if we look at a longer term chart of the Dow during the 1970's when the price of Gold was soaring along with much higher Interest Rates you can see the Dow peaked in January of 1973 and it took nearly 10 years (November of 1982) before the Dow was able to rise back above its previous high made in January of 1973.

If we look at a longer term chart of the price of Gold versus the Yield on the 10 Year Note going back to the early 1960's the last time there was a significant upward move in the price of Gold in the 1970's (points A to B) there was a steady increase in the Yield on the 10 Year Note (points C to D) which meant higher Interest Rates. Also notice when the price of Gold peaked in the the early 1980's and began its descent through 2000 the Yields on the 10 Year Note also dropped which led to much lower Interest Rates. Since 2001 the price of Gold has been trending higher however so far there has not been a substantial increase in the Yield on the 10 Year Note. However one has to wonder if the same scenario which occurred in the 1970's repeats itself then at some point there should be a substantial rise in the Yield on the 10 Year Note which would lead to higher Interest Rates in the future.

--Bob

Last week I said the index had to move above the September 4th swing high. Then there would be two probabilities; either a small multi day distribution pattern as soon as it got above the high, followed by a resumption of the down trend. Or it would go up to test the June / July highs and then distribute and go back to test the August low. It has now gone to a new high above the September high in a rather dramatic fashion. The index will need to consolidate this wide range day, maybe into as long as next Tuesday if we are going see a top here. It has moved above a ¾ retracement and also moved further above the high of the fourth of September than would be normal to set this up a lower high. So unless there is a distribution pattern that can be recognized something similar to the one that occurred at the July high, a test of the high could occur by October 10th.

Five year cycles have a strong history in US stocks. This is a chart of the 5 year or 60 month cycle divided into 1/8th and 1/3rd. If a time period or cycle has validity those mathematical parts of that cycle should also prove to have a vibration in time. You can see that almost every division of this time period of 60 months was significant. Most importantly the mid point of the cycle or 30 months was a significant low and it is not unusual to see a market go low to low in a time period and repeat that same time period into completing the trend. You can also see the last two divisions of the cycle were exact for lows so this time window of October 10th plus or minus a week is good probability for ending the trend if it can move up past this week. I still don’t see this as a new leg up in the ongoing bull trend but simply a further period of distribution to complete the bull campaign.--BILL M

Babcock & Brown Air Ltd.

Dublin, Ireland

(302) 738-6680

babcockbrown.com

Lead underwriters:

Morgan Stanley, Citi, Merrill Lynch

and Credit Suisse

Offering price: $22-$24

Expected date: week of Sept. 24

Ticker: FLY

THE BUZZ

The credit crunch this summer gave aircraft-leasing stocks a haircut. Or in some cases, more like a full head shave.

Recent new issues Genesis Leasing, (GLS) AerCap Holdings (AER) and Aircastle (AYR) lost 25% to 35% of their value between mid-July and mid-August.

However, the Federal Reserve's decision last week to cut interest rates rallied the sector's stocks. That's excellent timing for Babcock & Brown Air, which plans to go public this week.

The firm is also taking advantage of longer-term trends, especially in global markets. Worldwide air traffic has been growing at more than 5% a year since the 2004 recovery, according to Airline Monitor. In emerging markets, such as China and India, the rate has been more like 9% to 10%.

At the same time, a larger share of the aircraft flying all that traffic is being leased. Last year, about 30% of commercial jets were flying under operating leases, compared with 24% in 2000.

THE COMPANY

Technically, B&B Air is a newly formed company. But parent company Babcock & Brown has been in the business for 17 years. It manages 240 aircraft. The new issue will get 44 of its 47 planes from JET-i Holdings, a company managed by Babcock & Brown, and will get their lease deals already in place.

B&B's management boasts of its fleet's relatively young average age of 5.7 years. According to the company's roadshow, its three public rivals' fleets average 7.1 years, while the North American average plane age is 14 years. B&B also says the aircraft can be easily converted from passenger to freight use if need be.

The existing leases, with expiration dates ranging from this year to 2021, involve 29 different airlines in 16 countries. The largest customer share belongs to India's SpiceJet, which contributes 9.1% of appraised value to B&B Air's portfolio. India overall takes up 15% of the portfolio's value. The next leading countries are the U.S., Mexico and China.

The parent Babcock & Brown will own 13% of the company after the offering and continue to help it grow. B&B Air has a $1.2 billion credit facility to fund future aircraft purchases.

RISKS/CHALLENGES

The $1.2 billion is a pretty hefty debt to start out with, given that the historic fleet draws a fraction of that in annual revenue. It exposes the firm to interest rate risks as well as various terms and conditions on its borrowings.

Despite the limited ownership, the firm will remain deeply interwoven with Babcock & Brown, and dependent on it for management and services. Investors in B&B Air will have to concede a lot of control to a nonpublic finance company.

Because the parent firm still has its own aircraft under management, the company will be competing with itself in some markets.

The airline business is historically cyclical, and it's been in an up cycle for about three years now. Also, as we saw in 2001, unforeseen disasters can hit air travel hard. B&B Air competes with some much larger players, including divisions of General Electric (GE) and Boeing. (BA)

THE RESULTS

Although B&B Air's newness doesn't allow exact historical comparisons, its prospectus provides the financial history of predecessor JET-i Leasing. In the first six months of the year it drew $67.4 million in revenue with net income of $9.9 million.

USE OF PROCEEDS

B&B Air expects to draw $846 million from the offering of 18.7 million shares. It essentially will use most of the money to form the company, including buying planes and paying formation and offering costs. There will be $120 million left over for general corporate purposes.

THE MANAGEMENT

Colm Barrington
Chief executive and director

Joined Babcock & Brown in 1993 after his former employer, GPA Group, merged with GE Commercial Aviation Services. He began his aviation career at Aer Lingus in 1967. He holds an MA in economics from University College, Dublin.

Steven Zissis
Chairman and director

Also president of Babcock & Brown Air Management. He joined the firm in 1990 from Citibank. Holds a degree in finance and international studies from Rhodes College.

Gary Dales

We first added shares of SPIL to our High Risk list back in Dec 2006 at just over $3.50 per share. To date the shares are up $7 since we added them for your consideration, or a ROI of 205%.

Spil is one of the worlds largest contract Semiconductor packaging and testing companies based out of Taiwan. SPIL is one of many companies that benefits from the growing trend of outsourcing of non-core process, which increasingly includes packaging and final testing.

This business is highly cyclical, has high fixed cost, and rises and falls based on the global demand for semiconductors, which is not controllable by SPIL.

In looking at the fundies for SPIL, I really like what I see and believe in the short term, 3-6 months, this stock presents a possible double in price.

First, SPIL has grown at 25% for the last 5 years. So, this is why I put the time table for 3-6 months, because I still believe the BULL run is in its final stage.

I think we are likely to see a 2008 world wide decline in business spending and stock markets around the world to finish lower.

By any measure, even though SPIL is up 200% since we first brought the stock to your attention, the shares are on the low end of their historical valuation.

The 5 year p/e range for SPIL is between 8xs and 140xs, currently we are sitting around 14xs. This compares to the industry average p/e of 28xs.

Looking at the chart, we seem to have 2 possibilities. Either we have settled into a trading range between $10 and $12 a share, or we are about to take out the $12 resistance level and run to new highs.

Given the overall markets big run the last 3 weeks, the likely hood of a small correction in the broader market is high.

Many times we will see a stock move in a trading range for a while consolidating, before breaking out. This is the scenario I am expecting, thus I will be looking to trading in and out of the shares between $10-12 per share, until we can build up an ownership position with no risk.

We think if the broader markets can hold up, the shares can move to $20 per share. Boosting this prediction is the fact that 4 analyst cover the stock, 2 of them are sitting on downgrades.

Analyst are always late to the party, so this is something we look for at the Trademechanic. Preferably no analyst coverage, or the majority sitting on downgrades.—Jon

For those who say the FED doesn’t pay attention to the stock market and doesn’t care about stocks, found out different today. Clearly the move today was an attempt by the FED to upside sell the stock the market into a rally.

This is great news for us running money because it gives us the green light assurance that all major dips in the market will be bought.

Now I don’t want to throw fire on the flames today, but lets keep in mind professional money was not chasing this market today. But, we are willing to buy the market now, so that is the big switch from just a few weeks ago.

Don’t forget that this week is triple option expiration, most of those positions got blown out today, on lower volume.

So the game plan from here is to watch the S&P 1500 level for a false break out pattern, or a re-test and hold of the 1500 level, setting us up for a run to 1550.

No set ups the rest of the week as the most important money, institutional, will be sitting this week out and spend this weekend getting their shopping list ready, waiting for a good entry point.-Jon

Below you will see a write up and chart by a long time Wall St pro who I much respect Bill Mclaren. Bill and I are in agreement that the "probability" of a market sell off has grown by a large margin because of the weak volume rally, already pricing in a FED move.

I will post Bills words as is, but just keep in mind, this is the way we are playing things for the coming and plan on taking a short position via the QID ETF at some point next week.--Jon

Last week I warned you not to get too bearish even though I forecast the next high would be 12 trading days from the low. The technical extremes that were hit at the exhaustion low in August indicated “fear” at an extreme level. Those technical extremes tend to take some time to work off. Since the index held its March low that also established a horizontal level of support and offers a probability of running to the previous horizontal resistance or testing the high. The retracement of up to 2/3rd of the decline is also quite large for a secondary high. Everything in these markets are probabilities there are no certainties and time cycle represent probabilities. The reality is the pattern of trending and the normal pattern of trending for a period of distribution are “three thrusts” that show a weak trend. A weak trend can be defined because the moves down go deeply into the run up and well below the previous swing high, as this move has shown. You can see how last weeks high failed on the 12th day of the rally as forecast and fell 4 days, well below the previous high. That represents a weak trending structure. There are two probabilities here set up by the pattern of trending and the internals. The index moves marginally above the 12 day high which completes the three thrust distribution and resumes the downtrend. I’ve drawn that on the chart. Since a rate cut has already been put into the market when the news of a cut is confirmed on the 18th that could complete the pattern. This has been a blue chip rally on light volume so it isn’t all that pretty.--Bill M

BRLC Syntax-Brillian "(nasdaq: BRLC - news - people ) shares slid 34.6%, or $2.12, to $4.01, on Thursday because of the disappointing sales prediction. The company expects first-quarter sales between $170.0 million and $180.0 million. Analysts polled by Thomson Financial were expecting sales of $256.6 million."

I point this stock out to say that investing in electronic product makers is the worst. The bottom line, their product lines go from hot to cold and pricing power is not there. The only thing these companies can ever do, is lower prices to generate more sales, which just puts constant downward pressure on their margins.

Apple to date has been one of the few exceptions to this rule, although they did lower the price of their I-Phone fairly quickly.--Jon

All week long I have ponderd this latest move up in the markets, and what that means for us as traders on next Tuesday after the Fed rate decision.

In other words, do we lighten our load before hand? If stocks rally, we can always buy back in no problem on dips. But if they sell off, then its hard to get out when everyone is hitting the panic button at the same time.

Clearly the market has already priced in the Fed action, everything except no rate cut, worry worried about inflation.

Here at Trademechanic, we try to maximize our profits on each trade, by being patient and limiting our trading in and out of each position. Traders that over trade, find themselves in the long run, ending up in the funny farm and under performing the market averages.

However, there are times when this slow to sell technique gets us in a jam.

Honestly my fear next week is could this be one of those times. Would it not be better to go ahead and exit what we can, then regroup after the dust settles.

Lets go to some charts for answers.

This is a Market Timing Chart provided by VectorVest. They define this as, " Each and every day in the VectorVest Views, we analyze the movements of the VVC’s price, its RT and the ratio of Buy to Sell recommendations in our database. These three factors are combined into a master indicator, called the Market Timing Indicator (MTI)"

As we can see on this 4 year chart, everytime the index has crossed below the 40 day sma average, that has been the bottom. This is where we find ourselves today, even after the last few 100 point gains.

So, is this a bottom? Well recent history acording to this chart says yes. However, more longer term history says bull market runs last 4 years, which is where we are today. I have no doubt in my mind 2008 will not be an up year for the stock market. However, the question is, are in that sideways to downtrend now?

Here we have a chart of the S&P. We look at this index because its broader than lets say the Dow, which only has 30 stocks.

Looking at this chart, it looks just like the oil chart I posted when oil was $70, and I said it look like its going to $80.

This has formed a inverted head and shoulders pattern as well. So, putting the MTI index chart, together with the S&P chart, and the fact that we are approaching some of the better months of the year, against my thougts all week that we will sell off after the Fed, it looks like we are going to move higher.

Charts of course are only as good as yesterday, but the fundamentals are solid, the good months are coming up, and I have yet to see a stock market sell off big when the Fed is cutting rates. Since sucessful stock trading is all about weighting out probability, and risk verses reweard, I would say we sit at 70/30 to move higher next week.--Jon

Headline, "U.S. Global Investors Achieves Record Earnings in FY 2007"

Assets under management have swelled to 5 billion, WOW! This company by far is the cream of the Asset Management Industry, and based on this chart of Gold:

The future looks bright indeed.

If your short this stock, I got a message for you Message from Jon --Jon

Headline, “Life Partners Expects 1,200% Increase in Earnings for First Half of Fiscal Year”

The stock is down after hours 16% on this news or $8 per share.

The stock only has 1 analyst that covers the stock, which you know I love that. However this analyst had expectations a smidge higher, so the stock tanks.

This is the kind of idiot trading that enables long term stock traders to feed their families.

I have written many times and given many examples of how market inefficacy is how to make money.-Jon

Stocks staged an up-and-down session Monday, ending the day mixed in lighter volume.

The Nasdaq and NYSE composite both shed 0.3%. The S&P 500 edged down 0.1%. The Dow industrials held on for a 0.1% gain.

Volume eased across the board. It sank 5% on the Nasdaq compared with Friday's level. NYSE turnover dropped 8%.

The major indexes perked up at the open on a bullish report from tech bellwether Intel. (INTC) The chipmaker said third-quarter revenue should top Wall Street projections.

But both Intel and the broad market soon pulled lower, following comments by several Federal Reserve officials disputing the notion that deep interest rate cuts would be required to bolster the economy.

San Francisco Fed President Janet Yellen said downside risks to the economy have climbed. But, she said, interest-rate policy shouldn't necessarily be tied to the movement of equity markets.

Elsewhere, Atlanta Fed President Dennis Lockhart pointed to Friday's soft jobs report as showing weakness in the nation's employment picture. But the data need to be evaluated alongside more recent, positive retail sales reports and other indicators when gauging the overall economy.

Dallas Fed President Richard Fisher also issued fairly positive comments concerning the state of the broad economy.

The Fed's next policy meeting is slated for Sept. 18. The likely debate is whether to cut the key fed funds rate by 25 or 50 basis points.

Bond prices have risen lately. The yield on the 10-year note sank to 4.33% from 4.39% Friday.

Meanwhile, the stock market has hit a few bumps. The major indexes notched two distribution days of higher-volume selling in a three-session span last week. That's not the kind of action you want to see so soon after a follow-through at the start of a new rally.

Still, several leading stocks have shown signs of strength. Hints of sector rotation have emerged.

Fresh faces have surfaced among individual stocks and broader sectors. Some top-performing stocks from the previous market uptrend have languished.

Medical stocks have cropped up all over new highs list in recent weeks. That sector had taken a back seat to materials and other market niches earlier this year. Now, medical-related groups are yielding some new leaders.

Omnicell (OMCL) surged 1.87 to 25.93 on three times its normal trade. The provider of medication dispensing, pharmacy storage and other medical services broke out of a seven-week base, vaulting to an all-time high.

Rising oil prices also have caused a shift in the market landscape. Energy-dependent transportation stocks have lagged the broad market's performance over the past few months. The Dow transports slid 0.8% Monday, as railroad, trucking and airline stocks all fell.

October crude bounced 79 cents to $77.49 Monday. Oil is up almost 52% from its January lows.

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Additions Sept 8th

Were adding 12 more stocks this week to our watch portfolio. Again I have not cut down our list yet and probably wont until October.

However, I have been carefull to add only the top stocks in their respective industry groups and trading at the lower end of their historical range.

On this weeks additions, shares of GigaMedia GIGM. This stock I am espcially excited about and look forward to trading in and out of this one over the next few years, building a long term position. As of right now, assuming all reported earnings numbers are true, sky is the limit for this company.

CF, SCHN, ATW, CMTL, BKH, TDW, GIGM, BLL, TXN, RBC, FTI, NTES.-Jon

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Sector Focus Metals Sept 8th

The metals sector has been in a nice tight trading range during these volatile times. It now seems to have formed an inverted head and shoulders pattern.

The top 5 stock in this sector are:

ACH, FSTR, VMI, SCHN, BOOM.

Jon-

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Buyouts to Consider Sept 8th

Here is a list of announced stock buyouts that I think will be completed and offer easy profits if so.

FRZ – Offer price $31, however large shareholder says price should be closer to $40

GTRC – Offer price $63

AGE – Offer $89

HUN Offer $28

TRB –Offer $34

Running money for a living can be a difficult job, that is 24hrs a day, no vactions. So you should always be looking for the easy money plays as much as possible.-Jon

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Cashless Companies in Play Sept 6th by Marilyn Alva

Right after Labor Day, a slew of New York City taxi drivers protested plans to roll out credit- and debit-card payment systems in the back seats of all 13,000 medallion cabs.

They feared they would lose money on tips if passengers didn't pay in cash.

But proponents, including Mayor Michael Bloomberg, outnumbered the protesters.

Supporters say the ongoing program will better serve customers and actually help bring in more money for cabbies.

How? By speeding up turnovers and generating higher tips than normal from cash-strapped riders.

It certainly will help bring in more revenue for San Jose, Calif.-based VeriFone Holdings. (PAY) The company is a leading maker of point-of-sale terminals and wireless systems.

VeriFone — in partnership with MasterCard's (MA) PayPass — was the first firm approved to provide the wireless systems in New York's cabs. The systems make use of an ATM-style interface to accept credit and debit fare payments.

The company's back-seat screen monitors also deliver news, weather and tidbits on restaurants, night life, hotels and other attractions. An extra bonus: Like billboards, they bring in revenue-generating ad money.

"Every year, we find a free ride on a new segment of the economy that is going electronic," said Doug Bergeron, VeriFone's chief executive.

A few years ago, it was a big drive by fast-food chains. Cashless pay-at-the-table systems have been gaining steam more recently.

"Who knows what it will be next year?" Bergeron said.

The company's bread-and-butter business remains landline-based point-of-sale, or POS, terminals, especially in the U.S. But contactless wireless products are its fastest- growing business, and a higher-margin one at that.

After the market closed Thursday, VeriFone reported earnings of 42 cents a share for the third quarter ended July 31, beating Wall Street's consensus by two cents. The firm earned 28 cents in the same period last year. Revenue in the quarter rose 57% to $231.9 million.

The company said it expects to post another banner quarter in the fourth. It raised its full-year guidance to $1.59 to $1.60 per share, compared with Thomson Financial's current estimate of $1.56.

International wireless sales have been especially strong. One reason: In areas such as Mexico, Brazil, Latin America and the Asia-Pacific region, wireless connections are cheaper than landlines. Some governments, notably Mexico's, have been promoting cashless payments.

In addition, a growing middle class in largely cash-based developing nations is fueling demand for plastic.

"Two years ago, wireless was only 10% of our total revenue of $500 million. Today it is 30% of $900 million," Bergeron said.

Last year's acquisition of Israel's Lipman Electronic Engineering boosted VeriFone's wireless capabilities. It also gave it a stronger presence in Western Europe, Turkey and Asia-Pacific, including China.

"With Lipman, they are the undisputed leader in the global market," said Aravind Vanchesan, an analyst at Frost & Sullivan.

VeriFone's chief rivals are France-based Ingenico and to a lesser extent Phoenix-based Hypercom, (HYC) which has been losing market share for the past two years.

About 75% of VeriFone's sales are to banks, which in turn provide the systems to retailers. VeriFone's systems — which are manufactured by low-cost third parties — are integrated and bundled with bank processing services.

VeriFone sells to just about every major bank in the world that is involved in credit card processing. In addition, new innovations by card issuers such as MasterCard "require our involvement," Bergeron says.

Besides New York's cab program, MasterCard's PayPass system was the lead player in the rollout of cashless payment systems in Philadelphia's taxi cabs starting last year. VeriFone was a partner in that program as well. About 12% of Philly's cab fares are now paid with plastic, Bergeron says.

The remaining 25% of VeriFone's customers are oil companies (think gas pumps), government agencies and large global retailers that buy direct, such as TJX, (TJX) Walgreen, (WAG) Rite Aid (RAD) and Albertsons.

The U.S. POS terminal market is a mature one. Even wireless cashless systems in U.S. fast-food units have about a 90% penetration rate, analysts say. But fast-food expansion outside the U.S. will provide further growth, Bergeron says.

VeriFone intends to keep sales growing in the U.S. by bringing out new products, including outdoor payment systems and pay-at-the-pump technology that protects consumers' identities.

Bergeron calls VeriFone "a software company in disguise." Of the $60 million spent on research and development this past year, he says, $55 million was in new software that runs on its systems or servers.

"Does Motorola (MOT) download new software on old phones? No. They sell you a new phone. Software gets delivered on new devices," said Bergeron. "We live on that model. New encryption and capabilities result in new system sales."

In parts of Europe, South America and Asia, new security protocols to limit fraud might spur growth of new "smart card"-type terminals, Vanchesan says.

VeriFone makes terminals that use smart cards as well as magnetic swipe cards, which are ubiquitous in the U.S., where fraud isn't as much of a problem.

Even so, new security standards in the U.S. are driving some growth in new POS systems.

"The question is, what level of terminal replacements (is required)," said Robert Dodd, an analyst at Morgan Keegan. "A lot of (security) work being done is back-office stuff. So merchants may be able to get by without replacing terminals."

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One More Reason for a Fed Rate Cut Sept 3rd

Hugo Chavez’s economy is starting to unravel in the currency market.

While Venezuela earns record proceeds from oil exports, consumers face shortages of meat, flour and cooking oil. Annual inflation has risen to 16 percent, the highest in Latin America, as President Chavez tripled government spending in four years. Exxon Mobil Corp. and ConocoPhillips are pulling out after Chavez demanded they cede control of joint venture projects.

The currency, the bolivar, has tumbled 30 percent this year to 4,850 per dollar on the black market, the only place it trades freely because of government controls on foreign exchange. That’s less than half the official rate of 2,150 set in 2005. Chavez may have to devalue the bolivar to reduce the gap and increase oil proceeds that make up half the state’s revenue.

This could spill over into the Latin America economies, and ultimately into our economy. Some rate cut insurance is in order.—Jon

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Top Performing Close End Funds Tracking Stocks Sept 3rd

Its always a good idea as traders to know where professional money managers are placing their bets on other professional money mangers.

In other words, week to week, which close end funds tracking stocks are being bought buy their peers.

Here is this weeks Top 4, and their Top Holdings

Evergreen Utilities & High Income Fund - Kelda Group, United Utillities, Shenandoah Telecomunications, DPL, Enel SPA, Constellation Energy, ENI, Rogers Communications, Crosstex Energy

Templeton Dragon Fund – Dairy Farm International, China Mobile, China Petroleum, PetroChina, HSBC Holdings, Cheung Kong, CNOOC

Engex, Inc - Enzo Bio, Keryx Bio, American Vantage, SurgiVision, Silverstar Holdings, GMP CO

Cohen & Steers Quality Income Realty Fund – Ventas Inc, Vornado Reality, Macerich, Liberty Property Trust, Mack-Cali Realty, Brandywine Realty, Health Care REIT, AvalonBay Communities, Archstone Smith Trust—Jon

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IPO Hot Sheet Fuqi Sept 1st by AMY REEVES

Fuqi International Inc.

Shenzhen, China

86 (755) 2580-1888

fuqi.com.cn

Lead underwriters:

Merriman Curhan Ford

Offering price: TBA

Expected date: TBA

Ticker: FUQI

THE BUZZ

What are the upscale Chinese doing with their newfound wealth? Recent new issues have offered many possibilities. There are hotels (Home Inns & Hotels), (HMIN) private schooling (New Oriental Education), (EDU) investment advice (Xinhua Finance Media) (XFML) and real estate (E-house Holdings). (EJ) Some of those stocks have done better than others, but Fuqi International is testing the market's appetite for the ultimate luxury good: jewelry.

According to Global Industry Analysts, China's jewelry industry totaled $18 billion last year, up 35% from 2001. It is the third largest consumption item among Chinese, after automobiles and housing. By 2010, the country is expected to have the biggest jewelry market in the world.

Fuqi has taken advantage of this trend, achieving an average 57% annual sales growth rate in the last five years. So far it has sold its products wholesale to retailers and distributors. But now the company wants to open its own retail shops, and the U.S. initial public offering will help pay for it.

THE COMPANY

Fuqi was founded in 2001. It has built up a design database of over 20,000 products, mostly made from platinum, gold and other precious metals. Its wholesale markup ranges from 10% to 12%, which can climb as high as 30% by the time it gets to the consumer.

Not surprisingly, Fuqi would like more of that margin. Its retail plan is to open 20 counters and two stores this year and open 60 to 80 counters and eight to 10 stores next year. It also will shift its product line toward finished gemstone items. Historically, this hasn't been a very big part of the business, but the firm says it has higher margins than the strictly metal pieces.

In November, Fuqi went through a reverse-merger transaction with visitalk.com, a firm in Chapter 11 bankruptcy. However, the deal does not seem to have left the firm with significant long-term debt.

RISKS/CHALLENGES

Investing in China isn't for the risk-averse, as previous market tremors there this year have shown. As a highly discretionary item, jewelry is perhaps more vulnerable to economic fluctuations than most products.

Much of Fuqi's working capital comes from accounts receivable, i.e., orders that have not been paid. Major defaults could seriously hurt the company's cash supply.

Fuqi is vulnerable to commodity prices of the metals and gems it uses. Historically, it has not hedged against this, but it plans to do so in the future. The supply is also heavily regulated by the Chinese government.

It's hard to tell how the retail strategy will work out, since the firm has never done it before. It also will need to expand geographically, since sales are now concentrated in a few northern provinces.

Fuqi has about $16 million outstanding in short-term borrowings.

THE RESULTS

Sales have ramped respectably in the company's short life, totaling $92.4 million last year. In the first six months of this year sales gained 12% to $54.2 million, while net income rose 21% to $3.4 million.

USE OF PROCEEDS

Fuqi has not set terms for the offering, but it plans to spend the proceeds on expanding retail operations and product lines and for general corporate purposes.

THE MANAGEMENT

Yu Kwai Chong
President, chief executive, chairman

Founded the company and has headed it since 2001. Founded the first jewelry manufacturing and sales firm in Shenzhen over 20 years ago.

Ching Wan Wong
Chief financial officer and director

Joined in 2004 after two years as a tax consultant. Previously he served as finance director for MindShare China and Carat Media. He holds bachelor's degrees from both the Chinese University of Hong Kong and Southern Queensland University.

Lie Xi Zhuang
Chief operating officer and director

Co-founded the company after seven years at Shenzhen Ping Shen Gold and Silver Jewelry Co. Holds a management degree from Hunan Xiang Tan University.

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High Risk Play in Focus IOM Iomega Sept 1st

As stated last week, I am actively checking industry sectors for bottom formations and signs of early investment interest.

Today we discovered the Computer Memory Device sector as a bottom candidate.

As we see on this industry chart, this sector last bottom in September 2006. We all know history repeats, and it appears to be the case here, with a double bottom now in place going into September.

It is possible we could see a triple bottom form this month, but I believe we are safe enough to wade into the water at this point, as we have re-taken the 40 day sma.

So the question, what do we buy in this space?

Checking this space in IBD to see what stocks are top ranked, which is where we always start and usually end, we find shares of,

WDC, EMC, KOMG, STX, HTCH.

Ok, so running the numbers, I value WDC at $35, currently at $23. Not bad, that would be a 50% return, but with only 12% growth at 14xs earnings, maybe we can do better.

STX is a WDC direct competitor and clearly the dominate player in the hard drive space. I put value of STX at $40, current price $25 with 27% growth, 11xs earnings, very good numbers.

However, in the case of WDC and STX, one has to question the viability of their products as we move more to storage on chips, not hard drives, and removable, transportable storage for portable devices. Do we want to be paying these kind of stock prices in a declining industry niche?

Next move is to pull up all the stocks in this sector to see what jumps out.

When I say jumps out, that means explosive growth, possible turn around, little or no analyst coverage, and ability to return 100% on our investment with as little risk as possible.

Enter Iomega

Stock has been in a down trend for over 10 years, down from a peak of $135 a share. Bottomed finally at $2 and started working its way higher.

Iomega makes removable storage, or transportable storage. As the amount of storage capacity in computers grew, Iomega’s business suffered.

However, with the boom in all things small, and all in one cell phone devices, we can speculate Iomega once again might be in the sweet spot.

The company has no debt, trades at 14xs forward earnings with over 30% growth. They just put together their 3rd consecutive quarter of yoy growth, and increased operating cash flow by over 100%, net income up 110%.

We value these shares at $10, not including possible new product releases and increased sales.

I believe IOM offers limited downside risk, limited required investment capital, and a real chance to deliver 100% returns on investment.

We see shares of IOM as a strong buy and will attempt entry on Tuesday Sept 4th.—Jon

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