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2006-07-31 :: Black Crack, Illinois Smack

Yeah, I know its a bad pun on the Beverly Hillbillies song, but Coal (at least according to the Wall Street Journal) is the new energy alternative of choice.  With the world likely to become adicted to it just as it has petroleum products, and Illinois being the Saudi Arabia of coal, coal companies will likely make a major impact on the markets in coming years.  

Our investment in Consol Energy was up 6% or so today, and the rest of the energy portfolio also had a pretty great day, but coal was clearly the star.

So, what does it mean that coal is the alternative energy source of choice?  With natural gas now at $8 (up from $5 a couple of weeks ago), and likely headed higher as the heat wave continues to eat up our stores of nat gas on hand.  Estimates are that if this heat wave goes on for the next 2 to 3 weeks, nat gas supplies will be cut in half.  Coal as the alternative electricity source will be in tight supply and coal related industries will make a lot of money.

I know its a bit ugly to feel vindicated by the current action in the energy markets, but there are so many people out there that completely lack common sense.  Whether they are analysts or the pundits on CNBC who tried their best to convince us that energy stocks had seen their day, the reality of the world’s situation vis-a-vis demand V. supply in energy will keep the earnings of energy-related companies moving higher.

Ok, so maybe I was early when I started buying Consul, Headwaters and Alstom a based upon my thoughts that with petroleum products at all time highs and likely heading higher, coal would be the most likley substitute.  Consul produces coal; Headwaters provides technology for the use of coal byproducts; Alstom makes coal powered generators for industrial use; they should all be heading through the roof as alternatives for energy.  It now seems that the WSJ might agree.

Looking at this theme, the railroads are also a likely beneficiary of the coal revolution.  Alstom reports that its coal electricity generators are selling above expectations.  This is something that will be self-fulfilling prophesy as utilities switch from natural gas as a back up to coal as a back up source.  How will they ge the coal? By rail.  Look for rail earnings to continue to rise as a byproduct of the increase in coal useage.  Also, if you are looking for a coal-centric state, Illinois is your choice.  Peabody Coal is very big in Illinois and will be a good investment.  I’m going to stick with Consul for the time being but will likely add an additional rail investment, CSX to our holdings.

As I look at todays market I see what should be a normal day on the screen:  energy and metals are nicely green; consumer products are taking it on the chin; and everything else is mostly mixed.  Industrials, particulary the infrastructure stocks, have a great potential to jump significantly higher once the Fed’s interest rate direction is determined.  We’ve been adding bits of IR and URS to accounts, but its been on the way down (like today).  We will likely continue to add shares where I see its appropriate in anticipation of the big bounce we’ll likely see when the traders in NY figure out what happens normally when the Fed changes direction:  Cyclicals Rule!

Our overarching theme is that the US economy is in an expansion mode.  We may see some intermediate slowdowns (like now) or even a contraction (a recession, although not now on my radar), but that is a short-term thing.  If we live with the crazy times – like now – and wait out the bumps and grinds, the long-term is very positive and the cyclical stocks tied to the commodities and the infrastructure will be the big winners.

Its proved us right for since 2000 and will continue to do so.

More later!

Mark