The financial crisis is over.

I’m usually pretty critical of Wall Street research but a tip of my hat to Richard Bove, the financial sector analyst at Punk, Ziegel, who put out a report this morning titled, The Financial Crisis is Over. “There will be more negative developments,” he said, “but they will be meaningless.” Exactly right! As I said in the last Flash Alert, the Bear Stearns rescue was the poster child for this downturn, just as Penn Central and Chrysler were in the past. Sure, there will be more banks on the edge (Washington Mutual and Citigroup come to mind), lots of failed hedge funds and accelerating sub-prime mortgage defaults. Does any of that surprise you? Well, then, it won’t surprise the market, either. A hedge fund failing is a big deal on Wall Street, the floor of the New York Stock Exchange and CNBC. But it doesn’t mean diddly on Main Street, and unless it threatens a bank, the Bernanke Fed is likely to stand by and let the rich lose their money.

But nobody ever said the market recovery would be easy. The S&P 500 was in a perfect position yesterday around 1:30 p.m. EST to have a quiet day with a test up to 1340, a test down to 1320, and a close around Tuesday’s level. It’s common to see such an inconclusive day after a huge run like Tuesday’s, and then to see another big run the following day to ice the change in direction. We might have seen 1440 by the end of next week if that pattern had played out.

But that’s not what happened. The S&P dropped sharply to just under 1300 during the rest of the trading day. I was glad to see the VIX Fear & Greed Index leap four points, and it confirms what I’ve been seeing: Traders are so confused right now that they jump on every little trend and then the whole herd reverses at a moment’s notice. This is typical of markets where traders have no conviction about their forecasts, and it increases the size of the swings back and forth.

But the overall pattern still looks good for a run to 1440, and the March 22 turn date is upon us. A pullback that does not go below the previous low, accompanied by a sudden increase in fear, is the prescription for a major buy signal. Today we ran right back up to just under Tuesday’s close, which is pretty impressive given that everyone is squaring up positions for the three day weekend. It’s a likely time for another shoe to drop in the financial sector, accompanied by another Fed rescue. Come early next week, crossing Tuesday’s high at 1331 will ring the bell. If you have not done so already, sell any insurance puts or the UltraShort S&P 500 ProShares (SDS) exchange-traded fund.

Avian Flu MegaShift

Lost in the midst of the credit crisis news, researchers at the University of Wisconsin discovered that the bird flu virus has made a critical mutation that makes it easier to infect humans in the upper respiratory tract. This makes it a good time to update the outlook for our avian flu stocks.

In the past, strains of influenza have mutated and crossed the species barrier to humans. The bird flu virus (H5N1) is an especially virulent strain of the flu. Since 2003, 329 human cases have been confirmed, and 61%, or 201, of them have died.

H5N1 replicates most effectively in the bodies of birds, which have an average body temperature of 106 degrees Fahrenheit. Humans are generally poor incubators for strains of H5N1 because our average body temperature of 98.6 degrees. Plus, our nose and throat temperatures of 91.4 degrees are much too cool.

UW researchers, however, have identified a strain of H5N1 that thrives in these lower temperatures. The mutation was discovered circulating throughout Africa and Europe — not in Asia where most of the infections typically have been. Unless the virus mutates further, an airborne pandemic is unlikely. But given modern poultry raising practices and the overcrowding of birds in indoor facilities, the additional mutations are probably inevitable.

Both vaccines and antiviral medications will be needed in the event of an outbreak, and government stockpiling will continue. Crucell (CRXL) is going to be a big winner of this trend, as they license the technology to produce vaccines in human retinal cells instead of chicken eggs. CRXL remains a buy under $17 for my $35 target.

BioCryst (BCRX) has Peramivir in a pivotal trial for intravenous, hospital-based treatment of Avian Flu patients, and I think that it will prove to be much more effective than Gilead and Roche’s Tamiflu. The stock has been blasted by problems with the intramuscular, outpatient-based trial of Peramivir, even though Health and Human Services continues to financially support that trial. In addition, small growth stocks in general have been hard-hit in this market decline. I am cutting the buy limit on BCRX to $8 just to acknowledge the current price level, but I’m not changing my $30 target, which I expect to see after trial results are reported later this year.

Biotech MegaShift

Amgen (AMGN) has put most of its problems behind it, but the stock is down from $70 when I recommended the January 2009 $70 LEAP calls to $40 today, so the LEAPs are trading for almost nothing. John asked if there is a chance for recovery. Kulwant pointed out that the time value is eroding quickly as the stock continues to linger in low- to mid-$40s, and asked: “What is the next catalyst you see in this stock?” Timothy pointed out that the LEAP is almost worthless and suggested it is time to throw in the towel on AMGN, asking: “Isn’t it unreasonable to continue to recommend buying and holding the LEAPs?”

I have wrestled with this, as you can tell from my updates for the last several months. I’ve said that I would not buy this particular LEAP today for a new position, but I would stick with it for portfolio accounting purposes. That confuses the issue, I know. So here’s what we should do:

• Don’t sell the Janaury 2009 $70 LEAP call (VAMAN). There’s no point in selling it for 20 cents an option, or $20 a contract. I’m changing it to a Hold.
• Don’t give up on Amgen stock. The next catalyst should be surprisingly good sales of Epogen and Aranesp in the next couple of quarters.
• Buy the January 2010 Amgen $40 LEAP call (WAMAH) under $10 with a $20 target as a way to particpate in AMGN’s recovery. That call closed today at $8.15, so AMGN has to go to $57 over the next 21 months for you to double your money, or to $65 to triple it. I think those targets are easy to see, and there now is a chance of a bid for Amgen from a big pharma company at much higher levels, much sooner.

Content on Demand Megashift

Akamai Technologies (AKAM) might have something new threatening its stock price, although it wouldn’t affect the company’s 30% growth rate much. I think there’s a slight chance, say 20%, that Apple will switch their iTunes downloads business from Akamai to Google. This is just an early thought on my part, but here’s what I have pieced together.

Apple, of course, is intensely interested in high-quality content distribution, yet they did not support the Blu-ray DVD format in Macintosh computers or Apple TV. I think Steve Jobs believes Blue-ray is a threat to his distribution business — he wants you to download video from iTunes, not buy a Blue-ray disc.

So Apple must upgrade iTunes right now for high-definition video. Currently, iTunes can download movies in “high-definition” 720p format, but the market has moved on to 1080p. You can download 1080p in reasonable time using BitTorrent, but, of course, Jobs won’t want to use someone else’s open standard. But developing a new fast download protocol isn’t easy. The one minute and fifty-one second trailer for Indiana Jones and the Kingdom of the Crystal Skull is on Apple’s web site in QuickTime high definition. The 480p version, which is about the quality you can download through iTunes today, is a 47-megabyte file. The 720p version is 66% larger at 78 megabytes. The 1080p version is 168% bigger than the 480p version at 126 megabytes. A two-hour movie goes from a three-gigabyte file at 480p to over an eight-gigabyte file at 1080p. Apple has to figure out how to get that to the customer without paying 168% more for the download.

And that brings us to Google, which is putting data centers all over the world and, as I mentioned last week, is now even investing in a new undersea fiber-optic cable. As the owners of YouTube, Google knows that video distribution is an enormous opportunity. What better way to enter the market than offering a great deal to Apple for the iTunes contract? With the CEO of Google on Apple’s board, it sure wouldn’t be surprising.

I’m sure AKAM would take a hit if this 20% probability becomes a fact of life, but let’s think it through. If the Internet is about to get even more clogged, thanks to high definition video, other companies will have to turn to AKAM to keep their web pages loading at an acceptable speed. While I don’t know the details of the pricing on the iTunes business, I’ll bet the profit margin is as low as Akamai gets. I think that they could replace their iTunes business quickly, at better prices, and then reap the benefit of all the current non-customers that would decide they have to do something to provide a decent user experience even when hundreds of thousands of people are downloading Indiana Jones and the Kingdom of the Crystal Skull at the same time. Buy AKAM up to $36 for my $60 target.

Burst.com (BRST) drew a general question from Ron: “Please give us your thoughts on Burst in light of what’s happened to it.”

The stock has been dead because there has been no public information about what’s going on with the company. But privately, I think the scenario I laid out at the time of the settlement with Apple is playing out. Burst.com is going to sue others, such as TiVO, with Apple’s behind-the-scenes support. In January, Real Networks filed for a declaratory judgment that Burst’s patents are not valid. That means Burst was after them hammer and tongs to pay royalties, so Real Networks decided to file. Because Burst’s patents have been extensively reviewed in this same Federal court, the Northern District of California, I don’t think Real Networks has much chance of succeeding. It appears that they are doing it simply as a negotiation technique.

The big suit for Burst will be against TiVO, which I expect to see in the next six months. BRST remains a buy up to 50 cents a share for my $2 target. Also, I am moving the stock to the Content on Demand MegaShift, as it was the last one left in the Video iPod category.

Telkonet (TKO) will delay filing their 10K form by 15 days, and Michael H. asked for a comment and wondered when we will hear how the company is doing. He also asked: “How does the current economic condition affect your outlook?”

TKO presented at the Greentech Investor Conference today, but the presentation focused on their SmartEnergy products. I think the 10K will have a lot of detail, but the company has not started regular earnings conference calls yet. Once I get through the 10K, I will call them for another update. They may do a call this time, though, especially if they also have some product news to share.

The current economy is good for TKO. Their SmartEnergy products have a very fast payback when energy costs are high, and all of their potential customers are looking for ways to get energy costs under control. The broadband over powerline products are the cheapest way to bring an older hotel or apartment building into the wired world, and those customers are looking for new features to compete in the marketplace, while keeping incremental costs as low as possible. TKO remains a Top Buy all the way up to $5 for my $15 target as they turn profitable.

New Energy Technology MegaShift

Subscriber John asked: “Since the energy bill mandates concentration on the increased use of ethanol, despite its negatives, and also eliminated most of the incentives for other energy developments, where does that leave your recommendations for: a.) new energy technology, and b.) old wave sources, such as natural gas?”

Good question. The energy bill turned into a major joke, with major political contributor Archer-Daniels-Midland the primary beneficiary. I think that they overplayed their hand, and much of it will be rewritten next year if the Democrats take over the White House. All of the existing subsidies run through 2008, and I think the Democrats will extend them next year and make them retroactive to January 1, 2009.

But the important point to remember is that all of our investments in new technologies make economic sense without subsidies between $45 and $60 per barrel of oil, except solar. Solar makes sense when the price of oil is around $100 without subsidies, but the existing subsidies at the state and utility level go a long way towards lowering that break-even point. So even if the Federal subsidies die, the shift to new energy technologies will continue. I expect oil to trade in an $80 to $120 range for the next 18 months or so, unless there is a geopolitical event that pushes it higher. That should pull the price of natural gas higher, and I am taking another look at re-recommending heavy oil refiner Holly Corp. (HOC). We sold the stock at $67. 35 for a 70% gain last May, and now shares are trading back in the low-$40s.

Also in a high oil price environment, investors will be very interested in any company that can demonstrate success, such as Rentech (RTK) and Connacher Oil & Gas (CLL.TO).

Speaking of Connacher, the company reported earnings last night, and the news was good. They are now in commercial production of tar sands oil at Pod One and are producing 5,000 to 6,000 barrels a day, heading towards the 10,000 barrels a day capacity. As previously announced, the core hole drilling program has more than doubled their proven and probable reserves (2P) as well as their proven, probable and possible reserves (3P). The latter has a present value of $2.6 billion, while CLL.TO has a total market capitalization of $600 million. The company expects approval of their Pod Two project by mid-year. CLL.TO is a timely buy up to $4.50 for my $9 target.

Plug Power (PLUG) reported earnings last week, and said that they will name a new CEO by the time Roger Saillant retires on April 7, the day he turns 65. The company did $5.1 million in sales and lost 20 cents a share. They had 51 GenCore installations in the quarter, bringing them to 208 for the year. That was more than double 2006, but as previously announced, well short of their original 400 installation goal. They brought the cost of production down 20% during the year, admirable but also short of their 25% goal. However, PLUG integrated two important acquisitions in 2007 and should be able to take out both product costs and general/administrative expenses in 2008.

They secured 122 new orders in the December quarter, more than the 88 orders booked in the first three quarters combined. And they have 305 units in backlog, after taking out 100 units ordered by a distributor that have been cancelled.

The report had little impact on the stock, and PLUG remains a buy up to $5 for my $10 target.

WiMAX MegaShift

Towerstream (TWER) reported $1.9 million in sales for the December quarter, up 22% from last year, and just short of my aggressive $2 million estimate. The September quarter was up 8% year over year, and the June quarter was up 3%, so their business is accelerating as I expected. As the company trains more and more salespeople to become fully effective, revenues will continue to accelerate.

The company lost $2.7 million, or eight cents a share, compared with $1.7 million or five cents a share last year. The increased loss does not bother me because Towerstream is going through the heavy investment cycle: eating its expenses from the -opening of its new call center, as well as rapidly hiring and training the telemarketing sales force. But it did bother analysts at Morgan Joseph and Canaccord Adams, who downgraded the stock to hold. The Canaccord Adams analyst cut his target price from $6.50 to $1.50, so one has to wonder why he still rates it a hold. Incidentally, Canaccord Adams has one of the worst recommendation performance records on Wall Street.

Another reason the stock is down sharply today is because CEO Jeff Thompson tried to set the bar low for the March quarter by saying sales would grow 25% or more year over year. Twenty-five percent would mean sequential growth of only 3%, a slowdown from the sequential growth of 8% that they demonstrated in the December quarter. But later in the conference call, Jeff said that they would show sequential double-digit growth for the next two quarters. This was the first time TWER has provided guidance, and they just forgot to reconcile the real forecast for accelerating sequential double-digit growth with the set-the-bar-low forecast for year-over-year growth. They’ll actually do something closer to $2.5 million, and I am keeping my $3 million estimate as a stretch goal.

The reported churn rate was a bit high, just over 2%, but on the conference call Jeff said that was because two big contracts were only temporary, and they have since expired. The churn rate will return to normal this quarter.

Towerstream ended the year with 95 fully trained salespeople, and a small drop in average monthly new revenue per salesperson. That will accelerate as the sales force gets more experience. It also means that they can start turning on new markets, and not repeat their mistake of opening a new market before they have the sales power to start offsetting the costs. I still think that they will be in 15 to 20 markets by the end of the year, up from eight now. Management said that they have enough cash on the balance sheet, $41 million, to fully fund their strategy. There will be no dilution at these low stock prices, where the stock is trading just above net cash per share. Yet, they will still be cash flow positive later this year or early next, and turn profitable in 2009. I cannot believe this company is trading for a total market capitalization under $50 million. Buy TWER up to $6 for my $16 target after they turn profitable.

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