by Kevin Klombies, Senior Analyst

Wednesday, May 14, 2008

Chart Presentation: NTT

Today’s Chart Presentation is based, at least in part, on the following news item from yesterday:

TOKYO (AP) – Japan’s top telecommunications company Nippon Telegraph and Telephone Corp. said Tuesday its group net profit surged 32 percent for the fiscal 2007 on booming long distance and international communications business.

The market continues to do what it does best- chase strength. Any sector that shows significant earnings growth is attracting capital which, in turn, creates price momentum. From sector to sector and theme to theme prices are pushed higher and then lower- with the exception of energy prices, of course- as the flow of money creates its own version of reality.

The chart at right compares, from bottom to top, the ratio of the share price of Caterpillar (CAT) to Coca Cola (KO), the stock price of Canadian natural gas producer Duvernay (DDV on Toronto), the sum of the share prices of U.S. home builders DR Horton (DHI) and Hovnanian (HOV), and the share price of Japanese telecom giant Nippon Tel (NTT).

Into early January the trend favored the defensive names as the CAT/KO ratio trended lower. Early in the year, however, money began to anticipate a resurgence of economic activity as the Fed lowered interest rates even as energy and metals prices pushed upwards. The natural gas stocks went from dogs to darlings in a veritable blink while the home builders turned back to the upside.

The flip side to this trend change can be seen in the chart of NTT. After rising with the defensive theme from August through the end of the year the stock price of NTT turned lower from January into May. What caught our attention was the way the stock price has recently pivoted back up to the falling trend line while the home builders have turned lower after struggling for a number of weeks at the 200-day e.m.a. line.

It is hard to know whether the outsized strength in certain sectors is creating the downward trend in others or whether the lack of earnings momentum in the negative groups is concentrating the focus of momentum-based capital on anything that is positive. After watching the share price of AMR rise from below 10 to above 40 and then fall all the way back to 7 our sense is that it is a bit of both. However, our point today is that the markets continue to follow the seasonal trend which favors commodity-driven growth into the May/June time frame but as this trend becomes over extended new leadership will emerge… which is why we thought we would show NTT today.


Equity/Bond Markets

One has to take a really big step backwards and view the markets from a ‘macro’ perspective to like Anheuser Busch (BUD) at this time. It is a steady but slow growing large cap consumer with a middlin’ dividend yield and a high-teens PE ratio. Earnings, we expect, are being squeezed by higher grains and aluminum prices along with significantly stronger energy prices. In other words, not much to like based on the fundamentals of the moment.

From a technical perspective BUD is even less attractive as each rally towards the 54- 55 level turns into yet another dive back into the 40’s. Prudent investors might like this stock between 40 and 45 while momentum-favoring traders might go long on a break out above the 55 level.

Since we are neither prudent nor momentum-based we tend to like BUD at current levels just as we liked it several weeks ago at lower prices and, unfortunately, months ago at higher prices. We like BUD because it fits in very well with a number of our intermarket views.

The chart at top right compares BUD with the ratio between the U.S. Dollar Index (DXY) and copper futures from late 1992 through 1999. The focus here is on what happened through 1995 as the dollar/copper ratio made a bottom.

After trading below 15 for close to three years BUD broke to new highs in late 1995 as the dollar began to firm relative to copper prices.

Below right we show the current long-term position of this relationship. BUD has been trading below the 55 level for close to six years as the dollar has declined relative to copper.

If we tighten the view up (chart below) we can see that as the dollar began to firm on both an absolute basis and relative to copper futures in March the stock price of BUD began to lift. Our positive view on BUD is based in part on our negative view for metals prices as well as our persistent view that in due course the dollar is going to swing substantially higher. BUD above 55 would certainly help with our convictions.