by Kevin Klombies, Senior Analyst

Thursday, August 16, 2007

Chart Presentation: Cdn Dollar Bear

Aug. 15 (Bloomberg) — Federal Reserve Bank of St. Louis President William Poole said there’s no sign that the subprime- mortgage rout is harming the broader economy and an interest-rate cut isn’t yet needed.

“It’s premature to say that this upset in the market is changing the course of the economy in any fundamental way,” he said in an interview in the bank’s boardroom. “Obviously, there could be an impact, but we have to rely on some real evidence.”

Interesting perspective. Mr. Poole’s view appears to be that corporations’ capital spending plans remain intact. In 2000 the issue was the collapse in capital spending but in 2007 it is all about consumer spending so we suspect that Mr. Poole is looking for answers in all of the wrong places. Typical.

Today’s Chart Presentation is based on the premise that one ‘should have known’ that a mortgage-related problem was on the way because the share prices of the U.S. home builders turned lower around the end of 2005.

The chart compares Beazer Homes (BZH) with Bear Stearns (BSC). The idea is that the pressures on the credit markets began to build around the time the home builders turned negative. It took a good twelve months for the credit markets to understand that there really was some sort of imbalance between supply and demand in the housing sector.

The chart below compares the Canadian dollar futures with the CRB Index.

The argument is that if took the credit markets one full year to react to the weakness in housing then perhaps it will take one year for the commodity currencies to come to grips with the fact that commodity prices (as measured by the CRB Index) have already peaked.

In a sense we are arguing that the home builders peaked around the end of 2006 with the CRB Index topping in mid-2006. At the end of 2006 the major investment banks reached a top and six months later the commodity currencies reached what appears to be a cycle peak. What intrigued us was the way the chart of the Cdn dollar in August appeared similar to BSC back in February.



Equity/Bond Markets

The chart compares the stock prices of Valero (VLO), Caterpillar (CAT), and AMR with the sum of the stock prices of U.S. home builders DR Horton (DHI) and Hovnanian (HOV).

We have done this comparison on a few occasions in the past but thought we should run through it one more time. The idea was that the home builders and the airlines (AMR) did not turn upwards in price last year until early September and this trend change occurred after both VLO and CAT had declined back below their 200-day e.m.a. lines.

In the current situation the ‘green light’ to take a run at the home builders and airlines would turn on once CAT moved nicely below around 73. VLO is already just below its moving average line so one of the two preconditions has been met.

We included some comments from William Poole on today’s first page. Our thought when we read the Bloomberg article was that Mr. Poole appears to be stuck fighting the last war. The collapse in capital spending in late 2000 created the need for markedly lower interest rates and easier credit conditions which helped push real estate prices upwards which in turn served to boost consumer spending.

Today’s situation is in some ways exactly the opposite to 2000. To explain we have included a chart of DR Horton and the U.S. 5-year T-Note futures below along with a chart of Intel (INTC) and the 5-year T-Note futures below right.

Long before the collapse in capital spending became apparent (to the Fed) the bond market began to lift. As bond prices turned higher the stock prices of the home builders began to rise. Our argument is that Intel represents the capital spending theme and its share prices has been trending higher with rising bond prices since the middle of last year. The Fed will be forced (eventually, it appears) to bail out the real estate sector which supports consumer spending and the offset will be an acceleration of capital spending. In other words… the chart of Intel today appears similar to that of DHI in the second half of 2000.