Trading Diary: Cliffs Industries’ magical disappearing act

Cliffs Industries (CLF) is the Achilles heel in our portfolios right now, with Ciena (CIEN), On Semiconductor (ON) not far behind.

Guided by the Roman poet Virgil, Dante is about to enter the bowels of Hell. Who will he find there? We already know: Bankers, crony capitalists and the amoral politicians they own and operate. Has anything changed? (Doré, Plate 8, Canto III of the Inferno, image via Wikipedia)

WASHINGTON, April 19, 2017 – Part of posting our ongoing trading diary most trading days of the week is a bit like posting a blog. Sometimes it’s fun, sometimes it’s not, sometimes it’s loaded with information and cheer and sometimes it’s frankly depressing.

This is one of those depressing days.

Trading Diary:

We’ve done quite well thus far in 2017, meeting and beating our ongoing objectives for capital gains and income. But occasionally, we blunder into something that seems a bit like the message posted at the entrance to Dante’s Hell:


That’s certainly been the case with three of our relatively recent investments, namely Cleveland-based iron ore producer Cliffs Industries (symbol: CLF), Maryland-based network architecture and services company Ciena (CIEN) and Arizona-based semiconductor and chip manufacturer On Semiconductor (ON).

After several dismal years, during which the Obama Administration dealt a death blow to its vast coal holdings, Cliffs Industries (formerly Cleveland Cliffs) managed to sell those holdings—for a colossal loss, of course—getting the company back to its original core business, which involves mining iron ore in Minnesota, the Upper Peninsula of Michigan and elsewhere, “pre-refining” a great deal of its Minnesota product into round, concentrated iron pellets known as taconite.

After its near death experience with its once highly lucrative coal mining holdings, the company has finally begun to recover. The recent robust pricing for iron ore—itself the victim of a prolonged slump due to Chinese overproduction of and stockpiling of finished steel—has caused a major rebound in CLF shares, which actually soared after their most recent earnings report far exceeded analysts’ predictions.

We bought in after an expected selloff in the shares. Problem is, after rebounding briefly, CLF has been slowly, relentlessly sinking into the primeval much. Brief rallies in the stock price are robustly sold off, usually a day later, and the stock hasn’t been able to find any traction since, say, February 2017. We figured we’d average down and our position got too big, even as the stock continued to sink.

CLF has had a large short position, but that’s shrunk slightly of late. Nonetheless, someone’s still selling, meaning they know something we don’t know, or the short sellers aren’t yet ready to close out their large short positions, which they do, of course, by buying the stock back at a lower price than they sold it for.

It’s a reverse of normal procedure that new investors generally can’t comprehend. But such transactions often supply serious buying power if and when a company’s situation changes for the better. That seemed to be what was happening for Cliffs in February, but it looks pretty rotten for now.

Because of our overbalance in this position, we’ve defensively sold off small chunks of it for a loss. But this is a game that can only go on so long, leading us to regret, at least for now, that we piled up so much CLF stock to begin with. But hey, it happens. Even the Prudent Man can occasionally become the victim of irrational exuberance.

To a lesser extent, we’ve experiencing the same issues with Ciena and On Semi. Both companies are reasonably well rated by many analysts, even to this day. But again since around late February-early March, many tech companies, particularly those involved at least in part in manufacturing, like CIEN and ON, have been taking a hit as market uncertainty leads investors to lower risk levels.

In addition, you can’t get away from the fact that if everything goes haywire, re: the North Korean situation, tech supply chains, heavily indebted to manufacturers located in East Asia, specifically South Korea and Taiwan as well as the People’s Republic of China, could be in mortal jeopardy, at least in the short term if the U.S. and North Korea come to physical blows over the North’s mouthy aggression and rent-seeking.

It’s perhaps this deep seated but rarely voiced fear that has kept the tech manufacturing sector on the sell list for many investors, no matter how bright the theoretical prospect might be.

The upshot, for us, is that our smaller-than-Cliffs Industries positions in CIEN and ON are also under pressure, and we’re watching these with frustration and not a little trepidation. We’ll keep you posted on all three of these stocks on our Major Worries list.

On the other hand, since we hold a widely diversified portfolio, other issues have been behaving much better for us, particularly those in the real estate sector and our larger than usual holdings of preferred stocks. So our portfolios on the whole are stable to up.

Unfortunately for this prudent trader’s psyche, we prefer for portfolios to be massively profitable and not merely stable. Yet this latter situation is the one we’re finding ourselves in right now, and we’re looking for creative ways to make more money faster even when the Trump Rally seems to have gone into hibernation.

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