by Kevin Klombies, Senior Analyst

Tuesday, April 15, 2008

Chart Presentation: Banks

April 14 (Bloomberg) —Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co., three of the five largest U.S. banks, may miss analysts’ earnings estimates based on results reported by their biggest competitors.

Wachovia Corp., the No. 4 bank by assets, posted a loss of 20 cents per share today after 21 analysts predicted a profit of 40 cents. Washington Mutual Inc., the top U.S. savings and loan, said April 8 it would have a first-quarter loss of $1.40 a share, 40 percent bigger than expectations.

April 14 (Bloomberg) — Crude oil rose more than $1 a barrel in New York after a Group of Seven Nations meeting failed to end the dollar’s slide against the euro.

April 14 (Bloomberg) — Natural gas advanced on shrinking liquefied natural gas imports and rising crude oil prices.

Above are snippets from three Bloomberg articles published yesterday. The point is that the financials are trending with the U.S. dollar and both are moving inversely to crude oil prices. As crude oil prices strengthen gasoline, heating oil, and natural gas prices rise. In a sense if we take this argument ‘full circle’ commodity prices are as over done to the upside as the shares of the major banks are over done to the down side. If one argues that the financials are still far from a bottom in terms of both price and time then the conclusion would be that the commodity trend is far from a top as well.

At right we show the U.S. Dollar Index (DXY), the share price of Wells Fargo (WFC), the ratio of the oils (Amex Oil Index- XOI) to the S&P 500 Index (SPX), and the ratio of the gold miners (Philadelphia Gold and Silver Index- XAU) to the SPX.

The chart shows quite nicely that the dollar and the financials have been trending lower as the oils and golds have risen relative to the broad market. To turn or reverse this trend the markets have to stop selling off the banks on ‘news’ and that is unlikely to happen until either Citigroup or JPMorgan Chase release their quarterly results later this week.




Equity/Bond Markets

We are going to take one more run at the chart-based argument at right before putting it to bed for the time being. The charts show the sum of the share prices of Caterpillar and Valero, crude oil futures, and the pharma etf (top right) from 2006 and CAT and VLO, crude oil futures, and the stock price of Johnson and Johnson (JNJ) from the current time frame.

JNJ reports earnings early today so the market’s response should be somewhat helpful. On any given number the share price could go up, down, or sideways but ideally the reaction helps push it back towards the major resistance point around 68.

In 2006 as the sum of CAT and VLO turned lower to mark the end of the rising pressure on crude oil prices we can see that the markets began to shift money back to the pharma sector. Whether it was weaker oil prices that helped lift the pharma stocks or stronger pharma stocks which pulled money away from the commodity trade is debatable but, either way, this is the way the markets resolved out of the mid-2006 bottom for the SPX.

Our quick point is that if we use JNJ instead of the PPH we get the impression that the markets have been working on a trend change since mid-March. We will focus rather intently on the mid-March time frame on today’s third page.

Below we show the Shanghai Composite Index and the stock price of Wal Mart (WMT).

We have been arguing for months that WMT trends inversely to the Chinese equity market. Strangely enough this broad relationship seems to have tightened up quite considerably. The chart below suggests that WMT above 55- 56 should go with new lows for Chinese shares while a bounce in the Chinese market would likely slow the pace of WMT’s ascent.