A Telling Divergence

 | Aug 28, 2013 | 3:03 PM EDT
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We are seeing a really telling divergence today. This non-stop selloff in the consumer packaged goods plays vs. many other portions of the stock market is begging to be noticed because it's speaking louder than anything else I am watching.

Think about it: Procter & Gamble (PG) and Colgate-Palmolive (CL) aren't able to rally. Neither can Kimberly Clark (KMB), and Hershey HSY and General Mills (GIS) look awful. Clorox (CLX) can't rally. What does that say?

I think it says interest rates are still going higher and today's climb back up is for real. These stocks are all part of that bond market equivalent trade and they failed to rally when rates dipped back down the other day. This tells me that the decline in rates isn't for real and we will soon see 3% on the 10 year Treasury note, about a quarter of a point from where it is now.

Of course, there could be other forces at work here. A principal ingredient for all of these companies is oil, which is moving higher again today. The products have to be shipped to the merchants. They often use packaging that requires energy to be made. Plus, these companies often sell into the emerging markets where the growth is -- and those markets are getting crushed right now.

But I think it all comes back to rates. These stocks were terrific for so long with even the ones with the least growth flying higher. I know that I often talked about how angry I was that my charitable trust sold these on the way up rather than holding on to them because I thought their valuations were ridiculously stretched. At the top they were valued much more richly than many Internet and biotech stocks. This was despite the fact that many of these companies only have 3% organic growth -- or even less. Now they are coming back to earth and from the looks of them, they still have further to fall. Four is the new three, as in 4% breaks the fall the way 3% used to.

What do you do if you own these stocks? First, you have to recognize that it might be years before you see those prices again. That's because at their height they were fixed-income plays and it's pretty clear from the action and all the talk about the Fed tapering its QE program, we aren't going to those rates any time soon. Second, while these companies have terrific, consistent earnings, if the economy takes off, they will do nothing. Nothing at all. Third, understand that most of these companies are too big to be taken over. Fourth, your best hope is that management decides to break the companies up or boost dividends to the point where, once again, their yields sell at a hefty premium to the 10-year note. Finally, fifth, perhaps if the Fed does taper QE, further slowing the economy (particularly housing), people will believe we are going to slip back into recession. Their consistent earnings streams will then make them more attractive. But I don't think that will move the stocks up all that much. It just makes them relative outperformers.

To me, this means these stocks have become sales on any lift -- and you can and always do get a lift. Ironically, it was right about here that my charitable trust started taking profits in these companies. Maybe I will be wrong again but without the prop of lower rates, I think the group is dead money at best. And that's no place you want to be.

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