Japan Is Not Going to Meltdown

Japan is not going into meltdown

Worries about the full impact of the triple Japanese disasters and the popular uprisings in North Africa and the Middle East dissipated as the world and the investment community came to the conclusions that a nuclear meltdown had been avoided, and unrest in Muslim countries would not spread as rapidly as previously thought to more important oil exporters such as Saudi Arabia. After nearly a month-long pullback the stock market rallied strongly through early April. The Federal Reserve fanned the renewed market flames by leaving its monetary policy unchanged and restating its intention to carry out its $600 billion bond purchase program through June, sending several stock indexes past their prerecession highs.

Then the sovereign debt problems in Europe resurfaced, with Portugal requesting more aid, and the U.S. budget stalemate took center stage with government shutdown threats from both sides. While the short-term discussions are over, nothing has been resolved.

U.S. debt could erupt

The deal reached minutes before a shutdown lowered the current year budget deficit by a mere 1%, with both parties claiming a major breakthrough on how to get rid of severe acne. This year’s deficit is set to become the largest ever and it is pretty clear that the political focus in Washington has shifted from job creation to tackling the national debt.

The largest single-day stock market losses in over a month came just yesterday when the Standard & Poor’s rating agency said there is a 33 percent chance it would lower the U.S. credit rating from AAA in the next two years if Washington fails to pare the country’s debts. The warning also expressed doubts that the government would move quickly to curb the mounting deficits.

GE and Google invest in solar

As Earth Day approaches (recognized around the world on April 22), it is heartwarming to see two giant companies making major bets on renewable energy.

Google joined BrightSource Energy and NRG Solar with a $168 million investment in what is presented as “the world‘s largest solar project under construction which, when completed in 2013, will nearly double the amount of solar thermal electricity produced in the U.S. today.”

GE’s announcement is more significant because of their rapid ascent as a wind energy leader which they now want to replicate in the solar space. The company announced their intent to spend $600 million to build “the largest solar factory in the United States”, which when built, at full capacity will produce 400 megawatts of panels per year. Of added significance is that their stated approach is with thin-film technology which uses cadmium telluride (CdTe), the same technology which has been perfected by First Solar (FSLR). The upcoming May issue includes our analysis of GE’s major move and our solar stock recommendations.

The Portfolio update and recommendations

The price of energy (oil) took a breather after a relentless climb while other commodities (gold, silver) are reaching all-time highs. The alternative energy sector has been hit harder, probably because of continued budget worries in developed countries placing government subsidies in doubt. The broad stock market as measured by the S&P 500 advanced 5.00% in the month since our last update while The Portfolio lost 1.77%.

Before we review which sectors and stocks dragged down our returns we must mention the strongest performer, one of our preferred energy efficiency pure plays, which advanced 16.91% in the month, helping that sector to lead all other green sectors with a 6.26% gain.

On the downside we had a couple of unhappy surprises from our wind energy stock holdings. Our speculative Chinese wind energy play, China Wind Systems (CWS), hit its 30% trailing stop loss at $3.15 on March 17th, right after our last update went out, and accordingly, we closed the position. The second unwelcome news came from another of our small cap wind holdings which caused us to issue an alert e-mail to current subscribers on April 6, when the shares plunged some 45% after the company warned of lower quarter and fiscal year results. At current levels, we view the company as very undervalued and, for our more aggressive subscribers, we recommend doubling up on your position as we are doing in our model portfolio.

Losses in these two used riding mowers shows that the wind energy sector is near the bottom with a 6.87% drop. Still, it was the solar sector which managed to lead the way down with a 7.11% drop during the month. Rallying strongly after the Japanese nuclear disaster, solar shares have since been hit by fears of further subsidy cuts in Europe causing a solar market slowdown this year. The culprit once again, is Germany’s SMA Solar, the world’s largest maker of solar inverters, which continues to manage analyst expectations downward with scare tactics, despite keeping their own guidance unchanged.

With all eyes already on Italy, the world’s second largest solar market after Germany, where discussions are currently underway to decide the fate of the country’s subsidies and annual caps, the bearish opinion from SMA caused many investors to head for the exits. Most solar stocks, Chinese manufacturers in particular, have been hard hit with several of them down by over 15% since the beginning of April.

Since inception The Portfolio has gained 29.27% while the S&P Global Clean Energy index is down 26.41% over the same period.

We are not making any market predictions, and The Portfolio invests with a long-term view, but as we approach the summer months, a statistically weak period for stocks, we would not be surprised by some corrective action or meandering before the bull market resumes. For those of us with large long equity positions we highly recommend reading “Downside Protection: When And How” in the April 2011 issue of the newsletter.