by Kevin Klombies, Senior Analyst

Tuesday, May 20, 2008

Chart Presentation: Quick Comparisons

Below we show a comparison of the ratio between the S&P 500 Index and the DJ AIG Commodity Index and the ratio between the share pries of FreePort McMoRan (FCX) and JPMorgan Chase (JPM).

The basic and, we hope, intuitive point here is that the metals and miners do better than the major U.S. financials when commodity prices are rising relative to equity prices. The trend favored the banks from early 1995 through into 1999- 2000 and then reversed back in favor of the commodity sector.

Below we show a short-term view of the equity/commodity ratio. The argument is that the trend may have changed back in March. If so then we would expect to see a better U.S. dollar and upward pressure on U.S. interest rates.

Below right is a comparison between 10-year U.S. Treasury yields and the ratio between the CRB Index (commodity prices) and the Nikkei 225 Index (Japanese equity prices).

From 2000 into 2008 the trend included lower 10-year yields along with outperformance by commodity prices over the Nikkei. As mentioned above if the trend changed back in favor of both U.S. and Japanese equities this past March then we would expect to see 10-year Treasury yields work back up to and eventually through the 5.0% range.




Equity/Bond Markets

Sam Zell made his fortune- a very large one- in the real estate market. A year or so back he sold his Equity Office Properties Trust to Blackstone Group for around $39 billion (one way to mark THE high in the U.S. real estate market) and purchased the Tribune Company.

The point is that Zell became a seller of real estate- a nicely timed decision- and a buyer of old-line media assets. It is the latter that we wished to cover briefly today.

At top right is a comparison between the sum of copper and crude oil futures along with the share price of Gannett (GCI). Goldman Sachs recently commented that GCI was the ‘best managed company in a very tough industry’.

The chart argues that as the sum of copper and crude oil futures broke above the 1990 highs back in the spring of 2004 the stock price of GCI began to plummet falling from over 90 that year to just above 25 last month. For as tempting as these sorts of companies are on a valuation basis they still lack a catalyst to turn them higher although the charts do suggest that a down turn in the commodity markets would be of some help.

The chart below right shows the short-term picture. GCI may not be for the weak of heart but it does represent what appears to be a somewhat reasonable anti-commodity trade with a 5%+ dividend yield.

Below we compare U.S. 10-year Treasury yields with the Japanese 10-year (JGB) bond futures.

10-year yields continue to hold below the 200-day e.m.a. line around 4.0%. The JGBs have bounced back over 135 to end yesterday at 135.19. Our Japanese bank argument depends on lower Japanese bond prices and higher Treasury yields.