Bookkeeping: Cutting back on LDK Solar (LDK) by 19%

I am cutting 150 of my 800 shares in LDK Solar (LDK) - this stock has been the fund's biggest loser even though I sold in the $70s and started buying back in the low $50s (down to mid/upper $30s). I have to say I was quite disappointed in the news Tuesday that they are just now starting an audit with outside auditors. The inference I had from earlier comments from the company was they would immediately begin an audit with outside auditors when their accounting issues first surfaced. Instead they just did yet another internal audit. What's the point? Get people from the outside, a 3rd party source not tainted by bias, and let's hear from them. Why that was not begun 2 weeks ago is beyond me. Whatever the reasoning, I don't like it.

I still like LDK Solar as a business and I think once this dark cloud clears this will be seen as a good price; but the action here with the audit issue is not pleasing. That said, the stock is reacting well in a bad tape and short of some terrible news the stock seems to hold at the $36-$37 level. So that appears to be the downside. Most sellers seem washed out at this point. With earnings coming soon enough I will await for more clarity - I certainly hope the outside audit has its full report ready by that time so we can begin clearing out the uncertainty. Wall street hates uncertainty more than bad news (see how joyously they reacted a month ago when all the financials whispered sweet nothings about how big their write offs and this was the 'kitchen sink quarter')

With that said, this is 1 sector (solar) that my timing has been awful in every sense - I lost many points of performance this quarter for the fund by ill timing. My investing methodology does not work in the midst of mania it appears.

1. Instead of buying either of the 2 extremely expensive American solar companies, First Solar (FSLR) / Sunpower (SPWR) or Chinese JA Solar (JASO) I wasted most of the quarter in the two "value stocks" Suntech Power (STP) or Trina Solar (TSL) - both did nothing for almost the entire quarter. I did an analysis here 3 weeks ago.
   
2. I sold out of my large Yingli Green Energy (YGE) position in August, citing the large share count that will hit this earnings season and confusing management structure - the stock went on to gain well in excess of 100% since. Ouch.
   
3. I finally got tired of waiting on Suntech Power (STP) so I reduced the position to 1.0%, the stock promptly rose about 50% within 2 weeks.
   
4. I kicked Trina Solar (TSL) out of portfolio as it never participated this quarter in the mania that is solar stocks. It has since rallied strongly.

Apparently in this sector, *I* am the ultimate contrary indicator. Hence LDK Solar is probably destined for a 100% move within weeks... ;) This appears to be 1 sector the more you know, the worse you will do. If you simply believe in "the solar dream" and just buy buy buy, you win. If you analyze things and differentiate between companies and try to avoid overvalued stocks in lieu of undervalued you lose. Hence I am a loser in solar.

Thankfully, my timing has been superb in every other sector (aside from the deep sea oil drillers which have not moved much all quarter) but this solar group has escaped me. At this point, other than Trina Solar (TSL) I find the entire group grossly overvalued (even if polysilicon pricing drops by 20-30% next year); so it is hard for me to jump back on the bandwagon of a group I have been bullish on since last winter - even though I realize speculators... errr, investors are pushing up this sector every week no matter what valuation. Earnings are coming for this entire group in the upcoming weeks, so I will be interested to see if the stocks can continue their unrelenting momentum in the face of some near term "facts" (while understanding people will just ignore any near term bad news and extrapolate out 6-9 months and believe everything will be better by summer 2008). At it's core this is a commodity business with relatively low margins with a potential of a tidal wave of supply coming online if polysilicon shortages desist, but inconvenient facts like that are being ignored and buying anything at any value is the mantra - simple is good: "oil high, solar good" (insert caveman grunt here). Standing in front of a tidal wave of herding humans never works so its fruitless to apply logic to this group at this moment. Again, this comes from a long time bull on the space.

Long Suntech Power, LDK Solar in fund; no personal position