One of the more important questions with regard to the markets is whether the dominant trend has actually changed. While there are obviously any number of trends that we could argue were or are ‘dominant’ the one that we are referring to today revolves around the relative strength for crude oil prices.
Around the end of 1998 with crude oil futures prices pushing down towards 10 the ratio between the CRB Index and crude oil price reached a cycle peak. In other words this was the low point for crude oil prices on a relative basis. From 1998 into 2008 the trend was dominated by strong and rising crude oil prices. Investors learned through experience that oil and gas stocks should always be bought on corrections.
Belowwe show a chart comparison of the ratio between the CRB Index and crude oil futures prices and the stock price of Carnival Cruise Lines (CCL).
The point is that CCL tends to trend with the CRB Index/crude oil ratio which simply means that it does best during those periods of time when growth is positive but not concentrated in energy price strength. When the CRB Index/crude oil ratio peaked through 1998 this marked the end of the positive intermarket run for CCL even though the stock apparently didn’t realize it through much of 1999.
Below we have included the same chart comparison for the current time period. The chart shows that the CRB Index/crude oil ratio finally made a bottom through 2008 which suggests that the intermarket trend for CCL has finally turned positive.
The problem today is almost exactly the inverse of what transpired through 1999. In 1999 economic growth was strong enough to keep CCL’s share price from declining even as energy prices began to ramp higher. In 2009 economic growth is weak enough to hold CCL near the lows even as energy prices weaken on a relative basis.
So the question is… has the trend changed? In other words did the CRB Index/crude oil ratio bottom in 2008 in the same way that it topped in 1998 because… if it did… then CCL would represent one of our best ideas for the days ahead.
Continuing on- briefly- with today’s first page argument we show below a chart comparison between the CRB Index/crude oil ratio and the U.S. Dollar Index (DXY) futures.
If we believe that the CRB Index/crude oil ratio made a major trend-changing bottom back in 2008 and will resolve to the upside AND we note that the ratio is trending with the U.S. dollar THEN it shouldn’t be difficult to understand why it is that we remain steadfastly positive on the dollar. The key, as we have mentioned, is whether the major trend has changed because if it hasn’t then we should swing right back to a weak dollar/strong commodity price theme later this year. Our view is- as always- that the dollar will continue to push higher, commodity prices will remain somewhat under pressure, and cyclical growth will swing back from the energy producers to the energy users.
In the spring of 2004 we argued that the Fed was holding short-term interest rates too low for too long and that the markets would force rates higher through strong energy prices. The chart at right compares the share price of steel maker Nucor (NUE) with heating oil futures.
The markets effectively ‘split’ in 2004 and our view is that this shifted growth from U.S. ‘domestic’ to non-U.S. ‘foreign’. Let’s see is we can explain what we mean by this.
Below we show Boston Scientific (BSX) and the product of crude oil futures times natural gas futures. From 2001 into 2004 energy prices were ‘low’ (i.e. oil times gas below 300) and BSX’s share prices was stronger. In 2004 oil times gas broke to new highs which shifted the flow of money away from the health care theme which, we will argue, is essentially domestic-based U.S. spending, and over to an energy price theme that tends to go with money flowing out of the U.S. A few years later everyone just knew that growth meant China, Brazil, Russia, India, Kuwait, etc. The point? The product of crude oil times natural gas is well back below 300, Russia is in a state of financial crisis, and the share price of BSX is starting to recover.
