The Inger Letter 'Defense at Light Speed'

Gene Inger's Daily Briefing. . . . for Wednesday, June 21, 2006: Good evening; Activation of U.S. Missile Defenses . . . for the first time (as hinted likely Mon night) combined with hesitation about the meaning (we thought just 'noise') about the higher 'housing starts' (but lower permits), to repel several attempted stock market rebounds on Tuesday. There are other issues too of course; including Canadian 'bird flu' fears, and domestic interest rates (actually the least important of concerns) to contemplate. After a normal post-Expiration forecast retrenchment, giving us a fairly heavy Monday behavior, which continued into Tuesday after the suspected unsustainable gap-up at the day's start, we got a new slip-slide that keeps the September S&P declining-tops alive, as it possibly shoots for the gap area from last Thursday's high to Friday's low, which may or may not be 'filled' before the market tries the upside (as outlined). As to the North Korean ICBM issue, it became front-and-center when the U.S. started consulting with allies about the term 'launch' versus the use of the word 'test'. As we'd noted last night, a 'test' implies foreknowledge of what's going to take place. In a 'test' countries, aircraft and 'ships at sea' downrange for a test, are alerted to the situation and told to 'be on the lookout' and avoid the planned impact area. A 'launch' situation, itself, tells nothing about the intentions of the country launching any missile; where it is going, or whether the purpose is actually a test, or conceivably is actually hostile. It's why Japan's Defense Minister initially reacted by calling the 'launch' a provocation and saying that if it 'fell' on Japan, they'd view it as a North Korean attack on Japan. It was speculated here that any such 'launch', unless prefaced by the communists as a 'test', with appropriate downrange information, might draw-forth intercept attempts by the limited missile defense capabilities the United States Navy now possesses; to wit: Aegis Class Destroyers or Cruisers. (Using Standard Missile II they conceivably may attempt an intercept in boost stages, whereas silo-based Alaskan missiles can only be utilized during a last-minute reentry, should any missile approach North America.) In our view, the latter is a last-ditch measure, but wouldn't be provocative, in-event of an actual attack; though the system is controversial, and it would be embarrassing for sure if it didn't work (which many scientists contend would be the case as it's old-style in design.. to wit: bullet-against-bullet rather than solid-state laser-based intercepting) whereas using the Aegis would be more reliable, but likely viewed provocatively by the communists, since the intercept efforts would have to take place within moments of the initial launch. It's why we again showed graphics last night, which depicted the various methodologies of missile intercepts (related to some of our new stock ideas). No, we don't expect North Korea is about to attack anyone; yes, we suspect they will launch, and they have just rejected their own Pyongyang Agreement formally today. I do suspect, however, that this contributed to tempering the market's zeal just for now. The housing 'noise' was higher starts but lower permits, which we disputed right from the day's start, because all that does is increase inventory in a poor housing market. I would put more weight on the concerns about (other issues ingerletter.com outlines). That's almost as bad as the behavior of some of the hedge funds around the world. If you ponder a hedge manager proclaiming his 'support', while elsewhere he's shorting your stock, you might have an idea about how ruthless some of those guys might be. Of course some aren't; they just function with algorithms or try to push stocks up or in a downward direction. It's the ones that are openly long your stock, but have offshore or similar set-ups, that maybe one ought to keep a wary eye on. Manipulation? They proclaim not, but what is it if they drive a stock relentlessly lower in an impossible-to-detect strategy, that for all one knows, is setting-them up to go the other way, maybe at about the time conventional holders (even if belief in a company is valid) capitulate or get crunched by (factors that ingerletter.com outlines). The foregoing is just a theory of course; but it's the kind of thing that can occur when certain conditions unfold, and it's also how a stock (we've seen it in several high-flyer stocks over the years) can soar, then crater, and sometimes spring back to life more than one might think conceivable, if the fundamentals prove to be as original goals of a company outlined (though as often occurs in life, taking their sweet time to evolve). (Comments comparing Rambus (RMBS) & Coherent (COHR) past action reserved for subscribers.) So, before you want to put your 'favorite' hedge manager, analyst, or corporate exec. in the nosecone of that North Korean long-dong rocket (or whatever it translates too), consider that while it's too bad Government doesn't really tackle naked short-selling issues; there is another way to approach it. Evaluate what 'you' believe about a firm, and if pessimistic, don't presume it comes back. If optimistic, look at crunch-time as a conceivable entry, or simply (if there are too many characters at play) go elsewhere. You never know if your 'missile defense' strategy is bulletproof, but you do want to be able to stay 'in the game', so that's why you want intelligence and a layered defense. Daily action . . . certainly also knows about market seasonality plus the bull and bear alternating environments, of which the current one isn't the easiest to participate in, at the same time as it is a climate we forecast commencing with the 'unconfirmed' highs by the Dow Industrials and the S&P in the late April / early May time as forewarned. Of course we've been fairly negative on big-techs, such as in the Nasdaq 100 (NDX) or Semiconductor Index (SOX) since moving out late last year and in January, and now it's merely a question of which point we elect to become more optimistic (the timing for that prospect continues as we've outlined to our members). MarketCast (intraday audio-email) comments from the get-go were suspicious of the gap-up housing-supported optimism (we called it nonsense) and sought to short, but as it was already dropping, the early guidelines started with a long around 1249-50. It worked pretty well (out at around 1255 with a wide mental stop in theory); and then a series of nominal moves (some gains, losses or near breakeven) for Tuesday's rest, as far as Sept. S&P efforts. The market fell-away quickly, rebounded, eroded more, and firmed again near the end. Wednesday could be nervous; but maybe up-dip-up. Tonight's additional comments are accompanied by audio plus remarks on Ionatron and QPC, the newly covered semiconductor-laser stock for which coverage initialized last weekend. Now that members have had a couple days to assess the newest spec in the initial 'buy-zone', we are pleased to let others know we picked newly emerging QPC Lasers (bb: QPCI), which has only been publicly traded for about a month now, but which is reasonably established and has been shipping (products already). As a quiet entry (via reverse merger) we suspect it will command higher prices (more). Overall we're honored to have identified both the topping process back in April / early May, and the bottoming process forecast for last week, with an expected retrenching early this week, before another rebound, for this phase of our called-for 'Summer of Discontent'. Don't be surprised if parts of the Summer evolve (as we've outlined). To summarize: starting primarily in late April, we warned against bidding-up stocks via leverage; in stocks we like(d) or are interested in during the swansong of forecast decline. For the benefit of new readers, we emphasized the risk via updating our term 'crash alert' to describe that risk, while denoting much of the risk was concentrated in Senior Average multinationals, such as the Dow Industrials and S&P represent. For sure small-caps were also heavily eroded, due in-part to the 'baby with the bathwater' toss-out syndrome, where calls on marginable stocks are met by selling small-caps of course; not marginable. Sometimes that's clever; sometimes it backfires. But it also is capable of creating some attractive prices in the small-caps with nothing wrong at all. So yes, we targeted the decline; but called it to be a logical 'Summer of Discontent' adjustment within a secular bull. Then we looked for a 'relief rally' that was suspected started last week, which would be contested after Expiration, before trying to gather a bit of steam as it comes together over the days ahead (as is tentatively trying). As far as our being 'right' on this still being a 'secular' bull, that's debatable. But since we suspect the Fed's 'bark is going to turn out louder than their bite'; at least overall from beyond the upcoming Fed meeting, and because we think corporate profits may dip in many cases temporarily (some from double to single digits), we suspect the Fed is rather quickly going to grasp that the real risk out there isn't 'inflation', but 'deflation'. Debating Light's Path has been an evolving challenge for the laser industry; clearly focused on how to miniaturize, empower and integrate the technologies into systems that once refined, are less cumbersome (solid-state, meaning absent toxic chemicals of the early airborne or theatre lasers), so as to allow 'world-class' high-power, cost-efficient, lightweight laser-chips and defensive weapons to flourish in their own realm. (We refer you to last night's review if you'd like greater observation about this sector.) Coincidentally Monday morning QPC Lasers received an order for Phase III lasers, as they won a US Government Contract to develop and deliver high-power Mid-Infrared Lasers. Note the Phase III award is a follow-on to previous development activity funded by the US Army, which culminates with the delivery of semiconductor lasers which emit light in the Mid-Infrared wavelength regime. One overriding thing we believe; the 'real' incorporation of Directed Energy Weaponry in Future Combat Systems, bodes very exciting promise. In addition to the battlefield, low-power design spin-off's will eventually enhance all our daily lives, in the areas of medical advancement, industrial applications, or eventually 'power transmission' (or variables); with the goal to keep the U.S.A. at the helm of advanced technology. I promised a summary of QPC Lasers (QPCI) this week, rather than the lengthy first overview, and that was complimented by the discussion last night. Also; we're getting to know these technologies, and occasionally have a couple terms misinterpreted. It's been pointed-out that our reference to QPC's Mid-IR effort was high power, when in actuality the Mid IR work is not high power. However, QPC's laser work with DARPA and their NAVY contracts are high power. Sorry for any oversights in the particulars. As to the prospects for the stock, we were delighted to see it trade Monday and part of Tuesday in the initial buy-zone we thought reasonable; and then move on up a bit. Note volume increased with improved price behavior during the session. While there is little doubt but that the stock may be attractive to investors (reserved for members). Here's the promised summary of our preceding initial coverage analysis (abridged): Summary: QPC Lasers (QPCI) develops and produces next generation high-brightness and (mid or) high power semiconductor lasers and related optical components for, military, homeland security and industrial markets, with medical market (and certain military) products already currently shipping. QPC has built a staff of more than 30 employees, with about 40 intended by yearend including at least a number of prominent scientists and engineers (10 or so currently with PhD's). In Sylmar, California it created a state-of-the-art facility allowing QPC to conduct nearly all operations on-site, including R&D, its semiconductor wafer fabrication, processing, packaging and shipping. In its present configuration, it estimates capacity at three million devices per year; scalable to an estimated 20 million devices yearly. QPC was founded in late 2000 with backing from strategic venture capital investors. QPC's proprietary technology platforms were developed by a staff including the PhD's, as well as eminent scientists and engineers in the high-power laser field. Intellectual property consists of three issued patents and 13 pending patent applications plus 'trade secrets', and is expected over the next year to two years to enable QPC introducing high performance, low-cost lasers to multi-billion dollar laser markets. Conclusion As it is entirely unknown (or little known) by major firms or funds thus far, that may change; so we've elected to establish a pilot position (as outlined), pending developments as may evolve (more). Coverage of QPC Lasers (bb: QPCI) was initiated this past weekend as a speculative entry with initial entry buy in the 2.15-2.55 price zone. Given just several weeks of trading history, information is limited technically, as there was no IPO, due to it being quietly brought to market via the reverse merger. So there is no pattern assessment yet ascertainable (other than firm), and the stock is considered 'under radar screen' views, so far. To the best of our knowledge, we are providing the first regular coverage of QPCI; a probable 'disruptive technology' issue (further discussion follows). We believe their goal is eventual customer acceptance and broader coverage over time, along with potential NASDAQ listing, or the American Exchange A financial target includes potentially being cash-flow-positive ideally by the middle of next year. We think, if that's achieved, this would be a fast-ramp for the sector. It is difficult to estimate price appreciation potential versus other laser firms; because the technology has a potentially disruptive (sector altering) 'quantum leap' improvement over competitor's offerings. If that is to remain the case for any period of time, barring unforeseen competition, it could become very interesting. (Full review, as well as the original and follow-on write-up's, are available to ingerletter.com members.) Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of major technology issues (as needed for assessment of general factors in techs overall, or as compelling developments may call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks merit further reflection. Broadwing (BWNG); Intel (INTC); Texas Instruments (TXN) and Motorola (MOT); Microsoft (MSFT); Advanced Photonix (API); InkSure (INKS); Essex Corporation (KEYW); Ionatron (IOTN); PURE Bioscience (PURE); and QPC Lasers (QPCI) are commented upon. Please see main text above for summary and other QPC remarks. ~~ As always our caution that all speculative stocks; as well as all future technologies, to an extent have one always betting 'on the come', until or unless it does arrive. In such cases as stocks we cover, we not only believe 'core' technologies real, or customers and partners to be serious players, but suspect that stock purges, or future purges, if any, create most attractive prices for such issues in awhile, by virtue of the sharp and persisting retreats that have been seen. That's no assurance, but if a technology was of interest a month ago and nothing changed but share price; then it's still interesting. ``` We can't answer detailed questions for you (how could we; companies release what they will when they do; ditto for the Departments of Defense or Homeland Security); but these are topics previously explored as part of our assessment of advanced tech stocks; notably for key reasons: we view Directed Energy Weapons and all related or sector products, of any 'pure play' or high-power solid-state laser-related companies, as new potentially important 'disruptive technologies' to benefit the U.S. defense; they're important as anything else able to shift the world into 21st Century technology. In summary . . events continue reminding us of risks Allied fighting forces face, given continued attacks on free peoples, by elements including organized terrorist forces in various countries. A world addressing terror threats continues (further discussions). McClellan Oscillator finds NY 'Mac' fluctuating; NY near -115; NASDAQ at -29. Issues continue including oil, terror; Iraq; Iran; Hamasistan, and Bird Flu. As to the situation in Iraq; things remain fluid, but just improved with the elimination of terrorist insurgent leadership. But needs for advanced weaponry to protect secured civilized areas will remain as important, or certainly in future combat engagements elsewhere. Further, advanced weaponry to eviscerate vermin without mushroom clouds, to spare harm to vast majorities of people (innocents) are a necessary plus for civilization and for the military's armamentarium. We are focused on this area now and in the future; and that is partially as advanced defense is not so sensitive to consumer economics, or recession concerns domestically as this 'Summer of Discontent' evolves further. The new week could be defensively heavy early, then another midweek rally try; but may get defensive in later week activity; as becomes feasible ahead of the following week's FOMC. S&P futures are off about 50 this evening. Enjoy the evening, Gene Gene Inger, Publisher ~Gene Inger’s Daily Briefing™ (The Inger Letter daily analysis on www.ingerletter.com) ~Gene Inger’s MarketCast™ (Intraday audio updates emphasizing S&P futures and market action)