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RobBlack.com MarketWrap:

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We are back to earnings statements, economic reports, and the ebb-and-flow of Wall Street strategists. U.S. stocks rose on expectations the lowest interest rates in 45 years will lead to bigger increases in profit later this year. Computer-related shares including Microsoft and Intel led the advance. The S&P 500 added 10 points (+1.1%) to 985. The DJIA rose 67 points (+0.8%) to 9079. The Nasdaq advanced for the first day in six, climbing 31 points (+2%) to 1634. Nine stocks advanced for every five that declined on the New York Stock Exchange, while five rose for every three that fell on the Nasdaq Stock Market. Almost 1.4 billion shares traded on the Big Board, 3 percent less than the three-month daily average.

Strong Sectors: wireless, semiconductor, aluminum, airline, lodging, biotech, tobacco
Weak Sectors: oil driller

Top Stories . . . The number of U.S. workers filing for state unemployment benefits fell more than expected last week to the lowest in three months, suggesting the pace of job cuts may be easing, a government report showed.

The dollar rose to a five-week high against the euro in New York amid speculation the lowest interest rates in 45 years will restore growth in the world's largest economy without spurring inflation.

Lehman Brothers, the fourth-largest U.S. securities firm by capital, may buy Neuberger Berman, an asset manager that oversees $56.3 billion, to reduce its dependence on bond trading, a person familiar with the situation said.

American International Group, the world's biggest insurer, agreed to buy General Electric Co.'s Japanese life insurance business and U.S. car and home unit for $2.15 billion, its largest purchase in more than two years.

Razorfish, Red Hat, and 307 other companies that went public during the Internet boom of the late 1990s reached a $1 billion settlement with investors who said their stock offerings were rigged.

Quotes of Note . . . Rising earnings and ``low interest rates do wonders for equity valuations and stock prices,'' said Benjamin Pace, who helps oversee $22 billion at Deustche Bank Private Wealth Management in New York. He's been buying Anadarko Petroleum Corp. and St. Jude Medical Inc.

Money in bank deposits and money market funds ``at some point is going to have to move to something with a better return,'' said William Braman, chief investment officer at John Hancock Funds, which manages about $28 billion.

Of Note . . . A Reuter's poll of 20 primary bond dealers find 16, believing we have seen the final rate-cut, while the others see another 25-basis points at the August 12 meeting.

The number of American consumers delinquent on their credit-card accounts was unchanged at 4.07 percent on a seasonally adjusted basis for the first quarter, the American Bankers Association said Thursday. Calling it "remarkable" that credit-card delinquencies remained flat in the face of difficult economic conditions, ABA chief economist James Chessen said a recovery in employment and a resumption of job growth are needed before delinquency rates show a meaningful drop. At the same time, past-due personal loans, mobile home loans, and home-equity lines and loans all were higher on a percentage basis as opposed to the fourth quarter of 2002, according to the trade association.

Rate Cut (why it matters) . . . Undoubtedly, one reason for the more modest rate-cut was consideration for Money Market Funds. According to Bloomberg, more than 10% of all Money Market Mutual Funds may need to waive fees as yields slide closer to zero. The quarter-point cut may force the 209 funds yielding 0.25% or lower to waive fees to prevent "breaking the buck." The cost of waiving the fees would reach $155-million if overnight rates stay low for a year. Byron White, who manages $60-billion for Evergreen Investment, says the Fed is almost forcing everyone into the equity market as investors reach for higher yields. A half-point cut might have forced more than 1/3 of all Money Funds to waive fees.

Bond yields . . . Economist Mike Norman says they may have hit their lows. Using the Benchmark 10-Year Treasury Note Yield, and subtracting the core inflation rate, real yields are at 1.74%, which is the lowest point in 23-years. The average real yield in the past 46-years has been 2.75%. The highest they have been was just under 9% in 1983, and they briefly dipped into negative territory in 1974 and 1980. He says in recent years, each time the real yield dipped below 2%, it has triggered a rise in inflation, and a rise in rates. Bonds and stocks have recently been rallying together, but at some point, there is likely to be a disconnect, and bonds will top out.

Eco Speak . . . Help-wanted advertising was stable at a low level in May. The help-wanted index remained at 36 vs. 44 a year ago. Ads for job openings declined in eight of nine U.S. regions over the past three months. Consumer spending remains strong and is likely to firm with tax cuts, said Ken Goldstein, economist for the board. "But a real recovery, including a slowdown in lahyoffs and the opening of new jobs, is far more dependent on recovery in investment than on stronger consumption growth," Goldstein said.

The number of U.S. workers applying for unemployment benefits fell in the week ended June 21 to 404,000, down 22,000 from the previous week's upwardly revised figure, the lowest level since March 22 of this year. The four-week moving average for claims fell to 428,250, a decline of 5,250 from the upwardly revised 433,500 figure posted a week earlier. The number of initial claims has fluctuated between 415,000 and 450,000 for the past three months. Economists say new claims must consistently fall below 400,000 to indicate job growth.

The U.S. economy grew at a weak 1.4 percent annualized rate in the first quarter, a half percentage point lower than previous estimates. The government said inventories grew less than first believed and imports grew more. The revisions had no impact on final sales to domestic purchasers, which rose 1.4 percent. Economists were expecting the previous 1.9 percent estimate to stand. The government said consumer spending and provided most of the lift. Business investment dragged growth lower. Despite the anemic growth, corporations boosted their after-tax profits by 12.2 percent compared with a year earlier, the biggest increase in more than three years.

Dividends Going Higher? . . . check at the bottom of the page to learn about the banks that are likely to raise dividends. This is a long piece so I am putting it below all else.

Financials . . . Friedman Billings Ramsey Group Inc said it has priced a $699.4 million dollar initial public offering for American Financial Realty Trust, a REIT that acquires coporate owned real estate assets from financial institutions. The 55.95 million shares were priced at $12.50 per share and now trade under the NYSE symbol "AFR." American Financial Realty is based in suburban Philadelphia.

PMI Group warned for 2nd quarter, sees EPS of $0.71-0.78 versus consensus of $0.96. For Y03, PMI says it will not meet consensus estimate of $3.96. The company cited "higher than expected claims payments in its U.S. mortgage insurance portfolio, record low persistency rates in its U.S. mortgage insurance portfolio and the significant reduction in the earnings contribution, if any, from Fairbanks" for shortfall.

Paychex was upped to Outperform at RW Baird. The firm says would recommend aggressively buying the stock up to $32.

Deutsche Securities upgraded Morgan Stanley to Buy from Hold based on valuation; firm thinks the company's trends in 3rd quarter will more closely resemble those of the industry, and the stock's price to book is in line with the group's mean, even though its average level over both a 5 and 10 year period is a premium of 25%; in addition, when mergers and equities eventually rebound the co should be among the best positioned to capitalize on industry gains. The firm raised target to $54 from $49.

The Wall Street Journal reports General Electric's GE Insurance Unit has agreed to sell its Japanese based insurance operations along with its U.S. auto and home insurance businesses to AIG. The deal is valued at approximately $2.15 bln, depending on the closing date, which the co expects to be around 90 days.

The Wall Street Journal reported Lehman Brothers Holdings is in advanced discussions to purchase Neuberger Berman for approximately $3 billion in stock and cash. The significance of this potential acquisition for LEH would allow the co to own a money management firm, which would allow it to compete with rivals such as Merrill Lynch and Morgan Stanley. In addition, it provides LEH an opportunity to diversify its revenue stream.

Late last week, Kimco and Mid-Atlantic Realty (MRR) announced a definitive merger

agreement in which Kimco will acquire all the oustanding shares of MRR in an all cash transaction, which is expected to close around September 15, 2003. The transaction is a positive indication of ongoing consolidation in the shopping center sector. Kimco values the transaction at $680 million based on $444 million of cash consideration (21 million MRR shares at $21.00 per share) and $236 million of assumed debt. Kimco, which will finance the transaction with its line of credit and $66 million of newly issued equity, is paying an 8.5% premium to the prior

price of MRR shares. Essentially, a strategic asset purchase, MRR represents a 5% increase to Kimco's 92.7 million square foot portfolio. Kimco plans to allocate the properties among its co-investment programs (primarily KROP) to benefit from leverage and management/leasing fees.

Oil & Gas . . . ChevronTexaco says U.S. oil and gas production is down less than 1 percent for the first two months of the second quarter, compared to the first quarter. International natural-gas output was down primarily because of lower seasonal sales in Europe. But international liquids production was flat with production in Nigeria, which suffers from civil urest, at 115,000 barrel per day during the first two month of the quarter, compared to net production last year of 127,000 barrels per day. The company's realized price for crude in the U.S. fell by about $5 per barrel, while its realized price for U.S. gas fell by $1 per thousand cubic feet. Meanwhile, foreign exchange charges in the first two months of the quarter totaled $102 million afer taxes because of the weaker dollar, with the company expecting addtional foreign exchange charges in June.

Since the Gulf of Mexico drilling cycle peaked in May 2001, a total of 31 offshore rigs have been moved from the U.S. Gulf of Mexico to international markets, primarily Mexico. The supply (or the available pool of deep and shallow water rigs) was 213 in May 2001 and today stands at 182. While the supply of rigs has fallen by 31, demand has fallen by 60 rigs (from 192 in May 2001 to 132 today). The exodus of rigs to stronger and steadier international markets did not eliminate the rig surplus in the Gulf of Mexico because demand fell more than supply.

Now, however, the rig supply in the Gulf of Mexico continues to shrink but demand has bottomed and is rebounding. The Gulf of Mexico rig market is strengthening, as reflected in rising prices for the kind of rigs that are in greatest demand (premium jack-ups). These rigs are now negotiating rates from $37,000-$38,000 per day at the low end to $42,000-$44,000 per day at the high end. In at least one new contract signed last week, a premium jack-up owned by ENSCO was contracted at $50,000 per day. This rig is capable of drilling in 400 feet of water and is considered to be at the top end of the premium jackup class of rigs.

Meanwhile, the supply of rigs is continuing to shrink. A total of 7 rigs (4 jackups and 3 semisubmersibles) are in the U.S. Gulf of Mexico today, but are preparing to move to Mexico under contracts of 3 to 4 year’s duration. All 7 rigs will have departed by October 1, lowering the supply of rigs in the U.S. Gulf of Mexico from 182 to 175. The 7 rigs are made up of the Pride Alabama, the Pride Colorado, the Pride Tennessee, the Noble Bill Jennings, the Pride Viking, and Diamond Offshore’s Ocean Ambassador and Ocean

Worker. All 7 rigs are now under multi-year contracts with Pemex (the Mexican national oil company).

Energy . . . Fitch Ratings downgraded Mirant's senior notes and convertible senior notes to "CCC" from "B-."

Calpine plans to raise $1.8 billion through an offering of secured notes and term loans. Calpine plans to use the proceeds to repay debt

Defense . . . Northrop Grumman's Vinnell Corp. unit has received a $48 million contract to help train a new Iraqi army, the Defense Department said Wednesday. The program will run from July 1 through June 30, 2004 and take place throughout Iraq. The Pentagon said five bids were received on the contract.

Transports . . . CSFB upgraded AMR to "outperform" from "neutral." The American Airlines parent said it had positive operating cash flow in May and June, thanks to cost reductions and better sales. Though the carrier did not indicate how much cash it had, it did note that the positive cash flow did not include the $358 million it received from the government related to the conflict in Iraq. CSFB analyst James Higgins said his metrics suggest a year-end cash balance of $1.4 billion to $1.5 billion. He cut his second-quarter loss estimate almost in half to $1.95 a share from $3.60 a share, and the full-year loss to $11.50 a share from $15.50. His 12-month target price is still $18.

KVH Industries announced that Fleetwood Enterprises, the #1 RV manufacturer in the U.S., has expanded its use of the KVH TracVision line of satellite TV antennas on its 2004 model year motor homes. Separately, Investors Business Daily features KVHI in its New America section in today's issue.

J.P. Morgan's airline analysts also narrowed their U.S. industry second-quarter loss outlook to under $1 billion: $950 million, lower than the earlier $1.2 billion estimate.

Consumer Products . . . Playtex Products expects earnings of 8 to 10 cents per share for the second quarter, below the average estimate for a profit of 23 cents per share. The maker of personal care and consumer products said tampon sales were hurt by industry promotional activities. Also, inclement weather stalled interest in sun care products, and unfavorable growth trends continued in several businesses, the company said. For the year, Playtex now sees earnings of 42 to 45 cents per share. Wall Street's consensus estimate is for a profit of 74 cents per share for the year.

Death . . . Stewart Enterprises approved the buyback of up to $25 million worth of its class A common stock. The Metairie, La., funeral services provider has roughly 108.4 million outstanding shares, 104.8 million of which are class A common shares.

Food & Beverage . . . Del Monte reported fourth-quarter net income of $23.5 million, or 11 cents per share vs. $47.5 million, or 30 cents per share in the year-ago period. Sales were $776 million, up from $498.4 million. Adjusted net income was 21 cents per share, up from 20 cents per share. One analyst surveyed by Thomson First Call estimated earnings of 21 cents per share for the San Francisco food company. The company reiterated financial guidance provided on May 16 of fiscal 2004 revenue growth of 2-4 percent over pro forma fiscal 2003. The company also expects reported diluted earnings per share of 80-84 cents for 2004.

ConAgra Foods reported net income of $150.4 million, or 29 cents per share, down from $192.2 million, or 34 cents per share after the effects of discontinued operations from the sale of its chicken business and other items. The food giant reported net income from continuing operations of 42 cents per share. A survey of analysts forecasted earnings of 41 cents per share. Revenue fell to $3.9 billion from $5.9 billion. The company said a change in business mix and plans for concentrated marketing will keep its first-quarter 2004 earnings below the level of last year. Last year the company posted EPS of 42 cents. Wall Street is expecting ConAgra to report earnings of 38 cents per share in the coming quarter. ConAgra said it's not providing specific EPS guidance for full year fiscal 2004 as it evaluates its business.

Retail . . . Herman Miller (office furniture maker) reported a a net loss of $1.3 million, or 2 cents a share, versus a net loss of $18.8 million, or 25 cents a shares, in the same period the year before. But the firm said that, including a restructuring charge of 5 cents, it expected first-quarter earnings of between a penny and 5 cents a share, far lower than the 12 cents a share.

JMP Securities downgraded Family Dollar to Market Perform from Market Outperform. The firm is saying the stock has met their $36 price target and they see limited near-term catalysts to improve sales and earnings performance.

Gap announced the completion of a $1.95 billion three year credit structure consisting of two components: (1) a secured $750 million revolving credit facility with major commercial banks and (2) agreements securing $1.2 billion in letter of credit issuing capacity. The latter component will be secured by GPS using approximately $1.2 billion of its $2.8 billion cash position, which will be reported as restricted cash on the balance sheet and will continue to earn interest income. The new debt structure replaces a two year $1.4 billion facility due in March 2004, which had more restrictive covenants and was materially more costly. The company’s new debt structure is far less restrictive and, because GPS is self collateralizing its letters of credit, the rate it pays to the banks has come down significantly.

Specifically, GPS used to pay 150 basis points to the banks for letters of credit issued on its behalf whereas now the company will only pay 5 basis points. On the plain vanilla revolver piece, the company’s rate has been reduced to 50 basis points from 75 basis points previously. In aggregate, GPS’s new debt structure is expected to reduce its gross interest expense by about $10 million for the remainder of 2003, which translates into an approximate $20 million annual savings run rate. The lion’s share of the interest expense

40 reduction stems from the letter of credit component, as GPS had approximately $659 million issued as of 1st quarter 2003. Lastly, as part of these new agreements, the company has the opportunity to further reduce its rate based on its debt-to-EBITDA ratio.

Restaurants . . . Panera Bread reports 3% increase in May/June comps.

Healthcare . . . Conceptus received positive decisions from Blue Cross/Blue Shield plans representing nearly 43 million people for the coverage of its Essure non-incisional alternative to tubal litigation for women seeking permanent birth control. In addition, the company said both Aetna and Wellpoint have issued a medical policy for Essure listing the procedure as "a covered technique for permanent sterilization."

Medical Devices . . . Digene announced that its DNAwithPap test is a covered benefit for more than 15 million covered lives across the U.S. and DNAwithPap testing is now available at U.S. laboratories.

Drugs . . . Biovail announced the U.S. Food and Drug Administration (FDA) issued an Approvable Letter for the once-daily antidepressant Wellbutrin XL. The drug was developed for the treatment of major depressive disorder in patients aged 18 and older. It said that the letter "involves resolution of routine matters and consequently, approval of Wellbutrin XL is still expected during the second half of 2003."

ImClone Systems received a $3 million payment from Merck KGaA for reaching a clinical development milestone with its Erbitux oncology drug. The company said the milestone relates to the development of Erbitux for the treatment of non-small cell lung cancer.

Elan plans to delay the filing of its 2002 annual report could put it technically in default with some debt holders. Elan said the delay results from talks with the SEC over the accounting treatment for Elan's qualifying special purpose entities. It added that the delay in filing the 2002 Form 20-F "may cause a technical default under certain of Elan's debt covenants that require it to provide audited consolidated financial statements to the holders of the EPIL II and EPIL III notes and Elan's 7 1/4% Senior Notes."

Biotech . . . Esperion was upgraded at Piper Jaffray to Outperform from Market Perform and raised their target to $23 from $14 following the company's Phase II ETC-216 news.

Genta initiated four new clinical trials with lead anticancer drug.

Serono announced that an FDA panel did not recommend approval at this time of Serostim for use in the treatment of short bowel syndrome in patients receiving specialized nutrit. The committee's view was based, in part, on the fact that the majority of study patients were treated in a single specialty treatment center. This committee recommendation does not impact the current use of Serostim in the approved indication of AIDS wasting.

Novavax informed by the FDA that it may need additional time beyond July 12 for a full review of the company's Estradiol Partner Transfer Study Report submitted in May of this year. Novavax does not expect that any extension of the review process will affect the anticipated launch date for Estradiol.

The Wall Street Journal's "Heard on the Street" column discussed concerns over Genentech's insider selling in light of its increasing stock price. Six of the company's top officers have sold stakes that are no larger than 30% of the shares or options they held as of Dec 31 with most sales being the first in two years. However, the article suggests the stock's recent appreciation could be a momentum play. Raymond James analyst believes Avastin, which has helped propel the stock into its current price, is a "great drug" but believes there's "very little evidence" it can meet expectations with a fair price of the stock being around $60. The analyst does not recommend shorting the stock by betting on its decline.

Hotel & Leisure . . . Cendant announced Thursday that it has signed a multi-year global agreement with Starwood that will give the hotel operator access to Cendant's distribution products and services while providing Cendant's travel units with preferred rates and exclusivity on some promotions. "Our properties will have access to various new distribution outlets both online and offline, all at considerable cost savings through one managed relationship, which is far more efficient," said Steven Hankin, head of Starwood Technology and Revenue Systems.

MGM Mirage has cut a deal to sell its Golden Nugget casinos in Las Vegas and Laughlin, Nev., to a private investor group for $215 million. The transaction is expected to close before the end of the year and MGM Mirage said it should be able to "report a modest gain upon completion." Isle of Capri upgraded to Buy at McDonald Investments.

Carnival indicated the pace of bookings post-war have been very strong, but pricing, though firming a bit, is still under pressure. 2nd half yields are expected to be down 4% to 6%, slightly worse than expected. Expenses for the back half of the year are expected to be down slightly, which is consistent with prior guidance. Based on the company's new guidance, analysts are cutting our 2H 03 estimates, bringing our full year to $1.64 from $1.74 per share. Additionally, analysts are also trimming 2004 estimates to $1.98 from $2.04 per share. Management was very positive on the call about the prospects for a continued rebound in trends. Think the long-term outlook is coming together nicely, but we're not convinced that capacity issues don't still exist for this year and next. The recent improvement in trends is encouraging, nevertheless.

Media . . . Smith Barney analyst Lanny Baker upgraded his rating on CNet Networks to "outperform" from "underperform" and established a 12-month price target of $8 on the technology-oriented Web site operator. Baker cited his belief that the San Francisco-based company can outpace Wall Street's consensus expectation for 10 percent revenue growth next year. Much of CNet's revenue growth will flow to the bottom line because of cost controls that the company has implemented, Baker said. Baker foresees potential upside of more than 60 percent.

Telecom . . . Nextel reaffirmed 2003 EPS guidance, says it will "meet or exceed its full-year 2003 guidance." On May 19, company announced that 2003 EPS would come in at "at least $0.75." Reuters Research consensus is $0.93, estimates range from $0.75-$1.11, so analysts seem mixed in their opinions of what "at least $0.75" implies.

Research In Motion upped to Over Weight at ThinkEquity. The upgrade from Equal Weight follows what firm terms an "excellent quarter." In light of the strong adoption RIMM is seeing from its next generation products, firm is confident that RIMM's performance will improve going forward. ThinkEquity raised 2004 estimate to $0.06 from ($0.22) and 2005 to $0.26 from $0.05. The firm also increased price target to $30 from $18.

Needham downgraded Research In Motion to Sell from Hold. The firm says DELL will soon introduce wireless handheld devices integrating Good Technology's arguably superior push email software, which should significantly pressure RIMM's market position. The firm believes the shares are dramatically overvalued noting that stock trades at 67x firm's 2005 estimate; firm's free cash flow model pegs fair value at $8.43

Storage . . . Overland Storage sees dilution as company enters disk market. The firm announced the acquisition of Okapi Software for $5.0 million. OVRL says move marks its entry into the emerging market for disk-based appliances based on iSCSI and Serial ATA disk technologies. The company currently estimate that during fiscal 2004, its entry into the disk-based appliance market will result in earnings dilution of approx $0.11 per share, $0.07 of which is amortization of the Okapi purchase price, but will become accretive in fiscal 2005.

Sun Microsystems will buy privately held Pixo. Pixo provides network operators with Java technology-based server software to manage the secure distribution and monetization of digital content for end users' mobile devices.

Network Equipment . . . Korea Telecom will examine Lucent's networking gear in a test run, which could lead to a contract.

FBR believes the Verizon contract announced by Juniper may not be as positive for Juniper as expected. Firm believes Cisco may have won a good portion of the contract. Firm also believes that Verizon may have gained greater-than-expected price concessions from Juniper in edge router negotiations.

Semiconductor Equipment . . . Taiwan Semiconductor Manufacturing has announced a filing with the SEC for a global offering of 79 million ADSs with all of the securities being sold by shareholders. Goldman Sachs and Merrill Lynch are handling the stock sale with the underwriters having the option to purchase 11.8 million ADSs in case of significant demand. The 79 million ADSs are the equivalent to 395 million common shares.

Semiconductors . . . Sandisk has filed a complaint of declaratory relief with the U.S. District Court for Northern California against Infineon Technologies AG. The complaint seeks a declaratory judgment that SanDisk does not infringe U.S. Patent No. 5,726,601 (the "'601 patent") and that the '601 patent is invalid. SanDisk believes that its products do not infringe the '601 patent, as alleged in a letter received from Infineon. Co believes Infineon's correspondence was motivated by Infineon's announced intention to become a flash supplier.



ATI Tech surprised on the upside with its May quarter results and August quarter guidance. May-Quarter revenues of $342 million (up 7.4% Quarter over Quarter) beat estimates of $300 million and consensus of $305 million (down 4.2% Quarter over Quarter). Adjusted EPS at $0.07 beat our and consensus estimate of $0.04. It was a better than expected improvement in gross margin contributed to the earnings upside -- gross margin increased 4 points to 32.9%. The positive surprise in revenue vs guidance was mainly due to an improvement in desktop ASPs, which were up about 20% Quarter over Quarter at the chip level. The increase was driven by a significant portion of shipments of new products during the quarter (Radeon 9800, 9600, & 9200 desktop GPUs). ATI gained market share from NVIDIA on the desktop side and expect the share gain to continue in 2nd half 2003. ATI guided for August quarter revenues in the $335-$365mn range (mid-point up 2.3% Quarter over Quarter), better than consensus estimate of $321 million. Expect a significant ramp in desktop integrated products in the November Quarter, after shipments of the new IGP family begin in August. Expect ATI's desktop IGP to be very competitive, and forecast its share to increase to 10% in 4th quarter from virtually 0% today.



Software . . . Manugistics reported a first-quarter adjusted loss of $3 million, or 4 cents per share, narrower than its year-ago equivalent loss of $18.4 million, or 27 cents per share. 16 analysts were looking for a loss of 9 cents per share in the period. Revenue slipped 12 percent in the latest three months to $65.6 million from $74.6 million in the same period a year earlier. Looking ahead, Manugistics expects "adjusted operating income in its second quarter similar to its first quarter" on revenue of between $61 million to $62 million. Wall Street's current consensus estimate for the company is for a loss of 5 cents per share in the August quarter on revenue of $63.2 million.



Kana Software expects a loss of 40 to 45 cents per share on revenue of between $11 million and $12 million for the second quarter. Two analysts were looking for a loss of 6 cents per share in the period, on average. The maker of customer relationship management software said sales cycles are lengthening in the current economic environment, and it was unable to close several significant license transactions this quarter.



Pacific Growth expected Business Objects to meet 2nd quarter estimates and maintain 2003 guidance.



Novell was upgraded to Buy at Davenport. Price target $5.



SuSE Linux announced that Hewlett-Packard ill resell and support SuSE Linux Enterprise Server 8, powered by UnitedLinux, on industry-standard HP ProLiant servers and HP's Itanium-based servers.



Kana Software lowered guidance and now sees a 2nd quarter loss of $0.40-0.45, on revenues of $11-12 million versus consensus of $18 million. The company cited "lengthening sales cycles" for shortfall.



Dividends Going Higher? . . . Bank of America became the first major bank to increase its dividend in response to the new lower federal income tax rate on dividends, raising its annual dividend rate by 25% to $3.20 per share from $2.56. Although Bank of America did not specify a target payout ratio, we believe it is significant that the new dividend rate represents about 51% of the mean estimate for Bank of America’s 2003 earnings under GAAP and about 49% of our estimate of cash earnings. In discussions with chief financial officers of other major banks, 50% is most frequently mentioned as the highest dividend payout ratio with which they would be comfortable. At least a few other banks will follow suit and announce above-trend dividend increases within the next several quarters. For a variety of reasons detailed below, our favorite candidates to announce larger-than-usual dividend increases are Bank One and Wells Fargo.



In looking for candidates to make significant dividend increases, analysts are focused on banks that currently have payout ratios under 40% of cash earnings, in part because Bank of America had been at the 39% level prior to the dividend increase it announced on June 25. Focus on the nine banks with payout ratios of 37% and lower calculated on this basis. As a reminder, definition of cash earnings simply adds back the after-tax impact of amortization of intangibles arising from acquisitions, but does not add back other types of non-cash amortization charges or depreciation. Use the income statement provision for loan losses, which should converge with charge-offs over time. Earnings power and capital adequacy are clearly the most important factors in determining a bank’s ability to increase its dividend. With all the banks in our coverage universe at or well above capital levels deemed adequate by bank regulators and capital markets, earnings power is the most important hurdle.



In addition to capital levels and likely earnings power, a decision to increase a bank’s dividend significantly will also be affected by the need to retain capital to support likely balance sheet growth and the potential to make acquisitions with cash. An additional factor is the attitude of the senior management and board toward stock buybacks and dividends. This is difficult to assess at the moment because executives and directors who until recently preferred stock buybacks because of their greater tax efficiency in returning capital to shareholders must now incorporate the tax code’s newly level playing field into their thinking. State Street, just announced a one-cent increase in its quarterly dividend rate (a 17% increase) and Mellon, are unlikely to increase their payout ratios much above current levels. Both companies must retain capital to support balance sheet growth if their processing activities for customers increase from their currently sluggish levels. Also note that Mellon cut its dividend rate in half two years ago when it sold its retail banking operations and viewed itself as becoming a higher-growth company. Although both Bank

One and Wells Fargo have previously shown a preference for stock buybacks, their payout ratios are low— 32% for Wells Fargo and 26% for Bank One—and both are well-capitalized. Bank One may be reluctant to increase its dividend dramatically, having cut the dividend in half in 2000. But with Bank One having more than $4 billion of excess capital even after its recently acquisition of certain U.S. life insurance operations of Zurich Financial and not having raised its dividend in three years, we believe at least some dividend increase is likely. Since the 1998 merger of Wells Fargo and the former Norwest Financial, Wells Fargo has increased its dividend every three quarters. The last increase took effect in the first quarter of 2003, so expect Wells Fargo’s next increase to be effective no later than the fourth quarter of this year.