Like so many summer markets, this one is a tough one. But it isn’t the usual “sell in May and go away” problem–actually, the 10-year cycle and the Presidential cycle show the 2008 market normally would be higher by Labor Day than the end of May. The problem this time is shaking off the known bad news and breaking out of the 1270 to 1440 trading range on the S&P 500 that reflects the fear around the housing mess, the credit crunch, inflation and high oil prices. Oil prices are in a parabolic increase, which is a main factor keeping a lid on equity prices. The bad news is that parabolic increases often go much higher and last much longer than anyone expects, and oil really could hit $200 a barrel after a bad hurricane or a geopolitical incident. The good news is that parabolic increases don’t last. Best of all, when they end instead of consolidating at a higher level–they break. When that happens, the stock market should soar. Another way to look at this is that oil hit nearly $140 a barrel this week, and the S&P is still well above the March lows. If the bears can’t use the current flow of bad news to knock stocks down, what are they going to use in the future?

I think oil will peak at $155 to $160 sometime in the next 45 days or so, but that’s just a guesstimate from looking at the chart. There now is a chance that $140 marked the top, but we won’t know until it either makes another run or two at that level and then fails, or breaks $130 right now. If you see that breakdown happen at the same time the S&P 500 breaks out above 1345 and then 1370, expect the rally to April 2009 to accelerate dramatically.

We’re in the part of the quarter where we should be hearing negative earnings preannouncements, and there haven’t been many. [One, Infinera (INFN), caught me by surprise, as discussed below.] Once we get past July 3 and investors begin to stop worrying about the first half of the year, the companies should confirm on their conference calls that the second half will be much stronger. We are well-positioned for that shift in perspective and sentiment.

China MegaShift

One area we are almost entirely out of, and better for it, is China. The Shanghai Composite Index has fallen 11 of the last 12 trading days, capped by a 6.5% drop last night. It is down more than 50% since the October high – the equivalent of having the S&P 500 at 800 today, or the Dow Jones Industrial Average at 7000. Over $1.2 trillion in market value has gone to money heaven.

The idea that China would prop up their market at least through the Olympics was wrong. Investors are worried that the government will focus on keeping inflation down instead of concentrating on measures that will promote growth or boost stocks. This fear is already appearing to be warranted, as just this morning the government said they will raise the price of oil about 18% tomorrow, even as the World Bank increased their estimate of China’s 2008 growth rate from 9.4% to 9.8%. Inflation is running over 8%, so the Chinese central bank has raised rates six times since the beginning of 2007 and also sharply raised reserve requirements. The Chinese stock market had a great run, increasing 500% in two years to become one of the most expensive equity markets in the world. Newbie stock buyers poured money in at the top, opening 1.1 million new accounts in September as the market approached its October 16 high. They had never seen a bear market–now they have, and they are shifting into cash. But the stock market has a long way to fall before this is over.

I don’t think the Chinese economy will slow much for the next year, so we still have time for UTStarcom (UTSI) to get to my target price. UTSI remains a hold for the $10 target.

Content on Demand MegaShift

Infinera (INFN) reaffirmed their guidance for the June quarter, but they forecast their September quarter revenues in a range from $75 million to $80 million on Monday of this week, saying that they expect North American demand to be weaker than expected. This was new guidance; the consensus forecast was $97.7 million. The only way they could have had such a shortfall in orders would be if one of their largest customers dramatically reduced their purchases. In the March quarter, Level 3 Communications accounted for 31% of revenues, while Cox Communications, Interoute Communications and XO Communications each accounted for more than 10%. Odds are that it was Level 3 that accounted for most of the cutback. The company blamed the shortfall on the timing of new network builds at existing customers, the sales cycle with potential new customer wins, and a product transition associated with its recently announced new system.

Infinera cut their 2008 annual revenue growth forecast from 25% to 10%, which would bring them in at $340 million. The Street was looking for $388.5 million, so the $20 million shortfall in the September quarter will be followed by about a $28 million shortfall in the December quarter.

Analysts immediately moved their 2008 estimates from an 11 cent profit to a 12 cent loss, and cut the 2009 outlook from 30 cents to four cents, with many looking for a loss. The stock dropped over $3.50 Tuesday on over 10 million shares traded.

The earnings news completely overshadowed some really amazing news: Deutsche Telekom, a Tier One telecom company, selected Infinera’s deep wave division mulitplexing (DWDM) gear for its pan-European network. This is a very big contract. It marks the company’s first win of a Tier One customer and IFIN will book $4 million in additional costs in the September and December quarters in connection with it. It will be the best possible reference installation for future Infinera sales.

What’s more is that Deutsche Telekom is known as one of the toughest buyers in the business, and INFN beat out Alcatel, Ciena, Nortel and others to win this contract. Deutsche Telekom said the Infinera equipment will carry them into the next decade. INFN is the only company that can offer this kind of capacity and flexibility to Duetsche Telekom and its Tier One competitors. No telecom company can afford to fall behind in the broadband growth that is in store over the next three to four years, and I expect substantial orders from several more of the big companies.

This week, Infinera is at NXTcomm08 in Las Vegas, where they’re demonstrating their commercial 100 gigabit Ethernet (100 GbE) service over a long-haul network from their booth to Los Angeles and back. While this is of interest only to the most advanced network owners today, such as Level 3 and Deutsche Telekom, it will become a mainstream product in two years. Their new ILS2 chip, (which they have called their most important product introduction since the original optical chip), can process eight terabits of data per second on a single optical fiber. That is the equivalent of about 1,700 DVD movies per second. They appear to be three to five years ahead of any competitor.

I don’t like being surprised any more than the next guy, so when it comes to Infinera I have to question their management’s insider selling program and even whether the company’s CEO should be replaced. However, at the end of the day their financial model makes sense, as their gross profit margin expanded from last year’s June quarter of 28% on $58.4 million in sales to 34% in September, 36% in December and 45% in March. Their market opportunity is huge as 100 gigabit Ethernet moves from the bleeding edge to mainstream, and their technology is so good that we should treat this dip as an opportunity to initiate or add to positions and wait for the payoff from the Deutsche Telekom contract win. INFN remains a buy up to $15 for a $30 target.

New Energy Technology MegaShift

Saudi Arabia claims they increased oil production by 300,000 barrels a day in May, and will go up another 2% or 200,000 barrels a day in July. I’d like to see independent verification of the reported May increase, as the country has a long history of bragging about one thing and while having done another. As for the 200,000 July increase–forget about it. Not only do they not have the capacity, but even 200,000 barrels would not offset the declines in Nigeria and the North Sea. The only thing that could possibly turn this into a fruitful prediction is if Saudi Arabia’s new oil field at Khursaniyah suddenly becomes more productive after being behind plan for over a year–fat chance. Oil traders know that the real message of a 200,000 barrel promised increase is that Saudi Arabia is tapped out–they would have to promise us a million barrels a day to break oil prices.

One of the biggest problems in the supply and demand for oil is the number of countries that subsidize gasoline prices. This includes countries such as the aforementioned China. The CEO of EnCana, a leading company in the exploration, production and marketing of oil, said oil demand is growing fastest in countries that regulate and depress gasoline prices; pointing a finger at:

Country–Gasoline price per gallon
• Venezuela– $0.19
• Nigeria–$0.56
• Iran–$0.56
• Saudi Arabia–$0.56
• Mexico–$2.45
• Indonesia–$2.45
• China– $2.84 (before tomorrow’s increase)

For the last few years, chuppies (Chinese urban professionals) have been driving around in SUVs. Beijing Auto has the Trojan, and SUV imports (BMW, Porsche, Lexus, Cadillac) are up from 100,000 a year in 2002 to 370,000 last year. Why not, when the government keeps gas prices down?

Boone Pickens has called our imports of foreign oil “the biggest transfer of wealth in the history of mankind.” He thinks the $700 billion a year we now pay for imported oil will increase to $10 trillion a year within 10 years. I would not be surprised if we got there simply by a continued devaluation of the dollar. In an environment only 1/10 that bad, our alternative energy technology stocks will soar.

Energy Conversion Devices (ENER) is already soaring. They priced a secondary stock and convertible offering this morning, and had to increase the size to meet demand. The stock hit a new 52-week high today, so this has to be one of the best-placed secondaries ever. One hopes that the vultures who short every company that announces an offering, planning to cover on the deal (which is illegal), received their just desserts today.

Obviously, we were right to hold onto our whole position even after the stock soared past our $55 target price. The company really is doing better, but at today’s close of $77.98, it is selling for over 50x my earnings estimate and about 10x my revenue estimate. While the mo-mo crowd at Investor’s Business Daily could keep it running, it is time for us to get off this train, so I sent you a Flash Alert earlier today to sell ENER for a 178.5% gain in 16 months. The stock is down $2.48 in the aftermarket, but if you missed the Flash and did not get out today, sell it tomorrow.

U.S. Geothermal (HTM) filed their 10-K this Monday, but won’t hold their conference call until after next Monday’s close. The very first thing I want to ask them is why on earth they would do that, as it helped knock the stock down about 10%. I expect the answer is growing pains affecting a small company that is learning investor relations on the job.

While I haven’t found anything bad in the 10-K thus far, they did say that Ormat has completed their redesign/repair planning process, and HTM will shut down Raft River for a while to implement the changes. Obviously this is both necessary and transitory, but none the less it nicked the stock.

Today they issued a press release saying that the net electrical power output of the Raft River plant is running 10.5 to 11.5 megawatts. With four production and four injection wells in operation, the maximum net electrical output achieved by the plant during March, April and May were 11.2, 12.0, and 11.7 megawatts respectively. The power plant operated at 99% availability during the same period, including scheduled maintenance. Under their contract with Idaho Power, prices during the spring months of March through May are 73.5% of the contract price, and then 120% of the contract price during the summer and winter peak months of July-August and November-January. The remaining months are paid at the 100% price level.

I expect a very positive call after the close on Monday. If you don’t have a full position in HTM yet, use today’s weakness to get in before the call. HTM is a Top Buy up to $4 for my $6 first target. I expect us to hold this stock for much higher prices over the next several years.

WiMAX MegaShift

TowerStream (TWER) was added to the NASDAQ naked short sale list last Friday, which means the manipulators are out in full force. Honestly though, regardless of what you might read on a few message boards, TWER is doing fine. They recently switched from a traditional telephone system to a VoIP system that will let them integrate several physical call centers into one virtual center. Their phone costs went from $25,000 a month to $8,000 a month, and their sales calls went from 70 per salesperson per day to 100. TWER is a Top Buy all the way up to $6 for my $16 target. TWER is my best buy for 2008.