"In the land of the blind, the one eyed man is king" -Erasmus
I don't like using quotes multiple times, but this oldy was just too perfect for what is happening right now. The Dollar, everyone's favorite currency to mock these days, is looking awfully good again. Wednesday's commodity massacre was evidence of that.
Copper (-5%), Silver (-7%), Gold -(4%), Oil (-4%).
And it gets better…
Mining Capital Equipment powerhouse Joy Global (JOY) was down 11% on the day and is down 17% since I highlighted it last week as a prime equity short idea for those looking to follow my China longer-term cap-ex slow down theme.
So what is going on here? How can the garbage dollar of Bernanke's printing press be attracting any investors? How can Gold fall 10% in two days? Why isn't Silver skyrocketing? Where are the precious metal bugs when you need them?
To put it simply, there are three reasons why this is all happening:
- The Fed is holding its ground and not easing at the margin
- The stubborn ECB continues to avoid monetization
- The Chinese have fallen off the cap-ex treadmill
Put these things together and you have what us global macro traders like to call a Deflation Friendly trading environment. With monetary policy in the West not getting much more relatively accommodative, or to put it more clearly, remaining pretty much neutral, the main influencer of prices in the commodity space becomes Chinese demand. (Again think of this marginal demand standpoint as China is probably accounting for 70% of growth in this space.) And right now it is one of those points in time when it is not good to be the World's factory. The Chinese government just reported that exporters face a 'very severe' q1 because of what is going on in Europe. Combine this headache with all the domestic pressure in the real estate market, and you start to understand why the big 'D' has resurfaced. My favorite way to play this continues to be short copper as the pyramiding financing scheme in the metal should eventually lead to a violent collapse. Though I will say I am happy to see that the Ultra Long Silver ETF (AGQ) has, as I speculated in May, turned into a repeat of the Ultra Short Financial Etf. AGQ seems to make a new low every day and is now down 75% from its peak. Anyways the bugs will have their day in the sun again, but right now is not that time. Let this deflationary cycle run its course, you will get a far better deal on gold.
But that's not all that is going on in the World.
One thing that caught my eye was the great big First Solar (FSLR) warning we got yesterday. The company slashed guidance for this year and next with the stock closing down 20%, and now trading in the low $30 range. I mention FSLR here because once upon a time as a prop trader I used to routinely short this stock in the $140-$170 range. I used to explain to my boss, who usually had no interest in understanding why I was doing something, that it was a $50 stock if we just had the patience to sit on it for a couple of years (not exactly a trader mandate, but hey, sometimes opportunities come along that are worth listening to). I had a pretty good case on why down the road subsidies wouldn't last, euro currency risk would weigh, and most of all that China overinvestment price destruction would make silicon based solar cells more price competitive with thin film cadmium telluride. Well, reading over the First Solar conference call transcript it would seem that time has finally arrived. Though if you have been following the stock for the past five months you knew that already. Silicon cells are now expected to sell for as low as $1.17 per watt on average in 2012, which means the huge cost advantage of First Solar modules has almost disappeared and maybe will disappear completely as silicon approaches 70-80cents per watt. Add in that your typical crystalline silicon module array is at 15%-20% efficiency versus the 11% efficiency of thin film cadmium, and you probably understand why this stock continues to suffer. I will however say I liked reading this conference call transcript because it was chalk filled with great quotes on what is going on in the industry. Management announced that they will be running at 80% capacity in 2012, and described the industry as 'structurally imbalanced.' Here are some excerpts:
The essential point is that the polysilicon supply chain has undergone a fundamental structural change. This is not a cyclical or seasonal phenomena. In a supply chain without structural entry barriers, several things occur. First, production volumes increase so long as capital is available to fund it, and we've seen over the past several years that U.S. equity markets and, more recently, Chinese governmental entities have been willing to provide the capital needed to fund a massive production expansion. Second, production volumes eventually exceed demand and pricing declines as manufacturers attempt to sell the excess product compressing margins. Third, prices and margins continue to decline until the financing eventually stops and only the most resilient producers remain in operation. And fourth, the supply-and-demand equilibrium that is eventually achieved is only temporary. Excess production resumes when capital again becomes available to fund it. FSLR, Dec 14th CC
and then came this gem…
In summary, the solar industry is structurally imbalanced. Production capacity is uncapped and growing. Installation capacity is limited by subsidy levels and declining. We believe large, open, transparent markets that enable the industry to achieve the current annual volumes are shrinking, and that that these programs will not be replaced by similar programs in the future. FSLR, Dec 14th CC
There is no difference between the above quote and the bear case on First Solar of the last two years; they are one and the same. The only news is that yesterday the bear case was being acknowledged by the CEO. I bet the bull FSLR story will now shift to General Electric (GE) (GE is going to be very busy with proposals as it is in thin film cadmium solar and LED bulbs, two places the Chinese have inflicted lots of pain, so also add Cree Inc., (CREE) to your list of soon to be weekly GE rumors) buy out speculation or an IBO (institutional buyout) of some sort.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
