Avoid Stocks Until End of Debt Crisis Becomes Clear, Coxe Says

Don Coxe, the Bank of Montreal (BMO) strategy adviser who recommended selling equities in May, says investors should refrain from buying more stocks until it’s clearer that the European debt crisis won’t cause a recession.

Because the euro-region troubles are unprecedented, it is impossible to know the likelihood of the currency’s survival, Coxe said in a telephone interview Nov. 29. The uncertainty makes equities unattractive, even with stocks trading at historically low levels relative to earnings.

“When nobody can quote you the odds, it’s like someone who’s an expert poker player being asked to play blackjack,” said Coxe, 75, who has 39 years of investment-industry experience. “He’s not going to bet a lot of money in that game.”

The Standard & Poor’s 500 Index fell 5.9 percent from May 26, when Coxe said North American investors should reduce their stock holdings, through yesterday. Canada’s S&P/TSX Composite Index slumped 11 percent during the same period. The U.S. gauge traded at 13.1 times earnings yesterday, compared with a 10-year average of 17.6.

World equities have declined, led by financial stocks, as European leaders have struggled to contain the debt crisis. Stocks rallied yesterday after central banks in Europe, Asia and North America cut lenders’ borrowing costs to bolster the financial system. Coxe said yesterday the decision, while a good sign, didn’t change his views on the equity markets.

Partial Solution

“It relieves one of the crucial aspects, which is the lack of liquidity in the European banking system,” said Coxe, the chairman of Coxe Advisors LLP in Chicago. “It doesn’t do anything about the problem of sovereign debt.”

Either of two things would lead Coxe to start buying stocks again, he said. One would be European Central Bank purchases of government bonds to “monetize” the debt. Juergen Stark, a member of the ECB’s executive board, said Nov. 8 he can’t foresee the central bank ever doing that.

The other buying signal would be an outperformance for U.S. bank stocks relative to other equities, Coxe said. “If that happens, I will be among the most-bullish,” he said.

The KBW Bank Index (BKX) sank six times as much as the S&P 500 this year through Nov. 29, indicating investors didn’t believe the debt-crisis solutions offered to that point would work, he said. The bank index jumped 7.2 percent yesterday as the S&P 500 advanced 4.3 percent.

Instead of equities tied to the economy, investors should consider buying gold-mining stocks or the metal itself, Coxe said. Gold, which settled at $1,750.30 an ounce on the Comex in New York yesterday, will surpass $2,000 an ounce in the event of “a full-blown crash of the banking system” in Europe, he said.

To contact the reporter on this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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