US Steel: Always Been There, Always Will Be.

With all the talks of recession, of manipulation in the financial markets, of hedge funds short selling the brokers and of oil hovering around all time highs, sometimes it seems that investors get too caught up in the fast paced world of Wall Street. Sometimes people forget about the "old-timers"...the companies that are responsible for making Wall Street what it is today. Companies that saw the Great Depression come and go, saw two world wars pass and saw times when titans like J. Pierpont Morgan, Andrew Carnegie, Charles Schwab, and so many other notables ruled the Street.

Perhaps I'm just being a little nostalgic for a simpler, more gentlemanly time, but it just seems like today's Wall Street players, people like Vikram Pandit, Jamie Dimon, Lloyd Blankfein and Jeffrey Immelt can't quite stand up to the caliber of their predecessors. I'm not doubting the intelligence of these individuals nor do I mean to diminish their accomplishments, but what I am saying is that I think they're caught up in a Wall Street that just over complicates things.

Take for example, US Steel (X) in the year 2008. In a year that has seen all of the major indices fall into bear market territory, US Steel has seen its shares rise 28% year to date. Yet, no one on Wall Street seems to notice. I never hear Jim Cramer dedicate a segment to US Steel and the Wall Street Journal has given more attention to the crumbling airline stocks than they have to a perennial winner like US Steel. Why is this?

I think the answer is simple really. US Steel just isn't very "sexy" by today's Wall Street standards. They don't engage in transactions that require an accountant, an engineer and divine intervention to value. You never really hear them griping about short sellers manipulating their stocks and you don't see them taking their excess capital to the NYMEX to speculate on crude oil. No, US Steel focuses on one thing. It is the same thing that they have focused on (minus that brief 20 year period when they owned Marathon Oil) for their entire century plus of existence. That is producing and selling steel.

There was a time, though, when US Steel was the "sexiest" thing on Wall Street. Incorporated on February 25, 1901 with the efforts of J.P. Morgan, Elbert H. Gary and Andrew Carnegie, US Steel was the world's first ever IPO in excess of 1 billion dollars. It was so massive and so revolutionary that for years, Wall Street simply referred to it as "the Corporation". The great Charles Schwab was the company's first president (he would leave in later years to run Bethlehem Steel).

US Steel has had a history of resilience too. They have fought off the anti-trust efforts of the federal government, survived the difficulties of the Great Depression, withstood countless labor disputes and even repelled an effort by President Harry Truman to nationalize their steel mills.

Even more than most people realize, US Steel is also an American icon. They have lent elements of their logo (the three multi-colored hypocycloids) to the Pittsburgh Steelers NFL team and in 1906 they built the city of Gary, Indiana (and still operate the largest steel mill in the northern hemisphere in Gary).

But even with such a rich history, Wall Street still doesn't even seem to recognize US Steel now. They don't make extraordinary profits like some on Wall Street would like, but they do make a steady flow of profit. Their share price has risen this year which could easily be attributed to the high worldwide demand for steel (which isn't likely to decrease any time soon), but the bottom line is that, US Steel knows the steel industry better than anyone else (that's bound to happen when you've been in the same business for a century).

It is likely that their current CEO John Surma has documents in his file cabinet signed by Charles Schwab, Andrew Carnegie and the incomparable J. Pierpont Morgan. These documents are probably lost to time though just like the once great company that was known by all simply as "the Corporation".

I can't ignore the fact that US Steel is still profitable and that they focus simply on producing steel. Even the subsidiary companies that they own now are involved in the production of basic materials needed to produce steel or in the distribution of steel. This company has experience in its industry that you just can't find anywhere else.

Maybe it's time that I stopped feeling so nostalgic and just put US Steel out of my mind like Wall Street seems to have done. But when I ask myself "if the likes of J.P. Morgan were here today where would he be putting his money?" The answer that I invariably come to is that Morgan would be ashamed of Wall Street and its CDO's and of the irresponsible lending that led to this current crisis (even though I think he would be proud of the way Jamie Dimon "rescued" Bear Stearns) and he would have his money in none other than US Steel. And J.P. Morgan certainly wasn't wrong all that often. Something to step back and think about for all those in the fast paced world of Wall Street.

Happy Investing

InglefoX

Trouble on the Horizon for the Brokers?

We all know that the brokers play an integral part in both trading and investing. Everyone who trades needs a brokerage account and some people have multiple accounts with various brokers. These brokers make their money based upon the commissions that they receive, generally on a per trade basis. This has been a profitable model for these brokers as the market conditions of years past have been bullish which encourages people to put their money to work in the financial markets. The more money people put to work in the markets the more commissions the brokers can earn. But with thoughts of a recession looming a recent rash of people pulling money out of play in the markets should mean that the brokers' main source of revenue, their commissions, will fall drastically.
This expectation should lead the stocks of these brokers such as Optionsxpress Holdings (OXPS), The Charles Schwab Corporation (SCHW) and Interactive Brokers Group (IBKR) to fall. In fact, the thought of recession has led to recent declines in the prices of all three of these stocks. What is the problem then? The issue is with the market expectations that these companies are still going to make windfall profits. Under the conditions of tough credit and a market that has seen capital fleeing over the past quarter, it is baffling as to how the analysts can still claim that all three of these brokers (OXPS, SCHW, IBKR) are going to exceed their earnings from the same period last quarter. The stocks are falling for a reason right? And a stock price generally shouldn't fall on a company that is making more money every single quarter.
For the quarter ended June 8, 2008, analysts have given OptionXpress a mean earnings estimate of $0.39 a share versus actual earnings of just $0.35 a share for the same period last year. For The Charles Schwab Corporation that estimate is $0.26 per share versus an actual of $0.23 for the same period last year and Interactive Brokers Group has been give a $0.49 a share mean estimate despite just earning $0.33 a share for the same period last year.
It is important to realize that these companies have other sources of income other than just their brokerage commissions. They operate some proprietary trading and collect a significant amount of interest from margin accounts. The margin interest is also likely to suffer from having a lesser amount of capital entry into the markets and even if these companies were able to keep interest and trading income equal to last year's levels, there is still no possibility that they could have brought in the same amount of brokerage commissions.
The bottom line is that it seems as though these companies are set up to disappoint the market when they report for this most recent quarter. OptionsXpress will report on July 15, The Charles Schwab Corporation on July 14 and Interactive Brokers Group on July 21. If one of them reports lower than expected earnings look for the market to then price in lower earnings for the entire group, but until that happens this can be a great opportunity particularly for you traders out there. These look like prime put option opportunities if you can get in before any fall in expectations takes place. In the long run though the market will rebound and that is the time for those of you who are long term investors to swoop in and pick up these companies, which are actually quite well managed companies, at bargain prices.
Happy investing...happy trading

InglefoX
(disclosure: author is short OXPS)