Market and Solar Outlook for 2009
Feb 15, 2009
Renewable and Solar Energy Perspectives with J. Peter Lynch
Exclusively for InvestorIdeas.com and Renewableenergystocks.com
One of the most disconcerting things facing investors in 2008 was the “crazy” market and the violent swings BOTH ways that seemed to go on throughout the year. With that in mind I decided to do some research on where 2008 stood in annals of stock market history.
A Little History on the broad Stock Market
As most everyone knows 2008 was certainly one of the worst years in history for the stock market in general. In fact, the Dow Jones was down 31.1% for the year, which ranks as the 6th worst year in history. I always find it informative and interesting look at history to give me a broader perspective when such a significant event occurs.
Take a look at the tables below:
Ten Worst and Best Years for the Dow Jones Industrials
|Year||Yearly return||Year||Yearly return|
It is interesting to note that when the market goes to EXTREMES (either plus or minus), it tends to correct to the opposite extreme. It appears to build up momentum in one direction and when it finally turns around and reverses itself, it overshoots in the opposite direction.
For example: Four of the worst years ever were 1929(-17.17%), 1930, 1931 and 1932 which are generally known as the great depression years. However look at the two BEST YEARS in history, 1928 and 1933. One year (1928) was the TOP of the bullish extremes of the 1920’s and the other (1933) was the explosive momentum off of the 4 year bear market of the great depression, which continued up (1935) until this extreme too was corrected in 1937.
The next serious down period was the recession of 1973(-16.58%) -1974 which was reversed by the strong gains of 1975.
Most recently we all experienced the “technology bubble” of the late 1990’s and the terrible crash in the technology heavy NASDAQ exchange. The NASDAQ index fell -39.3%, -21.1% and -31.5% in 2000-2001 and 2002 only to rebound UP 50% in 2003.
This strong rebound in 2003 set the stage for the long bull market of 2003 – 2007, which ended in October of 2007 and resulted with the NASDAQ down 40.5% and the S&P 500 down 36.1 percent in 2008.
What about overall market volatility?
|Years with the HIGHEST Volatility in the Stock Market|
As you can see, 2008 was the fourth most volatile year in stock market history. The table shows that the worst times were during the great depression (1929-1932), after the internet tech bubble (2000-2002) and after the terrible recession of 1973-1974. If you look at the years AFTER these three time frames you will see that 1933, 2003 and 1975 were three of the BEST years in stock market history.
What is to be learned from this mini stock market history lesson?
- History does seem to repeat itself and as a result we should have some very good years AFTER this current mess has been resolved.
- The old stock market adage, “Buy them when the blood is running in the streets” appears to hold some validity; it is only a matter of timing WHEN to buy. Maybe, in retrospect, November of 2008?
- For some reason, it appears that we and the market never seem to learn as we swing from one extreme to another.
- The reasons why we never seem to learn are in my opinion are VERY simple and oh so easy to forget: FEAR (stock market bottoms) and GREED (stock market tops).
What does this tell us about the present situation? It tells me that we are firmly STUCK in the “FEAR” part of the cycle. In this case, among the things, it is being driven by:
- Uncertainly as to: Does anyone REALLY know what to do now? As we “may be” in uncharted waters. This accounts for the historically high volatility in the market in 2008 and January of 2009. The market HATES uncertainty and at this time, that is all it is getting fed by the media and uneducated speculation.
- Lack of Trust in the banking system and therefore a resultant credit crisis. This is one of the primary problems the solar industry is encountering now i.e. project funding has stopped or has been suspended in many countries around the world.
- The housing collapse and the resultant nationwide mortgage/debt situation.
How do we get out of this terrible situation?
First, the GOOD NEWS:
- We have the Great Depression and the Japanese real estate crisis of the 1990’s as an example of what NOT to do. In the depression the US government reacted too little and too late, thereby greatly prolonging the situation. In Japan they lowered interest rates too slowly and the crisis got out of control.
- We have a new administration that is staffed with smart, experienced people who are students of past financial crisis’s and should be best equipped to deal with it.
- The first steps have been the correct ones – the government moved quickly, aggressively and with significantly more money than in past crisis’s of this magnitude.
- I think we HAVE averted a total crash of the financial system and are now on the road to a long slow recovery.
- Although the stock market “appears” to be potentially heading back to test the November 2008 lows the overall market breath is getting better behind the scenes. For historical perspective this positive divergence in breath NEVER occurred in the downturns of 1929-1932 and the 1973-1974 downturn until the bottom was formed
Second, the BAD NEWS
- This is a very serious and complex problem that is in many ways (unfortunately) uncharted waters and will NOT just go away by itself. It will take time and patience.
- Even though the Japanese real estate crash was WORSE than the current one in the U.S. (hard to believe, but true) the Japanese had a huge buffer because of the very high personal savings rate in Japan, unlike the U.S. in which personal saving is very low and debt is sky high.
- I think we are still in a BEAR MARKET. Looking at the numbers in the beginning of this article I think it is clear that when you have multiple years of stock market good years it is usually followed by MORE THAN one bad year. As a result, I think we have seen the bear market bottom in November of 2008. However, I think we will see a series of bear market rally’s before we see the start of a new bull market.
- This will remain, in my opinion, a stock pickers market. There will always be areas of the market that are doing well and an investor will have to be vigilant and nimble to catch those areas and also be prepared to exit quickly when the favorable winds shift.
The Solar Stock Market Segment
Unfortunately the solar industry has been the victim of a number of negative influences simultaneously:
- The 2 or 3 year long silicon shortage which drove solar stocks over the past few years has turned into a significant silicon surplus, causing a drop in silicon prices and a resultant drop in panel prices.
- As a result of #1 solar companies are experiencing margin pressure on their panel business.
- The current financial crisis, specifically the credit crunch has resulted in a large number of projects being cancelled or postponed due to lack of financing. This will result in an excess build up of inventory and significant pricing pressure on companies to control their inventory.
- Solar stocks were the “high flyers” of 2005, 2006 and 2007 FAR out performing the general market, but in 2008 solar stocks were down 76% on average, over twice the decline of the general market. Sound familiar? Individual stocks, industry segments and the market in general ALWAYS go to extremes and at some point correct these extremes with a swing to the opposite extreme.
- Finally the solar industry is basically a “start up” industry that is not yet well accepted in the general marketplace and has not fully developed its technology future in any of its market sub-sectors. It is too bad the industry had to go thought this phase of its development when all of these other “problems” outside the industry were occurring.
What is next for the Solar Industry?
The next phase of development for the solar industry is the same phase that all new industries went through – autos, semiconductors, computers etc. – it is the consolidation and shake-out phase.
The industry WITHOUT question has a very bright future. However, as in all new industries the strong will survive and the weak will be acquired or go out of business. New technology will emerge and new leaders will distance themselves from the pack. This is NOTHING NEW and not unique in any way to the solar industry.
What can Investors expect?
Investors can expect very erratic movements in solar stocks until the overall market volatility starts to get back to the “normal” range.
** Note: if you go to a stock quote service on the internet and put in the symbol VIX or $VIX, this is the CBOE SPX Volatility Index and is designed as a measure of market volatility. Once you get a chart pull up a two year picture. As you can see the “normal” range for VIX was between 15 and 30 in past years. Late 2008 and early 2009 are clearly FAR ABOVE historical highs. In fact, you can see that the VIX moved above its “historical ceiling” right around October of 2007, the very beginning of the current bear market. Until the VIX settles down I think you will see this erratic, uncertainly driven market continue.
With this said is there a way to look at solar stocks (or any stocks for that matter) today and try to “pick” the ones that have the most potential? Once again, it is impossible to accurately determine which will be the winners and which will be the losers. However I think that there are at least three of areas an investor should look (there are others, but I would START with these three areas) at that I would consider to be critically important especially in the current climate. If a company possesses ALL three of these characteristics it would have much higher probability that it will be a leader in the next phase of the emerging solar boom.
First: CASH. During times like this CASH IS KING. So an investor will have to make sure to check each potential company’s balance sheet and insure that they have adequate cash reserves to carry them through at least 2009 without need of further financing.
Second: RELATIVE STRENGTH. In periods like this good stocks and bad stocks BOTH are carried down with the general market. However, the better stocks generally drop last and come back (when the tide changes positive) first. These stocks will also most likely be the ones with the most cash (best financial shape) therefore with the best future prospects. As a result, an investor should look for the solar stocks with the highest relative strength compared to the general market - they will be the early leaders in the next market stage and the first to break above their 50 day moving averages (see below).
One of the simplest short term methods I have used over the years to determine trading points for stocks (and the market in general) is the 50-day moving average. To summarize:
- If a stock is trading OVER its 50-day moving average it is in an uptrend.
- If a stock is trading UNDER its 50-day moving average it is in a downtrend”.
Third: PRODUCT DIFFERENTIATION. With a new industry like solar the longer term leaders are generally the companies with some form of competitive advantage or product differentiation. Remember these companies may have innovative products, but they must also pass the first two hurdles (cash and relative strength) in order to warrant further consideration as an investment.
Mr. Lynch has worked, for 31 years as an independent analyst and investor in small emerging technology companies. He has been actively involved in following developments in the renewable energy sector since 1977 and is regarded as an expert in this field. He was the contributing editor for the past 17 years to the Photovoltaic Insider Report, the leading publication in Photovoltaics industry that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. He can be reached via e-mail at: email@example.com or at his new website: www.sunseries.net.
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