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U.S. stocks ended little changed in light trading as a pullback in crude prices and a drop in bond yields was balanced out by a weaker-than-expected reading on manufacturing activity in the Philadelphia region. The DJIA was down less than a point for a close of 9,937. The Nasdaq Composite dropped 1.53 points to 1,896 while the S&P 500 was flat at 1,089. Technology stocks limped to the finish line as the sector closed with weak results. Double-digit percentage declines came from the likes of Tellabs, Ciena and Intuit and outweighed slight gains elsewhere in the sector. Still, the most noteworthy statistic from today's action is the extremely low volume figure of 1.2 billion shares traded on the NYSE. There are no economic releases tomorrow although it is an options expiration day.

Strong Sectors: REITs, printing services
Weak Sectors: computer networks, construction, mining, gold

Top Stories . . . Gap, the biggest U.S. clothing chain, said first-quarter earnings climbed 54 percent as shoppers bought more apparel such as women's Capri pants and men's wrinkle- resistant khakis at full price.

The number of Americans filing initial claims for unemployment insurance unexpectedly climbed to 345,000 last week, the second straight rise.

The index of leading U.S. economic indicators rose 0.1 percent in April as stock prices, Treasury yields and money supply rose. That followed a revised March increase of 0.8 percent, the biggest gain since May 2003.

The dollar rose against the euro and 11 other major currencies before a Federal Reserve report that economists predict will show manufacturing in the Philadelphia region expanded for a 12th month, reinforcing the case for higher U.S. interest rates.

U.S. Treasury notes rose for the first day in three after the number of people filing first-time claims for state unemployment insurance unexpectedly increased.

Richard Strong, founder and former chief executive of Strong Capital Management Inc., reached an agreement with New York State Attorney General Eliot Spitzer to settle allegations of improper trading.

Bonds Buyer . . . Talking about rates, Bill Gross, who runs PIMCO, says inflation related to Treasury debt is a relatively cheap way to protect against a rise in consumer prices. The difference in yield between regular 10-year Treasurys and 10-year tips have widened to 2.76 percentage points, the biggest gap since the U.S. began selling these instruments in 1997. The differentiation represents the expected inflation rate over the life of the notes. He is also buying the debt of Germany, and other euro nations where inflation has a lesser bias.

Oil & the Consumer . . . As for the impact of rising oil on the consumer, Bruce Lanni of AG Edwards says spending by Americans at gas stations would need to more than double to equal the percentage of personal disposable income spent in the years 1979 to 1981, when the Iran crisis triggered soaring oil prices. He said prices would have to rise to $3.00 a gallon to begin curbing consumer demand.

Bad News is Good News? . . . The New York Times Financial Page has a feature on bad news being good news. The argument is a slower paced economy is good for bonds, and ultimately, for stocks. Stuart Schweitzer of JP Morgan Fleming argues that while a cooling economy will impact both job growth and earnings, it will be offset by rates stabilizing, or even falling, as inflation expectations are contained. Of course, says Schweitzer, investors have to be confident that growth is slowing, not declining.

India . . . Manmohan Singh, the soft-spoken economist named India's next prime minister, pledged Thursday to work to restore religious harmony, keep India investor friendly and seek peace with rival Pakistan. Singh's appointment Wednesday ends a week of political turmoil in which Sonia Gandhi, the Italian-born widow at the head of the country's most powerful political dynasty, turned down the job.

Why I hate Annuities . . . Three firms and three brokers were fined a combined $503,000 for alleged abuses selling variable annuities. NASD censured and fined Nationwide Investment Services and Nationwide Securities a combined $175,000. American Express Financial Advisers was fined $300,000 for inadequate record keeping during a four-year period. Former A.G. Edwards broker Michael Tew was suspended six months and fined $28,000. Daniel K. Park, formerly of Northwestern Mutual, and Deborah A. Fruge, formerly of Banc One Securities, were barred from the industry.

Financials . . . UBS out positive on Citibank saying that although one cannot deny the benefit low rates have had on economy and Citi's earnings, they don't think the party comes to an end with first rate hike as higher rates generally reflect a stronger economy, which tends to produce higher customer balances and improved credit quality. The firm estimates that a 100bp rate hike shock should equal less than $0.07 hit to EPS but a 50bp drop in consumer credit ratio should add estimated $0.27 to EPS. Firm also notes that a look at Fed Funds rate impact on net interest margins over the past 20 yrs showed no discernable pattern, little predictive power. BIS study revealed little correlation between interest rates, yield curve and net interest margin; it also concluded banks have been fairly successful at managing interest rate risk. With the shares trading only 10.2x 2005 EPS estimate, the firm is reiterating their Buy rating with $56 target.

The NASD has chosen to pursue an enforcement action against American Express (finanicial advisors) as a result of alleged inadequate disclosures of revenue sharing arrangements from the sales of non-proprietary mutual fund products. The decision is preliminary and American Express has an opportunity to respond to the NASD. The NASD's concerns relate to the adequacy of disclosure, not the revenue sharing arrangements themselves, which are fairly common. This investigation appears consistent with ongoing regulatory reviews of mutual fund companies. Earlier this year, American Express was fined $3.7 million for failing to provide breakpoint discounts to customers. The NASD has focused on sales made between January 2001 and May, 2003. Since then American Express has apparently complied with disclosure requirements. It is difficult to estimate the size of a fine, if any, but note that Morgan Stanley agreed to pay a fine of $50 million late last year to settle charges that it steered customers to certain funds in exchange for fees. American Express earned fees totaling about $250 million during the 30 months in question, or about $0.15 per share. This assumes about 30% of the company's roughly $73 billion of mutual funds during the period were of non-proprietary funds which generated fees of about 1%.

Oil & Gas . . . Bernstein upgrades Halliburton to Outperform from Market Perform and raises their target to $35 from $25. The firm says HAL's EPS should grow faster than the market due to increasing activity in its core pressure pumping biz, and restructuring efforts should also help improve margins. Firm also says the asbestos issue is largely behind the company, and the stock does not appear to discount any improvement in activity.

Metals . . . IISI released on Tuesday global crude steel production data for April – output rose 6% year/year, to 83.4 mmt and is up 8% YTD. However, production was down 4% month/month – adjusting for one more calendar day in March, output would have been basically flat month/month. China was the main driver, with output up 21% y/y to 20.9 mmt (+25% YTD). The rise is despite ongoing tight raw material, rail, and energy availability but remains below the record 21.8 mmt in March. Ex-China production was up a more modest 2% y/y, with emerging (+11%) far outpacing developed markets (+1%). Ukraine was the second-biggest gainer, up 10% y/y to 3.3 mmt. Brazil also rose, up 6% y/y to 2.7 mmt – but is still below August-03 levels. Russia was flat year/year at 5.2 mmt but is up 5% YTD. U.S. output eased 1% y/y to 7.8 mmt, likely affected by coal/coke shortages – utilization levels were reported at 90% versus 82% a year earlier. After falling in March, production in Japan moved up 2% year/year, still trending very close to the 110-mmt annualized level, with roughly 35% exports. India surprisingly fell 5% year/year to 2.4 mmt. We note that, apart from limited capacity, both markets are likely seeing some raw material input shortages. The E.U. rose 2% year/year, to 16.2 mmt, and is up 3% YTD.

Bottom line. The April data imply annualized China steel production remains at 250-260 mmt (+20%) – but this looks well below consumption levels, and the growth rate has slowed from the 26.7% level in 1st quarter 2004. Measures taken by its government to slow fixed-asset investment will likely hit demand in coming months, and possibly supply, with long products particularly vulnerable.

Defense & Aerospace . . . Bloomberg.com reports that Taser's shares have soared on speculation its stun guns will become standard equipment for U.S. police officers. A survey of the 10 largest local police departments shows the optimism may be misplaced. Only three -- Houston, Los Angeles and Miami -- want to make Taser guns available to their entire forces. Houston's police have yet to receive the needed funding, said Robert Hurst, a department spokesman. Most of the others -- including New York, the country's largest police force with 34,000 officers -- said they have put limits on deployment of the weapon and don't plan to provide it to all uniformed officers. "It's not issued to individuals, but to supervisors or emergency units,'' said Robert J. Castelli, a professor at John Jay College of Criminal Justice in New York who spent 22 years with the New York State Police. "It's not something an officer is going to keep on his belt"... 'Over the next five years, you will see one of these for every cop,'' Taser Chairman Phillips Smith said in an interview when asked about the survey results... Even assuming that investors will pay a premium, the stock appears overvalued, said investors such as Andy Abrams of Abrams Investment Partners. The company's revenue would need to rise to $418 million, for example, for shares to trade at 2 times sales.

Transports . . . Lehman upgrades Delta Airlines to Overweight from Equal-Weight and raises their target to $10 from $9 based on relative valuation. The firm says their call is contingent on a pilot deal that buys time that the co needs to address other issues. The firm says that if there is no pilot deal, there is no choice but Chapter 11 and a $0 share price (recent warnings are not just posturing); while the pilot situation is thorny, firm says the case is strong for a deal and pilots would likely be worse off in Chapter 11.

The Washington Post reports ever since gas prices started spiking last month, customers have been flocking to one side of the Lustine Toyota/Dodge in Woodbridge and ignoring the other. "The Dodge truck business is way down," General Manager Jim Giddings said, because of what he called "this gas thing." He's on track to sell just 36 Dodge trucks this month, compared with 68 during the same month last year. Toyota sales, on the other hand, are up 38% so far in May. One of the big drivers is the Prius, the gas-electric hybrid that has become a phenomenon in the past year. Giddings said he has a waiting list of more than 50 customers. According to the article, sales of truck-based SUVs fell in April, and sales of small cars went up. Automakers rushed to the aid of SUVs, which is where they earn most of their profit, lowering base prices and offering more incentives than on any other type of vehicle. At the same time, they raised prices on small cars.

Goldman Sachs lowers their view of the Airlines sector to Neutral, as they now believe that $40/bbl oil prices are more likely to be sustainable (their previous estimate was $30/bbl). Consequently, firm revises their estimate of pretax losses for the major US airlines to $3.2 billion from $0.8 billion, and cuts estimates for nearly all the company's under coverage, with the exception of the regional jet fee-for-departure airlines Mesa Air, Sky West, and Express Jet; and because of its 80% hedged position, firm only modestly trimmed their South West estimate, but now expects all the legacy airlines to post significant losses.

Retail . . . Department stores are capitalizing on economic resurgence. Leading department store chains are beginning to experience the payoff of managements' laser-like focus on inventory levels, as well as various initiatives aimed at improving the in-store experience, broadening private-label brands, differentiating assortments, and strengthening marketing programs.

Discounters are well positioned for continued market share gains. Discounters continue to

offer customers a reason to shop - great value in a convenient setting. This group drives traffic through its assortment of non-discretionary merchandise, as well as upgraded apparel and other general merchandise categories. Discounters are still in growth mode and continue to open stores aggressively.

Higher energy prices and interest rate hikes loom. There is a negative correlation between

retail gasoline prices and personal consumption expenditures, department store sales, and general merchandise store sales. Oil prices and stock price performance of retailers to be negatively correlated. The performance of retail stocks in a rising interest rate environment tends to be mixed.

UBS says department store stocks are cheaper than in 1996 despite a superior outlook. At both times, it was a period of strong fashion cycle, numerous brand launches, a reasonably strong consumer and relative earnings strength. The chief difference was the negative long-term outlook in 1996. The firm's leading indicator, the RSP, is pointing to a good sales environment for most of the year. Indicators such as home sales and refi activity have a long lead time to sales and will play out over the rest of the year. Fashion savvy and/or excellent real estate are the common themes with the firm's recommended stocks, which include Federated, Nordstrom, Kohl’s and Neiman Marcus.

In another blow to the Martha Stewart brand name, Kmart has recalled 588 boxes of Martha Stewart Everyday Safety Matches due to a fire hazard, according to federal regulators. The discount retailer recalled the matches, saying that they could ignite upon impact, posing a fire hazard to consumers, the Consumer Product Safety Commission said in a statement.

PETsMART reported earnings of $0.24 per share, $0.03 better than the consensus of $0.21. Revenues rose 14.0% year/year to $796.3 million versus the $783.1 million consensus. The company sees 2nd quarter EPS of approximately $0.23 in line with the consensus of $0.23. For 2005 company sees EPS of $1.17-1.18 versus the consensus of $1.14.

Hott Topics total sales rose 27%, with same-store sales of 4% (vs. 2.6% LY), driven by strength in the core music-licensed and men's segments. The gross margin contracted by 80 bps to 34.6%, primarily resulting from higher markdown rates in women's and accessories; yet, the SG&A improved by 60 bps to 28.1%. During 1st quarter, HOTT successfully anniversaried challenging comps in its music-licensed segment, as an increasing diversity of music genres and the ongoing demand for rock tees drove solid results. Men's was also healthy in 1st quarter, thanks to continued momentum in novelty tees. Comps in the women's and accessories areas fell during 1st quarter. Women's was impaired by cont'd weakness in street bottoms and several inventory and fashion issues, which are being addressed with the addition of color and new fashions. Accessories suffered from disappointing results in gifts. HOTT'S efforts to improve and fine-tune the Torrid business are working - Performance of East coast and Midwest stores have reached greater parity with the West (more in line with trends of East and West coast Hot Topic stores); Torrid's apparel business was solid across all categories, exceeding internal sales plans. A new loyalty program is set to launch in 4th quarter 2004.

Restaurants . . . AG Edwards calls Darden Restaurants a classic value investors' play with the stock trading at a 13x earnings multiple on firm's fiscal 2005 (ending May) EPS estimate of $1.63, which dramatically understates the chain's dominant two flagship brands in Olive Garden and Red Lobster and the chain's solid financials that include a pristine balance sheet and the ability to grow EPS 10%-15% longer term.

Healthcare . . . Oppenheimer initiates coverage of Tenet Healthcare with a Buy rating and $17 target. The firm says the stock may be volatile until the government's review of outlier payments is completed, yet notes that liquidity and cash flow are adequate, the outlier payments issue is manageable, and fundamentals are solid.

Patterson Dental reported earnings of $0.65 per share, in line with the consensus of $0.65. Revenues rose 20.1% year/year to $537.4 million versus the $552.1 million consensus. The company sees 1st quarter EPS of $0.58-0.60 versus the consensus of $0.58. For 2005 co sees EPS of $2.68-2.72 versus the consensus of $2.69.

Hospitals got a strong message Wednesday from the nation's third-largest purchaser of health insurance: Reduce your costs or lose business. The California Public Employees Retirement System, which has sparked national trends, cut 38 of the state's costliest hospitals from its HMO offerings to save $36 million next year. The decision could start a shift back to the smaller networks of hospitals common in the early days of managed care before backlash led most employers to offer a wide range of doctors and hospitals. Calpers spends $3.9 billion a year on health care for 1.2 million state and local employees, retirees and dependants.

Biotech . . . Biomira and Inno-centre Alberta announce a collaborative agreement to create a spin-off company. The co, Oncodigm BioPharma, will be dedicated to the development and commercialization of a promising cancer therapy. The therapy, Liposomal-Interleukin-2 is projected to re-enter clinical trials in 2005.

Pharmion has received full approval from the FDA to market Vidaza for the treatment of Myelodysplastic Syndromes. The FDA approved Vidaza for treatment of all five MDS subtypes. Until now, there have been no approved therapies for the treatment of MDS.... Co also announces its intent to provide additional clinical data and resubmit its application with the European Medicines Evaluation Agency for the use of Thalidomide Pharmion 50mg to treat patients with multiple myeloma.

Media . . . Sanders Morris Harris is positive on Sirius and EchoStar in light of their distribution deal announcement. The firm continues to assert that a relationship with DISH is about the best thing that could happen to SIRI and awareness will certainly increase since DISH is offering SIRI to 8 of its 10 million subscribers and using this as a tool to entice its lower-end subs to higher-end programming. DISH will also sell new co-branded SIRI units at its retail outlets later this summer. The firm believes this will make SIRI's hopes for hockey stick sub growth a bit more of a reality. Sanders Morris Harris would urge investors to look at DISH, given its positive analysis of DISH's current business (contrary to the street), their competitive position, and the indications of a long-term and profitable relationship with SIRI.

Barron's Online highlights Univision, which has seen its shares falling sharply recently with other media stocks on fears that rising interest rates could slow advertising spending. But, according to the article, this telenovela could have a happy ending, Univision's future rev growth can easily outpace that of other media, because major company's are spending more to target Spanish-speaking consumers. As that population grows, more ad dollars should flow to Univision. "The Spanish population has now reached critical mass, and advertisers cannot ignore it any more," says Andrew Marcus, an analyst at Deutsche Bank. "Univision is a great top-line rev growth story, and we think it is the best way to play the growth of Hispanics in America and marketers targeting the Hispanic community." Univision probably gets ad dollars from only half of the top 300 advertisers, but David Joyce, a media analyst at Guzman & Co, thinks that number could double by 2010. "That incremental demand will drive [ad rates], revenue growth, cash flow, earnings and [the] stock price for Univision, Entravision, Spanish Broadcasting and others," Mr Joyce says Univision can sustain 10% rev growth for the next 3 to 5 years, compared with only 4% to 6% growth for mainstream radio, television and newspaper outlets, says Mr Marcus. Even though the stock fetches 44.3x projected earnings, that's actually near Univision's lowest P/E ratio of the past 5 years, well below its median P/E of 63.4x forward earnings. The stock also trades at 35.8x trailing-12-month cash flow, a big discount to its median 48.3x cash flow over the past 5 years.

Microsoft and Comcast Cable announced an agreement that extends their existing relationship and gives Comcast the ability to make Microsoft TV Foundation Edition 1.7 software available to up to 5 million customers, with the option to expand the rollout at a later date.

Telecom . . . The Financial Times reports that Verizon will begin selling video over fiber optic lines to homes and businesses in 2005 as part of a long-term strategy to fight cable co's on their own turf before they erode too much of Verizon's traditional telephone business. While the first video services Verizon will offer will mimic those available from cable and satellite television services, Verizon executives say the company will eventually move into higher-technology formats that could offer far more options to viewers.. "We have a huge opportunity," Paul Lacouture, Verizon's president of network services, told. Fiber optics "allows us to get beyond parity with cable and get to a video product that will be different from the traditional 150 channels on cable and satellite."

IT Services . . . Siebel and IBM announced the expansion of their alliance to provide comprehensive business solutions that meet the needs of pharmaceutical, biotechnology, and medical products organizations of all sizes. Through the expanded alliance, IBM and SEBL will provide additional deployment options for life sciences solutions. Under the agreement, IBM will host and manage Siebel Pharma, Siebel Medical, and Siebel Clinical. IBM and SEBL are also combining efforts to provide business intelligence to medical products organizations.

Storage . . . Brocade reported 2nd quarter 2004 non-GAAP EPS of $0.03 (vs. $0.00 last year), in-line with its $0.02-$0.03 guidance and in-line with FirstCall consensus estimate of $0.03. Revenues of $145.5 million (up 11% Year/Year) came in in-line with Brocade’s $143-$147 million guidance -- FirstCall consensus was at $145 million. Brocade noted strength in its enterprise (SilkWorm12000/24000) offerings while the entry level (3200/3250) offerings were down sequentially with mid-quarter new product introductions. Brocade noted that mid-range offerings were about flat sequentially. Gross Margins of 55.3% were slightly above the high-end of Brocade’s guidance of 53%-55% and slightly above 54.9% estimate. Ports shipped grew 5% sequentially while Brocade noted ASP declines of mid-single digits in the April quarter. Operating expenses of $70.8 million were below our $72 million estimate and below Brocade’s guidance of $71-$73 million. R&D expenses were about $1.8 million below our estimate while SG&A was $ 0.7 million higher than estimates. Balance Sheet: Cash and investments increased by $29 million last quarter to $760 million. Net cash excluding convertible debt at around $330 million or about $1.26 per share. DSOs increased from last quarter’s 49 days to 53 days – Brocade’s target has been for DSOs in the 50-60 days. Days inventory remained flat with last quarter at under 6 days.

Network Equipment . . . Sanders Morris Harris initiates coverage of JDS Uniphase with a Buy rating and $4 target. The firm sees early signs of growth in the optical component market after a 3-year slowdown, as inventories are depleted and new metro and long-haul builds have begun. The firm also says the company's restructuring is complete, it is close to break-even, and gross margins are improving (although pricing remains tough); in addition, firm says the recent stock price pullback mitigates valuation concerns, as the stock now trades at 25x normalized 2005 EPS, net of cash.

Deutsche Bank upgrades Brocade to Buy from Hold and trims their target to $7 from $7.50 following in-line 2nd quarter results. The firm also cites: 1) management's continued solid execution, which is clearly establishing the company as a leader in the space; 2) growing top line driven by a new product roll-out, as well as the benefits of a restructuring program that is leading to operating leverage; and 3) attractive valuation.

JP Morgan adds palmOne to their Focus List, as they believe the co is experiencing the benefits of growth in secular demand for smartphones, and believes PLMO is entering an era of sustained profitability that will attract new investors into the stock. Firm says that near-term catalysts abound, as Treo 600 supply constraints should ease by August, at least 3 new Tier 1 carrier distribution partners are likely to be added before calendar year-end (leading to pipeline inventory build), they expect a new Treo product to be launched by the fall, and they believe PLMO will license RIMM's BlackberryConnect, enhancing the attractiveness of the device for corporate IT managers.

Prudential initiates coverage on Qualcomm with an Overweight rating and $75 target. The firm believes that the company is strongly positioned to benefit from the broader adoption of CDMA-based technologies over the coming years, both from the sale of chipsets and through a near-monopoly on 3G intellectual property. Also, firm notes that the company's financial position is solid, with $6.6 billion in cash and no debt.

Ciena reported non-GAAP loss of $0.09 per share, excluding multiple items, $0.01 worse than the consensus of ($0.08). Revenues rose 1.6% year/year to $74.7 million versus the $78.7 million consensus and the $78.6 million consensus.

Prudential initiates coverage of Avici with an Underweight rating and $9 target. The firm notes that the company's cash balance stood at $94 million in the March quarter, and they do not believe liquidity is a near-term concern since the co has no debt, but firm would like to see the co become cash flow positive and achieve sustainable profitability; also, while they believe that the Huawei and Nortel relationships present a strong opportunity for AVCI to expand its customer base, until they see signs of such traction, they would remain on the sidelines.

CIBC notes that industry research firm Dell Oro released Q1 market share stats for Ethernet switching and core/edge routers. The Layer 2/Layer 3 data is of importance to Cisco, Foundry, Extreme Networks, and Nortel. The router data is important to CSCO, Juniper and Redback. CSCO extended its dominating lead in the L2/L3 Ethernet switch market. Within the total Ethernet switch market, it comprised 73.6% of the $3.05 billion market. This is a 520 bp increase in market share and the highest share ever. Radware's share in the total Layer 4-7 "fixed" market rose 80 bps to 18.9%. NT's Layer 4-7 market share fell 230 bps to 17.9%. The total core router market grew 6.9% sequentially. CSCO and JNPR continue to dominate this market with a combined market share over 90%. JNPR gained share in the core and mid-range and CSCO gained share at the edge.

The WSJ's "Telecommunications" section reports as Alcatel has emerged from the telecom depression and is in good shape, it might start thinking about making some acquisitions. "There are too many competitors today," says Philippe Germond, Alcatel's president and chief operating officer. As demand for telecom equipment collapsed in recent years, and with new equipment suppliers, including Asian firms, entering the market, the sector has become overcrowded. As a result, he says, it's hard to imagine that there won't be "some kind of reshaping of the industrial environment." According to the article a large merger is unlikely, and ALA would rather buy small, tech-specific co's. The article says that anyone looking at acquisitions within the industry would have to take a look at NT, although a move is unlikely until that co's accounting issues are resolved.

JMP Securities upgrades Netgear to Strong Buy from Market Outperform. The firm is saying the company offers a pure-play investment in the secular growth of home and SOHO networking. The firm also notes that NTGR is posting solid financial results and trades at a compelling valuation, and says that the company has what investors should be looking for: revenue growth, operating margin expansion, net income growth, and a rapidly expanding mkt. Target is $23.

The NY Times held an interview with Lucent's CEO Patricia Russo. Ms Russo, who took the helm at Lucent during the depths of the telecom's collapse in 2002, is anything but sanguine. Having staved off Lucent's financial freefall, she is now in a race against time to develop new products and services that will allow Lucent to survive as the entire industry changes around it. New Internet-based technology and other innovations now allow all that content to travel over unified digital networks. To generate much needed growth and forestall the company's obsolescence, Ms. Russo is trying to leapfrog into the next generation of products. The strategy is admirable, but will succeed only if demand for the technology Lucent is betting on grows faster than the decline in its traditional businesses. "The question is, can Lucent run fast enough to outrun the decline in its older businesses?" asked Albert Lin, an analyst at American Technology Research. "It will be hard to do." Worse still, telecom's equipment is subject to ever-greater price pressure. According to the article, the co now expects rev to grow in the "low single digits" this FY. Most analysts say Lucent is underestimating the strength of the current recovery, but they do not blame the co for being conservative. Lucent is also looking elsewhere for growth. In addition to selling abroad, the co is making strides in winning more government contracts, particularly from the Department of Homeland Security. Lucent's gains, though, are small compared with the larger issue of how Lucent participates in the building of networks, Ms. Russo said. She said she pushed her executive team to figure out "where the puck is going," though she admits there are no simple solutions. Competition is fierce and the questions will not be answered for several years. "The market has clearly stabilized," she said. "It was a scary time and it feels a lot better to be focused on growth again."

Prudential downgrades UT Starcom to Underweight from Neutral-Weight and cuts their target to $32 from $37. The downgrade is based their belief that increasing competition in PAS handsets, a slow path to revenue diversification, and the potential for a slowdown in the Chinese economy point to increased risk in the stock over the next 12-18 months. Firm says several vendors have entered the PAS handset market in China over the past year, putting more than 100 new models on the market, which has served to erode UTSI's market share from 70+% to 60% and has contributed to a 610 basis point decline in gross margin over the past 4 quarters. While the company's competitive position appears to be more stable in PAS infrastructure, firm sees little coming down the road to help ease these handset margin pressures.

Advanced Fibre will be acquired by Tellabs for $1.9 billion in cash/stock. Including synergies, the transaction is expected to be accretive to Tellabs' 2005 pretax income on a per-share basis, excluding amortization associated with acquired intangibles and other purchase accounting adjustments.

Software . . . Goldman Sachs made a note regarding Symantec's acquisition of Brightmail for $370 million. Goldman Sachs says that strategically Symantec needed the anti-spam tuck-in after having struggled to get its own product off the ground; firm's analysis of the total anti-spam market suggests it could be worth as much as $6 billion over the next 7 years, growing at 40%, and is about 5% penetrated today. The firm notes that SYMC paid about 12x trailing revs, or 8x forward revs, and as to whether that is expensive, firm says the answer lies in execution, which SYMC has a good record on. Assuming SYMC quickly integrates the product and gets it into their installed base of customers, firm says the acquisition should pay for itself over the next 4-6 quarters.

Jefferies downgrades Intuit to Hold from Buy and cuts their target to $42 from $55. The firm is saying 3rd quarter results were respectable relative to expectations, but they are deeply discouraged by 2005 guidance that overshadows the qtr's actual results; firm says that high single-digit rev growth guidance for 2005 is a sharp deceleration from 13% expected in 2004, and marks a sharp change in the stock's growth/valuation paradigm, and they now have a much less generous valuation opinion as a result; compounding the valuation issue was a generally vague explanation for the slowdown that leaves them scratching their heads about its specific root causes, at least until the co provides segment-level guidance with its July quarter results 3 months hence.

Several firms out in defense of Inuit following results and guidance announced last night. Despite showing solid results for 3rd quarter, market participants focused on fiscal 2005 guidance calling for high single digit revenue growth. Participants on the conference call appeared surprised by guidance, sending the shares down -7.3% in after hours trading. Merrill Lynch out saying they Intuit's guidance represents a conservative base case for 2005 and sets co up to potentially beat estimates as the year progresses. The firm is surprised by the negative reaction to Intuit's new guidance since the writing has been on the wall for the past month as they lowered their 2005 outlook back in April. They see the decline in shares as a very good buying opportunity because once investors focus on Intuit's EPS growth potential, which still remains quite strong in firm's opinion, the stock will perform much better. CSFB out noting they believe mgmt is attempting to set the bar low having stumbled on guidance for certain segments in the past couple of years. Therefore, firm leaving full year F2005 sales estimate of $2.08 billion, up 11% year-over-year, and EPS of $1.95 up 18% year-over-year essentially unchanged. They believe that at $40, trading at only 20.5x F2005 EPS estimate, the shares offer considerable upside.

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