Last week I warned you that a market crash was probably in the cards. Despite Tuesday’s move higher, this scenario is still not completely off the table, but so far the bears have not been able to take advantage of the window that opened for them, and the window is now rapidly closing. The old saying is that markets that won’t go down, go up. It could be that the week of October 6 through October 10, which was the worst drop in the history of our stock market, marked the bottom for now. The very volatile daily moves we’ve lived through since then could simply be confirmations of the bottom that will confuse bull and bear alike, before the big fourth-quarter rally I’ve been looking for.

During that week, volume on the New York Stock Exchange hit 11 billion shares one day, a new record. The exchange-traded fund that tracks the S&P500 traded a record 800 million shares in one day and another record-breaking three billion shares for the week. A big drop on big volume certainly sounds like capitulation.

Last Friday, the 79th anniversary of the beginning of the Crash of 1929 and the one-year anniversary of the market’s all-time high, the VIX Fear & Greed Index sailed up to new intraday high at 89.53 and closed at a record 79.13, but the S&P 500 did not sink to new lows. When panic and fear skyrocket while stock prices are little changed, something is up. Unlike 1929, there was no Black Monday or Black Tuesday, even though the VIX set another closing high at 80.06 on Monday. Tuesday, or course, saw a spectacular rally starting at the 845 level on the S&P. There is some resistance at 962, which we saw again today, but the immediate target for this rally is at least 1050, and eventually 1270, a whopping 50% move from Tuesday’s low.

A break below the October 10 low of 7,882 on the Dow Jones Industrials or 839.80 on the S&P 500 would put the crash scenario front-and-center again, but that has become the low probability outcome. If you watched the short squeeze in Volkswagen shares on Monday and Tuesday after Porsche announced they’ve bought up most of the remaining float, you can get a feel for the higher probability outcome. The short sellers, put buyers and cash holders are all going to try to get on this train at once to salvage their 2008 performance statistics, and there aren’t enough doors or seats. Yesterday’s Fed rate cut to 1% convinced at least some of them that the train is departing right now.

By the way, I think the Fed should have cut to 0% if they wanted to exceed expectations, kick-start the credit markets and have some impact on the developing l-o-n-g recession. But Bernanke is not the guy for a dramatic gesture, so his Fed funds cuts will prove to be ineffective. It will take other initiatives to straighten out our economy.

And in the How-Not-To-Do-It Department, Iceland’s once-booming economy has been driven close to collapse by bank failures tied to credit default swaps and collateralized mortgage obligations. Collectively, the banks held assets five times the size of Iceland’s GDP, on extreme margin, of course. Iceland’s central bank cut a deal with the International Monetary Fund for a measly $2 billion loan and agreed to the IMF’s condition to raise their interest rate to 18%! The IMF is a serial assassin of developing country economies, and now they have a shot at wrecking a developed one. Yup, 18% interest rates, that sure will defend the currency — not. Who would want to have money in Iceland as those high interest rates cause a depression?

Now is the time to jump on some bargains served up by this year-long, vicious decline. We sold Omniture (OMTI) in June 2007 at $23.37 for a 226% gain, and here it is back at $11. We sold Energy Conversion Devices (ENER) in June 2008 at $77.98 for a 174% gain, and now it’s trading for $32. We bailed out of Cree (CREE) way back in March 2004 at $28.50 for a 38% gain, and I have mentioned it several times this year as a stock we need to own at a better price. Today’s close at $20.18 is a lot better price. We’ll add all of those picks back to our portfolio today — details below.

Finally, I want to add to our solar exposure [Canadian Solar (CSIQ) and Energy Conversion Devices] with a new recommendation of Suntech Power (STP). On top of that we’ve seen good earnings reports from Harmonic (HLIT), ViroPharma (VPHM) and others, plus the usual news flow. We have a lot of ground to cover, so let’s get started.

Four New Buys

Omniture (OMTR) was a very successful September 2006 recommendation in the New Economy MegaShift, and not much has changed from my original write-up, which you can find here. One thing that has changed is that they are up from 1,000 customers to 5,000 customers in two years, including eBay, AOL, Wal-Mart, Gannett, Microsoft, Neiman Marcus, Oracle, General Motors, Sony and HP. Omniture provides an online service that runs business optimization software for corporate marketing departments that need to manage and integrate online, offline and multi-channel business initiatives. Their SiteCatalyst service collects information on how users interact with their corporate customers’ web sites. This can include how a web user got to the site (Search engine? Pay-per-click? Free publicity?), how they moved around the site, how long they stayed, what they bought, what they almost bought and on and on. All of this can also be related to offline drivers like TV and radio advertising or direct mail, and everything is stored in a data warehouse for easy access by the customer, including the ability to build custom reports.

The customer accesses everything through a web browser — there is no need to buy a huge software package and wait months for it to be installed in-house. This software-as-a-service model, also known as application hosting, is very attractive to me because it provides recurring monthly revenue, instead of the big, lumpy software sales that may come in the last two days of a quarter, or not. I think Wall Street will pay higher price/earnings (P/E) ratios for companies that use this model.

SiteCatalyst just won the ClickZ Interactive Marketing Excellence Award for Best Analytics Platform. A member of the judging committee described the service as “hands down the most innovative, ever-expanding platform in the space.” It has the #1 market share in the industry.

When I recommended the stock in 2006, I was expecting sales to roughly double to $80 million that year and then hit $130 million in 2007. They did $79.7 million and then $143.1 million. They should close out 2008 with another double to $308 million in sales, and even in a rotten economy in 2009 they will hit $400 million. Companies need SiteCatalyst to compete for Internet sales in a worldwide economic slowdown.

As for earnings, back in 2006 I was expecting them to lose 15 cents a share pro forma, and then make 15 cents a share in 2007. They reported an eight cent loss for 2006 and a 20 cent profit for 2007. This year, I am looking for 42 cents, followed by 65 cents in 2009.

When I recommended OMTR in late 2006, the company has a total market capitalization of $345 million, less than 3X the 2007 sales estimate. Today the total market cap is $762 million, or less than 2X the 2009 sales estimate. It should be selling for double or triple that, given the growth rate. Buy OMTR under $11 for a $22 target in 2009. This is a stock we can hold past the April high I am expecting, and let it compound for a few years.

CREE (CREE) was another successful recommendation dating back to March 2004, and the description of their business (which you can find here) and opportunity have not changed. The company makes light-emitting diodes (LED), and also combines them into LED lamp bulbs to replace incandescent and compact fluorescent bulbs. About 19% of our energy bill goes toward lighting, almost all of it for either incandescents that waste heat or fluorescents that contain toxic mercury. Cree’s XLamps can slash our country’s lighting bill, so they fit in the New Energy Technology MegaShift.

Although LED flashlights now cost about the same as a regular flashlight, LED lamp bulbs that contain many more individual LEDs are still much more expensive than incandescents. But governments around the world, as well as several U.S. states, have set deadlines to outlaw incandescents, and rapid increases in LED lamp production are bringing down prices. Cree recently signed a distribution deal with Zumtobel, one of the world’s leading lighting fixture companies, to sell Cree’s LED downlights in Europe, where many legislated deadlines to stop using incandescents are coming up.

Cree used to make only the LED components, but entered the lamp business in competition with many of its customers a few years ago. Angry customers began switching to other suppliers, even though Cree has the best technology and very competitive prices. So the company has been balancing flatness in its components business and a decline in its old businesses against growth in their XLamp LED lamps. The resulting flat revenues and weak earnings brought the stock down.

But the company just announced September first quarter results, and it looks like the breakout quarter. They did record revenue of $140.4 million, up 24%, and 15 cents a share proforma. Their gross profit margin increased to 36% due to higher throughput in their LED chip factory and improved XLamp yields, which resulted in higher XLamp profit margins. XLamp sales showed another double-digit increase, and all their results were at the high end of their guidance. They raised guidance for the December quarter to $142 million to $146 million in sales and 15 to 16 cents a share.

For the June 2009 fiscal year, I’ve raised my numbers to $600 million in sales and 55 cents a share. For June 2010 it looks like $900 million and 75 cents to 80 cents. With the transition to LED lamps just starting, mostly in commercial buildings where there is a significant labor savings from change bulbs only 5% as much, CREE is a stock we can own for many years. The company has $339 million in cash and no debt, so the current turmoil in the financial markets will not affect them. Buy CREE while it is under $22 for my $50 target — that’s 50% higher than the last time we owned the stock.

Energy Conversion Devices (ENER) is yet another prior winner for us in the New energy Technology Megashift — in at $28.40 in February 2007 and out at $77.98 in June 2008. The big change at ENER since that day is a new management team that focused the business on United Ovonic Solar as the best near-term revenue and profit opportunity. They stopped pouring R&D into science projects that will take years to pay off. Their semiconductor memory joint venture with Intel now stands on its own, with Intel doing the heavy lifting in both product development and financing. Their half of the Cobaysis joint venture with Chevron will either be sold to Chevron, or the whole company will be sold to Toyota or a big battery maker like Johnson Controls.

So solar it is. United Ovonic Solar does not make traditional solar panels. They deposit a photovoltaic thin-film coating on a substrate designed to replace roofing materials. So the whole roof is solar-active, and qualifies for renewable energy credits. As a solution for new construction or re-roofing an existing building, it is a no-brainer for any company worried about their energy costs. That’s pretty much everyone these days.

At their recent analyst day, management said they are building a new 120 megawatt solar-cell manufacturing facility. They had planned to have total capacity of 300 megawatts in fiscal 2010 and 600 megawatts in 2011, but they raised that to 420 megawatts and 720 megawatts. They can fund the expansions with cash flow, and don’t need to go to the credit markets. They repeated their commitment to hit 1000 megawatts — one gigawatt — of capacity in fiscal 2012. Capacity is growing about 40% a year, and that’s a good estimate for the growth rate of the company in the near term.

They also discussed a new joint venture with CertainTeed to make next-generation solar residential roofing material by incorporating UNI-SOLAR photovoltaic cells into CertainTeed roofing materials. Products will be commercially available beginning in 2010. This is a very big deal, because CertainTeed dominates the roofing materials business with a great, trusted name and has distribution everywhere.

Thanks to the capacity increases, extended investment tax credits and what I expect will be surging oil prices next year as the dollar falls, I think ENER can report $480 million in sales and $1.75 a share in the current June 2009 fiscal year, followed by $750 million and $3.50 in fiscal 2010. The September quarter results will be reported on November 10, and they should show sales up about 100% from last year and 20 cents to 25 cents a share, compared to a 17 cent loss last year. Buy ENER before the November 10 report up to $32 a share, this time for a $65 target price.

Suntech Power Holdings (STP) is another solar stock that was clobbered in the last week, down 50% before starting to recover Tuesday afternoon, and has fallen from $90 at the beginning of the year to the mid-teens. It is a very volatile stock, but two of the negatives — the confusion over solar installation reimbursements in Europe and the delayed extension of the investment tax credit in the U.S. — are resolved. The third negative, falling oil prices, will be with us for a while, but I don’t think it will affect commercial solar sales, and I expect oil prices to be much higher in 2009.

Suntech is based in China and takes advantage of that country’s low labor and materials costs, but they sell globally through a large distribution network. They have a wide range of traditional solar panel products, including monocrystalline and multicrystalline silicon cells, photovoltaic modules and building-integrated photovoltaic products. They have a large domestic business in China, where they also provide photovoltaic system integration services, such as designing and installing PV systems for lighting outdoor urban public facilities, and telecommunications and transportation systems.

In 2005 they did $226 million in sales. They grew revenues 164% in 2006 to $598.9 million, and then tacked on another 125% in 2007 to $1.35 billion. I expect them to finish 2008 up about 55% to $2.1 billion and then grow another 55% in 2009 to $3.3 billion. It is a remarkable growth rate for a company that went from small to large very quickly, with increasing profitability the whole way. They should report $1.70 a share this year, up from $1.02 in 2007, and hit $2.50 in 2009. It isn’t often you can buy 55% growth for less than 10X coming earnings. Buy STP up to $16 for a $40 target. I may raise that to $50 (20 x $2.50) as we get close.

Avian Flu MegaShift

BioCryst (BCRX) had two good reports this week. On Monday they reported their Phase II trial results in hospitalized influenza patients who were administered peramivir intravenously for up to five days. The drug was well tolerated. Most of the major symptoms disappeared in an average of 25 hours, and patients were discharged in an average of four days, compared to the usual six days. Best of all, there were no deaths at all, whereas normally of the 200,000 people in the U.S. admitted to the hospital with flu, 36,000 or 18% die. After discussing the results with the FDA, I think they could get permission for a pivotal clinical trial using Tamiflu as the control, because it would not be ethical to give these very sick people a placebo. Success in that trial would lead to approval.

On Tuesday, their Japanese partner Shionogi presented data from their Phase II study in non-hospitalized seasonal influenza patients treated with a single intramuscular injection of peramivir. We already knew the top-line results were good. Shionogi said both the low and high doses tested significantly reduced the time to alleviation of symptoms by 32% to 33%, compared to the placebo. The company will proceed with a Phase III study.

There is no antiviral approved for the hospital setting, and practitioners are always interested in new antivirals due to the tendency of the virus to develop resistance to existing approved drugs. I think this data clearly shows that peramivir works, and will eventually be approved. It’s still a long road, but if BioCryst can get the FDA to agree to a pivotal Phase II, at least for avian flu, then we could see the drub commercialized within 18 months or so. From today’s depressed price, this will be a big winner. I am reducing the buy limit to $3 to reflect the current market, but leaving the target price after peramivir is approved at $30 — a 10-bagger.

Biotech MegaShift

eResearch (ERES) reported after the close, with the conference call starting in a few minutes. The company was expected to do $35 million in sales and earn 12 cents a share, and they did $33.9 million and 13 cents. Bookings hit $43.0 million, pushing the backlog to $159.2 million. The company raised guidance for 2008 earnings to 47 cents to 50 cents a share. For the December quarter, they guided to a range of $31 million to $34 million in sales and 10 cents to 13 cents per share. The consensus was looking for $37.3 million and 15 cents, so this is a disappointment. I will focus on this in the conference call, and send you a Flash Alert if my advice changes. For now, ERES remains a Top Buy up to $15 for my $30 target.

QLT (QLTI) reported earnings and results from their punctal plug study, plus some news about their Novartis relationship. To set the stage, they are slimming the company down to focus on Visudyne and their new punctal plug program for glaucoma. The have sold other drugs, sold their corporate headquarters for a big capital gain, and are in negotiations to sell Eligard. They have $2 a share in cash now, although part of that is restricted in a bond put up on a legal appeal. The oral arguments on that appeal are done, and they should hear any day if they won or lost.

On Visudyne, Novartis decided to close down their U.S. sales force, while continuing to sell the drug in the rest of the world. This is not as bad as it sounds, as U.S. sales have been flat and Visudyne has had to pay their share of the expenses of the sales force. There won’t be any negative earnings impact at all. Meanwhile, all the studies on combining Visudyne with anti-VEGF drugs like Lucentis are going forward, and if they are successful we will see U.S. sales grow even without a sales force. Plus, at that time I would not be surprised to see Novartis come back to the U.S. market.

The Phase II puntal plug study essentially tested the ability of the plug to hold a drug inside the eye and get better treatment outcomes. It was quite successful in dropping intraocular pressure by 20% in about two-thirds of all patients. That was good enough to show that this is a commercially viable platform that would be competitive with other glaucoma agents. They will move on to a second Phase II trial using higher doses. I am reducing the buy limit on QLTI to $4 to reflect current market realities, while leaving the target price at $12 after the Visudyne/Lucentis combination trial results are published.

ViroPharma (VPHM) reported a solid September quarter, booking $65.9 million in Vancocin sales, far better than the consensus estimate of $58.5 million. They killed on the bottom line, too, coming in at 32 cents compared to the consensus for 23 cents. Management said Vancocin sales are beginning to benefit from the proposed updated guidelines for the treatment of Clostridium difficile infection, which call for earlier and stronger intervention. They raised guidance for 2008 Vancocin sales again, this time from a range of $220 million to $240 million up to $235 million to $245 million.

After paying for the Lev Pharmaceuticals acquisition, they expect to end the year with about $300 million in cash. Next Wednesday, November 5, they will hold a conference call to discuss the launch plans for Cinryze, the drug they are getting with Lev. They will transition the 100 patients now on the open label trial, and have a list of 800 more interested in evaluating it. The full roll out will start in early 2009 with a newly-hired 20 person sales force. On the call, they also will tell us the pricing — I am expecting $3,500 per dose.

The last dose in the Phase III trial for maribavir for stem cell transplant patients is done, and the last follow-up should be completed by the end of November. We should see top-line results in the March quarter and a new drug application to the FDA in the September quarter. Maribavir also is in a Phase III trial for liver transplant patients, and that trial continues with results expected later in 2009.

I really don’t understand why this well-run company sells at such a low price. The bears who said generic Vancocin would be on the market last year were utterly wrong. The Lev acquisition is an obvious winner already, given the FDA approval of Cinryze. This is a street-smart management that knows how to conserve cash and build shareholder value. VPHM can be bought up to $13 for my $25 target.

Content on Demand MegaShift

Akamai (AKAM) reported September quarter results after the close, and the conference call is about to start. They did $197.3 million in sales and 40 cents a share, better than the consensus for $195.2 million and 39 cents. In the press release, management said they had strong growth in newer offerings like application performance services and dynamic site acceleration, but the environment is getting “increasingly difficult.” I’m sure we’ll explore that statement in depth on the conference call.

Akamai is buying an online shopping data cooperative, acerno, for $95 million in cash. This relatively small deal will close by yearend, and is designed to flesh out a new advertising decision solutions product line that helps online ad companies improve their Web-based marketing. These companies are important customers for Akamai’s web acceleration products. AKAM remains a Top Buy. I am cutting the buy limit to $20, still well above today’s close, and leaving the target price at $60, which is what this extraordinary company is worth.

Harmonic (HLIT) reported record revenues and bookings, and a positive outlook for 2009. Even as major customers like Comcast trim their capital spending budgets, they are spending more dollars with Harmonic because the need to handle video efficiently and competitively is driving their capital budgets.

Sales hit $91.5 million in the quarter, with cable customers accounting for 63% of revenue, satellite 22%, and telcos 15%. Their largest customers were Comcast at 24% of sales, in spite of their cut in their capital spending budget, and EchoStar (DISH Network) at 10%.

They booked about $110 million in orders, for a book-to-bill ratio of 1.2X. That implies 20% growth over the next six months or so. They guided to $92 million to $95 million revenues in the December quarter; the consensus is at $93.1 million. I expect them to hit the high end of the range.

Pro-forma earnings hit 17 cents a share, right on the consensus. The estimate for the December quarter also is 17 cents, bringing them in at 67 cents for the year.

Harmonic has the December quarter in the bag, and management said normally they would say all the trends are in place for strong double-digit growth in 2009. But they are cautious in the current financial environment, even though they are not hearing negatives from customers, and not giving any 2009 guidance yet. At the end of the day, I think they will grow 15% to 20% again next year, with earnings flat as they begin reporting on a fully taxed basis. HLIT remains a Top Buy up to $10 for my $18 target.

Infinera (INFN) reported GAAP revenues of $120.5 million, but their pro forma numbers based on invoiced shipments are more conservative and more accurate. On that basis, they did $80.9 million and 12 cents a share, better than their guidance on the last conference call, and better than the consensus for $77.6 million and a loss of four cents a share. However, they guided conservatively for the current quarter, forecasting $75 million and a loss of seven cents as they start to ship the big Deutsche Telekom order. The Street was looking for $80 million and a two cent loss.

Infinera added five new customers this quarter, including the fifth of the top five cable companies in North America, and two new European companies. That does not include Deutsche Telekom, which will become a new customer this quarter. They are expecting to add four more new customers in the December period.

During the quarter, their photonic integrated circuits passed a milestone: 100 million hours of operation in live networks without a single failure. By designing and building their products from the ground up, instead of assembling other companies’ components, they’ve been able to achieve extraordinary performance at attractive prices. Infinera remains an excellent buy. I am lowering the buy limit to $10, again to reflect current market realities, while leaving the target price at $30.

Motorola (MOT) reported this morning, and it was all bad news. The quarter was disappointing, coming in at $7.5 billion in sales with a pro-forma profit of five cents per share. While that beat the consensus for two cents, they then guided lower for the December quarter, expecting two cents to four cents. They said their plan to spin off the handset division by the third quarter of 2009 is on hold, presumably because (a) it isn’t doing well enough to stand on its own, and (b) MOT won’t have the $4.4 billion in cash they need to complete the separation, including $3.2 billion for the mobile devices operation. Part of the problem is that the recession finally got to cellphones — September quarter sales fell 0.4% from the June quarter and were up a measly 3.2% from last year. The company shipped only 25.4 million handsets during the quarter, several million units short of Wall Street’s forecast, and said that handset sales would be weak in the first half of 2009. The Motorola January 2009 $17.50 LEAP calls (MOTAW) are going to expire worthless, so sell them now or in early January, whichever fits your tax situation better. I apologize for getting us into these — I thought MOT would be out much sooner with their smart phones coming next year to compete with Apple’s iPhone. I still think those smart phones will make a difference, so Hold the Motorola January 2010 $10 LEAP calls (WMA AB) for a reduced $8 target.

New Energy Technology MegaShift

Ocean Power Technology (OPTT) may benefit from the California Public Utilities Commission rejection of a Pacific Gas & Electric contract for a test wave energy installation. The supplier, Finavera Renewables, planned to operate wavepower buoys about 2.5 miles off the coast of Eureka to generate two megawatts of power starting in 2012. The PUC said Finavera’s wave-energy technology is “in a nascent stage” and the system is “not currently viable.” They noted that a prototype buoy deployed by Finavera off the Oregon coast in 2007 sank before its six-week test period was concluded.

PG&E “respectfully disagreed” with the decision. Guys! Call OPTT and get a proven system with Department of Defense testimonials!

A report by Greentech Media and the nonprofit Prometheus Institute found that only about 10 megawatts of ocean power have been installed worldwide so far (mostly by Ocean Power), but that a could grow to 1 gigawatt (1,000 megawatts) by 2015. One megawatt of power is enough to provide electricity for 750 homes. They project that more than $4 billion will be invested in ocean-wave research and the construction of wave farms over the next six years.

Daniel Englander, a co-author of that report, said the PUC decision is not a death blow for wave-energy projects. “PG&E picked the wrong company,” he said. “Finavera isn’t a bad company, it’s just that their technology isn’t at a stage where it’s ready to deliver power commercially.”
OPTT is ready. Buy OPTT up to a reduced buy limit of $10. I am not changing the $40 target.

Next week I will catch up on NetLogic (NETL), QuickLogic (QUIK), Silicon Image (SIMG) and SiRF Technology (SIRF), all of which have reported.

Did you enjoy the bull market? The S&P 500 bottomed at 839.80 intraday on October 10 and hit 1,044.31 intraday on October 14, a 24% increase that exceeded the typical “up 20%” rule to identify a new bull market. Of course, it didn’t happen on a closing basis, and even if it counted I’m afraid it will go into the record books as the shortest bull market ever. It looks more and more like we are on the edge of a 2,000 point crash in the Dow Jones Industrial Average following last Friday’s intraday high at 9305 on the Dow and 985 on the S&P. While this has been a bad week so far, the market is likely to stage one last small rally to around 9000 on the Dow and 950 on the S&P before a major plunge begins.

What would change my mind? If the Dow can regain 9300 and then 9800, while the S&P 500 gets over 980 and then 1030, you can forget about the crash. The market would be telling us that it bottomed on October 10 and is starting a multi-month run to much higher levels. On the other hand, if it immediately breaks below 8,200 and then 7,900 on the Dow, equivalent to 865 and then 830 on the S&P, you can forget about that last small rally. The market will be telling us we are headed down for sure, perhaps as low as 6,400 on the Dow and 715 on the S&P.

But after than, we would still get the multi-month run to much higher levels, even if they are not quite as high as the “October 10 was the bottom” scenario. Consumers are more negative then they have been that at any time during the entire 1982-2000 bull market, or since. The recent University of Michigan survey numbers are worse than the personal computer/tech stock collapse in 1984, the Crash of ’87, the1990 recession, the collapse of Long Term Capital Management, the collapse in Asian currencies, the dotcom crash or 9/11. That’s negative sentiment! You have to go back to the 1974 bear market low to find comparable numbers, and in the last 70 years that is the only time the stock market had a worse 12-month record than today.

Source: University of Michigan; Fusion IQ

I know it is counterintuitive, but when sentiment is just about as bearish as it gets, it’s very bullish for stocks. When stocks have a terrible 12 months, they usually have a good 12 months after that:

The only times the market couldn’t book positive double-digit returns in the 12 months following a major fall were at the beginning of the Great Depression and after the dot-com bust. Given that stocks are cheaper now than they were in those two cases, unless we are heading into a Greater Depression right away, the market should give us excellent returns over the next six months to a year. As you know, I think we only have six months, but that should be long enough to book most of the gains. And I still think those gains will not be driven by financial, commodity, energy, homebuilding or consumer staples stocks. Technology, healthcare and global industrial stocks will lead the charge, and our portfolio should benefit tremendously.

As I mentioned last week, earnings season is well underway, and will dominate the Radar Report for the next three issues. Let’s get to the results.

Biotech MegaShift

Amgen (AMGN) reported a very good quarter after the close last night, as their cost-cutting helped the bottom line while revenues grew faster than expected. They reported sales up 7% to $3.87 billion and earnings up 14% to $1.23 a share, well ahead of the consensus for $3.72 billion $1.07. Nearly all their drugs outperformed the consensus estimates, especially Neulasta, which prevents infections in chemotherapy patients, and Enbrel, which is used to treat rheumatoid arthritis. Aranesp sales rose 3% to $845 million, although that was after some accounting adjustments. On a real basis, Aranesp fell 8% overall, including a 12% dip in the U.S. Happily, we are near the end of the negative comparisons for Epogen and Aranesp.

Management said they will file for approval of denosumab for post-menopausal osteoporosis “in the very, very near future.” The company raised their 2008 revenue guidance for the second time from a range of $14.6 billion to $14.9 billion up to between $14.9 billion and $15.2 billion. The consensus was $14.8 billion. They also raised 2008 earnings guidance, again for a second time, from a range of $4.25 to $4.45 per share to between $4.45 and $4.55. The consensus was at $4.38, so the stock moved up. This significant increase in guidance is further proof that Amgen management is confident that its Aranesp/Epogen franchise has stabilized.

Amgen had $1.2 billion in free cash flow during the quarter and $9.8 billion in cash on the balance sheet at the end of September. As Wall Street finally shifts their focus from year-over-year declines in the Aranesp/Epogen franchise to the likely blockbuster application of denosumab for osteoporosis, and the under-appreciated possibilities for denosumab in cancer, I think AMGN will get back to setting new highs. At the San Francisco Money Show, on one panel a biotech newsletter writer went out of his way to blast my pick of Amgen, which even then was setting new 52-week highs. All the news since then has been good, and AMGN is becoming the stock to own in biotech. The company is hosting a business review meeting on November 7 in New York to update their commercial strategy for denosumab and the rest of their pipeline. With the stock down over 20% from its highs, I am moving the Amgen January 2010 $40 LEAP call (WAMAH) from Hold back to Buy, with a new $17 buy limit and an unchanged $35 target. Continue to hold the January 2009 $70 LEAP call (YAAAN), which is now under a quarter. In the rally I see coming, we have a reasonable chance to get our purchase price back.

ViroPharma (VPHM) completed the acquisition of Lev Pharmaceuticals, which is no surprise given the FDA’s approval of Cinryze on October 10th. Even better, management announced that the FDA has granted orphan exclusivity to Cinryze for the prophylaxis indication of hereditary angioedema (HAE). This orphan status provides Cinryze with seven years of marketing exclusivity in the U.S. for the prophylaxis indication. Cinryze will be launched by the end of the year, with patients currently receiving Cinryze in an open label trial transferred to the commercial product. In early 2009, the new Cinryze sales force will begin a full rollout of Cinryze. VPHM remains a buy while it is under $13 for my $25 target.

Content on Demand MegaShift

EMC (@WUEAC) and their 85%-owned subsidiary, VMware (VMW) reported September quarter results. EMC grew sales 13% to a record $3.72 billion, hitting expectations, and made 25 cents a share pro forma, ahead of last year’s 22 cents and much better than the consensus call for a down quarter at 20 cents. VMware contributed $472 million of sales, up 33% from a year earlier. There was some worry ahead of the numbers that weak results from IBM’s Data Storage Division and another loss at Sun Microsystems meant bad news for the entire storage industry, but EMC was fine. U.S. revenue increased only 7% in the third quarter, but sales in the rest of the world grew 19% year-over- year and hit 46% of total revenue. This was their 21st consecutive quarter of double-digit year-over-year revenue growth.

Management gave conservative guidance for the current quarter, looking for about $4 billion in sales and 30 cents to 31 cents a share. Wall Street was looking for 25 cents on $4.16 billion. EMC stock ticked up on the news, in part because VMware jumped 10%, and the EMC January 2010 LEAP $15 call (WUE AC) remains an excellent buy up to $5 for my $11 target.

Harmonic (HLIT) is trading at only 2X book value and 11X cash flow, with $3 a share in cash, about 40% of today’s market price, and no debt. That’s too cheap for a profitable company growing 30% a year. The only possible reason the stock is at this level is because Wall Street thinks Harmonic’s customers will slash capital spending in 2009 due to the credit crisis, stopping Harmonic’s growth. I doubt there are any worries about the September quarter report coming next week, as the company already said they will come in at least at the high side of the six-month guidance provided during the July conference call. Many sectors will see slower demand in 2008 and 2009 than they did in 2007, but one of the few exceptions will be video infrastructure equipment supplied by HLIT.

DirecTV recently awarded Tandberg a contract for MPEG-4 encoders used to move high-definition video around their network. This was a backhaul application, which is not as demanding as the broadcast applications, where they use Harmonic gear. It is common for a big customer like DirecTV to have two suppliers for as much gear as possible, and I don’t read this as a big negative for Harmonic, even though the news nicked the stock.

I am more interested in the conversion now underway at movie theaters to change to digital video projectors. The rumor is that Sony is booking orders to put their projectors in hundreds of theaters. As that turns into thousands, someone has to supply the equipment to move the feature films to the theaters. Harmonic, anyone? HLIT remains a Top Buy while it is under my recently reduced $10 buy limit for my unchanged $18 target price.

QuickLogic (QUIK) reported after the close today, and will hold their conference call in about an hour. They did $6.2 million in sales, the high end of their guidance, and lost a penny a share pro forma, or two cents per share under GAAP. The lone analyst still publishing on the stock was looking for $6.1 million in sales and a loss of six cents a share, with December quarter guidance for $8.6 million and a loss of one cent. More importantly, in the press release management said: “Our third quarter results demonstrated the benefits of our recently completed operational realignment,” said E. Thomas Hart, chairman, president and CEO. “We had a 36% reduction in our non-GAAP operating expenses compared with the second quarter and our ending cash was essentially unchanged from the prior quarter.” I am looking forward to their expanded remarks on the conference call. QUIK remains a Top Buy all the way up tp $4 for my $8 target, which would give you a 700%+ return from purchases at current levels.

SanDisk (SNDK) fell after Samsung withdrew their offer to buy the company for $26 a share. Like SanDisk’s rejection of the offer, I think all of this is just a negotiating tactic. Samsung needs SanDisk’s technology and patents if they want to stay in the NAND flash memory business, where they are the #1 producer today.

The smaller the die that electronic circuits can be crammed into, the more die that will fit on a wafer and therefore the lower cost per die that a manufacturer can achieve. Today, Samsung has a die size advantage over SanDisk because they manufacture their high-density NAND flash on a 34 nanometer production line, compared to SanDisk’s larger 43 nanometer technology. But the advantage will flip to SanDisk during the first quarter of 2009 as SNDK brings up its 3-bit-per-cell multi-level-cell technology in a 32 gigabit part. Then, in the second quarter of 2009, SanDisk has said it will start producing its 4-bit-per-cell technology, which reduces die size requirements by nearly a third over 3-bit-per-cell technology, and ship the industry’s first 64 gigabit part. This will provide SanDisk with a substantial die size advantage over Samsung.

And then it gets worse. In mid-2009, SanDisk and their production partner, Toshiba, will transition the 3-bit-per-cell parts on a new 32 nanometer technology. I expect them to move the 4-bit-per-cell parts soon thereafter. Each of these steps will widen the advantage SanDisk has over Samsung and other competitors.

Samsung recently withdrew its appeal to a Federal court, giving up on their attempt to overturn the binding arbitration decision that Samsung will no longer have license rights to either SanDisk or mSystem patents and intellectual property after August 2009. (SNDK bought mSystems in 2006.) This means that Samsung would lose their rights to develop and produce parts using 4-bit-per-cell technology. Samsung also will lose rights to other SanDisk system level patents if a new agreement is not reached before August 2009. So Samsung has a strong, continuing motivation to either come to an agreement with SanDisk that would involve substantial royalties, or just buy the company.

During a conference call, management said: “The future of the mobile storage industry, we believe, is in All Bit Line, ABL, multilevel cell, 3-bits-per-cell MLC, 4-bits-per-cell MLC, managed NAND, 3D read-write, advanced controllers, mobile security, and solid state drives. SanDisk holds many of the fundamental patents and know-how for these technologies and Samsung knows it. This is why owning these patents and the know-how is so critical for Samsung’s future profitability.”

Strong sales of Intel’s Acorn processor show that the Mobile Internet Device, a smaller-than-laptop computer where power consumption, weight and size are key, will build traction for NAND flash solid state drives to replace hard disk drives. As the solid state drive trend builds, NAND flash manufacturing capacity will be absorbed quickly, and prices and profitability for NAND flash manufacturers should improve markedly. I think SanDisk will either enjoy a material cost advantage over Samsung or dramatically increase its highly profitable license revenue…or be bought out. I am moving SNDK to a Top Buy after this price drop, keeping the $15 buy limit and $32 target price either in a buyout or based on earnings growth.

Silicon Image (SIMG) reported after the close today and the conference call starts in a few minutes. They did $77.8 million in sales and made 23 cents per share. Expectations were for $76.5 million and 10 cents a share, with guidance for $72.4 million and seven cents a share. In the press release, management said “We have $200 million in cash and investments and no debt. We’ve experienced a number of design wins during the quarter and expect to win additional slots as we progress through the 2008/2009 customer design win season in accordance with our new product initiatives roadmap.” SIMG remains a buy up to $8 for my $16 target.

Zhone Technologies (ZHNE) reported only $32 million in sales in the September quarter, below their original guidance for $36 million to $37 million and down sharply from the June quarter’s $40.1 million, as the credit crunch hit their customers. CEO Mory Ejabat said: “Our new product releases and customer wins were unfortunately overshadowed by weaker than expected financial performance. The global credit contraction caused many of our customers to defer or reduce network expansion. Until the economic environment improves, we will continue to reduce operating expenses and improve gross margins by reducing the cost of our products.”

Well, maybe. The company never was able to get ahead of the price and cost decline curve in good times, and I doubt they will do any better in a harsher environment. They lost $6.5 million or four cents a share under GAAP, and even lost money on their relaxed version of EBITDA. They don’t see any near-term improvement and guided for a flat $32 million December quarter.

Shareholders have approved a 1-for-5 to 1-for-10 reverse stock split, which Zhone intended to implement before the December 8 deadline imposed by NASDAQ. However, NASDAQ has suspended enforcing the sub-$1 rule due to the bear market, and will take another look on January 16. With the stock at current levels, Zhone would have to go for the 1-for-10 option, and even then the stock would be highly likely to fall back below $1.00 again, requiring the company to either move to the pink sheets or do yet another reverse split. They have a total market capitalization of $21 million, and these days it costs $1 million a year to be a public company. The only sensible exit is to sell the company to someone larger before it runs out of money, so continue to hold ZHNE for a buyout.

New Energy Technology MegaShift

Infinity Energy Resources (IFNY) extended their forbearance agreement with Amegy Bank to May 31, 2009. Amegy made the founders exercise options for 550.000 shares of stock to get money into the company. Amegy also will issue an $850,000 letter of credit to put up collateral on the Nicaraguan oil lease concessions. IFNY is slowly working their way out of their problems, and if there is as much oil off Nicaragua as I think, the stock will get to my target price. Hold IFNY for the $7 target.

Robotics MegaShift

iRobot (IRBT) reported a strong quarter this morning. Sales grew 44.8% to $92.4 million and they earned 15 cents a share, compared to a loss of six cents a share last year. This was their 17th consecutive quarter of year-over-year revenue growth. For the December quarter, their military business is 100% booked, but there are obvious uncertainties related to holiday sales of consumer robots. September quarter sales were fine; total home robot revenue increased 56% from last year, including international home robot revenues that more than doubled and accounted for 26% of total home robot sales in the quarter.

They increased their revenue guidance for the year to between $310 million and $315 million, up 24% to 27% and well above the consensus for $294.5 million. But based on an estimated $1 million pre-tax loss from the Nekton acquisition and their uncertainty about the retail market, management cut their earnings guidance to a range of eight cents to 10 cents a share. The consensus was looking for 14 cents, but the stock went up today anyway. IRBT can be bought up to $15 for my $30 target price.

Tuesday’s mid-day rally was starting to look like a move that could break out into the next upleg in the market, when it suddenly collapsed into the close. As I said in Monday’s Flash Alert: “If we see volatile, down days today and Tuesday, there is a major danger of the 2,000 point Dow crash by Friday. The bulls would have to show some spine today and tomorrow to change this pattern. It could happen, but we’ll have to see it to believe it.” The last hour of trading on Tuesday showed the bulls are spineless right now.

The decline continued with a sharp drop from the opening today, following major weakness in Asian and European markets overnight, which puts the crash scenario front-and-center for later this week or very early next week. If the market can find the energy to rally the S&P 500 back over 985 and then up to 1030, I think we can forget about a crash and assume that the market bottomed on October 10.

If the market did bottom on October 10, you can expect a dramatic, multi-month rally to an April 2009 top. If we still have a 2,000 point Dow crash to get through, which could drive the S&P 500 below its July 2002 low of 775, we will still get a dramatic, multi-month rally into April…but from lower levels.

The Lehman Brothers credit derivative swaps settled Tuesday, and may have caused some of the late-day weakness as those who wrote the insurance sold stocks to come up with the money to pay. Lehman had over $600 billion of debt, which attracted about $400 billion in outstanding swap contracts.

About 350 different counterparties to the Lehman contracts were at the auction, where it was determined that Lehman’s debt is worth only 8.62 cents on the dollar in bankruptcy. So the “protection sellers” who sold insurance against Lehman’s default have to pay out 91.38 cents for each dollar of debt they insured. If you are keeping score, net of offsets that’s about $270 billion from firms like AIG, Bill Gross’ PIMCO and the Citadel hedge funds. It goes to the banks, brokers, pension funds and other financial intermediaries that held Lehman debt and paid the insurance premium. Of course, this is the largest payout ever in the $55 trillion credit default swap market. It may be blamed for triggering a crash this week.

What Should You Do?

Most subscribers should continue to sit tight to catch the coming rally. One conservative strategy for those interested in timing their next move is to wait for the S&P 500 to break 1030 before going long, or wait for it to break 850 to go short by buying the ProShares UltraShort S&P 500 (SDS) exchange-traded fund, which is designed to move twice as much as the S&P over any given time period, but in the opposite direction. In “short,” the ETF goes up twice as fast as the S&P goes down.

But I think the message from the market is pretty clear right now, and you don’t have to wait that long in either direction. A close over 985 should be safe to buy stocks, with a stop loss at 980. The break this morning should make it safe to buy the ProShares ETF right now, with a stop loss at 960 on the S&P 500.

In early October of 1987, I published a prediction that a 1,000 point crash in the Dow Jones Industrial Average was imminent. I do not make an extreme prediction like that lightly, as I got lots of cancellations to this service even though I was right, and would have gotten many more if I’d been wrong. Some people thought I had caused the Crash of ’87, which happened 21 years ago yesterday, by being so vocal about it in advance. That was silly, and I will always tell you exactly what I am thinking whatever the effect on subscriptions, because that is what you pay me to do.

In last week’s Radar Report, I said that if there is a market crash coming, it will come in the next five days. Friday’s market action was very poor, with a failed rally and a plunge into the close. This morning, I have bad news and good news. The bad news is that, just as in 1987, extremely volatile intraday swings are telegraphing that a crash is imminent, and this time it could be as much as 2,000 points on the Dow Jones Industrial Average, a 22.6% drop from Friday’s close. That translates to about 212 points on the S&P 500, which would bring that index to 728. That would be the extreme case, and I actually think the 775 low from the summer of 2002 will hold. But even that would mark a shattering 17.5% decline from Friday’s close, on top of all the damage that has been done already.

In 1987, starting from Monday, October 12 when the Dow closed at 2741.44, here were the swings:

Monday intraday low to Tuesday intraday high: +94 points, +3.9% (equals 344 points today)
Tuesday intraday high to Wednesday intraday low: -128 points, -5.1% (equals 468 points today)
Wednesday intraday low to Thursday intraday low: -55 points, -2.3% (equals 201 points today)
Thursday intraday low to Friday intraday low: -138 points, -5.9% (equals 505 points today)

Monday, October 19 was the Crash of ’87
Friday intraday low to Monday intraday low: -530 points, -24.0% (equals 2,126 points today)
Monday intraday low to Tuesday intraday low: -61 points, -3.7% (equals 312 points today)

The Crash bottomed Tuesday morning.
Tuesday intraday low to Tuesday close: +25 points, +1.5% (equals 130 points today)
Tuesday close to Wednesday close: +187 points, +10.1% (equals 865 points today)

After Wednesday’s enormous rally, the market consolidated between Tuesday’s and Wednesday’s close for several days.

Now look at what has been happening in the Dow this month, starting from Wednesday, October 1, when the Dow closed at 10,831.07. Here are the swings, mostly using intraday numbers to highlight the unprecedented intraday volatility:

Wednesday intraday high to Thursday intraday low: -654 points, -5.9%
Thursday intraday high to Friday intraday low: – 518 points, -4.8%
Friday intraday high to Monday intraday low: -1,342 points, -12.4%
Monday intraday high to Tuesday intraday low: -931 points, -9.0%
Tuesday intraday high to Wednesday intraday low: -1,162 points, -11.4%
Wednesday intraday high to Thursday intraday low: -1,255 points, -12.8%
Thursday intraday high to Friday intraday low: -1,749 points, -18.4%

Then came the big relief rally:
Friday intraday low to Monday, October 13, intraday high: +1,728 points, +22.2%

Then an indecisive day:
Monday close to Tuesday intraday high: +437 points, +5.7%
Monday close to Tuesday intraday low: -338 points, -3.6%
Monday close to Tuesday close: -77 points, -0.8%

Then another bad day:
Tuesday intraday high to Wednesday intraday low: -1,408 points, -14.2%

And another volatile, indecisive day:
Wednesday close to Thursday intraday low: -402 points, -4.7%
Wednesday close to Thursday close: +401 points, +4.7%

The Thursday rally continued into Friday afternoon:
Thursday intraday low to Friday intraday high: +1,128 points, +13.8%

Followed by a sharp drop Friday afternoon:
Friday intraday high to Friday close: -452 points, -4.9%

If we see volatile, down days today and Tuesday, there is a major danger of the 2,000 point Dow crash by Friday. The bulls would have to show some spine today and tomorrow to change this pattern. It could happen, but we’ll have to see it to believe it. It looks like our market will open strongly, following good results in foreign markets overnight. But it has to stay strong. A wimpy rally back from Friday’s close does not count, and actually would confirm the imminent crash scenario.

Tuesday is the day the Lehman Brothers credit derivative swaps are to settle, and it looks like those who insured the paper will have to come up with about 91 cents on the dollar — the paper is only worth nine cents on the dollar. Nobody knows who all these unregulated insurers are, but you can bet that not one of them set aside reserves of 91 cents per dollar of exposure. There are about $400 billion in credit default swaps written on about $150 billion of Lehman debt, so there are bound to be some stunning, negative announcements. That may be the trigger for a crash this week.

So far, between the stock market and the housing market, about $10 trillion in wealth has gone to money heaven, roughly equal to one full year of our GDP. Another big smack down in stocks will just make consumers retreat even more. But here is the good news I promised you: A crash now will certainly mark the bottom of this leg down, with the Dow down over 8,000 points from last October’s top, and lead to a multi-month rally led by tech stocks. I think the rally can last into mid-April, and it seems unlikely that consumer, energy or financial stocks will lead it. Defensive stocks never lead a rally, so that pretty much leaves technology as the place to be. I know I keep harping on the $4 trillion in cash on the sidelines, but that is going to be the key driver of the next upturn. It has to go somewhere in order to participate in the rally, and tech companies with global markets are the likely targets.

What Can You Do?

If the drop comes as I expect, it will be fast and furious, there will be chaotic trading at the turn with difficulty getting executions or even knowing what current bid/ask prices are, and little opportunity to catch the first 10% to 20% of the snap back. Therefore, for most subscribers, you should continue to sit tight.

IF you are very nimble and IF you can watch the markets all day long and IF you are comfortable identifying the bottom when it comes, you could buy some ultrashort exchange-traded funds to hedge your position and book a quick trading profit. I suggest the ProShares UltraShort S&P500 (SDS), which is designed to move twice as much in the opposite direction as the S&P over any given time period. A 15% to 20% drop in the S&P 500 should give you a 30% to 40% profit in a short period of time. I am not making this a formal recommendation, as it is a very short-term trade that is unsuitable for many of you.

If you are still sitting on cash, as I know some of you are, some amazing things can happen during a chaotic bottom. Sometime people get margin calls and the broker goes to sell, but there are no bids due to the chaos in the reporting systems. If yours is the only low-ball bid out there, you get the stock. If you have stocks you want to own, it might be worthwhile putting out some bids at 50% or 60% of Friday’s closing price and see what happens.

This would be an especially powerful tactic for the Content on Demand MegaShift stocks that are likely to bounce back the fastest: Akamai (AKAM), Harmonic (HLIT), Infinera (INFN), NetLogic Microsystems (NETL), SanDisk (SNDK), and the January 2010 LEAP calls on Cisco Systems (WCY AD) and EMC (WUE AC). I want to add a new recommendation here: Buy the Intel January 2010 $15 LEAP call (WLN AC) up to $3 for a $15 target. It closed Friday at $3.70, and would only go under my $3 buy limit in a crash. If this trade does not trigger, I will raise the buy limit to $4 or $5 after the danger of a crash has passed.

I will be in touch via a Flash Alert again if anything changes between now and Thursday’s Radar Report.

We are going to have bad economic news for some time, as even Fed Chairman Ben Bernanke admitted yesterday. Right now, bad news or the fear of bad news pushes stock prices down. Yesterday’s report that September retail sales fell 1.2% caused the worst drop in three years. Today’s weak read from the Philadelphia Fed quickly aborted what started as a recovery rally, but then was overwhelmed by buyers. At some point — perhaps today — a deep, long recession will be completely discounted by the market, and bad news will no longer have any impact. That’s the way it happens every time, and there’s little doubt that we are in the bottom-feeding zone. But where is the exact bottom?

I wish I could give you an exact date, but no one really knows. Spending $250 billion of the $700 billion bailout bill to buy stock in big banks was a baffling decision by Treasury Secretary Paulson that will do nothing to unlock the credit derivatives markets or help homeowners facing foreclosure, which are the two hot buttons for getting out of this mess. Maybe this is Trader Hank doing a little bottom fishing of his own, buying special preferred stock just like Warren Buffett, and someday this will turn into a profitable trade for the taxpayer. But it just doesn’t do anything for the real problems, and the markets voted Wednesday with the biggest percentage drop since the 1987 Crash, and second-largest point drop in history. Japan’s Nikkei stock index rose more than 14% on Tuesday, the biggest gain in its 60-year history, based on the initial thought that the coordinated worldwide bank bailout was a Good Thing. It then crashed 11.4% today, following the U.S. decline on Wednesday.

In last week’s Radar Report I said: “I think 944 will prove to be the controlling energy level, even though we hit 910 this afternoon and closed well below 944 today. If I’m right, today should have marked the ultimate bottom on a closing basis.” Although Friday’s close was slightly lower, after a sickening plunge intraday that sent the VIX Fear & Greed Index to a level of panic and fear that will not be topped in our lifetimes, the 944 energy level on the S&P 500 sucked prices back up in Monday’s spectacular rally and even seemed in control through yesterday’s sharp drop to close at 907.84. Today, the S&P rallied to close just over the 944 level.

But this volatile up and down pattern means we now are in danger of losing the support at 944, and not seeing the ultimate bottom until much, much lower levels. In Tuesday’s Flash Alert I said a quick test down to 944 was possible, but the least likely scenario, yet that is what happened. The NASDAQ 100 plunged 120 points on Wednesday on panic selling, and not one of the 100 stocks rose for the day. Not one. Now we have another “Slingshot or Crash” set-up, and the S&P has to hold over 944 and head higher, or it could revisit the 2002 lows around 775 — or worse. There are minor support levels at 880 and 865, which was touched this morning. The VIX jumped sharply today to as high as 81.13 intraday, and that is an indication that 865 might hold.

I don’t want to scare you, but another 200 point plunge in the S&P 500 , equivalent to about 2,000 to points on the Dow Jones Industrial Average from Tuesday’s close, has become a possibility. If another crash happens, it will happen in the next five trading days. I still think you should just ride it through, because these incredibly volatile days leave no room to trade intelligently and this is going to end with an amazing rally. We have seen 20 triple-digit swings in the Dow in the last 23 trading sessions. Whether the S&P 500 can stay above 944 or we see the crash play out down to 775, you must be fully invested for an explosive rally when the downturn ends. As I’ve been saying, the first 20 or so days after the final bottom will give the more-than-$4-trillion on the sidelines very few opportunities to get in gracefully. The short sellers and put buyers will be slaughtered. I expect the S&P to move up in a straight line to 1010 from its ultimate low, but then look for one or two more tests of 944 from above before the really big upmove can get underway. A lot of damage has been done, and it takes some time to repair. Because I think the whole market will top out next April, and because we are starting from a lower level to get there in the remaining six months, I have lowered some target prices and some buy limits for stocks and options we will not be holding past April.

This week marked the beginning of earnings season. Good reports from a wide range of companies like Intel (INTC), Coca-Cola, Abbott Labs and State Street set the tone. Although most of the financials are reporting down earnings, Charles Schwab, JP Morgan Chase and Wells Fargo have all beaten estimates. It may take until next week’s Radar Report to sink in, but better-than-expected earnings may turn out to be the spark that ignites the next bull market. Or maybe it will take the Fed
buying vast amounts of commercial paper beginning on Oct. 27 that will do the trick.

Incidentally, in the you-think-you-have-problems department, the 25 richest Russians lost a collective $230 billion in the Russian stock market between May and October 6, and another huge chunk since then on days they allow the market to open at all. Roman Abramovich, the Russian billionaire who already owns three megayachts, is having the 555-ft Eclips built in Germany. Word is that if the yacht is ever finished, it won’t hit the water under his ownership So this is a heads up if you are in the market for a great deal on a big boat.

In a more serious vein, earnings news will dominate your Radar Reports for the next three weeks and we’ll be watching the numbers very carefully.

Biotech MegaShift

Geron (GERN) published preclinical data showing that its telomerase inhibitor drug, GRN163L, significantly boosts the effects of Herceptin against HER2-positive breast cancer cells, and restores sensitivity to Herceptin in Herceptin-resistant tumor cells. This could be a big deal, because Herceptin is one of the most successful cancer drugs in the world, in both financial and medical terms. Of course, preclinical data is very early stuff, but we already know from other trials that GRN163L is safe and will breeze through its Phase I trial. Buy GERN up to $9 for my $18 target — not by next April, but we will hold this stock through the next bear market.

ViroPharma (VPHM) got some great news: The FDA approved Lev Pharmaceuticals’ Cinryze for a rare genetic disorder, hereditary angiodema (HAE). ViroPharma is in the process of acquiring Lev for $443 million. HAE is caused by a genetic defect that causes periodic acute episodes of painful swelling in a patient’s extremities, gastrointestinal tract and, most dangerously, the air passages, which can lead to death by suffocation. HAE treatments have been approved in Europe for 30 years, but this is the first drug approved for use on the 7,000 to 10,000 U.S. patients. (An interesting data point to cite the next time someone tells you the U.S. has the best healthcare system in the world.) Cinryze will be launched at around $3,500 a dose, and for acute use probably will generate about $25,000 per patient per year. I think the drug will do $50 million to $100 million in sales in 2009, and eventually hit $250 million for acute use.

ViroPharma will work on a label expansion for preventive use, which would generate $250,000 or more per patient per year. There are a couple of competitive drugs coming along for HAE, but Cinryze will have seven years of exclusivity as an orphan drug. Buy VPHM up to $13 for my $25 target.

Content on Demand MegaShift

Harmonic (HLIT) has been weak due to fears that their customers will slash capital budgets in 2009. There’s little doubt the September quarter was good, and I think both December and March are in the bag. No one has much visibility past that, but it seems likely that Americans who cut back will turn to their TV sets for more entertainment, and certainly the cable versus telephone company wars are not letting up at all. That’s good for Harmonic, the arms supplier in this conflict, especially because the demand environment will be strongest in the products categories where HLIT is the clear leader. During the Altera conference call, they mentioned December quarter strength in “broadcast equipment,” which means video. HLIT remains a Top Buy, but I am reducing the buy limit to $10 while keeping the target price at $18.

Infinera (INFN) won a contract from the Northern Tier Network Consortium for a regional optical network linking 27 universities in nine states from Washington to Illinois. The new network connects to the nationwide Internet2 network. Infinera is a unique company and INFN can be bought all the way up to $15 for my $30 target. I doubt we will see $30 by April, but we will be holding INFN for a few years as the Internet is rebuilt for much higher speeds and capacity.

Intel (INTC) hit their numbers in their earnings announcement after the close on Tuesday, reporting $10.22 billion in sales and 35 cents a share, versus the consensus estimate for $10.25 billion and 34 cents. Gross profit margins were better than they’ve been in a while at 58.9%, in spite of strong sales of the new Atom processor for cell phones and other mobile devices. Atom has lower gross margins than PC microprocessors.

Competitor Advanced Micro Devices has teamed up with IBM to design its future chips, and with two sovereign wealth funds from Abu Dhabi, the capital of the United Arab Emirates, to fund new factories. The AMD/Abu Dhabi joint venture plans to go into the contract manufacturing business to compete with Taiwan Semiconductor. If they tap IBM’s production expertise, it could eventually work, but this is no near-term threat to Intel.

Intel management predicted December quarter sales of $10.1 billion to $10.9 billion, in line with the $10.77 billion expected by analysts. Despite Wall Street worries that profit margins would slip as consumers buy low-end PCs that use less expensive Intel chips, management said gross profit margins would remain essentially flat around 59%. They did add that the financial crisis is “creating some signs of stress that may impact our business” in the fourth quarter, and that was enough to send the stock to its lowest price in six years. Over the last six weeks, INTC has fallen 30%. It can easily and quickly get that back in a major rally, but we need to see that process start soon to see any value in our LEAP calls. In line with my market commentary above, I have to take the Intel 2009 $22.50 LEAP call (NQAX) off the Top Buy list, and I’m moving it to a Hold for a lower $7.50 target, which requires the stock to get to $30 in the inevitable slingshot rally.

New Energy Technology MegaShift

Everyone thought I was crazy when I predicted under $100 per barrel oil, but they’re not laughing now that it has broken below my updated $80 projection to around $70, depressed by fears of an economic slowdown and an actual slowdown in China. I expect prices to move above $80 as winter approaches, but stay below $100 a barrel through the first half of next year. That might keep investors disinterested in alternative energy stocks right now, but the recently-passed alternative energy tax credits and the fact that almost all of these technologies make economic sense at $80 to $100 oil means we can continue to accumulate the stocks for the inevitable run to $200 oil.

Connacher Oil & Gas (CLL.TO) said their CEO got caught in a margin call and was forced to sell most of his holdings in the company. These things happen, and it doesn’t mean anything for the rest of us. I expect that between options and some open market purchases, he will rebuild his position over time. CLL.TO remains a buy up to $4 for my $9 target.

Plug Power (PLUG) signed an important deal with Rittal GmbH, a German company, to provide GenCore fuel cells packaged in Rittal enclosures to the chemical production, traffic and tunnel infrastructure, information technology and telecommunications industries in Europe. Plug Power already has more than 800 units in the field in 26 countries, and this will extend their reach quite a bit.

In the U.S., Plug Power’s largest customer base is wireless telecommunication providers. The FCC is going to mandate that wireless carriers must provide at least eight hours of backup power to all cell tower sites. That is really going to explode sales, because many of these sites are in areas that are not easy to get to, and keeping batteries charged and functioning would be a major pain. PLUG is now under $1 a share, so I am going to trim my buy limit to $4 but leave my target price at $10. I don’t think the stock can hit $10 by next April, but this is a MegaShift and a company we will continue to hold even through a bear market.

U.S. Geothermal (HTM) won a Department of Energy grant for $9 million to demonstrate the viability of enhanced geothermal systems at their Raft River, Idaho power plant. The grant is to create a thermal stimulation of an existing injection well to improve permeability by fracturing the hot rock with cold water and pressurized fluids, and thus extract more geothermal energy from Raft River site than might otherwise be developed. U.S. Geothermal has a spare injection well and several monitoring wells that can be used for the demonstration.

Management said the Raft River Unit One geothermal power plant has operated at 99.9% availability for the past six months. Power generation increases with cooler fall temperatures, and current production is 11.0 to 11.5 megawatts. HTM is still a Top Buy, but I am lowering the buy limit by $1 to $3 and keeping the $6 target.

Security MegaShift

SiRF Technology (SIRF) and Qualcomm signed a “mutual non-assertion agreement” covering each of their patent portfolios. The difference between that and a patent cross-licensing agreement escapes me, and they certainly have the same effect. These are two of the largest location-based patent portfolios in the world.

SiRF also said the International Trade Commission is reviewing claims in three of the six Broadcom patents that were the basis of Broadcom’s complaint against SiRF, which Broadcom won in August. The Commission will issue a final ruling in December, which is then subject to a 60-day presidential review period and can then be appealed to the Federal Circuit Court of Appeals. SIRF remains a buy, but I am cutting the buy limit to $5 and the target price to $15, most likely in an acquisition.

We are watching extraordinary financial history being made in real time. The Fear & Greed Indices, the VIX and the VXO (the old VIX) went off the charts on Friday. eSignal had a quote of 103 for the VXO at one point, which is theoretically impossible since it is a scale of of 0 to 100., The VIX hit 76.94, a level of panic and fear that will not be topped in our lifetimes. Then the S&P 500 bounced almost 100 points in the last 45 minutes on Friday, and another 104.13 points yesterday–an 11.6% gain.

My target for this first move up is 1110. There could be another huge move today, or we may see a high level consolidation day before another huge move on Wednesday. Although it is possible that this market will give us one more entry opportunity on a quick test down towards the 944 level, that is the least likely scenario.

You should be fully invested. The next 20 or so days will give the more-than-$4-trillion on the sidelines very few opportunities to get in gracefully. The short sellers and put buyers are going to be slaughtered. Enjoy the upturn, and I’ll have more to say about it in Thursday’s Radar Report.

With four straight record closes on the VIX Fear & Greed Index this week to over 60 today it’s obvious that fear is totally in control. This is a scary, difficult market. Yesterday’s negative reaction to the worldwide coordinated interest rate cut, led by the Fed’s emergency half-point cut in the Fed funds rate, is just the latest evidence that fear rules.  If the stock market was a rubber ball, it was dropped from what looked like stepladder height, but the stepladder was on the edge of the Grand Canyon and the ball is still falling.

But like that rubber ball, the further it falls, the more energy it will have when it bounces.  I wrote in a recent Flash Alert that 980 was a major support level for the S&P 500, and that proved to be where the decline stopped yesterday.  However, it gave way today and the fear is so intense that we have to turn to the S&P monthly chart to get a clue where the ball will hit bottom and bounce.  The breakout level from the 2000-2002 bear market was 944.  That is, the S&P broke down from 944, hit a major bottom at 775, and then shot back up to clear 944 and confirmed the beginning of a new bull market.  These breakout levels are extremely important energy points, providing powerful support on the way down and substantial resistance on the way up.  I think 944 will prove to be the controlling energy level, even though we hit 910 this afternoon and closed well below 944 today.  If I’m right, today should have marked the ultimate bottom on a closing basis.  There could be an intraday dip lower tomorrow morning, but with the G20 meeting on Friday in Washington and traders squaring up for the weekend (I expect most of them will be covering shorts), we should see the S&P close back above 944 tomorrow — preferably, well above.  As you know, it is typical for bear markets to bottom in October.  So the good news is that while things look very, very dark, it really is darkest right before the dawn.

Like the current drop, the last plunge in the summer of 2002 to finish off that bear market was so extreme that the rubber ball had a tremendous first bounce, +28.4% in only 22 trading days.  I expect the same sort of move this time, which would take the S&P from 944 to 1212.  However, also like the July 2002 drop and bounce, the first big bounce is often followed by a retest, and sometimes two, before the new bull market begins.  So the most likely outcome is that the Fed takes more action this weekend, again coordinated with central banks worldwide, that sets off a furious rally back to at least the 1078 support/resistance leveland eventually to the last breakdown level at 1265.  I think there is a very high probability that the S&P closes October above 1078, and clears 1178 by mid-November.  We will have to see how strong the rally is to judge whether the S&P can get all the way back to 1265 on this first move.  But then from a first top somewhere between 1178 and 1265, there probably will be another drop, perhaps early next year, to rebuild fear and retest the 944 to 980 area.  After that we will either begin a new bull market, or suffer through one more rally and retest before the big move begins.

If I’m right about all this, there will be an opportunity to upgrade our portfolios by selling some stocks after the first rally, picking up some more of the future MegaShift leaders on the following decline, and concentrating our portfolios in the sectors likely to lead in the New World we clearly are entering: Biotech and healthcare, Internet-based computing and communications, alternative energy and green technology, nanotechnology and a few others.  It is almost impossible to catch the first bounce from the sidelines because it is so fast and furious, so my advice remains the same: Sit tight through this mess, as we are at or very close to a bottom.  If you have cash to put to work, you can start now, as anything below 944 should be the buying opportunity of the decade before what should be a record-breaking bounce.

With earnings reports starting this week, and then flooding us over the following three weeks, there has not been a lot of news during this quiet period.  IBM announced this morning that they beat estimates, a good sign for tech stocks.  Most technology companies will make their numbers and be cautious about the outlook, just based on the level of uncertainty.  But I don’t think there will be a lot of downside surprises, as Wall Street is very cautious already.  On balance, the September quarter conference calls should be a mild positive for the tech sector and the market.  Perhaps the best impact will be getting them behind us, because once analysts know what the December quarter guidance will be they start looking forward to next year’s results and stocks start selling on those usually higher earnings estimates.  That’s a good part of the reason for the typical fourth-quarter rally, and I don’t see anything to upset the applecart this time.  An Obama victory is already in the market, with an assumption that he and the Democrats are not so dumb as to raise taxes in a recession.

I sent you a Flash Alert earlier this week on the good news at Dendreon (DNDN) and the bad news at CombinatoRx (CRXX).  There’s been some news on some of our other holdings, even though we are the quiet period for most.

Avian Flu MegaShift

BioCryst Pharmaceuticals (BCRX) laid off 19 workers, or 20% of its staff, to save cash as they wait for clinical trial results in both intramuscularly and intravenous peramivir trials.  They have $74 million in cash, but they looked at the capital markets and decided they needed to be in a position to get to their key milestones without needing any further financing.  That’s a smart move.  They will get Phase II data from the Japanese trials run by Shionogi, their licensee, later this month, and then the intravenous data for hospitalized flu patients.  BCRX remains a buy all the way up to $8 for my $30 target after permavir is shown to be effective against avian flu.

Crucell (CRXL) won a $30 million initial contract from the National Institutes of Health to develop a multivalent filovirus vaccine that includes both Ebola and Marburg viruses.  Ebola and Marburg cause hemorrhagic fever, marked by a high fever and massive internal bleeding. Between 50% and 80% of all patients with the conditions die. Both viruses are commonly seen in tropical Africa.  The contract includes options for an additional $40 million.  CRXL remains a buy up to $17 for my $35 target.

Biotech MegaShift

Amgen (AMGN) appears to have won a total victory against Roche.  A federal court upheld the prior jury decision affirming Amgen’s patents for Epogen and Aranesp, and said it is entitled to a permanent injunction against competitor Roche‘s Mircera.  Amgen can get a permanent injunction against Roche once an appeal over the issue is resolved.  Continue to hold the Amgen January 2009 $70 LEAP call (YAA AN) and the January 2010 $40 LEAP call (WAM AH).
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Dendreon (DNDN) gave back much of its immediate jump after they announced the results of the interim peek at the Provenge clinical trial data.  I have read the bearish analyst reports, and their point is that the study is fully mature and the survival benefit only hit 20%, so they are suspicious about it improving to the necessary 22% over the next nine months.  But looking back at past studies, the survival benefit is more and more pronounced the longer one measures, which is to say the untreated patients have the typical life expectancy with the disease, but the Provenge-treated patients do much better, and some do extraordinarily well.  I think the survival benefit will exceed 22% at the 95% confidence level when the study concludes next summer. 

If the 22% level is hit at “only” 93% or 91% confidence, what will the FDA do?  Provenge has a near-perfect safety profile, and the targeted treatment group has no acceptable alternative to dying.  Will the Oncology Division of the FDA, which is not reviewing Provenge, try to sabotage approval again, as they did last time?  Or did they get outed so thoroughly last May that they won’t dare try their little game again?  Obviously, I don’t expect these issues to even come up because I expect the 22% level to be hit, but it makes for interesting speculation just in case.   DNDN is a buy under $8 for my $40 target after Provenge is approved. 

QLT (QLTI) started a Phase I trial in adults for an oral synthetic retinoid replacement to treat Leber’s Congenital Amourosis.  This is a rare disease that affects one in 100,000 newborns, with no current treatment.  It is an inherited progressive retinal degenerative disease that leads to retinal dysfunction and visual impairment beginning at birth.  If the Phase I trial is successful, they will go for Orphan Drug Status and do a Phase II trial in newborns.  It will be difficult to accumulate enough cases to conclude these studies quickly, but it is a dreadful disease and everyone hopes they have a cure.  QLTI remains a buy up to $6 for my $12 target.

Content on Demand MegaShift

SanDisk (SNDK) may have some big leverage over Samsung in the latter’s $5.8 billion acquisition bit for SNDK.  The details on a patent arbitration ruling that SanDisk won against Samsung on their new X4 technology have come out.  Samsung testified that, if upheld, SanDisk’s patent could cost Samsung “billions of dollars.”  A panel of arbitrators in May found that SanDisk was within its rights in canceling a contract that gave Samsung rights to the technology, and that ruling was recently affirmed by a federal court in New York.  SNDK is a buy on dips under $15 for my $32 target.

New Energy Technology MegaShift
With oil already closing in on my $80 target for the low end of the 2009 range, I am expecting it to hang around there through the end of the year, and then slowly climb back towards $100 by the end of 2009.  However, natural gas should be relatively stronger for the next several months, because it is shaping up to be the coldest winter in years.

The bailout bill that passed last week included an extension of tax credits for alternative energy producers. the credits apply to Canadian Solar, Fuel Cell Energy, Ocean Power Technology, Plug Power and Rentech.

Canadian Solar (CSIQ) said this morning that they signed a sales contract with Systaic of Germany for 60 megawatts of regular solar modules for delivery in 2009.  In the last month, CSIQ has signed contracts for European delivery of at least 226 megawatts in 2009, with options for an additional 80 megawatts.  The total of 306 megawatts is more than half of their planned 2009 capacity of 500 megawatts to 550 megawatts. 

Most of these contracts came from large, long-standing customers in Germany, where the uncertainty over the 2009 reimbursement rules has ended.  The company also signed deals in Spain, which also set 2009 rules, and in several countries that are just starting down the path Germany and Spain pioneered: Italy, France and the Czech Republic.  CSIQ also said their North American and Asian sales are on track, and there will be a separate update for those regions later this fall.  They described their order book as “strong.”  Buy CSIQ up to $31 for my $65 target in 2009.

Connacher Oil & Gas (CLL.TO) said they are shelving plans to expand their Montana refinery from 9,500 barrels a day to 35,000 barrels a day, but it was for a good reason.   A combination of increased pipeline access to the U.S. and more upgrading capacity in Canada has reduced the discount for heavy oil and tar-like bitumen compared with lighter oil, thereby reducing the need to refine their output in order to maximize revenues.  The company will concentrate its capital investments on increasing output from its Canadian oil sands holdings. 

The company will complete the Ultra Low Sulfur Diesel project that is underway, and will produce clean diesel starting in January.  I would not be surprised to see them sell the refinery, which they bought in 2006, at a healthy profit.  Buy CLL.TO up to $4 (a fifty-cent reduction from my prior buy limit for my unchanged $9 target.

Gasco Energy (GSX) said their net production for the September quarter was 1,252 million cubic feet equivalent, up 24.8% from last year.  Rockies natural gas prices were soft during parts of September due in part to seasonal demand decreases and in part to a scheduled shutdown of the Rockies Express Pipeline for hydrostatic testing.  So Gasco curtailed production by about three million cubic feet equivalent per day, and has continued at that level so far in October-the “shoulder” months.  They resume full production when prices rise for the winter.  They started five new wells during the quarter and completed three of them, and can now finish a well in just over 25 days.  They sold four producing wells during the quarter for a total of $7.5 million. 

I expect natural gas prices to rise going into what appears to be a very cold winter.  GSX is a timely buy up to $4 (also a fifty cent reduction from my prior buy limit) for my also-unchanged $9 target.  I will be making it a Top Buy in November if it continues to hang around $1.

Ocean Power Technologies (OPTT) deployed another PowerBuoy, this one off Atlantic City for the U.S. Navy.  It provides power for oceanographic sensor systems to gather and transmit information collected at sea. Besides the obvious application for vessel tracking for homeland security, it will be used for tsunami warning systems, ocean observing systems, and off-shore aquaculture.  OPTT is a buy all the way up to $20 for my $40 target.

Security MegaShift

SiRF Technology (SIRF) introduced a single-chip solution combining GPS technology with Bluetooth technology, to lower the cost of those two functions in a cellphone.  The SiRFlinkIII Combo Radio IC is certified as Bluetooth 2.1+ compatible, and comes with reference designs to allow handset manufacturers to add these two functions quickly as well as at a lower cost.

Analysts are trimming their 2009 global cellphone market forecasts, as economists reduce GDP forecasts.  The received wisdom has been that consumers would not cut back on cellphones regardless, but it is easy to see a slower replacement cycle as people delay upgrades, or even weakness in China and India as their growth slows in reaction to a U.S. and European recession.  So those who were looking for 6% growth have cut to 3%, and those at 8% have cut to 6%.  But the full-featured, high-end phones are growing much faster, and even if there is a bit of a slowdown there, SiRF’s single-chip solutions reduce handset manufacturers’ costs and should see good sales.  SIRF remains a buy up to $8 for my $20 target.

WiMAX MegaShift

Sprint, Intel, Samsung, Motorola (MOT), Nokia, Acer, Asus, Dell, Lenovo, Panasonic, Sony and Toshiba officially inaugurated the world’s first 4G cellular network based on WiMAX.  It’s called Xohm (pronounced Zome) and was deployed in Baltimore.  This is a fully mobile network, although right now they only have 75% coverage and are working on the “bubbles” where signals drop out.  That means you can drive around downloading files, watching streaming video (the passengers, not the driver, please) or playing interactive video games.  WiMAX is going to get a lot of attention because the competitive 4G network technologies will be lucky to be deployed in 2010, let alone 2009.  

Towerstream (TWER) won a Best of WiMAX World Award in the Service Provider Deployment category for its New York City network.  The award cited Towerstream, from xchange magazine. Towerstream’s innovation, speed, bandwidth and reliability.  TWER is a Top Buy up to $6 for my $16 target, and is the cheapest stock on my whole list.

After Friday’s very disappointing drop in the S&P 500 to close below 1112 following the House vote to approve the bailout, the Index is in a precarious position for bulls and bears. The next move, whether it is up or down, is likely to be a lulu.

At one point on Friday the SPX was all the way back up to 1154, and looked good to finish off the week and maybe even trigger a daily buy signal. But the collapse after the House vote left a very nasty-looking breakdown pattern. We will almost certainly see some further damage early this week, yet a quick drop to the next support levels could easily create an intraday market bottom that is completely erased by the close. The VIX Fear & Greed Index is sky-high at 45.14, and could spike over 50 intraday and then close back below the Friday close.

The weekly chart looks especially bad, with the potential for a couple of days of huge selling pressure, and even the possibility of an outright crash today or tomorrow, following 5% drops last night in Asia and Europe. Remember that market crashes don’t happen during the early stages of a decline, they happen at the end to create the final low.

The next support level is in the broad 1078 to 1094 range, and as I write this the futures suggest the S&P will open today around the middle of that range. But there is much stronger support at 1040 and, in a crash, at 980. Any of those drops would be very scary if they happen, sending the VIX way over 50 and routing the bulls to get them to the sidelines before the market takes off in its usual fourth quarter rally. Incidentally, in the week after the 9/11 terrorist attack, the S&P was at the same point: It opened trading at 1092, plunged to 944, and rebounded to 1099 for the week and hit 1175 over the next three months in the first leg of the recovery. The VIX hit the mid-50s that first week.

Whether the bottom was Friday, or is coming today or Tuesday in a sharp decline, or in a few weeks in a gentler decline (which seems less likely), we should see a rally even stronger than the post-9/11 low, because big rallies are always what happens after fear and uncertainty have ruled the day. They certainly were in command last week, the worst week for stocks since September 2001, with the Dow down 7.3%, the S&P off 9.4% and the NASDAQ clobbered for 10.8%.

If we stumble into a crash scenario, remember that the circuit breakers are still in effect. These are levels at which trading is halted for various time periods if the Dow Jones Industrial Average declines 10%, 20% or 30% in a single day. For the current quarter, the circuit breakers are:

Level 1 Halt

An 1,100-point drop in the DJIA before 2 p.m. Eastern time will halt trading for one hour, or for 30 minutes if it’s between 2 p.m. and 2:30 p.m., but will have no effect if that level is hit after 2:30 p.m., unless there is a Level 2 halt.

Level 2 Halt

A 2,200-point drop in the DJIA before 1:00 p.m. will halt trading for two hours, or for one hour if it’s between 1:00 p.m. and 2:00 p.m., and for the remainder of the day if it comes at 2:00 p.m. or later.

Level 3 Halt

A 3,350-point drop will halt trading for the remainder of the day regardless of when the decline occurs.

I’ll be in touch again if any of these scenarios come into play or if there’s any immediate action you need to take with your holdings.

Of all the days to announce bad news, it would be hard to find a worse day than today. But CombinatoRx (CRXX) has the top-line results from their Phase IIb study of Synavive (CRx-102), their leading drug candidate, for knee osteoarthritis. They studied 279 patients at 57 sites.

The good news is that the drug worked. There was a dose-dependent response, which means the more drug a patient got, the better it worked–an important sign of real efficacy. It also worked better in combination with prednisolone than either prednisolone alone or the placebo.

The bad news is that the improvement was not statistically significant, in large part because the placebo worked much better in this trial than in the promising Phase IIa trial they completed earlier this year. That news sent the stock skidding from $3.00 to as low as 56 cents this morning.

The company will study the data further to try to understand what happened, but I think this version of Synavive is a dead duck for knee osteoarthritis. I heard nothing on the conference call to make me think it will be pursued for this indication. It was statistically significant for hand osteoarthritis, and may have a future there. Overall, 37% of the patients chose to voluntarily continue taking Synavive, and said their pain was reduced a whopping 70%. But the action of the stock is typical of what happens to a one-product company when that product fails in a clinical trial.

However, CombinatoRx is not a one-product company–that was a very important factor in my being willing to recommend the stock. They have data on two Phase 2a clinical trials coming in the next few months:CRx-401 for Type 2 diabetes and CRx-197 for topical dermatology. They have several other programs in their pipeline, including a next generation version of Synavive. Only one of these has to work to make the stock move much higher from today’s crater-like levels.

I still believe CombinatoRx’ fundamental technology of combining already-approved drugs into new entities is sound, and they have developed the biggest pipeline per dollar of R&D spending I have ever seen in a development-stage biotech company.

After today’s results, I have to take CRXX off the Top Buy list, of course. I am lowering the buy limit to $2 and the one-year target price to $7, expecting one or both of the forthcoming Phase 2a trials to be successful. This clinical trial failure basically puts them one year behind my original timeline, but I still think we will eventually see this stock at my original $16 target.

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Dendreon (DNDN) announced the results of the “interim peek” in the Provenge Phase III trial data. Provenge improved survival in relapsed prostate cancer by 20% at the 95% confidence level for statistical significance. It had to hit 22% to allow the company to file for approval based on this interim data, so the trial will continue through mid-2009. The longer the period after dosing, the better Provenge does against a placebo, so I think it is highly likely that Provenge will hit its numbers and be approved early in 2010. There were no safety concerns.

The stock was halted for trading, and after it started up again it hit both a new low ($4.25) and a new high ($10.00) for the year. The new low was based on the fact that the interim data was not statistically significant. The new high was based on the fact that the shorts clearly are wrong: Provenge makes a substantial difference to survival. As management said on the conference call: “We’re encouraged by the results we’ve seen so far, and the final analysis, by design, has a higher probability of success.” DNDN is one of the most heavily-shorted stocks on the market, and these results cut the fundamental ground out from under the bears. With the results out, I’m taking DNDN off the Top Buy list, but leaving the buy limit at $8 and the target price at $40 after Provenge is approved.

“May you live in interesting times.” That old Chinese curse seems very applicable to the last two weeks. We saw a record Dow Jones point drop and the worst S&P 500 drop in 21 years on Monday, followed by the biggest S&P point gain in six years on Tuesday. I’ve sent you two Flash Alerts so far this week to help you navigate through the carnage. Yesterday’s relatively quiet day was welcome relief in advance of the Senate passage of the bailout bill last night. Speaking of the bill, did you notice that they added worthless tax cuts for businesses and Alternative Minimum Tax relief, plus hurricane damage grants to the bill? It adds up to billions of dollars they cannot pay for, since the government already is running a record deficit. Spending money you don’t have is one of the main behaviors that got us into this mess, but the irony was lost on the Senators. Both Obama and McCain voted for the bill, which to my mind is further evidence that neither one of them is ready to be President.

The House should pass the bill tomorrow, setting off a relief rally. My market indicators suggest another big move is coming in the next couple of days, but there is no way to tell if it is up or down. Certainly, if the House can’t swallow the increased deficits and rejects the bill again, the move will be down. Today’s sharp drop in the Dow Jones Transportation Index, down almost 9% even with lower oil prices, is a sign the market may drop further next week even if the bill passes, as people question whether the bailout will solve the credit crisis. In that case, we could see a Crash day to end this downturn.

But the 1152 energy level on the S&P 500 has been a formidable support level, and if the index can rally back and close over that level tomorrow, it will be three weeks in a row of a big drop below that level during the week being rejected by the end of the week. This is exactly how the market builds up energy for its next move, and in this case three weeks of support at 1152 would suggest an upturn of hundreds of S&P points is around the corner. Right now, I think that is a more likely outcome than a Crash next week, but the reaction to tomorrow’s vote will tell the tale. Interesting times, indeed.

Bank Update

The only firm that Secretary of the Treasury Hank Paulson actually forced into bankruptcy was his old competitor Lehman Brothers, and you may have noticed that the consequences of that decision have been much worse than anyone imagined at the time. Lehman’s bankruptcy filing on September 15 accelerated the collapse of American International Group (AIG) and caused severe losses for institutions from the Reserve Primary Fund, a money market fund, to the government pension fund in Norway ($800 million in Lehman bonds and stock) and banks in Iceland. The chain reaction starting with credit default swaps involving Lehman put international credit markets into chaos, eventually locking them up with a soaring London Interbank (LIBOR) lending rate, and requiring the $700 billion bailout plan. Nice call, Hank! It turns out the largest bankruptcy in U.S. history was too big to failcexcept Hank let it fail, and he doesn’t get a do-over.

The cost of insurance against bond defaults shot up on September 15 in its largest one-day rise ever. When the cost of default insurance rises, it generates losses for sellers of insurance — insurance companies like AIG, banks and hedge funds. They immediately must put up additional collateral to guarantee they will be able to make good on their obligations. On September 15 alone, sellers of credit default swaps had to find about $140 billion to meet their margin calls. How did they do it? They had to sell whatever they could, in a panic liquidation that hit financial markets all over the world.

AIG alone had to raise $14 billion for added collateral on the $400 billion of credit default swaps it had written. And anyone who was on the other side of a credit default swap involving Lehman cannot cash in their profits until the bankruptcy court is ready. Money market funds holding Lehman Brothers commercial paper got bids of 20 cents on the dollar. The Reserve Primary Fund owned Lehman debt with a face value of $785 million, and had to “break the buck” to trade below the sacrosanct $1.00 a share. In the biggest government intervention in financial markets since the 1930s, Paulson and Fed Chairman Bernanke extended federal insurance to cover $3.4 trillion — with a T — in money-market funds.

The turmoil has dropped the Investor’s Intelligence bull/bear survey to 33.7% bulls, down four percentage points in a week to the lowest level since mid-April, when the bulls peaked at 40.7%. The bears surged to 47.2%, up more than seven points in a week and well off their low of 38.4% five weeks ago. With far more bears than bulls, sentiment is bullish for stocks, because it is a contrarian indicator. But recent history tells us that it is possible sentiment can get even worse before we see a final bottom and upturn in the broad market. We shall see.

Right now, 1152 remains a crucial energy level. A collapse and close below 1110 would mean the market is going lower for now. A rise and close over 1170 will trigger a buy signal that should take the S&P 500 at least back to 1220, and could mark the first segment of a much larger upturn to at least 1440. That entire 20%+ move could happen in 20 to 30 trading days.

Not Quite A Buy

I mentioned in one of this week’s Flash Alerts that I was working on a new recommendation. The stock is Accuray (ARAY), the medical device manufacturer of the CyberKnife robotic cancer surgery machine. This is a remarkable technology for brain, prostate and lung cancer tumors, as it directs x-rays very precisely to the tumor without hitting many healthy cells around the target site. Unlike the usual cancer radiotherapy, with radiosurgery the patient’s hair doesn’t fall out, there is no nausea, and it requires only four or five sessions instead of forty.

But each machine costs $4 million, and the stand-alone radiology clinics can’t get financing in this environment. Accuray has been shifting their sales efforts towards hospitals and build a nice backlog there, but again financing can be an issue. The machines pay for themselves quickly because Internet-savvy patients find out about this better alternative and demand it as their treatment. But as long as the credit markets are locked up, Accuray is at serious risk of disappointing Wall Street with their September and December quarter results. I would not be surprised if they report a loss for both periods. The stock is down from $29 two years ago to around $8 due to a disappointing June quarter and the recent departure of the Chief Financial Officer, but if they announce a loss because customers can’t get financing, it could drop below its all-time low of $6.72.

I think that like another robotic surgery company, Intuitive Surgical (ISRG), Accuray could be a 10-bagger someday. But the risk of a near-term disappointment is too high for me to recommend it now. Who’d have thought that credit default swaps written by Lehman Brothers would have slammed a health care stock? Keep this stock on your radar and I’ll let you know if and when the time is right to buy.

News On Our Companies

With everyone’s attention focused on all the turmoil in the credit markets, something remarkable slipped by: There were virtually no negative earnings preannouncements in the last 10 days of the September quarter. Yes, GE cut their guidance and Research in Motion had some negative comments. But unless we hear bad news from a bunch of software companies today and tomorrow, which are always the last to know because they can “ship” their product right up to 11:59 PM on September 30, this has to be the least-disappointing quarter in recent stock market history. Of course, guidance for the December quarter will be key to stock prices, and there is a lot of uncertainty in the retail channel about holiday sales. I expect most companies to plan on a modestly better Christmas than last year — up 2% to 4% in both dollar and real terms — so guidance will be cautious but not disastrous. By the time we actually get to the season, sales could be more disappointing if consumer sentiment hasn’t improved, but for most of our companies that becomes an inventory problem for the March quarter, not a sales problem for the December quarter.

Biotech MegaShift

SXC Health Solutions (SXCI) is focused on lowering healthcare costs, and it’s hard to see the demand for their services being hurt by an economic slowdown. Just the opposite. The company acquired National Medical Health Card for $143 million to more than double its drug-benefit customer base in this $4.5 billion market. SXCI had 1.5 million plan participants, and National Medical had 2.3 million. SXCI gave very conservative guidance for integrating National Medical, and I suspect they are ahead of schedule in driving sales growth on their current cost base. We should hear a good September quarter conference call, with increased guidance to drive the stock up. Buy SXCI on the occasional dips under $15 for my $30 target.

Content on Demand MegaShift

Akamai (AKAM) fell today when it was downgraded by Wedbush Morgan from buy to hold and also by Goldman Sachs from neutral to sell. They believe the weak economy will hurt Internet traffic growth due to budget reductions at Akamai’s customers. I expect the weak economy to accelerate Internet traffic as people turn to it for better pricing on purchases, cheap entertainment and up-to-date news during a high-activity period for political and economic news. Both Wedbush and Goldman are worried about profit margins, as customers move towards shorter contracts and fixed rate pricing. I agree that gross margins will remain under pressure, but as Akamai loads up their servers, their incremental profitability is very high. AKAM remains a Top Buy up to $30 for my $60 target.

Intel (INTC) will ship a lot of microprocessors this quarter, but it isn’t clear how strong the sell-through of personal computers will be. August worldwide chip sales grew 5.5% from last year to $22.7 billion, as demand for PCs and cell phones continued to hold up, offsetting falling prices for memory chips. Excluding memory, sales were up 11.4% year-over-year. This morning, Micron reported a worse than expected loss and said they expect fourth quarter PC sales to be flat or up a tad, not the 10% growth they were previously expecting. Surveys show a major drop in PC spending expectations by corporations. So I think Intel will report good numbers for both the September and December quarters, but there could be a post-holiday inventory overhang that depresses March quarter results. However, two good quarters in a good market should still be enough to get the stock up much higher, even to my $35 target. The Intel 2009 $22.50 LEAP call remains a Top Buy up to $6 for my $12.50 target.

QuickLogic (QUIK) traded below $1 a share on Tuesday, and I went through my analysis again to see if anything has changed, or if I would aggressively recommend the stock today. I would. They have a unique technology, and the consumer electronics market is coming their way in terms of strategy and design philosophy. QUIK is starting from a small enough share of the consumer electronics business that they will grow whether or not the overall business has a good holiday season. Like TowerStream (TWER), Isolagen (ILE), Burst.com (BRST), Telkonet (TKO), Plug Power (PLUG) and Integral Technologies (ITKG), these dollar and penny stocks that have been abandoned by Wall Street will show incredible percentage returns going forward. At current levels, everyone should have a large position in QUIK, a Top Buy up to $4 for my $8 target.

New Energy Technology MegaShift

Canadian Solar (CSIQ) and other solar panel producers will benefit from last week’s House vote to pass the Renewable Energy and Job Creation Tax Act of 2008. This $18 billion package not only extended the renewable energy tax credits for eight years, it removed the $2,000 cap on residential solar installations. The Senate still has to pass it, but there is nothing like an impending election to put Congress in a generous mood with your money. Their theory is to get the most votes money can buy, and Americans have shown time and again that their vote is for sale to whomever will give them the most goodies. I expect the Senate to pass the program.

Solar stocks were slammed last summer when the Spanish government proposed a 300 megawatt cap on their solar reimbursement program for 2009. Like Germany, Spain has been a leading market for subsidized solar in the last few years. After negotiations, the government just announced a 500-megawatt cap on solar incentives. Solar power reimbursement levels were reduced, but not nearly as much as originally proposed. This should have some impact on the programs in other countries, and people forget that even as Germany and Spain start reining in incentives because their solar industries have become well-established, most other European countries are just getting started.

Renewable energy from solar, wind, hydropower, geothermal and biofuels now accounts for 10.6% of U.S. energy consumption, according to the U.S. Energy Information Administration, and its share is growing at 5% per year. Nuclear is still larger at 12.0%, but its share is falling by about half a percent a year. Solar will be the fastest-growing major sector of renewable energy for many years, and you should buy CSIQ up to $31 for my $65 target.

Connacher Oil & Gas (CLL.TO) said they have been advised that their application to proceed with Pod Two construction will get final approval from the Alberta government this month. The company will immediately start construction, with a goal of being in production by the end of 2009. At Pod One, bitumen production hit 9,750 barrels per day, within 250 barrels per day of the original design capacity of the plant. That output was achieved with 14 of 15 well pairs contributing. Steam is presently being injected into the 15th well pair and it is anticipated this well will come on-stream once the critical down hole temperatures are reached. CLL.TO is a buy up to $4.50 for my $9 target.

Ocean Power Technologies (OPTT) got a $2 million grant from the Department of Energy to install and test Phase I of a wavepower project 2.5 miles off the Reedsport, Oregon coast. The first one will be operational by the end of 2009, and eventually there will be 10 PowerBuoys generating 1.5 megawatts of electricity to supply 1,500 homes. This is the first award for building ocean wave energy systems by the Department of Energy. Wavepower is catching on all over the world, and Ocean Power is the clear leader. Buy OPTT all the way up to $20 (the first double) for my $40 target (the second double).

Robotics MegaShift

iRobot (IRBT) won a $3.75 million R&D contract from the Army for two of the new iRobot Warrior 700s. The Warrior can evaluate danger zones and inaccessible areas, and provide real-time video, audio and sensor readings to soldiers and SWAT teams. It can carry a 150-pound payload, with an innovative payload positioning system that allows radical changes in the robot’s center of gravity for high mobility in rough terrain. The first production units will be available in the September 2009 quarter. IRBT is a buy on dips under $15 for my $30 target.

WiMAX MegaShift

Sprint Nextel launched their WiMAX network in Baltimore this week, just in time for a big WiMAX conference in Chicago this week. The Telephony LIVE 2008 meeting also is underway, and there’s been lots of news. The most important came from Alvarion (ALVR) and TowerStream (TWER).

Alvarion (ALVR) won the Wisper High Speed Internet selection process to expand its WiMAX network for broadband data services to over 550,000 residential and business customers across Minnesota. There will be hundreds of these small contracts all over the world during the next few years. ALVR remains a Top Buy up to $11 for my $17 target price.

Towerstream (TWER) became the first double winner of Telephony Innovation Awards at Telephony LIVE 2008, one for “Most Innovative Broadband Wireless Service” and another for “Most Innovative Small Business Service.” Towerstream also said they deployed Alvarion’s BreezeMAX mobile wireless solution in Chicago, one of their nine current city markets. Mobile wireless allows Towerstream to offer their service to non-line-of-sight customers, and also lets the customer self-install their premises equipment, saving Towerstream from paying for the truck roll. More revenues, lower costs…we like it! At current levels, everyone should also have a large position in TWER, a Top Buy up to $6 for my $16 target.