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Are Cliffs Natural Resources shorts finally getting squeezed?

Written By | Jul 20, 2017

WASHINGTON, July 20, 2017 – As we noted in our companion column today, we’re back from another refreshing trip to America’s heartland. Usually when we’re gone, we hole up with relatives and friends or at inexpensive hotels, all of which tend to have poor connectivity. That leaves us without many options when it comes to trading action.

Read also: Market levitation slows Thursday, politics gums up the works

Given the immutable laws of chance, lacking connectivity usually guarantees that every time we leave for a few days, the markets tank. This time, however, we returned home with a surprise. Virtually every one of our holdings actually increased in value during our hiatus.

True, recent market action, based on disappointment over continued Republican failures to repeal Obamacare, has not been so hot. Yet much of our portfolio continues to increase in value, which can mean only one of two things: Either we are geniuses (our preferred choice); or we are just plain lucky (the likely reality).

Today, all sectors save tech are looking anemic once again. But for some reason, our portfolios are up around 0.15 percent Thursday anyway, and we don’t even hold much tech. Go figure.

Trading Diary:

Given the generally anemic if net positive moves in markets during the summer thus far, we continue to play things conservatively, holding a good deal of cash out of caution, while slowly picking into stable sector ETFs that show some long-term promise.

What’s caused us some excitement, however, are that slow and steady signs of life are beginning to stir in our still overly-large speculative position in iron ore giant Cliffs Natural Resources (symbol: CLF).

As readers of this column will recall, we were forced to sell off some of this position earlier in the summer when our mental stop-loss points were hit, giving us some nasty negative returns. Making matters worse, a roughly 15 percent short-interest position in this stock was getting worse, peaking out at over 16 percent of all shares at some point in June, indicating a negative consensus.

However, having reduced our position, we decided to hold on to the rest, given very reasonable expectations for a great summer (Q2) earnings report, due out next week, July 27. An additional kicker – a long-threatened imposition of tariffs on Chinese steel by the Trump administration – is also renewing interest in this company and in the steel industry in general.

While we think next week’s Cliffs Natural Resources earnings report will not disappoint, we’re less certain about that impending U.S. steel tariff increase. Yes, it deserves to happen, and doesn’t negate this country’s usual free trade stance, given that the Chinese are indeed continuing to dump underpriced steel here, undercutting our domestic steel industry.

On the other hand, international politics, like Washington politics, tends toward the Byzantine. We are beginning to think that the administration might now be resorting to a carrot-and-stick approach on steel tariffs regarding potential Chinese cooperation in de-fanging their dangerous two-bit tyrant Commie friends to the north, aka, those Kim-licious North Koreans.

If our political guess is correct, the proposed tariffs may either be delayed or, in case cooperation should fail, put off indefinitely, partially blunting what appears to be a building short-squeeze in CLF shares.

The most recent report on Cliffs shorts (revised every 2 weeks but running behind the real-time curve) has those positions down to 14.4 percent, already a considerable reduction.

But the action is slow. Every time CLF shares get a big buying boost, the sellers go back in the next day and reduce the fractional point gains by roughly half, making this a two steps forward, one step back exercise. Yet price plus moving average charts show the stock is, at least for now, in a slow, steady uptrend.

Cliffs is currently experiencing one of its down days Thursday, after a whopping Wednesday gain. So we wait and see. We’d write covered calls on our position as a hedge and to increase income. But with stock market volatility as measured by the VIX still way down, CLF options don’t really have enough built in premium to make the risk of losing our shares worthwhile.

So we sit and wait. If we get those great earnings, a steel dumping tariff, or both, we’re off to the races and to Profit City. If not? Well, let’s not think about that.

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17