Dow Jones 10620.13 -62.81 9:57 am PST, September 13, 2005  NASDAQ 2174.79 -8.04 For info, visit access.smallcapnetwork.com S & P 500 1233.48 -7.08 Change your subscription status here Russell 2000 674.12 -6.70 VOLUME 05: ISSUE 70  Feature: Blowing Bubbles. Novelos Collaborates. Coverages Dropped. Investing rule number one: Every market corrects. Investing rule number two: Read rule number one. The ugly stepsister of the growing economy is the current obscene level of consumer debt in America. And what could well happen to that robust economy if rates rise more-- even modestly. Mix in the apparent ease with which absolute neophytes are making money in the real estate market and the wicket gets even stickier. A year ago, houses for sale in Southern California averaged three days on the market. Now it's three weeks. Granted, that's just one pocket, albeit an important one. More troubling, as with most forming bubbles, is that it's difficult to find anyone who doesn't think house prices will rise unfettered, forever. You need significant and continuously rising real estate equity to extend the re-finance and attendant consumer watusi. And in our opinion, the fat lady may well be warming up just off-stage. As we look at a weekly chart of the Dow Jones Home Construction Index we see the volatility increasing. While not the definitive indicator of the housing market, the index direction has moved in lockstep with the unprecedented rise in prices we've seen over the last year. To our eye, the increasing volatility as evidenced by a break and close below the 3x3 Displaced Moving Average line (DMA) is significant. While there could be a small rally soon and the index may break and close above the 3x3 line, a subsequent break and close below that line would suggest a rollover would likely follow. The index is showing increased volatility and, as we've stated, too many people are bullish. The decline will result not due to a wholesale supply glut--although that will come--but for homeowners who have leveraged themselves into properties using industry created vehicles with enticing characteristics such as no-down payment, interest only and/or the very scary negative amortizations. The average homeowner is financially stretched already with no savings and the highest personal debt in history (an average $7200 per household)--which has doubled in the last decade-- coming in at a total north of $2 trillion. As well since 2001, consumer mortgages assumed are up 42 percent to nearly $9 trillion. A one percentage point rate rise in a 6 percent APR $200,000 mortgage will result in roughly an 11 percent increase in a monthly payment. Or, more simply, the increased cost of that mortgage will result in the equivalent of one extra monthly mortgage payment a year. Doesn't sound like much, but should rates rise a point or more the huge number of folks who took on 'creative' leveraged financing will have to sell, lose their homes or at the very least curtail the critical consumer buying binge that keeps the US economy buoyant. Hence, more supply and the resultant flat or declining prices. And make no mistake; rates will rise more eventually, the recent Katrina shock notwithstanding. Bottomline? In 1998-2000 no one wanted real estate, just stocks. Investing neophytes were rich on paper. Most got skinned. In 2005, no one wants stocks because real estate investments make folks--especially neophyte buyers-- look just as flush with seemingly endless rising prices. Sound familiar? Of course it does. And it won't be different this time, either. The time to buy stuff whether stocks or any another asset class is when no one wants them. And sell them when there's frenzy and whatever market is in denial of a decline. Now is the time to look at stocks. The tide will turn, soon and the early money has and is already taking positions, both in large and small cap issues. A Tad More Upbeat. In our recent Katrina piece we made a number of assumptions, one of which would be that the FED would pause further rate rises. Given that one of our other observations postulated that gas and oil prices would decline--and have faster than we anticipated--I suspect that a further 25 basis point rise will appear on September 20th and like rises will continue for at least two more meetings. Heating fuels are still quite dear, but I imagine those too will moderate somewhat as the snow flies. It will still take a larger chunk of the household budget, but less than the disaster scenarios first proffered after Katrina.   Novelos Collaborates. Tuesday, biotech Novelos Therapeutics (OTCBB: NVLT) announced a research relationship with the Medical University of South Carolina (MUSC). The two will jointly present a Mechanism of Action Study at the International Conference on Molecular Targets and Cancer Therapeutics in mid-November. Damn, that's a mouthful. From the release: The overall objective of the Novelos/MUSC research program is to add to the understanding of how NOV-002 and NOV-205 (Novelos' development stage products) act at a cellular and molecular level to provide the clinical benefits they have demonstrated in cancer and hepatitis C patients, respectively. As investors know, these types of conferences are critical to early stage biotechs. The exposure will obviously be important, as is the linking to MUSC, a leading medical research institution. The complete press release is here: http://biz.yahoo.com/bw/050913/135128.html?.v=1  We first brought the readership Novelos on August 1st at $3.17. While trading has been a bit challenging due to a lack of supply, volumes, as we suspected, are increasing and the shares have performed well currently trading at $4.10 for a nice early move. We will continue to bring news and commentary about this unique company as it executes both its business plan and clinical development schedule. We expect good things from Novelos over the long-term and continue to suggest accumulation of the shares here and on any pullbacks. Stay tuned.   Coverages Dropped. While they may well prosper in the future and we may revisit, the shares of Spescom (OTCBB: SPCO) and Stream Communications (OTCBB: SCNWF) have failed to perform to our satisfaction. One of the tenets of smallcap investing is to move on if the timing is or appears wrong. As well, we have other names that we will bring you in the fall and feel that we must amend our coverage list with names that have better current prospects. And finally, re-read rule number one.   We Value Your Feedback Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 3525 Del Mar Heights Rd #334 San Diego, CA 92130 Subscribe Information is power and timely information is profitable. Become informed and profit from SmallCapDigest Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. Add your email address below and make sure to check your email inbox and confirm your opt-in request to start receiving the SmallCapDigest Email Newsletter on a regular basis. To ensure newsletter delivery, you can add any additional email addresses you may have to the SmallCapDigest Member List. Receiving the SmallCapDigest Newsletter in multiple locations is the best way of making sure you don't miss the next investing or trading opportunity! For web based email addresses, the SmallCapDigest recommends @yahoo.com or @aol.com for timely and reliable email newsletter delivery. Subscribe Here Note: Your email address will be kept strictly confidential, and will not be shared with any other entity for any purpose at any time. If you no longer wish to receive the SmallCapDigest, simply follow the instructions located at the bottom of every SmallCapDigest Newsletter Edition. Unsubscribe Here D I S C L A I M E R: The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a licensed investment professional or broker-dealer. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward  maximizing the upside potential for investors while minimizing the downside risk, whenever possible.  Moreover, as detailed below, this publication accepts compensation from third party consultants and/or companies which it features for the publication and circulation of the SmallCap Digest or representation on SmallCapNetwork.net.  Likewise, this newsletter is owned by TGR Group, LLC.  To the degrees enumerated herein,  this newsletter should not be regarded as an independent publication. Visit Here to view our compensation on every company we have ever covered, or visit the following web address:  http://access.smallcapnetwork.com/compensation_disclosure.html for our full compensation disclosure and http://access.smallcapnetwork.com/short_term_alerts.html for Trading Alerts compensation and disclosure. TGR Group LLC has been paid a fee of $25,000 and 100,000 shares of newly issued restricted stock by Novelos for coverage of the Company. Additionally, Some of the companies featured in the SmallCap Digest Newsletter pay an ESP (Electronic Service Provider) fee to an affiliated Technology Company for electronic delivery of this newsletter and other web related technology services. Fees range from $3,000 to $5,000 per month. All statements and expressions are the sole  opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities  mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. From time to time TGR Group LLC sells shares in the open market it receives as compensation for coverage of client companies. Since the shares are received as compensation for services as previously disclosed, and not for investment purposes, the editors do not view the sale of the shares as contradictory to any advice delivered in the content. This should be viewed as a conflict of interest by shareholders or prospective shareholders of the client companies. The editor, members of the editor's family, and/or entities with  which the editor is affiliated aside from TGR Group LLC itself, are forbidden by company policy to own, buy, sell or otherwise trade stock for their own benefit in the companies who appear in the publication unless specifically disclosed in the newsletter. The profiles, critiques, and other editorial content of the SmallCap Digest and SmallCapNetwork.net may contain statements that appear forward as it relates to the expected capabilities of the companies mentioned herein. THE READER SHOULD VERIFY ALL CLAIMS AND DO THEIR OWN DUE DILIGENCE BEFORE INVESTING IN ANY SECURITIES MENTIONED. INVESTING IN  SECURITIES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS PROFILE IS PROTECTED BY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCED IN ANY WAY WITHOUT THE EXPRESSED, WRITTEN  CONSENT OF THE EDITORS OF SMALLCAPNETWORK.NET. We encourage our readers to invest carefully and read the investor information available at the web sites of  the Securities and Exchange Commission ("SEC") at http://www.sec.gov and/or the National Association of Securities Dealers ("NASD") at http://www.nasd.com. We also strongly recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at  http://www.sec.gov/consumer/cyberfr.htm . Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site.