Chart Presentation: Offsets

We are never sure whether it is because the days are getting shorter in the northern hemisphere, seasonal construction and jobs are slowing down, or whether individuals are depressed after coming back from summer vacation only to face the prospect of yet another winter but... there is something about the month of October that creates the impression that cyclical growth is collapsing. The seasonal trend leads to slower growth into October and November and stronger growth into April and May. This tendency shows up in the old adage to ‘sell in May and go away' and supports out view that, if possible, one should be a buyer into weakness in October.

Today's initial topic has to do with ‘offsets'. At top right is a chart of the Nasdaq Composite Index and the share price of TransCanada  Corp. from 2000 through 2002.

We all know that 2001 and 2002 were part of a major equity ‘bear' market but the reality is that many companies traded steadily higher even as the Nasdaq spent a couple of years washing out the excesses created into 2000. Equity indices declined because there were more companies with greater market capitalizations trading down with the Nasdaq than there were trading up as a result of the downward pressure on yields than went hand-in-hand with the tech and capital spending melt down.

The question is... did TransCanada ‘foretell' the future? Should one have known that the next trend was going to be focused on ‘all things related to energy' because TRP was exhibiting such remarkable relative strength during 2001 and 2002?

The Nasdaq peaked in March of 2000. Ten years later the ratio of crude oil to the CRB Index reached a peak in March of 2010. The next question would be... is the unwinding of energy price strength since early 2010 similar to the correction in the Nasdaq ten years earlier and, if so, then what kinds of stocks are rising in a manner similar to TRP?

While these kinds of comparisons are difficult to do in real time the stock that looks the most like TRP may be Japanese telecom company Nippon Tel . Does this represent an improving Japanese economy, the simple end result of a stronger Japanese yen, the resurrection of telecom growth, or the ongoing shift towards safety and income? Time will tell.

Equity/Bond Markets

The good news, we suppose, is that a number of relative prices have declined all the way back to the levels associated with the 1990 bear market lows.

Below is a chart of the ratio between the S&P 500 Index and gold and the ratio between Japanese 10-year bond futures and U.S. 10-year bond futures from 1990- 91.

At the bottom in October of 1990 the SPX had declined to only 75% of the price of an ounce of gold. The Japanese bond futures were only 4% higher in price than similar U.S. T-Note futures.

Following more than 20 years of economic stagnation in Japan and a decade or so of wallowing for the U.S. we show the current situation below right. The  S&P 500 Index is now ‘cheaper' in terms of gold than it was in 1990 while the Japanese bond futures are only a few points higher relative to the T-Notes. If you had bought Japanese bonds more than 20 years ago and held them to the current time frame you would be ahead in price by only a few more points than U.S. bonds .

Quickly... adjusted for the recent split... the price of Citigroup has not been below that of Wells Fargo since 1981. In 1991 just ahead of the major rebound in the laggard banks the ratio fell to 1:1. The chart below shows that as of the end of trading yesterday the ratio had returned once again to 1:1. Citigroup should rise relative to Wells Fargo when the trend becomes more bullish.

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