Chart Presentation: 1990 Redux

At right we start off with two comparative charts of the S&P 500 Index (SPX) and the ratio between crude oil futures prices and the U.S. 30-year TBond futures. The top chart shows the time period through 1990 while the lower chart is from the present time frame.

The lows for the equity market back in 1990 were reached at the peak for the ratio of oil to bond prices. The economy, on the other hand, went into recession in early 1991 months after the SPX had turned higher.

Reminiscent of 1990 we have very high oil prices leading into real estate price weakness but the difference might be the action in the bond market. In 1990 bond prices declined as interest rates moved higher until oil prices finally reached a peak while this time around the bond market has been considerably more ‘scattered’ with prices pivoting higher in July. Our sense is that this served to cushion what could have easily been a formal equity ‘bear’ market.

Quickly… below we show Citigroup (C) from 1990 and Countrywide Financial (CFC) from 2007. While C certainly made its low in October of 1990 it didn’t start to really recover until the end of 1991. Those financials specifically levered to today’s problems could remain dead in the water for a considerable length of time even if they do rally into 2008 once energy prices finally turn lower.

On page 1 we showed how the SPX went into a bear market between the summer and autumn of 1990 and how this decline came to an end once the ratio of oil to bond prices finally turned lower. We also commented that one difference between 2007 and 1990 has been the early recovery in the bond market which has served to support the broad market.

At right we show charts of Wal Mart (WMT) and Anheuser Busch (BUD) from both 1990 (at right) and 2007 (below right).

Both WMT and BUD peaked in the summer of 1990 and then declined to a bottom around the middle of October. The basic point is that this year’s action has been remarkably similar.

Below we show two charts of crude oil futures. The top chart is from 1990 while the lower chart is from 2007.

Our purpose here is to show exactly when oil prices reached a peak in 1990. Prices rallied to a high in late September, dipped for a couple of days, and then pushed on to new highs during the first two weeks of October.

The point that we have been circling is that two things were supposed to happen before stocks like WMT and BUD turned higher. Interest rates had to turn lower and crude oil prices had to reach a peak. Our thought is that whether oil prices have peaked or whether there is one last push coming into October when we reach the other side of this trend we should ‘know it’ by the speed with which stocks like BUD and WMT start to rally. To us it still feels as if the markets are stuck in transition.