by Kevin Klombies, Senior Analyst

Tuesday, June 10, 2008

Chart Presentation: The Next Theme

Our basic view is that regardless of what crude oil prices do this month we expect to see oil prices close to 80 by the final quarter of this year. Between now and the end of the month however… just about anything could happen.

We are consistently intrigued- and often times annoyed- by the markets’ tendency to run trends from quarter to quarter. When we are on the right side of the trend (something that we believe might happened once or twice in the distant past) we are usually appreciative but when we are looking for a change in trend the wait can seem interminable.

We start off today with a comparison between Valero (VLO) and Newmont (NEM) from 2007.

The point is that in January of 2007 the trend turned positive for the energy sector with particular emphasis on the refiners due to the perception of an impending shortage of gasoline. The stock price of VLO turned upwards in January and pushed on into July at which time the trend shifted in favor the gold sector as the mortgage-related pressures increased.

From July into January of this year the golds pushed higher and then as Newmont reached a peak the trend shifted once again back to the energy sector. The focus this time around was on natural gas so at bottom right we show natural gas futures and the stock price of Chesapeake (CHK).

We have made this exact argument on a number of occasions recently so we aren’t covering any new ground here. Our intention was not to point out once again that the natural gas theme will very likely find some way to continue pushing through the end of the quarter but rather to examine the way a new trend begins. To do this we are looking at the way Valero transitioned from down to up at the start of 2007, how Newmont made the turn in mid-2007, and what happened to Chesapeake at the start of this year.

The problem is that in early to mid-June and in early to mid-December it was not at all clear that VLO, NEM, or CHK were imminently going to become relative strength juggernauts. This suggests that the only thing that we can be sure of regarding next quarter’s theme is that it will very likely be driven by stocks or sectors that are thoroughly unloved today.



Equity/Bond Markets

Below we show a comparison between the Shanghai Composite Index and the share price of Las Vegas Sands (LVS).

LVS owns and operates casinos in Las Vegas and Macao, China so there is some relationship between the Chinese stock market and this particular stock over and above the remarkable similarity between the charts.

In late 2005 LVS was around 30 while the Shanghai Comp. was close to 1200. Both rose by a factor of five times into late 2007 as the Shanghai Comp. reached 6000 while LVS nipped up to 150.

We are pointing this out because LVS moved below 60 yesterday which, in terms of our comparison, would be the equivalent of around 2400 on the Shanghai Comp.

The argument is that while Asian growth tends to go with rising commodity prices the trend turned lower last autumn as energy and food prices began to sky rocket. Below we show the Shanghai Comp. along with the product or combination of crude oil and rice futures.

If LVS trends with the Chinese stock market and at some portion of the initial pressure has come from the rise in commodity prices then there is a good chance that the markets have created some form of offset.

Below right we show the Shenzhen Comp., the Shanghai Comp., and the stock price of Wal Mart (WMT).

When the Chinese stock market was ‘hot’ between 2005 and late 2007 the stock price of WMT held essentially flat. Now that the trend for Chinese shares has turned negative the stock price of WMT is on the rise. The point would be that as long as WMT keeps making new recovery highs the news from China should remain negative.