Raising the Caution Flag

 | Jul 20, 2012 | 3:00 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:


Over the years I have been to a few of those spectacles know as NASCAR races. I am not really a huge race fan anymore, but going to them is still exciting -- the cars barrel along nose to nose, and door to door, at well over 100 miles per hour. Every once in a while, when there is an accident or something on the track that might endanger the drivers, a caution is called. This gives NASCAR time to remove the dangers, and because it is too dangerous to be on the track at a high speed, everyone slows down a bit until it is safe again.

For the stock market, it looks to me like the caution flag is out right now. The first indication that it may be time to slow down comes from my regular screening activity. There simply are not many stocks that qualify as cheap right now. As I examined Thursday, big-cap names are not particularly cheap in spite of the Wall Street cheerleading, and even the smaller stocks do not offer many screaming bargains. My basic Walter Schloss-based screen has just 30 names on it right now, the fewest since the beginning of 2008. Not a single U.S. company turns up on my "triple six" screen right now. Stocks simply are not very cheap right now.

The second warning sign was a discussion with fellow Real Money contributor Roger Arnold about sovereign bond yields around the globe, and what that is telling us about economic growth. As Roger points out, equity markets may be cheerily forecasting a recovery, but bonds are telling us we have more economic struggles and slowdowns ahead of us. When Roger throws a warning flag I listen. He was one of the very few who correctly counseled me to hold a large amount of cash in 2007.There is a chance that the equity markets have become smarter than the bond market as an economic tell, but that has not been the case for the decades I have been around the markets. Bond markets are at historic lows, with some major sovereign issues actually sporting negative yields, and this does not bode well for the world economy. I do not see this reflected in equity market pricing right now.

The other caution flag has been earnings and guidance so far this earnings season. We have seem many of the more economically sensitive companies, such as Cummins (CMI), telling investors they expect revenues and profits to slow in the second half of the year. A very common headline the past two weeks has been "meets estimates but light on revenues." Companies may be showing profits thanks to cost-cutting and workforce reduction, but in many cases they are not selling more products and services this year vs. last year.

One of the things I noticed, flipping through "Market Lab" in Barron's last week was that consumer sales were only up about 3%, and more than half of that was accounted for by an the increase in the consumer price index. Business may be better than it was in the dark days of early 2009, but it is not quite good yet. If you want to see the impact of missing the sales forecasts from the analysts, take a look at Chipotle's (CMG) shares today.

We hear a lot of talk right now about the looming fiscal cliff. The combination of spending cuts and tax increases, scheduled to take place early next year, could shave a few points off U.S. economic growth. Everyone may be talking about it, but I do not see the political will or spirit of cooperation between the parties to fix the problem before it occurs. The economy has struggled to gain any sort of traction for the past few years, and this could be a blow that knocks any recovery completely off the track.

I am not a macro guy by any stretch of the imagination. Still, the lack of cheap stocks, together with the looming economic difficulties both at home and in Europe, are making me cautious. When I see a cheap stock like Kelly Services (KELYA), I will buy it, regardless of my misgivings -- but I am not willing to stretch the definition of safe and cheap at this point. I will be spending part of the weekend combing through portfolios and making sure everything I own right now still fits the safe-and-cheap definition.

It is not time to quit the race by any means, but the caution flag is currently out on the economy and the stock market.

Columnist Conversations

We will take off some more risk, bank some winners SOLD PG OCT 90 CALL AT 3.3 (in at 2.90) ...
After a very calm and sedate period of volatility which saw the VIX fall not only to all time lows but had a r...
today is a good day to lighten the load and take some positions off the table. SOLD WB OCT 85 CALL AT 11 (i...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.