Jan. 28 (Bloomberg) – U.S. stocks rose, extending a global rally, as President Barack Obama prepared to set up a so-called bad bank to absorb toxic investments and Yahoo! Inc. and Germany’s SAP AG reported better-than-estimated earnings.

Jan. 28 (Bloomberg) – Wells Fargo & Co., the second-biggest U.S. home lender, reported its first quarterly loss since 2001 after acquiring Wachovia Corp. The stock surged 31 percent in New York trading after the bank maintained its dividend and said it doesn’t need more federal aid.

In any event we start off with a chart of the yield index for 10-year U.S. Treasuries (TNX) and the ratio between Johnson and Johnson (JNJ) and the S&P 500 Index (SPX).

The argument is that the JNJ/SPX ratio peaked just below .075 in the autumn of 2002 and again this past November. The highs for the ratio in 2002 marked the lows for the equity markets so as long as the ratio holds below the recent peak a very good case can be made that the equity markets are now on the road to a broad recovery.

Below is a comparison between the U.S. 30-year T-Bond futures and the ratio between gold and copper futures. The ratio is based on gold in dollars versus copper in cents so at present gold is around 6 times the price of copper.

Over time the upper extreme for the gold/copper ratio has been 5:1. The blast above 5:1 in early December went with a concurrent upside moon-shot by the TBond futures. In other words in a world returning to some state of normalcy we would expect to see bond prices weaken with the TBonds sliding back below 125 while the ratio of gold to copper moves down below 5:1. If the ratio is forced to adjust lower while copper prices remain somewhat flat near 1.50 (150) then this would pull gold prices back to or below the 750 level.



Equity/Bond Markets

…despite these concerns, investor interest in the oil market has continued to climb back toward the levels of last summer.

The net speculative length in the oil market, including the ETF demand, is now larger at $45/bbl oil than it was this summer at $147/bbl oil. Further, we estimate index investors now own 837 million barrels of oil versus 1,032 million barrels when oil prices peaked. On net, investor owned barrels of oil between both active (speculators) and passive (index) investors is now only down 13% (or 157 million barrels) from the levels in July when prices peaked.

Above is a snippet from a Goldman Sachs energy report published earlier this week. It really isn’t relevant to today’s topic but we did find it interesting enough to include. We will save our comments, however, for today’s 5th page.

We are going to quickly run through a 3-chart argument starting with the comparison at top right of heating oil futures and the ratio between Boston Scientific (BSX) and the S&P 500 Index (SPX). We set up the chart based on the expectation that BSX would report earnings after the end of trading Wednesday but we have not yet seen the numbers or the markets’ reaction to them.

The world went awry in 2004 when energy prices pushed to new all-time highs. Energy price strength pushed short-term U.S. interest rates higher and helped draw capital away from many of the non-commodity sectors. The chart shows that strength in heating oil futures led to weakness in the trend for BSX.

We also showed yesterday that the ratio between corporate bonds (LQD) and Treasuries (TLT) began to decline in the spring of 2004 so the argument would be that a return to a rising LQD/TLT ratio should go with some sort of rotation away from energy and back to the broader health care theme.

Below we feature the ratio between Exxon Mobil (XOM) and Boston Scientific (BSX). In our view the ratio represents the markets’ periodic swings back and forth between energy and health care themes. The ratio was supposed to peak at the end of 2007 (based on a 7-year cycle) with the next bottom due around 2010 (i.e. around 3 years after the peak). We like the idea even if it hasn’t shown much in the way of traction as of yet.