And the annus horribilis comes to an end on an upnote. The Dow rose 108 points today while the S&P 500 rose 12. A nice day, but for the year the Dow lost 33.8% before dividends and the S&P fell 38.5%. It was the worst year for stock prices since Herbert Hoover was president, when the Dow Jones Industrial Average dropped an all-time record 52.7% in 1931. This was the third worst year in the 112-year history of the Dow, with 1907′s 37.7% loss in the #2 position. For the S&P 500, it was the worst year ever since that index was created in 1957. Annus horribilis maximus, I’d say.

The conventional forecast is for a bad first quarter in the economy, a weak first half, and an improving second half. Therefore, the conventional wisdom is looking for a bad first half for stocks, and a better second half. I don’t know why people keep thinking that the stock market is a coincident indicator that moves up and down with the economy. It’s not. It is a leading indicator — actually, the best leading indicator of all — and moves up and down well in advance of the economic news. By the time the surveys, polls, CEOs and talking heads are giving the all-clear signal, the stock market will have moved up 20% to 30% and be well into new bull market territory. Happens every time.

The problem this time is that I think the consensus outlook is wrong. I agree that the first half will be weak, but I think the weakness in real terms will continue through 2009 and well into 2010. I underlined “in real terms” because at some point monetary inflation is going to overwhelm the three major deflationary forces, the dollar will collapse, and in nominal terms the stock market will go up even as the economy flounders. It’s very hard to predict when that point will come, but my best guess is that it won’t come before the middle of 2010. However, I could be wrong…maybe the Chinese or the Japanese will realize they are about to be taken for a ride, and start dumping their dollar reserves sooner. I watch for this every day, and I’ll let you know the moment I see it start happening.

Why should you care? Because if we were headed for deflation/depression, as so many think, you would want to own safe bonds and cash. You would want to be out of debt, real estate, stocks, commodities, precious metals — anything that has a price, because prices will be heading down.

But if we are headed for sky-high inflation, as I believe, the last things you want to own are bonds and cash. They lose real value minute by minute in a hyperinflation environment. You want to be in debt if it is fixed-rate debt that you can repay with cheap dollars in the future. Real estate, stocks, commodities and precious metals all soar in price as inflation heats up. I understand why so many believe a big deflation is coming. The three major deflationary forces are:

1. Demographics — the aging of the baby boomers
2. The Credit Collapse — not just the current pain, but the permanent change in consumers’ attitudes going forward
3. Technology — the whole world is now riding Moore’s Law of ever-falling real prices

The first baby boomer hits 65 in April 2009, and if the past is any guide, retiring boomers will be spending much less than they have been. Less spending in retirement is not the problem, it is the sheer number of boomers that is the problem. From birth to now, every stage of the boomers’ lives has had an outsized impact on society and the economy. The massive economic growth they powered in their 30s, 40s and 50s is about to turn into a massive economic drag. That’s deflationary.

The credit collapse is obvious to all. Even though Hank Paulson seems to think the cure is the “hair of the dog,” it looks like his prescription for easier credit and more consumption is falling on deaf ears of both sellers and buyers. Banks are making it tough to get a loan at any price, and consumers seem more interested in paying down credit cards and building a little rainy day fund than taking on more debilitation debt. The debit card is the new credit card. That’s deflationary, too.

The Revenge of the New Economy

After the collapse of the dot.com stocks, the fuddy-duddies and Establishment power brokers who never understood technology took great delight in skewering anyone who had ever believed in the New Economy. They confused the financial games in the stock market with the worldwide revolution in the economy, business, the way people worked, lived and entertained themselves. One famous commentator specifically named George Gilder and yours truly as wrong-wrong-wrong. Then he sent his daily newsletter to his 300,000 subscribers. Did he print 300,000 copies every day? Put postage on 300,000 envelopes and mail them out? And do it all for free? No, no and yes. Of course, he just pushed a button and sent an email to 300,000 people every day for virtually no charge, saying he sure didn’t see any so-called New Economy, harrumph, harrumph.

Well, maybe now he sees it. We are living in the New Economy, and learning that it can be rough. Companies use the Internet to manage the design and production process worldwide, outsourcing every step to the least expensive provider that hits the quality standards. Then they use the Internet again to build demand worldwide, provide shipment tracking, customer service, technical support, customer newsletters, follow-on marketing — you name it. The good result: Lower prices (deflation), faster change, improving living standards in the less developed countries and a higher quality customer experience. The bad result: Hollowing out of U.S. manufacturing, failures of U.S. retailers and mall operators, bankruptcies of companies that can’t keep up.

New Economy that, unbelievers!

The three deflationary forces I spoke about are ripping through the U.S. economy, with varying degrees of fallout on the UK, Europe, the CRIB countries (China, Russia, India, Brazil) and the rest of the world. Left to themselves, they would force a quick, brutal deflationary adjustment to the New Economy realities. But they won’t be left to themselves, because standing in their way is the arch-enemy of deflation and the Great Depression, Fed Chairman Ben Bernanke. To be fair, the rest of the Fed has swallowed the same anti-deflation line. As Bernanke famously said to Milton Friedman about the Great Depression: “You were right. We did it. But we won’t do it again.”

Nope, he won’t. He’ll do something much worse. He’ll try to stop deflation by printing money, and the resulting hyperinflation will be very painful for any debt holder, anyone on a fixed income, and any country holding a lot of U.S. dollars. Then it will end in the Greatest Depression, anyway, much worse than the 1929-1932 experience.

All this is the topic of a book I am finishing now. The takeaway is that there should be a very strong stock market rally dead ahead, which probably already started, as the market discounts the consensus view for a recovery in the second half of 2009, fed by enthusiasm over the Obama administration’s new spending programs. We’ll know the rally is real when the S&P 500 breaks out of the 850 to 910 range we’ve been consolidating in for three months since the initial bottom on October 6, and today’s action sure looked like the beginning of that breakout. Investors have built up an $8.85 trillion cash hoard, equal to about 75% of the market value of all U.S. public companies. That’s the highest ratio since 1990, and from the eight previous peaks in the cash/market value ratio, the S&P 500 averaged a 24% gain over the next six months. So I think there is still enough time and sideline cash to get the S&P up into the 1250 to 1550 range in the first half of 2009. After that, though, I expect the next and largest leg down of the bear market, until finally Bernanke prints enough money to unbottle the inflation genie and nominal stock prices take off in a frantic hyperinflation.

The good news for us is that we can and will profit from all three deflationary forces. Retiring baby boomers means a dramatic increase in health care spending, which is terrific news for the biotech and medical device companies in our portfolio. With roughly 25% of the health care dollar wasted on pushing paper around or failed drug trials, there are many other opportunities for new companies to create a big, fast-growing business even in a bear market.

The credit collapse means people will be spending less, staying home, and finding their entertainment in new ways. Consumer electronics prices fall every year thanks to Moore’s Law, and engineers know how to keep that downward-sloping curve going until at least 2020. Again, opportunities abound for companies that develop products to meet these new customer needs.

The New Economy, driven by technology, will continue to change all the rules about manufacturing, selling and supporting products. We own stocks of companies that will take advantage of the new opportunities to produce real growth while the rest of the world is shrinking. Remember, tech company managements are used to seeing prices fall 25% a year. They’ve been growing companies in a deflationary pricing environment for 50 years! Deflation may be a harsh wake-up call for GM and Ford, but it’s business as usual for Hewlett-Packard and Intel.

We’ll also profit from the hyperinflation to follow, but that’s the topic of another Radar Report and a follow-on book. For now, I would say don’t be an optimist or a pessimist — BE A REALIST! That plus a good dose of common sense is what will get you through the next several dangerous years. There is not another baby boomer demographic coming, and there won’t be another credit expansion to drive up GDP for quite some time. We can’t correct 16 years of excesses in a normal, 16-month bear market. Without more appropriate Fed and fiscal policy, the U.S. may permanently lose its world leadership status to China, just as the Great Depression marked the end of British domination as the torch passed to the U.S. Unless the Obama administration does a 180o, the monetary and fiscal policy of “no Great Depression at any cost” will lead directly to hyperinflation, a dollar collapse, and the Greatest Depression any of us will ever see.

Yet we will come out of even that worst case invested in strong companies generating real profits. England didn’t cease to exist as a second-class power after WWII, it was just that their new winners were entirely different from the old blue chips. The U.S. has an entrepreneurial spirit, great universities, excellent scientists (although not enough of them), a strong venture capital tradition and experienced technology managers. We will survive as a country, and prevail as technology investors — and more.

Could You Make Money If You Knew Where The Next Bubble Will Be?

There was a bumper sticker around Silicon Valley in 2003/2004 that said: “Lord, Just One More Bubble.” Well, they got it. Trouble was, those who benefited from the dot.com bubble and then went down the tubes mostly missed the real estate bubble. Those who played the flipping game in real estate mostly didn’t get out in time. Instead, the dot.com bubble ruined the career and retirement plans of one group of folks, while the next bubble in real estate took out an entirely different group when it popped. Then we had the oil price bubble, complete with obviously manipulated prices on the New York Mercantile Exchange. It popped and oil fell 75%, but the damage seemed to be limited to the big dogs like Boone Pickens and those who bought Canadian energy royalty trusts for the yield.

So what if I could tell you what the next bubble is? Would you use that information to make a fortune? Would you get out in time, or even short the bubble as it popped?

Good, because believe it or not, the next bubble is already here, right now. It is caused by — who else but the masters of bubblemania?–the Fed. And it is about to pop. Will you profit? I am going to expand the coverage of New World Investor somewhat to include a few non-tech investments that will be huge winners in the new financial and economic world we have entered. That’s what I meant by “prevail as technology investors — and more.” This is a “get ready” introduction to making money as the next Fed-caused bubble pops, ruining many more companies, hedge funds and investors.

If I didn’t label the chart below, would you guess it is Amazon.com from the 1999 Internet bubble, or an exchange-traded fund invested in Treasury bonds?

Source: StockCharts.com

Yes, it is Federal government debt where the next Fed-caused disaster lies. As you know, bond prices move in the opposite direction from bond yields. With the Fed cutting short-term rates essentially to 0%, and the inflationary impact of their out-of-control printing presses still in the future, the entire yield curve has shifted much, much lower. Bonds have soared, as Treasurys of all maturities returned 14.9% this year, the most since 1995 and the first double-digit year since 2002. But what’s next?

The Fed has embarked on a new, dangerous strategy: “Quantitative easing.” That means printing lots and lots of money, counting on the money supply rather than credit easing to kickstart the economy.

Panicked investors have already driven the yield on the 20 year Treasury bond down to 2.20%, and on the 30-year bond down to 2.65%, both around historic lows. Yet the Fed says they may start buying 10 year notes and 30 year bonds to continue to drive down rates. That’s why I am not pulling the trigger today on my recommendation to make a fortune when the Bond Bubble pops. The Fed is going to take that already-extended bubble chart above and blow even more air into it, making the inevitable pop even worse. Either investors are going to find alternatives to such mangy returns or the dollar is going to drop so far that imported inflation takes off. Either way, the pop is coming.

When it hits, we will buy another exchange-traded fund, the Proshares UltraShort Lehman 20+ Year Treasury (TBT), which goes up twice as fast as the TLT goes down. As you can imagine, the TBT chart is a disaster:

Source: StockCharts.com

Volume has exploded in the TBT during December because investors are trying to pick the bond market’s top. That’s another argument in favor of waiting, because any announcement that the Fed is buying long-term bonds would start a sharp sell-off in the TBT as these new speculators bail out. But when this bubble pops, it is going to make the subprime mess look like kid stuff.

2009 Forecasts

I’ve already given you my main overview of 2009, so here is a short list of a few specifics:

• Personal computer sales will fall about 7% to 10%. Laptops will be flat thanks to the new netbooks, but desktops will be very weak, even in Asia
• Cellphone sales will be flat to down about 5%, with the best results at the extremes — high-end smartphones and entry-level, cheap handsets
• Semiconductor sales will be down 5%, including DRAM down 15%
• The S&P 500 earnings will come in around $50, which already is discounted in the market. Yes, I know the analysts have only cut to $70 at this point, but no one believes them. If $50 is wrong, it will probably be too high.
• March quarter earnings will be terrible, but that is already discounted in stock prices. Unfortunately, the June quarter will be worse, and that is not discounted yet.
• There will be far more bankruptcies in 2009 than in 2008, with many household names going under. At the San Francisco Money Show I said GM would be bankrupt by the end of the year. I didn’t count on the Feds loaning them $15 billion (GM plus GMAC) when the entire market capitalization of the company is just over $2 billion. GM can now survive until the end of March, so Chrysler will go first. Chrysler will be just the first of hundreds of leveraged buyouts that will not be able to make their debt payments, and will go bust. Interestingly, those that can survive this period due to better interest rate coverage or longer debt maturity schedules will be huge winners in the coming hyperinflation.
• Commercial real estate, especially retail malls, often is financed with short debt maturities and/or adjustable rates. Either way, the whole sector is in big trouble in 2009. Is the American taxpayer willing to bail out landlords? Probably not.
• Here’s a shocker: China’s GDP will decline in the first half of 2009 and show no growth for the year as a whole. Here’s a second shocker: They will not get back to double digit growth ever. But sometime after 2011 they will recover to 5% growth for a number of years, which is a heck of a lot better than the U.S. or Europe will see. Power generation in economies where manufacturing is a high percentage of GDP correlates well with GDP growth, and China’s power generation declined more than 8% in November.
• The Alt-A mortgage resets in 2009 are about five times the size of the subprime problem, and now we are in an environment of falling house prices with 10% of all mortgages already seriously delinquent or in the foreclosure process. Another trillion dollars in losses will hit lenders in 2009.
• Even during the worst of this mess, some areas will do well. Biotech companies with enough cash or deep-pocket partners will continue to develop great new drugs, especially in personalized medicine. Companies will move to cloud computing to save money. Video chat will finally take off, first using PC and living room TVs, and then on cellphones. I’ve already mentioned netbooks picking up most of the slack as desktops and traditional laptops take a hit in 2009. WiMAX will continue to spread like crazy, especially in South America, Russia, China, India, Africa and Asia. Electric cars will finally become a reasonable prospect, thanks to the Tesla and the Chevrolet Volt. (The record-setting electric Taurus I ran at the Bonneville Salt Flats has a higher top speed higher than the Tesla, heh heh, although their 0-60 MPH time is better.)
• Blue-ray DVD player prices will fall well under $200, and become the hot holiday gift for 2009.
• Apple will have real competition for the iPhone for the first time. Steve Jobs will not be running the company by the end of 2009, but Apple will continue to do relatively well as they push sales of the iPhone around the world.
• Yahoo will be dismantled and sold in 2009.
• Outsourcing will continue to grow about 5% a year as U.S. companies look for even more ways to cut costs.
• Security software sales will increase to match the increase in crime that occurs during every recession. Microsoft will offer free consumer security software in the second half of 2009 to try to keep their user base on board for Windows 7, due to replace the troubled Vista operating system. But customers will increasingly choose Firefox over Internet Explorer for security reasons, and Open Office over Microsoft Office to cut costs.
• The first tech-savvy President in U.S. history will start the government on the path to a unified, citizen-centric database to cut costs and increase accountability.

Taking my own advice, I am not optimistic or pessimistic about 2009 — I am trying to be balanced and realistic. We are invested in many great companies doing great things, even though their stock prices are temporarily down. Those who introduce new products and show revenue and earnings growth in 2009, or position themselves to take advantage of the new Administration’s priorities, will shine brightly against a background of recession, ongoing credit problems, bankruptcies and poor earnings. When that $8.85 trillion comes off the sidelines, a disproportionate share of it will flow to the companies and industries that are doing well in a tough environment. That’s what the New World Investor portfolio is all about.

Have a happy and safe New Year’s holiday, and remember that we will not only survive but prevail together in 2009 and beyond.

Back on November 20 and 21, just before Thanksgiving week, the S&P 500 completed a sharp plunge with a base in the 750 area. After a dramatic five-day rally, it tested 820 a few times for about a week, and then jumped again. Since then, it’s been testing 850, with even last Tuesday’s big jump just part of the consolidation pattern, building up energy for the next move. I still think the next move will be up, partly because of the stair-step pattern of the interim energy levels that are being tested. If that’s right, we should see a big up day on the order of 50 to 60 S&P points, followed by another 100 to 150 points over the following several days. There may not be enough trading days left in this year to unleash the pent-up energy, but the first five days of January often provide some fireworks. In either case, we should be close to the next phase of this upswing.

One of the factors that I find encouraging is the widespread bearishness among my fellow newsletter writers. Investor’s Intelligence tracks newsletter sentiment, and the percentage of bulls is at a multi-decade low:

Sources: Data from Investor’s Intelligence, chart from SentimentTrader.com

Newsletter writers are almost always completely wrong at the turns, with bullishness hitting a peak as the market peaks, and bearishness ruling as the market bottoms. In contrast, the percentage of insiders buying their company’s stock is at an all-time high. These usually-correct investors have been taking advantage of the dramatic price declines in their stocks across the board. The only thing I don’t like about this market is the steady decline in the VIX Fear & Greed Index, which has slipped from 81.48 on November 20 to 45 at today’s close. We may need one more, scary trip down to 850 from higher levels, or 750 from current levels, to get the VIX back up. With a full load of negative sentiment, my interim S&P 500 targets of 1015 or 1065 will be easy to attain. That move would be compatible with either a new bull market leg up or a bear market rally, which makes it very likely to happen. After that, we’ll let the market tell us what to do…but my gut still says up and away to new highs by April. We shall see.

There isn’t a ton of news in this holiday-shortened week, but there are some interesting developments. I’ll also tell you a way to lock in the current low price of gasoline for a year or so.

Avian Flu MegaShift

BioCryst Pharmaceuticals (BCRX) said interim data showed Forodesine reduced cancerous white blood cells in five of 13 leukemia patients in an ongoing Phase II clinical trial. These patients with chronic lymphocytic leukemia (CLL) had failed previous therapies.  There were no partial or complete responses as a result of lowering the malignant cells.  The dosage was 200 milligrams once a day, and was well-tolerated.

In a parallel study in healthy volunteers, dosing 200 milligrams twice a day, demonstrated substantially increased drug exposure and pharmacodynamic effect, with no negative side effects. So BioCryst will continue the Phase II study in CLL patients with two daily doses of 200 milligrams each, looking for partial or complete responses.

Meanwhile, peramivir may come out of the clinic just in time. The Center for Disease Control (CDC) says the common H1N1 strain of influenza circulating in the United States this winter has mutated to become resistant to Tamiflu, the most popular drug used to treat it. So far, the resistant strain has turned up in Hawaii, Massachusetts and Texas—the states with the most flu cases. BCRX remains a buy up to $3 for my $30 target.

Biotech MegaShift

Amgen (AMGN) submitted denosumab to the FDA for approval. The indications are:

• Treatment and prevention of postmenopausal osteoporosis in women;
• Treatment and prevention of bone loss in women undergoing hormone ablation for breast cancer;
• Treatment and prevention of bone loss in men undergoing hormone ablation for prostate cancer.

The submission includes data from six Phase III trials involving more than 11,000 patients. I expect approval in late 2009, with introduction in the March 2010 quarter. The Amgen January 2009 $70 LEAP calls (YAA AN) remain a hold, although they are likely to expire worthless and can be used for a tax loss if you need one by selling now. The January 2010 $40 LEAP calls (WAM AH), where we have a substantial profit, are a hold for my $35 target.

Rochester Medical (ROCM) introduced their new Magic3 intermittent urinary catheters. Other catheters are made with a single layer of latex or, in Rochester’s case, silicone. They have to be rigid enough to insert, which can make them painful to use and are subject to kinking that cuts off the flow of urine. The Magic3 is made of three layers: an outer layer of nano-smooth soft silicone to reduce insertion trauma, a middle layer of firmer silicone for quick, simple insertion, and an inner layer designed to resist kinking. The inner layer also uses the hydrophobic (water-repelling) characteristics of silicone to enhance urine flow. Magic3 comes in male (16"), female (6"), and pediatric (10") lengths and in a wide range of diameters. Some versions have the antimicrobial technology to dramatically reduce infections.

Medicare’s change to reimbursing for 600 catheters a month per person instead of four means healthcare providers no longer sterilize and reuse catheters—they have become a disposable item. Medicare’s other rules change to end reimbursing hospitals for treating hospital-caused infections, 40% of which come from urinary catheters, will drive demand for antimicrobial catheters. Rochester is in the sweet spot for both of these regulatory changes, and 2009 is going to be a wonderful year for them. ROCM is a Top Buy up to $20 for my $40 target.

Content on Demand MegaShift

The pattern of pricing and sales during the holiday season indicates there will be too much inventory on the shelves even after the post-holiday sales. That’s confirmed by the plunge in Chinese exports in November, when retailers panicked and slashed their reorder schedules for December delivery. It is now widely believed that cell phone and personal computer sales will be down in 2009 from 2008, and I wouldn’t argue with that. The Consumer Electronics Show in Las Vegas the first week of January is going to be its most subdued ever.

However, the negativity can go too far. The market research firm iSuppli now projects down sales for flat-panel TV sets in 2009, the first ever down year, as a result of the inventory glut. They are forecasting $21.8 billion in sales, a 10.7% drop from 2008. If you talk to a lot of people, you will find an amazing number who do not know that the analog TV signal will be turned off on February 16, 2009. People may have their $40 coupon to buy a converter box, but guess what—there aren’t any converter boxes in stock. I think the yelling on February 17 is going to be impressive, followed by a quick trip to the mall to buy a flat panel digital TV.

However, even if it is a flat year instead of a down year, TV and all other high-end consumer electronics are in for a rough ride. Last Thursday after the close, Silicon Image (SIMG) lowered its December fourth-quarter revenue outlook from $68 million to $69 million to $56 million to $58 million. Analysts were looking for $67.8 million. They cited weakness in consumer electronics sales due to the economic turmoil, but surprised everyone with a relatively positive outlook for the March quarter. They are expecting sequential growth in revenues due to their customers introducing and shipping new products. Instead of plunging, the stock was only off a few cents the next day. Management also confirmed that they will take a one-time restructuring charge of $4 million to $5 million related to the job cuts announced earlier this month. SIMG can be bought up to $8 for my $16 target as their new product roll-out continues.

QuickLogic (QUIK), though, will not be impacted by the overall weakness. Their Customer- Specific Standard Processor (CSSP) solutions make even more sense in a weak market, where manufacturers need to both cut costs and segment the market with more and more versions of a basic product, each with a slightly different feature set. In 2009, the winners will be those who understand the customer’s problem and then provide a very close match in features to solve the problem, without adding a lot of unnecessary bells and whistles that only drive up the retail price.

QUIK is in even better shape with their Visual Enhancement Engine (VEE) LCD backlighting solution for high end-cell phones and smart phones. Manufacturers who adopt this chipset can brag about higher quality displays in bright light, including video, while increasing battery life. Essentially, every phone manufacturer has to offer these capabilities, or the free market will decimate their sales. QUIK will grow VEE revenues rapidly in 2009 even if overall cell phone sales are declining. QUIK is rated a Top Buy up to $4 for my $8 target.

Harmonic (HLIT) also is not impacted by weakness in consumer electronics. To the extent people start staying home and watching more TV for cheap entertainment, Harmonic benefits. This morning they announced the acquisition of Scopus Video Networks (SCOP) for $5.62 a share or $51 million net of Scopus’ cash. Scopus is an Israeli-based global provider of digital video networking solutions, with a product line that fits well at the end of Harmonic’s digital video broadcast and distribution equipment.  SCOP had $55.4 million in sales through the September quarter, growing 35% from the 2007 period. Harmonic will cut $8 million to $10 million in overlapping costs, and the acquisition will add to 2009 pro forma earnings. It looks like an excellent fit. HLIT remains a Top Buy up to $10 for my $18 target.

New Energy Technology MegaShift—Protect Yourself from Future Higher Gas Prices

With oil tumbling under $38 a barrel this morning on more news of economic weakness (surprise, surprise), it’s easy to think the oil crisis is over. Not so, and I’ve noticed that the used-car prices for big SUVs have not recovered a bit. Everyone focuses on OPEC and their purported two million barrel a day supply cut, but they’ve forgotten about the demand side from China and India. The Chinese economy has slowed way down, from 11% growth to probably 4% or 5%, yet their demand for oil is still growing in double digits. India has not slowed down much, as it is more of a service economy (software technical support, call centers, etc.) than a manufactured goods exports economy like China. India also is posting double-digit growth in oil demand.

I think higher oil and gasoline prices are baked in for the next few years. Did you know there’s a way to protect yourself? Say you drive 16,000 miles a year on average, and your car gets 24 miles to the gallon. At $1.90 a gallon, you will burn 667 gallons of gas in a year, which will cost you $1,267 at $1.90 a gallon. OPEC is trying to get the price of oil up at least 75% to $70 a barrel. You can protect yourself by investing $1,267 in an exchange-traded fund, the United States Gasoline Fund (UGA). It is quite volatile, down 73 cents today to $17.25 on the weakness in oil prices, but it tracks gas prices very well. If gasoline continues to go down, you will lose money on UGA but spend less at the pump, essentially locking in the current price. The payoff comes when oil and gasoline prices shoot back up because your UGA profits will cover your extra outlays to fill ‘er up.

Ocean Power Technologies (OPTT) signed a deal with Leighton Contractors to develop wave power projects off the east and south coasts of Australia. Leighton is a huge, 50-year-old infrastructure builder in Australia, with over 9,000 employees. It’s a sweet deal and a model for OPTT’s plan to form alliances with strategic partners in key areas all over the world. Leighton will pay OPTT to identify potential project sites and assess their commercial prospects. Then Leighton will do the heavy lifting: get approvals, negotiate power purchase agreements, structure project financing, and oversee building and operating the power stations. Of course, Leighton will use Ocean Power’s PowerBuoy wave power stations. I expect literally dozens of these deals over the next five years, because OPTT simply has the best technology. Buy OPTT up to $20 for my $40 target.

Plug Power (PLUG) will cut 90 employees to reduce the cash burn and breakeven point. It’s a sensible move in this environment, even though they have a ton of cash. PLUG remains a buy up to $4 for my $10 target.

*   *   *   *   *

Next week’s Radar Report will arrive on Wednesday, December 31, with my 2009 technology and tech stock market outlook. Whether you celebrate the Winter Solstice, Christmas, Hanukkah, Las Posadas, Kwanzaa, or any other special event of the season, have a safe and merry holiday. Focus on the good things in your life and remember that even if the economy gets much worse and this downturn lasts much longer than even I expect, it won’t last forever and we can all come out of it richer and wiser if we learn and apply the lessons it has to teach.

HAPPY HOLIDAYS!

I don’t get it. Anyone involved in technology stocks since the early 1980s knows who Bernie Madoff is, and has probably listened to him talk or met him. He was a very bright, very nice guy. He managed to live a lie for more than 30 years, funding a lavish lifestyle that included an upper East Side full-floor apartment, the Hamptons in the summer and Palm Beach in the winter, and generous philanthropy. Now, at the age of 70, he is virtually certain to spend the rest of his life in jail while his wife of 40 years faces life-long friends who her husband has impoverished.

But that’s not what I don’t get. There always seems to be one or two of these guys around, until they blow up. Of course, $50 billion is quite a blow-up. But you have to remember, that is the total of the fake values Bernie was reporting. If you give someone $100,000 to invest, and they tell you they are compounding it at 100% a year, after five years your account shows $3.2 million. Then it is revealed that the whole thing was a Ponzi scheme. Did you “lose” $3.2 million? Or $100,000? Just $410 million would compound to $50 billion over 30 years, assuming he “earned” 18% a year. (He claimed 1% to 1.5% per month.) Of course, he didn’t have all the money for all 30 years. Some heroic assumptions and quick spreadsheet work suggests that Madoff was entrusted with as little as $10 billion at cost, with the other $40 billion coming from his imaginary returns. When you see a fund of funds like Fairfield Greenwich Group say that they had $7.5 billion invested with Bernie Madoff, that’s at the last reported account level, not at cost. So $50 billion is a breathtaking number, and Madoff certainly had help just in creating the fake paper trail, but this still isn’t what stuns me.

What I don’t get is how the SEC could possibly have missed this one. Apparently, they never audited his asset management company. Initially, I thought he must have paid off an SEC auditor, but now I think he paid off whoever schedules the audits. The SEC did examine his brokerage firm in 1999 and 2004, but I don’t see how that would have uncovered duplicity at the management company. One of the SEC examiner/attorneys in those reviews married Madoff’s niece last year, but that smells like a red herring of little real importance. The key question is why there was no scheduled audit of the management company.

When I bought three mutual funds in the late 1990s, the SEC came in for an audit of both the purchase transaction and the way I intended to manage them in relation to my investment newsletters. A few years later, they showed up for our periodic audit and spent a week going through all of our records, including relating every trade in the funds to every issue of the newsletter. They also examined every account record in our private accounts management business. A couple of years after that they audited the parent mutual fund company, Monterey Mutual Funds in Santa Monica, for about three weeks. That included a couple of days focused on us.

Every registered investment advisor and registered investment company expects regular audits from the SEC. They can “pop audit” anytime. We all carefully maintain records of every decision, trade, accounting entry, financial statement, etc. The SEC carefully examines them. They compare our records to the securities custodian’s records. They look at the shareholder custodian records for the mutual funds, and for individual accounts they want to see everything in the folder, including proof that the account holder is accredited, that all the account opening documents are properly signed, and that accurate financial records exist for each account. Again, they will look for auditor certifications, check company records against bank records, compare manager records to account custodian records, and so on. I had a superb trader/compliance guy who kept us on the straight and narrow, but even so these audits were grueling.

So how did Madoff get away with a Ponzi scheme for so much longer than anyone else? His separate brokerage firm, run by his sons, probably acted as custodian for the management company accounts. An SEC audit team would merely have had to take Madoff’s management company records down two floors in the same building to discover that the assets listed in the records did not exist in the actual account. Madoff used an accounting firm with three employees, one a receptionist, one a 78 year old retiree in Florida, and one who took Madoff’s payoff and looked the other way. All the SEC had to do was visit his 13′ x 18′ office once and demand to see the audit papers, offer him immunity from prosecution, and they would have had the whole story. It is not astonishing to me that even a “good guy” like Bernie Madoff could perpetrate a Ponzi scheme. Given how long it ran, I guess it isn’t even surprising it got to $50 billion — an excellent, if unfortunate, demonstration of the power of compound growth. But it is completely baffling as to how he got away with it for so long. As I said, I don’t get it. Heads will roll at the SEC, and I think a few people will go to jail in addition to Bernie.

There also could be a lasting U.S. market impact. Europeans and Far Easters just spent a year writing down U.S. housing-related assets and derivatives due to what they see as lax regulation of the U.S. mortgage market. Iceland lost all its banks to nationalization, and that country’s stock market fell 77% in a single day in October and is down 90% year to date — thank you, USA financial market regulators.

Now comes Madoff, with billions more to be written off at the end of this annum horribilis. Nicola Horlick, the manager of Bramdean Alternatives, which had 9% of their funds invested with Madoff, said: “I think now it is very difficult for people to invest in things that are meant to be regulated in America, because they have fallen down on the job. All through the credit crunch this has been apparent. This is the biggest financial scandal, probably, in the history of the markets.”

Warren Buffet said you have to wait for the tide to go out to find out who’s swimming naked. Well, it was Bernie. Fortunately, the Fed upstaged the whole story on Tuesday by cutting the funds rate to a range of zero to one-quarter percent, when it was already trading at 0.13%. I expect Bernanke to cut the discount rate to a negative number, probably 50 basis points (half a percent) to start. The big rally after the Fed cut looks like further progress on what should turn into an explosive rally as the end of the year approaches, or the first few days of January. I still think our stocks will lead, including the New Energy Technology MegaShift stocks as they follow oil back up.

Five Top Quality Tech Companies At Giveaway Prices

In the last issue I covered five penny stocks with tremendous percentage return potential. In your portfolio, it is wise to balance the home run, 10-bagger type stocks with some larger, more conservative companies that can provide your core growth. I count 16 of these stocks in our portfolio, and carving that down to just five positions is hard. I decided to eliminate the three solar stocks for now, as they are depressed by the low price of oil. Of course, Canadian Solar (CSIQ), Energy Conversion Devices (ENER) and SunTech Power (STP) are selling below their buy limits and can all be bought today. I also left out FuelCell Energy (FCEL) even though it is a Top Buy, and Ocean Power Technology (OPTT), not because the price of oil is impacting them, but because Wall Street thinks the price of oil is impacting them.

I left out Top Buy-rated SanDisk (SNDK) because while I think the success of netbook computers will improve flash memory prices, it hasn’t quite happened yet. Because a buyout offer could come anytime, I would hold or buy more on any trade under the limit. Two other Top Buys, Alvarion (ALVR) and Harmonic (HLIT) didn’t make the list because Wall Street is worried about any company exposed to capital spending cutbacks, even though there are none to speak of in WiMAX or video. Infinera (INFN) and Omniture (OMTR) have the same question overhanging their heads: Will the capital budget be there to pay for this stuff, in this case networking equipment and website analytics software, respectively. Harris & Harris (TINY) needs a better initial public offering (IPO) market to get investors excited.

The Favored Five

So what made the cut? Companies that do well in unsettled times, like healthcare, took three spots: eResearch (ERES), Rochester Medical (ROCM) and ViroPharma (VPHM). The explosion of video over the Internet combined with an implosion in its stock price got Akamai (AKAM) on the list. The impending demise of the incandescent light bulb gives a remarkable opportunity for Cree (CREE) to clobber the nasty compact fluorescent bulbs (CFC) and dominate the lighting business.

eResearch(ERES) is showing remarkable backlog growth as pharmaceutical and biotech companies all over the world comply with the new regulations to test the impact of new drugs on heart function, even if a drug is targeting something other than heart problems. With quarterly orders well above revenues, future growth is locked in. ERES closed today at only $6.02, and is a Top Buy up to $15 for my $30 target.

Rochester Medical (ROCM) is depressed because they have deliberately increased marketing to take advantage of their two huge opportunities, sacrificing short-term profits. Everyone wails and moans about how short-term oriented corporate managers are, because they want to get their stocks up and cash in their options. Here’s a company where management has much of their net worth in the stock, yet they are making the right long-term decision for all the shareholders — and no one will buy their stock! Medicare has changed the rules on intermittent catheters in the long-term care or home setting to reimburse for 600 a month instead of four, which means the catheters are now a disposable item. Rochester’s silicone-based catheters are less likely to cause irritation and allergic reactions.

In the hospital and long-term care setting, the company’s anti-microbial catheters dramatically reduce infections. Medicare stopped reimbursing hospitals for treating hospital-caused infections on October 1. Rochester is going to have a terrific 2009. ROCM closed today at $13.92, and is a Top Buy up to $20 for my $40 target.

ViroPharma (VPHM) is my third healthcare company that will grow dramatically in 2009 regardless of what the economy does. Their recent acquisition of Lev Pharmaceuticals gave them Cinryze, now approved to treat for acute attacks of hereditary angioedema. This a rare disease that causes recurrent, unpredictable, debilitating, and potentially life threatening attacks of inflammation affecting the larynx (patients can suffocate), abdomen, face, extremities and urogenital tract. The 4,600 patients with hereditary angioedema average about 20 to 100 days of incapacitation per year.

VPHM will start marketing the drug aggressively in January, and I expect dramatic revenue growth. The stock came down due to fears we would see generic Vancocin in 2007. As I said at the time, that was very unlikely. It never happened. Didn’t happen in 2008, either. The company and I have been expecting to see it in 2009, but guess what? No competitor seems anywhere near introducing a generic. Wall Street was totally wrong, but of course they aren’t going to bid the stock back up to where it should be just because they were wrong.

The Food and Drug Administration (FDA) has posted draft guidance for establishing bioequivalence (BE) to Vancocin. The new draft guidance is open for public comment, and if finalized as proposed would add new requirements for generic applicants beyond the in vitro dissolution testing originally proposed in March 2006. Under the draft guidance, generic applicants will also have to show that their products contain substantially the same inactive ingredients in substantially the same quantities as Vancocin. For generic versions of Vancocin that are not Ql and Q2 the same as Vancocin with respect to inactive ingredients, FDA is recommending in vivo BE studies with clinical endpoints in patients with Clostridium difficile.

Importantly, FDA has also called for public process specific to Vancocin, announcing that there will be a 60 day public comment period to review and comment on these draft guidance. FDA has acknowledged the complexity of the issues involved, and specifically stated that they will carefully consider such comments before responding to ViroPharma’s Citizen Petition and finalizing BE recommendation for Vancocin.

Last Friday, the FDA posted their draft guidance for establishing bioequivalence to Vancocin. It goes well beyond the simple in vitro dissolution testing originally proposed in March 2006. Generic applicants will also have to show that their products contain substantially the same inactive ingredients in substantially the same quantities as Vancocin, or they will have to do in vivo studies. There also is a 60 day public comment period to review and comment on the draft guidance, which ViroPharma had requested. Of course, the company will oppose any generic that is proposed, dragging out the period that Vancocin can command a premium price.

Now that generic Vancocin is delayed and ViroPharma already has the drug that will replace all the Vancocin revenues and then some, you would think Wall Street would pile in before the good news hits. That hasn’t happened either. So the company will simply demonstrate quarter-by-quarter through 2009 what real growth looks like in a deep recession, and maybe THEN the Street will buy the stock. VPHM closed today at $12.21, and remains a Top Buy under $13 for my $28 target.

Akamai (AKAM) sells a variety of services related to speeding and managing the delivery of Internet web pages to potential customers browsing a company’s website. The competitors typically offer only faster page loads, and often only for video. During a recession, more people surf the Internet for entertainment, watch videos and buy online instead of driving around. That means worldwide page view growth even in a deep 2009 recession, which is good news for Akamai. AKAM closed today at $15.14, and can be bought up to $20 for my $60 target.

Cree (CREE) is riding an unstoppable MegaShift: The Death of the Incandescent Light Bulb. Governments all over the world are mandating incandescent phase-outs, and I expect the Obama administration will make this an important part of their new alternative energy policy. Simply ordering a Federal government switch from incandescents to LED lights would bring the price and cost of production of LED lights down sharply. The compact fluorescent alternative has a disposal problem with toxic mercury, as well as a crummy light quality. This should be a no-brainer for Obama, and Cree will be the main beneficiary. CREE closed at $15.56 today, and is a Top Buy up to $22 for my $50 target.

China Megashift

Growth in China slowed dramatically in November, as industrial output rose only 5.4% year-over-year, the slowest in seven years and down from 8.2% growth in October. Exports plunged, which is especially ominous right before the holidays. When an economy goes from 10% growth to 5% growth, it is extremely disruptive because all the participants have geared their inventory, manufacturing plans, hiring and plant expansion to a 10% growth world.

They are going to boost their money supply 17% next year, even though they had quite an inflation problem in late 2007 and early 2008. That follows a multibillion dollar economic stimulus package announced n November. I expect them to be pushing on this string for some time to come.

UTStarcom (UTSI) is holding a business update call in a few minutes, and I need to jump on it. The press release said they will reduce operating expenses by $100 million or 25%, including a 10% headcount reduction. UTSI remains a Hold for my $10 target.

New Energy Technology MegaShift

“Oil steady at $40 after 4-year low on demand gloom.” That was yesterday’s headline over a story pointing out that oil is near its lowest price in four years, after touching $39.19 yesterday morning. The drop came after OPEC said they would cut 2.2 million barrels of daily output starting January 1, slightly more than expected. That’s on top of the 2.0 million barrels a day cuts they’ve announced since September.

Of course, most people don’t believe any OPEC member but the Saudis can afford to cut, but still — what could send oil higher? Here’s the answer:

Source: StockCharts.com

The Federal Reserve interest rate cuts finally overwhelmed the flight to safety pressures, and our dollar is headed down and, I believe, out. This could be the big drop, although we are more likely to see a stairstep decline that ultimately takes the dollar to 40, before it goes off the cliff. I have been warning you for two years that the Fed has decided to sacrifice the dollar in order to eliminate the burden of debt — at the federal, state, and personal levels. Holding bonds or notes of almost any maturity is a major mistake right now. One of the biggest beneficiaries of a weaker dollar is oil prices. Higher oil prices mean higher prices for alternative energy and new energy technology stocks.

A comprehensive, important study of alternative fuel sources from Mark Jacobson, a professor of civil and environmental engineering at Stanford, is likely to become a guiding document for the Obama administration. He found that the best ways to wean the country off oil while reducing air pollution and global warming are wind, water and sun. “Clean” coal, biofuels and nuclear are at the bottom of the list. This is the first scientific, quantitative evaluation of the major alternative energy solutions that includes not only their potential for delivering energy for electricity and vehicles, but also their impacts on energy security, reliability, global warming, human health, water supply and pollution, space requirements, wildlife and sustainability. The options now getting the most attention, such as ethanol, are up to 1,000X more polluting than the best available options.

The best energy sources in order are wind, concentrated solar using mirrors to heat a fluid, geothermal, tidal, rooftop solar panels, waves and hydroelectric. The worst choices are nuclear, coal with carbon capture and sequestration, corn ethanol and cellulosic ethanol made of prairie grass. Cellulosic ethanol is worse than corn ethanol because it results in more air pollution, requires more land to produce and causes more damage to wildlife. Both kinds of ethanol cause more damage to human health, wildlife, water supply and land use than oil!

Wind cuts carbon and air pollution emissions by over 99%, and it would take only 15 square miles of land for enough turbines to run an entire U.S. fleet of electric cars and trucks. That’s about 3% of the land required for ethanol to do the same job, and crops could be grown under the turbines. Biofuels, clean coal and nuclear are the hot items in Washington, so it will not surprise you to learn they are exactly the wrong solution. Biofuels are the worst choice, clean coal is about 100X as polluting as wind, and nuclear is about 25X as polluting.

Professor Jacobson says that wind alone is not the complete solution, and we also need to develop solar, tidal, wave and geothermal power. Right on! I don’t have any decent wind energy investments yet, but we have the three solar stocks, one wavepower and two geothermals. I’ll get to work on a wind opportunity and let you know the moment we’re ready to buy.

Last Minute Tech Presents

For you two or three others like me who have waited a bit too long to buy holiday presents, here are some of the best technology alternatives that can still get under the tree in time. You can find most of them online, but be sure to compare prices, including shipping and sales taxes (if any) with the last-minute blowout sales this weekend at most brick-and-mortar retailers. Look on shopping.com, Amazon, eBay and cnet.com to compare prices and get reviews.

Anyone who has a digital camera more than a couple of years old would like a new Canon PowerShot A470. It has 7.1 megapixel resolution, 3.4X optical zoom, and a good-sized 2.5- inch LCD display. It’s about $100 to $120.

A digital camcorder is about twice that price, but the black Flip Video Mino HD is a very cool gift. The Flip is very small and light, easy to use, and its software works with Windows or Mac.

If they are “cameraed-out” you could get them a personal navigation device. The Navigon 2100 is compact, with text-to-speech and an integrated traffic update receiver. You’ll find prices all over the place, from just under $100 to just over $200, because as we know from our SiRF Technologies (SIRF) investment, there’s a lot of GPS inventory around.

Sticking with the portable device theme, why not give our own SanDisk (SNDK) a boost and give a SanDisk Sansa Clip MP3 Player or two? It has two gigabytes of flash memory storage (what else?), really good sound quality, an FM radio and integration to the Rhapsody DNA music service. It’s also easy to use, which is helpful in the gym, and will set you back only $50 or a bit more.

Portable game players are another possibility, although I am personally against them for young kids. For teenagers and up, the Nintendo DS Lite is a slim, snazzy design with lots of proprietary games. It should be a hit even if someone already has the old Ninetendo DS or another portable game player. You probably will pay $80 to $100 for one, although I occasionally see them under $50 as a loss leader.

In the more serious portable department, laptops have gotten cheap. You can get a Dell Inspiron 1525 for $499 directly from Dell, which includes $100 off. It has an Intel Celeron 2.13 GHz processor, 2 GB of main memory and a 120 GB hard drive. Unfortunately, it comes only with Vista, so be sure your recipient hasn’t chosen to stay with XP.

Instead of a laptop, though, you might want to give one of the new netbooks. These are small, light laptops that do word processing, email and Internet access via Wi-Fi. May have a digital camera / webcam built in. Avoid the ones with hard disk drives, as the solid state storage models (flash memory from SanDisk and others) have much longer battery lives — usually six to eight hours. The screens are small, usually 10″ or so, and they are not the choice for connecting to the iTunes store or watching high definition videos. But they are hard to beat for what most people do. I like the Asus Eee PC 901 with 7.8 hours of battery time, a 12 GB solid state drive, 1 GB of memory backed up by 20 GB of free Internet storage, and an 8.9″ display. Like all netbooks, you won’t save much if anything over a basic laptop — the Asus goes for around $400.

If your giftee is loaded down with portable products, maybe a plasma screen TV would blow them away. The LG 50PG20 50″ Plasma Flat Panel HDTV has great color, lots of controls, hidden speakers and PC input for $999 (refurbished) to $1,400, with most prices in the $1,100 to $1,200 range.

So there you are, eight great last minute consumer electronics presents from $50 to $1200 that will put a smile on someone’s face, even if they were invested with Bernie Madoff.

Calendar

Due to the holidays, next week’s Radar Report will be published on Tuesday, December 23. The following week we will publish on Wednesday, December 31.

In spite of today’s “no bailout” decline, my Flash Alert on Monday still looks like a good call: The rally into next April has begun. I want to see the S&P 500 recapture and break away from the 895 support level, and start dealing with getting through 944. That would “lock in” the November 21 intraday low at 741 as the low for the last leg down. The closing low came the day before at 752, so a close over 903 equals a gain of 20% from the closing low — the very definition of a bull market. We already surpassed 20% if you start from the intraday low, so today’s drop would be read as a correction.

There is more bad news directly ahead to test this nascent bull market. General Growth Properties (GGP), a very large commercial property REIT with a portfolio of approximately 200 regional shopping malls in 45 states, will file for bankruptcy tomorrow. They have $900 million in debt coming due that they can’t pay, and the credit markets are closed to them. They are just the first of a series of commercial property REIT bankruptcies that will become the next “unexpected” financial disaster, with calls for bailouts, Fed loans, etc.

I am not guessing; these companies have scheduled debt maturities coming up, with no way to get the cash. In fact, after GGP files tomorrow, the value of regional shopping malls will get marked down and some of the other commercial REITs even without maturing debt might be asked to put up more collateral for their loans. They can’t do that, either. So, like the credit default swap market, the dominoes are lined up. I expect a Colorado REIT to go under on January 15 after they miss a $50 million payment and a big Ohio REIT to follow on January 30 when they miss a $275 million deadline. The next big one after that is a big New York REIT in March for $200 million.

With Treasury Secretary Hank Paulson gone by then, I wonder if the bailout-happy government might come to its senses and let these firms restructure. In just the first two months of the new budget year, October and November, the budget deficit totaled $401.6 billion, almost matching the record annual gap of $455 billion in the September 2008 fiscal year. We are headed for a $1.0 to $1.5 trillion deficit, a record both in size and percentage of the economy, post-World War II.

But the bigger question is whether the GGP bankruptcy filing will knock stocks down. Their financial situation is widely known and the stock is already selling for well under $2 a share. The company has until midnight Friday to make the payment, so they may not file until Monday morning. I remember shorting Alexander’s in 1992, a similar situation, based on a detailed income and balance sheet analysis. I shorted at $3, looking for a zero. They filed for bankruptcy and the stock went to $11. Lesson learned: Shorting companies with big assets that are going broke because they have insufficient cash flow is not a good idea. The wise guys are shorting GGP, and may be about to learn the same lesson. The better short probably is Vornado Realty Trust (VNO), a $60 stock that will be hurt by a general mark-down in the value of shopping centers. Ironically, they own the biggest chunk of the revived Alexander’s. With GGP too low to short safely, I’d have to go through VNO with a fine-tooth comb to actually recommend shorting it. One thing I learned from managing all-short funds is that you have to do ALL of the work yourself, as you’ll get very little help from other analysts and none from the company.

One reason I am sure the credit markets are closed to General Growth Properties is the remarkable Treasury note sale on Tuesday. The Treasury sold $30 billion of four-week notes, and could have sold $120 billion to meet the demand, at zero interest rate. People were more willing to hold Treasuries than cash, which means the short-term debt markets are still completely locked up. In fact, the previously issued four-week notes traded at negative yields Tuesday. I’ve been saying the Bernanke Fed can cut the discount rate to a negative number if they want to, paying banks to take the money, but here we have wealth-holders paying 0.1% to 0.2% of their assets just to having something that is not risky.

I covered the bad employment news from last Friday in Monday’s Flash Alert…a loss of 553,000 jobs in November, the most in 34 years, and a 15-year high in the unemployment rate at 6.7%. (That’s about 11% under the definition that used to be used, including during the Great Depression.) That news stopped the rally for one day, but then the S&P came back on Monday. This morning’s bad jobless claims number, the worst since the recession in 1982, had much less impact today than the potential failure of the auto bailout legislation. We can expect continuing bad employment news, climbing foreclosure rates, a sharp decline in GDP this quarter and weak holiday sales to provide the classic “wall of worry” that a bull market has to climb. I will monitor the situation carefully to be sure the market is climbing it.

Infrastructure Technology MegaShift

It’s clear that President Obama plans to spend over $1 trillion that the U.S. does not have on infrastructure renewal, to provide jobs and kickstart the economy. “Infrastructure” is being defined very broadly. They will start with the Interstate highway system, and give block grants to states for roads and, especially, bridges. The distribution of electricity to power electric and plug-in hybrid cars is another issue, so upgrading and modernizing the power grid will be another huge chunk. Alternative energy generation is high on the new President’s agenda, and that should be good news for Canadian Solar (CSIQ), Energy Conversion Devices (ENER), Ocean Power Technologies (OPTT), Ormat (OMT), Suntech Power (STP) and U.S. Geothermal (HTM). I think they also may sweep alternatives to oil into the energy infrastructure pot, picking up Fuel Cell Energy (FCEL), and Rentech (RTK) as a clean coal alternative.

Using that electricity efficiently also counts as infrastructure, so look for lots more spending on monitoring and control systems from Telkonet (TKO), and LED lighting from Cree (CREE) and Energy Focus (EFOI). Broadband Internet access, especially in rural areas, is another infrastructure issue. Harmonic (HLIT) and Zhone Technologies (ZHNE) should benefit. The nationwide cellular and forthcoming WiMAX communications systems have a major role to play in broadband infrastructure, benefiting Airspan (AIRN), Alvarion (ALVR), Proxim (PRXM) and Towerstream (TWER). Backup power to reduce or prevent Internet access outages is a big deal too, and Plug Power (PLUG) can demonstrate systems powering remote cellular antennas that work perfectly.

Obama has even recognized the backward government information technology systems, and I expect significant spending on government and healthcare infrastructure. Akamai (AKAM) should be a direct beneficiary, and Cisco (CSCO) and Intel (INTC) are likely to see an uptick as the government modernizes. Our old friend Cerner (CERN) at $38 a share is starting to look interesting again if Obama is serious about reducing healthcare costs before the Medicare tsunami hits.

I’ll be looking for more infrastructure ideas, especially in conventional and alternative energy production, distribution and use. With the rising number of retiring baby boomers, healthcare infrastructure also looks interesting for more investments. We got into this mess by overspending our income and keeping interest rates too low for too long. It appears the plan to get out of it is to spend lots more money and make sure interest rates stay low. I have no idea why anyone seriously thinks “the hair of the dog” is the right remedy, but while the economy falls apart in 2009 and 2010, these New Technology Infrastructure companies are going to have the wind at their backs. We might as well take advantage of it.

Avian Flu MegaShift

Crucell (CRXL) announced very early but very powerful results for a new influenza monoclonal antibody. In preclinical testing against Tamiflu, the Crucell antibody was 100% successful against avian flu, and outperformed Tamiflu against a wide range of seasonal flu viruses. Many viruses have developed an immunity to Tamiflu. In addition, Crucell’s antibody provided immediate protection against a range of influenza viruses, which would make a patient non-infective and stop an outbreak or pandemic if given as soon as possible to every patient. Immediate action is especially important for protecting elderly, infant or immune-suppressed patients. It’s a long way from preclinical results to a drug, and BioCryst (BCRX) will be on the market years before Crucell can make it through the FDA process. Both companies are targeting a better drug than Tamiflu, and both should succeed. Buy BCRX up to $3 for my $30 target after the peramivir Phase III trials are done. Buy CRXL up to $17 for a $35 target.

Biotech MegaShift

Geron (GERN) is another beneficiary of the Obama Administration. Obama will issue an executive order overturning Bush’s 2001 edict that hurt stem cell research by restricting government funding to the then-available embryonic stem cell lines. Most government funding goes to universities and research institutes, but some of them will partner with Geron or use Geron’s patents under a license that costs little for academic research, but kicks in a hefty royalty for any commercial products that come out of that research. However, the effect on Geron’s stock should be very positive once the executive order is announced. In addition, Pfizer has established a big stem cell effort, and I expect them to partner with Geron during the coming year. Merriman Curhan Ford initiated coverage this morning with a buy. Buy GERN up to $9 for my $18 target.

China MegaShift

China’s exports actually fell in November for the first time in more than six years. A flip from double-digit growth in October as retailers stocked up for the holidays to a 2.2% drop in November is breathtaking — and devastating to the Chinese companies that have bought raw materials and built inventory in anticipation of further growth. If this doesn’t turn around quickly, there will be more closed manufacturing plants and retailers, more unemployment and, in China, a resurgence of riots after years of domestic peace. This situation could develop into something way worse than even I expected when we sold all our Chinese stocks before that market fell 70%. I am still willing to hold UTStarcom (UTSI) for my $10 target because the Chinese government will probably respond with even bigger stimulus programs, some of which will continue the Internet Protocol TV roll-out. UTSI is a direct beneficiary. Also, I don’t think India and Japan will be hit as hard, and those are important markets for UTSI.

Content on Demand MegaShift

NetLogic Microsystems (NETL) has been hammered by forced selling from mutual funds and hedge funds to meet redemptions. I do expect slowing capital spending to cause the company’s new products to grow a little slower than I’d expected, and their legacy products to decline a little faster. But they operate in a sector of the economy, Internet infrastructure, that was going to grow in 2009 even before the Obama infrastructure initiative. So we are talking slower growth of about 10% even in a bad economy, and then a gradual acceleration back to 19% to 20% growth as the Obama spending kicks in. Continue to buy NETL under $23 for a $47 target, possibly as early as April.

SanDisk (SNDK) will cut 10% of its staff in the fourth quarter to reduce 2009 operating expenses below $800 million. Flash memory chip prices are still depressed, but the new “netbooks” are looking like a big success for the holidays, displacing laptop sales. Laptops use hard disk drives, but netbooks use solid state flash memory “disk drives.” The weak economy is pushing customers towards buying cheaper netbooks, and now Verizon and AT&T are thinking of subsidizing netbook prices as if they are cell phones. I think a netbook-driven upturn in flash memory prices is imminent, and SNDK stock will respond quickly from these very depressed levels. SNDK is a Top Buy up to $15 for my $32 target — more than a triple from here.

New Energy Technology MegaShift

Although the stories about $1 a gallon gasoline are fun to read, that’s not likely to happen. Oil prices are moving up from four-year lows, partly because oil imports are rising again as Americans breathe a sigh of relief, fire up the SUV and hit the road again. With inventories back in balance and Chinese demand falling, oil should trade in a $40 to $80 range for the coming year. A cold winter could push it a bit higher, but I think most industry folks are looking at $60 plus or minus as an average price for 2009. At that level, almost all of our New Energy Technology companies can break even or make some money. Once inflation takes off, as it has to, we’ll be looking at much higher prices and windfall profits for those who bought plants, reserves or materials at current prices.

Fuel Cell Energy (FCEL) reported October fourth-quarter results this morning. They did $26.2 million in sales, up almost 59% from last year and just ahead of the $25.6 million consensus. They lost 35 cents a share, a bit more than the 32 cent consensus. Because they lose money on every power unit they ship, higher shipments (revenues) mean higher losses — for now. The product cost-to-revenue ratio was 1.54-to-1 in the October quarter, another sequential improvement. The good news is that they expect the gross profit margin to turn positive in the fourth quarter of 2009. I expect them to turn solidly profitable in 2011.

The backlog increased 52% from last year to $87.6 million, while orders increased 118% to 32.3 megawatts for the year. Annual revenues more than doubled to $100.7 million from $48.2 million in fiscal 2007. On the conference call, they said they are on track to put the new, cost-reduced megawatt-class products in production around July. That is what will turn the gross profit margin positive.

South Korea announced a green growth plan, naming FuelCell Energy as one of that country’s top green technology economic drivers. I believe the same thing will happen in the U.S. in 2009 as part of the Obama infrastructure and green initiatives. The company said they already are seeing the development of broad public policy in the U.S. that will drive faster growth, just as that type of support group drove rapid growth and adoption of other clean technologies like wind and solar. In October, the federal investment tax credit for fuel cells was increased to $3,000 per kilowatt or 30% whichever is less, and extended for eight years to 2016. In addition, utilities can now take the credit for the first time. This extension happened late in their fiscal year, and they are now seeing orders delayed by the ITC uncertainty moving to close.

Round 3 of Connecticut’s Project 150 has identified an additional 27 megawatts of projects using FCEL fuel cells. No other competitor is being considered. These projects run at up to 60% efficiency, double the rate of a conventional power plant. There will be a final decision next month on the five project, and I expect at least three to go forward. FCEL stock should respond well to the announcement of the wins.

January first quarter sales should be up to $28 million, with another 32 cent loss. However, the big news will be orders after the ITC was renewed and expanded, and I think even excluding Connecticut the news will be good. FCEL is a Top Buy up to $12 for my $22 target.

Ocean Power Technologies (OPTT) reported October second quarter results. They did only $700,000 in revenues as they wrapped up a couple of projects, and lost $6.1 million. However, their contract order backlog increased to a record $8.0 million from $3.7 million at the end of the first quarter. They deployed and tested a PowerBuoy off the coast of Spain under the wave power contract with Iberdrola, and another for the US Navy at a site off Oahu. In a second Navy project, they went 70 miles off the coast of New Jersey to ocean-test an autonomous PowerBuoy developed for the Navy’s ocean data gathering program. The Navy awarded them $3 million for the second phase of this project. Ocean Power also got $2 million from the Department of Energy for a wave power project in Reedsport, Oregon.

On October 3, President Bush signed the new Energy Improvement and Extension Act of 2008 that includes wave power qualifying for the production tax credit. OPTT still has $89.6 million in cash, and will burn about $11.5 million in the second half of their fiscal year, about the same as the first half. They are the clear leader in wave power with the projects I’ve mentioned plus two more in the UK (Orkney Islands and Cornwall). I expect the Obama administration to dramatically increase funding for wave power as part of their alternative energy initiatives. Buy OPTT while it is still under $10 for my $40 target.

Plug Power (PLUG) got a big contract for 220 GenDrive fuel cells to power an entire fleet of Yale lift trucks for Central Grocers, an Illinois grocery cooperative. Central Grocers is building a new distribution center that will open at the end of 2009. Revenues won’t be recognized for some time, but this gives PLUG serious bragging rights for its forklift solution. Buy PLUG up to $4 for my $10 target.

WiMAX MegaShift

Alvarion (ALVR) announced a cost reduction to take $15 million out of their breakeven revenue level. They said they are seeing some announcements of capital spending reduction from various operators, which may affect ALVR projects, and also some sales cycles are lengthening. They are cutting costs enough to stay profitable at their lowest revenue forecast. This is what professional managers are supposed to do for shareholders, and I expect WiMAX capital spending to be up a lot in 2009, with possible cuts in other areas that won’t affect Alvarion. ALVR is a Top Buy up to $11 for my $17 target.

In last Thursday’s Radar Report I said: “At some point, the knee-jerk reaction to negative news that should be no surprise to anyone will stop. When that pattern breaks, I still think there is a spectacular move to the upside in the works as the sideline cash and newbie short sellers and put buyers learn there is no such thing as free lunch.”

On Friday, the worst jobs report in 34 years triggered another knee-jerk reaction down 27 points on the S&P 500 to 818 at 10:45 a.m. But then a powerful reaction based on nothing visible shot the S&P up 58 points or 7% to close at 876. That sure looked like the end of the knee-jerk reactions for now.

In the last Radar I also said: “So immediately ahead, I want to see the S&P 500 break out over 895, the top of this downward channel of lower highs and lower lows that we’ve been seeing since early October.”

The Index is in a perfect position to trigger this major buy signal today or tomorrow. Remember that a breakout over 895 should carry all the way up to the major energy level at 944, and breaking that would set up a run over the 1006 close on Election Day. My work shows 1015 or even 1065 as reasonable targets. If you’ve been thinking of putting some cash to work, whether in the Top Buys or in the penny stock portfolio I talked about last Thursday, a breakout over 895 or a brief test back down towards 895 from above should be the safest entry points.

Also remember that while some folks are talking about a small bear market rally or an extended sideways period after the recent losses, no one is talking about the possibility of new highs by April. Yet the market’s energy patters are lined up for that “fantasyland” outcome, which may be based on nothing more that the outlook for a bad first half of 2009 not getting any worse.

Yesterday, the S&P 500 climbed back over the strong 850 energy level to close yet again at 870.  In the last seven weeks we’ve seen this number several times, starting on October 10 when the S&P plunged through it to 840, and then rallied sharply back above it to close at 899.  The 870 level was back as part of the intraday low range on October 16 and again a week later on October 23.  It gave way on October 17, when the S&P closed at 849, but was part of the rally energy the next day that saw the Index soar 92 points to close at 940.51.

It took the bears just six trading days after the Election-Day rally to send the Index back through 870 to close at 851, and it wasn’t until last Wednesday, the day before Thanksgiving, that the bulls could push it back to an 869 intraday high. Of course, last week’s remarkable rally, the strongest weekly performance for stocks since 1932, was ripped to shreds by Monday’s fourth-largest decline ever in the Dow Jones Industrial Average.  But Tuesday saw a close back up at 849 (the 850 energy level again) and yesterday continued that rally to close at 871.  Today, of course, we cracked back below there and then blipped back towards it at the close.

So you could say the market has gone nowhere since October 10, but in truth it has gone everywhere, with huge swings up and down that seem to be mind-numbing to investors. In the last 60 trading days, the average absolute daily percentage change o f the S&P 500 has been 3.82%.  It is the most volatile period in the history of the S&P 500.

That’s been true and it will continue to be true, until it isn’t. At some point, the knee-jerk reaction to negative news that should be no surprise to anyone will stop.  When that pattern breaks, I still think there is a spectacular move to the upside in the works as the sideline cash and newbie short sellers and put buyers learn there is no such thing as free lunch.

So immediately ahead, I want to see the S&P 500 break out over 895, the top of this downward channel of lower highs and lower lows that we’ve been seeing since early October.  I didn’t mind today’s retest of 850, even though we have had three other tests already and that’s usually enough.  I definitely do not want to see the S&P close under the November 21 intraday low of 741.

A breakout over 895 should carry all the way up to the major energy level at 944, and breaking that would set up a run over the 1,006 close on Election Day.  From there we will have to let the market tell us what it wants to do, but new highs by April — which seems like fantasyland right now — are still on the table.

In that kind of a run, is it better to own big, safer companies like Intel (INTC) and EMC (EMC), or smaller, completely trashed stocks like QuickLogic (QUIK) and Towerstream (TWER)?  The answer is: Both.  For the core or more conservative part of your portfolio, big companies that dominate major industries are available at prices and valuations we haven’t seen in decades.  These reliable growers and dividend payers will be the first to move, as the big institutional money managers pour a flood of cash back into stocks.  Not only are they relatively cheap, but their stocks have broad, deep markets that can absorb a lot of money quickly. Many advisers are saying these are the only stocks to buy right now, just because the blue chips are so rarely available this inexpensively.

While that is true, looking back from next April I expect all of the top performing stocks will be red chips and white chips.  While the blue chips are very attractive buys for the core of your portfolio, these smaller, more risky stocks are being given away today.  They should provide spectacular percentage returns from current levels.  So I wanted to do a quick run-through of the stocks I’ve recommended that are trading under or not much above $1 a share.  With so many top-quality companies in the low teens or even under $10 a share, the “penny stocks” (under $2 a share, and often actually in pennies) have been abandoned by Wall Street.  Yet some of them have good balance sheets, good management, a viable business plan and a developing or rapidly-growing market.

You may know the story of Sir John Templeton, who in 1939 bought $100 worth of every New York Stock Exchange listed stock that was trading under $1 per share. There were 104 stocks, and 37 were already in bankruptcy. When asked why he did it, Sir John said: “I was sitting in my office at 30 Rockefeller Plaza in Manhattan when the news came out that Hitler had invaded Poland. It was obvious within a few days that it was going to lead to the Second World War. During war, everything that was in surplus, and therefore unprofitable, becomes scarce and profitable. Three years later I had a profit on 100 out of the 104.”

Sometimes it is just that simple.  Right now, you only need to answer three questions: Will the U.S. economy eventually recover?  Will the industry this company is in continue to grow during the down period?  Will this company not only survive but be a dominant supplier to its industry?

If the answers are yes, yes and yes, and the stock is selling for under or around $1 a share, I think you can buy it and put it away for the huge, 10-to-1 or even 100-to-1 return on investment that can save your retirement.  My answer to the first question is yes, the economy will eventually recover.  It could have been on the upswing as early as 2010, but due to the various bailouts and the unintended but inevitable consequences like hyperinflation, I now think it could take until 2012.  But it will recover, although the dollar probably will be formally devalued and some very tough times are coming for fixed-income investors.

So this week I want to give you my take on the answers to the other two questions for each of our very low-priced stocks.

Avian Flu MegaShift

BioCryst Pharmaceuticals (BCRX) is in an industry that will continue to grow, as spending on drugs is not cyclically sensitive at all.  Obama will try to reduce drug prices, but at the same time will dramatically increase access to health care, so total spending is set to soar.  I think BioCryst’s peramivir will eventually be on the government’s stockpile list for avian flu, and also will get approval for seasonal flu, at least in hospitalized patients.  Yes & Yes.  Buy BCRX up to $3 for my $30 target after peramivir is approved.

Biotech MegaShift

CombinatoRx (CRXX) has the same industry dynamics as BioCryst.  This is an investment in a drug development technology, not just one drug like the one that just failed in clinical testing.  While that devastated the stock, this company has many shots on goal, and they are very likely to wind up with a successful drug.  Yes & Yes.  Buy CRXX up to $2 for my $7 target.

Isolagen (ILE) has different industry dynamics, because the Isolagen Process is cosmetic and not reimbursed.  Will aging baby boomers continue to try to look good, or will they hunker down next to their smoldering 401-Ks and say: “Heck, wrinkles are good, they show I’ve survived.”  I think spending on cosmetic procedures will be lower than previously forecast, but Isolagen is awaiting FDA approval and will gain substantial market share because their results are better than existing treatments.  The company is running out of cash, but with a successful Phase III trial in hand and FDA approval pending, they should find financing.  A qualified Yes & a qualified Yes.  ILE is a Top Buy up to $2 for my $9 target.

China MegaShift

UTStarcom (UTSI) sells Internet Protocol TV equipment and other communications gear, especially into China, India and Japan.  I think China and India are in for a severe downturn because they are leveraged to the U.S. business cycle.  The government of China may accelerate IPTV spending as a way to pacify the masses and boost the economy, but in the longer term I do not think this industry can grow through a severe crunch.  Although the new management team at UTSI has done a great job of cleaning up the balance sheet and cutting costs, they need to sell the company.  No & No.  Hold UTSI for a buyout at up to $10 a share.

Content on Demand MegaShift

Burst.com (BRST) makes their money suing companies that are infringing on Burst’s extensive portfolio of patents on transmitting audio and video over the Internet.  I expect they will win several more large settlements before their run is over, starting with TiVO.  Netflix also should be on their short list.  Burst is immune to the economic cycle and spends so little money they can survive, so Yes & Yes.  Buy BRST up to 50 cents for my $2 target.

QuickLogic (QUIK) will be in so many portable consumer electronic devices in the future, either as a configurable processor or display backlight manager, that the industry’s sales could be cut in half and QUIK would still show spectacular earnings growth.  It’s very well-managed financially.  An emphatic Yes & Yes. QUIK is a Top Buy all the way up to $4 for my $8 target.

Telkonet (TKO) is focusing on their Smart Energy products, using their broadband-over-powerline technology to inexpensively deploy sensors all over a hotel or office building to turn lights and heat on and off.  Even with the price of oil and energy down, their customers are committed to cutting energy costs after the bad scare they got in 2007-2008.  TKO’s new management has reduced costs and boosted revenues, working with a tight margin of error financially.  I think they will pull this off, so I give them a Yes & a qualified Yes.  TKO remains a Top Buy up to $5, a long way from the current 15 cent price, for my $15 target — a legitimate 100-to-1 potential investment.

Zhone Technologies (ZHNE) has succeeded in only one area: Making excellent products and servicing them well.  They don’t seem to be able to make any money doing it, and they’ve made dumb acquisitions, missed opportunities to sell the company for a higher valuation, and now are considering a reverse merger that will further reduce shareholder value.  Insiders bought and bought the stock, and went down the tubes with us.  Their industry will slow in an extended economic downturn, and they keep losing money, so this is a No & No.  I expect the Board to do the right thing and sell the company, so ZHNE remains a hold for a $1 target.  However, this is an obvious place to book tax losses you can use for 2008 on part of your position and hold the rest for a buyout.

New Energy Technology MegaShift

Connacher Oil & Gas (CLL.TO) is suffering from investor aversion to anything tied to energy prices, with oil now down to $47 from $147 last summer.  Producing oil from tar sands using conventional methods costs about $70 a barrel, but Connacher probably hits around $60 a barrel using their steam-assisted gravity technology.  I don’t think oil will stay under $80 a barrel for very long due to the growth in demand in China and India, even in an economic slowdown.  But the current pricing has slammed the stock prices of many alternative energy stocks, and if you believe oil prices will be near current levels for a long time, this is not an attractive area.  So with the caveat that oil needs to get back above $80 a barrel in the coming cold winter, my answers are Yes & Yes.  The industry will continue to grow through an economic downturn, and Connacher will survive to be a dominant supplier of oil from Canadian tar sands.  Buy CLL.TO up to $4 for my $9 target.

Energy Focus (EFOI) will benefit from the change to LED lighting from incandescent lights.  This change is being mandated worldwide, so the industry is going to grow no matter what the economy does.  EFOI is a leader in combining LEDs with fiber optic cable to carry the bright, heat-free light to its destination.  They are financially well-managed.  Buy EFOI up to $6 for my $16 target.

Gasco Energy (GSX) is directly impacted by natural gas prices.  One cold winter and this stock would double or triple, and in the longer term natural gas is seen as a pollution-reducing choice.  In part because I expect energy prices to recover, and in part because natural gas should gain market share from oil and coal, I think Gasco rates a Yes & Yes.  It certainly shouldn’t be at 53 cents a share.  Buy GSX up to $3 for my $9 target.

US Geothermal (HTM) is up and running at Raft River, Idaho and in Nevada, with more production coming in both places plus Oregon.  Again, if you think oil prices are not going to recover and electricity prices are about to fall sharply, HTM is a bad choice.  I expect the opposite, and rate them Yes & Yes.  Like GSX, there’s no way this stock should be at 44 cents.  Buy HTM up to $3 for my $6 target.

Infinity Energy Resources (IFNY) had a financial disaster and basically has lost its operating assets to the bank, keeping a trickle of income to develop their Nicaraguan offshore leases.  I would say cut and run but for the fact that Nicaragua could be gigantic, with as many as five of the “elephant” fields containing at least one billion barrels of oil.  The company is living hand-to-mouth, but with the founders back in running the show the payoff could be huge.  So Yes to the industry, No to their balance sheet, and hold IFNY to see what develops, with a $7 target.

Plug Power (PLUG) is not just an alternative-to-high-oil-prices company.  Their fuel cell powered backup generating systems can be used in pollution-sensitive areas, or where getting to the site (think cellular tower in the Andes) is difficult and expensive.  The company got a big chunk of investment capital from Russia before that stock market collapsed, and can survive.  Yes & Yes.  With the stock under $1, you can buy PLUG up to $4 for my $10 target.

Rentech (RTK) has fallen under 60 cents a share on Wall Street’s fear that low oil prices = low coal prices = no one will buy the company’s coal-to-liquids process, because oil is so cheap and abundant.  But imported oil is a national security matter, and the Department of Defense wants to buy at lease half of their jet fuel from U.S. based alternative energy companies.  In addition, low coal prices are bad news for Williams Coal, Arch Coal and Peabody Coal, all of which do business with Rentech to convert their coal into higher-value petroleum liquids right at the minehead, before they have to pay shipping costs.  The Obama administration is likely to do more for the coal-to-liquids industry, not less.  Buy RTK up to $4 for my $8 target.

Security & Location MegaShift

SiRF Technology Holdings (SIRF) is in the midst of the difficult transition from dedicated GPS personal navigation devices to GPS as a feature of many other consumer electronics products.  They need to capture design wins and leverage their patent portfolio licensing.  Even as the demand for consumer electronics falls, manufacturers have to add GPS to defend their market shares, so SIRF gets a qualified Yes for industry growth.  They get a Yes for survival.  The problem is that without accelerating design wins, they will turn into a “living dead” company with slow growth and a stagnant stock price.  I still think the interim management plans to sell the company, so SIRF can be bought up to $5 for a higher target in a sale, or a $15 target if they start churning out design wins in 2009.

Nanotech & Materials MegaShift

Integral Technologies (ITKG) will be unaffected by the economic downturn because their electrically conductive plastics technology is just getting underway, and has hundreds of applications to explore.  The company also can survive, because all they do is develop their technology for partners and then collect royalties.  So they get a Yes & Yes.  But, like SIRF, they need accelerating development contracts and design wins to avoid becoming a zombie company.  I think that will happen, and ITKG remains a buy up to $2 for my $4 target.

WiMAX MegaShift

Airspan (AIRN) could be hurt by the downturn, as some potential WiMAX customers are going to have trouble getting financing to deploy their networks.  I think the damage will be small, as WiMAX has substantial economic and technical advantages over the wireless alternatives, and is ready now.  Many governments around the world, starting with the U.S., will turn to infrastructure project spending as a way to boost their economies.  Installing a wireless broadband network to give an entire country, or at least its rural and mountainous areas, 21st century access to the Internet is an easy decision. 

For example, Latin America has a population of 550 million with a broadband penetration below 15%.  Yet Latin America is also one of the most urbanized regions with 75% of the people living in metropolitan settings. Brazil only has a 3% broadband percent penetration rate, and over 40% of the country’s cities lack mobile telephony, broadband access and cable TV services.  WiMAX can fix that, quickly and relatively cheaply.

So I give AIRN a Yes & Yes on the two questions of industry growth and company survival.  But I still don’t have the stock as a buy because while customers really like the products, they really dislike AIRN’s software and installation processes.   The company is working on fixing those problems. Hold AIRN for my $5 target.

Proxim Wireless (PRXM) is in a more precarious position than Airspan.  Proxim gets a Yes for the performance of the WiMAX industry over the next several years, but the company’s balance sheet is very weak and the situation could be terminal.  There are a number of products and patents in this company that are worth something to an acquirer, so PRXM remains a hold for my $4 target (at most).

Towerstream (TWER) under 75 cents a share?  Why?  The worse the economy gets, the easier is it to sell a telephone company T-1 line equivalent for a substantial cost saving.  TWER has stopped their expansion at the current nine major cities in order to get profitable, so they will survive.  The company already has tower locations identified or leased in the next few cities, and won’t stop expanding until they at least get into the top 20 cities.  An enthusiastic Yes & Yes here, and TWER remains a Top Buy up to $6 for my $16 target.

For a new subscriber, I would recommend buying a basket of the very best-positioned penny stocks: Towerstream, QuickLogic, Telkonet, Isolagen and Gasco Energy.  At today’s close, you can buy a basket of 100 shares of each stock for less than $250.  Like Sir John Templeton, I think you’ll be very pleased in three years, and ecstatic in five.

Right behind them, my second-tier basket would include BioCryst and CombinatoRx, plus four energy stocks: Connacher Oil & Gas, Energy Focus, Plug Power, Rentech and U.S. Geothermal.  If you want to speculate on what could be the biggest winner of all, add Infinity Energy Resources to either portfolio.

News Updates

Biotech MegaShift

Geron (GERN) said that Merck, its collaborator on cancer vaccines has started a Phase I clinical trial of a cancer vaccine candidate targeting telomerase. The trial will assess safety and tolerability, and also look for an immune reaction of the vaccine in solid tumor cancers, including non-small cell lung cancer and prostate cancer.  In a different market, this would have shot GERN skyward.  Hopefully, we will be in a different market when the results are announced in a few months.  GERN is a buy up to $9 for my $18 target.

QLT (QLTI) started a modified Dutch auction tender for $50 million more of their stock today.  We won’t know the price for sure until the end of the auction on January 9, but the range is $2.20 to $2.50 per share.  They’ll repurchase at least 20 million shares.  Don’t tender!  The stock is ‘way cheap, and management knows that.  QLTI is a buy up to $4 for my $12 target.

China MegaShift

UTStarcom (UTSI) will hold a conference call after the close on December 18 to discuss their business model and additional cost cutting.  I have to give these guys an “A” for effort, as they are cleaning up the mess and stabilizing it at a remarkable rate.  The world economy is against them, but at least they are moving in the right direction.  As I said above, UTSI remains a hold for my $10 target.

Content on Demand MegaShift

SanDisk (SNDK) was up 25% yesterday on a rumor Toshiba, their joint venture production partner, would make a bid for the company.  The rumor was quickly pooh-poohed by analysts, but wait a minute…the stock was down to 1/3 of its late-September price.  If you are in the business world, as opposed to the Wall Street world, that looks like a timely opportunity just as NAND flash “disk drives” are taking off.  Intel and Hitachi just announced a joint venture to make them.

One analyst said he “doubted Toshiba could get the financing.”  The world is awash in cash, especially in Japan, and the idea that Toshiba could not get twice the financing it needs with one phone call is ridiculous.  Although SNDK backed off a dollar or so today, this could be real.  It might set off a bidding war between Toshiba, a SanDisk licensee as well as production partner, and Samsung, SanDisk’s largest licensee and bitter rival of Toshiba.  SNDK remains a Top Buy up to $15 for my $32 target.

New Energy Technology MegaShift

Ocean Power Technologies (OPTT) will announce results and hold a conference call at 10 a.m. EST on December 10.  The numbers don’t matter as much as an update on how their various deals are progressing.  This is a great technology that makes economic sense even with oil prices at these low levels.  OPTT is a buy up to $10 for my $40 target.

In Closing

I met Sir John Templeton at his home in the Bahamas when my then-partner was invited to his second wife’s funeral, and again in San Francisco when he won an award from the Independent Institute.  He was interested in how the investment newsletter business worked, and after three or four penetrating questions that let him gauge the bottom line and amount of effort required, said in his very courtly, kindly way: “I think you should switch to money management.” 

His intellect and good humor affected everyone positively, and his deep religious convictions that always went hand-in-hand with an inquisitive, open mind and tolerance for others’ views dominated the last few decades of his life.  Sir John died July 8 at the age of 95, and this week’s sign-off leads not to his remarkable Templeton Prize, which will live on and hopefully keep him in investors’ minds for a long time, but to the even more remarkable Templeton Foundation.