The Daily Reckoning February 5th
Let’s talk coal.
With the bad news that’s been flooding the coal industry over the past few years, sentiment in the stock market for US coal producers couldn’t be worse. Two big names in the industry tell the story; Alpha Natural Resources (Symbol: ANR) and Arch Coal (Symbol: ACI). Over the past year both stocks have tumbled more than 50%, even while the S&P 500 Index has racked up a double-digit gain.
Most other coal plays in the US have suffered a similar fate, too. And fundamentally it makes some sense. After all, coal is considered “dirty” energy. So legislation has not been favorable here in the US.
Plus, at the same time the coal industry is facing a formidable headwind from Washington, the shale gas boom is delivering lots of super-cheap natural gas — a development that has made coal-burning power plants and coal-using steel manufacturers virtually a thing of the past. Natural gas is now cheaper, more efficient and cleaner to burn. So when coal-fired power plants have the choice to switch to gas, they do.
It’s a coal bloodbath! But it’s also a perfect opportunity to “buy low.” You see, although coal use in the US may be gearing down, the rest of the world is ratcheting it up. The best way to look at this situation is through US coal exports. Here’s a look at the recent export action…
2012 set the all-time record for US coal exports — 125 million short tons, smashing the previous record of 113 million short tons, set in 1981.
China, India, Brazil and Europe are the major markets. Coal use in those markets has been ramping up of late. After all, those countries don’t have a bounty of cheap natural gas. So easily-transportable coal is an attractive option.
And you won’t believe where a lot of that coal is coming from…
The #1 exporter of US coal to Asia is…drumroll please… Baltimore, Maryland! That’s right; my hometown and my publisher’s headquarters!
When I first found out about that little tidbit, my mind started spinning. I instantly wanted to know how this was possible. My hometown of Baltimore couldn’t possibly be the biggest supplier of coal to Asia, could it?
Yes, it could.
According to the US Energy Information Administration, “Exports to Asia originate mostly from the East Coast [...] primarily out of Baltimore. Somewhat counter-intuitively, most coal out of Baltimore — almost double the port’s European volume — is destined for Asia, the world’s largest coal consuming region.”
The Baltimore coal connection leads us to one company that you’ll want to put on your radar. The owner of the Baltimore coal-exporting facility is Consol Energy (CNX). Once a primary coal supplier in the US, Consol is now a hybrid company that produces natural gas (from shale) and exports loads of coal to Asian markets.
The Asian exports come from its wholly-owned Baltimore export facility, which is set for a handsome upgrade this quarter. Consol plans to increase the facility’s capacity from 14 million tons per year to 16, all in an effort to accommodate a growing world market.
And did I mention that Consol’s stock is on sale? After hitting nearly $120 in the summer of 2008, Consol’s share price collapsed to less than $20 a few months later. Today, the stock hangs around $31. At the current quote, Consol shares sell for 30 times estimated 2013 earnings, which is not exactly in the bargain category. But looking out a few months, I think the company’s earnings could rebound very sharply from today’s depressed levels.
But don’t just take my word for it. Legendary oilman, T. Boone Pickens, just added Consol to his BP Capital Fund in the third quarter of 2012. When it comes to timing energy plays, Pickens knows a thing or two. Right now you can get in right alongside him.
Add it all up and the next 12 months could be turnaround time for US coal. And with more output headed to Asia, Consol could be the darling of the bunch.
Never was working-class Baltimore happier with its lot in life. Yesterday, neighbors greeted each other with a smile. Co-workers exchanged stories…laughed…and slapped each other on the backs.
No one seemed to care about crime or trash…or corruption…or school teachers who can’t read…or acres of boarded-up houses. Baltimore may be a dump. But no one complained yesterday.
It was pandemonium on Sunday night. Fireworks, horns, street parties, accidents…the drunks poured out of bars and basements…eager to give each other high fives and find their cars. Old timers said they couldn’t recall so much merriment — ever. Even when WWII was over.
But this is a sports town. Football is more important to Baltimoreans than warfare. The typical resident of the Hampden or Dundalk neighborhoods would sooner lose a major war than lose the Super Bowl.
But the Ravens came through. They got so far ahead in the first half we worried that the refs would have to stop the game…out of pity for the opposing side. Instead, a cunning 49er fan must have thrown the switch and stopped the game. When the power came back on, the birds couldn’t find their mojo. But they didn’t need it. They had enough of a cushion accumulated to protect their lead. And this morning a parade will take the team from City Hall to the stadium. Woe to uninformed travelers in the downtown area: you shall not pass!
Meanwhile, over in the stock market, the Dow fell 129 points yesterday. And here is some advice, worth every penny you pay for it:
Yes, dear reader, get out of the US stock market. Stocks are near an all-time high. Barron’s tells readers to prepare to break the record this week.
Maybe. But when you are near the top you have more to lose than to gain.
Besides, we have a better idea.
“I took my money out of the stock market,” said a friend over the weekend. “I figure stocks went up…they can go down. And I’m too old for that. So, I used the money to buy two new houses down by the military base at Solomon’s Island. I paid only $160,000 for each. And they’re new. And I’m renting them for $1,900 a month to soldiers with families. You can do the math yourself, but I figure I’m netting about 10%. And I don’t think they’re going to go down from here. I think they’re going up.”
We gave our friend some advice too:
“Want to do even better? Get the biggest mortgage you can. You can get 30 year financing for…what…about 3.5%? And the real inflation rate is probably about 10%. So, you’re making about 6.5% on borrowed money…plus the rental income. Let’s see, that’s about 16.5%… With very low risk. That’s a lot better than the stock market.”
Try it. Let us know how it works out for you. Just send your ‘thank you’ notes to our email address.
For those schooled in economics, the gasoline shortage during Hurricane Sandy last November was no surprise. Demand for gas goes up. Supply lines are disrupted. It’s the old supply-and-demand thing. The price goes up. Higher prices attract new supplies from unconventional paths. Prices respond and fall back again. The market handles it just fine.
All is well except for one thing: There were anti-gouging laws on the books. These laws restrict the upward path of prices. Plus, most people anticipated exactly what happened. By executive order, governments at all levels impose even more restrictive controls. These controls prevented prices from being licitly raised at the onset of the crisis.
Most of us got our news during this time from conventional outlets. We lived on scraps of information. Most reporters, as you probably know, are not schooled in economics. They don’t know what to look for. They see a gas line and don’t know what to make of it. The whole problem just mystifies them. They don’t get how cause and effect work in the economic realm. That’s why those of us on the outset had to make due with such scattered reporting.
What about the people on the ground? There was one trader in New Jersey schooled in economics who knew exactly what to look for. He understands cause and effect. He knew that shortages were coming. And he knew the market wouldn’t give a flying flip about the government’s orders not to raise prices.
His name is Peter Earle. He did real-time reporting during the entire episode.
His report begins three days after the storm hit. He was on the ground watching pump prices. He saw black markets working. He was downloading smartphone applications that were quoting real trades. He spent his evening hours on websites where there were bid-ask quotes going on constantly. He subscribed to every gas tweet, of which there were many thousands.
What he found was extremely revealing. Despite laws and warnings, threats and denunciations, the market did, indeed, work as expected. The action began on Nov. 3. Prices shot up from $5 to $10 and $15 per gallon. Diesel was selling for $35. Generators were also all over the markets, rising in price.
The markets became very sophisticated very fast. People were including delivery in their price at premiums. Within hours, the terms became more complex, varying by quantity purchased and service provided. One seller offered the following terms: “10 gallons costs $150, 20 gallons costs $200, 30 gallons costs $250.” Another offered 50 gallons for “no less than $7 per gallon.” Still another offered $12.50, but with a 5-gallon minimum.
Earle calls the sellers of gasoline and other essentials “disasterpreneurs” — business people who know how to make a buck while providing the services people need. We think of black markets as consisting of sketchy people selling to sketchy people, but this was not the case. Absolutely the whole population was involved.
Already on this day, the economically illiterate were denouncing what was going on. Earle quotes one tweet: “Instead of trying to screw people, you should be someone who has no heat… free gas ***hole.”
Well, that misses the point. Gas will be rationed in good times and bad. It can be rationed through market prices that reflect real scarcities or it can be rationed by executive edict, as was eventually the case in New Jersey.
All throughout this day, prices were both up and down. The highest price Earle found was from devastated Staten Island. It was for 5 gallons for $25 per gallon. But not even an hour later, he found a new low offer that fell to $8 per gallon.
Interestingly, not all bids were for money. Earle found some evidence that some unnamable illegal services were being offered for gasoline. Also, the following morning, a trade in New York sought to buy 5,000 gallons of gas for a baseline minimum of a $20 Gold Eagle.
Interesting, isn’t it? Most people don’t keep much cash on hand. In a crisis, they can’t get to a cash machine. In a serious crisis, the cash machines don’t work. Or maybe they are empty. What do you do? Gold and silver might be the only truly marketable commodities.
The trading boards were also filling up with offers to bring gasoline from Maryland, Ohio, and as far away as Georgia — all provided that market prices would prevail. After all, if there are surpluses in those states, why not truck it in, make some money, and do some good at the same time? Makes sense.
Yet as expected, it was just as these markets were driving down the price to a stable equilibrium that officials at all levels started to announce they would soon begin prosecuting price gougers. That did it: Prices went up again to the $15-20 range. This was when things got pretty scary and the market players had to become a bit more careful, arranging deals in secret and exchanging goods rather furtively.
The political pressure to crack down only increased. As I wrote at the time, Gov. Chris Christie briefly considered letting the market work. But reports said that he said this almost as an intellectual musing and then quickly shifted to a full-scale rationing position based on the 1970s model of something totally irrational. The days on which it was legal to buy depended wholly on your license tag. That immediately led to new forms of markets opening up: markets for license plates!
Did any of the controls make any difference at all? According to Earle, they managed only to drive legitimate markets underground. They slowed markets and distorted them, but did not end them. From the point of view of what was actually being bought and sold, they made no difference whatsoever. People from all walks of life threw themselves into the black market to survive.
People never imagine that they will openly defy the powers that be. Americans like to think that they are law-abiding people and that their government has their best interests at heart. But matters change when your refrigerator stops working, your house is freezing, cellphones die, and your car has no fuel to get to the store or the hospital.
Suddenly, regular people in New Jersey and New York found themselves having to make the decision between obeying and surviving. They chose surviving. You probably would too.
Will officials learn anything from this experience? Absolutely not. They will repeat it. The experience of Sandy only ended in tightening the gouging laws. Gov. Christie was widely considered a hero even though his despotic actions spread misery much more widely than it otherwise would have spread.
Here’s Earle’s conclusion, written during the thick of the action: “What’s keeping folks fed, warm, and safe in Queens and Staten Island? Not FEMA, the Red Cross, Obama, or Romney. Anarchy is.”
By anarchy, he means human action. People finding peaceful ways to deal with disaster. Some of those ways included getting generators, buying gas on the free market, and even paying in gold and probably silver, too.
Here is an interview that was my pleasure to conduct with Mr. Peter Earle, the man who is the source of much of the information above. Peter is a trader in New York with an scientist’s eye for detail. In this interview you will learn how people managed to get by when the whole of the state’s infrastructure collapsed, and the government was doing everything possible to restrict access to basics. He shows how people defied the law in order to survive.
Original article posted on Laissez-Faire Today
Price doesn’t move lock step with history. But it does march to an eerily similar beat.
Take the first month of 2012, for example.
An unexpected New Year’s rally kicked stocks into high gear to start the month. Shares marched higher almost every single day.
Sound familiar yet?
Up until yesterday’s pullback, the S&P 500 was following almost the exact same script from 2012. Fresh year, fresh rally. By Feb. 3, 2012, the S&P had posted year-to-date gains of nearly 7%. As of today (after dropping more than 1% in yesterday’s trading) the S&P is up a little more than 5% year to date.
Both the 2012 and 2013 melt-ups are surprisingly similar.
Take a look at the market’s version of Groundhog Day:
We already know how the first half of 2012 panned out. After a false breakdown in March, the S&P finally peaked at the beginning of April, setting off a correction that lasted more than two months.
So here we are one year later with the S&P 175 points higher, fully engaged once again in a low-volatility melt-up. It could be nothing more than a coincidence right now. But it’s a relationship worth keeping an eye on in the coming days and weeks.
We knew going into yesterday’s drop that the market was overbought, making this particular pause in the action much less urgent than it feels in the media coverage. Now that we’re seeing red, this week’s action should tell us a lot more about how this market will react to a little adversity. Bring it on…
In 1881, Dakota Territory had never sold a bushel of wheat to anybody outside of Dakota. Six years later, it sold 62 million bushels.
I recently read Garet Garrett’s The American Story, which came out in 1955. It is a well-written history of America, unusual because of its emphasis on the powerful economics that drove the country to great heights. Garrett tells the Dakota story in this book, which is a useful reminder about how economies grow and prosper.
What happened in Dakota was that farmers invested in machinery. The riding plow, the reaper and the combine harvester made the farms far more productive than they had been. Suddenly, the labors of one man could produce 5,000 bushels of wheat. A single miller could turn that wheat into 1,000 pounds of flour.
But that was not all. New railroads connected the farmer to the mill and the mill with markets and ports in the East. The energies released were enormous. Garrett writes:
“So the labor of four men — one a farmer in Dakota, one a miller in Minneapolis and two on the railroad — plus a very low rate for ocean carriage — could put into Europe enough flour to feed 1,000 people for a year.”
Let’s look at another example: steel. In 1870, there was nothing anyone would call a steel industry in the U.S. Americans bought their steel from Europe. Yet 30 years later, Americans would produce more steel than Germany, France and England put together.
Again, the investment in machines and rail and roads unleashed a torrent of once frozen economic potential.
Those forces worked wonders as a free people tinkered, invented and created. “In sheds and attics and little machine shops everywhere,” Garrett writes, “with sticks and strings and glue and bits of metal, eccentric minds were making models of things that might work, either to save labor or to save time — two thoughts with the same meaning.”
Steam drills. Sewing machines. Electric lamps. Rotary printing presses. Cranes and elevators. Steam engines. Steel ships. Air brakes. Plumbing. Refrigeration. All of these things came in the years that followed.
Millionaires sprouted up like mushrooms. “Most of these new millionaires had come from the ground — from the mines and steel mills and oil wells and packing houses — and smelled of their work,” Garrett writes.
Wall Street financed great undertakings that would be beyond the power of five or six rich men. Huge sums of capital went toward growing the new industries. Many of the larger enterprises now had public stockholders.
The first billion-dollar company in America was United States Steel, stitched together by J.P. Morgan. It owned not only steel plants, but coal mines, limestone quarries, ships, railroads and whatever else touched on steel.
Wall Street sold it to the public for $40 per share. Then it fell to $9. But a few years later, Wall Street was buying it back from the public at $100 per share. And soon it topped $200. It was a heady, risky time. If you bought five stocks, odds were that two might go to zero. But the three, held long enough, produced fortunes.
This is the work of a free people. Testing things. Trying them out. Succeeding and failing. It is a rough laboratory from which winners and losers emerge through trial and error. It is what builds great wealth, great economies and great countries.
It is the American story of two centuries past.
While there are no virgin places for a new American story to take root, no empty continents where a people might go to try to build something from scratch, there are new versions of the American story unfolding in places likely to produce astounding wealth in similar ways.
In places like Mongolia or Myanmar, for example, you find today’s Dakota Territory. Not that Mongolians are as free as those American pioneers, but there is so much frozen potential to unlock by applying technology and know-how and capital to their situations. It’s these mind-bending changes — and the lure of profiting by them — that attract me to explore the world beyond the developed West.
In 10 years, for example, Mongolia may well be among the richest countries, on a per capita basis, in the world. Along the way there will be a number of profitable opportunities.
Investing in Mongolia along with other ideas I’ve shared with my readers, I expect, will be very up and down, much like the U.S. Steel example in the American story. But the long-term trends here are undeniable and will take years to fully play out. You have to believe in the big-picture idea. You have to trust that a few companies are doing the right things in the right places.
I know it is hard to take the long view. I get panicky emails all the time from readers who fret over this or that stock because it is hasn’t gone up after six months or a year. I know most people will not follow me no matter what I say. They will own a stock for a few months or maybe a year, and when it doesn’t pan out (or even if it does show a profit), they will sell out. On to the next great thing!
But in the real world, great stories unfold slowly. As with the American story, they take their time in the telling, with many digressions along the way. Learn to enjoy the story and think long term. Don’t get distracted by the daily and weekly march of news and prices.
Keep your sights on the grander story and stick with the original thesis as long as it remains valid!
Original article posted on Daily Resource Hunter
The Next Great “American” Investment Isn’t In America appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.