It seems like just yesterday when we were focused on how companies wrapped up 2006 and what they would say about the March quarter. But here we are with earnings season around the corner and a strong stock market telling us what’s about to happen next. Notice that there have been almost no negative preannouncements. For the record, next Monday is the official start of the June-quarter reporting period with the Alcoa report, but the technology sector really gets rolling on July 17 with Intel (INTC) and Yahoo.

Overall, second-quarter earnings are not expected to be strong. Standard & Poor’s predicts that the S&P 500 will increase earnings only 5.7% year-over-year. Good! We like low expectations, because beating them pushes stocks and markets up. I am actually looking for 8% growth, or even a bit more.

According to S&P, the three strongest sectors should be telecom, with earnings up 25.0% year-over-year, health care at 22.2% and technology at 10.1%. Of course, most of telecom and much of health care is also technology, so I’d say that we are certainly invested in the right general area. With the second half of the year normally strong for consumer electronics product sales and oil prices near $70 a barrel boosting our New Energy Technology stocks, guidance for the quarter should be surprisingly good.

With the S&P 500 back above the 1513 level, good earnings guidance should drive this leg up in the market to all-time highs. It would be natural to have a consolidation period around the old high at 1552, or maybe even another scary dip like the one we just had to rebuild negative sentiment — the precursor to virtually every rally for the last three years. But if the S&P 500 can blow right through 1552, watch out for my parabolic scenario to kick in. Although it is still not the most likely outcome, many factors are lining up for a moonshot to 1800 or even 1900 by the end of the year.

Despite our positive outlook for the rest of the year, there are plenty of bears out there trying to rain on our parade. I read a lot of bearish commentary about sub-prime mortgages and foreclosures, high gasoline prices and weakening consumer spending, excessive personal debt, out-of-control government finances, the seemingly implacable trade deficit, overleveraged private equity buyouts, and how a Day of Reckoning is coming. Their logic is compelling, and the truth is that they are right about all of it except one thing: The market is going to continue to move up anyway. That is because there is only one factor that matters right now — one factor that is driving the stock, bond and commodity markets — and that is the deliberate destruction of the value of the dollar by Chairman Bernanke and the Fed. As long as the Fed is growing the M3 money supply at current rates — now in excess of 13% a year — excess dollars are going to flow into financial assets and then real assets. No one wants to hold paper dollars that are declining in value by 13% a year. They don’t even want to buy bonds at a 5% yield unless they, more or less, have to, as the Chinese government does. They want to get at least a 13% yield to offset the falling value of the currency, and that means buying stocks or maybe real estate.

I believe that we are in the right asset class — stocks — and the right sector — technology — to benefit the most from either a resumption of this two-year bull market, or the parabolic scenario that crams a couple of years of stock returns into the next six months. So as I’ve said for quite a while now, to take advantage of the current strength in the market, you should be fully invested — and you should definitely be fully invested before earnings season begins. If a market run-up gives us an opportunity to take some more profits, like last week’s 226% gain in Omniture in ten months and the 105% gain in Burst.com in ten months, I may recommend rolling our profits into some new companies. I am still very interested in the second-quarter results from Quick Logic (QUIK), Cnet (CNET) and a few others, and I’ll let you know if and when you should be investing in them.

While most companies are now in their “quiet period” before the storm of earnings reports starts, there has been some news in a number of our holdings and some good subscriber questions that I would like to address today.

Biotech MegaShift

Biogen Idec (BIIB) drew a question from Kulwant: “Do you still believe that the stock will move to your original forecast, ie IDKAI going to $20 a share?”

Biogen’s common stock is currently trading around $55, and it has to get to $68 over the next six months for the January 2008 $45 LEAP call (IDKAI ) to be worth my $23 target. I do think the stock will get there based on accelerating sales of Tysabri and in the context of the good market that I am expecting over the next several months. We’ll get the latest data point on Tysabri when the company reports earnings on July 25, and I am expecting good news, which would be another boost for the stock. You can still buy IDK AI just under the $12 buy limit for my $23 target.

Dendreon (DNDN) jumped when “traders said they expected positive news to be released soon on the company’s drugs.” I think that this was an after-the-fact explanation for huge call buying last Wednesday in the July $7.50 and July $10 contracts. About 120,000 contracts traded, and over 100,000 of them were new call buys. But this easily could have been some short seller buying a little insurance, or even offsetting a longer-term put position. Over 50% of Dendreon shares are still sold short.

There was a rumor that following the recent debt offering to raise more money, DNDN might expand the current IMPACT study to 600 patients. More patients might help the study achieve statistical significance, although that would come at the cost of delaying results. But the CEO squashed those rumors and said that increasing the study size is not in the company’s plans. By setting the number of patients and time lapse after treatment, Dendreon has already powered the interim analysis to show statistical significance, assuming their results are the same as in previous studies.

Brian G asked: “While reviewing the 103-page slide show at: http://www.fda.gov/ohrms/dockets/ac/07/slides/2007-4291S1_1.pdf, I got stuck on slide 33 – Study 2. Seems that Study 2 on its own is statistically insignificant. Then there’s some mumbo jumbo of integrating Study 1 and Study 2. Can you please comment on: (1) how Study 2 fits in, and why we should not worry that ongoing work will yield a data set like Study 2, and (2) judging by eye (yes, analyzing raw data would be better), none of the data seem to show significant separation of placebo and Provenge until after twelve months. With this in mind, when should we really consider that an interim review might result in approval? Thank you for many profitable ideas over the years. P.S. A comment on slide 60 “CD54″ would be welcomed as well — is this saying that a high concentration REALLY extends lives?”

Thanks, Brian, for asking the right questions. Wall Street is now completely focused on the wrong question, which is whether Dendreon loaded the placebo group with the sickest patients and biased the results. As you saw on slide 14, and especially on slide 15, there were differences in the baseline characteristics of the treatment and placebo groups. These were presented to and thoroughly explored by the FDA staff, and they were found to be random differences that did not affect the conclusions of the study.

But the issue you bring up is the real key: Will the interim peek at the data due next year or the final data in 2009 show statistical significance? Slide 33 shows overall survival, and you are right that Study 2 on its own was not statistically significant. Neither was Study 1 on its own, and we already knew that. By combining the studies (Slide 36), Dendreon was able to get clearer statistics. They then drilled down to the prostate cancer specific survival rates (Slide 29) to get the data to support approval of Provenge.

If you look at Slide 22 on overall survival, the benefits of Provenge appear to kick in around nine months after treatment, and Slide 23 shows that after 36 months, 34% of the treated group survived versus 11% of the placebo group.

So here is the key: The current trial is “powered” for approval at the interim peek point. That means the company has agreed with the FDA on the number of cases that will be submitted for a peek at the data, the median length of time after treatment, and the specific endpoint(s). Dendreon set these three parameters so that they will have statistically significant results if the current study results are similar to the prior two studies. But we do not know what the values of these parameters are for the current study. My guess is that they will look at 150 to 200 cases with an average length of time after treatment of nine to 12 months, and in addition to overall survival, they will look at prostate cancer specific survival. There are no guarantees, because sometimes the placebo does surprisingly well in these critical trials. But in this case, there isn’t much else in the standard of care that could cause the Provenge results to fall dramatically, or the placebo results to rise. Based on that, I think the odds on a successful interim peak are pretty good. Remember that there is a Special Protocol Assessment on this interim peek results, as well as on the final results due in 2009, so if Provenge hits statistical significance at either point, it gets approved, period.

The answer to your postscript question is “yes;” those in the highest quartile of CD54 concentration had much higher survival rates, ending well over 50%. Survival rates lined up perfectly with CD54 concentration rates, with the lowest quartile showing the least benefit. At this point the connection between CD54 concentration and survival is strong, supporting evidence that Provenge works and the company understands the mechanism of action. It isn’t useful in establishing a therapeutic protocol, because I don’t think they have the technology (yet) to control the uptake of CD54. This is an obvious path to explore for future research.

Regarding the stock, we could see a European distribution deal announced anytime, so rather than wait I would continue to buy DNDN on dips under $7 for my $40 target when Provenge is approved.

Content on Demand

Intel (INTC) should be the biggest beneficiary of recent semiconductor industry statistics that showed accelerating microprocessor shipments. The May numbers are out, and unless Advanced Micro Devices has seen a sudden upswing in market share, which is highly unlikely, the April and May data taken together suggest that Intel will easily beat the midpoint of its guidance, and may even beat the high end. If so, the stock will head up to $28 in a hurry, so now is your last chance to buy or add to the Intel 2009 $22.50 LEAPS (VNLAX), which are a Top Buy under $5 for my $12.50 target 18 months from now.

New Energy Technology MegaShift

Lighting Science Group (LSGP), my newest recommendation, appears to be in a sweet spot, according to the May semiconductor sales data. Although the numbers for overall optoelectronics chips were on the weak side, the subcategory of “lamps” (light-emitting diodes, or LEDs) was very strong — up 33% year-over-year, the same as the April statistics. This is being driven by commercial lighting, and I expect residential lighting to pick up the torch by 2009.

Regarding my US Geothermal (UGTH) writeup, subscriber Del questioned my thinking on Raser Technologies (RZ): “Your statement re Raser in yesterday’s Rader Report was not accurate in my opinion. They have leased over 12,000 acres of land and are starting to drill to begin their geothermal power generation business. I think this stock is a 10-bagger within a year. Thanks for reviewing this again.”

In the June 21 Radar Report, I wrote: “I am interested in Raser (RZ), which makes binary cycle geothermal equipment. The company, though, has been a long-time promoter of a new type of efficient electric motor that really hasn’t gone anywhere. I will watch them to see if they get any traction in geothermal equipment before making an official recommendation.”

Del is right that I didn’t mention RZ’s own geothermal acreage, in addition to their equipment business, even though I knew about it. They actually have 50,000 acres under lease in Nevada and Utah now, after signing up another 9,370 acres after that Radar Report was published. But they don’t have the capital to develop these on their own, so they will have to find partners, then develop project plans, then get permits and licenses, and then drill. The stock would have to go from today’s $7 area to $70 over the next 12 months to be a 10-bagger, yet they are not likely to drill even one well by then. It’s a much longer haul than US Geothermal, which I recommended as a buy under $2.25 in the June 21 Radar Report. UGTH traded under that level on Friday, June 22, but has run up since with the price of oil. Don’t chase it; I will raise the buy limit if necessary, but UGTH is a very volatile stock and I still think we’ll get a chance to buy more at lower prices.

Security MegaShift

Packeteer (PKTR) said that they received an IRS notice of an examination alleging that the company owes about $122 million in back taxes for 2003 and 2004, plus $49 million in penalties and an additional hit for interest. The IRS based this on overstated transfer costs between Packeteer and a foreign subsidiary.

I’ve now done enough work on this to be almost certain that this is nonsense. The company rightly said that it believes the IRS position is not consistent with either tax law or Treasury regulations, so it will file a protest and make no payments until the issue is resolved in an IRS appeal or Tax Court.

These transfer pricing issues are a thorn in the side for the IRS, because companies can use them to shift profits to lower tax jurisdictions. But in this case, PKTR only reported net profits of $25.5 million in 2003 and 2004 combined. Their total cash flow from operations for the two years was just $38.0 million, and at the end of 2004, they had negative retained earnings of $77.9 million. I don’t see how they could possibly owe $122 million in taxes on these results — heck, their total revenues for the two years only hit $165 million! If $122 million represents a 38% tax rate, then their profits must have been $321 million — on $165 million in sales. Waahoo!

The fact that the IRS claim is obvious baloney did not stop the short sellers from piling on, or certain brokerage firms from cutting their ratings. But further investigation shows that Packeteer’s auditors went through a major review of the method and valuation of all significant transfers of intellectual property. It appears that the IRS examiner used Packeteer’s market capitalization at the time of the transfer to calculate the value of the intellectual property, rather than using the IRS guidelines that Packeteer’s auditors used. This is bizarre, and it will take a year to straighten out and cost the company a million dollars. But Packeteer is not going to knuckle under to an obvious extortion attempt by settling. Good for them.

This does heighten the risks of the upcoming earnings report, because the short sellers will use the IRS ammunition over and over if PKTR disappoints. Remember that the company did disappoint in the March quarter, and then committed to fixing the problem immediately and reporting double-digit growth for the rest of the year. The consensus estimate for June-quarter revenues is $37 million, up 6.5% from the March quarter and 8.6% from last year’s June quarter, which is to say that Wall Street does not believe the company’s guidance. They’ll report after the close on July 19, and I suspect they have to show at least 10% growth year-over-year or the stock could get hit again. But this CEO has always been able to recover quickly from a disappointment and give accurate guidance, so I think the short sellers are in for a surprise. PKTR is trading well below my $12 buy limit, and it should be bought before the earnings report or immediately after for my $22 target price.

WiMAX MegaShift

Alvarion (ALVR) jumped over my $9 buy limit when the Australian government awarded a billion dollar contract to install a WiMAX network covering the whole country. The winning bidder has not named their equipment suppliers yet, but I’m betting that ALVR will get the business. That probability was underscored by Monday’s announcement that Allegro Networks will immediately deploy a private business WiMAX network in Australia using Alvarion’s BreezeMAX system and negotiate to hook it into the government system after that is built.

As I’ve been saying, 2007 is the Year of WiMAX. You certainly can buy ALVR on any dips under $9 for my $18 target. My #2 pick in this area, Airspan Networks (AIRN) is still well under the $5 buy limit and can be bought immediately for the $10 target. The same is true of #3, Terabeam (TRBM), now around $2 and a buy up to $4 for my $7 target. I continue to think a basket approach is best, owning all three stocks, with around 50% of the basket in ALVR, 30% in AIRN and 20% in TRBM.