SCP Blog en Copyright 2010 2010-11-08T14:44:00-08:00 Nuclear Still a Bad Plan Novermber 8, 2010 - The Vermont Yankee nuclear plant was shut down this past weekend after a pipe started leaking radioactive water (containing tritium and other isotopes). The Nuclear Regulatory Commission said the public was not in any danger. Another Entergy-owned reactor had issues over the weekend as well, as a transformer exploded, causing an emergency shut-down. No injuries and no leakage were reported at Indian Point 2. Other issues at Vermont Yankee this year: ·         January 2010 – tritium had turned up in a test well on Vermont Yankee’s property on the banks of the Connecticut River in Vernon. Later, the radioactive substances had found to have leaked into groundwater and soil surrounding the plant; ·         January 2010 – it was learned that Vermont Yankee employees had lied to legislators and state regulators saying the Vermont Yankee didn’t have the type of underground piping that would leak tritium; Nevertheless, Vermont’s state Senate has voted to allow regulators to issue a new state license for the 38-year old plant to continue to operate after 2012. 2010-11-08T13:44:00-08:00 Whose National Debt….Better Look Before You Vote This is a reprint of an article sent to us from our friends at ZFacts (   Whose National Debt? . . Better Look Before You Vote ( Especially if you're under 30. ) Is our present debt from World War II, when it was the biggest ever? Then our national debt shot up by (the equivalent of) $10.5 Trillion That put millions to work, ended the Great Depression and won World War II. But look at how fast we paid it down, Republicans and Democrats alike, to its low point in 1981. Then ... ... disaster struck. In 1981 Reagan's supply siders said they would fix the debt, but look above! They wrecked decades of progress in just a few years. So they're still blaming Congress. But ... Congressional budgets averaged $2B Less than Reagan asked for. So you can't blame any of the $3,414 Billion ($3.4T) debt on Congress. But don't we have to pay interest on that supply-side debt? You bet. Almost too amazing to believe! $12 Trillion of our $13.5T debt is Republican. But 17 years of compound interest on top of $3.4T comes to $8.2 Trillion. Without that interest, Clinton would have almost paid off the WWII debt! The supply-siders are back with the Republican Pledge. They've made the debt worse 20 out of 20 years (Reagan & 2 Bushes). Fool me once, shame on you. Fool me 20 times, ... Don't Vote for Supply Siders if You Care about Our Future! Please Pass This On to at Least One More Voter ( ... and one person who will keep it going. It's worth thinking about this. You could start a chain letter that would reach a million! )   2010-11-01T12:06:00-08:00 Bloomberg Plays Key Role in Dumbing Down America, Playing One Side of the Issues October 29, 2010 - Why is the general public so under-informed, and susceptible to Wall Street and the GOP’s opposition to the Obama administration’s economic policies? There is no silver-bullet answer, but a large part has to do with how broadly the mainstream financial media is painting the administrations’ policies with a negative brush. Case in point – this morning on Bloomberg, Betty Liu, interviewing former Treasury Secretary John Snow, who we admittedly have criticized in the past as being slightly more than competent but definitely ill-prepared for the job under George W. Bush’s administration, cited a Paul Krugman (Nobel Prize winning economist) Op-Ed piece in the NY Times: “ If the Republicans control the House, we will get the worst of both worlds. They will refuse to do anything to boost the economy now, claiming to be worried about the deficit while simultaneously increasing long-run deficits with irresponsible tax cuts.” The interviewer added, rhetorically and indignantly, ‘irresponsible tax cuts’ almost in disbelief, and in a tone totally writing off Krugman’s assessment, which we think is totally correct Bloomberg is a key financial news outlet. It is critical to most of us working in the financial services industry. It is supposed to be a bit less bias than CNBC’s Squawk Box and is definitely less so than the fair and balanced offering of Fox. But here it is, the most ‘objective’ of financial news sources we have to watch, pushing an agenda, which is, in our opinion totally short-sighted, based in greed, and chalked with an attitude and economic philosophy that is quite possibly going to inject much more systemic risk into the economy. Granted our take is debatable. But let’s have the debate. Bloomberg doesn’t want to. Here it is before election week pushing a loaded political agenda and not offering up a champion with an opposing view to provide a forum for better informing its audience of the issue from a more holistic standpoint. It doesn’t even offer up a straw man. Instead, we get fed John Snow’s response, almost robotic, that, “Well, you know, it seems to me that the important task of the next Congress is to make sure we don’t get a tax increase. A tax increase at this time would be disastrous when the American economy is underperforming as much as it is now, and unemployment is as high as it is.” Snow took the opportunity then to make a pitch for the more competent new faces, the opposition to the administration’s policies, which are queued up to take their new seats on the heels of next week’s elections. And ever the leading questioner, Liu re-emphasized “And if that happens Mr. Secretary, then you are confident that this tax issue will be resolved and we won’t get the tax cut that you say is disastrous, right?” Wink-wink. In rhythm, Snow added, “Well I think it would be disastrous” and that the new leaders poised to come to Washington as a result of next week’s election will put us on a better course. Liu asked for a description of what “disastrous” means in Snow’s mind,  with Snow responding that “we could easily have a double dip recession, absolutely, that’s what we are talking about. We are talking about the economy getting worse rather than getting better.”  The only thing missing in this interview is a ‘we support this message’ from the GOP. We know why the GOP is hostile to Obama’s policies. It is really just a partisan disposition. But why is Wall Street so hostile? After all, since inauguration day of the Obama administration, the S&P 500 is up 39.3%. That is pretty solid performance. Contrast that with the performance on Wall Street under the Bush W. regime – down 36.7%. Nevertheless Wall Street, the financial media and the proxy for business in the U.S., the Chamber of Commerce, are all calling for a redux of GW policies. What gives? 2010-10-29T13:40:01-08:00 Dumbing Down Energy - Ron Johnson (Would Be Senator Elect) Heads in the SandThis week U.S. Senate candidate Ron Johnson affirmed either a strong political agenda, an entrenched dogmatic world view or total ignorance – not mutually exclusive – opining that global warming is an ‘unproven’ science that has no place as a basis for U.S. policymaking. Johnson appealed to the well-traveled line of GOP reasoning that policies to address climate change are costly, more costly than the conventional energy policies in place today, and therefore would hurt U.S. business and result in jobs overseas to jurisdictions with less restrictions. This is a bad argument. What is worse is the fact that the Obama administration, the majority of Democrats (some of them actually buy into it) and the alternative energy lobbies have let the GOP/Chamber of Commerce make and win it. Deconstruction: ·         “Climate Change” is unproven – if Johnson et. al. want to make a strong epistemological claim steeped in robust skepticism, ‘how do you know’ in the strongest sense, then sure, climate change is unproven. On those grounds, anything which is not tautological, or defined, can be doubted. If Johnson et. al. accepts a more practical version of empiricism and science, then the overwhelming majority of scientists accept and endorse that the theory of climate change is based in fact. The beauty of scientific theory and the way most scientists (who are not subsidized) do their work, is that if counterexamples and anomalies to the theory overwhelm, or refute the theory, then it is back to the drawing board. Lack of evidence, or refutation of evidence, undermines, or negates the theory. So far, the overwhelming evidence accepted in the scientific community is that climate change is supported by the facts on the ground. It isn’t the scope of this newsletter to cite the evidence, but if you are so inclined, and have sufficient intellectual honesty, a pretty quick Google should provide some support here. ·         “Climate Change science has no place in policy making” – really? And physics has no place in airplane manufacturing models right? ·         “Putting a price on emissions will result in higher energy costs and jobs overseas” – there is no reason to believe that this is anything more than a threat, as opposed to an economic inevitability. In addition, it totally discounts the costs of climate change (but then arguing away the reality of climate change removes this problem altogether). The fact is that U.S. businesses will probably not ship the jobs overseas in the kinds of numbers that Johnson et. al. would like us to believe if policies restricting emissions are enacted. Moreover, if policies restricting emissions are more broadly enacted, new industries and jobs in alt energy and clean tech sectors would likely greatly offset jobs lost in sectors like mountain top mining. Finally, these same folks that try to scare us out of embracing climate change policies out of fear of shipping jobs overseas seem to have adopted quite well to the fact that the U.S. manufacturing industry is largely offshore because countries like Indonesia have  less restrictions for companies like Nike and production costs, as well as wages, are significantly lower. The U.S. economy did not collapse when these other sectors started moving offshore. Johnson will face Democratic incumbent Sen. Russ Feingold in November. A recent poll showed Johnson with a slight lead in the race. 2010-10-01T16:45:00-08:00 Glen Hubbard’s Agenda - Internal Inconsistencies in the GOP Economic Platform September 10, 2010 - Glenn Hubbard, former Economic Advisor to GW Bush, told Bloomberg Surveillance President Obama’s first step in the implementation of an economic plan from this point is to ‘get rid of the uncertainty.’ Simple – ‘clarify the path we are going to take on financial regulation, on tax policy, it is saying let’s extend the Bush tax cuts until we have the next presidential election so that we can have a real debate with the American people on the size of government and how we are going to pay for it – that would clear up a lot of uncertainty.’ Sure it would. It would certainly add to the increase in debt spending, which is what Hubbard and his allies also want to rail against – an internally inconsistent position with extending the tax cuts. It is a fact that those tax cuts are not paid for. The crux of the argument is that Obama also wants to let taxes rise next year on the highest wage earners while keeping existing tax cuts for families with annual incomes of $250,000 or less and individuals making $200,000 a year maximum. Republicans insist on keeping the lower tax rates for higher incomes, arguing that doing so would help small businesses too. Obama argues that's a financial burden the country can't afford to bear.The GOP conveniently dismisses history and its implications on this whole debate and is counting on its talk radio army and lobbies to help dumb down America to get its support. So, let’s review history: ·         When GW took office, he took office with a budget surplus that Clinton left him ·         When GW left office, the nation had sunk into its largest debt in history – it signed on to the first war it has ever fought on the debt (now more than $1 trillion), its strong dollar policy became a novelty argument,  deregulation ran its course and the housing market as well as the financial services industry ran off the rails, and Cheney’s statement that ‘Reagan proved deficits don’t matter’ sounded like the sound of a malicious siren Back in 2003, in our commentaries, we emphatically complained that GW and his economic policies were running the country into the ground. We lauded Professor and Nobel Laureate George Akerloff’s statement that GW had looted the surplus and pointed to the full page ad Akerloff and many other Nobel prize winners took out in the NY Times declaring the Bush administration’s economic policies the worst in our history. Of course Hubbard, a former advisor to GW, wants to defend the Bush tax cuts. He can’t do so if he accepts that this is really a have vs. have not agenda, so he conflates us all into a beautiful society led by its strong business sector where about half the people in the top 1% of the income distribution, the people in our communities, are business owners. They are the ones creating jobs and taking risks. Really? I can say firmly that this half the people in the top 1% of the income distribution do not live in my neighborhood. They do not share my pains. And the risks they take are mitigated by incentives and tax breaks. Hubbard’s argument may work well on a bumper sticker and in a talk radio one-liner but it is hardly compelling when you apply any level of logic to it. And what of stimulus, is it working? Hubbard says the $814 billion stimulus package is not working. BTW, he says it is equivalent to giving out almost $100K to every newly unemployed person and it isn’t having any effect. He acknowledged the Federal Reserve’s bold actions did help. He said in public policy there were things we could have done, investment incentives, corporate tax cuts, payroll tax cuts – all of these were possible but the President simply rejected them. Never mind the fact that investment incentives, corporate tax cuts and payroll tax cuts are already a part of the fabric of this economy. Hubbard must be suggesting that these should all have been increased, which would stretch out the debt spending further. Here are some more facts. Money borrowed from the general fund is, as of the time of this writing, hitting $13.5 trillion. How do the general and trust funds get their money? They get it from all personal and corporate income tax. It would be good for Hubbard to provide a coherent and meaningful argument about how we can, at the same time, cut corporate taxes further while materially paying down the $13.5 trillion debt – fast approaching 100% of GDP, which is unsustainable and has more damnning consequences for this economy than consequences for the families with income of greater than $250,000 if they fail to get to keep their tax cuts. Hubbard might appeal to Boehner’s economic platitudes. We can have it both ways, extending tax cuts, extending corporate tax cuts, paying down the debt, through incentives on one hand which will help us grow out of this debt, and by cutting pork barrel spending, on the other hand. First, there is not enough pork in the barrel to account for the massive level of debt this country has built for itself. Not even close, so that is a red herring. Second, it was proved, empirically in the 2001-2008 period that the kind of tax cuts Hubbard is calling for did not help the U.S. grow out of anything but rather, into more debt and disarray. Debt does matter. In the end, either Hubbard is just a bad economist hell bent on pushing bad economics into the nation’s agenda through the support of talk radio and fair and balanced programming, or he is just deeply entrenched in a political agenda which, as a byproduct deviously conflates that haves and the “have nots” of this country for the sake of voting power, but that is about where the bus stops and where the “have nots” are thrown off the bus. The irony is that so many of them are still so quick to apply the bumper stickers, with the bumper sticker politics to their cars. For argument’s sake, let’s say that this brand of economics Hubbard is pushing is a different variety than the one he pushed under GW. Let’s say it is different enough to keep us from going down the same economic rabbit holes they led us down back in the 2001-2008 period that may very well have derailed this economy over the longer term. That may be, but the burden of proof is on them to demonstrate how it is different and how, what appears to be internally inconsistent premises (cut debt spending and extend Bush and corporate tax cuts) can be reconciled in a manner that can really lead this economy back down the right path. So far, their tact is not to provide any reasonable and coherent thesis on this point. Rather, it is just to wind up the spin machine and let the media do what it does so well – dumb down America. 2010-09-10T13:02:00-08:00 The Media is Dumbing Down The Economy - We See Potentially Disastrous Consequences August 13, 2010 - The financial media continues to exacerbate the problem by lame thinking. We listened to a reporter on Bloomberg this morning talking to a fund manager about the potential for a double dip. The fund manager forecasted slower growth, at about 2% this year but suggested a double dip was unlikely. While the Bloomberg reporter brought up the ‘Bush tax cuts’, opining, ‘why would we eliminate the Bush tax cuts while we are in this period of slow growth?’ insinuating that to do so would almost certainly thrust us back into a double dip. This is bone-headed thinking. The Bush tax cuts go to the heart of the ‘leveraged’ way of thinking that threw this economy off the rails in the first place. Remember that before Bush took office the economy ran at a surplus. As Nobel winning economist George Akerloff put it, Bush just ‘looted’ the U.S. economy, drove national debt to record levels and sent the dollar into a tail spin. Here we are now in a debt-ridden economy and short-term thinkers are suggesting an extension of the Bush tax cut regime, which, by the way aren’t paid for, so they would add to our debt. Keep in mind that the proposal by the Obama administration is not to raise taxes on the middle class but only on those making more than $250,000. The leftover dogma of ‘trickle down’ economics from the Reagan era has got to go. We don’t see money trickle down from the haves to the have-nots. In the W Bush era, amidst his tax cut regime, poverty levels increased. There was an appearance that the tax cuts were having an effect of driving the economy because there was so much other leveraged policy in place, including easy money and ridiculous incentives for folks to borrow on homes and personal expenditures. But as we saw, at some point, in a leveraged economy you have to pay the tab. We would expect a more intelligent positioning of the issue by a media powerhouse like Bloomberg. But they have dumbed the issue down to suit the political purposes of those advocating the extension of a Bush tax cut and through implicit advocation of the policy, they are almost holding the Obama administration hostage on the issue. The more they build up expectations that the Bush tax cut policy should be extended and show the perception that more fund managers are behind it, the higher the potential shock to the markets if the Bush tax cuts get eliminated. As it stands, there are hardly any people in Washington that have the intestinal fortitude to craft and advocate policy that is designed for the long-term good of the country. We have ‘fast food’ policy instead – policy for the here and now. Policy to make us feel good for the time being – never mind the longer term implications. This is the same mindset that drug addicts get – just one more fix. In this analogy, our addiction is leverage and spending. But we are inevitably faced with the ‘new normal’, where GDP growth is going to, at best be in the 1% to 2% range. Consumers who are tasked in this flawed economic paradigm  to carry the weight of 70% of GDP, have seen 8 to 9 million jobs lost and confidence is reasonably poor. So we see in this morning’s data that retail sales are sluggish. This is a predictable conclusion. We haven’t seen the Street recalibrate expectations for S&P earnings yet to reflect 2% GDP growth instead of 3%. When they do, stocks will look more expensive, so we see systemic risk built into the markets at current levels are suggest that investors take a risk-managed approach accordingly. Here is another topic that the financial media is totally missing. There is no serious reporting going on, only ‘oohs’ and ‘ahs’ of the type that you get at a  circus when the ringmaster stands in front of the elephant in the room. Well, the elephant in this room is that the system is broken. The economic assumptions are flawed. Policy makers in Washington are paralyzed by partisanship. And the financial media, which should be informing us and providing us with a breadth of perspective, is just dumbing us down instead. Structural Problems: ·         Housing market continues to reel and foreclosures continue to increase, while home price values remain soft; ·         The labor market remains in bad shape, as businesses borrow and hoard cash but are not hiring back the workforce; ·         Credit remains tight, if not totally unavailable to most consumers; ·         Consumer confidence remains poor; ·         Retail sales continue to be soft (keep in mind that in order for consumers to carry their weight of GDP they will have to spend more than 90% of their disposable income); ·         Economic data is basically weakening across the board; ·         The national debt is approaching 100% of GDP. The New Normal ·         Target unemployment will be closer to 7% than 4%; ·         Target GDP growth will be closer to 1.5% than 3%; and ·         Unless the U.S. addresses its debt issues, a step down from Aaa rated debt. There is no quick fix. We are not going to get the economy back to a truly stable condition until we make some hard and uncomfortable decisions, which may mean a prolonged period of that feels recessionary. Do we expect that to happen? No. Politicians won’t have this conversation. The financial markets don’t want to hear it. Consumers have been led to believe it doesn’t need to happen, having bought into the rhetoric spewed out by talk radio that all negativity in the economy which impacts them at home could have been avoidable by a better decision and policy in Washington. So the best case in our opinion, is the New Normal. The worst case, in our opinion, is that the stress just continues to build as Washington kicks the ball down the road in deference to the quick fix today. If that happens, the stress in the system, the structural problems, will ultimately lead to a break and the recession of 2008 will look mild in comparison. At that point, we will have less tools to deal with it as well. We will have run debt up to much higher levels, and our debt will likely have achieved a lower rating by that time. We won’t be able to as quickly print our way out of it. 2010-08-13T12:31:00-08:00 Our Take on the New Normal - Adjust for Downside Risk Now August 12, 2010 - We continue to think that the Street has already priced in, if not overpriced in, the impact of relatively strong earnings season. It has, up until yesterday, been largely ignoring the implications of all of the negative economic data we have been getting. ·         Retail sales lagging as consumers are spending less. MasterCard Advisors SpendingPulse reported this morning that U.S. retail sales rose 0.1% in July from June. Excluding autos, sales fell by 0.9%. On a year-over-year basis July sales ex-autos were up1%. ·         Housing market remains in disarray. Realty Trac said this morning that foreclosures increased again in July. Banks repossessed more than 92,858 properties in July, up 9% over the previous month and up 6% in the year. ·         The labor market is a mess. This morning’s weekly jobless claims report, once again, was worse than expected. There can be no economic recovery in an economy which counts on consumers to represent 70% of GDP, when that economy has lost 8.5 million jobs and is close to 10% unemployment. In this environment consumers will predictably slow their spending. GDP will predictably contract, and potentially grind to a halt. Add to this dynamic the fact that there is really very little the government can do without making the situation worse, either in the short term or the long term. If the government opts for the populist-driven near-term relief, it will continue with stimulus (debt) spending measures and policies. But with the national debt approaching $14 trillion, and 100% of GDP, we run the risk of throwing our economy off the rails if the U.S. loses its AAA rating. If the government does what it needs to do (our opinion), and focuses efforts on nursing the economy back to health by cleaning up its balance sheet, shifting policy to emphasize more export  business and more domestic manufacturing and less on a reliance on consumer spending, then we can expect a prolonged period of slower, if not anemic growth while the U.S. economy’s fundamentals hopefully stabilize – the ‘new normal’. What the populists don’t admit, or realize, is that it is probably going to be the case that this is unavoidable. Even if they throw stimulus measure after stimulus measure against the wall – whether in the form of cutting taxes or printing money. The disingenuous component of the populist argument is that any tax cuts would not be paid for any way and would just add to the debt. This is a discussion that most folks in Washington either don’t want to have or are totally missing the point on. Against this backdrop, we will continue to remain cautious. We think there needs to be a shift in thinking about valuations – unfortunately. In the ‘new normal’ , a price-to-earnings target of 14x (the historical average) the S&P 500 is probably wishful thinking. In the ‘new normal’ it is probably going to be closer to 10x. We also continue to think that the Street is over-optimistic about FY10 expected earnings for the S&P at $82 to $85. We think the number will likely be closer to $70. If we are right on these points, at yesterday’s closing price, the S&P 500 is trading 15.6x earnings of $70 and looks topped out. The consensus view would have the S&P trading at 13.28, still not exactly a depressed asset range. If we are right about the inevitable adjustment to valuations under the new normal, a 10x trading range for the S&P 500, assuming $70 would put the index closer to 700, a serious leg down from the current 1,089 level. Even at $80, it would put the index closer to 800, which represents about 26% downside risk. In our opinion this scenario is not a question of ‘if’ but ‘when’ and we would caution our readers to stay sober and not get caught on the wrong side of this trade when the Street gets around to doing the math. To be sure, this last round of earnings reports was pretty solid, demonstrating that companies are doing a good job managing their cost infrastructure. But they are hoarding cash. In this market, for a public company, it is easier to borrow money (at historically low rates) for stock buybacks to window dress solid earnings than it is to find the intestinal fortitude to start hiring again, in anticipation of consumer demand 2010-08-12T12:37:00-08:00 Time to Get Agressive on Renewables? An investor asked us the following question this morning: Do you think it is time to go big time on margin into renewables, thinking they will catch up here to the market finally??? Our response:   Nope - margin is for extreme situations (opportunistically) in my opinion. Right now, we are in the Netherlands. Street continues to bet on $80-$85 on S&P 500 earnings this year. At $80, we are looking at a current P/E of 13.83. Historically, trades in the 14 range, so go ahead and mark 13 on the low side and 15 on the high side - which would put the S&P at 1,200 to the upside. To me that doesn't make a compelling use of margin.   I would be more inclined to use margin on a deeply oversold scenario.   My outlook for the S&P is more bearish. I don't think $80 will be attainable. I am looking for something closer to $65 to $70. At $70, we are at 15.8x earnings, which seems a bit topped out.   The data on the economic front remains mixed, so I don't see a scenario where the bulls run valuations up into the 16-20x range in any case.   This is all more 'macro' driven considerations. Drilling down the renewables, my general approach is not to try and swim upstream. So if the broader markets are getting pretty topped out, and could potentially pull back, I will wait for the pull back to stick the net into the stream for the fish I want to catch.   Until then, I am looking at relative strength as  an opportunity to sell calls into (hedging downside risk)....when stocks pull back, selling puts on stocks I want to own at lower prices.   This morning's reaction to home sales data is what it is - 'less bad' - it is not 'good'. Businesses are still not hiring. Consumer sentiment remains in the tank. Washington is getting set to go to war over the Bush tax regime which will further infuse 'uncertainty' into the mix and the Street is not fond of uncertainty. It will certainly react to the potential that rich folks don't get to maintain their tax brackets at some point in the process.   2010-07-26T13:44:01-08:00 Losing the Energy Debate Depressing – that is about what comes to mind when one thinks about the deconstruction of Obama’s once impressive Energy Plan. 2009 started out with a bang and expectations were high that Democrats in Congress might leverage their majority, spurred by Obama, to get an Energy Bill enacted in Obama’s freshman year. But then Obama embraced the healthcare debate and energy took a back seat. By the time all was said and done, a weaker healthcare plan was passed, and as Obama made his first State of the Union Address, he was conceding ground, now backing offshore oil drilling, clean coal and promising more support for nuclear. All the while, opponents to an energy bill promising commitments for alt energy, clean tech and putting a price tag on pollution have gained ground, promising to thwart any version of a bill that threatened higher energy prices and American jobs. After all, that is how they have framed the debate, while Obama and other advocates have stood by letting them have it their way. At this point, it looks less likely that any energy bill is going to make it. Not even the worst environmental disaster in U.S. history, which should be an indictment on offshore oil drilling, and make us all think twice about mountain top mining as well as nuclear storage issues, has buoyed Obama et. al.’s agenda. Clearly, Obama is feeling the pressure. This week, reports surfaced that Obama is making another concession. White House Chief of Staff Rahm Emanuel has gone on record signaling that the Obama administration will now propose caps on the utility sector this week, and utilities only – never mind other polluters. The thinking here is that this would give an energy bill a better chance to get through a more-partisan-than-ever Congress. Did we say this is depressing? With this much of a lack of conviction, why should opponents agree to even a utility-only cap? Why not hold out for no caps at all? Meanwhile, a federal judge in the U.S. Eastern District Court of Louisiana struck down the Obama administration's six-month ban on deepwater oil drilling in the Gulf of Mexico as rash and heavy-handed Tuesday, saying the government simply assumed that because one rig exploded, the others pose an imminent danger, too. If the Obama administration had its act together, it would have made a better case. It gets worse. In California, which is generally speaking a proxy for where clean energy legislation is heading across the nation, the oil industry-backed measure to suspend AB 32, which sets a limit on GHGs from automobiles, oil, refineries and other industry, requiring up to a third of the state’s electricity to come from renewable sources by 2020 and would drive increased sales of fuel-efficient cars,, has qualified for the November ballot. On the oil industry’s side – Meg Whitman – who is gaining momentum politically in the race to California’s governorship. On the side of AB 32, and the advocacy to reduce emissions, is Governor Schwarzenegger,  who is on his way out under heavy criticism over the state of fiscal disrepair in California. Opponents to AB 32 have smartly positioned the legislation as being anti-jobs, and as a ‘tax’ on energy which will make life harder on consumers, or at least more expensive. This is a mirror image of the debate being held on the national level, and as with that debate, supporters of AB 32 are totally failing to show the costs of higher emissions and effectively counter the argument that reducing emissions will result in job losses. Did we mention this is all depressing? 2010-06-23T12:49:00-08:00 Our Take on First Solar (Nasdaq:FSLR) - Is Needham’s Bearish View Warranted? June 7, 2010 – Asked this morning by a reader about my take on Needham’s outlook and comments regarding to First Solar (Nasdaq:FSLR) – initiated at UNDERPERFORM with Fair Value of $92 – here is my take:  I am most concerned about the whole group on the euro exchange – most company guidance is based on a $1.20-$1.25 euro. If the euro continues to slip, it will mean further downward adjustments. For example, as Bachman from Auriga points out about First Solar: “A sensitivity analysis suggests that for each 0.01 move in the EUR/USD exchange rate, revenue is affected by $10 million and net income is affected by $6 million.” First Solar’s guidance is under an assumption of $1.30, we are at $1.19 this morning. I agree with Needham’s assessment that margins will contract, and with most of its reasons for the contraction. It is a bit of a concern that module efficiency seems to be hitting a ceiling in terms of improvement, and manufacturing cost/watt has been leveling out as well. Perception will likely be that c-Si firms will start to catch up. In terms of insulation to this risk,  I think First Solar’s balance sheet with more than $1 billion in cash and marginal debt is key. It has the potential to deploy capital strategically for higher margin/value-add opportunities. The Needham assessment is a good one, I think, on its own merit. Add to that the potential for broader market risk. The Street, and media, is starting to spend more cycles on the topic of whether we are heading for a retracement back into stronger recessionary headwinds. That this is just becoming a media-worthy topic is remarkable, as it has been obvious for months that conditions in the labor market were nowhere near where they need to be to support GDP forecasts and S&P 500 earnings forecast that were driving stocks higher. I think a test of the 1,056 level is eminent. There are basically two lines of thinking here – the bullish one is that stocks are oversold, and this is based on expectations of S&P 500 earnings this year coming in the $75 to $85 range. At Friday’s close of 1,064, this would put the forward PE at 12.5 to 14.18. Pretty much near discounted to historical levels. On the other hand, the labor market is so dismal, and credit markets are so unforgiving, adding to that the outlook for the housing market, that consumers will be loath to contribute the level of spending corporate America needs to achieve the kind of earnings mentioned above. In which case, I am looking for earnings this year closer to $65, and therefore, stocks don’t look oversold. They still look expensive with a forward PE of 16.36. Assuming a PE worthy of getting back into accumulation mode for stocks is at about 14, and assuming $65 in earnings this year, we would be inclined to stay on the sidelines form the buy-side until the S&P 500 dips to 910, which would be another 14% dip from here. So broader market pressure could also be a drag on First Solar, as well as the group. It is too bad for solar companies, which generally had positive remarks in the latest round about increasing demand. That theme is getting totally drowned out now by the FX issue, as well as erosion in the European economy which has been a key driver of growth. And looking at the most recent California Solar Initiative (CSI) data, where California is basically a proxy for the U.S. market, it is a mixed bag. In May we were way down in terms of applications at 63MW (from a record 168MW in April), so this could be a signal that headwinds are picking up. On the other hand, year-to-date through May, we are at 332.59MW in applications compared to 104.44MW, a 218% positive variance. A lot to watch. 2010-06-07T14:01:00-08:00