The San Francisco Money Show ended yesterday, and again I had the privilege of meeting many of you and talking with you about the market, current recommendations, new ideas and what’s coming next. I don’t miss many Money Shows, as they give me an important opportunity to meet subscribers from all over the country, one-on-one. If you’re planning ahead, the next one is in Orlando from February 7 to 10. After that, we’ll be in Las Vegas from May 14 to 17, San Francisco from July 26 to 28, and finally Washington, D.C. from September 6 to 8. I hope you can get to one of these in 2007.

In each of my presentations and panels at the San Francisco show, I spent more time than usual on the short-term market outlook. I was not trying to predict the market, but rather to point out that the 1365 level on the S&P 500 is a crucial balance point. In January 2001, there was a long firefight between the bulls and the bears at 1365, and the bulls lost. Now, five years and nine months later, we are finally back up to that level again, and again, it is likely to turn into a firefight.

Declining long-term yields, a declining dollar and a declining volatility index all helped the market stage an impressive rally all summer long, and right through the normally weak September and (so far) October periods. But with the sudden reversal in the bond market and the dollar rallying, two important props for higher stock prices are fading.

On the other hand, earnings season is off to a good start with the Intel, IBM and Apple results, and Microsoft seems determined to introduce Windows Vista, at least the version for businesses, the day after Thanksgiving.

So, we have to let the market tell us what to do. If the S&P drops into the 1344 to 1354 range and then rallies up to new highs over 1372, we will know the two-year bull market has begun. If it drops into that range, then rallies back to test 1365 and fails, dropping through 1344, we will know there is going to be a fast, volatile flush down 100 to 200 S&P points. After that, the two-year bull market can begin.

Of course, if the market just consolidates around 1365 for a while and then heads north through 1372, it will be showing admirable strength and we’ll have to get reinvested quickly for a big bull move.

I still think the odds favor the flush scenario, but it’s how the market trading unfolds that counts. This is likely to be a drawn-out, double or triple top sort of scenario rather than an immediate, clean message, so I continue to advise patience. I recommend that you hold a level of cash that will allow you to buy stocks if they move 20% to 30% lower — an opportunity that fortunes are built on. For the invested portion of your portfolio, you should look first to the Top Buys and any of the New Energy Technology MegaShift stocks for new money. As I’ve said over the past couple weeks, I think the price of oil is bottoming here, and there could be a reversal in oil with a charge up to $68 a barrel that causes a stock market decline. I think all of our other MegaShift stocks will perform relatively well even in a broad market decline, as small stocks have been under pressure all year. When the two-year bull market begins, they will have plenty of catalysts to push them higher. And I’ll be sure to let you know in an issue or Flash Alert when the time is right to go fully invested.

Having said all that, technology earnings and guidance look pretty good. Intel is gaining market share back from Advanced Micro Devices, which is why Intel stock went up yesterday, while AMD was crunched today. But Intel went out of their way to say the PC business looks fine for the December quarter. That certainly is not my outlook, but maybe there are a lot of folks who are more willing than me to upgrade their operating system to Vista a few weeks after they buy a computer. We shall see.

Now that you know the possible market scenarios that are on the horizon, let’s take a look at a number of our MegaShifts. A few of our holdings have announced earnings, while most will be reporting over the next three weeks. I’ll be sure to relay any important information that comes out of these announcements to you in a Radar Report. Plus, if there’s timely news that I think you need before the weekly report, I’ll send a Flash Alert.

Avian Flu MegaShift

Switzerland became the first country to order enough flu vaccine to protect its entire population in the event of a bird flu epidemic. They bought Glaxo SmithKline’s vaccine, which is 80% effective against the current strain of H5N1. No one really knows how it will work against a mutated strain that causes a pandemic, but the hope is that enough of the virus would remain the same to let the vaccine offer some protection. Of course, those who get bird flu anyway would then be treated with an antiviral like Tamiflu.

Gilead (GILD) reported an excellent quarter. They took a big write-off for an acquisition, but after adjusting for that, they reported 64 cents a share, beating the consensus by eight cents, on $748.7 million in sales. Sales were up 51.7% year-over-year, thanks to strength in their new HIV drug formulations and sharply higher Tamiflu royalties from Roche.

Gilead is one of the very few biotech companies that has taken on Big Pharma head-to-head and won. In 2007, I expect their HIV drug sales will be larger than the current leader, Glaxo SmithKline. And on the Tamiflu side, Roche indicated in their conference call that by the end of this year they will have the capacity to make 400 million doses of Tamiflu a year, so they raised their sales estimate for 2007 by 25%.

So, 2007 is looking like it will be a pretty good year for Gilead. The January 2008 $50 LEAP (YGDAJ) is trading well over my $16 buy limit and pushing closer to our $30 target. Hold YGD AJ. The January 2007 $60 LEAP (GDQAL) is over my $9 limit, and should start its run to my $20 target now. Hold GDQ AL.

Crucell (CRXL) is going to have an analyst meeting in New York on November 16 that will be webcast. They will update all their product programs and talk about the integration of Berna. This is a real opportunity for management to change the analysts’ negative attitude towards the stock. CRXL remains a buy under $28 for my $50 target.

China MegaShift

UTStarcom (UTSI) and Verizon want to know: Are you a four-wheel drive kind of guy or gal? Do thin phones with brushed pastel cases give you hives? Well, then, as of tomorrow you can get the G’zOne Type V phone, built to withstand harsh environmental conditions for the person with an outdoor lifestyle. It’s compliant to various military standards — you can expose it to 140 degrees of desert heat, beat it up with extreme vibration from your off-roading Jeep, make calls in storms with up to two inches of rain per hour, or drop it in three feet of water and it will still let you download video clips from your favorite sports teams. I dropped my wimpy Nokia into the San Francisco Bay once in about eight inches of water and the sucker died, even though I grabbed it before it hit bottom.

Needless to add, UTSI makes the G’zOne Type V. I am hoping our Governator can be persuaded to wear one. Even if he can’t, UTSI remains a buy anytime it dips under $9 for my $15 target.

Content on Demand MegaShift

Harmonic (HLIT) will report earnings on October 26. Their main competitor, Tandberg TV, reported a 19% quarter-to-quarter drop in revenues, mostly due to a 31% drop in Europe, which they blamed on market share gains by Harmonic. Tandberg also said that the Internet Protocol TV (IPTV) market is heating up, which is also good news for Harmonic.

The Street is looking for $62.8 million in sales and four cents a share, but I think this could be the breakout quarter for HLIT, with something over $64 million in sales and five or six cents a share. It depends on whether the digital satellite customers came through with orders in September. In any case, December-quarter guidance should be above the consensus outlook for $68 million and six cents a share. Buy HLIT on any market-related dip under $7 for my $12 target.

Telkonet (TKO) just knocked one out of the park, but no one was watching. You probably know that Earthlink is very aggressive in the municipal Wi-Fi business and teamed with Google to install a system in San Francisco. Earthlink now made their first move into broadband-over-power lines, teaming with Telkonet to install BPL for Internet access and voice services, including caller ID, voicemail and three-way calling, in nine apartment complexes in the Washington, D.C. area.

This is a huge win because (1) TKO’s gear works, (2) Earthlink will roll this out across the country as a way to get their service into older apartment buildings that would be too expensive to rewire with cable, and (3) Earthlink alone can provide enough U.S. commercial customers for TKO, while EDS provides the military customers and various distributors to deliver to Europe and the rest of the world. You gotta love it! I may have to invent a category above “Top Buy” for TKO and a couple of other of our stocks. Buy as much TKO as you ever want to own right now while the stock is still trading under my $5 buy limit. I think this deal will prove to be the spark to get to my $15 target price — maybe not by the end of the year, but definitely once Wall Street realizes what’s going on.

Zhone Technologies (ZHNE) will hold their conference call later this evening, and I will send you a Flash Alert tomorrow with my analysis of it. They pre-announced the poor results — revenues of $43.1 million compared to $54.2 million in the June quarter but we need to hear more details on why it happened and what their plan is to fix things. They took a big $113.7 million write-off for impaired goodwill. This is not a cash charge, but an acknowledgement that they will not get the value they expected from some of the acquisitions, probably primarily Paradyne. Management said that they expect revenues to rebound over the next few quarters and blamed seasonality in Europe for the September-quarter results, but I think they will get some very sharp questioning on the conference call.

Steelhead Partners, the top-performing Seattle hedge fund, more than doubled their holdings of ZHNE in the September quarter to 290,000 shares. So, stay tuned, and tomorrow I’ll bring you my latest thoughts on Zhone and any action I want you to take in a Flash Alert.

New Energy Technology MegaShift

Plug Power (PLUG) announced a partner in Russia to develop that market, and also their largest single international order ever for 120 GenCore systems from their South African distributor. PLUG has a new model that starts from electricity stored in a capacitor instead of a battery, for use in harsher environments, like the jungle, that might reduce battery life. PLUG is executing well and remains a strong buy up to $7.50 for my $15 target after oil prices rebound.

Royal Dutch Shell (RDS.A) said today that their oil sands expansion projects would be profitable at $30 a barrel oil, even though costs of steel pipe and labor are up sharply. That’s even lower than I had estimated. Earlier this week, the CEO of Nexen said that they need $45 a barrel oil prices to break even on oil sands. In my presentation yesterday at the Money Show, I used a very conservative $50 level as the profitability point for tar sands, oil shale, coal-to-oil and ethanol. These investments still make sense at that level, because the price of oil should not go below $50 even in a U.S. slowdown. If Royal Dutch can breakeven at $30, they are going to make a lot of money out of tar sands, as is Connacher Oil & Gas (T.CLL). Buy RDS.A on any dips under $66 for my $75 target. T.CLL remains a Top Buy up to $4.50 for a first target of $7, and higher levels after that.

Security MegaShift

Check Point Systems (CHKP) beat the estimates, but confusion over the comparison numbers held down the gain in the stock. Revenues hit $142.5 million, nicely above the average consensus expectation for $138.8 million, in a range from $134 million to $144 million. They did 34 cents a share proforma and 31 cents a share under GAAP, while the consensus was for 32 cents proforma and the range was 30 cents to 33 cents. However, many services reported the results as 31 cents versus 32 cents, instead of 34 cents versus 32 cents.

On the conference call, CHKP’s management said that they did five deals over $1 million each, and seven deals between $500,000 and $1 million. They’ve been targeting larger customers for direct sales calls, and it is working. At the other end of the scale, their consumer/home office/small business retail sales also did well, and their products are now in all major retail outlets.

One crucial program has been a big success: CHKP engineers worked with Intel engineers to modify the Intel Basic Input-Output System (BIOS) that runs the new dual-core Intel processors. Intel agreed to change the BIOS to optimize the performance of Check Point’s security solutions, and as a result, Check Point can offer full security at 10 gigabits per second, a much faster speed than any of their competitors. This is going to make a big difference over the next 12 months.

The company guided for fourth-quarter sales of $153 million to $165 million, with GAAP earnings in the 34-cent to 37-cent range. The consensus was $158 million and 38 cents proforma, so guidance actually was above the current estimates. The stock added 63 cents a share by today’s close, after the early confusion was sorted out.

While Check Point is getting their act together, I am worried that a capital spending slowdown in 2007 will keep a lid on the stock. It is certainly possible in the short term that CHKP could trade up to $22 to $24, if the market can rally from here, but the risk is that it might fall back under $20 and then Wall Street may start to turn negative on the economic outlook. So, I want you to sell CHKP into this modest strength.

Packeteer (PKTR) will hold their conference call later today. They reported $36 million in sales, a bit under consensus, but up 45% from last year and up 5% sequentially. Proforma earnings of 14 cents a share beat the consensus expectation for 10 cents, but included a couple of cents a share in a one-time tax benefit. On the call, I’m looking for guidance for $39.5 million to $40 million and 13 cents in the December quarter. In the press release, the company only said that they are looking for “much improved sequential results.”

Subscriber Questions

“Michael, I think we’d all be interested in hearing your thoughts about the competitive position of Motorola (MOT). They appear to compete with UTSI in Passive Optical Networking (PON) and handsets. Also, TKO in broadband over powerline — same goals. Also, Alvarion and Airspan in WiMAX. Note also that all these have done poorly. Thanks.” –John

The bulk of MOT’s sales and earnings come from high-end cellular handsets, which is essentially a fashion or “hits” kind of business. Right now MOT is doing well, but the cycles are very short. I find it hard to time these stocks as they go in and out of favor on a regular basis.

UTSI competes in niches (see the G’zOne Type V, above) and cheap, simple handsets. TKO is miles ahead of MOT in actually deploying BPL. MOT is going into WiMAX on the back of the Sprint Nextel contract, and will be a big competitor — or acquirer. MOT could buy Alvarion (ALVR), Airspan (AIRN) and Terabeam (TRBM) for less than $800 million, even paying a 30% premium to the current stock prices, and totally dominate WiMAX. With a $57 billion market cap, they’d hardly notice any impact to earnings.

My bottom line is that MOT is doing many things to keep growing at 12% a year, but with the stock at 17X earnings and the PEG ratio (price/earnings to growth rate) about 1.5X, I can’t recommend the stock. MOT would be a screaming buy at 12X earnings, or $16 a share, but it hasn’t been that low for 18 months.