Are we in a recession? Are we in a bear market? The honest answer is: “Maybe, or maybe not.” December-quarter GDP growth was slow at 0.6%, and the best guess for the March quarter is another stall at +0.4%. But as long as a plus sign stays in front of the growth number, it’s hard to argue that we are in a recession, let alone the serious drop that some commentators are talking up (including a few using the “D” word — depression). Of course, the numbers could be revised later, but when you see results like today’s retail sales report (not great overall, but no further deterioration) and sharp drop in jobless claims, it is obvious that not everything is sliding rapidly downhill. The bears depend on recycled old news, like foreclosures hitting a new high last quarter (duh) or more financial institutions having trouble with mortgage-backed securities (double duh). I’m not seeing the new bad news that would push stock prices much, much lower.
Which brings us to the “bear market.” At today’s close, the S&P 500 was down 15.7% from its all-time record close of 1553 last July 13. That’s a solid correction, but not the -20% required for a bear market. It’s also up from its last 12-month intraday low of 1270 on January 23. We’ve had seven straight weeks where the S&P tested the 1326 level during the week and bounced back. That’s plenty of time for the bears to show that they can take a market down. We will find out tomorrow if the market can recover from today’s drubbing and1326 will hold again for the eighth week, or if a test to 1295 or even 1270 is in the cards.
You don’t hear about it much, but, as you can see in the chart below, the yield curve has turned very positive, which usually means economic growth is about to resume.
Courtesy Bloomberg LP
It’s about to get even more positive, as the Fed will cut 50 basis points again, or maybe even 75 basis points, at the March 18 meeting. Remember all the chest-beating on CNBC when the yield curve turned negative last year? Where are those guys now?
Fighting the Fed is usually an unprofitable experience, even when the Fed is “wrong” or doing the “wrong thing,” and especially when they are pumping an extra $60 billion a month into the banking system via the new Term Auction Facility. They just announced that they will do it again in March, starting next week.
Yet, the American Association of Individual Investors survey shows only 22% bullish, 26% neutral and 52% bearish. This is a contrary indicator; it is least bullish at bottoms and most bullish at tops. New York Stock Exchange data shows that investors are holding more buying power (cash plus available margin) in their accounts than at any other time in the last 16 years. The ingredients are in place for an explosive rally.
On any breakout over 1340, the next 100 points will come very quickly, and you options traders can load into calls when you see that breakout. At 1440, we will get the real test of the long-term trend. If the S&P fails at 1440, the odds are that we really will see a bear market, and those who are calling it that right now will breathe a sigh of relief and get to say: “I told you so.” But if the S&P can clear 1440 based on the energy from the Fed pumping in liquidity; record cash levels in brokerage accounts; high short selling levels; a positive yield curve and intense negative sentiment among those who usually are wrong; the year-long correction will end; and the bull market will resume. In that case, those who are calling this a bear market will simply say nothing until the crowd forgets about their mistake. I prefer to just listen to the market, whether at 1270 or 1440, and continue for now to stay invested in the rapidly-growing companies in new technologies that are changing the world. A lot more of them reported earnings recently, so let’s check in with them now.
Avian Flu MegaShift
BioCryst (BCRX) reported $28.2 million in sales in the December quarter, thanks to revenues from their peramivir flu contract with the Department of Health and Human Services. That compares with $2.1 million last year. They lost six cents a share, compared with a 34-cent loss last year. And the company finished the year with $85 million in cash, of which they expect to use $25 million to $30 million this year.
But, of course, the real meat was in the status of their various clinical programs. As a result of the needle length trial, they concluded that a longer needle is needed for overweight or obese women, and they will specify that in the next intramuscular peramivir Phase II trial. That trial, starting in the second half of 2008, will use the highest dose of peramivir from the last trial plus an even higher dose, as they have seen a dose-dependent response with few side effects.
The psoriasis program continues as partner Roche started a Phase II trial for moderate to severe plaque psoriasis. I don’t expect much from this, simply because psoriasis is poorly understood. As for other potential drugs that the company has on tap, BioCryst said that they will file an Investigational New Drug application for a new autoimmune compound in the third quarter.
I still believe peramivir will be a success in at least the hospital (IV) setting, and that alone can get the stock to my $30 target. It looks strange to have a $13 buy limit on a stock now selling for less than $4 a share, but the truth is that I would buy it up to that level, and still look for the $30 target. Rather than cut the buy limit, I am going to leave it out there to show the opportunity. Buy BCRX up to $13 for my $30 target.
Biotech MegaShift
Amgen (AMGN) won another round as the European Union rewrote all the red-cell stimulating labels to recommend using these drugs, like Aranesp, when hemoglobin levels fall to 10 grams/deciliter, and not to try to increase hemoglobin above 12 grams/deciliter. I think everyone agrees that going above 12 grams/deciliter is a bad idea, and the current Aranesp label has that limit. So there is essentially no additional impact on Aranesp or Epogen sales from this decision.
On March 13, the FDA advisory committee will meet to review data from studies that raised hemoglobin levels above 12 grams/deciliter. The question is whether they should raise the current Aranesp label level, which they won’t, but Wall Street is afraid the committee will take this opportunity to lower the limits. I don’t think that will happen, and there should be a sharp reflex rally once we get past this last hurdle.
The day before the committee meeting, the panel will review Amgen’s Nplate for increasing platelet counts in adult patients with chronic ITP (Immune Thrombocytopenic Purpura), an autoimmune disorder that especially hits people who have had their spleen removed. I expect a recommendation for approval, with final approval in May. It won’t be a huge drug, but it will be another win for Amgen.
So this is a good time to buy an Amgen LEAP option. If you want to either average down a current position or start a new one, it makes more sense to buy an option with a strike price closer to the current price of the stock than the $70 contract that I originally recommended. But for purposes of keeping track of the New World Investor portfolio, I am going to stick with the original recommendation to buy the January 2009 $70 LEAP call (VAMAN) all the way up to $12.50, for a $25 target price when AMGN stock hits $95, on or before the LEAPs expire.
CombinatoRx (CRXX) reported earnings this morning, with no surprises since the recent analysts’ meeting. They ended the year with $112.6 million in cash, and said that they will end 2008 with about $58 million to $64 million. They do not intend to raise any money until they get the Phase IIb results for Crx-102 in arthritis, expecting another trial showing a large, statistically significant reduction in arthritis pain. They guided for a full-year loss of $49 million to $55 million on $15 million to $20 million in revenues. That was much better than analysts’ expectations for a $62.1 million loss on $15.2 million. We’ll see a flood of clinical data this year to drive the stock higher, beginning this month, as I’ve covered before. CRXX is a great buy under $7 for my $16 target, which would be a triple from current prices.
China MegaShift
As you know, but no one else seems to, the Chinese have been growing their money supply at 18% a year, even faster than Helicopter Ben’s Fed. Now they have inflation — isn’t that a surprise — which they are blaming on the one inch of snow that fell a couple of months ago in southern China. So in good old-fashioned Mao style, they will use price controls and credit curbs to hold annual inflation to less than 5%. Lots of luck on that one, guys. Much of their inflation is in food, including an 18.2% jump in food prices in January alone (that darn snowstorm…). Whereas we in the U.S. simply exclude food and energy costs from our “core” inflation rates, the Chinese are a bit worried that their urban and rural poor mostly spend their money on food and energy so it gets factored into their “real” inflation rates.
The government has promised a tighter monetary policy, which would do the job if they stick to it. They are planning for 8% growth this year, which was their same target last year, when they grew 11.4%. Private economists think that they’ll grow 10.0% to 10.5%. Of course, if they really threw on the monetary clamps…nah, not a chance.
I think there’s a good chance that if China lets the yuan float, it would go down in value versus the dollar, simply because they are growing their money supply so fast. But I’m not ready to make that bet quite yet.
UTStarcom (UTSI) reported results last Friday. Revenues rose 14.5% to $806.3 million and they lost 20 cents a share, compared with a 35-cent loss last year. They repaid $289.5 million to retire their convertible notes without diluting shareholders, and still had $180 million in cash left, net of the remaining short-term debt. They warned that the auditors might put a “going concern” disclaimer on the audit this year due to the repayment dropping cash to a level that is worrisome looking at their recent history of losses. But they said that their cost-cutting and focus on Internet Protocol TV and broadband should return them to positive cash flow and then profitability.
For the March quarter, they guided for year-over-year revenue growth to the $500 million to $520 million range. Gross profit margins will remain terribly depressed at 13% — this is their biggest problem right now. Still, they expect to be cash flow neutral.
UTStarcom customers are up to 750,000 IPTV subscribers from 600,000 at the last conference call. The company has a 65% market share of IPTV equipment sales in China and 80% in India. A recent Chinese government ruling allows telecom operators and broadcast operators to compete in each others’ business, which means China Telecom and China Netcom — both big UTSI customers — can offer IPTV anywhere in China. This deregulation is good news for IPTV growth, and very good news for UTSI.
The conference call was more upbeat than the numbers or the press release would suggest. So I am maintaining my recommendation to hold UTSI for a $10 target.
Content on Demand
Akamai Networks (AKAM) won a $45.5 million jury award in their patent infringement suit against competitor Limelight Networks last week. This is Akamai’s key patent, and although Limelight can appeal, they would have to post a bond in the amount of the judgment. Even worse, Akamai will go for an injunction to stop Limelight from selling its service. Rather than leave all their customers in the lurch for Akamai to easily pick up, I would not be surprised to see Limelight accept a buy-out offer from Akamai. We shall see. AKAM remains a buy under $36 for my $60 target.
New Energy Technology MegaShift
Oil surged a remarkable $5 a barrel yesterday to a new record over $104 after the government reported a surprise drop in crude oil stockpiles and OPEC held production levels steady. This morning it spiked up to $106 and then sold off on profit-taking. Part of the push on oil prices comes from the declining dollar, and I don’t think that’s over. But another part is just speculation on demand during the U.S. summer driving season, and I think that worry will go away. There is lots of gasoline around, and demand will soften at least a little with the economy. So I think oil prices are in a peaking area right now.
But I don’t think a decline back to $90 or $80 is going to hurt our New Energy Technology stocks very much. First, the run up was never fully priced into the stocks, because it came so fast. Second, even with oil at $80 per barrel, every technology that we’re invested in, except solar, makes economic sense without any subsidies, and even solar makes sense just with the subsidies in place. So the companies will continue to progress, sign contracts, grow revenues and turn profitable or grow their bottom line. That should be reflected in the stocks.
Energy Focus (EFOI) reported this morning, but fell short of the consensus and received the usual trip to the woodshed, losing 34% for the day. The company did $5.4 million in sales and lost 31 cents a share, while the consensus of three analysts was looking for $6.7 million and a 20-cent loss. EFOI exited the year at a $21.6 million “run rate” ($5.4 million times 4) and said that they expect fiber optic sales to double in 2008 and account for half of all sales for the year. Traditional product sales will decline another 15%, so overall sales should increase 20% to around $27.5 million. They burned $7.6 million of their cash in 2007, and have $8.4 million left on the balance sheet. They expect to use only $5 million in 2008, with half of that burned in the first quarter as the Pool division buys materials to get ready for the summer season.
Their new fiber optic products already meet the government’s recently-enacted mandate for higher efficiency lighting starting in 2012. But, of course, the government itself will not wait until 2012 to start replacing incandescent lighting. EFOI has installed their Navy ship products, and then used that technology to create the new, rugged products that were introduced in January.
On the conference call this morning, EFOI management said that while they were disappointed to miss their guidance, the cost reductions that they’ve made to deal with declining sales of swimming pool legacy products are paying off, and they see strong growth in EFO technology. They’ve built a strong patent position and signed new distributorships. And they are expecting to close a couple of big orders, including one from a retail chain of 200 stores. On May 2, they will have the formal opening of their new EFO demonstration showroom, which should generate some press coverage. I am moving EFOI to a Top Buy due to today’s decline, and I am not changing my $6 buy limit and $15 target.
FuelCell Energy (FCEL) reported their December first quarter this morning. Revenues rose over 120% to $15.0 million, backlog was up 131% from last year to $84.7 million, and they had record orders of $28.8 million. They lost 29 cents a share, better than last year’s 38-cent loss. They used $15.1 million in cash in the quarter, which was also better than last year’s $22.3 million. And they had $138.6 million left at the end of the period. In January, Connecticut approved projects that will add six more large power plants totaling $43 million to the backlog as soon as the paperwork is done. Connecticut also gave contingent approval to a second project that would mean another $50 million or so to FCEL.
So, of course, the stock was down over 7% today. That’s nuts. FCEL remains a Top Buy up to $12 for my $22 target.
Gasco Energy (GSX) reported earnings Tuesday after the close. Remember that the new Rocky Mountain pipeline did not open until this quarter, so the company was stuck with not being able to sell gas even as natural gas prices soared over $9, where it remains today. So the company reported that they lost three cents a share on $5.6 million in sales in the December quarter.
Management could hardly wait to kiss 2007 goodbye. This year, they can fund their drilling program out of cash flow, and it looks like they are sitting on a bonanza in Rocky Mountain gas. Their breakeven cost is down from $5.50/mcf to $3.50/mcf, and they have hedged about 60% of their future production at today’s high prices. GSX is an excellent buy up to $4.50 for my $9 target.
Security MegaShift
Packeteer (PKTR) is evaluating the Elliott Associates’ buyout bid, but as I said in yesterday’s Flash Alert, I expect them to put the company up for bid rather than accept Elliott’s offer. There’s nothing to do but hold on for now. I still think that the company will sell for double-digits, if it is sold at all, and is worth $20 in the long run if they don’t sell it now. So I’m not changing my $9 buy limit or $20 target, and in the short term if you buy it under $5, I expect you will cash out at $10 or more, with little risk now that Elliott’s $5.50 offer is on the table.
SiRF Technology (SIRF) bought Truespan, a pioneer in mobile digital TV receiver chips, a while ago. Why is this acquisition important? Garmin, the biggest handheld GPS receiver manufacturer, and a major SiRF customer, recently introduced a GPS receiver that supports mobile TV. I have not been able to find out yet if it uses a SiRF chip, but I expect it does. The larger point is that GPS and mobile TV have converged, as I have been predicting, and a whole new class of these devices will be introduced over the next few years. With the Truespan technology, SiRF is very well positioned to capture a large share of this new market. SIRF is a Top Buy up to $12 for my $28 target.
Death of the Dollar
What can one say? The European Union and the British are not going to cut interest rates because they are afraid of inflation, while the Bernanke Fed is going to slash rates until the housing mess is over — inflation be damned. The dollar is going to go lower and lower until the Fed stops cutting. I am pleased that I was able to give you plenty of warning about this, and I know many of you took advantage of it one way or another. Today was the third day in a row of record lows for the dollar, with the euro hitting $1.5370 and the British pound up through $2 again. Continue to hold your cash in anything but dollars.
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