I hope your holidays have been happy and relaxing, with more to come for the next few days. We started celebrating the holiday season with the Winter Solstice, which also marked the beginning of Saturnalia, the ancient Roman holiday, and Samhain, the ancient Celtic festival. And we go right through Twelfth Night, which is either January 5 or 6 depending on how you define it, and, of course, in the midst of this, we’ll be ringing in the New Year. So in preparation for another year of investing, last week we covered my macroeconomic and stock market outlook for 2008, which can be summarized as a muddle-through economy, a good rally into late March, and then high-level churning through the election. With that backdrop, let’s take a look at the company-by-company outlook for the coming year.

Avian Flu MegaShift

BioCryst Pharmaceuticals (BCRX) started 2007 strong, but stumbled towards the end of the year due to problems in both their hepatitis C and intramuscular flu antiviral programs. But it is the intravenous flu program that we bought this stock for, and that remains on target.

The company is trying to save the intramuscular program with a small study showing that using a longer needle to deliver the antiviral will work. I’m doubtful on how successful this will be, but there’s little downside in giving it a try.

In 2008, I expect the results of the intravenous trial to be announced and be positive, making peramivir eligible for government programs to stockpile treatments for bird flu. BCRX remains a buy all the way up to $13 for my $30 target after peramivir sales begin.

Crucell (CRXL) integrated their Berna Biotech acquisition in 2007, and the December quarter should be the breakout quarter for the combined company. If they hit their vaccine sale goals during the heavy vaccination season, Wall Street will start moving the stock up steadily in 2008, as the company turns first cash flow positive and then earnings positive. We will find out soon, when they report, and I am still expecting this stock to be a good-sized winner. Buy CRXL up to $28 for my $50 target.

Biotech MegaShift

Affymetrix (AFFX) will be shipping their latest gene chips in volume in 2008. Even better, I expect a settlement in their patent infringement lawsuit against Illumina that will carry hefty royalties in the 15% area, with a large catch-up payment for past infringement. After factoring in the royalties, the profitability of Affymetrix and Illumina will be about the same, and a lot of Illumina shareholders might decide to switch into or buy an additional position in AFFX. AFFX is a buy up to $27 for my $40 target after the Illumina settlement is announced.

Amgen (AMGN) was clobbered on worries about Epogen and Aranesp before I recommended the LEAP call options, but I was too early. The bad news, in endlessly rehashed form, just kept getting repeated. The stock went down on fears over labeling for cancer treatments, which turned out to be no worse than the original news. It then went down again on fears over Medicare reimbursement for cancer treatments, and that did turn out to be worse than expected, as I’ll discuss below. And it dropped again on fears over a September FDA panel meeting review of usage guidelines for kidney dialysis, but nothing bad happened. Then the share price dropped recently on fears of another FDA panel meeting to be held early next year. Again, I don’t think anything negative will come out of that meeting.

The one negative, though, was the Medicare reimbursement guidelines, which deny reimbursement until the cancer patient’s hematocrit falls below nine grams per deciliter (g/dl). That is a shockingly low number, forcing sick people undergoing chemotherapy to live borderline anemic, or forcing doctors to use blood transfusions from the perpetually near-empty blood banks to boost red cell counts, instead of Aranesp or Epogen. Instead of following along as the bears predicted, the other big payers like Blue Cross are following the recommendations of doctor groups like the American Society of Clinical Oncologists to use a hematocrit level of 10 g/dl as the critical level. I don’t really expect Medicare to backpedal, although they will be under continual pressure on this issue, but I also don’t think that this situation will get any worse for Amgen.

In 2008, I expect the upcoming FDA panel review to pass without incident. Amgen will make sure that the media hears every story about the blood bank being drained because Medicare won’t reimburse properly for Aranesp. The company’s cost cuts will lead to upside earnings surprises, and by the end of the year, the year-over-year growth numbers will be back on track. I am still looking for $95 on AMGN stock by the end of 2008, so continue to buy the Amgen January 2009 $70 LEAP call (VAMAN) all the way up to $12.50, for a $25 target price when the LEAPs expire.

CombinatoRx (CRXX) should have a great 2008, driven by clinical results from several Phase II trials and partnership announcements as those drugs are moved into Phase III. This company has the richest pipeline of drugs per dollar of R&D spent of any biotech company that I have ever seen. I’m reducing the buy limit on CRXX by 50 cents to $7, just to carry an even number, while keeping my $16 target price.

Dendreon (DNDN) will have a big 2008, if, as I expect, the mid-year interim peek at the latest Provenge Phase III trial shows a statistically significant survival advantage. That would be followed by FDA approval — no backroom games by Mr. Pazdur this time — and naming a European partner. That’s plenty to get to my $40 target, so continue to buy DNDN under $8.

eResearch (ERES) will accelerate their growth this year, as the steady growth in orders during the last several quarters translates to a steady growth in revenues. This pattern started in the U.S. but is now going worldwide, as various national health regulatory bodies adopt the new FDA standards for cardiac impact testing.

Richard Blum, Senator Diane Feinstein’s husband, now owns 17% of the company and has a representative from Blum Capital on the board. Dick is neither a growth nor a value investor — he buys great businesses at attractive prices. RS Investment Management is the #2 holder of the stock at 14.7% — they are growth investors. Royce & Associates is the #3 holder of the stock at 12.4% — they are Ben Graham-style value investors. How can one company attract that much concentrated firepower from such a diverse constituency of investors? The answer is that it is a great business with tremendous growth opportunities selling at a value investor’s price. ERES is a Top Buy up to $16 for my $30 target.

Geron (GERN) will press forward in 2008 with both its stem cell programs and its anti-telomerase cancer, “silver bullet,” programs. The stock tends to shoot up when news is released, and there should be plenty of news in 2008, as the company continues to develop these treatments. Buy GERN under $9 for my $18 target.

Isolagen (ILE) will complete their Phase III data analysis for the Isolagen Process in 2008, and the positive outcome that I am expecting should easily get the stock to my first target. Buy ILE under $4.50 for my $9 target

Millennium Pharmaceuticals (MLNM) will get their label expansion for Velcade in 2008, and I expect the stock to march steadily towards my $23 target price, unless it is bought out by a big pharma at $23 a share or better. It looks unlikely to trade below my $12 buy limit ever again, so I am moving MLNM to a hold for the $23 target in the next 12 months.

QLT Inc. (QLTI) has done what they can in the short-term to get the stock price up — they’ve cut costs, bought back a large amount of stock and supported doctors who are doing little trials of combination therapy for wet macular degeneration using Visudyne with newer drugs. So 2008 should be the year when those efforts pay off in the U.S., and 2009 will be when they pay off in Europe. It has taken much, much longer than I expected for doctors to adopt combination therapies, but it is slowly happening. With no downward exposure to the slowing economy, QLT remains a buy up to $6 for the $12 target.

Rochester Medical (ROCM) will settle its lawsuit against Covidien and Novation in 2008, bringing in millions of dollars and opening another channel into the hospital market. The company should see steady, strong sales growth from their distribution deal with Premier, and then in October the new Medicare reimbursement rules kick in that stop paying hospitals to cure hospital-caused infections. About 40% of those infections come from urinary catheters, and Rochester has the solution with their antimicrobial-eluting urinary continence and urine drainage care products. The stock would have to double just to get to my buy limit, so I am reducing the buy limit slightly to $20, leaving the target price at $40 and keeping ROCM as a Top Buy — one of the very Top Buys at this price.

Sequenom (SQNM) has given us a 109%% return in six months so far, but I’m beginning to think that it has much further to run than I originally thought. I’m not ready to raise the $10 target price quite yet, but after the yearend conference call, I may do it rather than sell the stock.

This is a stock that came public at $26 a share in March 2000, right at the peak of the tech and biotech bubble, based on the excitement around the possibilities from sequencing the human genome. It shot straight up to $171. A year later it was under $10, and six years after that we bought it at $4.52.

But unlike many of their peers, it looks like Sequenom will make genetic sequencing pay off. Their prenatal Down syndrome product is non-invasive and would replace amniocentesis. There is an alternative method of looking for Down syndrome that we did earlier this year for our yet to be born little girl, which combines an ultrasound scan to look for an abnormally thin neck on the fetus plus a blood test. While it is safer than amnio, it is expensive because it requires an experienced radiologist to interpret the scans.

Sequenom’s prenatal screening tests are designed to be more accurate than other tests as well as noninvasive — about 275,000 women a year are falsely diagnosed as being at risk for carrying a child with Down syndrome, and then put through more invasive tests. The company will do a cystic fibrosis test next, and they can grow to a substantial size just in these two indications.

How is it that Sequenom has been so successful in the aftermath of the tech and biotech crash? Sequenom went into the contract research business. They developed their own tools for more accurate and quicker genetic analytical work, and then marketed the tool as their MassARRAY product. They now have 200 customers, including 14 new ones that were added in the September quarter. Sales grew from $19.4 million in 2005 to $28.5 million in 2006, and I am looking for $40 million in 2007. I expect them to beat $55 million in 2008. So while the company is still losing money as they research and develop their prenatal diagnostic tests, they have trimmed the losses from $26.5 million in 2005 to $17.6 million in 2006 and around $13 million in 2007. They should be down in single digits, around $7 million to $8 million, in 2008.

Sequenom also did a $30 million private placement in the September quarter, and that cash should carry them through to profitability. Once the first two prenatal tests are approved, they can use the cash flow to address a huge array of other disorders with non-invasive tests, both within and beyond the prenatal markets. And they have finished early work on a test for genetic material from malignant cells to diagnose cancer before any tumor can be detected. Because we all have some cancer cells circulating in our bodies all the time, this test will have to be sensitive but not too sensitive.

So Sequenom came back from the near-dead after the tech crash with the help of good management that focused the new genetic science on practical diagnostic opportunities that have a shorter path to approval than drugs. I’m expecting good news from their Down syndrome program to drive the stock to the current $10 target price in 2008. Again, I might raise the target rather than sell it. Until then, continue to hold SQNM for my $10 target.

SXC Health Solutions (SXCI) has not performed as I expected so far, but I think the main reason is that they are going after larger and larger pharmacy benefit management (PBM) contracts, which have a longer sales cycle and therefore take longer to close. The industry still looks golden to me. With the baby boomers starting to retire, managing pharmacy benefits is a crucial cost-reduction strategy for retirement plans. SXC is the fastest-growing small PBM company, and the bigger ones have produced hundreds of percent of return to investors in a smooth, up-and-to-the-right chart pattern over many years. I am looking for a lot of big contracts to close and get booked in 2008, so SXCI remains a buy while it is under $15 for my $30 target.

ViroPharma (VPHM) will have two major events to handle in 2008: Their patent protection on Vancocin will expire, and there will be a filing for generic Vancocin by some competitor in 2009. That is exactly what management and I expected, and the whole bashing that the stock took over a possible earlier generic was wrong. Of course, the stock is still depressed from the bashing.

But that will be fixed in a hurry after management announces their next acquisition or in-licensing of an approved product with label expansion possibilities that is being poorly marketed. ViroPharma is following the path that Cephalon took to build a major pharmaceutical company by in-licensing, expanding labels, and marketing, marketing, marketing. We made a ton of money in Cephalon several years ago, and I think we will make a ton again with ViroPharma. Buy VPHM up to $12 for my $25 target.

China MegaShift

UTStarcom (UTSI) has one chance to prove the critics wrong, and this is it. Internet Protocol Television (IPTV) is catching on rapidly in less-developed countries, and UTStarcom is a major IPTV equipment supplier, especially in China. The Beijing Summer Olympics is creating a manic demand for TV in rural China, and big bucks will be spent to get IPTV to as many people as possible. If UTStarcom can execute well (something they have not done for quite a while), they can start the rebuilding process. But if CEO Hong Lu blows this one, he will be forced to sell the company. We’ll know soon enough. UTSI remains a hold for dramatic IPTV sales growth in the next six months, which would start the move to my $10 target over the next couple of years.

Content on Demand MegaShift

Akamai Technologies (AKAM) will have a great 2008 as video continues to take over the Internet. Video bits now account for around half of all the traffic on the net — amazing! Thank you, YouTube. And another thank you to Apple Computer, which will announce on January 14 at Macworld in San Francisco that people will be able to rent movies from 20th Century Fox online through Apple’s iTunes store. That’s more bits for AKAM to deliver quickly to consumers.

AKAM is down due to worries over new competition for dumb caching services. As I explained in the last issue, Akamai sold nothing but dumb caching services four years ago, but they now offer a full suite of services around that, including support for streaming video such as YouTube, fail-safe delivery, content management systems and software, load balancing, network monitoring, real-time reporting on delivery performance, redundancy, security and optimization. They are head and shoulders above the new competitors. Buy AKAM on any dips under $36, which have been plentiful in the last several days, for my $60 target.

Harmonic (HLIT) is performing very well under the new CEO, and will continue to be a big beneficiary of the Internet video explosion in 2008. Buy HLIT under $12 for my $18 target.

Intel (INTC) will get top line growth from the continuing upgrade cycle to Windows Vista, plus a number of people who had waited to upgrade their computer and now have to do it, even though they’ve decided to stick with Windows XP. Intel will get additional earnings growth from their cost-cutting programs that started last year, plus their migration to 45 nanometer processing. Even if business spending slows a bit in the first half of the year, I expect the stock to ride the earnings growth created by revenue growth and cost reductions to my $35 target at the end of the year. Buy the January 2009 LEAP calls with a $22.50 strike price (VNLAX) anytime they are under $6 for a $12.50 target price.

Motorola (MOT) has changed CEOs, which probably puts the company in play for a buyout offer due to Carl Icahn’s position. In addition to that, the company’s new phones are selling well, and in the back-and-forth cycle of the cell phone business, I think that we bought MOT at the right time. They will pick up market share from Nokia in 2008, and maybe from Samsung, which can get MOT stock up to $28 by the end of the year. Continue to buy the Motorola January 2009 $17.50 LEAP calls (VMAAW) up to $4 for a $10.50 target.

QuickLogic (QUIK) will benefit from one of the biggest trends in the Content on Demand MegaShift: Intelligence and Internet connectivity embedded in more things that were previously dumb. Microprocessors combined with wireless adapters can already be found inside flat-panel TVs, set-top boxes, toy robots and the like. Intel is pushing hard for smarter connected devices that use all-in-one consumer electronics chips that operate on low power. That is exactly what QuickLogic makes. Even better, the QuickLogic chip allows the manufacturer to deploy several models of a device with basic, mid-range and high-end functions at different price points. Or the manufacturer can regularly upgrade the available features without redesigning the whole device.

We are headed for “digital Gaia,” where intelligence and connectivity chips are in virtually everything. QUIK is one of the very few companies with solutions today, and they have a fundamental technology advantage. That’s why QUIK is a Top Buy up to $4 for my $8 first target.

Silicon Image (SIMG) should benefit from an Apple announcement that I expect at Macworld: new LCD displays with HDMI ports. Apple had always prided itself on having knockout displays for the Macintosh users, but the competition has passed them by with built-in cameras and HDMI connectivity. Steve Jobs won’t stand for that. As the leading HDMI chip vendor, Silicon Image will benefit from the realization that HDMI is going to be in personal computers for a long time, whether it is their chip in the Apple displays or not. For the rest of 2008, adding HDMI to every sort of consumer device will be an unstoppable trend, and I think management’s conservative current guidance will turn out to be too pessimistic. Buy SIMG up to $13 for my $20 target. I may move the stock to a Top Buy after we hear how the December quarter went, and get an update on March-quarter guidance.

Telkonet (TKO) has changed CEOs, and now we will see what this technology can really do. The new 32-year-old CEO is a successful entrepreneur and a hard-driving manager, and the troops have to be thrilled that they are once again a real contender. Think Boston Red Sox in 2002, when futures trader John Henry bought the team. I expect world-class results from TKO in 2008, including major new government program wins for their Broadband over Power Line technology. Buy TKO up to $5 for my stubbornly unchanged $15 target.

Zhone Technologies (ZHNE) has run out of excuses, and I think CEO Mory Ejabat knows it. After the mildy disappointing September-quarter results, he said that new customer wins and introductions of new products will drive strong sequential growth in the December quarter to between $44 million and $45 million in sales. That would produce the long-awaited pro forma positive EBITDA (earnings before interest, taxes, depreciation and amortization).

After the call, I moved ZHNE back to a buy because I think that Mory is determined to pull this off, and he has the backing of the biggest venture capital firm in the world. But as I said then, this may be a case of fool me once, shame on you; fool me twice, shame on me. If so, we will sell the stock. If not, 2008 should be the year that the business starts growing again, and the stock should do well. Buy ZHNE under $1.50 for a modest $4 target.

Nanotech & Materials MegaShift

Integral Technologies (ITKG) will sign more licenses in 2008 and may see some products from prior licensees come to market. That would focus more attention on this unique stock, where nothing has changed since it hit $3.95 last December 29. Buy ITKG up to $2 for my $4 first target.

New Economy MegaShift

Cnet Networks (CNET) benefited from strong online advertising spending during the holiday season, and the now rapidly-growing shift to online merchandising will be accompanied by a similar shift in ad spending. Cnet has a great collection of properties to monetize, and they will take more steps in 2008 to do that. This is an extraordinarily cheap entry point for what could be a huge winner over the next five years. Buy CNET while it is under $9 for my $17 first target.

New Energy Technology MegaShift

On December 19 President Bush signed the new energy bill, but it really only increases the automobile and truck fuel economy standards and continues to subsidize corn-based ethanol, a loser for almost everyone but heavy political contributor Archer Daniels Midland. In the compromise bill, the — wait, let me choose the right word here… — morons dropped almost all the benefits for renewable energy, and did not extend the 30% investment tax credit for fuel cells, wind power and solar that expires at the end of 2008. Election-year pandering may get that one extended in time.

Fortunately, what Congress and the President can’t do, $90 oil can. Solar doesn’t make much sense without large tax credits, and with California’s property tax revenue now falling, I suspect the million solar rooftops program will take a hiatus. Other states are not likely to step into any breach left by the feds, so I am keeping a close eye on sales at Energy Conversion Devices (ENER). I still think they’ll be OK, as detailed below, even if the investment tax credit expires.

Connacher Oil & Gas (CLL.TO) will benefit in 2008 from two things: Steady production from their oil sands leases under Pod One, and an important, although little-known, potential SEC rules change. The SEC is updating their rules for reporting oil and gas reserves in the first major revision since 1978. I expect the biggest positive impact will be on companies with a large, marginal resource base, like oil sands producers. Connacher and others will be able to greatly increase the size of their reported “proven reserves.” The size of the increases for many companies, including Connacher, will be huge, and that should result in much higher valuations for the companies. Buy CLL.TO while it is under $4.50 for my $9 target.

Energy Focus (EFOI) will have an excellent 2008 as big companies seek to slash their energy costs by substituting LED and fiber optic lighting for incandescents and fluorescents. This is a multi-year trend that EFOI intends to ride, and we will be carried along. Buy EFOI under $6 for my $15 target.

Energy Conversion Devices (ENER) is under new, good management and has about finished their reorganization and cost-cutting. If the solar investment tax credit looks like it will expire at the end of 2008, there will be a big push by businesses to replace their roof with United Solar Ovonic thin-film photovoltaic roofing.

At the same time, in 2008 Cobasys, the hybrid car battery joint venture with Chevron, should see a resolution of its future, either by Chevron buying out ENER or the two owners taking Cobasys public.

In 2008 we can also look forward to the first commercial introduction of Ovonic memory from Intel. It will be a big news year for Energy Conversion Devices, and they should turn solidly profitable during the year. The stock has been strong recently in spite of the energy bill disappointment, and you should buy ENER on any market-related dips back under $30 for my unchanged $55 target.

FuelCell Energy (FCEL) will have the same selling dynamics as United Ovonic Solar. If the 30% tax credit is really going to expire at the end of the year, then 2008 is the last chance to install FCEL systems and get the credit. For big hotel chains like Sheraton that have committed to the idea, the tax credit is quite a motivator.

It’s also clear that Korea is going to be a really big customer in 2008, backed by government loans and guarantees. FCEL is a Top Buy up to $12 for my $22 target.

Gasco Energy (GSX) had a miserable 2007 because there is not enough pipeline capacity in the Rocky Mountains to get their’s or anyone else’s gas to market. That all changes in January, when a major new pipeline opens, and 2008 will be a great improvement for them even if national natural gas prices don’t move. But gas is cheap relative to oil right now, so I think GSX will also benefit in 2008 from gas prices rising even if oil stays flat. GSX is a timely buy all the way up to $4.50 for my $9 target.

Infinity Energy Resources (IFNY) was knee-capped in mid-2007 when their bank pulled their credit line. With the original management back in place and their asset sales program heading quickly for actual transactions, 2008 will be much, much better. At the end of the day, we will wind up with a nearly debt-free exploration company with overrides in the Rockies, partners in the Barnett Shale, and a huge potential hit offshore Nicaragua. That’s worth much more than the current sub-$1 stock price, which is suffering from tax-loss selling. Buy IFNY all the way up to $3 for a $7 target based on the eventual value of their assets.

Ocean Power Technologies (OPTT) will have a good 2008 as some installations go live and other projects like PG&E’s wave farm off the coast of Northern California focus attention on the technology. The stock has never recovered from the botched U.S. IPO, so we’re able to pick up shares for a bargain. Buy OPTT up to $20 for my $40 target.

Plug Power (PLUG), like FuelCell Energy, will use the pending expiration of the 30% investment tax credit to boost their U.S. sales effort in 2008. At the same time, they will push harder to dominate the cell phone tower back-up power market, especially outside the U.S. and Europe. Plug Power is well financed, and you can buy PLUG up to $5 for my $10 target.

Rentech (RTK) reported December fourth-quarter revenues of $29.6 million, just above the $29.0 million consensus, and lost 13 cents a share compared with the consensus for a six-cent loss. Both earnings numbers are before a $38.2 million one-time, non-cash impairment charge reflecting their decision to not convert the East Dubuque, Illinois, fertilizer plant to the Rentech process, and instead build a new plant in Natchez, Mississippi. After listening to the conference call, I agree with their decision, although I think that they should have anticipated the fact that it will be easier to monetize the carbon dioxide byproduct in Natchez than in East Dubuque.

Rentech will benefit from the “Energy Independence and Security Act of 2007″ due to the expanded mandate for corn-based ethanol, which means more growth and strong pricing for the ammonia nitrogen fertilizer products produced at East Dubuque. The new law doubles the size of the corn-ethanol mandate to 15 billion gallons per year by 2015, and factory farmers like Archer-Daniels-Midland will continue to destroy the country’s topsoil by piling on ammonia nitrogen fertilizer.

The new energy bill also includes a mandate for renewable biodiesel, which could encourage coal companies to use the Rentech Process to produce ultra-clean diesel fuel from coal, or other companies to use biomass. Rentech already has an agreement with the Solena Group to develop a municipal solid waste-to-fuels plant in Northern California that will be capable of diesel and jet fuel production. There aren’t any financial incentives for renewable biodiesel in the bill, though.

Sherwood Securities sent the company an unsolicited offer to buy all the stock at $2.28 a share, but I expect the Board of Directors to turn them down. Sherwood does this kind of thing to draw attention to stocks in which they have a large holding. RTK is back on the buy list with a $4 buy limit and an $8 first target.

US Geothermal (UGTH) is starting off 2008 right by turning on the Raft River power plant for commercial production. Look for a press release any day, and continue to buy UGTH under $4 for my $6 target before the announcement.

Robotics MegaShift

iRobot (IRBT) should have had a decent holiday sales season based on their many new products, in spite of the general slowdown in retail spending. They can ride the new product cycle through 2008, with more products introduced towards the end of the year. Buy IRBT under $20 for my $30 target.

Security MegaShift

American Science & Engineering (ASEI) has unpredictable results quarter-to-quarter, but one thing is for sure: Every year, terrorism will drive their sales higher. Today’s sad news about the suicide bombing death of Pakistani opposition leader Benazir Bhutto is just the latest example. A Z Backscatter van from ASEI could possibly have prevented her death. ASEI is a Top Buy any time it dips under $59, as it is now, for my $93 target.

Packeteer (PKTR) is another show-me company right now, with CEO Dave Cote on the grill to fix their sales execution problems and take advantage of their superior traffic-shaping technology. I think Dave will come through, or the company will be sold under pressure from a large shareholder, Elliott Associates. Either way, PKTR is a buy up to $9 for a $20 target.

SiRF Technology Holdings (SIRF) must have had an excellent fourth quarter due to the strong sales of standalone GPS navigation devices, and the empty shelves means that the March quarter will be OK, too, as manufacturers rebuild their inventories. But the big story in 2008 will be their integration of processing and GPS, opening up huge markets like cell phones. SIRF is a great buy anytime it dips under $24, which happened as recently as December 20, for my $42 target.

Video iPod MegaShift

Burst.com (BRST) will file suit against TiVO in 2008, unless I have totally misread the real meaning behind the cheap settlement with Apple. Apple will introduce a new version of the Apple TV, a flop so far, that includes a TiVO-like video recorder, and may at that time announce a royalty license with BRST. Burst.com would take that contract and some behind-the-scenes help from Apple’s patent lawyers and sue TiVO.

BRST stock would double or triple overnight, and a win against TiVO would mean more royalties from Philips and others. Plus, the streaming video patents that survived Apple’s challenge can still be enforced against many other companies. All in all, Burst.com’s value is much higher than the market currently thinks, and if you have a place for this kind of speculation, you should buy BRST while it is under tax-selling pressure, with a 50-cent buy limit and a $2 target after they file suit against TiVO.

WiMAX MegaShift

All of the WiMAX equipment suppliers will do well in 2008 as the equipment market doubles, then doubles again in 2009 and yet again in 2010. We are in the fastest-growth part of the curve for this gear, and our three equipment companies are well-positioned.

Airspan (AIRN) is selling fixed WiMAX systems that can be upgraded to mobile WiMAX as those systems are certified in 2008. AIRN is a buy up to $5 for my $10 target.

Alvarion (ALVR) is selling more fixed systems than Airspan, and they are the independent market leader with systems installed in over 80 countries. The stock is more expensive than AIRN, but I would still establish a position here first, and then add AIRN for diversification. The basket of stocks approach is the right way to go when you want to capture a major technology move like the shift to WiMAX. ALVR is a Top Buy while it is under $11 for my $18 target.

Proxim Wireless (PRXM) is the smallest and riskiest of these three, with a heavy focus on providing equipment for municipal Wi-Fi systems that can later be upgraded to WiMAX. Buy PRXM under $1 for a $4 target.

TowerStream (TWER) is not an equipment supplier, but an equipment user and WISP (wireless Internet service provider). They will add a couple of more cities in 2008, expand their network in a few others, and show rapid revenue growth as they staff up their new 180-seat telemarketing center. TWER is my #1 stock for 2008, and is a Top Buy all the way up to $6 for my $16 target.

Market Outlook

Consumer spending was mediocre but not a disaster during the holidays, and housing continues to be a big drag on the economy. Yet, with all the problems and nouveau bears on CNBC, the S&P 500 is still within 5% of its all-time high. I would have liked to have seen the index hold above 1490 today, but the news of Bhutto’s death clipped it. Still, even another drop to 1440 would not change my bullish outlook for the next three months. It would just mean an even stronger slingshot rally off that support level.

I still expect a rally to new highs and beyond into late March, peaking somewhere between 1600 and 1710. That won’t be the end of this bull market that started in mid-2002, but we will be due for the usual Presidential cycle pattern of high-level churning through the election. After that, I’m looking for a parabolic move up to the ultimate top for this bull around April 2009. There’s lots of money left to be made, and lots of time for fallen angels to turn themselves around. Let’s wish all of our companies and their managements what I wish for you and yours: A Very Happy 2008!

The New Year is just a couple weeks away, and you know what that means: It’s end-of-the-year forecasting time again. So, this week I’m going to cover the macroeconomic and stock market outlook for 2008 and a bit beyond. And then next Thursday I’ll go through each MegaShift and provide you with the company-by-company outlook for the coming year. I hope that will be among your Top 10 interesting things for the week, even in competition with two major holidays.

Predicting what will happen to our economy in 2008 may seem roughly akin to guessing where the locomotive will wind up when you are in the middle of a train crash. And I must say that it is harder this year to nail the macroeconomic outlook than any of the past five years or so. That’s because the U.S. economy will be walking the knife edge of recession for the first two or three quarters of the year, as the “Bernanke Box” that I identified for you in early 2006 becomes very constricting.

There’s no doubt that without massive intervention by the monetary authorities, the U.S. would slide into a deep recession. This is because high energy prices and falling house prices would kill consumer spending, which in turn could cause businesses to pull back by cutting inventories and firing people, which could then cause the world economy to head south.

But there is massive intervention by the monetary authorities already underway, and note that I did not say “U.S. monetary authorities.” The problem in the world’s economy started in the U.S., for sure, and as we all know, there just wasn’t a darn thing that the Fed could have done to prevent it. We all know that because former Fed Chairman Alan Greenspan wrote a wonderfully comic op-ed piece in The Wall Street Journal on December 13 that said: “I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly very little the world’s central banks could do to temper this most recent surge in human euphoria…”

I learned a long time ago that when someone says “clearly” they probably don’t have any evidence for a position that they desperately want you to agree with. Greenspan blamed the problems on “global capital flows,” as if the capital suddenly fell from the sky. The money came from his Fed dramatically accelerating the growth in the money supply! Does he think that we didn’t notice? Has he never heard the phrase “take away the punch bowl?” Or did he hear: “Just as the party gets rolling, the Fed’s job is to spike the punch bowl?”

While he was the Fed Chairman, Greenspan’s game was to focus the media on the level of interest rates — the price of money — while spending much of his time behind the scenes on growing the money supply — the quantity of money. Well, Bernanke ended the reporting of M3 to try to hide the growth in the money supply, and then he accelerated M3 growth. But the current credit crisis is a crisis of both leverage and confidence, and Bernanke needs to publicly show that he is making quantities of money available. Which he recently did: The Fed announced the bank credit auctions that I discussed last week, including $20 billion last Monday and $20 billion today. That increased the money supply by 3%.

That may seem like a decent chunk of cash but not compared with what occurred on the other side of the pond this week. The European Central Bank dropped $500 billion in new credit into their banking system on Tuesday. Wow! They don’t even have sub-prime mortgages, except the ones that they bought from us, although there is a housing price bust in Spain that probably will spread to the UK. The ECB made Bernanke look like a piker. A side effect from this influx of cash is that they will knock the euro down versus the dollar, because more paper money means less value for each piece of paper. Their manufacturers will also be a little better able to compete with the U.S. and China around the world, and their price of oil will go up a little bit. But the main impact will be that half a trillion dollars will unlock their credit markets. If they take it back out soon, it won’t have much negative impact. More likely, they will never really take it back, avoid a recession and just eat the inflation, which will happen over a few years.

One indicator to watch in this situation is the London Interbank lending rate, or LIBOR. That’s the rate that banks charge to lend to each other, and if it doesn’t come down even with coordinated actions by the major central banks, things could get much worse than I am now expecting — in the U.S, Europe and the UK.

I think the six biggest economic stories of 2008 will be how high inflation goes, how low U.S. GDP growth goes, how long it takes to unlock the credit markets, where oil prices go, who gets elected President, and the path the stock market takes for the year. So let’s take a look at each of these scenarios now.

How High Will Inflation Go?

Inflation is a consequence of how much money Bernanke and the Europeans print, but there is a self-limiting aspect to it. Last Friday’s top stories included these two headlines:

Gas Prices Spur Consumer Inflation- AP

Oil Prices Fall on Inflation Report- AP

With less than one month to go, inflation in 2007 is rising at an annual rate of 4.2%, far above the 2.5% that we saw in 2006. But a surge in inflation will cause consumers to cut back quickly on non-essential spending, and “core” inflation, leaving out food and energy, is not relevant to someone impacted by high gasoline, heating and food bills. The resultant slowdown in the economy will reduce inflationary pressures — sometimes by taking a big whack out of corporate profits. My forecast for inflation in 2008 is 5%, and it is that low only because I’m looking for slow GDP growth. I think we are on course for accelerating inflation every year for quite some time.

How Low Will GDP Growth Go?

GDP in the current December quarter is likely to be better than the 1% consensus forecast, clocking in somewhere in the 1% to 2% range. But both the first and second quarters of 2008 are going to be slow, because business capital spending is slowing, the credit markets are not going to unlock easily, and consumers are squeezed by high gasoline and heating oil prices. In a recent Roper poll, two out of three Americans said that they will cut back on spending for other things due to higher energy costs in 2008. Almost 25% said that they will be making significant cuts in other areas.

I’m expecting growth below 2% in the March and June quarters, and 3% in the September and December quarters. The year should skirt a recession and come in around 2.5%, which is a bit better than the consensus of 1.8%. For the world economy, I am looking for just over 4% growth, lower than the consensus for 4.8%. I still think a slowdown in the U.S. will have a meaningful impact on Asia, while others think China won’t slowdown much in 2008, if only because of the Beijing Summer Olympics.

One of the biggest reasons why a U.S. slowdown still has so much worldwide clout is that this is where the wealth is. Almost two-thirds of the household wealth in the whole world is in two countries, the U.S. (37%) and Japan (27%). China does not make the top 10. (If you are interested, the remaining wealth is in the UK (6%), France (5%), Italy (4%), Germany (4%), Canada (2%), Netherlands (2%), Spain (1%), Switzerland (1%), Taiwan (1%), and the other 183 countries in the world total less than 10% of global wealth. If you have a net worth over $500,000, you are in the top 1% of the world’s households.)

How Long Will It Take To Unlock the Credit Markets?

The sub-prime credit markets aren’t going to unlock. The Fed has proposed rules outlawing no doc and “stated income” or liar loans, and requiring lenders to be sure that borrowers can afford the payments after a loan resets. In other words, most sub-prime borrowers will not be able to buy a house in the future. That means there will be no more sub-prime mortgage pools, so Wall Street will have to overdo something else next time.

Vindu Goel, who blogs for the San Jose Mercury News, asked; “What’s the difference between the fire department and the Federal Reserve Board?” Answer: The fire department actually tries to save a house before it’s gone.

The existing pools of defaulting sub-prime mortgages will be passed around from the current holders to others (private equity, bank pools) at a big discount, damaging the lending ability of the original holders. But the Fed will provide enough liquidity to put the better banks back in the lending business right away, and the rest will be stabilized by mid-2008. At the same time, corporate demand for funds will fall as business slows. Homebuilders won’t be looking for money until after midyear. The net effect should be available credit in the March quarter, with lower demand making it seem like the markets have healed. The issue should be behind us by the end of the June quarter, due more to slow GDP growth than anything else.

Where Will the Price of Oil Go?

In a slower-growth world economy, inventory adjustments and speculation in the futures market can take oil prices lower than they would otherwise go. After all, slower growth is still growth, and even if China grows 7% to 8% instead of the 9.8% forecast by the Organization for Economic Development, their use of oil will increase in 2008. As will India’s use. That will easily offset any softening of demand in the Western world — which I expect to grow at a lower rate in 2008, but not decline. The net of all this should be an oil price range of $80 to $100 a barrel in 2008, centered on $90.

However, I could be low. The U.S. Energy Information Administration says that worldwide demand for oil will outstrip supply in 2008. They are forecasting gasoline to average well over $3 a gallon in 2008, with a spike to $3.40 in the spring, versus a nationwide average of $3 now. (We are far over $3 a gallon in California already due to state and regional taxes.) Whether the GDP softness impacts energy prices early in the year or not, towards the end of the year inflationary money supply growth could cause oil to break out over $100, and I certainly think that is in the cards for 2009.

Who Gets Elected President?

I think Hillary Clinton and Barack Obama will run together against Mike Huckabee and Rudy Giuliani, in either a Huckabee/Giuliani configuration or Giuliani/Huckabee, and Clinton/Obama will win a squeaker. I also think that it doesn’t matter who runs or wins — unless it is Ron Paul, who makes too much sense to even get nominated, much less attract the average American voter.

What Path Will the Stock Market Take for the Year?

The short answer is that most likely we are either going to see a sideways-to-up consolidation into late March, followed by a dramatic move up, or we are going to get the dramatic move shortly, lasting into late March, followed by high-level churning through the election. As always, we will let the market tell us what to do, but I think the odds still favor the latter scenario.

One of the reasons that I think we could see a big move over the next three months is the huge amount of money coming from the European Central Bank and the Fed into the world economy. Usually, that money sloshes into financial assets first, and then wends its way into real businesses. But if capital spending is slowing and companies are trying to reduce inventories, a lot of the new money will stay in financial assets longer than expected.

In theory, the Fed should be constrained by accelerating inflation and less able to deal with the still-spreading worldwide credit crunch. In fact, I think that the Fed will slash interest rates just as Alan Greenspan did after the Internet bubble burst and slowed the economy in 2000 to 2001, and inflation and the dollar be damned. That’s why I’ve been guiding you away from holding U.S. dollars or dollar-denominated, fixed-rate CDs, notes, bonds or mortgages.

It is obvious that 1440 on the S&P 500 is every bit as important as I’ve been saying, as both resistance on the way up and support on the way down. After watching the market internals over the past two weeks and today, I now think that we are on the verge of a strong move higher. We have tested 1440 as support over and over again, on both the weekly and daily charts (including yesterday) and the bears just can’t knock the market lower. Markets that refuse to go lower generally go up. And it looks to me like the market has just been recharging ahead of the next big move to the upside, so the next move up over 1490 should be a lulu, going to all-time highs.

It is always possible that there will first be yet another quick, scary decline to 1440 like yesterday’s midday swoon to clean out the last of the chicken bulls, but that would just increase the energy available for a slingshot move up. I expect a bit of consolidation at 1490 and again in the 1507 to 1510 range, with a little longer period of consolidation at 1530. And there should be a couple of weeks of consolidation just under the old high at 1555. Any of these consolidation periods could include a retest of the prior level, and I certainly expect the market to touch 1555 and then go back down to test 1530, maybe two or three times.

Looking at the longer-term weekly data, I conclude that decisively breaking the old high at 1555 is likely to start a very sharp move up to 1690. It is possible that move will overshoot to 1710 or, in a really extreme case, 1790. Wherever it ends, this is a move that you do not want to miss. The whole move should play out to an important top in the second half of March.

I doubt that will be the ultimate top for this bull market, but it is very typical in an election year for the market to stage an early rally and then churn at a high level from spring through the election, without drastically breaking out in either direction. In part, that’s because during the campaign the candidates slug each other and scare the voters, especially those on Wall Street. I doubt a Clinton/Obama ticket with good poll numbers would be very welcomed on the Street. In general, there’s just too much uncertainty, pandering, charges and counter-charges during the campaigns to keep investors comfortable, and that goes double for overseas investors who take Presidential elections in the United States seriously.

The Bottom Line

Be fully invested right now, whether that means your maximum is 50% equities, 100% equities or 150% equities on margin. If you normally hold bonds, you should shorten up maturities, because I expect long-term interest rates to rise even as short-term rates fall. It is normal for the yield curve to move to a positive slope if there isn’t going to be a recession, and the Fed will do everything it can to avoid a recession. Don’t fight the Fed.

If you hold cash, you can switch it to a Eurodollar or yen CD account at Everbank, or use the Philadelphia Exchange World Currency options to protect the value of your dollars. For the next few months, though, with the ECB and the Chinese central bank both creating money even faster than the Fed, the dollar should be OK against everything but the yen.

In our MegaShifts, these stocks that should move the most from now to March:

• Affymetrix (AFFX)
• Rochester Medical (ROCM)
• Akamai (AKAM) — where I am raising the buy limit to $36
• Harmonic (HLIT)
• QuickLogic (QUIK)
• Intel January 2009 $22.50 LEAP (VNLAX)
• Motorola January 2009 $17.50 LEAP (VMAAW)
• Gasco Energy (GSX)
• US Geothermal (UGTH)
• iRobot (IRBT)
• SiRF Technology (SIRF)
• CNET Networks (CNET)
• Airspan (AIRN)
• Alvarion (ALVR)
• TowerStream (TWER)

I expect Crucell (CRXL), eResearch (ERES), Millennium Pharmaceuticals (MLNM), SXC Health Solutions (SXCI), Silicon Image (SIMG), Telkonet (TKO), Connacher Oil & Gas (CLL.TO), Infinity Energy Resources (IFNY) and several others to have big moves based on specific company news, which may or may not come by March, so I left them off the above list, but still rate them as buys.

Biotech MegaShift

There’s an important shift going on at the FDA that is making me more cautious on biotech companies working on cancer drugs. On December 5, Genentech got a turndown from the FDA Oncologic Drugs Advisory Committee (ODAC) to expand the label for Avastin to cover breast cancer patients in conjunction with chemotherapy. Avastin is already FDA-approved for colorectal and lung cancer, and it is no small drug, doing $1.7 billion in sales for the first nine months of 2007. This got my attention, because Genentech normally is very good at getting drugs through the FDA. But the head of the Oncology Division of the FDA, Richard Pazdur, has become very strong politically, to the point that industry insiders now refer to some FDA decisions as “being Pazdurized.”

On Avastin, he simply constructed the ODAC panel meeting to get a “no” vote, using the always-reliable “let’s wait for more data” excuse. Some people think that the FDA will overrule the panel and approve Avastin on February 23 because the vote was only 5 to 4 against approval. But I think they are really wrong, for two reasons. First, as Pogo used to say, truth is a 5 to 4 vote by the Supreme Court. Second, Pazdur has an agenda. In the past, progression-free survival has been a surrogate endpoint for survival, and a drug that showed progression-free survival for a period of time could get approval. But Pazdur seems to want real survival data, which can take much longer to collect at a point that it will be statistically significant. Essentially, he has said: “I don’t care if the tumors stop growing if the drug doesn’t extend survival, so show me the survival data.”

I have mixed feeling about this. None less than the American Cancer Society has said that if you have a healthy immune system, you won’t get cancer. In that sense, cancer is a symptom of an unhealthy immune system, not a disease in itself. Treating the tumor without treating the underlying immune system problem is like bringing a fever down without addressing an underlying infection. It doesn’t do much good, and may actually do harm. In the case of the fever, your body is trying to burn out the source of the infection. In the case of cancer, chemotherapy and radiation both suppress the immune system, making it more likely that cancer will recur and be fatal.

On the other hand, this is bad news for cancer biotech companies and their stocks, and may reduce R&D in this area. It simply takes a lot more money and time to prove survival than to prove tumors are not progressing. So a new approach that works, which I think Dendreon (DNDN) has in Provenge, might not get pursued just because of the daunting financial requirements to get to approval.

Incidentally, if Provenge had gone before an Oncology Division advisory panel, I am sure that Pazdur would have arranged a complete turndown. FDA Commissioner Andrew von Eschenbach cleverly put the Provenge approval track in the Biologics Division. But after their advisory panel recommended approval, Pazdur waged a behind-the-scenes war to get the FDA to overrule the panel, and he won because he has more power than the Commissioner. It is that process that Congress is being asked to investigate. I still think the investigation will have no impact on Dendreon.

It may be possible to get a drug approved with statistically significant progression-free survival data plus good survival data that needs a couple of more years of follow-up to reach statistical significance. We just don’t know yet. What is clear is that if you have statistically significant progression-free survival data without good survival data, or with neutral or even negative survival data, Pazdur is going to be sure you are turned down. We have to factor that into our decisions to invest in biotech cancer companies going forward.

Amgen (AMGN) has become the whipping boy for biotech bloggers and shortsellers emboldened by the stock’s performance in 2007, but that is about to change. I have no doubt that the stock has been under pressure by yearend window-dressing sellers, mainly pension fund managers looking to get losers out of their portfolio before December 31 so that they don’t have to defend the position to their clients. AMGN stock was essentially flat from mid-September through December 6. The FDA panel turned down Genentech’s Avastin on December 5th, which sent shudders through all the major pharma and biotech stocks. And the stock took a big drop on Friday, December 7, ahead of the American Society of Hematology (ASH) meeting, when management said that they are in discussions with the FDA about label changes for Aranesp (no surprise) and that there would be another meeting of ODAC in the March quarter to review, yet again, Aranesp, Epogen and Johnson & Johnson’s Procrit. That was a surprise.

The label discussions are about using Aranesp off-label to drive hematocrit to high levels in patients undergoing chemotherapy. We already knew that’s too risky, and that this part of the market accounted for less than 10% of Amgen’s sales of these drugs. We also know that Medicare has slashed the hematocrit level below which they will reimburse the use of Aranesp or Epogen. At the time Medicare did that, investors hit Amgen’s stock because they expected private payers like Blue Cross to follow suit. That has not happened — just the opposite, really. Doctor groups are saying that the Medicare-approved levels are too low, dangerous for the patient, and likely to put an intolerable strain on the blood transfusion supply, which is the alternative to having the patient make their own red blood cells using Aranesp or Epogen.

So, Amgen is about to make label changes to Aranesp and Epogen that are already widely-known. The Medicare dosing changes are not having a wider impact and, in fact, are medically wrong (not that I think they will be overturned). Finally, through this whole controversy, Amgen’s original market for Epogen and Aranesp in kidney dialysis has been untouched. I believe that even though the ODAC meeting in the March quarter will be before the same folks that just turned Avastin’s label expansion down, doctors and Pazdur have exactly the opposite motivation from what Wall Street thinks. Just as Pazdur was furious when Dendreon end-ran the ODAC committee with a cancer drug, I suspect that he does not want Medicare setting drug standards that are different from the ones he sets at the FDA. It makes him look bad. So I expect the ODAC meeting to re-recommend the current hematocrit standards, and give Medicare a slap on the wrist.

In addition to all the sturm und drang over Aranesp, at the 30th Annual San Antonio Breast Cancer Symposium meeting Amgen revealed some good data on denosumab, its osteoporosis drug that initially targets raising bone density in women undergoing breast cancer treatment. The data showed marked improvement in cortical bone density, compared with treatments currently on the market. (Cortical bone is the hard outer portion of a bone.)

Other studies are looking at the drug in post-menopausal women (who make up the majority of people with osteoporosis) and in men with prostate cancer, which like breast cancer is often treated with hormone-blocking drugs that can weaken bones. Amgen thinks that this can eventually be a $2-billion-a-year drug.

I still think AMGN will hit $95 on or before our January 2009 $70 LEAP calls (VAMAN) expire in about 13 months, so you can buy the calls all the way up to $12.50, for my $25 target price ($95 minus $70).

China MegaShift

China’s consumer price inflation hit an 11-year high in November at 6.9%. Deputy Central Bank Governor Wu Xiaoling told a financial forum that the rapid growth in the Chinese money supply “is also adding to the upward pressure on inflation.” That’s the first time I have seen a high-level admission that they are printing money like, well, paper. He said that the main factor stoking inflation was “rising prices in certain sectors of the Chinese economy.” Dude, that is inflation. Saying inflation is caused by rising prices is like saying fevers are caused by high thermometer readings. Let’s turn to the expert, Milton Friedman: “Inflation is always and everywhere a monetary phenomenon.”

Content on Demand MegaShift

Akamai Technologies (AKAM) was clipped after AT&T said that they will build up their Content Delivery Network business. Cowen & Co. downgraded AKAM as a result. Yawn.

Cowen noted that AT&T has such a big network that the average distance between a Content Delivery Network node and the customer could shrink to 100 miles by the end of 2008, compared with Akamai’s current 250 miles. Double yawn.

AT&T has been in the Content Delivery Network business for four years, and gone nowhere. They may have a customer for video somewhere, but I’ve never read about one, and there aren’t any customer case studies on their website. Meanwhile, Akamai sold nothing but dumb caching services four years ago, but they now offer a full suite of services around that, including support for streaming video (a la YouTube), fail-safe delivery, content management systems and software, load balancing, network monitoring, real-time reporting on delivery performance, redundancy, security and optimization.

After Akamai started, by 2000 they had lots of big name competitors who said that they were going into content delivery: Quest, MCI, Sprint and even the then-version of AT&T. After a year or so, they were all gone. Meanwhile, Akamai’s average revenue per user grows quarter after quarter. Sure, some customers still sign up for dumb content delivery, but they quickly realize that by using Akamai’s other services, they can greatly increase the economic value of what they are sending over the Internet. Quicker delivery of physical packets, which is what AT&T is talking about, is a small part of a total Internet distribution service. I watch Limelight Networks, Level3 and others as they try to compete with AKAM, and I know this market is so huge that there will be more than one winner, but right now the way to take advantage of the video explosion is to buy AKAM under my raised $36 buy limit for an unchanged $60 target.

Security MegaShift

SiRF Technology (SIRF) must have benefited from this: The #1 electronic item purchased on the Black Friday shopping day after Thanksgiving was a GPS monitor –they were up 500% over last year in unit sales. Two years ago, GPS devices cost $1,000. But the cheapest ones now have broken the $100 barrier and many are now competing on a variety of features.

SiRF also said that GPS will be a core technology in Google’s Android cell phone reference technology coming in 2008. That makes sense — Google wants to serve you ads like Starbuck’s coupons that match up to where you are. SIRF closed today under my $24 buy limit. Buy SIRF now for my $42 target.

Dollar Death Watch

With the European Central Bank out-printing Bernanke for the moment, the dollar should stabilize. A big shopping mall near the Orlando airport estimated 80% of its holiday customers are foreigners this year. They fly in from England and Europe on charters, packing 500 people on a plane, because prices in U.S. dollars are half the price of the same goods in pounds or euros at home. A condo in Florida is now cheaper than one on the coast of Spain. A ski cabin in Colorado is cheaper than one in the Alps. That’s the way it’s supposed to work!

The U.S. trade deficit declined during the September third quarter to the lowest level in two years. But before you get too excited, it fell by 5.5% to $178.5 billon. At that rate, it would take over four years to get us back to a trade surplus. Unfortunately, that would require a responsible Fed and a group of politicians willing to really balance the budget, starting with not counting the money that they borrow from the Social Security Trust Fund as income. That’s not the way to bet.

“Slow learner.” That was the first thought that I had after seeing Tuesday’s newsflash that the Fed cut the Fed funds rate and the discount rate by only one-quarter point, instead of a half-point cut. Just like the action after the August 10 special meeting decision to leave the Fed funds rate unchanged, the markets immediately took the Fed to the woodshed. No surprises there.

When he was teaching, Bernanke always opposed gradualism and advocated early, decisive Fed action if there was a need to do something. Apparently, talk is cheap. The two-year Treasury note, which usually drives Fed policy, is around 3%, which means that the market is looking for meaningful economic weakness in 2008. That has become a reasonable worry, as the very sensitive Economic Cycle Research Institute Weekly Leading Economic Indicators took a recent downturn:

Chart courtesy of Economic Cycle Research Institute Weekly Leading Economic Indicators

In the past, when this index has dropped to a -5% growth rate and stayed there for a few weeks, a recession is likely immediately ahead. The growth rate just fell to –2.7%, and in the past when it got this low, it usually kept going down. But the stock market is an important part of the index, so if the Fed gets their act together or if we see a big rally for some other reason, the recession risk would go away.

So the Fed needs to get the funds rate down to 3% as quickly as possible in order to avoid a prolonged economic downturn. That means they needed to drop the Fed funds rate and the discount rate about 1.5 percentage points or 150 basis points ASAP.

They had a chance to surprise Wall Street a little bit with a 50-basis-point cut on Tuesday, and they blew it. If the Fed had actually done that, they could have done another 50-basis-point cut on January 30 and a final 50- or 25-basis-point cut at the March 18 meeting, if needed. Now they will either have to do an embarrassing between-meetings cut, which makes it obvious to even the uninformed that the market drives the Fed, not vice-versa, or they will have to accelerate to 50-basis-point cuts for the next three or four meetings. Or, of course, they can take a recession during a Presidential election year, and again watch a Clinton follow a Bush into office.

On top of all this, what really disconcerted me was yesterday’s announcement that the Fed is going to loan up to $24 billion to European banks to be sure that there is no shortage of Eurodollars, so the Fed can help those banks unlock their credit markets. Excuse me — a shortage of Eurodollars? The world is awash in U.S. dollars that it does not want, and the dollar has been plunging against the euro all year long. This is pure posturing, not sound monetary policy.

The accompanying announcement that the Fed will auction off $40 billion in credit this month makes a bit more sense. First, that is about 3% of the money supply, so it is a big injection of fresh money. Sure, the dollar will fall even further because of this, but at least the program is big enough to have an impact.

Second, there is a stigma attached to a bank that has to borrow at the discount window, even though we all know that many of them — from Citigroup to Washington Mutual — are in deep doo-doo. By calling this a “credit auction” instead of discount window borrowing, the Fed can give some of the weak sisters cover. The first $20 billion auction is next Monday, followed by another on December 20. There will be two more auctions in January.

But this is the wrong prescription, at the wrong time. The auctioned credit lines will go to the most desperate banks that need to raise capital to shore up their balance sheet against Structured Investment Vehicle (SIV) exposure. These “SIV-Positive” balance sheets will buy some time, but I doubt it will be enough to let them get the toxic assets off their balance sheets before they implode. Incidentally, “SIV” is not a takeoff on “HIV;” there really is a Simian Immunodeficiency Virus that affects monkeys and apes, and the label seems particularly appropriate to the current situation.

The Fed is trying to resolve the sub-prime crises by increasing the quantity of money, goosing the M3 money supply growth up to a ridiculous 18% rate even before this latest $40 billion injection. But that is only going to kill the dollar and, eventually, cause inflation. What they should do is what Alan Greenspan did: Drop the price of money to 1% so the banks can borrow at almost no cost and then buy Treasury bonds to re-liquefy their balance sheets.

Every year New York Magazine runs a contest for satiric titles for the World’s Shortest Book. My entry would be The Accurate Forecasts of Alan Greenspan, but in this case he was right. If you aren’t going to let the undeserving banks fail — and, remember, the Fed is not a government agency, it is owned by the banks — then the closest you can get to a free market solution is to let them borrow cheaply and figure out who gets the loans. But Bernanke wants to be his own man, and I still maintain that he will be forced to resign before his term as Fed Chairman is up.

The effect of all this on the stock market this week was unnecessary and nasty. Tuesday’s 350-point drop from the intraday high in the Dow Jones Industrial Average probably rang the bell for more downside action. The S&P 500 sliced right through the critical 1490 level and was unable to recapture that level yesterday or today, so I expect a test of 1440 is in the cards. If that does not hold, we’ll be looking at 1326 again for the bull market’s goal-line stand.

The structure of the market does not look like the big bull move is over, though, and I still expect to see a blow-off rally into late March or early April. But if things are going to change, now is when it will happen, as the daily and weekly charts are in neutral zones and could break either way. I am not recommending protective puts again because I do expect 1440 to hold, although that may happen after a scary spike down from that level to clean out some nervous bulls. But as I’ve been saying, the market doesn’t care what I expect, so I will send you a Flash Alert if I see something more ominous developing.

The Watch List

Despite the direction of the market over the next couple weeks and months, there are still going to be plenty of opportunities to make money. And I’ve been working on three new ideas that I wanted to give you a heads-up on today: Cree (CREE), Genomic Health (GHDX) and Nanosphere (NSPH). I’ve already explained in the December 6 Radar Report why we are not going to buy into Cree at this time or price, so today I want to put out my thoughts on Genomic Health and Nanosphere. Genomic Health and Nanosphere are both medical diagnostic companies, an area where billions of dollars will be spent as the baby boomers age, regardless of what happens to the economy.

Genomic Health is a Redwood City, California-based company focused on genomic-based clinical diagnostic tests for personalized cancer treatment. The Oncotype DX test predicts the likelihood of cancer recurrence, the likelihood of patient survival within 10 years of diagnosis, and (most important) the likelihood of chemotherapy benefit. This test is currently used for early stage breast cancer, where the chemotherapy regimen is long, arduous and destructive to the very immune system that must eventually clear a woman’s body of cancer cells. Genomic Health is in various stages of development for other cancers, including colon, prostate, kidney, non-small cell lung and melanoma. But the stock is selling near its 12-month high, with a $650 million market capitalization and the company is losing $34 million a year. I think it is too richly priced to move forward right now, but put it on your watch list for a potential buy down the road.

Nanosphere came public on November 1, and the stock pretty much immediately slipped below its $14 IPO price. They are just introducing the Verigene System, an FDA-approved molecular diagnostics platform that enables genomic and protein testing on a single platform. It uses nanoparticle technology to run multiple tests at the same time on the same sample, and the company can develop new test assays to run on the same platform. That makes the platform cost more palatable to their clinical lab and research customers. They are starting with a warfarin blood thinner metabolism test to find out if Coumadin will do a patient any good, and another test that is a hyper-blood coagulation panel.

The company is also developing diagnostic tests for a wide range of cancer, neurodegenerative (cystic fibrosis), cardiovascular and infectious diseases. They will also have pharmaco-genomic tests for personalized medicine. The ultra-sensitive protein detection nanotechnology provides earlier detection of various diseases, and it gives us a way to invest in both nanotech and medtech at the same time. Nanosphere reported September-quarter results this morning, and after listening to the conference call, I have some questions to resolve about their cash burn during this launch phase. The stock fell over 4% after the call. At a $250 million market capitalization, it is not cheap, but I suspect we will own it sooner or later because its cutting edge technology in the personalized medicine area fits perfectly into the Biotech MegaShift.

Again, I’ll send a Flash Alert when it’s time to pull the trigger on Cree, Genomic Health or Nanosphere. For now, though, here are the latest updates on some of our MegaShift holdings and a few answers to your questions during this traditionally slow-news period.

Biotech MegaShift

Dendreon (DNDN) jumped today after CNBC said that three members of Congress asked for an investigation of a Food and Drug Administration panel’s vote against Provenge. Reportedly, the bipartisan trio — Reps. Mike Michaud (D-Maine), Dan Burton (R-Indiana.) and Tim Ryan (D-Ohio) — asked Rep. John Dingell, chairman of the House Energy and Commerce Committee, to probe allegations of conflicts of interest and ethical violations of at least two FDA advisory committee members that opposed approval of Provenge.

What’s wrong with this story? First, the panel didn’t vote against Provenge, they voted in favor of it. So what they really must be asking for is an ethics probe into the Food and Drug Administration’s handling of Provenge after the positive panel vote.

Second, Dingell may not schedule an investigation now or ever. He may want to wait until after the Provenge interim results come out before scheduling it. Even if there is an investigation, it won’t make any difference to Dendreon, because Provenge is either going to hit its numbers at the interim peek in mid-2008 and get approved, or it isn’t going to show efficacy that early, and the whole Phase III process will have to play out through 2009. Either way, we’re in this for the long haul.

More than 21.5 million shares traded today, about nine times normal volume. That’s probably because 29.62 million shares were sold short, out of 84.53 outstanding shares. When 35% of a stock’s float is sold short, it doesn’t take much of a spark to light a fire. Interestingly, option buyers were bullish before the news came out, with call option volume of 52,227 contracts easily exceeding put volume of 21,665 contracts. Of course, some of those short sellers may have been long calls as insurance. Setting all this noise aside, DNDN remains a buy up to $8 for a $40 target after Provenge is approved.

Millennium Pharmaceuticals (MLNM) announced good multiple myeloma data for Velcade at this week’s big American Society of Hematology conference, and the stock moved up. The data will be used to support Millennium’s application to use Velcade in combination with other drugs as a first-line treatment.

At the same time, competitor Celgene announced mediocre results for Revlimid for multiple myeloma, clipping their stock 15%. Their data doesn’t look strong enough to persuade the FDA to approve Revlimid for first-line use, and more data won’t be available until 2009. So Millennium should get a nice head start in a market that will probably move towards a cocktail of Velcade and Revlimid. MLNM is above my $12 buy limit and headed for my $23 target.

Rochester Medical (ROCM) drew a short-selling question from Dave: “It appears that a short sale program has been in play for ROCM for some time. Should we back up the truck or wait some more until it is over?”

First, the numbers: ROCM shares sold short increased from 819,920 in October to 876,750 in November. That equals 6.1 days of average trading volume, which is a typical level these days. So, I don’t think that ROCM is being targeted especially; it is just caught up in the hedging and program trading that dominates day-to-day market moves these days. Short interest equals about 10.1% of the float, and that is a little high. But remember that big upswings usually start when something caused the shorts to rush to cover, and if you aren’t in before that move, you will miss the lift-off. See Dendreon, above.

I would buy every stock in the portfolio trading under its buy limit today, and I’d hold the rest. But I had a great question at the San Francisco Money Show, which was a variation on the “which one stock would you buy if you had to go to a desert island for five years” question. I was asked which 10 or 12 stocks would I buy if I had to follow Warren Buffet’s advice to buy as few stocks as possible in your life and hold them as long as possible, preferably forever. (If you recall, we discussed this previously in the October 4 Radar Report.) That’s very hard to do in technology, which I think is the main reason that he doesn’t buy tech stocks. But if I had to name names, I would pick Affymetrix (AFFX), eResearch (ERES), Geron (GERN), Rochester Medical (ROCM), Akamai (AKAM), Harmonic (HLIT), Energy Conversion Devices (ENER), FuelCell Energy (FCEL), US Geothermal (UGTH), SiRF Technology (SIRF), Alvarion (ALVR) and TowerStream (TWER). Some of these are Top Buys right now for shorter-term reasons, and others are not. Most are under their buy limits, but some are over. For a five-year holding period, I would put that portfolio up against any tech, growth or value portfolio out there today, including Berkshire Hathaway’s.

So, Dave, the direct answer to your question is back up the truck and buy a full position in ROCM today while it is so cheap that it could double to my $23 buy limit, on its way to my $40 target after the new Medicare rules on hospital infection reimbursement go live in October 2008.

China MegaShift

If the Fed can get themselves straightened out and the U.S. market rally resumes, I fully expect the China stocks to participate in the next upleg. But this really is a bubble, and a burst is likely to happen sooner, rather than later. Here’s an example: the second-biggest insurance company on a global basis is American International Group, but China’s Ping An Insurance is just about to pass them. AIG trades for 9.2X earnings and Ping An trades for 41X earnings. AIG’s monthly premium inflow just about equals Ping An’s yearly premium inflow.

Here’s another data point: Over half of the investment managers in Mainland China have less than two years’ experience, and a third have been running money for less than a year. That’s even worse than the situation in March 2000 at the top of the U.S. Internet bubble.

All this tells me that we need to continue to remain cautious about investments in China. We’ll continue to hold UTStarcom (UTSI) for their wireless phone services and Internet Protocol TV business, but other than that, we’ll continue to steer clear of the China bubble for now.

Content on Demand MegaShift

Motorola (MOT) might be broken up. At a Lehman Brothers conference in San Francisco last week, Chief Financial Officer Tom Meredith said: “I will just share with you that I believe that there is every opportunity for us to create significant economic value, therefore drive shareholder value higher, as a whole. Does that mean, however, that other options aren’t vital options? No, not all. And as I said, a change in circumstance sometimes requires a change in action. So I will leave it at that.”

Breaking up MOT would be a very big deal, and I don’t really think that’s the most likely way for us to cash in our LEAPs. But it is a possible route. The Mobile Devices division that makes cell phones accounted for 51% of sales in the September quarter, and Motorola’s last twelve-month sales hit $38.8 billion. So it could certainly be a stand-alone company.

The Home and Networks Mobility Division accounts for 27% of revenues, selling set-top boxes to cable companies (the old General Instrument business) and wireless equipment to telephone companies. It could be a stand-alone company, as well, but this is a hot area and more likely it would be sold to Alcatel or Siemens. I don’t think Cisco could get an acquisition of this division past the antitrust regulators.

The third division, Enterprise Mobility Solutions, sells communications equipment to corporations and governments. It accounted for 22% of September-quarter sales, and it is in a similar position as Home and Networks Mobility. It is big enough to stand alone, but more likely would get snapped up.

So there’s the plan: Sell Home and Networks, sell Enterprise Mobility, and keep Mobile Devices as the smaller, still-public MOT. The total value of all this would be well over my $28 target for the stock by January 2009, so continue 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.

Telkonet (TKO) did it! As of this morning, Ron Pickett, the drive-by CEO, becomes Vice-Chairman of the Board and, as I predicted, Jason Tienor has been named President and Chief Executive Officer. Tienor promptly named a new Chief Operating Officer, a new Chief Financial Officer (CFO), and a new Vice President of Global Sales. Sounds like a pretty clean sweep.

Tienor said that the company’s cost reduction program has projected savings of about $2.1 million a year. Telkonet’s energy management and hospitality businesses are scheduled to double, matched by continued growth within the government systems-related sectors. Gross profit margins will increase through 2008 in line with increasing revenues, and the company is still committed to cash flow breakeven in the near term and positive earnings per share for the full 2008 year.

The proxy is also out for the Board of Directors vote coming on December 21, and Ron asked: “What do you suggest when it comes time to vote?”

I suggest voting against Warren (Pete) Musser, the Chairman of the Board, and against Ron Pickett, the former President and CEO. Vote for the other directors. Truthfully, they all deserve a “no” vote for letting Pickett try to run the company by remote control for so long, but we will collectively have a bigger impact if Musser and Pickett get fewer votes than the others.

I like Pete Musser from his days at Safeguard, but I think he would be a bit shocked if he got a lot less votes than the other outside directors. He is 80 years old and probably doesn’t want any stains on his record at this point, so maybe shock would turn to action. Jason Tienor needs to be the management person on the Board, and Pickett needs to get out of the company.

Meanwhile, with the appointment of Tienor as CEO, I am making TKO a Top Buy again up to $5 for my $15 target.

New Energy Technology MegaShift

Goldman Sachs just raised its average 2008 forecast on oil to $95 from $85 per barrel. That means they expect oil to be over $95 for half the year, and probably over $100 for at least 90 days. While that’s bad news for consumers at the pump, it’s good news for New Energy Technology stocks.

Energy Conversion Devices (ENER) moved up over my buy limit after their UniSolar subsidiary announced an order from Sun Edison for up to 17 megawatts of solar cell laminates for large rooftop installations on industrial and commercial buildings in the U.S. Sun Edison is America’s largest solar energy service provider, so this was a big win for the company. Continue to buy ENER on any dip under $30 for my $55 target. I am taking the stock off the Top Buy list, because it is currently trading over my buy limit.

FuelCell Energy (FCEL) reported that sales were up 81% to $16.5 million in the October fourth quarter, while they reduced their loss per share from 47 cents in the October 2006 period to 25 cents per share this year. The backlog rose 107% to $57.8 million, and, in addition, in November and December, they received $35 million in orders from The Linde Group, the world’s largest industrial gases company, and the Eastern Municipal Water District in California. Wastewater treatment facilities now represent 33% of the company’s total business. The fuel cell uses the methane that these facilities generate to produce electricity, and the heat byproduct generated by the fuel cell can be used in the wastewater treatment process.

The conference call was very positive. The company announced the sale of two of the big 2.4-megawatt DFC3000 fuel cell power plants to POSCO, their Korean distributor. They are scheduled for installation in 2009, but if FCEL can increase their production capacity fast enough, POSCO wants them earlier. FuelCell is increasing annual capacity from 11 megawatts to 25 megawatts right now, and then will expand to 60 megawatts during 2008. They also intend to take another 20% out of their cost of goods.

The Connecticut Clean Energy Fund selected six FuelCell Energy projects totaling 68 megawatts earlier this year. The utility review and public hearing process are now complete, and the Department of Public Utility Controls will deliver its draft decision on December 21, with the final decision due on January 9.

Plus, the 2007 Clean Energy Bill now in a conference committee includes favorable provisions for fuel cells, with an eight-year extension of the investment tax credit and an increase in the available tax credit to 30% of the project capital cost or $3,000 per kilowatt.

One striking statistic: On the conference call, management pointed out that the Energy Information Administration says that global demand for electricity is expected to almost double from 14.8 trillion kilowatt-hours in 2003 to 27.1 trillion kilowatt-hours by 2025. Throughout the world, governments, businesses and voters are looking for ways to generate this electricity 24/7 by using renewable, ultra-clean technologies.

The stock jumped 16% on Tuesday, and we’ve all had plenty of time to buy it under $11. Just in case you didn’t buy it yet, I am temporarily raising the buy limit to $12 and making the stock a Top Buy for the December 21 announcement and the impending passage of the 2007 Clean Energy Act. The target price remains $22.

Dollar Death Watch

With everyone so negative on the dollar, it is hard for a natural contrarian like me to stay bearish. But then I get up in the morning, see what Bernanke has done today, and it’s a lot easier to be negative. The $40 billion of cheap money that he will pump in via the two December auctions — probably to be followed by another $40 billion at the two January auctions — should push M3 money growth way over 20%. That’s like hitting the dollar with a semi. If the Fed actually provides another $24 billion to European central banks, that’s like backing the semi up to run over the dollar again. I think he must know by now that he is in great danger of being remembered as the Fed Chairman that killed the dollar. Maybe he doesn’t care or, more likely, maybe that is the plan. Whatever the truth is, I can’t turn bullish on the dollar in spite of the fact that I now have too much company on the negative side. Continue to protect yourself.

Short Selling

In addition to Dave’s question on timing an entry into Rochester Medical, Norm wrote: “On Nov. 20, you wrote, ‘…a new SEC regulation on short sellers, requiring that all Failures to Deliver (illegal naked short selling) be located and closed out by December 4.’ You declared that Dendreon and Telkonet had heavy naked short interest. What exactly did this SEC regulation mean and why have both these stocks gone only down, down, and down. My calendar says it is December 4. Is it wrong?”

Unless it’s a digital calendar and the battery went dead, probably not. The S&P 500 is about flat since December 4. Dendreon traded double its normal volume on December 4, and it was up from $4.61 to $5.64 at yesterday’s close, before today’s jump. Telkonet was also pretty flat over the same time period.

Short sale data is collected in the middle of the month, and the listed data is made public around the 22nd of the month, followed by the NASDAQ data on the 26th. We’ll know then what has happened in terms of covering shorts. If I don’t see a big decline in the short interest, I will file a complaint with the SEC regarding each company. The TKO management news today should scare the shorts, though, and the Dendreon news caused obvious covering, although the shorts may come back quickly, so it won’t be clear what really impacted the data.

Recently, I’ve been thinking about perception versus reality in the stock market, and how out of whack things seem. Maybe it’s just the magnitude of the sub-prime mess, or maybe it’s the holiday season, but I think that I’m seeing an abnormal amount of goofiness lately. For example, in last Thursday’s Radar Report I wrote: “I think the best the bears can hope for is a quick drop back to test 1440 from above, which might let them cover their shorts gracefully, but I sure wouldn’t count on that. When a market goes through a former crucial level so easily, it usually means that level has lost a lot of its importance.”

The S&P 500 managed to get back under 1470 on a closing basis on Tuesday, which should have been followed by a test down to 1440 yesterday. But the test never happened because this market is so strong. A week or two more of this, and I will have to revise a second statement from last week: “I also think this rally will end in a parabolic upmove into the 1700 to 1800 range by about the third week in March, but consider that an early call as I don’t have all the evidence yet. We shall see.” The S&P could be at 1900 by the third week in April, judging by the strength of this move so far.

Yet, Joe Bel Bruno, an Associated Press business writer, put out a piece on Saturday headlined: “Market Outlook: Choppy Finish for Wall Street.” His thesis is that: “Wall Street, battered the first three weeks of November, must contend with the still-unfolding turmoil in the mortgage and credit markets that has pummeled banks, mortgage companies and investment houses.” Then he quoted Scot Wren, chief economist for A.G. Edwards, saying: “In no way, shape or form are we going to move higher in a straight line during December. It’s going to be choppy.”

Well, maybe the Santa Claus rally will flame out and Mr. Wren will be right. I would never say “in no way, shape or form” could he be right, just because I’ve learned to be a little more humble than that. But sub-prime problems and bank write-downs are not new news, and Chairman Bernanke will likely cut rates 50 basis points next Tuesday, breaking an unofficial rule that the Fed never changes rates during the holiday season. And then I expect another 50-basis-point rate cut at the January 29 to 30 meeting. Why do I think a rate cut is inevitable? Just look at the two-year Treasury note — the Fed is well behind the curve and will cut hard. We’re starting to see a little competition, too, as the Bank of Canada cut rates on Tuesday and the Bank of England cut this morning.

Also, M3 money supply growth has ratcheted up from an embarrassing 13% to 14% growth rate to thoroughly disgraceful levels over 18%! Helicopter Ben is dropping quantities of money all over the economy, in addition to cutting the price of money — interest rates. He’s driving the dollar down, which is good for exports until inflation takes off. But with inflation nowhere in sight, and a weak outlook for GDP growth and corporate earnings this quarter already baked into forecasts, unless there is new bad news — as opposed to the old bad news that gets rehashed endlessly on CNBC and Fox Business — I suspect that Mr. Wren will have egg on his face. To put it another way, if all the bad news is out and has not been able to break the bull market trend, why should it suddenly do so in the next three weeks?

Another, more specific example of the confusion of perception and reality happened yesterday when Intel (INTC) jumped 3.5% to a two-year high because an analyst at Thomas Weisel Partners raised his earnings estimates and his recommendation to overweight. His reason: There’s a shortage of laptop parts, including panels, batteries and keyboards, so demand will slop over and the March quarter will be better than he expected.

But what is reality? He has had a market perform recommendation all year, while the stock climbed 35%. And he raised his 2008 earnings estimate from $1.28 to $1.52, while the Street estimate was already at $1.49. In other words, his prior estimate was too low, he was too bearish, the stock ran up without him, and (knowing Thomas Weisel Partners) the institutional salesmen must have been beating up on him daily. Oh, and the laptop sales that he expected in the December quarter will be pushed into the March quarter. Big deal.

Don’t get me wrong. I’m happy to get the move up in the Intel’s stock’s price, but it’s hard to see why the market paid any attention to this upgrade when it is basically someone admitting that they’ve been wrong. It put my LEAP option recommendation well over the buy limit, so I’m removing it from the Top Buys this week. But you should still buy the Intel January 2009 LEAP call (VNLAX) anytime it is under $6 for my $12.50 target when the stock hits $35 before the option expires.

Another interesting example of perception not matching reality was the 15% jump in Cree Inc. (CREE) on the Monday after Thanksgiving. As I wrote several times earlier this year, CREE is on my short list for potential new recommendations — a good entry point would be somewhere in the mid-teens. CREE was flirting with its $20 support the prior week, and I was looking for a $5 breakdown to buy in. But then Philips Electronics announced that they are buying U.S. lighting maker Genlyte Group for $2.7 billion, and up soared Cree on double its usual volume.

But here’s where the perception in relation to reality gets fuzzy: Cree is in the midst of a very tricky transition from a manufacturer of LED components to a manufacturer of LED lighting, competing with many of its current customers. Sources in Taiwan say that the component customers there are running away from Cree as fast as they can, which means Cree’s recent quarterly reports and guidance, which have been slightly above expectations, are likely to flip-flop to the disappointing side. I don’t know how low the stock will go in that event, but my current target is $15 or so. I can see the argument for $12, and even single digits in a bad market environment. That’s just too much risk for me to recommend the stock to you above $20, yet the Philips announcement still had quite an impact. What was the perception — that Philips is about to buy Cree? That General Electric will buy Cree to keep it away from Philips? What about the reality of Cree’s business transition?

So despite the current perceptions versus the actual realities out there, I think the right thing to do is just relax and enjoy this run in the market. Yesterday’s jump probably sealed 1470 as the current support, with a sharp drop to 1440 and a bounce still possible, but even less probable than when I wrote last week. As of today’s close, we’re right back at the 1507 level that magnetized the market on the way up in July and August. Our old friend 1530 should be coming up soon, and then a push through the all-time closing high at 1555. Now with few companies still reporting earnings, I want to focus this issue on the news and your recent questions.

Biotech MegaShift

Amgen (AMGN) dropped after a long-term survival analysis of Aranesp for early stage breast cancer tumors showed no advantage over the placebo. In the trial, there were 733 breast cancer patients going through chemotherapy before surgery, and half of them were given Aranesp to see if it would enhance the effects of chemotherapy. It didn’t work, and the drug may have even interfered with the chemotherapy. This was not an important trial because it was a label expansion trial that used a high dose of Aranesp. When the trial began, that looked like a good idea, but we now know that the high dose, off-label use of Aranesp is a bad idea. I don’t see these results having any additional impact on Aranesp sales. Amgen is a very cheap stock, and the AMGN January 2009 $70 LEAP call (VAMAN) can still be bought all the way up to $12.50 for my $25 target.

New Energy Technology MegaShift

Energy Conversion Devices (ENER) should break through the $32 to $34 range that has capped the stock on this upturn. In addition to the cost cutting and business rationalization going on inside the company, all three of the businesses-driving results should have positive news in 2008. ENER’s United Solar segment is the only major solar manufacturer that produces flexible, lightweight solar panels that can be used as roofing material. About 30% of U.S. commercial buildings would need reinforcement to install a large solar system, and United Solar can eliminate that cost. This segment is also in the midst of a huge expansion, from producing 58 megawatts of solar capacity in 2007 to 175 megawatts in 2008. They will steadily add production lines to the new factories and get to 300 megawatts by 2010. Half of their sales are exports, so they will also benefit from the weak dollar.

The second leg of the business is ENER’s one-third interest in Ovonyx, the semiconductor memory company. Early in 2008, Intel (which is a shareholder in Ovonyx) will introduce a 128-megabit part code-named Alverstone, and Samsung will produce a 512-megabit part later in the year. The technology is also licensed to Elpida, Hynix, Qimonda and ST Microelectronics. It will initially replace NOR flash memory in cell phones, but I expect it to go on to replace NAND flash for digital cameras and other storage applications. It could eventually replace DRAM, but it will take a while to get the cost down.

The third leg is ENER’s 50% interest in the Cobasys joint venture with Chevron, manufacturing nickel-metal hydride (NiMH) batteries for hybrid cars and other applications. The two companies are in arbitration over what to do with Cobasys, and I expect either Chevron to buy out ENER’s interest or the two companies to agree to take Cobasys public.

On top of the good fundamental outlook for 2008, there’s been a little insider buying and a whopping 30% of the shares are sold short. I am making ENER a Top Buy while it is under $30 for my $55 target.

Plug Power (PLUG) has announced partnerships with Honda to set up fueling stations for the new Honda hydrogen-powered car, and Norman asked: “When do you think they might announce any new sales to help support the recent run-up? I am hoping they become a leader as we move to a hydrogen economy.”

I would say that they already are a leader, as they have real products and tons of cash. Sales were up 158% to $4.5 million in the September quarter, and even though they won’t hit their goal of installing 400 GenCore systems this year, they’ll come close. The new GenDrive fuel-cell forklift truck business is growing quickly, and PLUG recently was chosen to commercialize fuel-to-hydrogen technologies developed at Exxon Mobil. The Honda deal is for PLUG’s fourth generation Home Energy Station, a fuel cell system that converts natural gas into hydrogen that can be used to fuel a hydrogen-powered car, while providing heat and electricity for the house. Smaller versions of this are popular in Japan, and at $100 oil and, say, $9 natural gas (coming soon), they’ll make sense in the U.S. So PLUG remains a buy up to $5 for my $10 target.

Rentech (RTK) said that they have decided to build their first commercial scale Fischer Tropf synthetic fuels plant at their site near Natchez, Mississippi, instead of finishing the conversion of the fertilizer plant in East Dubuque, Illinois. They’ll take a $30 million impairment charge for the time and materials they’ve wasted, although they may be able to reuse some of the gear in Mississippi. They’ll have another $8 million charge in the March quarter.

No matter how you cut it, this is a major management screw-up. They just bought the plant in April 2006, and they say a number of factors have changed dramatically. Hmmm… It will be 2011 before they get Phase I of Natchez built, which will produce only 1,600 barrels a day. Phase II will increase that to a commercial level of 28,000 barrels a day.

This is still going to work, and the proof-of-principle plant in Colorado is on track. But I am taking RTK off the Top Buy list, cutting the buy limit by $1 to $4, and reducing the target price to $8.

Security MegaShift

SiRF Technology (SIRF) drew a basic question from John G.: “Some time ago you mentioned that Wall Street didn’t know what a big deal SIRF was. Please explain. I am not sure I understand either.”

Glad to, because SiRF is one of the companies that I am most excited about. SiRF has two advantages over its competitors. The first is that their GPS-only chips are just plain better — faster, more accurate and less likely to lock-up. That used to be a much bigger advantage, but other companies have narrowed (but not closed) the gap.

SiRF’s second advantage is that they can combine GPS with a dedicated processor, thanks to a couple of recent acquisitions, and that lets them provide a highly-integrated solution to companies that make products where GPS is a feature, not the main purpose of the device. Of course, the big volume product here is cell phones, but there are many other products that can use GPS as a feature. So, although the transition to high-volume products using an integrated GPS approach raises some risks, it also dramatically expands the company’s total available market. Given SiRF’s history of executing well, that bigger market translates to higher potential and eventually a higher target price.

The stock has been under a bit of pressure due to the resignation of Ed Zander from the CEO slot at Motorola, a big SiRF customer. But it is like a rock at $24, so I’m raising the buy limit to $24, just under the current price, and keeping the $42 target.

WiMAX MegaShift

Larry asked: “Airspan is getting its wings clipped over the past few weeks. Is it time for us to fly away or will the wind return to help make Airspan fly again?”

The wind always returns. There is a WiMAX spectrum auction under way in Italy for three licenses covering the 3.4 gigahertz (GHz) to 3.6 GHz bands. There are other major spectrum auctions this month: One in Japan starting shortly for two licenses and another in New Zealand beginning on December 11 for the 2.3 GHz and 2.5 GHz bands. Interestingly, they are reserving a block of spectrum for the native Maori to own and manage, as a way to bring them into the 21st century. We’ll also see an auction in Mexico in the first half of 2008 for the 3.4 GHz to 3.7 GHz bands. WiMAX continues to roll on, in both developed and less-developed countries.

John M. asked: “Please comment on WiMAX going forward with the decision by Sprint to stop at this time. While I know our stocks were not involved, how do you think this will affect the installation pace?”

In the U.S., while it would be nice to have Sprint back on board for mobile WiMAX, this really won’t affect the installation pace much. Craig McCaw’s Clearwire is full speed ahead, and private companies serving fixed commercial accounts (the TowerStream (TWER) model) are putting in WiMAX now.

Roger wanted to know why the equipment stocks that I’m recommending are not mentioned in Wall Street Journal articles. He added: “Are these stocks only for developing country markets, or is there some possibility that they will benefit from whatever McCaw or Google et. al. do within the U.S.? If the answer is that they will or could benefit, how could that happen? In contrast, these stories DO mention Intel, which I thought was somehow linked to Alvarion. Also, why would anyone build a new WiFi network when WiMAX is available, assuming that is actually happening?”

While the WiMAX equipment market outside of the U.S. will always be bigger than in the U.S., and will happen sooner, there will be a big market in the U.S. for both fixed and mobile WiMAX equipment. Airspan (AIRN) and Alvarion (ALVR) have the reference installations and broad product lines to compete on any Request for Quote. Many of those RFQs have to go to the lowest bidder, especially for government installations. So I do think that the smaller companies will get their share, especially since they have years of successful experience to point to.

Intel is partnered with Alvarion and Airspan, and lets them see WiMAX chip development under a nondisclosure agreement. I’m not sure about Proxim Wireless (PRXM), but all four companies are on the board of directors of the WiMAX association.

As to why someone would build a Wi-Fi network, please look at the May 17 Radar Report in which I covered mesh network topology. It might be possible to build a very high speed mesh network to cover, say, a college campus, and then link that to the Internet via some fixed WiMAX connections. Also, offering Wi-Fi is very close to free for a store like Starbucks, and it will take a while to have cheap WiMAX covering every Starbucks.

Vendors are doing interoperability testing, and Nortel, Nokia, Motorola and Alcatel-Lucent are getting equipment certified to compete with Airspan, Alvarion and Proxim. Some companies are even teaming up — Alvarion has partnered with Hitachi to supply the Japanese market, where I expect Softbank and DoCoMo to each win a license. I also expect some companies to be acquired in 2008, and all three of our equipment suppliers could be swallowed up at substantial premiums for their technology and installed base of customers.

In the U.S., AT&T will deploy WiMAX in rural areas to supplement their WildBlue satellite service (which I now use). Clearwire will compete nationwide. And Sprint may or may not stick with WiMAX, but that decision probably will determine whether the company lives or dies. Around the world, it is a robust market for WiMAX and AIRN remains a buy up to $5 for my $10 target.

Terry asked for an update on Proxim, due to the decline in the stock: “What’s the plan? What’s changed? Are they going bankrupt?”

On July 24, Proxim announced a private placement that raised $7.5 million, selling 4.3 million shares of stock at $1.75 a share with warrants to purchase another 2.15 million shares. Then in early August, they announced the sale of Ricochet Networks, which occurred in order to focus the company on the municipal wireless broadband market. On November 6, in addition to announcing results, management said that they agreed to buy back 2.3 million of those private placement shares for $1.70 each (the stock was at $1.39 before the announcement) and cancel 1.25 million of the warrants. I suspect someone threatened a lawsuit, but who knows? The buyback reduced their cash on hand to $7.5 million, and their outstanding fully diluted share count to around 22.9 million.

In the September quarter, they did $16.9 million in sales not counting Ricochet, which is about flat with recent levels, and lost one cent a share proforma. They were also able to improve their gross profit margin to 49%.

So the story at Proxim has changed somewhat. They are focused on selling equipment for municipal broadband wireless, which, as MobilePro showed us, is a difficult market right now. And they have proprietary Wi-Fi and WiMAX expertise. At today’s close of 95 cents a share, Proxim’s total market capitalization is only $21.8 million after the stock buyback. Yet, they’ll do about $68 million in sales this year, report proforma breakeven in the December quarter, and turn profitable in 2008 based on the $1 million annual cost reductions that they have already implemented.

So I think the stock is very underpriced, but I’m not a fan of the market that they have decided to concentrate on. They aren’t going bankrupt unless the business takes a major downturn from current levels later in 2008. If they can execute well from here, they can eventually get the stock to $4 just because they have so few shares out, but I think my $7 target is too far away. I am reducing the buy limit on PRXM to $1 until we see resumed revenue growth, and reducing the target price to $4. I’ll raise the buy limit to $2 once we see some revenue progress. In the WiMAX equipment area, at current prices you should own Alvarion first and in the largest size, Airspan second and Proxim third.

TowerStream (TWER) is cheaper than all of the equipment companies, in my view, and I felt that way before the recent slide. What caused the drop? Nothing real. It is possible that there is some tax selling starting, but I doubt it. Most likely, this is hedge fund short selling ahead of the December 8 expiration of the insider lock-up that accompanied the 40 million share private placement last June. But insiders at TWER have been buying, not selling, and I really doubt that we are about to see a huge flood of selling. So if the shorts are about to get squeezed, now is an excellent time to buy TWER. I don’t think the stock has much risk of trading below $2, even if there is some tax-loss selling.

The key to TowerStream is that they provide a fixed commercial WiMAX service, not a mobile WiMAX or a fixed residential service. Mobile and residential take big companies, lots of capital investments and years of losses before they turn profitable. TowerStream can “wire” a major city for $1 million and turn it cash flow positive within a year. They will have 20 markets open by the end of 2008, and they have $44 million in cash to get there. Once a market turns cash flow positive, it builds profitability very rapidly. The company has to make a big investment in its sales force, and it plans to hit 100 telemarketers by the end of this year. It recently completed a 180-seat telemarketing center, as well as a much expanded training center. This is not a hard business, and that is why TWER is a Top Buy all the way up to $6 for my $16 target.

Dollar Death Watch

What, you’re still doing business in dollars? Why? In the film American Gangster, the hip-hop musician Jay-Z flashes a big wad of cash. But the cash isn’t dollars, it’s 500-euro notes. The U.S. $500 bill doesn’t circulate, but the 500-euro note is worth $728 and very convenient to carry, so it is a favorite of drug dealers. Soon, it will probably be your favorite, too.

Other Subscriber Questions

Tony asked: “Do you have any specific suggestions on effective use of PHLX World Currency Options to hedge against continued weakness in the U.S. dollar? It appears to me that if it’s being used as a hedge rather than insurance, deep-in-the-money June or September calls offer the best bang for the buck.”

Shorting calls is for very experienced options traders. If you are in that category, you are right. But for the rest of us, simply buying puts on the dollar makes the most sense. Because I expect Bernanke to cut 50 basis points next week and again in January, now is as good a time as any to open a position.

Allan wanted “an Internet address regarding guidance on using puts and calls. These are new terms to me and I was unable to follow your alert advice. It sounds like these terms are going to need to become part of my vocabulary.”

Bravo for being willing to expand your horizons and knowledge. I’d start with the Chicago Board Options Exchange information at http://www.cboe.com/Strategies/basics.aspx. You could then check out Investopedia.

Both Stephen and John M. asked for a list of stocks to sell for tax losses because they have little or no chance of recovery over the next six months to a year. In the market environment that I see coming through next March or April, all of our stocks should go up. If you sell for tax losses now, you have to wait until early January to buy the stock back or you will fall afoul of the IRS wash sale rule.

But you could sell some stocks to generate losses providing you immediately put the cash to work in other stocks to maintain exposure to this bull market. If it doesn’t bother you that you will probably not be able to buy these stocks back at today’s prices, these stocks will probably go up less than most of my other recommendations over the next couple of months:

• BioCryst (BCRX) — better chance than most of buying back at current price
• Dendreon (DNDN) — better chance than most of buying back at current price
• Sequenom (SQNM)
• Telkonet (TKO) — unless the CEO resigns
• Burst.com (BRST)
• Proxim Wireless (PRXM)