If September turns out to be as “bad” as August, the market is in a lot better shape than I thought. August and September are usually the two worst months of the year, but we closed today with the S&P 500 for August up 2.13%. Maybe I’m still suspicious because I was burned so badly in 2000, when a very nice 6.1% August rally capped a four and a half month recovery from the dramatic March-April decline as the Internet bubble burst. I thought that rally meant the market had stabilized and was starting to look forward to the usual fourth-quarter rally, and I was wrong on both counts. The hanging chad election in 2000 certainly didn’t help, but my experience is that strong markets recover from blows like that, while weak markets cave in as that one did.

So now we have a smaller August rally, but still a rally, capping a two and a half month recovery from the May-June decline. I’m having a hard time believing this can continue. Ernesto missed the Gulf oil platforms, but more hurricanes are coming to run the price of oil and natural gas higher. Of course, we may not even need a hurricane to do the job, with Iran insisting that they have the right to enrich uranium to the 6% level to power nuclear plants, and the U.S. saying there can be no compromise between 6% and the 80% level that would let Iran build a nuclear bomb.

In addition, the market has chosen to ignore the Fed’s statement that pausing was a “close call” at the August 8 meeting, and focus on their comment about the possibility of “economic growth below potential over the next six quarters.” I certainly think they got that right! The very accurate Economic Cycle Research Institute Weekly Leading Indicator peaked in May, and it usually leads a recession by six to nine months with very few false signals:

The remarkable factor here is that stock prices are one of the biggest components of this index, and they are rising… which means everything in the real world must be falling apart to make the overall index fall so decisively.

Others are finally using the “R” word, and with housing spiraling down faster than even I expected, it looks like the recession I’ve been forecasting is inevitable. The theory was that weak housing and high gasoline prices would take the consumer out of the game, but the baton would pass to business spending to keep the economy afloat. With consumers making up 70% of the economy, it takes a heck of an upsurge in business spending to make up for consumer weakness. Now it looks like the baton is about to get dropped. The weakness in revised second-quarter GDP figures for business spending on equipment and software, down 1.6% for the biggest drop since 2002, is confirmed by surveys of reduced spending intentions for the rest of the year.

As for housing, I read about a recent corporate meeting with a large, private California home builder where the young guys, who have been in the business for maybe 10 years, think all they have to do is get rid of the current inventory and then go back to business as usual. All the older, more experienced execs think 2007 will be worse than 2006, and they don’t know yet whether 2008 will be better or worse than 2007. Housing is likely to be a drag on the economy for some time, even after the Fed reverses direction and cuts interest rates.

So at the September 20 meeting, the Fed will again face the problem of a slowing economy with inflation well above their 1% to 2% comfort zone. Of course, it has been above their comfort zone since March 2004, with few signs of a meaningful decline, and that didn’t stop them from pausing in August. Fed forecasts presented to Congress last month predicted inflation of 2% to 2.25% next year, above the top of their supposed comfort zone. It is always interesting to contrast what people say with what they do.

Are the markets setting up for a crash, like 1987 or 2000? Maybe. The last of the shorts are being squeezed out now by this low-volume grind to the upside, and there may even be a continued rally after Labor Day to a double top around 1325 by options expiration on September 16. The higher the market goes in this rally, the more vulnerable it becomes as the bears are forced to throw in the towel. A negative surprise in September from the Fed, a hurricane, Iran, or even mid-quarter earnings updates could set off a sharp decline. We’ll know more after we see how money managers respond after they get back from the beach next week, and we’ll know a lot more by mid-September.

Meanwhile, most of our MegaShift stocks have lifted with the market rally and should report good progress for the September period.

Avian Flu MegaShift

Crucell (CRXL) reported earnings that were below expectations due to the costs of the Berna acquisition and a decision to increase R&D spending. Although the stock dipped for a day, management’s comments on the conference call were so positive that it snapped right back.

Crucell was expected to report sales of $37.9 million with a loss of $13.4 million. They actually reported sales of only $24.3 million and a loss of $33 million. But management reiterated their forecast for full-year sales of $167 million to $193 million, even though they only did $39.3 million in the first half of the year. Obviously, they will have to produce a gangbuster second half.

They expect to do that because the vaccines they acquired from Berna have a strongly seasonal sales pattern. And CRXL is very confident that they will get approval to launch Quinvaxem, their 5-in-1 vaccine for childhood diseases, in September or October, giving them time to sell the seven million doses that Novartis and they have produced before the end of the year.

CRXL also expects to start six Phase I trials in the second half of the year, including a pandemic flu study of the H7N1 avian flu strain and vaccines for tuberculosis, Ebola, a malaria and rabies. By the end of 2006, they will announce results of a Phase I trial in the West Nile virus and a big Phase I/II trial in England in H9N2 avian flu, and they will also announce a development plan for blood factor protein therapeutics. That’s a lot of positive news flow!

With the company forecasting breakeven cash flow next year, the news announcements and especially the approval of Quinvaxem should drive this Netherlands-based stock higher, regardless of what the U.S. market does. CRXL remains a good buy under $28 for my $50 target.

Biotech MegaShift

Biogen Idec (BIIB) announced on Monday that the placebo-controlled Phase II study of Rituxan for multiple sclerosis, which it did with Genentech, hit its primary endpoint — a statistically significant reduction in the number of brain lesions. There were only 104 patients, and the advantage over placebo came as early as 12 weeks after treatment, and continued to get better at the 16-, 20- and 24-week points. Achieving statistical significance with such a small number of patients is remarkable, and bodes well for the Phase III trial.

The company will be presenting at the Thomas Weisel Healthcare Conference next Wednesday with a live webcast, and it may give us a hint on how Tysabri sales are going. Buy the January 2008 $45 LEAP call (YZUAI) up to $12 for a $23 target. The January 2007 $45 LEAP call (IDKAI) is still a good buy, but a more speculative buy up to $10 for my $21 target.

QLT (QLTI) is almost certain to get a hostile bid after their current share buyback at the Dutch auction ends on September 8. I’ve been expecting the company to announce good news after that date anyway, and if they think a bid is coming, they will certainly try to run the stock up in advance of it.

Jim asked: “Why should anyone accept QLTI buy back offer of $7 to 8?”

For those who were thinking about selling anyway, putting the stock up for sale at $8 gets them out a little higher than recent trading. But I agree that this is the wrong time to be selling QLTI — it is better to match your actions to management’s actions. They obviously think the stock is deeply undervalued, or they wouldn’t be buying so much of it back.

Rodney O’Conner, a major shareholder who founded Atrix Laboratories and sold it to QLT, has been trying to negotiate a takeover that would take the company private. He is backed by an unnamed private equity group, and this week The Globe & Mail published the story. Now he says he may make a hostile tender offer after the buyback process is over.

The stock rose a bit on about double normal volume. You should not tender your shares in the Dutch auction, as one way or another this stock is now in play and headed higher. If you want to get in on the fun, I’m raising the buy limit on QLTI to $8 but keeping my $20 target. I would expect an offer from O’Conner in the $13 area, but there are others who would also like to own QLT, including Genentech, which could market their Lucentis with QLT’s Visudyne in a combination therapy. So, I think QLT could see even higher prices.

ViroPharma (VPHM) announced very strong data for their hepatitis C drug, although it was an early Phase 1b trial. This is an oral drug that they are co-developing with Wyeth. In this dose-ranging study of 100 milligrams to 1000 milligrams (1 gram), twice a day for 14 days, combined with pegylated alpha-interferon, they showed whopping viral reductions of 99.95%. There was no evidence of viral rebound, and no dose-limiting toxicities. A pill for hepatitis C would be a blockbuster drug. They plan to start a Phase II trial at 500 milligrams in the fourth quarter. The stock moved up 13% on heavy volume on Tuesday, but VPHM can still be bought under $13 for my $28 target. The stock still trades as if generic Vancocin will be introduced in 2007, which simply isn’t going to happen.

China MegaShift

Huaneng Power (HNP) told the China Daily that they plan to spend $31 billion in the next five years to more than double their generating capacity by 2010. They will install a mix of coal-fired and renewable-energy plants, targeting wind and hydroelectric to produce 10% to 15% of their electricity. Adding another 50 gigawatts of generating capacity that quickly will become a huge effort, and they expect it to boost their annual sales to $17.6 billion from the current $5 billion run rate. That’s a 37% growth rate or 28% if they take an extra year to get there — miles above Wall Street’s 9% expectation for the next five years. Remember that their first green nuclear, pebble-bed reactor plant will be online in 2010, providing them a major expansion route for the following decade. China is desperate for non-polluting electricity generation, and HNP’s pebble-bed plant is the answer.

The stock didn’t budge on this story, which reinforces my belief that Wall Street really doesn’t get it with this company. China can’t grow without power, and HNP is going to provide a lot of the incremental power — not the state-owned industries. Buy HNP up to $30 for my $45 target, and enjoy the 4.7% yield while you wait.

Content On Demand MegaShift

Comcast (CMCSA) is one of the most aggressive bidders in the wireless spectrum auction now underway in Washington. They joined with three other cable firms, Time Warner, Cox Communications and Bright House Networks, to form SpectrumCo. It was thought that they were just trying to run up the prices for the satellite guys, DirecTV and Echostar. But those two dropped out of the auction, and SpectrumCo is still in there as the third-largest bidder at $2.3 billion. They are bidding for New York, Long Island and Chicago, among others. They may be planning a unified service for mobile users that are Comcast subscribers at home, or they may be planning to use their share of the spectrum in their partnership with Sprint. It’s an interesting development, although it’s made some investors nervous that the long-awaited cash flow from the network upgrade spending will get sucked into another round of capital investment related to this spectrum. My take is that Comcast is run well enough to know how to take care of shareholders, while strategically growing the business. CMCSA is a big, safe stock that you should continue to hold for my $62 target.

Telkonet (TKO) has not had a lot of news recently, and it still hasn’t announced the strategic investment that I believe is coming. But I have a received a couple email questions about TKO that I would like to address today.

Jim asked: “Last week you said that assuming no one is short selling TKO, we’ll see why the lenders negotiated a $5 cap on the stock price. Did you mean to say ‘why the borrowers (meaning TKO) negotiated a $5 cap?’”

No, the way these work is that they calculate the average price of the stock over a fixed number of days, and then divide that into the amount of money changing hands to calculate the number of shares that will be given to the lender. The higher the stock price, the fewer shares the lenders get, so they often negotiate a cap, like this $5, to be sure they get at least a certain number of shares.

Laura asked: “Telkonet has already fallen back after the announcement of the Navy contract, and it continues to hover in the same range. Just two years ago Telkonet fell short of analysts’ expectations by 95%!!!! Today, it has the same CEO, appears on no ‘buy’ lists and no one seems to be tracking it. What makes you believe it can get to $15 by the end of this year from where it is now ($2.81). That would be a quintuple-plus in just a little more than 4 months, which seems highly doubtful. Would a strategic alliance cause the stock to ‘pop’ that much?”

The stock could easily double on the strategic alliance announcement, but the key to getting to $15 is in your question — “no one seems to be tracking it.” Depending on who the partner is, TKO could get picked up by one or two analysts for new coverage, and that would push it much higher in a strong bull market, which I am expecting after mid-October. Add the momentum players trying to get some performance into the end of the year, and this could be an explosive situation. Even at $15, TKO will still be a small cap stock with a $750 million market cap, and therefore have a natural constancy of aggressive mutual funds and hedge funds. Admittedly, everything has to go just right to hit $15 by the end of the year, but if it can get much of the way there this year and the rest in 2007, I don’t think many of us will complain.

Continue to buy TKO under $5.

New Energy Technology MegaShift

Fuel Cell Energy (FCEL) announced a technology breakthrough that increases electrical power output by 20% from any fuel cell size. They will deploy it across their product line for commercial introduction by the end of the second quarter of 2007. This is a down payment on their program to increase output by 50% while decreasing costs. The company will announce July third-quarter results before the market opens on September 7. I am not expecting much — a 38-cent loss on about $8.2 million in sales and probably only around 750 kilowatts in new orders. But they should have a large four-megawatt contract with PPL, the Pennsylvania utility, to announce by the end of September. FCEL is a buy up to $11 for my $22 target.

Holly Corp. (HOC) dipped below my buy limit after Ernesto missed the Gulf of Mexico oil platforms, weakening oil prices. This is just what we’ve been waiting for, so if you want to own a refinery (they aren’t building any more of them) with the technology advantage of processing heavy and sour crude, now is the time. Buy HOC under $46 for a move to $60 as oil prices firm up again.

Rentech (RTK) landed another big contract, indirectly. DKRW Advanced Fuels licenses Rentech’s technology, and Arch Coal just acquired a 25% stake in DKRW-AF and announced an expanded coal-to-liquids program. DKRW-AF and Arch are already developing a 10,000 barrels a day project in Wyoming, and now they will expand to two other coal basins. With Peabody Coal partnering with Rentech and Arch Coal partnering with a Rentech licensee, the handwriting is on the wall for the rest of the coal industry. These two giants and industry leaders did all the due diligence, and both picked Rentech technology. RTK is a strong buy under $5, which it just moved over this week, for my $11 target.

Royal Dutch Shell (RDS.A) and Chevron were picked to begin tests on extracting oil from shale in the Green River Formation under Colorado, Utah and Wyoming, according to a leak to The Wall Street Journal. The Bureau of Land Management (BLM) began public consultation on commercial leases last week, according to the Journal. The BLM said the formation has more than twice Saudi Arabia’s total stated reserves. RDS.A is a big, conservative stock with the oil shale kicker, and can be bought on dips back under $66 for my $75 target.

Meet Ernesto. He’s just a young ‘un, but he is expected to be quite something when he matures. Right now, he is a tropical depression near the Caribbean’s Windward Islands, but according to a forecaster at the Miami-based U.S. National Hurricane Center: “As it moves over the warm waters of the Caribbean, it could get even stronger. Conditions are favorable; it’s just a question of when.”

Ernesto would be the fifth named storm of the current hurricane season, with no hurricanes yet. On average there have been 4.6 tropical storms by this point in the season, but by this time last year, the Atlantic had produced 11 named storms, including four hurricanes. This week marked the one-year anniversary of the 11th storm’s formation, Hurricane Katrina, which caused $81 billion in damages.

For the Equities Portion of Your Portfolio

The hurricane season runs from June 1 to November 30, but the peak season is mid-August through October. The forecasters at Accuweather expect a burst of tropical storms during the next four or five weeks, beginning with Ernesto. It’s another reason (added to Iran, Nigeria and Iraq) to think now is a good time to be buying New Energy Technology stocks.

What you will want to remain cautious about is jumping into full positions in other areas. The market may or may not crack before the end of August, but I still haven’t seen anything to change my outlook for a substantial drop into a mid-October low.

Certainly, two of the stalwart areas of technology are weakening, with a third — business capital spending on software — about to crack. Cell phones have been an area of surprising (to me) strength, but it looks like there’s an inventory adjustment going on there right now. National Semiconductor cut its sales outlook due to lower-than-expected sales to mobile phone customers. Analog Devices said that Asian cell phone companies are cutting orders because they overestimated demand for handsets.

PCs have been an area of surprising (to Wall Street) weakness. As I expected, the market research firms are starting to slash industry sales estimates for this year. In one of the most pathetic marketing balloons I’ve ever seen released, Microsoft is thinking about offering Vista discount coupons to spur hardware sales during the holiday season. That’s ridiculous on at least two counts:

1. The odds that Vista will ship on schedule in January are very small, which means there’s almost certainly going to be another embarrassing delay to turn people off the idea of upgrading now. Microsoft operating system releases are usually delayed several times — the original name for Windows95 was Windows94, and the delay led to a poor year for PC sales. Typically, production versions are released about nine to twelve months after the second beta version. The second beta for Vista was released in May, so that implies that we should expect a production version in the second quarter of 2007 rather than the current expectation of January. But the second beta has been widely reviled as unstable and lacking many promised features, so I think even that is an enthusiastic schedule.
2. Very few people are willing to go through the pain of a Microsoft operating system upgrade to save $30 or so on Vista. People buy new computers with the operating system preloaded just to avoid the upgrade situation.

If this discount program even sees the light of day, I doubt it would change my outlook for PC demand one bit. The Gartner market research firm now says Vista’s delay will cause the PC industry to lose about $4 billion in revenues this year, and they’ve changed their revenue forecast from flat to down 2.3%. That’s around four million PCs that won’t be bought. I think the real number is closer to fifteen million, and industry revenues will be down 10% for the year. Because 30% to 40% of all PCs are bought in the fourth quarter, many for the holidays, we probably won’t see the real shortfall until the year is over. But assuming Vista is delayed to the spring, the PC stocks should move down well before the holidays. I still want to own more semiconductor stocks, Intel, Microsoft and maybe Dell for the Vista MegaShift, but this is not the time to get ahead of the news.

These are some of the reasons why I’ve recommended that you keep a portion of your portfolio in cash. I had a subscriber email from Zack: “Again, you state we should be holding a lot of cash. If that’s the case, why have you consistently recommended that we continue to buy stocks during the April-July stock decline? If you were a realistic advisor, you would have recommended that we sell and wait. Then we would have some cash to invest. You are not consistent in your advice when you advise we buy stocks and hold cash at the same time. You don’t make sense.”

Sorry, Zack, I thought I’d said this enough, but I’ll say it again. Beginning with our timely sale of a large percentage of most subscribers’ portfolios at the beginning of February, followed by an equally timely sale of the China Internet stocks at the end of May, I have consistently said to hold a large percentage of your portfolio in cash — but not 100%. For the portion that remained invested, plus new cash flows into some subscribers’ portfolios, plus new subscribers joining us with nearly all cash (I met some at the Washington, D.C. Money Show), I have stocks on the buy list, Top Buys and new recommendations.

So, Zack, what you need to do is ask yourself five key questions that will help you determine how much cash you should have in your portfolio. The first portfolio decision you need to make is a strategic one: How much cash should I hold?

The second decision is also strategic: Which companies do I want to associate my capital with?

The third decision is tactical: Is the stock attractive at today’s price?

The fourth decision is also tactical: Should I buy a full position, or average in over two or three buys?

The fifth decision is strategic: What should the relative positions be among the equities in my portfolio?

The answers to these questions are as individual as each of you. I can tell you what an “average” portfolio might be, but like the good people of Lake Wobegone, I think all of you are above average. Under SEC regulations, I can’t give you individual portfolio advice, but I try to make it pretty plain what I would be doing with a clean-slate portfolio today. That becomes a model to move your portfolio towards, understanding that there always are real-world constraints, like brokerage commissions and tax considerations.

Now that you know how to determine how much cash to put aside, here are some updates on our companies, which may also be bought under their buy limits should you chose to.

Avian Flu MegaShift

It’s the dog days of summer, with very little going on, which accounts for this shorter-than-usual issue. But the avian flu is about to move back on to the front pages as the southern migration of birds from Canada and Alaska begins. I was showing my daughter how to cast a spinning reel yesterday when the first flock of Canada geese came honking in for a landing. They’ll be here for a couple of months and then head further south. And while they’re in the area, I’ll be making sure that neither they nor the resident Muscovy ducks try to share any of the chicken feed. Ducks don’t get bird flu, but they can carry the H5N1 virus from wild birds to domestic poultry.

Indonesia reported seven sick people in one village, again raising the possibility of human-to-human transmission. One 35-year-old woman died, which was the 95th bird flu case this year, matching all of 2005. She also was the 63rd death in 2006, about a triple from 22 this time last year, and already 50% higher than the 2005 total of 41 deaths. With the seasonal flu season starting soon, it looks like a very bad year.

The Jakarta-based chief of the health and nutrition unit of UNICEF said: “We have a national pandemic among birds and that is where we should be focusing.” The Indonesian government will spend $54.4 million this year to fight avian flu, but due to a lack of resources they have cut next year’s budget 15% to $46.5 million. So much for getting control of the situation.

BioCryst Pharmaceuticals (BCRX) remains my Top Buy up to $19 for a $30 target after H5N1 is found in the U.S. Crucell (CRXL) is a buy up to $28 for my $50 target. Gilead (GILD) has listed January 2009 LEAPs, and I seriously considered advising those holding the January 2008 $50 calls (YGDAJ) to roll out to the new January 2009 $60 call (OJKAL) and take some profits off the table. However, I think we should stick with the ’08s, which have a lot of leverage and may give us long-term capital gains treatment. I would still buy the January 2007 $60 LEAP (GDQAL) under $9 for a $20 target.

Biotech MegaShift

Biogen (BIIB) has been trading sideways for nine months, and the time premium on the January 2007 $45 LEAPS (IDK AI) is burning off. When the stock went under $45, the options dropped sharply, and I received several subscriber emails from Greg and others questioning the $21 target and asking if it is smarter to average down in the 2007s or roll them out to the 2008 $45 LEAPS (YZUAI).

I understand your concern, but there are two reasons that I think my $21 target is still good, which implies a $66 price for BIIB when the options expire in January.

• I’m expecting a sharp market rally from mid-October into January, with biotech outperforming in the downturn into mid-October and then being the #1 or #2 industry group (with semiconductors) in the rally.
• I’m expecting Biogen to report surprisingly strong Tysabri sales as MS patients worldwide clamor to get the drug.

As for averaging down or buying the 2008s, I am always in favor of diversifying. The 2008s give you time diversification. I would not roll the 2007s into the 2008s, as I think the risk/reward is similar when comparing the two options. But I would put new money into the 2008s rather than average down in the 2007s.

Dendreon (DNDN) submitted two sections of their rolling BLA (Biologics Licensing Application) to the FDA, covering their clinical and non-clinical testing for Provenge. The clinical data shows a survival advantage without any significant toxicity. They will submit the chemistry, manufacturing and control sections as the year rolls on, which will complete the application before the end of the year.

The rolling filing process is part of Fast Track Review, which should get them an FDA decision by mid-2007. Provenge will be the first therapeutic cancer vaccine, and the exact same process can be applied to other solid tumor cancers like breast, head and neck and melanoma.

However, the FDA could always turn Provenge down — I’ve seen them do things that dumb before — but extending survival is the gold standard for a cancer drug, and without any toxicity, it is difficult to see why the FDA might nix it. Clearly, Wall Street believes Provenge will not be approved, probably because the clinical trials missed their primary endpoint of tumor progression. Survival was a secondary endpoint. I think the Street is wrong, and I would continue to buy DNDN under $7 with a $14 target after Provenge is approved.

Content on Demand MegaShift

Harmonic (HLIT) is buying a venture-backed private company, Entone, for $45 million — $26 million in cash and about 3.54 million HLIT shares. Entone makes software that turns an ordinary server, usually from H-P or Dell, into a Video on Demand (VoD) server. It is a direct competitor to Arroyo, which was acquired by Cisco for $92 million on Tuesday. These two companies are the leaders in VoD software systems, with Arroyo mostly targeting cable companies and Entone mostly targeting telecom and satellite companies. Entone also has close ties to Tandberg, a main Harmonic competitor. Tandberg even invested in Entone, so this could be interesting.

This acquisition hardly budged HLIT’s stock price, but it is a big deal for a number of reasons. First, it will be accretive to earnings in the first quarter of 2007, which is really quick and suggests Entone is growing very rapidly. Harmonic paid half as much for Entone as Cisco paid for Arroyo for roughly the same $10 million revenue run rate, which is part of the reason it will be accretive so quickly. About 50 of Entone’s 80 employees will join Harmonic’s team, mostly R&D engineers based in Hong Kong.

There are a number of companies, like Seachange (SEAC), that produce expensive video servers based on custom semiconductor designs. Entone takes advantage of the ever-cheaper standard servers and can more easily add features in the future because it is software-based rather than hardware-based. Harmonic now has an end-to-end VoD solution without having to add a custom video server product.

Entone has 35 customers, including Hong Kong-based PCCW, which is the largest IPTV supplier in the world and is supplying HDTV over DSL lines. That installation uses Tandberg TV’s encoders instead of Harmonic’s. Harmonic could continue to support Tandberg, or (more likely) choose to migrate the Entone software away from that competitor to tie it to Harmonic encoder sales. Entone is the #1 VoD server supplier to smaller telecom companies through an extensive distribution network, and that is a market Harmonic has not had the time and resources to address in the past.

The Content on Demand MegaShift that we’ve identified is going to happen very quickly. Most of us will watch VoD within five years, and the idea of a regular broadcast schedule probably will be dead in ten years. This was a superb acquisition, and HLIT remains a Top Buy under $6 for my $12 target.

Telkonet (TKO) rallied on the EDS contract announcement, but then gave back about half the gain. That is typical market behavior, and I’d like to see the stock base around $2.50 before the next leg up.

Dick asked: “Are the announcements about TKO and EDS the end of the good news until their earnings?”

No. There will be a large investment by a strategic investor that will give TKO a lot of credibility and attention, and they will be appointing a new CFO. There also should be a series of order and contract announcements as Broadband-over-Powerlines hits the growth curve. TKO is a great buy all the way up to $5, and I am sticking to my $15 target (a $750 million market cap) as the aggressive small cap growth funds discover it in the coming bull market.

Security MegaShift

Symantec (SYMC) quietly increased renewal pricing for its 2006 consumer products like Norton Internet Security. In late 2005 they introduced autorenewal. The combination of autorenewal and higher prices is likely to provide some upside surprises in the September and, especially, December quarters. SYMC is a hold for a higher exit price in the fall.

WiMAX MegaShift

I said last week that the more I looked at Sprint’s $3 billion commitment to WiMAX, the more I liked it. It’s going to change the way people access the Internet, cut costs and provide fourth generation (4G) mobile phone service. The higher speed, longer distance features of WiMAX work best in the licensed spectrum, although WiMAX also has several unlicensed spectrums for the standard. Sprint dropped $1 billion in the early ’90s to buy spectrum for a Multipoint Multichannel Distribution Service (wireless cable TV), which never went anywhere. That same spectrum can be used for WiMAX. Then, when Sprint bought Nextel, they acquired even more of the spectrum that they need to convert to a nationwide WiMAX system. They already have the Nextel and Sprint towers in place, so they don’t have to buy spectrum or lease towers — they can just deploy the equipment. Sprint’s core cellular network is based on a low-power technology called PCS (Personal Communications System) that required lots and lots of towers. That’s a tremendous competitive advantage for a WiMAX network, and explains why Sprint is so ready to spend seriously big bucks on this project. It’s also why they jumped straight to mobile WiMAX — they can upsell their 51 million mobile customers, and provide fixed service along with the mobile. Cell phone competitors are afraid to sell their data services for fixed applications, because they might get overwhelmed by the demand for bandwidth. WiMAX has plenty of bandwidth for all — voice, video and data.

Airspan (AIRN) said Last Mile Broadband, an Irish Midlands broadband supplier that put 50 Airspan base stations in place in 2005, just ordered another 35 to launch higher speed broadband and VoIP services.

Michael, a subscriber, wrote that he read the 10Q for the quarter, but apart from the revenues being significantly higher than the consensus, there was no real reason for the negative price action. He asked: “What happened?”

Michael, I’ve covered this in previous Radar Reports. Their big Japanese contract with Yozan is in turmoil, both because it isn’t clear how much more product Yozan will take and due to very technical accounting issues that led them to book a lot of deferred revenue in the recent quarter, while leaving it very unclear what they can book for the rest of the year.

The key to a stock like AIRN is focusing on the forest — is WiMAX growth accelerating? And then the trees — are they getting their share of orders? So far, the answers are yes and yes. Twelve months from now, Yozan and the accounting issues will be history, WiMAX will be one of the very hot stories, and Airspan, Alvarion and Terabeam (TRBM) will be on everyone’s watch list. That’s why I want you to keep buying AIRN under $6 for my $10 target. Incidentally, I don’t think it has any meaningful risk from current levels.

Alvarion (ALVR) has also won a couple of big contracts. Netia, one of the leading communications providers in Poland, chose Alvarion’s BreezeMAX for a 20-city WiMAX deployment to be turned on at the end of August. That’s an amazingly fast deployment time, and a tribute to Alvarion’s no-hassle solution. Three other companies in Poland were granted WiMAX licenses, and it will be interesting to see if Alvarion can get some of the other business.

A subsidiary of NTT, the Japanese telephone company, choose Alvarion’s BreezeACCESS VL system to bring broadband to Okinawa. A wired infrastructure would be too difficult and costly, due to the mountains and rural character of much of the island. ALVR remains a buy under $9 for my $18 target.

MobilePro (MOBL) won another plum Wi-Fi contract for Longmont, Colorado, which has one of the highest concentrations of software jobs in the nation. They’ll start deployment in the fourth quarter, and as usual, they will give the city free access for government services. The network will cover 22 square miles and more than 71,000 residents.

The PowerPoint presentation MobilePro management gave at the annual meeting is at http://www.hawkassociates.com/mobilepro/company.php, where you can also listen to a replay of the talk. They said that after the Sacramento experience, they will not make a press release on new wins like Longmont until they have a signed agreement. They used to announce a win when the city council voted for it, but that put them at a negotiating disadvantage. Over 700 cities have indicated that they are going to look at building a municipal Wi-Fi network. MobilePro needs $18 million in capital to build out these networks over the next 18 months, and they want to pay off the $15 million convertible in cash. They have $9 million in funding that will close in the next couple of weeks, plus $15 million in serious discussions, and another $10 million in a terms sheet from an international fund, on which they are doing due diligence. They are looking for equipment financing from Cisco and Motorola, their two largest suppliers.

MOBL said that they have a globally known advertising partner announcement coming this fall for the WazTempe network — it could be Yahoo. They also said that they are targeting a stock listing, either by a reverse merger or a reverse split. The CEO said they are in preliminary talks for a reverse merger, and he personally is not in favor of a reverse split. He is targeting a listing by the end of March, and part of his bonus is tied to that. They are very disappointed with the stock’s price, because they feel they have addressed the major concerns of organic growth, funding and are working on a listing. They emphatically said that they are trying to build long-term value and plan to be here for years.

David, a subscriber, wrote to point out that I said I would report on my review of the company’s 10Q, and then forgot to do it last week. He’s right. There was nothing unusual in the filing, but I should have told you so. Buy MOBL up to 25 cents for a 60-cent target.

Google Short

Google (GOOG) stopped us out at $385 last week and almost immediately fell back. I expect it to try to rally a bit here and then fall away.

In the last 18 months, insider selling at the top of Google totals over $7.4 billion. Here are the big chunks:

Seller	Amount
Sergey Brin:	$1.9 billion
Omid Kordestani:	$1.1 billion
Eric Schmidt:	$650 million
Ram Shriram:	$650 million (Director, Investor)
David Drummond:	$200 million
George Reyes:	$200 million
Jonathan Rosenberg:	$200 million

Needless to add, not one of them has bought a single share of GOOG on the open market. Maybe they see the advertising market weakening in an economic slowdown, as always happens. In any case, short GOOG over $370 with a $384 stop loss on a closing basis. My target is still $200, and the December $380 puts (GOP XP) are only a little overpriced relative to their theoretical value.

Market Outlook

I used to feel like an alarmist about the housing bust, but now that it is headline news, I’m not so alone. July sales of previously-owned homes in the U.S. were the lowest in two years at an annual rate of 6.33 million. That was lower than the lowest forecast, let alone the consensus. Sales are down 11.2% from last year, while the inventory of houses for sale exploded to a new record — 3.86 million, or a 7.3 months’ supply.

July new home sales, announced this morning, fell more than forecast to an annual rate of 1.072 million from 1.131 million in June. Sales were down 22% from last year. The inventory of unsold new houses rose to 568,000, or a 6.5-month supply — the highest level in 11 years. Purchases of used homes fell in all geographical areas, while new homes fell in the Midwest and South, so this is not a bicoastal bubble bursting — it is a serious recession in this sector.

The median price of an existing house rose 0.9% in July from a year ago, to a record $230,000. New house prices rose 0.3%, also to a record $230,000. With sales down in double digits year-over-year, it seems likely that prices will turn down. Potential buyers, well aware of the inventory situation, say they are waiting for prices to fall. I think this housing recession will extend well into 2007, acting as a significant depressant on economic growth.

The bond market seems to agree. The yield curve is still inverted (lower yields on 10-year notes than 2-year notes), which means the bond vigilantes expect a big slowdown. But at the same time, the spread between Treasury Inflation Protection Securities (TIPS) and regular Treasuries is getting wider and wider. That means the bond market also expects more inflation. Hmmm, a slowing economy with rising inflation — S-T-A-G-F-L-A-T-I-O-N anyone? Higher inflation will force the Fed to raise rates again, even with growth slowing. When the stock market figures it out, which I expect to happen by mid-October, we should see the bottom created.

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.

I know the big picture geopolitical outlook seems complex and confusing right now, especially with the thwarted terrorist actions in the U.K. today and the ongoing fighting between Israel and Lebanon. My son is in Beirut, and has been traveling in the Becaa Valley, interviewing Hezbollah leaders and fighters. He’s been held by them several times, and a minority of them always want to kill him on the spot, yelling: “George Bush!” at him. But he has safe passage from the Lebanese military, which tells me that they are in control, at least in that part of the country.

I believe the whole conflict between Israel and Lebanon was started by Iran to divert attention from their nuclear program, and they have played their hand beautifully. A nuclear power plant runs on uranium enriched to 6%, while a nuclear bomb requires uranium enriched to at least 80%. Iran wants uranium that is enriched more than 6% but maintains that it is only using the uranium for nuclear power plants. Secretary of State Condoleezza Rice’s idea that there could be no compromise between 6% and 80% set the stage for the showdown between the United Nations and Iran. Iran will win the disagreement not by getting to enrich uranium, but by getting a huge monetary payoff from the West to not do it. And they will bank substantial extra revenues for their oil in the meantime, thanks to the higher oil prices the crises generated.

The home front political picture is also complex and confusing, but I think Joe Lieberman’s loss in the Connecticut senatorial primary does not show “division and divisiveness” in the Democratic Party, as the Republicans said. What it really showed is that a political neophyte can beat a three-term senator simply by running against President Bush’s Iraq policy. For good or ill, that message went all over the country instantly, and a lot of close races just got a lot more focused and closer. There is a very good chance Nancy Pelosi (D-CA) will be the next Speaker of the House, and an increased chance Hillary Clinton will be the next president — especially if the coming recession is deeper than what I am now expecting because the Fed feels tied to their publicly-stated 1% to 2% inflation goal. Of course, a Clinton win would set up the big economic downturn in 2010 to 2012, which I suspect is coming to complete the bear market that began in 2000.

Through all this, the MegaShifts will be the growth areas, and there will be opportunities to make substantial amounts of money. We need to stay in synch with the major market moves — down into this October, then up for two or three years, and then the big market downer leading the economy in 2009 to 2010. The capital spending surveys will be weakening over the next few months, so those who base their market calls on this lagging indicator will be turning negative and helping to create the October bottom.

Now that we are mostly through earnings season, with Cisco’s good July-quarter numbers announced after the close Tuesday — a nice bookend to Intel’s crummy June numbers announced three weeks ago — this week I want to get back to some of the fundamental drivers in our various MegaShifts, and how they should play out for the tricky second half of the year.

My stock market scenario for a weak third quarter into a spike low in mid-October still looks highly likely, followed by a powerful run up that should last for many months as the Fed reduces rates to counteract the recession. It will be an ideal environment to buy cheap stocks of companies with good growth prospects, and then get a big payoff when their fundamentals come through.

Right now, you should be holding lots of cash, nibbling at the Top Buys on down days, and thinking about what you want to own coming out of an October bottom. Of course, part of that decision depends on how low prices go, and at that time I probably will be sending Flash Alerts almost daily.

Avian Flu MegaShift

New outbreaks in people in Thailand, Indonesia and Vietnam, and an infected dead swan at the zoo in Dresden served as reminders that even in the off-season for flu, this is still a serious situation. The Thais killed 300,000 chickens after two more people died, and chicken-exporting countries are seeing their trade collapse. With bird migrations about to start again and flu season on its way by November, the whole avian flu issue will return to the front page and help push these stocks higher.

BioCryst (BCRX) reported earnings yesterday morning, and the stock dropped 18%. It was surprising, especially after they said on Monday that they received the Special Protocol Assessment that I’ve been expecting from the FDA. The Special Protocol Assessment is for Fosodine in a T-cell leukemia trial for patients who have failed at least two previous courses of treatment. BCRX will start enrollment of the 100-patient, pivotal trial by the end of the year, but it could take 18 to 24 months for enrollment. That would put final data in 2009 and FDA approval in 2010, right on schedule. But there’s also a possibility that it could enroll a little faster and get to market six months earlier.

On the conference call, BCRX disclosed that the FDA did not identify a target efficacy hurdle, which means the drug will be reviewed in context of its overall risk-to-benefit profile. That plays into Fodosine’s strengths of a very benign safety profile with proven activity. We should see several Phase II results at the American Society of Hematology (ASH) meeting December 9 to 12 in Orlando.

In regards to earnings, BCRX lost 35 cents a share for the second quarter compared to the consensus estimate of 29 cents. They are spending more on R&D and clinical trials than expected, as they see a window to get a lot of Phase I trials done before the flu season starts. They burned about $11.5 million in cash and ended the quarter with $74.7 million on the balance sheet. BCRX said that they will be increasing the burn rate to about $15 million a quarter by the end of the year.

During the conference call, management reported that they recently completed their third Phase I clinical trial of intravenous peramivir for seasonal and avian flu, which is targeted at hospitalized patients. (Intramuscular peramivir is for treating earlier-stage patients, and it is about to start its own Phase I trials.) There are about 200,000 seasonal flu patients in the U.S. every year that require hospitalization, and about 35,000 die. Intravenous peramivir would be a new treatment option for these patients, as in animal studies a single infusion knocked out both seasonal flu and bird flu.

BCRX is going to do additional Phase I studies in elderly and other subpopulations to prepare for Phase II studies during the upcoming flu season. Phase II sites will include Vietnam, Thailand and Indonesia, all hotbeds of H5N1 activity. The company will present results from all Phase I trials at the Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC) conference from September 27 to 30 in San Francisco.

Congress recently allocated $3.8 billion to the Department of Health and Human Services to fund pandemic flu initiatives, and BioCryst requested support for these clinical development programs. I think the Department will present these awards by the end of their fiscal year on September 30, and BCRX could get up to $100 million.

And that’s not all that BioCryst is working on. By the end of the year, the company expects to file an Investigational New Drug application for BCX-4678 to start human clinical trials in hepatitis C.

It is always a danger for a biotech company to be presented with “insurmountable opportunities,” but BioCryst management seems to me to be increasing spending intelligently, in response to real clinical progress and partnering opportunities. Fear of the increased burn rate hit the stock yesterday, and while I understand the thought process, especially in a crummy market that doesn’t like small cap or biotech stocks, I think it is really misplaced in this case. As the ThinkEquity analyst said in his report today: “While the stock reacted negatively to the call’s news flow, we see no catalyst within the information provided that justifies yesterday’s sell-off. Indeed, we view the call as being incrementally positive for BioCryst, and we continue to expect a steady stream of positive news in the second half of 2006, including 1) extensive data for Fodosine at ASH in December, 2) government funding for peramivir in the third and fourth quarters of 2006 and 3) peramivir efficacy and safety data in the fourth quarter of 2006.” BCRX remains a Top Buy up to $19 for my $30 target.

Crucell (CRXL) will report results on August 29, and update us on the integration of the Berna Biotech acquisition. We should also get an update on the potential use of their cell technology in creating avian flu vaccines. Expectations are low because merger expenses are hitting the bottom line, but I think they will surprise analysts with cost reductions and guidance for more of the same. CRXL is a Top Buy up to $28 for my $50 target.

Gilead (GILD) is helping generic drug makers in India learn to copy Truvada, their very successful HIV medicine. Truvada sells in the U.S. for $24.51 a pill, and in Africa for 87 cents a pill. Gilead doesn’t want to manufacture the drug for 87 cents a dose, but they want to do what they can to help poor patients in these markets. About 6.5 million people in poor countries have HIV infections, but only 50,000 of them are taking Gilead’s drugs. By shifting the costs to the generic drug manufacturers, Gilead gives up little profit but makes up for it with a lot of goodwill. The generics will be a different shape and color than Truvada, and the manufacturers will not be allowed to export them to the developed countries.

GILD stock is doing well, and you can still get the Top Buy-rated January 2007 $60 LEAP (GDQAL) under my $9 buy limit for a $20 target in five months.

Biotech MegaShift

I mentioned in the BioCryst writeup that the market has not liked biotech stocks this year. The AMEX Biotechnology Index (BTK) is down over 17% since the end of February, and the NASDAQ Biotechnology Index (NBI) is down more than 19%. That often happens in the first half of a year, when there are fewer medical conferences and less FDA activity. Looking at the last 10 years of quarterly performance, these two biotech indices usually outperform the broad market, but they do it all in the second half of the year. In fact, biotech often leads all the industry indices in the second half of the year, especially the fourth quarter, as results are announced at conferences and the FDA scrambles to approve enough things to justify a budget increase.

The whole pattern may be accentuated this year by a confirmation of an FDA Commissioner in the next six to eight weeks, shortly after the FDA approves Barr Pharmaceuticals’ Plan B morning after contraceptive. We may also see more mergers and acquisitions in this area, as stock prices for the defensive big pharma and biotech stocks hold up relatively well in a market decline based on developing economic weakness. I expect only one blockbuster product approval in the second half, panitumumab from Amgen, but predictable, consistent earnings growth should support big pharma and big biotech stock prices.

There haven’t been any big-cap “blow ups” this year like the Vioxx disaster, but there have been some small- and mid-cap problems at companies like Neurocrine Biosciences, Pozen, Anadys, Dov Pharmaceuticals, and Inhibitex Therapeutics that have depressed the smaller stock sector. That’s an ideal set-up for more mergers, and some of our companies are definitely candidates. I think BioCryst, Dendreon, eResearch, Millennium, QLT and ViroPharma all must be on everyone’s list of prospects.

Dendreon (DNDN) reported a 26-cent per share loss yesterday morning, better than the 36-cent loss estimate, and said they are on track to finish filing their Biologics Licensing Application (BLA) for Provenge by the end of the year. But the stock barely budged on the news, as the bears, like the Brean Murray brokerage firm, continue to play the “missed their primary endpoint” tune.

I want to focus on the negative story out there so you understand the situation. Brean Murray said that they expect DNDN’s stock to continue to drift lower due to uncertainty surrounding Provenge approval. Specifically, they do not believe that DNDN will be able to submit a Provenge BLA that conclusively supports approval, given that the first two Phase III trials failed their primary endpoints. While the company is using the secondary median survival endpoint that they did meet, Brean Murray points out that this endpoint encompasses a period of time during which patient’s post-progression
treatment was highly variable. The brokerage firm thinks this is highly confounding to the analysis, especially given that 75% of the placebo patients crossed over to
Provenge upon disease progression. So, Brean Murray is recommending sale of the stock on price spikes that may be triggered by the release of data from the third Phase III PROTECT trial, if it is positive, and the announcement of completing the filing of the BLA.

I have been over this ground before, and none of these arguments are new. What Brean Murray fails to mention is that the secondary endpoint — extending median survival — is the gold standard for approval of a drug. While it is true that survival was extended by a broad range of months, the point is that some folks were helped only a little and others were helped a whole lot. The crossover of placebo patients is a red herring, as this is not a complex statistical adjustment. Perhaps the biggest factor is that the company already went over all of this in detail with the FDA staff, and was told to go ahead and file on a rolling basis to reduce the time to approval. It would have been easy for the FDA to tell Dendreon to wait until they had the PROTECT Phase III results. Instead, they told them to go ahead and file based on the first two trials’ results.

The FDA can and has done strange things before, and telling a company to file does not presume that they will approve the drug. But it does say there was enough statistical evidence about a meaningful endpoint to justify a filing. Brean Murray is entitled to their opinion, but the FDA’s actions, so far, do not support their position.

On the conference call, management said they completed the initial build-out of their New Jersey manufacturing facility to meet the clinical and potential commercial manufacturing needs for Provenge. They also completed the production of consecutive conformance lots of antigen, the key raw material used in the production of Provenge.

During the quarter they published the results of their pivotal Phase III Provenge trial in the Journal of Clinical Oncology. We have seen the numbers before:

• A median survival time four and a half months longer than the median survival seen in the placebo group.
• A 41% overall reduction in the risk of death.
• 34% of the patients receiving Provenge were alive at 36 months after treatment, compared to 11% of the patients randomized to receive the placebo.

The company lost about $19 million in the quarter and has $105.6 million in cash left, or only enough for about five or six more quarters. The BLA is on fast track review, so they should have an answer from the FDA by mid-2007, before they run out of money. I think the $300 million current market capitalization is less than their technology is worth in a takeover, because it can be applied to all solid tumor cancers and is complementary to most conventional and biotech-based approaches to cancer. But I have no illusions that we will somehow make money even if the FDA turns Provenge down — this is a speculation on one approach to cancer getting approval, which will lead to a host of approvals in other cancers over time.

The downside from current levels is minimal, and the upside is life-changing profits. So, I will make DNDN a Top Buy if it dips under $4, and I am keeping my $7 buy limit and $14 target after Provenge is approved. The PROTECT results and completed BLA filing should pop the stock, as would naming an international distribution partner, and even if Brean Murray’s customers sell into the news, we may not get a chance to buy DNDN under $4, so there is nothing wrong with buying a one-third to one-half position now, and picking up the rest when and if it becomes a Top Buy.

China MegaShift

UBS Bank published an interesting contrarian argument on China, written by their chief Asia economist. It argued that the pace of urbanization is only half the magnitude discussed in financial headlines. Instead of 250 million to 300 million “Chuppies” (Chinese urban professionals), they put the real number at 65 million to 75 million. The difference is that China labels 562 million people, or 42% of the population, as living in urban areas. But they define “urban” as huge areas that include many small villages and farming areas. For example, “cities” like Chifeng, Qiqihar, Ganzhou and Baise are larger than Maryland, Vermont or Massachusetts. UBS says the true urban population is about 244 million, or less than 19% of the population. They said: “Of all the hype and controversy surrounding the mainland economy, perhaps none is more potent than the relentless rise of the Chinese urban consumer.”

Judging by the number of Internet users, the truth probably lies somewhere between the UBS estimate and the received wisdom. If there are only 244 million urban dwellers, straight math translates to 110 million to 130 million “Chuppies,” or substantially more than the 65 million to 75 million estimated by UBS. In any case, if and when we re-enter the Internet and travel stocks we sold in May, I will use more conservative estimates for their current available market. I noticed that Ctrip (CTRP) reported a decent quarter this morning and the stock sold off anyway on valuation concerns. It is down 8.4% from where we sold it.

UTStarcom (UTSI) actually benefits from lower “Chuppie” estimates, as that means the market for those needing a cheaper wireless solution than cellular is larger than we thought. UTSI doesn’t install systems in the giant “cities” because their telecom customers need population density to make the systems profitable.

The company reported $549.1 million in sales in the June quarter, below the $558.6 million consensus. But they handily beat on the bottom line, losing only 18 cents a share instead of the 46-cent loss expected. Gross profit margins beat everyone’s estimates, including mine, as their cost reduction programs and supply chain consolidation really started to pay off.

The book-to-bill ratio was about 1.0 for the quarter, and they guided in-line for the September quarter, looking for sales of $590 million to $625 million (consensus $610 million) and a loss of 23 cents to 33 cents a share (consensus is a loss of 32 cents). The stock jumped on the better bottom line news and on management’s forecast for revenue growth in the third and fourth quarters, as well as their statement that Internet Protocol TV (IPTV) is now a major opportunity for the company.

On the conference call, they said the trend for telcos to dump their circuit-switched networks in favor of IP-based networks continues, and UTSI currently has the largest softswitch deployment in the world, supporting over 50 million subscribers. In the June quarter, they received a contract from a Tier 1 Philippines telco to build their next generation network.

In IPTV, they have a technology lead that provides far better capabilities and scalability than their competitors, and they have won over 50% of all government license IPTV deployments in China. UTSI currently has over 90% of the commercial subscribers in China on their networks. In the June quarter, they signed a follow-on deal with China Telecom to expand commercial IPTV coverage in Shanghai, a market of nearly 18 million people with two million broadband subscribers. According to the market research firm IDC, China IPTV subscribers are expected to reach 4 million in 2007 and double to 8 million by 2008 Outside of China, they are about to launch the first commercial IPTV network in Brazil with Brasil Telecom, which has almost one million broadband subscribers. UTSI’s pay IPTV trial in India continues with Bharti, a leading operator with over 1.5 million broadband subscribers.

In wireless, the PAS market should decline over time, but PAS revenues are still very important for the fixed line operators in China that are not allowed to deploy cellular systems yet. Both China Telecom and China Netcom continue to invest in expansion contracts, and in the first half of 2006, total PAS subscribers grew by six million to 92 million, of which 51 million are on UTStarcom equipment.

Outside of PAS, UTStarcom partnered with Qualcomm in the June quarter to let Qualcomm resell UTSI emergency response systems to governments in North America. UTSI is also taking market share in CDMA handsets in North America and is now the #4 supplier in the U.S. They are shipping unique handsets that are waterproof or ultra-thin to every CDMA carrier in North America. In the June quarter, they shipped a record 750,000 internally designed handsets, a triple from the 250,000 sold in the March quarter, which itself was more than the 200,000 sold in all of 2005. That’s momentum!

They had $25 million positive cash flow from operations in the quarter, and paid down $50 million in short-term debt. UTSI now expects to return to profitability in the first half of 2007. As of the end of June, they had $658 million in cash ($5.44 a share) against a varying amount of debt and credit lines. Book value was $7.52. With the stock closing today at $7.47, UTSI is a value and growth investment at the same time. I am moving the stock to a Top Buy due to the profit margin improvement, as I see little price risk even in a further market decline. I am not changing my $9 buy limit or $15 target price, but if they execute as expected and return to profitability in 2007 as planned, I will have to raise the target.

New Energy Technology MegaShift

Rentech (RTK) reported $19.7 million in sales and a 9-cent per share loss for their June third quarter. Revenues were far above the March quarter’s $2.0 million due to the April 26 acquisition of the nitrogen fertilizer plant in East Dubuque, Illinois. This plant will be converted to use the output from RTK’s clean coal-to-synthetic-fuels process that will be installed on the plant site. That will be done by the end of 2009.

The 9-cent loss was just a bit above the March quarter’s eight cents, and was better than last year’s 12-cent loss. On the conference call, management said it will take about a year to plan the two Peabody Coal clean fuels plants, with the key being 100% sequestration of carbon dioxide. Projects in Mississippi and Colorado are progressing on schedule. They ended the quarter with $65.6 million in cash. The Department of Defense is still very positive on buying synthetic fuels, and the DoD stays up to date almost daily on how Rentech is doing. RTK is an excellent buy under $5 for my $11 target.

Security MegaShift

American Science & Engineering (ASEI) reported a big revenue shortfall yesterday before the open, in spite of a building backlog and the promise of two major government orders closing as early as next week, or no later than the end of the September quarter. They were supposed to do $38 million and make 73 cents pro forma. Instead, ASEI booked only $29.9 million in sales and reported about 65 cents pro forma (41 cents under GAAP — Generally Accepted Accounting Principles).

The stock plummeted from $45.80 at Tuesday’s close to $36.27 yesterday, and then shot back up $9.37 today on the terrorist arrests in the U.K. to close at $45.64. Of course, nothing changed in the real world — the short attention span traders forgot that ASEI is the only choice for backscatter vans to detect bombs in passing cars and automated cargo inspection systems that can penetrate 14″ of solid steel.

On the conference call yesterday morning, management said that they booked a record 20 backscatter van orders from nine international clients in eight countries this quarter, which was a market they targeted to reduce the quarter-to-quarter lumpiness in orders from the U.S. They booked their third order for a $3.4 million OmniView Gantry system for container inspection at the port of Charleston, and began taking orders for the Gemini parcel inspection system that screens baggage for both organic and metallic threats. Total bookings were $25 million, with 58% from international orders.

ASEI is demonstrating the SmartCheck walk-through airport passenger screening system around the world and is waiting for the U.S. Transportation Security Administration to authorize a pilot program. When the two major government orders for backscatter vans are announced, I think they will be from the Army and the Marines, to protect bases in the Middle East and other hotspots. You may not want to chase the stock after a pop like today, but the truth is it is very cheap, and ASEI remains a buy up to $59 for a $93 target.

Gemalto (GEMP) has their tender offer open until August 14. If you are a shareholder, you should have received documents and a form to tender your Gemplus shares for stock in the new combined company. Go ahead and do it now. You will receive two shares of Gemalto for every 25 shares of Gemplus, and you will also receive a cash distribution of about 33 cents a GEMP share. Settlement will be about August 30.

The company got its first order for a U.S. electronic passport, after a long qualification process. All new or renewal passports issued from 2007 on will have a chip in them, and the U.S. issues about 10 million passports a year. News like today’s thwarted terrorist action will just accelerate the adoption of electronic passports all over the world. GEMP remains a good buy up to $6 for my $12 target.

WiMAX MegaShift

Sprint announced a $3 billion commitment to a nationwide WiMAX system. This was very good news for the industry, because Sprint already has a sophisticated cellular data network in place. The message was that WiMAX provides a different level of service from cellular data, and every other Tier 1 carrier has to look at it. Sprint gave Motorola the contract for infracture, and there is some chance Motorola will subcontract for devices from Alvarion (ALVR). Samsung received the contract for customer devices, and Intel was specified for chips.

Airspan (AIRN) reported this morning and had a long, informative conference call. They did a record $45.4 million in sales, far better than the $28.2 million consensus, and lost 19 cents a share, a bit worse than expectations for a 17-cent loss. The three most recent estimates were for a loss of 20 cents, 16 cents and 19 cents, so this wasn’t far off from real expectations. But all three of these estimates expected only $23 million to $24 million in sales, while the one analyst looking for $41 million (still low) also thought the company would lose only four cents a share. Here’s what happened.

They booked $16.8 million of sales to Yozan, their huge Japanese customer, which included $5.7 million deferred from the end of the March quarter. But Yozan renegotiated a substantially smaller agreement, and Airspan had to write off some excess inventories and pay some cancellation charges on purchase commitments, totalling about $4.4 million.

Over $17 million of their revenues were from WiMAX products shipped to more than 30 customers, including their distribution agreements with Ericsson and Nortel. Their gross profit margin on these new products is lower than they want, so they are going to reduce headcount 25%, in part by getting rid of contractors related to Yozan and consolidating supply chain efforts, and reducing other operating expenses. They will break even at $37 million in sales on a proforma basis after the restructuring is done.

For the year, AIRN now expects to do $120 million to $130 million in sales, well above the Street consensus for $117.5 million. So, they will show double-digit growth in spite of the legacy Proximity business dropping 50%, or $30 million for the year.

AIRN finished the quarter with $23.1 million in cash, including $4.7 million in restricted cash that they use to back letters of credit for their customers. This week they announced a new credit line with Silicon Valley Bank for $10 million, which will free up the $4.7 million. And they have a deal with Oak Partners (they are blue-chip VCs) to buy a $29 million preferred, subject to Airspan shareholder approval. Oak Partners now owns about 15% of the fully diluted stock and will own 33% after the new preferred is issued. Fully diluted shares will go from 47.3 million to just under 61 million. Airspan will be cash flow positive by the second quarter of 2007, even without any more business from Yozan.

Airspan also added on the conference call that they are working on a tri-band WiMAX connector that fits in the USB slot of a laptop And they have not seen any disruption at their Israeli R&D facility to date, which is next to the Tel Aviv airport, but they have had six of their 110 employees called up for military service. Their products are built by Flextronix in a facility only seven miles south of Hiafa, and about 10% of Flextronix’ work force have been recruited for duty. So, AIRN has started the process of moving production to a different Felxtronix facility somewhere else in the world.

Both Wall Street and I liked the conference call and the revenue forecast, which moved the stock up 13 cents today. It is still very cheap, and AIRN can be bought up to $6 for my $10 target.

MobilePro (MOBL) reported today, and while the top line looked good, their costs were a little high. I will analyze the 10-Q and give you a full report next week, but I don’t see anything that would change my recommendation to buy MOBL up to 25 cents for a 60-cent target.

Google Short Sale

It looks like we set the stop-loss on the Google (GOOG) short sale just right at $385, as the stock hit $384.68 at yesterday’s open before plunging to close at $374.20 today. As investors worry about a sharp drop in advertising in a recession, I expect GOOG to lead the market to the downside. Short GOOG over $350 for a $200 target in mid-October. The December $370 put contract (GGDXN) or the December $380 put contract (GOPXP) are good alternatives if you don’t want to take the risks of a short sale, or if you want to do this in a retirement account that can’t short.

Market Outlook

Wasn’t this pause supposed to refresh? The odds of a pause grew rapidly after Chairman Bernanke’s dovish testimony to Congress in late July. But the important factor was the six-week rally in the bond market, which dropped long-term yields well below short-term yields — the inverted yield curve.

Why would the bond vigilantes rally bonds if the Fed is not going to fight inflation? Because they see a hard landing coming for the economy. In fact, that is exactly why an inverted yield curve usually forecasts a recession. The folks who set bond yields see it coming.

The pressures are easy to spot: High energy prices are crimping consumer budgets, and the housing market is now sliding into the tank. The California Realtors Association, a cheerleading group if there ever was one, expected a 2% drop in housing sales in 2006, but they just revised that to a 16.8% drop. The CEO of D.R. Horton, the largest U.S. homebuilder, said that in June his company’s national sales “fell off the Richter scale.” I think he mixed a couple of metaphors there, but you get the idea. In May, AmeriQuest, the largest U.S. mortgage lending company, announced that they were laying off 3,800 employees — a third of their work force — and closing all 229 of their retail branches. Yesterday, Toll Brothers, the largest luxury home builder, reported its first year-over-year revenue decline in four years and cut their December-quarter outlook. Countrywide Financial reported that mortgage lending dropped 19% in July from the same month last year, and the CEO said: “I’ve never seen a soft landing in 53 years.”

I expect the economic news to continue to get worse, but it won’t slow down inflation any time soon. As I’ve noted before, inflation is a lagging indicator, and Tuesday’s announcement that unit labor costs increased 4.2% in the June quarter marked the largest increase since the end of 2004. It was a dramatic increase from the 2.5% recorded in the March quarter, which was double the 1.2% expected at that time.

As an object lesson in how these numbers are either unreliable or manipulated (take your pick), the 2.5% increase reported on May 4 was one of the factors that caused the market to peak the next day, as investors feared more Fed increases to ward off inflation. But that March-quarter number was revised down to 1.6% on June 1, “easing concerns that rising wages will fuel inflation.” Bloomberg reported that: “Greater efficiency is helping businesses control labor costs, allowing them to withstand surging raw-materials prices without resorting to large price increases. Smaller labor-cost gains will come as a relief to the Federal Reserve policy makers concerned about inflation and may tip the balance in favor of holding interest rates steady at the Fed’s next meeting.” The S&P obligingly rallied 20 points in two days.

Then, in Tuesday’s announcement that June-quarter labor costs shot up 4.2%, they quietly raised the March-quarter figure back to 2.5%. Whether we should mutter “bozo alert” or “mission accomplished” I don’t know, but I do know it illustrates one of the reasons why we focus on making money over one- to three-year holding periods. The very short term is just random noise.

The big picture here is that the Fed wants the economy to grow substantially less than 3% in order to keep energy costs from seeping into wage rates, and from there into product prices. By pausing, they put pressure on the dollar because other countries are increasing rates, and a lower dollar creates more inflation by raising the price of imported goods. So, while they don’t want housing to crash or oil to go to $100 a barrel, those two forces will play into their hands if they put a good-sized crimp in consumer spending. That’s the big picture I am watching, and we should start seeing estimate cuts in the consumer sectors shortly to confirm it. The crash in the economically-sensitive Dow Jones Transportation Index, which fell 125 points yesterday but gained back 52 points today, and is down 15% from July 3, is an early signal the market is rapidly swinging to my view that a mild recession will start as early as the December quarter.

My sympathies to our East Coast subscribers, who are now “enjoying” the heat that ripped through California a week or two ago. And I thought it was hot at the Money Show in Washington, D.C. last week! Of course, the heat is helping to skyrocket natural gas prices and contribute to another big drama right now — the Fed’s response to an economy that is clearly slowing, but inflation that is clearly accelerating.

Janet Yellen, the president of the San Francisco Federal Reserve Bank, gave a speech this week in which she said (please note my translation in parentheses):

• Economic developments have made obsolete the Federal Reserve’s two-year-old strategy of a hiking interest rates at every meeting by a quarter of a percentage point. (“We’re going to pause.”)
• The economy would grow at a slower pace in coming quarters, which should ease inflationary pressure. (“We’re going to pause.”)
• However, there has been no sign of this yet in the economic data. (“We’re not going to pause.”)
• We are at a delicate point for policy, when we are close to the end of the road. (Close, not at? “We’re not going to pause.”)
• There is a slowdown reining in the economy. (“We’re going to pause.”)
• But inflation is too high. (“We’re not going to pause.”)
• But the Fed can’t just continue to hike rates until there are signs that inflation is slowing. "If we kept automatically raising rates until we saw inflation start to respond, we most likely would have gone too far." (“We’re going to pause.”)

Yellen, a voting member of the Federal Open Market Committee this year and considered one of the most influential committee members, said she was not signaling what the Fed would do on August 8. Now that’s the truth!

William Poole, the president of the St. Louis Fed, cut to the chase in his speech and put the chances of an August 8 rate hike at 50-50. That is to say, as was obvious from the recently-released minutes of the last meeting on June 28 and 29, the Fed has no idea what is going on or what to do, so they may as well flip a coin.

Inflation Accelerates — What, Me Worry?

While this drama plays out, the behind-the-scenes action is a little more interesting. The bond market is rallying on days the Fed indicates it might pause, which means the bond vigilantes are not worried about a pause accelerating inflation. That is not what I expected, and I am watching this day-to-day to see if the bond folks really are going to let the Fed get away with pausing while inflation is accelerating. And there is no doubt that it is accelerating:

• The producer price index rose 0.5% in June from May, up from +0.2% in May from April.
• The PPI ex food and energy rose 1.9% year-over-year in June, up from 1.5% in May.
• The consumer price index ex food and energy rose 0.3% in June for the third straight month
• The CPI ex food and energy rose 2.6% year-over-year, up from +2.4% in May.
• The core Personal Consumption Expenditures index, supposedly the Fed’s favorite measure of inflation and the one that usually gives the lowest number, rose 2.9% in the June quarter, up from +2.0% in the March quarter.
• The core PCE was up 2.4% in June on a year-over-year basis, after being up 2.1% in May.

Normally, Treasuries would yield about three percentage points more than the rate of inflation. Just taking the CPI for the last 12 months, up 4.3%, and subtracting it from the 10-year note at 5.0% gives a “real” inflation-adjusted yield of 0.7% — the lowest it has been in 25 years. Using the core PCE of 2.4% gives an inflation-adjusted yield of 2.6% — not as striking, but still well below the long-term average.

Tomorrow, we get the July labor data, the last big numbers before the Fed meeting. The consensus is for 145,000 new jobs, and it probably would take a gain over of 200,000 new jobs to force the Fed to raise rates again. But they may do it anyway, and say that they are looking for at least a slower rate of increase in inflation before pausing. Or they may pause, and then we will see if the bond vigilantes care. If not, the bond folks may know something Wall Street equity strategists don’t: It is too late to avoid a recession, as the housing market continues to collapse. One well-known vigilante, Bill Gross of PIMCO, seems to think that is the case and recently said that the bond market has bottomed.

Earnings Season Winding Up

We have a lot of earnings reports to go through again this week, and I’m sure you have noticed that most of our stocks fall into one of two categories: good numbers and good guidance, or we are waiting for something. In the latter category, I would put the following companies:

Symbol	Stock	Waiting For
BCRX	BioCryst	Clinical news; avian flu to spread to the U.S.
CRXL	Crucell	Avian flu to spread to the U.S.
GILD	Gilead	Truvada sales news; avian flu to spread to the U.S.
BIIB	Biogen Idec	Tysabri sales news
DNDN	Dendreon	Complete FDA filing for Provenge
ERES	eResearch	Turn record orders into accelerating revenues
QLTI	QLT	Dutch auction; Visudyne combination therapy news
VPHM	ViroPharma	FDA to reopen generic Vancocin issue
HNP	Huaneng Power	China slowdown; utility rate increases
UTSI	UTStarcom	Profitability
TKO	Telkonet	EDS contract announcement; financing announcement
ZHNE	Zhone	DSL revenue increase to exceed legacy revenue decline
PLUG	Plug Power	Order acceleration
PKTR	Packeteer	September-quarter earnings
ALVR	Alvarion	End to Israel/Lebanon conflict; accelerating WiMAX shipments
AIRN	Airspan	Accelerating WiMAX  shipments
TRBM	Terabeam	Accelerating WiMAX deployments
MOBL	MobilePro	Call from company about convertible dilution
PLAY	PortalPlayer	Next Apple video iPod intro; Microsoft Zune intro

We make money in these stocks by buying them when others are uncertain about whether the good news will ever come. And then when we’re right, we hold the stocks as they become more and more popular and eventually go to extremes. In addition to financial analysis and valuation work, I am always tracking the specific events that should trigger good returns for your portfolio. Delays, such as at eResearch (ERES) (see below), create buying opportunities. But complete flip-flops in the outlook generate sell recommendations. Right now, after all the earnings reports so far, only MobilePro (MOBL) had the potential to go on the sell list, and I had a reassuring conversation with them today. Dips in these stocks, now or in an October market meltdown, are opportunities to lower your average cost and set up big paydays in 2007 and 2008. We should see a very strong market for 12 to 24 months coming out of mid-October, and you can be planning now what you want to own for that.

Short Sale

It is time to short Google (GOOG). They reported an excellent quarter on July 20, earning $2.23 a share, up from $2.01 in the March quarter. However, they barely beat the consensus for $2.22. Wall Street raised their consensus for the September period from $2.30 to $2.43, and there’s the rub. Recently, Google did a complete reset of their Adwords program that has their users in an uproar. Winning bids suddenly went from the 25-cent to 35-cent area to $5, $10 or $15. No one knows exactly why it happened, but there is a teleseminar virtually every day by someone trying to explain it. I spend a lot of time in the Internet marketing community, and I can practically guarantee this will hurt the September quarter, as people are simply canceling their ad budgets until they can understand what is going on.

In addition, the price of advertising is very sensitive to the early stages of an economic slowdown, and then the volume of advertising is very sensitive to the later stages as well. GOOG took quite a hit Tuesday and Wednesday, breaking very strong support at $379. Today’s $8.16 rally back gives us a low-risk entry point for this short sale. Short GOOG over $350 for a target of $200 in mid-October. Yes, that is a shockingly low target, but Google was the poster child for momentum investors in the whole upswing that ended in May. Use a $385 stop-loss to reduce your risk. If you’d rather do this by buying a put (which you also can do in most 401-K accounts), look at the December $370 contract (GGDXN) or the December $380 contract (GOPXP). If my $200 forecast is accurate, you will make about 500% on your investment. Obviously, don’t do this with money you can’t afford to lose, and if GOOG gets to the $385 stop price, sell the puts and take your 50% loss.

Avian Flu MegaShift

A bird flu outbreak in Laos caused neighboring Thailand to threaten to jail farmers who don’t cooperate in identifying and culling poultry that gets ill. For many of the farmers, the alternative is to have no protein to eat, so this could turn into quite a confrontation.

Right now, we are in the summer lull for bird flu outbreaks, as the fall migrations haven’t started yet and the regular flu season is still some months away. But governments around the world are still planning and budgeting to stockpile vaccines and antivirals, and all of our recommendations in this area now are on the Top Buy list. BioCryst (BCRX) will report earnings on August 9 (I had estimated August 2) and remains a Top Buy under $19 for my $30 target. Crucell (CRXL) should report on August 29 and is also a Top Buy under $28 for a $50 target. Gilead (GILD) already reported, and I am making the January 2007 $60 LEAP (GDQAL) a Top Buy up to $9 for my $20 target.

Biotech MegaShift

Amid the signs that the FDA will finally approve Barr Pharmaceuticals Plan B emergency contraceptive pill for over-the-counter sales in the next few weeks, Dr. Andrew von Eschenbach finally received a confirmation hearing to be the new FDA Commissioner. Senators Patty Murray (D-WA) and Hillary Clinton (D-NY) won’t allow an actual vote until Plan B is approved, but then things should move pretty quickly. The Barr approval will limit sales to those 18 and older, which was the compromise negotiated by Dr. von Eschenbach. Of course, everyone knows this is a face-saving “victory” for those who have been blocking any approval, while it won’t affect usage by girls under 18 one bit. Eschenbach did a good job on this one, and I have high hopes that he will really shake up the FDA over the next couple of years and maybe even be reappointed by the next President, regardless of political party.

In his confirmation hearing, he said: “The FDA of the 21st Century must be prepared to respond to the new opportunities and challenges of science and technology. Through initiatives like Critical Path and Personalized Medicine, we are working to improve the tools we use to more effectively evaluate new products and processes. For example, through the use of biomarkers, we will be able to predict, earlier and more accurately, both the safety, as well as efficacy, of drugs, biologics and devices. This is the pathway that will take us into the era of personalized medicine, where healthcare is tailored to each individual patient, and where the safety of medical products is enhanced by our improved understanding of how they interact with different patients, different drugs and under different conditions.”

We could not have asked for a better nominee. I think he will seize technology as a way to overhaul the FDA, accelerate drug approvals and increase safety testing.

Increased safety testing leads us directly to eResearch (ERES), which preannounced another quarter of very strong orders, yet disappointing revenues, and reported final numbers after the close today. They saw a near-record $35.1 million in orders in the June quarter, above their mid-quarter guidance of $31 million to $34 million. But revenues of $22.8 million were 10% below the low end of their previous guidance for $25 million to $27 million, and they reported a disappointing pro forma of five cents a share, compared to the six cents expected. Obviously, the shortfall relates simply to their customers delaying the starting date of clinical trials.

The strong orders show that customers are complying with the new FDA regulations and ERES is getting a large share of the business. Revenues were up from the March quarter by $1.4 million, and up 29% from last year’s depressed June quarter. They conservatively forecast second half revenues of $47 million to $52 million, compared to expectations for $57 million.

The stock is around $8 in aftermarket trading, which matches the marginal new 52-week low on Tuesday. As I expected, the new management gave conservative guidance for the rest of the year, which will create an excellent buying opportunity tomorrow. ERES is a Top Buy up to $16 for a $30 target.

Geron (GERN) reported June-quarter results on Monday. As usual, the financials don’t mean much — $800,000 in revenues and the third 14-cent quarterly loss in a row. What’s more important is that they used only about $6.5 million in cash for operations and have $180 million in cash on the balance sheet with no debt.

During the call, management said that their stem cell patent portfolio now includes over 260 filings owned or licensed to Geron, and their telomerase patent portfolio has over 90 issued U.S. patents plus over 130 granted in other countries. They are expecting to present some Phase I data for a couple of telomerase programs around the end of this year. GERN remains a good long-term buy under $9 for my $18 target.

ViroPharma (VPHM) beat the June-quarter consensus, reporting $43.8 million in Vancocin sales and 25 cents a share, compared to expectations for $42.5 million and 23 cents per share. Vancocin sales were a record, with prescriptions up 11% sequentially, and far above the $29.2 million booked in the March quarter as wholesalers reduced inventories.

For the full year, they reiterated their revenue guidance of $160 million to $170 million, compared to the $162.9 million consensus, which would be up 27% to 35% over 2005. Operating income will grow 10% to 20% over 2005 numbers.

The bearish argument on VPHM is straightforward: The FDA comment period closes September 26 on ViroPharma’s petition against the approval of a generic version of Vancocin without a clinical demonstration of bioequivalence. They should get a reply from the FDA within six months, or by the end of March 2007. Meanwhile, Strides and possibly Sandoz and Akorn will file for a generic version in the current September quarter, and it could be on the market as early as the end of 2007, unless the FDA grants ViroPharma’s petition. The market is pricing in about a 33% chance that the petition is granted, and the bears think that is too high. So the bears are looking for $177 million in Vancocin sales in 2007 and then sales to fall to $72 million in 2008.

In contrast, I think the FDA will take longer to come back with an answer, with the odds about 50-50 on approval. If the agency does not approve it, ViroPharma will sue and ask for an injunction until the issue is settled. That will tie up the process even longer. Generic Vancocin will be on the market by the end of 2008, perhaps six months sooner than I expected when we bought VPHM. Revenues in 2008 will be in the $190 million area, falling to $85 million in 2009. By then, management will have in-licensed or acquired other drugs to put through their system, and Maribavir will be through its Phase III trials, which start this September. They finished the quarter with $176 million in cash, up $19 million from the March period, and no debt, so they have plenty of resources to expand their pipeline. Their immediate goal is to pick up one or two more products by the end of this year.

ViroPharma is a unique biotech company, because they have a pipeline of both emerging and late-stage products that address large, unmet medical needs, while at the same time they are profitable and produce significant cash flow to fund their product development and growth. In the current quarter, they will start their first Phase III trial for Maribavir in stem cell transplantations, followed by another Phase III in solid organ transplants in the fourth quarter. The Phase II results were terrific, and I expect the Phase III trials will be successful. VPHM will also present HCV-796 Phase Ib combination data this quarter for hepatitis C. VPHM remains a buy under $13 for my $28 target.

Content on Demand MegaShift

Telkonet (TKO) still has not announced either the big government contract with EDS or the strategic financing, in spite of them telling me both would be done by the end of July. But they are coming. The stock moved up after they announced the sale of an iWire system to a major utility that will use it to monitor its energy data. They also recently announced that the Trump Organization added several properties to the high-speed wireless network in New York.

At the FCC monthly meeting this morning, the Commissioners said that they are looking for a push on broadband-over-powerline to provide a viable “third pipe” for rural and underserved areas. As I expected, they shot down requests by the amateur radio community to exclude or prohibit BPL offerings at certain frequencies, saying they didn’t have enough evidence of interference to warrant the extra limitations. Four of the five FCC commissioners said that they had a chance to see BPL equipment in action during a recent field trip to Texas, and encouraging this technology is obviously important to them. That’s good news for TKO, which remains a Top Buy up to $5 for my $15 target.

New Economy MegaShift

Click Commerce (CKCM) reported a slight revenue shortfall, yet beat the earnings consensus on a lower tax rate. The company did $19.7 million in sales, up 48% from last year, and 36 cents a share, compared to expectations for $20.9 million in sales and 34 cents per share. They showed a 14% sequential decline in product license revenue and flat subscription revenue, which led to flat maintenance and hosting revenue. But consulting and implementation revenues grew 7% sequentially, and this area leads their product growth. Right now, they are doing a lot of RFID consulting and systems design, and as those projects are implemented, product license and subscription revenue will accelerate.

Yesterday, they announced a contract teamed with Oracle to update the Air Force’s global logistics system. This is a big deal that will generate substantial revenue for many years, starting in the current quarter. The company has many other large government contracts in the bid process right now, and signed several large commercial contracts in a variety of industries in the June quarter that will start impacting the revenue line by the end of this year.

CKCM was hit for a couple of dollars a share as analysts brought estimates down for the second half of the year, but little has really changed. Estimates for 2006 came down about five cents a share, from $1.40 to $1.35. For 2007, the reduction was also in the five-cent range, from $1.55 to $1.50. So the stock is selling for less than 10X next year’s earnings, and the company can grow 20% or better for at least the next five years. I am making CKCM a Top Buy up to $21, with an unchanged target of $40.

New Energy Technology MegaShift

Gasco Energy (GSX) will benefit from the sharp move in natural gas prices over the last four weeks. Gas went from $5.53 per million BTU to a six-month high over $8 last Monday, and closed today at $7.31. The heat wave that drifted across the country was responsible — not a hurricane or winter freeze that used to move gas prices. Gas is the third-largest source of fuel for U.S. electricity generators, behind coal and nuclear energy. Power demand peaks in the summer as people turn up air conditioners, sparking higher demand for electricity from gas-fired power plants. With Tropical Storm Chris bearing down on the Gulf of Mexico, this price move could be the start of something big. The futures market is saying gas will be over $10 in January, and we could see that by the end of August as hurricane season gets underway in earnest. Buy GSX while it is under $4.50 for a $9 target.

Holly Corp. (HOC) reported a great June-quarter yesterday, with revenues of $1,120.8 million, up 42% from the March period. Fully diluted earnings from continuing operations, excluding the sale of their Montana refinery to Connacher Oil & Gas (T.CLL), hit $1.51 compared to 79 cents last year and 52 cents in the first quarter. The Street consensus was about $1.30 on $1,154 million in sales, so Holly showed substantially better profitability than expected.

Holly produced these numbers in spite of substantial downtime to complete the expansion of their two refineries and install equipment that makes 100% of their production ultra-low-sulfur diesel. They can now produce diesel from asphalt and are in an excellent position to continue to process sour crude, which is what Saudi Arabia has in their much-touted reserves.

The company continued its $200 million share buyback, soaking up $27 million of stock in the June quarter. The Street estimate of $1.10 for the September quarter is far too low — anything from $1.35 to $1.70 is more likely. They will earn well over $4 a share this year, and maybe even $5. Wall Street is seriously underestimating the advantages that Holly has in being able to process sour crude. Even though the stock hit my original target price, I am raising the target price to $60 and the buy limit to $46.

Plug Power (PLUG) reported a disappointing quarter, sold off 18%, and it is now recovering. I was looking for a loss of 13 cents a share on about $3 million in sales, and they lost 15 cents on $2.8 million. I would call this a minor shortfall, but it clobbered the stock because Thomas Weisel Partners cut their rating from outperform to peerperform, and they have been one of the supporters of the stock.

Plug completed the $217 million Smart Hydrogen investment, and intends to do technical work with their Russian partners, as well as open that market. If you are running a cell phone company in Siberia, back-up batteries are unlikely to survive the winter, so you need a more reliable alternative that keeps the system functioning. The company now has $290 million in cash against only $3 million in long-term debt, and they are burning about $11 million a quarter. They now have 126 million shares outstanding.

On the conference call, they did not back down a bit on their sales projections for the year, in spite of the first half’s softness. They have over 150 systems on active duty today located in at least 23 countries. They can leverage that by deploying more at current customers and getting new customers who need uninterruptible power to compete, such as cell phone base stations. The U.S. has four major wireless carriers that have 85% of the market, and PLUG has GenCore systems deployed on the networks of three of them. They also have initial systems at AT&T and Verizon.

The company shipped 41 systems in the second quarter, compared to 27 systems during the second quarter of 2005, and 17 shipments during the March quarter. They received orders for 31 systems in the June quarter and now have 219 systems in the backlog. Orders will have to be very strong in the current quarter if they are going to make their projections, and on the conference call they made it clear that they are on track.

This should be the breakout quarter for PLUG. If we start to see a string of contract announcements, I will make the stock a Top Buy before the September-quarter earnings report. For now, you can continue to buy PLUG up to $7.50 for my $15 target.

Royal Dutch Shell (RDS.A) reported a good quarter and hit my end-of-year $70 target already. I am raising the target price slightly to $75 and think you should continue to hang onto Royal Dutch and not sell during hurricane season.

For the June quarter, Royal Dutch did $83.1 billion in sales and earned $1.13 a share, up nicely from the March quarter’s $76.0 billion and $1.06a share. The consensus was looking for 95 cents a share. Record crude prices overcame production losses in Nigeria and a planned two-month shutdown of their Canadian tar sands project.

In addition to their oil shale projects in the U.S., which is why I recommended the stock, the company plans to invest up to $18 billion in a gas-to-liquids plant in Qatar that will be the largest of its kind. The plant will produce three billion barrels of oil over its lifetime, so the capital cost is only $6 a barrel. Adding operating costs would probably double that, so they will be producing $12 a barrel of equivalent products. Not bad.

The company now thinks unconventional fuels will grow from 5% of their output to 15% by 2014. Royal Dutch produces oil and natural gas mostly in 10 countries, including Britain, Canada and the U.S. They have net proved reserves of 1.3 billion barrels of oil equivalent, not counting Qatar or the Rocky Mountains oil shale. They operate seven refineries with an aggregate capacity of 974,000 barrels of crude oil a day and have 4,000 U.S. retail gasoline outlets. It’s more than doubled earnings in the last year, yet sells for just under 10X this year’s estimate. So, I’m raising the buy limit to $66 and the target price to $75.

Security MegaShift

@Road (ARDI) missed the consensus for earnings, and then said that they had discovered an interest accounting error that will cause them to restate 2005 earnings and the March quarter of 2006. For the June quarter, they did $23.2 million in sales and lost two cents a share, compared to the consensus for $25.4 million in sales and a profit of two cents a share. They had reported $24.7 million for the March quarter and a penny loss, so instead of being sequentially up, they were sequentially down.

ARDI found the interest accounting error while preparing their tax returns. They were booking interest on government home loan securities, where they park their cash, as tax-exempt, but it is taxable. This is not likely to make a significant difference to the bottom line. They had $1 million in interest income in the March quarter, only part of which would have been affected by this, and their tax rate was only 19%. I expect we are looking at something in the range of a $200,000 quarterly adjustment, or less than half a cent a share for the March quarter and a penny for last year.

The weak revenues would be of more concern, but on the conference call management said that they are seeing a longer-than-expected subscriber activation time due to a shift in demand towards much larger customers with more complex solutions. That’s actually good news. Many of these major customers are not interested in the basic track and trace GPS solution. They want to integrate ARDI software applications with existing back office solutions like order entry, maintenance and repair, workflow and scheduling, fleet management, customer relationship management and billing. @Road’s technology becomes part of these customers’ seamless technology of how they fundamentally conduct business.

In addition, new orders were quite strong at 22,000 subscribers, one of the best quarters in the company’s history. The company now expects 70,000 new orders this year, an increase from their previous guidance for 63,000. Telstra, Australia’s leading telecommunications and information services company, ordered 7,000 in-vehicle devices for installation by the end of the year. @Road got this order via Accenture, the global management consulting company Telstra retained to find the best-in-class solution.

AT&T is expanding its deployment of @Road solutions to include their Project Lightspeed fleet of over 2,000 additional mobile workers — field technicians dedicated to Internet Protocol TV installations as AT&T expands its fiber optic network deeper into neighborhoods. @Road already serves about 35,000 of AT&T’s field service technicians.

Although guidance for total new subscriber bookings for this year increased, and installation will accelerate in the last two quarters of 2006, the company still reduced guidance to a conservative $100 million in sales this year, up from $92.9 million last year. This should be the lowest year for growth, with 20% or better annual growth in 2007 to 2009. They confirmed guidance for $129 million in sales for 2007, up 29%. Profit margins will be at the low end of a 47% to 55% range this year, but they are headed up from here.

Although this stock hasn’t done much, I really like the way their business is shaping up. They should return to pro forma profitability in the current quarter, making two or three cents a share. But the real story is revenue growth for the next three years, with increasing profit margins. I’m making ARDI a Top Buy at current levels, and keeping my buy limit at $5.50 and my target price at $8 this year and $10 to $12 in 2007.

Video iPod MegaShift

PortalPlayer (PLAY) reported $34.6 million in sales and a six-cent per share profit (eight cents pro forma), where Wall Street had been expecting $34.9 million and a one cent loss. The company also guided up for the September quarter, where they are looking for $32 million to $42 million in sales, compared to the Street consensus for $25.7 million. They expect to report breakeven to eight cents per share, thanks to cost cuts, while the consensus was for a six-cent loss. The stock immediately started moving up on heavier volume, from $9.74 just before the announcement to $12.05 at today’s close. That was in spite of the CEO announcing that he will leave by yearend to go run venture-backed private companies.

The company said that they expect to stay in the video iPod “through the end of the year,” and that they have won a wireless contract for an unnamed cellular system. On the conference call, they said: “We believe the feature-rich segment of the personal media player market has a lot of innovation ahead. By adding a variety of wireless technologies such as Bluetooth, Wi-Fi, HSDPA, and so forth to our platform, we can enable customers to develop feature-rich players that no longer need to sync by cable with a computer.” That describes Microsoft’s forthcoming Zune to a T, and I still think that they have an excellent chance at this business, especially since they are working closely with Microsoft on the small display that will be on the outside of new laptops running Windows Vista, and probably will be detachable for use as a VoIP handset.

The company is focused on providing highly integrated, cheaper chips for wireless personal multimedia devices, such as audio players, video media players, Preface-enabled personal media displays, cellular handsets and GPS systems. This is not just an iPod company anymore. PLAY remains an excellent buy any time it dips under $11 for my $20 target. I expect to see much higher targets in 2007 and 2008.

WiMAX MegaShift

MobilePro (MOBL) now has Wi-Fi interests in eight cities. Tempe, Arizona, is up and generating revenue. Chandler and Gilbert, Arizona, and Farmer’s Branch, Texas, are being deployed. Yuma, Arizona, is about to start deployment. Cayahoga Falls and Akron, Ohio, are in pilot testing to design and plan the deployment. They are negotiating a contract in Brookline, Massachusetts, where they have been selected as the provider.

I talked to Jay Wright, the CEO of MobilePro, about the renegotiated convertible bond. He is a Georgetown grad with a law degree from the University of Chicago, who worked as a mergers and acquisitions attorney for Skadden Arps and Foley & Lardner, and then became an investment banker at Merrill Lynch. MOBL did the renegotiation to improve cash flow, as the May and August principal payments were postponed. Wright confirmed my calculation that the overall duration of the bond was shorter, which will put more pressure on them in 2007, but said he intends to pay it in cash, not stock. Because it is only at 7.75% interest, he could raise more money, create a sinking fund in a CD at 5% or 5.5%, and pay it off over time instead of calling it in a refinance.

Naturally, he could not comment on the SEC investigation of Cornell Capital, which loaned MobilePro the money. I still believe that this has the potential to be toxic, but after talking to him, I think he has the experience and skill to deal with it in a way that does not hurt the shareholders. With all the new Wi-Fi systems coming online, and the toxic convertible issue on the back burner for now, I am putting MOBL back on the buy list with the buy limit reduced a nickel to 25 cents and the target reduced a dime to 60 cents. However, plan to hold this for another couple of years for much higher prices.

Alvarion (ALVR) did $50.5 million in sales in the June quarter and broke even on a pro forma basis, where the Street had been looking for $49.8 million and a four-cent per share loss. The company guided for $50 million to $54 million in sales this quarter, about in line with the consensus estimate for $53.5 million. They said that they will report pro forma results between a loss of one cent a share and a profit of two cents, again about in line with the consensus for a one-cent loss.

The stock moved up because WiMAX was 33% of revenues in the quarter, and they were just recently certified. They have 70 commercial deployments already. It looks like the upturn finally is here, and ALVR remains a Top Buy all the way up to $9 for an $18 target. The shooting in Israel is a big negative for the stock right now, but it will pass.