Coal: What Happens When Bubbles Pop

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

Below is the chart of Consol Energy (CNX), a huge coal producer in Appalachia:

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The chart for James River Coal Company (JRCC) is truly a joke. It's a coal company that's losing money right now, but that that hasn't stopped it from going from $3 to $60 over the past year:

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Lastly, this is that chart for the Market Vectors Coal ETF (KOL). When an ETF declines 10%, you know that the industry is getting crushed.

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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. Although nine times out of ten (if not more) that $2 options contract would have been a wasted lottery ticket, this time, it would have panned out nicely.

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. This is especially true in the case of JRCC, a company with no earnings. It's astronomical price increase has occurred 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.

Disclosure: None

Comments

[Stephen Fra...:]

Pachanguero,

As stated in the article, I hold no position in any of the mentioned securities and don't even have a completely bearish outlook on the sector. The article was primarily a recognition of the possible sudden drops when assets of any class - whether commodities or the underlying equities - appreciate tremendously.

It appears as though you have an emotional attachment to the coal stocks (that I'm assuming you're long). Take some blood pressure medication and relax.

2008 Jul 07 04:23 PM

[Mark Anthony:]

Just because something has risen too much too far doesn't necessarily mean it's a bubble. I looked at the reason why coal spot price went up that much, and looked at whether coal stocks are justified at their current price levels. Here are my analysis:
stockology.blogspot.co...

2008 Jul 08 09:25 AM

[Stephen Fra...:]

My first comment looks unmerited because a post was deleted.

Mark Anthony, the price of a stock such as JRCC is a complete fabrication. Though not short, there's nothing better than seeing that stock lose 33% of its value in days.

2008 Jul 08 01:58 PM