We are going to start off today by repeating a premise that we have used in these pages for some time. The premise is that there is a broad relationship between the trend for copper and crude oil prices and that, in general, the price of copper is roughly equivalent to three times the price of crude oil.

Our argument is based on copper prices in cents and crude oil prices in dollars. 60 cent copper prices go with 20 dollar crude oil as an example.

The chartbelow shows copper futures minus three times crude oil futures. If our contention is correct then the spread or difference between copper (in cents) minus 3 times crude oil (in dollars) should swing back and forth through the ‘0’ line. In other words at any given point in time copper prices might be ‘high’ or ‘low’ relative to crude oil prices but over the long run the relationship will tend to always work back towards balance.

Our view is that the trend for copper prices tends to reflect the general trend for Asian growth. Strong copper prices go with strong Asian growth and vice versa. So far, so good.

It is generally conceded that crude oil prices rose to almost irrational levels last year but we argued from time to time that copper prices were actually ‘the problem’.

The chart below shows copper futures from late 2001 through to the end of last week. Notice that copper futures hit an intraday peak around 4.16 in 2006 and then pushed up through 4.00 once again in mid-2008.

The first point would be that from this perspective copper prices actually dragged crude oil prices higher. A 4.00 copper price equates to crude oil prices in the 130’s.

The second point would be that Asian growth tends to trend with the spread so the stronger copper is to crude oil the headier the action in the Asian stock markets. The Chinese stock market, for example, concentrated almost all of its rise into the period of time between 2005 and 2007 when copper prices were ‘high’ relative to crude oil.

There is, we hope, some method to our madness so we will continue with our explanation on the following page.



Equity/Bond Markets

We have argued on many occasions that Wal Mart (WMT) tends to trend inversely to Asian growth. In other words strong Asian growth goes with relative weakness for WMT while weaker Asian growth goes with a rising trend for WMT’s stock price.

If we distill ‘Asian growth’ into the relative action between copper and crude oil we come up with the chart comparison below. The explanation for why WMT has been dragging lower over the past six months would be, strangely enough, that crude oil prices are weaker. Not weaker on an absolute basis but instead relative to copper. As long as the copper minus crude oil spread is rising the trend for WMT will be negative. Chart-wise a break below the ‘0’ line for the copper minus crude oil spread would appear to be a positive for WMT now.

Moving on… we show below two chart comparisons.One comparison below features General Electric (GE), 3-month euribor futures (short-term Euro-denominated debt prices), and Boston Scientific (BSX) from 2000 into 2004. Below we show GE, euribor futures, and the stock price of Genentech (DNA) from the current time frame.

The argument would be that GE represents the trend for cyclical growth so when its’ stock price turns lower we would expect to see a rising trend for euribor prices. In other words when GE’s stock price weakens it means that cyclical growth is weakening which leads to falling short-term interest rates.

We continue to look for the ‘offset’. The offset to slowing cyclical growth and falling interest rates in 2001 and 2003 included a stronger trend for medical device maker BSX.

There are very few stocks or sectors that are showing much in the way of relative strength in the current cycle and try as we might we can’t get gold to fit into this equation. The biotechs and Wal Mart remain our best choices as the sectors that turned higher- as BSX did in late 2000- when cyclical growth began to weaken back in the autumn of 2007.