by Kevin Klombies, Senior Analyst

Thursday, August 28, 2008

Chart Presentation: Lessons From the Past

We start off with a chart comparison below between the CRB Index and the ratio between theshare priceof Coca Cola (KO) and the S&P 500 Index from 1987 into 1992.

The argument rests on a fairly straightforward but, we imagine, somewhat debatable premise. The bottom for the KO/SPX ratio marks the ‘true’ peak for the commodity cycle. In other words once the KO/SPX ratio makes a bottom and begins to trend higher it reflects the start of downward pressure on commodity prices.

The KO/SPX ratio turned upwards in mid-1988 at the peak for the CRB Index so in this instance the relationship is fairly clear. Interestingly enough, however, the 1988 trend change preceded the bear market for U.S.equities by a bit more than two years even as the equity market’s decline occurred in front of the 1991 economic recession.

The 1990 equity bear market ran from the summer of 1990 into October and ended as crude oil futures prices broke to the down side. Weakness in energy prices went with the end of the rising trend for the CRB Index that had carried it well above its declining trend line.

The question today is… how much different is 1988- 1990 from 2006- 2008? We accept that there are always going to be differences and that some of them could well be ‘thesis busting’ but our focus today is on the similarities.

The KO/SPX ratio bottomed in the spring of 2006 as the CRB Index made a peak. The ratio rose nicely into January of this year and then stumbled once the CRB Index broke to new highs. The argument is that IF the ratio is merely marking time on the way higher THEN, at least in terms of time, the equity markets are wading through a bearish trend that is almost identical to 1990.

The charts suggest that recent strength in the CRB Index matches the rally into the autumn of 1990. In both instances equities were pressured lower by political tensions and rising crude oil prices within a back drop of intense downward pressures on real estate prices and a sense of crisis in the banking sector.