The major indices have pulled back over the past couple of trading days, due to mixed economic data and weak earnings results from several large retailers. This is certainly of interest to investors, and we wanted to offer our take on the action. In addition, we've added another two stocks to TheStreet.com Stocks Under $10 Watch List this week. Much of this article went out to subscribers of Stocks Under $10 Tuesday morning. ( Click here for a free trial to receive all of our alerts.) Tuesday morning, the Labor Department reported that April producer prices at the core rate (which excludes food and energy) rose 0.4% -- double what economists had forecast. Outside of food and energy, inflation on the wholesale level rose by 3% year over year, which is the largest increase in 17 years. Although the bulls have put a positive spin on otherwise weak economic data over the past month -- including fewer-than-expected job losses and better-than- expected consumer data that suggested a decline in energy prices due to a seasonal effect -- it's difficult to find anything encouraging in this report. And therein lies the cause behind the 199-point loss in the Dow Jones index yesterday. Adding to the pessimism, Home Depot ( HD) reported earnings that topped estimates, but management said, "The housing and home improvement markets remained difficult in the first quarter and conditions worsened in many areas of the country." That outlook was similar to Lowe's ( LOW) -- which reported Monday -- given that the company also warned of tougher conditions ahead while posting a same-store sales drop of 8.4%.
Not only has this sentiment been echoed by almost every major homebuilder over the past few months, but even the management at Target ( TGT) -- which reported earnings results today -- said: "The current economic environment remains challenging on softer-than-expected sales and higher costs." These recent reports suggest that our economy is likely to see short-term headwinds, which is contrary to most opinions we have been hearing in the media. However, it seems as if the equity markets are ignoring the warning signs and continuing to push higher. We agree that that the credit crisis is mostly behind us and that the odds of another Bear Stearns ( BSC) meltdown are low. However, this does not mean that equities deserve to be trading close to all-time highs considering the long-term risks in the market, which include record energy prices, tighter credit-lending practices and a declining housing market. Of course, there are areas in the market that are working, such as natural gas, oil, technology and alternative energy; many buying opportunities exist even after the two- month run-up seen in these sectors. But many stocks -- especially in the under-$10 space -- are overpriced. Therefore, we expect a pullback in the short term, which will lead to additional opportunities. Turning to our Watch List, we added WSP Holdings ( WH)and Lundin Mining ( LMC). WSP is a China-based oil and equipment company that manufactures seamless oil country tubular goods used in oil and natural gas drilling. Last week, the company reported earnings that were in line with estimates; shares then sold off on the news, mostly due to high expectations.
The company has a strong balance sheet of $300 million in cash and only $60 million in debt, and is in the process of shifting its sales mix from low-margin API (American Petroleum Institute) products -- which are manufactured according to the standards formulated by the API -- toward higher-quality, higher-margin, non-API products. Next, Lundin Mining is a mid-cap diversified exploration play that focuses on copper, zinc and nickel. The company currently has operations in Portugal, Sweden, Spain and Ireland, and it also has interests in the Russian Federation and the Democratic Republic of Congo in Africa. Lundin reported a solid quarter last week, and while shares rebounded off their lows, the stock is still down 40% from its 52-week high. This is mainly due to escalating costs from the Tenke Fungurume copper/cobalt project. Located in the Democratic Republic of Congo, it is among the world's largest and most valuable known copper/cobalt resources. Lundin's stake in the Tenke project is roughly 25%, while copper giant Freeport-McMoRan ( FCX) holds a 58% stake and is the project operator. The exploration and production of Tenke has been a long-term catalyst for Lundin, and it should come online by late 2009. In the meantime, commodity prices remain high due to strong demand, which could certainly bode well for this diversified miner. Frank Curzio manages TheStreet.com Stocks Under $10 service. He writes regularly about stocks priced under $10 a share, such as Ford (F), Lawson Software (LWSN), and Sirius Satellite (SIRI) Nasdaq) for TheStreet.com.