Cliffs Industries vs. bears, steel tariffs and D.C. malaise

There’s always something in your portfolio that keeps you on edge no matter how hard you try. Our problem child is Cliffs Industries.

This is the sign that welcomes you to the sleepy U.K. Village of Little Snoring. It could also have served as a sign describing today's Wall Street action. (Image via Wikipedia)

WASHINGTON, July 11, 2017 – In the dog days of summer, we have to work extra hard to come up with anything worth writing about. After all, our readers don’t click on these links just to read a financial article that starts out by saying, “Nothing to see here, folks, just move along.”

Read also: Wall Street: Experiencing seasonal affective disorder?

Although there’s always room for a July surprise, we don’t see anything like that anytime soon when it comes to taking decisive action in our meandering portfolios. So we continue to back and fill in small increments, hoping the tea leaves will provide a sensible reading.

Trading Diary

Our most interesting portfolio position to date remains our still-too-large speculative position in American iron ore giant Cliffs Industries (symbol: CLF). We’ve reduced this position incrementally over the past month, taking an unfortunate loss on the overpriced shares we dumped.

We never do this lightly, as a loss, once booked, is a real loss and no longer a paper loss. But with the market as wobbly as it is this summer, holding a too-large position in a speculative stock is not financially prudent, so we’ve gritted our teeth and pared the position back as the stock has attempted to recover in recent weeks.

We initially accumulated the larger position when we were convinced a massive short-squeeze was imminent in the stock. As of the most recent report on short positions in CLF shares – we get them every other week – an astounding 16 percent of CLF shares have been sold short. Such positions rarely exceed 2 percent of a company’s stock “float” or number of shares outstanding.

When you see such an enormous short position in a stock, you know, barring additional evidence, that only one of two things can be true:

  • The big boyz absolutely know there are reasons why this company’s shares will suffer a waterfall decline, perhaps to oblivion; or
  • The big boyz think they know this company’s shares will tank but are about to get so shocked and surprised that they’ll be forced to close out their short positions in an epic buying panic. That will send such once-hapless shares soaring, to the absolute delight of nervous bulls who’ve held onto their shares while the bears were killing their positions.

We’d bought into CLF in several tranches on their way down, assuming the latter scenario would occur. Certainly, any number of analysts agreed with us. But Mr. Market doesn’t always read our investing script.

By doing something incredibly prudent, CLF management chose to pay off a massive amount of corporate indebtedness in Q1 2017, wiping out what should have been a significantly profitable quarter and sending the quarter into the red by 0.11 cents per share.

Outraged, the bulls, who’d bid these shares up considerably in anticipation of that now vanished profit increase, dumped CLF shares like there was no tomorrow. Short sellers added to the fun by shorting even more, sending these shares down roughly 50 percent in what seemed like a matter of days. We kept buying on the way down, but we seriously underestimated how low this implosion would go.

Lately, CLF shares appear to have bottomed out at ~$5 per share. They’ve lately been in a strong uptrend, with reasonably robust Q2 earnings figures expected to be released on July 27. Charts have turned up, and things are looking much better for Cliffs.

But here’s an additional kicker: Some players, including Cliffs’ highly-effective CEO Lourenco Goncalves, think the Trump Administration is on the verge of imposing long-threatened anti-dumping tariffs on Chinese steel, which could very well send steel and iron ore mining shares (like Cliffs) soaring considerably above expectations.

But this announcement was first expected around June 30. What happened? Such decisive moves are politically fraught, and even some members of the Trump financial team still think that a move like this one is ill-advised. The current North Korean game of Russian Roulette Extortion may also figure into the decision, with foreign policy geeks wary of pissing off the Chinese right when we need them to behave, re: Kim Dung-il.

That’s why we pared back our position in CLF shares a bit more today and may write calls against our remaining holdings to get at least a little income back. We’ve learned never to place too much trust in “hope” when it comes to investment decisions.

The U.S. should certainly impose punitive tariffs against Chinese steel imports. But when in recent memory have you ever seen official Washington do anything that they should be doing as opposed to what’s expedient and politically correct, or at least helps kick another can down the road?

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