Chart Presentation: KO

The chart below shows the stock price of Coca Cola (KO). Our basic point is that KO is driving higher in price and holding support at the rising 50-day e.m.a. line in a manner not seen since post-1994.

The third chart below compares the ratio of U.S. equity prices (S&P 500 Index) to commodity prices (DJ AIG Commodity Index) with the stock price of Schering Plough (SGP). The idea is that the equity/commodity trend is nicely reflected by the trend for the share price of SGP. We also use the pharma etf (PPH) for this comparison (page 7).

With the stock price of KO driving upwards and the ratio of equities to commodity prices also on the rise the current time frame is showing marked similarities to the mid-1990’s.

Around mid-1994 the stock price of KO began to lift along with the equity/commodity ratio. In early 1995 interest rates turned lower (chart below) and later in the year copper prices peaked and the U.S. dollar bottomed.

Crude oil prices eventually turned lower at the start of 1997 with the Hang Seng Index and commodity cycical sectors turning negative towards the end of that year. Interest rates continued to decline until the Asian and commodity themes bottomed towards the end of 1998.

In other words the rising trend for Coke’ stock price and the equity/commodity ratio preceded first the peak in interest rates, then the bottom for the dollar, and eventually the top for Asian and commodity growth ultimately peaking towards the end of 1998 at the low point for cyclical growth. With the exception of a brief period in 1997 concurrent with the ‘crash’ in the Hang Seng Index KO’s stock price consistently found support at the rising 50-day e.m.a. line or, on occasion, slightly lower at the 200-day e.m.a. line.

TOKYO, Oct 26 (Reuters) – Shares in Sony Corp jumped more than 7 percent on Friday after the company swung to a quarterly operating profit and raised its annual outlook…Net profit soared to 73.72 billion yen from 1.68 billion yen a year earlier, a record second-quarter figure.

We are starting things off with a news release concerning Japan’s Sony Corp (SNE) because it has broad implications for the various markets. First, however, we show at top right a comparison between the NASDAQ Comp., the Bank of Montreal (BMO), and the ratio between BMO and the NASDAQ between 1998 and 2002.

The offset to NASDAQ strength into 2000 was weakness in sectors like the financials. Money- as so often seems to be the case- was willing to chase growth and momentum at any price so if something wasn’t working immediately it was sold and moved into the tech and telecom sectors.

Between 1998 and 2002 the NASDAQ rose from 1500 to 5000 and then fell back to 1500 while BMO fell from 43 to 22 and then rose back to 43. Net/net/net both markets were absolutely flat between mid-1998 and mid-2001 even though the NASDAQ had more than tripled in the interim while this particular bank stock fell by close to 50% before doubling.

The idea of an offset- a destination for money and a source of that money- serves as the basis for today’s argument.

We have read a number of articles and reports detailing just how ‘cheap’ stocks are in Japan at present. The problem is that there is no momentum and with Japanese investors chasing higher interest rates abroad foreign investors have been faced with a double whammy- a declining yen and an underperforming stock market. The idea is that Japan and the Japanese equity market has been the source of money with China and Hong Kong representing the destination.

Below we show the Hang Seng Index, the stock price of Matsushita (MC), and the ratio between MC and the Hang Seng. We are comparing MC today to the Bank of Montreal into 2000 and the Hang Seng Index to the NASDAQ.

We are using Matsushita because we have focused on it in the past and have shown that it trades almost exactly with Mitsubishi UFJ (MTU). MC also reports earnings today.

Through the entire run upwards in the NASDAQ between 1998 and the spring of 2000 the stock price of the Bank of Montreal declined. We observe that the weakness in Japanese stocks like Matsushita has gone with the ascent of the Hang Seng since the spring of 2006. The point is that similar to 2000 the pivot or trend change downward for the Asian equity markets should go with an offsetting rise or return to strength for those sectors that have been pressured lower. In other words just as the ratio of the Bank of Montreal to the NASDAQ declined from 1998 into 2000 and then rose from 2000 through 2001 we would expect the low point for the Matsushita/Hang Seng ratio to mark the inflection point for capital flows as well as the end of one trend and the start of another.

Whether this is timely or not remains to be seen but, as mentioned, with Sony’s earnings showing strength and Matsushita’s due for release as the stock price shows some intention of making a bottom we thought this would be an appropriate time to make this argument.