Over the past week, we’ve been discussing the likelihood of another rate cut by the Fed during its Open Market Committee meeting this week. Well, we got the 50-basis-point cut in the Fed funds rate yesterday, and the S&P 500 soared over 1368 immediately following the announcement. But the S&P could not hold that gain, and it did not close over 1368. It staged the obligatory retest of 1326 this morning, actually not getting lower than 1334, and then — ka-boom! Over 1368 to close just about at Wednesday’s high. So we have the clear-cut buy signal, and the slingshot move up is underway. The news this morning that mortgage insurer MBIA lost a lot of money and that Standard & Poor’s might downgrade a flock of collateralized mortgage obligation securities could hardly be more “same ol’ same ol’” and could only depress the market long enough for the naïve to sell.

Still, starting 2008 with a crummy January is not pleasant, even if it was necessary to build up negative sentiment. The news that economic growth is slowing this quarter — hey, there’s a surprise –continued this week, with the GDP report, new unemployment claims and business spending data all contributing to the fear level. By the end of today’s rally, the VIX Fear & Greed Index was still solidly ensconced in the mid-20s. That’s enough fear to drive a 200- or 300-point rally in the S&P 500.

One reason why the GDP number was weak, although not negative, was that businesses slashed inventories and cut 1.25 percentage points off GDP growth. Without that, the GDP would have shown a slow, but decent, 1.85% growth rate. Inventories already were low, and it is hard to have a deep recession (or, indeed, any recession at all) without inventory liquidation. So I think that the U.S. economy will skin through with a couple of quarters of sub-par growth, but no recession. When that becomes obvious to others, there will be a furious rally. I think that could become obvious any day.

Now before I get to our company updates and earnings reports, we have a chance to take advantage of a return to reality in a recent IPO. Not by buying the stock, but by buying the parent.

Buy Storage, Buy Virtualization

When we entered the Content on Demand MegaShift almost two years ago, I noted that the driving force behind it was people’s desire to be able to access media content wherever and whenever they so chose. And the Internet plays a huge role in the immediate accessibility to all this content. So it should not surprise you that with the shift to online everything, the explosion in streaming video, government mandates to preserve more records and emails, and Google’s efforts to put all of the world’s knowledge online, the demand for online storage is stronger than ever. Considering the rate at which the rest of the world is increasing their Internet participation rates, I don’t see this slowing down any time soon either. Storage is an attractive industry, although most of the hard disk drive manufacturers run on such thin profit margins that they make the DRAM memory industry look good. But the leading storage company, EMC Corporation (EMC), buys hard disk drives and builds large networked storage systems and software that they sell to companies and governments at good profit margins.

Before we delve into this new recommendation in the CoD MegaShift, it’s important to understand how online storage works these days. Virtualization is the key. This term refers to a group of physical devices, like hard disk drives or computers, that are treated as one device from the user’s point of view. It started in storage, where the user or computer program would see only one big disk drive, while software inserted between the drives and the operating system managed the actual physical resources, keeping track of where things were stored and what needed to be written or retrieved. It then spread to the whole computing environment, and today companies can buy lots of standard personal computers and “virtualize” them into a single computer resource that can run multiple operating systems and programs, accessing data wherever it is physically located. It’s a money-saver for big and small companies, and rapidly spreading as a way to improve performance while cutting costs.

The leading virtualization company, VMWare (VMW), just came public in August 2007 at $29 a share. It was a spin-out from the leading storage company, EMC, and it was a hot stock, jumping 76% the first day. By the second day, it was up to $57.71, giving it a $22 billion market value. Only four other public software companies are worth more than that: Microsoft, Oracle, SAP and Adobe. A few days later, VMW hit its all-time high of $125.25.

Since then, in spite of the excitement around the company’s business, the stock trended down until this week, when it plummeted 30% in one day, bringing it right back to the $57 area. VMWare reported earnings well above the consensus forecast, but revenues were $5 million short — a tad over 1%. For shame! The Street removed $10 billion in VMW’s market capitalization pretty much instantly.

So, does that make VMW cheap? No. It started from being overpriced at a 70X price/earnings ratio on the 2008 forecast, and the drop brought it back to something closer to fair value. We are not in the business of buying stocks trading at fair value.

The interesting investment here, though, is not VMW but rather EMC. EMC still owns 85% of VMW’s stock, and management has repeatedly said that they have no intention of selling anytime soon. And because EMC has such a large interest in VMW, Wall Street hit EMC stock, too, although not nearly as much.

So with VMWare back to a $22-billion market capitalization, EMC’s 85% share is worth $18.7 billion. That’s about $8.90 per EMC share. In addition, EMC has $1.20 a share in cash. So at today’s closing price of $15.83, only $5.73 of that is what Wall Street is paying for EMC’s earnings. But EMC just announced earnings on Tuesday, with 2008 guidance for 78 cents a share on a GAAP basis or about $1 pro forma. Even on GAAP earnings, that’s a P/E ratio of 7.3X.

Yet this 29-year-old company is no slow-growing dinosaur. For the fourth quarter, EMC’s revenues were up 19% to $3.83 billion and pro forma earnings climbed 25%. GAAP earnings were up 33%. It’s a well-run company, they’re growing fast, they throw off tons of cash and they are buying back hundreds of millions of dollars worth of stock. The amazing thing is that EMC would be fairly priced even if they didn’t own a single share of VMWare! That is a gift.

You could buy EMC under $16 for my $26 target by next April. But I want to see a potential double, and that means you should buy the EMC January 2010 (yes, two years out) LEAP call with a $15 strike price (WUEAC) up to $5 for an $11 target.

Biotech MegaShift

Affymetrix (AFFX) reported earnings after the close, and the conference call begins shortly. The company did $107.6 million in revenues and 20 cents a share, a bit over the consensus expectation for $108.9 million and 16 cents. But the analysts’ range was unusually wide, from 11 cents to 20 cents, depending on how negative an analyst was on lab and R&D spending cutbacks due to the economic outlook.

They guided for $505 million to $525 million in sales in 2008, including the $90 million payment from Illumina due in the March quarter. That is above the consensus for $493 million, including the payment.

If I hear anything dramatic on the call, I’ll send a Flash Alert tomorrow. Otherwise, AFFX remains a buy up to $25 for my $35 target.

Amgen (AMGN) reported last week, and today I want to give you the promised follow-up on the conference call. After hitting their numbers for the December quarter, the company gave a cautious 2008 forecast. The stock jumped last Friday anyway, based on a study showing that denosumab, their osteoporosis drug, was 40% more effective than Merck’s Fosamax in treating postmenopausal women. We’ll see more denosumab results in the second half of 2008 to drive the stock higher.

Wall Street is still pretty negative on the outlook for Aranesp, and worried about the outcome of the March 13 FDA panel review. Aranesp sales fell 12% in 2007, and I think we are at the bottom. Of course, the year-over-year comparisons will be down in the first half, because Aranesp’s sales problems hit in the second half of 2007, but it looks to me like quarterly sales have bottomed. I expect Amgen to come through the March panel unscathed, just as they did the last one. So the sequence of events should be:

• March panel comes and goes with no further issues on Aranesp safety or dosing;
• March-quarter Aranesp sales announced in April show little or no further decline;
• Second-half denosumab clinical results confirm advantages over Fosamax.

Is all that enough to rally AMGN to my $95 target by mid-January 2009? I think so, especially in the market environment that I foresee. If I was recommending a LEAP call today, I would pick one closer to the current stock price, but for those who own it, the Amgen January 2009 $70 LEAP call (VAMAN) makes sense all the way up to $12.50, for a $25 target price when AMGN stock hits $95, on or before the LEAPs expire in mid-January 2009.

Content on Demand MegaShift

Harmonic (HLIT) blew the doors off and, even better, I think Wall Street is beginning to understand what we have been talking about for over a year. Sales rose 17% to a record $88.4 million, and they reported their sixth straight profitable quarter under the new CEO, hitting 19 cents a share pro forma, and 15 cents under GAAP. The consensus was at $83.6 million and 15 cents pro forma. Harmonic provides a rolling six-month forecast instead of quarterly guidance, and said first half sales would be $165 million to $175 million, bracketing the consensus outlook for $171 million. They are sandbagging a little, and I expect them to do close to $400 million in 2008, with earnings over 50 cents a share.

The stock rose about $1.50 on the news. It may just have been a knee-jerk reaction to beating their numbers, but the questions on the conference call made me think that analysts are beginning to understand that:

• The cable TV business remains strong as cable companies fight back against telephone company VVD (voice-video-data) offerings;
• Harmonic has diversified away from U.S. cable in a dramatic way, and they are now an important supplier to the telephone companies as well;
• Harmonic has regained its #1 position with the satellite companies, and they in turn are fighting tooth-and-nail against both cable and phone companies (or partnering with them to provide the second V in VVD);
• Harmonic has a substantial non-U.S. business growing even faster than their U.S. operations;
• In addition to their traditional lead in video encoders, as shown by recent satellite contract wins, Harmonic is in numerous new, fast-growing areas like switched digital video, Internet Protocol TV and cable modem termination systems;
• Even the traditional video infrastructure markets are growing a very respectable 15% to 20% per year;
• The emerging video markets are growing 40% per year or more;
• Very strong orders in the December quarter, when much other capital spending weakened, show that the video infrastructure buildout is stronger and growing faster than ever before;
• Harmonic will report about $500 million in sales in 2009, up 60% from 2007.

There were a number of larger brokerage firms on the conference call asking questions that do not currently publish a recommendation on HLIT. I suspect we will see some new research soon, so you should continue to buy HLIT up to $12 for my $18 target.

QuickLogic (QUIK) reported good December fourth-quarter results, booking $10.7 million in sales, up 39% from last year and up 19% from the September quarter. They lost four cents a share pro forma, the same as in the September quarter and much better than last years eleven-cent pro forma operating loss. New product sales jumped 117% sequentially from the September quarter, thanks to a big design win with a Tier 1 GPS manufacturer. Management said that QUIK products are being designed in to several of this company’s product platforms, which will result in strong revenue growth this year.

QUIK guided for March-quarter revenues of $11.2 million, plus or minus a couple of hundred thousand dollars. That will be up 80% from last year.

QuickLogic’s strategy is working. There is a growing need for flexible interface chips that let manufacturers design one “platform” product, and then spin off numerous variations and update quickly. QuickLogic can deliver the basic design in a couple of weeks, and then redesign the electronic or human interface in a few hours or days. The customer doesn’t have to do anything but market.

QUIK should turn this Customer Specific Standard Part strategy into about $50 million in sales in 2008, up 45% from 2007, with pro forma profits in the second half of the year. QUIK remains a Top Buy up to $4 for my $8 target.

Zhone Technologies (ZHNE) also reported after the close, and the conference call should be less contentious. They did $46.6 million in revenues, lost a penny a share on GAAP accounting and broke even on a pro forma basis. That was a little better than the consensus expectation for $44.5 million and a one-cent loss pro forma. In the press release, CEO Mory Ejabat pointed to very strong international growth. If there is additional news on the call, I’ll send a Flash Alert. Otherwise, ZHNE remains a buy up to $1.50 for my $4 target.

Robotics MegaShift

iRobot (IRBT) pre-announced a pretty good quarter, even after adjusting for some positive one-time events. We won’t see the full results until February 19, but they said that they did about $99 million in sales, much higher than the $91 million that the consensus was expecting, as new products did very well. Operating earnings were below consensus due to the cost of making new products this early in the experience curve and legal costs associated with shutting down their competitor, Robotic FX. A big tax adjustment then drove reported earnings to 80 cents a share, way over the 47-cent consensus forecast. Backing that out, they did about 27 cents a share.

The good news is that without the legal costs, and assuming gross profit margins increase on schedule, the company will get to their targeted 15% operating margins in two or three years. The stock didn’t move much and IRBT remains a buy on any dip under $20 for my $30 target.

Security MegaShift

Packeteer (PKTR) is our third company that reported earnings after the close today, with a conference call after this issue gets emailed. It was a put-up-or-shut-up quarter for CEO Dave Cote, and he put up. Packeteer beat the consensus expectation for $38 million and breakeven, reporting $40.9 million in revenues, up 12% from the September quarter, and one cent in proforma earnings. Elliot Associates, the large dissident shareholder that wants the company sold, probably will not be happy, but Dave has earned himself another quarter to get this train moving.

In the press release, Dave said: “We turned the corner in the third quarter, and in the fourth quarter have continued our improvement with a sequential increase in revenue of 12%, resulting in the second largest revenue quarter in our history. In addition, we were gratified to produce another quarter of improving non-GAAP operating income. Our outlook for 2008 is very positive. We expect to accelerate our revenue growth and return to profitability in 2008.”

As always, if I hear anything dramatic on the call, I’ll respond with a Flash Alert tomorrow. Otherwise, PKTR remains a buy up to $9 for my $20 target.

SiRF Technology (SIRF) took a hit after Qualcomm agreed to set up a joint venture with a private company, Mio, to put GPS into chipsets for high-end cell phones that work on Qualcomm’s CDMA network. Wall Street promptly clobbered SIRF.

Qualcomm said that their phone will include GPS, personal digital assistant (PDA) functions and a digital camera. What else is new? Garmin introduced a cell phone with GPS in 1998, the NavTalk. Nobody bought it. I think that the time has come to combine these two products, but Mio is a distant fourth in the GPS market. There are already numerous phones like this out there — Mio alone ships five such phones today, all of which use SiRF chips, in combination with either an Intel (INTC) or Texas Instruments processor. These are niche products, and Mio’s total share of the handset market is miniscule.

SiRF will integrate their GPS receiver with the applications processor that they picked up in the Centrality acquisition, and offer the same product. I trust that they will talk more about that on the earnings call on February 4. Don’t miss SIRF at these giveaway prices — be sure to have a position before the conference call. Buy SIRF up to $24 for my $42 target.

WiMAX MegaShift

TowerStream (TWER) is one of more than 200 companies now bidding in an FCC auction for the 700-MHz spectrum, which is attractive because its signals pass relatively easily through buildings and don’t require many towers. I have not assumed that they will win anything, but if they do, the stock will shoot up. Buy TWER up to $6 for my $16 target as they fill up the new telemarketing center with revenue-producing reps.

At about 1:45 p.m. EST today the Fed decision will be given to reporters, embargoed for release until 2:15 p.m. But some of those reporters will call a few traders on Wall Street, and we should see stock prices start to move in one direction or another. Then, at 2:15 p.m., the rest of us will find out what happened.

The Fed funds rate is about 120 basis points over the two-year Treasury note rate. If the Fed cuts the funds rate by 50 basis points, as they should if they learned their lesson from their last quarter-point cut, the next leg up of the bull market will continue. You should first see the S&P breakout over 1368, come back down to test that support level from above, and then take off. The test, whether it comes later in the day Wednesday or on Thursday or Friday, will be the last (and safest) opportunity to get fully invested.

But if the Fed only cuts rates 25 basis points (one quarter point), the S&P will probably fall sharply to our old friend, the 1326 level. That level has to hold for me to believe that the recent low marked a directional change in stocks. If it doesn’t, we will see a full-on test of 1260. In either of those cases, the negative press around the Fed could easily cause another 50-basis-point “emergency” cut, and I think the bull market scenario will resume then. It would take a real, sustained break of the recent lows to make me think this bull market is over.

I’ll follow-up in tomorrow’s Radar Report, or with another Flash Alert if necessary.

Before the opening on Monday, the S&P 500 futures market followed the Asian markets down, getting as low as 1310 at 1:30 a.m. EST in a test of the 1313 support level. At that point the futures reversed, climbed into the opening of the regular market, and then kept rising to close 46 points higher at 1356.75. This marked a successful test down to lock in the recent rally off the January 23 bottom at 1270.05 (or 1250 in the futures market).

Although there always could be one more quick, scary test down to last week’s lows, Monday’s action tells me that it would be successful. But it’s also important to note that unless the market can find something new to worry about, such as a U.S. attack on Iran, there may not be another test at all. And an S&P close over last Friday’s high of 1368, which could come as early as today, could trigger a monster rally. When the S&P goes back down to make a secondary low, and then gets a burst of energy to push it up over the previous high, that marks a true reversal, not just an oversold rally.

An impending close over 1368 is the time to get to a maximum invested position, whatever that means to you: Buying stocks, going on margin, buying options or buying futures. Be sure to close out all put positions and “inverse” exchange-traded funds that go up when the market goes down.

One reason that there may not be another test down is that it would supposedly be driven by the reality of a recession. Those who invest based on surveys or consumer confidence polls have been pointing out that the average recession lasts about 10 months, with the market starting to rally about six months before the end of the recession. As tomorrow morning’s December-quarter advance GDP report will show, we are not in a recession yet. Therefore, these investors conclude that there are at least four months of down market ahead of us, before the bottom.

There are three problems with this kind of thinking. First, the best predictor of recessions is the stock market. Surveys and polls almost always will make you lag the real bottom by two or three quarters. Second, the Fed knows the history and numbers as well as anyone, and now that Bernanke’s paralysis is over, they have lots of bullets left to shoot at a slowdown. Third, over 70% of the populace now expects a recession, yet widely anticipated recessions usually fail to materialize. Why is that? Because businesses cut inventories so that they don’t get caught, and the normal inventory cycle that causes recessions is aborted. Right now, the inventory/sales ratio is at a record low. That’s not where recessions start from, yet you are not hearing about this on CNBC or Fox Business.

Here’s how the Economic Cycle Research Institute just put it: “If we have a recession this year, it would turn out to be the most widely anticipated recession in history. Clearly, the pessimism of consumers and business managers could cause them to cut spending, creating a self-fulfilling recession prophecy. But there is another side to the story.

“The biggest negative impetus in any recession comes from the manufacturing sector, driven mostly by the inventory cycle. Unaware of an approaching recession, businesses typically produce goods in anticipation of rising demand. When to their surprise, demand for their products starts falling, inventories mount rapidly, forcing sharp production and job cutbacks, thus reducing income and spending power. The spending cuts force further production cutbacks to work off the excess inventory.

“This time, prolonged pessimism about the economy, along with a surprise acceleration in growth through last summer, has resulted in a sharp drop in business inventories, taking the inventory/sales ratio to a record low. Thus, there is very little inventory left to whittle down in response to slackening demand.

“Therefore, the inventory cycle downturn responsible for most of the downward impetus in a recession is likely to be less powerful this time. Also, if timely stimulus results in a quick burst of consumer spending it will force manufacturers to boost production instead of reducing inventories. That is why prompt stimulus could be unusually potent in this cycle.”

Just like 1998, when the Asian currency crisis caused their markets to collapse in July and the Russians defaulted on their debt in August, bankrupting the Long-Term Capital Management hedge fund and causing U.S. investors to worry about a domestic recession, the Fed slashed interest rates to restore order. Before any of the worries subsided, the S&P 500 successfully tested its lows and began a powerful 68% rally that lasted 17 months to the bull market peak in March 2000. A similar 68% rally over the next 14 months would get us just over my parabolic market target of 2100 by the April 2009 turn date. It looks to me like that is a far more likely outcome than a U.S. recession and four more months of stock declines. It requires only a daily close over 1368 to get underway.

For those buying stocks, my recommendations for the companies most likely to respond earliest and strongest in the next upleg remain the same:

Akamai Technologies (AKAM)

Alvarion (ALVR)

American Science & Engineering (ASEI)

eResearch (ERES)

Harmonic (HLIT)

Intel January 2009 $22.50 LEAP calls (VNLAX)

Motorola January 2009 $17.50 LEAP calls (VMAAW)

QuickLogic (QUIK)

SiRF Technology Holdings (SIRF)

TowerStream (TWER)

US Geothermal (UGTH)

For those buying call options on the SPDRs (S&P Depository Receipts (SPY)), the April expiration is about as near-term as I would go for a speculative position. That would get you past the March 22 turn date, and I would stick to slightly out of the money strike prices. If you are more conservative, go out to the December expiration and buy well-in-the-money contracts. For example, if you wait for an impending S&P 500 close over 1368, the December SPY 132 (SFBLC) or 133 (SFBLD) strike prices would be attractive contracts at that time. We will not be tracking these in the New World Investor portfolio.

Yesterday was a bullish consolidation day for the S&P 500, and today may have been the final test back down to 1326 — it was hard to tell, though. Closing the week over 1326 was important for the weekly chart, and strength from this level on Monday will be a clear sign that the recent decline is over. At the August turn, the S&P closed out the week 75 points off the low, and you saw what happened after that reversal. Well the S&P closed today 60 points off the 1270 low, so this may not be quite as strong an upleg as the mid-August to mid-October run.

If you are looking to put money to work, this is the second-best time to do it. The absolute best time would be on one more sudden and scary retest of support at 1326 that does not break 1313 intraday, and that could come as early as Monday or as late as my March 22 turn date. As I said in yesterday’s Radar Report, when it happens it won’t feel right to be buying stocks, because all the bears will be growling: “Told you so!”

But to help you act then, the best thing to do is ignore the bears’ ranting and just check the news at the time to see what is supposedly driving the drop. I’ll bet it’s more of the same ol’, same ol’ — the after-effects of the sub-prime mess (yawn), weak housing prices and fears about consumer spending (spare me), or some big hedge fund or bank discovering that they hold a lot of bad paper (cue the world’s smallest violin playing My Heart Cries For You).

Even today, the market weakened after Standard and Poor’s lowered its ratings on 93 classes of mortgage pass-through certificates from 25 different U.S. sub-prime residential mortgage-backed securities transactions from nine issuers. It doesn’t get more “same ol’, same ol’” than that.

So when we do get the test down to 1326 (or 1313 intraday), I want to see the market springboard off that low the same way that it springboarded off 1270 on Wednesday, and then close back over 1326. That will be the equivalent of ringing the bell for the next upleg of this bull market. If today was the final test, though, the market will open strongly on Monday and springboard higher.

It’s possible that the S&P will run up to 1377 or 1389 and then give us a retest of 1326, so don’t feel like you are missing out if you want to wait for further confirmation that the December to January decline is over. As of right now, the market is telling me that another retest is coming, sooner or later, although if the S&P makes it up to 1389 first, the retest level will move up from 1326 to about 1350. Either way, the retest will be a low-risk entry point for a big move up to the ultimate top in April 2009.

It’s been an eventful week for the broad market with some key levels breaking and then being retraced. We’ve covered a lot of this action over the past couple days in Flash Alerts. I’ve especially stressed the importance of keeping a close eye on the crucial 1326 weekly and monthly support level on the S&P 500. In yesterday’s Flash Alert I said that the S&P 500 had to recapture 1326 in order to move us out of the “crash alert” zone. That happened in a most spectacular way, as the S&P first dropped as low as 1270 in a clear retest of Tuesday’s lows, and then rocketed 69 points or 5.4% in three hours to close on Wednesday at 1339. Today that move was cemented by a strong close over 1351. A lot of the action has also been taking place in the S&P futures market outside of normal trading hours, and there the reversal off the intraday low was 83 points.

After all this, I find it fascinating that so many people are still bearish. Especially since the Fed’s three-quarter-point rate cut this week was its biggest move since it raised rates 0.75% in November 1994, right before a strong five-year bull market, and its largest cut since October 1984 — 23 years ago! The Fed’s move before the opening on Tuesday was followed by two powerful trading days that put an important triple bottom pattern in place. Yet during the day yesterday, I even saw stories bemoaning the bear market like this Associated Press missive:

Stocks Wobble Amid Recession Worries

Wednesday January 23, 2:39 pm ET

NEW YORK (AP) — Wall Street stumbled through an erratic session Wednesday, with the Dow Jones Industrials falling more than 320 points before regaining ground to trade nearly flat. Investors weighed down by recession fears sought some bargains, but it was likely that this rebound would be short-lived.

“You continue to see a handful of buyers come in, but they’re quickly overwhelmed by the sellers,” said Todd Salamone, vice president of research at Schaeffer’s Investment Research in Cincinnati.

Note that this article was written about two hours after the upturn had hit and the Dow was back to flat, yet the “handful of buyers” are “quickly overwhelmed by the sellers.” To me, this is starting to look like the Weebles’ market. Those of you with kids or grandkids know from the PBS cartoon show that “Weebles wobble but they don’t fall down.”

Apple had a very bad day after guiding under the consensus for their March second quarter. That may explain why some holders are saying that we are in a recession and a bear market, even though GDP will be up for the March quarter and the market has already shown that it doesn’t want to go down. Of course, there’s always the possibility that we could slip into a recession and stocks could head down again into a bear market. But that is not the message of the market so far this week, and I would rather listen to the market than a bunch of reporters and gurus panicking and selling stocks.

After the close I read that: “Investors were head-over-heels in love with stocks from the early 1980s to 2000, almost 20 years. This relationship is due for a cooling period.”

“Due?” Says who? I actually agree with the sentiment, and I am expecting a cooling period to start in April 2009, not now. But until I see it start, I won’t have the hubris to say that the market has to go down because I think it is “due.”

Yet, others obviously don’t feel the same way. Just take a look at the American Association of Individual Investors sentiment chart and you can see that bearish sentiment is overwhelming:

Plus, yesterday’s Yahoo! Finance survey question was: “With Wednesday’s dramatic turnaround has the U.S. stock market finally reached bottom?” The vote of 17,471 respondents: “Yes, it’s time to go shopping” — 33%; “No, this was a sucker’s rally”– 67%. Every contrarian should be salivating.

And also look at the I/B/E/S valuation chart, which is now at record lows.

From this all-time low of -56, just a rally back to fair value would take the S&P up to my longstanding April 2009 target of 1880. Every value investor should be salivating.

Sure, you feel terrible about your portfolio — everyone feels terrible. That’s what down markets are supposed to do:

1. Make you feel terrible
2. Panic you into selling stocks so you don’t suffer further losses
3. Make you feel even worse by turning and going up
4. Panic you into buying back in at higher prices so you don’t miss out
5. Rinse and repeat

I can’t do a lot about #1, except to point out the great bargains that you can get if you have cash flow to invest. (I advised you to be 100% invested before the recent decline started, so I won’t try to pretend that everyone has lots of available cash to put to work.) But if the Flash Alerts, sentiment and valuation charts, and accuracy of my turning point forecasts can break the chain of events that could occur at #2, then I will have done part of my job.

When the stocks and LEAPs that I’ve advised you to buy lead the next leg up in the market, providing you the doubles and triples that you deserve as we close in on that April 2009 major top that I now see in the cards, I will have done another important part of my job.

Finally, if I can identify that top, get you out of almost all stocks and into securities that go up when the market goes down, I will have done the last part of my job for this cycle.

So if we get a weekly close over 1326 tomorrow, I will feel very good about the market, as this will have been a near-perfect test of the monthly and weekly support that I expected at 1326. The big drop under 1326 during the week was scary, but when a market survives such a test and then quickly rebounds, it leaves a “long tail” down for the week on the candlestick charts. That sets the stage for a monster rally.

Then, on a successful test back down towards 1326, which might happen around my next turn date of March 22, I will send you a Flash Alert to recommend going back on margin, buying call options or just being sure that you are fully invested. These mini-panic corrections don’t happen that often, thank goodness, but when they do you can take maximum advantage of them by entering on the test down and riding the upturn all the way to the next bull market top. I will tell you right now that it won’t feel “right” to buy into that test down, because the gurus and talking heads will be rolling out all the same old reasons why this was a false rally and the bear market really, truly is about to begin this time. You have to be mentally prepared to step up to the plate when that Flash Alert hits your inbox. When moments like that strike, I plan to buy short-term SPDRs (SPY) call options and just keep rolling them up.

This market reminds me very much of the Long-Term Capital Management hedge fund mess in 1998, which capped a string of bad news. The reporters and gurus thought that the long bull market was finally over, but the big drop turned out to be just a nasty correction — 21% in only 31 days. Then the successful test of that low launched a 68% upleg during the next 17 months to the bull market peak in March 2000.

A similar 21% decline from the recent all-time S&P intraday high of 1576 would take the market to right about 1250, which is exactly where the futures bottomed on Tuesday. If we now got another 68% rise, the bull market peak would be at 2130, and my “parabolic” target for April 2009 is 2100. If the upleg runs “only” 50%, the market would get to 1880, which is my most likely (non-parabolic) market target. You can see the tremendous risk that someone is taking to label this a bear market and advise raising cash after Monday and Tuesday’s action.

Meanwhile, we are in earnings season and so far, it’s one of those times when whatever a company says knocks their stock down. Maybe it’s just the market environment so far, but when a company the size of Intel says that they see strength, but they are guiding low because everyone else is predicting weakness, you can bet most managements are going to guide conservatively. So let’s get to the earnings and other news, and add some quick updates to answer your recent questions.

Avian Flu MegaShift

BioCryst Pharmaceuticals (BCRX) said that they have concluded the small trial of intramuscular injections of peramivir for seasonal flu using a longer needle, and they think that it is worth moving forward with a larger trial. So instead of initiating a Phase III test this flu season, they will do another Phase II trial at a higher dose with the longer needle. But the trial will have to wait until the upcoming flu season in the Southern Hemisphere, starting around May. It sounds like the Department of Health and Human Services will only provide partial support for this trial, and the BioCryst/HHS $102.6 million, four-year research deal has been modified but is still in place.

To me, HHS must be more interested in the avian flu trial, and that is still on track and fully funded under the research contract. On balance, I heard nothing to change my opinion that BioCryst will be successful in bringing peramivir to market for hospitalized patients with avian flu, and therefore it will get added to the government’s purchasing list for antiviral stockpiling.

Next Monday, Shionogi Pharmaceuticals in Japan will discuss their initiation of a Phase II trial for intramuscular peramivir. Shionogi just gave BioCryst a $7 million milestone payment, so the news will be good. Continue to buy BCRX up to $13 for my $30 target after peramivir is approved for government purchase.

Biotech MegaShift

Amgen (AMGN) reported fourth-quarter earnings after the close today, and I am about to hop on the conference call. They did $3.75 billion in sales, compared with the consensus for $3.54 billion, and they reported $1.00 per share, up 11% from last year and beating the 97-cent consensus. At first glance, it was not a bad quarter considering that Aranesp sales fell 25% as the re-labeling process continues.

For 2008, the company guided for $14.2 to $14.6 billion in sales, compared with the current consensus for $14.49 billion. They said that adjusted earnings per share would be in a range from $4.00 to $4.30, compared with the consensus for $4.37.

I will update you next week on the rest of the report and conference call, unless something dramatic comes out on the call that requires a Flash Alert tomorrow. I still think that AMGN is headed higher after the March FDA panel meeting, if not sooner, and recommend buying the January 2009 $70 LEAP call (VAMAN) up to $12.50 for my $25 target.

Dendreon (DNDN) drew a question from Lyndon: “Because of the European approval of Provenge, may we have an update and your opinion?”

Even though Dendreon has not even applied for European approval, several news stories used that word to describe the European patent that was granted to DNDN last week. It was a broad patent, and would make the company worth more in a sale, but it is not significant at this time to the price of the stock. We just have to wait for the interim peek data, which the company says is “powered for approval.” Buy DNDN up to $8 for my $40 target after Provenge is approved.

SXC Health Solutions (SXCI) stock had a very disappointing 2007, down more than 50% from its highs. The market has given up on the stock, and its current price around $14 implies about a 5% growth rate, while it actually will grow 18% to 20% or more for the next several years. SXCI probably did $93 million in sales and 60 cents a share in 2007, so the price/earnings ratio is down to 23X, roughly the same as the growth rate. That’s cheap for a medical services stock.

We bought SXCI for their unique transparent pricing model, in which they pass along normally hidden discounts and kickbacks to the customers. No other pharmacy benefit management (PBM) company does this, and I still expect them to take lots of market share as new contract wins are announced in the industry.

At $14 a share with $4 a share in cash, the downside risk is minimal. Buy SXCI under $15 for my $30 target.

China MegaShift

The China Miracle looks to be in deep trouble in the stock market, just as I forecast, but I do expect them to rally back with the U.S. market to new highs after the Beijing Summer Olympics. Look at these recent IPO catastrophes:

Earlier Chinese IPOs, like Xinhua Finance Media (XFML) and Noah Education (NED), that went public earlier in 2007 have seen their stocks cut in half.

But China keeps growing, with 11.2% growth just reported for the fourth quarter. That’s the fastest growth in 13 years, and the government is putting in price controls to stop inflation, which is also at the fastest rate in 13 years. Yet they continue to print money like crazy, trying to keep up with Helicopter Ben so that the yuan doesn’t rise too quickly against the dollar. It’s a very volatile situation, and if there is a serious recession in the U.S., the Chinese market will blow up. But I don’t see a recession in the U.S. yet, just very slow growth for a couple of quarters, and in that environment the country can hold it together through the Olympics. But I would not be surprised to see the U.S. market substantially outperform China from the opening of the Olympics through an April 2009 top, so for now we will stay away from any major shift into Chinese stocks. I am tempted by Baidu.com (BIDU), Ctrip.com (CTRP) and a couple of others, though, and we might add one or two selectively in the next few weeks.

Content on Demand MegaShift

Harmonic (HLIT) has been weak, even though everything other companies have reported to date that would affect broadband video sales has been strong. Maybe Wall Street sees something coming in capital spending that neither I nor the company sees. More likely, maybe they don’t get the video revolution after all, and I confused the $12 prices in late October with a spreading understanding of what Harmonic is all about.

At the Needham Technology Conference, Harmonic’s CFO said that December-quarter bookings were “VERY” strong, and the company had a much larger backlog of orders as they exited the quarter. You can bet that guidance will be a pleasant surprise. We’ll have to wait for the January 29 conference call for details, but having this stock trading around $9 is just silly. Buy HLIT before the conference call up to $12 for my $18 target.

Motorola (MOT) reported an as-expected December quarter, but then the new CEO said that new handset products will not be introduced until late in the March quarter, too late to do much good. So they guided for a revenue decline and a loss in the quarter, which knocked almost 20% off the stock price, returning it to 2003 levels.

He was pretty blunt: “The recovery in mobile devices will take longer than expected and there is a lot more work to be done. Demand for some of our products has slowed in an intensified competitive landscape. Our consistency of new product introduction is still not where it needs to be. And we still have gaps in the portfolio in areas that are experiencing high rates of growth, including 3G (third-generation), China and other emerging markets.”

All of their turnaround problems are in the handset area, which we already knew. He is leveling with the Street and laid out his game plan for getting back on top of the product cycle, in part by using software-in-silicon. That’s the same product QuickLogic (QUIK) provides to some of MOT’s competitors, but I don’t expect QUIK to get a contract from Motorola.

We are in this stock for the turnaround, and I still believe that it will happen this year. Continue to buy the Motorola January 2009 $17.50 LEAP calls (VMAAW) up to $4 for a $10.50 target.

Telkonet (TKO) drew several questions from subscribers. Joe and Art wanted an update on the new CEO, since the stock hasn’t jumped up since his appointment. As I covered in last week’s Radar Report, the new 200-megabit product is a game-changing introduction and if the new full-time CEO can turn this technology into dollars — which I think he can — then we’re going to see a well-deserved pop in shares. So basically, the CEO has to prove that he can do the job, before the Street pushes the stock price up.

M. asked: “What are the prospects for TKO being bought out by a company such as Johnson Controls? In particular, the energy management aspect of TKO appears to be well within the scope of the business of Johnson Controls. Is the powerline aspect of TKO different enough to pique the interest of a larger company?”

It sure is, but I really hope they don’t sell. The new CEO has cheap stock options and a chance to make his fortune in his early 30s, and he has little incentive to sell now. But you are right that the broadband-over-powerline technology is a beautiful fit for many companies, and that gives us a realistic exit for the stock if he can’t turn it around. TKO remains a buy all the way up to $5 for my $15 target.

New Energy Technology MegaShift

Infinity Energy Resources (IFNY) completed its sale of operating wells in Colorado and Wyoming to Forest Oil for net proceeds of $16 million. They will pay off $12 million of their bank debt, settle some derivative liabilities and pay about $800,000 in interest and penalties to Amegy Bank. Infinity keeps 100% of its exploratory properties in the Piceance Basin and Labarge areas in the Rocky Mountains, and the right to a 20% working interest in any future wells that Forest Oil drills in the Sand Wash Basin.

In addition to the sale, Infinity cut a deal with Forest Oil to continue the drilling program in Erath County, Texas. Forest gets a 75% interest in the first 10 wells that they drill, and then a 50% interest in the 31,000 remaining undeveloped acres. Infinity keeps all the completed wells, plus 100 acres around each completed well.

Brian and Fred asked if this is the beginning of good news, and John said: “IFNY has sold all of their Rocky Mountain properties, which I had understood to be the ‘Crown Jewels’ of the firm after the Central American holdings. Doesn’t this eliminate future prospects for this firm? What’s left to give value here?”

What’s left is a lot of exploration prospects in the Rockies, a good interest in Texas, and a potential elephant offshore Nicaragua. There is no doubt that this dust-up with the bank hurt the shareholders, but there is plenty of value here to grow the company back up, with Nicaragua being the blockbuster win sometime in the future. Buy IFNY up to $3 for my $7 target.

WiMAX MegaShift

Intel said that their first WiMAX/Wi-Fi integrated chipset (code named “Echo Peak”) will begin appearing as an option on Centrino notebooks in mid-2008. Because WiMAX is a worldwide standard, travelers will be able to use a WiMAX laptop to make phone calls and connect to the Internet from almost anywhere. I think this will be a very hot product in the December quarter, and focus a lot of attention on WiMAX stocks.

Death of the Dollar

The U.S. budget deficit will balloon to $250 billion this year, and that is before the $150 billion tax rebate stimulus plan our responsible political leaders just agreed to. The $400 billion deficit for 2008 will double 2007′s rate, balloon the trade deficit and put even more pressure on the dollar.

At this week’s World Economic Forum in Davos, Switzerland, George Soros, the brilliant hedge fund manager, said: “The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars.”

The dollar’s share of foreign reserves reached a record low of 63.8% in the September third quarter, down from 65% in the June period. What do you want to bet it falls quarter-by-quarter in 2008?

It may surprise you that I liked Tuesday’s stock market pattern, considering that the S&P 500 did not recapture the crucial 1326 weekly and monthly support level. But the week and the month are not over yet, and many of the most memorable lows in stock market history happen with a deep, washout low like we saw yesterday morning, followed by a strong rebound. The S&P 500 was down over 50 points to 1274 about six minutes after the opening, but it got back 35 of those points during the rest of the day. In premarket trading, the S&P futures got down to the equivalent of 1250. The rally back left a long “tail” down on the daily (and possibly weekly) candlestick chart, which is a common pattern marking a turn.

The VIX Fear & Greed Index also spiked up to the high 30s at one point, and closed at 30.01, up more than 10% on the day. That’s a confirming indicator that we’ve seen a point of maximum fear for now.

In Tuesday’s Flash Alert I said that we do not want to see two or three of these days in row, as that is the “crash alert” pattern. So we need to see the S&P build on Tuesday’s intraday rebound right away, recapturing 1326. Of course, we could first see a test back down to 1274 that is rejected, but then we need to see a solid close back over 1326 to really believe this is not a bull trap. As long as the S&P stays under 1326, it is still in the “crash zone” where something bad could happen. Once it clears 1326, it should be out of immediate danger.

It looks to me like there is enough negative energy now to push the S&P 500 back to 1440, albeit in a two steps forward, one step backward fashion. It might take a couple of months of backing and filling to get there, but when it happens, breaking 1440 is a prime candidate to set off the next and last leg of this bull market. I don’t know what news at the time will be designated as the “cause” of this move, but that is how the chart is lining up.

I think the rally back to 1440 is in the cards for sure, but we will have to watch very carefully what happens there. In many ways, the S&P is following the pattern of August to November 2000, when the drop in July stopped around 1440. The market then rallied into late August, but declined through September and broke down through 1440 in very early October. By mid-October it was rallying back towards 1440, even including a couple of “long tail down” days in mid- and late October. But that test from below the 1440 breakdown level failed right at 1440 in the first few days of November — then the longest Presidential election ever spooked investors, and the vicious bear market of 2000 to mid-2002 was on.

So here we are with 1440 as a crucial level once again. The S&P will go up there either as one last test before a bear market begins, or as a crucial, successful move to start a strong new uptrend. At this point, it looks like the latter to me. As long as the index stays above 1263, I will treat every move down as a test probing Tuesday’s lows, so there’s no need to change my mind or my advice to treat weak days as buying opportunities.

The two-year Treasury note rallied Tuesday to close at 2.01%, which means that even after the Fed’s big cut, they are still 1.5% behind the curve. It will be interesting to see how big the next reduction is on January 31 — 75 basis points or more will tell us that Bernanke finally gets it.

The Fed FINALLY did something meaningful, cutting the Fed funds rate three-quarters of a point this morning. I often say that the market tries to fool the most people that it can as much of the time as possible, and it may be about to fool me. But the bottom line is this:

If after this dramatic Fed move we see one or two more days of high intraday volatility without much change in closing prices, and if the S&P 500 does not bounce sharply back to the 1326 support level and then move easily through it, we will have a market pattern from which crashes occur.

I am not trying to be an alarmist — I spent much of the long weekend reviewing the data, the news and the reaction to the news. After a sharp, volatile decline like the one we’ve had since December 26, it is healthy to see the market consolidate by bouncing up, coming back down to test the low, bouncing again and then testing again — that’s OK. But here’s where it gets dangerous: When the market consolidates by posting a few days with wide intraday swings but little net change. We do not always get a market crash following this pattern, and every crash is not preceded by this pattern, but there’s enough smoke to start thinking about yelling: “Fire!”

After a big decline like the one we’ve been seeing, bargain hunters should be stepping in and daytraders should be looking for opportunities to squeeze the short sellers. That has not been happening, though, and last Friday we were left sitting at a crucial weekly and monthly support level around 1326. A major decline this morning could be the start of a crash, but the performance of the British market suggests that our market is more likely to rally back up to 1326, either celebrating the news that the Fed has finally taken effective action, or more ominously just on a test of the breakdown level. But closing near 1326 would just be another day of high intraday volatility with little change in closing prices, and that is the pre-crash pattern. Basically, if the S&P 500 can’t recapture 1326 and go up from there right now, we could be going down much further than I’ve been thinking.

The problem is obvious. Last Thursday, stocks held up very well until Chairman Bernanke began speaking, and then they promptly tanked. On Friday President Bush put forth his $145 billion tax rebate proposal, and the market promptly tanked. The market is saying that the Fed and the Administration just don’t get it, and what they are doing is too little, too late.

When he was in private life, Ben Bernanke was a vigorous advocate of the Fed moving quickly and decisively at the first hints of real trouble, whether to tighten or loosen, because he said that it took much more firepower to turn things around if the Fed got behind the curve. It must be a lot easier to talk the talk than walk the walk, because he is so far behind the curve, he’s been lapped. The Fed supposedly keys off the two-year Treasury note, where yields have sunk well under 2.50%. Yet Bernanke and his gradualist one-quarter-point rate cuts had the Fed funds rate still up at 4.25% before this morning’s cut. That’s very restrictive. When he opened his mouth on Thursday, the market only wanted to hear one thing: “We are cutting the Fed funds rate three-quarters of a point immediately, without waiting for the January 30 to 31 meeting.” He didn’t say that, and the market tanked. This morning, he said it — but it may be too late. Even the new 3.50% funds rate is restrictive, as it is well over the yield on two-year Treasuries.

President Bush’s Friday plan was equally demoralizing for a series of reasons. First, everyone believes that he has little interest in economics and doesn’t really understand what is going on. Second, this was a drop-in-the-bucket plan, not even targeted at the real problem. Third, in an election year, the Democrats are not going to give the President a win. Instead, they are going to propose a much larger program and dare him to veto it, so they can pillory the Republicans at the polls. If he doesn’t veto it, the deficit skyrockets on his watch. If he does, President Hillary will blame every bad economic event for the next two years on Republicans.

After thinking about all this during the weekend, I came up with another reason to be worried. It requires assuming that Chairman Bernanke is not stupid and incompetent, but stay with me here. Admittedly, one reason to believe that the Fed got so far behind is that Bernanke is clueless. Yet the guy academic-smart, has served on the Fed before and was a frequent critic in great detail about how the Fed should operate.

Now that he’s the Chairman, he isn’t doing anything that he advocated in private life. Why? My new worry is that he has some reason to do this, and he is deliberately keeping the Fed funds rate higher than the two-year Treasury note. He is flooding the economy with cash (the quantity of money) but keeping the price restrictively high (the cost of money, or the interest rate). Greenspan slashed interest rates so banks could borrow from the Fed, buy Treasury notes and use the profits to rebuild their balance sheets. Remember that the Federal Reserve System is owned by its member banks, not by the taxpayers, and the Fed will always step in to help or save the banks. So why hasn’t Bernanke played the Greenspan game to bring Citigroup, Washington Mutual and others back from the brink?

My thought is that maybe he wants to change the rules before the overall situation gets so out of hand that there really is a devastating depression. I’ve been thinking the Big One is coming as early as 2010, and sometime before 2015. There is so much debt in the system to be liquidated that I think the big depression is inevitable. But it’s also clear that Bernanke could easily keep the economy glued together for another cycle — there’s no reason that he has to take the big downturn right now.

But what if that is his agenda? It would explain everything he’s done — his reluctant action bordering on inaction, his late-to-the-party Fed funds rate cut before the opening today, and even his no-comfort choices of words and phrases in speeches like Thursday’s. Maybe he’s decided or been told to take a big hit now, instead of a knockout punch in three to five years. And maybe the market has figured that out. According to the very accurate economic forecasters at the Economic Cycle Research Institute, there is a real, albeit brief, opportunity for dramatic policy action to head off a downward spiral. Here’s a three-minute video of an Economic Cycle Research Institute (ECRI) analyst explaining their position, and how there are only a few weeks left until it’s too late to avert a recession. The Fed needs to drop rates by a huge amount, right now. Bernanke knows it. So why did he wait so long to take the first big step? How quickly will he cut another 75 basis points to be sure the economy does not spiral down?

I still think the most likely scenario is that he does not have a hidden agenda, and that he is simply stupid and incompetent. If that’s right, the most likely path from here is a bounce back to and then above 1326 that builds on all the negative sentiment, gets fed by this aggressive rate cut and the prospect of another one at the end of the month (three-quarters of a point, please), gets teased along by headlines about a possible tax rebate coming, and winds up tracing the usual fourth year of the Presidential cycle: High-level churning without much overall progress for the year. In that environment, our stocks will do fine — much better than their current prices would suggest. Stocks overall are very depressed on the I/B/E/S valuation model, and bear markets rarely start from low valuation levels.

But we need to watch the market action very closely over the next few days, because this truly is a time that the market will tell us what is going to happen. The market is very good at predicting economic outcomes, and if we get the bounce that I am looking for, there will be no recession. In fact, there will be one of the biggest snap-back rallies in history.

But if the market continues to believe that the Fed and the Administration are going to do too little, too late, look out below.

The Asian markets were hammered on Monday and Tuesday, with Tokyo down 8.8%, Hong Kong’s Hang Seng index down 13.7%, and China’s Shanghai Composite index plunging 11.9%. India’s market fell 7.4% on Monday and trading was halted for an hour on Tuesday when the Sensex index plummeted 9.8% within minutes of the opening. It came back to close down 5.0% for a two-day loss of 12.0%.

Since the start of the year, Japan’s benchmark index is down nearly 18% and Hong Kong’s Hang Seng index is down more than 22%, mostly due to worries over the U.S. economy. While some folks persist in believing that increased trade within Asia has made the region less dependent on the course of the U.S. economy, I still think that Asia will suffer substantially from a U.S. recession. I’ll be watching the Asian markets to confirm that whatever we see in the U.S. market is for real.

The European markets were down sharply overnight in their worst sell-off since the September 11 terrorist attacks, but recovered much of their losses after the Fed funds rate cut announcement. In the U.S., just before the Fed’s announcement, the Dow Jones Industrial Average futures were down 523 points, or 4.3%, and the S&P 500 futures were down 64.4 points, or 4.8%.

The Bottom Line: This is a risky situation, even though we probably will avoid a crash thanks to the three-quarter-point rate cut. Here’s what to do:

1. After this S&P 500 drop at the opening if there’s an intraday rally back to test the 1326 level, you should get off margin. The market may pass the test and go above 1326, in which case you can get back on margin as soon as we see a successful test back down to that level, which would again act as support.

If you are really worried or on margin, you can try the short-term put or ultra-short exchange-traded fund strategies described below without waiting for a rally up to test the 1326 breakdown level, but watch out for a quick, cathartic flush down that quickly reverses into a slingshot higher. That would hand you big losses on your puts or exchange-traded fund position unless you are mighty nimble and get out as the market is reversing.

2. If the S&P 500 doesn’t rally back to 1326 in the next day or two, expect a crash. You can either buy a short-term protective put or, for retirement accounts, an exchange-traded fund that goes up when the market goes down. I would buy puts on the S&P Depository Receipts (SPY). The February contract expires on February 15, which is long enough to let this little drama play out. The simplest idea is to buy puts that are at or just out of the money. Each put contract costs 100 times the quote, and protects about 50 times the strike price. So a 132 contract, which closed at $3.60 on Friday, would cost $360 and protect about $6,600 of portfolio value. That’s a half a percentage point off your annual return for a few weeks of protection — it isn’t cheap.

If the SPY fell $1 to 131, a portfolio of 100 shares of the SPY would fall from $13,200 to $13,100 in value. The 132 contract would go up in value to about what a one-strike-higher contract cost on Friday. The 133 contract closed Friday at $4.05. So the option contract value might go from $360 to $405, a gain of $45, while the portfolio value fell by $100. If you divide the value of your portfolio by $6,600, you’ll know how many contracts that you have to buy for something near full protection.

3. If we see another day or two of high volatility with little net change on the day, don’t be surprised by a crash. You can either buy a short-term protective put as above or, for retirement accounts, an exchange-traded fund that goes up when the market goes down. The UltraShort S&P 500 ProShares (SDS) works, or you can pick another one HERE. There are options on the SDS, but they are so illiquid that I would not trade them.

Right now, I would treat any flush down from current levels as a major buying opportunity, and plan in advance what you would like to add to your portfolio at give-away prices. Companies that are sensitive to the economy have been beaten up the worst, and their stocks should bounce first when the real rally comes. Here’s a good shopping list:

Akamai Technologies (AKAM)

Alvarion (ALVR)

American Science & Engineering (ASEI)

eResearch (ERES)

Harmonic (HLIT)

Intel January 2009 $22.50 LEAP calls (VNLAX)

Motorola January 2009 $17.50 LEAP calls (VMAAW)

QuickLogic (QUIK)

SiRF Technology Holdings (SIRF)

TowerStream (TWER)

US Geothermal (UGTH)

I will send a Flash Alert again if it looks like you should suspend all stock buying for a while, but that’s not likely to happen. I doubt that we will sell anything at this point, yet we have to be ready for whatever comes. There probably will be frequent Flash Alerts during the next couple of weeks.

Technology earnings season kicked off this week, with a fourth-quarter report out of Intel (INTC) on Tuesday. Last week I predicted that Intel would come out with a good report, and say that chip inventories are normal. And I was right — after the close on Tuesday, Intel did report a good quarter and did say that chip inventories are normal. I expected this announcement to trigger a nice rally, so I also said that if you like to take index options positions, on any S&P 500 close over 1413, that you should buy short-term calls. Unfortunately, the rally never ensued. The S&P closed at 1416.25 on Monday, and if you bought these short-term calls early on Tuesday, you ran right into a buzz saw. My apologies for that, but I still think that positions taken over 1413 are going to be O.K., so if you own them, don’t sell just yet.

The market was pulled down on Tuesday in anticipation of an earnings miss from Intel, and then the following day, the Street hammered Intel’s stock not just on earnings news, but also on very cautious guidance for the March quarter. Despite this cautious outlook and the beating that Intel took, the broad market on Wednesday looked like it was going to post a big reversal day until about 30 minutes before the close. But investors are looking for a Fed funds cut any day, hoping Bernanke “gets it” and won’t wait for the January 31 scheduled announcement. When it became obvious the cut was not coming yesterday, traders clocked the market in the last half hour. Today Bernanke did not move again, and the S&P headed down, down, down towards the very strong support at 1326.

It really is quite startling how far behind the curve Bernanke is. The two-year Treasury note, which the Fed normally follows, is around a 2.5% yield, while the Fed funds rate is at 4.25%. Bernanke has to cut the funds rate a whopping 1.75 percentage points, and either do it quickly or take a fairly deep recession. It would be responsible and intelligent to take the recession now, rather than postpone it until 2010, but the Fed usually does not act responsibly or intelligently. Maybe “this time it’s different,” but without solid evidence of that, I sure wouldn’t bet that way. Unlike the Japanese central bank in 2001, after they cut their interest rate to 0%, the Fed still has options: It has hundreds of basis points of interest rates left to cut and billions of paper dollars to print. Plus, it has the pressure of an election year and a new Chairman who does not want to start his term with a deflationary bust.

So the fear of a recession has made sentiment very negative. The VIX Fear & Greed Index is in the high-20s and headed higher on any further weakness. Investors are twitching on any news about mortgages, unemployment, consumer spending or a slowing economy. Trouble is that they’ve been twitching about those same issues for six months, although it has gotten worse since the Fed’s measly quarter-point cut on December 11. You can only discount bad news a few times before it is “in the market” and loses its power to push stocks down. I think we are very close to that point, or already there. This morning, the market moved into negative territory after Helicopter Ben said that the risks of an economic downturn are more pronounced, and that the housing sector will be a drag on the economy for much of this year. Was this news to anybody?

Specifically, now that the S&P 500 tested 1360 again and it didn’t hold, look for a quick trip to 1326 plus or minus a few points, probably tomorrow. That weekly support level should hold, as it did in February and August 2007, and if folks are as negative at level as I expect them to be, the slingshot to 1440 and beyond will kick in. If the Fed cuts rates over the weekend, they will murder the shorts — so they won’t do that with a Goldman Sachs guy running the Treasury Department. But he will be sure that the Plunge Protection Team, which recently met in the Oval Office for the first time, will find an opportunity to provide buckets of cash to the market to keep it up and restart the economy.

As I’ve been saying, the economy really is slowing. “Every bull market has a copper roof” is an accurate rule of thumb (see my signature line for others), and copper prices are down 1% from a year ago. Global copper inventories rose 36% in December to the highest level in three months. At the same time, the Baltic Dry Index that tracks the cost of shipping stuff, which went parabolic in the fall, has been down for seven weeks in a row. These sensitive indicators are pointing to very slow March and June quarters — but we already knew that.

The Fed’s solution — cut rates and print money — always works, with a three- to six-month lag. It also always weakens the dollar and kicks off inflation. It was not surprising that overall inflation in 2007 was the highest in 17 years at 4.1%. Much of the upward push came from food (+4.9%) and gasoline (+29.6%) prices, which jumped by the largest amounts since 1990, but are not counted in the Fed’s “core” inflation rate. The core rate rose 2.4% in 2007, a bit better than the 2.6% recorded for 2006, but well above the Fed’s “comfort zone” of 1% to 2%. As you know, I think that the “comfort zone” is a laughable concept, right up there with “strong dollar policy” as something to feed to the media.

Individuals’ comfort zones may feel a bit violated, too, since most of them eat and drive, and could not care less about “core” inflation. The other side of the 4.1% increase in inflation is a 0.9% drop in average weekly earnings in 2007, the fourth decline in the last five years. Maybe outsourcing our whole manufacturing base via NAFTA and CAFTA wasn’t such a great idea. The service economy that we are transitioning into seems to have a lot of burger flipper and Wal-Mart greeter jobs at minimum wage. Sending every U.S. family a $300 tax rebate — a program that President Bush is likely to announce in the January 28 State of the Union speech — will have about zero impact on the real underlying problems. But the President and Congress no longer deal with real problems, they deal with photo ops and opportunities to bash or embarrass the other party, especially in election years.

So in this type of environment, how can I be bullish? Well, we need to look back at similar times when two factors come together: First, stock prices traded at depressed levels reflecting fears of economic recession or economic contraction; and, second, central bankers aggressively eased credit conditions and increased the money supply. It turns out that when those two factors come together, stocks do extraordinarily well as the bad economic news is unfolding. Martin Fridson wrote a great book about this: It Was A Very Good Year — Extraordinary Moments in Stock Market History. He looked at 105 years of data, over which the stock market returned about 11% per year compounded. In the 10 years where both factors above were present, the average return was 36%:

Fridson summarized his research this way:

“The Winning Combination: Depressed Prices + Sudden Credit Easing
Looking ahead, the most likely formulas for the next very good year emerge from the pattern of the two most recent occurrences: Stock prices begin at a depressed level, reflecting fears that inflation-conscious central bankers will inflict more pain.
Suddenly a financial crisis reduces the price level to a secondary public policy consideration. As the Fed liquefies to the system, the stock market quickly and radically adjusts to the changed circumstances. In their eagerness to prevent a meltdown, the monetary authorities unavoidably give stock investors a windfall. . . . All in all, it’s reasonable to infer that Federal Reserve chairmen feel justified in temporarily setting aside the battle for price stability when some overriding economic concern arises. Spotting such an overriding concern, at a time when stock prices happen to be depressed, represents the best hope for getting a jump on a very good year in the stock market.”

The I/B/E/S model that I showed you in last week’s Radar Report shows that stocks are very undervalued, and it’s pretty obvious what the Fed is going to do if the Plunge Protection Team is meeting in the White House. (You can read a review of It Was A Very Good Year here, and at the same time you can listen to Ol’ Blue Eyes sing the song here.)

To convert all the bears to bulls, the S&P needs at least to go to a new high above 1555. I really think that it will take more than that, up to 1880 or perhaps 2100, to get everyone to believe that the economy is not going to collapse under the weight of a surge in foreclosures. We’ll let the market tell us when the time comes to turn bearish. For now, earnings season has begun and first on our list is a close examination of what Intel really said, as opposed to what Wall Street says they said.

Intel (INTC) reported fourth-quarter earnings on Tuesday and then fell 12% on Wednesday as over 309 million shares traded, its third-highest volume in five years. At today’s close, the stock was down 27.5% over the first 12 trading days in 2008. They reported $10.7 billion in sales compared with their guidance for $10.5 billion to $11.1 billion (midpoint $10.8 billion) and consensus expectation for $10.8 billion. They earned 38 cents a share compared with the consensus for 40 cents. In addition to that mild disappointment, their high-end guidance for the March quarter was at the low end of the Street consensus: Revenues of $9.4 billion to $10.0 billion, with the midpoint up 10% from last year.

Intel had all-time record microprocessor and chipset sales, in both units and dollars. Revenues rose 10.5% for the quarter compared with last year, and their gross profit margin was up 8.5 percentage points to 58%, thanks to their cost reduction programs. They have over 30 products being manufactured on the newest 45-nanometer technology, and they’ll be trialing 32-nanometer by the end of 2008. They’re throwing off a couple of billion in free cash flow every quarter and bought back $1.5 billion of their stock during the December period.

Everything was strong except NAND flash memory prices, and Intel is selling that operation (Numonyx) to Marvell Technology. The deal was supposed to close in the December quarter, but slid into the March period. Once it is off Intel’s books, both the growth rate and profit margins will improve. This is the only real problem Intel has, and it is going away.

The company also said that they were being cautious due to everyone else talking about a slowdown, but they do not see it. Let me juxtapose some Wall Street concerns with management quotes from the conference call. These were the specific reasons for the recent downgrades on the stock, and every single one was false. Remarkably, most of them were repeated in analyst comments after the conference call.

1. Wall Street: PC sales are soft because corporations are waiting for the Service Pack 1 release from Microsoft before adopting Windows Vista.

CFO Stacy Smith: In the fourth quarter, what we saw was that the computing-related products actually grew as we expected, roughly seasonally on the back of a very strong third quarter.

CEO Paul Otellini: Most of the industry analysts have PC unit volume growing in the low double-digits in 2008 over 2007. That is an assumption that we wouldn’t argue with, and that’s one that we’re building our capacity plans around.

Otellini: Stacy said, I think, pretty clearly that our view of the first quarter is not being clouded by a pessimistic view of computing.

(And I would add that the Service Pack 1 release is imminent, which is when the real “Vista bump” will hit PC sales.)

2. Wall Street: Laptop computer sales were soft during the holiday season.

Otellini: Mobile unit growth continues to be very strong and consistent with the shift to mobility that we’ve seen over the past couple of years.

Smith: We saw double-digit unit growth in server and mobile microprocessors.

3. Wall Street: Europe is slowing. Asia is slowing.

Otellini: We had a very strong quarter in Europe. It was up 22% sequentially and our customer reports, in terms of sales out there, are very strong including the stuff that we’ve received most recently in the first part of January. So far we’ve not seen any significant signs of slowdown in Europe, or anywhere else for that matter.

Otellini: This last quarter, the fourth quarter, Asia-Pacific and Japan both hit records and Japan is not an emerging market, but Asia-Pacific is a pretty good surrogate for that. And sales in China continue to boom, and I think with the Olympics coming on this year it’s going be even a better year for electronics in China.

4. Wall Street: There are high inventories of microprocessors in the distribution channel.

Otellini: Overall, channel inventories appear healthy and in line with our expectations as we head into the first quarter.

Smith: We didn’t see anything unusual in terms of cancellations, and we didn’t see anything unusual in terms of inventory building up. Our inventory is a little lower than I’d like. The distribution channel inventory that we have visibility into is at the low end. So it all felt pretty healthy through the fourth quarter.

Otellini: In terms of channel inventory, I can only speak to our inventory, our distributor inventory in the channel. On a worldwide basis, that’s in very good shape. It’s actually down a little bit from the prior quarter, and that’s at a point in time when we’re trying to replenish that with 45-nanometer product. So if anything, I’d like to try and get that up a little bit just like I’d like to try and get our internal inventories up a little bit. In terms of our customers and downstream inventories, I haven’t heard any problems.

5. Wall Street: Sell the stock.

Otellini: We remain optimistic about 2008.

Otellini: I have the same caution that I think that everybody in America who watches CNBC has today. You hear all of the pundits saying that the world is going to a trash basket and you worry. It may be a self-fulfilling prophecy. At this point though, we don’t see anything on the horizon, our customers don’t see anything on the horizon. I was at the Consumer Electronics Show last week, talking to people from all around the world and we just don’t see it. You have to remember that 75% of Intel’s revenues are not in the United States. And that’s where the bulk of the growth has been coming from. So if there is a near-term concern, I think it tends to be focused on the U.S. market, particularly on the U.S. capital markets, and our customers at least and we don’t see that bleeding over at this point in time. It would be imprudent not to be cautious about it though.

I’ve read the conference call transcript a couple of times, and it is almost embarrassing to see how Street analysts basically say: “Your information conflicts with my opinion, so you must be wrong.” Of course, it also leads to the remarkable opportunity that we have in front of us. Intel will be 40 years old this year — at American Express Investment Management, we invested in a private venture round in 1970, when the company was about 18 months old. They have 28% operating profit margins, dominate the semiconductor business, earn a huge cash flow, pay a rising dividend and buy back their stock. In short, it is a must-own stock for the institutions when the market is going up. If I am right that the 1326 support level on the S&P 500 will hold, the Intel LEAPs are going to have a sensational rate of return over the next year. INTC is about 18% below its 200-day moving average, so all the technical traders are out. But after subtracting the $2.40 in cash per share, the stock is selling for 15X 2007 earnings and 14X my 2008 estimate of $1.40. A below-market P/E multiple for the dominant company in one of the most important industries in the world is a gift.

Intel’s annual Investor Days are coming up on March 5 and March 6. I expect them to show a roadmap to shipping many more processors per quarter, while continuing their cost reductions and generating even more cash. They’ll also have more of a read on the seasonality of the March quarter for PC sales, in light of Microsoft’s impending release of Vista Service Pack 1. I want you to double up or triple up on the Top Buy-rated Intel January 2009 LEAP calls with a $22.50 strike price (VNLAX) at current prices. They are a buy up to $6 for a $12.50 target price at expiration.

Telkonet (TKO) introduced a major new upgrade, the Series 5 Broadband-over-Power-Line box that handles data at 200 megabits per second instead of 14 megabits per second. That means it can handle streaming video, as in video surveillance cameras. The box has numerous new interfaces for various industrial standards, better security and runs on AC or DC power. Telkonet is targeting five huge markets:

• Government, initially upgrading current installations under the EDS contract;
• Retail, where one network box can control digital signage, point-of-sale functions, energy management, building automation, digital security and network connectivity;
• Security, where all the new applications, like universities, face huge bills for pulling cable capable of carrying signals from remote cameras;
• Hospitality, where TKO’s 2,300 customer installations would love to add surveillance, video conference services and Internet Protocol TV;
• Energy management, working with utilities to lower their customer’s energy usage. TKO just won a $3.8 million energy management contract for InTown Suites.

This is the second shoe to drop in the revitalization of TKO, with the first being the appointment of the new CEO. I’m sure these products were under development before he arrived, but the great thing about having a successful entrepreneur running this company full-time is that he will turn the technology into dollars. I am keeping TKO as a Top Buy, keeping what must seem like a ridiculously high buy limit of $5, and my even higher $15 target. Those numbers can be achieved with the new management and the new products.

Biotech MegaShift

Isolagen (ILE) presented at the JPMorgan Healthcare Conference last Thursday. As I expected, both outgoing CEO Nick Teti and Incoming CEO Declan Daly spoke, and both said that there is no negative clinical information coming. Daly has been the Chief Operating Officer, and although he is stationed in Ireland he has been managing the company day-to-day from there. That’s the only possible negative that I heard, and I still think that the stock will move on the clinical results, not on which of them is the CEO. The major strategic decisions have been made. The stock has not recovered at all since the transition was announced and it plunged 75% from the $2.40 level. This is really stupid — the “efficient market” is telling us that three-quarters of the value of the company came from Nick Teti running it, which is absurd. I am making ILE a Top Buy and keeping my $4.50 buy limit and $9 target.

Death of the Dollar

Gold futures began trading in Shanghai this week, and the Chinese are already paying $1,000 an ounce. Gold gurus said that the high prices reflect the lack of connectivity between Shanghai and the rest of the world’s gold markets. But the truth is that the Chinese are more scared of any paper currency than most cultures, and they know their government is printing yuan at an 18% annual rate. As for the U.S. dollars that they are getting for all those sweatshop products sold at Wal-Mart — forget it. The Chinese government may have to hold greenbacks as the Fed prints more at a 13% annual rate and their value erodes away, but individual businessmen simply buy gold as fast as the dollars come in. Overpriced real estate, overpriced stocks on the Shanghai Exchange and overpriced gold are three of the few things that they’re legally allowed to invest in. Maybe they will come out of this mess better off than any of the rest of us.

This morning, Fed Chairman Ben Bernanke said: “I was wrong. The economy is a lot weaker than I thought. We are way behind the curve in cutting rates, and we’ve put the economy in danger of a recession. We will slash interest rates to catch up with the Treasury market. I take full responsibility, and I resign.”

Well, not really, but he came as close as any Fed Chairman has ever come to saying that. Here’s how he actually phrased it: “In light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary. Officials stand ready to take substantive additional action as needed to support growth.”

The “recent changes” are the ones that I have been telling you about since mid-2007. Glad to see the Chairman finally got the memo. Sadly, the part about resigning didn’t happen yet — but it will.

The weakish holiday selling season and continued turmoil in the very large financial sector turned up recession talk this week. And a jump in the unemployment rate only added fuel to the fire, tanking the market. Or did it? Last Wednesday, an analyst downgraded Intel (INTC) due to worries about excess inventories of personal computer components and “a limited market for microprocessors.” I doubt there is much excess inventory beyond what happens every year, and Microsoft is about to introduce Windows Vista for real, which will drive corporate PC upgrades. “For real” means that they are releasing the Service Pack 1 bug fixes, and most companies know to wait for Service Pack 1 to get a relatively trouble-free operating system from Microsoft.

I would also agree that the market for microprocessors is limited — it is limited to Planet Earth. The number of products that do not yet have a microprocessor installed or are not yet connected to the Internet, but will be, is staggering. However, in the meantime that analyst’s downgrade spurred a couple of similar actions by others, most notably by JPMorgan last Friday, and the stock market has been under extreme pressure ever since. The NASDAQ Index had eight straight losing sessions, before closing up yesterday.

Subscribers Bob, George, John and many others emailed me about what to do after the S&P 500 broke 1440. I should have sent a Flash Alert to tell you to watch and wait for a day or two, to see how the market handled the next support level down. At this point, I like this market even more. Why? It has taken everything thrown at it for six months, yet we are still within 10% of the all-time high on the S&P 500. When the important 1440 level finally gave way under the pressure of the Intel downgrade, the even more important 1377 level held. And while it is still possible that there could be one last dump down to the crucial 1326 level, now that Helicopter Ben has seen the light, that’s not the way to bet.

Clayton asked: “I recently read that November 2007 stock/mutual fund outflows just surpassed the 2002 outflows that were a new record at the time. Could this be viewed as a signal to sell or buy?”

Clayton, mutual fund flows are a contrary indicator, and they have been since I did one of the first studies on this indicator for American Express Investment Management in 1969. We are still in a correction, which is to say a consolidation of the big upmove in 2006 that lasted into February 2007. Everything that has happened since then, including the new highs last summer, has been part of a high-level churning pattern that is designed to frustrate both bulls and bears. The market loves to kick as many people as possible off the boat right before it raises anchor and sails away.

I think that is about to happen again. The S&P 500 had to get solidly over 1410 to kick off this next upleg, as it did today. Realize that all the usual suspects — 1440, 1495, 1507 and 1532 — are sure to create pauses or tests back down to the prior level. But I think we are headed through the old high at 1555 this time, to be followed by 1607 and maybe 1690 or 1710. It’s an election year, so I’m not sure that the market can do better than that. But if the dollar gets weak enough (and, believe me, Ben Bernanke does not care what happens to the dollar as he tries to stop a deflationary downturn), even higher levels could be in store by December 31, 2008.

Part of the reason that I am so bullish is that the I/B/E/S valuation model, which relates earnings forecasts and interest rates to Treasury bond levels, is at an all-time record low of 48.8% below fair value. At the peak of the Internet bubble, it was 60% above fair value. If it were now to fall to 60% below fair value, it would be at the crucial 1326 level. So even if that happened — and I rate that scenario as very unlikely — the next move would almost certainly be a dramatic slingshot back up.

With the Fed ready to take interest rates lower while printing all the money that banks and corporations need to re-inflate, it’s hard for me to understand how the gurus on CNBC can be so negative. The Fed is not out of bullets — their problem is that they used a .22 last time, when a .45 Magnum was called for. And now they get it.

So here’s the strategy: Alcoa kicked off earnings season yesterday with a good December-quarter report. Intel kicks off the technology earnings season next Tuesday after the close, and I expect that they will have a good report as well. The key is guidance: Will they confirm excess inventories or deny them? I expect them to say inventories are normal, sparking quite a rally. So you should at least be fully invested right now, and if you like to take index options positions, today’s sharp upturn means it is time to buy short-term calls. I won’t be tracking this advice in our New World Investor portfolio, but like last fall’s successful index put trade, I will tell you when to sell.

Biotech MegaShift

Affymetrix (AFFX) settled their lawsuit with Illumina for a one-time payment of $90 million, but no ongoing royalties. This was a mistake, and the market immediately dropped AFFX stock. The issue now is whether Affymetrix can go head-to-head with Illumina in R&D productivity. I still think that we should invest in AFFX, because the entire field of gene diagnostics is going to grow so rapidly. But if AFFX had held out for a 15% royalty, they could have been the unquestioned leader. Now, even though they are currently #1, it is going to be a fight. After their stock settles down, I will revisit Illumina for a potential buy recommendation. Meanwhile, I am reducing the AFFX buy limit to $25 and the target price to $35.

Amgen (AMGN) drew a question from John: “Amgen is scaring the daylights out of me. Should we buy some calls at a lower strike price, say 55 or 60? And hopefully Infinity Energy Resources (IFNY) has turned a corner. I was really high on it. I got my in-laws in IFNY (bad). Thank God I got them into DNDN earlier and they more than tripled their money in two weeks (good). I still think I am the favorite son-in-law. Hope to read about these soon.”

John, Amgen is at the maximum scary point, right before they report earnings and have another FDA panel review. But earnings will be at least OK due to their quick, effective cost-cutting program, and I expect no changes from the panel review. As always, the maximum scary point coincides with the lows for a stock. So buying lower strike price calls as a way to average down is an excellent idea. In the portfolio, I will stick with buying the Amgen January 2009 $70 LEAP call (VAMAN) all the way up to $12.50, for a $25 target price when AMGN stock hits $95, on or before the LEAPs expire.

Crucell (CRXL) said that their 2007 revenues missed the consensus due to the weak dollar, and the stock dropped 6% on the news. The company cut their revenue guidance from a range $323.5 million to $330.5 million down to $313.1 million. However, they did say that they were cash flow positive for the first time in their corporate history.

The vaccine business must have disappointed for the company to have missed revenue estimates. We will find out more on the conference call, but for now I am reducing the buy limit to $20 and the target price to $35. If a more serious problem is revealed on the conference call, we will probably sell the stock.

Isolagen (ILE) will present at the JPMorgan Healthcare Conference just after this issue goes out today, so I will be on the webcast shortly. They did not cancel their presentation, as the rumormongers were claiming, and both outgoing CEO Nick Teti and incoming CEO Declan Daly will be there. Of course, they will address the transition head-on, and I expect them to say that there is no-zero-nada negative clinical information that has not been released. Will that pop the stock back to the $2.40 level? It should. My Flash Alert on Tuesday was written within pennies of the absolute low. I see no reason to change either my $4.50 buy limit or my $9 target price. Continue to buy ILE.

Content on Demand MegaShift

Intel (INTC) will straighten us all out next week on what is really happening, but in the meantime, the Banc of America Securities downgrade really pummeled both the stock and the tech sector. BofA is looking for a global recession this year, and their economists are much more negative than the consensus. With the European, British, Chinese and U.S. central banks all printing money at a rapid clip, I have a hard time believing that there will be any recession at all. Slower growth, yes, especially in the financial, housing and retail sectors. Business capital spending may grow at a slower rate, but the cutbacks will not be in technology — not unless they want to fall far behind competitors who are spending money to get into the Internet century.

Charles asked: “Please comment on the INTC January 2009 LEAP. The LEAP price has dropped about 50% this last week. Please, we need a comment – the price drop is huge!!!”

Indeed it is — and it is an equally huge opportunity. I am making the Intel January 2009 $22.50 LEAP calls (VNLAX) a Top Buy under $6 for a $12.50 target price at expiration, more than a triple from current levels.

New Energy Technology MegaShift

Energy Conversion Devices (ENER) has a subsidiary, United Solar Ovonic, that makes the highest efficiency thin-film photovoltaic (PV) cells for solar-generated electricity. Solar modules traditionally are made of polysilicon cells that are mounted in a metal frame, covered with protective glass and wired together for connection to each other in PV arrays. It’s an expensive, mechanical assembly process. Combined with a shortage of polysilicon, it has kept the cost of generating solar power about five times as high as the petroleum-based alternatives.

In the mid-1990s, AstroPower developed a continuous film coating process to put the polysilicon on films that could be attached to a prewired frame and shipped as a module. I had these modules in an array on my ranch in Half Moon Bay, and they worked great. But they were still about triple the cost of conventional electricity, and if it hadn’t been for a 70% co-payment by Pacific Gas & Electric and the taxpayers of the State of California, I wouldn’t have done it.

United Solar Ovonic takes that idea a step further to deposit a thin film of amorphous silicon, not the hard-to-get polysilicon, in a continuous process that produces a roofing material usable in new or retrofit construction. It has about 16% efficiency these days, and it is cost-effective under the current Energy Bill tax incentive of 30% of cost.

The reason I brings this up is because recently, I’ve had a couple of questions about nanosolar, applying nanotechnology to greatly reduce or even eliminate the need for silicon. Last week, a technology breakthrough at an Israeli nanotechnology institute caught my eye. They used conductive glass — no silicon — and nanodots of platinum to produce PV cells 100 times as large as current cells. They reduced the amount of expensive platinum needed to make a solar cell function by 97.5%.

The institute is working with a private Israeli company, Orion Solar, to develop the technology. This is just one of hundreds of similar innovative programs at research institutes, universities and private companies happening today, all around the world.

Does this threaten United Solar Ovonic? I doubt it. United Solar will watch these developments and team up with or acquire whatever is going to eventually replace amorphous silicon, because United Solar has the sales channels, customers, systems and money to take a new technology to market. Buy ENER while it is under $30 for my $55 target.

FuelCell Energy (FCEL) has Jack concerned: “Isn’t it still a rule of thumb that the market discounts the macro-future about six months out? If every company that wants a fuel cell in the next couple years is going to book it by 12/08, won’t our companies sell off by midyear 2008? Who will buy them if everyone knows the strong quarterly bookings in 2008 are temporary? Even if tax credits are reinstated in 2009, won’t significant sales have already been “stolen” from 2009 during 2008?”

Maybe. I will be watching this closely, and the tip-off will be increasing orders but a decreasing stock price. However, I think it is very likely that the Presidential candidates will get in an “outpromising” game on alternative energy, and at least make it clear that the tax credits will be extended. At the current stock price, I would not let this potential problem keep me from starting a position. FCEL is a Top Buy up to $12 for my $22 target.

WiMAX MegaShift

TowerStream (TWER) drew a question from Don: “I just received your email and have some question regarding your recommendation of TowerStream. The stock was up (52-week-high) to over $11. To fall back that much is considered high volatility. Why can we feel safe? Also, I’m very technical, so I understand the potential. But there are always factors that have nothing to do with technology (I believe Google backed out of S.F.). How do you account for those factors? And, historically speaking, in technology being first doesn’t guarantee anything. What makes you so sure this is different?”

What makes TWER different, Don, is that the key to business fixed WiMAX is getting the best locations for antennas. To do that you need enough capital to sign a 40-year lease, or the Empire State Building won’t even talk to you. TWER has the locations already in about 15 cities and is identifying and negotiating another 15. There is no other competitor with the size or cash to compete. TWER will have the top cities locked up soon. Buy TWER under $6 for a $16 target.

Death of the Dollar

The dollar was weak in 2007 against both other currencies and real commodities like gold, silver, metals, grains, non-U.S. real estate and stocks. As Chairman Bernanke cuts and cuts rates over the next few months, the weakness against real commodities will continue. That’s inflation. But the weakness against other currencies might not be so dramatic if those central banks are printing paper money at the same furious clip. It’s going to be an interesting shift going forward. I still think that the yen and Canadian dollar will be very strong, while the pound and euro will go up against the dollar, but not as quickly as before. So if you are holding your cash in a foreign currency account, I would switch to the yen or Canadian dollar to ride out the next leg of dollar weakness.

Chris, a subscriber, is thinking one step beyond the death of the dollar. He looked at the November 15 signature link to www.lifeaftertheoilcrash.net and said: “It had a prolonged effect on me and I was wondering if you, as a person in whose opinion I ‘put some stock’ believe the ideas contained therein are worth taking zero, little, significant or major action in response. Your 2 cents?”

I take the implications very seriously, and they are worth taking major action. I’ll talk more about that in future issues — there is plenty of time. Meanwhile, you can read Garden Planet by William Kötke, or download his earlier version called The Final Empire free from http://www.rainbowbody.net/Finalempire/.

But don’t let it depress you — there is a very positive way to look at all this, whether it is peak oil, genetically engineered seeds or even global warming. Kötke is on the right track.

Birth of a Baby

Camellia Rose Murphy-Cunningham was born a week ago today, eight pounds five ounces, 21 ¼” long. Mother and daughter are doing well, and big sister Gwyneth (five years old, and a frequent Money Show attendee) is big sistering all over the place. I won’t be at the Orlando Money Show due to this blessed event, but I expect to be at Las Vegas. In fact, I may share the podium, as newly-responsible Gwyneth told me last night that she would help me do the presentation so I would have more time to change diapers.

We’re going to have a great 2008 together, and I hope something this good happens to you to kick off the new year. Heck, my Toyota Camry Hybrid just beat out the Prius for Hybrid of the Year! My cup runneth over.

Today, Isolagen (ILE) announced that their Chief Executive Officer has resigned, but he will stay on as non-executive Chairman of the Board and a consultant. They then promoted the Chief Operating Officer Declan Daly to CEO. Daly was also the Chief Financial Officer and will continue to act in that capacity until they can find a new one.

Moving the COO up to be CEO is not a big deal, especially when the company is moving well along its clinical path for its lead product, the Isolagen Process. The fact that he was also the CFO may have implied to some people that financial skills will be needed at the top immediately ahead; e.g., the Phase III trials for the Isolagen Process are going to fail. But we have no way to know that, and I doubt that the company even knows that, or they would have released the information. There was no conference call, but the company confirmed today that they will present at the JPMorgan Healthcare Conference on Thursday. I believe that they would have cancelled this presentation if there was some big problem with the trial.

In connection with the CEO’s resignation and vesting his stock options, Isolagen is required to record a non-cash compensation charge during the March quarter of about $1.3 million. The CEO’s unvested options will generate a non-cash charge of about $1.4 million in total over the next five fiscal quarters, beginning with the March quarter. Non-cash charges usually don’t upset Wall Street, especially since these options would have vested eventually anyway, generating similar or probably higher charges.

But Wall Street certainly is upset today — the stock is down almost 75% at the time of this writing. So here’s what to do:

BACK UP THE TRUCK!

If you already have a position in ILE, double up or triple up to get your average cost down. If not, and you can take the risk of a development-stage medical company that could have a clinical flop, buy the stock now. This should not be a huge portion of your portfolio, but at 65 cents a share, it has very little risk and a huge potential upside. I am not changing my $9 target price, as I expect to see that price after the Isolagen Process succeeds in clinical trials. I’ll have more on this in Thursday’s Radar Report.