Rather than do a high-level review of the week's solar news, I'm going to focus on just two pieces of news that hit the sector hard late in the week.

First, of course, was First Solar's (NASDAQ:FSLR) fourth-quarter earnings report yesterday. The company beat analyst estimates, but 2010 guidance was nowhere near as sunny as what we heard from JA Solar (NASDAQ:JASO). The dim outlook is really driven by Germany, where everyone's rushing to get ahead of the subsidy cut that's expected to arrive around mid-year. First Solar talked about a "potential pause" in the second half of the year.

That doesn't sound like the end of the world, but the bottom line is that we could get into another oversupply situation. Suntech Power (NYSE:STP) has talked about markets like the U.S. potentially picking up the slack, but that's a tough call.

Given First Solar's differentiated offering from all the crystalline solar modules out there, I don't believe it would be the hardest hit by a further round of price competition. However, collapsing prices could arguably erode any remaining advantage the company's thin-film panels have over conventional modules offered by the likes of Trina Solar (NYSE:TSL) or Yingli Green Energy (NYSE:YGE).

A lot of media outlets and analysts covering First Solar's results are pointing to a drop in the solar player's margins as a major point of concern. The company has long made it clear that yesterday's unsustainably high margins will fall. The focus is on generating economic profits, not margins. I do see reasons to be cautious on First Solar, but not because gross margins have fallen to 41.5%.

Canadian Solar (NASDAQ:CSIQ), meanwhile, has a new problem that goes well beyond margin compression. This morning, the company reported "higher processing costs and lower yields caused by certain defective production equipment at the Company's new ingot and wafer plant." On top of that, it looks like the company had to write down aged inventory following recent module price declines. CSI will report mid-teens gross margins as a result of this double-whammy development.

When a solar company operates this close to the edge of profitability, then yes, margins really should preoccupy investors. They are probably reacting appropriately to today's news.

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Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter. The Motley Fool has a disclosure policy.