by Kevin Klombies, Senior Analyst

Wednesday, July 11, 2007

Chart Presentation: Rolling, Rolling

July 10 (Bloomberg) — D.R. Horton Inc., the second-largest U.S. home builder, will report a third-quarter loss after orders plunged 40 percent and said it sees no sign of a housing rebound.

One thing to keep in mind is that when the Federal Reserve actively attempts to slow the U.S. economy down… it succeeds. When it attempts to accelerate the economy it also succeeds but there is such a lag between the change in policy and its ultimate impact that many forget that the only variable open to question is ‘when’.

We show three charts. The top chart is of U.S. home builder DR Horton (DHI), the middle chart shows the CRB Index, and the lower chart features the stock price of Bear Stearns (BSC).

All three charts cover the same amount of time but each is from a different time period. The chart of DHI begins in May of 2005, the CRB Index in November of 2005, and BSC starts in May of 2006. In other words we have set the charts up at six month intervals to show the way the Fed’s attempts to slow the pace of growth in the U.S. economy is working through the various markets.

The idea is that DHI peaked around the end of 2005 before turning negative. The CRB Index topped out six months later around the end of the second quarter of 2006 while BSC continued to push higher into the early weeks of 2007.

The first concentrated negative trend for DHI lasted from January of 2006 through into the summer. This lines up very nicely with the initial spate of weakness in the CRB Index that extended through the second half of the year. If the pattern repeats for BSC then it is possible that the stock could get very negative through the balance of the month before turning upwards (ideally from much lower levels) into early 2008.

Obviously the charts can not time the markets’ swings to the day or even, perhaps, to the month but the idea presented is still rather intriguing. It provides a nice explanation, for example, as to why the CRB Index keeps pushing higher and an even better forecast for what will happen once the rising trend comes to an end this summer. The bottom line is that the first half of 2007 included a very positive trend for commodity prices while the second half appears to offer an equally negative trend.



Equity/Bond Markets

Aside from the usual suspects- oils, mines, and some of the go-go cyclicals- there were very few stocks higher yesterday. We noticed, however, that Micron (MU) was up on the day so we thought we would start things off here by featuring a rather peculiar repeating trend.

MU turned upwards in the spring of 2003 and then again in the spring of 2005. If this is a two-year pattern then it would make sense that it would become positive once again after the spring of 2007 and that is exactly what the chart at top right shows.

There are a few other groups that have exhibited this general behavior with the most notable case being our ‘Japan’ theme. Both the stock prices of Mitsubishi UFJ (MTU) and Matsushita (MC)- chart on page 6- pivoted higher in the springs of 2003 and 2005. We also find it interesting that MTU held ‘flat’ in 2005 right into August and then snapped higher to catch up with the positive trend.

In yesterday’s issue we commented that the markets in many ways seemed to be similar to May of last year. At that time Genentech (DNA) had just completed six months of grinding lower and as the commodity theme turned negative the markets shifted back to the biotechs. Below we show the chart of DNA from 2005 into 2006 along with the current chart. DNA reports earnings today and a positive reaction would certainly be helpful.

The bond market rose rather sharply in price yesterday as the subprime woes returned. That is how things work in the markets- stresses appear and then fade away only to reappear. Eventually the stresses turn into crises much to the surprise of the markets. In any event the spread between the prices of the 30-year and 10-year Treasury futures has been moving inversely to copper prices. We are copper ‘bears’ so when we look at the chart below we do so with the bias that it suggests lower copper prices. This fits in nicely with the argument regarding the CRB Index.