Currency/Commodity Markets
It is obvious- to most, in any event- that the U.S. dollar will continue to decline. As usual we disagree and as usual, we could still be wrong. Ever hopeful, however.
We show a dollar-based comparison on page 5 and another at right. This chart compares the U.S. Dollar Index (DXY) futures with the ratio between the World ex. USA Index and the Dow Jones Industrial Index (DJII).
The point is that the declining trend for the dollar has gone with an equally relentless rising trend for relative strength by non-U.S. equity markets. To the extent that weakness continues in China, Hong Kong, India, Vietnam, Canada, Kuwait, and Zimbabwe the dollar should do better. Best case is that the dollar made its low in early November concurrent with the bottom in the equity/commodity ratio shown on page 2 and the first of two tops for crude oil futures prices.
The page 2 argument was that correction in the equity/commodity ratio this year was almost identical both in terms of time and slope to the one that ranged from March into July last year. If history were to repeat exactly oil prices could theoretically hold near the highs for another 11 trading sessions (although there are 17 trading days until the Dec. 11th Fed meeting).
Below and below right we have included three charts of crude oil futures. The charts below right are from 2003 and 2006 while the lower chart is from the current year.
We have argued that the intermediate-term cycle begins when crude oil futures prices lift up off of the 200-day (red line) e.m.a. and ends- or at least changes- when crude oil prices return to the starting point. In 2003 oil prices lifted up from roughly 26 in November and then corrected back to that level close to 6 months later in early May. In 2006 oil prices turned higher in March from around 60 and then returned to 60 close to 6 months later in September.
In terms of ‘time’ a repeat of the 6-month cycle would suggest oil prices in the low 60’s by month end which, we admit, would surprise even us. We still maintain that everything beyond the low 80’s represents a ‘mystery rally’ that can be seen on page 7 using the natural gas comparison. Beyond that our first down side for crude oil prices remains the low to mid-60’s.
Short-Term Views
Nov. 16 (Bloomberg) — Federal Reserve Governor Randall Kroszner said policy makers probably won’t need to reduce interest rates further to help the economy weather a “rough patch” in the coming year.
On Friday Fed Governor Kroszner stated that the Fed probably wouldn’t cut interest rate in December but as Fannie Mae melted down in price the markets gave just over 90% odds to a 25 basis point rate reduction. When all is said and done it is always best to follow the message of the markets.
On page 4 we show a comparison between FedEx and ocean shipping rates. The argument is that the weakness in FDX indicates future weakness in shipping rates and we have also argued that the dollar tends to bottom at the peak for the Baltic Freight (Dry) Index. The chart at top right makes a similar case to pages 2 and 3- it is entirely possible that the dollar hit bottom earlier this month.
Quickly... below we show the SPX futures. On Friday we commented that trend changes can and often do occur mid-quarter. It is also true that while the SPX futures spend days making a top they tend to make bottoms on intraday reversals. Specifically we were looking for a day that started off weak and then ended stronger. Friday certainly ended stronger although it obviously wasn’t a reversal day. In other words the jury is still out on whether the trend for the SPX is higher or lower.
Last week- with some obvious trepidation- we suggested that there might be one last rally in crude oil prices before the final top was reached. The idea was that when a market turns sharply higher it often doesn’t reach a peak for three months. Below right we compare China’s Shanghai Comp. with crude oil futures. The idea is that Chinese equities turned upwards in mid-July only to peak three months later in mid-October while oil prices lagged behind until the second half of August forecasting a top during the second half of November. Our thought is that there is close a month and a half ‘lag’ between the Shanghai Comp. and oil prices which, in turn, helps to support the idea that oil prices could remain reasonably strong through the end of the month. Then we would get the first break in oil prices and the start of serious weakness in China’s equity markets.
