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Stephen Weiss: Why Steel Stocks Could Drop Like an Anvil

The venerable old-line symbol of American industry, US Steel , reported earnings yesterday and it was déjà vu all over again.

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Tom Mihalek | AFP | Getty Images

It brought me back to a time not that long ago when there was no rising tide of liquidity lifting all stocks, regardless of fundamentals or lack thereof. Now, in full disclosure I am short X, and AKS – well one out of two worked yesterday – but the reasons are not sentimental, not a longing for the bad old days from 1997-2004 when 44 steel companies filed for bankruptcy protection.

When commodity cycles fall apart it is typically because either supply saturates the market or demand atrophies. But when either of these two things occurs, price usually declines. So here’s the rub:

When US Steel reported, their sales were up by 13% attributed to 6% higher volumes and 7% higher prices yet they still lost money, $1.16/share on an operating basis despite seemingly every industrial company coining it. X also lost money each of their last two years and despite management stating they will be solidly profitable in 2011, I’m skeptical because…well, here it is in X’s own words from their 1st quarter earnings release:

“While recent order rates have moderated, we remain cautiously optimistic that improving global economic conditions will continue, further stimulating end user demand.”…“Our raw steel capability utilization rate is expected to decrease from the first quarter of 2011 due to reduced spot market demand caused by increased production across Europe and the rising threat of imports. Strength of underlying demand, as well as low to moderate inventory levels across the supply chain, should limit the duration of this current cycle. Based on the current low level of spot customer orders…”

And did I mention that China’s steel making capacity continues to increase and a number of new plants are under construction? All of the above issues also apply to AKS. I’m staying short. Everything old is new again.


* Stephen Weiss is partner at Short Hills Capital and author of The Billion Dollar Mistake, Learning the Art of Investing Through the Missteps of Legendary Investors.

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Trader disclosure: On April 27, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Weiss owns (VZ); Weiss owns (QCOM); Weiss owns (NAV); Weiss owns (TCK); Weiss owns (UUP); Weiss owns (DVN); Weiss owns (COP); Weiss owns (BTU); Weiss owns (TBT); Weiss owns (NIHD); Weiss owns (MSFT); Weiss is short (X); Weiss is short (AKS); Karabell owns (AAPL); Karabell owns (CSCO); Karabell owns (GE); Karabell owns (GOOG); Karabell owns (IBM); Finerman and Finerman's firm own (AAPL); Finerman and Finerman's firm own (BP); Finerman owns (C); Finerman and Finerman's firm own (CVS); Finerman's firm owns (IBM); Finerman's firm owns (JPM) and (JPM) leaps; Finerman owns (JPM); Finerman and Finerman's firm own (MSFT); Finerman's firm owns (TGT); Finerman owns (UNG); Finerman owns (USO); Finerman's firm is short (IWM), (MDY), (SPY); Finerman's firm is long S&P 500 puts; Finerman's firm is long Russell 2000 puts; Grasso owns (AMD); Grasso owns (ASTM); Grasso owns (BA); Grasso owns (BAC); Grasso owns (C); Grasso owns (CSCO); Grasso owns (JPM); Grasso owns (FITB); Grasso owns (LIT); Grasso owns (LPX); Grasso owns (MHY); Grasso owns (NDAQ); Grasso owns (PFE); Grasso owns (PRST)

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