Greetings from San Francisco! The San Francisco Money Show kicked off today, and the weather wasn’t the only thing that was a bit hazy as the crowd was also mirroring the confusion of the markets. Tuesday’s 30-point drop in the S&P 500 went right through the last breakout point at 1534, and then stopped at the major breakout point at 1510. Today’s additional plunge broke the 1495 support level and closed below it, bringing the big breakout level at 1440 in sight. There was a short-term trading buy signal about an hour before the close, and if the S&P 500 can hold above 1475 tomorrow, there will be another hourly buy signal that could start the process of recovery. But remember that the S&P needs to use this build up of negative sentiment to climb quickly over those same breakout points — 1495, 1510 and 1534 — if there really is going to be a move to new highs.

People are worried that the sub-prime mortgage problems will make lenders back away from risky lending, such as debt for highly leveraged buyouts. Many remember the United Airlines buyout deal in 1989, where the debt financing fell through and marked the top of that buyout-driven bull market.

I know this is scary stuff, but let’s look at what is really going on. First, the Dow Jones Industrial Average’s big drops Tuesday and today are similar to the 242.67-point tumble on March 13, and that was also due to concerns that the sub-prime woes could infect the broader lending industry.

But here’s the difference between these plunges: On March 13, the Dow ended at 12,075.96. So measuring from that low to today’s low, we are now 1,397 points higher on the same news causing two daily drops of the same magnitude. If you let these big drops panic you out of stocks, it can be very painful to buy back in. Why? Because the market is going to consolidate these losses and then continue its trek higher. Remember the really big 416-point drop on February 27? The Dow closed then at 12,216.24 — 1,257 points lower than today’s close.

In a bull market, which you can see we are in just by glancing at the weekly charts, the purpose of these drops is to stoke up bearish sentiment to provide the fuel for the next big jump up — in this case, to get decisively through the old high at 1552. Even though today’s drop was part of a hard test down through major breakout points at 1534, 1510 and 1495, and it could get as low as 1440 in the next couple of days, I still think the old highs are the next target. If that is right, there is now enough bearish sentiment stored up to “go parabolic” and blast right through 1605 and then 1710, towards 1800.

What would change my mind? A decisive break of 1440 would mean the big bull move that started in mid-2002 is in jeopardy. Anything less is probably just consolidation, stretching the rubber band for the next run higher. But as always, we will let the market tell us what to do. It is a strange year, with the possibility of the year’s top coming as early as August in a parabolic move up, or as late as December if the market has to do some more work in the mid-1400s before gathering enough strength for the next big rally. I’ll be keeping a close eye on all this market movement over the next few weeks and months, and I’ll always keep you up to date on any action you should take regarding your holdings.

You should also note that we’re in heart of earnings season, and big disappointments always have the potential to knock the market down. The earnings news has been mixed, so far, with a disappointment from Texas Instruments bearing much of the blame for the Tuesday sell off, and then stellar news from Amazon helping the market rally Wednesday. Overall, the quarter is coming in somewhat above expectations, with guidance about equal to expectations — which means companies are lowballing again. As money comes out of financials, it is going into tech. The Bottom Line: We are on track for a stronger second half of the year, especially in technology.

A number of our companies reported earnings this week, so let’s take a look at how they fared.

Biotech MegaShift

Affymetrix (AFFX) reported June-quarter results after the close last night, hitting $88.3 million in revenues and five cents per share. That beat Wall Street’s outlook for $86.2 million and two cents. The company raised its guidance for 2007 revenues to between $365 million and $385 million — the midpoint of $375 million is well above the current consensus for $368.1 million. Affymetrix also expects gross margins to hit 60% for the year. The stock was up 48 cents yesterday before the announcement, and up over $1 today in response to the good news.

Their new SNP Array 5.0 chip containing 920,000 single nucleotide polymorphisms (SNPs) — the tiny variations of DNA that make us each different, even though we share the same human genome — is shipping in full volume. Competitor Illumina just caught up with AFFX at the end of June, starting to ship their new Human1M DNA Analysis BeadChips. But Illumina has yet to settle the lawsuit with AFFX, and I am expecting about a 15% royalty payment to fatten Affymetrix’ coffers and future earnings reports. So between the two, I still want you to buy AFFX while it is under $27 for my $40 target.

Amgen (AMGN) reported after the close today, just a few minutes ago. They did $3.73 billion in sales and $1.12 a share, above Wall Street’s expectations for $3.68 billion and $1.06. I’ll be hopping on the conference call shortly. Of course, the main issues overhanging the stock are Medicare reimbursement and any possible further FDA action against Epogen and Aranesp, but I don’t expect them to be able to say much about either of those yet.

In the Sicko department, on July 2 Blue Shield of California changed its reimbursement policy for Aranesp and Epogen from coverage for patients with hemoglobin levels of 11 grams per deciliter (gm/dl) of blood or less, down to 9 gm/dl or less. (Patients with heart conditions would be covered at 10 gm/dl or less.) Essentially, they tried to get doctors to wait to give the medication until an anemic cancer patient’s hemoglobin level fell to levels closer to the cutoff for needing a blood transfusion. Doctors protested loudly, and yesterday Blue Shield reversed part of the policy by raising the level to 10 gm/dl for everybody. Blue Shield has three million members in California, and I expect doctors to continue to prescribe Aranesp and Epogen as needed. These two drugs were the top selling biotech drugs in 2006, with sales of $7.2 billion, and Johnson & Johnson’s Procrit (Epogen by another name) was fifth with $2.9 billion in sales. This is all about money, not good medicine.

I’ll get a Flash Alert out to you if there is any news from the conference call, but if you don’t hear from me you can assume that the AMGN January 2009 $70 LEAP call (VAMAN) remains a buy up to $12.50 for my $25 target price when AMGN stock hits $95, on or before the LEAPs expire in January 2009.

Biogen Idec (BIIB) also reported excellent June-quarter results, with all eyes on Tysabri sales. The company said that sales of Tysabri, a drug to treat multiple sclerosis, accelerated to $72 million, of which their share was $48 million. That helped push overall revenues up 17% to $773 million, well ahead of the Street consensus for $760 million. Biogen’s revenues from Rituxan for non-Hodgkin’s lymphoma, which they co-promote with Genentech, grew 12% to $231 million. Avonex, their original multiple sclerosis drug, was up 8% to $462 million. Pro forma earnings hit 70 cents per share, up from 57 cents last year and also well ahead of expectations for 63 cents.

On top of that, Biogen guided higher for 2007, in part due to the impact of their recent $3 billion Dutch auction buyback of 16% of their shares. They raised revenue guidance from “mid-teens” to a range of 16% to 18%, and raised earnings guidance to $2.60 to $2.70 per share, up from prior guidance of $2.50 to $2.65.

Management cautioned that they are “not out of the woods yet” on the Tysabri re-launch, but I think that they are being awfully conservative. As of mid-July, 14,000 patients were taking Tysabri, up from 12,500 at the end of March. About 1,000 of those are in clinical trials, but most are paying $28,000 a year for the therapy. (The price is about the same in Europe, thanks to the weak dollar, and it was just approved for reimbursement in Britain.) The company says that four out of five Tysabri users either had never taken a multiple sclerosis medication before or had taken a drug made by one of Biogen’s competitors. In other words, Tysabri is not cannibalizing Avonex.

Biogen also said that the marketing and administrative costs of re-launching Tysabri would level off for the rest of the year, so we should see accelerating patient growth and an ever faster growth in earnings contribution from the product.

As a result, in Tuesday’s market bloodbath, BIIB went up $1.49 and the value of our January 2008 $45 calls went up about 15%. I know it has been tough to see the option expiration approaching, only six months away, and you may wonder how BIIB stock can make it to $68 in time to validate my $23 target for the calls. The answer is: Results like this. In a better market and with good September results coming in October, I still think we’ll get there. The stock added another $2.77 yesterday before giving back 82 cents today, and rumors of a Pfizer buyout began circulating. Pfizer sold its consumer business to Johnson & Johnson for $16 billion, and it could easily pay $70 a share for BIIB. That would get us to our target in no time! Buy the BIIB January 2008 $45 calls (IDKAI) only on dips under $12 for my $23 target.

Millennium Pharmaceuticals (MLNM) reported in-line second-quarter earnings this morning and raised their guidance for the year. Sales of $113.3 million and pro forma earnings of a penny a share were right on the button. Velcade sales hit $62.6 million, up 7% from the March quarter, and we are on the verge of some good clinical news. A scientific presentation during the quarter, regarding a long-term follow-up of a Phase II trial in previously untreated (first-line) patients, showed a remarkable 43% complete response rate — the best three-year survival rate ever in first-line multiple myeloma patients. In the current quarter, the company will get a peek at the Phase III first-line therapy data for new multiple myeloma patients. If the data shows a statistically significant benefit, MLNM intends to file a supplemental New Drug Application to expand Velcade’s label from so-called “rescue” therapy for those who have failed other drugs to first-line therapy for all multiple myeloma patients. Of course, their total available market will expand dramatically when the label is expanded, whether that happens after this quarter’s peek or when the Phase III trial finally concludes.

The company raised the lower end of their guidance range for Velcade sales this year from $240 million to $250 million, while keeping the top end at $260 million. Royalties will hit $150 million to $155 million, an increase from their $140 million to $150 million guidance. Pro forma earnings will hit $20 million to $30 million, or six cents to nine cents a share.

Millennium is advancing 10 different molecules through the clinic, and they have the cash to execute such a broad program. On June 30, they had $844.4 million in cash and said that they will finish the year with something over $800 million. I could not have asked for a better quarter, and even though the data peek could disappoint some if it is not statistically significant, most investors know these peeks normally are not powered for approval. MLNM remains a buy under $12 for my $23 target, and it is also a likely takeover target for a big pharma looking for a good pipeline of drugs.

QLT (QLTI) also reported earnings this morning. Revenues fell 25.4% from last year to $35.7 million, which was better than the $33.7 million consensus. Pro forma earnings of eight cents a share beat the consensus by a penny. But it was not the quarter that I am waiting for. I’m looking forward to a time when Visudyne sales are much stronger than expected due to the widespread adoption of combination therapy for macular degeneration. Visudyne worldwide sales were $59.3 million, down 37.8%, which included U.S. sales of $10.3 million, down 45.4%. Because the competitive products like Lucentis were released in the U.S. first, I’m expecting to see the bottom in the U.S. first. But we aren’t there yet. QLTI’s share of Visudyne sales was $19 million.

Eligard sales rose 35.4% to $44.6 million, driven by opening new markets in Europe. The company raised guidance for full-year sales by $20 million to a range of $160 million to $180 million.

Thanks to their dramatic cost reductions, cash increased to $284.9 million even after the company spent $5.8 million buying back stock. This was part of an ongoing $50 million buyback program. With Visudyne sales getting too low to do much more damage to overall revenue growth, we should see Eligard driving revenue growth up until doctors adopt combination therapy and Visudyne starts adding to growth. With Eligard growing rapidly, costs under control and the buyback underway, QLTI can be bought while it is under $8 for my $16 target.

Content on Demand MegaShift

Comcast (CMCSA) reported before the opening this morning, hitting their numbers and reaffirming guidance. But a loss of basic cable subscribers rattled investors, and the stock closed down $1.33 today.

First, the numbers: Revenues were up 30.5% from last year to $7.71 billion and earnings came in at 19 cents a share, both on target. Guidance remains the same: 2007 revenue growth at least 11%, capital spending $5.7 billion and cable cash flow growth north of 14%.

The company added 670,000 subscribers for its Internet phone service, 2.1 million digital cable boxes and 823,000 new digital cable subscribers — a very strong number. About 59% of subscribers now get digital video service. Comcast added 330,000 new broadband subscribers, and more than 26% of the video customers also get their cable modem service.

The only soft spots were that basic cable subscribers were down 95,000 in the quarter, and the company did not raise guidance in spite of the strong digital subscriber additions. Comcast said that they expected the decline in basic cable, but it was at the high end of Wall Street expectations. As for the guidance, I think that they are just sandbagging.

The dip in the stock today under my buy limit is a buying opportunity. Buy CMCSA under $28 for a $62 target.

Harmonic (HLIT) also reported after the close last night. The consensus was for $72.65 in sales and 10 cents per share, and the company did $71.3 million, up 34% from last year, and 11 cents. Bookings were strong across the board, and they are now guiding for $150 million to $160 million in sales in the second half of the year, compared with consensus expectations for $146 million. They also predicted 44% to 45% pro forma gross margins in the second half, again above expectations.

Where is the strength coming from? Everywhere, as satellite, cable and telephone companies around the world all plunge into delivering video to the consumer’s living room, and that should be followed by high-definition video. In Japan, consumers get 100 megabits-per-second (mbps) fiber-optic Internet service for less than $30 per month. Comcast, my new Internet provider, will be rolling out Data Over Cable Service Interface Specifications version 3 (DOCSIS-3) over the next two years. DOCSIS-3 cable modems can operate at 150 mbps, compared to the 12 mbps service that I now get. Verizon, with fiber to the living room, and AT&T, with fiber to the curb and then as much copper as it takes to the living room, have to respond to Comcast’s new faster Internet offering. We are on the edge of a dramatic increase in Internet speeds, with a much broader area for connections, thanks to WiMAX.

We’re also on the edge of a serious price war. Verizon’s fiber optic business Internet price schedule was leaked — only $40 a month for 10 megabits downloading and two megabits uploading, up to $350 a month for 50 megabits downloading and 10 megabits uploading. That will easily replace a couple of T-1 lines, which cost at least $500 a month each. Competition is heating up, and HLIT will be at the front of the markets, providing the top video technology to these companies.

As I have said many times, video is the hardest part of the voice-video-data (VVD) “triple play” offering, and Harmonic is about the best there is at video. In response to yesterday’s conference call, the stock was up 28 cents today, and HLIT remains a Top Buy as long as it is under $10 for my $16 target.

Quick Logic (QUIK), my newest recommendation, also had a good earnings report after the close on Wednesday. There was only one analyst estimate, calling for $7.5 million in sales and a pro forma loss of nine cents a share. They reported well above that, with $8.4 million in sales, up 35% from the first quarter, and a loss of six cents. QUIK saw strength across the board in new products and legacy products. New products were 14% of sales, identical to the first quarter, and they will be the biggest growth drivers in coming quarters. QUIK’s strategy of providing customer-specific, low-power programmable chips lets customers introduce products that can easily be upgraded, or introduced with entry-level, mainstream and high-end models.

QUIK rose 22 cents today and has had a good run. It closed over my $3.50 buy limit. Rather than raise it right now, though, let’s see if this market drop can give us some more stock around or even under $3 to increase your position. The target is still $8.

Zhone Technologies (ZHNE) reported June-quarter revenues of $44.1 million and a $2.9 million EBITDA (pro forma earnings before interest, taxes, depreciation and amortization) loss. Revenues were barely up from the March quarter’s $43.1 million, and down sharply from last year’s $54.2 million. The EBITDA loss was the same as the March quarter, but much better than last year’s $10.1 million.

The company guided for $42 million to $44 million in sales in the current quarter, a disappointing flat-to-down outlook compared to the $47.2 million that analysts expected. They also forecast gross profit margins between 33% and 35%, and therein lies the second problem. Flat revenues due to declining legacy product sales are understandable, but gross profit margins should be rising as new products become a larger share of sales. CEO Morteza Ejabat said that they grew their DSL business 5% sequentially, and their new Gigabit Passive Optical Network (GPON) solution, which delivers high-speed broadband cheaper than point-to-point fiber solutions, drew “a significant level of interest by our customers.”

GPON can usually handle 32 customers with a single optical line to the GPON equipment, which then shares the capacity among the 32 termination points. But I keep coming back to the low gross profit margins. The company has had plenty of opportunities to correct this, and they just have not delivered. I am moving ZHNE to a hold, and we are going to exit the stock on either the next rally or because the venture capitalists still on the board force a sale of the company.

New Energy Technology MegaShift

With oil now over $75 and near all-time highs even before a hurricane hits, these stocks are starting to move. There is still inexplicable weakness in natural gas prices, which hurts companies like Gasco Energy (GSX), but I think that will snap back. I am doing a separate presentation at the San Francisco Money Show on investing in this MegaShift, as I think it is vital just for portfolio diversification reasons to have a meaningful percentage of your assets in energy.

FuelCell Energy (FCEL) booked a $1.2 million Army follow-on research contract to scale up their very successful Electrochemical Hydrogen Separation system. It extracts hydrogen to provide fuel for hydrogen vehicles at less than half the cost of current systems and has no moving parts. The Phase I prototype ran for more than 6,000 hours in a very successful test. This Phase II project runs through mid-2008.

FCEL was a bit weak after another newsletter editor was stopped out at $8, but with the hurricanes coming, FCEL remains a buy under $11 for my $22 target.

Plug Power (PLUG) reported earnings yesterday morning, booking $4 million in sales, more than double the $1.9 million consensus. But they also reported a 19-cent per share loss, and even backing out a $2 million warranty charge, they lost 17 cents — more than the 13-cent loss that Wall Street was looking for. They had about $2.7 million in additional operating costs related to the two acquisitions that they closed in the quarter, Cellex Power and General Hydrogen. Both companies develop fuel cell power units and hydrogen refueling technology for electric lift trucks. By acquiring both companies, Plug Power will be able to introduce GenDrive fuel cell solutions for forklifts.

They installed 41 GenCore systems in the quarter, up from 17 in last year’s period but down from the unusually strong 63 installed in the March quarter. First half installations of 104 systems are already higher than the 85 installed in all of last year, and the company reiterated their goal for 400 installations by the end of the year. If they can do the implied 296 in the second half of the year, I don’t see how the stock can stay depressed.

The company shipped 62 systems in the quarter, but they don’t count them as revenue until they are installed. They got only 18 orders, which was a weak spot, but the backlog still stands at 489 systems.

PLUG remains a buy up to $5 for my $10 target, and remember that we are one big hurricane away from a major move in all of our New Energy Technology stocks. (And that PLUG provides the emergency backup power systems for the Florida Department of Emergency Services.)

Robotics MegaShift

iRobot (IRBT) reported before the opening this morning, hitting the consensus numbers and raising their 2007 guidance. Sales rose 36% from last year to $47.0 million, just above the $46.5 million consensus. They lost 20 cents a share, right in line. During the quarter, they signed a strategic alliance with Taser to sell the PackBot military robot to law enforcement, and they also got two U.S. military orders totaling $17.5 million for PackBots.

For the year, the company said that they will report $233 million to $243 million in sales, up from their prior guidance range of $225 million to $235 million, and well above the consensus for $228.2 million.

iRobot normally has a seasonally strong second half of the year, and expectations for the September quarter were for $67.4 million and profits of 26 cents a share. This year, they are introducing a new version of the Roomba carpet vacuum robot, and they’ve worked with retailers to reduce store inventories of the current model. Consequently, they will benefit from “channel fill” in the second half of the year, and it looks like they will beat the September-quarter consensus. IRBT looks unlikely to get under my $18 buy limit again, so I am raising it to $19 and keeping the target price at $30.

Security MegaShift

Packeteer (PKTR) reported disappointing results, as I said last week, and while the conference call last Thursday didn’t have anything new to report, that itself was news. Management seemed frustrated and less sure of the current quarter than they normally are.

So, as John and many others asked: “Once again PKTR execs have pulled the rug out from under their company. What’s their excuse this time? Still trust the CEO?”

Fair questions. The main excuse was margin pressure in older products, and extended customer evaluations of the new iShaper, where competitors are promising features that don’t really exist today. It is hard to sell against “vaporware.”

The question about trusting the CEO is harder, and I would say it is a matter of degree. This is the first time that he has said that he would fix a problem and didn’t do it. So, sure, I trust him a little bit less — not because I don’t think he is honest and hardworking, but because his judgment was off. During the March-quarter conference call, when PKTR missed their numbers, the CEO guided for 5% to 10% sequential growth in the June quarter and 10% sequential growth in both the third and fourth quarters. The actual June-quarter results were $4 million less than the low side of his guidance, and instead of at least 5% sequential growth, revenues were down 6.6% sequentially. For the first time that I can remember, sales were even down year-over-year, falling 5.1% from last year’s June quarter.

I think the stock has found a base in the low $7s, though. Based just on its service revenues and cash, it should be worth $11 or so in an acquisition. Elliott Associates, the activist hedge fund that has been buying the stock, is a catalyst to sell the company sooner rather than later. If PKTR can stay independent, I think the new iShaper branch office solution will do very well against Cisco, Riverbed and Blue Coat and drive the stock into the high teens, possibly to $20. I am reducing the buy limit on PKTR to $9 — still well above its current price — and taking the target price down $2 to $20.

Video iPod MegaShift

Now that we’ve taken profits in Burst.com (BRST), the only two stocks left in this MegaShift are Harmonic and Silicon Image (SIMG). They are also part of the Content on Demand MegaShift, so until I hear that the next-generation video iPod is imminent, I am retiring this MegaShift. Of course, I will continue to cover HLIT and SIMG in Content on Demand updates.

WiMAX MegaShift

MobilePro (MOBL) drew a question from Carolyn: “Your newsletter comment about the Sprint/Clearwire deal leaves an open question as to how this may affect MobilePro. Given the long term touting of MobilePro in your newsletter, this comes across as a glaring omission. Please don’t leave us to read between the lines on this one.”

Point taken. I should have said flat-out that this shouldn’t affect MobilePro. Here’s why: MobilePro is building municipal Wi-Fi networks that cover a limited area. WiMAX will be a much more expensive service, primarily serving rural and mountainous areas. So, a lot of the value-added for MobilePro is being able to work with municipal governments to come up with a proposal that satisfies all the stakeholders and gets the contract. The technical skills to install the network can be contracted for, if necessary.

But here’s the kicker. The new mesh networks that I discussed in the May 17 Radar Report give WiMAX-like performance in the municipal area, with only one or two connections from the municipal network to the Internet. Those connections could be to optical fiber or to wireless, probably WiMAX, services. In some remote areas, the connection might even be to Sprint/Clearwire, although I doubt that will be the norm. So, MOBL has an opportunity to apply its skills at getting contracts, upgrading the standard Wi-Fi networks to a mesh topology, and taking advantage of competition in the Internet backbone business between fiber and WiMAX to buy cheaper connections.

So there is still a lot of value in MOBL, and management certainly seems to be trying to unlock it. Their stock options will be worthless if they don’t succeed. At a penny a share, I think we just hold MOBL to see what they can do.

The markets have been steadily moving higher in July, with the Dow breaking 14,000 and hitting another record high today for the 53rd time since October. The S&P 500 also hit an all-time high this week. This type of action has me convinced that my market outlook for a continued, possibly parabolic, upswing is right on, and that the tools I am using will get us out shortly after we see the final top. But, as you know, we aren’t going to try and predict when this top will appear. The best course of action right now is something that I always say in my Money Show presentations: “Let the market tell you what to do.”

Speaking of Money Shows, the San Francisco Money Show is coming up next week, and I want to give you a preview of what I will be saying about the current market environment and what it is telling us. It won’t surprise you. My basic point is that the bears are worried about:

• A sharper housing slowdown with falling prices
• A sub-prime mortgage implosion
• Squeezed consumers
• No Fed interest rate cuts due to inflation fears
• Falling profit margins
• Hurricane season
• Geopolitical risks

The bears are probably right about all these fundamental problems. They are only wrong about one thing: The market is going to go up anyway. The overwhelming flood of liquidity from the Fed and other central banks has to find a home somewhere, and stocks, bonds, commodities and real estate will all benefit.

In the near term, I think the S&P 500 has about a 4% risk down to 1490, or at the worst a 7% risk down to 1440. The near-term reward is also about 4% up to 1610, or maybe 10% up to 1710. But we need to stay invested as long as the market it telling us that it wants to go up, and that is especially true if we are about to begin a parabolic rise that could take us to 1800 (+16%) or beyond. We just saw such a parabolic rise from last July through the end of 2006, and in the larger sense, the market today looks very much like it did at this point before the parabolic increase in 1999.

Bulls have lots of arguments as to why the market should continue up, including stock buybacks and private equity takeouts, but the real basis of almost all of those arguments is that cash is trash and money is freely available.

As is leverage. Guess how much equity a professional investor has to put up to buy a portfolio of AAA-rated bonds? Not the 50% that you normally might have to put up, or even 25%. Would you believe only 5% — that they can leverage 20-to-1? Well, the real number is 0.56% — 56 cents to control $100 worth of bonds. If those bonds are BBB rated, though, they have to put up $4.80 to control $100 worth of bonds. So guess what happens when Moody’s downgrades a portfolio of AAA sub-prime mortgage loans to BBB? Investors lose money, and if they are heavily leveraged, they lose lots of it. That’s why Bear Stearns is calling investors to say sorry, the hedge fund you invested in has no assets left. Nothing. Zip. You lost it all. Not exactly what pension and endowment funds want to hear. Especially after they find out that the hedge fund paid its last $1.2 billion to its senior lender before closing its doors. The name of the senior lender: Bear Stearns.

In this environment, the dollar’s decline could accelerate, with little to stop it. That would push stock prices (and gold and oil and metals and wood, and….) to unprecedented heights. So, you need to be fully invested just to protect yourself against the falling dollar. And this is exactly what I’ve been recommending that you do for several months. So far, this strategy has worked out well for us — we’ve recently cashed in some nice profits in a few of our holdings. (If you are tired of holding your cash in an ever-weakening currency, call EverBank at 800-926-4922 and open an FDIC-insured CD account in any currency you want, or a mixture of, say, the euro, yuan and yen.)

Now that you know where I stand on the current market environment, let’s take a look at what has been happening in our MegaShifts. Earnings reporting season is upon us, and so far, mostly so good. I want to review a few of those announcements this week in light of what they probably portend for the bulk of our holdings, which will be reporting for the next couple of weeks.

China MegaShift

I don’t think most people realize the power of China. Chinese exports hit $103 billion in June, their first month over $100 billion. Their official foreign exchange reserves now stand at $1.333 trillion dollars. But what is really amazing is that their quarterly inflow is accelerating. Just like the 1800s, when the UK was the manufacturing floor to the world or the 1900s, when the U.S. held that title, the cash is pouring in the door to the manufacturing superpower of the 2000s — China. Here is the recent quarterly growth in their foreign reserves:

Q4:05 +$49.9 billion

Q1:06 +$56.2 billion

Q2:06 +$66.0 billion

Q3:06 +$46.8 billion

Q4:06 +$78.4 billion

Q1:07 +$135.7 billion

Q2:07 +$130.6 billion

During the first half of the year, they have accumulated $266.3 billion in U.S. dollars, more than all of last year ($247.3 billion). They are banking half a trillion dollars a year, which they have to put somewhere.

So, it was with a mixture of sadness and amusement that I read that our Housing and Urban Development (HUD) Secretary is in Beijing, asking (begging?) them to buy U.S. mortgage-backed securities. So, let’s see, we want them to buy securities in a collapsing sector, and then the U.S. Congress is demanding that they revalue the yuan by 20%, guaranteeing China a 20% purchasing power loss on whatever they buy, on top of whatever the credit losses are. If the HUD Secretary can have this conversation with a straight face, it certainly explains why he is qualified for his job and I am not.

We will be making more investments in China, but due to the high amount of speculation by individuals in those markets right now, I think we should wait. However, I have a feeling that I’m going to be doing a lot more international traveling. Total world foreign exchange reserves today are around $5.3 trillion. About $3.4 trillion of that is held in dollars, or almost two-thirds of the total. (That percentage is falling, by the way.)

China, Russia and India own almost $2 trillion of that. Japan, Taiwan and Korea own another $1.1 trillion, so those six countries hold 93% of the world’s dollar reserves. With the exception of Japan, the other five currencies are at or near all-time highs, and the governments don’t want to sell dollars because that would drive their currencies even higher. All of their economies are growing or booming — a penthouse apartment in Moscow overlooking the river now costs more than the equivalent in Manhattan. This is definitely a MegaShift that we’ll want to take advantage of, so I’ll let you know when the timing is right.

Content on Demand MegaShift

The worldwide personal-computer market grew at a better-than-expected-by-Wall-Street rate in the June quarter, with shipments up about 12%, according to market researcher IDC. As you know, I have been estimating PC sales above the Street for this year, with the strength coming mostly in the second half. It is a pleasant surprise to see it starting this early, as this bodes well for many of our Content on Demand holdings.

Intel (INTC) reported an interesting quarter after the close on Tuesday. The stock hit a 52-week high at $26.33 before the announcement. Sales rose 8% from last year to $8.68 billion, which was just above the consensus estimate for $8.54 billion. Earnings per share excluding a one-time tax gain hit 19 cents, right on the consensus and up 27% from last year. The reason earnings only hit the consensus, even though revenues came in better than expected, was that product gross margins fell to 46.9% of revenues, at the low end of guidance. The biggest problem was weak demand for NOR flash memory chips, which are mainly used in cell phones. But Intel is in the process of fixing this problem by spinning off this money-losing division to a joint venture. The company also announced that microprocessor selling prices were a little lower than expected. The stock dropped $1.27 yesterday in reaction to the report.

But the really important points that Wall Street is missing are:

• The NOR flash memory division is irrelevant, even though Intel can’t account for it as a discontinued line of business quite yet.
• The company guided for a much better gross profit margin in the September quarter, 52% plus or minus two points.
• The company guided for $9.0 to $9.6 billion in sales, in line with the consensus.
• The last time Intel reported a gross margin this low, in the third quarter of 2002, their operating profit margin was 16.5%. This time it was 19.3%. That means they have delivered on their promise to get leaner and more productive, holding down expenses. Also, Intel reduced its inventory by 5.5% (almost $250 million) from the March quarter. That is the first sequential quarterly reduction in inventory since 2003, and inventory reductions almost always have a negative impact on gross margins.
• Intel’s manufacturing efficiency is running far enough above expectations that the company will reduce its 2007 capital spending budget.

Net net, I liked the quarter. And with the semiconductor sector showing strength and PC sales picking up already, I expect Intel to have a strong second half of the year. Our LEAP calls were nicked yesterday, and on any further weakness that takes them under my $5 buy limit, pounce on the Intel January 2009 $22.50 LEAP calls (VNLAX) for a target price of $12.50

Motorola (MOT) reported a 19% drop in revenues and the expected June-quarter loss this morning. But, despite all this, the stock traded up 22 cents today — further proof that it is completely sold out at these levels, making our LEAPs a great buy at this time.

The March and June losses are their first back-to-back quarterly losses in five years, as the company lost cell phone market share to Samsung, which took over the #2 spot, and #1 Nokia. MOT is expecting improved results in the second half of the year, but Wall Street doesn’t really believe it. I expect CEO Ed Zander to resign, which will pop the stock 10% or so.

Looking into the numbers, they only reported a loss of a penny a share. The losses from continuing operations were two cents a share, but that was after a four-cent charge for downsizing and some insurance litigation. Really, they made a small operating profit compared to the 33 cents a share pro-forma profit that they reported last year. Making a profit isn’t all bad when revenues fell 19% from $10.82 billion last year to $8.73 billion, and cell phone sales fell 40% from $7.14 billion last year to $4.27 billion.

The cell phone business is a fashion business, and we’ve already seen Nokia go into the toilet and then come back out with hot new models. MOT will do the same, although probably too late to save Zander’s job. In fact, three years ago Samsung passed MOT to become #2 just before Motorola introduced the Razr phone and knocked Samsung back to #3. I expect that to happen again. The Razr2 and the Rizr are doing O.K., and either MOT will turn out another hit phone or the company will be merged out or taken private. Whatever happens, we are going to make a lot of money with our calls. Buy the Motorola January 2009 $17.50 LEAP calls (VMAAW) up to $4 for a $10.50 target ($28 minus $17.50) in January 2009.

Telkonet (TKO) drew a number of questions again this week as the stock slipped below $1.75. I completely understand your nervousness, but you have to remember that Mr. Market is manic/depressive. One day he wants to buy your share of the business for $10, and the next day he wants to sell you his share of the business for $2. If you stay cool-headed and unemotional, you can make a lot of money taking the opposite side.

That’s assuming things work out, as I think they will at Telkonet. What we know about TKO is that they have a unique technology to carry data over the electrical wiring inside an existing structure. The technology works and has many applications from Internet access to HVAC control to security and so on. They’ve been through the request for proposal mill with EDS and are a supplier on a huge contract to install at military sites all over the world. They would not have won that contract if their technology didn’t work or was not cost effective.

At the same time, TKO has a CEO who is not there enough, and made at least one bad acquisition. That has now been rectified by a spin-off, but Wall Street still wants him out of there. So do I. I don’t know when that will happen, as the board is packed with his buddies, but sooner or later it will.

In the meantime, TKO just has to execute on what they already have on their plate to be a very successful company. So Jim asks; “TKO is getting me nervous. Do you see any news on the horizon that will turn this stock around? Should we sell and move on for better near and mid-term gains?”

I have a half a dozen stocks that I think will move before TKO — they are on the Top Buy list. But I still think this is a $15 stock at some point, and that is almost 10X today’s price. I don’t think you should sell unless it is the only New World Investor stock that you hold. If that’s the case, you may want to swap it for Infinity Energy Resources (IFNY), the Motorola LEAPs or something else.

Joe said: “Both Zhone (ZHNE) and Telkonet continue to be disappointments. I would like further clarification on a question that has been bothering me: Do these companies have a bad business plan, a poor management team, or both? Neither seems to be able to capitalize on what sounds like great business concepts and plausible market niches.”

Both have good business plans. I think Zhone’s management is good — their customer service gets really high marks, and that is often a hallmark of good management — but their industry is tough. It has a shorter upgrade cycle than they were expecting. I still think they will pull this off, or the venture capitalists still on the board (who have bought back a lot of stock in the open market) will find an exit strategy at much higher prices.

TKO has a CEO who is not working hard enough, not setting a leadership example, and needs to depart. At this point, I think the people under him can guess what’s coming, and the good ones are busting their butts to be sure that they are invaluable when a new CEO comes in.

Ray asked: “The Telkonet spin-off, MSTI Holdings (MSHI), announced New York City installations have been by MSHI, not TKO. What is your opinion of MSHI? And, is their relationship with CSI Digital of future significance to MSHI potential?”

That is correct. MSHI was freed up by the spin-off to pursue its own business, and those installations will be made by MSHI. But TKO still owns a big chunk of the company. MSHI signed a deal with CSI Digital to offer Internet Protocol Television (IPTV) in Manhattan, and that certainly will help them in the future. MSHI is a very well-run little company, and I hope TKO’s ownership interest turns out to have made the original investment worth it.

Craig said: “What is the current recommendation? It’s clear that TKO is no longer a “Top Buy” as it is no longer included on the list. Is it still a “buy”? It is frustrating, particularly where this stock was touted for so long, not to see continuing commentary.”

I guess it’s just me, but I feel like I write about TKO more than any other stock. In any case, it is not a Top Buy, and probably won’t be until the CEO departs (or I get wind that is imminent). But my most current write up and recommendation are always on the website: TKO remains a buy up to $5 for my $15 target.

New Energy Technology MegaShift

Oil is at $75 a barrel, and we haven’t even had a major hurricane yet! It isn’t Iran fears driving it up, or running out of gasoline during summer driving season. It is, purely and simply, demand overwhelming supply as China and India continue their explosive growth. California has 1.050 cars for every 1,000 residents. China has three cars for every 1,000 residents. India, with a population approaching China’s, uses only one-third as much oil today as China does. So, it doesn’t matter whether world peak oil production is in 2007, 2012 or 2017. Short of a worldwide recession/depression, oil prices are going to stay high and periodically spike higher. You really must have a meaningful percentage of your portfolio in our energy technology stocks that either are involved in extracting or creating oil in new ways (CLL.TO, GSX, IFNY, RTK), producing energy from alternative sources (ENER, FCEL, PLUG, OPTT, UGTH) or slashing energy consumption (ENER, EFOI, LSGP).

Connacher Oil & Gas (CLL.TO) reported a dramatic expansion in its independently-estimated official reserves, thanks to the 81 core holes that they drilled in the December through March period:

• Proved plus probable (2P) bitumen reserves up 111% to 178 million barrels;
• Proved plus probable plus possible (3P) bitumen reserves up 120% to 242 million barrels;
• 2P reserves plus best estimate total resources up 60% to 417 million barrels with $6.5 billion of future net revenues (equal to a pretax present value of $1.1 billion);
• 3P reserves plus high estimate total resources close to 800 million barrels with $13.4 billion of future net revenues (equal to a pretax present value of $1.6 billion, or $8 per CLL share, with a production peak in 2022);
• Conventional 2P reserves rose 14% to 10 million barrels of oil equivalent, thanks to a 27% increase in natural gas reserves after a very successful winter drilling program in Alberta, Canada.

No reserve volumes, future net revenue or present value was assigned to Connacher’s 26% equity interest in Petrolifera Petroleum Limited’s crude oil and natural gas reserves in Argentina.

The company said that the Pod One steam-assisted gravity drainage (SAGD) wells and the 10,000 barrel–a-day production facility are “nearing completion” and start-up of SAGD operations is anticipated “shortly.” I expect that event to move the stock up sharply. The company has also applied to develop another 10,000 barrels-per-day facility about six miles east of Pod One, which would be another boost for the stock. Before the announcement that Pod One is operational, buy CLL.TO while it is under $4.50 for my $7 target.

Security MegaShift

Packeteer (PKTR) reported results just after the close today, and I have to jump on the conference call. They did only $32.4 million in sales and a pro-forma loss of eight cents a share, compared to the consensus expectations for $37 million and breakeven. Revenues declined a bit sequentially from $34.7 million, instead of increasing, and this is a disappointment. Just skimming the written release, it looks like the new iShaper product is off to a good start, but not quite enough to overcome profit margin pressures in the older products. iShaper is going to be a big hit for Packeteer, but it is reasonable to expect them to stay cautious with their guidance on the conference call, as they have now missed two quarters in a row. I’m sure this will increase the pressure on them from Elliot Associates, and 8.3% shareholder, to sell the company.

The stock is down 33 cents in the aftermarket, which I consider a pretty mild reaction. If anything dramatic comes up on the call, I will send you a Flash Alert tomorrow, but based on what I see right now, PKTR remains a buy up to $12 for my $22 target.

WiMAX MegaShift

The rumors were true, and Sprint Nextel has signed a deal with Clearwire to combine their nationwide WiMAX networks in order to get blanket coverage very quickly. This is a nationwide mobile broadband network, although it will have many fixed connections from those in rural areas not served by cable modem or DSL. This will leapfrog Sprint past AT&T and Verizon in the mobile Internet industry, and put Clearwire into the same exalted company only a few years after its founding by Craig McCaw, the cellular pioneer.

Sprint’s budget of $2.75 billion would have had them in 19 cities by the end of 2008, and now with this deal they can dramatically accelerate their plans. The two companies have complementary coverage areas, so all they need to do is solve any technical interface problems and they are ready to roll.

This is great news for Airspan (AIRN), Alvarion (ALVR) and Terabeam (TRBM) because it puts intense pressure on the competitors to do something. WiMAX can deliver faster service than EV-DO, the cellular data standard, at about 10% to 50% of the cost. Having someone like Craig McCaw blessing the technology and a functioning nationwide network in the U.S. will be powerful sales arguments in every country around the world. As I’ve said before, this is truly the year of WiMAX.

We live in interesting times, or at least the S&P 500 does. That ancient Chinese curse certainly applies to the last few months of trading. The San Francisco Money Show is only a couple of weeks away, and if you look at the daily chart of the S&P 500, in the two months since the Las Vegas Money Show, through yesterday we had netted no gain after four runs up and four runs down. The weekly chart, though, shows an almost complete consolidation of the huge run up that started a year ago. It often takes many months to consolidate a move like that, but this time it happened in about eight weeks.

That’s one big reason that I am keeping the parabolic upturn on the table as an option. After today’s move, I’m pretty sure that we are about to blast through the old high at 1552 and break 1600 on the S&P 500. Whether we then get the parabolic move to 1800 I don’t know, but looking at the weekly chart, I sure would not rule it out.

The root cause of all this nominal strength is the ever-weakening dollar, which is down to a new low against the euro this week. I expect the dollar to fall a little against the Chinese yuan and a lot against the Japanese yen over the rest of the year. After five years of a falling dollar, at some point it is has to hit bottom. But while Wall Street is watching interest rates — the price of money — for a clue, I am watching the quantity. The Street thinks that if the Fed has to cut rates to save the economy from a real-estate-led recession, the dollar will keep falling. If not, the buck can strengthen. But as long as the Bernanke Fed is growing the M3 money supply at a 13% clip, I think the supply of new dollars will continue to depress the value of the greenback and push up stock prices.

There are some other interesting indicators that lead me to believe that the market will continue to head up. Hedge funds are shorting S&P 500 futures at the highest rate in three years. It will require $45 billion to cover the shorts, although, undoubtedly, some of that is already hedged. But at the same time, according to the new Commitments of Traders report, the smart money commercial hedgers, who have generally held net short positions in equity index futures contracts for the past seven years, have swung to their biggest net long position in 20 years. They now have a $14 billion bet that the bull market will resume. It is stunning that they are holding a new record long position at this time. The last time that they were anywhere near these levels was October 1999, and before that in May 1994. Both times, these hedgers got in at the lows for the S&P over the next several months. So, it is very unusual that they would be net long at all when the indices are currently flirting with new highs. That’s why I think that these levels are going to be a drop in the bucket compared with the record-setting highs that we’re going to see later in the year.

In this environment, the right thing to do is to be fully invested, although you should still be willing to trade one position for another to upgrade your portfolio with the best companies for profits right now. I am recommending some sales and carefully looking for new buy ideas for you in each of our MegaShifts, especially those that are depressed, with improving fundamental outlooks, where the stock seems to have bottomed and already started moving up. That describes this week’s recommendation in the Content on Demand MegaShift.

Be QUIK!

As you know, Content on Demand is a huge MegaShift that is affecting a wide swath of companies, as the demand for more user-friendly, sometimes handheld, devices with capabilities to provide media content to consumers any hour of the day, anywhere in the world, continues to grow. The new Apple iPhone is a great example of this, as it contains your cell phone, Internet browser, text messaging, digital camera, email and MP3 player. And while Apple would seem like a very logical investment in the Content on Demand MegaShift since they are taking the right steps, you know that I like to delve a little deeper into the technology and find the companies that are really making it all happen.

A lot of times these companies are supplying the materials to create the hot new products hitting the shelves at your local electronics store. A great example of this is Harmonic (HLIT), as it provides the best video encoders and other equipment that allows cable, satellite and telephone companies to deliver video directly to the consumer. We have a number of these types of companies already in our portfolio, but today I’d like to add another one. This new recommendation is also an arms merchant — supplying the semiconductors in many of the portable devices on the market.

Right now, you’re probably thinking that we’ve already got a great semiconductor investment with our Intel (INTC) LEAPs position, and what makes this new company so special? The answer is that they own a unique technology that is perfectly suited for battery-powered, high-volume consumer electronics — just the sort of device that gets content on demand to the user.

QuickLogic (QUIK) and I go way back. The company was funded in 1988 by my old friends at Morgenthaler Ventures, and almost 20 years later, QUIK’s founding CEO Tom Hart is still running the show. QUIK is a semiconductor company that began as a competitor to Xilinx and Altera in programmable logic semiconductors — these chips can be inserted into a hardware programmer that alters them to do different functions based on what the customer wants. For example, if the customer wants to sell a portable device that plays audio and another model that plays both audio and video, the same QuickLogic chip can be programmed for both of these uses.

The demand for programmable logic semiconductors is growing, and many customers, like Dell and Apple, are turning to companies like Xilinx, Altera and QuickLogic for their chips. The reason for this transition is that it is very expensive to make full-custom chips to do each of the desired tasks.

QuickLogic is “fabless,” which means all of their chips are manufactured by companies like Taiwan Semiconductor. So, what QUIK does is provide the basic chip design and then someone like Taiwan Semiconductor creates it. Then QUIK orders these chips in huge volumes to get the lowest cost that they can. Finally, they sell design software, programming hardware and a low number of chips to a new customer for their engineers to create a design. There may be many functions on the final chip that the customer does not use right away or ever, but the overhead cost of this waste space is still much less than doing a full custom design.

Once the design is validated and the product introduced, QUIK has built-in revenue growth. As that product grows, QUIK’s sales of the chips inside grows. If the product turns into a very high-volume winner, it is possible that the customer could replace the QUIK chip with a custom part that can be manufactured for less money. But in real life, many of QUIK’s chips go into mobile products like cell phones, which are sold to consumers. So, QUIK’s customers must constantly upgrade, add features and respond quickly to their competitors, and it is both very easy to modify a QUIK design and very hard to modify an all-custom design. In practice, once QUIK gets the design win, they are rarely displaced.

While QuickLogic now has good retention rates with its customers and a better technology that creates smaller and, therefore, less expensive chips than its competitors, back in the early ’90s when its chips were just hitting the market, they ran into a few snares. Trouble was, engineers were completely familiar with the design tools provided by Xilinx and Altera, and it wasn’t easy to convince them to learn a whole new way to design the chips. So in order to draw in more customers, QuickLogic targeted power-sensitive applications, where it has the biggest technological advantage. This is when it also created its standard product designs that can easily be modified by the customer to become Customer Specific Standard Products. That reduced design time and time-to-market, while still giving the customer enough room for customization to create a competitive advantage.

Product lines coming into this year included the Eclipse II and QuickPCI II, which provide low power solutions for applications requiring medium to small amounts of programmable logic, and the PolarPro architecture to provide very low power consumption. Using QUIK’s chip designs, their customers are able to produce a wide range of products: Medical electronics, aircraft navigation and flight controls, semiconductor test equipment, cellular base stations, telecom switching equipment, 3G data cards for laptop computers, video compression, flat panel display controllers and many others.

For the past year, QUIK has been going through a radical transition to focus almost exclusively on top tier manufactures of high-end, battery-powered, usually handheld, consumer electronics. For example, they have a low-power secure digital input/output controller that they optimized for high-capacity applications, like the memory cards used in digital cameras, MP3 players and cell phones. Using QUIK’s design tools, customers can keep up with the rapid increase in storage size that has been enabled by the collapse in flash memory prices, while lowering the battery drain thanks to QUIK’s lower power requirements.

As the company was going through this transition period, they were also upgrading and changing their sales force, and introducing an important new product. All of that has been disruptive to their business, and they missed guidance last year, which drove the stock to a low of $2.61 last September and $2.45 in March.

Then on April 25, QuickLogic introduced the new product that I’ve been waiting for — the ArcticLink. It is based on the PolarPro, but in addition to low power consumption, it adds important functions like USB 2.0 and Bluetooth support. These added capabilities are going to drive sales for ArcticLink, as USB and Bluetooth markets are expanding at a rapid clip. The market research firm iSupply projects that by 2010 there will be 750 million handheld units shipped that include USB. The second most popular connection will be Bluetooth, which iSupply projects will be included in 680 million handheld units by 2010.

And that’s not all this product does. QuickLogic says that ArcticLink provides a highly flexible platform that enables designers to integrate a broad spectrum of interfaces without compromising their power budget and to still keep pace with consumer demands. ArcticLink can connect to and control wireless devices, mobile TV, flash memory cards, micro hard disk drives and optical drives in mobile products. Target markets include smartphones, portable media players, portable navigation devices, flash memory cards and numerous portable industrial products. It is a relatively small chip and has instant-on capability. EETimes polls its design engineer readers for the best new products, and they just named ArcticLink a Top 10 new product in the processors and memories category. As you can see, ArcticLink is going to be a huge product for QuickLogic.

QuickLogic got a clean bill of health from the SEC in March on their options accounting. The company currently has $22.6 million in cash, which is plenty to get over the hump with ArcticLink and to get profitable. I expect QuickLogic to show revenue acceleration for the rest of 2007 based on sales of Eclipse II and PolarPro, with design wins for ArcticLink this year and serious volume hitting in 2008. There is a bit of risk that the June quarter will be softer than I expect as the older products wind down, but Wall Street expectations are already low. The Street is looking for $7.5 million in sales in the June quarter, followed by $8 million in September. I think that the company will report closer to $8 million — the top end of their guidance range — in their conference call around July 25, and then guide for $8.5 million to $9 million in September. The consensus earnings estimates for a nine-cent loss in June and an eight-cent loss in September are probably correct, as QUIK absorbs the introductory expenses associated with ArcticLink. But the stock will move up on a positive revenue surprise. In fact, it has already started moving up a little this month. The company also hired the former VP of Worldwide Sales at Broadcom, with the incentive of a boatload of out-of-the-money stock options. This guy has a great reputation, and I expect him to get the company in front of customers that they have not been able to crack before.

I want you to buy a one-half position in QUIK under $3.50, with an $8 target this time next year. If the company disappoints on the July conference call, you will be able to buy the second half around $2.75. If they hit my numbers, you will probably pay $4. Either way, you will be well-positioned for the acceleration in revenues that should start in earnest in the second half of this year.

Content on Demand MegaShift

Confirming my write-up on QUIK, this morning Wal-Mart said that their strongest sales category is entertainment merchandise — including flat panel televisions, MP3 players, video game hardware and accessories, laptops and desktop computers — which had “significant” year-over-year gains.

Intel (INTC) hit a 52-week high today after the Banc of America Securities analyst raised his June-quarter estimate a penny to 21 cents and his yearend target $1 to $29. Our LEAP purchase is looking very timely. I am taking it off my Top Buy list because it has been trading over my buy limit, but if you get another chance in this volatile market, do not hesitate to buy the January 2009 LEAP calls with a $22.50 strike price (VNLAX) if they trade back under $5. The target price remains $12.50 at expiration, a 250% return from the buy limit.

If you missed this trade but want to get in on the next big LEAP mover, I think it will be Motorola.

Motorola (MOT) stock could have been killed today after last night’s announcement that they will report a second-quarter loss on lower-than-expected revenue, due to poor mobile-phone sales in Europe and Asia. The company will report sales of $8.6 billion to $8.7 billion, well below both its prior $9.4 billion target and the $9.25 billion Wall Street consensus. They also said that the mobile-handset business won’t be profitable for the entire fiscal year. In an effort to improve things, they named a new EVP of mobile devices. But he has been running supply chain operations, and I’m not sure about his marketing chops.

So, this is bad news for the company. But for the stock? Up 13 cents at the close! To me, this indicates that:

• The stock is sold out, because when bad news like this hits, it can’t move the shares down.
• Shareholders who voted 55% to 45% against Carl Icahn in the recent proxy fight for a board seat are probably mighty sorry.
• MOT just moved way up on the list of takeover targets.

Stocks that act surprisingly well in the face of bad news are virtually always strong buys. It means that there aren’t any sellers left, and it won’t take much buying or even rumors of a takeover to send the stock up. I am moving the Motorola January 2009 $17.50 LEAP calls (VMAAW) to a Top Buy up to $4 for a $10.50 target (based on a $28 target for the stock minus the $17.50 strike price) in January 2009.

Biotech MegaShift

Dendreon (DNDN) said that it was notified on July 9 that the SEC has started an informal probe of the timing of insider sales in relation to the clinical trials for Provenge, its market application for the drug and the FDA’s subsequent review of that application. I suspect that this is in response to a shortseller’s unsupported allegations that since three officers sold stock after the advisory panel recommended approval, they must have known that the FDA was going to turn it down. The news stories quoted unnamed analysts, which is a dead giveaway that the shortsellers called the reporters to be sure they saw Dendreon’s announcement. Pay no attention to this issue and continue to buy DNDN anytime it dips under $7 for my $40 target.

Geron (GERN) recently started Phase I/II clinical trials of its telomerase inhibitor drug, in combination with standard chemotherapy, for leukemia and non-small cell lung cancer. This is their first combination trial with chemotherapy, and I doubt that it will work. Officially, the test is for safety and maximum dosage, and I’m sure that part will be fine. But chemotherapy is so destructive to the body that it will probably mask any beneficial contribution from inhibiting telomerase, so the combination is unlikely to achieve statistical significance. Depending on how the stock acts, we may want to get out before results are reported in about a year. I’ll let you know if this is the case.

I’ve always thought it interesting that polls of oncologists typically show that 75% to 85% of them would not recommend or undergo chemotherapy if they or a family member had cancer, yet they often recommend it to patients because it is the standard of care. Between peer review and reimbursement guidelines, oncologists would be taking career risks to discourage chemotherapy, even though they would never do it themselves. That’s one of the saddest commentaries that you will ever see that shows how messed up the U.S. health care system is. For now, GERN should be bought while it is under $9 for my $18 target.

China MegaShift

Huaneng Power (HNP) said that they increased power generation by 13.9% year-over-year in the first half of 2007. The stock has been a stellar performer and closed over my $48 target price again today. Sell HNP and take your 63% gain in 21 months. I am still very interested in their pebble bed nuclear reactor technology, and we will be back to HNP on any meaningful weakness.

New Energy Technology MegaShift

A minor refinery outage in Coffeyville, Kansas, of all places, sent oil over $73 a barrel today — well, that plus the usual terrorism fears. The Kansas refinery handles 250,000 barrels a day, and it should be back on line this weekend. But this speaks volumes about the fragile balance between supply and demand right now, as we head into hurricane season. Maybe we will have a second record-low number of hurricanes after the benign 2006 season, but that is not the way to bet. All of our energy technology positions will do extremely well if it is even a normal season, and the forecasters are calling for a relatively high number of storms. Of course, they were completely wrong last year, so there are no guarantees. I think it is safe to say that if we do see a spike in oil and gas prices related to hurricanes, Infinity Energy Resources (IFNY) and Gasco Energy (GSX) will have the most upside leverage. IFNY remains a Top Buy up to $5 for a $10 target.

Gasco said that they had record quarterly production from their Riverbend Project in Utah. They estimate 1,135 million cubic feet equivalent (MMcfe) in the June quarter, up 7.9% from the March quarter and 32% from last year’s June quarter. They posted this production increase even though they deliberately delayed completion of some recent wells due to the low gas prices in the Rockies. They also curtailed production from existing wells, as they see no sense in giving the gas away at these levels. Part of the problem is a lack of takeaway capacity, which will be relieved in January 2008 when Phase I of the Rockies Express pipeline goes into service.

The company will present at the A.G. Edwards Exploration & Production Conference in New York on July 17 at 3 p.m. ET. Buy GSX up to $4.50 for my $9 target.

Energy Conversion Devices (ENER), as you know, supplies the batteries for Toyota’s hybrid cars — the Prius, Camry and Highlander. The president of Toyota Motor North America predicted this week that hybrids will dominate U.S. roads as gasoline prices move ever-higher. In fact, he said: “Eventually, everything will be a hybrid.”

Hybrid sales will be up 60% this year, but the 12 available hybrid models only account for 2.3% of all sales. Toyota expects to sell 175,000 Prius hybrids this year, up from 109,000 last year. Toyota sells three out of every five hybrids in the U.S. Honda just killed their Accord hybrid due to slow sales. When I decided to trade in my 2003 Honda Civic hybrid, I test drove the Accord hybrid and then the Camry. It was no contest, and with 19,000 miles now on the Camry, I am sure that I made the right decision.

With Toyota hybrid sales up more than 60% this year, ENER is a strong buy while it is under $35 for my $55 target.

Royal Dutch Shell (RDS.A) was downgraded by the UBS analyst from buy to neutral just because the stock is up 30% since mid-March. They raised their target price 10% at the same time. This follows a Goldman Sachs downgrade to sell.

I have no doubt that Royal Dutch will move higher if there is a bad hurricane season, but it is now about $10 over my target price. Mindful of the old Street saying that bulls make money, bears make money and pigs get slaughtered, I think it is time to sell RDS.A for a 35% gain in just over 12 months. We got a nice 3.3% dividend, too.

Robotics MegaShift

iRobot (IRBT) got a $17.5 million order for 74 robots from the Department of Defense’s Robotic Joint Project and, oddly enough, the Naval Sea Systems Command. These robots are used to identify bombs in Iraq and Afghanistan. IRBT remains a buy on dips under $18 for my $30 target.

Security MegaShift

Packeteer (PKTR) said that it will hold its earnings call on July 19, and they did not make a negative preannouncement. The recent Wall Street fears that the company will disappoint again appear to be wrong. If you are worried, July put options expire the day after the earnings release and provide protection at low cost. The $10 contract (XOUSB) is the only one that makes any sense, but, frankly, I think it will be a waste of money.

I found it interesting that Elliot Associates, which has asked the board to solicit bids for the company, increased its stake in PKTR from 6.3% to 8.6% in spite of the proposed IRS action. He seems to think the IRS allegation is as meaningless as I do. PKTR is a buy up to $12 for my $22 target.

WiMAX MegaShift

Airspan Networks (AIRN) won a $4.5 million contract with Guyana Telephone & Telegraph, Guyana’s largest telecommunications carrier, to install a WiMAX network in the licensed 3.5Ghz frequency band. The network will eventually cover the whole country. This really is the Year of WiMAX, and I expect a flood of orders like this for all of our WiMAX companies in the second half of the year. AIRN is a buy up to $5 for my $10 target.

MobilePro (MOBL) is selling its telephone and ISP subsidiaries to a private company, USA Telephone, for $21.9 million in cash and $8.1 million in convertible preferred stock. This was the best offer that they received from a dozen companies that responded to MobilePro’s asset sale. When the deal closes in 90 to 120 days, they will entirely pay off Cornell Capital.

In addition, they sold their mobile broadband business to another private company, Gobility, for $2 million in convertible bonds. Gobility has to raise $3 million in cash by August 15 for the deal to go through.

Assuming both deals close, Cornell Capital will be out of the picture and the company will be left with the municipal WiFi business that interested me in the first place. The president resigned the same day that the Gobility deal was announced, as CEO Jay Wright trims back expenses. There will be an ungodly number of shares outstanding due to the Cornell Capital fiasco, but the base will be there to build something of major value. As I’ve been saying in the portfolio comments on the website, with a pure play on the municipal Wi-Fi business unencumbered by Cornell Capital, we have a good chance of seeing the stock recover. For now, MOBL remains a hold.

Rich asked: “I just saw a notice on Bloomberg regarding an audit concern regarding MobilePro. They have serious doubts that MOBL can remain a going concern. Any thoughts?”

It is standard procedure for accountants to put in “going concern” language for small companies that are losing money, and, of course, those comments were made before these resent asset sales. The real issue going forward is whether Jay Wright can make his options good by building the municipal WiFi business with minimal additional dilution, and take advantage of the new mesh network and WiMAX technologies to create a meaningful business. This is an investment in a technology and a person, and I still think he is the right guy to pull it off.

It seems like just yesterday when we were focused on how companies wrapped up 2006 and what they would say about the March quarter. But here we are with earnings season around the corner and a strong stock market telling us what’s about to happen next. Notice that there have been almost no negative preannouncements. For the record, next Monday is the official start of the June-quarter reporting period with the Alcoa report, but the technology sector really gets rolling on July 17 with Intel (INTC) and Yahoo.

Overall, second-quarter earnings are not expected to be strong. Standard & Poor’s predicts that the S&P 500 will increase earnings only 5.7% year-over-year. Good! We like low expectations, because beating them pushes stocks and markets up. I am actually looking for 8% growth, or even a bit more.

According to S&P, the three strongest sectors should be telecom, with earnings up 25.0% year-over-year, health care at 22.2% and technology at 10.1%. Of course, most of telecom and much of health care is also technology, so I’d say that we are certainly invested in the right general area. With the second half of the year normally strong for consumer electronics product sales and oil prices near $70 a barrel boosting our New Energy Technology stocks, guidance for the quarter should be surprisingly good.

With the S&P 500 back above the 1513 level, good earnings guidance should drive this leg up in the market to all-time highs. It would be natural to have a consolidation period around the old high at 1552, or maybe even another scary dip like the one we just had to rebuild negative sentiment — the precursor to virtually every rally for the last three years. But if the S&P 500 can blow right through 1552, watch out for my parabolic scenario to kick in. Although it is still not the most likely outcome, many factors are lining up for a moonshot to 1800 or even 1900 by the end of the year.

Despite our positive outlook for the rest of the year, there are plenty of bears out there trying to rain on our parade. I read a lot of bearish commentary about sub-prime mortgages and foreclosures, high gasoline prices and weakening consumer spending, excessive personal debt, out-of-control government finances, the seemingly implacable trade deficit, overleveraged private equity buyouts, and how a Day of Reckoning is coming. Their logic is compelling, and the truth is that they are right about all of it except one thing: The market is going to continue to move up anyway. That is because there is only one factor that matters right now — one factor that is driving the stock, bond and commodity markets — and that is the deliberate destruction of the value of the dollar by Chairman Bernanke and the Fed. As long as the Fed is growing the M3 money supply at current rates — now in excess of 13% a year — excess dollars are going to flow into financial assets and then real assets. No one wants to hold paper dollars that are declining in value by 13% a year. They don’t even want to buy bonds at a 5% yield unless they, more or less, have to, as the Chinese government does. They want to get at least a 13% yield to offset the falling value of the currency, and that means buying stocks or maybe real estate.

I believe that we are in the right asset class — stocks — and the right sector — technology — to benefit the most from either a resumption of this two-year bull market, or the parabolic scenario that crams a couple of years of stock returns into the next six months. So as I’ve said for quite a while now, to take advantage of the current strength in the market, you should be fully invested — and you should definitely be fully invested before earnings season begins. If a market run-up gives us an opportunity to take some more profits, like last week’s 226% gain in Omniture in ten months and the 105% gain in Burst.com in ten months, I may recommend rolling our profits into some new companies. I am still very interested in the second-quarter results from Quick Logic (QUIK), Cnet (CNET) and a few others, and I’ll let you know if and when you should be investing in them.

While most companies are now in their “quiet period” before the storm of earnings reports starts, there has been some news in a number of our holdings and some good subscriber questions that I would like to address today.

Biotech MegaShift

Biogen Idec (BIIB) drew a question from Kulwant: “Do you still believe that the stock will move to your original forecast, ie IDKAI going to $20 a share?”

Biogen’s common stock is currently trading around $55, and it has to get to $68 over the next six months for the January 2008 $45 LEAP call (IDKAI ) to be worth my $23 target. I do think the stock will get there based on accelerating sales of Tysabri and in the context of the good market that I am expecting over the next several months. We’ll get the latest data point on Tysabri when the company reports earnings on July 25, and I am expecting good news, which would be another boost for the stock. You can still buy IDK AI just under the $12 buy limit for my $23 target.

Dendreon (DNDN) jumped when “traders said they expected positive news to be released soon on the company’s drugs.” I think that this was an after-the-fact explanation for huge call buying last Wednesday in the July $7.50 and July $10 contracts. About 120,000 contracts traded, and over 100,000 of them were new call buys. But this easily could have been some short seller buying a little insurance, or even offsetting a longer-term put position. Over 50% of Dendreon shares are still sold short.

There was a rumor that following the recent debt offering to raise more money, DNDN might expand the current IMPACT study to 600 patients. More patients might help the study achieve statistical significance, although that would come at the cost of delaying results. But the CEO squashed those rumors and said that increasing the study size is not in the company’s plans. By setting the number of patients and time lapse after treatment, Dendreon has already powered the interim analysis to show statistical significance, assuming their results are the same as in previous studies.

Brian G asked: “While reviewing the 103-page slide show at: http://www.fda.gov/ohrms/dockets/ac/07/slides/2007-4291S1_1.pdf, I got stuck on slide 33 – Study 2. Seems that Study 2 on its own is statistically insignificant. Then there’s some mumbo jumbo of integrating Study 1 and Study 2. Can you please comment on: (1) how Study 2 fits in, and why we should not worry that ongoing work will yield a data set like Study 2, and (2) judging by eye (yes, analyzing raw data would be better), none of the data seem to show significant separation of placebo and Provenge until after twelve months. With this in mind, when should we really consider that an interim review might result in approval? Thank you for many profitable ideas over the years. P.S. A comment on slide 60 “CD54″ would be welcomed as well — is this saying that a high concentration REALLY extends lives?”

Thanks, Brian, for asking the right questions. Wall Street is now completely focused on the wrong question, which is whether Dendreon loaded the placebo group with the sickest patients and biased the results. As you saw on slide 14, and especially on slide 15, there were differences in the baseline characteristics of the treatment and placebo groups. These were presented to and thoroughly explored by the FDA staff, and they were found to be random differences that did not affect the conclusions of the study.

But the issue you bring up is the real key: Will the interim peek at the data due next year or the final data in 2009 show statistical significance? Slide 33 shows overall survival, and you are right that Study 2 on its own was not statistically significant. Neither was Study 1 on its own, and we already knew that. By combining the studies (Slide 36), Dendreon was able to get clearer statistics. They then drilled down to the prostate cancer specific survival rates (Slide 29) to get the data to support approval of Provenge.

If you look at Slide 22 on overall survival, the benefits of Provenge appear to kick in around nine months after treatment, and Slide 23 shows that after 36 months, 34% of the treated group survived versus 11% of the placebo group.

So here is the key: The current trial is “powered” for approval at the interim peek point. That means the company has agreed with the FDA on the number of cases that will be submitted for a peek at the data, the median length of time after treatment, and the specific endpoint(s). Dendreon set these three parameters so that they will have statistically significant results if the current study results are similar to the prior two studies. But we do not know what the values of these parameters are for the current study. My guess is that they will look at 150 to 200 cases with an average length of time after treatment of nine to 12 months, and in addition to overall survival, they will look at prostate cancer specific survival. There are no guarantees, because sometimes the placebo does surprisingly well in these critical trials. But in this case, there isn’t much else in the standard of care that could cause the Provenge results to fall dramatically, or the placebo results to rise. Based on that, I think the odds on a successful interim peak are pretty good. Remember that there is a Special Protocol Assessment on this interim peek results, as well as on the final results due in 2009, so if Provenge hits statistical significance at either point, it gets approved, period.

The answer to your postscript question is “yes;” those in the highest quartile of CD54 concentration had much higher survival rates, ending well over 50%. Survival rates lined up perfectly with CD54 concentration rates, with the lowest quartile showing the least benefit. At this point the connection between CD54 concentration and survival is strong, supporting evidence that Provenge works and the company understands the mechanism of action. It isn’t useful in establishing a therapeutic protocol, because I don’t think they have the technology (yet) to control the uptake of CD54. This is an obvious path to explore for future research.

Regarding the stock, we could see a European distribution deal announced anytime, so rather than wait I would continue to buy DNDN on dips under $7 for my $40 target when Provenge is approved.

Content on Demand

Intel (INTC) should be the biggest beneficiary of recent semiconductor industry statistics that showed accelerating microprocessor shipments. The May numbers are out, and unless Advanced Micro Devices has seen a sudden upswing in market share, which is highly unlikely, the April and May data taken together suggest that Intel will easily beat the midpoint of its guidance, and may even beat the high end. If so, the stock will head up to $28 in a hurry, so now is your last chance to buy or add to the Intel 2009 $22.50 LEAPS (VNLAX), which are a Top Buy under $5 for my $12.50 target 18 months from now.

New Energy Technology MegaShift

Lighting Science Group (LSGP), my newest recommendation, appears to be in a sweet spot, according to the May semiconductor sales data. Although the numbers for overall optoelectronics chips were on the weak side, the subcategory of “lamps” (light-emitting diodes, or LEDs) was very strong — up 33% year-over-year, the same as the April statistics. This is being driven by commercial lighting, and I expect residential lighting to pick up the torch by 2009.

Regarding my US Geothermal (UGTH) writeup, subscriber Del questioned my thinking on Raser Technologies (RZ): “Your statement re Raser in yesterday’s Rader Report was not accurate in my opinion. They have leased over 12,000 acres of land and are starting to drill to begin their geothermal power generation business. I think this stock is a 10-bagger within a year. Thanks for reviewing this again.”

In the June 21 Radar Report, I wrote: “I am interested in Raser (RZ), which makes binary cycle geothermal equipment. The company, though, has been a long-time promoter of a new type of efficient electric motor that really hasn’t gone anywhere. I will watch them to see if they get any traction in geothermal equipment before making an official recommendation.”

Del is right that I didn’t mention RZ’s own geothermal acreage, in addition to their equipment business, even though I knew about it. They actually have 50,000 acres under lease in Nevada and Utah now, after signing up another 9,370 acres after that Radar Report was published. But they don’t have the capital to develop these on their own, so they will have to find partners, then develop project plans, then get permits and licenses, and then drill. The stock would have to go from today’s $7 area to $70 over the next 12 months to be a 10-bagger, yet they are not likely to drill even one well by then. It’s a much longer haul than US Geothermal, which I recommended as a buy under $2.25 in the June 21 Radar Report. UGTH traded under that level on Friday, June 22, but has run up since with the price of oil. Don’t chase it; I will raise the buy limit if necessary, but UGTH is a very volatile stock and I still think we’ll get a chance to buy more at lower prices.

Subscriber Question Subscriber Jim wrote: “I know you can’t give personal advice, but I was just wondering if you would recommend a book on stock options. I notice that there are a few options recommendations in your list. I would like to learn the basics of trading options and thought you might be able to give me a good book recommendation that would explain the ABCs.” Setting aside the popular books on daytrading options, like Larry McMillan’s Options As a Strategic Investment and McMillan on Options, I think there are two books that are in synch with what we are trying to do in New World Investor. The first one is an excellent general introductory book, The Short Book on Options by Mark D. Wolfinger. It has all the basics in an easy-to-read style, and focuses on using options in a conservative way for risk protection, profitability and safety. It’s a good book even for buy-and-hold investors. Wolfinger started as a market maker on the floor of the CBOE in 1977, so he has street smarts, but he also has a PhD from Northwestern. The book is $13.25 on Amazon, and there are used copies for as low as $6.95. The other book that is more directly related to the LEAPs that I like to recommend from time to time is LEAPS: What They Are and How to Use Them for Profit and Protection by Harrison Roth. It is also a pretty easy read, and it has a laundry list of strategies you can use with LEAPS to lower your risk, as opposed to this newsletter’s very simple approach of simply buying the one with a strike price closest to today’s price. The book is $39 on Amazon, and they have some used copies for as low as $5.

Security MegaShift

Packeteer (PKTR) said that they received an IRS notice of an examination alleging that the company owes about $122 million in back taxes for 2003 and 2004, plus $49 million in penalties and an additional hit for interest. The IRS based this on overstated transfer costs between Packeteer and a foreign subsidiary.

I’ve now done enough work on this to be almost certain that this is nonsense. The company rightly said that it believes the IRS position is not consistent with either tax law or Treasury regulations, so it will file a protest and make no payments until the issue is resolved in an IRS appeal or Tax Court.

These transfer pricing issues are a thorn in the side for the IRS, because companies can use them to shift profits to lower tax jurisdictions. But in this case, PKTR only reported net profits of $25.5 million in 2003 and 2004 combined. Their total cash flow from operations for the two years was just $38.0 million, and at the end of 2004, they had negative retained earnings of $77.9 million. I don’t see how they could possibly owe $122 million in taxes on these results — heck, their total revenues for the two years only hit $165 million! If $122 million represents a 38% tax rate, then their profits must have been $321 million — on $165 million in sales. Waahoo!

The fact that the IRS claim is obvious baloney did not stop the short sellers from piling on, or certain brokerage firms from cutting their ratings. But further investigation shows that Packeteer’s auditors went through a major review of the method and valuation of all significant transfers of intellectual property. It appears that the IRS examiner used Packeteer’s market capitalization at the time of the transfer to calculate the value of the intellectual property, rather than using the IRS guidelines that Packeteer’s auditors used. This is bizarre, and it will take a year to straighten out and cost the company a million dollars. But Packeteer is not going to knuckle under to an obvious extortion attempt by settling. Good for them.

This does heighten the risks of the upcoming earnings report, because the short sellers will use the IRS ammunition over and over if PKTR disappoints. Remember that the company did disappoint in the March quarter, and then committed to fixing the problem immediately and reporting double-digit growth for the rest of the year. The consensus estimate for June-quarter revenues is $37 million, up 6.5% from the March quarter and 8.6% from last year’s June quarter, which is to say that Wall Street does not believe the company’s guidance. They’ll report after the close on July 19, and I suspect they have to show at least 10% growth year-over-year or the stock could get hit again. But this CEO has always been able to recover quickly from a disappointment and give accurate guidance, so I think the short sellers are in for a surprise. PKTR is trading well below my $12 buy limit, and it should be bought before the earnings report or immediately after for my $22 target price.

WiMAX MegaShift

Alvarion (ALVR) jumped over my $9 buy limit when the Australian government awarded a billion dollar contract to install a WiMAX network covering the whole country. The winning bidder has not named their equipment suppliers yet, but I’m betting that ALVR will get the business. That probability was underscored by Monday’s announcement that Allegro Networks will immediately deploy a private business WiMAX network in Australia using Alvarion’s BreezeMAX system and negotiate to hook it into the government system after that is built.

As I’ve been saying, 2007 is the Year of WiMAX. You certainly can buy ALVR on any dips under $9 for my $18 target. My #2 pick in this area, Airspan Networks (AIRN) is still well under the $5 buy limit and can be bought immediately for the $10 target. The same is true of #3, Terabeam (TRBM), now around $2 and a buy up to $4 for my $7 target. I continue to think a basket approach is best, owning all three stocks, with around 50% of the basket in ALVR, 30% in AIRN and 20% in TRBM.