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U.S. stocks dropped, led by telephone shares such as Verizon Communications, on concern increased competition will erode profits. Benchmark indexes retreated in the last hour after bouncing between gains and losses for most of the session. Trading fell short of this year's daily average for a 16th day in the last 17 as investors contemplated the prospect of higher borrowing costs. The Federal Reserve meets June 29-30 to set interest-rate policy. The S&P 500 Index lost 4 points (-0.4%) to 1,130. Gains in regional bank stocks limited the drop after SouthTrust Corp. agreed to be bought by Wachovia Corp., the fourth-largest U.S. bank, for $14.3 billion. The DJIA slipped 45 points (-0.4%) to 10,371. The Nasdaq Composite declined 12 points (-0.6%) to 1,974. More than 15 stocks fell for every 14 that gained on the New York Stock Exchange. Some 1.12 billion shares changed hands, 23 percent less than the daily average this year.

Strong Sectors: drug store, apparel, health care supplier

Weak Sectors: managed care, aluminum, biotech, communication equip, casino, auto, homebuilding, oil driller

Top Stories . . . Wachovia, the fourth-biggest U.S. bank, agreed to buy SouthTrust for $14.3 billion to expand in nine Southeastern states, including Florida, and speed its entry into Texas.

Simon Property Group, the world's largest owner of shopping malls, said it agreed to buy Chelsea Property Group Inc. for $3.5 billion.

Walgreen, the largest U.S. drugstore chain, said third-quarter profit rose 16 percent as extended store hours and more prescriptions helped lift sales.

Revlon, the cosmetics maker controlled by financier Ronald Perelman, reduced its profit and sales forecast for this year because of slower-than-expected demand in the U.S.

Gurus . . . On the Nightly Business Report, Gene Peroni of Claymore Partners said he is pleased with the rotation and singles out Burlington Resources, ITT Industries, Nucor, and Whole Foods.

On the Rukeyser show, panelist recommendations on Chevron Texaco, Met Life, Microsoft, Tyco, Merck, AES Corp., and El Paso.

On the Fox Brenda Buttner show, recommendations on ATI Tech, Lloyds Bank, Seagate Tech, Occidental Petroleum, Neiman Marcus, Mellon Bank, and Taro Pharmaceutical.

Goldman Sachs’ strategist Abby Cohen tells Barron’s the market is resting after its 40% move from March 2003 to February 2004. The next move will be up about 15%, and we will get to 1250 on the S&P about six to 12 months from now. She likes Microsoft, American Int’l, and Exxon Mobil.

Barron's cover story highlights interviews with Barron's roundtable, which includes: Scott Black, a founder and president of Delphi Mgmt; Abby Joseph Cohen, a Goldman Sachs star analyst; Marc Faber, a managing director of Marc Faber Ltd; Mario Gabelli, a chairman of Gabelli Asset Mgmt; Bill Gross, a founder and CIO of Pimco; Archie MacAllaster, a chairman of MacAllaster Pitfield MacKay; John Neff, a retired portfolio manager of Vanguard Windsor Fund and Gemini II; Art Samberg, a chairman and CEO of Pequot Capital Mgmt; Ocar Schafer, a managing partner of O.S.S. Capital Mgmt; Meryl Witmer, a general partner of Eagle Capital Partners and; Felix Zulauf, a founder and president of Zulauf Asset Mgmt. The article notes that managers are generally bullish, even Felix Zulauf, resident skeptic, sounded bullish. Stocks mentioned positively include: Inco, Alcoa, Dow Chemicals, MEMC Electronic Materials, H&R Block, Phelps Dodge, Fiat, CNH Global, Deere, Cavco Industries, Skyline, Southern Energy Homes, Cavalier Homes, Palm Harbor Homes, Champion, Coachmen, Fleetwood Enterprises, Nobility Homes, Sensient Technology, Albertson's, American International Group, Microsoft, Exxon Mobile, Cia Vale do Rio Doce, Nucor, Achnitzer Steel, Canadian Natural Resources, Health Net, Teekay Shipping, Fidelity National Financial, M&T Bank, Frontier Oil, Centex, Hovnanian, Toll Brothers, Lennar, KB Homes, Citigroup, Washington Mutual, Countrywide and Tate & Lyle.

Barron's highlights Timothy O'Brien, an Evergreen Investments' Utility Fund manager, for his stock picks. He took over fund in April 2002 and found that it had been hit hard by the fallout from Enron's collapse and WorldCom's accounting scandal. The Boston-based asset-management company's Evergreen Utility and Telecommunications Fund had lost more than 17% of its assets in 2002's first quarter and had shrunk to less than $214 million by the end of the year, from $400 million at the start of 2002. "It was tough time for both sectors," says O'Brien, a 19-year veteran of the utility and telecom business with stints running funds at Gabelli and Eaton Vance. "What I inherited was a fund that had positioned itself very aggressively in both sectors, in an operating environment that clearly demanded more defensive posturing." Currently, the fund contains more than 60 anmes, among them Verizon, BellSouth, SBC Comm, TXU, Exelon, Florida Power & Lightning, Whiting Petroleum, American Tower, Dominion Resources and Nextel. He recently sold Western Wireless, MMO2 and FirstEnergy.

Earnings . . . Thomson First Call says only 36% of the 202 S&P 500 companies that have previewed second-quarter earnings have said they will fall short, while 45% said they will beat forecasts. It is rare for upside previews to outnumber downside warnings, indicating analysts have not caught up to the fundamentals.

Moreover, companies in the S&P 500 may be about to complete the fourth straight quarter with earnings growth of more than 20%. There have been similar streaks only four times in the past half-century. The problem is valuations are stretched. Bill Miller, who runs the 14-billion dollar Legg Mason Value Trust, says he is struggling to find much to buy. Ditto Leon Cooperman, who runs the 2.8-billion dollar Omega Advisers.

Market Comment . . . Expect a durable expansion with mild inflation and higher interest rates. The initial rate hikes will act as an accelerant to the economy, causing more economic activity rather than less.

Some argue that the rate hikes will have to be substantial enough to slow the economy, or else inflation will not be mild. Some disagree. It is not growth that is causing inflation, but rather dollar weakness in 2003. As long as rates rise fast enough to keep the dollar relatively stable, inflation should peak within 12-18 months. The dollar’s response will be an important signal of whether rates are rising fast enough to stop future inflation.

Here are top reasons for thinking rate hikes won’t cause a slowdown:

1. The level of interest rates probably matters more than the change in rates. Even after several hikes, rates will be low in real terms and will also be low relative to recent (post 1960s) economic history. The initial interest rate hikes will simply be reversing the “deflation insurance” the Fed took out in 2002 and 2003. The next set of rate hikes will only be moving toward “neutral”, so monetary policy will still be loose, just not as loose as before.

2. The positives from job growth will offset some of the impact of the interest rate hikes. For example, residential investment, which was fueled to an extent by the 1% rate, will probably get more benefit from the declining unemployment rate than harm from the initial rate hikes.

3. Foreign economies are strengthening, offsetting some of the effect of U.S. rate hikes. Growth in Asia will probably be somewhat independent of U.S. interest rates, in that Japan is coming out of deflation and China’s growth is shifting toward consumers and rural areas.

4. U.S. households are sizeable net creditors with long-maturity liabilities, so rate hikes will add to disposable income. Firms have unusually strong cash flows and liquid asset positions to finance new investment. Bond losses from higher interest rates will be widely disbursed to U.S. and foreign holders.

5. Futures markets have already priced in significantly higher interest rates.

6. Rate hikes will probably be gradual. Since inflation starts from a very low level, and deflation is a fresh memory, the Fed should have more patience than in past rate-hiking cycles.

7. There have been two stress tests already, with only limited negative impacts from the stiff bond sell-offs in July 2003 and April 2004. Though the 1% interest rate was akin to a “free lunch”, not that many distortions seem to have developed, so there may not be that much capital misallocation to unwind as rates rise. Some of the uncertainty about rate hikes – timing, market impact, unwinding of distortions – will be relieved when the hikes get underway.

8. The current low-interest-rate environment has an important silver lining: the distribution of interest rate risk has improved in a pro-growth way. The low interest rate environment allowed many middle-class households to lengthen their liabilities and shift toward fixed rate mortgages. Many growing firms issued debt or lengthened maturities. The result: a redistribution of long-term capital in a way which makes the economy more stable.

Accounting Issues . . . There is a new report from the Financial Accounting Standards Board on guidance on valuation . The report looks at the difference between employee stock options and conventional market-traded options and the unique issues that surround employee stock option valuation, as well as the models and assumptions that are used in valuation. In particular, it compares and contrast the Black-Scholes-Merton formula and lattice-based models. The FASB has proposed a preference for lattice based models, such as the binomial model. Such models, while providing better valuation of employee stock options, also allow management more input into the valuation, which is not always transparent.

Expect changes in stock option expensing to stimulate changes in granting behavior. Based on analysis of data from 112 companies in the S&P 500 Index that have already begun expensing stock options under the fair value method, there is evidence to suggest that companies will reduce stock option grants once they are required to begin expensing. Excluding Microsoft, the companies in the sample in the aggregate decreased the number of options granted in 2003 by 40% compared to 2002 grant levels. It is important to note that these 112 companies are predominantly non-technology companies with a concentration in the financial sector; therefore, the results of the early adopters may not be representative of the results of the overall

index.

Despite attempts in Congress to derail employee stock option expensing, the market still anticipates that companies following U.S. GAAP will be required to begin expensing stock options for all employees for fiscal periods beginning after December 15, 2004 (January 1, 2005 for calendar year companies). Earlier this week, Representative Richard Baker’s bill passed the House Financial Services Committee. Baker’s bill would limit the stock option expense required in the financial statements to the compensation going to a company’s top five executives. On Thursday, Senator Richard Shelby, chairman of the Senate Banking Committee, indicated that his committee has no intention of initiating the necessary parallel legislation that would be needed in the Senate. Shelby stated that he thought it was best to “leave it up to the accountants, who know best”. Given that it does not look as though the parties opposing employee stock option expensing will have sufficient political support to block the efforts of the Financial Accounting Standards Board, it is still believed that required option expensing with the fair value method remains on course to become a reality.

Financials . . . SouthTrust and Wachovia announce merger agreement valued at $14.3 billion. It is expected to be accretive to cash earnings per share within 24 months and to operating earnings per share within 30 months, and is expected to provide an internal rate of return (IRR) of 16 percent.

JMP Securities cuts their 2004-05 EPS estimates for Novastar Financial and lowers their target to $50 from $55, as originations are slightly below their mode. While industry volume trends continue to be strong, firm says competition is increasing as large prime-quality and privately-held lenders continue deepening their reach into the sub-prime segment; also, the current bearishness in the money markets has resulted in lower ests of excess spread throughout the life of a sub-prime bond deal (for all lenders, not just NFI) and is putting pressure on execution economics.

The FT reports General Electric plans to bring together all of its consumer finance businesses under a single global brand in preparation for an aggressive expansion into retail banking. GE Money, as the business will be known, aims to capitalize on the US conglomerate's strength in store cards and sales financing by offering personal loans, mortgages and dual-use credit cards direct to consumers. The rebranding, which recently began in Germany and Australia, is expected to be rolled out across 15 other Asian and European countries this autumn and launched in the US next year. GE offers some retail banking products in less developed markets, but hopes to create a global brand to rival those of Citigroup and HSBC by renaming local operations and extending business-to-business activities in more mature markets such as the US and UK.

Simon Properties to will acquire all of the outstanding common stock and operating partnership units of Chelsea in a transaction valued at approx $3.5 billion, or $66.00 per share. The company will also assume Chelsea's existing indebtedness and preferred stock, which totaled approx $1.3 billion as of March 31, 2004. The company expects transaction to be at least $0.09 per share accretive to 2005 Funds from Operations (FFOs) and $0.18 accretive to 2006 FFOs; deal should close in 4th quarter 2004.

Oil & Gas . . . Valero Energy expects 2nd quarter results to exceed $4.00/share (consensus $3.75). VLO cites continued strong refining margins, wide sour crude discounts and higher throughput rates.

Barron's highlights Tsakos Energy Navigation, which should benefit from growing tanker demand and new price peaks. Freight rates this year topped the firm prices seen in 2003, and in some instances hit record highs. The energy adviser to the world's largest oil-consuming nations recently raised near-term projections: The International Energy Agency now expects demand to grow 2.9% in 2004, the largest jump in 24 years. Tanker owners regard that news as money in the bank. In addition, ship owners and brokers say they expect the tanker market to remain strong, at least through this coming winter. Responding to the OPEC's June 3 pledge to raise its output ceiling by 8.5% in July, experts at the event predicted even stronger tanker rates if No. 1 producer Saudi Arabia can actually deliver more barrels. Although London ship brokerage Simpson Spence & Young expects this year to be one of the busiest on record for new tankers, with delivery of 23.4 million deadweight tons scheduled, the industry isn't worried about the possibility of oversupply. "People are more willing to pay, they don't fight as hard, and owners have more resolve to try to be a little firmer. Today, there's a lot more business available," says Basil Mavroleon, managing director at Charles Weber. Tsakos Energy Navigation operates a fleet of 27 oil tankers and is scheduled to take delivery of 13 new ships through 2007.

Metals . . . Barron's highlights Great Northern Iron Ore Properties, which last Monday hiked the quarterly distribution to $1.90 from $1.80. The new dividend makes for a hefty yield of close to 8%. This is the 6th boost in 2 years and the second in 2004. CEO Joseph S. Micallef says "mining activity has remained strong...[and] this improved taconite demand, and increases in our royalty rates due to escalation of producer-price indexes, will result in higher net income in 2004 than 2003." Great Northern earned $10 million, or $6.65 a share, in 2003. This year's 1st quarter net came in at $2.9 million, or $1.94, up 21% year over year.

Education . . . The WSJ's "Tracking the Numbers" column discusses the for-profit education industry, suggesting that shareholders who have made a bundle in this industry may still end up falling behind. The latest lesson came last week, when a class-action lawsuit against Career Education was amended to include 13 former employees' allegations of wrongdoing by the company. The legal risks at CECO also are on the curriculum elsewhere in the sector, threatening to mar the permanent record of some stocks that last year soared like advanced-placement students. Allegations about student records go to the heart of the industry's business model, and to the risk to investors who own the stocks. These companies generate revenues by enrolling students and rely heavily on so-called Title IV federal loans and grants. To get those funds, schools must be recognized by accreditors named by the Education Department, must maintain a low rate of loan defaults and can't offer commissions or bonuses to recruiters based on the number of students they enroll. Schools proven to be cheating on records could end up losing accreditation and funding. Some traders who have shorted these stocks say they're betting that Title IV funds are in jeopardy. "The whole industry is built around federal funds," said Scott Levy, a lawyer involved in a suit against ITT Educational. The course load of concerns about the sector has even got some fans worried. Harris Nesbitt Gerard analyst Jeffrey M. Silber was the top-ranked consumer-services analyst in the latest WSJ "Best on the Street" report, thanks to Buy ratings on shares of CECO and Corinthian Colleges. But Mr. Silber downgraded his rating on CECO to Neutral in December before the class-action suit was first filed against the co, and in a research report Friday the analyst repeated that rating.

Defense & Aerospace . . . TASER raised 2004 revenue growth forecast from previous guidance of 100% growth to new forecast of 150% growth. Company reported revenues of $24.5 million in 2003, new guidance equates to 2004 revenue forecast of $61.25 million versus consensus is $56.4 million.

The US Office of the Secretary of Defense Comptroller's Office has placed an order with Saflink for security software, hardware, and services for more than 250 users as part of an initial deployment. No terms were disclosed.

Food & Beverage . . . Barron's highlights Coca-Cola Hellenic, which shares has fallen about 10%, partially in profit-taking after a big run and also in reaction to the second important management departure since last August. Shares of Coca-Cola's bottlers around the world have outperformed Coke stock this year, as the beverage maker has decided to focus on price gains rather than volume rises. Such a move benefits the bottlers, who have heavy infrastructure costs. Coke takes care of the global advertising, but the bottlers actually make the famous brown sugar water. More interesting for Coca-Cola Hellenic is a renewed emphasis on emerging markets being proposed by Coke's brand new chairman and CEO, E. Neville Isdell, himself a former Coca-Cola Hellenic CEO. Should Coke follow through on that push, it could bode well for Coca-Cola Hellenic, which gets 45% of EBITDA from countries like Russia, Poland, Hungary, and Nigeria, among many other emerging market nations. In a recent interview with Barron's, Nik Jhangiani, the company's new CFO, repeated the firm's mantra that in 2004 it will see volume increases of 7% to 8%, and a rise of 11% to 12% in Ebidta. Longer term, and what is new, is Jhangiani's prediction that "Coca Cola Hellenic could see a doubling of net income in 3 to 4 years, though rev wouldn't necessarily double." The new CFO says the firm's strong growth rate is sustainable, thanks in part to that wide exposure to emerging-market nations, many of them in eastern Europe. "We would expect our growth rate to be twice the GDP growth" of the respective less developed countries, he said. And, in 3 to 5 years, Ebidta from less-developed areas will top that from established markets, he adds. Right now, Coca Cola Hellenic trades at a not particularly compelling 25x the 2005 consensus estimate of $0.80 per share. A doubling of net income in 4 years, to about $1 per share, would suggest the bottler is roughly fairly valued, but such a rise in 3 years, that is, in 2006, would mean the stock is cheap.

Consumer Products . . . UBS says the key takeaways from a meeting with Black & Decker were that business at Lowe's continues to increase and that its heightened focus on industrial/construction channel should result in further market share gains. Firm also notes that BDK is trading at 12.1x their 2004 EPS estimate versus an average P/E of 16.5x and a range of 8.9-35.9x. This represents a 17% discount to its peers and a 32% discount to the market. The firm reiterates Buy and $75 price target.

Retail . . . Goldman Sachs raises their 2nd quarter rev/EPS estimates for EBAY (firm is now in-line with consensus), saying their study indicates that the co is successfully navigating the notable seasonality of 2nd quarter with strong growth internationally and in store/half.com listings; firm says stronger than expected listings (Int'l and stores/half.com) is the primary driver of their higher estimate, citing: 1) listings of 334 million versus their prior 331 million estimate, 2) a 48% incremental operating margin (up from 43% in Q1 and the third consecutive qtr above 35%+), and 3) relatively stable prices and conversion rates for EBAY's classic (i.e. non-store/half.com listings); despite a 34% share gain year-to-date, firm believes that EBAY should continue to outperform the group through the remainder of the year, with a typical seasonal pause in August & early September. Maintains Outperform.

Wal-Mart Stores said June sales at stores open at least a year were tracking "around' the low end of its forecast, a term it uses to indicate that sales could miss its expectations.

WR Hambrecht says that despite investor concerns about the slowdown in comp store sales growth, they believe that Sharper Image is cheap at current levels and that there may be a short-term trading opportunity for investors. Firm thinks potential upside is 10-15%.

Barron's highlights JoS. A. Bank, which shares have plunged more than 10% since the company disclosed earlier this month that the New York attorney general E. Spitzer had requested documents related to its advertising and in-store promotions. The bank's promotional strategies, including frequent 50%-off sales, have long baffled investors and analysts. Many of the clothes, suits, shirts, ties and other garb, are never offered at full price. The company sported gross margins of more than 61% in its most recent quarter, despite the normal barrage of price promotions. JoS. A. Bank's "days of inventory on hand," or quarter-end inventory divided by the cost of sales per day, has ballooned to a staggering 371 days from 333 days a year ago. That's more than double the level at Men's Wearhouse, the company's closest competitor, and the highest in the apparel business, industry experts say. The company said in its latest quarterly report that it expects inventories to increase in 2004 to "support new store openings, sales growth in existing segments and other initiatives." Still, the costs of financing lots of socks and shirts can add up quickly. While the recent selloff in shares might look like a buying opportunity, the article suggests looks aren't everything, even in the clothes business. Depending on just how Spitzer proceeds, the shares, now trading at 15x earnings, could easily fall back to their historic norm of 12x earnings.

Goldman says that if investors look for a retailer with an unblemished track record that continues to gain share piques interest, then one should focus on Bed Bath & Beyond. According to the firm, 1st quarter should deliver solid comps and at least in-line EPS results. As 2003 earnings rose 32%, the stock underperformed the market by 26% and the RLX by 36% as fears of slowing new space productivity (N.S.P.) weighted on the stock; while 1st quarter should not bring relief as N.S.P. remain under pressure given double the number of openings versus last year, they say a more comparable Year over Year store opening schedule should alleviate pressure as the year progresses. Firm believes the stock's current valuation of 24x their 2004 EPS estimate discounts its new growth reality; despite KSS's greater fashion risk and heightened competition, KSS stock trades at a comparable calculation. Firm believes current BBBY levels represent a more compelling risk/reward. Maintains In-line rating.

Walgreen reports 3rd quarter earnings of $0.33 per share, $0.01 better than the consensus of $0.32. Revenues rose 15.0% year/year to $9.58 billion versus the $9.54 billion consensus.

Healthcare . . . Thomas Weisel McKesson price target to $39 from $36 as believes that MCK has sharpened its corporate focus and now has more visibility into 2005 than it had during 4th quarter 2004 call. The firm sees more positives: 1) The VA contract appears to be performing ahead of expectations. 2) MCK is making tangible progress in its discussions with pharmaceutical manufacturers. 3) Continuing progress in stemming sell side margin erosion. 4) Reaccelerating the provider technologies segment 5) Planned increase in financial leverage. 6) Attractive valuation at less that 15x 2005 EPS est of $2.40.

CIBC initiates coverage of Isolagen with an Outperform rating and $17 target. The company has developed a broad and proprietary technology platform that utilizes autologous therapy (patient's own living cells) to correct facial wrinkles and scars. The firm believes that the company is well-positioned to participate in the large and growing non-surgical cosmetic market, and they estimate the potential market for the Isolagen Process in treating facial wrinkles at $6.3 billion annually. The firm forecasts that ILE will grow sales from $1.8 million in 2004 to $149.8 million in 2007, driven by the full commercial launch of Isolagen in Europe in 2005 and the U.S. in early 2006.

Barron's highlights Millipore, which should benefit nicely as labs around the world scramble to find new products to replace those whose patents are expiring. R&D spending by the leading research-based drug and biotech company's rose 7.4% last year, to $33.2 billion, says the Pharmaceutical Research and Manufacturers of America. During the 1st quarter, R&D spending at giants such as Merck and Wyeth rose at double-digit rates, a pace likely to continue through the year. Its products are turning up in some enviable places: Genentech and ImClone Systems, for instance, now use Millipore filters to produce Avastin and Erbitux. If those drugs succeed, each could dramatically increase its orders from Millipore. "It's a conservative investment in an industry [biotech] where it's hard to find conservative investments," says Nancy Prial, CIO for Burridge Growth Partners.

Medical Devices . . . Barron's highlights Cyberonics, which received an FDA approval to its implantable pacemaker as a treatment for depression. The measure of the surprise was a doubling of Cyberonics' stock. Article suggests that if the agency rejects Cyberonics' device for depression, then the investors who just put a billion-dollar market value on the company will be terribly discouraged. So will the many patients who desperately need a treatment that works. Yet Cyberonics' studies produced only weak evidence that its device did, in fact, work. FDA staffers told the panel that the studies' failure to randomly give some participants a placebo meant that the implant's apparent benefit could have been a placebo effect or the result of differing drug regimens. Even if the FDA sides with Cyberion's CEO Robert Cummins, who estimates that the treatment-resistant depression market for Cyberonics is $60 billion, his market forecasts have proven unreliable before. Epilepsy sales fell well short of his guidance. If that happens again, Cyberonics' new valuation, 9x trailing 12-month sales and almost 150x earnings, will prove short-lived.

OraSure Tech receives rapid test HIV-2 patent sublicense from Bio-Rad. OraSure will sell a rapid test for both HIV-1 and HIV-2 using its OraQuick technology platform on a worldwide basis. Bio-Rad maintains rights to patents claiming the HIV-2 virus and various means to detect its presence in infected patients.

Biotech . . . Paradigm Genetics received a Small Business Innovation Research Phase I/II contract from the National Institute of Environmental Health Sciences, National Institutes of Health. Fast Track contract will support company's efforts to discover biochemicals in urine, serum and liver tissue that predict the early onset of drug-induced liver injury. Under the award, PDGM will conduct preclinical studies on three compounds known to cause liver damage.

Media . . . Thomas Weisel upgrades InterActiveCorp to Outperform from Peer Perform based on the following factors: 1) improving margins, 2) hit to mark-ups being offset, 3) share up despite competition, and 4) long-term growth story is taking shape. Firm believes the margin outlook is improving and they see sequential gains throughout the year as ad spend declines, losses narrow for the Int'l/Corp Travel platforms, and the Hotels.com/Hotwire integrations complete in 4th quarter 2003.

The WSJ reports Cablevision will offer unlimited local and long-distance phone calls, plus digital cable television and high-speed Internet access for $90 a month. Many consumers already pay $90 a month just for their cable television and high-speed Internet access bills, meaning Cablevision is effectively giving away phone service. "These low price points give us the opportunity to talk about the savings in many different ways; one way is to show the customer that they are essentially receiving their voice service for free," said Patricia Gottesman, senior vice president of consumer product management and marketing for Cablevision, which services 3 million cable customers in the NY metropolitan area. That can only be a headache for the regional Bell company's, which are already seeing demand for their traditional phone lines decline, in part, because Internet telephone services such as Cablevision's that charge far less. Goldman Sachs estimates that cable companies could take 7% of residential phone lines from the Bell companies by 2006 and nearly 20% over 10 years. Cable companies including Comcast and Cox Comm. are planning big rollouts of phone service.

Viacom announced Blockbuster spin-off and prior to the exchange, Blockbuster will pay a special dividend of $5 to shareholders, which translates into a tax-free $738 million to Viacom. UBS believes that Viacom will use its $738 million dividend payout to buy back its stock. The firm lowers 2004 pro forma FCF/share estimate to $1.74 from $1.78 (included Blockbuster for the full year). Viacom is currently trading at an estimate F12M EBITDA multiple of 11.7x, a 16% discount to its average of 13.9x. UBS reiterates Buy.

Hotel & Leisure . . . Merrill Lynch lowers International Game Technology price target to $42 from $52 to represent 70%/30% presumption of slots approval/disapproval by PA, with fair values of $46 and $33 for both scenarios, respectively. Although the UK appears to be moving forward on slot legislation, the long-term growth opportunity has diminished to 20,000 now from 40,000 from 60,000. Additional slot machines in California would add better visibility to 2005 estimates; Positively, it appears that CA is very close on inking a deal with 4 Indian tribes.

Roth Capital upgrades ISLE Isle of Capri to Buy from Neutral. They believe the company will continue to experience competitive pressures in Bossier City and Kansas City and construction disruption at its Black Hawk, Lake Charles, and Biloxi properties over the next fiscal year, they believe the recent sell-off in the stock is overdone and that the stock is attractive at current levels.

Telecom . . . Barron's highlights Susan Kalla, a senior telecom analyst at Friedman Billings Ramsay, for her telecom sector outlook. Ms Kalla slapped Underperform ratings on the telecom-equipment stocks she covered three years ago, a shocking move in the era before Sell recommendations came into vogue. Kalla came to her conclusion by polling the service providers to determine their demand for telecom equipment instead of heeding the rosy forecasts of CEOs. Investors who heeded those warnings were spared the agony of watching the equipment providers' stocks shrivel to single digits. Now she has broadened her scope to the entire communications industry, telecom, cable and satellite, and concluded that revs will rise by less than 1% annually, to $274 billion by 2006. That's far from the 4% annual growth the industry is promising. The $17 billion shortfall means the industry has committed to too much capital spending and its bottom line will suffer. Shares of telecom players could fall 15% annually as competition heats up. The cable co's, which have higher debt levels and trade at loftier multiples, could face even greater risk. "Everyone knows there's going to be a war, but they don't know the war is going to be this bad," she states. So while Kalla isn't crazy about the Bells, she thinks they're still better positioned than the cable companies.

IT Services . . . Interactive Pictures discloses that PricewaterhouseCoopers dismissed as auditors. The reports of PricewaterhouseCoopers LLP on the consolidated financial statements of IPIX Corp for the past two years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to audit scope or accounting principles except that the report on the consolidated financial statements for the year ended December 31, 2003 expressed substantial doubt regarding company's ability to continue as a going concern.

Storage . . . The WSJ reports that a former employee of Legato Systems alleged in a lawsuit that the company overstated the rate at which customers renewed contracts for its software in the months leading up to its acquisition by EMC. David Halterman, a former midlevel product manager at Legato, claims in the suit that he was fired after he repeatedly raised questions to his superiors about the renewal rates, which Legato said in public filings were more than 90%. Mr. Halterman says his analysis, based on internal data he was provided while on the job, showed rates for some products as low as 20% to 30%. Mr. Halterman sued Legato and EMC, as its successor company, earlier this month in Santa Clara County Superior Court, in California, where Legato was based. He is seeking back pay and damages for alleged wrongful termination. Michael Gallant, a spokesman for EMC, Hopkinton, Mass., said the lawsuit is "completely without merit."

Network Equipment . . . WR Hambrecht previews SuperComm 2004, the telecom equipment industry's largest trade show; firm believes that this year's show will be an important near-term catalyst for the following stocks: Adtran, which they think has won a significant new contract to supply DSLAMs to an incremental domestic ILEC customer; Juniper, which is garnering a disproportionate share of the resilient IP-router and burgeoining security markets, and XXIA, which is capitalizing on growth in IP test and measurement.

Smith Barney is telling investors to buy Motorola, and raises their 2004 handset estimate to 610 million units from 530 million units which translates into +15% growth as they expect the handset manufacturers to keep the accelerator on handset launches throughout 2004. According to them, it is important to note that aggressive 2nd half model launches by all global players raises inventory risks in the supply chain, this they see growth decelerating to 6% in 2005, to 645 million units, as the replacement cycle peaks. That said, the window of opportunity is narrowing for stock which may peak with the 2004 replacement cycle - firm is bullish on Motorola, but see short-term downside risks in the 2nd quarter results of both Nokia and Samsung.

Prudential adjusts their UTStarcom estimates to reflect acquisition of Audiovox's handset business. The firm raises their 4th quarter 2004 and 2005 revenue estimates to $964 million from $759 million and to $4.5 billion from $3.5 billion, respectively, and lowers their EPS estimate for 4th quarter 2004 to $0.59 from $0.62 and raises EPS estimate for 2005 to $2.42 from $2.20. Firm believes the deal provides an opportunity to leverage company's existing manufacturing/sourcing capabilities and Audiovox's carrier relationships in the Americas; at the recent meetings, mgmt highlighted its focus on growing demand for broadband services over wireless and wireline connections, particularly on CDMA. Firm believes co faces new contract opportunities in key markets like India.

Barron's highlights Motorola, which made a dramatic comeback in the last year. But Friday, Morgan Stanley's Arindam Basu downgraded the stock to Equal-Weight. Basu lowered his target price to 20 from 25, figuring that the co shouldn't be valued above 1.5x his 2005-year estimate of $35.6 billion in sales, which he figures will yield earnings of $2 billion, or EPS $0,70. According to the article, Motorola clearly has fallen behind in the competition to sell wireless-network infrastructure. Current results for this Motorola segment look fine: sales rose by a peppy 38% in the March 2004 quarter, and should remain strong for the rest of the year. The problem is Motorola's paucity of deals for 3G networks. In about a year, demand will shift to 3G products, wireless rivals Ericsson and Nokia have announced over 30 contracts apiece to supply 3G gear, while Nortel and Siemens each have announced at least 20. Motorola has just one announced deal for 3G. Infrastructure matters, it accounted for $4.4 billion of Motorola's $27 billion in total sales for 2003, and almost 23% of pretax profit. The worrisome prospects for this segment were one reason for this week's Sell recommendation by Mark Roberts, a analyst who runs Off Wall Street Consulting Group. Motorola's next-generation problem ties in with another threat, says Roberts -- threat of losing its status as monopoly supplier to Nextel. Roberts estimates that Nextel sales generate about half of Motorola's handset profits and nearly all of its profits on infrastructure. "Longer term," says Roberts, "Motorola has everything to lose at Nextel." China has also been an important market for Motorola, but the Chinese government is considering a homegrown 3G standard that would give an edge to domestic suppliers.

The FT reports that speculation about a partnership between networking equipment makers Cisco Systems and Nortel Networks gained currency after confirmation late on Friday that the two company's CEO's met in Canada last week. A spokeswoman for Nortel confirmed that William Owens met Cisco's John Chambers soon after the two executives said at an industry summit that they were both open to partnerships. Analysts said to the paper that a partnership between the company's would make sense because Nortel sells about 70% of its equipment to phone company's, while Cisco's customer base is heavily weighted towards large corporate customers.

Lucent and Juniper announce the expansion of the use of Juniper Networks routing platform at US LEC (CLEC). "We're pleased to announce US LEC as a joint customer with Lucent," said Kurt Melden, chief scientist, Juniper Networks. "The strategic relationship between our two companies continues to enable customers to transform their networks to create and IP/MPLS-based infrastructure capable of delivering revenue-generating services with next-generation capabilities".

Boxmakers . . . Apple Computer 2004-05 estimates raised at First Albany above consensus, primarily due to higher iPod growth forecasts. The firm expects reacceleration in Sept, driven by European ramps of iPod Mini and iTunes, as well as this summer's launch of the HPod; another highlight for AAPL is pending cash repatriation incentives in Congress, which would most likely be used for share buybacks.

Semiconductors . . . JP Morgan says that checks at Intel indicate the company continues to gain share in flash memory and more recently in microprocessors. As a result, firm believes that the company's 2nd quarter revenue is tracking to the high end of its range of $8.0-$8.2 billion, and that the company continues to experience upside due to share gains in flash memory due to aggressive pricing, particularly at Nokia. Firm raises their 2nd quarter revenue estimate to $8.2 billion (high end of guidance, above consensus of $8.1 billion) and raises their 2004 rev/EPS estimates slightly above consensus.

The U.S. Patent and Trademark Office issued NVE Corp a patent for an innovative type of (Magnetic Random Access Memory)MRAM. The invention (patent #6,744,086 which was granted in June concerning spin-momentum magnetic memory cells) has the potential to significantly reduce MRAM write currents with lithographic feature sizes of less than 100 nanometers and could enable MRAM cell densities comparable to those of DRAM or Flash.

Thomas Weisel suggests that overall digital-camera market remains healthy, but the market for Taiwan suppliers is soft. The firm's checks suggest that OmniVision's head of sales, John Lynch, recently left the company. While the co has yet to put out an official release, the firm did confirm that Lynch has been on a "leave of absence" for several weeks. Such a departure would be perceived negatively by the market, particularly given recent events (accounting and weakening sales concerns). Reiterates Peer Perform.

DRAM spot and contract prices have been on a downward trend in recent weeks, with 256Mb DDR spot prices down 3-4% over the past week. Based on recent checks believe near-term incremental DRAM supply could continue to exceed incremental demand, as 0.11-micron yield rates have been improving at a number of manufacturers, including at Infineon and its manufacturing partners. Checks also continue to indicate above-normal inventory levels in the channel, although there has been some inventory reduction in recent weeks. Inventory at DRAM manufacturers however appear to have risen, due to a combination of factors including yield improvements, seasonal demand weakness, and to some extent the inventory buildup that occurred in March/April in the channels and at PC OEMs that led to a well stocked market.

ATI should benefit from the ramp of Grantsdale chipsets in the quarter given its strong design win momentum with PCI Express based GPUs, which began shipping in May. Regarding the impact of Grantsdale on the discrete graphics market, do not expect the integrated portion of the graphics market changing significantly from the 50-55% range seen in the past couple of quarters, given that the PCI Express bus that Grantsdale incorporates is also leading to performance leaps in discrete graphics, and there has already been a significant shift to integrated in the past two years. ATI is shifting towards a higher gross margin model from the 32-35% range it has articulated in the past, contributed by growth in its consumer (DTV and handset/handheld) businesses. ATI indicated that it could announce new design wins for its Imageon product in 2nd half 2004, both for new customers as well as for new models with Motorola. Meanwhile, believe the DTV market is at the bottom of an S curve, and that ATI is very well positioned in this segment.

Software . . . The WSJ reports that Blue Coat today will announce a companion device that is designed to make it much faster to scan Web traffic for viruses and other malicious software. Besides corporate e-mail accounts, such harmful programs can enter company's when employees use Web-based e-mail services or download programs from Web sites. Some vendors of antivirus software have developed products that also screen Web traffic, and sometimes combine software with server hardware to handle such chores. Most customers don't routinely screen Web traffic because the process tends to slow down Web performance. Tests cited by Blue Coat show that some antivirus products can delay calling up Web pages by almost 2.5 seconds. The company's new ProxyAV product is as much as 150x faster, with average delays of just 15.8 thousandths of a second. Blue Coat's proxy server helps determine what kinds of Web pages should be screened before passing them to the ProxyAV device for analysis.

Barron's highlights Microsoft, which has $56 billion in cash, $15 billion in strategic investments and no debt. Microsoft faces growing pressure to use its cash to benefit shareholders more directly. Investors seem to expect a plan soon, possibly by Microsoft's July 22 earnings report or the July 29 investor meeting. As speculation mounts that Microsoft may buy back shares or boost its dividend, hopeful investors have begun buying calls or selling puts on the stock. "The volume is pretty heavy even by the standards of Microsoft," one of the most liquid and actively traded options, says Robert Wilson, an option strategist at Susquehanna. Such wagering has been around as long as, say, Windows 2000, but it has revved up this summer. With the software maker generating about $1 billion in cash flow each month, the cash stash has only gotten bigger. Another reason for hoarding cash, to deal with potential liabilities, has become less persuasive after Microsoft settled antitrust lawsuits with the JD, Time Warner and Sun Micro., and learned the extent of possible fines by the EU. In a research note last week provocatively titled "What if MSFT buys back a LOT of stock," Goldman Sachs analyst Rick Sherlund says he expects a large share-repurchase program or a special cash distribution.

First Albany sees several positives in Check Point Software's core business, including: 1) demand for firewall/VPNs remains solid, 2) improving competitive landscape, as Cisco's firewall/VPN business is struggling and Juniper has stopped gaining ground on CHKP, 3) newer products are being received well by the channel and should support rev growth, and 4) they are comfortable with their revenue and earnings estimates for the quarter.

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