Is inflation whipped? Is the Fed done raising interest rates? Do we have new peace in the Middle East? Is it going to be a light hurricane season, after all? Has the market bottomed two months earlier than I expected?

I doubt the answer is “yes” to any of these questions, but I want to answer a number of your emails about what we should do if all of these turn out to be true. The background to this is a representative email from Ken, who said he is down on all of the stocks he bought that are still rated buys, and asked for an explanation. The summary answer is in this table:

Broad Market	2006 High to Friday 8/11 Close
Dow Jones Industrials	-4.80%
S&P 500	-4.50%
Smaller Stocks
Russell 2000	-13.40%
Tech Stocks
NASDAQ 100	-15.40%
AMEX Biotech Index	-17.60%
Philadelphia Semiconductor Index	-26.40%

The broad averages are still down since I turned negative on the market in February, even after the dramatic two-day rally on Tuesday and Wednesday of this week. I am not surprised that smaller stocks and tech stocks did worse than the market in this downturn. They usually do. But I was surprised that stocks in areas of obvious secular growth — MegaShifts like Avian Flu, Biotech, Content on Demand and WiMAX — would get hit as hard as stocks of companies driven by PC sales, cell phones, consumer electronics, traditional pharmaceuticals and enterprise capital spending. There hasn’t been much differentiation, as you can see in the tech stock index results above.

So, what happens from here? The intraday highs on August 4 and today look like a double top in the S&P 500, but it’s always possible that more liquidity will flow in and push the index over 1326 to a new high for the year. There are normally fewer buyers and sellers in August, which makes it easier to move the market in one direction or another. In 2000, the market ran up 7% from July 31 to September 1, closed for the Labor Day weekend, and then headed pretty much straight down for the next two years.

I still think the most likely path for the broad market is down to a mid-October bottom. I had been thinking that bottom could be as low as 1040 on the S&P 500, but unless this rally fails quickly, I’ll probably have to revise that to 1175 or so. That’s still a nasty drop from current levels, although not that much worse than the 1219 intraday low we saw in mid-June. The evidence to date tells me that our stocks will fall with the market rather than resist it, even though that shouldn’t happen based on their outlooks.

However, we would then be looking at a very strong market for the following 18 to 24 months, and our MegaShift stocks should snap back and lead to the upside as these companies ride their various waves. Of course, the table above will completely invert in the next upturn, with small stocks and tech stocks leading the charge, as usual.

Best of all, though, the price action this week suggests that our MegaShift stocks will lead this upturn, if it materializes. We’ve seen a number of these oversold jewels snap back in a big way, and I expect the rest to get in gear pretty quickly if the rally continues. The most important thing you can do for your portfolio right now is to figure out what you want it to look like when the all-clear signal sounds. Be ready to put cash to work or to swap some stocks for others so that you are in the best position for a big upswing through 2007. (Please see my discussion of the Top Buys this week for more on structuring your portfolio.)

Now, back to my original questions: what if everything falls into place right now, the Fed’s interest rate increases to date are enough to engineer the first soft landing ever in the housing market, inflation slows, growth slows but remains positive, and interest rates fall? The broad market will continue to rally, of course. If this happens, we probably would not get a graceful buying opportunity in some of the stocks I’ve been monitoring, like Broadcom, Intersil, Energy Conversion Devices, Cree, Ctrip.com, Kongzhong, Suntech Power and SiRF Technology. But we would probably still get a shot at Quick Logic, Cnet, Microvision, Cerner and others on my short list.

I don’t want to make any new recommendations this week, until we get a clearer message from the market that this rally is something more than typical summer suck-’em-in-and-pull-the-plug action. Plus, there are a number of issues the market is facing right now. Yesterday’s consumer price announcement included a year-over-year increase in the core rate that edged slightly higher to 2.7% — the highest level since December 2001, and well above the Fed’s target of 1% to 2%. The housing market really is falling apart, as the National Association of Home Builders said Tuesday that the confidence of U.S. home builders collapsed in August, falling to the lowest level since February 1991. And while Hewlett-Packard’s reported market share gains after the close yesterday showed we were wise to get out of Dell in February, the overall PC market is very soft. We’ll hear more from Dell when they report after the close today. These are all issues that portfolio managers will need to deal with when they get back from the beach, and it may take until September 5, the day after Labor Day, to see where sentiment really is.

Focus on the New Energy Technology MegaShift

The New Energy Technology MegaShift is one where I think you should be holding full positions right now. If the market heads back down, it will probably be because the inflation numbers turned bad again, hurricanes hit in earnest, or the price of oil went up for geopolitical reasons (Iran or Hezbollah, most likely). In all those scenarios, oil prices will move higher and our New Energy Technology stocks should follow.

Also, it’s important to know that anytime oil is over $35 a barrel, alternative oil extraction or conversion technologies get more attention, and at $50 a barrel these projects are rock-solid. I am convinced that oil will stay over $50 a barrel, even in a mild U.S. recession next year. Obviously, the potential to go higher than $75 a barrel, based on hurricanes, geopolitical events and demand growth from China and India, will be with us for the rest of the decade. As investors adjust to this reality — and they haven’t done so yet — hydrogen fuel cells, oil extraction technology and alternative energy will emerge as market leaders in the coming up cycle.

Another important reason to own these stocks is that they act as diversifying assets for your portfolio. Like biotech, the forces that drive them are completely different from those driving the typical technology stock. All of our recommendations that are below their buy limits should be on your shopping list right now.

Connacher Oil & Gas (T.CLL) reported $64.6 million in sales and $11 million in positive cash flow for the June quarter, thanks to the acquisition of Luke Energy (natural gas) and the Great Falls, Montana, heavy crude refinery from Holly Corp. The first 10,000 barrel per day Steam-Assisted Gravity Drainage facility at their Great Divide oil sands project is targeted to come online in the second quarter of 2007. They received regulatory approval during the June quarter, and in anticipation of that, they had started design and construction of the project and the required equipment.

The company will be updating its reserve and resource report shortly to reflect the results of their winter drilling program, and I expect a significant jump in reserves They are doing 3D seismic work this summer on expansion areas, and that will provide a further boost by the end of the year. These announcements should power a meaningful move in the stock.

Management also announced that they did a private placement of 5.7 million shares at $5.25, when the stock was around $4. They get the premium because these are “flow-through” shares used to incur eligible Canadian exploration expenses, which then flow through to the purchasers to reduce their taxes.

T.CLL now has about 200 million shares outstanding, giving them a total market capitalization around $800 million. I think after they add the latest drilling program results, they will announce about 200 million barrels of reserves and actually have about 350 million barrels. At just $40 a barrel, 200 million barrels translates to $10 a share. If the real numbers are 350 million barrels and $60 a barrel, there is over $25 in asset value behind each share. That makes my $7 target look modest. Buy T.CLL up to $4.50 for a near-term target of $7, and substantially higher numbers after that.

Gasco Energy (GSX) reported $5.8 million in sales, up 132% from last year, and a pro-forma loss of two cents a share, before a 60-cent impairment charge for the carrying value of their oil and gas properties. Yet, they also reported a much-improved reserve position. Here’s what happened:

The SEC requires companies like Gasco to estimate their future net revenues by applying current prices for natural gas to their proven oil and gas reserves. Then they estimate their future expenses to produce the gas, and discount the net cash flow at 10%. If this number is less than net capitalized costs, they are required to write off the difference as a non-cash expense.

What this means is the net capitalized costs get reduced whenever gas prices are low, and on June 30 gas was $5.42 per mcf. Today it is $6.58 and it has been as high as $8.62 since the end of the quarter. So, this is a meaningless charge that does not impact the real value of their proven reserves. On top of that, gas companies are worth some portion of their probable, and even possible, reserves. I expect natural gas to hit double digits again in January, which will be a far more important driver of the stock price than any SEC-required accounting adjustment.

The company had record cash flow from operations of $3.2 million in the quarter, and has $57.6 million on the balance sheet. They reported 76.7 billion cubic feet equivalent (Bcfe) proved reserves at the end of December. Their consultants just completed a probable reserves analysis, which cannot be included in SEC documents, and the numbers look great. Proved plus probable reserves at the end of December totaled 280.8 Bcfe, and by the end of June they were up 22% to 343.7 Bcfe. This analysis covered only areas that have been at least test drilled, which is less than 9% of the acreage in the total Riverbend Project. GSX is a great buy all the way up to $4.50 for higher natural gas prices this winter, which is when the stock should hit my $9 target.

Infinity Energy Resources (IFNY) reported record revenues of $12.7 million, up 65% year-over-year. Gross profit also set a record, up 87% from the prior year and up 31% from the March quarter. Oil and gas production set a record, up 26% year-over-year and up 32% from the March quarter. Their oilfield services unit had record revenues of $9.3 million, up 71% year-over-year and up 10% from the March quarter. Net income of 18 cents was hit by a non-cash “ceiling” charge, just like Gasco.

The company has decided to sell its oilfield services unit, which should bring a very good price considering its record results. They already have offers on the table, and won’t sell it if the after-tax proceeds can’t pay off their $47 million in debt. At the same time, they are planning to replace the senior secured notes with some different debt financing. They can bring in gas at about $3.10 per Mcfe, and are going to focus on drilling as many wells as they can project in the one-to-two Bcfe range. Obviously, the profit leverage is huge as energy prices increase. So, they will invest proceeds from the sale and debt refinancing into drilling more wells.

I suppose the debt refinance could keep a lid on the stock until it is done, although when the oilfield services company sale is announced, it could be a shockingly high number north of $70 million. We shall see. By the end of the year, the company should be drilling flat-out, have completed the sale of the oilfield services unit, have their debt refinanced, and possibly have a partnership agreement to proceed on the Nicaraguan offshore leases. IFNY is one of the cheapest stocks on our list and can be bought up to $6.50 for my $9 target — a possible double from current levels by the end of the year.

China MegaShift

Huaneng Power (HNP) reported better first-half results than anyone expected, thanks to more stable coal prices and rate increases in May last year and another 7.3% increase in June this year. The cost to generate a megawatt of electricity actually fell 1.7%, while power generated climbed 2.2%. The company did $2.5 billion in sales, up 5.2% from last year’s first half, and 90 cents an ADR share compared to 70 cents last year. Management said the second half of 2006 looks good, as more generating capacity will come on-line to ease China’s power shortages, while the balanced supply/demand situation in coal gives HNP a chance to control its fuel costs. HNP remains a buy under $30 for my $45 target.

Content on Demand MegaShift

Telkonet (TKO) finally was able to announce the Navy and Marine Corps contract with Electronic Data Systems (EDS) today, and the stock jumped 26.5%. TKO’s Broadband-Over-Powerline systems will eventually go into every Navy and Marine Corps base around the world. Also, remember that TKO already installed systems in the Queen Mary in Long Beach, showing that they can deal with the complex, often poorly documented, wiring systems on a ship. I would not be surprised to see some shipboard iWire systems. Telkonet is the only Broadband-Over-Powerline supplier approved by the Department of Defense. Army and Air Force contracts should follow in time, as EDS looks for opportunities to bid iWire systems around the world.

The other two announcements that I am expecting are a large investment from a strategic investor and the appointment of a new CFO. The good news that I was not expecting was yesterday’s announcement that they retired their convertible senior notes for $6.5 million in cash and $3.4 million in stock. They’ve been very low on cash, but they pulled $6.5 million out of a letter of credit pledged as collateral on these notes. The stock will be priced at the lower end of $5 or 92.5% of the average price of the common stock for the 20 trading days beginning yesterday. Today’s jump obviously helped, and this could turn into a virtuous circle. The higher the stock is in the next 20 trading days, the more it is worth because the lower the dilution will be. Assuming no one is short selling behind the scenes — a safer assumption now that the SEC is bringing enforcement actions on this point — there is a real opportunity to turn this situation around. If the company can announce the strategic investment during this 20-day trading period — and that may be exactly why they negotiated this deal before the EDS and investment announcements — we’ll see why the lenders negotiated a $5 cap on the stock price. TKO remains a Top Buy up to $5 for my $15 target.

Security MegaShift

Gemalto (GEMP) is in the middle of their exchange offer for Gemplus, and I’ve had a lot of subscriber questions about what to do. The issue is that after the exchange, Gemalto currently does not intend to have a U.S. traded security. That may change, but for now we should assume that is the case.

Most brokerage firms can hold foreign securities and trade them on the Euronext exchange. You should be able to participate in the exchange offer, leave the shares in your account and sell them when the time comes. (The recent offer expired August 14, but I expect it to be extended and Georgeson & Co. tells me they should know by Monday.)

If your broker does not have a Euroclear account or if you are in a state that will not permit you to do the exchange under their Blue Sky laws, you should go ahead and sell GEMP now. You do not want to get tied up in a two-year process in the French courts to get the residual shares bought out.

As for getting quotes, Gemalto’s French symbol is GTO. Find out how to get foreign quotes in your system. In Yahoo, for example, the symbol is AXL.PA.

WiMAX MegaShift

The more I look at Sprint’s commitment to mobile WiMAX for the fourth generation (4G) network, the more I like it. It was a very gutsy move on their part, as most other telecom companies are still thinking about how to evaluate the alternatives. Putting $3 billion on the table got everyone’s attention, and makes mobile WiMAX the technology that every competitor has to measure the other choices against. All three of our WiMAX stocks are even stronger buys right now.

Google Short Sale

We were stopped out of our Google (GOOG) short on yesterday’s close over the $385 stop-loss point. Google was the poster child for irrational exuberance in the run-up at the end of 2005, and it remains a good daily touchstone for how the momentum investors are feeling. The stop loss was designed to take us out to avoid further damage in case I was wrong about the effect of a slowing economy on their advertising revenues, or about Wall Street’s willingness to look across the valley of a couple of soft quarters. Unless the economic outlook changes dramatically, though, I will look for another entry point on this short.

Top Buys

As stocks were getting hit in the last few weeks, I’ve been adding to the Top Buy list. Several of you have emailed me to ask if I could trim it back to only the very best choices right now, recognizing that any stock well under the buy limit is a great buy right now.

Fair enough, with one caveat. I am always in favor of more diversification if it doesn’t lower your future rate of return. Owning dozens or even hundreds of stocks, as so many mutual funds do, lowers the rate of return unless the management company has dozens of analysts. The reason is simple: For superior performance, a portfolio should stay in the top 10% or so of all the stocks an analyst follows. In order to put hundreds of millions or billions of dollars to work, given the liquidity constraints of the market, it takes dozens of analysts to provide enough ideas to the portfolio manager.

At New World Investor, I use computers to monitor about 1,200 stocks in areas of interest. The 30 to 40 recommendations in the service are the top 3% to 4% of what I see. Buying as many of these as you can when they are under their buy limits will give you diversification without lowering your expected return, and it is a better idea to own more positions instead of concentrating everything on one or two stocks — especially with development-stage companies like we have in the various MegaShifts. For example, if you already own, say, Rentech and you are trying to decide whether to add to it or buy Ocean Power, and if they are equally attractive to you it’s almost always better to add the new stock and increase your diversification.

You can treat the bigger companies in our list, which will certainly be in the same business in five years, as the core, conservative part of your portfolio: Biogen Idec (BIIB), Comcast (CMCSA), Gilead (GILD), Huaneng Power (HNP) and Royal Dutch (RDS.A) fall into this category.

So, I went through the Top Buys this week to carve them back to the 10 best opportunities right now. Although they all are very attractive stocks right now, I put Crucell (CRXL), Gilead (GILD), Biogen Idec (BIIB), Zhone (ZHNE), Airspan (AIRN), Terabeam (TRBM), Plug Power (PLUG), Packeteer (PKTR), @Road (ARDI) and UTStarcom (UTSI) back in our buy list.

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