I Think the Markets Are Still Undecided

Markets remain undecided

As July began, the stock market was rallying strongly and the Dow Jones Transportation index even established a new all-time high, prompting some to predict an imminent Dow Theory buy signal. Alas, the Dow Jones Industrials which needed to set new highs to confirm a signal started tumbling instead. The Transportation promptly followed suit with a bearish gap reversal.

As ways how to get rid of smoke smell in house go, the price of copper has been more reliable in recent years than the Transportation and Industrials indexes used by Dow Theorists. The industrial metal is up over 14% since its May lows which is bullish for the economy.

The European Sovereign debt crisis has accelerated and the specter of a U.S. default has risen as yet another potential blow to the economy. In the absence of a crystal ball we cannot predict the outcome of the debt ceiling debate. We would like to think that cooler heads will prevail in time to steer away from the precipice, but we are not willing to bet on it.

For now, fear has returned to the markets and investors are shunning risky assets once again. Gold is at new record highs.

The energy sector has been rallying with other commodities. Many are watching current crude oil price moves as they represent the first serious attempt to stop declines and establish an intermediate low. Light crude oil prices had fallen over 20% since their highs in early May, but they bounced back some 8% from the June lows.

Judging by the S&P Global Clean Energy Index which dropped over 4% in the last month, the renewable energy sector is not participating in the broad energy rally. With all the doom and gloom about the economy, the national debt and budget deficits added to the gridlock in Washington, energy policy is a very remote concern right now.

The stealth clean economy

A report published last week by the Brookings Institution and Battelle, “Sizing the Clean Economy” revealed some startling figures. The public at large remains mostly skeptical about the amount of green jobs that can be created in the sector of the economy that produces goods and services with an environmental benefit. The conclusions of the report give us much hope for the future. For example:

  1. The clean economy employs some 2.7 million workers, already more than the fossil fuel and bioscience industries
  2. From 2003-2010, newer clean economy establishments – especially those in young energy-related segments such as wind energy, solar PV, and smart grid-added jobs at a faster rate than the national economy
  3. The clean economy is manufacturing and export intensive

Buying dollars for 62 cents

The article “Solar Contrarians” in the July issue of the newsletter presented a review of why we believe the solar sector is oversold and why selected companies are now screaming buys. As the solar sector declined some more since then we feel compelled to highlight one of these opportunities here. One of the two solar companies we added to The Green Portfolio two weeks ago, the Chinese maker of solar wafers, has since issued reduced guidance for second quarter revenue and margins, for which it got punished with lower share prices.

Forgetting about all the noise and bad news, this is a profitable company that’s gaining market share in a fast growing market. And it sells below book value! The company has $4.53/share in cash on hand, more than yesterday’s closing price.

Yes, investing in Chinese solar stocks comes with a non-negligible amount of risk, but if you can stand the heat you will seldom find more favorable risk/reward propositions than right now.

The Portfolio update and recommendations

Despite extreme weakness in the renewable energy sector, and a one month decline of 4.05% in the S&P Global Clean Energy Index, The Portfolio rewarded us with a gain of 2.18%.

Uncharacteristically, the Holset HX35 was not the laggard this month as that distinction went to the energy efficiency segment which was pulled down by plummeting LED stocks. The LED sub-sector was in fact the worst industry segment of all during the last month, and our portfolio’s worst performer was the leading provider of LED manufacturing equipment which lost 20.55%. Much of the sector’s weakness can be attributed directly to successive quarterly misses, rising inventories and lowered guidance by LED industry poster child Cree, Inc. (CREE) The build out of global LED manufacturing capacity is nowhere near complete and we are sticking with our LED stock through the current weakness.

On the positive side, the strongest segment of our portfolio was wind energy which gained an average 11.42% this month. All of our wind energy stocks had double digit gains with the strongest of them, Woodward, Inc. (WWD), a leading maker of energy control solutions sold to wind turbine makers and other industries. After gaining 12.17% this month the stock is now up 82.17% since we recommended it.

While the solar energy sector continued its slide, it also delivered our best performer which for the second month in a row is our preferred U.S.-based solar manufacturing equipment provider. With this month’ 19.03% advance, the stock is up over 44% in four months.

We are now bracing for a rough earnings reporting period during which it would not be surprising to see companies sold off for the slightest misses or signs of future weakness. As always, the solar sector should be a favorite of short sellers anticipating more bad news.

On the other hand, since the solar sector is so extremely oversold with most of the sector’s risks and liabilities factored in current valuations, any indication of stronger than expected results and outlooks could trigger rallies in selected shares. Just remember that if share prices start moving upward, the shorts will be forced to cover, creating that many more buyers for these stocks.