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U.S. stocks slumped as the market closed amid the busiest trading on the New York Stock Exchange in seven weeks as investors implemented changes in benchmark indexes. The membership of the Frank Russell Co.'s indexes, and stocks' weightings in the benchmarks, shifted in an annual process to ensure they reflect the market. General Electric Co. and Pfizer Inc. led the decline in the S&P 500 Index. The S&P 500 lost 6 points (-0.6%) to 1,134 after climbing as much as 0.5 percent. The DJIA shed 72 points (-0.7%) to 10,371. The Nasdaq Composite added 9 points (-0.5%) to 2,025. Eight stocks advanced for every seven that declined on the New York Stock Exchange. Some 1.8 billion shares changed hands on the Big Board in the busiest trading since May 10. It was the second time in the last 21 sessions that trading exceeded this year's daily average.

Strong Sectors: airline, electrical equip, footwear, internet, aluminum, electronic manuf, wireless, REIT, oil driller

Weak Sectors: auto, tobacco, homebuilding, general merchandise, drug, cable

Top Stories . . . The U.S. economy grew at a 3.9 percent annual pace from January through March, slower than estimated last month as companies imported more goods to meet demand. The government's measures of inflation increased.

Credit Suisse Group, which yesterday parted ways with co-Chief Executive Officer John Mack and split the company along three business lines, said the reorganization doesn't include merger plans ``at this time.''

Shares of Titan Corp., a provider of translators to the U.S. Army, failed to settle a criminal probe by today's deadline for its $1.66 billion sale to Lockheed Martin.

Interpublic., the world's third-largest advertising company, named Michael Roth as chairman and said Chief Financial Officer Christopher Coughlin will retire at the end of 2004.

U.S. sales of previously owned homes rose to a record 6.8 million annual pace in May.

Quotes of Note . . . ``This has probably been the most-anticipated interest rate increase in the history of mankind. `At some point, investors will have fully digested the increase in rates and look to continued earnings growth.'' Douglas Foreman, chief investment officer for stocks at TCW Asset Management, which oversees $44 billion in Los Angeles.

Gurus . . . Mark Hulbert is worried because the market timers have turned too constructive. In May, the average short-term timer was recommending a net short position, so naturally the market advanced. Now, the timers are significantly more bullish. In fact, says Hulbert, they are more bullish than at the February 11 Dow Jones Industrial Average peak of 10,783. His Hulbert Sentiment Index stands at 37.9. At the bottom on May 19, it was a negative 13.5 when the Dow was at 9938.

Bill Gross who runs the biggest bond fund for Pimco, says the rise in yields over the past three months has made U.S. Treasuries the market where his money is headed. On April 1, Gross recommended investors buy anything but Treasuries. Since then, two-year Treasury note yields have surged 1.13 percentage points and ten-year note yields have climbed 0.77. We have come to a point, says Gross, where there is more value in the U.S. market. Pimco is maintaining its investments in non-U.S. debt, including bonds of the UK and Australia, since central banks there have already been raising rates.

Financials . . . RW Baird downgrades Wells Fargo to Neutral from Outperform based on valuation, as the stock is trading near their $61 target and at a 5% premium to regional banks. The firm also notes that: 1) company is well-diversified, but has no catalysts; 2) company hasn't been maximizing origination value of mortgages, but is taking a more balanced approach, 3) company's net income still benefited from mortgage banking boom, but a decline in sector size is expected, and 4) balancing its investment portfolio is becoming more difficult when the yield curve flattens.

Oil & Gas . . . Smith Barney upgrades Rohm and Haas to Buy from Hold and raises their target to $47 from $40 based on positive results from their new paint survey, which found that retail paint sales at stores are 10-20% higher than last year. The firm says this high growth rate is partly due to robust housing activity and partly due to sunnier weather compared to last spring, and customers appear to be opting for higher quality paint and have become less price-sensitive. Firm notes that builders generally use lower quality paint during construction, but homebuyers tend to repaint their homes within a few years of initial purchase, which should create sustainable demand for high quality paint over the next couple of years.

Transports . . . The WSJ reports the DHL Unit of Deutsche Post is about to make a push to become a powerhouse in the $48 billion-a-year U.S. package-delivery industry with $1.2 billion in spending in the next three years to build or upgrade shipment-sorting facilities and make other improvements to its delivery network throughout the country. DHL holds only 6% market share, compared to combined 70% of UPS and FedEx. DHL doesn't appear to be igniting a price war to win business, as some analysts have worried, and FedEx and UPS are generally playing down the growing challenge from DHL.

Defense & Aerospace . . . Morgan Keegan comments that it appears that a consumer version of the X26 TASER will be available this summer, as management reported in early 2004. In addition, firm has heard rumors that a national retailer will be carrying the weapon to sell to individuals (rumor is it will be Sharper Image). Management was not able to confirm this report. However, it is firm's opinion that this development could benefit shares of TASR more than the material impact to the company itself. Historically, TASER has sold the majority of its consumer products directly to customers via the company's website. Morgan Keegan believes that this alternative distribution channel would raise consumer recognition of the product and have the potential to increase sales of the products; notes that TASER weapons are currently restricted for consumer use in 7 states: Hawaii, Massachusetts, Michigan, New Jersey, New York, Rhode Island, and Wisconsin. If the TASER consumer weapons become available through major retail outlets and achieve widespread acceptance, firm believes there is a chance that some of the restrictions could be lifted. Firm also raising 2004 estimate to $0.59 from $0.54 versus consensus $0.48.

Morgan Stanley raises their target on Boeing to $60 from $50, citing the following catalysts: 1) a dual-barreled upcycle in its two key businesses defense and commercial aerospace, 2) the power of mgmt as catalyst for change, and 3) growing order cycle momentum catalyzed by the just-launched 7E7. Firm says near-term triggers include continued 7E7 and other aircraft orders (Farborough Air show week of July 19, plus possibly more orders in the summer/fall), 2nd quarter results, ongoing share buyback, and likely new program wins in defense.

efferies downgrades Raytheon to Hold from Buy given a lack of near-term catalysts as well as valuation, as the stock is trading near their former target of $36 and at the high end of its historical EBITDA valuation range.

The WSJ reports Lockheed Martin Corp's $1.66 billion acquisition of Titan Corp appeared to collapse when Titan announced that it doesn't expect to reach a plea agreement by today's deadline to resolve a Justice Department investigation into alleged overseas bribery. The closing of the deal was already postponed by LMT twice, but yesterday LMT refused another extension. LMT gave no comment on whether the merger agreement is to be terminated, noting that the final deadline hasn't expired.

CSFB notes that although Lockheed-Titan has not yet commented on what they will do, it now appears there is a high probability that the Titan transaction is doomed and LMT will move to terminate its merger agreement. However, firm finds it interesting that LMT has not yet formally indicated for certain that it will move to terminate, leaving open the possibility that the transaction can be salvaged at the last minute, perhaps with a reduced offer to TTN (below $20/share). Firm sees a modestly positive reaction for LMT, and they do not see any significant strategic implications. LMT will keep their $1.7+ billion in cash and likely apply that to more share repurchases and/or dividends. In regards to TTN, firm reiterates their belief that the stock will settle in the mid-teens, perhaps in the $13-$15 range.

Education . . . Corinthian Colleges comments on Dept of Education program review at San Jose campus. The firm says that the main finding of the review was that the school had not properly verified information in students' financial aid applications and resolved inconsistencies and discrepancies in the available information pertinent to the applications. The DoE has not notified Corinthian of any intention to conduct additional program reviews at other campuses. Co says the delay in receipt of Title IV funds has had an immaterial financial impact on Corinthian's financial performance. The company estimates for the quarter ending June 30, 2004, the impact will be an increase of between $750,000 and $1,000,000 in accounts receivable... see yesterday's In Play for commentary on this issue

Food & Beverage . . . JP Morgan initiates AmBev with an Overweight and $24 target, citing the following factors: 1) strong 17% growth rate in EBIDTA between 2003 and 2005 on back of strong fundamentals in its key operations, 2) company benefits from top-line growth, lower costs, and the streamlining of its distribution network in Brazil, 3) synergies related to its alliance with Quinsa as well as economic recovery in key markets should continue to drive strong results in Southern Cone, 4) int'l projects are starting to mature in a profitable manner, 5) synergies and margin improvement are achievable at Labatt, and 6) valuation adequately considers the higher risk of the pending Interbrew-AmBev transaction.

Retail . . . Wedbush downgrades Guitar Center to Hold from Buy based on valuation, as the stock has exceeded their $44 target. The firm is also concerned that investors appear to be ignoring the potential dilution (as much as $0.12 on an annualized basis) from the company's convertible securities that are likely to be treated "as-converted" for EPS purposes starting in 2nd quarter, which makes upside earnings surprises more difficult over the next several quarters.

RW Baird downgrades PETsMART to Neutral from Outperform based on valuation, as the stock is trading near their $34 target; firm also notes that the stock's forward P/E of 26.1x is above the two-year average of 21.2x and near the two-year high multiple of 27.2x.



The WSJ reports eBay shareholders voted down an investor proposal that would have required the company to treat employee stock options as an expense on its income statements, a move that would hurt the company's profit. Had eBay expensed its stock options, the company's first quarter earnings would have been $185 million, 8% less than the $200 million it reported. For 2003, the change would have lowered its earnings by 44%.

Pacific Growth initiates coverage on American Eagle with an Overweight rating. The firm believes that the improved, fashion-right product offering at AEOS should translate into positive same-store sales, stronger margins, and increased earnings growth in FY04 and thereafter. Also, Back to School fashions should continue to favor color, preppy, denim, and dressier styles, which they believe has traditionally been AEOS's core merchandising strengths. At 15.2x firm's 2004 EPS estimate, AEOS is trading at a discount to a sector average of 18.0x, despite its reinvigorated profit growth potential. Firm sees fair value at $40.

Healthcare . . . Morgan Stanley upgrades HCA Healthcare to Overweight from Equal-Weight based on their belief that bad debts will improve. The firm's proprietary analysis of labor trends in HCA's markets gives them confidence that the co should benefit from the current rebound in employment; firm believes that employment is closely tied to uninsured trends, which is the primary cause of HCA's bad debt issues. Target is $49.

Drugs . . . Goldman Sachs downgrades Forest Labs to Underperform from In-Line and cuts their 2005-06 EPS estimates below consensus, as they believe the stock will see more downside from pressures on the top-line; firm notes that: 1) the depression market is slowing down, 2) increased scrutiny will intensify the slowdown, 3) new Lexapro trial demonstrates a lack of efficacy, 4) its core marketing message is driven off mixed trial results, and 5) firm questions the continuance of heavy rebating.

The Financial Times reports that the first independent trial of Pfizer’s Aricept, the best-selling drug for Alzheimer's disease, has found it is only minimally effective - producing a slight, temporary improvement in memory test performance but failing to improve patients' quality of life or delay the progress of dementia. In a study published on Friday in medical journal The Lancet, researchers at Birmingham University in the UK concluded that Aricept, developed by Eisai of Japan and co-marketed by Pfizer of the US, "is not cost effective, with benefits below minimally relevant thresholds". Global sales of Aricept were $1.3billion last year.

Morgan Stanley out noting that earlier this week there was significant volatility in Forest Labs shares as investors were very concerned about the suicide risk related to Lexapro and Celexa and its potential ramifications (i.e., an attorney general review similar to GSK regarding Paxil), but the firm believes Thursday's new release should be viewed positively by investors. Overall, they believe the stock's decline earlier in the week was an overreaction as investors have been hypersensitive to suicide risk with antidepressants. According to the firm, it should be understood by investors that the suicide information added to the Celexa product label is similar to the language used in the labels of other major antidepressants in the category. Also, the delay in Eli Lilly's Cymbalta launch announced last night is clearly a benefit for Lexapro. CSFB out saying they remain buyers of the stock on yesterday's pullback, with the stock selling at 20.8 times '05 calendar earnings of $2.80, a comfortable discount to the 21.7 commanded by the group.

Biotech . . . Amgen announced data from a Phase 3 study showing that administration of Neulasta in the first and subsequent cycles of chemotherapy significantly lowers the rate of infection, as manifested by febrile neutropenia, hospitalization and the use of intravenous anti-infectives in breast cancer patients receiving moderately myelosuppressive chemotherapy. The results will be presented by one of the study's lead investigators, Lee Schwartzberg, M.D., medical director of The West Clinic, Memphis, Tenn., in a plenary session tomorrow at the Multinational Association of Supportive Care in Cancer (MASCC) Annual Meeting.

Medical Devices . . . According to Goldman Sachs, Boston Scientific's sell-off was overdone as a result of in-line guidance for worldwide Taxus sales in 2004, but with possible upside in 2005 and 2006 in ANPI's presentation at the analysts meeting as investors focused on a potential lack of upside surprise in the top-line. Firm sees cash flow, acquisition opportunities, and a depressed valuation as more important; feels comfortable with its Taxus sales ests; continues with Buy rating and $52 fair value.

Hotel & Leisure . . . Barron's Online highlights hotel chain stocks Hilton Hotels and Starwood Hotels, which have easily outpaced the Standard & Poor's 500 index's 15% increase during the past 12 months with more than 40% growth, as corporate travel has picked up. However, the article suggests major hotel stocks could easily slip as chains add new capacity again. That would increase the number of rooms available and potentially cut into prices and profits. In addition, hoteliers lost roughly $1 billion in 2003 alone because of online discounters who keep prices low. Also possibly squeezing profits: rising costs of health care, worker's compensation and terrorism insurance. While currently HLT and HOT look fairly valued, given the continuing threat of terror and the new danger of overbuilding, the article suggests investors might be better off somewhere else.

Bear Stearns upgrades Four Seasons to Outperform from Peer Perform following a series of meetings with mgmt; firm cites the following factors: 1) better understanding of key strategic issues, such as mgmt focus and corporate culture; 2) a deeper development pipeline than previously believed; and 3) greater appreciation of pricing power and brand premium. Target is $71.

Media . . . A U.S. appeals court refused to allow loosened federal rules on media ownership to take effect, dealing a blow to large broadcasters like News Corp. and Tribune that may be looking to expand their reach. Businesses will not be able to own more than one television station in a city, or both a newspaper and TV or radio station in a city, until the FCC better explains why that would not harm competition, the court said.

Nanotech . . . Nanogen issued patent for detecting genetic variants utilizing base stacking. The '148 patent is a continuation of patents issued to Nanogen that cover methods and apparatus that are particularly useful for detecting varying lengths of genetic variants. The patent covers the application of base stacking technologies that use specific types of oligonucleotides, both capture and probe oligonucleotides, to bind and discriminate nucleic acid sequences of differing lengths.

Electronics . . . Roth started TiVo with a Strong Buy and price target $19. With over 100% subscriber growth last qtr, TiVo's roughly 1.6 million subscribers represent an attractive asset, which should drive increasing revenues over time as new and incremental revenue sources emerge. Having in firm's opinion already proved the potential of its model to reach critical mass (defined by us as achieving significant positive cash flow) as recently as its January-ended quarter (4th quarter 2004). The firm believes the subsequent initiatives to accelerate its already high rate of growth via substantially increased spending over the near-term, has created an environment in which investors focused on near-term earnings. The company's valuation has become depressed in light of the push out of profitability timing targets; therefore, believes this pullback has created an attractive entry point for longer-term investors willing to hold through the forecast move to profitability by the end of 2006 (January 2006-ended) or roughly 18 months.



Telecom . . . AT&T cut to Market Perform from Outperform at FBR. Price target goes to $18 from $23.

Network Equipment . . . RW Baird initiates coverage of ADTRAN with an Outperform rating and $38 target. The firm says the company has expanded its product portfolio to include DSLAMS, optical access equipment, routers, Ethernet switches, and security products, and the company believes these new markets will present significant growth opportunities with an addressable market value of more than $10 billion. Firm also notes that the stock trades at 27x 2005 EPS, which is below its historical average of 36x.

Semiconductors . . . Thomas Weisel upgrades Silicon Image to Outperform form Peer Perform after the co raised guidance; firm sees the following 2nd half 2004 growth drivers: SATA, digital consumer electronics, and lower rate PC applications. The firm also considers 20% operating margins achievable.

Smith Barney out on M-Systems and Sandisk following US retail sell-through data of flash memory cards and USB drives for the month of May, as collected by NPD. The data, received on Wednesday post-close showed USB drive revenues were weaker than expected, and while memory card revs looked good on the surface, adjusted for manufacturing rebates they too appear soft.

Software . . . The WSJ reports Microsoft is readying a new version of Windows for release in Asia, possibly as early as September, in response to growing competition from Linux. The new version, which will be called Windows XP Starter Edition, is designed for first-time computer users, offering less features; It will be available in local languages through government programs that offer personal computers to citizens at reduced prices, including existing programs in Thailand and Malaysia.

Atari has shipped 2.5 million units of DRIV3R to retail outlets worldwide. "Our worldwide shipment is right in line with our plan for DRIV3R..." At Electronics Boutique, the Divisional Vice President of Merchandising said: "With just three days of sales, DRIV3R is certain to be one of our top three sellers for the month of June. We had high expectations for the title and it is meeting them."

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