Commodities took a bit of a breather yesterday, however we continue to see bright spots within various sectors and that we find bullish. Even if we have a pullback in the general commodity space, it shall remain a stock pickers' market and one can make very good returns in situations such as those. We think that good management teams run many of the companies we are invested in and that shall insulate us from many of the follies competitors may make if tougher times do arrive … which we do not foresee at this time, simply a pullback as the market consolidates.
U.S. Steel (X) saw shares fall $1.58 (6.94%) to close at $21.19/share yesterday as Dahlman Rose lowered the shares from a Buy to a Hold. Shares finished near the lows for the day, and with the macroeconomic news and common belief now that everyone is going to fall off of the fiscal cliff it is easy to go bearish now, but that probably is not the correct way to go. China is scaring everyone that they will have a hard landing, but if Europe can solve their problems that will solve many more problems for China and should answer all questions regarding whether China will have a hard or soft landing. We think that the U.S. will carry the world forward as it has many times before during rough economic times and that buying on the dips of those who make the goods which build the economy is the way to go.
Which brings us to Vale (VALE) and the question of why this has been such a laggard over the past few months. Yesterday we heard a talking head on one of the financial news networks discussing how the shares were going to go to the low teens which we found as a bold statement. We see a few things working out for the company moving forward, most importantly being the fact that the industry is shying away from the multi-billion dollar investments of years past and instead looking to wring efficiencies out of their current producing mines. Should companies begin to mothball or delay plans to develop new iron ore mines we think that the outlook gets much better for the company. One thing to watch however is the dividend yield which is approaching that level where it becomes less of a good thing and more of a topic of chatter regarding whether the company will be able to maintain it. For this one must remember that the company is obligated under Brazilian law to pay out a portion of earnings for the dividend and the rest comes from cash flow and their cash hoard - so watch those three areas.
To bring this all together we can talk about the coal miners this morning. Many are worried about the stagnation here, but we look at it as a consolidation. Shares still move between 3-10% on what seems a daily basis, but for the most part we see many in the industry hanging around their current levels which they achieved on the rally after the most recent lows. We are following Alpha Natural Resources (ANR), Arch Coal (ACI) and Peabody Energy (BTU) closely here although as we have previously stated we will stick to buying only the blue chips in the industry when we do initiate buys. To update readers on our thinking, we think next quarter shall be weak too which is not news as many of the companies indicated this much during their conference calls but much of that shall be priced in. If we can continue to consolidate here and build a base and maintain that base moving into next earnings season then we think that is when one should initiate positions assuming economic growth and world economies have not fallen off that fiscal cliff everyone is discussing these days.