Chart Presentation: Coke vs. Copper

The hottest trade at this time would likely to be long commodities and short either equities in general or the financials in particular. Short-term U.S. interest rates continue to race lower with the markets now giving about 75% odds that the Fed will cut the funds rate later this month to 2.25% from 3.0%. As the spread between European and U.S. interest rates widens money pushes into the euro creating downward pressure on the dollar which, in turn, ramps commodity prices higher.

OPEC meets later this week and the consensus view is that quotas will remain unchanged. OPEC officials argue that there is no need to increase production to meet demand that does not exist but in the mean time oil prices continue to hold above the 100 level as the lack of consumption demand is overwhelmed by investment demand. Strange days indeed.

We are going to show a macro perspective to start things off today so we have included a chart of copper futures and the stock price of Coca Cola (KO) below. The charts have been offset or shifted in time by eight months.

The stock price of KO began to rise in the late spring of 1994 while copper prices did not peak until early in 1995. KO peaked in price during the third quarter of 1998 while copper prices eventually bottomed around 8 months later in the spring of 1999.

The point is that on a broad basis KO tends to trend inversely to metals prices but instead of following the trend for copper it has shown a tendency to ‘lead’. With this in mind we show the current situation below.

The stock price of KO began to rise some time around the start of 2006 which then argued that by late summer copper prices should be ready to turn lower. The break in commodity prices occurred in early August of 2006 as crude oil prices finally broke to the down side. With KO still finding support at the 200-day e.m.a. line into 2008 the argument would then be that at best the trend for copper is neutral to negative until some time later this summer but if KO pushes on to new highs then the underlying metals trend would remain negative at least into 2009.

Below is a chart comparison of the Nasdaq Composite Index, the Bank of Nova Scotia (BNS), and the Bank of Montreal (BMO) from 1999 into the start of 2001.

The argument that we have made on a number of occasions in the past is that the peak for the Nasdaq in March of 2000 coincided with the bottom for the Canadian bank shares. As soon as the Nasdaq reached the 5000 level the stock prices of BNS and BMO pivoted upwards and were through their respective 200-day e.m.a. lines by the end of that month.

What we find interesting about this is that in March of 2000 it was anything but obvious that the Nasdaq had reached a multi-year or, more likely, multi-decade price peak. True weakness did not really show up until more than six months later with the Fed responding with a rate cut in January of 2001.

The point is that the markets responded decisively in March of 2000 by selling off the Nasdaq and ramping the Canadian banking shares higher and this inexplicable change in trend did not even take place at the end of a quarter.

The chart below compares the CRB Index with Japan’s Mitsubishi UFJ (MTU). The late-cycle ramp in the CRB Index is somewhat similar to the final rally in the Nasdaq through the autumn of 1999 and the perils of Y2K at year end. The financials have been weaker as money moves towards the commodity sector in response to the weaker U.S. dollar.

If 2008 proves to be anything like 2000- and it is the month of March now after all- then the pivot should include a break in commodity prices and the euro, strength in the dollar, and a decline in long-term Treasury and Japanese bond futures prices. The chart below shows that the JGBs through 137 would indicate that a more positive trend has begun for the financial sector.