First Solar

Recently, I began to search for a strong solar energy company. There is no doubt that eventually the demand for alternative energy will create a paradigm shift in the way energy is purchased throughout the world. Energy will always be  needed. Just like any company, the questions remain the same. Which companies have sustainable business models? Which companies are going to grow? Which companies are managed properly?

After reaching the financials of the 2012 FSLR annual report, it became very clear to me that FSLR is not a company I would want to invest in. Early in the AR the company touts its advancements in R&D, efficiency, and other technological innovations. Despite this, and a very long list of risk factors, I was alarmed.

First and foremost, FSLR's customers rely on bank loans to find financing for solar panels. As rates continue to rise, this will impact the sales of FSLR. But, this may not hurt FSLR as much as other solar companies as FSLR primarily sells to project developers which resell to end users. More alarming than a decline in sales is the unique risk to all solar companies: competitors, according to the AR, may be able to obtain sovereign capital, enabling competitors to operate at minimal or negative margins for an extended period of time. This debacle is a huge problem for investors in the solar industry, and underscores just how integrated politics and finance truly are.

Just to touch on an accounting issue of FSLR, long-term asset impairment, in my opinion should be listed as a risk factor. According to FSLR, "For long-lived assets, when impairment indicators are present, we compare undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to, determine if the asset group is recoverable." Putting the accounting jargon aside, essentially what will happen is that the market value of the panels will drop when technology advances. The panels will no longer have as much value, and the company will have to take a hit on its income statement. Solar technology will advance and will have an impact on its market value of installed panels compared to expected cash flow.

In the company's defense, it has been able to produce improving results in 2013. Although the results are promising, you have to question their validity and transparency. The CEO of First Solar is none other than James Hughes, the former COO of Enron. There is no doubt in my mind that Mr. Hughes has a complete understanding of First Solar and the industry experience to make First Solar a leader in the industry. But, personally, I don't believe FSLR is the strongest company in the industry. I don't have enough faith in Mr. Hughes to bring FSLR to the top. Therefore, I will not invest in FSLR.

Market Correction: Opportunity or Panic?

There is no doubt the market has gone into correction. It was understood that based on the 2013 performance at some point there was going to be some sort of correction, how big and when it was going to occur was the question. By May of 2013 alone, the market crushed expectations. But, increased tapering, valuations concerns, questionable manufacturing numbers, and lack of confidence in emerging markets has pulled the market into correction. For now, it looks like we have recovered and my bullish outlook on the year remains upbeat.

The taper in the US has been viewed as a negative; economics 101 tells us that an increase in lending rates will slow economic growth. While this is true, I have a different view on the situation. The Fed's balance sheet is at an all time high, I for one am glad to see them scale back their buying and force institutions to buy back treasuries. I do not have serious fears about inflation like some but this program has been unprecedented and it is yet to be determined what effect it will have in the long term. Although the CPI index has not been inflated, perhaps inflation can only be seen in the rapid increase of financial markets. The real economy and the financial economy are two very different things and have seen very different growth rates. Although the market has really been pushing, the S&P is still trading at 15 times twelve months earnings. Additionally, the taper signals that the FED sees growth in the economy, which there has been. This is a good thing. We are not in a rational market when the unemployment rate falls and the market falls because the FED may cut QE. Another promising sign are the spike in GDP numbers that have been largely thrown out by the street. At the same time, the FED is doing exactly what it has said it would do. Bernanke's unemployment target was 6.5%, it is currently at 6.6% and I have no doubt Janet Yellen has the same target. In some ways, it is nice to see a governmental institution sticking to its word.

With that said, reflecting on this recovery it still shocks me that there has not been any fiscal support at all. This is not a political blog but politics and finance are unbelievably intertwined. On the left, you have a President who ran on the premise of change, transparency, and increasing support to the poor. Although he had a huge win in the passage of the Affordable Care Act, how much change has he made? Underemployment is still inching down very slowly (thanks to the FED), student loan debt is at an all time high, and the real economy really has not recovered. Just last week Obama signed a farm bill that reduces food stamps -- was this what he meant by aid to the poor? Sure, financial markets are booming and US companies are reporting strong earnings but they are not hiring at a rate many would like to see. Why aren't they hiring? It is not because of increased taxes or compliance costs, it is because there is uncertainty about the future of the US economy. This stems directly from the current political climate. If the US itself is not investing in itself through education, infrastructure, and R&D, why should companies? Companies would rather buyback their own, often overvalued shares than invest in the real economy.

Congress cannot make it more any more clear they are divided. Anyone who has watched a Sunday morning talk show in the past six years can attest to this. The constant fighting between the two parties is literally painful. There has been no fiscal support to aid this recovery because congress cannot get its act together and pass anything. We have experienced a period with the least amount of bills passed ever. Sure, we have a budget now but it is not long term in structure and it only cuts $20 Billion from the deficit. Our representatives have not been able to give CEOs any reason to think that long term investments in the US will result in a respectable return on capital. There is no leadership for any party. Luckily for us growth in emerging markets has cooled off and the US stock market is pretty much the only game in town given rising interest rates.

For the year, I am still very bullish on the financial sector as well as utilities and manufacturing. Exposure to these sectors can be found cheaply through the spdr sector ETFs as well as some undervalued closed-end funds. I am still cautiously optimistic on the economy as the disconnect between the real economy and the financial economy is not found on cnbc.