by Kevin Klombies, Senior Analyst

Friday, June 6, 2008

Chart Presentation: JNJ

We start out today with a chart of Johnson and Johnson (JNJ). Given the 6 point rise in crude oil prices yesterday there may well be more topical topics to consider but, as usual, when the markets get volatile we tend to get more macro.

JNJ is an interesting chart for a number of reasons. The stock rose up to the 69 level in early 2005 before flattening out into a protracted consolidation that continues to this day. In 2006, 2007, and again in 2008 the stock made a bottom- a successively higher levels- early in the year but has so far failed to get through resistance between 68 and 69.

The point- if, indeed, there is one today- would be that JNJ is having a hard time making new highs. Now we will show why we view this as more than a passing curiosity.

Below right is a chart comparison between the sum of the Canadian and Australian dollar futures (CAD plus AUD) and the ratio between the share price of JNJ and that of FreePort McMoRan (FCX).

The argument is that the trend for the commodities currencies is almost the exact mirror image of the trend for the JNJ/FCX ratio. As commodity prices rise money tends to favor the stocks of those companies- like FCX- that produce commodities over those companies- like JNJ- that represent long-term consumer growth and/or the health care theme. Fair enough.

Our view is that while commodity prices remain stronger the ‘driver’ behind rising commodity prices is becoming progressively weaker. Put another way rising food and energy prices tend to do the most damage to those who can least afford it which is reflected in the observation that recent food riots are occurring in the less developed countries instead of in North America.

In any event the chart suggests at least the possibility that the trend began to swing back in favor of JNJ last month as the sum of the CAD and AUD made its last peak. If so… then JNJ should rise relative to FCX but as long as JNJ remains range bound beneath the 68- 69 level it is very difficult to argue that this is going to be ‘net’ bullish for the equity markets. Our view, of course, is that JNJ will push on to new highs this year but the longer this takes the more times the S&P 500 Index is going to swing wildly back and forth through the 1400 level.



Equity/Bond Markets

Moving on from JNJ to Wal Mart (WMT) we have included a chart at right of the ratio between WMT and the S&P 500 Index (SPX).

The WMT/SPX ratio bottomed around the end of 1996 and then turned higher right through 2002. From 2002 into late 2007 the ratio pushed lower only to pivot back to the upside towards the end of last year.

We included this chart on many occasions in 2007 and made the argument that WMT should begin to outperform the SPX once crude oil prices finally reached a peak. In fact we focused most of our attention on the chart below right which compares WMT to the product or combination of crude oil futures prices times the Australian dollar (AUD) futures.

In retrospect we think we got this one right but perhaps for the wrong reasons. The idea was that the WMT/SPX ratio would rise when crude oil times the AUD reached a peak but… the ratio began to rise late last year even as energy prices and the AUD remained strong.

The explanation? One of our views is that the basic commodity trend goes with the broader Asian and emerging markets growth trend. WMT’s stock price began to rise at the start of 1997 because this was the beginning of the contraction in Asian and emerging markets growth that ultimately led to the Asian/Russian/Brazil/LTCM crises through late 1998 into early 1999.

The point is that the best way to explain how it is that WMT can rise more than 2 at the same time that crude oil prices gain 6 is that WMT is trading inversely to the trend shown below. WMT is rising as the Asian stock markets and commodity currencies trend lower. Given that rising energy and food prices are doing damage to Asian growth this actually makes some sense- at least to us.