Trading Diary: Defensive action during bull move in stocks
WASHINGTON, April 24, 2017 – Short column today, as we’ve covered most of Monday’s socio-political, market-moving turf in a pair of previous columns. Although most issues, including our own, are currently ahead, our holdings in utilities, financials and preferred stocks are taking an expected, although moderate hit.
Word on the Street, at least today, is dump all your safe issues and buy the crazy stuff like crazy. This market, however, can change on a dime, so we’ve only jettisoned stocks today that have been behaving badly of late.
Among those stocks behaving badly in our portfolio were On Semiconductor (symbol: ON) and Akron, Ohio-based electric utility giant, First Energy (FE). The former, although still highly rated by most firms, took a pasting earlier this month when out of the blue, Credit Suisse analysts gave the stock a big thumbs-down saying it had already peaked. As a consequence, they put their dreaded “SELL” warning on the shares, which ignored all the other positive analysis and proceeded to tank badly.
ON shares picked up rather nicely throughout most of last week, but drifted on Friday and were hammered again today. This was a bit of a surprise to us on a bullish day like today. But it indicated that the relentless selling in ON—right or wrong—was about to continue, so we reluctantly pulled the plug on this one for a loss.
The modest hit taken by First Energy (FE), however, was more potentially ominous long term, as it was (and is) based on what analysts are viewing as an increasing likelihood that this giant Midwest and East Coast electric utility may have to file for a protective bankruptcy at some point, perhaps in the near future.
The reason? Short answer: Barack Obama’s savage war on coal. A few of First Energy’s key unregulated power plants ran on coal. Upon reading the not-so-fine print in the savage anti-coal rules promulgated by Obama’s out-of-control EPA, FE concluded it would have to shutter its questionable coal plants rather than spend millions of dollars to upgrade them to impossible EPA emissions standards.
Shutter the plants they did, thus violating long-term coal haulage contracts with several major suppliers and long-haul railroads. First Energy chose to view the EPA regulations similar to an Act of God—which in a way they were and are—invoking a clause in their contracts that allowed them to be terminated early, at least in the company’s view.
Now they’re under an onslaught of lawsuits filed by the affected railroads as well as new suits filed by affected coal companies. There’s likely to be blame spread around for this mess. But it puts FE’s financials potentially at risk, not at the moment but at some point in the future.
We suspect that this issue will likely be resolved eventually in a way that will indeed hurt FE but not force it into a damaging bankruptcy. On the other hand, had not Obama’s EPA crusaders gotten completely out of hand imposing asinine air pollution standards over the past 8 years, none of this would have transpired.
But, under the circumstances, we dumped our small position in FE for a loss rather than hanging around watching these shares languish until… whenever. Too bad, as the company pays a swell dividend. But when a company hits a government imposed rock it can’t navigate around, it’s best to head for something else until and unless the adverse situation resolves. In the case of First Energy, however, that could take years, so we’re gone, at least for now.
Better news has been happening with our other badly-damaged position, this one in iron ore producer Cliffs Industries (CLF). Shares continue to improve from their recent massive hit, so we continue to hold.
On the other hand, our shares in B&G Foods (BGS), after rising back to positive territory last week, have suddenly taken another big hit today, getting us back into red ink territory. No news to account for this move, at least yet. So once again, we watch and wait.