by Kevin Klombies, Senior Analyst

Thursday, December 20, 2007

Chart Presentation: Kookmin

Dec. 18 (Bloomberg) — Asian stocks rose. Mitsubishi UFJ Financial Group Inc. and Kookmin Bank led an advance among banks as some investors judged as excessive recent falls.

We rarely keep the same charts on a page for two days in a row but today will be something of an exception. Once again we start off with the comparison between the S&P 500 Index and the ratio between crude oil futures and the U.S. 30-year T-Bond futures from 1990. Below right we show the stock price of Wells Fargo (WFC) through the same time frame.

The theme through the late 1980’s was rising asset prices. From rare coins to baseball cards to auctions at Sotheby’s asset prices- including real estate- moved upwards until people were lining up to buy and flip yet-to-be-built condos. Junk bonds were all the rage and the stock market was propelled by the prospect of leveraged buyouts. Substitute subprime for junk bonds and private equity for corporate raiders and history appears to be doing a nice job of repeating itself.

The stock market bottomed in the autumn of 1990 ahead of the 1991 recession after oil prices had finally turned lower along with interest rates. Our thought is that the largest problem post-1990 was Japan which helped to lift U.S. financials higher so if today’s weakest link is the U.S. then we should focus more on some of the Asian financials. Below we show Korea’s Kookmin Bank (KB) as a comparison for WFC coming out of the October 1990 bottom.




Equity/Bond Markets

The chart at right compares the S&P 500 Index (SPX) with the ratio between crude oil futures and the TBond futures from the present time period.

The page 1 point- once again- was that the SPX should bottom at the peak for the crude oil/TBonds ratio. The bond market has generally cooperated skating long-term yields lower but crude oil prices continue to hover near the highs. Through trading yesterday the Amex Oil Index was still outperforming the broad market.

At bottom right we show the U.S. Dollar Index (DXY) futures and the ratio between the biotech etf (BBH) and gold prices (GLD).

The basic point is that as the dollar declined gold prices rose and as gold prices rose along with general commodity prices the stock prices of the major biotechs underperformed.

The argument was and is that when the dollar turns higher we should see lower gold prices and/or a return to relative strength by the biotechs. We have certainly seen some improvement in the dollar but the BBH/GLD ratio continues to decline. Some of this may be due to the near proximity of quarter and year end.

Another explanation for the weakness in the biotechs is shown below as we compare the BBH to crude oil futures.

The idea here is that the push above roughly 84 by crude oil went directly with the end of the recovery for biotech. One might argue that the news for the biotechs- from Genentech to Biogen and then to Amgen- has been flat-out negative leaving the energy sector as one of the few sectors with attractive fundamentals but… even so… the chart argues that a return to sub-84 prices for crude oil would go a long way towards swinging this beleaguered sector back to the upside.