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The S&P 500 rose for a third day on optimism that the Federal Reserve's pledge to boost interest rates at a ``measured'' pace won't derail a 14- month rally. Charter One Financial advanced after the company agreed to a $10.5 billion buyout offer from Royal Bank of Scotland Group. Energy shares gained, led by Exxon Mobil, as crude oil futures closed at a 13-year high. The S&P 500 added 2 points (+0.2%) to 1121. The benchmark is up 40 percent since its 2003 low in March of that year. The Nasdaq rose 6 points (+0.4%) to 1957, its third consecutive day of gains. The DJIA lost 6 points (-0.1%) to 10,310. About the same number of stocks rose and fell on the NYSE. Some 1.5 billion shares changed hands on the Big Board, in line with the three-month daily average.

Strong Sectors: hardware, semiconductor, computer storage, biotech, healthcare, regional bank, casino & gaming
Weak Sectors: REIT, gold, insurance, auto manufacturing, forest & paper product, oil services

Top Stories . . . An index of U.S. service industries unexpectedly rose to a record in April and more companies were hiring than at any time since November 2000, a private survey showed.

U.S. Treasury notes rose after the Federal Reserve signaled yesterday it may not raise the benchmark interest rate from an almost 46-year low of 1 percent as fast as some investors had expected.

CVS., the second-largest U.S. drugstore chain, said first-quarter profit rose 25 percent, helped by higher sales of generic drugs.

The U.S. will sell $54 billion in Treasury notes next week to finance the federal government's operations, resume sales of 5-year notes indexed to inflation and begin sales of a 20-year inflation-indexed bond.

Crude oil rose to a 13-year high for a third straight day after an Energy Department report showed that U.S. inventories increased less than expected last week.

Martha Stewart and her former broker, Peter Bacanovic, were denied a new trial, after a judge rejected a claim that their conviction for obstructing justice should be overturned because a juror hid a prior arrest for assault.

Texas Pacific Group, a buyout firm founded by David Bonderman, agreed to buy Iasis Healthcare for about $1.4 billion in a bid to repeat earlier profitable healthcare investments including Oxford Health Plans Inc.

Quotes of Note . . . ``That should take concerns out of the market, and should let the fundamentals such as corporate earnings growth shine through a bit more.''David Chalupnik, head of equities at U.S. Bancorp Asset Management, which oversees $122 billion.

Gurus . . . John Berry, the Fed expert, feels that while the Central Bank is less accommodative, it is hardly aggressive. He says the Fed's mandate is to keep inflation under control, not to reduce it by slowing the economy. Moreover, so much of the changed perception of the economy's strength is based on one month's job figures, so the Greenspan Gang will require additional confirmation.

Meanwhile, Ned Davis is pondering when to re-enter the Bond Market. He says a 50.0% rise from the bottom for the next 10-year note yield would bring it to 4.75%. So, around 5.0% on the 10-year, Davis would likely buy back the bonds. As for stocks, he says strong market trends, up or down, tend to be bullish. However, lots of divergences and mixed trends, like now, are mildly bearish.

Market historian Jim Stack has gone back in time to market performance in the face of rate hikes. In 1997 and 1994, a tightening cycle did not result in a bear market or significant decline. In 1958, a mild bear did ensue. Four others (1955, 1963, 1967, and 1999) resulted in more bull market gains. In only two cases, 1987 and 1973, did the first rate hike occur prior to the start of a bear market. The bottom line is that 80.0% of the time the first rate hike did not lead to a bear market, and we don't expect a rate hike until late June.

Mortgage Notes . . . Mortgage applications rose for the second straight week, according to the Mortgage Bankers Association, as 30-year fixed-rate mortgages rose to 6.10% from 6.01% the week before. The applications index rose 4.4% in the week of April 30th due largely to a further projected rise in borrowing costs. The purchase index rose 4.1% higher in the week while refinancing increased 4.7%.

Market Comment . . . If you believe the Fed will slow down the economy via raiding interest rates. Then you have to read this.

The flowers are not the only thing blooming this spring as a string of friendly announcements seems to suggest that the economy is blossoming as well. Indeed, almost every indicator of activity has come in on the high side of expectations during the past month, and first-quarter earnings season has been nothing short of spectacular. Regardless, the stock market managed to lose ground during the past month! While interest rate fears certainly contributed to investors’ uneasiness toward equities, we believe the real story lies in the loss of momentum in leading indicators of the economy such as the ISM. This development usually coincides with a market transition, and this time appears to be no exception.

The ISM is one of the most useful macro indicators for portfolio strategy. Around since the 1930s, the ISM is both time tested and timely in its release. While the ISM’s April reading of 62.4 is consistent with very strong growth in the economy, it is equally important to note that the indicator declined slightly last month and still remains below the January posting of 63.6 — a reading that increasingly appears to be the cycle high point. Going forward, interest rate trends in the global economy suggest that monthly declines in the ISM could become a more common occurrence. Indeed, a look at the chart above shows that the momentum in international short-term interest rates typically leads other leading indicators such as the ISM. At this juncture, this forward-looking relationship argues that we are likely in the midst of an important transition.

The equity market also appears to be at a crossroads. Indeed, cyclical sector leadership, evident throughout most of 2003, has begun to wane in recent months. The fact that this ebb in cyclical leadership began pretty much on cue with the peak in the ISM is no coincidence, in our opinion. As such, the investment conclusion suggested by the macro backdrop is clear: Noncyclicals are the way to go! A number of other elements also argue in favor of noncyclicals. These include the stretched relative valuation of cyclicals versus noncyclicals; the presidential election year, which typically favors noncyclicals; and a quantitative model, which currently displays a preference for the more stable segments of the market. The body of the evidence supporting noncyclical leadership going forward is growing larger by the day. Accordingly, some investors might want to take a defensive posture and overweight noncyclical sectors such as health care and staples, and underweight the more cyclical segments of the market like industrials, materials, and technology.

In order to understand why a transition is occurring in financial markets, we have to first study the events that have led up to it. After delivering significant returns in 2003, the stock market has moved sideways since January. The market’s failure to make headway is largely attributable to the peaking of many leading economic indicators in recent months. Accordingly, expect to find historical evidence of the negative impact of a turn in leading economic indicators on financial markets. Indeed, analysis shows that once leading indicators come off the boil, investors can expect a loss of momentum in equity market returns.

Historically, a peak in cyclical pressures has typically brought with it more measured gains for the S&P 500. Indeed, the equity market tends to perform much better in the 12-month period leading up to a peak in leading indicators (up an average of almost 15%), when economic momentum is accelerating, than in the year following a peak in leading indicators (down on average about 3%), when momentum begins to wane. The current easing of cyclical pressures sends a strong message — that investors should expect a much

different stock market environment over the next 12 months than they’ve seen in the past year.

The historical performance of the S&P 500 surrounding past post-60 peaks in the ISM can provide useful insights as to what is likely to lie ahead in the coming year. Indeed, it is interesting to note in the table above that most of these periods have seen a solid rise in the S&P 500 in the year leading up to a peak in the ISM, followed by a decline or severe loss of market momentum in the year after. One notable exception is 1987, which was distorted by the stock market crash. Putting this aside, the best performance the S&P 500 has delivered in the 12-month period following an ISM peak has been a paltry 3%.

A turning point in cyclical pressures can also bring about a change in stock market leadership. Indeed, investor focus usually shifts away from non-dividend-paying stocks to the dividend-paying universe with a trend change in economic momentum. In that regard, a look at the historical record will reveal that the outperformance of dividend-paying stocks in aggregate has been almost 5% relative to their non-dividend-paying brethren in the 12-month period following a cyclical peak in the ISM Index.

A transition in cyclical pressures can also lead to a change in investor preference in the area of company quality. Indeed, a rising ISM Index usually brings with it strong performance for low-priced/high-beta stocks (commonly referred to as low quality). This trend typically comes to an end coincidentally with a peak in leading economic indicators, such as the ISM, at which time high-grade companies are preferred. Therefore, we would not be surprised to see quality companies gain investor interest in 2004.

While a peak in leading indicators of the economy can influence overall market returns, it is at the sector level that this situation has the most important implications. The bullish case for cyclicals in 2003 was predicated on the fact that leading economic indicators were at low levels and rising — an ideal condition for cyclical sectors. In February 2004, with many indicators sitting at 20-year historical highs, it is time for investors to consider the implications of a pullback in cyclical pressures. At that time, analysts advised investors to reduce their cyclical sector weighting to market weight and to increase their noncyclical sector weighting to market weight.

In early March, analysts advised investors to take a further step toward a less aggressive portfolio by changing the mix of industry recommendations within each sector, placing emphasis on this offering stability. Following weeks of indecisive market action, analysts are now suggesting that investors take the additional step of raising their noncyclical weighting to overweight and of reducing their cyclical weighting to underweight. Indeed, cyclical sectors tend to dominate in the year leading up to a cyclical peak, and noncyclicals take over in the subsequent 12 months. Noncyclical leadership in the period following a cycle peak typically lasts about 23 months. In other words, it is not too late to take action since this is likely still the first inning of noncyclical leadership.

Health Care & Biotech average 33.5% returns 100% of the time following peak in ISM

Consumer Staples average 19.0% returns 100% of the time following peak in ISM
Financials average 4.7% returns 75% of the time following peak in ISM

Utilities average 4.8% returns 50% of the time following peak in ISM
Telecom average 2.2% returns 50% of the time following peak in ISM

Industrials average -4.2% returns ollowing peak in ISM

Consumer Discretionary average -4.4% returns 50% of the time following peak in ISM
Energy average -5.2% returns 50% of the time following peak in ISM

Technology average -9.5% returns 25% of the time following peak in ISM

Materials average -12.2% following peak in ISM

As the table above indicates, the sectors that consistently outperform once cyclical pressures recede are health care and consumer staples, both delivering double-digit relative returns on average — a full 100% of the time. Conversely, industrials and materials have consistently underperformed the market once cyclical pressures come off the boil. All the while, financials, utilities, and telecom have on average managed to outperform the market, albeit their performance has been less consistent than that of health care and staples.

The aforementioned three-step process toward noncyclical positioning has been gradual, in line with the historical pace at which this transition typically occurs. Indeed, let us remind readers that we maintained a pro-cyclical stance for the better part of the 15 months leading up to February. During that time, we favored industrial stocks, particularly the machinery segment, since these stocks are strong beneficiaries of accelerating economic momentum. The downgrade of cyclical segments and shift in industry mix from cyclical overweight to more noncyclical segments took several months. Now that the ISM has remained below its January peak for a third consecutive month, it is time to upgrade noncyclical sector weighting to overweight from market weight and to downgrade our cyclical sector weighting to underweight from market weight.

When economic momentum was accelerating for the better part of 2003, along with industrials, the market favored the materials and technology sectors. At this juncture, however, noncyclical sectors such as consumer staples and health care are at the top of the market list and offer a much more compelling risk/reward profile. As a general rule, focus on industry groups that are less vulnerable to the economic cycle — i.e., groups that are better positioned within their sector as economic pressures continue to wane. For instance, investors should reduce exposure to the most cyclical segments, such as metals, semiconductors, and machinery. For those who wish to maintain a cyclical position, suggest segments such as chemicals, software, and restaurants, all of which are “somewhat” less vulnerable to a decline in cyclical pressures.

Historically, the materials and industrials sectors have demonstrated a particular vulnerability to a turning point in leading indicators of the economy. Indeed, over the past 20 years, both of these cyclically-leveraged sectors have shown a zero batting average in terms of performance in the 12-month period following peaks in the ISM. In other words, neither of these sectors has ever outperformed in the year past a high mark in the leading indicators such as the ISM Index. Moreover, during these periods, materials and industrials delivered relative returns on average of negative 12.2% and negative 4.2%, respectively. As such, an overweight in either of these sectors at this stage is tantamount to bucking history.

The technology sector, on the other hand, has shown the ability to buck the economic cycle at least once. Indeed, in aggregate, tech stocks have managed to outperform the market in one of the episodes following the last four rollovers in the ISM. Notwithstanding this, a close look at performance trends shows that tech has typically underperformed more significantly than industrials. In other words, while it’s bucked the trend once, on average, tech has been a worse place to be than industrials. In fact, the average performance of the technology sector following a peak in economic momentum has averaged about negative 9.5%, whereas industrials has averaged negative 4.2%. Certainly, beta is another factor one must consider with technology.

Unsurprisingly, the results for the discretionary sector are somewhat mixed, showing vulnerabilities as well as opportunities. Since the sector is essentially a hodgepodge of different industry groups, some segments have never outperformed following a peak in cyclical pressures, while others have offered good opportunities. For instance, durable goods segments such as household appliances and auto

parts & equipment have never outperformed during the last four periods of waning cyclical pressures. Meanwhile, segments such as hotels and auto manufacturers have defied the trend on one occasion, although both have underperformed significantly.

Consistent Underperformers Following Cycle Peak

% of Time Average Relative

Outperforming Performance

Materials 0% -12.2%

Steel 0% -27.7%

Gold 0% -26.2%

Diversified Chemicals 0% -15.4%

Paper Products 0% -15.0%

Commodity Chemicals 0% -14.7%

Forest Products 0% -10.1%

Aluminum 25% -17.7%

Containers & Packaging 25% -8.6%

Diversified Metals & Mining 25% -8.3%

Paper Packaging 25% -8.3%

Specialty Chemicals 25% -3.3%

Industrials 0% -4.2%

Employment Services 0% -31.6%

Airfreight & Couriers 0% -22.6%

Construction & Farm Machinery 0% -17.6%

Building Products 0% -14.0%

Office Services & Supplies 0% -12.3%

Machinery 0% -12.1%

Electrical Equipment 0% -8.8%

Industrial Machinery 25% -11.5%

Construction & Engineering 25% -4.4%

Commercial Services & Supplies 25% -4.0%

Industrial Conglomerates 25% -0.3%

Technology 25% -9.5%

Computers & Peripherals 25% -20.9%

Semiconductors 25% -12.4%

Electronic Equipment 25% -12.0%

Energy 50% -5.2%

Integrated Oil & Gas 25% -7.6%

Consumer Discretionary 50% -4.4%

Household Appliances 0% -21.9%

Auto Parts & Equipment 0% -19.0%

Catalog Retail 0% -18.6%

Apparel & Accessories 0% -18.5%

Hotels 25% -16.3%

Auto Manufacturers 25% -10.8%

Home Furnishing 25% -8.3%

Apparel Retail 25% -7.7%

Consistent Outperformers Following Cycle Peak

% of Time Average Relative

Outperforming Performance

Health Care ex. Biotech 100% 33.5%

Pharmaceuticals 100% 38.2%

Distributors & Services 100% 36.6%

Equipment 100% 32.9%

Supplies 75% 17.8%

Consumer Staples 100% 19.0%

Food & Drug Retail 100% 24.0%

Beverages 100% 15.1%

Food Distributors 75% 27.2%

Brewers 75% 14.4%

Food Products 75% 10.4%

Packaged Foods 75% 9.8%

Household Products 75% 9.6%

Financials 75% 4.7%

Diversified Financial Services 100% 12.1%

Insurance Brokers 75% 7.5%

Property & Casualty Insurance 75% 2.8%

Life & Health Insurance 75% 2.1%

Multi-line Insurance 75% 1.8%

Banks 75% 0.4%

Utilities 50% 4.8%

Electric Utilities 75% 6.4%

Telecom 50% 2.2%

RLECs 75% 49.8%

RBOCs 75% 33.8%

Consumer Discretionary 50% -4.4%

Homebuilding 75% 16.3%

Broadcasting 75% 6.9%

Industrials 0% -4.2%

Data Processing 100% 19.4%

Defense 75% 40.9%

Materials 0% -12.2%

Industrial Gases 75% 5.7%

Insurance . . . The WSJ's "Ahead of the Tape" column highlights life insurers that have recently outperformed. Investors consider these stocks havens as bond prices fall, since they are less expensive, less volatile and they offer a variety of stock-linked products. So far, things have been okay, though investors may start to become concerned about a wide investigation into annuity and insurance-brokerage practices by Eliot Spitzer. Life insurers have been reporting slightly better-than-expected results. Today, Nationwide Financial Services delivers its financials, with investors looking at how its fixed-annuity business has performed. According to the article, latest developments in rates are good for some insurers, since low rates from the short-end to the long-end created a margin squeeze for insurers that was more pronounced than the similar squeeze applied to banks. Given a lack of consolidation in the industry, "there are some company's that are at risk of underpricing their product to meet near-term growth objectives," writes Sandler O'Neill's Elizabeth Werner. As is typical in many industries, life insurers outline earnings goals that any co in any commodity industry would have a hard time meeting year after year. Company's offering variable annuities may be helped by an improving economy and stock market. Variable annuities are expensive, but investors like them in rising markets, a help to insurers' margins. Life insurers and the analysts argue that the company's will be fine as long as interest rates move up slowly. In the past month, the bond market didn't have a move that can be called "gradual."

Financial . . . Prudential upgrades Morgan Stanley to Overweight form Neutral-Weight based on valuation, as the stock has 20% upside to their $63 target. The firm also says the company's investment bank is not only benefiting from the cyclical recovery in equity underwriting and advisory, but has also gained share, and thinks that asset mgmt should benefit from strong YOY increases in AUM levels; in addition, firm believes the improving economy should bring relief to Discover (higher interchange and lower credit losses) and IIG (reduced risk aversion by retail investors).

The wave of bank merger activity continues with the purchase of Charter One Financial for $44.50 per share in cash by the Citizens Financial unit of Royal Bank of Scotland. The price was

reasonable, given Charter One’s heavy mix of mortgage-related assets. The purchase validates view that top-tier market share in major banking markets is what will drive most large bank acquisitions: Charter One has a No. 3 ranking in Cleveland, which is the 14th largest bank deposit market in the United States.

Oil & Gas . . . Banc of America lowers their view of the Oilfield Service sector to Underweight from Overweight and recommends selling the group, as they believe that the latest stock price cycle for the group is ending; firm sees a number of factors impacting the stocks, including the deceleration of the U.S. rig rate of change, which is a primary predictive indicator of activity; firm also sees the U.S. rig count dropping by 5%, driven by a drop in commodity prices over the next several qtrs as supply/demand converges, all of which should lower the valuation multiples and stock prices. Firm downgrades SLB, BJS, CAM, CLB, FTI, SII, VRC, WFT, GW, NBR, PTEN, DO, ESV, GSF, PDE, RDC, and RIG (see upgrades/downgrades page for individual rating and target changes).

The New York Times reports that a senior Libyan oil official said that his country planned to hold an auction by the middle of the year to draw foreign investment into eight oil and gas projects, the first opportunity for American oil company's to do new business in Libya since President Bush eased sanctions 10 days ago. The easing of sanctions against Libya allows American oil company's to revive their participation in decades-old production ventures in the country, and already, Occidental Petroleum, ConocoPhillips, Marathon Oil and Amerada Hess have moved to renegotiate their old leases. But the new projects Libya is preparing for auction would let American company's catch up to European rivals like Agip and Total that have moved in over the last 20 years to help develop Libya's reserves.

Transports . . . The WSJ's "Tracking the Numbers" column highlights General Motors that nowadays looks more like a bank than a car manufacturer. Since 2001, most of GM's profits have come not from selling cars, but from its financial arm, General Motors Acceptance. And with profits at GM's auto operations slipping so far this year, GM and Wall St are counting on GMAC to continue to pick up the slack. According to the article, that may be a tall order, particularly in view of the rising headwinds that are likely to result from rising interest rates. Certainly, auto financing as well as mortgage lending, GMAC's primary businesses, will be tougher going forward. GMAC Chairman Eric Feldstein, in an interview with the paper, said GMAC's 2004 earnings will surpass $2 billion, but will likely fall short of the 2003 level of $2.8 billion. That means GMAC will need to keep expanding nonautomotive businesses and extending the reach of its consumer-finance business into new markets, such as China. While the co has expanded overseas, it isn't yet making loans in all target nations. "We are hopeful that by the second half of this year, we are actually going to be writing loans in China, very cautiously," Mr. Feldstein said. Paper suggests that mortgage volumes may decline going forward, but Mr. Feldstein expects other parts of GMAC's business to compensate. For example, GMAC's insurance segment should thrive this year, Mr. Feldstein said, thanks in part to strong premiums and underwriting income. The co also could derive more growth from its commercial and residential development projects, which include land development and acquisition and the financing of residential construction.

Defense & Aerospace . . . Taser announced two significant orders of TASER X26 conducted energy weapons and accessories. The first is from the Harris County Sheriff's Office located in Houston, TX, the nation's fourth largest city. The second order is from the Toledo Police Department in Ohio. These two purchase orders totaled over $500,000.

Northrop did produce strong earnings and bookings performance. Undoubtedly, the negative sentiment simply reflected Northrop’s decision to hold 2004 earnings and free cash flow guidance steady. Essentially, Northrop was the only major defense company that didn’t raise earnings guidance for 2004. Northrop’s shares are selling in line with the overall defense group. Based on the four metrics that you can use (free cash flow yield, multiple on economic earnings, multiple on GAAP eps, and multiple on EBITDAP), NOC is selling at either a slight premium or discount to the group average.

Food & Beverage . . . SABMiller announced that it was bidding for Chinese brewer Harbin, at a price of HK4.30 per share. SABMiller recently increased its stake in Harbin to over 30%, which requires a tender offer under Hong Kong securities law. Anheuser-Busch announced it had agreed to acquire a 29% stake in Harbin at HK3.70 per share ($139 million) just three days ago.

Retail . . . Wild Oats reported earnings of $0.12 per share, excluding $0.04 in charges related to asset write-offs, restructuring charges and accelerated depreciation for the planned closure or relocation of distribution centers, warehouses and stores, $0.05 better than the consensus of $0.07. Revenues rose 11.8% year/year to $263.8 million versus the $264.4 million consensus.

CVS reported net earnings of $0.59 per diluted share, $0.03 better than the consensus of $0.56; revenues rose 8.0% year/year to $6.82 billion versus the $6.80 billion consensus. Same store sales for qtr rose 6.4%, while pharmacy same store sales rose 8.3% and front-end same store sales increased 2.0%.

Piper Jaffray says the recent pullback (down 10% in last week or so) in Tractor Supply presents a buying opportunity. Business conditions remain strong as the firm raises estimates. The firm models 2nd quarter same-store sales growth of +7% (up from +5% previously), which may prove conservative considering the strong traffic-driven sales gains of 1st quarter and a potential uptick in seasonal sales if weather patterns cooperate during the quarter. Additionally, the company is up against its easiest comparison of the year in 2nd quarter at +1.2%.

Biotech . . . First Albany upgrades Myriad Genetics to Buy from Neutral and raises their target to $22 from $16 following stronger than expected 3rd quarter results; firm says the apparent health of the predictive medicine biz (now six months past a weak spell) and the reaffirmation of clinical timelines increases their confidence, suggesting that Myriad's stock could now be positioned to rise again.

Hotel & Leisure . . . Deutsche Bank downgrades Alliance Gaming to Hold from Buy based on their ongoing concerns of increased competition across of the company's business segments; while the recent pullback has resulted in a more appropriate valuation level at 17x their 2005 estimate, they believe all of the company's business lines will face potential lost market share over the next 12-18 months.

Telecom . . . Deutsche Bank upgrades Sprint FON to Buy from Hold, as firm continues to view the stock as an attractive asset with a good mix of defensive/growth properties, and a confinable exposure to long-distance decimation; while the P/E of 22.8x is one of the highest in the sector, firm says this is due to a large depreciation expense.

IT Services . . . The WSJ's "Understanding Outsourcing" column highlights Savvis Communications, which has found a way to take costs out of technology outsourcing by automating the process. "I give IBM credit for being an early mover" in tech-service outsourcing, says Ted Chamberlin, an analyst with Gartner. But the framework offered by IBM, EDS and others "is a model fundamentally laden by lots of hardware and equipment" and requires "lots of people," he says. Savvis doesn't send a team of consultants to evaluate a co's infrastructure. "I can have a new server up for you in a minute, not a month," Savvis Chairman and CEO Rob McCormick says. We give you a slice of a big carrier-class" machine. Co's that outsource their basic technology save money two ways. First, they don't have to buy hardware or employ large tech staffs. They also benefit from outsourcers' cost efficiencies. Savvis aims to save clients even more money through automation. The savings could be substantial. Mr. McCormick says Savvis clients can slash their IT costs by half compared with doing everything in-house. Gartner's Mr. Chamberlin goes a step further, saying the reduction from Savvis's service could reach 70%. The consulting-heavy model used by IBM and others saves only 15% to 30%, the analyst estimates.

Barron's Online highlights Indian outsourcing companies, which have more than doubled from their 52-week lows. Gartner expects worldwide sales from outsourcing of business processes to grow by almost 18% next year, to $143 bln. That could reach $157 bln in 2006. But along with opportunity has come increased competition and greater demand for skilled personnel. Result: Salaries in India rose by 14% last year, according to Hewitt Associates. Hewitt expects Indian salaries to rise by another 13% this year. Accenture, Computer Sciences, Oracle and others are adding personnel, and to get enough bodies Accenture has been offering to double the salaries of experienced personnel, says Partha Iyengar, an analyst at Gartner. And there are signs of a backlash against offshoring. Dell announced last month that it's moving the co's notebook and desktop computer customer call center back to the US after customers complained about the quality of service. Another blow to the Indian service firms is rupee that in April reached a peak it hasn't seen in nearly 4 years. "Rupee appreciation continues to be a major uncertain variable," Satyam's chairman Ramalinga Raju told investors during a conference call late last month. Syntel's Q1 gross margins dropped by more than a percentage point in part because of a 1% rise in the rupee. And last month, Satyam said it missed its Q4 earnings est in part because of the strong rupee, and it gave a cautious outlook for the year. If the rupee continues to strengthen, Indian software services firms would need to either pass the costs on to customers or accept narrower profit margins, says Douglas Porter, an economist at BMO Nesbitt. According to the article, Indian services firms' shares also seem a bit rich. Wipro, Satyam and Syntel trade at moderate premiums to their historic forward median P/Es. The three firms' multiples also exceed their long-term projected annual earnings growth rates. Plus, Wipro fetches about 8x trailing-12-months sales, Satyam goes for 6x sales and Syntel sells for about 5x sales.

Network Equipment . . . Bear Stearns upgrades Research in Motion to Outperform from Peer Perform, citing the potential for continued growth through new markets and products, lack of a meaningful competition, and compelling valuation; firm also notes that there are a number of positive catalysts ahead for RIMM, including: 1) geographic (China/India) and carrier expansion, 2) new handheld products with enhanced wireless features (Wi-Fi, EV-DO) and form factor, 3) entry into small/medium businesses through BlackBerry Web Client, and 4) the potential for a significant increase in net subs through its growing list of BlackBerry Connect licensees. Target is $120.

RIMM’s positive and negatives . . .

Investment Positives:

• Best wireless email solution.

• Shift from hardware to services/software licensing model that could lead to margin expansion and significant growth in the long-term and may ultimately transform the company to a pure services/software licensing company similar to Qualcomm.

• Strong patents on wireless data solutions.

• Multiple growth opportunities such as geographical expansion, extension of its services offering on new wireless networks, addition of incremental enterprise data solutions, and its licensing of its technology to third party OEMs (e.g., Nokia, Samsung, Sony Ericsson, Siemens and Motorola).

• Long history in wireless.

• Strong brand recognition in enterprises.

• Strong balance sheet.

• Ubiquitous platform. RIM’s choice of Java 2, Micro Edition (J2ME) as its platform enables the company to gain critical mass immediately through the 2.5 million Java developers worldwide at the same time making its solutions ubiquitous.

Investment Concerns:

• Legal uncertainty surrounding its litigation with NTP.

• Success of RIM’s BlackBerry Connect licensing program may negatively impact RIM’s hardware sales.

• Competition emerging from emerging from start-ups (i.e., Good Technology) to PDA manufacturers (i.e., palmOne) to software vendors (i.e., Microsoft) to PC manufacturers (i.e., Dell).

• May be perceived as a single function device.

Terayon announced an alliance with Juniper Networks, that will enable customers to create new, more flexible network architectures for delivering broadband services over cable networks, embracing a 'best-of-breed' solution by teaming Terayon BW 3500 CMTS (Cable Modem Termination System), qualified to meet DOCSIS 2.0, with Juniper Networks' high-performance IP edge routing platforms.

Semiconductor Equipment . . . Applied Materials isin the relatively early stages of a cyclical recovery in the semiconductor and semiconductor capital equipment industries. Analysts see choppiness in the shares this summer as end market pull is debated. The market is at the typical worry point and that the risk/reward is positive. Share gains expected in most market segments. Over the last year, Applied has worked diligently to bring the few lagging product segments to more competitive positions. The product portfolio offered by Applied as among the strongest in its history. The company should continue to dominate segments like PVD, CVD, RTP and

CMP, and increase share positions in etch, inspection, and metrology. 300mm wafer transition could help extend the cycle. The transition to larger 300mm wafers along with the typical drivers of line width shrinks and capacity shortage drivers could help to extend the length of the upturn. If the economic current recovery is stronger than anticipated, our scenario for a peak in order rates in 1st half 2005 may prove to be conservative.

Semiconductors . . . JMP upgrades Micron to Strong Buy from Market Outperform, citing attractive valuation; despite a slight weakening in DRAM spot prices (down about 10% in the last few weeks) due to seasonality, firm believes that contract pricing for Micron is still firm and rising with key customers. Also, firm is confident that a cyclical recovery in the DRAM memory market is likely to happen within the next 12 months and that the top 3 DRAM players (Samsung, Micron, Infineon) are likely to behave rationally in the mkt. Target is $20.

Boxmakers . . . Banc of America upgrades Dell to Buy from Neutral, raises their 2005-06 above consensus, and raises their target to $40 from $35. The firm now believes that the co has the opportunity to show upside in EPS and/or margins over the next several years, driven by: 1) better margin mix, with enterprise and services leading the way, and 2) improved PC and notebook forecast. Longer term, firm also believes that the co has a significant opportunity in printers, though printers won't move the needle in 2005 (Jan 2005).

Software . . . Last night, NPD weekly sales data for Symantec was released. NPD sales of Symantec products totaled $21.8 million in the first four weeks of June Quarter, down 23% from the first four weeks of March Quarter. The firm believes the Street is looking for a 0% to 5% sequential decline in consumer offline sales from March to June. However, the firm expects consumer offline sales to increase based on the Sasser worm. For the balance of June Quarter, the firm expects the stock to be dependent on virus activity.

Roth Capital raises its target on Viisage Tech to $14 from $10 and reits a Strong Buy after the company reported 1st quarter results Monday after the close. The firm remains bullish on the stock as it could benefit from the prospect of additional federal program wins, new driver's license awards, and international secure document opportunities. The new target is equivalent to 50x this year's cash adjusted EPS estimate.

Firm believes Computer Associates has well positioned itself for growth opportunities outside of its core systems management business, which includes security and storage; believes CA could benefit from the potential convergence of these areas with broader systems management. Price target of $36 is based on an 18x multiple applied to firm's 2005 FCF per share estimate in the $2.00 area.

JP Morgan says that Business Object’s 10-Q filing for 1st quarter has revealed an informal SEC inquiry relating to the company's "practices with respect to backlog", which was not previously disclosed in the company's 10-K; while the term "backlog" could denote multiple interpretations. The firm believes this may be in reference to the company's deferred rev balance. The firm says the most notable change to that balance in the last six months has been the addition of deferred rev related to Crystal contracts, and they believe this inquiry could be focused here. Historically, firm says BOBJ has been conservative with its accounting policies, and they suspect this announcement is not a significant operational issue; however, firm believes this news will likely add to the growing concern over Crystal/BOBJ integration issues, at least until further color becomes available. Maintains Neutral rating.

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