by Kevin Klombies, Senior Analyst

Wednesday, June 13, 2007

Chart Presentation: 1997

A couple of quick thoughts. Apparently Toyota surpassed General Motors in world wide sales last year. The problem is that Toyota’s market cap is $195 billion versus General Motors $17.8 billion. Volume is nice if each unit is being sold for a profit.

Energy prices were lower yesterday but once again the weakness came on a Tuesday. We would like to see energy prices sell off after the weekly inventory report instead of in front of it as has been the case for the past number of months.

We show two comparative charts. The top chart includes copper producer Phelps Dodge (PD- recently bought by Freeport-McMoRan), copper futures, and DaimlerChrysler (DCX) from 1996 through 1998. The lower chart features Freeport-McMoRan (FCX), copper futures, and DaimlerChrysler from the start of 2006 to the present day.

The idea here is that we are comparing 1996- 97 with 2006- 07.

Copper futures rose to a peak in May 1996 and then made a second top into June 1997. The top for Phelps Dodge was also reached in June 1997.

Copper futures rose to a peak in May 2006 and have rallied higher this year with FreePort-McMoRan moving up to a high in June 2007.

The argument is that similar to 1996- 97 copper futures prices have made two distinct tops with the share price of FCX pushing upwards this month in a manner similar to that of PD ten years ago. If the relationship continues to hold then metals prices should turn lower through the balance of the year as the mining stocks decline.

The chart of DCX is also quite similar to 1997. DCX reached a peak about a month after PD turned lower and then sold off into the end of the year as the Hong Kong stock market ‘crashed’. The airlines and autos returned to a positive trend early in 1998.

The charts argue that the strong cyclical theme might have a few more weeks to run but by late summer we are going to have to get considerably more defensive.



Equity/Bond Markets

U.S. interest rates are being pushed higher by stronger commodity prices and then pulled lower by weakness in real estate. At present the commodity theme is dominating but with the share prices of the home builders (DR Horton and Hovnanian) moving to new lows we suspect that in due course the markets will shift focus from concerns about inflation to worries about slowing growth and employment.

The chart below right compares the U.S. 30-year T-Bond futures with the ratio between the share prices of Caterpillar (CAT) and Coca Cola (KO).

When CAT is stronger than KO the market theme is based on strong cyclical growth and rising interest rates. Conversely KO will tend to outperform CAT when interest rates are trending lower.

Another view is shown below using the ratio of the share price of Johnson and Johnson (JNJ) to the S&P 500 Index (SPX).

The JNJ/SPX ratio moves inversely to the trend for 10-year U.S. Treasury yields. In a sense yields have been rising from the moment that the Fed pulled the funds rate down to 1% in mid-2003 so over the past four years JNJ has been weaker than the broad market.

We continue to watch 10-year Japanese yields which are last seen at 1.93%. Our view is that 10-year yields should be at least 2% higher than the inflation rate so if Japan’s yields ever rise above 2.0% it will indicate that at long last Japan has moved back to a positive inflation rate. Rising asset prices, interest rates, and widening spreads should also serve as a nice positive for Japan’s major banks. On the other hand we have seen 10-year Japanese yields run into the 1.9%’s on a number of occasions before failing lower once again…