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U.S. stocks rebounded from six-week lows after General Electric reported higher-than-forecast earnings and lifted its 2004 estimate, reassuring investors that the economic recovery is intact. The S&P 500 added 3 points (+0.3%) to 1,112. The DJIA climbed 41 points (+0.4%) to 10,213, and the Nasdaq Composite gained 11 points (+0.6%) to 1,946. All three benchmarks closed yesterday at the lowest since at least May 26. Since last Friday, the S&P 500 lost 1.1 percent and had its fourth consecutive weekly drop as disappointing results from companies including Yahoo! and Veritas Software cast doubt that profits would revive a stock-market rally. The Dow shed 0.7 percent and declined for a third straight week. The Nasdaq slipped 3 percent this week. About seven stocks rose for every four that fell on the New York Stock Exchange today. Some 1.19 billion shares changed hands on the Big Board, 16 percent less than the three-month daily average.

Strong Sectors: auto, railroad, apparel, homebuilding, semiconductor equip, software, hospital, aerospace

Weak Sectors: health care supply, consumer finance

Top Stories . . . U.S. wholesale inventories rose 1.2 percent in May, more than forecast and the ninth straight gain, as companies kept more goods in stock to keep up with orders.

General Electric, the world's largest company by market value, said second-quarter profit rose 3.4 percent as acquisitions and demand for industrial goods and consumer loans fueled the biggest sales gain in almost four years.

Altria Group's Philip Morris International agreed to pay about $1.25 billion over 12 years to settle European Union charges that the company aids cigarette smuggling.

Dana, the biggest maker of axles for light trucks, said it will sell its automotive replacement- parts business to buyout firm Cypress Group for $1.1 billion.

Abbott Laboratories, the world's No. 2 maker of diagnostics tests, said second-quarter profit from continuing operations rose to $634.9 million on higher sales of drugs such as the rheumatoid arthritis treatment Humira.

Gurus . . . Economist Gary Shilling says he is not worried about rates because the economy is soft enough to preclude any aggressive tightening. His concern is productivity, which he believes was behind the tremendous profit gains over the past six quarters. As business avoided new hiring and stretched existing staff over increasing production, output per hour leaped at a 4.5% average annual rate and pumped up profits at an annual 17% rate. However, a rising employment gain will hurt productivity. You can’t have rapid job growth and beneficial productivity.

Fund Flow . . . Funds investing primarily in U.S. stocks took in $2.5 billion in new money during the week ending July 7, estimates Trim Tabs director of research Carl Wittnebert, up from inflows of $2.3 billion the prior week. International stock funds had inflows of $400 million, vs. zero net flow the week before. "Recent equity inflows have likely been inflated by automatic investing at the beginning of the quarter," Wittnebert noted. "Fund investors do not buy when the market is falling." Bond funds had outflows of $300 million, adding to the prior week's outflows of $1.3 billion.

Oil & Gas . . . Arch Coal issues downside guidance for 2nd quarter as it now sees EPS of $0.20, ex items, vs. consensus of $0.26 and prior guidance of $0.20-0.30. Co attributes shortfall to rail service disruptions in both the eastern and western U.S.; missed shipments and production curtailments resulting from high mine inventory levels cost ACI an estimated $8 million after tax, or $0.13 per share, during the period.

Energy . . . CSFB downgrades Ballard Power to Neutral from Outperform after the company sold its fuel cell systems business back to DaimlerChrysler and Ford; while this will lower BLDP's cash burn, firm feels that BLDP has moved down the value chain, and not only will the company lose the rev prospects from this area of the business, overall margins will be relatively lower as well. Firm increases loss est for 2004 to ($1.50) from ($1.34), but reduces 2005 loss estimate to ($0.80) from ($1.18) due to lower rev forecast.

Metals . . . JP Morgan initiates Commercial Metals with an Overweight rating. The firm believes the eventual decline in long steel product prices will lag the decline in flat-rolled steel prices, and the company's fabrication biz should have locked in attractive fixed contract prices that will offset the expected decline in earnings from its domestic minimills segment. Firm says company is a long-term winner in the steel industry based on its integrated structure from metal trading and scrap processing through steel production and downstream fabrication and diversified (product and geographic) rev streams which are unique among steel minimills in the US. Also, firm cites attractive valuation, and says a slight increase in earnings is expected YoY due to higher fixed priced fabrication contracts and strong performance from CMC Zawiercie (CMC's Polish minimill), offset partially by lower domestic steel and ferrous scrap prices.

Food & Beverage . . . Pepsi Bottling downgraded to Hold from Buy at Legg Mason.

UBS upgrades Constellation Brands to Buy from Neutral and raises their target to $45 from $38 based on: 1) expectations of stronger brand equity and sales and profit growth in FY06 and beyond after this year's one-time hike in spending on wine and beer; 2) company's step-up in brand support should drive 6-7% rev growth over 3-5 years; 3) wine margins/shipments are expected to recover nicely from 2006-09, with wine EBIT growing 8%+; and 4) company could likely be awarded the Eastern Modelo U.S. import rights in late 2006. Firm raises EPS estimates for 2005 and 2006 to $2.69 and $3.06 from $2.62 and $2.88, respectively.

Restaurants . . . UBS upgrades Darden Restaurants (DRI) to Buy from Neutral as the stock is priced near five year absolute P/E lows. The UBS-Global Insight Restaurant Leading Indicator is pointing to accelerating industry growth through the fall, something that should help Red Lobster and Olive Garden traffic. Consumers have embraced steak and chicken as Atkins friendly fare, and have largely ignored seafood. However, the firm believes that seafood will make a comeback as consumers focus more on calories and fat. Red Lobster has just started to market the healthiness of seafood.

Retail . . . McDonald downgrades Wal-Mart to Hold from Buy due to consistent deterioration in sales performance at the Wal-Mart division, as measured by their proprietary Store Productivity Indicator, since December. Field observations and other sources suggest a higher level of out-of-stocks at the Wal-Mart Division stores. A build up of negative media and legal attention has worried investors. Firm lowers their EPS estimate for the January 2005 fiscal year to $2.34 from $2.39, and cuts their 2005 EPS estimate to $2.66 from $2.74.

UBS downgrades Whole Foods to Reduce from Neutral based on valuation, saying the current price discounts growth and profit levels in excess of what can be reasonably expected. Target is $52.

Healthcare . . . The WSJ's "Tracking the Numbers" column highlights an interview with Joe Chiarelli, a senior investment analyst at Oppenheimer, for his recent Tenet Healthcare recommendation. Mr Chiarelli recently initiated coverage of Tenet, a troubled HMO, with a Buy rating and price target of $17. Many believe that with so much uncertainty surrounding the timing and total amount of any settlement, it is too early to be recommending the stock. According to Reuters Research, only two analysts recommend buying Tenet, while eight have Sell or Underperform ratings and 11 have Holds. Mr. Chiarelli acknowledges the company's problems, but is sticking to his guns. He says investors have overreacted to Tenet's legal woes, driving the stock down to levels where it now looks attractive. Tenet's growth, its expected earnings and its historical P/E ratio suggest a price of $17, he says, after what he calls the current "turmoil period."

Medical Devices . . . First Albany upgrades Medtronic to Strong Buy from Neutral and raises their target to $60 from $54, noting that the stock trades at a lower price and market cap today than it did in April 2000, while from 2000-2004 the company saw 15% EPS growth rate, total sales from $5.0 billion to $9.2 billion (16% growth), and cumulative free cash flow of over $5 billion. Firm expects MDT to execute on growth initiatives in large, expanding target markets (CRM, vascular/DES, diabetes, spine, neurology), which should reinvigorate investor interest and drive multiple expansion. Firm also believes that ENDEAVOR D.E.S. concerns are adequately reflected in the stock. Separately, firm also initiates coverage of GDT with a Buy rating and $61 target.

Drugs . . . The WSJ's Health section a new AIDS drug that is finally gaining traction, and could provide a wave of AIDS therapies. In a study published today in the journal Science, a Merck compound that blocks integrase was successful in monkeys infected with simian-human immunodeficiency virus (SHIV), reducing the level of the virus to one-hundredth or less of the level found in untreated monkeys. SHIV is a hybrid of the human and monkey versions of the retrovirus. The result, while still early, could bring new hope for AIDS patients who have developed a resistance to existing drugs. "It's been years since we've seen a new class of oral drugs to treat HIV and a new class would be very important for our patients," says Paul Volberding, president of the HIV Medicine Association, which is part of Infectious Diseases Society of America.

Biotech . . . The NY Times reports that Amgen's anemia drug might have broad new uses, recent studies have found. Laboratory and animal studies have shown that in addition to bolstering the body's red blood cells, the drug, EPO, is present in the central nervous system and acts to protect cells and tissues from damage and death. That could make it useful as a treatment for strokes, spinal cord injuries, multiple sclerosis and many other ailments. Testing in humans is in very early stages. A small study by academic scientists in Germany found that EPO, when given within eight hours of a stroke, helped protect the brain from damage and improve patient recovery. A larger trial is now under way there. Another early-stage trial in Germany is testing EPO as a treatment for schizophrenia, and in the US, academic scientists are planning trials for AIDS-related dementia and for a nerve disease similar to multiple sclerosis.

Media . . . Expect Pixar to report 2nd quarter 2004 results during the week of August 2nd. Anticipate quarterly revenue of $51.2 million with gross profit of $42.9 million, resulting in EPS of $0.40. For EPS, Street consensus is at $0.38 and guidance called for $0.30. We have lowered our 2Q04 estimates to a less aggressive stance on international sales of Finding Nemo on home video. While ultimate DVD projections continue to remain bullish at 50 million units over Nemo’s entire life, we believe 2nd quarter estimates were perhaps too aggressive based on the markets in which the DVD was sold into in the quarter. 2nd quarter 2004 revenue estimate has decreased by $21.3 million, gross profit estimate has decreased by $18.1 million, and EPS estimate has decreased by $0.19. This adjustment to our international home video sales expectations has pushed some revenue and gross profit into our 2005 forecast. As a result, our 2004 EPS estimate is now $1.51 (previously $1.60) and 2005 estimate is now $1.70 (previously $1.68). Price target remains unchanged at $62.

Time Warner is expected to report 2nd quarter 2004 on July 28th before the market open. Expect revenues of $10.46 billion, up 5% over the same period last year, with OIBDA of $2.52 billion, up 22%. Our 2Q EPS estimate of $0.15 is in line with street consensus. Expect 6% growth in subscriber revenue, 10% growth in advertising revenue and 7% growth in content revenue. Other revenues should be down 30% coming mostly from the publishing division having sold Time Life in December 2003. 2nd quarter revenue and OIBDA estimates have been revised down by $24 mil. and $25 million, respectively. This is largely due to lower estimates for AOL's domestic advertising business. Analysts have also adjusted our subscriber estimates for the cable division. 2004 EPS estimate comes down $0.01 to $0.62. The Cable division is likely to drive growth in the quarter, although expect to see some normal seasonality in the business. Estimates call for $2.15 billion of cable revenue, up 12% from last year, with OIBDA of $834 mil., up 11%. Results will be driven by expected net subscriber additions of 16,000 for basic, 112,000 for digital, 137,000 for residential data and 19,000 for telephony.

Disney is scheduled to report 3rd quarter 20Y04 results during the week of August 9th. Expect 3rd quarter revenue of $7.40 billion, up 11%, with operating income rising 14% to $1.24 billion, both on a pro forma basis. Analysts are maintaining EPS estimate of $0.30 for the quarter, above consensus of $0.26. Despite recent upward revisions, continue to believe that the Street's 2004 expectations lag evidence of improvements in travel trends and growth in broadcasting. The biggest driver in the quarter is expected to be the Media Networks led by continued growth at the

Cable Nets. Despite the ratings situation at ABC, we believe broadcast revenues will post mid-single digit growth, though higher expenses will mute some of the operating income impact. The Theme Parks segment should continue to rebound on strengthened travel, improved weather

conditions and higher per capita spending versus 2003. Operating income growth may be tempered somewhat by employee benefit expense, marketing costs and promotions. Although the company faced theatrical challenges in 3rd quarter, Studio performance should remain strong on home video sales driven by further DVD penetration. Despite marketing expenses for films to be released 4th quarter, anticipate 20% operating income growth in Studio Entertainment driven by home entertainment.

Hotel & Leisure . . . Merrill Lynch downgrades Argosys Gaming to Neutral from Buy, citing limited upside to 2004-05 earnings estimates, as the consumer's appetite for gaming could slow in 2nd half 2004. Also, firm says the company's plans to expand its Riverside property, as well as the likely expansion in Lawrenceburg, represent viable long-term growth opportunities but limits the chance of a positive balance sheet surprise.

Royal Caribbean’s 2nd quarter has historically represented an important transition quarter into the company’s peak selling season. During the quarter, estimate the company grew its capacity 11.9%, most recently with the addition of the 2,100 berth Jewel of the Seas in May, 2004. But almost equally important in growing RCL’s long-term brand awareness, the company continued to expand its itineraries into tertiary markets throughout Europe and the US. And along with new itineraries the company also introduced an array of new (highly advertised) opportunities for the company to capitalize in the near-term on increasing onboard spend budgets, such as new entertainment and dining venues.

Telecom . . . The FCC voted in favor of a swap awarding Nextel 10MHz of spectrum at 1.9GHz in exchange for spectrum and other cash considerations from Nextel. Nextel had estimated its own retuning/base station costs at $550M; the current company estimate is $807M. The company is confident that the entire total will be eligible to be credited against the $3.2B owed ($4.8B less $1.6B for forfeited spectrum). While Nextel's minimum cash exposure is $3.2B, in theory there is no maximum exposure; the company is responsible for all migration costs for relevant incumbent users of the spectrum, as well as its own costs. However, do not expect total costs to exceed this amount. The General Accounting Office (GAO) has apparently agreed to review the decision. It is our understanding that the GAO is considered to be largely immune from the effects of lobbying, and will be ruling only on the legality of the issues involved. Specifically, do not believe the GAO will evaluate the $4.8B figure the FCC attached to the 1.9GHz spectrum, or the value attached to the spectrum Nextel is giving up. Rather it will examine the applicability of the Anti-Deficiency Act and the Miscellaneous Receipts Act.

Network Equipment . . . WR Hambrecht downgrades UTStarcom to Hold from Buy. Earlier this quarter, the co announced its intention to acquire the Handset Division of Audiovox Communications for $165.1 million in cash. The acquisition provides UTSI with an entree into the high-growth CDMA handset market in North and South America. However, the integration of ACC introduces significant incremental execution risk into the company's operating model, and severely limits visibility into intermediate-term margin performance. The firm expects the stock to remain in a trading range as investors gauge management's ability to enhance the margin profile of the CDMA handset business over the next few quarters.

Piper Jaffray downgrades 3-Com to Market Perform from Outperform and cuts their target to $6 from $9.50, based on the following factors: 1) indications that Neal Oristano, VP of Sales (Americas), who had been instrumental in turning around the Americas region after a string of dismal qts, is leaving the co; 2) the relationship with EDS is taking longer to gain traction than expected; 3) the reasons behind the departures of the CFO, Mark Slaven, and the EVP of worldwide operations, Dennis Connors, continue to be a mystery and indicate a disenchantment among some senior execs about the co's strategy. Firm lowers rev/EPS ests for 2005-06 below consensus.

Semiconductors . . . CSFB initiates SanDisk at Outperform with a $35 target. The company's extensive intellectual property has provided a high-margin source of licensing revs as well as allowed the co to become the cost leader. SanDisk's strong brand and extensive distribution have led to an industry-topping 39% market share. Embedded in the $20 stock price are EBITDA margins and revenue growth both around 10%, which seems unreasonable given the growth for the last two years and historically high returns. SanDisk more efficiently utilizes its assets compared to its peers, enabling it to earn higher returns.

CFSB initiates coverage on Lexar Media with Outperform and $10 target. According to the firm, embedded in the current $6 stock price are EBITDA margins of approx 5% and revenue growth of near 10%, which seems unreasonable given pending price cuts by Lexar's flash supplier and the 100% growth the company and industry have enjoyed for the last two years. Lexar's sales have grown at a 94% CAGR over the last five years. Mobile consumer electronic end-markets are forecast to grow by a 40% CAGR for the next five years.

Digitimes reports despite Intel resuming deliveries of 915 chipsets, full availability of 915 motherboards in the channel is not expected until late July, according to sources at Taiwanese motherboard vendors. In addition, the actual number of defective 915 chipsets might be higher than was previously estimated, which would delay production ramps at local motherboard makers, said the sources. It is "regrettable," said Jonney Shih, chairman of Asustek Computer, Taiwan's largest motherboard maker, while commenting that the impact of the chip defect on global motherboard sales will be limited. The article also notes demand from PC OEMs should remain strong.

Piper Jaffray says Cypress Semi continues to be its favorite idea heading into earnings season, as the market is punishing the stock excessively. The combination of inventory correction by comm OEMs and distributors appears to be the chief culprit. First of all, Cypress has only 35% exposure to the wireline/wireless industry, much less than other comm IC names. Second, CY's business with Cisco has been solid this quarter. Third, the firm sees the inventory correction in the distribution and comm business as a small change. While CY is the firm's favorite name heading into earnings season, investors do not need to be aggressive at this time. Sales guidance is not likely to be much above $280 million.

Software . . . Microsoft said that Amazon.com will begin taking orders for Portable Media Centers, a new line of portable devices for listening to music and viewing video content. Microsoft has been working since early 2003 to get device manufacturers to put the Portable Media Centers on the market in order to compete against Apple Computer's popular iPod portable digital music player. The world's largest software maker, which developed software for the new handheld multimedia devices, also said that Major League Baseball games and footage would be available for download to the devices, which are scheduled to be shipped later this summer. Microsoft licensing deal with MLB could provide new competition for Sirius Satellite Radio and other media companies that license sports entertainment content on their platforms.

Piper Jaffray downgrades Computer Associates to Market Perform from Outperform and cuts their target to $27 from $29 after the company lowered guidance. The firm says that a preliminary review of CA's bookings leads them to believe that bookings as an indicator of growth, without categorically defining the type of bookings by size, contract length, and status as new or renewal, is becoming less valuable.

Bernstein upgrades Siebel to Market Perform from Underperform and raises their target to $8 from $7, saying the stock's valuation as well as market sentiment are beginning to reflect some of the issues that we expect to challenge the co.


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