Dec. 15–Not so long ago, steelmakers were serving up apocalyptic visions of what would happen if the import penalties were lifted too soon.
Their credibility has been called into question by a stock market that’s craving steel stocks. Analysts say two phenomena that have had a more profound influence on the industry are also fueling steel stocks: the debilitated dollar and China’s booming economy.
The weaker U.S. currency makes imports more expensive while China’s demand exerts upward pressure on steel prices. Compliment the trends with the reenergized U.S. economy and you can understand why investors have been bidding up steel stocks.
One of the biggest beneficiaries has been International Steel Group [ticker: ISG]. The Cleveland company’s ability to resurrect bankruptcy producers such at LTV and Bethlehem Steel is surpassed only by its impeccable timing in offering its shares to the public.
ISG originally intended to sell 15 million shares for $22 to $24 per share. Instead, the company issued 16.5 million shares at $28 after the market closed Thursday. On Friday, their first day of trading, ISG surged as high $35.75 before closing at $35.20, a 26 premium to the IPO price.
When was the last time you heard “steel,” “IPO” and “successful” in the same sentence?
Riding ISG’s coattails is Cleveland-Cliffs [CLF], a Cleveland iron ore producer which owns 5 million ISG shares. Cliffs shares have advanced 140 percent since ISG notified the Securities and exchange Commission of the offering July 31, closing Friday at $47.56. Based on ISG’s closing price, Cliffs’ stake in the steelmaker is worth about $176 million, or $17 for each Cliffs share outstanding.
U.S. Steel [X] shares are at their highest levels in nearly four years, closing at $30.42 Friday. They are up 131 percent this year vs. a 22 percent increase in the Standard & Poor’s 500.
Another high flyer is specialty metals producer Allegheny Technology [ATI], which jumped 19 percent Thursday on a buy recommendation from Merrill Lynch. They closed Friday at $10.80, up 43 percent for the year.
“It’s been a long time coming,” Charles Bradford of Bradford Research says of overheated steel stocks.
The question is, just how long will the good times roll?
The Dallas, Texas investment company that sponsors a mutual fund loaded with sin stocks is in trouble with the SEC.
The agency has lodged a civil fraud complaint against Mutuals.com Inc., Chief Executive Officer Richard Sapio, President Eric McDonald and others connected with the firm. The agency alleges they made “thousands of market timing and late trades in hundreds of mutual funds” over the last two years.
Market timers take advantage of differences between the price of fund shares and the value of the stocks in the funds. While not illegal, the trading hurts investors by letting timers purchase funds at artificially low prices and unload them at artificially high prices. Their frequent trading also drives up a fund’s transaction costs.
Late trading is illegal. It permits investors who place orders after the market’s 4 p.m. close to purchase funds at that day’s closing price instead of the following day’s. In effect, late traders make bets on yesterday’s horse race.
McDonald, 35, is co-manager of Vice Fund [VICEX], which was featured in this space July 21. According to the prospectus, the fund “deliberately intends to invest in products often considered socially ‘irresponsible’ ” such as casinos, tobacco, alcohol and weapons. It’s the contrarian cousin to the gaggle of “socially responsible” funds that avoid sin stocks.
Co-manager Dan Ahrens says the SEC’s allegations are without merit and have no impact on the Vice Fund or other funds Mutuals.com sponsors.
But in these suspicious times, investors will be interested to know what the SEC has to say about how McDonald et al helped hedge funds and institutional clients purchase shares of other funds.
According to the SEC complaint, Mutuals.com received hundreds of warnings from mutual fund clearing agencies about market timing. Many of the funds restricted or prohibited the firm and its clients from trading in their shares. The SEC alleges Mutuals.com got around the restrictions a number of ways, including changing account numbers.
In May 2002, Pershing, a firm Mutuals.com used to execute fund trades, told Sapio what it thought he and McDonald were up to: making as many market-timed trades as possible until the fund put its foot down, then moving on to the next fund complex.
“It’s not unlike a rock band which knows that they continue to trash motel rooms on their tours — and as soon as Hyatt throws them out, they’ll move on to Hilton, then Marriott, then somebody else,” Pershing said in a portion of an e-mail excerpted in the SEC complaint.
The SEC wants Mutuals.com to disgorge profits it made from the trading and pay a penalty and interest. The company is contesting the charges.
Meanwhile, the Vice Fund, currently at about $7.5 million in assets, keeps chugging along. Through Thursday, it was up 29 percent for the year, outdistancing the S&P 500 and several prominent socially responsible funds.
While the SEC determines how closely aligned the company’s investing practices are with its investment theory, consider the mission statement Sapio has on Mutuals.com’s Web site: “to build and maintain the most respected, reliable and trusted mutual fund company in the world.”
Given the SEC’s allegations, it sounds like the founder of the Vice Fund may have a way to go.
Len Boselovic can be reached at [email protected] or 412-263-1941.
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ISG, CLF, X, ATI, VICEX,
