by Kevin Klombies, Senior Analyst

Tuesday, March 25, 2008

Chart Presentation: Lags and Leaps

We start off today with a comparison of 3-month euribor futures, the Nasdaq Composite Index, and ocean freight rates (Baltic Freight (Dry) Index- BFI) times crude oil futures.

Euribor futures are similar to TBills or eurodollars in that they are priced at a discount to 100 but instead of representing U.S. yields they represent European interest rates. When euribor prices are declining it means that European short-term interest rates are rising and vice versa.

Euribor prices bottomed in late 2000 around the time that the Nasdaq began to decline in earnest so in the current cycle we are replacing the Nasdaq as the major cyclical ‘driver’ and replacing it with crude oil prices and ocean shipping rates.

In the March 20th issue of the Wall Street Journal we read, ‘A sharp drop in freight shipped across the Pacific during the past two months suggests the shipping-industry slump is about to get worse.

At the major ports of Los Angeles and Long Beach, Calif., which bring in nearly two-thirds of West Coast containerized goods, import volume fell 8.8% in both January and February compared with a year earlier…’.

Below right we show the combination of the BFI times crude oil futures prices along with China’s Shanghai Composite Index.

Our point is that ocean shipping rates have been weaker with much of decline due to reduced imports from Asia into the U.S. European short-term interest rates rose through 2000 and then declined once the tech and telecom cycle began to buckle but in the current situation there has not been enough ‘real’ weakness aside from the implosion in the credit markets to convince the European Central Bank to pull yields lower.

While ocean shipping rates and crude oil prices- especially as a combination- are somewhat difficult to grasp in concept the argument is that this is somewhat similar to Chinese equity prices which, in turn, argues that the trend for short-term European interest rates will go with or lag behind the trend for Chinese equity prices. An interesting leap of logic to be sure.



Equity/Bond Markets

We have included three comparative charts on this page that consist of the stock price of Boston Scientific (BSX) and the ratio between Exxon Mobil (XOM) and BSX.

The chart at right shows the time period from 1993 through 1994, the chart below right is from 2000 through 2001, while the chart below is from 2007 to the present day.

We have done this one on a number of occasions but to quickly refresh the argument is that at the end of 1993 relative prices within the equity markets shifted so that energy stocks turned lower while health care names such as BSX turned higher. In other words the XOM/BSX ratio peaked in 1993 and declined in early 1994.

Seven years later- at the end of 2000- the markets repeated the process as the XOM/BSX ratio reached a peak and once again turned to the down side as BSX began to strengthen while money moved away from the energy sector.

If history were to repeat the cycle would reach a third peak seven years later at the end of 2007… which explains why we keep coming back to the chart-based argument.

In the two prior instances the first rally for BSX came to an end as the ratio returned to the 4:1 level so our basic view has been that one way or another we are going to remain positive on BSX until the ratio pulls back to 4:1. As we can see from the chart below that will still take some doing and, we suspect, will have to include substantially weaker crude oil prices than a mere tickling of the 99- 100 level. From time to time we will update the argument by tucking the chart into the back pages but for now we will set this one aside until BSX finally manages to get on the north side of its 200-day e.m.a. line.