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U.S. stocks rose, led by energy- related shares such as Exxon Mobil and BJ Services, as oil and gasoline prices surged. The S&P 500 Index had its first advance in a week. Mounting demand for oil and gas may lift profits for companies that produce and refine the natural resource. Some 750 U.S. companies are scheduled to report earnings this week, including about 60 in the S&P 500. The S&P 500 gained 5 points (+0.5%) to 1145. Energy shares accounted for a fifth of the advance. The DJIA rose 73 points (+0.7%) to 10,515. The Nasdaq added 12 points (+0.6%) to 2065. About the same number of stocks rose and fell on the NYSE. Some 1.08 billion shares changed hands on the Big Board, the slowest day this year. Profits for the S&P 500 members probably rose, on average, by 17.4 percent in the first quarter, according to an analyst poll by Thomson Financial. Analysts began the year with an average forecast of 13.4 percent for the period, Thomson said.

Strong Sectors: telecom, biotech, broadcasting & cable TV, forest product, oil services, chemicals
Weak Sectors: utility, real estate operations, homebuilding

Top Stories . . . Gasoline futures rose to the highest price in two decades of New York trading after the International Energy Agency increased its forecast for global petroleum demand for the sixth straight month.

U.S. Treasury notes fell after San Francisco Federal Reserve Bank President Robert Parry said the Fed's key interest rate has the potential to rise to about 3.5 percent if inflation averages 1 percent to 2 percent.

Microsoft, the world's biggest software maker, agreed to pay InterTrust Technologies $440 million to end a patent dispute and license programs that help fight illegal copying of digital movies and music.

Lockheed Martin, the biggest U.S. defense contractor, delivered 50 C-130J transport aircraft to the U.S. Air Force that have deficiencies, the Pentagon inspector general said.

Gannett, the biggest U.S. newspaper publisher, said first-quarter profit advanced on higher advertising, while New York Times Co. reported lower net income as costs rose faster than sales.

Bottom-line barrage. . . This week, about 750 companies are expected to report earnings, including 57 in the S&P 500. And, the latest reading from First Call is that S&P profits will rise 20%, and perhaps 22%.

Quotes of Note . . . ``Earnings continue to impress in a quarter that was largely anticipated as good. From a general point of view, you're going to have a good year'' in the stock market. Arnim Holzer, chief investment strategist at Deutsche Asset Management, which manages $250 billion in New York. ``

Gurus . . . On the Rukeyser Show, favorable comments on Japan's iShares (EWJ), Harley Davidson, Arch Capital, Isle of Capri, Medicis, Zebra Tech, Apple Computer, SunMicro, and Ameritrade. Guest was Tobias Levkovich, strategist for Smith Barney, who is cautious on the market, envisioning lower prices by year-end. However, he does favor Gillette, Apache, and Anthem. He is under-weighting banks, and says materials could be vulnerable to a China slow-down.

On the Brenda Buttner Show on Fox, recommendations on Magna Entertainment, Sallie Mae, and Silicon Image. And, on the Wall Street Week Show, David Olstein favored Tyco, McDonald's, and Interpublic.

Morgan Stanley's Byron Wien predicts a 20 multiple for the S&P by year-end, which could produce a target of 1280, against Thursday's close at 1139.

Ed Yardeni says he believes the S&P target is 1340, based on 2005 projections.

Barron's highlights the picks of Russ Fuller, a Fuller & Thaler Associates founder and president. Fuller oversees research on about $2.6 bln in assets, mainly small-cap stocks, held in long-short and market-neutral hedge funds; he also watches over two mutual funds, JPM Undiscovered Managers Behavioral Value and JPM Undiscovered Managers Behavioral Growth. Behavioral Value, which has about $50 mln in assets, boasts a five-year return of 22%, versus 16% for the Russell 2000 Value Index. In the same span, Behavioral Growth, which has about $130 mln in assets, was up 5.7%, versus the Russell 2000 Growth Index's 3%. Mr. Fuller's funds own Orthologic, Sola International and Gold Banc. Mr. Fuller thinks that "froth stocks" such as Research In Motion, Red Hat, Mamma.com, and Sento will burst soon, and that the cycle will be much faster compared to 1998-99.

Newspapers . . . Favorable comments in Business Week on Winn-Dixie Stores, NPS Pharma, and Morgan Stanley. The N.Y. Times says soaring plywood prices may dent the housing market, while Crain's Chicago reports the Nextel-Motorola relationship may be unraveling. Barron's is bullish on Japanese stocks, and says that memory chip stocks may be expensive. The technology trader section looks at Quantum Fuel and USHG Corp. Alan Abelson's column is negative on big drug stocks.

Nano-Fraud? . . . The NY Times reports that on Thursday, investment firm Asensio & Company faxed a letter to Eliot Spitzer, the New York attorney general, charging that misuse of the nano label has become a favorite tactic for fraudulent stock promotion. Asensio asked Mr. Spitzer to investigate Merrill Lynch for including many company's that have little or nothing to do with nanotechnology in an index of 25 publicly traded nanotechnology company's that Merrill introduced on April 1. "Investors are being harmed on a daily basis," said Manuel P. Asensio, chief executive of the investment firm. Juanita Scarlett, a spokeswoman for Mr. Spitzer, said that the office's first step in response to such a request would be an informal inquiry.

Dilutive Covertibles . . . The Wall Street Journal's "Ahead of the Tape" column discusses convertible bonds that many company's issued over past several years. For example, Yahoo's shares outstanding went up by about 31 million because of the offerings, which is equal to a penny a share, based on YHOO's $0.14 in earnings, which means the offering was dilutive by 7%. This matters most for company's with convertibles that are close to being in the money. As the reality dawns on investors, this could cap certain stocks. About a year ago, Mandalay Resort issued $400 million in special convertible debt that wasn't convertible only into stock, but also had a sweetener for investors as the stock continued to go up. In exchange for this sweetener, the financing was extra cheap. But now, after its meteoric performance in the past year, Mandalay shares are about $61, within striking distance of the convertible price of about $69 a share. When holders convert, it would add about 8 million shares to the total outstanding, which CIBC estimates would be about 68 million by the end of 2006 ending in Jan. That's about 12% dilution. While CIBC estimates that Mandalay will earn $3.73 a share in operating income in fiscal 2006, after the convertible dilution it would be down to about $3.40. That puts a stock that normally trades at around 15x the coming year's earnings estimates at around 18x.

Jobs Comments . . . The economy is in the early stages of a durable expansion built on small businesses, a flexible labor force, innovation and lower tax rates. The dollar’s retreat from its deflationary strength in 2001 and 2002 was critical to the recovery, as were the 2001- 2002 interest rate cuts and the 2003 tax cut. The strength and durability of the expansion are likely being broadly underestimated. The unemployment rate has fallen to 5.7% from a post-recession peak of 6.3%, putting it at a level that was considered relatively full employment as recently as 1996. Employment is already strong enough to sustain the expansion and is likely to improve further. Several current indicators show marked improvement in the labor situation in the first quarter, pointing to the likelihood of continued gains in the establishment survey in coming quarters. On April 8, initial unemployment claims fell to 328,000. With the exception of the 1999 employment surge -- we think related to the excesses in the dollar and the stock market -- this is the lowest level of claims relative to workers on record.

The Institute of Supply Management asks manufacturing companies whether they have more workers than in the previous month. At 57.0 in March, the index of employment is at the highest since the late 1980s. The National Federation of Independent Businesses prepares a diffusion index showing hiring intentions by the nation’s smaller businesses. It shows a sharp improvement beginning late in 2003 and accelerating in 2004. Hiring intentions are near the intensity of the late 1990s, approaching the optimism reflected in the new all-time record in the Russell 2000 index hit on April 5. (The Manpower survey of hiring intentions shows a similar surge.)

The household survey (Labor Department phones about 60,000 households per month) showed 1.3 million new jobs in 2003. In contrast, the establishment or payroll survey (Labor Department contacts about 160,000 businesses and government agencies covering approximately 400,000 different worksites) showed a net decline of 61,000. The household survey and the unemployment rate are giving a clearer picture of the employment situation than the establishment survey. The establishment survey is distorted by the 1999 bulge in establishment jobs. Some of those jobs probably didn’t exist (e.g., double counting as people job-hopped), while some existed but weren’t dependable (telecom jobs at now-bankrupt companies). Establishment jobs rose from a steady 94% of household jobs prior to 1995 to a bulge of 99% of household jobs in 1999 and have now subsided to a more-normal 96% of household jobs. Early in an expansion, the establishment survey is regularly revised upward toward the household survey – in 1994, the

Labor Dept found 1.8 million more jobs on nonfarm payrolls for 1992 and 1993 than they had initially estimated.

One of the factors for revising the establishment survey is already showing a tendency toward a strong upward revision, which we expect to occur later in 2004 and in 2005. On March 26, wage and salary income was revised upward by a cumulative $138 billion (at an annual rate) for the period July 2003 through January 2004. The revision used new information through September 2003. One possible explanation is that there were more jobs created in the third quarter than currently being counted. Two other likely factors in the revision are higher wages and more hours worked per week, both of which also point to a stronger employment situation than previously reported.

One criticism of the employment situation involves the decline in the labor participation rate and the increase in the number of discouraged workers, workers whose response to the Labor Department’s telephone survey of households is that they don’t have a job and have not been looking for a job because they don’t have good prospects. The two measures are similar in concept and show similar movements – an extreme in 1999 followed by a reversion to normal in recent years. The decline in labor force participation reflects workers leaving the labor force for any reason, not just discouragement. It

has returned to its mid-1990s level of roughly 66%, after rising to 67% in the late 1990s. The percentage of discouraged workers relative to the working-age population is now at the same levels as the mid-1990s.

The government releases several measures of unemployment – the conventional one which shows a 5.7% rate; a measure now at 6.0% which takes into account discouraged workers; and a broader measure, now at 8.6%, which measures the whole pool of available workers by adding to the unemployed those individuals who say they would like a job but aren’t currently looking for one. These three measures show the same trend – record low unemployment in 2000, a rise during and after the 2001 recession, and a healthy subsequent decline. In all three measures, the current unemployment rate is below those recorded in the mid-1990s and well below the peaks after the recessions of 1990-1991 and 1982.

Many criticisms have been levied against the statistical accuracy of the employment surveys. Economic data is, in general, not very precise. The unemployment rate gives a reasonably accurate picture of the labor-market situation, whereas the establishment survey is more challenged. It is based on a statistical sample seeking to measure small changes (say 100,000) in a large number (131 million.) One particular criticism of the establishment survey is that it does not accurately adjust for the birth and death of new firms. The adjustments started in April 2003 and are shown below. The government assumed a lot of firms failed in January, so it reduced the net jobs created by 321,000, a large adjustment relative to the final result (a seasonally-adjusted gain of 159,000). There’s a good chance that the government is underestimating the birth of new firms, creating the prospect of upward revisions to the establishment survey later on.

Buffet Mania . . . According to Barron's, Berkshire Hathaway shareholders and other followers ought to pay more attention to what Warren Buffett does and less to what he says. The cover page of his annual shareholder letter shows a remarkable outperformance by Berkshire Hathaway vs the S&P 500 index, but this record measures Berkshire's book-value gains against gains in a stock-price index. There is a footnote in the letter that implies that Berkshire's performance is handicapped by having to pay taxes, whereas the S&P index doesn't pay taxes. This is true in itself, but again it is based on an unfair comparison. Surely Buffett meant that, despite the fact that the S&P 500 company's in the index pay taxes, the S&P 500 index itself doesn't pay taxes. The article also notes that Berkshire's board is full of his friends and family members, and some even have significant, related-party transactions with Berkshire. According to article, there are several other risks that shareholders of Berkshire Hathaway are taking by following Buffett's major strategies and policies: Berkshire's overall goal seems to be the reinsurer of last resort for other reinsurers, so a massive terrorist attack on the U.S. or other disaster of unprecedented size could wipe out a good portion of Berkshire's liquid assets, or the liquid portion of its equity; any major tax-law change or regulatory change adversely affecting company's with large deferred tax liabilities, retained earnings, or investment-co status could dramatically affect Berkshire's fortunes; the cult-like following that Buffett has attracted among money managers, regulators, and the press is a bad sign, since Buffett will not live forever, and his sudden death could expose the company to forces that his successors could not control.

Financials . . . Mellon Financial reached a definitive agreement with Safeco to acquire Safeco Trust Company. Terms of the agreement, expected to close within 30 days, were not disclosed.

Oil & Gas . . . JP Morgan downgrades Occidental Petroleum to Neutral from Overweight as its top-of-the-pack valuation fully reflects its strong fundamentals and limits further upside. According to the firm, doubts linger on the company's ability to continue to fight the decline in the US asset base and lack of share buyback program has been a disappointment. The firm suggests that top-tier free cash flow generation supports continued debt reduction and dividend increases. The firm projects 4% annual volume growth from 2003-2006, inline with its peers.

A combination of improved transport access, new recovery projects, continued low costs and improving refining margins, should keep Petrokazakhstan well positioned to maintain and grow production ahead of its North American pack. Despite recent appreciation, PKZ remains cheap especially in light of accretive projects to boost 2004 earnings. Current indications suggest

CNPC will build a pipeline east from PKZ’s Turgai Basin to 3 refineries in Northwestern China. This simple change in direction from west to east can boost the market value of PKZ’s reserve base relative to more distant competitors or alternatives. Wedged within the GEM Universe, PKZ maintains strong corporate governance standards, disclosure and management access. Await progress on a material acquisition which may reload its portfolio otherwise expect a special dividend possibly in the order of $3.00/sh. 1st quarter 2004 output may disappoint due to field stoppage - volume growth targets remain 10% beyond. Trading at only 3.1x 2005E EBITDA and 5.1x 2005E cash flow, PKZ remains cheaper than Russians and Chinese but more expensive than

Latins or some US independents. Our reserve depletion model suggests a value of $35.40/ADR or 4.6x 2005E EBITDA and 5.8x ‘05E cash flow suggesting 20% upside.

Energy . . . Entergy guides 1st quarter EPS of $0.85 versus the consensus of $0.96, due to lower earnings contribution from Entergy-Koch, LP joint venture. The company also reaffirms 2004 EPS guidance of $4.10-4.30 versus the consensus of $4.23.

Barron's highlights Quantum Fuel Systems Tech, a company that sells lightweight fuel tanks and fuel lines for vehicles that burn natural gas or hydrogen. Its tanks also hook up to fuel cells, a still-developing technology that works like a hydrogen-powered battery. Quantum's tanks apparently are top notch, and its biggest customer is General Motors. GM's loyalty is also inspired by the 20% of Quantum stock that GM got when the little firm was spun off from tank-maker Impco Technologies in 2002. In the past 12 months, Quantum's shares have roared from just a few dollars to 8. But the business from GM and other customers didn't enable Quantum to turn a net profit on its $19 mln in revenues for the nine months ended January. Quantum blames GM's low production volumes. According to the article, there's a more direct problem with the reasoning of folks who invest in hydrogen plays like Quantum just because the price of oil is rising: These days, most hydrogen is made from oil. So as oil gets more expensive, hydrogen does, too.

Transports . . . FedEx hosted a well attended analysts meeting in Memphis last Thursday that provided access to its senior management team, an update on its long term strategy for growth and improved shareholder value, its vision regarding Kinko’s strategic and financial importance to FDX and an update of near term earnings guidance as well as initial guidance for 2005. Management laid out its strategic plans for long term 10% revenue and 10%-15% EPS growth. A combination of strong international and above market domestic ground volume growth and solid rational global pricing should allow FDX to achieve its goals for the foreseeable future. FDX had identified a need to grow its retail outlet and small business customer presence—two of the industry’s fastest growing and most profitable engines. Kinko’s gives it a great entry into these markets, albeit at a steep purchase price. Suspect FDX had few strategic alternatives to penetrate these markets and was concerned Kinko’s future interest might diverge from it. Management citing a strong economy and strong improvement in volumes, particularly IP, one month into the quarter took up continuing EPS guidance by about a nickel or 4% for 4th quarter 2004. It also provided its first guidance for 2005 in a range of $4.00 to $4.20 compared to our former estimate of $3.97 and prior Consensus of $4.03. The intermediate term direction of revenue and EPS as continuing upwards for FDX. Longer term we continue to expect FDX’ to be rewarded with an increasingly higher valuation relative to the S&P 500, as it continues to show better than market internal growth with less cyclicality and improving cash flow and returns.

Paper . . . Kimberly-Clark raised guidance. The company now sees 1st quarter EPS of $0.91 versus the consensus of $0.87 and prior guidance of $0.85-0.87, due to strong top-line growth, success in reducing costs and a slightly lower effective tax rate, and reports record sales of $3.8 billion versus an estimate of $3.67 billion. The company also sees 2004 EPS toward high end of targeted range of $3.55-3.65 versus the consensus of $3.61.

Consumer Products . . . CSFB initiates coverage of Gillette with an Underperform rating and $38 target. While they believe that the co owns the consumer sector's best brand franchise and its mgmt team is executing well against its strategic plan, they say the company's turnaround and growth prospects are more than reflected in the stock price.

Food & Beverage . . . The Wall Street Journal reports that Coca-Cola's general counsel, Deval L. Patrick, has resigned after three years with the company. Douglas Daft, Coke's chairman and CEO, delivered the news in an e-mail sent Sunday night to employees world-wide. Mr. Patrick "guided the legal team through significant challenges and obstacles faced by our company during the past four years," Mr. Daft said in the statement. Coke named Geoff Kelly, a 34-year Coke veteran and chief deputy counsel, as interim general counsel. Mr. Patrick has been heavily involved since last year with two government investigations into the company's accounting.

Retail . . . Wal-Mart still expects April sales at U.S. stores open at least a year to rise in the range of 4-6%, and said Easter sales were ahead of its expectations.

Wedbush removes Bebe Stores from its Focus List based on valuation. The firm believes that the co should be valued on an ex-cash basis. The co had approximately $7.50 of cash per share. Excluding cash, the stock currently trades at 20.3x C04 est. The firm's $37 target is based on a 19x 2004 EPS estimate plus the company's $7.50 per share in cash. The co is currently trading at 26.2x and 24.7x firms 2004 and 2005 earnings estimates. The company's current peer group multiples for F04 and F05 are 24.5x and 21.2x. Within the past five years, the company's stock has traded within a range of between 6.5x and 32.2x forward earnings with a median multiple of 18.3x.

The Wall Street Journal reports that Limited Brands, owner of the Victoria's Secret chain of lingerie stores, said Saturday that it is canceling its provocative annual televised fashion show in the wake of an indecency crackdown by federal regulators. According to the company's Chief Marketing Officer, Limited spent close to $10 million to produce and advertise the program.

The WSJ reports that Limited Brands, owner of the Victoria's Secret chain of lingerie stores, said Saturday that it is canceling its provocative, annual televised fashion show, in the wake of an indecency crackdown by federal regulators. Ed Razek, chief marketing officer for Limited, said that the decision to skip the annual special was made several weeks ago, after Janet Jackson's incident during the Superbowl half-time. "It was a mutual decision" with CBS, said Mr. Razek. "We were in the middle of negotiations when it became apparent that to consummate a deal made no sense." According to Mr. Razek, Limited spends close to $10 million to produce and advertise the program.

Healthcare . . . Barron's highlights Larry Feinberg, a founder at a health-care hedge fund Oracle Partners. According to the article, Mr. Feinberg has a negative take on the big-cap pharmaceutical company's after being quite bullish on the sector just a few months ago. His benign view of the major drugs was grounded in the conviction that their nicely improving product pipelines more than made up for the bruising competition from generics. He also shrugged off as less than imminent any groundswell for massive imports of drugs from Canada. On that, he now believes, he was dead wrong, and sees the passage of drug-reimportation legislation as a sure thing. Mr. Feinberg hasn't sworn off all drug stocks and certainly not those with biotech bona fides. He's very hot, by way of example, on Biogen Idec, a stock he recommended. He thinks it's pretty much a cinch that the co will file for FDA approval this summer and its also pretty much a cinch that the FDA will say OK. He has also shorted Serono, a Swiss biotech co and a leading supplier of an existing drug for MS. The stock, a big favorite in Europe, currently trades around 16, and Larry's downside target is 10.

Barron's highlights Odyssey Healthcare, which is showing impressive growth numbers, but questions are arising about patient care and level of Medicare payments. According to the article, there are also signs the co can't keep up with its heady growth. Higher labor costs, especially in California, which represent 13%-15% of its revenues, as well as higher drug costs hurt Odyssey's margins in last year's Q4. In reporting those results on Feb. 23, the company forecast lower-than-expected earnings for this year. Odyssey also disclosed, in its most recent quarter, six of its programs exceeded the amounts they were entitled to receive in Medicare reimbursements, raising questions about whether patients admitted to its programs are truly eligible. Some former nurses and marketing representatives told Barron's that patients being kicked out of Odyssey programs after 90 days upon being "reevaluated" or because they required hospital care. Former staffers complain about lack of access to supplies and caseloads that are heavier than industry norms. The company's CEO, David Gasmire, says Odyssey follows all federal guidelines.

Stifel Nicolaus defends Odyssey Healthcare after a negative article in. The firm take issue with the implication that the co's service practices and standards, particularly at its San Diego hospice site, are below industry norms. The article cited deficiencies only at its hospice site in San Diego, with all the critical violations having been corrected in December 2003. Importantly, the article does not make mention of any of its other 67 hospice sites throughout the country. Also, many of the other allegations are nothing new. This is just the first time that it has been published in an influential journal.

Medical Devices . . . Wachovia upgrades Ventana Medical Systems to Outperform from Market Perform to reflect decreased earnings risk. The firm believes that Ventana will be able to continue to market and sell its Human Papilloma Virus (HPV) testing products. The firm remains bullish regarding the outlook for Ventana's Benchmark and Symphony products and retains 2005 EPS estimate of $1.55 that is $0.16 higher than consensus. Valuation range is $51-$54.

Drugs . . . JP Morgan downgrades Abbott Labs to Underweight from Neutral. The firm has become increasingly convinced that Abbott's $539 million US Biaxin franchise will succumb to generic competition from Teva beginning in May 2005. This includes both Biaxin and Biaxin XL and is by no means in Street forecasts, which assume a smooth transition from the original Biaxin to the XL formulation. The firm estimates the hit to Abbott's EPS from generic Biaxin XL at $0.18. This brings to seven the number of drugs that Abbott has "at risk" in the 2005-06 timeframe, including Synthroid, Tricor, and Ultane, which has gotten little Street attention, and the three BI drugs - Flomax, Micardis, and Mobic. The stock trades at 17.1x and 16.3x the firm's 2004 and 2005 EPS estimates (pre-spin). This is in line to slightly above its peers, most of which have higher forecasted longer-term growth rates.

Biotech . . . Piper Jaffray downgrades Alkermes to Market Perform from Outperform and lowers its target to $16 from $19. J&J is quietly but aggressively developing an active metabolite to replace Risperdal. Paliperidone is expected to have an improved side effect profile relative to Risperdal. Paliperidone is further along than expected. Assuming successful clinical development, the firm projects that oral paliperidone and paliperidone palmitate could be on the market as early as mid-2007 and 2008, respectively. The firm is increasing its discount rate from 30% to 35% to account for the potential risk posed to ALKS' peak sales estimate by paliperidone and a slower-than-expected U.S. launch of Consta.

Morgan Stanley downgrades Trimeris to Underweight from Equal Weight. Despite TRMS/Roche's redoubled marketing efforts, prescription data for Fuzeon indicate that demand has seen little growth. The firm's lower sales forecast for Fuzeon leads it to believe that TRMS's ability to reach profitability and generate meaningful earnings could be in jeopardy. The firm lowers its 2004-06 EPS forecasts, and removed its price target.

Media . . . Banc of America upgrades Comcast to Buy from Neutral and raises its target to $41. The firm is increasingly convinced that Comcast will ultimately abandon the Disney bid as the considerable bid/ask spread is unlikely to close. The firm believes the bid has overshadowed positive fundamentals for the group and, in absence of the bid, the stock is particularly compelling. The firm's $41 target price is based on an average of DCF, using a 8.4% WACC and 4% FCF growth in perpetuity, and discounted P/FCF analysis, which applies a 20x, 17x and 17x multiple to 2006E, 2007E and 2008E FCF, respectively.

Barron's highlights BSkyB given its enormous growth opportunities with its digital channels being watched by 28% of all households in the United Kingdom and Ireland, up from nothing seven years ago. Investors may want to start tuning in. Although Sky's ADR's have been in the doldrums, sliding about 1% this year, the company's business prospects have been brightening. Sky, which holds the main contract to air the national pastime, soccer, and is expanding its news and entertainment programming, is well-positioned to boost sales to two camps: existing customers upgrading their service and the nearly 13 million households in the U.K. and Ireland that still have neither satellite nor cable. First Call's consensus of analysts' estimates puts earnings for the fiscal year ending June 30, 2005, at $2.40 an ADR, up from a projected $1.39 for the current year. That would bring the lofty P/E ratio of 36.5 times the current year's earnings down to a more earthly 21.1x 2005 earnings. Or, if the multiple holds a little stronger at, say, 28 times the higher earnings that would suggest a price of about $67, up 33% from the current $50.20.

Tech Talk . . . From a larger perspective, we continue to get a stream of data points implying stable/improving IT demand, as the recent tech stock weakness is reflective of normal seasonal business trends and stock prices. Despite tech stock underperformance in the February through May period, we haven’t seen fundamental signs of business slowing and would prepare to build positions by late Spring.

IT Hardware: The sense is that the general demand environment for IT hardware continues to move in the right direction, with several “macro” drivers suggesting greater optimism in 2004. Still expect a modest expansionary cycle in 2004 owing to a confluence of strengthening macro trends, replacement cycles and several “killer apps."

Data Storage: In storage systems, with application-driven requirements and need for product refreshes, the demand outlook is clearly improving. In SAN components, the key investment issues remain competition: new technologies (iSCSI), OEM emphasis on lowering SAN costs, and new players (CSCO). In drives, June is usually the seasonally toughest quarter and we don’t see any supply constraints.

iAppliances & Imaging: The trend toward mobility remains strong with robust demand for iPod mini and notebooks (masked by a short-term inventory correction). While smartphones are garnering more interest given Treo 600 results and strength at RIM, demand for PDAs is still disappointing. As for printers, we’re seeing favorable industry dynamics with growth in AiOs and benign industry pricing.

EMS . . . Raymond James upgraded Flextronics to Strong Buy from Outperform due to better-than-expected demand trends, an improved outlook for its burgeoning ODM business, and the recent Nortel agreement. Although Mach Quarter is typically the weakest, the firm believes that the sequential drop-off will not be as severe as expected. As a result, Flextronics is now one of the firm's top priority investments in the EMS sector. Valuation also remains attractive. Based on a two-year 20% revenue CAGR and 5% EBIT margin, Flextronics has earnings power of approximately $1.70, or 10.7x the current price versus the EMS industry average multiple of nearly 14x. The firm's price target of $24 is based on 40x its 2005 EPS estimate.

Network Equipment . . . Barron's highlighted Nokia, which gave an earning warning early last week, but still looks cheap, at about 17x expected 2004 earnings. According to the article, the company still has the fattest margins in the cell phone business, which it continues to dominate. It is expanding its wireless-infrastructure business and it has a plethora of new models coming. Albert Lin, an analyst at American Technology Research, thinks the market-share losses and margin erosion will reverse as new models are introduced. He says the company's woes are exaggerated by currency: Without the weak dollar, Lin notes, revenue would have been at the high end of guidance. He thinks Nokia shares are a steal, saying the stock is relatively inexpensive and investor expectations low. The stock, he says, has "disaster already priced in."

Barron's highlights 3Com, which was a once-high-flying wonder of the tech-bubble days that crashed and burned with all the rest and now has even grander ambitions to recreate itself as a co that aims to take away a big slice of the lucrative networking business from rival Cisco. Last year 3Com struck up a partnership with Huawei, arguably the premier networking company in China, that opened up shining new vistas. The arrangement allows 3Com to sell Huawei's high-end networking gear in the U.S. and Europe, and thus target the bigger company's that have long been Cisco's entrenched domain. The Huawei-3Com joint venture gives 3Com access to incredibly cheap labor, whether for engineering or manufacturing. As a result, says chief financial man Mark Slaven, "We've been able to triple the number of engineers working on R&D projects." Promising as the partnership is, and the potential is huge, let us hasten to add that the payoff isn't just around the corner. Indeed, Mr. Slaven estimates that 3Com won't turn cash-flow positive until late this year and won't hit break-even until next summer. However, 3Com's cash burn is modest and its cash hoard is immense, some $1.4 billion, or almost $3.50 a share. At $6.73 a share, down from a high of $9.34 earlier this year, shares are going for 1.7 times book and less than two times net cash.

William Blair upgrades Tellabs to Outperform from Market Perform, as they believe that shipments of enterprise hardware are increasing, which will gradually lead to greater demand for T1/T3 links and drive demand for the company's core Titan 5500 product; also, firm believes that TLAB's wireless product lines continue to experience healthy demand, and that the addition of Krish Prabhu as the company's new CEO will provide it with broader perspective and vision in future years.

UTStarcom announced a new contract valued at approximately $40 million with China Telecom to expand and optimize its IP-based PAS (Personal Access System) network in China's Jiangsu Province. Under the terms of the contract, iPAS networks will be expanded in seven cities in the province. UTSI will also extend its mSwitch-based iPAS core network in two cities and the value-added services (VAS) platform for the entire province.

Kaufman upgrades Westell to Buy from Hold and raises their target to $10.50 from $8.50. The firm believes that the company will benefit as its customers look to transition the majority of their businesses to integrated Wi-Fi modems over the next several years, and also notes that near-term order trends at WSTL remain strong, as its largest customer Verizon is set to report strong growth in DSL subscribers.

Lightreading reports that Bookham Technology's deal to buy the components division of Nortel Networks is looking even better these days, given an interesting pricing relationship. According to the article, sources say Nortel sold the business to Bookham with the agreement that it would continue to keep Bookham as a supplier and buy the components at fixed prices, even though the market rate for optical components is dropping. Nortel agreed to buy a fixed percentage of its components from Bookham for three years, with purchases guaranteed to total at least $120 million for the first 18 months. According to sources, part of the deal has Nortel paying fixed prices on certain parts, a deal that gets worse as component and module prices decline. This also implies that Bookham is collecting some revenues that will dry up when the prix-fixed contracts end. Nortel accounted for 58% of Bookham's sales in the quarter ended Dec. 31. Analyst Jeff Montgomery with ElectroniCast Corp. notes that some long-haul component prices fell as much as 60% between 2000 and 2003. One of the sources noted the same kind of situation might exist between Avanex and Alcatel. Avanex acquired the component divisions of both Alcatel and Corning in a deal that included a three-year purchasing commitment from Alcatel, among other concessions.

Semiconductors . . . JMP Securities raises their 1st quarter rev/GAAP EPS estimate for AMD and their 2004 EPS estimate above consensus. The firm cites higher ASPs and margins on its processor mix as well as slightly more bullish assumptions on the margin improvements in its flash memory biz. Maintains Outperform rating and $20 target.

CE Unterberg initiates coverage of SanDisk with Short-Term Buy/Long-Term Buy ratings and a $40 target. The firm believes that potential upside to 1st half 2004 exists due to virtually no price erosion in 1st quarter followed by seasonally strong 2nd quarter revenues.

Reuters reports Intel is freshening up its money-losing communications business with a new set of chips for cell phones, days ahead of its quarterly earnings report. The company plans to introduce chips that will allow video conferencing on mobile phones and DVD-quality video playback on handheld devices. The new chips aim to inject some life into Intel's communications business, which lost $858 million last year. Intel combined its communications and data networking businesses last year after failing to gain traction in the fiercely competitive mobile phone chip business. Texas Instruments is the largest supplier of cell phone chips.

ThinkEquity upgrades Intel to Overweight from Equal-Weight in anticipation of significant margin expansion throughout 2004. While firm is not advocating that investors buy with an anticipation of big 1st quarter results or even positive 2nd quarter guidance, they say the recent correction from overly optimistic models have been based on stale news/concerns (e.g. Dothan delay); firm's key assumption is that the materiality of this bad news is largely behind Intel and leverage will return as 300mm production ramps. While Intel is not cheap, firm says the stock is attractive given that it is trading at 18x their 2005 EPS estimate, and that despite record rev and earnings, the stock has already underperformed its peer group.

Advanced Micro has settled patent claims with Intergraph relating to AMD's microprocessors. Under terms of agreement, AMD will receive a license under Intergraph's "Clipper" microprocessor patents and the patent lawsuit in U.S. District Court for Northern District of California will be dismissed. AMD will pay Intergraph $10 million, plus 2% of profits from its microprocessor sales for three years (2005-2007); payments are capped at $5 million per year and total of all payments under agreement are capped at $25 million.

Boxmakers . . . Goldman Sachs says it continues to view Dell as one of the most attractive technology opportunities and would be buying the shares now. According to the firm, applying Dell's 28x multiple to their preliminary FY2006 earnings forecast of $1.46 implies a stock price of around $40-$41 even without the expected earnings upside. The firm is also positive on other players in the field noting they would overweight a basket of DELL, EMC and LXK as the firm sees Dell a notable stimulus to both partners. In contrast, while note recommends being underweight HPQ, the firm would be an opportunistic seller of its shares over the intermediate term as they believe the co is seeing tough competition from Dell.

Software . . . The Wall Street Journal reports that BEA Systems and Veritas are teaming up to defend their market positions against IBM, Oracle, and other software-industry giants. Today, the two are expected to announce an engineering and marketing alliance that will package together their major products. Their joint offering for "utility computing," one of this year's hottest technology trends, is intended to help customers manage clusters of low-cost computers as a single system. The integrated products are expected to be available in the second half of the year.

The New York Times reports that Microsoft plans to announce today that it has reached a $440 million legal settlement and licensing deal with the InterTrust Technologies, a private co and a pioneer in the development of software to protect digital music and movies from piracy. The InterTrust settlement removes a threat to Microsoft's ability to deliver piracy protection technology in its software products for playing and handling digital media. The technology for digital rights management, analysts say, is crucial for Microsoft's plans to extend its Windows software into the emerging market for legally distributing music and movies over the Internet, in competition with rivals like Apple, RealNetworks, Sony and others.

Prudential says that conversations with field contacts suggest that Peoplesoft's 2004 license guidance of $700-$715 million might be at risk. With many deals not only slipping in, but even lost in 1st quarter, the firm is now forecasting 2004 license revenue of $655 million. The firm thinks PSFT is in the unfortunate position of being squeezed in a secular shift inside the applications market, as leader SAP continues to take market share at the high-end with MSFT business applications moving upstream at a quicker pace than conventional wisdom; with the shares trading 18.8x their 2005 EPS estimate, firm maintains their Neutral-Weight rating and $23 target.

Raymond James upgrades Convergys to Outperform from Market Perform on yet more positive news for the company's IMG (billing) division. Last week, Convergys announced retention of AT&T Wireless as a customer; this after re-signing a deal with Sprint PCS, winning a wireless data billing deal with Verizon, new business at O2, and acquiring a strong presence in the wireline market via purchase of Alltel information systems. The stock's valuation is relatively low: 15X FCF, P/E of 16X, and 1X sales.

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