Chart Presentation: Pondering

At time of writing news reports suggest that conditions in Japan are calming somewhat while the same can not be written about Libya. We find ourselves with far more questions than answers today but, we suspect, we are not alone in this.

We are going to have to tread carefully with our musings today because the point that we have been pondering has to do with a very rough comparison between 2001's terrorist attacks and Japan's natural disaster.

Below is a chart of the U.S. Dollar Index futures and the CRB Index from 1997 through 2002.

Next we have included a chart of the Nikkei 225 Index and the combination of the Japanese 10-year bond futures times the Japanese yen futures.

In broad terms the commodity price rally that has literally defined the trend over the past decade began as the U.S. dollar reached a cycle high some time after the Nasdaq peaked and turned lower. In other words the trend change from strong U.S. large cap/tech/telecom that had dominated the final half of the 1990's did not clearly shift into a new theme until early 2002 when the dollar began to weaken. Yet a few months ahead of the dollar's final top the CRB Index began to rise with the pivot taking place within days of 9-11.

Our thought has been that the Nikkei 225 Index might weaken during 2011 as it followed a similar path to the CRB Index in 2001. Confirmation of a trend change back to a stronger Japanese equity market was supposed to come from a down turn in Japanese bond prices and/or the yen. The argument was that while the offset to pressure on the commodities markets during 2001 was dollar strength the current offset to pressure on the Nikkei was coming from a strong yen and rising long-term Japanese bond prices.

Will the earthquake, tsunami, and subsequent nuclear nightmare lead to a trend change in a manner similar to 2001's terrorist attacks? Will the flood of liquidity generated by the Bank of Japan move away from Japan while weakening the yen? Will the process of rebuilding the damage provide the economic spark required to push Japan out of deflation? Will concerted central bank efforts to stop the rise of the yen prove successful? As we mentioned above... we have for more questions than answers today.

Equity/Bond Markets

Research in Motion reports earnings later this week. We can not and will not argue that RIMM is critical in terms of the over all trend but... then again... the reaction to these earnings may tell us something about the sustainability of the trend.

At right we show RIMM and 30-year Treasury yields. The argument is that both have declined to their respective 200-day e.m.a. lines. To the extent that the recovery is based on economic expansion and rising yields it would helpful if the markets viewed RIMM's earnings from a glass if half full perspective. In other words if the reaction to earnings shows that the markets have been overly pessimistic about RIMM's prospects then we should see at least some amount of upward pressure on yields.

Below is a chart of 10-year Treasury yields and the ratio between the Bank Index and the S&P 500 Index .

With a number of the major banks raising dividends following the end of the U.S. Government's second bank ‘stress test' the BKX has recently begun to rise relative to the broad market. Not by a lot, of course, but perhaps by enough to make the case that upward pressure on yields is starting to show up once again.

The chart below compares GlaxoSmithKline with the ratio between equities and commodities .

Our rather strange view is that GSK tends to be ‘fair' when it is close to the SPX/CRB Index ratio. With the ratio around 3.65 and GSK near 36.5 the idea is that the pharma stocks have returned to a position of balance. This may help steady out the equity market somewhat while leading to an improvement in the health care trend if, as, or when the SPX ever starts to outperform the raw materials sector.