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U.S. stocks declined after Alcoa and Seagate reported quarterly results that missed forecasts, raising concern that corporate profits won't increase enough to extend the market's rally. Earnings from Alcoa and companies such as Yahoo! and General Electric, which both report this week, may signal to investors whether stocks have further to rise. Analysts predict members of the S&P 500 Index will boost profits by an average of 17.1 percent in the first quarter, up from their Jan. 1 estimate of 13.4 percent, Thomson Financial said. The S&P 500 declined 7 points (-0.6%) to 1141. The DJIA had its first loss in five days, shedding 90 points (-0.86%) to 10,480. The Nasdaq fell 9 points (-0.47%) to 2050. About the same number of stocks advanced and declined on the New York Stock Exchange. Some 1.24 billion shares changed hands on the Big Board, in line with the same time a week ago.

Strong Sectors: oil & gas services, real estate operators

Weak Sectors: retail, chemical, aluminum, casino & gaming, computer storage

Top Stories . . . Prices of goods imported to the U.S. rose 0.9 percent in March, reflecting the drop in the value of the dollar and an increase in costs of oil and other raw materials. Excluding petroleum, prices edged up 0.2 percent.

Wal-Mart Stores, the world's largest retailer, lost a ballot initiative in Los Angeles County to build a retail complex amid criticism from local officials that the development would hurt small businesses.

Kerr-McGee agreed to buy Westport Resources for $2.49 billion in stock, the biggest acquisition in its 75-year history, to boost natural-gas output in Texas and the Rocky Mountains as prices and demand increase.

The wife of former Enron Chief Financial Officer Andrew Fastow withdrew her guilty plea and will stand trial June 2, following a judge's refusal to be bound by a plea bargain that would have limited her prison term to as little as 10 months.

Yahoo!, owner of the world's most-used group of Internet sites, said its first-quarter profit more than doubled to $101.2 million as it sold more advertising linked to the results of Web searches.

Genentech, the world's second- biggest biotechnology company, said first-quarter net income rose 17 percent on higher sales of its Rituxan and Herceptin cancer medicines.

Crude oil futures surged after the Energy Department said U.S. inventories unexpectedly fell for the first week in eight.

Quotes of Note . . . Earnings ``are going to be one of the more positive catalysts for the market in the near term. On a sporadic basis, you could have some disappointment.'' Liz Ann Sonders, chief investment strategist at Charles Schwab.

Gurus . . . A Bloomberg survey of 74 economists finds that inflation will accelerate this year, and the unemployment rate will fall, as the U.S. economy expands the fastest since 1984. The Consumer Price Index may rise 2.0% this year, while the unemployment rate may fall by year-end to 5.4%, the lowest since October of 2001. GDP is expected to rise by 4.5% in the first-quarter, 4.3% in the second-quarter, and then slow to 4.0% in the third-quarter, and 3.9% in the fourth.

Allen Meltzer, political economy professor at Carnegie Mellon, says the U.S. dollar is not tumbling. The currency has just returned to about its value of the mid 1990s. Meltzer suggests that the euro's 46.0% gain against the dollar since October 25, 2000 is simply a reversion to a time before the U.S. currency surged in value as a safe haven in the late 1990s in the wake of the Asian financial crisis.

Barron's Online highlights Amy LaGuardia, a Legg Mason Financial Services Fund manager, for her picks. LaGuardia looks for banks that can gain share in their markets when competitors consolidate. The fund, which has $70 million in assets, has gained 37.6% over the past 12 months, slightly trailing the Lipper Financial Services Fund index. But its annualized return over the past three years is 13.23%, handily beating that index. Mrs LaGuardia recommends Sovereign Bancorp as a pure valuation play and Hilb, Rogal & Hamilton as a takeover candidate by Brown & Brown, which she also owns; and MBNA that should do well when interest rates go up.

Eco Speak . . . The nation's prices for imported goods rose 0.9 percent in March, the sixth consecutive monthly increase. Excluding petroleum, import prices rose by 0.2 percent, marking the fifth monthly rise in a row. In February, import prices rose an unrevised 0.4 percent. Oil import prices jumped 6.1 percent in March after the prior month's tiny increase of 0.1 percent. Export prices rose 0.9 percent in March.

Market Comments . . . Market participants love a good rebound, and the recovery of the major indices in recent weeks has definitely lifted their spirits. While Friday’s employment report was the likely catalyst for the market’s advance, the record showing in the ISM Nonmanufacturing Index may be even more important. Extreme readings in economic benchmarks such as the ISM typically lead transition phases in financial markets. Since many leading indicators of the economy are currently at or near decade highs, this would suggest that the best environment for equities has likely passed. Indeed, equities often post their best returns when the economy is recovering, not when it has achieved maximum momentum. As such, market returns going forward are likely to be much more measured.

One of the better indicators for portfolio positioning is the ISM Manufacturing Index. Historically, a rising ISM has typically coincided with an upward-trending equity market characterized by significant gains in the cyclical segments. While the ISM Index may be a leading indicator of the economy, it is a coincident indicator of equity trends since stocks are a leading economic indicator as well. Since the ISM oscillates between bullish and bearish economic extremes, it is best used as a contrarian indicator, with bullish readings demanding a more cautious equity market stance and bearish readings a less cautious one. Accordingly, the wary tone in recent months has been partly influenced by the fact that the ISM is hovering near 20-year highs. While the rise in the Index in March may have been of comfort to many, it does not change the fact that the ISM remains at extremely elevated levels. Over the course of the year, expect to see the ISM drift lower from its currently high level.

One series that has proven to lead the ISM in the past is the momentum of global short-term interest rates. This series confirms belief that the ISM should soon begin drifting lower, which, would have implications for cyclical segments. Besides the ISM, there are other factors that would suggest that we are in the home stretch of cyclical leadership. First, Presidential cycle theory analysis has shown that noncyclicals have fared better than cyclicals in an election year. Second, the price-to-sales ratio of cyclicals relative to noncyclicals is near a historical high. And, lastly, our quantitative valuation model currently exhibits a preference for noncyclicals. In short, all signs seem to be pointing to one conclusion: a major shift in market sector leadership is likely in the coming months.

The economic cycle is the most important element for sector positioning. As a general rule of thumb, cyclical sectors have leadership of the market when economic momentum is accelerating, while noncyclicals typically outperform when momentum eases. One of the best measures of cyclical pressures is the ISM Manufacturing Index. While there are many other useful leading economic indicators, the ISM offers both a long and successful track record. The past year has seen the ISM rise to near 20-year highs from what is considered a low reading (46 in March 2003). Coincidentally, of course, cyclical sectors have outperformed during this rise in the ISM Index. In our opinion, it would be highly unusual for the Index to rise significantly from here. As such, it is difficult to make a case for a continuation of cyclical sector leadership.

Besides the macro backdrop, there are three other factors that lead us to believe that cyclical leadership is in its final stage. First, Presidential cycle theory argues that noncyclicals have historically fared much better than their cyclical brethren during an election year. Second, the relative price-to-sales ratio of cyclicals to noncyclicals is near a 20-year high, suggesting that cyclicals offer unattractive value at this juncture. And last, but not least, a quantitative model places two noncyclical bellwethers (i.e., health care and consumer staples) at the head of the pack. In conclusion, a host of indicators that we follow suggest that a change in stock market leadership from cyclical sectors to noncyclical sectors is upon us.

Investors want to know how the election will affect financial markets. One way is through seasonality. Indeed, there are clear market patterns at the sector level in election years. Historically, noncyclicals have fared much better than cyclicals over the course of a presidential year. Typically, cyclicals in aggregate perform very strongly out of the gates and have leadership of the market for roughly the first three months of the year before relinquishing leadership to the more stable noncyclical groups. This would suggest that a transition toward noncyclical sectors such as health care, consumer staples, and, perhaps, utilities is imminent.

One indicator that suggests that an overweight in cyclicals is unwarranted at this juncture is valuation. Indeed, on a price-to-sales basis, the ratio of cyclically-sensitive stocks to recession-resistant industries is sitting near a 20-year high. Therefore, like the ISM, it is at a historical extreme. Though one could argue that an even higher ISM would be favorable for cyclicals, they would still have to deal with relative valuation, which suggests that the risk/reward profile of overweighting cyclicals is poor at this time. In short, an aggressive position in cyclical sectors has not been this risky in almost 20 years.

The final step in an evaluation process for sector recommendations is to employ quantitative methods. Our quantitative model, which looks at the trade-off between relative earnings estimate momentum and relative valuation, is simple but effective. Analysts do not believe that a quantitative model will ever incorporate all the variables affecting the stock market. For instance, quantitative models cannot effectively capture political uncertainty or exogenous shocks such as terrorism. That said, it is a good discipline and should be used as a complementary tool. At this juncture, our model exhibits a strong preference for noncyclical bellwethers, such as staples and health care, and an aversion to the highly cyclical technology sector. Accordingly, our model is offering a confirming signal on sector positioning — overweight noncyclicals relative to cyclicals at this juncture.

A number of factors argue against the likelihood of cyclical stocks maintaining market leadership at this stage. As mentioned, the equity cycle, valuation, and quantitative screens are all suggesting that the cyclical rally has grown long in the tooth. Nonetheless, the economic cycle is probably the most important factor for gauging the risk/reward of owning cyclicals at this point. The ISM Manufacturing Index offers a good proxy for measuring economic momentum. With this indicator hovering near historical highs, encourage investors to consider ways to hedge a further decline in cyclical pressures.

Financials . . . St. Paul Travelers upgraded at Bernstein to Outperform from Market Perform and raises their target to $49 from $42. While they think that the merger integration could cause greater uncertainty than many investors expect, they can no longer justify such a punitive valuation stance towards the combination. Also, if mgmt executes as it has stated, firm says there is likely upside to their estimates.

Lehman Brothers is considering making acquisitions outside the U.S. as part of its plan to get non-U.S. revenue to represent half of the firm's total, according to a spokesman in London. But there are no specific targets in mind and there is no timeframe for making a deal. The company, which employs 3,100 at its new European headquarters in London, is also looking to add staff to help boost non-U.S. revenues.

REITs . . . BofA Sec does not think there's a buying opportunity in real estate stocks b/c valuations are high even though the stocks have plunged 8.9% over the past three trading days. Real estate stocks were expensive at the start of the year, and even with the recent decline, the stocks are up 3.0% y-t-d. In addition, the average real estate stock is still trading at 13.0x estimated 2004 FFO (funds from operations), a 27% premium to the historical average (1993-2003) of 10.3x, and above the prior peak (1997) of 12.9x. Slowing fund flows present downside risk: Funds flows have been at record-breaking levels over the past 15 months, which is important because firm's proprietary trading desk estimates that a significant portion of the strong performance in 2003 and 1Q/04 was driven by a high level of funds flows making their way into a relatively illiquid group of stocks. If this trend were to reverse, which is likely given the size of the recent decline in stock prices, it could accentuate the downward move.

Industrial Equipment . . . CS First Boston upgraded Cummins Engine to "outperform" from "neutral." Analyst John McGinty said the company's raised earnings outlook on Tuesday was the first clear evidence that the company was taking advantage of stronger overall industry demand. In addition, he noted that recent industry checks suggest the difference between Cummins' product and rival Caterpillar's "was not great enough to create a meaningful distinction."

Defense & Aerospace . . . Lockheed Martin amends Titan merger agreement. Titan stockholders will now receive $20 in cash (down from $22) in exchange for each Titan share owned. Revised merger agreement provides that if merger is not completed on or before June 25, 2004, either LMT or TTN may terminate the merger agreement. TTN has also scheduled a new special meeting to be held on or after June 7, 2004.

Education . . . Career Education target raised to $68 at Lehman. Lehman raises 2004 and 2005 by 4.5% and 9% to a above-consensus $1.65 and $2.18 (vs previous $1.58 and $2.00) to incorporate higher online profitability assumptions into firm's model. Firm also increasing its price target by $8 to $68, or 31x new 2005 EPS estimate. Lehman expects CECO to exceed firm's revenue and EPS estimates of $384 million and $0.33 when it reports 1Q'04 results after the close on April 20.

Consumer Products . . . Thomas Weisel believes its 3rd quarter (Mar) EPS estimate for Coach, which is $0.01 above guidance and in line with consensus, is probably slightly too conservative. Recent channel checks reveal: (a) Positive reaction to spring product overall. Strong color trends that are benefiting apparel retailers also benefit Coach. Recent product introductions that will be important for June Quarter have received a particularly strong early response. (b) The higher price point products have been particularly strong sellers. The firm believes the average price point will increase greater than the targeted 5% in March Quarter and this will continue in June Quarter.

Retail . . . Abercrombie upped to Strong Buy from Accumulate at Buckingham. Price target goes up to $44 from $38.

CIBC raises its target on Linens 'n Things to $43 from $38 ahead of the company's 1st quarter report on Apr 20. The firm expects 1st quarter comps of 6% versus management's 3%-5% plan. The firm cites easy comparisons, industry sales trends and increased traction of turnaround initiatives as factors. With over 200 stores currently operating with increased inventory controls and benign sales comparisons on tap for both 2nd quarter (up 0.1%) and 3rd quarter (up 1.8%), the firm believes positive news flow in terms of improving top-line productivity is likely to continue in the months ahead. The stock offers investors exposure to a meaningful operating turnaround story at an attractive valuation.

Raymond James upgrades Lowe’s to Strong Buy from Market Perform, citing a series of positive preannounements from the company's suppliers (Masco, Fortune Brands, Stanley Works, Black & Decker), relatively easier 1st quarter comps, continuing "crisp" execution, and their positive view on the company's CEO succession plan. Target is $69.

Smith Barney upgrades Wild Oats to Buy from Hold. The firm raises their 2004-05 EPS estimates above consensus, and raises their target to $17 from $15. Despite the negative sentiment on the stock (short interest is 14%, investors and analysts think 2004 guidance is unrealistic), firm believes that the co will likely achieve 2004 guidance due to: 1) strong industry fundamentals, 2) greater than expected benefits from the supermarket strike, 3) a relatively smooth and strategic distributor switch, and 4) improving store base quality.

CVS Corp cut to Sell from Hold at AG Edwards. The firm essentially sees CVS as a good source of funds as it begins its rather risky asset integration journey into the southern assets of the Eckerd drugstore chain.

Short Interests . . .

Luxury Goods. Short interest in Coach Inc. decreased 17.3% in March, to 3.8 million shares, which is still below its 51-month average short interest of 5.4 million shares. Coach’s decrease in short interest during March followed an increase in February, which was the first rise in eight consecutive months. Coach’s stock price increased 3.4% in March, following an 11.9% rise in February. Coach’s stock is up 8.6% year to date, outperforming the AMEX, Nasdaq, NYSE, and the Bear Stearns Retail Composite (which are up 7.1%, down 0.5%, up 2.5%, and up 5.9%, respectively). Coach’s days-to-cover ratio decreased to 2.8 days from 3.1 days in February, and is below its 51-month average of 5.6 days. At Tiffany & Co., short interest decreased by 3.8%, to 2.2 million shares from 2.3 million shares in February. Tiffany’s short interest is below its 51-month average of 5.5 million shares. Tiffany’s days-to-cover ratio increased to 2.2 days from 1.9 days in February, which is below the 51-month average of 5.4 days. Tiffany & Co.’s share price decreased 9.2% on a month-over-month basis in March (following a 6.1% increase in February).

Consumer Electronics. Short interest in Best Buy shares rose 5.5% during March, to 7.6 million shares, which is below its 51-month average of 13.6 million shares. Best Buy’s days-to-cover ratio decreased to 1.7 days from 2.2 days in February, and remained below its 51-month average of 3.3 days. Short interest in the shares of Circuit City Stores decreased 13.5%, to 9.3 million shares from 10.7 million shares in February. The days-to-cover ratio at Circuit City decreased to 2.5 days from 3.8 days in February, which is still above its 51-month average of 2.2 days. In March, short interest in RadioShack’s stock fell 13.0%, to 5.2 million shares from 5.9 million shares in February, and moved in line with its 51-month average short interest of 5.2 million shares. RadioShack’s days-to-cover ratio rose to 6.8 days from 5.3 days in February, approaching its 51-month high of 7.6 days. In terms of monthly price performance, the share price of RadioShack (down 4.1%) underperformed both Best Buy (down 2.9%) and Circuit City (up 1.1%) during March. Year over year, shares of Best Buy and Circuit City outperformed RadioShack, increasing 91.8% and 117.3%, respectively, versus RadioShack’s 48.8% gain.

Home Furnishings. Short interest trends varied across our home furnishings universe during March, while stock price performance was positive for all the companies. At Linens ‘n Things, short interest rose 12.8%, to 3.2 million shares, and moved further above its 51-month average of 2.7 million shares. Linens ‘n Things’ days-to-cover ratio rose to 6.7 days in March from 3.7 days last month. Linens ‘n Things’ share price increased 4.5% in March. Short interest at Bed Bath & Beyond fell 1.3%, to 6.0 million shares from 6.1 million shares in February, and remained below its 51-month average of 8.1 million shares. Bed Bath & Beyond’s days-to-cover ratio decreased to 1.9 days from 2.2 days in February. Bed Bath & Beyond’s share price ended March up 2.4% on a month-over-month basis. Rent-A-Center’s short interest rose 33.5%, to 1.4 million shares from 1.1 million shares in February. Rent-A-Center’s days-to-cover ratio expanded to 3.7 days from 1.9 days in February, but remains significantly below the 51-month average of 11.2 days. On

top of a 4.4% gain in February, Rent-A-Center’s stock price increased by 1.3% in March. Short interest in Tuesday Morning rose 42.4%, to 0.8 million shares, which is above its 51-month average of 0.4 million shares. Tuesday Morning’s days-to-cover ratio increased to 4.2 days from 2.1 days last month, and is above its 51-month average of 2.2 days. Tuesday Morning’s share price rose 4.4% in March, and the shares increased 75.1% year over year. At Williams-Sonoma, short interest decreased by 1.4%, to 3.1 million shares, and remained below its 51-month average of 7.4 million shares. Williams-Sonoma’s days-to-cover ratio fell to 3.4 days from 4.4 days in February. William-Sonoma’s share price increased 6.9% in March, and is up 56.9% year over year.

Home Improvement. During March, short interest in Home Depot fell 9.0%, to 21.0 million shares from 23.1 million shares, but remained above its 51-month average of 20.6 million shares. The company’s days-to-cover ratio decreased to 3.0 days from 3.1 days in February, but is above its 51-month average of 2.5 days. Following last month’s 9.9% increase, short interest in the shares of Lowe’s rose 1.8% in March, to 12.5 million shares, but remained below its 51-month average of 13.7 million shares. Lowe’s days-to-

cover ratio increased to 3.4 days in March from 3.2 days in February. During March, Lowe’s stock price increased 0.2%, compared to Home Depot’s 2.9% gain. Year over year, Lowe’s shares appreciated 37.5% versus Home Depot’s 53.4% rise.

Office Superstores. During March, short interest decreased for Office Depot and increased at Staples. Short interest in Office Depot’s shares fell 1.0%, to 5.4 million shares, which is below its 51-month average of 6.1 million shares. Office Depot’s days-to-cover ratio increased to 3.4 days from 2.7 days in February. On top of a 9.3% increase in February, Office Depot’s share price rose 8.0% in March. Year over year, Office Depot’s share price appreciated 59.1%. At Staples, short interest increased 17.9%, to 4.6 million shares, but continues to be below its 51-month average level of 7.7 million shares. The increase in short interest comes after four consecutive monthly declines. Staples’ days-to-cover ratio decreased to 1.0 days from 1.1 days in February, and is below its 51-month average of 1.6 days. In terms of stock price performance, Staples’ shares decreased 3.2% on a month-over-month basis. Year over year, Staples’ shares underperformed Office Depot’s shares, increasing 38.1% versus Office Depot’s 59.1% gain.

Healthcare . . . Lehman upgrades Cigna to Equal Weight from Underweight and raises its target to $72 from $53 based on its recent pre-announcement. While lower visibility remains, and potential short term risks, the firm does not expect the stock to underperform HMOs again this year. The firm increases its 2004 EPS estimate to $5.40 from $4.80 and 2005 EPS estimate to $6.00 from $5.25.

Cigna raised first-quarter EPS guidance from range of $1.20 to $1.40 to a range of $1.75 to $1.95per share with the increase a result of stronger-than-anticipated performance in the company’s health care business. Specifically, the company noted better-than-expected medical costs driven by lower inpatient utilization trends. In addition, the company cited benefits from expense reduction efforts and a significant favorable prior period reserve development. Raised guidance for first quarter compares to estimates of $1.25 and to consensus estimate of $1.33 per share. CIGNA also raised 2004 operating earnings guidance to a range of $720 million to $780 million (including $45 million in earnings from sold retirement operations to be booked in the first quarter) from prior guidance range of $600 million to $660 million (excluding $45 million in operating earnings from retirement operations in the first quarter) or $645 million to $705 million including the first-quarter earnings from the sold retirement services business. Here note that the company has not given full-year 2004 EPS guidance with the issue in question being the share repurchase activity the company will demonstrate this year. Also, note that given the company’s comments, the $75 million earnings increase is likely heavily impacted by favorable prior-period reserve development as the company did not increase guidance for the out quarters in 2004. Health care segment now anticipated to generate income from continuing operations before realized investment results and special items of $170 million to $185 million for the first quarter of 2004 and $525 million to $575 million for full-year 2004. Updated health care segment earnings guidance compares to prior guidance of $95 million to $110 million for first quarter 2004 and $450 million to $500 million for full-year 2004.

Biotech . . . Merrill Lynch out negative on Biogen IDEC saying that based on NDC data, lyophilized Avonex as a percent of new scripts has increased vs. the pre-filled syringe, which has manufacturing issues with lower product yields. According to the firm that may indicate that Biogen IDEC is attempting to conserve inventories of the pre-filled syringe and suggests that the production issue has not been resolved. Although it is unlikely to be a long-term problem, it is likely to have a negative impact on gross margins until the issue is resolved. The firm is reducing their 2004 gross margin assumption to 87% from 89%. Thus, 2004 EPS est. declines to $1.40 from $1.49 (Reuters consensus $1.48) while 2005 remains unchanged at $1.80 (consensus $1.79). Price target remains at $69.

Hotel & Leisure . . . CIBC upgrades Mandalay Resort to Sector Perform from Sector Underperform as management has demonstrated that it can create and leverage unique assets on the Strip. The firm is assuming a more positive outlook and forecasting stronger growth through 2005 and 2006, driven primarily by further increases in convention traffic at Mandalay and Luxor. Its target goes to $64 from $53. The firm has historically been cautious on older assets, but mgmt has succeeded in creating a unique high-end offering on the Strip, which has more than offset these concerns.

Media . . . S.G. Cowen comments that with its Daimler Chrysler announcement yesterday, Sirius showed the first sign that it is moving to the more successful OEM Push model that XMSR has employed. The deal actually exceeded firms expectations as companies agreed that 550K vehicles would be installed in a 2-year period, firms expected 408K subs from the Chrysler deal. Firm's DCF valuation shows SIRI fully valued, but outperformance could push up estimates and stock price further.

Bank of America upgrades The New York Times to Buy from Neutral based on 1) industry channel checks indicating accelerating (and ahead of budget) national ad growth, 2) significant sequential improvement in help wanted, 3) a near-term turn in the entertainment category and 4) the anticipation of a turn in the lagging real estate category later this year. The firm recommends buying the stock ahead of the Q1 release on 4/12. Target price is $50.

Sirius announced after the close yesterday, a long awaited OEM deal with DaimlerChrysler (Chrysler) which calls for ~ 550K factory installed SIRI radios across 11 Chrysler models beginning with the 2005 model year. Chrysler expects production of these vehicles to be completed by the end of June 2006. SIRI will receive its standard one year subscription from Chrysler for each unit sold, although it is not clear how much if any will be prepaid. Also SIRI will reimburse Chrysler for the costs of factory-installed Sirius radios and will make additional payments upon reaching certain production levels, similar in principal to XM's OEM agreement with GM. This news is a positive for the company, providing a more direct distribution channel for the SIRI product with a firm factory install commitment vs. a factory install option (typically initiated by the car dealers). Expect additional news flow from the New York Auto Show later this week which could include programming, new product and additional auto announcements. However, the recent run up of SIRI shares this week indicates that the market anticipates much of this news flow.

IT Services . . . Unisys announced it has won "blanket task order" D.O.D.'s primary counterintelligence coordinating body, Counterintelligence Field Activity. Initial order is worth only approximately $11 million, however D.O.D. estimates that it may order up to a total of $345 million in products and services under this blanket task order over its 5-year term.

Electronic Data Systems said its customers signed $1.3 billion in contracts during the last week of the first quarter. Most were mid-size deals and the result of add-ons and renewals of existing contracts, the company said. "There's no particular industry that's dominating -- it's across the board," said Kevin Lightfoot, EDS spokesman.

Goldman Sachs comments that it picked up no evidence of extremes in either direction over the course of IBM's quarter, suggesting that IBM should be okay to achieve its targets for the March Quarter. Firm's inclination is once again to think that if there is a bias to top-line expectations of $21.9B (down 15.4% quarter/quarter, up 9.2% year/year) it is more likely on the upside, although any variance is likely to be slight. Applying a 1.1x multiple to the current S&P 500 P/E of 18.6x and using firm's 2005 EPS estimate for IBM (OP/A) of $5.55 yields a share price of $113-$114 per share, roughly 20% higher than yesterday's close.

The WSJ's column "Tracking the Numbers" highlights Indian company's such as Infosys Technologies, Wipro and Satyam Computer Services, which has seen its ADRs fetch heady premiums compared to where their stocks trade in India.. The ADR's of Infosys, two of which convert into one of the Bangalore, India, company's Indian shares, closed at $85.56 on the Nasdaq yesterday. Earlier, on the Bombay Stock Exchange, Infosys's stock closed at $121.78, which is a 41% premium to its Indian-share price. Wipro trades 37% above its Bombay-traded shares; Satyam's ADRs carry a 61% premium. "It comes down to a lack of liquidity," says Goldman Sachs analyst Julio Quinteros. "That's the issue with all of these stocks. Unless their market floats increase, there's no reason to think that there's going to be a big contraction in price." Furthermore, with many investors hanging on to their Infosys ADRs, just a portion are available for trading. "It's not easy for American investors to go into India and purchase shares," says Jefferies & Co. Asia-Pacific trader Wayne Yu. "Until India fully deregulates their market, this premium situation is going to continue." According to Mr. Quinteros's valuation work, Infosys's ADRs would be fairly priced at $63, right about the level Infosys India-traded shares imply. Many value-minded investors blanch at the idea of paying any premium.

The Financial Times reports that IBM has acquired India's third largest call-centre operator, Daksh eServices, for $160-170 million, according to people close to the deal. IBM's acquisition, the largest cross-border deal of its kind, came on the heels of the US company winning a 10-year outsourcing contract worth $750 million from Bharti TeleVentures, the largest telecommunications company in India. Delhi-based Daksh eServices was set up four years ago and is one of the fastest growing call-centre operators in India with 6,000 employees.

Storage . . . JP Morgan raising 1st quarter estimates for Lexar Media to $0.13 EPS on $150.25 mm revenues from $0.12 EPS on $142.25 mm, with consensus at $0.12 on $141.1 mm. According to the firm, company guided to $0.10 on revs of at least $140 mln. The revised model now assumes sequential product revenue decline of 15%, compared with prior estimate of 20% decline. Also, stronger than anticipated digital camera shipments in February could drive NAND revenue upside. The firm believes that demand is likely to outstrip supply through 2004 and into 2005 and that Infineon seems to be behind schedule on production plans. With the shares trading trades at 26.5 times 2004E EPS, a discount of 50% to their 2-year pre-tax income CAGR estimate of 53%, the firm is reiterating their Overweight rating.

S.G. Cowen states that customer concentration issues continue for Innovex, but new wins could yield upside. INVX's largest customer, Seagate, provided preliminary EPS below previous guidance on weaker-than-normal seasonal patterns. While the news raises concerns about N-T outlook, firm believe INVX shares already price in 2nd quarter weakness due to STX, noting the most substantial factor in STX warning was notebook segment, which is not presently a material rev source for INVX. Firm expects an in-line 2nd quarter for INVX, and Q/Q rev growth in 3rd quarter based on low HDD channel inventories and new non-HDD wins reaching volume. Firm states they would take advantage of weakness, given additional FSA and non-HDD wins should help broaden the base away from STX.

The analyst community is generally surprised by the magnitude of negative preannouncement issued by Seagate last night. JP Morgan downgrading the shares to Underweight from Overweight noting that with the shares trading at 17x their revised calendar 2005 EPS estimate, Seagate trades above the hard disk drive peer group average of 12.5x. They believe that the company's shares should trade at lower multiple levels in the coming months. The firm does not believe the sudden slowdown in notebook business represents a material slowdown in end demand but rather a series of supply-chain snafus by HP. The firm is lowering their March Quarter revenue and EPS estimates to $1.43 billion and $0.06 from $1.54 billion and $0.23. Firm's June Quarter revenue and EPS estimates now stand at $1.37 billion and $0.05, down from $1.51 billion and $0.22 previously.

Lehman notes that they now believe the HDD stocks are likely to trade sideways and would stay on the sidelines heading into the seasonally weakest quarter of the year. Also worth noting that Prudential is out this morning in defense of Agere and Marvell, for which STX was a 12% and 4% customer in December 2003 quarter. They do not think this announcement will have an impact on the March 2004 or April 2004 quarter for Agere and Marvell, respectively. For Agere they believe the co has already factored in weak HDD shipments into its lowered March 2004 revenue expectations given on March 17th. For Marvell, they believe as a small customer, weakness at STX will likely be offset by growth as WDC.

Network Equipment . . . Sanders Morris Harris says that their checks still indicate that Cisco's April quarter is tracking to the high end of the guidance range and the relative softness impacting the storage group does not appear to be impacting the rest of the company's business. The firm believes that the company's storage revenues will be in the mid-$30 million range, below an internal stretch goal of $40 million and in-line with last quarter's orders of $34 million. While a goal of $40 million does not appear to be a stretch given that Cisco still has the last month of the qtr remaining. The firm believes the month of April will be weak for its storage unit since it is the first month of the qtr for storage OEMs through which Cisco sells most of its storage switch products.

Next Generation comments that yesterday Nokia mentioned a 3-4% share loss in cell phone market, but also that their 6820 camera phone sales were strong adding to margins. Firm believes this is a net positive for OmniVision, because a) OVTI does not supply to NOK. Nokia's share loss is a gain to the other OEMs such as Samsung, LG, Motorola where OVTI supplies camera sensors, also b) the fact that camera phone sales are still strong in Q1 is a positive indicator on the segment for OVTI.

Boxmakers . . . Prudential says that Hewlett-Packard checks lead them to believe that the 2nd quarter EPS consensus of $0.34 is aggressive, and accordingly cuts their estimate to $0.33. While demand is tracking about as expected, firm has not seen a hint of upside 2 months into the qtr, and large enterprise is improving at a very gradual pace. Also, pricing continues to be aggressive across nearly all segments and this seasonally soft quarter for PCs makes higher unit volume from market elasticity unlikely; other sources of margin pressure come from components, notably tight pricing of flat panels and limited availability and increasing price of DRAM. Trims target to $25 from $26.

Semiconductors . . . Ramtron International signs agreement with National Semiconductor to settle their long standing (originated in 1991) patent interference dispute. As consideration for assigned patent applications and cross license provisions, RMTR will pay NSM ten annual payments of $250,000. In addition, the company's have agreed to cross license any and all future patents that may mature from the four applications at no additional cost to either company. RMTR says the settlement does not affect its FRAM product sales or the status of its key foundry supplier.

Broadcom acquired privately-held Sand Video, Inc., a leading developer of advanced video compression technology for a broad range of consumer digital video apps. BRCM will pay a total of up to approx $77.5 million - $70.1 million in form of 1.666 million shares of its Class A common stock issued or reserved for future issuance and $7.4 million in cash consideration -- in exchange for all outstanding shares of Sand Video capital stock.

Nokia's pre-announcement yesterday was led by lower than expected handset shipments. Nokia is Texas Instrument's largest wireless customer, representing ~50% of its wireless revenues or 14% of total sales. While Nokia's share loss clearly has some impact on TXN, most analysts do not think 1st quarter estimate is at risk as at the time of its mid-quarter update on 3/9, it had decent visibility into the full quarter. TXN is on a consignment inventory program with Nokia; that is, there are no long lead times associated with Nokia, and the impact on TXN's revenues is instantaneous. This leads us to believe that TXN had already built Nokia's shortfall into its guidance as they were already probably seeing it at the time of their mid-quarter update.

1st quarter 2004 estimates for TXN are revenues of $2.94 billion and pro forma EPS of $0.22. Do expect Nokia's share loss to impact TXN's 2nd quarter and 3rd quarter as a share recovery is not imminent. Expect some of the weakness from Nokia to be offset by the strong business TXN is seeing with its ODM customers. Also expect many of the trends that have led to strength in 1Q to continue their momentum through 2004. These trends include: 1) improving ASPs across commodity products: standard logic, standard linear and display-driver products; 2) A continuing increase in wireless silicon BOM per handset and additional sales of cell phone components such as GPS and bluetooth; 3) Continued strength in broadband and DLP. Additionally, gross margin should benefit from higher fab utilization rates and ASP strength. Though analysts are lowering estimates, the overall impact to 2004 EPS is $0.02. Analysts are lowering 2nd quarter 2004 pro forma EPS estimate by $0.01 to $0.23, and 3rd quarter 2004 EPS by $0.01 to $0.26. Analysts are leaving our estimates unchanged for 4th quarter 2004 and 2005.

Software . . . Following report of NPD sales released last night (Symantec products totaled $89.7 million in the Mach Quarter), Piper continues to believe that retail offline consumer sales are trending stronger than anticipated and attributes this strength to the unusually high number of virus outbreaks year-to-date. The firm expects upside to Street consumer numbers for the March Quarter. Near term, the firm believes shares of SYMC will be strong as Street estimates climb in the first part of calendar 2004. Longer term, analyst expects anticipation regarding Microsoft's entrance into the anti-virus market to weigh on shares.

Pacific Growth says Business Objects could meet the firm's 1st quarter estimates, but that there is still top line risk as the firm continues to hear from its checks that there is difficulty in integrating both the sales cultures as well as the technologies. The stock is trading at 2.7x EV/'04 sales and p/e of 32x.

Merrill Lynch downgrades Electronic Arts to Neutral from Buy based on valuation, as the stock is now trading at 28x their 2005 estimate and close to its peak multiples of 25-30x. The firm believes that much of the stock's recent advance has been related to the news of the X-box price cut as well as Microsoft's announcement that it will not release its Sports titles this year, which implies that many investors believe that ERTS estimates could go higher.

Southwest Securities says their channel checks indicate the recent $30 price cut on Microsoft's Xbox (from $179.99 to $149.99) is causing a significant pickup in Xbox hardware sales. The firm believes that hardware price cuts (firm also expects Sony to cuts its PS2 price), combined with the upcoming E3 trade show, will likely prove to be near-term catalysts for video game stocks. The firm raises their targets for ATVI to $18 from $16, ERTS to $60 from $57, THQI to $23 from $20, and TTWO to $40 from $37.

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