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Stocks ended mixed, with gains in the Treasury market and better-than-expected factory orders in June helping blue chips while a slide in biotechs kept the Nasdaq in the minus column. The S&P 500 added 2 points (+0.3%) to 982 after earlier falling as much as 1.4 percent. The DJIA climbed 32 points (+0.4%) to 9,186 and the Nasdaq Composite lost 2 points (-0.1%) to 1,714. Treasuries rose. Last week they completed their biggest monthly loss since 1984 as investors became convinced low interest rates and tax cuts would stoke the economy. On the earnings front, second-quarter profits rose an average 9.7 percent among the 409 companies in the S&P 500 that reported as of Friday. That surpassed an earlier forecast for a 5.2 percent gain. Analysts expect S&P 500 company earnings to jump 14 percent in the third quarter and 22 percent in the fourth, Thomson Financial said. The pace of earnings announcements slows this week, with 35 S&P 500 companies reporting quarterly results.

Strong Sectors: gold, tobacco, steel, drug store, homebuilding, paper, brewer, aluminum

Weak Sectors: oil driller, insurance

Top Stories . . . Orders placed with U.S. factories rose in June by the most in three months, paced by more bookings for cars, commercial aircraft and machinery.

General Electric agreed to sell its bond-insurance unit for $1.9 billion to a group led by mortgage insurer PMI Group as part of a strategy to exit slower growing businesses, people familiar with the situation said.

Genzyme, the biotechnology company that won U.S. regulatory approval for two medicines in April, agreed to buy SangStat Medical for $600 million in cash to gain products used to treat organ-transplant patients.

U.S. Steel Corp., the largest U.S. steelmaker, had a second-quarter loss of $49 million because of health-care obligations and will have a $500 million pretax charge in the second half for job cuts and additional retiree costs.

Union Pacific, owner of the largest U.S. railroad company, said it filed for a planned sale of shares in its Overnite Transportation trucking unit after withdrawing a sale offer five years ago citing weak demand.

GenCorp, a maker of aerospace components, is among companies that may sell about $8 billion of bonds in the U.S. this week as signs of a quickening economy prompt some borrowers to raise money for purchases.

Qwest Communications, the fourth-biggest U.S. local-telephone company, is in negotiations to sell its wireless network after earlier announcing plans to switch its mobile-phone customers to Sprint's network.

Quotes of Note . . . ``The decent earnings reports are already priced into the market. Now, interest rates are up a bit and we went from worrying about deflation to worrying about that. It's a daily battle.'' '' said CIO David Rolfe, at Wedgewood Partners Inc., which manages $150 million in assets in St. Louis.

`The recent dramatic rise in long-term interest rates has quickly made equity overvaluation a significant issue,'' Merrill Lynch’s Richard Bernstein wrote in a note to clients today. Investment strategists compare the average earnings forecast for S&P 500 companies with the yield on Treasuries or corporate bonds to estimate an appropriate level for the index. The rise in rates has left U.S. stocks 15 percent to 20 percent overvalued according to Bernstein. Bernstein suggests that investors keep 45 percent of their portfolio in stocks, the lowest allocation among 15 strategists surveyed weekly by Bloomberg. He said he may lower his stock weighting and raise his bond allocation - also 45 percent, and the highest in the survey -- after the surge in interest rates. Analysts expect S&P 500 company earnings to jump 14 percent in the third quarter and 22 percent in the fourth, Thomson Financial said.

Of Note . . . The back-up in yields has been troublesome, but not quite fatal for stocks. After all, rates rise when the economic pace quickens.

Gurus . . . Merrill Lynch chief market analyst Richard McCabe believes the stock market's inability to respond positively to evidence of an improved economy and corporate profits "may be a sign of a temporarily overbought intermediate-term trend condition." He believes this could lead to pullback in late summer, early autumn, but thinks the overall major trend is still up. He noted that there could be further attempts to "revive and extend" the rally off the March lows, given the upturn in short-term momentum and continued negative sentiment.

Edward Keon, quantitative strategist at Prudential, said he continues to believe stocks will move higher as second-quarter results have so far exceeded his prior "very bullish" expectations. He believes S&P 500 earnings per share will be at least $13.32, profit growth will be 8.7 percent over year-earlier results, and sales growth will be a "respectable" 4.5 percent amid "strong improvement in business fundamentals."

While not yet a concern for equity investors, Paul Nolte, director of investments at Hinsdale Associates, said any more declines in bond prices will likely force asset allocators to overweight bonds, selling equities to achieve that. "As we enter the toughest three months for stocks on the calendar, things are getting just a bit dicey for equities," the strategist said. He continues to favor small- and mid-cap stocks relative to larger names and also prefers value shares to growth issues, expecting the technology sector to underperform the broader market for the remainder of the year.


On the Kudlow-Cramer Show, Jim Cramer says we are in the early stages of an economic boom, and the panic selling in bonds is overdone. Guest was Stefan Abrams of Trust Co. of the West, who favors big pharmas, like Eli Lilly and Pfizer, and whose top-choice is Texas Instruments. Doug Kass of Seabreeze Partners is less bullish about the market, but he is long the XLB Spyder, which is a basket of industrial stocks.

The Sunday NY Times carrieds an interview with Ed Yardeni, who says he does not have a problem with 10-Year Note Yields at 4.0%-to-4.5%. He thinks rising yields is a reflection of a recovering economy. The S&P is selling at 18-times projected 2003, and Ed sees wiggle room to 20-times, which implies the 10-Year Note Yield could get as high as 5.0%.

On the Rukeyser Show, Ken Heebner of CGM Portfolio continues to favor selected home builders, like Toll Brothers and Standard Pacific, as well as regional airlines, like Air Tran and Frontier Airlines. Panelist Tom Gallagher, Washington Manager for ISI, says he does not think asbestos reform will pass the Congress, and feels USG Corp. is vulnerable. He does feel that utilities will benefit from the energy bill, and sees Medicare drug benefits passing this year.

IPO . . . Advancis Pharmaceutical filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering of its common stock. It said Lehman Brothers and Pacific Growth Equities were lead underwriters for the offering.

Barron's interviewed Warren Isabelle, whose small cap fund has returned 7.15% a year since inception. Isabelle who is not "terribly bullish" on the economy with more of a neutral stance of on the markets. The fund manager mentions capital goods company's as being of interest with DT Industries as a special situations example. He also mentions the following biotech co's" United Therapeutics, Ariad, Praecis, Maxygen and refinery company Tesoro.

Controversy . . . TiVo competitive concerns highlighted in Barron's. The company is the subject of a Barron's article in light of its lack of total users despite the enthusiasm around the technology. The product is expensive and difficult to install. Cable operators already have been taking an interest in its markets with assistance from Motorola and Scientific Atlanta. The company has been pushing hard to sign on cable systems with its hiring of an NBC veteran executive to no avail. An analyst at Yankee Group believes the company will make little inroads with cable providers. The article describes the company as having great opportunity given the projected growth in the DVR markets but also a huge risk if there is no traction with cable operators. The company is expected to lose money on a GAAP net income basis in fiscal 2004 and the Street expects further losses in fiscal 2005.

Eco Speak . . . New orders for factory goods rose 1.7 percent in June, the Commerce Department said Monday. Economists had predicted orders to rise 1.5 percent in the month. Durable good orders rose a revised 2.6 percent after the department initially reported a 2.1 percent rise. This is the largest increase in durable goods orders since July 2002. Non-defense capital good orders, a key component of the monthly report, rose 3.2 percent. Excluding transportation, new orders for factory goods rose 1.2 percent, the fifth increase in the last seven months. Excluding defense, orders rose 2.2 percent, the fourth increase in the past six months.

Financials . . . The Wall Street Journal reports the GE is in final negotiations to sell its financial guaranty insurance business for approximately $2.16 billion to a consortium lead by PMI. The terms of the deal are for PMI to own about 43% with Cypress and Blackstone owning more than 20%. Bank of America will have approximately a 7% stake with GE retaining 5%.

Oil & Gas . . . Expeditors International upped to Buy at Deutsche based on view that recent weakness presents an opportunity for investors to build positions in a best in-class, variable cost model with industry leading financial returns that is well positioned for an improving economy.

Monsanto was cut to Neutral at Bank of America. The downgrade from Buy is based on firm's opinion that contingent liability risk associated with Solutia has increased.

Energy . . . TXU Corp was upped to Overweight at Lehman based on compelling valuation and near and long-term potential catalysts including an announcement for Erle Nye's successor.

Homebuilders . . . M.D.C. Holdings said it would pay a second quarter cash dividend of 12.5 cents a share, which is 53 percent above the first quarter dividend and 72 percent more than the same period a year ago.

Metals . . . United States Steel reported a net loss of $54 million, or 51 cents a share, versus a profit of 28 cents a share in the year-earlier period. Excluding non-recurring items and the effects of an accounting change, the loss was 1 cent a share, narrower than average analyst loss forecast of 6 cents a share. Total sales rose 31 percent to $2.4 billion.

Strayer Education was upped to Buy at Jeffries on the basis of increased confidence that the company is entering a "new growth" phase. Its significant sequential uptick in total enrollment suggestive indicator of aggressive growth strategy beginning to pay off at a faster rate. Price target raised to $99 up from $78.

Defense . . . Harris Corp awarded Lockheed Martin contract to provide an unfurlable mesh reflector for the JCSAT-9 geostationary telecommunications satellite.

Transports . . . July auto sales beat expectations with a SAAR of 17.3M units, as it appears that the consumer has been encouraged by the economic stimuli -- not the least of which are aggressive sales incentives -- currently in the marketplace. Although sales were off from a year ago (-4%), it was the strongest month we have seen this year and it was up 6% from June; given the fragile state of the economic recovery, we believe more weight should be put on the sequential movements in auto sales compared to the year-ago levels. GM led the Big Three with sales off only 6% led by strong sales of pickups; sales at the Chrysler Group of DaimlerChrysler were the most disappointing (-8%) and Ford sales were off 11%, as it is currently launching its all-new F-150; it was the same story for the foreign players, as they continued to garner greater market share. After a strong month of sales and two weeks of summer shutdowns, inventories appear to be in good shape (mid-60-day supply), which should bode better for fourth quarter production than we had previously believed.

Union Pacific plans to sell its Overnite trucking unit through an initial public offering of common stock. Overnite, through its Overnite Transportation and Motor Cargo subsidiaries, has a fleet of 6,000 tractors, 21,000 trailers and 208 services centers and 14,400 employees.

AMR Corp. plans to sell $250 million worth of convertible notes due 2023 to qualified institutional investors. The parent company of American Airlines plans to use the proceeds of the offering for working capital and general corporate purposes. The deal will include an over-allotment option for the sale of $50 million worth of notes.

Sonic Automotive plans to sell $200 million worth of senior subordinated notes due 2013 through a private placement with qualified institutional investors. The firm plans to use the proceeds to redeem in full its outstanding 11 percent senior subordinated notes due 2008, and pay down debt.

Yellow reaffirmed 3rd quarter EPS guidance of $0.70-0.80, which includes certain non-recurring expenses related to financing of proposed transaction with ROAD versus consensus of $0.69.

Barron's article highlighted Lear in light of challenging times in the auto industry and its recent encouraging second quarter results. The company makes seating and other cabin interiors for the automobile industry and is poised to grab "cabin share" of both U.S. and foreign cars. LEA has been using its cash flow to pay down its debt, recently won a big contract with to provide seats for Toyota's new minivan and continues to have "high hopes" for its two big programs with auto giants General Motors and Ford. The debt ratio has fallen 52% and could hit 46% by year end.

Caterpillar has been selling engines to the Oil & Gas industry for more than 60 years. From an initial focus on on-shore applications, it expanded the business to practically every type and every stage in the oil & gas extraction industry. For drilling, the company provides land rig and offshore power modules, electric drive engines, mechanical drill rig engines, and industrial engines. For preparation, it provides engines for fracturing, acidizing, cementing, and gas turbine starting. For production, it provides gas engines for compressor and pump drives, and generator sets (gas and diesel fueled). It also provides natural gas compressors and gas turbines under the Solar brand name. Caterpillar supports this business through its dealer network with 1,200 worldwide locations. Engines are in the 85 to 20,000 hp (63-14,920 kW) range. Caterpillar provides both reciprocating engines (under the Caterpillar brand name) and gas turbines (under the Solar brand name). In reciprocating engines, the company provides high speed diesel engines, with ratings available from 54 to 13,600 hp (40 to 10,000 kW). Depending on requirements for horse power, pricing for these engines commonly fall between $100,000 and $1 million. Caterpillar is also a major supplier of HD diesel fuel systems and natural gas engines. Solar Turbines is a wholly owned subsidiary of Caterpillar and provides mid-range industrial gas turbines for use in power generation, natural gas compression, and pumping systems. Solar participates in two major market segments: oil and gas production and transmission (O&G), and power generation (PG). In the oil & gas sector it provides generator sets, mechanical drives, and compressor sets. Gas turbines are usually priced in the $500,000 to $5 million range. While Caterpillar revenues in this sector are approximately evenly split between reciprocating engines and gas turbines, the latter enjoys higher margins as it is a more tailored and complex product. In addition, the aftermarket business is larger for gas turbines.

Education . . . Career Education price target upped at BofA to $93 from $90. The firm believes new-student growth for the post-secondary education stocks will benefit far more from the fiscal problems plaguing state universities than they will suffer from any counter-cyclical forces. The target implies a multiple that is a modest premium to secular EPS growth, warranted, in its view, by earnings visibility, consistent outperformance and improving ROIC.

Strayer Education was cut to Underperform at Barrington Research . Despite the strong quarter that STRA reported on Friday, firm believes stock looks fully priced at current levels, trading at 41x and 34x the firm's raised estimates, a significant premium to the industry average of 39x and 31x. On a PEG basis, firm says STRA is at an industry high of 2.0x. Firm does not see a negative catalyst at this time, but more of a valuation downgrade.

Services . . . Administaff was cut to Underperform at Baird. The downgrade from Neutral is based on valuation. The firm's new price target on the name is $10.00 based on 27x projected 2004 EPS.

Food & Beverage . . . Tasty Baking reported earnings per share of $0.05, but a penny of those earnings resulted from a reversal of a prior restructuring charge. Given that we did not hold the original charge against the company, we do not consider the reversal to be part of earnings from operations; thus, view of the quarter’s EPS is $0.04. This is a penny short of consensus

expectations and $0.02 below prior $0.06 forecast. Reasons for the shortfall included: weaker-than-expected top line, unfavorable mix, investments in both human capital and technology, and incremental marketing to support re-launched products, specifically, the improved fruit pie line.

These drivers more than offset a reduction in discounts and allowances, lower interest expense and a decreased tax rate. On the earnings call, CEO Charlie Pizzi provided an update on the company’s strategy. The relatively new management team is making great strides in the areas of building brand equity, delivering on product innovation, focusing on core route growth, expanding geographically and improving the company’s supply chain. However, worry about

the competitive environment facing Tasty. As evidenced by the recent difficulties encountered by Interstate Bakeries, the snack cake category remains very challenging.

Retail . . . Walgreen said July same-store sales jumped 9.8 percent. Total sales for the month rose 13.7 percent to $2.75 billion from $2.42 billion in the same period a year earlier.

J.P. Morgan Securities raised Borders Group to overweight from neutral, telling clients it has not "have not changed our cautious view on the book retailing industry, but we see Borders positioning itself for better results through more astute capital allocation, store enhancements, and operating improvements."

Kohl's subject of positive commentary by Goldman Sachs. The firm remains confident that KSS is the best long-term growth story in the broadlines sector; thinks long-term investors should feel comfortable adding to positions at current levels.

AnnTaylor was upped to Outperform at Wachovia. The upgrade is based on view that ANN has a good chance of posting positive quarterly comps for the back half of 2003 leading to better-than-expected earnings.

Healthcare . . . UBS lowers its rating on Lifepoint, Province and Triad to Reduce from Neutral based on valuation, as all three stocks have run up over the last month, leading to significant multiple expansion. Notes that for the week ended August 1st, the hospital group experienced the third strongest weekly gain in the past ten years, up nearly 14%, despite reporting the second consecutive quarter of rather sluggish patient volume trends.

Medical Equipment . . . Cardiac Science announced overnight that its Powerheart AED G3 automated external defibrillator was granted marketing approval by the U.S. Food and Drug Administration. The company said it would begin shipping the new product line immediately.

Medtronic was upped to Outperform from Mkt Perform at Bernstein. The upgrade is on the notion that successful drug-eluting stent entry in 2005 ensures mid teens top-line growth and high earnings quality through 2006. Firm raises price target to $60 from $54.

Drugs . . . Mylan Labs reaffirmed the 2004 (Mar) EPS guidance it issued on July 23. The company sees EPS of $1.59-1.69, which excludes the $0.08 gain from litigation recorded in 1st quarter versus consensus of $1.62. MYL also announces it has begun the sale of its 10 and 20mg omeprazole delayed-release capsules.

Biotech . . . Genzyme agreed to acquire SangStat for about $600 million. The deal values SangStat shares at $22.50 each in cash, a hefty premium from Friday's close at $15.48. Genzyme expects the transaction to be dilutive to its GAAP (generally accepted accounting principles) earnings through 2004 due to amortization. Excluding items, Genzyme believes the deal will be neutral to slightly accretive to earnings through 2004, and accretive thereafter. SangStat, whose lead product Thymoglobulin treats acute rejection in renal transplant patients, reported revenue of $120 million in 2002.

Genentech price target raised to $115 at UBS. The firm has heard from industry sources that the initial Xolair launch is going extremely well and demand is high from physicians. Consequently, firm is raising its 2003-05 Xolair estimates to $37 million, $274 million, and $501 million, from previous estimates of $20 million, $80 million, and $150 million. Based on the higher Xolair numbers, firm is raising 2003 est to $1.20 (from $1.19), 2004 to $1.72 (from $1.61) and 2005 to $2.50 (from $2.30). Also raises price target to $115 from $100.

SangStat agrees to be acquired by Genzyme for $22.50/share cash. The $600 mln transaction is expected to be dilutive to Genzyme's GAAP earnings due to amortization through 2004. Excluding amortization, it is expected to be neutral to slightly accretive to Genzyme's earnings through 2004, and accretive beyond that time.

CV Therapeutics and FDA agree to cancel Sept Ranexa review of angina drug Ranexa. CVTX and the FDA agreed that an advisory committee meeting in Sept would not provide sufficient time for the company and the FDA to complete analysis of the new drug application. CVTX still expects a decision on the NDA by the FDA PDUFA action date of October 30th. This news can viewed as a moderate, but not unexpected negative, for the company as the analyst community had been pointing towards a 50% regulatory success probability for the drug.

Genaera reported strong clinical results from AMD trial. Positives including improved vision, for the Phase I/II clinical trial of its systemically administered anti-angiogenic drug, squalamine, for the treatment of choroidal neovascularization associated with age-related macular degeneration, also known as "wet" AMD. Of patients treated with squalamine, 97% had preserved or improved vision two months after initiation of therapy.

Media . . . Brian Shipman at UBS downgraded Knight-Ridder to "neutral" from "buy," on the belief that reduced spending on advertising by the newspaper publisher's customer, namely Dillard's, "may start to pinch" revenue growth in the coming months. He also feels margins will be pinched by the company's inability to keep expense growth in line with revenue.

America Online and CareerBuilder.com sign an exclusive 4-year alliance valued at up to $115 mln under which CareerBuilder.com will power the Careers and Jobs areas of several America Online brands. CareerBuilder.com will also receive promotion on several Time interactive properties as well as on CNN.com.

Knight-Ridder was cut to Neutral from Buy at UBS. The firm believes that reduced ad spend by select Knight Ridder customers, namely Dillard's department store, may start to pinch ad revenue growth in the coming months. Co's high exposure to large department store advertising causes some concern, as these advertisers could potentially scale back spending in many of Knight Ridder's newspapers. Target cut to $73 from $84.

Sirius Satellite earnings preview. Aug 6 earnings report, SG Cowen indicated that the quarter looks promising. The firm is expecting SIRI to beat consensus by $0.02 and top firm's 106K sub estimate. Firm also says that several of the concerns it had were addressed during the quarter, including exclusive deal with Ford, intro of portable units, and elimination of funding gap.

Telecom . . . Covad target rasied to $5 from $3 at Kaufman Brothers. The firm believes that company is seeing traction with third-party ISPs. Kaufman predicts that accelerating launch of line splitting through IXCs and UNE-P providers will enable Covad to prove its model can generate free cash flow in 2004.

Equinix started with a Buy rating at Kaufman Brothers with a price target $24. The firm believes that EQIX shares are undervalued, considering company now hosts the "who's who" of the Internet, including Google, Yahoo! and Amazon.com. As those businesses grow, and as EQIX loads its centers. The firm sees substantial upside to the stock.

IT Services . . . Computer Sciences upped to Buy at Jefferies . Given the strong financial performance coming out of pure play Federal IT players last week, the firm expects a very strong bookings quarter. Couple that with an attractive valuation and firm says risk/reward on CSC is improving. Company ups sales and EPS estimates for C2003 to $13.57 billion and $2.71 from $13.5 and $2.64, respectively. The firm expects CSC will report one of its best booking quarters in the last few years when it reports Aug 12.

The Wall Street Journal reports two companies doing business with AT&T have said the company has engaged in the same routing practices as MCI. In addition, MCI has found no evidence of wrongdoing after a weeklong internal investigation. The two co's are Alaska's General Communications, Inc. and Mexican telephone company Telefonos de Mexico SA.

Storage . . . Analysts are raising estimates for Seagate to reflect its June quarter results -- On 07/15, Seagate had reported June quarter results at the high-end of its pre-announced range and its outlook for FY04 was higher than our estimates. The near-term outlook for the drive industry appears healthy with seasonal strength in demand and manageable inventory levels. With channel inventories trending down from 6 weeks in mid-June to 4 weeks now, while going in to a seasonally strong period, the near-term pricing outlook is healthy. Further, while Seagate and Maxtor have nearly transitioned to the 80GB/platter desktop products, the ongoing transition at Western Digital and smaller players Hitachi and Samsung would keep near-term supply conditions reasonable. While oncerns on the sustainability of the generally favorable pricing and supply behavior at the drive vendors as industry supply of the 80GB/platter desktop products improves late in the year (and it will be a long product cycle well in to 2004), the near-term demand and pricing outlook appears healthy. Seagate's entry in to the laptop drive market will help drive incremental growth.

Network Equipment . . . SG Cowen analyst Christin Armacost upgraded Cisco to "strong buy" from "outperform" a day ahead of the release of fiscal fourth quarter results. Armacost believes revenue is poised to reaccelerate as the company's non-core segments, such as carriers and emerging technologies, become larger pieces of overall sales. She also lifted her fiscal 2004 revenue forecast to $20.5 billion from $20.1 billion and her earnings estimate to 67 cents a share from 64 cents. In 2005, she believes 2005 revenue will grow 14 percent to $23.4 billion and earnings will rise 19 percent to 80 cents a share. For the latest quarter, analysts expect Cisco to earn 15 cents a share on revenue of $4.66 billion, on average.

Avocent agreed to supply its KVM Over IP switching system for Microsoft. The system will be used to manage disaster recovery for the servers that will host Microsoft's Xbox Live online gaming activities.

ADC Telecom selected by Adelphia for broadband network. The FastFlow Broadband Provisioning Manager will be the exclusive provisioning solution for its nationwide high-speed data network.

Ciena is expected to report results on August 21st. Ciena’s business is likely tracking to the low-end of guidance of $65-$75 million in revenues versus $73.5 million last quarter. Yhe company will guide for a strong sequential increase in October given the ramp up at BT as well as some initial material revenue from WaveSmith at SBC. Analysts are forecasting a loss of $.09 versus a loss of $.10 last quarter. Loss per share should decline as a result of lower operating expenses and a slightly higher share count given the close of the WaveSmith acquisition (closed on June 16th). Although Ciena may guide for a healthy revenue increase and could announce some additional

restructuring, we remained concerned about the valuation. The major issue for Ciena remains the lofty break-even level, which is north of $175 million on a quarterly basis. The stock has moved up partially due to the anticipation of further cost cutting measures. There will be further restructuring as several larger R&D projects are coming to a conclusion (on basically every optical related product line). The company is trading at 4.8x 2004E revenues (we have over 20% growth modeled for 2004) and 70x a normalized 2004 earnings estimate. Based on a discounted cash flow analysis, the company is discounting growth of just under 25%. This analysis assumes steady state operating margins of 14%, 9.5% WACC, 5% terminal growth and 10-YR CAP.

Semiconductor Equipment . . . Goldman Sachs analyst James Covello upgraded Novellus Systems to "outperform," citing expectations that the company's mid-quarter update on Aug. 28 will be a "positive catalyst for the stock." The upgrade is based on a) firm's view that the negative issues that have caused the stock to underperform its peers since mid-April have been resolved, b) relative to its peers, the stock is trading at a 20% discount on normalized free cash flow, c) company has good exposure to some of the customers that are driving the emerging equipment upturn, d) given the historically high correlation of the equipment stocks and NVLS' underperformance YTD, firm expects NVLS to outperform most of its front-end peers, and e) expects that both the Applied report and Novellus' mid-quarter update will be positive catalysts for the equipment stocks and believes that investors will look to NVLS to add additional exposure.

Kulicke & Soffa was upped to market perform at Adams Harkness & Hill. The firm is raising its rating on KLIC to market perform based upon its improving bottom line outlook due to the co's cost control actions. The analyst believes the cost control measures should come to fruition over the next three to four quarters. Price target increases from $7 to $10.

Semiconductors . . . Worldwide sales of semiconductors reached $12.54 billion in June, up from $12.49 billion in May, according to data released by the Semiconductor Industry Association. For the second quarter, chip sales increased to $37.6 billion, up 10.4 percent from $34.1 billion in the year-earlier period. On a quarterly basis, sales increased 3.2 percent from $36.4 billion in the first quarter. "In June, we forecast 3.2 percent growth for the second quarter and steadily increasing growth throughout the year, and that is exactly what we are seeing," said SIA President George Scalise. "As predicted, the recovery is broad-based, and now is beginning to draw strength from computation, the largest end market for semiconductors, as well as the global consumer and communications sectors."

WR Hambrecht commented on Semiconductor sales data. For the month of June, worldwide semiconductor sales totaled $12.5 billion, up 10% year/year and flat month/month. Key takeaways from the data include: 1) NAND flash shipments grew 57% quarter/quarer in 2nd quarter versus firm's estimate of at least 50%. The firm believes its estimates of 10-20% bit shipment growth in 3rd quarter for Sandisk and Lexar Media may prove conservative; 2) YTD IC volumes continue to track ahead of peak 2000 levels which supports firm's positive bias towards SAT sector including Amkor and ASE Test; 3) SYNA continues to benefit from positive notebook trends although product mix is hurting growth prospects in 2nd half 2003; and 4) preliminary indications suggesting total handset market growth of 0-5% vs. firm's previous expectation of 5-8% which support caution heading into 3rd quarter for wireless IC names including RF Micro Devices and Sawtek.

Nvidia announced an agreement to buy privately held MediaQ for $70 million, predominantly in cash. The deal for the provider of graphics and multimedia technology for wireless devices is expected to close in the third quarter of fiscal 2004. According to chief executive officer of NVIDIA Jen-Hsun Huang, "This acquisition supports NVIDIA's strategy of extending our platform reach and accelerates our entry into the wireless mobile markets."

Tech Other . . . Synaptics was upped to Outperform at Bear Stearns. The upgrade from Peer Perform is due to more compelling valuation, SYNA's position as a play on multiple high-growth markets, experienced management team, and strong balance sheet.

Software . . . Ascential Software announced an agreement to buy business integration software maker Mercator Software for $106 million, or $3 a share in cash. That represents a 22 percent premium to Friday's closing price of $2.45 for Mercator shares. Ascential expects the deal, which is anticipated to close by the end of the third quarter, to be accretive to earnings within the first year.

Red Hat and Network Appliance unveil global partnership. At the core of this partnership is the companies' mutual commitment to develop and deliver Linux storage protocols and collaborative support for customers to maximize NetApp storage capabilities in Red Hat Enterprise Linux environments.

BEA Systems announced the next version of its WebLogic application-server software. The company put out about several dozen press announcements of customers who have purchased the software, and partners that will support or help the company sell WebLogic Platform 8.1. Hewlett-Packard will use the new BEA software to help business customers build human resources and finance "portal" Web sites.


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