Last week, with the winter flu season nearly upon us, we checked in on what has been happening in the Avian Flu MegaShift. This week, I continue on a similar track with an update on the big picture for the Biotech MegaShift, because from a seasonal perspective, autumn is typically the best time of year for biotech stocks. But before we dive into this sector, I want to lead off with a potential repurchase in the Content on Demand MegaShift.

BRSTing Apple’s Bubble

No, I’m not talking about the backdated stock option chickens that are about to come home to roost. As you know, the biggest reason that we don’t own Apple is because I think Steve Jobs will be indicted in the Apple and Pixar backdating scandals. This week, Apple lost two rounds. Steve was subpoenaed by the SEC in their civil case against Apple’s former general counsel, Nancy Heinen. It’s a very good idea to tell the truth to the SEC when under oath, as Martha Stewart found out, and in this case, the truth is that Steve knew about the backdating, understood the accounting implications and profited from it. As the only CEO of two companies on the SEC’s bad boys list, it’s hard to believe that he is going to walk, no matter how many strings Senator Feinstein pulls. The second round was the Boston Retirement Board winning some access to Apple board meeting minutes about backdating. They had to sue in California Superior Court to get it — after all, they are only the shareholders who own the company.

However, the judge denied the heart of the retirement board’s suit: Access to documents related to Apple’s internal investigation into the backdating fiasco, led by Al Gore. And any documents that Apple hands over can’t be disclosed to anyone else. The judge’s order will be issued tomorrow.

Apple’s more immediate problem, though, is their lawsuit against Burst.com (BRST on the pink sheets). Burst is now a three-person company after spending 20 years and over $66 million with 100 employees developing and patenting ways to send digital audio and video over networks. They own a moat of patents covering delivery of video over the Internet. Microsoft tried to get around them, but couldn’t, and after numerous nasty tricks that nearly broke the company, Microsoft finally paid BRST $60 million for a license. Apple’s iTunes video downloads violate many of the BRST patents, but they assumed Microsoft would wipe Burst out when they started using the technology. Yet, instead of following Microsoft and settling, Apple sued to have the patents declared invalid. A big mistake, in my opinion, but not in the opinion of The New York Times, which published an article last Thursday that knocked BRST down to $1.40 for a split minute.

We originally bought BRST at $1 on September 7, 2006, and sold it for a 105% gain on June 28, 2007. I really didn’t expect to see it under $1.50 ever again. But the Times story reported on Apple’s lawyers filing a motion to have Burst’s countersuit thrown out and their patents invalidated as not novel, obvious, and having nothing to do with iTunes or QuickTime. The Times slant was this is just another little company trying to hold up a big company for ransom based on flakey patents, and the big company is about to cream them. The reporter included some pretty caustic comments from Apple’s counsel. It read like an Apple public relations release.

That’s just about 100% wrong. Microsoft gives away the technology that they stole from Burst and later licensed it for $60 million. Apple sells it, and Burst calculates their damages, based on over three billion iTunes downloads, at around $500 million. And Burst has been winning the battle with Apple so far. In patent lawsuits, there is a step called the “Markman claims construction ruling” that determines what the actual words in the patent do or don’t mean. Burst won more than 90% of the Markman issues, and the judge who issued that ruling was actually surprised when Apple moved to dismiss the suit, which The New York Times didn’t mention.

I still think that Burst.com is going to win the patent lawsuit with Apple, most likely in a very large out-of-court settlement. The reason I label this a “potential” repurchase is that I only want you to buy BRST if you get another chance under $1.50. My target this time is $3, because I think the settlement will be larger than I previously estimated. If you want to read the original recommendation, it is here.

Biotech MegaShift Update

With the equinox just behind us, this is a timely update because fall is the best time of year for biotech stocks. Over the last 20 years, the AMEX Biotech Index (BTK) has compounded at 16% per year, and 80% of the gains come in the fall. Nineteen out of 20 years, the BTK rose in the last half of the year. The numbers are similar for the NASDAQ Biotech Index (NBI), which was up five of the last six years for the September to November three-month period, averaging a 9% gain. Biotech also did pretty well during the credit-related chaos this summer, which provides a good base for the usual yearend strength.

Why do biotech stocks go up about now? There are so many annual medical society meetings and biotech brokerage firm conferences between now and January that it sometimes seems like companies time their clinical trials to conclude in time to have data ready for the fourth quarter. We’ll also see FDA filings before yearend, so companies have something to brag about in their shareholder letters. There also used to be a real push by the FDA to get drugs approved by the end of the year, if only to show Congress that they were doing something and deserved a bigger budget. But the jury is still out on whether the FDA is any more effective after the last few years of leaderless paralysis. Last year’s crop of yearend filings is supposed to get reviewed in 10 months, and that’s another reason for the cluster of regulatory decisions that should be coming soon.

But with only a couple of exceptions, we don’t need the FDA to do anything other than keep their special protocol agreements. What we are looking for is clinical trial or marketplace results. Here’s our stock-by-stock outlook for our Biotech and Avian Flu holdings:

Affymetrix (AFFX) has successfully launched the SNP Array 6.0 DNA chip reader, and it is regaining market share from Illumina. I also expect to see a settlement of their patent lawsuit against Illumina by the end of the year, giving Affymetrix 12% to 15% royalties on Illumina’s sales of the infringing technology. I have raised the buy limit on AFFX $1 to $27, while keeping my target at $40 for now. Buy AFFX.

Amgen (AMGN) said this week that they will cut more than 1,000 jobs at their California headquarters and Rhode Island manufacturing plant, starting to fulfill their promise to shareholders to slash costs to offset possible lower sales of Epogen and Aranesp due to the recent reimbursement changes by Medicare. That’s 5% of the company, and they plan to cut another 1,800 jobs over the next year. They’ll also cut capital spending by $1.9 billion, trim R&D projects and close one of the two Rhode Island plants.

Stocks normally go up when companies cut costs, and there is lots of room for Wall Street to turn positive on Amgen based on how management is protecting the bottom line. Right now, though, Wall Street is neutral on the stock, with only one buy recommendation since mid-March. Next February’s day-long meeting in New York to go through the entire clinical pipeline in detail is going to be a seminal event for AMGN, and I expect many analysts to get ahead of it by putting out buy recommendations between now and the end of the year.

The patent trial against Roche is underway, and we should have a decision by the end of the year. This looks like an easy win for Amgen, and it is going to cost Roche a bundle to settle now, compared with what they would have had to pay before the trial began.

Amgen will earn about $4.20 a share this year, and grow that 12% to $4.70 in 2008, even though revenues will flatten for one year to absorb the Medicare changes. As I’ve said before, if Medicare reverses itself before the blood banks run dry, Amgen’s stock will rocket higher. But I am not counting on that to get it to $95 by January 2009 — we just need a number of Amgen’s drugs currently in trials to advance towards approval. Buy the Amgen January 2009 $70 LEAP call (VAMAN) all the way up to $12.50, for a $25 target price when AMGN stock hits $95, on or before the LEAPs expire.

BioCryst (BCRX) is still looking for a bottom after last week’s clinical disappointment, and they may have found it this morning at $7.24. The lack of Phase II statistical significance for the intramuscular injection of peramivir for seasonal flu, which I covered last week, is a setback for that program. They may have a way out if their 40-person test of injections using a longer needle works out, with results due by the end of the year, but my main interest is intravenous (IV) peramivir for patients hospitalized with avian flu. If that Phase II trial works, as I expect, peramivir will go on the government stockpile purchase list right away, and it would be years before peramivir for seasonal flu would get through its Phase III trials. The stock had a dramatic decline even though it was the far-off program that ran into problems, while the IV peramivir program that will pay off near-term is still on course.

Fodosine for T-cell and cutaneous T-cell leukemia, plus BCX-4208 for transplantation and autoimmune diseases, are also worth $5 to $10 a share. So, we are getting peramivir for avian flu free, even if the seasonal flu indication never pans out. I think BioCryst will book $500 million to $700 million in government stockpile sales by 2010. Buy BCRX up to $13 for a $30 target.

CombinatoRx (CRXX) will have Phase II results for one drug by the end of the year, and just yesterday they started a Phase II trial for CRx-102 in osteoarthritis of the knee. The company will put three more drugs into Phase II trials in the December quarter. The news releases alone should move the stock up. I really like the broad pipeline and high level of clinical activity in a company that spends only $100 million a year on R&D. I want you to buy CRXX under $7.50 for a $16 target this time next year, when they will have results from several of the new Phase II trials and should be announcing partners for Phase III trials.

Crucell (CRXL) had a bit of a bumpy week, when Merck announced that they were discontinuing their HIV study that is produced by CRXL’s PER.C6 technology. This is silly and I was glad to see the stock bounce back after stating that the discontinuation of the study is not in any way related to the safety or efficacy of their technology. Crucell also reaffirmed their revenue outlook for the year — $310.2 million to $317.3 million. I agree, as CRXL will see rapidly accelerating revenues in the September and December quarter as the flu vaccine season gets underway. CRXL is an excellent buy at these levels and up to $28 for my $50 target.

Dendreon (DNDN) could announce a European partnership any time, or they might wait until after the interim peek at the data next year. They will do one or two data presentations between now and then, but I expect the stock to be quiet until a partnership or the peek results are announced. Buy DNDN under $8 for my $40 target after Provenge is approved.

eResearch (ERES) should beat $25 million in sales in the September quarter and then guide for around $28 million in the December period, as revenues finally start accelerating to match the growth in the backlog of cardiac study contracts. I would like to see more than $30 million in orders for the September quarter. The stock has built a steady up-and-to-the-right chart since last November’s plunge under $6, and nearly doubled since then. But there is still a long, long way to go with the dominant company in outsourced cardiac safety testing for FDA clinical trials. ERES is a Top Buy up to $16 for a $30 target.

Geron (GERN) has been in a $6 to $9 range for a year, perhaps showing the impact of Federal policy on embryonic stem cell research. However, no matter which party wins the 2008 election, the bans are likely to be loosened or eliminated. Companies like Geron need independent validation of their work by academics, who in turn are funded by National Institutes of Health grants. Today, these academics write grant applications for non-embryonic stem cell research, even though many of them don’t believe their research will be useful. As Tom Okarma, CEO of Geron, says: “An enormous amount of scientific damage has been done. I assume whoever is elected will change the policy.”

I don’t assume anything, since President Clinton signed this ban into law. But I expect that the candidates will have to take a stand, and if it is Giuliani against Clinton, both will tend to lean towards reviewing or changing the policy.

In the meantime, Geron is spending millions of its own money on stem cell research, and announced in August that animal studies showed transplanted human embryonic stem cells improved heart function after a heart attack. Their showcase program is an embryonic stem cell drug to repair spinal cord damage for the 11,000 people a year that suffer these injuries — the same one that killed Superman. They need FDA approval to start a Phase I trial. GERN is a buy up to $9 for a run to my $18 target after the next major news story.

Isolagen (ILE) will have clinical trial results by the end of the year for the wrinkles and creases study. Most of Wall Street doesn’t expect successful results from the trial, but I think that they are underestimating what the company’s new management team is capable of doing. And any positive news from the trial will push the shares higher. Buy ILE under $4.50 for a $9 first target.

Millennium Pharmaceuticals (MLNM) will present efficacy data from their Phase III study of Velcade as front-line therapy for multiple myeloma at the American Society of Hematology meeting in December. If you recall, this 682-patient study was stopped early because the drug worked so well. If the numbers look better than Celgene’s Revlimid, MLNM will shoot up. In any case, Millennium will file for the label expansion in the first quarter of 2008. The company is now a prime takeover candidate for any one of several big pharmas. Buy MLNM while it is under $12 for my $23 target.

QLT (QLTI) should see some presentations of doctor-sponsored trial results of using Visudyne in combination with Lucentis or other new macular degeneration drugs before the end of the year. I still believe combination therapy is the answer to this crippling disease. Buy QLTI on any dips under $8 for my $16 target.

Rochester Medical (ROCM) could settle with Covidien any day, which will send the stock soaring. I also think that the September quarter will be pretty good, beating the lone estimate out there for seven cents a share. ROCM is a Top Buy based on the possibility of a potential settlement with COV. The buy limit is all the way up at $23 for my $40 target.

Sequenom (SQNM) is our second investment in gene chips, behind Affymetrix. The stock has run up since I recommended it — we currently have a 52% gain. Yesterday, they announced a new assay design and validation service, and they have more new services and modules to announce over the next few months. The news popped the stock almost a buck today, or 15%. It probably would take a couple of scary days in the market to break it back down. I am raising the buy limit to $5 just in case you missed getting in the first time around — it closed at $6.89 today — but I’m keeping the target price at $8 for now.

SXC Health Solutions (SXCI) is extremely cheap, considering that they are one of the key players in keeping down healthcare costs through efficient pharmacy benefit management. I expect major new contract announcements before the end of the year. Buy SXCI under $23 for a move up to $30 by the end of 2007 and my target of $46 by the end of 2008.

ViroPharma (VPHM) is down due to their problems with transient liver side effects in their HCV-796 hepatitis C study partnered with Wyeth. But we own this stock for the management team, which has an opportunity to take the cash flow from Vancocin and buy or in-license another major drug. That announcement could come any day. I want you to buy VPHM on dips under $12 for my $25 target.

China MegaShift

All right, someone has to say it: China is in a bubble stock market similar to the Internet bubble, and it is going to end the same way. I really don’t know if this is equivalent to the beginning of 1999, which means Chinese stocks can go from overpriced to ridiculous, or the end of 1999, which means we are already at ridiculous. Yes, I know they are growing GDP 10% a year, and the government will pull out all the stops to make the 2008 Beijing Olympics a flawless coming-out party. I know that they have more cell phone users than the U.S., more Internet users than the U.S., and a middle class developing like the U.S. in the 1920s and 1930s. But you may remember that there was a little decline in our stock market at the end of the 1920s, and I fear the same is coming in China.

Here’s the problem: Since the beginning of 2006, the Shanghai index is up 400%. This summer, when the U.S. market crumbled, Shanghai went up. This was widely regarded as a good thing and a sign of incredible strength. But the buyers are first-time investors who have never seen a bear market, and they really don’t have a concept of stocks going down and staying down. They have absolutely no experience with that. They don’t sell short, and they don’t buy puts for protection. They never heard of a crash that lasts more than a day. They think that stocks only go up, and one is stupid not to open a brokerage account and buy stocks. And until August 20, it was illegal for them to invest outside of China.

On August 20, the Chinese government started trying to relieve the pressure of money flowing into the Shanghai Stock Exchange by letting mainland investors buy Hong Kong listed stocks, which sell for about a third of the P/E ratio. Bulls on China think that means you just have to buy Hong Kong and wait for the tide of money to lift all the boats. But the Hong Kong Hang Seng index was up 30% in the month after the announcement. It’s already been discounted.

Unfortunately, it is the institutions that are running Hong Kong up, planning to dump their stock on the mainland newcomers. At this week’s Interest Rate Observer Conference, a speaker from Shanghai Shenyin Wanguo Research and Consulting, an institutional research firm, said that Chinese stocks are not in a bubble because they are only trading at 35X next year’s estimated earnings (43X current year estimates). He thought that was cheap for 10% to 15% revenue growth and 15% to 22% earnings growth.

So, there is an obvious risk that Shanghai stocks will start declining as money switches to Hong Kong, institutional traders sell and individual investors learn to their sorrow that some stocks go down and never come back. This week, China Construction Bank went public on the Shanghai Stock Exchange. The stock went up more than 30% the first day. Investors were so disappointed that it didn’t pop at least 50% that they knocked down the Hong Kong-listed shares 7%.

There are honest companies in China, but most of the state-owned enterprises and virtually all of the banks are not among them. Their accounting standards are not up to Western standards, and I am sure that a lot of the numbers being reported are fraudulent. Every bank is bankrupt under Western loan loss reserve standards, and the coming financial crisis will make the U.S. savings and loan mess look like kid stuff. For some reason that I will never understand, many of the big Wall Street China funds invest heavily in these state-owned enterprises. They are going to get clobbered in the downturn. Remember that about a third of the prices in China are still set by the Communist party, so “capitalism” always needs to be in quotes. This system probably won’t blow apart next week, and maybe they can keep it glued together through the Olympics, but some bad stuff is coming.

Will U.S.-listed Chinese companies with American auditors weather this storm? Yes, the companies will. And their stocks should do relatively well, falling maybe 30% while the averages fall 50% to 70% and the real junk goes down 90% to 100%. But you can’t eat relative performance, so we are going to stay out of this MegaShift for now, except for holding UTStarcom (UTSI) for as long as the bubble keeps inflating. We’ll let that market tell us when the game is over, and then we’ll exit UTSI.

Content on Demand MegaShift

Akamai Technologies (AKAM) has been under a bit of pressure since another newsletter recommended selling the stock due to the “pricing war” in content delivery. Prices per byte are coming down, but volume is exploding as video takes over Internet sales and marketing. I think the price declines are already factored in the stock, but the volume explosion is not. This sell-off gives you one last chance to grab AKAM under $30 for my $60 target — don’t miss this gift!

Motorola (MOT) has a new hit phone at last, the Razr2. Retailer polls already show strong sales of the phone, which was released in July, and the current $249 to $299 price will be cut to $199 for the holidays. MOT should ship well over two million phones in the December quarter. Buy the Motorola January 2009 $17.50 LEAP calls (VMAAW) while they are under $4 for a $10.50 target ($28 minus $17.50) in January 2009.

Market Outlook

Yesterday’s Associated Press headline said it all about this market: “Durable Goods Orders Plummet.” According to the first paragraph, durable goods orders fell 4.9% in August, the biggest drop since January. It was not until the 10th paragraph that I found the number I was looking for: Durable goods orders ex-transportation. That was down only 1.8%. You see, the extremely volatile transportation component is dominated by orders for Boeing jets, which dropped 41% in the month. Unless you own Boeing, the transportation component just doesn’t matter. But the mood out there is to provide the glass-half-empty perspective on every number that comes along, and try to scare you about a coming recession. Even before getting to the ex-transportation number, paragraph eight said: “Some put the chance of a recession as high as 50-50.”

Well, I think “some” have put the chances of a recession at 50-50 every month for the last two years. I’m not sure what that comment adds to our store of knowledge, but it’s an irresistible sound bite. When it comes to recessions, there are two really good predictors: The S&P 500 and the Economic Cycle Research Institute (ECRI). The S&P is within 2% of its all-time high. The Weekly Leading Index (WLI) growth rate from ECRI shows a soft patch for growth, but no recession. It fell from over 6% growth in June to under 1% in early September, but stabilized as it became obvious that the Fed would act. The ECRI said: “Following a plunge in August, WLI growth stabilized in early September, even before this week’s rate cuts. Thus, a slowdown in economic growth is clearly in sight, but not a recession.”

Also, one of the best concurrent indicators of real global economic activity is the Baltic Dry Index, which is the price paid to move freight on ships. It is skyrocketing to all-time highs, showing the intense demand for space to move goods.

But over 67% of Americans think that we are on the verge of or in a recession, according to a new Wall Street Journal/NBC News poll. Combine that with the scare stories about October crashes that are all around, and one wonders how the S&P can be so high.

And that is the point.

If the market is doing this well when fear is abundant, what happens when the fears go away? The S&P has been consolidating just under the 1528 to 1534 breakdown range for a few days. The most likely course over the next few weeks is a drifty consolidation between 1500 and the 1555 high, as we work our way through earnings reporting season. Then the Fed meets again on October 30 and 31, and either it’s clear that the credit markets have unlocked, so they declare victory, or they cut rates another half point (50 basis points) to set the economy up for a strong holiday season. Either way, the S&P should move up 100 to 250 points by yearend, followed by another 100 to 250 points in the March quarter. That’s a bull market, and we are well positioned for it.

Dollar Death Watch

This morning, the dollar reached yet another low against the euro, after six straight trading days of looking for a new bottom. I suspect it will stabilize for a few weeks around $1.40 to $1.42, and then plunge again as the October 31 Fed rate cut announcement approaches. Remember that a falling dollar is good for U.S. stocks, so this should be another force igniting the next upleg. Also remember to get out of bonds and keep your cash in yen or euros at EverBank, or hedge yourself with the new Philadelphia Stock Exchange World Currency Options.

The seasons are changing across the United States, as cooler temperatures and shorter days signal that autumn is nearly upon us. And what follows fall? Flu season. I’m sure that many people have already lined up their flu shot appointments in preparation for winter weather and the germs that will likely be spread throughout corporate offices and schools over the next several months. So, that makes this a good time to check in on a MegaShift that has been on the back burner for news: Avian Flu. I’ve had a lot of questions about why nothing seemed to be happening in this area. The short answer is: A lot is happening, but it isn’t on the front page.

In spite of the cartoon above, I take avian flu seriously because the last bird flu epidemic was the Spanish Flu of 1918. The same H5N1 virus infected about 20% of the population of the world and had a 15% to 20% fatality rate, killing 3% to 4% of the world’s population, or 50 million to 65 million people. The current version of the avian flu has a much higher fatality rate of 60% to 70%, so if it mutated to become easy to pass from human to human, the World Health Organization thinks at least 150 million people would die.

As I reported a few issues ago, a mutation in Indonesia has been identified, and it can pass from human to human, although not easily. But when the virus does go airborne and can be passed by sneezing or coughing, that’s when the epidemic begins. In a strange sense, it’s a good thing that this flu kills its victims so quickly, because that gives the virus less time to mutate. When the Swine Flu jumped from pigs to humans in the 1976 epidemic, it became an ongoing threat that has killed about 30,000 people a year in the U.S. alone, and has killed about 100 million people worldwide in the last 30 years. Avian flu has a much higher death rate than Swine Flu.

There have been 200 deaths in 328 confirmed cases of avian flu since 1997:

Rank	Country Name	Number
	Global	328
1	Indonesia	106
2	Vietnam	100
3	Egypt	38
4	China	25
4	Thailand	25
5	Turkey	12
6	Azerbaijan	8
7	Cambodia	7
8	Iraq	3
9	Laos	2
10	Djibouti	1
10	Nigeria	1

At the end of August, researchers at the Fred Hutchinson Cancer Research Center confirmed human-to-human transmission of H5N1 between eight people within a family in Indonesia. All but one died, suggesting that this mutation was even more virulent. Indonesia just announced their latest death 10 days ago. Chinese experts just confirmed an outbreak of H5N1 in ducks in the southern province of Guangdong on farms close to the provincial capital, Guangzhou, which is near Hong Kong. Interestingly, the ducks had been vaccinated against H5N1, so the virus must have mutated again. Last week, the World Health Organization warned China and other Asian nations: “Despite efforts to control outbreaks, H5N1 has become deeply rooted in domestic birds, making it difficult to control the spread of the virus.”

Obviously, Asia is nature’s laboratory for producing this and other viruses, mostly because so many people live in close proximity to chickens, ducks and pigs. The overwhelming number of people and small farms combined with the lack of resources to monitor or track infections and deaths means little can be done to prevent or even monitor virus mutations. As our Center for Disease Control says:

“The highly pathogenic avian influenza A (H5N1) epizootic (animal outbreak) in Asia, Europe, the Near East, and Africa is not expected to diminish significantly in the short term. It is likely that H5N1 virus infections among domestic poultry have become endemic in certain areas and that sporadic human infections resulting from direct contact with infected poultry and/or wild birds will continue to occur. So far, the spread of H5N1 virus from person-to-person has been very rare, limited and unsustained. However, this epizootic continues to pose an important public health threat.

“There is little pre-existing natural immunity to H5N1 virus infection in the human population. If H5N1 viruses gain the ability for efficient and sustained transmission among humans, an influenza pandemic could result, with potentially high rates of illness and death worldwide…

“Research suggests that currently circulating strains of H5N1 viruses are becoming more capable of causing disease (pathogenic) in animals than were earlier H5N1 viruses. One study found that ducks infected with H5N1 virus are now shedding more virus for longer periods without showing symptoms of illness. This finding has implications for the role of ducks in transmitting disease to other birds and possibly to humans as well. Additionally, other findings have documented H5N1 virus infection among pigs in China and Vietnam…”

The problem is also in the West. In July, the state of Virginia had to ban all live poultry sales and shows for the month after avian flu antibodies were discovered in a flock of 54,000 turkeys on a Shenandoah County farm. Ten days ago, Germany found H5N1 in frozen duck meat and said that some of it probably got to consumers’ tables. As a preventive measure, they killed 334,000 ducks on farms near the town of Wachenroth.

Now after updating you on all the recent occurrences and mutations of the avian flu virus, it is important to remember that we do not need a pandemic to make money in the Avian Flu MegaShift. Because an airborne, human-carried mutation of the avian flu is almost inevitable, governments around the world are stockpiling vaccines and antiviral drugs. I expect that the vaccine money is completely wasted, as any vaccine that we have today is not likely to be very useful against a future mutation. Crucell (CRXL), though, has invented a vaccine development technology using human cell lines instead of chicken eggs, and that could sharply reduce the time to both develop an effective vaccine and then produce it. This week, Crucell said that they developed an antibody against the current H5N1 strain, and this may be useful for a human-borne version or may at least speed the development of a new antibody. CRXL still remains a great buy under $28 for my $50 target.

So, with the exception of Crucell’s human cell vaccines, I think the best way to prepare for an avian flu outbreak is by producing and stockpiling antivirals. The antiviral drugs like Tamiflu and Relenza block the flu virus from escaping an infected cell and spreading further. Even though the drugs have to be taken within 48 hours of getting the flu, they have some effectiveness and will be widely used for the two priority classes: Healthcare workers and politicians. (I am not kidding; the politicians put themselves in second position to get drugs in case of an epidemic, showing that they still have a small sense of shame — otherwise, they would have outranked healthcare workers.) Gilead Sciences (GILD) makes Tamiflu, and we made a 206% profit in 18 months on LEAP options on that stock. GlaxoSmithKline makes Relenza, but it is only a tiny portion of that big pharma’s revenues, so it’s not a good investment for the Avian Flu MegaShift.

That brings us to BioCryst (BCRX), which announced some bad news after the close yesterday. And, of course, the stock was clobbered today, closing down $3.78 to $8.00. To put this in perspective, BioCryst has Fodosine in a Phase IIa trial for patients with T-cell leukemia and in a Phase I trial in cutaneous T-cell lymphoma. It also has BCX-4208 in trials for transplantation and autoimmune diseases; that drug is being developed in a partnership with Roche. Those two drugs together are worth $5 to $10 a share.

But the drug that I am most interested in is peramivir, which is in Phase II trials as an intramuscular injection for seasonal flu and, separately, as an intravenous drip for hospitalized avian flu patients. Yesterday, the company announced preliminary results for the intramuscular seasonal flu trial. This was a randomized, double-blind placebo-controlled dose ranging study in 313 patients with confirmed flu, testing both a 150-milligram and a 300-milligram single injection of peramivir to reduce the duration of symptoms in seasonal flu. Both dosages were safe and well-tolerated. Although the 150-milligram dose reduced duration by 22.9 hours and the 300-milligram dose reduced it by 21.1 hours, neither result was statistically significant. It is also not intuitive that the 150-milligram dose did better than the 300 milligram dose. Digging into the data, the company realized that a one-inch needle was used in this trial, while a 1.5-inch needle was used in the successful Phase I trial. So, they suspect that only about one-third of the patients actually got a meaningful amount of the drug.

They found the one-third, or 101 patients, by doing a lab test called serum creatine kinase elevations over baseline. In this group, peramivir showed an improvement of 44.6 hours over placebo at the 150-milligram dose and 64.8 hours at the 300-milligram dose. So, the dose response made sense, even though the subgroups were too small to be statistically significant. The 2.6-day improvement seen at the 300-milligram level would have been very statistically significant if that arm of the whole study had shown similar statistics.

I have a couple of problems with the company’s reasoning. The first being that lots of things can elevate creatine kinase, including exercise or muscle injury. The second is that no one puts a needle in up to the hilt, so the actual injection depth difference between the 1.5-inch needle used in Phase I and the one-inch needle used in Phase II could be pretty small or nonexistent. The company plans to test their theory by running a quick 40-person test in the fourth quarter, and then start their Phase III program on schedule by yearend.

While suspending judgment on the intramuscular program, I don’t think these results impact the intravenous avian flu program at all, which is what I care about. Obviously, peramivir has a positive impact on flu, and intravenous administration gets a heck of a lot more drug into a person than a shot. I still think the Phase II intravenous trial will be successful, and the company will book $500 million to $700 million in government stockpile sales by 2010.

But I also realize that if the 40-person test is not successful and BioCryst has to abandon the seasonal flu indication, the stock could get hit again. So, I am reducing my buy limit to $13 — still far above the current price — and taking off the Top Buy designation until we see the results of the 40-person test. But I am not changing my target price, which reflects a successful avian flu drug, plus Fodosine and BCX-4208. Buy BCRX up to $13 for a $30 target.

Biotech MegaShift

Amgen (AMGN) presented at the Merrill Lynch European Conference, and it was one of the most level-headed presentations that I have ever been exposed to. These folks are good! They went through the Medicare decision very carefully, and said that they will let the angry doctor groups like the American Society of Clinical Oncology (ASCO) carry the fight to overturn it. After the Congressional recess, the Senate voted 100-to-0 for a “Sense of the Senate” resolution to overturn it. Those doctors are organized! During the recess, they brought Senators in to see their treatment facilities, and then pointed out that they will have to ask aging, often infirm cancer patients to take periodic 100-mile roundtrips from a radiation clinic to a hospital to get a blood transfusion.

The company also said that with very few exceptions, the private payers are not following the Medicare guidelines, but are sticking to ASCO guidelines. Regarding the September 11 meeting on the use of Epogen and Aranesp for kidney dialysis, they were very pleased with the outcome. I know you may have read some other newsletter editors advising buying puts on AMGN before that meeting because “they are going to get creamed again,” but they were wrong. The stock has been up $2 to $3.50 a share since the meeting.

Another of the bear stories is that Amgen has a weak pipeline. So, management mentioned upcoming data on three different products in Phase III trials, with numerous Phase II programs behind that. The company is going to do another “open the kimono” meeting in February in New York, spending a whole day discussing all their clinical work. The last time they did this, the stock took off.

The patent trial against Roche is also underway. I thought Roche would settle rather than proceed with what looks like a sure loser, but to each their own. Amgen management seemed very confident of victory.

Overall, it was a good, solid presentation that made it obvious that the stock is way too cheap. They will earn $4.13 to $4.23 a share this year, and the 14% reduction in their workforce means that next year should show 12% earnings growth to the $4.70 area even as revenues flatten for one year to absorb the Medicare changes. Top-line growth will resume at 20% a year after that. Of course, if the doctors or Congress prevails and Medicare reverses themselves before the blood banks run dry, the stock will rocket higher. But I am not counting on that to get it to $95 by January 2009 — remember we’re betting that a number of drugs currently in trials will advance towards approval, which is what will ultimately get us to our target. Buy the Amgen January 2009 $70 LEAP call (VAMAN) all the way up to $12.50, for a $25 target price when AMGN stock hits $95, on or before the LEAPs expire.

Biogen Idec (BIIB) made a strong presentation at the UBS Global Life Sciences Conference, and it pushed our LEAP call options up to their target price. Biotech usually has a good fourth quarter due to the number of scientific conferences, but we should not get piggish. Sell the Biogen January 2008 $45 calls (IDKAI) for a 286.5% gain in 19 months.

Millennium Pharmaceuticals (MLNM) moved up about $1 a share after an interim analysis by an independent committee of one of the Phase III studies of Velcade as front-line therapy for multiple myeloma. The analysis showed such strong efficacy that the company halted the trial to allow patients in the placebo arm to have access to Velcade. This happens when the results are so clear that it would be unethical to continue to assign patients to a placebo, and it is about the best news a company can get. Velcade was approved in 2003 as a second-line treatment for those who have failed on other drugs for multiple myeloma. It is co-marketed by Millennium and Johnson & Johnson in the U.S. and did $220 million in sales last year.

Millennium said that the study demonstrated highly statistically significant improvement in all efficacy measures, which included time-to-disease progression (the primary endpoint), progression-free survival, overall survival and complete remission rate, compared with the control arm. The Velcade efficacy data from this 682-patient study will be presented at the American Society of Hematology meeting in December, and then we will know if it is likely to replace Revlimid as the standard of care.

Millennium will file for the label expansion in the first quarter of 2008. After approval, Velcade will compete with Celgene’s Thalomid and Revlimid. The front-line market is about the same size as the second-line market, and I expect Velcade to pick up $75 million to $150 million in new sales. Thalomid is approved for front-line therapy, and Revlimid is widely used off-label. Revlimid is an oral drug, and doctors worry about patient compliance. Velcade is administered by IV, so the dosing is much less frequent and the docs know for sure it happened. They are both good drugs, but CELG has a $26.5 billion market capitalization, and MLNM has a $3.3 billion market cap. I think it is obvious where the opportunity lies. Heck, Celgene could buy Millennium for $7.3 billion and get a terrific portfolio of cancer drugs, plus the royalties on Integrilin, the successful heart drug. Buy MLNM while it is under $12 for my $23 target, which happens to translate to a $7.3 billion market capitalization.

China MegaShift

UTStarcom (UTSI) completed their internal investigation of historical sales contracts in China, which was conducted by their Audit Committee, independent legal counsel and forensic accountants. The results were no big deal. They found that in one of the five regions in China, some revenue was recognized too early, so they will restate financials to shift it to later periods. They will have the final numbers in a few weeks, but there will be no impact on cash or, as near as I can tell, on cumulative sales. The sales were not faked, they were just recognized incorrectly.

UTSI will also have to beef up their internal controls to comply with Sarbanes-Oxley. I am hoping that CEO Hong Lu will take responsibility and resign after the restatement, which would move the stock up dramatically. For now, hold UTSI.

Content on Demand MegaShift

QuickLogic (QUIK) has an important part in the Model 7500 ultra-mobile PC from Taiwan’s HTC. There was a tear-down report in RF Design Line this week that not only confirmed that the Customer-Specific Standard Product is in there, but praised it extensively for both the functions that it performed and the fact that HTC simply reprogrammed it to create a sister product, rather than have to redesign the whole PC. Good stuff. QUIK is a Top Buy up to my recently increased buy limit of $4 for an $8 target.

Security MegaShift

SiRF Technology (SIRF) wobbled a bit when Avnet signed a deal to distribute Global Positioning System (GPS) products made by LinksPoint. It’s funny how Wall Street will look negatively at almost any announcement concerning a stock that they are currently down on. This was not a component distribution deal — LinksPoint doesn’t make chips, they make GPS systems. It was the Avnet Technology Solutions division that made this announcement, which sells mobile solutions like remote printing, RFID and mobile printing equipment.

The real takeaway should have been that Avnet sees enough demand for GPS equipment from its mobility customers to add another supplier to its current roster of Motorola, Intermec and Enterprise Mobility. All four of these companies, including LinksPoint, are SiRF customers. LinksPoint has been a customer since 2003, and it embeds licensed SiRF software in some of its products. SIRF is a Top Buy up to $22 for my $40 target. Don’t miss this one.

Nanotechnology & New Materials MegaShift

Subscriber Robert asked: “In any new technology, there are the ‘pick and shovel’ companies. What do you think of FEIC as a pick and shovel company for nanotechnology?”

As long-time subscribers may remember, we previously owned Accelrys (ACCL) and Veeco (VECO) as pick and shovel companies for nanotech. Accelrys sells software and Veeco sells atomic force microscopes from one division. We sold Veeco due to their large exposure to semiconductor equipment, and shortly after that they made a bid for FEI Corp. (FEIC) that ultimately fell through.

All three of these are good companies, and at the right time I expect to own them all. FEIC can earn $1.60 or so next year, so it is just under 20X earnings — not terribly expensive. But R&D budgets are somewhat cyclical, and when Wall Street starts to worry about a slowdown, this stock does not do well. I expect it to move up in the strong market that I see coming, but I’ve decided to wait for the bottom of the next cycle to recommend it. I’ll let you know when the time is right to get on board.

New Energy Technology MegaShift

Energy Focus (EFOI) closed 22% higher on Tuesday, after hitting an intraday high of $7.85, based on orders for its EFO LED/optical fiber display case lighting from a Wal-Mart SuperCenter and a Sam’s Club, both in Cabo San Lucas. The energy savings payback on these systems is pretty quick, and Wal-Mart de Mexico includes 122 Super Centers and 78 Sam’s Clubs. Of course, that’s just the camel’s nose under the tent to get into Wal-Mart in the U.S. If you didn’t buy this stock yet, don’t chase it now. See if it settles back under my buy limit over the next couple of weeks. If not, I’ll raise the limit. For now, buy any dip in EFOI under $6 for my $15 target.

Infinity Energy Resources (IFNY) still has not returned my calls to the CEO, nor have they held a conference call about their financial situation. The new management team had a very positive earnings conference call on August 10, and obviously they did not see this coming. But to not have a conference call now, if only to hold hands, is a public relations disaster that will tar them for some time to come. They aren’t talking to anyone else, either — that’s now against the law — yet, they work for us. I am sure Infinity’s assets net of the bank debt are worth far more than the current stock price, so I don’t see any sensible course other than to hold IFNY until they resolve the situation.

Tax Loss Selling

Jeffery asked: “Can you include some strategies for year-end tax loss selling? I have some large realized gains on some of our sells. I also have some huge losses in stocks such as Gasco, Fuel Cell, Infinity, MobilePro, QLT, Telkonet, UTStarcom, ViroPharma and Zhone. If these stocks are not going to have any news to move them for the next few months, does it make sense to sell them, realize the tax loss and then buy them back when allowed by the IRS rules? (I forget whether that is 30 or 60 days). Know you can’t give advice on specific stocks, but some general information as to which of our holdings would fit this strategy would be helpful.”

The “wash sale” rule requires a taxable account to wait 30 days before buying a stock back. During the next 30 days, we could see a major hurricane that would impact the energy stocks, and between now and the end of the year, I expect a very strong market. It’s hard to pick a 30-day window when stocks might be more stable, although I expect those periods to come around 1605 and 1710 on the S&P 500. At that time, it would make the most sense to take a tax loss in MobilePro (MOBL), UTStarcom (UTSI) and Zhone Technologies (ZHNE). Those are stocks that we probably would not buy back today, simply because there are others where the future is clearer. Selling and buying back QLT (QLTI) is riskier in the sense that you may have to buy back at a higher price, and might not want to do that for a situation that is still murky. I would not take the chance of being out of Telkonet (TKO) when they announce a change in CEOs, or out of ViroPharma (VPHM) when they announce their next acquisition. Given what is happening with the dollar and oil prices, with the potential for a cold winter right around the corner, I would not try a wash sale strategy in Gasco Energy (GSX), FuelCell Energy (FCEL) or even Infinity Energy Resources (IFNY) in spite of their current financial travails. So, for now, I recommend that you keep these companies in your portfolios, and I’ll let you know when you should sell.

Why You Should Care About a British Building Society

As the dollar collapses, you are witnessing one of the biggest currency moves of all time. It certainly would qualify for a MegaShift if it was a change in technology, so this week I want to explain what is happening one more time and let you think through how it applies to all your assets. Our MegaShift stocks should benefit greatly from what is going on.

Who would have thought that Northern Rock, a company that we never heard about on this side of the pond, would provide the decisive economic event of 2007? It isn’t surprising that this round of Fed mismanagement blew up a mortgage banker, although I sure didn’t expect it to be in Britain.

As the events surrounding Northern Rock (which we’ll discuss in a moment) play out, I think that you’ll be able to look back secure in the knowledge that you knew what was coming, and that you are protected. Others are not going to be so lucky. We have hit a point where the dollar might finally rise against the British pound and the euro for a while, yet that will still be bad news for most investors.

The background to what is happening is the foreign exchange market and international capital flows. Don’t let your eyes glaze over; this is going to be easy. You may know that the foreign exchange market (or Forex, to those who use buzzwords to impress laymen) is the largest, most liquid market in the world. About $3 trillion in currency trades on a good day, much more than what trades on all world stock markets combined.

The currency market performs many useful functions. It facilitates international trade and investment. It also adjusts interest rates and risks between countries, by changing the exchange ratio of the currencies. It also moves liquidity from areas of excess capital to areas that need capital; or, to put it another way, from countries that are saving or have high cash inflows to countries that are investing, spending or have high cash outflows. It does all this at a price — the exchange rate — that reflects two other prices, the two national interest rates, and a host of other factors including creditworthiness, fiscal policies, monetary policies and so on.

That’s why all of this is important to you. What happens in the foreign exchange market affects your interest rates, the value of your assets (including your stocks), the availability of credit and the global purchasing power of your cash.

With the sub-prime mortgage mess locking up the credit markets and the dollar dropping rapidly due to the Bernanke Fed turning on the monetary firehose, the stage is set for a financial accident. Last week, Alan Greenspan said that the credit crunch is “identical” to the Russian default crises of 1998, which brought down Long Term Capital Management because they were the most leveraged speculator at 100-to-1 debt to equity.

This week, Treasury Secretary Hank Paulson, who used to run Goldman Sachs, said that we have a “severe” crisis of confidence in the credit markets that it is likely to last longer than most financial shocks that we’ve seen in the last 20 years, and that it might last longer than the Latin American debt crises of the 1980s.

Both of them were saying these things for one main reason: To send a message to Ben Bernanke. Last week I said that the Fed would cut the Fed funds rate for the first time in four years by a half a percentage point, as they did on Tuesday. That was an easy prediction, because the Fed already was lending just below 4.75%, even though the stated Fed funds rate was 5.25%. And because Wall Street was only giving a 58% chance to a half-a-point cut, it was also easy to predict Tuesday’s market explosion afterwards. Big moves up are not made by bulls buying stocks, they are made by bears covering shorts and the underinvested trying to get on a train that seems to be leaving the station.

So now, since I seem to be on a roll, let me make five more predictions:

• This Fed cut is not going to be any significant help to the credit markets, because money was already available at 4.75% and the credit markets are still locked up. Alan Greenspan is, as usual, wrong. This is not “identical” to 1998, it is much worse:
• Then it was just Russia going down the tubes; now it is most of the much larger U.S. mortgage market melting down.
• Then only Long Term Capital Management and a few other hedge funds drank the efficient markets/high leverage Kool-Aid; now it is hundreds of private equity funds around the world.
• Then the “carry trade” — borrowing in low-cost Japanese yen, buying high-risk, high-yield debt and banking the spread — accounted for about $140 billion; today it is over $1 trillion — a 600% larger problem.
• There will be more Fed cuts, and they will continue to print dollars at the current 14% annual rate or higher.
• The dollar will continue to decline against a basket of currencies, but the relative weakness will shift from versus the pound and euro, to versus the yen and other Asian currencies. That’s because the pound is about to be debased at the same clip as the dollar, thanks to Northern Rock, and the euro will get sucked in. Meanwhile, the yen will soar as hedge funds buy yen to repay loans and unwind their carry trades before the losses on their high-risk investments get even worse (or as their investors pull out capital). In 1998, the yen shot up 20% as they unwound only $140 billion in carry trades.
• Assets like gold, other metals, timber, stocks and eventually real estate will soar. Today, the Canadian dollar hit parity with the U.S. dollar for the first time in 30 years, in great part because Canada has raw materials and resources. My parabolic upturn scenario to 1800 or more on the S&P 500 by March 2008, which looked ridiculous just five weeks ago, is very much on the table.
• The Northern Rock fiasco in Britain will cause the British and then the European Union to cut rates, print money and bail out their financial institutions, contributing to the sharp increase in the value of real assets, while possibly temporarily stabilizing their currencies versus the dollar (everyone drowns at the same rate). Today, the euro breached $1.40 for the first time, and if it can roughly hold that level, it could replace the dollar as the world’s reserve currency.

Now to be clear on the role that Northern Rock — which should be known after this week as Northern Pebble or maybe Northern Sand — plays in all this, let’s focus on it. Northern Rock started as a “building society” (similar to a savings and loan in the U.S.) in the industrial town of Newcastle, and it grew to become Britain’s eighth-biggest bank, with $230 billion in assets — loans. It is, or was, the fifth-largest mortgage lender in Britain, outgrowing its rivals by adopting new financial technologies (shades of Long Term Capital Management) and leveraging its balance sheet 37-to-1 (shades of Long Term Capital Management). They carry their $230 billion in assets on an equity base of only $6 billion, using financial technology to manage their borrowing and liabilities to control risk. Most of the time. Their liabilities included just $61 billion in deposits, as of a week ago, which was overwhelmed by $163 billion in debt, much of that in short-term instruments or inter-bank borrowing.

So here is another financial company built by borrowing short, lending long and leveraging to the hilt. When the credit markets locked up, it became progressively harder and more expensive to roll over the debt, and then impossible. Word got around that there was a problem, and last Friday Northern Rock was rescued by the Bank of England in its first lender-of-last-resort operation in 34 years. But over the weekend the bank lost over $4 billion in deposits, and Monday started with pictures on the telly of people lining up to get their money out when the doors opened. It turned into a good old-fashioned run on the bank, even though the government kept repeating that Northern Rock is secure and solvent.

Why? Because the British government said that their Financial Services Authority stood behind their standard, legal guarantee — if the bank goes under, depositors are 100% protected on their first $4,000, 90% protected on the next $65,000, and out of luck on anything over that. This was their guarantee to “calm” the markets. Of course, it was like throwing gasoline on a fire — “Mabel, we could lose 10% of our savings over $4,000 if we don’t get our money out of Northern Rock today. Be a love and pop round there to close the account and move it across the street.”

Prime Minister Gordon Brown is steadfastly refusing to force a takeover or guarantee all depositors against all losses, citing Britain’s “controlled experiment in free market central banking” (!) as opposed to the meddling interference by U.S. and European Union regulators. One British newspaper reported that the Bank of England refused to provide a credit line to potential bidders for the failed bank because it might be seen as a government subsidy that violates European Union rules. Another paper said that the Bank of England expected bidders to come forth after Northern Rock’s yearend financial statements are published! With this lackadaisical approach, Northern Rock could become a monster financial cancer requiring an enormous bailout by the British government. Just two days before last Friday’s bailout, Mervyn King, the Governor of the Bank of England, gave a blistering diatribe against bank bailouts, so the British commentators have concluded that the Bank of England and Financial Service Authority are taking a hard line, the government is panicking, and the whole crowd is less than competent. Quite so.

There has never been a market-based solution to a bank run in the monetary history of the world, unless you call shutting down the bank and liquidating the depositors at a loss a solution to the problem. The Bank of England apparently has no idea what is about to hit them. Anyone with any sense will get their deposits over the $4,000 guarantee out of the bank, and all $8 billion of inter-bank deposits have probably disappeared already. Another $35 billion in short-term debt will be impossible to roll over. The Bank of England is going to have to come up with $60 billion to $80 billion in cash, the biggest single loan ever made by any government to any private company anywhere in the world. They would have to take Northern Rock’s entire owner-occupied mortgage loan portfolio for security on a $60 billion loan, and anything over that comes backed by $12 billion in mortgage loans to real estate investors and speculators, or another $16 billion in completely unsecured loans. These unsecured loans are almost triple the bank’s $6 billion in equity.

And then what happens when depositors look at the other “financial engineering” mortgage lending banks, like Alliance & Leicester and Bradford & Bingley, or perhaps even Europe’s biggest mortgage bank, Halifax/HBOS? Will they conclude that the Bank of England is tapped out after the Northern Rock rescue, so they’d better get their deposits out of those banks, too?

I think that Prime Minister Brown is going to wind up offering a 100% guarantee to all British banks, and the Bank of England will have to drop interest rates and flood their economy with money. That may stop the pound from increasing against the dollar for a while, but it will exacerbate both inflation and the skyrocketing prices of real assets like oil, metals, gold, silver, stocks and real estate. You will certainly see the yen soar as the carry trades unwind.

An easy way to profit from all this is to buy the Rydex Japanese yen exchange traded fund, called CurrencyShares Japanese Yen Trust (FXY) or, if you understand options, the new Philadelphia Exchange World Currency Options. An even easier way — the strategy that we’re going to stick to — is to stay fully invested in our MegaShift stocks, which benefit tremendously from worldwide currency debasement. Stocks are companies, and companies are real assets, with ours growing at rapid rates and throwing off cash either now or soon. That’s why stocks always shoot up when a currency tanks.

Market Outlook

As you know the Fed decided to cut the Federal Funds rate on Tuesday by a half of a point, and the news sent the market skyrocketing. Tuesday’s explosive upmove needs to be consolidated over the next few days, as we went right back to the 1530 level on the S&P 500 that I targeted last week. Also, the VIX Fear & Greed Index fell sharply on Tuesday, and we need to build up some more negative sentiment to fuel the next upleg.

Like you, I am hearing the bears squealing in pain about the Fed bailing everybody out, the weak dollar, coming inflation, and so on. As I’ve been saying for months, the bears are right about everything, but the market is going to go up anyway. I expect we will see a major top sometime in the next two or three years, perhaps as early as March 2008 if there is a parabolic blow-off. More likely, it will come in the first or second year of President Clinton’s term, limiting her to one term of office and giving the Republicans a major economic card to play for years to come.

But that is then, and this is now. As long as the S&P 500 doesn’t fail at the 1530 level, which I am watching carefully, the next six months should be fabulous for our stocks. Either a sideways-to-down drifting consolidation for a few days or a quick, scary test back down to 1475 would be fine. Unless the S&P decisively breaks 1440, the bull market is intact.

I spend almost all my investment time thinking about the New World that we live in, which is based on rapidly-changing technologies. But my focus isn’t limited to just the impact of computers and the Internet, although that is my professional background and I have been online since 1969, with an online service provider starting in the 1980s. You see, the New World is also about biotech and the vast changes in medicine that are coming, the transformation of new energy technologies to extend or replace the use of oil, the nanotechnology revolution that is just over the horizon, and a score of other coming trends that we can’t even imagine. Most people have virtually no idea about how dramatically their lives will change with the new technologies currently being developed or yet to be discovered. For example, based on the incredible things happening in biotech, did you know that the first person to live to be 150 is alive today, and about 50 years old right now? (And, I hope, a subscriber to New World Investor.) The average female baby born in the U.S. in 2007 will live to see 2107. So, people who are going to live that long have to radically rethink the arc of their lives and how they are going to use the new technologies for profit and pleasure.

Yet, all this exists in a world with other, non-technology forces, and I have to spend some time researching and analyzing them, and then reporting my conclusions to you here. I have also spent an awful lot of time in my 37-year professional career trying to understand how the capital markets really work, right down to the nitty-gritty of proper statistical methods. I started with an efficient capital markets/random walk bias, but I realized early on that we operate in a market that is far from rational — the last price of a stock is often set by the most optimistic, possibly wild-eyed buyer transacting with the most pessimistic, possibly clinically depressed seller. Why anyone thinks that the price of that transaction represents a meaningful estimate of a stock’s future value is beyond me.

What all these musings, research and analysis come down to is this weekly letter to you, in which I try to get the big picture right, explain what I think is happening with the macroeconomic forces that could impact us, and then translate all the technology changes that are coming into stock recommendations that can have a dramatic positive effect on your finances. Sometimes that works wonderfully well, and sometimes I either misjudge the technology (too early, usually) or the ability of a management to take advantage of their opportunity. I am always trying to increase my batting average, and I’ll never be satisfied with less than 1.000.

So, what has the focus of my big picture research been recently? Well, as you know, I’ve been hammering for several months on the Fed’s unannounced but obvious decision to steadily erode the value of the dollar, what that means for the markets and our stocks, and the real possibility of a parabolic upswing in the broad market. I’ve talked about the real factor driving energy prices: Demand from Asia, especially China. I’ve even said that U.S. real estate is a great buy right now, as the falling dollar will push up the value of all real assets. And I’ve said that you should get out of all fixed income, because the falling dollar will eventually push up interest rates and clobber the value of bonds. Incidentally, foreign central banks sold off U.S. debt at a record rate in August, after being big buyers in the first few months of the year.

With the Fed backed into a corner on an embarrassing rate cut at next week’s meeting, the dollar is hitting all-time lows, oil is hitting all-time highs within 24 hours of OPEC saying that they would increase production, and gold has been on a rocket ride. None of this should come as a surprise to you — we’ve been talking about it for months. While the wave theorists and technicians have been calling for a dramatic decline or crash in the stock market, the VIX Fear & Greed Index has stayed remarkably high. That shows the stored-up energy potential for a parabolic move of hundreds of points to the upside in the S&P 500, as it drops back to the mid- to low-teens. Yes, it could be a bull trap, there could be a terrorist event or a hurricane that smashes the Gulf Coast oil facilities, and the market could take yet another scary, fast drop. But I hope by now that you realize that in a bull market, these only rebuild energy for another slingshot move up, and you are not letting them mess with your emotions.

The key levels on the upside now are to look for a breakout over 1482 for the S&P, which we may have gotten today. If the S&P stays over 1482 tomorrow as a weekly close, it should lead to a run to 1530, then over the all-time high of 1555, then on to 1607, 1710 or higher by March 2008. No market moves in a straight line, of course. Periods of consolidation or quick declines are needed to rebuild bearish energy that can be tapped to fuel the next upleg.

On the downside, it would be nice to see 1452 hold as support, but even a drop back to 1440 or even 1395 should not concern you. I would only get worried if the very long-term support at 1310 failed to hold, as that might mean that the character of the market really had changed. As for those who say that the market has to decline to discount the higher possibility of a recession, I say look at the S&P adjusted for the value of the dollar. It has already had a dramatic decline.

As for the Fed, on August 15 the esteemed St. Louis Fed President William Poole made the first comments from an actual Fed official after the multibillion dollar cash injections began. He said that the market turbulence fueled by the sub-prime loan default fallout doesn’t threaten U.S. economic growth, and that only a “calamity” could justify cutting rates now. He added: “The issue to me is whether it spread into business fixed investment or consumption. I don’t see evidence that that is taking place. No one has called up and said the sky is falling.”

He concluded quite forcefully: “It’s premature to say this upset in the market is changing the course of the economy in any fundamental way. I don’t see any impact as of yet on the real economy or on the inflation rate. Obviously, there could be an impact, but we have to rely on some real evidence. If the Federal Reserve were to act when it turns out there is no impact, then clearly the market would say these guys really don’t have the intelligence they need to have a policy actually based on solid evidence.”

Less than 48 hours later, the Bernanke Fed cut the discount rate.

This week, Mr. Poole said that he will retire from the St. Louis Fed next March.

The market will do whatever it wants to do in response to a 50-basis-point (half a percentage point) Fed cut next week, but I feel very good about the future for our stocks, including almost all of the problem children. Remember, as I said above, there are incredible things happening in the New World that we live in. New technologies are being developed that are going to shape the way live in the next 50 to 100 to 1,000 years. And these new developments should provide you with some nice profits if you’re invested in the right companies. So, in this issue, I take a look at the stocks in all of our MegaShifts and repeat the core reason that we hold every stock, in addition to covering some of the recent news.

Avian Flu MegaShift

BioCryst (BCRX) has numerous milestones coming in the near term, including the start of the Phase II intravenous trial of peramivir against the avian flu and the Phase III intramuscular trial against seasonal flu. Peramivir is the next big antiviral for bird flu. BCRX remains a Top Buy all the way up to $19 for my $30 target, and it may be the most undervalued stock on my buy list.

Crucell (CRXL) owns the next-generation human cell-based vaccine production technology, which will replace the current chicken egg-based production. They have licensed their technology to over 70 companies, most recently Merck, for upfront payments and royalties. Some of the licenses are even for avian flu programs. CRXL is an excellent buy at these levels and up to $28 for my $50 target.

Biotech MegaShift

Affymetrix (AFFX) is the leader in gene chips and is about to settle a patent lawsuit by extracting royalties from its main competitor, Illumina. Gene chips are moving from DNA research to clinical lab diagnosis, and eventually they will be used at the point of care in most doctors’ offices and clinics around the world. AFFX is a buy up to $27 for a $40 target.

Amgen (AMGN) is one of the largest biotech companies out there, with a well-established pipeline of drugs. I recommended this stock because AMGN has a lot of drugs in trials and the ability to get these drugs approved and on the shelves. They had their date with the FDA to discuss red blood cell stimulating drugs in kidney dialysis patients. Exactly as I expected, the FDA made absolutely no change to the use of Epogen and Aranesp, Amgen’s leading products for this treatment. The January 2009 $70 LEAP call (VAMAN) has 17 months to work out, with a buy limit all the way up at $12.50, and a $25 target price when AMGN stock hits $95.

Biogen Idec (BIIB) has successfully reintroduced Tysabri, and the LEAP option that I recommended in February 2006 at $5.95 is closing in on its $23 target. With four months left to expiration, I recommend that you hold the January 2008 $45 calls (IDK AI) for my $23 target. When that triggers, we’ll walk away with a nice 287% gain.

CombinatoRx (CRXX) follows a lower-risk drug development strategy by combining already-approved drugs into new, patentable therapies. Their intellectual property surrounding their automated search for and analysis of potential combinations is unique and undervalued. They have several Phase II studies underway, and I expect them to partner the successful ones to progress into Phase III trials. CRXX is a buy under $7.50 for a $16 target this time next year.

Dendreon (DNDN) has the first personalized prostate cancer vaccine recommended for approval by an FDA Advisory Committee. They have powered an interim peek at the current clinical data, scheduled for mid-2008, to let them file for approval under a Special Protocol Assessment with the FDA. As you know, I expect the vaccine to be approved, and it will just be the first of many billion dollar drugs using Dendreon’s technology. Buy under $8 for a $40 target after Provenge is approved.

eResearch (ERES) has more than half the market for the cardiac safety impact trials now required by the FDA for virtually every new drug. Revenues are accelerating with about a one-year lag from when the orders rolled in. ERES is a Top Buy up to $16 for my $30 target.

Geron (GERN) is the technology leader in both anti-telomerase drugs, the only potential silver bullet against cancer, and stem cell research. They are in clinical trials with both technologies, and they have a huge amount of intellectual property that they can license or use in joint ventures. GERN is a buy up to $9 for my $18 target.

Isolagen (ILE) is a cosmetic medicine leader, an area that will see rapid growth as the baby boomers age. Their lead product, the Isolagen Process, corrects and reduces the normal effects of aging, such as wrinkles. This is a product that will definitely be in demand as people live longer. ILE recently restarted their clinical trial to reduce wrinkles and creases, and I expect it to conclude successfully later this year, with data available around the end of the year. Buy ILE under $4.50 for a $9 first target.

Millennium Pharmaceuticals (MLNM) has a broad portfolio of drugs in various stages of clinical trials for cancer, heart disease and multiple sclerosis. That’s the reason why I’m recommending the stock. But it’s also important to note that with its vast pipeline of drugs and great relationship with larger biotech companies, like Johnson & Johnson, Millennium is also a takeover target. Buy MLNM while it is under $12 for my $23 target.

QLT (QLTI) has the original macular degeneration drug, Visudyne. Sales are currently depressed by the introduction of new drugs, like Lucentis, that have a completely different mechanism of action. I expect more and more use of a combination of drugs including Visudyne to treat this disease, especially as some independent clinical data is published. Buy QLTI up to $8 for a $16 target.

Rochester Medical (ROCM) has the best urinary catheters on the market, including a unique drug-eluting catheter to fight infections. Medicare will stop reimbursing hospitals for fighting infections that the hospitals cause, so I expect a rapid conversion to Rochester’s products. In addition, a settlement with the other two defendants in their antitrust suit could come any day. ROCM is a Top Buy up to $23 for my $40 target, and vies with BioCryst for the title of cheapest high-quality stock of all my recommendations.

Sequenom (SQNM) is the second gene chip stock to buy after Affymetrix. It has its own genetic platform called MassARRAY. They also develop and sell specific tests to run on their equipment, in addition to selling the hardware and chips to research labs and biotech companies. The company will host a live audio webcast with a slide presentation for an analyst and investor briefing event after the close on September 24. Buy a full position under $4.50 for an $8 target this time next year.

SXC Health Solutions (SXCI) is a pharmacy benefit manager with some new ideas about how to save health care providers’ customers money. The U.S. wastes about 25% of its health care budget pushing paper around, and SXC’s systems are part of the solution. As baby boomers continue to age, the demand for prescriptions is going to rise, so health care facilities are going to need a more efficient and cost-effective way to manage their drug programs. Buy SXCI under $23 for a move up to $30 by the end of 2007 and my target of $46 by the end of 2008.

ViroPharma (VPHM) is doing a great job of milking Vancocin for revenues and profits before generics come into the market. They will use their cash hoard to in-license products or acquire companies to make ViroPharma a big specialty pharma company, which is exactly what we expected when we bought the stock. Buy VPHM up to $12 for my $25 target.

China MegaShift

I missed the window to get back into a number of these stocks at reasonable prices, and even though their government has taken steps to open the Hong Kong market to Mainland investment, I don’t think the underlying valuations are compelling. So for now, we’ll steer clear, with the exception of a wireless service provider.

UTStarcom (UTSI) is a deep value and is straightening out its operations. Handsets and Internet Protocol Television are big, growing markets in Asia and India. But UTSI needs to change Chief Executive Officers before Wall Street will take them seriously. It is more likely that a Taiwan or Mainland China company will acquire UTSI. They will hold a conference call after the close on Monday to discuss their new corporate strategy, including their key focus areas going forward, and new cost reduction goals. I am moving the stock to a Hold until we get some indication that the board is ready to replace the CEO.

Content on Demand

Akamai Technologies (AKAM) is the leader in delivering Internet content rapidly around the world, with over 25,000 servers in nearly 3,000 loactions in over 70 countries. Companies use them to be sure that their web pages open quickly, so fickle surfers don’t get bored and click away. The company is growing 30% a year, and will continue at this pace as more and more people demand to get their music, videos, games and pictures smoothly and quickly. AKAM is a buy on any dip under $30 for a $60 target in 12 months.

Comcast (CMCSA) is leveraging all the new content technologies to create the best consumer service wrapping everything together. At the end of the day, I think this market will come down to Comcast, Time Warner, Verizon and AT&T — or the merged version of some of those companies. They will all be in telephony, Internet access, broadcast TV and audio/video on demand. And they will all offer fixed and mobile (wireless) services. Comcast and Verizon are the best dogs in this fight, and Comcast’s stock is cheaper. Buy CMCSA under $28 for my $62 target.

Harmonic (HLIT) announced half a dozen contracts wins at the IBC 2007 broadcaster’s conference in Amsterdam last week, including a DirecTV deal that was big enough to cause HLIT to raise guidance for the second half of the year. DirecTV bought high-definition encoders, video stream processors, multiplexers to put more than one video stream on a channel and system management software. I believe that this was a 100% win for Harmonic — they beat out everyone else for all of the business. The same is true of a win with PT Indonesia Telemedia, which delivers video over both satellite and cable. They bought a half a dozen different products from Harmonic for their next generation system. Manthan Broadband of India, a cable system with 800,000 subscribers, also bought multiple products for their next generation upgrade. In the DirecTV and Sky Perfect (Japan satellite TV) contracts, Harmonic appears to have bumped Tandberg TV. That’s confirmation of my position that Harmonic’s new MPEG-4 video encoder is by far the best product in its class.

Another contract with Israel’s Yes TV, a satellite service with half a million subscribers, was for Rhozet’s Carbon Coder — the product that Harmonic recently acquired that I discussed in last week’s Radar Report — which delivers Internet TV over cable or satellite. All of the satellite and cable companies will be buying that one. SeaMobile Enterprises bought video encoders, schedulers to insert commercials and video storage systems that will let them deliver broadcast and on-demand programming to 300 cruise ships through their Wave Entertainment Network.

In addition to the new contracts, Harmonic announced a number of new products. One of the biggest is that Rhozet now supports Adobe Flash as a video standard that can be quickly translated to and from other video formats with no loss of quality. They also announced a leading edge encoder that supports 1080 progressive line coding for 60 frames per second video. At the other end of the scale, they put out a low-cost standard-definition MPEG4 encoder. They also combined a number of products into the MediaPrism Suite to create and manage video on demand.

Analysts are looking for 12 cents a share in the September quarter, 13 cents in the December quarter, and 40 cents for the year. I think Harmonic will blow away the September quarter with 14 cents or 15 cents (or better, based on all these contract announcements), and then guide for 17 cents or more in December. As I’ve been saying for months, they could do as much as 50 cents a share this year, and 65 cents to 70 cents in 2008. Wall Street is way too low. This is the stuff big stock moves are made of, so I am raising the buy limit another dollar to $11 and raising the target price by $2 to $18.

Intel (INTC) raised their September-quarter sales guidance “as a result of stronger than expected worldwide demand for its computing products,” which means that the PC business is stronger than they or Wall Street expected. I am not surprised. Market researcher IDC raised their estimate this morning to 12.6% growth this year. Intel now thinks that they will report $9.4 billion to $9.8 billion, up from their previous guidance for $9.0 billion to $9.6 billion. They will probably beat the high end of their guidance by $50 million to $100 million. The consensus was at $9.4 billion before the announcement, and it has now moved up to $9.6 billion, so there is still room for a good upside surprise.

Higher revenues should mean better operating margins in a well-run company, and Intel also raised gross profit margin guidance to “the upper half of the previous range of 52%, plus or minus a couple of points.” So, Wall Street raised the consensus estimate from 28 cents to 30 cents a share, and they are still low by a couple of cents.

If you didn’t buy the LEAP calls when I was pounding the table on them a few weeks ago when they slipped under $5, I am raising the buy limit on Intel’s January 2009 LEAP calls with a $22.50 strike price (VNLAX) to $6. I’m keeping the target price at $12.50 at expiration, better than a double from current levels.

Motorola (MOT) is a turnaround story, based on new phone models reclaiming market share from Nokia. This was a faith-based investment, on my part, at the time we made it, based on the fact that I have followed this company seemingly forever, and I also knew CEO Ed Zander from his lengthy tenure at Sun Microsystems. But now we have some solid info, as MOT executives were all carrying the unannounced Q9 phones with an AT&T label at last Friday’s analyst meeting. The Q9 is a mass market smartphone for under $200. It was a great tease, and the company said that they will introduce new models next month. I’m expecting two major lines, each with models at various price points. Some will have GPS — see the SiRF write-up below. Management also said that they want to be “boring” by producing a broad line of successful phones targeting every niche from the low end to the high end of the market, rather than betting the farm on one product like the Razr. Sounds good to me. I suspect their market share has bottomed, so this is a very timely opportunity to 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.

Silicon Image (SIMG) will benefit this holiday season from the sale of hundreds of consumer electronics products that use their HDMI chips to connect to each other. Holiday production starts now, with orders to the chipmakers at the very front of the process. As the HDMI leader, SIMG should do surprisingly well for the next few quarters. The stock is a Top Buy all the way up to $13 (more than a double from current levels) for a $20 target (almost a quadruple).

Telkonet (TKO) is the leader in in-building Broadband over Power Lines, but that hasn’t stopped the stock from sliding to a new 52-week low as investors fret over the current absentee CEO. I think the recent COO appointment is just the prelude to a face-saving resignation by the CEO, and then the stock can run.

Subscriber Ron asked: “Did Telkonet miss the boat on selling broadband over power lines by not going after the consumer? ‘Netgear is a major force in the consumer electronics market and a leader in offering high-performance products,’ said Jorge Blasco, CEO of DS2. ‘Our partnership with Netgear is proof positive that there is a growing consumer demand for Power line products. Moreover, DS2′s 200 Mbps Power line chipsets are providing simple, reliable broadband connectivity that offers the necessary bandwidth to connect the digital home. DS2 technology is proven and mature. Our technology is currently in use by several service providers and we are delighted to be working with Netgear to bring this technology directly to the consumer.’”

Ron, this may have been a boat that they didn’t especially want to catch. These chips go into a device that attaches to a PC and then plugs into the electrical outlet. Then you can put a similar device on your TV or media center and move digital content around your house over the electrical lines. This is not to connect to the Internet. It primarily is a substitute for Wi-Fi to cover dead spots inside a house. TKO is focused on making each electrical outlet a connection out to the Internet for voice, video and data. As a side benefit, you can move stuff around inside the house, just as with Netgear. To be fair, right now I think that the Netgear chip runs faster, but TKO has a roadmap to steadily increase their connection speeds.

TKO has delivered its power line networking solution to over 200 Department of Defense sites nationwide, with an additional 600 locations scheduled for deployment between now and through 2008. I believe the CEO will resign soon, and you surely want to own a full position in TKO the day that happens. Buy TKO up to $5 for my $15 target.

Zhone Technologies (ZHNE) is a leading supplier of DSL and other Internet access devices to both cable and telephone companies for resale or lease to their customers. Zhone has had a hard time getting new products growing before old products start declining, and I suspect that the company will be sold soon. As long as the venture capitalists that bought so much insider stock in the open market are sticking with the company, we should, too. They will maximize shareholder value, whether in a buyout or by getting operations on track. Hold ZHNE.

New Energy Technology MegaShift

After a long meeting, undoubtedly involving significant arm-twisting by the Saudis, OPEC announced a surprise increase in their production quotas of 500,000 barrels a day above their real current production. “Our message to the consumer is that we care,” said Abdalla Salem El-Badri, OPEC’s secretary general. Golly, now I feel so much better about dealing with a cartel that’s been picking my pocket for so many years.

Usually these increases are based on existing quotas, which are meaningless because more than half of them cheat and pump excess oil. Recently, they’ve been pumping an extra million barrels a day. So this was a big, real increase, and it brought oil prices down.

For 20 minutes.

Then — zip! Right back up to a new intraday record over $80 a barrel. If you heard an overweight woman singing in Arabic, you heard right. OPEC no longer has control of oil prices, and if they can’t control prices, they are finished. What good is a cartel that can’t control prices? Bye-bye OPEC, hello Ma Kai.

Ma Kai is the minister in charge of the National Development and Reform Commission in China, which controls Chinese oil exploration and other oil matters. China’s very strong economic growth has not slowed down, and it is Chinese demand plus the weak U.S. dollar that is driving oil prices, not OPEC. So, what is Ma Kai going to do for the poor SUV drivers in the U.S.? So sorry, but China just decided to establish a large strategic oil reserve, and will be increasing government purchases to fill it. Gee, remember the good old days when regular gasoline was only $3.00 a gallon?

There’s nowhere to refine OPEC’s additional oil, anyway, and it is too late to get more oil into home heating tanks for the first round of winter deliveries. If your home heating oil supplier offers a fixed price, advance-pay contract, grab it. You can tell everyone you are long home heating oil, and they will think you are a big time commodities speculator.

Connacher Oil & Gas (CLL.TO) jumped yesterday after an oil stock newsletter recommended buying it. Their point was the one that I made in my original recommendation: We are buying Connacher’s proven and probable oil in the ground for $4 a barrel, even giving no value to Pod One’s 10,000 barrels a day production and the Montana heavy crude refinery. Plus, we get their 26% interest in Petrolifera Petroleum (PDP.TO), which has a $775 million market capitalization. Petrolifera is producing another 10,000 barrels a day, and exploring five million acres in two basins in Peru. If you subtract Connacher’s $200 million of Petrolifera from CLL.TO’s market cap, we’re buying Connacher’s oil in the ground for $3 a barrel. How the heck can we lose money doing that? This may be my only risk-free recommendation.

Last month, Marathon Oil bought Western Oil Sands for $9.46 per barrel of proven and probable reserves. Looking at the valuation metrics, Connacher is worth $9 to $16 a share in a buyout. CLL.TO remains a Top Buy up to $4.50 a share, and I am raising the target price by $2 to $9 to reflect the Western Oil Sands transaction.

Infinity Energy Resources (IFNY) drew many anguished emails after they filed an 8-K announcement that their bank line seems to have become adversarial. Gary said: “What on earth is going on with IFNY? Do you really think these guys know what the heck they are doing or are they just hyping and stalling? Very poor chart.” Quentin added: “I would appreciate your comments on IFNY given their (1) announced loan default, (2) cash flow situation and (3) lack of any updates on their asset sales.” And Rich got to the bottom line: “IFNY is down over 20% today, and down nearly 60% since the day I bought it off your Top Buy recommendation. Should we sell?”

Here’s what I know and what I think happened, but the CEO has not returned my phone calls, and they have not done a conference call. Both of those are bad signs, but — to address Rich’s question first — not so bad that we should think about selling the stock.

I’ve bolded some of the language in the 8-K that Infinity filed for an Entry into a Material Definitive Agreement that said:

“On August 31, 2007, Infinity Energy Resources, Inc. (the “Company”) entered into a Forbearance Agreement (the “Agreement”) under the loan agreement among the Company, Infinity Oil and Gas of Texas, Inc., and Infinity Oil & Gas of Wyoming, Inc. (each wholly owned subsidiaries of the Company and together, the “Guarantors”), and Amegy Bank N.A. (“Amegy”) dated January 9, 2007 (the “Loan Agreement”). The Agreement relates to the breach by the Company and Guarantors of: (i) the “Interest Coverage Ratio” set forth in Section 8(a) of the Loan Agreement for the period ended June 30, 2007; (ii) the “Funded Debt to EBITDA Ratio” set forth in Section 8(d) of the Loan Agreement and (iii) the requirement to deliver certain lien releases under Section 9 of the Loan Agreement (the “Existing Defaults”).

“Under the Agreement, effective as of August 10, 2007, the borrowing base under the Loan Agreement is reduced from $22,000,000 to $10,500,000, with a resulting borrowing base deficiency of $11,500,000. The borrowing base remains subject to periodic redetermination by Amegy as provided in the Loan Agreement. The borrowing base deficiency must be cured by the end of the Forbearance Period (as defined below) through the sale of assets, refinancing of the loan, or some other means of raising capital.

“Under the Agreement, Amegy agrees to forebear from exercising any remedies under the Loan Agreement and related loan documents and to waive the Existing Defaults through November 30, 2007 unless earlier terminated by Amegy due to a further default under the Agreement or the Loan Agreement (the “Forbearance Period”). If the Company has entered in a definitive sale agreement with respect to certain assets of the Company with proceeds sufficient to repay the borrowing base deficiency on or before November 30, 2007, Amegy may seek credit approval to extend the Forbearance Period through January 31, 2008.

“During the Forbearance Period, the default interest rate will be the stated rate under the Loan Agreement, plus six percent, currently 14.25 percent. Monthly cash general and administrative expenses have been further limited under the Agreement to $150,000, excluding approved broker fees.

“The Company has agreed to proceed with the sale and marketing of all assets of Infinity Oil & Gas of Wyoming, Inc. and to take certain actions in furtherance of such sale. In addition, if directed by Amegy, the Company has committed to proceed with the sale and marketing of the assets of Infinity Oil and Gas of Texas, Inc. The Company has also agreed to pay Amegy a forbearance/ waiver fee of $220,000, due on or before the earlier of the end of the Forbearance Period, the cure of the borrowing base deficiency or the refinance of the revolving note by another lender.

“While the Forbearance Agreement provides a temporary waiver of the Existing Defaults, it does not cover any potential future events of default. It is likely that the Company will be unable to maintain compliance with the financial covenants and ratios required under the Loan Agreement, and additional events of default are likely to occur. If the Company is unable to obtain waivers of future expected events of default and otherwise to maintain compliance with the terms of the Loan Agreement, Amegy would be entitled to declare an event of default, at which point the entire unpaid principal balance of the loan, together with all accrued but unpaid interest thereon, and all other amounts then owing to Amegy, would become immediately due and payable. If Amegy were to declare such acceleration, there is no assurance that the Company would be able to repay the amount due. In addition, because substantially all of the Company’s assets are collateral under the loan, if Amegy declares an event of default, it would be entitled to foreclose on and take possession of the Company’s assets.”

My first thought on reading this was: How did they get into this pickle? It is common to have financial ratio covenants in loan agreements, and it is common for those to slide into technical default if a company loses money in a quarter. But why is Amegy acting this way, forcing the company to sell the Wyoming assets on Amegy’s timetable, and putting the Texas assets on the table after the company had decided to keep them? I don’t know. I don’t think there is any real chance that Amegy would not get repaid.

Most likely, they felt that the company they loaned to was going to sell assets that the bank had counted on when they made the loan, but Infinity had no plans to pay down the debt. The bidding process closed after Infinity took down this loan. If that’s the case, it simply means that Infinity will have to sell Wyoming as they wanted to, do more joint ventures than they’d planned, and find another oil patch lender to take Amegy out.

I believe IFNY is a roaring buy right now, but until I can talk to the CEO or the company has a conference call, I have to move it to a hold. I am sure other investors are getting cold-shouldered also, or the company would do a conference call. So, other investors are also putting it on hold, or selling. The new management team has a crisis to get through for sure, but it appears to be a crisis manufactured by their lender for reasons that we can speculate about, but not confirm. Hold, do not sell, IFNY until I can get more information.

Energy Focus (EFOI) is riding the white light LED revolution by delivering the light over fiber optics for specialty lighting and remarkably colorful signs, like most of the Las Vegas Strip. They are the world’s leading supplier of this lighting, and all their technology is protected by 40 patents, with more pending. Instead of my original plan to buy a one-half position under $7, I’m taking the buy limit down $1 and recommending you buy a full position under $6 for my $15 target this time next year.

Energy Conversion Devices (ENER) is a leader in solar roofing, hybrid car batteries and new memory chip technology. New, cost-conscious management can make this collection of advanced technologies throw off a lot of cash. The stock has fallen since they reported June-quarter earnings, but the recent cost-cutting hasn’t begun to throw off the savings that are coming. I am reducing my buy limit to reflect the current market levels, but there’s no reason to cut the target price. Buy ENER under $30 for my $55 target.

FuelCell Energy (FCEL) is the leading manufacturer of stationary fuel cell power plants, with recent big contract wins in Connecticut and California. Like all the alternative energy stocks, it should benefit from higher oil prices. Buy FCEL under $11 for my $22 target.

Gasco Energy (GSX) has been squeezed by low natural gas prices in the Rocky Mountains, due to a lack of gathering and transportation capacity to get the gas to market. That infrastructure will be there by January. There is no slowdown in the development of Rocky Mountain oil shale, which will require huge amounts of natural gas in order to extract the oil from the rock. Gas prices are way low relative to oil, and I believe GSX is as cheap as it will ever get. One bad hurricane or one bad winter could double gas prices and triple GSX stock. Buy GSX up to $4.50 for a $9 target.

Lighting Science Group (LSGP) is a leading white LED company that will benefit from the forced conversion away from incandescent bulbs. They have some of the best technology in this area, with the first high-output, dimmable, Edison-based white-LED light bulb. Their immediate opportunity is a supplier relationship with Philips Solid State for parking garage lighting. LSGP is a Top Buy up to 50 cents a share, with targets of $1 in 2008, $2 in 2009, $3 in 2010, $4 in 2011 and $5 in 2012, when the California conversion deadline hits.

Ocean Power Technologies (OPTT) can generate power from ocean waves at the same cost as oil at $45 a barrel, or put another way, three to four cents per kilowatt hour. They’ve been winning major development contracts, and it is only a question of time until this technology takes off. Even some of the oil companies are getting on board. Chevron is in the process of licensing the Northern California coast for energy wave farms. Buy OPTT up to $20 for my $40 target.

Plug Power (PLUG) is the leader in standby or back-up fuel cell power systems. These types of systems are especially in demand in states like Florida that need durable and reliable energy sources for times — hurricane season — when the power grid is most likely to go out. PLUG is selling its GenCore systems worldwide, and they are well financed. Buy PLUG up to $5 for a $10 first target.

Rentech (RTK) is the clear leader in non-polluting coal-to-oil conversion. This technology can convert coal into gasoline, diesel or jet fuel for less than $45 a barrel. With their pilot plant opening soon, RTK should come back into the investor spotlight. RTK is a Top Buy up to $5 for my $11 first target.

U.S. Geothermal (UGTH) will flip the switch on their Raft River plant in the next few weeks. It will produce clean, cost-effective geothermal power from the amazing Idaho property that they took over from the Department of Energy. The plant will eventually be able to generate enough megawatts of power to provide electricity to the entire state of Idaho. UGTH is a Top Buy up to $3 for my $6 first target.

Important Note: I expect us to hold every one of the New Energy Technology stocks, including Infinity Energy, for many years, with ultimate target prices much, much higher than those listed here.

Robotics MegaShift

iRobot (IRBT) is the leading consumer robots company with several new product announcements imminent. They’re also an important supplier of robots to the military, which wants 30% of their future fighting force to be machines rather than soldiers. Buy IRBT on dips under $19 for my $30 target.

Security MegaShift

American Science & Engineering (ASEI) has the best X-ray and explosives detection systems in the post-9/11 world. Its CargoSearch systems scan motorized vehicles, containers, pallets and air cargo at border crossings, seaports, military bases, airport and railroads to check for illegal drugs and weapons entering the country. Also, their Z Backscatter systems are being used to detect car bombs, and the SmartCheck system will become the new standard for security checks in airports around the country. Buy ASEI if it dips under $59 for my $93 target.

Packeteer (PKTR) still has the best traffic optimization solutions for network administrators, and I think that they will get their operations straightened out in the next few months. If not, the company will be sold for a much higher price than it trades for today. Buy PKTR under $9 for my $20 target.

SiRF Technologies (SIRF) will have their GPS technology embedded in the two new Motorola phones coming in October. In 2007 there should be about eight follow-on phones that use the SiRF Global Positioning System (GPS) chips, including some using the GSM/EDGE standard to target China and others using the WCDMA/HSDPA standard to target Europe. Some of these phones will be very high-volume devices, and others will be expensive, high-feature models.

Wall Street is seeing SiRF’s domination of personal navigation devices, such as those made by Garmin and TomTom, under attack. What The Street is missing is that the market for GPS chips in cell phones is literally 100 times as large. SiRF has about 75% of the personal navigation device market, but the opportunity in cell phones is much, much larger. As long as the company can keep driving costs down to protect their margins as chip prices fall, Wall Street will be positively surprised by the results. The carriers want to sell smartphones with more features and extra revenue from additional services, so we can be sure that GPS will continue to spread rapidly into almost all handsets. SiRF is already in the new BlackBerry 8300, which is a big success.

On top of all this, the short interest in SiRF is up to 18% of the outstanding stock. That’s nuts. SIRF is a Top Buy under $22 with a $40 target.

Nanotech & Materials MegaShift

Integral Technologies (ITKG) is the leader in electrically-conductive plastics, with dozens of patents and many licensees and joint ventures. The key thing to remember about this technology is that these plastics offer the electrical conductivity of metal. They’ll be able to be used in vehicles, airplanes, cell phones and lap top computers. The stock round-tripped from my buy limit to my first target price and back. I think the next move up will be for keeps. Buy ITKG under $2.50 for my $4 target.

New World Economy MegaShift

Cnet Networks (CNET) is a great content producer during a time when content is king for Internet traffic. Its branded websites provide content on technology, business, video games, television, music, films, food, parenting, and much more. As more and more people move to the web to find information, companies like CNET are going to be the biggest benefactors. Accelerating PC sales not only helps Intel, but has a very positive halo effect for CNET as PC makers increase their advertising budgets. Buy CNET under $8 for a $17 target. This could turn into a multi-year hold, or it could be bought out at any time.

WiMAX MegaShift

Airspan (AIRN) is benefiting from the rapid spending growth in this Year of WiMAX. It provides the equipment needed for wireless high-speed network connections, and AIRN is especially strong in mobile WiMAX solutions. Buy AIRN up to $5 for my $10 target.

Alvarion (ALVR) also focuses on high-speed Internet connections, and AIRN is its biggest competitor. Alvarion is bigger than Airspan, and the stock has already done well for us. They also will be a big beneficiary of WiMAX spending, trials and orders this year. Buy ALVR on any market-related dips under $9 for my $18 target.

MobilePro (MOBL) builds and operates municipal Wi-Fi networks. But the company is currently sorting out their financing and operating challenges, and there is no point in selling the stock until we see how it will come out, unless you want the tax loss. Hold MOBL.

Proxim Wireless (PRXM) is the new name and symbol for Terabeam. They are a smaller WiMAX company than Airspan or Alvarion, but they make sense as part of a basket of WiMAX stocks, as they also provide high speed wireless equipment and services. They also have a point-to-point optical wireless technology that will be interesting. Buy PRXM up to $4 for my $7 first target.

TowerStream (TWER) uses WiMAX to create very cost-effective last mile broadband services for businesses that can be provisioned and changed faster than the phone company, at lower cost. They are “wirelessing” major cities with a very practical business model, and they are the clear leader in their field. TWER is a Top Buy up to $6 for my $16 target.

The End Is Nigh

As background to my rather philosophical introduction this week, I’ve been thinking about how fast life is changing. My older kids are likely to make it well into that 100- to 150-year-old range, which will soon be the norm. And when I mentioned that the average female baby born in the U.S. in 2007 will live to see 2107, I have a personal interest because we are expecting another little girl by the end of the year. So, I have to make it into triple digits, too. But the biggest event behind these ruminations was my mother’s death last Saturday. She went gently at the age of 89, held by my sister, as my brother and I scrambled to get to Des Moines. Like so many of her generation, she spent four years with infants and toddlers while my dad was away at war, and afterwards just kept working that hard her whole life. She earned her retirement.

Yet, she also went too young. Her mother lived to 95 and her slightly younger brother, a Rear Admiral and ex-Commandant of Kings Point, is driving, sailing and leading an active life. But 15 years ago Mom went on Coumadin, which is a killer, and I could not talk her out of it. Aside from giving people Lipitor without telling them that they need to take big doses of CoQ-10 to avoid muscle weakness and death, I think the warfarin rat poison with the sanitized name Coumadin has to be one of the worst things modern medicine does to people. And that’s why I’m also very interested in the better, life-saving medical technologies that are already being developed, or will be, in the upcoming years.

So, In Memoriam, Jane Austin (King) Murphy, March 22, 1918 to September 8, 2007. And don’t let any of your loved ones take Coumadin.

Most investors remember August as a tough, bad month for stocks, yet the S&P 500 was actually up 1.3%. The reason that investors think that August was so bad is that it was a very volatile time for the market, with a number of steep plunges and a couple of leaps up before it essentially returned to previous levels. So, investors don’t really remember the gradual climb from the August lows — they vividly recall the nervousness that they felt during those dips.

One way to gauge just how panicky investors were during this period is the VIX Fear & Greed Index, which went from 23.52 on July 31 to 25.06 on August 30, before dropping back to 23.38 on the last day of the month. As of today, the S&P is up 1.6% from the end of July, and the VIX closed at 23.99, down 2.0X% over the same period. I like to see fear staying high even as the market goes up, because it sets up a bear trap that can move the S&P up 200 or 300 points in a hurry.

You see, when the market is going up but the VIX is falling quickly, it usually means complacency is setting in as investors embrace the upturn. Of course, that’s what makes market tops… but we seem to be a long way from there. So, as long as the declines scare more people than the advances breed complacency and bullishness, we should assume that the market will keep climbing.

It also helps that investors now widely expect the “usual” weakness in September and October, because widely anticipated market moves are often discounted in advance. People have already forgotten that last year the S&P 500 rose 2.5% in September, 2.2% in the first half of October and another 0.9% in the second half of October. The “weak” September to October period was actually up 5.7% in total.

So, what can we expect over the next couple of months? Well, the crucial level of 1479 was easily taken out on Tuesday, but then given back yesterday. Today, the S&P held above yesterday’s 1466 close, and rallied right back up to close a whisker below 1479. If we don’t see any significant weakness below 1466, I would call Tuesday’s action a normal quick retest, with the next big number of 1530 still on the table. Tomorrow morning’s employment report could be a catalyst to start that move.

But if 1466 doesn’t hold, or there the Street interprets the employment report as bad, we could easily see a drop back to 1370. I would much rather see an out-of-the-blue or hurricane-related scary test back down to 1370 right now, followed by a slingshot rebound, than a move up to 1530 that stalls, fails and then drops back under 1466. If the stall pattern occurred during a period that the VIX fell, I would say the September to October weakness scenario really is going to play out, with the possibility of a more serious decline. But either a drop to 1370 and a rebound, or a decisive move over 1530 directly ahead, would suggest a very strong market right into March 2008. That still seems to be the most likely outcome, but, as always, we will let the market tell us what it wants to do.

One reason that I remain bullish is that the Fed is pumping money into the economy and will probably cut the Fed funds rate on September 18, sending the dollar even lower. The dollar has been teetering on breaking some long-term support, and this should do the trick. As the dollar falls, the value of real assets — like companies, timber, commodities, real estate (!) and metals — rises. Just look at gold; it’s about to break $700. So, in this type of environment, our MegaShift stocks should soar.

Speaking of stocks that have the potential to reach new heights, there is one stock that I have been watching for a long time. The company finally put some potential SEC problems behind it this week, and now I think that it is time to step in and buy our next big winner in the New Economy MegaShift. (We cashed out the last one, Omniture (OMTR), for a 226% gain in eight months.)

See The Net?

In the June 8, 2006 Radar Report, I introduced the New Economy MegaShift with a recommendation on Click Commerce, which we sold for a 14% gain in three months. Our second recommendation in that MegaShift was Omniture. Today’s recommendation is the third, but before we discuss the company, I want to update my introduction on the New World Economy from that June 2006 issue.

In the early 1990s, I realized that we were entering a New Economy, replacing the old mass-production, middle-class economy with a technology-based economy. I wrote a timely book about that shift. Stocks that benefited from the change soared in the 1990s and crashed from 2000 to 2002. Many commentators thought the crash in the stocks proved that the whole New Economy was a fraud. Not so. I remember one particularly crusty newsletter that railed against the New Economy day in and day out — by email. From Paris. To 250,000 subscribers. An absolutely impossible situation in the Old Economy he so loved.

It has been estimated that building enough Internet capacity to support today’s traffic using the old telephone switches and copper wire would have cost $19 trillion. Instead, fiber optics, routers and optical switches built the Internet at a fraction of that cost. The stocks involved in that buildout all collapsed, but the economy changed forever. The New Economy, with one-to-one marketing, customer-driven ratings and 24/7 connectivity is a reality. Individuals without any employees are making mid-six-figure incomes from their home computer, thanks to Google Adsense. Every new company needs an Internet selling strategy, and every company of any size needs an online sourcing and distribution strategy as well.

And that is what morphed the New Economy into the New World Economy. The new model is to design in the U.S., build the hardware in Asia, write the software in Russia, set up customer service in India, and market to the world from the U.S. through an online/offline strategy. And as manufacturing wealth builds in Asia, programmer incomes soar in Russia and service jobs proliferate in India, sell them Levi’s, Motorola cell phones, iPods, Coke and Kentucky Fried Chicken.

The New World Economy is interconnected, worldwide, boundary-less, efficient and explosive. And we are just in the early days of the Internet Century. China and India only decided in the last 10 years to ride the Internet to middle class status, and they have decades of transformation ahead. There are numerous opportunities in the New World Economy MegaShift. An important one is providing software and services to enable e-commerce, which will grow well into the double digits this year and next, regardless of what the U.S. economy does. A lot of these companies are survivors of the Internet boom and bust that reorganized (with or without court protection) and remade themselves to match the real opportunities out there today.

One of the most valuable assets a website can have in the New World Economy is content. People go online to search for information, advice and answers. Those with lots of relevant content become authority sites, with a loyal and often large and growing user base that creates high traffic and high page views. That’s what advertisers want to hear, and whether it is banner ads, affiliate emails or Google Adsense, the advertising money follows the traffic, and the traffic follows the content.

Cnet Networks (CNET) is a 15-year-old interactive media company that creates branded, destination websites loaded with content, and then cashes in by selling advertising and some affiliate products. They own several of the most important online media brands. Cnet started with websites covering technology, and Cnet.com is the still the first place that I turn to for tech product reviews (400,000 archived), including consumer electronics, and software downloads from Download.com. They also own ZDNet and TechRepublic, which offer business white papers, case studies, Webcasts, audiocasts and other interactive content. In addition to daily news, blogs, podcasts, peer feedback and ongoing research, Cnet reaches out to their users with targeted email alerts and newsletters. I get a half a dozen of these covering various tech topics.

Cnet has broadened their portfolio beyond technology, though, to include business, video games, television, music, films, food and parenting. Here’s a look at a number of their websites and what they offer:

• They have News.com for tech news, and an excellent general business site, Bnet.com — see this week’s signature line for one example of the content. Each of these sites has followed the Cnet.com formula of offering lots of on-site content like white papers and case studies, with free subscription newsletters on numerous business topics.
• Cnet’s GameSpot.com and other gaming websites provide video gamers with game information for virtually all console, PC and portable platforms. They cover news, previews and reviews of new titles, guides, and even provide hints on how to play. They also offer game downloads, videos and live Webcasts, such as their coverage of the recent big E3 video game business conference. At these websites, Cnet operates an online gaming community and offers online tournaments to these fanatical users.
• The TV.com entertainment websites provide TV show summaries, episode guides and downloads, biographies, photos and news.
• Its movie website, FilmSpot.com, features movie summaries, critical opinions, trailers, news, photos, actor and character guides, celebrity bios, theatrical and DVD release schedules, and box-office results.
• MP3.com, the company’s music website offers free music tracks, music videos, exclusive interviews, live sessions, daily news, charts, and forums, and it serves artists looking to promote their material online.

Besides all of these websites, Cnet also offers online communities for IT professionals, CHOW for foodies, and Urban Baby and Kids.com for parents. They also have Webshots for online photo and video sharing communities, but Yahoo’s Flickr and Google’s YouTube have passed them by and Webshots is being de-emphasized. As you can see, Cnet manages a number of popular entertainment- and information-oriented websites.

The bad news about Cnet, though, is that their page views are growing slower than Yahoo or Google, and they have been spending close to $3 million a quarter on an SEC investigation of stock options backdating. Most of the old management team resigned after the stock options backdating scandal enmeshed them. And their Search.com site never really caught on.

But the good news is:

• Page views don’t count as much with advertisers any more, because the more sophisticated measurement is how long does the user stay on the page — and Cnet has excellent “stickiness.”
• This week, the SEC concluded their investigation of stock options backdating with no recommendation for any further enforcement action.
• A new management team, including Jack Haire from Time Warner as a special adviser to the CEO on corporate advertising sales strategy, is going to extract a lot more money from Cnet’s huge vault of content and huge daily traffic. The big advertisers — McDonald’s, Pepsi, Budwiser, GM — are rapidly diverting their ad budgets to online campaigns. Targeted paid search is a gold mine.
• Cnet has a growing presence in China.
• The stock is on its butt.
• It is a takeover candidate.

And if that’s not enough, Cnet is showing steady growth. Cnet did $291 million in sales in 2004, grew 21.7% to $354 million in 2005, and then 9.4% to $387 million in 2006. I expect them to hit $425 million this year, up 9.8%, and then get back on the growth path in 2008, up about 16% to $493 million. That estimate is higher than The Street, and it requires the new management team to execute on their plan to better monetize the existing and expected traffic to their numerous websites. I think they can do this.

In the June quarter, the company had 137 million unique monthly visitors, up 18% from last year. Daily page views fell 19% as Webshots winds down, but excluding that site, page views fell just 1%. That still isn’t great compared with Yahoo and Google, and it will be a major focus of the new management team. There isn’t much that can be done with Webshots, because photo sharing has become a feature of the Web 2.0 social bookmarking sites rather than a standalone destination. It always was a hard site to monetize, because Google AdSense doesn’t work well when people are just looking at pictures.

Revenues rose just 5% to $97.2 million in the quarter, and the company reduced guidance for the year. They are expecting a huge $1.19 per share positive tax adjustment in the December quarter, and including that adjustment, management said that they expect to report $1.30 to $1.39 a share on revenues of $405 million to $430 million. Obviously, with the stock under $8, Wall Street is not counting the tax adjustment in earnings, or CNET would be at a 5.5X price/earnings ratio. Revenue guidance was reduced from $425 million to $445 million, or by $10 million to $15 million. On the conference call, management attributed this to lower-than-expected ad spending by personal computer companies. Earnings guidance came down from a previous forecast of $1.37 to $1.47, or by seven to eight cents a share. We know the tax item barely changed, so this was a meaningful adjustment.

Cnet reported three cents per share pro forma, down from seven cents last year. I think their operating earnings excluding stock option expense will come in around 28 cents a share for 2007, and 35 cents in 2008. With the number of unique monthly visitors growing in the high teens, and given the inherent leverage in their business model where the incremental page view brings in revenue at no additional expense, success will depend on how well the new team can market their sites.

Cnet will also continue to make acquisitions of potentially major properties, or websites complimentary to existing brands. They are willing to borrow money to do these acquisitions, rather than dilute the current shareholders by using or selling stock at these low levels. I am comfortable with Cnet’s 27% debt/equity level, but this is a more leveraged company than the typical tech stock. I want you to buy CNET up to $8 for a $17 target this time next year. This could turn into a multi-year hold, or it could be bought out at any time.

Avian Flu Megashift

A new analysis confirmed that bird flu did spread from person to person in Indonesia in April. Since 2003, the H5N1 avian flu virus has infected 322 people and killed 195. Almost all of the victims have been infected directly by birds. But a few clusters of cases have been seen for which no other explanation can be found except person-to-person transmission.

The Indonesian cluster began with a 37-year-old woman who had been exposed to dead poultry and chicken feces. It appears she then passed the virus to her 10-year-old nephew who then passed it on to his father. The possibility that the boy infected his father was supported by genetic sequencing data. All but one of these flu victims died.

Researchers now estimate that the secondary-attack rate, which is the risk that one person will infect another, is at about 29%. That is much higher than previously thought, and probably indicates that there is a mutated version of the virus that passes more easily from human-to-human. It is still not pandemic level — yet — but while the general public has forgotten about bird flu, virologists are more worried than ever about a pandemic. So, as you know, we’re invested in Avian Flu MegaShift companies that will benefit from governments throwing money around to develop and stockpile vaccines and antivirals in preparation for a pandemic. BioCryst (BCRX) remains a Top Buy up to $19 for my $30 target after their flu clinical trial results come out. Crucell (CRXL) is a buy under $28 for a $50 target as they continue to license their biotech production processes, as in this morning’s deal with Invitrogen.

Biotech MegaShift

Amgen (AMGN) is under attack by the short-sellers and put buyers. Although they are playing the usual throw-everything-against-the-wall-and-see-what-sticks game, their big focus is on the FDA meeting that will review the use of red blood-cell stimulating drugs in kidney dialysis patients suffering from anemia. One put buyer said: “…there is a critical FDA meeting early next month on the use of its anemia drugs in renal failure, and they are going to get creamed in this one.” I disagree. Let me reiterate that I expect NO CHANGE in the FDA recommendations or labeling for Aranesp and Epogen in renal failure. None.

You will also hear statements like: “Amgen has a terrible pipeline given its size.” The company has 40 molecules in preclinical and clinical work, more than almost any other company, biotech or pharma. So, comments like this are silly and unfounded. Ignore them.

Although I am not counting on the Centers for Medicare and Medicaid Service (CMMS) to reverse their indefensible strict reimbursement rules for the use of Epogen and Aranesp in chemotherapy-related anemia, the Senate passed a resolution yesterday calling for reversal. Amgen has been lobbying like crazy, pointing out that the new rules don’t follow the clinical practice guidelines from the American Society of Hematology and other leading medical groups. It’s more likely the CMMS will compromise a little after they run the nation’s blood supply bone dry, trying to stabilize patients with anemia the hard way. Continue to buy the Amgen January 2009 $70 LEAP call (VAMAN) up to $12.50 for a $25 target price when AMGN stock hits $95, on or before the LEAPs expire in January 2009.

Dendreon (DNDN) drew a question from Mike: “I have both DNDN and PKTR. I trade options and have the November $7.50 on both stocks. PKTR option prices are much higher with the stock out of the money. But for DNDN, which has been much more explosive in the past, the calls trade at very little premium while in the money. With the partnership potential and how volatile this stock has been, why are the option prices so very cheap? In all of my experience trading options, the market makers usually know what the future holds, most of the time. Do you feel DNDN will trade back down below the strike if we don’t get any news?”

There is a large short interest in DNDN, and market makers can create an artificial short by selling calls and buying puts. It could be market maker call selling that is keeping premiums low. There’s no special reason for DNDN to trade below $7.50, but the reality is that is about the center of the recent range, so the stock could easily be below the strike price at expiration. Or, as easily, be above it. I’m not a big fan of options on low-priced stocks, but if someone wants to do this for a possible partnership announcement, I would buy the January 2009 $20 LEAP call (ORGAD) for $1.50. There are over 20,000 open contracts. A partnership announcement would move DNDN to the $12.50 area or better, which should move this LEAP over $5. A successful interim peek at the data next year would put the stock back to $30 or $40 even before FDA approval, moving this LEAP to $10 or $20. But for the rest of us, I continue to think that the best way to invest in Dendreon is with the common stock. So, that’s what we’ll continue to follow. I am raising the DNDN buy limit by $1 to $8 and keeping my target price following Provenge approval at $40.

Content on Demand MegaShift

Harmonic (HLIT) recently acquired Rhozet for $15.5 million, and I’ve talked about the synergy of this acquisition a couple of times. But I was thinking about it over the Labor Day weekend, and I’ve concluded that it is even a bigger deal than I first thought. Rhozet, you may recall, created software that translates video from one format to another with no loss of quality, so they can turn one video into many formats for DVD, broadcast, satellite, Internet, cell phones or whatever. They hit a sweet spot with the transcoding software and quickly signed up some big “A-list” content creation companies like Amazon, Yahoo, The Weather Channel, Discovery Channel, MTV and ESPN. Just this week they added Adobe’s Flash format to their transcoding portfolio.

Harmonic, of course, has been selling gear to efficiently distribute digital video. Their customers are not the content creators, but the digital video carriers: broadcasters, satellite, cable and telcos that send video to a fixed location. So, where’s the synergy?

Harmonic’s customers want to integrate what they do with the Internet and mobile devices. For example, Comcast (CMCSA) would like to take video off the Web and create a Comcast cable channel showing “Best of the Web This Morning.” They would like to send snippets of an NFL game in progress to sports fans’ cell phones, and then make the whole game available as content on demand after the fan gets home.

So, with the Rhozet acquisition Harmonic gets to move a little further downstream, selling to and working with the content creators. That will help them develop even better products for the content distributors as they deal with real-world problems of creating multi-protocol content and putting it through new distribution channels. By sitting right between the content creators and content distributors, HLIT will have a unique vantage point to guide their R&D. Their world is changing from real-time distribution of video to on-demand distribution. Transcoding is the basic opportunity in off-line processing, and Harmonic expects to find many more niches to exploit. At the same time, some of their competitors have been using Rhozet’s technology under license. Those folks now need to do something else. I am more convinced than ever that HLIT is a Top Buy under my recently increased buy limit of $10, and the $16 target price should be just the first stop as the video buildout rolls on into 2010.

Telkonet (TKO) said that they have started several significant energy management projects for an energy efficiency program with a major utility in California. These projects will generate over $5 million in sales during the rest of 2007. The utility offers energy qualified hotel owners free, energy-saving retrofits of Telkonet’s SmartEnergy system to eliminate wasteful use of air conditioning and heating units. These projects will save millions of kilowatt hours per year, and the program runs through the end of 2008. I expect these initial showcase installations to lead to significant orders during the next year. This is another application of Telkonet’s Broadband over Power Lines technology. TKO remains a buy up to $5 for my $15 target. I still expect the current part-time CEO to resign soon, which should pop the stock up.

New Energy Technology MegaShift

Crude-oil futures closed at a one-month high above $76 a barrel today, as crude oil and gasoline inventories fell more than expected. OPEC and other key producers seem likely to stand pat on output and an updated forecast renewed concerns about September hurricanes in the Atlantic. Two Category 5 storms have hit Central America just two weeks apart, marking the first time that has happened in years. The often-wrong hurricane researchers at Colorado State University released an updated forecast Tuesday. They still expect to see 15 named storms for the Atlantic hurricane season, with the month of September likely to see five named storms, four of them hurricanes and two of those major hurricanes. As of September 1, five named storms, one hurricane and one major hurricane have developed. If researchers are actually correct this year and we really see a number of hurricanes wreaking havoc on oil drillers in the Gulf of Mexico, you can expect to see oil prices skyrocket and the demand for alternative energy pick up speed.

Gasco Energy (GSX) is ridiculously cheap, because there is not enough gathering and transmission capacity in the Rocky Mountain area to move the gas that is being found. That problem ends in January, when a major pipeline expansion project will be finished. But in the meantime, I know it is hard to keep the faith. So consider this: Even without this pipeline project, natural gas prices should be heading up. North American gas reserves are declining, while Canadian tar sands operators need more and more gas to accelerate production of crude oil from bitumen. U.S. and Canadian gas consumers will be competing for a diminishing supply of natural gas. Prices could return to all-time highs — yes, I am talking about the $12 to $15 range just from one hurricane in the wrong place, or one cold winter. So, as I said, GSX is extremely cheap right now, and as we get closer to January, I will make it a Top Buy under $4.50 for my $9 target.

Lighting Science Group (LSGP) has a deal with Philips Solid State to distribute LED lighting for parking garages. Another huge market is replacing sodium and mercury-based streetlights with white LED lights. Ann Arbor, Michigan, had the first pilot program, and now Raleigh, N.C., Toronto, and Welland, Ontario are also on board. Welland says that they currently spend $372,000 every year for electricity for street lighting. If they replaced all 6,573 fixtures, they could save 47% of that, or $175,000. In addition, they would save 75% of $179,000 budgeted for annual capital and maintenance costs, for a total annual savings of $309,000. Relume, the private company supplying the first round of LED lights for the pilot test, also provided lighting to Ann Arbor, and worked with financial partners to offer municipalities a package deal that can be funded out of annual savings. I expect to see LSGP and Philips in this market as it takes off LSGP is a Top Buy up to 50 cents a share, with targets of $1 in 2008, $2 in 2009, $3 in 2010, $4 in 2011 and $5 in 2012, when the California conversion deadline from incandescent lights hits.

Security MegaShift

Packeteer (PKTR) was the second stock that option trader Mike wanted to know about: “Also, what is going on with PKTR and what is the potential upside?”

After the June-quarter disappointment, I think CEO Dave Cote has until the end of the year to get the ship righted or the company will be sold, as he is under pressure from one of its largest holders, Elliott Associates. If Dave can fix things and post some good numbers in the December quarter, the stock should trade back to $14 or so. In a buyout, most likely by Cisco, I think PKTR would go for $16 to $20. The risk from current levels looks pretty low, so PKTR remains a buy up to $9 for my $20 target.

WiMAX MegaShift

Airspan (AIRN) won a nationwide contract to provide the Jordanian carrier Umniah Mobile with a fixed and mobile WiMAX network. Umniah is a subsidiary of the Batelco Group, which offers voice and data services in Bahrain, Jordan, Kuwait and Egypt, so there could be major follow-on orders in the other countries.

This morning, Airspan filed to sell 14 million shares in a public offering. That will keep a lid on the stock until the deal is done, but AIRN remains a buy up to $5 for my $10 target, and they should start following Alvarion after the public offering is sold.

Alvarion (ALVR) won a big contract covering the Central Federal District of Russia, which includes Moscow. The BreezeMAX network has already started rolling out for CenterTelecom, one of Russia’s seven inter-regional operators that is owned by the giant federal holding company Svyazinvest. Just another day in the unstoppable Year of WiMAX.

The stock has done very well and is above my $9 buy limit. Buy ALVR on any market-related or panic dips below $9 for my $18 target.

Terabeam (TRBM) is changing its name and stock symbol over the weekend. It is taking the name of its largest business unit, Proxim Wireless, and changing the symbol to PRXM before the opening on Monday, September 10. TRBM or PRXM, it is still a buy up to $4 for my $7 target as the WiMAX rollout accelerates.

TowerStream (TWER) CEO Jeff Thompson had a cover story and interview in the third-quarter Enterprise Wireless magazine. Jeff pointed out that TowerStream has been providing business users with high-speed wireless data access for over five years, at first using pre-WiMAX technologies and now committed to upgrading to WiMAX. They are in New York City, Los Angeles, Chicago, Boston, San Francisco/Oakland, Rhode Island, Miami and Seattle.

Jeff said that TowerStream always prices its solutions 20% to 50% less than the landline competition, and sometimes it is the Chief Financial Officer that calls them in, not the IT manager. The cost gets them in the door, and the flexibility, redundancy and features make the sale. For example, backing up a company database offsite can take all weekend using a T1 line, and that’s assuming the servers don’t fail. On the other hand, TowerStream has customers that call up and ask for 5 megabits for Friday night, instead of the usual 1.5 megabits. TWER charges a premium for that. On Friday night the customer does the backup in a couple of hours. So, the IT department gets its weekends back, and WiMAX has changed the company’s business process and improved the performance of its IT department.

Jeff said that they compete every day with the wireline sides of very well-established companies like Verizon and AT&T. So, they have a 30-day money-back guarantee and great references. He also pointed out that lots of times a TowerStream field engineer saves the day for the IT department by arriving at hours that no one else would, to give customers the broadband service that they need to avoid running into problems. That gives them lots of good references to talk to potential customers. TWER even focuses on seemingly mundane things like the telephone wait time for customer support calls. Jeff said: “We spent a lot of money making sure that they can get to a human really quickly…We beat everyone to the punch in terms of speed…The average delivery time for a wireline T1 is 26 business days. We can be there in three to five business days, or do a rapid installation and bring it up within hours.”

Jeff made an interesting point about WiMAX that I had not thought about. Most people think any broadband connection is a big, dumb pipe, as optical fiber is. But WiMAX can get everywhere, providing (for example) telephone service to areas that have never had it. It has high quality of service and can support Voice over Internet Protocol (VOIP) by giving priority to voice traffic.

It can also be tuned to increase or decrease data throughput on demand. Jeff gave the example of a recent conference in San Francisco, where the sponsor found out that broadband was not available the Friday before the show was scheduled to begin on a Monday. Before the show opened, TowerStream provided them with access to 1.5 megabits broadband, about the same as a T1 line. Halfway through the first day they called and said that the system was running too slowly, so TWER immediately turned the system up to 5 megabits. Their usage shot up to 2.5 megabits, all of it uploading bandwidth. You can’t even get uploading capability like that with a legacy landline, DSL, cable or even T1. And the needed capacity was delivered very quickly.

Jeff also confirmed my belief that Wi-Fi and WiMAX fit hand-in-glove. Wi-Fi has critical mass and people are comfortable using it, but they don’t like the 200-foot limit, and it doesn’t have the quality of service required for VoIP. But Wi-Fi provides a $39 indoor access point to connect to a WiMAX backbone, which can be indoors or outdoors. The two technologies together give almost complete coverage in most markets and applications and can be deployed quickly at relatively low cost.

Jeff addressed the critical issues for enterprise adoption of WiMAX, and said that there are no technology issues. The technology works, is reliable, scales to higher speeds and is enjoying falling costs. It is ideal for the world of portable connections and content on demand, and probably also for mobile communications. It has such a throughput advantage over 3G cellular that a combined Wi-Fi/WiMAX chip is a certainty, first in laptops, and then in phones and PDAs.

As for the future of WiMAX, in channels where TowerStream used to push through 45 megabits, they are now closing in on 800 megabits. Jeff expects to see gigabit (1000 megabits) speeds shortly, and then multi-gigabit point-to-point technology in only 18 months.

I think TowerStream is one of the best opportunities that we have to make very large amounts of money over several years. An effective management that thoroughly understands both a technology and its customers can create an unbelievable amount of shareholder value. It is amazing to me that only one analyst follows the company, and it has a total market capitalization just barely over $100 million. Of all the Top Buys, this is one of the best. Buy TWER up to $6 (it’s at about half that level) for my $16 first target.