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U.S. stocks rose after an industry report showed job gains helped lift confidence in the economy to a two-year high, even as the Federal Reserve gets ready to boost interest rates tomorrow. Computer-related stocks including Solectron Corp. and Advanced Micro Devices Inc. led the advance amid optimism that rising borrowing costs won't deter technology spending. The S&P 500 Index added 3 points (+0.3%) to 1,136. Gains were limited by a drop in Washington Mutual Inc. after the biggest U.S. savings and loan cut its full-year profit forecast. The DJIA rose 56 points (+0.5%) to 10,413. The Nasdaq Composite climbed 15 points (+0.8%) to 2,034. About the same number of stocks advanced and declined on the New York Stock Exchange. Some 1.1 billion shares changed hands on the Big Board, in line with the same time a week ago. With one day left in the quarter, the S&P 500 has gained 0.9 percent since March 31, the Dow average has added 0.6 percent, while the Nasdaq has climbed 1.9 percent.

Strong Sectors: Computer Storage, Construction, Semiconductors

Weak Sectors: Retail, S&Ls, Gold

Top Stories. . .Consumer confidence in the U.S. economy surged in June to the highest level in two years, spurred by job gains and falling gasoline prices, a private survey found.

Carlyle Group and Providence Equity Partners will each buy a 27 percent stake in PanAmSat Corp., the biggest U.S. commercial-satellite operator, for about $953 million, or a total of $1.9 billion, regulatory filings say.

Bank One Corp., the sixth-largest U.S. bank, agreed to settle allegations by regulators that it allowed a hedge fund to make improper mutual fund trades, people familiar with the matter said.

Crude oil in New York fell to the lowest price in almost three months as increased OPEC production and the end of output disruptions encouraged speculators to sell futures.

Of note. . . The New York Stock Exchange is facing its slowest month of trading since December. George Mairs, a money manager with 50 years of experience, doesn't expect an increase any time soon. Investors such as Mairs and traders including David Hegarty at Commerzbank Capital Markets have blamed the slowdown on this week's Federal Reserve decision on interest rates and the transfer of control in Iraq to an interim government. The decline in turnover has crimped earnings at trading firms such as LaBranche & Co. and Van der Moolen Holdings.

Bonds. . . The U.S. government bond market is headed for its biggest quarterly loss in 24 years as job growth accelerates and the rate of inflation rises. Merrill Lynch & Co.'s U.S. Treasury Master Index fell 3.73 percent in the second quarter to date, its biggest quarterly decline since it lost 5.06 percent in the third quarter of 1980. The index includes 113 securities with a combined face value of $2.02 trillion. The 10-year Treasury note's yield, which is used to set interest rates on home mortgages, started the quarter at 3.84 percent and at one point rose to 4.90 percent, the highest level since June 2002.

Financial Services. . . The analyst community is not surprised by WaMu's profit warning, but rather by the magnitude of it. The co lowered guidance for 2004 as expense reductions are behind schedule, higher rates will pressure mortgage earnings, and MSR hedging is proving tricky... Deutsche Bank expects shares to decline Tuesday as the market digests the news. Firm is lowering their ests for 2004-05, but leaves their target of $41 and Hold rating unchanged. EPS ests go from $4.25 to $3.30 for 2004 and from $4.60 to $4.25 for 2005. Firm notes that it's pretty much the scenario we encountered last Dec when the co surprised the Street with the news that 2004 would be a transition year and that strong earnings growth was unlikely to emerge until 2005. They like the idea that negative sentiment in the near-term should take some wind out of the stock. Takeover rumors have stretched the valuation lately given the co's recent disappointments and hints at coming bad news... Lehman notes that the mortgage banking business represents a small percentage of revs (15% or less), yet continues to distract from the co's primary operations. They expect the co to benefit significantly in 2005 from cost reductions in 2H04, asset growth from ARMs originations, and increased fee income from its expanding retail banking franchise. Reiterates Overweight rating... Sandler O'Neill out downgrading WM to Sell from Hold saying they have long thought that the earnings quality at WM was subpar, and thought that the previous guidance of around $4.30 was unrealistic. However, they were surprised by the magnitude of the revision. Their new target is $33.50.

The FT reports that Citigroup is taking a hard look at a deal worth more than $5 bln that would extend its presence in the lucrative retail banking market in the NYC area. According to the article, in recent days, staff at the corporate development arm of the Citigroup have been working intensely on a potential deal to buy New York Community Bancorp. However, people close to the banks cautioned that Citigroup had not yet entered serious negotiations and could still face rival offers. The likely price range of a deal would be between $20 and $23 per share, valuing NYCB at $5 bln to $6 bln, bankers said to the paper. NYCB announced in May that it had hired three investment banks to explore its options.

Food & Beverage. . . Starbucks introduces Frappuccino Light with 30-40% fewer calories. Company announces it will premiere its new Frappuccino Light blended coffee with the co's first ever N. America sampling day. Frappuccino Light blended coffee has 30-40 percent fewer calories than the original Frappuccino blended coffee beverage. "Frappuccino Light blended coffee was created in response to customer requests for a lighter blended coffee option with the same delicious taste." This is an example of how Starbucks comes up with new ways to drive same-store sales growth and to appeal to an even wider audience.

Health & Medical. . .A strain of bird flu that scientists fear could lead to a worldwide pandemic in humans is becoming more infectious to mammals. Scientists say it is only a matter of time before the virus adapts to spread among humans. The flu already passed from birds to humans in Hong Kong in 1997, killing six of 18 infected people. Since then human cases also have been reported in Vietnam and Thailand. Now China-based researchers studying the H5N1 flu strain report that over the years it is changing to become more dangerous to mammals. Their research, based on tests in mice, is reported in Monday's issue of Proceedings of the National Academy of Sciences.

Women on a high-protein diets, including those following the Atkins regime, could be significantly reducing their chances of conceiving, a study involving animals suggests. It remains to be proven if human fertility is also affected by a protein-rich diet, says David Gardner of the Colorado Center for Reproductive Medicine in Englewood, who led the study. "But to err on the side of caution, I'd suggest women who want to conceive get off a high-protein diet," he says. Eating protein-rich food increases levels of a metabolic byproduct, ammonium, in the female reproductive tract of mice and cows, and ammonium is known to slow development of mouse embryos. So Gardner and his colleagues wondered if high levels of ammonium would affect normal reproduction. "It's always hard to extrapolate from animals," says Randy Jirtle of the Duke University Medical Center in Durham, North Carolina, whose team studies the effect of diet on embryos. "But from this data it doesn't look like a good thing for everyone to eat tons and tons of meat."

Media & Entertainment. . . SG Cowen does not expect Netflix to see a meaningful negative impact from the recent 10% price increase when the co reports Q2 subscriber numbers on July 1 and earnings on July 15. Despite the recent price increase, firm expects the co to report results at the high-end of guidance for the seasonally slow Q2, and they believe the co will achieve long-term U.S. household penetration of 6-10% (compared with 1.4% in Q1) as the mkt transitions from traditional movie rentals to online renting, digital video recorders, and video-on-demand.

WR Hambrecht assumes coverage of Netflix with a Buy. The firm believes consumers' enthusiasm for online DVD rental and Hollywood's dependency on DVD profits will drive a $1 bn opportunity in 2005. A competitor base plagued by conflicts with core businesses should enable Netflix to increase rev and EPS by a 20% CAGR in the next 5 years. Analyst thinks the tenets of the Netflix bear case range from 'unsupported' to 'irrelevant' and that upside to 2004 results will send bears scurrying, inspire short covering, and drive NFLX shares to $40. (note: Short interest in NFLX is reported at approx. 55% of float).

IT Services. . . Barron's Online highlights Unisys, which saw its stock rise by 40% last year, but is 18% off its 52 week high as the co's shares seem to fully factor in the economic recovery. "I just don't see any tremendous catalyst to drive [Unisys's stock]," says Joseph Vafi, an analyst at Jefferies. That's why the shares may continue to struggle as hardware becomes less and less central to its business, while Unisys's growing but less profitable services business faces continuing competition. Mr Vafi expects Unisys's hardware sales to slip 2% to $1.1 bln this year. That's a big concern, since hardware represented 45% of last year's earnings. Christine Pezino, an analyst at J.P. Morgan, ests that it can account for up to 60% of Unisys's profits. "As hardware rev declines, so do [Unisys's] margins," says Pezino. One problem is that Unisys's highly profitable ClearPath servers use the co's proprietary OS, thus limiting their appeal. Corporations have been buying cheaper hardware that runs on OS's, so "[sales of] those older systems are still shrinking," says Mr Vafi. Unisys trades at nearly double the stock's expected long-term annual earnings growth rate and it fetches a 10% premium to the S&P's 500's multiple, which is well ahead of its 5-year 30% median discount to the index's P/E. UIS' stock is at a modest premium to its 5-year median P/E ratio of 14.6x forward earnings and the co has a total debt-to-equity ratio of 0.73.

Legg Mason downgrades Cognizant to Hold from Buy based on valuation, as the stock is trading near their $27 target.

Wireless. . . DigiTimes reports that Digital China and ECS Technology, two of PalmOne's PDA sales agents for the China mkt, will stop selling PalmOne products in China due to decreasing profits. PalmOne's only other general sales agent in China is Worldlink. In addition to the "unofficial" competition, the three sales agents competed head to head with each other and often discounted prices in their channels, further decreasing their margins. According to Digital China, margins on a PDAs made by Taiwan-based Asustek Computer are 2-3x higher than Palm PDA margins, even though marketing costs are higher for Palm products. ECS Technology complained that PalmOne is not serious about the China market, as the Palm PDA is not really Chinese-language based like Hewlett Packard and Asustek PDAs.

Semiconductors. . . DigiTimes reports, citing sources, that efforts by Intel to boost sales of its 845- and 865-series chipsets with favorable pricing are unlikely to result in significant results due to high inventory levels at leading Taiwan motherboard makers and channel distributors. Despite the recall of its recently launched 915/925 chipsets, Intel lowered some 865, 848 and 845 chipset prices on June 28 as planned, said the sources to the DT. However, mobo makers are not interested in purchasing additional Pentium 4 chipsets since inventory levels are already at one-month levels instead of a normal two-weeks, and motherboard demand did not pick up substantially in June. Inventories at some motherboard makers may not be able to drop to normal conditions until the end of the 3Q, although demand from OEM clients is likely to increase in July.

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