by Kevin Klombies, Senior Analyst,

Nov. 3 (Bloomberg) — U.S. auto sales plummeted 32 percent in October to the lowest monthly total since January 1991, led by General Motors Corp.’s 45 percent slide, as reduced access to loans and a weaker economy kept consumers off dealer lots… Industrywide U.S. auto sales fell for the 12th straight month, extending the longest slide in 17 years.

From the perspective of fundamentals and, quite likely, common sense the U.S. automakers appear to be one of the very worst sectors to consider from the long side. However… when viewed from an intermarket perspective this is an unusually attractive long-term proposition.

At top right we show a comparison between the sum of the share prices of Ford (F) and General Motors (GM) and the ratio between the price of the U.S. 30-year T-Bond futures and heating oil futures.

The TBonds represent long-term financial asset prices while heating oil represents energy costs. When the ratio is declining then energy costs are rising relative to financial asset prices and this is a significant negative for the autos. On the other hand when the ratio is rising the trend turns positive for the autos.

The point is that the trend may finally be swinging back in favor of the autos after close to ten very tough years.

Below we feature Ford (F) and the point spread or difference between Canada’s S&P/TSX Composite Index (TSX) and the Dow Jones Industrial Index (DJII).

The Canadian equity market outperforms the U.S. equity markets when commodity prices in general and crude oil prices in particular are strong and rising. Ford, on the other hand, tends to trend lower when energy prices are trending higher.

Our thought today is that going positive on the autos is an interesting idea in search of some form of timing. In other words we need a ‘trigger’ of sorts that pushes us into this trade. The chart at right suggests that if the DJII were to strengthen relative to the TSX to the point where the spread moved not only below ‘0’ but also down to something less than -250 then the post-1998 trend should have changed. Given the nature of the markets, however, this is very likely an idea that we should tuck away until early January next year.



Equity/Bond Markets

Below we continue on with our review of the intermarket trends that are impacting the autos. The chart compares the stock price of GM with the ratio between the share price of Coca Cola (KO) and copper futures.

The chart suggests that the trend for GM should turn positive once the KO/copper ratio begins to rise. In this instance KO represents financial asset prices while copper represents cyclical commodity prices. When the KO/copper ratio is strong and rising- especially if it moves back above 3% (with copper at 1.86 this would go with KO moving above 55)- the trend for GM should be positive.

We mentioned on page 1 that this is an idea best left for January. The equity markets tend to focus on relative strength during November and December and hold off moving into weaker sectors until the new year begins. In other words fund managers intent of maximizing calendar year returns (and bonuses) will tend to chase strength late in the year and then make risky bets on turnaround candidates as a fresh calendar year begins.

At right we return to a chart comparison that we have been showing on a daily basis recently. The chart consists of the yield index for 30-year U.S. Treasuries (TYX), the ratio between commodities (CRB Index) and equities (S&P 500 Index), and the ratio between the oils (Amex Oil Index- XOI) and the broad market (S&P 500 Index).

Yesterday was a fairly calm day in the equity markets but we did notice that the CRB/SPX ratio declined somewhat, the XOI/SPX ratio stopped moving higher, and at day’s end long-term Treasury yields were a bit lower. Our view, of course, has been that yields will resolve to the down side, commodities will continue to decline relative to equities, and the oils should weaken over time relative to the SPX. We have also argued that when these three things happen this will mark the leading edge of a new equity bull market. The only problem has been that the process has been moving in what feels like ‘slow motion’ with 30-year yields bouncing rather dramatically up off of support around 3.9%.