An Industry in Severe Trouble

We always keep a close eye on industries that are in trouble (as our countless articles on the gold industry probably demonstrate), because this is where bargains usually emerge. We have a simple rule of thumb: Investment success depends primarily on one thing, namely how cheaply one buys.

Show us a stock market with a single digit P/E ratio (like the Russian or Greek markets these days) and we will begin to look at it as a potential opportunity. We don’t care much for tech stocks with triple digit P/Es, even though we may acknowledge their worth as successful companies and even use their products.

Photo via telegraph.co.uk

One market sector that has suffered a bout of destruction like few others is the coal industry. This chart of the coal miners ETF KOL should convey a rough idea of just how bad things have become:

Click on picture to enlarge

The coal miners ETF KOL has collapsed in recent years

 Many well-known coal companies (e.g. Patriot Coal and Alpha Natural Resources) have gone bankrupt. There are several reasons for this. For one thing, there has been huge malinvestment in all sorts of commodity-related industries, as monetary pumping by the Fed and the PBoC has artificially inflated demand for commodities and driven their prices to unsustainable levels.

In the course of this, many coal companies have taken on more debt than they were able to support in the event of a sharp decline in coal prices. Given that at its peak, the “China story” about unceasing demand for commodities apparently sounded very convincing to many people, they probably didn’t expect that a huge slump in coal prices was imminent. And yet, this is precisely what happened.

However, there are also other reasons for the woes of coal producers. A major one is the sharp deterioration in the regulatory environment, which is largely the result of a topic beloved by the political left, namely climate alarmism. Power generation with coal is considered “dirty” and coal plants have been subject to stiff regulatory restrictions for quite some time.

Things got worse for the coal industry after environmental bureaucracies declared CO2 a “pollutant” (keep in mind here that plants need CO2 to survive). This view of CO2 is based on climate alarmism and the hypothesis that CO2 production by industrial civilization is causing “catastrophic global warming”. Of course, not even the most basic predictions of the alarmists have come true so far (e.g. over the past approx. 19 years, there has been precisely zero warming while CO2 in the atmosphere has increased by one third). It looks more and more like a total scam designed to extort tax payer funds and expand government control over the economy even further.

The RSS satellite monthly global mean surface temperature anomaly dataset shows no global warming for 18 years 7 months – i.e., since January 1997. Needless to say, reality is diverging rather dramatically from the “model predictions” of the alarmists.

As we have previously mentioned, there was a time when the environmental movement actually made sense. However, its most important and well-justified complaints have largely been addressed, at least in the Western industrialized nations (the time when US cities regularly had smog alarms and many rivers and lakes were actually poisoned are long past. We don’t hear a peep about acid rain anymore either). We should mention as an aside to this that a truly free society with strong property rights would address such problems most effectively, as most environmental problems are at their core “tragedy of the commons” problems.

One gets the impression though that a major concern of environmentalists these days is to somehow destroy the capitalist system. They seem not overly concerned about the fact that this would be tantamount to destroying civilization itself. Many leftists who lost their sugar daddy in Moscow after the communist bloc imploded have migrated to environmentalist groups, which evidently appeal greatly to their authoritarian instincts.

The political left has taken up environmentalist causes with great relish. According to president Obama for instance, currently non-existing “global warming” (renamed “climate change”, which is as fuzzy a term as the “war on terror”) is the most pressing problem of our time. And this problem of course requires ever more government regulations and spending (and consequently higher taxes), as well as assorted wealth redistribution measures. A the upcoming climate summit in Paris, the redistribution of at least $50 billion per year will be on the agenda. In short, this is such a giant gravy train, that it is no wonder that in spite of all the evidence to the contrary, the alarmist headlines are becoming ever more hysterical.

From the coal industry’s perspective, a slew of additional regulatory restrictions couldn’t have come at a worse time of course. Many producers have simply been unable to survive the double-whammy.

 Crony Capitalism in Action

A surprisingly large number of prominent businessmen supports socialism nowadays. We are slightly baffled by this, but it demonstrates how deeply ingrained Marxist ideas have become in today’s society (in fact, many Marxist ideas have become so commonplace that people are no longer aware of their provenance). Many businessmen, instead of standing up for free market capitalism are seemingly falling over each other apologizing for it!

Among the well-known “limousine Bolsheviks” we find inter alia Geroge Soros, who has donated staggeringly large sums to the cause of fighting “climate change” – it was e.g. reported a few years ago that he has pledged $1.1 billion to “climate change initiatives” (interestingly, the alarmists are continually accusing skeptics of being funded by the fossil fuel industry, an accusation for which not a shred of proof exists as far as we know). Naturally, Soros is free to do as he wishes with his own money, but the people and organizations he funds all advocate expanding the power of the State.

As we mentioned above, we are keeping an eye on coal stocks, and recently one of those that were widely held to be at death’s door has made a rather surprising comeback – the stock has risen by a factor of 10 in less than a month:

Click on picture to enlarge

ACI (Arch Coal) becomes a 10-bagger off its recent low 

 It turns out that the company – after being destroyed by the kinds of regulations for which Mr. Soros evidently is an advocate – has been “rescued” by none other than Mr. Soros. As Steve Milloy writes at Breitbart (admittedly not an unbiased site, but in this case the facts are what they are):

“I predicted in this column last week that the left wasn’t going to kill off the coal industry so much as it was going to steal it. That prediction is already becoming true courtesy of billionaire George Soros.

U.S. Securities and Exchange Act filings indicate that Soros has purchased an initial 1 million shares of Peabody Energy and 553,200 shares of Arch Coal, the two largest publicly traded U.S. coal companies. As pointed out last week, both companies have been driven perilously close to bankruptcy by the combination of President Obama’s “war on coal” and inexpensive natural gas brought on by the hydrofracturing revolution.

Under the hypothesis that not even socialists would leave trillions of dollars worth of a perfectly safe and clean energy source in the ground for the sake of the imaginary “climate crisis,” I posited that once the existing coal industry ownership was wiped out by President Obama’s regulatory onslaught, a new politically correct ownership would rehabilitate the fuel by contributing to Democrats.

Enter George Soros, a hardball investor and philanthropist to myriad left-wing causes, including the activist and “clean energy” rent-seeking movements that have helped take down the coal industry.”

(emphasis added)

Perhaps though this was simply a case of Soros’ philanthropic activities and his investment activities working at arm’s length from each other? Maybe it was a coincidence, a one-off event? It actually appears that Mr. Milloy is on to something. A few days later yet another investor known for his sympathies for the political left and “environmental causes” grabbed a piece of the coal action for himself:

The day after I made my prediction, news came that leftist billionaire George Soros had purchased shares of the two largest U.S. coal companies, Peabody Energy and Arch Coal. Now comes news that bankrupt Patriot Coal is being purchased in a $400 million deal led by Tom Clarke, a prominent Virginia-based environmentalist.”

(emphasis added)

What is most interesting however is just how Mr. Clarke will soothe his conscience about having become an evil fossil fuel purveyor. Apparently a costly new regulatory scheme will be involved, including “carbon credits” – ultimately this probably means that taxpayers will jump into the breach (someone will have to pay after all):

“My original article forecast that the new kings of coal would have try to rehabilitate coal so they could profit from it with a straight face after having for years bashed the essential commodity as a people- and planet-murderer.

So Clarke plans to do this — no kidding — by planting trees. Clarke will sell his coal at a 10 percent premium. And why would any cash-strapped utility pay 10 percent more for Clarke’s coal? The coal will come with a carbon credit certificate (also called a “carbon offset”) worth 30 percent of the coal’s emissions. This 30 percent figure, conveniently, is about how much carbon dioxide the average utility has to reduce its carbon dioxide emissions under Obama’s Clean Power Plan.

What a scam.

[…] it is not at all clear that planting trees will reduce any global warming that may be occurring. Past the dubious notion that carbon dioxide is a major problem for the climate, some studies say that planting trees actually increases warming by darkening the Earth’s surface and reducing the amount of solar radiation reflected back to space.

Even assuming, for the sake of argument, that trees actually remove carbon dioxide from the atmosphere on net balance, there are lots of tree planting scams and deceptions .

Finally, the carbon offset business is known to be ripe with fraud. Congress, the General Accounting Office and the Federal Trade Commission have all expressed concern about the unregulated carbon offset racket.

(emphasis added)

The cronies never fail to entertain us, we have to give them that much. Alas, we doubt that the formershareholders of Patriot coal will be terribly amused – they walked away with nada.

Conclusion

For one thing, we would note that the vultures have begun to circle coal, which means there will probably be more money-making opportunities. Aside from that, we are greatly amused by this newest demonstration of environmentalism-inspired cronyism. It’s not quite as juicy a story as Solyndra was, but still quite funny even so.

Charts by: StockCharts, wattsupwiththat