Financial Post, Feb. 25, 2009:The U. S. arm of Nortel Networks Corp. is seeking bankruptcy court approval to sell a piece of its application-delivery business for US$17.65-million to information-technology firm Radware Ltd., pending higher bids at auction.

Radware’s bargain bid represents a sharp decline for the business, which makes switches for use with computer servers and networks. Nortel acquired the business when it purchased Alteon WebSystems for about US$7.8-billion in 2000.

The article above, published in the Financial Post yesterday, caught our attention because it represents one of the themes that we have mentioned in these pages on a few occasions.

Belowwe show a chart of oil service giant Schlumberger (SLB) from 1980 into 1991. The argument is that the energy sector reached a major cyclical peak in 1980 and then went through a long period of consolidation that ran through 1988. In early 1989 the trend finally turned positive but the twist was the many of the major winners that grew out of the recovery did so by creating growth through the purchase of oil production assets sold off by companies that had previously been involved in take overs.

The point is that Radware (a stock with a nice chart but not one that we have followed) is attempting to purchase for roughly $17 million a company that NorTel paid $7.8 BILLION for back in 2000.

Below we show a chart of the sum of the share prices of Cisco and Intel (CSCO plus INTC) along with the stock price of Schering Plough (SGP).

Our thesis is that tech, telecom, and the major pharma companies peaked in price back around the year 2000 and, similar to the oil companies back in the 1980’s, have spent the last 8 or 9 years consolidating. If the ‘decade trend’ were to repeat we would expect to see new growth trends emerging for these sectors as we dig through the current year. There has obviously been a considerable amount of consolidation and take over activity in the pharma, medical products, and biotech sectors over the past few quarters but the report of the potential NorTel asset sale pulled our thoughts back to the idea that tech and telecom should be set for a new upswing in due course as well.



Equity/Bond Markets

In yesterday’s issue we returned to a chart comparison that we showed in these pages on many occasions last year. The basic idea is that a new trend will begin once the financials start to rise relative to gold prices.

Today we wanted to circle back and show how the financials versus tech relationship evolved in the spring of 2000. At right is a chart comparison of the S&P 500 Index (SPX) and the ratio between Canada’s Bank of Montreal (BMO) and the Nasdaq Composite Index.

The Nasdaq peaked around the end of March in 2000 but the chart shows that the BMO/Nasdaq ratio actually began to rise in early March. In other words… one indication that the rampaging trend for the Nasdaq was coming to an end was the up turn in the banks versus tech ratio. As long as money was pushing away from the financials and into tech the trend was safe and secure but a few weeks before the Nasdaq finally reached a peak the ratio started to strengthen.

The chart below shows the S&P 500 Index and the ratio between Japanese bank Mitsubishi UFJ (MTU) and the gold etf (GLD). Since gold is the last commodity still in a rising trend and the financials are still mired in falling trends the best and perhaps only ratio that makes sense is financials versus gold. In any event our view is that an early warning signal of an impending stock market bottom this year could come from a few weeks of strength in the MTU/GLD ratio.

We are going to attempt to make one last and very quick point here. Through a major top or major bottom for the equity markets there are often a series of minor tops or bottoms. In 2000 the stock price of Qualcomm peaked in early January, Cisco topped out in March, and General Electric peaked in August. This is essentially the sequence that we are looking for as the equity markets create a bottom this time around as the sectors make a series of lows between last October into May or June. If all goes well the entire market would then be ready to swing back to the upside.