Replies to post #2937 on Sector Investing

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VIX extremes vs the SMH and NDX on 3 year weekly charts:
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VXO, VIX vs SOX on 5 Year Weekly Charts:

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Technical Analysis: Still Selective
By Paul Shread

http://stocks.internetnews.com/article.php/3345031

The rally continues to be very selective, with another day of poor internals. As long as that continues, any rally will be vulnerable. The Nasdaq (first chart below) faces resistance at 2059-2060, 2079, and 2088-2095, and support is 2043-2044 and 2033-2035. The S&P (second chart) faces tough resistance at 1142-1143, and 1150, 1157, and 1160-1163 are above that. Support is 1133-1135 and 1126. The Dow (third chart) has resistance at 10,500-10,510 and 10,570, and support is 10400-10,425 and 10,332. Another less than inspiring sign is today's new low in the VIX (fourth chart), the options volatility index. That comes a little too soon, with the indexes well below their highs.

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The S&P 500 Index rose after a stronger-than-expected reading on consumer confidence encouraged investors that growth in earnings and the economy will help extend the market's 14-month rally. Pulte Homes gained after the homebuilder reported profit that beat the average analyst estimate. Energy shares advanced, paced by Exxon Mobil, after OPEC's president said the cartel might raise its oil-price target by 30 percent. The S&P 500 rose 2 points (+0.2%) to 1138, its fourth advance in five days. It has jumped 42 percent since its 2003 low in March of that year. The DJIA added 33 points (+0.3%) to 10,478.16. The Nasdaq lost 4 points (-0.2%) to 2032.. Benchmark indexes pared gains after reports of explosions in Syria and gunfire in Iraq. The United Nations building was on fire and a terrorist group started shooting following three explosions in a western Damascus neighborhood, Al-Arabiya news reported, citing the Syrian state news agency SANA. Six stocks rose for every five that fell on the New York Stock Exchange. Some 1.5 billion shares changed hands on the Big Board, in line with the three-month daily average.

Strong Sectors: oil services, oil, retail, drugstores
Weak Sectors: gold, semiconductors, computer storage

Top Stories . . . Verizon, the largest U.S. local-telephone provider, earned $1.2 billion in the first quarter as demand for wireless calls lifted sales 3.9 percent, ending nine quarters of little or no revenue growth.

U.S. consumer confidence rose in April to a three-month high and previously owned home sales increased to the second-fastest pace amid job and income growth.

More crude oil is needed to encourage U.S. refiners to expand inventories and to ease record fuel prices, Deputy U.S. Energy Secretary Kyle McSlarrow said after meeting Saudi oil minister Ali al-Naimi in Washington.

Wyeth, which has set aside $16.6 billion to resolve suits over damages caused by fen-phen diet combinations, must pay $1.013 billion to the family of a Texas woman who died from a lung disease after taking weight-loss pills that the company makes, a jury ruled.

Lockheed Martin, the biggest U.S. military contractor, said first-quarter profit climbed 16 percent, buoyed by U.S. spending on Patriot missiles used in Iraq and to develop new jets. The company raised its 2004 forecasts.

DuPont, the second-biggest U.S. chemical maker, said profit rose 25 percent in the first quarter on foreign exchange gains and sales of synthetic fibers and chemicals used to make electronics.

Janus Capital Group may pay about $200 million, including fee reductions, to settle allegations that it allowed clients to engage in improper mutual- fund trading.

ImClone Systems, a drugmaker that last year won U.S. regulatory approval for its Erbitux cancer medicine, soared after the company reported a five-fold increase in revenue.

Quotes of Note . . . ``The stock market is torn right now between fear of higher interest rates and the really good company earnings we are seeing,'' said Erich Hein, who helps oversee the equivalent of $7.1 billion at SEB Invest GmbH. Hein has been selling shares of banks including Citigroup and J.P. Morgan Chase because the companies may be hurt by rising interest rates. He's been buying drugmakers such as Pfizer Inc. and Merck & Co., which tend to be less affected by shifts in rates.

``We expect a deceleration of earnings estimates and a tightening of rates in coming months and we are trying to anticipate that as much as possible,'' said Sebastien Doisy, a strategist at CDC Ixis Asset Management in Paris.

``If consumer confidence is up, then, de facto, investor confidence has got to be up as well.'' Dave Briggs, head of global equity trading at Federated Investors.

Gurus . . . UBS says recent evidence suggests that while information technology spending in Europe has passed the bottom, the rate of recovery remains slow. Even in the U.S., the recovery in the IT service sector is relatively gradual.

Smith Barney continues to expect a 10%-to-15% correction from here by mid-summer. Strategist Tobias Levkovic notes earnings growth is likely to slow, given high margin levels, and anticipated rising compensation costs. Large cap safe-havens include Wal-Mart, GE, Microsoft, Altria, United Parcel, and American Int'l.

Joe Carson, Director of Economic Research at Alliance Capital, says current dollar GDP should top 7.0% in the first-quarter. Real GDP is expected to exceed 5.0%. Nominal GDP exceeded 7.0% only once in the most recent bottom (the second-quarter of 2000). No wonder corporations are in the pink! First-quarter pre-tax profits should rise to a record $1.275 trillion, which would represent 11.0% of GDP. In the first-quarter of 2003, the profit share of GDP was 8.6%. The expected increase would represent the biggest one year jump in more than 40 years.

Financials . . . The New York Times reported Allied Capital has come under scrutiny over a $9 million transaction, which has led to questions on Wall Street about the quality of its financial statements and to an informal inquiry by federal securities regulators. However, the company says that the 2003 transaction with a related entity was both immaterial and irrelevant and did nothing to affect the financial status of either business. For that reason, a company executive said, details of the transaction - which involved the transfer of defaulted loans to Allied from Business Loan Express, the largest company in its investment portfolio - were not specifically disclosed.

REITs . . . Kimco reported 1st quarter 2004 FFO of $0.89 per share, materially ahead of estimates

($0.84) and the consensus ($0.85). The quarterly result included a $0.04 per share impairment charge; as such, the $0.93 per share operating result exceeded our estimate by $0.09 per share. Better than expected results were due to strong internal growth and external expansion. Occupancy moved higher sequentially and year-over-year. As of 1st quarter 2004, occupancy was 91.9% compared with 90.7% as of December 31, 2003 and 89.1% a year ago, a sign of Kimco's leasing ability. KIR was 97.3% occupied and KROP was 98.0%. In 1st quarter 2004, Kimco acquired six shopping centers and one land parcel for $256.6 million,

representing 1.7 million square feet. Analysts are assuming $600 million of acquisitions in 2004. Dispositions totaled $63.4 million (2 in KROP, 3 in Kimsouth). Given these run-rates, it is possible that there will be some upside to portfolio expansion assumptions. 2004 and 2005 FFO per share estimates are $3.45 and $3.75, implying growth of 6.8% and 8.7%, respectively. Kimco's raised its 2004 FFO guidance range to $3.47-$3.52 from $3.41-$3.46 per share. This guidance confirms thesis on the shopping center sector; namely, landlords have pricing power and the sector is characterized by accelerating earnings momentum.

Homebuilders . . . Pulte Homes, the fourth-largest U.S. homebuilder said earnings jumped 53 percent as falling mortgage rates spurred more people to buy new houses. Profit from continuing operations totaled $1.02 cents a share, exceeding the 85-cent analyst estimate.

Oil & Gas . . . Bloomberg.com reported that OPEC may raise its target price by 30 percent because the weak dollar has reduced purchasing power and boosted inflation in member states, the group's president said.

Baker Hughes reported 1st quarter GAAP earnings from continuing operations of $0.29 per diluted share, excluding $0.01 from discontinued operations, $0.04 better than the consensus of $0.25. Revenues rose 16.6% year/year to $1.40 billion versus the $1.35 billion consensus.

Transocean reported earnings of $0.07 per diluted share, $0.04 better than the consensus of $0.03. Revenues rose 5.8% year/year to $652.0 million versus the $581.9 million consensus. Company also reported an "adjusted" EPS number of $0.15, associated with early debt retirement and TODCO initial public offering (IPO)-related items, so upside surprise could be bigger.

Chemicals . . . DuPont reported earnings of $0.96 per share, $0.01 better than the consensus of $0.95. Revenues rose 14.2% year/year to $8.21 billion versus the $7.99 billion consensus. The company sees 2nd quarter EPS of approximately $0.78 versus consensus of $0.77, First Call consensus of $0.78. The company reaffirmed 2004 previously issued EPS guidance of $2.10-2.30, consensus $2.33.

Metals . . . U.S. Steel reported earnings of $0.47 per share, reflecting assumed conversion of company's convertible preferred shares into approximately 16 million common shares, $0.09 better than the consensus of $0.38. Revenues rose 55.6% year/year to $2.97 billion versus the $2.64 billion consensus.

Barrick Gold is looking forward to 2004 and beyond. Both management and market is focused on the

company's aggressive growth strategy to reach 6.8-7.0 million ounces by 2007. Management followed through on promise to reduce hedgebook (800k oz in 1st quarter), even at a significant opportunity

loss and below market gold prices. ABX reiterated its new no-hedge policy even in a higher significantly higher gold price environment as the company has outgrown its need to hedge. Expect lower volumes and higher costs 2004-2005 before new projects come on line 2006-2007. Analysts have adjusted 2004 expectations to $0.33 from $0.35 to reflect the negative impact expected from management's plan

to deliver 1.5 million ounces into the hedgebook (in 2004). Analysts maintain 2005 forecast of $0.40.

1st quarter came in modestly below expectations due to a lower than expected realized gold price impacted by delivery of lower priced hedged ounces. Excluding non-recurring items ($10 million post-tax non-hedge derivative loss), ABX earned $0.07/share - modestly below expectations. Analysts continue to believe that the market is factoring in most of the negative news surrounding Barrick. Investors continue to focus on ABX's large negative MTM hedgebook. A more aggressive de-hedging would allow a faster collapse of its

valuation discount.

Defense & Aerospace . . . Lockheed Martin, the biggest U.S. military contractor, said net income climbed to 65 cents a share, more than the 53-cent average forecast. Revenues rose 18.2% year/year to $8.35 billion versus the $7.73 billion consensus. The company sees 2004 EPS of $2.50-2.60, up from previous guidance of $2.30-2.40, in line with consensus of $2.53, on revenues of $33.8-34.8 billion, consensus is $34.4 billion.

L-3 Comms reported earnings of $0.67 per share, $0.03 better than the consensus of $0.64. Revenues rose 39.7% year/year to $1.52 billion versus the $1.42 billion consensus. The company sees 2004 EPS of $3.35-3.40 on revenues of $6.5 billion versus the consensus of $3.36 $6.32 billion respectively.

Armor Holdings received a contract award from the U.S.Army Tank-Automotive and Armaments Command (TACOM) to supply additional crew protection kits for the U.S. Army heavy truck fleet. Under the contract, which totals approx $60 mln, co will supply armor solutions for the Heavy Expanded Mobility Transport Truck (HEMTT), the Palletized Loading System (PLS), the Heavy Equipment Transporter (HET), and the M915 series of trucks. Co noted that it expects this new business to represent approx $60 mln of revenue incremental to company's previous 2004 revs guidance.

The WSJ reports that Boeing faces a federal criminal investigation that has expanded into whether it used a rival company's documents to compete for NASA contracts, according to government and industry officials close to the probe. Investigators are trying to determine whether a former employee of Lockheed Martin hired by Boeing in 2001 gave his new employer access to documents containing sensitive pricing data. Government officials are increasingly focusing on whether the Lockheed Martin documents affected Boeing's pricing decisions concerning rocket-launch contracts for the NASA and other government customers.

Lear Corporation announced 1st quarter 2004 EPS of $1.30, up 29% from last year, on the back of $4.5

billion of revenue, up 15% from last year. The $1.30 per share was higher than our expectations, but mostly

because $0.10 per share of facility closing costs did not occur in the quarter and were instead pushed into 2nd quarter. Approximately $250 million (just under half) of the year-over-year revenue increase was truly from new business, with the balance a result of FX movements. Of the $250 million, $180 million of this was from Europe, as the company has previously disclosed it expects most growth to come from outside of North America this year. Margins were negatively impacted by ongoing facility consolidation costs -- a trend analysts expect will continue in the near-term but reverse in 2005 as the company's cost structure will be more competitive. Lear believes commodity pricing had a negative $0.04 per share impact on the quarter's results, and could have a $0.10 negative impact for the year but believes savings can be generated elsewhere to offset this expense; approximately half of the expense is steel-related.

Education . . . Piper Jaffray raises its target on Corinthian Colleges to $40 from $36 based on 29x 2005E EPS of $1.38, in line with the company's peer group. The firm believes the company's strategy for new program adoptions throughout CDI, Corinthian's Canadian postsecondary education business, will ultimately drive both enrollment growth and operating margin expansion at CDI. The firm recommends the stock as a core higher education holding due to its large exposure to the appealing allied health education field, its growing online business, its strong and consistent operating results, and the potential for upside to March quarter estimates.

Merrill Lynch downgrades Apollo Group to Neutral from Buy based solely on valuation. The firm believes the potential stock appreciation is limited and that investors have built APOL's success into its stock price. Currently trading at a premium at 49.8x 2004E EPS of $1.91/sh and 38.3x 205E EPS of $2.48/sh vs. the group average of 36.6x and 29.8x.

Apparel . . . The WSJ's "Tracking the Numbers" column highlights K-Swiss, which ran up 122% last year, but may lose traction. K-Swiss's success has been fueled by the popularity of its Classic original, essentially unchanged from the all-white, all-leather tennis shoe that the co first started selling 37 years ago. Sales of the shoe rose to $163 million in 2003, when it represented 38% of the company's total sales. K-Swiss got a further boost from a long-running spat between Foot Locker and Nike. The result: Foot Locker had extra shelf space to fill, and one of the things that it filled it with was shoes from K-Swiss. Foot Locker and Nike recently made amends, and there are signs the trend toward white-on-white classics that boosted K-Swiss's sales is beginning to fade. The 6 month order backlog from Foot Locker fell only 4% to about $34 million at the end of 2003. That doesn't seem bad, unless you consider that the order backlog had risen earlier in 2003. According to conference-call transcripts, the order backlog rose to about $48 million by the end of the 3rd quarter of last year, nearly 40% above where it started 2003. Viewed in those terms, the $14 million drop in its order backlog to $34 million in the 4th quarter was stark. According to the article, a shift in trend away from white-on-white classic sneaker styles also could hamper K-Swiss. Mindful of this danger, K-Swiss has been focusing its efforts on Classic original-derived shoes that add color and has launched an ad campaign that, as K-Swiss vice president of marketing Debbie Mitchell put it on the company's 4th quarter conference call, features "a diverse group of hip people, each with their K-Swiss shoe of choice." Unfortunately, such top-down efforts at generating buzz are difficult to pull off, particularly for a company like K-Swiss, whose past derives from the tennis court rather than the basketball court.

Martha Martha Martha . . . Martha Stewart Living Omnimedia announced that it has extended its key merchandising agreement with Kmart by two years, through January 2010. The Kmart contract is extremely important to MSO, having become the company’s largest profit generator given the depressed state of the flagship Martha Stewart Living magazine. The contract was also

revised to provide certain concessions to both Kmart and MSO. An amended contract will be filed along with the company’s 2nd quarter 2004 10Q filing in August 2004. Concurrent with this announcement, Kmart has withdrawn its lawsuit against MSO (filed in February 2004) which contested certain terms of the contract.

Going forward, Kmart’s payments to MSO will be based on the higher of 1) a royalty on total sales of Martha Stewart Living Everyday products sold in stores or 2) a minimum guaranteed threshold level. The annual minimum guaranteed payment to MSO has been lowered modestly, perhaps by $3-4 million. The company’s 2003 10K filing disclosed that the minimum payment for 2004 was

scheduled to be $53.4 million. The annual minimum guaranteed payment (in absolute dollars)

will continue to rise about 10% annually through the balance of the contract.

There will be no secondary level of minimum guaranteed payments to MSO based on sales by specific product category. It is our understanding that MSO prized the product level categories due to the protection that they gave in ensuring adequate floor space for emerging product lines in

Kmart stores. Despite this adjustment, it does appear that Kmart is committed to expanding the Martha Stewart Everyday franchise as evidenced by the announcement of plans to develop new categories, such as ready-to-assemble furniture. Estimate that the secondary level of guarantees would have totaled about $3.5 million in 2003. Following the lawsuit by Kmart back in February, analysts had already adjusted estimates to exclude this figure. Therefore, this revision will have no impact on our earnings estimates.

Healthcare . . . Medco Health reported earnings of $0.48 per share, ex items, in line with the consensus of $0.48. Revenues rose 6.9% year/year to $8.91 billion versus the $9.00 billion consensus. The company sees 2004 EPS of $2.03-2.14, ex items, versus consensus of $2.10.

Barron's Online highlights managed care stocks, such as UnitedHealth, Wellpoint Health Networks, Anthem, Aetna and Health Net. According to the article, the economic recovery should eventually boost premium revenues, meanwhile, many HMO stocks' valuations still appear reasonable, in some cases, downright cheap, especially in light of increased mergers and acquisitions in the sector. Managed care company's profits depend on the spread between premiums and medical costs. Since 2000, premiums have risen faster than costs have, boosting earnings. Last year, medical costs rose less than expected as employers cut jobs and raised workers' out-of-pocket medical expenses. Patients also used more generic drugs and delayed unnecessary medical procedures, cutting hospital admissions and HMOs' reimbursements. The trend should continue this year, although spreads could narrow in 2005 if cost increases pick up and premium hikes slow, says Edmund Kroll, an analyst with SG Cowen. And Wall St is selective, too, favoring industry powerhouses like Wellpoint Health, Anthem, Aetna and UnitedHealth. "[UnitedHealth] is a growth stock in a growth industry, and it is cheap," says Caspar Rock, portfolio manager of the Munder Healthcare Fund. According to the article, shares of Health Net look even cheaper, trading at a 51% discount to the S&P 500, a bit below its historic discount of 47% to the market. The stock trades at about 8.7x earnings over the next four qrtrs; it historically fetches 11.1x forward earnings.

Piper Jaffray upgrades Immucor to Outperform from Market Perform. The FDA approval of Immucor's 510k filing for the Galileo immunohematology analyzer comes a full 6 months earlier than the firm had expected and modeled. Automation is presently used in less than 20% of U.S. hospital blood banks. The firm believes there are at least 600-800 metro hospitals that would be prime candidates for Galileo - putting the equipment opportunity alone at roughly $90 million. The firm expects the co will be ramping sales and service support quickly to try and launch by mid-May.

Tenet Healthcare issues 1st quarter guidance. The firm now sees a loss of $0.25, which is not comparable to the consensus of $0.00. THC guidance includes multiple charges totaling $0.23.

Late yesterday evening, UnitedHealth announced that it had entered into a definitive agreement to purchase Oxford Health Plans for about $4.9 billion, about a 13% premium to the prior day’s closing price. Under terms of the stock/cash deal, which is expected to close in the fourth quarter of 2004, UnitedHealth will pay consideration of $16.17 in cash per share and exchange 0.6357 shares of UNH for each share of OHP, (the exchange ratio is fixed, no collar exists). The terms compute to a valuation of $56.79 per share for OHP at yesterday’s UNH closing price. The price equates to 12.6x and 11.5x our 2004 and 2005 earnings estimates for Oxford, respectively (the full group currently trades at 13.7x and 12.2x 2004 and 2005 earnings estimates, respectively). For comparative purposes, recent transactions have typically averaged in the 14x to 17x range on next year’s earnings. Including the $200 million of cash in excess of debt and capital requirements, the transaction is more closely valued at about $4.7 billion. On an enterprise value-to-EBITDA, the deal is valued at about $3,200/member (the full managed care group trades at approximately $1,400 per member and recent transactions have typically ranged closer to $1,000/member). The significantly higher per member valuation reflects Oxford’s much higher than industry average profit per member, though that factor seems to be adequately reflected in the lower price-to-net valuation indicated above. The transaction is expected to close in the fourth quarter 2004, subject to regulatory and shareholder approvals.

Medical Devices . . . QLT reported earnings of $0.34 per share, $0.03 better than the consensus of $0.31. Revenues rose 25.3% year/year to $41.3 million versus the $39.7 million consensus. The consensus includes net gain of $0.15 from Kinetek acquisition, consensus of $0.24 appears to include some estimates which include gain and some estimates which exclude it. The company raises 2004 Visudyne guidance from $420-455 million to $430-455 million. Treating convertible notes on a "not converted basis", company sees 2004 EPS of $0.86-0.96 versus consensus of $0.94.

Drugs . . . Bristol-Myers reported the settlement of patent infringement litigation by it and patent holder Research Corporation Technologies Inc against TEVA subsidiary Pharmachemie Group in relation to Paraplatin, or carboplatin. Under the agreement, BMY will, in addition to continuing to distribute Paraplatin, sell product to Pharmachemie allowing it to distribute an unbranded version of carboplatin commencing June 24, 2004, subject to several conditions including approval by the Federal Trade Commission.

Sepracor reported a net loss of $0.59 per diluted share, which includes a charge of $30.7 million or $0.36 for selling and marketing expense related to termination (effective Dec. 31, 2004) of agreement to co-promote XOPENEX, may not be comparable to the Reuters Research consensus of ($0.45). Revenues rose 17.8% year/year to $99.5 million versus the $107.7 million consensus and the $107.7 consensus.

Analyst community somewhat divided on how to react to news from last night of Wyeth walking away from the Flumist deal. The more bearish firms point to the fact that FluMist is unprofitable at current levels and therefore represents a drag on earnings. MedImmunehas previously indicated that if Wyeth were to exit the collaboration, it would cost an additional $0.10-0.20 per share per year through 2007. Furthermore, the company had previously indicated that the FluMist franchise will not materially contribute to revenue growth until the introduction of the CAIV-T (next gen. FluMist) product in the 2007-2008 flu season. Smith Barney out noting they believe the stock could be under pressure today, as they believe the large majority of Street earnings estimates, including their own estimates, currently do not reflect Wyeth exiting the collaboration and therefore, will likely be substantially lowered. Firm maintains their Sell rating and $19 target. On a more positive note there are firms out saying the dissolution of FluMist deal should mark the beginning of a new era for the company. Prudential noting the news was expected and is establishing an 18-month price target of $32 based on 2007 EPS estimate of $1.00, anticipating primarily solid Synagis growth in worldwide markets with accelerating product sales growth coming from CAIV-T in 2007... Finally, Goldman Sachs saying that depending on the upfront payment to WYE, which they estimate should be around $30 million, the shares may react slightly positive. However, they note, significant share appreciation is unlikely near term because FluMist will probably not be profitable until 2008/09.

Biotech . . . ImClone, which won U.S. regulatory approval for its Erbitux cancer medicine last year, said first-quarter revenue totaled $109.6 million, besting the $62.2 million average analyst in a Thomson Financial survey. Imclone reported earnings of $0.76 per share, $0.59 better than the consensus of $0.17. Revenues rose 460.1% year/year to $109.6 million versus the $62.2 million consensus. The comapny states "We were pleased with the sales of ERBITUX in just over five weeks of product shipments during the quarter, as they appear to indicate that physicians are rapidly integrating this first-of-its-kind antibody into patients' treatment regimens"

Genentech target goes to $144 from $124 at Lazard.

Goldman Sachs out on Genentech following positive results from Phase III Tarceva trial saying they estimate sales potential of NSCLC to be $0.5-0.6B based on $15,000-20,000/patient/year. Assuming 5x sales, value of Tarceva is $2.5 billion-3.0 billion, which the firm believes is reflected in DNA shares. According to Goldman, the share reaction implies expectation for use outside of NSCLC and may be higher pricing/penetration. They also note that DNA's p/e of 84x on 2004 EPS or PEG of 3.1 is near historical peak for biotech. On 2005 EPS, the 66X p/e and 2.4 PEG may be sustained if there are further positive product news and sentiment remains bullish. They would not be surprised if DNA shares consolidate in the near term but maintains its Outperform rating for long term investors based on a robust pipeline and momentum of the Avastin launch. Rating remains Neutral.

Wall Street Journal's Health column highlights new treatments for brain cancer. Until now, new drugs have offered the promise of better treatments for cancer in virtually every organ except one: the brain. Now for the first time, a growing number of new methods of delivering chemotherapy to the brain are being tested and offered to patients with brain cancer. Xenova plans to start a clinical trial later this year to treat brain-cancer patients with its drug TransMID using this system. Guilford Pharma recently won FDA approval to use its Gliadel wafer in newly diagnosed patients with malignant brain cancer along with surgery and radiation.

Media . . . FindWhat.com, an Internet advertising service, said profit totaled 27 cents a share, topping its earlier estimate of 22 cents.

Metro-Goldwyn-Mayer approved a one-time dividend of $8 a share, payable May 17 to shareholders on record May 7. Separately, the Wall Street Journal reported that a group of bidders, led by Sony, sent MGM a letter formally indicating an interest in acquiring the company.

Since Echostar reported its 4th results, the market has heard concerns from investors on the increased costs that DISH discussed in its 10K and conference call. While higher spending is a concern, we believe that the additional money spent will lead to increased revenue growth and free cash flow acceleration. While DISH's increased satellite obligations call for addt'l payments of >$600M ('04-'10), and total payments of +$2.5 billion (~10 years) "back of the envelope" analysis which assumes an addt'l 425K net adds and modest ARPU increases, justifies the increased spending. The incremental revenues from expanded services will also prove profitable for EchoStar. As for increased SAC, analysis indicates that DISH will make the choice to spend more for a better, longer lasting subscriber which will lead to an increase in cash flows and a higher NPV per sub. DISH also will continue to capitalize on its lead into 116 local markets (DirecTV is currently in 64). DISH reports 1st quarter results on Thursday, May 6. Although inventory shortages continued in Q1, which contributed to the net add miss in 3rd quarter, analysts remain optimistic that DISH can hit our 281K net add estimate with the rollout of 6 more local markets in Q1 and additional foreign language programming. Analysts remind investors that the company' $190 milion share buy back in 4th quarter coupled with the early retirement of its $1 billion 4 7/8% convertible notes at $45.55 in October, signals that DISH mgt believes that its shares are undervalued. Analysts have a valuation of $44 per share, based on a DCF model as well as FCF and EPS multiples, supports our valuation.

Hotel & Leisure . . . Prudential has presented 10 reasons why they believe International Gaming Tech has never been more promising, including: replacement cycle is actually accelerating with no rational prospects for 2005/2006 slowdown; yields on participation games should improve in conjunction with gaming budget recoveries; rising interest rates should help consolidated gross margins; class II gaming and systems initiatives are abound; domestic gaming expansion appears more likely in 2004 than in 2002 and 2003; tangible international opportunities exist.

Argosy Gaming reported earnings of $0.63 per share, excluding after-tax expenses of $14.8 million or $0.50 associated with February 2004 refinancing of company's outstanding 10-3/4% notes due 2009, $0.14 better than the consensus of $0.49. Net revenues rose 11.8% year/year to $264.1 million versus the $250.3 million consensus. The company also guides, sees 2004 EPS of $1.73-1.83, after deduction of $0.52 in charges related to debt refinancing, versus the consensus of $2.21.

Electronics . . . Sony, the world's second- biggest consumer-electronics maker, said profit will total 100 billion yen ($921 million) in the year ending March 31, 2005, lower than the median estimate of 107.9 billion yen by six analysts.

Bloomberg.com reported that Canon, Sony and Sharp led Japanese consumer electronics companies forecasting higher annual earnings on rising demand for DVD recorders, flat- screen televisions and digital cameras. Canon, the world's second-biggest digital camera seller, forecast a 12 percent gain in 2004 net income to 309 billion yen ($2.8 billion), raising its January estimate. Sony, the world's second-biggest consumer electronics maker, forecast a 13 percent gain in profit in the year ending next March 31, lagging analysts' estimates. Sharp forecast a 24 percent profit gain. The Senior Managing Director of Canon told a press conference the company will sell 15.2 million digital cameras this year, raising its forecast from 15 million.

AmTech comments on Sony's Earnings: While SNE made its FY goal of shipping 20mm PlayStation 2 units, on a regional basis, Europe and Japan sales were up but North America was down 37% (greater than anticipated). SNE is also now forecasting FY05 shipments down 30%. The firm believes the declining PS2 sales in North America may help prompt a price cut before E3 trade show in 2 weeks. Any delay in this anticipated price cut beyond E3 would likely disappoint the Street and be considered a negative for Activision, Electronic Arts, Take-Two and THQ-Interactive.

Telecom . . . Verizon, the largest U.S. local- telephone provider said first-quarter profit, excluding some items, was 58 cents a share, beating the average estimate of analysts by 1 cent, according to Thomson. Revenues rose 3.9% year/year to $17.14 billion versus the $17.18 billion consensus.

Washington Post tech section reports that New York state Attorney General Eliot L. Spitzer yesterday urged the Federal Communications Commission to sharply increase the amount Nextel Communications should pay for a swath of higher-frequency spectrum it would get in exchange for moving its airwaves to minimize radio interference with public safety communications. Entering an already contentious dispute, Mr. Spitzer said in a letter dated yesterday, "Nextel must be required to compensate the United States Treasury for the spectrum it receives in the amount that would have been received at an auction of that spectrum."

IT Services . . . EDS reported 1st quarter 2004 results that were generally in-line with expectations. However, the company lowered EPS and Free Cash Flow guidance for the full-year. Free Cash Flow continues to disappoint. In 1st quarter 2004, EDS recorded negative Free Cash Flow of $166 million versus

+$122 million in 1st quarter 2003. The company expects 2004 Free Cash Flow of $300-$500 million, down from previous guidance of $500-$600 million. The free cash flow will be back-end loaded. NMCI continues to be a challenge. The "other" losing contract (Dow Chemical) will likely be terminated resulting

in further write downs and ultimately no return on the effort. "New" business signings remain weak, at approximately $2.2 Billion (vs. $1.7 Billion a year ago). Revenue from General Motors remains under pressure as EDS gets closer to renegotiating the Master Service Agreement in 2006. Expect a significant portion of this high margin, less capital intensive business to go away under a new agreement.

Network Equipment . . . Scientific-Atlanta adds VoIP launch program to SciCare services for cable operators.

UTStarcom upped to Overweight from Equal Weight at Lehman. The firm believes that sub traction lifts visibility into handset and infra sales, thus lift firm's estimates once again. Lehman's 2004 estimate goes to $1.95/$2.7 billion from $1.91/$2.6 billion; 2005 goes to $2.25/$2.95 billion from $$2.18/$2.9 billion. While recognizing concerns over international sales and 3G positioning, firm considers these concerns reflected in the share price, now 13x 2005. Target $37, or 16x 2005 EPS.

Schwab SoundView has learned that Nokia is taking swift action to mitigate its handset share loss, the company is aggressively lowering phone prices and offering attractive terms to dealers. The firm believes this will have a stimulative effect on the global mobile phone market, but it is revenue neutral for Nokia as higher Nokia units are offset by lower ASPs. The firm is raising global mobile phone market 2nd quarter estimates today. Also firm also skeptical of the long-term efficacy of Nokia’s actions.

Semiconductors . . . Conexant Systems, which makes semiconductors for high- speed modems and cable television set-top boxes, said its net loss for the second quarter widened to $143.4 million from $68 million a year earlier and announced it will cut 200 jobs, or 8.3 percent of its workforce, by the end of the year.

UBS provides color on market share shifts which occurred in 1st quarter. The firm notes strong desktops offset weak notebooks in 1st quarter according to a Mercury Research PC graphics chip report on data from 1st quarter. In addition, the average selling price was flat at $19.03. UBS provides color on overall market share: Intel gained 1.5% pts market share (now 33%), NVIDIA gained 2.5% (now 27%) and ATI lost 0.7% pts (now 24%) due to the disproportionate decline in notebook shipments in 1st quarter. The firm notes the decline in notebook shipments in 1st quarter due to channel inventory has been well documented. The firm also suggests strong desktop market bodes well for Nvidia's April quarter.

Merrill Lynch out on Advanced Micro saying that despite the long-term story looking interesting, the firm sees challenges in the intermediate term that investors may have overlooked. According to the firm, one reason for the dramatic improvement in AMD's financial performance during the past two quarters has been flash memory. Now, their checks indicate that Intel is moving aggressively to retake share, and that pricing for NOR flash into handset OEMs is beginning to weaken. Firm thinks it's unlikely that flash memory will continue to improve as dramatically for AMD. With the shares trading 25x their $0.65 2004 EPS estimate, the shares look fully valued. Firm reiterates their Neutral rating.

ATI Tech announces that the FireGL T2-128 and the FireGL X1-256p graphics accelerators will be the 3D graphics options available in the new H-P Workstation c8000.

Agere reported pro forma EPS of $0.05, which includes an $82 million tax gain that was not included in analysts' estimates. After backing this out, Agere reported net breakeven, the consensus is $0.01. Revenues rose 4.3% year/year to $462.0 million versus the $469.1 million consensus. The company sees 2nd quarter EPS of $0.00-0.01 versus consensus of $0.00 on revenues of $495-505 million versus consensus is $504 million.

Software . . . E.piphany, the maker of software for online marketing campaigns estimated that second-quarter sales will be $19 million to $22 million, below the analyst estimate of $22.7 million.

Red Flag. Reuters reported that Oracle dismissed two Danish managers last week but declined to comment further on a report they had left after accounting irregularities were revealed. Oracle Denmark said Peter Perregaard, vice-president Oracle’s European Emerging Markets and Danish Sales Manager Jan Skelbaek had both left the company. Financial daily Borsen reported on Tuesday the two had been dismissed after an internal audit revealed accounting irregularities in the Danish business.

As previously expected, Computer Associates management announced that it would be re-stating its 2000 and 2001 financials as per the findings of its internal audit. In total, the gross amount of prematurely booked revenues for fiscal year 2000 and 2001 totaled $1.8 billion, above the $1.4 billion indicated by the SEC’s investigation, as CA’s own internal investigation uncovered additional contracts that were improperly booked in the fiscal 2000 year. For fiscal 2000, restated revenue is expected to decline by $2 million to $6,092 million and no effect in net income is expected due to the insignificant change in revenue. For fiscal 2001, more meaningful changes will occur as revenues increase by $553 million to $4,748 million while the net income loss for that year declines by $333 million to a loss of $258 million or an EPS loss of $0.44, as restated. In addition, CA estimated that improperly booked revenues for fiscal 1998-1999 would have a net effect of reducing revenue for those 2 years by $561 million and lowering net income by $333 million.

Analysts do not expect the implications from this restatement to have any negative impact to current financials. The prematurely booked revenues were related to the fiscal 2000-2001 years (ending in March), and this practice ceased after the new business model began on October 2000. The restatement will mostly re-allocate the revenues that were prematurely booked into their respective quarters. Please note that the aggregate amount recognized by the re-statement has not changed, just the timing of it. The changes will

have no impact to the deferred revenue accounts in CA’s current balance sheet. CA will be releasing its fiscal 2004 10K as expected on May 12.

Hot Items - Check out the "Hot Items" page (updated daily)


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Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.

http://www.robblack.com/rb_marketwrap.shtml

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MORNING WATCH, Apr. 28
By Frederic Ruffy, Optionetics.com
4/28/2004 6:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10298

Mixed corporate earnings news and ongoing concerns about rising interest rates seem to have set the table for a weaker open Wednesday morning. One hour before the opening bell, stock index futures pointed to losses for both the Dow Jones Industrial Average ($INDU) and Nasdaq Composite Index ($COMPQ). In addition, trading may be a bit cautious ahead of key economic data due out tomorrow and Friday.

Shares of Comcast (CMCSK) are set to trade higher after the cable television operator ended its $54 billion takeover bid for Walt Disney (DIS). Shares of Disney moved modestly lower on the news. Comcast also said that it swung to a profit in the first quarter. Net income rose to $65 million on revenues of $4.6 billion. CMCSK rose $1.85 to $30.70 following the news.

A large number of companies are reporting earnings this week and the results are expected to be well above year ago levels. As of yesterday, more than 300 members of the S&P 500 have reported profit results in the latest period. In addition, more than 75% have posted results that have topped expectations. Results are running nearly 25% above year ago levels, according to First Call.

Time Warner (TWX) and Anheuser Busch (BUD) are among the companies reporting results today. In addition, Bristol Meyers (BMY) is expected to trade actively after reporting an increase in first quarter profits thanks to higher sales of its cholesterol drug and its blood thinner. McDonald’s (MCD) said a weaker dollar and strong US sales helped push first quarter profits 56% higher. Costco (COST) may rise after declaring a 10-cent quarterly dividend. At the same time, RF Micro Devices (RFMD) may fall after lowering its sales forecast for the current quarter.

No economic reports are scheduled for Wednesday’s trading session. However, the widely watched Gross Domestic Product [GDP] numbers are due out before the opening bell Thursday. Weekly jobless claims and the employment cost index [ECI] are also due out tomorrow. Friday holds key data on consumer sentiment and manufacturing. Due to the recent rise in interest rates, which has been triggered by a series of strong economic reports this month, trading may be a bit cautious on Wednesday ahead of the data due out Thursday and Friday.


Frederic Ruffy
Senior Writer
Optionetics.com ~ Your Options Education Site

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From Briefing.com - Semi Related News: 11:06AM Nasdaq Composite moves to new session low (COMPX) 2007 -24.50: -- Update -- -- Technical -- The index stabilized following the initial test of its 50 day simple mov avg at 2008 but has recently edged to a minor fresh session low. Thus far is holding near the 62% retrace of the rally off last wk's low at 2006 (session low 2005.42 with next supports at 2003/2000 and 1996/1995 (congestion as well as trendline off the March/April lows). Short term need sustained push back above the 2014/2016 area to help improve the negative tone.

10:14AM Sector Watch: Semi Index -- SOX -- : -- Technical -- Index (SOX 467.84 -0.1%) broke below support at 468 yesterday (Dec low, last wk's low) and extended the slide this morning. However, has rebounded off the low (463.79) and approached this short term resistance point (hit 467.76) before pausing. Next resistance is at 470 (200 day ema).

8:34AM August Tech beats by a penny, guides Q2 revs (AUGT) 13.18: Reports Q1 (Mar) net earnings of $0.08 per diluted share, $0.01 better than the Reuters Research consensus of $0.07; net revenues rose 148.5% year/year to $16.4 mln vs the $15.5 mln consensus. Co expects further revenue growth of 10-15% in Q2 based on growing interest in co's proven solutions, along with record shipments and backlog; R.R. consensus is revs of $17.5 mln.

8:33AM M-Systems beats by $0.02, guides above consensus (FLSH) 20.01: Reports Q1 (Mar) earnings of $0.11 per share, $0.02 better than the Reuters Research consensus of $0.09; revenues rose 32.9% year/year to $64.2 mln vs the $60.4 mln consensus. Company sees Q2 EPS at or above $0.11 vs consensus of $0.10 on revenues of $68 mln or more, consensus $64.6 mln

8:32AM AUGT prelim $0.08, penny ahead; revs $16.4 mln vs $15.5 mln consensus :

8:29AM FLSH prelim $0.11, 2 cents ahead; revs $64.2 mln vs $60.4 mln consensus; guides EPS outlook higher:

8:15AM Keithley beats by $0.06, guides Q3 revs above consensus (KEI) 19.7: Reports Q2 (Mar) earnings of $0.16 per share, $0.07 better than the Reuters Research consensus of $0.09; net revenues rose 30.8% year/year to $34.0 mln vs the $31.1 mln consensus. Co also guides, sees Q3 revenues of $33-35 mln, vs the R.R. consensus of $32.7 mln; co also expects pretax earnings to be in the high-single digits to low teens as a percentage of sales.

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MTSN DT/ST bot 2000@10.14

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From Briefing.com: 6:24PM Thursday After Hours prices levels vs. 4 pm ET: A relatively quiet session in the after hours as buyers remain a reluctant bunch despite the relative value opportunities created by the past two days' sell-off. Earnings reports have come in mostly better than expected, and they have, once again, not done much to inspire the efforts of buyers. Presently, the S&P futures, at 1114, are 1 point above fair value, and the Nasdaq 100 futures, at 1433, are flat with fair value.

The below table lists the evening's relevant news items, as well as the stocks' reactions.

After Hours Mover % Change Move Reason for Move
Avon Products (AVP) unch Cosmetic products giant beats the Q1 (Mar) Reuters Research EPS estimate by $0.03 after guiding estimates higher on Mar 25; Avon also increased its FY04 (Dec) EPS outlook to a 'range of $3.30' from $3.18-3.20 earlier; Briefing.com has been positive on AVP in Story Stocks for over a year, and the stock has moved higher by 38%
Business Objects (BOBJ) -12% Provider of business intelligence software misses the Q1 (Mar) consensus EPS estimate by $0.05 and goes on to warn for Q2 (June) and FY04 (Dec); Briefing.com noted in its In-Play, a Platinum product, Earnings Preview that 'many analysts have cited concerns over the lack of visibility regarding the growth prospects and cost synergies from the Crystal Decisions acquisition'
Electronic Arts (00C0) +2% Video game maker delivers upside in its Q4 (Mar) report, but issues weaker than expected guidance for Q1 (June); Could be a case of the company trying to manage expectations as it also gave in line FY05 guidance; Market could be also taking comfort in Electronic Arts's unchanged game hardware sales forecast (versus Sony, which sees a decline)
Foundry Networks (FDRY) -27% Maker of telecom equipment disappoints the Street with a Q1 (Mar) report that falls short of top and bottom-line estimates; Management noted revenues in Japan were below expectations due to the timing of several orders from its largest customer, Mitsui; Foundry then warned for Q2 (June); Stock was down 2% today, and then down an additional 3% yesterday on competitor NT's restatement/management re-shuffling news
Gateway (GTW) unch Computer seller reports its 9th consecutive quarterly loss with Q1's (Mar) ($0.22) result; The figure was actually $0.02 shy of the Reuters Research estimate; Company indicated that it should report another loss in Q2 (June) - at ($0.15) - on revenues that are relatively flat with the prior year; Gateway also said it planned to cut an additional 1,500 jobs; Briefing.com previewed GTW's report in Looking Ahead column

Tomorrow, the market will have a good number of economic and earnings reports to sift through for a Friday. Biogen Idec (IDPH), ChevronTexaco (CVX), Cigna (CI), and Procter & Gamble (PG) are some of the more noteworthy companies that will report before the open. As for economic data, March Personal Income & Spending, the revision to April Consumer Sentiment, and the April Chicago PMI Index are on tap.

For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap. -- Heather Smith, Briefing.com

4:45PM Intl Rectifier beats by $0.03, ex items, guides Q4 revs above consensus (IRF) 39.94 -2.21: Reports Q3 (Mar) pro forma earnings of $0.43 per share, excluding a $5.9 mln net pretax gain from a settlement with Hitachi/Renesas and a $9.9 mln pretax charge for ongoing severance and restructuring activities, $0.03 better than the Reuters Research consensus of $0.40; revenues rose 28.5% year/year to $275.4 mln vs the $264.9 mln consensus. Co guides, sees Q4 revenues of approx $289.2-294.7 mln (based on sequential rev growth of about 5-7%), vs an estimate of $277.8 mln.

4:32PM Ingram Micro reports in line, guides Q2 below consensus (IM) 16.08 -0.72: Reports Q1 (Mar) earnings of $0.24 per diluted share, in line with the Reuters Research consensus of $0.24; revenues rose 14.6% year/year to $6.28 bln vs the $6.28 bln consensus. Co also guides, sees Q2 EPS of $0.13-0.16, vs the R.R. consensus of $0.22, and revenues of $5.6-5.8 bln, vs an estimate of $6.1 bln.

4:28PM Varian Semi beats by a penny, issues Q3 guidance (VSEA) 34.38 -2.23: Reports Q2 (Mar) earnings of $0.38 per share, $0.01 better than the Reuters Research consensus of $0.37; revenues rose 14.5% year/year to $127.3 mln vs the $127.8 mln consensus. Co expects Q3 EPS of $0.45-$0.53 on $138-$148 mln in sales (consensus $0.49 and $144.5 mln), and expects gross margin to be in the mid-40s.

4:26PM ChipPAC beats by a penny, ex items, guides (CHPC) 6.13 -0.37: Reports Q1 (Mar) earnings of $0.03 per share, ex items, $0.01 better than the Reuters Research consensus of $0.02; revenues rose 43.2% year/year to $126.9 mln vs the $128.2 mln consensus. Co sees Q2 EPS of $0.05-0.07 on revs of $137-143 mln vs the consensus of $0.07 & $136.5 mln respectively.

4:25PM Genesis Microchip reports in line, ex items, guides Q1 revs below consensus (GNSS) 17.16 -0.78: Reports Q4 (Mar) pro forma earnings of $0.03 per share, in line with the Reuters Research consensus of $0.03; total revenues rose 0.2% year/year to $54.9 mln vs the $54.5 mln consensus. Co also guides, sees Q1 revenues of $52-56 mln, vs an estimate of $58.1 mln.

4:25PM VSEA prelim $0.38, penny ahead; revs in-line :

4:20PM Terayon Comm misses by a penny, ex items, guides Q2 below consensus (TERN) 3.15 -0.30: Reports Q1 (Mar) loss of $0.09 per share, excluding a charge of $3.4 mln or $0.05 related to restructuring activities and related asset write-offs, $0.01 worse than the Reuters Research consensus of ($0.08); revenues rose 84.8% year/year to $41.2 mln vs the $41.5 mln consensus. Co also guides, sees Q2 loss of $0.02 to loss of $0.04, ex items, vs the R.R. consensus of ($0.01), and revenues of $42-46 mln, vs an estimate of $46.0 mln.

4:14PM Adaptec beats by a penny, ex items (ADPT) 8.21 -0.14: Reports Q4 (Mar) pro forma earnings of $0.06 per share, ex items, $0.01 better than the Reuters Research consensus of $0.05; revenues rose 14.9% year/year to $121.3 mln vs the $121.2 mln consensus.

4:13PM Foundry Ntwks misses by 3 cents, guides Q2 below consensus (FDRY) 14.15 -1.04: Reports Q1 (Mar) earnings of $0.14 per share, $0.03 worse than the Reuters Research consensus of $0.17; revenues rose 14.2% year/year to $104.0 mln vs the $112.6 mln consensus. Co expects Q2 EPS of $0.13-$0.15 on $105-$110 mln in sales, vs consensus of $0.17 and $115.6 mln.

4:08PM Newport beats by $0.02, guides Q2 revs above consensus (NEWP) 14.32 -0.98: Reports Q1 (Mar) earnings of $0.03 per share, $0.02 better than the Reuters Research consensus of $0.01; revenues rose 27.3% year/year to $42.4 mln vs the $38.5 mln consensus. Co expects Q2 sales and revs of $43-$46 mln and $0.02-$0.04 vs consensus of $40 mln and $0.03.

Close Dow -70.33 at 10,272.27, S&P -8.53 at 1,113.88, Nasdaq -30.76 at 1,958.78: The major averages managed to end the session off their respective session lows, but the last minute buying efforts were dwarfed by the market's steady decline through the entirety of the session... The negative bias, which culminated in heavy volume and losses of 0.7-1.6% for the major averages, was largely an expression of the market's concern regarding rising interest rates, which has become all too familiar over the past month...
Also contributing to the market's apprehension was continued unrest in Iraq, as well as belief that earnings growth is bound to slow as the market is faced with tougher comparisons in the second half of the year... To be entirely fair, none of these concerns are new... Yet, they found resonance with participants in today's session in view of the upcoming FOMC meeting on Tuesday, as well this morning's economic reports ... With respect to the latter, Q1 advance GDP at 4.2% was strong, but worse than the expected 5.0%, while the higher than expected Chain Deflator report at 2.5% (consensus 2.0%) and Employment Cost Index at 1.1% (consensus 0.9%) evoked concerns of accelerating inflation...

At the same time, the Initial Claims report checked in at 338 K (consensus 343K), suggesting that the high readings of the past two weeks were temporary and lay-offs are slowing down... The bulk of the sectors ended the session in the red, with laggards of note including the hardware, telecom, internet, networking, semiconductor, software, biotech, REIT, industrial, oil services, transportation, utility, and broker/dealer, to name a few... Leaders to the upside were harder to come by, but included the gold and personal & household products groups... Elsewhere, the bond market closed with the 10-year note down 8/32, bringing its yield up to 4.53%...NYSE Adv/Dec 869/2441, Nasdaq Adv/Dec 860/2359

8:54AM Skyworks (SWKS) 10.84: Skyworks is a designer and manufacturer of radio frequency front-end modules, subsystems and cellular systems for handset, infrastructure and WLAN (wireless local area network) customers.

After the close on Wednesday, the company published Q2 pro-forma EPS of $0.05, excluding extraordinary items and amortization, on revenue of $183.471MM (+16.6% Y/Y) vs. Reuters Research consensus at $0.04 on $176.17MM.

Front-end modules accounted for 45% of sales; RF subsystems 40%; and infrastructure 15%. GSM accounted for approximately 70% of sales; CDMA 30%. Shipped over 30MM WLAN switches (~$5MM in revenue). Turns business was approximately 10% of sales.

Gross margin declined 206 bps Y/Y to 38.3%. Operating margin, excluding extraordinary items, increased 460 bps Y/Y to 7.2%. Capacity utilization at 75-80%; expect margins to improve as firm ramps production and brings yields on new products up to corporate averages.

Management is not seeing handset inventory buildup in channel. Component supplies remain tight but not materially impacting company results. Guided for Q3 pro-forma EPS of $0.07 on $192.6MM (+28.3% Y/Y) vs. consensus at $0.05 on $182.67MM. Gross margin expected to be approximately 38.5%. Company is 90% booked for Q3, suggesting possible upside given high visibility into quarter.

SWKS shares are, based on our inverted EVA/DCF model, priced for sustained lower 20% revenue growth from F06 assuming improvement to 24-25% operating margin.

The following table shows price multiples and Y/Y growth rates for SWKS compared against direct comps and the semiconductor components group. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Skyworks (SWKS) 1.7 (52.2) 2.5 2.2 2.0 20.7% 17.5% 12.0%
Agere Systems (AGR) 1.7 (23.1) 2.1 2.0 1.8 0.3% 10.3% 14.4%
Anadigics (ANAD) 1.8 (8.8) 1.9 1.6 1.2 32.5% 31.4% 27.0%
Broadcom (BRCM) 3.0 (17.9) 6.6 4.8 4.1 58.4% 59.2% 16.9%
Fairchild (FCS) 1.6 (277.1) 1.7 1.5 1.3 1.3% 21.1% 12.4%
Intersil (ISIL) 3.0 30.0 5.0 4.9 4.2 21.0% 18.3% 16.5%
Microsemi (MSCC) 2.6 68.8 3.2 2.9 2.4 2.4% 21.0% 20.1%
RF Microdevices (RFMD) 1.4 33.9 2.2 1.9 1.7 28.3% 15.4% 15.8%
Semiconductor Components 2.9 39.3 4.7 n/a 15.1% n/a
*P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of April 23, 2004.
**P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of April 23, 2004.

High visibility into quarter and rapidly developing market for WLAN solutions suggest SWKS is positioned to accelerate growth into H2, and is likely to provide a base of support for shares. But upside is baked into price until the company demonstrates greater traction in growing sales and expanding margins. We would wait for at least a 15-20% pullback.--Ping Yu, Briefing.com

8:43AM Volatility Trading Ideas Listed below are companies that have traded through their volatility bands (normal trading range), presenting short-term trading opportunities on a trend reversal basis.

Companies that trade below their lower bands are considered to be oversold, and represent long opportunities. Conversely, companies that trade above their upper bands are are considered to be overbought, and represent short opportunities. We would look for trend reversals generally at or within 1-3% of the market price.

These are highly dynamic short-term intra-day / intra-week trading ideas based on technical, not fundamental analysis. There may be fundamental reason(s) why a company trades through its normal range.

Lower / upper limit represents next inflection point (support / resistance) if trend continues to extend due to general market conditions. Trends may take up to several days to reverse if at all. Adjust strategy according to, among other factors, company fundamentals and technicals, current events and market conditions.

General market conditions: Oversold; Dow Jones has yet to pierce lower volatility limit.

Companies are ordered by sector and alphabetically. Company Sector Trend Lower Limit Market Price Upper Limit
California Amplifier (CAMP) Comm Eqpt OverSold 8.55 8.81 12.27
C-COR.net (CCBL) Comm Eqpt OverSold 8.82 9.09 11.31
Garmin (GRMN) Comm Eqpt OverSold 31.92 32.91 39.23
Inter-Tel (INTL) Comm Eqpt OverSold 24.10 24.85 30.77
MRV Communications (MRVC) Comm Eqpt OverSold 2.13 2.20 3.01
Polycom (PLCM) Comm Eqpt OverSold 19.65 20.26 24.13
Pegasus Solutions (PEGS) Computer Services OverSold 10.33 10.65 12.69
SINA (SINA) Computer Services OverSold 29.44 30.35 37.91
Komag (KOMG) Comp Sys & Periph OverSold 13.42 13.83 17.65
Energizer Holdings (ENR) Elec Instr & Cntrls OverSold 40.67 41.93 48.16
Merix (MERX) Elec Instr & Cntrls OverSold 15.74 16.23 19.78
Nam Tai Electronics (NTE) Elec Instr & Cntrls OverSold 18.57 19.14 24.81
Plexus (PLXS) Elec Instr & Cntrls OverSold 15.09 15.56 18.89
Three-Five Systems (TFS) Elec Instr & Cntrls OverSold 5.38 5.55 7.05
Thomas & Betts (TNB) Elec Instr & Cntrls OverBought 21.38 25.10 25.55
Mattson Technology (MTSN) Semi Cap Eqpt OverSold 9.97 10.28 12.44
Mykrolis (MYK) Semi Cap Eqpt OverBought 11.56 14.85 15.12
Amkor Technology (AMKR) Semiconductors OverSold 8.37 8.63 12.30
ASE Test Limited (ASTSF) Semiconductors OverSold 6.31 6.51 9.69
Conexant Systems (CNXT) Semiconductors OverSold 4.64 4.78 6.00
ChipMOS Technologies (IMOS) Semiconductors OverSold 8.29 8.55 10.51
Lattice Semiconductor (LSCC) Semiconductors OverSold 7.47 7.70 9.15
Rambus (RMBS) Semiconductors OverSold 20.20 20.82 25.51
Siliconware Precision (SPIL) Semiconductors OverSold 4.27 4.40 5.28
Triquint Semiconductor (TQNT) Semiconductors OverSold 5.86 6.04 7.16
Ascential Software (ASCL) Software & Program OverSold 16.50 17.01 21.79
Network Associates (NET) Software & Program OverSold 15.50 15.98 19.38
Quest Software (QSFT) Software & Program OverSold 12.57 12.96 15.73
Satyam Computer (SAY) Software & Program OverSold 19.58 20.19 23.53
Witness Systems (WITS) Software & Program OverBought 10.35 14.21 14.47

Philadelphia Semiconductor Index (SOXX) OverSold 448.44 462.31 506.21
Nasdaq 100 Trust Shares (QQQ) OverSold 35.11 36.20 38.52
Dow Jones Diamonds (DIA) OverSold 100.66 103.77 108.15
S&P SPDRs (SPY) OverSold 109.44 112.82 117.78
Performance. The following table tracks the average daily return over a five day period for all companies highlighted in Volatility Trading Ideas. Hypothetical returns are calculated based on intra-day high and low prices and assumes positions are opened at listed market prices. Actual performance will vary depending on, among other factors, entry and exit points, duration of holding period and transaction costs. Intra-Day Maximum Return Holding Period
1 Day 2 Days 3 Days 4 Days 5 Days
OverSold 1.4% 0.1% (2.4%)
OverBought 4.0% 5.4% 5.9%
Average Return 3.0% 4.1% 4.4%
Performance reflects downward bias in markets over the past week as well as limited, staggered data points. Preliminary data suggests greater probability of success when trading with market but that it is possible to profitably trade against general market trends on an intra-day basis.

Updated list will be posted on the Tech Stocks page. E-mail if you wish to receive notification when the list is posted. Please specify Volatility Trades in subject or body.--Ping Yu, Briefing.com

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EGLS ST bot 2000@3.94

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SENTIMENT JOURNAL: Jitters Rise as Tech Stocks Slide
By Frederic Ruffy, Optionetics.com
4/30/2004 3:00:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=10319

Technology stocks are falling and the Nasdaq Composite Index ($COMPQ) lost ground during all five trading sessions this week. In the end, the Nasdaq finished 130 points, or 6.3%, below last Friday’s levels. The greatest percentage losses have occurred among the networking, semiconductor, and internet stocks. The Dow Jones Industrial Average ($INDU), meanwhile, fell during four of five trading sessions to finish the week down roughly 250 points, or 2.5%.

Market jitters rose a bit during the market’s latest slide. The increase in market angst was visible in the movement of the CBOE Volatility Index ($VIX), which fell to new multi-year lows last Friday. On the week, the market’s so-called “fear gauge” rose from 14.01 to 17.19. At the same time, the CBOE put to call ratio rose to relatively high levels. On Friday, the ratio rose to 1.02. Readings above 1.00 from this ratio are relatively rare and indicate that put volume is increasing relative to call volume on the Chicago Board Options Exchange [CBOE], which generally occurs when investors are becoming more bearish or anxious.

While the VIX and the CBOE put-to-call ratio point to rising bearishness or anxiety among investors, some indicators suggest that investors remain relatively bullish or upbeat. For instance, the International Securities Sentiment Index [ISEE] rose above 200 two times this week. Readings above 200 indicate two times more call than put buying on the International Securities Exchange [ISE], the largest US options exchange. The relatively heavy call buying is a sign that options traders are still willing to place bullish bets despite the market’s recent slide. So the ISEE is clearly at odds with the recent rise in the CBOE put-to-call ratio and the VIX.

Meanwhile, the surveys of investor sentiment are also showing relatively high levels of bullishness. According to Investors Intelligence, 50% of those surveyed are bullish and only 22.4% are bearish. Similarly, the American Association of Individual Investors [AAII] reports 50% bullish and only 21.4% bearish in its latest sentiment survey.

Mutual fund investors are also bullish. According to the Investment Company Institute [ICI], stock mutual funds saw inflows of $15.84 billion during the month of March, which follows $26.2 billion of inflows in February. The pattern appears to have continued during the month of April. AMG Data reports that stock mutual funds saw $5 billion of new inflows during the past two weeks. Therefore, fund investors seem undeterred by the market’s recent slide.

In addition, mutual fund managers are also buying stocks. Recall that stock mutual funds are nothing more than pools of money. A portfolio manager controls these pools, or funds, and makes decisions regarding what stocks to buy and sell. According to ICI, at the end of March 2004, there were 4,621 different stock mutual funds in existence. Therefore, it is a competitive business and mutual fund managers that fail to produce superior returns often lose investors to competing funds.

In addition to deciding what stocks to buy and sell, fund managers must also decide on how much cash, or liquid assets, to leave in the portfolio. Managers must always have some cash immediately available, because if faced with redemptions (outflows when mutual fund shareholders exit the pool), they must redeem shares for cash—and not be forced to sell stock. Therefore, the percentage of liquid assets held in mutual funds is important because, if it is low, heavy fund outflows can lead to heavy stock selling as portfolio managers are forced to liquidate their portfolio’s holdings in order to raise cash.

The chart below shows the percentage of liquid assets held in the average stock fund over the past 19 years. It hit an all-time high in the early-1990s (12.89% in October 1990) and began falling. The percentage of liquid assets held in the average stock fund hit an all-time low in March 2000. At that time, it fell to 4%. Perhaps not by coincidence, that coincided with a major top in the stock market. March 2000, as we all know, was followed by extreme volatility. Now, the percentage is once again falling. According to ICI, it fell to 4.2% in March 2004 and its lowest levels in four years. That, in turn, sets the stage for more market volatility if, like in April 2000, fund investors turn bearish and begin selling mutual fund shares.

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MarketGauge 5 Day Advance/Decline Oscillator

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Amateur Investors Weekend Stock Market Analysis (5/1/04)

In my opinion next week is a crucial week for the market as the major averages are approaching critical longer term support areas. The Dow has a critical support area in the 9950 to 10000 range which corresponds with its late March low (point A), 200 Day EMA (blue line) and longer term 23.6% Retracement Level (calculated from the October 2002 low to the February 2004 high). In order for the Dow to be constructive it needs to hold support near 10000. If the Dow fails to hold support near 10000 then look for a possible drop back to its longer term 38.2% Retracement Level near 9400 (point B) in the weeks ahead.



The Nasdaq is nearing a critical support area around the 1900 level which corresponds to its late March low (point C), 200 Day EMA (blue line) and longer term 23.6% Retracement Level (calculated from the October 2002 low to the January 204 high). It will be critical for the Nasdaq to hold support next week near the 1900 area. If the Nasdaq fails to hold support near 1900 then it could undergo a much larger drop and eventually fall back to its longer term 38.2% Retracement Level near 1750 (point D).



Meanwhile the S&P 500 has a critical support area in the 1075-1090 range which corresponds to its late March low (point E), 200 Day EMA (blue line) and longer term 23.6% Retracement Level (calculated from the October 2002 low to the March 2004 high). Thus for the S&P 500 to remain constructive it really needs to hold support in the 1075-1090 range next week. If the S&P 500 fails to hold support at these levels then look for a larger drop back to its longer term 38.2% Retracement Level near 1015 (point F) in the weeks ahead.



Meanwhile a few sectors to keep an eye on are the Banks (BKX) and Semiconductor Holders (SMH). The BKX has a critical support area in the 93 to 94.50 area which coincides with its longer term 23.6% Retracement Level (calculated from the October 2002 low to the March 2004 high) and 200 Day EMA (blue line). If the BKX fails to hold support in the 93 to 94.50 range and breaks below 93 it could eventually drop back to its longer term 38.2% Retracement Level around 87 (point G) which would cause additional selling pressure in the S&P 500 as well. Thus it will be important for the BKX to hold support next week at or above the 93 level.



Meanwhile the Semiconductor Holders (SMH) have been in a steady downtrend since peaking in early January which has had a significant impact on the technology laden Nasdaq. The SMH's have broken well below their 200 Day EMA (blue line) and now are approaching their longer term 38.2% Retracement Level near 35. The Slow Stochastics indicate the SMH's are now becoming very oversold as the %K line (point H) has dropped well below 20. Over the past several months when the %K line has dropped below 20 (points I) this has led to some type of rally in the SMH's with varying degrees of magnitude. Thus it's possible the SMH's are getting close to a possible reversal.



Meanwhile the Volatility Index (VIX) gave us a fairly strong signal last weekend that the market was due for some more selling pressure this week as investors had become to complacent. Notice that the VIX dropped just below the 14 level (point J) which in the previous two occasions (points K) led to selling pressure in the S&P 500 as well. What we would like to see happen next week is for the VIX to rise substantially above its 10 Day Moving Average (blue line) which would signal widespread fear among investors that could lead to an upside reversal. Notice in the past when the VIX has risen substantially above its 10 Day Moving Average (points L) this has led to an upside reversal.



I know the market hasn't been acting well but watch these support levels next week in the major averages and see if they can hold: Dow (near 10000), Nasdaq (around 1900) and S&P 500 (1075-1090). If the major averages can hold support near these levels then this would be a positive development which could eventually lead to a rally.

Meanwhile when the market is correcting you should really be paying close attention to those stocks which are holding up well as those may be the ones to perform the best once the market reverses to the upside. An example of a stock which has been going up and forming the right side of a 7 month Cup as the market has been going down is SFCC. Now what we would like to see is for SFCC to begin developing a Handle over the next few weeks.



How can a Premium Membership to Amateur-Investors.Com benefit you as an investor? We focus on stocks which are exhibiting favorable Sales and Earnings Growth that have developed a favorable chart pattern such as a "Cup and Handle", "Double Bottom", "Flat Base" or "Symmetrical Triangle". These stocks are then included in our "Stocks to Watch List" which gives investors a quick reference to those stocks which may provide the best buying opportunities to the long side in the weeks ahead. Each stock in our "Stocks to Watch List" includes specific Buy Prices, Stop Loss Prices (very important) and projected Target Prices.

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From Briefing.com Semiconductor Related: 10:53AM Sector Watch: Semi Index -SOX- : -- Technical -- Index (SOX 452, +1.9%) tacks on solid gains with it recently probing resistance at 453/454 which marks the top of the April 29/30 range, a short term trendline and its 20 exp avg -hourly. Intraday posture above 449 and 447 keeps the pattern of the recovery off Friday's low favorable. Next resistance is at 459/460 (congest and 38% retrace off April 23 high and 465 (50%). An important level as the week unfolds is at 468 (initial pullback low on April 22 and Dec low).

10:37AM Axcelis Tech names Stephen Bassett as CFO (ACLS) 10.92 +0.41: Bassett has served as the co's interim CFO since last year.

10:36AM Loop Capital comments on SIA data : Loop Capital believes that SIA data could serve as a support for the Semiconductor space this morning after a week of rough sledding. While the info is more of a look in the rear-view mirror, firm thinks the numbers were solid with sales increasing to $16.28B from $15.58B in February. Firm believes this was another notable accomplishment for a first quarter to outpace a generally strong fourth quarter. All in all, these statistics support what we witnessed through 1Q04: solid results and some clear highway ahead in the near-term.

10:01AM ISM Index 62.4 vs Consensus 62.7 :

10:01AM Construction spending +1.5% vs 0.5% consensus :

9:58AM Nasdaq Composite holding near 200 day sma (COMPX) 1936 +15.00: -- Technical -- Firmer bias to start the week with the index edging slightly above initial resistance mentioned in The Technical Take in the 1933/1936 area (200 day sma, congest). Intraday watching support at 1932/1930 and 1926. Sustained posture above leaves the index in position to extend this morning's recovery attempt. Next resistance is in the 1944/1946 area followed by 1955/1957.

9:56AM Brooks Automation announces legal settlement in Israel (BRKS) 16.92 +0.14: Co announced that on 4/28 Brooks was notified by letter that a legal settlement had been concluded against it in Israel in the amount of approx $700K. The legal proceeding arose out of a dispute between PRI Automation, prior to the acquisition of PRI by Brooks, and an Israeli engineering services firm. The dispute pertained to an arrangement under which PRI engaged the services of the Israeli firm to obtain workers to perform work on a contract basis for PRI in Israel in 1997. Those workers were later hired by PRI as direct employees, and the Israeli firm subsequently filed suit alleging contractual violations and other damages. Co anticipates making payment of the full amount of the settlement to the Israeli firm during May 2004. Because this resolution provides additional evidence with respect to the expense associated with the previously disclosed legal proceeding, co will record the expense associated with the payment of this settlement in Q1 (Mar).

8:40AM Broadcom simplifies wireless LAN setup experience and improves coverage range (BRCM) 37.83: Broadcom today announced two new solutions that will significantly improves wireless connectivity for consumers who use 54g based equipment in their Wi-Fi networks. The first is an intelligent software tool that radically simplifies wireless LAN network installation and automatically configures security settings. The second is a highly integrated hardware module that can increase the range of 54g-based wireless LAN devices by up to 50 percent. Broadcom's new solutions will enable next generation 54g products not only to deliver higher performance wireless LAN access, but also to alleviate the usability concerns of many first-time Wi-Fi users.

7:40AM CSCO should report AprQ at upper end of guidance -- Piper 20.91: Piper Jaffray says Cisco finished Q3 (Apr) at the upper end of its 1%-3% guidance. A quarter with 3%-4% top-line growth is most likely. Within Advanced Technologies, VoIP and security products did particularly well. In addition, April closed off on a strong note, with broader participation from the co's Ethernet switching group. This bodes well for backlog going into the seasonally strong Q4 (Jul).

7:25AM WorldGate announces deal with Motorola (WGAT) 1.64: Co announces an exclusive multi-year agreement with Motorola (MOT) for the worldwide development of the Ojo personal video phone. Motorola will market the Ojo personal video phone as part of its "connected home" portfolio of consumer broadband solutions. Motorola will distribute Ojo worldwide. The Motorola Ojo personal video phone is expected to be available this fall. Additionally, Motorola and WorldGate will jointly develop future broadband video telephony solutions. The agreement includes a prepayment by Motorola against future product purchases.

http://finance.yahoo.com/mp?u

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U.S. stocks rose after the Federal Reserve reassured investors that any increase in its benchmark interest rate will be ``measured,'' even as policy makers dropped their pledge to be patient in boosting borrowing costs. Tyco gained after the company boosted its 2004 profit forecast. Teva Pharmaceutical, the world's biggest generic-drug maker, increased after earnings beat estimates. The S&P 500 Index rose 2 points (+0.2%) to 1119. The benchmark jumped 26 percent last year and is up 0.7 percent so far in 2004. The Nasdaq gained 11 points (+0.6%) to 1950. The DJIA added 3 points to 10,317. Four stocks advanced for every three that fell on the New York Stock Exchange. Some 1.7 billion shares changed hands on the Big Board, 13 percent more than the three-month daily average.

Strong Sectors: gold, mining, steel, coal, communications equipment
Weak Sectors: casinos, insurance

Top Stories . . . Federal Reserve policy makers voted unanimously to keep the benchmark U.S. interest rate at a 45-year low of 1 percent and suggested they will lift borrowing costs at a ``measured'' pace to head off inflation.

The 10-year U.S. Treasury note fell in New York after the Federal Reserve signaled it can raise interest rates at a ``measured'' clip, suggesting to some investors that the policy may lead to faster inflation

The dollar traded near a three-week low against the euro after the Federal Reserve left its key interest rate at a four-decade low of 1 percent and said it can take a ``measured'' pace in raising borrowing costs.

U.S. auto sales rose 0.8 percent in April as Toyota Motor Corp. and Nissan Motor Co. benefited from an expanding economy and new models and as fleet customers bought more General Motors Corp. vehicles.

Tyco International, the world's biggest maker of security systems, said fiscal second-quarter profit surged because of cost cuts and higher sales of electronics and new health-care products. The company raised its 2004 forecast.

Warren Buffett, the world's second- richest man, and Bill Gross, the biggest bond manager, lead a small but growing number of investors who say the Federal Reserve should already have raised overnight lending rates to nip inflation before it gets out of hand.

Frank Quattrone, the highest-ranking securities executive to face prison since junk-bond pioneer Michael Milken was sentenced, will try to overturn his obstruction-of-justice conviction by attacking evidence rulings by the presiding judge, his lawyer said.

Pioneer Natural Resources, which produces oil and natural gas in North America and Africa, agreed to acquire Evergreen Resources Inc. for about $1.7 billion in cash and stock to add gas reserves in the U.S. Rocky Mountains.

Fed Policy . . . Today, the Fed kept its benchmark interest rate at a 45-year low of 1 percent.

The Fed's rate will probably rise to 1.25 percent in the third quarter and 1.5 percent by the end of 2004, according to the median forecasts of 58 economists surveyed by Bloomberg news from April 27 to April 30. They predict the rate will rise to 2.75 percent in the third quarter of 2005.

``At this juncture, with inflation low and resource use slack, the committee believes that policy accommodation can be removed at a pace that is likely to be measured,'' members of the rate-setting Open Market Committee said in a statement following their meeting in Washington.

``The economy's on a good footing going forward. Rates may be going up, but they won't be as much of a headwind.'' Philip Tasho, money manager in charge of $220 million at Tamro Capital Partners.

``It gives equity investors comfort that things will be predictable, rather than excessively rapid or destabilizing to the pace of the recovery.'' Jack Caffrey, equity strategist at J.P. Morgan Private Bank, which oversees $280 billion in New York.

Where will the rates go and when. In the Wall Street Journal today, Richard Berner, economist for Morgan Stanley, thinks somewhere north of 4.0%. However, on CNBC this morning, Wayne Angell, former Vice Chairman of the Fed, says he believes a neutral Fed policy is 1½%, just 50 basis points from the current level. Angell says the language might change at this meeting, but the Fed will signal a rate change at the June meeting, and raise Fed funds in August. He thinks the August hike could be 50 basis points. With the election interceding, Angell projects a 2005 rate hike to a range of 2.0%-to-2.5%. While inflationary pressures are rising, it has not found its way to the critical wage area, as yet.

Quotes of Note . . . ``Corporate profits are coming in better than expected. That's the most important thing. We can handle one or two rate increases as long as they're small ones.'' Fritz Reynolds, who manages the $225 million Reynolds Mutual Funds.

Gurus . . . On the profit front, Ed Hyman's ISI Service says nominal GDP in the second-quarter will be bigger than the first-quarter, and as a result, earnings could be up more than the 27.0% estimated in the first-quarter. They could be up 30.0%.

IPO . . . Silicon Strategies has heard from sources that the IPO of shares in Freescale Semiconductor Inc. by Motorola may not go ahead as planned. Silicon Strategies heard that a sell-off of shares in Freescale in the Spring of 2004 was the plan, but it was pointed out that selling off Freescale may no longer be in Motorola shareholders' best interest, at least in the short term. Motorola SPS has weathered the industry's longest and deepest slump and undergone considerable restructuring, but now the industry is in a recovery phase, and apparently a very strong one, which means that Freescale sales should start to climb and profits return. In addition, Motorola has its own problems and Freescale represents $4.6 billion of rev, much of which is good steady business. "You rarely make things better by cutting rev. You make things better by cutting cost," the source said. On the other hand it would seem strange to have Freescale Semiconductor as a differently named but wholly owned subsidiary of Motorola. And folding Freescale back into Motorola or renaming it as Motorola Semiconductor would probably be perceived as unacceptable dithering, even if Zander claimed the spin-off was not his plan in the first place.

Financials . . . Janney Montgomery Scott comments that despite generally positive 1st quarter 2004 earnings, bank and thrift stock prices were hammered in April because of mounting concerns regarding higher interest rates; stocks were particularly vulnerable, given their lofty valuations due to M&A speculation rather than economic fundamentals. Firm thinks most companies, particularly banks, are asset sensitive and earnings will not necessarily be harmed by higher interest rates, provided that such increase is gradual and accompanied by a stronger economy, which would spur loan demand. Firm is seeking selective buying opportunities, particularly where stock prices of quality companies have been unduly punished because of sector rotation or other non-fundamental reasons. Firms top picks among the small-cap bank, mid-cap bank, and thrift universe are First Niagara Bancorp and New York Community Bancorp.

Equity Office reported funds from operations of $0.66 per share, in line with the FFO consensus of $0.66; revenues rose 1.0% year/year to $796.2 million versus the $777.7 million consensus. The company sees 2004 funds from operations of $2.55-2.70 vs consensus of $2.64.

MBNA has again been speculated to be interested in buying Egg, the UK on-line credit card lender still 79% owned by UK's Prudential insurance. While the acquisition makes sense strategically, the current 155p share price of Egg would seem too high to justify a purchase. We believe MBNA remains as focused on returns as it has historically which should influence the price paid. The speculation was repeated by a London newspaper, implying for a second time that MBNA is close to buying Egg for 1.4 billion UK pounds or about $2.5 billion. That equates to a premium of about 7.7% over the current share price and a premium to receivables of about 33%. Egg is profitable in the UK, but losing money in France. At March 31, Egg had credit card loans of about 3 billion UK pounds and other consumer loans totaling 2 billion UK pounds. The UK business generated a return on assets of about 1.2%. Losses in France, however, more than

offset those profits. In its early days as an "Internet" business (IPO in 2000), Egg generated significant losses as it focused on customers rather than profits. Over the past two years, profitability in the UK business has increased dramatically and the company's 2.8 million card customers represent an attractive franchise (at a price).

Analysts met recently with CFC’s Senior Managing Director - Corporate Development (Eric Sieracki) to discuss the company’s recent progress and strategies for future growth. There were several incremental tidbits which further support our positive view of CFC’s shares. First, while recent growth goals are admittedly bold and top-down driven, CFC has a plan for achieving targets (e.g., 30% origination market share by ‘08) including doubling of its variably compensated sales force and further retail expansion. Second, while production margins should eventually “normalize” to 35-70 bps, they may stay higher for longer (exp 85 bps in ’04) given a higher proportion of higher margin loan production (incl home equity and subprime). Third, while the “servicing hedge” has been effective over the past decade, CFC may reduce its use of

this relatively higher cost source of “insurance”–using more targeted inventory sales to offset lower production earnings (as in 1st quarter 2004) as rates rise. Fourth, while we believe CFC is more “acquisition ready” than ever before, servicing deals may not be imminent since the company still suffers from a leverage disadvantage versus other prospective bidders and management prefers to allocate capital to organic growth.

Alexandria Real Estate does not have any obvious comparisons, given that it is the only REIT focused solely on the biotech industry and, specifically, laboratory office space. That said, a group of other office companies, including Boston Properties, CarrAmerica, Equity Office Properties, Glenborough Realty, and Prentiss Properties, together make up a relevant comparison set. Alexandria trades at 113.1% of NAV, which calculate to be $50.33 per share, an 18.0% premium to its peer group average of 95.9% of NAV. At a 14.4x estimated 2004 CAD multiple, however, Alexandria is trading in line with its peer group average (14.3x). Given Alexandria’s above average growth potential, especially in contrast to its pure office peers, forecast a year-end 2004 target price of $66 (was $72), which assumes 6% multiple expansion and a target 2005 CAD multiple of 15.3x. Analysts lowered target price to reflect the sell-off of REITs in general over the past month, and the reduced multiples at which the group is currently trading. Achieving a new target price, combined with a current dividend yield of 4.2%, would generate a total return of approximately 20%. Alexandria owns and operates 5.7 million square feet of office/laboratory space, in 89 properties, with the largest concentrations in San Diego, suburban Washington DC, the San Francisco Bay area, Eastern Massachusetts, and Seattle. Primary tenants include pharmaceutical, biotechnology, and life science product and service companies.

Diversified . . . Tyco reported earnings of $0.41 per share, $0.05 better than the consensus of $0.36. Revenues rose 11.7% year/year to $10.04 billion versus the $9.60 billion consensus. Company sees 2nd quarter EPS of $0.39-0.42 versus consensus of $0.40; for 2004 sees $1.52-1.58, consensus $1.51.

Energy . . . PG&E Corp reported earnings of $0.41 per share, excluding one-time gains, $0.01 better than the consensus of $0.40. Revenues rose 27.6% year/year to $2.72 billion. Company sees Y04 EPS of $2.00-2.10 versus consensus of $2.06.

Defense & Aerospace . . . Northrop Grumman reported earnings of $1.25 per share, $0.04 better than the consensus of $1.21. Revenues rose 21.1% year/year to $7.11 billion versus the $6.32 billion consensus. The company sees 2004 EPS of $5.60-5.90 versus consensus of $5.80 on revenues of approximately $28 billion, consensus $28.2 billion.

In a Business Wire release, Source Capital Group announces that it has upgraded its opinion on Taser International Inc to a BUY from Hold with a $45 tgt. "The recent price drop has brought the earnings multiple down to levels that make the stock compelling on a valuation basis," stated Joe Blankenship, vice president research at Source Capital in Scottsdale, Ariz. Blankenship continued, "We think our 2004 and 2005 EPS estimates have some upside potential as the company continues its market penetration in law enforcement in the United States and makes headway with agencies in international markets. At approximately 30 times our 2005 EPS estimate of $1.04 per share, Taser's stock is attractive for a company growing at 75% - 100% per year".

Transports . . . The Wall Street Journal suggests on Sunday, when Southwest Airlines begins to serve Philadelphia, the launch will mark the culmination of an atypically muscular marketing campaign and the onset of what is expected to be no-holds-barred competition with US Airways. According to the article, already, US Airways has declared that Southwest is trying to "kill" it, and last week US Airways slashed fares in the market, which happens to be its biggest hub. Excluding Philadelphia, Southwest provides service to 58 cities and 59 airports in 30 states.

It appears that April auto sales will come in at the low end of range of expectations at roughly 16.7 million units on a SAAR basis, this would compare only slightly favorably to a year ago and would be roughly in line with the rate we experienced in March. Ford reported weaker than expected results with sales off 4%; the Chrysler Group of DCX was roughly in line, up

1%, with strong sales of the new 300; analysts expect GM to report a sales figure that was up approximately 3% from a year ago. Foreign automakers, in aggregate, were up with Asian brands doing slightly better (+5%) in April than European brands (+4%). Nissan (+14%) and Toyota (+10%) were up while Honda (-2%) was down; of the European brands, German makers, BMW (+12%) and Porsche (+15%) were up, while Volkswagen (+1%) stemmed a streak of year/year

losses. With sales that were weaker than most would have liked, inventory levels continue to run high; as such, we would expect another uptick in incentive spending, as analysts do not anticipate any NA production cuts for the second quarter; however, a weak May could put a damper on 3rd quarter production.

Food & Beverage . . . Kraft Foods, the largest North American food company, is planning a distribution deal with Starbucks that will put Seattle's Best Coffee in grocery stores throughout the United States later this year, a Kraft spokeswoman said on Monday. Starbucks completed the purchase of the parent company of Seattle's Best last July.

Kellogg’s stock has been a stellar performer and its relatively high valuation causes us to wait for another good buying opportunity. Bucking the Atkins trend and the impact of higher ingredient costs may be helped short term by these lower than expected benefits costs. But the biggest benefit has been international growth which may continue although we remain a little worried about the important U.K. market. K has gained a lot of market share around the world and that

trend is one we will continue to watch with some tougher comparisons ahead.

Retail . . . Jefferies upgrades Gap Stores to Buy from Hold, as they see two near-term catalysts that could drive the stock higher: 1) firm expects the co to beat 1st quarter consensus on May 20 (firm's estimate is $0.29 versus consensus of $0.27), and 2) company will report April same-store sales results on May 6, and firm thinks mgmt could provide Q1 earnings guidance then that exceeds consensus, and if guidance is not given, the Street may raise Q1 ests after April sales results are announced. Target is $26.

Last night Best Buy hosted an analyst dinner to discuss its customer centricity initiatives. The presentation was primarily theoretical in nature, and somewhat short on executional details.

Store visits today may answer some of our questions. The company's customer centricity initiatives are essentially an attempt to transform the corporate culture at BBY by having store employees focus on customer needs as opposed to sales of product. Management stated that comp-store sales at customer centricity stores were, on average, 700 bps higher than other BBY stores, while gross margins were 50 bps higher, but SG&A costs were 240 bps higher. Clearly, in our opinion, the company achieved strong results, however, going forward, the challenge will be to achieve similar results in a less costly fashion. Analysts applaud management for attempting such a difficult transformation in its organization, and if the company is successful we believe it would create significant competitive advantage. However, the transformation will not be easy, and success may be dependent upon a number of unknown variables.

Safeway reported earnings of $0.16 per share, which excludes $0.06 charge for closing of Dominick's stores, but includes $0.27 Southern California strike charge. Reuters Research has informed us that their consensus of $0.28 is compiled on the same basis. Revenues fell 5% year/year to $7.64 billion vs the $7.89 billion consensus. SWY reaffirms 2004 EPS guidance of $1.95-2.03, which excludes both the Southern California strike charges and the Dominick's charges and is not comparable to consensus estimates.

The WSJ highlights Coinstar, which operates change-counting machines in almost 11,000 locations, mainly supermarkets. It charges shoppers a hefty 8.9% commission for its services. Still, the company is growing briskly, rev for the first three months of the year were up 13.3% from the year-earlier period; Coinstar says it is on track to add a total of 1,000 new machines this year. WSJ made an experiment, hauled a bag of change into Commerce Bank and Citibank, and dumped another one into a Coinstar machine in a NYC supermarket. They also bought a coin-counting gadget from Office Depot. The WSJ wanted to test speed and accuracy. For consistency, they began with equal piles of $87.26 worth of pennies, nickels, dimes and quarters that they had gotten from a local bank in coin envelopes. The machines at both Commerce Bank and Coinstar gave them less back than they put in, Commerce Bank missed by a whopping $7.02, while Coinstar was off by 57 cents. Makers of coin-counting machines say errors, referred to in the industry as "variances," happen when foreign objects, from paper clips to overseas coins, get into the mix. Alarmed at the results, columnists decided to give the machines a second chance. They painstakingly counted out two batches of $68.23 in change. But once again, both Commerce Bank (82 cents) and Coinstar (14 cents) were off, in the machine's favor. A spokesman for Commerce Bank says the accuracy rate of the co's machines last month was 99.9%. He called WSJ $7.02 deficit a "highly unlikely" result. Coinstar also says columnists experience was atypical. For disputes under $15, the stores will typically refund on the spot, a spokeswoman said.

Healthcare . . . Tenet Healthcare reported pro forma earnings of $0.05 per share, which excludes $0.31 in charges and discontinued operations, in line with the consensus of $0.05. Revenues fell 2.9% year/year to $2.67 billion versus the $2.64 billion consensus. First Call EPS consensus is $0.03, however this includes at least one estimate of a loss of $0.15, which includes charges and is not comparable to pro forma results.

Barron's Online highlights LifePoint, whose shares have almost doubled in the past year, but may continue to rise. LifePoint is growing its way out of bad debt, recruiting new doctors and adding new hospitals to keep admissions climbing, while controlling costs and expanding margins. And new Medicare funding also should swell LifePoint's bottom line this year. But perhaps most importantly, the portion of rev consumed by unpaid medical bills has decreased from qrtr to qrtr over the last 9 months, suggesting that bad debt is stabilizing. "The stock may be catching people's attention because of the Q1 performance, but it remains an underappreciated name in health care services," says A.J. Rice, an analyst with Merrill Lynch. "Bad debt is something the hospital industry has to live with at this point," says Lee Grout, co-manager of the Berwyn Fund. "They have to learn to manage it, which is what LifePoint has been doing, and doing well." "I am not saying the war is over with bad debt. But it seems that it will not be getting dramatically worse," says David Dempsey, an analyst with Avondale Partners, who upgraded LifePoint to Buy last week. That may be good enough to bolster the stock price. At 18.23x expected earnings over the next four qrtrs, the shares trade in line with the S&P500 index and at a 6% discount to the hospital industry. Historically, the stock trades at a 70% premium to the industry and a 30% premium to the S&P500. If LifePoint keeps "doing what it is doing," says Mr. Dempsey, it could trade at 17.3x his projected earnings for '05 of $2.42, or $42 a share. What's more, some analysts insist that management's guidance calling for profits of $2.00 to $2.04 a share in '04 is too conservative.

Drugs . . . Teva Pharm reported earnings of $0.64 per share, $0.06 better than the consensus of $0.58. Revenues rose 38.9% year/year to $1.05 billion versus the $1.00 billion consensus. The company sees 2004 EPS of $2.70-2.74 versus consensus of $2.57 on revenues in excess of $4.5 billion versus consensus $4.38 billion.

Media. . . . The New York Daily News reports a big run-up in travel marketing expenses at Barry Diller's Internet empire, InterActiveCorp, has investors running scared. According to the article, shares fell $1.19 yesterday, or nearly 4%, to $31.06 after the company said it spent more than expected on drawing more transactions for their travel Web sites. That has Wall Street whispering that InterActiveCorp could get swallowed up. "This could easily be taken over by eBay, Google or Yahoo," a source for the article said. "If I were Barry, I'd be worried about that."

Clear Channel reported earnings of $0.16 per share, ex items, $0.02 better than the consensus of $0.14. Revenues rose 10.7% year/year to $1.97 billion versus the $1.84 billion consensus. Company "expects that operating income will increase in the low double digits on a percentage basis and earnings per share will increase in the high teens to low twenties on a percentage basis for the full year of 2004".

Marvel Enterprises reported earnings of $0.27 per share, $0.06 better than the consensus of $0.21. Revenues rose 40.0% year/year to $122.3 million versus the $109.1 million consensus. The company now sees 2004 EPS of $0.89-0.94 versus the Reuters Research consensus of $0.88.

Network Equipment . . . Smith Barney reiterates their Buy rating and $34 target on Cisco ahead of 3rd quarter results on May 11. The firm sees the enterprise end markets as improving and thinks that the company's service provider biz should snap back in the quarter. Also, while it's not unusual to see a book-to-bill in the 0.90-0.97 range in the seasonally-weak April qtr, firm expects a book-to-bill around 1.0 due to the strong demand trends they saw in March and April, which should materially improve visibility into the seasonally-strong July quarter. Overall, firm thinks the quarter, conference call, and guidance will be supportive of the stock.

Research In Motion and Vodafone announce plans to offer the BlackBerry wireless solution to mobile professionals in Australia. Operating on Vodafone's GSM/GPRS network, BlackBerry will provide integrated access to email, data and phone applications.

Banc of America says that given the dramatic pullback in Communications Equipment stocks as well as the improved fundamental outlook for 2004, they view valuations in the group as attractive. Firm remains most positive on Cisco, Nokia, Juniper, Research in Motion, UT Star Telco, and Foundry.

Lucent was awarded $150 million contract from U.S. Cellular.

Needham reiterates its Buy and $3 target on Corvis after it reported 1st quarter results on Friday. The company is emerging from a turnaround, including the recent purchase of Broadwing. The firm says Corvis, recognizing the need to evolve its business in a new direction while also preserving the largest test bed for its gear, seized the opportunity to buy Broadwing for a fraction of revenues out of a distressed sale in 2003. The firm sees significant upside heading into a cyclical upturn. The co confirmed that the sales pipeline is growing driven by a revamped sales force. The firm expects the co to report news of VoIP launches and possibly initial packet-switched voice customers this Spring. Meanwhile, the co discussed potential government contracts.

Semiconductor Equipment . . . Susquehanna says they remain cautious toward the semi equipment sector as the company's approach what they believe will be a cyclical peak in semi growth in the next several months; firm says a combination of decelerating semi growth and aggressive capacity expansion in late 2004 will lead to a difficult environment for equipment stocks. Firm downgrades Lam Research, United Micro, and Varian Semi to Net Neutral from Continued Net Positive as a result of their increasingly cautious stance toward the semi equipment sector, and also downgrades MKSI and Teradyne to Net Negative from Continued Net Neutral, saying these company's lack some of the defensive characteristics they consider important during a cyclical downturn.

Taiwan Semi, the world's leading contract microchip maker, is likely to increase capital spending this year -- perhaps by another 10%-- to boost production capacity in the face of surging demand. TSMC had forecast $2 billion in capital spending this year, up from $1.2 billion in 2003 and the company's chairman told investors Friday that even more investment could be needed to address an expected capacity shortfall this year. Asked about that outlook, an investor relations official with the company, said at a JPMorgan investor conference on Monday that TSM was "likely" to increase its capital spending budget. According to the Reuters report, TSMC sent shares of semiconductor equipment firms surging last year when it first announced plans to boost capital spending in 2004.

United Micro, the world's second-largest contract chip maker, will increase its $850 million budget for spending at its Singapore plant this year -- if it can get hold of production equipment in short supply. Chris Chi, president of United Microelectronic Corp's Singapore business, UMCi Ltd, said on Tuesday the co planned to raise production of semiconductors at the plant to above an original target of 10,000 wafers a month by the end of the year. But, like other chip makers, Chi said UMCi's ability to ramp up production to meet booming demand for chips for gadgets such as mobile phones was limited by shortages of semiconductor production equipment. He said that was particularly true of lithography equipment for mapping out electronic circuits on silicon wafers, which has to be ordered a year in advance. UMC's lithography supplier is Dutch company ASML Holding.

Semiconductors . . . AmTech maintains their Buy rating on Marvell Tech, saying the stock has been under pressure due to the overall weakness in technology as well as concerns over insider selling; firm notes that the company's top two senior execs still own more than 10% of the co each, and from a fundamental standpoint, they find several data points in MRVL's favor: 1) strength at WDC, 2) stronger market in notebooks in 2004, and 3) new design wins in Prestera switch ICs.

Software . . . The Marker.com, an Israeli technology website, reports that Microsoft CEO Steve Ballmer said he assumes that in the foreseeable future, when the co puts its legal wrangles behind it, it will share the cash it built up with shareholders possibly through dividends or by repurchasing shares, or in some other fashion. Ballmer also said Google's Gmail service may come complete with security problems and compromise the users' privacy, and said "you'd be surprised to hear how close we are to Google in our search abilities."

CNET News reports Red Hat on Tuesday plans to announce its first version of the open-source operating system for desktop computers. Red Hat initially won't tackle the entire desktop software market, aiming instead for corporations whose employees need only basic computing features such as word processing and Web access. Red Hat's primary target has been Unix running on higher-powered networked computers called servers. But with its Red Hat Desktop product, the co directly aims for Microsoft and its Windows stronghold.

RedHat held a press conference in London this morning and issued a press release announcing the launch of the RedHat Desktop.This is a long-term positive as it represents a first step in broadening RHAT's opportunity to leverage its Linux leadership on the server and open-source software development strategy to deliver an alternative desktop solution to enterprises globally. Analysts do not anticipate RHAT will generate a material amount of client revenue in 2005 as the product is expected to sell on a subscription basis at $5 per month per user with a 50 user minimum. The product will be generally available May 15th and initially sold directly through RHAT and other partners but the company has not signed any OEM agreements at this time. RHAT indicated it is in discussions with several large enterprises and government entities to begin pilot projects with the RedHat Desktop. A key differentiator in RHAT's client strategy is manageability of the client environment. The RedHat Network has the potential to significantly reduce the overall support costs of a client environment through automated provisioning.

Piper Jaffray comments on Macrovision's 1st quarter results, which confirm the firm's belief that industry trends in DVD-to-VHS protection and FlexNet are improving. While Macrovision will not play in all areas of content protection, the co's current and upcoming product offerings will result in the re-emergence of a growth story. The co indicated that SafeDVD, which the firm believes represents the largest potential market opportunity for Macrovision, is being production tested by a major film studio this quarter and should have revenue by 4th quarter.

Wedbush Morgan downgrades Siebel to Hold from Buy and cuts their target to $12 from $18 after the co announced that Michael Lawrie will replace Tom Siebel as CEO; although Lawrie appears exceptionally well qualified, firm says he is new to SEBL and they envision a number of near-term transition issues over the next several quarters, such as: 1) firm has some concern that Mr. Siebel, despite remaining Chairman and a full-time employee, will almost inevitably scale back his role; 2) SEBL remains dependent on big-deals, and they worry that less involvement from Mr. Siebel could put some rev at risk from big deals lost or downsized; 3) key SEBL execs will now report to Lawrie, and firm would not be surprised to see some executive-level turnover (forced or voluntary); and 4) firm sees some mgmt and strategy changes, although none are immediately in the works.

Analysts viewing the news of Tom Siebel stepping down from the CEO role as a neutral to positive change from a corporate governance standpoint. Michael J. Lawrie will succeed Mr. Siebel as a CEO effective today, which does raise some questions with skeptics noting that the CRM industry must be facing some unusual challenges for management to bring in someone from outside for the position. Michael J. Lawrie was most recently SVP and Group Executive, Sales and Distribution, at IBM and led the company's global operations, responsible for delivering more than $80 billion of annual revenue. JP Morgan out noting the resignation is not entirely unexpected noting the transaction could potentially make Siebel a more attractive acquisition candidate as it introduces a new perspective to the operating committee, separates the founder from the CEO position and is a step toward Mr. Siebel playing a smaller role going forward.

Oppenheimer upgrades Macrovision to Buy from Neutral and raises their target to $23 from $22 following stronger than expected 1st quarter results and raised guidance; firm also says recent price weakness in the stock offers a compelling entry point, and also cites improved visibility in the company's ELM businesses.

Lehman upgrades Adobe to Equal-Weight from Underweight and raises their target to $46 from $36 after the company raised 2nd quarter guidance; firm says they are gaining more confidence that the new pricing structure that the co adopted on its Creative Suite launch and the last Acrobat upgrade will allow these products to have a longer and more profitable tail than initially expected.

Barron's Online highlights Macromedia, a co known for its products such as developer tools like Flash, which make it easier to design and develop dynamic web content. Sales of those tools remain strong as customers buy upgrades, such as its software package called Studio MX, as well as sales of new products like training software eHelp. "Macromedia repackaged Studio MX, so you get more bang for your buck," says Ed Bierdeman, an analyst at Moors & Cabot, who rates the stock Buy. Macromedia expects its nascent business and consumer products, such as a version of Flash used on cell phones, to double in the FY ending in March, from about $37 mln in F04. Mr. Bierdeman sees these products, such as eHelp, growing to about 20% of sales in F05. With its core business strong and new products growing, Mr. Bierdeman now expects Macromedia to earn 85 cents per share next year, well above the consensus of 68 cents before the co announced results. The stock now fetches a modest 1.4x Macromedia's projected long-term annual earnings growth rate. And the shares are at a discount to its historic 5-year multiple of 45.3x forward earnings. According to the article, staple products like Flash are selling well, and cell phones could grow into a big market as Macromedia broadens its customer base beyond creative professionals.


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Amateur Investors Midweek Market Analysis:

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The S&P 500 rose for a third day on optimism that the Federal Reserve's pledge to boost interest rates at a ``measured'' pace won't derail a 14- month rally. Charter One Financial advanced after the company agreed to a $10.5 billion buyout offer from Royal Bank of Scotland Group. Energy shares gained, led by Exxon Mobil, as crude oil futures closed at a 13-year high. The S&P 500 added 2 points (+0.2%) to 1121. The benchmark is up 40 percent since its 2003 low in March of that year. The Nasdaq rose 6 points (+0.4%) to 1957, its third consecutive day of gains. The DJIA lost 6 points (-0.1%) to 10,310. About the same number of stocks rose and fell on the NYSE. Some 1.5 billion shares changed hands on the Big Board, in line with the three-month daily average.

Strong Sectors: hardware, semiconductor, computer storage, biotech, healthcare, regional bank, casino & gaming
Weak Sectors: REIT, gold, insurance, auto manufacturing, forest & paper product, oil services

Top Stories . . . An index of U.S. service industries unexpectedly rose to a record in April and more companies were hiring than at any time since November 2000, a private survey showed.

U.S. Treasury notes rose after the Federal Reserve signaled yesterday it may not raise the benchmark interest rate from an almost 46-year low of 1 percent as fast as some investors had expected.

CVS., the second-largest U.S. drugstore chain, said first-quarter profit rose 25 percent, helped by higher sales of generic drugs.

The U.S. will sell $54 billion in Treasury notes next week to finance the federal government's operations, resume sales of 5-year notes indexed to inflation and begin sales of a 20-year inflation-indexed bond.

Crude oil rose to a 13-year high for a third straight day after an Energy Department report showed that U.S. inventories increased less than expected last week.

Martha Stewart and her former broker, Peter Bacanovic, were denied a new trial, after a judge rejected a claim that their conviction for obstructing justice should be overturned because a juror hid a prior arrest for assault.

Texas Pacific Group, a buyout firm founded by David Bonderman, agreed to buy Iasis Healthcare for about $1.4 billion in a bid to repeat earlier profitable healthcare investments including Oxford Health Plans Inc.

Quotes of Note . . . ``That should take concerns out of the market, and should let the fundamentals such as corporate earnings growth shine through a bit more.''David Chalupnik, head of equities at U.S. Bancorp Asset Management, which oversees $122 billion.

Gurus . . . John Berry, the Fed expert, feels that while the Central Bank is less accommodative, it is hardly aggressive. He says the Fed's mandate is to keep inflation under control, not to reduce it by slowing the economy. Moreover, so much of the changed perception of the economy's strength is based on one month's job figures, so the Greenspan Gang will require additional confirmation.

Meanwhile, Ned Davis is pondering when to re-enter the Bond Market. He says a 50.0% rise from the bottom for the next 10-year note yield would bring it to 4.75%. So, around 5.0% on the 10-year, Davis would likely buy back the bonds. As for stocks, he says strong market trends, up or down, tend to be bullish. However, lots of divergences and mixed trends, like now, are mildly bearish.

Market historian Jim Stack has gone back in time to market performance in the face of rate hikes. In 1997 and 1994, a tightening cycle did not result in a bear market or significant decline. In 1958, a mild bear did ensue. Four others (1955, 1963, 1967, and 1999) resulted in more bull market gains. In only two cases, 1987 and 1973, did the first rate hike occur prior to the start of a bear market. The bottom line is that 80.0% of the time the first rate hike did not lead to a bear market, and we don't expect a rate hike until late June.

Mortgage Notes . . . Mortgage applications rose for the second straight week, according to the Mortgage Bankers Association, as 30-year fixed-rate mortgages rose to 6.10% from 6.01% the week before. The applications index rose 4.4% in the week of April 30th due largely to a further projected rise in borrowing costs. The purchase index rose 4.1% higher in the week while refinancing increased 4.7%.

Market Comment . . . If you believe the Fed will slow down the economy via raiding interest rates. Then you have to read this.

The flowers are not the only thing blooming this spring as a string of friendly announcements seems to suggest that the economy is blossoming as well. Indeed, almost every indicator of activity has come in on the high side of expectations during the past month, and first-quarter earnings season has been nothing short of spectacular. Regardless, the stock market managed to lose ground during the past month! While interest rate fears certainly contributed to investors’ uneasiness toward equities, we believe the real story lies in the loss of momentum in leading indicators of the economy such as the ISM. This development usually coincides with a market transition, and this time appears to be no exception.

The ISM is one of the most useful macro indicators for portfolio strategy. Around since the 1930s, the ISM is both time tested and timely in its release. While the ISM’s April reading of 62.4 is consistent with very strong growth in the economy, it is equally important to note that the indicator declined slightly last month and still remains below the January posting of 63.6 — a reading that increasingly appears to be the cycle high point. Going forward, interest rate trends in the global economy suggest that monthly declines in the ISM could become a more common occurrence. Indeed, a look at the chart above shows that the momentum in international short-term interest rates typically leads other leading indicators such as the ISM. At this juncture, this forward-looking relationship argues that we are likely in the midst of an important transition.

The equity market also appears to be at a crossroads. Indeed, cyclical sector leadership, evident throughout most of 2003, has begun to wane in recent months. The fact that this ebb in cyclical leadership began pretty much on cue with the peak in the ISM is no coincidence, in our opinion. As such, the investment conclusion suggested by the macro backdrop is clear: Noncyclicals are the way to go! A number of other elements also argue in favor of noncyclicals. These include the stretched relative valuation of cyclicals versus noncyclicals; the presidential election year, which typically favors noncyclicals; and a quantitative model, which currently displays a preference for the more stable segments of the market. The body of the evidence supporting noncyclical leadership going forward is growing larger by the day. Accordingly, some investors might want to take a defensive posture and overweight noncyclical sectors such as health care and staples, and underweight the more cyclical segments of the market like industrials, materials, and technology.

In order to understand why a transition is occurring in financial markets, we have to first study the events that have led up to it. After delivering significant returns in 2003, the stock market has moved sideways since January. The market’s failure to make headway is largely attributable to the peaking of many leading economic indicators in recent months. Accordingly, expect to find historical evidence of the negative impact of a turn in leading economic indicators on financial markets. Indeed, analysis shows that once leading indicators come off the boil, investors can expect a loss of momentum in equity market returns.

Historically, a peak in cyclical pressures has typically brought with it more measured gains for the S&P 500. Indeed, the equity market tends to perform much better in the 12-month period leading up to a peak in leading indicators (up an average of almost 15%), when economic momentum is accelerating, than in the year following a peak in leading indicators (down on average about 3%), when momentum begins to wane. The current easing of cyclical pressures sends a strong message — that investors should expect a much

different stock market environment over the next 12 months than they’ve seen in the past year.

The historical performance of the S&P 500 surrounding past post-60 peaks in the ISM can provide useful insights as to what is likely to lie ahead in the coming year. Indeed, it is interesting to note in the table above that most of these periods have seen a solid rise in the S&P 500 in the year leading up to a peak in the ISM, followed by a decline or severe loss of market momentum in the year after. One notable exception is 1987, which was distorted by the stock market crash. Putting this aside, the best performance the S&P 500 has delivered in the 12-month period following an ISM peak has been a paltry 3%.

A turning point in cyclical pressures can also bring about a change in stock market leadership. Indeed, investor focus usually shifts away from non-dividend-paying stocks to the dividend-paying universe with a trend change in economic momentum. In that regard, a look at the historical record will reveal that the outperformance of dividend-paying stocks in aggregate has been almost 5% relative to their non-dividend-paying brethren in the 12-month period following a cyclical peak in the ISM Index.

A transition in cyclical pressures can also lead to a change in investor preference in the area of company quality. Indeed, a rising ISM Index usually brings with it strong performance for low-priced/high-beta stocks (commonly referred to as low quality). This trend typically comes to an end coincidentally with a peak in leading economic indicators, such as the ISM, at which time high-grade companies are preferred. Therefore, we would not be surprised to see quality companies gain investor interest in 2004.

While a peak in leading indicators of the economy can influence overall market returns, it is at the sector level that this situation has the most important implications. The bullish case for cyclicals in 2003 was predicated on the fact that leading economic indicators were at low levels and rising — an ideal condition for cyclical sectors. In February 2004, with many indicators sitting at 20-year historical highs, it is time for investors to consider the implications of a pullback in cyclical pressures. At that time, analysts advised investors to reduce their cyclical sector weighting to market weight and to increase their noncyclical sector weighting to market weight.

In early March, analysts advised investors to take a further step toward a less aggressive portfolio by changing the mix of industry recommendations within each sector, placing emphasis on this offering stability. Following weeks of indecisive market action, analysts are now suggesting that investors take the additional step of raising their noncyclical weighting to overweight and of reducing their cyclical weighting to underweight. Indeed, cyclical sectors tend to dominate in the year leading up to a cyclical peak, and noncyclicals take over in the subsequent 12 months. Noncyclical leadership in the period following a cycle peak typically lasts about 23 months. In other words, it is not too late to take action since this is likely still the first inning of noncyclical leadership.

Health Care & Biotech average 33.5% returns 100% of the time following peak in ISM

Consumer Staples average 19.0% returns 100% of the time following peak in ISM
Financials average 4.7% returns 75% of the time following peak in ISM

Utilities average 4.8% returns 50% of the time following peak in ISM
Telecom average 2.2% returns 50% of the time following peak in ISM

Industrials average -4.2% returns ollowing peak in ISM

Consumer Discretionary average -4.4% returns 50% of the time following peak in ISM
Energy average -5.2% returns 50% of the time following peak in ISM

Technology average -9.5% returns 25% of the time following peak in ISM

Materials average -12.2% following peak in ISM

As the table above indicates, the sectors that consistently outperform once cyclical pressures recede are health care and consumer staples, both delivering double-digit relative returns on average — a full 100% of the time. Conversely, industrials and materials have consistently underperformed the market once cyclical pressures come off the boil. All the while, financials, utilities, and telecom have on average managed to outperform the market, albeit their performance has been less consistent than that of health care and staples.

The aforementioned three-step process toward noncyclical positioning has been gradual, in line with the historical pace at which this transition typically occurs. Indeed, let us remind readers that we maintained a pro-cyclical stance for the better part of the 15 months leading up to February. During that time, we favored industrial stocks, particularly the machinery segment, since these stocks are strong beneficiaries of accelerating economic momentum. The downgrade of cyclical segments and shift in industry mix from cyclical overweight to more noncyclical segments took several months. Now that the ISM has remained below its January peak for a third consecutive month, it is time to upgrade noncyclical sector weighting to overweight from market weight and to downgrade our cyclical sector weighting to underweight from market weight.

When economic momentum was accelerating for the better part of 2003, along with industrials, the market favored the materials and technology sectors. At this juncture, however, noncyclical sectors such as consumer staples and health care are at the top of the market list and offer a much more compelling risk/reward profile. As a general rule, focus on industry groups that are less vulnerable to the economic cycle — i.e., groups that are better positioned within their sector as economic pressures continue to wane. For instance, investors should reduce exposure to the most cyclical segments, such as metals, semiconductors, and machinery. For those who wish to maintain a cyclical position, suggest segments such as chemicals, software, and restaurants, all of which are “somewhat” less vulnerable to a decline in cyclical pressures.

Historically, the materials and industrials sectors have demonstrated a particular vulnerability to a turning point in leading indicators of the economy. Indeed, over the past 20 years, both of these cyclically-leveraged sectors have shown a zero batting average in terms of performance in the 12-month period following peaks in the ISM. In other words, neither of these sectors has ever outperformed in the year past a high mark in the leading indicators such as the ISM Index. Moreover, during these periods, materials and industrials delivered relative returns on average of negative 12.2% and negative 4.2%, respectively. As such, an overweight in either of these sectors at this stage is tantamount to bucking history.

The technology sector, on the other hand, has shown the ability to buck the economic cycle at least once. Indeed, in aggregate, tech stocks have managed to outperform the market in one of the episodes following the last four rollovers in the ISM. Notwithstanding this, a close look at performance trends shows that tech has typically underperformed more significantly than industrials. In other words, while it’s bucked the trend once, on average, tech has been a worse place to be than industrials. In fact, the average performance of the technology sector following a peak in economic momentum has averaged about negative 9.5%, whereas industrials has averaged negative 4.2%. Certainly, beta is another factor one must consider with technology.

Unsurprisingly, the results for the discretionary sector are somewhat mixed, showing vulnerabilities as well as opportunities. Since the sector is essentially a hodgepodge of different industry groups, some segments have never outperformed following a peak in cyclical pressures, while others have offered good opportunities. For instance, durable goods segments such as household appliances and auto

parts & equipment have never outperformed during the last four periods of waning cyclical pressures. Meanwhile, segments such as hotels and auto manufacturers have defied the trend on one occasion, although both have underperformed significantly.

Consistent Underperformers Following Cycle Peak

% of Time Average Relative

Outperforming Performance

Materials 0% -12.2%

Steel 0% -27.7%

Gold 0% -26.2%

Diversified Chemicals 0% -15.4%

Paper Products 0% -15.0%

Commodity Chemicals 0% -14.7%

Forest Products 0% -10.1%

Aluminum 25% -17.7%

Containers & Packaging 25% -8.6%

Diversified Metals & Mining 25% -8.3%

Paper Packaging 25% -8.3%

Specialty Chemicals 25% -3.3%

Industrials 0% -4.2%

Employment Services 0% -31.6%

Airfreight & Couriers 0% -22.6%

Construction & Farm Machinery 0% -17.6%

Building Products 0% -14.0%

Office Services & Supplies 0% -12.3%

Machinery 0% -12.1%

Electrical Equipment 0% -8.8%

Industrial Machinery 25% -11.5%

Construction & Engineering 25% -4.4%

Commercial Services & Supplies 25% -4.0%

Industrial Conglomerates 25% -0.3%

Technology 25% -9.5%

Computers & Peripherals 25% -20.9%

Semiconductors 25% -12.4%

Electronic Equipment 25% -12.0%

Energy 50% -5.2%

Integrated Oil & Gas 25% -7.6%

Consumer Discretionary 50% -4.4%

Household Appliances 0% -21.9%

Auto Parts & Equipment 0% -19.0%

Catalog Retail 0% -18.6%

Apparel & Accessories 0% -18.5%

Hotels 25% -16.3%

Auto Manufacturers 25% -10.8%

Home Furnishing 25% -8.3%

Apparel Retail 25% -7.7%

Consistent Outperformers Following Cycle Peak

% of Time Average Relative

Outperforming Performance

Health Care ex. Biotech 100% 33.5%

Pharmaceuticals 100% 38.2%

Distributors & Services 100% 36.6%

Equipment 100% 32.9%

Supplies 75% 17.8%

Consumer Staples 100% 19.0%

Food & Drug Retail 100% 24.0%

Beverages 100% 15.1%

Food Distributors 75% 27.2%

Brewers 75% 14.4%

Food Products 75% 10.4%

Packaged Foods 75% 9.8%

Household Products 75% 9.6%

Financials 75% 4.7%

Diversified Financial Services 100% 12.1%

Insurance Brokers 75% 7.5%

Property & Casualty Insurance 75% 2.8%

Life & Health Insurance 75% 2.1%

Multi-line Insurance 75% 1.8%

Banks 75% 0.4%

Utilities 50% 4.8%

Electric Utilities 75% 6.4%

Telecom 50% 2.2%

RLECs 75% 49.8%

RBOCs 75% 33.8%

Consumer Discretionary 50% -4.4%

Homebuilding 75% 16.3%

Broadcasting 75% 6.9%

Industrials 0% -4.2%

Data Processing 100% 19.4%

Defense 75% 40.9%

Materials 0% -12.2%

Industrial Gases 75% 5.7%

Insurance . . . The WSJ's "Ahead of the Tape" column highlights life insurers that have recently outperformed. Investors consider these stocks havens as bond prices fall, since they are less expensive, less volatile and they offer a variety of stock-linked products. So far, things have been okay, though investors may start to become concerned about a wide investigation into annuity and insurance-brokerage practices by Eliot Spitzer. Life insurers have been reporting slightly better-than-expected results. Today, Nationwide Financial Services delivers its financials, with investors looking at how its fixed-annuity business has performed. According to the article, latest developments in rates are good for some insurers, since low rates from the short-end to the long-end created a margin squeeze for insurers that was more pronounced than the similar squeeze applied to banks. Given a lack of consolidation in the industry, "there are some company's that are at risk of underpricing their product to meet near-term growth objectives," writes Sandler O'Neill's Elizabeth Werner. As is typical in many industries, life insurers outline earnings goals that any co in any commodity industry would have a hard time meeting year after year. Company's offering variable annuities may be helped by an improving economy and stock market. Variable annuities are expensive, but investors like them in rising markets, a help to insurers' margins. Life insurers and the analysts argue that the company's will be fine as long as interest rates move up slowly. In the past month, the bond market didn't have a move that can be called "gradual."

Financial . . . Prudential upgrades Morgan Stanley to Overweight form Neutral-Weight based on valuation, as the stock has 20% upside to their $63 target. The firm also says the company's investment bank is not only benefiting from the cyclical recovery in equity underwriting and advisory, but has also gained share, and thinks that asset mgmt should benefit from strong YOY increases in AUM levels; in addition, firm believes the improving economy should bring relief to Discover (higher interchange and lower credit losses) and IIG (reduced risk aversion by retail investors).

The wave of bank merger activity continues with the purchase of Charter One Financial for $44.50 per share in cash by the Citizens Financial unit of Royal Bank of Scotland. The price was

reasonable, given Charter One’s heavy mix of mortgage-related assets. The purchase validates view that top-tier market share in major banking markets is what will drive most large bank acquisitions: Charter One has a No. 3 ranking in Cleveland, which is the 14th largest bank deposit market in the United States.

Oil & Gas . . . Banc of America lowers their view of the Oilfield Service sector to Underweight from Overweight and recommends selling the group, as they believe that the latest stock price cycle for the group is ending; firm sees a number of factors impacting the stocks, including the deceleration of the U.S. rig rate of change, which is a primary predictive indicator of activity; firm also sees the U.S. rig count dropping by 5%, driven by a drop in commodity prices over the next several qtrs as supply/demand converges, all of which should lower the valuation multiples and stock prices. Firm downgrades SLB, BJS, CAM, CLB, FTI, SII, VRC, WFT, GW, NBR, PTEN, DO, ESV, GSF, PDE, RDC, and RIG (see upgrades/downgrades page for individual rating and target changes).

The New York Times reports that a senior Libyan oil official said that his country planned to hold an auction by the middle of the year to draw foreign investment into eight oil and gas projects, the first opportunity for American oil company's to do new business in Libya since President Bush eased sanctions 10 days ago. The easing of sanctions against Libya allows American oil company's to revive their participation in decades-old production ventures in the country, and already, Occidental Petroleum, ConocoPhillips, Marathon Oil and Amerada Hess have moved to renegotiate their old leases. But the new projects Libya is preparing for auction would let American company's catch up to European rivals like Agip and Total that have moved in over the last 20 years to help develop Libya's reserves.

Transports . . . The WSJ's "Tracking the Numbers" column highlights General Motors that nowadays looks more like a bank than a car manufacturer. Since 2001, most of GM's profits have come not from selling cars, but from its financial arm, General Motors Acceptance. And with profits at GM's auto operations slipping so far this year, GM and Wall St are counting on GMAC to continue to pick up the slack. According to the article, that may be a tall order, particularly in view of the rising headwinds that are likely to result from rising interest rates. Certainly, auto financing as well as mortgage lending, GMAC's primary businesses, will be tougher going forward. GMAC Chairman Eric Feldstein, in an interview with the paper, said GMAC's 2004 earnings will surpass $2 billion, but will likely fall short of the 2003 level of $2.8 billion. That means GMAC will need to keep expanding nonautomotive businesses and extending the reach of its consumer-finance business into new markets, such as China. While the co has expanded overseas, it isn't yet making loans in all target nations. "We are hopeful that by the second half of this year, we are actually going to be writing loans in China, very cautiously," Mr. Feldstein said. Paper suggests that mortgage volumes may decline going forward, but Mr. Feldstein expects other parts of GMAC's business to compensate. For example, GMAC's insurance segment should thrive this year, Mr. Feldstein said, thanks in part to strong premiums and underwriting income. The co also could derive more growth from its commercial and residential development projects, which include land development and acquisition and the financing of residential construction.

Defense & Aerospace . . . Taser announced two significant orders of TASER X26 conducted energy weapons and accessories. The first is from the Harris County Sheriff's Office located in Houston, TX, the nation's fourth largest city. The second order is from the Toledo Police Department in Ohio. These two purchase orders totaled over $500,000.

Northrop did produce strong earnings and bookings performance. Undoubtedly, the negative sentiment simply reflected Northrop’s decision to hold 2004 earnings and free cash flow guidance steady. Essentially, Northrop was the only major defense company that didn’t raise earnings guidance for 2004. Northrop’s shares are selling in line with the overall defense group. Based on the four metrics that you can use (free cash flow yield, multiple on economic earnings, multiple on GAAP eps, and multiple on EBITDAP), NOC is selling at either a slight premium or discount to the group average.

Food & Beverage . . . SABMiller announced that it was bidding for Chinese brewer Harbin, at a price of HK4.30 per share. SABMiller recently increased its stake in Harbin to over 30%, which requires a tender offer under Hong Kong securities law. Anheuser-Busch announced it had agreed to acquire a 29% stake in Harbin at HK3.70 per share ($139 million) just three days ago.

Retail . . . Wild Oats reported earnings of $0.12 per share, excluding $0.04 in charges related to asset write-offs, restructuring charges and accelerated depreciation for the planned closure or relocation of distribution centers, warehouses and stores, $0.05 better than the consensus of $0.07. Revenues rose 11.8% year/year to $263.8 million versus the $264.4 million consensus.

CVS reported net earnings of $0.59 per diluted share, $0.03 better than the consensus of $0.56; revenues rose 8.0% year/year to $6.82 billion versus the $6.80 billion consensus. Same store sales for qtr rose 6.4%, while pharmacy same store sales rose 8.3% and front-end same store sales increased 2.0%.

Piper Jaffray says the recent pullback (down 10% in last week or so) in Tractor Supply presents a buying opportunity. Business conditions remain strong as the firm raises estimates. The firm models 2nd quarter same-store sales growth of +7% (up from +5% previously), which may prove conservative considering the strong traffic-driven sales gains of 1st quarter and a potential uptick in seasonal sales if weather patterns cooperate during the quarter. Additionally, the company is up against its easiest comparison of the year in 2nd quarter at +1.2%.

Biotech . . . First Albany upgrades Myriad Genetics to Buy from Neutral and raises their target to $22 from $16 following stronger than expected 3rd quarter results; firm says the apparent health of the predictive medicine biz (now six months past a weak spell) and the reaffirmation of clinical timelines increases their confidence, suggesting that Myriad's stock could now be positioned to rise again.

Hotel & Leisure . . . Deutsche Bank downgrades Alliance Gaming to Hold from Buy based on their ongoing concerns of increased competition across of the company's business segments; while the recent pullback has resulted in a more appropriate valuation level at 17x their 2005 estimate, they believe all of the company's business lines will face potential lost market share over the next 12-18 months.

Telecom . . . Deutsche Bank upgrades Sprint FON to Buy from Hold, as firm continues to view the stock as an attractive asset with a good mix of defensive/growth properties, and a confinable exposure to long-distance decimation; while the P/E of 22.8x is one of the highest in the sector, firm says this is due to a large depreciation expense.

IT Services . . . The WSJ's "Understanding Outsourcing" column highlights Savvis Communications, which has found a way to take costs out of technology outsourcing by automating the process. "I give IBM credit for being an early mover" in tech-service outsourcing, says Ted Chamberlin, an analyst with Gartner. But the framework offered by IBM, EDS and others "is a model fundamentally laden by lots of hardware and equipment" and requires "lots of people," he says. Savvis doesn't send a team of consultants to evaluate a co's infrastructure. "I can have a new server up for you in a minute, not a month," Savvis Chairman and CEO Rob McCormick says. We give you a slice of a big carrier-class" machine. Co's that outsource their basic technology save money two ways. First, they don't have to buy hardware or employ large tech staffs. They also benefit from outsourcers' cost efficiencies. Savvis aims to save clients even more money through automation. The savings could be substantial. Mr. McCormick says Savvis clients can slash their IT costs by half compared with doing everything in-house. Gartner's Mr. Chamberlin goes a step further, saying the reduction from Savvis's service could reach 70%. The consulting-heavy model used by IBM and others saves only 15% to 30%, the analyst estimates.

Barron's Online highlights Indian outsourcing companies, which have more than doubled from their 52-week lows. Gartner expects worldwide sales from outsourcing of business processes to grow by almost 18% next year, to $143 bln. That could reach $157 bln in 2006. But along with opportunity has come increased competition and greater demand for skilled personnel. Result: Salaries in India rose by 14% last year, according to Hewitt Associates. Hewitt expects Indian salaries to rise by another 13% this year. Accenture, Computer Sciences, Oracle and others are adding personnel, and to get enough bodies Accenture has been offering to double the salaries of experienced personnel, says Partha Iyengar, an analyst at Gartner. And there are signs of a backlash against offshoring. Dell announced last month that it's moving the co's notebook and desktop computer customer call center back to the US after customers complained about the quality of service. Another blow to the Indian service firms is rupee that in April reached a peak it hasn't seen in nearly 4 years. "Rupee appreciation continues to be a major uncertain variable," Satyam's chairman Ramalinga Raju told investors during a conference call late last month. Syntel's Q1 gross margins dropped by more than a percentage point in part because of a 1% rise in the rupee. And last month, Satyam said it missed its Q4 earnings est in part because of the strong rupee, and it gave a cautious outlook for the year. If the rupee continues to strengthen, Indian software services firms would need to either pass the costs on to customers or accept narrower profit margins, says Douglas Porter, an economist at BMO Nesbitt. According to the article, Indian services firms' shares also seem a bit rich. Wipro, Satyam and Syntel trade at moderate premiums to their historic forward median P/Es. The three firms' multiples also exceed their long-term projected annual earnings growth rates. Plus, Wipro fetches about 8x trailing-12-months sales, Satyam goes for 6x sales and Syntel sells for about 5x sales.

Network Equipment . . . Bear Stearns upgrades Research in Motion to Outperform from Peer Perform, citing the potential for continued growth through new markets and products, lack of a meaningful competition, and compelling valuation; firm also notes that there are a number of positive catalysts ahead for RIMM, including: 1) geographic (China/India) and carrier expansion, 2) new handheld products with enhanced wireless features (Wi-Fi, EV-DO) and form factor, 3) entry into small/medium businesses through BlackBerry Web Client, and 4) the potential for a significant increase in net subs through its growing list of BlackBerry Connect licensees. Target is $120.

RIMM’s positive and negatives . . .

Investment Positives:

• Best wireless email solution.

• Shift from hardware to services/software licensing model that could lead to margin expansion and significant growth in the long-term and may ultimately transform the company to a pure services/software licensing company similar to Qualcomm.

• Strong patents on wireless data solutions.

• Multiple growth opportunities such as geographical expansion, extension of its services offering on new wireless networks, addition of incremental enterprise data solutions, and its licensing of its technology to third party OEMs (e.g., Nokia, Samsung, Sony Ericsson, Siemens and Motorola).

• Long history in wireless.

• Strong brand recognition in enterprises.

• Strong balance sheet.

• Ubiquitous platform. RIM’s choice of Java 2, Micro Edition (J2ME) as its platform enables the company to gain critical mass immediately through the 2.5 million Java developers worldwide at the same time making its solutions ubiquitous.

Investment Concerns:

• Legal uncertainty surrounding its litigation with NTP.

• Success of RIM’s BlackBerry Connect licensing program may negatively impact RIM’s hardware sales.

• Competition emerging from emerging from start-ups (i.e., Good Technology) to PDA manufacturers (i.e., palmOne) to software vendors (i.e., Microsoft) to PC manufacturers (i.e., Dell).

• May be perceived as a single function device.

Terayon announced an alliance with Juniper Networks, that will enable customers to create new, more flexible network architectures for delivering broadband services over cable networks, embracing a 'best-of-breed' solution by teaming Terayon BW 3500 CMTS (Cable Modem Termination System), qualified to meet DOCSIS 2.0, with Juniper Networks' high-performance IP edge routing platforms.

Semiconductor Equipment . . . Applied Materials isin the relatively early stages of a cyclical recovery in the semiconductor and semiconductor capital equipment industries. Analysts see choppiness in the shares this summer as end market pull is debated. The market is at the typical worry point and that the risk/reward is positive. Share gains expected in most market segments. Over the last year, Applied has worked diligently to bring the few lagging product segments to more competitive positions. The product portfolio offered by Applied as among the strongest in its history. The company should continue to dominate segments like PVD, CVD, RTP and

CMP, and increase share positions in etch, inspection, and metrology. 300mm wafer transition could help extend the cycle. The transition to larger 300mm wafers along with the typical drivers of line width shrinks and capacity shortage drivers could help to extend the length of the upturn. If the economic current recovery is stronger than anticipated, our scenario for a peak in order rates in 1st half 2005 may prove to be conservative.

Semiconductors . . . JMP upgrades Micron to Strong Buy from Market Outperform, citing attractive valuation; despite a slight weakening in DRAM spot prices (down about 10% in the last few weeks) due to seasonality, firm believes that contract pricing for Micron is still firm and rising with key customers. Also, firm is confident that a cyclical recovery in the DRAM memory market is likely to happen within the next 12 months and that the top 3 DRAM players (Samsung, Micron, Infineon) are likely to behave rationally in the mkt. Target is $20.

Boxmakers . . . Banc of America upgrades Dell to Buy from Neutral, raises their 2005-06 above consensus, and raises their target to $40 from $35. The firm now believes that the co has the opportunity to show upside in EPS and/or margins over the next several years, driven by: 1) better margin mix, with enterprise and services leading the way, and 2) improved PC and notebook forecast. Longer term, firm also believes that the co has a significant opportunity in printers, though printers won't move the needle in 2005 (Jan 2005).

Software . . . Last night, NPD weekly sales data for Symantec was released. NPD sales of Symantec products totaled $21.8 million in the first four weeks of June Quarter, down 23% from the first four weeks of March Quarter. The firm believes the Street is looking for a 0% to 5% sequential decline in consumer offline sales from March to June. However, the firm expects consumer offline sales to increase based on the Sasser worm. For the balance of June Quarter, the firm expects the stock to be dependent on virus activity.

Roth Capital raises its target on Viisage Tech to $14 from $10 and reits a Strong Buy after the company reported 1st quarter results Monday after the close. The firm remains bullish on the stock as it could benefit from the prospect of additional federal program wins, new driver's license awards, and international secure document opportunities. The new target is equivalent to 50x this year's cash adjusted EPS estimate.

Firm believes Computer Associates has well positioned itself for growth opportunities outside of its core systems management business, which includes security and storage; believes CA could benefit from the potential convergence of these areas with broader systems management. Price target of $36 is based on an 18x multiple applied to firm's 2005 FCF per share estimate in the $2.00 area.

JP Morgan says that Business Object’s 10-Q filing for 1st quarter has revealed an informal SEC inquiry relating to the company's "practices with respect to backlog", which was not previously disclosed in the company's 10-K; while the term "backlog" could denote multiple interpretations. The firm believes this may be in reference to the company's deferred rev balance. The firm says the most notable change to that balance in the last six months has been the addition of deferred rev related to Crystal contracts, and they believe this inquiry could be focused here. Historically, firm says BOBJ has been conservative with its accounting policies, and they suspect this announcement is not a significant operational issue; however, firm believes this news will likely add to the growing concern over Crystal/BOBJ integration issues, at least until further color becomes available. Maintains Neutral rating.

Hot Items - Check out the "Hot Items" page (updated daily)


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Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.

http://www.robblack.com/rb_marketwrap.shtml

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CLOSING WRAP-UP, May 7
By Frederic Ruffy, Optionetics.com
5/7/2004 2:15:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=10356

Sellers seized control of the stock market Friday and sent the major averages sharply lower. The sell-off was triggered by a strong monthly employment report, which sent bond prices tumbling and the yield on the benchmark ten-year note to its highest levels since July 2002. Stocks, which were able to hold steady throughout the first half of trading, eventually caved in. At the end of the day, the Dow Jones Industrial Average ($INDU) was down 123 points and the Nasdaq Composite Index ($COMPQ) had lost twenty. For the week, the Dow gave up 108 points and the Nasdaq was essentially unchanged.

Friday, the selling pressure became intense. On the New York Stock Exchange [NYSE], turnover totaled 1.65 billion shares and down volume overwhelmed up volume eight-to-one. At the same time, the ratio of advancing to declining issues was more than twelve-to-one negative! The number of stocks setting 52-week lows swelled. Yesterday, 311 stocks set new 52-week lows on the Big Board. Today, more than 700 set new 52-week lows and only 27 new highs.

Nasdaq stocks performed better and were trading in positive territory during the early trading hours. Yet, despite morning strength, market internals on the Nasdaq Stock Market turned negative. At the end of the day, overall volume totaled 1.62 billion shares and up volume trailed down volume nearly two-to-one. The ratio of advancing to declining issues in Nasdaq trading was three-to-one negative.

The heavy selling on Friday is being blamed on the Labor Department’s unemployment report, which is released on the first Friday of every month. The most recent report showed the US economy gaining 288,000 jobs during the month of April. Economists were expecting a 170,000 gain in new jobs. The stronger-than-expected numbers significantly increase the odds of a rate hike at the next Federal Reserve Open Market Committee [FOMC] meeting in June. As a result, bonds tumbled and rates soared on the news.

Interest sensitive groups like banks, brokers and utility stocks were among the day’s weakest. Airline stocks lost altitude amid concerns about rising energy and jet fuel prices. Crude oil rose 56 cents to $39.93 a barrel and the AMEX Airline Index ($XAL) fell 4.5%. However, gold mining shares were the day’s biggest casualties. As gold prices fell more than $9.00 to $379 a troy ounce, the PHLX Gold and Silver Mining Index ($XAU) tumbled more than 5% on the day.
Semiconductor stocks were able to buck the bearish trend on Friday after Nvidia (NVDA) said its first quarter earnings rose to 12 cents, compared to analyst estimates of 10 cents. Sales also topped analyst forecasts. Shares of the chipmaker finished the day up 17 cents to $22.08. Meanwhile, the PHLX Semiconductor Index ($SOX), which tracks the performance of chip and chip equipment companies, was the day’s only bright spot and finished the day up 1%.



Frederic Ruffy
Senior Writer
Optionetics.com ~ Your Options Education Site

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Is Sentiment Bearish enought to fuel a rally now?

http://www.sentimentrader.com/

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Amateru Investors Weekend Stock Market Analysis (5/8/04)

This coming week could be a defining week for the major averages as they are getting very close to key support levels. The Dow needs to hold support next week in the 9900-10000 range. The 10000 level coincides with its late March low and 40 Weekly EMA (blue line) while the 9900 area is at its longer term 23.6% Retracement Level calculated from the October 2002 low to its early 2004 high. One of two things will probably develop once these key support levels are reached. Either the Dow will find support in the 9900-10000 area and then undergo some type of rally due to oversold conditions or it will break below 9900 and then undergo a more significant drop back to its longer term 38.2% Retracement Level near 9400 (point A).



The Nasdaq currently has held support near 1915 which is at its 40 Weekly EMA (blue line) and longer term 23.6% Retracement Level calculated from the October 2002 low to the early 2004 high. Another area of support to watch next week in the Nasdaq if it drops below 1915 is at its late March low near 1900 (point B). One of two scenario's are possible in the Nasdaq. Either the Nasdaq will hold support near 1900 next week and eventually rally due to oversold conditions or it will break below 1900 leading to a much bigger drop back to its longer term 38.2% Retracement Level near 1760 (point C).



As far as the S&P 500 the key support levels to watch next week are in the 1070 to 1090 range which coincide with its longer term 23.6% Retracement Level (1070), 40 Weekly EMA (1080) and late March low near 1090. Just like the Dow and Nasdaq there are a couple of scenario's for the S&P 500 as well. If the S&P 500 can hold support above 1070 then this may lead to an oversold rally but if it breaks below 1070 then look for a much bigger drop back to its longer term 38.2% Retracement Level near 1015 (point D).



A few sectors to keep an eye on next week are the Banks and the Semiconductors. The Banking Index (BKX) broke below its 40 Weekly EMA (blue line) this week and closed on Friday near its longer term 23.6% Retracement Level just above 93. A key level to watch next week in the BKX is around 92 which was near the low made in the Fall of 2003 (point E). If the BKX takes out the 92 level then its next level of downside support would probably be near 87 which is at its longer term 38.2% Retracement Level (point F). Remember the Banks are heavily weighted in the S&P 500 so it will be critical for the BKX to hold support near 92 next week.



Meanwhile looking at the Semiconductors the Semiconductor Holders (SMH) actually performed well this week. Remember what happened earlier in the year when the SMH's topped out in early Janaury (point G) while the Nasdaq peaked a week later (point H). Notice this week the SMH's were rallying while the Nasdaq continued lower. Thus it will be interesting to see if the recent strength in the SMH's is a signal that that the Nasdaq is possibly nearing a bottom.



One thing I will be watching closely next week is the action in the Volatility Index (VIX). What I would like to see is a strong spike upward similar to what occurred in late March when the VIX rose into the lower 20s (point I) and got stretched significantly away from its 10 Day Moving Average (MA) which signaled a nearing reversal. On Friday the VIX closed just above 18 so if it can rise above 20 next week hopefully this will be a sign of a nearing bottom followed by an upside reversal.



As mentioned last weekend when the market is correcting that is the the time to really start noticing which stocks are holding up well and developing a favorable chart pattern. What you should be looking for now are those stocks which have developed the right side of a Cup. For example as pointed out last weekend SFCC has formed the right side of a 7 month Cup and now needs to develop a constructive Handle over the next few weeks to complete a "Cup and Handle" pattern.



How can a Premium Membership to Amateur-Investors.Com benefit you as an investor? We focus on stocks which are exhibiting favorable Sales and Earnings Growth that have developed a favorable chart pattern such as a "Cup and Handle", "Double Bottom", "Flat Base" or "Symmetrical Triangle". These stocks are then included in our "Stocks to Watch List" which gives investors a quick reference to those stocks which may provide the best buying opportunities to the long side in the weeks ahead. Each stock in our "Stocks to Watch List" includes specific Buy Prices, Stop Loss Prices (very important) and projected Target Prices.

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Economic Sector Rotation after ISM Peaks:

http://www.investorshub.com/boards/read_msg.asp?message_id=3020907

Market Comment . . . If you believe the Fed will slow down the economy via raiding interest rates. Then you have to read this.

The flowers are not the only thing blooming this spring as a string of friendly announcements seems to suggest that the economy is blossoming as well. Indeed, almost every indicator of activity has come in on the high side of expectations during the past month, and first-quarter earnings season has been nothing short of spectacular. Regardless, the stock market managed to lose ground during the past month! While interest rate fears certainly contributed to investors’ uneasiness toward equities, we believe the real story lies in the loss of momentum in leading indicators of the economy such as the ISM. This development usually coincides with a market transition, and this time appears to be no exception.

The ISM is one of the most useful macro indicators for portfolio strategy. Around since the 1930s, the ISM is both time tested and timely in its release. While the ISM’s April reading of 62.4 is consistent with very strong growth in the economy, it is equally important to note that the indicator declined slightly last month and still remains below the January posting of 63.6 — a reading that increasingly appears to be the cycle high point. Going forward, interest rate trends in the global economy suggest that monthly declines in the ISM could become a more common occurrence. Indeed, a look at the chart above shows that the momentum in international short-term interest rates typically leads other leading indicators such as the ISM. At this juncture, this forward-looking relationship argues that we are likely in the midst of an important transition.

The equity market also appears to be at a crossroads. Indeed, cyclical sector leadership, evident throughout most of 2003, has begun to wane in recent months. The fact that this ebb in cyclical leadership began pretty much on cue with the peak in the ISM is no coincidence, in our opinion. As such, the investment conclusion suggested by the macro backdrop is clear: Noncyclicals are the way to go! A number of other elements also argue in favor of noncyclicals. These include the stretched relative valuation of cyclicals versus noncyclicals; the presidential election year, which typically favors noncyclicals; and a quantitative model, which currently displays a preference for the more stable segments of the market. The body of the evidence supporting noncyclical leadership going forward is growing larger by the day. Accordingly, some investors might want to take a defensive posture and overweight noncyclical sectors such as health care and staples, and underweight the more cyclical segments of the market like industrials, materials, and technology.

In order to understand why a transition is occurring in financial markets, we have to first study the events that have led up to it. After delivering significant returns in 2003, the stock market has moved sideways since January. The market’s failure to make headway is largely attributable to the peaking of many leading economic indicators in recent months. Accordingly, expect to find historical evidence of the negative impact of a turn in leading economic indicators on financial markets. Indeed, analysis shows that once leading indicators come off the boil, investors can expect a loss of momentum in equity market returns.

Historically, a peak in cyclical pressures has typically brought with it more measured gains for the S&P 500. Indeed, the equity market tends to perform much better in the 12-month period leading up to a peak in leading indicators (up an average of almost 15%), when economic momentum is accelerating, than in the year following a peak in leading indicators (down on average about 3%), when momentum begins to wane. The current easing of cyclical pressures sends a strong message — that investors should expect a much

different stock market environment over the next 12 months than they’ve seen in the past year.

The historical performance of the S&P 500 surrounding past post-60 peaks in the ISM can provide useful insights as to what is likely to lie ahead in the coming year. Indeed, it is interesting to note in the table above that most of these periods have seen a solid rise in the S&P 500 in the year leading up to a peak in the ISM, followed by a decline or severe loss of market momentum in the year after. One notable exception is 1987, which was distorted by the stock market crash. Putting this aside, the best performance the S&P 500 has delivered in the 12-month period following an ISM peak has been a paltry 3%.

A turning point in cyclical pressures can also bring about a change in stock market leadership. Indeed, investor focus usually shifts away from non-dividend-paying stocks to the dividend-paying universe with a trend change in economic momentum. In that regard, a look at the historical record will reveal that the outperformance of dividend-paying stocks in aggregate has been almost 5% relative to their non-dividend-paying brethren in the 12-month period following a cyclical peak in the ISM Index.

A transition in cyclical pressures can also lead to a change in investor preference in the area of company quality. Indeed, a rising ISM Index usually brings with it strong performance for low-priced/high-beta stocks (commonly referred to as low quality). This trend typically comes to an end coincidentally with a peak in leading economic indicators, such as the ISM, at which time high-grade companies are preferred. Therefore, we would not be surprised to see quality companies gain investor interest in 2004.

While a peak in leading indicators of the economy can influence overall market returns, it is at the sector level that this situation has the most important implications. The bullish case for cyclicals in 2003 was predicated on the fact that leading economic indicators were at low levels and rising — an ideal condition for cyclical sectors. In February 2004, with many indicators sitting at 20-year historical highs, it is time for investors to consider the implications of a pullback in cyclical pressures. At that time, analysts advised investors to reduce their cyclical sector weighting to market weight and to increase their noncyclical sector weighting to market weight.

In early March, analysts advised investors to take a further step toward a less aggressive portfolio by changing the mix of industry recommendations within each sector, placing emphasis on this offering stability. Following weeks of indecisive market action, analysts are now suggesting that investors take the additional step of raising their noncyclical weighting to overweight and of reducing their cyclical weighting to underweight. Indeed, cyclical sectors tend to dominate in the year leading up to a cyclical peak, and noncyclicals take over in the subsequent 12 months. Noncyclical leadership in the period following a cycle peak typically lasts about 23 months. In other words, it is not too late to take action since this is likely still the first inning of noncyclical leadership.

Health Care & Biotech average 33.5% returns 100% of the time following peak in ISM

Consumer Staples average 19.0% returns 100% of the time following peak in ISM
Financials average 4.7% returns 75% of the time following peak in ISM

Utilities average 4.8% returns 50% of the time following peak in ISM
Telecom average 2.2% returns 50% of the time following peak in ISM

Industrials average -4.2% returns ollowing peak in ISM

Consumer Discretionary average -4.4% returns 50% of the time following peak in ISM
Energy average -5.2% returns 50% of the time following peak in ISM

Technology average -9.5% returns 25% of the time following peak in ISM

Materials average -12.2% following peak in ISM

As the table above indicates, the sectors that consistently outperform once cyclical pressures recede are health care and consumer staples, both delivering double-digit relative returns on average — a full 100% of the time. Conversely, industrials and materials have consistently underperformed the market once cyclical pressures come off the boil. All the while, financials, utilities, and telecom have on average managed to outperform the market, albeit their performance has been less consistent than that of health care and staples.

The aforementioned three-step process toward noncyclical positioning has been gradual, in line with the historical pace at which this transition typically occurs. Indeed, let us remind readers that we maintained a pro-cyclical stance for the better part of the 15 months leading up to February. During that time, we favored industrial stocks, particularly the machinery segment, since these stocks are strong beneficiaries of accelerating economic momentum. The downgrade of cyclical segments and shift in industry mix from cyclical overweight to more noncyclical segments took several months. Now that the ISM has remained below its January peak for a third consecutive month, it is time to upgrade noncyclical sector weighting to overweight from market weight and to downgrade our cyclical sector weighting to underweight from market weight.

When economic momentum was accelerating for the better part of 2003, along with industrials, the market favored the materials and technology sectors. At this juncture, however, noncyclical sectors such as consumer staples and health care are at the top of the market list and offer a much more compelling risk/reward profile. As a general rule, focus on industry groups that are less vulnerable to the economic cycle — i.e., groups that are better positioned within their sector as economic pressures continue to wane. For instance, investors should reduce exposure to the most cyclical segments, such as metals, semiconductors, and machinery. For those who wish to maintain a cyclical position, suggest segments such as chemicals, software, and restaurants, all of which are “somewhat” less vulnerable to a decline in cyclical pressures.

Historically, the materials and industrials sectors have demonstrated a particular vulnerability to a turning point in leading indicators of the economy. Indeed, over the past 20 years, both of these cyclically-leveraged sectors have shown a zero batting average in terms of performance in the 12-month period following peaks in the ISM. In other words, neither of these sectors has ever outperformed in the year past a high mark in the leading indicators such as the ISM Index. Moreover, during these periods, materials and industrials delivered relative returns on average of negative 12.2% and negative 4.2%, respectively. As such, an overweight in either of these sectors at this stage is tantamount to bucking history.

The technology sector, on the other hand, has shown the ability to buck the economic cycle at least once. Indeed, in aggregate, tech stocks have managed to outperform the market in one of the episodes following the last four rollovers in the ISM. Notwithstanding this, a close look at performance trends shows that tech has typically underperformed more significantly than industrials. In other words, while it’s bucked the trend once, on average, tech has been a worse place to be than industrials. In fact, the average performance of the technology sector following a peak in economic momentum has averaged about negative 9.5%, whereas industrials has averaged negative 4.2%. Certainly, beta is another factor one must consider with technology.

Unsurprisingly, the results for the discretionary sector are somewhat mixed, showing vulnerabilities as well as opportunities. Since the sector is essentially a hodgepodge of different industry groups, some segments have never outperformed following a peak in cyclical pressures, while others have offered good opportunities. For instance, durable goods segments such as household appliances and auto

parts & equipment have never outperformed during the last four periods of waning cyclical pressures. Meanwhile, segments such as hotels and auto manufacturers have defied the trend on one occasion, although both have underperformed significantly.

Consistent Underperformers Following Cycle Peak

% of Time Average Relative

Outperforming Performance

Materials 0% -12.2%

Steel 0% -27.7%

Gold 0% -26.2%

Diversified Chemicals 0% -15.4%

Paper Products 0% -15.0%

Commodity Chemicals 0% -14.7%

Forest Products 0% -10.1%

Aluminum 25% -17.7%

Containers & Packaging 25% -8.6%

Diversified Metals & Mining 25% -8.3%

Paper Packaging 25% -8.3%

Specialty Chemicals 25% -3.3%

Industrials 0% -4.2%

Employment Services 0% -31.6%

Airfreight & Couriers 0% -22.6%

Construction & Farm Machinery 0% -17.6%

Building Products 0% -14.0%

Office Services & Supplies 0% -12.3%

Machinery 0% -12.1%

Electrical Equipment 0% -8.8%

Industrial Machinery 25% -11.5%

Construction & Engineering 25% -4.4%

Commercial Services & Supplies 25% -4.0%

Industrial Conglomerates 25% -0.3%

Technology 25% -9.5%

Computers & Peripherals 25% -20.9%

Semiconductors 25% -12.4%

Electronic Equipment 25% -12.0%

Energy 50% -5.2%

Integrated Oil & Gas 25% -7.6%

Consumer Discretionary 50% -4.4%

Household Appliances 0% -21.9%

Auto Parts & Equipment 0% -19.0%

Catalog Retail 0% -18.6%

Apparel & Accessories 0% -18.5%

Hotels 25% -16.3%

Auto Manufacturers 25% -10.8%

Home Furnishing 25% -8.3%

Apparel Retail 25% -7.7%

Consistent Outperformers Following Cycle Peak

% of Time Average Relative

Outperforming Performance

Health Care ex. Biotech 100% 33.5%

Pharmaceuticals 100% 38.2%

Distributors & Services 100% 36.6%

Equipment 100% 32.9%

Supplies 75% 17.8%

Consumer Staples 100% 19.0%

Food & Drug Retail 100% 24.0%

Beverages 100% 15.1%

Food Distributors 75% 27.2%

Brewers 75% 14.4%

Food Products 75% 10.4%

Packaged Foods 75% 9.8%

Household Products 75% 9.6%

Financials 75% 4.7%

Diversified Financial Services 100% 12.1%

Insurance Brokers 75% 7.5%

Property & Casualty Insurance 75% 2.8%

Life & Health Insurance 75% 2.1%

Multi-line Insurance 75% 1.8%

Banks 75% 0.4%

Utilities 50% 4.8%

Electric Utilities 75% 6.4%

Telecom 50% 2.2%

RLECs 75% 49.8%

RBOCs 75% 33.8%

Consumer Discretionary 50% -4.4%

Homebuilding 75% 16.3%

Broadcasting 75% 6.9%

Industrials 0% -4.2%

Data Processing 100% 19.4%

Defense 75% 40.9%

Materials 0% -12.2%

Industrial Gases 75% 5.7%

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CLOSING WRAP-UP, May 10
By Jody Osborne, Optionetics.com
5/10/2004 5:00:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=10361

Stocks see another large decline Monday, taking the Dow ($INDU) below 10K. The Dow fell 127.32 points, or 1.26 percent, to close at 9,990.02. The S&P 500 ($SPX) also fell sharply, giving up 1.05 percent to 1,087.12. The Nasdaq ($COMPQ) came well off its intraday low near 1,880, but still lost 1.14 percent Monday to finish the session at 1,896.07. Volume was fairly strong, with the NYSE trading 1.90 billion shares and the Naz turning over 1.88 billion. Market breadth was sharply negative by a 3-to-26 and 7-to-24 margin on the Big Board and Naz respectively.

Fears about rising interest rates continued to haunt stocks Monday, following Friday’s better than expected employment report. However, geopolitical concerns are also on traders’ minds, with the problem in Iraq seeming to worsen. With a Presidential election going on, things tend to get even more attention and this too could be hurting the stock market. Nonetheless, there is no denying that earnings were extremely strong in the first quarter and the jobs market is definitely on the mend.

Ironically, Monday did have good news, with SunTrust Banks (STI) announcing over the weekend that it would buy National Commerce Financial (NCF) for nearly $7 billion. Both stocks fell on the news, with NCF shares getting a boost last Friday when the rumor hit the street. Overall, the PHLX Banking Index ($BKX) fell 1.64 percent to 91.71.

The Philly Semiconductor Index ($SOX) bucked the downtrend Monday, rising 0.41 percent. The sector benefited from an upgrade of Applied Materials (AMAT) at JP Morgan to “Overweight” from ‘Neutral.” AMAT shares gained 2.24 percent on the session to $19.09. Ironically, the SOX has gained ground for five straight sessions now, which is in stark contrast to the broader market. This could be a sign that the selling in the broader market is soon to end.

It’s no coincidence that the stock market started to fall when the fear indices traded down to support. Though everything looked rosy and traders were optimistic, the fear indices were telling us that stocks were in jeopardy of falling and this is what has occurred. The basic idea is that when everyone is bullish there is no one left to buy stocks and this creates selling pressure. We’ll have to see if rate fears subside now that rate hikes are imperative or whether further selling will occur before the bulls can regroup and take stocks higher.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site

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Technical Analysis: Selling Nears An Extreme
By Paul Shread

http://stocks.internetnews.com/article.php/3352071

Today was the third straight day of 80% downside volume on the NYSE; the only time we can recall seeing four straight was at the July 23, 2002 bottom. We also had another high equity put-call ratio reading today, and the new highs and lows are approaching bear market bottom levels. Now all we need is a turn. The Nasdaq (first chart below) broke its March lows of 1897-1900 today. Next support levels are 1880, 1840-1860, and 1822. Resistance is 1908, 1918-1922, 1930 and 1940. The S&P (second chart) also broke its March lows of 1087-1091. 1075-1080 is now critical support. Resistance is 1100 and 1107. The Dow (third chart) also broke its March low of 10,007, and took out its closing low of 10,048. That places a lot of pressure on the Transports (fourth chart), which would issue a Dow Theory sell signal if they close below their March closing low of 2750.8, according to Richard Moroney of Dow Theory Forecasts. The Dow faces resistance at 10,007, 10,048, 10,108 and 10,217-10,250, and support is 9850-9900.

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Tuesday May 11, 2004 Daily MarketWrap

http://www.robblack.com/rb_marketwrap.shtml

Summary: I will be speaking at a two day financial freedom seminar this weekend. It should be a fun event in San Jose. This is not a pure investment seminar. Some of the topics that will be covered over the two days include how to get started, find money, tax savings, property management, foreclosures, 1031 exchanges, property analysis, creative financing, negotiating skills, partnerships, networking, and of course some real estate investment angles. For more information go to http://sjrei.net/financialfreedom.html

U.S. stocks gained, recovering from yesterday's drop that sent benchmark indexes to their lows for 2004, on optimism that a growing economy will limit the effects of rising interest rates on corporate profits. Cisco., the largest maker of computer-networking gear, advanced before its quarterly earnings report. Intel. rose as the company boosted inventories in anticipation of higher chip demand. The DJIA closed below 10,000 yesterday on speculation the Federal Reserve may boost its benchmark lending rate as early as June. Investors including Jack Caffrey said the drop made some stocks worth buying. The S&P 500 Index climbed 8 points (+0.8%) to 1095. The Nasdaq rose 35 points (-1.9%) to 1931. The DJIA rose for the first time in five days, adding 29 points (+0.3%) to 10,019. The gain was limited by a drop in shares of Altria Group. Since reaching a 23-month high on Feb. 11, the S&P 500 has shed 5.4 percent, while the Dow has lost 6.7 percent from its 31- month high the same day. The Nasdaq has retreated 10 percent since its two-and-a-half year high set in January. Almost four stocks rose for every one that fell on the NYSE today, making it the broadest advance in three months. Some 1.5 billion shares changed hands on the Big Board, 1.2 percent more than this year's daily average. Yesterday, seven stocks closed at new 52-week highs on the NYSE, the lowest in almost eight years. There were 635 new lows, the most in almost two years.

Strong Sectors: biotech, hardware, software, internet, networking, telecom, semiconductor, industrial, oil services, transportation, broker/dealer
Weak Sectors: tobacco

Top Stories . . . The dollar rose against the euro as the Organization for Economic Cooperation and Development boosted its forecast for U.S. growth and said the Federal Reserve should raise its key interest rate by mid-year.

Crude oil futures in New York surged, closing higher than $40 a barrel for the first time since 1990, on speculation that a growing global economy will boost fuel demand and lower inventories.

Cisco Systems, the largest maker of computer-network equipment, said third-quarter earnings rose 23 percent to $1.21 billion as it added home-network products and sold more Internet routers and switches to corporations.

The Senate Banking Committee will ask the Securities and Exchange Commission to investigate whether Citigroup, Merrill Lynch and other banks stuffed client shares into mutual funds during the three-year stock market decline, said a spokesman for Committee Chairman Senator Richard Shelby.

May Department Stores, the owner of Lord & Taylor and Foley's, said first-quarter profit rose 5.6 percent, the smallest gain in three quarters, as sales plunged last month.

Quotes of Note . . . ``In the short term, the selling has gotten too far ahead of itself. It certainly seems like we are due for a bounce.'' Jack Caffrey, equity strategist at J.P. Morgan Private Bank, which oversees $280 billion in New York.

Gurus . . . Don Hays of Hays Advisory tells Kudlow-Cramer that the gloom is overdone. He notes that on Friday, 20% of the Big Board stocks were at 52-week lows. Going back in history, Hays has found the aftermath of extreme days like that finds the market higher 60-to-90 days later. He is also encouraged by the growing bearish attitude of day traders, as expressed in the Rydex Index, as well as the put-to-call ratio. Finally, a steep yield curve is eventually friendly to stocks. Hays turned cautious in January when the mood was euphoric, and is willing to go against the crowd at this time.

Ed Yardeni of Prudential said he still believes in the global synchronized boom theory, although tighter conditions in China begin to test this theory. The outlook for our economy remains strong, as profits continue to soar. However, it is hard to conjure up a catalyst to turn the tide beyond the Fed actually doing the deed.

Technical deterioration has caused Smith Barney to realign its grouping. They upgrade healthcare distributors, drug retail, and pharmaceuticals. They downgrade construction and farm machinery, household appliance, life and health insurance, and move broadcasting and cable to a sell status.

Brian Westbury, economist for GKST Economics, feels geopolitics have been the important downside factor. He says the Fed could triple rates tomorrow, and Fed policy would still be accommodative.

Jobs . . . The New York Post discusses Friday's labor report and suggests that investors should not get too excited about all those new jobs that were supposed to have been created in April. According to the article, the bottom line is that most of the 288K jobs that the Labor Department says were created last month may not really exist and they could be figments of statisticians' optimism. Back in the March employment report, the government added 153K positions to its revised total of 337K new jobs because it thought (but couldn't prove) loads of new company's were being created in this economy. That estimate comes from the Labor Department's "birth/death model." As staggering as the assumption about new company's was in March, the Labor Department got even more brazen in April as it was disclosed that these imaginary jobs had been increased by 117K to 270K for the latest month. Without those extra 117K make-believe jobs, the total growth for April would have been just 171K, which is sub-par for an economy that's supposed to be growing at more than 4% a year.

Financials . . . Merrill Lynch, the biggest U.S. securities firm, revenue growth from Merrill's retail brokerage over the next two years will make up for declines in other businesses such as fixed-income sales and trading, Michael Hecht, an analyst at Bank of America Securities. He raised the stock to ``buy'' from ``neutral.''

UBS upgrades Washington Mutual to Buy from Neutral based on valuation, as the stock is now trading at 9x their 2004 EPS estimate, which is below the company's historic average of 10.1x; firm also notes that the stock's current price/book ratio of 1.7x is materially below the historic average 2.2x. Target is $45.

ThinkEquity upgrades Intuit to Overweight from Equal-Weight based on valuation; firm believes the recent sell-off, which reflects in part concerns over QuickBooks growth prospects, is overdone in light of Intuit's earnings growth potential. Firm believes that Intuit is on track to report an in-line qtr led by a solid TurboTax season, and believes that the recent pullback in the shares is consistent with the seasonal trading pattern that INTU has experienced since 1998.

MBNA released its 10Q filing for the first quarter of 2004 which provided additional details on the acquisition of Premium Credit and Sky Financial, sensitivity to interest rates and credit quality statistics. With the acquisition of Premium Credit in the UK, MBNA assumed $1.2 billion of ABS debt on balance sheet at March 31, 2004. MBNA recorded goodwill and other intangibles of $323 million and expects an increase of $11 million from amortization of the intangibles in 2004. The company also recorded acquired reserves of $22 million from this acquisition. The acquisition of Sky Financial, consisted of $893 million of receivables. MBNA recorded goodwill and other intangibles of $47 million and also recorded acquired reserves of $21.4 million for credit losses. MBNA's interest rate sensitivity analysis to a 100 bp parallel shift upward in interest rates shows that projected managed net interest income by $67 million.

Fannie Mae released its 10Q after the close on Monday, providing some previously undisclosed information, including the company's March 31 balance sheet and the resolution of OFHEO's criticism of Fannie's calculation of impairment (the first from its ongoing "examination"). The 10Q disclosed that while the SEC accepted the company's prior calculations of impairment of some of the company's ABS investments, changes will be required beginning April 1 that will likely result in impairment of about $250 million in 2nd quarter. An increase in impairment, while equivalent to about $0.17 per share in 2nd quarter, won't have a material effect on the

company's capital or business. It is possible that some portion of these additional write downs could be recovered over time through earnings. New derivatives disclosure and discussion of changes in the value of derivatives are useful in evaluating changes in the company's portfolio and balance sheet, but derivative use remains complex.

Oil & Gas . . . AG Edwards upgrades Exxon Mobil to Buy from Hold, as they believe production growth has reached a positive inflection point, augmented by an impressive pipeline of development projects. Also, firm notes that XOM is trading at 18.3x their 2005 mid-cycle earnings estimate, at the lower end of its historic range of 18-20x. Target is $47.

Homebuilders . . . Raymond James downgrades Centex, D.R. Horton, Lennar, Pulte, Ryland, Toll Brothers, Standard Pacific, and WCI Communitieis on growing concern over rapidly rising interest rates and deteriorating general market conditions. The firm is becoming increasingly concerned, in light of the recent sharp move in Treasury yields, that negative investor sentiment will make stock outperformance more challenging, in spite of the fact that fundamental performance will likely continue to outpace the broader economy. Firm says negative sentiment is likely to be exacerbated in the near-term as investors point to decelerating, albeit still robust, housing data points.

Paper . . . Goldman Sachs upgrades the paper/forest products sector to Attractive from Neutral due to the following factors: 1) tightening sector fundamentals, as shipments are rising as end mkt demand is picking up; 2) improving earnings outlook,; and 3) favorable valuation. Firm upgrades IP to Outperform from In-Line, and downgrades PKG to In-Line from Outperform.

Consumer Products . . . Procter & Gamble has purchased remaining stake in its China joint venture from its partner, Hutchison Whampoa China Ltd, which will now give co 100% ownership in its operations in China. PG, or its designee, will acquire its remaining 20% stake in joint venture for $1.8 bln, which is the purchase price of $2.0 bln net of minority interest and related obligations that will be eliminated as a result of transaction; deal expected to close on June 18, 2004.

Retail . . . CVS reports a 5.4% increase in April comps and a 7.3% increase in pharmacy same store sales, while front-end same store sales increased 1.4%. Total pharmacy sales represented 69.7% of total co sales in April.

Medical Devices . . . Barron's Online highlights Varian Medical, which has jumped almost 60% over the last 12 months. According to the article, despite the adoption of Intensity Modulated Radiation Therapy, the co faces several headwinds and has little room for error. The stock trades well above historic valuations at a time when rev and profit growth appears to be slowing, especially U.S. oncology sales. What's more, hospitals with severe financial problems may delay large purchases. And low-cost competition in Europe could further pressure sales. "(The stock) is priced for perfection," says Ryan Rauch, an analyst with SunTrust. "They are a great co with a great backlog, but we would rather be on the sidelines." In F03, oncology sales generated $856 mln, or 82% of rev with X-ray products and brachytherapy technology comprising the rest. Earnings per share jumped 38% to $1.87 and rev rose 19%. But, according to the article, like other fast-growing co's, Varian Medical may not sustain such rapid growth. This year, profits should grow 23%, followed by a 17% gain in F05. About half of all U.S. cancer patients receive radiation and about 10 mln new cases are diagnosed worldwide per year, with about 1.3 mln in the U.S. alone. While Varian Medical has most of this market, Sweden-based Elekta, one of its main rivals, has cheaper prices, which could attract smaller, financially strapped hospitals. The stock fetches 34.5x projected earnings over the next four qtrs, compared to its median multiple of 29.4x forward earnings for the past 5 years, which is a 110% premium to the S&P's 500 Index and a 40% premium to its peers. The stock also trades well above historic medians for price to sales and price to cash flow.

Orthopedics . . . As far as we can see, the favorable backdrop for the orthopedic industry can continue. Due to the surprising stability of market shares, we continue to think Biomet, Stryker, and Zimmer will all benefit operationally from strong industry fundamentals. Although priced for perfection at current levels, Zimmer continues to have the most potential for earnings upside given the accretion power of the Centerpulse integration. Stryker remains the most consistent performer, and this can continue due to uptake of the company’s new products and its excellent execution strategy. Biomet remains our favorite ortho play for value-sensitive investors — investors continue to underappreciate the potential positive developments ahead for Biomet’s spinal, European, and hip businesses.

Although investors continue to be concerned about ongoing pricing increases on existing products, we argue that pricing is the least significant growth catalyst. Instead, sustainability of the favorable mix shift and how providers will continue to allocate reimbursement given the potential benefits of new, premium-priced products could be the more significant areas to focus on. The recent rollouts of alternative-bearing materials, biologics, and the pending launches of innovative spinal disc replacements give us more confidence that the favorable mix shift could continue.

Unlike the cardio industry, given the glacial nature of market share shifts in ortho, short product lead times, the consolidated nature of the industry, and the unusual degree of surgeon loyalty to their sales reps, positive market trends could continue to benefit all players. All of the large players continue to have leverage over hospitals with respect to increasing prices and driving through sales of premium-priced implants.

Drugs . . . Barr Pharmaceuticals received U.S.FDA approval for its New Drug Application (NDA) for Enjuvia 0.625 and 1.25 mg tablets. Enjuvia is the only plant-derived, synthetic conjugated estrogen product that includes the component delta 8, 9-dehydroestrone sulfate, an additional active estrogenic component. The patent on Enjuvia expires in 2020. BRL's application for Enjuvia 0.3 mg and 0.45 mg tablets is currently pending at the FDA.

Mylan Labs reported earnings of $0.25 per share, excluding net gains on legal settlements, $0.02 worse than the consensus of $0.27. Revenues fell 5.7% year/year to $333.4 million versus the $344.4 million consensus. The company affirms 2005 EPS guidance of $1.30-$1.40 versus consensus of $1.36. Note, this anticipates a July 24, 2004 launch of fentanyl.

Shares of Watson Pharma have declined approximately 26% YTD following a revaluation of the generic group (down 25% YTD vs. 2% decline of S&P) driven by several peer group earnings misses (PRX, TARO) and market concerns relating to inventory buying patterns and widespread generic pricing pressure. However, the sell off was particularly extreme for Watson which now trades at 8.0x EV/2004 EBITDA and 13.5x 2005 EPS (10% discount from average peer

P/E of 15.0x). Continue to believe that industry fundamentals remain solid and that investors should focus on companies with more diversified businesses and stable long-term duration assets. Target price remains $48 or 22x 2004 EPS of $2.18 (+17%). Continue to expect that the company has the potential to exceed consensus EPS in 2004 and into 2005 EXCLUDING potential dilution from its convert from solid underlying business fundaments.

Media . . . Young Broadcasting reported 1st quarter 2004 net revenue of $50.9 million, $1.5 million or 3% better than $49.4 million estimate, and 7.9% or $3.7 million ahead of the $47.2 million reported in the year ago period. The company benefited from an incremental $4 million of gross political revenues (or roughly $3.4 million on a net basis) versus $0.2 million in 1st quarter 2003. Excluding net political revenues, estimate that revenues grew roughly 1.0% to $47.5 million. According to management, local was up over 2 percent while national was essentially flat

with the year ago period. According to management, local and national revenues in January were down 7.2% from January 2003, while there was a rebound in March to 13.5% from March 2003.

In terms of station performance, management said that KRON revenues grew at a mid-single digit clip during the quarter, suggesting that the affiliates grew at a high single digit clip.

The company noted that it continues to make headway in San Francisco. During 1st quarter 2004,

the company estimates that KRON’s market share grew slightly to 11.5% on a consecutive basis from 11.0% in 4th quarter 2003 but was above the 10.8% garnered in 1st quarter 2003. Management thinks that the market, while weak in early 1st quarter and sold on lower rates, will grow in 2nd quarter. Management mentioned that the market has been sold out for a good month or so for the second quarter. On its call, management said that the market was up at its height of roughly $750 million. That was the height of the .com boom in 1999/2000. Since then it dropped to $600 million. Management believes the market could be up 5 %to 10% higher this year. Young is trading at 18.0x projected 2004 EBITDA and 13.9x projected 2004 BCF. However, it is more appropriate to value KRON separately (since it is not currently generating significant cash flow), then applying a multiple to the cash flow of the company’s remaining network affiliated TV stations. Analysts conservatively value KRON at the value at which the company’s auditor’s valued KRON in 2nd quarter 2002: $412 million. The company has taken no additional write-downs since then.

Walt Disney, the second-biggest U.S. media company, will have strong growth this year based on improving theme park business, political advertising, and DVD sales, said UBS analyst Timothy Wallace in a research note. He boosted his rating to ``buy'' from ``neutral.'' Target is $30.

AmTech initiates coverage of ASK Jeeves with a Buy rating and $47 target. The firm cites the following key factors: 1) +30% growth estimated for overall internet advertising, 2) strength in search advertising (75% of revs and fastest growing segment of overall internet advertising with 200% growth in 2003), 3) strong rev growth and potential margin expansion, 4) potential upside to consensus, 5) negative sentiment reflected in the 14% of float short interest, and 6) attractive valuation at 21x their 2005 free cash flow est vs its 25-30% sustainable rate. Firm also initiates CNET and Doubleclick with Hold ratings.

CSFB says they continue to be big bulls on Disney, and believe that the stock continues to have a big cyclically-driven run in front of it and could comfortably break through the $30 mark this year. Firm believes there is potential for upside versus Street expectation with the 2nd quarter report this week, and notes that DIS has beaten Street expectations four out of the last five quarters. They also continue to believe that Street consensus for 2004 of $0.98 is very beatable. With the shares trading at 11.5x their 2004 est, they see a 12-18 month target of $37.

Smith Barney upgrades Dow Jones to Buy from Hold and raises its target to $64 from $48 on a higher mid-cycle EBITDA estimate. A recent uptick in WSJ advertising is likely to be an important driver for the stock. Also, the company's change in ROIC is expected to be among the best in the group.

Fulcrum upgrades Viacom to Buy from Neutral and raises their 2004-05 above the top-end of guidance. The firm believes that sentiment is at or is nearing a bottom (VIAB is right near its 52-week low, despite improving business trends), and while several risks remain, they believe the risk/reward in the stock has finally become attractive. Target is $42.50.

CSFB initiates coverage of Netflix with an Outperform rating and $43 target. The firm believes that the company can continue to grow by capitalizing on the dramatic growth in both Internet usage and DVD player penetration, and also cites the stock's relatively attractive valuation. In addition to growth in DVD player penetration and Internet usage, firm believes that widespread broadband adoption, int'l opportunities, and the significant operating leverage in the company's model will drive nearly 45% compound annual sales growth and nearly 50% compound annual EPS growth over the next five years.

Goldman Sachs recommends buying Yahoo, saying recent weakness in the stock presents an opportunity as their study of top 200 US advertiser activity on YHOO demonstrates continued positive branded online ad trends; firm also sees the following near-term catalysts: 1) the company's 2-for-1 stock split on 5/11, 2) the 5/13 analyst day, and 3) firm's own conference on 5/26. Firm also notes that the stock is trading at 28x 2004 and 20x 2005 EV/EBITDA estimates, and sees potential 25-30% upside to an implied value of $60-$70.

Yesterday, Liberty Media announced its 1st quarter 2004 results, without a conference call. The numbers looked good, and there were no negative surprises. Management did not hold a conference call as they will be hosting an investor day Thursday in New York City. All major operating subsidiaries beat our expectations:

• QVC exceeded expectations significantly (21% revenue growth and 28% OCF growth versus expectations of 8% for both, driven largely by the international businesses).

• Starz Encore beat our OCF numbers modestly while missing revenue only slightly (revenue growth of 1% and OCF decline of 36% versus our expectations 5% and -45%, respectively).

• Discovery Communications revenue was up 23% and OCF rose 37%, their revenue better than our expected 17% growth rate and OCF roughly in line with expectation for 34% growth.

• Jupiter Telecommunications grew revenue 29% and OCF 56% (excluding the effects of currency, these growth rates were 15% and 40%, respectively). We were expecting growth of 10% for revenue and closer to 20% for OCF.

• Finally, the Jupiter Programming Co. (JPC) grew revenue 43% and OCF doubled (excluding the forex impact these growth rates were 28% and 73% respectively). Analysts had been expecting 10% and 40% growth, more analogous to the growth excluding forex impact.

Hotel & Leisure . . . Brean Murray initiates coverage of Orbitz with a Buy rating and $30 target. The firm believes the company is ideally positioned to benefit from an offline to online channel shift as well as an extension of its strong air offering to higher-margin products.

Telecom . . . MCI and Microsoft announce a global strategic relationship to jointly develop and market communication and collaboration solutions featuring Microsoft Office Live Meeting, beginning with the next generation of MCI's Net Conferencing services. In addition, Microsoft and MCI are establishing a relationship as preferred communication and collaboration partners, including Web conferencing services. This agreement expands on the companies' existing relationship.

Covad will file for a five-day extension with the SEC to submit its Form 10-Q for 1st quarter. The delay is being requested because of a lone accounting issue regarding treatment of stock issued to Covad employees under its 2003 Employee Stock Purchase Plan (ESPP).

Oppenheimer initiates coverage of Earthlink with a Neutral rating. While the company has established a viable major alternative to AOL and MSN in the premium ISP category, the declines in this core segment (its most profitable) and the difficulty it faces in competing with cable and telephone company's for broadband customers create considerable rev pressure, and thus adds significant uncertainty to its outlook.

Nortel and Polycom will team to promote to enterprises a SIP (Session Initiation Protocol)-based, rich video conferencing solution for next generation IP broadband networks, the companies announced at Networld+Interop Las Vegas 2004. NT and PLCM have executed an interim letter of agreement covering the initial terms of this arrangement. They expect to replace the LOA with a long-term agreement within the next few months. NT and PLCM will develop fully-interoperable multipoint video capabilities that will enable PLCM systems to take advantage of NT multimedia features like voice call processing, forward, transfer, hold, presence and instant messaging. In addition, the companies are drafting and sponsoring SIP-based video standards in the Internet Engineering Task Force and the International Telecommunications Union.

Storage . . . Thomas Weisel upgrades Brocade to Peer Perform from Underperform based on: 1) a lower valuation, 2) their expectations for a decent April quarter, and 3) improved visibility for the back half of the year driven by new products. However, firm remains cautious on the stock longer-term due to the competitive environment in SAN switching and BRCD's low-end focus.

Brocade is providing new SAN Switch Modules for IBM eServer BladeCenter. The module is a high-performance 16-port fabric switch, designed to support seamless integration of Brocade's Advanced SAN features into IBM eServer BladeCenter solutions.

Network Equipment . . . . Baird upgrades Symbol to an Outperform from Neutral based on strengthening revenue trends, better channel conditions and improving service execution, combined with recent stock price weakness. The firm expects to see incremental fundamental improvement throughout the remainder of 2004 and into 2005. Also, the stock is down roughly 35% since its peak last January, and currently trades 18x 2005 EPS estimate. Historically, Symbol trades, on average, 25x-30x.... Wachovia also upgrades the stock to Outperform as the co appears to be gaining share. The stock has sold-off in recent months to a level that is more reflective of the opportunity.

Nokia has been chosen by Polkomtel S.A. to supply and deploy the initial phase of its 3G network deployment in Poland, under amendments to the two companies' existing contract. In addition, Nokia will provide GSM/EDGE infrastructure to expand Polkomtel's existing mobile networks. 3G deliveries will begin in May; deliveries of EDGE have already started.

Piper Jaffray upgrades Linktone to Outperform from Mkt Perform and raises their target to $15 from $12 based on: 1) company's strong 1st quarter performance with upside to ests and mkt share gains, 2) their increased rev and margins ests, and 3) their increased confidence in the co's ability to outperform estimates. Separately, ThinkEquity upgraded LTON to Overweight from Equal-Weight.

All about Intel . . . Intel, the world's largest semiconductor maker, added 45 cents to $27 and was the biggest contributor to the S&P 500's gain. Intel has increased inventories to the highest levels since 2001 in a bet that spending on electronics will rise. Worldwide chip sales surged 32 percent in March from a year earlier, the Semiconductor Industry Association said last week. Intel is holding an investor meeting Thursday in New York.

Intel is hosting its Spring Analyst Meeting on 5/13 in NY from 1pm-5pm. Expect the tone of the meeting to be relatively upbeat given the easing of a number of recent investor concerns: (1) its progress with the 90nm transition: with yields better than expected in 1st quarter 2004 and the launch of Dothan earlier this week, (2) the turnaround in its flash business, and (3) recovery in the notebook market. Expect Intel to provide an update on its product roadmaps, given recent changes with the cancellation of the Tejas and Jayhawk processors and acceleration of its roadmap for dual-core desktop processors. The reworking of Intel’s roadmap is positive at the margin, as the shift is likely to ease concerns about heat dissipation in the next-generation of processors. The shift also reflects a closer alignment to end market demand, as users increasingly move to applications that are able to take advantage of the benefits offered by a dual-core processor.

Intel is likely to highlight its headroom with gross margin improvement, as the shift to 300mm/90nm manufacturing continues. Based on its 1st quarter 2004 results we believe Intel’s manufacturing story is coming through, and our GM for 2004, at 63.4%, remains at the high end of guidance of 62%+/-a few points. Though the launch of Dothan is slightly behind indications at its Fall Analyst Meeting, the overall transition appears to be largely on track, and expect the majority of its microprocessor shipments to be based on 300mm/90nm by year-end.

On the communications side, Intel’s flash business is clearly turning around, and we expect the company to highlight its recent strategic shift to diversify beyond the cellular market and into the broader flash markets. Given the price cuts it has implemented, expect Intel to also recapture some of its lost market share on the cellular side. This would be negative at the margin for AMD. Expect Intel to also highlight its longer-term strategy to enter the data flash market, which is currently dominated by NAND flash. $38 price target. From a valuation perspective, Intel is currently trading at 16x 2005 pro forma EPS estimate, well below the past five year median of 29x, and the stock offers a compelling risk-reward ratio. Intel should benefit from strong PC unit growth in 2nd half 2004 as the ongoing PC replacement cycle continues, which should allow the company to take advantage of the leverage in its business model.

Semiconductors . . . Lehman upgrades National Semi to Overweight from Equal-Weight and Micrel to Equal-Weight from Underweight, and downgrades Integrated Silicon, Linear Tech, and Maxim Integrated to Equal-Weight from Overweight. The firm maintains their Overweight on ADI, which remains their top pick. Firm remains encouraged by improving broad-based demand trends, which should enable an upswing of the current cycle to extend beyond where current valuation suggests.

Boxmakers . . . Merrill Lynch maintains their Neutral rating on Hewlett-Packard. While the excess notebook inventory appears worked off and they think the company will achieve their $0.34 estimate, firm gets the sense that Europe, especially Germany, may be weakening even as U.S. enterprise demand improves (HPQ is dependent on Europe). While benign pricing is a near-term positive for printing, firm doesn't see profitability improving much from here and wouldn't be surprised to see perhaps 3 points of margin compression 12-18 months out (creating a $0.17 headwind) as HPQ defends its business from new entrants. On the other hand, firm says valuation is becoming quite compelling.

Software . . . Electronic Arts and Microsoft sign agreement that will allow players of EA Sports and EA Games titles to compete and play online through Xbox Live. Players will have access to voice communication, tournaments, and ladders. The first game to include Xbox Live capability will be NCAA Football 2005, scheduled for release in July. Madden NFL 2005, Tiger Woods PGA Tour, NBA Live 2005 will follow.

Hot Items - Check out the "Hot Items" page (updated daily)


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Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.

http://www.robblack.com/rb_marketwrap.shtml

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From Briefing.com: 6:07PM Tuesday After Hours prices levels vs. 4 pm ET: After today's slight respite, the bears have once again taken over the market. Cisco's (CSCO) Q1 (Apr) report and Q2 (July) outlook failed to impress traders as they question whether such growth rates are sustainable against more difficult comparisons. Presently, the S&P futures, at 1089, are 6 points below fair value, and the Nasdaq 100 futures, at 1413, are 10 points below fair value.

The below table lists Cisco's results, as well as other relevant news items of the night.

After Hours Mover % Change Move Reason for Move
Abercrombie & Fitch (00C) +2% Teen retailer reports Q1 (Apr) EPS that rose 19% to $0.31 (consensus of $0.30) and revenues that also increased 19% to $411.9 mln (consensus of $400.9 mln); Same store sales were flat for the quarter; Management said it's 'comfortable with EPS estimates in the range of $0.38-0.40 for Q2 (July)' as compared to the Reuters Research estimate of $0.39; Stock moves higher after rallying 4% today
Cisco Systems (CSCO) -2% World's largest networking equip company tops the Street's Q1 (Apr) EPS and revenue estimates, meets its own gross margin guidance, and says its book-to-bill ratio was about 1; On its conference call, Cisco put Q2 (July) revenue growth at up 3-5% sequentially, to $5.78-5.90 bln (consensus of $5.74 bln); Shares trade lower as traders try to rationalize CSCO's valuation (31x FY05 earnings) against its growth rate; Company suppliers BRCM, XLNX, IDTI, and PMCS also take a hit
OSI Pharmaceuticals (OSIP) -1% Biotech company with an oncology focus misses the consensus Q2 (Mar) top and bottom-line estimates by a wide margin; Stock hardly sells off, though, as its anti-EGFR drug, Tarceva, announced positive Phase III results Apr 26 which included meeting the primary endpoint of improving survivability; Stock more than doubled in that day alone; Since then, shares have drifted lower as many analysts believe OSIP already discounts Tarceva's full potential
Pixelworks (PXLW) -7% Marketer of semiconductors/software for the advanced display industry said it plans to offer a $125 mln convertible debt offering; Company intends to use the proceeds for general corporate purposes, including potential acquisitions; The dilutive effect on shares outstanding (which impacts EPS) has prompted the selling efforts
Sycamore Networks (SCMR) +8% Developer of networking products turns in a Q3 (Apr) net loss of $0.03 per share, which was $0.01 better than the Street estimate of ($0.04); Management noted Q3 included the initial purchases of its optical switches for the GIG-BE project; Stock gets a nice bounce as revenues handily beat forecasts ($14.7 mln versus the consensus of $8.8 mln) and SCMR has sold off 37% from its mid-Jan highs

Tomorrow, earnings and economic reports are once again slim, although the March Trade Balance is due out at 8:30 ET. After the close, Walt Disney (DIS) will be reporting its Q2 (Mar) results.

For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap. -- Heather Smith, Briefing.com

5:27PM Cisco Systems correction (CSCO) : -- Update -- y/y growth of 23-25% was a comparison of Q4 versus prior year Q4, not a comparison of Y04 revs versus Y03 revs. We apologize for any inconvenience.

5:21PM Cisco Systems guidance on conf call (CSCO) 22.25 +0.63: -- Update -- Co guided Q4 revs to increase 3-5% q/q, approx $5.78-5.90 bln, Reuters consensus is $5.74 bln. Sees Q4 gross margin between 67-69% and GAAP EPS to be $0.01-0.02 lower than pro-forma EPS due to amortization and other charges.

4:56PM Cisco Systems sees CEO's optimism increasing (CSCO) 22.28 +0.66: -- Update -- On call says, from a CEO perspective, it is seeing increasing optimism toward economy and their own companies

4:26PM CSCO Suppliers moving after market: BRCM -0.25, XLNX -0.43, IDTI -0.10, PMCS -0.25 and ICST +0.04:

4:08PM Cisco Systems beats by $0.01, beats on rev (CSCO) 22.28 +0.66: Reports Q3 (Apr) earnings of $0.19 per share, $0.01 better than the Reuters Research consensus of $0.18; revenues rose 21.7% year/year to $5.62 bln vs the $5.55 bln consensus. Gross margin were 68.8%.

3:21PM Cisco Systems Preview (CSCO) 22.25 +0.63: -- Update -- Cisco Systems is scheduled to report its Q3 (April) results tonight after the close, with the analyst community almost unanimously expecting strong results. Reuters Research consensus is for $0.18 in EPS on $5.55 bln in sales (1-3% growth q/q), but as some firms note, the real expectations may have already moved higher. Bear Stearns thinks that current rev growth expectations for Q3 now stand at 4-5%, and expectations for EPS a penny above consensus. According to the firm, CSCO's expected rev strength is likely driven by increased activity in April, and healthy growth in the enterprise mkt in particular. Also contributing to growth is the extra week of operations in the April qtr. Firm expects gross margins to remain flat at around 68.5%. Book to bill is expected to be below 1, consistent with normal trends in the April qtr. With regard to guidance, analysts are generally expecting 3-5% sequential growth, with bookings growing somewhat faster, as Cisco should benefit from improving order trends in April, US enterprise market growth, and stronger govt business. On the call, mgmt is expected to take a cautiously optimistic tone, balancing uncertainty in the global macroeconomic recovery against increasing CEO/CFO confidence levels, modest growth in IT spending, and near-term seasonal strength for the July qtr. (See also yesterday's "Looking Ahead" column in the archive for an expanded preview of CSCO's earnings report.)

12:27PM California Micro Devices (CAMD) 13.90 +0.23: California Micro Devices reported Q4 results after the close on Thursday. The fabless designer of application specific analog semiconductors, power management integrated circuits and thin film resistor networks for the commercial LED, mobile computing and consumer electronics, and medical markets posted EPS of $0.08 on revenue of $15.837MM (+47.0% Y/Y) vs. Reuters Research consensus at $0.07 on $15.10MM.

Bookings totaled $16.8MM, driven by mobile products. Gross margin increased 3,982 bps Y/Y to 41.4%. Operating margin increased 4,384 bps Y/Y to 13.5%.

Guided for Q1 revenue of $16.5-16.8MM (+38.6-41.1% Y/Y) vs. consensus at $0.08 on $16.17MM. Mobile and Computing & Consumer products are expected to grow Q/Q. Medical products is expected to be flat to slightly down. Other products is expected to continue to decline. Gross margin is expected to be slightly down Q/Q due to product mix.

CAMD shares are, based on our inverted EVA / DCF model, priced for sustained upper 20% revenue growth from F07 assuming improvement to 22% operating margin.

Shares generally trade at a discount to direct comps. The following table shows price multiples and Y/Y growth rates for CAMD compared against industry comps within the semiconductor components group. Company *P/SG **P/OPG P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
California Micro Devices (CAMD) 2.4 (386.7) 4.5 3.7 2.9 37.5% 23.0% 25.1%
Fairchild Semiconductor (FCS) 1.3 (234.4) 1.6 1.4 1.2 1.3% 21.3% 12.8%
Kemet (KEM) 1.6 (7.1) 2.4 1.9 1.6 42.9% 24.4% 21.0%
Linear Tech (LLTC) 7.1 15.6 15.4 14.6 10.7 26.4% 27.2% 36.5%
Maxim Integrated Products (MXIM) 6.1 17.7 11.7 10.7 7.9 15.4% 24.8% 35.2%
Micrel (MCRL) 3.5 86.8 5.3 4.2 3.5 7.1% 32.7% 21.5%
National Semiconductor (NSM) 2.5 29.0 4.1 3.8 3.1 10.2% 17.5% 22.0%
ON Semiconductor (ONNN) 0.9 96.0 1.3 1.1 0.9 (2.2%) 26.1% 12.1%
Semtech (SMTC) 5.3 34.0 8.4 6.2 5.1 (0.5%) 35.8% 20.5%
STMicroelectronics (STM) 1.5 59.2 2.5 2.2 1.9 16.2% 22.9% 13.8%
Vishay Intertechnology (VSH) 0.9 19.7 1.3 1.1 1.0 18.7% 26.8% 9.9%
Semiconductors 2.5 31.0 4.2 n/a 18.1% n/a
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of May 7, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of May 7, 2004.

CAMD is increasing penetration into handset manufacturers. The company is selling a greater number of components into more phones. Design win momentum in a growing global handset market, and a PC market that is expected to strengthen over the coming quarters suggests upside to revenue expectations. Operating margin expectations factor in efficiencies from recently completed product rationalization initiatives and reductions in operating expense as a percent of revenue as management scales business, and are below levels for direct comps.--Ping Yu, Briefing.com

9:16AM InterDigital Comm (IDCC) 16.26: InterDigital Communications develops and licenses technologies, including 2G, 2.5G and 3G standards, that are embedded in chips for handsets and wireless base stations.

The company reported Q1 results before the open on Monday. Pro-forma EPS was $0.10 on revenue of $33.016MM (-11.5% Y/Y) vs. Reuters Research consensus at $0.07 on $31.53MM.

NEC contributed 50% of sales; Sony-Ericsson 22%; Sharp 13%. Research In Motion and Sierra Wireless also contributed to results.

Operating margin decreased 2,228 bps Y/Y to 24.5%.

Guided for revenue of $27-30MM per quarter for the rest of the year (+4.7-16.4% Y/Y for Q2). Reuters Research prints Q2 consensus EPS at $0.06 on $31.52MM, and C04 at $0.30 on $131.61MM. Q2 Operating expense is expected to increase 4-6% over first quarter 2004 levels as cost savings from repositioning activities partially offset expenses from recently implemented long-term incentive program. Q3 and Q4 operating expenses are expected to be at or below Q2 levels. Management expects the company will be cash flow positive for C04.

IDCC shares are, based on our inverted EVA/DCF model priced for sustained mid to upper teens revenue growth from C06 assuming 35% operating margin.

The following table shows price multiples and Y/Y growth rates for IDCC compared against the semiconductor group. Company *P/SG **P/OPG P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
InterDigital Communications (IDCC) 3.2 13.5 8.2 7.2 4.1 30.5% 14.8% 74.3%
Qualcomm (QCOM) 6.3 17.8 12.2 10.4 9.5 14.0% 24.2% 9.3%
Texas Instruments (TXN) 2.5 26.2 4.2 3.4 2.9 20.9% 31.8% 15.2%
Semiconductors 2.5 31.0 4.2 n/a 18.1% n/a
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of May 7, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of May 7, 2004.

IDCC shares are attractively priced on a DCF and on a price-operating income-to growth basis with room for upside to estimates. Management expects to conclude additional licenses during the year which are expected to be accretive to guidance. The company boasts a vast IP portfolio of over 4,000 issued patents and applications, and is developing a number of opportunities including cellular and WLAN.--Ping Yu, Briefing.com

9:55AM KOMG reiterated Buy at Needham 13.18 +0.26: Needham reiterates Buy on Komag (KOMG), but lowers its price target to $20 from $25 due to industry multiple compression. Firm believes KOMG's current valuation represents a compelling investment opportunity for long-term investors given: 1) forecasted industry unit growth through 2008 of 10%; 2) restructured capital structure with lower interest rates and no covenants; 3) significant operating leverage; 4) opportunity to further penetrate existing customers and gain share from weaker players.

http://finance.yahoo.com/mp/q?tqnt

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Amateur Investors Mid Week Market Analysis (5/11/04)

The market appears to be bouncing form oversold conditions which I mentioned over the weekend to be prepared for this week. There were two things showing up that indicated to me a reversal was nearing. First the Semiconductor Holders (SMH) were strong last week while the Nasdaq continued to falter. Notice in the chart below the SMH's made a bottom last Monday while the Nasdaq eventually headed lower by the end of the week.



Secondly the Volatility Index (VIX) spiked up strongly on Monday (point A) and closed well above its 10 Day Moving Average (blue line) as some fear entered the market. However the VIX still didn't rise to the level that occurred in late March (point B) so the question is was enough fear generated on Monday to allow for a significant bounce to develop like we saw from late March through early April (points C to D).



As far as the major averages the Dow is trying to hold support near its 200 Day EMA (purple line) around 10000 which is also near its longer term 23.6% Retracement Level calculated from the October 2002 low to the 2004 high. If your an optimist you could make the case for a potential "Double Bottom" scenario if the Dow can hold support near 10000 with a potential rally back to the 10300 area which is near its 50 Day EMA (blue line) and 100 Day EMA (green line). However if the Dow is unable to hold support near 10000 then this would likely lead to an eventual bigger drop back to its longer term 38.2% Retracement Level near 9400 or so.



The Nasdaq which broke below its late March low on Monday reversed today and closed back above its 200 Day EMA (purple line). Just like the Dow if we take a positive spin on things the Nasdaq possibly could be in the early stages of a potential "Double Bottom" pattern if it can hold support the rest of this week above its intra day low on Monday. If the Nasdaq follows through to the upside I would expect quite a bit of resistance to occur near 1980 which is where its 50 Day EMA (blue line) and 100 Day EMA (green) are converging at. Meanwhile if the Nasdaq fails to hold support near its intra day low on Monday then this would probably lead to an eventual drop back to its 38.2% Retracement Level (calculated from the October 2002 low to the early 2004 high) near 1760 or so in the longer term.



The S&P 500 held support on Monday right at its 200 Day EMA (purple line) near 1080. If the S&P 500 can hold support at or above 1080 the rest of this week then hopefully this would lead to a potential "Double Bottom" pattern as well with an eventual rally back up to the 1110 (100 Day EMA) or 1120 (50 Day EMA) range. Meanwhile if the S&P 500 fails to hold support near 1080 then this could eventually lead to a bigger drop back to its longer term 38.2% Retracement Level (calculated from the October 2002 low to the early 2004 high) near 1015 or so.



Finally as mentioned over the weekend continue to look for those stocks that have formed a Cup and are developing a Handle. SFCC provides a current example of a stock which has formed a 7 month Cup and is now beginning to develop a small 2 week Handle (H).

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Chip industry on the rebound
By Tony Sitathan

http://atimes.com/atimes/Global_Economy/FE13Dj02.html

SINGAPORE - The Semiconductor Equipment and Materials International (SEMI) exhibition held in Singapore last week seemed to reflect the state of the global semiconductor industry: global recovery on the back of record sales. Indeed, the industry is expected to outperform sales recorded in the previous two years and post more than US$210 billion in global semiconductor sales for 2004 alone.

This recovery is largely based on a recent surge in demand for semiconductor equipment and materials. As a sign of what's to come, global semiconductor unit shipments climbed to record-breaking highs of more than 100 billion units in the final quarter of 2003. And the overall pick-up in sales has prompted semiconductor equipment makers and materials manufacturers to increase their capacity to meet the rising demand.

Stanley T Myers, president and chief executive officer of SEMI, says the semiconductor market is forecast to see double-digit growth this year, with the equipment market expected to grow 39 percent and the materials market forecast to expand by 11 percent.

"This year is no doubt a year of growth as strong fundamentals are in place," Myers said. "However, it's hard to predict strong growth for next year as we may see [a] possible contraction in growth for semicons by late 2005, but demand should still add up positive."

For George T Lin, president of SEMI Southeast Asia, the rebound in the semiconductor industry already was evident by the number of companies represented at the SEMI exhibition on May 4-6 and the total stand space taken up for the show.

This bodes well for those involved in the industry, but analysts warn that riding the demand wave can be a challenging task, not just for wafer foundries, but for semiconductor equipment makers as well.

"In 2002-03, there was significant underutilization. Now it's a reverse situation where there is almost a 95 percent fab-utilization capacity. There is currently more demand than supply," said Len Jelinek, a principal analyst for semiconductor manufacturing and supply at iSuppli Corp, a market-research consultancy based in the United States.

Jelinek pointed out that the economic difficulties of the past have made the wafer foundries lean, and there is now a lack of ready capital to be mobilized for quick expansion. He predicted that semiconductor factory utilizations will be limited to about 5-7 percent in 2004, which could pose constraints on the industry's ability to meet the growing demand.

However, the increased chip demand for the consumer, wireless and personal-computer (PC) markets has now become more widespread, and with worldwide economic recovery fueled by soaring US and Chinese imports, the market has shown some sustainable economic growth.

Jelinek says China will play an increasingly greater role in the global semiconductor market. Last year it contributed close to 4 percent of the world's semiconductor output, and by 2007 it is expected to contribute closer to 9 percent. China's overall capacity is set to increase as foundry service providers expand their operations to meet forecast global and domestic demand, especially for the 200-millimeter wafer technology.

This renewed optimism also is being felt in Singapore. According to a recent Economic Development Board (EDB) survey on business expectations related to the state of the manufacturing sector in Singapore, all signs point to renewed optimism among electronic manufacturers; at least 67 percent of manufacturers expect robust business performances for the next six months of the year. This positive outlook is broad-based, ranging from electronic component to end-product makers. The semiconductor firms are the most upbeat, as they expect orders to be boosted by the rebound in chip demand, especially chips used in communication and consumer electronics products.

From the survey of 400 manufacturing respondents, which had a 93 percent response rate, 35 percent of the manufacturers foresee higher levels of production, 27 percent anticipate more orders, and 24 percent expect higher exports in the second quarter of 2004. In addition, 82 percent of the manufacturers plan to invest in plant and machinery over the next 12 months, while 31 percent have indicated intentions to increase their capital expenditure. In terms of employment, 10 percent of the manufacturers expect to hire more workers in the second quarter of 2004. The semiconductor segment in particular expects to increase production to meet the rising export demand.

Within the infocomms and consumer electronics companies, a higher output of mobile phones and computers is expected. Singapore's demand for semiconductor chips was worth an estimated $3.3 billion in 2003 and may exceed $3.8 billion for 2004. It is forecast to reach $4.7 billion by 2007.

Reginald Wee, head of electronics and precision engineering for EDB, says Singapore aims to take advantage of the boom in the semiconductor industry. "We want to build a front-end support industry that takes advantage of Singapore's ability to provide cluster development services, including infrastructure, logistics and distribution support to the semiconductor industry," Wee said. "Even if we get [only] 10 percent of the $30 billion semiconductor equipment manufacturing pie, we would have succeeded in the long run."

But will this bull run in the semiconductor industry last, or even pick up more momentum? Several electronics analysts and market-research companies warn of overcapacity, or supply outstripping demand, in the second half of 2005. Many of them, including iSuppli, maintain that there could be some corrections in inventory levels, causing the industry to slow down to reflect only 1.7 percent growth by 2006. IC Insights, another market-research firm in the US, has predicted a slowdown of negative 5.0 percent for the semiconductor industry as early as the third quarter of 2005.

An accounts manager in the device manufacturing systems department at Hitachi High Technologies in Singapore maintained that it's good to be optimistically cautious when it comes to the semiconductor industry.

"The semiconductor industry has cyclical highs and lows built into the system. Now we seem to be enjoying a boom period, so we must also anticipate the low period, and then anticipate the turnaround. The trick is to anticipate the turnaround, that is the period [when] we are all in business. So for the time being, we seem to be riding a strong wave in the semiconductor industry. Let's hope we don't fall over too soon," he warned.

(Copyright 2004 Asia Times Online Co, Ltd. All rights reserved. Please contact [e-mail] for information on our sales and syndication policies.)

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U.S. stocks rebounded from losses, lifting the DJIA by almost 200 points in the last two hours of trading. Bank of America and other financial stocks gained. The rally began after the S&P 500 held above its average price for the past 200 days. Traders track such levels on stock charts to gauge the market's momentum, and the S&P 500's ability to stay above 1078 showed that the decline was running out of steam. The DJIA rose 25 points (+0.3%) to 10,045. The benchmark earlier fell as low as 9852, a loss of 1.7 percent. The S&P 500 added 1 point (+0.2%) to 1097.. The Nasdaq lost 5 points (-0.3%) to 1925, its fourth loss in five days, after Cisco's earnings failed to impress investors. Advancing and declining stocks were about even on the New York Stock Exchange. Some 1.7 billion shares changed hands on the Big Board, 14 percent more than the three-month daily average. Since reaching a 23-month high on Feb. 11, the S&P 500 has shed 5.2 percent, while the Dow has lost 6.5 percent from its 31- month high the same day. The Nasdaq has retreated 11 percent since its two-and-a-half year high set on Jan. 26.

Strong Sectors: biotech, broker/dealer, oil services, insurance
WeakSectors: semiconductor, gold, tobacco, personal services, chemicals

Top Stories . . . World oil demand this year will rise the most since 1988 as economic growth accelerates and consumption surges in China, the International Energy Agency said. Crude oil traded to 13-year highs.

The dollar had its biggest decline against the euro in a week after the U.S. trade deficit unexpectedly widened to a record $46 billion.

The U.S. trade deficit grew in March to a record $46 billion as the highest oil prices in more than two decades and increased consumer spending boosted the value of imports, the Commerce Department reported in Washington.

Citigroup, the world's biggest financial-services company, agreed to buy Principal Financial Group's residential-mortgage business for $1.26 billion, as rising interest rates increase the value of servicing existing mortgages.

Upcoming Event . . . I will be speaking at a two day financial freedom seminar this weekend. It should be a fun event in San Jose. This is not a pure investment seminar. Some of the topics that will be covered over the two days include how to get started, find money, tax savings, property management, foreclosures, 1031 exchanges, property analysis, creative financing, negotiating skills, partnerships, networking, and of course some real estate investment angles. For more information go to http://sjrei.net/financialfreedom.html

Quotes of Note . . . ``There's still a lot of anxiety, particularly with crude oil above $40 a barrel. And certainly, Cisco didn't exactly knock the cover off the ball.'' Keith Keenan, head of trading at Wall Street Access, which trades for 60 mutual funds and hedge funds in New York.

Gurus . . . Economist Irwin Kellner says there is a rule of thumb that every penny per gallon that gasoline prices rise takes $1 billion out of the economy. Since the end of 2001, gasoline prices have jumped by over 80-cents a gallon, effectively negating more than one quarter of the $316 billion in stimulus that was provided by the three Federal tax cuts.

Sy Harding publishes a newsletter based on the seasonal patterns. He says the success of the November-thru-April period is because investors have more cash to invest from year-end bonuses and tax refunds. When the spring arrives, and the flow of extra money dries up, it deprives investors of money and mutual funds of money to buy the dips.

Barron's Online highlights Daniel Rice, a manager of State Street Research Global Resources fund, for his stock pick's. Mr. Rice has delivered market-busting returns for his shareholders by keeping a steady eye on company's tied to three fossil fuels -- oil, natural gas and coal. In 2003, Mr. Rice's fund gained 60% and though the stock market has lost ground this year, fund is up more than 5%. Over the past 5 years, the fund has averaged a stellar 25% annualized return. Mr. Rice's favorite coal co right now is CONSOL Energy. He likes to play high oil prices through Plains Exploration & Production. Mr. Rice's favorite sector is oil services and favorite stock in this sector is Patterson-UTI Energy.

Tax Breaks . . . The Wall Street Journal reports that a package of corporate-tax breaks and other changes cleared the Senate as lawmakers embraced an election-year chance to help domestic manufacturers, U.S. multinational company's, and the energy industry while closing numerous business tax shelters. The heart of the bill, which faces an uncertain future in the House, is the repeal of an export-tax incentive that the World Trade Organization ruled illegal, resulting in stiff tariffs on U.S. exports to the European Union.

Mortgages . . . Demand for U.S. mortgage loan refinancings plummeted last week amid a rise in mortgage rates, but applications for loans to buy homes rose, an industry trade group said on Wednesday. The Mortgage Bankers Association said on Wednesday its measure of demand for mortgage refinancings, the refinancing index, fell 13.2% to 2,184.6 in the week ended May 7. Average interest rates on 30-year mortgages rose 22 basis points to 6.32%, the highest level so far in 2004, the MBA said. The MBA's mkt index, a measure of overall lending activity, fell 5% to 742.2, and the group's purchase index, a gauge of requests for loans to buy homes, rose by 2.4% to 494.3 from 482.5 in the prior week. Overall lending activity dropped 5% according to the group's market index and the purchase index rose by 2.4% in the week to the second highest level on record up to 494.3 from 482.5.

China . . . Over the past week, senior Chinese leaders have given additional clarity on China’s ongoing policy-induced slowdown. The recent steps constitute a constructive, incremental monetary tightening. They should moderate China’s fixed asset investment growth without causing a broad, sharp economic slowdown. Expect China’s reported year-over-year real GDP growth to slow to roughly 8% by late 2004 and into 2005, down from the 9.7% year-over-year growth rate recorded in the first quarter of 2004.

There has been an adverse market reaction to China-related news since mid-April has largely been due to uncertainty, not the actual measures. Premier Wen Jiabao’s remarks in Europe over the past week and comments from President Hu Jintao are helping clarify the leadership’s policy. The measures signaled thus far imply a continuation of the incremental monetary tightening begun in mid-2003. They focus on areas where imperfect information and an underdeveloped price mechanism have caused sector-specific bubbles in China’s economy.

Financials . . . Morgan Stanley upgrades Capital One to Overweight from Equal-Weight and raises their target to $71 from $69. The firm cites valuation, as the stock has sold off by 16%, compared to 3% for the S&P 500 in the past month.

The WSJ reports, citing people familiar with the matter, that General Electric is nearing an agreement to buy Boeing's commercial-finance portfolio for about $2 billion. The deal, which still is being negotiated, would include Boeing leases and loans on such heavy equipment as ships, drilling rigs, trucks and office equipment. People familiar with the deal say it could close within the next week.

Prudential upgrades Bank of America to Overweight from Neutral Weight and raises their target to $86 from $84, given expectations for faster than expected merger savings. The firm says BAC has a more stable mgmt, an easier to understand structure, less regulatory risk, better positioning for higher rates, and (vs Citi) a more certain expense driven earnings outlook.

Citigroup will acquire Principal Residential Mortgage, one of the largest independent mortgage servicers in the US. The company originates, purchases, sells and services home loans, consisting primarily of conventional, conforming, fixed-rate prime mortgages. It is owned by The Principal Financial Group. The transaction includes $6.9 billion in assets and also includes $137 million of franchise premium. It is expected to be accretive to Citigroup's 2004 earnings.

There has been a “rush to judgment” in extrapolating Citigroup’s record $2.65 billion settlement of the WorldCom litigation and its more than $5 billion addition to its reserves for other litigation to other banks. Although the lead plaintiff in the WorldCom litigation is seeking to settle with other banks on some of the same terms that Citigroup agreed to, argue that Citigroup’s multiple roles as debt underwriter, merger adviser, and champion of WorldCom’s stock through a highly visible equity research analyst made Citigroup uniquely vulnerable once WorldCom entered bankruptcy court. In addition, Citigroup’s eagerness to settle the litigation was driven partly by concern about its retail brokerage franchise and how yet another public airing of conflicts between investment banking and equity research would affect that business’s continuing recovery from a three-year bear market. Most banks don’t havea retail brokerage business as important to its earnings as Citigroup’s, and therefore those banks may be willing to take a harder line in settlement discussions than Citigroup did. Expect that other banks will also ultimately settle litigation stemming from the collapse of WorldCom, Enron, and Parmalat, most analysts doubt that any other bank will post a charge that wipes out one quarter’s worth of its earnings, as Citigroup’s did.

Capital One reported monthly managed data for April. The data showed continued improvement in credit quality. Managed loan growth was weak, but we believe growth was somewhat understated as a result of a stronger US dollar relative to UK pounds and CDN dollars during April. In April, the managed chargeoff rate decreased to 4.70% from 4.74% in March. Dollar chargeoffs increased very slightly (less than $1 million) in April. The managed 30+ delinquency rate decreased to 3.69% at the end of April from 3.80% at the end of March. Managed loans grew by $183 million, or 26 bp (3.06% annualized) from March to April. Excluding the estimated

effect of a stronger dollar, managed loans increased by 67 bp (8.06% annualized ). The US dollar strengthened by 3.6% against the UK Pound and by 4.7% against the Canadian Dollar in April. At March 31, the company had $8.3 billion of international loans. The managed chargoff rate and the delinquency rate are the lowest since the company began reporting monthly managed data (still a good idea). The delinquency rate is the lowest since 1995, according to the company. Much of the improvement in credit quality is attributable to the mix shift up market in US cards as well as diversification into non-card lending, though the improved economy helped.

Oil & Gas . . . Saudi Arabia said today that it stood ready and able to boost oil output to meet global demand growth, but only after consultation with fellow OPEC exporters. "We will make sure there is no shortage in the market. If there is a need, and in coordination with OPEC, we will increase our production," a senior Saudi oil official told Reuters. OPEC will discuss the Saudi proposal at an informal meeting in Amsterdam on May 22-24 and then finalise any decision when it meets on June 3 in Beirut.

Defense & Aerospace . . . Northrop Grumman 2- declares a 2-for-1 stock split and approves a 15% quarterly dividend increase to $0.46 (1.9% yield) from $0.40 on a pre-split basis.

Retail . . . Prudential upgrades Abercrombie to Overweight from Neutral-Weight following stronger than expected results; firm also cites the following factors: 1) 320 basis points of gross margin upside versus their estimate; 2) improving sales trends, as comps in the ANF adult biz were positive in the last 2 weeks of April, and the girls biz improved with new deliveries; 3) comps that have been above expectations in 3 of last 4 months and easier comparisons going forward; 4) a new growth vehicle on the horizon; 5) conservative ests and significant earnings power in the story; and 6) attractive valuation. Target is $39.

What is driving Retail (mostly Apparel) . . . . Demographic, cultural, and societal trends have a powerful effect on consumer preferences; the value-conscious, channel-neutral

consumer is just one example.

Retail Opportunities: Baby Boomers, Gen Y, Hispanics, and Asians. In 2003, the largest generational segments were the baby boomers and Gen Yers, both with 26% of the population. In addition, the future growth rates are the largest for the older-than-55 group, while the 38-55 demographic is shrinking (and so may the retailers that target this group)! Finally, Asians and Hispanics have the highest projected population growth rates across all ethnicities.

Pop Culture Is Driving Consumer Interest. Urban brands, preppy fashions, low-carb foods, and personal care products (particularly for males) are all the rage.

Powerful Digital Products and Fashion Cycles Are Creating Impressive Demand Trends. The digital products cycle is resonating with the consumer, driven primarily by the convergence of media and technology. In apparel, the impressive fashion cycle is leveraging sales and promoting firming pricing power. Vibrant colors from the apparel world are also penetrating the world of home décor . the kitchen in particular.

Labor Market Recovery Bodes Well for Career Wear and the Lower-to-Middle Income Demographic. The improving employment picture is reviving the once-quiet world of career wear and sets a compelling backdrop for spending by the lower-to-middle income demographic for the remainder of 2004.

Strategies to Grow Retail after Top Line Post-Store Saturation

Enhance the Current Offering. Retailers that can offer customers a broader assortment and/or customizable products will win the battle for shopping dollars. Old Navy often markets and merchandises directly to the Hispanic consumer when the demographics support such a strategy.

Make Product and Brand Extensions. For example, as store growth slowed, Gap introduced Gap Body, and Victoria’s Secret launched its perfume and beauty aid lines.

Launch Second Concepts. For example, in 2000, realizing that store saturation was fast approaching with 265 core A&F stores, the company rolled out Hollister. By 2003, Abercrombie was operating 357 A&F and 172 Hollister stores, which represents compound annual growth rates of 10% and 225%, respectively.

Invest in Store Remodels and Refurbishments. When stores reach maturity, they often achieve a base same-store sales level of approximately 2%-3%. Updating the store format often increases store productivity. Look at the remodeling of the Express and Express Men’s concepts by Limited.

Relocate Stores. What might have been the right location several years ago may no longer work today. In the early 1990s, Circuit City expanded quicker and earlier than Best Buy and thus has a greater percentage of less attractive B and C locations in its portfolio. However, it now plans to relocate about one-third of its store base (approximately 200 locations) over the coming years in order to level the playing field with Best Buy.

Restaurants . . . Jack In The Box reported earnings of $0.53 per share, $0.10 better than the consensus of $0.43. Revenues rose 11.6% year/year to $517.3 million versus the $507.0 million consensus. The company sees 3rd quarter EPS of approximately $0.53 versus the consensus of $0.46. For 2004 company sees EPS of $2.14, ex items, vs the Reuters Research consensus of $1.92.

Apparel . . . JP Morgan believes that investor concerns over the slowing European market which sparked from 1st quarter weakness at Reebok, Adidas, and Foot Locker is valid, but overblown as it relates to NKE. The firm does not believe weakness in Europe presents significant risk to their earnings forecast for NKE, as a slowing growth rate for this region has already been assumed given a decelerating backlog for the last 3 qtrs. With NKE now trading at 16.1x their 2005 EPS estimate, firm says the stock seems to assume significant downward earnings revisions, and they would be buyers of NKE ahead of Foot Locker's earnings release on May 19, which they expect to reassure the mkt. Maintains Overweight.

Healthcare . . . Smith Barney upgrades Humana to Hold from Sell based on valuation, as the stock is now below their $18 target (up from $17).

Smith Barney upgrades Coventry Health to Buy from Hold and raises their target to $54 from $51 based on: 1) firm assigns a B+ to CVH reserves in their proprietary "Reserves Revisited" report available on Thursday; 2) attractive valuation, as the stock is trading 1 point above the low-end of its 7-year normal range, and trades at 10.5x their 2005 EPS estimate versus 10.9x for group; 3) firm expects 30% EPS growth in 2004 and 15% in 2005; 4) potential upside from acquisitions.

KeyBanc/McDonald downgrades Weight Watchers to Hold from Buy following in-line results and below-consensus 2004 guidance. The firm says that near-term, the recovery in attendance has become less certain due to the proliferation of low carb food products introduced by packaged foods company's, and the confusion in the marketplace is causing many dieters to switch to unstructured self-help diets under the misconception that low-carb food consumption alone will produce weight loss. Also, firm says management indicated that it has a 3-point plan to help reverse the negative attendance trends, but was vague regarding details and timing.

Biotech . . . Maxim Pharm announced the results of an international Phase 3 clinical trial testing the combination of Ceplene plus interleukin-2 in 320 patients with acute myeloid leukemia in complete remission. The company meets the primary endpoint of the Phase 3 trial as patients treated with the Ceplene/IL-2 combination therapy experienced a statistically significant increase in leukemia-free survival. AML is the most common form of acute leukemia in adults and is typically treated with chemotherapy, but the majority of patients will ultimately relapse. The prognosis for AML patients after relapse is dismal, with few long-term survivors.

Media . . . Stifel Nicolaus notes that Sirius reported that it reached the 400k subscriber mark after the close yesterday, which implies that SIRI has added 49k subscribers so far in the qtr. Firm says their first impression of this number was that SIRI is pacing to miss their 2nd quarter subscriber addition estimate of 135k, as the co has only hit 36% of their estimate yet is now 44% into the number of days in the qtr; however, firm says a deeper analysis of sales data reveals that in each of the past two years June was a disproportionate percent of the quarterly retail sales for XM Satellite Radio and SIRI combined, at about 44%; thus, firm estimates that in prior quarters about 37% of product sales were made through May 10. The data also indicated that April and May were below March data, which is roughly in-line where SIRI is right now. Given a lag between product sales and activations, firm says SIRI is on track to slightly miss or meet their 2nd quarter subscriber number, which they believe is roughly in-line with the Street.

AmTech says they expect 3 things from YHOO's analyst day tomorrow: 1) lots of discussion about the breadth of YHOO's product offering, with the implication that it is broader than Google; 2) a focus on growth in int'l mkts; and 3) new long-term margin guidance, which they think will in the range of 40-45% EBITDA (YHOO did 38% in March, exceeding prior guidance of 30-35%). Firm expects the analyst day to be positive but do not expect numbers to be raised afterwards. While YHOO remains their top internet stock with a 12-month horizon, they would not encourage purchase purely for a trade into the analyst day.

Prudential downgrades Washington Post to Underweight from Neutral-Weight as the firm thinks the stock price is overvalued at this time relative to its peers. Broadcasting is expected to face tough comps in 2005 as the firm forecasts an incremental $34.5 million of Olympic and political related ad revenue in 2004. The firm expects 2005 operating profit growth to moderate as several years of cost controls help give margins a boost in 2004.

Napster, a subsidiary of Roxio, has signed a worldwide distribution deal with UK independent labels body AIM, the Association of Independent Music. Initially, 50,000 tracks from 50 of AIM's 800 member companies will be made available for digital downloading and streaming through the new Napster service when it launches in the UK this summer. Napster members in the US will also gain access to this content, as soon as repertoire is uploaded.

Hotel & Leisure . . . Isle of Capri will still seek approval to build a casino in a Chicago suburb despite Illinois Attorney General Lisa Madigan's decision to revoke the license won by ISLE in a controversial March auction. Co says it is greatly disappointed, but not surprised, and takes great issue with her mischaracterizations of ISLE and its management. Co says this process has become a game of political one-up-man-ship.

Telecom . . . Raymond James upgrades Triton PCS to Outperform from Market Perform following mixed 1st quarter results. While firm believes that TPC will continue to see turbulence in 2004 due to the proposed Cingular/AT&T Wireless merger, they believe that the market has overreacted and the potential rewards now outweigh the risks. Target is $7.

Network Equipment . . . Cisco results were in line with most previews. Revenue of $5.62 billion was better than the consensus of $5.55 billion. This revenue represents a quarter/quarter increase of 4.1%. Gross margin was 68.8%, up sequentially from 68.5% in the last quarter. Operating margin was flat at 30.6%. Pro Forma EPS was $0.19, or a penny better than our and

consensus estimates. Book to bill was 1. Major positive standouts include: More optimistic outlook as result of better business activities, Cisco will hire 1000 in R&D and Sales in 2004. Deferred revenue up 7% across the board. Margin improved through cost reduction despite lower prices. Market share gains in enterprise markets. Concerns: Inventory increased 20% quarter/quarter, could be vulnerable to risks of slow downs if expectations of better demands does not materialize. Router sales decline by 9%, despite booking up 10%. Carrier sales were relatively sluggish, especially in optical. Linksys – slower growth of 5% quarter/quarter. China/AP was a bit soft. Overall, we are still impressed by Cisco’s favorable market position, positive outlook, and excellence in execution. Analysts are increasing 2004 & 005 revenue estimates modestly to $22 billion and $24.9 billion. Analysts are also raising estimates of 2004 EPS by 1 penny to $0.74, and FY2005 EPS by 3 pennies to $0.84. Cisco is trading 5.6x 2005E revenue and 26.5x FY2005 EPS. Our DCF analysis suggests that Cisco’s stock is discounting 11% annual growth over the next 10 years. This appears slightly aggressive, given the growth limitations of a large company, peak margins, and high stock options expense. However, Cisco deserves a premium.

Oppenheimer upgrades Scientific-Atlanta to Buy from Neutral and raises their 2005 EPS estimate above consensus, citing the following factors: 1) the shipment of "significant" quantities of HD-capable set-tops to several customers in Japan, 2) the decision by Time Warner to test the Explorer 8000 for potential deployment in its Motorola-based systems, 3) Pioneer's announcement last week that it is withdrawing from the cable set-top mkt, and 4) a potential increase in interest rates, which could add to SFA's earnings given its $1.2 bln cash position. Target is $38.

Morgan Stanley upgrades Adtran to Equal-Weight from Underweight; after significant underperformance over the past 12 months, firm believes that current valuation should enable ADTN shares to trade in-line with the wireline equipment industry; firm would be buyers of the stock in the high teens.

Qualcomm issued upside guidance for 3rd quarter. The company sees EPS of $0.51-0.53, excluding company's QSI segment versus consensus of $0.50. For 2004, company sees EPS of $2.00-2.05, consensus $2.00. Improved outlook is due to greater than expected WCDMA royalties, faster migration to 6000 series MSMs and stronger orders for CSM products.

The analyst community is generally positive after reviewing Cisco's April qtr results, which beat consensus and seemed to be in-line with the real expectations of the mkt. Gross margins of 68.8% exceeded even the more bullish estimates, with opex growth coming in at 4.9% vs guidance of 5-7%. Also, several firms are pointing to book-to-bill that was close to 1, vs below 1 over the last several qtrs. Surprisingly, inventory grew 20% sequentially to $1.12 billion from $933 million in 2nd quarter 2004. JP Morgan notes that while this may sound like a strange positive given that rev only grew 4%, the last time inventories grew much faster than rev was in July 2003, when inventory grew 14.1% quarter/quarter versus only 1.8% for rev; in the following qtr, rev grew 8.5%, far above guidance of 2-4%. Despite all the positives, the shares did end up down 2.3% in after hours trading, which is mainly attributed to views that 4th quarter 2004 revenue guidance of 3-5% sequential growth was a bit disappointing given the additional positive commentary provided throughout the conference call. Also, the sequential opex guidance of 2-4% growth was somewhat heavier than consensus of a 2% decline, as the co is planning to add more headcount and a 20% rise in inventory to address higher lead times. Overall, we are not seeing any rating changes, but some firms are making minor upward adjustments to their estimates.

Motorola extends its infrastructure product portfolio with the introduction of four new products for Hybrid Fiber Coaxial networks. These products form an essential foundation for broadband operators to reliably deploy advanced services -- enabling them to deliver Motorola's "connected home" experience to subscribers.... Co also announces that it and Padcom, a provider of connectivity software for mobile workers, will be using Padcom's TotalRoam solution to integrate Motorola's advanced private voice and data networks with public wide area and local area wireless networks.

Barron's Online highlights Alcatel, which announced this month sales could rise as much as 10% this year after weathering 3 years of red ink, thanks to rising capital spending by telecom's. However, investors appear to have already anticipated a turnaround, with Alcatel's ADR's almost doubling since a 52-week low last May. What's more, investors are counting on continued good news at a time when competition is growing from low-cost Chinese competitors and only modest spending increases are expected from customers. "Competition is severe," in China says Gauri Pavate, an analyst with Gartner Dataquest. Worldwide average equipment rev per DSL line dropped to $76 last year, from about $100 in 2002. Alcatel expects gross margins to hold steady this year at about 36%, but pricing pressure could easily threaten margins. In North America, the cable service providers have about 60% of the high-speed Internet market and they are looking to woo the Bells' phone customers with voice service via coaxial cable. While DSL is playing catch up, cable's advance is a negative for Alcatel, says Steve Rago, an analyst at iSuppli. And wireless subscriber growth in North America is easing, as carriers like Verizon expect to hold spending at current levels. That could be a problem, since mobile equipment comprised 28% of Alcatel's sales last year. Like the U.S., Western Europe's wireless market is fairly mature, with subscriber growth expected to grow by just 1% through 2007, according to In-Stat/MDR. According to the article, Alcatel's stock isn't cheap trading at about twice its historic five-year median P/B ratio of 2.5x. The company, which has about $7 billion in cash and owes about the same amount.

Semiconductors . . . Goldman views Cisco's comments on its earnings call as generally constructive for communications semis; while much focus has been on CSCO 's inventory level (which increased 8 days Quarter/Quarter), firm notes that CSCO indicated that it maintains a strategic approach to inventories and will likely continue to increase inventories in the near-term given its view of continued tight supply and optimism regarding customer demand; firm maintains a favorable bias towards Marvell and Agere. JP Morgan says they are becoming concerned about the large inventory buildup and the high potential of double ordering in the communications supply chain, and estimates that total inventory days in the wireline supply chain increased a whopping 24 days sequentially, from 86 days in 4th quarter 2003 to 110 days in 1st quarter 2004, well above the normalized level of 85 days. Firm says the reason they got more bullish on Xilinx and became more positive on the comm semi space last year was due to inventory being worked down, but now it appears there could be an inventory correction looming. Firm remains Overweight XLNX, but believes it will be difficult for the stock to get back to its previous high.

Software . . . Microsoft and SAP announce plans to work closer together to improve products and simplify access over the Internet. The two companies detailed a road map for deeper integration between Microsoft .NET and SAP NetWeaver, the company’s respective strategic platform initiatives, allowing customers to get more out of business-critical SAP applications and technologies running in collaboration with Microsoft .NET.

Atari to will develop and license games for Nokia's N-Gage platform. The first Atari titles for the N-Gage are expected to be released in 2005 and will include Civilization, a strategy game, and DRIV3R, the latest installment of Atari's hugely successful driving adventure franchise.

Hot Items - Check out the "Hot Items" page (updated daily)


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Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.

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CLOSING WRAP-UP, May 12
By Jody Osborne, Optionetics.com
5/12/2004 7:00:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=10379

Stocks stage amazing comeback, although the Nasdaq ($COMPQ) still finishes in the red. The Dow ($INDU) closed the session with a gain of 25.69 points to 10,045.16. Intraday the Dow reached a low of 9,852.19. The S&P 500 ($SPX) added 1.83 points to 1,097.28, which was 21 points above its intraday low. The Nasdaq at one point Wednesday traded as low as 1,878.77, but finished the session at 1,925.59, a loss of just 5.76 points. Volume was moderate, which tells us that the drop and recovery wasn’t necessarily the formation of a bottom. The NYSE traded 1.68 billion shares, with the Naz turning over 1.87 billion. Market breadth was flat on both the Big Board and Naz today.

Rising oil prices sent stocks sharply lower in the early going Wednesday, with the price of a barrel of oil shooting to nearly $41. High oil prices are already creating problems for airline companies and could start to slow consumer spending. The fear is that OPEC is not going to do anything about rising demand and this will just lead to higher oil prices. As oil prices raise it takes a toll on disposable income and this is a concern for the economy. At the same time, firms need to recoup the cost of higher fuel prices by raising consumer prices and this leads to inflationary pressures.

Shares of Cisco (CSCO) closed with a loss of 1.3 percent, though this was well off its intraday low. The networking giant announced earnings last night that beat estimates by a penny, but traders sold the good news after sending the stock higher this past week. Cisco also provided a rather optimistic outlook, as did Qualcomm (QCOM). QCOM shares fell 1.3 percent as well Wednesday despite raising its third quarter and 2004 earnings and revenue estimates.

Tobacco stocks took a hit today following a negative announcement from the Florida Supreme Court. This court agreed to look at the dismissal of the $145 billion judgment against several cigarette companies. Shares of Altria (MO) fell 6.74 percent, with R.J. Reynolds (RJR) shares declining 5.64 percent.

Overall, traders took advantage of an oversold market today to buy stocks heading into the close. However, volume was not very heavy, showing that many traders are still waiting for more information about the economy. Though interest rates are expected to rise in the near term, many traders are now wondering how quickly the rise will be. In the next two sessions, there will be some key economic reports that could answer some of these questions.

Jody Osborne
Senior Staff Writer & Options Strategist
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Friday May 14, 2004 Daily MarketWrap

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The S&P 500 Index and DJIA finished little changed, rounding out their third straight week of losses. The Nasdaq Composite Index dropped after Dell's profit forecast failed to top analyst estimates. The S&P 500 and Dow average bounced between gains and losses today as investors assessed the impact of a report showing consumer prices rose for a fifth month in April. The Federal Reserve last week pledged it would raise interest rates at a ``measured'' pace to curb inflation. The S&P 500 lost 0.78, points (-0.1%) to 1095. The DJIA added 2 points to 10,012. The Nasdaq, which gets 40 percent of its value from computer-related stocks, shed 21 points (-1.1%) to 1904. For the week, the S&P 500 slid 0.3 percent, the DJIA average lost 1 percent and the Nasdaq declined 0.7 percent. Five stocks rose for every four that fell on the New York Stock Exchange today. Some 1.3 billion shares changed hands on the Big Board, making it the slowest trading day in three weeks. Since April 2, when a government report showing a greater- than-forecast increase in jobs fueled expectations of higher interest rates this year, the S&P 500 has dropped 4 percent.

Strong Sectors: oil & gas equip, gold, tobacco, casino, homebuilding, airline, auto, REIT, hospital
Weak Sectors: chip equip, software, communication equip

Top Stories . . . Crude oil rose to an all-time high in New York as surging gasoline demand raised concern that refinery capacity and fuel supplies will be inadequate in the months ahead.

Nortel Networks, facing accounting probes by U.S. and Canadian regulators, said federal prosecutors in Texas have asked the company to turn over documents as part of a criminal investigation.

The U.S. dollar fell against the euro for a third day in four after the University of Michigan's gauge of consumer confidence fell short of economists' forecasts.

Prices paid by U.S. consumers rose 0.2 percent in April amid higher costs for travel and medical care, reinforcing expectations that the Federal Reserve will start raising interest rates.

Interest Rates . . . The WSJ reports that by now, just about any economist who is paying attention expects the Federal Reserve to start raising short-term interest rates sometime in the not too distant future on signs that economic growth is picking up and inflation is beginning to creep higher. The WSJ's latest monthly survey of private economists lays out expectations for the course of short-term interest over the next 19 months. Forty-three of the 55 economists surveyed said they expected the Fed to nudge up the benchmark federal-funds rate by June from the current 46-year low of 1%. That is a sharp shift from the previous survey a month ago, when economists on average believed the Fed would wait until September before acting. The median forecast calls for the fed-funds rate to rise to 1.25% in June and hit 1.75% by December, 2.5% a year from now and 3.5% by December 2005.

Hot IPO . . . The upcoming initial public offering for Salesforce.com has been bumped back at least a week from the IPO calendar after a report in The New York Times revealed CEO Marc Benioff no longer owns about 8.4 million of his shares in the company ahead of its stock market debut. Benioff owns about 28 million shares now, down from 36.5 million shares he purchased 1999 and 2000, according to the newspaper. The IPO document does not disclose when Benioff sold his shares or how much he got for them. Kathy Smith, fund manager with Renaissance Capital, said the $85 million IPO from the San Francisco-based business software maker has been delayed from the week of May 23 to give the company time to update its IPO prospectus about the CEO's stock sale. The stock sales would have taken place during years in which Benioff earned only $1 per year in salary. Smith said the IPO will still likely kick off, but it'll face a delay. The IPO has been widely seen as a dot-com appetizer for the big $2.7 billion IPO from Google.com, since both companies share the same lead underwriter Morgan Stanley.

Market Comment . . . While high oil prices and impending interest rate increases weigh on the outlook, the positive factors are The U.S. economy is accelerating markedly. GDP growth was 4.2% in the first quarter, with each month stronger than the previous. Thus, April and May are building on very strong March results, so the comparison of the second quarter to the first is likely to be favorable when second quarter GDP data is released on July 30. Analysts are expecting 5.2%. Expect a durable, multi-year expansion spurred by a reasonably valued dollar (neither inflationary nor deflationary), small businesses, employment growth and an acceleration in growth abroad. Analysts disagree with increases will block the expansion and that China is heading for a hard-landing.

While high oil prices and impending interest rate increases weigh on the outlook, we think the positive factors are stronger. The near-term drivers are an improvement in business sentiment, which suffered a second dip in the uncertainty leading into the April 2003 Iraq war, and indications of stronger growth in inventories, business investment and payrolls.

Inventory building has not yet made a significant contribution to overall GDP growth in the current expansion. Look for the inventory “after burners” to kick in during 2004, providing a significant boost to an already accelerating expansion.

• Demand for commercial and industrial loans has recently started growing. This typically coincides with an increase in business inventories. Growth in loans and inventories make sense given the “get-it-while-you-can” nature of today’s superlow interest rate environment.

• The inventory/sales ratio is at all-time lows, well below its longer-term structural downtrend.

• In the near-term assuming a continuation of the current pace of sales growth, even a reversion to the secular downtrend (on the graph, the solid line rises to meet the declining dotted line) would add almost 0.9% to GDP.

• Further, we’re not sure the secular downtrend in the inventory/sales ratio will persist. It was partly driven by disinflation and the unusually high real interest rates in the decades after the 1970s inflation crisis. Those factors combined with technology to create a “just-in-time” inventory culture, culminating in an outright aversion to inventory in recent years. If mild inflation and relatively low real interest rates persist in coming years, the secular downtrend might flatten, with further positive implications for GDP growth, employment and industrial production.

Corporations Ready to Invest

Corporate profit growth accelerated beginning in 2002, reaching the highest percentage of GDP since the late 1960s.

• While investment spending on plant and equipment (capital spending) began to revive in 2003, it remains below the level of aggregate cash flow, reflecting both the extent of the investment excess in the late 1990s and the subsequent bust.

• While investment spending on plant and equipment (capital spending) began to revive in 2003, it remains below the level of aggregate cash flow, reflecting both the extent of the investment excess in the late 1990s and the subsequent bust.

• CEOs have become significantly more optimistic, which should reduce their risk aversion and lead to increased jobs, inventory and business investment.

With balance-sheet restructuring mostly completed, profits strong and CEOs more confident, we think pent-up investment demand will contribute to the economy’s acceleration in 2004. Don’t agree with the concern that excess capacity will place a low limit on investment growth.

• The Institute of Supply Management reports capacity utilization in its semiannual survey of its members. The ISM measure is generally larger than the Fed’s measure (which we think includes a substantial amount of uneconomic capacity) and moves with it. However, recent observations on the ISM series show a divergence, with the ISM measure rising much faster than the Fed’s.

• One explanation is that private-sector executives are “moth-balling” uneconomic capacity much faster than the Fed assumes, suggesting that business investment will grow faster than expectations in coming quarters.

Consumer Resilience

Consumption growth has accelerated despite relatively low consumer confidence and continuing concerns about the international situation.

• Retail sales were down 0.5% in April from March. However, the March-April total was 2.2% (13.9% annualized) above the January-February total. If the April sales level simply holds, second quarter retail sales will be 1.3% (4.6% annualized) above the first quarter.

Eco Speak . . . Consumer sentiment held steady in early May, researchers at the University of Michigan said Friday. The consumer sentiment index remained at 94.2, the same level as reported in late April. Economists had expected sentiment to improve in May. The consensus forecast of Wall Street economists was for sentiment to rise to 95.9. The current conditions index rose to 107.2 in May from 105.0 in April. The expectations index fell to 85.8 in May from 87.3 in the previous month.

Output of the nation's factories, mines and utilities rose at a faster-than-expected rate of 0.8 percent in April. Capacity utilization rose to 76.9 percent from 76.5 percent, the highest level in nearly three years. Economists had been expecting industrial production to rise 0.4 percent and capacity utilization to increase to 76.7 percent. Manufacturing output rose 0.7 percent in April after a scant 0.1 percent rise in March. Output at the nation's utilities rose 1.5 percent in April after falling 2.3 percent in March.

record surge in U.S. business sales helped the inventory-to-sales ratio set a new record low in March. Business inventories rose 0.7 percent in March, the seventh consecutive increase. Inventories rose to a record $1.2 trillion, while sales at U.S. businesses increased a record 2.9 percent to a record $928.7 billion. The inventory-to-sales ratio fell to a record low 1.30 in March from the previous record of 1.33 in February. Economists had been expecting inventories to rise 0.4 percent in March.

Fund Flow . . . Funds investing primarily in U.S. stocks had outflows of $700 million during the week ending May 12, estimates Trim Tabs director of research Carl Wittnebert, after taking in $600 million in new money the prior week. "With recent developments in the equity and bond markets, it is no surprise that investors are liquidating some holdings," Wittnebert said. "What surprises me is that they aren't liquidating more." Meanwhile, international stock funds had inflows of $100 million, adding to the prior week's inflows of $400 million. Bond funds suffered outflows of $3.6 billion, on top of the $1.1 billion in outflows the week before.

Financials . . . Barron's Online highlights leading Wall Street securities firms, suggesting they have low valuations and could potentially trade higher. According to the article, investors seem more focused on bad news, such as rising interest rates and geopolitical risk. So far this year, the S&P's Investment Bank index has slipped 7%. But, according to the article, this recent decline may be overdone. Rising interest rates could signal a full-fledged economic rebound, which should keep equity markets strong and prompt even more IPOs and M&A activity. Plus, the surprisingly cheap valuations make Wall Street powerhouses such as Merrill Lynch and Morgan Stanley look more compelling. The sell-off in these stocks "is an interesting thing, since [the investment banking] business is getting better and better," says Dave Macey, senior vice president and portfolio manager with Boston Company Asset Management. MER's P/E ratio is in line with its growth rate and below its 5-year median P/E of 15.3x projected earnings. It also fetches only 1.8x book value, well below its median 2.2x book over the last 5-years. While MWD's P/E slightly exceeds its growth rate, the stock looks like a value by other measures. It's 16% off its 52-week high and is trading below its median P/E of 15.3x forward earnings for the last 5-years. At 2.2x book value, it's significantly below its median 3x book over the last 5-years.

Real Estate . . . Bank of America says real estate stocks, which are down 18% since April 1 are approaching attractive valuation levels. On April 6, the firm wrote, "Even Down 8.9% Real Estate Stocks Aren't Cheap". Six weeks later, valuations have declined further, major funds outflows have not materialized, and much of the expected rate increase is behind us. Real estate stocks are no longer expensive. The average real estate stock is now trading at 11.4x 12-month forward funds from operations. Although this is still an 11% premium to the historical average of 10.3x, it is down from the April 2004 peak of 14.1x and the 1997 peak of 12.9x. The big move in rates is likely behind us as the yield on the 10-year Treasury has risen to 4.86% from 3.89% on April 1. The firm continues to like malls - including Simon Property and General Growth - because of strong growth and reasonable valuations and sees opportunity in office names like Equity Offices and CarrAmerica, industrial names like Prologis, Cattelus Development, and St Joe.

Oil & Gas . . . Morgan Stanley raised its 2004 oil price forecast to $33 per barrel from $28, citing higher marginal production costs, unusually tight refined markets and expectations of continued OPEC cohesion. June crude futures were last trading up 24 cents at $41.32. As a result, analyst Douglas Terreson raised his earnings and stock price targets on several oil companies, including Exxon Mobil, ChevronTexaco, ConocoPhillips and Marathon Oil.

Paper . . . Deutsche Bank upgrades Weyerhaeuser, Pope & Talbot, Glatfelter, Wausau-Mosinee to Buy from Hold, and upgrades RKT to Buy from Sell and upgrades Caraustar to Hold from Sell. Firm notes that the decline in paper stocks over the last 3 weeks has been dramatic, but says that over the past 6-8 weeks the cyclical recovery in pulp & paper has strengthened markedly; also, domestic demand has accelerated in several key businesses (containerboard & uncoated white paper especially), trade numbers are showing signs of improvement, and demand in many other parts of the world appears to have improved.

Food & Beverage . . . The WSJ reports that the cola warriors are shaking up the orange-juice aisle in a bid to win back calorie-counting consumers. Tropicana Products, a unit of PepsiCo, said it plans to expand its line of Light 'n Healthy reduced-calorie orange juice, while eliminating more sugar and calories from a product line that it says has become a hit with health-conscious consumers. Meanwhile, Coca-Cola's Minute Maid unit said it would begin selling later this month an orange juice with less than half the calories and sugar of regular juice. Both beverage giants are trying to reverse an industrywide slide in orange-juice sales, fueled by consumers who are drinking less of the breakfast staple because of concerns over calories and carbohydrates.

Tobacco . . . UBS upgraded Altria to "neutral" vs. "reduce" and reiterated a price target of $51, highlighting the positive prospects for a spinoff of the company's majority stake in Kraft over continued tobacco litigation. "UBS has always argued that US tobacco litigation is unpredictable," UBS said in a note to clients. "The events of 12th May (The Florida Supreme Court's decision to overturn the Engle judgement) prove this once again." UBS said the spinoff of Altria's Kraft stake is the main investment case for the stock and the valuation now appears "far more reasonable," he said.

Retail . . . Wal-Mart reported 1st quarter 2004 EPS from continuing operations of $0.50 vs. $0.41, a penny above estimates and consensus of $0.49 and at the higher end of the $0.48-$0.50 plan. Higher other income as well as a higher level of share repurchase than we were estimating drove the penny upside in the quarter. GAAP EPS was $0.50 vs. $0.42, as 1st quarter 2003 included $0.01 from the McLane business which sold in May 2003. Total U.S. retail comps for 1st quarter 2004 came in at 6.4% for the quarter, composed of 5.9% comps at the Wal-Mart stores division and 8.8% comps at Sam’s Club. Wal-Mart provided 2nd quarter 2004 EPS guidance of $0.60 to $0.62 and raised its full year 2004 EPS guidance to $2.35-$2.39 from $2.34 to $2.38. 2nd quarter 2004 comps are planned in the 4%-6% range for the total corporation vs. a 3.2% comparison. Analysts are bumping up our 2nd quarter 2004 estimate to $0.61 from $0.60 and full year 2004 estimate goes to $2.38 from $2.36. Analysts are also raising 2005 EPS estimate to $2.72 from $2.70. Comp comparisons are 2.1% in May, 2.7% in June and 4.6% in July. Analysts are estimating 2nd quarter 2004 U.S. comps of 5.0%, comprised of a 5.0% increase at the Wal-Mart stores division vs. a 3.1% comparison and 5.0% comps at Sam’s Club vs. a 3.6% comparison. May comps are planned up 4%-6% vs. a 2.1% comparison, and comps are trending in line with plan month-to-date.

High energy prices are pressuring WMT both on the expense side, with utilities costs now expected to run 5% above the original plan for the balance of 2004, and sales line, with gasoline prices negatively hurting consumers by an average of $7 a week. However, an improving jobs picture and real incomes should help mitigate high energy prices. Wal-Mart has not yet seen a pick up in spending by lower income households as indicated by the mid-month paycheck cycle which remains pronounced. Revised comp estimate for

2004 is 4.7% (vs. prior 4.5%), and are not expecting Wal-Mart to gain any leverage on expenses this year due to higher healthcare, workers’ compensation and utility costs. However, expecting gross margin expansion due to better management of apparel inventory and benefits from global sourcing. Note that gross margin comparisons ease in 2nd half 2004, particularly in 3rd quarter vs. gross margin declines a year ago.

Media . . . SunTrust Robinson Humphrey upgrades Roxio to Neutral from Reduce based on their assumption of a stabilizing and profitable software biz, as well as their belief that Napster is in the early stages of what could be tremendous growth.

The Washington Post reports that Yahoo officials said that the market for Internet searches will grow from $3 billion to $11 billion over the next 5 years, as computer users increasingly look for more local and product information online. Even as Internet searches continue to grow in popularity around the world, Yahoo executives said the big money to be made in the near term is by linking computer users with more retailers, restaurants, dry cleaners and other businesses located nearby. Already, 20% to 25% of online queries have some local component, and Yahoo is planning to introduce greater capabilities for company's to advertise locally in the coming months. "We think now is the right time to go after the local market," said Ted Meisel, president of Overture, Yahoo's search engine subsidiary.

Outsourcing . . . Jefferies on Indian IT consulting: The upset victory by the Liberal Congress Party has generated speculation that the new government could be more protectionist. With the rupee down the last few weeks, and no need for foreign investment in order to grow. the firm says Indian IT companies are less vulnerable to potential changes in economic policy. Jefferies says that while the new government could be less pro-business, India-based IT services firms are intact and potentially improving... Major Indian IT names: Infosys, Satyam, Wipro.

Network Equipment . . . Buckingham says that channel checks indicate that Avaya is displacing Cisco and beat competition from Nortel for high reliability VoIP implementations at 3 major brokerage firms, with greenfield builds for corporate headquarters. Firm believes that CSCO continues to win the low-end VoIP business for remote sites deployments, with AV supplying the backup.

Cisco authorizes up to $5 billion in additional repurchases of its common stock. Cisco's board had previously authorized up to $20 billion in stock repurchases. There is no fixed termination date for the repurchase program.

Boxmakers . . . CIBC downgrades DELL to Sector Perform from Outperform. While execution remains solid within a challenging backdrop, firm believes that factors outside DELL's control are putting structural -- and perhaps secular -- pressure on margins, which marked a 4th consecutive quarterly decline. Firm says intensified pricing from large competitors and rising component costs combine for a squeeze which they do not see abating, as their perspective in semi and FPD markets points to more shortages through 2H04; firm also notes that the stock trades at a 52% premium to the S&P 500.

Analysts are somewhat disappointed with DELL's $100 million revenue upside to $11.54 billion, which was offset by a challenging component environment that drove gross margins lower than expected. Gross margin came in at 18.1% versus 18.3% expectations, resulting in no EPS upside which most market participants had been betting on. Also, Dell server revs reported an increase of 26% to $1.3 billion, which missed analyst expectations, and storage revs increased 18% y/y to about $412 million, which missed the 25-35% year/yaer growth expectations. UBS notes that the storage miss could be attributed to a mix shift, as Dell shifted its focus to selling more co-branded Dell/EMC mid-range CLARiiON systems rather than reselling some high-end EMC branded Symmetrix systems and selling its own direct attached storage offerings. Regarding EPS guidance for 2nd quarter, the company had another disappointment in store, as despite guiding higher than consensus on revenue ($11.7 bln) and enjoying a lower than anticipated tax rate of 27% (versus 28%), the co only managed to guide in-line with the Street estimate of $0.29. Merrill Lynch notes that this suggests gross margin won't rebound. On a more positive side, JP Morgan notes that Dell's results provided strong evidence that PC demand remains healthy, though the component pricing environment remains difficult. Firm believes it is now clear that corporate PC demand is accelerating. At 24x their calendar 2005 EPS estimate, Dell trades at the low-end of its historical multiple range.

Semiconductors . . . Bernstein gives an update on their conversation with INTC CEO Craig Barrett; in response to the most frequently asked question since the Q1 call on April 13, Barrett said that he was comfortable with inventories at Intel and in the channel, and said that an inventory write-down was the "farthest thing from my mind" since it was due to better than expected yields, not worse than expected demand. Firm says he was very disdainful of this question, and their conclusion is that he thinks there is zero chance of a microprocessor inventory write-off. Regarding the cancellation of its next-generation "Tejas" and "Jayhawk" processors due to head dissipation, firm believes that the cancellations and difficulty Intel is having with power dissipation at 90nm make it likely that AMD will have a harder time with its R&D budget, which is one fifth as large as Intel's. Maintains Outperform rating.

Software . . . B. Riley downgrades Activision and THQI to Neutral from Buy based on valuation. In addition, firm sees difficulties ahead for the video game software publishers: with the Xbox 2 and PS3 likely to be released in 2005 and 2006. Respectively, firm expects software sales industry-wide to be down in 2005; and unlike the last console transition. The firm expects the software publishers to continue to create front-line games for the PS2 and Xbox even as the PS3 and Xbox 2 are rolled out, which should result in a slower ramp of next generation console sales than occurred in the last video game cycle.

Lesson on Which is Better . . . Stocks or Bonds?

What Is the Mean?

Forecasting seems to often assume that it is just a matter of time until history repeats itself. On average, the future will be average. The mean is the mean. Even statistical techniques that isolate dependent variables from independent variables presume a regression to the mean. But what is the relevant sample to determine what is average, what is the mean?

Ten-year U.S. Treasury issues are yielding 4.5%, about 65 bps below what they yielded, on average, over the past 75 years, and 260 bps below the average yield post-1982. (Why 1982? It’s not a totally arbitrary starting point — that year marked the beginning of a great bull market in financial assets, for both bonds and stocks.)

The “earnings yield” of the S&P 500 (i.e., the inverse of the P/E ratio and, supposedly, a popular metric at the Federal Reserve) is 4.6%. This compares with an average earnings yield of 7.5% over the past three-quarters of a century, and 5.7% average post-1982.

It’s a Real World

Yet we believe it would be foolish to argue that these “nominal” numbers will regress to their means. Why? Because it’s a “real” world. Bonds are bought for their real yields, i.e., after taking inflation into account. The same holds true for equities. Indeed, the same is true for any and all investments. In real terms, Treasury yields do not look compelling: The real 10-year bond yield

is 2.5% today versus a long-term average of 2.0% and 3.9%, on average, post-1982. Likewise, there is no compelling case for equities either: The real earnings yield is 2.6% today versus an average of 4.3% long term and 2.5%, on average, post-1982.

In contrast to today, in recent years it was only rarely the case that the stock market earnings yield was above the U.S. Treasury yield. The fact that this has not been the case recently does not mean that equities are less risky than Treasuries. Rather, the key issue is that equities offer the

potential for a growing stream of income (i.e., earnings and dividends), whereas bonds offer a static — and relatively puny — stream (i.e., coupons).

A Relative Case for Stocks Versus Bonds

Comparing stocks and bonds, the current 10 bp equity earnings yield gap makes a relative case for stocks, given that the current equity earnings yield gap is 225 bps above the post-1982 average. However, versus the long term (i.e., 1925 forward), the current equity earnings yield gap is still 145 bps below average. So which period is relevant? Which mean will the markets regress to?

The period beginning in 1925 includes the depression and World War II, times of great uncertainty. That could well account for the materially higher equity earnings yield gap over the long term (i.e., from 1925 on) than in the post-1982 period. Indeed, it was not until 1968 that the earnings yield first fell below the government bond yield, although only for a five-year period. It really was not until the 1980s that the earnings yields remained below the bond market yield.

Why has the spread moved lower? As Citigroup economist Steven Wieting has noted, the “Great Moderation” (as Fed Governor Ben S. Bernanke has dubbed it) seems to provide a possible explanation. According to this theory, as economic volatility has declined (as evidenced by the declining standard deviation of GDP growth), the inherent risk of equities has declined and, therefore, so has the equity earnings yield gap.

Also note that, until the second half of the 20th century, stock market dividend yields were actually higher than bond yields. This was not because stocks were riskier back then, but rather because a larger portion of the total return from equities came from dividends. Indeed, it was not until 1959 that the stock market dividend yield fell below bond yields. The dividend payout ratio prior to 1959 was, on average, over 62%; after 1959, the average payout was under 50%.

The Absolute Case for Equities Requires Low Inflation

Based on the post-1982 averages, in order to make any absolute case for equities today (rather than simply a relative case versus bonds), one has to assume that the key post-1982 variable of low inflation remains in place. Declining inflation has largely been attributed to above-trend productivity gains. Indeed, nonfarm productivity rose 9.5% during the third quarter of last year and averaged 4.5% overall during 2002–03 — its best two-year performance since the survey began in 1947, and the first time it exceeded 4.0% for two years in a row. These outsized productivity gains have, in turn, suppressed resource utilization and inhibited job growth.

To be sure, fourth quarter productivity declined to 2.6%, which may have contributed to the surprisingly strong addition of 308,000 to March nonfarm payrolls, as well as to upward revisions to the prior two labor reports. Moreover, bellwether economic indicators such as the core CPI and the GDP price deflator have risen, and the personal consumption deflator — a measure of inflation tied to consumer spending favored by the Fed — rose at its fastest pace since the third

quarter of 2000.

Despite renewed inflation fears fueled by these reports, Fed Chairman Alan Greenspan and other members of the FOMC have been quick to state that concerns about broad-based inflationary pressures are unwarranted given the still considerable slack in the economy. Expect new efficiencies fostered by technology and the growing integration of a global workforce to help sustain relatively high productivity gains longer than in past economic cycles.

Of course, reinflation, or fears thereof, could take a toll on both the stock and bond markets. Or would it? Clearly any reinflation would be a negative for bonds. But could a little inflation actually be good for stocks?

In theory, the lower the inflation rate, the lower the rate at which future growth is discounted; therefore, the lower the required earnings yield and the higher the P/E ratio. (The P/E ratio is the inverse of the earnings yield.) But, in fact, the equity market has historically had a “sweet spot —” i.e., where earnings yield is lowest and P/E is highest — when inflation has been between 2% and 4%. Understandably, high inflation has been a negative, but so has low inflation/deflation. Why? Possibly because deflation, and fears of deflation when inflation fell to very low levels, threatened the future growth of profits.

So does that mean that reinflation from today’s low levels to the 2%–4% “sweet spot” would drive stocks higher? Not necessarily — not if stocks are already valued to reflect that higher inflation level. Indeed, current earnings yields (and therefore P/E ratios) seem to be already at levels commensurate with inflation rates that are higher than those currently prevailing.

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6:28PM Weekly Wrap: For the third week in a row the major indices closed the week with a loss. As was the case in the prior two weeks, the negative disposition was a by-product of concerns surrounding rising interest rates, higher inflation, escalating energy prices, and developments in Iraq that hit an an appalling low this week with the videotaped beheading of an American man at the hands of an al-Qaeda operative.

Against such a backdrop, who can blame investors for sitting on the sidelines? Certainly not us; in fact, we suggested last Friday that the sidelines were the safest place to be. For the most part, we still think that's the case, but there were some signs this week that participants were beginning to wade back into the investment waters.

To that effect, the market looked rather ugly on Wednesday with the Dow, Nasdaq, and S&P down 167, 52, and 19 points, respectively, at their worst levels of the session. An afternoon rally, however, kicked into gear, and by the closing bell, the Dow and S&P were showing slight gains while the Nasdaq pared its loss to just 6 points.

Additionally, it wasn't lost on technicians that the S&P 500 closed the week on an upbeat note after finding support at its 200-day simple moving average during the early sell-off on Wednesday. That key support level is currently 1079.28, and at the moment, the S&P 500 is the only one of the three major indices to remain above its 200-day moving average. As such, traders will be keeping a close eye on that line in the sand. The successful defense of that floor this week, though, could prompt some follow-through activity on Monday barring any surprises over the weekend.

Another development that may very well foster some dip buying activity was the performance of the 10-yr note on Friday. Struck by a slightly higher than expected print in core-CPI (+0.3% vs +0.2% consensus), the yield on the 10-yr note hit its highest level (4.90%) in nearly two years soon after the release. Its fortunes turned on a dime, though, with a short-covering rally that drove the yield back down to 4.77%. The striking reversal could foster a sense that the Treasury market is coming around to the idea that the Fed's expected tightening has been priced in already. Suffice it to say, if there is some stability, or some recovery, in the Treasury market, the stock market's fortunes should improve.

That consideration showed up in some of the leadership groups this week as a number of them were the same rate-sensitive groups that have been undercut during the 10-yr note's trek from 3.88% to 4.90%. Those groups included, but were not limited to, thrifts & mortgage, apparel, investment banking, aluminum, paper products, building products, REITs, banks, and homebuilding. There wasn't any discernible pattern among the laggards, but several defensive-oriented groups like drugs, drug store, soft drinks, distillers, and tobacco underperformed the market.

Tobacco (-9.72%) got smoked in a manner of speaking after the Florida Supreme Court ruled that it would review an Appeals Court decision to throw out the $145 bln verdict in the Engle class action case. The next worst-performing S&P industry group for the week was Computer Storage & Peripherals (-3.25%). Tech groups, in general, failed to provide much inspiration as neither Cisco (CSCO) nor Dell's (DELL) solid earnings reports, nor increased guidance from Qualcomm (QCOM), provided the sector with much of a spark.

Sparks were flying in the energy pits, though, as ongoing concerns about supply shortages/disruptions entering the busy summer driving season in the U.S. sent oil prices to a record high. Crude oil for June delivery ended the week at $41.38/bbl. Rising energy prices also upset international markets, particularly Japan, which is also battling concerns about a slowdown in China. The Nikkei dropped 5.2% for the week, with the yen falling 1.8% against the dollar.

On the economic front, worries about inflation were stoked with the PPI and CPI reports, but overall, the data continued to point to an improving economy. Industrial Production for April increased 0.8% (consensus +0.5%) while Capacity Utilization was 76.9% (consensus 76.7%). A rate closer to 80.0% is consistent with inflation in the industrial sector.

Next week, economic data should fade into the background as there are only a handful of releases. As for earnings reports, they have grown progressively lighter since their peak a few weeks ago. Nonetheless, there will be some reports of interest out of the retail and technology sectors, as Applied Materials (AMAT), Hewlett-Packard (HPQ), Home Depot (HD), JC Penney (JCP), and Gap, Inc. (GPS) are among the companies on the docket. --Patrick J. O'Hare, Briefing.com

 
 Index   Started Week   Ended Week   Change  % Change   YTD  
 DJIA        10117.34    10012.87   -104.47    -1.0 %  -4.2 %  
 Nasdaq       1917.96     1904.25    -13.71    -0.7 %  -4.9 %  
 S&P 500      1098.69     1095.70     -2.99    -0.3 %  -1.5 %  
 Russell 2000  548.56      543.76     -4.80    -0.9 %  -2.4 % 

12:38PM INTC: Color on analyst meeting 27.10 -0.34: Bernstein gives an update on their conversation with INTC CEO Craig Barrett; in response to the most frequently asked question since the Q1 call on April 13, Barrett said that he was comfortable with inventories at Intel and in the channel, and said that an inventory write-down was the "farthest thing from my mind" since it was due to better than expected yields, not worse than expected demand. Firm says he was very disdainful of this question, and their conclusion is that he thinks there is zero chance of a microprocessor inventory write-off. Regarding the cancellation of its next-generation "Tejas" and "Jayhawk" processors due to head dissipation, firm believes that the cancellations and difficulty Intel is having with power dissipation at 90nm make it likely that AMD will have a harder time with its R&D budget, which is one fifth as large as Intel's. Maintains Outperform rating.

7:21AM Semi equipment sector initiated at Schwab Soundview : SoundView initiates the semiconductor equipment and manufacturing sector. The firm's analysis suggests that despite a 45% yr-over-yr equipment spending growth in 2004, aggregate wafer capacity growth remains about in-line with end-market unit growth at 15%. Overcapacity is unlikely if 2005 capital spending growth remains at 25% yoy. Front end equipment picks are LRCX and NVLS, its top back end equipment pick is TER and its top foundry pick is TSM. See up/downgrades page for full list of initiations.

6:25AM Cisco Systems authorizes $5 bln in additional stock repurchases (CSCO) 21.76: Co authorizes up to $5 bln in additional repurchases of its common stock. Cisco's board had previously authorized up to $20 bln in stock repurchases. There is no fixed termination date for the repurchase program.

12:37PM Analog Devices (ADI) 46.67 +0.62: Analog Devices posted Q2 EPS after the close on Thursday. EPS came in at $0.39 on $678.53MM (+35.2% Y/Y) vs. consensus at $0.35 on $664.06MM.

The company saw growth across all major market segments, particularly from the consumer electronics and industrial markets. The company is increasing content per system in digital cameras, digital TVs, projectors and other audio/video products. The following table shows sequential revenue growth by market segment. Market Segment % of Sales Q/Q Growth
Industrials 35-40% 15%
Communications 35-40% 10%
Computers 15-20% 5%
Consumer 10-11% 21%
Analog revenue (80% of sales) increased 40% Y/Y, driven by converters (+40% Y/Y; 40% of analog sales) and high-performance amplifiers (+29% Y/Y; 20% of analog sales). DSP revenue increased 20% Y/Y, driven by wireless and general-purpose DSPs, offset by a decline in DSL due to supply constraints.

Asia/Pacific accounted for 37% of sales; North America 24% of sales; Japan 20%; Europe 19%.

Backlog increased 20% Q/Q to $571MM. Turns business accounted for approximately 40% of sales.

Gross margin increased 469 bps Y/Y to 59.2%. Operating margin increased 984 bps Y/Y 28.0%. Improvement reflects scale efficiencies as ADI ramps internal fabs, product mix shift and cost containment. Pricing was stable. Capacity utilization is in the 70-75% range.

The following table shows price multiples and Y/Y growth rates for ADI compared against industry comps within the semiconductor group. Company *P/SG **P/OPG P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Analog Devices (ADI) 6.0 20.2 11.4 10.6 8.3 10.7% 22.9% 27.1%
Cirrus Logic (CRUS) 2.9 (19.6) 2.9 2.3 1.9 (32.3%) 27.0% 19.9%
Linear Tech (LLTC) 7.1 15.6 16.1 15.3 11.2 26.4 27.2% 36.5%
Maxim Integrated Circuits (MXIM) 6.1 17.7 11.8 10.8 8.0 15.4% 24.8% 35.2%
National Semiconductor (NSM) 2.5 29.0 4.1 3.8 3.1 10.2% 17.5% 22.0%
STMicroelectronics (STM) 1.5 59.2 2.5 2.1 1.9 16.2% 22.9% 13.8%
Texas Instruments (TXN) 2.5 26.2 4.2 3.4 3.0 20.9% 32.1% 15.5%
Semiconductors 2.5 31.0 4.2 n/a 18.1% n/a
*Normalized P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of May 7, 2004.
**Normalized P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of May 7, 2004.

Management's goal is to grow revenue at 2x the industry average while constraining operating expense growth below revenue growth. Operating model calls for gross margin in the 60% range, operating expenses in the 25% range, and operating margin in the lower to mid 30% range.

The company is seeing strong demand for broadband access products, cellular phones and wireless base stations. Blackfin is expected to be a major contributor to revenue. Company continues to make progress in developing Blackfin and TigerSHARC in wireless and across a broad range of general-purpose applications. Blackfin secured several design wins during the quarter for EDGE-based handsets slated for market in late 2004 through 2005, as well as in IP set-top boxes where Blackfin replaces several ASICs for decoding multiple video algorithms. There are approximately 5K customers evaluating and over 1K active design ins. TigerSHARC is designed into Ericsson's new 3G wireless basestation.

Guided for Q3 EPS of $0.43-0.45 on $725-745MM (+39.3-43.2% Y/Y) vs. consensus at $0.39 on $700.54MM. The company is 78% booked to the mid-point of guidance for the quarter based on current backlog.

ADI shares are, based on our inverted EVA/DCF model, priced for sustained upper 20% revenue growth from F06 assuming 34% operating margin.--Ping Yu, Briefing.com

9:22AM LTX Corp (LTXX) 10.14: LTX Corp designs, manufactures, markets and services semiconductor test solutions. The company reported Q3 EPS of $0.07 on revenue of $70.333MM (+144.4% Y/Y) vs. Reuters Research consensus at $0.07 on $70.25MM.

IDMs accounted for 74% of bookings and 81% of revenue; contract tests and fabless companies accounted for the balance. Products accounted for 91% of bookings and 87% of revenue; services accounted for the balance.

Gross margin increased 2,315 bps Y/Y to 41.6% due to higher volumes and shift to new products. Operating margin improved Y/Y from a loss to 7.2%.

The following table shows price multiples and Y/Y growth rates for LTXX compared against industry comps within the semiconductor capital equipment and electronic instruments & controls groups. Company *P/SG **P/OPG P/S Revenue Growth
TTM 2005E 2005E TTM 2004E 2005E
LTX (LTXX) 2.4 (10.6) 3.0 2.4 1.5 76.5% 113.0% 63.1%
Agilent (A) 1.4 (32.9) 2.0 1.8 1.6 4.9% 13.7% 11.8%
Credence Systems (CMOS) 2.1 (11.3) 3.4 2.0 1.5 28.6% 102.1% 34.6%
Teradyne (TER) 1.9 (64.3) 2.8 2.0 1.7 10.7% 52.5% 14.7%
Semiconductor Capital Eqpt 2.4 532.4 3.0 n/a (3.7%) n/a
Electronic Instruments & Controls 0.7 265.8 0.9 7.2%
Blended 1.0 312.2 1.2 5.1%
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of May 7, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of May 7, 2004.

Management believes recent performance reflects a strong start to a sustained up cycle. The company exited the quarter with a book-to-bill of 1.1. Guided for Q4 EPS of $0.12-0.14 on $77-80MM (+128.5-137.4% Y/Y) vs. consensus at $0.15 on $81.58MM.

LTXX trades in line with industry comps after pulling back over 38% since April and 48% since January. Shares are, based on our inverted EVA/DCF model, priced for sustained lower 20% revenue growth from F06 assuming 15% operating margin. Implied growth rate drops to lower teens range assuming 20% operating margin (eight year peak is ~18%). Expectations priced into shares remain high despite sharp devaluation. Shares may track higher on a short-term rebound but upside is unsustainable.--Ping Yu, Briefing.com

9:06AM DELL (Dell) 35.87: Dell reported Q1 results after the close on Thursday. EPS came in at $0.28 on revenue of $11.540B (+21.1% Y/Y) vs. Reuters Research consensus at $0.28 on $11.350B.

The following table shows Y/Y unit and revenue growth by geography. Geographic Market Y/Y Growth Revenue $ in B % of Sales
Unit Revenue
Americas Business 18% 16% 5.758 50%
U.S. Consumer 22% 18% 1.738 15%
EMEA 37% 31% 2.653 23%
Asia/Pacific/Japan 38% 31% 1.391 12%
Total 25% 21% 11.540 100%
Management estimates the company widened its worldwide market share by 260 bps to 18.6%, 3.1 points ahead of closest competitor.

The following table shows Y/Y unit and revenue growth by product segment. Software & Peripherals revenue increased 39% Y/Y. Services revenue increased 41% Y/Y; $3.0B annual run-rate. Product Segment Y/Y Growth
Unit Revenue
Desktop 21% 13%
Notebook 39% 24%
Enterprise 22% 19%
Total 25% 21%
Gross margin declined 37 bps Y/Y to 18.0%. Operating margin declined 14 bps Y/Y 8.4%. Gross margin compression due to component pricing pressures was partially offset by focus on growing unit revenue and controlling operating expenses.

Guided for Q2 EPS of $0.29 on revenue of $11.7B (+19.7% Y/Y) vs. consensus at $0.29 on $11.562B. Unit shipments expected to increase 24% Y/Y. Operating income to grow in line w/ revs.

The following table shows price multiples and Y/Y growth rates for DELL compared against peers in the computer systems & peripherals and computer services groups. Company *P/SG **P/OPG P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Dell (DELL) 1.6 20.3 2.1 1.9 1.6 22.7% 17.9% 15.5%
Apple (AAPL) 0.9 46.5 1.4 1.3 1.2 23.3% 27.7% 1.1%
Gateway (GTW) 0.4 (4.1) 0.4 0.4 0.4 (14.8%) 2.3% 7.3%
Hewlett Packard (HPQ) 0.6 15.6 0.8 0.8 0.7 18.4% 7.4% 6.2%
IBM (IBM) 1.1 11.7 1.6 1.5 1.4 9.7% 8.0% 6.1%
Sun Microsystems (SUNW) 0.8 (18.2) 1.2 1.2 1.2 (6.9%) (4.1%) 1.6%
Computer Systems & Peripherals 0.9 17.9 1.3 n/a 11.0% n/a
Computer Services 1.1 18.3 1.5 5.0%
Blended 1.0 18.1 1.3 8.8%
*Normalized P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of May 7, 2004.
**Normalized P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of May 7, 2004.

As we commented in the Q4 review, Story Stocks, February 12, 2004, DELL trades at a premium to direct comps and to peer groups, reflecting stable operating model, and market share and revenue momentum. Shares are, based on our inverted EVA/DCF model, priced for sustained upper 20% revenue growth from F07 assuming 8.5% operating margin. Implied growth rate drops to lower to mid 20% revenue growth assuming 10% operating margin. Revenue momentum improving but downside risk still greater than upside until company demonstrates even greater revenue momentum or traction towards 10% operating margin. We would wait for a 10-15% pullback.--Ping Yu, Briefing.com

http://biz.yahoo.com/mu/story.html

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Amateur Investors Weekend Stock Market Analysis (5/15/04)

The market tried to bounce from oversold conditions this week but really didn't have too much success. The Dow broke below its 40 Weekly EMA (purple line) this week as well as its longer term 23.6% Retracement Level (calculated from the October 2002 low to the early 2004 high) just above 9900. One of two things are possible over the next few weeks. Either the Dow will hold support near 9900 and eventually rally back to where its 10 Weekly EMA (blue line) and 20 Weekly EMA (green line) are converging at just below 10300 or it will break strongly below the 9900 area leading to a more substantial drop back to around 9400 which is at its longer term 38.2% Retracement Level (point A).



The Nasdaq is also below its 40 Weekly EMA (purple line) and appears to have a key support level near 1880. If the Nasdaq can hold support next week around 1880 and then undergo a rally look for upside resistance around 1980 which is where its 10 Weekly EMA (blue line) and 20 Weekly EMA (green line) are converging at. Meanwhile if the Nasdaq gaps strongly below the 1880 area this spells big trouble as its next support area would probably be at its longer term 38.2% Retracement Level (calculated from the October 2002 low to the early 1004 high) near 1760 (point B).



The S&P 500 so far has held support above its 40 Weekly EMA (purple line) and longer term 23.6% Retracement Level (calculated from the Octboer 2002 low to the early 2004 high). If the S&P 500 can hold support above 1070 next week and attempts to rally look for upside resistance in the 1115 to 1120 which coincides with its 10 Weekly EMA (blue line) and 20 Weekly EMA (green line). Meanwhile if the S&P 500 drops below 1070 this would likely lead to a substantial drop as its next downside support level would probably be at its longer term 38.2% Retracement Level near 1015 (point C).



As far as a few sectors the Banks (BKX) fell below their 40 Weekly EMA this week as well as their longer term 23.6% Retracement Level. If the BKX attempts to rally next week and rises above its 40 Weekly EMA look for strong upside resistance just above 96 which is where its 10 Weekly EMA (blue line) and 20 Weekly EMA (green line) are converging at. Meanwhile if the BKX fails to hold support near the 91 area then look for its next area of downside support at its longer term 38.2% Retracement Level just above 87 (point D).



The Semiconductor Holders (SMH) tried to rally this week but stalled out near 38 which is just below where their 10 Weekly EMA (blue line) and 40 Weekly EMA (purple line) are converging at. The key support area to watch next week is near their longer term 38.2% Retracement Level just above 34.50. If the SMH's break below 34.50 then this may eventually lead to a drop back to their longer term 50% Retracement Level near 31.50 (point E).



Meanwhile its been a while since I talked about the Put to Call Ratio and the Bullish-Bearish Indicator. The running 5 Day Average of the Put to Call Ratio shows that it spiked up strongly this week which means investors are beginning to worry about the longer term outlook for the market. Another thing I have noticed over the past few years is that once the Put to Call Ratio has initially risen well above 1.0 (points F) that the market will bounce for a brief period of time before heading lower and eventually making a bottom (points G) a month or so later followed by a strong upside reversal. If a similar pattern is developing now will the major averages have to trend lower before we see a significant bottom develop sometime in June.



As far as the Bullish-Bearish Indicator since 1997 most significant market bottoms (points H) have occurred when the % difference between the Bullish and Bearish Investment Advisors has narrowed and approached zero (black circles). In fact in some cases the % of Bearish Advisors was greater than the % of Bullish Advisors. Right now there is still quite a spread between the Bullish and Bearish Investment Advisors although the % difference has been steadily decreasing since early March. If this trend continues and the % difference between the Bullish Advisors and Bearish Advisors approaches zero in the weeks ahead this could be a strong signal that a significant bottom is nearing. Thus I will be watching this indicator closely over the next few weeks especially if the major averages come under more selling pressure.



How can a Premium Membership to Amateur-Investors.Com benefit you as an investor? We focus on stocks which are exhibiting favorable Sales and Earnings Growth that have developed a favorable chart pattern such as a "Cup and Handle", "Double Bottom", "Flat Base" or "Symmetrical Triangle". These stocks are then included in our "Stocks to Watch List" which gives investors a quick reference to those stocks which may provide the best buying opportunities to the long side in the weeks ahead. Each stock in our "Stocks to Watch List" includes specific Buy Prices, Stop Loss Prices (very important) and projected Target Prices. Our Performance so far in 2004 is shown below as compared to the major averages.

Performance (Long Strategy) vs Major Averages
(1/1/04-5/14/04)

Amateur Investors +26.5%
Dow -4.2%
Nasdaq -4.9%
S&P 500 -1.4%

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From Briefing.com: 7:41AM GSI Lumonics acquires MicroE Systems Corp (GSLI) 12.42: Company announces closing of its acquisition of MicroE Systems Corp, a maker of position encoders for precision motion control apps in data storage, semiconductor and electronics, industrial automation and medical markets, for an all-cash purchase price of $55.0 mln, excluding expenses.

7:22AM AMAT qtr preview at WR Hambrecht; Hold reiterated 18.54: WR Hambrecht reiterates its Hold rating on Applied Materials with a $22 target assuming that the stock should sell at 8x estimated 2005 gross profits of $2.72 per share. The co is scheduled to report its AprQ results tomorrow afternoon. The firm looks for orders of $2.20 bln, up from $1.68 bln and expects FQ3 guidance to call for a 5%-10% increase in orders, 15%-20% revenue growth, and EPS of $0.22. However, the firm believes that Applied's size and large market share will limit its future growth to a rate nearer the equipment industry average of 10%-12% as opposed to its 25% annual growth rate from 1980 to 2000.

7:18AM Eastman Kodak forms long-term agreement with Lexar Media (LEXR) 8.68: Company forms long-term agreement with Lexar Media, Inc. to gain a larger share of mkt for removable digital memory products, driven by surging demand from the mass-market adoption of digital cameras, mobile phone cameras, portable music players and other consumer electronics devices. Consumers can expect to see a full suite of KODAK branded memory cards on store shelves in Q404... LEXR will host a call this morning at 11 ET to discuss the EK pact.

6:58AM Transmeta Announces C.F.O Transition Plan (TMTA) 2.11: Co today announced that Svend-Olav Carlsen, the company's chief financial officer, plans to resign in June 2004 in order to accept a new opportunity with a privately held company. The company has initiated a search for a new CFO and is defining its transition plan. The transition date has not yet been established.

6:47AM PeopleSoft Comments on Oracle's Revised Offer (PSFT) 17.30: "Given the significant antitrust obstacles in both the United States and Europe, we do not believe Oracle's bid can be completed at any price. We note that Oracle has timed this announcement on the eve of our annual Leadership Conference, our most significant customer event for senior executives with more than 2,500 attendees. This is one more instance of what we firmly believe is Oracle's ongoing effort to damage our business. Consistent with its fiduciary responsibility, the Board will evaluate the reduced offer at a regularly scheduled board meeting later this month."

6:47AM Oracle Revises PeopleSoft Bid to $21.00 Per Share (ORCL) 11.60: Late Friday ORCL announced that it has revised its cash tender offer to purchase all of the outstanding shares of PeopleSoft to $21 per share, or approximately $7.7 billion. The previous offer was for $26 per share, or approximately $9.4 billion. ORCL also announced that it has extended its previously announced tender offer to midnight EDT on Friday, July 16, 2004.

http://finance.yahoo.com/mp/q?tqnt

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The StockCharts Newsletter:

http://stockcharts.com/commentary/archives/cww20040514h.html

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Monday May 17, 2004 Daily MarketWrap

http://www.robblack.com/rb_marketwrap.shtml

The market took a step back based on worsening geopolitics, record high oil prices, and threats of rising rates. A bomb killed the leader of Iraq's governing council and the price of petroleum threatens to slow growth in the world's biggest economy. Benchmark indexes closed at their lowest this year. Transportation stocks declined, led by Continental Airlines, on concern higher oil prices will crimp profit. Shares of retailers, including Federated Department Stores, fell on the prospect that a rise in gasoline prices and an expected increase in interest rates will cause shoppers to spend less. The S&P 500 Index dropped 11 points (-1.1%) to 1084. The DJIA slid 105 points (-1.1%) to 9906. The Nasdaq shed 27 points (-1.5%) to 1876. More than two stocks fell for every one that rose on the NYSE. Some 1.4 billion shares changed hands on the Big Board, 3.6 percent less than the three-month daily average. The S&P 500 has posted three consecutive weeks of losses and has declined 6.4 percent from its 2004 high on Feb. 11. The Nasdaq has dropped in five of the past six weeks and has retreated 13 percent from this year's high on Jan. 26.

Strong Sectors: none
Weak Sectors: hardware, internet, networking, semiconductor, software, telecom, biotech, banking, insurance, transportation, broker/dealer

Top Stories . . . Manufacturing in New York state expanded for a 13th consecutive month in May as companies added workers to meet increased demand and shipments rose, a Federal Reserve survey of factories showed. A measure of prices manufacturers received for their goods increased to a record.

The dollar tumbled against the euro, yen and 10 other major currencies after Izzedine Salim, head of the interim governing council in Iraq, was killed in a car bomb attack in Baghdad.

U.S. Treasury notes rose after bombings in Iraq and Turkey boosted demand for the safety of government debt. A government report showing foreign purchases of Treasuries increased also pushed prices higher, helping the 10- year note to its biggest two-day gain in more than two months.

Lowe's, the world's No. 2 home- improvement chain, said first-quarter earnings rose 8.1 percent as the company expanded into metropolitan areas and sales exceeded analyst forecasts.

International investors increased their holdings of U.S. government debt, corporate bonds and stocks by a net $78.6 billion in March, the smallest increase since December.

Sherwin-Williams, the largest U.S. paint seller, agreed to buy Duron, a coatings company, for about $253 million to gain 231 stores and increase its manufacturing capacity.

Lucent, the largest U.S. maker of telephone equipment, will pay a $25 million fine for failing to cooperate with a federal probe into the company's improper booking of revenue.

Quotes of Note . . . ``People are wondering what these factors will do to the pace of the recovery and what it will do to consumer spending. There will be some bumps along the way.'' said Bernie Myszkowski, who oversees $2.5 billion as chief equity officer for ABN Amro Asset.

Gurus . . . On the Nightly Business Report, money manager Bruce Steinberg recommended General Electric, Alcoa, JetBlue, and Intel. On the Rukeyser Show, recommendations on Intel, Johnson & Johnson, Amgen, Radian, Kohl's, Xerox, and Capital One. Guest Gene Hensler stressed Pepsi, Target, Pfizer, and Bank Of America.

Mike Santoli of Barron's underscores the growing use of exotic program and index trading by brokers and hedge funds, which claim an increasing level of day-to-day activity. The proliferation of hedge funds has added to the volatility. On Friday, Alexis Glick of CNBC indicated record short selling activity in these instruments.

The WSJ's "Ahead of the Tape" column discusses stocks to buy in a rising interest-rate environment. Since 2nd quarter began, only the health-care and energy sectors, according to Baseline, are up, and all the other sectors are down. The playbook is to buy consumer staples and pharmaceuticals, defensive stocks that do well in a slowing economy. According to the column, it isn't hard to figure out what won't do well. Banks that have been generating earnings by playing the steep yield curve and buying mortgage-backed securities and auto makers that have financed their customers to the breaking point must top the list. The best investors, and those who aspire to be, give the same answer they would in any environment: Buy good company's that have competitive advantages and make real, honest money. That is, besides Microsoft, which is relatively inexpensive and has Himalayan cash and underappreciated growth prospects. Something will do well. Merrill Lynch's Rich Bernstein has been arguing for some time that there is a larger secular growth story with energy stocks, based on concerns about supply. Within that larger secular growth period, there will be cycles of stronger and weaker earnings. He points out that he has never argued that energy companies aren't cyclical. A top in the latest cycle may be on the horizon. In that case, he contends investors should be moving into the higher-quality, less-speculative energy companies: the integrated giants. Exxon Mobil trades at 15.6x the earnings estimate for this year. It isn't wildly cheap, but that is a discount to the market.

The WSJ's "Heard on the Street" column discusses hedge-fund related problems. During the past year, riskier investments around the globe became investment darlings for hedge funds eagerly hunting higher returns in a low-rate environment. After such a good run across so many asset classes last year, Boston-based hedge fund Baupost Group's president Seth Klarman wrote to clients in his year-end letter: "Could virtually all asset classes be overvalued?" Hedge funds play a bigger role than ever in terms of global capital flows. More than 7K hedge funds now prowl global markets in search of investments. And these private investment partnerships, which often copy one another's strategies and move in and out of investments and regions with alacrity, are an X factor as analysts try to gauge the impact of rising rates. "In the past, [a rate increase] has been a source of instability," warns the most recent Global Data Watch from J.P. Morgan Securities. "Moves in private capital flows can be sudden and severe." Hedge funds now have about $860 bln in capital from investors. But that figure understates the magnitude of their influence, since hedge funds usually use borrowed funds to amplify their investment strategies. When rates are low, the use of leverage expands. Along with using similar strategies, many funds are using the same risk models, as are the proprietary trading desks of banks, securities firms and even some central banks. But since nearly everyone uses the same models, the probability that most funds move at the same time and in the same direction is greater. Such a phenomenon can create pile-ups at the exit door, diminishing liquidity and creating difficulties in financial markets.

Defensive . . . Barron's highlights few defensive stocks that are worth to pick up. If money flow doesn't do it for you, consider some fundamental factors pointing in the same direction. Morgan Stanley equity strategist Teun Draaisma predicts upward earnings revisions will likely top out in the next two to three months, seasonally the most sanguine time for upgrades. Actual European corporate profits won't reach a cyclical summit until the fourth quarter, but a crest in estimate revisions typically leads reported results by two quarters. A peak in the profits expectations is the "classic signal" to sell cyclicals, like metals, mining and technology stocks and buy defensives, he argues. Some of his favorite defensive picks include oil co Total, Nestle, and drugmaker AstraZeneca. Last year, just taking the Total stock dividend yield plus share buybacks produced a 7% return, he notes. It trades at a relatively undemanding P/E multiple of 14x 2004 earnings estimates, "as if oil were $20 per barrel not $40," he says. Both the Swiss food giant and the Anglo-Swedish pharmaceutical co were recently added to the Morgan Stanley recommended portfolio. AstraZeneca, meanwhile, saw 1st quarter earnings drop and is spending buckets to promote its cholesterol fighter, Crestor, but, says Draaisma, pharma remains an unloved sector and AstraZeneca has a good drug pipeline.

Barron's highlights financially strong company's that should head higher over the next 12 months. Also called Barron's 500, a unique stock ranking system, which grades how well the 500 biggest publicly traded U.S. and Canadian company's (measured by sales) have performed for investors. Barron's sixth annual survey relies on calculations made by CSFB Holt. This year's top honor goes to Boston Scientific, maker of medical devices, that earned a perfect 4.0. Placing second is Countrywide Financial, a mortgage broker, which also earned a 4.0, but for which Holt estimated a slightly lower growth rate for '04 CFROI. In third place, with a 3.75 grade, is L-3 Communications, which sells secure and specialized communications systems, many with military applications. Nos. 4 and 5, respectively, homebuilder D.R. Horton and Omnicare, a provider of pharmacy-management services, also received a 3.75 grade, but Horton had a slightly higher forecasted CFROI. Sun Microsystems, which makes computer workstations and servers, bears the dubious distinction of ranking last in this year's survey, after years of ranking near the bottom. The company's annual rev has declined in each of the past two years, and one-time profits have turned to losses. Other bottom-dwellers include grocer Winn-Dixie Stores, AT&T, Qwest Communications and El Paso, a natural-gas pipeline operator.

IPO . . . Barron's highlights Blue Nile, the online purveyor of diamonds and jewelry that hopes to dazzle investors with its IPO this week. In business only since 1999, the co has won a loyal following by selling diamonds at below-market prices, and, as an Internet vendor, not charging sales tax outside its home state of Washington. Blue Nile doesn't carry loose diamonds in its inventory. Suppliers ship stones to the co the day after a customer makes a purchase, and Blue Nile assembles and ships the end-product. The co also sells non-diamond jewelry and watches, and offers a much wider variety than any neighborhood merchant. Blue Nile's financials have grown more brilliant over its brief history. Sales swelled to $128.9 mln last year, from $48.7 mln in 2001. Operating income jumped to $11.3 mln, from a loss of $5.3 mln two years earlier. A plus: the co has no debt. In the IPO, the co will sell 2 mln shares, and existing shareholders will sell another 1.74 mln. On a positive note, senior management won't be selling. Slated for Wednesday, the offering will be sold through investment banks led by Merrill Lynch. Shares are expected to price between $17.50 and $19.50. "I will buy Blue Nile [if shares are priced in the current range] and pair it against my Zale short," says Doug Kass of Seabreeze Partners, a Palm Beach hedge fund. Kass is short the bricks-and-mortar jeweler because he expects margins to be squeezed by online competition. Kass estimates Blue Nile will earn 52 cents this year and 70- to- 75 cents in '05. Its shares, if priced within the indicated range, would sell for 25x '05 estimates. That's well above Zale's P/E multiple of 12, based on F05 ests, and Tiffany's P/E of 18, but below Amazon.com's 31. Kass believes Blue Nile's valuation is warranted because earnings could rise 40%.

Japanese . . . Japan is a primary beneficiary of the shift in the global environment from deflation to inflation. It is being pushed out of its deflation by the decline in the super-strong (deflationary) dollar of 2000, the U.S. expansion, and the increase in the U.S. inflation rate. Analysts are raising forecast for Japan’s full-year 2004 GDP to 3.4% (was 2.2%), up from 2.7% in 2003.

Inflation . . . Expect only a mild inflation in coming years. This assessment is a key variable in the outlook for a durable expansion, with strong growth in employment and corporate profits. Analysts recognize risk to this outlook if inflation spikes. For several months, the outlook will be somewhat at the mercy of the inflation data. The U.S. is the first country ever to exit a deflation while maintaining a floating exchange rate, so the inflation behavior is new territory.

• Financial markets have reacted sharply in belated recognition of the inflation problem. The Fed is probably encouraged by the smoothness of the transition. Short-term interest rates have priced in substantial rate hikes, with the Fed funds rate now expected to reach 2.5% in mid-2005 and 3% near the end of 2005. This prospect strengthened the dollar, raised bond yields and caused sharp declines in the prices of gold, commodities, equities and emerging market assets, in effect reversing much of the inflation trade of late 2003 and early 2004.

Why an inflation?

Inflation is primarily a currency phenomenon brought about when the value of a currency falls substantially.

• Prices have to adjust across borders, whether goods are readily traded or not. The arbitrage is relatively thorough, though it operates with a lag. In a floating exchange-rate environment, money supply growth rates or analyses of the slackness in the economy are not very helpful in anticipating inflation.

• The dollar weakened substantially after 9/11, reacting to negative real U.S. interest rates and concerns about U.S. growth. This created a reflation process and then, as the accommodative monetary policy continued, an inflation process

• The evidence of an inflation problem now is similar to the evidence of the deflation problem in the late 1990s. The price of gold is as far above its moving average as it was below in 1999. This indicates dollar weakness and upward pressure on dollar prices.

• Expect a piece-by-piece inflation process, the mirror image of the piece-by-piece deflation in 1997-2001. The inflation rotation has proceeded from dollar weakness to higher gold prices, negative real interest rates, higher commodity prices, inflation signs in China, and an extreme in the ISM prices paid index. Pipeline inflation pressures are already evident.

• According to the ISM index, the prevalence of price increases to manufacturers is at its highest level since 1979 (when inflation was rampant.)

• Price increases are spreading further up the inflation “food chain.” Core CPI inflation, normally the last to be hit, rose 0.3% in April, bringing year-over-year inflation to 1.8%. Combined with the 0.2% reading in February and 0.4% in March, the three-month annualized inflation rate is now 3.3%.

Why is inflation mild, but persistent?

The dollar has weakened to the point of causing a mild inflation. The graph below shows the deviation of the price of gold from its ten-year moving average since leaving the gold standard. In effect, this measures bouts of dollar weakness or dollar strength. Assuming a steady $375 gold price going forward, the upward pressure on prices should persist for several years but not be too pronounced.

Factors adding to inflation:

• With inflation now rising, real interest rates are likely to remain negative well into 2005 when the Fed funds rate will finally overtake the inflation rate.

• Expect the Fed to raise its interest rate target to 1.25% from 1% at its June 30 meeting, beginning the long process of raising interest rates to neutral. Recall that the Bank of England has its rate at 4.25%, even though it has slower growth and lower inflation than the U.S. The Fed’s most recent statement said that “policy accommodation can be removed at a pace that is likely to be measured.” This means policy will remain loose for several more quarters.

• Consequently, we expect the rebound in inflation, while modest, to be persistent. Factors holding down inflation:

• U.S. consumer price inflation didn’t slow much in the deflation process (though dollar-linked China’s did). The U.S. CPI basket is clearly sticky. We think memories of the deflation and recession will hold down price increases during the inflation. Reinforcing this, some of the excess capacity built in the late 1990s is still economically viable.

• While we think inflation will encourage higher inventory levels, the 20-year experience with disinflation will retard the transition, spreading the demand (and probably price) impact over several years. This same logic will probably keep Japan’s demand growth somewhat restrained.

• The diffusion index of items in the CPI basket shows that the dispersion of price increases is spreading but is still below the pre-deflation norm. With 70% of items rising in price in an average month, the impact on overall CPI is mild rather than pronounced.

Small Caps . . . The WSJ discusses small stocks profits, which are pegged to surge and could drive stock prices higher as the year progresses, especially if concerns about interest rates, oil prices and Iraq can subside. But, according to the paper, further out a potential problem looms. Since this year's profit growth is expected to be so high, company's will have hard time beating or even meeting those growth rates next year, and the poorer comparisons could be viewed negatively. "The outlook for this year's earnings is quite good and that should help stocks in 2004," said Bob Davidson, co-manager of Touchstone Small-Cap Growth Fund. "But there is no question earnings will slow and especially the weaker competitors could fall by the wayside in 2005." As for vastly outpacing analysts' ests, the percentage leader on the S&P 600 is NYSE-traded Ryerson Tull. The metals processor turned a profit of 46 cents a share when Wall Street was expecting 2 cents. Next up is Park Electrochemical that posted earnings of 20 cents a share compared with the 4 cents that analysts expected. The biggest miss on a percentage basis is OshKosh B'Gosh, a children's clothing and accessories retailer that lost 16 cents a share when an earnings gain of 6 cents was expected. Next is Concord Communications, a software provider that posted a loss of two cents a share when Wall Street projected earnings of one cent. According to the article, basic-materials company's, like chemicals, paper products and metals, are shining most, with earnings growth of 240% as a result of easy comparisons from last year's 1st quarter and improved global demand. The same factors are driving tech company's, the second-best performers, with earnings having grown 161%. The poorest performers are telecom company's, with 3% growth, utilities up 7% and financials up 8%.

Financials . . . Barron's cover story highlights Fannie Mae, which presents to the outside world a face of consistent earnings growth and transcendent social mission. However, the article suggests this compelling story line has frayed of late. A Barron's analysis of Fannie's accounting methods finds that, while legal, they obfuscate rather than illuminate Fannie's true financial condition, allowing billions of dollars of derivative-related losses not to be reflected on its income statement. As a result, Fannie's capital strength is less robust than the company's many fans on Wall Street and on Capitol Hill would contend. The Bush administration, meanwhile, has mounted a frontal assault on Fannie and its smaller sibling, Freddie Mac, contending that the company's high-balling growth in the residential housing market potentially threatens the financial safety of the U.S. and the global financial system. The Bush administration has failed over the past 2 years to force legislation through Congress to rein in Fannie and Freddie. According to the article, Fannie is now feeling the heat, too. Two weeks ago, Ofheo announced that the probe had uncovered evidence that Fannie had failed to follow proper GAAP in determining the size of impairment charges and rev recognition on investment holdings in manufactured- housing and aircraft-lease securities in prior fiscal quarters. Fannie subsequently argued it had done nothing wrong and will be able to avoid any restatements that, given the size of $8 bln in its manufactured-housing securities and reported $300 million in aircraft-lease paper, could be substantial.

REITs . . . El Paso Corporation has advised Crescent Realty it is planning to move all personnel from Crescent's Greenway Plaza complex, located in Buffalo Speedway submarket of Houston, to El Paso's existing headquarters in downtown Houston. As of March 31, 2004, three El Paso subsidiaries leased a combined total of 912,000 square feet in Greenway Plaza which, under current terms, which translates into 4.6% of Crescent's total annual office revenue. El Paso's move is expected to be complete by year end 2004.

All about REITs . . . Better than anticipated earnings were the theme for REITs this quarter. Although fundamentals are still weak, they are improving. In contrast, REIT stocks have tumbled as bond yields backed up on positive job growth reports in March and April. A good managers inclination is to favor those sectors with the best earnings growth propsects and total return potential.

Quarterly FFO Performance. The whole REIT coverage universe reported an average year-over-year FFO per share decline of 4.2% in 1st quarter 2004 (after adding back non-cash charges) due primarily to fundamental weakness in the multifamily and office segments. Within the REIT universe, shopping centers (FFO/sh up 7.0%), regional malls (up 5.6%), and specialty finance (up 7.4%) were the top performers.

Full Year 2004 Projections. For full year 2004, FFO per share is expected to increase a modest 0.5% for coverage universe. Anticipate that the best performance will be delivered from shopping centers (up 7.4%), industrial (5.2%), specialty finance (4.8%) and regional malls (3.9%). Multifamily and office are projected to show declines but not as significant as 2003.

REIT Bear Market. REIT stock prices climbed 13.2% but are now down 6.0% year-to-date. Given strength in the economy, it appears as though higher interest rates are on the horizon, which leads to the question whether REIT fundamentals can outpace the effects of higher interest rates on valuations. They will but not until later in the year.

Sector-Specific Trends. Within each of the REIT sectors, there were unique takeaway points gathered from the first quarter results which are explored in more detail later.

Office Trends. During the earnings season, office companies reported continued weak conditions in their markets but modestly increased activity. According to REIS, 33 of the 61 largest U.S. office markets reported negative absorption in 1st quarter 2004, (up from 19 markets in 4th quarter 2003), but positive net absorption for the nation in total, for the second consecutive quarter. With modest new deliveries, the overall national vacancy decreased 10 bps to 16.8%, the first quarterly decline since 2000, according to REIS. Effective rents fell in 46 markets, 0.7% on average to $20.29 per sq. ft. Management teams seemed encouraged by the increase in net absorption in their markets, and feel that rents are unlikely to fall much further, perhaps with the exception of select tech-oriented markets. However, most do not expect rents to rise until a fair amount of positive absorption takes place (i.e., 2005-2006). Assuming a modest economic recovery in 2004, office REITs expect occupancy to remain stable and potentially increase later in the year. With respect to rents, office REIT managers were less sanguine, and continue to expect no increase in pricing power in 2004.

Multifamily. The nine multifamily companies that covered generated an FFO per share decline of 6.0% in the first quarter of 2004 versus 1st quarter 2003, using Operating FFO as defined above. Heading into earnings season, we were expecting an average decline of 9.6%, so the results were ahead of projections. That outperformance, for the most part, can be explained by a significant variance for both Archstone-Smith and Camden, which realized unexpected non-recurring income in the quarter. In Archstone-Smith’s case, year over year FFO would have been negative if not for the non-recurring income, while Camden’s FFO grew year over year (by 4.0%) even after subtracting out the non-recurring contributions; additionally, Home Properties had year over year FFO per share growth of 3.3%. The entire apartment universe, including seven companies we do not cover, saw FFO per share decline by 4.0% in 1st quarter 2004 versus 1st quarter 2003. In addition to those companies mentioned above, Amli, Associated Estates, and Mid-America had positive year over year FFO per share growth, while United Dominion was flat. The worst performers in the quarter all come from within our coverage universe: AIMCO (negative 25.6%), Gables (negative 18.5%) and Post (negative 14.8%). Using operating FFO, analyst are projecting a more modest FFO per share decline of 2.4% in 2nd quarter 2004; analyst are calling for a 1.7% decline for full year 2004 over 2003. Heading into earnings season, we were projecting a 0.9% FFO per share decline in 2004 over 2003 coverage universe; reduced guidance in several cases led to the modest 80 basis point reduction. Looking at the multifamily universe as a whole, FFO is expected to decline by 1.5% in 2004 versus 2003.

Industrial. FFO per share for the three industrial names we cover increased 1.3% in 1st quarter 2004, versus our estimate of a 2.1% increase, which included PLD (-7.3%), AMB (-10.2%) and Keystone (+21.2%). The results were aided by easy comparisons for Keystone. Our revised 2004 FFO estimates for our coverage universe now represent a 5.2% increase over 2003, in line with prior estimate of a 5.2% increase. In comparison, FFO per share is expected to rise 8.0% for full year 2004 for the six industrial companies that we track. Revised 2004 CAD estimates reflect a 1.0% increase from 2003 for our coverage universe.

Retail. The three shopping center companies that we cover reported an FFO per share increase of 7.0% in the first quarter of 2004, which was ahead of the 1.6% that we were projecting. Kimco

outperformed, followed by New Plan. Kimco’s strong results may be attributed to solid leasing activity and occupancy gains as well as acquisitions. New Plan reported healthy rental rate growth and acquisitions outpaced expectations. This was the first quarter of same property NOI growth since 3rd quarter 2001. Equity One performed in line with our estimates as leasing was robust and the level of acquisitions were high. The 11 shopping center REITs that we track posted FFO per share growth of 9.1% in the quarter. The top performers in terms of FFO per share growth were Kimco, up 19.2%, Developers Diversified, up 16.4%, and Weingarten, up 10.7%. The two laggards were Acadia Realty, down 11.1%, and Heritage Property Trust, off 1.4%. For the full year 2004, the three shopping center REITs covered are expected to post 7.4% growth versus 8.2% for the group overall. In 2005, the expectation is for 7.5% growth for our coverage universe and 7.4% for the 11 shopping centers that we track. The nine regional mall REITs that we track posted 10.0% FFO per share growth in first quarter 2004. The outperformance was driven by Pennsylvania REIT, up 34.9%, followed by Taubman Centers, up 34.2%, and General Growth Properties, up 22.4%. CBL & Associates gained 3.4% and Simon

Property Group achieved 7.9% growth. For the two regional mall REITs in our coverage universe, we estimate 3.9% growth in FFO per share in 2004, and for the nine mall REITs, the expectation is for 7.9% in 2004 and 9.2% in 2005.

Specialty Finance. The specialty finance coverage is focused primarily on commercial mortgage REITs, which typically underwrite credit risk, not interest rate risk. For this reason, concerns over rising interest rates appear to be overblown. Fundamentals in this industry continue to be solid because origination opportunities remain strong, and there are positive spreads to be made over current capital costs. Long-term real estate debt securitization trends have created a huge playing field; while the volatile interest rate environment may reduce overall investment opportunities, it is conceivable that spreads will widen making those opportunities more attractive. Given the better than average dividend yields in the specialty finance sector, especially after the interest rate related sell-off of the past 45 days, these stocks offer solid potential total returns.

Oil & Gas . . . BJ Services upped to Strong Buy from Outperform at Raymond James based on the recent 10-15% pullback in the stock has created an attractive entry point for investors, as firm believes the fundamentals continue to support solid earnings growth. Price target $55 (25x 2005 estimate), suggesting 34% upside.

JP Morgan upgrades Noble Drilling to Overweight from Neutral, saying the combination of strong free cash flow and 9.4 million shares remaining on its repurchase authorization provides good downside support; given current inflation fears and a seemingly unstoppable oil price. The firm believes that pairing NE against Global Santa Fe or Diamond Offshore looks particularly appealing, as NE has underperformed both of these peers meaningfully YTD, but both the fundamentals and relative valuation now favor NE. Also, earnings are expected to grow 122% between 2Q04 and 4Q04. Importantly, essentially all of this gain is attributable to better asset utilization and is not at all dependent upon improvements in global day rates.

Transports . . . Prudential lowers their view of the Automakers sector to Unfavorable from Neutral, saying Fed Funds rate increases have historically had a negative impact on shares of the domestic OEMs. While firm is not convinced that upcoming moves by the Fed will materially hurt the earnings of the automakers, they believe that investors will at least initially react as they have (negatively) to prior rate increases by paying less for those earnings. Firm downgrades General Motors to Neutral-Weight from Overweight, and downgrades Ford and Daimler Chrysler to Underweight from Neutral-Weight. Firm also upgrades Toyota, as they believe the Japanese OEMs will provide a relative haven to auto industry investors in a rising Fed Funds environment.

Retail . . . Lehman upgrades Tiffany to Equal-Weight from Underweight based on valuation. The firm says that any incremental improvement in sales in Japan, while not likely to materialize until 2nd half 2004, could provide a catalyst for the stock. The firm sees the opportunity for substantial efficiencies in sourcing and distribution in 2004 and after via internal manufacturing and new facilities; U.S. sales remain robust, and current trends remain on plan thus far in 2nd quarter, making the stock more compelling from a risk/reward standpoint. Firm also notes that TIF trades at 20.5x their 2004 EPS estimate, a 27% discount to its historical median forward P/E.

Lowe's reported earnings of $0.57 per share, $0.03 better than the consensus of $0.54. Revenues rose 22.0% year/year to $8.68 billion versus the $8.49 billion consensus. The comapny expects 2nd quarter EPS of $0.89-$0.91 versus consensus of $0.88.

Limited reports earnings of $0.13 per share, in line with the consensus of $0.13. Revenues rose 7.4% year/year to $1.98 billion versus the $1.96 billion consensus. The company sees 2nd quarter EPS of $0.23-0.26 versus the consensus of $0.24. The company also announced that it has authorized a $100 million share repurchase plan. This additional repurchase plan follows the successful completion of its March 2004 tender offer to repurchase $1billion of its common stock.

Healthcare . . . Barron's highlights company's that may benefit from an e-prescription system that may finally supplant the paper prescription pad. In speeches this year by President Bush and his Medicare boss, Dr. Mark McClellan, electronic prescribing topped their lists of technology fixes for America's health-care hassles. Congress included e-prescribing pilot projects when legislating Medicare's new drug benefit. Health insurers are starting to pay doctors to install electronic prescribing systems. By the end of the summer, about 75% of the nation's pharmacies should be wired into an e-prescribing network built by the drugstore industry. If e-prescribing's time has at long last come, that is, according to the article, welcome news for little firms like Allscripts Healthcare Solutions, health insurers and prescription benefit managers, like CareMark Rx, Express Scripts and Medco Health Solutions. "A lot of people go to a retail pharmacy because we like the relationship there," says Dr. Mark Frisse, an e-prescribing expert at First Consulting Group. "But there will be a lot more going to mail order." Medicare-funded drug plans will ultimately favor mail order, predicts Dr. Frisse. A few weeks ago, the health maintenance organization WellPoint said it would pay $40 million in startup costs for 19K doctors to start using software from Allscripts or its Dallas-based rival Zix. The P/E multiple of 32x next year's EPS places Allscripts at the high end of the range for the medical software stocks like Cerner, Eclipsys or IDX Systems. But Allscripts CEO Glen Tullman sees tremendous upside, with a deal like WellPoint's suddenly giving Allscripts a chance to add some of the HMO's 19K-affiliated doctors to the 15K-20K doctors that it took Allscripts 5 years to sign.

On Thursday, May 13, HCA held its annual investor day at its headquarters in Nashville, TN. Overall, sensed a slightly more cautious outlook than last year’s guardedly optimistic tone, although we believe the company’s long-term business model and growth expectations remain intact. Most of the conference focused on the uninsured and bad debt trends, with the conclusion that HCA is not looking for improvements yet, it is still focused on stopping the bleeding at this point. To that end, the company has continued to refine how it calculates bad debt and is devoting significant efforts to improve collections. Besides bad debt, other business trends appear rather mixed, with consolidated volumes likely to remain uncertain in the near-term, and improved labor and insurance costs being offset by higher supply expense. Pricing trends appear to be holding up well, with strong Medicare and managed care increases expected. While analysts were somewhat expecting the company to announce a new share buyback program, with only $225 million left on its prior program as of the end of the first quarter. Rather, HCA reiterated is goal of reducing debt and lowering its debt to capital ratio from 55% to the low 50s by mid-to-late 2005. Overall, HCA’s current share valuation is somewhat reasonable, but not cheap. Given uncertainty over potentially worsening uninsured and bad debt trends and the subsequent impact on margins and earnings growth, analyst would like to see either a more attractive valuation multiple or a stabilization in operating trends before becoming more positive on the shares. To this point we note that our current model suggest 18% EPS growth in 2005 (off of a down year in 2004), as comparisons ease. However, we have somewhat optimistically assumed a 50bp improvement in bad debt trends and if 2005 bad debt is at 2004 levels, then 2005 EPS growth would shrink to approximately 10%.

Medical Devices . . . Oppenheimer out on St. Jude Medical following news from last Friday that the EPIC-HF, a cardiac resynchronization therapy system, would not be cleared by the FDA in May. However, the company still expects to receive product approval by the end of the current quarter. According to the firm, the delay could be significant, as it pushes back STJ's US launch of a CRT system, the lack of which has cost the company some US market share losses to Medtronic and Guidant, both of which introduced CRT systems in the US around two years ago. They are not making and changes to their full-year EPS estimate of $2.23 but note that there could be downside to earnings projection for this year if the delay in the EPIC-HF's clearance extends well into the third quarter. Firm also notes that with the stock trading 34x 2004 EPS estimate on Friday, the valuation was fully factoring in this year's gains from a successful 2nd quarter or 3rd quarter launch of CRT systems thus, the stock might weaken today. Firm maintains their Neutral rating.

Drugs . . . Prudential is out on Eli Lilly saying that the odds of company losing its Zyprexa challenge now appear to be higher than previously thought. One of the generic companies' arguments supporting patent invalidity has centered around a legal doctrine known as "public use", but this appeared to be a non-issue because of prior court precedent, further affirmed by a lower court ruling in 2003 on a different patent dispute between GlaxoSmithKline and Apotex related to Paxil (depression). LLY even cited this lower court ruling as support for its Zyprexa patent. Recently, however, the Court of Appeals for the Federal Circuit reviewed the lower court Paxil findings and issued an opinion that overturns the lower court's findings on "public use" - this creates a potentially dangerous legal precedent for LLY. According to the firm, the odds now appear higher that the way in which LLY conducted some of its Zyprexa clinical trials could indeed lead to invalidation of the patent based on "public use". They note that when the odds of a win were previously 90/10 in favor of LLY, then maybe it is now 75/25. Prudential does not believe current LLY share price fully reflects this new, increased risk.

Biotech . . . Protein Design Labs reported that its humanized antibody, daclizumab, did not meet the primary endpoint in a Phase II clinical trial in patients with moderate or severe ulcerative colitis. Steven Benner Chief Medical Officer said, "We are disappointed that daclizumab did not demonstrate a clinical benefit in this setting. Based on these findings, we do not plan to further develop daclizumab as a treatment for ulcerative colitis."

Hotel & Leisure . . . Roth upgrades Century Casinos to Strong Buy from Buy after the co reported in-line 1st quarter results. The firm believes that Womacks' casino revenue will stabilize in 2nd half 2004, they expect the co to be recommended for approval by the Alberta Gaming and Liquor Commission to be awarded a casino license in Edmonton, Alberta in the next 3-5 months, and they think that potential upside exists from a positive ruling on the company's Johannesburg casino license, which is currently being contested by the Gauteng Gambling Board in the South African Supreme Court.

CSFB upgrades Mandalay Resort to Outperform from Neutral, saying recent multiple compression (-17% off 52-wk high) and continued fundamental momentum combine to create an attractive trading opportunity; firm says that multiple Las Vegas operating momentum drivers are likely to remain in place for the next several quarters: lengthening booking curve, favorable convention and FIT mix shift, reduced third-party distributor dependency, close-to-home consumer mentality, positive currency effects, and relatively low airfares. Target is $62.

Media . . . The Financial Times reports that Viacom is in talks to buy Viva Media, the struggling German broadcasting company, in a move that would strengthen the US media group's grip on music television in Europe. People close to the talks said to the paper that Viacom was conducting due diligence on Viva Media with a view to making an offer that would value it at about 300 million. They said to the paper that discussions were at a fragile stage and there was no assurance of agreement. The talks come as Viva Media is struggling with declining ratings at its two music TV channels in Germany, which are facing intense competition from MTV.

Interesting Note from Bear Stearns on radio stocks . . . Rough "C" #1 & #2: Contrast/Cancellations. A year ago, radio was enjoying a burst of activity with the image of President Bush declaring the end of the heavier military aspects of Mission Iraqi Freedom. This year's image is Fallujah and prison abuse. This may have led to some rotation of business to June from May, especially for national advertisers. Rough "C" #3/#4: Comparables/Context. In 1st quarter 2004, companies provided guidance above their current 1st quarter pacings, expecting 1st quarter would improve. March's 10% growth brought 1st quarter above consensus; most public companies did better. In 2nd quarter 2004, companies gave guidance below internal pacings and see higher sell-outs and rates. Weekly pacing data often comes without context, which makes pacing hard to interpret. Rough "C" #5: Capitulation from Core Investors? On average, since January 1, 2001, radio stocks have seen double-digit upward/downward returns every 47 days. How many "core" investors are now unable/disinterested in the group due to its incessant volatility. Radio's weekly pacing data versus newspapers (monthly) and TV (quarterly) may contribute to the problem. Rough "C" #5: Contraction. During the last two weeks, radio stock valuations have taken a beating, down on average 16%. Multiples have contracted to those levels the industry faced in the worst of times and radio's free cash flow multiples have slipped below those of the newspaper business. Radio Can Ride the Rough "C's"! TV Should Not Suffer By Association. Radio stocks are very attractive right now. While pacing data could weaken again this week, as "comps" suggest, 3rd quarter in TV is brewing to be very big. Radio should not be left behind. TV stocks should not suffer by association with radio. BS likes the broadcast group right now.

IT Services . . . Goldman Sachs retains its Neutral view of Indian IT Services stocks after last week's surprising elections in India. The local market in India (Sensex) closed down 10% due to three factors: (1) Concerns of increased influence from the communist/left parties in the newly formed coalition govt; (2) Retail margin selling pressure. (3) FII/Hedge funds selling of Indian state owned govt sponsored industries. Assuming a worst case scenario change in taxation, the firm notes a 3-4% change in DCF fair values for Indian IT. Firm expects sector to remain volatile.... CIBC also chimes in on the election. The telecom landscape may see some impact depending on which policies Ms. Gandhi wishes to embark on. Cos from the infrastructure side with exposure to India include ERICY, NOK and UTSI For the handset market, CDMA is an emerging technology and one of the fastest growing regions for QCOM's chip sales. OEMs with exposure in India for/with CDMA or GSM are LG Ericsson, Motorola, Nokia, and Kyocera. Chip suppliers include RF MIcro, Triquint, Sawtek and Anadigics.

Smith Barney upgrades Cognizant Tech to Buy from Hold, saying the latest sell-off related to the Indian election results seems completely unjustified, as they think it is highly unlikely that the new Indian government will take steps that adversely impact the fast-growing IT/BPO industry. In addition, firm notes that the US dollar has strengthened about 4% since late March 2004, which helps the company's gross margins. Target is $56.

Telecom . . . The WSJ reports that AT&T asked the regional Bell company's to agree to a binding arbitration in an effort to resolve the dispute over wholesale rates, but the Bells rebuffed the proposal. A federal appeals court in March struck down FCC competition rules that require the regional Bell phone company's to lease their networks to rivals such as AT&T and MCI at deep discounts. Attempting to avoid industry chaos in the wake of the decision, the FCC asked both sides to reach private agreements on wholesale prices, which the Bells maintain are too low. There has been little progress to date even as the June 15 date for the court order to take effect approaches. AT&T CEO David Dorman on Friday said the company is "frustrated by the lack of progress in negotiations to date," and called for the use of arbitration to break the impasse. Parties to arbitration must abide by the final agreement. Mark Cooper of the Consumer Federation of America backed AT&T's call for arbitration. The group is concerned that higher wholesale rates could raise prices for consumers or price Bell competitors out of the market. "AT&T has realized that the Bells are not interested in a reasonable solution and has upped the ante by proposing binding arbitration," Mr. Cooper said. "This approach can provide the needed breakthrough that levels the playing field among competitors and ensures long-term competition to the benefit of consumers."

The WSJ reports that Vonage Holdings will announce today that it is cutting the price of its unlimited calling plan by 14% to $29.99 from $34.99. Vonage has 155,000 Internet phone lines and is adding 25,000 new phone lines a month. The move comes just six weeks after AT&T launched its Internet calling plan which it plans to roll out to 100 cities by year end. AT&T's unlimited calling plan costs $39.99 a month, though the company is offering it for $19.99 a month for the first six months.

Network Equipment . . . Morgan Stanley out in defense of Lucent saying the SEC is set to close its 3+ year investigation into Lucent's accounting. An already disclosed fine of $25 million is expected to be levied against LU for failing to cooperate with the inquiry. The cooperation issue stems from LU's decision to indemnify employees under investigation, something the SEC disproves of, and has since added provisions against this practice in settlement agreements. According to the firm, today's announcement should not be viewed as new information. The company announced in December 2000, that it had improperly booked approx $679 million in revenue and restated its financials. They do not view today's news as unexpected, and believe it should close the SEC investigation. While the stock may react unfavorably to the news, they do not believe that today's announcement is likely to change any of the previously disclosed information regarding the SEC's investigation.

The WSJ reports that the SEC is coming down hard on Lucent, both to deal with its alleged misdeeds and to send a clear signal that the agency wants nothing less than full cooperation from company's under investigation. The securities watchdog is expected to file civil fraud charges against Lucent as early as today for improperly recognizing $1 billion in rev and to fine it $25 million for failing to cooperate with inquiries. The cooperation issue included disputes over Lucent's indemnifying employees under investigation from some things such as legal fees, fines and penalties, a practice on which the SEC has gotten tougher. The agency will charge at least five former Lucent executives for their alleged roles in the company's accounting problems, people familiar with the matter said to the paper.

Thomas Weisel comments on the N+I 2004 trade show. The firm's main conclusion is that except for a few emerging pockets of growth (security, wireless LANs, voice-over-IP), the networking market is relatively mature and differentiation among vendors is increasingly hard to see -- meaning share gains will be critical to vendor growth. From a stock perspective, the firm comes away more positive on Adtran, Polycom, and to a lesser extent Foundry. The firm continues to be cautious on Extreme Networks and F-Five. Booth chatter reinforced the firm's view that Polycom's business trends are increasingly healthy, both due to the improving economy and the multiple new product introductions. As for ADTN, the firm says its valuation is attractive at 21x our 2005 estimate (versus growth rate of 15% and peer group median of 22x).

The WSJ reports that Nortel gave some top executives millions of dollars in cash bonuses, rather than the usual award of stock, just weeks before the company's shares plunged on a March 10 warning that earnings would have to be restated for a second time. Meanwhile, Nortel said Friday it is the subject of a criminal investigation by the U.S. attorney's office for the Northern District of Texas, Dallas division. Nortel said it received a federal grand jury subpoena to produce financial statements and corporate, personnel and accounting records as far back as Jan. 1, 2000. The Dallas investigation is in addition to ongoing investigations into Nortel's accounting by the U.S. SEC and the Ontario Securities Commission. According to a review of regulatory filings, the bonuses, awarded in Feb, were part of the company's long-term compensation plan. In past years, most recently in July 2003, the award had been granted entirely in the form of restricted stock. According to the article, this time around, when the board's compensation committee voted to award the shares on Jan. 29, it decided to give the executives half of that compensation in cash. Nortel's stock has since fallen nearly 44%, meaning that if the executives had received Nortel stock instead of cash, they would have fared far worse.

Semiconductor Equipment . . . WR Hambrecht reiterates its Hold rating on Applied Materials with a $22 target assuming that the stock should sell at 8x estimated 2005 gross profits of $2.72 per share. The company is scheduled to report its April Quarter results tomorrow afternoon. The firm looks for orders of $2.20 billion, up from $1.68 billion and expects 3rd quarter guidance to call for a 5%-10% increase in orders, 15%-20% revenue growth, and EPS of $0.22. However, the firm believes that Applied's size and large market share will limit its future growth to a rate nearer the equipment industry average of 10%-12% as opposed to its 25% annual growth rate from 1980 to 2000.

Transmeta announced that Svend-Olav Carlsen, the company's chief financial officer, plans to resign in June 2004 in order to accept a new opportunity with a privately held company. The company has initiated a search for a new CFO and is defining its transition plan. The transition date has not yet been established.

Boxmakers . . . The six-week waiting list to get a popular iPod Mini digital music player from Apple Computer is likely to get shorter by the end of the year. Hitachi’s hard disk drive unit said on Sunday that it will spend about $200 million to double the disk drive output of its Thailand factory, including the 1-inch, 4-gigabyte disk drives that are found in the iPod Mini.

Semiconductors . . . SG Cowen out on Lexar Media and Sandisk saying that based on their recent survey suggests SNDK is aggressively leading price cuts, on average about 30% since March (vs. 20% previously announced). LEXR appears to be more selective, but competitive in retailers where both brands are sold. LEXR average pricing declined 11% since March. Firm notes that PNY (a smaller player) was slow to react to price cuts, and on average has shown flat pricing since the end of March. Thus, they see the potential for further market share consolidation for SNDK and LEXR. LEXR is near a 2-year low P/E, but the firm recommends investors await signs of more stable pricing before putting new money to work. Fear of further price declines could depress P/E for some time.

Eastman Kodak forms long-term agreement with Lexar Media, Inc. to gain a larger share of market for removable digital memory products, driven by surging demand from the mass-market adoption of digital cameras, mobile phone cameras, portable music players and other consumer electronics devices. Consumers can expect to see a full suite of KODAK branded memory cards on store shelves in 4th quarter 2004.

Goldman Sachs upgrades AMD to outperform from In-Line and raises their 2005 EPS estimate to $0.99 from $0.70 (consensus $0.72). The firm believes the upside to consensus for AMD in 2004 and 2005 will come from: 1) better ASPs from the impact of 64−bit processors and Intel's less aggressive price cuts, 2) an opportunity Intel has provided AMD to sell 64−bit MPUs before Intel launches its own with Microsoft's 64−bit OS, 3) the likelihood that NOR flash (51% of rev) will contribute upside in 2nd quarter due to tight supply, the low cost architecture of MirrorBit, and aggressive transitions to 110nm and 90nm, 4) long-term improvement in interaction with enterprise customers, and 5) seasonal improvement in 2nd half 2004 PC units.

Goldman Sachs downgrades Sandisk to In-Line from Outperform; while they continue to believe there is some upside left to 2004 estimates, they believe that it is likely too late to be overweight the stock approaching mid−2004, with 2005 coming into view where NAND supply will grow more quickly. Also, firm expects a 4% oversupply environment in DRAM in 2005, which will likely have a spill−over effect on the NAND market. The firm expects that SNDK's 2004 estimates will likely peak out around $1.50, at which point greater bit shipments would likely have to be at lower average ASPs.

ThinkEquity upgrades Anadigics to Overweight from Equal-Weight and raises their target to $10 from $9; firm says recent checks indicate that an improving demand picture for ANAD and the expected strength in the overall wireless handset market could result in substantial upside to ANAD's ests for the 2H04 and beyond. Also, the progress ANAD is making in expanding into new programs with existing customers and its broadening customer base have resulted in a substantially improved long-term outlook for the co.

Software . . . SG Cowen initiates coverage on Red Hat. Having established its initial market presence via low-cost license fees, the company is rapidly shifting to a value-added subscription model that provides high visibility into revs and earnings. Firm expects revs to grow by 50%+ annually to $300 million in 2006, with GAAP EPS more than quadrupling to $0.36. However, firm believes that much of this upbeat outlook is already reflected in the stock, which has more than tripled in the past year and now commands a valuation (16x 2006 rev, 69x 2006 EPS) that leaves little room for disappointment. Firm recommends holding the shares, but would lean towards selling into strength rather than buying into weakness.

JP Morgan in Europe adds SAP to their Focust List, as they expect strong Year over Year license growth and improving operating margins to drive earnings growth, leading to significant stock outperformance.

Bear Stearns upgrades BEA Systems to Peer Perform from Underperform based on valuation; having fallen 23% since its close of $10.78 on May 13, and more than 40% since the beginning of March. The firm now believes that much of the near-term downside in the stock has been captured; in addition, while firm continues to view BEAS as a relatively solid co with a large customer base, they believe strategic issues may haunt BEAS's growth prospects over the next couple of years, and they will be watching the co closely for further signs of sales force execution difficulties and any competitive developments with IBM and Oracle.

PeopleSoft comments on Oracle's revised offer. "Given the significant antitrust obstacles in both the United States and Europe, we do not believe Oracle's bid can be completed at any price. We note that Oracle has timed this announcement on the eve of our annual Leadership Conference, our most significant customer event for senior executives with more than 2,500 attendees. This is one more instance of what we firmly believe is Oracle's ongoing effort to damage our business. Consistent with its fiduciary responsibility, the Board will evaluate the reduced offer at a regularly scheduled board meeting later this month."

Late Friday Oracle revised its cash tender offer to purchase all of the outstanding shares of PeopleSoft to $21 per share, or approximately $7.7 billion. The previous offer was for $26 per share, or approximately $9.4 billion. ORCL extended its previously announced tender offer to midnight EDT on Friday, July 16, 2004.

Hot Items - Check out the "Hot Items" page (updated daily)


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Go International!
By Jay Kaeppel, Optionetics.com
5/18/2004 6:45:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10406

Every once in awhile the average investor comes across an advertisement or a column telling them of the importance/necessity/advantages/etc. of investing in foreign stocks. The arguments usually involve diversification and/or opening oneself up to investment opportunities around the world that you won’t get by just holding IBM and GE.

At first blush it all makes a lot of sense. The only problem is that most investors have enough trouble trying to figure out what to do with the U.S. stock market, let alone worrying about the stock markets throughout the entire world. So the majority of investors never do avail themselves to the capital gain and/or diversification opportunities available in international stocks. And that’s too bad. On the surface it is understandable that someone might be overwhelmed at the prospect trying to figure out quite literally where in the world to invest. But if we take a closer look, maybe it’s not as hard as it seems. In a nutshell, the answer seems to be to buy the one’s that are going up. But we’ll get to that in a moment.

The Choices

The idea of building a portfolio of individual stocks of companies from all over the world is simply not a realistic option for most of us. The work involved in scanning the globe for investment opportunities is simply too overwhelming a task. As an alternative, there are mutual funds that invest in foreign stocks. They generally fall into one of two categories – global funds and country funds. Global funds can and will invest anywhere in the world. Wherever the funds portfolio manager finds investment opportunities, that’s where the fund will invest. The good news is that if the fund manager is good you will get the diversification and exposure to opportunities outside the U.S that you are looking for. The bad news is that you never really know what you are getting. The fund may be heavily invested in Asian stocks one quarter, European stocks the next and Japanese stocks the quarter after that. This may be good or it may be bad, but the problem is if it is bad, you won’t know until after the fact.

Country funds on the other hand (generally) focus their investments in a single country. The good news here is that if you happen to be in the right country at the right time you can do very well. On the flip side, if you buy and hold a country fund and that country experiences a bear market, you can suffer surprising large losses.

So what’s an investor to do? There are over twenty exchange trade funds [ETFs] available representing indices from different countries throughout the world. With a single purchase an investor can own a portfolio of Japanese companies or Swedish companies or Canadian companies, etc., etc.

So what would happen if an investor took the overly simplistic approach of simply buying the five country ETF’s that have advanced the most over the previous 12 months? Answer: something good. I ran a test using the list of country ETFs, which appears below in Figure 1. The methodology was painfully simple, as follows:

· After the last trading day of each month, identify the five ETFs that have advanced the most over the last 240 trading days. Buy and hold those five ETFs (each ETF represents 20% of the portfolio) until the end of the next month. Then repeat this process.

· If less than five funds posted an advance over the past 240 trading days, then hold that portion of the portfolio in cash (in other words, if only three funds were up over the past 12 months, buy those three funds and hold the remaining 40% of the portfolio in cash).

Ticker
Country

(EWA)
Australia

(EWC)
Canada

(EWD)
Sweden

(EWG)
Germany

(EWH)
Hong Kong

(EWI)
Italy

(EWJ)
Japan

(EWK)
Belgium

(EWL)
Switzerland

(EWM)
Malaysia

(EWN)
Netherlands

(EWO)
Austria

(EWP)
Spain

(EWQ)
France

(EWS)
Singapore

(EWT)
Taiwan

(EWU)
United Kingdom

(EWW)
Mexico

(EWY)
South Korea

(EWZ)
Brazil

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Wall Street pushed the big rock up that big hill of worry. After yesterday's bad news barrage, conditions were a lot less fearsome this morning. India bounced back and Oil prices have slipped. Retailers including Home Depot, J.C. Penney and Staples reported higher-than-expected earnings. Computer-related shares, the second-worst performing industry group of 10 in the S&P500 Index this year, accounted for one-fourth of the benchmark's advance. Yesterday, stocks slumped on concern rising oil prices and the prospect of higher interest rates will slow economic growth. The S&P 500 added 7 points (+0.7%) to 1091. The DJIA increased 61 points (+0.6%) to 9968. The Nasdaq climbed 21 points (+1.3%) to 1897. Eight stocks advanced for every three that declined on the NYSE. Some 1.4 billion shares changed hands on the Big Board, 8.7 percent less than the three-month daily average. About 1.4 billion shares changed hands on the Nasdaq, making it the lightest trading day of the year. The market is living hour-to-hour these days, but valuations draw some interest especially with robust earnings.

Strong Sectors: hardware, internet, networking, semiconductor, telecom, biotech, banking, REITs, gold, industrials, broker/dealer, transportation, steel, coal, retail
Weak Sectors: oil services

Top Stories . . . U.S. housing starts fell 2.1 percent in April, the third decline in four months, as higher mortgage rates deterred some homebuilders from beginning work on projects they haven't yet sold.

Hewlett-Packard, the world's No. 2 computer maker, said second-quarter net income rose 34 percent as demand from Asia and Europe drove revenue to a record. The shares rose after the company said second-half sales may beat analysts' forecasts.

President George W. Bush said he is nominating Alan Greenspan to a fifth term as chairman of the Federal Reserve, reflecting the central banker's ``superb job'' in guiding the U.S. economy to the fastest growth in two decades.

Marsh & McLennan, the world's largest insurance brokerage, said it agreed to buy security firm Kroll Inc. for $1.9 billion in cash.

Home Depot, the world's largest home-improvement chain, said first-quarter profit climbed 21 percent as remodeling of older stores and demand for John Deere lawn tractors helped sales. The retailer also boosted its annual earnings forecast.

Deere, the world's largest farm- equipment maker, said second-quarter profit rose 86 percent as farmers boosted spending and consumers bought more lawnmowers and utility tractors. The company raised its full-year forecasts.

Quotes of Note . . . ``The momentum is quite strong for corporate profits. There are a lot of things that will mitigate the negative aspects of interest-rate increases.'' Randy Bateman, who oversees $10 billion as chief investment officer at Huntington Capital Corp. Bateman said the S&P 500 may rise as much as 10 percent this year as gains in U.S. company payrolls bolster earnings growth. The benchmark has lost 1.8 percent so far in 2004.

Market Bottom . . . Investor's Daily says one silver lining of yesterday's sell-off was to push the market's panic button. The put-to-call ratio jumped to 0.96 from Friday's 0.80. The ratio moves higher when more option traders by bearish puts than bullish calls. Spikes over 1.0 have coincided with key market bottoms.

Short or Long-Term . . . Over the short-term conomic developments seem to play second fiddle to geopolitical events, Goldman Sachs says technology spending looks promising. The firm's IT spending survey shows rising end-market demand from top customers, leading to improved revenue, and earnings growth. They see 2004 margins averaging 15%, and notes Information Technology is more attractively valued, relative to the market, than it was in March of 2003. Those undervalued include: Microsoft, Cisco, and Dell.

Interest Rates & the Market . . . The Leuthold Group says that since 1946, the S&P 500 has risen by an average of 9.9% in the first year after the Fed's initial rate increase. And, Investech Research says the benchmark peaked before the Central Bank started rising rages only twice in the past 50 years.

India . . . Indian shares rebounded six percent from the wrenching decline the day before, as investors found value in stocks hammered by fears a new leftist-backed government would stall economic growth. The rupee was firmer, moving away from an eight-month intra-day low struck on Monday, while bonds rose as the central left interest rates on hold. "The confidence seems to be coming back, and the valuations are attractive at these levels to the long-term players, who are not as affected by the negative sentiment," said associate vice president of HDFC Securities. "It is anyone's guess if the rally will sustain, but the negative bias does not seem to be as dominant today." Software bellwether Infosys Technologies was up seven percent while Wipro rose 11.5 percent.

Financials . . . Goldman Sachs would be a buyer of Aflac in anticipation of a positive analyst meeting on Friday. At a recent meeting the firm had with the CEO, the recovery in US sales was reconfirmed and the continued margin improvement in Japan given substance. The May analyst day has been the forum where AFL adds an additional year's target EPS growth rate - this time for 2006. The firm expects that growth rate to be 15% in local currency. In addition, the co would benefit from rising interest rates particularly in Japan given the annual cash flow of 390 billion yen that needs to be invested.

The NY Times reports that an investigation into the fees that insurance companies pay insurance brokers could change a profitable business practice that reaps hundreds of millions of dollars for the brokers. The investigation by the New York attorney general, Eliot Spitzer, is advancing. Late yesterday, an investigator involved in the case disclosed that several major insurance companies had received subpoenas from Mr. Spitzer's office, in addition to the four brokers that reported last month that they were under investigation, the Marsh & McLennan Companies, Aon, Willis Group Holdings and Kaye Insurance Associates. The investigator's disclosure came after Chubb said after the close of the market yesterday that it had received a subpoena. The American International Group declined to say whether it had been subpoenaed. A spokesman for the Hartford Financial Services Group said the co had received a subpoena. The investigation is looking into potential conflicts of interest among the brokers, whose role is to arrange the best possible coverage for corporate clients at the best possible price. "This is a new round of subpoenas,'' the investigator said of those to the major insurance companies, which he said were delivered to the insurers early last week. "It's all part of the same investigation into the insurance brokers,'' he said to the paper.

Sandler O'Neill notes that Netbank reported April operating statistics yesterday, where total mortgage production increased 15.4% to $1.5 billion, however mortgage sales totaled $826 million (down 48% from the prior month) and nonconforming production was up 9.2% from March, but sales were down 4.2%. While management had initially expected 2nd quarter results to be comparable to 1st quarter. The firm says the company stated that "pricing pressure in the conforming mortgage operation and servicing net hedge performance pose additional downside risk." Firm says their 2nd quarter estimate of $0.19 is below consensus of $0.20, and says this announcement reinforces their view that NTBK's transition period could last longer than anticipated. The firm now believes that NTBK could report soft results for what will be the third quarter in a row (firm had previously thought it could be a one or two qtr phenomenon). Maintains Hold rating and $11 target.

April data indicates that Fannie Mae's retained portfolio did not grow (-$430 mil.) for the seventh month in a row. Although purchases improved ($26 billion vs. $20 billion in March), liquidations also increased offsetting the higher business volume. The decline in the retained portfolio was expected. Purchase spreads still remain relatively unattractive. Purchase commitments entered into in April were similar to March ($29.4 billion versus $28.9 billion). About $23 billion remain outstanding, suggesting that the portfolio won't grow again in May, though on the trend in

liquidations. Analysts are still optimistic that higher interest rates and interest rate volatility will result in better purchase opportunities for FNM in the months ahead. Combined with lower liquidation rates, this should lead to some retained portfolio growth. An $8.05 EPS estimate does not assume any retained portfolio growth in 2nd quarter, but does assume an improvement in the second half. Fannie's MBS portfolio grew only slightly in April (1.6% annualized) which reflects the spike in the liquidation rate (36% vs. 27% in March) that typically occurs before an increase in new issuance. Expect balances to grow more in May. FNM's duration gap widened to 3 months from 0 in March, though remained within the company's targeted range. The company also reported a slight increase in sensitivity to a 50bp rate shock and less to a 25bp shock. We don't consider these changes significant. Higher rates should create bigger problems for other mortgage investors, eventually providing FNM with improved purchase opportunities.

MBNA reported monthly managed data for April this morning in an 8-K filing. The managed loan portfolio declined, partly reflecting the appreciation of the US dollar against the UK Pound and the Canadian Dollar. The decline was also due to the decreased used of teaser rates on balance transfer offers. Credit quality continued to improve in April. The managed loan portfolio fell by $1.17 billion in April from the end of March (1% decline) to $116.4 billion.

We estimate that the strengthening of the US Dollar versus the UK Pound and the Canadian Dollar, reduced managed loans by about $815 million. However, even without the impact of the stronger dollar, estimate that managed loans would have declined by 30 bp in April. The company indicated that the decline in managed loans is at least partly due to its reduced use of teaser rate balance transfer offers. Fewer teaser rate offers should help the net interest margin, providing some offset to slower loan growth. Analysts have not yet revised our estimate that managed loans will grow by about 9% in 2004. In April, the managed chargeoff rate decreased to 4.88% from 4.98% in March. The credit card chargeoff declined by 9 bp to 4.69% and the consumer loan chargeoff rate decreased by 27 bp to 6.01%. The managed delinquency rate fell by 7 bp to 4.20%, with similar declines in the card and consumer loan portfolios. While loan balances at the end of April were lower than we had anticipated (credit card loans declined by about $200 million, adjusting for currency during the month), we are maintaining our EPS estimates, rating and price target.

Oil & Gas . . . Merrill Lynch upgrades BJ Services to Buy from Neutral, citing the recent pullback in the stock and their view that the company's outlook continues to improve. The firm believes that the company's leverage to global natural gas markets positions it for above average growth in 2004-05, and notes that global natural gas demand is growing faster than oil demand as producers seek to monetize natural gas resources around the world. Target is $50.

The WSJ reports the Pentagon says it has suspended nearly $160 mln in payments to Halliburton as part of a lingering dispute over the charge for feeding U.S. troops and other personnel in Iraq. The suspension, which Defense Department officials said was necessary "to protect the Army's financial interests," could complicate the provisioning of troops in Iraq if it disrupts payments to Halliburton's many subcontractors who cook and serve about 300K meals a day. Some Defense officials suggested the financial cost to Halliburton's Kellogg Brown & Root unit could increase substantially as the two sides feud over the bills for feeding U.S. personnel.

Goldman Sachs upgrades their view of the Integrated Oil, E&P, R&M sector to Attractive from Neutral, as they see the potential for the stocks to rally 30-40% to peak valuations versus an estimated 10% trading downside risk. Although their 2004 EPS estimates are broadly in-line with consensus, their 2005 EPS estimates are approx 25% above consensus on average. The firm now sees the risks to their $30/bbl forecast for 2004 and 2005 as skewed to the upside given greater confidence in the sustainability of Chinese oil demand growth, demand elsewhere in Asia and the US, ongoing geopolitical turmoil, and generally tight supply; in terms of timing, firm no longer believes that a correction in oil prices to below $30/bbl is likely this spring.

Metals . . . Alcan Aluminium announced its intention to pursue a spin-off to its shareholders of substantially all of the rolled products businesses held by Alcan prior to its acquisition of Pechiney. The proposed distribution will create the world's largest aluminum rolled products company.

Paper . . . Goldman Sachs reiterates its Attractive sector view of the paper stocks as recent data points and conversations support the view that the cyclical upturn in papers is underway. This view is based on: (1) April preliminary printing/writing paper shipments increased 5.2% Year/Year; (2) Pulp & Paper Week reported higher uncoated free sheet prices in May; and (3) participants (both buyers and sellers) at the Market Pulp Conference last week expect pulp and paper markets to tighten further in 2004. The firm continues to like DTC, SPP, and IP because of their leverage to paper and upside to peak value.

Transports . . . Air Tran Holdings finalized an agreement for six more Boeing 717 airplanes to be delivered in 2005. The six aircraft represent the exercise of four options and firm orders for two additional aircraft, and the announcement comes only a few weeks before AirTran Airways accepts delivery of the first of 100 new Boeing 737-700 aircraft. AAI already operates the youngest all-Boeing fleet in U.S., currently flying 76 Boeing 717s with an average age of three years.

Legg Mason says strong economic growth is combining with a strong freight market to create opportunities. The US freight market is strong across-the-board, as the Cass Freight Index (shipment volumes) is up 12.9%, year-over-year, in March, air cargo traffic comps are up domestically and internationally, railroad carload and intermodal container load traffic are both up over last year, West Coast port traffic is up double-digits, and the American Trucking Associations' truck tonnage index is up double-digits as well. The firm highlights some of its Buy recommendations: Heartland, JB Hunt, Knight Transportation, Old Dominion Freight, Burlington Northern.

Industrial Equipment . . . Deere reported earnings of $1.88 per share, $0.13 better than the consensus of $1.75. Revenues rose 43.6% year/year to $5.30 billion versus the $4.87 billion consensus. Company sees 3rd quarter sales growth of approximately 25-27% year/year.

Defense & Aerospace . . . TASER announced four significant orders for TASER conducted energy weapons. The three Florida orders include a purchase by the Tampa Police Department of 515 TASER X26 units; a purchase by the Hillsborough County Sheriff's Office of 500 TASER X26 units; and a purchase by the Pinellas County Sheriff's Office of 250 ADVANCED TASER M26 units. In addition, the Charlotte-Mecklenburg Police Department in North Carolina purchased 197 TASER X26 conducted energy weapons and accessories. The four purchase orders total over $1.2 million.

Northrop Grumman confirms 2004 and 2005 financial guidance today at its Annual Meeting of Stockholders. Consistent with previous guidance, the company expects 2004 sales of approx $28 billion and EPS from continuing operations are expected to range between $5.60-5.90 ($2.80-2.95 after two-for-one split) versus the consensus of $28.6 billion and $5.90, respectively. Net cash provided by operating activities for 2004 is expected to total approx $1.5 billion. For 2005, co expects sales of approx $30 billion ( consensus $30.6 billion), continued margin expansion and solid double-digit growth in EPS. The company expects 2005 cash provided by operations to be between $1.8-2.0 billion.

CE Unterberg comments on ID Systems' passing of a series of key tests administered by the FAA and TSA yesterday. The system is being used to control and secure ground service equipment in and around the Newark airport. With the test successfully completed, IDSY has now been granted additional funding for a more expanded rollout covering up to 150 fuel trucks, baggage carts, plane tugs and other Port Authority vehicles. With over 1 million ground service vehicles at US airports alone, this represents a potential market of over $2 billion. The firm believes that IDSY has established a meaningful lead in this market and is well positioned for further funding and rollout. The firm raises its target to $14.

Education . . . SunTrust Robinson Humphrey upgrades Corinthian Colleges to Neutral from Reduce based on their view that the unique risk associated with the company's high allied health enrollment is now more fully reflected in the stock price. Firm notes that the stock is trading at 19.9x their 2005 estimate, well below its peer average of 27.9x as well as its own 5-year average in the mid-twenties. While they believe the co will be negatively influenced by slowing demand in the health segment, they are still unsure of the timing and magnitude of this effect; also, COCO generates around half of its rev in non-healthcare segments that should have more of a positive leverage to the economy, and therefore the co may sustain rev and earnings growth over the next several quarters that is sufficient to support a P/E valuation in the upper-teens, even if there is some relative slowing in growth.

Food & Beverage . . . The Washington Post reports that the nation's appetite for low-carbohydrate foods seems bottomless, judging by the many low-carb products showing up in supermarkets and the new menu items at restaurants and fast-food chains. And when Krispy Kreme Doughnuts recently announced slowing sales, it put part of the blame on low-carb diets. Yet the mood at a recent Washington conference on the business was bleak. Sales of low-carb products have fallen sharply at independent and health food stores, and some longtime industry insiders say a shakeout has begun. "I do think now we're on the downside of the roller coaster, and there will be ups again, but not as high," said Dean Rotbart, executive editor of industry trade publication LowCarbiz, which organized the conference. Even as they rush to cash in on the craze, some major food manufacturers say they see the phenomenon cooling down and becoming one part of the broad market for weight-loss products. "It's kind of exploded, it's a trend, and then it becomes, really, a niche," said Michael E. Diegel, a spokesman for the Grocery Manufacturers of America Inc. "That's where it looks like it's going at this point." Curtis Price, co-owner with his brother and another partner of Whoa . . . That's Lo!, a low-carb store in Silver Spring, is typical of specialty retailers feeling the pinch, with sales off 15% to 20% in the past two months. "It reached a peak, and now it's trickling off, but it's going to eventually level out," he said. "

The WSJ's "Heard on the Street" column highlights Atkins and South Beach diet related stocks that many investors have picking up recently. According to the article, now many of these stocks have climbed too high in recent months. In fact, some co's benefiting from the popularity of the Atkins and South Beach diets are beginning to look risky, some say, especially if the stock market continues to experience weakness. "Many of these stocks are expensive, and while the earnings are great, expectations are going too high," says John Romero, who runs Aptus Partners LP hedge fund. "It's all a great story, and the momentum investors have been getting in, but they'll get right back out when the companies stop increasing their earnings guidance." According to the article, overpriced stocks include: Hormel Foods, Smithfield Foods, Tyson Foods, MGP Ingredients, Hansen Natural, Cal-Maine Foods and Lifeway Foods.

Retail . . . Home Depot reported earnings of $0.52 per share, ex items, $0.09 better than the consensus of $0.43. Revenues rose 16.2% year/year to $17.55 billion versus the $17.11 billion consensus. The company sees 2004 sales growth of 10-12%. The company also raised its 2004 EPS growth guidance from 7-11% to 10-14%. Excluding items company sees 2004 EPS growth of 13-16%.

Dick's Sporting Goods reported earnings of $0.21 per share, $0.03 better than the consensus of $0.18. Revenues rose 19.5% year/year to $364.2 million versus the $360.5 million consensus. The company sees 2nd quarter EPS of $0.33-0.34, excluding $0.01 charge for store relocation consensus is $0.36.

Barnes & Noble reported earnings of $0.17 per share, $0.05 better than the consensus of $0.12; revenues rose 22.5% year/year to $1.45 billion versus the $1.47 billion consensus. The company sees 2nd quarter EPS of $0.12-0.17 versus the consensus of $0.18. For 2004 the company sees EPS of $2.19-2.26 versus the consensus of $2.25.

Goldman Sachs upgrades Rite Aid to In-Line from Underperform, primarily based on improved valuation. The firm notes that the stock has declined 25% YTD (vs a flat performance for drug retailers and a slight decline for the S&P 500), and now trades at 7.7x their 2005 EBITDA estimate, which more accurately reflects stubbornly soft pharmacy productivity gains; with robust front-end sales and gross profits driving above-trend EBITDA growth, firm sees little additional downside in the stock, but says that as long as the comp script count remains anemic, the stock will likely tread water over the next several months.

The WSJ's "Ahead of the Tape" column highlights Kmart's stock, which gained 10% on the news of its 1st quarter earnings. The company reported net income of $93 million in the quarter, compared with a loss of $862 million last year and cash on hand went up from the prior quarter. But according to the article, this isn't proof that Kmart is back. The company swung to an operating profit of $165 million from a loss of $39 million last year. Those numbers underwent several adjustments for one-time events. Since the co wrote down its property in conjunction with the bankruptcy filing, it had depreciation and amortization of $7 million in the quarter, compared with $177 million a year earlier. If you add back the latter D&A figure to last year's loss, along with a $37 million charge for restructuring taken in that quarter, one gets a $175 million profit from operations. For this year, add the $7 million in D&A and take away $32 million in asset-sale gains to the most-recent quarter's figures, and operating income was $140 million, down from last year. Using those figures, Kmart shows a modest improvement in operating margin. But since it had significant clearance sales last year, there should be. It isn't as dramatic an improvement as it appears. Kmart is hunkering down, it is reducing ad spending, raising prices and cutting its sales personnel in stores. According to the article, that isn't exactly a tried-and-true recipe for retail success. Same-store sales fell 13% in the qrtr. Other bulls think that retail success isn't why the investment will work. They want management to milk the business for cash until it can sell its underlying real estate. However, the article suggests that strategy is even more uncertain.

Lowes reported 1st quarter 2004 EPS of $0.57 vs. $0.53 last year and estimates of $0.53. During 1st quarter 2004, total sales increased by 22.0% to $8.68 billion vs. $7.12 billion last year and estimates of an increase of 18.0% to $8.40 billion, with same-store sales of 9.9% vs. 0.1% a year ago, and our estimate of 6.0%. The 1st quarter 2004 average ticket increased by 8.7% to $62.56 from $57.57 a year ago, and customer count increased slightly more than 12% during the quarter. Higher year-over-year lumber and building materials prices positively impacted 1st quarter 2004 same-store sales by 175 bps. The sales performance for the quarter was well-balanced, with every region and product category delivering positive comps. Categories that performed above average in 1st quarter 2004 included millwork, lumber, rough electrical, outdoor power equipment, seasonal living and cabinets. In addition, the tool category reported same-store sales roughly inline with the company average during the quarter. Through the first 16 days of 2nd quarter 2004, LOW has experienced same-store sales that have exceeded its 6%-7% quarterly guidance range. In 1st quarter 2004, the gross margin increased 190 bps to 33.1% of sales vs. 31.2% last year and our estimate of a 120-bp increase to 32.4%. The improvement was due to better margin rates driven by lower inventory costs and a 5-bp reduction in inventory shrink. The gross margin improvement was partially offset by a 30-bp negative impact from product mix related to strength in the lower margin lumber category. There was a 300-bp increase in the 1st quarter 2004 operating expense ratio to 24.0% from 21.0% a year ago and our estimate for a 270-bp increase to 23.7%, driven primarily by the impact of the adoption of EITF 02-16, which had a negative effect of 355 bps. Offsetting this negative factor was leverage of occupancy and other operating and administrative expenses. In addition, 1st quarter 2004 SG&A includes $18MM (or 14 bps) related to LOW’s decision to expense stock options beginning in 1st quarter 2003. The 1st quarter 2004 operating margin decreased by 100 bps to 9.1% of sales vs. 10.1% a year ago and our estimate of a decrease of 130 bps to 8.8% of sales. During 1srt quarter 2004, LOW opened 29 new stores, and closed one, to end the quarter with 980 total stores in 45 states and 111.9MM sq. ft., which increased approximately 15.1% over last year’s 97.2MM sq. ft. During the quarter, LOW opened 8 new 94,000 sq. ft. format stores, bringing the total for the year to 40 stores. In addition, during the quarter, LOW opened stores in Tucson, AZ; Las Vegas, NV; Dallas, TX; and Brooklyn, NY. For 2Q04, LOW plans to open 19 new stores, including 2 relocations.

Restaurant . . . Barron's Online highlights Panera Bread, which lost 11% last Thursday following the company's latest quarterly earnings report. Despite a 26% rise in net income for the quarter, the company's management discussed margin pressure due to the rising costs of milk and butter. Management also warned of higher labor costs as the company opens more stores. "I see limited upside," says Mathew DiFrisco, an analyst with Harris Nesbitt Gerard. DiFrisco downgraded the stock from Outperform to Neutral on Panera's 1st quarter earnings news, citing factors including the lower productivity of new stores. According to the article, the stock is looking stale. Panera traded at 34.56 late Monday, 28% off its 52-week high. While its P/E ratio is below its long-term growth rate and below its median forward P/E of 32.3 for the last five years, it is trading at a P/B ratio of 5.1x for the last five years. That's above its median P/B of 1.6x for the same time period. And its forward P/E has fallen sharply from 33x to 27x, since Barron's Online first wrote skeptically about the stock in January.

Medical Devices . . . Boston Scientific announced clinical trial data supporting the safety and effectiveness of the Enteryx procedure in relieving the symptoms of gastroesophageal reflux disease (GERD) at 24 months post- treatment. David A. Johnson, M.D., Professor of Medicine, Chief of Gastroenterology at Eastern Virginia School of Medicine and the study's Principal Investigator, presented study findings Monday showing that 67% of the patients who were dependent on proton pump inhibitors (PPIs) prior to the Enteryx procedure were no longer using these medications two years after the procedure. An additional 5% (3/64) of the patients were able to reduce their dose of PPIs by at least 50%. "Data in this study suggests that GERD symptoms can be managed effectively and safely over a two-year period using the Enteryx procedure," said Dr. Johnson. "These results support the use of Enteryx as an attractive alternative to daily medications for the relief of GERD symptoms."

QLT Inc upgraded to Market Perform at Raymond James on valuation. Price target $26.

Drugs . . . Bentley Pharm announced that its Spanish subsidiary has been granted approval to market a generic equivalent of simvastatin in the U.K. through a company focused in the UK. According to IMS, the market size of this product in the UK is approx $480 million and growing at an annual rate of approx 30%.

Barron's highlights generic drug maker stock's, which have lost some steam lately. However, the article suggests there are several reasons why the sector now looks enticing. Verdicts in several patent litigation cases this year could open the door to new generic drugs in 2005. And several companies expect to reap rewards from partnerships with other drug makers. The proprietary drug businesses that many companies launched to diversify profits continue to grow, too. "I think people overreacted [to the sell-off]," says Jeffrey Long-McGie, an analyst with Think Equity. "I think we are still in a position where generic pharmaceutical companies have a lot of rev fuel in front of them." By 2006, 40 million Medicare recipients will receive prescription drug benefits, which should prove a boon for the industry. And generics replaced their brand-name equivalents in less than half of all new prescriptions written last year, leaving lots of room for growth. "The new product flow is the lifeblood of the industry. Without that, the core business is a declining business," says Adam Greene, an analyst with First Albany. According to the article, Watson Pharmaceuticals, for one, is well positioned. The nation's largest maker of oral contraceptives should launch 12 new generic drugs this year, including six "authorized generics" as part of agreements with name-brand drug makers. Watson has 28 to 29 "authorized generic opportunities" in its pipeline. The stock trades at just 16.4x projected earnings over the next four quarters compared with a historical median of 20.4x future earnings. Another potential winner is Andrx, which is successfully leveraging its expertise in developing time-release medications to generate higher profits and limit competition. "This way you see three or four competitors instead of twelve," says Mr Greene. This year, the co expects to launch 15 new generic drugs. At 25.53, shares of Andrx trade at only 19.5x projected earnings over the next four quarters, compared to a historic median of 25.1x.

Biotech . . . Gilead Sciences granted priority FDA review for a New Drug Application for the fixed dose co-formulation of the company's anti-HIV medications Viread and Emtriva. Gilead submitted its application to the FDA on March 12, 2004 and had anticipated a decision by January 12, 2005 based on a 10-month traditional review. Under priority review, the NDA will be reviewed within six months.

Gilead Sciences upped to Outperform from Market Perform at FBR. The firm notes that in two days there have been three important catalysts for Gilead: priority review of the Viread/Emtriva co-formulation, FDA easing of requirements needed to bring co-formulations of approved HIV drugs to market, and an imminent deal with Bristol Myers that should make Gilead benefit preferentially from this FDA change of heart. Firm's price target goes to $80 from $59.

Genencor has manufactured research sample quantities of enzymes that will neutralize sarin gas and certain other organophosphate-based nerve agents. The company is providing samples to formulators for development into sprays, foams and detergents for use by military and civilian first responders, such as firefighters, police and hazardous material response teams. The enzymes were developed in collaboration with the U.S. Army Edgewood Chemical Biological Center.

Media . . . First Albany initiates NetFlix with a Buy and $36 target. The firm estimates that DVDs were in 58% of all US households, up dramatically from just 13% in 2000. This migration to the DVD format has fueled an 83% CAGR in DVD rentals over the last 3 years. While competitors such as Wal-Mart and Blockbuster could never be dismissed entirely, the competitive bar in the on-line subscription rental market has been raised, as Netflix expands its brand and gains consumer mind-share. As a result, the firm believes on-line subscription rental will be a one-company market.

First Albany initiates Ask Jeeves with a Neutral and $40 target. The firm is not convinced that Ask Jeeves can sustain its recent share gains, particularly as the larger destinations have substantially more resources to invest in both product and marketing initiatives. As a result, over the long run, the firm expects market share to consolidate around the three largest destinations: Yahoo!, MSN, and Google. In addition, the firm is wary of Ask Jeeves' reliance on a competitor-Google (about 70% of 1st quarter revenues)-and expect the economics of traffic acquisition to rationalize over time.

Piper Jaffray comments on the potential impact of Microsoft's Janus Technology on Apple's iPod. While Janus will begin to be integrated into subscription music services in 2nd half 2004, the firm does not expect Apple's iTunes or iPod revenue to be significantly impacted in the next several quarters. However, long term (late 2005, into 2006), Janus will gain momentum. The firm expects the inflection point in the portable device market to be when 20GB devices are available in the $150 range, possibly toward the end of CY05. Microsoft unveiled its Janus technology on 5/2. The firm expects services, such as Napster , to have Janus enabled offerings by the end of 2004.

Morgan Stanley upgrades Univision to Overweight from Underweight; firm cites valuation (stock has almost 20% upside to their $36 target), as well as their expectation that the Spanish language upfront should benefit from CPM pricing levels established by general market trends, and since UVN's rating share may stabilize in 2005, firm believes another 15%+ upfront is possible in deals completed in June through August.

Telecom . . . Nextel’s CFO Paul Saleh and CTO Barry West discussed the current issues and business environment facing Nextel. Investors’ main focus continues to be the Consensus Plan outcome with the FCC (potentially resolved this or next month), despite Nextel’s continued strong fundamentals. Nextel management displayed no apprehension toward customer growth or cash flow guidance, and seemed upbeat overall despite the stock weakness. The company stated that it has not been loosening credit standards, rather tightening restrictions on some credit classes. Nextel reiterated its stance against receiving 2.1GHz spectrum as another comment period and incumbent competitors could delay a transition. Investors seemed to worry about not only the potential swap outcome but also its impact on FCF. Specifically, how much for the swap and when to pay it, and then Nextel’s future technology path and expense. Nextel views the Flarion technology as more flexible and superior to CDMA EVDO at present, offering cost advantages and a 2-year lead time. Though still in early stages, the trials are providing valuable

information regarding usage, value to price proposition and customer market segmentation. 30% of subs are “mobile” users, hitting at least 7 cell sites per day. Despite the excitement with Nextel’s performance and FCF generation, the spectrum swap overhang cannot be overlooked. Analysts do not see a consensus building and believe a conclusion this month is unlikely. Given investors’ obvious focus on the swap and technology path we believe the stock will remain range bound until there is additional clarity.

Expect Vodafone to report a solid set of 2004 results with consolidated revenues of up 10.6% to £33.6 billion (consensus £33.5bn), and EBITDA up 15.3% to £12.8 billion (consensus £12.7bn), equating to a margin of 38.1%. Analysts forecast clean EPS of up 34.5% to 9.16p share, ahead of consensus of 9.0p. Lower capital expenditure, combined with growth in operating income and a

bumper dividend stream from SFR, should result in March 2004 cashflow of up 45.0% to £7,498 million, in line with Vodafone’s guidance of at least £7 billion. Lower net debt, but affected by acquisitions. Analysts forecast net debt of £9,373 million at March 2004, down from £13,839 million in March 2003. However, the proceeds from the sale of the Japan Telecom fixed line business were more than offset by the acquisition of the UK service providers, the minorities in Telecel and Panafon and the share buyback. Investors will focus on Vodafone’s use of cashflow,

M&A strategy, the progress of the Japanese business and an update on the UMTS launch. An update on guidance for the year to March 2005 (currently: high single digit revenue and subs growth, mobile margins flat to modestly ahead and capex of around £5bn) will also be closely watched. Seven potential catalysts could close the valuation discount. Consensus forecasts for March 2005 look too low; concerns about bidding for Verizon appear misplaced; France is unlikely to be a near term event; expansion is possible but impediments likely to limit activity; the buyback could be extended; Japan needs to be put into context and the network advantage of 3G will become more apparent.

IT Services . . . IBM and Cisco Systems said they will launch a joint services and product offering aimed at corporations who buy telephone services over the Internet. IBM said it would jointly market its consulting services with Cisco's voice, video and conference solutions because it wants to help develop the nascent market. IBM said that both companies will make significant investments in the area, which is seeing increasing demand from medium and large-sized corporations, according to IBM's Don Fitzpatrick, vice president of Cisco strategic alliances. "We think we have hit that inflection point. We think it's taking off," Fitzpatrick said. "We think it's a significant opportunity." The companies also will also work on making their future products and technologies in this area work better together

Network Equipment . . . The WSJ reports that a portion of the Cisco Systems software that runs most of the networking equipment on the Internet was apparently stolen and published on the Web. The apparent theft might allow hackers to exploit weaknesses in the code and could embarrass Cisco, which has a growing business helping other co's fend off cyberthreats. A Russian computer-security Web site published two snippets of software code and said they were a small portion of the 800 megabytes of code that had been stolen. According to the article, security experts said publication of the code wasn't an immediate security threat. Still, they said hackers might study the code for flaws that would allow them to disrupt or disable Cisco routers, which could have a big impact on the Internet.

Lucent awarded contracts worth more than $120 million by China Unicom for further CDMA network expansion.

ThinkEquity upgrades Packeteer to Overweight from Equal-Weight and maintains their $18 target; firm says channel checks indicate that Q2 demand remains solid, and they say their contacts have also indicated that system integrators are starting to design WAN optimization products into new network deployments and, while early, this would be a major catalyst for this space; firm also says longer-term trends (system integrator interest and strategic partnerships) will keep the momentum going in 2005.

Semiconductors . . . Amtech comments that overnight the European Patent Office released the specifics behind their decision to revoke one of Rambus' patents in February. In layman's terms, the patent was revoked because of lack of inventiveness on this particular patent. While Amtech had previously marginalized the impact of the EPO on US litigation (and continues to believe so), the rationale for revoking one of the top 4-5 patents is perhaps troublesome and ominous for RMBS. Firm maintains Hold rating.

Software . . . UBS upgrades THQ Interactive to Buy from Neutral and raises their target to $26 from $21. The think the multiple can expand throughout the year due to a better balance sheet and product lineup. The firm thinks the company's product portfolio is materially better than last year, as it has a solid kids and wrestling biz (about 65% of revs are existing brands) and they think its action-oriented games are much improved, which gives the co a well-rounded portfolio to hit all segments of the market.

Wind River reported a loss of $0.02 per share, $0.01 better than the consensus of ($0.03). Revenues rose 8.9% year/year to $52.8 million versus the $50.2 million consensus. The company sees 2nd quarter non-GAAP loss of $0.01-0.03 versus consensus of ($0.03) on revenues of $53-55 million consensus $51.2 million.

Check Point Software announces that Check Point Next Generation with Application Intelligence has passed rigorous testing to achieve the National Institute of Standards and Technology Federal Information Processing Standard (FIPS) 140-2 Level 2 certification and meets the cryptographic requirements of the US govt's National Security Telecom and Information Systems Security Policy (NSTISSP) Number 11. NIST's Cryptographic Module Validation Program (CMPV) provides module and algorithm testing for FIPS 140-2, which is a standard that applies to federal agencies using validated cryptographic modules to protect highly sensitive government data in computer and telecom systems.

Piper Jaffray thinks April video game sales tracked in-line and earnings estimates for April QuarterQ are achievable for videogame retailers. ELBO and GME are well-positioned to benefit from near-term industry catalysts including recent hardware price cuts (Xbox to $149 on 3/29 and PS2 to $149 on 5/11) and the launch of highly-anticipated video game properties such as Spiderman, Shrek, and Harry Potter.

Hot Items - Check out the "Hot Items" page (updated daily)


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Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.

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MORNING WATCH, May 20
By Frederic Ruffy, Optionetics.com
5/20/2004 6:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10429

Stocks index futures were not much changed Thursday morning. Economic news is expected to garner most of the market’s attention in early trading. Disappointing earnings news might drag down the technology sector. As a result, roughly one hour before the opening bell, index futures showed a small gain for the Dow Jones Industrial Average ($INDU) and a modest loss in the Nasdaq Composite Index ($COMPQ).

Investors will get a series of readings about the economy today. According to statistics released from the Labor Department early Thursday, the number of weekly jobless claims rose during the latest period. The report showed that the number of applications for jobless benefits rose by 12,000 from a revised 333,000 the week before. Economists predicted the report to fall towards 330,000.

Bonds moved higher on the news, and the yield on the benchmark ten-year Treasury note fell. The report might therefore temporarily ease some of the interest rate jitters that have spooked investors lately, which could also help push stock prices modestly higher early Thursday.

In other economic news today, the index of leading economic indicators is due out at 10:00 a.m. ET and, after rising .3% during the month of March, is expected to increase by .2% in April. The Philadelphia Fed Survey is due out at noon. Economists expect the widely watched gauge of manufacturing activity to produce a reading of 31, compared to 32.5 in April.

Technology stocks are likely to trade actively following disappointing earnings news from Intuit (INTU) and Ciena (CIEN). Software maker Intuit warned that its fiscal fourth quarter loss will be wider than previous estimates. Ciena is expected to fall after the company said its second quarter loss totaled 9 cents a share. Analysts were expecting the marker of fiber optic equipment to show a loss of 8 cents a share.

Elsewhere in the networking sector, Tellabs (TLAB) might fall on news that it will acquire Advanced Fibre (AFCI) for $1.9 billion in cash and stock. The deal values AFCI at $21.25 a share, and up 25% above yesterday’s closing price. Brocade (BRCD) is expected to trade higher after the maker of switches for data storage networks said job cuts help the company narrow its quarterly loss to only 1 cent a share, compared to 57 cents a year ago.

In the options market, traders will be adjusting positions ahead of Saturday’s option expiration. Today is the last day to trade many index option products. Friday represents the last opportunity to trade any remaining contracts. Therefore, options strategists will be using the next two days to close out or roll forward any options positions that involve May 2004 options contracts, which could also cause volume and volatility to rise.



Frederic Ruffy
Senior Writer
Optionetics.com ~ Your Options Education Site

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U.S. stocks ended little changed in light trading as a pullback in crude prices and a drop in bond yields was balanced out by a weaker-than-expected reading on manufacturing activity in the Philadelphia region. The DJIA was down less than a point for a close of 9,937. The Nasdaq Composite dropped 1.53 points to 1,896 while the S&P 500 was flat at 1,089. Technology stocks limped to the finish line as the sector closed with weak results. Double-digit percentage declines came from the likes of Tellabs, Ciena and Intuit and outweighed slight gains elsewhere in the sector. Still, the most noteworthy statistic from today's action is the extremely low volume figure of 1.2 billion shares traded on the NYSE. There are no economic releases tomorrow although it is an options expiration day.

Strong Sectors: REITs, printing services
Weak Sectors: computer networks, construction, mining, gold

Top Stories . . . Gap, the biggest U.S. clothing chain, said first-quarter earnings climbed 54 percent as shoppers bought more apparel such as women's Capri pants and men's wrinkle- resistant khakis at full price.

The number of Americans filing initial claims for unemployment insurance unexpectedly climbed to 345,000 last week, the second straight rise.

The index of leading U.S. economic indicators rose 0.1 percent in April as stock prices, Treasury yields and money supply rose. That followed a revised March increase of 0.8 percent, the biggest gain since May 2003.

The dollar rose against the euro and 11 other major currencies before a Federal Reserve report that economists predict will show manufacturing in the Philadelphia region expanded for a 12th month, reinforcing the case for higher U.S. interest rates.

U.S. Treasury notes rose for the first day in three after the number of people filing first-time claims for state unemployment insurance unexpectedly increased.

Richard Strong, founder and former chief executive of Strong Capital Management Inc., reached an agreement with New York State Attorney General Eliot Spitzer to settle allegations of improper trading.

Bonds Buyer . . . Talking about rates, Bill Gross, who runs PIMCO, says inflation related to Treasury debt is a relatively cheap way to protect against a rise in consumer prices. The difference in yield between regular 10-year Treasurys and 10-year tips have widened to 2.76 percentage points, the biggest gap since the U.S. began selling these instruments in 1997. The differentiation represents the expected inflation rate over the life of the notes. He is also buying the debt of Germany, and other euro nations where inflation has a lesser bias.

Oil & the Consumer . . . As for the impact of rising oil on the consumer, Bruce Lanni of AG Edwards says spending by Americans at gas stations would need to more than double to equal the percentage of personal disposable income spent in the years 1979 to 1981, when the Iran crisis triggered soaring oil prices. He said prices would have to rise to $3.00 a gallon to begin curbing consumer demand.

Bad News is Good News? . . . The New York Times Financial Page has a feature on bad news being good news. The argument is a slower paced economy is good for bonds, and ultimately, for stocks. Stuart Schweitzer of JP Morgan Fleming argues that while a cooling economy will impact both job growth and earnings, it will be offset by rates stabilizing, or even falling, as inflation expectations are contained. Of course, says Schweitzer, investors have to be confident that growth is slowing, not declining.

India . . . Manmohan Singh, the soft-spoken economist named India's next prime minister, pledged Thursday to work to restore religious harmony, keep India investor friendly and seek peace with rival Pakistan. Singh's appointment Wednesday ends a week of political turmoil in which Sonia Gandhi, the Italian-born widow at the head of the country's most powerful political dynasty, turned down the job.

Why I hate Annuities . . . Three firms and three brokers were fined a combined $503,000 for alleged abuses selling variable annuities. NASD censured and fined Nationwide Investment Services and Nationwide Securities a combined $175,000. American Express Financial Advisers was fined $300,000 for inadequate record keeping during a four-year period. Former A.G. Edwards broker Michael Tew was suspended six months and fined $28,000. Daniel K. Park, formerly of Northwestern Mutual, and Deborah A. Fruge, formerly of Banc One Securities, were barred from the industry.

Financials . . . UBS out positive on Citibank saying that although one cannot deny the benefit low rates have had on economy and Citi's earnings, they don't think the party comes to an end with first rate hike as higher rates generally reflect a stronger economy, which tends to produce higher customer balances and improved credit quality. The firm estimates that a 100bp rate hike shock should equal less than $0.07 hit to EPS but a 50bp drop in consumer credit ratio should add estimated $0.27 to EPS. Firm also notes that a look at Fed Funds rate impact on net interest margins over the past 20 yrs showed no discernable pattern, little predictive power. BIS study revealed little correlation between interest rates, yield curve and net interest margin; it also concluded banks have been fairly successful at managing interest rate risk. With the shares trading only 10.2x 2005 EPS estimate, the firm is reiterating their Buy rating with $56 target.

The NASD has chosen to pursue an enforcement action against American Express (finanicial advisors) as a result of alleged inadequate disclosures of revenue sharing arrangements from the sales of non-proprietary mutual fund products. The decision is preliminary and American Express has an opportunity to respond to the NASD. The NASD's concerns relate to the adequacy of disclosure, not the revenue sharing arrangements themselves, which are fairly common. This investigation appears consistent with ongoing regulatory reviews of mutual fund companies. Earlier this year, American Express was fined $3.7 million for failing to provide breakpoint discounts to customers. The NASD has focused on sales made between January 2001 and May, 2003. Since then American Express has apparently complied with disclosure requirements. It is difficult to estimate the size of a fine, if any, but note that Morgan Stanley agreed to pay a fine of $50 million late last year to settle charges that it steered customers to certain funds in exchange for fees. American Express earned fees totaling about $250 million during the 30 months in question, or about $0.15 per share. This assumes about 30% of the company's roughly $73 billion of mutual funds during the period were of non-proprietary funds which generated fees of about 1%.

Oil & Gas . . . Bernstein upgrades Halliburton to Outperform from Market Perform and raises their target to $35 from $25. The firm says HAL's EPS should grow faster than the market due to increasing activity in its core pressure pumping biz, and restructuring efforts should also help improve margins. Firm also says the asbestos issue is largely behind the company, and the stock does not appear to discount any improvement in activity.

Metals . . . IISI released on Tuesday global crude steel production data for April – output rose 6% year/year, to 83.4 mmt and is up 8% YTD. However, production was down 4% month/month – adjusting for one more calendar day in March, output would have been basically flat month/month. China was the main driver, with output up 21% y/y to 20.9 mmt (+25% YTD). The rise is despite ongoing tight raw material, rail, and energy availability but remains below the record 21.8 mmt in March. Ex-China production was up a more modest 2% y/y, with emerging (+11%) far outpacing developed markets (+1%). Ukraine was the second-biggest gainer, up 10% y/y to 3.3 mmt. Brazil also rose, up 6% y/y to 2.7 mmt – but is still below August-03 levels. Russia was flat year/year at 5.2 mmt but is up 5% YTD. U.S. output eased 1% y/y to 7.8 mmt, likely affected by coal/coke shortages – utilization levels were reported at 90% versus 82% a year earlier. After falling in March, production in Japan moved up 2% year/year, still trending very close to the 110-mmt annualized level, with roughly 35% exports. India surprisingly fell 5% year/year to 2.4 mmt. We note that, apart from limited capacity, both markets are likely seeing some raw material input shortages. The E.U. rose 2% year/year, to 16.2 mmt, and is up 3% YTD.

Bottom line. The April data imply annualized China steel production remains at 250-260 mmt (+20%) – but this looks well below consumption levels, and the growth rate has slowed from the 26.7% level in 1st quarter 2004. Measures taken by its government to slow fixed-asset investment will likely hit demand in coming months, and possibly supply, with long products particularly vulnerable.

Defense & Aerospace . . . Bloomberg.com reports that Taser's shares have soared on speculation its stun guns will become standard equipment for U.S. police officers. A survey of the 10 largest local police departments shows the optimism may be misplaced. Only three -- Houston, Los Angeles and Miami -- want to make Taser guns available to their entire forces. Houston's police have yet to receive the needed funding, said Robert Hurst, a department spokesman. Most of the others -- including New York, the country's largest police force with 34,000 officers -- said they have put limits on deployment of the weapon and don't plan to provide it to all uniformed officers. "It's not issued to individuals, but to supervisors or emergency units,'' said Robert J. Castelli, a professor at John Jay College of Criminal Justice in New York who spent 22 years with the New York State Police. "It's not something an officer is going to keep on his belt"... 'Over the next five years, you will see one of these for every cop,'' Taser Chairman Phillips Smith said in an interview when asked about the survey results... Even assuming that investors will pay a premium, the stock appears overvalued, said investors such as Andy Abrams of Abrams Investment Partners. The company's revenue would need to rise to $418 million, for example, for shares to trade at 2 times sales.

Transports . . . Lehman upgrades Delta Airlines to Overweight from Equal-Weight and raises their target to $10 from $9 based on relative valuation. The firm says their call is contingent on a pilot deal that buys time that the co needs to address other issues. The firm says that if there is no pilot deal, there is no choice but Chapter 11 and a $0 share price (recent warnings are not just posturing); while the pilot situation is thorny, firm says the case is strong for a deal and pilots would likely be worse off in Chapter 11.

The Washington Post reports ever since gas prices started spiking last month, customers have been flocking to one side of the Lustine Toyota/Dodge in Woodbridge and ignoring the other. "The Dodge truck business is way down," General Manager Jim Giddings said, because of what he called "this gas thing." He's on track to sell just 36 Dodge trucks this month, compared with 68 during the same month last year. Toyota sales, on the other hand, are up 38% so far in May. One of the big drivers is the Prius, the gas-electric hybrid that has become a phenomenon in the past year. Giddings said he has a waiting list of more than 50 customers. According to the article, sales of truck-based SUVs fell in April, and sales of small cars went up. Automakers rushed to the aid of SUVs, which is where they earn most of their profit, lowering base prices and offering more incentives than on any other type of vehicle. At the same time, they raised prices on small cars.

Goldman Sachs lowers their view of the Airlines sector to Neutral, as they now believe that $40/bbl oil prices are more likely to be sustainable (their previous estimate was $30/bbl). Consequently, firm revises their estimate of pretax losses for the major US airlines to $3.2 billion from $0.8 billion, and cuts estimates for nearly all the company's under coverage, with the exception of the regional jet fee-for-departure airlines Mesa Air, Sky West, and Express Jet; and because of its 80% hedged position, firm only modestly trimmed their South West estimate, but now expects all the legacy airlines to post significant losses.

Retail . . . Department stores are capitalizing on economic resurgence. Leading department store chains are beginning to experience the payoff of managements' laser-like focus on inventory levels, as well as various initiatives aimed at improving the in-store experience, broadening private-label brands, differentiating assortments, and strengthening marketing programs.

Discounters are well positioned for continued market share gains. Discounters continue to

offer customers a reason to shop - great value in a convenient setting. This group drives traffic through its assortment of non-discretionary merchandise, as well as upgraded apparel and other general merchandise categories. Discounters are still in growth mode and continue to open stores aggressively.

Higher energy prices and interest rate hikes loom. There is a negative correlation between

retail gasoline prices and personal consumption expenditures, department store sales, and general merchandise store sales. Oil prices and stock price performance of retailers to be negatively correlated. The performance of retail stocks in a rising interest rate environment tends to be mixed.

UBS says department store stocks are cheaper than in 1996 despite a superior outlook. At both times, it was a period of strong fashion cycle, numerous brand launches, a reasonably strong consumer and relative earnings strength. The chief difference was the negative long-term outlook in 1996. The firm's leading indicator, the RSP, is pointing to a good sales environment for most of the year. Indicators such as home sales and refi activity have a long lead time to sales and will play out over the rest of the year. Fashion savvy and/or excellent real estate are the common themes with the firm's recommended stocks, which include Federated, Nordstrom, Kohl’s and Neiman Marcus.

In another blow to the Martha Stewart brand name, Kmart has recalled 588 boxes of Martha Stewart Everyday Safety Matches due to a fire hazard, according to federal regulators. The discount retailer recalled the matches, saying that they could ignite upon impact, posing a fire hazard to consumers, the Consumer Product Safety Commission said in a statement.

PETsMART reported earnings of $0.24 per share, $0.03 better than the consensus of $0.21. Revenues rose 14.0% year/year to $796.3 million versus the $783.1 million consensus. The company sees 2nd quarter EPS of approximately $0.23 in line with the consensus of $0.23. For 2005 company sees EPS of $1.17-1.18 versus the consensus of $1.14.

Hott Topics total sales rose 27%, with same-store sales of 4% (vs. 2.6% LY), driven by strength in the core music-licensed and men's segments. The gross margin contracted by 80 bps to 34.6%, primarily resulting from higher markdown rates in women's and accessories; yet, the SG&A improved by 60 bps to 28.1%. During 1st quarter, HOTT successfully anniversaried challenging comps in its music-licensed segment, as an increasing diversity of music genres and the ongoing demand for rock tees drove solid results. Men's was also healthy in 1st quarter, thanks to continued momentum in novelty tees. Comps in the women's and accessories areas fell during 1st quarter. Women's was impaired by cont'd weakness in street bottoms and several inventory and fashion issues, which are being addressed with the addition of color and new fashions. Accessories suffered from disappointing results in gifts. HOTT'S efforts to improve and fine-tune the Torrid business are working - Performance of East coast and Midwest stores have reached greater parity with the West (more in line with trends of East and West coast Hot Topic stores); Torrid's apparel business was solid across all categories, exceeding internal sales plans. A new loyalty program is set to launch in 4th quarter 2004.

Restaurants . . . AG Edwards calls Darden Restaurants a classic value investors' play with the stock trading at a 13x earnings multiple on firm's fiscal 2005 (ending May) EPS estimate of $1.63, which dramatically understates the chain's dominant two flagship brands in Olive Garden and Red Lobster and the chain's solid financials that include a pristine balance sheet and the ability to grow EPS 10%-15% longer term.

Healthcare . . . Oppenheimer initiates coverage of Tenet Healthcare with a Buy rating and $17 target. The firm says the stock may be volatile until the government's review of outlier payments is completed, yet notes that liquidity and cash flow are adequate, the outlier payments issue is manageable, and fundamentals are solid.

Patterson Dental reported earnings of $0.65 per share, in line with the consensus of $0.65. Revenues rose 20.1% year/year to $537.4 million versus the $552.1 million consensus. The company sees 1st quarter EPS of $0.58-0.60 versus the consensus of $0.58. For 2005 co sees EPS of $2.68-2.72 versus the consensus of $2.69.

Hospitals got a strong message Wednesday from the nation's third-largest purchaser of health insurance: Reduce your costs or lose business. The California Public Employees Retirement System, which has sparked national trends, cut 38 of the state's costliest hospitals from its HMO offerings to save $36 million next year. The decision could start a shift back to the smaller networks of hospitals common in the early days of managed care before backlash led most employers to offer a wide range of doctors and hospitals. Calpers spends $3.9 billion a year on health care for 1.2 million state and local employees, retirees and dependants.

Biotech . . . Biomira and Inno-centre Alberta announce a collaborative agreement to create a spin-off company. The co, Oncodigm BioPharma, will be dedicated to the development and commercialization of a promising cancer therapy. The therapy, Liposomal-Interleukin-2 is projected to re-enter clinical trials in 2005.

Pharmion has received full approval from the FDA to market Vidaza for the treatment of Myelodysplastic Syndromes. The FDA approved Vidaza for treatment of all five MDS subtypes. Until now, there have been no approved therapies for the treatment of MDS.... Co also announces its intent to provide additional clinical data and resubmit its application with the European Medicines Evaluation Agency for the use of Thalidomide Pharmion 50mg to treat patients with multiple myeloma.

Media . . . Sanders Morris Harris is positive on Sirius and EchoStar in light of their distribution deal announcement. The firm continues to assert that a relationship with DISH is about the best thing that could happen to SIRI and awareness will certainly increase since DISH is offering SIRI to 8 of its 10 million subscribers and using this as a tool to entice its lower-end subs to higher-end programming. DISH will also sell new co-branded SIRI units at its retail outlets later this summer. The firm believes this will make SIRI's hopes for hockey stick sub growth a bit more of a reality. Sanders Morris Harris would urge investors to look at DISH, given its positive analysis of DISH's current business (contrary to the street), their competitive position, and the indications of a long-term and profitable relationship with SIRI.

Barron's Online highlights Univision, which has seen its shares falling sharply recently with other media stocks on fears that rising interest rates could slow advertising spending. But, according to the article, this telenovela could have a happy ending, Univision's future rev growth can easily outpace that of other media, because major company's are spending more to target Spanish-speaking consumers. As that population grows, more ad dollars should flow to Univision. "The Spanish population has now reached critical mass, and advertisers cannot ignore it any more," says Andrew Marcus, an analyst at Deutsche Bank. "Univision is a great top-line rev growth story, and we think it is the best way to play the growth of Hispanics in America and marketers targeting the Hispanic community." Univision probably gets ad dollars from only half of the top 300 advertisers, but David Joyce, a media analyst at Guzman & Co, thinks that number could double by 2010. "That incremental demand will drive [ad rates], revenue growth, cash flow, earnings and [the] stock price for Univision, Entravision, Spanish Broadcasting and others," Mr Joyce says Univision can sustain 10% rev growth for the next 3 to 5 years, compared with only 4% to 6% growth for mainstream radio, television and newspaper outlets, says Mr Marcus. Even though the stock fetches 44.3x projected earnings, that's actually near Univision's lowest P/E ratio of the past 5 years, well below its median P/E of 63.4x forward earnings. The stock also trades at 35.8x trailing-12-month cash flow, a big discount to its median 48.3x cash flow over the past 5 years.

Microsoft and Comcast Cable announced an agreement that extends their existing relationship and gives Comcast the ability to make Microsoft TV Foundation Edition 1.7 software available to up to 5 million customers, with the option to expand the rollout at a later date.

Telecom . . . The Financial Times reports that Verizon will begin selling video over fiber optic lines to homes and businesses in 2005 as part of a long-term strategy to fight cable co's on their own turf before they erode too much of Verizon's traditional telephone business. While the first video services Verizon will offer will mimic those available from cable and satellite television services, Verizon executives say the company will eventually move into higher-technology formats that could offer far more options to viewers.. "We have a huge opportunity," Paul Lacouture, Verizon's president of network services, told. Fiber optics "allows us to get beyond parity with cable and get to a video product that will be different from the traditional 150 channels on cable and satellite."

IT Services . . . Siebel and IBM announced the expansion of their alliance to provide comprehensive business solutions that meet the needs of pharmaceutical, biotechnology, and medical products organizations of all sizes. Through the expanded alliance, IBM and SEBL will provide additional deployment options for life sciences solutions. Under the agreement, IBM will host and manage Siebel Pharma, Siebel Medical, and Siebel Clinical. IBM and SEBL are also combining efforts to provide business intelligence to medical products organizations.

Storage . . . Brocade reported 2nd quarter 2004 non-GAAP EPS of $0.03 (vs. $0.00 last year), in-line with its $0.02-$0.03 guidance and in-line with FirstCall consensus estimate of $0.03. Revenues of $145.5 million (up 11% Year/Year) came in in-line with Brocade’s $143-$147 million guidance -- FirstCall consensus was at $145 million. Brocade noted strength in its enterprise (SilkWorm12000/24000) offerings while the entry level (3200/3250) offerings were down sequentially with mid-quarter new product introductions. Brocade noted that mid-range offerings were about flat sequentially. Gross Margins of 55.3% were slightly above the high-end of Brocade’s guidance of 53%-55% and slightly above 54.9% estimate. Ports shipped grew 5% sequentially while Brocade noted ASP declines of mid-single digits in the April quarter. Operating expenses of $70.8 million were below our $72 million estimate and below Brocade’s guidance of $71-$73 million. R&D expenses were about $1.8 million below our estimate while SG&A was $ 0.7 million higher than estimates. Balance Sheet: Cash and investments increased by $29 million last quarter to $760 million. Net cash excluding convertible debt at around $330 million or about $1.26 per share. DSOs increased from last quarter’s 49 days to 53 days – Brocade’s target has been for DSOs in the 50-60 days. Days inventory remained flat with last quarter at under 6 days.

Network Equipment . . . Sanders Morris Harris initiates coverage of JDS Uniphase with a Buy rating and $4 target. The firm sees early signs of growth in the optical component market after a 3-year slowdown, as inventories are depleted and new metro and long-haul builds have begun. The firm also says the company's restructuring is complete, it is close to break-even, and gross margins are improving (although pricing remains tough); in addition, firm says the recent stock price pullback mitigates valuation concerns, as the stock now trades at 25x normalized 2005 EPS, net of cash.

Deutsche Bank upgrades Brocade to Buy from Hold and trims their target to $7 from $7.50 following in-line 2nd quarter results. The firm also cites: 1) management's continued solid execution, which is clearly establishing the company as a leader in the space; 2) growing top line driven by a new product roll-out, as well as the benefits of a restructuring program that is leading to operating leverage; and 3) attractive valuation.

JP Morgan adds palmOne to their Focus List, as they believe the co is experiencing the benefits of growth in secular demand for smartphones, and believes PLMO is entering an era of sustained profitability that will attract new investors into the stock. Firm says that near-term catalysts abound, as Treo 600 supply constraints should ease by August, at least 3 new Tier 1 carrier distribution partners are likely to be added before calendar year-end (leading to pipeline inventory build), they expect a new Treo product to be launched by the fall, and they believe PLMO will license RIMM's BlackberryConnect, enhancing the attractiveness of the device for corporate IT managers.

Prudential initiates coverage on Qualcomm with an Overweight rating and $75 target. The firm believes that the company is strongly positioned to benefit from the broader adoption of CDMA-based technologies over the coming years, both from the sale of chipsets and through a near-monopoly on 3G intellectual property. Also, firm notes that the company's financial position is solid, with $6.6 billion in cash and no debt.

Ciena reported non-GAAP loss of $0.09 per share, excluding multiple items, $0.01 worse than the consensus of ($0.08). Revenues rose 1.6% year/year to $74.7 million versus the $78.7 million consensus and the $78.6 million consensus.

Prudential initiates coverage of Avici with an Underweight rating and $9 target. The firm notes that the company's cash balance stood at $94 million in the March quarter, and they do not believe liquidity is a near-term concern since the co has no debt, but firm would like to see the co become cash flow positive and achieve sustainable profitability; also, while they believe that the Huawei and Nortel relationships present a strong opportunity for AVCI to expand its customer base, until they see signs of such traction, they would remain on the sidelines.

CIBC notes that industry research firm Dell Oro released Q1 market share stats for Ethernet switching and core/edge routers. The Layer 2/Layer 3 data is of importance to Cisco, Foundry, Extreme Networks, and Nortel. The router data is important to CSCO, Juniper and Redback. CSCO extended its dominating lead in the L2/L3 Ethernet switch market. Within the total Ethernet switch market, it comprised 73.6% of the $3.05 billion market. This is a 520 bp increase in market share and the highest share ever. Radware's share in the total Layer 4-7 "fixed" market rose 80 bps to 18.9%. NT's Layer 4-7 market share fell 230 bps to 17.9%. The total core router market grew 6.9% sequentially. CSCO and JNPR continue to dominate this market with a combined market share over 90%. JNPR gained share in the core and mid-range and CSCO gained share at the edge.

The WSJ's "Telecommunications" section reports as Alcatel has emerged from the telecom depression and is in good shape, it might start thinking about making some acquisitions. "There are too many competitors today," says Philippe Germond, Alcatel's president and chief operating officer. As demand for telecom equipment collapsed in recent years, and with new equipment suppliers, including Asian firms, entering the market, the sector has become overcrowded. As a result, he says, it's hard to imagine that there won't be "some kind of reshaping of the industrial environment." According to the article a large merger is unlikely, and ALA would rather buy small, tech-specific co's. The article says that anyone looking at acquisitions within the industry would have to take a look at NT, although a move is unlikely until that co's accounting issues are resolved.

JMP Securities upgrades Netgear to Strong Buy from Market Outperform. The firm is saying the company offers a pure-play investment in the secular growth of home and SOHO networking. The firm also notes that NTGR is posting solid financial results and trades at a compelling valuation, and says that the company has what investors should be looking for: revenue growth, operating margin expansion, net income growth, and a rapidly expanding mkt. Target is $23.

The NY Times held an interview with Lucent's CEO Patricia Russo. Ms Russo, who took the helm at Lucent during the depths of the telecom's collapse in 2002, is anything but sanguine. Having staved off Lucent's financial freefall, she is now in a race against time to develop new products and services that will allow Lucent to survive as the entire industry changes around it. New Internet-based technology and other innovations now allow all that content to travel over unified digital networks. To generate much needed growth and forestall the company's obsolescence, Ms. Russo is trying to leapfrog into the next generation of products. The strategy is admirable, but will succeed only if demand for the technology Lucent is betting on grows faster than the decline in its traditional businesses. "The question is, can Lucent run fast enough to outrun the decline in its older businesses?" asked Albert Lin, an analyst at American Technology Research. "It will be hard to do." Worse still, telecom's equipment is subject to ever-greater price pressure. According to the article, the co now expects rev to grow in the "low single digits" this FY. Most analysts say Lucent is underestimating the strength of the current recovery, but they do not blame the co for being conservative. Lucent is also looking elsewhere for growth. In addition to selling abroad, the co is making strides in winning more government contracts, particularly from the Department of Homeland Security. Lucent's gains, though, are small compared with the larger issue of how Lucent participates in the building of networks, Ms. Russo said. She said she pushed her executive team to figure out "where the puck is going," though she admits there are no simple solutions. Competition is fierce and the questions will not be answered for several years. "The market has clearly stabilized," she said. "It was a scary time and it feels a lot better to be focused on growth again."

Prudential downgrades UT Starcom to Underweight from Neutral-Weight and cuts their target to $32 from $37. The downgrade is based their belief that increasing competition in PAS handsets, a slow path to revenue diversification, and the potential for a slowdown in the Chinese economy point to increased risk in the stock over the next 12-18 months. Firm says several vendors have entered the PAS handset market in China over the past year, putting more than 100 new models on the market, which has served to erode UTSI's market share from 70+% to 60% and has contributed to a 610 basis point decline in gross margin over the past 4 quarters. While the company's competitive position appears to be more stable in PAS infrastructure, firm sees little coming down the road to help ease these handset margin pressures.

Advanced Fibre will be acquired by Tellabs for $1.9 billion in cash/stock. Including synergies, the transaction is expected to be accretive to Tellabs' 2005 pretax income on a per-share basis, excluding amortization associated with acquired intangibles and other purchase accounting adjustments.

Software . . . Goldman Sachs made a note regarding Symantec's acquisition of Brightmail for $370 million. Goldman Sachs says that strategically Symantec needed the anti-spam tuck-in after having struggled to get its own product off the ground; firm's analysis of the total anti-spam market suggests it could be worth as much as $6 billion over the next 7 years, growing at 40%, and is about 5% penetrated today. The firm notes that SYMC paid about 12x trailing revs, or 8x forward revs, and as to whether that is expensive, firm says the answer lies in execution, which SYMC has a good record on. Assuming SYMC quickly integrates the product and gets it into their installed base of customers, firm says the acquisition should pay for itself over the next 4-6 quarters.

Jefferies downgrades Intuit to Hold from Buy and cuts their target to $42 from $55. The firm is saying 3rd quarter results were respectable relative to expectations, but they are deeply discouraged by 2005 guidance that overshadows the qtr's actual results; firm says that high single-digit rev growth guidance for 2005 is a sharp deceleration from 13% expected in 2004, and marks a sharp change in the stock's growth/valuation paradigm, and they now have a much less generous valuation opinion as a result; compounding the valuation issue was a generally vague explanation for the slowdown that leaves them scratching their heads about its specific root causes, at least until the co provides segment-level guidance with its July quarter results 3 months hence.

Several firms out in defense of Inuit following results and guidance announced last night. Despite showing solid results for 3rd quarter, market participants focused on fiscal 2005 guidance calling for high single digit revenue growth. Participants on the conference call appeared surprised by guidance, sending the shares down -7.3% in after hours trading. Merrill Lynch out saying they Intuit's guidance represents a conservative base case for 2005 and sets co up to potentially beat estimates as the year progresses. The firm is surprised by the negative reaction to Intuit's new guidance since the writing has been on the wall for the past month as they lowered their 2005 outlook back in April. They see the decline in shares as a very good buying opportunity because once investors focus on Intuit's EPS growth potential, which still remains quite strong in firm's opinion, the stock will perform much better. CSFB out noting they believe mgmt is attempting to set the bar low having stumbled on guidance for certain segments in the past couple of years. Therefore, firm leaving full year F2005 sales estimate of $2.08 billion, up 11% year-over-year, and EPS of $1.95 up 18% year-over-year essentially unchanged. They believe that at $40, trading at only 20.5x F2005 EPS estimate, the shares offer considerable upside.

Hot Items - Check out the "Hot Items" page (updated daily)


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From Briefing.com: 6:19PM Thursday After Hours prices levels vs. 4 pm ET: The after hours is sporting a postive bias as the futures indications trade higher relative to fair value. Presently, the S&P futures, at 1090, are 1 point above fair value, and the Nasdaq 100 futures, at 1402, are 4 points above fair value. An April semiconductor equipment book-to-bill ratio that rose to 1.14 has renewed interest in tech.

The below table lists the night's other relevant developments, as well as the stocks' reactions:

After Hours Mover % Change Move Reason for Move
Gap Inc (GPS) unch After raising its Q1 (Apr) EPS outlook on May 6, specialty retailer exceeds the revised Reuters Research estimate by $0.02 on revenues that rose 9% to $3.67 bln (consensus of $3.68 bln); Same store sales increased 7%, on top of 12% last year - proof that last year's turnaround was not just the benefit of easier year/year comparisons; Briefing.com turned positive on GPS in Story Stocks this time last year, when the stock was $16.66

Marvell Tech (MRVL) +6% Semiconductor maker posts a 79% increase in Q1 (Apr) EPS and 60% rise in revenues - both figures ahead of the market's expectations; In Briefing.com's Earnings Preview on In-Play, a Platinum Product, we noted analysts were generally positive going into tonight's earnings; Stock has shown relative strength to the Nasdaq year-to-date

McData (00C0) -6% Switch maker tops the Q1 (Apr) Reuters Research estimate of breakeven by a penny; however, revenues fell 6% to $97.2 mln (consensus of $99.0 mln); Company goes on to warn for Q2's (July) top and bottom-line; McData's direct competitor, Brocade, reported last night, and the stock also sold off as investors were disappointed with the lack of upside

Nordstrom (JWN) +4% After increasing its Q1 (Apr) EPS guidance twice, the high-end department store surpasses the revised consensus estimate by $0.05; Same store sales surged 13.2% and provided a tremendous boost to the bottom-line; Management goes on to issue better than expected Q2 (July) forecasts - putting EPS at $0.70-0.74 versus the consensus of $0.65

SERENA (SRNA) +16% Provider of infrastructure software shows strong upside to the Street's Q1 (Apr) estimates; Also reports that software license revenues were $15.8 mln, up 46% over the same quarter a year ago; Company goes on to guide Q2 (July) EPS and revenues well above consensus estimates; SERENA recently announced plans to acquire British-based Merant Plc, creating the second-largest provider of enterprise change management software

Tomorrow, the earnings and economic calendars are fairly barren and should not provide any catalysts for the market. Volume should be noticeably light in response and lead to fairly volatile trading.

For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap. -- Heather Smith, Briefing.com

5:59PM Semi Book-to-Bill : Semi equipment industry book-to-bill ratio rose to 1.14 in April. Bookings of 1.59 bln came in 15.6% above March's level of $1.37 bln and 111.0% above the $757 mln in orders posted in the same time a year ago.

4:31PM Ultratech Stepper guides for Y04 (UTEK) 15.74 -0.13: For the full year of 2004, co is expanding the ranges of the guidance. Co states, "Based on the current order outlook and visibility, UTEK could achieve annual revenue growth on the order of 20%-30% compared with 2003. Gross margin looks to be in a range of 48%-51%, based on the projected product mix for the year. Operating margin for the year looks to be in a range of 5%-10%. The projected tax rate for the year looks to be about 10%, due primarily to the jurisdictional effect. Earnings per share (diluted) for the year are projected in a range of $0.35-$0.50. Cash flow for the year is still anticipated to be positive", Reuters Y04 EPS consensus is $0.44 and rev guidance is $126 mln. Revs 20-30% growth is approx $120-130 mln.

4:21PM McDATA beats by a penny, ex items, light on revs, guides Q2 below consensus (MCDTA) 4.77 -0.02: Reports Q1 (Apr) non-GAAP earnings of $0.01 per diluted share, excluding charges, $0.01 better than the Reuters Research consensus of $0.00; revenues fell 5.8% year/year to $97.2 mln vs the $99.0 mln consensus and the $99.0 mln First Call consensus. Co also guides, sees Q2 non-GAAP loss of $0.02 to breakeven, ex items, vs the R.R. consensus of $0.01, and revenues of $92-100 mln, estimate $105.3 mln.

4:16PM Marvell beats by $0.02, ex items, beats on revs (MRVL) 39.81 -0.17: Reports Q1 (Apr) earnings of $0.34 per share, excluding items, $0.02 better than the Reuters Research consensus of $0.32; revenues rose 60.2% year/year to $269.6 mln vs the $267.6 mln consensus.

Close Dow -0.07 at 9,937.64, S&P +0.50 at 1,089.18, Nasdaq -1.58 at 1,896.59: The day opened with a whimper and closed with a whimper...stocks opened modestly higher today in part because oil prices were slightly lower...Tellabs (TLAB 7.95 -1.24) acquiring Advanced Fibre (AFCI 18.96 +2.13) and an earnings warning from Navistar (NAV 33.96 -6.25) were the top corporate news items...the May Philadelphia Fed Index at 12:00 ET was a disappointment at 23.8 compared to expectations of 31.0, and this slight sign of slower manufacturing growth in that region took the indices into the red...but they quickly recovered and meandered near unchanged for the rest of the day...
the July crude oil contract closed down $0.72 at $40.80, which provided some modest support to stocks...the 10-year note rallied 14/32 and the yield fell to 4.71%, temporarily easing rate fears a bit...still, the most noteworthy statistic from today's action is the extremely low volume figure of 1.2 billion shares traded on the NYSE...there simply isn't a lot of activity right now...there are no economic releases tomorrow although it is an options expiration day...NYSE Adv/Dec 1951/1362, Nasdaq Adv/Dec 1339/1782

11:54AM Metrologic Inst subsidiary awarded additional orders from Lawrence Livermore National Labs (MTLG) 14.77 -0.09: Co announced that its subsidiary, Adaptive Optics Associates, has been awarded Purchase Orders from Lawrence Livermore National Labs for design enhancements to the Input Sensor Packages and Output Sensor Packages used on the National Ignition Facility Construction Project. The total value of these additional purchase orders is $559K.

1:56PM Brocade Communications (BRCD) 5.55 +0.42: Brocade reported Q2 results after the close on Wednesday. The provider of SANs (storage area networks) infrastructure solutions published pro-forma EPS of $0.03 on revenue of $145.579MM (+11.2% Y/Y) vs. Reuters Research consensus at $0.03 on $145.17MM. GAAP EPS was ($0.01).

Director business was strong. Port count increased over 5%, which helped to offset an approximate 5% decline in average selling prices. Sales in the Entry-level segment were down sequentially, which management attributed to product transition as a result of the mid-quarter introduction of new entry-level switches. Sales in the Mid-Range segment were in line with Q1. Sales in the Enterprise segment benefited from the introduction of SilkWorm 24,000, which offer customers product protection.

Enterprise IT spending continues to improve. Management expects the pricing environment to remain stable. The adoption of blade servers, information life cycle management, and utility computing are expected to drive demand for intelligent switching and network storage solutions. IDC forecast the blade server market to grow from under $700MM in 2003 to over $8B by 2008. The mid-range and enterprise SAN market segments are forecast to grow 38% and 45% per year respectively through 2007. The entry-level market, for small and large enterprises alike, is under-penetrated and represents emerging, rapidly growing large market opportunities. The following table shows market penetration and port growth for SAN solutions by customer market segment. Segment Market Penetration Port Growth 2003-2007
FC SAN Server FC SAN-Attached Storage
Entry-Level 5% 15% 300%
Mid-Range 25% 50% 38%
Enterprise 50% 65% 45%
Gross margin increased 129 bps Y/Y to 55.3%. Extra week in quarter added approximately 3% to revenue but operating expenses declined 4.1% Y/Y as management reduced sales and marketing expense. Operating margin increased Y/Y from a loss to 6.6%.

Management announced headcount reductions totaling 110 people to further optimize business model; 40 positions were eliminated in Q2. Guided for Q3 revenue of $147-152MM (+10.1-13.9% Y/Y). Gross margin is expected to be 55-56%. Target for 2005 is 55-58%. Operating expense is expected to be $67-69MM, 44-47% of sales vs. target at 38-40%. Capex is expected to be $6-8MM. Headcount related cost savings expected to total $3-4MM, and will help offset planned increases in product development. Reuters Research consensus at $0.04 on $150.65MM.

The following table shows price multiples and Y/Y growth rates for BRCD compared against industry comps within the computer systems & peripherals and software & programming groups. Company *P/SG **P/OPG P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Brocade Comm (BRCD) 1.6 (10.5) 2.4 2.2 2.0 0.6% 13.8% 12.7%
CNT (CMNT) 0.1 (2.9) 0.4 0.3 0.3 141.1% 19.5% 13.6%
CIENA (CIEN) 5.1 17.4 5.8 4.6 3.2 9.5% 24.1% 42.1%
Cisco Systems (CSCO) 3.8 18.2 7.1 6.7 5.8 3.2% 16.6% 14.6%
EMC (EMC) 2.1 34.3 3.7 3.1 2.7 21.8% 29.3% 14.3%
Hewlett-Packard (HPQ) 0.5 15.3 0.8 0.8 0.7 18.4% 9.2% 5.9%
IBM (IBM) 1.1 11.5 1.6 1.5 1.4 9.7% 8.0% 6.1%
McData (MCDTA) 0.6 (50.4) 1.3 1.3 1.1 49.2% 3.7% 15.5%
QLogic (QLGC) 2.4 7.7 4.8 4.6 4.1 25.6% 5.5% 11.0%
Sun Microsystems (SUNW) 0.9 (18.8) 1.1 1.2 1.1 (6.9%) (4.2%) 1.9%
Veritas (VRTSE) 2.7 15.0 5.9 5.1 4.5 21.8% 16.5% 11.4%
Computer Sys & Peripherals 0.9 17.2 1.3 n/a 11.2% n/a
Software & Programming 2.7 34.1 4.8 6.9%
Blended 1.4 22.0 2.2 9.9%
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of May 14, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of May 14, 2004.

BRCD has declined over 20% since the Q1 review, when we suggested investors wait for a 15-20% pullback or for growth to accelerate and operating margin to expand into the lower teens before initiating a new position. Shares are now, based on our inverted EVA/DCF model, priced for sustained upper teens revenue growth from F07 assuming 23% operating margin.

Increased revenue momentum reflects improved product positioning and firming market demand but shares continue to price in relatively high expectations for revenue growth and operating improvement. Management's 2005 operating margin goal is 15-20%. We would wait for an additional 15-25% pullback.--Ping Yu, Briefing.com

http://biz.yahoo.com/mu/story.html

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U.S. stocks rose as crude oil fell below $40 a barrel in response to Saudi Arabia's proposal to boost output, easing concern that higher energy prices will slow consumer spending. Producers of raw materials such as Phelps Dodge Corp. and Freeport-McMoRan Copper & Gold Inc. advanced along with copper futures. A rally in the price of crude had sent benchmark indexes to their 2004 lows on Monday. The S&P 500 added 4 points (+0.4%) to 1093. An index of producers of raw materials had the biggest gain among the S&P 500's 10 industry groups. The DJIA rose 29 points (+0.3%) to 9966. The Nasdaq Composite Index advanced 15 points (+0.8%) to 1912. Two stocks rose for every one that fell on the NYSE today. Almost 1.3 billion shares changed hands on the Big Board, 15 percent less than the three-month daily average. Some 1.4 billion shares traded on the Nasdaq Stock Market, making it the slowest trading day since Dec. 26. Both the S&P 500 and Dow average completed their fourth consecutive weeks of decline, falling 0.2 percent and 0.5 percent, respectively. That marks their longest such losing streak since February 2003. The Nasdaq rose 0.4 percent since last Friday, its first weekly advance in four.

Strong Sectors: steel, internet, homebuilding, gold, steel, home furnishing, casino
Weak Sectors: oil driller, wireless service

Top Stories . . . Saudi Arabia, the world's largest oil exporter, said it will boost production by about 8 percent and proposed a higher quota for the Organization of Petroleum Exporting Countries to help bring down near-record prices. Crude oil fell 2.1 percent in New York.

A government ink expert who told jurors in the Martha Stewart trial that her broker altered a worksheet listing her holdings was charged by U.S. prosecutors with lying during his appearance on the witness stand.

Former Coastal Corp. Chairman Oscar Wyatt and a group of investors including Citigroup Inc. have agreed to pay $1.77 billion for Enron Corp.'s U.S. natural-gas pipelines, the bankrupt company's largest remaining business.

Philip Morris USA, R.J. Reynolds Tobacco Holdings Inc. and other U.S. cigarette makers must pay more than $590 million to fund quit-smoking programs in Louisiana, a jury in New Orleans decided.

Quotes of Note . . . ``It looks like there is going to be an increase in oil production and that will certainly be a positive. The fundamentals of the economy are strong and those gains should give stocks some momentum.'' Robert Baur, who oversees $22 billion as a managing director at Principal Global Investors.

``We need some clarity going forward around the Iraqi handover of power and with what the Fed is going to do. Until that happens, it will be a choppy, sideways market.'' Robert Arancio, head of Nasdaq trading at Lehman Brothers.

Interest Rates . . . A survey of primary bond dealers says that the Fed will begin raising rates in June, and won't stop until it reaches at least 4.0%, although it may take until the end of 2005, or longer. And, the NewYork Times has a feature on the global speculation that has developed out of 1.0% Fed funds. David Bowers of Merrill Lynch says we had a cluster of financed trades around the turn of the year, all funded by cheap U.S. credit, with a falling dollar. Now, we have the prospect of people being forced to liquidate. When the first really good jobs report came out on April 2nd, markets around the globe headed lower.

Bad Boys . . . The WSJ reports that Richard S. Strong agreed along with his firm to a $175 million settlement of state and federal allegations that he traded rapidly in and out of his firms' funds and allowed similar trading by a hedge fund, hurting long-term investors. Mr. Strong himself will pay $60 million of the fines and restitution, along with making an extraordinary apology. Mr. Strong became the first mutual-fund executive required to apologize to investors in what New York Attorney General Eliot Spitzer called a "public humiliation." Mr. Strong, who also agreed to be barred for life from the securities industry, issued a two-paragraph statement that concluded: "My personal behavior in this regard was wrong and at odds with the obligations I owed my shareholders, and for this I am deeply sorry."

Inflation . . . The inflation problem will be mild, not severe. This is one of the key variables in the economic outlook. Several leading indicators of inflation have either peaked or stabilized. They are responding to the increase in interest rate expectations. Economists are encouraged by the price reaction to the evolving Fed stance, and think it supports our view that the inflation problem will be a mild one.

The dollar price of gold, while still pointing to higher inflation ahead, is currently more than 10% off its highs. This indicates that “measured” rate hikes are considered less inflationary than the previous stance of “patience”.

Similarly, the Journal of Commerce index of industrial materials prices excluding petroleum, after having soared throughout the second half of 2003, began to stabilize in March 2004 and more recently has retreated from its highs.

The dispersion of commodity price increases has also begun to narrow. The diffusion index that we have constructed from the eighteen individual components of the Journal of Commerce index has fallen to 80, after being at 100 for four consecutive months (when every individual price in the index had increased over the preceding six months). While the current reading of 80 is still high, the decline from 100 indicates that upward pressure on commodity prices is becoming less widely spread.

The Baltic dry index, a measure of ocean shipping charges, has receded from the astronomical highs reached earlier in 2004. While its current reading still points to continuing upward pressure on shipping-related prices, the recent decline implies that pressures are moderating.

The price of steel scrap, which is thought to be one of Fed Chairman Greenspan’s preferred inflation indicators, has leveled off, but remains at record highs.

Some cautions on our forecast of mild inflation:

• There is substantial inflation uncertainty – there’s no history on how prices in a floating-exchange rate environment react after a deflation.

• Even mild inflation is bad, reducing the growth outlook relative to what it would have been in a more constructive reflation. However, mild inflation is better than faster inflation.

• U.S. monetary policy will still be accommodative even as the Fed raises rates, given the very low starting point. Hence, the upcoming inflation is likely to be persistent.

• Some indicators are still showing accelerating inflation, including: the ISM diffusion index, the Philly Fed’s indicators of prices paid and prices received (both at new near-term highs), the PPI and the CPI. These reflect the weakness of the dollar in late 2003 and will be responsive over time to the Fed’s new stance.

Financials . . . CIBC upgrades Morgan Stanley to Outperform from Sector Perform, as they think the co is better positioned than its competitors for a rising rate environment, Discover's outlook is improving, and its current valuation is depressed. Target is $65.

Oil & Gas . . . The NY Times reports that the president of the Organization of the Petroleum Exporting Countries said Thursday that there was little the group could do to lower fuel prices anytime soon, because OPEC's oil production quotas were not the main problem. His remarks contradicted statements last week by Saudi Arabia calling for increases in the quotas to ease price pressures. Purnomo Yusgiantoro said that the recent sharp rise in retail prices for gasoline and other fuels was "due to factors beyond OPEC's scope." In a meeting with reporters Thursday morning, Mr. Purnomo said that speculation, geopolitics and structural problems in the United States gasoline market were to blame for the run-up in pump prices in America. Even so, he said, representatives of OPEC members will meet informally this weekend at an oil industry conference in Amsterdam to consider Saudi Arabia's proposals for raising production quotas by 1.5 mln barrels a day.

Transports . . . Frontier Airlines cut to Market Perform from Outperform at Raymond James. The downgrade is primarily due to the recent rise in fuel prices to around $41 per barrel for crude oil, firm is lowering its EPS forecast for FRNT as follows: from $0.11 to $0.05 in 1st quarter 2005; from $0.30 to $0.15 in 2nd quarter 2005; from $0.20 to $0.10 in 3rd quarter 2005; and from $0.11 to $0.01 in 4th quarter 2005. This forecast reflects an average price per barrel for crude oil of around $40 per barrel in 1st quarter 2005 and assumes that fuel prices will be around $37per barrel in 2nd quarter 2005 and remain around $35 per barrel for 3rd quarter 2005 and 4th quarter 2005. Given firm's sharp reduction in FRNT's fiscal 2005 EPS forecast from $0.72 to $0.31, which reflects a 38% YOY decline in earnings.

Barron's Online highlights Continental Airlines, which said this week it would raise fares, but that may not give it enough additional revenue to offset rising jet fuel prices. The price of crude oil has risen 11% over the past month to roughly $41 per barrel. Meanwhile, jet fuel prices have shot up to $1.17 per gallon. According to the article, there may be more stormy weather ahead. "Fuel prices are more than likely to go higher," says Robert W. Mann, an independent airline analyst. "The issue really is, airlines have run through hedge positions and have been unable to replace [contracts] at ... rational prices." Mr Mann thinks $1.15-per-gallon jet fuel will be the new annual average price. That's 77% higher than the historical average of 65 cents per gallon. Continental announced this week it would raise ticket prices between $20 and $40 per round-trip flight. But if other airlines don't follow it, those higher fares won't stick. That's why the airline still may need to lay off some workers and get wage and benefit concessions from employees. According to the article, the stock does look cheap at 1.9 x trailing-12-months cash flow, compared with a 5-year average of 4.3 x cash flow. And if Continental can wring out costs through job cuts or labor concessions, the stock could perk up. But the co is losing money, and it is producing cash flow per share well below peak levels. Plus, negotiating with unions takes time.

Food & Beverage . . . CSFB upgrades Kraft Foods to Outperform from Neutral and raises their target to $34 from $32 based on valuation, as firm notes that on either a P/E or EV/EBITDA basis, the stock trades at close to a 17% discount to the group as a whole. While KFT clearly has its fundamental problems, firm believes the price level to its peers is unwarranted.

The market loves protein and foodservice exposure but Hormel is a little too expensive for our value orientation. Hormel had a solid quarter ($0.37 operating versus our $0.34 estimate) already appears in stock. Weak grocery trends (volumes down 6% but against tough comparisons) may stay sluggish if two new chili competitors are aggressive and if price increase is not well received. Strong refrigerated and turkey trends are pleasing to see but investors usually assign a lower multiple to these earnings than to grocery where operating profits were down 22%. Bottom line, we own no Hormel at this time we kick ourselves for not upgrading during Mad

Cow scare right before Christmas. Target price raised to $30 from $29 and 2004 estimate raised from $1.56 to $1.60.

Retail . . . Roth Capital upgrades Restoration Hardware to Buy from Neutral and increases its target to $7.50 from $5 after the company reported April Quarter results last night. Sales increased by 21%, well ahead of the firm's expectations. Comps increased 9% on top of an 11.9% comp in 1st quarter 2003 which indicates the company's changes to merchandising and marketing strategies are paying off. Due to the strength in the direct business, the improved gross margin exhibited during 1st quarter 2004, and the upcoming merchandising initiatives, the firm thinks the future for Resto is beginning to brighten considerably.

Barron's Online highlights Kohl's, which saw its stock lose 14% during the last 12 months. But, according to the article, the worst may be over for Kohl's due to leaner inventories and better products, featuring both private-label and branded goods, and a realignment of its merchandising department. "Kohl's boasts an attractive merchandise selection [and] environment and convenient locations," says Bernard Sosnick, analyst with Oppenheimer. And despite its stumbles last year, Sosnick views Kohl's as "a retailer with a proven growth concept over a long period of time." Barron's Online says the retailer is trying to keep its merchandise fresh for its typical shopper. For example, a clothing line under the moniker of Daisy Fuentes, an actress and model, debuted in March. "New brand introductions are key for any retailer," says Jeff Stinson, an analyst with FTN Midwest Research. "Whether it is private-label or national brands, retailers need to add some newness to the mix. Daisy Fuentes has done that for them." According to the article, Kohl's stock is real bargain, it was almost 32% off its 52-week high and 43% off its 2002 all-time high. And although its P/E ratio is slightly above its projected long-term annual earnings growth rate, it looks cheap by other measures. Fetching about 21x estimated earnings for the FY ending next Jan, it is trading way below its median P/E of 41.7x projected earnings for the last 5 years. It's also selling below its median 2.9x sales for the last 5 years.

Piper Jaffray says it would buy Electronics Boutique on weakness after it reported a strong quarter last night. Same store software comps were positive and used software growth exceeded new during the quarter. The firm thinks the stock's valuation remains attractive with a long-term EPS growth rate of 14%. Its average PE multiple during 2002-2003 was 15.9x forward earnings and its closest competitor GameStop's (GME) comp PE was 16.8x. The firm thinks the stock has pulled back recently with market conditions and lack of headlines, but the fundamentals remain strong.

UBS upgrades Rite Aid to Buy from Neutral following recent price weakness. While Rx sales may lag its peers, this is not new and RAD's excellent mgmt team has continued to execute well at the front end. Furthermore, the co has continued to generate decent cash flow, helping to increase investment in the store base. Recent 4th quarter results showed EBITDA growth of 22% Year Over Year. While this outstanding performance may moderate in the medium term, the firm still feels confident that the co can grow EBITDA by 12-15% in the current year. Analyst feels 1st quarter results, due late June, should confirm continued strong profitability. Price target moves to $5.50 from $6.

Piper Jaffray raises its target on Aeropostale to $31 after the company reported a strong 1st quarter report last night including robust same-store sales growth of 19%, with all merchandise lines performing well. Margins looked good this quarter: gross margin improved 230 basis points to 29.3%, G&A expenses dropped by 70 basis points, for an overall operating margin of 6% (a significant improvement over 2.9% operating margin in 1st quarter 2004).

After the close, Nordstrom reported 1st quarter 2004 EPS of $0.48 vs. $0.20, above the consensus of $0.43. Earnings per share were much better than the original company plan of $0.23 to $0.28, driven by strong sales, lower markdown levels, buying and occupancy leverage and expense leverage. Results included an $0.08 per share charge for early retirement of debt. Same-store sales were up 13.2%, beating the original plan of 4-6% comps. Inventory continued to be well controlled, with inventory per square foot down 8.6% at quarter-end. Looking ahead, the plan is for 2nd quarter 2004 EPS of $0.70 to $0.74 based on 4%-6% comps and full year 2004 EPS of $2.42 to $2.46 based on 4%-6% comps. This compares to full-year 2004 EPS guidance given at the beginning of the year of $2.02-$2.08 based on a 1-3% comp. Analysts are raising estimates as follows: 2nd quarter 2004 EPS to $0.74 from $0.62, 20Y04 EPS to $2.50 from $2.27 and FY05 EPS to $2.80 from $2.50. We are assuming 6% comps in 2nd quarter 2004, in line with the plan for a 4%-6% increase and projected full year 2004 same-store sales of 6.1%, slightly higher than company plan.

Gap Stores 1st quarter 2004 sales rose 9.4% to $3.7 billion, with comps of 7% vs.12% LY. The top line was driven by same store sales growth of 21% at Banana Republic, 9% at Old Navy, and 5% at Gap Domestic. Strong product assortments and effective marketing put some fire power in the top line! The 1st quarter 2004 gross margin rose 490 bps to 43.0% driven by merchandise

margin expansion and the leverage of fixed costs in COGS. The 1st quarter 2004 SG&A ratio rose 150 bps to 28.0% due to marketing initiatives and premiums paid for early debt retirement. GPS's operating margin rose 340 bps to 15.0%. GPS now targets a 2004 operating margin at the low end of its mid-teen guidance range (13.5%-16.4%), a year faster than expected. This accelerated timeframe is being driven by more regular price selling and higher markdown margins - its merchandising, marketing, and operating strategies are gaining more traction. While GPS raised its SG&A guidance (see details below), the considerable gross margin expansion it has realized in recent quarters will continue, serving as an offset. As such, anlaysts are maintaining 2004 and 2005 EPS estimates of $1.40 and $1.55, respectively. This translates into annual EPS growth of 28% in 2004 and 10% in 2005.

Medical Devices . . . CIBC spoke with Boston Scientific management, given concerns on Wall Street about the Taxus drug-eluting stent involving the balloon sticking issue. In the company's words "there are no issues with any of their stents." Share gains in the coronary stent market also support its comments. The co may have as much as 75% US coronary stent share at this juncture. The firm's industry checks have told it that "Taxus VI will put to bed any concerns about overlapping stents in longer and more complex coronary lesions," implying the data will be good. Data will be presented on 5/25 at the Paris Course (PCR) medical conference, the largest interventional cardiology conference in Europe.

SunTrust Robinson Humphrey upgrades Conceptus to Neutral from Reduce, as they believe there are a handful of catalysts (combined with 7.5 million shares short) that could limit downside and potentially drive the stock higher in the near-term. The firm says the co should receive FDA approval for a 3-year enhanced effectiveness claim (of 99.8%) for labeling on its Essure device in the very near future; the co has submitted the additional data needed for the JNJ enhanced labeling revision, and they believe the approval will come by the end of June; and firm expects JNJ to begin launching the product right after the enhanced labeling claim is granted.

Drugs . . . Bernstein downgrades AstraZeneca to Market Perform from Outperform, as the stock is trading at a 10% premium to peers on 2005 EPS despite earnings growth for 2005-08 that is just in-line with the industry. The firm says their prior Outperform rating was premised on the potential of Crestor, Iressa, and Exanta, but with these stories now understood, firm sees investors becoming increasingly concerned with post-2005 growth when there is no pipeline heir apparent.

JP Morgan is out positive on Sepracor saying that following the 21% decline from its April 26 one-yr high, they would be buying the shares. Firm attributes the weakness to insider selling, the approach of the late-May/early-June response to the Estorra approvable letter, and strangely lingering confusion about the 6-month turnaround they expect for a Class II resubmission. Post-APA, they continue to remain exceedingly bullish on the "second coming" of the insomnia market, although investors seem to still underestimate the size. With rates of prevalence as high as 30% of the normal population, underdiagnosis of the condition, firm projects at least 25% CAGR for the insomnia market to grow from $1.8 billion in 2003 to $5.3 billion in 2008. Also, there seems to be an underappreciation of the timeline slippage on Estorra's competitor, indiplon, as Pfizer/Neurocrine need to take extra time to reorganize the NDA filing strategy. Firm reiterates that SEPR is one of their top picks for 2004.

Hotel & Leisure . . . Goldman Sachs downgrades Alliance Gaming to In-Line from Outperform in order to make room for Starwood Hotels as an Outperform-rated stock. Considering that AGI has missed slot sales expectations the last two quarters, firm does not expect the stock to show significant appreciation until the co reports results in August and investors' confidence is restored.

Goldman Sachs raises their view of the Lodging sector to Attractive from Neutral, and upgrades Starwood Hotels to Outperform from In-Line; with the economy accelerating (even with fed tightening) and some pent up demand, firm expects more business travelers to hit the road. Also, firm's latest proprietary forecast suggests RevPAR growth will average 6% per year through 2006. Firm also points out that both MAR and HLT should be attractive to new investors in an improving lodging environment.

Telecom . . . The Federal Communications Commission has pulled back its approval of a plan backed by Nextel Communications Inc. to secure valuable new airwaves on which to transmit its phone traffic, sources close to the commission said. This week, FCC Commissioner Michael K. Powell pulled his vote supporting the 1.9 gigahertz exchange, effectively extending negotiations and increasing the possibility that Nextel may be forced to take the less-desirable frequencies it says it will not accept, sources close to the FCC said.

AmTech suggests investors avoid "buying the pullback" on Nextel but look to "lighten into strength." NXTL's version of the plan is to clean up the 800MHz band in order to reduce harmful interference of public safety radio communications calls for replacement spectrum in the 1.9GHz band. In return, the company would then pay for the public safety's relocation costs as well as giving up some of its own spectrum in the 800MHz band. It now appears more than likely that the FCC will rule that NXTL can NOT switch to the valuable 1.9GHz spectrum. Instead, the co may be forced to use the 2.1GHz band (which would create higher costs for phones). Both sides of the debate are still locked firm in their positions. However, FCC Chairman Powell has just switched sides and indicated his desire to complete the FCC's decision by the end of the month.

The WSJ's "Heard on the Street" column highlights Global Crossing, which saw its shares tumble by 27% three weeks ago after executives startled investors with word that the telecom provider expects to restate 2003 results and withdrew its 2004 earnings forecast, sparking the Nasdaq to consider delisting the stock. But possible troubles ahead doesn't scare Mexican billionaire Carlos Slim Helu, who became the latest big-time investor to buy up a serious chunk of Global Crossing shares. Mr. Slim, who has invested heavily in the telecom business, said he may increase his stake to nearly 20%, according to the article, citing filings he made with regulators in several states. Mr. Slim and his family currently own a 9.9% stake in the co. Word of the possible higher stake comes just a week after Richard Rainwater, the Texas investor, said he also had been buying up shares after the stock's recent stumble, and days after Global Crossing sewed up a key $100 mln bridge loan from Singapore Telemedia Pte Ltd., the biggest investor in the co. "The Slim buying doesn't change anything," says Romeo Reyes, a telecom analyst at Jefferies & Co., who has an "underperform" rating on the stock. "The business has gotten progressively worse since they've come out of bankruptcy."

IT Services . . . Wedbush Morgan initiates coverage of RSA Security with a Buy rating and $21 target. The firm believes that the identity management market is the fastest growing market in the security industry and will benefit from spend dollars shifting to internal security and infrastructure. The firm believes that RSAS is getting its house in order after a stumble a few years ago, and they believe the cash cow SecurID product will give the co the leverage to expand into new product lines, such as ClearTrust, which now has its own dedicated sales force.

Storage . . . Thomas Weisel says that McData's revenue is likely bottoming creating a favorable risk / reward after the co reported last night. The firm notes that non-EMC revenues were up an encouraging 30% year/year (EMC sales down 29% year/year). Renewed growth depends on stabilization at EMC and success of new products. While competition is not going away, the firm thinks a successful ramp in Nishan (2nd quarter/3rd quarter) and launch of Sanera (3rd quarter/4th quarter) - combined with likely stabilization at EMC due to FICON and Nishan - positions the company for renewed growth.

McData's 1st quarter results and guidance did nothing to make the analyst community feel any better regarding the stock. 1st quarter results came in-line with consensus estimates but 2nd quarter guidance disappointed yet again with the co giving revenue guidance of $92-100 million with an operating EPS loss of ($0.02) to breakeven. MP Securities out noting that of McDATA's greater than 10% customers, IBM posted the worst decline, dropping 26% Quarter/Quarter (after a strong January quarter) while EMC declined by 18% Quarter/Quarter. With the stock trading at approx 47x firm's 2005 EPS estimate, but at a low LTM P/S, they believe the stock will perform in-line with the market. First Albany out downgrading the shares to Underperform from Neutral saying the disappointing revenue trends are primarily the result of two factors: the relative weakness of corporate IT spending at the high end (particularly in the U.S.) and the lengthening of sales cycles especially for large deals due to increased competitive pressure from Cisco (and, to a lesser extent, Brocade). In light of reduced visibility, lack of near-term catalysts, increased competition, and uncertainty regarding various transitions, they think the stock will continue to underperform. The company's cash per share of $1.80 provides some downside protection, although they note that net cash per share is only $0.14.

Network Equipment . . . Raymond James comments that following a prolonged absence, Motorola appears to have cracked into Sprint PCS with the V60v handset. While this is likely a relatively small financial opportunity, all sales to Sprint represent incremental upside to Motorola's handset business. Firm continues to be encouraged by momentum in the company's new product initiatives, and expects healthy trends to continue going forward. Based on a mid-20s multiple of 2005 EPS, firm's price target is $28. This suggests the stock trading at approx 1.7x forward revenues, in-line with peers.

Smith Barney upgrades Tellabs to Buy from Hold, as they view the company's proposed acquisition of AFCI as a good deal. The firm thinks there are nice synergies between AFCI's access and TLAB's transport and data products, and believes that TLAB has the service and support organization to push AFCI products into more accounts in greater volumes. Also, AFCI's products should provide a growth driver for TLAB, and should also give TLAB greater entry into the IOC market for transport and data products.

Merrill Lynch upgrades ADC Telecom to Buy from Neutral based on earnings momentum. The firm expects EPS to grow substantially over the next few years, and says the acquisition of Krone could help the company grow the high-margin connectivity biz and improve gross margin 40-43% by increased volumes in similar product space. The firm also believes the co is in the process of divesting its loss-making billing software and cable businesses, which could bring down operating expenses to a run-rate of $90 million/qtr. Target is $3.20.



Morgan Stanley downgrades Nokia to Underweight from Equal-Weight due to their increased conviction in the company's structural problems. The firm's market share model suggests that NOK's market share drops to 28% by 2008, and with an increasingly price sensitive and lower growth market. The firm's EPS now show a five-year growth rate of -6.6%. In addition, firm says that a Russian market research contact suggests NOK has dropped from #1 to #3 (though NOK does not agree) in Russia -- a key emerging market -- with product, distribution, and marketing issues. Firm also says that valuation is not compelling on an intrinsic value or sum of the parts basis.

Goldman Sachs cut its fair value and earnings forecasts on mobile phone giant Nokia on expectations that growth in the handset market will slow. Goldman said it did not expect Nokia to regain its market share. The bank cut its fair value to 11.5 euros from 13, and its 2004 earnings per share estimate to 0.65 euros from 0.70 euros, keeping its recommendation at "in-line".

Network Equipment Report . . . New market share data from the Dell’Oro Group on the enterprise and carrier routing markets were released last night. Cisco gained roughly 1% market share in the overall routing market up to 81% as its overall router sales increased 6% sequentially. Juniper’s share remained essentially flat, inching up 30 bps to 11%.

Within the carrier core routing market, Juniper saw strength in high-end core routing, where its revenues grew 10% sequentially, boosting its market share to 34% from 31% in the December quarter. Juniper’s T-Series high-end core routers continue to gain ground against Cisco, as Cisco has not yet introduced its competing high end HFR core router. Cisco’s high-end core routing revenues grew 2%, but the company lost 2% market share to Juniper. Pricing in the core router

market remains favorable for both Cisco and Juniper, and each saw mid-single digit sequential price increases.

New market share numbers for Avici, on which we initiated coverage last night, confirmed what the company said when it reported March quarter results. Avici’s market share dropped to 2.5% from 4.7%, as both new chassis shipments and line card shipments declined. Avici should deliver stronger results in the June quarter as recent contract announcements move to the initial phases of deployment. Procket, a private start-up competitor in the core routing market, shipped 20 routers in the quarter. It appears Procket is beginning to gain some initial traction in the core router market, though it is still in the very early stages. Procket’s 29 chassis shipments over the past six months are even with Avici’s level of shipments over the past year.

In the edge routing market, Cisco’s 2% sequential growth was enough to push its market share up 3% to 74%. Juniper also gained market share slightly by roughly 50 bps to 14.2%. The biggest share drop in the market came from Nortel, whose revenues declined nearly 40% to $22 million (primarily from its Shasta product and Backbone Node router lines), leading to a 3% decline in market share. Nortel’s results in this business have been choppy over the past year, and this is

a relatively small piece of Nortel’s overall portfolio.

Cisco, Lucent, and Alcatel each posted slight 1-2% market share gains against Nortel in the WAN switch market. The combined effect led to a 4% market share decline for Nortel. Cisco, Lucent, and Alcatel each posted essentially flat revenues—an incremental positive given the typical seasonal decline in the March quarter—while Nortel saw a more severe than normal seasonal decline of 19% to $169 million.

Cisco saw 15% sequential growth in low-end enterprise routing and 5% in mid-range enterprise routing, two markets where it continues to dominate with over 90% market share. Pricing remained fairly stable overall—midsingle digit price increases in low-end routers, but an unexpected 8% sequential decline in mid-range ASPs. Mid-range routing ASPs can fluctuate based on the mix of routing modules sold in the quarter, but we had expected new module sales to lead to more stable mid -range ASPs. Given the record level of mid-range chassis shipments—nearly 50,000 chassis in the quarter, the highest level over the past decade—it would appear that Cisco is building its installed base, and add-on module sales will come further down the road.

Semiconductor Equipment . . . Thomas Weisel downgrades Ultratech to Peer Perform from Outperform. There are two reasons for increased caution on the near-term revenue potential: (1) the company's revenue growth trajectory in the current semi equipment upturn does not appear to be keeping pace with its peer group, and (2) the recent decision by INTC to adopt multiple smaller cores in its processors creates increased uncertainty around the timing of potential adoption of UTEK's laser processing technology by the semi industry.

Semiconductors . . . Based on its belief that overall business conditions remain robust, Morgan Stanley raises its estimates for Broadcom. Its 2004e EPS has been increased to $1.32 from $1.25, while 2005e has been raised to $1.50 from $1.40. These are above consensus of $1.29 and $1.47, respectively. This has been driven by expectations for faster revenue growth and better margins, and the firm believes that additional upside potential remains likely.

Morgan Stanley initiates coverage of Conexent with an Overweight rating and $6 target. The firm sees CNXT as an attractive value idea in their semi universe, and foresees a higher multiple on earnings as the co monetizes certain assets, deleverages its balance sheet, and delivers merger-related synergies.

Analysts positive following strong results and guidance from Marvell Tech. July Quarter guidance for 10% revenue growth came in much better than consensus forecast for 5% growth and whisper number of 7-9%. Western Digital's transition to SoC technology contributed significantly to MRVL's storage revenue growth during the quarter. MRVL also benefited from gigE IC ramps at Cisco and other OEMs during the April Quarter. Merrill Lynch out raising their 2004 EPS estimate from $1.40 to $1.53 and 2005 EPS estimate from $1.71 to $1.84 saying they believe MRVL has strong growth opportunities in several new markets in 2005. They expect to see a notable increase in the company's WLAN IC sales later this year from product ramps in a new gaming platform. Firm also continues to be encouraged about power management, which management believes could account for $100+ million in sales in 2005. They are currently modeling only about $35 million from power management in 2005, which means there is potential for significant upside to estimates. Firm is reiterating their Buy rating and $52 target.

The WSJ reports a small Canadian-based computer company has filed a $500 million patent lawsuit against Intel. In a lawsuit filed in U.S. District Court on Thursday, All Computers Inc. alleges that Intel violated patent laws by using the company's patented circuitry in its Pentium processors without a license. Although All Computers is suing for $500 million, attorneys for the co said under patent laws as much as $1.5 billion in damages could be awarded, if the infringement was deliberate. "It's probably one of the largest patent infringements in the U.S. or the world's history because of the volume of sales and the types of products," said William E. Levin of Laguna Beach, Calif., an attorney representing All Computers. "We expect it will have a big impact on the computer industry as a whole." The circuitry controls the frequency of input of the processors, said his partner, Edward F. O'Connor. "Virtually every computer in the world utilizes this technology."

Software . . . BMO Nesbitt Burns upgrades Business Objects to Market Perform from Underperform based on valuation, as the stock now reflects disappointing 1st quarter results. Price target is $26.

Microsoft and Oracle announced a software development agreement on Thursday, signaling an improved relationship between the two corporate database software market rivals. Software developers will be able to work with Microsoft's tools to write programs for Oracle's databases under the accord.

Hot Items - Check out the "Hot Items" page (updated daily)


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Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.

http://www.robblack.com/rb_marketwrap.shtml

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Amateur Investors Weekend Stock Market Analysis (5/22/04)

Although there has been some volatility over the past two weeks the major averages have essentially been trading sideways. The Dow has been trading mainly between 9850 and 10050 the past few weeks and eventually it will probably make a significant move in one direction or the other. If the Dow can break above 10050 then look for upside resistance around 10225 which is where its 50 Day EMA (blue line) and 100 Day EMA (green line) are converging at. In the longer term if the Dow can rally above 10225 then it's next area of significant upside resistance would probably reside near 10450 which is along its developing downward sloping trend line (point A). Meanwhile if the Dow breaks below 9850 it could quickly fall back to the low made last November near 9600 (point B). In the longer term if the Dow breaks below 9600 then a drop back to its 38.2% Retracement Level near 9400 (calculated from the October 2002 low to the early 2004 high) is possible.



The Nasdaq has roughly been trading between 1880 and 1935 over the past two weeks. If the Nasdaq can break above 1935 then look for initial upside resistance near 1975 which is where its 50 Day EMA (blue line) and 100 Day EMA (green line) come into play at. In the longer term if the Nasdaq can break above 1975 then its next area of upside resistance would probably reside around 2030 which is along its downward sloping trend line (point C). Meanwhile if the Nasdaq breaks below 1880 then its next major support area is around 1760 which is its longer term 38.2% Retracement Level calculated from the October 2002 low to the early 2004 high.



The S&P 500 so far has held support near its 200 Day EMA (purple line) around 1080. The S&P 500 has initial upside resistance in the 1115-1118 area which coincides with its 50 Day EMA (blue line) and 100 Day EMA (green line). If the S&P 500 can break above 1118 then look for the next area of upside resistance near 1140 which is along its downward sloping trend line (point D). Meanwhile if the S&P 500 breaks below 1080 look for a quick drop back to the 1055 area which was near the low made last December (point E). In the longer term if the S&P 500 falls below 1055 its next major support area would reside around 1015 which is its 38.2% Retracement Level calculated from the October 2002 low to the early 2004 high.



As far as a few sectors the Semiconductor Holders (SMH) which tried to put in a bottom in early May have been encountering resistance near their 200 Day EMA (purple line) around 38. If the SMH's can rally above 38 then look for additional upside resistance either at 39 which is the 100 Day EMA (green line) or around 40 which is along their downward sloping trend line (point E). Meanwhile a key support level to watch is near 34.50 (point F). If the SMH's break below 34.50 then this would likely lead to a drop back to their longer term 38.2% Retracement Level near 32 (calculated from the October 2002 low to the early 2004 high)..



Meanwhile the Oil sector (XOI) which has been in a steady up trend since March of 2003 has started to pull back some over the past 2 weeks. The key support level to watch over the next few weeks is around 580 which is close to the XOI's 20 Weekly EMA (green line) and longer term 23.6% Retracement Level (calculated from the March 2003 low to the recent high). If the XOI breaks below 580 this would likely lead to a drop back to either its 40 Weekly EMA (purple line) near 555 or its longer term 38.2% Retracement Level just above 540.



For those of you following the Gold and Silver sector (XAU) it has found near term support at its longer term 50% Retracement Level near 78. If the XAU continues to bounce I would look for upside resistance to develop at its 10 Weekly EMA (blue line) near 90. Meanwhile if the XAU breaks below 78 then its next level of downside support would be at its longer term 61.8% Retracement Level near 70 (point G).



Last weekend I talked about the Bullish-Bearish Indicator starting to show signs that investors were slowly becoming pessimistic about the future of the market as the % difference between the Bearish and Bullish Investment Advisors was slowly decreasing. Over the last several years when the % difference between the Bearish and Bullish Investment Advisors has approached zero or become negative (% of Bearish Advisors is greater than % of Bullish Advisors) then this has led to a some type of bottom (points H) followed by a decent rally. Right now the % difference between the Bearish and Bullish Investment Advisors is around 17% but in late April its was around 28% so as I said above it has been slowly trending lower.



How can a Premium Membership to Amateur-Investors.Com benefit you as an investor? We focus on stocks which are exhibiting favorable Sales and Earnings Growth that have developed a favorable chart pattern such as a "Cup and Handle", "Double Bottom", "Flat Base" or "Symmetrical Triangle". These stocks are then included in our "Stocks to Watch List" which gives investors a quick reference to those stocks which may provide the best buying opportunities to the long side in the weeks ahead. Each stock in our "Stocks to Watch List" includes specific Buy Prices, Stop Loss Prices (very important) and projected Target Prices. Our Performance so far in 2004 is shown below as compared to the major averages.

Performance (Long Strategy) vs Major Averages
(1/1/04-5/21/04)

Amateur Investors +26.6%
Dow -4.7%
Nasdaq -4.5%
S&P 500 -1.6%

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BPNDX, BPCOMPQ, VXO, VIX, VXN vs. SOX on 3 year daily charts. Low readings on the BP Indices plus 6% reversals theoretically show buy opportunities for the SOX. The reverse is true for market tops. The volatility indices move in an inverse relationship to the SOX. Look for spikes higher in fear indices (volatility) to mark market bottoms while market tops are more difficult to time:

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WEEKLY OUTLOOK, May 24
By Jody Osborne, Optionetics.com
5/24/2004 7:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10441

The major market indices saw little net movement last week, as traders wait for more information on oil prices and interest rates. The Dow ($INDU) and S&P 500 ($SPX) extended their weekly losing streak to four, though the Nasdaq ($COMPQ) was able to rise just slightly. Technically, the fact the Dow closed below 10K on the week is a bearish indicator. However, the SPX has been consolidating just above its 200-day moving average, which has held as support so far. Low volume has made it difficult to create an accurate forecast, but most analysts do expect higher prices once traders come to grips with a rise in interest rates.

Economic news is likely to be a crucial part of how stocks trade this week, with a large schedule of reports on tap. Below is a list of these reports:

Monday: UBS Index of Investor Optimism

Tuesday: Chain Store Sales Snapshot, The Conference Board Consumer Confidence, Existing Home Sales

Wednesday: MBA Mortgage Applications Survey, ABC News/Money Magazine Consumer Comfort Index, Durable Goods, New Home Sales, Monthly Mass Layoffs

Thursday: Jobless Claims, GDP, The Conference Board Help Wanted Index

Friday: Personal Income, NAPM – NY Report, University of Michigan Consumer Sentiment Survey, Chicago PMI

Traders will have several different reports to focus on; with perhaps the most closely watched being the Personal Income report—a favorite of Fed Chairman Greenspan. Meanwhile, the Personal Consumption Expenditure Index [PCE] is the preferred inflation gauge for the Fed. Estimates are for the PCE to rise just 0.2 percent, hardly a major cause for concern. However, negative news could be found in the consumer spending component, as higher oil prices might start to show a negative impact on spending.

Over the weekend, OPEC decided to push off a decision on oil production until June and this is likely to be met with higher oil prices this week. Traders had pushed down oil prices slightly on Thursday and Friday in hopes OPEC would start to lift production sooner. This news could also be a negative for the stock market Monday, with high gasoline prices expected to impact consumer confidence as well. We’ll get a better idea of how much confidence has waned from gas prices when the University of Michigan consumer sentiment survey and the Conference Board report on confidence are released this week.

Earnings news will be on the light side this week, with very few reports left to be announced. Nonetheless, first quarter earnings were very strong, but have been overlooked because of oil prices and inflationary pressures. Traders have chosen to neglect positive earnings news, focusing instead on rising interest rates and problems in Iraq. However, this does set the stage for a strong rally once traders come to grips with these issues. This rally might have started as soon as Monday, but OPEC’s decision to push back production increases might keep the bulls at bay.

The Nasdaq might in store for some higher prices if the Nasdaq Volatility Index ($VXN) is correct. After moving above its 200-day moving average resistance two weeks ago, a sign that lower prices were in store, the VXN was able to fall sharply this past week and move back below this key moving average. Remember, the VXN is a contrarian indicator, so when it pushes lower, this normally is accompanied by buying in tech stocks. The VXN is sitting near 25 currently, but hit a low near 20 in April. Thus, if this indicator continues to move toward this low, the Naz should see higher prices.

The CBOE Market Volatility Index ($VIX) isn’t showing the same movement. In fact, the VIX didn’t show a net movement this last week and has been consolidating between 18 and 20 for the past couple of weeks. The SPX is showing consolidation as well, sitting right above its 200-day moving average. This lack of movement from both the VIX and SPX makes it difficult to predict where the indices are heading. However, a break of its 200-day moving average on strong volume would be bearish for the SPX.

Last Friday was option expiration for May contracts, which means new June contracts will be available Monday. Traders should make a habit of checking their option positions around expiration time to make the appropriate adjustments to their trades. Not all strategies need consistent watching, but every trade should be checked from time to time and expiration is a logical time for this review.


Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Jody's Forum

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Technical Analysis: Still Range-bound
By Paul Shread

http://stocks.internetnews.com/article.php/3358621

So much for the end of expiry resolving this indecision. The indexes continue to consolidate near the lows, suggesting the possibility of another leg down, but they could also be trying to bottom. The Nasdaq (first chart below) has gapped up for five straight days without having much to show for it. A break above 1934-1936 would be a good start, with 1951 major resistance above that. Support is 1920, 1897-1900 and 1878. The S&P and Dow (second and third charts) appear to be forming wide bear flags. Support on the S&P is 1093, 1083-1085 and 1075, and resistance is 1103-1107 and 1110. The Dow has support at 9950, 9900, 9852 and 9822, and resistance at 9975, 10,000, 10,048 and 10,120.

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The Next 20 Years: Will Energy And Financials Switch Places?

http://bcaresearch.com/public/highlights.asp?pre=PRE-20040525.GIF

Market leadership changes are slow to develop, but can last for a long time when they do occur. For example, the energy sector’s share of the total market capitalization was over 25% in the early-1980s, the last time oil was at such high levels. Conversely, at that time when interest rates were sky-high, the financial sector accounted for a meager 5% or so weighting. The two sectors have completely reversed places in the past 25 years, owing to the relentless drop in interest rates and, until recently, depressed crude oil prices. Consequently, we anticipate a major reversal in relative fortunes in the years ahead. The emerging world’s rising demand for energy and the increased global push to stockpile supplies in the face of heightened geopolitical risks suggest that energy company profits will continue to grow as a share of total GDP for a long time to come. Meanwhile, an end to the disinflation era could see Treasury yields begin a long, slow rise upward, especially if high oil prices in the next decade contribute to an increase in inflation expectations.

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Monday's MarketWrap:Better late than never!

http://www.robblack.com/rb_marketwrap.shtml

Stocks closed broadly higher though steep losses in Altria Group left blue chips stranded in the red. The DJIA ended down 8 points (-0.08%) for a close of 9,958 while the Nasdaq lifted nearly 10 points (+0.57%) to 1,922. The S&P 500 added almost 2 points to 1,095. Crude oil futures had their biggest gain in more than three months, with the price back up to $41.67, just below the old high of $41.85. Oil stocks, like ConocoPhilips and ExxonMobil did well.Altria stumbled 8.9 percent after a U.S. Tobacco stocks were rocked on a court ruling that could leave the industry vulnerable to allegations that the industry fomented policies leading to addiction. The market was also helped by a stable interest rate environment, while the dollar improved against the yen and euro.

Strong Sectors: hardware, networking, telecom, gold, REIT, industrials, oil services, transportation, coal, utility
Weak Sectors: tobacco

Top Stories . . . Saudi Arabia, the world's largest oil exporter, is going ahead with plans to boost oil production in a bid to lower record-high prices, after other members of the Organization of Petroleum Exporting Countries deferred a decision on increasing the group's output quota.

Omnicare, a provider of pharmacy services to the elderly, made an unsolicited offer to buy NeighborCare Inc. for about $1.5 billion, including assumed debt, to increase the number of patients served.

Lehman Brothers named Joseph Gregory president and sole chief operating officer, putting him in the No. 2 role behind Chairman and Chief Executive Richard Fuld.

Exxon Mobil, the world's largest publicly traded oil company, agreed to transfer stakes in 28 U.S. oil and natural-gas fields to Apache Corp. and to jointly explore for gas with Apache in the Gulf of Mexico.

General Electric will sell a stake for as much as $4.5 billion in a business it doesn't want.

New York Attorney General Eliot Spitzer will today sue former New York Stock Exchange Chief Executive Officer Richard Grasso to recover some of his $139.5 million pay package, a Spitzer spokesman said.

Quotes of Note . . . ``The Saudis are making more oil available but it will not get here fast enough to meet summer demand. The reaction we're seeing to the closure of the MARS platform shows how sensitive we are to any disruptions.'' Phil Flynn, senior energy trader for Alaron Trading.

``The last time I can recall the Saudis doing anything like this was in November 1997 when OPEC was preparing for the Jakarta meeting. They only make announcements like this when they are trying to send a signal that they mean business.'' '' Bill O'Grady, director of fundamental futures research at A.G. Edwards.

Gurus . . . On the Rukyeser Show, panelist recommendations included Fox, Genuine Parts, Fluor, Harman Int'l, Ralph Lauren, Biogen IDEC, JP Morgan, Abbott Labs, and Reader's Digest. Guest Jim Moffett of UMB Bank recommended Hellenic Bottling and Smith Nephew.

On the Fox-Brenda Buttner Show, recommendations on Garmin, Solectron, Panera Bread, National Semi, and Automatic Data.

David Wyss, economist for Standard & Poor, says that the economy reliance on oil has lessened, and that Americans spend a historically small proportion of disposable income on gasoline. Homes and vehicles are more energy efficient, many power plans have switched from oil to natural gas, and the U.S. has shifted to a service economy.

Barron's highlights Mary Meeker, a Morgan Stanley stock analyst, for her picks. Six years ago, Barron's crowned the stock analyst the "Queen of the 'Net" for her influential calls on leading Internet stocks. Mary Meeker thinks that Chinese Internet stocks hold great long-term promise, but she wants to wait to jump in. Stocks mentioned in article include China Mobile and China Unicom. Ms Meeker suggests that one way to play internet stocks generally, is to buy eBay or Yahoo, with the best pure play in China mentioned as Sina. Ms Meeker also suggests that we may have a lot of wind in our face from a stock-market standpoint over the next six months or so and therefore recommends to hold back jumping into Chinese internet stocks, including also new public companies, like Shanda Interactive and LinkTone.

Barron's highlights Bernie Myszkowski's and co-manager Rick Drake's stock picks. Mr Myszkowski oversees $1.3 billion ABN Amro Growth fund, which invests mainly in large-capitalization growth stocks. "We aren't looking for the quick kill or the fast buck," says Bernie Myszkowski. "If I've learned anything after more than three decades in this business, it's that there is no such thing as a sure thing. We simply look for large-cap companies with consistent earnings growth and strong balance sheets and let time work its magic." The fund's relatively concentrated portfolio of 38 stocks is full of quality names such as Pfizer, Cisco Systems, Dell, Harley-Davidson, Texas Instruments, Walgreen, Medtronic and American International Group, some of which have been in the fund since its start in 1993. The fund has performed admirably over long stretches. During the past 10 years, according to fund-tracker Lipper, the fund was up 12.14%, beating the 11.06% of the S&P 500 and topping the performances of more than 95% of large-cap growth funds. Over five years, the fund beat 88% of its peers. And on a three-year basis, though its annualized return was a negative 5.21%, that was still better than 90% of its rivals. The fund manager recently sold some holdings of EMC and completely purged Freddie Mac. Two recent additions to the portfolio are Zimmer Holdings and Qualcomm.

Of Note . . . Getting back to the exceptional first-quarter results, the translation into stock prices left something to be desired. The S&P 500 has lost 2.9% in the second-quarter after gaining 33% in the previous 12 months. We are dealing here with peak momentum—the first-quarter is as good as it gets, and one sells the deceleration. Similarly, in the depths of despair in March of 2003, the market began a one year unrelenting bull phase.

Ouch . . . Unleaded gasoline futures leaped to an all-time high on the New York Mercantile Exchange as crude neared $42 a barrel. The June contract for gasoline was at $1.465 a gallon, up 4.82 cents, or 3.4 percent. A fire over the weekend shut down a major pipeline system in Washington, spurring fresh fears about gasoline supplies.

Politics . . . Lehman identifies stocks and industries it thinks will perform better under a Bush administration and a Kerry administration. Real-money Presidential election vote-share futures have been steadily discounting a Bush re-election but the margin of victory has recently become very tight. Industries the firm thinks will perform better under a Bush administration are Pharma, HMO, PBM, Drilling, Utility, Auto, Asset Managers, P&C Insurance, and higher-end retailers. A Kerry administration would aid the market performance of Facilities, annuity oriented insurers, GSEs, Homebuilders, Banks, and retailers catering to middle-class. The equity market, on average, is near flat during the first half of an election year but moves considerably higher during the second half.

Financials . . . Wells Fargo, the fifth-biggest U.S. bank, may buy Strong Capital Management Inc., which settled lawsuits last week over allegations of engaging in improper mutual fund trading, people familiar with the matter said. Wells Fargo probably would pay as little as $400 million, or less than half what Strong Capital would have fetched before it was linked to improper trading, said Burton Greenwald, a consultant with BJ Greenwald Associates in Philadelphia. Richard Strong, the founder of Strong Capital in Menomonee Falls, Wisconsin, turned down takeover offers as recently as 1999 of about $1 billion.

Oil & Gas . . . Apache and ExxonMobil announced an agreement that provides for transfers and joint venture activity across a broad range of prospective and mature properties in West Texas,Western Canada, onshore Louisiana and the Gulf of Mexico Continental Shelf, and is expected to increase the realized value of the portfolio for both companies. APA's participation in this agreement will include a cash payment of $385 million. The parties will now work together to close the various transactions with more definitive agreements.

Friedman Billings upgrades Giant Industries to Outperform from Market Perform and upgrades FTO to Market Perform from Underperform, both based on valuation; firm says that the smaller independent refiners (FTO, GI, HOC, and TSO) represent the best value using their price/free cash flow analysis.

More on Oil & Gas . . . High demand for gasoline (up 3% year to date), relatively low inventories (2% below last year and 3% below the 10-year seasonal average), and concern that environmental regulations might lead to regional shortages have pushed up margins across the nation. The sharpest increase occurred in the Midwest, where margins have increased 67% above the first quarter, to $11.22/bbl. Refining margins on the East and Gulf Coasts have increased 27% and 44%, respectively. West Coast margins have jumped 62% above the first quarter average to $23.64/bbl. Estimate margins nationwide to be 90% higher than margins at this time in 2003 and 154% above midcycle. Price differentials between light grades of crude and heavy/sour grades remain high. In the second quarter to date, the spread between West Texas Intermediate (WTI) and Bow River has widened by $2.48/bbl, or 27%, above first quarter, while the average spread between WTI and West Texas Sour crude has remained flat from first quarter averages of $3.41/bbl. The average WTI/Maya spread and the WTI/Arab heavy has declined 5% and 9%, respectively, below first quarter averages, but remain high relative to history. Wide light-heavy spreads should benefit Valero, Premcor and Frontier.

These companies’ earnings are highly sensitive to changes in refining margins. Estimate each $1 change in the margin affects earnings by $2.15 per share, or 81%, for the group. 2nd quarter earnings projections assume refining margins in June will be approximately 30% below current levels. This could mean that results exceed our higher estimates. Our estimates for 2005 are unchanged.

There are signs that refining margins are nearing their peak. Gasoline production has increased in the

second quarter by 5%, to 8.8 million b/d, from the first quarter average as refiners have emerged from maintenance, with utilization averaging 92.9%, compared to 89.2% in the first quarter. In addition, imports have risen to 945,000 b/d, or 25%, above first quarter levels. As a result, gasoline inventories are building -- up 6.2 million barrels in the past month. Continued strong economic activity would be a force that could support high gasoline demand but we find that seasonally adjusted demand tends to be elastic when retail prices exceed $1.75 per gallon. Gasoline prices nationwide now exceed $2.00 per gallon. Expect these high prices to dampen demand growth at the same time that supplies increase.

Refining stocks tend to move with margins. Given the high volatility of refining margins, the independent refining stocks could correct sharply if margins pull back even from extraordinarily high levels to above average levels. The risk/reward for these stocks is unfavorable. On average, see downside of 38% and 10% upside for the independent refiners. There are no changes to our individual stock ratings: Outperform rated stocks are Premcor and Frontier Oil; Peer Perform are Ashland and Valero Energy, and Underperform are Sunoco and Tesoro Petroleum.

Energy . . . Smith Barney upgrades Edison to Buy from Hold and raises their target to $26 from $24; firm says that a constructive California P.U.C. should issue a general rate case decision for EIX later this week, allowing the co to earn a fair return on its growing utility capital investment; also, firm believes that the company's merchant biz (Edison Mission Energy) could become healthier through asset sales and better cash flow from improving midwest power markets, and they think that a $1.5 billion parent cash balance will drive value through debt reduction, reinvestments, and/or share repurchases.

Hydrogenics announced that it has been contracted by ITOCHU Corp of Tokyo, Japan, to provide a 10 kilowatt HyPM fuel cell power module for a demonstration project in Mie Prefecture, Japan. One of the aims of the project is to demonstrate a zero-emission energy system based on renewable energy.

Metals . . . The WSJ reports that Alcoa, focusing on nations with low-cost energy, is planning a $1 billion aluminum smelter on the island of Trinidad, even as it prepares to break ground on another $1 billion smelter in Iceland. According to the article, these smelters will replace mothballed capacity in several states of the U.S., especially in the Pacific Northwest where high energy prices have made them too costly to operate. Under a preliminary agreement, the Caribbean plant would produce about 250K metric tons of aluminum annually, with Alcoa owning 60% of the plant and the government owning 40%. The government has options to buy as much as 100K metric tons of aluminum a year to sell to other Caribbean manufacturing sectors or back to Alcoa. The plant will use low-cost electrical power converted from the country's natural-gas fields. The company said it also is looking at smelter projects in China, Brunei, Bahrain, Brazil and Canada. "We are looking anyplace in the world where there is competitively priced energy," said a spokesman, Kevin Lowery.

Midwest Research upgrades Nucor to Neutral from a Trading Sell and reits its Sell on AK Steel. On Friday, China's Commerce Ministry announced that it will eliminate export rebates on coke and reduce the number of export licenses to 10 million tons versus 14.8 million last year. The move is significant given that China is by far the world's largest coke exporter. This will likely result in higher domestic coke prices for a longer duration of time. However, the firm believes that the continued increase in raw materials utilized in the integrated model vis-à-vis the mini-mill model will cause companies such as NUE to be more attractive.

Defense & Aerospace . . . CSFB upgrades Boeing to Outperform from Neutral and raises their target to $52 from $47. The firm says they have higher confidence that the 7E7 will prove a success, citing the large number of 7E7-class aircraft approaching retirement age, their belief that the aircraft will serve the "sweet spot" of airline industry profitability, and the 7E7's favorable capital and operating cost profile. The firm is also more confident in the Integrated Defense Systems outlook, as they are impressed by the relative caution with which BA views the defense spending outlook, and the reward/risk and returns in the business appear stronger than expected.

The NY Times reports that the Department of Homeland Security is on the verge of awarding the biggest contract in its young history for an elaborate system that could cost as much as $15 billion and employ a network of databases to track visitors to the United States long before they arrive. The contract, which will probably be awarded in coming days to one of three final bidders, is already generating considerable interest as federal officials try to improve significantly their ability to monitor those who enter at more than 300 border-crossing checkpoints by land, sea and air, where they are going and whether they pose a terrorist threat. Interviews with government officials, experts and the three company's vying for the contract, Accenture, Computer Sciences and Lockheed Martin, reveal new details and potential complications about a project that all agree is daunting in its complexity, cost and national security importance.

Retail . . . Wal-Mart maintains 4-6% same-store sales growth forecast.

Deutsche Banks reits a Buy on Kohl's. The firm says Wednesday's analyst meeting will mark the next inflection point. The presentation will likely include an announcement that Ralph Lauren's Chaps line is going into Kohl's stores, which could have a significant whole house impact. The firm says that now that the turnaround is accelerating (lower inventories, expanding margins, and improved comps) current levels reflect a compelling entry point.

Analysts estimate sellers listed 13.3 million items on eBay’s core U.S. site during the most recent week (5/15/04-5/21/04), a 27% increase from the year-ago period. Quarter-to-date (4/1/04-5/21/04) listings total approximately 101 million items, a 31% year-over-year increase. Estimate listings on eBay Germany during the most recent week grew 36% from the year-ago period. Quarter-to-date listings on eBay Germany have increased 45% year-over-year. Listings on eBay U.K. grew approximately 104% from the year-ago period during the most recent week. Quarter-to-date listings on eBay U.K. have increased 130% year-over-year. Passenger vehicles and auto parts on eBay Motors grew 45% and 58%, respectively, this past week. Quarter-to-date, estimate that passenger vehicles and auto parts on eBay Motors grew 41% and 66%, respectively.

Restaurants . . . CIBC upgrades Applebee's, PF Chang's to Outperform from Sector Perform based on valuation; firm views both stocks as relatively defensive in the sector, with better than average cost visibility and compelling top-line stories. Firm says APPB's well-established record of same store sales gains, its current national rollout of the Weight Watchers program, and low commodities exposure provide visibility and make it a compelling defensive play; stock has fallen 14% in past six weeks, to its cheapest level in 8 months. Firm regards PFCB as a best in class growth casual diner, yet now it trades at its cheapest valuation in 14 months.

Healthcare . . . Omnicare it sent a letter to NeighborCare offering to purchase all of the outstanding shares of NCRX common stock for $30.00 per share in cash. The transaction is valued at approx $1.5 billion, which includes the assumption of NCRX's net debt. OCR's offer represents a premium of 70% over NCRX's closing stock price on 5/21, the last trading day before OCR's offer.

Medical Devices . . . The WSJ "Ahead of the Tape" column highlights rumors among traders that Medtronic's earnings, scheduled to be released today, may be slightly better than expected, thanks to strength from its defibrillators. Recent positive data on the safety and effectiveness of defibrillators have bolstered sales slightly. The whole market is growing strongly. But investors and traders are bracing for slightly worse-than-expected data from Medtronic's trials for its stent. Investors are poised to closely analyze longer-term data on the renarrowing of the arteries called "late loss," a precursor to restenosis. Meanwhile, Boston Scientific's stock is trading at 15.6x next year's estimates and J&J changes hands at 16.6x. Medtronic is trading at 25.9x the estimate for 2005. Guidant trades at 20.9x estimates for next year. The discount for Boston Scientific, the market leader, is attributed by investors fear that earnings will peak next year, and then fall off thanks to competition from Medtronic and Guidant. But, according to the column, both Medtronic and Guidant seem to have already had modest delays in their stent programs. If those delays become exacerbated, the market leader will benefit, and Boston Scientific could earn more money than forecasted.

Media . . . The WSJ reports that Time Warner isn't planning to spin off or sell the company's AOL unit "anytime soon," Time Warner Chairman Richard Parsons told shareholders. Mr. Parsons's comment appeared to rebut speculation in recent months that the company was thinking about shedding the unit, whose lackluster performance in the past two years has dragged down the parent's results. Mr. Parsons didn't commit himself to keeping the unit permanently, but he expressed confidence about its future. "AOL is not only righting itself but is also becoming a serious engine for growth," he said, speaking at the company's annual shareholder meeting.

Net2Phone and Liberty Cablevision launch VoIP telephony system. Liberty Cablevision maintains ownership of the customer, service brand, and Tier I customer and technical support, while Net2Phone supports the back office platform, switching and transport, ongoing operations and Tier II+ technical support to deliver a fully managed QoS IP solution. Net2Phone tracks and monitors voice quality and network performance metrics from start to finish and provides the cable operator with a full view into telephone calls routed over its network. Consumers benefit on two fronts: inexpensive stand alone telephony when compared against traditional phone service and savings derived from the video, data and voice triple play in cable TV, high-speed Internet access and telephone services.

The WSJ's "Heard on the Street" column discusses Martha Stewart Living Omnimedia, which saw its shares soar on Friday after perjury charges against a government witness in the Martha Stewart trial. Larry Stewart was charged with lying eight times when he testified during the trial about his participation in tests done on the ink used on a worksheet detailing Ms. Stewart's stock portfolio. Mr. Stewart, no relation to Martha Stewart, was also charged with lying about having read a book proposal written by colleagues that discussed a different way to test ink. The fading enthusiasm for Martha Stewart Living stock during Friday's session stemmed from the realization that the perjury charges aren't likely to undermine her obstruction-of-justice conviction, according to the column, citing defense lawyers who aren't involved in the case. The legal standard for overturning a conviction based on perjured testimony of a witness is high. Defense lawyers would need to show that the jury would have acquitted if it hadn't been for his testimony. If the defense had disputed Mr. Stewart's conclusions, which it didn't, then the defense could have argued that Mr. Stewart's credibility was more relevant to the jury. The perjury news could be a mixed blessing for the co, which has sought to put Ms. Stewart's legal troubles behind it. A lengthy appeal, made more complex by the perjury allegations, could prove damaging, as many advertisers are waiting for a resolution of the case before considering buying ad space from the magazine and television-show co, the Journal said.

Electronics . . . palmOne announced that summary judgment had been issued in its favor dismissing Xerox's claim that palmOne's former text-entry system, Graffiti, infringed a Xerox patent. The ruling will result in the dismissal of a lawsuit brought by Xerox in 1997 against Palm, Inc. and its former parent, 3Com.

Lehman increases palmOne etimates for May Quarter and full year estimates given an improving Treo outlook. The May Quarter estimate goes to $0.13/$255 million from $0.10/$250 partially on solid handheld demand and largely on lower taxes; full year goes to $0.66/$1.14 billion from $0.28/$1.08 billion. According to firm, Treo component constraints appear set to abate this summer. As carrier checks suggest low channel inventories, firm believes reordering from AT&T, Sprint, and Cingular is likely. Two additional catalysts that would likely spur additional demand would be a Verizon launch this summer and a BlackBerry Treo this fall. While component challenges may limit May Quarter upside, Treo strength should offset August seasonality and allow PalmOne to lift 2005 guidance of 15% sales growth.

Telecom . . . Bear Stearns upgrades Nextel to Outperform from Peer Perform based on valuation, as they think the stock is cheap at 10.9x their 2005 EPS estimate of $2.08, or 16.0x fully taxed EPS of $1.42. Firm also expects continued solid execution in 2004, and believes that while FCC and technology issues are significant, the stock is now discounting a worst-case scenario; firm finds it unlikely that NXTL would agree to a resolution to the spectrum swap which destroys value, and they also believe it increasingly likely that NXTL will build Flarion rather than a more expensive CDMA overlay. Target is $30.

Prudential comments that Sprint Corp. lowered pricing for its push-to-talk "Ready Link" service to $10 per month from $15 per month along with the first two months free with a one-year agreement. The company also announced plans to introduce a new push-to-talk handset priced significantly less than a comparable handset from Verizon Wireless and Nextel, $69.99 vs. $199.99 and $149.99, respectively. With 275k "Ready Link" customers to date since the service launch in November 2003, Sprint is looking to drive additional demand and gain traction for the service, in firm's opinion.

Verizon announced an agreement late Friday to sell its 707K access lines in Hawaii to The Carlyle Group, a private equity firm. The $1.65B sale also includes the services and assets of Verizon Long Distance, Verizon Online, and Verizon Information Services (directory publishing). The company's wireless assets and operations in Hawaii are not included in the sale. Verizon had been exploring the sale of its Hawaiian operations in order to shed non-strategic assets as it pursues higher growth opportunities, particularly in its wireless and broadband businesses. Verizon will likely use the proceeds to continue its debt reduction efforts. Verizon Hawaii has approximatley $125 million of outstanding debt coming due in 2005, and $300M coming due in 2006. The transaction equates to a per line valuation of approximately $2,300, lower than the approximate $3,300 Verizon received for access lines sold to ALLTEL and CenturyTel in August 2002. However, the prior sale did not include the long distance, Internet, and directory publishing businesses, making comparisons problematic. The transaction is expected to close in 2005 following regulatory approval and is conditional upon the closing of financing commitments obtained by The Carlyle Group. Analysts are leaving 2005 EPS estimate unchanged as lower operating income as a result of the access line sales will likely be offset by reduced interest expense associated with debt reduction. The operations sold produced revenue of $610 million, and normalized operating income of $128 million in 2003.

Guzman & Co is out in defense of Nextel saying that investors should be taking advantage of today's Nextel weakness based on misconstrued reports that FCC Chairman Powell is "against" offering Nextel 1.9 GHz in order to resolve what has become, thanks to major media, a very high profile issue both inside and outside the Beltway. According to the firm, Nextel CEO Tim Donahue, has already drawn a line in the sand, stating that Nextel would not accept 2.1GHz. In firm's opinion, in order for Nextel to accept 2.1 GHz, the FCC would almost have to pay Nextel to take it. In other words, if CEO Donahue reversed himself, he would have to look like a hero to Nextel shareholders. Firm believes that now Nextel will either get 10 MHz of 1.9 GHz at a discount, or they will get 2.1GHz, basically for free. Or Nextel will walk, and that's not what Mr. Powell can afford, especially when it looks obvious that the White House and Mr. Powell want this issue wrapped up ASAP, and probably before the end of this month. With the shares trading at 5.7x 2005E EBITDA and 11.5x 2005E EPS investors should focus on what is probably the best wireless operator in the U.S. with a boat load of contiguous spectrum, a path to wireless broadband and a takeover kicker. Rating remains Outperform, target $40.

Network Equipment . . . Barron's highlights a new threat to US telecom's - the VOIP. Michael Powell, the chairman of the Federal Communications Commission, has heralded it as promising "the most important shift in the entire history of modern communications since the invention of the telephone." That shift will unleash powerful competition, create important players and offer huge opportunities for some company's that hadn't been in the picture, particularly cable-TV operators. And it is already under way. According to the article, there are at least five distinct markets for VOIP-based services. The largest, if least ballyhooed, is carrying long-distance and international calls. It is often cheaper for long-distance company's to transport calls via IP than by circuit-switched networks. MCI, AT&T, Level 3 and other company's carry calls this way. There also is a growing market in corporate VOIP networks. Cisco, Nortel and Avaya this year should sell about $2 billion in IP-based PBX, or public branch exchange, equipment that lets company's move voice calls over their own data networks, saving considerable sums on telecom bills while providing a variety of new features. Skype dominates the PC-to-PC category. Thanks to a huge spate of publicity, more than 12 million people have downloaded the free Skype software; thousands use it to make free calls to other Skype users. And Skype plans to sell a version for Internet-enabled hand-held devices. VoiceGlo, a unit of TheGlobe.com offers a Web-based service that connects with the public network for as little as $3.99 a month, plus a per-minute charge. Also, consumers can use instant-messaging software such as Yahoo! Messenger, Microsoft's MSN Messenger and ICQ, to have a voice "chat" from PC to PC. They also can use those services to make calls from a PC to any phone, via service providers like Net2Phone and DeltaThree. Other stocks mentioned positively in article include Time Warner, Cox Communications, Comcast and Qwest Communications.

While the Barron's cover story discusses VOIP plays, which could benefit as the usage of the technology spreads, a separate article highlights problems with VOIP setup. The first problem is that VOIP requires broadband Internet access, via DSL or cable. About 22 million American households now have broadband access; the total will hit 47 million by the end of 2007, according to AT&T. Also, VOIP users must do a little installation work. Sign up, and the co sends a modem-sized black box called a telephone adapter. Insert it into home network configuration, between modem and router, or, if there's no network, simply between the PC and the modem. This should be a snap, but, according to the article, it isn't. The journalist had the same painful experience with both Vonage and AT&T: He spent a half-day on the phone with the co call center, trying to troubleshoot connection to get the phone working while keeping regular Internet connection running. There was a similar experience setting up CallVantage service. According to the article TheGlobe.com service is cheap, but the quality is spotty at best. Also, attempts to use the service through the computer-network firewall failed. Calls based on instant-messaging software, which don't use regular phones or phone numbers, tend to be of the lowest quality. But they're also free.

W.R. Hambrecht states that it appears that the majority of telecom equipment vendors are increasingly reaping the benefits of a sustained multifaceted industry turnaround. Firm believes that both carrier and enterprise spending have reached an inflection point, driven primarily by renewed demand for bandwidth and new services. Firm expects accelerating demand for new services will offer significant growth opportunities for communications technology vendors. Some of the prevailing demand trends that will drive investments include: strong operational performance; stocks that have underperformed the broader market; carrier spending forecast suggesting continued growth; broadband subscriber trends and spending drivers. Firm's top pick, which they feel best leverages these trends and is poised to show upside to their 2004 estimates, is ADTRAN. The three companies which they feel are uniquely positioned to show substantial growth throughout the remainder of 2004 are F5 Networks in the traffic management market, Ixia in the IP network test and measurement market, and Netopia in the DSL and WLAN market. Firm would be aggressive buyers of these stocks.

Oppenheimer out positive on Arris Group following positive Barron's cover story on VoIP. The article's theme is that the cable operators will be successful in the rollout of VoIP service and that the net losers will be the RBOCs. According to the firm, Arris is currently the second largest supplier of Cable Modem Termination Systems (CMTS) and one of the largest provider of VoIP customer premise equipment (modems) to the cable operators. ARRIS' VoIP customers include Charter, Comcast, Cox, and Time Warner. Since the beginning of the year, ARRIS shares have experienced a significant pullback. Currently trading at less than 1x sales and 12.6x FY05E EPS of $0.38, they believe that ARRIS' shares offer good value. Firm's tgt price is $11.

UBS cuts their targets on Adtran, Cisco, Corning, Harmonic, Juniper, Lucent, Nortel, and Scientific Atlanta. The firm says that with most major US and European telcos having reported 1st quarter results, they conclude global capex growth is likely to slow in 2nd half 2004 through 2005. Also, several equipment vendors either have begun or will commence growing expense levels commensurate with revs, and they do not expect vendors to generate the same level of margin and EPS growth that they achieved moving out of the downturn; in addition, firm says there is a high probability that stock option expensing becomes mandatory in 2005.

Thomas Weisel believes the pieces are falling into place for Scientific-Atlanta to convince investors that robust growth for SFA is probable. The firm sees five growth drivers: 1) DVR/HD upgrade cycle, 2) overlay opportunities, 3) international deployments, 4) transmission upgrade cycle, and 5) future telco opportunities. Underpinning the firm's positive stance is our belief that the value of SFA's 40% ownership of the US cable network -- via its PowerKey proprietary conditional access -- has gone up sharply in light of the two fundamental transformational technologies taking place in the cable/television market right now - DVR and HD.

Barron's highlights Nokia, which saw its shares fall by 45% in the past two months, following laggard 1st quarter results and a 2nd quarter earnings warning. According to the article, Nokia might be a buy as value investors take a second look at the co, which has a net cash position of about €11 billion, about a fifth of its market cap. Undoubtedly, the handset king has some serious problems, like dull cellphones. But a company with Nokia's resources and track record should be able to recover inside a year. With the unveiling of some 30 new models in 2004, Nokia should be able to claw back some market share, or at least stem the losses. Nokia also happens to sell lots of mobile-network infrastructure equipment, a business that's doing well now that many telecom operators have gotten their acts together. Spending on both maintenance of current "2G" systems and upgrades to "3G" equipment is likely to continue rising smartly, and Nokia showed a 16% rise in 1st quarter network sales. Some believe this business could account for 25% of profits by 2006. Currently, Nokia sells at a P/E ratio of just under 13x consensus 2005 estimates of $1. Still, Motorola trades at a much pricier 21x 2005 forecasts.

Lucent will acquire Telica, privately held voice over I.P. systems provider for approx. $295 million in stock and options, plus additional employee-related cash payments. LU will exchange 92.7 million shares of common stock and options for all of Telica's equity, deal expected to close in 4th quarter 2004. Lucent also expects acquisition to be dilutive to 2005 EPS by approximately $0.01-0.02 and "neutral to slightly accretive in fiscal 2006".

Boxmakers . . . The NY Times highlights interview with Michael S. Dell, the 39-year-old founder and CEO of the fleet front-runner among personal computer makers. Mr. Dell said "The biggest mistake I've made, was not getting into printers sooner." But according to the article, lately, Dell Inc. has been making up for lost time. Since it started selling Dell-branded printers a little over a year ago, shipments have risen at an encouragingly rapid pace. Mr. Dell predicts "tremendous growth" for his company's computer printer business over the next 5 to 10 years and vows to change the economics of the industry. Tomorrow, Dell plans to announce that it will begin selling printers for the corporate and home market that it claims will reduce the cost of some printing jobs by 30 percent or more.

Needham upgrades Gateway to Hold from Underperform, saying the stock is reasonably priced at its current level; firm also thinks that it's likely that the company will soon announce distribution agreements with a number of major retail chains for Gateway-branded PCs and possibly consumer electronics products; and while they question whether these deals will translate into a meaningful profit opportunity, they say the market is likely to bid the stock up in response.

Semiconductors . . . Two companies that dominate the lucrative market for memory chips used in digital cameras and music players are slashing prices to stoke demand and undermine emerging rivals, industry officials and analysts said. The move by Samsung Electronics Co Ltd and Toshiba Corp is a bonanza for consumers snapping up flash memory devices in increasing numbers and sets the stage for a fierce battle in the most profitable part of the memory industry. Industry experts said Samsung and Japan's Toshiba are taking a pre-emptive strike against companies including Infineon Technologies AG, Hynix Semiconductor Inc and Micron Technology Inc that are trying to break the virtual duopoly.

Barron's highlights Applied Micro Circuit, which traded back in 2000 at a market value of $29 billion, a modest 230x earnings, 66x sales and 24x tangible book. These days, the stock can be had for a bit less, $4.60, and the market cap is a somewhat more sober $1.4 billion, or 1.6x tangible book. Last fiscal year on sales of $131 million, the company lost $105 million. But after 12 quarters of red ink, the company is expected to break into the black this quarter. And for all of this FY on projected revs of $310 mln-$320 million, the co is expected to earn something around a nickel a share. Moreover, even after several synergistic acquisitions that nicely expanded the company's scope and customer list, Applied Micro still boasts a slug of cash, roughly $1.50 a share, and not a cent of long-term debt. Which is no small reason why even in the darkest days of the telecom collapse, the company was able to spend mightily on R&D. Last Fiscal Year it laid out a whopping $112 million for R&D, or 85% of sales. According to the article, the business is back on the upswing. In the 4th quarter revenues jumped 24% sequentially, 136% yoy. Backlog climbed 30%, and the co announced a slew of design wins from key customers. Scott Black, who runs Boston-based Delphi Management, can't resist buying a first-rate tech outfit at 1.6x book and 3x cash. He believes all that R&D spending is about to pay off and reckons Applied Micro may well do better than the Street anticipates. He pegs net at 5 cents to 8 cents a share for March '05, and 25 cents to 28 cents for March '06 and sees the stock as an easy double in a year or so.

JMP Securities believes Gartner's PC upgrade data and trend towards 64-bit computing favors AMD, Intel and Micron. The firm recommends to buy these names in anticipation of a seasonal 2nd half 2004 and secular, strong PC, corporate and consumer upgrade cycle for the next two years.

Software . . . Morgan Stanley upgrades Peoplesoft to Overweight from Equal-Weight, as the company is beginning to see some early signs of improvement in its pipeline, particularly in its mid-market product lines and in the public sector for the Enterprise product line; also, firm thinks that customer uncertainty over product release schedules, the Oracle bid, and the major pain of the sales force reorganization is predominantly behind the company. Target is $21.

Deutsche Bank out positive on Activision saying Shrek 2's box office popularity bodes well for the company. The theatrical release Shrek 2 blew away box-office expectations this past weekend, pulling in roughly $125.3 million in ticket sales in its first five days of release across N. America, according to DreamWorks. Shrek 2's opening performance sets a new record for 5-day box office sales, topping last year's Lord of the Rings: Return of the King, which pulled in $124.1 million in its first weekend. The firm is modeling 1.5 million units for the video game, yet the early results from the film should help push through the game into the hands of consumers. The title has moved up on several key top-seller lists, including Amazon.com's PS2 top-seller list (#4 as of Sunday night). Firm is reiterating their Buy rating and 19 target.

Barron's highlights Symantec, which has seen its stock quadruple since 9/11. While security software and hardware has been a veritable haven during the corporate tech-spending drought, it's possible that the trend could be cooling off. At least, that is the conclusion of information-security analyst Kevin Trosian of Wedbush. In a refreshingly independent and thorough study of the industry, Mr Trosian initiated his coverage of the sector with a Neutral weighting, or Hold, compared to the rest of technology. While Trosian isn't saying that the sector will dry up and go away, the brokerage analyst is betting that its growth rate will be lower than what most of his peers are forecasting. He is predicting compound annual growth of about 15% through 2007. International Data Corp. expects around 18%. Simply put, most brokerage analysts plug IDC's market forecasts into their models, which in this case could inflate their valuations, Mr Trosian argues. "We believe IDC's market estimates are skewed. Based on our review of their ests, which many of our competitors take as gospel, we believe that IDC consistently overestimates the rate of growth in most areas of security spending," Trosian charges. But Trosian contends that technology buyers at big companies are going to buy more "internal" security products.

Mercury Interactive upped to Buy from Hold at Wells Fargo and a target of $60. The firm recognizes that there has recently been overall market weakness, particularly in high-beta technology stocks. However, firm is making a fundamental call on the stock and believes recent weakness presents a buying opportunity. Firm notes that it has a high degree of confidence in its estimates, which are at the high end of management's forecast range.

The U.S. Court of Appeals for the Ninth Circuit denied Microsoft's petition for interlocutory appeal in its ongoing trademark litigation against Lindows, Inc. The denial of MSFT's appeal sets trial on a timetable to take place in 2nd half 2004 in Seattle, WA with the Honorable Judge Coughenour presiding; the trial is expected to last approx two weeks with each side having one week to present its case. Witnesses already designated to testify include Bill Gates, Steve Ballmer and Lindows, Inc. CEO Michael Robertson.

BEA Systems announces additional $200 million buyback.

Thomas Weisel says that, given its recent checks around the health of Tibco's business, it expects the co to report a solid May Quarter. The firm believes the co will hit the mid to high end of revenue guidance. The firm continues to believe a pickup in high-end integrations projects is benefiting Tibco. The firm is hearing that business remains healthy for Tibco and expects the co to close a few $2-$3mn deals which are typically required to make the quarter.

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From Briefing.com: 9:56AM 50 Day-Alert -- Semiconductors Hldrs Trust (SMH) 38.02 +0.14: -- Technical -- The sector ETF edged above yesterday's high of 38.02 and probed resistance at its 50 day exp mov avg of 38.06 (session high 38.07) before pausing. The 50 day simple mov avg comes into play just above at 38.17.

9:51AM EMC Corp and Dell expand partnership (EMC) 11.05 +0.35: -- Update -- The co's today unveiled a new entry-level networked storage system and announced that Dell will offer backup and replication software from EMC's Legato Software division.

9:45AM Micron extends rally, nearing May high of 14.69 (MU) 14.60 +0.28: -- Technical -- Initial resistance thereafter, if a breach is seen, is at its 50 day exp mov avg at 14.76 followed by the April 28 gap bottom at 14.83 (session high 14.60).

9:18AM QLogic delivers SANS solutions with EMC for SMBs (QLGC) 26.76: Co announced that EMC has qualified the QLogic SAN blade QLA200 value line of host bus adapters as E-Lab Tested for the new EMC CLARiiON AX100 networked storage system targeting the Small and Medium Business market. EMC has also qualified the QLogic SANblade QLA2340 Series high performance Fibre Channel HBAs as E-Lab Tested with the CLARiiON AX100.

9:16AM Emulex teams with EMC to deliver storage solutions to SMBs (ELX) 18.70: Co announced that EMC has qualified the Emulex LP101 Fibre Channel HBA as E-Lab Tested for use with the new EMC CLARiiON AX100 networked storage system targeting small- to medium-sized business (SMB) customers.

9:00AM Microchip raises guidance for JunQ (MCHP) : Co announced that 1Q05 (Jun) revs and EPS05 are expected to exceed the upper end of prior guidance originally provided on 4/22. Co raises its Q1 revs expectation to $210-212 mln (previously $205-207 mln) and EPS to $0.26 (previously $0.25), Reuters consensus is $205 mln and $0.25, respectively. Co raises guidance based on strong available OEM backlog, strong sell-through in the distribution channel, and record bookings for the first two months of this quarter. Co states, "Led by our PIC Flash Microcontrollers, we are experiencing strong demand on all major product lines and in all geographies. We have seen record bookings in the first two months of the quarter. Based on current lead times, this quarter is nearly booked and we are seeing strong backlog starting to build for the next quarter".

7:52AM Motorola leads adoption of Push-To-Talk over cellular with wins and trails in Asia Pacific region (MOT) 19.91: Motorola today announced it has won 12 contracts with customers operating in 18 countries and territories worldwide to supply Push-To-Talk over Cellular (PoC) infrastructure solutions for both CDMA2000 1X and GSM/GPRS networks. Some of the prominent Asian telecom companies that have recently announced PoCcontracts or trials with Motorola include: Maxis Communications Berhad (Malaysia) and GUAMCELL Communications (Guam). "The response from carriers in Asia for the Motorola PoC solution has been tremendous, with engagements underway across the region."

7:41AM Praxair and Applied Materials announce service alliance to streamline customer operations (PX) 36.22: Applied Materials (AMAT). and Praxair Electronics, a division of Praxair, Inc., announced today a joint initiative to provide fab-wide Commodity Consumables Services (CCS) to semiconductor manufacturers worldwide. The Commodity Consumables Services, which will be marketed by Applied Materials, is aimed at streamlining the efficiency and lowering the cost of customer fab operations. It offers a one-stop shopping service for a wide range of generic commodity consumable items that are critical to the maintenance and operation of all wafer fabrication equipment.

7:35AM Therma-Wave started with an Overweight at ThinkEquity; tgt $7 (TWAV) 3.44: ThinkEquity initiates coverage of TWAV with an Overweight and $7 target; firm believes that the co has successfully reversed the steep slide in mkt share from CY00-02, and with questions of its survival out of the way, top-tier customers are starting to come back to what remains one of the best metrology technologies. Given their view that metrology spending per fab should more than double at 130nm node compared to 180nm, firm's CY05 EPS of $0.13 on $106 mln in revs could prove conservative.

7:29AM DELL's aggressive pricing on printers to hit HPQ where it hurts - Piper 35.33: Piper Jaffray notes that Dell has introduced four new printer products, all of which are aggressively priced vs Hewlett-Packard (HPQ). The firm estimates that Dell's two new monochrome laser printers are priced 50%-66% below comparable HPQ printers. The strategy is to hit Hewlett-Packard where it hurts, in its imaging and printing profit pools, thus reducing HP's ability to subsidize its PC businesses.

7:22AM TranSwitch enters into patent cross license agreement (TXCC) 1.62: Company announces a cross license agreement with Raza Microelectronics, Inc. and Paxonet Communications, Inc. in which each party will be able to utilize selected key patents of the other in the areas of SONET/SDH and ATM technologies. Parties have also agreed not to sue each other for patent infringements related to cross-licensed patents and certain others during course of agreement which is set to run until Dec. 9, 2008.

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EGLS ST SS 1000 shares@5.20 - Low volume rallies generally fail. Why should this one be different?

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10:29AM Two biotech IPOs price poorly: ACAD, CRTX : A couple of biotech IPOs price well below range today. Acadia Pharma (ACAD 7.00), and Critical Therapeutics (CRTX 7.00) both price at $7, well below their initial ranges of $12-$14 and $11-$13. The cos had subsequently reduced their ranges to $7-$8... Acadia focuses on small molecule drugs for the treatment of central nervous system disorders. It has five drug programs in clinical and preclinical development. The co has 3 clinical programs for treatment-induced dysfunction in Parkinson's disease currently in Phase II clinical trials... CRTX focuses on products designed to treat asthma and critical care diseases through the regulation of the body's inflammatory response. Its most advanced product is Zyflo, a tablet formulation of zileuton, which the FDA approved in 1996 for the prevention and chronic treatment of asthma. The co licensed from Abbott Labs exclusive worldwide rights to Zyflo. The co is in the process of changing manufacturing sites for Zyflo, and subject to FDA approval of these sites, it expects to begin selling Zyflo in the first half of 2005.... As with most small cap biotechs, the cos have little financials to speak of. The pricing on these deals are good examples of investors' distaste for biotech IPOs these days mainly because there have been so many this year, roughly one-third of IPOs in 2004. Also, two more are coming out tomorrow: ANLY and INHX, which does not bode well for them... ACAD and CRTX deal sizes are 5 mln (BofA and Piper are co-leads) and 6 mln (SG Cowen is the lead) and begin trading this morning... A thought to keep in mind is to keep these battered biotech IPOs in the back of your mind for biotech rallies later this year as many traders will forget these names.

http://finance.yahoo.com/mp/q?tqnt

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From Briefing.com: 2:10PM Semi Index --SOX-- reverses near 200 day : -- Technical -- The index (SOX 479.57, +0.2%) has held on to a positive bias throughout but it is hovering just above the session low (478.19) after the early failure near resistance at 484/485 (200 day simple mov avg, 62% retrace of April/May slide). A minor secondary support is at 476 followed by 474/473 (50 day sma/ema, congest). The key to maintaining this week's favorable chart posture is for the index to stabilize near/above these averages and the breakout point at 470.

9:01AM NVIDIA works with Intel on PCI Express (NVDA) 22.50: Co announced that Intel Corp will be using NVIDIA's top-to-bottom family of PCI Express graphics processing units (GPU), as part of Intel's PCI Express-enabled chipset launch programs. Intel has purchased several thousand NVIDIA PCI Express enabled GPUs which Intel will be using for: platform level testing; software development kits; channel seed kits; technical solutions training; and various demo systems.

8:43AM QLogic names new CFO (QLGC) 27.35: Co announced the appointment of Tony Massetti to the position of vice president and CFO, effective immediately. He replaces Frank Calderoni, whose resignation had been previously announced in February. Massetti has served the company as interim CFO since Calderoni's departure and previously held the position of vice president of finance for two years at QLogic.

8:06AM ASM Intl NV announces wins for PECVD and RTP at Japanese electronics manufacturer (ASMI) 20.69: Co announces that it has been selected by the major Japanese consumer electronics manufacturer for critical process equipment at the customer's new 300 mm/90 nanometer production facility. Deliveries of ASM's Eagle-12 Single-Wafer Plasma Enhanced CVD and Levitor 4300 Rapid Thermal Processing systems are scheduled to begin in Q4.

7:41AM Motorola signs new multi-year credit agreement (MOT) 19.92: Motorola announced that it has signed a new multi-year revolving credit agreement effective May 26, 2004 for $1 bln, replacing two existing facilities totaling $1.6 billion on Wednesday . The facility is used as a commercial paper back-up facility and has never been utilized. There was significant demand for participation in the facility.

7:27AM Skyworks to offer licenses for its selectable mode vocoder technology (SWKS) 9.07: Skyworks today announced that licensing rights for the patented and proprietary Selectable Mode Vocoder technology incorporated in mobile handset applications, are immediately available on a fair, reasonable and non-discriminatory basis. SMV is a technology that is capable of increasing subscriber capacity by up to 75 percent, while improving the quality of wireless voice communications for the consumer.

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Thursday May 27, 2004 Daily MarketWrap

http://www.robblack.com/rb_marketwrap.shtml

U.S. stocks rose, sending the Standard & Poor's 500 Index to its longest rally in nine months. Retailers including Costco, Michaels Stores and Dollar Tree Stores gained after earnings surpassed estimates. Stocks were also helped by a drop in oil prices and a government report that showed the biggest increase in corporate profits in two decades and faster first-quarter economic growth than earlier reported. The S&P 500 added 6 points (+0.6%) to 1,121. The benchmark had its sixth consecutive increase, the longest streak since September. The DJIA advanced 95 points (+0.9%) to 10,205, led by a gain in Boeing Co. The Nasdaq Composite rose 8 points (+0.4%) to 1,984, for its first five-day gain since January. More than two stocks rose for every one that fell on the New York Stock Exchange, the eighth day in a row that advancing issues beat declining shares on the Big Board. That's the first time that's happened since December. Some 1.45 billion shares changed hands, in line with the three-month daily average.

Strong Sectors: internet, semiconductor, communications services, consumer, drug, steel, chemical, retail, gold

Weak Sectors: oil & gas services

Top Stories . . . The U.S. economy grew at a 4.4 percent annual pace from January through March, faster than estimated last month, as businesses replenished inventories, government spending rose and home construction accelerated.

The dollar fell to the lowest in almost two months against the euro after U.S. unemployment- benefit claims were more than expected. It weakened against all 16 major currencies.

Costco Wholesale, the largest U.S. warehouse-club chain, said third-quarter earnings beat analysts' forecast, rising 29 percent because of increased sales of gasoline and food.

Citigroup, the world's biggest financial-services company, plans to sell its remaining shares in Samba Financial Group, ending its presence in Saudi Arabia after almost half a century.

Donald Trump's Trump Hotels & Casino Resorts made a $73.1 million interest payment due on $1.3 billion in debt, just days before the company would have been in default.

Gurus . . . Prudential Economist Dick Rippe says U.S. corporations are incredibly profitable. He says that in 2003, we had reached the fourth highest level of return on capital. If he is right about 2004, we will likely make an all-time high in the return on capital. He is estimating an 8.0% return. After considering all of the years in which the return on capital has been over 6.0%, the stock market returned 16.0% on average during those years. Capital spending expanded during those periods, and good growth in employment developed.

Investors Intelligence says optimism among financial newsletters fell to a 14-month low on concern about rising inflation and oil prices. Of course, greater concern is viewed as a positive, since complacency is the enemy of the bull.

Financials . . . Wells Fargo agreed to buy most of the assets of Strong Financial, the Wisconsin-based asset management firm whose founder, namesake and former CEO was accused of benefiting personally from rapid trading in the firm’s mutual funds. This is a sensible acquisition for Wells Fargo, adding distribution channels as well as $34 billion in assets under management. If the price of $700 million reported by the press is correct, the equivalent of 2% of assets under management seems reasonable for a well-known but tarnished brand name in the asset management business. The reported transaction structure, including a multi-year earn-out period for a substantial part of the purchase price, is consistent with WFC's past money-management acquisitions. Wells Fargo is purchasing assets, not the company, to minimize liabilities; the purchase will increase equity funds to 31% of WFC's mutual fund assets from 21%, and WFC will gain entry into distribution by four major retail securities firms. The transaction is expected to close in early 2005.

Barron's Online highlights Wells Fargo, which has risen about 27% since the publication last wrote favorably about it a year ago. According to the article, low mortgage rates in recent years have helped Wells report 11 consecutive quarters of earnings growth, but as interest rates rise, Wells Fargo will likely see earnings growth slow. Plus, the stock isn't much of a bargain now. First of all, it's hard for a bank of Wells' size, nearly $400 billion in assets, to grow quickly. "The co is becoming increasingly large and complex, meaning it will be harder to keep up its track record" of consistent earnings results, says John McDonald, an analyst with BofA. Also in 1st quarter, Wells' home mortgage rev was down 50%. Wells cited an increase in home mortgage rates in late 2003 as the prime culprit for this decline. That could be a taste of things to come: The Mortgage Bankers Association expects U.S. mortgage originations to drop by roughly 27.5% this year from 2003 and refinancings to fall by almost 60%. John Leo, director of growth equities for Northern Trust, calls Wells a "good, high-quality banking organization." But he says the threat of higher rates prompted Northern to pare its position in Wells and other potentially interest-rate-sensitive financial stocks such as Lehman Brothers and Legg Mason. According to the article, the valuation of Wells' stock shows no sign of falling, Wells fetches a healthy 2.8x book value, well ahead of financial behemoths such as Citigroup, at 2.3x book value, and JP Morgan Chase, going for 1.6x book.

American Express is enjoying considerable success, management appears focused on further strengthening the business. It seems unlikely that company will become complacent as happened in the 1980s when it was similarly successful for a time. The company’s increased flexibility and scale are significant advantages. This flexibility now enables the company to formulate a range of plans in anticipation of a variety of market conditions and competitive factors. These plans can now be executed quickly to take exploit opportunities that arise. The company’s decision to sharply increase marketing spending in early 2002 which many competitors had reduced their marketing spending is an example. The company seeks to be a “market mover” in each of its businesses. The company appears to focusing even more intensively on further differentiating itself from competitors in each of its businesses. This is to be accomplished in part by devoting more attention to the forces and factors that influence customer behavior. Over time, the company has become better and better at understanding and measuring how different actions and factors affect customers’ experience, satisfaction, and behavior. Customers’ experience builds and strengthens the brand, advertising doesn’t. At a recent meeting of 160 senior managers, several other companies’ successes were examined and reviewed as examples. To improve the performance of its various businesses and operating units, the company is seeking to better align performance goals and measures with overall customer behavior and business results. For example, providing superior customer service is no longer sufficient. Improvements in customer service must lead to higher customer spending and higher earnings to be of value and to justify increased compensation. This increased attention to the impact various actions and investments have in terms of business benefits is likely to continue the transformation of the company that the focus on flexibility and efficiency over the past several years began. American Express seeks to build on its premium value positioning with an even greater focus on the high spenders that make its spend centric model work. Network services agreements with US banks (beginning with MBNA) are expected to increase American Express’ dominance of the high spending segment of the market. Network agreements are a logical extension of the company’s ongoing efforts to capture an increased share of customers’ spending (and at AEFA, an increased share of customers’ assets). Over a period of years, migrating only a small portion of a bankcard issuers’ charge volume to American Express’ network could generate meaningful charge volume, revenue, and profit given the low incremental investment needed to handle additional network volume. Earnings growth still seems dependent on market performance, but over time, the company expects to generate earnings growth by increasing its market share. There seem to be few opportunities to increase profit margins, but given the significant operating leverage that exists (and limited additional capital required as the business grows), the opportunity for increased earnings is significant if assets under management and fee generating businesses grow in size. Improving the linkage between the card business and AEFA and developing market segmentation skills and strategies similar to those used in the card business are increasingly important elements in the company’s strategy for AEFA. The company is to introduce a GOLD account in about two months (focus on customers with $100, 000 of investible assets) which will complement the previously introduced PLATINUM account which was targeted at customers with at least $500,000 of investible assets.

Freddie Mac's April data showed that its retained portfolio declined at a 7.8% annualized rate, slightly faster than in March. This was the sixth month in a row the portfolio has shrunk. Purchases were slightly higher than in March, but liquidations and sales increased more. With purchase commitments relatively flat in April ($20.3 billion vs. $20.6 billion in April) we don't expect the retained portfolio to grow if May either, even if liquidations decline somewhat. PCs outstanding also declined in April (at a -4.9% annualized). New PC issuance was higher than in March, but liquidations spiked to a 44% annualized rate, restricting growth. Freddie Mac's market share of new issuance was an estimated 40% and more "normal", but the liquidation rate on its portfolio suggests that its securities are still more prepayment sensitive than Fannie's. Credit quality overall remains very good. Delinquencies on non-credit business totaled just 30 bps vs. 29 bps a year ago. Delinquencies on credit-enhanced (riskier) business totaled 1.62%. This was the second month in a row that they didn't increase. Lack of portfolio growth should lead to an increase in surplus capital, creating an even greater cushion relative to the OFHEO's mandated 30% surplus. The company should be well positioned to take advantage of an improvement in market conditions when one occurs.

Transports . . . General Motors advanced hybrid technology will be used on transit buses in the Seattle area beginning next month, eventually creating the nation's largest fleet of diesel-electric hybrid buses. King County leaders were scheduled to take delivery of the first of 235 buses Thursday at Seahawks Stadium. The 60-foot mass-transit vehicles, which are more expensive than standard diesel buses, deliver up to 60 percent greater fuel economy and can reduce emissions by as much as 90 percent, GM said.

Defense & Aerospace . . . Google news reports through several media channels that there is a huge bullet shortage in Iraq. According to several media channels, American soldiers are firing so much ammunition that the military's largest supplier of bullets can't keep up. Tanks that log 800 miles a year in peacetime are grinding through that many miles in a month, wearing out their treads. Dan Murphy, CEO at bullet supplier Alliant Techsystems, said the company's Army ammunition plant in Missouri has gone through its fastest increase in production since the Vietnam war. It has hired 1,000 workers and some production lines are running around the clock. "There's no question that on many of the items that are being consumed rapidly in Iraq, like tank treads, like body armor, like small-caliber ammunition, the Army is beginning to run out, and the Army is becoming worried about its stockpile," said Loren Thompson, a defense analyst with the Lexington Institute. Alliant Techsystems is churning out 1.2 billion bullets a year at the Army-owned plant it runs in Independence, Mo., but it's already working 24 hours a day. So the Army has given contracts for 70 million rounds each to Israel Military Industries and the Winchester unit of Olin Corp., said Lt. Col. Matthew Butler, who buys bullets for all branches of the armed forces through the Army. He said the first deliveries on the new contracts are expected next month.

Consumer Products . . . CSFB notes that Gilette's M3 Power was launched in the U.S. this week; despite M3 Power's 67% price premium to Mach3 Turbo, firm does not believe the razor (handle) carries a higher margin, and they expect the negative margin impact of greater razor versus blade sales to be amplified. However, firm says their new earnings model incorporates the base-case scenario for 2004, which they believe appropriately reflects the profitability pattern of a new system launch and incorporates last year's Mach 3 Turbo launch in Europe and this year's launch of Venus Divine and Sensor3. Firm raises their 2004 EPS estimate to $1.64 from $1.61 and raises their 2005 estimate to $1.83 from $1.82. While the First Call consensus for 2004 is $1.61. The firm believes the market consensus is somewhat higher, and despite the likelihood of upward earnings revisions, they believe the stock is already pricing in EPS expectations in the $1.65 range.

Food & Beverage . . . UBS upgrades Coca-Cola to Buy from Neutral and raises their target to $60 from $55 based on their belief that the company's new marketing and innovation strategies clearly hit on the major opportunities. Firm believes it is quite possible that Steven Heyer will stay and they are becoming more comfortable with Neville Isdell as CEO. Firm says that KO's unveiling of its mid-calorie cola C2 in the US and Japan, as well as KO's new ads for Diet Coke/Sprite, gives them confidence that high-margin CSDs (88% of volume) will return to growth in 2H04 and beyond.

Retail . . . At 21.7x 2004 estimate of $2.15, Kohl’s shares are trading at a 47% discount to the five-year average 12-month forward P/E of 41x, and at 1.2x the forward multiple accorded the S&P 500, below the historical rate of 1.8x. Although the stock may appear inexpensive compared to historical levels, we note that the shares have traded down due to inventory problems, resulting slower sales and earnings misses. Although the worst of the inventory issues appear to be behind them, Kohl’s has not yet experienced a pick-up in same store sales. Kohl’s is still sorting out its merchandise content and marketing strategy. In addition, the competitive landscape has become more dynamic as traditional department stores revitalize their assortments, J.C. Penney continues its turnaround, and off the mall retailers such as Old Navy and Target strengthen their apparel offering. It is critical for KSS to start consistently meeting its earnings guidance and look for Kohl’s to hit its planned net income growth of 25%-30% in 2004, (vs. a decline of 8.1% in 2003). Should the launch of several new apparel brands in the Fall as well as the launch of the new Estee Lauder cosmetic brands at KSS be successful, there could be upside to our 2004 EPS estimate of $2.15.

Medical Devices . . . Merrill Lynch downgrades Guidant to Neutral from Buy after the co announced that issues related to its Champion stainless steel stent could result in a delay of its lead drug eluting stent program. Firm says that a simple manufacturing sequence change may influence performance and could be implemented in a timely fashion, allowing GDT to still get CE Mark by early 2005 and to start its pivotal U.S. study this summer; however, even if this benign outcome materializes, firm says that process scale-up issues could still delay full enrollment in FUTURE IV (U.S. pivotal study) by six months. Alternatively, a stainless steel redesign may be necessary, which could delay the program by at least 6-9 months. Firm says a more draconian scenario would put the program back to square one, in which case the SPIRIT, a Vision stent coated with a durable polymer and everolimus, would likely become GDT's lead program, which would delay a U.S. launch until 2007.

Media . . . Piper Jaffray says the international launches of Napster are happening sooner than expected. Napster has gone live in both the UK and Canada within the last week. The firm had been expecting both services to be launched in mid-to-late summer. The firm now has a higher degree of confidence that the co will hit June Quarter Napster estimate of $7 million. The launches are positive, given the co beat competitors, such as Apple and Real Networks, to these geographies. Applying average multiples to Roxio's respective software and Napster business equates to a $14 stock. While clearly this is too aggressive given the turnaround nature of the Roxio story, this valuation exercise demonstrates that the stock is trading at a deep discount to its peer group.

The WSJ reports that Yahoo! plans to announce today the availability of a new antispyware service through its toolbar software. The new service will allow registered Yahoo users to scan for spyware, monitor Web surfing and other computer activities, and carry out other orders. The Yahoo! users can then have the service remove the spyware from their computers. They need to have installed Yahoo's free toolbar software, which works with a web browser and allows users quickly to access other services such as Web search. Antispyware software "is the number one thing we're hearing from our users in terms of the security tools and services they wanted to see delivered from Yahoo," said Julie Herendeen, VP for network products at Yahoo!. Yahoo's! new service uses technology from PestPatrol Inc., a closely held maker of antispyware software.

Storage . . . Bank of America out with a negative call on disk drive stocks saying they believe investors have bid up the drive stocks in anticipation that numbers have bottomed and major restructurings will be announced. The firm believes that the June Quarter has been slightly weaker than anticipated for all drive companies and that fundamentals haven't improved much, if at all. All of the disk drive stocks have rallied in the last week. Since 5/18, Seagate has increased by 10%, Maxtor by 1% and Western Digital by 14%. According to BofA, the month of April was weak, May was on plan, and they don't yet know what June will look like, though they note that white box demand in Europe still seems weak. Drive companies will do 40%-50% of the June Quarter revenues in the month of June. In addition, pricing is still very difficult. They have heard comments that desktop pricing is still down 5% quarter/quarter, whereas the firm has assumed down 10% year/year in their long-term model. They believe that both MXO and STX will announce restructurings in the next few months. Analysts do not know if STX will be in the position to announce its proposed restructuring on the conference call next week; it may have to wait until the July conference call. They think that many investors are expecting a 10% headcount reduction, and suspect it may be smaller. BofA is currently not making any changes to estimates.

Network Equipment . . . Bear Stearns believes that Juniper may have lost major core switch upgrade opportunities worth $300-$400 million at two North American RBOCs (likely to be Verizon and SBC). Despite JNPR's alliance with Lucent, the incumbent switch vendor, firm says these RBOCs chose Alcatel's 7670, a next-gen routing switch which allows the carriers to better preserve their ATM/FR data service revenue. Firm sees competitive pressure mounting in the core IP routing space with the introduction of Cisco's CRS-1, which could potentially limit the growth rate of JNPR's router rev over the next 12-18 months. In the near term, firm believes that JNPR's revenue outlook remains strong, and they think the company will likely beat its own guidance and consensus for 2nd quarter and 2004. However, firm says the stock is fully priced at 39x their 2005 EPS estimate. Reiterates Peer Perform rating.

Semiconductors . . . Intel will be using NVIDIA's top-to-bottom family of PCI Express graphics processing units (GPU), as part of Intel's PCI Express-enabled chipset launch programs. Intel has purchased several thousand NVIDIA PCI Express enabled GPUs which Intel will be using for: platform level testing; software development kits; channel seed kits; technical solutions training; and various demo systems.

Intel is scheduled to provide its mid-quarter update after the close on 6/3. Analysts are maintaining revenue estimates for 2nd quarter at $8.0 billion (down 1.1% Quarter over Quarter), above the mid-point of the April guidance range of $7.6-$8.2bn (-6.1% to +1.3% Quarter over Quarter), and EPS estimate at $0.27. Intel is likely to tighten its revenue guidance to the higher

end of the prior range – expect a range of $7.9-$8.1bn. PC builds in 2nd quarter 2004 are in line with normal seasonality, with overall business conditions tracking expectations at the start of the quarter. On the desktop side, though we estimate Taiwan motherboard shipments to decline 12% Quarter over Quarter in 2nd quarter 2004, which is below normal seasonality, this data only partially captures Intel's motherboard ramp in 2nd quarter 2004 and thus does not provide an accurate picture of PC builds. As is customary with any chipset launch, Intel is ramping its own motherboard production ahead of the Grantsdale and Alderwood launches in June, and believe overall motherboard shipments are tracking normal seasonality. Recall that when Springdale was launched in 2nd quarter 2003, there was a similar disconnect between Taiwan shipments (down 7% Quarter over Quarter), and Intel motherboard shipments (up Quarter over Quarter) and revenues (up 1.0% Quarter over Quarter). Taiwan notebook shipments meanwhile are expected to see a healthy 10% Quarter over Quarter increase in 2nd quarter, at the high end of normal seasonality. Gross margin estimate for the quarter, at 62.2%, is also at the high end of the guidance range of 60% +/- a couple of points. The 60% mid-point is on the conservative side, given 1) our estimate for revenues to decline by only 1.1% Quarter over Quarter, 2) expect startup costs for 65nm development to be minimal, 3) gross margin should see a positive contribution from the shift in processor mix toward notebooks, and 4) the continued migration to 300mm/90nm production. However think there is a good chance Intel may leave the mid-point unchanged at 60% in its mid-quarter update, tightening the range to 60% +/- 1%, given the company’s tendency in recent quarters to be conservative in its margin guidance. Catalysts for the stock include: the ongoing shift toward mobile computing, recovery in the flash business, and the gross margin story playing out in upcoming quarters. A heavyweight PC semiconductor oriented stock like Intel will be one of the early outperformers in our space leading into and in 2nd half 2004, as we should soon start to see incremental PC builds for a seasonally firm 2nd half 2004, which should also serve as a catalyst for the stock.

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Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.

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MORNING WATCH, May 28
By Frederic Ruffy, Optionetics.com
5/28/2004 6:15:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10467

Stock index futures may face a bit of profit taking Friday morning. The S&P 500 Index ($SPX) has risen during eight of the past nine trading sessions and added 3.4% during that time. Early Friday, indications pointed to a weaker open, however. With no major news events to help guide trading, some investors may be sidelined ahead of reports on manufacturing and consumer sentiment due out later today. In addition, some investors may take some money off of the table on this last trading day during the month of May and ahead of the three-day Memorial Day holiday weekend.

Economic data is in focus Friday morning. A government report out one hour before the bell showed US consumer spending rising during the month of April. According to the Commerce Department, spending increased by .3%, after rising at a revised .5% rate in March. Personal incomes rose .6%. The numbers were in-line to expectations.

In addition, the personal spending report also pointed to slowing inflation. To be specific, the price index of the report rose just .1% in April, which follows a .3% increase in March. Overall, investors appeared to react favorably to the news because stock index futures began climbing after the numbers were released.

Reports on manufacturing and consumer confidence will also impact trading today. At roughly 9:45 a.m. ET, the University of Michigan is expected to say its consumer sentiment index remained unchanged at 94.2 during the month of May. Fifteen minutes later, the National Association of Purchasing Manager’s is expected to report that its Chicago Index edged down to 61 from 63.9 the month before.

Oil prices, which have been a source of conversation among market watchers due to the recent rise to all-time highs, are little changed today. Crude was up 11 cents to $39.55 a barrel, but remains well below the peak levels of $41.85 set last week. Prices may continue to fall in anticipation that the Organization of Petroleum Exporting Countries [OPEC] will decide to raise output at its June 3 meeting in Beirut.

In stock news, semiconductor companies are in focus after Novellus (NVLS) raised its second quarter earnings and sales forecast. According to the chipmaker, profits will be in the 25 to 27 cent range on sales of $335 million. Previously, Novellus said results would be near 20 cents a share on sales of $325 million. The stock rose $1.32 to $32.70 on the news.

Today is also the last trading day of the month. The markets are closed on Friday in observance of Memorial Day. In all, despite concerns about rising oil prices, Iraq, and interest rates, trading has been relatively quiet during the month of May 2004. So far, the S&P 500 Index has risen 12 times, fallen on seven occasions, and added only 14 points. The average daily point move has been just six points. Therefore, the market is not making much movement from one day to the next and this pattern helps explain why the CBOE Volatility Index ($VIX) has dipped back down to only 15.3%.





Frederic Ruffy
Senior Writer
Optionetics.com ~ Your Options Education Site

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Amateur Investors Weekend Stock Market Analysis (5/29/04)

The major averages have continued to bounce from oversold conditions which began a few weeks ago. The Dow has rallied back to around the 10225 area which is where its 50 Day EMA (blue line), 100 Day EMA (green line) and 38.2% Retracement Level (calculated from the February high to the low made a few weeks ago) reside at. In the near term the Dow has become somewhat overbought as the Slow Stochastics show that the %K Line has risen above 90 (point B) thus we may see a little bit of selling pressure develop next week. If the Dow does encounter some resistance in the 10225 area I would look for short term support around 10100. Meanwhile if the Dow does break above 10225 its next upside resistance area will probably come into play around the 10400 level (point A) which corresponds to its downward sloping trend line (red line) and 61.8% Retracement Level.



The Nasdaq has rallied around 100 points during the past two weeks and has risen back above its 50 Day EMA (blue line) and 100 Day EMA (green line). However on a short term basis it has become overbought as the Slow Stochastics show the %K Line has risen above 90 (point C) as well. If the Nasdaq does come under some selling pressure next week I would look for initial support at its 50 Day EMA (blue line) just above 1960. Meanwhile if the Nasdaq can break above its 50% Retracement Level near 2010 (calculated from the January high to the mid May low) then it will probably rally back to around the 2040 area (point D) which coincides with its downward sloping trend line (red line) and 61.8% Retracement Level.



The S&P 500 has rallied around 40 points since finding support at its 200 Day EMA (purple line) a few weeks ago and has risen back above its 50 Day EMA (blue line). Just like the Dow and Nasdaq the Slow Stochastics show that the S&P 500 has become somewhat overbought in the short term as the %K Line has also risen above 90 (point E). If the S&P 500 stalls out an comes under some selling pressure next week look for initial support at its 100 Day EMA (green line) just above 1110. Meanwhile if the S&P 500 can break above the 1130 area which corresponds to its 61.8% Retracement Level (calculated from the March high to the mid May low) then look for it to rally up to 1145-1150 range which is where it stalled out at in April.



Also keep a close eye on the Volatility Index (VIX) as it has been trending lower again and is getting stretched away from its 10 Day Moving Average (blue line). Over the past 6 months or so when the VIX has fallen to 14 or below (points E) this has led to some type of correction.



As far as some sectors the Semiconductor Holders (SMH) are approaching a significant resistance area near 39.50 (point F) which is along their downward sloping trend line (black line). Also as I have mentioned in the past since the SMH's peaked in early January they have typically rallied about 4 to 5 points (points G to H) while remaining in a downtrend. Since making a bottom in early May the SMH's have rallied about 4 1/2 points so it will be interesting to see if they will stall out near the 39.50 area and then come under more selling pressure.



Meanwhile the Oil Sector (OIX) appears to have formed the right side of a 3 Year Cup and could be in the early stages of developing a Handle. The key support level to watch in the OIX is around the 330 area which is at its 20 Weekly EMA (green line). If the OIX holds support at or above 330 this would keep its developing Handle intact. However if the OIX breaks below 330 this would negate its Handle and likely lead to a quick drop back to its 40 Weekly EMA (purple line) near 315. It seems lately the market has been fixated on the price of Oil so future market direction may depend on how the price of Oil acts in the weeks ahead. If the OIX breaks above 355 this probably will have a negative impact on the market while if the OIX drops below 330 then this may have a positive affect on the market.



Finally for those following the Gold and Silver sector (XAU) the XAU which found support at its longer term 50% Retracement Level a few weeks ago after becoming oversold is now approaching a significant upside resistance area near 93. The 93 level coincides with its 20 Weekly EMA (green line) and 40 Weekly EMA (purple line) and this is where the XAU may stall out and come under some selling pressure.



When looking for stocks to invest in focus on those that have good Sales and Earnings Growth which are developing a favorable chart pattern such as the "Cup and Handle". HANS has done very well over the past several months after breaking out of a "Cup and Handle" pattern last October.



How can a Premium Membership to Amateur-Investors.Com benefit you as an investor? We focus on stocks which are exhibiting favorable Sales and Earnings Growth that have developed a favorable chart pattern such as a "Cup and Handle", "Double Bottom", "Flat Base" or "Symmetrical Triangle". These stocks are then included in our "Stocks to Watch List" which gives investors a quick reference to those stocks which may provide the best buying opportunities to the long side in the weeks ahead. Each stock in our "Stocks to Watch List" includes specific Buy Prices, Stop Loss Prices (very important) and projected Target Prices. Our Performance so far in 2004 is shown below as compared to the major averages.

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InvestmentHouse Weekend Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- Flat lining into the weekend.
- Manufacturing is on fire.
- Market avoids selloff, posts a modestly constructive session to cap a positive week.

Market slides into weekend quietly, but action is positive.

Low volume and modest price movement overall, but the indexes closed near the highs, fighting a modest urge to sell ahead of a long weekend that faces renewed terror threats. No one really wanted to take many chances, but there were still some nice moves from some stocks sporting solid patterns. That is one thing the market has shown since the follow through on Tuesday: solid, even if few in number, breakouts.

There was some great economic news from personal income and spending, and the Chicago manufacturing index was simply blowout. Indeed, the surging manufacturing sector almost assures that jobs for May will be another very strong showing. The market mulled the news, but did not necessarily rejoice. Bonds had been rebounding, but the strong Chicago data coincided with a drop in treasuries as bond traders saw the strong construction sector simply meaning higher rates were more of a certainty.

It was a quiet session with low volume and modest breadth, but it was not a weak session. Stocks started soft but in the end overcame early selling to close near session highs. The gains and losses were modest overall, but the market fought off some attempts to sell it, and buyers were not afraid to step into some stocks that have shown good strength during the selling and that are making breakout moves. Many have denied this move has any real meaning or that it is actually a summer rally, but more stocks are breaking out. Not hoards of stocks, but a steady improvement after the follow through. Often the market will provide a follow through and then stocks will continue to form up and then provide waves of breakouts as the overall market continues to set up its pattern. Indeed, the market is trying to set up a broader double bottom pattern following the follow through to the rally that started two Tuesdays back. In other words, it is still working on building even as some early leaders start breaking out. That is how rallies typically progress. This coming week we will see if the positive shift in price/volume action turns into even stronger volume gains to show more conviction.

THE ECONOMY

Personal spending and incomes continue to show solid gains.

April spending rose 0.3% versus the 0.2% expected and 0.5% in March (0.4% originally reported. Income increased 0.6% after a 0.4% rise in March (0.5% expected), one of the few times incomes actually outpaced spending in the past six months. Incomes, despite many who argue there is no recovery, continue to expand. That does not happen without a recovery.

Inflation news was good as well as the price index contained in the spending and income report rose just 0.1% versus a 0.3% March rise. The data is mixed regarding inflation. The GDP price deflator was lower as reported Thursday, another indication that inflation is not necessarily all it is cracked up to be. What we see is not necessarily a current problem with inflation but a structural problem that can give rise to future problems, i.e., where the supply has not caught up with demand. We have discussed this in the past two weeks, and basically it is a situation where stimulus was applied to the demand side long before the supply side was pushed to expand. Indeed, the supply side until quite recently has purposefully lagged as producers have held back, still burned from the big overhand left in their laps in 2000.

Chicago PMI surges to record levels, provides some promise supply is trying to catch up.

The May Chicago regional manufacturing report surged to a 16 year high at 68.0, much better than the 62 expected. New orders hit a 20 year high at 74.4; as you recall, we have pointed out each time orders have hit 20 year highs. That is key. Even during the boom of the 1990's, the growth rates were not the supercharged levels seen now. The last time growth was this explosive was after the big supply side incentives of the early 1980's were passed in Reagan's Emergency Economic Recovery Act. The supply side incentives led us to the greatest growth ever seen during the following 20 years. Once gain we are duplicating those explosive growth rates, setting up the potential for another boom where we see low inflation coupled with strong growth based on the productivity technological gains give us.

Yet, there are still many we see on the financial stations and other news stations making bald faced assertions that there is no economic recovery. It is a case of selective recognition or denial. You can cite actual statistics about GDP growth, surging business investment, surging profits, a job market that is catching fire, growth rates in economic indicators, the already sharp decline in deficit projections and be met with statements about how the stock market has still not recovered its losses, how jobs have not been totally replaced. Ask anyone who is intellectually honest and he or she will tell you the market does not recover to those astronomical levels for years after the bust. That does not mean the market is not healthy or that the job market is not growing rapidly, it just means the boom peaks have not been hit. And, of course, if they were already hit just a few short years later, you would be right back at a top and would be ripe for another collapse. It drives you batty listening to the intellectual dishonesty being pushed to unsuspecting citizens who presume that reporters may just possibly be intellectually honest. The growth is there; it cannot be denied. You may want resources directed to foster growth in other areas, but you cannot deny there is overall growth and strong growth at that.

Strong manufacturing sector helps reduce inflationary pressures.

As one manufacturer from the Chicago region stated, manufacturing is on fire. That is good news for inflation. Everyone worries about a strong manufacturing sector indicating more inflation; treasuries sold off on the news of strong Chicago gains. Yet, manufacturing is the supply side, the part of the economy needing to catch up to demand. If it is really cranking up, that is very good news vis- -vis inflation. More supply means supply finally starts to catch up with demand. In other words there are goods to meet demand and prices don't have to be bid higher as dollars fight for a limited number of goods. In a free market, supply will meet demand. It was meeting demand back in the late 1990's and 2000, but the Fed blocked it, choked off demand when it dried up the money supply, and left producers with mountains of inventory. With supply free to meet demand, there was no problem with inflation. Indeed, the numbers showed that. The Fed, however, killed off demand and the effects of that lasted well into the demand recovery in 2002. The Fed impacted supply even after its rate hikes because it left the supply side in such a sorry shape when it killed off demand. Just now supply is starting to come to life, and we can only hope that the surge in manufacturing is a sign that it is catching up to demand.

When will the Fed raise rates?

It is getting closer to the June FOMC meeting, and the FFF contract shows 25 basis points still priced in. We have said all along that 3 strong jobs reports in close proximity would mean the Fed is ready to raise rates. Yes it is using a lagging indicator to trigger its rate hiking campaign, but that is what it has told us. The strong regional manufacturing reports and their employment sub-indexes are indicating a third consecutive strong monthly report. New non-farm payrolls in excess of 200K is what we are expecting the jobs report to show next Friday. That will be enough for the Fed to act at the late June meeting.

Unfortunately, the Fed is going to play its usual cloak and dagger games regarding how much it is going to raise rates and when. It likes to keep the market guessing despite all of the rhetoric regarding transparency and the new statements. It is going to say it will 'go slow', but that is no guarantee as we have discussed. That only means the Fed will act too long and end up doing too much, all the while keeping the market guessing as to when it will finish. That won't give the Fed the cushion it needs soon enough, and it won't give the market the certainty it needs. The market has already moved through 5 months of correction, and that could easily be enough to set the stage for the next move. The Fed, however, has only just recently made clear it will raise sooner than later. That puts additional uncertainty in the market and extends the correction. The Fed says it does not want a repeat of 1994, but it is acting as if that is what it wants. As we noted Thursday night, history lessons are never learned or at least are never applied to real life. The Fed may say it doesn't want another 1994, but it is going by the same playbook that gave us 1994. Five months into a correction and the Fed is just hinting around about rate hikes. The market hates that uncertainty, and it finds it hard to make significant gains with the Fed cloud overhead, not to mention the other near term problems. Five months can stretch into most of 2004 if the Fed is not clearer. Again, a one step move to the target level with a pre-released statement saying what it was going to do and why would be a huge shot of certainty to the market as well as give the Fed some disaster maneuvering room. Will it happen? Ha.

THE MARKET

Overall a positive week, and not just in the fact the indexes posted gains, the first time in four weeks. The week saw a follow through to the rally that started modestly two Tuesdays back. That follow through is a necessary step to set up a further move though it does not guarantee the move. Stocks continued higher after the follow through, though there was no major rush higher. As noted, there were some solid breakouts from leadership stocks as the indexes worked to form the second leg of their double bottom bases. The action may have been modest overall as stocks took a breather ahead of the Memorial Day weekend, but it held its gains and is set up well for a further move.

Despite what many say, this looks like the summer rally to us. It started early, but so does Christmas shopping season each year as well. It is not waiting for the Iraq handover, and it anticipated the break in the oil price climb higher, starting to rally just before prices per barrel peaked on the adamant Saudi statements regarding production. Even after the close Friday, more OPEC and non-OPEC producers were saying they were already ramping up production to help ease prices. They know all too well that if prices remain too high for too long western economies suffer. If that happens prices will decline anyway because demand goes down and who knows when it will resume. Far better to push prices lower now, avoid a recession, and keep demand solid. Again, that has helped kick off an early summer rally a week before it is officially summer.

While we don't think this summer move will be sustainable through year end as was the 2003 recovery tour move, we don't necessarily buy off on what Merrill Lynch and others were telling their clients Friday. Basically they were saying it was going to be a tough summer, and with stocks already at resistance they did not expect the market to make further headway but would bottom in September after a tough summer. There were several brokerages and pundits stating this point Friday. It is getting to the point of being accepted conventional wisdom. That is typically a problem for that view. We think this rally could surprise more to the upside than they are anticipating before it peaks out and makes a late summer dip into September.

That almost presupposes that the major indexes will be unable to breakout from the double bottom patterns that are forming, thus sending them back into their bases to form up once more into October for a possible break higher right ahead of the election. For now we see a decent follow through as well as some strong stocks making breakouts and bucking for leadership. If those continue to improve we could see significantly more upside to come during the current move.

It was very interesting to see SP400, the mid-cap index, in the lead Friday. While small stocks have been getting the tough love treatment on the financial stations (i.e., like them but have to leave them in favor of large caps), mid-caps may present an alternative that investors can move into and feel they are getting a better value. Not that the mid-caps did not run as did the small caps during 2003; they did. They are often overlooked in the comparisons of small and large caps. They may prove to be a happy medium for those looking to get out of small caps but who do not want to own lumbering large caps.

Market Sentiment

Despite the gains for the week, sentiment remained dampened. Bulls declined while bears rose, but not enough to turn the tide. The put/call ratio remained at high levels all week, indicating investors were still not comfortable with the move higher, using the bounce to hedge their long plays and speculate on some downside action.

VIX: 15.5; +0.22
VXN: 21.33; -0.17
VXO: 15.82; +0.29

Put/Call Ratio (CBOE): 1.05; +0.11. Another close over 1.0, the tenth in three weeks. Definitely moving to more extreme levels, and indeed it appears the market has started a meaningful bounce after those repeated closed over 1.0.

NASDAQ

Modest gain, moving laterally as it takes a breather on low volume after breaking over its 200 and 50 day EMA last week.

Stats: +2.24 points (+0.11%) to close at 1986.74
Volume: 1.246B (-24.26%). Amazingly weak volume to close out a decent week that saw some accumulation action. Nothing major, but up on rising volume and lower on declining volume. That is what you want to see.

Up Volume: 709M (-339M)
Down Volume: 512M (+16M)

A/D and Hi/Lo: Advancers led 1.09 to 1
Previous Session: Advancers led 1.2 to 1

New Highs: 56 (-22)
New Lows: 22 (-1)

The Chart: (Click to view the chart)

After clearing the 200 and 50 day EMA (1956, 1966), NASDAQ was content to move laterally Friday, holding onto its gains on low trade. Not a bad cap to a week that saw a higher volume advance on the follow through session that sets the stage for a further rally. After a gap lower that undercut the March lows and then a gap right back up (clearer on the QQQ), this advance has commenced. That gap lower then immediate gap higher is a bullish technical indication, and thus far that appears to be the case. It is also a classic double bottom with the right leg undercutting the left, shaking out (scaring out?) the last sellers before starting the rebound. Still a lot of work to do on the 4.5 month base. A trip up to 2075 near the middle of the pattern, would be a very solid move in itself and warrant at least a rest to form a handle. From there whether it breaks out or not remains to be seen given the strength of the market at that time.

QQQ continued its advance toward the hump in its double bottom (37.50). It never violated its March low and thus is considered technically in better condition for sustained upside movement.

S&P 500/NYSE

Nowhere session on very low volume, but after retaking the 50 day EMA that is not a bad day. Rest is good.

Stats: -0.60 points (-0.1%) to close at 1120.68
NYSE Volume: 1.17B (-19.21%). Major volume drop off as the large caps took a breather after a solid move off the 200 day SMA and up to the 50 day EMA. Good volume action given the index was taking a breather.

Up Volume: 629M (-408M)
Down Volume: 519M (+134M)

A/D and Hi/Lo: Advancers led 1.37 to 1
Previous Session: Advancers led 2.26 to 1

New Highs: 65 (-15)
New Lows: 15 (-3)

The Chart: (Click to view the chart)

Held the Thursday break over the 50 day SMA (1117) as volume remained low and it still needed a breather after the strong Tuesday and Thursday moves. Showing much better price/volume action (up on rising sessions, down on falling sessions) as it provided a follow through move this past week. It is sitting just below near resistance at 1125, tapping at that level on the highs the past two sessions. It may walk laterally for another session or two before it resumes, but we expect volume to start improving this week. It needs to for it to break and hold a move over 1125.

DJ30

Could not break over the 50 day EMA (10,214) or the higher simple 50 day MA (10,246) as the blue chips never got on track Friday after some big point gains last week. It has set up similarly to the other indexes, but it has yet to successfully take out the 50 day MA after it was able to recapture the 200 day SMA (10, 064) Tuesday. Still think it is following as opposed to leading.

Stats: -16.75 points (-0.16%) to close at 10188.45
Volume: 159 million Friday versus 187 million Thursday.

The Chart: (Click to view the chart)

THIS WEEK

Last week the market set up a further upside move with its follow through to the rally that started the prior Tuesday (5-18-04). Volume was decent, but notably lower given the pre-holiday week. What most are looking for this week is whether volume picks up, and if so, does it work in the same direction as last week, i.e., does accumulation take place.

There are some major economic reports to be released such as the ISM (national manufacturing), ISM services, productivity, factory orders, and the May employment report. The latter will be the focus as investors try to get a handle on when the Fed will raise rates. 215K are expected as of now, but we think it could easily top that given what the regional manufacturing reports are showing. If the ISM employment sub-index is strong, you can expect that expectations will be ratcheted higher.

The return from Memorial Day officially marks the start of summer for the market, and in normal summers that typically means slower trade. After a rally all of 2003, we expect this to be more normal: early summer rally that peaks out sometime before July earnings, then a waffling remainder of the summer where stocks struggle and slide into September and October. Typically stocks find a bottom in September and start a meaningful move in October. With the election in November and the Fed starting to raise rates, that is even more likely this year.

Again, we think the summer rally has already started, anticipating the softening in oil prices this past week when it bounced off the lows two weeks back. We think the market will be hard pressed to breakout over the April highs, but that depends upon the strength. If things improve in Iraq, if there is no major insurgency or terrorist attack there, we could see the handover factor get priced in as well. All of this would help the follow through continue to build, and we would expect to see more breakouts flowing as it does.

That is where we will be looking with respect to plays: the stocks that set up good patterns and then are part of the waves of breakouts. We will see how big the waves are or if they are ripples. Again, we are not expecting a watershed rally, so we will set our targets but be realistic and take what the market gives on the moves. If they run out of gas early, we will protect what we have made.

Reports are coming in regarding an attack in Saudi Arabia relating to oil facilities. 10 people are reported killed including one American. One British citizen was dragged behind a car. Hostages have been taken and there is now a standoff as Saudi troops have surrounded what are said to be Al Qaeda terrorists. We have written about our concern of attacks on Middle Eastern oil facilities, and it is not too hard to draw a connection between Saudi's statements about increasing oil output. It is a tenuous situation. The attack does not appear to have hampered any production, but we expect to see some nervous response in oil prices this week, and in the recent past that has put pressure on the equity market.

Support and Resistance

NASDAQ: Closed at 1986.74
- Resistance: 1990 to 2000, the top of the late 2003 base. 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high.
- Support: The simple 50 day MA (1972) and 50 day EMA (1966). The 200 day SMA (1956). 1900 to 1890. The April lows (1880, 1878). 1850 below that. Some price tops at 1777, 1750.

S&P 500: Closed at 1120.68
- Resistance: 1125 stalled the last bounce attempt. The April and January highs (1150 to 1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
- Support: The exponential 50 day MA (1114), and the simple 50 day MA (1117). The 18 day EMA (1107). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1085). April lows (1079, 1076). 1075 to 1070 from the December consolidation. 1058 - 1060 from November tops.

Dow: Closed at 10,188.45
- Resistance: The 50 day EMA (10,214). The simple 50 day MA (10,247) and price resistance at 10,250. 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
- Support: The 18 day EMA (10,104). The 200 day SMA (10,064). March low (10,007). 9900-9850.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

6-01-04
- Construction spending, April (10:00): 0.4% expected, 1.5% March.
- ISM Index, May (10:00): 61.5 expected, 62.4 April.

6-03-04
- Productivity, rev. Q1 (8:30): 3.7% expected, 3.5% prior.
- Initial jobless claims (8:30): 337K expected, 344K prior.
- Factory orders, April (10:00): -1.0% expected, 4.3% March.
- ISM Services, May (10:00): 66.0 expected, 68.4 April.

6-04-04
- Non-farm payrolls, May (8:30): 215K expected, 288K April.
- Unemployment rate, May (8:30): 5.6% expected, 5.6% April.
- Hourly earnings (8:30): 0.2% expected, 0.3% April.
- Average workweek (8:30): 33.8 expected, 33.7 April.

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ISIL MT SS 1000 shares@21.06

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U.S. stocks rose, led by energy companies including Exxon Mobil as the price of crude oil surged to a record in the wake of terrorist attacks in Saudi Arabia, the world's largest oil exporter. Transportation stocks such as Delta Air Lines, whose fuel costs rise with the increase in oil prices, slumped. The S&P 500 Index gained 0.52 points (+0.1%) to 1121. The DJIA advanced 14 points (+0.1%) to 10,202. The Nasdaq added 4 points (+0.2%) to 1990. The index climbed for a seventh day, its longest rally since Sept. 4. About 15 stocks rose for every 14 that fell on the NYSE. Some 1.2 billion shares changed hands on the Big Board, 17 percent less than this year's daily average and the fourth straight day of below-average trading. Friday's employment report may show the economy added 225,000 jobs in May, according to economists surveyed by Bloomberg News. A reading higher than that may spark concern that the central bank will raise its target interest rate more quickly than expected to keep inflation in check, Coolidge said.

Strong Sectors: internet, biotech, oil services, transportation, healthcare facilities, coal
Weak Sectors: REIT, gold, broker/dealer, personal & household products, airline

Top Stories . . . Crude oil rose the most in five months after the killing of 22 foreign workers in Saudi Arabia Saturday raised concern that attacks on the infrastructure of the world's largest oil exporter might disrupt supplies.

Viacom President Mel Karmazin unexpectedly resigned from the third-largest U.S. media company after three years of tension between him and Chief Executive Officer Sumner Redstone.

A gauge of U.S. manufacturing unexpectedly rose last month, close to a two-decade high, as increased demand prompted more factories to hire than at any time in 31 years, an industry report showed.

Boston Scientific, the world's largest maker of heart stents, agreed to buy closely held Advanced Bionics for about $740 million in cash to add products that treat neurological disorders.

Anheuser-Busch., the world's biggest beermaker, raised its stake in Harbin Brewery Group, setting up a bidding contest with SABMiller Plc for China's oldest brewer.

Quotes of Note . . . ``Higher sustainable oil prices would be favorable for companies in the energy sector. Spending on oil services and equipment would have to increase.'' Brett Gallagher, who helps manage $9 billion as head of U.S. equities at Julius Baer Investment Management.

``The stronger-than-expected economic data we saw earlier today have enabled the markets to shrug off the higher oil prices.'' Todd Clark, head of listed trading at Wells Fargo Securities.

``We're sort of in waiting mode. There's no real impetus to go out there and sell or buy.''' Peter Coolidge, a money manager with Deltec Asset Management.

Gurus . . . On the Rukeyser Show, panelist recommendations for Comcast, Prudential, Johnson & Johnson, ExxonMobil, Microsoft, Alcoa, Ingersoll Rand, and Dow Chemical. Guest John Rogers of Ariel Capital favors Northern Trust, Markel, and St. Paul. He likes Rouse for yield, and recently sold Kroger and SafeWay.

Stan Druckmeiler, who runs Duquesne Capital, says the most striking domestic economic development has been the enhancement of corporate profitability, and the generation of free cash flow. He tells CNBC that over the painful corrective period, corporations went from a debt position, to a $250 billion surplus. He sees the Stock Market in a cyclical trading range. He feels the unraveling of the "carry trade," based on 1.0% money, has been largely completed, so that the actual Fed funds rate boost should not be that punitive. And, while he does not see the price of oil soaring higher, he does believe a new floor has been created above $30.00. His favorite market is Japan, which he feels has entered a secular bull market after 13 years, with cash flow improving, and costs under control.

Byron Wien, strategist for Morgan Stanley, says the S&P 500, up just 1.0% this year, could finish 2004 near 1300, 15.0% above current levels. He does not see why the S&P 500 can't trade at 20 times 2004 operating earnings in an environment of relatively benign inflation and interest rates.

Bear Stearns economist David Malpass believes acceleration in the global economy is still being underestimated, which has positive implications for growth in corporate profits. He noted that wages, readings on the quality and quantity of jobs and small business income are all reaching all-times highs. Of the 30 "major" countries he looked at, 23 are expected to post growth of 8 percent in 2004 in dollar terms.

Smith Barney equity strategist Tobias Levkovich believes a summer decline in stocks is more probable than expectations among traders of a summer rally, as the recent focus on day-to-day newsflow will be more of a distraction that an investment style. He believe there will be a "V-shaped" trading pattern over the next 6 to 9 months, as a sharp pullback over the next few months is followed by a rally starting in late 2004 and into 2005. Levkovich believes a defensive approach to stocks is appropriate for the time being, but that should shift to a more aggressive stance by the fourth quarter.

Dividend Achievers . . . Barron's highlights companies, which recently increased their stock dividends. With a record-setting quarter tucked in its tool-belt, Home Depot is remodeling its dividend again. The world's No.1 home-improvement retailer hiked its quarterly common payout on Wednesday to 8.5 cents a share, from 7 cents. Additionally, directors cleared another $1 billion for stock repurchases; not including a 20-cent-a-share special dividend it paid in March. Charter Financial now sports a 3% yield, following its 25% dividend hike last Wednesday; One of the nation's biggest food wholesalers, Supervalu, last Wednesday raised its quarerly to 15.25 cents a share from 14.5 cents. That marked the 33rd consecutive year in which it has boosted its payout; citing its stronger earnings and cash flow, Western Gas Resources announced last Monday a 2-for-1 stock split and said it will maintain its nickel dividend on the greater number of shares outstanding after the split, in effect doubling its payout. In a seperate article, Barron's highlights European dividend plays Allianz, Bayer, Credit Suisse and Serono favorably. In addition, the article also suggests Alcatel, Bayer, Credit Suisse Group are probably overvalued dividend plays.

How to buy cheap stocks . . . Barron's highlights M&A strategy for long term investors. A favorite fantasy of many short-term investors is to identify the target co before a deal is publicly disclosed, then sell the shares after they climb on the announcement. But, alas, trying to anticipate which company will attract an offer is usually a fool's game and attempted deals sometimes fizzle. But there's another way to profit in the corporate-marriage game. When merger attempts are terminated, the target's shares usually face sharp, prolonged downturns as they come under selling pressure from short-term investors. This can create opportunities for patient investors. Of course, like all investment strategies, betting on the targets of broken deals isn't foolproof. Barron's suggests that investors shouldn't blindly buy every broken-deal target. As with any investment, they shouldn't make a decision without examining factors such as management quality, the company's operating performance and the state of its industry. But busted deals are clearly worth a look. Shares of PeopleSoft, for example, may sell off if Oracle's longstanding hostile bid, now valued at $21 a share, collapses. The Justice Department has filed a suit seeking to bar the linkup, which it deems anticompetitive, and most observers expect the takeover effort to fail. If the bid fails, and PeopleSoft shares do indeed swoon, that might create a nice opportunity, article suggests. Based on its 1st quarter results, PeopleSoft is generating positive cash flow, and its balance sheet is strong, with net liquid assets of $1.6 billion and no long-term debt.

Next Big Tech-Wave . . . Barron's highlights RFID technology, which tracks goods from every stage of production to consumers' shopping carts, suggesting it has the potential to rev up the economy, perhaps even more than the Internet or PC's. "That's where all the action is," says Lyle Ginsburg, managing partner of technology innovation at consulting firm Accenture. "The world keeps getting smaller and faster and more competitive, and the need for more information is king." Certainly, RFID is becoming one of the single biggest drivers of tech spending, according to William Whyman, co-founder and president of the Precursor Group, a technology and telecom research firm. And, in no small part, that is because two of the largest organizations on the planet, Wal-Mart Stores and the Defense Department, have seen the future and decided it includes RFID. Also other company's around the globe are quietly moving ahead with their own programs, including Metro, Tesco, Target and Boeing. As a result, RFID is expected to be a $4.6 billion market by 2007, up from $1.03 billion at the end of 2003, according to market-research firm Venture Development and brokerage house Robert W. Baird. Reik Read, a Baird supply-chain analyst, thinks that estimates could prove conservative as pilot programs and adoption mandates expand. According to the article, about 30 company's are playing an active role in the RFID market, including Accenture, Capgemini, Philips Electronics, Texas Instruments, Infineon, IBM, SAP, Sun Microsystems, Manugistics, Alien Technology, Matrics and VeriSign. In addition, as the technology becomes more pervasive, look for data-management and server-and-storage companies such as EMC, Hewlett-Packard and Network Appliance to benefit. Baird's Read is recommending Zebra Technologies, which makes printers and encoders for the RFID market; Unova, whose Intermec unit is a leader in data collection and wireless networking in the warehousing and distribution industry; and Manhattan Associates, another major warehouse-management-system co, as company's likely to profit in this early phase. Longer-term, Mr Read likes the positioning of Symbol Technologies, Accenture, Manugistics and SAP. Bear Stearns' supply-chain research team also likes Manhattan Associates, Zebra and Unova as well as Tibco Software, which writes computer programs that link trading partners with real-time data.

U.S. Income Growth Surges . . . One of the most tenacious underestimates of the U.S. economy relates to concerns about the U.S. consumer. I disagree with the view that the consumer will slump. The factors adding to personal disposable income heavily outweigh (by roughly 3:1) the increased cost of gasoline, the increase in mortgage rates, the reduction in mortgage refinancings and the wind-down of tax rebates

and tax refunds.

• The aggregate data shows that the household sector is strong in terms of assets, income from assets, income from labor and the resulting increases in saving. This explains the steady growth in consumption and the likely sustainability of that growth into 2005.

• There is a severe underestimate of the U.S. personal savings rate -- the monthly savings data excludes income from assets and the related buildup of liquid assets to record levels. As a result, the U.S. household sector is a big net creditor and will benefit on average from the coming interest rate hikes.

• Some leveraged households will be squeezed by debt, inflation and rising interest rates, but the great majority of households will benefit unde a durable expansion, mild inflation, rising interest rates. In the aggregate, the squeeze will be more than offset by hiring, increased interest income from liquid assets, and income growth.

Personal disposable income will continue to exceed expectations, powered by relatively high wages, the improvement in the quality and quantity of jobs, and the growth benefits from the 2003 income tax cut.

• Data released May 28 showed that personal income grew 0.6% in April. This brings year-over-year growth in personal income to 5.7%.

• The first-quarter GDP report released May 27 provided a strong upward revision to wage and salary income. While the exact details will be released later, the revision is due to changes in hours worked, the number of jobs, and/or the wage level. The revision reflects an improving job situation, an important driver in the ongoing U.S. economic acceleration. The upward revision to wages and salaries will probably result in an upward revision in the payroll survey of employment, bringing it more into line with the stronger picture in the household survey.

• While much attention, both positive and negative, has been focused on the major records being set in corporate profits, income in smaller businesses is also growing fast. Non-farm proprietors’ income increased 11.3% in the year through April. This nearly matches the peak growth rate in the late 1990s.

Eco Speak . . . Fueled by low interest rates, U.S. construction spending surged to a record high level in April after rising faster than previously estimated in March. Construction spending rose 1.3 percent in April to a record $970.4 billion. Economists had forecast a 0.4 percent rise in the month. In March, construction spending rose a revised 2.4 percent after the department initially estimated a 1.5 percent gain. Residential construction spending rose 1.2 percent to $520.7 billion in April. Public construction spending rose 1.7 percent in the month to a record $230.5 billion.

Factory activity in the United States accelerated in May from its already high level, the Institute for Supply Management reported Tuesday. The ISM index rose to 62.8 percent in May from 62.4 percent in April. This is the seventh month in a row that the index has been above 60. The increase was unexpected. The consensus forecast of estimates collected by CBS Marketwatch was for the index to fall slightly to 62.0. Readings above 50 indicate expansion. New orders fell to 62.8 in May from 65.0 in April. The employment index rose to 61.9 in May from 57.8.

Financials . . . Merrill Lynch downgrades Chicago Mercantile to Neutral from Buy based on valuation, as the stock is nearing their $132 target, and is up 370% from its Dec 2002 IPO. The firm also notes that there is also potential selling pressure arising from the lock-up period ending June 4, as 19 million shares (over half of shares outstanding) will be available for potential sale.

Jefferies upgrades Providian to Buy from Hold and raises their target to $16 from $12. The firm says that the company's recent delinquency trends indicate that the co will experience much greater loss rate improvement over the next 12 months than firm had anticipated, and they are increasingly confident that the company's net interest margin will remain relatively stable at or near current levels, easing concerns that its ongoing portfolio transition will erode profitability. In addition, based upon increased marketing spending in 1st quarter and a number of new marketing partnerships, firm believes that the company's asset generation platform is gaining strength.

Homebuilders . . . UBS says positive news and the sell off in homebuilders has reawakened investor interest in homebuilders. Positive media attention on the builders has accelerated, with news articles highlighting the sustainability of demand and EPS power. While this positive attention is a welcome relief from 'bubble' reports, the highlighted changes are not new, but have evolved over the last 10 years. Favorable demographic trends and a sophisticated mortgage market are contributing to robust, steady demand. This, combined with supply constraints and record low inventories, should result in steady EPS growth and continued margin expansion. Positive news flow along with a 30% dip in the stocks appears to be peaking investors interest. Also, short interest is bottoming at just 4 days.

Barron's cover story discusses the housing market, which has been booming lately. In the late 1990s, the baby-boom generation, 80 million strong, entered its peak earning years. "More and more, we see baby boomers 'buying up' for retirement and also purchasing second homes," says Jim Gillespie, president and CEO of Coldwell Banker Real Estate, a subsidiary of Cendant. "Generally, boomers have more wealth than previous generations. They have built up tremendous equity in their homes and are using inheritances left by their parents to purchase second and even third homes." In discussion, how to buy own piece of paradise, the following company's are mentioned positively: Cendant, Starwood Hotels & Resorts, Four Seasons, Sonesta and Hilton Hotels.

Energy . . . Barron's highlights the windmill and solar panel market, as big corporations are starting to plow billions into the field. Giants such as General Electric and Royal Dutch/Shell have jumped into the manufacturing end of the business, while wind farms are finding equity financing from the likes of FPL Energy, a unit of Florida's FPL Group; PPM Energy, a unit of Scottish Power; and the Zilkha family of Texas. "We're in [the wind business] because we think we can make money at it," says Terry Hudgens, CEO of PPM Energy, Scottish Power's U.S. subsidiary. "The convergence of the lower cost to produce wind power along with higher price of natural gas [used to power utilities] has made wind economically attractive." Indeed, the surging prices of oil and natural gas this year have added real urgency to the effort -- and raised the stakes for everyone from state governments to private investors. Right now, there are no direct plays on the industry for individual investors, but opportunities are sure to arise as the industry moves to fund its expansion. There is no question that wind- and sun-generated electricity is gaining ground. Last year alone, new windmills boosted total wind-energy production by 36%, to almost 6,400 megawatts. Likewise, the total U.S. capacity of solar power jumped 21%, to 218 megawatts. Though wind and sun power still account for less than 3% of all electricity produced in the U.S., the new markets should keep growing at a blistering pace. Some consultants figure that wind and solar each will grow 20% annually for the next 5 to 10 years. One of the largest projects in limbo is a 310-megawatt wind farm planned for Iowa by MidAmerican Energy, a unit of Berkshire Hathaway and the latest entrant into the market. The company had expected to start the $323 million project this year, but it will put construction on hold until the tax credit passes, says Jack Alexander, senior vice president of supply and marketing at MidAmerican.

Oil & Gas . . . Refining margins declined 21% on the West Coast to $20.63/bbl, due to lower product prices. Gasoline and diesel prices on the West Coast fell 15 cents per gallon and 10 cents per gallon, respectively, an 8% decrease for both products. Elsewhere, refining margins fell 2% on the East Coast and 8% in the Midwest. Refining margins were up 0.2% on the Gulf Coast. Tanker traffic is reportedly high for European gasoline imports. Exports from West African reportedly have increased as well. While overall gasoline imports in 2004 have lagged 2003 levels by 6%, we believe the current arbitrage spread will attract more imports. The arbitrage spread for May has averaged 4.3 cents per gallon, verses 0.5 cents per gallon in April and -2 cents

per gallon in May during the last five years. Expect gasoline imports to increase significantly in June. Earlier this week, analysts indicated that refining margins have reached record levels but that these margins may be “as good as it gets.” Findings show that seasonally adjusted demand tends to be elastic when retail prices exceed $1.75 per gallon. Nationwide average gasoline prices are at $2.06 per gallon. As expected, gasoline conservation efforts are starting to make headlines. Expect demand to dampen at the same time that supplies increase, resulting in an inventory build.

Transports . . . UPS upped to Hold from Sell at AG Edwards. The upgrade is based upon on firm's bullish outlook for the economy. AG Edwards continues to have two basic long-term reservations about UPS's stock. One of those is based in the company's inability to improve its Return on Invested Capital (ROIC) and the other is a reflection of firm's view on the valuation. Hence, firm doesn't believe it warrants a Buy rating. That said, AG Edwards sees an extremely robust surge in the U.S. economy unfolding, as the manufacturing sector rebounds with unpredicted vigor.

Retail . . . AmTech downgraded EBAY to Hold from Buy based on the following factors: 1) stock has reached their $86 target, and is trading at the highest forward multiple since July 2002; 2) firm doesn't see as much upside to the June qtr versus the March quarter, yet they see the 8% intra-qtr rise in EBAY is an expectation of significant June qtr upside; 3) typical weak seasonality in the June and Sept quarters; 4) lack of positive near-term catalysts; and 5) positive sentiment.

The WSJ reports that a new law will throw China's retail and distribution sectors wide open to foreign investors, and probably lead to faster growth in an already rapidly expanding area of the economy. The law, which was issued in April and goes into effect today, removes both longstanding restrictions and the threat of recently proposed measures to further hamper foreign investment. Beginning in December, foreign retailers can do business without Chinese partners and set up stores anywhere in the country. The law removes prohibitive asset and sales requirements that had barred all but the world's largest retail chains from entering China, and it loosens an earlier rule that all store openings needed approval from the central government. While the law merely puts into effect China's promises to the World Trade Organization, under which Beijing agreed to open its retail and distribution sector within three years of joining the global trade body, it is particularly welcome to foreign investors, since it runs counter to recent protectionist calls by Chinese retailers and some officials. "It will increase the speed of expansion of the big retailers," says Li Fei, a professor at Tsinghua University's School of Economics and Management who was involved in drafting the new law. In recent years, global chains like Wal-Mart Stores and France's Carrefour SA have expanded aggressively in China. Local retailers had lobbied heavily for protection from the onslaught.

The WSJ's "Ahead of the Tape" column highlights Kmart Holdings, which has been a public company for over a year, but you couldn't tell that from the companies actions. Instead, Eddie Lampert, the Kmart Holding chairman and hedge-fund manager who controls a majority of the stock in the retailer, continues to run the co as he does his hedge fund, very quietly. Kmart has yet to hold a conference call for analysts and investors after its quarterly financial reports. It doesn't even deign to prerecord a call from executives about the quarter, as Wal-Mart Stores does. Kmart hasn't yet held an analyst or investor day to discuss its strategy and has no plans to hold one soon. It hasn't attended investor conferences or put up a tent at any dog-and-pony shows. Unlike the vast majority of retailers, it doesn't issue weekly or monthly sales updates. And last week, the co turned away some non-shareholders and interested potential investors from its annual meeting. Kmart has the right to a grace period as a re-emerged public co to hunker down and operate the business. Moreover, it's typical practice for a co to let only shareholders into an annual meeting, but this was hardly the run-of-the-mill annual meeting attended mostly by 72-year-old retirees. This was the only opportunity so far to hear from top Kmart executives and owners about their strategy. Article suggests that Kmart could have made an exception to normal practice. Kmart seems to be adopting the Berkshire Hathaway model of investor relations, hoping to let the financials and the stock price speak for them. It hardly needs mentioning that there are fairly significant differences between Berkshire and Kmart. Nevertheless, investors, like people everywhere, tend to find reticence charming and imbue strong and silent types with all sorts of talents.

Healthcare . . . Merrill Lynch adds Caremark Rx to their Focus 1 List and reiterates their $40 target. The firm believes that CMX is well-positioned as the leading PBM, with substantial scale and expertise across a broad array of product lines. The firm also notes that the company is either the number one or two PBM in every major business category, and given the winning of the FEP contract is quickly closing the gap with the market leader in the all-important mail segment.

Medical Devices . . . Barron's highlights Cyberonics, whose request to sell an implantable pacemaker for treating people who suffer depression will be voted on June 15 at a panel of FDA advisers. The submission by Cyberonics is a first for the FDA, because the agency has never before evaluated a device for a psychiatric illness. People with drug-resistant depression are in the first group that researchers are trying to help with devices like Cyberonics'. But FDA approval is far from assured for the pioneering Cyberonics device. The FDA knows its first psychiatric-device approval will set standards for all that follow, so some of the agency's top brass have been scrutinizing Cyberonics' depression studies. Experts in psychiatry and neurology have criticized the Cyberonics' studies as poorly designed and executed, with the resulting data, consequently, offering insufficient grounds for subjecting millions of patients to surgical implantation of the company's device. One leader of Cyberonics' studies was Dr. Mark George, a psychiatry and neurology researcher at the Medical University of South Carolina. In a Thursday conference call, Mr George acknowledged that the Cyberonics implant hadn't proved to be "a home run" in its depression trial, but he argued that it indeed works. He predicted that the plight of patients with hard-to-treat depression would move the FDA to approve the device anyway, perhaps with a requirement for post-approval studies. "There is intense pressure from the mental-health advocates to allow this to go out," Mr George said of the antidepressant implant. According to the article, Cyberonics might not be the trustiest steward of a post-approval study. An accomplished neurologist says he put a stop to the company's data collection in a post-approval study on epilepsy when he found that a Cyberonics salesman had pulled patients' charts and was himself rating the patients' progress. The company's aggressiveness has antagonized some neurologists, who say the co has an extreme style of direct-to-consumer marketing, in which salespeople have met directly with families of people with epilepsy.

CSFB downgrades Guidant to Neutral from Outperform after the co announced that it identified issues with the stent platform for its Champion drug-eluting stent; if the issue can be addressed with only a manufacturing change, firm says the company's timetable will likely remain intact, however firm assigns this scenario just a 25% probability, with the more likely outcome being a redesign that pushes Future IV back 6 months and FDA approval from 1H06 to late 2006. With GDT's internally developed drug-eluting stent (Spirit) on its best-in-class Vision stent slated for US launch in 1st quarter 2007, firm wonders if it's even worth launching Champion if it gets delayed. Also, assuming the mid-point of EPS guidance for 2nd quarter ($0.54-$0.60). The firm says GDT would have to earn $1.26 in 2nd half 2004 to meet the low-end of its range for the full year ($2.40-$2.55), which is an 11% increase from 1st half 2004, which makes them nervous considering they don't see much changing between now and then.

TriPath Imaging received approval for expanded labeling claims from the U.S. FDA to include the use of a brush/plastic spatula combination collection device with TPTH Imaging's liquid-based cytology system. The approval was granted based on a supplemental filing to TPTH Imaging's PreMarket Approval (PMA) of its liquid-based cytology system. The data submitted to the FDA included results from a prospective, paired sample clinical study that demonstrated that an endocervical brush/plastic spatula combination is as effective as the currently approved broom-type collection device in transferring representative cervical material from the sampling device to the SurePath preservative fluid.

Genzyme and Medtronic announced that they were launching a new joint venture targeted at creating cardiac therapies. The new entity, MG BioTherapeutics, will look for ways to combine coronary medical devices with cellular therapies. The new company will assume development of Genzyme's cellular therapy for the treatment of ischemic cardiomyopathy, which is currently in Phase II clinical trials.

Biotech . . . POZEN announced that the FDA issued a not-approvable letter on Friday, May 28, 2004 concerning the New Drug Application (NDA) for MT 100 for the acute treatment of migraine. MT 100 is a novel combination of naproxen sodium and metoclopramide in a single tablet. In the letter, the Agency noted that POZEN demonstrated unambiguous statistically significant superiority of MT 100 compared to an appropriate control on a valid measure of pain as well as on the three associated symptoms of nausea, photophobia, and phonophobia in one study. However, they noted that MT 100 did not clearly meet these criteria in a second study. The FDA also cited the apparent lack of superiority of MT 100 over naproxen for sustained pain relief, which was the primary endpoint for the two component studies. This appears to arise primarily from an apparent difference in understanding between POZEN and the Agency as to the appropriate statistical analysis of this endpoint. "Based on our understanding of our many previous communications with the FDA and the data contained in the NDA, we are extremely surprised and very disappointed by the Agency's action."

Array Biopharma has received a $420,000 research milestone payment from Amgen. The payment resulted from a drug discovery agreement initiated between AMGN and ARRY in January 2002. As part of the agreement, ARRY collaborated with AMGN on the discovery of proprietary lead compounds for an AMGN therapeutic target. ARRY would be entitled to additional payments if AMGN's program continues to advance and additional program milestones are achieved.

Media . . . Newsweek reports that Martha Stewart plans to try to shorten her jail time by offering to serve part or all of her sentence helping underprivileged women start businesses. Ms Stewart approached the Women's Venture Fund, a New York-based nonprofit group, o-ffering to work 20 hours a week, teaching low-income and minority women to become entrepreneurs, according to the report which cited the venture's president Maria Otero.

Merrill Lynch analyst Jessica Reif Cohen believes the resignation Viacom president Mel Karmazin is a "very significant negative" for the media giant, given that the company loses "an extremely talented" operating executive. She kept her rating on the stock at "buy," however, due to what she views as "very attractive" valuation and "very strong" operating fundamentals. She feels the downside risk is limited vs. the stock's upside potential.

Smith Barney says it would be buyers of Viacom's stock on potential weakness related to today's management moves, as firm feels that this paves the way to a smoother management progression at the top. Also, with financial targets likely to be reaffirmed on the conference call today, these announcements do remove an overhang that has been plaguing Viacom for years.

Telecom . . . The WSJ reports that Qwest and MCI became the first major telecom company's to sign an accord over network leasing rates, an issue that has pitted long-distance carriers against local phone company's for years. Representatives of the nation's largest phone company's negotiated over the holiday weekend at the headquarters of the FCC at the request of top FCC officials, who are urging a negotiated solution to the leasing dispute, instead of sending the matter back to the courts. Other companies involved in the negotiations included AT&T, SBC and Verizon. For its part, AT&T late last night labeled the three days of talks "failed." The Qwest and MCI pact, which is expected to be announced today, outlines a series of wholesale rates Qwest will charge MCI to lease its network to offer local phone service to consumers and businesses, overriding rates set by regulators. If talks among the larger companies fail, the FCC could still seek a U.S. Supreme Court review of rules governing what local phone companies can charge for long-distance companies to lease their lines.

Storage . . . The WSJ reports that Sun Microsystems, hurt by the falling price of computer hardware, is moving to put similar pricing pressure on sellers of the popular Linux OS. According to the article, the company today will outline plans to woo customers to its Solaris OS and subscription-based software and services. Sun is highlighting the lower price for Solaris compared with Red Hat, whose popular version of Linux is resold by IBM, H-P and others. Jonathan Schwartz argues that Sun has a distinct advantage over company's that don't make their own OS' for low-end servers. While pricing Solaris aggressively, either as a separate product, or bundled with servers, Sun can still derive additional rev from the software to counteract the effect of falling hardware prices, he said. Mr. Schwartz, who is describing the strategy at a customer gathering this week in Shanghai, predicts that recurring rev from software and services could allow Sun to offer company's hardware on a subscription basis or for free, a bit like the way cellphone services subsidize the price of handsets. "My belief is in 5 years, customers will no longer be paying for hardware, it will be free," Mr. Schwartz said.

Network Equipment . . . Merrill Lynch upgrades Foundry Networks to Buy from Neutral. The firm says that Federal spending (about 32% of rev) on data networking gear should continue to grow, and notes that Federal revenues in the next 2 quarters are typically seasonally strong. Also, the company's focus on the enterprise market this year should be a good move, with hints of a recovery in spending. Target is $16.

Smith Barney out on Tellabs saying that based on their conversations with industry contacts, they believe Tellabs has won a large ($100+ million) multi-year contract with Verizon as a strategic vendor of edge IP/MPLS multiservice switching/routing. Under this contract the Tellabs 8800 router, acquired last year via Vivace, would be used in Verizon's enterprise network to aggregate a variety of services, place an MPLS header on the various frames, and put the services onto an IP core transport network. According to the firm, this should be viewed as a significant catalyst for the stock as one of the bear cases around Tellabs has been the slow takeoff of the Vivace revenue ramp. Verizon contract should allow Tellabs to grow its broadband data revenues into the double-digit millions in the near term and should help allay concerns about the company's ability to integrate acquisitions. Firm also notes that Lucent is acquiring Equipe's IP after the Multiservice switch startup founded in 1999, shut down last week, apparently after having been informed that it did not win the Verizon contract Tellabs appears to have won. Finally, Tellabs's win at Verizon should be considered a negative for CIENA's chances of expanding its DN 7000 (WaveSmith) rollout to include MultiService IP/MPLS apps. Smith Barney is reiterating Buy on TLAB with $11 target.

Semiconductors . . . Global sales of semiconductors in April rose 37 percent over the same period a year ago, and 4.1 percent from March, to $16.94 billion, according to the Semiconductor Industry Association, the highest level seen since July 2000. Results were boosted by strong demand fop cell phones, personal computers and digital cameras, as well as economic growth in the U.S. and China. "The fundamentals are in place for strong growth through the remainder of the year, and it is likely that growth for 2004 will significantly surpass last fall's forecast of 19 percent growth," said SIA president George Scalise.

Zoran was upped to Buy from Market Perform at Unterberg. Price target was $22. According to firm, 2/3s of way through the quarter, ZRAN's business is tracking ahead of expectations driven by strength in the DVD player business: firm believes ZRAN's DVD player business is tracking ahead of plan driven partly by the co's growing market share due to its competitive cost position at the low end and partly due to the ever increasing size of the DVD player market. The firm is adjusting 2004 estimates slightly from $390 million and $0.67 to $394 million and $0.67 (due to slightly lower gross margin assumption). However, firm's conservative 2005 estimates go up from $472M and $0.83 to $472 million and $1.00 (due to higher operating leverage).

Lehman sees a buying opportunity in National Semi ahead of its 4th quarter (May) report. The firm believes concerns over a slowdown at NSM has created an opportunity ahead of what should be strong 4th quarter results and guidance on June 10. NSM, along with ADI, remains one of the best analog plays at this stage of the cycle with both strong growth and margin leverage on the horizon at a compelling price.

Digitimes reports, citing sources with DRAM makers, that DRAM contract prices are forecast to drop up to 5% in the first half of June, ending a rally that began in Jan. Average contract prices for 256Mbit (32Mbitx8) DDR have surged 44% since Jan to $5.33 during late May, although these months are generally regarded as the weak months for PC sales. Market observers attributed the scenario to the previous round of price surges in the spot market. Contract prices will drop for the 1H of this month to reflect the eroding spot prices, commented Pei-lin Pai, spokesperson of Nanya Technology. Spot prices for 256Mbit DDR have dropped below $5 after they peaked at $6.5 in early April, according to DRAMeXchange. Albert Lin, spokesperson of ProMOS Technologies, said the drop in contract prices is normal since demand for PC is usually weak in June. The outlook for DRAM pricing is still positive, he added.

SiliconStrategies reports that Intel has reserved 50 to 70 acres of land in Chennai, in the South of India, for a manufacturing plant. The land is at the Siruseri IT Park, the report said, adding that Intel executives had earlier looked at other sites, including one in the Mahindra Industrial Park. "Intel has finalized its plans for the Chennai plant over the last fortnight and is expected to sign an agreement within the next few weeks," the report quoted an un-named local official as saying. However, it remains unclear whether Intel is considering a wafer processing facility or, more likely, a test and assembly facility in the city.

Toshiba has selected Trident Microsysem's PanelTV SVP chip to deliver home-theater quality video for multimedia PC applications on Toshiba's line of Dynabook Notebook PCs.

First Albany is out on Intel saying they expect the company to tighten the ranges of revenues and gross margin guidance in its mid-quarter update on June 3. However, they think there is more risk of the company lowering the midpoints of its revenue and gross margin ranges than raising them. Firm's EPS and revenue estimates for the June qtr are $0.25 and $7.95 billion, respectively. Firm expects INTC to tighten the revenue range to $7.8-$8 billion from $7.6-$8.2 billion, with a small risk for the co to lower the midpoint of the revenue range. According to the firm, 2nd quarter is typically a back-end-weighted quarter. Their most recent checks indicate that PC demand is a bit soft. Estimates call for revenues to be down 1.7% sequentially. Over the last 8 years 2nd quarter results have been flat to down 8%, with an average decline of 3.4% sequentially. Also, there seems to be some risk to gross margin guidance that is likely to come in at 60% plus or minus a point vs previous 0% plus or minus a couple of percentage points. This is due to the increase in inventory at the company. First Albany is maintaining their Buy rating and $35 target, as the company is entering the seasonally strong period of demand, but thinks the upside potential in the shares is somewhat limited.

The U.S. International Trade Commission (I.T.C.) in the patent lawsuit with Broadcom (BRCM) has now been finalized in favor of Microtune. The I.T.C. denied BRCM's petition to review a final initial determination made on 4/2, by Administrative Law Judge Sidney Harris finding no violation of Section 337 of the Tariff Act of 1930 and announced the termination of its investigation. The final determination of the I.T.C. can still be appealed by BRCM to the U.S. Court of Appeals for the Federal Circuit.

Digitimes reports Hynix Semiconductor may double its wafer starts for NAND flash to 40,000 8-inch equivalent wafers per month in the third quarter, after completing a hike to 20,000 wafers this month, according to a June 1 Commercial Times report, citing sources with chip distributors. According to the article, the move suggests that NAND flash production would take up almost the entire capacity at one of Hynix's 8-inch fabs and it also means less capacity will go to DRAM, the report indicated.

Boxmakers . . . Hewlett-Packard, one of the biggest backers of the Linux operating system, said it will increase its backing of "open source" software by being the first large technology company to certify and support programs made by MySQL AB and JBoss Inc. The move by H-P is intended as a competitive strike against rival IBM, which sells its own stack of proprietary "middleware" software. H-P says that by adding open-source programs from MySQL and JBoss to its offerings -- which also include middleware programs from ORCL and BEAS. -- it is giving customers more software choices.

Software . . . Fulcrum upgrades Siebel to Buy from Neutral, saying conversations with customers suggest improved demand. The firm says that their channel checks reveal strength this qtr in mid-six figure to low-seven figure deals, with particular demand noted in government & education, telco & high tech, healthcare services, transportation, and travel services. Also, firm says customers indicated that SEBL pricing has stabilized, providing further evidence towards increased demand. Target is $13.25.

Prudential downgrades Oracle to Neutral-Weight from Overweight and cuts their target to $13 from $15. The firm is saying ORCL's long-term license growth prospects remain limited to the single-digits without the help of favorable currency or acquisitions. Looking into 2005, firm is beginning to question the company's ability to organically achieve license rev growth above its core database market of 5-6%, and their biggest concern is that ORCL is not innovating quick enough beyond its core database offering (80% of license revs) to drive a higher level of top-line growth required to meaningfully accelerate the stock from current levels.

UBS analysts reiterated their "buy" stance on Oracle shares ahead of the company's quarterly earnings report expected later this month. Analyst Heather Bellini sees a good buying opportunity for the shares ahead of the earnings report. Oracle is likely to meet or exceed Wall Street estimates for the quarter for the third time in a row, Bellini said in a note to clients. UBS' price target for the shares is $16.50.

Hot Items - Check out the "Hot Items" page (updated daily)


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Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.

http://www.robblack.com/rb_marketwrap.shtml

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Inflation Type Investment Strategies
By Jeff Neal, Optionetics.com
6/2/2004 6:30:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10490

With inflation becoming a growing concern and with oil prices surging, this might be a good time to discuss investment strategies to accommodate each type of inflationary environment. The types of inflationary environments include price stability, moderate inflation, accelerating inflation, and rapid inflation. Each type of inflation demands its own unique set of investment strategies to be successful.

In an economic environment of price stability interest rates will be stable with inflation coming in at the 1 to 3 percent range. In addition, unemployment will be low or declining and the Gross Domestic Product will be growing at a moderate clip. Some investments to consider are stocks and bonds, which generally provide a higher return than the inflation rate. Both growth stocks and blue chip equities are fine choices in this type of environment. However, money market type investments that are tied to interest rates will more often than not perform poorly. Also, real estate can be a good investment since interest rates are relatively low.

Another type of economic environment a trader needs to be aware of is moderate inflation. As the business cycle matures, inflation begins to heat up slightly. The inflation rate is usually being reported between 4 and 5 percent on an annual basis. Usually the stock market begins to level off or show signs of weakness. At this time money market rates and intermediate-term CDs will begin to look attractive. Since inflation could go either way, depending on the actions of the Federal Reserve and market forces, it is not wise to stake out any long-term positions yet. For example, if inflation continues to rise, being locked into long-term CDs could cost you money as rates surge past your guarantee. On the other hand, if inflation moderates, you’ll want to have funds available for other investments. Also, if you do not have a position in real estate yet, then this usually is the last chance to do it before the roller coaster begins.

The next level is accelerating inflation. In this environment the inflation rate is between 6 to 8 percent and requires the investor to start taking defensive positions. This type of inflation is usually a precursor to bad times ahead. By taking defensive positions and you’re wrong, you still have your capital; however, if inflation gets out of hand and you haven’t prepared for it, you risk losing everything.

Money market accounts and CDs are definite components of your portfolio at this time, but you don’t want to lock in rates for too long. An investor should also consider purchasing precious metals such as gold and silver during this period. There is a distinct chance that you will not be able to keep up with rising interest rates and metals will begin to appreciate faster than rates are rising.

Concentrate on blue chip stocks in this environment since they have probably declined in price and are offering some very attractive yields. However, the investor should avoid growth type equities because historically they perform poorly at this point in the cycle. In addition, with the high interest rates an investor should not consider real estate at this time.

Finally, an investor has to be prepared for a rapid or hyperinflation climate. This comes when inflation exceeds the 9 percent level. An investor needs to only be in precious metals and money market type funds. The equities market is usually engaged in a major sell-off so until things start to stabilize the investor should not be purchasing stocks.

As investors we need to be in tune with the current economic environment so we can align our investment objectives appropriately. Of course, if you are an Optionetics trader you already are well aware that you can be profitable in the stock market regardless of the current economic climate.

Happy Trading.


Jeff Neal
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
[e-mail]

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From Briefing.com: 10:30AM : New session lows for the major averages, as the S&P 500 joins the Nasdaq in negative territory, while the Dow maintains only a fraction of its earlier gains and is hugging the flat line... The semiconductor sector continues to spearhead the decline, with the SOX index down 2.6% at this juncture... Among the laggards of note are Xilinx (XLNX 34.77 -1.58), KLA Tencor (KLAC 46.40 -1.31), and Maxim (MXIM 49.49 -1.22)...

Also in the red is Altera (ALTR 22.12 -0.71) on the heels of its mid-quarter update, where the company stated that Q2 is tracking at the high end of its expectations of revenue from $260.0-265.0 mln... Intel (INTC 28.02 -0.31) is lower ahead of its mid-quarter update tomorrow... Separately, note that the 50-day simple moving average for the S&P 500 is at 1117 and the index's failure at this level would likely incite additional selling pressure...NYSE Adv/Dec 1535/1288, Nasdaq Adv/Dec 1220/1419

9:59AM Fairchild Semi Intl approaches it May lows (FCS) 17.72 -1.78: -- Technical -- As the stock comes under selling pressure this morning, it approaches potential support at its May lows (17.52/17.64) and its October 3 bullish gap low (17.80).

7:17AM Fairchild Semi reits Q2 sales guidance, but notes backlog volatility (FCS) 19.50: Co reits previous guidance for Q2 sales growth of 5% sequentially which computes to $417.7 mln vs the $416.4 mln consensus. However, co notes backlog volatility. Also, lead times increase steadily through the quarter.

7:53AM TTMI target lowered to $14 at RBC following filing 11.45: RBC lowers its target on TTM Technology to $14 from $23 to reflect (a) 4.4 mln share (11+%) overhang following amended registration statement indicating TTMI's intent not to sell stock, but the VC's intent to fully liquidate holdings and (b) poorer market sentiment following Merix's (MERX) repeated disappointments over past few months.

9:32AM Sierra Wireless inks deal with Adino Telecom (SWIR) 27.95 +0.32: Co announced an agreement with Adino Telecom Limited, an Indian broadband solutions company, to distribute the Air Card 750 wide area wireless PC Card and the rugged MP 750 GPS modem, for use on GSM (Global System for Mobile Communication) and GPRS (General Packet Radio Services) networks, and the new Air Card 775 PC Card for EDGE (Enhanced Data rates for Global Evolution) networks, to customers in India. This agreement marks SWIR's first entry into the Indian marketplace.

8:57AM Merrill Lynch cuts estimates for disk drive stocks : Merrill Lynch cuts ests for STX, MXO, WDC, and HTCH, and says it's still too early to invest in the U.S.-based hard drive stocks. Firm cites the following factors: 1) recent T.S.R. (hard drive supplier) data, which suggests downside to their prior ests; 2) distributor checks, which suggest that shipments would be down sequentially in CQ2; 3) their belief that key supplier HTCH has not reached an inflection point in its suspension assembly biz; 4) their Taiwan team's ests that PC motherboard shipments will be down 11% sequentially in CQ2; and 5) slowing growth in Europe due to a declining euro and weakness in continental Europe.

http://biz.yahoo.com/mu/update.html

We have a series of lower highs in place for the SOX. Take a look at this chart and simply draw a mental line over the tops the last six months.



There is a downtrend in place that apparently was not going to be broken no matter how high the total put to call ratio got recently.

RtS

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<<Smith Barney Citigroup (AMAT, KLAC, DPMI, PLAB, BRKS, NVLS, CMOS, LTXX, TER, LRCX, WFR, AMKR, INTC) JagNotes.com

2 June 2004, 08:36am ET

AMAT: Assuming Coverage And Lowered Rating To Hold - Assuming coverage and lowering rating to Hold (2H) and target price to $23. While signs of a cyclical top are starting to materialize, we believe the process will not fully play out until mid-CY2005 - for now, we prefer late-cycle or derivative plays with attractive valuation. AMAT at current levels does not meet our criteria.- AMAT is now reaping the benefits of down-cycle cost structure improvements to boost profitability. A leader in virtually every market it serves, AMAT`s challenges are to maintain market share while finding new revenue growth opportunities.- Key issues for the stock include: 1) Top-line growth opportunities (at respectable gross margins), 2) copper deposition (particularly ECD) market share, and 3) use of nearly $6B in cash and equivalents and potential longer-term impacts on valuation.

KLAC: Assuming Coverage And Lowered Rating To Hold - Assuming coverage and downgrading to a Hold (2H) rating and lowering our target price to $51 from $73.While we see signs of a cyclical top starting to materialize, we do not expect the process to fully play out until mid-CY2005 - at this juncture, the only stocks we like are late-cycle/derivative plays or those with attractive valuations. KLAC at current levels does not meet our criteria.- As the top provider of yield-enhancing process control equipment, KLAC may be the best positioned company we cover over the longer-term given our view that yield issues at the 65nm node will be at least as acute as at 130nm. That said, we like the stock as a potential hedge for those investors who need exposure to the group even in a downturn - thus we would wait a Q or two.- By our analysis, key issues for the stock include: 1) increasingly wide ranges in order guidance, 2) expansion of served markets/revenue opportunities, and 3) competition at lower price points.

DPMI: Initiate Coverage With A Buy - Initiating coverage with Buy (1S) rating and $30 price target. While signs of a cyclical top are starting to materialize, we estimate the process will not fully play out until mid-CY2005 - in the meantime we prefer late-cycle or derivative plays with attractive valuation, and DPMI fits the bill.- With share loss and bad acquisitions behind us, DPMI is in the middle of an operational turnaround that our analysis indicates provides an attractive risk/reward scenario for patient investors.- While low current valuation may be justifiable given profitability issues, we note that our EPS estimates are more than double consensus in C05 - we estimate that when numbers turn they will turn fast, and we prefer to be early.- Key issues for the stock include: 1) the need to execute on the plan for return to profitability, 2) the ability to leverage solid leading-edge market share into operational gains, and 3) secularly slowing merchant mask shop growth.

PLAB: Initiate Coverage With A Hold - Initiating coverage with Hold (2H) rating and $18 price target. While signs of a cyclical top are starting to materialize, the process will likely take into mid-CY2005 to fully play out. In the meantime we prefer late-cycle or derivative companies with attractive valuation. PLAB, at current prices, does not fit this bill.- Photronics has established itself as the key low-cost merchant photomask provider to the semiconductor industry by prioritizing operational excellence and customer service. That said, our research indicates its successes have been largely priced into the stock, and see better risk/reward elsewhere.- Key issues for the stock include 1) relatively low market share in advanced technology photomasks, 2) secularly slowing merchant mask shop growth, and 3) potential issues in executing plans to better integrate the efforts of chip designers and manufacturers.

BRKS: Initiate Coverage With A Sell - Initiating coverage on Brooks Automation with Sell Rating (3S) and $17 price target, based on a 14x multiple to our estimated peak TTM EPS of $1.20 - our estimates are, on average, 14% below consensus in 2004 and 2005.- As the largest supplier of automation to chipmakers, BRKS appears well positioned as the transition to 300mm makes automation more critical.- BRKS` core tool automation position remains strong, however, the company`s lack of momentum in software and margin-anchoring AMHS add a lackluster sheen to the story.- Key issues for the stock include traction and profitability in AMHS, conversion of captive tool h/w market to merchant opportunity, and growth in software.- While we see the semiconductor cycle as fundamentally intact, we prefer late-cycle or derivative plays with attractive valuation, and see the risk/reward for BRKS at this level unattractive and the stock overvalued.

NVLS: Assuming Coverage And Lowered Rating To Hold - Assuming coverage and downgrading rating to Hold (2H) and lowering target price to $36. We see clear signs that a cyclical top is starting to materialize, but we also do not think the process will fully play out until mid-CY2005. In the meantime we prefer late-cycle or derivative plays with attractive valuation, and NVLS does not fit that bill.- While NVLS remains well positioned with key 300mm leaders (and thus big spenders like Samsung and Intel), we remain concerned that, with a clear decision to compete head-to-head with AMAT now made, NVLS will be forced to continue sacrificing margins to achieve strategic penetration in new markets like CMP and PVD.- Key issues for the stock include: 1) margins versus continued expansion into new markets with entrenched suppliers, 2) copper and PVD market share gains, and 3) accelerating new product development (i.e., CMP, ALD).

CMOS: Assuming Coverage With a Hold - Assuming coverage with a Hold (2H) rating (changed from 2S) and maintaining a $15 target price. While we see signs of a cyclical top starting to materialize, we expect the process to not fully play out until mid-CY2005.For now, we prefer derivative or late-cycle plays with attractive valuation - CMOS at current levels does not meet our criteria.- Our analysis suggests that, while the NPTest acquisition should be earnings neutral in the near term, there is potential for several cents per quarter accretion to bottom line at the peak of the cycle. Although an acquisition of this scale is usually fraught with difficulties, and the potential for operational missteps is large, our bias is positive and we look forward to seeing early positive results.- Key issues for the stock include: 1) NPTest acquisition, 2) improving cost structure, 3) overcrowding in the ATE market and further needed consolidation.

LTXX: Initiate Coverage With A Hold - We are initiating coverage on LTXX with a Hold rating (2H) and a $12 price target based on 14x our estimated peak TTM EPS of $0.88 (below Street given our dubious view of back-end growth potential). The only stocks we like are late-cycle/derivative plays or those with attractive valuation, and LTXX at current levels does not meet our criteria.- Checks suggest LTXX`s position at core customer TXN (58% of revs in F2003) is strong as ever and it is starting to diversify its customer base into Asia. This is our favorite stock in the semi-test space, however, we find better opportunity in fab-related names that are apt to grow faster in the coming quarters.- Key issues for stock remain LTXX`s diversification of concentrated customer base (TXN >50% of revs), traction of new high-end tester (HFi) for margin improvement, free cash flow generation from outsourcing initiative, and further consolidation of the overcrowded, price competitive ATE market.

TER: Assuming Coverage And Lowered Rating To Sell - We are assuming coverage of TER, downgrading the existing Hold rating to a Sell (3H), and reducing the price target from $30 to $20 as our "sum of the parts" analysis suggests the stock is currently overvalued.- We no longer see the back-end as "underbought" as wafer fab equip growth is likely to outpace test & assembly for remainder of cycle. We prefer late cycle or derivative plays w/attractive valuation - and TER fits neither bill.- TER maintains a strong position in semi test and is well leveraged to next-gen devices and IDMs/subcons alike. Considerable restructuring and strategic decision to jettison lower margin TCS business has injected operating leverage into the model, although much of this is now factored into current expectations.- Key issues for stock remain increased traction of new product pipeline, improved margins on non-semi test side, and further consolidation of the overcrowded, price competitive ATE market.

LRCX: Assuming Coverage With A Buy - We assume coverage of LRCX with a Buy rating (1H) and are reducing the price target from $40 to $35. Our new estimates are high on Street as we believe consensus still has not fully appreciated Lam`s operating leverage.- As the leader in the oxide etch market, we see Lam as a derivative play on a number of technology trends, including the migration to copper interconnects.- Lam`s customer base matches up well with incremental spenders in the coming quarters including AMD, Samsung, Infineon, and Japanese logic players (Sony, Toshiba) with opportunties at a key US chipmaker still on the horizon.- Key issues for the stock include diversification outside of etch, discontinuation of margin-anchoring CMP business, and keeping a lid on operating expenses.- While signs of a cyclical top are starting to materialize, we believe the process will likely take well into C2005 to fully play out - in the meantime, we prefer late-cycle or derivative plays with attractive valuation and LRCX fits the bill.

WFR: Assuming Coverage And Upgrading From Hold To Buy - We are assuming coverage of WFR, increasing the prior Hold (2S) rating to Buy (1H), lowering the risk profile from Speculative to High, and increasing the price target from $11 to $14.- While WFR is one of the purest plays on semiconductor units, the basis for our recommendation is a combination of growing market share, the industry`s lowest cost structure (that should enable profitability even in the downturn), and better commodity wafer pricing - even if short-lived - that makes consensus expectations look very conservative.- Key issues for the stock include duration of tight wafer supply, increased 300mm market share, expansion of customer base, and reduction of overhang.- While signs of a cyclical top are starting to materialize, we believe the process will likely take well into C2005 to fully play out

AMKR: Assuming Coverage And Upgrading From Sell To Hold - We are assuming coverage of Amkor, upgrading the rating from Sell (3S) to Hold (2S), and increasing the price target from $8 to $11.- AMKR is a leading provider of assembly & test services to the semiconductor industry, and is very close to a pure-play on chip units. Current favorable unit trends are providing a tailwind to AMKR, however, our analysis suggests that consensus expectations for the company remain too high.- The company continues to have a significant amount of debt, and while it has successfully refinanced some instruments, a tighter monetary environment coupled with a low stock price may increasingly back the stock into a corner.- Key issues for stock include expanding customer base (particularly in Taiwan and China), increasing test capabilities, and further cleansing of balance sheet.

INTC: Reit Buy - While bias is flat-to-up, we expect Intel to maintain mid-point of revenue guidance by tightening guidance range to $7.7B-$8.1B (from $7.6B-$8.2B) - China has shown some relative weakness in recent weeks and may create enough uncertainty to keep mid-point unchanged; we are encouraged by more recent signs that China may be coming out of this weak period and re-building inventory in light of solid PC-OEM outlooks - Company likely to have a positive bias to gross margin, reflecting inventory build in the quarter (typical build is 5%) - No change to revenue estimate, which remains above mid-point, pending further clarity on China--our estimates reflect 1.4% sequential decline, slightly below median 2Q revenue declines since 1994 (0.9%) - Continue to view Intel as the quality investment on an expected seasonal uptick for semiconductor stocks>>

http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=20186644

Many thanks to Don Wennerstrom for posting this information.

RtS

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SECTOR WATCH: Sizing Up the Select Sector SPDRs
By Frederic Ruffy, Optionetics.com
6/2/2004 10:30:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10494

The S&P 500 Index ($SPX) started the year reading 1,111.90. Midday Wednesday, the index was trading at 1,119.01. So, the index has not moved very much during the past five months. In addition, the CBOE Volatility Index ($VIX), which measures the expected volatility of S&P 500 Index options is now near 16.50 and therefore at relatively low levels. So, while the S&P 500 Index has showed relatively little movement so far in 2004, the low readings from the VIX indicate that options traders expect the market to exhibit quiet trading going forward. Yet, this same pattern does not hold across all sectors of the market. Instead, expectations are for volatility to rise throughout most areas of the market going forward. To demonstrate, this article looks at the actual and implied volatility of the nine S&P 500 Select Sector SPDRs.

Select Sector SPDRs are a group of exchange-traded funds [ETFs] that hold baskets of stocks from various economic sectors. Collectively, the Select Sector SPDRS hold the five hundred stocks included in the S&P 500 index. Shares of these nine funds trade on the American Stock Exchange [AMEX] and can be bought and sold like stocks. Options are also listed on these investment vehicles.

Table 1 lists the nine Select Sector SPDRs, the ticker symbol, and the performance of each fund so far this year. Energy has been the best performing sector and the Select SPDR Energy Fund (XLE) is up 9.5%. Consumer stables, healthcare, and financials have also performed relatively well. Technology and basic material stocks have lagged the market. The mixed performance of the various sectors of the market helps explain the lack of movement in the S&P 500 Index. In short, gains in some sectors have offset losses in others.

Select Sector SPDR
Symbol
Performance Since December 31, 2003
20-day Statistical Volatility
Implied Volatility

Energy
XLE
9.47%
21.50%
20.50%

Consumer Staples
XLP
5.83%
9.10%
12.70%

Health Care
XLV
2.55%
9.70%
15.10%

Financials
XLF
1.28%
13.50%
18.80%

Industrials
XLI
1.08%
13.00%
15.00%

Utilities
XLU
0.86%
17.20%
17.30%

Consumer Discretionary
XLY
0.22%
17.40%
17.00%

Information Technology
XLK
-1.82%
12.80%
18.80%

Basic Materials
XLB
-4.23%
20.40%
21.20%


The table also shows the volatility of the various funds using the 20-day Statistical Volatility [SV] and Implied Volatility [IV]. SV is measure of volatility that is computed as the annualized standard deviation of closing prices during the past twenty days. Put simply, the higher the 20-day SV, the greater the volatility of the instrument during the past twenty days. Notice that the market’s top performer has also been the most volatile. The worst performer, basic materials, has also been the second most volatile. Therefore, as one might expect, the more volatile sectors have experienced the largest percentage moves.

While SV is computed using past prices, implied volatility is a measure of the expected volatility of the underlying asset. It is a derived from the option premiums using a model. When IV is high, it is a sign that traders expect the volatility of the underlying asset to exhibit high volatility. When it is low, the option premiums are pricing in expectations of low volatility. For instance, the IV of the Select Sector SPDRs Energy Fund and the Select Sector SPDRs Basic Materials Fund (XLB) are the highest today. Therefore, traders expect energy and basic material stocks to exhibit the greatest volatility going forward. Indeed, this probably owes to the fact that, as we have seen, these two groups have exhibited the greatest amount of volatility in the past.

Contrary to one might expect, information technology stocks have been among the least volatile. Historically, technology stocks have tended to experience larger percentage moves than most other sectors of the market. Yet, the Select Sector SPDRs Technology Fund (XLK) has statistical volatility of less than 13%, which, compared to other funds, is low. However, looking at the IV of the technology fund suggests that traders do not expect this period of low volatility to last. The implied volatility of the XLK is almost 19%. Similarly, financial stocks, which currently account for the largest percentage of the S&P 500 Index, have exhibited relatively low volatility, but now have IV near 19%.

So, judging by the implied volatility of the Select Sector SPDRS, traders expect that this period of relatively quiet trading during the first five months of 2004 will give rise to greater volatility going forward. In addition to technology, financials, energy, and basic materials funds, the implied volatility of healthcare, utilities, and consumer staples remains relatively high when compared to the past. So, if expectations are correct, and many of these sectors do begin to exhibit greater volatility, the S&P 500 Index may begin to make larger percentage moves and the VIX will begin to tick higher.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
Visit Fred Ruffy’s Forum

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U.S. stocks rose, sending the Standard & Poor's 500 Index to its highest in five weeks. Concern that higher energy costs may slow the economy eased as oil prices had their biggest decline this year. The S&P 500 added 3 points (+0.3%) to 1,124, a level not seen since April 27. Eight of the S&P 500's 10 industry groups rose. The DJIA gained 60 points (+0.6%) to 10,262, the highest in four weeks. The Nasdaq Composite slipped 1 point (-0.1%) to 1,988, for its first drop in eight days. Three stocks rose for every two that fell on the New York Stock Exchange. Some 1.26 billion shares changed hands on the Big Board, 14 percent less than the three-month daily average. Crude oil for July delivery sank 5.6 percent to $39.96 a barrel on the New York Mercantile Exchange, after jumping to a record $42.33 yesterday.

Strong Sectors: health care facility, casino, airline, biotech, beverage, REIT, aerospace, biotech

Weak Sectors: semiconductor, internet

Top Stories . . . The dollar weakened against the euro, yen and eight other major currencies on concern oil prices near record highs will cool economic growth in the U.S., the world's biggest consumer of oil.

OPEC should pump oil at will in the next few months, Qatar's energy minister said as the group's president called for efforts to cause a ``significant'' drop in record oil prices.

Crude oil futures declined from a record in New York and from a 13 1/2-year high in London after OPEC officials signaled output may reach full capacity to lower prices and ease concern supplies will be disrupted.

Harbin Brewery Group, China's oldest brewer, asked shareholders to accept a takeover bid from Anheuser- Busch Cos. that values the company at HK$5.89 billion ($757 million) and tops a rival offer from SABMiller Plc.

Albertson's, the second-largest U.S. supermarket chain, said first-quarter profit dropped 79 percent after a strike hurt sales and the company shed its New Orleans stores.

Gurus . . . Ed Hyman says his survey of major companies shows a renewal of momentum, following a lull that ended the past few weeks. Most impressive was the improvement in home-building and auto dealers. At the same time, the economy is looking stronger, and inflation is looking faster on all fronts, except for last week's tame core consumption price deflator for April. As for the job figures on Friday, his regression model calls for payroll employment to rise 222,000, with manufacturing jobs up 20,000. Analyst estimates for second-quarter earnings moved up over the past week from 18.1% to 19.0%.

Goldman Sachs says gold may rise this year because of buying by hedge funds, and an expected decline in the U.S. dollar against currencies, such as the euro. The precious metal may rise to $428.00 an ounce by 2005, as the dollar weakens to $1.30 against the euro.

JP Morgan says profit margins may be near their peak, because employment is increasing, and productivity is likely to slow. Fewer companies will report earnings that surpass estimates. In the first-quarter, more than 72.0% of the S&P companies exceeded estimates.

Mortgages . . . The number of applications for mortgages in the United States declined 1.2 percent last week on a seasonally adjusted basis. Applications for purchase loans rose 2.2 percent while applications for refinanced loans fell 6.6 percent. Refinancings fell to 34.3 percent of loans from a 36.2 percent share. The average rate on a 30-yaer fixed loan dropped to 6.24 percent from 6.26 percent.

Inflation . . . Barron's Online discusses oil prices, which has whipped up a mini-hysteria in media. Many news reports note that crude oil is near $42 per barrel and gasoline at $2.00 per gallon are at record highs. But, according to the article, those prices are not records when they're adjusted for inflation. In 1981, following the Iranian Revolution and hostage crisis, oil prices reached an all-time high near $80 in current dollars (roughly $40 per barrel in that year's dollars). Gasoline also reached a peak in the early 1980s of $3.00 a gallon, adjusted for inflation. Today Americans actually are spending less of their household income on energy than they did in the 1980s. Energy spending for the average U.S. household is a mere 4.8% of after-tax income today, according to David Wyss, chief economist at S&P's. Energy costs were 8% of household income in 1981, he says. Mr Wyss says that if gasoline and oil prices remained high for 12 months, it would cut GDP by about $30 bln, only 0.25%. But he says, "We are seeing no evidence that people are driving less or changing vacation plans, which means that gasoline prices are not pinching very much." And, he adds, it all depends on whose ox is being gored. "High oil prices are bad for US Airways' corporate profits, but good for Exxon," Mr Wyss says. Some transportation co's, including FedEx, can pass on higher gasoline costs to consumers. But not UAL, which is "in bankruptcy, so it doesn't have any time," says Philip Verleger, a senior fellow at the Institute for International Economics in Washington, D.C. Mr Verleger also thinks Toyota Motor and Honda Motor would thrive, because they produce a wider range of fuel-efficient models, if energy prices spike higher.

Accounting . . . The Emerging Issues Task Force has issued EITF Issue No. 03-1, containing new guidance on other-than temporary impairments of investment securities. The new rules dictate when impairment exists, provide guidance on determining if the impairment is other than temporary, and direct how to calculate the impairment loss. The impact of expected rising interest rates on fixed income markets, and the related impact on equity markets (as well as other concerns), could result in losses that will have to evaluated under the new rule, and possibly recorded in the income statement. The new rules are effective for periods beginning after June 15, 2004, generally the third quarter of this year. The new rules are backed up by expanded disclosures. Even if an impairment loss is not taken, all investments with unrecognized losses are subject to new annual disclosure rules. Breaking out loss positions between those existing for less than one year and for one year or longer is especially telling. Investments accounted for under the cost method (because there is no readily determinable fair value) will also be subject to the new rules, and will be evaluated in light of impairment indicators. Investments accounted for under the equity method are excluded from EITF 03-1, so they will continue to be evaluated under existing rules

Market Speak . . . The economic backdrop is the strongest we have seen in years and the recent revival of employment now adds a feel-good factor to the recovery. Still, the same data that support the favorable economic outlook also argue that the best of times for equities is behind us. Indeed, the topping patterns seen in many leading indicators suggest that the momentum trade in stocks is likely over. The May release

of the ISM Manufacturing Index is a good example of this. The indicator remained at very elevated levels, arguing for strong growth in the economy, but failed to increase significantly, or, in other words, to provide the conditions typically associated with a rapid rise in stock prices — on the whole, a reading that argues in favor of a noncyclical equity portfolio bias.

The biggest argument on a noncyclical call is that this cycle is very different from prior ones. Indeed, many investors proclaim that this recovery is unusually favorable for cyclical stocks since it is marked by a return of pricing power for basic industries. This alone, many argue, is enough for these stocks to continue to outperform despite signs that many leading indicators may have reached peak momentum. It is important for investors to differentiate between cyclical and secular forces. While a secular uptrend would be supportive for commodity industries, cyclical forces can sometimes savagely punctuate secular gains.

The chart above is a graphic representation of the simulated path of commodity/basic industry pricing during a deflationary period much like that of the past 20 years or so. It is interesting to note that capital goods stocks managed to outperform from 1991 to 1994 despite this so-called secular decline in pricing. If this segment could outperform in such a dire pricing environment, could it not underperform in a favorable pricing environment? Of course, it can, and we believe it will. Indeed, cyclical forces generally prevail over secular ones in the short term. As such, a topping pattern in leading indicators like the ISM Index is a sign that the best of times are behind us for most cyclical segments, regardless of the secular environment.

While it is still premature to say that we are at a truly secular turning point in inflation, it is not too early to study the investment implications of a turn. A return of pricing power would have minor implications for sector positioning over the next 12- 18 months; however, it would have a more profound effect on the outlook for the overall market. Indeed, historically, the stock market has not fared well in periods of accelerating inflation. While pricing power can be a good thing for earnings, the higher interest rates

that come with it often nullify this favorable impact by lowering P/E multiples. Mild inflation is the most desirable outcome here.

Inflation

A key topic on investors’ minds of late is the inflation outlook. Indeed, a number of important gauges of inflationary pressures have begun to flag cautionary signals. For instance, the prices paid component of the ISM Manufacturing Index continued to hover near a 25-year high last month. Unsurprisingly, perhaps, a number of pundits have now begun to talk about a secular turning point in inflation trends. More importantly, some argue that this could be a good thing for stocks since it would lead to higher earnings. While it is still too early to say whether we have reached a secular turning point in inflation, investors need to note that a return of inflation cannot be assumed to be favorable for equities.

The “inflation is good for stocks” thesis holds up as long as one assumes P/E multiples — an integral part of the valuation equation — remain largely unaffected by rising inflation. Typically, though, rising inflation is accompanied by higher interest rates, and higher interest rates generally compress market multiples. In fact, our analysis has found that at today’s interest rate levels, a 50-basis-point change in bond yields impacts the market’s forward P/E by a full point. Put differently, a rise in inflation that would lead to a 100- basis-point rise in long-term interest rates would shave the market’s multiples by more than two full points. Under such a scenario, earnings would have to rise by over 15% to perfectly offset this effect. So, be careful what you wish for: a turning point in inflation would not likely prove to be that positive for equities.

Financials . . . Goldman Sachs says that while they remain comfortable with their in-line 2nd quarter estimates for U.S. brokers, they believe that the prospect for significant upside surprises to estimates is unlikely given some deceleration in several key securities industry trends the last 2 months and the rising rate environment since early April. Firm also believes that investor's bias towards consensus estimates beyond 2nd quarter will move to more neutral or even negative in 2nd half 2004, and that 2nd quarter will mark the first quarter of a new down cycle in Return on Equity trends. Firm expects this down cycle to be fueled by declines in fixed income trading revs, which they do not believe will be fully offset by growth in M&A and equity-related businesses. Firm also continues to believe that pretax margins have peaked, and given the historical relationship between R.O.E. trends and P/B valuations, they continue to believe recent multiple compression is warranted and that further P/B multiple contraction may be possible.

The WSJ's "Heard on the Street" column discusses Charles Schwab, as stocks have climbed out of a multiyear funk, stock mutual-fund purchases are strong and individuals have a renewed hankering for investing thrills. That should be good news for Schwab, but according to the article recent actions by the co indicate that the road ahead remains far from smooth. To attract more customers, the firm last week announced plans to slash prices for some online stock trades. The firm says the move, aimed in part at narrowing the pricing gap between Schwab and discount online brokers Ameritrade and E*Trade, will help it attract customers while costing Schwab just 2% to 3% of its rev over the next year. But the move has rattled investors, who suspect the pain may be worse than Schwab is predicting. Their concern: The company may not attract nearly as much new business to offset the price cut. Making matters worse, Schwab shares remain expensive, despite dropping more than 30% in the past 8 months, says the Journal. And with the stock market hitting weakness, and the co struggling to boost earnings and still trying to figure out how best to compete with rivals, some investors are concerned a turnaround isn't around the bend.

Oil Prices & OPEC . . . OPEC members should pump oil at will during the next few months to lower record prices, Qatar's energy minister said, joining calls from Saudi Arabia, Kuwait, Indonesia and the United Arab Emirates for more supply. The minister, Abdullah bin Hamad al-Attiyah, said concern of potential attacks on Middle East oil installations or U.S. gasoline shortages have inflated prices by $10 a barrel. "Everybody should produce what they want over the next few months,'' the minister said. The OPEC president, Purnomo Yusgiantoro of Indonesia, told reporters that members want to increase output and have a "significant impact'' on prices.

Oil & Gas . . . First Albany upgrades Devon to Strong Buy from Buy and raises their target to $77 from $66, and upgrades Apache to Buy from Neutral and raises their target to $49 from $42. With DVN, firm notes that the stock is trading at 4.5x 2005 normalized EBITDA vs the large cap peer average of 5.2x, the co has a positive outlook for debt reduction in excess of $1.6 billion this year, and should significantly reduce finding costs this year (an ongoing criticism of the co). With APA, firm says that the new price deck is significantly accretive to 2004-05 EPS, and 2004 F&D costs will benefit from the large Qasr discovery in Egypt.

Restaurants . . . Prudential upgrades Outback Steakhouse to Overweight from Underweight, and downgrades Darden and McDonald’s to Neutral-Weight from Overweight. While same store sales are slowing and historically high commodity costs are limiting flow-through to earnings. The firm believes these factors are already reflected in estimates and valuations, as are higher gas prices and rising interest rate concerns. Firm's favorite ideas are Wendy’s and Outback Steakhouse, and their least favorite is Brinker’s.

Retail . . . Banc of America downgrades Home Depot to Neutral from Buy based on growing concerns about the traffic-ticket gap. The firm says that HD remains attractive on a number of valuation metrics, but after posting two consecutive quarters of 7% comps, the Street is no longer likely to be surprised by good performance from the company. In addition, firm believes that even without an up-tick in rates, it is very unlikely that housing will show increases over the prior year, which could trigger negative comps in 2005. Finally, firm says that recent comps have been heavily weighted towards ticket as traffic has flattened out, and they note that the spike in ticket looks a lot like 1994 and 1999 -- just prior to deteriorating fundamentals and severe underperformance. Target is $37.

Albertson's reported earnings of $0.15 per share, $0.04 better than the consensus of $0.11. Revenues fell 2.5% year/year to $8.69 billion versus the $8.75 billion consensus. The company reits full year EPS of $1.40-$1.50, including Shaw's versus consensus of $1.41. Note: the $0.15 includes a number of charges, which had been included when guidance for the qtr was provided by the co, so it's comparable.

Marquis Research initiating coverage of Netflix with a Buy and a $41 price target. The firm notes Netflix, while best known for its DVD rental service, is a widely misunderstood company. The DVD rental service, while profitable and the main driver of the business to date, is not the primary reason investors should take a look at this company. Rather, the burgeoning Video-On-Demand market is the biggest reason investors should focus on NFLX. The firm notes long term investors should use the DVD rental market as a proxy to determine the expertise of NFLX management. The firm believes the DVD rental business should eventually cede to the downloading or Video-On-Demand market. With many of the moving parts yet to be determined in the Video-On-Demand delivery, Marquis believes that the significant membership presence, solid relationships with big and small movie distributors, and proprietary movie selection /recommendation system will make NFLX the incumbent in the Video-On-Demand market. In terms of valuation, the firm notes NFLX represents a true venture investment in Video-On-Demand that has liquidity and an underlying business that is already performing well. Given this situation, Marquis believes that a traditional tech multiple of 29x '05 EPS yields an appropriate price target in the current market environment.

Healthcare . . . The WSJ reports hospitals across the country are starting to hit up patients for part of their bill before discharging them, and sometimes even before treating them. The aggressive new push is part of a broad effort by hospitals to cut bad-debt expenses. Starting later this month, HCA will begin asking patients to pay their co-payment before receiving non-emergency treatment. If patients say they cannot afford it or don't have the money, the hospitals will ask for at least a down payment. HCA is implementing the new approach in each of its 191 hospitals. Hospitals are increasingly implementing these strategies now, or making them tougher, for several reasons. For one thing, improved technology gives more hospitals the real-time information to figure a patient's deductible and co-payment amounts. For example, at Tenet Healthcare administrators are going online to determine a patient's co-payment, among other tactics as part of a pilot program in Florida to improve collection procedures. According to the article, the more aggressive billing stance is expected to have a significant impact on hospital finances.

Medical Devices . . . icad announced the FDA approval for release of iCAD's new Second Look 200 system for early detection of breast cancer with substantially improved cancer detection software. The co says its new combination of Second Look 200 with iCAD's Version 6.0 cancer detection software represents both the most sensitive cancer detection solution available, and the least expensive.

FTN Midwest downgraded Boston Scientific to Neutral from Buy. The firm is saying the potential for continued revenue and earnings growth upside stemming from the successful Taxus launch is now "known" and reflected in the stock's valuation. The firm also says the company's revenue and earnings growth outlook for 2006 and beyond continues to depict a significant deceleration in growth, despite yesterday's announcement of the planned acquisition of Advanced Bionics. Maintains $50 target.

Cardiac Science and Chindex jointly announce multi-year distribution agreement whereby Chindex will market DFIB's line of Powerheart-brand AEDs on exclusive basis to hospitals and other medical supply dealers throughout mainland China. Agreement also allows Chindex to distribute DFIB AEDs on non-exclusive basis into other emerging mkt segments such a physician offices, police, fire, EMS, military, corporations and public transportation.

Drugs . . . Morgan Stanley assumes coverage of Medimmune with an Overweight rating and $32 target (former rating Equal-Weight). After the disappointing FluMist launch and facing slowing top- and bottom-line growth, the firm acknowledges that MEDI no longer commands a premium. However, firm believes that the Street is now underestimating the Synagis cash flow potential and discounting the pipeline. Firm assumes coverage of BIIB with an Overweight (former rating Equal-Weight) and $77 target; while their 2004-05 EPS estimates are in-line with consensus, they believe that there is meaningful upside to longer-term numbers, with Antegren driving at least 22% compounded growth between now and 2010. Firm also assumes coverage of AMGN with an Equal-Weight, and DNA with an Equal-Weight (former rating Underweight).

Biotech . . . The WSJ's health section discusses stem-cells, as capitalizing on the emergence of stem-cell therapy as standard treatment for many kinds of leukemia and lymphoma. The article notes a co called NeoStem wants healthy consumers to pay $5K to bank their own stem cells for the future, to be used in the event of disease. Last month, NeoStem opened its first collection center in Los Angeles and plans 60 or more in the U.S. over the next 3 years. Some research suggests stem-cell therapy may one day be useful in treating everything from heart disease to spinal-cord injury to radiation sickness. Indeed, stem-cell research "has the potential to revolutionize the practice of medicine and improve the quality and length of life," according to the National Institutes of Health. NeoStem is betting that well-to-do consumers will pay to maintain their own healthy blood stem cells in the event they become ill or injured. The company's founders think cell banks can become a multibillion-dollar business. "One group that excites us is people who have had an infarction and are at risk for another heart attack," said CEO Denis Rodgerson of NeoStem. So far, some 20 people have undergone the procedure, including Dr. Rodgerson and some of the firm's investors. Researchers are studying whether stem cells can promote growth of healthy heart tissue. From a scientific point of view, stem-cell banking isn't particularly controversial. Transplants using a patient's own cells are less costly than those involving matched donors. And blood stem-cell banking doesn't involve embryonic stem cells, which are at the center of a world-wide ethical debate over their use in drug development and other human experiments.

Media . . . Cable and entertainment stocks have been languishing, as investors question entertainment’s organic growth potential and worry over cable competition. With both groups’ return on capital depressed by consolidation and/or investment, investors are now looking for payback, in the form of growth, return of cash, or some mix of the two. Implied costs of capital suggest either excessive risk in the stocks or too much equity on the balance sheet, and sometimes both. For cable, reassessment of the risk/reward trade-off could result in a repricing of the group, while for entertainment, wealth-sharing and cyclical improvement could be the catalysts

for outperformance. Not all the stocks share the same risk/reward profile. Viacom may provide the best near-term opportunity in entertainment, while Time Warner provides longer-term appreciation potential. In cable, Cablevision after the spin-off could be the best performer, while both Comcast and Cox are expected to outperform the market should investor sentiment change.

The WSJ reports that Sirius Satellite Radio is bolstering its programming lineup to take on rival XM Satellite Radio in the race for subscribers. The company signed programming pacts over the past few months with the National Football League, National Hockey League and National Basketball Association. According to the article, Sirius officials say more deals are on the way. "We want to be the destination for sports, and we've got a pretty good start," CEO Joe Clayton told shareholders at a meeting earlier this week. The programming ramp-up is Sirius's latest effort to narrow the substantial gap between itself and XM. "They have to differentiate themselves," said Jimmy Schaeffler of the Carmel Group. Sirius "must convince listeners that they are worth $3 more."

Yesterday, Marvel Enterprises announced formally that it has settled its lawsuit with Sony Pictures. Marvel alleged that Sony had essentially "hijacked" the Spider-Man character from Marvel. Sony in turn sued Marvel for not properly accounting for Spider-Man merchandise revenues, on which Sony was entitled to a royalty. As part of the settlement, Marvel will consolidate its JV with Sony and record the total revenue associated with Spider-Man non-toy merchandise licensing, along with the corresponding expenses, including royalties to Sony.

Previously this was recorded in equity income on a net basis, with Sony and Marvel splitting the licensing revenue 50/50. Additionally, Marvel will now have total control over both Classic Spider-Man licensing as well as movie Spider-Man licensing. The latter was previously controlled by Sony, and MVL management believes led to a less optimal overall licensing strategy for the Spider-man character. Now, Marvel believes it can better maximize this segment

of its business going forward. Despite the announcement, Marvel maintained its full year operating income guidance, which was probably the reason for the weakness in the stock yesterday. However, Marvel will now receive better than 50/50 splits on the Spidey merchandise and any upside to earnings in 2004 will come on stronger than expected sell through at retail. Overall, the settlement is a positive for MVL, but the benefits are difficult to quantify at this point. As such, analysts are making no changes to our projections. At current levels, Marvel's valuation is not overly compelling, but reasonable. In the near term, while the consensus is that Spider-Man 2 will be a box office success, visibility into 2005 remains low.

The NY Post has learned that representatives for Mel Karmazin are expected to reach out to Walt Disney's board of directors soon about the possibility of the former Viacom president succeeding Disney honcho Michael Eisner. Karmazin has indicated he wants to be a CEO of a big media company, and many in the industry expect him to wind up at Disney. On a conference call with reporters yesterday, Viacom chief Sumner Redstone said, "I don't see a place" for Karmazin at another major media company. In a statement yesterday, Disney Chairman George Mitchell said: "The board has complete confidence in the current management. On the strength of our recent results we believe that confidence has been justified, and will be further validated as our performance continues to improve." The board, meanwhile, has stepped up succession plans in response to the shareholder revolt. At the very least, Eisner is expected to not be given an extension when his current employment contract expires in 2006. Meanwhile, Eisner's top deputy, Bob Iger, is not seen as a potential heir to the Disney throne. Many in the media industry have predicted he would be tossed to make way for a new No. 2 who would be groomed to take the top spot when Eisner's contract ends.

Electronics . . . palmOne upped to Buy from Hold at Stanford Group. Target goes to $29 from $20. The firm believes that Sony's exit from the US PDA market bodes well for PLMO. Whereas Microsoft PDAs will likely capture some of the void left by Sony, firm expects PLMO to take the lion's share. Firm raises 2005 estimate to $0.71 from $0.65 (Reuters consensus $0.72). Firm raises target to $29 from $20 noting that PLMO will benefit from fewer competitors in the US and from increased unit sales. As a result, believes that PLMO could achieve operating margins above firm's previous expectations over the next few years.

Telecom . . . The WSJ reports wireless entrepreneur Craig McCaw is expected to announce today that he is launching a national wireless broadband service to compete with the high-speed Internet access offered by cable operators and telephone company's. The executive will detail his strategy at the Wireless Communications Association International conference in Washington, D.C., though word of his plans has been circulating as he has bought up wireless spectrum licenses. His co, called Clearwire, aims to offer wireless Internet access to consumers in roughly 20 markets over the next year, according to Gerry Salemme, the executive vice president of Clearwire and a longtime executive at various ventures of Mr. McCaw's. It will launch service in two cities this summer, Jacksonville, Fla., and St. Cloud, Minn. Clearwire is seeking to offer a national service that targets not only rural markets but large markets where other wired alternatives are available. Clearwire's service will be marketed to consumers as a fixed product to compete directly against Internet access via cable modems and digital subscriber lines. Mr. Salemme said that Clearwire's service would offer speeds in a range of 1.5 to 2 megabytes per second, potentially slightly faster than home DSL or cable modems, and significantly faster than wireless services being contemplated by cellular carriers. Mr. Salemme said that the network's technology will be compatible with WiMax, a hotly anticipated technology that will provide wireless, high-speed Internet access at ranges of several miles, expected to be available in 2006.

EMS . . . Flextronics will host a mid-quarter review on Thurs, June 3rd. Revenue and EPS estimates are $3.925B (up 4% Quarter/Quarter and up 26% Year/Year) and $0.14 versus consensus of $3.9B and $0.14. The 4% Quarter/Quarter revenue increase is better than last year's 1.5% increase driven by new wins and the continued ramp of ODM handset programs. On average, over the last 5 yrs (excluding 2000) June rev has increased 1% Quarter/Quarter. Based on our recently hosted meetings with Jabil and Benchmark Electronics managements, business appears on track for the June qtr in EMS. Key customer themes (Sony-Ericsson and Siemens and HP inkjet volume) appear to be holding. Customer comparables analysis shows FLEX's top-ten customers up 3% in June with outsourcing adding 1%. Expect to get an update on the closing and impact of FLEX’s pending NT transaction. NT deal originally expected to close late June/early July and to add over add over $2B in annual incremental rev costing $500 million in cash paid over roughly 9 months. The outsourcing agreement will conservatively be $0.08 - $0.10

accretive to 2005 EPS. Better working capital management key to concerns about a follow-on offering. Given the $500 million required for NT deal, concerns about FLEX needing to raise capital arose after $250 million AP paydown and $80 million AR increase in March which turned CFO negative despite better than expected operating income. Currently FLEX has ~$1.5B in

liquidity including $615 million in cash and ~$900 million in revolver availability.

Storage . . . Merrill Lynch cuts estimates for Seagate Tech, Maxtor, Western Digital, and Hutchinson, and says it's still too early to invest in the U.S.-based hard drive stocks. Firm cites the following factors: 1) recent T.S.R. (hard drive supplier) data, which suggests downside to their prior estimates; 2) distributor checks, which suggest that shipments would be down sequentially in 2nd quarter; 3) their belief that key supplier HTCH has not reached an inflection point in its suspension assembly business; 4) their Taiwan team's estimates that PC motherboard shipments will be down 11% sequentially in 2nd quarter; and 5) slowing growth in Europe due to a declining euro and weakness in continental Europe.

Imaging . . . Deutsche Bank reiterates their Sell and $20 target on Eastman Kodak. The firm is saying the recently released May IRI data shows worsening retail sales growth of -18.1% in the company's core film business. The firm says the negative sales trend is the worst they have seen since they began tracking IRI data in July of 2002, and the steep decline was due primarily to weakness in disposable cameras.

Network Equipment . . . Jefferies said market share erosion at Nokia, the handset maker, has been more pronounced that it has recognized. "The company claimed market share in the order of 35 percent in the first quarter, but subsequent data from competitors suggests that overall first quarter growth was much stronger than Nokia had estimated. Our count of unit shipments is 151.5 million, suggesting growth of close to 35 percent and putting Nokia's market share at 29.5 percent... Most of these rivals continue to make up beat noises," it said. Jefferies reiterated a "hold" rating on the stock.

Digitimes reports Nokia has recently launched 3 new handset models in Taiwan, which include the 6230, the 3120 and the 7200. The company said that sales of the three models are expected to increase its market shares in Taiwan over the 11.3% it recorded in March. The 7200 is Nokia's first clamshell model, and demand has already exceeded supply, according to the co. The three new models have boosted monthly sales in May, the co added. Nokia's market share climbed to 16% in May, up 2 percentage points on month, according to the article, citing sources at Taiwan handset distributors. The sources also indicated that Motorola still led all vendors, with about 20% of the market.

Advanced Fibre announced a new five-year contract extension with SBC Services Inc., a subsidiary of SBC Communications, to provide its AdvancedVoice and UniversalDSL solutions. AFC has been a supplier of broadband access solutions to SBC since 1997. Financial terms of the new agreement were not disclosed.

Based on Nortel's work to date, including the work done since the update provided on 4/28, related to the planned restatements, the principal impacts of the restatements and revisions identified to date to company's results continue to reflect the following: reduction of approximately 50% in previously announced net earnings for 2003. These amounts will largely be reported in prior periods, resulting in a reduction in previously reported net losses for such periods including 2002 and 2001; net loss for the 1st half 2003 compared to the previously announced net earnings for that period; the net income reductions are expected to substantially impact company's continuing operations rather than discontinued operations in 1st half 2003; no material impact to prior period revenues; and no material impact to company's cash balance as at 12/31/03. As previously indicated, company's work to date with respect to the planned restatements and revisions and the expected impacts mentioned above are subject to a number of important limitations, including: Expectations as to the impacts continue to be partial and preliminary; ongoing work of the Nortel Networks Audit Committee independent review; The significant work to be done by the Company, including with respect to the detailed review of 2nd half 2003, accounting documentation and reporting systems issues and the impact of accounting for certain matters, including foreign exchange; The previously disclosed material weaknesses in company's internal controls over financial reporting; and audit of the Nortel Networks financial statements by the company's independent auditors.

Semiconductor Equipment . . . Smith Barney initiates coverage on the Semiconductor Equipment sector; firm says their analysis suggests that chipmakers' capacity utilization will peak for the cycle in Q2, and therefore most equipment stocks have likely peaked for the cycle on an absolute basis; however, they believe that this cyclical top will not fully play out until mid-2005. With many equipment stocks already down 25-30% or more from recent peaks, firm likes a defensive strategy that focuses long positions on names that exhibit some combination of fundamentals that will hold up longer into the top of the cycle, attractive valuation, and/or co-specific drivers that make consensus ests too low. Firm is thus steering investors to stocks like Dupont Photomask, Lam Research, and MEMC Electronics. Firm upgrades WFR to Buy from Hold, upgrades Amkor to Hold from Sell, downgrades Teradyne to Sell from Hold, downgrades Applied Materials and Novellus to Hold from Buy, initiates LRCX and DPMI with Buys, and initiates Brooks Automation with a Sell.

Semiconductors . . . UBS upgrades Nvidia to Buy from Neutral and raises their target to $28 from $25, as they believe that the demand for discrete graphics chips for desktops is strong. The firm says results for 1st quarter and guidance for 2nd quarter show better trends compared to typical seasonal declines, and they expect demand to remain strong due to increased demand in emerging markets, a new product cycle, and stagnant competition from integrated graphics.

Software . . . Lehman raises their 4th quarter estimates for Oracle (EPS estimate now a penny above consensus). They say they would be buyers of the stock ahead of the company's June 15 4th quarter report; based on feedback from their customers. They believe that the company should deliver greater upside from the database biz than the application biz; firm expects Europe to show the strongest traction, and the U.S. to be solid as well.

Banc of America upgrades Siebel to Buy from Neutral. The firm says field checks indicate that demand continues to improve with higher deal sizes and stable prices, and higher software revenues boost the outlook for recent flattish services revenues. In addition, firm believes that Mike Lawrie is the right CEO to improve employee morale and customer satisfaction at SEBL, that the new Siebel 7.7 release boosts the company's competitive outlook, and that the stock's unjustifiably low valuation provides an attractive entry point. Target is $14.

The Los Angeles Times reports Oracle might have a decent chance of prevailing as it begins to fight back in a San Francisco trial set to begin Monday. According to the article, the major reason is the following: Some of the federal government's legal theories haven't been subjected to court scrutiny because so few corporate suitors have stood up to regulators. What's more, when they have been tested, they haven't always passed. "The government is more likely to win," said Lawrence Fullerton, a former deputy assistant attorney general now in private practice. "But there are some issues, both factual and legal, that could lead to a victory for Oracle." The article also notes the policy of opposing mergers when the resulting company would have that kind of market power was adopted by the government in 1992. But it has since lost several cases brought on the basis of so-called unilateral-effects analysis. Because of the legal uncertainty, "unilateral-effects cases are hard to bring," said Stanford University economist Roger Noll. "Some courts have said if you have 40% of the market, that's dominant. Others have said if you have 75%, that's not enough."

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Amateur Investors Mid Week Market Analysis (6/2/04)

The Dow has broken above short term resistance near 10225 which coincided with its 50 Day EMA (blue line) and 100 Day EMA (green line). The next level to watch is around 10300 which is the Dow's 50% Retracement Level from the February high to the May low. If the Dow can break above 10300 then it may rally up to the 10400 (point A) which corresponds to its 61.8% Retracement Level and is near its downward sloping trend line (solid red line). In the near term a key support level to watch will be around 10200.



The Nasdaq still remains above its 50 Day EMA (blue line) and 100 Day EMA (green line) in the 1965-1970 range which is a key short term support area. If the Nasdaq can break above the 2010 area which corresponds to its 50% Retracement Level calculated from the January high to the May low then it still has a chance to rally up the 2040 level (point B). The 2040 area is at the Nasdaq's 61.8% Retracement Level and is near its downward sloping trend line (solid red line). Meanwhile if the Nasdaq drops below 1965 area then this would likely lead to a drop back to its 200 Day EMA (purple line) near 1920.



The S&P 500 also remains above its 50 Day EMA (blue line) and 100 Day EMA (green line). If the S&P 500 can break above the 1130 area, which corresponds to its 61.8% Retracement Level calculated from the March high to the May low, then it has a chance to rally up to the 1145 to 1150 range which is where it stalled out at in April. Meanwhile a key support level to watch in the near term is just above 1110 which coincides with its 38.2% Retracement Level and 100 Day EMA.



I'm continuing to watch the Semiconductor Holders (SMH) closely as they have been weak the past two trading days as they encountered resistance near 38.75 which coincided with their 100 Day EMA (green line) and 38.2% Retracement Level calculated from the January high to the May low. The key support area to watch in the near term is just above 37. If the SMH's break below 37 this could lead to additional selling pressure in the Nasdaq so it will be important for the SMH's to hold support above the 37 level the rest of this week.

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The Incredible Shrinking P/E
Thursday June 3, 11:50 am ET
By Cody Willard, Special to RealMoney.com

http://biz.yahoo.com/ts/040603/10164411_2.html

Remember when Motorola (NYSE:MOT - News) reported a shockingly strong quarter? After soundly beating estimates, which billion-dollar companies rarely -- if ever -- do on this magnitude, Motorola's stock, already in a steady uptrend, was suddenly valued at less than 20 times next year's earnings, because estimates had to go immediately higher.

Everyone had been forecasting earnings of 62 cents per share in 2005. Now they expect 92 cents. The stock instantly ripped from $17 (with a forward P/E of 27) to $21 (with a P/E of 22). Here's a company with its foot in all kinds of important tech arenas that said business was way better than anybody expected. And its P/E multiple contracted.

And now? Motorola is back at $19, which puts its forward P/E at about 20.

Remember when Microsoft (NasdaqNM:MSFT - News) beat estimates and guided higher? The stock jumped from $25 to $28, a move it basically hadn't seen since the rollout of Windows 2000.

Although so far, forecasted consensus earnings for next year have only inched up, Microsoft's P/E multiple has also contracted. Excluding cash, the stock now trades at about 15 times next year's earnings -- that's for the most profitable company in history. The bulls were hoping that the old stalwart would kick the markets out of their earnings-season funk and lead stocks higher.

Microsoft is now back to $26.

The list can go on and on. Few stocks were able to hold their post-call gains -- if the stock was lucky enough to have done anything besides sell off after the report, anyway. Yahoo! (NasdaqNM:YHOO - News), Research In Motion (NasdaqNM:RIMM - News) and Sycamore (NasdaqNM:SCMR - News) are a few winners that held pretty tough or even ran further.

For the most part, though, a lot of great earnings, which changed real-world P/E ratios and profit expectations, have been wholly ignored. Or, looked at another way, they were simply more than already priced in. Oil, terrorism and interest-rate concerns have worked to shrink multiples in the market in the face of some great earnings.

It goes back to the question of whether this is as good as it gets. I think there are more upside surprises, but as estimates for most companies and industries have already risen substantially, it will be harder to find the ones with big upside surprises in store. Stocks at those companies that do far outpace expectations will continue to rise, even in the face of a shrinking P/E multiple, a la Motorola.

If interest rates and bond movements steady and access to capital remains strong, if we convince ourselves that we're winning the war on terrorism, and if oil can come back in despite the supposed supply/demand imbalance, the possibility for multiple expansion comes back into the equation. That would obviously result in even higher stock prices.

Finally, if any of the above doesn't work out and if earnings estimates turn out to be wrong to the high side, well, it's going to get ugly fast.

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Chart of the Day

http://www.chartoftheday.com/20040602.htm

Today, the Institute for Supply Management (ISM) reported that the Purchasing Managers Index (PMI) now stands at 62.8, which suggests that the economy continues to expand at a rapid pace. Today's chart illustrates how the stock market has often corrected soon after the PMI crossed above 60. How so? A surging economy puts upward pressure on inflation and interest rates, which can dampen earnings and decrease the relative attractiveness of stocks. Stay tuned...

Notes:
- A PMI reading greater than 50 indicates that the manufacturing economy is expanding.
- What are the latest economic and financial indicators saying about the stock market? Find out with the exclusive long-term stock market charts, indicators, and studies of our premium service Chart of the Day Plus.

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Intel narrows forecast to upper end of range
Thursday June 3, 4:19 pm ET

http://biz.yahoo.com/rc/040603/tech_intel_outlook_1.html

SAN FRANCISCO, June 3 (Reuters) - Intel Corp. (NasdaqNM:INTC - News), the world's largest microchip maker, on Thursday narrowed the range of its quarterly revenue forecast to the upper end, citing better-than-expected performance in its communications business.
Intel said it now expected revenue of $8.0 billion to $8.2 billion, with a gross profit margin of between 60 percent to 61 percent. In April, Intel forecast quarterly revenue in the range of $7.6 billion to $8.2 billion, and gross margins of about 60 percent.

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U.S. stocks rose after a government report on jobs and a sales forecast from Intel signaled that companies stand to benefit from sustained growth in the economy and profits. The S&P 500 Index had its first back-to-back weekly advance in three months. The S&P 500 rose 5 points (+0.5%) to 1122. The Nasdaq climbed 18 points (+0.9%) to 1978 and the DJIA added 46 points (+0.5%) to 10,242. For the week, the S&P 500 rose 0.2 percent, notching consecutive weekly gains for the first time since March 5. The Dow average gained 0.5 percent and the Nasdaq fell 0.4 percent. Almost two stocks advanced for every one that declined on the New York Stock Exchange. Some 1.1 billion shares changed hands on the Big Board, making it the slowest trading day since April 12 and 23 percent less than the three-month daily average. Benchmark indexes pared their gains in the final 30 minutes of trading. The Nasdaq climbed as much as 1.8 percent before giving back almost half of its advance.

Strong Sectors: gold, semiconductor, airline, internet, internet, electronic manuf service, lodging, brokerage, consumer finance
Weak Sectors: appliance, footwear

Top Stories . . . U.S. employers added 248,000 workers to payrolls in May, more than forecast, helped by the biggest gain in manufacturing employment in almost six years. The economy has now recouped all the jobs lost since the recession ended in November 2001. The unemployment rate held at 5.6 percent.

U.S. Treasury notes fell after the economy created more jobs than forecast last month, raising speculation the Federal Reserve may have to raise its key interest rate at a faster pace than traders expected.

Computer Associates International Inc. said former Chief Executive Sanjay Kumar will leave the company.

Home Depot agreed to buy as many as 24 stores for about $365 million from Kmart Holding Corp., which closed locations to exit from bankruptcy last year.

Nestle SA, the world's largest foodmaker, is considering a bid for General Mills Inc. to add brands such as Cheerios cereal and Betty Crocker dessert mixes, people familiar with the matter said.

Maytag, the No. 3 U.S. maker of household appliances, said it will fire 1,100 employees and earn less than forecast because sales of Hoover vacuums and Maytag washers are lagging. The company's shares fell 7.7 percent.

Quotes of Note . . . ``The stars are aligned for a nice second half.'' The better-than-expected employment figures, which included the biggest gain in manufacturing jobs in almost six years, underscore the economy's strength, and Intel's statement ``last night was quite bullish.''Philip Orlando, who manages the $300 million Federated Large Cap Growth Fund in New York. Orlando predicts the S&P 500 will end the year at 1200, an increase of 7.9 percent for the year. The index is up 1 percent in 2004.

Eco Speak . . . The nation's unemployment rate remained at 5.6 percent while the participation rate remained at 65.9 percent. Economists were expecting payroll growth of about 220,000. The jobless rate was expected to stay at 5.6 percent. Reaction in financial markets was muted. Bond prices dipped, pushing the yield on the benchmark 10-year note up to 4.73 percent. In the past three months, the economy has created 947,000 jobs, the best three-month gain since the summer of 2000. Payroll growth in April and March was revised higher by a total of 74,000 jobs. So far in 2004, the recovery has seen the creation of about 1.2 million jobs, or an average of 238,000 a month, after shedding 2.7 million between March 2001 and August 2003.

According to a survey of 400,000 business establishments, job growth was widespread across industries. Over the past three months, 75.4 percent of 278 industries have added workers. The average workweek stayed at 33.8 hours for the fifth month in a row in May. Total hours worked in the economy increased by 0.3 percent. Average hourly pay rose 5 cents or 0.3 percent to $15.64. Real wages are up 2.2 percent in the past year. Goods-producing industries added 72,000 jobs in May, including 32,000 in manufacturing, the fourth increase in a row. Construction added 37,000 jobs. The factory workweek increased by 0.4 hours to 41.1 hours, while factory overtime rose by 0.1 hours to 4.7 hours. In manufacturing, 70.2 percent of 84 industries have added workers over the past three months. In May, durable-goods manufacturers added 26,000 jobs. Services-producing industries added 176,000 payroll jobs, including 19,000 in retail and 36,000 in health care. About half of the 64,000 jobs added in professional and business services were temporary help positions. In the separate survey of 60,000 households, the Labor Department found employment rose by 196,000 while the work force increased by 233,000, leaving 39,000 more people listed as unemployed. A total of 8.2 million Americans were unable to find work in May. The jobless rate ticked higher for teenagers, whites, men and blacks and fell for women and Hispanics. Of the 8.2 million jobless Americans, 1.79 million had been out of work longer than six months. The average duration of unemployment rose to 20 weeks from 19.7 weeks, while the median duration rose to 10 weeks from 9.5.

Financials . . . Barron's Online highlights Sovereign Bancorp, which stock has been under pressure recently as takeover rumors haven't materialized. According to the article, Sovereign's stock appears to be undervalued, even in a rising rate environment. The company's low-cost deposit base means it may avoid the margin compression that some of its peers could face from rising interest rates. And the bank should pick up frustrated customers of banks involved in mega-mergers. "I am impressed with what Jay [Sidhu, Sovereign's CEO since 1989,] and his team have done the last couple of years," says Frank Barkocy, a portfolio manager with Keefe Managers, a bank hedge fund which holds Sovereign stock. Two acquisitions announced this year should boost growth: a $1.1 bln takeover of Seacoast Financial Services and a $980 mln deal for Waypoint Financial. This comes on top of the 27 acquisitions the co has completed since Mr Sidhu became CEO. Because investors are wary about unexpected pitfalls that arise in acquisitions, the successful integration of these two banks could help Sovereign stock, notes Anton Schutz, a portfolio manager with Mendon Capital Advisors, a Sovereign shareholder. The article suggests the stock, which is roughly 15% below its 52-week high, looks cheap too. Sovereign's P/E growth ratio is just slightly ahead of its expected long-term growth rate and the stock is trading at only 1.7x book value, below the S&P Diversified Banks Index book value of 2.5x.

UBS believes that market concerns about Freddie Mac missing its self-imposed June 30 deadline for its 2003 earnings release are misplaced. The firm has spoken to mgmt twice in the last few weeks and they have reiterated that the co is on track to release the information by June 30. The firm believes that the 2003 earnings release will be the first of several positive catalysts. In addition, the co should benefit from expected board turnover, increased visibility into the timing of 2004 earnings, and improved portfolio growth in 2004 as rising rates make it less attractive for banks to portfolio MBS. Although the 2003 release would represent a major milestone, a few others remain including becoming fully current by early to mid-2005 and becoming an SEC registrant later that year. Further, the ongoing audit at Fannie Mae by its regulator, OFHEO, could result in some negative headline risk for both GSEs over the rest of this year.

The WSJ's "Heard on the Street" column discusses Chicago Mercantile Exchange Holdings, which saw its stock to triple following its 2002 Dec IPO. According to the article, today the stock's free float may jump significantly as IPO lockup ends. The members who got stock in the IPO in Dec 2002 can sell many of those shares for the first time. The lockup date has caused jitters among Wall Street analysts and some members of the Merc, as the commodity exchange is known, who increasingly wonder whether the highflying CME shares are due for a correction, spurred by profit taking and the flood of newly tradable stock. Last month, analysts at Bear, Stearns downgraded CME. This week, Merrill Lynch analyst Colin Clark followed suit, bumping CME from a Buy rating to Neutral, prompting one of the sharpest daily selloffs in the 18 months or so that CME has been a public co.

Diversified . . . Moody's Investors Service raised its long- and short-term debt ratings on Tyco International to investment grade, citing the company's lower debt and improving profit margins. Last week, Bermuda-based Tyco said it would take steps over the next several quarters to pay off debt that piled on during the reign of former Chief Executive Dennis Kozlowski and to contribute more to its pension plan.

Oil & Gas . . . Goldman Sachs believes investors should buy Schlumberger in front of the June 15th analyst meeting. The firm remains bullish on the cycle + Goldman's recent survey work suggests E&P spending will rise 10%+ in 2004 vs +6-7% previously, suggesting potential upside to consensus EPS for select oil service companies including SLB. Goldman notes that SLB is -12% (OSX -9%) over the last several weeks. The firm's $72 fair value estimate implies about 30% upside potential.

Transports . . . UBS says that if Harley-Davidson has no price increase, this could be offset by upside in margins. Recent comments that keeping prices low will broaden HDI's customer base leads the firm to believe that it may not see a typical increase in model year '05, which starts next month. However, there is room for margin improvement to offset that potential impact to earnings. Dealer comments were positive in conveying low inventory, as they typically are, but supporting that color: the firm found no financing incentives -- good news given the same time last year Harley used financing incentives for the first time.

Imaging . . . JP Morgan says that after their meeting with Eastman Kodak management, they say the co appears to be executing to plan, and the transition to digital may even be ahead of plan; firm says the main take-away is that the digital biz appears to be growing at a faster pace than the 26% CAGR co target; co continues to gain market share, and investors should expect the rate of production introductions to increase in 2H04. Also, the company's acquisition strategy appears to be unchanged: focus is on health imaging and commercial printing (firm believes that Agfa, which is reportedly seeking strategic alternatives, and Lexar Media, whose partnership was announced May 17, are improbable acquisition targets). Separately, firm also thinks that Agfa's apparent distress may help EK win market share in the declining film biz, enhancing its cost structure. Reiterates Neutral rating.

Food & Beverage . . . Bloomberg reports that Nestle, the world's largest foodmaker, is considering a bid for General Mills to add brands such as Cheerios cereal and Betty Crocker dessert mixes, people familiar with the matter said. " Nestle has yet to approach General Mills and no agreement is imminent, one person familiar with Nestle's plans said. General Mills, with a market value of $17.2 billion, may fetch as much as $22 billion based on the average 26 percent premium acquirers paid for food companies in the past five years, according to data compiled by Bloomberg.

Defense & Aerospace . . . TASER received a follow-on order of 450 more TASER X26 conducted energy weapons plus accessories from the Las Vegas Metropolitan Police Dept. The total value of the purchase order is over $450k.

Retail . . . Banc of America upgrades Albertson's to Neutral from Sell and raises their target to $23 from $19. They believe that the risk/reward profile is now balanced given favorable macro trends and that co-specific execution issues are tempered. The firms says the company remains positioned to benefit from positive broader economic trends, newly restructured labor agreements, supply chain mgmt, cost savings, and Shaw's synergy savings. However, these positive factors are mitigated by weak traffic trends in the broader business, California sales pressure, stand-alone drug-retailing exposure, and execution risk associated with integration and multiple initiatives.

bebe stores target raised to $29 from $27 at Sanders Morris Harris after strong comps, raised guidance.

Jefferies downgrades Bed Bath & Beyond to Hold from Buy and cuts their target to $34-$42 from $48; firm cites the following factors: 1) their negative view of the sector and resultant reduction in valuation yardsticks, 2) their slightly reduced 3-5 year growth rate forecast (now 18%, down from 19%), and 3) valuation.

CSFB believes Federated has by far the most sales and profit momentum of the traditional department stores in firm's universe. Price target is $55.

UBS raises its target on Kmart to $70 from $54, reflecting a first look at 2005 as well as higher confidence that cash will be not be primarily used for reinvestment in infrastructure. The firm's favored scenario is using the cash to buy other assets to use the tax losses. Firm says "This Is Not Your Grandmother's Kmart": While there are positive signs of improving apparel sourcing and offerings and the possibility of a better fall circular schedule, the firm sees the asset play as more compelling than a long term retail turnaround vs. WMT. The firm notes that the investor base is highly concentrated. The float is less than 30% there is a large short interest. To the extent that Kmart can surprise on EBITDA generation, these factors could provide added momentum to the stock.

CSFB raises their 2004-05 EPS estimates at Gap Stores slightly above consensus and raises their target to $27 from $23 based on above-plan merchandise margins, which are significantly above last year and are driven by greater full price selling and higher markdown margins. Firm maintains their Neutral rating, but believes that GPS represents a near-term trading opportunity based on their belief that: 1) 2nd quarter 2004 EPS will exceed consensus of $0.28, 2) their 2nd half 2004 comp estimates of +1-3% may prove too conservative, and 3) their belief that 1Q04 record gross margin could portend stronger 2nd half 2004 gross margins than their est of a 200 bps increase.

Kmart has signed definitive agreements with The Home Depot, Inc., to sell up to 24 stores for a maximum purchase price of $365 million in cash. The exact number of stores, locations, and total purchase amount will be determined based upon the satisfaction of certain conditions to occur within the next 60 days. Assuming that the conditions for the transfer of the stores are satisfied, it is expected that such Kmart stores will be converted to Home Depot stores as quickly as possible after delivery to Home Depot.

The WSJ highlights Speedo's new high-tech swimsuits, which got attention at the Sydney Games. They cover the shoulders, arms, legs and sometimes the entire body in a synthetic material that glides better in water than human skin. Companies that make the suits say they make swimmers faster. Suits were huge success to the co. Now, swimwear maker Speedo plans to discontinue the original Fastskin suit that wowed Olympic crowds 4 years ago and replace it with a new, even-sleeker model, the Fastskin FSII. Speedo has been testing and refining the suit in the races leading up to the U.S. Olympic trials next month, and it is expected to be highly visible at the Summer Games in Athens in August. Scheduled to hit retail stores at about the same time and priced at $200 to $400, the FSII illustrates how far the swimsuit industry has pushed itself in just 4 years. Full-body swimsuits now can be found at almost every type of swim meet in every age group, from eight-year-olds to adults. Speedo says the suits are worth the price. "As you know...youth sports these days aren't cheap, and we feel that, given the research and development and technical advances on the product, the price is fair," says Craig Brommers, vice president of North American marketing for Speedo at licensee Warnaco (WRNC) "If anything," he adds, "competitive swimmers are excited to see just how fast they can go, and that's made the sport more exciting."

While the consumer electronics marketplace is competitive, we believe unit demand and traffic trends remain solid, and Best Buy is still capturing market share. The company has embarked on its transformational customer centricity program to manage the business as a portfolio of customers instead of a portfolio of products, empowering store level employees with additional capabilities to direct resource investment towards its most profitable consumers. BBY should be able to continue to capitalize on the strong digital product cycle in the future through its diversified distribution channels (Best Buy – 619

stores, Best Buy Canada – 19 stores, Future Shop – 109 stores, Magnolia Audio Video – 22 stores at the end of fiscal 1st quarter 2005). The company continues to maintain a solid balance sheet, with $2.60 billion in cash and a 19.9% debt-to-capital ratio as of the end of fiscal 2004. Analyst are pleased that the company has initiated a $0.40 annual dividend and has begun repurchasing shares, as we believe strong retail operators that generate solid cash flow have the ability to return value to shareholders in the form of cash dividends, while continuing to grow the business. Sales momentum should remain solid as the company balances investment in its customer centricity initiatives without sacrificing excessive margin. Analysts are raising 1st quarter 2005 estimate by a penny to $0.33 vs. $0.21 last year due to the better than expected total top line result during the quarter. Analysts are also raising 2005 and 2006 estimates by $0.01 to $2.87 (vs. $2.44 in 2004) and $3.30, respectively, to reflect our increased 1st quarter 2005 estimate. Assuming BBY trades above its current 2005 P/E multiple of 18.1x to the mid-19x range (a level the company has attained as recently as the end of April), we arrive at our 2004 yearend price target of $65, based on 2006 EPS estimate of $3.30.

Healthcare . . . Goldman Sachs initiates coverage of WebMD with an In-Line rating; firm says that HLTH represents a rich portfolio of company's (ex-Porex) with exposure to the evolving connectivity mkt. If healthcare follows other industries and looks to technology as a tool to increase efficiency, firm thinks HLTH is well-positioned. In the meantime, firm says that execution challenges, including HIPAA implementation, modest organic growth, and the uncertainty associated with future acquisitions yield a more modest near-term view.

Drugs . . . Teva Pharma was up 47% in 2003 and up 15% YTD in 2004 vs. the generic industry on average up 67% in 2003 and down on average 12% YTD. Teva has a market capitalization of $20.0 billion as the bellwether name in the group. Although the company will have stellar returns in 2004 and perhaps even 2005, the stock could be impacted, resulting in a better entry point, as the market begins to focus on Biogen Idec/Elan’s Antegren, which could be approved by year-end if priority review is granted (BLA filing announced May 25, 2004 and pivotal trial results expected in the fall). Analysts anticipate Teva to report particularly strong revenue and earnings growth in 2004, estimated up 41% and 27%, respectively which puts the company well on its way in achieving its strategic goal of doubling revenues every four years (19% CAGR) and net income in even shorter periods of time (includes organic and inorganic growth). Teva is the

world’s leading manufacturer and marketer of generic drugs both in terms of revenues and global reach—it is also ranked 18th among the world’s top pharmaceutical companies (as of 2003; IMS Health NPA Data) excluding the benefit from the January 22nd close of the Sicor acquisition. Over the last five years, Teva has spent over $820 million in gross R&D ($672 million, net). Teva’s scale advantage and commitment to generics is a competitive advantage (with customers)

which should result in further expansion of its industry leading market share, and should allow it to outgrow a generic drug industry which is already enjoying several positive secular trends (rising utilizations, positive pricing, patents expiring and successful paragraph IV challenges). Unlike many generic companies, who end up ‘di-worsifing’ by attempting to expand into the branded pharmaceutical business broadly, management continues to focus and build further

on its core strengths—leadership in the worldwide generic drug industry with only a niche proprietary focus—a strategy and commitment which we find attractive. Top-line organic growth of +41% to $4.6B will be driven by the combination of the industry’s largest portfolio of

Abbreviated New Drug Applications (ANDAs), ~109 ANDAs which include an eye-popping 57 paragraph IV challenges targeting brand sales of $67 billion and continued contribution from Copaxone, Teva’s proprietary therapeutic indicated for the reduction of relapses in relapsing-remitting multiple sclerosis (MS). The company believes that it has claims to sole/shared 180-day Hatch-Waxman generic exclusivity for 18 products targeting $15 billion in brand sales. A several year expansion in gross profit margins, driven by higher margin new generics is expected to expand corporate margins contributing to bottom-line growth exceeding top-line growth. Historically, Teva has also grown externally through smart acquisitions (Novopharm, Copley and most recently Sicor on January 22nd) and a litany of strategic alliances (Eisai, Impax Labs, Andrx, Aventis, Lundbeck, Savient, Biovail, etc.), a strategy which will likely add to further bottom-line and top-line growth. The acquisition of Sicor makes obvious strategic sense allowing Teva to expand into the injectable generic market as well as develop a platform for generic biologics. Additionally, from a financial perspective, the acquisition will address the dramatic fall in asset turnover ratio over the last five-to-ten years due in a large part to rising cash balances (increasing convertible debenture financing as well as accelerating operating cash flow). Importantly, strength in the base business plus the accretion from Sicor should allow Teva to continue to generate returns of 25-27% and above previous peaks (24% return on equity in 1993-1994).

Biotech . . . The WSJ reports that Carl Icahn, who has made big gains in ImClone stock by buying when it was out of favor, said he sold 897,805 shares of ImClone Wednesday and yesterday, reducing his stake in the co to 4.29 million shares, or 5.6% of its stock, from 6.8%. Wall Street waits impatiently for new studies to be presented this weekend on ImClone Systems' cancer drug Erbitux. Despite yesterday's decline, the shares have risen about 70% from their price of $42.99 on March 1. Some analysts expect the surge to continue after results are reported on studies of Erbitux at the annual meeting of the American Society of Clinical Oncology medicine's largest meeting on scientific advances in cancer.

Biogen Idec and Elan submit Marketing Authorisation Application (M.A.A.) to European Medicines Agency for approval of ANTEGREN (natalizumab) as a treatment for multiple sclerosis (M.S.). Submission includes one-year data from two ongoing Phase III trials but in order to protect the integrity of the trials, BIIB and ELN are not disclosing the one-year data at this time.

Medical Devices . . . Lehman says that given the recent problems with Guidant's drug eluting stent program, the 26% decline in the stock from its 52-week high, and the very recent retirement announcement by GDT's CEO. They feel that a number of company's may have an interest in GDT given the value of its CRM franchise and the value of its vascular biz (most importantly its vascular sales force, engineers, and patents). Among its potential suitors, firm believes that JNJ buying GDT would make good strategic and financial sense, and that a deal would not likely violate antitrust issues in the US or Europe. While firm is not suggesting that a deal is being contemplated, they believe that at a minimum there should be solid downside protection for GDT shareholders below current levels, and that long-term investors should be well-rewarded despite the tough near-term prospects. Maintains Overweight rating and $65 target.

Media . . . Viacom Chairman and Chief Executive Sumner Redstone shot down speculation that his company might seek to acquire Electronic Arts saying it would be too expensive. But industry observers said that aside from the barrier of price -- potentially $20 billion or more -- EA could be a good fit for Viacom or another media conglomerate.

U.S. House of Representatives panel approved a measure Thursday requiring Echostar and Direct TV to put local broadcast channels on a single satellite dish instead of two dishes within a year to ensure that satellite customers get local stations where they are available. In markets where satellite operators begin offering local broadcast stations, the bill gives subscribers 60 days to decide whether they want that service or prefer to continue receiving the signal of a distant broadcast network.

IT Services . . . IBM is still eyeing German IT service firms after its bid to buy ThyssenKrupp's IT arm failed, a German newspaper reported on Friday. "It is to be assumed that IBM will participate actively in the consolidation of the IT services market in Germany," the German head of IBM's Global Services unit was quoted as saying in an interview with business daily Handelsblatt. -- Reuters

Storage . . . First Albany upgrades EMC to Buy from Neutral based on valuation, as the stock is down 30% from recent Jan highs and is down 16% since reporting 1st quarter results in April, even though estimates have increased slightly during each of those periods. Firm says near-term catalysts include next week's analyst day and the ramp of the AX-100; in the longer-term, firm thinks SG&A leverage should improve relative to current expectations. Target is $13.50.

EMS. . . Morgan Stanley notes that Flextronics said in last night's mid-qtr conference call that mgmt indicated that consensus calendar 2nd half 2004 rev/EPS estimates seem too low given business conditions. The firm maintains their 2005 EPS estimate (25% above consensus), and expects consensus estimates to continue to increase. For 2nd quarter, firm expects EPS of $0.16 versus the consensus of $0.14, and they believe the vertical components of FLEX's business could provide upside to their $0.90 2005 EPS est. Firm expects a return to normal operating margin of 10-15% in PCB fabrication by the Sept qtr, and they think that peak margin could approach 20%; also, PCB fab pricing continues to trend higher, and mgmt indicated that the co may be gaining market share. Finally, firm expects a return to normal levels of account receivables securitization (throughout 2005), following a $130 million decline in 4th quarter, which should more than offset some modest inventory build.

Semiconductors . . . Intel's flash-memory chip unit, a business that has posted sales declines for five straight quarters, is helping propel revenue gains this period as sales growth in desktop computers slows. CFO Andy Bryant's comments that the company is regaining market share in flash-memory and that personal computer and laptop chip sales are "on track," allayed investors' concerns about waning chip demand. The Philadelphia Semiconductor Index, which includes Intel and 17 other chip-related stocks, had declined 5.1 percent this week.

Intel in its mid-quarter update tightened its 2nd quarter 2004 revenue guidance to $8.0-$8.2bn (mid-pt. at $8.1bn, flat Quarter over Quarter), to the high end of the prior guidance range of $7.6-$8.2bn (mid-pt. at $7.9 billion, down 2.4% Quarter over Quarter). The mid-point of the

new guidance was above prior estimate of $8.0 billion and consensus estimate of $7.98 billion. Gross margin guidance was tightened to 60%-61%, from 60%+/-2% previously. The higher revenue guidance was attributed predominantly to better than expected flash revenues. Intel is clearly gaining market share in NOR flash, through its strategy of re-engaging in the broader markets, and we suspect it is also seeing a return in orders from handset OEM customers that had switched suppliers in 1st quarter 2003. Expect Intel's market share gain to continue in upcoming quarters. Intel attributed the change in gross margin guidance to the upside in revenues, which were predominantly flash revenues. While this may appear counter-intuitive given substantially lower margins in the flash business, this is clearly an indication of the significant leverage in Intel's flash business, given low capacity utilization rates, leading to high incremental margins vs. average margins. Intel's guidance reflects normal seasonality in PC builds in our view. The market expectations going into the mid-quarter update were largely tempered by weakness in the widely followed Taiwan motherboard data for 2nd quarter 2004. The data, which implied lower than normal seasonality, does not fully reflect the ramp in motherboard shipments by Intel ahead of Grantsdale.

Digitimes reports, citing sources at memory module makers, that starting from June 1, Samsung has begun cutting contract prices for 1Gbit NAND flash by over 15% to about $15-16 per chip. The module makers will suffer a loss from inventories due to Samsung's price cuts, the sources indicated. Samsung's move reflects an ongoing drop in spot prices, which sources attribute to a weaker-than-expected demand and an increase of supply.

Based on firm's checks, Jefferies believes that lead times for Xilinx's PLDs have ceased to extend over the last month. In fact, lead times may have moderated slightly over this period. While this datapoint alone, may not speak to the direction of equipment demand in aggregate, firm says it supports concerns with respect to marginal changes in availability of semiconductors.

Analyst community positive on Intel this morning after the co raised the midpoint of its revenue guidance to $8.1 billion from the previous midpoint of $7.9 billion. Intel said that its microprocessor business is in line with its original expectations and communications revenues were higher than original expectations due to increased demand for flash memory products. AG Edwards out noting that while they had expected that Intel would be able to raise the midpoint of its guidance, they did not expect that with comparable revenues to the first quarter, Intel would be able to increase its gross margin from about 60% in the first quarter. Intel remains their Top Pick with $50 target. Also, Smith Barney out positive saying that given expectations for no change (in light of worse than seasonal desktop weakness), they would expect Intel's revision to re-fuel the recent rally in INTC and the SOX. Although they anticipate typically volatility around earnings season, they continue to look forward to a seasonally driven rally in semiconductor names in 2nd half 2004. About the only somewhat negative note this morning is from JP Morgan. The firm notes that Intel did not say whether its inventory will rise or fall and they remain concerned as inventory has risen to 79 days, the highest level since 1995. Intel's inventory days have reached this level twice in the last 10 years, with gross margins negatively impacted on both occasions. As a result, they are concerned with risk to Intel's utilization rates and therefore gross margins during 2nd half 2004 and 2005. Firm sees the stock as appropriately valued.

Checks indicate Texas Instrument’s 2nd quarter 2004 is tracking in line with expectations as lower than expected wireless revenues are offset by strength in its non-wireless semiconductor products such as high performance analog, catalog DSP, standard logic, DLP, and microcontrollers. We are maintaining our 2nd quarter 2004 revenue and EPS estimates of $3.23 billion (up 10% Quarter over Quarter) and $0.25, in line with consensus. During its mid-quarter update on June 7, expect TI to tighten its 2Q04 guidance around the mid-point of its previously stated range. Expect TI to narrow its revenue guidance from $3.09-$3.33 billion (up 5%-13% Quarter over Quarter) to $3.14-$3.26 billion (up 7%-11% Quarter over Quarter) and its EPS expectations from $0.23-$0.26 to $0.24-$0.25. This implies a 2nd quarter 2004 gross margin of 46%-47%, in line with estimate of 46.5%. Within wireless (28% of revenue), checks indicate sales to Nokia (14% of revenue) remain weak as Nokia continues to lose share. Although we believe TI has been able to offset much of the weakness at Nokia with share gains at Sony Ericsson and LG, increased sales of OMAP and strength in infrastructure, believe the entire handset market could be slightly weaker than expected during 2nd quarter 2004. Outside of the wireless market, sales of high performance analog, catalog DSP, and standard logic (combined approximately 18% of revenue) continue to be bolstered by a firm pricing environment. Checks at Fairchild and ON Semiconductor indicated that commodity analog pricing should increase 5%-10% Quarter over Quarter during 2nd quarter 2004 as industry supply remains constrained and lead times are stretched. Continue to highlight TI as a stock that will outperform in 2nd half 2004. The stock could be flattish in the near-term as the strong 2nd quarter guidance seems to be priced in, and have near term concerns about weakness in the handset market. However, once TI's wireless orders start to improve, we think consensus revenue estimates for 3rd quarter 2004 and 4th quarter 2004 could prove to be conservative.

Software . . . Thomas Weisel says Red Hat's long term potential is there, but expectations are high. The firm believes that Red Hat's business momentum continues to track the pace of Linux adoption as the co retains its market leadership position in the Linux market. However, expectations are running high. The stock is up close to 55% in the last 3 months vs -3% for the Nasdaq. The firm cautions investors that at current valuation levels the stock is already assuming not only execution in Linux server market, but also beginning to factor in some success in the Linux desktop and other Open Source Software markets - something yet to be realized.

Schwab SoundView comments that, as usual, there are plenty of crosscurrents with respect to views on the quarter as well as Oracle's prospects for growth. Firm says its checks have generally been quite positive, and while firm has not heard of any "mega" deals, it believes that the overall volume of business was very good. Currency is likely to be less of a benefit, increasing the risk that Oracle's reported license revenue growth could be less than firm estimated. However, firm remains optimistic that strengthening in the Americas will offset the impact, hence no change to firm's 12% est.

WR Hambrecht initiates coverage of Novell with a Buy rating and $11.50 target. The firm believes that NOVL's Linux strategy is a turning point for the company, and the potential network effects of its Linux strategy upon other portions of the company's business are not fully appreciated by the mkt. Firm believes that the company's Linux strategy stops the Netware decline, enables Linux growth within NOVL, and drives the company's server infrastructure applications businesses.

The WSJ reports that Microsoft has adopted a new approach to the use of its patents. Microsoft now holds about 4,500 patents, covering its inventions in fields such as how computers store files and how text is displayed on a screen. In Dec, Microsoft announced a new policy to begin licensing its patents, citing requests from customers, regulators and others, though it is unclear how many of the patents cover techniques already in use by other company's. The company says it has more than 100 patent-licensing discussions under way. It's offering royalty-bearing licenses both to partners and competitors, even to sellers of open-source products that have emerged as the company's biggest threat. "We have said that we are prepared to license our patent rights to all comers," says Brad Smith, Microsoft's general counsel. "That, by definition, includes open-source products." But some proponents of open-source software see an implicit threat in such moves. They believe Microsoft may press for royalties from the distributors or even users of open-source programs including Linux, and they fear that Microsoft could resort to patent-infringement suits if they don't agree to licensing deals. Such a move could disrupt the open-source world. "Microsoft hasn't started suing anyone, but we don't think that's far off," says Daniel Ravicher, executive director of a nonprofit group called the Public Patent Foundation. "If they don't, people will know they are just bluffing." In April, the group asked the U.S. Patent and Trademark Office to revoke a Microsoft file-system patent that it believes could be used against open-source programs. Larry Rosen, general counsel of the Open Source Initiative, a nonprofit group that certifies open-source software, says a senior-level Microsoft employee he declines to identify told him privately about a year ago that "it would not be unreasonable of Microsoft to assert its intellectual property against Linux or any other open-source software."

Southwest Securities believes that Year over Year video game software sales during May likely declined by double-digits (around -15%) due to difficult comparisons to last year and a relatively weak schedule this year. The firm believes the sharply negative results for May this year could disappoint some investors, causing near-term pressure on stocks, yet they note that June 2004 has easy comparisons (software sales declined 9% in June 2003) and the software lineup is strong; firm consequently recommends buying the stocks on any near-term weakness, and maintains Strong Buys on Activision, Electronic Arts, and Electronic Boutique.

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Some intermediate term indicators that are highly effective for market timing the SMH based on using the NASDAQ New Highs and similar indexes are shown here. To go long: First wait for the NASDAQ New Highs to set a new low and reverse itself from an approach of the lower Bollinger Band. To go short: Wait for the NASDAQ new highs and other similar new high indices to set a new high print at, near, or above the upper Bollinger Band. I am also now using the NASDAQ McClellan Oscillator (Ratio Adjusted) ($NAMO) to confirm the above - Overbought above 25 - Oversold below -25. These charts do not update until after market close.



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Short Term Indicators vs. the SMH; any index can be used - The first set of short term indicators I use are based on the put to call ratio. To go long it is best to wait for the put to call ratio to close over 1.0. On the chart below the put to call ratio now updates intraday but it is not always accurate! Intraday reading of the put to call ratio can be found here updated every half hour after the open:

http://www.cboe.com/MktData/default.asp

The more days in a row the put to call ratio prints over 1.0 this the more likely the bottom will be a strong one. The link above shows intraday readings of the P/C ratio.

Also closes on the put to call ratio below 0.50 and sometimes a bit above are indicative of a short term top. Watch the simple moving averages as well because periods of too much buying of puts or calls will almost certainly bring about market bottoms and tops respectively. On the CPC/VIX ratio; this is largely a longer term indicator where investors are likely to make more money on the long side once the short-term 21 day sma has crossed above the 200 day sma. The reverse is true as well. An investor will likely make more money on the short side when the 21 day sma crosses below the 200 day sma:

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Next I use the VIX and VXO can help to refine decision making on tops and bottoms upon reverses from upper or lower Bollinger Bands especially when the index stretches more than 10% above or below its 10 day simple moving average.

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Also TRIN and TRINQ readings on the 5 and 10 day simple moving averages over 1.5 are bullish while readings below 0.85 are bearish. These readings don't happen often especially with the 10 day sma. They are also early indicators so the market can continue higher or lower for a while but they are reliable for indicating market turns that are about to take place.

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