Downgrades Based on Valuation Ignore the U.S.

This morning, Vale (VALE - commentary - Trade Now) one of our Action Alerts PLUS stocks caught a "valuation" downgrade from HSBC. Given that this raw material play needs worldwide growth and its stock price is anticipating it, I understand the downgrade, especially given the slide of the Baltic Freight Index. I don't buy into the downgrade though, and subscribe to the dueling upgrade that Morgan Stanley just gave us.

McDonough on the Baltic Freight Index

Shippers Take It on the Chin

But when I heard about the valuation downgrade I immediately told Stephanie Link, our product's fabulous research director, that we should begin to expect a lot of these, especially on heels of what looked like a "popular" downgrade of Toll (TOL - commentary - Trade Now) by Citigroup yesterday -- popular meaning it hurt the stock, even though it was simply an extension of Citigroup's negative view on housing here. So many stocks have run to levels that anticipate a "V"-shaped recovery, no longer just a "U" and certainly not an "L" let alone a "W," that you have to believe that analysts will get cold feet soon.

I think the way to approach this moment is to recognize that the multiples could be very low if the United States comes back or if Europe comes back. China's the engine for certain, but the sheer size of the U.S. and European markets cannot be overlooked in this period where we basically have given up on both.

Take Caterpillar (CAT - commentary - Trade Now). There is no way CAT should be at these levels if the whole move is China. People are betting that the U.S. and Europe kick in and that CAT can make $10 in 2011, so why not start buying now? The idea that if we have a "V," the $10 can pull through to 2010 is hardly a fantasy, and in September we only care about 2010 anyway.

If anything, I think Vale and stocks like Freeport (FCX - commentary - Trade Now) and Nucor (NUE - commentary - Trade Now) are just too darned cheap given even an anemic recovery, because there is not much demand at all right now ... and that won't last.

Downgrade VALE on valuation? You'd better hope for an "L" or you are never going to get back in, which is the real problem for analysts.

Go ask anyone who downgraded Freeport in the $30s or $40s or $50s. They know what can happen.

Random musings: I have to admit that copper has one of the ugliest charts known to man and we don't really have enough data about the future on this one. Pros are all calling for a correction, but I can't tell other than to say it would be overdue and that's part and parcel of the VALE downgrade. ... Incredibly impressive Bank of Montreal (BMO - commentary - Trade Now) numbers this morning. Canadian lenders are so much better than our lenders. ... How was this Taylor Bean & Whitaker able to stay in business. Where were the regulators?

At the time of publication, Cramer was long Vale.

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