The Fed stood pat yesterday, as was widely anticipated, yet the market reacted with another breakout. And over the past week, the S&P 500 has taken out two crucial levels, first 1365, which was the breakdown level in January 2001 that signaled the worst down-leg of that bear market, and then 1377. It is showing tremendous strength and is now in a position to sail up to 1405 or even 1440. I think you can count on a pullback or retest of 1365 from those levels, or even 1325. But if the market survives that retest, it will be all-clear to go to new record highs in 2007, possibly above the March 24, 2000, peak of 1553.

With all of this recent market activity, I must admit that I’ve been wrong in expecting a September/October market decline to let us get back into the market gracefully. Why was I wrong? Well, I think the problem lies with the record level of short interest. Too many people were either hedging or betting on a decline, so every little sell-off stopped right at the prior breakout level, and then when the market started to bounce another group of short-sellers rushed to cover their positions. The result is a parabolic ascent since Labor Day.

The trouble with parabolic ascents is that they always break, and usually result in parabolic declines. However, you never know how far a blow-off move can go. So, I think it is safe to put a third to a half of your cash position to work now, but only in stocks that have very little downside risk even if the market started to correct tomorrow. That would be stocks like BioCryst (BCRX), Dendreon (DNDN), eResearch (ERES), Harmonic (HLIT), Zhone (ZHNE), Omniture (OMTR), Connacher Oil & Gas (T.CLL), Gasco Energy (GSX), Infinity Resources (IFNY), Rentech (RTK) and Alvarion (ALVR). Today, I am going to make those 11 stocks the new Top Buy list, because they could benefit in a market that could move sharply either way. I’m also leaving Telkonet (TKO) on the Top Buy list.

In addition, I am making a new recommendation today — actually a re-recommendation of a stock that we’ve made good money with in the past. The stock took a big jump today, and the buy limit that I was planning to implement was $1.50 above the market price and now it’s $3.00 below. But when this parabolic move breaks, you should be able to buy the stock beneath my buy limit.

Personalized Cancer Treatments

You know that I like Dendreon because they will have the first FDA-approved personalized cancer treatment with Provenge for prostate cancer. Provenge is personalized because it is made from an individual’s cancer cells. The oncologist removes cells from the patient’s tumor and sends them to Dendreon; Dendreon then amplifies (grows) the cells, attaches an antigen, and sends Provenge back to the oncologist to be re-infused in the patient.

Now, while Dendreon’s personalized cancer treatment process is already familiar to most of you, there is another, broader kind of personalized treatment based on looking at the genetic structure of the tumor. That’s what today’s recommendation is based on.

In my book, Every Investor’s Guide to High-tech Stocks and Mutual Funds, I told the story of the New York lawyer with brain cancer who paid to have his tumor’s genes sequenced. It turned out to be metastasized breast cancer, even though he didn’t have any obvious tumors in his chest, and even though men only rarely get breast cancer. Once the oncologist knew exactly what kind of cancer the man had, he treated the lawyer with Herceptin, and the cancer went into remission.

It cost $100,000 that the lawyer gladly paid for the treatment, and my point in the book was that the cost of that test would fall every year, and eventually an event would occur to make gene sequencing a standard diagnostic test.

That event just happened.

In the new issue of Nature Medicine, researchers from Duke University said that they have a genetic test that is 80% accurate in predicting which drugs will be most effective against a particular cancer, given the patient’s genetic make-up. This test can predict whether a single drug or a specific combination of drugs will work.

So, how does this genetic test work? A gene chip is used to scan the messenger RNA (ribonucleic acid, or mRNA) from thousands of genes in a tumor. Messenger RNA translates a gene’s DNA code into the proteins that run a cell’s functions, so mRNA can be used as an indication of how active any particular gene is inside the cell.

This research was performed on tumor samples from several hundred people with ovarian, breast and lung cancers, and leukemia. Duke researchers will start testing the genetic assay in breast cancer patients next year.

Over 400,000 people in the U.S. alone are treated with chemotherapy every year. Yet, in a famous survey of 64 oncologists at the McGill Cancer Center in Montreal, 58 of them — more than 90% — said that if they or their family members had cancer, there was no chemotherapy program that they would undergo. They said that all chemotherapy programs are ineffective and have an unacceptable level of toxicity. A similar survey by the Los Angles Times found that 75% of the oncologists surveyed considered chemotherapy and radiation as unacceptable treatments for themselves and their families.

These oncologists only prescribe these treatments for their patients because it is the standard of care. They would not take it themselves because they know chemotherapy is miserably difficult, destroys the immune system, and there is no firm basis on which to select a drug.

Gene assays should let oncologists personalize chemotherapy for better outcomes by identifying the right drug or drugs for each individual patient. This will work on the new targeted biotech drugs like Tarceva and Herceptin, which target certain genetic subsets. And it should also work on the typical drugs used in a standard practice, such as cisplatin, paclitaxel, topotecan and 5-fluorouracil.

So, here is the trigger: Doctors need this information to select the right chemotherapy drugs for each patient, and choosing the right drugs will dramatically improve outcomes. The Duke researchers found that comparing their genetic assay predictions to the actual results patients had with chemotherapy showed that the tests are 80% accurate in predicting whose tumors would be stopped by a particular drug or combination of drugs. Genomic tests are going to revolutionize cancer care, and the payers — the HMOs and Medicare — are going to have to foot the bill.

Special AFFX

The basis of the tests at Duke was a “gene chip” made by today’s buy recommendation, Affymetrix (AFFX). Gene chips are made in a semiconductor-like process, putting layer after layer of the As, Gs, Cs and Ts that make up a strand of DNA onto a glass substrate. The result is a microarray of tiny strands of DNA called oligonucleotides, packed vertically on the chip. Affymetrix knows the makeup and location of every strand, so the chip can be used to detect the presence of a sequence in a sample.

Here’s how that works. The As, Gs, Cs and Ts (and Us, in messenger RNA) make up the double helix of DNA and are very attracted to their complements. An A will try to bind with a T (or a U, for mRNA) and a G will try to bind with a C. Suppose Affymetrix creates a very short oligonucleotide by depositing first an A, then in the second layer a G, then in the third layer another G, and then in the fourth layer a T. That sequence — AGGT — will try to bind with its complementary strand, TCCA, from a tissue sample. So, the AGGT acts as a probe to determine if TCCA is present, and if it is, it can be made to glow.

Affymetrix can pack a quarter million probes on a chip, up from the few thousand that was possible five years ago. They can now put the human genome on two chips. They run a sample across the chip to see what glows. For example, suppose the bird flu mutates into a virus that can cause a pandemic. By exposing the virus to a chip, researchers can see what gene sequences are present and how that differs from the unmutated virus. Then they can zero in on the mutation, and develop an antiviral and a vaccine that will be effective against the changes. Or in the case of different cancers, they can run a cancer cell across the chip, and identify what type of cancer it is.

Affymetrix owns most of the intellectual property in this area. Some companies provide complementary DNA (cDNA) probes — a relatively low-tech solution that has a small market share. Agilent has less than 10% of the market, focused in the low-density area. Motorola and Corning tried to compete in high-density gene chips, but couldn’t get around the Affymetrix patents.

Affymetrix grew very rapidly in the late 1990s, approximately doubling revenues every year through 2001, to the $225 million level. Their growth slowed in 2002, when they hit $290 million, and practically stopped in 2003 at $301 million. Although 2004 was up 15% to $346 million, 2005 was a real disappointment at $368 million. AFFX had problems turning out enough of the new, very high-density chips. They started missing guidance and reported a 15-cent per share loss in the June quarter on $80.1 million in sales, which was a sequential decline from the $86.4 million reported in the March period.

Yesterday, after the close, they reported $84.7 million in sales, barely ahead of last year’s $83.4 million, and a six-cent per share loss. So, why did the stock leap $4.37 today? First, because the Street was looking for $80.1 million and an eight-cent loss. Second, it now looks like the company can regain profitablity in the December quarter, at least hitting the Street consensus for $102.7 million and a nine-cent profit. The stock was down 53% for the year to date at yesterday’s close, and this evidence that the turn really is here popped it today.

I agree that the turn is here, but I also think the shorts were badly squeezed today, pushing the stock higher than what it will be trading for next week. Short interest in AFFX was flattish at nine million shares in the first half of the year, and then climbed to 11.7 million in July, 12.4 million in August, 12.7 million in September and 13.7 million in October, or 20% of all the stock outstanding. The short interest ratio — the number of shares sold short compared to average daily volume — soared to 13.71 in October. That’s about double the average stock, and means the short sellers would have to buy every share that traded for 13.71 days of average volume to cover all of their positions.

Affymetrix expanded wafer capacity at its Sacramento factory by 30% in the December 2005 quarter, and another 30% in the March 2006 quarter. It looks like they are now getting the yields up on this new equipment. They also have a new production facility in Singapore that went online in September. As they improve yields, their profit margins will improve. Gross profit margins fell from 70.6% in last year’s September quarter to 56.2%, mostly due to “forward pricing” for the 500K two-chip genome product. “Forward pricing” means that they set the price to produce normal profits at normal yields, which should happen next year.

Affymetrix is a classic razor-and-blades business. They sell instruments like GeneChip loaders, handlers and scanners, and software for workstation analysis to get a customer set up, and they have 1,480 systems in the field. But then the real money comes from selling GeneChips to that same customer for years. That’s why this new approach to cancer chemotherapy is so important — it moves GeneChips from the research lab to the clinical lab, and locks in a high volume of the most complex and most profitable chip sales. Eventually, GeneChip systems will be in every hospital and clinic — even some individual doctor’s offices.

Last November, Affymetrix was expected to do $460 million in sales in 2006 and $550 million in 2007. By March, those forecasts had been reduced to $420 million and $480 million. That’s when I started focusing on AFFX for a potential recommendation, but I just couldn’t see them hitting $420 million in 2006. Coming into this quarter, expectations had been cranked down again to $350 million in 2006 and $385 million in 2007. I think they’ll do a bit over $355 million this year, but they have a good shot at $400 million next year, if they can smoothly accelerate production at the Singapore plant. Street estimates for next year are all over the map, from seven cents a share to 65 cents, with an average of 35 cents. I am looking at 50 cents a share, followed by $1 a share in 2008.

Today’s price action probably establishes $22 as the worst-case low going forward, even in a bad market correction. The breakout point for this move, which I do think will be tested, is $23. So, I want you to buy AFFX on dips under $24, and I think we could see that as early as next week after the short covering subsides. My target is $40 by the end of 2007.

Avian Flu MegaShift

A new study from John Hopkins and the Ben Gurion University in Israel warned that a third of the countries who have pandemic flu plans have not decided how they would distribute medical treatment. The researchers examined 19 plans from developed nations and 26 from developing countries, covering in total 3.8 billion people or about two-thirds of the world’s population. About half of the plans favored antiviral medications like Gilead Science’s (GILD) Tamiflu, while 62% prioritized giving citizens a flu vaccine. That was strange, because no one thinks that it is possible to vaccinate more than one-in-seven (14%) of the world’s population within a year of a pandemic beginning. Antivirals will be the only medical treatment available in most countries.

Most countries prioritized health care workers for the vaccine and antiviral treatments, but policies varied on other groups such as the elderly, essential service workers and children. Almost half of the countries studied had prioritized children, despite a World Health Organization recommendation against it.

I continue to think the world is very unprepared for a pandemic mutation, and that the first bird flu infections in the U.S. will be found during the current migration season — first in wild birds and then in domestic birds. Continue to buy BioCryst (BCRX) all the way up to $19 for my $30 target; Crucell (CRXL) up to $28 for a $50 target, and hold both the Gilead January 2007 $60 LEAPs (GDQAL) for my $20 target, and the 2008 $50 LEAPs (YGDAJ) for my $30 target.

Biotech MegaShift

Millennium Pharmaceuticals (MLNM) announced results this morning. After numerous adjustments, including a restructuring charge to cut employment by 14%, they lost a penny a share on $104.1 million in sales. The Street was looking for a one-cent loss on $111 million in sales, but the good news about the restructuring program outweighed the revenue miss, and the stock rallied 73 cents today. Millennium raised their 2006 guidance, due to milestone payments on sales of Velcade, and now look for a profit from operations of $30 million to $35 million, with a smaller net loss in the $50 million to $60 million area. They had previously projected a $95 million to $115 million loss, so this is a dramatic change with only three months to go in the year.

Millennium also announced a deal with Ortho Biotech, the Johnson & Johnson subsidiary, to help promote Velcade in the U.S. Ortho already markets Velcade outside of the U.S. This gives the drug more firepower against Celgene’s Revlimid, approved in June for the same indication as Velcade — multiple myeloma. The restructuring program also makes them a more attractive acquisition candidate for Genzyme or Ortho. Continue to buy MLNM under $11 — it went over that today — for my $23 target. There is a huge amount of value in this company, and they are finally starting to unlock it.

QLT (QLTI) also announced before the opening this morning. They did $38.2 million in sales and made six cents a share proforma. Like Millennium, it was a confusing report due to write-downs and special items like patent legal fees, but I think it is fair to say that sales were weaker than the $42.4 million expected, while earnings were about on target.

Management cut their estimate for Visudyne sales for the year from a range of $370 million to $385 million down to a range of $340 million to $355 million. My thesis that doctors will move to a combination therapy with Lucentis and Macugen for macular degeneration is not playing out — yet. I still think that will happen, although it may take some results from the current combination clinical trials to make it occur.

The good news is that management raised their estimate for Eligard sales from a range of $100 million to $115 million up to a range of $110 million to $120 million. Proforma earnings for 2006 should hit 25 cents to 33 cents a share. QLTI is reducing headcount by 80 people and slightly reducing R&D.

I’m leaving the buy limit on QLTI at $8, but bringing the target price down to $16 to reflect the more rapid drop in Visudyne sales than I expected. I still think the stock can eventually get into the $20s, when the combination therapy takes off.

Content on Demand MegaShift

Comcast (CMCSA) reported before the opening today, and it was good news. Excluding a 32-cent per share gain from the purchase of Adelphia Communications, Comcast reported 26 cents a share, clobbering the Street forecast for 19 cents. Sales were in line with the Street forecast at $6.4 billion. Revenues were more profitable than expected because they came from a higher number of customers for their $99 phone, digital TV and Internet access service, a high-margin offering. The company signed up 483,000 new digital voice (VoIP) customers, up from 72,000 in the September 2005 period. They added 558,000 digital cable customers, up 77% from last year. About 536,000 bought broadband Internet access, the most for a quarter in two years.

Management said that the December quarter will be “as good or better.” They used phrases like “the third quarter was the inflection point” and “this is just the beginning.” The Street was looking for $6.7 billion and 21 cents in the December quarter, and I think they will now have to raise their earnings estimates dramatically. The stock jumped $1.24 today, and CMCSA remains a strong hold for my $62 target.

Harmonic (HLIT) also reported an excellent quarter, booking $62.9 million in sales, up 18% sequentially and right on the consensus. They could have shipped more, but they had some supply shortages that will be resolved this quarter. U.S. cable and international telco and satellite customers were areas of strength. Earnings hit 10 cents a share, far above the four cents Wall Street expected. Orders were strong, especially for their new video products, and they guided for December-quarter sales in a $67 million to $72 million range, with the midpoint a bit above the $68.2 million consensus. However, Harmonic expects a small sequential decline in gross profit margins, which may be due to the supply constraints or to the expected product mix.

In any case, the Street liked it and Harmonic took a nice $1.47 jump today. Buy HLIT on any dip under $7 for my $12 target. I am thinking about raising both the buy limit and target price, especially if the stock gets caught in a correction in the broad market.

Silicon Image (SIMG) reported after the close. They did a record $78.3 million in sales and earned 24 cents a share proforma, compared to Street expectations for $77.6 million and 21 cents. In the press release, they said they are encouraged by the design wins they have for 2007, and that over 450 companies have now adopted the HDMI standard. The conference call will be starting as this goes on the web, and if they say anything dramatic I will follow up with a Flash Alert tomorrow.

The consensus for the December quarter was $79.0 million and a sequentially flat 21 cents. The company guided for a decline of 3% to 5% due to normal seasonality, or $74.4 million to $76 million. That hit the stock almost $2 in aftermarket trading.

I am not worried about the December quarter, but I am worried that weakness in the U.S. economy in the first half of 2007 could translate to slower sales of high-end consumer electronics products. SIMG is well above my $10 buy limit, and instead of raising my buy limit, I am moving it to a hold for my $18 target.

Telkonet (TKO) installed their new Smart Energy system at The Octagon, a 500-unit luxury apartment complex in New York City. It monitors the amount of energy generated by 240 solar panels on the roof of the eco-friendly building and uses the building’s wiring to transmit the data to controllers and monitors, both on-site and remote. This is the largest solar array in Manhattan. The building owners saved tens of thousands of dollars by not having to run dedicated wiring to the panels and weather data collectors on the roof. The Octagon was built in 1841, and this restoration and conversion to apartments would have been far more expensive without Telkonet’s iWire system. Buy TKO up to $5 for my $15 target.

New Energy Technology MegaShift

Plug Power (PLUG) reported $1.8 million in sales and a 14-cent loss for the September quarter, worse than the $3.5 million and 10-cent loss expected. The company is deferring product revenues at the time of sale, and amortizing them over the life of the contract. But deferred revenue only grew $100,000 in the quarter, so it was weak any way I look at it.

PLUG has received orders for more than 400 systems so far this year, on track for their goal of 500 to 750 orders. They still have plenty of cash left — $278.5 million. With their partners and products, I think they are bound to succeed. But it is taking longer than I expected to get sales traction, so I am reducing my buy limit on PLUG to $5 and my target price to $10 for sometime in 2007. The stock seems to have very strong support around $4, so the risks are more time-related than price-related.

Royal Dutch Shell (RDS.A) announced their September-quarter results before the open today. They clobbered estimates, hitting $84.3 billion in sales and 93 cents a share. Production increased above year-ago levels for the first time since the March 2003 quarter, in spite of their problems in Nigeria. In contrast to BP, they also increased their refining profits.

Earlier this week, they offered $6.8 billion to buy out the 22% interest owned by their partner in the Canadian tar sands operation. The stock jumped $1.82 a share today, and RDS.A remains a buy on any dips under $66 for my $75 target.

Security MegaShift

Packeteer (PKTR) reported $36.0 million in sales and 10 cents a share, compared to the consensus estimate for $37.3 million in sales and 10 cents. The Tacit acquisition, which they closed in the June quarter, was supposed to grow from a $900,000 contribution in the June period to $3 million to $4 million in September, but it fell a little short due to integration issues. The slight miss on revenues is no big deal, and Tacit is expected to double to close to $5 million this quarter. You may see a 14-cent earnings number for the quarter, but that includes a tax credit that I don’t count.

Wall Street continues to love competitor Riverbed (RVBD), giving it a $1.5 billion market cap, in spite of the fact that the company is losing money. Packeteer is bigger than Riverbend and has a much more complete solution for Wide Area Network (WAN) optimization and server/storage consolidation, which are the main markets both companies compete in. Yet, Packeteer’s market cap is only $413 million. Both Gartner and IDC rate PKTR as the market leader in the rapidly expanding WAN optimization market.

Packeteer should grow revenues 25% in 2007 and see improving profit margins. I am raising my buy limit to $11 and raising my target price from $17 to $22.

@Road (ARDI) reported after the close today, and the conference call will be on as this is posted on the web. I will send a Flash Alert tomorrow if anything unexpected comes up. The company did $25.2 in sales and three cents a share proforma, compared to Street expectations for $24.5 million and one cent a share.

The Street was looking for modest growth in the December quarter to $26.9 million and four cents a share, but management said orders were strong. I expect analysts will start increasing expectations, as the company is executing better than they thought. ARDI remains a buy only on dips under my $5.50 buy limit, and I am not changing the $8 target.

Symantec (SYMC) reported a disappointing quarter, and I think this is a signal to us to get out. In contrast to the recent strong report from Check Point Systems (CHKP), Symantec missed their earnings expectations, reporting 22 cents a share compared to the 26-cent consensus. European sales fell short due to execution issues. Sell SYMC.

Video iPod MegaShift

Portal Player (PLAY) announced after the close today, with the conference call starting shortly after this issue is posted on the web. Wall Street was looking for $37.3 million in sales and 12 cents a share, and PLAY missed on the top line with $34.8 million, but came through on the bottom line with 13 cents.

For the December quarter, the Street consensus was for flattish sales and earnings, with $38.9 million in revenues and, again, 12 cents a share. The company gave disappointing guidance of $31 million to $38 million and five cents to 14 cents on the bottom line.

The key to this stock is what happens at Macworld in January. It looks like Apple will introduce the iPhone, which is a cell phone and music player. PLAY has a chip for that. If Apple settles the Burst.com (BRST) lawsuit before then, they’ll also introduce the high-end video iPod. PLAY has a chip for that, too. PLAY remains a buy up to $12 for my $20 target. If they say anything that would change my mind on the conference call, I will follow up with a Flash Alert tomorrow.

Zhone Technologies (ZHNE) held their September quarter conference call after yesterday’s Radar Report went online, and since I had a number of questions on ZHNE at the San Francisco Money Show I wanted to make sure you were all up to date. ZHNE had preannounced a disappointing quarter, which sent the stock down to close at $1.00 a share for a few days last week. Yesterday, they gave us more detail on what happened in the quarter.

After five good quarters of growth, their hot-selling DSL products (single line, multi-service, or SLMS) saw a sequential sales drop due to (1) order deferrals from a couple of large customers in Central and Latin America, and (2) technology transition issues in other international markets — the normal problems that arise as carriers lock in their strategies for the next round of broadband services deployment (Voice over Internet Protocol, Internet Protocol TV, and high-speed Internet access). ZHNE’s legacy product revenues actually increased for the quarter, but that was an anomaly and they expect steady declines in the future as those products phase out.

So instead of making two cents a share pro forma on $56 million in sales, as Wall Street expected a couple of months ago, they lost four cents a share on $43.1 million. In the December quarter, they’ll do $43 million to $45 million, compared to the Street estimate for $45.3 million, and sharply reduce the loss. Their earnings before interest, taxes, depreciation and amortization (EBITDA) were negative $5.1 million, and they are planning to reduce that to a loss of $2 million to $5 million in the current quarter. They have outsourced production to cut costs, and expect operating expenses to decline in the December period. Longer term, ZHNE is targeting profitability by the end of 2007.

Zhone still has the right products for the broadband buildout by cable and telephone companies worldwide. All phone companies are migrating to Internet Protocol-based networks, and from copper to optical fiber. Zhone has to run hard to stay ahead of the competition, but their Single Line Multi-Service products and architecture still get top ratings in the technology press and from customers. Even in this disappointing quarter, they had 18 new customers, about the average of the last several quarters.

ZHNE has the resources to recover. They burned a little cash in the quarter, about $4.5 million, and prepaid $1.5 million in debt. So cash declined from $71.8 million at the end of June to $65.8 million now. They should be nearly cash flow neutral in the current quarter and turn positive early next year.

This has been a very disappointing stock because management has repeatedly forecast profitability and then missed their goal. At just over $1 a share, the whole company has a market value under $160 million. That’s well under the $193+ million in sales they’ll do this year. With their costs coming down due to outsourcing and some of the delayed orders falling into place in the current quarter, I want to keep the stock on the buy list. I expect we will see Dick Kramlich, the head of New Enterprise Associates (the biggest VC firm and a major investor in ZHNE) buying more stock. Although it is possible the stock will get caught in tax-loss selling at the end of the year, it should bounce back quickly in January and do well in the two-year bull market I see coming. Therefore, continue to buy ZHNE under $2, and we will see if they can execute on their profitability goals and get to my $5 target (or even my previous $7 target) in 2007.

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

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

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

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

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

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

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

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

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

Avian Flu MegaShift

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

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

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

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

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

China MegaShift

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

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

Content on Demand MegaShift

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

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

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

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

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

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

New Energy Technology MegaShift

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

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

Security MegaShift

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

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

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

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

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

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

Subscriber Questions

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

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

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

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

With the Dow Jones Industrial Average hitting record levels and the NASDAQ Composite at its best level in five years, October certainly hasn’t lived up to its trick-or-treat reputation for stocks so far. Normally, the first half of October brings some nasty tricks in the form of big down days before earnings are announced. The second half of the month brings treats in the form of big up days as analysts take the first three reported quarters for the year, add the companies’ guidance for the fourth quarter, declare the year over, and then look forward to how good things could be in the coming year and how much cheaper stocks are on forward-year earnings than they are on current-year earnings.

I have no problems with that process, having watched it for over 25 years. In fact, I can tell you the exact day that stocks bottom, on average: October 10. That was Tuesday, the very day the Dow hit a record high, which was surpassed again today. So, either we are dealing with something very different this year, or stock market investors are in for a rude awakening.

I remain open-minded on that subject, but still biased towards the “rude awakening” scenario. Because as long as the Fed says they are “data driven,” then the stock market will be data driven. And we will have to see what the real data says in order to determine the next market move.

So now, let’s take a look at some of the recent data out there that has me leaning towards the “rude awakening” scenario.

The bond market is in a free-fall, sending long-term interest rates back up. The good news from that is the inverted yield curve is less inverted, suggesting a recession will be brief, shallow, or maybe not even happen. The very large trade deficit with China that was announced this morning certainly points to a stronger consumer sector than I expected at this point in the cycle. The bad news is that rising long rates suggest rising inflation — a Fed no-no, as they reminded us this week — and also kick a major prop out from under the recent stock market rally.

If the bond vigilantes now agree with stock market investors that the economy is not going to weaken significantly, that may mean both bonds and stocks are in for a nasty tumble.

Also, the relative weakness in the Philadelphia Semiconductor Index (SOX) over the last four weeks — up only 0.7% while the S&P 500 rose 3.5% — makes me suspicious. The SOX should roughly double the S&P’s moves in either direction, yet it is still about 20% below its January high for this year. It’s hard to imagine a big new up-move getting underway without the semiconductor stocks.

And last week, regarding the price of oil I said: “It would be normal to see it retest that $57 to $58 range shortly, and then head up to probe the resistance at $68. The process of adding $10 a barrel to oil prices might prove pretty unnerving to the stock market.” Oil retested down to $57.24 intraday yesterday. We may be about to see rising oil prices take the market down.

Whatever the reason, my most likely scenario is the one I outlined last week: First, this quick move up to the January 2001 major monthly breakdown level of 1365 on the S&P 500, now just a couple of points away, and likely to be accompanied by 12,000 on the Dow, which will definitely give CNBC something to talk about. This move is almost certain to be followed by a decline back to the recent support level at 1327, and that’s where the next key move will begin. I think it will drop through support and then crack 1295 to head back to the 2006 lows around 1220, or even all the way down to 1140. It would happen much later in the year than I expected, but we would still use that downturn as a major buying opportunity for the next two years.

But if the S&P can bounce off 1327 and decisively break through the major resistance at 1365, then the August 2000 high of 1518, and maybe even the all-time high of 1553, become the next targets. In that case, as I said last week, I will raise some buy limits, bring you some new stock ideas and recommend going 100% invested.

Right now, earnings season is just barely getting underway, so there isn’t a lot of news from our companies. But I do have some thoughts on some of our MegaShifts, and there are a couple subscriber emails that I want to address today.

Biotech MegaShift

In addition to the SOX index, I often look at the AMEX Biotechnology Index (BTK) as a leading indicator for the whole market. Here, the picture is brighter. In the last four weeks, the BTK is up 7.8%, handily beating the broad market averages. The index slumped from last November through May and built a basing pattern through the end of September. It’s really come alive recently, as often happens in the fourth quarter. There are lots of scientific meetings coming up, and the FDA really does make an effort to approve some drugs before the end of the year to make their statistics look better.

If the market retrenches as I expect it will, and biotech can hold its own, this will signal that the biotech sector will be a market leader in the coming rebound. Institutions always look for non-cyclical investments when they smell an economic slowdown, and healthcare/biotech goes to the top of their shopping list.

QLT Inc. (QLTI) barely budged after Genentech announced strong results after the close on Tuesday. The results were driven in part by surprisingly strong sales of their new macular degeneration drug, Lucentis. Genentech also raised its guidance, based on a higher forecast for Lucentis. The drug was launched in the U.S. on June 30, and the company sold $153 million of it in its first quarter on the market. That’s better than even Avastin, their blockbuster cancer drug that brought in $133 million in its first quarter on the market.

Why is this good news for QLTI? Two reasons. First, the introductory splash around Lucentis will get more untreated patients into their doctors. Macular degeneration has one of the lowest treatment percentage rates of any disease, especially in its early stages. Second, when those patients get there, the doctor will explain that Lucentis has to be injected into the eyeball. And then they’ll give an alternative treatment option: QLTI’s Visudyne. Some doctors will urge patients to go on both drugs, as they have totally different mechanisms of action and anecdotal evidence from the combination trials underway suggests that a combination regimen is more effective than either drug alone.

When QLT announces results in a couple of weeks, we’ll find out for sure whether the Lucentis launch helped or hurt the quarter. The stock is trading within pennies on each side of my $8 buy limit, and QLTI can be bought now for my $20 target as Wall Street realizes Visudyne will be part of everyone’s combination therapy.

China MegaShift

Last week’s Radar Report triggered this email from Jake: “Are you then saying from your report today that you do not recommend we buy any stocks, including your Top Buys, until you advise us to? What about Ctrip.com (CTRP)? You had mentioned to me at D.C. Money Show in August to wait. Is now the time or not?”

First, what I have been saying is you should hold a large cash position right now, but not 100%. For the invested portion of your portfolio, you can buy any stocks under the buy limits. Focus on diversifying your portfolio, so you are not overcommitted to just one or two MegaShifts, and start with the Top Buys as my best ideas.

Regarding Ctrip.com: Not yet. The stock is down a couple of dollars since the D.C. Money Show, but if the U.S. market is hit on recession or interest rate fears, China will take a bigger hit. We saw this phenomenon play out in May, just after we sold CTRP. On the other hand, if the U.S. market takes off, it probably will pull some money out of the Chinese market for a little while, and give us a chance to get back in. I’ll be sure to let you know in a Radar Report or Flash Alert when the time is right to buy back into CTRP.

Content on Demand MegaShift

It’s all about video. That’s one of the big messages from the Google (GOOG) acquisition of YouTube for $1.65 billion in stock. It’s also the message from Microsoft’s announcement that their IPTV (Internet Protocol Television) software platform for set-top boxes will be supported in the next-generation, system-on-a-chip boxes coming from Cisco, Tatung and Philips. It’s also the message from Steve Jobs’ recent preannouncement of Apple’s iTV media center for your living room, coming in the spring. And, of course, these messages are all good news for our Content on Demand stocks.

Harmonic (HLIT) is not in the set-top box business, but anything that drives IPTV or more video over the Internet is good for HLIT. Harmonic sells the video infrastructure systems that go at the head end of the process, in TV studios and cable company distribution points. They also sell some of the video transmission network gear to get the signal out to neighborhoods and to the curb. I am raising the HLIT buy limit to $7 for an unchanged $12 target, as it seems unlikely to dip below $6 even in a significant market correction. HLIT remains a Top Buy.

Zhone (ZHNE) is another big beneficiary of video over the Internet, as they sell gear to both the telephone and cable companies to be used at the customers’ premises to make high-speed, broadband connections. After the negative preannouncement that I covered in the September 28 issue, the stock dipped below $1 a share intraday this week, although it hasn’t closed below that level.

But it has raised some concerns and a flurry of emails. The following three questions pretty much sum up the majority of the concerns I have received lately. From Carl: “You did not mention ZHNE in your last report. Is it still a great buy or is it going down the tubes?” Larry asked: “At what price are you worried the price will break down and we are ‘down and out’ with this stock?” And Jerry said: “When the price dropped, I loaded up. Now, you have quit talking about the stock. It has been one of your Top Buys for months. What now?”

Obviously, missing this quarter was not good for Zhone, as it adds to the uncertainty that has been depressing the stock’s price for two years. I think insiders decided not to let it close below $1.00 a share, as that is the level that brings about NASDAQ procedures that are better avoided. But we really won’t know more until Zhone reports after the close on October 19.

The company has cash, blue-ribbon venture capital support, a rapidly-growing market and industry-leading products. With a market capitalization just over $150 million, compared to over $1 billion in paid-in capital, I still think Zhone looks like a gift of major proportions.

As I said in the September 28 issue: “This should be as bad as it ever gets, as the September quarter is the hardest one to close international business. While the old products run down, their new DSL products are still growing rapidly. Management should guide very conservatively for the December quarter if they have any sense. I’m going to ZHNE as a buy based on price, not on timing, but reduce my buy limit to $2 to reflect this latest disappointment. I’ll cut the target price to $5 for next year, although there’s no reason they can’t hit the $7 figure if they execute better in a more favorable stock market environment.”

I think you could put in an order to buy ZHNE at $1.01, just above whoever is supporting the stock, and maybe get some more on a down market day. I’m putting Zhone back on the Top Buy list, as I said last week based on price, not timing.

New Energy Technology MegaShift

We never got the bad hurricane season the experts predicted — we never even really got one hurricane in the Gulf of Mexico. That, plus what passes for peace in Lebanon, plus the expiration of our firm deadline for Iran to do something (they didn’t), sent the price of oil falling to my lowest targets at $57 to $58. As I said above, oil looks like it just completed a retest of that range this morning, and I expect the next move to take oil up $10 a barrel or so to the $68 area.

That would mean the correction in energy stocks is about over. The Independent Petroleum Association of America held an investor conference this week, and few people attended. That’s another sign the sector is sold out. With the weather turning cooler, the benign “shoulder months” for energy demand (September and October) give way to worries about winter demand for energy. The National Oceanic Atmospheric Administration forecasts a 5.9% colder winter for the lower-48 states compared to last winter, which was fairly mild.

The Energy Department just said that fuel bills should average 12.5% less this winter due to lower prices, and they are classic trend-line thinkers who are very wrong at turning points. Natural gas heats 58% of U.S. homes, and the DOE used the recent abnormally low prices for gas to make their forecast. Also, you can look for a change in their forecast after the election is over.

All of my New Energy Technology recommendations are trading below their buy limits except Holly (HOC), which went back over the limit today. This is the time and these are the prices to put money into this area, as rising oil prices will push these stocks up even as they push the broad market down.

WiMAX MegaShift

Gary asked: “With the largest rollout of WiMAX being announced by spectrum-rich Sprint Nextel, and their teaming with Motorola, Intel, and Samsung just how is it that AIRN, ALVR, and/or TRBM are going to directly benefit from this mammoth deployment? I own INTC and am buying MOT in addition to your recommendations and agree that WiMAX will be big, but I want to be well covered for this powerful MegaShift.”

Gary, when the equipment orders come in, it is very possible that Airspan (AIRN), Alvarion (ALVR) and/or Terabeam (TRBM) will get a piece of the Sprint Nextel pie. More important, though, is the pressure the Sprint Nextel deployment of a fourth generation (4G) communications network puts on all their competitors. You have rightly perceived that this is a powerful MegaShift.

If Microsoft delays Windows Vista, you will be early on Intel. I find Motorola a difficult company to analyze these days, because most of their earnings come from high-fashion phones, where you are only as good as your last design. And while I like Samsung, I don’t think they will list their stock in the U.S. due to Sarbanes-Oxley, and it’s really hard to buy it otherwise.

So my answer is to own all three of AIRN, ALVR and TRBM now, and look to buy INTC after the Microsoft announcement, if it comes. Also, on a side note, Terabeam just won the WiMAX contract for Taichung, Taiwan, a citywide broadband project to be completed in two years.

MobilePro (MOBL), like Zhone, drew a couple of questions. Melbourne asked: “What are your feelings re: risk/reward/solvency?” And Carolyn asked: “Why are we still holding it? If not for your recommendation, I would have been done with this stock months ago.”

MOBL has enough assets to avoid insolvency, but the risk is on the structure of their liabilities and whether they can refinance or monetize the contracts they are going to announce with many, many municipalities that want to deploy Wi-Fi and WiMAX networks. You can tell by the stock price that this is a high-risk, very high-reward position. The company announced today that it obtained up to $3 million in lease financing for Wi-Fi deployments.

As for Carolyn’s question, we are holding it because tens of thousands of towns and cities plan to deploy Wi-Fi networks to cut their costs, revitalize their downtowns and stay competitive. MOBL is one of the top five companies in that business — arguably, one of the top three. They have “insurmountable opportunities” and we can make 10-to-1 or 20-to-1 on the stock. (The current market cap is only $71 million, so 10-to-1 or 20-to-1 is well within the reality envelope.)

Incidentally, you have probably heard about the 10b5-1 stock plans that top managements use to sell large portions of their holdings on a regular monthly basis over time, in an effort to avoid being accused of selling on insider information. The CEO of MOBL has a 10b5-1 plan, too, except his is to buy the stock. This week, he extended the plan through January 2007 and reported that he has acquired 422,000 shares of stock under the plan so far. Go thou and do likewise. MOBL would be a buy at twice the current price, as my buy limit is 25 cents for an initial target of 60 cents.

Google Short Sale

Google (GOOG) is up on the news that they are buying YouTube. We’ll let the stock tell us when to short it again — not yet, certainly — but I wanted to comment on the deal. First, they are paying stock, not cash for YouTube. If Google thinks that their stock is far overvalued (insiders have sold about $1.4 billion so far), then they really aren’t paying $1.65 billion. At my short sale target price of $200, they are really only paying about $800 million.

Still, I said “only” $800 million for a company with little revenues and huge losses. But look at the numbers. YouTube has about 75 million unique visitors each month, and the average user does 11 page views before they move on. Big websites think two to four page views is reasonable. So, if users only visit once a month, there are 750 million page views. But most people think the real number is about double that on the site, 1.5 billion page views, and an equal number posted to other sites and blogs, for a total of three billion page views.

Advertising rates run from around $10 per thousand page views on a general site like CNN to about $40 per thousand on a specialized site, like Edmunds.com. That’s one cent to four cents per page view, and Google is awfully good at matching ads to pages.

But assume they only get one cent a page view for the 1.5 billion pages per month on their site, and we ignore all the blog and other reuse pages. That is $15 million a month or $180 million a year in sales, currently growing at a 100% rate. So Google paid less than 10X this year’s potential revenues at the stated price, and less than 5X next year’s sales. At the “real” price implied by a $200 stock, they paid less than 2.5X next year’s sales.

The real issues here are how Google will handle copyright infringement, which is an epidemic on YouTube, how they will monetize the pages (Adsense and banners, most likely) and whether YouTube is a just a flash in the pan. Those are big issues, but they have little to do with my continuing interest in shorting Google. I am still looking for advertising prices to fall apart in an economic downturn, and I don’t think Wall Street has any concept of how hard that would hit Google’s bottom line.

The YouTube acquisition pushed GOOG up, making it an even juicer short when the time comes. I will send you a Flash Alert when that happens. It could be soon.

Today’s Radar Report is probably the most important one I’ve sent in the last 18 months. We are approaching a critical point and time for the equity markets, and the pattern is not yet playing out as I had expected. Although the market will have the final say, I don’t think I was “wrong” — I think I was early. In this issue, I want to tell you what you should expect for the rest of 2006, how that affects my outlook for 2007 and what is in store for us through 2011. So, let’s jump right in and start with the shorter-term picture.

The Shorter-Term Outlook

I’ve recommended high levels of cash through the hurricane season, but the forecasters were completely wrong in calling for a worse-than-normal year. So far, it has been far better than normal.

I’ve also been leery of the seasonal weakness in September and October, but we just closed September with a 2.5% gain in the S&P 500 — the best month since January.

Sliding oil prices and optimism that the Fed is done raising rates overcame slowing GDP and housing fears to make it a good month.

However, my projection for a downturn in the fourth quarter of 2006 may simply be delayed rather than cancelled. What it comes down to is that the falling price of oil has been a big driver for this market — and it may be over. My projection has been for a bottom at $57 to $58 a barrel. The November futures hit $57.80 yesterday morning, before OPEC leaked a rumor that they might take a million barrels a day out of production at their next meeting. Translation: Don’t knock oil down any further, traders, or we will burn your shorts. With OPEC guaranteeing the downside, oil prices rebounded sharply to just under $60. It would be normal to see prices retest that $57 to $58 range shortly, and then head up to probe the resistance at $68. The process of adding $10 a barrel to oil prices might prove to be pretty unnerving to the stock market.

For the very short term, though, low oil prices and good September-quarter earnings should provide enough enthusiasm for traders to push the S&P 500 up to 1365. However that is the major monthly breakdown level from the January 2001 mini-rally that previously signaled that a serious bear market was underway. It is very typical for markets to rally all the way back to significant breakdown levels and then “kiss them goodbye” into a final plunge.

On the other hand, if the S&P can decisively break through 1365, then the August 2000 high of 1518, and maybe even the all-time high of 1553, become the next targets. If this happens, which to me is highly unlikely, I will put my bearish outlook into the dustbin.

The fundamentals underlying my outlook are my belief that investors are making a similar mistake to the one they made in early 2000. Then, stocks traded on an assumption that the Fed, personified by Alan Greenspan, could avoid recessions while technology earnings grew 30% a year forever, thus justifying what looked like very high P/E ratios. Now, stocks are trading on an assumption that the Fed can engineer a soft landing, avoiding both inflation and a recession, so corporate profit margins will stay at record levels, allowing price/earnings ratios — which look cheap based on projected earnings — to expand further, pushing stocks higher. There is no allowance for the fact that profit margins will revert to normal levels in a downturn.

Also, both then and now, the final moves up show deteriorating market internals, such as increasing divergences across industry groups, poor breadth and slowing or non-confirming volume. The rally in big-cap stocks has carried the market, and even that has been deceptively narrow. As of last Thursday’s close, when the Dow Jones Industrial Average set a 2006 high just a few points away from a new all-time high, not one of the 30 components rose to a new all-time high. An astonishing 19 stocks — 63% of the Index — showed losses of 20% or more from their individual all-time highs, and 13 of those (43%) showed losses of 40% or more. In the broader market, at last Thursday’s peak, less than 6% of domestic common stocks rose to new 52-week highs, while almost 27% already show losses of 20% or more over the last year. This kind of narrow selectivity typically marks major market tops, and major market drops often happen within the six-month window preceding a recession. We are probably in that window now.

Outlook for 2007 and 2008

No one wants to hear this but I expect that the economy will be weak in 2007, especially in the first half of the year. However, I don’t want you to get discouraged before you even start, because 2007 will also be an unbelievable entry point to buy stocks that can fuel your portfolios into retirement.

History shows that during periods when the GDP and corporate earnings are growing rapidly, stock prices often do poorly. That’s because the market is looking ahead to what they know is coming: The Fed tightening monetary policy, raw materials prices and wages accelerating, and inflation picking up. In contrast, when the economy is soft and corporate earnings are disappointing, which I think will characterize 2007, the market starts looking ahead to Fed interest-rate cuts and improving profit margins. So, stock prices do better.

There are three things that I think will ultimately affect the markets in 2007: housing, consumer spending and business capital spending.

Just as housing tends to lead the economy down, as it has been doing since June 2005, housing also usually leads the economy up after the Fed cuts interest rates. So one of the keys to my outlook is when the Fed will cut rates. I think it will be sooner rather than later, even though the inflation numbers will stay above the Fed’s “comfort level” for most of the year. Inflation has been above their comfort level since March 2004, so I take “comfort level” to be a meaningless phrase in terms of actually impacting Fed policy. The Fed will respond to weakening GDP and a possible recession with both interest rate cuts (the price of money) and high monetary growth (the volume of money).

Consumer spending, overall, will be subdued this holiday season and into 2007, but I expect a significant shift towards spending on consumer electronics for holiday gift giving. Following that, the very large personal computer cycle that will be driven by Windows Vista, Intel Quad-Core processors and WiMAX will get underway sometime between January and May, depending on when Microsoft really ships Vista.

Business capital spending will be weak in 2007, because budgets will be established during the weak December 2006 quarter. However, there are some “must spend” areas like video on demand, WiMAX, 3G cellular and broadband over power lines that will continue to get funding for competitive reasons.

Also, as you probably already know, 2007 marks the third year of the Presidential cycle. And typically, the third year often follows a recessionary second year and can provide some spectacular stock market gains. But this time, the mild recession or near-recession will be happening early in the third year instead of in the second year, and the stock market has not yet acknowledged that risk by dropping below its mid-2006 lows. Major gains will likely wait until the second half of 2007, when we see the Fed start cutting interest rates and improving housing and consumer spending numbers are on the horizon. Of course, a sharp market drop in the next several weeks could provide the launching pad for the typical 50% broad market gain in the third year.

In either case, 2008 will be the fourth year of the Presidential term, and will bring the usual fiscal stimulus and steady monetary policy that causes a good year in both the economy and the stock market. I expect most of the MegaShift stocks that we now hold to set multiyear highs in 2008 and early 2009. The path after that will depend on who wins the 2008 Presidential election and many other current unknowns, but the longer-term fractal market projections are pretty dismal for 2009 to 2011, with another major bottom in the area of the 2001 and 2002 bottoms — or worse.

The Bottom Line

I forecast the weakening economy and collapsing housing market long before most other prognosticators, and turned negative on the stock market in February. There’s been little progress in most market averages since then, and actual downturns in most stocks and sectors, but the broad market has not cracked yet to reflect the oncoming weakness. After the December 2000 quarter, I am not willing to assume that strong seasonal factors can make up for complacent investors in a weakening economy, so I am not ready to sound the all-clear signal yet.

Even if we are in a Goldilocks market that is eventually going to extend to new highs above 1560, it is still very likely the S& P 500 will hit huge resistance at 1365. It would be normal to correct back down to 1327, or perhaps all the way back to 1292, even in an ongoing uptrend.

If the S&P 500 can vault through the major resistance at 1365, I will raise some buy limits and recommend going 100% invested. But I think the big risk is that the S&P 500 will fail at 1365, drop through the recent support level at 1327, and then crack 1295 to head back to the 2006 lows around 1220, or even all the way down to 1140. We would use that downturn as a major buying opportunity for the next two years.

I’m not going to try to make money on that quick decline even if it happens, but I know some of you are short-term traders and others would feel better with some portfolio protection in place. Subscriber Michael asked: “I ‘m getting several reports also predicting a massive downward correction shortly and are advising we protect ourselves with purchasing puts of certain indexes? What is your position on that and exactly which puts would you recommend?”

It is usually best to buy puts with a strike price near the current price, but a term much longer than you expect any problems to occur. Otherwise, you can get badly hurt as the time premium decays, even if you turn out to be right on the direction. You also need liquidity, as the options market is the last refuge of the fixed-spread scoundrels, who are buying options at 40 cents and selling them at 50 cents in the next trade. So I would stick with put options on either the Nasdaq QQQQ or the S&P 500 SPY.

Today, on the QQQQ that would mean buying the January $40 put (QQQ MN), and on the SPY you would have to go out to March to buy the $133 put (SFB OC). After they list January SPY options in mid-October, you could sell the March contracts and buy the January contract.

For those who have similar concerns but can’t or don’t want to trade options, there are mutual funds that goes up twice as fast as the NASDAQ 100 goes down, and vice-versa. One is the ProFunds UltraShort OTC ProFund (USPIX).

For the portion of your investments that you keep in stocks, the MegaShifts least likely to be affected by a brief down market are Avian Flu, Biotech, New Energy Technology and WiMAX.

Avian Flu MegaShift

Indonesia is the fourth-most populous country in the world, and its citizens raise about 300 million backyard fowl, including right in the capital city of Jakarta. Most Indonesians don’t keep dogs as pets for religious reasons, but 80% of the 55 million households keep everything from ordinary chickens to exotic pet birds. The country’s Director of Animal Health now thinks as many as 27% of the birds are infected with the H5N1 bird flu virus, which accounts for the country’s leading position in flu-caused deaths so far this year. The good news is that a recent analysis of tissue samples from birds in many areas showed that the virus has not mutated much over the last year.

But the prevailing attitude in Indonesia is summed up by a 39-year-old janitor named Setyabudi, who said; “Why should we be afraid of bird flu? People die because it is God’s will.”

That attitude combined with inadequate funding means the problem is only going to get worse. Indonesia will only spend $54.4 million this year on bird flu control, while world organizations think a $250 million program is needed. Their budget for next year shows a decline of 15% to $46.5 million.

I know I harp on Indonesia, but that’s because it is the most likely place for H5N1 to mutate to a form that can be transmitted from human to human by sneezing and coughing. The new case in China this week reminds us that there are many other contenders for this dubious honor, but Indonesia remains the prime focus. With the fall migration season underway, I expect the lethal form of H5N1 to be found in the U.S. before the end of the year. (The H5N1 found last week in teal ducks in Illinois is the same low-level form found earlier this year in birds in Michigan, Maryland and Montana.)

BioCryst (BCRX) announced positive Phase I data for peramivir at all dose levels in both intramuscular and intravenous trials. I expected this, and the company will press on with Phase II trials during the coming flu season. Remember that successful Phase II trials can lead to early FDA approval under the BioShield legislation.

In a “you-gotta-be-kidding” moment, the stock dropped about $1.50 on these results. There was no reason for it. BCRX is a Top Buy all the way up to $19 for my $30 target, which I expect when peramivir is approved for government stockpiling for avian flu next year.

Gilead Sciences (GILD) was hit for $4.50 on Monday and another $2.25 on Tuesday after they announced the acquisition of Myogen (MYOG) for $2.5 billion. The deal gives Gilead two hypertension drugs — one about to file for approval and one potential blockbuster in Phase III clinical trials — but the acquisition will dilute earnings about 8% in 2007 and 2008. It will add $300 million to $500 million in sales in 2009 and 2010, and most Street analysts are raising their growth estimates for GILD now that they know what the new product pipeline will be.

The stock has stabilized because the deal makes tremendous business sense for Gilead, and also means they probably won’t do another dilutive deal in the next 12 to 18 months. However, they did pay a high price and this did not further their avian flu portfolio, which is the main reason why we own the stock.

Of our two LEAP option recommendations, I’ve liked the January 2008 $50 call (YGDAJ) best, but it never seems to trade under the $16 buy limit. It hit $24 last Friday, on its way to my $30 target, before this announcement. It closed at $19.70 today. I don’t think we need to change anything here unless the market heads up further, in which case I might raise the buy limit to $20. Continue to buy YGD AJ on any dips under $16 for my $30 target.

The January 2007 $60 call’s (GDQAL) time premium is about to start vanishing. That’s the risk. The reward is that any negative news on bird flu will jump GILD and possibly skyrocket this option. So I want to stick with it for a while, changing the buy limit on GDQ AL to a Hold, and leaving the target at $20.

Biotech MegaShift

eResearch (ERES) was the subject of an email from Alan: “Would you please comment upon the status of eResearch in the next Radar Report. Their appearance at the UBS Global Healthcare Services Conference on Sept. 25th did not seem to do anything for the stock price and it has certainly been languishing for some time.”

Quite true on all counts. As you know, eResearch’s orders have been stronger and stronger for three quarters, and probably were up again in the September quarter. But the lag time to start the trials has been disappointing, and therefore the company keeps missing their revenue guidance, so the stock is mired at $8.

Revenues for the March and June quarters hit $21.4 million and $22.8 million, respectively, a total of $44.2 million for the first half. They guided for $92 million to $96 million for the year, which means $47.8 million to $51.8 million for the second half. That’s very modest growth, and quarterly revenues would be tracking far below orders. So, either companies are ordering much further ahead of need than they used to, or ERES is unable to scale up fast enough to keep their backlog from climbing, or they are low-balling us. I suspect the latter.

Wall Street is looking for only $23.5 million in sales for the September quarter, in a range of $22.3 million to $24.4 million, with four cents to six cents a share in earnings. I am expecting $24.2 million and six or seven cents. For the December quarter, Wall Street is at $25.9 million, in a range from $24.0 million to $27.4 million. The consensus earnings estimate is eight cents a share, in a range from five to ten cents. I think the company will guide for $27.5 million and nine to ten cents a share, bringing them in at the top of their current guidance range for the second half ERES should also say something about continued growth from there, based on the backlog.

All that will get the stock moving again, and ERES remains a Top Buy all the way up to $16 for my $30 target.

New Energy Technology MegaShift

I said above that I expect a near-term drop in oil prices to the $57 to $58 per barrel range, and the drop so far clearly is impacting all energy and alternative energy stocks. I want to make it clear that $57 to $58 looks like a major bottom to me, and we will be up and away from there as cold weather hits and the geopolitical risks play out. Of course, it is just “trader stuff” to mark down an alternative energy stock just because the current price of oil falls. There are many underlying issues over the next several years that will push alternative energy stocks higher, including shrinking supplies of conventional oil, still-rapidly increasing demand in China and India, and the need for politically secure sources of energy. Canadian tar sands, oil shale, coal-to-liquids, wind-power and wave-power can generate electricity at the equivalent of about $35 to $45 per barrel of oil, and solar is competitive without subsidies at $60 to $70 a barrel. None of these are going to go away just because oil drops to $57 for a week or two.

Natural gas prices also headed higher for the fifth day in a row as traders shifted their focus to the coming colder weather. With a developing El Niño off the California coast, it could be a very cold winter in the Northeast this year. That’s good news for Gasco Energy (GSX), which announced third-quarter net natural gas production today from its Utah and Wyoming projects, in oil shale territory. Production hit 944.7 million cubic feet equivalent, up 10% from the June quarter and up 93% from last year’s period. This was an excellent number.

Subscriber Jacob emailed: “Hey, Michael, I was wondering if the recent buyout by GSX will push back your time frame on the future $9 price. I am very impressed with GSX but I don’t know if I want to jump in just yet.”

Just the opposite, Jacob. Their buyout of their production partner, Brek Energy, will add to earnings even at current low natural gas prices. If you want to own it, the stock has started moving up and now is the time to load up on Top Buy GSX under $4.50, for my $9 target.

Fuel Cell Energy (FCEL) will benefit from California’s extension of the Self-Generation Incentive Program from 2008 to 2012. The extension was signed by the Governator late last week. That program is providing $1.9 million for a new FCEL contract with an unnamed hospitality and entertainment resort — Fuel Cell’s third hotel site in California. The customer will install the system themselves to save money, a move that Fuel Cell encourages, as they designed their system to be easily-installed. It will be ready in April 2007, when the customer will be named. The little birdies are whispering: “Disneyland.” Buy FCEL up to $11 for my $22 target.

Infinity Energy (IFNY) is having great operating results and cash constraints that may lead to a sale of the company — at higher prices, of course. The operating results included a record $11 million in oilfield service revenues, more than the previous guidance and 18% ahead of the June quarter. That operation is for sale, with the proceeds anticipated to be enough to pay off all their debt. On the production side, they hit their previous guidance for a record 5.3 million cubic feet equivalent of natural gas as a daily average, up 15% from the June quarter.

But they are low on cash, so they let their rented drilling rig go instead of restarting their drilling program this quarter. They also renegotiated their debt to a January 15 due date with no cash outlays, and IFNY said on the conference call that they are looking at all the alternatives, including a sale of the whole company. The falling price of oil certainly slowed down their spin-off of the oilfield services operation, but they have had expressions of interest from buyers for that and for the whole company.

The best outcome for us would be a sale of oilfield services so that they can pay off the debt and get a new bank line to start drilling again. Second would be a partner on their South American offshore leases. I really hope they don’t have to sell the whole company, although I expect any such transaction would be at substantially higher prices than today.

Because I think oil has bottomed, I am comfortable sticking with IFNY. My sum-of-the-parts analysis is that this stock should be at $14, not $4. I am not willing to take it off the Top Buy list or reduce the modest target price, but I will trim the buy limit from $6.50 to $5 just to reflect the uncertainty Buy IFNY under $5 for my $9 target, even if we have to get there by seeing the company broken up and sold in pieces.

WiMAX MegaShift

Alvarion (ALVR) made an important product announcement of the BreezeMAX 2300 and 2500 products for fixed and mobile WiMAX in the 2.3 gigahertz and 2.5 gigahertz bands used in North America. This product was designed from the ground up to the mobile WiMAX standard (802.16e), as opposed to being a modified older product. It is aimed right at the heart of the Sprint Nextel-type deployment, which means any potential competitor has to take a look at it.

Subscriber Michael asked a good question about Alvarion: “Why is it that with only positive news coming out periodically, ALVR goes nowhere but down?”

I know it seems that way, because I often ask myself the same thing. The easy answer is that Wall Street is waiting for them to have a breakeven or better quarter. The last five quarters of small losses, while we waited for the WiMAX certifiers to do their job, proved to be too long for the Street to wait, especially with the Israel/Lebanon conflict. Expectations for the September-quarter range from minus a penny to plus a penny, so ALVR has the opportunity to surprise a bit to the upside and report good orders to drive a good December quarter.

But the truth is the stock price already turned. ALVR was trading around $6.25 in June, before the July swoon and the conflict dragged it down to $5. But a ThinkEquity buy recommendation in early August pushed it up over $7, and now it has settled back to a tight range with good support at $6.25 and, so far, resistance at $6.75. We’ll take out that resistance level on the next move up, and then see how the stock does at the following overhang point at $7.25. I think with the WiMAX rollout accelerating, thanks to Sprint, this will be one of the hot industries and hot stocks in the next market up leg. So, ALVR is still a Top Buy up to $9 for an $18 target.