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U.S. stocks chalked up their first loss in three sessions, as weakness in blue chips and an unexpected decline in May durable goods orders took a toll on investor sentiment and overshadowed early strength in the technology sector. The first release of economic data in nearly a weak also knocked bond yields and the dollar lower, and pushed gold prices back above $400. The DJIA closed 35 points lower (-0.3%) at 10,443. The Nasdaq Composite closed off 5 points (-0.2%) at 2,015, while the S&P 500 fell 3 points (-0.3%) to 1,140. While all major indexes ended lower, advancing stocks outnumbered decliners by a 17 to 16 score on the NYSE and by 16 to 15 on the Nasdaq exchange. Volume was relatively light, with 1.4 billion shares traded on the Big Board and 1.7 billion shares traded on the Nasdaq. The U.S. Commerce Department said May orders for goods that last more than three years fell 1.4 percent, vs. Wall Street expectations of a 1.4 percent rise. The bond market rallied on the data, sending the yield on the benchmark 10-year Treasury note down 0.051 percentage points to 4.647 percent. The yield hit a four-week low of 4.613 percent earlier in the session.

Strong Sectors: gold & silver, casino & gaming, homebuilding, construction services

Weak Sectors: airlines, wireless services, commercial services, post secondary education, auto manufacturing and equipment

Top Stories . . . U.S. orders for durable goods unexpectedly dropped 1.6 percent in May, a second consecutive fall, paced by fewer bookings for autos, computers and machinery.

The number of Americans filing initial claims for unemployment benefits rose to 349,000 last week, the first full business week for government offices this month, a Labor Department report showed.

U.S. new home sales surged 14.8 percent in May to a record, boosted by job and income gains this year that have offset a rise in mortgage rates.

The U.S. Securities and Exchange Commission is delaying sales of $9.4 billion of a new type of security that combines debt and equity because of concern over how the companies have calculated estimated dividends, say lawyers such as Richard Willoughby of Torys LLP.

Allied Capital, a Washington- based investment firm, said it's under investigation by the U.S. Securities and Exchange Commission.

Corinthian Colleges shares declined after the Financial Times reported the company's Bryman College campus may have helped students file fraudulent applications for federal student loans.

Viacom, the U.S. media company that owns MTV, agreed to buy a majority stake in its only German music television rival, Viva Media AG, in a transaction that values the broadcaster at 308.8 million euros ($373 million).

Quotes of Note . . . ``There's a big fear of the effect interest rates will have on economic growth in the U.S. When interest rates rise, earnings growth has to be reassessed.'' van den Bos, who oversees $1.7 billion in stocks at ING Investment Management.

Gurus . . . Dick McCabe, chief technician for Merrill, notes that most major trend-related momentum indicators such as the annual rate of change in the S&P 500, the New York Stock Exchange (NYSE) new high list, the percent of stocks above their 200-day moving average, and NYSE average daily volume peaked in January or February. Because these measures typically hit their highest levels six to 12 months before the final peaks of the major averages, the implication is there should be one more new high in the averages.

Bill Dudley, chief economist for Goldman Sachs, says the Fed tightening process will begin on the 30th and the Fed will tighten four times or 100 basis points. He expects the economy will slow going forward, which will cause the Fed to take a break from tightening during the first half of 2005. Two wild cards are energy and productivity.

Eco Speak . . . The number of people filing for unemployment insurance rose in the latest week. Initial weekly jobless claims rose 13,000 to 349,000, while the four-week average of initial claims rose 1,000 to 344,250. Economists prefer the four-week average over the more volatile weekly number, which is subject to large revisions and can be skewed by one-time factors such as weather or holidays. In fact, a department official said this week's figure may show an exaggerated increase following last week's decline, which was sharper than it would have been because state unemployment offices were closed in observance of the funeral of former President Ronald Reagan.

Orders for new durable goods fell for the second straight month in May. Orders for goods that last more than three years fell 1.6 percent to $189.1 billion. The decline was unexpected. Wall Street economists had forecast a 1.4 percent gain in May durable goods orders. Shipments of durables fell 0.7 percent while unfilled orders rose 0.4 percent. New orders fell a revised 2.6 percent in April, compared with the previous estimate of a 3.2 percent decline.

Sales of new homes in the United States rose 14.8 percent in May to a record seasonally adjusted annualized rate of 1.37 million. The increase was much larger than expected. Economists were expecting a sales rate of about 1.12 million in May. Estimated sales in April were revised higher to an annual rate of 1.19 million from 1.09 million. The number of new homes for sale on the market fell about 0.5 percent to 372,000, representing 3.3-months of sales at the May pace. New-home sales surged in the Northeast and the South. Sales rose about 53.2 percent in the Northeast to 121,000. This is the biggest gain since March 2003. Sales rose about 20.3 percent in the South to a record 663,000, the biggest gain since July 1995. The median sales price rose 1.5 percent year-over-year to $198,400.

Market Comment . . . Here are several favorable developments in recent weeks.

The outlook for economic growth and NIPA-based corporate profits is still being underestimated.

We note several favorable developments in recent weeks. The outlook for economic growth and NIPA-based corporate profits is still being underestimated.

• U.S. economic data continues to show a powerful acceleration. Industrial production grew at a 7.5% annualized rate (in unit or real terms) in the three months through May. The forward-looking diffusion indices (ISM, Philly Fed, Chicago PMI) indicate continued economic acceleration (each well above the critical mid-point level).

• Expect second half U.S. growth to be even faster than the first half (4.9% annualized vs. 4.5%), based on the contributions from job growth, corporate investment spending and some recovery in inventories.

• The bond market re-pricing in April and May went relatively smoothly. Interest rate futures (and we think market expectations) have now priced in substantial rate hikes in 2004 and 2005, resolving our concerns about interest rate complacency.

• Oil prices have fallen over 10% from their high. Supply is greater than demand and is growing faster, undercutting the bearish arguments based on oil at $50 per barrel. In gold terms to compensate for the change in the value of the dollar, oil prices have fallen from 9.1 barrels per ounce on May 14 to 10.5 now, but are still remain nearly 50% above the long-term ratio of 16 (which translates to $25 per barrel). U.S. oil inventories including SPRO are their highest since at least 1983. Bear Stearns’ oil analyst Fred Leuffer has shown that the high inventory levels are consistent with a $24-$28 oil price.

• The yield curve remains steeply upsloped, indicating significant monetary stimulus. The 2003 tax cuts are likely to remain in effect until at least 2008, allowing the private sector to grow faster than it would have.

• Recent data keeps showing that Japan is accelerating and China is growing strongly.

• In mid-June, the House of Representatives passed a bill on international taxation which included corporate tax reductions and a provision to drastically reduce the tax rate on corporate capital repatriation (to 5.25% from 30% or more.) Though the bill still has to be re-approved by the Senate and then merged in a House-Senate conference, it has a chance of enactment and would be both pro-growth and pro-dollar.

Financials . . . Allied Capital said that the Securities and Exchange Commission is conducting an informal investigation its portfolio company Business Loan Express. The company said the probe involves allegations made by short sellers of its stock over the past two years. "Over the last two years, we have consistently refuted frivolous allegations made by short sellers based upon false and misleading information and distorted facts," said Bill Walton, Allied's chairman and CEO, in a press release. "We welcome the opportunity to fully cooperate with the SEC, provide all the facts, and demonstrate once and for all that the short sellers' allegations are false."

UBS downgrades Senior Housing to Neutral from Buy based on valuation, saying the recent surge in share price gives them caution; firm notes that in recent weeks the stock is up almost 16% versus 7% for Healthcare REITs overall, they believe the stock is now fairly valued. Also, while cap rates for assisted/independent living and skilled nursing have remained flat over the last 18 months, firm says an increase in financing costs may modestly compress investment spreads/earnings in the near-term; also, yield-hungry investors may begin to shift capital to investments with similar yield attributes that provide better earnings visibility. Target is $17.

Education . . . Corinthian Colleges traded lower after the U.S. Department of Education reportedly uncovered violations in obtaining federal loan at the for-profit provider of higher education's Bryman College campus. The Financial Times, citing sources familiar with the situation, said the DOE has revoked the school's ability to receive advance payments on student loans as a result. Bear Stearns reiterated its "outperform" rating, saying the stock's reward vs. risk profile was still attractive, but cut its price target to $33 from $44. "While the improprieties appear to be isolated to this particular campus, no other schools are reportedly under investigation, and the financial impact is minimal, investors may have less tolerance for regulatory risk in light of the legal/regulatory issues plaguing competitors ITT and Career Education," analyst Jennifer Childe said.

UBS out on Corinthian Colleges commenting on an article in Financial Times saying COCO's Bryman College campus in San Jose, CA violated Title IV rules in pursuit of financial aid for student. The article reports that the DOE has revoked the school's ability to receive advance payments on its student loans. Firm thinks this school has over 600 students. Article states inspectors discovered school officials helped students manipulate financial aid documents to get the maximum awards. It further states that investigators found admissions officers assisted students in claiming extra dependants to obtain additional financial aid. UBS thinks COCO shares will trade down today, as this news may cause investors to question the stock and the sector.

University of Phoenix Online posted net income of $8.2 million, or 48 cents a share compared with $4.4 million, or 27 cents a share in the same quarter in 2003. The average estimate was for earnings of 41 cents a share. Looking ahead, the online education provider said it expects to earn 42 cents a share in the fourth quarter, in line with the current consensus estimate of 10 analysts polled by First Call. For 2004, Phoenix Online is forecasting earnings of $1.55 compared with the First Call estimate of $1.48 per share. The group's results and outlook came in a statement which also gave third quarter results for Apollo Education Group. Both companies are listed separately but wholly-owned by the Apollo Group.

Apollo Group reported earnings of $0.56 per share, $0.05 better than the Reuters Estimates consensus of $0.51; revenues rose 36.5% year/year to $497 million versus the $480.2 million consensus. The company also issues upside guidance for 4th quarter (Aug), sees EPS of $0.48 versus consensus of $0.48, and revenues of $483-486 million versus the Reuters consensus of $487.1 million. The firm sees 2004 EPS of $1.83, vs the Reuters consensus of $1.78, and revenues of $1.78-1.79 billion versus the consensus of $1.78 bln.

Jefferies downgrades Career Colleges, Corinithian Colleges, and ITT Education to Underperform from Buy, as they expect continued pressure on these names in the short-run due to the potential for additional negative headlines as well as a lack of demand by investors to hold these names going into the qtr-end. The firm also downgrades Education Management, Strayer, and Universal Technical Institute to Hold from Buy. While they believe there is less risk with these 3 stocks, as there are no lawsuits or investigative matters clouding the stories, firm says investigations into the other education comapny's should cast a shadow over the entire group.

Transports . . . FedEx reported continuing EPS of $1.33 (or $1.36 including a one time tax benefit offset by a penny from re-alignment costs) in line with its pre-report two weeks ago. Our sense is results would have been even better ex. unusually high plane engine maintenance costs and a fuel drag in the quarter. Management introduced a 1st quarter 2005 EPS guidance range of $0.90-$1.00 with the mid range 19% above consensus of $0.80 but increased full year guidance by only 5% to $4.20-$4.40 (from $4.00-$4.10). Management has set an easy bar to jump over during the remainder of 2005. Ground profitability has decelerated somewhat into difficult

comparisons while Domestic and Intl. Express and LTL profitability has clearly improved. FDX is both a strong secular and cyclical story, with more upside to come driven by improving volumes leading to better margins. Total domestic overnight and deferred y-o-y package growth

was positive for the first time since 1st quarter 2004 and believe is gaining momentum with the acceleration of package weights further boosting yields. Anticipate a continued domestic Express volume recovery over the next few quarters as historically the Express market recovers after heavier freight.

Defense & Aerospace . . . Wachovia downgrades Titan to Underperform from Market Perform, as they have become less comfortable that the co will reach a plea agreement with the Dept of Justice regarding the Foreign Corrupt Practices inquiry before Lockheed Martin's Friday June 25 drop dead date. Firm says the announcement of an agreement (not the final agreement) is necessary, or LMT has indicated it will walk away from its $20/share cash offer and pay the $60 mln breakup fee. While they have no specific knowledge of the DoJ outcome, firm's industry sources have increasingly suggested that the deal may not happen. Also, firm notes that over the last few months, TTN has lost several senior managers, and if TTN remains independent, they will need to rebuild some mgmt capability, which suggests some reduced confidence in their 2005 estimates.

Consumer Durables . . . American Standard expects 2nd quarter EPS to come in at the "top end" of its previously guided range. In April, the company estimated earnings of 67-72 cents per diluted share versus the consensus of $0.70. Company issues upside guidance for 2004 (Dec), sees EPS of $2.17-2.27 vs. Reuters Estimates consensus of $2.16.

Retail . . . Rite Aid raised its fiscal 2005 earnings outlook to a range of $121 million and $167 million. Its prior forecast was for a profit of $112 million and $157 million. The pharmaceutical retailer updated the outlook after reporting first-quarter earnings of $63.3, or 10 cents per share, well ahead of a loss of $38.8 million, or 8 cents per share, a year ago. The average estimate of analysts was for earnings of 5 cents per share in the first quarter. Revenues for the 13-week first quarter rose 4.9 percent to $4.2 billion with same-store sales up 5.4 percent. The first-quarter results include a $4.6 million store closing and impairment credit.

JP Morgan initiates coverage on the sporting goods retail sector, with The Sports Authority at Overweight and Dick’s at Neutral. For TSA, with the Gart Sports merger now behind the co, firm believes the "new" TSA will begin to focus more on organic growth as opposed to acquisitions, which should allow for solid EPS growth and, over time, promote a reduction in the 17% discount the stock has historically received relative to its peers. Also, given TSA's inexpensive valuation, they believe downside is limited and expect multiple expansion as the co extracts synergies and gains scale. For DKS, firm sees a premier sporting goods retailer led by a strong management team, but at 19.4x 2005 EPS, they do not find the stock compelling at current levels and would prefer a better entry point to buy the shares.

Lazard downgrades Gap Stores to Hold from Buy based on valuation. The firm is saying the recovery in operating margins to peak 1999 levels by 2005 is now priced into the stock. The firm also believes that the Gap brand may be decelerating, as their sources have reported that some Gap units are cutting back on labor hours, which could be a leading indicator of decelerating momentum; and firm expects EPS to decelerate to 16% in 2005 and 15% thereafter, from 29% projected in 2004 and 91% in 2003. Target is $27.

UBS says that Bed Bath and Beyond reported better than projected 1st quarter results. Pessimists, and they seem in abundance around this name, will point to the two year comp trend slowing, but maybe that is because there was little else to point to on the negative side. Firm liked what they saw and even if the stock was not down in the aftermarket, they reiterate their Buy recommendation.

Barron's Online highlights Target, a company that has long been a favorite among Main Street shoppers and on Wall Street, too. Shares of the self-described "upscale" mass-market retailer have surged almost 20% so far this year, topping the Standard & Poor's Retail General Merchandise industry group by seven percentage points and the S&P 500 by a whopping 18 percentage points. But Target, known for its red bull's-eye logo, may have more room to run. First, it's surpassing its main competitor, Wal-Mart Stores, in growth of sales and operating margins. Target should continue to gain market share from department stores and other discounters, thanks to what's perceived as a superior shopping experience. Fran Radano, a senior equity analyst with Gartmore Global Investments, notes that Target sells compelling products in a different, "cleaner" atmosphere than Wal-Mart offers. But what could really spur the stock price is the closing of the Marshall Field's sale - and a possible sale of Mervyn's, too. Target will use the proceeds from the Field's sale to pay down debt and repurchase stock, having authorized a $3-billion buyback a couple of weeks ago. That program should last two to three years and add six cents per share altogether to Target's earnings during that time. Although it's selling at a premium to its 15% projected annual long-term earnings growth rate, it's fairly valued by other measures. For example, it's trading below its median 20.4x forward earnings for the last five years, according to Thomson Baseline. And, it's well below Wal-Mart's 22.5x estimated fiscal 2005 earnings estimate of $2.38 per share.

Drugs . . . Morgan Stanley upgrades Schering-Plough to Overweight from Equal-Weight. The firm is saying the company possesses the greatest amount of operating leverage among stocks they follow, triggered by Vytorin and a stabilization in the base business. Firm views Vytorin as a lay-up within the Global Cholesterol class, and they expect FDA approval for Vytorin next month. Stability in SGP's base business will be key to an eventual turnaround, and they have already seen signs that PEG-Intron's share of the Hep C market is stabilizing and believe that a waning impact from the FDA's Consent Decree should unleash significant operating margin leverage in late 2005 and beyond. Target is $25.

Banc of America cuts Abbott Labs 2004-05 estimates slightly below consensus after ABT issued a press release stating its Citizen's Petition regarding Synthroid has been denied by the FDA The firm had expected the petition to lead to the convening of an FDA advisory panel to further establish guidelines for generic approval, and delaying launch of a generic until 2005; but while ABT reiterated its 2004 EPS guidance of $2.24-$2.31 (citing Synthroid's low relative cost), firm nonetheless believes that generics will likely take share. Target is $46.

Hotel & Leisure . . . JP Morgan reiterates their Overweight ratings on Int'l Game Tech and WMS Industries, as after several frustrating false starts, they believe there is a more than reasonable chance slots legislation will be introduced in Pennsylvania next week. According to their sources in the Senate, all unresolved issues, including permissive language relating to Native American casinos, local distribution of tax revs, and the issue of one license per operator have been cleared up; firm also understands that both the House and the Senate have the necessary votes to pass. Firm notes that in particular this legislation is positive for WMS, because sales to Pennsylvania are not included in any of their estimates.

Media . . . Cnet News reports that Ask Jeeves said it will phase out its paid-inclusion program altogether in the coming months. The terminated service allows marketers to pay an annual fee of $30 to submit a Web address into its search engine. Industry leader Yahoo is also considering nixing certain fees for commercial Web sites that seek to ensure exposure in the site's free search results. Yahoo launched a service in early March that offers marketers swifter inclusion into its search index with both an annual flat-fee for site review and a "per click" rate. Critics say paid inclusion can blur the lines between editorial content and advertising. Yahoo rival Google does not offer a paid-inclusion program and its executives have denounced for-fee indexing because of its potential to skew results.

The WSJ reports Gemstar-TV Guide International has agreed to pay $10 million to the Securities and Exchange Commission to settle charges stemming from allegations the company overstated its revenue from 1999 to 2002. The company had been accused of overstating revenue by nearly $250 million, but as part of the settlement the company neither admitted nor denied the charges. The company said it will pay the $10 million from funds already set aside and expensed in connection with a previous announcement related to class-action litigation.

Napster, a division of Roxio, and Best Buy announce a major strategic marketing alliance to drive new subscribers to Napster and deliver a range of digital music experiences to Best Buy's customer base. Best Buy will promote Napster as its leading digital music service through comprehensive in-store marketing activities as well as extensive broadcast, print and online advertising. Best Buy will also market a co-branded version of Napster which will be made available to customers online through Bestbuy.com. In connection with the transaction, Best Buy will receive Roxio stock with a value of up to $10 million over the term of the agreement and Napster will engage with Best Buy in jointly funded marketing activities.

Roxio upgraded to Buy from Neutral at Robinson Humphrey.

America Online agreed to acquire online marketer Advertising.com for $435 million, extending its advertising footprint on the Web. America Online, a unit of Time Warner Inc., said the all-cash transaction will allow the company to reach more than 140 million Internet users. "Online advertising is showing very strong growth across the industry, and the acquisition of Advertising.com underscores AOL's determination to strengthen its competitive position," said Jonathan Miller, Chairman and CEO of America Online Inc. Although this move could raise competitive concerns in the space, size of the deal and AOL comments on strong industry growth could offset these fears, as market looks for further M&A activity in the group. Look for potential reaction in e-advertising names including Docbleclick, 24-7 Media, Modem Media, Aquantive and Digital Impact.

Netflix started with a Buy at Jefferies. A $34 price target based on 1) Accelerating business momentum, 2) View that short-term margin pressure should Yield long-term benefit, 3) Co pioneering and dominating the online DVD rental market.

Microsoft and Ask Jeeves are joining the rush to boost storage space for Web-based e-mail, in advance of a service expected from Google. Microsoft this summer plans to increase the storage available for free accounts on its MSN Hotmail service to 250 megabytes, up from two megabytes; a premium Hotmail service, priced at $19.95 a year, will offer two gigabytes of storage, up from 10 megabytes. Ask Jeeves, is increasing the storage of its My Way, iWon and Excite sites to 125 megabytes of free storage from six megabytes each. Microsoft and Ask Jeeves are joining the rush to boost storage space for Web-based e-mail, in advance of a service expected from Google Inc. Microsoft this summer plans to increase the storage available for free accounts on its MSN Hotmail service to 250 megabytes, up from two megabytes; a premium Hotmail service, priced at $19.95 a year, will offer two gigabytes of storage, up from 10 megabytes. Ask Jeeves, of Emeryville, Calif., is increasing the storage of its My Way, iWon and Excite sites to 125 megabytes of free storage from six megabytes each.

Pacific Growth initiates with an Equal Weight noting that while Sina.com is perhaps the most powerful Internet brand in China with over 100 million registered users. The firm has concern that a number of changes in MII regulations and expansion of the MISC billing system could accelerate churn in the commodity-type SMS services. Firm is waiting for evidence that SMS turmoil has bottomed in 2nd quarter before becoming more positive. SINA is trading at 21x firm's 2005E EPS of $1.68, and 7.4x firm's '05E revs of $270m and 7.3x EV/Sales, which Pac Growth believes is a justified premium to China peers at 16.6x, 5.8x and 5.2x, respectively.

Legg Mason initiates XM Satellite with a Buy rating and $35 target. The firm believes that analysts and many investors are significantly underestimating XMSR's growth potential over the long-term. Also, firm notes that the co has a significant lead over the competition in terms of form factor, price, and functionality of its products, and they note that the co has very strong OEM relationships; while a significant amount of growth is already priced into the stock, firm believes the company will show upside to estimates over the next several years. Firm also starts SIRI with a Hold rating; while they believe that analysts and investors are significantly underestimating the company's growth potential, and they believe there is upside potential to the subscriber consensus over the long-term, firm does not believe the stock is undervalued due to the company's high cost structure and higher cost of capital.

Telecom . . . AT&T lowered its 2004 financial outlook, citing price pressure and recent changes in FCC policies. Following the news, Bear Sterns lowered its rating of the company to "underperform," calling the magnitude of the revision "unexpected" and saying the outlook reflects "worsening industry fundamentals." JP Morgan maintained its "underweight" rating on the company's stock, saying it expects the news to prompt "selling pressure across [the] industry."

The WSJ reports Nextel won a hard-fought battle with federal regulators when Federal Communications Commission Chairman Michael Powell agreed to give the company a lucrative chunk of telecommunications spectrum in exchange for fixing interference problems with public-safety equipment. The Co will be awarded 10 megahertz of spectrum in the 1.9 gigahertz band. The deal, according to Nextel's latest proposal, is valued at about $5.4 billion, including how much the co will spend to upgrade public-safety equipment and the value of the spectrum it is turning in to the government to ease congestion.

Bear Stearns downgrades AT&T to Underperform from Peer Perform in response to worsening fundamentals, including: 1) the magnitude of the company's revised guidance was above expectations, 2) business Services revenue is being pressured by the company's more aggressive pricing tactics as well as continued competitive pressure from other industry participants, 3) RBOC aggressiveness is evident in the small- and medium-sized business marketplace, and 4) recent regulatory events in conjunction with ongoing RBOC competition and technology substitution are conspiring to create significant pressure for AT&T Consumer Services. CSFB downgrades T to Underperform from Neutral and cuts their target to $14 from $18.

CSFB downgrades MCI Inc (MCIA.pk) to Underperform from Neutral and lowers price tgt to $10 from $14 after AT&T's reduction to its outlook, saying that 1) MCIA has limited ability to respond to expected price war with AT&T, 2) Any potential M&A interest will be delayed until visibility improves, 3) MCIA is equally exposed to the business and wholesale local access pricing issues. Firm lowers 2004 revenue estimate to $20.0 billion (down $470 million) and EBITDA estimate to $1.7B (down $350 million).

Lehman upgrades Crown Castle to Overweight from Equal-Weight and raises their target to $18 from $16. They believe that strong wireless fundamentals will drive robust demand for tower leases well into 2005 as carriers continue investing in both network quality and wireless data.

CIBC comments on AT&T's warnings last night. While problems are widely known, the severity of the guidance cut was surprising - the firm is lowering already below consensus numbers accordingly. The company's dividend yield of 6% and 2005 free cash flow yield 20% look enticing, but the firm remains worried that the stock could be a value trap, as EBITDA is expected to fall 30% Year over Year.

SoundView downgrades Vodafone to Neutral from Outperform and cuts their target to $23.50 from $32, as information from contacts suggests the company will be more aggressively pursuing 3G than they had originally expected. The firm's analysis of 3G in Japan concludes that 3G brings additional cost, but little extra revenue. Also, firm notes that Hutchison 3G, the only remaining greenfield operator in Europe, is now beginning to gain increased traction in the U.K. market, and VOD has announced several high-profile mgmt losses and firm has learned of departures of other key staff and of poor working relationships between senior directors.

IT Services . . . The WSJ reports IBM settled lawsuits with about 50 current and former California workers who blamed workplace hazards for their cancers, damping fears that their cases would spur a widespread legal assault on the technology industry. The terms of the settlement were undisclosed, and as plaintiffs agreed to dismissals with prejudice, the suits cannot be refiled. IBM still faces more than 100 cases in New York and other states alleging that employee cancers or birth defects in workers' children.

Network Equipment . . . Soundview upgrades Ericsson to Outperform from Neutral and raises their target to $40 from $30. The firm calls the stock their top pick due to an improved outlook for infrastructure rev growth in 2nd half 2004 and 2005. The firm raises their 2004 global infrastructure numbers to 12% Year over Year from 8%, citing big-bucket mobile voice pricing, Western European wireless capex expansion, and the rapid acceleration of U.S. 3G.

Semiconductors . . . ATI Technologies reported net income of $48.6 million, or 19 cents a share, up from 6 cents a share in the year-earlier period, and above the average analyst estimate of 17 cents a share. Revenue rose 38 percent to $491.5 million, exceeding analyst forecasts of $465.7 million, amid strength in sales of desktop PC chips, as well as for the handheld and digital TV markets. Gross margin percentage grew 2.7 percentage points to 35.3 percent. Looking ahead, the graphics chip maker expects fourth-quarter revenue of $510 million to $550 million, vs. current analyst projections of $494.6 million.

JP Morgan out positive on Omnivision saying the 4th quarter results beat their above-consensus expectation by a penny. Gross margins of 40.3% exceeded expectations due to higher yields. OVTI generated $18 million of cash from operations, in part by running down inventory in anticipation of a new product launch. Firm notes that quality of earnings is good. As expected the accounting issues appear to be modestly benign in nature (upward revision of $0.04 EPS to 2004 earnings), of known scope, and they appear to have been resolved. According to the firm the only material impact may be the legal costs associated with shareholder lawsuits, which the company believes are without merit. 1st quarter 2005 guidance of $0.29 - $0.31 EPS on revenue of $95 - $100 million was reaffirmed. 1st quarter guidance of $0.29 - $0.31 EPS on revenue of $95 - $100 million was reaffirmed. The market reacted negatively to this guidance originally, but firm believes OVTI is being conservative in view of the uncertainty associated with the new chipset that moves them into the higher-resolution DSC market (e.g. CCD territory). The new sensors could fuel another leg of DSC-related growth. Firm is reiterating Overweight rating saying that at a 2005 P/E multiple of 9.9x, OVTI looks to be significantly undervalued as the leading CMOS sensor provider in the rapid-growth digital sensor market.

Software . . . Banc of America upgrades Microsoft to Buy from Neutral and raises their target to $35 from $28.50 based on the following: 1) further top-line acceleration, 2) multiple expansion as the core business reaccelerates, and 3) near-term catalysts from an improving IT spending environment and resolution of cash deployment issues; firm believes that the co is entering a new phase of growth as overhang issues related to Upgrade Advantage and cost containment abate, which should lead to easier compares in the future.

Microsoft considered taking a minor stake in PeopleSoft to help the company fend off a $7.7 billion hostile takeover bid by Oracle according to an e-mail from Microsoft founder Bill Gates made public on Wednesday. Gates' email, written a day after Oracle announced on June 6, 2003, that it would seek to take over rival PeopleSoft, also said Microsoft should consider buying Germany's SAP. "Thinking about this PeopleSoft bid by Oracle made me wonder if we should approach them and suggest a minority investment to bolster their independence in return for a modest platform commitment," Gates wrote to Microsoft Chief Executive Officer Steve Ballmer... Another thought that came to mind is that its (sic) time we bought SAP," Gates wrote. "Given our view of the need to strengthen our platform and willingness to use value to do it seems interesting."


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