It may not feel like it, but it is time to Give Thanks. If you are short of things to give thanks for in the stock market and the economy, here are some suggestions:
- Give thanks that the stock market did not go to zero. It went only halfway to zero. Around 2:45 p.m. last Friday, the S&P 500 made its second touch of the 741 level, down 53% from the October 2007 intraday high of 1576.
- Then, in less than 15 trading hours to the close on Tuesday, it gained 15%. We can give thanks for that!
- Three more points and we’ll be in a new bull market, right? A bull market often is defined as a 20% move up from a prior low. That’s 890. Don’t forget to give thanks for the new bull market.
- Now that the Index has recaptured the very important 850 energy level, the next likely stop is 922, and then after a brief retest of support at 850, on to 1015 for the next test. Give thanks as the S&P climbs over 922.
- The bears don’t believe the rally and the VIX Fear & Greed Index is still well over 50, indicating we could see a very big run right now. Give thanks for the bears, the shortsellers and the put buyers, for without them there would be no market bottoms.
- With the amount of money on the sidelines (close to $5 trillion by now) and most of the hedge funds net short as they battle for survival, let alone performance fees, the stage is set for a 1,000-point, single-day rally in the Dow Jones Industrials. Next week?
- Maybe two in a row. Now that would really deserve your thanks!
This looks like the “immediate V-shaped rally that blasts past 850 and 944 in a day or two” that I have been talking about for the last two weeks. It comes in spite of downwardly-revised GDP figures and yet another huge bailout by Hank “here’s the new strategic plan for the next few hours” Paulson and cronies. Fellow taxpayers, we just bailed out a bank that spent $400 million to put its name on a stadium. At the center of the South American loan crisis, the S&L crisis, the oil loan collapse in the 1980s and the housing/derivatives disaster of today, you will always find Citicorp. Usually with a CEO exiting with a tarnished reputation and a multimillion dollar golden parachute, to be replaced by the next CEO that will lead the bank into the next catastrophe, banking big bonuses along the way until it is his turn to pull the ripcord. Do not believe that Citicorp is too big to fail…the truth is that they are too dumb to be allowed to continue in business. They are the poster child for why the government should not bail out companies headed for bankruptcy due to their poor management and bets gone wrong, whether those bets are on housing prices or pickup truck sales.
Two weeks ago I wrote to you that: “I would not be surprised to see the final bottom come next Thursday or Friday, because the following week is Thanksgiving week, which often is when bear markets stop and bull markets begin.” The bottom came right on schedule last Friday. With gasoline prices back under $2 a gallon, the next big surprise will be that holiday spending is flattish, rather than showing a dramatic decline or a wipe out. Yes, people say they are going to spend less this Christmas — people say lots of things. But surveys don’t mean squat compared to what they do, and I expect them to do what they always do: Freak out in the last two days and buy more presents than they intended to. With shelves bare of inventory after the holidays, the outlook for the March quarter will be better than the likely GDP report for the December period. I am looking for a 3.5% to 4.0% decline in GDP in the current quarter.
News that things are not getting worse should power the S&P 500 much higher by next April, but I still think we just came through the first down leg of what will turn out to be a much bigger decline starting in mid-April and lasting more than a year. It will be driven by a sharp jump in foreclosures as the Alt-A and Option ARM mortgages default at 5X the number of subprime defaults. We’ll use the “relief rally” to sell stocks next April, keeping only those few that can produce strong earnings and go up in a severe down market.
I could be wrong about the next leg down if President-elect Obama’s new economic team, guided by the very competent Paul Volker, comes up with a way to fix the housing mess without destroying the dollar. I see proposals like “rebate the last five years of taxes to every American” and “rewrite every Fannie Mae, Freddie Mac, VA and FHA loan to 3% interest fixed for 30 years.” They all seem very impractical to me, and little attention is paid to what will happen to the dollar under these scenarios. Longer term, the inevitable drop in the dollar should result in higher asset prices — commodities, real estate, stocks — as inflation accelerates into hyperinflation. The Fed, with or without Bernanke running it, will choose inflation over deflation every time, until they finally lose control and hyperinflation leads to a deflationary crash. But that is a few years away, and right now it’s time to watch the bear traps go off and enjoy the ride up.
This week, I want to finish up on earnings reports and news. I’m going to hold off on the EZChip (EZCH) recommendation for a while until Wall Street realizes just how soft spending on network equipment is for this and the next couple of quarters. The overall softness should not affect EZCH that much because they have such a small market share, but Wall Street will knock the stock down anyway if EZChip’s big customers reduce their guidance.
Content on Demand MegaShift
QuickLogic (QUIK) has cut their breakeven revenue level to only $8.5 million, so they should return to profitability next year. They are moving quickly into new markets, and their revenues can grow based on market share gains even if the overall market for a product is flat to down. QUIK’s customers may delay a product introduction here and there, but overall 2009 is going to be a good year. What the heck is this stock doing at 58 cents a share? QUIK remains a Top Buy up to $4 for my $8 target.
SanDisk (SNDK) will benefit from the new mobile Internet device market for NAND flash memory. It is going to be bigger than all the current markets for NAND Flash combined. That should become obvious in the first half of next year, so whether SNDK gets another acquisition bid from Samsung, Toshiba or someone else, the stock is headed much, much higher. Buy SNDK up to $15 for my $32 target.
New Energy Technology MegaShift
Last week I wrote about the real oil problem: Lower supply as far as the eye can see. The main problem is Iran, Venezuela, Mexico, and Indonesia, the four national oil companies that currently supply 25% of the world’s energy exports. They have been diverting their income to social programs instead of oil exploration, and won’t be able to export any energy in three to five years.
But that’s just the main problem. The more pervasive problem was highlighted in a new study from the International Energy Agency. They sent 25 specialists out to survey 450 of the world’s biggest oil fields, and their conclusion is that world oil supplies are declining at the stunning rate of 9.1% per year. At that rate, current world oil production of 84 million barrels a day will fall to 52 million barrels a day in 2013. That is the equivalent of losing 100% of Saudi Arabia’s production over the next five years.
But it gets worse, because at the same time the current demand for oil is 85 million barrels a day, so the world already is using more oil every day than it is producing. The IEA projects demand growth at 1.6% per year, so by 2013 daily demand will be 93.5 million barrels, compared to the 52 million barrel supply. Can’t happen. The world would have to discover and bring into production the equivalent of three Saudi Arabias in just five years to make up the gap to match current consumption. Add in the 1.6% per year growth, and make that four Saudi Arabias in five years. Won’t happen. The IEA report says the world needs to invest $1.2 trillion a year on average for the next 20 years to find enough oil meet demand. Not going to happen. The only way to allocate the oil is to let the price go through the roof. China will buy most of it, because they can add value to oil by manufacturing products.
That’s why you must have exposure to the New Energy Technology MegaShift. Some companies are finding oil and gas (Gasco Energy (GSX) and Infinity Energy Resources (IFNY)). Others have new ways to produce or refine oil (Connacher Oil & Gas (CLL.TO), Holly Corp. (HOC), Rentech (RTK)). Many of my recommendations produce electricity without oil (Canadian Solar (CSIQ), Energy Conversion Devices (ENER), Fuel Cell Energy (FCEL), Ocean Power Technologies (OPTT), Ormat (ORA), Plug Power (PLUG), Suntech Power (STP), US Geothermal (HTM)). Some save electricity (Cree (CREE) and Energy Focus (EFOI)). Infinity Energy is a hold, while every one of the other 14 is under my buy limit.
Connacher Oil & Gas (CLL.TO) reported record financial and operating results. September quarter revenues more than doubled from last year to $225 million, as production rose 324% from last year. Pod One hit 13,000 barrels a day in late September, and Pod Two (Algar) was approved for development by the Alberta Cabinet. They can start construction, and because they have already ordered long lead-time components, they expect to have it build in 300 days, weather permitting.
Total cash flow, the Canadian equivalent of pro forma earnings in the oil industry, hit 15 cent a share, up from five cents a share last year. In addition to being cash flow positive, on Tuesday they unwound a cross currency swap asset covering their $600 million of senior notes denominated in U.S. dollars. They banked $89.1 million on the transaction without any equity dilution or additional debt. Combined with their $389 million of cash and bank credit, they can fund all of their capital spending from now through the end of 2009. That includes building the Algar Pod Two.
Connacher can make money on tar sands even at current oil price levels, and their Montana refinery is doing very well now that the crack spread is up somewhat. Buy CLL.TO under $4 for my $9 target.
Cree (CREE) held up very well from mid-September through the election, but finally cracked in the downdraft since then. Nothing has changed, except the price of electrical energy may come down for a while in the short term. But companies looking to provide healthy lighting while saving labor costs for bulb replacement as well as energy costs will continue to switch to LED lighting. Cree brings costs down dramatically every year, in good semiconductor fashion, and we are about to hit the range of the big demand curve to make the switch.
About 19% of our oil import bill goes for incandescent lighting, and compact fluorescents have a serious waste disposal issue due to mercury contamination. The Energy Policy Act of 2005, which was just extended to 2013, offers anywhere from a 25-cent to 60-cent tax deduction to existing building owners who upgrade their lighting systems. President-elect Obama will expand the government incentives programs as part of a broad-based energy package early next year. He visited Cree during the campaign, and is aware of the need to bring LED lighting down the cost curve by substantially boosting demand, and thereby saving a large part of the U.S. energy budget.
Besides its LED lighting technology, will be hot news next year as the energy package goes through, Cree makes high power discrete semiconductors that are useful in wind, solar and electric car applications. I used a number of these in the Godzilla controller I had on my electric car that set a land speed record at the Bonneville Salt Flats. I am making CREE a Top Buy up to $22 as one of the earliest beneficiaries of the Obama administration, still with a $50 target.
Energy Focus (EFOI) uses optical fiber, some driven by LEDs, to replace both flourescents and incandescent lighting. They also will benefit from the Obama energy-saving incentives, especially in their system to replace heat-generating incandescent lighting in supermarket freezer display cases. The company reported earnings after the close on a Thursday, and I gave you the numbers then: $6.4 million in sales with an 11 cent loss, compared to 28 cents last year. Thanks to extensive cost reductions, it was their first cash positive quarter in over two years.
On the conference call, they said they are seeing strong EFO-LED growth, especially in Europe, India and the Middle East. Customers love the 10-year Dock Light, which gets the sales team in the door. In the current quarter, they will introduce additional lighting products to feed into that sales channel. They also continue to get orders for the EFO-HID lighting products, like the EFO-ICE lighting system for refrigerated food cases.
But their big new push, which looks like it is going to be a huge success, is bundling their products together with infill products from other companies to provide a turnkey lighting energy solution. They just beat out three competitors at Great Lakes Cold Storage by showing that their recommended lighting solution was technically superior and had the highest return on investment. Great Lakes will cut its lighting energy cost by over 35% while providing a safer work environment for its employees through the improved white levels of the LED retrofits.
Energy Focus targets the regional grocery chains right now, typically around 100 stores. Each store averages about $330,000 in annual profit. By putting in the freezer case, dock light and a few other products under a turnkey contract, they can save each store about $50,000 a year, boosting profits by 15%. That is very significant at the executive level. EFOI can be bought up to $6 for my $16 target.
Gasco Energy (GSCO) should earn about nine cents a share this year, net of hedging operations where they have been reporting big profits — 14 cents in the September quarter, added to operating earnings of three cents a share. Wall Street thinks they will be down in 2009 due to the decline in energy prices, but I don’t buy it. Unless we have an awfully warm winter and cool summer, I expect oil to head back over $80 a barrel next year, with a bigger jump in gas prices. GSX can easily report 15 cent to 20 cents a share in that environment. Buy GSX under $3 for my $9 target.
Suntech Power (STP) reported great revenues but weak profit margins in the September quarter and then gave terrible guidance, which knocked the stock down 40% in a day. The problem was twofold: The depreciation of the euro against the dollar, and customers unable to get financing for solar projects, a fallout of the credit crisis. For the September quarter they reported revenues up 53.7% to $594.4 million, well above the high end of their guidance. They did 35 cents a share pro forma after taking the euro/dollar hit. Production capacity hit 750 megawatts by the end of the quarter.
They revised their full year production guidance from 550 megawatts to 490 megawatts, and dropped revenue guidance from a range of $2.05 billion to $2.15 billion down to $1.85 billion to $1.87 billion. That meant cutting December quarter guidance to a range of $345 million to $360 million, well below the consensus estimate of $506 million.
There’s no doubt that the Obama Administration will push for an expansion of alternative energy in general, and solar in particular. Because Suntech is the leading Chinese solar manufacturer, they will benefit immediately from new Chinese government program spending to boost that economy. It’s also clear that polysilicon prices are falling like a rock, yet there is no slowdown in customer demand for solar panels. The customers just can’t finance them, or get letters of credit. I think STP is a call on the Obama and Chinese solar programs, as well as on the euro versus the dollar. I predicted this dollar rally, and now I am predicting it will end in 30 to 90 days, with the next move back to the lows and worse. That is a good environment for STP as it makes their products cheaper in Europe. Buy STP up to $16 for my $40 target next year as new solar incentives kick in.
US Geothermal (HTM) reported $600,000 in revenues and a loss of three cents a share for the September quarter. They have about $6 million in cash, and burned a little over $800,000 in the quarter. In addition to their continuing operations at Raft River, Idaho, they are drilling a new production well at San Emidio, Nevada, and recently drilled a successful production well at Neal Hot Springs in eastern Oregon. As these wells come into service and revenues accelerate, management intends to move the company towards profitability rather than try to expand to more properties. Of course, that could change if there are distress sales of attractive properties due to the current economic environment, but they won’t buy anything they can’t finance. In spite of its sub-$1 price, HTM can be bought up to $3 for my $6 target.
Security & Location MegaShift
SiRF Technology (SIRF) reported $60.1 million for September quarter revenues, down 34.1% from last year. They lost 11 cents a share pro forma, compared to a profit of 29 cents last year. In addition to their ongoing legal expenses fighting the Broadcom patent suit, a number of their recent design wins for integrated GPS/radio chips for cell phones won’t start volume production until early next year. The good news is that many of those platforms will launch this quarter, so the reviews and buzz process can get started. Meanwhile, the older products that are the bulk of their current shipments have declining volumes and lower profit margins. Garmin, a major customer for GPS chips, recently lowered their revenue guidance for the December quarter by $300 million, in part due to the anticipated effect of the economic turmoil on holiday sales of personal navigation devices.
In the conference call, SiRF said it is expecting fourth-quarter patent litigation expenses to be similar to the $3.6 million booked in the third quarter. SiRF is getting some breaks since Broadcom won an International Trade Commission ruling that certain SiRF products infringe six patents held by Broadcom. First, earlier this month the ITC decided to review the initial infringing ruling on three of the patents. However the review comes out, five of the six patents at issue are software-related, and SiRF is working with their customers to rewrite the software. In general, that is not hard to do. The one hardware-related patent was asserted against the current i5000 product, not the new SiRF Star III or SoC products, and it is one of the three being reviewed. There should be a decision early next year.
So although SiRF is constantly obligated to say that “the ongoing ITC litigation could affect the future importation and delivery of certain current SiRF products into the United States,” and reporters cannot resist repeating that ad infinitum, I doubt this will ever make much difference beyond the unnecessary legal expense. The Circuit Court of Appeals recently ruled that the ITC does not possess the statutory authority to ban products produced by downstream users (SiRF’s customers) that are not named in the ITC complaint. SiRF has a very large patent portfolio, and at some point they will make Broadcom pay for the trouble that was created.
Broadcom also sued SiRF in Federal District Court, naming four of the six patents. SiRF complained to the Patent Office and all four have been accepted for re-examination due to substantial new questions of patentability. Usually, this means someone like SiRF came up with enough prior art to make the patent invalid as not a new or novel invention. The Federal case won’t come to trial until the December quarter of 2010.
Out of sheer caution, management lowered December quarter revenue guidance to a range of $50 million to $55 million, with a pro forma loss of 16 cents to 19 cents per share. Next year will have a much stronger portfolio of new products contributing to revenue growth, and they will continue to bring down their breakeven point from the current $70 million to $75 million range. They should be able to return to profitability in 2009. Buy SIRF up to $5 for my $15 target.
WiMAX MegaShift
Airspan (AIRN) reported September quarter sales down 21% from last year to $17.8 million, which also was down 17% from the $21.4 million reported in the June quarter. The main reason for the drop is that many shipments are on hold while customers arrange letters of credit. I think the credit markets will loosen enough this quarter to let AIRN ship a lot of those orders. Although the company’s cost reduction program is working, with operating expenses down 14% from the June quarter, they still has a 13 cent per share loss, compared to 15 cents in the June quarter and 24 cents in last year’s September period.
In the September quarter, about 26% of revenue came from customers in Mexico, Latin America and the Caribbean, 27% from Europe, 11% from Africa and the Middle East, 22% from the United States and Canada, and 14% from Asia. They are well-diversified, especially for a small company. They have $31 million in cash and burned about $5.5 million in the quarter.
Because the capital spending outlook as deteriorated, and given the problems with letters of credit that their customers are having, they lowered revenue guidance for 2008 to $80 million. Next year should show growth as a number of big contracts start to ship. During the quarter, they and their partner Nortel won a big contract from FairPoint, a large U.S. telephone operator. FairPoint will provide high speed Internet service throughout the Northeastern U.S. that will be cheaper and faster than DSL.
Airspan also announced the first seamless, uninterrupted handover from one frequency band on a mobile WiMAX network to another frequency band. Handovers between base stations on the same frequency are hard enough, as anyone suffering dropped calls can attest, but changing frequencies is really remarkable. Carriers and operators will be able to deploy a single, large mobile WiMAX network using two or more frequency bands to overcome spectrum limitations. AIRN remains a hold as long as they can move towards profitability. My target price is $5.
Alvarion (ALVR) reported record revenues for the September quarter, up 23% from last year to $74.3 million. Pro forma earnings per share came in at five cents versus four cents last year. WiMAX revenues were $49.5 million of the total, and grew 41% from last year.
Management said they see no evidence that their customers are cutting capital spending, but they expect the downturn to impact them at some point. So they kept guidance for December quarter revenue at only $70 million to $78 million with earnings between zero and seven cents a share, and said they expect 2009 to be a “tough year.” Analysts were looking for $81.1 million and six cents a share, and I think the stock went up just because Wall Street was afraid the guidance would be worse. The company has frozen hiring and will repurchase only about $5 million in stock in the current quarter. With $146 million in cash, they can afford it.
They won their first major deal with new partner Nortel Networks for a mobile WiMAX deployment in Russia. Note that Airspan also is a Nortel partner. Both Alvarion and Airspan also partner with Intel, and both sit on the WiMAX Forum governing body. I think Alvarion might buy Airspan someday.
Management noted that Nokia has launched a WiMAX-enabled mobile Internet device, Intel has introduced laptops with built-in WiMAX chips, and the Sprint/Clearwire joint venture successfully turned on their Baltimore commercial network. The Year of WiMAX was 2008, but the Decade of WiMAX is just getting started.
Remembering that ALVR has $2.25 a share in cash and will report about $310 million in sales next year, the current market capitalization of $201 million makes no sense. It is only 64% of next year’s sales. Subtracting the $146 million in cash, the price/forward sales ratio falls to 18% of sales! The stock is being given away, which is why the company keeps buying it. ALVR remains a Top Buy under $11 for my $17 target.


