Kevin Klombies is a prolific writer and
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07/24/2008
Chart Presentation: Trend Thoughts With the markets fairly active of late we are going to revert to a reasonably long-term perspective today. For one reason or another the more volatile the daily action the more likely we are to get ‘macro’ with our work.
Below we show a chart comparison between copper futures and corn futures from 1994 through into 1999.
The argument is and has been over the years that the grains rally once copper prices reach a peak.
Chart Presentation: Trend Checks A 3 point decline in crude oil prices yesterday helped offset negative earnings reports to lift the U.S. equity markets and dollar. The Airline Index (XAL) flew to more than a 22% gain. Intermarket analysis is based on the premise that one market impacts another. Strong crude oil prices lead to higher refined products prices which in turn leads to greater demand for ethanol which pushes grains prices higher.
Chart Presentation: Assorted Thoughts We have argued from time to time that when the S&P 500 Index trends lower through the first few weeks of a new quarter the pivot back to the upside is usually found somewhere around the 22nd to 25th day of the month. In other words with the equity markets weak to start the third quarter this year a more positive trend would be expected to show up some time this week.
Chart Presentation: What If Today’s topic is something of a ‘what if’. By this we mean that the markets are currently set up for one of two very different outcomes so the theme is ‘what if’ the one we are expecting to transpire actually occurs.
Below we show a chart of crude oil futures from March of 2006 through June of 2007. The focus here is on the decline for crude oil prices through the second half of 2006 followed by a sharp trend reversal back to upside in January of 2007.
Chart Presentation: Rotation We very much like animals so we hesitate to return to one of our oft-repeated topics in a manner reminiscent of beating a dead horse but to the extent that this seems timely... we are going to do so anyway. Our apologies to our equine readership.
The premise is that the markets have shown a tendency to make dramatic trend changes in the first month of a new quarter.
Chart Presentation: Trend Check Goodness... we never would have believed that the markets could rejoice because crude oil futures prices were only 134. How times have changed.
Energy prices continued to decline and the equity markets snapped higher with much of the strength concentrated into those sectors that have fared the worst recently. Wells Fargo gained 32% while General Motors, Ford, and the Airline Index were all up 16% to 18%.
Chart Presentation: Equities Lead The only problem that we had with the decline in crude oil prices was that it was a ‘Tuesday’. We have noted on many occasions in the past that sharp price declines tend to take place on Tuesdays and have been followed in most cases by strength later in the week. All things considered we would prefer to see crude oil prices move lower towards the end of the week but we will take what we can get.
Chart Presentation: Cycle Peaks For many years we used the stock price of Phelps Dodge to represent the trend for the base metals so we were less than pleased when it was taken over by FreePort McMoRan in 2007. Since late last year we have been showing Canada’s Duvernay as a surrogate for the natural gas trend but that came to an end yesterday following a take over offer from Royal Dutch Shell.
Chart Presentation: Summary We are going to attempt to quickly summarize one of the points that we have been working on of late. To start with we show 3-month euribor futures below. European short-term interest rates began to rise in late 2005 as euribor prices turned lower.Below we show Citigroup (C) and the ratio between Japan’s Mitsubishi UFJ (MTU) and the gold etf (GLD).
Chart Presentation: MTU/GLD July 10 (Bloomberg) — Japan’s wholesale inflation rate rose to a 27-year high in June as companies raised prices to counter record oil and commodity costs. Producer prices climbed 5.6 percent from a year earlier, after a revised 4.8 percent gain in May, the Bank of Japan said in Tokyo today.
Chart Presentation: 1987 Comparison Chart-wise one can trace downward pressure on the financial sector back to the start of central bank interest rate increases in both Europe and Japan. Our view is that the trend for short-term European interest rates remains one of the keys for the markets through the balance of the year.
Chart Presentation: Ratio Adjustment July 8 (Bloomberg) — Crude oil fell more than $5 a barrel, the biggest decline in three months, as signs that the global economy may slow prompted investors to sell commodities.
July 8 (Bloomberg) — Soybeans fell for a second straight day on speculation record energy prices have slowed the global economy, prompting investors to sell commodities.
Chart Presentation: Themes We are going to return to one of our recurring themes today. At right we show a chart of oil refiner Valero (VLO) from October of 2006 through into March of 2008.
What interests us about the chart is the way VLO trended higher through the first half of 2007. Many will argue that commodity prices trade simply on fundamentals but each time we view a chart that shows a trend running almost perfectly through one or two calendar quarters we suspect that there is a bit more to the markets than merely supply and demand.
Chart Presentation: The Dollar July 3 (Bloomberg) — The euro fell the most against the dollar in more than two months after European Central Bank President Jean-Claude Trichet signaled that he may not increase interest rates again.
Chart Presentation: Oil Lags July 2 (Bloomberg) — The euro may be nearing an “explosive breakout,” reaching record levels against the U.S. dollar, according to a Citigroup Global Markets Inc. research note. The point that we have been trying to make over the last few days is that the euro has reached a decision point of some importance and that an ‘explosive breakout’ would tend to support the rising commodity theme with particular emphasis on gold prices.
Chart Presentation: Reverse Engineering Our recent argument has been that as we enter a new quarter the euro has reached a critical decision point. After working through a consolidation the euro is set to accelerate to the upside or fail to the down side. We have argued that commodity prices in general and gold prices in particular tend to trend with the major European currencies so the fate of the broader commodity trend hangs in the balance.
Chart Presentation: Redux Below are the same two charts that we included in yesterday’s issue. It isn’t that we can’t come up with something new- that is rarely a problem for us- but rather that we feel that we should make this point at least one more time before moving on to something else.
Chart Presentation: 1987 Comparison June 27 (Bloomberg) — Crude oil rose above $142 a barrel for the first time as falling stock markets spurred investment in commodities.
Oil has climbed 48 percent this year as the U.S. dollar declined against the euro and the MSCI World Index of global equity markets dropped 12 percent. Oil may extend gains if the European Central Bank boosts rates on July 3, further weakening the U.S. currency.
Chart Presentation: Encouraging We have written on occasion that we didn’t think that the equity market’s correction had fully run it’s course and that we expected the S&P 500 Index to make bottom between 1280 and 1290. By closing yesterday at 1283.15 in the face of additional bond markets strength a tentative case can be made that a bottom is within reach. Of course all bets are out the window if crude oil prices continue to spike higher.
Chart Presentation: Third Quarter Shift Below we show a comparative view of the 10-year U.S. Treasury yield index (TNX) and the CRB Index from the spring of 2006 through into August of 2007. Around the end of the second quarter in 2006 10-year Treasury yields reached a peak along with commodity prices. In other words the trend for both interest rates and commodity prices peaked around the end of June.
Chart Presentation: 2-Year Lag The Fed funds futures argue that there is a 90% chance of no change in the funds rate today with a 10% chance that the target rate will be raised to 2.25%. In other words we would expect the Fed to hold the funds rate at 2.0%.
Chart Presentation: The End of the Quarter In general we tend to look for indications of a change in trend around the end of the third week in the first month of a new quarter. In other words around the 22nd to the 25th day of next month. On the other hand there is the possibility that the juggernaut commodity trend could break as early as this week so we thought we would return to a chart comparison that supports this eventuality.
Chart Presentation: Correction June 23 (Bloomberg) — Crude oil fell in New York trading after Saudi Arabia pledged to increase production next month and militants in Nigeria called a cease-fire in their attacks on oil pipelines and vessels. We have included three comparative charts that show the S&P 500 Index (SPX), the Amex Oil Index (XOI), the ratio between the share prices of Caterpillar (CAT) and Pepsi (PEP), and CAT.
Chart Presentation: Cycle Comparison June 19 (Bloomberg) — Crude oil fell more than $4 a barrel, the biggest drop in 11 weeks, on speculation demand will decline, after China said it will raise fuel prices starting tomorrow. Today’s argument begins with a chart ‘detail’ that we do not have the room to show.
Chart Presentation: The SPR The U.S. Strategic Petroleum Reserve was authorized by Congress in 1975 following the Arab oil embargo of 1973- 74. The reserve consists of four underground storage facilities within naturally occurring salt domes on the Gulf coast in Texas and Louisiana and has current storage capacity of 727 million barrels of oil. As of this week the reserve holds 705.7 million bbls.
Chart Presentation: Looking Ahead One of our arguments of late has been that the markets have shown a tendency to change trends at the start of the year and at the midway point so as we approach the end of this month it is time to start thinking about what might happen next. Below we have included a comparison between the sum of copper and crude oil futures along with the sum of the U.S. 30-year T-Bond futures and the U.S. Dollar Index (DXY).
Chart Presentation: Leading Below we show crude oil futures and the Hang Seng Index from 1998 through 1999 and into early 2000. Below right we show the same comparison from May of 2007 to the present day. The argument here is that the lows for the Hang Seng Index preceded the bottom for crude oil prices by more than six months back in 1998- 1999.
Chart Presentation: Trend Test June 13 (Bloomberg) — China’s stocks had the biggest weekly decline on record, dragging the benchmark index below 3,000 for the first time since April 2007, on concern government policies to curb inflation will hurt profits. Below we show the Hang Seng Chinese Enterprise Index (we could have used the Hang Seng Index or something like the Shanghai Composite Index but this will likely suffice), the stock price of base metals miner Rio Tinto (RTP), and the sum of the Canadian (CAD) and Australian (AUD) dollar futures.
Chart Presentation: Trend Shift We are not, as a general rule, inclined to superstition but we have to admit that each and every time we start to write an issue for a Friday the 13th we feel somewhat uneasy. Fridays are strange markets day at the best of times.
In yesterday’s issue we started on the topic of consumer versus cyclical. The idea was that from time to time- recently this has meant about once per year- the equity markets shift from one theme to another.
Chart Presentation: Comparisons Crude oil prices surged higher yesterday following a surprising decline in U.S. weekly oil inventories. Surprising to some, we suppose, but not to those who read Morgan Stanley’s report last week that called for a spike in the price of oil. The reasoning was that the Middle East has been shipping record volumes to Asia which has led to a 20 million barrel decline in the ‘oil in transit’ pipeline to Atlantic destinations.
Chart Presentation: The Unwind From our point of view yesterday may well have marked DAY 1 of the ‘Great Commodity Markets Unwind’. One of the problems or challenges that comes from comparing the current markets cycle to a previous time period is that history never repeats exactly. There are broad similarities, of course, but always with enough differences to hide the fact that the markets move through broad cycles instead of never ending trends.
Chart Presentation: The Next Theme Our basic view is that regardless of what crude oil prices do this month we expect to see oil prices close to 80 by the final quarter of this year. Between now and the end of the month however... just about anything could happen.
Chart Presentation: Second Half Even though we have included a comparison between crude oil futures prices and the Nasdaq Composite Index into the first quarter of 2000 on a number of occasions (page 7 today) we found Friday’s oil price action somewhat disconcerting. One of our ongoing page 5 arguments- based on the relationship between the stock price of Potash Corp. and crude oil futures- indicated on Thursday that higher oil prices were due but we really expected something a bit less dramatic.
Chart Presentation: JNJ We start out today with a chart of Johnson and Johnson (JNJ). Given the 6 point rise in crude oil prices yesterday there may well be more topical topics to consider but, as usual, when the markets get volatile we tend to get more macro.
Chart Presentation: Sequence We start things off today with a chart comparison of copper futures and the cross rate between the euro and the Japanese yen from 2000 into 2001.
In past issues we have argued that copper prices tend to rise with crude oil and then turn lower a few months in advance of energy prices. Our objective today is to try to cobble together a sequence of sorts to help us struggle through the balance of this year.
Chart Presentation: Currency Musings June 3 (Bloomberg) — The dollar rose to a two-week high against the euro and increased versus the yen as Federal Reserve Chairman Ben S. Bernanke said the central bank is “attentive” to the implications of the U.S. currency’s decline... The Fed is working with the Treasury to “carefully monitor developments in foreign exchange markets” and is aware of the effect of the dollar’s decline on inflation and price expectations, he said.
Chart Presentation: 100 or 150? One of the recurring themes that we have touched on over time has been the tendency for the markets to shift rather intensely from sector to sector every six months. We grant that at any given time any number of stocks or sectors may be rising or falling but there is typically one key or central idea that serves as the focus for capital flows.
Chart Presentation: Big Charts Of all the intermarket relationships that we follow the ones that we like the best are based on one market leading while another lags. These help to remove at least some portion of the randomness that the markets exhibit on a day-to-basis. Over time the stock prices of large cap consumer names such as Coca Cola (KO) tend to trend inversely to commodity prices which, we expect, makes some amount of intuitive sense.
Chart Presentation: Favorites May 29 (Bloomberg) — U.S. stocks rose for a third day, the dollar jumped to a three-month high against the yen and the 10- year Treasury note’s yield climbed to the highest since December after a government report showed the U.S. economy grew more than estimated in the first quarter. Crude oil dropped the most in two months.
Chart Presentation: Offsets TORONTO (Reuters) - Canadian biotechnology companies have joined a chorus of their global counterparts to rail against the U.S. Food and Drug Administration’s tardiness in approving new drugs. Products by companies such as Labopharm Inc and Cardiome Pharma Corp have been delayed in the key U.S. market for months, chipping into their revenue and waylaying their plans. The FDA has blamed a severely depleted staff and dwindling funds for the holdups in approving treatments, while it also deals with an overly cautious U.S. Congress that is keen to turn over every stone.
Chart Presentation: Up and Down, Back and Forth From 1980 into 2007 the major trend shifted back and forth from the financials to the commodity producers. However, when the U.S. Dollar Index broke below the 80 level last year what started off as a trend became excessive enough to be termed a ‘bubble’. Downward pressure on the commodity producers should increase as the DXY moves back up towards 80.
Chart Presentation: The Euro's Next Move The point that we were trying to make above was that what happens next for the euro is going to be very important. If the positive commodity trend is alive and well- as so many currently believe- then the euro will continue to resolve higher. On the other hand it is possible that with so many investors leaning in the same direction the markets may have the potential to ‘surprise’ by whipping the euro back towards the 1.5250 support level.
Chart Presentation: Crude Oil vs. The 2000 Nasdaq The points that we were trying to make through the rather large comparative charts above were as follows: First, if we take the Nasdaq comparison literally then the cycle peak for crude oil would be made some time in June. Second, even if we accept it ‘generally’ then the charts still argue that crude oil futures would have to break below the rising 50-day e.m.a.- at minimum- to turn the trend.
Chart Presentation: Comparison May 22 (Bloomberg) — Oil’s rally to a record above $134 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange. The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.
Chart Presentation: Challenges Crude oil futures prices continued to push higher yesterday while various equity indices in Hong Kong and China declined by anywhere from 2% to 5%. The financials were weaker as long-term Treasury yields moved somewhat lower and in response to the weaker dollar and lower interest rates gold prices rose rather sharply. In other words... more of the same.
Chart Presentation: Quick Comparisons Below we show a comparison of the ratio between the S&P 500 Index and the DJ AIG Commodity Index and the ratio between the share pries of FreePort McMoRan (FCX) and JPMorgan Chase (JPM). The basic and, we hope, intuitive point here is that the metals and miners do better than the major U.S. financials when commodity prices are rising relative to equity prices.
Chart Presentation: Simple Reality The positive commodity trend extended through last week. We might argue that it is old and fraught with speculation but that doesn’t and won’t change simple reality. Our point, however, is that the markets move in cycles instead of simple straight lines and while the odd analyst will look at prices on a logarithmically-scaled chart and assume a never ending parabolic rise to justify something like $200 or $225 crude oil prices we tend to believe that history has shown that trees and prices rarely grow forever.
Chart Presentation: Things Go Better We start things off today with a ‘macro’ perspective. The chart at right compares the stock price of Coca Cola (KO) divided by oil service company Schlumberger (SLB) with crude oil futures prices divided by the U.S. 30-year T-Bond futures.By way of explanation we are using crude oil divided by the TBonds because this ratio marked not only the bottom for the S&P 500 Index (SPX) in 2006 but also- and more importantly- the lows for the SPX back in the autumn of 1990.
Chart Presentation: Three Quick Points We thought that we would make three fairly quick points today to start things off. The first two points are related to an argument that we have made in the past that the transition through a trend change this year would be split into two parts. At right we feature a comparison between the ratio of the stock price of Canada’ Bank of Montreal (BMO) and the Nasdaq Composite Index through the Nasdaq’s peak in March of 2000 and the ratio of Japan’s Mitsubishi UFJ (MTU) and the gold etf (GLD) into 2008.
Chart Presentation: NTT Today’s Chart Presentation is based, at least in part, on the following news item from yesterday:TOKYO (AP) - Japan’s top telecommunications company Nippon Telegraph and Telephone Corp. said Tuesday its group net profit surged 32 percent for the fiscal 2007 on booming long distance and international communications business. The market continues to do what it does best- chase strength.
Chart Presentation: Rolling May 12 (Bloomberg) — Sponsors of a measure to halt shipments of oil to the U.S. Strategic Petroleum Reserve are confident they will gain passage of the bill, following a week in which records for the price of oil were set each day. We have argued over the years that trend changes for crude oil prices tend to follow policy changes with regard to the Strategic Petroleum Reserve.
Chart Presentation: Defensive One argument for why the U.S. equity market manages to avoid getting crushed by rising energy prices comes from a simple ratio. In January of 2007 the ratio of the S&P 500 Index to crude oil futures prices rose to roughly 28 times while it ended last week around 11 times. To put this into some form of perspective notice that the daily closing low for this ratio in the midst of the 1987 stock market crash was about 11.3:1.
Chart Presentation: 1988-92 Immediately below are two charts of the stock price of Coca Cola (KO) and copper futures. The top chart begins in early 1988 and runs through into late 1992 while the lower chart covers the time frame from late 2005 up to the close of trading on Wednesday. The argument begins with the start of a rising trend for Coke at the end of the second quarter back in 1988.
Chart Presentation: 80 Perhaps someone should do us a favor and deliver a few side-of-the-head slaps to help cool our enthusiasm because our sense is that everything is finally coming together. Given our propensity to be early, of course, even if we used the term ‘immediately’ it would be based more on days or weeks than minutes or hours. We will spend much of tomorrow’s issue working on putting a more detailed argument together.
Chart Presentation: Nikkei/Copper Perhaps the most dominant trend since last summer has been weakness in the financials along with concurrent strength in the energy sector. With the financials showing strength yesterday in the face of yet another record high for crude oil prices perhaps we can be forgiven for lapsing back into a macro perspective to start things off today.
Chart Presentation: Compelling We are going to start things off today by returning to our comparison of Wells Fargo (WFC), Carnival Cruise Lines (CCL), the ratio between the oils (XOI) and broad U.S. equity market (SPX), and crude oil futures. The idea for this argument came from the 1990 equity bear market.
Chart Presentation: Paid We have argued time and time again that the strong commodity theme was being driven by the weaker dollar. Our problem was that the relationship was really supposed to be coincident instead of causal which simply means that in more normal times the two trends- strong commodities and a weaker dollar- would coexist without feeding off of one another.
Chart Presentation: Going Macro The Federal Reserve cut the funds rate by 25 basis points yesterday -as expected- and while the markets were certainly jittery the action fell far short of anything close to real ‘chaos’. Too bad- it would have made for an interesting session.
Chart Presentation: Chaos The Federal Reserve is widely expected to cut the funds rate by 1/4% today to 2.0% and, in general, the Fed follows the dictates of the markets. However, it isn’t what the Fed does or doesn’t do today that is important but rather what the markets do in response. From any number of angles and perspectives the markets appear to be on the verge of something approaching pure chaos so this should make for an interesting next few days.
Chart Presentation: Banks We are going to start off today with a macro perspective dating back to the collapse of Japanese asset prices in 1990. Below we have included a comparative view of the ratio between the Nikkei 225 Index and the S&P 500 Index, the stock price of Canada’s Bank of Nova Scotia (BNS on both Toronto and New York), and Japan’s 10-year (JGB) bond futures.
Chart Presentation: Decision Point What promises to be an interesting week begins today. On Friday crude oil futures priced climbed back towards 120 following a refinery strike in Scotland, dwindling supplies from Nigeria, and warning shots from a ship carrying U.S. cargo at Iranian boats. Microsoft disap
