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RobBlack.com MarketWrap

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Welcome to July -- the month for Brewski, Fireworks and Foam. On the first trading day of the quarter, stocks rose in spite of some lackluster economic results. Brokers led the gain after two judges dismissed lawsuits that accused Merrill Lynch, Goldman Sachs, Credit Suisse Group and Morgan Stanley of biased research. The S&P 500 added 7 points (+0.8%) to 982. The DJIA increased 55 points (+0.6%) to 9040 and the Nasdaq Composite rose 17 points (+1.1%) to 1640. It was the first day in three that the benchmarks advanced. Three stocks rose for every two that fell on the NYSE. Some 1.5 billion shares changed hands on the Big Board, 1.6 percent more than the three-month average daily volume.

Strong Sectors: brokers, semis, gold, Internet, homebuilding

Weak Sectors: paper, autos, metals

Top Stories . . . U.S. manufacturing unexpectedly contracted in June for a fourth straight month as factories kept inventories low until demand strengthens, an industry report showed.

The dollar fell for a third day against the euro in New York on speculation the U.S. economy is growing too slowly to attract the investment needed to compensate for a widening current-account deficit.

Verizon Communications, the largest U.S. local-telephone company, will take as much as $3 billion in first-half charge, most related to an accounting change at it directories business and discontinued operations.

Goldman Sachs, the top global mergers adviser in four of the past five years, extended its dominance in the first half of 2003, managing four of the 10 biggest acquisitions. Credit Suisse First Boston fell to fourth place from first this time last year, as Internet and phone deals dried up.

General Motors's U.S. auto sales rose 1.5 percent in June from the year-ago month and Ford Motor Co.'s were unchanged, as the largest U.S. automakers fell short of analyst forecasts while boosting incentive spending from May.

Quote of Note . . . ``We're not sure things are getting better,'' said Charles Stutenroth, a money manager at Fort Washington Investments which manages $26 billion in Cincinnati. For stocks to keep advancing, he said, ``we're going to need more confirmation that the economy is on a rising, upward path.''

Of Note . . . Historically, July is a friendly month, with 32 winners and 20 losers over the past 52-years. But, this July follows one of the more successful quarters in history, so there is some hesitancy.

Report Card . . . The S&P 500 closed at 974 yesterday, up 11% for the first-half. History shows that the S&P has had it's first-half returns greater than 10% in 18 of the past 50 years. In 14 of those years, stocks increased in the second-half, gaining an average of 11%. Jeff Weiss, technician for Key Corp., tells CNBC that support for the Benchmark lies in the 940-to-945 area, and the bullish task is to get above 1000 -- and stay there for a spell. If so, that would conjure up a high of 1050-to-1060.

Hot IPOs . . . Ten initial public offerings debuted in the first half of 2003 in one of the slowest periods in the IPO market in about 30 years. But collectively, the deals averaged a gain of 36 percent as of the close of the first half on Monday. Accredited Home Lenders is the biggest gainer of the crop, with shares closing 143 percent over their $8 offering price as of Monday. None of the IPOs have done badly in the aftermarket. The worst performer is Bancshares of Florida, which is trading just 1 percent below its $10 IPO price.

Gurus . . . Tobias Levkovic, equity strategist for Smith Barney, thinks stocks could over-shoot his 2003 target of 1075 for the S&P. He says expectations appear low, while the potential for upside earnings surprises remains high, citing cost cutting, improved demand, and a weak dollar. He envisions continued shifts in asset allocation toward equities, and away from bonds and cash. He is also confident about a pick-up in merger activity.

Dick McCabe, Chief Market Analyst for Merrill expects the uptrend will resume this summer, following a consolidation phase into July. He says while near-term momentum indicators are at-or-near oversold levels, intermediate indicators are still at overbought readings.

Cynthia Latta, economist for Global Insights, says U.S. economic growth in the second-half may be twice as strong as the first, fueled by the most potent combination of stimulus measures in 62-years. What the predicted acceleration may not do is spur enough hiring to cut unemployment, or pull Europe and Japan out of the doldrums.

Interesting New Law. . . A new CA law went into effect yest. May have wide-reaching implications on the security space. The law (SB 1386) is an attempt to prevent identity theft and requires companies to notify customers in the event of certain computer security breaches or risk facing fines and possible lawsuits. Though this is a CA law, it pertains to any co. doing business in CA. It is too early to tell how companies will react, but it will likely make it very difficult for cos. to maintain the status quo. If breaches become more public and enforcement becomes a real liability, companies may raise the priority of IT security spending. A potential boost for the entire space as a whole.

Eco Speak . . . The manufacturing sector in the United States contracted again in June for the fourth month in a row, the Institute for Supply Management reported Tuesday. The ISM index rose to 49.8 percent from 49.4 percent in May. Economists were expecting the index to rise to 51.3 percent in June, which would have indicated growth in the sector. Readings over 50 percent indicate that a majority of firms surveyed thought business was getting better or at least no worse. New orders rose to 52.2 percent from 51.9 percent in May. Production rose to 52.9 percent from 51.5 percent in May.

U.S. construction spending unexpectedly fell 1.7 percent in May to $869.8 billion, the Commerce Department said. The drop was the largest in a year. Economists polled by CBS MarketWatch looked for a 0.3 percent gain on average. Public construction spending dropped 1.8 percent largely on cutbacks in school and prison building. The closely watched private sector also showed weaker spending in May, down 1.7 percent overall. A 24 percent tumble in outlays for office buildings contributed to the decline. All non-residential construction spending fell 0.4 percent in May. Within the residential sector, construction spending fell 0.9 percent.

Financials . . . Banc of America Securities raised its rating on Allstate to a "buy" from a "neutral" and upped its price target to $43 from $37 on belief that unit volume growth trends are improving and on belief that earnings growth should continue to be strong over the next several quarters.

Mellon Financial was downgraded at AG Edwards to Hold from Buy based on valuation, as the shares have outperformed peers over the last 2 months are nearing their $29 fair value estimate.

Morgan Stanley lifted its third-quarter earnings-per-share estimate on Goldman Sachs to $1.12 from $1.09 and its fiscal 2003 profit forecast to $5.08 from $4.87, citing the brokerage's better-than-expected trading revenues in the second quarter. Morgan also hoisted its second-quarter and full-year earnings estimates on Mellon Financial, noting that the bank's expenses are now "back in line." Finally, Morgan upped its second-quarter and 2003 profit estimates on T. Rowe Price, citing higher estimates on the company's assets under management.

American Financial Realty Trust closed on the acquisition of 158 properties located in 19 states housing the operations of a Bank of America subsidiary. The real estate investment trust paid $769.8 million in the deal, under which it gains 8.1 million square feet of space including the Bank of America center located in Chicago's financial district. Bank of America has agreed to lease back 5.2 million square feet of the acquired office space for 20 years on a triple-net basis, American Financial said. The deal comes a day after American Financial launched its initial public offering of 64.3 million common shares.

Portfolio growth improved in May (though still remained slower than the market we believe) due to a temporary decline in liquidations. Interest rate and credit risk remained well managed. The retained portfolio grew at an 8% annualized rate in May and purchase commitments rose meaningfully. Liquidations seem likely to increase again over the next several months, but the surge in purchase commitments could set the company up for very strong retained portfolio growth in June (similar to our view for Fannie Mae). The PC portfolio grew at a 6% annualized rate in May, as Freddie Mac recovered some market share and liquidations declined slightly. Market share still remains lower than normal, and liquidations will likely increase again, which should limit PC growth in the short-run. Delinquencies were relatively flat (80 bps) with the previous month. Duration gap (0 months) and PMVS measures (1.92% and 0.74%) remained very low. Although it appears that retained portfolio growth may end up being better than our prior forecast for 2nd quarter, estimates are unchanged given the ongoing reaudit. Roughly $15 billion of debt repurchases still seem likely to depress earnings materially without some offsetting large "gains."

Homebuilders . . . Lennar acquired Mid America Title for undisclosed sum.

Energy . . . Southern Co was cut to Underperform from In-Line at Goldman Sachs. The firm notes that SO represents the highest valuation in the sector. Importantly, firm thinks that the average utility stock will be up 10-15% over the next 12 months, which means SO could underperform many names by 20% or more.

Duke Energy was initiated with a Reduce at UBS based on their belief that the co remains challenged in addressing the ongoing underperformance of its wholesale power generation subsidiary, Duke Energy North America. The firm believes the company has a 6-9 month window to exhibit sufficient cash flow generation capability from its merchant fleet before credit pressures could re-intensify. Target is $16.

Transports . . . Mesa Air Group signed a memorandum of understanding with UAL's United Airlines to operate as a United Express carrier. The deal "significantly" expands Mesa's current code share agreement with United. Financial terms weren't disclosed. Mesa will now operate 35 regional jets on select portions of the United Express service, in addition to the 10 Dash-8 aircraft it already has under contract.

Nissan said Tuesday that its U.S. sales in June rose 22 percent from last year to 68,799 vehicles. Sales for the year are up 0.9 percent. Nissan-badged vehicles rose 19 percent in June while the Infiniti line rose 43 percent.

Ford reported a 7.7 percent decline in U.S. sales last month. Overall unit sales and leases totaled 311,252 vs. 337,300 in June 2002. Sales of trucks and sport-utility vehicles fell 4.1 percent, while cars dropped 13.7 percent.

Merrill Lynch dropped its rating on Atlantic Coast Airlines to 'neutral' from 'buy,' citing valuation and competition from UAL's expanding United Express service. Volume is already 480,000 shares, more than half the issue's daily average of 764,800.

Defense & Aerospace . . . Deutsche Bank downgraded Boeing to a sell from a hold, telling clients it sees "a real disconnect between the ongoing weak fundamentals in commercial aerospace and the strong recent price performance for Boeing."

Lockheed Martin received a contract to produce the guided multiple launch rocket system and related equipment for the U.S. Army. The initial phase of the deal, which authorizes production of 156 million rockets, is estimated to be worth roughly $30 million. The company will also supply engineering and logistics support services. Deliveries are expected to begin in March 2004. Lockheed shares are adding 45 cents to $48.02.

Retail . . . US chain store sales fell 0.5 percent in the week ended June 28, according to the Bank of Tokyo Mitsubishi and UBS Warburg. This is the first decline after two straight weekly increases. Sales contune to be erratic, the firms said. On a year-on-year basis, sales were up 1.1 percent after rising 0.6 percent in the previous week. BTM-UBS said they expect June monthly sales will post a gain of about 2.0 percent. Monthly chain store sales will be released on July 10.

Walgreen was upgraded at Goldman Sachs to Outperform from In-Line based on the following factors: 1) the company continues to possess rare 13% top- and 15% bottom-line multi-year growth prospects, 2) firm thinks valuation has not been this compelling in several years, and 3) top-line momentum is poised to reaccelerate beginning in Aug/Sept.

Amazon.com Japan launches new Electronics store.

Restaurants . . . Peet's Coffee named Tom Cawley as their new CFO, effective July 21. Cawley will replace former CFO Mark Rudolph, who accepted a new position at the privately-held Boudin Bakery & Cafe.

Smith Barney raised its rating on Starbucks to 'outperform' from 'in-line' saying same-store sales trends at the Seattle coffee seller "remain the best of any company we cover." The firm believes Starbucks could outperform Wall Street expectations for an increase of 5 to 6 percent when it reports its June same-store sales figures after the closing bell. Smith Barney left its price target at $29 but added Starbucks as a 'top pick,' noting its belief that the stock has become "relatively more attractive" because it has under-performed the firm's average covered restaurant stock by 16 percentage points since April 24.

Cheesecake Factory was cut to Underperform at Smith Barney, citing the possibility of soft 2nd quarter comps due in large part to unfavorable weather, unit-opening schedules in 2nd quarter- 4th quarter that seem to suggest the possibility of pre-opening expense pressures for 2nd quarter-3rd quarter, and the possibility of weak bakery sales. The firm cuts target to $36 from $39.

Healthcare . . . Banc of America Securities hoisted its rating on Aetna to a "buy" from a "neutral," citing strong growth prospects and belief the company will build market share in 2004. Banc of America also upped its 2003 earnings-per-share estimates to $5.00 from $4.20 and its 2004 numbers to $6.00 from $4.85 to reflect expectations for lower medical costs and growing enrollment. The firm also raised Aetna's price target to $75 from $65, representing 20 to 25 percent appreciation from current levels.

Ventas has completed its ales of 16 skilled nursing facilities in Florida and Texas to Kindred Healthcare, its primary tenant. Kindred previously leased the facilities. The transaction yielded cash proceeds of $59.7 million to Ventas. In addition, Kindred paid a lease termination fee of $4.1 million. Ventas is also saying it expects funds from operations of 38 to 39 cents per share for the second quarter, and $1.50 and $1.52 per share for 2003. The company is also reaffirming its forecast for FFO of $1.55 to $1.57 per share for 2004.

Medical Devices . . . Staar Surgical is saying the pre-market approval application for its implantable contact lens has been accepted for substantive review by the Food and Drug Administration. The application, which seeks approval for the treatment of myopia in the range of -3.0 to -20.0 diopters, has also been granted an expedited review status.

St. Jude Medical received approval for Integrity pacemaker line in Japan. The firm received regulatory and reimbursement approvals from the Ministry of Health, Labor, and Welfare in Japan for its Integrity Micro pacemaker family.

Drugs . . . Teva Pharmaceutical said that effective today, it holds all product rights relating to the leukemia treatment Purinethol for the United States, Puerto Rico and Canada. The company gained the product rights from GlaxoSmithKline as part of their settlement of patent and antitrust claims arising from nabumetone, the generic version of GlaxoSmithKline's Relafen. Purinethol had North American sales of approximately $87 million for the 12-month period ended March 2003. Teva said it will record a one-time gain of approximately $100 million in second-quarter results to reflect the Purinethol transaction. In addition, GlaxoSmithKline and Teva will share future gross profits from sales of Purinethol.

MedImmune and partner Wyeth intend to initiate a broad marketing campaign during late summer including a two month (September to November) DTC campaign in order to increase awareness of FluMist among consumers. MedImmune also intends to focus on pharmacists as a key point of distribution for the product. Synagis continues to increase its penetration of key markets. The company reiterated its full year guidance for the product of $802 million-$828 million, estimate 2003 Synagis sales of $827.9 million. MedImmune plans to file data on its new, easier to use, liquid formulation of Synagis in 2nd half 2003. Much of MedImmune’s pipeline remains early stage with later stage clinical programs focused around additional indications for existing, commercialized products. The company intends on adding four new targets, either identified internally or licensed in each year going forward.

Biotech . . . Geron has completed its research collaboration with Celera Genomics focusing on characterization of active genes in human embryonic stem cells. The companies collaborated to sequence, identify and analyze the function of the genes expressed in the cells, both in an undifferentiated state and in the course of their differentiation. The research resulted in the creation of physical libraries of clone mRNA transcripts, or cDNA clones.

Tularik receives $35 million milestone payment from Amgen. This news is related to May 21 collaboration under which Amgen agreed to acquire $35 million worth of newly-issued Tularik common stock at $10 per share.

Vivus trial fails to demonstrate increase in the time to ejaculation.

Millennium Pharma announced an agreement with JNJ unit Ortho Biotech Products to collaborate on the commercialization and continued clinical development of cancer drug Velcade. Terms called for MLNM to receive just a $15 million upfront payment, which is being viewed as a disappointment by investors. Separately, UBS comments that it believes the agreement's structure reflects the reality that the majority of the upside from the drug for JNJ depends on potential successes in larger oncology indications. In addition, firm believes that MLNM's total revenue guidance for 2003 of $450-$475 million continues to be difficult to achieve based on this agreement.

Amgen exercised commercialization option for HuMax and IL15. In addition, Amgen has expanded its agreement with Genmab to include a new antibody program on an additional disease target. If products to all three targets are successfully commercialized and certain sales levels areachieved, Genmab will be entitled to receive up to $135.5 million in license fees and milestone payments. Genmab is also entitled to royalties on commercial sales instead of the profit sharing designated in the original agreement.

Media . . . Gannett, the publisher of USA Today and many other media holdings, has a diversified business line which "should drive solid cash flow growth and generate economic value over the next five years," said securities firm SG Cowen. "USA Today provides attractive exposure to national growth," it added. The findings should encourage the media industry, which has been stung by an advertising slowdown throughout much of the past few years. Gannett, which also has numerous holdings in medium-sized U.S. cities, is often regarded on Wall Street and Madison Avenue as a barometer in the newspaper publishing industry because of its size and breadth.

EW Scripps dwas owngraded at Smith Barney based on valuation. The firm is saying the market is efficiently pricing the meaningful value that the company has created in its cable networks. Price target is $90.

XM Satellite exceeds 692k subscribers.

Hotel & Leisure . . . Callaway Golf was cut to Hold at Wells Fargo based on their belief that there is a large degree of uncertainty surrounding the financial numbers from Top-Flite as well as ELY's ability to grow the combined golf ball entities.

Callaway entered into agreement with the Top-Flite Golf Company (formerly Spalding) to purchase the major assets associated with Top-Flite's business for approximately $125 million. Callaway would be acquiring these assets out of bankruptcy court, consequently, other bidders now have 60 days to submit competing bids. Analysts are not changing our numbers at this time but instead will wait for Callaway’s 2nd quarter 2003 earnings call in the hopes of filling in a few missing pieces. However, based on some information heard yesterday, Callaway's golf ball business could reach breakeven before the end of next year, adding back anywhere from $0.12 to $0.22 to EPS. Those estimates are based in part upon a comment by Top-Flite's CEO that his company's operating margins are "commensurate" with Callaway's (approximately 12%). Later in the call, however, he declined to say if Top-Flite was EBIT-positive in 2001 and 2002, which concerns us. Analyst do not agree that Callaway’s resolution of its ball business is the sole issue plaguing future growth and profitability. Changes in the golf industry (lower introductory price points, perceived lack of product differentiation, and continued poor demographic trends) paint a difficult picture for Callaway and other golf equipment manufacturers over the long-term. Maintain Peer Perform.

Morgan Stanley initiates coverage on the gaming industry with an In-Line view The firm thinks the overall group is currently trading at fair value, but also notes that some of the company's have significant employee stock option expense, which should get increased investor focus in 2004 when the company's should be forced to expense this labor cost. Initiates Argosys (target $31), Aztar (target $19), and Boyd (target $20) with Overweight ratings; Mandalay Bay (target $36), Harrah’s (target $45), and Park Place (target $10) with Equal-Weight ratings; and Station Casinos (target $23) and MGM Grand (target $29) with Underweight ratings.

priceline.com acquires Rentalcars.com for undisclosed sum.

Telecom . . . Verizon will take a noncash charge of $1.6 billion, or 59 cents a share, in fiscal 2003 to reflect a change in how it accounts for its phone-directory business. Part of that charge will be deducted from previously released first-quarter results, the company said. Earnings per share in that quarter have been reset at 87 cents, down from an initially reported $1.41. The accounting change will effectively smoothen out revenue flows in Verizon's yellow-pages unit over the course of each fiscal year, instead of bunching revenue up in certain months. Also, Verizon will take a second-quarter charge of $900 million, or 33 cents, related to its recent decision to sell its stake in Grupo Iusacell. In addition, the carrier will take assorted other charges totaling up to $500 million, or 19 cents a share. Yet full-year projections for revenue and profit from operations are unaffected by the changes, Verizon said.

Level 3 will make a debt offering of $250 million of notes slated to mature in 2010. The provider of high-speed Internet infrastructure technology is also reaffirming its forecasts for the second quarter and full year. Second-quarter revenue is seen totaling $945 million, while full year revenue is expected to come in at $3.9 billion to $4.34 billion. On average, analysts polled by Thomson First Call expected to see second-quarter revenue of $938.5 million, and a 2003 figure of $4.11 billion.

Network Equipment . . . TranSwitch announced that it now sees 2nd quarter revenues of approximately $6 million versus previous guidance of $4.5-$5.0 million versus consensus $4.78 million. TXCC cited stronger European demand for the company's DSL product line. However, for 3rd quarter co is estimating revenues of approx. $4.5 million versus consensus $4.90 million.

Alcatel has been awarded a 'multi-million dollar' contract to deliver a two-way satellite broadband Internet access network in China. Alcatal said the contract included a satellite gateway, Customer Premise Equipments (CPEs) and a comprehensive network management platform. Nanjing Toptry China-Spacenet Co. Ltd, a broadband access service provider, granted the contract. "This cooperation will lead to a great expansion of communications in China by providing a satellite solution, which will allow people in the remote areas to get access to state-of-the-art satellite technology, and the communication systems in the urban areas to have a flexible back up," Alcatel said.

F5 Networks will work with NTT DoCoMo on wireless security. The company announced its F5 Big IP will provide Secure Socket Layer or SSL client authentication and SSL acceleration for data encryption and decryption for NTT DoCoMo Corp's Freedom of Multimedia Access or FOMA 3G phones. NTT DoCoMo's new authentification service helps ensure high security for remote access to the enterprise intranet, authentification for online shopping, trading via mobile phone and general mobile Internet access.

Semiconductor Equipment . . . Texas Instruments announced plans to build a $3 billion 300mm fab in Texas. Construction will begin at the end of '05 and the fab is not expected to be completed until 2007. Machinery will be added in stages beginning in 2007, as dictated by demand. Estimates for '03 - '04 remain unchanged given the timeframe. Plans for wafer production to ramp from 10K to 25-30K at TXN's DMOS 6 fab remain on track.

Banc of America Securities issued a cautious research note on Applied Materials. "We don't share Wall Street's enthusiasm for AMAT's July quarter. We think the company is scrambling to make their flat new order guidance," analyst Mark Fitzgerald told clients. He feels the stock needs to correct from current levels to represent good value.

Semiconductors . . . LSI Logic was upgraded by Morgan Stanley to an "equal weight" rating. The firm also lifted its estimates on the chip company for 2003 and 2004. Morgan Stanley said LSI is taking the necessary steps to "right-size its operating structure" and mentioned the company's positive pre-announcement on Monday as reason for the ratings move.

American Superconductor signed non-binding letters of intent with three groups of investors to provide up to $50 million in financing. The electricity technology firm expects the deal to consist of a five-year term loan of up to $30 million, a $10 million working capital credit line, and the sale of $10 million in convertible subordinated notes. American Superconductor plans to use the funds for general corporate purposes, and the scale up of pilot manufacturing for its second generation of high temperature superconductor wire.

Software . . . PeopleSoft's Board of Directors said rival Oracle's. $19.50 a share cash tender offer "severely undervalues PeopleSoft based on its financial performance and future opportunities. Furthermore, the massive downside risk is a critical consideration in evaluating any Oracle transaction." The board members cited concerns a PeopleSoft and Oracle deal "faces many months of delay for review by antitrust authorities and a significant likelihood that, in the end, the transaction would be blocked as anticompetitive." It also said "Oracle's statements regarding its plans for PeopleSoft's products create serious uncertainty as to the level of support and enhancements that PeopleSoft customers could expect."

Activision accused Viacom of breaching its fundamental promise to continue exploiting the Star Trek franchise consistent with its practice at the time the agreement was signed in 1998. "Viacom has released only one Star Trek movie since entering into agreement with Activision and has recently informed Activision it has no current plans for further "Star Trek" films. Viacom also has allowed two Star Trek television series to go off the air and the remaining series suffers from weak ratings. "

MicroStrategy software was selected by Dick's Sporting Goods. "After reviewing reporting solutions from among the many available business intelligence products, Dick's chose MicroStrategy to replace their Cognos installation."

McDonald Investments initiates coverage of Macromedia with a Hold. The company's long-term outlook is positive but the firm believes the stock appears to be trading well ahead of its fundamentals, as MACR shares are up over 102% YTD, and even though MACR's 24.4x earnings multiple is relatively consistent with arch-rival ADBE, the latter is the leader in a larger mkt (vs MACR's more niche status) and consistently delivers 28%+ operating margins vs operating margin ests for MACR that are 13% for FY04 and 19% in 2005. The firm would prefer to enter the stock in the $16-$18 range.

SAP was downgraded at JP Morgan to Neutral from Overweight. The firm is citing the following factors: 1) firm sees a risk that spending deferred in 1st quarter may not return in 2nd quarter, 2) according to their survey, 23% of customers are pushing back more spending than expected into 4th quarter, 3) firm thinks consensus license estimates may have to come down, 4) sector M&A is unlikely to benefit SAP's top line in 2003 and market share gains in a declining market do not necessarily mean growth, and 5) firm is still concerned about the scale of the mySAP opportunity.

Deutsche Securities downgraded Boeing to Sell from Hold. The firm is saying there is a real disconnect between the ongoing weak fundamentals in commercial aerospace and the strong recent price performance for BA. The firm says lowered production rates and a multi-year slump in orders potentially through 2005 could be sources of disappointment for investors expecting a recovery directly on the back of any traffic rebound for airlines. Target is $28.