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Monday's MarketWrap:Better late than never!

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Stocks closed broadly higher though steep losses in Altria Group left blue chips stranded in the red. The DJIA ended down 8 points (-0.08%) for a close of 9,958 while the Nasdaq lifted nearly 10 points (+0.57%) to 1,922. The S&P 500 added almost 2 points to 1,095. Crude oil futures had their biggest gain in more than three months, with the price back up to $41.67, just below the old high of $41.85. Oil stocks, like ConocoPhilips and ExxonMobil did well.Altria stumbled 8.9 percent after a U.S. Tobacco stocks were rocked on a court ruling that could leave the industry vulnerable to allegations that the industry fomented policies leading to addiction. The market was also helped by a stable interest rate environment, while the dollar improved against the yen and euro.

Strong Sectors: hardware, networking, telecom, gold, REIT, industrials, oil services, transportation, coal, utility
Weak Sectors: tobacco

Top Stories . . . Saudi Arabia, the world's largest oil exporter, is going ahead with plans to boost oil production in a bid to lower record-high prices, after other members of the Organization of Petroleum Exporting Countries deferred a decision on increasing the group's output quota.

Omnicare, a provider of pharmacy services to the elderly, made an unsolicited offer to buy NeighborCare Inc. for about $1.5 billion, including assumed debt, to increase the number of patients served.

Lehman Brothers named Joseph Gregory president and sole chief operating officer, putting him in the No. 2 role behind Chairman and Chief Executive Richard Fuld.

Exxon Mobil, the world's largest publicly traded oil company, agreed to transfer stakes in 28 U.S. oil and natural-gas fields to Apache Corp. and to jointly explore for gas with Apache in the Gulf of Mexico.

General Electric will sell a stake for as much as $4.5 billion in a business it doesn't want.

New York Attorney General Eliot Spitzer will today sue former New York Stock Exchange Chief Executive Officer Richard Grasso to recover some of his $139.5 million pay package, a Spitzer spokesman said.

Quotes of Note . . . ``The Saudis are making more oil available but it will not get here fast enough to meet summer demand. The reaction we're seeing to the closure of the MARS platform shows how sensitive we are to any disruptions.'' Phil Flynn, senior energy trader for Alaron Trading.

``The last time I can recall the Saudis doing anything like this was in November 1997 when OPEC was preparing for the Jakarta meeting. They only make announcements like this when they are trying to send a signal that they mean business.'' '' Bill O'Grady, director of fundamental futures research at A.G. Edwards.

Gurus . . . On the Rukyeser Show, panelist recommendations included Fox, Genuine Parts, Fluor, Harman Int'l, Ralph Lauren, Biogen IDEC, JP Morgan, Abbott Labs, and Reader's Digest. Guest Jim Moffett of UMB Bank recommended Hellenic Bottling and Smith Nephew.

On the Fox-Brenda Buttner Show, recommendations on Garmin, Solectron, Panera Bread, National Semi, and Automatic Data.

David Wyss, economist for Standard & Poor, says that the economy reliance on oil has lessened, and that Americans spend a historically small proportion of disposable income on gasoline. Homes and vehicles are more energy efficient, many power plans have switched from oil to natural gas, and the U.S. has shifted to a service economy.

Barron's highlights Mary Meeker, a Morgan Stanley stock analyst, for her picks. Six years ago, Barron's crowned the stock analyst the "Queen of the 'Net" for her influential calls on leading Internet stocks. Mary Meeker thinks that Chinese Internet stocks hold great long-term promise, but she wants to wait to jump in. Stocks mentioned in article include China Mobile and China Unicom. Ms Meeker suggests that one way to play internet stocks generally, is to buy eBay or Yahoo, with the best pure play in China mentioned as Sina. Ms Meeker also suggests that we may have a lot of wind in our face from a stock-market standpoint over the next six months or so and therefore recommends to hold back jumping into Chinese internet stocks, including also new public companies, like Shanda Interactive and LinkTone.

Barron's highlights Bernie Myszkowski's and co-manager Rick Drake's stock picks. Mr Myszkowski oversees $1.3 billion ABN Amro Growth fund, which invests mainly in large-capitalization growth stocks. "We aren't looking for the quick kill or the fast buck," says Bernie Myszkowski. "If I've learned anything after more than three decades in this business, it's that there is no such thing as a sure thing. We simply look for large-cap companies with consistent earnings growth and strong balance sheets and let time work its magic." The fund's relatively concentrated portfolio of 38 stocks is full of quality names such as Pfizer, Cisco Systems, Dell, Harley-Davidson, Texas Instruments, Walgreen, Medtronic and American International Group, some of which have been in the fund since its start in 1993. The fund has performed admirably over long stretches. During the past 10 years, according to fund-tracker Lipper, the fund was up 12.14%, beating the 11.06% of the S&P 500 and topping the performances of more than 95% of large-cap growth funds. Over five years, the fund beat 88% of its peers. And on a three-year basis, though its annualized return was a negative 5.21%, that was still better than 90% of its rivals. The fund manager recently sold some holdings of EMC and completely purged Freddie Mac. Two recent additions to the portfolio are Zimmer Holdings and Qualcomm.

Of Note . . . Getting back to the exceptional first-quarter results, the translation into stock prices left something to be desired. The S&P 500 has lost 2.9% in the second-quarter after gaining 33% in the previous 12 months. We are dealing here with peak momentum—the first-quarter is as good as it gets, and one sells the deceleration. Similarly, in the depths of despair in March of 2003, the market began a one year unrelenting bull phase.

Ouch . . . Unleaded gasoline futures leaped to an all-time high on the New York Mercantile Exchange as crude neared $42 a barrel. The June contract for gasoline was at $1.465 a gallon, up 4.82 cents, or 3.4 percent. A fire over the weekend shut down a major pipeline system in Washington, spurring fresh fears about gasoline supplies.

Politics . . . Lehman identifies stocks and industries it thinks will perform better under a Bush administration and a Kerry administration. Real-money Presidential election vote-share futures have been steadily discounting a Bush re-election but the margin of victory has recently become very tight. Industries the firm thinks will perform better under a Bush administration are Pharma, HMO, PBM, Drilling, Utility, Auto, Asset Managers, P&C Insurance, and higher-end retailers. A Kerry administration would aid the market performance of Facilities, annuity oriented insurers, GSEs, Homebuilders, Banks, and retailers catering to middle-class. The equity market, on average, is near flat during the first half of an election year but moves considerably higher during the second half.

Financials . . . Wells Fargo, the fifth-biggest U.S. bank, may buy Strong Capital Management Inc., which settled lawsuits last week over allegations of engaging in improper mutual fund trading, people familiar with the matter said. Wells Fargo probably would pay as little as $400 million, or less than half what Strong Capital would have fetched before it was linked to improper trading, said Burton Greenwald, a consultant with BJ Greenwald Associates in Philadelphia. Richard Strong, the founder of Strong Capital in Menomonee Falls, Wisconsin, turned down takeover offers as recently as 1999 of about $1 billion.

Oil & Gas . . . Apache and ExxonMobil announced an agreement that provides for transfers and joint venture activity across a broad range of prospective and mature properties in West Texas,Western Canada, onshore Louisiana and the Gulf of Mexico Continental Shelf, and is expected to increase the realized value of the portfolio for both companies. APA's participation in this agreement will include a cash payment of $385 million. The parties will now work together to close the various transactions with more definitive agreements.

Friedman Billings upgrades Giant Industries to Outperform from Market Perform and upgrades FTO to Market Perform from Underperform, both based on valuation; firm says that the smaller independent refiners (FTO, GI, HOC, and TSO) represent the best value using their price/free cash flow analysis.

More on Oil & Gas . . . High demand for gasoline (up 3% year to date), relatively low inventories (2% below last year and 3% below the 10-year seasonal average), and concern that environmental regulations might lead to regional shortages have pushed up margins across the nation. The sharpest increase occurred in the Midwest, where margins have increased 67% above the first quarter, to $11.22/bbl. Refining margins on the East and Gulf Coasts have increased 27% and 44%, respectively. West Coast margins have jumped 62% above the first quarter average to $23.64/bbl. Estimate margins nationwide to be 90% higher than margins at this time in 2003 and 154% above midcycle. Price differentials between light grades of crude and heavy/sour grades remain high. In the second quarter to date, the spread between West Texas Intermediate (WTI) and Bow River has widened by $2.48/bbl, or 27%, above first quarter, while the average spread between WTI and West Texas Sour crude has remained flat from first quarter averages of $3.41/bbl. The average WTI/Maya spread and the WTI/Arab heavy has declined 5% and 9%, respectively, below first quarter averages, but remain high relative to history. Wide light-heavy spreads should benefit Valero, Premcor and Frontier.

These companies’ earnings are highly sensitive to changes in refining margins. Estimate each $1 change in the margin affects earnings by $2.15 per share, or 81%, for the group. 2nd quarter earnings projections assume refining margins in June will be approximately 30% below current levels. This could mean that results exceed our higher estimates. Our estimates for 2005 are unchanged.

There are signs that refining margins are nearing their peak. Gasoline production has increased in the

second quarter by 5%, to 8.8 million b/d, from the first quarter average as refiners have emerged from maintenance, with utilization averaging 92.9%, compared to 89.2% in the first quarter. In addition, imports have risen to 945,000 b/d, or 25%, above first quarter levels. As a result, gasoline inventories are building -- up 6.2 million barrels in the past month. Continued strong economic activity would be a force that could support high gasoline demand but we find that seasonally adjusted demand tends to be elastic when retail prices exceed $1.75 per gallon. Gasoline prices nationwide now exceed $2.00 per gallon. Expect these high prices to dampen demand growth at the same time that supplies increase.

Refining stocks tend to move with margins. Given the high volatility of refining margins, the independent refining stocks could correct sharply if margins pull back even from extraordinarily high levels to above average levels. The risk/reward for these stocks is unfavorable. On average, see downside of 38% and 10% upside for the independent refiners. There are no changes to our individual stock ratings: Outperform rated stocks are Premcor and Frontier Oil; Peer Perform are Ashland and Valero Energy, and Underperform are Sunoco and Tesoro Petroleum.

Energy . . . Smith Barney upgrades Edison to Buy from Hold and raises their target to $26 from $24; firm says that a constructive California P.U.C. should issue a general rate case decision for EIX later this week, allowing the co to earn a fair return on its growing utility capital investment; also, firm believes that the company's merchant biz (Edison Mission Energy) could become healthier through asset sales and better cash flow from improving midwest power markets, and they think that a $1.5 billion parent cash balance will drive value through debt reduction, reinvestments, and/or share repurchases.

Hydrogenics announced that it has been contracted by ITOCHU Corp of Tokyo, Japan, to provide a 10 kilowatt HyPM fuel cell power module for a demonstration project in Mie Prefecture, Japan. One of the aims of the project is to demonstrate a zero-emission energy system based on renewable energy.

Metals . . . The WSJ reports that Alcoa, focusing on nations with low-cost energy, is planning a $1 billion aluminum smelter on the island of Trinidad, even as it prepares to break ground on another $1 billion smelter in Iceland. According to the article, these smelters will replace mothballed capacity in several states of the U.S., especially in the Pacific Northwest where high energy prices have made them too costly to operate. Under a preliminary agreement, the Caribbean plant would produce about 250K metric tons of aluminum annually, with Alcoa owning 60% of the plant and the government owning 40%. The government has options to buy as much as 100K metric tons of aluminum a year to sell to other Caribbean manufacturing sectors or back to Alcoa. The plant will use low-cost electrical power converted from the country's natural-gas fields. The company said it also is looking at smelter projects in China, Brunei, Bahrain, Brazil and Canada. "We are looking anyplace in the world where there is competitively priced energy," said a spokesman, Kevin Lowery.

Midwest Research upgrades Nucor to Neutral from a Trading Sell and reits its Sell on AK Steel. On Friday, China's Commerce Ministry announced that it will eliminate export rebates on coke and reduce the number of export licenses to 10 million tons versus 14.8 million last year. The move is significant given that China is by far the world's largest coke exporter. This will likely result in higher domestic coke prices for a longer duration of time. However, the firm believes that the continued increase in raw materials utilized in the integrated model vis-à-vis the mini-mill model will cause companies such as NUE to be more attractive.

Defense & Aerospace . . . CSFB upgrades Boeing to Outperform from Neutral and raises their target to $52 from $47. The firm says they have higher confidence that the 7E7 will prove a success, citing the large number of 7E7-class aircraft approaching retirement age, their belief that the aircraft will serve the "sweet spot" of airline industry profitability, and the 7E7's favorable capital and operating cost profile. The firm is also more confident in the Integrated Defense Systems outlook, as they are impressed by the relative caution with which BA views the defense spending outlook, and the reward/risk and returns in the business appear stronger than expected.

The NY Times reports that the Department of Homeland Security is on the verge of awarding the biggest contract in its young history for an elaborate system that could cost as much as $15 billion and employ a network of databases to track visitors to the United States long before they arrive. The contract, which will probably be awarded in coming days to one of three final bidders, is already generating considerable interest as federal officials try to improve significantly their ability to monitor those who enter at more than 300 border-crossing checkpoints by land, sea and air, where they are going and whether they pose a terrorist threat. Interviews with government officials, experts and the three company's vying for the contract, Accenture, Computer Sciences and Lockheed Martin, reveal new details and potential complications about a project that all agree is daunting in its complexity, cost and national security importance.

Retail . . . Wal-Mart maintains 4-6% same-store sales growth forecast.

Deutsche Banks reits a Buy on Kohl's. The firm says Wednesday's analyst meeting will mark the next inflection point. The presentation will likely include an announcement that Ralph Lauren's Chaps line is going into Kohl's stores, which could have a significant whole house impact. The firm says that now that the turnaround is accelerating (lower inventories, expanding margins, and improved comps) current levels reflect a compelling entry point.

Analysts estimate sellers listed 13.3 million items on eBay’s core U.S. site during the most recent week (5/15/04-5/21/04), a 27% increase from the year-ago period. Quarter-to-date (4/1/04-5/21/04) listings total approximately 101 million items, a 31% year-over-year increase. Estimate listings on eBay Germany during the most recent week grew 36% from the year-ago period. Quarter-to-date listings on eBay Germany have increased 45% year-over-year. Listings on eBay U.K. grew approximately 104% from the year-ago period during the most recent week. Quarter-to-date listings on eBay U.K. have increased 130% year-over-year. Passenger vehicles and auto parts on eBay Motors grew 45% and 58%, respectively, this past week. Quarter-to-date, estimate that passenger vehicles and auto parts on eBay Motors grew 41% and 66%, respectively.

Restaurants . . . CIBC upgrades Applebee's, PF Chang's to Outperform from Sector Perform based on valuation; firm views both stocks as relatively defensive in the sector, with better than average cost visibility and compelling top-line stories. Firm says APPB's well-established record of same store sales gains, its current national rollout of the Weight Watchers program, and low commodities exposure provide visibility and make it a compelling defensive play; stock has fallen 14% in past six weeks, to its cheapest level in 8 months. Firm regards PFCB as a best in class growth casual diner, yet now it trades at its cheapest valuation in 14 months.

Healthcare . . . Omnicare it sent a letter to NeighborCare offering to purchase all of the outstanding shares of NCRX common stock for $30.00 per share in cash. The transaction is valued at approx $1.5 billion, which includes the assumption of NCRX's net debt. OCR's offer represents a premium of 70% over NCRX's closing stock price on 5/21, the last trading day before OCR's offer.

Medical Devices . . . The WSJ "Ahead of the Tape" column highlights rumors among traders that Medtronic's earnings, scheduled to be released today, may be slightly better than expected, thanks to strength from its defibrillators. Recent positive data on the safety and effectiveness of defibrillators have bolstered sales slightly. The whole market is growing strongly. But investors and traders are bracing for slightly worse-than-expected data from Medtronic's trials for its stent. Investors are poised to closely analyze longer-term data on the renarrowing of the arteries called "late loss," a precursor to restenosis. Meanwhile, Boston Scientific's stock is trading at 15.6x next year's estimates and J&J changes hands at 16.6x. Medtronic is trading at 25.9x the estimate for 2005. Guidant trades at 20.9x estimates for next year. The discount for Boston Scientific, the market leader, is attributed by investors fear that earnings will peak next year, and then fall off thanks to competition from Medtronic and Guidant. But, according to the column, both Medtronic and Guidant seem to have already had modest delays in their stent programs. If those delays become exacerbated, the market leader will benefit, and Boston Scientific could earn more money than forecasted.

Media . . . The WSJ reports that Time Warner isn't planning to spin off or sell the company's AOL unit "anytime soon," Time Warner Chairman Richard Parsons told shareholders. Mr. Parsons's comment appeared to rebut speculation in recent months that the company was thinking about shedding the unit, whose lackluster performance in the past two years has dragged down the parent's results. Mr. Parsons didn't commit himself to keeping the unit permanently, but he expressed confidence about its future. "AOL is not only righting itself but is also becoming a serious engine for growth," he said, speaking at the company's annual shareholder meeting.

Net2Phone and Liberty Cablevision launch VoIP telephony system. Liberty Cablevision maintains ownership of the customer, service brand, and Tier I customer and technical support, while Net2Phone supports the back office platform, switching and transport, ongoing operations and Tier II+ technical support to deliver a fully managed QoS IP solution. Net2Phone tracks and monitors voice quality and network performance metrics from start to finish and provides the cable operator with a full view into telephone calls routed over its network. Consumers benefit on two fronts: inexpensive stand alone telephony when compared against traditional phone service and savings derived from the video, data and voice triple play in cable TV, high-speed Internet access and telephone services.

The WSJ's "Heard on the Street" column discusses Martha Stewart Living Omnimedia, which saw its shares soar on Friday after perjury charges against a government witness in the Martha Stewart trial. Larry Stewart was charged with lying eight times when he testified during the trial about his participation in tests done on the ink used on a worksheet detailing Ms. Stewart's stock portfolio. Mr. Stewart, no relation to Martha Stewart, was also charged with lying about having read a book proposal written by colleagues that discussed a different way to test ink. The fading enthusiasm for Martha Stewart Living stock during Friday's session stemmed from the realization that the perjury charges aren't likely to undermine her obstruction-of-justice conviction, according to the column, citing defense lawyers who aren't involved in the case. The legal standard for overturning a conviction based on perjured testimony of a witness is high. Defense lawyers would need to show that the jury would have acquitted if it hadn't been for his testimony. If the defense had disputed Mr. Stewart's conclusions, which it didn't, then the defense could have argued that Mr. Stewart's credibility was more relevant to the jury. The perjury news could be a mixed blessing for the co, which has sought to put Ms. Stewart's legal troubles behind it. A lengthy appeal, made more complex by the perjury allegations, could prove damaging, as many advertisers are waiting for a resolution of the case before considering buying ad space from the magazine and television-show co, the Journal said.

Electronics . . . palmOne announced that summary judgment had been issued in its favor dismissing Xerox's claim that palmOne's former text-entry system, Graffiti, infringed a Xerox patent. The ruling will result in the dismissal of a lawsuit brought by Xerox in 1997 against Palm, Inc. and its former parent, 3Com.

Lehman increases palmOne etimates for May Quarter and full year estimates given an improving Treo outlook. The May Quarter estimate goes to $0.13/$255 million from $0.10/$250 partially on solid handheld demand and largely on lower taxes; full year goes to $0.66/$1.14 billion from $0.28/$1.08 billion. According to firm, Treo component constraints appear set to abate this summer. As carrier checks suggest low channel inventories, firm believes reordering from AT&T, Sprint, and Cingular is likely. Two additional catalysts that would likely spur additional demand would be a Verizon launch this summer and a BlackBerry Treo this fall. While component challenges may limit May Quarter upside, Treo strength should offset August seasonality and allow PalmOne to lift 2005 guidance of 15% sales growth.

Telecom . . . Bear Stearns upgrades Nextel to Outperform from Peer Perform based on valuation, as they think the stock is cheap at 10.9x their 2005 EPS estimate of $2.08, or 16.0x fully taxed EPS of $1.42. Firm also expects continued solid execution in 2004, and believes that while FCC and technology issues are significant, the stock is now discounting a worst-case scenario; firm finds it unlikely that NXTL would agree to a resolution to the spectrum swap which destroys value, and they also believe it increasingly likely that NXTL will build Flarion rather than a more expensive CDMA overlay. Target is $30.

Prudential comments that Sprint Corp. lowered pricing for its push-to-talk "Ready Link" service to $10 per month from $15 per month along with the first two months free with a one-year agreement. The company also announced plans to introduce a new push-to-talk handset priced significantly less than a comparable handset from Verizon Wireless and Nextel, $69.99 vs. $199.99 and $149.99, respectively. With 275k "Ready Link" customers to date since the service launch in November 2003, Sprint is looking to drive additional demand and gain traction for the service, in firm's opinion.

Verizon announced an agreement late Friday to sell its 707K access lines in Hawaii to The Carlyle Group, a private equity firm. The $1.65B sale also includes the services and assets of Verizon Long Distance, Verizon Online, and Verizon Information Services (directory publishing). The company's wireless assets and operations in Hawaii are not included in the sale. Verizon had been exploring the sale of its Hawaiian operations in order to shed non-strategic assets as it pursues higher growth opportunities, particularly in its wireless and broadband businesses. Verizon will likely use the proceeds to continue its debt reduction efforts. Verizon Hawaii has approximatley $125 million of outstanding debt coming due in 2005, and $300M coming due in 2006. The transaction equates to a per line valuation of approximately $2,300, lower than the approximate $3,300 Verizon received for access lines sold to ALLTEL and CenturyTel in August 2002. However, the prior sale did not include the long distance, Internet, and directory publishing businesses, making comparisons problematic. The transaction is expected to close in 2005 following regulatory approval and is conditional upon the closing of financing commitments obtained by The Carlyle Group. Analysts are leaving 2005 EPS estimate unchanged as lower operating income as a result of the access line sales will likely be offset by reduced interest expense associated with debt reduction. The operations sold produced revenue of $610 million, and normalized operating income of $128 million in 2003.

Guzman & Co is out in defense of Nextel saying that investors should be taking advantage of today's Nextel weakness based on misconstrued reports that FCC Chairman Powell is "against" offering Nextel 1.9 GHz in order to resolve what has become, thanks to major media, a very high profile issue both inside and outside the Beltway. According to the firm, Nextel CEO Tim Donahue, has already drawn a line in the sand, stating that Nextel would not accept 2.1GHz. In firm's opinion, in order for Nextel to accept 2.1 GHz, the FCC would almost have to pay Nextel to take it. In other words, if CEO Donahue reversed himself, he would have to look like a hero to Nextel shareholders. Firm believes that now Nextel will either get 10 MHz of 1.9 GHz at a discount, or they will get 2.1GHz, basically for free. Or Nextel will walk, and that's not what Mr. Powell can afford, especially when it looks obvious that the White House and Mr. Powell want this issue wrapped up ASAP, and probably before the end of this month. With the shares trading at 5.7x 2005E EBITDA and 11.5x 2005E EPS investors should focus on what is probably the best wireless operator in the U.S. with a boat load of contiguous spectrum, a path to wireless broadband and a takeover kicker. Rating remains Outperform, target $40.

Network Equipment . . . Barron's highlights a new threat to US telecom's - the VOIP. Michael Powell, the chairman of the Federal Communications Commission, has heralded it as promising "the most important shift in the entire history of modern communications since the invention of the telephone." That shift will unleash powerful competition, create important players and offer huge opportunities for some company's that hadn't been in the picture, particularly cable-TV operators. And it is already under way. According to the article, there are at least five distinct markets for VOIP-based services. The largest, if least ballyhooed, is carrying long-distance and international calls. It is often cheaper for long-distance company's to transport calls via IP than by circuit-switched networks. MCI, AT&T, Level 3 and other company's carry calls this way. There also is a growing market in corporate VOIP networks. Cisco, Nortel and Avaya this year should sell about $2 billion in IP-based PBX, or public branch exchange, equipment that lets company's move voice calls over their own data networks, saving considerable sums on telecom bills while providing a variety of new features. Skype dominates the PC-to-PC category. Thanks to a huge spate of publicity, more than 12 million people have downloaded the free Skype software; thousands use it to make free calls to other Skype users. And Skype plans to sell a version for Internet-enabled hand-held devices. VoiceGlo, a unit of TheGlobe.com offers a Web-based service that connects with the public network for as little as $3.99 a month, plus a per-minute charge. Also, consumers can use instant-messaging software such as Yahoo! Messenger, Microsoft's MSN Messenger and ICQ, to have a voice "chat" from PC to PC. They also can use those services to make calls from a PC to any phone, via service providers like Net2Phone and DeltaThree. Other stocks mentioned positively in article include Time Warner, Cox Communications, Comcast and Qwest Communications.

While the Barron's cover story discusses VOIP plays, which could benefit as the usage of the technology spreads, a separate article highlights problems with VOIP setup. The first problem is that VOIP requires broadband Internet access, via DSL or cable. About 22 million American households now have broadband access; the total will hit 47 million by the end of 2007, according to AT&T. Also, VOIP users must do a little installation work. Sign up, and the co sends a modem-sized black box called a telephone adapter. Insert it into home network configuration, between modem and router, or, if there's no network, simply between the PC and the modem. This should be a snap, but, according to the article, it isn't. The journalist had the same painful experience with both Vonage and AT&T: He spent a half-day on the phone with the co call center, trying to troubleshoot connection to get the phone working while keeping regular Internet connection running. There was a similar experience setting up CallVantage service. According to the article TheGlobe.com service is cheap, but the quality is spotty at best. Also, attempts to use the service through the computer-network firewall failed. Calls based on instant-messaging software, which don't use regular phones or phone numbers, tend to be of the lowest quality. But they're also free.

W.R. Hambrecht states that it appears that the majority of telecom equipment vendors are increasingly reaping the benefits of a sustained multifaceted industry turnaround. Firm believes that both carrier and enterprise spending have reached an inflection point, driven primarily by renewed demand for bandwidth and new services. Firm expects accelerating demand for new services will offer significant growth opportunities for communications technology vendors. Some of the prevailing demand trends that will drive investments include: strong operational performance; stocks that have underperformed the broader market; carrier spending forecast suggesting continued growth; broadband subscriber trends and spending drivers. Firm's top pick, which they feel best leverages these trends and is poised to show upside to their 2004 estimates, is ADTRAN. The three companies which they feel are uniquely positioned to show substantial growth throughout the remainder of 2004 are F5 Networks in the traffic management market, Ixia in the IP network test and measurement market, and Netopia in the DSL and WLAN market. Firm would be aggressive buyers of these stocks.

Oppenheimer out positive on Arris Group following positive Barron's cover story on VoIP. The article's theme is that the cable operators will be successful in the rollout of VoIP service and that the net losers will be the RBOCs. According to the firm, Arris is currently the second largest supplier of Cable Modem Termination Systems (CMTS) and one of the largest provider of VoIP customer premise equipment (modems) to the cable operators. ARRIS' VoIP customers include Charter, Comcast, Cox, and Time Warner. Since the beginning of the year, ARRIS shares have experienced a significant pullback. Currently trading at less than 1x sales and 12.6x FY05E EPS of $0.38, they believe that ARRIS' shares offer good value. Firm's tgt price is $11.

UBS cuts their targets on Adtran, Cisco, Corning, Harmonic, Juniper, Lucent, Nortel, and Scientific Atlanta. The firm says that with most major US and European telcos having reported 1st quarter results, they conclude global capex growth is likely to slow in 2nd half 2004 through 2005. Also, several equipment vendors either have begun or will commence growing expense levels commensurate with revs, and they do not expect vendors to generate the same level of margin and EPS growth that they achieved moving out of the downturn; in addition, firm says there is a high probability that stock option expensing becomes mandatory in 2005.

Thomas Weisel believes the pieces are falling into place for Scientific-Atlanta to convince investors that robust growth for SFA is probable. The firm sees five growth drivers: 1) DVR/HD upgrade cycle, 2) overlay opportunities, 3) international deployments, 4) transmission upgrade cycle, and 5) future telco opportunities. Underpinning the firm's positive stance is our belief that the value of SFA's 40% ownership of the US cable network -- via its PowerKey proprietary conditional access -- has gone up sharply in light of the two fundamental transformational technologies taking place in the cable/television market right now - DVR and HD.

Barron's highlights Nokia, which saw its shares fall by 45% in the past two months, following laggard 1st quarter results and a 2nd quarter earnings warning. According to the article, Nokia might be a buy as value investors take a second look at the co, which has a net cash position of about €11 billion, about a fifth of its market cap. Undoubtedly, the handset king has some serious problems, like dull cellphones. But a company with Nokia's resources and track record should be able to recover inside a year. With the unveiling of some 30 new models in 2004, Nokia should be able to claw back some market share, or at least stem the losses. Nokia also happens to sell lots of mobile-network infrastructure equipment, a business that's doing well now that many telecom operators have gotten their acts together. Spending on both maintenance of current "2G" systems and upgrades to "3G" equipment is likely to continue rising smartly, and Nokia showed a 16% rise in 1st quarter network sales. Some believe this business could account for 25% of profits by 2006. Currently, Nokia sells at a P/E ratio of just under 13x consensus 2005 estimates of $1. Still, Motorola trades at a much pricier 21x 2005 forecasts.

Lucent will acquire Telica, privately held voice over I.P. systems provider for approx. $295 million in stock and options, plus additional employee-related cash payments. LU will exchange 92.7 million shares of common stock and options for all of Telica's equity, deal expected to close in 4th quarter 2004. Lucent also expects acquisition to be dilutive to 2005 EPS by approximately $0.01-0.02 and "neutral to slightly accretive in fiscal 2006".

Boxmakers . . . The NY Times highlights interview with Michael S. Dell, the 39-year-old founder and CEO of the fleet front-runner among personal computer makers. Mr. Dell said "The biggest mistake I've made, was not getting into printers sooner." But according to the article, lately, Dell Inc. has been making up for lost time. Since it started selling Dell-branded printers a little over a year ago, shipments have risen at an encouragingly rapid pace. Mr. Dell predicts "tremendous growth" for his company's computer printer business over the next 5 to 10 years and vows to change the economics of the industry. Tomorrow, Dell plans to announce that it will begin selling printers for the corporate and home market that it claims will reduce the cost of some printing jobs by 30 percent or more.

Needham upgrades Gateway to Hold from Underperform, saying the stock is reasonably priced at its current level; firm also thinks that it's likely that the company will soon announce distribution agreements with a number of major retail chains for Gateway-branded PCs and possibly consumer electronics products; and while they question whether these deals will translate into a meaningful profit opportunity, they say the market is likely to bid the stock up in response.

Semiconductors . . . Two companies that dominate the lucrative market for memory chips used in digital cameras and music players are slashing prices to stoke demand and undermine emerging rivals, industry officials and analysts said. The move by Samsung Electronics Co Ltd and Toshiba Corp is a bonanza for consumers snapping up flash memory devices in increasing numbers and sets the stage for a fierce battle in the most profitable part of the memory industry. Industry experts said Samsung and Japan's Toshiba are taking a pre-emptive strike against companies including Infineon Technologies AG, Hynix Semiconductor Inc and Micron Technology Inc that are trying to break the virtual duopoly.

Barron's highlights Applied Micro Circuit, which traded back in 2000 at a market value of $29 billion, a modest 230x earnings, 66x sales and 24x tangible book. These days, the stock can be had for a bit less, $4.60, and the market cap is a somewhat more sober $1.4 billion, or 1.6x tangible book. Last fiscal year on sales of $131 million, the company lost $105 million. But after 12 quarters of red ink, the company is expected to break into the black this quarter. And for all of this FY on projected revs of $310 mln-$320 million, the co is expected to earn something around a nickel a share. Moreover, even after several synergistic acquisitions that nicely expanded the company's scope and customer list, Applied Micro still boasts a slug of cash, roughly $1.50 a share, and not a cent of long-term debt. Which is no small reason why even in the darkest days of the telecom collapse, the company was able to spend mightily on R&D. Last Fiscal Year it laid out a whopping $112 million for R&D, or 85% of sales. According to the article, the business is back on the upswing. In the 4th quarter revenues jumped 24% sequentially, 136% yoy. Backlog climbed 30%, and the co announced a slew of design wins from key customers. Scott Black, who runs Boston-based Delphi Management, can't resist buying a first-rate tech outfit at 1.6x book and 3x cash. He believes all that R&D spending is about to pay off and reckons Applied Micro may well do better than the Street anticipates. He pegs net at 5 cents to 8 cents a share for March '05, and 25 cents to 28 cents for March '06 and sees the stock as an easy double in a year or so.

JMP Securities believes Gartner's PC upgrade data and trend towards 64-bit computing favors AMD, Intel and Micron. The firm recommends to buy these names in anticipation of a seasonal 2nd half 2004 and secular, strong PC, corporate and consumer upgrade cycle for the next two years.

Software . . . Morgan Stanley upgrades Peoplesoft to Overweight from Equal-Weight, as the company is beginning to see some early signs of improvement in its pipeline, particularly in its mid-market product lines and in the public sector for the Enterprise product line; also, firm thinks that customer uncertainty over product release schedules, the Oracle bid, and the major pain of the sales force reorganization is predominantly behind the company. Target is $21.

Deutsche Bank out positive on Activision saying Shrek 2's box office popularity bodes well for the company. The theatrical release Shrek 2 blew away box-office expectations this past weekend, pulling in roughly $125.3 million in ticket sales in its first five days of release across N. America, according to DreamWorks. Shrek 2's opening performance sets a new record for 5-day box office sales, topping last year's Lord of the Rings: Return of the King, which pulled in $124.1 million in its first weekend. The firm is modeling 1.5 million units for the video game, yet the early results from the film should help push through the game into the hands of consumers. The title has moved up on several key top-seller lists, including Amazon.com's PS2 top-seller list (#4 as of Sunday night). Firm is reiterating their Buy rating and 19 target.

Barron's highlights Symantec, which has seen its stock quadruple since 9/11. While security software and hardware has been a veritable haven during the corporate tech-spending drought, it's possible that the trend could be cooling off. At least, that is the conclusion of information-security analyst Kevin Trosian of Wedbush. In a refreshingly independent and thorough study of the industry, Mr Trosian initiated his coverage of the sector with a Neutral weighting, or Hold, compared to the rest of technology. While Trosian isn't saying that the sector will dry up and go away, the brokerage analyst is betting that its growth rate will be lower than what most of his peers are forecasting. He is predicting compound annual growth of about 15% through 2007. International Data Corp. expects around 18%. Simply put, most brokerage analysts plug IDC's market forecasts into their models, which in this case could inflate their valuations, Mr Trosian argues. "We believe IDC's market estimates are skewed. Based on our review of their ests, which many of our competitors take as gospel, we believe that IDC consistently overestimates the rate of growth in most areas of security spending," Trosian charges. But Trosian contends that technology buyers at big companies are going to buy more "internal" security products.

Mercury Interactive upped to Buy from Hold at Wells Fargo and a target of $60. The firm recognizes that there has recently been overall market weakness, particularly in high-beta technology stocks. However, firm is making a fundamental call on the stock and believes recent weakness presents a buying opportunity. Firm notes that it has a high degree of confidence in its estimates, which are at the high end of management's forecast range.

The U.S. Court of Appeals for the Ninth Circuit denied Microsoft's petition for interlocutory appeal in its ongoing trademark litigation against Lindows, Inc. The denial of MSFT's appeal sets trial on a timetable to take place in 2nd half 2004 in Seattle, WA with the Honorable Judge Coughenour presiding; the trial is expected to last approx two weeks with each side having one week to present its case. Witnesses already designated to testify include Bill Gates, Steve Ballmer and Lindows, Inc. CEO Michael Robertson.

BEA Systems announces additional $200 million buyback.

Thomas Weisel says that, given its recent checks around the health of Tibco's business, it expects the co to report a solid May Quarter. The firm believes the co will hit the mid to high end of revenue guidance. The firm continues to believe a pickup in high-end integrations projects is benefiting Tibco. The firm is hearing that business remains healthy for Tibco and expects the co to close a few $2-$3mn deals which are typically required to make the quarter.

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