The Ticker

Just finished Richard Florida's interesting take in The Atlantic on how the current crisis might alter America's geography (economic and otherwise). The whole thing is worth a read, so check it out.

One bit jumped out: New York may be America's financial capital, but it's not the only place with a relatively high concentration of finance professionals. A surprising number of cities now rely on banking as a major source of jobs, and that could mean more economic pain in more places as damage in the sector unfolds. Florida says:

Lean times undoubtedly lie ahead for New York. But perhaps not as lean as you’d think—and certainly not as lean as those that many lesser financial outposts are likely to experience. Financial positions account for only about 8 percent of the New York area’s jobs, not too far off the national average of 5.5 percent. By contrast, they make up 28 percent of all jobs in Bloomington-Normal, Illinois; 18 percent in Des Moines; 13 percent in Hartford; 10 percent in both Sioux Falls, South Dakota, and Charlotte, North Carolina. Omaha, Nebraska; Macon, Georgia; and Columbus, Ohio, all have a greater percentage of population working in the financial sector than New York does.

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Goldman Sachs takes a look at the 2008 stimulus plan (remember that check from the government?) and finds that, yes, stimulus has an impact on consumption. It gets a bit wonky, but according to Goldman's models based on data dating back to the early 1960s, actual real consumption growth in the first half of last year should have shrunk by about a quarter point at an annual rate. Instead, it grew nearly 1 percent, and "the difference between actual and predicted consumption growth was one of the largest over the last 20 years," according to economist Seamus Smyth. (The second biggest was the second round of Bush tax cuts in the second half of 2003).

What matters here is that Goldman's model suggests more than 50 percent of the stimulus was spent, pumping somewhere around $50 billion into the economy. That reinforces Goldman's view that a similar fraction of the current stimulus will be spent this time around and the impact of economic activity "will be meaningful over the next few quarters."

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First Solar, the thin-film solar panel maker considered by many to be the best name in solar stocks, can't escape the realities of the economy and credit markets. That's the message this morning after the Tempe, Ariz.-based company's earnings report, which included some generally healthy guidance tempered by some dire comments from CEO Mike Ahearn. Shares are off 19 percent this morning as analysts slash their ratings and price targets on the company after Ahearn said on the earnings call that "the short-term outlook for the solar industry in our view has never looked more difficult."

A quick roundup: S&P cut the stock to "hold" from "buy." Canaccord Adams, Citigroup, FBR Research cut price targets. ThinkEquity slapped a "sell" rating on the stock. And remember, this is after the company blew past expectations for fourth-quarter earnings! (Earnings release is here.)

So what's happening? The answer is a combination of expectations for the sector that were simply too high and the realization too late that the credit crisis is absolutely hammering investment in the solar sector. It's also the story of the messy rise of a young industry that got caught in one of the worst downturns in recent memory. Broadly, investors spent several years pouring money into the sector that hadn't produced much in the way of profits, clear sector leadership, or the ability to sustain growth without the help of a friendly investor base and favorable government subsidies.

Ahearn deserves credit for being up front regarding the industries troubles. From the transcript of the earnings call (via Seeking Alpha) he outlines why the situation has become so difficult:

Equity financing in solar projects ranging from building owners that purchase systems for their rooftops to institutional project investors is continuing but its become less predictable and in some cases more expensive than before the crisis ensued. In particular, we’re seeing larger, more sophisticated investors take an opportunistic approach to maximizing investor returns and this is causing them to compare solar project returns to other investment alternatives that provide higher yields and/or better liquidity.

As a result of these dynamics, a couple of things are happening to the fundamentals of the business model. Project pipelines are more uncertain than before, both in terms of realization and timing, which makes short-term results less predictable. And as stated in our last call, project finance costs are higher than before, putting downward pressure on its [goal] systems and module prices.

These conditions are pressuring the entire solar value chain, equipment suppliers, module manufacturers, as well as project developers, system integrators and distributors and as an example we mentioned on our last earnings call that although First Solar generally enjoyed a strong customer base, we consider a small number of our customers to be under financial stress. We currently believe the potential customer defaults translate to roughly 10 to 15% of 2009 volumes.

Basically, even though the government stimulus package included grants worth up to 30 percent of a projects cost, that still leaves the other 70 percent that has to be financed. Right now, that's still a looming uncertainty for lots of investor who formerly flocked to the solar space. As Ahearn mentions, there's little clarity on when institutional investors will again favor the sector.

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It's not news that uncertainty and fear are running high at the moment, but it's a bit surprising just how down-in-the-mouth everybody is in the latest confidence surveys. The Conference Board's Consumer Confidence Index plunged to 25 in February, down from 37.4 in January and way below the slight dip to 35.5 expected by economists. The reading set another all-time low.

High Frequency Economics called the drop in confidence "breathtaking," and hints that the turmoil in stocks (three straight days down more than 1 percent before today's rise) is swamping factors like lower gasoline prices. HFE also says the dismal expectations index, if maintained at its February level, "is consistent with real consumers' spending falling by about 5% y/y. In Dec it was down 1.7% so there is still some way to go, unfortunately."

Action Economics says: The index remains far below prior cycle lows of 47.3 in February of 1992 and 50.1 in May of 1980, hence leaving a grim reminder of just how focused the public is on the "crisis environment" in this cycle, despite the confidence bounce we might have ordinarily seen from both a sharp drop in food and energy prices through December and the massive "stimulus" plan aimed at shoring up confidence.

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