The United States has been compared to Saudi Arabia when it comes to our coal reserves.
We’re swimming in the stuff. But unlike the Saudis, we aren’t producing anywhere near our maximum output.
The problem is political. Since day one, President Obama’s EPA has opposed coal. After all, coal is a dirty burning fuel. Even with the use of CO2 scrubbers and other technology to capture particulates, it’s still not as clean as natural gas or nuclear power. That may not be a problem for a country with fast-growing energy needs like China or India. But for developed, wealthy nations that place at least some value on a clean environment, it is.
It’s no wonder that many coal companies are a shadow of their former selves. Arch Coal (ACIIQ) filed for bankruptcy in January. They were one of the larger players in the industry.
What few well-paying blue collar jobs in poverty-stricken Appalachia have existed are now a memory.
Enter Donald Trump, fresh off his win in the West Virginia primary. It’s time to make America great again, and nothing is as American as coal mining. From anyone else running for president, the sentiment would sound like a political promise without the possibility of being repaid. From Trump, it comes off as a clear conviction.
After all, it creates middle-class jobs for hardworking folks. And the coal doesn’t have to be used domestically. We might as well take advantage of strong overseas demand for the stuff. That will benefit companies that have to transport the coal to its final destination as well.
Is this the start of a turnaround for the coal industry? It might be. We’ll know for sure after the election. But back in 2012, when polls put Mitt Romney near President Obama, the beaten-down coal sector started rallying on expectations on a change in management.
We’ll likely see that again as the general election approaches. But if Trump wins (and the numbers are moving in his favor), the rally will hold in the coal stocks. It will take time for the underlying companies to start turning around operationally, but it will likely make for a solid sector-based bet on the election in the meantime.
Given the substantial risks in the individual coal companies right now, betting on the sector ahead of the election is the best play here. If you expect a Trump (or Republican) presidency, it’s time to take a serious look at the VanEck Vectors Coal ETF (KOL). If you expect a Democrat victor, then take a look at buying put options a few weeks before the election with the expectation that shares will take a dive.
Coal is a commodity. Commodities always have some use. They never go to zero. Yet for political reasons they’ve been heavily out of favor and in a downtrend for nearly 8 years. That could change in November—or we could see the sector continue to struggle as a shadow of its former self. In either event, there’s likely going to be a big move either way.
Michael Carr, CMT, is a subadviser to a mutual fund family and a chartered market technician. To read more Michael Carr,
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