by Kevin Klombies, Senior Analyst

Tuesday, July 3, 2007

Chart Presentation: Quick Review

The first trading day of the third quarter certainly had a ‘strong cyclical’ feel to it as energy and metals prices pushed upwards along with the equity market. The chart at top right compares the Canadian dollar futures with the sum of the Nasdaq 100 Index (NDX) and copper futures (in cents and multiplied by 12 times).

The peak for the combination of the Nasdaq and copper in 2000 marked the top for the Cdn dollar. As it pushes (ever) higher the argument is that cyclical growth in one form or another is still positive.

The chart below shows the Philadelphia Semiconductor Index (SOX) divided by copper futures. In early 1995 the ratio rose from around 1:1 and after peaking close to 17:1 in 2000 the ratio returned to 1:1 last year at the peak for the CRB Index. The trend for ‘tech’ versus ‘metals’ is still lower but if we had to choose we would still lean towards ‘tech’ here.

At bottom we show copper futures and the spread between the price of the 30-year and 10-year Treasury futures. The 30- 10 spread goes with the bond market so when it is rising bonds are moving upwards in price (and the yield curve is flattening) and when it is falling bond prices are trending lower (as the yield curve widens). The basic point is that stronger copper prices go with lower bond prices and higher interest rates while weaker copper prices lead to higher bond prices and lower long-term interest rates.




Equity/Bond Markets

On the one hand… the cyclical trend appears to be quite strong which implies higher interest rates and lower bond prices. On the other hand… the commodity stocks are not the only cyclical sectors and they have had a very strong run over the past six months.

A month or three ago we were arguing that we were looking for ‘gaps’ in major non-commodity stocks or sectors to indicate the potential for a rotation away from the commodity sector. We mentioned that the start of weakness in crude oil prices just happened to coincide with the upside ‘gap’ in the stock price of Cisco.

The chart at top shows the stock price of DaimlerChrysler (DCX) along with Japan’s Mitsubishi UFJ (MTU). Fair or not the chart is set up to show that both DCX and MTU were floundering around well under the rising trend that began back in early 2003 when the equity markets began to recover. Recently DCX swung back ‘on trend’ leaving MTU mired near the lows.

The thesis that we have used is that MTU tends to trend with the ratio between the Nikkei 225 Index and the Japanese 10-year bond (JGB) futures. In May of 2003 and again in May of 2005 the trend for MTU turned positive only to peak and roll negative in May of 2004 and May of 2006. Obviously we were of the view that if this trend continued MTU should begin to rise this summer. With the Nikkei/JGB ratio at new highs we continue to wonder why it is taking so long to show any kind of life.

Why did crude oil prices recover yesterday? One explanation is that the ‘roll’ for the lead contract for gasoline futures took prices to the support line and since there was no obvious reason for the trend to ‘break’ the entire energy complex started to lift. Notice that gasoline futures were actually lower due to the roll to the August contract and that the rally simply kept the positive trend intact. The stock price of Amgen tends to mirror gasoline futures prices and it remains somewhat above the lows of May.