Are we in the thick of earnings season, or what? EMC (EMC), Silicon Image (SIMG), Zhone Technologies (ZHNE) and Harmonic (HLIT) reported earlier this week. We have seven companies reporting today, with Motorola (MOT) first up before the opening, and SiRF Technology (SIRF), Cnet (CNET), Packeteer (PKTR), Affymetrix (AFFX), Amgen (AMGN) and QuickLogic (QUIK) all teed up for this afternoon. There’s also a little company named Microsoft I’ll be listening to, and tomorrow we get to hear from QLT (QLTI). Next Tuesday we get Rochester Medical (ROCM), followed by three more on Wednesday: ViroPharma (VPHM), Sequenom (SQN) and Akamai Technologies (AKAM). Whew! I’ve given you my analysis, quick take or expectations on this week’s reports below, and, of course, I will send a Flash Alert if anything unexpected comes out on the conference calls.

Fortunately, although guidance is understandably conservative in the current depressed environment, tech earnings in general are pretty decent and the NASDAQ has been outperforming the broader indices. The S&P 500 is following my playbook very well, pausing just under 1395, consolidating in a mostly sideways fashion with the occasional dip back to 1370, and building up energy for a move to 1420 and then 1444. I still don’t have a clear signal on whether 1444 will mark the end of a countertrend rally in a developing bear market or be the breakout level that shows that the whole last year was just a typical nasty correction in an ongoing bull market. What I do know is that the weekly and monthly charts are showing that there’s enough stored energy to move the S&P 500 300 points or more, so it is going to be exciting.

The grinding, big-day-up-four-little-days-down nature of this rally reminds me of the 1973-74 market in reverse. Then, the long grind down from January to July 1973 was followed by a few months of consolidation and then a devastating, rapid drop as the bulls finally gave up. This time, the higher highs and higher lows of the grinding up pattern probably will be followed by an explosive 300 point move up. But before we can be sure that is underway, the S&P needs to clear 1440, dip back to test it and then not look back. If that pattern plays out, most people will not realize how important it is to get fully invested, go on margin, or buy calls — whatever “maximum exposure” means to you. I hope these very accurate market calls I’ve been making give you the confidence to get the jump on the rest of the market.

Biotech MegaShift

Affymetrix (AFFX) reported the poor quarter they had pre-announced after the close. Excluding the $90 million lawsuit payment from Illumina, they earned $79.6 million in sales. I haven’t been able to adjust the income statement yet, but there was an operating loss. I’ll have more in next week’s Radar Report. I am keeping AFFX as a Hold until after the earnings call, and will send you a Flash Alert if there is any change.

Amgen (AMGN) also reported today, hitting $3.6 billion in sales and $1.12 pro forma earnings per share. The consensus was looking for $3.6 billion and $1.04, and the stock is up a bit in after-market trading. Management reaffirmed its 2008 revenue guidance range of $14.2 billion to $14.6 billion, with pro forma earnings from $4.00 to $4.30. At 10X this year’s earnings, Amgen is incredibly cheap. Buy the Amgen January 2010 $40 LEAP (WAMAH) under $10 with a $20 target.

QLT (QLTI) will report tomorrow. I am looking for $26 million in sales and a couple of pennies positive on the bottom line. That would be viewed favorably by the market, and I noticed that RBC Capital upgraded the stock today ahead of the report. Buy QLTI up to $6 for my $12 target.

China MegaShift

Since we pulled out of almost all our China MegaShift stocks last year, their markets have fallen about 50%. I am tempted to get back in for a roughly one-year trade to what will probably be their high point for the first decade of this century. I’m looking at Chinese solar and medical stocks that might work for us.

But I am still worried about the obvious imbalances in their economy. The government has put substantial price controls on various sectors in an attempt to slow inflation, especially in food and energy. Huaneng Power (HNP), which we owned and sold much higher, is currently caught in a bind between high coal prices and government-mandated caps on electricity prices. China has only enough coal in the entire country for 12 days of consumption. In the cities, they have less than a week of inventory, yet 70% of their electricity comes from coal. They are at serious risk of the kind of disaster that almost always results from centralized government planning.

While I expect Chinese stocks to run up sharply, following the U.S. market, these fundamental issues are going to take time to work through. We may be safest just missing that move and sticking with U.S. stocks. Of course, a big rally in China would be good news for UTStarcom (UTSI), which I still rate as a hold for my $10 target.

Content on Demand MegaShift

EMC (EMC) and their 85% owned spinout VMware (VMW) reported March quarter earnings. EMC did $3.47 billion in sales and 16 cents a share excluding an acquisition charge, right on the consensus for $3.45 million and 16 cents. Revenues grew 17% year-over-year, pro forma earnings grew 28% and free cash flow grew 22%. VMware also beat their marks, growing revenues 69% to $438 million and reporting 22 cents a share, compared with the consensus for $423 million and 22 cents. (VMware only gives annual guidance, not quarterly, so the analysts tend to have a wide spread of forecasted outcomes. However, they did reaffirm their 50% growth target for 2008, and said the June quarter would see 55% revenue growth.)

At EMC, U.S. sales grew 9%, and the whole storage network business is taking off in the emerging (emerged?) countries like China and India. EMC said that they see not economy-related weakness, customers are very focused on Return on Investment (ROI) and will spend money to save money. The company cited new areas like storage tiering and consolidation, data de-duplication, virtual provisioning, server virtualization, content management and security that are benefiting from new technologies and new approaches. EMC sells products in all these areas, and goes on to sell the customer on implementing them all for maximum efficiency and highest ROI, instead of buying them one at a time. EMC’s broad product line and experience putting the pieces together in a cost-effective way are the core of their competitive advantage, not just the hardware. They confirmed their January forecast for $15 billion in sales and about $1.04 a share this year, pro forma. Management said they have no current plans to spin off the rest of VMware to shareholders.

VMware said that even though corporate IT budgets are tight in reaction to the slow economy, virtualization is still growing because it is a cost-saver when cutting costs is on everyone’s mind. Not only can virtualization cut the number of servers required to handle a company’s data traffic, but the savings in energy is becoming significant. They specifically said they saw strong customer demand across all geographies, including the U.S., which accounted for 51% of the quarter’s revenues. The company had more than 100,000 customers worldwide, including 100% of the Fortune 1000.

Whether we have a mild recession or just slow growth, and whether corporate spending is slightly down or slightly up in 2008, VMware and EMC both will do well this year. Continue to buy the EMC January 2010 LEAP call with a $15 strike price (WUEAC) up to $5 for an $11 target.

Harmonic (HLIT) reported an excellent quarter. Sales hit $87.3 million and pro forma earnings came in at 17 cents a share, well above last year’s $70.2 million and 14 cents. They also clobbered the consensus for $82.3 million and 14 cents. Domestic cable and satellite customers were one area of strength, and Latin America was another. Management gave overly conservative guidance for the next six months of $170 million to $180 million, implying they may have to have a $100 million December quarter to make the annual consensus. The fact is that they will hit the high end of their guidance for the next two quarters, and then do a $100 million December quarter anyway. Management said their long term growth forecast is still 15% to 20% a year, and it looks like they will be at the high end of that range this year, hitting $375 million. That would be well over the $367 million consensus. HLIT remains a Top Buy up to $12 for my $18 target.

Motorola (MOT) reported a mediocre quarter this morning, which was no surprise. After an initial hit, the stock regained most of its losses by the close. They beat the pro forma consensus for a loss of seven cents a share, reporting a five cent loss on $7.45 billion in sales, which was a bit below the $7.85 billion consensus. Handset sales did not improve and were down 39% from last year. The company guided for a two cent to four cent loss in the June quarter, worse than the consensus for a one cent loss.

This all sounds terrible, but most of the damage is already factored into the stock. The plan to split the company into two parts is moving forward, and that event will be a major driver to push the stock up. However, in the near-term the company has to stop the decline in the handset business, where they sold only 27.4 million phones in the March quarter. The consensus was for 31 million, so MOT’s market share loss to BlackBerry and Apple’s iPhone is getting worse. (They shipped 45.4 million phones in last year’s March quarter.) New phones with faster 3G capabilities, email and messaging functions, and touch screens are coming, but not until next year. I expect MOT to stop buying back stock, cut the dividend, and cut handset prices to stop their market share losses. They will accelerate their cost-cutting program to stabilize the income statement. These big battleships are hard to turn around, and the company is very undervalued, but I underestimated the time it will take them to right this ship. With the new phones and the handset division spin-off both happening after our January 2009 LEAP options expire, I expect them to be worthless. Sell all MOT LEAP options, including the 2010s, for the tax loss, which we should be able to make good use of later this year to offset gains.

QuickLogic (QUIK) reported after the close. They earned $11.0 million in sales, up 77% from last year but just shy of the $11.2 million consensus. They lost two cents a share pro forma, a bit better than the three cent consensus. But there was only one analyst publishing an estimate, so “consensus” doesn’t mean much. Management said results were in line with or better than guidance, while new product revenue was at the high end of guidance. QUIK remains a Top Buy up to $4 for my $8 target.

Silicon Image (SIMG) had a good quarter, with revenues of $67.1 million well above their guidance range of $61 million to $63 million. They did four cents a share pro forma, doubling the consensus estimate for two cents. Gross profit margins held up very well, hitting 58.6%.

The company guided for June quarter revenues of $66 million to $68 million, gross margins of 57% to 58% and around four cents pro forma earnings per share, in line with the consensus. However, that would be flat quarter-to-quarter, which doesn’t make any sense. Under questioning, management admitted that they had a plan for the first half, and because March quarter revenues came in well above expected, they simply subtracted the excess out of their June quarter guidance to maintain the first-half guidance unchanged. In other words, they are sandbagging, and will almost certainly beat their June quarter guidance.

For the full year, they expect $270 million to $290 million in sales, gross margins of 55% to 57%, and around 12 cents pro forma. I think they will earn closer to 20 cents a share, given that they will have earned eight cents in the first half of the year during a difficult consumer environment. With the termination of analog television on February 17, 2009 — less than a year away — I suspect HDMI-enabled TVs and other products will have excellent sales in the second half of this year.

On the conference call, management said they have developed state-of-the-art protocols in the area of broadband connectivity for device discovery, user interface, security, and network streaming. They are turning these into a new product category for SIMG called the Personal Entertainment Network, and promised we’ll hear a lot more about this later in 2008.

They also have a low-power multifunction chip for high-end cellular handsets that combines high-quality digital audio, video, USB, charging, analog and headset functionality. They offer both chips and intellectual property licenses to handset manufacturers. At the same time, they have a wide range of HDMI solutions for the mass market cell phones that don’t require a multifunction chip — yet.

They are seeing strength in personal computers, Asia, and Blu-ray DVD players, where they had a number of design wins. Now that Blu-ray has won the DVD war, people are buying a new DVD to play high definition movies. SIMG will benefit. The stock is still depressed due to Wall Street’s worries about consumer spending, especially on consumer electronics. But with the Beijing Summer Olympics coming up and a burst of digital TV sales between now and next February, I am not as worried about the consumer as the surveys say I should be. A market rally and an improving economy will go a long way towards eliminating the Street’s fears. SIMG looks very cheap and can be bought up to $8 for my $16 target.

Zhone Technologies (ZHNE) reported a little better than expected quarterly revenues, and a little worse than expected quarterly earnings. Management repeated their commitment to break even in the second half of the year on earnings before interest, taxes, depreciation and amortization (EBITDA). Revenues hit $43.0 million, above their guidance for $41 million to $42 million. International sales accounted for 59% of results, led by the Middle East and Central and Latin America. In these areas, Zhone is considered a top-tier supplier and sells directly to the major telecommunications companies.

The gross profit margin was 32.1%, at the low end of their 32% to 34% guidance range. Margins should improve slightly in the current quarter to between 32% and 33%. Zhone lost $2.8 million on an EDITDA basis, larger than their $2 million guidance, and they expect to be back to the $2 million area this quarter. Although they say they will hit breakeven EBITDA in the September or December quarter, they’ve been saying that sort of thing for some time.

Zhone is hanging in there with about 600 customers and good ratings for its products, but they’ve been unable to improve their profit margins enough to break even. With $170 million in sales, the company ought to be worth about $350 million in an acquisition, or $2.33 a share. If they could turn profitable, it would easily be worth $4 a share. So I am maintaining my current buy limit of $1.50 with a $4 target. However, if they can’t perform better or get bought out on this run up into next April, we’ll sell the stock no matter where it is.

New Economy MegaShift

Cnet Networks (CNET) reported after the close, with $91.4 million in sales and a three cent pro forma loss. The consensus was looking for $93.5 million in sales and a pro forma loss of four cents a share. The company just announced an expanded relationship with Yahoo, to provide content to Yahoo and run more Yahoo ads. Hmmm. So if Microsoft buys Yahoo, is Cnet next? CNET is a buy up to $9 for my $17 target.

Security MegaShift

Packeteer (PKTR) has a buyout offer from a competitor, Blue Coat (BCSI) for $7.10 a share in cash. The acquisition makes sense for Blue Coat, but the price is too low. There were a couple of other bidders, though, and I think Blue Coat has the advantage of being able to cut more Packeteer costs that some of the other candidates.

On the conference call, BCSI was practically gloating at getting better Quality of Service, Applications Classification and Applications Performance Management technologies than the ones they had. They are acquiring channel partners, hundreds of new customers and an Asian operation just as big as and much more productive than Blue Coat now has.

Packeteer has the best products, but their sales and marketing performance have been poor, or at least uneven. I haven’t heard any protests from hedge fund Elliott Associates, so I think this deal will go through. Don’t sell the stock quite yet — let’s give it a couple of weeks to see if a higher bid comes along. I am changing PKTR to a hold with a $10 target to leave room for a higher offer.

SiRF Technology (SIRF) reported after the close today, after pre-announcing that it would be a disappointing quarter. They did $62.0 million in sales and lost 14 cents a share, compared to consensus expectations after the negative pre-announcement for $61.9 million in sales and a loss of seven cents a share. I suspect they threw everything possible into the quarter, as long as it was going to be a bad one anyway, and they could blame it on prior management. Last Friday, Michael Canning resigned as CEO after presiding over two arrogant, sarcastic conference calls that isolated the company from its former friends. The stock jumped 15%, in part on hopes of a buyout. An old acquaintance, Dado Banato, who was a founder and Chairman of the Board of SiRF, was named interim CEO. I expect today’s conference call will show a very different tone, but I also suspect Dado does not want to sell the company at these prices. Buy SIRF up to $8 for my $20 target after Dado brings in a great CEO to straighten out the company.

On Tuesday at 4 p.m. ET, the S&P 500 closed up six points after bouncing off the 1326 attractor level. At that time the conventional wisdom was:

• The United States is in a nasty recession
• Surveys show businesses are slashing capital spending
• Spending on technology is very weak
• Consumers are tapped out due to weakness in home prices and high price of gasoline
• This time it’s different because the financial system has collapsed and has to be propped up by the Fed
• The recession is going to be deep and long-lasting
• Therefore, the bear market will resume soon and be equally deep and long-lasting

Fifteen minutes later, Intel (INTC) announced their results. They had record first-quarter revenues of $9.67 billion, up 9% from last year. Operating income rose 23% and the company earned 29 cents per share pro forma, beating the 28 cent consensus.

NAND flash memory prices were weak, as expected and pre-announced, but the microprocessor business was strong. There was the usual seasonal weakness in desktop computer microprocessors, although year-over-year results were good. Server products were particularly strong and turned all-time record revenues. The outstanding geography for growth: North America. The Americas region was up 17%, while Europe and Asia were up 8%, and Japan up 4%. Mobility products were also strong and constituted a third of the business.

Intel guided for a second quarter much like the first quarter. They simply don’t foresee any weakness. During the conference call, CEO Paul Otellini had these exchanges:

Analyst: Paul, to reiterate, you’ve seen no troubling signs of demand either from the US or Europe or Asia?

Paul Otellini: No, we haven’t.

(Later)

Analyst: With respect to overall PC demand you were pretty adamant about your statements that June quarter looks basically seasonal. You are not seeing anything to make you fearful in North America, etc. Can I extrapolate from that, that your view of 2008 really hasn’t changed much since the last time you made a comment? I think you had low double-digit PC unit growth shipments for ’08, is that fair?

Paul Otellini: Yes. Yes, it hasn’t changed and yes, that was our view at the time and I haven’t moved from there.

(Later)

Analyst: In terms of the underlying dynamics for the PC, Paul, much of the growth is outside the United States now. Does the outsourcing trend and the infrastructure build-out in the emerging markets still look strong and is that really the dynamic that we’re looking for to offset more of the mature markets in the United States and Europe?

Paul Otellini: Well, to a first approximation, yes. Most of the growth over the next few years — five years is going to be non-U.S. But the U.S. market has been pretty resilient based upon the transition to notebooks; people buy them more frequently than they do desktops and there are more notebooks per person, etc.

So I wouldn’t necessarily write it off. I think a notebook is becoming a bit of a fashion statement and that has a cachet associated with it and we’re seeing some of that. You certainly have seen that with the Apple (AAPL) product line growth.

But I really think the unknown dynamic is what happens when these $200 to $300 Netbooks are unleashed in India and China and Indonesia, and we don’t — there is no model for that at this point in time because you’re dealing with something that’s never existed before. So we’re optimistic but we just don’t know at this point.

Analyst: What can you comment with regards to the adoption rate for the middle class and general population with regards to notebooks in these emerging markets now? Have you seen an uptick there?

Paul Otellini: It is, and some of that is also back to Stacy’s last question on the dollar. I mean, as the dollar weakens against most currencies, particularly in some of these hot emerging markets, the amount of money it takes to buy a PC relative to local disposable income is less and less. So we are seeing PC penetration move more rapidly in some of these markets than we have seen in previous years. And that’s one of the reasons you see us pointing to a growth forecast in terms of low double digits for the units this year.

The Intel January 2009 LEAP calls with a $22.50 strike price (VNL AX) remain a buy under $6 for my $12.50 target at expiration.

This Intel report and conference call sparked the big rally on Wednesday, although admittedly a few more good earnings reports, particularly in the financial sector, helped. And after the close yesterday IBM (IBM) announced first-quarter earnings up 26% and increased their outlook for 2008. Again, U.S. operations demonstrated “surprising strength,” especially considering that their largest customer segment is the financial services sector. The U.S. generates 35% of IBM’s revenues, and U.S. sales rose 6%.

After the close today, Google (GOOG) reported $3.7 billion in first quarter revenues, a bit ahead of the $3.61 billion consensus and up 9% from the December quarter. They also beat the $4.52 consensus earnings estimate, reporting $4.84. They said: “Our ongoing innovation in search, ads, and apps helped drive healthy growth globally across our product lines, yielding another strong quarter for Google.”

Surveys may say businesses are slashing capital spending, but Intel, IBM and Google’s results say otherwise. The idea that the United States is in a nasty recession that will be deep and long-lasting is almost certainly wrong, simply because this was the most advertised slowdown in history. Bad recessions start when inventories are high, people are feeling great, jobs are plentiful, companies have over-hired, credit is easy and everyone wants to leverage up.

Nobody has felt that way for over a year, yet GDP growth has stayed positive so far. (We’ll see the March quarter advance number on April 30 and the first preliminary revision on May 29. It should be up between 0.1% and 0.6%. It’s hard to have a recession when GDP won’t go down.) Businesses started cutting back on expenses, production, inventory and payroll last year,and the inventory to sales ratio is back at historic lows. Not only is it hard to have a deep recession when there aren’t lots of inventories in the pipeline, the economy is very sensitive to even a small pickup in demand. Businesses will start to rebuild inventories when that happens, which means the Fed and the tax rebate program can have a magnified effect in the current situation.

The most dangerous current belief is that this time it’s different because the financial system has collapsed. Don’t believe it. When the Fed takes interest rates down this low, it’s very hard to want to keep your money in cash — especially when the dollar is depreciating a rapid clip and higher inflation has to be right around the corner. People will accept 2% interest when they’re worried about a capital loss if they put their money to work. But as soon as the markets clearly turned up, which to some Energy Information Administration people means bouncing off 1326 Wednesday, to others it will mean clearing 1370, and to all but the most ardent bears breaking out over 1440, the sideline money is set to flood back into the market. Even the ardent bears will have to give up when the S&P breaks out to new highs over 1555.

The idea that “this time it’s different” is refuted in a forthcoming article in the prestigious American Economic Review. Economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard reviewed financial calamities from 66 countries dating from the 1800s to the current subprime crisis in the US. They found that the subprime, credit mess was caused by the same factors that caused financial blowouts in the past:

• They begin with an innovation, like the steam engine, the radio, junk bonds, the Internet or collateralized debt obligations.
• Investors see the large returns to early investors in the new innovations and pile in.
• Banks and investment companies stretch their balance sheets so as not to be left out.
• Leverage is rewarded.

And then the game comes to an end when it runs out of new buyers, the asset prices fall, the companies with high leverage (banks, hedge funds, mortgage bankers) run big losses or fail. Those that survive go into their bunker, restricting credit, and the economy slows. The politicians relax fiscal and monetary policy, and the economy recovers.

According to Reinhart and Rogoff, since World War II there have been 18 banking crises in industrialized countries that share characteristics with the U.S. subprime crisis, including Finland, Japan, Norway, Spain, and Sweden. This time is not different; it’s the same old story, and ends the same way, with an out-of-the-blue sharp rally in stocks even while the real economy continues to weaken. The stock market is a leading indicator, while consumer spending is a coincident indicator and capital spending is a lagging indicator. If you wait for consumer confidence and spending to turn up before getting back into stocks, you’ll miss the first 15% to 25% of the move. If you wait for capital spending surveys and budgets to turn up, you’ll miss the first 20% to 40% of the move.

Yesterday, the S&P 500 delivered another big up day, the sixth one since the March 10 bottom. That’s evidence of underlining upside pressure that I think will be released shortly, since the daily, weekly, and monthly charts all show the sustained congestion that is necessary to build up the energy for a big move. The triggering event could come any day, and we may already have seen it in Intel earnings. The Fed will cut rates again at their April 29 – 30 meeting, and if the S&P hasn’t started to move before then, that should do the trick. I still advise you to be fully invested.

Biotech MegaShift

ViroPharma (VPHM) and Wyeth decided to stop development on the hepatitis C drug that earlier showed an increased risk of liver damage in a Phase II clinical trial. This was already in the stock, which was down only 40 cents today on the news. VPHM remains a buy up to $12 for my $25 target after they make their next big acquisition or in-licensing deal.

Content on Demand MegaShift

Silicon Image (SIMG) announced the next step up in their intellectual property cores for megapixel camera processors, to be integrated into the system-on-a-chip for mobile phones. Its features include a 12 megapixel processor — that’s more than my digital camera and, I’ll bet, most of yours — a continuous digital zoom, auto exposure, autofocus lens, shade correction, chromatic aberration correction, bad pixel detection and correction and image stabilization. In a phone! They already have five customers. SIMG remains a buy up to $8 for my $16 target.

Telkonet (TKO) has the best in-building Broadband over Power Line technology in the world, and they market it for general networking use, especially Internet connections. Then they realized there was a big niche in using BPL to support energy management functions in a building, primarily heating and lighting. They acquired Smart Systems International last year to get the energy management domain knowledge they needed.

This is good, because the record price of oil and energy has every business in America looking at how they can cut their energy costs. They know the US doesn’t have enough power plants, and even setting the price of oil aside, the mandates on the power production industry for pollution and carbon emission controls is going to keep upward pressure on energy prices.

Electrical power is a big business already. Revenues grew 47% from 1994 to 2005′s $298 billion. The Energy Information Administration says kilowatt consumption will climb from 3.8 billion kWh in 2005 to 5.5 billion kWh in 2025, a 47% increase in 25 years. Each kilowatt will undoubtedly cost a lot more than it does today. I’m also not sure where that electricity will come from, as just the projections for the next couple of years suggest brownouts are coming in New England, the Mid-Atlantic, the Midwest, Texas and the Rocky Mountain area. That alone can make companies more energy-conscious. Already, surveys show almost 60% of US companies are now “concerned” or “very concerned” about cutting energy consumption. Even better, a fourth of them are accelerating spending in this area already.

The late December IPO of Orion Energy Systems (OESX), a maker of high-efficiency lighting systems, monitors and controls, could spread a little fairy dust to TKO. Orion has a $300 million market capitalization and sells for 66X last 12 months’ earnings. About 37% of companies say lighting is the area it would be easiest to reduce energy usage, and another 31% say HVAC systems. Orion addressed the lighting area with an expensive fluorescent tube retrofit. Telkonet addresses both lighting and HVAC with a much less expensive monitor and control system. Both companies will have their niche. TKO already has started presenting at green tech conferences in addition to networking and communications conferences. Buy TKO up to $5 for my $15 target.

New Energy Technology MegaShift

Oil futures climbed over $115 for the first time yesterday, setting a record that held up today. The driving forces seem to be skimpy supplies of gasoline (inventories of gas fell by 5.5 million barrels last week when they should be increasing in advance of the peak summer driving months) and the falling dollar. Demand for gasoline also is weakening, and I expect supply and demand to come into balance pretty quickly, at somewhat higher prices per gallon. I just paid $175 to fill up my Ford Excursion with biodiesel fuel, which is 20 cents to 40 cents a gallon cheaper than regular diesel. I fully expect to pay $500 to fill the tank within the next five years. In the current environment, the refiners that have been hammered by rapidly-rising oil prices will reclaim their profit margin this summer, so last week I re-recommended Holly Corp. (HOC) as a buy under $48 for a $70 target before the end of this year.

Longer term, high oil prices mean all of our New Energy Technology stocks will come back into vogue, as they are all wildly profitable with oil between $80 and $120, most without any subsidies. Energy Conversion Devices (ENER) does need the subsidies to make an investment in its solar roof panels have a decent return on investment. Even that will change soon, though. Ray Kurzwiel, the scientist/futurist who I think is one of the smartest people in the world, says a new generation of solar panels based on nanotechnology will be available in just a few years that will make solar panels cheaper than fossil fuels. He pointed out that with the subsidies, the power we are generating from solar energy is already doubling every two years. At that rate it would be able to meet all of the Earth’s energy needs within 20 years, and nanotechnology promises to enable that future without subsidies. Most of the current crop of solar companies are ill-equipped to make this transition, but I expect ENER to pounce on one of the new companies and acquire the technology that will let them transition to the nano-age using their current distribution channels. ENER remains a buy on any dips under $30 for my $55 target.

USGeothermal (HTM) moved to the American Stock Exchange Wednesday under the new symbol HTM. The company closed a $10 million private placement, in part to fund their recent purchase of a 3.6-megawatt operating geothermal power plant and 28,358 acres of geothermal energy leases north of Reno, Nevada. The power plant is comprised of four binary cycle units that will be replaced with more efficient gear to get to 10 megawatts of production, a wet cooling tower and nine geothermal wells developed in a proven geothermal reservoir. They paid $16.6 million plus 290,000 shares of stock to a royalty holder. This gives the company two operating power plants with significant expansion possibilities, plus they are exploring a potential project in eastern Oregon. HTM is a Top Buy up to $4 for my $6 target.

WiMAX MegaShift

Airspan (AIRN) preannounced a 15% revenue shortfall, saying they will do $17.0 million to $17.5 million in the quarter and use about $3 million in cash. That leaves them with about $34 million on the balance sheet. The earnings conference call with further details doesn’t come until May 7. The stock dropped 12 cents to a new closing low of 65 cents and has a total market capitalization of about $40 million. With less than $10 million of debt, the company minus cash is being valued at about $15 million — a ridiculous price for a WiMAX leader, especially in mobile WiMAX. Until we can hear the full story, I am moving the stock to a hold, but leaving the $8 target price after they turn profitable.

Death of the Dollar

Just 14 months ago at the Money Show in the Orlando, I talked for the first time about the death of the dollar. After my presentation, the next speaker, a well-known permabull, passed me on the way to the podium and quietly said: “Same old crap that caused everyone to miss the bull market in the ’80s.” Of course, he didn’t realize that I thought a weak dollar would eventually be good for equities as everything real got re-priced higher to reflect the dollar’s depreciation. I also suspect he simply didn’t believe the dollar could be as weak as it’s been. Versus real assets, the dollar will continue to depreciate as long as Bernanke & Co. continue to print them. Versus other currencies, much of the worst is probably over for the dollar. I still expect the yen to be the strongest currency going forward. But you never can tell what new bubble will come out of the fire-hose of liquidity the Fed is now aiming at our economy — you just know for sure if there will be another bubble. It may not even be in this country, as the Fed does not seem to realize that the money they pump in here has a global impact due to the dollar’s status as the world’s reserve currency. My evidence for the Fed’s blindness comes from a wonderful quote:

“Markets are becoming aware of the fact that the decline in house prices is not stopping. I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon.” — Alan Greenspan, November 2007

Affymetrix (AFFX) announced a first-quarter revenue shortfall last night, and the stock is down 37% to just over $10 as I write. The company said that excluding the $90 million patent lawsuit payment they were awarded from Illumina, they earned approximately $80 million in revenues compared to the consensus expectation for $92.5 million. For the year, they lowered their revenue forecast (again excluding the Illumina payment) from a range of $415 million to $435 million to a range of $400 million to $420 million. The consensus forecast was for $421.1 million.

The company attributed the shortfall primarily to lower research spending by pharmaceutical and industrial customers, which makes sense given the weakness in the economy. However, Wall Street is suspicious that a more important factor to the shortfall is coming from growing competitive pressures, especially from Illumina, in Affymetrix’s expression array business. As a result of the lowered revenue forecast, three brokerage firms lowered their ratings, two to neutral and one to negative.

If the company hits their revised estimates, today’s decline will create an amazing buying opportunity, as this is a relatively small, 3% shortfall with a reasonable expectation — not the kind of news that should take 37% off an already depressed market capitalization. If Wall Street is right, this is just the first shoe to drop in a multi-year period of underperformance, but I suspect the company will report within its forecasted range, but we need to wait for the April 24 earnings call to get more information to make a decision, so I am moving AFFX to a Hold until after the earnings call. I’ll be in touch again if there are any new developments or actions you need to take.

A Note on the Market

The run up to 1370 on the S&P 500 last week did not achieve the escape velocity that I was looking for, and the market was quickly sucked back down to the 1326 attractor level. It is important that for the S&P to close this week over 1315 or so, and preferably over 1326, if the upside scenario is to remain intact. It doesn’t appear that things are getting worse — most of the scare headlines about gas prices and foreclosures are just old news playing out. But the market may decide to stage another scary drop back to 1270 just to build up bearish sentiment and create the energy for the next leg up. I am watching this closely and will have more comments in Thursday’s Radar Report.

In spite of a ton of bad news, including big layoffs at Advanced Micro Devices, negative earnings preannouncements, more bad housing news and Fed Chairman Bernanke saying we may be in a recession, the market’s action from Wednesday, April 2 through Monday was the very definition of a flat, drifty consolidation. Tuesday and Wednesday’s dip back to 1355 might have reminded you of something I wrote in last week’s Radar Report: “Otherwise, expect a brief dip back down to 1355 as the market builds up the energy to surge ahead to the 1440 level.”

Date	S&P 500 Close
Monday, March 31	1322.70
Tuesday, April 1	1370.18, +47.48 points
Wednesday. April 2	1367.53
Thursday, April 3	1369.31
Friday, April 4	1370.40
Monday, April 7	1372.54
Tuesday, April 8	1365.54
Wednesday, April 9	1354.49
Today	1362.99

Markets make streaky moves, both up and down, which begin as traders on the wrong side of the move race to adjust their positions. When the move is over, markets consolidate and build up energy for the next move. The consolidation can take the form of a retest back to the breakout point, in order to confuse both those who have the underlying move right and those who were wrong, covered their position, and now are sorry they did so. Or the consolidation can take the form of a flat, drifty market that lulls everyone into thinking the move is over. These drifty consolidations almost always mean the market will continue to move in the same direction it started to, as they are evidence that the opposite side does not have the firepower to even force a retest.

So if the first streaky move is down, it starts with over-leveraged bulls and daytraders dumping stocks. When the move stops, after the bulls sell and the bears increase their short positions, there will be a consolidation. A move back up to retest the breakdown level will either be successful, recapturing that level and moving higher, or fail with the “kiss goodbye” just under that level and resume its downturn. A sideways, drifty consolidation that doesn’t recapture many points almost always means the underlying weakness is about to resurface, often in a pretty violent manner. That’s that pattern I worry about when I send you a Flash Alert warning of the possibility of extreme weakness or even a Crash.

If the first streaky move is up, as this one was, it starts with the over-leveraged short sellers and put buyers getting blown out of the water. Again, the consolidation will either take the form of a retest back down to the breakout level, or a sideways drift. In the retest scenario, if the market moves well below the breakout level, the prior upmove has to be suspect. But if it comes back to the breakout level and finds support in the form of buyers, you can guess that it will move back up to the top of the range for another try at a further breakout. And, again, the strongest pattern of all is the flattish consolidation that builds up energy for the next upmove as the underlying strength resurfaces — again, often in a pretty violent manner. A flattish consolidation that ends with a retest of a minor breakout point like 1355 is the strongest consolidation pattern of all.

That’s where I think we are. I look at the market using various differencing intervals, from five minute charts to one hour, 150 minute, daily, weekly and monthly. The pattern of a streaky move followed by consolidation followed by streaky move is common across all these charts. The only difference is that the move on an hourly chart might last for a day and cover 30 S&P points, while the same pattern on the daily chart might indicate a several-day, 100-point move in the offing, and the same pattern on the weekly chart would indicate a several month, multi-hundred point move about to get underway. Right now, all the charts are lined up for a several hundred point move starting any minute. Unless this whole thing reverses very quickly — and I will certainly tell you via a Flash Alert it if does — it looks like a 35% upmove lasting into April 2009 is imminent, and it could be a 50% move to 2100 in the same time period. We will see numerous doubles and probably some triples in our MegaShift stocks and LEAPs in that environment. Best of all, we will know when to sell, simply by listening to the market instead of the TV gurus and talking heads.

I must admit that one talking head I will miss is Abby Joseph Cohen, the permabull market forecaster at Goldman Sachs. On March 17 — the exact day of the market bottom — Goldman said she would no longer be making S&P forecasts. I assume her 2008 yearend forecast of 1675 for the S&P 500 got her fired, and in what has to be a delicious irony, she’s probably right. If I’m right about this move, we will look back and see that the all-powerful Goldman Sachs panicked at the bottom. Maybe they will reinstate Ms. Cohen next April, right at the top. We shall see. In the meantime, her replacement is David Kostin, Goldman’s U.S. investment strategist. In a March 17 interview with Bloomberg — right at the bottom, remember — he said the S&P would fall another 10% before rebounding to 1380 by the end of 2008. Thirteen trading days later, the S&P hit 1380. So even though we’ve lost the ever-amusing Ms. Cohen, the apparently even more-wrongheaded Mr. Kostin should be providing just as much entertainment to avid CNBC viewers until he gets canned.

Meanwhile, we’re well positioned with many of our MegaShift companies, but I want to add to the list of profit opportunities. With the market showing signs of a run and the price of oil hitting a record $112 yesterday, it’s time to get back into my favorite heavy (sour) crude oil refiner, Holly Corp. (HOC).

Back Into Holly Corp.

Guess which oil companies make less money as oil prices rise? Refiners. They buy the stuff and “crack” it into gasoline, diesel, kerosene and whatever else they can. You may think gas prices are high, but they have not kept up with the price of oil. With the price of their raw material sky-high, the refiners’ profit margins have been badly squeezed, and the number of gallons sold is under pressure by a slowdown in the demand for gasoline. With the summer driving season coming up, the price of oil is likely to hold near current record levels ($112 a barrel yesterday), and gasoline will go up from this morning’s record $3.36 a gallon. The oil refiners’ stocks tanked beginning last summer, and a little recent rally based on hopes that higher gasoline prices are restoring profit margins seems to be reversing. Then yesterday the refiners’ stocks slumped on a government report that high prices are causing a slowdown in demand.

Sounds like a good industry to stay away from, doesn’t it? But the last time I recommended Holly was June 15, 2006, in similar circumstances, and just as the summer driving season was getting underway. The buy limit triggered at $39.52 on June 19, and we sold on May 11, 2007, at $67.35 for a 70.4% gain. I think we’ll make a similar gain this time, but quicker…possibly by the end of the summer.

And, by the way, I suggest that you take the advice of oil industry insiders. When you get gas, fill up the tank. Fill up your gas cans. Fill up everything. It isn’t going to be cheaper next time.

There hasn’t been a new refinery built in the U.S. in 29 years, and there won’t be another one for at least 10 more years. In fact, less than half of the refineries that were running 29 years ago are still in use today, although better efficiency has kept the decline in actual refining capacity to about 10%. But with our gasoline consumption up almost 50% over the same period, it’s obvious that when things are going right, refiners are in the key spot to capture a lot of the value added between a barrel of oil and a tank of gas.

The key to these stocks is the crack spread, or the difference between the selling price of all the products that come out of a barrel of oil and the cost of that barrel. But when the price of oil is shooting up, product prices tend to lag and the crack spread and refining margins get squeezed. That’s what’s been happening, but it’s about to change. Independent refiners use the demand from the summer upswing in driving to add several cents a share to their crack spread, and that has a dramatic, leveraged effect on their bottom lines.

The New York Mercantile Exchange 3-2-1 crack spread (the blue line in the chart below) averaged $12.60 in the March 2007 quarter. It leaped to $24.34 in the June quarter and then fell back to $13.74 in the September period. The December quarter was a disaster, as the crack spread fell to $7.84 and all the refiners reported poor earnings or big losses. There was not much improvement in the March 2008 quarter, as the spread averaged $9.83 and there were some periods where a barrel of gasoline sold for less than a barrel of oil. As the chart below shows, the crack spread is back to the $12 area. I expect the summer driving season to drive it to $20 or more.

Chart courtesy Oilintel.com

One of the reasons I expect the crack spread to expand is that it is very cyclical and it is currently around the lowest levels in 10 years. Here are the most recent upswings in the spread, and the impact on the big refiners’ stocks:

Crack Spread Low	Subsequent High	Average Gain for Major Refiners’ Stocks
2/15/99	4/5/99	16%
1/17/00	4/3/00	30%
12/11/00	5/28/01	46%
12/15/03	5/31/04	48%
2/28/05	4/25/05	7%
2/13/06	4/24/06	27%
2/5/07	5/14/07	32%

Most of the lows are between December and February, and most of the peaks are in April and May. The NYMEX low this year was at the very end of February, and I expect the high to be delayed until June. The rally in the stocks should approach 50% just from this move in the crack spread.

Petroleum products are distilled or cracked from crude oil. The lighter stuff that floats to the top, gasoline and diesel, is made of short chain hydrocarbons. The stuff that sinks to the bottom, like paraffin and asphalt, are longer chain hydrocarbons. Holly’s first advantage is that they can process “heavy” or “sour” crude oil, which sells for $10 to $30 a barrel less than the sweet crude prices you see in the headline news. Their refineries were designed with advanced technology to handle these harder-to-process oils, including bitumen from Canadian tar sands.

Second, Holly recently upgraded its refineries by investing in hydrocrackers that can reduce the long chain, low margin junk into high margin gasoline and diesel. They can convert 90% of a barrel of oil to gasoline or diesel, while their competitors can only convert 50% to 70%. They can also handle bitumen from the tar sands as easily as asphalt. With most of the sweet (low sulfur) crude found and spoken for, incremental oil even from places like Saudi Arabia is likely to be mostly sour or heavy crude, cheaper and in need of hydrocracker technology to maximize profits. Heavy crude sells at an average 20% discount to light sweet crude, yet Holly can get more barrels of gasoline out of a barrel of heavy crude than their competitors can out of light sweet crude!

Holly has two refineries, one near Salt Lake City and a larger one in Lovington, New Mexico. They’re just wrapping up a $500 million, three-year program to refit both refineries to handle heavy oil. The Salt Lake City plant uses Canadian heavy crude for over 75% of their feedstock. The New Mexico plant paid for its upgrade in six months by turning 90% of the feedstock into gasoline, diesel and jet fuel.

Then, of course, they have to sell it. Holly sells and distributes in six states: Idaho, Montana, Wyoming, Nevada, Utah and Arizona. The top five states for population growth are Nevada, Arizona, Idaho, Florida and Utah. Not a bad match. They built a finished-products pipeline from Salt Lake City to Las Vegas to capitalize on Sin City’s population explosion.

Holly has made money for each of the last 32 years, and hit $5.98 in earnings per share last year. The razor-thin crack spread will drop their March quarter earnings (to be announced in early May) close to breakeven, but I expect them to guide for sequential growth for the rest of the year, hitting around $4.00 a share this year and back to $6.00 in 2009. The stock is selling for only 7.8X trailing earnings, and just 11.6X this year’s depressed estimate. They also pay a small dividend. The independent refining industry will take advantage of the summer driving season to pick up some extra pricing per gallon, and sentiment towards this sector should change quickly. Right now, three brokerage firms are bullish, four are neutral and one is bearish. The last two analyst actions in mid-March were downgrades. There’s plenty of negative sentiment to fuel a sharp move up. I want you to buy HOC under $48 for a $70 target, possibly as early as Labor Day.

Biotech MegaShift

I reviewed Amgen (AMGN) in the March 20 Radar Report, concluding that “Amgen has put most of its problems behind it.” You’ve sent a number of emails since then asking how that can be, especially in light of the FDA’s three-month extension of its review of Amgen’s new blood-clotting drug, Romiplostim. The drug was originally recommended for approval by the advisory committee, but then afterwards Amgen gave the FDA its risk management program for appropriate use. The FDA said they considered this a major amendment (yeah, right) and extended their deadline date from April 23 to July 23, as permitted under the PDUFA rules. This really is a bureaucratic response to show Amgen who’s boss, as if Amgen didn’t know. It won’t affect the approval or eventual success of the drug at all. Amgen blew it by not getting this to the FDA earlier, so the FDA is making them wait in line a little longer.

The big jump in the stock today in sympathy with the Millennium news today (see below) reminds me of how sold out the biotech sector really is. The major indexes are down 25% in a few months, on no especially bad news. Hold the Amgen January 2009 $70 LEAP call (VAMAN). Buy the Amgen January 2010 $40 LEAP (WAMAH) under $10 with a $20 target.

Millennium Pharmaceuticals (MLNM) got a $25 cash bid from Takeda Pharmaceuticals of Japan after the close last night. For those who wonder where on earth I get my target prices from, I value companies as businesses and then recommend their stocks when they are at about half the target level. I’ve had a $23 target on MLNM since we bought the stock at $10.64 in February 2006). The deal has a quick close and a $247 million breakup fee, so there will not be another bid. Sell MLNM and thank you, Takeda, for a 128.8% gain in 26 months ($24.34 was today’s closing price)!

Content on Demand MegaShift

Intel (INTC) reports March quarter results next Tuesday after the close, kicking off the tech reporting season. Expectations have come down from 30 cents a month ago to 28 cents a week ago to 25 cents today. That’s good, because even though PC sales have slowed with the economy, expectations are low enough that the company’s reported numbers shouldn’t disappoint.

However, guidance could be a bit lower than the current published numbers. The consensus is looking for $9.63 billion in sales in the March quarter, dipping to $9.25 billion in the June period due to seasonal factors. But they are also looking for earnings to increase sequentially from 25 cents to 28 cents. I’d be more comfortable with 25 cents for both quarters. In the current environment, though, I don’t think the stock will go down even if they guide for 25 cents in June, because they also are going to say they expect a strong second half.

Rob wrote: “I’m getting nervous about our INTC Leaps. Down 38% after cost averaging, time decay is becoming an issue. Global slowdown likely to impact negatively, AMD is melting down. What do you think about rolling these out another year?”

There’s nothing wrong with rolling these out another year — it is a move conservative way to be in the position. However, I think the global slowdown will turn out to be mild and brief, due to the massive infusions of liquidity by central backs around the world. AMD is melting down in part because Intel is taking back market share. With my very bullish market outlook, I’d rather stay in the 2009 calls. But rolling out is always an option, depending on your portfolio position and risk tolerance. The Top Buy-rated Intel January 2009 $22.50 LEAP calls (VNLAX) can be bought all the way up to $6 for my $12.50 target price at expiration.

Motorola (MOT) settled their proxy fight with Carl Icahn, at least for now, by accepting two of his nominees for the board of directors vote in May 5 shareholders meeting. One of the two, Bill Hambrecht, is an old friend. Icahn seems to be most interested in Motorola’s cellphone unit, although at this point only to the extent of making sure the company gets the right CEO in their for the split up. With 6.3% of the stock (142 million shares), he has certainly earned the right to be interested.

The stock rose only about 30 cents on this news, perhaps because people were hoping for a proxy fight or a takeover bid, but I think this insures that the underlying value will be unlocked. I still like the Motorola LEAPs. The New World Investor portfolio holds the January 2009 $17.50 calls (VMAAW) for a $12.50 target price. For a new or averaged-down position, I want you to buy the January 2010 $10 LEAP call (WMAAB) under $2.50 for my $7.50 at a stock price of $17.50. I think we’ll see that price long before expiration.

New Energy Technology MegaShift

Rentech (RTK) drew a hopeful question from Seward: “Since hitting 82 cents a share on March 20, I note that Rentech has ticked up nicely, closing yesterday at $1.24, a move of slightly more than 50% on an uptick in volume. Do you have any insight into the reason behind this move? Any chance of the company announcing a partnership that would give it the capital infusion it so badly needs?”

Rentech’s stock bottomed with the market, and then the company gave a very detailed presentation at a Wall Street Analyst Forum on March 27 that is a must-read for everyone interested in alternative energy. They said the process currently produces competitive products at the equivalent of $50 per barrel of oil, with no government support. The company really has its ducks lined up to demonstrate efficient production of very clean biofuels, beginning as soon as the pilot plant opens. They certainly could use a strategic partner, but I would not want them to raise capital at these low levels. They could sell the fertilizer plant, which throws off about $45 million a year and may have more value to someone who believes in the long-term future for corn-based ethanol.

When the pilot plant turns on, they should get a little more respect and a lot more contracts and technology deals from the large number of tire-kickers they currently talk to. RTK is a great buy at these levels, with a $4 limit and an $8 target that may turn out to be just the first stop for this multiyear holding.

WiMAX MegaShift

Alvarion (ALVR) is restating their December quarter earnings up from six cents a share to 19 cents a share to account for their gain on the sale of their stake in LGC Wireless to acquirer ADC Telecommunications. A nice bit of change ($8.3 million), but it’s non-recurring and should have no major impact on Alvarion’s stock. This is going to be another very big year for WiMAX, and ALVR remains a Top Buy up to $11 for my $17 target.

Monday marked the end of the worst quarter for stock prices since the September 2002 quarter, with the S&P 500 down 9.9% and small capitalization and technology stocks doing worse. But that September 2002 quarter marked a loss of almost 18% as we approached the end of the tech bear market. It’s hard to stay unemotional during a three-month, 9.9% (or worse) decline, and that is of course exactly why these declines snowball. But listening to the market instead of CNBC can make all of the difference.

I still believe what I said in last week’s Radar Report. I think that 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 what we should expect to see going forward.

Friday and Monday were the “couple of days of consolidation” that I mentioned last week with a drifty move under the 1326 level to fake out the last bunch of suckers. And then came Tuesday. The S&P 500 jumped 3.6%, its best start to a second quarter since 1938. The Dow Jones Industrial Average posted its eighth biggest point gain in history led by the supposedly doomed financial stocks. This is the third time in two weeks it came close to or surpassed 400 points. When UBS announces a $19 billion write-off of subprime mortgages and the stock goes up 15%, I would say the lead sentence in the March 20 Radar Report was right on: “The financial crisis is over.”

Yesterday and today’s tight trading range at the new recovery level is typical of the days just following a big move. If we see another big up day in the next few days, as I expect, the move to 1440 will be quick. Otherwise, expect a brief dip back down to 1355 as the market builds up the energy to surge ahead to the 1440 level.

I want to be clear that I don’t know what will happen at 1440. I think there will be a period of congestion, followed by a multi-month move to 1880 or even 2100 by April 2009. That would mean we’ve been through a correction in an ongoing bull market, not a bear market. But if the S&P gets near 1440 and has a big failure, then Bernanke & Co. have missed their chance and a very serious bear market and recession could follow. As always, instead of listening to the economists, market gurus, surveys, op-ed pieces, short sellers and TV anchors tell us what they think the market shoould do, we will let the market tell us what it is going to do.

At the next market top, whether 1880 in April 2009 or 1440 in April 2008, I want to cut back the number of recommendations in New World Investor by at least half. Companies doing well in businesses that can maintain growth during a depression (the D word!) with stock prices that substantially undervalue their futures will stay on the list. Troubled companies, cyclically sensitive companies and those with stock prices approaching or at fair valuations will have to go. Right now, I am keeping stocks like UTStarcom (UTSI), Zhone Technologies (ZHNE), Infinity Energy Resources (IFNY) and Telkonet (TKO) on the list to see if they can work out their problems or get bought during a parabolic bull market during the next year. This week, Infinity Energy and Telkonet reported results, and if I had to pick right now, I’d say TKO will stay and IFNY will go. Of course, I’ll let you know immediately when the time has come to sell any of our positions.

Here’s what’s happening with these two companies:

Infinity Energy Resources filed a detailed 10-K, reported earnings for the December quarter and held a conference call that generated lots of questions. First, a bit of background. When their problems with Amegy Bank first surfaced last year, I talked to the CEO, and he told me that the whole problem began when IFNY decided to joint venture or sell its assets.

Naturally, the bank wouldn’t want their collateral to just disappear, so Infinity’s management paid a visit to the bank, but their lending officer just happened to be on an extended honeymoon. When he returned, the investment bankers had their offering circulars out, and the bank felt they had been ill-treated. I remember thinking that if that was the full story, it would blow over very quickly. So when it didn’t blow over, I concluded something else was up. I practically begged management to hold a conference call and take questions, but they never did it.

When the deals with Forest Oil were announced, I figured they would take out Amegy Bank or at least dramatically reduce the bank line to the point Amegy would be mollified. Not so. Infinity repaid $11 million, a little more than half of the line. Then they had to sign a second forbearance agreement with Amegy reducing their line to $3.8 million, which means they have to repay another $7.1 million by May 31 or they will default again. Also, they are not paying their suppliers, some of which have filed liens on drilling properties. Forest Oil won’t start drilling those properties under the recent farmout agreement until Infinity cleans up the liens. Forest may just be waiting for a Chapter 11 filing to pick up the drilling leases cheaply. Meanwhile, Infinity is losing a few leases because they have not kept to the contractual drilling schedule.

Infinity desperately needs cash to pay their bills, lift the liens, get some oil from the drilling program, and then securitize it to get the cash to pay off Amegy. Can they pull this off? Probably. The original CEO, now back in charge for over a year, is plugged in to the good ol’ boy network. The company wants to protect their Nicaraguan offshore leases, as that clearly is the only asset left that has giant potential. With the stock at 50 cents a share, a total market capitalization under $10 million and a probable NASDAQ delisting next, I think we should hold IFNY to see if management can…well, manage their way out of their financial box. If so, Nicaragua will eventually get this stock to my $7 target.

Telkonet had better news, growing sales, a cost-cutting program and straight answers on the EDS contract to install broadband over power lines at military bases. While both IFNY and TKO trade under $1 a share, TKO has a $55 million market cap and an all-new management team that is performing up to my expectations. They generated $3.7 million in sales in the December quarter, excluding $1 million in sales from MTSI, their 63%-owned subsidiary. This quarter’s sales were about even with the September quarter due to normal seasonality in the hospitality industry. They booked $11.5 million for the full year — again, excluding MTSI — up dramatically from $3.4 million in 2006. While they lost about 24 cents a share from operations in 2007, they said they expect record 2008 first quarter revenues, followed by “significant” sequential revenue growth, due to excellent visibility from recent contracts. They are trying to get the company cash flow positive as quickly as possible, and have reduced the number of locations by consolidating into their Germantown, MD and Milwaukee, WI facilities.

Thanks to high oil prices, energy management using a building’s electrical system for communications with sensors and thermostats is now Telkonet’s most profitable and fastest-growing area. The company is being deluged with requests for information and quotes. They’ve taken a very smart step to dominate this niche by providing “software as a service” in the form of remote monitoring, management and reporting of a system after it is installed. The customer doesn’t have to do a lot of training or add people, TKO picks up a service contract annuity (the “film” in the BPL “camera”), and field service is integrated into the monitoring program so TKO controls the truck roll. This is a compelling offering in a high-energy cost environment, where corporate customers can see a fast payback on their hardware investment without a lot of hassle.

They expect the EDS contract with the Army and Marines to continue in 2008 and expand as EDS wins more locations. TKO is now a well-managed company and the clear leader in both in-building BPL and energy consumption management over power lines. I am not going to change either my $5 buy limit or $15 target price because this company has an opportunity to expand quickly and then be bought out by any number of firms from GE to Honeywell to ADT Alarm Services.

Biotech MegaShift

Dendreon (DNDN) had a private placement with a so-far unnamed institutional investor for eight million shares of stock at $5.92 a share (that’s $47.4 million and the per share price is a full 64 cents above today’s closing price) with eight million warrants to buy more stock at–get ready for it–$20 a share!. The money is to “fund our commercialization activities for Provenge.” This follows Morgan Stanley and Visium Asset Management taking a 16.5% position in Dendreon. The new investor has 45 days to file their identity with the SEC, so we’ll know who it is soon.

It is amazing to me that the Dendreon bears think that the big hedge funds make investments of this size without extensive due diligence, including paying outside consultants to review the science, trial design and clinical results to date. The warrant is exercisable after October 8, so we have just gotten a big fat hint as to when the “peek” data from the clinical trial will be made public. DNDN still has a huge short interest, 35 million shares or 42% of the float. That’s almost enough to put the stock to $40 by itself if the data are good. Buy DNDN up to $8 for my $40 target.

China MegaShift

My call last year to get out of China turned out be very timely. The weakness in U.S. consumer spending is hitting the country’s top line, while domestic inflation caused by out-of-control money supply growth and dramatic increases in demand from Chuppies (my friend Robert Hsu’s term for upwardly-mobile Chinese professionals) have hit the Chinese stock market pretty hard.

I think the worst is over for a while, as the bull market in U.S. stocks resumes, our government gets control of the subprime mess (at your expense) and the Summer Olympics in Beijing approaches. But I still don’t want to go back in to Chinese stocks until we see how they will handle inflation (i.e. using free market principles, instead of their knee-jerk central planning/price controls philosophy from the bad old days). Yet we know their stock markets respond strongly to rallies in our market, so this is not the time to be short, either. As part of this “stand aside and watch” advice, I am maintaining my “hold” recommendation on UTStarcom (UTSI) for a $10 target if they can get the company straightened out and/or sold in the next 12 months.

Content on Demand MegaShift

EMC (EMC) still owns 86% of VMware (VMW), whose wildly successful IPO in 2007 has turned into a major meltdown in 2008, with very little change in its outlook. Wall Street is worried that Microsoft will rapidly gain share in the server virtualization market, where VMware has an 85% market share. But I look at surveys of where Chief Information Officers plan to spend money in a tight budget environment, and not only is virtualization always near the top of the list due to its cost-saving attributes, VMware is consistently the vendor of choice. Everyone knows it takes about three generations of product introductions before Microsoft gets it right, and even then you have to be very careful to trust them with mission-critical processes. Microsoft’s current product is in beta testing, and it will need to treat the Linux and Macintosh operating systems as just as important as Windows if virtualization is to work. So I think Wall Street’s expectations for VMware are too depressed, and that will help EMC outperform this year. Buy the EMC January 2010 LEAP call with a $15 strike price (WUEAC) up to $5 for my $11 target.

Intel Corp. (INTC) announced Tuesday it has begun shipping its Atom processor for mobile Internet devices (MIB) that put a PC in your pocket. The MIB can surf the web, do email, play video and, in some configurations, act as an MP-3 player and cell phone. I expect some will have digital cameras and camcorders installed. This is a big deal for Intel because the integrated MIB is a long-awaited product, and the Atom processor requires very low power for long battery life.

There is a transient post-holiday softness in worldwide PC sales that should lead to a strong second half. I still rate the Intel January 2009 LEAP calls with a $22.50 strike price (VNLAX) as a Top Buy under $6 for a $12.50 target price.

New Economy MegaShift

Cnet (CNET) stock hasn’t done anything for about two years, since it cratered in the summer of 2006. So when 15% shareholder Jana Partners published their 38-page plan on Tuesday to turn the company around, I was interested in their assessment: “There is no reason to believe that the current leadership, left to its own devices, should be further entrusted to stop the destruction of shareholder value.” I’m not sure how a flat stock for two years can be labeled “destruction of shareholder value,” but I understand their frustration that the company doesn’t extract a lot more value from the great Internet properties they own. Cnet is laying off 120 employees, about 4% of the workforce, to trim expenses, when I would rather see them hiring salespeople to drive up revenues.

Having said that, the Jana Partners plan calling for deploying better tools to sell more advertising and highlight CNet’s listings in Internet search results sounds like Search Engine Optimization 101 to me. I’ve just started doing some of this work for my son’s premium finance life insurance company (www.oxfordfinancialgroup.net, if you or someone you know is between 70 and 85 and would like a free quarter-million dollars), and it isn’t rocket science. In other words, Cnet already knows this stuff, so I’m not sure why they’ve been so ineffective in applying it. Jana says they are “lackadaisical” –maybe so. They also questioned the Internet savvy of the two investment bankers filling the CEO and CFO slots, but I wasn’t thinking those two would be coding websites.

Cnet offered Jana one of the seven Board seats the dissidents are seeking, but Jana turned them down. Whatever happens, I don’t think turning the dogs loose in the boardroom can hurt us. Jana estimated if the changes are made, the company can produce $183 million in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2009, pushing the stock over $11. I still rate CNET a buy up to $9 for my $17 target.

Security MegaShift

Packeteer (PKTR) responded to the Elliot Associates $5.50 a share buyout offer as I expected, rejecting it as too low. But there was more depth to their rejection than the usual press release. They filed an SEC 14D9 form with quite a bit of detail on why the Board of Directors turned it down. First, they said they have begun a review of Packeteer’s strategic alternatives, and believe they could sell the company for a substantially higher number. I agree. They added that if management can achieve the fiscal 2008 operating plan, they think the stock will trade much higher than $5.50. Again, I agree, and I also don’t think they would have said this if there was any indication of a March quarter shortfall.

It looked from the filing like 10 companies have had discussions about joint venturing or acquiring PKTR, and two have made offers above $5.50. With the stock still trading under $6, PKTR is a very timely buy for a good March quarter report and a possible acquisition bid. I still think you can buy the stock up to $9 for a $20 target if they can stay independent, or a takeover in the $12 to $14 range.