Jan. 26 (Bloomberg) – Copper surged to a seven-week high on signs of improved economic activity, raising speculation demand will increase for the metal used in pipes and wires.
Jan. 26 (Bloomberg) – Copper will lead declines in industrial metals this year as miners fail to cut production fast enough to keep pace with weaker consumption, according to a survey of analysts.
The two comments above were made on the same day, regarding the same market (copper), and presented on the same service (Bloomberg). It is one of the reasons why we do our best to avoid reading news accounts which attempt to explain why the price of anything is rising or falling.
We are going to continue with the chart-based argument that we started in yesterday’s issue so that we can wrap it up and move on. The idea was that over time copper prices (in cents) equate to three times the price of crude oil (in dollars). The spike above 4.00 by copper in 2006 suggested that the eventual high for crude oil was going to be somewhere north of 130 (i.e. three times 130 is equivalent to 3.90 for copper).
The argument goes on to suggest that when copper prices are stronger than crude oil this shows up through Asian economic strength. In other words… strong copper prices are a positive while strong crude oil prices are a negative.
The chartbelow compares the Shanghai Composite Index with the spread or difference between copper and crude oil. If the ‘0’ line serves as a form of equilibrium then a rising trend above the ‘0’ line should go with strength in the Chinese equity markets while a falling trend would serve as downward pressure. So far, so good.
The offset to Asian economic strength- we have argued- has been a rising trend for the share price of Wal Mart (WMT). The intermarket argument for why WMT has been trending lower since midway through 2008 would be- oddly enough- that copper prices have been stronger than crude oil prices. In other words while the markets have been in tatters on the expectation of tumbling cyclical growth and the prospect of years of recession or depression within the markets the trend has favored copper to the detriment of WMT for the past six months.
Belowwe show a chart that has featured this pages on dozens of occasions over the past year or two. The chart compares the Shanghai Composite Index with the ratio between Wal Mart (WMT) and the S&P 500 Index (SPX).
The argument was that WMT rises on a relative basis when the Asian equity markets weaken. We have also suggested the negative Asian cyclical growth goes with falling commodity prices (particularly base metals prices), weaker ocean shipping rates, and declining trends for commodity currencies such as the Canadian and Australian dollars.
In any event through the last three months the WMT/SPX ratio has created a ‘top’ of sorts as the Shanghai Comp. has rounded through a bottom. The process started roughly three months earlier when copper prices began to strengthen relative to crude oil prices.
What intrigues us about this is that the trend for the Shanghai Comp. represents a number of other cyclical trends. In other words, as the chart below attests, if the Shanghai Comp. is making new lows there isn’t much reason to expect that General Electric is going to be making an imminent come back. On the other hand if GE and stocks such as Caterpillar are still making new lows then it calls into question the fairly broadly held view that the Chinese stock market is going to lead the recovery.
To put this into some form of perspective we show a chart below of the sum of the Canadian and Australian (CAD plus AUD) dollar futures and the ratio between Caterpillar (CAT) and Pepsi (PEP). The CAT/PEP ratio represents one form of the ‘cyclical versus consumer’ debate. We have stood on the side of the ‘consumers’ for some time so our expectation was that the CAT/PEP ratio would decline along with the commodity currencies. To some extent the correctness of our thesis rests with how ‘real’ the bottom is for the Shanghai Comp. and whether this has, in fact, marked the lows for key stocks such as CAT and GE.