We never- until today that is- quote ourselves. However we are going to break our long-standing policy and include a paragraph from this past Monday’s issue:
In terms of our view that today is similar but opposite to 2000 the idea would be that while 30-year yields should resolve upwards over time the low point for the equity markets should be reached at the first sustainable peak for yields. In other words- in the short run- the equity markets should respond favorably to falling long-term Treasury yields.
With yields falling rather sharply yesterday after the Fed embraced the idea that now is the appropriate time to fire what may well be their last disinflationary ‘bullet’… the equity markets extended the recent rally.
Aside from the fact that 5 to 8 point moves in long Treasury futures, 3% one-day swings in forex rates, and a breath taking reversal in gold prices muddies the waters somewhat we will press on with yet another run at one of our current fixations- the relative strength of crude oil prices.
Belowwe show the ratio between the CRB Index and crude oil futures along with the share price of Carnival Cruise Lines (CCL) from 1997 into late 2000.
Between 1998 and 1999 the major trend changed. It shifted from a weak oil theme to a strong oil theme. The new ‘strong oil’ theme dominated markets trends all the way through 2008 and into 2009.
Our argument is that ‘strong oil’ represented the old trend and ‘weak oil’ will represent the new trend. Our view is that recessions mark trend change points.
The CRB Index/crude oil ratio peaked in 1998 while buoyant economic strength held the share price of CCL near the highs through 1999. In other words there was close to a one-year lag between the bottom for crude oil on a relative basis in 1998 and the top for an oil-user cyclical such as CCL.
Our argument has been that if history were to be kind enough to repeat the trend for CCL should turn nicely positive around the middle part of this year. Our concern is not that the Fed and Treasury’s flurry of emergency actions will fail but instead that they will shorten the lag so that CCL leaves the docks on a bullish voyage earlier than we had anticipated.
Equity/Bond Markets
The chartbelow compares the ratio between the Amex Oil Index (XOI) and the S&P 500 Index (SPX) with the sum of the share prices of Ford (F) and General Motors (GM).
The basic point is that a rising trend for the XOI/SPX ratio goes with a falling trend for the share prices of the major U.S. autos. In other words as long as the markets are keying in on the ‘strong oil’ trend things are going to progressively more grim for the autos.
We have a number of ‘if this, then that’ arguments that we are following including the idea that a sustained stock market recovery will not begin until the XOI/SPX ratio finally turns lower.
March 18 (Bloomberg) – U.S. stocks and Treasuries surged and the dollar tumbled after the Federal Reserve unexpectedly announced plans to buy $1 trillion of bonds in an effort to lower consumer borrowing costs and end the recession.
Belowright we show 10-year Treasury yields (TNX) and the ratio between Johnson and Johnson (JNJ) and FreePort McMoran (FCX).
Bond prices rose… the gold/copper ratio rose… but the defensive stocks that tend to strengthen when bond prices and the gold/copper ratio move upwards were somewhat weaker. In other words the initial reaction to the Fed’s surprising news was a weak dollar along with strong bond and gold prices but the equity market did not respond in kind.
On the other hand… way back in 1982 the stock market (SPX) tracked very closely with the combination of commodity and bond prices. The trend for the SPX was almost identical to that of the CRB Index times the U.S. 30-year T-Bond futures.
The point, we suppose, is shown below. The trend for the SPX for the past few quarters has been ‘dead on’ the trend for the combination of commodity and bond prices. If this relationship continues to hold then it makes sense that the stock market is rising on bond price strength as long as commodity prices are not falling at an equal or greater pace. Yesterday the TBonds were up 4%, the CRB Index was down 1%, and the SPX was up around 2%.
