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) |
|
X Y |
X |
| MLN0002 |
|
X | X |
| MLN0518 |
|
X X |
|
| MLN8054 and MLN8237 |
|
X | X |
| MLN4924 |
|
X | |
| MLN2238 |
|
X | |
| Early stage |
|
Y | |
|
X = expected |
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.


