by Kevin Klombies, Senior Analyst

Wednesday, June 6, 2007

Chart Presentation: WMT and China

We show two charts of the ratio between the share price of Wal Mart (WMT) and the S&P 500 Index (SPX). The WMT/SPX ratio represents WMT’s relative strength compared to the broad U.S. equity market.

The top chart shows the time frame from 1991 through 1998 while the lower chart extends from early 2001 to the present day.

We are comparing the long period of relative price weakness by WMT between the end of 1992 into 1997 with the similar trend between 2002 and 2007. The argument is that WMT has underperformed the broad market as commodity prices have pushed upwards in the face of a declining U.S. dollar.

In past issues we have made the case that WMT is very much of an anti-commodity stock. It does well when the dollar is stronger and tends to turn upwards around the time that crude oil prices turn lower.

From out point of view it isn’t whether WMT will do better but when to expect ‘the turn’. The problem with long-term chart comparisons is that they can present a compelling argument and be absolutely correct even if the timing is off by three or six months.

The issue of ‘when’ brings up a rather interesting point which we will attempt to make using the chart below right of WMT and the Chinese stock market (Shanghai Stock Exchange Composite Index).

The chart shows that as WMT turned upwards over the past few days the Chinese equity market cracked lower. Given that we have repeatedly argued that sector surprises and ‘gaps’ often go with trend changes in other markets this actually may make some sense. Strength in WMT may not be the cause of weakness in China but it may reflect the willingness of capital to move away from one high-flying market in search of better or, perhaps, safer returns closer to home.

To summarize… for close to five years WMT’s stock price has declined relative to the SPX and in recent months it has made no sense to own WMT and all the sense in the world to be long markets like China. Fair enough. We simply wanted to point out that over the last four trading sessions we have witnessed the potential for a major trend change. Whether this is THE trend change remains to be seen but the chart comparison certainly makes a compelling argument that it is.




Equity/Bond Markets

We showed a chart of the ratio between WMT and the SPX which declined into early 1997 and then turned higher. We show this in more detail at right.

In early 1997 crude oil prices peaked, the CRB Index began to decline, and ocean shipping rates reached a top. As these three markets turned negative the stock price of WMT began to rise. Perhaps THE reason the U.S. stock market held in so well when Hong Kong’s stock market ‘crashed’ in the autumn of 1997 was that the general trend towards weakness in Asian that culminated in the 1998 Asian Crisis was generally viewed as a positive for many large-cap U.S. companies.

If 2007 is similar to 1997 then the argument would be that oil prices are ready to decline, the CRB Index has reached a peak, and ocean shipping rates (Baltic Freight Index) are ready to roll over.

The chart below shows that as WMT has begun to show (minor) strength recently the CRB Index and crude oil futures prices have range traded below the late-March highs. There has even been a bit of weakness in shipping rates to make the argument just a bit more convincing.

Below we have included a chart comparison that could well be one of the most important that we have shown for some time. The chart features the yield index for 10-year Treasuries (TNX) and the product of the Australian dollar (AUD) futures times copper futures.

We will show this chart again when we have more time and room to do it justice but for now the idea is that the AUD and copper are ‘cyclical’ and rise with long-term interest rates. The channel on the TNX suggests that the recent rally in commodity prices and the commodity currencies has pushed cyclical prices back close to the highs of 2006 while 10-year yields have moved right back to the top of the channel. In other words… if 10-year yields continue to rise then trend towards lower interest rates will be broken. For 10-year yields to hold below the channel top we are going to have see renewed weakness in the AUD and copper- and soon.