by Kevin Klombies, Senior Analyst

Friday, March 28, 2008

Chart Presentation: Once Again

We are going to return to the two charts that we showed in yesterday’s first page. Our sense is that this is important enough to show once again so that is exactly what we will do.

The premise is that severe upwards pressure in one market or sector usually goes with significant downwards pressure in another as money is forced time and time again to sell what ever isn’t working in order to chase momentum. While the cast of characters changes from cycle to cycle the story remains the same. Managers of money who attempt to take a sane approach to the markets will always underperform when one or more sectors are overly ‘hot’ so in a sense the investment rationale behind buying high-yielding subprime toxic waste may well be similar to the frenzied chasing of garbage in 2000 and the commodity markets today. Of course, as Alan Greenspan was wont to point out, identifying a ‘bubble’ is often easier in hind sight than in real time.

As the Nasdaq surged through 5000 in March of 2000 the offset was weakness in sectors such as the Canadian banks. Investors were selling the banks at multi-year lows because, after all, they weren’t rising in price.

When the Nasdaq cracked down from 5000 to 4500 the stock price of the Bank of Montreal (BMO) shot upwards. When the Nasdaq pushed back to 5000 a second time the BMO dipped for a few days and then proceeded to push higher. Our argument was that this reaction helped show that the Nasdaq’s rise was now done.

In the present case we have been using a number of comparisons but have recently focused on crude oil and Fannie Mae. We suggested at the start of the week that we thought it likely that crude oil futures would take another run at the highs so now we are merely waiting to see whether FNM can do a reasonable job of holding above the March lows through the end of the quarter.



Equity/Bond Markets

We have argued from time to time that the markets have been moving through a series of rolling bubbles as money rotates rather frantically from theme to theme. The idea was that as one sector has lifted higher another has turned lower. Today we wanted to show a slight spin on this idea using the chart of Canadian natural gas produce Rider (RRZ- recently bought out) and Japan’s Mitsubishi UFJ (MTU) at right.

We are rather intrigued by MTU because it turned lower well ahead of the U.S. financials and in many ways helped to define the negative trend that the other banks would collapse back to during the second half of 2007.

The argument is that the natural gas theme turned positive ahead of MTU in 2004 and then peaked a quarter or two ahead of MTU in 2006. Using the chart of Duvernay (DDV on Toronto) as a surrogate for the recent trend for the natural gas stocks we can see that prices pivoted rather sharply higher at the turn of the year. In other words to the extent that MTU has been lagging behind the gas theme the recovery in DDV argues- weakly perhaps- that the rotation is advancing in a relatively understandable fashion with better news ahead as we work into a new quarter.

We show another perspective below using MTU once again and the spread between 30-year and 10-year U.S. Treasury yields.

At present 30-year yields are close to 4.37% while 10-year yields are 3.53% which creates a spread of. 84%. A wider spread tends to be a positive for the banks as they borrow short and lend long but the chart argues that the key isn’t a rising yield spread but rather the end of a rising yield spread and then an economic recovery strong enough to start squeezing it lower once again.