- All rallies must be sold; we're in a bear market - until we begin making new highs (over previous highs), and some of the high beta names (Apple, Google) start participating it is all white noise to me. Technicals say broken stock market. Gap ups like this morning are what breaks bulls spirits over time
- Tomorrow everyone will focus on the bogus CPI number. The market will react, one way or the other - futures will make a huge U-turn at 8:30 AM and CNBC will go into overdrive analyzing a flawed figure. We'll laugh. We'll sing. We'll cry. Who knows. Whatever the number is; it is rubbish. Imported goods costs are up 13% year over year and you know how much of our product in stores is "made in the USA".
- Earnings #1: Crocs (CROX) - haven't looked deeply in the numbers but the stock is putrid after hours, down 13%. Again, not worth the risk - if you like gambling on earnings I advise you to find a local Indian casino. The stock market is supposed to be about better than 50/50 odds. Sure you miss out on a few like First Solar (FSLR) but this is not the market to take those risks. Secure your capital; making up a substantial loss takes a lot of work.
- Earnings #2: Hewlett Packard (HPQ) - looks solid from first glance but weakness in US, offset by foreign strength. Sound familiar? Problem is Cisco (CSCO) and the like are telling us the same thing....and the stocks sell off relentlessly. If the economy is going to rebound in 2nd half 2008 you want to be buying these stocks here hand over fist. I am not in that camp.
- Earnings #3: In yet another case of "where is the SEC?" - let's watch if Huron Consulting (HURN) misses tomorrow morning. Out of the the blue the stock erases 12% of value on 5x average volume... the day before earnings. A coincidence I am sure. Luckily I reduced this to a minor position but at this point anything short of a miss would shock me. But the SEC won't bother to investigate today's trades... but this is how the game is tilted to big boys and why you need to respect price action. The small investor gets left holding the bag far too much as "something is leaked" to those with the access... despite all the "rules" out there. We'll see tomorrow morning but this sort of action happens all the time and it rarely turns out well for the small guy.
- Earnings #4: Suntech Power (STP) reports tomorrow - I've taken this name down to below 1% as well. I know this name very well since I've been invested or trading it at least for more than a year. I have some concerns and I saw a Seeking Alpha article today which sort of fall in line with my guesses for why the stock is so weak.... but again, a stock breaking its 200 day moving average like this ahead of earnings usually (not always) signals the big boys are handing shares to small retail investors and heading to higher ground. I could (as always) be wrong. I've modeled this earnings report 90 different ways and I can get a worst case of $0.31 and best case of $0.47 (estimates at $0.36 but the range is much wider by the 16 analysts). The company guided for 50 to 100 basis point increase in gross margins for this quarter which would be 21.9-22.4% gross margin. If 22% is achieved and we don't have any major surprises in their operating costs or currency issues (like Yingli Green Energy was hit with), I see a beat. And perhaps a solid one. But there are multiple concerns go forward (aside from the Chinese weather issue which is more of a timing issue, nothing more) -> China is overrun with smaller PV panel makers. They don't seem to care one iota about profitability. Why do I say that? Because polysilicon (which is the building block of all solar panels) is costing $400+ on the spot market. Which means, any buys at those price point leads to margins being destroyed. But the little guys don't care apparently since they (I assume) think "build the revenue and profitability will come later". I think that is wrong (it is a commodity business) and most of these small guys will be out of business in 2-4 years (if not sooner). Or maybe the Chinese government will subsidize them - and they can surprise. But even the Taiwanese PV makers are saying it's just stupid to buy polysilicon at these prices on the spot market. But how does that affect Suntech Power (STP) and other larger public PV makers? Well it hurts all their financials - especially in the near term future. To support growth, (a) some portion of their polysilicon is supplied at fixed lower cost rates, and (b) some needs to be bought on the spot market (or near spot market pricing) - and STP is by far the biggest fish. So if they are worried about satisfying customers (who they want to make happy for the long term), and they are short on polysilicon through long term contracts they need to go on the open market. And buy at these runaway inflated prices that the small fry are causing. So this might cause some issues for future guidance on margins. And why I think the stock might be breaking down. Again, it is a theory but the small guy is always last to know - so the one advantage the small guy has is observing the price action - and the price action would imply something is amiss. Since I doubt it is something in the current quarter, I think it might be something in a future quarter. I can be 100% wrong. But we'll find out tomorrow afternoon. From the Seeking Alpha conjecture:
Hearing Street chatter Suntech guidance tomorrow morning will be disappointing on the GM side as the co has been struggling to get poly supply deals done, forcing it to buy from MEMC & Hemlock on the spot mkt.
'NCN Solar' comments:
Just a little comment on that, they will likely buy less than 10% of supply on spot but they likely won't go for more supply considering spot rates are over $400. About 50% is long term 40% is sort of in between, sort of deals they make, meaning not as good as long term, but much below spot.
Regardless, can't expect a great STP report, tho long term, you can't overly punish them for near term poly price issues, meaning there will be time to buy this one back its a supply issue, not demand, and I'm looking to buy FSLR tomorrow, if the STP report is weak in fact, and the group trades lower.
*****
Again, we are all speculating on that last piece. But stock weakness "usually" telegraphs something ahead of time. I will be very interested to see how it works out because I did not hear such language from Yingli Green Energy (YGE) but Suntech Power (STP) usually does a good job of describing the landscape for solar in their commentaries. And if it becomes an issue for them, it will become an issue for the whole food chain (save First Solar). This is not a 3 year issue because just like China overproduces everything, at some point they will overproduce polysilicon - but it a question of when. Once those prices do sharply fall, the margins for those PV makers who are still around, with scale... should explode. But investing in solar stocks right now is a high risk/high reward proposal - it was much easier in early 2007... and I theorize will be much easier around late 2009. Between now and then I expect a huge amount of volatility.
Long Suntech Power, Huron Consulting in fund; no personal positions
