Betting on the bear

Goldman Sachs did not have a lot of good things to say about the solar industry. The investment bank is not only critical in its assessment when it comes to listed solar enterprises. Its statistical analyses also reveal how severely solar shares suffered on the stock market in the last twelve months. According to its Clean Energy Report published in the middle of December 2011, the shares of Asian and European solar manufacturers lost an average of sixty percent in value within a period of just one year. And with a decrease of 56 percent things are hardly better for U.S. manufacturers. However, the European solar equipment segment still represented the most successful grouping with a value loss of 42 percent.
A look at the balance of the BI GL Large Solar Energy Index is just as sobering. This index determined by the financial press agency Bloomberg for mapping the international solar industry plummeted by 70 percent in 2011. According to Bloomberg estimates, no share in the broad Standard & Poor’s 500 (S&P 500) developed worse in 2011 than those of the U.S. thin film specialist First Solar. The share lost more than 75 percent. In contrast the U.S. market barometer Dow Jones increased by 10 percent for standard shares. The technology exchange Nasdaq, where First Solar ranks among the top 100, moved up three percentage points in 2011.
Nevertheless, several investors were happy with the trend in prices for solar shares. One of them is presumably Jim Chanos, the head of the U.S. hedge fund Kynikos Associates. His specialty is shorts – investment vehicles with which bets are placed on falling prices, in particular with the help of so-called short selling. At the end of May 2011 Chanos – who enjoys cult status among some market followers – told the world at a conference that had otherwise not managed to garner very much attention, which industry he would strike out against next. He termed wind and solar as nothing more than “hot air” and denounced them as being “incapable” of meeting energy demands in a cost-effective manner. “Wind and solar are not efficient,” was his poorly differentiated conception of the world as far as energy is concerned.
Even if this hedge fund manager of Greek descent hardly even justified his opinion, it triggered a medium-sized quake among renewable energy values on the stock markets that abruptly put an end to the upswing after the events of Fukushima. This public announcement was probably calculated, because in order for the short strategies of gamblers like Chanos to pan out there have to be as many participants as possible. The alleged stock market gurus are no more capable of looking into the future than any conventional stock broker – but they are indeed able to influence the behavior of investors. The fact that Chanos’ words were heard by many investors is confirmed by studies conducted by the U.S. price data analysts Dataexplorers. “At the end of May, the number of short sold shares for companies in the regenerative energy sector amounted to eleven percent of all freely tradable shares of the companies,” calculated the statistics experts. This means that more than every tenth share of a wind or solar enterprise was borrowed during the same period only for the sole purpose of betting on declining prices. That was four times as much as what could be observed for standard shares on the S&P 500 index, according to Dataexplorers. Since then little has changed for the solar industry in terms of “popularity” among the short sell specialists, as a look at the current data from the U.S. technology market Nasdaq reveals.
In the case of the thin film market leader First Solar there were a total of 21 million shares borrowed for short sales compared with a daily volume of only five million traded shares in the middle of December. The number of “shorted” shares exceeded daily sales by more than sevenfold in the case of Suntech and Yingli. When it came to Yingli the gamblers drove short interest – the number of shares that have been sold short and not yet repurchased – on the Nasdaq to a record high of more than 20 million shares and thus 15 percent of the entire share capital of the company from Baoding, China in November.

How short selling works

What exactly is behind short selling? In this case speculators sell shares that they do not own in the hope of being able to drive down the price of a share. To do so they borrow the shares for a fee from a trading partner – for instance a bank that has them in its depots. Several days later they then have to return the borrowed shares. The trick works if the shares have actually become cheaper because then they can be bought back for less than they were already sold. The risk lies in the fact that prices can also increase in a few days and then the trader would incur losses.
However, volume is what counts because a high ratio of orders to sell short provides in principle for enormous selling pressure on the share – and the price falls. That is why it was a part of Chanos’ plan to publicize his intention to speculate. Short selling works particularly well with those shares where several billions are not traded daily, as is the case with highly solvent DAX or Dow Jones securities, where the impact of even concerted short selling power is not as strong. In contrast the shares of the renewable energies industry are less liquid.

Favorite target: solar stocks

“Besides the banking sector post-2008 financial crisis, I can’t think of a group that’s as hated and despised as solar stocks,” observed the U.S. Web columnist and stock broker Roberto Pedoni. “For whatever reason, this entire complex has become a favorite target of short-sellers. There are so many names in the solar sector that are heavily shorted that it’s hard to find a name the bears [who expect a downward trend – the editor] aren’t leaning all over.” However, it would be wrong to limit the strategy of short sellers to gambling alone. “Yet again, the vilified short sellers were the first to notice problems in an industry that was more hype than substance,” comments, for example, the U.S. financial newspaper GuruFocus.
In the lessons of pure market theory short sales are considered as a kind of cleaning service on the stock exchange that help to eliminate the exaggerations on the stock market – in this case too high prices for solar shares in light of their economic problems. Accordingly, however, a high short interest would also have to be an indication of imminent bullish performance on the part of the respective shares. The reason for this is that a high number of short sold shares normally indicates that there will be substantial purchases soon since the short sellers on the market have to purchase real securities in order to return them. According to Nasdaq information, this period was recently four to seven days on the average, for instance, for shares from First Solar, Suntech and Yingli. The pressure to buy can even go to the other extreme: a short squeeze. Since short sellers must cover themselves under time pressure and in doubt accept any price, their demand can shoot up the price like a rocket. These phenomena could actually be observed with solar securities, but only remained a flash in the pan that short sellers used in recent months in order to position themselves again as sellers.
It is difficult to determine just how the strategies of short selling specialists function because, with the exception of the Nasdaq, there are hardly any freely accessible statistics. The German stock exchange Deutsche Börse AG in Frankfurt – one of the largest trading centers worldwide – does not, for example, maintain special data on short sales. “How are we supposed to procure them? We cannot tell if someone who sells a share actually borrowed it first,” commented a German stock exchange spokesperson when talking with pv magazine.

Systematic sellout

In the last one and a half to two years short sellers were repeatedly provided with supporting arguments from financial analysts of banks and market research firms. Nearly every one of these establishments constantly downgraded the shares, which nipped even slight upward trends or an imminent short squeeze in the bud.
In this manner – whether through intention or coincidence – trading departments of the their own companies profited. Subsidiary companies of large business and investment banks such as Goldman Sachs and Deutsche Bank were right up in front with inscrutable hedge funds like Kynikos Associates from Jim Chanos when it came to the targeted sellout of shares.
Scrutiny of individual events may at least question the independence of the rating agencies. An example is provided by Goldman Sachs: The company not only makes money through the development and trading of investment products, but also with the purchase and sale of corporate shares. Moreover, thanks to its financial power the bank is one of the most powerful rating agencies. Up to the beginning of 2010 Goldman Sachs ranked among the largest shareholders of the wind turbine engineering company Nordex. The in-house analysts also left no doubt about the fact that this involved a very attractive company and recommended that the share be purchased for up to 14 euros. However, a few weeks after Goldman Sachs sold its interest for approximately 8.50 euros per share, the analysts’ assessment also changed and since then they recommend that the share be sold. Ever since, Goldman Sachs has stood out as one of the most pessimistic analysts of the industry, although the long-term prospects are always described as favorable. In the same period short selling – also by Goldman Sachs – substantially increased.

The optimists remain

However there is also another view of the world of renewable energies among banks. When the nuclear power stations collapsed in Fukushima in March 2011 several institutes foresaw new opportunities for regenerative energies and their shares through the change in energy policy in many countries. Institutes such as the Swiss banks Credit Suisse and Bank Sarasin, the French bank BNP Paribas and the equity research department of the U.S. rating agency Standard & Poors highly upgraded the shares for renewable energies. In contrast to the majority of competitors who outcry each other when it comes to negative scenarios, the optimists among the financial institutes have not revoked their positive message thus far. “We are quite surprised how bad the renewable equities developed after Fukushima,” Pierre-Yves Bolinger, analyst at Credit Suisse told pv magazine. “Fukushima does have effects, we can already see in Switzerland and Germany. But it will take more time than a few months to detect positive impacts in demand and the movements of companies’ stock prices.” In addition, he said, the general economic environment is quite simply poor.
That is why it would be too simple to cast the blame on speculators and analysts for the decline in prices. Short strategies hardly succeed if business and industry data do not point in the same direction. “The debt crisis overshadows everything. When Fukushima happened an escalation of the EU debt crisis on such a scale was unexpected,” says Frank von Collani, equity research analyst at the Hamburg private bank Berenberg Bank. Countries simply do not have the money for financial support for renewable projects in the foreseeable future, he explained, adding that the fact that many bank balance sheets are also threatened with substantial value adjustments on, for example, Greek government securities, does not make the situation any easier because the banks are increasingly hoarding their money. Credit Suisse analyst Bolinger also noted, “Because of the new requirements to provide a rising amount of equity capital according to Basel 3, it will become more challenging to find banking capital to finance new renewable projects.” At the same time, however, Berenberg analyst von Collani acknowledges that eco-electricity shares have “meanwhile been attractively valuated again and are interesting for investors thinking on a long-term basis.” Nevertheless, he refrains from getting into the industry in general at this point in time. No one knows whether the low on the bear market for renewable energy shares has already been reached. For many speculators this is certainly good news, for “normal” investors at the beginning of the new year, probably not. As long as there continue to be economic and industry uncertainties, the devotees of short selling will not call off their attacks on the solar industry in 2012.