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U.S. stocks rose after a government report on jobs and a sales forecast from Intel signaled that companies stand to benefit from sustained growth in the economy and profits. The S&P 500 Index had its first back-to-back weekly advance in three months. The S&P 500 rose 5 points (+0.5%) to 1122. The Nasdaq climbed 18 points (+0.9%) to 1978 and the DJIA added 46 points (+0.5%) to 10,242. For the week, the S&P 500 rose 0.2 percent, notching consecutive weekly gains for the first time since March 5. The Dow average gained 0.5 percent and the Nasdaq fell 0.4 percent. Almost two stocks advanced for every one that declined on the New York Stock Exchange. Some 1.1 billion shares changed hands on the Big Board, making it the slowest trading day since April 12 and 23 percent less than the three-month daily average. Benchmark indexes pared their gains in the final 30 minutes of trading. The Nasdaq climbed as much as 1.8 percent before giving back almost half of its advance.

Strong Sectors: gold, semiconductor, airline, internet, internet, electronic manuf service, lodging, brokerage, consumer finance
Weak Sectors: appliance, footwear

Top Stories . . . U.S. employers added 248,000 workers to payrolls in May, more than forecast, helped by the biggest gain in manufacturing employment in almost six years. The economy has now recouped all the jobs lost since the recession ended in November 2001. The unemployment rate held at 5.6 percent.

U.S. Treasury notes fell after the economy created more jobs than forecast last month, raising speculation the Federal Reserve may have to raise its key interest rate at a faster pace than traders expected.

Computer Associates International Inc. said former Chief Executive Sanjay Kumar will leave the company.

Home Depot agreed to buy as many as 24 stores for about $365 million from Kmart Holding Corp., which closed locations to exit from bankruptcy last year.

Nestle SA, the world's largest foodmaker, is considering a bid for General Mills Inc. to add brands such as Cheerios cereal and Betty Crocker dessert mixes, people familiar with the matter said.

Maytag, the No. 3 U.S. maker of household appliances, said it will fire 1,100 employees and earn less than forecast because sales of Hoover vacuums and Maytag washers are lagging. The company's shares fell 7.7 percent.

Quotes of Note . . . ``The stars are aligned for a nice second half.'' The better-than-expected employment figures, which included the biggest gain in manufacturing jobs in almost six years, underscore the economy's strength, and Intel's statement ``last night was quite bullish.''Philip Orlando, who manages the $300 million Federated Large Cap Growth Fund in New York. Orlando predicts the S&P 500 will end the year at 1200, an increase of 7.9 percent for the year. The index is up 1 percent in 2004.

Eco Speak . . . The nation's unemployment rate remained at 5.6 percent while the participation rate remained at 65.9 percent. Economists were expecting payroll growth of about 220,000. The jobless rate was expected to stay at 5.6 percent. Reaction in financial markets was muted. Bond prices dipped, pushing the yield on the benchmark 10-year note up to 4.73 percent. In the past three months, the economy has created 947,000 jobs, the best three-month gain since the summer of 2000. Payroll growth in April and March was revised higher by a total of 74,000 jobs. So far in 2004, the recovery has seen the creation of about 1.2 million jobs, or an average of 238,000 a month, after shedding 2.7 million between March 2001 and August 2003.

According to a survey of 400,000 business establishments, job growth was widespread across industries. Over the past three months, 75.4 percent of 278 industries have added workers. The average workweek stayed at 33.8 hours for the fifth month in a row in May. Total hours worked in the economy increased by 0.3 percent. Average hourly pay rose 5 cents or 0.3 percent to $15.64. Real wages are up 2.2 percent in the past year. Goods-producing industries added 72,000 jobs in May, including 32,000 in manufacturing, the fourth increase in a row. Construction added 37,000 jobs. The factory workweek increased by 0.4 hours to 41.1 hours, while factory overtime rose by 0.1 hours to 4.7 hours. In manufacturing, 70.2 percent of 84 industries have added workers over the past three months. In May, durable-goods manufacturers added 26,000 jobs. Services-producing industries added 176,000 payroll jobs, including 19,000 in retail and 36,000 in health care. About half of the 64,000 jobs added in professional and business services were temporary help positions. In the separate survey of 60,000 households, the Labor Department found employment rose by 196,000 while the work force increased by 233,000, leaving 39,000 more people listed as unemployed. A total of 8.2 million Americans were unable to find work in May. The jobless rate ticked higher for teenagers, whites, men and blacks and fell for women and Hispanics. Of the 8.2 million jobless Americans, 1.79 million had been out of work longer than six months. The average duration of unemployment rose to 20 weeks from 19.7 weeks, while the median duration rose to 10 weeks from 9.5.

Financials . . . Barron's Online highlights Sovereign Bancorp, which stock has been under pressure recently as takeover rumors haven't materialized. According to the article, Sovereign's stock appears to be undervalued, even in a rising rate environment. The company's low-cost deposit base means it may avoid the margin compression that some of its peers could face from rising interest rates. And the bank should pick up frustrated customers of banks involved in mega-mergers. "I am impressed with what Jay [Sidhu, Sovereign's CEO since 1989,] and his team have done the last couple of years," says Frank Barkocy, a portfolio manager with Keefe Managers, a bank hedge fund which holds Sovereign stock. Two acquisitions announced this year should boost growth: a $1.1 bln takeover of Seacoast Financial Services and a $980 mln deal for Waypoint Financial. This comes on top of the 27 acquisitions the co has completed since Mr Sidhu became CEO. Because investors are wary about unexpected pitfalls that arise in acquisitions, the successful integration of these two banks could help Sovereign stock, notes Anton Schutz, a portfolio manager with Mendon Capital Advisors, a Sovereign shareholder. The article suggests the stock, which is roughly 15% below its 52-week high, looks cheap too. Sovereign's P/E growth ratio is just slightly ahead of its expected long-term growth rate and the stock is trading at only 1.7x book value, below the S&P Diversified Banks Index book value of 2.5x.

UBS believes that market concerns about Freddie Mac missing its self-imposed June 30 deadline for its 2003 earnings release are misplaced. The firm has spoken to mgmt twice in the last few weeks and they have reiterated that the co is on track to release the information by June 30. The firm believes that the 2003 earnings release will be the first of several positive catalysts. In addition, the co should benefit from expected board turnover, increased visibility into the timing of 2004 earnings, and improved portfolio growth in 2004 as rising rates make it less attractive for banks to portfolio MBS. Although the 2003 release would represent a major milestone, a few others remain including becoming fully current by early to mid-2005 and becoming an SEC registrant later that year. Further, the ongoing audit at Fannie Mae by its regulator, OFHEO, could result in some negative headline risk for both GSEs over the rest of this year.

The WSJ's "Heard on the Street" column discusses Chicago Mercantile Exchange Holdings, which saw its stock to triple following its 2002 Dec IPO. According to the article, today the stock's free float may jump significantly as IPO lockup ends. The members who got stock in the IPO in Dec 2002 can sell many of those shares for the first time. The lockup date has caused jitters among Wall Street analysts and some members of the Merc, as the commodity exchange is known, who increasingly wonder whether the highflying CME shares are due for a correction, spurred by profit taking and the flood of newly tradable stock. Last month, analysts at Bear, Stearns downgraded CME. This week, Merrill Lynch analyst Colin Clark followed suit, bumping CME from a Buy rating to Neutral, prompting one of the sharpest daily selloffs in the 18 months or so that CME has been a public co.

Diversified . . . Moody's Investors Service raised its long- and short-term debt ratings on Tyco International to investment grade, citing the company's lower debt and improving profit margins. Last week, Bermuda-based Tyco said it would take steps over the next several quarters to pay off debt that piled on during the reign of former Chief Executive Dennis Kozlowski and to contribute more to its pension plan.

Oil & Gas . . . Goldman Sachs believes investors should buy Schlumberger in front of the June 15th analyst meeting. The firm remains bullish on the cycle + Goldman's recent survey work suggests E&P spending will rise 10%+ in 2004 vs +6-7% previously, suggesting potential upside to consensus EPS for select oil service companies including SLB. Goldman notes that SLB is -12% (OSX -9%) over the last several weeks. The firm's $72 fair value estimate implies about 30% upside potential.

Transports . . . UBS says that if Harley-Davidson has no price increase, this could be offset by upside in margins. Recent comments that keeping prices low will broaden HDI's customer base leads the firm to believe that it may not see a typical increase in model year '05, which starts next month. However, there is room for margin improvement to offset that potential impact to earnings. Dealer comments were positive in conveying low inventory, as they typically are, but supporting that color: the firm found no financing incentives -- good news given the same time last year Harley used financing incentives for the first time.

Imaging . . . JP Morgan says that after their meeting with Eastman Kodak management, they say the co appears to be executing to plan, and the transition to digital may even be ahead of plan; firm says the main take-away is that the digital biz appears to be growing at a faster pace than the 26% CAGR co target; co continues to gain market share, and investors should expect the rate of production introductions to increase in 2H04. Also, the company's acquisition strategy appears to be unchanged: focus is on health imaging and commercial printing (firm believes that Agfa, which is reportedly seeking strategic alternatives, and Lexar Media, whose partnership was announced May 17, are improbable acquisition targets). Separately, firm also thinks that Agfa's apparent distress may help EK win market share in the declining film biz, enhancing its cost structure. Reiterates Neutral rating.

Food & Beverage . . . Bloomberg reports that Nestle, the world's largest foodmaker, is considering a bid for General Mills to add brands such as Cheerios cereal and Betty Crocker dessert mixes, people familiar with the matter said. " Nestle has yet to approach General Mills and no agreement is imminent, one person familiar with Nestle's plans said. General Mills, with a market value of $17.2 billion, may fetch as much as $22 billion based on the average 26 percent premium acquirers paid for food companies in the past five years, according to data compiled by Bloomberg.

Defense & Aerospace . . . TASER received a follow-on order of 450 more TASER X26 conducted energy weapons plus accessories from the Las Vegas Metropolitan Police Dept. The total value of the purchase order is over $450k.

Retail . . . Banc of America upgrades Albertson's to Neutral from Sell and raises their target to $23 from $19. They believe that the risk/reward profile is now balanced given favorable macro trends and that co-specific execution issues are tempered. The firms says the company remains positioned to benefit from positive broader economic trends, newly restructured labor agreements, supply chain mgmt, cost savings, and Shaw's synergy savings. However, these positive factors are mitigated by weak traffic trends in the broader business, California sales pressure, stand-alone drug-retailing exposure, and execution risk associated with integration and multiple initiatives.

bebe stores target raised to $29 from $27 at Sanders Morris Harris after strong comps, raised guidance.

Jefferies downgrades Bed Bath & Beyond to Hold from Buy and cuts their target to $34-$42 from $48; firm cites the following factors: 1) their negative view of the sector and resultant reduction in valuation yardsticks, 2) their slightly reduced 3-5 year growth rate forecast (now 18%, down from 19%), and 3) valuation.

CSFB believes Federated has by far the most sales and profit momentum of the traditional department stores in firm's universe. Price target is $55.

UBS raises its target on Kmart to $70 from $54, reflecting a first look at 2005 as well as higher confidence that cash will be not be primarily used for reinvestment in infrastructure. The firm's favored scenario is using the cash to buy other assets to use the tax losses. Firm says "This Is Not Your Grandmother's Kmart": While there are positive signs of improving apparel sourcing and offerings and the possibility of a better fall circular schedule, the firm sees the asset play as more compelling than a long term retail turnaround vs. WMT. The firm notes that the investor base is highly concentrated. The float is less than 30% there is a large short interest. To the extent that Kmart can surprise on EBITDA generation, these factors could provide added momentum to the stock.

CSFB raises their 2004-05 EPS estimates at Gap Stores slightly above consensus and raises their target to $27 from $23 based on above-plan merchandise margins, which are significantly above last year and are driven by greater full price selling and higher markdown margins. Firm maintains their Neutral rating, but believes that GPS represents a near-term trading opportunity based on their belief that: 1) 2nd quarter 2004 EPS will exceed consensus of $0.28, 2) their 2nd half 2004 comp estimates of +1-3% may prove too conservative, and 3) their belief that 1Q04 record gross margin could portend stronger 2nd half 2004 gross margins than their est of a 200 bps increase.

Kmart has signed definitive agreements with The Home Depot, Inc., to sell up to 24 stores for a maximum purchase price of $365 million in cash. The exact number of stores, locations, and total purchase amount will be determined based upon the satisfaction of certain conditions to occur within the next 60 days. Assuming that the conditions for the transfer of the stores are satisfied, it is expected that such Kmart stores will be converted to Home Depot stores as quickly as possible after delivery to Home Depot.

The WSJ highlights Speedo's new high-tech swimsuits, which got attention at the Sydney Games. They cover the shoulders, arms, legs and sometimes the entire body in a synthetic material that glides better in water than human skin. Companies that make the suits say they make swimmers faster. Suits were huge success to the co. Now, swimwear maker Speedo plans to discontinue the original Fastskin suit that wowed Olympic crowds 4 years ago and replace it with a new, even-sleeker model, the Fastskin FSII. Speedo has been testing and refining the suit in the races leading up to the U.S. Olympic trials next month, and it is expected to be highly visible at the Summer Games in Athens in August. Scheduled to hit retail stores at about the same time and priced at $200 to $400, the FSII illustrates how far the swimsuit industry has pushed itself in just 4 years. Full-body swimsuits now can be found at almost every type of swim meet in every age group, from eight-year-olds to adults. Speedo says the suits are worth the price. "As you know...youth sports these days aren't cheap, and we feel that, given the research and development and technical advances on the product, the price is fair," says Craig Brommers, vice president of North American marketing for Speedo at licensee Warnaco (WRNC) "If anything," he adds, "competitive swimmers are excited to see just how fast they can go, and that's made the sport more exciting."

While the consumer electronics marketplace is competitive, we believe unit demand and traffic trends remain solid, and Best Buy is still capturing market share. The company has embarked on its transformational customer centricity program to manage the business as a portfolio of customers instead of a portfolio of products, empowering store level employees with additional capabilities to direct resource investment towards its most profitable consumers. BBY should be able to continue to capitalize on the strong digital product cycle in the future through its diversified distribution channels (Best Buy – 619

stores, Best Buy Canada – 19 stores, Future Shop – 109 stores, Magnolia Audio Video – 22 stores at the end of fiscal 1st quarter 2005). The company continues to maintain a solid balance sheet, with $2.60 billion in cash and a 19.9% debt-to-capital ratio as of the end of fiscal 2004. Analyst are pleased that the company has initiated a $0.40 annual dividend and has begun repurchasing shares, as we believe strong retail operators that generate solid cash flow have the ability to return value to shareholders in the form of cash dividends, while continuing to grow the business. Sales momentum should remain solid as the company balances investment in its customer centricity initiatives without sacrificing excessive margin. Analysts are raising 1st quarter 2005 estimate by a penny to $0.33 vs. $0.21 last year due to the better than expected total top line result during the quarter. Analysts are also raising 2005 and 2006 estimates by $0.01 to $2.87 (vs. $2.44 in 2004) and $3.30, respectively, to reflect our increased 1st quarter 2005 estimate. Assuming BBY trades above its current 2005 P/E multiple of 18.1x to the mid-19x range (a level the company has attained as recently as the end of April), we arrive at our 2004 yearend price target of $65, based on 2006 EPS estimate of $3.30.

Healthcare . . . Goldman Sachs initiates coverage of WebMD with an In-Line rating; firm says that HLTH represents a rich portfolio of company's (ex-Porex) with exposure to the evolving connectivity mkt. If healthcare follows other industries and looks to technology as a tool to increase efficiency, firm thinks HLTH is well-positioned. In the meantime, firm says that execution challenges, including HIPAA implementation, modest organic growth, and the uncertainty associated with future acquisitions yield a more modest near-term view.

Drugs . . . Teva Pharma was up 47% in 2003 and up 15% YTD in 2004 vs. the generic industry on average up 67% in 2003 and down on average 12% YTD. Teva has a market capitalization of $20.0 billion as the bellwether name in the group. Although the company will have stellar returns in 2004 and perhaps even 2005, the stock could be impacted, resulting in a better entry point, as the market begins to focus on Biogen Idec/Elan’s Antegren, which could be approved by year-end if priority review is granted (BLA filing announced May 25, 2004 and pivotal trial results expected in the fall). Analysts anticipate Teva to report particularly strong revenue and earnings growth in 2004, estimated up 41% and 27%, respectively which puts the company well on its way in achieving its strategic goal of doubling revenues every four years (19% CAGR) and net income in even shorter periods of time (includes organic and inorganic growth). Teva is the

world’s leading manufacturer and marketer of generic drugs both in terms of revenues and global reach—it is also ranked 18th among the world’s top pharmaceutical companies (as of 2003; IMS Health NPA Data) excluding the benefit from the January 22nd close of the Sicor acquisition. Over the last five years, Teva has spent over $820 million in gross R&D ($672 million, net). Teva’s scale advantage and commitment to generics is a competitive advantage (with customers)

which should result in further expansion of its industry leading market share, and should allow it to outgrow a generic drug industry which is already enjoying several positive secular trends (rising utilizations, positive pricing, patents expiring and successful paragraph IV challenges). Unlike many generic companies, who end up ‘di-worsifing’ by attempting to expand into the branded pharmaceutical business broadly, management continues to focus and build further

on its core strengths—leadership in the worldwide generic drug industry with only a niche proprietary focus—a strategy and commitment which we find attractive. Top-line organic growth of +41% to $4.6B will be driven by the combination of the industry’s largest portfolio of

Abbreviated New Drug Applications (ANDAs), ~109 ANDAs which include an eye-popping 57 paragraph IV challenges targeting brand sales of $67 billion and continued contribution from Copaxone, Teva’s proprietary therapeutic indicated for the reduction of relapses in relapsing-remitting multiple sclerosis (MS). The company believes that it has claims to sole/shared 180-day Hatch-Waxman generic exclusivity for 18 products targeting $15 billion in brand sales. A several year expansion in gross profit margins, driven by higher margin new generics is expected to expand corporate margins contributing to bottom-line growth exceeding top-line growth. Historically, Teva has also grown externally through smart acquisitions (Novopharm, Copley and most recently Sicor on January 22nd) and a litany of strategic alliances (Eisai, Impax Labs, Andrx, Aventis, Lundbeck, Savient, Biovail, etc.), a strategy which will likely add to further bottom-line and top-line growth. The acquisition of Sicor makes obvious strategic sense allowing Teva to expand into the injectable generic market as well as develop a platform for generic biologics. Additionally, from a financial perspective, the acquisition will address the dramatic fall in asset turnover ratio over the last five-to-ten years due in a large part to rising cash balances (increasing convertible debenture financing as well as accelerating operating cash flow). Importantly, strength in the base business plus the accretion from Sicor should allow Teva to continue to generate returns of 25-27% and above previous peaks (24% return on equity in 1993-1994).

Biotech . . . The WSJ reports that Carl Icahn, who has made big gains in ImClone stock by buying when it was out of favor, said he sold 897,805 shares of ImClone Wednesday and yesterday, reducing his stake in the co to 4.29 million shares, or 5.6% of its stock, from 6.8%. Wall Street waits impatiently for new studies to be presented this weekend on ImClone Systems' cancer drug Erbitux. Despite yesterday's decline, the shares have risen about 70% from their price of $42.99 on March 1. Some analysts expect the surge to continue after results are reported on studies of Erbitux at the annual meeting of the American Society of Clinical Oncology medicine's largest meeting on scientific advances in cancer.

Biogen Idec and Elan submit Marketing Authorisation Application (M.A.A.) to European Medicines Agency for approval of ANTEGREN (natalizumab) as a treatment for multiple sclerosis (M.S.). Submission includes one-year data from two ongoing Phase III trials but in order to protect the integrity of the trials, BIIB and ELN are not disclosing the one-year data at this time.

Medical Devices . . . Lehman says that given the recent problems with Guidant's drug eluting stent program, the 26% decline in the stock from its 52-week high, and the very recent retirement announcement by GDT's CEO. They feel that a number of company's may have an interest in GDT given the value of its CRM franchise and the value of its vascular biz (most importantly its vascular sales force, engineers, and patents). Among its potential suitors, firm believes that JNJ buying GDT would make good strategic and financial sense, and that a deal would not likely violate antitrust issues in the US or Europe. While firm is not suggesting that a deal is being contemplated, they believe that at a minimum there should be solid downside protection for GDT shareholders below current levels, and that long-term investors should be well-rewarded despite the tough near-term prospects. Maintains Overweight rating and $65 target.

Media . . . Viacom Chairman and Chief Executive Sumner Redstone shot down speculation that his company might seek to acquire Electronic Arts saying it would be too expensive. But industry observers said that aside from the barrier of price -- potentially $20 billion or more -- EA could be a good fit for Viacom or another media conglomerate.

U.S. House of Representatives panel approved a measure Thursday requiring Echostar and Direct TV to put local broadcast channels on a single satellite dish instead of two dishes within a year to ensure that satellite customers get local stations where they are available. In markets where satellite operators begin offering local broadcast stations, the bill gives subscribers 60 days to decide whether they want that service or prefer to continue receiving the signal of a distant broadcast network.

IT Services . . . IBM is still eyeing German IT service firms after its bid to buy ThyssenKrupp's IT arm failed, a German newspaper reported on Friday. "It is to be assumed that IBM will participate actively in the consolidation of the IT services market in Germany," the German head of IBM's Global Services unit was quoted as saying in an interview with business daily Handelsblatt. -- Reuters

Storage . . . First Albany upgrades EMC to Buy from Neutral based on valuation, as the stock is down 30% from recent Jan highs and is down 16% since reporting 1st quarter results in April, even though estimates have increased slightly during each of those periods. Firm says near-term catalysts include next week's analyst day and the ramp of the AX-100; in the longer-term, firm thinks SG&A leverage should improve relative to current expectations. Target is $13.50.

EMS. . . Morgan Stanley notes that Flextronics said in last night's mid-qtr conference call that mgmt indicated that consensus calendar 2nd half 2004 rev/EPS estimates seem too low given business conditions. The firm maintains their 2005 EPS estimate (25% above consensus), and expects consensus estimates to continue to increase. For 2nd quarter, firm expects EPS of $0.16 versus the consensus of $0.14, and they believe the vertical components of FLEX's business could provide upside to their $0.90 2005 EPS est. Firm expects a return to normal operating margin of 10-15% in PCB fabrication by the Sept qtr, and they think that peak margin could approach 20%; also, PCB fab pricing continues to trend higher, and mgmt indicated that the co may be gaining market share. Finally, firm expects a return to normal levels of account receivables securitization (throughout 2005), following a $130 million decline in 4th quarter, which should more than offset some modest inventory build.

Semiconductors . . . Intel's flash-memory chip unit, a business that has posted sales declines for five straight quarters, is helping propel revenue gains this period as sales growth in desktop computers slows. CFO Andy Bryant's comments that the company is regaining market share in flash-memory and that personal computer and laptop chip sales are "on track," allayed investors' concerns about waning chip demand. The Philadelphia Semiconductor Index, which includes Intel and 17 other chip-related stocks, had declined 5.1 percent this week.

Intel in its mid-quarter update tightened its 2nd quarter 2004 revenue guidance to $8.0-$8.2bn (mid-pt. at $8.1bn, flat Quarter over Quarter), to the high end of the prior guidance range of $7.6-$8.2bn (mid-pt. at $7.9 billion, down 2.4% Quarter over Quarter). The mid-point of the

new guidance was above prior estimate of $8.0 billion and consensus estimate of $7.98 billion. Gross margin guidance was tightened to 60%-61%, from 60%+/-2% previously. The higher revenue guidance was attributed predominantly to better than expected flash revenues. Intel is clearly gaining market share in NOR flash, through its strategy of re-engaging in the broader markets, and we suspect it is also seeing a return in orders from handset OEM customers that had switched suppliers in 1st quarter 2003. Expect Intel's market share gain to continue in upcoming quarters. Intel attributed the change in gross margin guidance to the upside in revenues, which were predominantly flash revenues. While this may appear counter-intuitive given substantially lower margins in the flash business, this is clearly an indication of the significant leverage in Intel's flash business, given low capacity utilization rates, leading to high incremental margins vs. average margins. Intel's guidance reflects normal seasonality in PC builds in our view. The market expectations going into the mid-quarter update were largely tempered by weakness in the widely followed Taiwan motherboard data for 2nd quarter 2004. The data, which implied lower than normal seasonality, does not fully reflect the ramp in motherboard shipments by Intel ahead of Grantsdale.

Digitimes reports, citing sources at memory module makers, that starting from June 1, Samsung has begun cutting contract prices for 1Gbit NAND flash by over 15% to about $15-16 per chip. The module makers will suffer a loss from inventories due to Samsung's price cuts, the sources indicated. Samsung's move reflects an ongoing drop in spot prices, which sources attribute to a weaker-than-expected demand and an increase of supply.

Based on firm's checks, Jefferies believes that lead times for Xilinx's PLDs have ceased to extend over the last month. In fact, lead times may have moderated slightly over this period. While this datapoint alone, may not speak to the direction of equipment demand in aggregate, firm says it supports concerns with respect to marginal changes in availability of semiconductors.

Analyst community positive on Intel this morning after the co raised the midpoint of its revenue guidance to $8.1 billion from the previous midpoint of $7.9 billion. Intel said that its microprocessor business is in line with its original expectations and communications revenues were higher than original expectations due to increased demand for flash memory products. AG Edwards out noting that while they had expected that Intel would be able to raise the midpoint of its guidance, they did not expect that with comparable revenues to the first quarter, Intel would be able to increase its gross margin from about 60% in the first quarter. Intel remains their Top Pick with $50 target. Also, Smith Barney out positive saying that given expectations for no change (in light of worse than seasonal desktop weakness), they would expect Intel's revision to re-fuel the recent rally in INTC and the SOX. Although they anticipate typically volatility around earnings season, they continue to look forward to a seasonally driven rally in semiconductor names in 2nd half 2004. About the only somewhat negative note this morning is from JP Morgan. The firm notes that Intel did not say whether its inventory will rise or fall and they remain concerned as inventory has risen to 79 days, the highest level since 1995. Intel's inventory days have reached this level twice in the last 10 years, with gross margins negatively impacted on both occasions. As a result, they are concerned with risk to Intel's utilization rates and therefore gross margins during 2nd half 2004 and 2005. Firm sees the stock as appropriately valued.

Checks indicate Texas Instrument’s 2nd quarter 2004 is tracking in line with expectations as lower than expected wireless revenues are offset by strength in its non-wireless semiconductor products such as high performance analog, catalog DSP, standard logic, DLP, and microcontrollers. We are maintaining our 2nd quarter 2004 revenue and EPS estimates of $3.23 billion (up 10% Quarter over Quarter) and $0.25, in line with consensus. During its mid-quarter update on June 7, expect TI to tighten its 2Q04 guidance around the mid-point of its previously stated range. Expect TI to narrow its revenue guidance from $3.09-$3.33 billion (up 5%-13% Quarter over Quarter) to $3.14-$3.26 billion (up 7%-11% Quarter over Quarter) and its EPS expectations from $0.23-$0.26 to $0.24-$0.25. This implies a 2nd quarter 2004 gross margin of 46%-47%, in line with estimate of 46.5%. Within wireless (28% of revenue), checks indicate sales to Nokia (14% of revenue) remain weak as Nokia continues to lose share. Although we believe TI has been able to offset much of the weakness at Nokia with share gains at Sony Ericsson and LG, increased sales of OMAP and strength in infrastructure, believe the entire handset market could be slightly weaker than expected during 2nd quarter 2004. Outside of the wireless market, sales of high performance analog, catalog DSP, and standard logic (combined approximately 18% of revenue) continue to be bolstered by a firm pricing environment. Checks at Fairchild and ON Semiconductor indicated that commodity analog pricing should increase 5%-10% Quarter over Quarter during 2nd quarter 2004 as industry supply remains constrained and lead times are stretched. Continue to highlight TI as a stock that will outperform in 2nd half 2004. The stock could be flattish in the near-term as the strong 2nd quarter guidance seems to be priced in, and have near term concerns about weakness in the handset market. However, once TI's wireless orders start to improve, we think consensus revenue estimates for 3rd quarter 2004 and 4th quarter 2004 could prove to be conservative.

Software . . . Thomas Weisel says Red Hat's long term potential is there, but expectations are high. The firm believes that Red Hat's business momentum continues to track the pace of Linux adoption as the co retains its market leadership position in the Linux market. However, expectations are running high. The stock is up close to 55% in the last 3 months vs -3% for the Nasdaq. The firm cautions investors that at current valuation levels the stock is already assuming not only execution in Linux server market, but also beginning to factor in some success in the Linux desktop and other Open Source Software markets - something yet to be realized.

Schwab SoundView comments that, as usual, there are plenty of crosscurrents with respect to views on the quarter as well as Oracle's prospects for growth. Firm says its checks have generally been quite positive, and while firm has not heard of any "mega" deals, it believes that the overall volume of business was very good. Currency is likely to be less of a benefit, increasing the risk that Oracle's reported license revenue growth could be less than firm estimated. However, firm remains optimistic that strengthening in the Americas will offset the impact, hence no change to firm's 12% est.

WR Hambrecht initiates coverage of Novell with a Buy rating and $11.50 target. The firm believes that NOVL's Linux strategy is a turning point for the company, and the potential network effects of its Linux strategy upon other portions of the company's business are not fully appreciated by the mkt. Firm believes that the company's Linux strategy stops the Netware decline, enables Linux growth within NOVL, and drives the company's server infrastructure applications businesses.

The WSJ reports that Microsoft has adopted a new approach to the use of its patents. Microsoft now holds about 4,500 patents, covering its inventions in fields such as how computers store files and how text is displayed on a screen. In Dec, Microsoft announced a new policy to begin licensing its patents, citing requests from customers, regulators and others, though it is unclear how many of the patents cover techniques already in use by other company's. The company says it has more than 100 patent-licensing discussions under way. It's offering royalty-bearing licenses both to partners and competitors, even to sellers of open-source products that have emerged as the company's biggest threat. "We have said that we are prepared to license our patent rights to all comers," says Brad Smith, Microsoft's general counsel. "That, by definition, includes open-source products." But some proponents of open-source software see an implicit threat in such moves. They believe Microsoft may press for royalties from the distributors or even users of open-source programs including Linux, and they fear that Microsoft could resort to patent-infringement suits if they don't agree to licensing deals. Such a move could disrupt the open-source world. "Microsoft hasn't started suing anyone, but we don't think that's far off," says Daniel Ravicher, executive director of a nonprofit group called the Public Patent Foundation. "If they don't, people will know they are just bluffing." In April, the group asked the U.S. Patent and Trademark Office to revoke a Microsoft file-system patent that it believes could be used against open-source programs. Larry Rosen, general counsel of the Open Source Initiative, a nonprofit group that certifies open-source software, says a senior-level Microsoft employee he declines to identify told him privately about a year ago that "it would not be unreasonable of Microsoft to assert its intellectual property against Linux or any other open-source software."

Southwest Securities believes that Year over Year video game software sales during May likely declined by double-digits (around -15%) due to difficult comparisons to last year and a relatively weak schedule this year. The firm believes the sharply negative results for May this year could disappoint some investors, causing near-term pressure on stocks, yet they note that June 2004 has easy comparisons (software sales declined 9% in June 2003) and the software lineup is strong; firm consequently recommends buying the stocks on any near-term weakness, and maintains Strong Buys on Activision, Electronic Arts, and Electronic Boutique.

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