why is that?
The typical commodity fund, such as the Goldman Sachs fund, rolls its investment
in each asset as the spot month expires, buying the next month’s offering. It doesn’t
for example, switch between some out months into spot and then back again.
Here’s a simplified version of the process. Suppose an investor holds, through a

fund, 100,000 barrels of oil which, at contract expiry, trades at $51 a barrel and
rolls it into the next month, which trades at $53 a barrel. The value of the sale is
$5.1 million, which is invested in next month’s crude. The investor now owns
96,226 barrels. In other words, as long as the contango lasts, the investor cannot
expect to profit from a long-term investment in the commodity. This is precisely
what happened to the big funds when oil swung from backwardation to contango
on its rush from $75 to $145. Some shocked pension funds moaned about “capital
destruction.”
We make this point to illustrate one reason why we argue that pension funds
should not treat commodity investing as an “alternative investment” that must
be conducted by investing in actual commodities through the best-known funds.
Owning the shares of commodity producers is a far more reliable way to participate
in a commodity boom—particularly the shares of those companies which are able
to expand their output at a time of rising prices through having politically-secure
reserves: the investor wins two ways at once.
April 29
That said, commodity funds have their place in pension investing, because most
commodities stayed in backwardation during the decades of commodities’ Triple
Waterfall, and most commodities are in backwardation today.
However, if—or when—inflation 1970s style returns, then most commodities will
surely swing into contangos, as speculators buy out month contracts as bets on
...if—or when— future inflation. That’s the way commodity bettors made their bucks back then.
inflation 1970s style
returns, then most But as long as deflation remains the over-arching fear, commodity fund investors
commodities will should get reasonable returns—but probably not as rewarding as those earned by
surely swing into investors in strong commodity-producing companies.
contangos...
The World’s Troublemakers Challenge The President
We wrote last fall that the unfolding tragedy in Pakistan could become a global
disaster. While most policymakers and pundits focus on the fast-emerging nuclear
threats from Iran and North Korea, the government of the most populous Mainland
Asian Muslim nation looks helplessly at the fast-rising power of the Al Qaeda-
backed Taliban. Its army has ceased to be controlled by the government, and remains
preoccupied with its traditional enemy—India. Now that control of Swat has been
handed over to the Taliban, the Dark Ages are returning rapidly. Already, 131 girls’
schools have been closed, and pictures of public floggings of young women who
displayed what these pious people call “public indecency”—whether in displaying
bare arms or in leaving their homes for even a few minutes unaccompanied by
their husbands—are being published daily.
President Obama and his Asian negotiator, Richard Holbrooke, have been publicly
forceful that the war against Al Qaeda and the Taliban in Afghanistan cannot be
won unless Pakistan’s government reins in the Taliban in its frontier regions.
In recent weeks, the Taliban has grown bolder, extending its bombings into the
cities, even including Lahore. The terrorists who took over the Taj Mahal and other
hotels in Mumbai (five days after we and our clients left), came from Pakistan,
were directed by a Kashmir-based group, and may have been actively aided by
the ISI, the powerful state-within-a-state that controls the army, the intelligence
services—and the nation’s nuclear weaponry.
Meanwhile, India is embarked on its month-long national Parliamentary elections.

Prime Minister Manmohan Singh—“India’s Deng Xiaoping”—at age 78 enters a
bitter campaign just weeks after his second experience with open-heart surgery. His
main opponent is the Hindu Nationalist Party (BJP), which, in its term in office,
continued the liberalizing policies Singh had introduced as Finance Minister in the
Congress Party’s previous term in power.

Mr. Singh’s health, and the Congress Party’s often-weak control over its fractious
coalition, have meant that India has not been moving forward as rapidly on
liberalization since 2004 as most external observers seem to assume. The
government has responded to the global crisis with some protectionist measures
designed to appeal to key voting groups. Moreover, as readers of Aravind Adiga’s
Booker Prize-winning The White Tiger have learned, the Singh government made The challenges from
scant progress in controlling the pervasive corruption that the multi-party political Iran, North Korea,
process fosters. What would doubtless most reassure global investors would be Afghanistan, and
a fairly decisive win for either of the two leading parties, so that the government now Pakistan will test
would not be dependent on support from Communists, Maoists or notably corrupt Obama’s coolness and
regional factions. Another worry: the Mumbai massacre and the Taliban’s rise in determination.
Pakistan may be giving respectability to extremist Hindu groups, which oppose
government programs designed to help the Muslim minority, and have been
responsible for persecution and murder of Christians.
Despite those concerns, we are still cautiously optimistic that the world’s largest
democracy will somehow once again demonstrate that it remains a largely-tolerant
and largely-progressive beacon of political and economic freedom in a Continent
that boasts pathetically few true democracies.
We were talking to an Indian friend at the Grant Conference. He is now deeply

concerned. He thinks that investors should be downgrading India in their portfolios,
because the collapse of the Zardari government in Pakistan could unleash a
catastrophe that would engulf the subcontinent.
Joe Biden predicted just after the election that the new President would be tested
by some foreign challenger within his first six months in office. For once, Mr.
Biden got it right. The challenges from Iran, North Korea, Afghanistan, and now
Pakistan will test Obama’s coolness and determination.
The Somali pirate drama—a TV spectacular—was good news for Obama, because
the risk was contained in a small space, there were only three pirates holding
Captain Phillips, and this was the kind of confrontation made to order for the
SEALs—the world’s premier seaborn operations force. The way the President
managed the situation was textbook-perfect, and Americans got a chance to rejoice
in a victory—and found a new hero in Captain Phillips just as the story of “Sully,”
the peerless USAir Captain (and, inconveniently, a staunch Republican) was fading
from the mainstream media.
April 31
Last month, we criticized the President for “riding madly off in all directions.” This
month, we commend him for displaying on his European tour what he does better
than anybody—campaign—and for his insistence that the war in Afghanistan is not
just “a good war” but a war that must be won. Those enemies of America across
the world who may have thought he was too callow and ideologized to be a serious
Mature democracies challenge may now have to rethink their assumptions. Mature democracies seem
seem to have the to have the ability—or good luck—to produce real leaders just when the going gets
ability—or good tough. Obama’s clumsy mishandling of the British file (sending back the bust of
luck—to produce real Churchill given by Tony Blair, giving Gordon Brown 25 DVDs that don’t work on
leaders just when the British TVs, and not bowing to the Queen while apparently bowing to the Saudi
going gets tough. prince) could have precipitated sneering and cynicism in the nation that has been
America’s key ally for a century. However, he and Michelle still wowed the Brits
with their panache—and the alliance is, thankfully, still intact.
We remain worried that his belief that he should take advantage of the deep
recession to fashion the statist society of the future will not only prolong the
recession, but weaken the American economy for at least a decade. We are unhappy
that Paul Volcker has been marginalized, and remain disappointed with Obama’s
willingness to defer to Nancy Pelosi, who, though smart and experienced, is not
conspicuously endowed with either pragmatism or a desire to build a consensus at
a time of crisis.
We decline to join those who have reawakened the Far Left’s assault on Larry
Summers. Like most geniuses, he can be erratic, and he doesn’t suffer fools
gladly—a real liability for a political figure. However, he is as smart and well-
informed as any American economist since Milton Friedman, and he’s likely to be
an excellent interpreter of the economy’s challenges to a President who must deal
with big economic and financial problems while beset with so many challenges
abroad.
Besides, with the wise and experienced Volcker receding into the background, he’s
all we’ve got… and he could be taking Bernanke’s place at the Fed next year.

RECOMMENDED ASSET ALLOCATION
Recommended Asset Allocation
(for U.S. Pension Funds)
Allocations Change
US Equities 18 unch
Foreign Equities
European Equities 6 unch
Japanese and Korean Equities 2 unch
Canadian and Australian Equities 9 unch
Emerging Markets 11 unch
Bonds
US Bonds 8 unch
Canadian Bonds 5 unch
International Bonds 11 unch
Long-Term Inflation Hedged Bonds 10 unch
Cash 20 unch
Bond Durations
Years Change
US 4.00 unch
Canada 4.25 unch
International 3.75 unch
Global Exposure to Commodity Stocks
Change
Precious Metals 35% unch
Agriculture 33% unch
Energy 22% unch
Base Metals & Steel 10% unch
We recommend these sector weightings to all clients

for commodity exposure—whether in pure commodity
stock portfolios or as the commodity component of
equity and balanced funds.
April 33
INVESTMENT RECOMMENDATIONS
1. F. Scott Fitzgerald had it wrong, at least for American stocks: you do get a second,
and even a third chance. Stocks leading that six-week rally looked down, couldn’t
see the bottom anymore, and promptly retreated to lower levels. Think about
what you’ll most want to own when The Real Thing arrives, and accumulate
them at leisure, while the market tries to decide whether the economic recovery
is a month, a quarter, or a year away.
2. Larry Summers adroitly brushed off a question about future levels of

unemployment by saying, “Economic forecasters are divided between those who
know they don’t know, and those who don’t know they don’t know.” Galbraith
said the function of economic forecasting has been to make astrology look
respectable. We know we don’t know, but we know we didn’t feel comfortable
with the speed of optimism’s return. Those last two deep Mama Bear recessions
didn’t end with such alacrity—nor did optimism return so speedily.
3. We do believe that the stock market is giving the correct signals that techs and
commodities will lead the next recovery.
4. The other winner will be (sound of trumpets) commodity stocks. They were
heavily outperforming the S&P until the late stages of the recent rally. We think
they’ll move back to #1 slot—at least on relative strength.
5. Gold has been a bitter disappointment to its boosters in recent weeks. Bullion
is down 4.6% this year, and most of the leading stocks are down far more than
that. These setbacks came at a time when gold was getting more publicity as a
haven investment than it has received in decades. Gold has been hurt by two
rallies—first the dollar, then the bank stocks. More recently, investors have been
spooked by the deal for the IMF to sell 403 tonnes of gold, at a time Indians,
traditionally the most reliable buyers, are on strike. That 500 tonnes of scrap
gold has come to the markets this year is a bad news/good news story: it’s a huge
amount for markets to absorb, but it proves anew that gold is a precious asset
in tough times. Gold stocks remain core investments within equity portfolios,
reducing overall portfolio volatility. They will be superstars when the dollar
finally falls, and people begin to get genuinely worried about inflation’s return.
The stocks will outperform bullion on the upside.

6. Copper’s remarkable performance (up 48% in three months) worries us. Yes,
China is coming back, but the industrial world is looking as bleak as a group
of paid mourners at a funeral. We do not recommend adding to base metal
exposure.
7. Within the energy group, we believe the bookends—refiners and oil sands—are
most attractive. Why refiners? (1) Most oil analysts despise them; (2) They
have to continue to refit their refineries to provide for greater percentage
usage of that great nuisance, ethanol; (3) Americans are driving less; however
(4) Refiners should hold up better than other oil sectors if there’s one last oil
shakeout coming. Oil sands: You just possibly may never be able to buy oil for
the 2020s as cheaply as you can today by buying the oilsands stocks. These are
cornerstone investments for long-term oriented investors.
8. It’s planting season as we write, and the snow is largely gone. Low corn prices
are discouraging farmers from planting as much corn as last year. Higher soybean
prices (and cold wet weather) are encouraging them to plant more beans. Both
these crucial crops are priced profitably for farmers, so don’t believe the talk that
they’ll be cutting back dramatically on fertilizers. However, the extra emphasis
on beans is bad news for the nitrogen fertilizer companies. (Beans don’t need
nitrogen.) Overall, we still think the agricultural stocks have the best risk/reward
profile.
9. The steep yield curve entices investors to buy long-term bonds and enriches all
those bankers who have any wiggle room for making real loans after succumbing
to the allure of all those fascinating, sophisticated ways to make ghastly bets.
However, what the market giveth, the market taketh away once the economy
begins to recover and inflation begins to return. Stay below your duration
benchmark: give up yield now for performance later.
April 35
© Coxe Advisors LLC 2009. All rights reserved. Unauthorized reproduction, distribution, transmission or publication
without the prior express written consent of Coxe Advisors LLC (“Coxe”) is strictly prohibited. Coxe is an investment adviser
registered with the U.S. Securities and Exchange Commission. Nothing herein implies that the firm is recommended or
approved by the United States government or any regulatory agency.
Information, opinions, estimates, projections and other materials (referred to collectively herein as, “Information”) contained
herein are provided as of the date hereof and are subject to change without notice. From time to time, Coxe publications
may contain Information with regard to securities, commodities, derivatives or other investment assets (each referred to
herein as an “Investment,” or collectively, the “Investments”), or investment strategies. Due to staggered publication dates,
any Information contained herein may differ from Information contained in prior or subsequent publications. Information
discussed herein may have been obtained from various unaffiliated third party sources believed to be reliable, but has not
been independently verified by Coxe. Coxe makes no representation or warranty, express or implied, in respect thereof,
takes no responsibility for any errors and omissions which may be contained herein, and accepts no liability whatsoever for
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Published by Coxe Advisors LLC
Distributed by BMO Capital Markets

BMO CM Basic Points April 2009

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BMO CM Basic Points April 2009

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Basic Points

Where Will America Go to Grow?

April 21, 2009

Published by Coxe Advisors LLC

Distributed by BMO Capital Markets

BMO Capital Markets Disclosures

Where Will America Go to Grow?

April 21, 2009

Author: Don Coxe 312-461-5365

Editor: Angela Trudeau 604-929-8791

Coxe Advisors LLC. www.CoxeAdvisors.com

President Obama, who became Fear-Merchant-in-Chief to overtake and win

Although we have reluctantly come to believe that the President’s “Stimulus

Apart from Japan’s demographically-driven Triple Waterfall Crash that begin in

Their powerful outperformance would turn out to be the up-leg to a Triple

4 April THE COXE STRATEGY JOURNAL

We proclaimed in February 2002, that what would become “The Greatest

Congress’s vast interventions into the housing market to promote trillions in

US-oriented equity investors were missing out on the fundamentally-driven booms

Australian Stock Exchange Index (ASX200)

6 April THE COXE STRATEGY JOURNAL

South Korea Stock Exchange (KOSPI Composite)

Taiwan Stock Exchange (TWSE)

As Larry Summers observed in his speech to the Washington Economic Club

8 April THE COXE STRATEGY JOURNAL

It could be a long slog back to traditional American consumer exuberance.

Which other equity groups are showing good relative strength?

Relative Strength of Technology and Basic Materials to S&P:

BHP BIlliton (BHP-NYSE) relative to S&P 500

10 April THE COXE STRATEGY JOURNAL

Potash Corp. (POT-NYSE) relative to S&P 500

Imperial Oil (IMO-NYSE) relative to S&P 500

Suncor Energy Inc. (SU-TSX) relative to S&P 500

...the leading info-tech 125

12 April THE COXE STRATEGY JOURNAL

The Collapse in Global Trade

Then it fell off a cliff.

The data for year-over-year percentage decline of exports in February are of

RJ-CRB Futures Index

14 April THE COXE STRATEGY JOURNAL

Several factors are worth considering:

2. The unprecedented scale of reliquification and bailouts from Washington,

4. Last year’s plunge in raw materials prices triggered panicky production

6. Remarkably, the strong commodity stock performance came against the

16 April THE COXE STRATEGY JOURNAL

Some economists have begun to cite the good performance of commodities as

So the next thing for investors to ponder is…

Which Sectors Will Be Hiring Heavily When the US Recession Ends?

1. Can State and Local Governments Create New Jobs?

18 April THE COXE STRATEGY JOURNAL

2. All Those Beautiful Jobs From “Clean” Energy

The Obama budget calls for hundreds of billions in government spending on

20 April THE COXE STRATEGY JOURNAL

3. As many climatologists admit, the long-term temperature statistics showing

4. Finally, we have many centuries of data to show a close correlation between

22 April THE COXE STRATEGY JOURNAL

As the sunspots became “nonespots” and stories of extra-cold weather became

In brief, he says high levels of sunspot activity—such as the earth experienced

He concludes, if sunspots don’t return by year-end, global warming scientists will

Are the American Banks Really Back On Track?

Those rallies made it look as if happy days were here again.

But skepticism is in order.

KBW Bank Stock (Large Cap) Index (BKX)