Monday marked the end of the worst quarter for stock prices since the September 2002 quarter, with the S&P 500 down 9.9% and small capitalization and technology stocks doing worse. But that September 2002 quarter marked a loss of almost 18% as we approached the end of the tech bear market. It’s hard to stay unemotional during a three-month, 9.9% (or worse) decline, and that is of course exactly why these declines snowball. But listening to the market instead of CNBC can make all of the difference.

I still believe what I said in last week’s Radar Report. I think that the market is telling us that the uptrend from 1273 that started on March 10 (or 1255 in the futures market, before the opening) is intact. The typical two-steps-forward-one-step-back market action is what we should expect to see going forward.

Friday and Monday were the “couple of days of consolidation” that I mentioned last week with a drifty move under the 1326 level to fake out the last bunch of suckers. And then came Tuesday. The S&P 500 jumped 3.6%, its best start to a second quarter since 1938. The Dow Jones Industrial Average posted its eighth biggest point gain in history led by the supposedly doomed financial stocks. This is the third time in two weeks it came close to or surpassed 400 points. When UBS announces a $19 billion write-off of subprime mortgages and the stock goes up 15%, I would say the lead sentence in the March 20 Radar Report was right on: “The financial crisis is over.”

Yesterday and today’s tight trading range at the new recovery level is typical of the days just following a big move. If we see another big up day in the next few days, as I expect, the move to 1440 will be quick. Otherwise, expect a brief dip back down to 1355 as the market builds up the energy to surge ahead to the 1440 level.

I want to be clear that I don’t know what will happen at 1440. I think there will be a period of congestion, followed by a multi-month move to 1880 or even 2100 by April 2009. That would mean we’ve been through a correction in an ongoing bull market, not a bear market. But if the S&P gets near 1440 and has a big failure, then Bernanke & Co. have missed their chance and a very serious bear market and recession could follow. As always, instead of listening to the economists, market gurus, surveys, op-ed pieces, short sellers and TV anchors tell us what they think the market shoould do, we will let the market tell us what it is going to do.

At the next market top, whether 1880 in April 2009 or 1440 in April 2008, I want to cut back the number of recommendations in New World Investor by at least half. Companies doing well in businesses that can maintain growth during a depression (the D word!) with stock prices that substantially undervalue their futures will stay on the list. Troubled companies, cyclically sensitive companies and those with stock prices approaching or at fair valuations will have to go. Right now, I am keeping stocks like UTStarcom (UTSI), Zhone Technologies (ZHNE), Infinity Energy Resources (IFNY) and Telkonet (TKO) on the list to see if they can work out their problems or get bought during a parabolic bull market during the next year. This week, Infinity Energy and Telkonet reported results, and if I had to pick right now, I’d say TKO will stay and IFNY will go. Of course, I’ll let you know immediately when the time has come to sell any of our positions.

Here’s what’s happening with these two companies:

Infinity Energy Resources filed a detailed 10-K, reported earnings for the December quarter and held a conference call that generated lots of questions. First, a bit of background. When their problems with Amegy Bank first surfaced last year, I talked to the CEO, and he told me that the whole problem began when IFNY decided to joint venture or sell its assets.

Naturally, the bank wouldn’t want their collateral to just disappear, so Infinity’s management paid a visit to the bank, but their lending officer just happened to be on an extended honeymoon. When he returned, the investment bankers had their offering circulars out, and the bank felt they had been ill-treated. I remember thinking that if that was the full story, it would blow over very quickly. So when it didn’t blow over, I concluded something else was up. I practically begged management to hold a conference call and take questions, but they never did it.

When the deals with Forest Oil were announced, I figured they would take out Amegy Bank or at least dramatically reduce the bank line to the point Amegy would be mollified. Not so. Infinity repaid $11 million, a little more than half of the line. Then they had to sign a second forbearance agreement with Amegy reducing their line to $3.8 million, which means they have to repay another $7.1 million by May 31 or they will default again. Also, they are not paying their suppliers, some of which have filed liens on drilling properties. Forest Oil won’t start drilling those properties under the recent farmout agreement until Infinity cleans up the liens. Forest may just be waiting for a Chapter 11 filing to pick up the drilling leases cheaply. Meanwhile, Infinity is losing a few leases because they have not kept to the contractual drilling schedule.

Infinity desperately needs cash to pay their bills, lift the liens, get some oil from the drilling program, and then securitize it to get the cash to pay off Amegy. Can they pull this off? Probably. The original CEO, now back in charge for over a year, is plugged in to the good ol’ boy network. The company wants to protect their Nicaraguan offshore leases, as that clearly is the only asset left that has giant potential. With the stock at 50 cents a share, a total market capitalization under $10 million and a probable NASDAQ delisting next, I think we should hold IFNY to see if management can…well, manage their way out of their financial box. If so, Nicaragua will eventually get this stock to my $7 target.

Telkonet had better news, growing sales, a cost-cutting program and straight answers on the EDS contract to install broadband over power lines at military bases. While both IFNY and TKO trade under $1 a share, TKO has a $55 million market cap and an all-new management team that is performing up to my expectations. They generated $3.7 million in sales in the December quarter, excluding $1 million in sales from MTSI, their 63%-owned subsidiary. This quarter’s sales were about even with the September quarter due to normal seasonality in the hospitality industry. They booked $11.5 million for the full year — again, excluding MTSI — up dramatically from $3.4 million in 2006. While they lost about 24 cents a share from operations in 2007, they said they expect record 2008 first quarter revenues, followed by “significant” sequential revenue growth, due to excellent visibility from recent contracts. They are trying to get the company cash flow positive as quickly as possible, and have reduced the number of locations by consolidating into their Germantown, MD and Milwaukee, WI facilities.

Thanks to high oil prices, energy management using a building’s electrical system for communications with sensors and thermostats is now Telkonet’s most profitable and fastest-growing area. The company is being deluged with requests for information and quotes. They’ve taken a very smart step to dominate this niche by providing “software as a service” in the form of remote monitoring, management and reporting of a system after it is installed. The customer doesn’t have to do a lot of training or add people, TKO picks up a service contract annuity (the “film” in the BPL “camera”), and field service is integrated into the monitoring program so TKO controls the truck roll. This is a compelling offering in a high-energy cost environment, where corporate customers can see a fast payback on their hardware investment without a lot of hassle.

They expect the EDS contract with the Army and Marines to continue in 2008 and expand as EDS wins more locations. TKO is now a well-managed company and the clear leader in both in-building BPL and energy consumption management over power lines. I am not going to change either my $5 buy limit or $15 target price because this company has an opportunity to expand quickly and then be bought out by any number of firms from GE to Honeywell to ADT Alarm Services.

Biotech MegaShift

Dendreon (DNDN) had a private placement with a so-far unnamed institutional investor for eight million shares of stock at $5.92 a share (that’s $47.4 million and the per share price is a full 64 cents above today’s closing price) with eight million warrants to buy more stock at–get ready for it–$20 a share!. The money is to “fund our commercialization activities for Provenge.” This follows Morgan Stanley and Visium Asset Management taking a 16.5% position in Dendreon. The new investor has 45 days to file their identity with the SEC, so we’ll know who it is soon.

It is amazing to me that the Dendreon bears think that the big hedge funds make investments of this size without extensive due diligence, including paying outside consultants to review the science, trial design and clinical results to date. The warrant is exercisable after October 8, so we have just gotten a big fat hint as to when the “peek” data from the clinical trial will be made public. DNDN still has a huge short interest, 35 million shares or 42% of the float. That’s almost enough to put the stock to $40 by itself if the data are good. Buy DNDN up to $8 for my $40 target.

China MegaShift

My call last year to get out of China turned out be very timely. The weakness in U.S. consumer spending is hitting the country’s top line, while domestic inflation caused by out-of-control money supply growth and dramatic increases in demand from Chuppies (my friend Robert Hsu’s term for upwardly-mobile Chinese professionals) have hit the Chinese stock market pretty hard.

I think the worst is over for a while, as the bull market in U.S. stocks resumes, our government gets control of the subprime mess (at your expense) and the Summer Olympics in Beijing approaches. But I still don’t want to go back in to Chinese stocks until we see how they will handle inflation (i.e. using free market principles, instead of their knee-jerk central planning/price controls philosophy from the bad old days). Yet we know their stock markets respond strongly to rallies in our market, so this is not the time to be short, either. As part of this “stand aside and watch” advice, I am maintaining my “hold” recommendation on UTStarcom (UTSI) for a $10 target if they can get the company straightened out and/or sold in the next 12 months.

Content on Demand MegaShift

EMC (EMC) still owns 86% of VMware (VMW), whose wildly successful IPO in 2007 has turned into a major meltdown in 2008, with very little change in its outlook. Wall Street is worried that Microsoft will rapidly gain share in the server virtualization market, where VMware has an 85% market share. But I look at surveys of where Chief Information Officers plan to spend money in a tight budget environment, and not only is virtualization always near the top of the list due to its cost-saving attributes, VMware is consistently the vendor of choice. Everyone knows it takes about three generations of product introductions before Microsoft gets it right, and even then you have to be very careful to trust them with mission-critical processes. Microsoft’s current product is in beta testing, and it will need to treat the Linux and Macintosh operating systems as just as important as Windows if virtualization is to work. So I think Wall Street’s expectations for VMware are too depressed, and that will help EMC outperform this year. Buy the EMC January 2010 LEAP call with a $15 strike price (WUEAC) up to $5 for my $11 target.

Intel Corp. (INTC) announced Tuesday it has begun shipping its Atom processor for mobile Internet devices (MIB) that put a PC in your pocket. The MIB can surf the web, do email, play video and, in some configurations, act as an MP-3 player and cell phone. I expect some will have digital cameras and camcorders installed. This is a big deal for Intel because the integrated MIB is a long-awaited product, and the Atom processor requires very low power for long battery life.

There is a transient post-holiday softness in worldwide PC sales that should lead to a strong second half. I still rate the Intel January 2009 LEAP calls with a $22.50 strike price (VNLAX) as a Top Buy under $6 for a $12.50 target price.

New Economy MegaShift

Cnet (CNET) stock hasn’t done anything for about two years, since it cratered in the summer of 2006. So when 15% shareholder Jana Partners published their 38-page plan on Tuesday to turn the company around, I was interested in their assessment: “There is no reason to believe that the current leadership, left to its own devices, should be further entrusted to stop the destruction of shareholder value.” I’m not sure how a flat stock for two years can be labeled “destruction of shareholder value,” but I understand their frustration that the company doesn’t extract a lot more value from the great Internet properties they own. Cnet is laying off 120 employees, about 4% of the workforce, to trim expenses, when I would rather see them hiring salespeople to drive up revenues.

Having said that, the Jana Partners plan calling for deploying better tools to sell more advertising and highlight CNet’s listings in Internet search results sounds like Search Engine Optimization 101 to me. I’ve just started doing some of this work for my son’s premium finance life insurance company (www.oxfordfinancialgroup.net, if you or someone you know is between 70 and 85 and would like a free quarter-million dollars), and it isn’t rocket science. In other words, Cnet already knows this stuff, so I’m not sure why they’ve been so ineffective in applying it. Jana says they are “lackadaisical” –maybe so. They also questioned the Internet savvy of the two investment bankers filling the CEO and CFO slots, but I wasn’t thinking those two would be coding websites.

Cnet offered Jana one of the seven Board seats the dissidents are seeking, but Jana turned them down. Whatever happens, I don’t think turning the dogs loose in the boardroom can hurt us. Jana estimated if the changes are made, the company can produce $183 million in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2009, pushing the stock over $11. I still rate CNET a buy up to $9 for my $17 target.

Security MegaShift

Packeteer (PKTR) responded to the Elliot Associates $5.50 a share buyout offer as I expected, rejecting it as too low. But there was more depth to their rejection than the usual press release. They filed an SEC 14D9 form with quite a bit of detail on why the Board of Directors turned it down. First, they said they have begun a review of Packeteer’s strategic alternatives, and believe they could sell the company for a substantially higher number. I agree. They added that if management can achieve the fiscal 2008 operating plan, they think the stock will trade much higher than $5.50. Again, I agree, and I also don’t think they would have said this if there was any indication of a March quarter shortfall.

It looked from the filing like 10 companies have had discussions about joint venturing or acquiring PKTR, and two have made offers above $5.50. With the stock still trading under $6, PKTR is a very timely buy for a good March quarter report and a possible acquisition bid. I still think you can buy the stock up to $9 for a $20 target if they can stay independent, or a takeover in the $12 to $14 range.