by Kevin Klombies, Senior Analyst, TraderPlanet.com
We are going to introduce a new argument today.
We show a comparison between the CRB Index and the Canadian dollar (CAD) futures from the end of 1979 through to the present time period.
Commodity prices peaked in 1980 before trending broadly lower into a bottom in 1998. In other words very close to 18 years elapsed between the peak for commodity prices in 1980 and the eventual bottom.
From time to time we have argued that there has been a cyclical markets peak at the start of the last three decades. Commodity prices topped out in 1980, Japanese asset prices reached a high in 1990, while the Nasdaq went ballistic into 2000.
The idea is that the flow of capital into the commodity sector- which tends to include commodity-oriented currencies like the Canadian dollar- reached a peak in 1980 before turning negative for the next 18 years.
So… if the broad commodity trend bottomed in the autumn of 1998 in the midst of the Asian crisis and then turned positive for close to ten years before finally swinging negative then it makes some sense to believe that the subprime crisis has created a bottom for an asset class that has been in a negative trend for the past 18 years. In other words… Japan. Our argument is that Japanese asset prices today are similar to the commodity markets in the fourth quarter of 1998.
At bottom right we compare a chart of the Canadian dollar futures from 1995 through 2000 with a chart of Japan’s Nikkei 225 Index multiplied by the Japanese yen futures from 2005 forward.
We may be comparing apples with oranges here but our thought is that the thesis is broader than just commodity prices and Japanese stocks. It has more to do with the direction of the flow of capital and less- at this stage, at least- to do with actual changes in asset prices. In other words into 1998 money was flowing rapidly away from the Canadian dollar because it represented the broader commodity theme and at the time there were better things for money to chase. Into 2008 money was moving inexorably away from the Japanese yen and Japanese equities for similar reasons.
One of the key features of markets activity over the past few months has been strength in the Japanese yen as yen carry trade positions have been reversed. Whether one views yen strength as a positive or a negative the reality is that money has actively begun to move back towards Japan. That, we will argue, is a major change in trend.
Now… one might believe that we are arguing in favor of owning Japanese stocks but, in a sense, that would similar to arguing in favor of the commodity markets towards the end of 1998. While crude oil and copper prices did reach bottom in early 1999 it was years before this theme gained much in the way of traction. The strongest sector by far coming out of 1998 was tech and telecom.
Over the past few months we have hammered away at the idea that the underlying trend is often the result of trends in both the dollar and bond market. In late 1998 the dollar turned higher while bond prices began to decline and this helped drive the Nasdaq skyward.
Are we arguing in favor of the Nikkei? Not really. The Nasdaq? Once again… not really. In fact, our thought is that we still like the broader health care theme and if we had to pick a specific cyclical sector our lean would still be towards biotech.
AUSTIN, Texas – Shares of Luminex Corp. surged Friday after the company swung to a profit on higher sales of its equipment for biotech drug developers.
Quickly… when the oil producers do well the oil service companies also do well. When the semiconductor stocks (Intel) are doing well the chip equipment makers (KLA Tencor) do well. When the biotech theme is positive then biotech equipment makers should do well and that was the case at the end of last week when Luminex (LMNX) surprised the markets with earnings and gained close to 30% in one day.
