Trump’s Latest Tweet Means More Profits for This Industry

Last week, Trump had steel and aluminum company executives come to the White House.

During this meeting, he announced his intentions to put a 24% tariff on steel and a 10% tariff on all imported aluminum.

He promised protection “for a long time.”

Regular readers shouldn’t be surprised by the announcement.

Trump has wanted to introduce tariffs for a long time. Especially on steel. We first brought this to your attention last June during our road trip through the Rust Belt.

I said to look for steel companies to thrive in an “America First” environment. Last time the U.S. put a tariff on just a small section of the steel industry was in 2016. And steel stocks went on an epic bull run that year. AK Steel went from $2 to $11. Nucor doubled and Steel Dynamics nearly tripled.

We’re seeing U.S. steel companies thrive again. Here’s how four U.S. steel stocks have performed since I wrote about them on June 13…

With the exception of AK Steel (which is running out of cash), these companies have made large moves in just under nine months… And this is most likely just the beginning.

I expect we’ll see a short-term sell-off after the official news is announced. But over the next couple years, I expect steel stocks to become a lot more profitable.

Let me explain…

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What These Tariffs Mean for the Steel Industry

Longtime readers know we’re not fans of tariffs. We’re free trade proponents.

Trade has helped propel the world economy forward since the end of World War II. And the last major trade war, started by the Smoot-Hawley Tariff Act in 1930, led to the world economy shrinking 25%.

Trade allows countries to specialize their exports. This makes everyone more efficient and creates more goods and prosperity for everyone. (We’ll go into more detail in a future Daily.)

With these new tariffs, U.S. steel and aluminum producers will be able to charge more. And every other company that uses steel and aluminum will have to pay more.

That means the pipes in our houses… the frame our car is built on… and even the cans our beer comes in will get more expensive.

It’s estimated these tariffs will add $175 to the cost of a new car. That means I’ll either have to pay $175 more for my next car or the car company will make $175 less.

That might not sound like much, but last year in the U.S. there were 6.3 million cars sold. These tariffs mean either car companies make $1.1 billion less or consumers have that much less to spend.

And that’s only one industry…

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U.S. Steelmakers Will Be Able to Charge More…

…about 24% more across the board.

Steel companies don’t need to do anything different. They don’t need to become more efficient, they don’t need to make better steel. With these tariffs, they can just raise the prices on their product.

And that’s great for them. Which is why Nucor CEO John Ferriola went on Bloomberg to say the tariffs were justified. Ferriola could barely contain his excitement during the interview.

He went on to say that Nucor can now pay its 25,000 “teammates” more as his steel mills can run at full capacity… and bring more people into the industry as he plans to open a new mill in Missouri and another in Florida.

Ferriola went on to say that the cost of cars would only go up 0.5%. He said that’s no big deal.

We’ll leave that for the market to decide…

What to Do Now

As I said above, over the next couple years, this is great news for the four steel companies I mentioned above. And long-term investors should hang on. These companies can run a lot higher.

But if anyone wants to trade around the news, I expect there will be a slight pullback in the next month.

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There’s an old Wall Street adage—“buy the rumor, sell the news.” In this case, that means to buy steel stocks on the rumor of tariffs. Because by the time the tariffs are announced, the immediate gains of these tariffs are already priced in.

In the past month, these four steel companies have run up an average of 18%. They are all up well over 10%. Investors bought the rumor.

Once the news is announced, the immediate catalyst is gone. And the traders who rode these higher since early February will get out. This will force prices down in the short-term.

Short-term traders could make a little money on this move lower.

But as we start seeing earnings reports from these companies later in the year, it will be clear that these tariffs allowed them to be more profitable. And then we’ll see the run in steel stocks resume.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. In tomorrow’s Daily, I’ll take a big-picture look at what these tariffs mean for other U.S. companies going forward. As you’ll see, there’s always retaliation when these tariffs are announced.

We could be on the verge of a massive trade war—and there will be many big winners and losers as this theme plays out. I’ll tell you how to prepare tomorrow…

MAILBAG

Today, some thoughts from a happy Palm Beach Confidential subscriber…

Dear Teeka,

Just wanted to say thanks for all your hard work and that of your team, it’s appreciated.

I hope all the knob-head subscribers don’t get you down with all their reactionary complaining and trigger-happy email send buttons—some of us can take responsibility for our trading and trust that you have our best interests at heart.

Cheers!

– Michael

We always appreciate feedback, positive or negative, from our readers…

If you have a question, comment, suggestion, or even just some thoughts on the state of the markets, send it right here.