What is a breakout level? When a market sets a top, then declines and sets a bottom, and then rallies up to the prior top, it is testing the resistance level. This is the point where I don’t try to predict what will happen next, but let the market tell me what to do. If it can close decisively above that prior top, that is a breakout. If not, it has failed the test and will head back down to test support at the most recent low.

It is absolutely normal for the market to test these resistance and support levels, sometimes three or four times, before making its next streaky move. The testing period can involve a relatively calm consolidation near the critical level, or it may include very volatile moves like yesterday’s 12-point drop. But you should not let these volatile moves upset you, as they are just noise until something happens to break the market’s trend. That’s the time to be agitated.

On Wednesday, March 19, the S&P 500 ran up to 1341.51 intraday, and on the hourly chart that I watch had an hourly close around 1338. Each of the next five hourly closes was sequentially lower, until the decline stopped around 1300. Although there was a nice recovery last Thursday in advance of the three-day weekend, it was not until Monday that the S&P had an hourly close over 1338 — the breakout level — getting as high as 1357. Tuesday there was a little retest of the breakout that reached 1341 and quickly moved back up. Yesterday, the S&P dropped at the opening to 1336, and quickly recovered to sit around 1341 the rest of the day. On the hourly chart, there were three little thrusts down to test 1338, and each was rejected. Today 1338 gave way, and we wound up right back at 1326.I think the market is telling us that the uptrend from 1273 that started on March 10 (or 1255 in the futures market, before the opening) is intact.

The typical two-steps-forward-one-step-back market action is just what we should expect. After another couple of days of consolidation , I suspect the market will be ready to go on another tear upwards. We shall see. My 1440 target for this move is still on the table, and I can practically guarantee you that some old support/resistance levels like 1395 will require their own period of consolidation and regrouping before the market assembles enough energy in the form of negative sentiment to vault over them. Don’t let days like yesterday and today worry you, any more than the “shocking” news that GDP grew only 0.6% in the December quarter should shock you. The Yahoo Finance headline on that story was, “Economy Sputters With 0.6 Percent Growth.” But we saw exactly the same figure as an advance number two months ago, and again as a preliminary number one month ago. This is the revised number, and I don’t think it surprised anyone except the AP reporter.

Instead of thinking about the market, which started rallying in earnest right around the March 22 turn date as I predicted, let’s step back to think about some amazing new technologies coming down the pike. One of my favorite technology magazines is Technology Review from MIT, and each year they do an issue on 10 technologies that are most likely to change the way we live. The 2008 version is out, and here is the list with my comments.

• Wireless Power: My personal favorite, as Tesla showed it can be done, and it could drive the cost of power to zero.
• Graphene Transistors: A new form of carbon to create much tinier transistors for computing and storage.
• Probabilistic Chips: Designing uncertainty into semiconductor chips may extend battery life for mobile devices, and may even extend Moore’s Law past 2030.
• Nanoradios: Built from carbon nano-tubes, these could wind up in everything from clothing to medical devices and cell-phones.
• Atomic Magnetometers: Another nanotechnology, this time creating tiny sensors that pick up magnetic fields. Think MRI scans with incredible detail.
• Cellulolytic Enzymes: Better enzymes to make bio-fuels (i.e. synthetic diesel, ethanol) from cellulose, turning waste into energy.
• Offline Web Applications: An Adobe and Google top priority to topple Microsoft, using the Web browser to serve up free word processing, spreadsheets, PowerPoint and more, with free, backed-up storage for your files.
• Connectomics: New technologies that allow us to map and observe neural circuits for brain development, and to cure Alzheimer’s and other diseases.
• Reality Mining: Using data gathered from cell phones to better understand human behavior.
• Modeling Surprise: Combining huge amounts of data with what we know about human psychology and then using machine learning (probably neural networks) to help manage surprising events.

Wireless Power: Tesla actually invented alternating current (AC) electricity, but he could not imagine people would be willing to pay to install wires everywhere to carry it to each room in each building in each city of the world. So he figured out how to do it wirelessly, and started building a 185 foot high tower on Long Island. He “ran out of funding” (some think with Edison working behind the scenes) and never finished it. Later, he took the engine out of a car, bought a few electrical components at a retail store, assembled them into a box that he installed in the car, and drove it all over town. He was pulling power from the resonant frequency of the earth, but the secret of how he did it died with him, as he was embittered by Edison’s success based on Tesla’s stolen ideas. At least that’s how Tesla saw it.

Current wireless power efforts are more modest, targeting automatic charging devices like cell-phones, smoke detectors and laptops as soon as you walk into a room. Radio waves waste most of their energy missing the target, and lasers require a clear line of sight to a specific spot. Resonant coupling is the phenomenon Tesla exploited, where two objects tuned to the same resonant frequency will exchange energy with each other, but not with other objects. For example, if you put some water in one wine glass but not in another, and then play a violin, you can hit a pitch that will shatter one glass but leave the other untouched. Magnetic resonant coupling is promising because magnetic fields travel easily through the air, yet don’t affect people or the environment, as long as they avoid the appropriate resonant frequencies. MIT physicists have wirelessly powered a 60-watt light bulb six feet away, on the other side of a thin wall, with 50% efficiency. The threshold for commercial applications is around 80% efficiency. More importantly, I think this line of research eventually could recreate Tesla’s work from a hundred years ago, pulling free wireless power from the resonant frequency of the earth. No more batteries!

New Components

The materials revolution, which is at heart a nanotechnology revolution, allows scientists to design new materials at the molecular level that have the exact characteristics needed to do a particular task brilliantly.

Graphene Transistors may be coming along just in time to replace silicon as it reaches its physical limits. Graphene, found in regular pencil lead, is a form of carbon only one atom thick. It can, in theory, create transistors 100X as fast as today’s fastest silicon transistors, at sizes so small we’ll have to invent all-new tools to process them. A Georgia Tech physics professor working at MIT’s Lincoln Labs has created arrays of hundreds of graphene transistors on a single chip. Electrons move through graphene without generating any meaningful heat, which is what creates problems with today’s silicon-based transistors. In fact, graphene is a great conductor of heat, and whisks it away. Silicon transistors are stuck in the gigahertz range, while graphene can, in theory, get to the tetraherz range, 1000X faster than silicon. Graphene also has better electrical properties at small sizes like one nanometer, while silicon loses its electronic properties around 10 nanometers. That’s only two or three generations away from today’s advanced 45-nanometer processes. Hewlett-Packard and IBM have graphene research projects, and Intel is funding the Georgia Tech research.

Probabilistic Chips are a new idea that goes against the received wisdom that perfect quality is a given requirement for semiconductors. An awful lot of money is spent going from 99.99% perfection to 99.9999% (“six 9s”) quality. Now, a Rice University computing professor thinks chips designed to come very close to right might be cheaper to make and, more importantly, extend battery life. They wouldn’t be used in, say, nuclear bomb controls, where precision is everything. But what about in an iPod? If A above middle C is rendered at 439 or 441 cycles a second some of the time, will anyone notice it wasn’t exactly on 440? Nope. But if allowing that to happen doubled the battery life of the iPod, would anyone notice? You bet!

The technology involved simply uses lower voltage than needed to always overcome electrical noise and be sure the transistor really is in the desired “0″ or “1″ state. The lower voltage can be applied to the circuits that calculate the least significant bits, like the number “8″ in 45.678. Although the initial application of probabilistic chips will be in audio, video, machine learning, cryptography and the like, as transistors get smaller it will be harder and harder for humans to be sure they are doing what they should. Probabilistic design techniques might become the standard for all chips.

Nanoradios, like graphene transistors, developed out of the work on carbon nanotubes. The key circuit for a nanoradio is a single carbon nanotube. Physicists at UC Berkeley developed this ultimate version of the transistor radio, and it will be used to create radios that make one battery last a lifetime, or radios small enough to circulate in the bloodstream, diagnosing problems or dispensing drugs. In contrast to Alexander Graham Bell’s famous first message: “Mr. Watson, come here, I want you,” the nanoradio’s first two receptions were Layla by Derick and the Dominos, and the unofficial U.S. national anthem Good Vibrations by The Beach Boys.

The nanotube actually “feels” the magnetic part of an electromagnetic radio signal, vibrating in sync with the radio wave. The vibrations are converted to electrical impulses to drive a nanospeaker. Next, they will turn the nanoreceiver into a nanotransmitter, which will open up all the medical diagnostic applications.

Atomic Magnetometers are magnetic sensors that have been around for fifty years. They sandwich a glass cell with vapor in it between a laser source and a photo-detector. Magnetic fields disturb the vapor, scattering the laser light. The stronger the field, the more the laser light is scattered. A very sensitive magnetometer is huge, but can pick up a magnetic field as weak as one femtotesla–about one-fifty-billionth the strength of Earth’s magnetic field. Researchers at the National Institute of Standards and Technology in Boulder have developed an atomic magnetometer the size of a grain of rice, as cheap and portable as today’s low-end sensors, but almost as sensitive as today’s stationary, power-eating high-end sensors. They shrunk the glass cell to a tiny silicon and glass cube filled with vaporized cesium atoms, and mounted it on a silicon chip between an off-the-shelf tiny laser and a photo-detector.

Soldiers can use portable atomic magnetometers to find unexploded bombs quickly. MRI machines will be cheaper, portable for first responders, and usable on those with pacemakers.

Cellulolytic Enzymes are the gating factor to cost-effective production of biofuels from cellulose. The Energy Independence and Security Act of 2007 calls for U.S. production of renewable fuels to grow 400% by 2022 to 36 billion gallons a year. Of that, biofuels derived from cellulose sources like agricultural waste, prairie grasses and wood chips are supposed to account for 16 billion gallons. The starch in corn kernels is easily broken down into sugars to ferment and process into ethanol. The sugars in crystalline chains of cellulose are a lot harder to break down, and it looks like new enzymes are the missing link to meeting the cellulose biofuel targets. Researchers at CalTech and UCLA are taking this a step further, looking for enzymes that will both metabolize the cellulose and then ferment the sugars into biofuels.

Using cellulosic ethanol rather than gasoline could cut auto greenhouse gas emissions by 87%, while corn-based ethanol achieves reductions of just 18% to 28%. Cellulose is the most abundant organic material on earth. Current cellulolytic enzymes cost 20 cents to 50 cents per gallon of ethanol produced. The new ones are targeting three cents to four cents a gallon, to compete with corn ethanol.

New System Approaches

Offline Web Applications, or “cloud computing,” are a hot topic in Silicon Valley right now, in part because Google sees them as a way to get more opportunities to match you with information and, yes, advertisers that you would like to see. The fact that cloud computing cuts the heart out of Microsoft’s Office applications business is just an added benefit. Now Adobe has signed on to the cloud computing future.

Internet-based computer programs are always up to date, always there, always have the latest printer drivers — you get the idea. But it’s hard for users to save data on their own computers, raising privacy issues, and it’s hard to drag and drop between applications or get services like appointment notifications when your browser window is closed. So Adobe is trying to expand on Google’s efforts by bringing everything back to the desktop if the browser is closed, to work offline on what is essentially an online application. Adobe Integrated Runtime is already available as a beta environment for software programmers. EBay Desktop is one of the first consumer products.

Connectomics is an emerging field trying to create a physical map of our neural circuits involved in sensing, learning, memory and brain development. Harvard and MIT neuroscientists have traced all the circuits in a small part of the cerebellum responsible for balance, and already know the brain can rewire itself to account for new information. The technology paints nerve cells in 100 different colors, making it easier to see where each axon from a cell leads. There are 100 billion neurons, with trillions of synapses and years of work to be done, but everything from Alzheimer’s to Down syndrome to aging will never be the same. Just as it took a tools breakthrough to sequence the human genome, connectomics is the tool to begin the massive effort to create an accurate wiring diagram of the human brain. The extraordinary picture below shows neurons in the hippocampus, a brain area involved in memory, with their neural projections pointing down.

Credit: Tamily A. Weissman

Reality Mining sounds scary at first. When you use a cell phone, your provider knows which towers you use and in which order if you are traveling, how long the call lasts and who you talk to . An MIT professor of media arts wants to collect even more information, and then use it for your benefit to connect you to others like you or show you things they like to do. It might be useful for understanding workplace dynamics, tracking and projecting disease outbreaks, or otherwise understanding the well-being of communities. Reality mining looks for patterns and uses them to help you live your life. In a paper published last May, researchers showed that cell-phone data facilitated them in accurately modeling the social networks of 100 MIT students and professors. They could precisely predict where subjects would meet with members of their networks on any day of the week.

As cell-phones take more pictures, access more web sites, and incorporate GPS location, the amount of data that can be reality-mined will increase exponentially. Apple’s iPhone includes a motion sensor that might be used to detect small changes in gait that are a prelude to Parkinson’s, or an aftereffect of a minor stroke. Analyzing speech snippets could show cadence changes indicating depression.

On the one hand, the privacy problems are obvious. On the other, Scott McNealy, the former CEO of tSun Microsystems once said, “There is no privacy online. Get over it.”

Modeling Surprise sounds intuitively great, as anyone who relies on weather forecasts would agree. Microsoft researchers are looking at things that surprised us in the past (i.e. Hurricane Katrina, 9/11) to model what might surprise us in the future. There are obvious applications in the stock market, the military, politics and many other fields. Surprise modeling was developed by modeling Seattle’s traffic flow. Everyone knows the roads that will have delays during commute hours. So the Microsoft team looked for extraordinary delays or surprisingly free-flowing periods, and then backed up 30 minutes to understand the patterns and factors that led to these outlier events. They can now predict about half of the surprise events in Seattle’s traffic, with less than a 5% false-positive rate. Over 5,000 Microsoft employees have the software installed on their cell-phones, usually customized for their own driving patterns. The researchers are now trying to generalize their approach to other surprise-susceptible areas.

As these and other technologies develop, I always keep an eye out for new investment opportunities and watch the impact on existing companies. Put several new companies in a new area and we’ll find a new MegaShift in the making. Speaking of which, there’s been some action in our existing MegaShift holdings.

Biotech MegaShift

Millennium (MLNM) made three broker conference presentations in March, and the FDA decision on the expanded label for Velcade in front-line multiple myeloma is June 20. Approval is a lock, and it will double the market for Velcade. Next, the company will go after a label expansion for follicular lymphoma, a form of non-Hodgkin’s lymphoma that afflicts 65,000 U.S. patients. That’s a bigger market than multiple myeloma.

Here’s the outlook for clinical development:

		1H08	2H08
VELCADE (proteasome inhibitor)	sNDA approval, front-line multiple myeloma Complete enrollment of Phase III non-Hodgkin’s lymphoma (NHL) trial Initiate pivotal subcutaneous trial Initiate additional NHL combination studies Data presentations	X X Y X	X X X
MLN0002	Results from ongoing studies Initiate Phase III for Ulcerative Colitis and Crohn’s disease	X	X
MLN0518	Data presentation — glioblastoma Initiate Phase II in glioblastoma		X X
MLN8054 and MLN8237	Data presentation (Aurora-A kinase oncology program)	X	X
MLN4924	Phase I start (Nedd-8 Activitaing Enzyme (NAE) oncology program)	X
MLN2238	IND filing (second-generation proteasome inhibitor — like VELCADE but better)		X
Early stage	New Development Candidate (MLN3126 for IBD)	Y
X = expected Y = has occurred

MLN0518 has fast-track status for acute myeloid leukemia and is to the only drug in its class of receptor tyrosine kinase inhibitors that can cross the blood-brain barrier. The MLN8237 data presentation in neuroblastoma is by a pediatric research group at the American Association for Cancer Research annual meeting April 12 to 16. Millennium is looking for a development partner for MLN0002 for inflammatory bowel disease, and in an interesting twist they said the drug’s target also is implicated in HIV. Finally, they said now that they are profitable on a GAAP basis, they intend to stay that way.

I think FDA approval on June 20 is enough to get the stock to my target, but having all the rest of this going on is great insurance. Hold MLNM for my $23 target.

Content on Demand MegaShift

Motorola (MOT) will split into two companies, cellphones and everythng else. The company also will put three of Carl Icahn’s nominees on the board of directors, including my old friend Bill Hambrecht. Although the initial reaction was muted, I am convinced the process of unlocking the substantial value in this company combined with a rising stock market will easily get MOT to $17.50 before our LEAP options expire. The right way to invest here is to do what we did with the Amgen LEAPs — don’t sell what you have, but if you want to buy more look at the January 2010 $10 LEAP call (WMAAB) for a new or averaged-down position. They closed at $2.05 today and would be worth $7.50 at a stock price of $17.50. I think we’ll see that price long before expiration.

Nanotech & Materials MegaShift

Integral Technologies (ITKG) drew a question from John, wondering what’s up. The stock price has slipped under $1 on the lack of news. The company has about $1 million in net cash, and will spend about $250,000 this year. They have lots of companies looking at their electrically-conductive plastic, and what is going to move the stock is license announcements. Those were far and few between in 2007, but I still think this is a viable technology that has wide applicability. We should see numerous contracts in 2008. ITKG remains a buy under $2 for my $4 target.

WiMAX MegaShift

Comcast, Time Warner Cable and Bright House Networks are talking to Sprint and Clearwire about forming a new joint venture for nationwide access. Intel and Google may invest, too. The first round would be about $3 billion to roll out a major metropolitan network, followed by another $5 billion to completely cover the country. The cable companies could then offer TV, data and landline service over their cable, plus wireless over WiMAX, and be full-line competitors with Verizon and AT&T. Makes sense, and it should be terrific news for this unfairly beaten-down sector.

Death of the Dollar

I’ve said before that I think gold is due for a rest after its spectacular run over $1,020. I think many months of consolidation, in the form of volatile trading between $700 and $1,000, are in the cards. But if the Bernanke Fed keeps killing the dollar, my estimates could be too conservative. Yesterday, the dollar slid again against the euro due to weak new home sales and a decline in durable goods orders for the second month in a row. Crude oil dutifully spiked up and gold jumped $14 an ounce to $949.

But looking a little deeper into the reaction, I still think the decline in the dollar and the rise in gold is over for six to nine months. Gold bulls reacted by saying this was just what they expected, not realizing that gold is just rallying up to test its recent breakdown level. Kevin Grady, a gold trader at MF Global in New York, gave the conventional wisdom response: “There’s a tremendous amount of dollars on the market and that constant flood of money is going to keep gold prices high.” He added that gold could make another run for $1,000. He neglected to mention that would be a double top or, in my language, a test of resistance. I think gold may run back to $1,000, drop, and run back up again three or four times before finally giving it the “kiss goodbye” that marks the beginning of a deeper, more serious drop. That’s how markets work.

Another expected reaction from governments and bureaucrats is lock-the-barn-door. The South Korean government said their National Pension Service, the fifth-largest pension fund in the world, will no longer buy U.S. Treasuries due to low yields and the falling dollar. And in one of those “tells” that hits close to home, the Taj Mahal said they will no longer accept dollars for admission. My bride and I were married there six years ago, when the mighty dollar had half a dozen free-lance photographers bidding frantically to take our picture. Instead of $5 for a couple of pictures, we hired one for $100 to take about 50 pictures. He delivered them in an album with all the negatives (as negotiated in advance) a few hours later to our hotel, and he’d put on a suit and tie for what must have been his biggest payday in years. I wonder if he still takes dollars at all? Probably, although I’m told the street money changers in Amsterdam won’t do dollars for euros anymore. They’re afraid the dollars will weaken while they are holding them.

When it gets to that point, the dollar should be about sold out. By this time next year, when the money changers are no longer worried, the next big plunge in the dollar can begin.

Before the opening this morning, SiRF Technology (SIRF) pre-announced a shortfall in revenue and earnings for the March quarter. There has been a sharp slowdown in consumer electronics spending in the U.S. and Europe since the holidays, and slower growth in Asia since the Chinese New Year. The slowdown has caused some inventory backup in the distribution channel, and SIRF is feeling the brunt of these forces right now.

The weakness in consumer electronics has been focused in the standalone or handheld personal navigation devices (like those made by Garman, TomTom and others), but has also spread to the automotive sector. SiRF said that they expect the lag in demand to continue into the June quarter as inventories are worked off, after which manufacturers will start ordering SIRF’s chips again for products to be sold in the second half of the year.

The company guided for March quarter revenues to come in at $60 million to $62 million, well below prior guidance for $71 million to $77 million and the consensus estimate for $74.2 million. To reduce costs SiRF is cutting staff by 7% over the next six months, closing their South San Francisco and Stockholm, Sweden development offices, and stopping development of mobile TV products. They should be able to book much of the related charges in the March quarter, and the total will hit $1.5 million to $2 million by the end of September. This will save them $2.5 million to $3 million per quarter after all the reductions are implemented.

The good news is that the handheld business represents SIRF’s past — their future is in products integrating GPS location with processing for integrated devices, such as cell-phones with built-in GPS. The bad news it that the company is making this transition at a difficult time for the U.S. consumer economy, and got nailed making the switch. Looking forward, though, SIRF still has the best GPS technology and is likely to be a leader in the integrated GPS/processor market, which will show explosive growth beginning from a low base in 2007. I also think the U.S. economy will be picking up in the second half of 2007 as the fire hose of liquidity from the Fed works its way through the banks into the hands of businesses, home buyers and consumers in general.

Taking a very short-term view, today’s stock hit (down $1.95) is not surprising. Looking further ahead, say six to 12 months, this clearly is a buying opportunity. The uncertainty over June-quarter earnings probably will keep the stock under $8 in the near future, so my $12 buy limit is too high. As they win more design contracts in the cell-phone area, I think the stock will do very well in the second half of 2008 into 2009, but I’m reducing the target price to $20 from $28 to be realistic about what can happen in the next 12 months. Buy SIRF under $8.

A Quick Comment on the Broad Market

The market is acting as I had outlined in last Thursday’s Radar Report, working its way higher by streaking up and then staging a drifty consolidation for a few days to gather energy for the next up-move. A dip back to test support at 1326 on the S&P 500 would be a superb buying opportunity, although it is unlikely to happen. My target is still 1440, and what happens there will tell us if the down market will resume and turn into a bear market, or if my more likely scenario of a rapid run up to 1880 will come to pass. You don’t want to miss a move like that.

The financial crisis is over.

I’m usually pretty critical of Wall Street research but a tip of my hat to Richard Bove, the financial sector analyst at Punk, Ziegel, who put out a report this morning titled, The Financial Crisis is Over. “There will be more negative developments,” he said, “but they will be meaningless.” Exactly right! As I said in the last Flash Alert, the Bear Stearns rescue was the poster child for this downturn, just as Penn Central and Chrysler were in the past. Sure, there will be more banks on the edge (Washington Mutual and Citigroup come to mind), lots of failed hedge funds and accelerating sub-prime mortgage defaults. Does any of that surprise you? Well, then, it won’t surprise the market, either. A hedge fund failing is a big deal on Wall Street, the floor of the New York Stock Exchange and CNBC. But it doesn’t mean diddly on Main Street, and unless it threatens a bank, the Bernanke Fed is likely to stand by and let the rich lose their money.

But nobody ever said the market recovery would be easy. The S&P 500 was in a perfect position yesterday around 1:30 p.m. EST to have a quiet day with a test up to 1340, a test down to 1320, and a close around Tuesday’s level. It’s common to see such an inconclusive day after a huge run like Tuesday’s, and then to see another big run the following day to ice the change in direction. We might have seen 1440 by the end of next week if that pattern had played out.

But that’s not what happened. The S&P dropped sharply to just under 1300 during the rest of the trading day. I was glad to see the VIX Fear & Greed Index leap four points, and it confirms what I’ve been seeing: Traders are so confused right now that they jump on every little trend and then the whole herd reverses at a moment’s notice. This is typical of markets where traders have no conviction about their forecasts, and it increases the size of the swings back and forth.

But the overall pattern still looks good for a run to 1440, and the March 22 turn date is upon us. A pullback that does not go below the previous low, accompanied by a sudden increase in fear, is the prescription for a major buy signal. Today we ran right back up to just under Tuesday’s close, which is pretty impressive given that everyone is squaring up positions for the three day weekend. It’s a likely time for another shoe to drop in the financial sector, accompanied by another Fed rescue. Come early next week, crossing Tuesday’s high at 1331 will ring the bell. If you have not done so already, sell any insurance puts or the UltraShort S&P 500 ProShares (SDS) exchange-traded fund.

Avian Flu MegaShift

Lost in the midst of the credit crisis news, researchers at the University of Wisconsin discovered that the bird flu virus has made a critical mutation that makes it easier to infect humans in the upper respiratory tract. This makes it a good time to update the outlook for our avian flu stocks.

In the past, strains of influenza have mutated and crossed the species barrier to humans. The bird flu virus (H5N1) is an especially virulent strain of the flu. Since 2003, 329 human cases have been confirmed, and 61%, or 201, of them have died.

H5N1 replicates most effectively in the bodies of birds, which have an average body temperature of 106 degrees Fahrenheit. Humans are generally poor incubators for strains of H5N1 because our average body temperature of 98.6 degrees. Plus, our nose and throat temperatures of 91.4 degrees are much too cool.

UW researchers, however, have identified a strain of H5N1 that thrives in these lower temperatures. The mutation was discovered circulating throughout Africa and Europe — not in Asia where most of the infections typically have been. Unless the virus mutates further, an airborne pandemic is unlikely. But given modern poultry raising practices and the overcrowding of birds in indoor facilities, the additional mutations are probably inevitable.

Both vaccines and antiviral medications will be needed in the event of an outbreak, and government stockpiling will continue. Crucell (CRXL) is going to be a big winner of this trend, as they license the technology to produce vaccines in human retinal cells instead of chicken eggs. CRXL remains a buy under $17 for my $35 target.

BioCryst (BCRX) has Peramivir in a pivotal trial for intravenous, hospital-based treatment of Avian Flu patients, and I think that it will prove to be much more effective than Gilead and Roche’s Tamiflu. The stock has been blasted by problems with the intramuscular, outpatient-based trial of Peramivir, even though Health and Human Services continues to financially support that trial. In addition, small growth stocks in general have been hard-hit in this market decline. I am cutting the buy limit on BCRX to $8 just to acknowledge the current price level, but I’m not changing my $30 target, which I expect to see after trial results are reported later this year.

Biotech MegaShift

Amgen (AMGN) has put most of its problems behind it, but the stock is down from $70 when I recommended the January 2009 $70 LEAP calls to $40 today, so the LEAPs are trading for almost nothing. John asked if there is a chance for recovery. Kulwant pointed out that the time value is eroding quickly as the stock continues to linger in low- to mid-$40s, and asked: “What is the next catalyst you see in this stock?” Timothy pointed out that the LEAP is almost worthless and suggested it is time to throw in the towel on AMGN, asking: “Isn’t it unreasonable to continue to recommend buying and holding the LEAPs?”

I have wrestled with this, as you can tell from my updates for the last several months. I’ve said that I would not buy this particular LEAP today for a new position, but I would stick with it for portfolio accounting purposes. That confuses the issue, I know. So here’s what we should do:

• Don’t sell the Janaury 2009 $70 LEAP call (VAMAN). There’s no point in selling it for 20 cents an option, or $20 a contract. I’m changing it to a Hold.
• Don’t give up on Amgen stock. The next catalyst should be surprisingly good sales of Epogen and Aranesp in the next couple of quarters.
• Buy the January 2010 Amgen $40 LEAP call (WAMAH) under $10 with a $20 target as a way to particpate in AMGN’s recovery. That call closed today at $8.15, so AMGN has to go to $57 over the next 21 months for you to double your money, or to $65 to triple it. I think those targets are easy to see, and there now is a chance of a bid for Amgen from a big pharma company at much higher levels, much sooner.

Content on Demand Megashift

Akamai Technologies (AKAM) might have something new threatening its stock price, although it wouldn’t affect the company’s 30% growth rate much. I think there’s a slight chance, say 20%, that Apple will switch their iTunes downloads business from Akamai to Google. This is just an early thought on my part, but here’s what I have pieced together.

Apple, of course, is intensely interested in high-quality content distribution, yet they did not support the Blu-ray DVD format in Macintosh computers or Apple TV. I think Steve Jobs believes Blue-ray is a threat to his distribution business — he wants you to download video from iTunes, not buy a Blue-ray disc.

So Apple must upgrade iTunes right now for high-definition video. Currently, iTunes can download movies in “high-definition” 720p format, but the market has moved on to 1080p. You can download 1080p in reasonable time using BitTorrent, but, of course, Jobs won’t want to use someone else’s open standard. But developing a new fast download protocol isn’t easy. The one minute and fifty-one second trailer for Indiana Jones and the Kingdom of the Crystal Skull is on Apple’s web site in QuickTime high definition. The 480p version, which is about the quality you can download through iTunes today, is a 47-megabyte file. The 720p version is 66% larger at 78 megabytes. The 1080p version is 168% bigger than the 480p version at 126 megabytes. A two-hour movie goes from a three-gigabyte file at 480p to over an eight-gigabyte file at 1080p. Apple has to figure out how to get that to the customer without paying 168% more for the download.

And that brings us to Google, which is putting data centers all over the world and, as I mentioned last week, is now even investing in a new undersea fiber-optic cable. As the owners of YouTube, Google knows that video distribution is an enormous opportunity. What better way to enter the market than offering a great deal to Apple for the iTunes contract? With the CEO of Google on Apple’s board, it sure wouldn’t be surprising.

I’m sure AKAM would take a hit if this 20% probability becomes a fact of life, but let’s think it through. If the Internet is about to get even more clogged, thanks to high definition video, other companies will have to turn to AKAM to keep their web pages loading at an acceptable speed. While I don’t know the details of the pricing on the iTunes business, I’ll bet the profit margin is as low as Akamai gets. I think that they could replace their iTunes business quickly, at better prices, and then reap the benefit of all the current non-customers that would decide they have to do something to provide a decent user experience even when hundreds of thousands of people are downloading Indiana Jones and the Kingdom of the Crystal Skull at the same time. Buy AKAM up to $36 for my $60 target.

Burst.com (BRST) drew a general question from Ron: “Please give us your thoughts on Burst in light of what’s happened to it.”

The stock has been dead because there has been no public information about what’s going on with the company. But privately, I think the scenario I laid out at the time of the settlement with Apple is playing out. Burst.com is going to sue others, such as TiVO, with Apple’s behind-the-scenes support. In January, Real Networks filed for a declaratory judgment that Burst’s patents are not valid. That means Burst was after them hammer and tongs to pay royalties, so Real Networks decided to file. Because Burst’s patents have been extensively reviewed in this same Federal court, the Northern District of California, I don’t think Real Networks has much chance of succeeding. It appears that they are doing it simply as a negotiation technique.

The big suit for Burst will be against TiVO, which I expect to see in the next six months. BRST remains a buy up to 50 cents a share for my $2 target. Also, I am moving the stock to the Content on Demand MegaShift, as it was the last one left in the Video iPod category.

Telkonet (TKO) will delay filing their 10K form by 15 days, and Michael H. asked for a comment and wondered when we will hear how the company is doing. He also asked: “How does the current economic condition affect your outlook?”

TKO presented at the Greentech Investor Conference today, but the presentation focused on their SmartEnergy products. I think the 10K will have a lot of detail, but the company has not started regular earnings conference calls yet. Once I get through the 10K, I will call them for another update. They may do a call this time, though, especially if they also have some product news to share.

The current economy is good for TKO. Their SmartEnergy products have a very fast payback when energy costs are high, and all of their potential customers are looking for ways to get energy costs under control. The broadband over powerline products are the cheapest way to bring an older hotel or apartment building into the wired world, and those customers are looking for new features to compete in the marketplace, while keeping incremental costs as low as possible. TKO remains a Top Buy all the way up to $5 for my $15 target as they turn profitable.

New Energy Technology MegaShift

Subscriber John asked: “Since the energy bill mandates concentration on the increased use of ethanol, despite its negatives, and also eliminated most of the incentives for other energy developments, where does that leave your recommendations for: a.) new energy technology, and b.) old wave sources, such as natural gas?”

Good question. The energy bill turned into a major joke, with major political contributor Archer-Daniels-Midland the primary beneficiary. I think that they overplayed their hand, and much of it will be rewritten next year if the Democrats take over the White House. All of the existing subsidies run through 2008, and I think the Democrats will extend them next year and make them retroactive to January 1, 2009.

But the important point to remember is that all of our investments in new technologies make economic sense without subsidies between $45 and $60 per barrel of oil, except solar. Solar makes sense when the price of oil is around $100 without subsidies, but the existing subsidies at the state and utility level go a long way towards lowering that break-even point. So even if the Federal subsidies die, the shift to new energy technologies will continue. I expect oil to trade in an $80 to $120 range for the next 18 months or so, unless there is a geopolitical event that pushes it higher. That should pull the price of natural gas higher, and I am taking another look at re-recommending heavy oil refiner Holly Corp. (HOC). We sold the stock at $67. 35 for a 70% gain last May, and now shares are trading back in the low-$40s.

Also in a high oil price environment, investors will be very interested in any company that can demonstrate success, such as Rentech (RTK) and Connacher Oil & Gas (CLL.TO).

Speaking of Connacher, the company reported earnings last night, and the news was good. They are now in commercial production of tar sands oil at Pod One and are producing 5,000 to 6,000 barrels a day, heading towards the 10,000 barrels a day capacity. As previously announced, the core hole drilling program has more than doubled their proven and probable reserves (2P) as well as their proven, probable and possible reserves (3P). The latter has a present value of $2.6 billion, while CLL.TO has a total market capitalization of $600 million. The company expects approval of their Pod Two project by mid-year. CLL.TO is a timely buy up to $4.50 for my $9 target.

Plug Power (PLUG) reported earnings last week, and said that they will name a new CEO by the time Roger Saillant retires on April 7, the day he turns 65. The company did $5.1 million in sales and lost 20 cents a share. They had 51 GenCore installations in the quarter, bringing them to 208 for the year. That was more than double 2006, but as previously announced, well short of their original 400 installation goal. They brought the cost of production down 20% during the year, admirable but also short of their 25% goal. However, PLUG integrated two important acquisitions in 2007 and should be able to take out both product costs and general/administrative expenses in 2008.

They secured 122 new orders in the December quarter, more than the 88 orders booked in the first three quarters combined. And they have 305 units in backlog, after taking out 100 units ordered by a distributor that have been cancelled.

The report had little impact on the stock, and PLUG remains a buy up to $5 for my $10 target.

WiMAX MegaShift

Towerstream (TWER) reported $1.9 million in sales for the December quarter, up 22% from last year, and just short of my aggressive $2 million estimate. The September quarter was up 8% year over year, and the June quarter was up 3%, so their business is accelerating as I expected. As the company trains more and more salespeople to become fully effective, revenues will continue to accelerate.

The company lost $2.7 million, or eight cents a share, compared with $1.7 million or five cents a share last year. The increased loss does not bother me because Towerstream is going through the heavy investment cycle: eating its expenses from the -opening of its new call center, as well as rapidly hiring and training the telemarketing sales force. But it did bother analysts at Morgan Joseph and Canaccord Adams, who downgraded the stock to hold. The Canaccord Adams analyst cut his target price from $6.50 to $1.50, so one has to wonder why he still rates it a hold. Incidentally, Canaccord Adams has one of the worst recommendation performance records on Wall Street.

Another reason the stock is down sharply today is because CEO Jeff Thompson tried to set the bar low for the March quarter by saying sales would grow 25% or more year over year. Twenty-five percent would mean sequential growth of only 3%, a slowdown from the sequential growth of 8% that they demonstrated in the December quarter. But later in the conference call, Jeff said that they would show sequential double-digit growth for the next two quarters. This was the first time TWER has provided guidance, and they just forgot to reconcile the real forecast for accelerating sequential double-digit growth with the set-the-bar-low forecast for year-over-year growth. They’ll actually do something closer to $2.5 million, and I am keeping my $3 million estimate as a stretch goal.

The reported churn rate was a bit high, just over 2%, but on the conference call Jeff said that was because two big contracts were only temporary, and they have since expired. The churn rate will return to normal this quarter.

Towerstream ended the year with 95 fully trained salespeople, and a small drop in average monthly new revenue per salesperson. That will accelerate as the sales force gets more experience. It also means that they can start turning on new markets, and not repeat their mistake of opening a new market before they have the sales power to start offsetting the costs. I still think that they will be in 15 to 20 markets by the end of the year, up from eight now. Management said that they have enough cash on the balance sheet, $41 million, to fully fund their strategy. There will be no dilution at these low stock prices, where the stock is trading just above net cash per share. Yet, they will still be cash flow positive later this year or early next, and turn profitable in 2009. I cannot believe this company is trading for a total market capitalization under $50 million. Buy TWER up to $6 for my $16 target after they turn profitable.

After decent earnings news from Lehman Brothers and Goldman Sachs, the Dow Jones Industrial Average was up 300 points in afternoon trading, while the S&P 500 was trading solidly around 1315, up 40 points on the day. The futures market was pricing in a 100% chance of a full percentage point cut in the Fed funds rate at 2:14 p.m. this afternoon. Never one to miss an opportunity to disappoint, the Bernanke Fed cut rates by “only” 75 basis points.

Now, that is a whopping cut–just not as whopping as the insiders wanted to see. And that means one more trip to the woodshed for Ben, until he gets the funds rate down to the rate on two-year Treasuries, or 1.5%. That’s only another 0.75% from the current level, and given Ben’s record, he may try to do it in three quarter-point cuts so it has no impact whatsoever. No wonder Treasury Secretary Paulson was looking so tired today, even admitting that the U.S. economy is in a “sharp decline” while refusing to use the “R” word. Well, maybe he is right, because if a decline is a recession, I guess a sharp decline is a depression.

Today’s vote was 8-to-2, with the minority wanting a smaller rate cut. The Fed admitted in their statement that “economic activity has weakened further” but pointed out that “inflation has been elevated” and “uncertainty about the inflation outlook has increased.” I would say that with the amount of money and credit they are creating out of thin air, uncertainty about the inflation outlook has decreased–it’s going to be really bad, for sure.

I have been saying that the all-clear signal would come on a breakout and close over 1326 on the S&P 500. The head-for-the-bomb-shelter signal would come on a breakdown and close under 1270. The average of those two levels is 1298, and the S&P moved down to exactly that level after the decision and then turned up. Against the backdrop of a “disappointing” albeit significant rate cut and all the short selling, put buying, cash building and trash talking, the market moved right up to close at 1329. The breakout is here.

If this is for real, there may be a token test of the 1312 to 1315 level tomorrow, and then a decisive move up over 1329. On such a test down and recovery, sell your puts or UltraShort S&P 500 ProShares (SDS).

If there is no test down, and the market heads over 1329 from the opening bell, sell your insurance position. You can go back on margin, buy calls or just get fully invested.

But if the S&P starts what looks like a test down and then breaks below 1312, and especially below 1295, it is headed for a retest of 1270 again. In that case, keep your insurance position in case 1270 fails to hold. The big negative today was the sharp drop in the VIX Fear & Greed Index back to the mid-20s. That could mean we need another jolt of fear before the S&P can go higher, or it could mean we’ll go up two steps, back one, up two, back one, etc., instead of seeing the slingshot higher. As always, we will let the market tell us what to do next and I’ll be in touch with what you should do now.

Today is an important day for the markets for a number of reasons and I’m writing to you this morning to make sure that you are prepared for what may lie ahead.

As I’ve been advising you, the 1270 level on the S&P 500 is a key support area on the monthly market charts. Last week this level was successfully tested on Monday, Tuesday, Thursday and Friday. Yesterday was the most severe test yet as the market swung all the way down to 1256.98 during the day, but managed to close above the support line at 1276.80. The fact that the market didn’t close below 1270, and that the market is making a big move higher this morning, means that we may have seen the bottom.

I say “may have seen a bottom” because, as always, there’s a chance the market could pull a fake out and move down to a lower trading range. If the S&P breaks 1270, it could plunge to 1180. That, my friend, will be the bottom. If we don’t see a strongly positive response to the Federal Reserve’s announcement later today, the market could put in an 1180 bottom by Thursday. Good Friday is a holiday, and traders will not want to hold positions over the long weekend if there are remaining issues about the effectiveness of the Fed’s latest move.

Adding to the mix of pressures on the market this week is that we’re fast approaching a pivot point for the markets. I’ve told you that March 22, this coming Saturday, should be a major turning point for the markets. These major turns generally come anywhere from a 10 days before to 10 days after the actual pivot day, so we are in the zone. A rally for the rest of the week will confirm that Monday marked the bottom, and I would not be surprised to see a slingshot move to 1440 by the end of next week. If there is a sharp decline after the Fed speaks, the government will take the three-day holiday to put programs into place to stop the crisis, and the rally will start next Monday.

For now, if you are a fully-invested long-term investor, you don’t have to do a thing. Of course, you don’t want to be on margin more than you could stand in the event that the S&P drops to 1180. If you want to trade this move or just protect your portfolio, here’s what you should do now:

• If you already bought put protection or the UltraShort S&P 500 ProShares (SDS), you should hold this position until we see what the Fed does. A cut of three-quarters or a full percentage point should start a major rally, but until it looks like the S&P will close solidly over 1326, keep the insurance. With this strategy we are simply letting the market tell us what to do. I will be watching for the announcement, of course, and will send you another Flash Alert later today if you should close out your downside protection play.
• If you don’t own protection, I don’t think it is worth buying any at this point. The Crash scenario is a lower probability than it has been in the last two weeks, and a dip to 1180 would be followed by a slingshot recovery so fast you should be able to ride it through (again, don’t get caught on margin)

What Else To Watch Out For

This is a difficult time because the psychology of the markets is terrible, and it is infectious. The best thing to do is turn off CNBC and ignore opinions from those who are ignoring history. I often watch well-meaning people on CNBC say things like: “Corporate earnings are going to slow for the next four quarters, so we’re advising people to cut back on their equity exposure.”

Every comment like that should be met by the anchor saying: “Well, we looked at every period of slowing corporate earnings for the last 50 years, and 95% of the time stocks outperformed the long-term averages.” The data is there, but the guru’s statement—which sounds so plausible on the surface—always goes unchallenged.

Here’s the reality of the situation: In the last seven days, the Fed has put up at least $230 billion to bail out the financial system, a.k.a. their buddies on Wall Street. That includes the $200 billion announced last Tuesday, which set off a furious market rally, and $30 billion over the weekend to bail out Bear Stearns. one reason they did not want Bear Stearns to go bankrupt is because six weeks ago Bear paid out hundreds of millions of dollars in bonuses to their traders, investment bankers and management. In a bankruptcy filing, those worthy folks would have had to return their bonuses. Unthinkable! So ex-Goldman head Hank Paulson and the inept Fed Chairman Bernanke bailed them out. Why should we care about what these guys will do for their buddies? Well we’re going to end up paying for this cronyism through inflation, the invisible tax that almost no one complains about. It’s the way the world works. So….

• Don’t listen to anyone who says the Fed can’t stop this problem. They can buy every subprime mortgage in America if they want to, just by electronically crediting the banks that hold them.
• Don’t listen to anyone who talks about a negative that has been known for weeks or months and is already in the market. If Goldman Sachs suddenly ‘fesses up to credit losses, that is not a new negative. The major financial companies have been slammed. We all know that. Get over it. If you hear that foreclosure rates are rising, the proper response is a yawn. If there’s a revolution in Saudi Arabia—now that’s a new negative.
• Don’t listen to anyone who says the market won’t bottom until surveys of economists, consumers or business budgets turn up. The market will bottom six ahead of the upturn, as it always does, and the surveys will bottom three months after the upturn, as they always do. I turned bullish on July 23, 2002, at the exact market bottom based on the VIX Fear & Greed Index spiking to the mid-40s. In other words, just listening to the market. The surveys turned up nine months later, after the S&P was already up over 18%. Yesterday’s VIX spike to the mid-30s gave us a welcomed dose of fear, which was missing last few months.

Nothing precludes one more plunge to 1180 and a VIX spike into the mid-40s again, but the market is telling me that the stage is set and we are very close in time and points to the bottom…if we’re not already there.

Growing-up, some of my younger years were spent on a dairy farm near Colora, Maryland. During the snowy winters, my Dad, my two-years-younger brother and I would pass the time by playinFg Monopoly. After a couple of hours, Dad usually owned most of the good properties, I was struggling to stay in the game, and my brother would land on the Boardwalk square with four hotels and be unable to pay. With him broke and out of the game, it would just be Dad and me — the outcome was inevitable.

Dad would look thoughtfully at the board, then at our cash positions, then at the bank, and finally say: “Let’s pass out the $500 bills.”

“Yaaay,” my brother and I would cry, as we went from near-broke to having wads of cash in front of us. The game could now continue for another few hours before Dad would need to infuse us with more cash again. Sometimes we made one game last the whole weekend that way.

My Dad would have been a great Fed chairman. He would have stopped this whole credit crisis cold, simply by announcing last summer that the Government was sending $100,000 to everyone with a Social Security number. Why not? The dollar is already a store of value roughly on par with Monopoly money. Of course, inflation would soar, but at least, everyone would know that it was coming, unlike the current situation where inflation is skyrocketing, but the sheeple haven’t a clue what is about to hit them.

When the Fed Chairman Bernanke was appointed, I read some of his work and proposals and said, in print, that he would not finish out his term, but would resign in disgrace. I stand by that. At the time, his favorite idea was to publish a specific inflation target, and that irked me. Inflation targeting is an academic theory that, as one would assume from the name, is a quantitative target set for inflation by an economic authority. Similar to beta and modern portfolio theory, inflation targeting will blow up in the real world. Think Long-Term Capital Management. All it does is tie the hands of the Fed, so it escaped me as to why any Fed chairman would think that it was a good idea. (I realize that lots of people outside of the Fed think that tying their hands, and preferably their whole bodies, to a stake surrounded by highly flammable material would be a great idea.)

Bernanke’s other claim to fame was his call to action for earlier, more forceful Fed intervention. His theory was that less intervention applied earlier has much more of an impact than massive intervention later. He’s probably right, but why didn’t he do it?

Now, he knows that the Fed’s real job is to follow the two-year Treasury-note yield, set by the market, and to do it while pretending to walk at the head of the parade. Besides that, all you have to do is confuse Congress now and then by using three-syllable words when you testify, and your limo and invitations to the DC party circuit are secure. It’s simple.

So how did he get so far behind the curve? That’s the real mystery. With the two-year T-note down to 1.5%, Bernanke needed to cut the Fed Funds rate in half yesterday. Instead, the $200-billion banks and Wall Street bailout that he announced — which I call the “Bear Stearns Bailout Program” — will probably lead the Fed to a 50-basis-point cut on March 18, instead of the 75-basis-point reduction rumored until now, or the 150-basis-point slash that is actually needed.

The plunge that began yesterday afternoon could be interpreted as the market worrying about the Fed “pushing on a string,” and most of the technical types are in that camp. I saw short sellers saying (or praying?) that the bottom is not yet set on this bear market, and technicians are saying a powerful upturn like Tuesday’s “ought” to be followed by several confirming rally days if there really has been a trend reversal.

But that didn’t happen. What we really saw was a probe above 1326 on the S&P 500 yesterday morning, followed by a rejection of that idea for now. That sets up two possibilities and one clear signal. First, let’s look at the latter. The clear signal, as I have been saying, is a breakout and close over 1326. You can count on the short sellers and talking heads to dismiss a breakout as just another bear market rally, but that will be the sign that the recent downtrend is over. It is very possible that when the S&P moves over 1326 and then stages a successful test of that level as support, it will never look back.

Now the first and most likely possibility is that today’s action marks one more quick test back towards 1270 that bottomed at 1282, right in the critical 1280 to 1290 range. That creates a triple bottom and enough negative sentiment to fuel a powerful slingshot rally over 1326 and on to 1440. Again, 1440 remains the crucial test for the larger decline since last October. A failure there could make for a very unpleasant summer, while vaulting over it would put the second-half rally to new highs back on the table. But we will deal with 1440 when we get to it — the big “all-clear” signal will be a close nicely over 1326. I expect that to start a very big new uptrend, leaving the bears and shortsellers crying that it ain’t fair.

The second possibility is the one that started this series of Flash Alerts warning of a potential Crash: 1270 does not hold, 1255 breaks and the S&P crashes to 1180, probably all in one day. Unless that happens very soon, the Crash has been avoided.

Until we see the actual breakout over 1326 following this triple bottom, there’s no reason to get wildly bullish. There’s also no reason quite yet to sell any protective options or the UltraShort S&P 500 ProShares (SDS) exchange-traded fund. They are insurance, after all, and they will be needed if the market can’t clear 1326. If you do own them, there will probably be a better exit price than today’s close, even if the market avoids a Crash. If you don’t own them, you should see how the S&P handles this rally after this morning’s retest towards 1270 before buying them if the market breaks. I will keep you informed as these scenarios play out in the market over the next couple weeks. I expect to send you one or two Flash Alerts about this over the next week or so, and then give market forecasting a much-needed rest until we get to 1440.

Memories Are Made Of This

A few weeks ago, I mentioned the Intel presentation on their processing breakthrough to double the capacity of phase-change memory, a technology invented by Energy Conversion Devices (ENER). I am a bit cynical about new memory technologies, because I’ve seen so many come and go, starting with bubble memories from IBM in the 1970s. The charge-coupled device that takes the picture in your digital camera started out as a new memory technology. But phase-change now looks real enough as a memory technology to spend a bit more time on it. It will be bad news for flash memory producers, but good news for Intel and great news for ENER.

First, let’s start with an overview on memory technologies, for all you tech junkies out there. As you probably already know, memories are used for different things:

• Main memory in a computer has to be cheap, hold a lot of data that can be accessed randomly and does not have to retain data after the power is turned off. The various flavors of DRAM (Dynamic Random Access Memory) suit this purpose.
• Program storage memory holds your operating system, so it has to retain data even after the device is turned off. That means it has to be non-volatile and provide random access. Desktop computers use magnetic storage — a hard disk drive — to store the operating system and a hard-wired chip to start loading the software into DRAM when the power is turned on. Consumer devices use NOR flash memory, which is non-volatile and easily accessed randomly, to store the operating system. NOR flash doesn’t drain batteries the way that electromechanical hard disk drives do, and it isn’t as susceptible to shock from being dropped. When the device is turned on, the operating system loads into random access memory, either DRAM or static random access memory (SRAM), from the NOR flash storage.
• Data Storage requires random access and non-volatile memory, so you don’t lose what you have done when the power is turned off. You or your device will save the data from RAM to either a hard disk or NAND flash memory.

User Configurations like screen brightness, TV color preferences or ring tones on a cell phone require non-volatile memory, but these change infrequently, so it does not have to be randomly accessible. NOR flash does well here.

Several memory technologies were developed to meet these varying needs in desktop and mobile computers, and consumer electronics.

Random access memories are cheap but volatile. DRAM is the cheapest, but slower and takes more power than SRAM. It also does not have a low-power, standby mode. SRAM is more expensive but faster, and can be used for low-power standby. Both types of memory have unlimited endurance and can be written to an unlimited number of times.

Flash memories are non-volatile and can be used to store whatever you want to keep when the power is shut down. NOR Flash allows for random access and therefore is used for storing program code, but it is slower and more expensive to make than NAND Flash. NAND flash is better for applications that require faster read and write speeds than NOR can provide, but until fairly recently it lacked random access capability and therefore was not suited for program storage. Some recent additions have led to “boot from NAND” capability, and since NAND is so much cheaper to produce, I think NOR is dead. That’s why Intel just got rid of their NOR operations.

Flash memory endurance is limited and the parts can wear out, but technology advances now have endurance up to a million write cycles. And software distributes the write operations and protects data from being lost in a flash memory cell that is wearing out.

Hard disk drive memory is amazingly cheap per bit, but compared with a chip is very slow and power hungry. In addition to its susceptibility to physical shock, it is not as reliable as a solid state semiconductor chip.

Computer and consumer electronics product designers mix and match these technologies to create product features and price points that will appeal to consumers. A computer has the Basic Input/Output System (BIOS) on NOR flash memory, which will load the operating system and programs from your hard disk to DRAM. The microprocessor has cache memory to speed up applications, and that is SRAM. You might plug in a USB flash memory stick with digital pictures to edit in DRAM and then store on your hard disk, or burn to a CD or DVD, each of which is a form of non-volatile and essentially non-random memory. A flash-based iPod, on the other hand, has an entirely different memory configuration.

Phase-change memory is based on a material, chalcogenide, that changes its physical state from liquid to crystal to store data. Intel should have phase-change memory chips on the market in 2010, initially to replace the NOR type of flash memory used in cell phones. Phase-change can also replace the NAND flash found in digital camera memory chips, USB sticks and other solid-state memories. Intel will pair phase-change memory with their Silverthorne processor project for portable Internet devices and handheld consumer products. Silverthorne is 25% smaller and uses 10% of the power currently used by low-power processors.

Energy Conversion Devices moved this technology into a subsidiary, Ovonyx (formerly Ovonic Memory Systems), and sold some of the equity to Intel, STMicroelectronics and other licensees. As recently as 2004, ovonic memory was only one of the many contenders for nanotechnology computer memory, even though way back in 1970 none other than Gordon Moore of Moore’s Law fame said that ovonics had great potential. But it always stayed in the “science project” category due to problems with power consumption and stability, and an alternative technology called MRAM (magnetoresistive random access memory) that uses the direction of electron spin to store information. MRAM seemed that it was the most likely contender to replace flash memory, and maybe DRAM and Static RAM, too. Something has to work soon, because by 2010 conventional flash, DRAM and static RAM (SRAM) technologies will no longer be able to scale successfully. Before that, as in next year, the speed and capacity of NAND flash memory is likely to be inadequate as a non-volatile memory for some of the new portable computing and consumer products. Companies tied to flash, like SanDisk, are making buggy whips as the automobile age begins.

Usually, existing memory technologies like DRAM and flash are sailing down the Moore’s Law curve, doubling capacity every 18 months. That makes it very hard for any new technology to catch the moving target. New technologies typically start at lower capacities and higher costs, so they have to live in niche markets until they slide down the manufacturing experience curve. Even then, the developer needs deep pockets to cross that chasm and seriously compete with the existing technologies. That’s why it is so important for us to recognize that flash memory is about to run out of technological gas and fall off the Moore’s Law curve. It opens a window for something new to come to the forefront.

All the Ovonyx licensees, including Hitachi, IBM, Infineon, Philips and Intel have made rapid strides in improving the technology, and Intel’s commitment has been crucial. Ovonic memory, MRAM and another technology called nanocrystalline memory (backed by Micron and Freescale) have emerged as the three key nanomemory technologies that could potentially dominate future memory chip technology.

While MRAM is fast and has high capacity, it is not cheap. Ovonic memory is easy and cheap to make. And with the stability and capacity issues solved, it suddenly is much more competitive with MRAM for the mobile memory market. Philips showed how to switch ovonic memory from amorphous to crystalline using only 0.7 volts, and the power consumption issue went away. Intel, which wasted quite a bit of time backing a losing technology called polymer memory, is now committed to ovonic memory and will sample products this year. That means all their competitors will have to take it seriously.

The triumph of ovonic memory is not a sure thing, but it is looking more and more likely. Samsung, the market leader in DRAM and flash memory, has chosen ovonics as their most likely replacement technology and will introduce products later this year. The key to ovonic memory becoming dominant or just important will be if it can become a hard disk drive replacement and bump expensive flash memory out of that market. The hard drive market is huge in terms of bits of storage. Ovonic memory does not have to be cheaper per bit than hard drives; it just has to be cheap enough at the typical hard drive capacity that is used in an MP3 player or a laptop. Laptops that need huge amounts of storage, such as those for product engineers, will stick with hard drives. But if the “cheap enough” number is, say, $35, and that buys enough storage using ovonic memory, there’s no reason to put in a hard drive with twice the storage. The whole laptop can be designed differently if the hard drive is not there. On the other hand, the video server that you will have in your home in seven to 10 years with all the high-definition movies on it will still use a gigantic hard drive for storage. Solid-state memory would be too expensive. Other technologies will still live on, but only in other specialized applications.

For example, Metaram, a Silicon Valley startup headed by Fred Weber, the former Chief Technology Officer at Advanced Micro Devices, has designed a chip that sits in front of ordinary DRAM and manages the read/write process. It substantially accelerates DRAM while allowing for 75% smaller physical memories. It can cut the cost of a supercomputer by up to 90%. It has immediate application in the large database servers, and eventually could enable a personal supercomputer in your home.

We are well-positioned for the triumph of ovonic memory through Energy Conversion Devices, where literally none of the present value of the company comes from their ownership of Ovonyx. When the company announced December second-quarter results in February, they broke a four-quarter streak of disappointing Wall Street. Revenues hit $56.4 million, up 20% from the first quarter and up a whopping 146% from the prior year. United Solar accounted for 92% of revenues, and solar production grew 50%. They lost 14 cents a share, including about 12 cents for one-time severance and preproduction costs, less than the 19-cent loss in the first quarter or the 37-cent loss last year. The new and very effective management team said (again) that they will show sustainable profitability in the June fourth quarter, because sales are running ahead of even their increased production.

They raised the lower end of their guidance for the year and are now looking for $235 million to $245 million in sales, instead of $220 million to $245 million. They also raised gross margin guidance to 23% to 25%, based on their cost-cutting program and increasing production at the new Greenville, Michigan, plant, which only opened last November.

Incidentally, General Motors said that it will put lithium-ion batteries in its hybrid cars and trucks in 2010. They have three times the power of the current NiMH (nickel-metal-hydride) batteries made for them by Cobasys, the joint venture between Energy Conversion Devices and Chevron. The contract for developing these batteries was awarded to Cobasys in January, which will work with A123 Systems, the partner I previously told you about. Toyota and Daimler (Mercedes) are going the same route, and everyone else will follow.

The stock bumped up 11% on the “sustained profitability” forecast, but still is dirt cheap as the thin-film solar laminates leader, unaffected by the polysilicon shortage because their process does not use it. Buy ENER while it is under my $30 limit for my $55 target.

Biotech MegaShift

Amgen (AMGN) got a unanimous vote yes yesterday from the Oncologic Drugs Advisory Committee to recommend approval of Nplate, as I predicted. Even Dr. Padzur agreed. The FDA is due to approve in May.

At today’s more important hearing on Aranesp, I thought the most likely outcome was restriction for use of the drug only in breast cancer, with a minimal chance that the drugs would be restricted for all cancers, and maybe a 40% chance they would walk away scott-free. Indeed, they won a 1- to-1 vote against banning Epogen for cancer treatment. They won an 8-to-6 vote saying Aranesp should not be limited to small-cell lung cancer. Then, as I expected, the panel by a 9-to-5 vote said that Aranesp should not be used for metastatic breast cancer, but they added head and neck cancer, which I didn’t expect. This relatively trivial restriction won’t have any significant additional impact on Aranesp sales.

The FDA should confirm the panel’s advice in 30 to 45 days, bringing this whole episode to a close with no additional damage. The stock was up $2.19 today, or almost 5%.

Amgen now has the formal approval of Nplate ahead of them, followed by positive late-stage data on their osteoporosis drug, with no more negatives in sight. The stock should move up dramatically no matter what the market does, to take its place with Genentech as a biotech industry leader. Genentech may increase its guidance tomorrow, fueling a relief rally in biotech. Of course, a strong market will make the process go quicker. As I’ve said before, if I was recommending a LEAP option today, I’d pick one closer to the current price of the stock, but I’ll continue to recommend buying the Amgen January 2009 $70 LEAP call (VAMAN) all the way up to $12.50 for as $25 target, which assumes AMGN hits $95 a share before the LEAP expires.

Dendreon (DNDN) said that the FDA has agreed to accelerate final review of Provenge by almost a year, and the interim peek is still planned for the second half of this year. They completed enrollment in October, so it is just a question of following up long enough to get statistical significance. On the conference call, management said that they were able to increase the power of the interim analysis while using 305 patients instead of 360 for the final analysis, which accelerated the timeline to approval.

DNDN has a new molecule targeting cancers and Benign Prostatic Hyperplasia that should go into human trials this year. They’ll present animal data at the American Urological Association meeting in May.

The company announced earnings this morning. They lost 32 cents a share for the quarter and burned $82.6 million in cash for the year, about the same as in 2006. They finished the year with $120.6 million in cash. Buy DNDN up to $8 for my $40 target after Provenge is approved, either in late 2008 after the interim peek or early in 2010 after the now-accelerated final data is submitted.

Geron (GERN) had two more important human embryonic stem cell patents upheld after a U.S. Patent Office re-examination. Geron holds a broad portfolio of in-licensed patents. Plus, it owns stem cell-related patent portfolio of 36 issued or allowed U.S. patents, 69 patents granted or accepted in other countries and more than 230 applications pending worldwide. GERN is a buy up to $9 for an $18 trading target, and higher prices in the longer term.

Isolagen (ILE) has fallen below 50 cents a share, and Dave wrote: “I just read the Isolagen 2007 annual report filed 03/07/08 form 10K and found it very, very negative, showing possible bankruptcy and denial of BLE license from FDA on patients dropping out of phase trial and law suits filed against directors for false representation.”

Another subscriber, Russell, asked for the details on why Isolagen failed the trial and why the new trial is likely to be successful, and asked if there are financial issues here.

Just to recap, Isolagen has completed dosing in both the Phase III nasolabial wrinkles trial and the Phase II full-face trial. In both cases, patients are in the six-month follow-up period, and when that is over, we will see the data. The Phase III trial for acne scars is still accruing patients.

The last wrinkles trial was badly designed and not conclusive. The new trial qualified for a Special Protocol Assessment with the FDA, which means if they hit statistical significance, they get approval.

The stock came down mostly on the appointment of the Chief Financial Officer as CEO. First, he lives in Ireland, not Exton, Pennsylvania. Second, the appointment could be read as Isolagen needing financial talent, not medical talent, to get to the next step. I think that’s true. They finished 2007 with $17 million in cash, enough to carry them through September, and a large negative book value. They certainly don’t want to sell stock at the current low levels, so they need to sell their Swiss office property and partner one or more programs. Longer term, they have $90 million in convertible debt due on November 1, 2009, that they need to take care of.

So the situation is that if the Phase III wrinkle program fails, the company will probably be sold for pennies. But I believe the program will succeed, in part because the therapy works and was already on the market in the U.K. It’s always possible for a U.S. clinical trial of a process approved in Europe could fail, just as Isolagen’s last trial did, but that is not the way this one is shaping up.

But the risk factors are high, because in the third quarter they will announce the Phase III wrinkle data and run out of money. With good data, the stock will shoot skyward, and they’ll be able to do a quick private placement (they already have a shelf registration effective) at much better prices. That’s exactly what I think will happen. Just to reflect the current market, I am reducing my buy limit to $1 but leaving my target price at $9, which assumes the trial works. ILE remains a Top Buy, although a very speculative situation.

Rochester Medical (ROCM) drew questions from Charles and John: “With all that cash why doesn’t management buy a few million shares to stabilize their stock and stop the bleeding before they lose all these new stockholders. Or don’t they care? If they don’t do something positive, it’s Tankville.”

John, Rochester has a much higher return-on-investment opportunity, and that is dramatically expanding sales of their anti-infective urinary catheters. I know the lower stock price is painful, but it is based on higher marketing spending depressing current earnings. We just can’t give in to Wall Street’s incredibly short-term focus, when everything is going right at the company and they are moving to take advantage of the opportunity that the FDA has handed them. Hospitals right now are convening committees to see how to reduce hospital-caused infections, and ROCM needs to be in that dialog.

A settlement with Covidien will go a long way towards getting the stock price back to where it belongs. In the meantime, ROCM at $10.38 (up $1.02 today) is a gift. Buy ROCM up to $20 for my $40 target.

Content on Demand

EMC (EMC) will benefit as business capital spending holds up for virtualization software sold by its 85%-owned former subsidiary, VMware (VMW). Spending will hold up because virtualization saves money, with a high return on investment. VMware has over 55% of the market for this software, with Microsoft and Citrix Systems about tied for a distant second with 20% each. IBM has 12% and Oracle 7%.

Furthermore, surveys show that VMware and IBM are the only two suppliers with satisfied customers. Citrix is in third place with less than a third of their customers happy, and Microsoft is at the bottom with about 29% customer satisfaction. That’s pathetic, and word travels fast among Information Technology (IT) customers. So it isn’t surprising that going forward, a recent survey showed three-quarters of all those intending to buy virtualization software will buy VMware. That’s very good news for EMC. Buy the EMC January 2010 $15 LEAP call option (WUEAC) up to $5 for an $11 target.

Harmonic (HLIT) has been weak, and I can find no reason why. Competitor Arris had a bad quarter, but that was because a competitor took market share away from them in a product that Harmonic does not even make. Comcast is rolling out its DOCSIS 3.0 high-speed Internet in the second half of the year, and Arris said that Comcast might have less demand for some Arris products. But Harmonic is a supplier to the DOCSIS 3.0 rollout, so this is good news for us.

Demand remains very strong for video infrastructure equipment, with video now more than half of Internet traffic. You may have seen that Google is investing in a 6,200-mile transpacific fiber-optic cable consortium to make sure there is enough capacity. Shades of Global Crossing! If only they could have held on for another five years, their vision of huge undersea cable networks to handle all the Internet traffic would have come to fruition.

At the recent Merriman Curhan Ford conference, Harmonic management said that demand remains strong, and in 2008 the company expects to operate above its goal of 15% operating profit. Take advantage of this weakness to buy HLIT up to $12 for my $16 target. I am making HLIT a Top Buy.

Security MegaShift

SiRF Technology (SIRF) drew two subscriber questions from Larry: “Given the legal sharks are circling, do you think of the case holds any merit? Given your experience, how long will these types of actions depress a stock’s price?”

No the cases have no merit. The plaintiff’s bar is looking to settle with SIRF’s insurance company. There will be a long fight among the lawyers, and then either the case will be thrown out or the insurance company will settle. These cases don’t depress stock prices at all. Now that Bill Lerach is in jail, my hope is that legislation will be passed exempting the company and its shareholders from any damage awards, and make the plaintiff’s bar sue the individual managers that caused a problem, if any. SIRF is a great buy up to $12, and I still think my $28 target will be hit after the combined GPS/processor chips are introduced.

WiMAX MegaShift

Alvarion (ALVR) reported an excellent December fourth quarter and is looking for strong revenue growth in 2008. But the weakness of the U.S. dollar versus the Israeli shekel led them to forecast March-quarter earnings of breakeven to three cents a share, below the five-cent consensus estimate, and that was the bulk of the reason why the stock declined. Another factor was AT&T saying that they would go ahead with investments in LTE (Long Term Evolution), an inferior cellular technology that will yet again keep U.S. carriers out of step with the rest of the world. Verizon probably will play the same game, leaving Sprint Nextel, Clearwire and the rest of the world to deploy WiMAX. It is the accelerating worldwide adoption of WiMAX that lets Alvarion management reaffirm their revenue guidance for $275 million to $300 million this yearup as much as 25% even as their legacy products decline.

For the December quarter, sales rose 32% to $66.3 million, above the high end of their guidance. That included record WiMAX revenues of $36.3 million, and the company said that the various trials they are in are getting bigger and more complicated. In addition, there are numerous spectrum auctions and awards going on all over the world — so actual commercial activity is accelerating. For the year, the company had record revenues of $236.6 million, up 30%; record WiMAX revenues of $124 million, up 74%; and record WiMAX shipments of $138 million, up 84%. I expect high growth rates to continue for several years. That’s why when Wall Street knocks the stock down because of quarterly results that will be reported six weeks from now will be impacted by the weak dollar, I tend to look at how much money we’ll make by buying the stock at these levels for a multi-year investment and get really excited. Of course, the company was profitable for the year, with 14 cents a share pro forma and six cents on a GAAP basis.

There is nothing wrong with the company or the WiMAX market, and ALVR remains a Top Buy all the way up to $11, a double from here, for my $18 target, a triple from here.

Death of the Dollar

Microsoft was fined $1.35 billion by the European Competition Commission, and they have to pay it in 90 days. But the Commission does not accept dollars — Mr. Softee has to pay in euros. I guess someone is agonizing about what day to pay.

With the dollar trading at its weakest level in 30 years, below 100 yen last night, gold over $1,000 and oil over $110 a barrel, one wonders how much worse Bernanke can make it. The answer is a lot, but probably not right now. I expect the dollar to stabilize against the euro for the rest of the year, although it will gradually lose more ground to the yen. I also think that gold will consolidate its recent gains, which in the case of that market means a year of volatile trading between $700 and $1000 an ounce, with little net progress. I also expect oil to stabilize in the $80 to $110 range, centered on $90 or so.

After the presidential election and the typical six-month honeymoon, assuming the democrats take control of Congress and the presidency, the bear market in the dollar should resume big time. As you know, after April 2009 I am expecting a big bear market, a big recession and a final resolution of the dollar’s future.

But there’s a lot of money to be made between now and then… not buying gold, oil or euros… but in the MegaShift stocks. Since last October, small-capitalization high-growth stocks have fallen 30% to 50%. That has brought their price/earnings and price/enterprise value ratios to historically low levels, a couple of standard deviations below normal. In the past, that’s been a buying opportunity that leads to well-above-average returns over the subsequent period, in this case to April 2009. It takes courage to take advantage of it, but remember that the headlines report what has happened, and the stock market only cares about what is coming.

Following Monday’s Flash Alert about the 50% potential for a Crash, the market made a dramatic turnaround yesterday. Actually, it was the biggest one-day gain in the Dow Jones Industrials since 2002. So was I wrong? Maybe, but it could be “Or What” until we see the dust settle and the S&P 500 stay above 1326.

In Monday’s Flash Alert, I wrote:

“So maybe I am the one getting shaken out this time, just before the delayed rally begins. But that’s not the way to bet until the market itself tells us it wants to reverse and go up.”

So, has the market spoken? To determine this, we need to look at what really happened yesterday, and what to look for to tell if Tuesday’s rally was just a sharp, countertrend rally in what is about to turn into a bear market and a recession, or if it was the first leg up in the market’s run to new highs, with a couple of slow growth quarters thrown in instead of an official recession. Along with discussing this, I’ll also cover what to do with protective puts or the UltraShort S&P 500 ProShares (SDS) exchange-traded fund that I recommended Monday morning.

First, let’s take a look at what happened in the market yesterday. A 416-point upswing in the Dow Jones Industrial Average, the biggest rally in points since July 29, 2002, and a 47-point move in the S&P 500 on heavy volume cannot be dismissed casually. The way that the rally unfolded was also very positive: It started with an opening salvo that ran up to 1310 on the S&P 500, followed by a test back down that got to 1286, and then the blistering rally into the close. Some commentators think that the Plunge Protection Team was behind the initial rally, and then short sellers drove the second big move up later in the day. I doubt that the Plunge Protection Team had to do a thing — I’ve talked recently about how negative sentiment has been, how much cash is on the sidelines and how high short interest is. That was plenty of fuel to drive yesterday’s action after the Fed came up with a $200-billion loan program to save the banks and stockbrokers, by letting them post sub-prime mortgages at face value as collateral.

While this program bails out their Wall Street buddies, the Fed plan does nothing for falling consumer and business spending, and it may even cause the slow-moving Chairman Bernanke to cut only 50 basis points from the Fed funds rate at the March 18 committee meeting. With the two-year Treasury note around 1.5%, the Fed funds rate is still 150 basis points too high. Bernanke has been behind the curve all the way, and until yesterday, another 75-basis-point cut was in the cards. Now a 50-basis-point cut is more likely, but it still leaves the Fed funds rate too high. Bernanke is trying to substitute a targeted program to unlock the mortgage market for another big general decline in interest rates. While what he and the other central banks have done will stop the collapse in the financial sector, I doubt that the firms that he is helping will suddenly open the mortgage spigot again. Most of the firms have far too many mortgages on their books, and their customers in turn have no interest in adding to their mortgage exposure.

The Fed’s program doesn’t even start until March 27, which will be too late to save some mortgage holders from getting margin calls and forced liquidation at low prices. Just like the tax rebate program, a sense of urgency seems to be lacking. To get the tax rebate, consumers have to file their 2007 tax return. Why weren’t the rebates based on 2006 returns, and sent out right away? Government “thinking” often baffles me.

So following the Fed’s announcement of the $200-billion loan program, yesterday’s rally ensued and almost wiped out the prior three days of losses. But until we see that solid S&P close over 1326, no one can say that the decline is over. It was interesting to see such a big rally, including the 200-point gain on the oil-dependent Transportation Index, on a day when oil prices spiked to another new record at $108.75, squeezing consumers just a little bit more. Consumer spending is 70% of GDP, but the Fed’s loan program doesn’t provide any money to households. Credit card companies are cutting limits and raising interest rates, while banks are raising lending standards. At the same time, home values are falling, income growth is slowing, and the amount of jobs available is shrinking. There’s nothing in this plan to turn those drivers around — this is a Wall Street bailout, simple as that. Where is Eliott Spitzer when we need him? Oh, right…

The Fed hopes real buyers will show up today and for the rest of the week. If they do, the S&P 500 will breakout over 1326 and that will be the time to sell protective puts or the SDS. I will send you another Flash Alert when I see the market likely to close over, say, 1329.

But if the real buyers sit on their hands and sellers take this opportunity to raise cash at a higher level, then yesterday’s up move was just another typical sharp counter-trend rally, and the markets will be heading much lower. So, here’s what to do in either of those situations:

• If the S&P rallies and looks like it will close solidly over 1326 (I usually allow about three points of leeway), sell your protective puts or the SDS; If the market retests back down to 1326, perhaps around the March 22 turn date, that would be a low-risk entry point to start buying stocks again;
• If you don’t own any protection, don’t do anything until you see which way the market breaks;
• If the S&P rallies today and then falls back from 1326, hold any protective positions you have, including cash;
• If the S&P breaks 1270 and you don’t own any protection, you might want to think about purchasing some.

As I said on Monday, breaking 1295 and then 1270 probably means a quick trip down to 1180. I think the whole down move could come in one day, with the Dow falling over 1,000 points. The drop from 1255 — the spike low in the futures market on January 23 — to 1180 could come in one or two hours.

But if the S&P hits resistance at 1326, falls back to retest 1270 and then rallies sharply, that would be a triple bottom at 1270 and one of the best buying opportunities in years. So as you can see, it’s a tricky period for investors, and you can expect a lot of Flash Alerts for the next couple of weeks.

Again, as I said Friday and Monday, if you are a long-term investor and can ride it through, you don’t have to do anything. After March 24, as worries about the credit crunch and a recession fade, I expect our stocks to lead the broad market in a strong move up into an April 2009 top.

Friday was a bad day in the stock market, and while some of the blame falls on the weak employment report, sinking dollar and high oil prices, here’s the real reason why the market tumbled:

Suppose you are the Secretary of the Treasury. A serious credit crisis has been going on for months, with locked-up credit markets, multibillion dollar write-offs at banks, busted hedge funds, bankruptcies of public mortgage companies and the whole nine yards. An inept Fed Chairman has been behind the curve the whole way in trying to stop the downward spiral. Now high-quality firms like Thornburg Mortgage, which leverage their equity to invest in AAA-rated debt of government-sponsored entities (GSEs), like Fannie Mae and Freddie Mac, are getting their loans called. They are forced to sell the AAA-rated paper to meet what is essentially a margin call, and even AAA-rated paper from these GSEs is infected by credit fears and losing value under the selling pressure.

What would you do? What would you say to calm the markets? Here’s what Treasury Secretary Hank Paulson effectively said on Friday: “I just want to remind everyone that the government does not really guarantee the debt of these GSEs, and rumors that we might guarantee them are absolutely not true.”

And down goes the market. Thanks, Hank. The S&P 500 not only failed to regain the 1326 level — finally breaking down on the weekly chart — it managed to close below the next support level down at 1295. The next possible area of support is 1270, only because that was the spike low on January 23. That level hasn’t really been tested, and if it breaks, the next stop is 1180.

Another thing that I really didn’t like about Friday’s market was that the VIX Fear & Greed Index did not show a spike of fear. Just before 3 p.m. Eastern Time, it was climbing nicely, but then it dropped back to a complacent 27.49 close. Markets bottom in an atmosphere of fear, not an atmosphere of complacency. The VIX should have closed well over 30, given the breakdown in the S&P 500. But instead, the slight signs of life in the last hour of trading immediately brought the VIX back down.

Considering the S&P’s actions on Friday coupled with the low close of the VIX, I think the whole 110 point down move from 1290 to 1180 on the S&P 500 could come in one day, equaling a drop in the Dow Jones Industrial Average of over 1,000 points. The drop from 1255, the spike low in the futures market on January 23, to 1180 could come in one or two hours.

Unlike Bernanke, Paulson is not inept, and neither of these guys is stupid. So there must have been some reason for Paulson to pull the rug out from under the credit markets at this point, other than his old employer, Goldman Sachs, being net short the affected stocks and bonds. But I have spent the weekend trying to answer Lenin’s question (“Who gains?”), and I can’t figure it out.

I suppose that it doesn’t matter, because all we care about is what comes next. Either the S&P will climb back over 1295 and head toward 1326 before collapsing, or it’s just going to keep dropping from here. Either way, the stage is set for a 1,000-point Bernanke/Paulson Crash in the Dow. I expect the VIX to be over 40 when we hit bottom.

Can we avoid it? Sure — that’s the other 50% probability. Remember that the market will always try to shake out every bull or bear, before setting off on a major trending move in the opposite direction. I was quite bullish last Wednesday because the S&P 500 was perfectly set up for a major rally to 1440 and beyond. So maybe I am the one getting shaken out this time, just before the delayed rally begins. But that’s not the way to bet until the market itself tells us that it wants to reverse and go up. I suspect that we won’t get that final test down and rally until after the Fed’s March 18 meeting, which would about coincide with my March 22 turn date. (March 22 is a Saturday and March 21 is a holiday, so the actual market turn or final retest should come on Thursday, March 20 or Monday, March 24.)

As I said Friday, if you are a long-term investor and can ride it through, you don’t have to do anything. After March 24, as worries about the credit crunch and a recession fade, I expect our stocks to lead the broad market in a strong move up into an April 2009 top.

But also as I said on Friday, if you want to ease the pain of watching a very sharp short-term decline, or even profit from a downturn, here’s what to do:

• Get off margin;
• Don’t buy any more stocks until you see the market clear the 1326 level;
• And unless you see a strong rally today, you should buy short-term protection and then remove the protection if the S&P 500 rallies decisively above 1326 and seems likely to close there.

Protection could include short selling the S&P Depository Receipts (SPY), buying the S&P Depository Receipts April 129 puts (SPYPY) that I discussed in Friday’s Flash Alert, or for retirement funds, buying the ProServe UltraShort S&P 500 ProShares (SDS), an exchange-traded fund that moves up at roughly twice the rate the S&P moves down.

I am going to add SDS as a recommendation in the New World Investor portfolio, and I will send you another Flash Alert when it is safe to close the position. And don’t miss Thursday’s Radar Report, where you’ll learn how playing Monopoly during snowy winters on a Maryland dairy farm as a 10-year-old prepared me for the Bernanke/Paulson regime.

I try not to be an alarmist about these things, but once again world stock markets have worked themselves into a situation where there is potential for a Crash in the next few days. The converse of the headline above is that there is a 75% to 85% chance that there won’t be a Crash. But we can’t bury our head in the sand about the possibility of a Crash. So today let’s look quickly at the set-up, what has to happen to avoid a Crash, what the roadmap will be if a Crash is imminent, and what you can do to prepare if a Crash is on the horizon.

The Set-up

As I said in yesterday’s Radar Report, we have had seven straight weeks where the S&P 500 went under 1326 during the week, but then rallied to close above it at the end of the week. Going into yesterday’s trading, the S&P was well-positioned to move up and create a very strong buy signal. Instead, it collapsed at the open and kept on going down all the way to the close, which was well under 1326. After bouncing convincingly from closes at 1326 on February 6 and March 4, this was the lowest close for the entire move down and a definite breach of the critical 1326 level. If there is not a significant bounce today, the weekly chart will be badly damaged.

In overnight trading, I am seeing weakness everywhere. Other countries are worried about the exposure of their financial institutions to the U.S. sub-prime mess, and they have already seen problems surface. They are also worried about a U.S. recession dragging down their economies by weakening exports. But in addition to the credit and recession worries that these countries share with the U.S., they are also worried about the weak dollar impacting profit margins at exporters and throughout their supply chain. Case in point, Japan’s Nikkei 225 Index fell 3.3% last night as investors sold exporters’ shares, because the dollar dropped to a three-year low against the yen during Asian trading.

Avoiding a Crash

So with foreign markets already falling, what can the American markets do to avoid a Crash? Quite simply, the S&P 500 has to get back above 1326, preferably today, and certainly by Monday or Tuesday. This has been a very difficult market to trade, as it seems to want to shake out every bear with rallies up to 1370, and then every bull with sudden drops under 1340. It could be that yesterday’s move is a massive fake-out, sucking in the last of the bears’ money before snapping the trap and heading up 150 points or so. That even seems likely, given the factors that I covered yesterday: Extremely negative sentiment, high short selling, record cash positions and a Fed determined to avoid a serious downturn.

But the bottom line is that while all those factors are positive, the market has to respond or they don’t mean a thing. There is an important support level at 1295 and another one at 1270. If the S&P spikes down to one of those levels, quickly recovers and then climbs back over 1326, we will know the big, multi-month upmove is underway. I’ve been holding out March 22 as the likely date for a big turn, and that would fit with a move back over 1326 now that extends to 1370 again, one last test back down towards 1326, perhaps stopping in the 1330 to 1340 range, and then the big turn up to new highs for the rest of the year and on to April 2009.

The Roadmap to a Crash

If this scenario doesn’t hold up, what should we watching to signal that a Crash is imminent? Again, this is pretty simple. A rally back to 1326 that fails quickly from there would be a very, very bad pattern right now and that would be the time to take protective measures. We could see such a rally today or, more likely, on Monday. So it isn’t the spike down to 1295 or 1270 that you should worry about, it’s a quick failure of the subsequent rally back towards 1326.

If the S&P does spike down all the way to 1270 today or Monday, and then bounces and fails below 1295, I would say a Crash is imminent.

What to Do

I still think that the big upturn is coming this month, but the market is in a precarious position for the next couple of weeks. Accelerated down moves tend to come at the end of consolidations or downturns, and they can cover a great distance in a short amount of time. If there is a Crash, the upturn could come from much lower levels, like 1180 or even 1000.

If you are a long-term investor and can ride it through, you don’t have to do anything. We own the right technologies and the right stocks for the New World of always-on, always-connected consumers, better healthcare, higher energy costs and more security. As worries about the credit crunch and a recession fade, as they will, I expect our stocks to lead the broad market in a strong move up into next April.

However, if you want to ease the pain of watching a potential short-term, sharp decline, or even trade a downturn, here’s what to do:

• Get off margin;
• Don’t buy any more stocks until you see the market clear the 1326 level;
• Buy short-term protective puts IF you see a rally that quickly fails at 1326 or, if there is a spike down to 1270 followed by a rally that fails at 1295.

The March option contracts expire on Thursday, March 20, because Good Friday is a holiday and the markets will be closed. So I would buy an April put contract on the S&P Depository Receipts (SPY), known as the SPDRs, pronounced “spiders.” The strike prices from 110 to 129, which are probably the ones that will be of interest, all have the symbol SPY and the month code P, for April. The strike price codes run from F for the 110 strike price to Y for the 129 strike price. Buy the strike price closest to the current price of the SPY at the time you make your move. For example, if the S&P 500 fails at 1326 and is sitting at, say, 1290, you would buy the 129 contract, symbol SPYPY. That contract closed at $5.60 on Thursday, and each contract covers 100 shares, so one contract would cost you $560 and protect $12,900 of portfolio value. It isn’t cheap, but it is insurance.

If the 15% to 25% chance of a Crash happens and the market drops, I will send you another Flash Alert after the protective put options trade triggers, followed by another when you should close the position.

Are we in a recession? Are we in a bear market? The honest answer is: “Maybe, or maybe not.” December-quarter GDP growth was slow at 0.6%, and the best guess for the March quarter is another stall at +0.4%. But as long as a plus sign stays in front of the growth number, it’s hard to argue that we are in a recession, let alone the serious drop that some commentators are talking up (including a few using the “D” word — depression). Of course, the numbers could be revised later, but when you see results like today’s retail sales report (not great overall, but no further deterioration) and sharp drop in jobless claims, it is obvious that not everything is sliding rapidly downhill. The bears depend on recycled old news, like foreclosures hitting a new high last quarter (duh) or more financial institutions having trouble with mortgage-backed securities (double duh). I’m not seeing the new bad news that would push stock prices much, much lower.

Which brings us to the “bear market.” At today’s close, the S&P 500 was down 15.7% from its all-time record close of 1553 last July 13. That’s a solid correction, but not the -20% required for a bear market. It’s also up from its last 12-month intraday low of 1270 on January 23. We’ve had seven straight weeks where the S&P tested the 1326 level during the week and bounced back. That’s plenty of time for the bears to show that they can take a market down. We will find out tomorrow if the market can recover from today’s drubbing and1326 will hold again for the eighth week, or if a test to 1295 or even 1270 is in the cards.

You don’t hear about it much, but, as you can see in the chart below, the yield curve has turned very positive, which usually means economic growth is about to resume.

Courtesy Bloomberg LP

It’s about to get even more positive, as the Fed will cut 50 basis points again, or maybe even 75 basis points, at the March 18 meeting. Remember all the chest-beating on CNBC when the yield curve turned negative last year? Where are those guys now?

Fighting the Fed is usually an unprofitable experience, even when the Fed is “wrong” or doing the “wrong thing,” and especially when they are pumping an extra $60 billion a month into the banking system via the new Term Auction Facility. They just announced that they will do it again in March, starting next week.

Yet, the American Association of Individual Investors survey shows only 22% bullish, 26% neutral and 52% bearish. This is a contrary indicator; it is least bullish at bottoms and most bullish at tops. New York Stock Exchange data shows that investors are holding more buying power (cash plus available margin) in their accounts than at any other time in the last 16 years. The ingredients are in place for an explosive rally.

On any breakout over 1340, the next 100 points will come very quickly, and you options traders can load into calls when you see that breakout. At 1440, we will get the real test of the long-term trend. If the S&P fails at 1440, the odds are that we really will see a bear market, and those who are calling it that right now will breathe a sigh of relief and get to say: “I told you so.” But if the S&P can clear 1440 based on the energy from the Fed pumping in liquidity; record cash levels in brokerage accounts; high short selling levels; a positive yield curve and intense negative sentiment among those who usually are wrong; the year-long correction will end; and the bull market will resume. In that case, those who are calling this a bear market will simply say nothing until the crowd forgets about their mistake. I prefer to just listen to the market, whether at 1270 or 1440, and continue for now to stay invested in the rapidly-growing companies in new technologies that are changing the world. A lot more of them reported earnings recently, so let’s check in with them now.

Avian Flu MegaShift

BioCryst (BCRX) reported $28.2 million in sales in the December quarter, thanks to revenues from their peramivir flu contract with the Department of Health and Human Services. That compares with $2.1 million last year. They lost six cents a share, compared with a 34-cent loss last year. And the company finished the year with $85 million in cash, of which they expect to use $25 million to $30 million this year.

But, of course, the real meat was in the status of their various clinical programs. As a result of the needle length trial, they concluded that a longer needle is needed for overweight or obese women, and they will specify that in the next intramuscular peramivir Phase II trial. That trial, starting in the second half of 2008, will use the highest dose of peramivir from the last trial plus an even higher dose, as they have seen a dose-dependent response with few side effects.

The psoriasis program continues as partner Roche started a Phase II trial for moderate to severe plaque psoriasis. I don’t expect much from this, simply because psoriasis is poorly understood. As for other potential drugs that the company has on tap, BioCryst said that they will file an Investigational New Drug application for a new autoimmune compound in the third quarter.

I still believe peramivir will be a success in at least the hospital (IV) setting, and that alone can get the stock to my $30 target. It looks strange to have a $13 buy limit on a stock now selling for less than $4 a share, but the truth is that I would buy it up to that level, and still look for the $30 target. Rather than cut the buy limit, I am going to leave it out there to show the opportunity. Buy BCRX up to $13 for my $30 target.

Biotech MegaShift

Amgen (AMGN) won another round as the European Union rewrote all the red-cell stimulating labels to recommend using these drugs, like Aranesp, when hemoglobin levels fall to 10 grams/deciliter, and not to try to increase hemoglobin above 12 grams/deciliter. I think everyone agrees that going above 12 grams/deciliter is a bad idea, and the current Aranesp label has that limit. So there is essentially no additional impact on Aranesp or Epogen sales from this decision.

On March 13, the FDA advisory committee will meet to review data from studies that raised hemoglobin levels above 12 grams/deciliter. The question is whether they should raise the current Aranesp label level, which they won’t, but Wall Street is afraid the committee will take this opportunity to lower the limits. I don’t think that will happen, and there should be a sharp reflex rally once we get past this last hurdle.

The day before the committee meeting, the panel will review Amgen’s Nplate for increasing platelet counts in adult patients with chronic ITP (Immune Thrombocytopenic Purpura), an autoimmune disorder that especially hits people who have had their spleen removed. I expect a recommendation for approval, with final approval in May. It won’t be a huge drug, but it will be another win for Amgen.

So this is a good time to buy an Amgen LEAP option. If you want to either average down a current position or start a new one, it makes more sense to buy an option with a strike price closer to the current price of the stock than the $70 contract that I originally recommended. But for purposes of keeping track of the New World Investor portfolio, I am going to stick with the original recommendation to buy the 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.

CombinatoRx (CRXX) reported earnings this morning, with no surprises since the recent analysts’ meeting. They ended the year with $112.6 million in cash, and said that they will end 2008 with about $58 million to $64 million. They do not intend to raise any money until they get the Phase IIb results for Crx-102 in arthritis, expecting another trial showing a large, statistically significant reduction in arthritis pain. They guided for a full-year loss of $49 million to $55 million on $15 million to $20 million in revenues. That was much better than analysts’ expectations for a $62.1 million loss on $15.2 million. We’ll see a flood of clinical data this year to drive the stock higher, beginning this month, as I’ve covered before. CRXX is a great buy under $7 for my $16 target, which would be a triple from current prices.

China MegaShift

As you know, but no one else seems to, the Chinese have been growing their money supply at 18% a year, even faster than Helicopter Ben’s Fed. Now they have inflation — isn’t that a surprise — which they are blaming on the one inch of snow that fell a couple of months ago in southern China. So in good old-fashioned Mao style, they will use price controls and credit curbs to hold annual inflation to less than 5%. Lots of luck on that one, guys. Much of their inflation is in food, including an 18.2% jump in food prices in January alone (that darn snowstorm…). Whereas we in the U.S. simply exclude food and energy costs from our “core” inflation rates, the Chinese are a bit worried that their urban and rural poor mostly spend their money on food and energy so it gets factored into their “real” inflation rates.

The government has promised a tighter monetary policy, which would do the job if they stick to it. They are planning for 8% growth this year, which was their same target last year, when they grew 11.4%. Private economists think that they’ll grow 10.0% to 10.5%. Of course, if they really threw on the monetary clamps…nah, not a chance.

I think there’s a good chance that if China lets the yuan float, it would go down in value versus the dollar, simply because they are growing their money supply so fast. But I’m not ready to make that bet quite yet.

UTStarcom (UTSI) reported results last Friday. Revenues rose 14.5% to $806.3 million and they lost 20 cents a share, compared with a 35-cent loss last year. They repaid $289.5 million to retire their convertible notes without diluting shareholders, and still had $180 million in cash left, net of the remaining short-term debt. They warned that the auditors might put a “going concern” disclaimer on the audit this year due to the repayment dropping cash to a level that is worrisome looking at their recent history of losses. But they said that their cost-cutting and focus on Internet Protocol TV and broadband should return them to positive cash flow and then profitability.

For the March quarter, they guided for year-over-year revenue growth to the $500 million to $520 million range. Gross profit margins will remain terribly depressed at 13% — this is their biggest problem right now. Still, they expect to be cash flow neutral.

UTStarcom customers are up to 750,000 IPTV subscribers from 600,000 at the last conference call. The company has a 65% market share of IPTV equipment sales in China and 80% in India. A recent Chinese government ruling allows telecom operators and broadcast operators to compete in each others’ business, which means China Telecom and China Netcom — both big UTSI customers — can offer IPTV anywhere in China. This deregulation is good news for IPTV growth, and very good news for UTSI.

The conference call was more upbeat than the numbers or the press release would suggest. So I am maintaining my recommendation to hold UTSI for a $10 target.

Content on Demand

Akamai Networks (AKAM) won a $45.5 million jury award in their patent infringement suit against competitor Limelight Networks last week. This is Akamai’s key patent, and although Limelight can appeal, they would have to post a bond in the amount of the judgment. Even worse, Akamai will go for an injunction to stop Limelight from selling its service. Rather than leave all their customers in the lurch for Akamai to easily pick up, I would not be surprised to see Limelight accept a buy-out offer from Akamai. We shall see. AKAM remains a buy under $36 for my $60 target.

New Energy Technology MegaShift

Oil surged a remarkable $5 a barrel yesterday to a new record over $104 after the government reported a surprise drop in crude oil stockpiles and OPEC held production levels steady. This morning it spiked up to $106 and then sold off on profit-taking. Part of the push on oil prices comes from the declining dollar, and I don’t think that’s over. But another part is just speculation on demand during the U.S. summer driving season, and I think that worry will go away. There is lots of gasoline around, and demand will soften at least a little with the economy. So I think oil prices are in a peaking area right now.

But I don’t think a decline back to $90 or $80 is going to hurt our New Energy Technology stocks very much. First, the run up was never fully priced into the stocks, because it came so fast. Second, even with oil at $80 per barrel, every technology that we’re invested in, except solar, makes economic sense without any subsidies, and even solar makes sense just with the subsidies in place. So the companies will continue to progress, sign contracts, grow revenues and turn profitable or grow their bottom line. That should be reflected in the stocks.

Energy Focus (EFOI) reported this morning, but fell short of the consensus and received the usual trip to the woodshed, losing 34% for the day. The company did $5.4 million in sales and lost 31 cents a share, while the consensus of three analysts was looking for $6.7 million and a 20-cent loss. EFOI exited the year at a $21.6 million “run rate” ($5.4 million times 4) and said that they expect fiber optic sales to double in 2008 and account for half of all sales for the year. Traditional product sales will decline another 15%, so overall sales should increase 20% to around $27.5 million. They burned $7.6 million of their cash in 2007, and have $8.4 million left on the balance sheet. They expect to use only $5 million in 2008, with half of that burned in the first quarter as the Pool division buys materials to get ready for the summer season.

Their new fiber optic products already meet the government’s recently-enacted mandate for higher efficiency lighting starting in 2012. But, of course, the government itself will not wait until 2012 to start replacing incandescent lighting. EFOI has installed their Navy ship products, and then used that technology to create the new, rugged products that were introduced in January.

On the conference call this morning, EFOI management said that while they were disappointed to miss their guidance, the cost reductions that they’ve made to deal with declining sales of swimming pool legacy products are paying off, and they see strong growth in EFO technology. They’ve built a strong patent position and signed new distributorships. And they are expecting to close a couple of big orders, including one from a retail chain of 200 stores. On May 2, they will have the formal opening of their new EFO demonstration showroom, which should generate some press coverage. I am moving EFOI to a Top Buy due to today’s decline, and I am not changing my $6 buy limit and $15 target.

FuelCell Energy (FCEL) reported their December first quarter this morning. Revenues rose over 120% to $15.0 million, backlog was up 131% from last year to $84.7 million, and they had record orders of $28.8 million. They lost 29 cents a share, better than last year’s 38-cent loss. They used $15.1 million in cash in the quarter, which was also better than last year’s $22.3 million. And they had $138.6 million left at the end of the period. In January, Connecticut approved projects that will add six more large power plants totaling $43 million to the backlog as soon as the paperwork is done. Connecticut also gave contingent approval to a second project that would mean another $50 million or so to FCEL.

So, of course, the stock was down over 7% today. That’s nuts. FCEL remains a Top Buy up to $12 for my $22 target.

Gasco Energy (GSX) reported earnings Tuesday after the close. Remember that the new Rocky Mountain pipeline did not open until this quarter, so the company was stuck with not being able to sell gas even as natural gas prices soared over $9, where it remains today. So the company reported that they lost three cents a share on $5.6 million in sales in the December quarter.

Management could hardly wait to kiss 2007 goodbye. This year, they can fund their drilling program out of cash flow, and it looks like they are sitting on a bonanza in Rocky Mountain gas. Their breakeven cost is down from $5.50/mcf to $3.50/mcf, and they have hedged about 60% of their future production at today’s high prices. GSX is an excellent buy up to $4.50 for my $9 target.

Security MegaShift

Packeteer (PKTR) is evaluating the Elliott Associates’ buyout bid, but as I said in yesterday’s Flash Alert, I expect them to put the company up for bid rather than accept Elliott’s offer. There’s nothing to do but hold on for now. I still think that the company will sell for double-digits, if it is sold at all, and is worth $20 in the long run if they don’t sell it now. So I’m not changing my $9 buy limit or $20 target, and in the short term if you buy it under $5, I expect you will cash out at $10 or more, with little risk now that Elliott’s $5.50 offer is on the table.

SiRF Technology (SIRF) bought Truespan, a pioneer in mobile digital TV receiver chips, a while ago. Why is this acquisition important? Garmin, the biggest handheld GPS receiver manufacturer, and a major SiRF customer, recently introduced a GPS receiver that supports mobile TV. I have not been able to find out yet if it uses a SiRF chip, but I expect it does. The larger point is that GPS and mobile TV have converged, as I have been predicting, and a whole new class of these devices will be introduced over the next few years. With the Truespan technology, SiRF is very well positioned to capture a large share of this new market. SIRF is a Top Buy up to $12 for my $28 target.

Death of the Dollar

What can one say? The European Union and the British are not going to cut interest rates because they are afraid of inflation, while the Bernanke Fed is going to slash rates until the housing mess is over — inflation be damned. The dollar is going to go lower and lower until the Fed stops cutting. I am pleased that I was able to give you plenty of warning about this, and I know many of you took advantage of it one way or another. Today was the third day in a row of record lows for the dollar, with the euro hitting $1.5370 and the British pound up through $2 again. Continue to hold your cash in anything but dollars.