When I was reviewing potential inventory creation Monday I ran a screen looking for cheap stocks in the S&P 500.
Although I found one that I like quite a bit, I also noticed something very disturbing in the contents of the list of large-cap stocks trading below book value. Many of the more economically-sensitive stocks had fallen to the point they were on the cheap list once again. Companies like Alcoa (AA), Marathon Oil (MRO) and US Steel (X) have given up their gains and are now flirting with lows. US Steel in the most economically sensitive of stocks and it is flirting with the 2009 lows. The old Wall Street adage about stocks being predictive of the future, with about a six-month lead time, is not always correct. But it is accurate enough to consider when we see this type of action.
The short list of cheap stocks made me curious enough to run some other screens to see if we were seeing a widespread selloff of economically-sensitive stocks or these were one-off company specific events. It appears like we are seeing a very widespread selloff of the issues most negatively affected by a slowing economy. Most of the money center banks that still need economic growth and a recovering real estate markets have declined sharply in the past month. Electric utilities, which are among the favorites of yield-chasing investors and should be see benefits from low coal and natural gas prices, are hitting 50-day lows. The aerospace and defense stocks are showing fears of defense cuts causing a slowdown in that industry.
Looking over the list I also see a lot of former retail darlings. Many of these stocks just simply found that reality could not keep up the optimism of the analysts. Fossil (FOSL) saw its stock price fall by 50% when it fell short of estimates in the past month. Tiffany (TIF) has seen strong results and even hiked its dividend recently, but fears of weakness in Europe have hurt the high-end jeweler's stock price. Former Wall Street favorite Abercrombie & Fitch (ANF) has seen its stock fall by 25% as they also discovered that reality is having a hard time keeping up with expectations.
The delivery stocks are often a tell for future economy activity and they are showing signs of weakness. Both FedEx (FDX) and UPS (UPS) are trading near 50-day lows. Packaging and container stocks like Mead Westvaco (MWV) and Ball (BLL) are also seeing their share price roll over to the downside. All of these groups and stocks have been hailed in the past by economic bulls as positive signs for the economy. Is there an inverted message in the recent price weakness?
I am not going to make a broad prediction about the economy. There are currently about 173,000 or so economic forecasts out there, so I will resist the urge to add to the clutter. But when I take the clues from the stock market and economically sensitive commodities like copper, gold, cotton and silver in recent weeks I see a disturbing picture emerging for the economy in the second half of the year.
In today's short-term news driven markets this could give us lower stock prices and additional inventory creation activities. Stick with my habit of reacting rather than predicting and keep cash levels high to take advantage of opportunities if a weakening economy leads prices lower.