Lots of ‘news’ this week. Goldman Sachs reports earnings this morning with Morgan Stanley due on Wednesday. The Fed should cut the funds rate later today to .25% which will mark the lows for U.S. short-term interest rates for the cycle. OPEC meets on Wednesday and will undoubtedly announce further reductions in oil quotas that may or may not be adhered to.
If all goes according to plan- which would make for a pleasant change- the U.S. dollar should be at a correction bottom this week, gold will be making a price top, and the equity markets will continue the slow process of shifting over to a more positive health care/biotech theme.
We return today to a chart comparison that we have been showing on occasion in recent weeks. Below we feature the S&P 500 Index (SPX) and the product of commodity prices (CRB Index) and long-term Treasury prices (U.S. 30-year T-Bond futures) from 1982 into 1983.
The idea is that equities are part ‘financial’ (i.e. similar to bonds) and part ‘real’ (similar to commodities). Rising bond prices are a positive while rising commodity prices are also a positive. When the combination of commodity and bond prices is very weak there tends to be downward pressure on the equity markets but when the combination is stronger the equity markets tend to benefit. The caveat is that this tends to work best in an equity markets trend that is linked closely to the commodity markets. When the cyclical trend is dominated by ‘tech’, for example, the relationship has less importance.
In any event… the chart at top right shows that the SPX was trading very closely with the commodities times bonds combination through 1982’s bear market and into the bull market that extended from August of 1982 through 1983. In fact, the true pivot upwards for the SPX in August of l982 occurred as the CRB Index times T-Bonds combination pushed above its 200-day e.m.a. line.
The chart below right shows where things stand at present. The bond market has been stronger of late while the CRB Index has begun to flatten creating a bottom of sorts for the combination of the two that has been matched by a much calmer trend for the S&P 500 Index. In theory a return to the 200-day e.m.a. line for the SPX (i.e. 1150) would require either much stronger TBond futures prices or a rally by the CRB Index from yesterday’s close around 225 back close to 294.
Equity/Bond Markets
We are not even sure when we first introduced the ‘decade theme’ but we suspect it was sometime back in 2002. The idea was that there are certain similarities that have been running through the last few decades. Cyclical peaks, for example, have been hit in the ‘0’ year (commodities in 1980, the Nikkei in 1990, the Nasdaq in 2000), ‘crashes’ have occurred in the ‘7’ year (1987- of course, as well as the Hang Seng in 1997, along with virtually everything from 2007 into 2008), while bear market bottoms have been made in the ‘2’ year (1982, 1992, 2002).
In any event we argued in 2002 that this should lead to a bear market bottom around the end of the third quarter (about 9 days too early) and then created a list of stocks in early 2005 that we believed should do well into 2007. This list included names such as British Airways, DaimlerChrysler, Coca Cola, Wal Mart, Anheuser Busch, Pepsi, etc.
At right we show a chart of Schlumberger (SLB) from 1986 into 1990 and Cisco (CSCO) from 2006 to the present day.
The argument is that ‘tech’ today is similar to the oils in or around late 1988. The commodity-related sectors peaked in 1980, corrected for several years before pushing higher into the stock market crash of 1987, and then began to rise in early 1989 through into the stock market’s peak in 1990. Our thought is that large cap tech stocks such as Cisco and Intel may be approaching the end of a correction that will turn into a sustainable rally that will run through 2009 and into the next cyclical peak due in 2010.
It is well known- we expect- that commodity prices have been trending inversely to the U.S. dollar. A weak dollar leads to rising commodity prices while a stronger dollar leads to declining commodity prices. Fair enough.
It is less well known, however, that the biotechs have been trending very closely ‘with’ the dollar so while a stronger dollar has led to downward pressure on raw materials prices it has also gone with a rising trend for stocks such as Amgen (AMGN).
Below we show AMGN from 2002 into 2003. The bottom for AMGN was made early in the third quarter of 2002 followed by a series of lows for the SPX in October of 2002 and March of 2003. In other words… AMGN turned higher ahead of the broad stock market in 2002 and may well have done something similar this year. If so then we can argue that a stronger dollar could prove to equity markets positive.
