Options Trader: Wednesday Outlook

This should be an exciting day!

Yesterday’s action was much the same as Monday’s, with an irrational rally based on $125 oil cheering up the energy sector. Solars went nuts as a CitiGroup analyst Tim Arcuri claimed his "contacts indicate the House Ways and Means Committee is likely to propose a new bill that will extend most of the credits for at least several years — longer than the one-year extension that has been discussed to date. The House is hoping to pass a bill before the Memorial Day recess."

Unfortunately, there was absolutely NO confirmation of this whatsoever and we’re sure it’s entirely coincidental that C initiated coverage on Friday with a buy on First Solar (FSLR) and a hold on SunPower (SPWR). Citigroup calls FSLR a buy on Friday with a p/e of 120 and on Tuesday one of their analysts claims to have inside information that the House is going to be extending solar tax credits. No, no sign of manipulation here… Speaking of manipulation - Of course Cramer had to herd his sheep in AFTER the 7% run on the day. FSLR is already featured on IgotCramered.com as it has often been featured on his show long after the momentum has slowed.

We sold into the excitement and picked up puts on FSLR, which is a train wreck of a company anyway as the exuberance was beyond irrational for a company that sells solar cells in Europe, and the extension of the bill will have little or no impact on their future sales. What FSLR has is production problems and cost problems and materials problems and pricing problems and the nagging problem of a market cap ($24Bn) that is 48 times total revenues and 153 times last year’s earnings. That means sales need to double and double and double again, just to get the p/e down to 35 IF they are able to keep costs down over the next 3 years. This company is simply an accident waiting to happen and this is going to be an excellent opportunity to grab the Sept $330 puts, probably for less than $60 and I’m in no particular hurry to sell the June $290 puts, now $15.75 as I’m fairly confident they will be back to the $30 they were at on Friday very soon.

FSLR’s panels require Tellurium and it is a very rare metal that was $10/Kg when FSLR started using it in 2004 but ran up to $860 last year and, as of April 9th, was selling for $2,060 per killogram! Why is this? Because FSLR, in order to make just $158M (at an average of $400 per kg last year), USED UP 10% OF THE WORLD’S ANNUAL SUPPLY OF TELLURIUM! So beware Cramer fans, this is a trap that can spring pretty fast - BooYa!

Asia had a pretty good morning with the Nikkei up 1% and the Shanghai Composite picking up 3% as the earthquake damage is being spun as "not too bad" and there are rumors that a Chinese company is buying a stake in BHP Billiton (BHP), which sent the whole mining sector flying. Banks also did well but Pioneer dropped 18% on an earnings warning, the same kind of thing our markets are ignoring this week.

Europe was heading straight down in the morning as BNP Paribas posted a 21% decline in net profits and ING Group (ING) took a 19% hit and the BOE warned inflation was heading past the 3% tolerance limit and said there was "a significant chance that it could spike above 4%." Europe has, however, perked up with our CPI report.

Our markets are taking off on a very tame CPI report, showing just a 0.2% rise and just 0.1% ex food an energy. Despite the pause, Consumer prices are up 3.9% over the past 12 months with just a 2.3% rise in the "core," so any increase in the cost of goods in your life is either an illusion you are experiencing or the result of your irresponsible shopping habits because it’s sure not showing up in the government data!

According to the report:

• Energy prices were unchanged
• Gas prices fell 2%.
• Natural gas prices rose 4.8%
• Food prices rose 0.9% (that is in a single month!)
• Transportation prices fell as new car prices AND airline fares (???) dropped.

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.5% in April, suggesting incomes aren’t keeping pace with prices, which could weigh on consumer spending. How this all translates into the Dow up 40 points pre-market is beyond me. Of course this data is very suspect, but what are you going to do about it? I am simply amazed that the media just spits out whatever garbage they are handed as unquestionable facts.

We have the oil inventories today and if we can knock oil down I may even want to buy into this rally, but I am remaining cautious until we get a firm breakout of our levels. If I wasn’t already covered, I’d be covering into this morning’s pop, which is taking us near enough to the week’s high to make me happy to cover. We need 12,850 to shape up as a real floor before we can embrace the statistical BS that’s been handed to us this morning and, let’s not forget, it’s options expiration week - anything can happen!

Be careful out there!

Comments

[GH]

When did "Mark Anthony" start writing your columns for you? Most of what you said about First Solar is false.

[Philip Davis]

If you have other data and can post links I'd be happy to take a look at it.

[EnergyFinancier]

You may be interested to know that First Solar's CEO Mike Ahearn will be presenting at the Renewable Energy Finance Forum-Wall Street ( www.reffwallstreet.com ) along with the executives of solar companies like Good Energies, SEIA, LDK Solar, Applied Materials, SunPower, GE Energy, JPMorgan, AWEA, NordBank, Acciona, BrightSource, and Abengoa Solar, as well as numerous other RE executives. Mr. Ahearn will be leading a discussion of investment opportunities in Solar PV.

[Jack Satan]

Huh? Where did you get that number of $2,060 per kilogram?!? I followed the link to Mark Anthony's page, but I didn't see any reference to that price??? But if you (or anyone else reading this blog) really does believe in that price, I would be happy to unload my Tellurium position for half of that... $1,030 per Kg - Any takers?

[Chungst]

Mr. Davis:

You wrote: " FSLR’s panels require Tellurium and it is a very rare metal that was $10/Kg when FSLR started using it in 2004 but ran up to $860 last year and, as of April 9th, was selling for $2,060 per kilogram (sic)!" and quoted the following article " seekingalpha.com/artic... " as your source.

However, when I read that article, its uses "Yuan" and not US Dollars as the relevant currency. Here's the exact quote: "The charts show that tellurium price staged an incredible rally since mid January, raising from 860 yuan to 2100 yuan per kilogram, or US$300 per kilogram, a raise of 2.44 fold in less than three months. Tellurium went from US$10 a kilogram in 2004 to now over US$300."

This clearly shows you are playing fast and loose with the numbers. It was 860 YUAN (not 860 USD) per kilogram in mid January (not at end of last year). It went from 10 USD per kilogram in 2004 to over 300 USD today as written in Mr. Anthony's article.

In summary, Mr. Davis you need to check the investment thesis for your trade, especially since you failed to discern the difference between $10 and $300 as opposed $10 and $2,060, respectively. To most people, myself included, $300 is not even close to $2,060.

Cheers.

[globalmacro]

The bowtie says it all. The FSLR financial wizardry doesn't surprise me either as it comes from a man who once called ISRG an inexpensive stock at $300 per share.

[G.R.]

thanks for being honest and actually saying the truth on FSLR. there is so much deception/manipulation... it makes 1999 look like a hiccup.

[Mark Anthony]

Dear Philip:

Thanks for referencing my article. I absolutely agree FSLR is a train wreck waiting to happen. I also perceive that the wall street crooks will keep supporting FSLR for a while to allow their big clients to get out. I currently do not hold any FSLR short positions, because I am heavily invested in PAL and SWC, and I see them as an even more worthy investment than shorting FSLR.

Please have a look:
seekingalpha.com/artic...

I really hope I can get back to shorting FSLR massively before it is too late, and catch the profit on the downfall of this stock.

One slight correction. The tellurium price chart I posted is in Chinese RMB, which is aboue 1/7 of a US$. So the chart shows a US$300/kilogram price, not $2060. But that's low purity tellurium price. Also, the price chart has been absolutely flat as a dead patient's heart beat chart, for the one month, signaling no trade whatsoever to set new price. Maybe all the tellurium from 2008 production has been spoken for already.

FSLR's recent job posting on their web site is even more disturing. Read it carefully. They have since removed it from their web site, but you can still find it here:

hotjobs.yahoo.com/job-...

[Philip Davis]

I stand corrected re. the Yuan, it did not occur to me that it wasn't in dollars so that's just the 3,000% increase in price then correct? I'll make sure we fix that fact.


We did short FSLR out of the box, both on the leap I recommended and, ultimately, we took the $320 puts during or morning session (we do live trading on the member site) so we're pretty pleased so far. Today we grabbed the $310 puts for a nice morning double and we'll short them again if they go up again but the leap stays naked, looking for a double over time.

Mark - that ad is a classic! Maybe I should apply and hook them up with Jack Satan, he seems to have some tellurium to unload. I really don't understand why it upsets people to point out a problem with an investment. Yes, I was wrong about the amount per Kg and I will say so but that doesn't change the fact that there is not enough tellurium on the planet earth for this company to fulfill their business model - the one that people are investing in.

Thanks for the forum link Energy!

ISRG was cheap at $300 (it went to $350) and we bought it again at $280 last month and it's still cheap at $290 but thanks for being a long-time reader global!

[CrossProfit]

"Transportation prices fell as new car prices AND airline fares (???) dropped."

Phil,

Airline fares dropped because fuel surcharges are not included in fare calculations. This is an easy manipulation. Reduce the ticket price by 2%; on average $5 and tack on an additional $10 fuel surcharge! Also the $12 checked bag fee is not included...get the picture?

Next month airlines intend on charging a fresh air surcharge on all flights and reduce the official ticket price accordingly. Mandatory tipping of flight attendants is scheduled for July, seat cushion rental for August (otherwise you get just a seat frame) and mandatory air sickness insurance for September. Airfares will never contribute to inflation as the official ticket price will continue to descend. ;-)

[Chungst]

"Yes, I was wrong about the amount per Kg and I will say so but that doesn't change the fact that there is not enough tellurium on the planet earth for this company to fulfill their business model - the one that people are investing in."

Mr. Davis, you were off by a factor of at least 6 times, almost 7 times in your analysis (difference between 2,060 and 300) -- and you don't consider this a material issue (thank goodness you don't design bridges, help build airplanes, etc). Wow.

That comment speaks volumes about you being a gunslinger.

Cheers.

[Jack Satan]

Philip - yes I have access to tellurium to unload, and the fact that I have been able to source another 6 metric tonnes of the stuff is indicative that First Solar can do the same... I too believe that First Solar cannot continue to expand forever - they have acknowledged as much in their quarterly reports and their investor conference calls by saying that "...as we make decisions for our plants we always review the capability to source the raw materials and base our plant investments on that" and "...demand continues to exceed supply". In other words, they limit how much they expand by the availability of the raw materials (tellurium).

So I do not believe that First Solar is stupid, and I do not believe that they will expand to the point that they lose money - rather they will expand to the point that the marginal cost of expansion increases the demand/price of tellurium by more than the marginal required return on said capital... So they do not need to expand "forever" in order to continue to be a successful company, but they absolutely cannot simply build 20X the capacity today and expect to be able to supply them... which lieads to the question of "how much can they produce?"

Quick math - First Solar panel = 72 watts, and 120CMX60CM, or 72 watts for .72m^2 or 100w/m^2 (in reality these numbers are a bit off since FSLR claims even better efficiency [106w/m^2], but this discrepency is largely due to the framing around the edges). CdTe weighs 5.85g/cm^3 of which tellurium makes up 53% or 3.1g/cm^3. First Solar uses a layer of CdTe that is approximately 2.5 microns, so we multiply 3.1g X .00025 = 7.75g/m^2 or 0.0775g/w...

So they can't keep expanding forever, but how much CAN they expand? Well based on current estimates of short-term availability of approximately 775 MT per year, they that would equate to 10 GW per year if they used the entire worlds production... given that current global usage limits production to less than 300 MT per year, it would be reasonable to assume that the remaining 475 MT would be available to First Solar. equating to approximately 6 GW per year... or at current prices approximately $14.4 Billion in sales, and more than $7.5 Billion in profits... of course they will not be maxing out the world production for quite some time, since they only have plans on their books for expansion to 1 GW... and this analysis does not take into account any technological improvements whch would result in both a greater w/m^2 and less Te/cm^2...

In Conclusion - First Solar will not take over the worlds energy markets in the foreseable future, but they WILL make a lot of money...

[Philip Davis]

That is very impresssive stuff Jack but I get stuck at how you're getting from FSLR's current use of 3 tonnes of tellurium last year (which was 10% of global production) to having free access to 300 tonnes. I have seen nothing to indicate production levels likely over 350 tonnes no matter what the price as the extraction of Te depends on someone first wanting copper.

If you have links I'd be happy to take a look at that IS the crux of my bearish long-term outlook on FSLR (although the fact that their contracts lower prices 20% per year and that Germany may be topping off their own solar rebates are coming in a close second and third now).

My assumption is that even if Te production does somehow increase to 350 MT a year and FSLR grabs 1/4 of it, that's ony enough for perhaps 1 GW at that point. Also - wouldn't it be awful if some other solar company decided to use Te, since it's so fantastic?

[Mark Anthony]

Jack:

You should be grateful IRS do not tax on braggings. Where did you get 6 tons of tellurium? Must be counterfeited material. It's hard enough for me to find and buy another 100 pounds. The rapid price appreciation of tellurium indicates there is ALREADY a shortage and there is not a single ton of extra tellurium to allow FSLR to grow, at this point. Actually they need to SHRINK to make more tellurium available to other more needy and more deserving new tellurium applications. They will be forced to shrink when the tellurium price keeps raising, until eventually emerging new applications use up all the tellurium available.

FSLR's decision to start a Tellurium Initiative Department, not for the purpose of traveling around the world to attempt to purchase the material, but to try to device a way of extracting residue tellurium from mining waste, is an act of desperation that speaks louder than any words. Their retraction of the job posting from their own web site, when it caught attention is a further confirmation this is something they attempt to hide from the public view. I emailed them asking them why they posted that job on their web site and why they removed it recently, and got no response.

I would have started massively shorting FSLR at this point if I do not perceive PAL and SWC long position here is a bigger opportunity than even shorting FSLR. But I surely hope I do not miss the money making opportunity of profitting from the eventual collapse of FSLR.

[Jack Satan]

Enter your comment herePhilip - The idea that the availability of Te is based on the demand for copper is a bit of misnomer. It is true that there are currently no stand alone tellurium mines (although check out www.theaustralian.news...), and that the vast majority of Te comes as a byproduct of copper. However, what is incorrect about your assumption is that since tellurium is such a trace element in copper (.01%) it can just be left in the copper, and the copper users don't care. Because of the historicaly low value of tellurium, it has not been economically worthwhile to extract the tellurium from the copper, and so most of it is just left in there. However, now that the prices have significantly increased, there is much greater financial incentive to extract the tellurium. So in essence, not only do we not need to mine more copper to access more tellurium, but unlike other minerals, there is substantial amounts of tellurium that is taken out of the ground every year, but it just has not had a great enough value to even harvest it...

Mark - now you're being a bit disingenuous... would YOU like to purchase some of my supply? I have offered it to you with pricing and delivery infomation previously by email, and you didn't respond...