THE STEWART REPORT HOTLINE SUMMARY

Tuesday, December 28, 2004

Next HotLine Recording Scheduled for Saturday, January 22, 2005
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Greetings Fellow Investors:

On behalf of everyone here at The Stewart Report, I’d like to wish each and every one of you the very best in 2005. For our part, we will do everything possible to help you achieve your financial goals in the year ahead. And, it shouldn’t be too difficult: Virtually all the elements we need to have a really big year are either already in place, very close to completion or on the verge of being announced.

As for the current holiday season, I hope you’re having a pleasurable one, with lots of friends and family and food and football. My girlfriend and I decided to spend ours on Catalina Island, so we took the boat over here to Avalon. That’s where I am now. My Dad, who lives in Oklahoma, can’t understand why I come here. In his mind, why pay for a hotel room that overlooks the ocean when your office is on Pacific Coast Highway and you live on the beach?

But it’s different here. For one thing, Avalon faces east, while Dana Point faces the west. Because of this, it offers a very different perspective of the sea. This is especially true in the early morning as the sun is rising – particularly if you hike up to the Wrigley Memorial. From there, he edifice the view of the ocean is so uninterrupted that, as you look to the horizon, you can actually see the curvature of the earth. It really puts you in your place. In turn, that puts you in a mindset appropriate for pure thought. So, for me, Catalina at Christmastime is a wonderfully serene place to ponder and contemplate and review and plan – which is precisely what I’ve been doing the past few days. During that time, I’ve come up with a couple of pertinent observations:

For starters, I’ve confirmed my long-standing suspicion that Santa Claus is probably just a myth. And, even if he does exist, the man is absolutely clueless as to who’s been naughty and who’s been nice. Take me for example…

Every year, I’m naughty – or, at least, I try to be. Conversely, my girlfriend suffers from congenital nice-ness. She doesn’t drink or smoke or kick dogs or trip small children or anything. She runs every morning; watches public television at night. She’s tolerant of slow drivers and stupid people, and is even respectful of law enforcement. But, despite her goodie-two-shoes lifestyle, I’m the one who got a Ferrari for Christmas. All Santa gave her was a lousy mountain bike. Sure, it’s a really nice mountain bike, but even the nicest ones don’t have throaty-sounding engines or beefy exhaust pipes. So, I have to ask myself: What’s the point of being good when life continually rewards dirty rotten scoundrels such as myself?

Similarly, you are by now probably asking yourself: What’s the point of this HotLine – and, if it does in fact have one, will he ever make it? The answer is, “Yes, there is a point to this HotLine – which is simply this:”

Life is unfair – and, for that, I will be forever grateful. Equally unfair is the distribution of wealth. It always has been – and always will be. But, the beautiful part – the part that’s essentially fair and equitable – is the fact that, even after money is distributed, it remains in a state of flux. Even cash that’s locked up tight in safety-deposit boxes or the irrevocable trust funds of undeserving idiots is always on the move. That’s because the capital in a capitalist society is always looking for a better home – a new place to deposit itself. And, because these movements are somewhat predictable, you don’t have to inherit a single dime to make several million. It’s easier said than done – but it’s doable all the same.

That’s what I love most about this country. The equity markets are essentially fair, the opportunities are absolutely unlimited and they’re freely available to anyone with a heartbeat and a telephone. If you’re with me so far, the big question to ask yourself is: Where’s the capital currently – and, more importantly, where is it headed in 2005? Here are my answers:

—Precious Metals. Platinum and chrome I can understand – especially chrome (technically, chromium). These are two of the most precious of precious metals – always in short supply, yet forever in high demand for industrial purposes, particularly automotive. Gold and silver, on the other hand, I just can’t see – not in a modern, technology-based economy. If this is the ultimate store of value, I’d rather shop at Wal-Mart. Gold is for grandparents, not for me. Same for silver – which could only manage a double, even after two decades of dormancy. The metals run is probably over. That money will be heading elsewhere.

—Real Estate: Over time, it’s hard to go wrong with real estate, particularly in America. We’re a nation of homeowners. Always have been; always will be. So, the demand will always be there – and, even when it wanes, tax laws and other incentives are usually enhanced to make it more attractive. At present, the real estate market – both residential and commercial – has enjoyed a big run. Too big, in my opinion. These days, it seems as though everybody and his mother has a newly minted real estate license. Rank amateurs are speculating in multiple properties with little or no money down, flipping them like pancakes. In the current property market, the players and the prices are acting just as stock players and prices did in late 1999 and early 2000, when cab drivers were trading their hack permits for brokerage licenses and impetuous day traders defined “long term” as just after the settlement date. We all know what happened next.

Now I’m no real estate expert; just another dumb schmoe happy to see his home triple in value in just six years. But the guys I know who are professionals in the field, who have made millions, consistently, year in and year out, tell me they stopped buying months ago and are now dusting off the “For Sale” signs. For me, that’s a sign in itself.

—Cash: Currently, one of the biggest homes for cash is cash itself. Trillions of it is sitting on the sidelines, ready to make a shift to something – anything, really – that might pay better than the anemic rates offered by money-market accounts. Indeed, the sum total of the nation’s cash and cash equivalents is probably the strongest bull-market argument there is today. That’s especially true if President Bush gets his way and American workers are given the opportunity to invest at least a portion of their Social Security contributions in equities. Any form of privatization in this trillion-dollar arena would be a boon to the stock market – one as powerful in potential as the adrenaline shot Reagan gave Wall Street around 1982 with the advent of IRA accounts.

—The Stock Market: The year-end rallies I said you could expect just as soon as the elections were over – and regardless of the victor – managed to drive the equity markets to their 2004 highs. However, even at 2,160, the NASDAQ isn’t even half as high as it was in March 2000 when it reached its all-time high of 5,132. By comparison, the Dow Jones Industrial Average has regained virtually everything it gave back. Currently, the DJIA is just 9 percent away from its 2000 high of 11,750. To me, this suggests that the better prices – as well as the bigger profits – will be scored with the smaller stocks on NASDAQ.

And, of the 30,000 or so NASDAQ stocks from which to choose, there are only three that I own. Only three that I fully understand and appreciate. Only three that I’ll need to support my exotic car habit and racing addiction. They are: Amarillo Biosciences (NASDAQ/BB: AMAR) – 35 cents; Emergency Filtration Products, Inc. (NASDAQ/BB: EMFP) – 33 cents; and International Card Establishment, Inc. (NASDAQ/BB: ICRD) – 52 cents.

Together, these little gems have a combined market cap of approximately $36 million. To put that in perspective, more than $37 million has been invested in the development of Amarillo’s interferon-based pharmaceuticals alone. It’s likely you heard or read the now-famous parting words of Tommy Thompson when he resigned his Bush Cabinet post on Dec. 3. If not, he said, “For the life of me, I cannot understand why the terrorists have NOT attacked our nation’s food supply because it is so easy to do.” Given that, you should be able to see just how Amarillo’s patented interferon solutions could, literally overnight, become one of the most sought-after pharmaceuticals since penicillin came into vogue in the early 1930s.

Or, you might look at that same three-company combined capitalization of $36 million relative to ICRD, which will post year-end revenues of $20 million or more for 2004 – and will likely do $50 million in 2005. All by itself! As for EMFP, it’s hard to precisely define its proportional contribution to the triumvirate. Suffice it to say, however, that a patented platform technology that will very probably be picked up in 2005 by every single branch of the U.S. military, as well as the 11th largest corporation on Earth, will be worth far more than $36 million – likely by a factor of 10!

All of which leads me to another important point: Each of these tiny companies already has a relationship with a global mogul. To wit:

· Amarillo’s long-standing relationship with Japan’s multi-billion-dollar Hayashibara Group, which is also one of AMAR’s largest shareholders.

· ICRD’s soon-to-be-announced deal with an as yet unnamed bank-card company. The name has yet to be disclosed, but even a small company in this sector will be an NYSE-listed Blue Chip.

· EMFP talks regularly and seriously with Itochu, an $80 billion international giant – as well as the Pentagon, Air Force, U.S. Army, Marine Corps and the Navy. The fact is, a contract with one – if not all – of these monsters is so probable that it’s almost a foregone conclusion.

Bottom line, it’s extremely rare to own three companies this size, all at once, that have this much potential – potential on the very verge of being fulfilled. Right here and right now! And, it’s even more unusual, given such potential, that we can still buy shares in each at prices much closer to their lows than their highs.

All of which begs one obvious and final question: If I’m so smart – and these companies are so great and their relationships so huge – then why are their shares so cheap? In a word: Dilution. Relative to ICRD, I thoroughly reviewed the pluses and minuses of this in the eight-page Report on that Company. As luck would have it – and I do mean luck – AMAR and EMFP also diluted themselves silly in 2004. It’s similar to the one last student loan you take out to finish medical school. It puts you in debt, but enables you to start making a physician-sized salary. It’s akin to taking out a home-improvement loan that reduces your equity but, dollar for dollar, greatly increases the value of your house. That’s exactly what each of these companies did. They created and sold lots of shares in 2004 to position themselves for enormous revenue growth in 2005.

That’s why each of these companies did so well over the past 12 months – but their stocks did not. Does that bother me? Hell no! Quite the opposite. By selling shares to raise funds to build their companies, they simply gave us more time to buy more shares at bargain prices – and at precisely the perfect moment. It’s like finding yourself with front-row seats at Cape Canaveral – with tickets priced at just 30 cents to 50 cents each, and the launch sequence just seconds away.

That’s not to suggest we haven’t endured a reasonable amount of grief getting to this point, but the important thing is that we have arrived – and so have our companies. Like I said at the outset, virtually everything is in place. In a few days, the New Year will arrive as well – and I’m 100 percent convinced that, before it’s over, it will bring us all a pile of money. I don’t know which of our three companies will take off first – or which will soar the highest – so your best strategy may be to BUY all three. Or, if you already own all three, average down on the one in which you have the highest cost basis. Either way, now is the time to act.

Once again, have a joyous holiday season – and, as always, thank you for listening, and subscribing,

J. David Stewart

Analyst and Publisher, The Stewart Report