Wednesday, February 25, 2009

Globe & Mail: Don Coxe - Why It Went All Wrong

Thanks for Jay at Marketfolly for a heads up on this article....

Before I started this website I had never heard of Don Coxe but early on some readers sent me some of his weekly missives. I found a lot of similar thought processes [Jan 18, 2008: One Lonely Voice Agrees with me on Food Inflation] [May 2, 2008: Don Coxe on Food Crisis] - specifically having to do with agriculture and in a larger sense commodities as a whole. Apparently after reading around I'm a Malthusian at heart [Mar 24: WSJ - New Limits to Growth Revive Malthusian Fears] as too many humans arrive on this planet, and more importantly too many are escaping stark poverty and striving for middle class (hence require much more of the world's limited resources) [Jun 20: World Population to Hit 7 Billion by 2012]. This has major implications as Americans (3% of the world's population sucking up 25% of its resources) We are in a great global competition for resources and it's just getting started. So Coxe & I share some very long term thoughts.

In yet another great irony just as Mr. Coxe launched his specialized fund [Apr 22: Don Coxe Offers Coxe Commodity Strategy Fund] he basically called the top in commodities within a month or two. Much like Ken Heebner's CGM Focus mutual fund peaked within weeks of his cover story on Fortune Magazine. [May 28, 2008: Ken Heebner - America's Hottest Investor]

Coxe had a VERY rough latter 2008 [Sep 11, 2008: Don Coxe with his Views on What "Just Happened"] and this is why I say constantly it is so much easier to be a pundit / strategist than an actual money manager. But 2008 was so bad, even pundits/strategists who can hide behind "being early" or "general time lines" were blasted left and right. Even if you are correct in the "long run" it doesn't matter if you lose 30,40,50,60% of your money being wrong in the "short run". After losing 50%, you need to make 100% just to break even. With that said, I still like to hear the thoughts of those with good long term track records, even if 2008 was horrific for them.

Coxe had a very lengthy article in Toronto's Globe & Mail of which I'll cut some snippets below - if you are interested in the rest just follow the link.
  • Donald Coxe, 73 years old and unbowed, offers no apologies for getting it wrong on commodities in 2008.
  • ... Coxe is not merely reminiscing. He also has a serious point. Well, two. The first is to let the listener know that he has been around for a long time, and seen more than a little bit of history— financial and otherwise. This is not some 36-year-old economics graduate who was still a university student when the early 1990s recession hit. Coxe doesn’t hesitate to remind people that he entered the world of Bay Street in 1972, and thus has lived through the horrific bear market of 1973 and 1974—an event that had him convinced, by the dawn of 1975, that “I’d probably come into the wrong business.”
  • But his second point is about the importance of leaders and leadership in tough times. Thatcher had a plan, and it pulled Britain out of stagnation, inflation and economic decline. Reagan’s policies had a similar effect in the United States. Deng Xiaoping, who placed China on the road to a market economy, changed the world. So did Manmohan Singh, the current Prime Minister of India and the Finance Minister in 1991, who used a financial crisis to shake that country out of its decades-long embrace of socialism.
  • “I’m not a believer in the idea that we’re caught up in forces beyond our control,” says Coxe. The right policies, combined with political will, matter. “So once I’m satisfied that we’ve got the smart people in there who are prepared to do whatever is necessary to prevent a collapse, I assume it will be done.”
  • All of which serves to explain why Coxe—who in December left his post as Bank of Montreal’s global portfolio strategist, to start Coxe Advisors LLCbelieves that history will vindicate him and prove that his difficult 2008 was an aberration. While Coxe wasn’t shocked to see a market meltdown last fall, he was caught badly off guard by the way the concomitant financial crisis destroyed prices for the commodities and commodity stocks that he has for years touted as the fastest way for investors to increase their wealth. Oil, after peaking at just short of $150 (U.S.) a barrel in July, fell to $45 (U.S.) by year-end. Corn, from a summertime high of roughly $8 a bushel, plunged to $4; copper went from about $4 a pound, to $1.40.
  • Few resource companies were spared, except for gold stocks. The shares of many junior mining companies lost most of their value. In the oil patch, even a blue chip like Suncor Energy Inc., a Coxe favourite, was down 56% in 2008. As for Coxe himself, he called the recession correctly, but stumbled on how to play it.
  • Stay overinvested in commodity stocks whose earnings and performance are tied to stronger economies in the Third World,” he advised his readers in one of his “Basic Points” reports. The date was July 3, 2008. As it turned out, that was the best time not to buy commodities, but to sell them. The Reuters/ Jeffries CRB commodity price index peaked on July 2. Over the next six months, it plummeted by half.
  • Worse still, the market now had a simple way to track his mistakes. The $300-million Coxe Commodity Strategy Fund, after debuting to a warm reception from investors in June, was down 55% by mid- October. For Coxe, there’s little escaping responsibility; even the ticker symbol, COX.un, makes it clear who is driving the fund. Coxe says that at one point during the downdraft, he had lost $2 million, or 40% of his personal equity portfolio. “From July 14 until, I would say, roughly last week, has been the most stressful [period] of my recent working life,” he said in an interview shortly before Christmas. “You’re talking to me at a time when I’m feeling somewhat beaten up.”
  • Coxe says he underestimated the role of the hedge funds. He knew that many of them had gone long on commodities and short on financial stocks—that was rather obvious, and amplified the sharp rise in commodity prices in 2007 and the first half of 2008. What he didn’t realize, or fully appreciate, was how many billions of dollars of those bets were made on borrowed money. Since commodities futures themselves are a leveraged investment, the result was a series of bets in which leverage was piled on top of leverage. The whole edifice came tumbling down during the summer, as hedge fund losses began to pile up and the margin calls came pouring in. (not working in the industry, I had the exact same issue: not realizing how much leverage was in the system, and more specific - how much was in the hedge fund food chain; but it appears many inside the industry had no clue either) “None of us, or nobody I talked to, thought that much of it was hedge funds that were leveraged 30 or 40 or 50 to 1,” says Coxe.
  • One rough year is not going to cause his loyal followers to stray. “For my money, he’s the best in Canada,” says Seymour Schulich, the billionaire investor and philanthropist. “Some of these guys, you look at and you think they’re from Mars.... You know what I like about him is, he’s got a real grasp of financial history.”
  • Like all strategists, Coxe got some predictions badly wrong. His bullish calls on gold in the early and mid-1990s were duds. For a time, he was an alarmist about the Y2K problem, writing: “Wouldn’t it be fascinating if the once-in-a-millennium crisis came because creditors were unready for Y2K?” Other predictions he got dead-right. He warned at the end of 1997 that the Asian crisis was far from over, which it wasn’t. He raised a skeptical eye at the absurd valuations on many technology companies in 1999 and 2000, and was right.
  • So he’s bruised. But wrong? Coxe doesn’t think the word applies. “When the market seems to have gone to hell, you say, ‘Well, aren’t you realizing in the middle of the night that you were all wrong?’ No!” He believes in the impact of strong leaders, and therefore believes the world—because of the efforts of Barack Obama, Ben Bernanke and the leaders of China and India and Europe, among others—will avoid spiralling into a 1930s-style depression. Not only will their policies breathe new life into the economy, Coxe predicts, they’ll do it so quickly that Bernanke, the chairman of the U.S. Federal Reserve, will be worried about inflation by the end of this year.
  • I’m more and more of the view that we’re going to find out that the surprise will be how strong we come out on the other side of this,” he says. “It won’t be long before inflationary pressures will show up. And, of course, they will show up first in the commodities.” It’s a forecast fit for an optimist, and one that few economists share in the winter of 2009.
In this case, for the greater good of all - I hope I am wrong and Coxe is correct.

But on this we both agree... I've said many times, if you have a 30-40 year time horizon arable farmland will be one of the best investments on the planet.
  • He is as convinced as ever that China and India will be the world’s great economic powers by the middle of this century, that the standard of living of their people will grow, and that the next great investment is food.

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