Last week, we discussed the four successful tests of the S&P 500 1320 level, and it turned out that the S&P required yet another test down to 1326 last Friday to clear the decks. It then shot up to the top of the 1340-to-1370 range that has defined most of the action since the middle of January. And after pausing a day to let the swing traders make the mistake of going short at 1370, it broke through that level on Tuesday.

This is a very good setup for further gains on the S&P, as each dip like today’s back to the 1370 area, or maybe future tests down to 1340 or even to 1326, will bring the bears out of their caves to say: “I told you so.” And that maintains the Wall of Worry (based on sub-prime mortgages, the credit lockup, a recession and weak consumer spending — all old news) that lets the market climb higher and higher after each dip. I am still focused on 1395, 1440, 1555, 1880 and maybe 2100 as the next 14 months play out to an April 2009 top.

A while ago, some friends at Visa told me: “Don’t worry about the banks… when Visa files to go public, you’ll see huge gains on their Visa equity positions.” Visa, of course, is owned by the banks, and on Monday Visa filed what will be the largest IPO in history — $19 billion. That will obliterate the current record of $10.6 billion set by AT&T Wireless in 2000. The current #2 deal is Kraft Foods’ $8.7 billion IPO in 2001. The Visa deal will probably be bigger than both of them combined.

Will it sell? Visa is a card processor, not a lender, so they have no consumer default problems. In addition to being the largest U.S. card processor, they have a worldwide business with 1.5 billion credit cards outstanding and are in many countries that are still in the early days of using credit cards. MasterCard stock is up 400% since its IPO two years ago. So yes, the Visa IPO will sell out. The company will list on the New York Stock Exchange under the symbol “V.”

More than half of the initial proceeds, or about $10 billion, will go to selling shareholders like Citigroup, Bank of America and JPMorgan Chase. These companies will then use the dough to rebuild their balance sheets to offset mortgage credit losses, and, on top of this, they’ll still own lots of Visa’s stock so they can benefit from its move to a public market value.

This week, Congress raised the dollar limits on the amount of mortgages Fannie Mae and Freddie Mac can hold. Fed Chairman Bernanke virtually promised more rate cuts, saying that he would deal with inflation later. The new, much higher limit on the size of a mortgage that government entities can buy went into effect. So anyone who is worrying about these old-news issues is fighting not only the Fed but the current Administration, both houses of Congress and most of the Presidential candidates, all of whom are determined to paper over the mess and put off the day of reckoning. I think that they will be able to do that one last time, creating a major financial bubble over the next 14 months. Be fully invested in our stocks to take advantage of it.

Biotech MegaShift

CombinatoRx (CRXX) held their analyst day in New York recently. Overall, they raised guidance for 2008 to revenues of $15 million to $20 million; a net loss of $49 million to $55 million, excluding stock option expenses and depreciation; and ending cash and equivalents of $58 million to $64 million.

We should see clinical data from at least four programs:

• Crx-102: Phase IIb clinical data for arthritis, and publications demonstrating corticosteroid dissociation through CRx-102′s unique mechanism of action;
• Crx-191: Phase II clinical data for plaque psoriasis;
• Crx-197: Phase II clinical data for atopic dermatitis;
• Crx-401: Phase II clinical data in Type-2 diabetes.

The company will also decide what programs to advance into Phase I clinical trials. I expect Crx-808 for hepatitis C to make the cut. There are other compounds for B-cell cancers, skin diseases and eye diseases in development.

My thesis in recommending this stock was that their proprietary technology of combining two already-approved drugs would spin off a lot of product candidates that can be partnered, while lowering the scientific risk. The biggest risk in this approach is showing efficacy at a safe dosing level in Phase II trials. The second biggest risk is striking partnership deals that bring in cash to continue discovery efforts and also backend royalties that will get Wall Street excited. I think that we get paid this year, so buy CRXX under $7 for a $16 target after they have results from the Phase II trials and start announcing partners for Phase III trials.

eResearch (ERES) reported a very good December quarter, with sales up 45% to a record $28.9 million compared with the $28.6 million consensus. They did 10 cents a share, well over the eight-cent consensus. ERES guided revenues up for the March quarter, and they are now looking for $31 million to $33 million in revenues, compared with the consensus for $29.6 million, and eight cents to 10 cents a share, bracketing the nine-cent estimate. For the 2008, they said that revenues will hit $130 million to $137 million, well over the $122.1 million consensus, with earnings in the 42-cent to 46-cent range, again well over the 41-cent consensus.

The strong order growth that we have seen for several quarters, with record bookings in 2007, is finally translating into strong revenue growth. We seem to be in a new world where the old six-month delay between an order and the beginning of a clinical trial has stretched out to 12 to 15 months. But the delay has stabilized there, so we are finally getting the revenue growth that I expected to start two or three quarters ago. With the backlog up 45% from last year, growth will continue.

On the conference call, management said that prices are stabilizing, as demonstrated by their over-28% pre-tax profit margins. Their pipeline of new opportunities that have not yet turned into bookings is growing as the pharma and biotech companies focus on meeting the FDA’s cardiac safety requirements. The CEO said: “The overall clinical trials business environment for Cardiac Safety and the need for technology-based solutions in clinical trials are as healthy as we have seen in a long time.”

The stock was up $1.80 yesterday and today in response to the conference call, but this is just the beginning. There are lots of investors looking for revenue momentum, earnings momentum and/or upside surprises, and we should see them piling into ERES over the next year. ERES is both a Top Buy and a very timely buy up to my $16 buy limit, and I expect to see my $30 target price before the broad market peaks in April 2009.

Geron (GERN) reported this morning, with a $16.5-million loss for the quarter, or 22 cents a share. They have $208 million in cash and no debt. The big news, though, was not earnings; it was that they developed a stem cell therapy that enabled paralyzed rats to walk. There have been no dangerous side effects in 2,000 animal trials. The therapy uses human embryonic stem cells, and it is not complicated in theory. Myelin is a fatty substance that provides insulation for nerve fibers, which is important for motor function. When a spine is damaged, myelin is usually stripped off. Just as an electric cord shorts out when its insulation is peeled away, the missing myelin disrupts the body’s ability to transmit sensory signals, resulting in paralysis.

Embryonic stem cells can turn into any type of tissue in the body. For Geron’s rat studies, the stem cells were developed into oligodendrocytes. These cells help nerve fibers replace myelin.

Geron spent $150 million over 13 years perfecting this treatment for spinal injuries. More than 250,000 people in the U.S. have paralyzing spinal injuries, with about 11,000 new cases reported each year. It’s too bad Christopher Reeve couldn’t live long enough to see it approved. That will be a great day, if GERN can complete the long and winding road through the FDA.

The company has assembled a 25,000-page filing just to ask permission to begin Phase I trials. They will file in the first half of this year, with no decision expected before the anti-embryonic stem cell Bush Administration leaves office. McCain, Clinton, and Obama all oppose Bush’s limits on funding for human embryonic stem cells.

Under the current regime, Geron had to use stem cell colonies that were not exposed to mouse skin cells, commonly used to provide nutrients to the stem cell culture, but capable of transmitting viruses. The FDA also made Geron show that injected rats stayed free of tumors or other side effects for up to a year. Because the rats were so severely injured, they had no control over their bodily functions, so lab technicians had to empty each rat’s bladder three times a day by hand for the whole year to keep the rats’ kidneys from failing. The next time you hear someone complaining about their job, ask them if they’d rather be a lab tech at Geron.

The stock jumped about 8% on this news. I expect it to take a bigger jump when Geron files for the Phase I human clinical trial, and a huge move up when they have the results. Buy GERN up to $9 for my $18 target.

ViroPharma (VPHM) reported earnings yesterday, with Vancocin sales up to $47.7 million from $38.5 million last year, and 25 cents a share. Analysts were looking for a bit more revenue, $50.4 million, but only 20 cents a share. The smaller loss was attributed to the fact that management is sourcing Vancocin from a different and cheaper contract manufacturer.

For the year, Vancocin sales hit $203.8 million, up 22.2% from $166.6 million in 2006. Management guided for 2008 Vancocin sales in the $210 million to $235 million range. The consensus was at $210 million, so this was an increase. At the high end of the range, Vancocin would show 15% growth for the year. Say, wasn’t this drug supposed to be wiped out by a generic by now?

There’s been little movement on that front, with the FDA still “thinking about it” in terms of whether generic companies will have to do human clinical trials. The FDA ruled that they did not, whereupon ViroPharma filed a couple of devastating briefs with the Agency asking them to reverse the ruling. In order to be effective against c.difficile, Vancocin has to be released in a certain segment of the intestine. It seems a little hard for a generic to demonstrate that in a lab test.

Meanwhile, the company is working on their own follow-on drug for c.difficile, still looking for takeover or in-licensing opportunities, and pursuing Camvia for CMV infections as an orphan drug in the U.S. and Europe. They are very well-positioned, although that is not reflected in the stock’s price.

It could be that before moving this stock up, Wall Street will wait for the FDA to formally say that they are withdrawing the generic Vancocin rules, or wait for ViroPharma to do an acquisition. In regard to the latter, the CEO has resigned to be with his family in France, and the CFO was promoted to CEO. Now, why would the right guy for the top slot right now be a financial guy? Answer: The company is going to do a big acquisition. You need to own it before that happens. Buy VPHM up to $12 for my $25 target.

New Energy Technology MegaShift

Oil prices broke through a new intraday high of $102 a barrel yesterday, due in part to another decline in the U.S. dollar and in part to a realization that any U.S. slowdown will be shallow and brief due to all of the government stimulus, both fiscal (thank you, Congress) and monetary (thank you, Bernanke Fed), being thrown at the economy. China and India are not slowing down, so energy consumption is headed up. I think that it is only a matter of time before all of our New Energy Technology stocks are recognized as living in a new world of permanently elevated petroleum prices.

Rentech (RTK) sent a President’s letter to shareholders outlining their strategy for getting coal-to-oil into mainstream production. Basically, they are paying the most attention to what to do with the carbon dioxide created by the process. In the Natchez plant, they will sell it for use in an industrial process. In other plants, it may have to be sequestered underground. A lot of venture capitalists are working on ways to use or fix carbon dioxide, and that work doesn’t cost RTK a penny.

Seward asked: “Oil is $100 a barrel and, while solar stocks have pulled back from their crazy highs, their performance indicates that alternative energy is of interest to the investing public. Would you do us the favor of discussing why Rentech has no traction in this market?”

Seward, I think that it is this carbon dioxide issue. Oil at these prices leaves lots of profit margin to invest in sequestering carbon dioxide, but a lot of investors would like to see a technology solution to get rid of it.

Carolyn wanted to know: “What event do you think is on the near-term horizon that will move that stock in a positive direction?”

There are at least two. One is the opening of their pilot plant in Colorado. The second is a contract from the Department of Defense for jet fuel. In addition to those, look for more contracts with coal companies as an additional driver for the stock.

Finally, Fred asked about Headwaters (HW) as a competitor to RTK. Headwaters has a wide range of businesses including architectural stone veneer and building materials, but the Hydrocarbon Technologies division focuses on upgrading heavy oil to a lighter, more valuable grade. They are applying some of that technology to coal liquefaction, providing coal to utilities in a form that, when burned, meets the EPA standards.

Their direct competition with Rentech is a project that they are doing with the Chinese government to convert coal to a synthetic diesel/jet fuel. I think there are issues with pollution and probably economics that make this process less competitive with RTK than appears on the surface. But I will watch Headwaters with interest, and may even recommend it some day, even though it is not nearly as pure a play on coal-to-synthetic fuel as Rentech. For now, buy RTK up to $4 for my $8 target.

WiMAX MegaShift

Airspan (AIRN) reported earnings last night, and the news was not good. Their legacy (non-WiMAX) products had very weak sales. For the December quarter, revenues fell 24% from last year, from $31.3 million down to $23.8 million. That was near the analyst consensus for $23.9 million. But the company lost 14 cents a share, compared with 10 cents last year and analyst expectations for an eight-cent loss. Stronger WiMAX sales growth might have made up for the rapid decline in legacy equipment sales, but that didn’t happen. The company guided for a seasonally weak March quarter, with sales of $20 million to $21 million, well below consensus expectations for $25.5 million.

The good news is that WiMAX accounted for 80% of their revenues in the December quarter, and it is growing 40% per year. The legacy business can’t drag them down much longer. In a December report, the market research firm Infonetics ranked Airspan #2 in equipment shipments across the spectrum, and #1 for certified, compliant mobile WiMAX equipment. Infonetics says that the industry is on an 80% annual growth rate path through 2010.

Due to the earnings report, AIRN was hit today, down 26 cents. I am reluctantly bringing my buy limit and target price down to reflect current market levels, but I still think owning the #2 company in WiMAX equipment is a great idea. Buy AIRN up to $3 for an $8 target.

Over the past few weeks and even months, we’ve been talking a lot about crucial levels on the S&P 500, tests of these levels, the all-too-familiar 1440 level and the March 22 turn date. Well, over the past two weeks we’ve had some important tests of 1340, and the 1440 level may now be back on the table.

On Monday, February 11, the S&P 500 dropped to 1320 before bouncing back to close at 1339.13. The next day the market did not trade below 1336, and it closed with a 10-point gain. Then the 1340 level was tested a second time last Friday, and the S&P bounced up 10 points. And yesterday, there was a hard test down to 1336, which was promptly rejected by a 24-point rally to close at 1360. Today we witnessed another test of 1340, which should be completed tomorrow morning.

With four tests of the 1340 level completed, what I expect next is a 100-point move up to 1440. It is typical for three or four successful tests in a row to mean that the market has found a real support level, and that it will then go up to find out where the resistance lies. There will be at least a pause around 1395, and maybe even a test back down to 1370. And I would not be surprised to see the bottom of that testing process coincide with my March 22 turn date, followed by a rapid move up to 1440.

After that, what happens at 1440 will be very important for the rest of the year. If a wave of stock selling appears and the bears take command, the market will give a “kiss goodbye” to the 1440 level and fall off quickly down to new lows below 1270. I still think that it is far more likely that after some consolidation around 1440, which could include a trip back down to 1410 or even 1395, we will see a blast-off to new highs over 1563 in the near term, and 1900 to 2100 by April 2009. I know others are saying that we are already in a recession, even though December-quarter GDP growth was positive and is likely to be revised higher. Some are saying that we are in the fifth month of a bear market, even though the S&P is just 13% off its high, which is normal correction territory. As you know, I prefer to let the market tell us what to do. And a big rally from here will mean there will not be a recession, while a move to new highs will send the bears scrambling to get invested. In that environment, our stocks should do very, very well.

Now, let’s catch up with some of our holdings, as earnings and other important news have been reported recently.

Biotech MegaShift

Amgen (AMGN) will not be hurt at all by the long-awaited Center for Medicare Services (CMS) report to Congress on bundling end-stage renal disease costs. In truth, the company will be helped — in direct contrast to what the bears were expecting. CMS pays for dialysis services under a composite payment rate that covers treatment expenses. The dialysis centers then bill Medicare separately for the cost of drugs like Amgen’s Epogen and Aranesp, laboratory services and some other items. Under the Medicare Modernization Act, Congress wanted to see a comprehensive bundled rate plan. CMS came up with a doctor-driven, flexible plan that includes reimbursement for Amgen at current rates, and incorporates a dozen variables like body mass index, gender, age and so forth. The good news for Amgen is that the plan includes a quality assurance component to be sure that patients are being treated adequately, and this should lead to increased use of Amgen’s drugs as doctors carefully review adequate dosages given the dozen variables that can justify higher usage.

If the plan is accepted this year, it would be implemented in 2011 at the earliest. So this is not a near-term driver for Amgen’s earnings, but it is a resolution of an issue that the bears were using to beat up on the stock.

The next and last big issue to be resolved is the March 13 FDA panel meeting to consider stricter labeling of Epogen and Aranesp in cancers, or maybe contraindication in specific tumor types. As I’ve said before, I expect Amgen to come through this essentially unscathed. No matter what happens, the issue will be resolved and no longer hanging over the company’s head (and stock price). AMGN is the cheapest major biotech stock by far, and any institution looking for a defensive healthcare stock to add to their portfolio will have no excuse not to buy it after March 13. I think the rally will begin March 14 at the latest, and you can still buy the Amgen January 2009 $70 LEAP call (VAMAN) all the way up to $12.50, for a $25 target price when AMGN stock hits $95, on or before the LEAPs expire.

Sequenom (SQNM) reported $11.1 million in sales for the December quarter, up 41% from last year. That brought them in at $41.0 million for the full year, up 44% from 2006. They lost 13 cents pro forma for the quarter.

The company ended the year with $53 million in cash, and they will burn about half of that in 2008. They are almost doubling their R&D spending from $14 million in 2007 to $26 million to $28 million in 2008, with a specific focus on prenatal diagnostics. Their Down syndrome test is now over 95% sensitivity and 99% specificity, which is better than other non-invasive tests like nuchal ultrasound imaging (the test that we used for my new daughter, as an alternative to amniocenteses). The test will be marketed around the end of 2008 or early 2009.

In addition, Sequenom’s Rhesus (Rh) D test, which determines the compatibility of a pregnant woman and her fetus, has already been approved by New York State as a Laboratory Developed Test, and it will be migrated to the company’s MassARRAY screening platform by mid-year. They will then do a 550-patient study at Baylor College of Medicine, and samples from the study will be used to support Sequenom’s application for FDA approval. A prenatal gender test will be launched by the end of September. All of these tests can be performed at once using only a small sample of maternal blood.

By this time next year, SQNM will have three prenatal diagnostic tests generating revenues. So the company expects to report $53 million to $56 million in sales in 2008, up 30% to 37%, with better gross profit margins. I am keeping SQNM as a hold and raising the target price again to $12.

QLT (QLTI) reported $30.9 million in December-quarter revenues this morning, beating the $29.1 million consensus. And they lost two cents a share, which was right on the consensus. Visudyne sales for the quarter were $45.5 million, down 40.5% from the December 2006 quarter. But here’s the good news and an early sign of the turn in Visudyne sales that I’ve been waiting for: Sales for the December 2007 quarter in the U.S. were $10.0 million, up 9.2% from the December 2006 quarter. Because Lucentis was approved overseas about a year after the U.S. approval, Visudyne sales outside the U.S. were down 47.2% to $35.5 million.

For all of 2007, worldwide Visudyne sales were $214.9 million, down 39.3% from 2006. U.S. sales dropped 45.1% and non-U.S. sales dropped 37.8%. Obviously, sales outside the U.S. will continue to decline in the first half of 2008 as the full impact of recently-approved competitive therapies gets into the market. On the conference call, management said that Visudyne worldwide sales will range from $145 million to $160 million in 2008, and they will get 20% of the profits. But if the company can build on the turn in U.S. sales in the December quarter, we can expect non-U.S. sales to follow. The big RADICAL combination study of Visudyne and Lucentis will complete enrollment in the first half of the year, with six-month results expected in the December 2008 quarter. I expect the results to be very positive for Visudyne, with combination treatment becoming the standard of care.

Worldwide Eligard sales hit $48.1 million in the December quarter, up 31.4% from last year. For all of 2007, Eligard sales were $180.9 million, up almost 50% from 2006. And QLT guided for Eligard sales over $200 million this year, which I take to mean: way over $200 million.

We’ve had a long slog with this stock because I recommended it too early. I wanted to own it when combination therapy is shown to be the right way to treat age-related macular degeneration, but I should have waited until now to recommend it. With the uptick in U.S. sales in the December quarter and the RADICAL study results coming this year, QLTI looks very cheap up to my $6 buy limit for a $12 target after the RADICAL data is released.

Content on Demand

Telkonet (TKO) did a dilutive warrant price reset, reducing the exercise price of warrants to purchase about 3.4 million shares from $4.17 a share to 70 cents. TKO will take a one-time non-cash charge of approximately $1.7 million. I am waiting to hear why they thought this was a good idea — judging by the SEC filing, they may have gotten rid of some portion of the remaining warrants.

Then they sold 2.5 million shares to a private investor at 60 cents a share and used the proceeds to pay off a $1.5 million senior note that came due at the end of January. This will give them more financial flexibility, and they immediately established a $2.5 million accounts receivable line of credit.

I don’t know if you have ever seen a circus parade come through town, but prior management was like the ringmaster at the front of the parade. A necessary job of the new management is to walk behind the elephants, cleaning up. That’s what’s going on here, and I don’t think it will make much difference to the outcome of our investment. TKO remains a Top Buy up to $5 for my $15 target.

New Energy Technology MegaShift

Well, with gold at an all-time high of $952, platinum skyrocketing and soybeans at record levels, you can say that $100 oil either shows how big the petroleum imbalance is or you can say it’s just the dollar hitting new lows. Given that oil is priced in dollars, it’s tempting to conclude that this is just more fallout from the Bernanke-led death of the dollar, but I think it goes deeper than that. With the Tata Motors unleashing their $2,500 Nano car on India’s 700 million would-be drivers, it’s hard to imagine that the demand for petroleum products is going to go down much, even in a real U.S. recession.

We will see regular unleaded prices in the $3.50 to $3.75 range in April and May, and $4 in the San Francisco Bay Area. That should set off another round of stock price escalation in the alternative energy sector.

Infinity Energy Resources (IFNY) has been cut in half over the last month on no news, since they closed the asset sale to Forest Oil. I’ve had a lot of questions about what might be causing this, and I’ve looked a lot of places, but I can’t find anything. The company has a delisting notice because the stock is under $1 a share — perhaps that is worrying some folks. The company still has lots of upside in Texas, significant acreage in the Rockies, and the Nicaraguan concession is still there. I’m reducing the buy limit to $2 to reflect the current market level, but I see no reason to change the $7 target price, based on the likely value of their Nicaraguan holdings.

Security MegaShift

American Science & Engineering (ASEI) reported another lumpy quarter, with revenues down 11% to $42.6 million and 43 cents per share — that’s half of last year’s 86 cents and well under the consensus for 62 cents. So, the stock traded up the next day! Why? Because business is good. ASEI saw $45.8 million in orders for the quarter, with 71% of those from international customers, and their backlog hit another record high at $125.5 million. Inventories were up because they have installed systems that are sitting at customers and awaiting acceptance. New programs are coming along and getting funded, and as long as there are terrorists, this company will continue to do just fine.

There was a 12-cent-per-share write-off this quarter, so the earnings miss was not as big as it looked. Their main problem is that their fastest-growing product lines still have lower gross profit margins, because they have not yet moved far enough along the manufacturing learning curve to get significant cost reductions. They are not “slashing prices to move new products” as one off-base commentator suggested. They are simply forward pricing to be competitive, and working on bringing down costs to improve profitability. ASEI is trading just under my $59 buy limit, and remains a Top Buy for my $93 target.

Packeteer (PKTR) won’t give guidance, but they have led one to a forecast for 10% year-over-year growth for the March quarter. However, I think CEO Dave Cote is carefully setting the bar at a level that doesn’t look awful, but will be easy to beat. Given the trends in their Internet traffic management market, I think they’ll be up 20% this year to around $175 million in sales. PKTR is a buy under $9 for my $20 target, possibly in a buyout.

SiRF Technology (SIRF) reported a disappointing December quarter, as I covered a couple of weeks ago in a Radar Report. I wanted to add to that, though, because I’ve been disturbed by Wall Street’s almost violent reaction to the conference call. Yes, the earnings were disappointing. As I said, it was a terrible call because management was terse and seemed uncooperative in helping the Street figure out what was going on. Yes, the March-quarter guidance was also disappointingly low.

But here’s where the company really is:

• SIRF reported December-quarter revenues of $100.4 million, a $600,000 shortfall compared with the consensus for $101 million.
• They did 28 cents a share, a four-cent shortfall from the 32-cent consensus.
• In response, Wall Street took 55% off the stock’s price, or over $500 million in market value. For a $600,000 shortfall?
• Fourth-quarter profit margins were low because there is a high mix of sales of low-end chips to Asian “white box” or no-name GPS manufacturers for the holidays.
• First-quarter sales are going to be sequentially lower to reflect the absence of that same white box business.
• The company is the clear leader in GPS chips.
• They are making an important transition to “GPS + processor” chips, which will get them into higher-value products and very high-volume markets, like smart phones.
• Their patent portfolio and current product lines are worth at least $13 in a buyout, and the stock is at about half of that now.
• The stock closed today at $6.80, and they have $2.30 a share in cash, no debt and are profitable.
• Even after reducing expectations, they will do over $6 a share in sales in 2008.
• Taking out the cash, the stock is selling for less than 9X the depressed 55-cent earnings estimate for 2008.
• Sales in 2009 are expected to be up 16% — I think that’s low — with earnings up 40%… as estimated by Street analysts who now hate the stock.

I’d make SIRF a Top Buy immediately, except that they are going to run a small loss or breakeven in the March quarter. They are a supplier to Research in Motion’s BlackBerry and have design wins at Motorola for a smartphone and Lenovo for a laptop. It is obvious that if the conference call had gone better and SIRF had explained how they are going to fix their problems, the stock would literally double from today’s close.

As I said two weeks ago, I still think SiRF will hit my target after the new products go into volume production. I’ve lowered my buy limit to $12 — far above today’s close –and my target to $28.

Death of the Dollar

Gold is closing in on $1,000 an ounce, and that may be the high for the rest of this year. Remember that gold doesn’t really go up in value, it is the dollar that goes down, and so it requires more of them to buy an ounce of gold.

Of course, it is not just dollars. Other central banks are printing paper money at an amazing clip. The British government has “solved” the Northern Rock problem that I discussed way back in the September 20, 2007, Radar Report: They just nationalized the bank. It’s the first time a private company has been taken into public ownership in over 20 years.

There is no equity left, so the shareholders deserve nothing. But what will they get? That’s the question. In the give-away, its-not-my-fault Western culture that we somehow have evolved into, we wouldn’t want the little guy to get hurt, right? So the British government will transfer wealth from taxpayers to private shareholders — wait and see.

The next disaster you will hear about is in the municipal bond market, where brokers have virtually stopped making markets even in perfectly good credits. For example, in a recent auction of variable-rate high-grade tax-free municipal bonds from the Port of New York & New Jersey, the borrower had to pay an annualized rate of 20% to roll a one week reset loan. Watch the closed-end muni funds, which run leveraged up to 3-to-1 to get a higher tax-free yield. Often the bonds were all insured so that the broker was selling a product that was labeled AAA. Sound familiar? A lot of the individual holders of these bonds only check their brokerage statement once a month, just to make sure that their “safe” AAA-rated investments are doing OK. It will be headline news when the downgrades hit, and overseas you will see even less belief that the dollar and U.S. investments are sound.

First, my apologies for the curtailed Radar Report last week. A truck hit a power pole — actually, the power pole — that feeds electricity to my whole valley early Thursday morning, and it was 14 hours before we had power again. I haven’t moved my backup propane generator to the new house yet, so the whole Radar Report was trapped on my very quiet hard disk. Maybe this was the Money Show gods telling me that I should have been in Orlando last week. OK, I surrender; I’ll be at the Las Vegas Money Show, May 12 to 15.

Now the big news this week is President Bush signing the economic stimulus package, but it isn’t because of the tax rebate checks going in the mail in May. People are so worried that a lot of these checks will be saved or used to pay down credit cards. And the money that is actually spent will clear out some inventories that may or may not be replaced, given that businesses are just as worried about the economy as consumers and know this is a one-shot stimulus.

The important part of the bill is the sharp increase in the dollar limit for what qualifies as a conventional mortgage that can be sold to or guaranteed by a government entity, versus what gets labeled a jumbo mortgage that no one wants to offer right now. The $417,000 conventional limit on an 80% mortgage covered a $521,000 house. In many parts of California, the Chicago area, Connecticut, New York City and elsewhere, that doesn’t buy you much. The new limit of $729,750 in high-cost areas will cover a $912,000 house with 20% down, so the whole $500,000 to $1 million bracket is about to “unlock.” Combined with the number of foreign buyers able to buy at a 20% to 30% perceived discount due to the weak dollar, the response should be immediate.

I suspect this is coming too late to save the AAA credit ratings of mortgage insurance companies like Ambac and MBIA by itself, yet the Fed cannot allow them to be downgraded. If a mortgage insurance company loses its Triple A rating, then all the paper that it insured also gets downgraded. All of a sudden, the banks holding this stuff are required to put up a lot more equity to cover the lower-rated assets — equity they don’t have, especially after writing off a large portion of their sub-prime loans.

I read a wonderful “the-sky-is-falling” comment on this situation: “This could be the bank crisis that rivals the 1920′s, that led to the Glass Steagall Act, that started the FDIC and the government’s insuring of bank deposits. If Ambac and MBIA are allowed to lose AAA status, many commercial banks will be faced with capital risk concerns, which will stifle lending, and partially shut down the credit function in the United States…The ramifications could be the onslaught of an economic depression, not recession.”

As if the Fed is not about to step in with some sort of pooled plan to guarantee Ambac and MBIA, thus letting Moody’s and S&P maintain the fiction that these are AAA credits. They used public money to save the Savings & Loans in the late ’80s, and they’ll do it again to save the bond insurers. The Fed is owned by the banks, for heaven’s sake — who do you think they look out for? The unwritten rule in America is: Privatize your gains, socialize your losses. They have already let banks borrow at the special Term Auction Facility (TAF) window to meet their reserve requirements. Another $30 billion went out through the TAF this week, and you’ll see a second $30 billion go before February is over.

The government will prompt outside money like the Middle East soverign (government) funds to come in, too. Also note that Warren Buffet is lining up with the Fed to reinsure municipal bonds held by Ambac and MBIA. Anyone who thinks Treasury Secretary Paulson (ex-Goldman Sachs) and Fed Chairman Bernanke aren’t aware of the problem and don’t have plans to avoid “the onslaught of an economic depression” is welcome to bet against the Fed. But don’t you get suckered into taking that wager.

There’s little difference between a shallow recession and no recession, so it amazes me how many people are eager to say that we are in a recession already, when they have so little evidence of that yet. The December-quarter GDP growth rate is likely to be revised up from the 0.6% preliminary estimate due to inventory accumulation. And this week’s news that retail sales rose 0.3% in January instead of dropping 0.2% as the consensus forecast should give the recesison bears a pause — but it probably won’t.

The best forecaster of recessions is the S&P 500, and as I said in Tuesday’s Flash Alert, it may be about to give a definite signal that the recession everyone fears is not going to happen. Yesterday’s close virtually right at the key 1368 level needs to be followed by a push over 1380 soon. Remember that last Tuesday the Index dropped from 1380 to 1336 in one day, seting up the test of support at 1326. This consolidation and testing process has built up more than enough energy to make a big move up. Tomorrow is options expiration day, and not much is likely to happen. But if the upturn gets underway early next week, there is a very large short interest and once the S&P goes over 1395, shorts will cover and the Index will woosh up to — surprise — 1440. The consolidation around 1440 will tell us if the S&P is headed for 1495 right away, to be followed by a record close over 1555, or if there will be more backing and filling until the March 22 turn date. After that, I think new highs are a lock. I’ll continue to keep you posted on the situation in Radar Reports and Flash Alerts when necessary.

But now, let’s take a look at what’s been happening with our MegaShift holdings. We’ve had a lot of companies report earnings, as well as a lot of subscriber quesitons this week and more from last week that I couldn’t get to. So let’s address some real news instead of worrying that the U.S. financial system is about to fall into a deep depression because Paulson and Bernanke haven’t noticed that there’s something wrong.

Avian Flu MegaShift

Crucell (CRXL) reported their preannounced December quarter, with decent results that fell short of their original guidance, but then made a surprise announcement that they are ending their West Nile virus program. There’s nothing wrong with the vaccine, but the U.S. market has fallen from 10,000 infections in 2003 to only 3,000 today. This was a major program, even if only a small part of the potential future value of the company. But the stock was not hurt after the announcement Tuesday morning.

Total revenue grew 51.2% for the year to $311.5 million, and operating cash flow hit $75.3 million in the December quarter, bringing the year into the black at $32.4 million. In 2006 Crucell had negative operating cash flow of $78.9 million, so this was a significant turnaround. Management said that they would get cash flow positive, they just didn’t hit the even higher numbers that they were targeting. For 2008, they said to look for 20% growth in both revenues and operating income.

The biggest driver of the upturn was the successful launch of Quinvaxem, a 5-in-1 vaccine for children. I am very much opposed to vaccines like this, which put children’s lives at risk just to save the cost of administering the vaccines separately. The shots also are typically given before a child has much of an immune system, which I think both increases the risks of serious side effects, including death, and weakens their immune systems in the long run. But others do not agree with me, and as long as the Gates Foundation is pouring money into less developed countries to vaccinate their children, Crucell will do well even if the children don’t.

In regards to ending the West Nile virus program, this was a big negative surprise. Given the numbers, management probably made the right decision, although one can hope that a smaller firm or nonprofit picks up the program just to eventually provide relief for patients who become infected. Wall Street seemed happy enough with the company’s guidance, though, to overlook the termination of the West Nile virus program.

Crucell looks awfully cheap to me. So I’m trimming the buy limit on CRXL to $17 to reflect the current market, but leaving the $35 target unchanged.

Biotech MegaShift

Amgen (AMGN) was supposed to do a business update call yesterday, according to CallStreet, but the reporting service had it wrong. The next major event is the March 13 FDA panel meeting, and I expect the company to come out of this last hurdle unscathed. Continue to buy the Amgen January 2009 $70 LEAP calls (VAMAN) up to $12.50 for a $25 target.

eResearch (ERES) drew a question from an anonymous subscriber: “You referenced in particular Blum Capital’s support — were you aware he sold over 1 million shares as of December 31?”

Blum Capital did file a Form 4 regarding the disposal of two blocks of stock, one for 676,743 shares and the other for 449,400 shares. However, they did not sell these. They distributed them to a limited partner on December 31. Usually, this means the limited partner left the fund for some reason, often an estate situation. The money manager lets the limited partner take shares rather than cash, in part to avoid the transaction costs of selling stock, and in part to avoid sending a message that they no longer like a large position. Furthermore, we don’t know if the limited partner got to pick and choose (not uncommon) or if Blum Capital decided to use ERES stock to fund the withdrawal. So there really is no way to draw an accurate message out of it.

ERES will report earnings on February 26, and I think that they will beat the Street consensus for $28.6 million in sales and eight cents a share. ERES remains a Top Buy before the earnings report up to $16 for my $30 target.

China MegaShift

The Capitalist Miracle took a hit last week as the Chinese government reverted to its pre-market reform era and froze electricity prices after earlier capping coal prices. The recent freak snowstorms in China, where one inch of snow brought many cities to their knees, also caught the utility companies with low coal stocks, in part because mines shut down rather than continue to sell coal at regulated prices. The idea that Beijing can regulate prices in major sectors of the economy and not cause shortages is absurd, but they seem determined to try in order to hold down inflation. I have a better suggestion for holding down inflation: Stop printing money at 18% per year! I understand why they want to weaken the yuan as fast as Bernanke is weakening the dollar, but it isn’t going to work. Their inflation spike is mostly in food and utilities, which affects the poor most severely, so they’ll freeze food prices and shift the pain to farmers, who will then cut output or switch to freely-traded crops. Ah, the command economy…such a hard idea to keep under the rock where it belongs.

To cope with the electricity shortages, thousands of trainloads of coal were rushed to utility power stations. Hundreds of mines were told to continue operating even through the Lunar New Year holiday. But the price of coal is expected to as much as double in 2008, and the government hasn’t said how the power companies are expected to cope. Huaneng Power (HNP) is down $14 or 28% from where we sold it in July 2007, yet I have no desire to lead you back into this stock in the current environment.

I assume that in a strong U.S. stock rally, Chinese stocks will participate. But I am glad that we are out of harm’s way for now, as they grapple with their inflation and political problems, while still keeping a good face on everything at least through the Summer Olympics. The government keeps gasoline and diesel prices low, and consequently fuel consumption is growing at 20% a year, and they import almost all of it. As crude oil prices went up, refineries were squeezed and stopped expanding capacity. Result: A diesel shortage in October that had truckers lined up at filling stations like a Mad Max movie, and a 10% price increase in November.

I would not be surprised if the government’s intervention and energy price caps cause power shortages and general disruption that ultimately increase inflation. Can political crackdowns be far behind?

Content on Demand MegaShift

Akamai Networks (AKAM) reported a great quarter last week, hitting $183.2 million in sales, up 14% from last year and well ahead of expectations for $174.6 million. Net income was up 47% from the September quarter, and they did 41 cents a share pro forma versus 21 cents last year. They now have 2,645 long-term contract customers, up 13% from last year. Their average customer now spends more than $275,000 per year with Akamai, and they have over 100 customers who spend more than $1 million a year. All the concerns about slowing growth and price competition were just blown away.

On the conference call, management attributed the strength in the quarter to “rich media” (in other words, video) “performing beyond expectations” and named the iTunes movie store as a major customer. They said that high-definition video is not yet a major factor, but in three to five years it would be a huge revenue generator. The video gaming market showed very strong growth. In response to a question about the rumor that Akamai would get into the ad-serving business, they gave a flat “no” and added that they do not compete with their customers.

In a really refreshing response to a question, management said that the company is unlikely to be hurt by an economic slowdown and may be positively affected as companies try to cut costs by moving more operations to the Internet. The stock moved into the $30s on this news, and AKAM is an excellent buy up to my $36 limit for the $60 target.

Harmonic (HLIT) has been weak, and I know only one possible reason why. Business is great in content on demand, as the Akamai results suggest, and Harmonic is better managed now than ever. But the company will probably move from untaxed to fully taxed reporting next year, and maybe Wall Street is worried about the reported numbers being flattish for a year. Note that this does not affect cash — Harmonic will continue to use tax-loss carryforwards to offset nominal taxes due. Normally, Wall Street understands this transition and does not penalize a stock for it. After all, it means that the accountants and board have decided that the company is likely to remain continuously profitable in the future, and therefore needs to start reporting taxed results.

During this transition, the key to the stock will be revenue growth. Right now, the consensus revenue estimates are for a 13% growth rate in 2009. That is laughably low — 26% is closer to reality. As long as HLIT can keep clobbering the revenue estimates, I don’t think that the stock will be hurt by the change in tax rate. I expect management to make this point every quarter, and they will probably give a comparably-taxed earnings growth rate just to make sure Wall Street gets it. Buy HLIT up to $12 for my $18 target.

Intel (INTC) unveiled their new phase change memory technology at the International Solid State Circuits Conference in San Francisco. This is the Ovonic Memory technology that is owned in part by Energy Conversion Devices (ENER). Intel has figured out a way to double the capacity of the memory. Phase change will replace NOR flash memory in cell phones and computers, and it may eventually replace NAND flash memory for digital cameras and MP3 players. But I won’t hold my breath on the NAND flash market, as I’ve been through too many of these “fabulous new memory” technologies that never could catch up to the existing technologies as they marched down the cost curve following Moore’s Law. I do think that Intel will make phase change a success, and the market currently values it at zero for ENER (or maybe a little less, since it uses some cash).

And the Service Pack 1 release for Windows Vista should drive personal computer sales for the rest of the year. Intel is very attractive at current levels, so continue to buy the January 2009 LEAP calls with a $22.50 strike price (VNLAX) under $6. The target price is $12.50 at expiration, over 500% on your money.

Motorola (MOT) is thinking of selling its cell phone operations, or maybe even breaking up into three companies. At the same time, Carl Icahn is going to start another proxy fight. With Ed Zander out, I think it is likely that there will be a big transaction or two at substantially higher prices. The stock jumped 10% on the news, but then backed off.

This is the process that we have been waiting for, and we are entering the payoff zone. Motorola and Nortel Networks are rumored to be in talks to merge their wireless infrastructure businesses, while Samsung has said that they are not interested in buying Motorola’s mobile phone operations. It will take six months to a year to get everything cashed out, and there will be lots of rumors and volatility along the way. Our LEAP calls are selling for peanuts, but I still think that the value of the company is in the $28 area in a breakup, so use this weakness to average down in the Motorola January 2009 $17.50 LEAP calls (VMAAW), looking for a final buyout price in the $28 area and making the calls worth my $10.50 target in January 2009.

Silicon Image (SIMG) reported a weak quarter, showing $85.3 million in sales compared with $86.3 million in the September period, and $87 million last year. But real results were even weaker than that, because the company used to defer sales in the last month of each quarter as the distribution channel couldn’t tell SIMG what their sell-through was. This quarter, they fixed that problem and added $6.7 million in December revenues, making them not comparable with prior periods. For the whole year, consumer electronics sales grew 24% and SIMG has a 57% gross profit margin — not too shabby.

But they guided below estimates for the first quarter, forecasting $61 million to $63 million in sales compared with the consensus for $69.2 million. They said that the year would come in at $270 million to $290 million, versus the consensus for $308.6 million. Management said that this is a “transitional” year as they complete and introduce a five-pin chip to connect mobile devices to high-definition TVs. That product will sell in volume in 2009.

The company has a ton of cash and no debt. They accelerated their current stock repurchase program, which is $62 million remaining on the original $100-million authorization, and said that the Board has authorized a second $100-million program.

Besides that, the story sounds like dead money, except yesterday when Artisan Partners disclosed a 5.2% stake. Artisan is an “activist” fund, and SIMG jumped over 11% on a whopping 10 million shares. I am cutting the buy limit to $8 and the target price to $16, because that is what the real value of the company is, whether in a takeover or on its own.

New World Economy MegaShift

CNET Networks (CNET) also reported a better-than-expected quarter last week, with $125.5 million in sales, up 11% year-over-year, and ahead of the $122.6 million estimate. Operating earnings hit 15 cents a share versus 12 cents last year. The reported number actually was $1.33 a share due to a huge tax benefit, and on that basis, analysts were looking for $1.29.

CNET guided for 8% to 13% growth this year, to between $440 million and $460 million, with pro forma profits in the 12- to 14-cent-per-share range. The consensus was looking for $447 million and 14 cents.

But for the March quarter CNET expects a pro forma loss of two or three cents a share on $91 million to $95 million in sales. That was a bit below analyst forecasts for a penny loss on $98.7 million in sales. But the stock did well anyway, in part because of a rumor that Google will buy them (I doubt it) and in part because hedge fund Jana Partners is leading a group of dissident shareholders to get control of the Board.

I think CNET is on the right track, and I hope that they stay independent. I don’t see much risk in the stock, and whether they earn their way out of the doldrums, get bought by Google (or Microsoft) or get split up by Jana Partners, CNET is a low-risk buy up to $9 for my $17 target.

Next Week’s Radar Report

I’ll cover the reports from Energy Conversion Devices, Rentech (RTK), iRobot (IRBT), American Science & Engineering (ASEI), Alvarion (ALVR) and numerous others next week. I also hope to get back on track answering your recent questions, but earnings season is always a big crunch time. Thank you for your patience as I listen to conference calls and analyze the results.

Death of the Dollar

Currency traders are betting that the Fed rate cuts will goose the U.S. economy as Europe slows, so they’re going long the dollar. It’s interesting that while the stock market worries about recession and the larger bond market shows no worries about inflation, the largest-of-all currency markets are betting on a stronger economy. The consensus forecast of 31 currency analysts surveyed by Bloomberg is that the dollar will gain 5.4% against the euro by the end of 2008 and another 6% in 2009. For perspective, the dollar fell 11.4% in 2006 against the euro, and 10.6% in 2007 for a cumulative drop of 19.9%.

I think that the forecasters are wrong and also focused on the wrong thing. It is true that the European Central Bank (ECB) is lending huge amounts of money to their banks to maintain liquidity, making our Fed look like Scrooge in comparison. The ECB has already pumped $623 billion into the banks, and they are letting the banks post collateral that includes about $500 billion in asset-backed paper, including sub-prime mortgage loan paper at face value. That means the banks have a few hundred billion in write-offs to take, but the ECB will let them spread it over many years.

The banks themselves don’t want to lend to each other, because no one knows who is in big trouble until they ‘fess up to some write downs. I believe that the rumors are true that one of the largest European banks is legally busted, with a negative book value if they wrote off their bad mortgage paper, as the U.S. banks have started to do. But, like Citigroup and Wells Fargo in the late ’80s, the regulators will paper over it, and there will be no day of reckoning.

The papering-over process tends to create a strong economy as liquidity is pumped into the system and interest rates are held low. The main reason that I think the euro will remain strong against the dollar is that the Europeans started with a budget closer to balanced, and they rely more on monetary policy than fiscal policy to save their banks while avoiding a serious recession.

In contrast, the record $3.1 trillion budget just proposed by President Bush will produce record deficits, and that’s before adjusting for his proposed spending cuts on Medicare and proposed elimination of dozens of popular domestic programs that will never happen. He proposed killing or sharply cutting about 150 programs to save $18 billion in 2009, including eliminating community services grants to nonprofit groups that help the poor, a food program for low-income seniors, the $283-million program to help people make their homes more energy efficient, grants to states to keep illegal immigrants convicted of felonies in jail, clean water grants, funding for local law enforcement, and homeland security grants to states and local governments. Funding for the food program for low-income pregnant women and their children would be frozen in spite of skyrocketing food costs, as would funding for health research by the National Institutes of Health. Many of those cuts have been proposed and rejected by Congress before, so this is all show. He would increase spending for a few programs, such as abstinence education.

He proposes spending only $70 billion on the wars in Iraq and Afghanistan, down from $189 billion in the September 2008 fiscal year, with no visible intention to cut troops. Through this sleight-of-hand, defense spending in 2009 is supposed to fall to $588 billion from $670 billion this year.

The longer-term projections are equally ludicrous. After 2009, there is nothing in the budget for either Iraq or Afghanistan. Spending on veterans’ medical benefits is going up slightly in 2009, but the Bush budget proposes cutting it each year for the following four years. The projected deficits before any adjustments for reality are $410 billion in 2008 and $407 billion in 2009, right around the record $413 billion deficit that he ran four years ago. That’s assuming Rosy Scenario is back, with 2.7% growth in 2008 — about double the consensus forecast. He forecasts a $48 billion surplus by 2012, assuming the Alternative Minimum Tax stays in place to sock the middle class.

When this “conservative” president took office, the projections were for $5.6 trillion in surpluses over 10 years. Those estimates were off-base, but there’s no question that he’s leaving the budget in much worse fiscal shape than he inherited. When he took office the total federal debt held by the public was $3.3 trillion. It will hit $5.4 trillion this year and $5.9 trillion in 2009, according to the President’s budget. About $2.3 trillion of that is held by foreigners, so we no longer “owe it to ourselves.”

The good result of a weak dollar is an improving trade balance, and this morning we learned that after five straight years of setting records, the U.S. trade deficit fell in 2007, in spite of higher oil prices and another record deficit with China. The improvement came from an increase in exports, thanks to the weak dollar. The annual deficit fell 6.2% to $711.6 billion, and if that dollar improvement continued, we’d hit the balance point in 2022. Cold comfort.

But perhaps the real story is not whether the dollar or the euro wins the race to the bottom. Perhaps I should change the title of this section to “Death of Paper Currencies.” The dollar, euro and yuan are all going to go down versus commodities — agricultural, metals, mined products, forest products, you name it. In other words, worldwide inflation is a much more real and serious problem than a shallow, possibly imaginary recession or a shortseller’s fantasy depression. In this context, I expect gold to hit $1,000 an ounce soon, but then enter a multi-month consolidation similar to what the stock market had been through over the last year. When the consolidation ends, there will be another great leap upward in gold, just like the one we are about to see in stocks, as people try to get out of paper currencies. Stay nimble and keep your cash in yen.

The last move up in the S&P 500 over 1368 was unable to hold last week, and the Index went back down to explore the 1326 level one more time yesterday. While it is possible that there could be more of this back-and-forthing all the way through my March 22 turn date, I was looking for a move up over 1340 this morning to confirm that another run at 1368 is in the cards.

And we got that. At the time of this writing, the S&P is around 1355, and I think that the Index will not only get to 1368, but will also break through and head for 1440 — a familiar level to us by now. I do expect a reaction back down from 1440, perhaps as low as 1368 again, and if that roughly coincides with the March 22 date, I’ll be pretty confident that we are going to see a run up to new all-time highs. I suspect the news that will “explain” that action is that the credit crisis is under control thanks to the new, higher loan limits on Federal home loans.

In this next run up, I expect our stocks to do extremely well. I will have an updated list of most-likely-to-advance stocks in Thursday’s Radar Report, but there won’t be any surprises, and any recommendation now under my buy limit is a good candidate for purchase. In picking new purchases, always try to balance two conflicting goals: (1) diversify your portfolio by buying a brand-new position, versus (2) buying additional stock in an existing position to drop your average cost.

After last week’s rally produced the best five-day gain since March 2003, I thought we might finally be ready to break free from the bottoming process and head up. But not quite yet. While these sharp declines are painful in the short run, everything I see tells me that we are about to head higher. If there was anything to smile about, it was yesterday’s S&P 500 close at 1326 — a number you should be thoroughly familiar with by now, and be able to say “Retest!” in your sleep.

With the VIX Fear & Greed Index now nearing 30, an extreme level in recent times, even more bulls are turning cautious or negative. You may have seen superbull Jim Cramer’s rant about an imminent 2000-point drop in the Dow Jones Industrial Average, for example. The S&P does have to rally from the 1326 area to keep the reversal pattern intact. It may go back to test the 1270 level one more time, but I think that is the lesser probability. Every major move since mid-2002 has shown this pattern of a reversal rally, a retest that goes back to the breakout point (1326) but not the lows (1270), and then the next leg up. That’s what I’m expecting. If the S&P breaks under 1326, stays there a while and then breaks 1270, I’ll have to agree that the immediate upside scenario is off the table. As always, we’ll let the market tell us what it wants to do.

We may or may not be in a recession right now. But it doesn’t matter because business is soft either way. The January contraction in the service sector certainly caught people by surprise, as it was the first down number in four and a half years. The January labor report showed that employers cut 17,000 jobs during the month, which will stand as the first reduction in four years, unless it is revised up. The Economic Cycle Research Institute has not made a recession call yet, but their latest index number leaves the Fed little time to avoid one:

In response to all this, the Fed announced plans to auction $60 billion more to banks in February, and they will keep doing that until the credit crises is over. They’ll have to make another quarter- or half-point reduction of the Fed funds rate, too. Will it work? Well, insiders are buying more stock than they are selling for the first time since 1995. And between 1988 and 1995, there were seven occasions when insiders were net buyers, and on average the S&P 500 rallied 21% over the subsequent 12 months. So I think that the insiders are making a better market call than the newly-bearish Cramer.

I’ve been working on a new tech recommendation that sells for less than $1 a share, but it was pushed out of this week’s issue by a flurry of earnings calls. With a sub-$1 stock, delaying the recommendation a bit makes tactical sense in this environment. But companies in our portfolio are doing well and even guiding strongly. So let’s get to the news and the numbers.

Biotech

Amgen (AMGN) said that they will do a business update call next Wednesday before the market opens. I don’t know the topic yet, but it may be related to the coming FDA advisory panel meeting on the safety of Epogen and Aranesp. I’ll let you know in next week’s Radar Report if anything noteworthy is brought up. Continue to buy the Amgen January 2009 $70 LEAP calls (VAMAN) up to $12.50 for a $25 target.

Millennium Pharmaceuticals (MLNM) reported fourth-quarter results this morning before the market opened. They did $181.2 million in sales and 17 cents a share, well above the consensus of $159.5 million and 13 cents. They confirmed their January 4 guidance for 20% to 30% growth in U.S. sales of Velcade to somewhere between $320 million and $345 million. Royalties on non-U.S. sales should be $175 million to $185 million. Pro forma earnings should hit 25 cents to 29 cents a share.

The company has priority review status from the FDA for Velcade as a frontline therapy for multiple myeloma, instead of just treating relapsed patients. That should lead to a June 20 decision for approval. About 62% of all drugs given priority review get FDA approval without the dreaded “approvable” letter or any other form of delay. MLNM’s odds are even better, both because Velcade is already on the market and because the phase III trial was halted when the drug proved to be extremely effective. Hold MLNM for my $23 target.

Rochester Medical (ROCM) reported December first-quarter sales up 9% to $8.2 million, below the $8.7 million estimate by the one analyst publishing on the stock. The 9% growth was the net result of 31% growth in Rochester brand sales and a 21% decline in private label sales. Management said that the decline is due to label changes and not expected to continue into the March quarter. ROCM earned five cents a share pro forma, down from 11 cents last year due to increased spending on sales and marketing. Earnings also fell short of the sole analyst’s prediction for seven cents.

The shortfall in revenues, and most of the shortfall in earnings, came from the decline in private label sales. This is a (1) volatile, (2) temporary and (3) less profitable part of the business that does not affect the real future of the company. Now that ROCM has distribution to hospitals, they are spending sales and marketing money to establish their branded products. Branded products are up to 70% of ROCM’s sales, growing over 30% a year. They will be in a perfect position when the October 1 Medicare reimbursement rules kick in, denying reimbursement for hospital-caused infections. Forty percent of those are urinary tract infections, and Rochester’s drug-eluting catheter is the answer to the problem.

On the conference call, management said that they are up to 10 salespeople, targeting 14. The stock dropped a couple of dollars due to disappointment over the earnings, yet it is this investment in marketing that will guarantee the future of the company and the stock. The shortfall in private label products is likely to swing the other way this quarter, while branded products continue to grow at 30% or better. One has to be really short-sighted to think that the stock should have been knocked down this much on these results. ROCM is a Top buy up to $20 for my $40 target.

Security MegaShift

SiRF Technologies (SIRF) reported fourth-quarter earnings on Monday, and the stock dropped following the announcement. I can’t write a complete analysis on the report today, due to the power outage, but I just want to say that it was one of the worst conference calls that I have ever been on in my professional life. Management was turbulent and seemed to feel threatened, and some analysts pulled the plug on the stock because of that.

I didn’t like the outcome of the conference call either, but looking at the numbers and rereading the transcript, I think that this has been way overdone. SiRF sells al lot of low-end processors to Taiwan “no-name” manufacturers who build the products for the holidays, including the Chinese New Year. Heavy sales of those products caused their profit margins to fall in the December quarter. Those sales go away after the holidays, so there will be a bigger-than-usual seasonal drop in first-quarter revenues. But I think that SiRF is still on track to introduce lots of high-end products as the year progresses, including important integrated chips that put GPS into cell phones.

I still think SiRF will hit my target after the new products go into volume production. But I am lowering my buy limit $12 and my target to $28.

Power Outage

Due to a power outage, I am unable to complete today’s newsletter. We’ll get caught up as soon as possible, no later than next week’s issue, and look for a Flash Alert on any breaking news that arises over the next few days.