This week’s news out of Germany was a terrible reminder of just how bad a shape Europe is in. The strongest country on the continent said that its GDP slowed to just 0.1% growth, which was down from 1.3% in the previous quarter. If Germany slides into a full-blown recession, the weaker links in the EU economy are going to be hurt even worse. If Germany catches a cold, the rest will die of pneumonia.
Which Means…
My bullish call on the solar sector was in all likelihood wrong. I liked JA Solar (JASO) due to its low valuations and low cost advantage, but the stock and the sector are heavily dependent on a healthy subsidy environment from Europe, with Germany and Italy being the two most important countries involved. Trouble has been brewing in Italy for a while and I just mentioned the anemic growth that Germany posted. JA Solar recently came out and said the pricing environment is deteriorating further, which is hurting their margins even more.
I still think solar has a bright future when all is said and done, but at this time the negativity surrounding the sector and the dependence upon an increasingly weakening European subsidy program do not bode well for the stocks, especially in the near term. It is better to acknowledge this now rather than cling to a call that doesn’t seem to reflect reality anymore.
The Next Shoe
I recently wrote about the risk premium in stocks not being high enough to capture all the risks out there and I still think this is the case. Many pundits are comparing Europe to what we went through in 2008, and if this is so than there is a lot more pain that has to be endured before it is even close to being resolved. The market will resume its “risk off” swoon if there are signs of banks in trouble or if there are rumblings that the contagion is spreading there. With mighty Germany’s economy screeching to a halt last quarter, it seems it is a question of when, not if.
Europe Is Still In Huge Trouble is an article from: 
