Chart Presentation: The Decade Trend

Dec. 12 (Bloomberg) — Copper fell the most in a week on speculation the Federal Reserve’s rate cut won’t be enough to stimulate U.S. expansion.

Dec. 12 (Bloomberg) — Crude oil rose more than $4 a barrel, the biggest gain since January, on speculation a decision by central banks to provide cash to financial institutions will spur economic growth.

The Dow Jones Industrial Index traded within a 380 point range yesterday rising to around 13700 and falling late in the session to 13320 before closing up 41 points around 13474. In a sense there was something for everyone as evidenced by the two Bloomberg comments included above.

Years ago we initiated the argument that in some ways the markets were following the same general pattern through each decade. After a peak in one or more cyclical markets to start the decade (commodities in 1980, the Nikkei in 1990, and the Nasdaq in 2000) the inevitable correction would run into the autumn of the ‘2’ year. For much of 2002 we argued that the S&P 500 Index should bottom around the end of the third quarter only to be early once again but this time by only 9 days.

At the start of 2005 we put together a short list of 9 stocks that we believed had the potential to double in price into 2007. Shortly there after we removed one of the stocks- AIG- at the original entry point due to an accounting scandal. The other 8 stocks can still be found on the fourth page. Of the 8 names 4 actually doubled in price- British Airways, DaimlerChrysler, A.G. Edwards, and recently McDonalds. One- Wal Mart- is net lower, another- Anheuser Busch- is marginally higher, and two- Coke and Pepsi- are up close to 50%.

British Airways is no longer listed on the NYSE and A.G. Edwards was taken over by Wachovia so the list has to and will be removed within the next few days.

In any event the point is that in terms of the ‘decade trend’ in both the fourth quarter of 1987 (S&P 500 Index chart top right) and 1997 (Hang Seng Index chart middle right) one or more markets ‘crashed’. As we focused on the potential for crash-like weakness in the Chinese shares market the U.S. financials did the honors as shown by the chart of Fannie Mae (FNM) below right. We are constantly amazed at the way the markets repeat the same behavior over and over again but in such unique ways that you hardly recognize it until it is too late.

When Bloomberg explains the rise in crude oil and decline in copper prices in the manner shown on page 1 today it makes it very difficult to understand what the markets are doing based on ‘the news’. So… we don’t.

At right we show a chart of Caterpillar (CAT) and the sum of copper and crude oil futures. Copper is in cents while crude oil is in dollars multiplied by three times. As an aside we have argued over the past few years that this weighting is about ‘fair’ so with crude oil pushing towards 100 while copper moves back to 300 we are finally seeing prices come back into some form of balance.

With regard to the chart the idea is that when CAT is on or near its 200-day e.m.a. line then the sum of copper and crude oil has been at or near is moving average line. If CAT represents cyclical growth then the lower its price moves the greater the risk of an economic slow down which, in turn, typically results in lower metals and energy prices.

The point, we suppose, is that CAT was a little ahead of itself when it broke from 74 down towards 67 in November so at present both markets are close to neutral with oil price strength offset to some degree by base metals price weakness. The question going forward is whether CAT continues to rally or breaks to new lows. We like the latter outcome.

We are not sure how many more times we are going to show the chart comparison below. We have been running a similar comparison on page 6 for several weeks now and we are getting close to the limits of our attention span. However, we feel it is important enough to hammer away at one more time so… we shall.

The chart below compares crude oil futures with Japan’s second largest bank- Mizuho Financial (MFG). Below right we show the Nasdaq Composite Index and the Bank of Nova Scotia (BNS) from 2000. The recovery in MFG began with the peak in crude oil in much the same way that the BNS started to rise once the Nasdaq had peaked at the turn of the century. As long as MFG isn’t making new lows we will argue that oil prices are working through a top in front of much lower levels.