The Stewart Report HotLine Summary

for

Monday, February 21, 2005

The Next HotLine Recording is Scheduled for Thursday, March 24, 2005

Overview: If what they say is true, if “no news is good news,” then this HotLine clearly implies the best news I’ve ever not reported because, frankly, I have little to give you aside from some easily obtained quotes.

That’s not to say that there isn’t a lot happening, because there is – and much of it is happening right now, as I speak. But therein lies the problem. Not that long ago, real-time information flowed much more freely. Perhaps too freely. Insider trading got out of hand. Something had to be done, that’s for sure. But what they did was too much.

Today there’s this almost Third Reich kind of Nazi nervousness that has everybody afraid to say anything about anything until after it appears in a news release or is published in an annual report. It’s a shame so many essentially honorable people now find themselves so tightly constricted. Especially since such constrictions never really work.

As long as there are CEOs and CFOs, there will be insiders. As long as the stock markets offer a profit motive, there will be inside information. And, as long as people play golf and have lunch together and talk on cell phones, information will be leaked.

Inside information – and the advantage it profers – is the very definition of an intelligence problem. And I’m almost sure that intelligence problems can’t be cured by forcing everyone who knows something to pretend that they’re ignorant.

It’s like some huge financial folly where everybody is expected to be a Sergeant Schultz. They “hear nuhthing!” They “see nuhthing!” But you know they do. For that matter, you know that I might know something, too. Then again, maybe the only thing I know is how it used to be and how well it used to work before the gluttonous Michael Milkins of this world messed things up for the little guy. But the biggest irony of all? When the little guy gets screwed, Big Brother is the one who takes it upon himself to make things virgin.

In this instance, Big Brother is the Securities and Exchange Commission. Same as labor unions, the SEC is a necessary evil. And, same as labor unions, if America didn’t have the SEC looking out for the little guy, Lenin would have been right. Capitalism would have failed. Virtually all the nation’s wealth would have ended up in the bank vaults of the Vanderbilts, Rockerfellers and Kennedys.

Just as interesting, and equally factual, was the SEC’s realization that it would take a thief to stop future thieves.

This led the Commission to hire Joe Kennedy – arguably the biggest Wall Street manipulator of the era – to sit down with members, show them how he did it and then reverse-engineer his various short-selling maneuvers, float lock-up strategies – and everything else he did so nefariously well – to design laws to making those practices illegal. The zero-tick/up-tick rules, disclosure of controlling ownership rules, and a hundred other loopholes, now closed, are the good and direct result of SEC intervention.

More recently, the SEC played an important role in identifying a financial atrocity that was very nearly committed by the NYSE, which was all set to extend Chairman Richard Grasso’s contract through 2007. Had the SEC not intervened, the soul-less swine-bastard Grasso would have received a bonus of $2.4 million and an accrued retirement salary of $139.5 million. That’s just too much money for a guy whose only really identifiable role is to decide over a $500 lunch which celebrity gets to swing the gavel for that day’s closing bell.

Swine-bastard adjectives aside, I’m trying to be reasonably fair in my appraisal here. I’m trying to show both sides, which is strangely simple since – as a stock analyst with a paying audience – I find myself caught smack dab in the middle. I have an equidistant view of both the left and the right, and all the present-day wrongs that lie in between. It’s like one of those Good Cop/Bad Cop things, except they’re both the same cop and the name on the badge says SEC. So, if you’re a smart boy you say nothing.

Finally, I’m trying to live by an adage of my father’s … the one that says it does no good to point out a problem unless you have a solution. But I don’t.

Conceptually, the SEC’s belief that it can create a fair playing field is fine and dandy. Most fairy tales are. Access to information may be granted equally to all men, but not all men are willing to work as hard as I do to obtain it. And not all men will work just as hard, sorting the newsletter wheat from the hypish shaff, as you have, that you might pay me to deliver it.

At this moment, all I know is that this Brave New World the SEC has imposed on all The Street’s key players has created an environment that’s anything but intrepid. Indeed, it’s now quite the opposite. It is now a world of fear ... The Fear that you might do or say or whisper or even think out loud about things you shouldn’t – and then find yourself wearing an orange jump suit like Martha Stewart. Of course, everyone shudders at that thought – especially the women. It’s not that the idea of being caught is so bad. You can use jail time to catch up on your reading and devise a new reality TV show. But to get “caught wearing spring colors in February … I don’t think so!”

Be that as it may, the most important quote of the day came last night when a friend called to tell me that Hunter S. Thompson had shot himself. No surprise there.

Very little news is available, but I’m betting he didn’t leave a suicide note. I’m also betting he’s presently debating Hemingway about who left the bigger mess, arguing over which libation is better – Wild Turkey or scotch whisky – and taking some great notes from Papa as to the details regarding the tiger he shot on the pool table at the Raffles Hotel in Singapore.

As for other quotes – ones a little closer to Wall Street? Well, they are as follows:

Emergency Filtration Products, Inc. (Nasdaq/BB: EMFP – 51 cents )

Fortunately, the last HotLine was devoted almost exclusively to EMFP – and for good reason. On the commercial front, I expect great things from the Itochu relationship now that both parties have a green flag from their respective governments.

And then there’s Uncle Sam. The DoD announcement – and the obvious implications to be drawn from the now formal relationship between our small company and the American War Machine – are mesmerizing.

In short, we are lacking publicly announced details; the flow of information is not entirely to our liking. But the fact remains:

1. We have the world’s 11th largest company gearing up to sell our products to its network. That’s the consumer side of the equation. Itochu is a gargantuan machine. The wheels don’t turn fast, but once they start rotating, they’re not likely to stop. The important thing is that they’ve formally agreed to turn big numbers in our direction.

2. We have public documents saying the world’s largest military checkbook is now open and ready to write EMFP’s name on the top line. We don’t know how many zeros will be attached. It doesn’t matter. Anytime the U.S. military writes a contract check it’s big enough to buy Paraguay.

With a fully diluted market cap of well under $20 million, our little company relative to these two monsters is a slam-dunk, no-need-to-be-a-rocket-scientist reason to buy shares. The fact that it’s so hard to get anybody to say anything also suggests a lot. For example: I know that EMFP’s founding CEO was in Arizona last week to meet with Mr. Austin, the Company’s new 13-d investor. I also know from the EDGAR system, that since the last HotLine, Mr. Austin has upped the ante from his reported 5% of all EMFP shares to 9%. In and of itself, that says a great deal.

Watching the daily trading volume and counting backwards, a trader buddy of mine figures that one-third of the approximately 3 million private placement warrants have been chewed through. (Also beneficial to us, the DoD announcement voided approximately 2 million “B” warrants the same day as the news.) That means we probably have another month of heavy volume and a go-nowhere stock price.

Once the warrants are gone (and hopefully converted to cash), most volume in the trading market of Emergency Filtration Products will be on the buy side. We already know good news is pending everywhere – commercially and militarily, and all around the globe. I suppose you could try to time the perfect trade, but personally I’m not feeling that cute. I did a buy last week at this level.

My feeling is, why should I try to fine tune a buy order that I know I’m going to make anyway? Why risk missing it entirely because Itochu or the Army or the Air Force or anyone else presently at the table gives them the contract a few weeks early? It makes no sense. BUY.

International Card Establishment, Inc. (Nasdaq: ICRD/BB – 48 cents)

As I said last time, this company now bores me to pieces.com. That’s because it’s now beginning to mature in an industry where the game is no more interesting to write about than the effects of compound interest – though it’s every bit as rewarding from the profit standpoint. Here I do have some unreported news that I am comfortable in making public.

Remember what a big deal I made about ICRD becoming a merchant bank? How overnight it would skyrocket the company’s reported revenues and greatly improve profit margins? Well, like so many things in life, it took longer than any of us imagined. But what we imagined did, in fact, happen. Last month, International Card Establishment cut a deal with First Data Corp. And though it may have taken longer, the final deal was noticeably better for shareholders than I first anticipated – i.e., a bigger percentage cut with a smaller capital commitment.

The only reason I’m comfortable reporting this without an announcement is because Wain Swap, the CEO of Neos, told me this. He also said he did not know why there was no release. Perhaps he’s too busy building the company, which is a good thing. Especially since he’s done such an excellent job of cost-cutting.

Lead-pipe cruelty at its finest! For me it’s all good.

I’ll know more soon. Before the next HotLine, anyway, because I’ll be driving out to Las Vegas for the 2005 annual meeting of the Electronic Transactions Association. It’s a big deal if you’re a card processor. It’s like Super Bowl Sunday – except there isn’t a Sunday, there isn’t any football and it’s probably boring as hell. But I’m going anyway. After all, this is how modern stock analysts learn things that would make you money if we were actually allowed to tell you what we learned.

(Only now do I realize that, in this Brave New World, for things to work well, the Investor/Stock Analyst relationship might have to grow comfortable with two words closely associated with teenage sex, valet car guys and used car salesmen. The two words are: “Trust Me.”)

BUY these shares with confidence, but be willing to exercise patience.

Amarillo Biosciences, Inc. (Nasdaq/BB: AMAR: 35 cents)

Here again, given the temporary information void I’m forced to work within, I must ask you to look beyond the lack of publicly announced specifics and use your own good sense. You may as well, because if you don’t know it already, simple common sense is the final marker of all good decisions. I learned this early on – and from true intellects. These were guys with decades of experience and success who would pore over hundreds of pages of financials, no intricacy too small, digest it all, boil it down and run with their best, most logical instinct ...

Thousands of informational bits distilled into a pure notion of obvious intensity that flows, eventually, into something that becomes a simple and elegant decision: buy, sell or hold. In the case of Amarillo Biosciences, the simple decision is buy.

Of the myriad reasons available, the simple one I would put before you is this:

Over the last 20 years, nearly $38 million has been invested in Amarillo’s suite of proprietary, niche biotechnologies that are covered by pristine patents. They address both animal and human maladies and have garnered the interest of giant working partners like Cargil in America – and Hayashibara in Japan. (The latter owns probably 20% of all stock outstanding.) Against these relationships and the obvious enormity of their backing – contractually and financially – as well as the $38 million invested to date, what do we have? We have a company hidden deep in cow country, ignored or simply missed by all analysts except The Stewart Report, with a current market cap of about $5 million. Even in a fire sale the tax loss carry forward is probably worth that much!

A value like this is beyond rare. It’s unheard of! But only because so few have yet to hear the story, see the people or take time to fly to the godforsaken Texas Panhandle to appreciate the technology. For speculative investors who may or may not need some patience, this is an important BUY.

As always, thank you for listening, and thank you for subscribing.

J. David Stewart

Analyst and Publisher, The Stewart Report

In Memory of Dr. Hunter S. Thompson

1937-2005

Sunday night at 10 pm is when I got the news. Ironically, I was doing what I usually do when I’m supposed to be writing a HotLine and can’t seem to make myself do it. I was watching the opening scene from “Where the Buffalo Roam.”

It’s wintertime in Colorado and Hunter S. Thompson is feeling some pressure for being late (as always) in delivering a feature story commissioned by Rolling Stone. He attempts to give himself a pep talk: “Come on, Thompson! It’s just another deadline. Get a grip. You’ve been through this before. Just lash together a few raw facts, some old Negro wisdom, and you’re done.” There’s a relentless telecopier in his study that won’t stop buzzing him. The person dialing from the other end – his editor, no doubt – is desperate for text. Thompson gets angry. “You’ll get words when I want you to have words!” He grabs some random pages from a magazine and feeds them into the machine. “Chew on that gibberish for a while, you heartless scum.” He takes a drink. For a moment there is some peace. But only for a moment:

The telecopier starts harassing him again. “You push me too far!” He jumps up from his typewriter, takes the .45 caliber semi-automatic from the pocket of his trademark Bermuda shorts and fires several rounds into the machine. There are some electrical sparks, a little smoke and lots of broken plastic bits everywhere. The buzzing goes dead. Thompson’s loyal Doberman, Bronco, rises from his rest spot near the fireplace and stands alert, but the animal doesn’t seem particularly startled. Bronco has come to learn that strange behavior isn’t strange. Not in this cabin; not with this master.

Thompson is appreciative of the animal’s calm demeanor, and decides to give him a treat. A few feet away is a life-sized mannequin wearing a blue suit and sporting a Richard M. Nixon Halloween mask for a face. Thompson looks at the mannequin, then at the dog, then back at the mannequin. There’s a long pause as Bronco anticipates “The Command.” Then it comes … “Nixon!” The dobie lunges at the faux President’s groin area. It goes completely berserk on the Nixon figure until Thompson intercedes. “Down, Bronco. Fun is fun.” Then they both settle back ... the dog to it’s warm spot by the fireplace; Thompson to the typewriter that made him famous.

And so it went. A glimpse into some of the weirdness at Woody Creek cabin on the outskirts of Aspen. This was Thompson’s hideout. His Hole-in-the-Wall-Gang for one. The place where he would drink Wild Turkey and write some of the best stuff anyone has ever written. Ever. The same place where he was arrested for shooting icicles off John Denver’s porch with a high-powered rifle. The place where Thompson shot himself last night.

With Dr. Hunter S. Thompson out of the way, political correctness will never be defeated and the written word will never be the same. Thompson’s irreverence was the clear inspiration for The Stewart Report. Through his work, I learned to appreciate the power and the beauty of language. He will be missed … because he can’t be replaced.

– JDS, February 21, 2005, Dana Point, CA