LDK Solar (LDK) Shows the Problem with "Hope"

I knew we were playing with fire here in the solar area. I wrote last Wednesday [Dec 31: Tax Loss Selling in ReneSola...]

(A) Solar has been one of our worst performing "bets"... I predicted a lot of consolidation in this space as it is a commodity but I thought it would come later - 2010/2011. It seems to be coming much sooner than I anticipated and I expect 2009 to be a rough one for solar [BusinessWeek: Clouds Over Solar Sector] I honestly fear for the viability of some of these names - keep in mind for every 1 public company listed in the US there are 10 counterparts (usually of smaller ilk) operating in China or Hong Kong - many of those shall perish. The credit contraction and drop in oil from $140 to $40 has destroyed this sector - I was hoping Obamamania would drive up these stocks but aside from yesterday and election day there has been nothing.

With that said, what I talked about above (business issues) are facts, and you know when Obama comes out with his energy policy and specifics the lemmings will drive up solar stocks at some point. So I want to have some exposure for those moments. Ironically the Chinese stocks have reacted better to Obama then the American stocks, but the only reason that is... is there are no facts on the Obama energy policy and its just speculation driven gambling by investors - and the Chinese stocks have the lowest prices and thus are the easiest for daytraders to run up. It's all about thesis, not facts.

And this is the problem with almost the entire market right now - we've now had 6 weeks of rally on hope - hope of the government, hope of the Federal Reserve... hope, hope, hope, hope. They will save us - the same people who 3 years ago hated government interference since it ruined innovation now pray at the alter of government interference. The only reason to buy stocks is hope or technical - stocks are not going down on bad news - hence it's time to buy. That's the casino way of doing things. Maybe we can rally on hope for another 12-15 months until facts actually say business is improving. I'd find it hard to believe. LDK Solar (LDK) is case in point - I only own these 2 solar stocks for one reason - Obama.

• Solar wafer maker LDK Solar Co Ltd (LDK) warned on Monday of lower-than-expected fourth quarter and 2009 revenue, saying the global economic crisis and tight credit markets have weakened demand for solar power, sending its shares down nearly 14 percent.
• The Chinese company also said it experienced a delay ramping up production at its new polysilicon plant.
• LDK expects fourth-quarter revenue of $425 million to $435 million. It previously forecast revenue of $555 million to $565 million for the quarter.

The horror. I thought Obama was all powerful and just by uttering words solar shall drive up demand in a world lacking of credit, and flush in solar panels. No? That's the hope. Hope. Hope. Hope.

The "thesis mongers" have unfortunately dominated more and more of the market in the past few years - everyone trying to front run each other ahead of a trend or a pattern. Hope is not a good reason to buy anything from an analytical sense but in this market Obama has been enough to move certain infrastructure stocks up 100% in weeks. It's been enough to drive a few of these solar stocks up 40% in a week. If you sit on the sideline scoffing at the absurdity of it all, you leave lots of profits on the table.

Obama. Hope. Obama. Hope.

That's not an investing theme... it's nothing but thesis. Until facts get in the way. And what LDK Solar announced yesterday is simply a precursor of what we are going to see over and over and over for at LEAST the next 120-150 days. Facts. Damn those facts. Facts that completely are in opposite of hope. But we'll be told "look through the valley - look through the darkness; the market is discounting all the great things that shall awash us in 6 months". Sure.

So I'll repeat it once more - we will ping pong between hope and reality. Reality will be what LDK Solar says - and it will be repeated by company after company in the next few quarters, in industry after industry. "Hope mongers" will say - that's ok, Obama is on the way. Uncle Ben has saved us. Obama & Ben - like Sonny & Cher. "I Got You Economy"

And this is why 2009 will not be an easy year in the market. At some point the avalanche of facts will overwhelm the Hope at the top of the hill... but guessing when is an abstract concept. And until then, anyone who relies on logic will stare at the wall in awesome horror watching the market whistle past the graveyard. Same pattern, different year.

I reduced LDK Solar yesterday a bit, down to 1.6% of fund as the action was getting frothy and it ALMOST hit the targets we laid out for it, (we were up nearly $2 in a week) but we'll take some hit today. (our entry was in the $13.40s so not a horrible hit)

But not to worry, on Jan 20th when Obama whispers "alternative energy" all the world's people will dream of a solar panel on their roof and we can drive these stocks up again.

Nevermind facts. Just stick to hope. I will watch in wonder as the market attempts to do this month after month after month through all of 1st half 2009.

Long LDK Solar in fund; no personal position