by Kevin Klombies, Senior Analyst

Monday, December 10, 2007

Chart Presentation: Comparsion

At right are two comparative charts of Wells Fargo (WFC), crude oil futures, and the cross rate between the Japanese yen and the Australian dollar futures (JPY/AUD). Strange bedfellows indeed. The top chart is from 1990 into 1991 while the lower chart is from the current time period.

In 1990 George Bush was President of the United States, Asian growth was peaking, crude oil prices had spiked higher, and real estate prices on a global basis were starting to decline after several years of rampant speculation. Asset price-based takeover speculation had ended, the stock market had gone through a reasonable correction, and as the savings and loan industry teetered on the edge of insolvency there was considerable concern about the future for many of the major financial institutions. In other words.. it was very much like the current time frame.

The argument is that when a credit markets crisis appears the markets tend to throw the baby out with the bath water in terms of the major financials. That was definitely true in 1990- 91 as the stock price of WFC declined into October as an offset to rising crude oil prices.

The Japanese yen/Australian dollar cross rate tends to decline as oil prices rise so the upward spike into October suggested that oil prices were set to decline. As oil prices moved lower the equity markets started to recover until by January of 1991 the stock price of WFC had returned to its mid-1990 peak.

Using the current chart comparison we are looking for indications of yen strength against the commodity-price sensitive AUD as a way of measuring the strength of the trend for crude oil prices. We are also trying to determine when the rising oil price/declining financial stock price trend began because when pressure abates the markets could swing price back to those levels. The chart suggests that the JPY/AUD cross rate has yet to show the kind of strength that would clearly mark the top for oil prices and it also makes the case that pressures in relative prices began to build during early May when crude oil prices were in the low 60’s.



Equity/Bond Markets

On page 1 we suggested that the present cycle is somewhat similar to 1990- 91. At that time the rising asset price trend that had shifted from rare coins, base ball cards, and art to leveraged buy outs and junk bonds came to an end at the peak for crude oil prices in the midst of an equity bear market led in large part by pressure on the financials. In other words one could argue that oil prices one of the last sectors to peak and that this top went with the lows for the major financials.

The chart below compares Wells Fargo (WFC) with Citigroup (C). In 1990 Citigroup was known as Citicorp but for our purposes we will simply refer to it here as ‘C’.

Into the autumn of 1990 all of the major financials were weaker although by late in the year it became known that Warren Buffett was building a position in WFC. Our point is that through this time frame investors were so worried about the impact on the financials from the collapse in real estate prices that it was very difficult to imagine going long any of the banks and brokers- although that is precisely what Buffett was doing.

Look at the difference during 1991 between C and WFC. C’s stock price essentially held flat for well over a year while WFC’s more than doubled. Our thought is that this does a nice job of explaining how crises in the financial sector can lead to reasonable opportunities for profit as long as one focuses on relative strength.

At right we show a chart of the S&P 500 Index (SPX) from 1980 into 1983, Canada’s Royal Bank (RY) between 1988 and early 2001, and Japan’s Mitsubishi UFJ (MTU) from late 2005 forward. All three charts cover the same amount of time even though they come from different time periods.

Our point is that MTU has certainly been weaker into 2007 although if one compares the correction to the financials into 2000 or the entire U.S. equity market into 1982 the picture is almost identical. To the extent that MTU has sold off with the financials but isn’t ‘the problem’- a point that may or may not be true since only time will tell- then it could conceivably lead higher similar to WFC through 1991. If that proves to be the case then the SPX and RY charts suggest that the recovery trend should run for roughly the next year.