Coal stocks

Here's my reasoning for the long position in Coal stocks I got in my portfolio.

Prices of Met coal have tripled, and prices of thermal coal are up 100% in the last year, or in fact, since the beginning of this year. Again, details are not important-the key element is, met coal has approximately tripled to $300 per ton, and thermal coal to $160 per ton.

Imagine a company selling just one product, sells $100 of this product, and it earns $10 in 1 year. With a p/e of 10, the market cap of that company is $100. i.e. you will pay $100 for this company today. The profit margin is 10% (profit/revenue---costs are $90, profit is $10).

If the price of the product it sells goes up 2x, i.e. $200, and if the costs remain the same, then the profit of the company will be $110! If you wanted to give the same price/earning ratio, of $10, you would actually bid up the price of the company to $1100. That is an 11 times increase.

However, that's too good to be true. The risks in this simple model are 1) price falls back down, and 2) costs go up.

So when a commodity like met coal goes 3x in price, and another like thermal coal goes 2x in price, the stocks of the producers of coal react positively, to say the least. But what is a fair price ---it can be anywhere between 1x to 11x, depending on what you feel the cost structure will be in the future, and what the price will be in the future. Note that the price can come down---as long as demand volume goes up with that-u still will make a very good profit-it makes sense to bring up more coal mines. In fact, price is a leading indicator of demand in this case-and stock price will follow the price of coal.

Some US listed coal companies shares have goes up 2-3x in this year, but depending on your outlook for prices-you can make a case that this is going much much higher.

And I for one believe that this is a sea change in the coal market-and demand is here to stay. Look at statements of MEE, ANR and JOYG-and you will get an idea. Earnings expectation keep going up every week on these names.

My favorite one is FDG-it is a Canadian trust which holds 60% of Elk Valley-the biggest producer of Met coal. If Met coal holds anywhere near $300 per ton, you are talking about a price of FDG close to $500! Granted that a lot of coal is advanced sold at lower prices, etc. but you have plenty of margin of error-the stock trades at $90 today.

The ETF KOL is also an okay play--but has too much of Chinese Government owned coal companies. They dont let them raise prices-profit making is still a shameful act for Government owned companies in China and India. Which leaves massive room for the private coal suppliers worldwide to make $$$, because the populations will need the steel and the energy regardless of whether the coal comes from domestic companies or foreign.

The rally in Coal in the next few years will look the rally of the last two years in fertilizer stocks look like defensive plays, IMO. I think Ferts still go higher-but the potential of making very large returns in Coal is great. Following the Kelley criterion-my portfolio is heavy on Coal stocks and has some Fertilizer stocks as well.

Sanjay

Obama, Racism, Religion, Discrimination against Women, South America and The World

The title of this post tells u that there's going to be quite a bit of stuff said in it. I don't claim to be right or accurate in what I say; but these ideas are from my own personal experience, and experience of close friends whose data I can trust. They are not from the books or "what they say about.."

Obama winning the Democratic Nomination in the USA is great for the blacks and minorities of that country. Finally USA can become more like Brazil-one of the least racist nations of the world. I have found from my personal experiences that South America is by far the least racist continent of the world. Racism, religion based discrimination, and status of women--all go hand in hand in my opinion. And South America is the most civilized continent of the world in these things.

Why?

A German, a black guy from Zimbabwe, a chinese from Shanghai can travel in this continent in a small town without knowing Spanish/Portugese---and they will not be harmed. They will not be attacked racially (again, nothing is absolute-the probability that that happens is low is what I am saying). I cannot imagine a Mexican Jose traveling in Sweden or China or the USA not speaking the local language and not being harassed/beaten up. The world outside South America needs to learn a lot from this continent where people live the most free.

It is nice to see another nation, USA, following the leadership of Brazil in this. Remember that Brazil was the first to abolish slavery, give equal rights to blacks-and today 51% of the population declares themselves as Mulatto. That is the human race of the future, the mulatto, mixed with some oriental blood (a race absent in Brazil. Most Red Indian/Aboriginal tribes of the region were murdered by the European conquerers-they are racially the same as orientals). A true intermingling of the four different types of human varieties.

Religion is a big problem in the world still-and religion based discrimination is rampant in many places, especially in Asia, Africa and the Middle East. Since all religions were founded and controlled by men; there is widespread abuse of women's rights in almost all highly religious societies. This all hopefully will go away in the decades to come.

A world free of racism, religion and a truly equal status for women would be a much better and fun world. By the way-you can measure this with this experiment.

The day when a woman can go out alone in a bar, pickup some guy, and have a wild night with him without being looked down upon by society, that day we know we are treating women as equal as men (we normally call her a slut-whereas give a pat in the back of a guy who picks up some girl in a bar and has a wild fling). She needs to be able to do this with a man of any color or religion, without that guy being at any risk of physical harm from other guys in the bar, and that is then a true test for a free society.

Even in South America we are not there yet-but we are getting there fast. The European and American worlds which pride in their economic development are culturally quite backward in terms of racism and discrimination against women---even though they are pretty much low religion societies-which is good. Asians and Africans are even lower down the human development scale-but in general, there seems to be improvement in all these societies on the key elements of eliminating racism, discrimination against women and eliminating the power of organized religion.

Sanjay