The Week in Solar Stocks: Impossible Germany

NEW YORK ( TheStreet) -- I'm pretty sure the rock band Wilco's lead songwriter Jeff Tweedy was not referring to some frustrating investments he made in solar stocks when composing lyrics for the song "Impossible Germany," but the last few weeks' action in solar stocks suggests that the title works pretty well for the alternative energy sector.

In the past week, "Germany to Kill Solar!" headlines hit the wires. This was, notably, one week after the "Germany Saves Solar!" headlines led solar stocks higher . Ionesco and Beckett would be hard pressed to create theater as absurd as the solar sector trading often presents for the investing public.

To recap: German demand in the fourth quarter of 2011 wildly surpassed expectations, with a demand frenzy ahead of 2012 annual subsidy cuts and cheaper-than-ever solar panel prices leading to what would be a few years' worth of installations for much of the world in a few months in Germany. That in turn led to bullish calls from Wall Street that the left-for-dead solar sector was back, and in Wall Street parlance, the shares oversold.

And that's not all.

The fact that Germany had installed 3.5 gigawatts of solar in the fourth quarter for a grand total of 7.5 gigawatts in 2011 would, no doubt, lead the Germany government to conclude -- for the umpteenth time -- that its method of slowing the growth of solar through gradual subsidy reductions wasn't working.

As such, Germany would have to take an even harder line against solar in 2012, but (always a "but" when politicians are involved) that harder line would probably take half the year to define by the German parliament and as such, the demand frenzy in Germany would continue through the first half of 2012, with one last boom fueled by the fear of the subsidy cuts to come.

Look up tortured logic in the dictionary and you might find German solar market supply/demand dynamics and German solar subsidy policy as listings number one and two.

Fast forward to this past week when the German hard line had already been set - at least according to Bloomberg, which reported that German Environmental Minister Norbert Roettgen (who has historically been an avid proponent for the solar industry) put in place an overhaul to Germany's current solar incentive scheme, moving to monthly vs. bi-annual cuts.

Solar shares tanked.

Not so fast, stated Reuters, which noted that the monthly cuts idea from Roetggen's lips was just a proposal. And given that it typically takes Germany at least a month of debate to decide on the next phase of debate, that makes a lot more sense.

Reuters also gave SolarWorld CEO Frank Asbeck, as an expert on German solar (who also happens to be heading a trade complaint on behalf of U.S. solar against the Chinese solar companies), a free platform in its article to once again blame it all on the Chinese solar companies. Apparently, at least in Asbeck's rendering of solar history, the Chinese solar companies are responsible for the German solar feed-in tariff scheme and not the German government.

(For some more solar absurd theater, take a look at the Christmas card Asbeck's SolarWorld sent to clients, revealed this week courtesy of Greentech Media here , though be advised the card is about as offensive as it gets, especially for someone claiming to be heading a dispassionate fight on behalf of the forces of solar "right" against those "trade dumping" Chinese companies.)

German publication Der Spiegel got into the anti-solar act this week also, and laid out some of the talking points in the solar debate.

But back to the real absurd world of solar, the proposal for monthly feed-in tariff cuts was really a best-case scenario, as those on the other side of the solar aisle from environment minister Roettgen were calling for an annual hard cap on solar installations at one gigawatt.

Either way, it was bad news for solar stocks because it's more uncertainty about what Germany does -- or doesn't do -- to limit the growth of solar, and uncertainty in German solar policy has always been a bad thing.

Two weeks ago, Axiom Capital analyst Gordon Johnson removed all of his sell ratings on solar stocks, citing the sudden German demand. Then on Friday, a day after the "Germany to Kill Solar!" headlines hit, Johnson put sell ratings back on every solar stock he covers in a note titled, That was short. By which he meant, presumably, the period of time in which he wasn't short solar was short.

The most important point amid the solar theater season is that the sudden demand frenzy in Germany shows that for all the solar companies claim to be geographically diversifying and less reliant on Germany; it's simply not the case. Germany, the world's largest solar market, is still the sword by which solar lives and dies. The fact that this has been the case for the past three years seemed to be lost on everyone until the past two weeks reminded everyone that nothing had really changed.

The sudden solar euphoria also seemed to ignore the fact that even if the solar market reaches 30 gigawatts in 2012 (previously unimaginable) there would still be overcapacity and the need for consolidation before most companies would be able to eke out a profit. In the words of Ticonderoga Securities analyst Paul Leming, ultimately what makes solar an un-investable sector is structural oversupply, and not Germany.

But that's an argument for another week, and as of now, the great solar advance of 2012 has ended.

To conclude this week's recap, I'd like to reference an invite to an upcoming Munich cleantech conference which I just received and that I think can help cut through some of the solar stock trading nonsense. The cleantech conference invite was prefaced by a quote from Albert Einstein:

"We cannot solve our problems with the same thinking we used when we created them."

For investors, the bottom line really has not changed: If you have the benefit of a hedge fund's playbook or your own garage high frequency trading machine, and you can get into and out of these stocks in a millisecond, god speed and good luck, you will probably continue to make money.

However, for those investors who are not just interested in printing green but in the future of green and view solar stocks as long-term winners, frustration awaits you at every turn. Unless you have a formula that tells you who the solar winners will be in 2014, there is only one factor on which your short-term solar stock fortunes hinge: Impossible Germany.

"After all this time it's a pretty significant statement that Germany still matters so much," Leming said.

Indeed, there always seems to be one more German subsidy trade, whether it's positive or negative, when what is needed is an end to subsidy trades, for good.

-- Written by Eric Rosenbaum from New York.

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