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The Case for Buying Into 2 Dying Industries

Coal

Most retail investors come to trading in their accounts by way of investing, and that can sometimes limit their view of what is an acceptable trade. There is a difference between the long-term prospects for a stock, commodity or even an industry, and its prospects for a short-term trade. You may believe, for example, that the march of history makes Tesla (TSLA)’s success and domination of the auto market extremely likely, but that doesn’t mean that you can’t short it occasionally when the market gets carried away, especially given the company’s past penchant for overpromising and underdelivering in the short term. Similarly, just because you believe that the fortunes of an industry are headed down, that doesn’t mean that you should ignore the potential for short-term gains.

That is the case right now in coal and steel. Let’s be clear, as I have said many times here in the past, I believe the coal business is going the way of buggy-whip manufacturing. It is a fuel that has past its prime, and is being replaced globally by cheaper, cleaner fuels. Steel’s future is somewhat less bleak, but U.S. companies face a huge uphill battle to compete with foreign producers who work with much lower labor costs and fewer regulations. From a long-term perspective I wouldn’t buy U.S. stocks in either industry with your money, let alone my own. That doesn’t mean, however, that stocks in those industries won’t occasionally rally in response to news or other short-term stimuli, and those rallies can represent good opportunities for disciplined traders.

One of those rallies could easily come as soon as next week, and positioning for it now offers the prospect of a decent profit, with relatively low risk. The reason, as with seemingly everything these days, is Donald Trump. The President left today for an eleven-day tour of Asia. The media focus regarding the tour has understandably centered on the implications for the situation with North Korea, but, assuming that nobody actually wants a potentially nuclear war, it is far more likely that there will be other news from the trip, and in particular from the scheduled talks with Chinese President Xi Jinping.

Given the domestic situation and the policy focus of each man, it would come as no surprise at all if a trade deal of some kind was announced. You can assign whatever reason you like based on your own politics, but the evidence so far is that President Trump is right when he says that he has a truly special relationship with Xi, and that relationship makes it far more likely that the experienced negotiator Trump will get at least some of what he wants out of the meeting. That could involve some concessions on North Korea, but a trade deal, particularly on coal and/or steel, would probably provide the President with what he cares about most of all, a boost to his base.

Candidate Trump spoke many times of revitalizing both coal and steel in America, a task that has so far proved harder to do than to talk about. Given that the U.S. has abandoned the Trans-Pacific Partnership (TPP), a unilateral deal of some sort with China is both possible and necessary, and this week would be the logical time to announce one. Obviously, anything like that could boost the short-term prospects of U.S. coal and steel producers, and result in a strong rally in their stocks.

The cynical or astute among you will have noticed that the above rationale for buying into two dying industries contains a lot of suppositions and, quite frankly, guesses. That is true, but that is the nature of attempting a trade in front of an event. If there is any chance of a big upside to a trade, however, what matters is the downside risk, and in this case, it is not too bad. We will know if a deal is announced within a few days, and if it is not, simply cut the positions. That may result in a small loss, but could also realize a small profit; either way it is highly unlikely to be an account-buster.

So, while I believe that both coal and steel are long-term losers, I will be going into next week with long positions in stocks in both industries. That may seem crazy to some people, but to me, as somebody who learned about markets in a dealing room, it makes perfect sense.




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