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[TTHQ Staff]

Gene Inger's Daily Briefing. . . . for Thursday, January 18, 2007: Good evening; Prospects of an Internet 'house of cards' . . along with other issues, such as a 'risk of peace breaking-out' in the Middle East between Syria and Israel, along with what it all means for our markets, have been subjects broached by ingerletter.com not as we necessarily perceive any of these events as actually probable, but because the press (omitted) has for the most part been narrowly-focused, on either a Goldilocks market environment, or Iraq as an issue, almost as if it was not simply (horrendous as it may be) part of a larger picture (chess game of a regional nature) with Iran, provoking not simply a U.S. 'escalation' as some argue, while the reality is we belatedly responded. Today everyone mostly focused on Apple's results, which were admirable to be sure (reserved). Those laptop sales eclipse the talk about iPhone's and iPod's by the way; or at least they should. And speaking of that (maybe changing name due to the Cisco suit) phone; we know what it is, and why (in our view) if AT&T (not Cingular anymore) prevails, or they incorporate 3G Broadband Connect (HSDPA) chip, the unit becomes a fairly justifiable UMPC (ultra-mobile PC), comparable to even more pricey or similar pricey (Windows Mobile or even micro-Vista) products if they go that way. Meanwhile our idea that the stock was a sale or trading short on the push over 97 in the wake of the premier last week, was right on again. It's our thinking that they will eventually penetrate the business crowd, but not initially, because it would require a rapid ramp to a primarily semi-professional product, rather than focusing on 'svelte' seekers of stylish products, that in the nomenclature of retail, would be low-hanging fruit at the outset. One example; the initial version won't 'sync' with Windows-based PC's, rather than being platform-agnostic, like almost all cellular devices are. That's ridiculous, as most businesses use PC's not MAC's, and Apple is not going to attract businessmen if you can't open the memory as an external drive at least, or sync contacts with Windows machines. Later, as they shift to 3G (along with next-gen WiFi), easily-changeable batteries and given USB 2.0 and Blue-tooth 2.0, it would presumably be able to make good use of accessory sales (more) as are Apple marketing hallmarks previously (incidentally). Apple has been a tricky partner for many vendors in the past (we're being kind), thus it will be interesting to see if they ramp-up the product to 3G sooner rather than later, while also having a downscale version for 'price-point' markets. The exclusivity with AT&T we don't question for now, though we're aware that some others think that will fail. We mention suspecting AT&T will press them on 3G because available fast-pace connections are important to cellular providers, to at least parlay a layer of revenue to compliment low basic cellular fees; as EDGE (as announced by Apple) won't get that. (More reserved for ingerletter.com; we share much of this review just to give an idea of our analysis approach, as we usually reserve our individual stock remarks to those who are not members.) The point? Apple stock was discounting everything, so likely doesn't spike one more time, and then maybe comes down. Will we be aggressive on the negative side? Not particularly; though beside aforementioned likely cannibalizing of iPOD sales down-the-line, how about really terrible iPOD sales between Christmas selling season and summer, because who the heck will pay 250, plus all of the extras for an iPOD, when double that gets this neat gizmo a few months out? So we actually suspect, given that Leopard (OX10.5) also comes at midyear, means Apple basically has nothing of significance new, other than chatter, to sell customers now. That could crimp Q1 / Q2 earnings, until these new products will appear. (Thus last week's sale.) And as for big-cap technology overall, we suspect some of the cheerleaders might be taking a page from our recent work; with regards to selling big-cap tech in January. It might be trite to point out, but we warned that would occur, by indicating that the time to do it was on (not days after) the series of CES and Mac-World announcements (as they upstaged CES in an ego-gratification orgy that is another issue); in expectations that a few days later such stocks mostly would be fairly negative. Now you'll see the after-the-fact crowd 'anticipating' a decline actually already well-underway for days. The exclusions to this (in our thinking) are connectivity and unique areas that are not in competition with each other, waiting for vaporware to become actually marketable products, or those that haven't run-up in belated anticipation of upcoming products or certainly specialty situations having nothing to do with 'retail' tech frenzies (reserved). (We won't complain if big techs get clobbered; after all that's what we're waiting for in harmony with our early-January projections of up-and-then-down for big-cap techs. In this regard we won't put a timeline on buying; depends on price behavior and more. I suspect, though, that for the biggest techs it's likely to be [reserved timeframe] before an ideal reentry is broached, though again, things could accelerate; it all depends.) Daily action . . . isn't particularly focused on Apple; but given the hype and extended move, we thought it warranted discussion about how nothing new to stimulate profits for the very near future, and that (in a sense) Steve Jobs gambled by announcing the phone, as opposed to waiting, because some big competitors (no matter what MSFT says) are now pouring money into software improvements for their next models. The first 'clue' of competition on the heels of Apple comes today; as Samsung now rolls-out a 'keyless' vibrating cellular gizmo that while not as 'cool' as Apple's; does at first blush most of the functions (if not all); plus handwriting recognition too! Available initially in China and South Korea (of course), the key may be that it's GSM & CDMA; and here now, not months ahead. Shhh… don't tell Cupertino there's competition. (In this regard we'll provide a picture here, since many will ponder what this looks like.) We thus would not count-out Motorola or even Nokia (much less Sony) from all this; as the best information we'd gather suggests that the 'intellectual property' powering these new and exciting products seems very much like a Linux-type OS's capable of. So, since Motorola's new Z6 RIZR (introduced but unnoticed at CES) is Linux-based, all they may have to do is re-write 'code' to move it into something like the MotoQ or the upcoming next-gen version of the unannounced RAZR-MAXX, so as to have their version of this kind of gear. That the competition is challenged is heard of course; but that the competition already has the internals (including HSDPA by the way) in units, but with less-elegant software (so far) isn't heard anywhere. It's the rest of the story. The postscript to the story relates to our earlier remarks about digital media or how the internet could be overwhelmed by bandwidth demands bumping into constraints. The other day we mentioned that CBS did not own much in the cable realm (relative to their competitors), and that they were attempting (thus the online deals you might have noticed) to 'broadcast' through the internet beyond the clips and basic fare that the others were offering (ie: their whole schedule and more). We felt for quite a long time that the 21st Century wouldn't be content with scheduled television such as the last Century (discussions of DVR's and internet transmission reserved for members). The point here is that today CBS confirmed what we wrote about, and indicated they intend to drive the digital media business. That takes us to a main point: the Internet cannot handle them and the competition in a race to shift in that manner, at least not until Internet 2 comes to the fore, down the line. That's of course part of our logic for retaining Level 3, which was the only system (Broadwing at the time; and we mean only the Broadwing part of LVLT we should add for now) to not 'go-down' during the big Midwest and Northeast blackout a few years ago. Keep in mind our perspective is different than others, because given the Broadwing double, we have essentially 'zero' cost for our LVLT holdings. Let's wrap-up this discussion by recalling it was not CBS, but NBC that signed with Level 3 last week, as ABC (Sports) as well as CNN already had done so (we anticipate 'live' CNNhd to commence this year; unannounced yet). Elsewhere . . . yesterday we didn't want to raise false hopes about the Middle East; but this is a tinderbox we all understand, and capable of market impacts; depending what happens. Now that Syria is also reportedly importing new Russian air-defense weaponry; that colors the optimistic peaceful talks just a bit (to say the least), but we wanted to share finally what seemed like a good and optimistic 'rumor', even if (sadly) most (if not all of it) doesn't pan-out. As the 'war(s)' continue or expand (time will tell, but of course there's no reason to expect Islamic extremism to be squelched, almost regardless of what happens vis-à-vis Iraq or even Iran), there will be need for counter technologies; including anti-IED, but also protective air and other evolving devices. I'd call attention to at least one key tidbit in tonight's Bits & Bytes, which will follow soon. MarketCast (intraday audio-email) comments warned that there was no assurance that this market would 'hold-up' into a nominal Expiration; and that we detected quite a few divergences both Tuesday and Wednesday, irrespective of the gains by a tired Dow Industrials, or the nonsense from those who disputed our warning that big techs would 'top' ideally at the start of CES last week, not this week after-the-decline was underway. That's partially why we did today's guideline S&P short at the 1442 level. In the next couple days I'll post a summary provided one of the Blue Ribbon Panels about my views of 2007's market, which members generally already know details of, and as far as we're concerned the idea of the overall (real) market running into a 'wall of resistance' at the year's start, and then becoming more evident after CES started. This is quite 'at variance' with the 2002-2005 calls when we persistently called for the Fed to 'reflate' and for all dips to be within the ongoing 'bull market context'. Note we were the most bullish of all analysts surveyed late in 2005; calling for DJ 12,500-800. In Summary: we do think this new year and beyond will be hardy technology cycles; just too bad that it will have to initiate in the midst of (reserved for ingerletter.com). Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of technology issues (needed for assessment of general factors in tech overall, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection. Level 3 (LVLT); Intel (INTC); Texas Instruments (TXN), Microsoft (MSFT); plus Motorola (MOT); InkSure (INKS); Essex Corporation (KEYW); Ionatron (IOTN); PURE Bioscience (PURE); QPC Lasers (QPCI); and LightPath (LPTH); the latest addition to the small group we monitor are commented upon in accompanying audio. A big birdie (actually a large California condor) flying over Marina del Rey, spotted a very unusual aircraft taking-off from LAX, and this was reported by the AP after stock markets closed today. What we can say is to summarize the AP story, with our own input, much of which you already know about, but as this was in earlier development. 'An MD-10 cargo jet equipped with Northrop Grumman's Guardian new anti-missile system took off Tuesday, from Los Angeles International Airport on a commercial flight. The FedEx flight marked the start of operational testing and evaluation of the laser system designed to defend against shoulder-fired anti-aircraft missiles during takeoffs and landings.' The accompanying photos are from various sources, while the operational graph was provided by the primary contractor in an earlier presentation. Adapted from military technology, Guardian is designed to detect any missile launch and then direct a laser to the seeker system on the head of the missile and disrupt its guidance signals. The laser is not visible and is eye-safe, the developers state. The first commercial flight with the Guardian system followed 16 months of tests on an MD-11, an MD-10 and a Boeing 747 using simulated launches of shoulder-fired missiles. The Guardian system appears as a pod with eye-like features attached to the belly of the FedEx MD-10, a freight version of what was originally the 3-engine widebody DC-10 airliner, generally shunned by commercial fleets since the United semi-disaster landing in Iowa (heroic flight crew saved over half the passengers as they landed with no hydraulics since the old DC-10 didn't use redundant check-valve systems or backup wireline or cable systems as did and do current Boeing aircraft). It is incidentally a shame our troops are frequently flown overseas on dubious DC-10 or MD-11 aircraft which have the same inherent design flaws as plagued the old planes. Incidentally; Sen. Barbara Boxer (D) viewed this, and said she was encouraged by it. "This program is very promising because it's already met the operational testing. Now it's a question of how does it actually work in terms of stresses on the system while the airplane is in operation for several hours," said Boxer, a longtime proponent of equipping planes with anti-missile technology. Boxer said her first priority will be to equip the Civil Reserve Air Fleet, operated by airlines that contract with the Pentagon to make military flights during emergencies. And therein we see a logic for 'funding'. Also; Northwest Airlines will provide engineering and technical services to develop commercially viable equipment sets suitable to operate within domestic commercial airframes. What we can say is that the system uses a (reserved for ingerletter.com). The AFRL (Air Force Research Laboratory) was involved in all phases of the original development, and we suspect continues to be involved in ongoing development. To 'reduce costs' and make this commercially affordable, the prime contractor sourced a number of components to various contractors, and therein lies our interest (the laser 'module' manufacturer). I suspect the 'Air Mobility Command' is utilizing such lasers currently (unconfirmed) and I also think the Air Force is (reserved for members). This has been achieved by the use of mid-IR lasers that are powerful and at least as if not more efficient, we're thinking. U.S. Special Operations Command (that is in Florida) may also be utilizing variations of this system in classified ways now. As for system from Raytheon, called 'Comet', that's essentially competition militarily but not commercially, as can best be gleaned from our studying work in the field. Pretty simple really; as Comet is derived from advanced flares, unlikely to ever be deployed in commercial aircraft over-flying urban areas; that's why we don't focus on it. As most military aircraft could face urban terrorist threats too, I lean toward future systems embracing mid-IR defensive PODS (or similar) as refined as it's key military aircraft also have protection wherever they're landing (heretofore most military systems are employed in-flight; not on-approaches). At least one company might supply 1,000 systems at a cost of $1 million each; and operation and maintenance will cost $365 per flight, above the $300-per-flight goal, and within reason we believe (that's our opinion not that of the AP or Northrop or BAE). We also suspect we have an idea 'who' is providing solid-state lasers used in the POD's (reserved). If we're right, it could be an American firm not all that far from today's takeoff point; nevertheless west of the Colorado River. Bottom line: suspect the overall Northrop system incorporates parts (POD) provided by (reserved). Realize this is a long-term project; but eventual realization of who provides such laser internals (and other upcoming applications) could stimulate interest considerably prior to general adoption by the American aviation fleet, should that eventually occur (and of course we believe this is by no means the primary or sole application for even this particular laser, should we be on-target with our suspicions about who makes it). We will not delve into further speculation, though we believe (again) that numerous uses of such technology are already being developed, contemplated, or actually utilized. It should be mentioned that we are addressing solely solid-state semiconductor lasers. ``` 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, as domestic issues absorb us less as we focus on the Middle East crisis and World War III avoidance. McClellan Oscillator finds NY 'Mac' stabilizing in initial year's action: +8; NASDAQ neutral really, at +3; with complacency pervading ideas of sustainable extensions. It is also the case that the market has ignored 'negative divergences' for several days now; but we suspect they'll not be able to remain blindsided to deterioration for long. Issues continue including oil, terror; the whole Middle East, Korea, and economics. As assessed for a couple weeks, extended rebounds were showing just exhaustion syndromes, and now without interpretation or forecast, increasingly negative action. Suspect Thursday may again be a series of failing flailing efforts at stock rebounds. It is not necessary to say 'crash alert' or plunge protection or anything like that because unlike the increasing growth of skeptics (embracing our view of the slow-growth facts as relate to the irrationality of further big-cap equity price gain here) our view's known on this subject, and as far as we're concerned the big-cap sector is declining more or less 'under-cover' of the Dow and S&P, which have been masking the deterioration. 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)