We have been arguing in favor of higher long-term Treasury prices for the past while so we thought we should show two charts that now argue that bond prices have, by and large, done what they were supposed to do. We are not arguing that we are now negative on the long end of the bond market but are only suggesting that our interest has waned somewhat over the past few trading sessions.

At top right is a comparison between copper futures and the price spread or difference between the 30-year and 10-year U.S. Treasury futures.

In general… weaker copper prices go with slower economic growth and slower economic growth goes with rising bond prices. In other words rising copper prices tend to go with falling bond prices and vice versa.

In general… when bond prices are rising the point spread between the 30-year and 10-year Treasury futures widens. A rising point spread goes with rising bond prices.

Over the past few years the 30-10 point spread has peaked when it reaches ‘five’. When the 30-year T-Bond futures rise to more than 5 points above the 10-year T-Note futures that has marked a peak for the bond market and a bottom for copper futures prices. The spread spiked up through ‘five’ last week.

Below right is a comparison between the U.S. 30-year T-Bond futures and the ratio between gold futures and copper futures.

In general… when bond prices are rising gold prices are stronger than copper prices. Gold is part financial while copper is pure industrial.

The point is that over time the ratio of gold to copper will swing quite widely with peaks for the ratio found at or near tops for long-term Treasury prices.

The chart shows that when the gold/copper ratio reaches as high as ‘five’ (gold in dollars divided by copper in cents) it is at or near a peak. The chart also makes the case that this goes with fairly significant tops for the TBond futures. With the 30-10 spread above ‘five’ and the gold/copper ratio now very close to ‘five’ we have two very good reasons to be significantly less positive on the long end of the Treasury market than we were even a week ago.



Equity/Bond Markets

The chart below compares the ratio between Johnson and Johnson (JNJ) and FreePort McMoRan (FCX) with the sum of the U.S. 30-year T-Bond futures and the U.S. Dollar Index (DXY) futures. The U.S. Dollar Index is an index of the dollar against the euro, Swiss franc, Japanese yen, British pound, Canadian dollar, and Swedish krona. In general we use the DXY to represent the broad trend for the dollar against most of its major trading partners.

The argument is and has been that when the dollar AND the bond market are rising then it makes sense to own JNJ and not FCX. In recent days the dollar AND the Treasury market have been stronger as money has moved towards safety and this has gone with rather severe weakness in the share prices of the commodity cyclicals and significantly less weakness in health care-type names such as JNJ.

In trading yesterday both the dollar and the TBonds were lower. In response FCX was considerably stronger than JNJ.

We keep finding reasons to like biotech. We are not sure whether this is a good thing or a bad thing but it most definitely has been a recurring theme in the IMRA over the past number of months.

Below we also show Japan’s Mitsubishi UFJ (MTU) and the ratio between the biotech etf (BBH) and the gold etf (GLD). The very quick argument is that biotech should do better than gold in advance of a broad recovery in the major financials.

Below right we show Amgen (AMGN) and a small cap Canadian biotech company called Oncolytics (ONC on Toronto, ONCY on the Nasdaq). The idea here is that while we have some interest in ONC it likely does not make sense to even consider the small cap biotechs until the large cap names have shown more strength. The lows for ONC in 2003 were made months after AMGN turned higher and around the time that the stock broke through resistance. At present it would take something north of 62- 63 for AMGN before the same conditions would be met.