Schaeffer's Trading Floor Blog

Coal Stocks Rally on Romney Election Hopes

ACI and BTU advance following the first Presidential debate

by 10/9/2012 3:44 PM
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When he was elected President of the United States in 2008, Barack Obama promised to make America the new progressive world leader on clean energy initiatives and alternative fuels. While this news was viewed as beneficial to firms that offered wind, solar, and ethanol as a form of energy, mainstays such as oil and coal were shunned in fear that new primary sources would be found.

Taking a look at the weekly charts of bellwether names such as Arch Coal Inc (NYSE:ACI) and Peabody Energy Corporation (NYSE:BTU) since mid-2007 clearly shows that the current market environment isn't exactly ideal for profitability within the industry. Granted, the highs made in 2008 were right in front of the broad-market bubble, but the fact that these names failed to sustain their post-bubble bounce is obviously not a great sign for bulls. (Click on the charts below to enlarge).

Weekly Chart of Arch Coal (ACI) Since July 2007
Weekly Chart of Peabody Energy (BTU) Since July 2007

While these names have been a graveyard for money since early 2011, there are hopes that such companies could be setting up for a sharp bounce. One change in policy could dramatically shift the nature of the industry, and comments made by Mitt Romney at the first presidential debate have hopeful coal bulls on their toes. Romney declared that the government was wasting a great deal of money on alternative energy, and that he supported clean coal initiatives as primary sources of energy.

While this may not be great news, given Obama remains firmly in the lead in most reputable polls that currently exist, his odds of being elected have been slipping since the first debate. Below is a chart of Intrade's probability of Obama being re-elected for a second term. For those of you unaware of Intrade, it is a site where people can speculate on political outcomes, current events, etc. Surprisingly, the website has an uncanny track record at actually predicting what will transpire. Since peaking near an 80% probability immediately before the first debate, Obama's odds have slipped dramatically to a current reading of about 60%. This can be largely attributed to his lackluster performance in the first debate. There are still two more debates before the election, though, so anything can happen. However, if Romney continues to outshine President Obama, it can reasonably be inferred that this graph below will continue to drop.

President Obama's Approval Rating Per Intrade Since December 2010
Chart courtesy of Intrade

Should Romney's odds of being elected continue to improve, you can't help but think coal names will rally sharply into November. This week alone, ACI has jumped about 5%, and BTU is up about 3% from Friday's close. While this may seem trivial, the rally has come amid a broad market that is down about 1% over the past two days.

In addition to this, the International Monetary Fund (IMF) and the World Bank both lowered their gross domestic product (GDP) estimates for the entire world, namely China and the rest of Asia. China is a major consumer of coal products, so one would tend to think that this news would be very bearish for coal names. However, this hasn't come to fruition. A major reason for this could be that sentiment has become over-the-top bearish on the industry as a whole. The chart below shows the skyrocketing short interest on ACI. In fact, the current 52 million shares that are sold short is an all-time high for the company.

Arch Coal (ACI) Short Interest Since October 2002

As with ACI, short interest on BTU looks very similar…

Peabody Energy (BTU) Short Interest Since October 2002

While I'm not saying go out and buy coal stocks right here and now, the present environment in these names, as well as the political backdrop create massive upside potential. Keep a close eye on Romney's odds to win the election in November, and should they continue to rise, one can't help but think that these beaten-down names could rally dramatically into the end of the year.

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