On Tuesday at 4 p.m. ET, the S&P 500 closed up six points after bouncing off the 1326 attractor level. At that time the conventional wisdom was:

• The United States is in a nasty recession
• Surveys show businesses are slashing capital spending
• Spending on technology is very weak
• Consumers are tapped out due to weakness in home prices and high price of gasoline
• This time it’s different because the financial system has collapsed and has to be propped up by the Fed
• The recession is going to be deep and long-lasting
• Therefore, the bear market will resume soon and be equally deep and long-lasting

Fifteen minutes later, Intel (INTC) announced their results. They had record first-quarter revenues of $9.67 billion, up 9% from last year. Operating income rose 23% and the company earned 29 cents per share pro forma, beating the 28 cent consensus.

NAND flash memory prices were weak, as expected and pre-announced, but the microprocessor business was strong. There was the usual seasonal weakness in desktop computer microprocessors, although year-over-year results were good. Server products were particularly strong and turned all-time record revenues. The outstanding geography for growth: North America. The Americas region was up 17%, while Europe and Asia were up 8%, and Japan up 4%. Mobility products were also strong and constituted a third of the business.

Intel guided for a second quarter much like the first quarter. They simply don’t foresee any weakness. During the conference call, CEO Paul Otellini had these exchanges:

Analyst: Paul, to reiterate, you’ve seen no troubling signs of demand either from the US or Europe or Asia?

Paul Otellini: No, we haven’t.

(Later)

Analyst: With respect to overall PC demand you were pretty adamant about your statements that June quarter looks basically seasonal. You are not seeing anything to make you fearful in North America, etc. Can I extrapolate from that, that your view of 2008 really hasn’t changed much since the last time you made a comment? I think you had low double-digit PC unit growth shipments for ’08, is that fair?

Paul Otellini: Yes. Yes, it hasn’t changed and yes, that was our view at the time and I haven’t moved from there.

(Later)

Analyst: In terms of the underlying dynamics for the PC, Paul, much of the growth is outside the United States now. Does the outsourcing trend and the infrastructure build-out in the emerging markets still look strong and is that really the dynamic that we’re looking for to offset more of the mature markets in the United States and Europe?

Paul Otellini: Well, to a first approximation, yes. Most of the growth over the next few years — five years is going to be non-U.S. But the U.S. market has been pretty resilient based upon the transition to notebooks; people buy them more frequently than they do desktops and there are more notebooks per person, etc.

So I wouldn’t necessarily write it off. I think a notebook is becoming a bit of a fashion statement and that has a cachet associated with it and we’re seeing some of that. You certainly have seen that with the Apple (AAPL) product line growth.

But I really think the unknown dynamic is what happens when these $200 to $300 Netbooks are unleashed in India and China and Indonesia, and we don’t — there is no model for that at this point in time because you’re dealing with something that’s never existed before. So we’re optimistic but we just don’t know at this point.

Analyst: What can you comment with regards to the adoption rate for the middle class and general population with regards to notebooks in these emerging markets now? Have you seen an uptick there?

Paul Otellini: It is, and some of that is also back to Stacy’s last question on the dollar. I mean, as the dollar weakens against most currencies, particularly in some of these hot emerging markets, the amount of money it takes to buy a PC relative to local disposable income is less and less. So we are seeing PC penetration move more rapidly in some of these markets than we have seen in previous years. And that’s one of the reasons you see us pointing to a growth forecast in terms of low double digits for the units this year.

The Intel January 2009 LEAP calls with a $22.50 strike price (VNL AX) remain a buy under $6 for my $12.50 target at expiration.

This Intel report and conference call sparked the big rally on Wednesday, although admittedly a few more good earnings reports, particularly in the financial sector, helped. And after the close yesterday IBM (IBM) announced first-quarter earnings up 26% and increased their outlook for 2008. Again, U.S. operations demonstrated “surprising strength,” especially considering that their largest customer segment is the financial services sector. The U.S. generates 35% of IBM’s revenues, and U.S. sales rose 6%.

After the close today, Google (GOOG) reported $3.7 billion in first quarter revenues, a bit ahead of the $3.61 billion consensus and up 9% from the December quarter. They also beat the $4.52 consensus earnings estimate, reporting $4.84. They said: “Our ongoing innovation in search, ads, and apps helped drive healthy growth globally across our product lines, yielding another strong quarter for Google.”

Surveys may say businesses are slashing capital spending, but Intel, IBM and Google’s results say otherwise. The idea that the United States is in a nasty recession that will be deep and long-lasting is almost certainly wrong, simply because this was the most advertised slowdown in history. Bad recessions start when inventories are high, people are feeling great, jobs are plentiful, companies have over-hired, credit is easy and everyone wants to leverage up.

Nobody has felt that way for over a year, yet GDP growth has stayed positive so far. (We’ll see the March quarter advance number on April 30 and the first preliminary revision on May 29. It should be up between 0.1% and 0.6%. It’s hard to have a recession when GDP won’t go down.) Businesses started cutting back on expenses, production, inventory and payroll last year,and the inventory to sales ratio is back at historic lows. Not only is it hard to have a deep recession when there aren’t lots of inventories in the pipeline, the economy is very sensitive to even a small pickup in demand. Businesses will start to rebuild inventories when that happens, which means the Fed and the tax rebate program can have a magnified effect in the current situation.

The most dangerous current belief is that this time it’s different because the financial system has collapsed. Don’t believe it. When the Fed takes interest rates down this low, it’s very hard to want to keep your money in cash — especially when the dollar is depreciating a rapid clip and higher inflation has to be right around the corner. People will accept 2% interest when they’re worried about a capital loss if they put their money to work. But as soon as the markets clearly turned up, which to some Energy Information Administration people means bouncing off 1326 Wednesday, to others it will mean clearing 1370, and to all but the most ardent bears breaking out over 1440, the sideline money is set to flood back into the market. Even the ardent bears will have to give up when the S&P breaks out to new highs over 1555.

The idea that “this time it’s different” is refuted in a forthcoming article in the prestigious American Economic Review. Economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard reviewed financial calamities from 66 countries dating from the 1800s to the current subprime crisis in the US. They found that the subprime, credit mess was caused by the same factors that caused financial blowouts in the past:

• They begin with an innovation, like the steam engine, the radio, junk bonds, the Internet or collateralized debt obligations.
• Investors see the large returns to early investors in the new innovations and pile in.
• Banks and investment companies stretch their balance sheets so as not to be left out.
• Leverage is rewarded.

And then the game comes to an end when it runs out of new buyers, the asset prices fall, the companies with high leverage (banks, hedge funds, mortgage bankers) run big losses or fail. Those that survive go into their bunker, restricting credit, and the economy slows. The politicians relax fiscal and monetary policy, and the economy recovers.

According to Reinhart and Rogoff, since World War II there have been 18 banking crises in industrialized countries that share characteristics with the U.S. subprime crisis, including Finland, Japan, Norway, Spain, and Sweden. This time is not different; it’s the same old story, and ends the same way, with an out-of-the-blue sharp rally in stocks even while the real economy continues to weaken. The stock market is a leading indicator, while consumer spending is a coincident indicator and capital spending is a lagging indicator. If you wait for consumer confidence and spending to turn up before getting back into stocks, you’ll miss the first 15% to 25% of the move. If you wait for capital spending surveys and budgets to turn up, you’ll miss the first 20% to 40% of the move.

Yesterday, the S&P 500 delivered another big up day, the sixth one since the March 10 bottom. That’s evidence of underlining upside pressure that I think will be released shortly, since the daily, weekly, and monthly charts all show the sustained congestion that is necessary to build up the energy for a big move. The triggering event could come any day, and we may already have seen it in Intel earnings. The Fed will cut rates again at their April 29 – 30 meeting, and if the S&P hasn’t started to move before then, that should do the trick. I still advise you to be fully invested.

Biotech MegaShift

ViroPharma (VPHM) and Wyeth decided to stop development on the hepatitis C drug that earlier showed an increased risk of liver damage in a Phase II clinical trial. This was already in the stock, which was down only 40 cents today on the news. VPHM remains a buy up to $12 for my $25 target after they make their next big acquisition or in-licensing deal.

Content on Demand MegaShift

Silicon Image (SIMG) announced the next step up in their intellectual property cores for megapixel camera processors, to be integrated into the system-on-a-chip for mobile phones. Its features include a 12 megapixel processor — that’s more than my digital camera and, I’ll bet, most of yours — a continuous digital zoom, auto exposure, autofocus lens, shade correction, chromatic aberration correction, bad pixel detection and correction and image stabilization. In a phone! They already have five customers. SIMG remains a buy up to $8 for my $16 target.

Telkonet (TKO) has the best in-building Broadband over Power Line technology in the world, and they market it for general networking use, especially Internet connections. Then they realized there was a big niche in using BPL to support energy management functions in a building, primarily heating and lighting. They acquired Smart Systems International last year to get the energy management domain knowledge they needed.

This is good, because the record price of oil and energy has every business in America looking at how they can cut their energy costs. They know the US doesn’t have enough power plants, and even setting the price of oil aside, the mandates on the power production industry for pollution and carbon emission controls is going to keep upward pressure on energy prices.

Electrical power is a big business already. Revenues grew 47% from 1994 to 2005′s $298 billion. The Energy Information Administration says kilowatt consumption will climb from 3.8 billion kWh in 2005 to 5.5 billion kWh in 2025, a 47% increase in 25 years. Each kilowatt will undoubtedly cost a lot more than it does today. I’m also not sure where that electricity will come from, as just the projections for the next couple of years suggest brownouts are coming in New England, the Mid-Atlantic, the Midwest, Texas and the Rocky Mountain area. That alone can make companies more energy-conscious. Already, surveys show almost 60% of US companies are now “concerned” or “very concerned” about cutting energy consumption. Even better, a fourth of them are accelerating spending in this area already.

The late December IPO of Orion Energy Systems (OESX), a maker of high-efficiency lighting systems, monitors and controls, could spread a little fairy dust to TKO. Orion has a $300 million market capitalization and sells for 66X last 12 months’ earnings. About 37% of companies say lighting is the area it would be easiest to reduce energy usage, and another 31% say HVAC systems. Orion addressed the lighting area with an expensive fluorescent tube retrofit. Telkonet addresses both lighting and HVAC with a much less expensive monitor and control system. Both companies will have their niche. TKO already has started presenting at green tech conferences in addition to networking and communications conferences. Buy TKO up to $5 for my $15 target.

New Energy Technology MegaShift

Oil futures climbed over $115 for the first time yesterday, setting a record that held up today. The driving forces seem to be skimpy supplies of gasoline (inventories of gas fell by 5.5 million barrels last week when they should be increasing in advance of the peak summer driving months) and the falling dollar. Demand for gasoline also is weakening, and I expect supply and demand to come into balance pretty quickly, at somewhat higher prices per gallon. I just paid $175 to fill up my Ford Excursion with biodiesel fuel, which is 20 cents to 40 cents a gallon cheaper than regular diesel. I fully expect to pay $500 to fill the tank within the next five years. In the current environment, the refiners that have been hammered by rapidly-rising oil prices will reclaim their profit margin this summer, so last week I re-recommended Holly Corp. (HOC) as a buy under $48 for a $70 target before the end of this year.

Longer term, high oil prices mean all of our New Energy Technology stocks will come back into vogue, as they are all wildly profitable with oil between $80 and $120, most without any subsidies. Energy Conversion Devices (ENER) does need the subsidies to make an investment in its solar roof panels have a decent return on investment. Even that will change soon, though. Ray Kurzwiel, the scientist/futurist who I think is one of the smartest people in the world, says a new generation of solar panels based on nanotechnology will be available in just a few years that will make solar panels cheaper than fossil fuels. He pointed out that with the subsidies, the power we are generating from solar energy is already doubling every two years. At that rate it would be able to meet all of the Earth’s energy needs within 20 years, and nanotechnology promises to enable that future without subsidies. Most of the current crop of solar companies are ill-equipped to make this transition, but I expect ENER to pounce on one of the new companies and acquire the technology that will let them transition to the nano-age using their current distribution channels. ENER remains a buy on any dips under $30 for my $55 target.

USGeothermal (HTM) moved to the American Stock Exchange Wednesday under the new symbol HTM. The company closed a $10 million private placement, in part to fund their recent purchase of a 3.6-megawatt operating geothermal power plant and 28,358 acres of geothermal energy leases north of Reno, Nevada. The power plant is comprised of four binary cycle units that will be replaced with more efficient gear to get to 10 megawatts of production, a wet cooling tower and nine geothermal wells developed in a proven geothermal reservoir. They paid $16.6 million plus 290,000 shares of stock to a royalty holder. This gives the company two operating power plants with significant expansion possibilities, plus they are exploring a potential project in eastern Oregon. HTM is a Top Buy up to $4 for my $6 target.

WiMAX MegaShift

Airspan (AIRN) preannounced a 15% revenue shortfall, saying they will do $17.0 million to $17.5 million in the quarter and use about $3 million in cash. That leaves them with about $34 million on the balance sheet. The earnings conference call with further details doesn’t come until May 7. The stock dropped 12 cents to a new closing low of 65 cents and has a total market capitalization of about $40 million. With less than $10 million of debt, the company minus cash is being valued at about $15 million — a ridiculous price for a WiMAX leader, especially in mobile WiMAX. Until we can hear the full story, I am moving the stock to a hold, but leaving the $8 target price after they turn profitable.

Death of the Dollar

Just 14 months ago at the Money Show in the Orlando, I talked for the first time about the death of the dollar. After my presentation, the next speaker, a well-known permabull, passed me on the way to the podium and quietly said: “Same old crap that caused everyone to miss the bull market in the ’80s.” Of course, he didn’t realize that I thought a weak dollar would eventually be good for equities as everything real got re-priced higher to reflect the dollar’s depreciation. I also suspect he simply didn’t believe the dollar could be as weak as it’s been. Versus real assets, the dollar will continue to depreciate as long as Bernanke & Co. continue to print them. Versus other currencies, much of the worst is probably over for the dollar. I still expect the yen to be the strongest currency going forward. But you never can tell what new bubble will come out of the fire-hose of liquidity the Fed is now aiming at our economy — you just know for sure if there will be another bubble. It may not even be in this country, as the Fed does not seem to realize that the money they pump in here has a global impact due to the dollar’s status as the world’s reserve currency. My evidence for the Fed’s blindness comes from a wonderful quote:

“Markets are becoming aware of the fact that the decline in house prices is not stopping. I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon.” — Alan Greenspan, November 2007

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