Chart Presentation: Three Quick Points

We thought that we would make three fairly quick points today to start things off. The first two points are related to an argument that we have made in the past that the transition through a trend change this year would be split into two parts.

At right we feature a comparison between the ratio of the stock price of Canada’ Bank of Montreal (BMO) and the Nasdaq Composite Index through the Nasdaq’s peak in March of 2000 and the ratio of Japan’s Mitsubishi UFJ (MTU) and the gold etf (GLD) into 2008.

The idea is that from 1998 into 2000 money was moving away from Canada’s banks towards the tech and telecom sectors. As the Nasdaq reached a peak capital flows reversed with the Nasdaq declining even as the Canadian banks moved higher. Through 2006 and 2007 money was moving away from Japan’s banks and into the commodity sector with the trend apparently reversing once gold prices finally reached a top.

The chart below right shows the ratio of Exxon Mobil (XOM) to Boston Scientific (BSX). Well after the BMO/Nasdaq ratio bottomed and turned higher in 2000 the markets shifted away from energy (XOM) and back to the broader health care theme (BSX). We continue to look for a similar trend change some time this year.

Finally our third point has to do with the seasonal trend. Cyclical growth tends to look quite strong into the spring and equally weak into the autumn. The chart below shows Alcan (recently taken over) from 2000 through 2002. During those times when the mines and metals reflect the seasonal trend is usually makes sense to sell this group in May and buy it back in October.

U.S. 10-year Treasury yields rose to just below 4.0% yesterday touching 3.988% before slipping back to end at 3.938%. Japanese 10-year bond (JGB) futures closed at 134.75 which, as the chart at right shows, is marginally below the late April low (close to a 1.68% to 1.70% yield).

The chart at right compares the JGB futures with the stock price of Japan’s Mitsubishi UFJ (MTU). We have commented (repeatedly) that when U.S. and Japanese long-term yields are rising the Nikkei tends to trend higher, the Nikkei tends to outperform the S&P 500 Index, and the stock price of MTU tends to outperform the Nikkei. In other words when long-term bond prices are falling MTU is a very good stock to be long but when bond prices are rising the opposite is true.

In any event MTU touched just above 11 towards the end of last month and has since been tailing back to the down side. Our thought is that if 10-year Treasury yields obtain a solid foothold above the 4.0% mark then MTU should do quite nicely.

Below we show 10-year Treasury yields (TNX) and the ratio between the Nikkei 225 Index and the S&P 500 Index. Note as well that we have included a comparative view of Nippon Tel and Sony on page 6 to make the point that there has recently been a marked improvement in the technical behavior of a number of Japan’s largest equities.

Below right is a comparison between another of Japan’s major banks- Mizuho Financial (MFG)- and the gold etf (GLD).

Mizuho and Mitsubishi UFJ are trending with long-term yields even as gold prices are trending in the opposite direction. During the credit crisis as the dollar and yields declined the markets pumped money into the commodity sector sending gold prices skyward. In mid-March the trends began to reverse with yields and the dollar firming up as Japan’s banks starting to improve while gold prices turned lower. Ideally we would see gold prices break the moving average line (around 840 for gold and 83 for the GLD), 10-year Treasury yields move above 4.0%, which would then go with an upward ‘whip’ for the Nikkei and further improvement in the share prices of Japan’s major banks.