Sometimes you have to divide the market in an apples-to-apples and oranges-to-oranges way. It can be the best way to understand what's really going on, what are the real fears of investors, not just the ones expressed by indices like the Vix or the Put/Call ratio.
Take, for example, some of the extreme valuations in this market, and when I say extreme, I am talking about genuinely out-of-control valuations.
First, consider American Airlines (AAL) and United Continental Holdings (UAL), General Motors (GM) and Ford (F) all sell at 5x this year's earnings. General Motors and Ford throw in 5% and 7% yields -- although the latter is boosted by one-time special dividend or would be 5%, too. They are all near or bumping along their lows.
Then there are Campbell Soup (CPB), which sells at 20x 2016 earnings, Kimberly-Clark (KMB), which is at 21x earnings, and Procter & Gamble (PG) and Clorox (CLX) which are selling at 22x and 25x earnings. All of these stocks are at or near their 52-week highs.
What do these disparities say about the market?
First, when it comes to the airlines, it says that their earnings have peaked and are going to go down, perhaps significantly. You just don't get multiples that low and have earnings pretty much stay even or get better than they were last year. You don't even have them that low if earnings are going to be slightly lower than last year.
You get them, typically, when earnings are going to be cut in half. I have seen it time and again, when a stock sells at less than one third of the average stock in the S&P 500, which is the case with all of these, it means that the earnings estimates are going to prove to be wildly aggressive and numbers have to come down severely.
In other words, the market is saying that these seemingly cheap stocks are actually very expensive. You just don't know it yet.
Now, we know there could be a couple of skeletons here. All of these companies do business in some countries with very weak currencies. But that's the case with the soft goods companies, too. All of them require credit to transact, and while their balance sheets are all much stronger than they were the last time their stocks were down here, perhaps that's an issue?
Or, let's just call it as we see it: these stocks are forecasting a recession. That's why, even though Ford and GM offer big dividends, people don't trust them as bond market equivalents. Investors think the dividend is either cold comfort against a 10 to 20% decline in the common, or they think that dividend cuts are coming. Remember, I am observing here, not making a judgment.
Now, let's look at the four consumer products companies' stocks. If you look at the organic growth rates of these companies -- the really true indicators of what's what -- you will see minuscule growth: Procter and Campbell's have about 1%. Clorox has 3% and Kimberly 4%. You would think: who in heck would pay more than 20x earnings for these? But PG has a 3.2% yield, Clorox has 2.4%, KMB 2.7% and Campbell's 2.2%. While none of those is all that compelling, even with the 10-year Treasury at 1.7%, they have all been able to raise that dividend over time, something Treasury never does.
All of these companies have gigantic energy costs and Clorox acknowledged last week that its commodity costs were a genuine tail wind.
Plus, this group, rightly or wrongly, trades on currencies, so it could be that people think that the dollar's peaking, which you could argue is the case with the euro as it is almost unchanged vs. last year's price to the dollar.
I think that a combination of potentially positive currency swings and lower commodity costs plus yields and the ability to take up dividends make this group as attractive as the airlines and autos are unattractive. Best of all, in a recession they retain their earnings power.
My conclusion? Both groups of stocks are forecasting a recession, with less travel and spending money and tighter credit. In other words, they are simply saying the same thing, but in very different ways.