Friday, April 29, 2011

When Silver Finishes its Run, Buy the Solar Sector

Did Jim Chanos & Aurigas Bachman just tell us when silver finishes its run, to buy the solar sector?

I don't know how long silver will continue on its parabolic trend. It has been amazing! The solar sector is down and has very high short interest following. Solar energy had a run-up when the Japanese nuclear crisis occurred, but now is going back down.

Jim Chanos argues that the raw component input cost is rising for PV solar panels. He specifically mentions silver paste component. He also states that the European subsidies are being cut back.

"continuing austerity in places like Germany and Italy and Spain where there were big government subsidies to put in solar. It still costs almost three times a kilowatt-hour for solar power than regular natural gas or coal fired power. [Also] you can't use it for base load. Solar stocks all rallied on the Japanese nuclear problem. Wind and solar may one day be there but they cannot do base load and you still need core power plants."

Bachman mentioned the same issues.
Between input costs and the Italy issue, the short-term earnings outlook from solar companies may be less rosy than companies thought at the beginning of the year. Most of the solar companies reported their 2011 outlook before Italy announced its plans, causing a near complete stop to installations in Italy.

But Bachman explains that the feed & tariff subsidies in Europe are generating 20% yield return for 20 years.

Im not a solar expert, but heres my two cents worth.
Europe subsidies may be slowing but U.S.s and Chinas are on-going. Also, China is content to sell into foreign markets abroad rather than issue more subsidies.

If oil is up, why is it not making solar more competitive compared to other energy sources? The Solar field competition is getting crowded. When companies get in trouble, mergers & acquisitions are not materializing and the survivors are picking up the scraps at marginal costs. Margins are shrinking due to competition.

There is also a confusing Efficiency versus cost-per-watt story that is clouding the issue.

The fear of Chinese accounting fraud is also stopping investors from participating in this sector.

In the short run, let's fall back to the basics contrarians rule as defined in David DremanContrarian Investment Strategies.:
"Rule 2: Respect the difficulty of working with a mass of information. Few of us can use it successfully. In-depth information does not translate into in-depth profits."

Silver and other commodity metals are up. Solar is to down.
If solar energy cant compete with oil at this higher price, when oil/silver commodities comes down, that would be a good time to measure the progress in the solar sector. Buy solar when silver goes down will be your alert signal to remember to re-evaluate the solar sector competitiveness at that time.

[Note: As I am writing this French energy major Total SA's  is offering  $1.37 billion for a majority stake in SunPower Corp  – this sector continues to change ]

Jim Chanos 
Auriga's Bachman


Cost-per-watt versus efficiency

Explanation of  base load

Short interest

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