by Kevin Klombies, Senior Analyst

Monday, May 19, 2008

Chart Presentation: Simple Reality

The positive commodity trend extended through last week. We might argue that it is old and fraught with speculation but that doesn’t and won’t change simple reality. Our point, however, is that the markets move in cycles instead of simple straight lines and while the odd analyst will look at prices on a logarithmically-scaled chart and assume a never ending parabolic rise to justify something like $200 or $225 crude oil prices we tend to believe that history has shown that trees and prices rarely grow forever.

The point of today’s Chart Presentation is not to argue that the commodity trend has ended but rather to show one way in which the markets would adjust in front of such an event.

At top right we feature a comparative view of copper futures along with the sum of the Canadian and Australian (CAD plus AUD) dollar futures from May of 1998 through September of 1999.

The basic commodity trend is intertwined with Asian growth, Asian equity prices, and the commodity currencies so we can mark the start of the current cycle as the low point for Asian growth towards the end of 1998 and into 1999.

Through much of 1998 capital was moving powerfully away from the Asian and Latin currencies as commodity prices declined. The ‘spike’ low for the sum of the Canadian and Aussie dollars was made around the end of August in 1998. As these currencies began to recover the underlying trend for energy and metals prices began to turn positive although copper prices did not make a bottom for another six to seven months.

At bottom right we show the same comparison for the current time frame. The sum of the Canadian and Aussie dollars made a ‘spike’ high in early November last year which, in theory, suggests that this could mark the start of a negative commodity trend. If history were to repeat the CAD plus AUD would resolve to the down side while energy and metals prices moved to new highs over the ensuing six to seven months.

What happens next depends in large part on the near-term direction of the U.S. dollar. If the greenback sags to new lows as the Canadian and Aussie dollars strengthen then higher commodity prices lie ahead but… if the sum of the CAD plus AUD breaks back below its 200-day e.m.a. line- similar in reverse to March and April of 1999- then it makes sense to look for lower commodity prices in the days ahead.



Equity/Bond Markets

The chart below compares General Motors (GM) with the ratio between the CRB Index and crude oil futures.

The chart argues that GM has been in a down trend since the start of 1999 which fits in nicely with our page 1 argument that this was when the positive commodity trend began. Our thought here is that if the positive commodity trend began with strength in the Canadian and Aussie dollars and led to a decade’s worth of weakness for both General Motors and Ford then the next trend should begin with weakness in these two currencies and lead to higher prices of the U.S. auto makers.

At bottom right is a chart comparison that we found somewhat intriguing. We included this chart once or twice in the past with an explanatory notation that if the Japanese 10-year (JGB) bond futures moved below 136.00 the party in the Kuwait stock market would likely be over.

The idea today comes from the comparison of the Kuwait and Egyptian stock markets included on page 6. Egypt’s stock market suffered its largest decline since 2006 before recovering somewhat towards the end of last week. Much of the pressure has come as a result of rising food prices.

In the spring of 2006 the JGB futures broke below the 135.50- 136.00 level as the Kuwait stock market plunged. This spring the pressures showed on in Egypt as the JGBs moved below the same level.

A number of equity markets sectors- including biotech and even the Japanese banks- peaked in the spring of 2006 before turning lower through into 2008. What caught our attention was the similarity between the charts of Mitsubishi UFJ (MTU) and something like corn futures. From the summer of 2005 into May of 2006 the chart of MTU appears almost identical to corn futures from the summer of 2007 into this month.