Christmas time is here, by golly
Disapproval would be folly
Deck the halls with hunks of holly
Fill the cup and don’t say when.
Relations sparing no expense will
Send some useless old utensil
Or a matching pen and pencil
Just the thing I need — how nice.
Tom Lehrer, the author of the above anti-Christmas carol, was an associate professor of mathematics at Harvard when I was there and when he released his first album with this tune. For the past few years, I’ve dedicated one issue to explaining popular technology gifts and alerting subscribers to unknown advancements. Since most of us have already started our holiday shopping, this issue of your Radar Report is dedicated to those who want to avoid being either the giver or the receiver of one of those useless old utensils. The following are my top picks for a technology gadget gift for the holiday season that will not have people humming Professor Lehrer’s song. There are so many cool tech presents for the holidays that I am not ranking these — they could each be #1 for somebody.
Manage Your Media
Do you remember the first portable media player? It was the Regency TR-1 transistor radio, and it came along at the end of 1954, just in time to let us carry Shake, Rattle and Roll and other early Rock ‘n’ Roll hits with us. That meant any flat area was a potential dance floor, so it was a great way to attract girls. It was brutally expensive, though, at $49.95 — about $370 in 2006 dollars. Three years later, Sony broke the $30 barrier just after Hound Dog went to #1, and that was pretty much the portable media story until late 1979, when Sony introduced the Walkman and put the listener in charge of the play list by making portable stereo audio cassettes the hot item.
While the years have passed and the charts are being topped by new, young artists, the desire for portable media players has not changed. This season there are two hot portable media players at the top of any music lover’s list. One is the latest top-of-the-line iPod with a 2.5″ screen and 80 gigabyte hard drive that stores 20,000 songs, 25,000 photos or 100 hours of video for $349.
Steve Jobs is twice as customer-centric as Henry Ford was, because you can get the iPod in any color you want as long at it is black — or white. Sadly, Microsoft’s Zune MP3 player is getting off to a slow start, and while it is far from a useless utensil, it will not substitute for an iPod in that brand-conscious teenager’s stocking.
Seward asked: “I am curious as to why you didn’t come back to Apple Computer as you suggested you would? The stock basically fulfilled your premise of a sharp pullback during the changeover to Intel, but since touching $50.16 on July 14, the stock has appreciated more than 82% on positive news regarding the changeover, the popularity of the Macbook line, excitement over Apple’s probable entry into the handset market, and iTv. Many of the stocks that you cover are microcaps so I would have thought that you would have come back to Apple in order to offer your clients a big-cap name with exciting growth prospects. What’s your take?”
Maybe I have missed Apple for good, but there is a very worrisome problem overhanging the stock. There is no doubt Steve Jobs knew about the options backdating at both Apple and Pixar, and no doubt that he benefited from it at Apple (in spite of what the company says). The SEC has picked out various CEOs to pursue hammer and tongs on this issue, and here is one who was CEO of two companies that cheated. Will they give him a pass because he is Steve Jobs? Maybe. But I think there is a real risk that they decide to make a high-profile example of him, and we get a sudden, shocking announcement that the SEC has notified him that he is the target of an investigation. That would be devastating to the stock, and I decided until this issue is put to bed for good, we would be taking too much risk to go back into Apple at this time.
If the iPod is too unimaginative a gift for you, the other, more unusual choice is the Samsung Helix XM radio tuner and MP3 player. XM satellite radio has over 170 channels, about 70 of which are commercial-free. Samsung put in an FM transmitter, so you can listen through your car or home audio system.
You also can record from the XM radio to a one gigabyte hard drive that can hold almost 50 hours of programming. It will cost you about $185 for the device and another $70 for the car kit. XM radio charges $10 to $13 a month, depending on your contract.
Both XM Satellite Radio (XMSR) and Sirius Satellite (SIRI) are building their businesses by spending far more on marketing than their current revenue base can cover, leading to huge quarterly losses. XMSR has seen a director resign and publicly say that they are headed for a financial meltdown, while SIRI took both stocks down sharply on Tuesday by cutting their 2006 subscriber forecast to 5.9 million from a range of 6.1 million to 6.3 million. That was a big reduction with only three weeks to go in the year, and their implication that the reduction was due to a weak retail environment didn’t add much light. In 2005, they added 500,000 subscribers in the last 10 days of the year as people got in line for Howard Stern’s debut on Sirius radio, but it is hard to believe they thought they had any chance to match that pace this year. More likely, the iPod is taking eardrum share from satellite radio. While there are constant rumors that the two services will merge, and then probably raise prices, I think we should continue to sit this one out until profits are at least on the horizon.
Bling Your Ring
If you are more interested in talking than listening, but still want your tunes with you, the disappointing Motorola Rokr evolved into the much hotter Razr V3i cellphone plus.
The first plus is that it can play iTunes, although it is still limited to storage for 100 songs. The second plus is a 1.23 megapixel digital camera with 8X digital zoom. The camera also will record short videos and play them back on the very nice 2.25″ color display. Other pluses include Bluetooth Class 1 wireless technology to communicate with a lightweight headset and 3D graphics. Get the gold Dolce & Gabbana case and for around $215 you will have the flashiest cellphone/iTunes combo for almost two weeks, until Apple introduces the iPhone at Macworld in Janaury.
The cell phone is described as the black hole of Silicon Valley, because it takes many products that were profitable to a whole food chain of suppliers, and turns them into features on a cell phone that’s built by people who calculate their costs out to the fourth decimal. When your phone is your camera, your camcorder, your Internet access device, your MP3 player and your organizer, why would you want to carry anything else? That’s why Palm had to introduce the Treo PDA/cell phone, and why Apple has to introduce an iPod/cell phone. I am always looking for interesting companies that supply this industry, even though I am licking my wounds over PortalPlayer (PLAY). As I said back in November, PLAY agreed to an acquisition by Nvidia (NVDA) for just $13.50 a share. And while I thought a bidding war could start, it doesn’t look like there will be another bid for that company at this time. So go ahead and sell the PLAY now.
Shift Your Show
This season, the media toy of choice is the Slingbox, which forwards whatever is on your TV (live shows like NFL Sunday Ticket, or anything that is stored on your TiVO) to any Internet-connected PC, laptop, cellphone or PDA anywhere in the world.
Oh, you can change channels, too, and it will only cost you $135 or so. Slingmedia is still private, and we may never own it because there will be dozens of small suppliers of video-enhancing gear to catch our attention. There’s no denying that the video explosion is upon us, including video weblogs, or vlogs, as well as the YouTube phenomenon. That’s great news for Harmonic (HLIT), Packeteer (PKTR) and Comcast (CMCSA). I would not be surprised to see these three stocks at the top of the performance derby in 2007, especially HLIT. I will raise my buy limit on HLIT and PKTR if a market decline doesn’t bring them down first.
Pay to Play
On to video game consoles, where you can do no wrong with any of the new generation: Microsoft’s Xbox 360, Sony’s PlayStation 3 and Nintendo’s Wii (pronounced “we”).
The latter two are pretty much sold out. Remember all those people camped out in front of Targets, Wal-Marts and Best Buys? Well, that’s why. So both PlayStation 3 and Wii will earn you extra points if you gift a gamer with either of them. You can get an Xbox 360 for around $430, the PlayStation 3 with a 60 gigabyte hard drive for $850 (if you can even find one) and the Nintendo Wii for $640.
The development codename for Wii was “Revolution,” and I think they should have kept it. This is the video game console that could make us a nation of video game players instead of card game players. Nintendo wanted to de-emphasize the fast twitch factor beloved by kids, and make video games intuitive, engaging, social and more physical. The control pad looks like a remote control, and it has a very sensitive motion sensor that picks up movement or rotation in three dimensions. The game players can get up and move around, making their character on the screen get up and move, or slashing their remote through the air to control the light saber, baseball bat or tennis racket on the screen. Wii Sports comes free with every system, and in Wii Tennis you can put spin on the ball as you return your opponent’s serve, hitting as hard or gently as you like. It is an immersive experience that will be much more attractive to people who were not interested in playing video games before. People even enjoy watching others play with Wii, which makes it a new party or family experience. Although the Sony PlayStation 3 controller also has a motion sensor, it is much less precise than Nintendo’s.
The video game stocks seem overpriced in anticipation of another up cycle in the industry, so the opportunity here is again with Harmonic and Packeteer because all three of these consoles can play games online. The explosive demand for video and storage will also drive a number of our new MegaShift investments in 2007 — I’ll talk about that more in the coming 2007 forecast issues.
The Right Shot
Digital cameras have been super presents every holiday season this century, because every year the picture quality (number of megapixels) at each price point improves dramatically. This year, you can give a point-and-shoot camera for less than $250 that will have five or six megapixel resolution and a 6X to 12X optical zoom. A good example is the Canon PowerShot S2 IS for $250.
You can ask for a $1,500 digital single lens reflex with great swappable lenses, eight to ten megapixel resolution, burst mode pictures at five frames a second, and a shutter release lag (the #1 thing people hate about digital cameras) of less than 50 milliseconds. Check out the Nikon D80 10.2 Megapixel SLR Digital Camera with an 18-200mm lens kit for $1,650.
Or if you really want to blow everyone away, pony up $5,800 for a Canon EOS 1Ds Mark II with an amazing 16.7 megapixel resolution and the ability to shoot 32 pictures at four frames per second.
As cell phone cameras gain functionality, pure digital cameras will be chased to higher and higher megapixel levels at each price point. But eventually this market is likely to bifurcate into the cell phone with a 20 megapixel resolution camera/camcorder at the low end, and the high-end single lens reflex with an array of lenses for professional use. Our opportunity comes in finding some new investments for 2007 that will benefit from the tremendous additional demand for digital storage of all these pictures and video clips.
Know Your Stats
The gripping and ultimately sad story of CNET editor James Kim’s death while trying to save his family in the Oregon wilderness has led me to put this item on the list: The Garmin Forerunner 305 GPS receiver.
About 35% of marathon runners use a GPS device to keep on track. This one not only tracks your location, it also measures your heart rate, speed, distance, pace and calories burned. If you, like so many New World Investor readers, jog, run, bike, hike, ski, snowmobile, camp or sail for health or recreation, this $260 monitor will make it more fun, and might someday save your life.
We made 59% from our first investment in SiRF Technology (SIRF), a manufacturer of GPS chips. I’m looking for an opportunity to get back into SIRF, and I’d like to add Garmin (GRMN) at the right price. Though this GPS device is only a holiday gift, products that provide location information will become more and more in demand. Just watch Google take over the world, as they deliver highly targeted, location-sensitive ads to your cell phone, Wi-Fi or WiMAX device. What we’re seeing now are the early stages of a MegaShift, and we will put our money on the table when the true winners come down to more attractive prices.
A Clean Sweep
If you know someone who loves to vacuum, do not give them a Roomba or a Scooba. The Roomba vacuums floors and rugs on its own — no physical exertion from you required. And that’s not all. It also takes itself back to the recharging station when necessary.
Models range from $150 to $350, depending on features, but I personally want two: The $300 Roomba Discovery for Pets to follow my Great Pyrenees around all day, and the $130 Dirt Dog Workshop Robot that will pick up nuts, bolts, nails, wood shavings and various other junk from my shop/garage floor.
The Scooba 5800 is a bagless floor washing robot for hard-surface floors. It runs around the room sweeping up dirt, washing, scrubbing and drying in one pass.
It cleans 250 square feet on a single tank while the human is doing something more interesting. It costs $300, and the bigger 5900 model that cleans 500 square feet costs $400.
iRobot (IRBT), the manufacturer, is a public company that I have been tracking for about a year for a MegaShift investment. The stock has been almost cut in half since a Motley Fool recommendation early this year, but still sells for 65X next year’s earnings. I’d like to see it around $15 to start building a position.
A Swiss Improved Standard
Finally, here is my favorite stocking-stuffer this year: A Swiss Army knife with a knife blade, scissors, a file with screwdriver, built-in ballpoint pen, red laser light and — wait for it — a one gigabyte USB flash drive.
There’s a 128 megabyte version for $45 and a 512 megabyte version for $85, but the top-of-the-line one gigabyte model is the way to go, if you can swing the $120 price tag. Incidentally, you can remove the USB drive to carry it on a plane, while putting the knife in your checked luggage. It’s 2.4″ long and weighs 1.2 ounces. SanDisk (SNDK) would be the most likely investment in this area, as the company designs and develops flash storage card products. Unfortunately, there is a glut of flash memory production capacity, so I would not buy SanDisk right now.
Tech Gifts for the Rich and Their Kids
Just in case this is your year to give a great, memorable gift to the person that has everything, how about a $1.7 million trip for six into space on Richard Branson’s SpaceShipTwo, debuting in 2009? You have to get in line for the Virgin Galactic trip now, which will shoot you 63 miles up to weightless orbit. After you come down, the astronauts plus six guests get a four-day stay at Branson’s Necker Island resort, and those who were actually shot up into outer space get the luxury version of those little tin wings United Airlines used to give away. Maybe if you contract to do some biotech or nanotech experiments in space, you can pay for the trip.
If you want a “greener” present, there’s a human/electric hybrid commuter vehicle for two called the Twike in the Neiman-Marcus catalog for $40,000. I haven’t found out yet if it uses Energy Conversion Devices (ENER) batteries, but I have not forgotten that we want to get back into that stock soon. I’ll be sure to let you know when the time is right.
So, what about the younger names on the wealthy shopping lists? My four-year-old thinks her play-acting imaginary friends and ever-changing collection of woolly bears, frogs and snails are the best toys around. The doll house, jump rope and two-wheel bicycle with training wheels that Santa is likely to leave will blow her away. TMX Elmo is not welcome. But some kids are on a different track, so the $300 animatronic Butterscotch pony will introduce many children to robotics this holiday season. She is three feet tall with moving eyes, ears, head and tail. She can whinny, snort and can be “fed” a carrot. If children sit on her she will “gently bounce,” as opposed to the death-defying act my daughter performs on her $30 rocking horse, Flyer.
For children not quite old enough for their own cell phone, which these days seems to mean those still in single digits, Hasbro has the $75 ChatNow two-way radio that looks like a flip-style cell phone. Kids can change the faceplate, just like their teenage older siblings, and it takes and stores up to 30 digital photos. Or they may like the $249 Zoombox projector that takes a DVD or video console input and projects games and movies on the ceiling or wall up to 60 inches diagonally. Instead of making the effort to sit on a couch, they can lie on the floor and watch even more TV as a rug potato.
For slightly older kids, I guess the Erector set is out. (I am looking forward to Christmas 2011, when the top-of-the-line Erector set will finally be mine…I mean, my daughter’s.) Instead, parents are buying Lego’s Mindstorm NXT, a wireless robot that can be programmed from a PC. It’s only $249, and at least the kid might be upright and moving around for a few minutes of their play time.
The Bottom Line
If you head out to the mall to buy any of these gifts, you’ll be joining a lot of others this year. If you head online, you’ll be part of an even faster growing trend. The large increase in retail buying on Black Friday weekend following Thanksgiving did not hold up, as I expected, but it’s still looking like a decent holiday season. The National Retail Federation predicts that consumers will spend $457 billion this season on themselves and presents. Of that, online sales in November and December will rise 22% from last year to $138 billion — good news for Amazon, eBay, Yahoo, Overstock.com and others.
A major part of that will be consumer electronics — very good news for Silicon Image (SIMG). Surveys show that more than 50% of buyers say they will spend more on consumer electronics this year — the highest percentage in the last three years. The big winners are iPods (named by over 12% of buyers), LCD TVs (15%) and digital cameras (over 25%), especially those made by Canon — no surprise there. Technology continues to gain share and roll on, and as I discussed in last week’s long-term outlook, these trends won’t stop for many, many years.
In the near term, there hasn’t been a lot of news, but what there was will make a big difference to some of our companies and MegaShifts. Let’s take a look at them now.
Avian Flu MegaShift
Crucell (CRXL) has not yet licensed their cell-based vaccine production technology to Medimmune, but I still expect that to happen. Medimmune just filed an Investigational New Drug application with the FDA for a cell-culture-based seasonal influenza vaccine, which they are developing under a $170 million contract with the U. S. Department of Health and Human Services (HHS). HHS is worried that the current technology using chicken eggs as the production medium limits scalability in manufacturing, slows response time and increases the potential risk of manufacturing delays or supply shortages. A severe outbreak of avian flu could kill the chicken flocks used to produce the eggs that would be used for vaccine production. Crucell has the basic patents in this area and has licensed it to Sanofi-Aventis for a flu product. Therefore, Crucell has to defend its patent estate by getting Medimmune to sign a license agreement. Crucell is a buy up to $28 for my $50 target.
Biotech MegaShift
Pfizer suffered a major blow when they had to stop development of torcetrapib, a drug intended to increase HDL cholesterol, rather than put patients through the difficult task of actually eating a healthy diet (pardon the sarcasm). In a 15,000 person trial, torcetrapib had the unfortunate side effect of causing high blood pressure with sometimes fatal results.
This has caused a lot of bloviating in the biotech investor world about how the big drug companies will now have to start buying biotech companies to fill their pipelines. Actually, that process started in March 2003 when Johnson & Johnson (JNJ) acquired Scios and JNJ stock went up. Before that, Wall Street held Big Pharma to a very strict quarterly earnings standard, with no room for potential dilution of any kind. But JNJ bought Scios, said it would dilute their earnings for three quarters before becoming accretive, and the stock went up because the long-term pipeline improvement outweighed the short-term earnings impact. It was a defining moment in biotech investing.
Pfizer, like every big pharma and big biotech, has been reviewing potential acquisitions to the tune of hundreds per year, and that will not change. It still makes little sense for them to buy development stage technology that may not work in humans. Merck’s acquisition of Sirna, which had earlier acquired a biotech called Ribozyme Pharmaceuticals that I was involved in, is an exception and a Hail Mary pass after the Vioxx disaster. I think we will continue to make the most money focusing on late-stage clinical trials and approved products, as those companies are most likely to form major Big Pharma partnerships or be bought out. The only early-stage biotech stocks that should be bought are those about to announce great Phase I or Phase II clinical results, for a trade, or those that can create a MegaShift of their own if their technology works, like Geron (GERN).
As I pointed out right after the election, passing the Missouri initiative to allow stem cell research was a big win for Geron and medical research. With the Democrats in control of Congress and the Republicans split on the issue, stem cell politics will be in the news for two years as an easy way to embarrass President Bush. The stock popped up Monday on a recommendation by another newsletter, but after it settles back a bit GERN is an excellent buy anytime it is under $9 for my $18 target.
Market Outlook
The S&P 500 is fibrillating in a 1407 to 1415 range, and as I’ve been saying, the longer this goes on, the worse it is for stocks. That’s because a decisive move over 1415 should extend all the way up to 1440 in early January, while a sharp break under 1407 could easily take 100 points off the S&P in a few weeks, and set us up for the two-year bull market that is coming, led by technology. The worst case is continued high-level volatility, as that would suggest the whole first half of 2007 could be difficult.
There’s really not much to do except watch and wait to see which way it breaks. Tomorrow’s labor report for November could be a catalyst, but the real killer is likely to be an increase in inflation rates even as the economy is stagnating. U.S. manufacturing unexpectedly shrank in November for the first time in three years, suggesting that the housing slowdown is now spreading through the economy. That’s why the labor numbers should be weak tomorrow, giving more fuel to the bulls who are touting a Fed rate cut as early as January.
But the Fed knows that we are not out of the woods on inflation, and will wait as long as they can before they cut rates. Of course, their mythical “comfort level” for inflation, which has been exceeded for three years straight, will not prevent them from cutting rates and printing money if they see a recession or deflation coming.
Since the mid-1990s, the Fed has systematically weakened the dollar, and a weak dollar means the prices of real assets — real estate, gold, silver, timber, corporations and so on — must go up to keep international prices comparable. So a weak dollar boosts all asset prices, and when the Fed starts cutting rates again, the current dollar weakness will look like child’s play. If the Fed stays on its present course, in 25 years the average suburban home will sell for $30 million. That’s one reason I think a major down leg is coming in 2010 to 2012, to force the Fed to change their unstated policy of dollar destruction. But it looks to me like there is enough wiggle room for one more big run up before the day of reckoning arrives.
This is a difficult, tricky and accident-prone environment, and I think we should stay cautious until we see either a market breakdown or a decisive market breakout that tells us the 2007 to 2008 bull market is underway, with no more big breakdowns left to threaten our capital.
Finally, my family and my team at Phillips would like to thank the Greatest Generation one more time for the long war they fought for freedom, starting 65 years ago today. My father’s brother was on the Arizona, and my dad enlisted the next day. He was around to see me born a few weeks later, and then off with millions of others to a four-year war that truly saved the world. Thanks to all of them.
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