by Kevin Klombies, Senior Analyst

Friday, October 12, 2007

Chart Presentation: WalMart to

It was only one day but we did find it interesting that just hours after Wal Mart (WMT) raised its profit forecast JP MorganChase reduced its estimates for third quarter earnings for Chinese search engine company (BIDU). The result was similar to throwing a stone at a tree full of birds as the equity index futures drove prices higher in early trading and then lower during the afternoon.

We have focused on WMT’s stock price on many occasions this year but our most recent argument was that the last time WMT’s stock jumped higher the Chinese equity markets moved rather sharply lower. This strange relationship made sense- to some extent at least- out of what was otherwise a very strange and volatile trading session.

The first chart which follows shows WMT and the ratio between crude oil futures and the U.S. 30-year T-Bond futures (crude oil/TBonds) from the summer of 1996 into the summer of 1998.

The idea is that the start of sustained price strength for WMT back in early 1997 went exactly with the peak for crude oil prices as well as the top for the ratio of oil to bonds. In fact the start of strength for WMT also went with general commodity price weakness and a declining trend for the commodity currencies.

While WMT was only popping up off of a very nice ‘bottom’ in the 42- 43 range the fact that it has been able to recover hints at an impending price top for oil prices. Perhaps ‘hints’ is too strong a word but that, at least, is what the charts suggest.

To put this into perspective we show WMT and the crude oil/TBonds ratio from the spring of 2006 forward in the second chart comparison below.

The U.S. dollar was weak yesterday as gold and platinum prices moved to new highs. Crude oil futures were hammering up towards 84, the Canadian dollar reached a multi-decade peak, and even wheat futures were pushing higher as bond prices declined. The Asian markets were flying upwards over night so it made perfect sense to assume that WMT was going to have a bad day. And then it rallied and some time later the stock price of which had been trading around 58 as recently as the spring of 2006- reversed to the downside creating a daily trading range of 58 from the high of 359.45 to the low of 301.25. Strange days indeed.



Equity/Bond Markets

The chart below compares the stock price of Boston Scientific (BSX) with the ratio between the stock prices of BSX and Exxon Mobil (XOM).

As we have mentioned in past issues the BSX/XOM ratio has spiked up to around 7:1 on two previous occasions- 1993 and 2000. Roughly seven years apart the ratio between these two stocks reached the same peak and now around seven years later the ratio has risen to a similar extreme.

Swings in the ratio tend to go with changes in the direction of interest rates so this did seem like a reasonable time to look for a trend change.

In both 1994 and early 2001 the first break lower by the ratio found a bottom several months later around 4:1 so our view was that our first target for BSX would be based on a decline in the ratio to that level. We mentioned in passing that something like 80 for XOM and 20 for BSX would be ‘about right’ but for much of trading yesterday it did appear as if XOM was ready to break to new highs above 94 on oil price strength.

In any event if this turns out to merely be a ‘false start’ then BSX will once again fail at its 200-day e.m.a. line (similar to January, May, and June this year). If it is the real thing then the next short-term high should be reached around the time that the 50-day e.m.a. line is crossing up through the 200-day.

The third chart below right compares the combination of crude oil futures times the Canadian dollar (crude times CAD) with the U.S. 2-year T-Note futures.

The basic point is that in many ways the markets make perfect sense (i.e. BSX now trending higher after the Fed cut the funds rate) while from an assortment of perspectives it is a complete and utter mess. The decline in interest rates was supposed to go with an end to the rally in the commodity cyclicals but as the crude oil times CAD combination surges higher (and higher and higher) it appears as if the bond market is taking a long walk off of a very short pier.