I am sorry I have been unable to contribute much of anything lately to this blog. So many demands work and otherwise. At least I have these notes and this time Don seemed a bit unglued with Bernanke's weekly call and 2 year "guarantee" of zero interest rates. So much that he took down his equity allocation. Here goes...........

Don Coxe 8/12/11 Institutional Conference Call

· Big theme of this call is that he is reducing equity exposures due to Fed’s call this week. Bernanke’s announcement crystalized his feelings that the risk reward is deteriorating so that he is cutting equity exposure 9 points for Pension Funds to 40% (used to be around 60% sometime ago and cut it 11 points in May). This is a big change in opinion for him. What has developed is a distinct negative for equities as an asset class. (But he didn’t say where he is putting the money he is cutting and in fact during Q&A indicated that he had not yet thought that far ahead as he is still reeling from Bernanke’s stance.)

· Mentioned that we would have made more money in long bonds with this rally than with gold.

· Move in gold this time is clearly in response to fears of deflation.

· Moves in stock market recently have really been bizarre. These gigantic moves both ways up and down have the stock market is “fibulating.”

· Bernanke has preannounced that financial heroin will continue for two years! He has “guaranteed” no interest rate increase for two years. This suggests great fear on the Fed’s part as to what is happening. This move takes away any positives for companies to put money into money funds.

· “Stop the world I want to get off” will be a theme he feels for two sets of investors. Retail investors will move out of the market as they will not want to be exposed to these kind of swings. No one can provide an adequate explanation to this phenomenon. Also CFOs are already in inventory liquidation mode. Plunge in Journal of Commerce Industrial Price Index is another reason Don decided to lessen equity exposure. This Index has had a great record in predicting industrial activity. At the very least we are in a significant pause now. Company’s inventory liquidation efforts are likely to accelerate.

· The spread of short selling bans are expanding as we see in Europe and even Emerging Markets. This reinforces the notion that the pricing mechanism that is at the heart of capitalism is on hold. None of this is positive for companies nor is it likely to cause them to spend money to expand. Fear feeds on itself. What Bernanke did is increase the “fear factor” by increasing the “zero factor.” (Note that three other Fed Presidents objected to the “2 year guarantee” of zero interest.)

· The risks out there are “novel risks” so that charts used in the past may not be so relevant and there may be difficulty in finding a working model. To Don the core of all of this is that capital asset pricing model is under attack.

· The crisis of 2008 was routed in subprime mortgages and other derivatives based on Congress’s mandate that banks give mortgages to people that could not afford them. This bad product was bundled together with good product so it was not noticeable.

· This time its different. This time it’s the problem with sovereign debt/credit in Europe. Based on this we don’t know how to price risk through the system. The heart at Europe is in question and this is spreading! Bailouts were being done on the basis that only a few countries are in trouble. But now we are moving to countries like France possibly being downgraded. Challenge is gigantic! Only ones left may end up being Germany, Luxembourg and the Netherlands. This will not be enough to sustain the European economy.

· This fear/unknown is being transmitted globally. Don says he doesn’t know how bad this will end up. But when you don’t have a fundamental model for pricing you have a real problem with determining what assets are worth. Problems with governments are moving back into private economies (e.g., Illinois is not paying its suppliers for months).

· Believes that food inflation will remain. This is reflected yesterday in the price of Don’s agricultural fund.

· View of a lot of people in the oil market is that the Arab countries will have to buy off their population and this means they will have to protect the oil price much more than they have in the past. Not sure whether they can sustain higher prices in the event of a global recession but they do need to put a higher floor under their oil prices given the population unrest.

· Food and fuel prices will remain higher than other prices so consumer spending will be under pressure.

· Fear now is that Obama Administration will have to show that it is still relevant by increasing its regulation. Obama’s speeches and tone recently has changed. “More jobs and better pay” is his new message. If he lets the Union Board enforce its rule against Boeing being able to move to a lower cost state this will be evidence of its regulatory clout and Don will then have a more negative view of the US. Will need to see if the US government makes Boeing close its lower cost plant in South Carolina which it needs to compete on a global basis. This may be done to offset situations like what happened in Wisconsin which by the way was just increased to a triple AAA rating after its budget cuts.

· Main street banks are really getting hit. Big banks stock price is falling below their book value. The mess created in 2008 has not really healed despite the big bonuses big banks gave to their management.

· There is thus one asset class that will move from being rated higher risk to lower risk and that is the big dividend stocks (e.g., those that increase dividends regularly). If you are talking about a 2.25% dividend yield this is better that what you get from a treasury. So Don is not saying that you just move out and into cash and sit there. There may be alternatives.

· This is not a panic call as he is still recommending to Pension Funds that they stay 40% in equities.

· Question: Does our current situation look like 1937 where austerity measures killed any positives for stock market? Don: One of Roosevelt measures that held back equities was the increasing of the union power. In the 1937’s tightening caused country to go deeper into recession. What will restrain the budget cutters is that the budget deficits will be much greater than they are anticipating.

· Don has not lost his enthusiasm for commodities or commodity related stocks. Gold is emerging as new money. Once people get used to high protein foods, they will stick with it. Supply of key commodities will still be restrained even in the event of a recession. Only commodities he sees at real risk is industrial commodities such as iron ore, copper, aluminum, etc.

· Fundamental commodity story remains in tact but there could still be mindless selling of these stocks.

· Question: Is there any likelihood of Germans finally saying NO, no more? This would mean that bonds denominated in Euros might never get paid back? Also won’t the American public ever wake up to see what this soundless financial approach is causing? Don mentions Wisconsin battle where the “constraint side” won. The Boeing battle brewing in South Carolina will be quite telling. If the government force Boeing to close the Carolina nonunion plant, it will be very bad for the US economy.

· Question: What are the chances of a recession? Said that some people will just throw in the towel and not want to deal with the market but he is not predicting a recession due to all the easy money.

· Question: Bloomberg says high frequency traders are causing this issue. Isn’t this just a fact that all this new technology is causing these wild swings and it will just sort itself out and we shouldn’t give it too much credibility? Don doesn’t think we need to have trades done in a millionth of a second by robots. This contributes to the feeling that people don’t want to have to deal with this. Doesn’t feel that we can just blame everything on high frequency traders and that people will just learn to ignore them.

· Question: In your allocation where does this 9% from equities go? Don said that the relative weighting of commodity stocks will go higher but it will take Don some time to figure this out. He just knows that he doesn’t have the confidence he used to. Hopes to provide us with some info next week. He felt that Bernanke gave such a stunning announcement that he had to change his allocation right away.