Coal stocks and inflation expectations

As traders and investors increasingly discount the possibility of QE3 (or QE to infinity if recent comments from more dovish Fed governors are to believed), inflation expectations have acted in kind. Inflation expectations, as measured by the break-even rate embedded in 5-year and 10-year treasury bonds and Treasury Inflation Expected Securities (TIPS), have ratcheted upward and approaching the highs of the year. The below chart shows the break-even inflation rate embedded in the Treasury bonds and TIPS.

I mention this because my research has shown that coal stocks tract the changes in inflation expectations. For example, the below chart shows the 13-week change in inflation expectations versus the average price of coal stocks, including Arch Coal, Peabody Energy, Consol Energy, Etc.

Historically, changes in inflation expectations tend to bottom before coal stocks. Barring an unforeseen event(s) that result in further demand destruction, I would expect higher inflation expectations to provide a floor under coal stocks.