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:

1. 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.
2. Then, in less than 15 trading hours to the close on Tuesday, it gained 15%. We can give thanks for that!
3. 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.
4. 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.
5. 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.
6. 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?
7. 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.

I was too early last week in telling you to sell your exchange-traded short funds and puts, but I don’t think it will make much difference looking back from 30 days from now. We shall see. As I wrote last week (emphasis added): “It would be very unusual to see this rally extend to, say, 944 on the S&P, and then have a fourth move down to 850. It simply should not be necessary. The only exception to that would be a rapid, one- or two-day drop to the 2002 closing low at 775 on some terrible news, followed by an immediate V-shaped rally that blasts past 850 and 944 in a day or two, and then heads for 1270. But that’s a low-probability scenario.”

The S&P closed today at 752 on the “terrible news” of the imminent bankruptcy of General Motors, which I’ve been predicting for months in these Reports. I was wrong about a big drop being a low-probability scenario, and it remains to be seen if this is a V-shaped, an L-shaped or an I-shaped drop.

I went on to write: “But what if this rally fails and the S&P breaks back below 850 into another downleg? It almost certainly will be the last one of this bear market and will not last very long. It could be deep, especially if the Dow breaks 7,773, its intraday low on October 10. [Note: It closed at 7,552 today .] The good news: Although this final downleg could be sharp, perhaps sending the Dow to its October 2002 bottom at 7,187, it all may happen in as little as one week. If there is one more downleg to go, 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.”

So here we are at “next Thursday or Friday” after the Dow broke that October 10 intraday low, and the panic level is extremely high with the VIX Fear & Greed Index closing over 80 . The received wisdom is typified by this Associated Press story yesterday:

Fed sees economic woes persisting into next year

“Fed sees country lurching deeper into economic despair, driving up unemployment

WASHINGTON (AP) — Pounded by a fierce financial crisis, the country is sinking deeper into economic despair and is likely to be in the hole well into next year, forcing more Americans into the ranks of the unemployed. The gloomy outlook from the Federal Reserve came as hopes dimmed that Congress could secure a fresh $25 billion rescue package for the tottering U.S. auto industry before lawmakers quit for the year.

With economic troubles cutting into customers’ appetites, businesses will remain in a cost-cutting mode, keeping layoffs high.”

That’s quite a lead for what was a totally downbeat story. I was especially interested because the rest of the story included two of the biggest current lies. There’s usually only one big lie at a time moving the market, but now we have both the GM bankruptcy disaster big lie and the hapless Fed big lie.

Big Lie #1

The AP story repeated without comment the GM position on the proposed bailout:

“General Motors Corp. CEO Rick Wagoner, meanwhile, warned the House Financial Services Committee on Wednesday that the collapse of the U.S. auto industry could lead to a loss of 3 million jobs within the first year.”

If GM does not file for bankruptcy tomorrow, they will build about 7,600 cars next Monday. On the other hand, if they do file for bankruptcy tomorrow, next Monday they will build….7,600 cars. The difference is that they will be able to pay their suppliers and support their dealers, using debtor-in-possession financing. They can set aside the union contracts that pay people $72 an hour to put nuts on bolts. They can stop paying health care premiums and pensions to retired workers, and turn their whole pension mess over to the Pension Benefits Guaranty Board — that would be the taxpayers, meaning you and me. What’s not to like? Mr. Wagoner seems to think that bankruptcy = collapse. Not so. Chapter 11 means a healthy reorganization, a leaner, more efficient GM, and Mr. Wagoner out of a cushy job with no golden parachute.

Representative Barney Frank (D-MA) said he is against allowing a bankruptcy because it would be used to break the union contracts, and there has been too much union busting already. Why does Massachusetts keep reelecting this guy? CEO Wagoner said GM is burning $5 billion a month. GM’s share of a $25 billion bailout would be about $10 billion. Do the math. If they get a bailout, they will be back to Congress right after Inauguration Day to say they are out of money again, and Congress just can’t let their $25 billion vanish or the taxpayers will kick them out, so they have to pony up another $25 billion. That makes a lot of sense…to Barney Frank.

Big Lie #2

The AP story repeated without thinking about a common misconception about the Fed:

“Once established, deflation is hard for Fed policymakers to break. That’s partly because the Fed can lower its key rate only so far — to zero — to combat it.”

The Fed can cut the Fed funds rate to a negative number if they want to. That is, they could pay the banks to take Fed funds. Why not cut to -1% or -2% if they need to? I remember during one of the many dollar crises since 1971 that the Swiss banks were “paying” minus 3% interest on accounts. Depositors had to pay the bank 3% a year in negative interest for the privilege of having their money in a Swiss bank account. If the Fed cut the funds rate to -3%, banks could offer loans at 0% and make their traditional spread. That might get the economy moving!

Bernanke Meets Reality

The Fed now forecasts GDP growth this year between 0.0% and 0.3%. For 2009, they cut their forecast to a range from -0.2% up to +1.1%. The most negative Fed Governor’s outlook was for a 1% decline. Incidentally, there is no such thing as “negative growth.” Those are weasel words for “decline.” It seems to be very hard for government cheerleaders to say the words “decline” and “depression.” “Recession” is a weasel word for depression that came into vogue after World War II, and now is being replaced by a second-level weasel word: “downturn.” If you hear someone use the phrase “negative growth,” the best thing to do is laugh uncontrollably until they stop it.

The Fed also cut their inflation forecast for this year to a range of 2.8% to 3.1%. In 2009 they expect inflation to moderate further to between 1.3% and 2%. Wrong! Ben, Ben, Ben. Remember Milton Friedman’s dictum: “Inflation is always and everywhere the result of excess monetary growth.” Chairman Bernanke is the poster boy for excess monetary growth, having inherited Alan Greenspan’s disastrous policy and then doubled down. Inflation, if not hyperinflation, is baked in for the next few years. I realize consumer prices just fell 1% in October, the biggest monthly decline since 1947 — 61 years. But that’s driven by oil, which is down $98 a barrel, from $147 to $49. Unless you think it going down another $98 to minus $49 over the next few months, you can expect this improvement in consumer inflation to be brief and transitory, if that is not redundant.

Between October 13 and November 13 we had the three biggest single-session Dow Jones Industrial Average point gains on record: 936 points on October 13; 889 points on October 28; and almost 553 points on November 13. And where has it gotten us? Well, yesterday we broke under the 2003 lows, and today we took out the 2002 lows from whence the bull market began, which is not good. There should have been buyers, even if only corporate buyers announcing acquisitions, but there were not. Unless the S&P 500 can quickly recapture the 850 level, close decisively over it, and then go on to clear the breakdown level at 912, I have to assume we are about to test the big energy level from the last bear market bottom at 775 a couple of more times as a resistance level . If the S&P can’t get back over 775 , it puts a much lower level in play (I hate to write this): 525. I know that is a shocking number, but these seem to be shocking times.

So, where does all of this put us? Doing what we need to do to make money in this market.

I have finished the work on EZchip (EZCH) and am ready to recommend the stock as soon as we see a market bottom. It makes the best network processors, and should grow 25% to 35% a year for at least the next five years. They have 70% gross profit margins, headed even higher, and I think they will report at least $1.20 per share in 2009. (That’s based on conservative assumptions; no analysts publish on the stock.) EZCH is selling for 7.5X earnings in 2009, or 5.8X if you exclude their cash. That’s a ridiculously low valuation for a company with this growth rate and profitability. Do your reading and research now (ezchip.com), and I will send you a Flash Alert the minute the timing seems right. For the rest of this issue, let’s catch up on earnings reports and important news.

Biotech MegaShift

Rochester Medical (ROCM) is a 24% growth company in a 13% growth disguise, and a highly profitable company in a so-so profits disguise. On the conference call for their September fourth-quarter results, management said that while overall sales grew 13% for the quarter to a record $9.5 million, the branded sales portion of that grew 23%. For the fiscal year, branded sales grew 24% and private label sales declined. Due to the new Medicare rules, the company is putting its marketing efforts into branded sales.

For that same reason, earnings fell to six cents a share for the quarter from 10 cents last year, due to their planned increase in sales and marketing. Because Medicare will no longer reimburse for hospital-caused problems, management said: “Hospitals are showing very strong interest in our infection control catheters. We are getting a number of evaluations and seeing hospital conversions to our products.”

In addition, Medicare has changed their reimbursement rules for intermittent catheters, often used in rehabilitation clinics and home health care, from four per month to 600 per month. That means no one has to spend expensive labor cleaning and sterilizing catheters, so management added: “Also we are seeing very solid growth in our intermittent catheter line and we expect that to continue both in the United States and United Kingdom.”

Private label sales will steadily fall as a percentage of revenue, while continuing to help bring manufacturing costs down. As branded sales increase their share, the reported growth in revenues will steadily accelerate towards 24%. As revenues grow, the company will not grow sales and marketing as quickly, so earnings will grow faster than revenues. And it doesn’t matter what the economy does, whether GM goes bankrupt or not, or bad inflation gets. Sweet! ROCM remains a Top Buy up to $20 for my $40 target.

China MegaShift

UTStarcom (UTSI) reported their first quarter of results after divesting the Personal Communications Division on July 1. PCD accounted for much of their revenue, but little of their profit. They did $181 million in sales, compared to $646 million last year, But gross profit margins improved to 32% from 10% last year, and the operating loss dropped to $34.9 million from $51.5 million last year. Obviously, they still have a way to go, but their cash increased to $331 million from $180 million, which gives them enough money to continue to realign the company to fit higher-growth markets. They paid off all their remaining debt during the quarter.

On the conference call, they said they have not yet seen any significant reductions in the capital spending budgets for new technology in the major telecom carriers in China and India. Of course, they are watching this carefully. I think the Chinese government may even accelerate spending on Internet Protocol TV as a way to stimulate the economy. The company guided for December quarter revenues from $215 million to $235 million, with gross margins in the mid-20s due to a higher proportion of handset shipments. The consensus is at $240.3 million, so this is a bit of a shortfall. I expect them to lose about 45 cents a share, compared to the 34 cent consensus estimate. IN 2009, the company is looking for 10% revenue growth and a major 15% to 20% reduction in operating expenses, with details on that program to come later this quarter.

All in all, it was a quarter of rapid progress, but not good enough to attract Wall Street, especially in this environment. As long as the new management keeps moving in the right direction, and in light of the much-improved balance sheet, we should continue to hold UTSI for my $10 target, possibly in a buyout.

Content on Demand MegaShift

QuickLogic (QUIK) reported $6.2 million in sales, at the high end of their $5.7 million to $6.3 million guidance. New product revenue hit $1.4 million, at the midpoint of the $1.2 million to $1.6 million guidance. Operating expenses were only $4.0 million, far below their guidance of $5.8 million to $6.2 million. They were able to realize their planned cost reductions more quickly than expected, a sign of good management.

The company guided for December quarter sales of $6.3 million, plus or minus $300,000, including new product revenue of $1.6 million, plus or minus $200,000. While other semiconductor companies are guiding for revenue declines, QUIK is guiding for an increase. Gross margins should be 55% plus or minus two percentage points, leading to a proforma operating loss around $900,000. Because they moved earlier this year to reduce expenses and have plenty of cash, they can grow their way into profitability instead of being in a panic, cost-cutting mode.

The company has a new sales forecasting and opportunity analysis software system, and they started revealing some of their metrics on the July conference call. They count things by Single Sales Opportunity (SSO). These start at the qualification level, not just by some salesman saying there may be an opportunity. Using this tougher definition:

• The total number of active SSOs have increased more than 220% since the first of the year, and increased 34% from the June quarter. I think that translates to about 75 active SSOs.
• The total value of all active SSOs increased 56% from the June quarter.
• 60% of all active SSOs accounting for 80% of all SSO value are in Tier 1 or Tier 2 accounts.
• 17% of the SSOs are in North America, 22% in Europe, 50% in Asia Pacific and 11% in Japan. But Europe accounts for 43% of total SSO value.
• 63% of the SSOs are for smart phones, navigation devices, portable media players and data cards, accounting for 79% of all SSO value. The rest are for other portable consumer electronics, portable industrial products, medical, military and other.
• 75% of the SSOs can be implemented using existing QUIK platforms, 23% are for products scheduled for production in the next 12 months, and only 2% will required special design efforts.

There are 40 active SSOs for Visual Enhancement Engine (VEE) applications, mostly with Tier 1 smart phone customers. That is almost double the 21 active VEE SSO’s reported at the end of the June quarter. A VEE display using only 13% backlight power produces a much better viewing experience than a non-VEE display using 100% backlight, and VEE is the only solution that works well in direct sunlight.

Backlight power is important because there are only three functions in a handset that consume as lot of power: signal transmission, the applications processor and the LCD backlight. Decreasing backlight power adds hours to battery life. Current handsets use so much backlight power that if they are used as a media player, supposedly one of the strong selling points for high-end phones, the batteries die quickly.

QuickLogic’s new product revenue should grow rapidly even during a serious worldwide recession. The September quarter showed they have successfully reduced fixed costs, yet improved their ability to recognize and pursue new sales opportunities. What this stock is doing at 53 cents a share with a total market cap under $16 million, less than half of next year’s revenues, is beyond me. Management is doing a great job and QUIK remains a Top Buy up to $4 for my $8 target.

Silicon Image (SIMG) reported a decent September quarter, but where they really shine is the number of new products and design wins they have, with more coming every quarter for the next two years. The company did $77.8 million, up sequentially from the $70.1 million June quarter, but still below the $86.3 million they reported in last year’s September quarter. Proforma earnings per share of 23 cents included 10 cents from reversing their accrued income taxes from the first half of the year, as they will not have taxes this year. So the real number was 13 cents, compared to 10 cents last year and seven cents in the June quarter. They generated $15 million in cash in the quarter, bringing them to $200 million in cash with no debt.

They have a home run product in the new Superman four-port HDMI processor chip that also supports their new Mobile High-Definition Link technology targeted at the mobile phone market.

In addition, the Instaport chip is going to be a big winner for next generation digital televisions, with Samsung their first big customer (and a great reference win). Instaport reduces HDMI device switching time to sub-second speeds, while the competitive solutions are stuck at four to seven seconds. The current DTV chip did not capture much market share in televisions, but that have seven or eight big wins in audio that will show strong revenue growth in 2009.

In the personal computer area, Intel’s new integrated chip with HDMI functionality will slowly erode Silicon Image’s PC business from 15% of sales to single digits by the end of next year. But they have a new Personal Electronic Network (PEN) chip that won “Best New Product Idea” at the CableLabs Summer Conference. The PEN Echocast technology guarantees High Definition TV pixel accuracy on any display on a wired or wireless home network.

The company also has a new ultra-low-power dual-mode chip combining HDMI with Mobile High-Definition Link technology to driving HD quality audio and video to mobile handsets. Mobile products will be an important part of the overall product mix in 2009, supplanting PC as a major segment for Silicon Image.

The company forecast December quarter sales of $68 million to $69 million, which will just hit the low end of their guidance for the year, but earnings will be in the middle of guidance or better. It looks to me like management has good control of operating expenses and already can point to numerous design wins, so the big question is how well their customers’ new products sell in 2009. Even if their customers are flat to a bit down in 2009, SIMG’s market share will grow rapidly and let the company show an up year. Wall Street is expecting 42 cents per share this year, but only 20 cents next year. I think their 2009 earnings will be at least flat, even with the different tax rates, so SIMG remains a buy up to $8 for my $16 target.

Telkonet (TKO) reported results both including and excluding its MST subsidiary, where it is trying to sell or dispose of its stake in order to get the reported results down to energy efficiency and broadband-over-power-line Internet connectivity, primarily in the hospitality industry. In the September quarter they reported $5.7 million in sales, up 24% from last year. Excluding the revenue from MST, they did $4.7 million, also up 24%. All the gross profits came from Telkonet, so excluding MST they had 47% gross margins, up from 42% in the June quarter and 35% last year. Management’s cost reductions are paying off, and they recently combined R&D centers and went from 20 to 15 engineers, which will save an additional $1.2 million per year. Again excluding MST, Telkonet’s selling, general and administrative expenses were $2.1 million in the quarter, down from $3.3 million last year. They were able to grow revenues 24% while reducing SG&A 37%. That’s good management.

The net loss was four cents a share, compared to seven cent last year. Excluding MST, their EBITDA loss was down to $400,000 from $1.2 million in the June quarter, and $2.6 million last year. Management still expects positive EBITDA in the current quarter, which will be a major breakthrough.

Although they have had a few installations postponed due to the credit crisis, projects that save energy expenses with a 30% return on investment are even more attractive in tough times. As long as some customers have or can get the upfront capital costs, TKO should do well in 2009.

Yesterday, the company was named as one of the country’s top 500 fastest growing organizations, ranking #23 on the Deloitte Technology Fast 500. This is an annual list of the 500 fastest growing technology, media, telecommunications and life sciences companies in North America. TKO is doing everything right, working in the right area, and growing revenues and earnings, with EBITDA breakeven about 41 days away. We could buy the whole company for less than $13 million, or about half of next year’s sales — and they’ll be cash flow positive! TKO remains a Top Buy from today’s 15 cents a share up to $5 for my $15 target — a 100-to-1 return on your investment.

New Energy Technology MegaShift

Oil prices have been hammered by every piece of weak economic data, as analysts worry about lower demand. Credit Suisse just cut its forecast for growth in China’s oil demand in 2009 from +4% to nearly zero.

“The latest set of economic data out of China suggests a much more severe economic slowdown is under way there. Hopes of even a slightly decoupled China in 2009 are fading fast,” the investment bank said.

But do you know what almost everyone is forgetting? Lower supply. Whether you believe in peak oil or not, the fact is that even if the oil is there underground, it can’t be gotten out in time to avoid a very serious supply crunch over the next few years. After that, if the peak oil theory is wrong, prices could come down somewhat from much higher levels. Of course, if the theory is right, prices will go up at an exponential rate.

The problem for the next few years is that the oil market is controlled by national oil companies that currently supply 25% of the world’s energy exports, but won’t be able to export any energy in three to five years. That’s 2011 to 2013, and it is a lock.

The big oil companies might be willing to drill, drill, drill, but these national oil companies are not reinvesting enough money to maintain their current production, let alone grow it. I am talking about Iran, Venezuela, Mexico, and Indonesia, all of which are diverting cash flow from exploration to social spending. Some of the diversion is even used to subsidize lower gasoline prices, so these government oil companies are encouraging domestic demand at the same time that they’re reducing future supply!

These four countries currently supply about 25% of the world’s export energy. In three to five years, not one of them will be an exporter. Even if they mended their ways today, which is not going to happen, it is too late to get oil into production. So the world is about to lose 25% of its export energy supply, with import demand growing at least 1.5% compounded for the next five years — and that’s reduced to account for the current recession.

The International Energy Agency just confirmed these numbers. A team of 25 IEA experts just finished an exhaustive survey of the world’s 450 biggest oil fields. Here’s the bad news: The world’s oil fields are depleting at a rate of 9.1% every year.

Current world oil production is 84 million barrels a day. Assume no one does anything to find more oil. According to the IEA, production is going to fall to just 52 million barrels a day by 2013. That’s a 38% drop in five years.

Current world oil demand is 85 million barrels a day, so we are already using more than we’re producing. There’s no way new oil discoveries can make up for a 38% drop in production from existing fields. We could drill, drill, drill the Arctic National Wildlife Refuge and it would supply the world for only six months, using the most optimistic estimate of its reserves.

Oil prices are going higher, and all the alternative energy companies in our portfolio are going to benefit.

Real estate agents love to sell to Wall Street traders.  Traders walk into a place, look around them, look at the view, and say: “I like it, I’ll take it, I’m outta here.”  The more money they trade, the bigger their egos are, and the biggest of all is Hank Paulson.  “Hey, here’s an idea, let’s borrow $700 billion dollars and buy toxic assets from the banks.  Oh, wait that’s not working.  Let’s buy bank stocks instead.”

If any commercial lender provided funds to a borrower who said: “Surprise!  We aren’t going to use the money for what we told you during the loan review process” the lender would simply recall the loan.  But the American taxpayer doesn’t get to do that, and with his buddies at Goldman and the big banks taken care of, King Henry said yesterday that his $700 bailout plan is doing a 180o.  Congress was fooled again — no surprise there.  I doubt more than 10 of them can explain what happened to get us into this mess.

In the last issue I said the S&P 500 had a chance to make a very important statement about the 944 level, one way or another.  As you know, 944 gave way, and we had a dramatic test of the 850 support level today.  I also said I would send you a Flash Alert if and when the broad market showed a definitive breakout or breakdown.  We’ve been in this “on the edge” market for weeks now, and even after the three-day decline this week that took another $1 trillion off the total market capitalization, we still didn’t have a clear indication of the direction of the next leg of this very volatile market until today’s close.  Until then, we could have seen the last big flush down, on the order of a 2,000 point drop in the Dow Jones Industrial Average — it certainly looked like that was underway after the S&P broke at 12:12 PM EST today and plunged for 50 minutes to 820.13.  Or we could have seen the S&P 500 hold at 850 and then get the next big leg up, again on the order of 2,000 Dow points.

But this waiting game is now over.  Yesterday’s test down to 850 on the S&P was the third touch of that level, as you can see from the daily chart below, and my experience is that three touches of an important reversal level is enough. 

This was the third distinct move down to the SPX 850 energy level, after the initial hard plunge down to there just over one month ago:

• On October 10, the S&P hit 839.80 intraday, then rallied to close at 902.55
• On October 27, the index closed at 858.92, just above the low for the day.  On October 28 it touched 848.27 intraday, then rallied to close at 940.51
• Yesterday it closed at 852.30, just above the low for the day.  Today it plunged to 820.13 intraday, then rallied 91 points — 11.1% — to close at 911.29.

After three touches of the reversal point, either all the potential sellers have been scared out, and the market holds there before a slingshot up, or a break of this level converts enough bulls to bears to create another significant down leg.  Today’s plunge intraday and dramatic rally into the close means the slingshot has begun.  You should sell all inverse exchange-traded funds or puts now.  They served us well in cushioning the downturn.

It would be very unusual to see this rally extend to, say, 944 on the S&P, and then have a fourth move down to 850.  It simply should not be necessary.  The only exception to that would be a rapid, one- or two-day drop to the 2002 closing low at 775 on some terrible news, followed by an immediate V-shaped rally that blasts past 850 and 944 in a day or two, and then heads for 1270.  But that’s a low-probability scenario. 

The odds are we just saw the last downleg of this long downturn, especially if the market can build on today’s rally and start the month-long 20% rally that should be in the cards after such a vicious decline. 

But what if this rally fails and the S&P breaks back below 850 into another downleg?  It almost certainly will be the last one of this bear market and will not last very long.  It could be deep, especially if the Dow breaks 7,773, its intraday low on October 10.  The good news: Although another, final downleg could be sharp, perhaps sending the Dow to its October 2002 bottom at 7,187, it all may happen in as little as one week.  If there is one more downleg to go, 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.  In any case, the message of the market today was that the bear market is over, bad employment news and an out-of-control Treasury Secretary are priced in, and as usual stocks will start up long before the pundits and surveys say the economy is getting better.

Speaking of an economy that is not getting better yet, Intel (INTC) provided an early business update yesterday that surprised everyone, including me, by the amount their business has deteriorated.  It was reasonable to think they would reduce guidance, but going from $10.5 billion in sales, plus or minus $400 million, to $9.0 billion, plus or minus $300 million, was a big hit.  The high end of the new range is $800 million lower than the low end of the old range.  The $9.0 billion midpoint equals a 12% sequential decline and a 16% year-over-year decline. 

Such a big drop this far into the quarter will cause gross profit margins to fall from 59% to 55%, both plus or minus a couple of points.  Wall Street slashed their 2009 outlook to show gross profit margins around 52%, but that is a mistake.  Intel is very, very good at reacting to the business environment, and while they may show a 52% gross margin in the first or second quarter of 2009, I think the full year will hit 54% to 55%.  Then, Intel will reduce expenses to match the gross margin reduction, and protect their bottom line.  I now expect Intel to report about $1.10 per share pro forma in 2009, after booking about 29 cents a share in the current quarter. At today’s close, INTC is selling for 13.1X 2009 earnings and yielding 3.9%.  Continue to hold the Intel 2009 $22.50 LEAP call (NQAX) for my $7.50 target, which requires the stock to get to $30 in the year-end rally.

Between the Intel early update, which was not scheduled until December 4, and Cisco’s recent cautious outlook, it’s pretty clear that mainstream technology is going to have a lousy quarter.  I have kept you out of the enterprise software stocks like SAP and Oracle, which are really going to get creamed when their normally seasonally-strong calendar fourth quarter turns into a major bust.  But it’s a fair question to ask how our other stocks will fare in the quarter, so here is my one-line take:

Avian Flu MegaShift — Unaffected

Biotech MegaShift — Unaffected

China  MegaShift

UT Starcom (UTSI) — Unaffected, because the Chinese government is accelerating spending on Internet infrastructure to fight their dramatic economic slowdown

Content on Demand MegaShift

Akamai Technologies (AKAM) — Unaffected, no slowdown in Internet traffic growth, particularly video

Burst.com (BRST) — Unaffected, lawsuits and settlements drive the stock

Cisco (CSCO) — Affected, overall capital spending on infrastructure hardware up only 10% to 12% in 2009 and 2010

EMC (EMC) — Affected by lower spending for storage equipment, but 85%-owned VMware should see growth from virtualization software that saves customers money by lowering equipment needs

Harmonic (HLIT) — Unaffected, capital spending on video is going up in 2009

Infinera (INFN) — Unaffected, new network processors from Cisco use their chips, so even if Cisco sales are flat to up a little, Infinera’s sales to Cisco will go up

Intel (INTC) — Lower sales of PCs likely to stall growth in 2009

Motorola (MOT) — Affected by slower growth in cell phone sales, but could be more than offset by successful new smart phones

NetLogic Microsystems (NETL) — Unaffected, spending on Internet infrastructure will be up worldwide in 2009

Omniture (OMTR) — Unaffected, the need to optimize Internet commerce goes up in an economic downturn

QuickLogic (QUIK) — Unaffected, even though consumer electronics weakens, their market share gains will more than offset

Silicon Image (SIMG) — Affected, large market share in flat screen TVs, which will be down in 2009

SanDisk (SNDK) — Could be unaffected if sub-notebooks take off due to lower prices.  Otherwise will be affected by weakness in consumer electronics.

Telkonet (TKO) — Unaffected, energy conservation remains a priority and IBM just put its weight behind broadband over power line

Zhone (ZHNE) — Affected as consumers slow down new DSL connections

New Energy Technology MegaShift — Minor effect from lower oil prices as long as they last, but regulatory requirements for clean power and alarming forecasts for oil production should swamp current price issues.

Robotics MegaShift

iRobot (IRBT) — Affected by squeezed consumer and wind down of Iraq War under President Obama

Security MegaShift

American Science & Engineering (ASEI) — Unaffected as security spending continues around the world

SiRF Technologies (SIRF) — Affected as consumers cut back on products with GPS functions, like cell phones and cars

Nanotech & Materials MegaShift

Integral Technologies (ITKG) — Unaffected as their technologies are designed in to new products

Harris & Harris (TINY) — Unaffected by the economy, but lack of an IPO market depresses their net asset value

WiMAX MegaShift

Airspan (AIRN) — Unaffected as WiMAX rollout continues around the world

Alvarion (ALVR) — Ditto

Proxim Wireless (PRXM) — Ditto

Towerstream (TWER) — Helped as companies look for ways to cut costs

Catching Up On Reports and News

Biotech MegaShift

Amgen (AMGN) held their business update meeting last Friday, and the tone was great.  They have weathered the storm in Aranesp, where they think another 10% to 20% sales drop primarily in Europe will mark the bottom, and they expect denosumab for osteoporosis to be a blockbuster.  They’ll file for approval in the next few weeks, which should give the stock a boost.  Hold both the AMGN January 2009 $70 LEAP call (YAA AN) for my original $20 target — a long shot, I admit, but I think we’ll get a chance to sell this position at much higher prices.  Also hold the January 2010 $40 LEAP call (WAM AH) that is well over my buy limit for the $35 target.  

Electro-Optical Sciences (MELA) will report top-line results of their pivotal clinical trial in the next few weeks.  They complete patient accrual in August, using the MelaFind system to evaluate more than 1,800 suspicious lesions from over 1,300 patients at seven medical centers.  I expect dramatic positive results.  Remember that melanoma caught early is 100% curable, bit if it is not caught until an advanced stage, there is no cure.  It probably is the most dramatic example of a disease where a better diagnostic instrument literally means the difference between life and death.  The stock has been clobbered in this downturn, but with the good news coming so soon I am making MELA a Top Buy, changing the buy limit to $6, and maintaining my $12 target.  

Content on Demand MegaShift

Telkonet (TKO) won a big in-room energy management contract with Columbia Sussex, a developer and manager with 70 hotel and casino properties across the U.S.  TKO has already installed their SmartEnergy system in 1,300 guest rooms in the Rochester Doubletree, Philadelphia Sheraton and St. Maarten Westin, and will do many more before the end of the year.

Meanwhile, the broadband-over-power line technology that is at the heart of the SmartEnergy system got a boost from IBM, which is teaming with International Broadband Electric Communications to bring BPL to rural America.  They plan to deliver high-speed broadband connectivity to millions of people, working with over a dozen electricity cooperatives in seven states: Alabama, Indiana, Maryland, Pennsylvania, Texas, Virginia and Wisconsin.  The first roll-out will serve 340,000 homes, about 86% of which have no DSL or cable access.

The utility line BPL technology does not compete with Telkonet’s in-building BPL technology, but IBM’s endorsement sure won’t hurt.  TKO closed today at a ridiculous 17 cents a share.  I am keeping it as a Top Buy all the way up to $5, and I am not changing my ultimate target: $15.  This company has the technology and management, and the opportunity is here.     

New Energy Technology MegaShift

Polysilicon prices fell about 25% during the past three weeks — dropping from $180 a pound to around $135 a pound, due to a dramatic slowdown in the semiconductor sector. Polysilicon is the major ingredient for making of solar cells, so this is good news for solar companies. 

In addition, scientists at Rensselaer Polytechnic Institute have developed a reflective coating that helps solar panels soak up more sun, no matter what angle it is coming from.  Current solar panels absorb only about two-thirds of available sunlight.  The coated panels harvest 96.2% of available sunlight, a 44% improvement.  That means a coated panel can cost 31% less for the same power output — a significant savings.  This is good news for our holdings in Energy Conversion Devices (ENER) and Canadian Solar (CSIQ).  Buy ENER up to $32 for my $65 target.  Buy CSIQ up to $31 for my $65 target.

Energy Focus (EFOI) reported after the close, with revenues up 11% to $6.4 million and an 11 cent loss compared to 28 cents last year.  While their cost-cutting paid off with positive cash flow in the quarter, they cut their 2008 growth forecast from 100% to 60% to reflect the economic uncertainty.  I’ll find out more on the conference call, but if we assume the swimming pool market won’t come back for a couple of years, the stock still looks very cheap based on commercial and industrial lighting.  EFOI can be bought up to $6 for my $16 target.

Gasco Energy (GSCO) should be able to earn one to two cents a share in the December quarter, compared to a two cent loss last year.  In the March first quarter I think they can do two or three cents compared to a penny a share last year.  For all of 2009 they should about double earnings to 13 cents to 14 cents a share.  Buy GSX up to $3 for my $9 target.

Nanotechnology MegaShift

Harris & Harris (TINY) reported a 21% decline in its net asset value from last quarter, to $4.68 per share. In the shareholder letter, management said: most of the drop “reflects the heightened risk associated with fledgling companies obtaining follow-on investment in the financial and economic environment in which we suddenly find ourselves.”  So they are being conservative in case these companies have trouble getting future rounds of financing.  Yet nanotech is one of the few areas the venture capitalists are still funding, so I doubt there will be anywhere near that amount of real damage.  However, it leaves the stock trading right around net asset value, with no need to pay the usual premium to get in.  Buy TINY up to my reduced limit of $5 for an unchanged $10 target.

Security & Location MegaShift

American Science & Engineering (ASEI) beat both revenue and earnings expectations. Revenuse grew 50% from a year ago to $56.3 million, and earnings hit 83 cents a share. They booked $93.5 million in orders, and end the quarter with a $197 million backlog.  That’s 61% higher than last year.

Although the company still has very unpredictable earnings quarter-to-quarter, there’s no doubt the trend to more security spending will continue through any economic downturn.  The stock jumped over my buy limit, so I am taking it off the Top Buy list, but if there is any significant dip you should  buy ASEI under $59 for my $93 target.

The election and the credit crisis are over — they ended on the same day. Yes, many more houses will go into foreclosure and many more banks will fail, but the interbank lending lock-up that has frozen both the credit markets and the economy is over. We know this because on Tuesday the three-month Libor interbank lending interest rate fell to its lowest level since June, the first time it has been at a pre-credit crisis level since Lehman Brothers announced its bankruptcy on Sept. 15. The overnight Libor rate fell to its lowest level ever, from an all-time high of 6.88% less than a month ago to 0.38% on Tuesday. The Fed’s unprecedented program to flood 13 central banks around the world with unlimited amounts of dollars worked.

I admit that there is still room for further improvement. The “TED spread,” the difference between the 3-month Libor and the 3-month Treasury bill, is a key indicator of investors’ willingness to take risk. It fell from all-time high of 4.63 percentage points in mid-October to 2.22 percentage points on election day, but that’s still above the 1.04 percentage point spread it showed a few days before the Wall Street crisis erupted.

October was the worst month in 21 years for the Dow Jones Industrial Average, even though the last week of the month showed an 11.3% gain, its best weekly performance in 34 years. The S&P 500 climbed 10.5% last week. Although my market read still says it is possible that the next 2,000 points on the Dow are down instead of up, that is becoming an unlikely scenario. The 944 level on the S&P 500 was the breakout level in 2002 for the last bull market. If this very strong attractor/repeller level can hold by recovering quickly from today’s decline, I would say you can close out all hedges and short exchange-traded funds, and assume October 10 marked the bottom. After all, we were up 18% from there at yesterday’s close. However, yesterday and today marked the worst two-day decline since October 10, and this could be a very scary final drop to shake out ALL the bulls before the market finally takes off. If 944 does not hold, the S&P could fall as low as 775 and the Dow would easily give up 2,000 points.

Why would the market not hold at these levels? It’s not fear about the economic agenda of President-elect Obama — that has been baked in to stock prices for at least a month. It is the psychological impact of the terrible economic news that will continue to come out this quarter. From Monday’s news that the Institute for Supply Management manufacturing index fell to 38.9, the lowest reading since September 1982 (26 years), and October auto sales had their worst drop in 25 years, to Tuesday’s grim factory orders ex-transportation report, down a record 3.7% in September after a 3.6% drop in August, to tomorrow’s employment report, which probably will show the largest layoffs in almost six years, making 10 straight months of lost jobs, the news is bad. Economists now think the recession will last through 2009, and I think it will run into 2010.

But at some point, all this bad news will be priced in and stocks will ignore or even go up on bad news, not down. The VIX Fear & Greed Index spent a record 21 days over the 50 level before finally dropping to 47.73 on Election Day, and then popped right over 50 again. Today it closed over 60. Remember that the stock market turns up six months before the economy, and it is an earlier signal than any other leading indicator, any survey, or any technical analysis. That’s why it is so important to pay attention to what the market is telling you, and tune out the gurus, talking heads and surveys that will keep you out of stocks until well after a new uptrend is in place. Right now, the market has a chance to make a very important statement about the 944 level, one way or another. I’ll send you a Flash Alert when I see a real breakout, or a real breakdown.

A Hot New Recommendation

The Bush administration, which took office as social conservatives, is now leaving as conservative socialists. In this quarter alone they will borrow $550 billion to pay for their economic rescue initiatives, which will eventually add $2.6 trillion to the national debt. The industries that did best in the last eight years were oils, pharmaceuticals and defense.

Who loses under an Obama administration? Oils, pharmaceuticals and defense are the obvious candidates. Who wins? Discount retailers, technology, alternative energy and infrastructure rebuilders. Discount retailers are obvious, as consumers remain under great stress for the next three years or so. The Chinese are in a poor position to raise wholesale prices, so Wal-Mart and Costco should continue to do well. Technology wins because:

• President-elect Obama knows how to turn on a computer and read his own email.
• He understands the power of the Internet, which was crucial to his victory.
• He has said he is going to take the technologies that drove his campaign and implement them across the U.S. government to cut costs and boost efficiency.

Alternative energy wins because the “Greening of America” is a major goal of his administration, as well as another way to boost the economy short-term through government spending. Rebuilding the infrastructure–highways, bridges, water and sewer systems–also provides an economic boost.

We have a number of alternative energy investments already, and I expect the less-recognized ones like coal-to-fuel, wavepower and geothermal to be major beneficiaries. So to go along with our Top Buy, US Geothermal (HTM), I want to recommend the premier geothermal company, which has finally fallen to an attractive level.

Buy Ormat Technologies

Ormat Technologies (ORA) is a geothermal plant operator, like US Geothermal, and a manufacturer of geothermal equipment. They also install and service entire geothermal plants, and they were the contractor on reopening US Geothermal’s Raft River project.

To review, geothermal energy costs four to seven cents a kilowatt-hour, which is competitive with oil and windpower, and much cheaper than solar. Of course, geothermal takes a trivial amount of space compared to a solar or wind farm, and the energy is predictable enough to be used for baseload power, unlike solar and wind. California utilities are supposed to generate 20% of their electricity from renewable sources by 2010, and that means baseload power sources are vital. There are no greenhouse gas emissions, and there is 50,000 times more heat energy in the first six miles of the Earth’s crust than in all the planet’s oil and natural gas resources.

Global investment in geothermal was around $3 billion last year, a tiny fraction of the estimated $116 billion funneled into wind and solar. Warren Buffett’s Mid-American Energy Holdings has a subsidiary, CalEnergy Generation, that operates 10 geothermal plants near the Salton Sea in Imperial County, California, and will open three more facilities in the next few years.

Even though there’s plenty of geothermal energy to be extracted quickly using conventional techniques, Google just put up $10 million for research into enhanced geothermal systems that engineer the necessary conditions by pumping water into the Earth’s crust and fracturing the hot rocks below. The hot rock warms the water, and the resulting steam is brought back to the surface to power turbines that create electricity. The water from condensed steam is then pumped back underground. Google is urging the U.S. government, and particularly Obama, to spend big on geothermal R&D. The Department of Energy just announced a $90 million funding opportunity for geothermal research, including $10.5 million for 2008, up to an additional $30 million in 2009 and another $49.5 million in 2010. I expect the Obama administration to at least double those outlays. Geothermal is on the cusp of becoming a hot new investment area regardless of what happens to the economy, and you need to add Ormat, a pure play, to your US Geothermal position to participate.

Ormat designs and builds modular power plants customized to match the full range of geothermal resources, which include everything from high heat content, high-pressure steam fields like The Geysers to low- and medium-heat content, water-dominated sources. They have installed over 900 megawatts of power plants worldwide, with millions of hours of operating history.

Their core technology is the Ormat Energy Converter to use low- and medium-temperature heat sources. It uses an organic fluid in a closed cycle to produce maintenance-free, unattended power in remote locations like oil and gas pipelines, offshore platforms and cellular phone networks. One of their oldest operating plans is on the Alaska Pipeline. They also recover heat for additional power generation with no emissions. The company holds more than 70 technology and systems patents.

They also own some of their own plants totaling around 364 megawatts net, with another 264 megawatts coming online in 2009.

Power generation accounts for 73% of revenues and 81% of operating income. Generation products and installation contracts are the other 27% of revenues and 19% of income. They announced September quarter earnings yesterday, hitting $99.7 million in sales, up 25.5%, and 35 cents a share. Sales were above the $92.9 million estimate, and earnings were a penny short. The stock hardly moved after this morning’s conference call. I think they will earn $1.10 a share this year on $325 million in sales, and $1.50 in 2009 on about $450 million in sales. Over the last five years they have grown earnings at 17.6% compounded, and they should be able to accelerate that to 25% a year during the Obama administration. The forward price/earnings ratio is down to 17X, which is cheap for 25% growth. I want you to buy ORA while it is under $26 for a return to its 52-week high of $58 towards the end of 2009. As a bonus, they pay a dividend of around 20% of net income, now 20 cents a year, which gives you a little yield while you wait.

Reports and News From Our Portfolio Companies

We are swamped with earnings this week, including five holdings today, and I’m still going through conference calls and spreadsheets from last week. Don’t worry, I will get them all analyzed and covered sooner rather than later. The most significant news was from Cisco (CSCO), which fell a bit short of the consensus 42 cents a share pro-forma, reporting 39 cents on $9.83 billion in sales in its October first quarter. But the company said orders weakened as the quarter progressed, and October was down 9% from last year, so they predicted a 5% to 10% revenue drop for the current January quarter. This is the first major tech company to report a quarter that included October, and it was not good news. Analysts were looking for $10.41 billion in the January quarter, so this was quite a shortfall. The stock did not get killed, in part because management reiterated its guidance for 12% to 17% per year growth over the next three to five years. Our 2010 options have plenty of time to recover, especially if the Obama administration moves quickly on their technology spending plans, so continue to buy the Cisco January 2010 LEAP calls (WCY AD) up to $6 for my $12 target.

Biotech MegaShift

eResearch (ERES) reported last week as the Radar Report was going out, and I was concerned that they had guided below consensus for the December fourth quarter. On the conference call, they said that in the June quarter they signed 15 Thorough ECG trials, but one or two would not start in the fourth quarter — after the usual six month delay. They have slid to the first quarter of 2009. They also are booking more Phase III trials than usual, which typically take a little longer to turn into revenue.

In the September quarter, which often is seasonally a bit weak, they booked $43 million in new orders, a record for September but down a bit from March and June. But in the first three quarters this year they have booked $142.1 million, which is $3.4 million more than they booked in all of 2008. They added that the pipeline of potential new contracts is very strong, so they are not accelerating contracts to make their numbers look good.

All in all, it was a good conference call and ERES remains a Top Buy all the way up to $15 for my $30 target.

Geron (GERN) reported an in-line quarter, losing $17.1 million. They have $175 million in cash and no debt. On the conference call, management spent some time on their various oncology programs, which are combination therapies with drugs like Herceptin or paclitaxel/Avastin, but they did not talk about their recent success in getting pancreatic islet-like clusters derived from human stem cells to express pancreatic islet proteins in diabetic mice. The cells responded to high glucose levels and extended the survival of the mice. Although early, this is a high-potential program. Continue to buy GERN up to $9 for my $18 target.

Rochester Medical (ROCM) reported after the close, and the conference call starts in a few minutes. They did $9.5 million in sales, up 12.6% from last year, but a little worse than the $9.7 million consensus. Pro forma earnings per share hit six cents, down 14%, but much better than the two cent estimate. In the press release, management said earnings are deliberately depressed as they continue to make strategic investments in sales and marketing to take advantage of this unique opportunity created by changes in Medicare’s reimbursement rules.
For the year, they reported record revenues of $35.2 million and earned 22 cents a share pro forma, down from 40 cents last year due to the marketing investments. They characterized it as a good year and said 2009 is shaping up to be a good year. I am looking forward to the conference call, to learn more details about sales of both anti-infective and intermittent catheters after the recent Medicare reimbursement changes. ROCM remains a Top Buy all the way up to $20 for my $40 target.

SXC Health Solutions (SXCI) reported $318.1 million in sales, well above the $298.3 million consensus, and 24 cents a share pro forma, beating the estimates by nine cents. They raised their guidance range for the full year to $840 million to $855 million in sales; their prior guidance was $825 million to $875 million. They also raised earnings guidance from 61 cents to 70 cents a share up to 78 cents to 82 cents a share. The integration of their acquisition of National Medical Health Card Systems is going very, very well.

After the end of the quarter, SXC went live in the State of Washington to support prescription drug claims and rebate contract management services for their Medicaid program. During the quarter they won several new contracts including one with the State of South Dakota to support their Medicaid programs. That is the fifth state where SXC is supporting Medicaid programs, and under the Obama administration I think the emphasis on comprehensive yet cost-effective health care for all will feed right into SXC’s strengths. After today’s move up in a down market, SXCI is just barely under my $15 buy limit and is a very timely buy for the $30 target price.

ViroPharma (VPHM) held their promised conference call to discuss the commercialization, patient access and pricing for Cinryze, the recently-approved drug they acquired when they bought Lev Pharmaceuticals. The label allows prophylaxis with the drug in any appropriate adolescent or adult HAE patient, many of whom are on steroids and will switch immediately. ViroPharma has about 200 patients in open label studies that will start paying, plus 350 patients who have opted in to the Cinryze registry. The company has identified the physicians of over 1,500 patients now on steroids, some of whom may also be in the registry. These will be the initial customers.

The formal U.S. commercial launch of Cinryze will be early next year, and they will ship product into their distribution channel in the first week of December. They have already hired 18 of the expected 20 sales people.

They have priced the drug at $1,950 per vial or $3,900 per dose. The label calls for 1.77 doses per week on average, or 92 doses per year. So that is $358,800 per patient per year, times just the 1,700 obvious patients gives an initial revenue stream of $610 million a year. Vancocin will do about $245 million in sales this year. Folks, we have a big winner. I am making VPHM a Top Buy while it is just under my $13 buy limit, and raising the target price by $3 to $28.

China MegaShift

Jamie Dimon, the CEO of JPMorgan, gave a talk to his Hong Kong employees this week and said he does not think Asia can weather the global financial crisis any better than anywhere else. He said that Asian markets will “get worse than you think” and he doesn’t believe the region can avoid the fallout from global problems. This week, China announced that October manufacturing slowed sharply due to export weakness. The government is frantically trying to spur growth, lifting a cap on bank lending and taking numerous other steps, such as cutting interest rates three times in the past six weeks, promising government loans to small businesses and increasing tax rebates to textile exporters.

But this week China’s main stock market index closed at its lowest level in 26 months due to investor unease about the economic outlook. Remember last year, when the government kept trying to slow the economy from its 9% forecasted growth, yet growth kept coming in at double digits? Now they say that the 9% growth in the third quarter, the lowest level in five years, is dangerously slow. Exports, which have been growing 20% a year, are headed for zero growth.

For a government that needs to create jobs for millions of new workers who enter the economy every year, that is a disaster. Going from 20% growth to 10% growth causes a recession as businesses have to burn off inventories all the way back through the product pipeline. Going from 20% to 0% is enough to trigger a depression. Of course, they can spend or distribute their enormous foreign currency holdings to satisfy a public that has come to expect steadily rising incomes, and get through this. But it is going to be very, very tough, and I am glad we are not invested there except for out one remaining stock.

UTStarcom (UTSI) is supposed to report today after the close, but there is no press release yet. The consensus is looking for$182.5 million in sales and a 54 cent loss.

UTSI just won a big contract with BSNL, India’s largest broadband and telecom services company, to build the second phase of a countrywide voice-video-data (VVD) network. UTStarcom deployed 1.3 million broadband subscriber lines during the first phase that began in December 2007, making it India’s leading provider of Internet Protocol TV and broadband infrastructure. The second phase will add 1.1 million more subscribers and, at the same time, speed up the whole network by a factor of 30X. I don’t think India will be hit as hard as China in this downturn, and you should continue to hold UTSI for my $10 target, possibly in a buyout.

Content on Demand MegaShift

Akamai (AKAM) reported last week, and although they beat the consensus and said their newer service offerings were doing very well, management said the environment is getting “increasingly difficult.” On the conference call, they made it clear that they will continue to introduce new services to keep their revenues growing, and they also expect their $800 million in cash to carry them through while smaller, sometimes under funded competitors go broke. They don’t have a lot of exposure to the Johnny-come-lately Web 2.0 social media website that are starting to shut down. AKAM is very cheap and remains a Top Buy all the way up to $20 for my $60 target in 2009.

Harmonic (HLIT) was nicked today by Cisco’s downbeat outlook, even though they serve entirely different markets. There is no weakness is projected spending on video delivery equipment, and it would be very dangerous for any cable, telco or satellite company to cut back while their competitors complete their build-outs. I think Harmonic will grow their top line 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.

NetLogic (NETL) reported last week, increasing revenues 39.1% from last year to $38.3 million with pro forma earnings of 42 cents a share. Cash increased $12.3 million, more than pro forma earnings, to $85.9 million.. They had a record level of design wins, and announced production shipments of their newest knowledge-based processor, which can hit 1.5 billion decisions per second and is optimized for next-generation 100 gigabit per second systems. It is targeted at next generation Internet Protocol TV and advanced mobile wireless networks.

Cisco was 36% of sales, a bit below their expectations due to weakness late in the quarter. This fits with CSCO’s earnings call this morning, but these are old products, not the new stuff. Both Cisco and #2 customer Alcatel (10% of sales) are reducing inventories, so NetLogic’s fourth quarter revenues will be down from the third quarter to about $36.1 million, with pro forma earnings around 37 cents a share.

The company should earn $1.57 this year on $146 million in sales, so the 12.1X price/earnings ratio looks ridiculously low. The problem is that analysts are looking for a flattish 2009–$!60 million in sales and $1.58. I think it is highly unlikely that won’t beat that, but the first half of the year could be indecisive if customers like Cisco are cautious about holding inventory or introducing new products. Most tech companies understand that the best way to deal with an economic slowdown is to introduce compelling new products as fast as you can, and I expect the new 1.5 billion decisions per second processor to power some amazing new entries, including some from Cisco. I am reducing the buy limit on NETL to $23, above today’s close, just because the market is so weak, while keeping the target price at $47.

SanDisk (SNDK) reported a couple of weeks ago. They did $821.5 million in sales, down form $1.04 billion last year as the weakness in flash memory pricing continued. That was above the consensus for $778.1 million. On a pro forma basis they lost 59 cents a share, much worse than the 27 cent loss analysts expected. But the stock went up, in part because the company sold some of its capacity in the Toshiba/SanDisk joint manufacturing venture to Toshiba for $1 billion, and in part because the stock is selling below book value and everyone expects Samsung to come back with a higher acquisition bid.

Regarding that, Samsung put out a trial balloon that maybe they won’t renew their patent licensing agreement with SanDisk, and just fight it out in court. I think this is just a negotiating tactic, and they either will sign up or buy the whole company — probably the latter.

I still expect shipments of sub-notebook computers with solid state memory instead of hard disk drives to take off this quarter, which would firm up flash memory prices. SanDisk would get a heck of a snap-back rally out of that, so continue to buy SNDK up to $15 for my $32 target in an acquisition or based on better memory pricing.

New Energy Technology MegaShift

Energy Focus (EFOI) reported after the close, with revenues up 11% to $6.4 million and an 11 cent loss compared to 28 cents last year. While their cost-cutting paid off with positive cash flow in the quarter, they cut their 2008 growth forecast from 100% to 60% to reflect the economic uncertainty. I’ll find out more on the conference call, but if we assume the swimming pool market won’t come back for a couple of years, the stock still looks very cheap based on commercial and industrial lighting. EFOI can be bought up to $6 for my $16 target.

Gasco Energy (GSCO) reported sales up 202% from last year to a record $9.7 million, thanks to both somewhat higher prices and much higher volumes shipped through the new pipeline. They earned three cents a share from operations and another 14 cents from hedging activities, for a total of 17 cents. They have a lot of production hedged “at attractive rates’ into 2009, even though they are expecting higher gas prices. I have not updated my spreadsheets yet, but it looks like they will be in great shape to produce good earnings in anything from a normal to severe winter. I’m reducing the buy limit on GSX by $1 to $3, while keeping the $9 target. I’ll have the updated numbers in next week’s Radar Report.

US Geothermal (HTM) will report next Wednesday. They should benefit from all the forces listed in the Ormat recommendation above, and HTM remains a Top Buy up to $3 (more than a triple from current levels) for my $6 target.

WiMAX MegaShift

Towerstream (TWER) reported this morning. It was an excellent quarter and a great conference call, and although I know they look ridiculous in this environment, my $6 buy limit and $16 target are right on. Their September fourth quarter was up 65% year-over-year and 15% sequentially to a record $2.7 million. They are benefiting from the economic disarray as potential customers look to save money. Their gross profit margin increased to 64% from 58% in the June quarter, as increased reveneus hit their leveraged business model, which has a very low marginal cost for new customers. In a mature market, they get to 70% to 75% gross margins. Their customer count went up 11% while their customer service expense rose only 1%.

Boston and New York are profitable on an EBITDA basis, and three or four other cities will turn profitable this quarter. They still expect the whole company to be EBITDA positive in the March quarter, and they have $28 million on the balance sheet to start expanding again to more cities, probably Newark or Philadelphia. They’ll also open their call center in Phoenix after they hit positive cash flow.

The recession is letting them be very choosy about hiring new telemarketers, and their new watchword is “Superstars only.” They have their pick of ex-mortgage brokers. With 1,200 customer connections installed, their revenue is predictable and growing, while their cash burn is declining. Customer churn remains very low at under 2%. December quarter revenues should be up 10% or more, a 66% year-over-year increase. TWER remains a Top Buy up to $6 for my $16 target.