International Trade and the Section 232 Investigation in the Steel Industry
(The following is part of the intro to the January 30, 2018 issue of Cabot Undervalued Stocks Advisor.)
The U.S. Commerce Dept. and the Office of the U.S. Trade Representative continue to examine most existing trade agreements and long-standing trade abuses with the goal of remedying trade cheating that’s been harmful to U.S. industry. It’s fair to say that past presidential administrations did not focus on fixing trade problems, and that’s probably why myriad changes in trade policy during the past year have surprised investors and spooked both voters and career politicians.
The only reason that changes in trade policy haven’t surprised me is that I spent several recent years working on trade problems in Washington D.C. Here’s what I learned: almost nothing that you hear about trade from the mainstream media is true. The funny thing is, you already know that popular ideas pertaining to your personal areas of expertise are sadly misinformed, from everything to cholesterol and vaccines to the relationship between birth control pills, abortion and breast cancer. Well, it isn’t any different with stocks or international trade. When you want truth, you’ve got to turn off the television and instead dig deeply into industry-specific resources.
To mention just a few changes in trade policy in recent months, we’ve seen new quotas and/or tariffs on certain sources of foreign softwood lumber, residential washers and solar panels—all with the approval of the U.S. International Trade Commission; ongoing NAFTA renegotiation; and the complete destruction of the Trans-Pacific Partnership (TPP) trade agreement, which cannot move forward without U.S. participation. As a reminder, the TPP was not entirely about international trade. The facet of the TPP that doomed its approval among Congressional Republicans was that it obligated the U.S. to future decisions made by a new global commission that would outrank decisions made by the U.S. Congress. In short, it gave away U.S. sovereignty. You didn’t hear that on the nightly news, did you? I rest my case.
The sixth round of NAFTA negotiations was completed in Montreal yesterday, with the seventh round scheduled to begin in Mexico City on February 26. While many chapters of the updated document have been agreed upon or almost completed, key sticking points remain in the areas of automobile rules of origin and investor dispute settlement. I mention this because while hundreds of government and industry experts and negotiators from the U.S., Mexico and Canada are working diligently to update NAFTA in a more fair and harmonious manner, it’s not uncommon to hear news media review the entire topic in one sarcastic sentence that makes the very existence of NAFTA sound whimsically contingent upon the supposed paranoia of the current U.S. President.
Honestly, I continue to be amazed at the sheer stupidity of the content of television broadcasts, many of which I was unfortunately exposed to in January while spending innumerable hours in hospital rooms, airports and hotel breakfast areas. Oh, and one more comment on NAFTA: there is no talk of “ending NAFTA†in the trade journals. Considering how often NAFTA’s demise is insinuated by non-trade professionals who have a microphone shoved in their faces, it’s important to understand that trade negotiators do not take their cues from media sound bites.
In keeping with the U.S. government’s new focus on remedying trade problems, we might see similar solutions implemented in the steel and aluminum industries via their almost-completed Section 232 investigations. The Commerce Dept. submitted its findings on the national security implications of steel imports to the White House on January 11, in keeping with the Trade Expansion Act of 1962. A response, which may include trade remedies, is due by mid-April.
What does all this mean for the steel stocks within the Cabot Undervalued Stocks Advisor portfolios? No doubt steel industry stocks will have a strong reaction to whatever decision is ultimately made. Rising earnings estimates and price action among our portfolio's steel stocks indicate that analysts and investors believe trade remedies will be implemented that favor the U.S. steel industry. However, it’s always possible that the President will decide to make little or no change to existing trade policy, which will almost certainly cause steel share prices to decline.
My suggestion is that you hold your steel stocks, consider buying more if a brief pullback (or a broad stock market correction) comes along, use stop-loss orders to protect capital gains, and consider using options for risk management and/or speculation. I expect steel stocks to keep moving, in one direction or the other, with a personal bias toward an upward direction. After all, even if no trade remedies are implemented, the growing global economy has ushered in a rising demand for steel.
Send questions and comments to crista@cabotwealth.com.