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The first major piece of news since our recommendation to take profits on solar's powerful rally this year has turned out to be decisively negative - underlining the fact that investors with anything other than a very long-term buy and hold strategy would do well to stay on the sidelines for now and invest another day. The German government looks likely to announce that it is planning to cut subsidies for solar power installations by between 20% and 30%.

German Environment Minister Norbert Roettgen and Economy Minister Philipp Roesler are set to hold a press conference on Thursday to outline the government's new approach on subsidies. However, the indications are that the cuts will be heavier than the market has been expecting:

  • a 30% cut in the feed-in-tariff (FIT) to 13.5 cents per kilowatt hour for new large solar installations
  • and a 20% cut in the FIT to 19.5 cents for new small plants

The market has of course been expecting cuts in the German FIT system. However, this news is decidedly worse than expected and likely to continue to pressure solar stocks - particularly those such as Yingli (NYSE:YGE) with a significant exposure to German solar demand.

Earlier in the year it is probably fair to say that the market consensus was for a cut in FIT rates of around 10 to 20%. Since then there may have been increased worries that the outcome could be worse. However, the market has certainly not priced in a 20% to 30% outcome. This is bad news.

From a medium to long term perspective, solar is heading towards grid parity in a broad range of geographical areas by 2015 and the result will be significant volume growth for solar. Moreover, the extensive oversupply seen in 2011 will be significantly eroded by the second half of this year, providing for a much better environment for margins.

For these reasons, we saw great value in the deflated prices in the sector in late November of last year. At that time we recommended being long a basket of tier one Chinese solar - Suntech Power (NYSE:STP), Trina Solar (NYSE:TSL) and Yingli (YGE). You can read an article on our original recommendation here.

The long-term justification for that trade remains in place. However, we recommended taking profits on February 10th with STP up +82.5%, TSL up +67.4% and YGE up +54.9%. The extent of the move simply seemed too rapid given the short-term issues that still face the sector. For a fuller discussion see our original article here.

The story currently developing out of Germany is a timely reminder of the mixed short-term environment. Solar stocks may well have significant room to fall further before we will be ready to buy on the solid long-term story once again.

Source: Germany Solar Feed-In-Tariff Cuts Underline Reasons To Stay Uninvested In Sector For Now