Rudi On Thursday

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

I’d like to introduce Don Coxe, global porfolio strategist at what used to trade as the Bank of Montreal, but what nowadays goes by the abbreviated BMO Financial Group. By the time you’ll read this, Don will have spoken at BMO Capital Market’s annual global metals and mining conference and his message will have left no doubt that he is a strong believer in what we oft refer to as the Super Cycle for Commodities.

Whenever you have any doubts about whether you should hold on to your BHP Billiton ((BHP)) shares, or your Newcrest Mining ((NCM)) stock, or your Fortescue ((FMG)) shares, think about Don Coxe’s conviction when he says “have no fear, the best is yet to come for the resources sector”. This won’t be over in a few years, he says, this won’t even be over in another ten years. This Super Cycle will last at least two decades!

The reason why you should take his views serious is because Don Coxe has been telling the world about the coming Super Cycle for more than six years now. This week I had the opportunity to read some of the predictions he made back in 2002 and I can now report back that one can only be amazed by the accuracy of his views at the time.

More than six years ago Don Coxe had come to the conclusion the mining and metals world was ripe for a serious resurrection. Amongst the considerations in his thinking back then were a long bear market for base metals that had sapped even the tiniest amount of enthusiasm left out of the last people who had maintained an interest in the industry, the inevitable end of global tech euphoria and the fact that he saw the formation of a new middle class in China, India and the rest of Asia. This new upcoming middle class in combination with a global industry in complete disarray, which had given up all hope in a sustainable revival, would make fertile ground for an extremely powerful bull market for commodities, he predicted.

Six years later we have all experienced how accurate his insights were at the time (at least thus far). But there’s also an unexpected ironic side to his story:  similar to 2002, Coxe finds himself again surrounded by naysayers and doubters. That’s why it makes sense to have a look at what his thoughts were back then.

He called it the Music of the Metal Markets, using the analogy of a classic sonata to describe what would happen in the years ahead; three different time slots that would make one musical story. While stock analysts at Wall Street and the financial media were still reporting about the virtues of new technologies, and why investors should have lots of technology stocks in their portfolios, the metals and mining industry was slowly awakening from its long period of hibernation. Nobody would notice at first, and those who did doubted whether it would prove to be anything more than a short term phenomenon.

How deep engrained this doubt was at the time is illustrated by an anecdote in the 2002 report when Coxe, after giving a speech at a conference where he was the only speaker who was bullish on gold and on base metals (all the others were only bullish on gold), was approached by the manager of a Northamerican mining company with many decades of experience in the industry. The miner asks him how he can be so sure of his predictions. Coxe answers he is confident about his views and that the share price of the miner’s company will go up significantly in a not too distant future, and it will only be just the beginning of a new era. He can see the disbelief in the miner’s eyes. When he looks up the share price of the company about a year later, it has had a good run, but Coxe also notices a queue of stock market announcements: company management has been offloading their stock all the way up.

They simply did not believe it could be true.

It has been the key theme throughout Don Coxe’s personal journey since he started visiting investors, Wall Street firms and mining companies from 2002 onwards: they simply did not believe him.

At one stage it struck him: most of the people he would talk to were under thirty; way too young to know much about history and naturally attracted to new technologies and high tech applications. How would they ever grasp the story about gold nuggets and copper resources becoming of vital importance again? On the other end of the scale were those like him, old enough to know about history, but in the business for too long and as a result they had lost all faith and hope, they had been disappointed too many times during the bear market, they simply wouldn’t allow for another possible disappointment again.

In the end, recalls Coxe, it were the new kids on the block, hired by the blossoming hedge funds, always on the lookout for new ideas outside the mainstream, who would lend him their ears. The rest, as they say, is now history.

However, what used to be to the sector’s advantage over the past few years, is now working against it. Coxe says those hedge funds and other speculators have made good money over the past few years, but they lack conviction in the fundamental story behind the investment gains. That’s why they happily jump out of the sector when something better comes along, or at the first signs of any possible threat. Those with a strong conviction are a minority group in the sector, he believes, and because they are strongly convinced about the longer term prospects they are likely to be fully invested as well (so no additional buying from them).

What we are currently experiencing, says Coxe, is part two of our “miner’s sonata”. The first part is the slow build up, the second is the so-called “Largo” -this is when things go slowly- and the third part will be the “Allegro con brio”, that’s when share prices and investor profits will run rampant – it’s the finale with the massive build-up. This is why Coxe announced at the conference this week: fear not, the best part is yet to come.

For investors the choice is the same as when they are listening to a sonata at a concert hall: do they use the second part to temporarily leave the room, stretch the legs, have a toilet break, or do they simply stick around with the intention of enjoying it all, waiting for the big finale to arrive, in order to soak it all up? There are strong arguments in favour of both possible choices and Coxe’s report from this year leaves the question unanswered (no doubt he believes you should come up with your own decision).

There’s another important side issue to this story: Coxe’s reports have a strong undercurrent view this new Super Cycle has almost developed like an anti-thesis for Wall Street advisory firms. He likes to use the size of research desks at Wall Street as a counter cyclical indicator, arguing when he started promoting base metals and other resources in 2002 most Wall Street firms were heavily resourced in technology research, with often no staff left at all for the old economy metals and mining. These firms simply had to advise their clientele to buy tech stocks to make up for the costs of all their research staff, he says. And history shows similar examples.

Isn’t it thus ironic that again problems caused by these same Wall Street hot shots are now preventing shares of miners to run at full potential?

Similar to what happened in the past, these Wall Street firms will try to advise investors along the lines of their cost structure, Coxe warns. So don’t believe all this cheap valuation theories about banks and financial institutions, he advises in the 2008 report; if you’re an investor with a long term view your portfolio should be heavily overweighted resources. And gold will outperform them all in the short term.

History shows that gold is a very good indicator for future problems in the financial sector, says Coxe. That’s why you should be afraid for financial stocks right now.

For what it’s worth, Coxe likes Energy, Agriculture and Precious Metals (in this order) above base metals, but he believes you should have all of them in your portfolio (all Overweight) and buy more while share prices are weak. And keep an above average amount in cash, he says. That’s for the opportunities that will arise.

It just so happens that I came across an interesting presentation by Jeff Rubin, chief economist and chief strategist at CIBC World Markets, which fits in perfectly with Coxe’s views (and not only because both are Canadian). Those readers with access to the FNArena website can download Rubin’s presentation via the Special Reports section on our website, or simply use the following link:

https://www.fnarena.com/index4.cfm?type=dsp_special_reports

(The above mentioned presentation is made available with permission from CIBC World Markets).

Till next week!

Your editor,

Rudi Filapek-Vandyck
(as always supported by the Ab Fab Team of Greg, Chris, Sophia, Paula, Grahame, Pat, George and Joyce)

Click to view our Glossary of Financial Terms