It finally happened! On Friday the Fed cut its discount rate – what it charges banks for direct loans – by 0.5% to 5.75%, in an effort to increase liquidity in longer-term loans and bonds. But Bernanke-bashing is alive and well, and there is a choir of analysts saying that Bernanke has gone soft on inflation. The Fed walks a fine line between acknowledging a problem and offering relief without saying anything that might spook investors further.
Photo:Christopher Chan, Creative Commons, Flickr
Monday's movements in yields show that the Fed has failed to convince investors that they have the situation under control. Yields on three-month Treasury bills fell the most since the 1987 stock-market crash as money market funds dumped asset-backed commercial paper in favor of the shortest-maturity government debt. If investors felt that the end of the problem was around the corner, yields would be higher. We're still seeing a continued flight to quality, and that's not what the Fed wanted.
But that's not the point. The Fed's move, while helpful, won't erase all of the market's unease. It's more psychological than that. The Fed is just fulfilling its lender-of-last-resort responsibility. Individual investors have not been protected, it is the market that has been protected, and that is an important distinction.
An old Wall Street adage says to buy when there's blood on the streets, and the bulls haven't given up. Data released on Tuesday showed that short interest on the New York Stock Exchange dropped -3.5% in August, and some suggest the figures reflect a decrease in bearish sentiment. I still feel that it's going to get worse before it gets better, but there might be some bargains in the solar sector.
Given that the credit market is the source of the problems we have today, debt structures might be a logical place to start looking for bargains. The idea is simple: companies with the lowest debt should be least affected by the current problems in credit markets.
Following is a list of current ratios based on earnings from the most recent quarter. If you are not familiar with the current ratio, click here for an explanation. If the current ratio is too small, the company may have problems meeting its short-term debt obligations. The bigger the ratio, the better. I have also included, in brackets, the price movement for each stock since July 20, the day the DOW started its downward slide from a record high. Going only by the credit criterion, the lowest current ratio stock should see the sharpest drop in price.
DSTI: 0.872 (-36.70%)
SPWR: 2.119 (-9.16%)
TSL: 2.284 (-25.82%)
CSIQ: 2.514 (-30.00%)
STP: 2.84 (-18.96%)
WFR: 3.947 (+1.22%)
SOLF: 4.085 (-14.11%)
FSLR: 5.497 (-12.64%)
ENER: 7.404 (-0.3%)
ESLR: 9.802 (-12.61%)
To provide some perspective, the DOW lost -6.32% over the same period. It looks like Sunpower (SPWR – Last trade $62.20) still has some downside. On the other hand, bargain hunters might want to look at companies like Evergreen Solar (ESLR – Last trade $8.66), SolarFun (SOLF – Last trade $11.20) and FirstSolar (FSLR – Last trade $96.49). Selling could be overdone, given the strong market liquidity of these companies. We'll look into these possibilities over the coming days.
Disclaimer: I do not own any stocks mentioned above. I do not own a solar panel.