Thursday, July 3, 2008

When Bubbles Pop (or Lose just a little Hot Air)

Coal stocks, which I have identified as overheated for a while (but thankfully didn't short), all crashed yesterday as spot prices in Europe were less desirable than expected.

Here's a chart of CNX, Consol Energy, a huge coal producer in Appalachia:

Here's JRCC, truly a joke - it's a coal company that's losing money right now. Still, that hasn't stopped it from going from $3 to $60 over the past year:

Lastly, this is KOL, the coal ETF - so when an ETF declines 10%, you know that the industry is getting crushed.
Earlier this week when I had some fresh funds (which I eventually put into CIT for a profitable trade), I was checking out JRCC $50 july puts when the stock was around $57.50... and I talked myself out of them because I didn't expect a move that big. Though nine times out of ten (if not more) that $2 options contract would have been a wasted lottery ticket, it would have panned out nicely this time.

I haven't stayed on top of the coal market enough to speak more specifically than I have just done, but the stocks above demonstrate the power of bubble-deflation. Especially in the case of JRCC, a company with no earnings, it's astronomical price increase has been because of complete fabrication and speculation, and it should all come crashing down. CNX is a solid company, but it too has enjoyed a massive price increase because of tightening worldwide coal supplies.

The thing that makes coal from different from oil is that there's no talk of "peak coal" - we know that we have hundreds of years of supply left. Getting it out of the ground in a timely fashion can be challenging, as big trucks and tires are in short supply, but I'd have to believe that the CEOs, especially of companies like JRCC, know that this heyday will end sometime, probably in the not-too-distant future.

1 comment:

jeffrey mindlin said...

all the lack of production just means that there exists a need to replace these tonnages.demand cannot meet supply-period.why are the gulf states going to coal fired plants,everywhere in the persian gulf there are huge build outs of these plants.these countries are considered underdeveloped according to the kyota protocal on co-2 emmissions.why are there 100 vessels parked outside of australia,s largest coal terminal unable to get loaded because the rr lines were destroyed by the typhoon in jan 08.utilities in the states like 4-6months of coal on the ground or on its way-most are at 30-45 days and the noose is tightening,i like btu-cnx and arn only,the rest are run by clowns.

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