Stocks Moving Higher - Fed Remarks and ISM Data Spark Further Recovery Optimism

March 1, 2011 – Stocks are opening higher this morning as the Street’s mood swings back to bullish on expectations for U.S. economic recovery. It seems almost like concerns about any implications of Middle East instability are in the rear view mirror. Meanwhile, Bernanke is set to address Congress this morning where he is expected to indicate interest rates will remain near zero. In China, manufacturing has slowed to the slowest pace in 6 months.

In terms of key economic data, the Commerce Department is expected to report that construction spending in January declined by 0.5%. The ISM’s Manufacturing Index for February is expected to increase to 60.9 from 60.8 in January.  

The dollar is slightly softer against the euro, with the euro trading at $.3836. Expectations are that the Fed will follow the European Central Bank in terms of maintaining a ‘loose’ monetary policy. Interestingly, according to the latest data from the Treasury, China increased its U.S. debt holdings to a record $1.175 trillion in October. Total foreign holdings of U.S. debt is $8.96 trillion. Meanwhile, expectations are that Congress will lift the debt ceiling  - again – shortly, which is about to be breached at $14.29 trillion.

Gold prices are up $12.10 to $1,422, which is clearly an indication that something has to give. Gold is a safe-haven trade, and typically does well when perceived systemic and economic risk, as well as risk in equities is rising. To be sure, with oil prices rising to $100, the instability in the Middle East, the rising U.S. debt levels, as well as other concerns in the U.S. system including unemployment, housing and the credit environment, it seems that gold traders are on track. But meanwhile, if you listen to the financial media, the spin on U.S. economic recovery continues and stocks are rallying again.

Oil prices are up $1.23 to $98.20. Middle East unrest continues to drive oil prices higher, while softness in the dollar is helping to buoy commodities altogether. The International Agency said that the cost of oil imports for the U.S., European Union and Japan may rise about 29% to $900 billion this year if crude prices average $100 a barrel, which is almost $200 billion more than in 2010 and potentially threatening their economic recoveries. The U.S. may pay $385 billion for oil imports this year if crude averages $100 a barrel, compared with $305 billion in 2010.

In terms of corporate/sector updates:

·         Alternative Energy – Solar Sector - JA Solar (Nasdaq:JASO) signed a 110MW supply agreement with Solar-Fabrik AG, with modules scheduled for delivery this year.

ReneSola (NYSE:SOL) reported FY10 revenues of $386.4 million, compared to $179.8 million for FY09, with gross margins of 30.9% and -0.6%, respectively. FY10 net income was $61 million, or $0.34 per diluted share, compared to a net loss of $28.1 million for FY09. From an operating perspective:

 Total solar wafer and module shipments for the full year 2010 were a record 1,182.8 MW, an increase of 124.6% from 526.6 MW for the full year 2009. Management said it continued to execute on our cost-reduction strategy in the fourth quarter, lowering non-silicon wafer processing cost to US$0.24/W, adding that its polysilicon plant also began to contribute to profitability as ReneSola continued to ramp up polysilicon production and reduce production cost to US$45/kg in February.

It also said it intends to further reduce wafer processing cost in 2011 and increase the current polysilicon production to 3,500 MT through de-bottlenecking while reducing cost to US$35/kg by the end of 2011. It said it has secured 20 long-term contracts in 2010 that represent 1.3GW of expected wafer sales in FY11 and its in-house poly production will meet about 30% of its internal poly demand with a FY average cost/kg between $40 and $45.

In terms of guidance, For Q1 2011, management expects total solar wafer and module shipments to be in the range of 320 MW to 330 MW, revenues to be in the range of US$310 million to US$330 million and gross profit margin to be in the range of 30% to 32%. For the full year 2011, it expects total solar wafer and module shipments to be in the range of 1.6 GW to 1.7 GW, representing an increase of 35% to 44% year-over-year.

In terms of what we expect in today’s session, look for stocks to move higher as the Street focuses on low interest rates and continued signals for economic recovery in the U.S. We remain both skeptical and cautious at current levels.