HORNBECK OFFSHORE SERVICES INC [HOS] was crushed, sinking 22% with volume close to 20 times normal, to close at $26.14. This followed the company lowering earnings guidance for the fourth quarter from a range of $0.72 to $0.77 per share to a range of $0.61 to $0.63 per share. Contributing to the decline was a downgrade by Goldman Sachs from “Neutral” to “Sell.” In addition to the lowered guidance and the downgrade, there was the continued drop in oil prices, and, given the dependency of the company on transporting offshore oil in the Gulf, there was apparently a perfect storm effect, generating some panic in the market.

With a rather attractive P/E ratio of 9.7 and given plans to increase the capacity of the fleet by 30%, this appears to be an great buying opportunity at this price.

Overall, it was a good day in the markets, with the average member of the SigmaInverse Universe gaining 0.95% and a very healthy 72.6% of the members posting positive returns for the day. Strong sector moves were seen for Airlines (up 2.2% - thanks to lower oil prices), Automobiles (up 2.3%), Entertainment (up 2.7%) and Oil & Gas Production (down 0.5%).

While there were not a lot of gains across the domestic markets on Wednesday, it appears that the large gains were definitely concentrated in the large capitalization range (i.e. ranks 1 to 500 in the universe tracked by SigmaInverse).

SYNTROLEUM CORP [SYNM] rose 20.6% closing at $3.81 on volume that was about four times normal with no significant relevant news events. The volume of the trades was also very suspicious with only one spike of 2 million shares at about 2:43 pm. We expect some sort of relevant news leak or a move by one very large institutional investor.

XM SATELLITE RADIO HOLDINGS INC [XMSR] jumped 10.1% closing at $16.65 apparently due to a Citigroup research note released on Wednesday, indicating increased openness on the part of XM SATELLITE for a merger with SIRIUS SATELLITE RADIO INC [SIRI] also up 7.3% closing at $3.98. We continue to believe that speculation on this merger is extremely risky and that, for a least one of the players, there is a more attractive strategy than the merger approach.

Overall, the markets were up with the average member of the SigmaInverse Universe posting a gain of 0.19%, although only 50.2% of the 3,501 members of the Universe posted positive returns for the day. Big sector moves were seen in Airlines (up 1.7% - oil prices down), Oil & Gas Production (down 1.2%) and Travel (up 1.7%).

Spurred on by lower oil prices, the Airline sector launched into the first quarter apparently determined to continue the impressive fourth quarter performance. Big gainers in the sector on Wednesday were AMR CORP [AMR] up 8.7% to close at $32.86 and JETBLUE AIRWAYS CORP [JBLU] up 7.0% to close at $15.20. Despite the recent sector gains, there are still some rather attractive P/E ratios among the airlines. Big sector losses for the day were Oil & Gas Production (down 3.7%) and Mining (down 3.9%).

Across the entire SigmaInverse Universe of 3,517 members, the average loss for the day was -0.09% although gainers outnumbered losers, 1,779 to 1,646.

It may come as a bit of a surprise, but, through last Friday, the three SI sectors posting the biggest cumulative gains for the fourth quarter were Airlines (up 23%), Travel (up 22%) and Entertainment (up 17%).

The final week of 2006 opened on a positive note with an average gain of 0.67%.   Approximately 71% of the 3,520 stocks in the SI universe posted a positive return for the day.  The sectors posting unusual returns for Tuesday were (once again) Airlines (up 2.0%), Oil & Gas Production (down 0.7%) and Retail Apparel (down 0.9%).

It’s probably just a coincidence, but the Airline sector on the busiest day of the year for airlines was the biggest gainer on Daily Sector Performance Chart (see below), thanks to some interesting news events involving regional carriers. Overall, of course trading was light in anticipation of the holiday. The average stock in the SI Universe of 3,521 lost 0.14% on Friday, with 35.6% posting positive returns for the day, 60.5% posting losses and 3.9% unchanged.

PINNACLE AIRLINES CORP [PNCL] took off on Friday, closing at $16.75 or a gain of over 56%, after announcing a new Airline Services Agreement, extending the partnership with NORTHWEST AIRLINES CORP [NWACQ] through 2017. NWACQ was down 8.6% closing at $4.04. PNCL was upgraded by Prudential, all the way from “Underweight” to “Overweight.” Part of the deal includes a $377.5 million claim in the bankruptcy proceedings of NORTHWEST AIRLINES so the exposure in that area appears to be largely covered. While the P/E ratio remains attractive, and the terms of the deal are likely to prove favorable over the next 11 years (especially the obligation of NW to provide jet fuel to PINNACLE at no charge, removing fuel as a revenue and expense item from PINNACLE’s statement of operations), we fail to see significant further upside potential unless the company takes advantage of new non-exclusive clauses in the new agreement.

Another interesting deal in the airline sector involved MESA AIR GROUP INC [MESA] up 2.7% closing at $7.92, after announcing that the company would be creating a Chinese regional airline in a joint venture with Shenzhen Airlines. The new airline is expected to launch operations within the year and to have 20 regional jets flying prior to the Beijing Olympic Games in 2008. Given the revenue growth that we are likely to see in this area and the rather attractive P/E ratio, this appears to be an interesting buy opportunity.

SCICLONE PHARMACEUTICALS INC [SCLN] jumped an impressive 38.5% closing at $3.13, on the news of Phase 2 clinical trial results in which a test group of patients with stage IV malignant melanoma, taking its new drug ZADAXIN® in combination with chemotherapy had a median survival period of 10.2 months, compared with 6.6 months for the control group treated with a combination of chemotherapy and interferon alpha.  Even more significant was the fact that the test group had more than double the tumor response compared with the control group.  On the basis of these results, we expect that the company will proceed with Phase 3 trials. Recalling the negative Phase 3 trial results last year for the combination of ZADAXIN and interferon alpha in the treatment of hepatitis C, this remains very speculative at this point. However, the balance sheet is reasonably healthy and the income statement showed a loss of only $0.03 per share in the third quarter. In addition, there is another proprietary drug, SCV-07, in the pipeline that has shown some efficacy in the treatment of multi-drug resistant tuberculosis and possibly other diseases. Given these considerations, it appears this remains a very speculative but intriguing buy opportunity.

Another drug stock with good news on Friday was INTERMUNE INC [ITMN] which shot up 29% closing at $28.40 on the news that a Japanese drug company SHIONOGI & CO LTD had reported positive results in a Phase 3 trial of a new drug pirfenidone in the treatment of idiopathic pulmonary fibrosis. INTERMUNE is also conducting Phase 3 trials for the same drug, although there is no guarantee that the results will also be positive since the dosage and length of treatment in the two studies are not the same. We see little remaining upside potential here because of the huge response in October to the ROCHE deal and the fact that profitability appears very far off at this point.

RED HAT INC [RHT] jumped 25% after announcing a very impressive third quarter result. Revenue for the quarter ended November 30^th, was up 45% over the same quarter last year. Net income for the quarter was $14.6 million or $0.07 per diluted share. Excluding stock compensation and special tax expenses, the profit was $0.14 per share, versus a consensus estimate of $0.12 per share. Also helping were upgrades by First Albany from “Neutral” to “Buy” and by Citigroup from “Sell” to “Hold.” It would appear that this move offsets the overreaction in October to the ORACLE announcements and indicates that ORCL and MSFT/Novell competitive moves are ultimately strengthening the Linux OS market. Despite the current P/E ratio (59.4 on trailing 12 months earnings) there is still some significant upside potential given the strong cash flow and growth possibilities through acquisition.

HAYES LEMMERZ INTERNATIONAL INC [HAYZ] jumped 40.6% to close at $3.50 following the release of financials for the fiscal third quarter ended October 31^st. The company reported sales of $589.5 million for the quarter, a decline of 2.4% from the same period last year, and a net loss from operations of $27.6 million, compared with earnings from operations of $16.8 million for the third quarter last year. However, the loss includes a one-time $39 million non-cash impairment charge. Excluding the impairment charge, the company’s earnings from operations would have been $11.4 million. The company attributes the decline in sales to a shift away from dependency on the North American automotive clients, which have seen declines of 15% in production volumes over the same period. The company also reported a reduction in overall debt by approximately $24 million in the third quarter, although long-term debt remains uncomfortably high at $667 million. (There was a reduction of $10.5 million in long-term debt during the third quarter.) Also encouraging was a positive free cash flow of $27.6 million, excluding the company’s securitization program. For the full year, the company provided revenue guidance in the range of $2.2 to $2.3 billion (basically the same as for 2005), and improved EBITDA compared to 2005. However, the company still has a long way to go before we could recommend it on fundamentals. From a trading perspective, it’s looking expensive again. Note that the company has almost no analyst coverage, so one cannot expect to find low risk opportunities based on gaps between expectations and likely results. The free cash flow is helping to create value by allowing some reduction in the long-term debt, but the rate of improvement is still very weak at this time.  Short-term bearish - long-term, the jury is still out.

NUVELO INC [NUVO] (Biotech) was crushed losing 79.3% to close at $4.05 with trading volume of over 85 million shares (over 180 times the average daily volume for the past 90 days) after it was announced that its new drug Alfimeprase had flunked its Phase 3 clinical trials. The company was downgraded by Miller Johnson from “Outperform” to “Market Perform,” by Banc of America Securities from “Buy” to “Neutral,” and by Brean Murray from “Hold” to “Sell.” Our sense is that Monday’s reaction was too extreme given the company’s balance sheet (especially considering deferred revenues) and that while the pipeline is thin for the next few years), this would be an attractive, albeit speculative, entry point.

NEOPHARM INC [NEOL] (Biotech) was also hammered losing 67.9% to close at $2.16 after announcing that its new drug, cintredekin besudotox, for the treatment of recurrent brain tumors, also flunked a critical Phase 3 clinical trial for improved efficacy over an existing drug. Although the company was downgraded by First Albany from “Buy” to “Neutral” and by JMP Securities from “Strong Buy” to “Market Outperform,” it was actually upgraded by Brean Murray from “Sell” to “Hold.” Given the current burn rate, balance sheet and expected difficulties in maintaining a market capitalization above $50 million, we do not see this as an attractive entry point at this time.

Daily Sector Performance Chart

The average stock in the SI Universe posted a return of 0.07% on Monday, with 51.9% of the members posting positive returns and 3.2% unchanged.  The big sector moves were Biotech (down 2.6%, thanks of course to the impact of the two wicked outliers noted above) and Airlines (up 1.5%, thanks to CONTINENTAL AIRLINES [CAL] being the subject of rumors regarding it being a takeover target).

US AIRWAYS GROUP INC [LCC] shot up 16.8% closing at $59.46 on news that it had made a hostile $8 billion bid for troubled DELTA AIR LINES INC [DALRQ.PK]. This news triggered a feeding frenzy for other potential targets in the Airlines sector. CONTINENTAL AIRLINES INC [CAL] was up 12.3% closing at $43.08, UAL CORP [UAUA] was up 9% closing at $39.99, AMR CORP [AMR] was up 5.4% closing at $32.33, JETBLUE AIRWAYS CORP [JBLU] was up 7.4% closing at $15.13 and NORTHWEST AIRLINES [NWACQ.PK] was up 93.3% closing at $0.84. However, the news was good for all airlines. Regional service providers, like MESA AIR GROUP INC [MESA], REPUBLIC AIRWAYS HOLDINGS INC [RJET] and SKYWEST INC [SKYW] were all down significantly on the assumption that the US AIRWAYS bid could interfere with contracts between DELTA and those regional providers.

EMBREX INC [EMBX] shot up 39.6% closing at $16.64 on the news that Pfizer Animal Health, a division of PFIZER INC [PFE] had agreed to acquire the company for a purchase price of approximately $155 million, or $17 per share in cash. Given PFIZER’s size, there does not appear to be an opportunity here.

RAILAMERICA INC [RRA] rocketed up 27.8% closing at $15.82 on the news that it had agreed to be bought by an affiliate of Fortress Investment Group LLC for about $1.1 billion, or $16.35 in cash per share of RRA. We were just a little tardy on this one, as it popped out on a screen yesterday suggesting it would be an interesting private-equity play.

DAKTRONICS INC [DAKT] jumped 26% closing at $33.60 after reporting very strong fiscal 2007 second quarter results. The company reported net sales of $123.5 million and earnings of $8.9 million, or $0.22 per share, compared with net sales of $75.8 million and earnings of $5.2 million, or $0.13 per share, for the same period last in fiscal 2005. The consensus estimate had been for net sales of $98.42 million and earnings of $0.15 per share. Given the company’s guidance of fiscal 2007 sales at $450 million, an increase of about 14% we find the current P/E ratio of 64 to be much too pricy.

AMERICAN ORIENTAL BIOENGINEERING INC [AOB] was up 17.3% closing at $9.89 after announcing great third quarter results. Both quarterly revenue and earnings more than doubled those of the third quarter 2005. The company expects fourth quarter revenue to be in the range of $37 to $39 million and earnings of at least $0.15 per share, easily topping the consensus estimates of $30.48 million and $0.12 per share, respectively. With a P/E ratio of only 29.17, and no significant debt, this still looks like it has a lot of upside potential.

ARVINMERITOR INC [ARM] advanced 9.1% closing at $17.68 after announcing fourth quarter (ended September 30^th) results that were basically in line with expectations but providing 2007 guidance that was better than expected. The company reported a loss of $261 million, or $3.76 per diluted share, with most of the loss due to a non-cash goodwill impairment charge. Income from continuing operations before special items was $28 million, or $0.40 per diluted share, matching the consensus estimate. The guidance for 2007 is for revenue to be in the range of $8.7 to $8.9 billion and earnings to be in the range of $1.15 to $1.25 per share. The current consensus estimate for 2007 is for revenue to be $8.58 billion and earnings to be $1.07 per share. The Balance Sheet is looking considerably better with a reduction in net debt by $103 million in the fourth quarter and by $501 million over the course of the fiscal year. With only 4% revenue growth over the past year, and a current P/E of about 15.6 it is hard to argue that this stock is undervalued. However, with $400 million in cash flow from operations in the fourth quarter and only $1.18 billion in long-term debt, this could be a private equity target as well.

CAREER EDUCATION CORP [CECO] climbed 7.9% to close at $26.02 on the news that it planned to sell some of its schools and campuses, including the 9 campuses that comprise the Gibbs division; McIntosh College; two campuses belonging to Brooks College; and Lehigh Valley College. The sale will enable CECO to concentrate on its core competencies where it has the greatest competitive advantages and the highest levels of expertise. From this perspective, we think it is a tad early to speculate on the strategy. Generally speaking it makes sense, but before passing judgment, it will be interesting to see how much money is raised by sales and how exactly it is put to use.

ARIAD PHARMACEUTICALS INC [ARIA] was up 7.4% closing at $5.40 on about 5 times the average daily volume with no really dramatic news. Looks like either a short squeeze or the impact of being featured as one of 7 bargain stocks in The Kiplinger Letter http://www.kiplinger.com/magazine/archives/2006/11/seven.html

Daily Sector Performance Chart

It was another strong day in the markets, thanks to encouraging comments following the FOMC meeting, speculation regarding more consolidation in Airlines, and better than expected manufacturing data thanks to the NY Empire State Index. The average gain in the SI universe was 0.79% with 66.7% of the 3,551 members posting positive returns for the day. The big outlier sectors were Airlines (up 4.2%), Alternative Energy (up 4.8%) and Railroads (up 3.9%). Alternative Energy’s big gains were probably due to a press release by PACIFIC ETHANOL INC [PEIX] indicating that it would be delayed in filing its 10-Q for the quarter, BUT that it would be reporting an actual profit for the first time!!! PEIX was up 10%, VERASUN ENERGY [VSE] was up 8.6% and MGP INGREDIENTS INC [MGPI] was up 8%.