by Kevin Klombies, Senior Analyst

Friday, May 9, 2008

Chart Presentation: 1988-92

Immediately below are two charts of thestock priceof 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.

After trending sideways between mid-1986 and mid-1988 Coke began to rise in price even as copper prices soared to a peak into the end of 1988. We have scaled KO in semi-log to show that the share price moved upwards at a constant and compounding pace from 1988 into 1992.

Two years- almost to the day- into the rising trend with copper prices swinging higher the stock price of KO began to correct lower until it had broken below its rising 200-day e.m.a. line. This correction occurred within the 1990equity bear market that also included a huge rise in crude oil prices.

The chart at bottom right shows that KO began to trend higher at the start of 2006- months before the peak in copper prices. It also shows that two years after KO’s stock price began to rise we were back to sharply stronger copper prices and right into another equity bear market. In other words… from this perspective we will argue that the first half of 2008 is altogether too similar to the second half of 1990.

The point is that KO began to rise in 1988 around six months before the peak in copper prices and almost exactly two years in front of the 1990 equity bear market. The 1990 correction went not only with rising oil prices but also with a rather pronounced rally in copper prices. It also included falling real estate prices, severe stress on the banking system, and tumbling Asian stock prices.

The interplay between Coke and copper between 2006 and the present day is similar enough to 1988- 90 that we are inclined to take something of a leap and suggest that what happens next will be in some ways similar to 1990- 1992. Notice, for instance, that after breaking below the 200-day e.m.a. line in 1990 Coke’s share price began to strengthen and it was more than two years later before it even came close to breaking below this moving average line while copper prices remained in a negative trend until well into 1992.



Equity/Bond Markets

Below we show the Nikkei 225 Index and crude oil futures from 1989 into 1991.

At the start of 1990 the Nikkei peaked very close to 39,000 (compared to yesterday’s closing level just below 14,000). By October of 1990 this index had fallen by very close to 50% into the peak for energy and metals prices.

Consider the chart below right of China’s Shanghai Composite Index and the combination of crude oil futures multiplied by rice futures. From the peak just over 6,000 last autumn the Shanghai Comp. fell almost exactly 50% to 3,000 into the April bottom.

Our point is that in both 1990 and 2008 a major and very speculative Asian equity market lost about half of its value.

As a final point consider that the Nikkei is still only about one third of the levels that marked the peak in 1990. Heating oil futures, on the other hand, peaked around 1.05 in 1981 and bottomed close to 18 years later in 1999 at .30 only to rise to today’s level of 3.50. In other words eight or nine years into the future we may well be writing about the potential for the Nikkei to move above the 100,000 level.

Changing gears (without a clutch, as usual) we show below a chart comparison of the ratio betweencrude oiland copper futures and the U.S. 10-year T-Note futures.

We probably haven’t shown this chart since the second half of last year but the idea is that when crude oil is stronger than copper the bond market tends to rise in price. That was most certainly the case yesterday as copper price declined, crude oil prices hit yet another record high, and the long end of the Treasury market spiked upwards in price.