I promised a lot more comments this week on two issues: Fed Chairman Bernanke’s warning that the U.S. faces a possible “fiscal crisis,” and my recent rants on the growth in the money supply. These are related, because the only acceptable solution to the “fiscal crisis” caused by the budget deficit, the trade deficit, foreign holdings of U.S. debt, the truly disastrous outlook for Social Security and Medicare and the overleveraged consumer/homeowner is simply to print money. Rampant inflation makes these problems much smaller. As I said last week, the good news is that Social Security will not go broke and a retiree will still be able to buy that latte at Starbucks. The bad news is it will take their entire $1,100 Social Security check.

The alternative to printing money is a major deflationary crash, and Chairman Bernanke already said the government could drop money from helicopters if necessary to stop a downward spiral. He has a long history of thinking inflation is better than deflation, and there’s no reason for him to suddenly change his views. With the yield curve seemingly permanently inverted, the markets are telling him that they are not worried about inflation, so why should he raise rates? Heck, why not cut rates and throw more fuel on the fire? None other than bond maven Bill Gross at PIMCO says long-term bonds are a great buy right now.

So, the big assets crash so beloved by the perma-bears, where housing and stocks collapse, just isn’t going to happen soon. The Fed can easily keep this game going for another three to five years. But the only way that all kinds of assets can go up at the same time — stocks, bonds, gold, silver, oil, commodities, real estate, art — is if the dollar is going down in value. In the early stages of the hyper-inflation periods in the German Weimar Republic after World War I and in Argentina more recently, their stock, bond, real estate and precious metals markets rose sharply, just as the U.S. is doing now. The German stock market rose 67% from 99 in January 1919 to 166 in January 1920. A few years later it topped out at 26,890,000, and the German mark was worthless.

Even if there is a day of reckoning, it is more likely to come in the form of a currency crash than a price collapse in housing and real assets. These numbers should shock you, but extrapolating the current trends could get us to a bad situation in 20 years — 2027 — when the average suburban house sells for $30 million and the Dow Jones Industrial Average is over 100,000. Those will be nominal dollars, of course, and not much of a real increase in anyone’s wealth, except for the fixed-rate debt that will be deflated to essentially worthless.

I bought a house for $29,000 in Mill Valley, California, in 1970. Were those the good old days? How about looking back from 2027 at those cheap $1,000,000 houses you could have picked up in 2007, if only you’d known?

How Fast Is Money Really Growing?

In regards to money supply, Charles, Ron and many others have asked me where I am getting my growth estimates for monetary growth, which are much higher than the published M1 and M2 figures. The M2 money supply used to grow around 1% to 2% a year, but beginning in early 1995 the Greenspan Fed jumped that to over 6% per year, compounded. The Fed stopped publishing the more comprehensive, widely-followed M3 statistics because “it cost too much” to collect the data, but these have been recreated at shadowstats.com and show a current growth rate of 10.8%.

My numbers come from a more direct measure: Fed Funds and Repurchase Agreements on the Fed’s balance sheet. This is a direct measure of how much credit the Fed is supplying to the economy. In 2006, it grew $366 billion, or 24%, to $2.4 trillion. That was on top of 14.5% growth in 2005, leading to a two-year gain of 42%. The banks are essentially required to take Fed funds, so they quickly re-lend them. But due to fractional reserve accounting, they lend $20 to $100 for each $1 they get in Fed funds. The leverage is enormous in an $11-trillion economy.

Why does the Fed create so much credit? It is in response to deficit spending by the government. Of course, the deficits are much worse than you have been told, because the government borrows the entire Social Security surplus every year and counts it as income. Nancy Pelosi may say that she is determined to protect Social Security, but there is not a chance that she will put an end to this scam. Of course, the notes the government gives to the Social Security “Trust Fund” will have to be paid off with future taxes on future workers — there is nothing in the “Trust Fund” that has been earmarked to meet future liabilities.

As a result of the Fed’s credit creation, according to the Credit Bubble Bulletin on prudentbear.com, bank credit grew more than 10% in 2006, loans and leases grew 10.4%, commercial and industrial loans grew over 14% and real estate loans grew 14.4% — this in a year when real estate supposedly was in trouble. The well-known economist Ed Yardeni pointed out that international reserve assets, excluding gold, grew at a whopping 19% in 2006. This is a measure of excess global liquidity, and it reflects the fact that it’s not just the Fed — central banks around the world are printing money at an accelerated rate, and banks are lending it out as fast as they can. This firehose of liquidity is one of the major reasons our stock market rallied so much in the second half of 2006, while the dollar was falling.

How Fast Is The Dollar Really Depreciating?

The big story of the next five years should be the depreciation of the dollar, especially as we pressure the Chinese to strengthen the yuan against the dollar. This isn’t a new story, as the dollar has lost about a third of its value against a basket of major currencies in the last five years. The euro has already replace the dollar as the leading currency in international bond markets, now accounting for 45% of the global market compared to 27% for the dollar.

I think the two most important jobs the Fed has areto maintain the value of the dollar, and price stability. They have failed miserably at the former, which means eventually they will fail miserably at the latter. But, so far, the weaker dollar has been invisible to most voters, while the low inflation numbers have been very visible to everyone, so people think the Fed is doing a good job. When inflation takes off, and it will, those who are leveraged or in debt — most people — will be better off. Those who have loaned money at fixed rates — the wealthy few — will get hurt. Politically, it’s a no-brainer. This also explains why the private equity guys are raising huge amounts of money, leveraging it as high as possible, and paying big bucks to take companies private, especially those with real assets. If they can convert the debt to fixed debt in time, they are trading dollars that will become near-worthless for assets that will maintain their real value in a hyper-inflation.

Also, the inflation numbers are “cooked.” Everyone who receives a contract payment that adjusts for inflation, primarily union workers and Social Security recipients, has been and will continue to be squeezed. The government has redefined the Consumer Price Index many times over the last 20 years, and you will not be surprised to learn that every change has tended to lower the reported CPI number.

John Williams at shadowstats.com carefully reconstructed the CPI from the mid-1980s as if it had never been modified, and found the original series shows current inflation at a 9% rate.

As a result of all this, I found Chairman Bernanke’s statement last week that the U.S. government may face a “fiscal crisis” in coming decades due to the cost of retirements and medical care to be very interesting. I think it is far too late to solve the problem through fiscal policy, especially if there was honest accounting for the annual borrowing from the Social Security Trust Fund. Bernanke may be setting up others to take the blame when he has to start printing money even faster just to stay in place and avoid the deflation storm he fears.

What does this mean for us? Two of the safest places to keep your money in this kind of environment are high-growth stocks that will benefit from a weaker dollar, and assets like oil and natural gas. As prices of those two vital commodities soar, our New Energy Technology MegaShift stocks will do well. Stocks in general are a good holding as inflation accelerates, and I think we will be pleasantly stunned by the nominal return in stock markets over the next three or four years.

Avian Flu MegaShift

The World Health Organization warned that we are entering the coldest months of the year, when both seasonal and avian flu cases begin to accelerate. Another death in Indonesia emphasized their point. I expect bird flu will get back on the front pages over the next few weeks, so if you have been waiting to buy or add to these positions, now is the time.

BioCryst (BCRX) started their Phase II trial for two different doses of injected peramivir, with a placebo control. The trial includes sites in North America, Europe and Southeast Asia. The Department of Health and Human Services is funding this trial under the $102.6 million, four-year contract that BioCryst won earlier this month. The contract covers reimbursement for clinical manufacturing and evaluation of peramivir all the way through to licensing. Continue to buy BCRX under $19 for my $30 target.

Biotech MegaShift

The President’s State of the Union speech identified healthcare as a problem to be addressed, but his modest proposals ran into general opposition, and I doubt most will ever become law. However, the focus of the debate showed the Democrats’ willingness to try to get Big Pharma drug prices down by negotiating harder over Medicare reimbursement. While this approach may not make it into law either, it makes it more likely that Big Pharma will go on an acquisition spree to pick up new biotech-based products that are years away from that kind of pressure. There are stocks that we own in the Avian Flu and Biotech MegaShifts that are prime acquisition candidates. These include BioCryst, Gilead Sciences (GILD), Dendreon (DNDN), Metabolic Pharmaceuticals (MBLPF), Millennium (MLNM), QLT Inc. (QLTI), and ViroPharma (VPHM).

Content on Demand MegaShift

Harmonic (HLIT) has been doing better this week, hitting a new 52-week high yesterday. The consensus expectation is now above the company’s guidance, which is for the December quarter to be the best one in 2006. However, I’m not too worried about Harmonic hitting their guidance and missing the consensus for December, because in that case, I think they would guide above consensus for the March period if a few shipments slide to the current quarter, especially to the satellite TV customers. The company reports next Wednesday after the close, and you can buy HLIT on any market-related dip under $7 for my $12 target.

Zhone (ZHNE) is holding their conference call after the close today, and I will update you on the report next week. Expectations are very low, and although they still had a small pro-forma loss, it was half of the third quarter. Newer products showed 11% revenue growth and they cut overhead expenses 10%. The stock is up a couple of pennies in the aftermarket. ZHNE is still a Top Buy based on price, with a $2 buy limit and a $5 target.

New Energy Technology MegaShift

The President’s comments on reducing our dependence on oil simply moved him closer to the consensus, and shouldn’t have much impact on our stocks.

Oil prices bottomed and then broke out over $53.70. While it is possible that prices will retest that level from above, the change to colder weather in the U.S. should by itself support a continuation of this move to the $60 to $61 range over the next few weeks. By the time we get there, I will probably have raised my near-term target.

That means it is time to be fully invested in these stocks. If you are looking for a place to put money, Infinity Energy Resources (IFNY) held a conference call this week to say that it is in talks with several companies to sell or partner non-core assets, and in separate talks with a couple of other companies that might want to buy all of IFNY.

The non-core assets include the Arch Field that is fully developed and produces 1.6 mcf of gas a day and 40 barrels of oil. In the Rockies, their Piceance Basin leases might be better owned by or partnered with another company that already has substantial operations in that area. Their large Nicaraugan offshore lease concessions are not a core asset, but they could be a huge wildcard for shareholders. Management is in very active negotiations to joint venture this asset with one of two multibillion dollar companies that have operations in the Gulf of Mexico. At least one potential buyer is down there doing inspections.

The company’s big core assets are the Sand Wash Basin in the Rockies, which is one of the main reasons we bought the stock, and their very successful holdings in the Barnett Shale. They’ve just plain done a better job than their competitors of drilling and developing in the Barnett Shale, where they have two very productive wells, two that need additional work and 30,000 more acres to drill. Infinity has another 30,000 acres in the next county south, Comanche County, which is almost untouched so far. Any company that would want to acquire all of IFNY would certainly want Barnett.

In the Sand Wash Basin, Infinity is getting a rig in to rework and deepen a well that was on the property when they leased it, which will bring them to three wells. They have one of the top 10 producing wells in Colorado on this site, and they believe additional wells also will be heavy producers. One of the reasons they took down some of their line of credit was to drill the 50,000 acres of prospects surrounding that top well.

The stock moved up a whopping 15 cents after this call — it should have doubled. Infinity management is laying out specific short-term plans in public conference calls and then executing on them 100%. It’s hard to ask for more than that. IFNY is a Top Buy up to $5 for my $9 target — which it could hit after just a couple of asset disposition announcements.

Rentech (RTK) drew a question from Art: “I bought a lot of RTK as a long-term buy. I see now that the DOE is sponsoring, along with eleven major energy companies, to develop better gasification plants, the first by 2009. Is RTK in this or is it being left behind?”

Coal gasification is a cleaner way to convert coal into electricity, rather than just burning it in power plants. The Department of Energy (DOE) project is aimed at making it economical by developing an advanced coal gasifier to put in power plants.

Rentech has no interest in this business. RTK turns coal into petroleum liquids, not gas. Their goal is to replace oil-derived gasoline, diesel and jet fuel with coal-derived equivalents.

To that end, they made another significant hire this week. They brought in Dr. Robert Freerks as Director of Product Development. He has 25 years of experience in Fischer-Tropsch synthetic fuels, synthetic lubricants and biofuels. For the last seven years, he was the Director of Product Development at Syntroleum, where he developed synthetic jet fuel produced by the Fischer-Tropsch process. Freerks worked with the Department of Defense to qualify the fuel for military aircraft, and also had a Department of Energy contract to test and demonstrate Fischer-Tropsch synthetic fuels performance in diesel engines under laboratory and field conditions. He worked for Chevron Research and Technology for 18 years before Syntroleum. We could hardly have a better person on our side, as the Department of Defense is going to be one of the biggest initial consumers of Fischer-Tropsch jet fuel. RTK is a Top Buy up to $5 for my $11 target.

Security MegaShift

Packeteer (PKTR) reported after the close today. Revenues grew 20% from the September quarter to $43.2 million, and they earned 14 cents a share proforma, a bit better than expected. The stock is up over 70 cents in aftermarket trading, after losing 62 cents during the day, and I’ll be on the conference call in a few minutes. I will send you a Flash Alert if anything unexpected happens, which I doubt. PKTR should only be bought on dips under $11 for my $22 target.

WiMAX MegaShift

Alvarion (ALVR) drew a “swap into Airspan (AIRN)” recommendation from another newsletter today, clipping ALVR for 22 cents a share. AIRN was up 17 cents. My experience is that in the early stages of a huge MegaShift like this, it is more important to identify all the possible big winners and own a little of each, rather than try to single out only best one. So, I would continue to rate ALVR as a Top Buy up to $9 for my $18 target. Buy AIRN under $5 for my $10 target, and also buy Terabeam (TRBM) up to $4 for my $7 target.

MobilePro (MOBL) was the topic of a question from Terry: “If you believe that MOBL will go to $0.60 and it is at $0.06, why isn’t this a screaming TOP BUY?”

A good question, and it gives me a chance again to point out that the Top Buys are stocks that I think will move sooner rather than later, based on an event, announcement, and so on. MOBL is a screaming buy for building wealth over the next few years. My 88-year-old mother owns only one tech stock, as is appropriate for her age, and it is MOBL. But when will Wall Street recognize the value here and get excited? Hard to tell. The company will keep building new municipal Wi-Fi systems and will make various financial engineering moves — acquisitions, sales and spinoffs — to extract shareholder value. But which one will be the spark that lights the rocket? Like Telkonet (TKO), Rentech, Zhone, Infinity Energy or Ocean Power (OPWT), it is hard to tell.

In short, to participate in the municipal Wi-Fi/WiMAX MegaShift, everyone should own some MOBL at these ridiculous prices. But if you want a stock that is surely going to move a lot in the next 120 days, it is Dendreon, not necessarily MOBL.

Market Outlook

The S&P 500 blipped up to close right at my long-standing 1440 target yesterday, and I think a decisive move will play out over the next couple of weeks. Most likely, it will pull back some, as it did today, rally back to test this very important level from below, fail and go into a sharp decline to 1326, 1236 or at worst 1140. But as I’ve been saying for a few months now, if the S&P just consolidates in the 1430 to 1440 area for a while and then breaks out over 1440, I think we are headed for all-time highs and the big move will be underway. Either way, I will recommend you get fully invested for the liquidity-driven bull market that will unfold over the next two years.

My Fear & Greed Index, the VIX or volatility index, dropped into the single digits yesterday. Throughout the whole bull move for the last four years, the VIX has rarely stayed under 10 for long, as that represents about as much greed as the market can stand. It bounced back 1.33 today to over 11. As it starts to rise, stocks usually weaken, which is one big reason why I think the most likely near-term path is down. The other reason is that the Fed has reined in liquidity growth for a few weeks, causing the dollar to strengthen and real assets like gold, oil and shares of companies to weaken. I doubt this will last long, as discussed above.

The cautious tone in March-quarter guidance continues, but tech investors chose to focus on good December-quarter results this week. Cautious guidance hit technology especially hard in the last couple of weeks, but yesterday’s rally changed the focus. It looks to me like oil prices have put in a bottom just under $50, with the next step a trade back up to $60 to explore support and resistance at that level. That would take energy stocks up, and they are still an important part of the broad market indices. So, an oversold bounce in tech, plus rallying energy, would give the S&P 500 an opportunity to break out over my 1440 target. But if it doesn’t happen soon, it probably won’t happen until after we’ve seen a sharp decline to shake up the bulls.

This remains a tricky environment, and I don’t see any need to put cash to work yet, unless you are underinvested in the New Energy Technology MegaShift, where stocks are bottoming now.

We’re three weeks into the New Year and you know what that means — another round of earnings announcements. Earnings season for tech companies officially started after the close on Tuesday with Intel reporting and then Apple following suit on Wednesday.

Intel’s “positive” announcement said that net income plunged 39% in the December quarter, on a 5% drop in sales, despite shipping a record number of chips. I say “positive” because they beat revenue and earnings expectations by a penny. The strategy of using pricing power to get market share back from Advanced Micro Devices seems to be working. Their new 65 nanometer chips are lowering overall costs, but costs associated with their next generation 45 nanometer chips, now in test production and scheduled to ship in the second half of 2007, will depress profit margins for a while. So their guidance for the March quarter worried Wall Street, and the stock sold off.

After the close Wednesday, Apple reported blowout iPod sales in their December second quarter, but fell 300,000 units short of expectations for Macintosh sales. The whispers and surveys were suggesting that they would beat Mac sale guidance, so this was enough of a disappointment to take the stock down $5.88 today.

Macintosh sales gained market share for the fourth calendar quarter and full year. Last year, I said that I expected worldwide PC sales to fall 10% in 2006, but I was wrong. U.S. shipments fell 3.2% in the December quarter and increased only 1.2% for the year, but continued strong sales in Asia and Latin America took worldwide shipments up 9.5% for the year to 239 million units from 2005′s 219 million. Dell and Hewlett-Packard finished in a tie for 2006 market share at 15.9% each, followed by Lenovo (who bought IBM’s PC business) at 7.0%, Acer at 5.8% and Toshiba at 3.8%. Dozens of companies shared the other 51.6%.

I’d expected a big snap back in PC sales in 2007, but since 2006 didn’t go down, I’m now thinking 10% growth would be a good year. Intel said 8% to 10% was the consensus range, and they had no major disagreement with that even though Windows Vista for consumers will finally start shipping on January 30.

Mobile phone sales also did better than I expected in 2006. I was looking for a flat year at 750 million units, but the wireless revolution rolled on and sales hit nearly 900 million units. Most of the growth came from new users in developing countries and prepaid services that let someone with poor credit get a phone. But there’s no doubt that the gadget consumers in the U.S. fulfilled their share as well, by tossing their perfectly functional old phones to buy new ones. The replacement handset market was larger than the new handset market in 2006 for the first time ever.

The In-Stat market research firm thinks growth in mobile phones will continue in the 10% to 15% range for the next five years, driven by the rollout of higher speed data networks. Today, there are about 3.2 billion phones in service worldwide, and by 2011 In-Stat thinks that 50% of the world population will have a mobile phone. In dollars, the handset market will grow from $144 billion to $200 billion by 2011 — good news for UTStarcom (UTSI).

The strength in PCs and cellphones helped semiconductor sales also come in better than my “flat” expectation. That will cause this year to look less robust. At the annual SEMI conference this week in Half Moon Bay, sponsored by the Semiconductor Equipment & Materials International trade association, the expectation was that the final data will show 2006 worldwide semiconductor sales up about 10% to $250 billion. Growth will slow this year to a gain of 5% to 7%, or $262.5 million to $267.5 million.

Putting it all together, 2007 looks like an OK year for technology fundamentals. It won’t be a whole lot better than 2006, but 2006 was surprisingly strong. By the second half of the year, Windows Vista will be shipping in volume and help to finish the year on a strong note. But as we’ve already seen from Intel, Apple and Lam Research, companies are likely to guide cautiously for the March quarter (and probably also for June). The market will have to overcome that to keep moving up in the two-year bull move that I have been forecasting.

Biotech MegaShift

The FDA approved only 18 new drugs in 2006, at the low end of the range for the last 10 years. This isn’t completely the FDA’s fault, because the big pharmaceutical companies aren’t bringing many new drugs forward — their pipelines are empty. Therefore, biotech companies should benefit this year, because they have lots of new products coming along. The FDA will have time to deal with them expeditiously and (one hopes) fairly, and some big pharmas may decide it’s time to make more biotech acquisitions to restock the research cupboard. Which brings us to…

Dendreon (DNDN) took a nice hop when they announced that the FDA would complete their Fast Track review by May 15. We already knew the FDA would do this, on top of letting DNDN file a “rolling” BLA (Biologics Licensing Application) all during 2006. So while no one should have been surprised, the jump in the stock tells me there are plenty of investors ready to jump on a biotech stock that seems to be making progress. The stock should rise towards the $7.50 level between now and May 15 and then roughly double over a few months following FDA approval. Remember that Dendreon could sign a partnership deal at any time if they make it conditional on approval. That would get the stock close to double digits. DNDN remains a Top Buy up to $7 for my $14 target.

Content on Demand

Comcast (CMCSA) will be facing competition earlier from Verizon and other phone companies going into cable TV distribution, as state and Federal governments are making it easier for the phone companies to deploy new services without getting a franchise from local governments. However, it won’t be a problem in 2007, and Comcast is one of the best examples of a content distributor with a huge user base leveraging new technology, both to make its customers happier and to increase its own revenues. Comcast will report earnings on February 1 before the open, and should have decent guidance relative to more cyclical or seasonal product companies. Hold CMCSA for my $62 target.

Telkonet (TKO) barely responded to the news that I covered in last week’s report about them beginning deployment of the Department of Defense Navy and Marine base contract. Christopher’s comment was typical: “I notice today there is a major announcement to deploy BPL in DoN, a $6.9 billion deal. Why did the market totally discount it? In fact, TKO dropped 3 cents on the day.”

The answer is simple: Nobody is looking. Or, to be more accurate, only we are looking. The company only has a $160 million market capitalization and isn’t followed by traditional Wall Street sources. This was a very important step in a life-changing contract for the company. In situations like this, I think getting the stock under $3 is a gift. The next announcement should be the long-delayed investment by a strategic partner, and maybe that will finally get investors’ attention. Buy TKO up to $5 for my $15 target.

New Energy Technology MegaShift

It’s a bit strange to see ice storms in the Midwest, multi-car crashes on icy roads in upstate New York, tens of thousands of people without power for days on end — and oil hitting two-year lows. Natural gas was hit even harder as the futures dropped 6% just yesterday. Oil briefly dropped below $50 a barrel today. After a few moments, it traded back up over $50 mark, but it could take a spike down another three or four dollars on any specific day. Yet, I think we are essentially at the lows, as the hedge funds have bailed out and gone short, while the weather is getting colder and worldwide growth looks like it is continuing. China and India should be snapping up futures contracts at these prices to lock in the oil that they will need as their economies strengthen in the second half of the year. So, I still think this is an excellent time to add to energy positions.

Connacher Oil & Gas (T.CLL) updated their operational activities, which have benefited from favorable weather and good planning. Subscriber Barry and others have asked for an update on the company, and the news is good. The Great Divide oil sands project construction is well underway, and the first five horizontal well pairs are being drilled at Pad 102. After those are completed, 10 more well pairs will be drilled at Pad 101, and by June, production can begin in the neighborhood of 10,000 barrels a day of bitumen. That will be refined at their Great Falls, Montana facility, which is being upgraded with enough storage to run continuously.

Additional core drilling to prove reserves was completed by yearend and will be counted in the next reserves update by their independent consultants, to be released on March 23. Additional drilling will get them to about 70 core holes in the spring. They picked up another 7,360 acres of oil sands rights at the January 10 Crown Sale in Alberta, and now have total oil sands lease holdings of approximately 90,000 acres.

Connacher also owns a 26% interest in Petrolifera Petroleum Limited (PDP on the Toronto Exchange). They invested $2 million, and it is now worth about $120 million, or roughly $1.00 per Connacher share.

The oil sands are profitable at $50 oil, so unless you think oil prices will stay this depressed, you must own Connacher at these levels — especially considering the $1 a share in Petrolifera stock. T.CLL is a Top Buy up to $4.50 for my $7 target this year — and much higher levels later.

Rentech (RTK) named Richard Penning as Executive Vice President of Commercial Affairs. I normally don’t comment much on appointments below the CEO level, but I suspect he will be the next CEO. He has a great background, mostly at UOP, an energy technology division of Honeywell. He’s been there 28 years, most recently as VP and general manager of the Venture & Business Development division.

Like our other recommendations, Rentech can still make money at $50 oil, and they will make a lot of money at $70 oil, which is where we are headed this year. RTK remains a Top Buy up to $5 for my $11 target.

WiMAX MegaShift

Alvarion (ALVR) and a Taiwan company are going to develop mass-market consumer electronics devices based on mobile WiMAX. While this is complimentary to Alvarion’s WiMAX backbone equipment, there’s no way ALVR can enter the consumer market with these products. So, I expect them to license intellectual property and reference designs to others, with Accton Technology, their Taiwanese partner, one of the first to actually produce handsets and other devices.

ALVR said that market research predicts the worldwide WiMAX backbone and customer equipment market will hit $3.7 billion in 2012, up from $490 million last year. Taiwan’s government has an initiative to blanket the island with fixed and mobile WiMAX, which gives Accton an incentive to make the handsets and Alvarion an incentive to find a partner who might facilitate future sales of backbone equipment into that market. 2007 is the real Year of WiMAX, and ALVR remains a Top Buy all the way up to $9 for my $18 target.

Market Outlook

The S&P 500 tried twice to push up to my 1440 ultimate target, but no cigar. I still think that can happen off one strong day of earnings reports that are not accompanied by weak guidance for the March quarter. But time is getting short, and right now, I would say a break below 1428 would be a real warning, and a break below 1414 would signal a meaningful decline to 1320 or so. There have been six 100-point declines in the S&P 500 in the last few years, and each has been followed by a run up to new recovery highs. From 1320, the S&P could make a decent run at all-time highs. Or it might retrace all the way to 1236 before blasting off.

I recently answered a poll for 2007 market and stock forecasts, and I thought you’d like to see my answers:

• High and low for the Dow and S&P 500 in 2007: Dow High 15753, Low 11197; S&P High 1836, Low 1236.
• Year-end close for the Dow and S&P 500 for 2007: Dow 15753 (closes the year on its high); S&P 1836 (closes the year on its high).
• Favorite Stock for 2007 (or top two): Telkonet (TKO) and eResearch (ERES)

I will have a lot more comments next week on two issues: Fed Chairman Bernanke’s warning today that the U.S. faces a possible “fiscal crisis,” and my recent rants on the growth in the money supply. These are related, as the solution to the “fiscal crisis” caused by the budget deficit, the trade deficit, foreign holdings of U.S. debt, the truly disastrous outlook for Social Security and Medicare, and the overleveraged consumer/homeowner is simply to print money. Rampant inflation makes these problems much smaller. The good news is a Social Security retiree will still be able to buy that latte at Starbucks, while the bad news is that it will take their entire $1,100 Social Security check.

Speaking of the money supply, Charles, Ron and many others asked me where I am getting my growth estimates for the money supply, and as it is a complicated answer (the real numbers are somewhat hidden), I will get to that next week, too. I’m planning to do a presentation with charts on this topic at the Orlando Money Show, but of course you will see the info first, here. Right now, I am off to catch the CREE (CREE) conference call in hopes that they can see the LED at the end of the tunnel.

It’s a new year, and, as usual, it is starting with a bang:

1. The JPMorgan Healthcare Conference gives biotech companies a place to shine;
2. The Consumer Electronics Show in Las Vegas unveils the latest and (a) greatest or (b) silliest ideas from inventive tech minds all over the world;
3. And Macworld San Francisco gives Steve Jobs his favorite podium to surprise us about the future of consumer electronics.

In all areas of technology, there is always another new product around the corner, and my job is to find the real life-changing revolutions — the MegaShifts — and get you into the public companies that will be the leaders of their respective MegaShifts and are trading at attractive prices.

Of course, timing is always a balancing act, as these early-stage ideas often involve development-stage companies that are losing money while they build a dominant market position. Although we sometimes get to participate in a MegaShift with larger companies like Toyota (TM), Comcast (CMCSA) or Huaneng Power (HNP), the real multiyear potential often lies with the little guys. I will always tell you what I think the stocks can sell for, but as we all know, a one-year target can turn into a two-year target pretty easily in this arena. The key to banking big long-term profits is patience — don’t be a swing trader or flipper, but try to build a big position with a multiple-buy strategy and hold it as long as the underlying theme is on track, regardless of where the day traders and market makers price a stock in the short term. That’s easier said than done, I know, but in the long run you will make and keep a lot more profits than the momentum guys who are chasing the next Taser.

These thoughts came to mind this week because even though I am still concerned about the broad market, we currently have an opportunity to buy a leader in a new MegaShift that is going to be huge. I have waited literally a year to recommend this stock to you, and once or twice I thought I’d missed it as it took off in a brief flurry. But now it is back selling near its 52-week lows, and on Monday the company made a crucial product introduction at the Consumer Electronics Show. And Wall Street totally misread it. Heck, they moved the stockdown on the day that I think people will look back on as the most crucial news in the company’s history.

R2D2, C3PO, Meet Roomba

During one of Ross Perot’s ill-fated runs for the White House, he did a TV infomercial that included holding up a list of the 10 key technologies required by the modern world. His implication was that the U.S. was sadly behind, but I got the list and discovered that we dominated nine of the 10 technologies. The 10th was robotics, where Japan led and we were #2.

Industrial robotics has long been a tough business in this country. I’ve been following these stocks for over 30 years, and have owned machine vision, assembly and test robot stocks from time to time. With the notable exception of Cleveland-based Morgenthaler Ventures, most of the venture capitalists that waded into this area got their heads handed to them. Like I said before, Japan has established a big lead in this area, and I have little interest in backing a company that has to go up against that sort of commanding lead.

But the revolution in consumer robotics is just getting underway, and that is where our opportunity lies today. Japanese consumer robotics products tend to be things like animatronic dogs that you have to “feed” — I am not making this up. Sony recently, uh, euthanized this product line. But one U.S. company has gone right for a practical application with this technology — iRobot (IRBT), which I mentioned in the March 9, 2006, issue: “I’m working on a new Robots MegaShift, where both iRobot (IRBT) and Intelligent Surgical (ISRG) should give us attractive entry points for another MegaShift that will grow strongly in 2006 even as the rest of the economy slows.”

Since then, Intelligent Surgical stock ran up and then fell back down to last March’s levels, and due to the number of momentum players in the stock, I think that it would probably be hit pretty hard in a market decline. But IRBT did little but decline through August, rally a bit, and then resume its decline.

In the December 7, 2006, issue, I mentioned iRobot’s products as great holiday tech gifts: “If you know someone who loves to vacuum, do not give them a Roomba or a Scooba. The Roomba vacuums floors and rugs, and takes itself back to the recharging station when necessary.

“Models range from $150 to $350, depending on features, but I personally want two: The $300 Roomba Discovery for Pets to follow my Great Pyrenees around all day, and the $130 Dirt Dog Workshop Robot that will pick up nuts, bolts, nails, wood shavings and various other junk from my shop/garage floor.

“The Scooba 5800 is a bagless floor washing robot for hard-surface floors. It runs around the room sweeping up dirt, washing, scrubbing and drying in one pass.

“It cleans 250 square feet on a single tank while the human is doing something more interesting. It costs $300, and the bigger 5900 model that cleans 500 square feet costs $400.”

I also noted that while I was following iRobot last year, the stock was almost cut in half. But it was still selling for 65X 2007 earnings, and based on that, I said that I would like to see it trading around $15 to start building a position.

Although I’d still rather be recommending the stock at $15 (IRBT closed today at $18.09), at the Consumer Electronics Show this week iRobot made an amazing announcement: “iRobot will take advantage of the robot hobbyist craze by extending its line of popular Roomba vacuum-cleaning robots. The new model, iRobot Create, uses the Roomba’s base sensors and motor but is completely user-programmable. The $129 model, available now, is a platform for hobbyists to create anything from a hamster transporter to a servant that will fetch a drink for you.”

Why Is This So Important?

I was in Silicon Valley at the beginning of the personal computer revolution, and my subscribers made a tremendous amount of money in PC, peripheral and software stocks. That industry developed out of hobbyists taking the early Intel microprocessors and a soldering gun, and making all kinds of fascinating and weird products. It was a time of tremendous ferment. You may not remember Corona Data Systems, Vector Graphic, Tandon or Domain Technologies, but these were headline-making companies for a while.

Software companies often try to recapture that exciting process today, by publishing Application Programming Interfaces that let other companies develop products to piggyback on the core product. AutoDesk is a past master of this, with something like 3,000 companies leveraging the AutoCad software with add-ons, graphics libraries, training and so on. When a company can develop that kind of ecosystem, the total effort becomes a massive barrier to entry to new competition.

iRobot is going to do the very same thing in consumer robotics. At $129 for the iRobot Create, we’ll probably see eighth-grade science projects based on it. Thousands — and maybe tens of thousands — of hobbyists and engineers are going to pounce on this to make thousands of products. Most of them will be failures, silly, or of little interest to others. But a few will be, as Steve Jobs says, “insanely great.” I’ll bet iRobot gets the first shot at marketing them. What IRBT has done will dramatically expand their R&D process by harnessing the efforts of thousands of creative individuals that they don’t have to pay — in fact, IRBT gets paid!

Fundamentals and Valuation

iRobot Create is a great idea, but whether this is a good entry point for the stock in the short term depends on the current business, fundamentals and valuation. iRobot began with robots for government security, law enforcement and the military, and they still operate in those markets. These robots mostly are meant for bomb disposal and reconnaissance. Their PackBot Scout is a mobile robot for military use in urban areas, while their PackBot Explorer does battle damage assessment and real-time targeting in inaccessible areas. The PackBot EOD is the ruggedized bomb disposal robot than can also handle hazardous materials or search-and-surveillance. iRobot sells the PackBot EOD to SWAT teams, bomb disposal units and other law enforcement and military customers, and there are over 500 units on duty in Iraq and Afghanistan. iRobot also makes an unmanned vehicle, the R-Gator, which can scout, guard or carry packs, supplies and ammunition on the battlefield. This Industrial and Government segment of the company is quite profitable and throws off quite a bit of cash. This segment of iRobot’s business adds a reliable revenue stream that offers some stability to the stock.

The Home Robots segment, which I am most interested in, sells consumer robots and offers faster growth with much bigger potential markets. Thanks to the company’s expansion into this market, it has been growing rapidly, from sales of $54 million in 2003 to $95 million in 2004 and $142 million in 2005. They should report about $190 million for 2006, up almost 34%, and then hit $250 million this year, up another 32%. Growth will continue at 25% to 30% for a few years.

iRobot will report about 12 cents a share for 2006, including an expected eight-cent loss in the December quarter. That is up just a bit from 11 cents in 2005, but I’m looking for 30 cents this year (even after a 16-cent per share loss in the March quarter). At today’s closing price of $18.09, the stock is selling for 54X this year’s estimate. That’s not cheap, but the total market capitalization is only $425 million, less than two times my 2007 sales estimate. That is cheap. Clearly, the company needs to get their profitability up, but like many leaders in new areas, they also need to spend enough money on marketing and R&D to build a big moat around their business. That’s where they are right now, and I don’t mind the depressed profitability for a while as long as sales keep growing rapidly.

The Consumer Electronics Show also gave me a peek into their competition. Microrobot is a South Korean company with the Ubot, which is already on the market in South Korea. It sweeps, vacuums and mops, but only does hardwood floors that have been imprinted with a special ultraviolet ink. Condo developers in South Korea install these floors and then throw in a Ubot to sell the condo. The Ubot is about twice as tall as the Roomba, so there are fewer places it can go. And it sells for $1,000, because it has navigation memory instead of the random pattern Roomba uses. Microrobot is promising a Roomba-size robot at a Roomba price that can do carpets, targeting an October introduction. We shall see how they do, if they ever get to market, but Microrobot is no threat to iRobot at this time.

The other competitor is privately-held Floorbotics, which is planning to introduce a Roomba competitor sometime this year. Their Cleanmate and Infinuvo models also will navigate, with a built-in floor mapping system, and should be able to finish a job faster than Roomba. Of course, iRobot undoubtedly is working on a navigation add-on, not to mention a couple of hundred Create programmer hobbyists.

iRobot is a clear leader in the Robotics MegaShift, and their emphasis on consumer robotics gives them the opportunity to become not only a very big company but a revolutionary one. Buy IRBT under $19 for a $38 target.

Avian Flu MegaShift

Concerns about H5N1 picked up this week as a 14-year-old boy died in Indonesia on Wednesday. Vietnam said that the flu is back after a year-long break, and China said that a farmer survived the virus and was released from the hospital. The flu season is just getting underway, and we can expect accelerating reports for the next few months.

BioCryst (BCRX) named a new CEO, as planned. He is Jon P. Stonehouse, the former senior vice president of corporate development at “German” Merck KGaA, where he managed global licensing and business development, corporate mergers and acquisitions, corporate strategic planning and alliance management. He had previously worked at “American” Merck and AstraZeneca and has both product development and marketing/sales experience. It looks like a very good choice and is effective immediately. BCRX is a Top Buy up to $19 for my $30 target.

Biotech MegaShift

Biogen-Idec (BIIB) has been stuck around $50 for a month. I still think the safest thing to do with the LEAPs is to sell the January 2007 $45 LEAP call (IDKAI) and roll the money into the January 2008 $45 contract (YZUAI) under $12 for my $23 target, or higher. However, I know that some of the ’07 contract holders want to gut this one out. The options expire a week from tomorrow, and I think the odds are that they will be slightly higher this time next week, so if you are not planning to roll them, the second best alternative is to hold them and sell them next week. A quick market break could steal all the value from these, which is why rolling them into the January ’08 contract, is the better alternative.

Content on Demand MegaShift

Silicon Image (SIMG) was the unseen hero of the Consumer Electronics Show (CES) and Macworld, as the HDMI interface was everywhere at CES and also inside the new Apple TV media center box. One of the stars of CES was a 108″ LCD TV from Sharp — with HDMI, of course. Global demand for LCD televisions will rise from 42 million units in 2006 to 69.7 million this year, according to market researchers DisplaySearch. By 2010, LCD television shipments are expected to rise to 128 million units — every single one with HDMI on board. Silicon Image won’t make every one of those chips, and may not even get royalties on every one, but will still be the dominant supplier of HDMI solutions.

The stock has settled around $13 and should start moving up as orders start picking up with demand. I am moving it from a hold to a buy under $13, and increasing the target price $2 to $20.

Telkonet (TKO) got a $200,000 consulting contract with the Patent Office to advise them on implementing the transition to Internet Protocol version 6 (Ipv6) and network security. What does this have to do with Broadband over Power lines? Telkonet’s Government Systems Group is going to be a main channel for BPL sales, and they bid on these kinds of contracts to develop customer relationships, understand leading edge technologies, and look for places to recommend BPL.

The company also announced that it will begin deploying BPL systems to Navy and Marine Corps locations before the end of January, under the big EDS contract approved last year. This is going to be a major thrust for the company in 2007, and I am expecting lots of positive press as these are ordered and go into service. TKO remains a Top Buy up to $5 for my $15 target.

New Energy Technology MegaShift

Oil prices are plunging, cleaning out all the bulls in a typical market move that happens before major reversals. Crude oil prices dropped 8% in the first week of trading in the New Year, and are back to the levels of June 2005. Yes, the temperature is abnormally warm from Boston to Washington and, for that matter, in California. This was also the warmest December in New York’s history. Global warming or not, that won’t last. Yes, Iran has brazenly defied the U.N. and the U.S. with little repercussions so far. That won’t last either. Most important, the dollar has been strengthening for a few weeks, which cuts the legs out from under all commodity prices. Unfortunately for our country, that won’t last either.

The mad dash to get out of oil at lower prices is the mirror image of the mad dash to get in when prices were north of $70. The real fundamentals of more oil demand from China and India, declining production from older oil fields, mediocre results from newly drilled fields and the Fed’s assault on the dollar are bound to take oil much higher, probably soon. Royal Dutch Shell (RDS.A) and Holly Corp. (HOC) are back around their buy limits, although probably not for long. Gasco Energy (GSX) has been especially hard-hit, as the moves in natural gas prices are a magnified version of what’s happening in crude oil. As we have seen repeatedly, the snap back in gas prices can be just as extreme as the current decline.

Demand for oil and gas has been weaker primarily due to the strange weather, and supply has been excessive because Nigeria and Iran are still pumping, while Saudi Arabia and the rest of OPEC are not really following through on their tough cutback talk. But I suspect $55 oil will get their attention, and they really will cut now — perhaps just as Nigeria and/or Iran flare up again, or the Alaskan air moves in.

Video iPod MegaShift

Unless you’ve been under a rock for the last two days, you know that Macworld introduced us to the Apple iPhone, which is either a phone that plays your music and takes pictures, or a widescreen iPod that lets you make phone calls. Either way, it’s a neat product, with two legal problems. First, Cisco Systems owns the trademark “iPhone” and ships iPhone products from its Linksys division. They’ve been in negotiations with Apple, and their latest offer the day before the announcement was never replied to by Apple, so yesterday Cisco sued. Second, Burst.com (BRST) owns the technology to deliver video to the iPhone, and Apple hasn’t settled that lawsuit, either. Maybe Steve Jobs thinks he’s operating on a reality plane above the law — d’ya think? — but these are two real suits that can lead to injunctions.

Regarding Burst, Gerry sent an email: “A while back you sent me a promotional email recommending BRST, indicating that this tip would be profitable, thus obtaining a new subscriber for life. I bought at $1.70 and it is now $1.15. Is this still a hold?”

Gerry, I originally recommended BRST with a $1.10 buy limit and later bumped it to $1.15. The stock closed at $1.35 today, so I assumed all subscribers held it at a profit — with more to come. The direct answer to your question is that BRST is still a buy on dips under $1.15, a hold at current levels, and my target is still $2 after Apple settles the lawsuit or buys the company. If I was a top executive at AAPL and the stock was near $100 a share, I’d sure use one or two million shares to buy out BRST, especially if there was a real chance that the CEO might be resigning soon to fight his backdating battles.

WiMAX MegaShift

Sprint announced that their first WiMAX deployments will be in Chicago and Washington, D.C. Motorola will provide the equipment for Chicago, as expected, but in a bit of a surprise, Samsung will do Washington. Motorola said that they are planning for 1,000 access sites around greater Chicago. Samsung will announce their details later, and this week Nokia also said that they will be part of Sprint’s deployment.

Subscriber Gary pointed out that: “Nick Tredennick of the Gilder Technology Report believes WiMAX will have an uphill battle achieving affordability before being overwhelmed by WiFi deployments. He writes that ‘WiFi builds for volume and WiMAX builds for performance…..Volume wins.’ This seems a little nearsighted to me since I believe there is plenty of room for both 802 standards. WiMAX appears to be the clear winner for backhaul, stationary point to point, and possibly rural mobile. Any comments?”

I like Nick. If you sign your name and then hold it up to a mirror, it will appear backwards. If you then spend many hours copying and practicing what you see, you will be able to quickly and accurately sign your name backwards. You gotta love anyone geeky enough to spend hours learning to do that, as Nick did.

Nick and George Gilder are religious about Qualcomm’s CDMA standard for 3G, or third generation, cellular networks, so when Sprint Nextel started referring to their WiMAX network as 4G, it was bound to arouse their ire. Especially since Sprint will complete its nationwide rollout of its 3G CDMA 2000 EV-DO network this year. EV-DO is a relatively slow and expensive way to access the Internet — interestingly, it is the communications standard build in to the new Apple iPhone. Sprint is moving fast to completely replace it with the WiMAX network, which is scheduled to be nationwide by the end of 2008.

Essentially, for the last three years Nick and George have taken any opportunity to bash WiMAX. But it is clear that Wi-Fi will never be useful for the three applications you mentioned: backhaul, stationary point-to-point (over 100 yards) or rural mobile access. It is also unlikely to be useful for urban mobile access, especially in a car, or rural fixed access, due to the cost of installing so many repeaters. Wi-Fi as a fixed point urban or suburban feeder technology to a WiMAX network makes sense. One of the big reasons why I like MobilePro (MOBL) so much is that all those Wi-Fi municipalities can easily be fed into a WiMAX backbone instead of a fiber cable, and the WiMAX backbone can easily pick up all the outlying areas and eventually capture mobile traffic. Think of a future iPhone that has Wi-Fi and mobile WiMAX capability, making VoIP (Voice over Internet Protocol) calls, downloading iTunes and iVideo segments, and communicating wirelessly with your desktop and laptop PC. That’s where all this is going.

Another subscriber, Frank, asked for advice on MOBL, in light of the stock price decline. This week, the company’s CloseCall America subsidiary acquired wireless contracts covering 7,000 customers from Telecommunications Systems, including the right to offer BlackBerry products nationwide. They paid nine million shares plus a cash earnout based on revenue over the next three years. The transaction is immediately accretive to earnings per share, so even though I don’t like to see an additional nine million shares used at these low levels, the operation must be pretty profitable to be non-dilutive from Day #1.

I think MOBL could be building up CloseCall America for a sale, with the idea of focusing entirely on municipal Wi-Fi networks, as the stock would be worth more as a pure play. We will see what they do. At current levels, the whole company is valued at less than $40 million, which seems dirt cheap for the market leader in municipal Wi-Fi systems. MOBL remains a Top Buy up to 25 cents for my 60-cent target.

Market Outlook

There’s certainly a lot to talk about this week when it comes to our MegaShifts, but on the eve of earnings season, the market continues to be tightly range-bound. The bulls couldn’t get the S&P 500 to stay over 1415 until today, and the bears couldn’t break it under 1405. Although the S&P has been exploring lower and lower downside limits, from 1410 down to 1405, I still think the next move is a break up to 1440. I am hoping it started today. But the most likely path after that is a substantial decline that will be made worse by the recent churning. As I said last November, a quick run up to 1440 and collapse back to the 1300 area would have been the best possible platform for a big bull move in 2007 and 2008. But the longer the market keeps noodling around, the more likely it is that there will have to be a decline that could last for the whole first half of 2007 before the big bull market can get started.

There is a chance the S&P could break through 1440 on this move and just keep going up to new all-time highs, if the Fed keeps pumping out lots of excess liquidity. Since the holiday season, they seem to have slowed their pace of printing money, and the dollar has rallied. That, in turn, has pressured commodity prices and stocks. If we see the dollar resume its fall just as the Fed money printing picks up, it becomes very possible that the market will just inflate up. In that event, I think the stocks we own, especially in the New Energy Technology MegaShift, would do really well.

But that’s getting way ahead of ourselves, as we have to navigate through the next three weeks of earnings reports. I will be sending Flash Alerts as necessary, if any of the results cause my advice to change.

As you know, I’ve been very cautious about the beginning of 2007 for several months. There are powerful deflationary forces loose in the world. Housing prices are falling. Outsourcing, an undervalued Chinese yuan and the Internet are bringing down the prices of finished goods. High gasoline prices hurt consumer spending last summer, and geopolitical instability means those prices could return anytime. High levels of consumer debt could lead to spending cutbacks. Retiring baby boomers are about to claim Social Security benefits when there is no money in the Trust Fund, so either Federal taxes are going to have to be raised (deflationary) or Federal spending has to be slashed (deflationary).

These are powerful forces that could create potholes in the market’s path early in 2007. And the one area that will be most obvious to investors is the housing market. Hardly a day has gone by that we haven’t heard about the housing market for the last year, or more. Real estate has become a benchmark for investors to measure the economy’s strength. And when the news is bad, they start getting antsy.

The evidence is clear to me that the housing sector has a long way to fall through 2007. Yesterday, the minutes from the Fed’s December 12 meeting were released, revealing a very bleak assessment of housing. And, if that’s not enough to confirm my outlook on the housing market, at the same time, Lennar Corp, the biggest U.S. homebuilder, said it experienced a loss in the fourth quarter and they “see no signs of a recovery in the housing market.”

This sector also accounted for a large share of the growth in GDP and employment over the last four years, so a long decline in activity will have a very noticeable effect on the economy. In addition, if housing prices also fall with activity, as I expect, there will be an extraordinary broad impact on consumers because this is a highly leveraged sector — lots of debt relative to equity for most everyone who bought homes in the last five years.

Yet the Fed says that while inflation is moderate, they are worried about it taking off again. Given that they are growing the money supply at 24% a year while real GDP is growing 2.4%, they should be worried. They are building in 20% per year inflation.

The question I have been asking myself is: Why are they doing that? What do they see that would cause such a radical policy? We know that Ben Bernanke fears a deflationary spiral more than anything, if only from his famous statement that the government could always stop a deflation by dropping money from helicopters. After reading the Fed minutes, I think I know what is going on:

The Helicopters Are Already In The Air!

In an economic sense, if 24% growth in the money supply only buys 2.4% growth in real GDP, the deflationary forces must be very strong. But asset deflation in a debt-heavy economy is a prescription for a disaster much larger than the 1929 Crash. So Bernanke has decided to inflate our way out of the problem, which means:

• Debt holders wind up with paper worth much less than they expected;
• The huge foreign holdings of U.S. government debt lose most of their value and can be paid back with cheap dollars;
• The Social Security burden is greatly diminished, as all those folks living on their $1200-a-month Social Security check find out that it barely covers their weekly food bill (Cost of living adjustments (COLA) provide some relief, but constant jiggering with the Consumer Price Index keeps the COLA far behind reality — as it is today);
• The U.S. dollar loses most of the rest of its value;
• Assets valued in dollars soar in price:
• Real estate, perhaps after a period of high foreclosures clears out the weak hands;
• Oil, gold, silver, forests, agricultural land, industrial metals;
• Stocks of businesses that can stay profitable in this environment, or own valuable assets offset by fixed-rate debt.

What does this mean for us, or more importantly, how will our technology investments be affected if the Fed continues to print money at a 24% annual rate? Technology has always been deflationary, thanks to Moore’s Law. The prices of computing power, communications bandwidth, consumer electronics and everything else associated with electronics fall sharply every year. Technology company managers have been prospering in a deflationary environment for 35 years or more. Many of these companies provide crucial pieces of the computing and communications environment that the world needs to buy through thick and thin. They also sell 40% to 80% of their products overseas, and can take advantage of a weak dollar to be aggressive on prices and take market share.

On the other hand — isn’t there always an “other hand”? — tech companies usually don’t have much debt, so other stocks may look attractive to investors in the hyperinflation scenario. They also don’t own minerals in the ground or real estate, which may make other investment opportunities relatively more attractive.

But I keep coming back to the idea that in either a deflation or a runaway inflation, people need to work as effectively as possible and companies need to compete globally using the Internet-based model of product development and production, with customer service-based selling. When the avian flu breaks out, it won’t matter much to Gilead if we are in an inflation or deflation. The terminal prostate cancer patient will still get Dendreon’s Provenge, whatever the value of the dollar. People won’t give up their cable TV until after they’ve given up their Starbucks latte — and you know that isn’t going to happen.

What all this means for the stock market in the long term is that it will go much, much higher to reflect the falling value of the dollar. But the short term is still an unknown. The S&P 500 came back from its four-day holiday, the longest close since 9/11, with a dipsy-doodle yesterday that ultimately, yet again, rejected the idea of going much under 1414. That means a possible high of 1440 is still in the cards, and makes it even more likely that we will see a sharp, possibly deep drop from that level over the next few weeks.

However, and this is a big one, if the S&P can crack through 1440 to the upside, I believe that we will be headed for all-time highs over the next couple of years. The 1440 level is that important. Breaking it might mean the big money has caught on to Bernanke’s game and wants out of cash that is declining in value and into assets. If we see the prices of oil, gold and stocks all going up together, we will have very clear evidence that a big move is underway. The most amazing thing about these terminal moves — and I am not using the word “terminal” lightly, as this would be the end game of a 10-year cycle — is how far they can extend. We saw it in 1997 to1999 in dotcom stocks. We may see it in 2007 to 2009 in virtually all stocks.

Between the New Year’s holiday and the day of mourning for President Ford, there hasn’t been a lot of news on most of our MegaShifts, but I have some updates and analysis on recent events with some of our stocks.

Avian Flu MegaShift

Neville emailed: “This time last year, there was extensive media coverage in Europe reporting the inexorable advance of the avian flu H5N1 virus. First in the Caucasus, then in the Baltic and Black Sea, in Eastern Europe, in Western Europe, in Scotland and ultimately in Ireland. Countless WHO and public health officials and various ‘experts’ all had their moments of media attention, accompanied by scenes of people in white protective clothing picking up dead swans. This year, nothing! Was this H5N1 frenzy inspired by the bio-pharma industry to extract major government research support and expenditure to stockpile their products?”

Shhhh — it worked! Seriously, although we own the stocks for that very reason, I do not think H5N1 is some sort of scam. Right now, migratory birds are wherever it is warm — Africa, Mexico, and the like. Most of those areas have very poor monitoring programs for bird flu. The birds are mixing, sharing water and nesting grounds, and passing H5N1 around. The inexorable advance you refer to will come in the spring, as the birds start migrating north through Europe and the U.S. to their summer quarters in Canada, Scandinavia and northern Russia. That’s when the news flow will pick up. Warmer weather should also bring a lot more bird flu cases in Indonesia, China and the rest of Asia, which is the most likely area for the virus to mutate into a human-to-human airborne form.

Biotech MegaShift

Metabolic Pharmaceuticals (MBLPF) announced that they completed their OPTIONS Phase IIb trial for obesity/weight loss on December 18, with results expected in March. They said that the number of completing subjects comfortably exceeded the statistical design goal, with 407 people completing the 32-week protocol in one of the four arms of the trial. The last trial, when they missed their primary endpoint because they met only the 90% confidence level instead of the required 95%, had only about 35 people completing each arm. The more people, the more likely they will hit the 95% level. Recall that in the first trial, they hit one of the secondary endpoints at the 99% confidence level, even with fewer total subjects.

The primary endpoint is weight loss over 12 weeks, with a secondary endpoint of weight loss over 24 weeks. The previous study showed the drug was very safe and easily tolerated, with an average weight loss of 4.4 pounds in 12 weeks.

The company has spent $31.5 million to $35.5 million on this drug so far, and the Phase III trials will have to involve several thousand subjects in the U.S. and Europe, as well as Australia, and cost north of $80 million. Metabolic expects to begin a Phase III study in late 2007 or, more likely, 2008, and I think that they will do that with a partner, unless their stock skyrockets after the March clinical trial results announcement and they sell more shares.

This drug is also useful for osteoporosis, so Metabolic could license the weight loss indication and continue work on their own on osteoporosis. Their second drug for pain also looks good. They now have an oral version of that drug, with obvious advantages over the injectable version.

MBLPF is a good buy either in the U.S. up to 56 cents or in Australia, up to 75 Australian cents, looking for a $4 stock over the next few years.

Content on Demand MegaShift

Michael wrote: “I am intrigued by PRAM. Does Samsung have a patent on this process?”

Yes, they do. I was hoping to recommend Samsung when they listed on the New York Stock Exchange, but it appears that they have decided not to list due to Sarbanes-Oxley. PRAM is the real deal and should replace flash memory over the next five years. Toshiba, SanDisk and Micron will be the biggest losers.

Telkonet (TKO) drew emails from Grady and Edwin. Grady asked: “What is going on with TKO? Has it been delisted? When I did a search for the company on the Internet, I came across a Lemon Stock website that had very negative things to say about the company and its approach to business.” Edwin added: “The website Yahoo Finance’s page for TKO shows $5.2 million cash on hand. Do you think the company is going bankrupt within six months at their current burn rate?”

I’m not sure what caused Grady to think that Telkonet has been delisted, as the symbol TKO brings up the stock price immediately. The stock jumped 30% intraday on December 26 as four million shares traded, after they announced that the Transportation Security Administration (TSA) and the Army completed their evaluation of the iWire Broadband over Power lines system. iWire was approved for deployment, beginning with four airports starting this month.

Clearly, this evaluation has been going on for some time and is probably part of an Electronic Data Systems (EDS) contract with the TSA. It’s a big win for TKO, and there will be many more like it coming.

The company also announced that it has installed iWire systems at substations owned by four major utilities. These systems are used to monitor the performance of the substations, delivering the data over the electric line. That lets the utility manage the substation remotely and centrally, allowing them to balance the grid and be aware of any problems immediately.

Each substation uses about $5,000 of TKO equipment, and there are 70,000 substations in North America alone — a $350 million opportunity that is TKO’s for the taking. Currently, Telkonet is in negotiations with 10 more utilities. Market researchers Newton-Evans think that total global spending on substation automation and integration programs is in the $550 million to $600 million range, with an overall potential market size of $40 billion.

Telkonet Energy Systems has been able to close deals and install equipment very quickly, and this could turn into the biggest part of the company in the near term. The company is about to announce a big deal with a distribution partner that specializes in selling to utilities. This whole business is a bluebird for us, as the stock is worth my $15 target based on their other businesses.

So, I’m not sure what Lemon Stock doesn’t like — Telkonet’s technology lead or patent portfolio? Long list of showplace installations? Exclusive contract with EDS to wire Army and Marine bases all over the world? Opportunity to grab a $350 million market in substation monitoring? Because that sounds like a winner to me.

As for TKO going bankrupt in six months: Out of the question. They would simply raise more money, like the $9 million that they raised in the September quarter. I am still expecting a large investment from a strategic investor above the current price of the stock, but even a couple of more of these big positive announcements should get the stock up to the point where they can just raise a little money at a time, as needed. TKO is a Top Buy up to $5.

New Energy Technology MegaShift

Infinity Energy Resources (IFNY) is progressing on the path I described to a much better valuation. They sold their two oilfield service companies to a private buyer in mid-December for $52 million, used the proceeds to pay off the $50 million in convertible senior debt that has been overhanging the stock with constant stock sales and signed a terms sheet with an unnamed leading energy bank for a $20 million revolving line of credit. On the conference call, management said that this deal should get rid of the immediate pressure on the stock, as soon as the former debt-holders have sold the remaining shares that they hold, and will let Infinity resume its drilling programs in Texas and Colorado. Also, now that the company is a pure exploration and production operation, their investment banker will start circulating a booklet to sell assets or the whole company. IFNY has already had expressions of interest from other companies and private equity firms. I am hopeful that they stay independent, but extract a lot of value for shareholders from the huge 1.4 million acre oil lease concessions they won off Nicaragua.

Gary and others wrote: “The stock response to the sale was small, but wasn’t this supposed to be a large catalyst to a big stock price jump?”

Yes, and I still think it will be. The transaction took place at a slow time of the year, and IFNY probably saw some tax loss selling in the final week of the year, especially when volume picked up on the last day. The drop in oil prices this week kept the pressure on in the short-term, but this transaction is excellent news for us, with management executing exactly on the plan they laid out to get the stock up.

As I said above, I think the recent “weakness” in oil prices is a short-term thing, and longer-term you must own real assets as long as the Bernanke Fed is bent on driving the dollar down. With the old senior notes paid off, IFNY is in better fundamental shape than ever, yet the stock is near its lows. IFNY is a Top Buy all the way up to $5, and I still think my $9 target is just the beginning of the wealth to come.

Google Short

If the S&P 500 breaks up through 1440, we are not going to short Google (GOOG) any time soon. But if it breaks below 1410, I think the handwriting will be on the wall. The most bullish analyst on Google is at Piper Jaffray. In early 2006 he raised his 12-month target price to $600, and the stock never came anywhere near that. In fact, it went into an immediate swoon from $475 to $330.

This week, he raised his 12-month target price to $630, or 35X his earnings estimate for 2007. But if the stock market starts to signal an economic slowdown, advertising spending will be at risk, and ad spending is about 120% of Google’s earnings (almost everything else loses money). To the extent his $630 target can prop the stock up for a while, we will benefit from a better short entry point. Stay tuned.