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the daily reckoning article

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    Beginning in early January, vicious snowstorms cut a destructive path through the Chinese countryside. They affected millions of acres of farmland, crippled national transportation, and left a 111 billion yuan hole in the economy.

    Coal took off.

    That ice and sleet got between coal mines and coal power stations. China had to source its coal from elsewhere, pushing up global prices. The Australian spot price for thermal coal (used in power stations) has ballooned to US$140.

    Contract prices don't move without negotiation, so they're still lingering at $US55. The next set of talks between contract buyers and sellers takes place mid-year. This has meant higher valuations for Australian coal stocks, with investors anticipating a higher contract price.

    But Aussie coal companies have put on serious weight. The average P/E for the top six Australian coal producers is just under 100. These companies have also averaged 15% share price growth since the beginning of the year. Remember...that 15% comes in spite of the biggest market correction since 1987. If you bought into coal in late December, you have every right to be feeling smug today now.

    Pricey coal companies wouldn't worry us so much in a carefree, rising stock market. But at the moment, there's the risk that any day another big investment banking loss or bad US housing number could spark a mini-crash. Coal companies wouldn't do well out of this. If you lost 20% in a week...well...you'd have to hope that prices would rebound and you'd break even. That could take months.

    To get an idea of what we mean, look at iron ore stocks. They were in almost exactly the same position as coal before January. Investors had bought in heavily to take advantage of future contract adjustments. When the correction in the share market struck, iron ore stocks fell hard. Fortescue (ASX:FMG) dropped 41% from its high in late December, compared to the market's 18% loss over the same period.

    We're not saying coal's a bad investment. It's more of a "hold". Over the long term, it should do well. Who knows...it might even add another 20% in the next few weeks. But it's not prudent investing to leap in at today's prices.

    On that note... if shares do crash, it might be the perfect time to go long in coal.
 
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