We suspect that we might well be the first and only chart-based service that has created an entire body of work based on the ratio between the share price of Coca Cola (KO) and the S&P 500 Index (SPX). Of course many might argue that what we view as a rather unique perspective is little more than meaningless and random coincidence.
In any event… at right we show two comparisons between crude oil futures and the ratio between KO and the SPX. The top chart shows the time frame from early 1983 through 1986 while the lower chart focuses on the time period between late 2005 and the present day.
Aside from 2008 there really has been only one total melt down in the price of crude oil in the past few decades. In late 1985 through the first half of 1986 the price of crude oil futures declined from around 32 down to 10.
The argument goes something like this: The start of a negative trend for commodity prices lines up with the beginning of a rising trend for the KO/SPX ratio. In other words when the KO/SPX ratio bottomed in mid-1983 and began to rise it suggested that commodity prices in general and crude oil prices in specific were beginning to fight a strong head wind.
Crude oil prices held near the highs for close to 2 1/2 years following the start of the rising KO/SPX trend only to collapse into 1986 and bottom as the KO/SPX ratio finally reached a top. Fair enough.
For the past year or two we have been showing and arguing that the KO/SPX ratio turned higher in early 2006. If our perspective proved to be valid then this would mark the start of a downward trend for commodity prices even if- and this was the important point- commodity prices continued to move higher.
We have lined up the charts to make an additional point. The length of time between the bottom for the KO/SPX ratio in 1983 and 2006 and the eventual peaks for crude oil in 1985 and 2008 were virtually identical. The cycle bottom for crude oil should be reached when the KO/SPX ratio finally moves to a cycle top and if the complete cycle time frames prove to be similar then we would expect to see the bottom for oil prices some time during the second quarter of next year.
Equity/Bond Markets
In a perfect world the commodity markets will reach bottom during or around the second quarter of 2009. In a less than perfect world- from our perspective- the commodity trend has already turned positive.
To explain… below we show copper futures and the ratio between Caterpillar (CAT) and Pepsi (PEP). Our view is that copper prices will remain under pressure for another six or so months. If so then the CAT/PEP ratio should resolve at least one more time to new lows. The concern- and we are always concerned about something- is that cyclical weakness tends to bottom in the October/November time frame so the stronger the CAT/PEP ratio the better the odds that base metals prices will turn higher sooner than we expect.
Below is a chart of equities (SPX) times commodities (DJ AIG Commodity Index). This is an interesting chart because it either means nothing or helps explain everything. If it proves to be more the latter than the former then the argument would be that downward or deflationary pressure on prices has hit bottom and similar to 1998 and 2002 we are set to return to a positive asset price trend. Beyond that if commodity prices remain under pressure through the first half of 2009 then equity prices would be expected to rise by an even greater percentage.
Below we show- once again- the chart comparison between 3-month euribor futures (short-term euro-denominated debt futures) and the ratio between Japan’s Mitsubishi UFJ (MTU) and the gold etf (GLD).
The argument is that rising European and Japanese short-term interest rates in late 2005 and early 2006 helped create the negative or bearish trend that eventually worked through the equity and commodity markets. This suggests that for the markets to recover we need to first see falling European and Japanese interest rates and that in due course the financials will begin to rise- sharply- relative to the price of gold.
