If you click on this article, you probably believe in coal's future, and so I do not need to tell you about coal. But there is a coal stock that I believe has good upside.

Cloud Peak Energy (CLD) is a coal miner that is newly spun off from Rio Tinto (RTP). Rio was cash strapped because it took on too much debt to buy Alcan; and so it recently spun off CLD to raise cash. After the spinof, Rio still holds about 49% of CLD. Currently, CLD is trading at 7 x PE and under 5 x EV/EBITDA. Most other coal miners trade at 16 x forward PE and 9 x EV/EBITDA. CLD's mines are in the extremly low production cost region of Powder River Basin. Further, its coal is low in sulphur and therefore less harmful to the environment than coals from competitors. Therefore, CLD deserves higher multiples compared to peers. CLD's margin was unusually high last year, probably because Rio was dressing it up for a sale. But after normalizing the margin (5% net margin vs 18% for trailing 9 months), and using a 16 x industry average PE, CLD is worth $19. And using some conservative EBITDA numbers ($300 million annual vs. pro forma $309 million for trailing 9 months), and a 8 x EV/EBITDA, CLD is worth $25.

Friday, a good friend showed me his insightful analysis of gold in an email. His email goes something like this:

“It is interesting to see that global investment demand is now larger than jewelry demand. I have said for a long time that the investment sector will have a HUGE effect on the price of gold, since only about 2,700 tons are produce each year, which translates to 0.0126 oz/person/yr. If only 1% of the people buy gold globally, then the number is 1.26 oz/person/year, which is not much. Then consider that the 2,700 tons produced each year is already spoken for. So where will the gold come from when investors want to buy it? The answer is that there will not be much of it to go around. May be only another 500 tons per year will float out of hoards into investor's hands. So instead of 2,700 tons, only 500 tons are available, which is about 0.00233 oz/person/year. Again, if 1% of the population is to buy gold, they can get only 0.233 oz/person/year. That is very interesting. It seems like the price of gold has a HUGE sensitivity to investor demand.”

In March, I wrote about the win-win situation for commodities. In the article, I argued that commodities were going to rise whether the economy turns up or down. This time, I am writing about an opposite asset class – long-term U.S. Treasuries. No matter what the economy does, I believe that long-term Treasuries are in a lose-lose situation.

But then again, with so many structural problems in the world’s economy, who really believes that the economy will heal any time soon? So suppose we stay in this trough for a while longer, and suppose the Keynesians continue to rule the world, a likely scenario, the government will spend, spend, and spend even more to get things going again. With dwindling tax revenues, the government will then have to issue more Treasuries to finance new spending. The liability side of the government’s balance sheet will then bloat; and debt ratios will deteriorate. Naturally credit ratings, and hence prices, of U.S. Treasuries will plummet!

While the recent stock market rally may seem to signal that the worst is past, a look at the big picture tells us otherwise. Look at the following obstacles, and you will know what I mean.

1. The economy is deleveraging. Not long ago, we were leveraging up. Growth was fueled by debt and was further boosted by the multiplier effect. For every dollar borrowed, the economy expanded by several dollars. Economic expansion thus went on steroids. Now, the reverse is happening. Consumers and businesses are reducing debt. And for every dollar of debt reduction, a few dollars are withdrawn from the economy. Therefore, we are now in a hangover state in which activities will shrink, putting pressure on revenues.
2. Leverage magnified profit margins in the recent past. Now that leverage is in reverse, profit margins and the bottom-line will contract.
3. The cost of borrowing is going up. So again, profit margins and the bottom-line will be under pressure.
4. It took the world about the last 20 to 30 years to leverage up. It will take much longer than a year or two to unwind the leverage.
5. Taxes in the U.S. are going up. Higher taxes will further impede economic growth and will also erode profit margins.
6. As borrowing costs rise, investors will begin to discount stocks at higher rates, meaning that stock PE ratio, and therefore stock valuation, will fall.

1. The banks in Asia are not as exposed to the bad debts as U.S. and European banks are. As a result, Asian banks will able to resume normal lending much faster than their developed world counterparts.
2. Asian economy is growing faster than the developed economies.
3. The balance sheet of Asian consumers is healthier than those in the U.S. and in Europe. Therefore, consumer deleveraging, and its effects, in the former market will be less pronounced than in the latter markets.
4. China has US$2 trillion of foreign reserve, a budget surplus, and a trade surplus. So China has the firepower to spend itself out of trouble and lift Asia along. The U.S. is opposite. It has large national debt, budget deficits, and trade deficits. It is having trouble borrowing from overseas, so it is printing huge sums of money to save itself. Common sense tells us that governments cannot print money indefinitely. If they keep doing it, sooner or later, the dollar will crash and the consequences will be tragic.
5. Asian stocks have fallen harder than the developed markets have. And even after the recent run-up, many Asian markets remain cheap. For example, the Singapore Straits Times Index and the Hong Kong Hang Seng Index are at levels close to their levels in the early 1990’s, before the Asian financial crisis.

In summary, I believe that a recovery of the world economy and stock markets will be slow and bumpy. However, I believe that Asia economies and stocks will lead the developed markets for the next few years.

In his 1923 book Tract on Monetary Reform, economist John Maynard Keynes urged the United States and Great Britain to abandon the gold standard, calling it a “barbarous relic.” In the decades that followed the book’s publication, countries around the globe heeded Keynes’ advice and relegated the gold standard to the dust bin. But lately, as the financial crisis deepens, and as the size of government bailout packages grows ever larger, the public becomes alarmed by the potential for future inflation and the call for a return to gold standard grows louder by the day. The belief is that the gold standard can prevent runaway inflation. Perhaps it is time to revisit history to examine if there is validity to this belief.

In terms of the gold standard, the United States experienced 3 distinct phases between 1834 and the present. These phases are as follows:

I was reading Ben Graham’s investment classis Security Analysis recently when I came upon the following paragraph:

It may be pointed out further that the supposed actuarial computation of investment risks is out of the question theoretically as well as in practice. There are no experience tables available by which the expected “mortality” of various types of issues can be determined. Even if such tables were prepared, based on long and exhaustive studies of past records, it is doubtful whether they would have any real utility for the future. In life insurance the relation between age and mortality rate is well defined and changes only gradually. The same is true, to a much less extent, of the relation between the various types of structures and the fire hazard attaching to them. But the relation between different kinds of investments and the risk of loss is entirely too indefinite and too variable with changing conditions, to permit of sound mathematical formulation. This is particularly true because investment losses are not distributed fairly evenly in point of time, but tend to be concentrated at intervals, i.e., during periods of general depression. Hence the typical investment hazard is roughly similar to the conflagration or epidemic hazard, which is the exceptional and incalculable factor in fire or life insurance.

With major market indices hitting multi-year lows, now may seem like a great time for bargain hunters to invest. However, with the global economy teetering between a recession and a small depression, the market may keep falling and satisfactory return may not come about for many years. Fortunately, amid uncertainty, there is one asset class that stands a better chance than others to emerge victorious - commodities. To understand the reason, let us examine commodities in two scenarios: 1) a recession with a quick recovery, 2) a depression with a long recovery.

The first scenario is relatively straightforward. The economy slows and then rebounds. Economic activities revive within a year or two, and demand for raw materials returns to pre-recession level. So commodity prices, after having fallen nearly 60% since last summer's peak, rebound swiftly. The second scenario, with the dreaded D word, requires more analysis. On one hand, demand for all things, including commodities, are bound to fall during a depression. On the other hand, the demand for many commodities is not very 'elastic', meaning that demand will not fall off the cliff.