by Kevin Klombies, Senior Analyst

Friday, October 19, 2007

Chart Presentation: BUD

We are going to show two comparative charts that centre around the stock price of Anheuser Busch (BUD) today.

BUD rose up to the 54- 55 level in 2002 and has made repeated attempts to move on to new highs over the past six years without success. The flat trend for BUD began around the time that the U.S. dollar turned lower and the commodity markets turned higher in early 2002.

The chart at right compares BUD with the ratio between the U.S. Dollar Index (DXY) and copper futures. When the dollar is rising copper prices tend to decline and when the dollar is weak- as it has been for quite some time- metals prices rise.

The argument is that in a weak dollar/strong metals trend the stock price of BUD will be under pressure. That this has only resulted in a prolonged sideways consolidation is rather impressive (in that it could easily have been much worse).

BUD is currently making its 8th or 9th push back towards the 54- 55 level since 2002 and quarterly earnings are due on Wednesday. Our thought was that if it did break to new highs it should also mark the end of the weak dollar/strong commodity trend.

Below right we show the Canadian dollar (CAD) futures and the ratio between BUD and the S&P 500 Index (SPX).

The BUD/SPX ratio tends to move inversely to the Cdn dollar so the strong and rising trend for this currency since the end of 2002 has gone with a steady decline in the value of BUD relative to the SPX. As the share price has gone sideways below 54- 55 the broad market has risen so that BUD’s value has moved down from roughly 5.8% of the SPX to only 3.4% today. In other words BUD would have to rise up to around 89 with the SPX at 1540 to return to a 5.8% level.

The point is that for close to six years the markets have been trending and trading on the same theme- weak dollar and strong commodity prices. This trend may last for months to come but if it is nearing its expiry date then we would expect to see stocks like BUD returning to some semblance of relative strength. With the stock only a couple of points below a major resistance level we thought this was a reasonable time to give it some focus.



Equity/Bond Markets

There are certain details about the way the markets are trading that are so strange that we doubt that even we could make them up. A case in point is the chart at right.

The market is divided into two opposing camps with the long end of the Treasury market and the dollar on one side and energy and metals prices on the other. The last sentiment numbers that we saw showed something like 90% bulls on crude oil and 90% bears on the dollar so it might make some sense to view this as a potential extreme.

In any event the chart at right compares the sum of copper and crude oil futures (with copper valued in cents and crude oil in dollars multiplied by three times) with the sum of the U.S TBond futures and the U.S. Dollar Index (DXY).

Yesterday the U.S. Dollar Index closed down .53 and the TBonds rose by .469 to create an offset. Crude oil was obviously stronger but copper was weaker to provide a similar sort of offset.

We use the copper plus crude oil combination as a measure of the trend for short-term U.S. interest rates so when it peaked in 2006 it marked the end of rising yields.

Notice that the combination of copper and crude oil prices as well as the combination of bond prices and the dollar are back to almost the same exact levels as May of 2006. After 17 months of trading, new all time lows for the dollar, record levels for crude oil, and a bond market that is often all over the map… both sides of the chart are unchanged. We have bond price strength as the dollar falls and now we are getting copper price weakness on any rise in energy prices.

At right we show the CRB Index and the ratio between Caterpillar and Coca Cola (CAT/KO).

The CAT/KO ratio tends to go with commodity prices and tends to reflect the direction of the trend for long-term yields. When CAT is stronger than KO the underlying trend is typically strong commodities and 10-year Treasury yields and when KO is stronger than CAT is reflects weaker commodities and falling yields.

CAT reports quarterly earnings tomorrow. We have been rather intensely following the CAT/PEP ratio (charts on page 6) because it was our view that when the ratio fell below 1.05’ish it would mark the end of the rally for crude oil. At one point in time yesterday the ratio actually narrowed in to that level as CAT traded down into the low 75’s while PEP was pushing up through 72 but by the end of the day CAT gained .89 while PEP lost .23.

We may be giving CAT’s short-term price movements too much focus but we are rather fond of the argument. After all the ratio has not broken below the 1.05 level and quite clearly crude oil prices have not turned lower so to date it seems to be working nicely.

To the extent that U.S. construction activity is slowing a fundamental argument could be made for a negative trend for CAT (although there is always China to take up the slack). Regardless of the actual numbers the way the market reacts to them in the days to come will provide us with some information regarding the health of the current cyclical commodity trend.