The market is so schizophrenic of late that it is hard to make buy decisions about any stocks, even sound stocks. Wednesday’s (Aug. 23, 2011) big negative event was a downgrade of Japanese debt one notch by Moody’s to Aa3. Moody’s again cited bulging debt as a reason for the downgrade (shades of Europe). In a more positive vein Moody’s did say the outlook for Japan was stable. The New Home Sales figures miss didn’t help either. After these data, it is hard to say exactly how the markets will behave. Before the Japan downgrade a near term bottom had been a better than even bet. It may still be. Dick Bove’s buy call on U.S. banks’ stocks on Aug. 23, 2011, seems likely to help. The Durable Goods Orders headline and core number beats (4% and 0.7%) should help to provide a floor.

An Associated Press survey of leading economists did find that a U.S. recession is unlikely in the next 12 months, but continued weakness in the economy is likely. Perhaps this will be enough to steady the market

Regardless, many stocks have sold off enough to more than reflect the likelihood of a coming recession. If we are unlikely to have another U.S. recession soon, many stocks will eventually go up. Many think that emerging market growth will take up the slack in a slight U.S. recession. If you think longer term, you can start to leg into some of the bargains, especially if those bargains sell their products internationally.

One of the biggest bargains in the market is Cliffs Natural Resources Inc. (CLF). This company mines iron ore, coking coal, some thermal coal, and chromite. It has suffered as the market has fallen and the prices of scrap steel have fallen slightly in August. They are still very close to July prices. CLF is now trading at an FPE of 4.79, and that is after some near term earnings estimate cuts by analysts. Since the analysts earnings estimates for FY2012 are still rising, it seems likely that the recent stock price crash will rebound upward soon. CLF’s revenue rose 52% year over year in the latest quarter, but CLF missed slightly on earnings due to increased costs of inputs. With the fall of oil prices recently, some of those extra costs will diminish for Q3 and Q4.

Other factors have conspired to ensure that iron ore prices will remain high. Iron ore exports from India are likely to decline by 28% this year on falling domestic production due to mine closures across the country. Weather related production cutbacks, labor shortages, infrastructure bottlenecks, and worker strikes in Africa have limited output of iron ore, copper, and coal. This means tightening supply and firm if not higher prices for the medium and long term. The steel prices on the LME would tend to substantiate this. The chart of the LME cash price chart of steel prices for the last year shows a strong up-trend for steel prices.