Steel stocks get red hot
Strong data out of China, confirming a global economic reacceleration, push metal stocks out of a long consolidation.
Earlier this week, I lamented that while we're looking at the best rebound in the economy since 2011, Wall Street is bailing out of stocks on fears of the Federal Reserve's plans to "taper" its stimulus next month. I pulled back, and recommended investors do the same.
Now, while the Dow continues to move lower, there are signs that parts of the market are waking up to the turn underway in manufacturing activity -- here at home, in Europe, and in Asia too -- and are moving into the stocks that will benefit most. Stocks like steelmakers, which have been beaten down and forgotten since early 2011.
Overnight, China reported that industrial production in July increased nearly 10% over the last year -- above expectations of a 9% jump. Motor vehicle production increased 15.4% vs. 13.5% in June. Machinery was up 10.6% vs. 8.1% while cement output jumped 9.1% vs. 8.8% in June.
Anecdotal evidence also suggests a rebound is underway. Look at electricity output, as highlighted in the chart above from Capital Economics.
And all of this comes in the context of a global resurgence, especially in Europe where countries like Spain are exiting recession as shown in the chart above of Spain's Manufacturing PMI measure.
In response, while maintaining a more neutral portfolio positioning, I'm adding back steel sector exposure to my Edge Letter Sample Portfolio via the Market Vectors Steel ETF (SLX) as well as AKSteel (AKS) and Mechel Steel (MTL). I sold Cliffs Natural Resources (CLF) earlier in the week, after adding it in late July, for an 8% gain. I'm also selling the UltraShort Emerging Markets (EEV).
All this said, the major U.S. averages are still looking weak. So, for conservative investors, maintain a cautious footing while, perhaps, nibbling a little on these steel names.
Disclosure: Anthony has recommended SLX, MTL, and AKS to his clients.
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While steel stocks may seem appealing, how long does that wave last? The last 4 years, with recession lingering into a recovery, the steel recycle business thrived. China has bought our old U.S. premium junk steel at relatively cheap prices in consideration of the price per foot verses the cash in per pound. The overnight sensation of scrapers, because of the uptick in recycle steel per ton, has helped many individuals find a source of income( including 2 loads myself @ $150 a ton) to make ends meet. Even the criminal activity of grabbing un-tied down bundles of copper, unattended scrap iron on rural properties, and various other thief's have skyrocketed to new levels.
From this angle, what's the bottom line, or in this case the Hard Line of steel. Researching China's output, verses demand of their steel, seems to point in the direction of next years pricing of recycled steel and imported steel to start to drop. China has bought so much imported salvage steel that this price drop should rattle the metals market in the near future. If you have some scrap the time to sell it off is NOW!
You are too late! Steel prices are headed back down again. The economy although improving is not strong enough to keep the high prices afloat. The mills will do anything to strengthen their position but it rarely lasts for long. Look before you leap!
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