by Kevin Klombies, Senior Analyst

Friday, July 25, 2008

Chart Presentation: GM

July 24 (Bloomberg) —Ford Motor Co., the world’s third- biggest automaker, posted a record quarterly loss of $8.7 billion and accelerated a conversion to fuel-efficient vehicles to wean itself from money-losing trucks.

The chart below compares thestock priceof General Motors (GM) with the ratio between the CRB Index and crude oil futures. The ratio rises whencrude oilis weaker than general commodity prices and declines when crude oil is strong on a relative basis.

The basic point is that the trend for the U.S. autos (Ford and GM) tends to go with the trend for the ratio between the CRB Index and crude oil prices. The ratio bottomed in the autumn of 1990 and then topped out in late 1998. We could also make the case that GM actually lags the ratio at the turns by a year or more.

The argument would be that while the lows for both GM and Ford tend to be made at the peak for energy prices (we tend to use heating oil futures as a proxy for energy prices which means that the July lows between 4.30 and 4.50 for Ford and below 10 for GM should mark the cycle bottoms) a positive trend will not begin until some time after the CRB Index/crude oil futures ratio turns back to the upside.

The problem of late has been that while crude oil prices have most certainly declined there has been scant evidence of the sort of relative price weakness that would serve to swing the trend for the autos clearly higher.

Given our contrary nature and our tendency to be early with respect to macro trends we find that we are warming up to the autos with each indication of weakness in energy prices. However, for the time being we still prefer the consumer defensive and health care sectors even though it is likely that we will increase our focus on the U.S. autos as we move towards the end of the year.


Equity/Bond Markets

Below we show copper futures and the ratio between Caterpillar (CAT) and Pepsi (PEP).

The front month copper futures contract (July) continues to hold the rising support line as the CAT/PEP ratio returns to what appears to be equivalent support. In other words when copper breaks support we would expect to see the CAT/PEP ratio follow to the down side.

The recent trend has two sides. On one side we find currencies like the Canadian dollar, Aussie dollar, the euro, and the Swiss franc along with base and precious metals prices. This trend has elevated the share prices of the commodity cyclicals and helped push the equity markets of countries like Canada and Brazil to the upside. The other side of the trend includes the U.S. dollar along with the consumer defensive and health care sectors.

We mention this because the chart at bottom right makes an interesting point. The weakness in copper futures prices yesterday was enough to swing the bond market higher while breaking recent support for Rio Tinto and the Brazil etf. As we have mentioned recently the markets were set up for a continuation of the trend which would push RTP and EWZ higher or the break and end of the trend. The latter looks increasingly likely now.

The chart below compares the sum of the Canadian and Australian dollar futures with the ratio between Johnson and Johnson (JNJ) and FreePort McMoRan (FCX). We have argued in favor of JNJ and against FCX and remain negative on the CAD and AUD while being positive on the U.S. dollar. Yesterday was a better day for our thesis although quite clearly it is still too early to mark this one as ‘done’.