Dec. 16 (Bloomberg) — The Federal Reserve cut the main U.S. interest rate to as low as zero and said it will buy debt as the next step in combating the longest recession in a quarter-century and reviving credit.
Dec. 16 (Bloomberg) — Saudi Arabia, the world’s largest oil exporter, said OPEC will cut production by about 2 million barrels a day at tomorrow’s meeting to curb oversupply as demand shrinks because of the global recession.
Below we show a comparative chart of, from bottom to top, the stock price of airline AMR, oil refiner Valero (VLO), gold producer Barrick (ABX), and natural gas producer Chesapeake (CHK).
We have shown this chart or something similar on many occasions over the past year or two. The argument has been that the markets have been splitting the calendar year into two distinct trends. The first half of the year (generally from around the third week in January through into the third week in July) has featured a strong energy price trend while the second half of the year (July to January) has been dominated by a weaker energy price trend.
The chart shows that AMR rose nicely through the latter half of 2006 with the market shifting gears back to the energy theme in January of 2007. Based on the perception of tight gasoline inventories the spread between crude oil and gasoline futures prices narrowed leading to a strong and rising trend for Valero.
At the start of the second half of 2007 the markets rather abruptly abandoned the energy trend and moved into a series of crises that helped propel the gold mining stocks higher. Barrick’s stock price rose from under 30 to more than 55 into early 2008. At the start of this year the trend shifted back to energy with an emphasis on the natural gas and coal stocks. Chesapeake’s stock price doubled over the first half of the year.
On a relative basis AMR has actually done very well through the final half of 2007 as the stock pushed up from 5 to more than 10 on a number of occasions. Not bad in a tough market. The point? As we move into the month of January we are going to have to start looking for a return to a positive energy theme with the potential for strength in the refiners. If all goes well perhaps we will be able to ‘grab a double’ in VLO during the first few months of the year.
We are going to take yet another run at an argument that we have made in each of the past two issues. As usual we will do so from a slightly different perspective.
At right we show a comparative chart of DaimlerChrysler (now simply Daimler- DAI) and British Airways. British Airways was listed on New York as an ADR into mid-2007 and can still be found under the symbol BAIRY (last trade 25.27). However, our chart runs of data back in 2007.
In January of 2005 we compiled a list of stocks that, based on the ‘decade theme’ we expected would do well into 2007. We updated prices on this list on page 4 of the IMRA for roughly 2 1/2 years before closing the books on the trade.
Daimler and British Airways were two of the stocks on the list. The idea was that they tended to do well from the ‘5’ year into the ‘7’ year. With the benefit of some hindsight we can see that, for good or for bad, the idea worked very nicely.
In any event the argument at the time was that we liked European cyclicals so we favored Daimler and Fiat over GM and Ford. We also liked British Airways although we spent quite a bit of time and space arguing in favor of AMR as well.
Our point, by the way, has nothing to do with either Daimler or British Airways. We are showing this chart simply to make the case that we have used the ‘decade trend’ in the past and have found that it can work.
Our actual point is that we are rapidly warming to the idea of being positive on a number of the large cap tech and telecom stocks that reached cycle peaks back in 2000. The chart below right shows that it took oil service company Schlumberger (SLB) from 1980 through 1988 to fully consolidate the excesses of the late 1970’s. After close to 8 years of correction we find that we are starting to look hard at names that the markets have largely given up on over the past while- Intel, Cisco, and even Microsoft along with General Electric and Nippon Tel. If we decide to make a new list next month chances are that some or all of these will be on it.
