by Kevin Klombies, Senior Analyst

Tuesday, September 25, 2007

Chart Presentation: Coca Cola

Below we show two comparative charts of the U.S. Dollar Index (DXY) futures and the ratio between thestock priceof Coca Cola (KO) and the S&P 500 Index (SPX). The top chart covers the time frame from mid-2003 into mid-2006 while the lower chart starts in mid-2005.

The two companies in the Dow 30 with the lowest percentage of total revenues derived from U.S. sales are Intel and Coca Cola. According to Dow Jonesonly 15% of Intel’s revenue and 29% of Coke’s is from the U.S.

We have shown on occasion that one of the most dominant and pervasive themes over the past seven or so years has been relative weakness in U.S. equities versus most other global markets with even greater weakness by the U.S. large caps. On the other hand- bit by bit and inch by inch- we note that Coca Cola’s stock price started to show better strength during the first half of last year.

The last time the KO/SPX ratio turned upwards was early in 1994 and since this coincided the downward run in the dollar that marked the bottom in mid-2005 we thought we would show the comparison today.

In early 1994 the DXY futures turned lower concurrent with the start of an uptrend in the KO/SPX ratio. Through 1994 and into the summer of 1995 the dollar pressed lower while Coke’s stock price moved higher.

Our thought is that late-cycle dollar weakness should actually be a positive for Coke because much of its earnings come from abroad and are then converted into U.S. dollars. Consider how similar the comments taken from the New York Times archives for July 21, 1995 might be to the current situation. In July of 1995 just days before the DXY pivoted upwards the Times wrote, “The Coca-Cola Company said yesterday that profit rose 18.5 percent in the second quarter, meeting Wall Street expectations, as its international sales grew strongly…Coke’s biggest volume increases included a 45 percent jump in Brazil and a 37 percent gain in China…The biggest setback came in the crucial market of Japan, where case sales fell 3 percent. Among the factors Coke cited for the decline were the slumping Japanese economy and the weather.

At times one feels as if the current market is wholly unique and at other times… it certainly seems rather eerily familiar.



Equity/Bond Markets

Months (and months) ago we introduced the argument that after the Fed cuts the funds rate for the first time the stock prices of Boston Scientific (BSX) and Lear Corp. (LEA) tend to swing higher. With a bit of a lag the same thing is often true with regard to lumber futures but that is an issue for another day.

Now that the Fed- rightly or wrongly- has made the first reduction to the funds rate we are going to do our best to keep tabs on the BSX argument. The long view is that once BSX turns higher it tends to trend upwards for about 3 years. The shorter view is that through the last two cycles the stock price of BSX has risen until the ratio between Exxon Mobil (XOM) and BSX has declined to around 4:1.

The chart at right shows BSX and the XOM/BSX ratio which declined yesterday to around 6.5:1. The best case for BSX might be that XOM remains at or even above its current share priceof 91.73 because BSX would then have to rise to around 23 to pull the ratio back to 4:1. Our thought was that we would expect something closer to 80 and 20 towards the end of the year and are naturally hoping that it doesn’t turn out to be more like 60 and 15 instead. We have included another perspective on page 5.

We have a number of intermarket relationships that we use with regard to the stock price of Wal Mart (WMT). Below and below right we show WMT along with the product or combination of crude oil futuresprices times the Australian dollar (AUD) futures.

The basic argument is that WMT trends inversely to the cyclicalcommodity theme so it will tend to trend flat to lower as long as oil prices and the commoditycurrencies are rising. The last major upward pivot for WMT occurred at the start of the first quarter in 1997.