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The Federal Reserve issued its statement this afternoon, and not one eyebrow on Wall Street was raised in surprise. The Central Bank did the 25 basis points and indicated future response will be at a "measured" pace, which means gradualism. Of course, the monetary mavens indicated policy might change if economic conditions changed dramatically, so when people lay out a road map for rate hikes with no supportive economic data, they are whistling Dixie. U.S. stocks closed with modest gains Wednesday after the Federal Reserve did the expected and lifted interest rates by 25 basis points. The move, which brings the rate to 1.25 percent, was the central bank's first hike in four years. The language of the Fed's accompanying policy statement will now come under scrutiny as it left the "measured" pace phrasing in place with regard to the degree and timing of its tightening in the face of inflation. The DJIA added about 22 points (+0.2%)to close at 10,435, while the Nasdaq Composite finished up almost 13 points (+0.6%) at 2,047. The indexes were mixed prior to the decision with the Dow down about 15 points, and the Nasdaq hovering just above the flat line. The S&P 500 rose 4 points (+0.4%) to 1,140. Volume reached 1.47 billion on the New York Stock Exchange and 1.73 billion on the Nasdaq. Breadth in broad market improved as the session wore on with advancers outpacing decliners on both exchanges - 24 to 9 on the Big Board and 19 to 12 on the Nasdaq - when the closing bell sounded. It was interesting to see the bond market improve on the Fed rate hike. The Fed promised to be vigilant against inflation while moving in gradual stages. The ten-year note yield fell seven basis points to 4.62%.

Strong Sectors: oil & gas, healthcare, communication equipment, construction, gold& silver

Weak Sectors: textiles, specialty retail, autos

Top Stories. . . Federal Reserve policy makers raised the U.S. benchmark interest rate by a quarter-point to 1.25 percent and reiterated that further increases can come at a ``measured'' pace. The Fed promised to respond to any changes in ``economic prospects.''

U.S. Treasury notes rose after the Federal Reserve, in raising its interest-rate target for the first time since 2000, reiterated that the pace of future increases can be ``measured.''

Brazil's central bank said the inflation rate will be higher than it previously expected for both 2004 and 2005 as an economic rebound gives retailers more room to pass on cost increases to consumers.

An index of growth for Chicago-area manufacturers and other businesses fell more than forecast this month after reaching a 16-year high, reflecting a slowdown in orders and production.

The dollar fell against the euro, trading near a three-week low, after the Federal Reserve lifted its interest-rate target by a quarter point to 1.25 percent and suggested it may stick to increases of a similar size this year.

Crude oil futures rose for the first session in four after the Energy Department reported that U.S. oil inventories fell as refineries increased production of gasoline and other fuels.


Comment. . . The question now is what breaks the market out of its sidewise slumber, and the answer has to be profits. According to Thomson First Call, the preannouncement season has been the best since they started keeping score, with upside revisions outdistancing the downside variety. If the confessional season is benign, then the projections for second-quarter S&P profits to rise 23-to-25% looks attainable. If so, it would mark the fourth straight quarter of plus-20% earnings growth, a development that has happened only four times in the last 50 years.

Moreover, mutual fund inflows have begun to accelerate, and managers have been content to let cash pile up. Stocks seemed to accelerate in the final half hour, which means that end-of-quarter window dressing may have kicked in. We might also be seeing the opening act of investors anticipating second-quarter earnings. We are past the Iraq transition and past the Fed, and now it’s up to the bottom line to bring on the good old summer rally.

Fed Speak. . . Fed raises fed funds rate target 0.25% to 1.25%.

The FOMC statement reads:

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved. Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors.

The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Saddam. . . Saddam Hussein will appear before an Iraqi judge Thursday to face charges of genocide, war crimes and crimes against humanity, Iraqi officials said Tuesday. Saddam will be charged with a 1988 massacre of Kurds, the 1990 invasion of Kuwait and the 1980-88 Iran-Iraq war, said Salem Chalabi, a lawyer leading the work of the tribunal.

Drugs. . . The NY Times reports Federal investigators said that drug co's had repeatedly overcharged public hospitals and clinics for low-income patients, making them pay more than the maximum prices allowed by federal law. Such taxpayer-supported hospitals, community health centers and clinics for people with AIDS are supposed to have access to the government's best prices for outpatient drugs. The investigators, at the inspector general's office in the Health and Human Services Department, found that prices charged to those agencies frequently exceeded the limits set by the Public Health Service Act. In one month, the investigators said, the overcharges totaled $41.1 mln, raising the cost of prescription drugs to public hospitals and clinics 18%, to $269 mln, from $227.9 mln. In 31% of the transactions examined, the prices charged by drug manufacturers exceeded the legal maximums, the investigators said. 36 of 37 health care providers had to pay more than the ceiling price defined by Congress.

Biotech. . . Barron's Online highlights an interview with Dr. Eric Shen, a member of the Pimco RCM Biotechnology Fund's management team, for his stock picks. The fund has gained 23.2% over the last 12 months, outperforming the Nasdaq Biotechnology index by more than 13 percentage points. Mr. Shen likes currently Gilead Sciences (GILD), saying that the co has a new combination formulation of Viread and another new HIV drug called Emtriva, which he believes is going to become the most prescribed combination pills and pretty much the top treatment for HIV after it is launched later this year. The fund manager also likes OSI Pharmaceuticals (OSIP), which has a new drug Tarceva that has the same potential as ImClone's Erbitux. "But I think once we have Tarceva launched early next year, people are going to realize what they are missing," says Mr. Shen. And finally he likes QLT (QLTI). Mr. Shen says that it is kind of a value play, trading at 16x his 2005 ests.

Security. . . Taser International announces it was awarded a contract from the US military for TASER conducted energy weapons and accessories that totaled over $1.8 mln. This military contract represents the single largest order in company history.

Financial Services. . . Shares of Commerce Bancorp fell after the indictment of two executives at the bank's Philadelphia unit in a corruption probe left investors uncertain about future growth. Federal prosecutors indicted on Tuesday a prominent supporter of Philadelphia Mayor John Street as well as the former city treasurer and 10 others in the graft scheme. Glenn Holck, the Pennsylvania president of Commerce Bank, and Stephen Umbrell, the regional vice president of Commerce Bank, were among those indicted. The bank has since suspended the two. Investors are concerned that Commerce's rapidly growing business of working with state and local governments -- especially underwriting municipal bonds -- will wither if other public officials being asked to do business with the New Jersey bank shy away from Commerce because of the investigation, said RBC Capital Markets analyst Gerard Cassidy. Furthermore, the indictment "begs the question of how much did senior management of the corporation, Vernon Hill and his colleagues, know of how the business was being conducted in Philadelphia," Cassidy said. The bank has been aggressively expanding and had 278 banking offices, including 145 in the New York City area and 133 in the Philadelphia area at the end of March. The bank has pulled in customers with free checking, Saturday and Sunday branch hours and other offers that took the competition by surprise, especially in New York City where J.P. Morgan Chase & Co and Citigroup Inc have dominated the market.

Retail. . . Sears, Roebuck to acquire ownership or leasehold interest in up to 61 off-mall stores in key Sears markets from Kmart and Wal-Mart for approx $620 mln.

Kmart to sell up to 54 stores to Sears for $621 mln, increases share buyback plan to $100 mln. The exact number of stores, locations, and total purchase amount will be determined based upon the satisfaction of certain conditions which are to occur within 60 days for the majority of the stores and 75 days for the remainder. Kmart will continue to operate the stores that are to be sold until March or April 2005. "The transactions with Sears and Home Depot (which was announced on June 4, 2004) represent a total purchase price of almost $1 billion for less than 80 of our stores, or approximately 5% of our current store base. We are not currently in discussions regarding any additional significant store sales, although we will continue to evaluate opportunities as they arise." Kmart also announced that its Board of Directors has increased its existing share repurchase authorization to $100 million

Education. . . UBS out saying that last night they spoke to Career Education’s mgmt about SACS "warning" the firm already discussed yesterday. Management explained that, 18 months ago, AIU Atlanta was reaccredited for 10 years pending the resolution, within 2 years, of certain issues. Warning status resulted because, with only 6 months left in window, certain "institutional effectiveness" issues remained outstanding. CECO managers told the firm they expect to resolve the issues within 6 months and that they think it's unlikely SACS would pull accreditation even if the 6 months deadline is not achieved. Firm notes that mgmt's assessment seems reasonable, but they still see this as a negative that may increase the chances of seeing more regulatory inquiries; rating remains Neutral with tgt unchanged... JP Morgan out noting they recognize that concerns surrounding the accreditation status of AIU could create pressure on CECO shares. However, institutional monitoring is typically a normal part of the reaccredidation cycle... CSFB out noting the most recent action by the SACS does not immediately jeopardize AIU's accreditation, in their opinion. According to SACS, the normal course of proceedings is a warning probation, denial of reaffirmation, and finally removal of membership if warranted. With all that is at stake (firm estimates AIU generates as much as $500M in revenue), they would expect mgmt to finalize this issue before it is elevated any further.

Casino. . .Roth Capital believes a positive vote in PA should fuel an extended rally in gaming equipment stocks. Set up as a video lottery, Pennsylvania would likely utilize games and systems similar to New York's video lottery, which benefits names like IGT, AGI, MGAM and GTK.

Wireless. . . The analyst community is positive regarding estimates but pretty much neutral on the stock following RIMM's Q1 results posted yesterday after the market close. Once again, forward guidance easily beat expectations. RIMM anticipates Q2 pro forma EPS of $0.40-$0.45 on rev of $290-$310 mln (Street: $0.36/$288 mln), and Q3 EPS of $0.45-$0.50 on sales of $340-$360 mln... JP Morgan notes that both bulls and bears have plenty of material to work with. RIMM is executing brilliantly, appears untouched by competition at present, and is ramping rapidly in the enterprise and consumer markets, and expanding geographically. However, sell-in exceeds sell-thru, effective taxes will jump in FY06, YoY rev and EPS growth rates will likely decline, and the NTP litigation risk remains active. Firm thinks the stock is likely to trade up on the strong results, but believe there is growing likelihood that the valuation multiple will contract as year-on-year EPS comparisons get much tougher. Maintains Neutral...BofA out saying that although the results and guidance were very strong, they are maintaining Neutral rating as the valuation currently reflects the company's strong fundamentals. They are increasing their FY05 EPS estimate from $1.44 to $1.75 based on revenues of $1.31B (up from $1.17B). For FY06, EPS estimate grows from $1.79 to $2.00, with sales of $1.81B (up from $1.46B). Based on higher estimates, the firm is increasing their price target to $66 from $60.

The LA Times reports that Verizon Communications says FCC officials may face criminal penalties should they approve Nextel's plan for reducing interference from mobile phones with police radios. Granting Nextel's request, without first auctioning the airwaves, may put the FCC in breach of laws that bar U.S. officials from distributing government property or taking funds without authority, Verizon General Counsel William Barr wrote in a letter to the FCC. Verizon, which owns 55% of the biggest U.S. mobile-phone operator, wants to derail Nextel's proposal and has said it would bid $5 billion for the rights.

Internet. . . Smith Barney initiates NFLX with a Buy and $42 target; firm notes that the co is on the threshold of a financial inflection point due to the achievement of initial critical subscriber mass, continued rapid subscriber gains, and a 10% price hike that took effect in June 2004. Also, firm expects the co's revs to jump by more than 90% in 2004 and another 70% in 2005, margins to triple between 2004-05; and expects GAAP EPS of $0.26 in 2004 and $1.25 in 2005. While the $8 bln movie rental business is mature, firm says the co's deep and broad selection, easy-to-use Web-based catalog, improving DVD turnaround times, absence of late fees, and favorable customer "buzz", should have considerable room to expand upon its current 3.2% mkt share.

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