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2020Insight.com Market Update:

http://www.2020insight.com/marketwrap.shtml

U.S. stocks fell, sending the Standard & Poor's 500 Index to its biggest drop in three weeks, after Freddie Mac ousted its top three executives amid a federal probe of employee misconduct and Motorola cut its profit forecasts. The S&P 500 lost 11 points (-1.2%) to 975. The DJIA dropped 82 points (-0.9%) to 8980, retreating from an 11-month high. The Nasdaq Composite shed 23 points (-1.4%) to 1603. Declines were broad-based, with losses especially pronounced in the semiconductor, financial, airline and biotech sectors. Government bonds took off across the board, with the yield on a 2-year note remaining below the fed funds rate target of 1.25 percent, suggesting investors are betting on a rate cut when the Federal Reserve meets to decide on monetary policy later in the month.

Strong Sectors: oil services

Weak Sectors: homebuilder, semiconductor, biotech, paper, retail, banking, casino, insurance, aluminum

Top Stories . . . U.S. 10-year Treasury notes rose in New York trading as investors sought the safety of government debt after Freddie Mac said it replaced its top three executives and federal regulators were investigating employee misconduct.

Freddie Mac, the second-biggest buyer of U.S. mortgages, ousted its top three executives and said the company's president altered documents related to a restatement of financial results the past three years. Shares of the government- chartered enterprise tumbled.

Motorola, the world's second- biggest mobile-telephone maker, reduced sales and profit forecasts for the year, blaming excess inventory and the outbreak of severe acute respiratory syndrome in Asia.

General Dynamics, the fifth- largest U.S. military contractor, agreed to buy Veridian for about $1.23 billion to increase sales of intelligence gathering as the U.S. government expands its fight against terrorism.

Quote of Note . . . ``It's going to be a slow grinding recovery and the market's going to be very volatile as we enter the earnings period,'' said Dennis Fitzpatrick, who helps manage $2.5 billion for First Investors Management Co. in New York. ``I'm still bullish, but I think we've come too far, too fast.''

``Valuations are just too high to ignore,'' wrote Lehman Brothers analyst Steven Levy in a note to clients. He lowered his rating on the stocks to ``underweight'' from ``equal-weight.'' ``The negative news from Motorola as well as some analyst downgrades of telecom stocks is giving the market an excuse'' to sell shares, said Jim Herrick, head of trading at Robert W. Baird in Milwaukee.

Gurus . . . Prudential strategist, Ed Yardeni, was on CNBC this morning, reiterating his constructive market view, which has been enhanced by the enormous amount of stimulative steam in the boiler. Ed also made reference to the minuscule returns available to small investors in money funds and bank CD's, suggesting some of that cash is finding it's way into the market place. He also notes that Fed Chief Alan Greenspan will address the House Energy Committee on the subject of natural gas pricing, and shortages that could be hurtful.

On the Kudlow-Cramer Show, Mike Holland, who runs his own shop, has been buying Intel, Varian Semiconductor, and Bank of New York, while Bruce Wilcox of Cumberland Associates is a buyer of Manpower and Laidlaw. Jim Cramer says he has been accumulating Anadarko and Schering-Plough.

On the Rukeyser Show, Ed Brown has been buying American International Group, HCA Inc., and AmeriSource-Bergen. Guest on the show was Francois Trahan, strategist for Bear Stearns, who had been cautious, but has turned friendlier to the long side. Recent recommendations include Omnicom, First Data, and Apollo Industries. His asset-allocation remains 60% stocks, 25% bonds, and the rest in cash, but he may be upping the stock position.

Barron’s interviewed Seth Glickenhaus, whose fund has delivered returns of 17% a year on average since 1981. The fund manager's outlook on the economy in the article is pessimistic with little or no enthusiasm for its prospects going forward. However, he still looks for stocks which have "abnormally" good prospects and price/earnings multiples that are "ridiculously" low. He mentions Countrywide Credit, Pengrowth Energy, Old Republic and Peabody Energy favorably and advises to stay away from blue chips due to their multiples selling too high.

Eco Speak . . . Plunging oil prices led to a record 2% decline in U.S. wholesale trade sales in April. In March, total wholesale trade sales rose 1%. Sales are up 3.8% in the past 12 months. Sales of wholesale petroleum dropped a record 24% in April, pushing down sales of non-durable goods a record 3.6%. The data go back to 1992. Sales of durable goods at the wholesale level dropped 0.2% in April following a 2.1% gain in March. Meanwhile, wholesale inventories sank 0.1% after rising 0.4% in March. With sales falling faster than inventories, the inventory-to-sales ratio bounced to 1.23 in April from a record low 1.21 in March. Inventories are still extremely tight, which means that any increase in demand from retailers would soon be answered by increased orders to manufacturers.

Internet Superhighway Roadkill . . . IPO.com Web site, which covered the market for initial public offerings during the bull market, has shut down, according to a letter on the Web site from David H. Roberts, co-founder and chief executive officer. Roberts did not say why IPO.com was ceasing operations, but the IPO market has been grinding away at multi-decade lows in terms of the number of deals. "It was a few days and six years ago that IPO.com was founded," Roberts said in a letter posted on the site. "In that time we have tracked the equity markets during the glory days of the Internet and through the darker days of terrorism and recession." The move comes just a few days after WebFN ceased its Internet Webcasts.

Fund Flows. . . Trim Tabs remains cautiously bearish on the market, viewing the recent inflows into equity funds as a negative. The fund flow tracker notes that a surge in inflows has always been a sign of a market top. Trim Tabs estimated that U.S. equity funds got a $3.6 billion cash infusion over the week ended last Thursday, the biggest inflow since mid-April.

Financials . . . Caren Mayer at Banc of America downgraded Freddie Mac to "neutral" from "buy," after the company said its Chairman and chief executive had retired, its chief financial officer had resigned, and its chief operating officer had been fired. He also noted that the government sponsored mortgage services company's restatement of prior results would not be completed until the end of the second quarter, or into the third. "Until there is some clarity on the issues surrounding Freddie Mac, we believe the stock will stay under pressure," Mayer said. Mayer said Fannie Mae shouldn't be pressured along with Freddie Mac's as the company is not subject to the same accounting concerns and has "extraordinarily strong" corporate governance.

Freddie Mac was cut to Hold from Buy at AG Edwards. In the firm's opinion, the complete change at the top of FRE management combined with the restatement process and the uncertainty that the previous executives were not fully "up-front" with all of the issues, creates a situation where firm's comfort level does not warrant purchase at this time.

Freddie Mac announced the retirement of Leland Brendsel, its chairman and chief executive, the resignation of Vaughn Clarke, its chief financial officer, and the termination of David Glenn, its chief operating officer. Gregory Parseghian was named chief executive, Shaun O'Malley was appointed non-executive chairman, Martin Bauman was named chief financial officer and Paul Peterson was named chief operating officer. Separately, the company said it continues to expect the previously announced restatements of its 2000 through 2002 financial results will lead to a "materially increase" in reported earnings and capital surplus due to adjustments affecting the timing of income recognition, but will have offsetting effects in future periods. The company expects "increased volatility" in reports for future periods.

E*TRADE announced portable mortgages. The company announces a program enabling consumers to lock in today's low portable mortgage rates on a home loan and then transfer the rate to the next home they purchase. The program enables borrowers to transfer the terms of the loan to a new future residence, rather than paying off the existing loan and applying for a new loan at potentially higher market interest rates.

MBNA announced today that it is acquiring a small portfolio of affinity cards from Royal Bank of Canada. This acquisition should help continue MBNA's growth as a major issuer in Canada, an important (though still significantly smaller than the US and UK) element in its international growth. Royal Bank of Canada is selling "less than 1%" of its roughly C$7 Billion managed portfolio to MBNA. These are apparently balances related to affinity cards. Royal Bank is apparently exiting the affinity market. MBNA's affinity strategy continues to distinguish the company from its competitors in each of the countries it operates in. Affiniity endorsements enable MBNA to generate significant growth in accounts and balances, without the reliance on price that some other major issuers have been forced to have. In Canada, MBNA currently has just over $2.7 billion of managed loans and relations with some 470 affinity groups. Over the past year, balances grew by 30% and endorsements by about 18%.

Energy . . . Fitch Ratings raised the debt rating of Xcel Energy to "BBB-" -- considered "investment grade" status -- from "BB+" -- seen as "junk" status -- due to the "substantial dividends upstreamed by its four main regulated subsidiaries," and the expectation that the company's exposure to the obligations of its bankrupt subsidiary will be limited. The outlook is now "stable." The debt rating agency noted that Xcel's subsidiaries -- Northern States Power of Minnesota and Wisconsin, Southwestern Public Service and Public Service Co. of Colorado -- distributed $567 million in dividends to the company in 2002, and have "strong" financial profiles.

Metals . . . UBS analysts Daniel Brebner and Brian MacArthur downgraded Alcoa to a "reduce" rating from "neutral," in contrast to an upgrade by rival brokerage firm Merrill Lynch. The analysts said investors are being "excessively pre-emptive towards a meaningful recovery in aluminum and downstream markets." While profitability for Alcoa is expected to improve in the second quarter 2003, "further earnings strength is likely to remain challenging in our view," they said.

Alcoa was boosted to a "buy" from a "neutral" at Merrill Lynch. Daniel Roling said that he sees "significant upside opportunity ahead resulting from strong industry and company fundamentals and a low current valuation." He set a $32 price target for the stock.

Defense & Aerospace . . . Northrop Grumman will pay $111 million to settle a lawsuit over alleged overcharging on government contracts at its recently acquired TRW business. However, Northrop said it is still on track to make cash from operations of $1.1 billion to $1.3 billion this year. The fiscal-year earnings estimate of $3.80 to $4.20 a share also stands.

General Dynamics said it'll buy Veridian for $35 per share. The price is a premium of 28 percent over Veridian's closing price of $27.35 on Friday. The deal includes the assumption of $270 million of debt. Veridian went public on June 5 of last year at an IPO price of $16 per share. Veridian is a provider of information-based systems to the U.S. government.

Staffing . . . Brandt Sakakeeny at Deutsche Bank upgraded Manpower, Resources Connection and Robert Half -- which he considers the top names in the staffing sector -- to "buy" from "hold," citing early signs of an economic recovery. Though labor market data is less certain, Sakakeeny believes improving economic growth trends suggests the worst may be over. "Although it is still too early to call the trend a definite one, we believe the time is now for long-term investors to begin buying staffing names," Sakakeeny said in a note to clients. His price targets increased for Manpower to $24, for Resources Connection to $28 and for Robert Half to $24.

Food & Beverage . . . ConAgra agreed to sell its chicken business to Pilgrim's Pride for roughly $590 million. The consideration will include $100 million in cash, $235 million in Pilgrim's Pride class A common stock, and $255 million in subordinated notes. ConAgra, which expects the deal to close this summer, will record a pre-tax charge of about $112 million related to the sale in the fourth quarter to reflect a write-down of the chicken business' assets. It believes the sale will not have a significant impact on its fiscal 2004 results.

Tobacco . . . R.J. Reynolds Tobacco chief financial officer, Richard Bogan, has resigned to pursue other opportunities. The company appointed Dianne Neal to replace Bogan, effective immediately. Neal, who joined the company in 1988, was named controller in 1997 and vice president of investor relations in 1999.

Retail . . . Safeway earned a spot on J.P. Morgan Chase's "focus list," as the brokerage raised its price target on the stock to $23.50. Analyst Stephen Chick said the grocer's centralization project is on track and "progress is being made" in efforts to cut labor costs. He also expects the results of the company's overhead review -- expected in August -- to lead to important changes in coming quarters. Chick said he sees the sale of the Chicago-based Dominick's chain eventually adding to earnings.

Deutsche Securities initiated Kohl’s with a Sell rating and $44 target. The firm believes that 1st quarter was the first major crack in the company's high-growth story, and that 18-20% square footage growth could result in national saturation of the co's only proven format; in addition, firm says both new and mature stores are showing declining productivity, and that the company's massive inventory bets have now backfired and will lead to significant margin erosion in 2nd quarter-3rd quarter, compounded by difficult comps.

Christine Augustine at Bear Stearns reiterated her "outperform" rating on Wal-Mart, given that opening price points continue to drive sales and that excess inventory should be worked through by the end of its fiscal second quarter. Augustine added that its Sam's Club division has begun to turnaround, as members have started to respond to product assortments refocused on small business customers.

Restaurants . . . McDonald's reported much better than expected May sales with constant currency worldwide same store sales up 2.2%, including a 6.3% increase in the U.S. Analysts had been expecting U.S. comps to be up about 3%.The month benefited from an extra weekend day, but nevertheless the performance was impressive. European same store sales were down 1% on a constant currency basis (versus a plus 6.4%), much better than expected even with about a 1.5% benefit from the extra weekend day. Total European sales were up 2% in constant currencies but up 24% on a reported basis given the soft dollar. MCD warned of $50 million in 2nd quarter expenses related to streamlining the business, including getting out of some real estate deals, as well as billboard spending. This equates to about $0.025 in EPS impact. Analysts are maintaining 2nd quarter EPS estimate at $0.37.

Healthcare .. . Legg Mason upgraded Beverly Enterprises to Buy from Hold following the announcement of 3.26% increase in Medicare reimbursement for nursing home operators. The firm believes that the additional Medicare funding will improve the company's financial performance and reduce the risk of any potential financial default; in addition, industry sources indicate there is strong interest in the properties the co is divesting, indicating divestiture transactions could come as soon as 2nd quarter that will further improve BEV's financial performance and reduce its liability risk profile. Target is $5.50.

Medical Equipment . . . Cytyc after the medical device firm won Food and Drug Administration clearance for an imaging system used in cervical cancer screening. The company has marketed a test, the ThinPrep Pap, for cervical cancer since 1996.

Biotech . . . Enzo Biochem has initiated a phase II trial of its antigen treatment for Crohn's disease. The company said results of its phase I trial were 'promising' with seven of the 10 patients enrolled achieving clinical remission. Enzo expects to enroll 30 individuals in the phase II trial.

Oxigene said its Combretastatin A4 pro-drug will be combined with chemotherapy drugs carboplatin and paclitaxel in a new trial treating patients with advanced ovarian cancer. Combretastatin is Oxigene's lead vascular targeting agent.

NaPro Biotherapeutics announced over the weekend "promising" results from a study of its treatment for Huntington's disease. The company said its proprietary technology worked in a "medicinal way" rather than a "genetic way," and inhibited aggregation and extended the life of neuronal cells. NaPro noted that the aggregation of the Huntington protein leads to neurotoxicity and cell death.

Michael King at Banc of America Securities upgraded Regeneron Pharmaceuticals's shares to "buy" from "neutral." In a note to clients, King cited the promise of Regeneron's experimental cancer therapy.

Consumer Electronics . . . TiVo received patent license from Gemstar-TV Guide. The companies dismiss pending litigation.

Telecom . . . Merrill Lynch upgraded Sprint PCS to "buy" from "neutral." Linda Mutschler believes the company's results, including churn and net subscriber additions, will improve sequentially. In addition, she feels the stock's valuation can be drive even higher than her $7 price target given the company's low free cash flow margin and high leverage.

Blake Bath at Lehman Brothers raised his rating on SBC Communications to "overweight" from "equal weight," as part of a more positive view on the telecom services industry. Bath also raised his price target on the stock to $30 from $26. He believes the regional bell operating companies will return to positive growth in revenue and cash flow by next year, while the overall industry returns to growth by 2005. Bath maintained his "overweight" rating on Verizon and his "equal weight" rating on BellSouth, but upped his price targets on the stocks to $48 and $30, respectively from $45 and $26.

Storage . . . Goldman Sachs upgraded Sun Microsystems to "in line" from "underperform." Analyst Laura Conigliaro said she still believes the company faces secular challenges, but feels stabilizing demand and relatively low valuation warrant make it more likely the stock will trade in line with it peer group.

Punk Ziegel downgraded select enterprise storage stocks, saying valuation has gotten too far ahead of growth. The firm downgraded Q-Logic to Sell from Market Perform, saying it is the most expensive in the group at 7x sales; target is $37. The firm also downgraded Brocade to Sell from Market Perform, as firm thinks the stock should trade at 2x sales, not 2.7x; target is $4.75. Firm downgrades McData to Market Perform from Buy and cuts price target to $13 from $15, citing valuation. And the firm downgraded Emulex to Market Perform from Buy and cuts their target to $24 from $28, saying a multiple of 25x forward earnings is reasonable.

Adaptec was downgraded at First Albany to Neutral from Buy based on valuation, as the stock is near their $8.72 price target.

Network Equipment . . . Steven Levy reaffirmed his view that the telecommunications services company has bottomed, and the stabilization phase of a recovery has begun, but he downgraded a number of companies in the group due to excessive valuation. He cut ADC Telecommunications, Nortel Networks, Sonus Networks and Tellabs to "underweight" from "equal weight," saying the differences between those stocks and the respective price targets were "too glaring to ignore."

Motorola warned of a second-quarter earnings and revenue shortfall. The company had blamed SARS and excess inventory for lower than anticipated handset sales in Asia. Cellular sales in North America, Latin America and Europe have been meeting expectations. The company now expects to breakeven for the quarter ending June, excluding one-time items, versus prior projections of 3 to 5 cents a share. Revenue for the period is now expected to be $6 billion to $6.2 billion, down from prior forecasts of $6.4 to $6.6 billion. Motorola said the issues that negatively affected its second quarter are expected to also impact its third and fourth quarters, leading to lower forecasts for the full year.

Raymond James raised Sonus Networks their 2004 est. to $0.03 from $0.00 versus consensus of ($0.03), based on their belief that capital spending trends are stabilizing and communications operators are making strategic investments. The firm thinks Voice Over IP deployments are occurring and traffic can grow at a 60-80% clip, and SONS will participate in that growth. Target is $7.

Ericsson sold its holding of France Telecom's 456 million euro convertible bond to a financial investor. The transaction will be completed before the end of the third quarter, Ericsson said. The bond is tied to Ericsson's outstanding customer financing to German operator Mobilcom, Ericsson said.

Adams Harkness believes that Advanced Fibre represents one of the most compelling plays on the broadband upgrade cycle. The firm expects AFCI to capture a meaningful share of the recent network expansion announced at Verizon and SBC.

Extreme Networks was cut to Underperform at RBC. The downgrade from Sector Perform is based on view that stock is pricing in an overly optimistic revenue outlook. Assuming a 30x multiple of 2004, EXTR's revs would have to grow by more than 30% in fiscal 2004 to justify its current price. Firm's $4 target is based on a sum of the parts valuation.

Semiconductor Equipment . . . Moors & Cabot downgraded Cymer to Sector Perform from Sector Outperform based on valuation, as the stock has almost reached their $36 target. Also, the company's mid-quarter update is likely to be cautious, and checks indicate that litho suppliers are not showing any pickup in demand.

Semiconductors . . . Goldman Sachs downgraded Qlogic (networking chips) to "underperform" from "in line," citing valuation and long-held concerns about risks to industry growth. She believes the company has "earned its place with investors" and deserves a premium valuation, but at current levels she feels the near-term risk outweighs the potential reward.

Taiwan Semiconductor Manufacturing said its May sales grew 10.6 percent from the same month last year to NT$16.8 billion ($484 million). The figure also represent an 10.1 percent increase from April. The company's shares advanced 0.85 percent to NT$59.

Software . . . CS First Boston downgraded Check Point Software to "underperform" from "neutral" due to valuation, given that the stock is trading well-above the new $17 price target. Analyst Todd Raker said his fundamental thesis on the company remains unchanged, but believes the company will continue to lose market share to rivals Cisco Systems and NetScreen.

J.D. Edwards said Oracle's hostile bid to buy PeopleSoft could possibly violate U.S. and European antitrust laws, given that it would "sharply reduce" options for business software customers. Meanwhile, the company said its merger with PeopleSoft was a "positive, bold step" that would share the future of the industry. PeopleSoft announced an agreement to buy J.D. Edwards on June 2.

J.D. Edwards officials cited the benefits of a merger with PeopleSoft while at the same time raising the specter of antitrust and integration issues should Oracle's $5.1 billion hostile takeover attempt of PeopleSoft be approved. Speaking at an annual customer event in Denver, J.D. Edwards CEO Bob Dutkowsky said a combined Oracle-PeopleSoft business would be large enough to bring up "serious antitrust problems" in the U.S. and aboard because its would leave customers with fewer software choices. Dutkowsky said J.D. Edwards approached PeopleSoft last fall about merging but that there was never a "for sale" sign on J.D. Edwards.

Merrill Lynch said that SAP could benefit if Oracle succeeds in taking over PeopleSoft, but is unlikely to become a target of bids itself and called Friday's share price gains "hard to justify." It reiterated its neutral outlook. SAP could benefit because of Oracle's desire to force PeopleSoft customers to its products; clients may opt to switch to SAP instead if forced to switch, the broker reasoned. SAP shares were off 1 percent in Frankfurt.

M&A activity really took off in the enterprise software market last week, starting with PeopleSoft’s announcement that it planned to acquire JD Edwards in an all-stock deal worth $1.7 billion (at the time). Following that, Software AG was bid up following an article in German financial daily, Boersen-Zeitung, that it was a potential bid target for either Microsoft or IBM, which was subsequently denied by Software AG. Finally, Oracle tabled an unsolicited cash offer for PSFT in a deal worth $16 per share, or $5.1 billion. The ORCL bid really set things alight and just about every stock in our coverage universe took off, although share prices pulled back by the close of the European trading day, and even further following the European close but by the end of trading in the US.