What Two Stocks Tell Us About an Industry, Possibly the Economy

Loyal readers know of my belief that stocks act as leading indicators. If a group of stocks within an industry are rising or falling in price, you can assume the business sector they operate in will correspondingly expand or contract in the six to 12 months ahead.

Some prime examples that became successful investment bets:

Gold stocks started rising in price in 2001, 2002 and 2003 more aggressively that gold bullion. But look at gold bullion today, the metal is up 150% in price since 2001. U.S. home builder stocks started to tank in the summer of 2005–the point at which the U.S. housing market was at its hottest in terms of price appreciation and transaction volume. We look at the U.S. housing market today and it is in worse shape than most analysts, except yours truly, believed would be possible.

Mortgage lending in the U.S. could be the next problem area for the economy according to two major U.S. mortgage stocks.

New Century Financial is a company that lends to people who want to buy a home but who have low credit ratings. New Century, with about $26 billion in assets, has seen its stock plunge 67% since the summer of 2005 as the company continues to report rising defaults on payments by its customers.

Countrywide Financial, a larger player with $175 billion in assets, is the largest home lender in the U.S. And its stock is also suffering–down about 10% from the begging of this February!

You have the stocks of mortgage lenders to “risky” customers, also known as the subprime market, getting hit while the stock prices of regular lenders like Countrywide are also declining rapidly. If I didn’t know better, I would conclude problems in the U.S. housing market have resulted in new problems for the mortgage lending business in the U.S.–two huge industries under pressure.

Can problems for the general U.S. economy be far behind? It won’t take long now for other consumer related stocks to come under fire. As a prudent investor, I’d stay clear of the consumer products stocks, as I’ve been suggesting for months.

NEWSFLASH–Masco Corp., a major supplier to the U.S. home building and improvement market, has cut about 8,000 jobs from its payroll since late 2006. The company, like many others in the U.S. home building industry, reports sales and profit margins are being pressured by the decline in activity in the U.S. home construction. Who was it that said the worse is behind us for the U.S. housing market? Oh yeah, that’s right, he’s no longer U.S. Fed Chairman.

NEWSFLASH–U.S. homebuilders started work in January on the smallest number of new houses since August 1997. A large inventory of unsold homes and colder weather were officially to “blame” for the poor housing starts numbers. I’d like add “colder” consumer confidence in housing prices to the list. in fact, let’s put it up at the top of the list.