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Robert Edwards
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Contrarian daytrading technician who specializes in micro scalping of stocks (using 1 minute bar charts), swing trading of stocks overnight, weekly stock option premium selling, pre-market and post-market psuedo market maker and stealth trading activity, and selling commodity option strangles... More
  • The Lower Cliffs Natural Resources Inc. (CLF) Goes Now, The Higher It Goes Later! 2 comments
    Jun 1, 2013 1:34 PM | about stocks: CLF

    On Friday, May 31, 2013, Cliffs Natural Resources (NYSE:CLF) filled the gap above $18.10 and closed lower at $18.04, the very low of the day. This is the gap that was made when CLF popped after recent earnings that were much better than expected. At first blush you probably would think this is very bearish news and that it means we go much lower, taking out recent lows at $16.74. However, I am not a bit concerned. In fact, it is ok that the gap filled as now there is no unfinished business like a gap laying around that is screaming to be filled. Now, CLF can rally unabated. And rally folks, it will. Much sooner than most traders believe!

    I have now turned bullish again on this stock!

    This stock has faced relentless selling. The short interest is through the roof. In the midst of such bearishness, how can I be bullish you ask. Well, you see, I am a contrarian. Also, I don't look at the present, I look into the future. I ask myself if this current bearishness will change. What catalyst will bring about that change. I think I have located the catalyst that will prove all these prognosticators calling for lower prices for iron ore in 2014, all wrong.

    More Of The Same From Bearish Analysts Piling On!

    I didn't feel so bad about the big bad selloff down to $18.04 in CLF on Friday, once I read how all the iron ore producers were hit hard this week. And why did they fall again on Friday? Well, if you are at seeking alpha, punch in CLF and then select "Market Currents" and you will read this. Iron ore prices suffered their worst week in a year, and Barclays believes the drop likely will continue as significant new capacity enters the market between now and 2014. But wait a second. This is not new news at all. This so called "news" about 2014 bringing lower prices has been broadcast by one analyst after another for several months and each time a different analyst speaks, the price of the stock falls like it was new news, catching everyone off guard. This news has already been factored into the stock dozens of times. At some point the stock price fully reflects all the bearishness. I believe CLF fully reflected all current and future bad news when it fell to the price of $20 and no trading under the price of $20 is justified. So the next time another analyst comes out and tells you iron ore prices will be lower in 2014, instead of selling like the lemmings, you might want to use it as a reason to buy!

    Iron Ore Inventories Are At Extreme Lows

    Here is an article you can click on that will explain how in February of this year the price of iron ore was at extreme lows, while inventories were at extreme lows. Now, wait a second. This is not right. Usually prices are at lows when inventories are high. So how can this be? Well, you must not know about the Chinese. They are masters at controlling supply and demand of anything they purchase to get the price down occasionally in order to restock at the lowest possible prices. What they do is, they hold off buying something they want like pork lets say. With them out of the market, the price of pork drifts lower as China is now the major buyer of pork in the world, and their buying is the major driver of price. So, the mere fact that China waits a little longer than usual to buy, starts to worry the pork producers and processors and they accept lower and lower prices while waiting for China to come back in and buy. How can China hold out their purchases to get the price to fall? Well, they stockpile pork when the prices are low. Then when the prices rise to a point they find them not so attractive, they draw down their inventories as they back away from the market. Not surprisingly, analysts all rush in and tell everyone how Chinese demand has decreased and as the price of pork falls, the analysts predict a more dire future and tell producers they better sell now because prices will go nowhere but lower in the future. The media is a propaganda tool to get prices lower and lower, which hurts the U.S. producers and processors but helps the Chinese. The media is a great tool of price destruction that helps make lower and lower prices a self-fulfilling prophecy. With demand from China actually steady and no change, because Chinese knows how to stockpile in approved warehouses (where everyone knows how much they might have) and unapproved warehouses (no one has a clue how much they have), then they can get the price to fluctuate both up and down. It is during the time prices are low that they do a majority of their purchases and lock in the low prices as far into the future as they can. The Chinese also usually refuse to sign long-term contracts as they want to be able to buy at the "spot" price. The spot price is preferred because the Chinese know how to get the spot prices back down after prices rise.

    When Stockpiles Are Used Up, Iron Ore Prices Will Bottom

    Now, how does this relate to iron ore? Well, the Chinese bought extra iron ore and stockpiled it. They have backed away from the high prices hit in 2012 and are now relying heavily on their stockpiles. They continue to draw down those stockpiles. Backing away from making purchases has dropped the cash prices for iron ore 10% just this week. The plan is working. I read somewhere that this could change in 90 days though when the Chinese will have used up their stockpiles and they will have to return to the market for more iron ore. If that is true, the price will bottom shortly and then start going up a bit to allow the Chinese to not only meet their current needs but allow them to stockpile again at rock bottom prices. I believe that replenishing stockpiles is the catalyst to a bottom in iron ore prices and the bottom in the price of CLF.

    Prices in 2014 Will Be Higher, Not Lower As Predicted

    They say the cure for high prices is higher prices. When there is a shortage of something and demand pushes prices higher and higher eventually the price hits a level where marginal buyers refuse to buy any more. Supply and demand returns to a balance and the free market naturally rations out supply to those who really need the product. Well, the cure for low prices is lower prices. As demand drops, marginal producers will stop producing which eliminates the excess supply and prices stabilize. Also, large producers aren't stupid either. They stockpile what they can as they don't want to sell their product at a price below what it takes to produce. No one is benefited from selling at a loss.

    You see this occur in all kinds of markets. Natural gas prices plummeted in 2012 with a glut of new supply thanks to fracking. Predictions abounded how they would run out of storage space during the fall "shoulder season" and the prices went below $2 MMBtu. Prices were supposed to be even lower in 2013 than in 2012. Analysts only reflect the present that they extrapolate indefinitely into the future. But a funny thing happened. The supply glut never quite materialized as the supply slowed down while the demand picked up to take advantage of all that cheap natural gas. In 2013, prices are now above $4 MMBtu where they started.

    Either the Stock Market Crashes Or Iron Ore Prices Rebound in 2014

    I naively believe that low iron ore prices of 2013 will cause supply to decrease and the low prices will increase demand so that in 2014, iron ore prices are higher and not lower as all the doomsday prognosticators insist will occur. Either the stock market will crash or iron ore prices are going to rise. There is a major disconnect here that must be resolved. The stock market is telling us happy times are here, and we are in a period of prosperity, but iron ore prices and bearish sentiment says we are in the midst of a deep recession or depression. One of these is wrong. Copper prices remain relatively high, which tells me the economy is not heading for disaster.

    Remember 2008 when auto sales were dropping causing the need for "cash for clunkers". Today auto sales are stronger than ever. Another example is housing. Since the housing market collapse, the number of houses on the market are slowly decreasing as we are not building enough new houses to replace those being destroyed. Eventually even the housing market will turn around as a result and at some point the price of housing will hit a new all time high, due to inflation. China has a real estate and housing bubble developing with a lot of houses and buildings sitting empty. The lull in building will eventually cause pent-up demand that will cause a big surge in building again and steel prices will shoot through the roof. I believe 2013 is the low in steel prices, 2014 prices climb to 2012 highs and 2015 we move to all time high steel prices as Europe starts working out of recession.

    In 2008, Freeport McMoran Copper & Gold (NYSE:FCX) traded down to $15.75 which translates to a split adjusted price of $7.87, compared to today's price range of $30 to $33. FCX came roaring back and I am convinced that even if CLF trades down to $12, $10, or even $6, the lower it goes the bigger the rebound. If we hold support around $17, then I believe we rally to at least $38 in the next 12 months, more than a double. If we fall to $12, then I see $48 to $60 in our future. If we fall below $10, then I see CLF going to $90 or higher. Think of it as a coiled spring. The more the spring is compressed, the greater the rebound when the pressure is relieved. I don't know where the bottom is. I just know that the lower it goes now, the higher it goes later. They are treating CLF as if we are in the midst of the great recession of 2008, which we are not. Any small bit of positive news or just less negative news and this stock could shoot up like a rocket, thanks to all the short interest.

    Recently gold mining stocks were extremely depressed to 2008 prices while the gold metal remains much higher than 2008 prices. The last few days, almost overnight, the sentiment has improved and now everyone is starting to jump on board the GDX train and turning much more constructive. The same will occur with the iron ore and coal stocks as sentiment extremes cannot last forever and we have passed the point of ridiculous.

    Coal Prices Will Rebound As Well

    I need to add a quick comment on coal prices. With the rebound in natural gas prices, one would expect some switching by utilities back to coal, but so far coal shipments remain depressed. This lag has also depressed the price of CLF because the company has metallurgical coal in addition to the iron ore mines. When liquefied natural gas (NYSEMKT:LNG) starts shipping out of this country in 2015, natural gas prices will get a big lift, which will cause coal prices to rise substantially. If coal prices rebound a bit, this stock will trade at $30 just based on the coal operations. Add if it trades another $30 dollars based on the iron ore operations, it is not hard to see a stock price of $60 by 2015, it not sooner.

    Conclusion

    It is no time to panic. We are surely very close to a bottom, as the bearish sentiment is so thick, you can cut it with a knife. Markets top when they run out of buyers. When every who wanted to buy has done so, prices plummet. Prices bottom when we run out of sellers. With the recent price action, the bottom can't be far off. There is something that I call the "puke factor" or "pf". It is very high right now. It is that feeling you get in the pit of your stomach when you are long and wrong. You are ready to puke and get out of the stock at any price. Right now the urge for diehard bulls to regurgitate their stocks is extremely strong. So, as I enjoy my weekend, I will take solace in the fact that the upward price movement potential far exceeds the downward movement potential. CLF will not go to zero and no one is predicting a move as low as even $6 under any scenario, since book value is $32.49 per share. But if it could drop to $6 that is a $12 drop from the current $18 price. A move to $60 is a $42 increase from $18 so there is 3 1/2 times more upward potential vs. downward potential. Personally I will be shocked if we ever trade as low as $12 with $15 the most likely worst case price scenario. If $15 is the bottom, that is $42 of gain vs. a $3 risk to the downside. I will take those odds any day!

    Disclosure: I am long CLF.

    Stocks: CLF
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Comments (2)
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  • Mktneutralhedger
    , contributor
    Comments (1361) | Send Message
     
    Being a little more conservative I think VALE is giving the same exposure with little less volatility. Don't you think?
    I am checking spreads of CLF corporates. Quite large. I will use the panic around Fed tapering to grab some.
    5 Jun 2013, 06:42 AM Reply Like
  • Robert Edwards
    , contributor
    Comments (584) | Send Message
     
    Author’s reply » If you go to yahoo.com and click on finance, you can put up a chart of VALE against CLF and look at different time frames. Vale did not fall as much as CLF did early on because it is a safer play. However, as CLF bottomed just under 17, and is now holding support above 18, VALE is making up for lost time and falling to new lows. CLF hit bottom first and should move out of the bottom first as well. I believe CLF is the best leveraged play and under 20, there is not that much risk based on the book value of CLF. Also, CLF has greater volatility both up and down so you get more pop for your money invested. Buy small at low prices and expect to buy back again lower, while taking partial profits on all rallies. I still prefer CLF to VALE based on a better looking chart formation over the last 60 days, but both should bottom shortly. Iron ore prices should bottom at 100 and move back to 130 to 140 by the end of the year and should approach 150 in 2014, and by the fall these stocks should begin to be one of the best performers on the board.
    5 Jun 2013, 04:19 PM Reply Like
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