Replies to post #3240 on Sector Investing

[ReturntoSender]

Major Market 6 Month Charts and Industry Indices:

[ReturntoSender]

HOT SHOTS: Is Intel a Buy?
By Jody Osborne, Optionetics.com
6/8/2004 4:45:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=10528

The stock market has been moving higher the past month, but volume has been light. On Monday, tech stocks saw a very strong move after positive economic data on the employment situation the prior Friday. Tuesday, stocks started lower, but managed to rise throughout the session to ultimately finish positive. The Philly Semiconductor Index ($SOX) has been moving higher, but has now ran into resistance at its 200-day moving average. If broken, which seems likely, chip stocks might see a significant jump in price. When chip stocks rise, it usually has to be led or at least accompanied by Intel (INTC).

Intel Corporation designs, develops, manufactures and markets computing and communications products at various levels of integration. It has three product line operating segments: the Intel Architecture business, which is composed of the Desktop Platforms Group, the Mobile Platforms Group and the Enterprise Platforms Group; the Intel Communications Group [ICG], and the Wireless Communications and Computing Group [WCCG]. The Intel Architecture operating segment's products include microprocessors and related chipsets and motherboards. ICG's products include wired Ethernet and wireless connectivity products, network processing components and embedded computing products. WCCG's products include flash memory, application processors and cellular baseband chipsets for cellular handsets and hand-held devices. The Company's products are sold directly to original equipment manufacturers [OEMs], and through retail and industrial distributors, as well as reseller channels throughout the world.

Last week, Intel held its mid-quarter update and this led to higher prices for the stock. The company raised earnings estimates and had positive things to say about the future. However, this good news still hasn’t been enough to push the stock through resistance just below $30 where the 200-day moving average resides. If the SOX is able to push through, this might provide the necessary strength that Intel needs to make a similar push.

Intel has a P/E ratio below 30, which is below the industry average and it is a popular holding for institutions. This means that when volume does return, Intel could be a major participant in a nice rally. Intel has a strong standing within its industry and is always looking to expand its abilities. As a result, the stock is often a core holding for long-term investors. With implied volatility at multiyear lows right now on Intel options, traders might want to look at buying LEAPS or entering longer-term bull call spreads on this chip giant.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Jody's Forum

[ReturntoSender]

Overheated Market Finally Lets out Steam
By Harry Boxer, The Technical Trader

http://www.thetechtrader.com/closing/index.php?HTTP_REFERER=(none)

The session started out with a gap down and then a very neat orderly intraday down channel in the morning ,as the market sold off steadily. Around the lunch hour they tried to rally, which failed at intraday declining moving average resistance. That failure accelerated the decline into the afternoon, when the indices retested important short-term support near the Nasdaq 100 and S&P 500 40-day moving average on the hourly charts.

They bounced off of that ,but were unable to break through resistance again, not only the moving averages but the intraday declining tops line resistance ,as well, and the markets sold off, taking out the earlier lows just slightly on the close.

The Dow was down 64 and change, the S&P 500 down nearly 11, the Nasdaq Composite nearly 33, the 100 26 1/2 , and the SOX Index around 4 percent, down 16.

It was a nasty day technically which confirmed the price action. Advance-declines were 3 to 1 negative on New York and a little less than that on Nasdaq. Up/down volume was nearly 4 to 1 negative on New York, on total volume of about 1 ¼ billion. Nasdaq volume was close to 1.5 billion, with 1.2 billion of it to the downside, or about 4 1/2 to 1 negative.

Reviewing TheTechTrader.com watchlist, it was a nasty day for the tech stocks. The SMH, Qlogic (QLGC) and Broadcom (BRCM) each were down 1.14, coincidentally. OmniVision (OVTI) suffered its worst spill in months, with a negative earnings guidance and possible restatement of earnings. The stock was down just under 8 points today on nearly 40 million shares, a huge breakaway gap to the downside on heavy volume, obviously very negative technically.

Other negative stocks of note, Mamma.com (MAMA) backed off 46 cents & Sigma (SIGM) gave back 39 cents. Dendreon (DNDN) fell 60 cents, deCODE genetics (DCGN) was down 4 cents, and Ariad (ARIA) fell 42 cents, highlight losers in the junior biotech sector.

On the plus side, IPIX on some positive news soared ahead nearly 3 ½ points early in the day, but gave back a big chunk of it, closing up 1.12 on 66 million shares, but way off the high by about 2 ¼. One of our recent Charts of the Week, IMAX soared 82 cents on strong volume after a company conference call. That broke out of a key short-term resistance level and acted great today .

Stepping back and reviewing the overall patterns, after the overbought condition caused a sell-off and futures were lower pre opening, the market sold off strongly today. It closed at the lows for the day and at key short-term support around 1470 on the Nasdaq 100 and the 1130-31 zone on the S&P 500.

It would be key that the market follows through to the downside to confirm a trend change. So far, we’re doing some very important testing, and if it does not hold we may be in store for some additional weakness over the next few days.

Good trading!

Harry

[ReturntoSender]

Market Internals: Trading was uneventful during this latest abbreviated week of trading. US financial markets are closed Friday in honor of former United States President Ronald Reagan. Prior to the three-day weekend, Monday through Thursday, the Dow Jones Industrial Average ($INDU) rose three times and fell once to finish the week up nearly 200 points. A surge on Monday pushed the industrials up almost 150 points. After that, stocks traded mixed and the Dow made relatively little progress. By Friday, trading volumes were light and market internals were mixed with advancing issues leading declining issues by a narrow nine-to-seven margin.

The Nasdaq Composite Index (COMPQ) moved back above the 2,000 level on Monday, but struggled thereafter. Tuesday, the Nasdaq traded flat and then fell 33 points on Wednesday. Thursday, the composite index rebounded and made another attempt towards 2,000, but volume was light and market internals on the Nasdaq Stock Market were decidedly mixed. For instance, as we can see from the table above, the ratio of advancing to declining issues was dead even. Also, fittingly, the number of stocks setting new 52-week highs to the number of 52-week lows on the Nasdaq is also even, with 40 stocks setting new highs and 40 setting new lows. Basically, while the Dow managed a respectable gain on the week, the Comp Index rose only 20 points and the Nasdaq market appears to be lacking clear direction.

Sentiment Data: With stocks struggling to find direction amid light volume, investor sentiment has turned mixed—with no obvious signs of extreme bullish or bearish sentiment. The CBOE Volatility Index ($VIX) edged lower during four of five trading sessions. Consequently, the market’s so-called “fear gauge” finished the week near 15.00, which was well below last Thursday’s levels of more than 17.00. The original formula VIX ($VXO) fell below 14% and to multi-year lows this week. Meanwhile, the Nasdaq Volatility Index ($VXN) is down from nearly 24% last week to 21.23% late Thursday. The drop in the volatility barometers is a sign that options traders are becoming a bit less concerned about the outlook for the stock market going forward. Bearish sentiment is easing.

Indeed, a few other indicators suggest that bullish sentiment may be on the rise. The latest surveys of investor sentiment, for instance, showed a sharp rise in bullishness this week. According to the latest poll from the American Association of Individual Investors [AAII] bullishness among investors has skyrocketed to 55.3% from only 33.3%. Bearish sentiment plunged to only 15.8% from 26.2%. Investor’s Intelligence, meanwhile, reports that 49.5% of newsletter writers are bullish, compared to 45.1% last week. Bearish sentiment fell to 20.2% from 24.5% the week before. So, the investor sentiment surveys indicate that bearish sentiment is relatively low once again.

Not all indicators suggest that investors are becoming zealous, however. For instance, the CBOE put-to-call ratio, which measures the daily number of puts traded divided by the number of calls traded on the Chicago Board Options Exchange [CBOE], remained relatively high during the latest week of trading. In fact, it has risen above 1.00 during three of the past six trading sessions and finished on Thursday at 1.15. Historically, readings of 1.00 or more from the CBOE put-to-call ratio have coincided with high levels of bearishness among traders. The ten-day average is now .97; and down slightly from .99 last week. The ratio remains high relative to historical levels.

Overall, then, the various indicators suggest that market sentiment has turned mixed. Basically, we have moved through a period in early and mid-May that saw a sharp increase in bearish sentiment and pessimism. Since that time, market jitters have subsided and we are seeing some indicators, like the surveys of newsletter writers and the mutual fund flows (discussed last week), beginning to show rising levels of bullishness or optimism. And, this is the type of shift in market psychology that can keep investors moving into the stock market and push stocks higher still.

http://www.optionetics.com/articles/article_full.asp?idNo=10543

[ReturntoSender]

Amateur Investors Weekend Stock Market Analysis (6/12/04)

I'm watching the Volatility Index (VIX) very closely as a drop back to 14 or below could signal a nearing top in the market. Remember the last three times the VIX has dropped to 14 or below (points A) this has been followed by some type of sell off of differing magnitudes (-3.4%, -6.0% and -6.0%) in the S&P 500.



As far as the major averages the Dow has rallied back to around its 61.8% Retracement Level near 10400 (calculated from the February high to the May low). If the Dow can rally above 10425 it should be able to rise back to its April high near 10550 (point B). Meanwhile if the Dow peaks around 10400 and comes under some selling pressure look for initial support around 10250 which is where its 50 Day EMA (blue line) and 100 Day EMA (green line) have converged at.



The Nasdaq stalled out this past week near its downward sloping trend line around 2025 (solid gray line) established from the January high. If the Nasdaq can break solidly above this trend line then look for a potential upward move to the 2060 (point C) to 2080 (point D) range which would be the next levels of upside resistance. Meanwhile if the Nasdaq encounters selling pressure look for initial support either at 1975 which is where its 50 Day EMA (blue line) and 100 Day EMA (green line) have converged at or around 1960 (point E) which has been the June low so far.



A sector that will have a significant impact on the Nasdaq is the Semiconductors. A look at the Semiconductor Holders (SMH) shows that their downward and upward sloping trend lines (solid black lines) are beginning to converge which tells me they are getting close to making a substantial move in one direction or the other. Over the past few weeks the SMH's have been encountering resistance near their 100 Day EMA (green line) just below 39. If the SMH's can break solidly above the 39 level this would be a Bullish sign with a possible rally up to their April high near 42 (point F) and would have a positive affect on the Nasdaq. Meanwhile if the SMH's break below the 37 level then this will likely lead to an eventual retest of the early may low near 34.50 and thus have a negative affect on the Nasdaq.



The S&P 500 stalled out near the 1140 area this week. If the S&P 500 rallies above 1140 it should be able to rise back up to its April high around 1152 (point G) or possibly as high as its May high near 1163 (point H). Meanwhile if the S&P 500 tops out in the near term and comes under some selling pressure look for initial support in the 1115 to 1120 area which coincides with its 100 Day EMA (green line) and 50 Day EMA (blue line).



One sector that will have a substantial affect on the S&P 500 is the Banking sector (BKX). The BKX has rallied back to its 61.8% Retracement Level near 98.50 (calculated from the March high to the May low). If the BKX can break solidly above 98.50 look for a potential rally up to the 102 level which would have a positive affect on the S&P 500. Meanwhile a key support area to watch in the BKX is just below 97 which is where its 50 Day EMA (blue line) and 100 Day EMA (green line) have converged at. If the BKX falls below 97 this could lead to a drop back to its 200 Day EMA (purple line) just below 95 which would have a negative affect on the S&P 500.



Finally continue to watch the Oil sector (OIX) closely as well. As I mentioned a few weeks ago the OIX had formed the right side of a 3 year Cup and it has now developed a 5 week Handle (H). If the OIX breaks above the 355 level (Pivot Point) then this would likely lead to selling pressure in the market as rising Oil Prices would have a negative impact on our economy. Meanwhile the key support level to watch in the weeks ahead is near 335 which is at the bottom of the 5 week Handle and is close to the OIX's 20 Weekly EMA (blue line). If the OIX breaks below 335 this would likely lead to a drop back to its 40 Weekly EMA near 320 and negate the Bullish looking "Cup and Handle" pattern and potentially have a positive affect on the market.



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.

[ReturntoSender]

InvestmentHouse Weekend Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- Modest gains and low volume again mark the end of a shortened week.
- Import prices driven higher by oil, while treasuries experience subtle shifts.
- Indexes poised to continue summer rally as they recover from Wednesday higher volume selling.

Volatile open, close provide bookends to quiet session.

The market showed spunk, coming right back after some stronger volume selling Wednesday. Futures were higher, stocks opened higher, and they never really caved in. They also did not break out, but with the Friday closing in honor of President Reagan, the volume was light as many were reluctant to commit ahead of another 3 day break.

That light volume did not keep the action subdued. Stocks were quite volatile early as NASDAQ and SP500 jousted with near resistance at 2000 and 1135, respectively. They made two early tests of that level in the first hour, each time bouncing lower. The second failure sent NASDAQ plunging to session lows, peeling off 12 points from the early high. Stocks rebounded right back again, but then settled into a 4 hour lateral move right at the mid-levels of the session. So, would the market rally or sell, take the bullish or bearish route? It took the former, reverting to its recent bend toward bullish action with the exception of the Wednesday sell off.

The late move pushed NASDAQ back up to 2000 and SP500 back up to its down trendline. No volume to clear the levels, but after failing at them earlier in the session, the move made it look as if they had no problem with the level. We noted very wobbly action in leadership stocks. In the end many recovered decently, but many were all over the map and more than a few gave up near support. Overall the indexes held their ground and the Monday break higher, but there was some internal strife. Such is the way of summer, low volume rallies.

Semiconductor sales expected to surge.

The Semiconductor Industry Association raised its 2004 growth expectations to 28.6% from 19% originally forecast. That would put sales at $214B, a record that surpassed the $204B in 2000. Consumer electronics are the main driver of the gains as chips find their way into just about everything we use. I am not all too sure that some people I know don�t have microprocessors inside them. Cellular phones, digital cameras, digital video recorders, and WiFi are major growth areas driving demand.

So you would think that would have the chip makers and analysts excited. That would be wrong. We have seen more enthusiasm at dental exams. Some analysts said higher chip demand meant the need to build more capacity and that would ultimately lead to overcapacity, lower prices, and a return to gloom in the industry. Well, yes, that could happen. If you make more money you can move into a higher tax bracket as well. Problems of the rich, problems of the successful. Talk about searching hard for the tarnished lining in an otherwise good story. The news did not help chips even with NSM announcing a strong quarter. It squeaked out a 19 cent gain, having to fight back to avoid closing negative. It simply was not the day for any stellar moves.

THE ECONOMY

Import prices rise on the back of 10% gain on oil.

Import prices rose 1.6%, double the 0.8% expected. That marks the eighth straight gain and brought on more talk of inflation. With oil jumping 10.3% after declining 0.4% in April, it was not hard to see where the increase came from. Take out oil and you have a 0.4% import price gain after a 0.2% rise in April. Industrial supplies excluding oil were still strong, however, posting a 2.1% gain as lumber, iron and steel, and natural gas rose.

For the past 12 months petroleum imports grew 43.9%. Overall import prices rose 7%. The divergence is stark. This of course brings us back to the inflation issue. Rising oil prices are considered by the Fed and others to be inflationary. First, we suggest that rising prices have more impact dampening economic growth than they do spurring inflation. As we have noted on several occasions, even if they were inflationary, raising interest rates is just about the poorest method there is of combating rising oil prices. Better to have a growing economy that has to deal with higher energy prices than a stagnant economy slowed by rate hikes that still has to deal with higher oil prices (remember 1974?).

Second, the rate of gain of oil prices versus other commodities in high demand (cement, lumber) is out of proportion. Lest we forget, OPEC started this rise in prices when it started talking about curtailing production because its internal projections showed a falling price per barrel in the second half of 2004. That started prices jumping early in the year, and then other problems, those unexpected events that always pop up when you monkey with market forces, started popping up. Iraq unrest. Attacks on Saudi oil compounds. Nigerian strikes. Before this is was the Venezuelan strikes in 2003 that raised prices. That terror premium on top of the OPEC created initial price rises that started the spiral higher are what has oil prices so high, not the demand. Again, oil prices are out of proportion with other commodities in short supply. It is starting to back off but there is much to be unwound, and there is the terror premium with respect to potential attacks on the actual production facilities or on the transportation modes (pipelines, tankers). That will push prices higher in times of worry, diminish in times of relative calm.

Treasury spreads narrow some as yield curve begins to flatten.

The bond market is always worth watching because it is one of the best forecasters for the economy overall and thus the stock market. Over the past few weeks the yield curve has flattened between the short term and longer term treasuries. The spread between the 2 year and 5 year treasury is narrowing, another measure of the yield curve�s slope. In an economy that is expanding on into the future the yield curve is �normal�, i.e., the short term treasury yields are lower than the longer term yields. That is what the yield curve is now.

Compare that with the yield curve back in 2000 where the short term yields were higher than the longer term, i.e., an �inverted� yield curve. The stock market had cratered in March and April, and the bond curve inverted that summer. That signals bad times ahead: long term rates are lower because the future economic activity is considered weak. If it were positive as in a normal curve, longer term yields would be higher because money would be more in demand in the future and yields would have to factor that into the present value.

Recently the yield curve between the 2 and 5 year treasuries is flattening out a bit. The spread is narrowing. They are not at critical levels as the yield curve is still healthy. After a dramatic improvement in the yield curve as the economy recovered and expanded, this weakening in the curve and spreads is another element worth watching much as the ECRI weekly indicator we discussed last weekend.

Why is this important? It paid to watch the signs of economic slowing in late 1999 and early 2000 that was being overlooked by the mainstream. Up through the market crash it was believed the economy was heating still. Despite the market plunge and the inverted yield curve it took a long time to let go of the idea that the economy was not expanding. We saw the signs of the slowdown and predicted the market meltdown. Right now we are simply being observant as to the true leading indicators, not the jobs report that everyone continues to hang on. These indicators are suggesting economic slowing in the future. They are not pointing to another recession, but with the higher energy prices, they are weakening some. That is consistent. Nine of the ten last recessions have come on the heels of a sustained spike in oil prices. Prices are dropping right now. They need to get down close to $30 and rather quickly to avoid being a real problem for the economy. As you know, we are predicting oil to fall closer to that level over the next month. Whether increased terror events ahead of US political conventions, the Iraq handover, and the election itself actually materialize will have an impact on those prices and thus the expectation of economic softening.

THE MARKET

Maybe investors were rattled when the government announced the postponement of the PPI. The treasury traders were blindsided, and that very well could have had a spillover effect on stocks Wednesday as well as hedges were frantically adjusted. In any event, after the higher volume selling the market woke up in a better mood and held positive most of the session. Yes volume was light, some rocky times for leaders, and no major breakthroughs, but the return to the more bullish intraday action where it rallied to the close healed some of the Wednesday selling and suggested that action was related to the reshuffling of hedges on the PPI move.

The action left the indexes poised to try another move toward the April highs. DJ30 is sitting on top of its early 2004 down trendline as is QQQ, the default leader of NASDAQ. Throw the SP600 (small caps) and SP400 (mid-caps) into that group as well. That puts them in very good position to continue the assault on the April highs.

NASDAQ and SP500 are just below their down trendlines, having given them back on Wednesday after punching through them Monday and Tuesday. They were unable to hold these levels. Both important indexes for the overall market�s move and they will have to recover the trendlines this week. SP500 has been a relative leader and is still in good position. Moreover, while the market managed a bounce Thursday, a lot of leaders were struggling. They will have to come around this week to move the market along toward the April highs.

Overall the market is still in good position to try the April highs as it continues the summer rally that has a follow through under its belt on this last move off of the May low. Once at the April highs the move becomes problematical. It would be in position for a real breakout and subsequent rally. With some of the signs of slowing economic activity we continue to believe that a continued rally through the summer is unlikely. The indexes may very well make a move through the April highs but we don�t think that move would be substantially above them or hold long; more of a peak to the next level and then faltering at some point around the July earnings.

This is our read on a more normal cycle this year as opposed to the 2003 run through the summer after 3 down years. It gives us more upside on this move to make some gains, and if it continues, so be it. If it falters we are going to be tight with positions and not take chances. We will still have upside opportunities even if it does falter in addition to some downside as the market fades in later summer on into September to set up a fall rebound.

Market Sentiment

VIX: 15.04; -0.35
VXN: 21.23; -1.12
VXO: 13.83; -0.93

Put/Call Ratio (CBOE): 1.15; +0.23

Rose on an up session. This indicator typically tracks opposite the market action. Given the change in the PPI date Wednesday and the long weekend there was a lot of hedging taking place once again. This is something we have seen during the past two months as the market sits on edge during the correction and is doing so even now as it moves higher to try the April highs after posting a follow through session to this rally. Still a lot of concern about the downside

NASDAQ

Tapped the 10 day EMA on the low and rebounded to close right at the high but below 2000 and the down trendline.

Stats: +9.26 points (+0.47%) to close at 1999.87
Volume: 1.356B (-11.31%). Second lowest volume of the year, both coming in the last month. Lots of low volume on NASDAQ as investors, while buying into technology on the rebound, are not lining up to put money into these stocks. Growth stocks need solid economic growth to expand, and with some softening in the yield curve and ECRI, they are showing some softening as well, not expanding on the upside move with much vigor.

Up Volume: 746M (+472M)
Down Volume: 586M (-657M)

A/D and Hi/Lo: Advancers led 1.04 to 1. Just about as flat as you can get.
Previous Session: Decliners led 2.77 to 1

New Highs: 40 (-24)
New Lows: 40 (+10)

The Chart: (Click to view the chart)

NASDAQ had pretty much filled the Monday gap higher, not surprising given the rather lackluster break higher. It has not given back the breakout and still has the follow through on this rebound under its belt. That is positive for the upside. It is still below the January/April down trendline at 2010 and just missed recapturing some minor (more psychological resistance) resistance at 2000. It did what it needed to do in response to the Wednesday distribution, i.e., held the breakout. That keeps it in the hunt this week to try another break over the down trendline and continue the summer move toward the April highs at 2060 t0 2080.

QQQ continued to outperform the overall NASDAQ, holding the breakout and the move over the January to April down trendline (36.40). Very low volume but it too responded well to the Wednesday distribution. The pattern is still a double bottom with handle, but over the past 10 weeks there is also something of a reverse head and shoulders. It is in good position to try the April high (37.50) and even a breakthrough on up to 38.50.

S&P 500/NYSE

As with NASDAQ, SP500 managed a low volume rebound from the Wednesday selling but still closed below the 2003 down trendline.

Stats: +5.14 points (+0.45%) to close at 1136.47
NYSE Volume: 1.165B (-8.52%). Volume dried up before the 3 day break after the rising volume, though still well below average, selling on Wednesday. Volume is still well below average; even though SP500 has rallied and delivered a follow through on some rising trade, overall there is still a real lack of conviction this summer. Volume will have to rise to take out the April highs.

Up Volume: 681M (+407M)
Down Volume: 451M (-527M)

A/D and Hi/Lo: Advancers led 1.27 to 1
Previous Session: Decliners led 2.98 to 1

New Highs: 49 (-40)
New Lows: 27 (+9)

The Chart: (Click to view the chart)

The large caps put a check on the Wednesday selling, rebounding to recover half the losses in a nice end to the week. The index tapped at the February/April down trendline (1137) three times intraday but could not retake it. It is banging right at that point as it easily held over 1125 support without coming close to testing that key level. Still poised for a test of 1150 (April high). After that it has a lot of heavy resistance from there to 1160 (1163 is the intraday high). It will have to find some additional strength to take out that level.

DJ30

Trying to exert some relative strength after lagging in a more ragged pattern during the correction. DJ30 held over the February/April down trendline (10,350) on the Wednesday selling and managed a bounce Thursday. Volume was lower, so there was no major upside strength, but holding that trendline gives the blue chips a decent launch pad to try for the April high (10,570). As with the other indexes the volume is lackluster, thus when it gets to 10,570, it will have a struggle on its hands unless there is a lot more trade on the upside.

Stats: +41.66 points (+0.4%) to close at 10410.1
Volume: 154 million shares Thursday versus 175 million shares Wednesday.

The Chart: (Click to view the chart)

THIS WEEK

Very interesting week ahead both from the economics to be released as well as how the market responds to the Wednesday heavier volume selling and Thursday rebound. As noted they are still set up to continue the move toward the April highs, particularly QQQ, DJ30, and the smaller caps.

The primary focus will most likely center on the PPI (to be released no earlier than 6-15) and the CPI. PPI prices have been rising, but the key as we have discussed is whether those increases are passed onto the consumer. Over the last 20 years there have been rises in the PPI that have never made it to the CPI, including times when oil prices spiked higher. The market really seems transfixed by what the Fed will do. Greenspan upped the ante last week with his address to the other central bankers, putting on a tough face to show them he meant business. That was in part for show and in part the same old Greenspan we know. The impact on the market is, despite the Fed�s disclaimers, along the lines of 1994. If the Fed moves in baby steps (our apologies to �What About Bob?�) to get to parity or just below with nominal rates, it has 4 to 6 rate hikes to go and it has not even started. Add onto that what we call the threat to increase the size of the hike if the Fed deems necessary, and you have the market wondering, rightly so, just what the Fed is going to do. It basically has said it will do what it has to, when it has to, and make its own timetable for doing so.

To us that leaves the question about as open as it can get even with the assurances there will not be another 1994. Well, look at 1994. NASDAQ lost 12.5% in the first few months of that correction that lasted 10 months. The current correction has taken NASDAQ down 13.5% and has lasted 4.5 months already. As noted, the Fed has not even started raising interest rates. With meetings in June, August, September, November and December remaining this year, the Fed would be up just 100 basis points by November if it goes slow and steady. That most likely would not be an end to the hiking, but it would be another 5 months, making 10 months since the correction started. Assuming the market stays in limbo as it did in 1994 until the Fed said it was done, we don�t see any difference from 1994 regardless of Fed soothsaying.

As always, the market is the final arbiter of the economic data. There are some signs of potential slowing reflected in the bond market and some leading indicators, and NASDAQ with its growth stocks started to lag some last week. At the same time other areas started to improve as noted. The market still has its follow through and its break higher intact, and we look for it to continue the move to the April highs regardless of concern about the Fed and some signs of potential economic slowing. The 1994 move saw its ups and downs in a range before it made the break higher; a move up to the April highs and a bit beyond would be no different.

Support and Resistance

NASDAQ: Closed at 1999.87
- Resistance: 2000 is the top of the late 2003 base. 2012 the January/April down trendline. 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: 1990 is the lower end of the range of the tops of the late 2003 base. The 50 day SMA (1980) and the 50 day EMA (1974). The 200 day SMA (1966). 1900 to 1890. The April lows (1880, 1878).

S&P 500: Closed at 1136.47
- Resistance: The March/April down trendline at 1137. 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: 1125. The 50 day SMA (1120) and the 50 day EMA (1118). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1090).

Dow: Closed at 10,410.10
- Resistance: 10,478 (late April highs). 10,512 (late April high); 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
- Support: The January/April down trendline (10,345). The 50 day SMA (10,266). Price support at 10,250. The 50 day EMA (10,243). The 200 day SMA (10,101). March low (10,007). 9900-9850.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the �Economy� section.

June 14
- Trade Balance, Apr (08:30): -$45.0B expected and -$46.0B prior
- Retail Sales, May (08:30): 1.0% expected and -0.5% prior
- Retail Sales ex-auto, May (08:30): 0.4% expected and -0.1% prior

June 15
- PPI, May (8:30): DELAYED 0.6% expected and 0.7% prior
- Core PPI, May (8:30): DELAYED 0.2% expected and 0.2% prior
- Business Inventories, Apr (08:30): 0.5% expected and 0.7% prior
- CPI, May (08:30): 0.4% expected and 0.2% prior
- Core CPI, May (08:30): 0.2% expected and 0.3% prior
- New York Empire State Index, June (08:30): 28.5 expected and 30.2 prior
- Michigan Sentiment-Prel., June (09:45): 91.0 expected and 90.2 prior

June 16
- Housing Starts, May (08:30): 1950K expected and 1969K prior
- Building Permits, May (08:30): 1965K expected and 2006K prior
- Industrial Production, May (09:15): 0.6% expected and 0.8% prior
- Capacity Utilization, May (09:15): 77.3% expected and 76.9% prior
- Fed Beige Book (14:00)

June 17
- Initial Claims, 06/12 (08:30): 330K expected and 352K prior
- Leading Indicators, May (10:00): 0.4% expected and 0.1% prior
- Philadelphia Fed, June (12:00): 25.0 expected and 23.8 prior

June 18
- Current Account, Q1 (08:30): -$139.6B expected and -$127.5B prior

[ReturntoSender]

U.S. stocks fell on concern government reports this week may show inflation is accelerating, prompting the Federal Reserve to raise interest rates more quickly than some investors had forecast. Shares of raw-material suppliers, banks and technology companies, all of which are hurt the most by slowing economic growth, led the drop. The Standard & Poor's 500 Index lost 11 points (-1%) to 1125.29. All 10 industry groups retreated. The DJIA fell 75 points (-0.7%) to 10,334. Both benchmarks had their biggest decline in almost a month. The Nasdaq shed 29 points (-1.5%) to 1969. Almost five stocks declined for every one that advanced on the New York Stock Exchange. Some 1.18 billion shares changed hands on the Big Board, 18 percent less than the three-month daily average.

Strong Sectors: none
Weak Sectors: internet, networking, semiconductor, software, telecom, disk drive, REIT, gold, transportation, banking, broker/dealer, housing, cyclical, retail

Top Stories . . . The U.S. trade deficit unexpectedly widened in April to an all-time high of $48.3 billion as the nation imported a record number of cars and consumer goods.

The dollar declined against the euro after the U.S. trade deficit unexpectedly widened.

MGM Mirage raised its offer for Mandalay Resort Group to $4.8 billion to become the world's largest casino company after Mandalay rejected a bid last week.

QLT Inc., maker of the Visudyne drug for an age-related eye disorder, agreed to buy Atrix Laboratories Inc. for about $855 million in stock and cash to add products for prostate cancer and acne.

Boeing., the second-biggest U.S. defense contractor, beat Lockheed Martin Corp. for a contract worth as much as $3.8 billion to replace the U.S. Navy's fleet of Lockheed-built submarine-hunting planes, U.S. Representative Norman Dicks said.

Halliburton, the world's largest oilfield-services company, was ``properly awarded'' its open- ended contract to repair the Iraqi oil infrastructure, the U.S. General Accounting Office concluded in a report issued today.

Quotes of Note . . . ``You're getting the impression that the rate hikes coming are not as benign as the market expects. Any sign of higher-than-expected core inflation is going to stump the markets.'' Russ Koesterich, equity strategist at Boston-based State Street Global Markets.

Gurus . . . CBS Market Watch says economist Stephen Stanley of RBS Greenwich came in first in their month-to-month forecasting derby. Having won in May, Stanley says the surprise in the June report will be the May Consumer Price Index, which will prove benign on a core basis. He envisions a rather tame 0.1% for May core inflation.

Market timer and radio personality Bob Brinker says the big money was made off his buy signal of March 11, 2003. Right now, he is inclined to buy on dips, and would step up, if the S&P were to fall below 1100.

And, the blue chip economic forecast now expects full-year GDP growth of 4.7%, up from 4.6% forecast a month ago, and the best performance since 1984. The forecast for 2005 dipped to 3.7%, down 0.1% from the month ago projection. Panelists expect Fed funds will be 75-to-100 basis points higher by early 2005.

The WSJ reports that in a strategy shift, an increasing number of small-stock money managers are adopting a more defensive approach, because they believe that the headwinds they face on the domestic and geopolitical fronts won't abate soon. "You don't want to get whipsawed as the uncertainty continues," said Carolie Burroughs, portfolio manager at ING Investment Management. Ms. Burroughs and other money managers cite a litany of challenges. Interest-rate increases, more turmoil in Iraq, continued fluctuation in oil prices, upticks in inflation and election uncertainty are among their major concerns. Ms. Burroughs is keeping more money on the sidelines in cash and reviewing her portfolio to weed out company's that may see their profits crimped by continued upheaval. Stocks that she is sticking with include MTS Systems, Central Garden & Pet and THQ. "We've begun stepping down our risk profile," said Fred Siegel, president of Siegel Group. "Value stocks tend to make it through uncertain periods better than growth." Stocks that Mr. Siegel likes include Charming Shoppes, LifePoint Hospitals and Coinstar.

Barron's highlights Robert Olstein, a portfolio manager of the Olstein Financial Alert Fund, for his stock picks. Mr Olstein's fund has notched a 5-year annualized return of 10.81%, besting the S&P 500 by 12.07 percentage points. That put it in the top 20% of Morningstar's mid-cap blend category. This year, the portfolio is up 4.46%, roughly 1.5 percentage points more than the S&P. The portfolio's recent purchases include Merck, Pfizer and Johnson & Johnson. He argues that Pfizer, now at 35 and change, should be in the low 40s; Merck, currently at 47.38, somewhere in the mid-50s, and J&J, now at 57.15, in the low 60s. He maintains that all three will be helped by the new Medicare prescription-drug program. Another stock that Olstein holds is Walt Disney (DIS), whose chief executive, Michael Eisner, he credits with steering the company onto the right path -- past mistakes notwithstanding. "If they can turn ABC [television] around, this stock is going to 30 to 35."

Barron's interviews Peter Siris, a co-founder of Guerrilla Capital Management and a manager of Guerrilla Partners Fund. The smallish hedge fund, totaling $20 mln, has done very well, rising 93% after fees since its inception in June 2000, including a gain of 61% in 2003. So far this year it's up 12.8%. Mr. Sirin likes auto-dealers, such as United Auto Group, Lithia Motors, Asbury Automotive Group, Sonic Automotive, AutoNation and CarMax. Mr Sirin also likes Bon-Ton Stores, despite being covered by zero analysts, even though it has $1.4 bln in sales. However the market cap is small, only $220 million. It trades for about 15 cents on the dollar of sales and under book value. One problem is that management won't talk to anybody. Bon-Ton should earn about $1.40 this year, including a lot of integration costs. Next year, it should do $2.10 to $2.40 a share. If this co makes $2.40, it will bypass the 20's quickly and go over $30 because everybody will be calling it a growth co. Ultimately, one of the big chains is going to buy Bon-Ton, says Mr Sirin. Other stocks mentioned positively include: Paxson Comm., Lions Gate Entertainment and Hartville Group. The fund manager's shorts include: P.F. Chang's China Bistro, The Cheesecake Factory, Panera Bread, Taser International, Ivanhoe Energ, Netflix and the airline industry.

The SmartMoney's Pro Shop interviews Mary Lisanti, a president of AH Lisanti Capital Growth and a portfolio manager of the recently founded Adams Harkness Small Cap Growth fund. Ms Lisanti currently owns Andrx, saying "I wouldn't sell it until it gets to $3 bln. If you look at Andrx, what's you've got is a turnaround with very strong earnings growth going forward. It has 2 to 3 years of 40% plus earnings growth." The fund manager also likes Cepheid, highlighting the company's very unique medical diagnostic product that detects anthrax. Cepheid has $72 million in cash and short-term investments and no debt, so it has enough money to get to break-even. And once it gets to break-even, it's going to be an incredibly consistent business model. Finally Ms Lisanti likes Children's Place, saying that it's not so much the comp numbers that matter with Children's Place, but more important is the fact that for the past 2 years it gave away its product for a 30% discount. Two years ago it was doing 13 sets a year, which meant that it was changing the product every month. The children's market doesn't need that, it's not the teen market. So now the co is changing sets four times a year and also stopped discounting.

Political Investing. . . The WSJ reports that big multinational pharma and tech companies are salivating over a provision in a pending tax bill that would permit them to bring home profits earned abroad without incurring big U.S. taxes. A provision in the bill wending its way through Congress allows American companies with foreign operations to "repatriate" earnings the company's have been permanently holding overseas, at a tax rate of 5.25%. At the current tax rate of 35%, company's have had little incentive to bring foreign earnings into the U.S. Among the biggest winners would be drug company's such as Pfizer, which has $38 billion in accumulated foreign earnings that would be eligible for the lower tax rate if brought into the U.S. Hewlett-Packard, has $14.4 billion, and General Motors $11.6 billion, according to the company's latest annual filings. In total, an estimated $650 billion is available for so-called repatriation if the legislation becomes law, according to J.P. Morgan Chase Bank. "Literally, it's a sort of windfall," said Robert Willens, tax and accounting analyst at Lehman Brothers. "I can't recall something like this ever happening before, where company's were able to tap into this great source of resources on such a low-cost basis."

Insider Selling . . . Barron's discusses insider selling, which accounted for $3.3 billion in May, versus $159 million for purchases. According to the article, insiders always sell more stock than they buy, in aggregate, but the ratio of sales to purchases often signals opportunity or danger in the overall market or particular stocks. That ratio of more than $20 in sales for every dollar of stock bought is well below the average sell/buy ratio of the past year. Selling swamped buying by a nearly unprecedented margin at times last year and in early 2004. As recently as Feb, the sell/buy ratio was 54 to 1. Yet the current reading is lofty, and thus bearish, by historical standards. Muzea Advisors tracks the number of co's at which insiders are net buyers and net sellers. Between May 10 and May 24, there was insider selling at 394 company's and buying at 454, for a ratio of 0.87. Any- time stocks being sold are outnumbered by those undergoing accumulation by insiders, it's a positive sign, excellent buy signals have come when that ratio is below 0.7. Yet the firm's founder, George Muzea, points out that with the rebound in the indexes in the past 3 weeks, insiders have already started selling much more forcefully. Company's at which they were selling ramped to 536 from May 25 through Tuesday, versus 219 on the buy side, for a high 2.4 ratio. Mr Muzea says the recent shift toward buying on the dips was noteworthy, but not dramatic enough to generate "an aggressive buy signal." But for now, the broad indicators of insider behavior are in neutral territory, offering no sharp edge on the direction of the market at large. One intriguing transaction was Donald Keough's purchase of $2 mln worth of Berkshire Hathaway A (BRKA) shares on May 12. This buy, at prices just under the recent $89K quote, is the largest ever by a Berkshire insider. Other insider buys include Ball (BLL), General Growth Properties (GGP), Aon (AOC), Airgas (ARG) and Level 3 Comm. (LVLT). In addition, the article notes Charming Shoppers (CHRS) had seven insiders sell stock for a combined $10.9 million.

Market Comment . . . Durable expansion, mild inflation. The global expansion is accelerating and should last several years. U.S. inflation is a key variable, because it will influence whether the Fed’s rate hikes are measured or hurried. Based on the current level of the dollar, we expect inflation to be mild but persistent and rate hikes to be within current market expectations.

Regime Shift. We note a major regime shift in U.S. monetary policy following 9/11. The 20-year strong-dollar disinflation/deflation process stopped. It was replaced by lower nominal and real interest rates, a weaker dollar, higher commodity prices, improved prospects for growth outside the U.S., and Japan’s exit from deflation. The change will lead to higher optimal inventory levels and larger balance sheets. Multi-year rate hikes. Interest rates in the U.S., Europe, Japan and China will likely rise toward neutral in a multi-year, mildly inflationary process mirroring the disinflation of the 1990s. Bond yields should seesaw upward in coming years, continuing the pattern started in 2003.

Global demand growth. Everyone is seeing a global shift toward faster total demand growth. It is characterized by consumer demand abroad and corporate demand in the U.S. The focus of growth in the U.S. is evolving constructively toward business investment, inventory rebuilding, and job growth.

Expensive oil. Oil prices approached new highs in dollar terms, but part of that strength was in response to dollar weakness. Relative to gold and other commodities, oil prices are well below the late 2000 record high that contributed to the 2001 recession. The drag from expensive oil will increase over time, but is being offset by the benefits from exiting a deflation and strong macro stimulus.

Many aspects of the expansion are working out as we expected, and we haven’t changed views much.

• U.S. growth has remained strong, tending toward acceleration rather than slowdown. The second half may be stronger than the first. Inflation, not deflation, is the bigger risk. Job growth in the establishment survey picked up when business confidence did.

• World nominal dollar GDP should reach $36.5 trillion in 2004, up 10.4% in 2004 and 11.8% in 2003. This provides a strong platform for corporate dollar profits. Rather than rolling over, real global growth is accelerating along with the U.S.

• U.S. interest rates are likely to start rising in June at a measured pace. Bond yields and interest rate expectations rose only after the Fed sent signals, confirming that the Fed is the 800-pound gorilla, not growth and inflation expectations.

• The order of first central bank rate hikes is on track with our expectations – UK, US, ECB, BOJ. China’s first hike should come later in 2004, perhaps near the time of the first ECB hike.

• China’s currency remains stable, as expected. China is continuing to grow fast, aided by currency stability, market liberalization, consumer gains, rural development and foreign investment. We think recent regulatory changes are constructive, adding to China’s long-term growth potential.

• Japan’s growth is shifting toward the consumer and is even stronger than we expected. Domestic demand in the eurozone is beginning to pick up, in line with our “half-the-U.S.” growth rate expectations.

Versus consensus, we no longer have sharp differences in terms of growth, inflation, Fed behavior, interest rates, or market prices.

Economists were surprised by the extent of the “free lunch” overshoot in late 2003 and early 2004, which led to the March-April reversal when the Fed set the stage for rate hikes.

• The out-of-consensus views that measured interest rate hikes won’t have much negative economic

impact, the U.S. consumer is not the weak link, China won’t land hard, the yen will strengthen relative to the euro and dollar, and money supply growth rates, fiscal deficits and trade deficits don’t give much insight.

• The U.S. presidential election will weigh on equity markets to the extent that it creates uncertainty in the outlook. Tax rates will be a key market litmus test, but either candidate may have difficulty changing current law given the divided Senate. Without hard-to-pass new legislation, key tax cuts are scheduled to expire in 2008 and 2010. If that becomes likely, the economic outlook and equity prices will be negatively affected, reversing some of the strong post-tax cut gains of mid-2003.

Financials . . . JP Morgan upgrades XL Capital to Overweight from Neutral, saying the current valuation underestimates the true earnings power of this well-diversified global underwriter; firm anticipates solid multi-year financial outperformance, and believes that the co stands to benefit from market share gains, its recovering balance sheet, and underwriting discipline.

Freddie Mac seems somewhat optimistic about its ability to find attractive purchase opportunities as interest rates rise, but doesn't expect significant bank selling as in past rising rate periods. Debt performance has benefited from reductions in issuance as a result of no portfolio growth. It is unclear how much a significant increase in debt issuance would affect spreads when portfolio growth picks up. Credit performance should continue to be very good, reflecting rising home values, a low average portfolio LTV and the use of credit enhancements. The company has undertaken a review of Alt A/non-prime lending that could limit its appetite for some lenders' production. The company is likely to release its response to HUD's new affordable housing proposal shortly. Meeting the June 30 goal for release of 2003 financials still seems possible, but so does a delay of a few days or weeks. While significant increases in accounting staffing have been positive, the company's systems and infrastructure apparently still aren't adequate to facilitate the timely production of financial statements.

Oil & Gas . . . Merrill Lynch downgrades Anadarko Petro to Neutral from Buy for the following reasons: 1) no added stock upside near-term from the company's comprehensive operations strategy, 2) large project timing risk issues remain, 3) its restructuring is dilutive, as plans of selling 15% of its 2003 proven reserves drops pro-forma 2004 production by 25%, 4) company's new 5-9% annual production growth target for 2005-09 is predicated upon a smaller production base.

Metals . . . JP Morgan upgrades Anglo American to Neutral from Underweight based on their belief that the stock's relative valuation offers better value than Rio Tinto, and that the company's defensive nature of its portfolio is likely to become more interesting to investors in the near-term.

Barron's discusses metal and other materials market, which looks strong in the long term. Steven Leuthold, who runs the money management arm of institutional brokerage Weeden & Co, holds a sizable position in metals. Mr Leuthold has amassed tens of millions of dollars' worth of ingots of silver, palladium, copper, aluminum and other metals, and stored them all in his or his firm's name in metals warehouses across the country. The article suggests that you don't have to fill a warehouse with metals to participate in commodities. Frank Holmes, chief investment officer of US Global Investors, had accumulated a 20% cash position in the fund family's Global Resource Fund as of early April, but he has since invested nearly half of that in commodities-related stock like China's Jiangxi Copper and Aluminum Corp. of China (ACH). This year's selloff, which cut stock prices in half, has doubled dividend yields on these stocks, he says, while P/E ratios are well below growth rates, often a sign of value. The commodities market has always attracted more than its fair share of ardent supporters. But the new breed of commodities bulls is different and has added a measure of stability. Their ranks include Warren Buffett, who once publicly disparaged commodities stocks but whose holding co, Berkshire Hathaway, has become one of the biggest energy pipeline co's in the Western U.S. in the last 2 years, thanks to a buying spree of discounted assets in the wake of Enron's bankruptcy. Energy is a favorite for many. Environmental and geopolitical concerns have restricted new drilling and accessible reserves are being depleted. Jay Sellick, senior analyst at 13D Research suggests investing in energy service stocks like GlobalSantaFe (GSF) and Weatherford International (WFT). Meanwhile, Mr Holmes trolls through Canadian and British stock markets in search of small mining co's that offer pure plays, such as South African Resources and Canada's Northern Orion Resources (NTO), a gold and copper producer.

Defense & Aerospace . . . Interactive Pictures announced that it has been asked to meet with Olympics organizers directly following the G8 summit regarding the Summer Games in Athens, Greece. IPIX says it has launched shipment of its security cameras to paying customers with 400 orders placed since the April 2004 launch.

Morgan Keegan comments that negative publicity continues for TASER, possibly weighing on results In early June, two in-custody suspects in the Atlanta area died after being subdued with a TASER weapon. The two incidents happened within the same week, and reports indicate that this is the third death since last September by someone who has been shot with a TASER. In addition, on April 25, 2004, Macon (GA) police suspended use of TASERs following the death of two inmates shocked by the weapon; the TASER has not been cited as the cause of death in either incident. Morgan Keegan lowering FY04 est to $0.54 from $0.59 and FY05 to $0.73 from $0.87.

Look for Homeland Security plays to find a bid this morning following a 60 Minutes segment last night discussing lax security at the nation's chemical plants. In the headline story entiltled U.S. Plants: Open To Terrorists, reporter Steve Kroft points out that although the government has enacted laws to tighten security at airports, nuclear power plants, and places where public water supplies are stored, there are approx. 15,000 chemical facilities across the country that are not regulated. In one portion of the story, 60 Minutes walked into a chemical plant outside Pittsburgh through an open gate and walked around for 15 minutes undetected. The reporters were able to walk up to the most dangerous chemicals in the plant -- chemicals that, if blown up, were said could have injured all of Pittsburgh. 60 Minutes also visited a plant just outside New York City with Sen. Jon Corzine, D-N.J., who says there's very little security at this plant. "You know, looks to me like you could drive a truck through some of these fences if you wanted to pretty quickly." According to Corzine, 12 million people the population living within a 14-mile radius of the plant that could be affected if a cloud of chlorine gas was released. A reporter corresponding with 60 Minutes claims to have walked into a plant in Chicago, and set on a chemical tank. "I found almost non-existent security in a lot of places," says Prine, who visited 60 plants all over the country, including the Chicago, Baltimore, Pittsburgh, Pittsburgh and Houston area. "I walked right up to the tanks. There was one plant in Chicago, I simply sat on top of the tank and waved "Hello, I'm on your tank."... see story. Look for action in video surveillance plays such as IPIX, Image Sensing, Digital Recorders and Mace Securities on this extremely strongly worded report, that is very likely to have ramifications on Capital Hill. Also look for interest in perimeter security systems and a video motion-detection system provider Magal Security Systems.

LoJack announced an Anti-Terrorism Program in which the company will offer discounted rates on its Stolen Vehicle Recovery Systems to companies whose fleets haul hazardous materials. The program, which was announced here at the National Cargo Security Council's 2004 Annual Conference, was developed in light of the June 1 event involving two propane tankers that were originally feared to be stolen for terrorist purposes, but later found to have no connection to terrorism.

Transports . . . Barron's highlights BorgWarner, which is likely to drive home an earnings increase of 11% to 14% this year, as the company's international expansion bears fruit. CEO Timothy Manganello jokes that his passport has grown a half-inch fatter in the past two years, reflecting his frequent visits to Asia, where the co is building a parts-making "campus" in South Korea and ramping up production in China. BorgWarner also has become a pacesetter at home, with a new engine technology. BorgWarner got off to a good start this year, reporting a 10% gain in profits for the Q1. Results were enhanced by rising demand for the company's fuel-efficient engine technology in Europe, and four-wheel-drive systems in North America. "We saw improvements in all our major operating areas," Mr Manganello said in the quarterly report. BorgWarner's new DualTronic system has been a particularly good seller. Competitors face a two-to-three-year struggle to match the company's advances, which some experts say have produced the best hybrid shifter available. Offered in some European cars now, it will be marketed around the globe. BorgWarner has estimated it will post earnings per share of $3.55 to $3.65 this year, compared with $3.20 on sales of $3.1 bn in 2003. While the co doesn't give specific estimates beyond a year, Mr. Manganello believes BorgWarner is on track to meet its long-range growth targets of 8% to 11% in sales and 12% to 16% in profits.

Barron's highlights Winnebago Industries, saying that the co's shares look like a bargain. The baby-boomer generation is a fat demographic bulge slowly passing through the belly of American consumerism. About 11,500 people turn 50 every day, more than 4 mln annually for the next several years. That will drive up demand for dentures, hip replacements and, increasingly, for recreational vehicles (RV), too. The well-off among the over-50 crowd are far and away the prime purchasers of those seemingly ubiquitous, big RVs chugging along America's highways these days. These folks are also the fastest-growing portion of the population, and as a group they define a powerful, positive factor for Winnebago. With a story like that, and with its shares down significantly, Winnebago represents good value to investors who are in for the long haul. If oil prices stabilize and interest rates rise at only a "measured" pace, as the FED has indicated they will unless inflation really spikes, investors could see the shares rise 15% to 30% over the next 18 months. When it comes to gasoline prices, "the reality is fundamentally different from the sentiment shifts we've seen [on Winnebago] in the last 4 to 6 months," argues Jason Schrotberger, a portfolio manager at Turner Investments. And, he adds, that reality isn't going to deter anyone from buying a RV. An owner drives a motor home, on average, about 7K to 8K miles a year, so a rise of 40 cents a gallon rise in gasoline prices would boost costs about $300 to $400 a year. That isn't likely to have much influence on the decision of anyone ready to spend $50K or much more on a big RV. At their close Thursday, Winnebago shares were trading at less than 14x Wall St's $2.12.-a-share consensus earnings est for F05, a significant discount to the overall stock market's 16 to 17 multiple for 2005 and much lower than the co's historic ROE. The co has a strong balance sheet, with no long-term debt. And it should see double-digit earnings growth over the next few years. Money manager Bob Straus of Icon Advisors notes that Winnebago's ROE topped 20% in its 1999-2003 FY's, quite unusual for a co generally viewed as cyclical. "That suggests management is doing an excellent job of using capital efficiently, keeping costs low and getting the most bang for the buck for shareholders," he observes.

Restaurants . . . RBC Capital upgrades PF Chang's to Outperform from Sector Perform, saying the stock's valuation and their expectation for strong long-term fundamentals create an attractive investment opportunity. Target is $60, and firm recommends taking advantage of price weakness and initiate/build positions at $43 and below.

Healthcare . . . Wachovia downgrades Express Scripts to Market Perform from Outperform based on valuation, as the stock now trades at 20.1x their 2004 EPS estimate, versus its historic median forward multiple of 18.2x; also, to meet the high end of its 2004 EPS growth guidance the co must accelerate profit growth significantly, yet given the slow uptake in Medicare discount drug cards and initial troubles with the Tricare retail contract launch, firm is no longer comfortable with estimates at the high end of the guidance range.

Piper Jaffray believes recent press reports related to a potential government global settlement could be a near-term positive for Tenet Healthcare. As reported last week by the LA Times, THC is supposedly in talks to settle various elements of its federal investigations, with the newspaper speculating on a settlement figure of "more than $1 billion." The firm suspects that the co is, in fact, moving more clearly towards a global settlement, the size of which is difficult to predict.

QLTI agreed to acquire Atrix's common stock for approximately $855 million in stock and cash, taking a significant step toward becoming a fully-integrated, biopharmaceutical company. In the transaction Atrix shareholders will receive one common share of QLTI and $14.61 in cash for each share of Atrix common stock. The transaction offer value is approximately $855 million and the transaction value net of Atrix's cash is $751 million. Atrix shareholders will own approximately 23% of the combined entity and QLTI shareholders will own approximately 77%.

Drugs . . . The WSJ reports that GlaxoSmithKlein suffered another setback when the FDA rebuked the drug maker for "false or misleading" television advertising for the antidepressant Paxil CR. In a letter to Glaxo officials Friday, the FDA criticized a 60-second consumer TV ad for wrongly suggesting Paxil CR can treat too broad a range of conditions and exaggerating the drug's safety. The agency ordered Glaxo to pull the ad immediately and cease from any similar advertising for Paxil CR, which is licensed to treat ailments including depression and social-anxiety disorder.

Barron's cover highlights statin drug makers, which sales surpassed $15 billion last year. The cholesterol-fighting power of products like Pfizer's Lipitor and Merck's Zocor have won them the title "superstatins" and made them supersellers. In 2003 Lipitor sales was the biggest prescription drug in the world, but within 2 years, the superstatins will bump into an age-old nemesis: price competition brought on by expiring patents. New entrants will crowd this slow-growth market, and trigger a price war. AstraZeneca already prices its statin, Crestor, 15% to 20% below Lipitor. Crestor's market-share gains may slow, after European regulators advised doctors last week to beware of side effects when prescribing the drug's highest dose. But in a few months, the FDA will likely approve a powerful new cholesterol fighter that should cause few safety worries - Vytorin. By combining Merck's Zocor with Schering-Plough's drug Zetia, Vytorin can cut LDL levels at least as effectively as Lipitor. But it works two ways: its Zocor ingredient curbs cholesterol production in the liver, while its Zetia ingredient blocks absorption of cholesterol from foods in the intestine. Both ingredients already have good safety records, so Vytorin may appeal to doctors who want to aggressively reduce low-density lipoprotein levels without an aggressive dose of statins. The FDA is reviewing Vytorin now, and will probably approve the drug before August. "We believe that Vytorin can compete with all statins in the marketplace, including Lipitor and Zocor," says Adam H. Schechter, general manager of the Merck/Schering-Plough venture. "We're planning to support it as we would support a blockbuster product." Morgan Stanley analyst Jami Rubin agrees that Vytorin will become a blockbuster. In an April note, she predicted sales of $1 billion for Vytorin's first year. While Merck may lose Zocor sales if Vytorin becomes that big, Schering's piece of that action would yield more than $300 mln in operating income, according to Rubin's calculation, or about 17 cents a share, after tax. Vytorin is the key to Schering-Plough's ability to reach consensus EPS ests of 10 cents in 2004 and 32 cents in 2005.

Biotech . . . Array Biopharma initiated a Phase I clinical trial for its small molecule anticancer compound, ARRY-142886 (AZD6244). The company partnered co-development and commercialization of this compound with AstraZeneca PLC in Dec. 2003 and is entitled to a $4 million milestone payment for initiating the trial. Co may receive additional development and commercialization milestones of over $81 million (dependent upon number of successfully commercialized products) and royalties on product sales.

Xenova Group announced today the presentation of results of two dose escalation Phase II studies of TA-CD, a vaccine being developed for the treatment of cocaine addiction, at the College on Problems of Drug Dependence 66th Annual Scientific Meeting in Puerto Rico. "These very encouraging results give a strong indication of proof of concept for the TA-CD cocaine vaccine and further validate its potential in assisting cocaine addicts to achieve abstinence."

Billionaire investor Carl Icahn has cut his stake in ImClone Systems Inc. below the 5 percent reporting threshold, according to a regulatory filing on Monday. Icahn disclosed that he now owns 3,656,399 shares of ImClone, or 4.8 percent of the total outstanding, crossing below the 5 percent level that requires a stockholder to file with the Securities and Exchange Commission when a change occurs in his holdings. Icahn has traded in and out of ImClone for more than a decade since the company was founded. He recently built up his stake in the biotechnology company, known for an insider trading scandal that resulted in criminal charges against its founder and Martha Stewart. In March, Icahn announced that he held a 6.9 percent stake in the company when it was trading at about $43 per share. In April, the company got a boost when U.S. regulators approved its long-delayed drug Erbitux as a treatment for colon cancer.

Media . . . XM launched nationwide in November 2001, reached 1 million customers in October 2003, and eight months later has topped 2 million. "The second million is even sweeter than the first," said Hugh Panero, CEO of XM Satellite Radio. "It took us almost two years to reach 1 million subscribers, and only eight months to double that figure. With more than 200 million vehicles on the road and 100 million households, we've just begun to scratch the surface of our market. Our rapid growth in both the retail and automotive markets puts us on our path to reach 20 million subscribers by 2010."

Bear Stearns reiterates its Outperform and $30 target on XM Satellite Radio. The firm believes that fundamentals remain strong for satellite radio, and in particular for XMSR. Several factors may have contributed to the narrow band that XM shares have recently traded within including: 1.) the general market decline 2.) anticipation of XM raising its year end sub guidance and 3.) a search for near term catalysts. The firm's channel checks indicate that sales continue strong with portable devices gaining popularity. WalMart is also ramping up sales. Several near term catalysts could include 1.) the announcement of 2 million subs 2.) Toyota OEM deal 3.) partnership with DirecTV 4.) new products with new advanced chipsets and 5.) an increase in year end guidance.

Thomas Weisel says Pixar's earnings power could double or triple in 2007. Beginning with the film in 2006, the firm expects Pixar to retain 100% of its film rights and profits, and pay a below-average fee for distribution. Assuming box office and downstream revenues comparable to Finding Nemo, Pixar's EPS could triple to more than $4.50 in 2007 with free cash flow of more than $6 per share. The stock has modestly underperformed the S&P 500 year to date, reflecting the lull between film releases. The firm says the stock is most attractive during these "lulls" between films. The Incredibles (to be released Nov 5) is nearing completion and the film has tracked better than any other Pixar release to date, especially among teenagers.

The FT reports that Apple and Napster are announcing this week separate initiatives to expand their distribution services internationally. Apple is expected to launch its popular internet music store in Europe Monday, in an attempt to build on the company's considerable success in the US online music market. Napster, a subsidiary of Roxio, will unveil a partnership with NTL to offer music subscriptions to the UK cable group's 1m broadband customers. The two initiatives follow agreement with music publishers over complex distribution rights in Europe. Apple, whose iTunes store and iPod digital music player have all but defined the US internet music market, has scheduled a press conference in London Monday, claiming "the biggest story in music is about to get bigger". One person in the industry said Steve Jobs, Apple's CEO, was expected to be on hand to announce Apple's music store would immediately be available to consumers in the UK, Germany and France. Mr Jobs was also expected to announce plans to eventually roll out the service to other European countries. "There's clearly been a lot of pent up demand for it. I think it will have a pretty good reception," said the person.

Hotel & Leisure . . . The WSJ reports, citing people close to the situation, that Mandalay Resort is weighing acceleration of a plan to more quickly build its next megaresort on the Las Vegas Strip. Mandalay Friday rejected MGM Mirage's takeover offer, in which MGM Mirage demanded that it be given 15 months to close the deal, with the option of canceling it with a $100 million breakup fee, according to people close to the discussions. Mandalay complained that takeover terms would mean the co could be frozen in time for more than a year. Despite Mandalay's rejection of the initial bid, some people close to the talks wouldn't rule out the possibility of resumed negotiations. According to the article, over the weekend, there were indications of attempts to rekindle the talks.

JP Morgan upgrades Host Marriott to Overweight from Neutral and adds the stock to their Focus List, citing the following factors: 1) pricing trends in the lodging industry are far stronger than consensus expectations, 2) their belief that we are just in the early stages of a recovery in independent business travel and corporate group demand, 3) their belief that street estimates will increase, and 4) HMT has traded between 15-20x forward FFO during periods of rising RevPAR and operating profits, and firm says a reasonable multiple of 14x forward FFO of $1.30 yields a price target of $17.50, over 40% above current levels.

JP Morgan upgrades Marriott to Overweight from Neutral based on their belief that the stock will meaningfully outperform other lodging names due to strong industry fundamentals, above average unit growth, incentive mgmt fee growth, and real free cash flow. Firm raises their 2004-05 EPS estimates above consensus.

Telecom . . . The WSJ's "Heard on the Street" column highlights MCI as a buyout target. At an investor conference 2 years ago, Verizon Chairman and CEO Ivan Seidenberg joked that WorldCom stock might become so cheap he would consider buying it for fun. With the stock cap of what is now named MCI languishing at around $4.6 billion, some investors are ready for the fun to begin. Prospective buyers like BellSouth , Sprint and SBC Comm. have done some preliminary sniffing around, according to the article, though no deal is currently in the works. The Bush administration's decision last week to side with local phone giants in a regulatory fight could make MCI an even juicier buyout target.

CSFB upgrades Sprint FON to Outperform from Neutral based on valuation as well as their growing comfort that the company is making the right moves to limit potential downside related to its long distance exposure.

IT Service . . . The WSJ reports that IBM said it is launching a wide-ranging program in Brazil to sell Linux-based systems for corporate employees, as an alternative to products using Microsoft's Windows software. The Brazilian effort marks the start of a broader push by IBM to expand the use of open-source software in the developing world. IBM sees these less-developed markets as ripe for an alternative to Microsoft, because many customers are still using paper-based processes and have yet to commit to any computer system. IBM has been a big booster of Linux since 2000, viewing open-source programs as a way for its consultants to sell more of Big Blue's hardware and software programs. The new program for Brazil standardizes the service in what IBM views as a large potential market. Peter Nielsen, director of Linux services strategy for IBM's global-services group said, "There's consistent customer demand [for Linux] in some emerging markets of which Brazil is the first." IBM is studying demand for such services in other emerging markets including China, India and Russia, he said.

Storage . . . Veritas sees 2nd quarter GAAP EPS of $0.21-0.23 on revenues of $490-505 million versus the consensus of $0.24 & $502 million respectively. The company says today's filing brings it into compliance with the SEC requirements for the filing of its periodic reports. The company expects its common stock to begin trading under the ticker symbol VRTS after NASDAQ completes its process to confirm that the company is in compliance with its listing requirements.

EMC hosted upbeat analyst meeting -- including more optimistic revenue outlook for 2004. Larger picture with EMC is that coming out of the IT market downturn, the company set and then delivered on its multiple targets -- lower-cost focus, product refreshes/expansion, assembling a broad portfolio with storage software acquisitions, channel expansion, and is positioned well to drive growth. The analyst meeting focus was on growth with EMC raising its 2004 revenue growth target from 25%+ to 30%. While there may be some concern about EMC stressing hitting 2004 numbers and not beating them, we came away bullish about EMC's growth prospects. Further, there are levers to drive upside to '05 EPS estimates -- mid-teens revenue growth, international growth/lower tax rate, share buybacks. EMC outlined initiatives in many areas with ILM (offering tape solutions, network based software, policy engines for greater automation, driving growth in best-of-breed and integrated software stack) and the Virtual Infrastructure

(VMware) as the back drop. As collateral impact, this bodes well for partner Dell and now ADIC in tape, and is a competitive negative for IBM and HPQ.

Semiconductor Equipment . . . JP Morgan adds ASML to their Focus list, citing the following factors: 1) their visit to ASML's facilities gives them renewed confidence in current business conditions, 2) the bill of materials for the Twinscan body will be further reduced by 25% in 2004, in addition to the earlier 25% reduction in 2003, 3) firm expects the value of backlog to rise materially in the June qtr with the inclusion of immersion tools, 4) the company's expected decision to enter into the LCD market in 3rd quarter, and 5) expected cash generation from low inventory of lenses and customers paying a portion of the price upfront. Target is $19.

Semiconductors . . . Smith Barney upgrades KEMET to Hold from Sell based on valuation, as the stock is now trading below their $14 target. Also, firm continues to believe that earnings have troughed, and improving order trends, rising capacity utilization, lengthening lead-times, and firming pricing are encouraging signals that the industry is on track for a sustainable recovery in margins and EPS.

Software . . . Jeffries upgrades Novell to Hold from Underperform and $9 target. Since Novell reported disappointing Q2 results on May 24, its stock has sold off by 21%. With the large sell-off, the stock has fallen below the firm's target. The stock's valuation is more reasonable and more appropriately reflects the execution challenges that face the company. The firm is still cautious overall, given the execution challenges of stemming NetWare losses and migrating customers to Linux.

Soundview cuts their target on Business Objects to $23 from $30, as contacts indicate that Crystal's business has continued to slow through Q2; specifically, firm has seen customers concerned over the execution of the new product road map and renewed interest in competitors' products; firm continues to see accelerating momentum at COGN and MSFT given successful new product rollouts, and while it is a bit premature to state Crystal is losing mkt share, firm has seen a number of Crystal customers look to demo new products while they get more comfortable with BOBJ integration strategies; in addition, while BOBJ's new 6.5 product is still on schedule for release at the end of Q2, they say it will likely come out in limited flavors and is unlikely to drive near-term sales. Maintains Neutral.

Symantec and AREVA's T&D division, announced partnership to provide "a comprehensive security solution that includes products, services and best practices for Supervisory Control And Data Acquisition systems in the electric power industry". Under terms, AREVA will resell Symantec for Electric Power solutions.

Morgan Stanley maintains their Overweight rating and $17 target on Oracle, as they think the pipeline remains strong, improved integrator relationships are beginning to pay off, and the channel feedback on the new low-end database product is encouraging. The firm also notes that the stock trades at 19x 2005 EPS, which represents a 10-year low. Merrill Lynch also reiterates their Buy rating on the stock ahead of tomorrow's 4th quarter report, saying their checks indicate that the qtr shaped up nicely as a typical 4th quarter, and as such they remain comfortable with their in-line estimates. The firm also believes the co will hit the mid-point or a touch better (10-12%) of the new license revenue guidance range of 5-15% annual growth.

Piper Jaffray expects Adobe Systems strong May Quarter results when the company reports Thursday. The firm expects Adobe to beat Street consensus and report in-line with its Street high estimates for 2nd quarter. The firm's confidence is based on CS trends and positive NPD data. Based on solid CS sales, stable Acrobat trends, and positive magazine ad revenue numbers, the firm believes Adobe will guide slightly above consensus for August Quarter.

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


--------------------------------------------------------------------------------

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

[ReturntoSender]

Amateur Investors Mid Week Market Analysis (6/15/04)

It has been really choppy the past few weeks with wild swings both to the downside and upside. Usually I show the chart of the S&P 500 Volatility Index (VIX) however today I'm going to show a chart of the Nasdaq Volatility Index (VXN). The VXN is approaching a value of 20 which has signaled a nearing top in the Nasdaq during the past 6 months (points A). If this pattern repeats itself again then we should be on the lookout for a potential top before much longer.



As far as the major averages the Dow is approaching a short term resistance area just below 10450 (point B). If the Dow can break above 10450 this could lead to a quick rally up to its April high near 10570 (point C). Meanwhile if the Dow stalls out near 10450 and reverses to the downside look for initial support near 10250 which is where its 50 Day EMA (blue line) and 100 Day EMA (green line) reside at.



The Nasdaq stalled out last week near its downward sloping trend line (solid black line) near 2025 but was able to hold support on Monday above 1960 which is a critical short term support area (point D). If the Nasdaq can rise back above its downward sloping trend line and clear the 2025 level then it could quickly rally up to the 2060 (point E) to 2080 (point F) range. Meanwhile if the Nasdaq is unable to clear the 2025 area and breaks below the key 1960 support level then look for a quick drop back to its 200 Day EMA (purple line) near 1925.



The S&P 500 has a short term resistance area just above 1140 (point G) and if it breaks above this level look for a quick move up to its April high just above 1150 (point H) or its March high around 1162 (point I). Meanwhile if the S&P 500 stalls out near 1140 and breaks below its 100 Day EMA (green line) just below 1115 then look for a drop back to its 200 Day EMA (purple line) near 1088.



As far as some sectors I'm watching the Semiconductor Holders (SMH) closely. On Monday the SMH's briefly broke below their small upward sloping trend line (point J) established from the early May low however they did rally on Tuesday. In order for me to become Bullish on the SMH's they will have to break above their longer term downward sloping trend line established from the January high and rise above the 39 level. Meanwhile if the SMH's drop below the 36.75 level this will be a Bearish sign which will likely lead to a retest of the early May low near 34.50.



A lot of you have asked me about the Gold and Silver sector (XAU). The XAU did rally today as it had become extremely oversold on a daily basis as the %K Line in association with the Slow Stochastics had dropped below 10 (point K). I still think there is a pretty good chance the XAU will have to retest the low made in early May near 77 (point L) before a meaningful bottom can occur.



Some of you have asked me how do you determine the left side of a Cup. A lot of times it can be very subjective an depend on how much longer term overhead supply there is in a stock. For example lets look at ALDN. In my opinion during the past 4 years ALDN has formed 3 "Cup and Handle" patterns after peaking in early 2000 with the rest of the market.

The 1st Cup (outlined in black) developed from April of 2002 through May of 2003 which was followed by a 6 week Handle (H). After breaking out in July of 2003 ALDN rose from about $3 to $9 (gain of 200%) where it then stalled out leading to its 2nd "Cup and Handle" pattern. The 2nd Cup started in October of 2000 (outlined in blue) and was completed in October of 2003 which was then followed by a 10 week Handle (H). ALDN then broke out of its Handle in early January of 2004 and then rose from $10 to $18 (gain of 80%) where it then briefly stalled out again leading to the formation of the 3rd "Cup and Handle" pattern. The 3rd Cup (outline in red) began in June of 2000 and was completed in March of 2004 which was then followed by small 3 week Handle (H). ALDN then broke out of its small Handle in late March and then rose from $18 to $28 for a gain of 56%.

Thus over the past year ALDN gave investors three different opportunities to buy it as it broke out of each "Cup and Handle" pattern. ALDN was first featured by us in December of 2003 in our Weekend Analysis for December 6th and again in March of 2004 in our Weekend Analysis for March 6th before it broke out of its "Cup and Handle" patterns.

[ReturntoSender]

From Briefing.com: 6:26PM Tuesday After Hours prices levels vs. 4 pm ET: Another upbeat after hours session as buyers step up after easing off at the end of the regular session. Presently, the S&P futures, at 1133, are 3 points above fair value, and the Nasdaq 100 futures, at 1484, are also 3 points above fair value. Earnings reports have come from a myriad of companies, most of them being better than expected.

The below table lists the most influential items of the night.

Company Stock Move Reason for Move
Callaway Golf (ELY) 12.00 -2.94 (-19.7%) Golf equipment company cuts its FY04 (Jan) EPS and revenue guidance to $0.15-0.25 and $975-990 mln, respectively, and says its Q2 (July) sales should come in at $290-295 mln (consensus of $330.6 mln); Callaway blames weak sales of titanium golf clubs, a decline in Japanese business, and a bigger-than-expected loss in its Top-Flite operation; The company missed the Q1 (Apr) consensus EPS estimate by $0.06 on Apr 22, sending shares lower by 25%

Lennar Corp (LEN) 44.20 +0.62 (+1.4%) Homebuilder shows upside to the Street's top and bottom-line estimates in its Q2 (May) report; Despite the higher interest rate environment, management said it was comfortable raising its FY04 (Feb) earnings target to $5.50 a share from $5.30; Company has been able to perform well in the current climate as it is one of the largest players and possesses geographic breadth

Lodgenet (00C0) 18.49 -0.88 (-4.5%) Provider of interactive television systems to hotels affirms its previously issued Q2 (Jun) outlook for operating income, net loss, but guides slightly lower for revenues; Now sees revenues of $65-67 mln versus the consensus estimate of $67 mln; Company also issues weaker than expected guidance for FY04 (Dec), putting net loss per share at $(1.47)-(1.28) as compared to the market expectation of $ (1.46)

Oracle (ORCL) 11.46 -0.25 (-2.1%) Enterprise software name turns in Q4 (May) EPS of $0.19 - a penny ahead of the consensus estimate - on revenues that increased 9% to $3.08 bln (consensus of $3.07 bln); License revenues of $1.313 bln came in ahead of the Briefing.com consensus of $1.310 bln; On its conference call, Oracle set Q1 (Aug) EPS in line at $0.09; Goldman Sachs noted that the applications license number was down 6% versus the firm's estimate of +2%, and that Q4 EPS benefited by a penny from the lower tax rate
Tomorrow, Bear Steans (BSC) and Best Buy (BBY) will follow-up reports from Lehman Brothers (LEH) and Circuit City (CC) today. Several economic reports are also on the agenda: May Housing Starts and Building Permits, and May Industrial Production and Capacity Utilization.

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

3:12PM Circuit City (CC) 12.72 -0.21: Circuit City's (CC) better than expected Q1 (May) earnings report fell on deaf ears today. Net loss per share narrowed from $0.21 to $0.03 and beat the Reuters Research consensus estimate by $0.05. Revenues similarly surpassed Street expectations, rising 7% to $2.07 bln (consensus of $2.03 bln) thanks to a 6.4% increase in comparable store merchandise sales.

Still, investors have been none too impressed with Circuit City's performance. To begin, there was reason to think sales figures would have been even stronger with year-ago comparisons easy. Same store sales declined 10% in 1Q04, and laid the groundwork for a stellar report in 1Q05. While comps were certainly encouraging, they were not the driving force behind the reduction in net loss.

A noticeable decline in costs was responsible for the bottom-line improvement. SG&A costs shrank 200 basis points to 23.6% of sales as Circuit City curtailed its renovation program in 1Q05. During the quarter, management completed only one store remodeling and spent $2 mln on remodel/relocation expenses, versus last year, when it spent $16.5 mln. Circuit City does not see an extension of this trend in the future - in fact, the speed of renovations should pick up as the company races to finish its restructuring plan. Implications for quarterly EPS are thus negative - effectively putting the pressure on sales to continue at a solid clip for the rest of the year.

This is definitely a possibility as Q2-Q4 comps are fairly benign (-5%, -1%, and +1%, respectively) and Circuit City has enjoyed traction in popular products like flat-panel TVs. However, conventional wisdom says demand for large-ticket items should ease with interest rates higher and tax refunds already doled out. The company still has yet to make a dink in Best Buy's (BBY) market leadership (as a reminder, BBY reports tomorrow before the open), suggesting the chain could be harder hit by any pullback in consumer spending.

Briefing.com continues to believe Circuit City has a ways to go before it meets the criteria of a long-term investment holding. Cash has risen substantially (to $990 mln - of which management will use $200 mln for a stock buyback) and improved the company's long-term health. However, costs that are headed higher, sales trends that have yet to truly stabilize, and a 'second tier' status to juggernaut Best Buy indicate that investors are better served playing the dips, rather than opening up a large position in CC that is to be held for years. -- Heather Smith, Briefing.com

3:08PM Note from Bear Stearns Conference - NVDA

NVIDIA (NVDA 20.60 +0.45) VP of Investor Relations Michael Hara highlighted company's latest GeForce 6 products.
Expects Sony Playstation to help drive demand given breadth of software titles that support platform.
Company remains focused on driving gross margin improvement.
Bland presentation. No update to guidance. Reuters Research prints Q2 consensus EPS at $0.16 on $506.09MM (+10.1% Y/Y); F05 EPS at $0.73 on $2.077B (+13.9% Y/Y).
NVDA shares have pulled back over 8% since the Q1 review, Story Stocks, May 7, 2004, and over 16% since the Q4 review. We commented in the Q1 review that shares were approaching attractive levels but that lack of near-term sales / operating visibility suggested downside risk was still greater than upside potential. We suggested investors hold off for an additional 8-13% pull-back or until total sales growth accelerates into the lower teens.

NVDA shares are now priced for sustained 20% revenue growth from F07 assuming 15-16% operating margin. Eight year historical high operating margin is 17.7%. Sales momentum is building and shares have pulled back but see at best limited upside given expectations baked into shares. Would continue to hold off.--Ping Yu, Briefing.com
12:37PM Note from Bear Stearns Conference - ADI

Analog Devices (ADI 48.75 +0.70) President and CEO Jerald Fishman discussed the proliferation of digital electronics driving demand for ADI solutions.
Company continues to invest in core technologies to grow market share and to drive ADI content in handsets, PCs, autos, wireless base stations, medical imaging, and aerospace/defense and industrial applications.
The company has outgrown peers throughout the business cycle, and has consistently improved margins.
Top 10 customers contribute 12% of sales; top 100 34%; top 1000 41%. Company has approximately 60K customers worldwide.
Top 1 generic product contributes 2% of sales; top 10 12%; top 100 49%. Company offers approximately 2K products.
No update to guidance. Reuters Research prints Q3 consensus EPS at $0.45 on $739.70MM (+42.1% Y/Y); F04 EPS at $1.62 on $2.800B (+36.8% Y/Y).--Ping Yu, Briefing.com
As noted in the Q2 review, Story Stocks, May 14, 2004, management's goal is to grow revenue at 2x the industry average while improving operating performance. Target 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 was 78% booked to the mid-point of guidance for Q3 based on current backlog, suggesting high probability for upside to guidance near-term. Shares are priced for sustained upper 20% revenue growth from F06 assuming 34% operating margin.--Ping Yu, Briefing.com
12:24PM Lehman Brothers (LEH) 75.58 -0.51: Lehman Brothers (LEH) began the parade of earnings for the brokerages this season, and gave every indication that future results from Bear Stearns, Morgan Stanley, etc should be ahead of expectations. The firm delivered a 39% year/year increase in Q2 (May) net income, to $609 mln or $2.01 per share (consensus of $1.90), for the second highest level of earnings ever. Lehman's pre-tax margin swelled 280 basis points, to 30.2%, and drove a significant portion of the bottom-line expansion.

The numbers, however, were down from 1Q04's (Feb) phenomenal figures. Market conditions were simply not as strong as last quarter's as the S&P 500 declined 1% and the ten-year note soared 60 basis points. Lehman performed commendably considering the so-so conditions - 2 out of its 3 operating units (investment banking and client services) posted sequential gains in revenues - but did experience softness in investment grade issuance that cut into its capital markets revenues. Net revenues, as a result, decreased 7% sequentially to $2.93 bln (consensus of $2.83 bln).

Despite the fact that most metrics were better than Street forecasts, LEH has still traded off today. Recognition that trading conditions - in a Fed tightening climate - should stay as is and not return to last year's optimal environment has weighed heavily on shares. The stock has dropped 16% since March 5 - the same day, coincidentally, in which the yield on the 10-year note headed near year lows (3.75%) and the S&P 500 peaked in its rebound try. 2H04 earnings estimates suggest traders may not be wrong in their recent profit-taking - Reuters Research EPS forecasts for Q3 (Aug) and Q4 (Nov) are both pegged at $1.60, down 21% and 6%, respectively, from year-ago levels.

Briefing.com would continue to advocate a market weight position towards shares as Lehman fights an uphill perception battle. Net income looks to have leveled off, interest rates are on the rise, and treasuries are trending lower - not the ideal conditions for a bond-centric firm like Lehman. Nothing has arisen that would signal selling at this point, but there is no catalyst - in our opinion - to drive shares out of the downward trading range. Concerns about near-term growth and the changing business environment should continue to limit buying interest. -- Heather Smith, Briefing.com

11:48AM Note from Bear Stearns Conference - LEXR

Lexar Media (LEXR 8.19 +0.19) CFO Brian McGee provided company overview and background on Kodak relationship.
Companies will cobrand products. LEXR will eventually be sole source supplier for Kodak branded digital media products.
No update to guidance. Presentation a non-event. Reuters Research prints Q2 consensus EPS at $0.01 on $188.98MM (+131.9% Y/Y); C04 EPS at $0.57 on $811.22MM (+96.8% Y/Y).--Ping Yu, Briefing.com
See Story Stocks on M-Systems (FLSH) for relative valuation and growth expectations.--Ping Yu, Briefing.com
11:38AM Note from Bear Stearns Conference - VRTS

Veritas Software (VRTS 27.80 +0.41) EVP & CFO Ed Gillis provided an overview of the company's position in storage software, storage management, backup recovery, and clustering and replication.
No change to outlook; growth expected to moderate as year unfolds. Reuters Research prints Q2 consensus EPS at $0.24 on $502.29MM (+21.6% Y/Y); C04 EPS at $0.98 on $2.063B (+16.5% Y/Y).
Believes company is continuing to take share from EMC/Legato due to strong new product cycle, and transition period at EMC/Legato.
Shares have declined almost 15% since the Q4 review, Story Stocks, January 29, 2004, when we commented that we would wait for a 15-20% pullback or until growth accelerates to the lower 20% range. Storage is likely to command a higher percent of enterprise technology spending as corporations digitize processes; VRTS is benefiting from this trend as well as from the continuing recovery in corporate technology spending. But already priced into shares. We would continue to hold off.--Ping Yu, Briefing.com
11:36AM M-Systems Flash (FLSH) 14.50 +0.51: M-Systems affirmed Q2 EPS guidance of $0.11 on $68MM (+165.6% Y/Y). Reuters Research prints consensus at $0.12 on $69.53MM.

FLSH develops and markets flash data storage solutions for digital consumer electronics including PCs, set-top boxes and thin clients. Representative customers include Acer, Apple, Hewlett-Packard, IBM, Iomega, LG Electronics, Mitsubishi, Motorola, Nortel, Philips, Samsung, Sony and Sony Ericsson. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
M-Systems Flash (FLSH) 1.0 90.3 3.1 1.8 1.4 128.1 123.4 30.5
Advanced Micro Dev (AMD) 0.6 (31.9) 1.4 1.1 1.0 61.0 48.4 11.6
Intel (INTC) 3.2 14.4 5.9 5.4 4.9 17.8 14.3 10.7
Lexar Media (LEXR) 0.4 4.5 1.3 0.8 0.6 161.5 96.8 32.0
SanDisk (SNDK) 0.9 4.1 2.7 1.9 1.6 107.4 67.3 23.7
Silicon Storage Tech (SSTI) 2.0 (69.5) 3.3 2.1 1.7 29.0 72.3 27.1
Semiconductors 2.6 31.1 4.4 n/a 18.2 n/a
Computer Systems & Peripherals 1.1 17.9 1.5 9.6
Blended 1.5 21.8 2.4 12.0
*P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of June 10, 2004.
**P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of June 10, 2004.

FLSH trades at a slight premium to direct comps and at a modest discount to blended average of peer groups. Shares are priced for sustained lower 30% revenue growth from C06 assuming 11% operating margin. Implied growth falls to upper teens assuming 15% operating margin.--Ping Yu, Briefing.com

9:02AM Ratings Briefing - STEL : JMP Securities upgrades Stellent (STEL 8.31) to Market Outperform from Market Perform and initiates price target of $12, citing the following reasons: 1) additional cost synergies of $2 mln primarily from headcount reductions after the merger of Optika; management has indicated that cost synergies should approximate $3.5 mln vs the prior $1.5 mln estimate; 2) product synergies that fill STEL's gap in records management document imaging; 3) potentially stronger than expected growth from key relationships with systems integrators, particularly for risk-management engagements.

What It Means:

At JMP Securities a Market Outperform rating means firm expects the stock price to outperform relevant market indices over the next 12 months
Why the Call Should Move the Stock
Positive tone in pre-market action following a palatable CPI report for May... favorable bias should exacerbate normal level of enthusiasm surrounding an upgrade of a small-cap company like STEL
Upgrade invites potential short-covering activity... as of May 10, short ratio on stock stood at 6.01 [source: Reuters] (short ratio is the number of days it would take to exhaust short position based on avg. daily volume)
An added source of support for STEL, which is down 16.2% year-to-date; however, stock has received three volleys of bullish backing since March 26 (Piper Jaffray upgraded to Outperform from Market Perform; KeyBanc Capital Markets initiated coverage with Buy; and today's upgrade by JMP Securities) and is up 20.8% in the interim
$12 price target will pique interest in STEL as an attractive risk-reward play since new target implies upside potential of 44% from current levels
Sidenote:
200-day simple moving average for STEL is currently at 8.63... a move above that resistance level could spur short-covering
Ratings distribution: 2 Buy; 3 Outperform; 1 Hold; and 1 Underperform [source: Reuters Research]
--Patrick J. O'Hare, Briefing.com

[ReturntoSender]

Chart of the Day - S&P 500 / gold ratio

To create today’s chart, we divided the S&P 500 by the price of one ounce of gold. This results in what is referred to as the S&P 500 / gold ratio or the cost of the S&P 500 in ounces of gold. For example, it currently takes about 2.93 ounces of gold to “buy the S&P 500.” This is considerably less that the 5.53 ounces three and a half years ago. When priced in gold, the stock market rally that began in October 2002 has been trending sideways. However, the S&P 500 is currently testing resistance (the red dashed line). Stay tuned…

[ReturntoSender]

Stocks bounced between gains and losses as investors weighed better-than-expected reports on housing starts and industrial production against concerns over terrorism and rising interest rates. The S&P 500 Index advanced 1 point (+0.1%) to 1,133, led by energy shares, as terrorist attacks on Iraqi pipelines and a smaller-than-expected increase in oil inventories pointed toward higher profits for the industry. The DJIA was unchanged at to 10,379. The Nasdaq Composite gained 2 points (+0.1%) to 1,998. About the same number of stocks rose and fell on the New York Stock Exchange. Big Board volume neared 1.2 billion shares, while Nasdaq volume topped 1.3 billion. In the bond market, Treasurys fell. The 10-year note was down 11/32 at 100 4/32, lifting its yield back up to 4.73 percent vs. 4.68 percent at the previous close. In foreign exchange, the dollar remained higher against both the euro and the Japanese yen. The U.S. currency rose 1.2 percent at $1.2006 per euro and 0.7 percent at 110.09 Japanese yen per dollar. In the commodities market, crude futures climbed on the New York Mercantile Exchange after the Energy Department and the American Petroleum Institute reported increases in U.S. oil inventories that fell short of market expectations. Crude for July delivery closed up 13 cents at $37.32 a barrel, after trading as high as $37.67. Gold for August delivery closed up 10 cents at $385.30 an ounce on the New York Mercantile Exchange.

Strong Sectors: casino & gaming, oil & gas, biotechnology, homebuilding, internet software
Weak Sectors: computer & electronic retail, semiconductors, agricultural products

Top Stories . . . U.S. industrial production increased 1.1 percent in May, the most in almost six years, as utility output surged and companies made more electronics and business equipment, a report from the Federal Reserve showed.

Bear Stearns., the seventh- largest securities firm, said its fiscal second-quarter profit rose 24 percent, boosted by trading revenue and investment banking fees.

The dollar climbed against the euro and yen on speculation a decline yesterday went further than justified by prospects for Federal Reserve interest-rate increases.

Sprint, the third-largest U.S. long-distance telephone carrier, will cut as many as 1,100 jobs in its unit that sells phone service to businesses.

Quotes of Note . . . ``It's important that you look at what's driving this recovery in the semiconductor industry today and it's consumption of consumer products,'' said Brian Halla, chief executive of National Semiconductor, which makes chips used in cell phones and laptops.

Gurus . . . Columnist John Dorfman resurrects Edson Gould and his three steps and stumble. This entails wariness when the Fed tightens three times. Meanwhile, Prudential’s Ralph Acampora tells Bloomberg that action in an election year is often back-end loaded with the fireworks coming in the second half of the year. Ralph says the Standard & Poor’s 500 is boxed in by formidable resistance between 1150 and 1160 (currently 1132). John Murphy, another noted technical type, feels strongly that we are going to take out those highs and get a summer rally once the Fed does its thing on June 30. And economist Ed Hyman remains constructive on the economy, but sees some signs of a slowing pace out of the latest manpower survey.

Barron's Online interviews Anton Schutz, a manager of Burnham Financial Services Fund and the Burnham Financial Industries Fund, for his stock picks. Mr Schutz says that "It doesn't really matter that you are right, it matters when you are right." Luckily for investors, his timing has been better than most. That's why his main portfolio, Burnham Financial Services, delivered a 40.7% return in 2003, ahead of the S&P's 500 by 12 percentage points and ahead of its financial services fund peers by almost 8 percentage points, according to Morningstar. And during the difficult markets in 2001 and 2002, Mr Schutz managed to rank near the top of the financial services fund category. Mr Schutz stock picks include AmeriTrade Holding, North Fork Bancorp and Providian Financial

Market Comments . . . Treasury data released June 15 showed that the funding of the U.S. current account deficit became even more long-term in April, sometimes called “overfunded”. Separately, Commerce data released June 14 showed a record April U.S. trade deficit. The two results are consistent with a durable expansion and are likely to continue.

• The April trade deficit on goods and services rose to a record $48.3 billion, bringing the 12-month total for the trade deficit to $514 billion.

• The four-quarter current account deficit through March was an estimated $540 billion. In the 12 months to April, foreigners increased their net holdings of long-term U.S. securities by $840 billion, underscoring the ease with which the U.S. has been funding its current account deficit.

The shift toward long-term funding of the U.S. current account deficit has accelerated in recent months, contradicting one of the key bearish concerns about the dollar and the trade deficit.

• The biggest net buyer in April was the UK, followed by Japan and China. The shift toward long-term funding also reflected a slowdown in net foreign central bank purchases of U.S. Treasuries and an increase in net purchases by the foreign private sector.

• While foreigners have continued to expand their position in U.S. equities, they still tend to be much more heavily weighted in U.S. bonds. This is consistent with the older demographic profile for Japan and Europe. It supports the view of a durable U.S. expansion somewhat insensitive to interest rate hikes, in that part of the bond losses from higher interest rates will be borne by foreigners.

• Despite continued foreign net purchases of U.S. equities, foreign equity investment is still only 10% of the combined market capitalization of the NYSE and Nasdaq, and less than that if the value of unlisted equities is considered.

• In 2002 (the latest year for which data is available), the U.S. net international debtor position grew to $2.4 trillion, a record 23% of GDP. However, it remains a small portion of the U.S.’s rapidly growing assets (estimated at $80 trillion). Also, the net debtor position is difficult to mark to market and probably understates the value of U.S. investments abroad.

The U.S. current account deficit is sustainable.

• The return on investment in the U.S. is higher than the cost of foreign capital, so the capital inflow associated with the current deficit is additive to U.S. growth. In addition, the return to foreign capital invested in the U.S. is, on average, higher than the foreign return on investment, meaning capital flows to the U.S. add to global growth as well. For example, Japanese investment in the U.S. returned more than investments in Japan, so it added to both U.S. and global growth when Japan increased its capital flow to the U.S.

• In 2003, investment abroad was $560 billion less than foreign savings, while investment in the U.S. was $590 billion more than U.S. savings (roughly equal to the current account deficit). In effect, the extra foreign savings funded extra U.S. investment, adding to U.S. and global growth.

• While the imbalance is sustainable, it is not preferable. A healthy change would be a higher rate of return on investment in foreign economies, making them more attractive to capital flows. This would probably increase savings in the U.S. and abroad at the expense of consumption. Japan’s economic recovery will help, as would an IMF shift from austerity to growth policies in the developing world. For now, expect the U.S. to continue running large trade and current account deficits, with stable funding from abroad.

One consideration in running a current account deficit is the impact on currency perceptions.

• Floating exchange rates as a momentum-driven popularity contest in which the judges change their preferences among growth, investment climate, interest rates, trade accounts, and fiscal accounts.

• In the end, the central bank controls the exchange rate by choosing the amount of money to create, sometimes accommodating currency weakness or strength. If locals or foreigners lose confidence in a currency, capital flight becomes a big negative. So far, we see no signs of this in the dollar’s movements.

• Maintain a forecasts for a December 2004 euro of $1.20 ($1.15 for December 2005) and December 2004 yen of 100 per dollar (95 for December 2005.) This takes into account expectation of strong U.S. second half growth, higher U.S. rates, and Japan’s constructive exit from deflation.

Eco Speak . . . Output of the nation's factories, mines and utilities rose at a faster-than-expected rate of 1.1 percent in May.. Capacity utilization rose to 77.8 percent from a revised 77.1 percent, the highest level in three years. Economists had been expecting industrial production to rise 0.8 percent and capacity utilization to increase to 77.4 percent. Manufacturing output rose 0.9 percent in May after rising 0.7 percent rise in April. Output at the nation's utilities jumped 3.3 percent in May after rising 1.5 percent in April.

ABC/Money survey says consumer confidence is near its worst level of the year as inflation picks up. The ABC/Money magazine Consumer Comfort Index stands at -20 on its scale of +100 to -100. Although the index is little changed from -19 the previous week, the index has dropped nine points in a month and is now only two points off its -22 low for the year, set in mid-March. The recent decline in confidence came as food prices climbed and gasoline topped $2 a gallon. Although gas prices dropped by 4 cents a gallon this week, the government said Tuesday that the consumer price index posted its biggest gain last month in nearly 3-1/2 years.

Financials . . . E*TRADE reports monthly Retail Daily Average Revenue Trades of 71,599 and Professional Daily Average Revenue Trades of 43,112 for total "DARTs" of 114,711, which represents a 27.7% sequential decrease from April results. "May represented a challenging environment for retail trading across the entire industry".

Bear Stearns reported second-quarter earnings of $347.8 million, or $2.49 per share, up from its year-ago profit of $280.4 million, or $2.05 per share. Revenue rose 17.8 percent in the latest three months to $1.7 billion from $1.5 billion in the same period a year earlier. The average estimate was for a profit of $2.23 per share on revenue of $1.59 billion in the May quarter. "This success highlights the diversity of our business mix and the sustainability of the underlying earnings power of this franchise," said James CEO Cayne,. "We saw robust activity across the fixed income businesses and steady improvement in clearing, wealth management and many of the equity areas." Revenue from fixed income rose 10.4 percent in the quarter to $844.4 million from $765.2 million in the same period a year earlier. The New York-based financial services provider added that it's received a notice from the SEC that the commission is mulling recommendation of a civil injunctive action and/or an administrative cease and desist order against the company related to its ongoing probe of the firm's mutual fund practices. Bear Stearns said it's cooperating fully with the SEC on the investigation, and that the possible action could result in "disgorgement, civil monetary penalties, and/or other remedial sanctions."

Merrill Lynch downgrades Knight Trading to Neutral from Buy and cuts their 2004 EPS below consensus after the co indicated yesterday that recent volumes in May and June were "dismal" and "discouraging". The firm says earnings are under pressure from a combination of factors, including the sharp decline in equity volume, but also less options trading and weak performance at NITE Deephaven hedge fund unit.

Diversified . . . Merrill Lynch increases Tyco 2005 EPS estimate to $2.00 from $1.85 (consensus $1.88), principally driven by higher profit expectations across Tyco's business, with the exception of Healthcare. According to the firm, Tyco Electronics should benefit from improving global demand and a lower cost base as the co increasingly migrates production to lower-cost locales like China. Tyco's other businesses should continue to realize profit expansion due to restructuring benefits and operational excellence initiatives, coupled with an improving industrial economy. Price target moves to $42 from $35 reflecting both firms upward earnings adjustment and updated "sum-of-the-parts" analysis.

Oil & Gas . . . Schlumberger described its business outlook as better today than at anytime since the 1970’s. The level of customer activity and demand for Schlumberger’s services is driven by the growth in demand for oil globally and the dramatic shrinkage in surplus oil production capacity since the early 1980’s. We are entering an era in which, Schlumberger believes, global oil production capacity will be barely adequate to meet demand. In this environment a major priority for Schlumberger’s customers will be to apply new technologies that identify and extract oil from untapped portions of large reservoirs that have been producing for many years. These so-called brown fields will account for more of Schlumberger’s revenues going forward than newly discovered green fields that are being brought into production. The amount of oil to be recovered (through new technologies) from brown fields is greater than will

be discovered through new exploration efforts.

Deutsche Bank upgrades BJ Services, Cooper Cameron, Ensco, Maverick, Nabors, Rowan, Schlumberger, and WH Energy Buy from Hold, and upgrades Veritas to Hold from Sell. The firm also raises their 2005 estimates for service company's and shallow water drillers, citing the higher rig count and more broad-based pricing improvement.

Defense & Aerospace . . . The WSJ reports Pentagon auditors told a House committee that contractor Kellogg Brown & Root billed the government for as many as 36% more meals than it has provided to troops in Iraq and Kuwait, adding to the dispute over how the Halliburton unit previously billed for dining-hall services. KBR, however, said its contract at times required it to prepare additional meals and estimates it charged for just 19% more meals than it actually provided. The discrepancy could lead Pentagon auditors to recommend suspending additional payments to KBR and Halliburton. Last month, Defense Department auditors suspended $186 million in payments for dining-hall services because of the disagreement. Auditors are expected to issue a final recommendation soon, at which point the Army Materiel Command will decide whether to permanently disallow the payments.

Transports . . . UBS raises their target on Harley-Davidson to $72 from $64, as they believe that the retail sales were up significantly in April (perhaps +30%) and up modestly in May (perhaps +6%), outperforming the industry for the qtr-to-date period. Based on their checks, firm believes that qtr-to-date HDI dealer sales could be up nearly 19%, above industry-wide growth of nearly 9%.

Retail . . . BB&T Capital initiates coverage of Longs Drug with a Buy rating and $30 target. While the company has very low profitability (despite industry-leading sales productivity), firm believes that with its new mgmt team in place, the company's intrinsic earnings power can be realized over time. Firm's EPS estimates are $1.05 for 2004 (versus $1.03 consensus and guidance of $1.05–$1.10) and $1.25 for 2005 (versus $1.16 consensus).

Best Buy reported earnings of $0.34 per share, $0.01 better than the consensus of $0.33. Revenues rose 17.3% year/year to $5.47 billion versus the $5.44 billion consensus. The company also guides, sees 2nd quarter EPS of $0.47-0.52, versus the consensus of $0.50, and 2005 EPS of $2.80-2.93, versus the consensus of $2.88.

Healthcare . . . The WSJ reports that 2 years ago, independent pharmacists, worried that Medicare prescription drug-discount cards would cut into their profits, sued the government and blocked the cards in court. But now that the program is under way, the independent pharmacists are offering a card of their own. In the process, they are taking aim at their sworn enemies, big pharmacy-benefit managers, which run drug benefits for employers and insurance co's and are offering rival Medicare cards. The Medicare program is the latest battleground in the long and bitter struggle between the independents and PBMs, two groups whose differing business models almost inevitably put them at odds. Pharmacists complain that PBMs squeeze the fees they charge for filling prescriptions and steer customers away from drugstores and into mail-order programs. PBMs argue that pharmacists jack up the costs of medications and that PBMs, not the druggists, are best equipped to bargain with the drug co's for lower prices. The pharmacists are making it a point to operate their new card program, called Community CareRx, differently from how most PBMs handle their cards. For example, their program is a nonprofit venture run by their trade group, the National Community Pharmacists Association. In addition, the pharmacists hired a computer-services firm, Computer Sciences, rather than a PBM, to manage the card, enroll beneficiaries and interact with the federal government. And, although the druggists are using a PBM, MemberHealth, to handle negotiations with drug makers, MemberHealth is making full disclosure to Computer Sciences about the rates it is getting. That isn't typical of a PBM, which often keeps a chunk of the discount it wins, pharmacists say. "Usually you have no idea what [PBMs] are keeping," MemberHealth vice president Scott Hughes says. With the exception of administrative fees in some cases, his co is passing almost all savings to customers, he adds

Drugs . . . Soundview initiates the U.S pharma sector with a cautious stance, as firm believes that the group is in the latter stages of a cyclical downturn in R&D productivity, with limited visibility into the next wave of innovative new products; firm also says the sector faces a number of secular challenges, such as increasing government involvement and heightened competition from generic manufacturers. Favorite name in the sector is Forest Labs, which they initiate with an Outperform and $78 target, saying the co should benefit from the recent launches of Lexapro, Namenda, and Benicar. Firm also initiated WYE with an Outperform and $45 target, saying the current price overly discounts the co's fundamentals, and initiates Pizer, Eli Lilly, Allergan, Bristol-Meyers, Merck, and Schering Plough with Neutral ratings.

Schering-Plough’s held an analyst meeting recently.

Schering’s key announcements in terms of business portfolio strategy:

- Dermatology will be spun out into a separate legal entity, with a view to partnering

- Oncology, formerly part of Specialized Therapeutics, will become the new fourth business unit, alongside Gynaecology & Andrology (G&A), Diagnostics/Imaging and Specialized Therapeutics.

- The allocation of the development budget has been reprioritized, with Oncology and G&A receiving the largest share of funds going forward.

Schering’s key announcements in terms of restructuring:

- Total cost saving in excess of €200 million.

- Headcount reductions of 2,000 worldwide, of which over 900 are in Germany.

- Restructuring costs were largely taken in 2003.

- Target operating profit of €1.05 billion in 2006 on sales of €5.8 billion is net of restructuring charges.

Biotech . . . OSI Pharma and Genentech entered into two agreements detailing the roles of the two parties with respect to promotion, marketing and manufacturing responsibilities for the investigational drug Tarceva. The agreements include an amendment of the 2001 contract. As stated in the original agreement, DNA will continue to be responsible for the marketing, launch and promotion of Tarceva. OSIP will assist with the promotion of Tarceva by providing at least 25% of the combined U.S. sales force. The second agreement is a manufacturing agreement. OSIP is responsible for commercial manufacturing and supply of Tarceva in the U.S. market.

Media . . . CIBC World Markets upgraded Cox Communications cable to sector outperform from sector performer. The broker told clients it sees Cox "as a key beneficiary of two positive fundamental trends that likely will impact cable stocks over next 12-18 months -- broadband adoption is likely to be much better than expected, and RBOC-MSO rivalry should remain rational and tempered through 2005."

ThinkEquity initiates coverage of Gemstar-TV Guide with a Strong Buy rating and $8 target. The firm believes that the company is ideally placed as a leader in the interactive TV programming guide biz, as the co already has distribution deals with the leading operators to carry its interactive programming guide (I.P.G.). The firm says that in a TiVo world with 500+ channels, they believe that the I.P.G. should become a critical tool for viewers to navigate their TVs. Also, firm says the continued SEC probe overhang as well as the company's recent lowering of guidance partly due to legacy legal issues masks what they believe is a very solid platform, with EBITDA growing strongly and an asset value which they estimate at $8.10/share.

Netflix reaffirms 2006 goal of 5 million members and $1 billion in sales.

Wachovia initiates coverage of XM Satellite with a Market Perform rating and Sirius with an Underperform rating; firm prefers XMSR over SIRI given its: 1) solid mgmt with a focus on economic returns, 2) existing OEM relationships and the potential for new relationships, 3) a leadership position in consumer premises equipment, 4) XMSR appears fully funded, while they believe SIRI will likely have to access the capital markets in 2006, 5) relative valuation (XMSR trades at $2,500 per 2004 sub, while SIRI trades at $4,500 per 2004 sub), and 6) a lower risk profile given the still early stage of the business.

CIBC upgrades Cox Comms to Sector Outperform from Sector Perform with a $36 target. Cox will be a key beneficiary of two positive fundamental trends that likely will impact cable stocks over next 12-18 months -- broadband adoption is likely to be much better than expected, and RBOC-MSO rivalry should remain rational and tempered through 2005.

Media General now sees EPS below $0.85 per share versus consensus is $0.89, previous company guidance called for $0.85-0.90. "Having the greatest impact on these lowered expectations is a reduction in anticipated equity earnings from SP Newsprint because newsprint price increases have not materialized to the degree previously anticipated. In addition, while Media General has seen solid year-over-year gains in advertising revenues, growth has not been as strong as anticipated in certain categories."

Google's initial investment in China's biggest search engine firm sets the stage for a face-off with archrival Yahoo in the world's second-biggest Internet market. Google, which has no physical presence in China, has dipped its toe into the market by buying a minority stake in Baidu.com, which calls itself China's top search engine and has plans to make an IPO in the US. Sources said at least eight Chinese and overseas investors, including Google, sank about $100 million into Baidu for a combined minority share. China's Internet market is expected to grow to 111 million subscribers by the end of this year from 81 million a year ago.

Hotel & Leisure . . . International Game Technology said it's in the process of terminating its existing $260 million credit line and arranging a new $1 billion facility. The gaming equipment company is also redeeming all $569.6 million of its outstanding 8.375 percent senior notes due May 2009. It expects these transactions to reduce pre-tax net interest costs by between $5 million and $7 million in the fourth quarter, and $24 million to $28 million in fiscal 2005. IGT also declared a quarterly cash dividend of 10 cents per share, and said it remains comfortable with Wall Street's current mean estimate for a profit of $1.32 per share in fiscal 2004 excluding items, and with its target for earnings per share growth of 15 percent in fiscal 2005.

Several firms out in defense of International Game Tech this morning after an aggressive sell-off yesterday. Smith Barney out saying shares were weak again, without any apparent incremental info. That said, 2 issues have been the focus of investor attention: PA and the UK. The outcome of legislation that would legalize slots in PA is still uncertain and will remain volatile as the June 30 end of the current legislative session approaches. Firm spoke with key PA contacts again and believes that negotiations are ongoing and that progress has been made over the last few days. They believe passage by the week of 6/28 is more likely than not, though the final outcome is difficult to predict. 2) Monday's version of draft legislation on UK gaming deregulation fell short of previous investor expectations, though they view this as a modest negative. Weakness also potentially related to IGT breaking 200 day moving average. All said, these developments would not explain the recent weakness in IGT shares.

MGM Mirage and Mandalay Bay reach agreement on $71.00/share merger, a premium of approximately 30% to Mandalay's closing share price on the day before MGM MIRAGE made its initial offer. The total value of the acquisition is approximately $7.9 billion, including equity value of approximately $4.8 billion, $600 million of convertible debentures and the assumption of approximately $2.5 billion in outstanding Mandalay debt. MGG anticipates the transaction will be completed by the first quarter of 2005.

Poised to sign new deals with five Indian tribes that cut the state a slice of their casino revenues, Gov. Arnold Schwarzenegger said he will actively oppose two November ballot measures that seek to dramatically expand casino gambling in California. The tribes would pay annual license fees for new slot machines over the current maximum limit of 2,000 in the existing compacts. The fees would be on a sliding scale, from $12,000 to $25,000, depending on the number of machines. Sources estimated that could eventually amount to about $275 million annually.

Telecom . . . Sprint disclosed plans to reduce its workforce by 1,100 employees as part of a restructuring to "further align company resources with customer segments and to maintain a cost structure that reflects highly competitive long-distance market conditions." The layoffs will include up to 850 employees in its Sprint Business Solutions unit, and 250 employees that support the unit. "While we are seeing growing customer acceptance of our integrated portfolio and experiencing strong wireless growth in particular, we continue to see market pressures in our traditional long-distance business," said Howard Janzen, the president of the Sprint Business Solutions unit. The company added that it continues to expect adjusted earnings of 70 to 75 cents per share for the year with free cash flow of about $1.8 billion. Sprint said the stronger performance of its PCS wireless division and a steady performance by its local division offset lower contributions from its global markets division.

JP Morgan adds Qwest to their Focus List based on valuation, as the stock has declined meaningfully since they removed it from the List on April 28, despite positive regulatory news; firm believes the stock's discount to other RBOCs is unwarranted, given that Q has the most to gain from higher UNE rates in terms of incremental free cash flow.

Storage . . . Brocade highlighted that it sees multiple growth drivers for the company -- with the SilkWorm 24000 now competing in the Director-class, FICON enabled market; emerging low-end market where it pointed to having nearly all of the OEM design wins; and with the new

multiprotocol router offering. There was no financial update from Brocade today with the company having reaffirmed its 1st quarter 2005 guidance at 06/09 analyst meeting. When asked about how it is competing with Cisco, Brocade cited its broader set of products, being

more partner focused, and its large installed base. At a seperate presentation, HP's Storage executive noted that it is seeing strong customer interest in Cisco SAN switches. In response to a question on Cisco's storage efforts at his keynote address today, Cisco CEO John Chambers noted

that while it takes time to break in to an installed base, Cisco is very comfortable with how its storage efforts have gone so far and that Cisco views its efforts here not just as targeting the SAN market, but as a much broader data center infrastructure and architecture effort.

Network Equipment . . . Nortel Networks, North America's largest maker of telephone equipment, said it is the lowest bidder for part of an order to supply India's Bharat Sanchar Nigam with equipment to run mobile-phone networks. In an earlier story, Bloomberg.com reported that Nortel Networks and Nokia may get an order worth 40 billion rupees ($881 million) from Bharat Sanchar Nigam Ltd., citing Business Line.

Smith Barney reits a Buy on Juniper Networks and would be buyers ahead of the company's 2nd quarter report on July 13 based on strong demand for service provider core and edge routers and enterprise firewalls, VPNs, and Intrusion Detection.

Baird notes that Westell stated in its 10-K that revenues and earnings for June Quarter and September Quarter are expected to be below March Quarter results. The September Quarter was new information. The main issues are price concessions on longer-term contracts, reduction of inventory held by RBOCs, and typical seasonality. However, this was in line with the firm's estimates. Stock likely to remain weak. Maintain Neutral rating and $5 price target.

Semiconductor Equipment . . . WR Hambrecht initiates coverage of Semitool with a Buy rating and $15 target. While the company faces formidable competition from larger equipment producers, it remains a technology leader in the high-growth electrochemical deposition and single-wafer clean markets.

Semiconductors . . . Sonic Solutions announces introduction of the Sonic Dolby Digital AC-3 Encoder for MIPS Technologies' (MIPS) new Consumer Audio Platform. Encoder is first software component designed specifically for microprocessors based on the industry-standard MIPS32 architecture. Sonic's says its "AC-3 Encoder dramatically cuts chip design cycles by providing MIPS licensees with a high-quality Dolby Digital stereo encoder that can be quickly and easily integrated into microprocessors for consumer electronics products".

Broadcom to signs a definitive agreement to acquire WCDMA (Wideband Code Division Multiple Access) mobile device maker Zyray Wireless Inc. Co will issue or reserve for issuance approximately 2.23 million shares of its Class A common stock (with total value of approx $96 million) in exchange for all outstanding shares of Zyray capital stock and upon exercise of outstanding employee stock options and other rights of Zyray. The boards of directors of both companies have approved the merger; transaction is expected to close during BRCM's 3rd quarter, which ends September 30.

Although semiconductor demand remains strong, there is not an order frenzy or a panic buying activity. This is not surprising given that we are in 2nd quarter which is probably the slowest quarter in the year. This is a longer term positive as customers are not double ordering and triple ordering. There are increasing indications that PC demand should improve heading into 2nd half 2004 which might lead to rush orders and serve as a catalyst for stocks to move higher. Note that ICST indicated its PC clock revenues rebounded quickly in June after a weaker than expected May. Analysts have considerable conviction that PC oriented semiconductor stocks will be the first ones to outperform in 2nd half 2004.

In graphics, an area of focus in the presentations was the new product cycle in that segment. While NVIDIA believes the PCI Express transition will not lead to any meaningful share shifts within the graphics market, ATI continues to express its optimism for market share gain. We believe ATI is well positioned ahead of the transition, based on the strong design win momentum it has seen with PC OEMs for Grantsdale-based PCs. ATI indicated that it could announce design wins in its handset business (Imageon product line) during 2nd half 2004 both for new handset customers as well as for new models at Motorola. Continued growth in the consumer businesses, where ATI is clearly well positioned, will be accretive to margins and ATI believes it is moving from a 32-35% gross margin model to a 34-38% model. ATI continues to announce positive press.

Software . . . The WSJ reports Hyperion Solutions last month said its board has earmarked $75 million for stock repurchases. Hyperion, which has about $340 million in cash, had just completed another buyback program, spending $125 million buying its stock from July through March. At the same time, however, several of the company's top executives were selling some of their holdings through prearranged trading programs. For example, Hyperion's chairman and CEO, Jeffrey Rodek, has realized more than $6 million from exercising options since July, including $1.6 million last week. Hyperion officials said the executive sales are for diversification reasons and not related to the buybacks. Mr. Rodek, who has run the co since 1999, said Hyperion executives set up their trading plans nearly two years ago, and Hyperion shares have risen sharply in the past 5 years. "When I joined the co, Nasdaq was above 2800 and our stock was at $19. Today, Nasdaq is under 2000 and [Hyperion shares are] at $38," he said recently. "So I'm not going to apologize to anyone on that."

Barron's Online highlights WebEx, suggesting the company should benefit from web conferencing growth. "Web conferencing is a young and growing industry and WebEx is the leader," says Steven Ashley, an analyst at Robert W. Baird. Worldwide Web conferencing revenue is expected to reach $1.5 billion in 2008 up from $584 million last year, says market research firm IDC. Since WebEx launched its service in 1999, the co has captured roughly 2/3 of the web conferencing market, according to market research firm Frost and Sullivan. In the past 6 trading sessions, shares of WebEx have fallen by 17% after ThinkEquity downgraded the stock to Sell based on concerns that Microsoft, with its marketing might, might poach WebEx customers by lowering prices. But the sell-off is overdone, say some analysts. "We're not seeing customers switching [to Microsoft]," says Andrey Glukhov, an analyst at Southwest Securities who rates shares of WebEx at Strong Buy. David Alexander, an analyst at Frost and Sullivan, expects WebEx to continue growing market share thanks its market dominance and expected growth for the industry. On the surface, WebEx's service may seem more expensive than Microsoft's Live Meeting. Microsoft typically charges about $22 per user for its Live Meeting service promotion, while WebEx charges about $75 per user with a 90-day contract after which the agreement goes month to month. But the two are comparable at about 30 cents a minute, says Mr Ashley. And WebEx's service can be shared among many employees whereas Microsoft's offering only allows the person assigned to that account to use Live Meeting. According to the article, WebEx shares look attractive, trading at a moderate discount to their expected long-term annual earnings growth rate. In addition, WebEx's P/S ratio of 4.5x is at a discount to its median ratio of 6.6x. The co seems to have plenty of cash to develop new services with $143 million, or $3.26 a share, in cash and little debt.

Merrill Lynch points out that Oracle has now seen three consecutive quarters of growth in the database business. Firm sees this as particularly important, as we have not yet hit the real 10G upgrade cycle at this time. They feel this growth is a clear sign of stability, and puts the company on solid footing going into the new year. Total apps revenue was a bit disappointing at $231 million, declining 6% annually but firm believes that the new 11i release later this year should also have a positive impact on the business. Firm believes that their F05 estimates could prove to be conservative, with an 8% (constant currency) growth rate.

JP Morgan says Oracle may trade lower on hand wringing about the applications, the firm's thesis has not changed and they continue to like the risk reward profile. Upcoming catalysts from here include 1) ending of DoJ trial (any resolution should remove shroud of uncertainty and headline risk) 2) the naming of a CFO and 3) the analyst day in Mid July. Firm notes that for the year, co guided to 10-20% operating income growth and a 40+ % operating margin. By their calculations, this implies a 5-14% revenue growth and roughly $0.55-$0.60 per share (up 10-20% Year over Year) putting consensus of $0.56 at the low end of guidance.

JMP Securities is reducing their target on Oracle to $15 from $17, to reflect the overall decrease in software trading multiples that has occurred over the past six months. Also calling Oracle's applications performance terrible, down 6% year-over-year and down 9% in constant currency. Maintains their Strong Buy rating.

RBC Capital initiates Chordiant Software with an Outperform and $6 target. More and more, financial services companies are looking for more advanced packaged solutions, and Chordiant is well positioned to capitalize on this market opportunity. Chordiant has established a strong presence in Europe with 5 of the top 6 most profitable banks in the UK. Today, Chordiant is focused on expanding its North American presence, as exhibited by two large wins in 1st quarter. The stock trades at 22x 2005 EPS estimate of $0.20 compared to the enterprise software group average of 29x. The $6 target assumes a slight premium.

Oracle said yesterday it was building up its cash reserves in the hopes of making "several large acquisitions" worth more than $1 billion each over the next two years. CFO Jeff Henley said that Oracle was studying a number of potential acquisitions, and that a successful takeover of PeopleSoft would not hold it back from pursuing other deals. "We're looking at several different things, all of them multi-billion dollars." The software maker has added more than $2bn to its cash and short-term investments over the past year, taking the total to $8.6bn, "in anticipation of doing some large acquisitions, including PeopleSoft," said Mr Henly. Target companies that had been studied include applications software companies such as PeopleSoft and rival makers of the "middleware" or platform software that Oracle already makes itself, he said, as well as acquisitions "in other industries".

CSFB downgrades Adobe to Neutral from Outperform based on the following: 1) tough Year over Year compares in the 2nd half 2004, 2) the normal tapering off of an already longer than expected product cycle, especially since the Creative Suite revs have already peaked, and 3) firm does not expect meaningful upside to rev and earnings estimates in 2nd half 2004, as expectations are already set too high. Firm notes that 3rd quarter is typically a challenging qtr, and they expect the co to guide conservatively owing to seasonal weakness in Japan and Europe and uncertainty over the current product cycle and education mkt. For 3rd quarter, firm's revenue forecast is $337 million versus consensus of $362 million, and EPS of $0.29 versus consensus of $0.32. Target is $51.

Wedbush Morgan comments that Oracle's results were mixed, with strong performance on the database side and somewhat disappointing on the application side. Earnings beat by a penny but due to a lower tax rate and share buybacks resulting in a decline in fully-diluted shares. In firm's view, neither the results nor the guidance were strong enough to generate incremental upside to the shares. At this point, believes that other Focus-List names (i.e., E.piphany, Hyperion Solutions, and MicroStrategy) offer more exciting near-term upside potential. Price tgt goes to $16 from $18.

Piper Jaffray says NPD sales of Symantec products totaled $61.0 mln in the first ten weeks of the JunQ, down 15.1% from the first ten weeks of the March Quarter. The firm believes the Street is looking for a 0%-5% sequential decline in consumer offline sales from March to June. Piper expect Symantec to meet Street estimates for the June Quarter. Firms analysis of NPD and Symantec domestic offline sales suggests that upside related to company's domestic offline business may be less than it has been in the previous two quarters. However, Piper believes the implications of the weekly NPD data are already reflected in SYMC shares. For the balance of the June Quarter, firm looks for SYMC share price to be dependent on virus activity.

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


--------------------------------------------------------------------------------

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

[ReturntoSender]

From Briefing.com: 6:33PM Thursday After Hours prices levels vs. 4 pm ET: A quiet after hours session in which the tech sector has begun to recover from today's drubbing - despite a May semiconductor equipment book-to-bill ratio that fell to 1.11 (below CIBC's estimate of 1.13). Presently, the S&P futures, at 1131, are 1 point above fair value, and the Nasdaq 100 futures, at 1469, are 2 points above fair value.

The below table lists the most influential earnings reports of the evening - with the standout being Adobe (ADBE).

Company Stock Move Reason for Move
Adobe Systems (ADBE) 43.61 -1.00 (-2.2%) Software maker delivers Q2 (May) EPS of $0.44, a penny ahead of the Street, on revenues that rose 28% to $410.1 mln (consensus of $401.9 mln); Adobe had actually raised its Q2 forecast in May, saying that EPS should be $0.30-0.44 and revenues should be $390-410 mln; In today's release, management guided Q3 (Aug) EPS to $0.31-0.36 (consensus of $0.32) and revenues to $360-380 mln (consensus of $359.1 mln); CSFB predicted a lack of strong upside to Q3 guidance in its downgrade yesterday

American Healthways (00C0) 22.50 +2.25 (+11.1%) Small-cap health service provider announces Q3 (May) EPS of $0.22, 57% better than last year's result; Revenues surged 56% to $65.4 mln (consensus of $64.3 mln) and the company reaffirmed its Q4 (Aug) EPS outlook of $0.26-0.27 (consensus of $0.26); AMHC had given back 25% over the past 6 weeks, creating an attractive entry point

Isle of Capri (ISLE) 18.37 -0.18 (-1.0%) Casino operator reports a 45% decline in Q4 (Apr) EPS to $0.35, $0.02 worse than the consensus expectation that had already been revised lower following the company's warning on Apr 27; Management said that its weakness in Louisiana, Mississippi, and Colorado would continue into Q1 (July), which Isle plans to offset with more aggressive promotions; The company recently had its license to build a Chicago casino revoked

Red Hat (RHAT) 20.23 -2.16 (-9.7%) Leading distributor of Linux software matches the Q1 (May) consensus EPS estimate of $0.05, but falls short on revenues; Sales climbed 53% to $41.6 mln, shy of the market expectation of $43.1 mln; Average enterprise subscriptions were $430 per year, lower than the average of $455 last quarter; RHAT has been under pressure this week - giving back 12% Monday night following management's announcement that the CFO was stepping down and there was no immediate replacement

Solectron (SLR) 5.17 +0.09 (+1.8%) Electronic manufacturing service provider reports Q3 (May) EPS of $0.01 (consensus of breakeven) - its first profit in 9 quarters; Management then issues better than expected top and bottom-line guidance for Q4 (Aug); Tonight's advance re-claims all of SLR's losses today off last night's Q4 (Aug) warning from JBL; Company described an 'inventory adjustment at some of its customers;' In a note today, Banc of America wondered if this could trickle down the supply chain, ultimately affecting semiconductors

Tomorrow is shaping up to be a fairly quiet day, with just the Q1 current account deficit slated for release. A quadruple witching options expiration, however, is on the calendar, and should lead to volatility in 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

4:09PM Red Hat reports, light on revs (RHAT) 21.50 -1.25: Reports Q1 (May) earnings of $0.05 per share in line with pre-announcement the co issued on Tuesday; revenues rose 53.1% year/year to $41.6 mln vs the $43.1 mln Reuters consensus and the $43.0 mln First Call consensus.

4:07PM California Micro reaffirms Q1 guidance (CAMD) 11.08 -0.13: Co states that they expect Q1 (Jun) EPS of $0.07-0.09 and revs is expected to be between $16.4-16.7 mln, Reuters consensus is $0.09 and $16.5 mln, respectively. Co states, "We expect to see strong sequential growth in revenue from our products for the Mobile market while revenue from our products for the Computing and Digital Consumer markets is now expected to be flat to up modestly compared to Q4. The reduced outlook for the latter is largely due to a weaker than expected demand for both notebook and desktop computers".

4:06PM Solectron beats by $0.01, ex items, light on revs, guides Q4 EPS above consensus (SLR) 5.21 +0.12: Reports Q3 (May) pro forma earnings of $0.01 per share, excluding charges, $0.01 better than the Reuters consensus of $0; revenues rose 5.3% year/year to $3.04 bln vs the $3.06 bln consensus. Co also guides, sees Q4 EPS of $0.03-0.05 (ex items), vs the Reuters consensus of $0.02, and revenues of $3.05-3.20 bln, vs the Reuters consensus of $3.18 bln.

Close Dow -2.06 at 10377.52, S&P -1.53 at 1132.03, Nasdaq -14.56 at 1983.67: The cash market opened lower on the higher than expected core PPI data, despite a drop in unemployment claims...Weakness came early in the session from Jabil Circuit (JBL, -13.1%) following last night's poor guidance announcement and weighed heavily on semiconductors and the Nasdaq all session...The effects of JBL's guidance were widespread in technology stocks with big names like Hewlett Packard (HPQ, -2.0%), one of JBL's largest customers, easing on the news as investors voiced concerns over demand issues...
The SOX Index finished the session -3.6%, led lower by Xilinx (XLNX, -7.3%) and Linear Technologies (LLTC, -3.7%), as weakness associated with JBL's guidance forced speculation that overall demand for semiconductors would wane...Several downgrades in radio stocks, including Westwood One (WON, -0.8%) and Cox Radio (CXR, -0.12%), added to the day's declines as both set new 52-week lows following the downgrades...The Dow found strength in Caterpillar (CAT, +0.9%) and Microsoft (MSFT, +2.1%) as it outperformed the broader market all session...

Crude prices closed +3.0% today after shrugging off supply concerns all week, as analysts anticipate continued violence in Iraq will eventually lead to longer term output shortages and higher prices...Tomorrow's quadruple witching option expirations could add some well needed depth to the market...The only economic release slated for tomorrow is the current account balance at 8:30 ET, but the release lacks significant market moving impact...The broader averages closed modestly lower with the Nasdaq underperforming the blue chip averages...NYSE Adv/Dec 1872/1391, Nasdaq Adv/Dec 1267/1823

3:14PM Note from Thomas Weisel Conference - SIMG

Silicon Image (SIMG 10.15 -0.47) CFO Bob Gargus discussed company's high-bandwidth digital content delivery solutions for the PC, storage and consumer electronics markets.
Management expects fibre channel business to be flat; market to shift to quad solutions with revenue per port lower than single port solutions.
Just beginning to see ramp of licensing and royalty streams.
Management views blended gross margin as sustainable; company expects manufacturing cost improvements to offset pricing pressures.
No update to guidance. Reuters Research pegs Q2 consensus EPS at $0.06 on $39.83MM (+63.7% Y/Y); C04 EPS at $0.31 on $164.98MM (+59.4% Y/Y).
Shares are down over 18% since the company raised its Q1 & Q2 guidance, Story Stocks, April 2, 2004. We commented that SIMG was enjoying strong revenue momentum from a number of recent design wins and the company was expanding its sales team. But suggested investors wait for at least a 15-20% pullback given valuation. Shares are currently priced for upper 20% revenue growth from C06 assuming 24-25% operating margin. Goal is 20% operating margin near-term; management believes improvement possible. We would continue to hold off.--Ping Yu, Briefing.com
12:45PM Progress Software (PRGS) 19.30 +0.67: Progress Software reported Q2 results before the open. Pro-forma EPS was $0.24 on revenue of $90.777MM (+17.1% Y/Y) vs. Reuters Research consensus at $0.22 on $89.0MM.

The following table shows sales, gross margin and Y/Y variance by revenue segment. Segment Revenue ($ in MM) % Sales Y/Y Growth Gross Margin Y/Y Variance in bps
License 36.905 41% 36.3% 93.8% 205
Maintenance & Service 53.872 59% 6.7% 74.1% (57)
Total 90.777 100% 17.1% 82.1% 147
Favorable currency contributed approximately 6 points of total growth; license revenue increased approximately 30% on a constant currency basis, and services 1%.

Application Development and Deployment revenue, which includes Progress, ObjectStore, PeerDirect and PSC Labs, accounted for 87% of revenue. Enterprise Application Integration revenue, which includes Sonic Software, accounted for 7% of revenue. DataDirect accounted for 9% of sales.

EMEA contributed 46% of sales; North America 44%; Asia-Pacific 6%; and Latin America 4%.

Gross margin increased 147 bps Y/Y to 82.1%. Operating margin, excluding amortization, increased 245 bps Y/Y to 31.5%.

Guided for Q3 pro-forma EPS of $0.23-0.24 on revenue of $88-90MM (+13.3-15.8% Y/Y) vs. consensus at $0.24 on $90.25MM. Operating income is expected to be $13-14MM, excluding $1.8MM for amortization of purchased intangibles. GAAP EPS is expected to be $0.20-0.21.

Raised F04 guidance: Pro-forma EPS from $0.90-0.93 on $360-365MM to $0.94-0.97 on $360-365MM (+16.5-18.1% Y/Y); GAAP EPS from $0.73-0.76 to $0.77-0.80. Operating income is expected to be $53-55MM, excluding $7.0MM for amortization of purchased intangibles and $2.6MM for in-process research and development.

The following table shows price multiples and Y/Y growth rates for PRGS compared against industry comps. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
Progress Software (PRGS) 1.0 13.5 2.0 1.9 1.7 16.0 16.2 9.4
BEA Systems (BEAS) 1.8 15.4 3.3 3.1 2.8 9.6 10.5 10.3
Microsoft (MSFT) 3.9 28.1 8.3 8.1 7.7 13.5 13.5 5.6
Oracle Corp (ORCL) 3.3 11.3 6.0 5.6 5.1 7.2 15.0 10.4
Tibco Software (TIBX) 3.4 87.9 6.0 5.3 4.7 4.8 19.3 11.6
Vitria (VITR) 1.2 (11.3) 1.4 n/a (23.9) n/a
Software & Programming 2.8 34.8 4.9 n/a 7.7 n/a
*P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of June 10, 2004.
**P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of June 10, 2004.

Shares are down over 10% since the Q1 review, Story Stocks, March 16, 2004, when we suggested waiting for a 20-30% pullback or until management delivers on sustained organic growth in the upper single digits to lower teens range. The company is building business momentum; organic growth is beginning to accelerate; RFID (radio frequency identification) is gaining momentum in the marketplace and is expected to drive Objectstore revenue in 2005. Shares are attractively priced; implied growth is upper single digits from F06 assuming static operating margin; lower teens growth assuming 25% operating margin.--Ping Yu, Briefing.com

12:17PM Note from Thomas Weisel Conference - SLAB

Silicon Labs (SLAB 45.86 -1.24) President and CEO Dan Artusi profiled company.
Set-top box and VoIP solutions, and new power amplifiers for handsets driving growth.
Management expects to continue to penetrate notebook market; notebook market to continue to grow.
Believes company can sustain 25% operating margin.
No update to guidance. Reuters Research prints Q2 consensus EPS at $0.38 on $121.55MM (+75.9% Y/Y); C04 EPS at $1.60 on $501.95MM (+54.3% Y/Y).
SLAB shares are down over 14% since the Q1 review, Story Stocks, April 27, 2004. We commented then that SLAB, like other providers of analog and mixed-signal solutions, is benefiting from strong demand for digital electronics, which is expected to drive consumption of analog and mixed-signal components and fuel Y/Y market growth of almost 30% to over $35-36B in 2004. We noted that SLAB traded at a discount to peers, is a relatively small player, and has opportunities to gain market share, allowing the company to post above-industry average growth. But we suggested waiting for a 20-30% pullback given that shares were priced at a premium to the semiconductor group, and were fairly valued on a discounted cash flow basis.

Shares are priced for sustained lower 20% revenue growth from C06 assuming 30% operating margin. Implied growth rises to upper 20% range assuming 25% operating margin. We would continue to hold off.--Ping Yu, Briefing.com
9:47AM Note from Thomas Weisel Conference - SNDK

SanDisk (SNDK 20.15 -0.46) President and CEO Eli Harari said company is well positioned to capitalize on the $12B market opportunity (2004E) for portable, secure storage as the market moves to mobile devices.
NAND memory is gaining share on NOR.
Strong IP position; generating royalty income and extending leadership position.
Markets are highly price elastic. Technology drives cost reductions and stimulates demand. Believes cost reductions of 30-40% are sustainable.
New leading edge manufacturing line with Toshiba to begin production in about 15 months; 300mm fab on 70nm technology going to 65nm.
4gb chip to ramp production in Q3; transition from 0.13µ to 90nm will take about three quarters. Provides company with unmatched cost structure/performance for next 12-15 months.
Company is in quiet period. No update to guidance. Reuters Research pegs Q2 consensus EPS at $0.31 on $415.54MM (+77.1% Y/Y); C04 EPS at $1.36 on $1.775B (+67.3% Y/Y).
Aggressive 20-40% price reductions to stimulate demand and transition to higher density products creates cloud of uncertainty around financial performance. Management believes product cost reductions of 30-40% are sustainable. Substantial upside provided management successfully stimulates demand and reduces costs to more than offset impact of price reductions. The market for NAND is expected to grow in excess of 25% over the next three to five years. SNDK shares are priced for sustained upper teens revenue growth from C06 assuming 15% operating margin.--Ping Yu, Briefing.com
9:25AM Jabil Circuit (JBL) 25.50 -2.55: Jabil Circuit reported Q3 results after the close on Wednesday. Pro-forma EPS was $0.26 on revenue of $1.626B (+33.3% Y/Y) vs. Reuters Research consensus at $0.26 on $1.610B.

Pricing environment is stable but the consumer business was softer than expected. Management indicated the Olympics is not creating demand as anticipated for home entertainment and mobile telephony products.

Gross margin declined 88 bps Y/Y to 8.4%. Operating margin, excluding amortization and extraordinary items, increased 18 bps Y/Y to 4.1% on overall scale efficiencies.

Company continues to reduce customer concentration; had three 10% customers in Q3; top 10 customers contributed less than 65% of sales.

The following table shows performance by industry sector and sequential revenue guidance for Q1. Sector % of Sales Q/Q Rev Growth (%)
Q4 Q1
Automotive 8 23 (10)
Computing and Storage 13 3 (8)
Consumer 22 15 10
Instrumentation and Medical 12 12 10
Networking 21 - (5)
Peripherals 7 9 5
Telecom 12 6 (5)
Guided below consensus: Q4 pro forma EPS of $0.25-0.27 on revenue of $1.60-1.65B (+23.5-27.3% Y/Y) vs. consensus at $0.28 on $1.686B; F04 EPS of $1.00-1.02 on $6.2-6.3B (+31.1-33.2% Y/Y) vs. consensus at $1.03 on $6.294B; and Q1:05 EPS of $0.30-0.32 on $1.75-1.85B (+16.0-22.6% Y/Y). GAAP EPS is projected to be $0.21-0.23, $0.80-0.82 and $0.26-0.28 for Q4, F04 and Q1:05 respectively. Operating margin is forecast to be 4.1-4.3% for Q1 and 4.2-4.6% for F05. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
Jabil Circuit (JBL) 0.7 30.7 1.0 0.9 0.8 34.0 33.1 17.4
Celestica (CLS) 0.6 (18.1) 0.5 0.5 0.4 (7.0) 35.7 12.6
Flextronics (FLEX) 0.5 (21.2) 0.4 0.4 0.4 8.6 23.2 12.3
Solectron (SLR) 0.4 (3.7) 0.4 0.4 0.3 (7.1) 7.1 15.1
Electronic Instruments & Controls 0.9 n/a 1.0 n/a 5.0 n/a
*P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of June 10, 2004.
**P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of June 10, 2004.

Guidance is marginally below consensus but will weigh on shares until company demonstrates better growth and operating momentum given that shares are priced for sustained lower 20% revenue growth assuming 7-8% operating margin.--Ping Yu, Briefing.com

[ReturntoSender]

Gross exaggeration?

http://money.cnn.com/2004/06/17/markets/gross/index.htm

Bond fund guru says global economy is more uncertain than at any time in decades. How right is he?
June 17, 2004: 4:38 PM EDT
By Mark Gongloff, CNN/Money senior writer

NEW YORK (CNN/Money) - When somebody as smart as Bill Gross warns of trouble in the economy, it's usually worth a listen.

Though analysts thought his latest warnings, reported on Thursday, were on the money in many ways, their immediacy may have been overstated. They sure hope so, anyway.

Gross, manager of the PIMCO bond fund, the world's biggest, told the Financial Times that the global economy was more vulnerable to a downturn than at any time in decades.

"Too much debt, geopolitical risk and several bubbles have created a very unstable environment which can turn any minute," Gross reportedly said. "More than any point in the past 20 or 30 years, there's potential for a reversal."

Gross's litany of worries included, among other things:


U.S. consumers -- whose spending makes up more than two-thirds of gross domestic product (GDP) in the world's largest economy -- are too deeply in debt and vulnerable to interest-rate increases.


The U.S. government is also too deeply in debt.


Oh, and there's too much debt in Japan, the world's second-largest economy, too.


There's a housing bubble in the United Kingdom.


There's a bubble in commodity prices, too.


The U.S. dollar is overvalued by 20 percent, propped up by an inflow of foreign capital that can be reversed at any time.


Hedge funds and banks are taking advantage of low short-term interest rates to indulge in the "carry trade," in which money is borrowed at cheap short-term rates and then invested in other stuff, leaving all such investors vulnerable to a pop in rates.

Little of that sounds crazy to other observers. A recent survey of nearly 200 chief financial officers by Duke University's Fuqua School of Business found many of them worrying that terrorism, inflation and higher interest rates would hurt business spending and hiring in the coming year.

Deeper underwater
Combined U.S. current account and budget deficits as percentage of GDP

Year Combined deficits
1994 4.6%
1995 3.7%
1996 2.9%
1997 1.8%
1998 1.5%
1999 1.8%
2000 1.8%
2001 2.6%
2002 6.1%
2003 8.4%


Sources: Bureau of Economic Analysis, Congressional Budget Office, CNN/Money

"The CFOs are telling us that there are growing risks to a continued recovery," Duke finance professor Campbell Harvey said Thursday. "Our analysis of this quarter's survey suggests the economic situation is growing more fragile."

Gross' warnings are also likely music to the ears of other prominent bears, such as Morgan Stanley chief global economist Stephen Roach, who's been making similar comments for years. Roach warned this week about "the accident-prone character of the global economy" and said investors seemed unprepared for the worst.

"Over the 2004-05 interval, looming bond market perils appear to pose the most serious challenges for [leveraged] consumers and property markets -- possibly even resulting in a new deflation scare," Roach wrote in a note to clients on Monday.

For now, runaway inflation is the monster that's scaring everybody and could make the bears' most dire predictions come true. Though the Federal Reserve believes inflation is relatively tame, giving it the luxury of raising rates very slowly, many investors worry the central bank is woefully behind the curve.

If they're right, then a surge in prices will force the Fed to jack up rates more quickly than it wants, potentially slamming practitioners of the "carry trade," U.S. homeowners, consumers with credit card debt and a host of other rate-sensitive victims.

Pain to come -- but not just yet
Fortunately, though, that's still not the consensus forecast.

And though consumer and government debt, the U.S. trade imbalance, the threat of terrorism and other potential headaches are patently obvious, most analysts still believe they will be offset -- at least for the next several months -- by a surge in global economic growth that's already in train.

"Obviously, the economy ails from important secular imbalances; there's a lot to be concerned about," said Carlos Asilis, portfolio manager with the hedge fund Vega Asset Management. "But the cyclical forces indicate that, at least over the coming quarters, visibility is high."

"So long as inflation doesn't become too big of a problem, I don't see why we are going to get a negative surprise this year," he added.

Later years are a different story. Asilis believes higher interest rates could indeed come to haunt overly leveraged consumers by 2006. Others believe the pain could come as soon as 2005.

Meanwhile, higher rates will drive stocks' price-to-earnings ratios down. Combined with the other headwinds Gross describes, some analysts worry that U.S. stock markets are in for a return to the doldrums that characterized the 1966-82 secular bear market.

"The cheerleaders talk about the economy growing, but the economy grew at 7 percent from 1966 to 1982, while stocks went nowhere because valuations were too optimistic," said Jeffrey Saut, chief investment strategist at Raymond James. "And they're optimistic now, by historic measurements."

The P/E ratio for the S&P 500 is still near its peak at the end of the 1980s-1990s bull market, Saut pointed out, and that may need to unwind before stocks can rocket upwards again.

"Yet you can make good money in that environment," Saut said. "It just takes a different strategy; you try to hold a core bunch of stocks you think are in secular bull markets and trade at inflection points."

[ReturntoSender]

Stocks rose as a forecast from Solectron, whose clients include Cisco Systems, reassured investors that second-quarter earnings growth will surpass estimates. The S&P 500 added 2 points (+0.3%) to 1135 and is up 2.1 percent this year. The DJIA gained 38 points (+0.4%) to 10,416.. The Nasdaq advanced 3 points (+0.2%) to 1986. For the week, the S&P 500 lost 0.1 percent, its first weekly decline in four. The Nasdaq dropped 0.7 percent. The Dow average added 0.1 percent, gaining for the fourth straight week. About nine stocks rose for every seven that fell on the New York Stock Exchange. Preliminary figures showed some 1.5 billion shares changed hands on the Big Board, 3.2 percent more than the daily average this year and the busiest since May 25. Trading picked up today because of the quarterly expiration of futures and options on stocks and stock indexes. The expiration often requires securities firms to buy or sell shares that had been used to hedge options positions.

Strong Sectors: aluminum, electronic manuf service, steel, airline, gold, auto, aerospace, casino
Weak Sectors: internet, health care distributor

Top Stories . . . The U.S. current account deficit widened to a record $144.9 billion in the first quarter as Americans bought more foreign-made goods, a government report showed.

GlaxoSmithKline, accused in a U.S. lawsuit of withholding findings about the antidepressant Paxil's effect on children, said it will create a public database of all its company-sponsored drug trials.

Viacom, the world's third- largest media company, said it will receive $738 million in cash from a special dividend paid by Blockbuster as part of its split-off from Viacom.

Halliburton fired two consultants, including the former chairman of its Kellogg Brown & Root unit, for violating the company's code of business conduct.

United Airlines parent UAL Corp. may seek new sources of capital and make additional cost cuts, after a U.S. government board rejected a UAL loan guarantee request while leaving open the possibility of reconsidering the bid.

Happy Birthday . . . Paul McCartney is 62.

Quotes of Note . . . ``We are having astounding corporate profits and the outlook is very strong. That will drive the market going forward.'' Doug Cote, who helps manage $40 billion at ING Investment Management. He expects the Standard & Poor's 500 Index to climb 15 percent in 2004.

Gurus . . . John Berry, the financial columnist close to the Fed, says the Greenspan gang has been monitoring the increase in worker compensation as a key to policy. It may be that some of the compensation increase took the form of increased benefit costs, including some large catch-up payments to under-funded pension plans. If so, there could be less momentum for aggressive tightening.

Interesting comments from Deutsche Securities' analyst Fumiaki Sato – who was credited with forecasting a collapse in the semiconductor market during the IT bubble - told Reuters it was time to move out of chip, PC and liquid crystal display (LCD) shares before those stocks plummeted on falling prices and a supply glut.

Earnings . . . The Wall Street Journal notes that the bottom line keeps getting underestimated. As we approach the second-quarter, report projections for the S&P 500 have risen from 15% to 20%. A big reason is that wage demands have been unexpectedly muted and capital spending continues to lag behind cash flow. The extra cash generated returns, contributing to results.

Fund Flows . . . Strategic Insight estimates U.S. investors put about 190 billion into equity funds during the first half. But some fund managers are finding fewer outlets for the cash, and managers of 38 funds have closed the door to new investors thus far this year. That compares with 35 funds for all of last year.

Bad Boys of Wall Street . . . The WSJ reports that the New Hampshire Bureau of Securities Regulation is expected to file civil fraud charges against Morgan Stanley. The suit will accuse the company of having improperly rewarding brokers with noncash incentives, including awards of raw steaks, so they would sell more in-house mutual funds and variable annuities. New Hampshire regulators will seek a $500K fine against Morgan Stanley, according to a draft of a petition expected to be filed in an administrative proceeding. The petition also alleges that a Morgan Stanley broker improperly solicited clients to buy several unregistered "penny stocks." Andrea Slattery, a spokeswoman for Morgan Stanley, said, "We terminated the broker involved in [the penny-stock] case more than three years ago and settled matters with each client who took issue with his conduct." As for the incentive programs, Ms. Slattery added: "Sales contests were something we addressed and resolved with the NASD last year."

Eco Speak . . . The U.S. current account deficit widened in the first quarter to a record $144.9 billion. Economists had expected the current account deficit to expand to $139.5 billion in the quarter from a revised $127.0 billion in the fourth quarter. The current account deficit is the broadest measure of the nation's financial balance with the rest of the world. Foreign capital inflows increased $447.6 billion in the first quarter, offset by capital outflows of $289.3 billion in the quarter. The gap in trade of goods and services widened to $136.9 billion in the first quarter from $125.5 billion in the prior quarter.

Market Comment . . . The most important driver of equities is the changing status of the fundamental backdrop, in our opinion. Still, there are numerous examples in stock market history of industry segments that have suffered significant reversals despite favorable fundamentals. This generally occurs when the favorable outlook becomes the consensus expectation. In other words, how can a stock price go any higher if every single investor is already bullish? The study of short interest trends is a way to gauge consensus sentiment within market segments, as well as a way to avoid the pitfall of being aggressively positioned in an industry or stock that is already a consensus favorite.

The short interest spread is an easy way to gauge investor expectations regarding sector positioning. This spread currently argues that short interest is relatively low in the cyclical sectors and relatively high in the noncyclical areas of the market. In other words, there is a lot more enthusiasm for cyclical segments overall. This comes as no surprise since the economy has been in recovery mode for several quarters. The really interesting development is that the current spread is near its lowest level in six years — levels associated with past turning points in relative performance trends.

A sector-by-sector look at short interest data in the table above reveals further interesting insights. Indeed, the segment with the highest level of short interest relative to S&P 500 short interest (i.e., relative short interest) less its 1998-to-date average (i.e., relative short interest spread) is utilities. The sector with the lowest relative short interest spread is technology. Within cyclicals, the discretionary sector has the highest relative short interest spread, and within noncyclicals, consumer staples has the lowest relative short interest spread.

Using relative short interest as a proxy for sentiment, the utilities sector would appear to be the least popular among the S&P 500 sectors since it has witnessed the largest increase in its relative short interest in recent quarters. Interestingly, the data suggest that almost 8% of S&P 500 shares short are concentrated in utility stocks, despite the fact that the sector represents only 3% or so of the overall market’s capitalization. The relative short interest for utility shares now stands about 2.5% higher than its 1998-to-date average.

The flip side of relative short interest extremes are sectors like technology, telecoms, and materials. The latter currently represents about 3% of the total S&P 500 short interest. Interestingly, short interest for the materials sector has been below its period average for almost two years as investor interest in the group has grown steadily. While the figure is slightly higher than it was in October 2002 at the nadir of the market decline, it still sits at levels considered to represent an optimistic outlook for materials stocks — i.e., there’s

still plenty of optimism for the sector, according to the data!

Analyzing short interest data at the industry group level can yield further insights. At this level, the segment with the highest relative short interest spread is still utilities. Moreover, two more noncyclical segments are among the top five: food & drug retailing and health care equipment & services. Interestingly, a couple of groups from the cyclical space also made the top five. The automobile & components and software & services industry groups also have a high relative short interest spread. These two segments buck the cyclical trend since most of the economic-sensitive areas of the market show lower relative short interest spreads at this time. This could present investors with an opportunity within the cyclical space. All in all, these five groups maintain at least a 1% relative short interest spread.

The five segments with the lowest relative short interest spreads are all economic-sensitive areas of the market. Interestingly, they hail from four separate sectors, but share common ground in that they are all cyclical in nature — e.g., retailing and media from consumer discretionary; commercial services & supplies from industrials; telecommunication services from the telecommunications sector; and technology hardware & equipment from the tech sector. Of these, only the latter two have a relative short interest spread below negative 1%. The segment that really seems to stand out is technology hardware & equipment, where the relative short interest spread is a remarkably low negative 4.41% — a sign of improved optimism for the group!

As we have cautioned with other indicators, short interest data should not be considered a silver bullet investment strategy tool. Still, it provides a good snapshot of the evolution of consensus trends for a sector or stock and can be useful in combination with other tools. The data above would seem to suggest that, compared to recent history, there exists a fairly high level of bullishness for the technology sector, and the hardware segment, in particular. Alternatively, the enthusiasm has yet to spread to the software side of the

technology equation, at least not with regard to short interest trends, perhaps arguing that software is better positioned to handle negative news than hardware is at this stage.

One of the few cyclical groups that stands out as having a high relative short interest at this time is software & services. Indeed, the segment currently represents almost 9% of all S&P 500 short shares. Software & services saw a strong increase in short shares in the wake of the rally in the spring of 2003, and has relative short interest that is nearly two percentage points above its 1998-to-date average. Interestingly, this is largely at odds with the rest of the cyclical space and the technology sector in particular.

The retail group is one area of the cyclical space that seems to fit the typical pattern for economic-sensitive segments. Indeed, the amount of relative short interest is low compared to its historical average. While it has increased slightly in recent months, retail’s relative short interest spread is a low -0.7%. Much like the rest of the cyclical space, this argues that investors have become more comfortable with the outlook for these stocks, thus their enthusiasm for the group has increased. This would make the segment vulnerable to negative news.

Financials . . . Barron's Online highlights SLM Corp., which should benefit from growing demand for degrees that Americans are seeking. The company both originates student loans and purchases loans from other lenders. It then bundles many of these loans into securities which are sold to investors. "They are the dominant player in an industry where the secular trends such as growing demographics and rising tuition are very favorable," says Stuart McDermott, a senior equity analyst with Holland Capital. This year, the co is expected to generate P/E growth of 15% year over year. And while Sallie Mae' stock has gained about 6% this year, 4 percentage points ahead of the S&P's 500, it has underperformed the S&P Consumer Finance Industry Group in the same time period. Concerns about rising short-term interest rates and the presidential election outcome are holding the stock back. But, according to the article, those fears appear largely unwarranted. Higher earnings growth is in the cards because Sallie Mae is gaining market share in an expanding industry. According to the article, the stock trades at a decent valuation too. It is trading at only a slight premium to its 15% long-term growth rate based on next year's P/E multiple. It also sells below its median forward P/E of 19x for the last 5 years, and below its median P/B value of 8.7x for the last 5 years.

Oil & Gas . . . It's anybody's guess where oil prices will be in 12 months, but investment pro John Maloney is convinced they will stay above $30 a barrel. He is betting on Suncor Energy (SU), which extracts crude from Canada's vast oil-sands deposits in Alberta. Many analysts, he notes, see oil falling from $37 now to $26. "But with economic recovery and limited capacity - exacerbated by turmoil in oil-producing nations - that's hard to imagine," says Maloney, who sees the stock, now at $25, hitting $35 to $40 within a year. He sees Suncor earnings $4 a share in 2005 - way above consensus. In 2004, he expects profits of $1.96 a share. Maloney calculates that every $1 rise in the price of oil adds $0.22 a share to Suncor's cash flow. Suncor's oil sands contain estimated reserves of 175 billion barrels - Second only to Saudi Arabia's. He says it costs Suncor $8 a barrel to extract oil from sands, vs $10 or more for the majors. Suncor's output, now at 214,000 barrels a day, has grown at 10% a year over the past decade. Suncor sees it hitting 500,000 in seven years, Maloney notes. In the long run, Suncor is the oil stock to own, asserts oil maven Charles Maxwell of securities firm Weeden. In three years , he says, Suncor "will be No.1 in production growth." Suncor was featured in his column on Nov.18, 2002, when it was at $14.

Transports . . . Legg Mason downgrades Heartland Express to Hold from Buy solely on valuation. Truckload demand remains strong for Heartland while industry capacity continues to be flat-to-down. However, the stock is approaching the firm's target price of $28 with no change to its model assumptions. The firm says the stock remains a core long-term truckload holding and should not disappoint much on the downside. However, investors could be better off buying Werner Enterprises and Marten Transport.

The WSJ reports leaders of Delta Air Lines pilots union have signaled that they were preparing a new concessions offer to try to jump-start wage-cut talks with the airline, after getting new information from the company detailing its financial peril. At the end of a three-day meeting, leaders of the Air Line Pilots Association, which represents 7,200 Delta pilots, said in a message to members that they had adopted a resolution "directing the negotiating committee to attempt to resume negotiations with management." The union's executive council, in its message to members, said it was aware that Delta was "under considerable pressure due to increasing fuel costs and declining yields." A union spokeswoman said the negotiating committee hasn't completed a new offer to the company, but said it would reflect Delta's worsening financial condition. The union said any concessions package would be "contingent upon a comprehensive restructuring of the airline." The union leadership said it met this week with representatives of Delta's creditors in a conference organized by Saybrook Capital, an investment co that is trying to organize Delta's major unsecured creditors. Catherine Stengel, a Delta spokeswoman, said no new talks are scheduled, but added that the airline is "encouraged that ALPA recognizes the need to provide Delta with a significant economic benefit."

The WSJ reports that US Airways, trying to hang on to its customers in the face of growing low-fare competition in Washington, today will roll out cheaper fares with fewer restrictions on 22 routes, including 15 served nonstop from Reagan National Airport. The US Airways Group unit also will offer the lower fares on seven routes served through connections from Reagan National and to all of the same 22 destinations served via connections from Washington's Dulles Airport. New discount carrier Independence Air took wing earlier this week from Dulles and will serve at least five of the same routes by summer's end, with even lower fares than US Airways' new offerings.

Homebuilders . . . Wachovia upgrades KB Home to Outperform from Market Perform in response to strong quarter and inexpensive valuation: 2nd quarter EPS of $2.40 beat firm's estimate of $2.10, courtesy of better homebuilding operating margins. The stock is trading at 6.1x 2004 EPS, 16% cheaper than group. Firm raises F2004 EPS estimate to $10.85 from $10.30 and 2005 estimate to $11.65 from $10.90, assuming higher deliveries and margins; Gives valuation range of $81 to $87.

Education . . . Lehman expects Apollo Group to exceed 3Q04 rev and EPS estimates with $0.02-$0.04 EPS surprise likely, as a result of: 1) operating margins nicely above the 32.0%-32.5% guidance level. 2) Enrollments modestly exceeding 238.4K est. UOPX, in particular, should drive the strong results. 3) APOL guidance is too conservative regarding the roll out of rEsource; However, firm believes that the positive surprise is largely priced into the stock. Lehman also raises 2005 EPS estimate to $2.25 from $2.19 for slightly better margins and higher online growth and price target to $95 from $88.

Harris Nesbitt comments that amended class action lawsuit against Career Education may have more negative impact than others. While there have been a number of class action lawsuits filed against the company, firm believes this one may have more negative impact. This law firm (Goodkind, Labaton, Rudoff & Sucharow) claims to have found 13 'witnesses" consisting of ex-CECO employees who have made these allegations. The stock was weak late yesterday on all sorts of speculation, although recovered somewhat late in the day. Firm expects further weakness this morning. While firm cannot comment on the validity of these allegations, this disclosure will likely once again highlight one of the key risks of investing in this stock (and the sector in general). Firm maintains its Neutral rating and suggests investors use the expected weakness in the group today to focus on some of the quality names such as Apollo Group, University of Phoenix, Education Management, and Strayer.

UBS comments that while it is impossible to gauge how this suit will play out, firm does believe that - given how detailed the allegations in it are - it is likely to exacerbate concerns about the regulatory risks associated with Career Education’s shares. The amended suit details a list of allegations that resulted from interviews with more than dozen of CECO's former employees; firm believes this amendment includes more employee accounts and more allegations than previous versions did. This amendment alleges that CECO engaged in falsifying student records, including enrollment figures, in order to please investors and qualify for federal funding; and manipulation of financial information, including revenues and margins, to the point of violating GAAP. The suit alleges that wrongdoings are pervasive across CECO's network of schools.

Food & Beverage . . . JP Morgan initiates Sara Lee with Overweight and $29 price target as the company's 21% P/E discount to food stocks does not reflect encouraging momentum in the company's food and beverage (F&B) business and signs of improvement in the apparel cycle. The firm sees 5% discount to pure food companies justifiable. Firm believes that although Apparel is dragging down EBIT for 2004, it may boost EBIT for 2005.

JP Morgan initiates ConAgra with Underweight as CAG's valuation does not properly reflect the company's below average execution risk now that co is entering a more challenging phase, where improving operational efficiencies, better integrated marketing and distribution practices, and margin enhancing product innovation should be the key drivers of EPS growth after successful transformation from a commodity-oriented business to a packaged food company of branded value-added products.

Piper Jaffray is seeing some evidence that low-carb mania is beginning to wane. Unfortunately, this could also reduce the sales potential on American Italian Pasta's (PLB) new low-carb pasta product introduction. The firm has heard from several retailers that customer acceptance has been just "so-so." The firm lowers its target to $34 from $38, reflecting a reduced near-term earnings outlook but retaining a multiple of 17x.

The WSJ reports that Archer-Daniels-Midland agreed to pay $400 million to settle a nearly nine-year-old civil suit alleging it rigged prices of a corn sweetener. The plaintiff class, a group of about 2,000 companies that includes PepsiCo and Coca-Cola, used an ADM sweetener called high-fructose corn syrup in their products. The group alleged that ADM conspired with other manufacturers in the highly concentrated corn-milling industry to illegally inflate high-fructose corn syrup prices in the early 1990s, costing them $1.4 bln.

Restaurants . . . Peet's Coffee cut to Neutral from Outperform at Harris Nesbitt as stock has neared $25 target.

Piper upgrades CBRL Group to Outperform from Market Perform despite yesterdays weak comp disclosure. The firm views the recent sales erosion as due to tougher industry comparisons, the initial gas price sticker shock, and the company's recent bad publicity. The firm does not anticipate these three to fuel further erosion in sales. Instead, they expect the format's enduring consumer appeal and solid execution to help revive comps to more normal levels. In firm's view, despite the erosion in their EPS estimates, the stock's valuation reflects further comp store sales erosion. Next Friday, mgmt will host its first analyst meeting in 7 years. Although the firm does not anticipate any major announcements, they expect investor confidence to improve following the meeting. 2004 EPS estimate moves to $2.30 and revenue estimate to $2.39 billion, 2005 EPS estimate goes to $2.65 and rev estimate to $2.585bn.

Retail . . . Pacific Growth initiates Abercrombie & Fitch with Overweight rating based on: 1) The improved, fashion right product offering at all 3 ANF concepts should translate into positive same-store sales, stronger margins and increased earnings growth. 2) Significant store growth opportunities at Hollister. Firm's EPS estimates are $2.52 for 2004 and $2.93 for 2005.

Viacom and Blockbuster announce terms of separation. The transaction would involve Viacom's distribution of its interest in Blockbuster through a "split-off" exchange offer to VIA.B stockholders. BBI also announced that, prior to the commencement of the exchange offer, BBI anticipates paying a pro rata special cash distribution of $5 per share, or a total of approximately $905 million based on the number of shares currently outstanding, to all stockholders, including VIA.B. As the owner of approximately 81.5% of BBI's outstanding shares, VIA.B anticipates receiving a cash payment of $738 million in the distribution, which, as to VIA.B, will be free of income taxes.

RFID . . . Lehman out saying RFID update from Wal-Mart suggests that rollout is on track, including favorable results from Dallas pilot facility. That said, the company expects to be 'live' in North Texas by January 2005 (top 137 suppliers), in addition to six distribution centers and 250 Wal-Mart stores by June '05. In following, and given that Avery will participate in the rollout as a primary converter (at the very least), the firm believes that confirmation of Wal-Mart's intention to stick with the previously disclosed timelines should be a positive for the stock. Lehman is sticking with their Overweight rating $72 target.

Media . . . The WSJ reports that each spring, the nation's big broadcast-television networks tout their coming prime-time schedules and go fishing for advance ad dollars. The event, known as the "upfront," is a highly competitive contest for rev and bragging rights, and the broadcast networks quietly release their data to the media. The dollar figures and percentages of increase or decrease are treated as a meaningful way to keep score, not only to compare networks but also to divine the health of the media industry and even the state of the economy at large. And the total money involved is huge, this year's take by the six major networks is believed to be in the neighborhood of $9.5 billio. "It's a number that is anything the networks say it is, quite frankly," says Larry Spiegel, a principal at the Richards Group. What's more, upfront numbers indicate commitments to spend money in the future. But as the TV season winds on, these early promises have been overtaken by ad dollars spent later on in what is known as the "scatter" market. The only networks to post upfront gains this year were Viacom's CBS and UPN. CBS secured about $2.4 billion in commitments, up from about $2.2 billion in 2003. UPN secured about $350 million in ad commitments, up from $250 million in 2003.

Hotel & Leisure . . . Carnival Corporation's 2nd quarter results beat expectations, reporting $0.41 vs. our estimate and Street consensus of $0.35. Net revenue yields increased 13.2% in the quarter on a pro forma basis, ahead of +10-12% guidance, and ahead of expectations of +11.0%. Occupancy was lower than expected, but was offset by much higher on-board per diems and much lower net cruise costs per available berth day, which declined slightly versus expectation of roughly a 2% increase. Management indicated that both occupancy and pricing for 3rd quarter has been strong. As a result, CCL guided 3rd quarter and full year yields each to be up 6-8% (aided by currency translation). Unit costs were reiterated to be flat to up 2% for the full year, reflecting expected cost synergies. Full-year EPS guidance is now $2.10 to $2.20, up from $2.05-2.15 and compared to consensus of $2.13. Analysts are raising 2004 estimate to $2.17 from $2.11 to reflect management's yield and expense guidance. Given the outlook for the remainder of 2004 and the continued positive implications for 2005, analysts are letting some of this year's strength flow through to 2005 and are thus raising our estimates slightly to $2.57 from $2.54. Given Carnival's visibility and positive outlook for the remainder of the year, we think 2nd half earnings risk is fairly limited, and thus the main reason for the pop in the stocks today. However, we believe the next real move in the stocks will come with better visibility and comfort with 2005. We don't think we're there yet.

Electronics . . . JP Morgan initiates TiVo with an Underweight due to 1) Less expensive, more fully featured offerings will emerge over the next several years that would slow TiVo's growth substantially, and pressure the stock. 2) DirectTV, responsible for 55% of company's total subscribers and nearly three-quarters of net additions in the April Quarter, is likely in the 2005 to 2007 time frame to shift its DVR sales focus to a less expensive, more integrated DVR offering based on technology from News Corp.-controlled vendor NDS. 3) Cable companies are ramping up sales of cheaper, more fully featured DVR services. 4) Over time, consumer electronics makers will begin selling non-subscription DVRs that will be effective alternatives to TiVo.

IT Services . . . AG Edwards initiates IBM with a Buy and $105 price target, citing: 1) IBM is the biggest IT services company in the world, with a 2003 market share of 8%, and also has a top three position in worldwide market share for software and each major segment of computer hardware. 2) Through the entire downturn of the last three years, IBM has had more than a billion dollars in net income from continuing operations in every qtr. 3) IBM has been awarded more patents than any other US company in each of the last 11 years, leading to belief that IBM has more intellectual property in the combined fields of computers, semiconductors and electronic materials that any other company in the world.

EMS . . . Jabil Circuit upped to Strong Buy from Outperform at Raymond James. The upgrade follows yesterday's 13% decline following disappointing guidance for the August quarter; believes the market's excessive reaction to this relatively minor shortfall was unwarranted. The firm emphasizes that it believes the issues responsible for the shortfall are temporary and not indicative of any underlying strategic weakness; the aforementioned startup costs are expected to impact margins for only the next three to six months; firm would expect a healthy rebound thereafter. Price target of $31 is based on 25x firm's 2005 estimate of $1.25.

Baird upgrades Solectron to Outperform from Neutral based on solid revenue trends, improved operational metrics, significantly lower net debt, progress with divesting businesses, and attractive valuation. Firm raises EPS ests for 2004 and 2005 to $0.01 from $0.00 and to $0.23 from $0.18, respectively; Increases price tgt to $8 from $7.

Solectron reported net sales of $3.04 billion, up 5.3% sequentially and 29.0% year over year on a continuing operations basis. Proforma EPS was $0.01 excluding charges, $0.01 above consensus, and up $0.03 sequentially. Net sales was inline with First Call consensus and 1.3% above estimates of $3.0 billion.

• The computing and storage (28.9% of revenues) segment fell 2% sequentially. We believe the sequential weakness might have been driven by Solectron disengaging from certain underperforming programs in the segment. Next quarter we expect Solectron’s computing and storage segment to increase sequentially as demand improves going into the second half of the year.

• Networking was up 1% sequentially and the segment accounted for 21.0% of sales, down from 21.8% last quarter. Cisco, Solectron’s largest customer, saw growth of 3.7% sequentially, outpacing the rest of the segment and likely above Jabil’s flat growth with Cisco in the quarter. Solectron’s higher-end Cisco programs continue to perform well and we expect them to be up next quarter.

• Communications revenues (19.3% of sales), which include both wireline and wireless infrastructure customers, were up 12% sequentially. The majority of the strength was on the wireless infrastructure side with key customers such as Motorola, Ericsson, Lucent, and Nortel. Motorola had a particularly strong quarter for Solectron rising double digits sequentially.

• The consumer products segment (19.8% of sales) rose 2% sequentially as a result of the strong set-top box demand for Pace Micro offset with a decline in the ramp of its NEC 3G handsets. As a result, NEC dropped below 10% of sales in the quarter.

• Sales to the automotive sector rose 23% or $16 million as demand bounced off a seasonally weak quarter and the industrial segment rose 38% due to strength with Solectron’s semiconductor & test customers which are seeing improving demand.

Network Equipment . . . RBC Capital says its sources indicate that executive management of Cisco and Nortel met yesterday to exchange an open dialogue following the Canada Telecom Summit. While not privy to what was discussed, the firm believes a partnership between the companies may make sense across several levels. Cisco's current mix of enterprise to service provider remains about 70%/30% while Nortel's mix is the exact opposite. Furthermore, both companies share similar service provider networking visions -an IP/MPLS core and multi-service edge. The firm believes no large acquisitions are pending and that it will take several months for a formal agreement to be announced, if at all. Nevertheless, the two companies have begun a dialogue and the firm expects progress to be made over the next several quarters.

Morgan Stanley upgrades Corning to Overweight from Equal Weight. The firm notes that stock has only appreciated 5% since the beginning of the year, with 15%+ upside from current levels to firm's DCF fair value estimate of $14.

Morgan Stanley downgrades Motorola to Equal Weight from Overweight and reduces tgt to $20 from $25. Firm believes 1st quarter margin performance, particularly in handsets, will be difficult to sustain, particularly since firm expects the competitive environment to intensify.

Goldman Sachs says its view following reports from two of Cisco's contract manufacturers and firm's channel checks suggest a continued healthy ramp in switching. While contract manufacturer Jabil cited a weaker than expected outlook in its business with CSCO, this was clearly a Jabil-specific issue related to inventory and product mix. Solectron, another manufacturer for CSCO, reaffirmed firm's view with its results last night in which CSCO's sales to Solectron were at the high end of our expectations.

UBS has a cautious view on the mobile phone sector heading into 2nd half 2004 due to the likelihood for slowing industry growth and increased pricing pressure as numerous new products are launched in 2nd half 2004. UBS notes industry volumes should exceed 600m this year based on strong 1st quarter 2004 results and modest sequential growth through the year. UBS believes several recent negative data points from the component food chain reflect several industry trends which include: adjustments to component inventory levels by OEMs ahead of new product introductions, slowing sequential industry volume growth, and share shifts in China towards multinational vendors.

CNET News reports Thomas Campana died June 8 at the age of 57, a day after an appeal got under way in a high-profile patent infringement case launched by his company, NTP, against RIM and its renowned BlackBerry device. Campana was co-founder and president of NTP, and the co-inventor of patented technology the company is seeking to protect. According to the article, people close to NTP downplayed speculation that Campana's death could open the door to a quick settlement in the case.

Semiconductor Equipment . . . WR Hambrecht says recent selling pressure on semi equipment stocks may continue in response to a slight decline in the industry book:bill to 1.11:1 from 1.13:1 (and a front-end B:B of 1.09:1 vs. 1.12:1) on slightly higher sales. SEMI's monthly equipment order figures for May were flat with April and in line with expectations. Process equipment orders for May Quarter were up 20% from February Quarter, and 129% from a year ago. Back-end order growth figures were similar month/month and quarter/quarter and rose 88% from a year ago. The firm believes that the flattening of orders is mainly seasonal and look for renewed order growth (and a rally in the stocks) by autumn in response to continued strength in electronics demand and semiconductor production. The industry's normal seasonality and the transitional between technology nodes are only temporary and are creating an excellent buying opportunity in these stocks.

Semiconductors . . . Deutsche Bank says Micron's 3rd quarter could provide an upside surprise, which might boost the stock in the near term. However, given its expectations for DRAM contract ASPs to decline into 2H04, and the company's poor competitive position, the firm sees limited attractiveness in the stock. The firm reits its Hold and $16 target. The stock remains uncompelling, although the company's current 1.5x NTM P/S & 1.6x TTM P/B are well below former peaks of 7.8x & 4.1x (mid-cycle 2.2x & 2.7x). However, the company's lack of competitiveness vs. peers (with similar valuations) limits the stock's attractiveness.

Boxmakers . . . Dell President Kevin Rollins plans to cut computer-printer prices in half and shave as much as 20 percent from the cost of printer supplies as he challenges Hewlett-Packard in its most-profitable market. "Our customers are telling us they've just been paying too much for ink and toner," Rollins said. "It's frankly the most expensive liquid on the planet." Rollins is crafting plans to use what he calls "the Dell effect" to muscle in on a market that Hewlett-Packard Chief Executive Carly Fiorina relies on to supply almost 70 percent of her company's profit. DELL's plans to bring down prices in the printer market aren't new. Nevertheless, watch for potential reaction in Lexmark and Hewlett-Packard.

Software . . . Needham upgrades Progress Software to Strong Buy from Buy after the company reported last night. Firm says the co continued to chug along in its May Quarter. The database related businesses each turned in somewhat better than expected. Sonic outperformed its peers, but continued to see long sales cycles as the Enterprise Service Bus technology transitions from early adopter to mainstream customers. The firm believes the stock is valued too inexpensively relative to its growth prospects.

First Albany downgrades Red Hat to Neutral from Buy as the stock has risen to the $20s from $12 in December. The firm is concerned by some quarterly metrics that makes it fairly valued until the firm can answer some newly surfacing questions. The firm is disappointed that RHAT's 1st quarter revenue of $41.6 million missed the consensus of $43 million. The revenue miss stemmed from a back-end-loaded quarter on the direct side, and disappointing indirect channel results. This is forcing the firm to reexamine its expectations for growth in RHAT's indirect channel; and that more back-end-loading of the direct business could mean MSFT's competitive response is lengthening RHAT's sales cycles.

CSFB increases Red Hat estimates. The firm raises 2005 estimate to $0.27 from $0.25. Based on higher estimated attach rates and operating margins. The firm revises 2006 to $0.63 from $0.56, and DCF target price to $27 from $25. The firm would be buyers on reduced expectations.

Lehman comments that NPD results through the end of May indicate that sales of Symantec retail products are up 80% year/year QTD, tracking ahead of firm's estimate for 48% year/year growth for consumer revenue for June. Based on current momentum, believes company is on pace to meet or exceed firm's 1st quarter consumer revenue estimate of $247 million.

Adobe reported solid 2nd quarter results with revenue of $410 million, exceeding the consensus estimate of $405 million. The upside was a result of better than expected performance of Intelligent Documents (Acrobat), which posted 26% year-over-year growth, and about $6 million in upside. CSFB out raising their 2004 EPS estimate despite the inline 2nd quarter based on continued strength of the CS upgrade. New F2004 EPS estimate is $1.62, up from $1.55, and 41% EPS growth. Firm would accumulate the stock in the low $40s in anticipation of a more constructive environment towards the end of year when they believe investors will begin to anticipate a blockbuster product year in 2005. Smith Barney out saying that, while numbers once again exceeded Street estimates, the quarter didn't feel as strong as the first quarter when all segments were up sequentially and at rates much greater than they had anticipated. Firm is raising their estimates but maintains Hold rating, noting they would be more interested in the shares below the $40.00 level.

TIBCO reported a strong second quarter last night that was even better than the summary numbers indicated, as EPS was negatively affected by extraneous items, reducing earnings by a penny. Even more impressive was the outlook, as guidance implies upside to current estimates when we attempt to exclude anticipated Staffware financials. TIBCO offers a compelling value at current levels. It is benefiting from favorable changes to its relationship with its previous parent company, Reuters, as evidenced by the robust performance of the financial services vertical. Analysts are raising estimates to reflect greater growth than we had anticipated and to account for the Staffware acquisition.


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


--------------------------------------------------------------------------------

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

[ReturntoSender]

Wall Street City Industry Performance Reports:

http://host.wallstreetcity.com/wsc2/Industry_Group_Report.html

[ReturntoSender]

Amateur Investors Weekend Stock Market Analysis (6/19/04)

Three things concern me at the moment. First the Volatility Index (VXN) which tracks the Nasdaq dropped to its lowest level in over a year on Friday (point A). As I have pointed out before the last three times the VXN has dropped to around 20 this has led to an eventual top followed by a sell off (points B).



The second thing that occurred this week was the breakdown of the Semiconductor sector. The Semiconductor Holders (SMH) have broken well below their previous small upward sloping trend line (solid black line) which originated from the early May low. If more selling pressure occurs in the SMH's this will likely have a negative affect on the Nasdaq. In the very near term we could see a brief rally in the SMH's as they are becoming somewhat oversold based on the Slow Stochastics as the %K Line has fallen well below 20 (C).



Thirdly the Oil sector (OIX) rallied this week and is is attempting to break out of a longer term Cup and Handle pattern. If the Oil sector follows through to the upside in the weeks ahead will this have an adverse affect on the major averages in the future if the price of Oil begins to rise again.



As far as the major averages the Nasdaq has a key short term support area around 1960 (point D) which has held twice before so far this month. Meanwhile the Nasdaq encountered resistance a few weeks ago near its downward sloping trend line (solid brown line) originating from the January high. If the low reading in the VXN leads to the development of selling pressure in the Nasdaq and it drops below 1960 then look for the next support area at its 200 Day EMA (purple line) around 1925. Meanwhile if the Nasdaq can break above the 2025 area (point E) which is where it stalled out a few weeks ago then this could lead to a quick move up to the 2060 to 2080 range.



The Dow has been in a small trading range (TR) between 10320 and 10450 over the past 8 trading days. Eventually the Dow will break out of this small trading range and either make a move up to its April high near 10575 (point F) or it will drop back to where its 50 Day EMA (blue line) and 100 Day EMA (green line) are converging at near 10250.



As far as the S&P 500 it has been basically stuck in a trading range over the past 8 trading days between 1140 (point G) and its 50 Day EMA (blue line) near 1120. If the S&P 500 can break above 1140 look for it to rise up to the 1152 to 1162 range which corresponds to its April high (point H) and March high (point I). Meanwhile if the S&P comes under some selling pressure look for initial support in the 1115 (100 Day EMA) to 1120 range (50 Day EMA). If the S&P 500 breaks below 1115 then its next longer term support area would be at its 200 Day EMA (purple line) near 1088.



For those of you following the Gold and Silver sector (XAU) it rallied this week after becoming oversold the previous week as the %K Line in association with the Slow Stochastics approached zero (point J). The XAU is approaching its first area of upside resistance at its 50 Day EMA (blue line) near 88. If the XAU breaks above 88 I would expect even stronger upside resistance to occur near 92 which is where its 100 Day EMA (green line) and 200 Day EMA (purple line) reside at. Meanwhile if the XAU stalls out near 88 and then reverses to the downside look for support near its early May low around 77 (point K).



For those not familiar with the Slow Stochastics Indicator it basically gives a signal of overbought or oversold conditions. Generally when the %K Line drops to 20 or below (points L) that is a signal the market is becoming oversold and will eventually reverse to the upside. Meanwhile when the %K Line rises at or above 80 (points M) that is a signal the market is becoming overbought and will eventually reverse to the downside. As with any indicator it's not always perfect as these examples show. Notice in December of 2003 the %K Line rose above 80 (point N) however the Nasdaq still rose substantially through the middle part of January 2004 before topping out. Another more recent example occurred in early May as the %K Line dropped below 20 (point O) and the Nasdaq rallied briefly for a few days before eventually going lower and not making a bottom until a week or so later. Although the Slow Stochastics aren't perfect more times than not they do pretty well in forecasting a nearing market reversal.



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.

[ReturntoSender]

InvestmentHouse Weekend Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- Stocks overcome some negative news, rebound from Thursday.
- Economic undercurrents continue as current account deficit widens, Fed holding fewer instruments for foreign countries.
- Stocks set up for the coming week if investors are ready.
- Subscriber Questions.

Stocks end volatile week holding the range.

The news was not all that good for stocks Friday with a weaker semiconductor book to bill report issued Thursday evening, an expanding current account deficit, and more despicable terror acts in the Middle East. The news was sprinkled throughout the session, the last item shaking the market late, and stocks never quite got back on track afterwards.

Even with the last hour shakes stocks managed a positive close. SP500 moved over the down trendline intraday and was making a successful test when the afternoon news hit. That kept it from breaking that resistance on some stronger volume, though the volume was attributable to expiration position shuffling as opposed to any significant accumulation by institutional investors. Thus the move over that resistance would have been nice, but it would still take Monday to show that it was something more than expiration volume and volatility.

Not to say the action was negative. Stocks overcame some bad news and a softer open to close positive. SOX closed negative again, but it managed to hold some support at 450 and show a nice doji on the candlestick chart as it rebounded off its lows. Overall the indexes maintained their lateral move, bounced back some from the Thursday up and down action, and showed no real inclination to sell off. They are still set up in decent shape to try for another breakout this week.

If they do make the break higher, the issue still remains how high they will rally before this early summer move runs out of gas. It has not been a barnburner move by any stretch with volume remaining low and the moves either way mostly modest. Some are saying that a breakout will usher in a summer rally past the April highs, etc. We are not so optimistic, setting the April highs as our target, but will gladly let stocks run if they will. Certainly the action would have to change, i.e., there needs to be more sustained buying, for the indexes to clear those levels.

THE ECONOMY

Trade gap hits a record. Will foreign investors start leaving the pool?

At $144.9B the current account deficit hit 5.1% of GDP. The current account is the broadest measure of overall trade. The 5% level is considered key. Back in 2002 we discussed the 5% level as key at least in the sense others consider a key level. When there is a deficit in the number, the US needs other countries to invest more in the US to cover the gap. We buy more of their stuff, they are buying less of our stuff, so we need more foreign investment in other US assets (e.g., equities, debt) to make up the difference so we can keep running the deficit. At some point that deficit gets to an uncomfortable level for foreign investors. That can be caused by insecurity about the future of the economy, interest rates, inflation, etc. Indeed, the size of the gap itself can cause the insecurity because of the fear of what a large current account gap might cause. In other words, the gap�s own shadow can scare foreign investors away.

If foreign investors don�t want to finance the gap they sell their dollar denominated investments and move the money elsewhere. When you sell anything and there is not another buyer standing in line willing to pay a higher price for it, price falls. Selling can beget more selling, and then you have falling prices in US assets. That is another way of saying potential deflation, something Japan just spent a dozen years mired in.

Are there any signs this is happening? Thus far they are few and modest, but there are some. We have reported that there was an outflow of foreign capital from the US equity markets. There has been some of this continually ongoing since 9-11. The threat of terror reduced the value of US assets in the eyes of some foreigners. The weakening dollar after that event also showed the same effect: uneasy foreign investors putting some of their assets in non-dollar havens just in case.

The flow out of equity markets picked up some the past three months. The Federal Reserve�s holdings of securities for foreign investors fell over 5% the past quarter. There is a definite flow of funds out of the US. The key is whether the flow becomes a flood. There are a lot of issues that are a long way from finding resolution. Iraq, the war on terror, Fed rate hikes, what direction the US is going to take economically, socially and globally after the election, higher oil prices. Foreign money may just be taking a sabbatical until some of these issues are resolved. For now it is not critical, but it is very interesting that it started as the current account gap neared 5%. Again, that may be something of a self-fulfilling prophecy as the 5% of GDP in and of itself caused some to flee. After this initial flow the key is whether it remains light or picks up speed.

How does the Fed react?

The outflows are in the same league as rising energy prices: the Fed does not like them because they cut against economic growth and the Fed cannot do a whole heck of a lot about it without crushing the economy. Monetary policy cannot impact energy prices but in a very indirect way. It can make the US somewhat more attractive to foreign investors if it jacks interest rates up well above market rates; that makes the dollar more valuable as foreign investors want to put their money into the US and take advantage of above market rates without risk. Of course that torpedoes the economy as US investors do the same as opposed to investing in the US economy. In the long run that means you get low growth and interest rates the eventually have to fall due to lack of economic growth.

So you might conclude that the Fed has to ignore it. Or does it? Over the past quarter the broadest measure of money supply has risen 22% on an annualized basis. That is huge. Huge. That has led to several conspiracy theories as to the reason such as the Fed is anticipating some massive negative to hit the US. Maybe a terror attack, maybe a big meltdown in a major Wall Street firm or bank. With the Fed funds rate at 1%, there is not any real ammunition to stimulate the economy in the event of a major disaster, so the theory is the Fed is monetizing the economy even more in an effort to get it really running ahead of this event.

There are some major problems with those theories, one of the most apparent of which is the Fed�s impact in such situations is not in the quiet background ahead of disaster, but in bold moves following the event where the world looks to the Fed and says �TGIF, thank God it�s the Fed� as the central bank makes a dramatic move such as, well, injecting tremendous liquidity into the system.

There is another possibility. The Fed sees the possibility that more foreign funds may be leaving, and it is pumping more liquidity into the market to help speed the US economy and perhaps offset some of the negatives associated with the current account gap to the extent foreign capital will have to think twice about leaving. It can do this even as it talks of rate hikes. Remember, the Fed was lowering rates during the bear market but the money supply was not rising. It was not providing real incentive to borrow. Not until late in the game did it really let money supply go. Well, the opposite can happen here. It can raise rates but still pump up money supply. Even with rate hikes, at these low overall rates there is still a lot of stimulus. This is just a possibility for the dramatic jump in money supply. Frankly, the conspiracy theories about some big yet secret event to the entire world is a bit much. Usually the actual explanations are not nearly as entertaining as the speculation.

Did you hear the one about the minimum wage?

It is once again being proposed that the minimum wage be raised in order to �get America out of poverty.� Laudable goal, dubious methodology. The way to get America out of poverty is to remove incentives to stay in a poverty-inducing payment system. Take that money and use it to educate and train in areas the economy needs skilled workers. Provide incentives for employers to provide day care so single moms and dads can take the training and take those jobs. Put the rest of the money back in the economy to further drive technology and job creation.

History is replete with minimum wage rate hike examples. You know what happens when you hike the minimum wage? You get fewer workers doing the same work all of the workers did before. Small businesses won�t hire that extra helper; they will simply make the others do that work. The problem is that simply raising the required wage does not generate more money, it simply causes a reallocation as to where it goes. If a small business only has a set pool of money it can pay its workers given its level of sales and expenses, it is going to cut back on something. Typically it is the number of workers, but it could also be that the business cuts its hours, civic donations, charitable donations, etc. None of those are good for the economy or those that live in this country. Again, a higher minimum wage does not create anything in the economy; it actually is destructive to those it is supposed to help and is another tax on small businesses that now have to make do with fewer employees or other investments in their business that could have made them more productive and profitable.

THE MARKET

To this point the upside move has been back and forth enough to make Job lose patience. Light early summer volume has kept SP500 and NASDAQ below the 2004 downtrend while DJ30, NASDAQ 100, and small to mid-cap indexes continue to hold over their 2004 downtrends. Leaders are holding up overall, but there continues to be erosion as the bottom drops out on apparently strong stocks. Big name semiconductors (INTC, AMAT, TXN, KLAC) continue to show very weak action while a few (e.g., BRCM) look very good. At the same time stocks such as MSFT and GE are showing a rebirth, rallying higher on strong volume as the come off their lows and form the right side of their bases. At the same time, big name industrials such as MMM continue to power ahead on volume.

Sounds like a market in transition, and while MSFT may be performing well, techs overall are having a rough go of it as NASDAQ has lagged the other indexes. It suffered two distribution sessions last week to add to the one the prior week. Breakdowns have not been confined just to technology, however. Even some of the defensive health and medical stocks are seeing the bottom open up and swallow them.

That has left energy stocks as one of the market leading groups. Historically that is not usually a positive for the market. Consumer, materials, and medical stocks are also leading, sectors that are a bit better for the market overall as they contain some growth stocks. Growth stocks are the market leaders in bull runs. If the more defensive, slower growth stocks take over, it is a sign the market is not anticipating strong continued economic growth.

Even with all of these undercurrents the indexes are still poised to continue the move off the May lows. Near term NASDAQ and SP500 have to take out their down trendlines. SP500 is at the doorstep, NASDAQ has some work but can make the move in a session as well. Again, the upside after that move is questionable above the April highs unless a real volume surge is maintained. As we noted last week, the market anticipates resolutions to issues well in advance, and it has yet to show action that suggests overwhelmingly favorable results regarding Iraq, the Fed, etc. At the same time it is setting up for the break higher. The strength of any upside breakout past the downtrend will be the best indication of the potential for the remainder of the rally. Indeed, a breakout itself could be the indication that the market has resolved its near term issues with Iraq, etc. As with all meaningful moves, volume will play the big role as the majority of investors will either want to move into stocks more aggressively or simply continue the same low volume meandering.

Market Sentiment

VIX: 14.99; -0.16
VXN: 20.02; -1.31
VXO: 14.75; -0.29

Put/Call Ratio (CBOE): 0.8; +0.01

NASDAQ

Rallied to tap resistance at 2000 once again, but gave back most of the move. Holding up, but needs to make a move to take out that level soon.

Stats: +3.06 points (+0.15%) to close at 1986.73
Volume: 1.729B (+16.33%). Big volume jump, but that was in all likelihood attributable to expiration though stocks such as MSFT, CSCO and DELL posted gains on big volume increases. Regardless of the Friday action, volume has to show some non-expiration strength on the next breakout move.

Up Volume: 930M (+513M)
Down Volume: 699M (-350M)

A/D and Hi/Lo: Decliners led 1.13 to 1. Mushy breadth as techs are still sluggish with NASDAQ underperforming much of the market thanks to SOX.
Previous Session: Decliners led 1.5 to 1

New Highs: 65 (+5)
New Lows: 73 (+30)

The Chart: (Click to view the chart)

A 26 point range, closing in the middle of the range. NASDAQ tapped the 50 day SMA (1974) and the 200 day SMA (1971) on the low (1973.91) and managed a rebound. Toward the close, however, it was falling as opposed to rising. Volume was above average for the first time since early May, but again, expiration drove that increase. NASDAQ held its ground above near support and below the 2004 down trendline at 2002. It is getting pinched between the two. There is a lot of pressure from the topside, and SOX as we noted Thursday, is a big drag on techs. That is one reason we believe that NASDAQ can bounce near term and move toward the April highs: SOX has sold hard and is due a relief bounce. That bounce can allow NASDAQ to break the trendline and test those highs. Unless SOX can pull a similar move and clear its 200 day SMA at 488, the move will be limited when SOX runs out of steam on its relief bounce.

QQQ gave a big intraday move up to 36.84 but it could not hold, fading similar to NASDAQ. Volume was extremely light as QQQ continued to hover over the down trendline (36.29).

S&P 500/NYSE

Decent action but gave up a brief breakout over the down trendline. Still ready to complete that move.

Stats: +2.97 points (+0.26%) to close at 1135.02
NYSE Volume: 1.494B (+15.27%). Above average volume as well, the first in just about a month. It too was expiration volume, so we are not putting much stock in it. NYSE volume, however, has showing positive attributes recently. Tuesday it was up on a solid up session. Thursday the index was down on rising trade, but the index made a strong comeback to close basically flat. This volume is indicating it is ready to make the break higher.

Up Volume: 901M (+199M)
Down Volume: 574M (+22M)

A/D and Hi/Lo: Advancers led 1.27 to 1
Previous Session: Advancers led 1.38 to 1

New Highs: 144 (+14)
New Lows: 22 (-18)

The Chart: (Click to view the chart)

This past week SP500 may have made the higher low that often comes right before a breakout. Monday it was under pressure, but held key support at 1125. That was the low point as the close held above the 10 day EMA (1130) the rest of the week with the Friday close right at the 2004 down trendline. Still in a good overall pattern since March, and as noted above, the price/volume action of late has been markedly improved. While it gave up the break over the 1135 trendline (high at 1139.08), it is still poised to make a move that sticks as it works for the April high at 1150.

DJ30

With MSFT and GE showing very strong trade and most other components rising on solid volume gains, DJ30 tapped the top of the recent range on the high (10,438) on strong volume. Seems the technology components were finally in sync with the more �industrial� components. Not all was upside volume, however, as WMT and HD were lower on some hefty trade. All in all, however, DJ30 continues to hold easily over its down trendline (10,330), tapping the 10 day EMA (10,351) on the low once more. Price/volume action has improved nicely, and DJ30 looks set to continue higher this week toward the April high (10,570).

Stats: +38.89 points (+0.37%) to close at 10416.41
Volume: 300 million shares Friday versus 170 million shares Thursday.

The Chart: (Click to view the chart)

THIS WEEK

Despite the struggles on NASDAQ, precipitated in large part by a languishing SOX, stocks are set up for a break higher. They were set up for a break higher at the start of the prior week as well, but the time was not right at that time either. The indexes are cheating higher as the June 30 Iraq handover and the FOMC meeting approach, and we still do not believe they will wait until the actual events to start their moves. The market anticipates events with respect to its more significant moves. Thus we still anticipate an upside move ahead of that period. Indeed, if stocks run to the April highs by the time of the meeting we could see the turnover and FOMC decision lead to a pullback.

That leaves us still looking at upside plays, and of course, if stocks continue a run past the April highs we will let them do so. If we see serious volatility and trouble at that level we will be ready to exit and also be ready with some downside positions. Again, for now that still leaves us looking at stocks that are in particularly good position to provide nice upside gains near term, e.g., breakout tests, 50 day EMA tests, solid patterns in high momentum stocks. There are still many solid stocks holding up quite well, ready to make a new or further upside move. We will take what the market gives on a further run from here, see how stocks react at the April highs, then move out and look to the downside if it gets rocky, take partial gains and ride the rest if it is still solid, and even look for more upside if it makes a really strong move at that point.

Support and Resistance

NASDAQ: Closed at 1986.73
- Resistance: 2000 is the top of the late 2003 base. 2002 is the January/April down trendline. 2024 is the June high. 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. April high is 2080. 2089 is the February closing high. 2112 is the early January high.
- Support: The 50 day SMA (1974). The 200 day SMA (1971). 1925 is some support. 1900 to 1890. The April lows (1880, 1878).

S&P 500: Closed at 1135.02
- Resistance: The March/April down trendline at 1135. 1142 is the June high. 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 10 day EMA (1130). 1125. The 50 day EMA (1121) and the 50 day SMA (1119). 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100. The 200 day SMA (1093).

Dow: Closed at 10,416.41
- Resistance: Late April peaks (10,478 to 10,512). 10,570 is the early April high. Price consolidation at 10,600 level. 10,747 is the February high.
- Support: The January/April down trendline (10,330). The 10 day EMA (10,351) held on the lows all week. The 50 day SMA (10,257) and EMA (10,267). Price support at 10,250. The 200 day SMA (10,126). March low (10,007). 9900-9850.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the �Economy� section.

June 24
- Durable Orders, May (08:30): 1.6% expected and -3.2% prior
- Initial Claims, 06/19 (08:30): 340K expected and 336K prior
- Help-Wanted Index, May (10:00): 40 expected and 38 prior
- New Home Sales, May (10:00): 1120K expected and 1093K prior

June 25
- GDP-Final, Q1 (08:30): 4.5% expected and 4.4% prior
- Chain Deflator-Final, Q1 (08:30): 2.6% expected and 2.6% prior
- Michigan Sentiment-Rev., June (09:45): 95.0 expected and 95.2 prior
- Existing Home Sales, May (10:00): 6.50M expected and 6.64M prior

SUBSCRIBER QUESTIONS

Q: In the Economy section you refer to the "ECRI" that comes out every Friday. What do the letters stand for and where is it reported? Thanks for the discussions on "supply side economics", it's making some sense to me now.

A: ECRI is the acronym for Economic Cycle Research Institute. It is a private entity that studies various aspects of the US and other world economies such as acceleration and deceleration and inflation prospects. The Conference Board puts out the LEI (Leading Economic Indicators) made up of a basket of 10 indicators. ECRI looks at several more indicators it has determined, after extensive study, give a faster and more accurate indication than other similar methods. By faster we mean it provides a more timely indication. The accuracy is historically proven with accurate calls of the 2001 recession, the end of the �Goldilocks� economy back in June 1999, and the Japanese recovery.

It has an impressive track record looking back, but it has a lot of the same problems of other indicators during the heat of battle. It gives indications, but you have to put them in context and figure out why they are showing what they are showing. Back in 2002 we were seeing an upturn in many points in the economy, but the ECRI was overstating some continuing slowdown. While it was picking up some of the same signs of improvement, they were overweighted by some continuing problems that were still worsening. Thus it blurred the potential recovery that was developing. ECRI was still pessimistic as we were turning optimistic. We received a subscriber question at the time regarding that discrepancy, and our answer was the same: ECRI offset the improved indicators with some that were still declining though they may have been a bit more lagging.

Nonetheless, it is a good indicator, particularly when looking at the trend. Right now it still shows a continuing decline in the annualized 4-week growth rate. It was down for the fifth straight week to 3.6% from 4.1%, a 13 month low. That is forecasting continued expansion, but at a slower pace in the second half. If the economy is not growing as fast, that puts pressure on stocks to advance their prices.

[ReturntoSender]

MORNING WATCH, June 22
By Frederic Ruffy, Optionetics.com
6/22/2004 6:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10592

Stocks are expected to trade mixed early Tuesday, as optimism about corporate earnings is offset by worry over next week’s Federal Reserve meeting. Approximately one hour before the opening bell, stock index futures showed a modest loss for the Dow Jones Industrial Average ($INDU) and a small gain for the Nasdaq Composite Index ($COMPQ).

Tech stocks may rise following upbeat earnings news from Priceline (PCLN) and PalmOne (PLMO). Shares of PalmOne rose sharply in after hours trading Monday after the company raised its first quarter earnings forecast. The company said it now expects to earn 17 cents a share, compared to previous estimates for a breakeven quarter. Meanwhile, Priceline is expected to move higher after the company said that higher bookings of airline tickets and hotel rooms would boost second quarter earnings to 32 cents a share, which was two cents better than previous estimates.

Shares of Seibel Systems (SEBL) may gain after Oracle’s (ORCL) Chief Executive Larry Ellison suggested that he may be interested in acquiring it and other software makers ahead of Oracle's hostile takeover of Peoplesoft (PSFT). Oracle’s Chief Executive made the comments in a videotaped testimony presented during part of the Justice Department’s ongoing efforts to block the PeopleSoft takeover.

Brokerage stocks are in focus today ahead of earnings reports from Goldman Sachs (GS) and Morgan Stanley Dean Witter (MWD). Goldman, the third largest US broker, is expected to report profits of $1.95 a share in the latest quarter. Meanwhile, analysts expect Morgan Stanley, which is the second biggest broker, to report earnings of $1.10 a share. Both firms are slated to report results Tuesday morning.

The economic calendar is empty today and tomorrow, but investors may remain skittish ahead of economic reports later in the week and ahead of the next meeting from the Federal Reserve. The Open Market Committee [FOMC] meets on June 29 and is expected to announce a rate increase on June 30th. Therefore, investors are watching the economic numbers this week in order to determine the extent of the forthcoming rate hikes.

However, no data is scheduled until Thursday, when weekly jobless claims, new home sales, and durable goods numbers are released. The latest Gross Domestic Product [GDP], consumer sentiment, and existing home sales numbers have the potential of moving the markets on Friday.

In the options market, sentiment turned mixed yesterday. The Dow fell 45 points on the day and the CBOE Volatility Index ($VIX) edged up .27 points. However, while the Nasdaq slipped 12.4 points, the Nasdaq Volatility Index ($VXN) edged down .29 to 19.73 and to new all-time lows. Meanwhile, the CBOE put-to-call ratio, which measures the relative levels of put and call activity on the Chicago Board Options Exchange, eased to .83, compared to a ten-day average of .89.



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

[ReturntoSender]

INDEX INTELLIGENCE: VXN—Bearish Divergence?
By Frederic Ruffy, Optionetics.com
6/22/2004 11:30:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10596

During the past few days, technology stocks have been facing a bit of selling pressure and the Nasdaq100 Index ($NDX) has been trading lower. At the same time, the Nasdaq 100 Volatility Index ($VXN), which measures the expected volatility of Nasdaq 100 Index options, has also been falling and is now setting new all-time lows. The drop in the volatility index amid falling stock prices in the technology sector is unusual. More often, the Nasdaq 100 and the VXN will move in opposite directions. So, why is the volatility index not rising this time? In order to better understand, let’s examine these two indexes and see what’s been happening with each of them lately.

The Nasdaq 100 Index consists of Nasdaq-listed stocks. To be specific, the index includes the one hundred largest non-financial stocks trading on the Nasdaq Stock Market. Furthermore, the index is weighted by market value. For that reason, large technology companies like Microsoft (MSFT), Cisco Systems (CSCO), and Intel (INTC) dominate the index. Table 1 (below) shows the top twenty components and their respective weightings within in the NDX today. Notice that these twenty companies account for 56.4% of the total index.

NDX Component
Symbol
% of Index

Microsoft Corporation
MSFT
8.15

QUALCOMM Incorporated
QCOM
5.55

Intel Corporation
INTC
5.40

Cisco Systems, Inc.
CSCO
4.59

eBay Inc.
EBAY
3.68

Dell Inc.
DELL
2.79

Amgen Inc.
AMGN
2.73

Nextel Communications, Inc.
NXTL
2.65

Comcast Corporation
CMCSA
2.30

Oracle Corporation
ORCL
2.03

Biogen Idec Inc
BIIB
2.00

InterActiveCorp
IACI
1.96

Maxim Integrated Products, Inc.
MXIM
1.96

Starbucks Corporation
SBUX
1.90

Yahoo! Inc.
YHOO
1.75

Applied Materials, Inc.
AMAT
1.44

Apollo Group, Inc.
APOL
1.42

Xilinx, Inc.
XLNX
1.40

Linear Technology Corporation
LLTC
1.39

Electronic Arts Inc.
ERTS
1.30

Total

56.38


The Nasdaq 100 Volatility Index trades under the symbol VXN and offers a real-time gauge of the expected volatility of Nasdaq 100 Index options. The formula used to compute the index lies beyond the scope of this article (but is available on the Chicago Board Options Exchange web site, cboe.com). Basically, the VXN measures the levels of volatility currently priced into NDX options. It tells us what investors and options traders expect the volatility of Nasdaq stocks will be in the future. When the volatility index rises, market players expect volatility to increase going forward. Those expectations are being priced into Nasdaq 100 Index options. On the other hand, when VXN falls, traders are pricing in the prospect of lower volatility.

Since the Volatility Index is a measure of expected volatility, some market watchers also use it as a barometer for investor sentiment. In that respect, it is similar to the more widely watched CBOE Volatility Index ($VIX). The VIX is sometimes called the market’s “fear gauge” because it rises when investors become nervous. The VXN works in a similar manner. If it is high, investors are a bit nervous or fearful about market conditions. They expect volatility to rise. On the other hand, when the volatility index is low, traders are bullish or perhaps complacent. If so, they expect market volatility to remain low.

The chart below shows the six-month change in both the Nasdaq 100 and the Nasdaq Volatility index. The Nasdaq 100 Index has been trending modestly lower during the past few months and now sits well below its yearly highs. The volatility index, meanwhile, has been jumping higher and lower. The index spiked up towards 30% in mid-May before heading lower. The jump in the VXN also coincided with a short-term bottom in the Nasdaq 100. From a contrarian’s view, this makes sense because market turning points often occur when investor sentiment becomes too pessimistic or bearish. Notice that a similar situation unfolded in mid-March—when the VXN spiked higher before a rally in the Nasdaq 100 Index.

Lately, however, VXN has been falling. In fact, the index is now trading at an all-time low. Furthermore, the recent decline has occurred amid falling stock prices. During the past two weeks, the Nasdaq 100 Index has fallen from 1,480 to 1,450. Therefore, contrary to what one might expect, the recent decline has not stirred up much anxiety or fear. Instead, the volatility index continues to set new lows. From a contrarian view, this divergence is a bearish omen. It indicates that investors and traders are too complacent, which is often the type of sentiment that prevails before stocks tumble.

While the low VXN is perhaps a sign of complacency and bullishness among investors, there is another important reason why it is low. Namely, the market has been trading very quietly for several months. To illustrate, the table below shows the daily price moves of the Nasdaq 100 Index since the end of April. The average daily point change in the index during the past month and a half has been less than twelve points. The average daily percentage change in the Nasdaq 100 has been less only .8%, which is extremely low by historical standards. Therefore, the VXN is low, not just because investors are bullish or complacent, but because actual levels of market volatility have also been low for quite some time.

Date
NDX Close
Daily Point Move
Daily % Move

4/30/04
1401.36



5/3/04
1415.29
13.93
0.99%

5/4/04
1422.11
6.82
0.48%

5/5/04
1428.42
6.31
0.44%

5/6/04
1415.6
-12.82
-0.90%

5/7/04
1406.19
-9.41
-0.66%

5/10/04
1397.1
-9.09
-0.65%

5/11/04
1421.89
24.79
1.77%

5/12/04
1414.83
-7.06
-0.50%

5/13/04
1417.09
2.26
0.16%

5/14/04
1399.85
-17.24
-1.22%

5/17/04
1379.9
-19.95
-1.43%

5/18/04
1397.47
17.57
1.27%

5/19/04
1396.34
-1.13
-0.08%

5/20/04
1396.87
0.53
0.04%

5/21/04
1408.17
11.3
0.81%

5/24/04
1413.97
5.8
0.41%

5/25/04
1447.72
33.75
2.39%

5/26/04
1453.87
6.15
0.42%

5/27/04
1463.11
9.24
0.64%

5/28/04
1466.22
3.11
0.21%

6/1/04
1468.54
2.32
0.16%

6/2/04
1464.22
-4.32
-0.29%

6/3/04
1445.21
-19.01
-1.30%

6/4/04
1455.04
9.83
0.68%

6/7/04
1491.45
36.41
2.50%

6/8/04
1495.97
4.52
0.30%

6/9/04
1469.5
-26.47
-1.77%

6/10/04
1481.27
11.77
0.80%

6/14/04
1458.64
-22.63
-1.53%

6/15/04
1479.2
20.56
1.41%

6/16/04
1479.99
0.79
0.05%

6/17/04
1464.03
-15.96
-1.08%

6/18/04
1464.65
0.62
0.04%

6/21/04
1453.23
-11.42
-0.78%






Average Daily Point Change

11.91
0.82%


While the recent period of low volatility has helped drive VXN to all-time lows, it is also making it more difficult for options traders to generate profits with directional trading strategies in the technology sector. In many cases, tech stocks are not moving fast enough to make up for the negative impact of both time decay and falling implied volatility. In this environment, it makes more sense to take a longer-term approach and even set up trades like diagonal or calendar spreads. Then, wait for VXN to begin moving higher in anticipation that investor sentiment is beginning to change, which would probably mean that market volatility is making a comeback.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
Visit Fred Ruffy’s Forum

[ReturntoSender]

From Briefing.com: 7:40PM Tuesday After Hours prices levels vs. 4 pm ET: A positive after hours that has absorbed a number of corporate announcements very well. Presently, the S&P futures, at 1135, are 2 points above fair value, and the Nasdaq 100 futures, at 1480, are also 2 points above fair value. Most of tonight's developments have pertained to acquisitions, or news that a particular acquisition has closed.

The below table lists the most influential announcements of the evening.

Company Stock Move Reason for Move
Automatic Data (ADP) 43.57
-0.02
(-0.1%) Provider of transaction services to the financial industry acquires Bank of America's (BAC) US clearing and broker-dealer services division for an undisclosed amount; The transaction will not be immediately accretive to earnings, as Automatic Data said the deal will cut into earnings by about $0.01-0.02 in the first two years; Current Reuters consensus estimates call for EPS of $1.56 in FY04 (June) and EPS of $1.74 in FY05
CheckFree (00C0) 28.91
-1.07
(-3.6%) Provider of online bill payment services announces it closed on its $110 mln all cash acquisition of American Payment Systems, which was a subsidiary of UIL Holdings (UIL); The unit enables 7 mln households to pay for services in-person through a national network of about 10,000 retail/agent locations; For Q4 (June), CheckFree sees the purchase being mildly accretive to underlying earnings; Management now anticipates EPS of $0.28-0.30 (consensus of $0.29); Stock recently fell below its 50-day sma
Darden Restaurants (DRI) 21.73
+0.08
(+0.4%) Owner of the Red Lobster and Olive Garden restaurant chains turns in a 31% increase in Q4 (May) EPS, to $0.46 (consensus of $0.44), and an 11% rise in revenues to $1.36 bln (consensus of $1.36 bln); Company cited new restaurant growth at Olive Garden and Smokey Bones and the additional operating week in the quarter for the strength; For FY05 (Aug), Darden expects EPS of $1.62-1.68 (consensus of $1.63) and sees same store sales growth of 1-3%
Kosan Biosciences (KOSN) 7.00
-0.89
(-11.3%) Niche biotech name and its partner on KOS-862, Roche Holdings, make known they will initiate a phase II trial of the drug in prostate cancer, but halt a Phase II trial of KOS-862 in colon cancer; Kosan blamed a toxic build-up of the compound; KOS-862 is one of two anti-cancer drugs the company has in development; Drug was being evaluated in 3 different cancer indications; Stock has given back nearly half of its gains since early May
3Com Corp (COMS) 6.92
+0.06
(+0.9%) Mid-cap computer network company narrows its Q4 (May) GAAP loss to $0.05 on revenues that rose 5% to $183.4 mln (consensus of $174.2 mln); For Q1 (Aug), 3Com said revenues should be flat to slightly up sequentially (consensus of $176.02 mln); As a side note, the company said it would be replacing its EVP of Worldwide Operations (Dennis Connors) and CFO (Mark Slaven) as both executives decided not to relocate to headquarters per their one-year commuting agreement said
Tomorrow, the market will likely be grasping at straws (again) for direction with no economic reports on the agenda and only one earnings report (Federal Express). Fed governor Bies may provide the market something to go off of in late-day trading as he will be speaking on Risk Management.

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

7:50PM CRM: Salesforce.com prices 10 mln share IPO at $11.00 : The IPO prices above the upwardly revised range of $9-10 (up from $7.50-8.50). Salesforce.com (CRM) is a provider of application services that allow organizations to share customer information on demand. Deal is being led by Morgan Stanley

5:25PM Swing Trader: GS, BRCM, GPRO, MMM, MXIM, MERQ, FSH : A weak morning turned into a mid-day rally led by Semiconductors and Brokers. Seeing these 2 groups rally on slightly higher volume is a good sign. The market is starting...(continued)

4:03PM FSI Intl beats handily on EPS and revs; guides revs in line for Q4 (FSII) 7.30 +0.40: Reports Q3 (May) earnings of $0.13 per share, $0.13 better than the Reuters Estimates consensus of $0; revenues rose 87.1% year/year to $36.3 mln vs the $29.7 mln consensus. Co sees Q4 orders of $30-35 mln and revs of approx $33-36 mln, Reuters revs consensus is $35 mln.

4:00PM FSII prelim $0.13, vs $0.00 consensus; revs $36.3 mln, vs $29.7 mln consensus :

Close Dow +23.60 at 10,395.07, S&P +4.11 at 1,134.41, Nasdaq +19.77 at 1,994.15: Stocks opened lower, and the continued selling from yesterday took the S&P Index hit -5.93 by mid-morning...then, the market turned around, and the S&P Index rallied over 10 points and closed near its highs of the day...all of this developed on very little news......semiconductor and telecom stocks rallied, and got credit for jump starting the market, but the action today simply left the major averages little changed for the week following yesterday's weakness...
in essence, today was largely a reversal of yesterday, and maintains the trading range mentality that has been in place for weeks...in the Dow, Wal-Mart (WMT 54.06 -0.87) was lower after a judge ruled a class action lawsuit could proceed, and DuPont (DD 44.00 -0.35) was down after a Wall Street Journal article said the US government might investigate chemical price fixing...Morgan Stanley (MWD 52.15 +0.90) and Goldman Sachs (GS 90.65 +1.86) were helped by strong earnings reports...attention remains on the Fed policy statement a week from today, as the economic and earnings calendar this week remains light...that also defines volume, which came in at only 1.38 billion shares on the NYSE...

bonds were slightly lower today, and crude oil futures bounced back $0.48 to $38.25 after falling $1.23 yesterday...NYSE Adv/Dec 1675/1588, Nasdaq Adv/Dec 1733/1391

3:41PM Note from Wachovia Conference - CNXT

Conexant Systems (CNXT 4.38 +0.36) management discussed company's focus on broadband communications for the network enterprise and digital home markets.
Believes company can grow 15-20% annually based on company's diversified product lines.
Focused on improving profitability and delevering balance sheet; realigning overall operating expenses. Anticipate potential annualized savings of $40MM on cost of sales line and $40MM in operating expenses from workforce reductions, process realignments and price concessions from vendors including foundry partners.
Estimate total addressable market at $5.8B in 2004 growing at a CAGR of 18% through 2007 ($6.4B in 2005; $7.2B in 2006; and $8.1B in 2007).
Target operating model is 45% gross margin in competitive, high volume markets; operating expense of $100MM; minimum operating margin of 15% by Q4:04.
No change to guidance. Reuters Research prints Q3 consensus EPS at $0.05 on $312.60MM (+178.2% Y/Y); F04 EPS at $0.21 on $1.137B (+89.5% Y/Y).--Ping Yu, Briefing.com
CNXT is a bet on the rapidly growing markets for satellite set-top box and high-speed data access solutions. Shares trade at a discount to peer group and, based on our inverted EVA/DCF model, are priced for sustained mid teens growth from F06 assuming 15% operating margin.--Ping Yu, Briefing.com

1:13PM Note from Wachovia Conference - BRCM

Broadcom (BRCM 43.64 +0.99) management discussed convergence of voice, video and data driving demand for the company's products.
Stressed company's efforts to diversify away from traditional businesses and develop new markets over the past few years.
Estimated served available market at approximately $23B.
No update to guidance. Reuters Research prints Q2 consensus EPS at $0.32 on $635.12MM (+68.1% Y/Y); F04 EPS at $1.29 on $2.585B (+60.5% Y/Y).--Ping Yu, Briefing.com
BRCM competes in some of the fastest growing segments within the consumer broadband, wireless and networking markets. Shares trade at a premium to peers and, based on our inverted EVA/DCF model, are priced for sustained upper 20% revenue growth from F06 assuming 30% operating margin, which is materially above management's long-term target of 20% operating margin on 50% gross margin. Implied growth rate rises to lower 30% assuming 25% operating margin.

As we have previously commented, BRCM may be able to sustain the expected level of growth over the short-term given that the company's targeted markets are in the early stage of recovery/growth, and BRCM is beginning to harvest $6.3B of investments in 14 companies acquired between 2000 and 2003. But the sustained growth rate priced into shares exceed the level which current industry fundamentals can support over the long term on a purely organic basis.

Modest upside to the targeted 20% operating margin possible as management remains focused on containing operating expenses and the company has little variable compensation tied to sales, but difficult to sustain given competitive dynamics. We would continue to hold off in view of the steep premium valuation accorded shares, and the potential for near-term dilution given the company has returned to the acquisition path, acquiring three developing stage companies for over $215MM since February.--Ping Yu, Briefing.com
12:30PM Goldman Sachs (GS) 89.38 +0.59: Like a lot of brokerage firms, Goldman Sachs (GS) made the best of less than ideal conditions during Q2 (May). The company managed to grow earnings and revenues in a meaningful fashion - for its second best quarter in firm history - but still posted results that were down on a sequential basis. The rise in interest rates and the volatility in credit spreads hurt trading revenues some, and forced management to rely on investment banking and asset management for its strength.

Both segments achieved sequential growth, although investment banking was more robust with an increase of 25% to $953 mln. Financial Advisory nearly doubled its revenues from a year-ago, to $513 mln, as client activity picked up. Goldman retained its number one position in mergers & acquisitions, and was number two in worldwide equity offerings, public stock offerings, and IPOs.

As strong as both areas were, their combined revenues still accounted for a little over a third (at 34%) of total revenues ($5.51 bln versus the Reuters consensus estimate of $5.09 bln). Trading and Principal Investments saw its revenues decline 10% sequentially to $3.63 bln as fixed income revenues dropped 10% from Q1's (Feb) huge result. Revenues from equities were essentially unchanged with principal strategies - Goldman's proprietary trading unit - experiencing a significant sequential decrease across most regions and sectors. An unrealized $561 mln gain from the firm's investment in Sumitomo Mitsui helped offset the lackluster trading performance.

Goldman effectively traded margins for volumes in its trading group as clients were unwilling to make large trades in the less favorable stock environment. Commission volumes were higher, but profitability declined as a result. The effect was felt in Q2's return on equity, which shrank 260 basis points sequentially to 20.9%.

It would not be surprising to see the same trading trend in Q3 (Aug), as most clients take vacations and/or prefer not to play the thinly traded summer market. Q4 (Nov) should see a noticeable improvement in trading as more players make their way back to the action. Two (expected) Fed rate hikes should also be absorbed by the market then.

Briefing.com would continue to advise long-term investors to hold GS (the stock is a holding in our conservative portfolio) as it remains one of the best positioned names in the brokerage space. Goldman's undisputed leadership in investment banking should help it weather the downturn in the bond market. Prospects for near-term gains remain admittedly challenging with the market focused on interest rate concerns, but we believe shares will start to inch higher after the FOMC begins raising rates and client activity ramps. -- Heather Smith, Briefing.com

11:51AM Note from Wachovia Conference - EMC

EMC (EMC 11.01 +0.05) EVP Mark Lewis commented that management is seeing markets return to normalcy of 60% annualized storage capacity growth; expects 70% growth in 2004.
Company participates in a variety of software markets: backup and recovery is basic market; replication market seeing reasonable growth driven by security needs; virtualization is emerging, rapidly growing and critical market. VMWare acquisition allows customers to build virtual environment that enables grid computing / utility computing.
Strong in enterprise; moving into small and medium size businesses market with Dell relationship.
No update to guidance. Reuters Research pegs Q2 consensus EPS at $0.08 on $1.968B (+33.0% Y/Y); C04 EPS at $0.35 on $8.083B (+29.6% Y/Y).--Ping Yu, Briefing.com
11:28AM Note from Wachovia Conference - IDTI

Integrated Device Tech (IDTI 13.66 +0.16) management discussed company's focus on communications ICs for accelerated packet processing.
End-market demand accelerating. Communications infrastructure equipment account for approximately 70% of company sales; wireless networking/base station infrastructure contributes 23% of company sales.
Cisco Systems account for 20-25% of business; components are sold via contract manufacturers.
Fab light strategy with significant manufacturing/operating leverage.
Management expects new chips introduced a year ago for solving interchip communications protocol issues to generate several hundred million in annual revenue within a few years. Chips combine buffering, switching and queuing functions.
No update to guidance; company reaffirmed on June 2. Reuters Research prints Q1 consensus EPS at $0.09 on $102.17MM (+23.0% Y/Y); F05 EPS at $0.49 on $440.30B (+27.5% Y/Y).--Ping Yu, Briefing.com
10:09AM palmOne (PLMO) 29.36 +7.90: palmOne reported Q4 results after the close on Monday. The provider of handheld computing and communications devices posted pro-forma EPS of $0.32 on revenue of $267.346 (+23.1% Y/Y) vs. consensus at $0.13 on $254.13MM.

Demand continues to exceed supply for Treo 600s and screen supplies also remains constrained. PLMO has added additional display vendors and expects to make progress in filling backlog.

The company extended its lead in handhelds from a 57.7% share in Q3 to 60% according to NPD.

The following table shows sales, Y/Y growth and average selling prices by revenue segment. Segment Revenue
($ in MM) % Sales Y/Y Growth (%) Units (in '000s) Average Selling Price
Handhelds--Devices 175.6 66 (12) 949 185
Handhelds--Accessories & Services 16.3 6 n/a
Smartphones 75.4 28 n/a 151 499
Total 267.3 100 23.1 1,100 228
Gross margin increased 406 bps Y/Y to 30.6% despite average selling prices declining 1% Y/Y, reflecting tight cost control, improved supply/demand and product life cycle management, and contribution from smart phones. Operating margin, excluding extraordinary items and amortization, increased Y/Y from a loss to 7.0%.

Guided for Q1 EPS of $0.12 on $250-260MM (+40.9-46.5% Y/Y) vs. consensus at ($0.01) on $232.07MM; F05 EPS of $1.15-1.25 on $1.21-1.29B (+27.4-35.8% Y/Y). Gross margin is expected to be 28.5-29.5%; operating margin 5-6%. Management expects the company to ship 240-260K smart phones in Q1. Revenue mix between handheld and smart phones is expected to shift from 72% handheld, 28% smart phones in Q4:04 to approximately 50/50 by Q4:05.

The following table shows price multiples and Y/Y growth rates for PLMO compared against industry comps within the communications equipment and computer systems & peripherals groups. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
palmOne (PLMO) 0.8 (27.6) 1.4 1.0 13.4 35.8
Research in Motion (RIMM) 6.4 149.0 15.8 8.0 6.0 82.6 98.7 32.2
Nokia (NOK) 1.3 10.0 1.8 1.9 1.7 (1.6) (1.9) 8.1
Dell (DELL) 1.5 18.7 2.0 1.8 1.5 17.9 18.9 15.6
Communications Equipment 2.0 31.6 2.7 n/a (3.3) n/a
Computer Systems & Peripherals 1.0 17.6 1.5 9.5
Blended 1.4 22.7 1.9 4.5
*P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of June 18, 2004.
**P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of June 18, 2004.

PLMO has risen over 85% since the Q3 review, Story Stocks, March 23, 2004, and continues to trade at a significant discount to peers. Shares, based on our inverted EVA / DCF model, are priced for sustained lower 20% revenue growth from F06 assuming 8-9% operating margin and aggressive working capital management.

Expectations are above management's near-term operating model but are likely to prove conservative over the long-term depending on smartphone market penetration, ASPs and PLMO's market share.

PLMO is partnering with carriers to drive the adoption of handhelds and smartphones which, according to IDC, is forecast to grow at a combined compound annual growth rate of 37% through 2008. PLMO ended Q3 with six carrier relationships and expects to close the calendar year with ten. Shipments are expected to increase as additional carriers come on stream. International markets represent significant growth opportunities with the U.S. market still accounting for approximately 62% of sales. Management remains focused on containing operating expenses and maintaining a stable supply/demand balance. We would continue to accumulate but expect shares to be volatile near-term.--Ping Yu, Briefing.com

9:05AM Ratings Briefing - QLGC : Merrill Lynch upgrades QLogic (QLGC 25.48) to Buy (volatility risk rating: high) from Neutral based on valuation, as it believes the recent decline (down over 50% YTD) more than reflects the risks of the business. Firm also says that last week's comments by Emulex at an investor conference likely led to reflexive selling of QLGC, and that the quarter appears to be tracking as key OEMs such as H-P and Sun appear to be pulling "normally" from their hubs; channel checks suggest flattish growth in the channel. Firm, therefore, believes that the OEM part of the business will drive growth this quarter, and that seasonality in H2/CQ4, which is usually strong, should start to weigh more on the share price. Target is $34.

What It Means:

At Merrill Lynch a Buy rating for a stock with a high volatility risk rating means expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating is 20% or more
Why the Call Should Move the Stock
Bullish endorsement of an out-of-favor stock from an influential firm should ignite buying interest among short-term accounts
With stock down 51% year-to-date, move to a Buy rating should prop up stock today as participants will be motivated by idea that stock has a favorable risk-reward relationship
IT sector known to do relatively well in a rising interest rate environment... upgrade at this juncture will help participants identify QLGC as a potential bargain hunting candidate that offers growth at a reasonable price
Firm's price target supports bullish thesis as it represents potential return of 33% from current levels
Sidenote:
Ratings distribution: 4 Buy; 4 Outperform; 11 Hold; 1 Underperform; and 1 Sell [source: Reuters Estimates]
QLGC expected to report fiscal Q1 (Jun) results around mid-July... current Reuters consensus EPS and revenue estimates are $0.36 and $130.35 mln
--Patrick J. O'Hare, Briefing.com

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

[ReturntoSender]

Chart of the Day - Market Uptrend Intact

This has been a challenging year for the stock market as illustrated by the downward sloping trend (see dashed red and dashed green lines). Even with this five-month downtrend, the Nasdaq has tested but not violated its long-term uptrend (see solid red and solid green lines). These two trends are converging and one will fail in the near future, but the long-term trend is still up until proven otherwise. Stay tuned...

Notes:
- What are the technical indicators saying about future Nasdaq trends? Find out with the long-term stock market charts, indicators, and studies of our popular premium service called Chart of the Day Plus.

[ReturntoSender]

OUTSIDE THE BOX: Determining Secular or Cyclical Market Biases
By Jeff Neal, Optionetics.com
6/23/2004 7:45:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10601

One of the biggest challenges an investor faces is to try to determine if the market is currently bullish or bearish. Is it long-term bullish and short-term bearish or vice versa? What about the intermediate trend—is it bullish or bearish? In addition, the investor has to also discern whether the particular market bias is secular in nature or cyclical. It can get confusing at times, however with some conceptual explanations hopefully getting a read on the latest market conditions can at least be made a bit simpler.

In general a bull market is described as an extended period of rising prices whether it be in an individual stock, group of stocks, or the market as a whole. However, because security prices are often subject to reversals, it is sometimes difficult to know whether there has been a temporary correction in or a permanent end to the bull market. This is why the opinion of whether a bull market is actually in progress is often subject to individual interpretation.

A bear market on the other hand is characterized by an extended period of general price declines in an individual stock, group of stocks, or the market as a whole. However, even in a widespread bear market it is possible to have bull markets in particular stocks or groups of stocks. For example, stocks of gold related companies often move against the prevailing trend in the equities market.

This brings us to the distinction between secular bull and bear markets versus cyclical bull and bear markets. A secular bull or bear market is one that can be consistently measured over a long period of time like decades. A historical example of a secular bull market is from 1982 to 2000 when the Dow Jones Industrial Average surged more than 1,400 percent over that time period. A secular bear market was experienced from the 1966 to 1982 time frame. During this period stocks declined as well as trading sideways which is typical of a secular bear market.

On the other hand cyclical bull and bear markets occur over much smaller time periods anywhere from several months to a couple of years. Typically a cyclical market or stock is highly dependent on the cyclical changes in general economic activity. As investors anticipate changes in profits, cyclical stocks often reach their high and low levels before the respective highs and lows in the economy.

The challenge for investors is identifying just what type of market environment we are experiencing. For example, are we in a bear market rally or is it the beginning of a long-term bull market? The downside risk of course could wipe out any gains achieved previously by catching investors by surprise with a major decline in equity prices. On the other hand, if investors strongly believe we are in a long-term bear market they will totally miss out on the cyclical bull market rallies leaving a lot of potential profits on the table. As history has so clearly pointed out minibull markets embedded in multiyear bear markets are not uncommon. Conversely, minibear markets can often occur within multiyear bull markets.

Defining just what kind of market we are experiencing is a constant challenge to the investor. Many times it is just not clear. However, one can still develop a market bias and participate in the markets if you stay hedged. By hedging you reduce your risk exposure dramatically and it also allows you to more easily adjust your positions as the market dictates.

Happy Trading.


Jeff Neal
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
[e-mail]

[ReturntoSender]

U.S. stocks rose, led by computer- related shares such as Cisco Systems Inc. and energy shares including Amerada Hess Corp. FedEx Corp. gained after the company boosted its earnings forecast. The S&P 500 Index reversed direction nine times in the first hour of trading as investors weighed the impact of an expected increase in borrowing costs by the Federal Reserve on June 30. The Nasdaq Composite moved from losses to gains for a second day. The S&P 500 added 9 points (+0.9%) to 1,144. An index of energy shares had the biggest gain among the benchmark's 10 industry groups. The Nasdaq rose 26 points (+1.4%) to 2,020. The DJIA increased 84 points (+0.8%) to 10,479. All three benchmarks had their biggest one-day gains since June 7. Almost seven stocks rose for every three that fell on the New York Stock Exchange. Some 1.4 billion shares changed hands on the Big Board, the 18th day in the last 19 that trading has lagged this year's daily average. Economists expect the central bank to lift its overnight lending rate by 0.25 percentage point from a 46-year low of 1 percent when policy makers meet June 29-30. That's according to the median estimate in a Bloomberg News survey. The handoff of Iraqi sovereignty also occurs June 30.

Strong Sectors: tobacco, homebuilding, oil & gas, communication equiptment, iron & steel, computer storage

Weak Sectors: gold & silver, discount retail, food processing & distribution

Top Stories . . . FedEx, the world's largest overnight package-delivery company, said fiscal fourth-quarter earnings rose 47 percent as a strengthening global economy boosted demand for its services.

The U.S. Securities and Exchange Commission is reviewing whether brokers who help set interest rates on $204 billion of corporate and municipal bonds misled investors and issuers.

Career Education, a for-profit education company, said it received a formal order of investigation from the Securities and Exchange Commission.

Mylan Laboratories, the largest U.S. maker of generic drugs, withdrew its earnings forecast and filed a lawsuit against the U.S. Food and Drug Administration after the agency delayed introduction of Mylan's version of the Duragesic pain-relief skin patch.

AT&T, the largest U.S. long- distance telephone carrier, said it will stop competing for residential customers in seven states after losing an attempt to revive rules that gave it discount rates when renting local-phone lines.

Quotes of Note . . . ``Earnings will continue to be strong, but share prices reflect that,'' ``I don't see significant gains in the markets in the coming months.'' Alison Porter, head of U.S. equities at Britannic Asset Management which manages $1 billion. Porter has been buying Motorola Inc., the world's No. 2 maker of mobile phones.

Gurus . . . Ken Perkins, research analyst for Thomson First Call says the outlook for second-quarter earnings is fabulous. He says S&P 500 companies in the second quarter will likely boost their third straight quarter of at least 25% profit growth. Year-over-year earnings improved 28% in the fourth quarter and 27% in the first quarter. Demand has been rising and firms have enjoyed the leverage that comes from cost cutting during the bad times. Analysts expect S&P firms’ profits will rise 20% in the second quarter, but Perkins says that given recent trends, he feels comfortable they will be up 26% when fully reported.

Ed Hyman of ISI concurs. His regression model is projecting second-quarter growth up 29%, and he is plus-20% for the third quarter. He says analyst projections are just too low.

As for technology, Alberto Vilar, who runs Amerindo Investment, says his success this year stems from his concentrated portfolio and his bets on eBay, Yahoo, Expedia, and Imclone. He would not be buying Google if the market cap exceeds 40 billion at the offering. He recently bought Eyetech Pharma and has been adding to Juniper and XM Satellite.

And on his radio show last evening, Jim Cramer says he is buying the neglected cable, radio and satellite stocks like Clear Channel, Emmis, Echostar, and Comcast. He would be selling Eight By Eight and Conexant on strength.

Barron's Online highlights an interview with Bernie Schaeffer, a Chairman and CEO of Schaeffer's Investment Research, for his stock pick's. Over the last 12 months, he says that his all-equity "master portfolio" is up 18.3% percent, beating the S&P's 500 index by almost 5 percentage points during that period. Right now, he's bearish, but is long on particular sectors, including auto makers, leading Internet companies, and several gold stocks. He also suggests that investors keep as much as 25% of their assets in cash. Mr Schaeffer currently likes Ford, General Motors, eBay, Kmart, SBC Comm., Hershey Foods, Yahoo and HOLDRs, including UTH, HHH and OIH. Mr Schaeffer currently doesn't like Microsoft. He says that of the 26 analysts that cover the stock, 25 have [Buy recommendations]. Microsoft can only minimally benefit from analyst upgrades, whereas Ford can benefit tremendously through upgrades. And short interest on Microsoft is negligible. "This stock is a prototype of a blue chip stock that I don't see having much fire power to the upside."

New Tech . . . The WSJ highlights the ShotSpotter, which can detect gunshots within about 2 miles and notify police within seconds, giving them the precise location where the gun went off. ShotSpotter listens for gunshots with acoustic sensors that can be affixed to trees, telephone poles and other structures. Once a gunshot is detected, ShotSpotter calculates the position where the gun was fired and sends the data over phone lines to a central server accessible by law-enforcement agencies. Because it uses computer software to analyze sounds, ShotSpotter is precise enough to ignore fireworks, backfiring cars and other noises that could be mistaken for gunfire. To address those concerns, ShotSpotter is developing a wireless system that can be moved on the fly. By the third quarter, the co expects to be producing a device that communicates wirelessly through a set of radio frequencies that send data to the central server. "You can have a complete wireless-sensor network up in an hour," says James Beldock, CEO and president of ShotSpotter. ShotSpotter's capacity to pinpoint the source of a gunshot within a few feet doesn't come cheap. Law-enforcement agencies have to pony up $180K, which buys a license to use ShotSpotter software and eight sensors. Each additional fixed sensor costs $2,640 and each additional wireless sensor will cost about $5K. Looking ahead, ShotSpotter is teaming up with Xybernaut , a maker of wearable computers, to develop a gunshot-detection device that can be worn on the body. The wearable ShotSpotter could be sewn into jackets or mounted on bullet-proof vests or patrol cars. These sensors could send gunshot data to a PDA, cellphone or other type of digital display, letting the person know in seconds where shots are coming from and the type of gun being fired. ShotSpotter says it's currently in talks with the military on applications for the device.

Mortgages . . . Mortgage applications edged higher 0.1% in the week of June 18 as 30-year mortgage rates fell 13 bp to 6.21% and 1-year adjustable rates remain attractive at 4.10%. Refinancing showed its 6th decline of the last 7 weeks (-1.7%) as purchases rose 1.1%. The purchase index has remained strong despite the rise in long term rates as May reached a record high which should be reflected in tomorrow's release of new home sales.

New Trading Rules . . . The WSJ reports the SEC is expected to approve a pilot program today that will lift short-selling restrictions on about 1,000 actively traded stocks for a one-year period, allowing investors to more easily bet against some large stocks. But the agency is abandoning, at least for now, an earlier plan that would have allowed short-sales only at prices at least one cent above the best national bid. It now plans to expand the pilot to 1,000 companies from the 300 it proposed in October and shorten the time period to one year instead of two. The SEC will also lift restrictions for a year on some after-hours short-sales, allowing unrestricted short-selling from about 6:30 p.m.

IPO . . . Salesforce.com’s IPO priced at $11, above the expected range of $9-$10, which was raised earlier in the day from $7.50-$8.50. The company is the largest provider, based on market share, of application services that allow organizations to easily share customer information on demand. It provides customer relationship management, or CRM, service to businesses of all sizes. Providing applications that are delivered through a standard Web browser, the co substantially reduces many of the traditional expenses of enterprise software implementations. From its introduction in Feb 2000, its customer base has grown to 9,800. According to a study, the market for on-demand application services is projected to grow from $425 million in 2002 to $2.6 billion in 2007. The company posted sales of $96 million last year, up 88% year over year. The company posted its first profit last year. The co planned to go public last month, but delayed the deal to allow a cooling-off period following comments in the press by its CEO. It's not Google, but this deal has generated a lot of interest as it has been an aggressive and successful player in the CRM space. It probably would have been even more warmly received had it listed on the Nasdaq rather than the NYSE. This is a 10 mln share deal, led by Morgan Stanley and begins trading this morning.

Economic Comments . . . The government periodically divides GDP into industries. The data continues to show several well-established trends. The output of the biggest industry, financial services, continued its steady growth as a share of GDP, reaching 20% in 2003. Manufacturing and agricultural output continued to decline as a share of overall GDP.

Industry data continues to show several well-established trends.

• The output of the biggest industry, financial services, topped $2.2 trillion (all data is nominal). The industry continued its steady growth as a share of GDP, reaching 20% in 2003.

• Financial services includes two major subdivisions. Finance and insurance make up 7.9% of GDP, while real estate and rental activity make up 12.4% of GDP.

• Manufacturing output continued to decline as a share of overall GDP, falling to 13% in 2003. In 1947, manufacturing output was $65.8 billion out of a $244 billion total GDP, roughly 27%.

• Agricultural output continued its long-term downtrend as a share of GDP. At $112 billion, it produces roughly 1% of GDP. In 1947, agricultural output was $20.7 billion out of a total GDP of $244 billion (in nominal 1947 dollars.) The uptick in the early 1970s was related to a definitional change in the data at that time.

• Mining (consisting mostly of oil and gas extraction) continues to be a relatively minor share of overall GDP, at 1% ($125 billion) of GDP in 2003. It was the fastest-growing industry in 2003, up 18.3%, due to the strength in oil and metals prices. The bulge in this industry’s share of GDP in the late 1970s as the dollar weakened, inflation rose, and equities in this sector surged.

Market Comment . . . Economic data releases continue to bring surprises to the upside. Indeed, last week’s release of industrial production for the month of May and the Philadelphia Fed Index for the month of June demonstrated that the economy is still delivering robust results. Nevertheless, all this positive news on the economic front has done little to revive market volume. In fact, in recent weeks we have begun to see typical summer season trading patterns emerge as volume on the averages has started coming in on the soft side. This probably marks the beginning of what is often a very dull season for the markets . . . summer.

Market Comment . . . June marked the beginning of what is typically the slowest season for market volumes. The common complaint is about the lack of liquidity in the market. Undoubtedly, vacation season lies just around the corner and investors are unlikely to make big commitments ahead of it. June historically represents 8.1% of total annual NYSE trading volume. July tends to be even slower, with about 7.9% of total volume, and August typically marks the depth of this cycle with an average of 7.6% of the total annual volume.

Summer rarely offers much excitement as far as volumes are concerned, and, unfortunately, this dull trend seems to seep into market performance as well. The summer months have typically been associated with some of the worst market episodes of the past 50 years! All in all, the combination of seasonal headwinds and a lackluster technical backdrop, as evidenced by the neutral reading on our MIBS composite (Momentum- Intensity-Bullish Sentiment) of oversold/overbought conditions, seem to suggest that significant market upside in the near term is unlikely.

The economy continues to show signs that it is firing on all cylinders, demonstrating some of the most robust growth we have seen in decades. The unavoidable consequence of such a strong economy is that inflationary concerns have begun to mount. As such, it is looking more and more likely that the Fed will raise rates at its next FOMC meeting at the end of the month. Indeed, in an interview this past week, Fed governor J. Alfred Broaddus, Jr. stated that “we’re clear that we need for rates to move up . . . We have a

credibility for low inflation, and we aren’t about to give it up.” Language from other Fed governors has been equally strong in recent weeks.

The Fed’s approach to monetary policy has been somewhat predictable over the years, since it is largely based on the concept of excess capacity. Essentially, the Fed waits for the economy to absorb excess capacity before moving the fed funds rate higher. We have a total economy capacity utilization rate that incorporates both the manufacturing and services sectors (the latter consisting of the portion of unused labor in the economy). Excess capacity is quickly being absorbed, and the utilization rate is nearing levels that are typically associated with the beginning of a tightening cycle.

The economy is currently running at 87.2% of total capacity, a level that is close to past levels associated with the beginning of monetary tightening cycles. Indeed, the utilization rate has risen significantly in the past two months, bringing us closer to the first Fed rate hike. At this pace, by the time the June economic data are figured in, the Fed should have the conditions it has historically viewed as necessary in order to begin raising rates.

The beginning of tighter monetary policy does not have to be a dire outcome for the equity market since at least a portion of the adjustment has already been discounted. Indeed, the backup in bond yields suggests that a large part of the tightening cycle is already being priced into the market, at least when it comes to the forward market multiples. The fact that the yield curve is currently sitting at a 50-year high suggests that the long end of the curve may not have to rise as much as the fed funds rate over the tightening cycle.

A different way to analyze what is currently being discounted in the market is to look at the term structure of the futures market. The fed fund futures are already pricing in more than a 125-basis-point fed funds rate increase by the end of this year, in a relatively linear, gradual path. Furthermore, investors are currently expecting the fed funds to continue on this gradual path into early 2005.

The conclusion to be drawn from the fed funds futures market and the bond market is that the first few rate hikes could be somewhat easier to digest than in prior cycles and that market multiples don’t have to be drastically affected since much of the outcome is already priced in. The uncertainty remains in how the tightening cycle will affect earnings, since rising rates tend to dampen the growth outlook. In short, while rising interest rates are never a positive for the market, the effect may not be as dire as some are

predicting in the current cycle.

The current monetary policy cycle has a number of elements that are similar to the policy cycle of the early 1990s. Indeed, in both the easing cycles of the early 1990s and that of the past three years, the fed funds rate dropped by about 500 basis points. Furthermore, the time period over which the rate cuts took place is also turning out to be quite similar. Both scenarios experienced less than a year-and-a-half between the last rate cut and the first rate hike (assuming the Fed in fact raises rates later this month). Thus, in terms of magnitude and duration, there are a lot of similarities between the two cycles.

Indeed, similarities certainly exist between the two episodes with respect to the amount of time in which the easing policy occurred as well as the magnitude of the rate cuts. Rates declined 525-550 basis points in each easing cycle, after which troughs in the monetary cycle (i.e., the period between the last rate cut and the first rate hike) lasted about a year to a year and a half. Furthermore, six months after the first rate hike in 1994, rates had risen 125 basis points — the exact same increase the fed funds futures are currently projecting for the end of this year (or six months from now).

Most investors seem inclined to focus on the similarities between the current cycle and that of the 1990s and are therefore ignoring the differences that exist this time around. In our view, what will be most helpful for portfolio positioning this year is to concentrate on the differences rather than the similarities to the early 1990s. At the heart of these differences is the pattern we have seen in leading indicators of the economy, which, of course, was influenced by the stimulating tax package in the recent cycle, causing leading

indicators to accelerate more intensely than in the earlier episode. Indeed, this difference is extremely important in regard to how the market will likely react to the Fed cycle this time around, in our opinion.

The biggest difference between the current backdrop and that of the 1990s is the pattern of leading economic indicators and the timing surrounding their respective peaks. For instance, at this juncture, it appears that leading indicators may have already seen a peak in momentum, whereas in 1994 they did not peak until nine months past the first rate hike. This difference has implications for sector positioning — in 1994, it meant that cyclicals maintained leadership despite the Fed raising rates (because leading indicators were still accelerating). Indeed, it is the direction of leading indicators that drives the relationship between cyclical and noncyclical sectors.

Another useful longer-term leading indicator is the momentum in global short-term interest rates, which tends to lead many indicators by about six months. The recent increase in the momentum of global rates suggests that leading indicators, like the ISM, may have already seen their peaks for the cycle and could soon begin to lose momentum. Even if global short-term rates remained flat, the index line would trend toward zero, suggesting that other leading indicators could soon follow suit, somewhat earlier than they did in the 1990s scenario.

While there are typical aspects to the equity market’s response to a tightening in monetary policy, understanding the dynamic of these leading indicators gives the best reading of what is likely to happen, in our opinion. While we cannot predict exactly how the market will react when the Fed raises rates, we can attempt to understand past patterns in market activity following a first rate hike to get a better sense of what is likely in store for the months ahead. However, the conclusion at the market level has not been as completely consistent over the years as it has been at the sector level. Indeed, sector leadership during a tightening cycle has been overwhelmingly dominated by noncyclical leadership — a theme we think will be key for portfolio positioning for the remainder of the year.

In a typical cycle, the equity market begins to lose some momentum heading into a tightening cycle. We have found that, on average, the S&P 500 typically loses steam about three months prior to the first Fed rate hike. In fact, the overall index rarely makes significant headway in these last few months leading up to a change in monetary policy. On average, the equity market has only managed to gain about 2%-3% in the 50-day period preceding an initial rate hike.

In addition, the S&P 500 on average has been down 3.5% from its intra-period (i.e., between the last rate cut and first rate hike) peak at the time of the first Fed rate hike. With that in mind, the S&P 500 reached 1158 in February, marking the high point for the current cycle. This suggests that the market should close at around 1125 on the day the Fed first raises rates if this were to play out as a perfectly typical cycle. As such, the current market level seems to be right where it should be, indicating that it is on cue for a Fed rate

hike.

The most predictable element of tighter monetary policy is the reemergence of noncyclical leadership. Indeed, a higher fed funds rate usually has an impact on the growth outlook, which inherently favors noncyclical, more stable segments of the market. A turning point in the relative performance of the most cyclically-sensitive industries usually occurs an average of 17 weeks before the first rate hike of a Fed tightening cycle — a trend we have seen begin to unfold in the market recently, suggesting that we are already in line with a typical path.

Indeed, we have already seen a shift from cyclical sector leadership to noncyclical leadership, suggesting that the reaction from equities has been typical thus far. We expect the noncyclical trend to continue and to intensify for the foreseeable future. The portfolio implication is clear: a decline in leading indicators and a dampened growth outlook from a higher fed funds rate suggest that investors should be defensively positioned at this stage. We caution investors that a pro-cyclical posture at this juncture has become a riskier venture.

Financials . . . Goldman Sachs upped to Outperform from Market Perform at Wachovia. The upgrade is reflective of a broader call on the brokers as well as Goldman specifically. Broadly, the firm thinks M&A is beginning to pick up again, fixed income is stronger than initially thought, and GS shares are simply becoming more attractive. Wachovia is raising their 2004 and 2005 estimates to $8.90 and $8.56 to reflect better fixed income trading, security service revenue, and modestly lower costs. Firm's full-year 2004 and 2005 ROE is now 20% and 16%, respectively. Valuation range $103 to $108

Education . . . Career Education cut to Peer Perform from Outperform at Bear Stearns.

Merrill Lynch downgraded Career Education to Neutral from Buy following news the company has received a copy of a formal order of investigation from the SEC. As they understand it, the significance of the SEC investigation becoming formal is that they have access to current and former employees and can fine the company if wrongdoing is found. Firm believes that this news, and to a lesser extent, an amended shareholder lawsuit filed against Career Education last Thursday, puts the company under a cloud that could hang over it for some time.

Transports . . . FedEx reported earnings of $1.33 per share, excluding a $0.04 gain and a $0.01 charge, in line with the consensus of $1.33. Revenues rose 20.8% year/year to $7.04 billion versus the $6.8 billion consensus. Company issues upside guidance for 1st quarter (Aug), sees EPS of $0.90-1.00 versus consensus of $0.80; for 2005 sees $4.20-4.40, consensus $4.29.

Tobacco . . . Deutsche Bank upgrades RJ Reynolds to Buy from Hold and raises their target to $75 from $64 after the FTC approved the company's bid to buy British American Tobacco's U.S. assets. The firm cites the speed of approval, steady domestic fundamentals with upside potential to their 2004 estimate, and heightened prospect of a dividend boost this year.

Restaurants . . . Piper Jaffray notes that, despite the upside reported last night from Darden, May same store sales at the two core formats were disappointing. Red Lobster fell 4.5% compared to the firm's 4.0% expectation while Olive Garden struggled with a 1%-2% gain compared to the firm's 6% estimate. The results were aided by stronger-than-expected margins (a phenomena the firm does not expect to continue), a lower-than-expected tax rate, and fewer shares outstanding. Also, management subtly reduced its long-term EPS growth expectations from its most recent "at least 15%" to one of "double-digits."

Darden’s Red Lobster same store sales declined 4-5% in May, slightly above our estimate, with traffic declines of 1-2%. Olive Garden's May comps rose only 1-2%, slightly below our estimate, with traffic declines of 1-2%. Negative May traffic for Olive Garden may raise concern that Olive Garden slows before Red Lobster turns. For the quarter, Red Lobster comps declined 6.4% while Olive Garden was up 5%. Darden repurchased 4.4 million shares of stock in the 4th quarter, which added approximately $0.01 to earnings versus estimates. Margins were lower than expected due primarily to unusually high SG&A costs, partially offset by lower food and beverage and other operating costs. Darden issued 2005 EPS guidance of up 8-12% growth ($1.62-$1.68), based on 50-60 new restaurants and 1-3% same store sales growth. The sales guidance is below DRI's prior historical target of 3-5% comp growth, but seems more realistic and should result in less aggressive advertising and promotion. DRI toned down its long term EPS target to growth in a "double digit range" from 15% or better.

Retail . . . Harris Nesbitt downgrades Dick's Sporting Goods to Neutral from Outperform, but raises their target to $35 from $32. The firm believes that the stock's valuation is full and fair, and they have some reservations about the benefits of the recently announced Galyns acquisition. Firm questions whether the returns from the acquired GLYN stores will match the industry-leading returns shareholders have come to expect from DKS, and they believe that the integration process could pose some disruption risk that could impact DKS's steady growth record.

Healthcare . . . UBS downgrades Laboratory Corp to Neutral from Buy based on valuation, as the stock is near their $48 target; also, while free cash flow yield (7%) and the potential for share buybacks are positives, they think year/year price comparisons will continue to be challenging for the reminder of the year.

Barron's Online highlights PacifiCare Health, suggesting its recent sell-off provides an attractive entry point. "It is worth far more than it is trading at," says Joe Pappo, portfolio manager with Lotsoff Capital Mgmt. "We think the stock has upside." Though many insurers abandoned or reduced their Medicare businesses a few years ago, PacifiCare held fast, garnering the biggest market share. That and several new products should give it a leg up if enrollment in Medicare health plans spikes next year, as many expect. Meanwhile, a healthy increase in government reimbursements should bolster PacifiCare's profits, offsetting a possible price war among commercial insurers. "Medicare is not the only driver. But the key to PacifiCare's stock will be success in Medicare," says William McKeever, an analyst with UBS. PacifiCare projects enrollment in its Medicare + Choice program will jump by about 7% to 736K by year-end. Paul Ginsburg, president of the Center for Studying Health System Change, says seniors are becoming more comfortable with this new breed of Medicare health plan, and he expects enrollment in these plans to pick up next year. By the end of 2005, enrollment in PacifiCare's Medicare health plans should reach the company's goal of 787K, according to Scott Fidel, an analyst with J.P. Morgan. By 2006, membership could exceed a million, estimates Christine Arnold, an analyst with Morgan Stanley. According to the article, PacifiCare's stock looks cheap-particularly compared with its peers. At 11.49x projected earnings over the next 4 quarters, the shares fetch an 18% discount to a group of managed care stocks and a 33% discount to the S&P's 500. The stock trades above its historical median of 9.1x projected earnings. Based on projected earnings for 2005, PacifiCare still has the second lowest P/E multiple among the ten largest publicly traded health insurers in the U.S. and its PEG ratio remains attractive.

Medical Devices . . . OraSure Tech gets FDA approval for HIV-1/2 test to detect HIV-2 in oral fluid. With this approval, the OraQuick HIV-1/2 Test is the only rapid, point-of-care test approved by the FDA for use in detecting antibodies to both HIV-1 and HIV-2 in oral fluid, finger stick and venous whole blood, and plasma samples.

Drugs . . . Morgan Stanley upgrades Baxter to Overweight from Equal-Weight, as they believe that the company is in the early stages of a turnaround. The recently announced restructuring efforts and additional actions by new management should improve the company's earnings quality and growth prospects over time. Target is $41. Firm also downgrades BDX to Equal-Weight from Overweight based on valuation, as the stock is approaching their $56 price target.

JP Morgan adds Forest Labs to their Focus List, saying yesterday's weakness is overblown. The firm feels the Celexa controversy in the media is irrelevant, since: 1) Celexa is not approved for adolescents and has never been marketed for such, 2) there was no intent to suppress the data from the failed Lundbeck study, 3) the FDA has had the safety data from both studies and has not raised any concerns, 4) Celexa is going generic, and 5) they find little legal basis for a suit similar to Paxil. Firm also notes that the SSRI mkt growth rate has been declining for over a year, although they think there will be a rebound, especially with Lilly's imminent launch of Cymbalta. At $57, firm notes that the stock is trading at 20x CY05 EPS, which is close to its 2-year trough valuation and below the 28x 2-year avg. Target is $68.

CIBC notes that a posting on the FDA's web site suggests the agency has reversed the approvable status of Mylan's ANDA for generic Duragesic, which is a $1.3 billion transdermal fentanyl product and the most significant near-term event in MYL's pipeline from final to tentative. Firm says they have limited information on details and were unable to reach MYL mgmt, although they believe that the FDA's move, despite mgmt's past proclamations, negates the possibility a launch post patent expiry on 7/23/04 until the expiration of a six-month pediatric exclusivity period. Firm says that Street estimates (2005 consensus is $1.35) almost universally assume a July launch, and they anticipate downward estimate pressure. However, firm thinks that MYL could still hit their $1.31 number, which factors in a Jan 2005 launch, assuming no JNJ-authorized generic and limited additional generics.

Schering-Plough will continue to co-promote INTEGRILIN with Millennium in the United States and retains rights to the product in other territories outside of Europe. Schering-Plough will continue to pay royalties to Millennium on INTEGRILIN sales in other territories outside of the United States. In the United States, Schering-Plough and Millennium co-promote INTEGRILIN and share profits. Financial details of the agreement pertaining to the return of the European rights are not being disclosed.

The FDA plans to extend patent protection for the pain-relief patch Duragesic by six months, Janssen Pharma said, delaying the launch of a generic version. Separately, Mylan announced that it is filing suit against the FDA in the U.S. District Court for the District of Columbia, seeking to restore final approval for its fentanyl transdermal system. "In siding with Janssen and withdrawing Mylan's final approval, the FDA has acted contrary to multiple sections of the Federal Food, Drug, and Cosmetic Act and the Administrative Procedures Act, its published regulations and the legal precedent on point. We view this decision as yet another assault on the generic pharmaceutical industry. Among other problems created by the FDA's decision, this opinion encourages branded pharmaceutical companies to ignore the 45-day timeline to sue and effectively eliminates a generic company's ability to challenge patents that are nearing expiration." Local procedural rules require a hearing in the suit to be held prior to July 23, 2004, and as a result, MYL suspended annual earnings guidance.

Biotech . . . Friedman Billings Ramsey maintains their Outperform on Imclone and raises their target to $93 from $82. The firm is saying recent head and neck cancer data suggests Erbitux potential with radiation therapy in multiple cancer types; firm raises their Erbitux sales estimate for 2nd quarter to $55 million from $31 million (consensus $45-$50 million), and raises 2004 estimate to $232 million from $154 million (consensus $225-$230 million).

Media . . . Jeffries upgrades Ask Jeeves to Buy from Hold and reits $39 target. A 22% pullback in the last 30 days, combined with an expected strong 2nd quarter report, make the stock attractive. The firm also believes that an extension of the Google agreement before the Google IPO is likely.

Electronics . . . Barron's Online highlights PalmOne, which saw its shares pop 36% Tuesday, after the company soundly beat analysts' expectations and boosted revenue for its FY. But, according to the article, PalmOne shares may have had their run. The Treo line could still prove to be a small portion of an industry where larger rivals like Dell loom and PalmOne's core organizer market erodes. The risk continues that once the early adopters have been captured, the Treo will be unable to cross [to mainstream consumers]," wrote Charles Wolf, an analyst at Needham in a note to investors. Despite the popularity of 'smart' phones like the Treo, "there could be a backlash" in the next several years, says Todd Kort, an analyst at Gartner. While the Treo is certainly cool, its price isn't likely to woo the masses. After rebate, a Treo 600 costs about $450 at AT&T Wireless. And most of Treo's impressive demand is coming from PalmOne's organizer customer base, a market in which PalmOne is losing ground. Gartner ests that PalmOne lost 7 percentage points of worldwide organizer market share last year to 35%. Further, organizer demand is stagnant. Gartner expects organizer unit sales to be essentially flat at 11.3 millon organizers by next year from 2003. And the Treo may have a lot more competition very soon. "You're going to see more and more models from more vendors," says Kort. Mr Kort expects Hewlett-Packard and Dell to enter the combination device fray some time next year. According to the article, PalmOne also trades at a lofty 4x its expected long-term annual earnings growth rate and at roughly 40x the consensus for its 2005.

Telecom . . . Smith Barney says that Vodafone's announcement of two mgmt changes in Southern Europe/Italy and Asia Pacific/Japan adds uncertainty to the stock. The firm thinks the former mgmt change is more negative, as the CEO was more involved in day-to-day operations and the business has performed well; maintains Hold rating.

The WSJ reports that Qwest Communication is expected to announce today it will launch a new Internet calling service for business customers in mid-July. The service, which will be available in major cities across the nation this year, will allow users to route calls through the Internet from laptops while on the road and forward voicemails to e-mail. It will also offer standard features such as call waiting and caller identification, 911 service and speed dial. The Internet calling service will run mostly over Qwest's long-haul and local network and comes with unlimited local and long-distance service.

AT&T will stop competing for local and long-distance residential customers in Ohio, Missouri, Washington, Tennessee, Louisiana, Arkansas and New Hampshire (approx population of $38 mln). This action is a result of a 6/9 decision by the Administration and the FCC not to appeal a recent Federal court decision that overturned FCC wholesale rules put in place to introduce competition in local markets. The reversal of local competition policy by the Administration will permit the Bell companies to raise wholesale rates as early as November. The increase in wholesale rates means that T will likely be unable to economically serve customers with the competitive bundles currently available.

SBC announced it will spend $4 billion-$6 billion on a fiber-to-the-node (FTTN) network upgrade over five years, pending the successful completion of video field trials and further

regulatory clarity on network sharing requirements. Estimate about two-thirds of the capital plan represents incremental spending. The FTTN plan will facilitate an IP-based video offering, utilizing Microsoft's IPTV product supported by the Windows Media 9 video codec. With the Microsoft platform, SBC could theoretically deliver four separate video channels (including HDTV), VoIP and several Mbps of broadband data. SBC expects to complete field trials of the

service by 2004 or early 2005. Estimate the $4B-$6B capital plan will cover ~10 million of SBC's in-region homes, equating to ~$500 cost per home passed. The capital plan includes building fiber to remote terminals within ~5,000 feet of each target home and using ADSL2+ access technology for the last mile. The plan does not include CPE or local/in-home network upgrades which may be necessary to support video services. While analysts are cognizant of the possibility that regulatory posturing could be one motivation for today’s announcement, a viable video solution remains a key goals for all of the RBOCs. This plan would likely be dilutive to earnings during the build phase, and possibly for a more protracted period depending on customer take rates. It is increasingly evident that SBC views video as a key component of its product bundle. Expect a spirited battle between the RBOCs and cable competitors as each attempts to enter the other’s core business. The result will be lower margins for all participants.

IT Services . . . IBM and Motorola announced that they plan to work together to promote highly integrated, standards-based computing platform technologies for telecommunications based on IBM's industry leading eServer BladeCenter system.

Network Equipment . . . Lehman cuts their 3Com target to $6.50 from $8 after the company reported solid results. However, firm says the disappointing resale of J.V. products and the unexpected departure of the CFO and COO place the company's long-term story on hold. Maintains Equal-Weight rating.

The WSJ reports SBC Comm. said it will test a new fiber-optic network this summer and could potentially invest as much as $6 billion to roll out the technology to millions of consumers during the next 5 years. SBC's move to invest in fiber reflects increased competition from cable-television company's and Internet start-up businesses that are ramping up the rollout of inexpensive phone services. The new network could allow users to get high-definition TV, super-fast Internet connections and Internet phone calls. Separately, Sprint said it will upgrade its wireless-telephone network to provide data speeds comparable to home digital subscriber line or cable-modem connections.

Semiconductors . . . Janney initiates Zoran with a Buy rating and $21 target. The firm is saying the company offers investors a great opportunity to invest in a growth story specifically focused on consumer electronics that is less than $1 billion in market cap. Firm expects the co to benefit from several emerging market opportunities, including its DVD, DTV, Digital Imaging, Digital Camera, and mobile handset business units. Although they anticipate integration issues and view Zoran's higher cost structure as a disadvantage, they believe these end markets, which are all experiencing growth rates in excess of 20% for the next few years, will permit our earnings growth forecast of 42% from 2004 to 2005.

Banc of America believes that AMD's 2nd quarter is tracking in-line to better than seasonal as a result of strong demand for NOR flash products (~51% of sales) and a better mix of processors (49% of sales) into a seasonal PC mkt. As a result, firm raises their 2nd quarter estimates to $0.11 from $0.09 and raises their 2004 estimate to $0.60 from $0.57, versus consensus of $0.09 and $0.60, respectively. Firm also notes, the recent weakness in shares of AMD presents a buying opportunity, as the recent concerns of Intel regaining share in the NOR Flash market are overblown. The firm thinks that given the tightness in capacity and the continued strength in the handset market, both Intel and AMD can both benefit from the overall strong demand environment. Target $20.

Software . . . JP Morgan cuts their license revenue estimate for Peoplesoft, saying that checks suggest a mixed 2nd quarter. The firm believes that its verticals remain inconsistent, with strength in government and healthcare, and weakness in financial services, manufacturing, and commercial; conversations suggests slightly improving pipeline within the public sector and state universities. They are hearing that there is little cross-sell between Enterprise and Enterprise One despite some newer initiatives within PSFT, and large deals remain elusive. Firm cuts their 2nd quarter license revenue estimate to $148 million from $160 million in 2nd quarter, versus company's guidance of $150-170 million. Firm also cuts their 2004 revenue estimate to $675 million, versus guidance of $675-$695 million and consensus of $689 million.

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


--------------------------------------------------------------------------------

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

[ReturntoSender]

MORNING WATCH, June 24
By Frederic Ruffy, Optionetics.com
6/24/2004 6:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10607

Stocks are seen opening mixed or modestly lower following two days of gains. AT&T (T) will drag on the Dow Jones Industrial Average ($INDU) after the company issued an earnings warning for 2004. Weaker-than-expected data is also seen weighing on investor sentiment. Consequently, after rising more than 100 points Tuesday and Wednesday, index futures on the Dow were off ten points early Thursday. Futures on the Nasdaq ($COMPQ) were little changed.

Shares of AT&T were recently down $1.13 to $15.28 after the phone company warned that profits and sales in 2004 will be below expectations due to weak pricing and declining orders. AT&T said late Wednesday that profits this year will total $1 to $1.4 billion, well below earlier estimates of $2.5 billion. Revenues are now expected to reach $30.5 billion, and shy of expectations of as much as $32 billion.

Software stocks may see some strength after Banc of America Securities upgraded Microsoft (MSFT) from “neutral” to “buy”. However, shares of Micron Technology (MU) may weigh on the semiconductor sector after the chipmaker said sales in the quarter ended June 3 totaled $1.12 billion, and below analyst estimates of $1.15 billion.

Shares of Career Education (CECO) are set to resume their recent decline. The stock has been falling on news that the Securities and Exchange Commission [SEC] has launched a formal investigation into the company amid allegations of inflated enrollment numbers and improperly recognized revenue figures. The stock fell $2.11 to $42.00 a share early Thursday.

In economic news, the latest weekly jobless claims numbers were in-line with economist estimates. One hour before the start of trading, the Labor Department said that jobless claims rose by 13,000 to 349,000. At the same time, however, a report on durable goods showed a large unexpected drop. According to statistics from the Commerce Department, durable goods fell 1.6% in May. Excluding transportation, orders dropped .7%. Economists were looking for a gain of 1.3%. The news of a surprise drop in durable goods during the month of May seemed to trigger a modest drop in stock index futures before the opening bell early Thursday. In other economic news, new home sales figures released at 10:00 a.m. ET.

As stocks rose yesterday, traders in the options market seemed to turn a bit more bullish. The Dow rallied 84 points and the Nasdaq rose above the 2,000 level on Wednesday. At the same time, 2.77 million calls traded across the six options exchanges, compared to 1.94 million puts. The total put-to-call ratio eased down to .71, compared to a ten-day average of .74. In addition, the CBOE Volatility Index ($VIX) slipped .33 to finish the day below 14 for the first time in more than seven years.


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

[ReturntoSender]

U.S. stocks chalked up their first loss in three sessions, as weakness in blue chips and an unexpected decline in May durable goods orders took a toll on investor sentiment and overshadowed early strength in the technology sector. The first release of economic data in nearly a weak also knocked bond yields and the dollar lower, and pushed gold prices back above $400. The DJIA closed 35 points lower (-0.3%) at 10,443. The Nasdaq Composite closed off 5 points (-0.2%) at 2,015, while the S&P 500 fell 3 points (-0.3%) to 1,140. While all major indexes ended lower, advancing stocks outnumbered decliners by a 17 to 16 score on the NYSE and by 16 to 15 on the Nasdaq exchange. Volume was relatively light, with 1.4 billion shares traded on the Big Board and 1.7 billion shares traded on the Nasdaq. The U.S. Commerce Department said May orders for goods that last more than three years fell 1.4 percent, vs. Wall Street expectations of a 1.4 percent rise. The bond market rallied on the data, sending the yield on the benchmark 10-year Treasury note down 0.051 percentage points to 4.647 percent. The yield hit a four-week low of 4.613 percent earlier in the session.

Strong Sectors: gold & silver, casino & gaming, homebuilding, construction services

Weak Sectors: airlines, wireless services, commercial services, post secondary education, auto manufacturing and equipment

Top Stories . . . U.S. orders for durable goods unexpectedly dropped 1.6 percent in May, a second consecutive fall, paced by fewer bookings for autos, computers and machinery.

The number of Americans filing initial claims for unemployment benefits rose to 349,000 last week, the first full business week for government offices this month, a Labor Department report showed.

U.S. new home sales surged 14.8 percent in May to a record, boosted by job and income gains this year that have offset a rise in mortgage rates.

The U.S. Securities and Exchange Commission is delaying sales of $9.4 billion of a new type of security that combines debt and equity because of concern over how the companies have calculated estimated dividends, say lawyers such as Richard Willoughby of Torys LLP.

Allied Capital, a Washington- based investment firm, said it's under investigation by the U.S. Securities and Exchange Commission.

Corinthian Colleges shares declined after the Financial Times reported the company's Bryman College campus may have helped students file fraudulent applications for federal student loans.

Viacom, the U.S. media company that owns MTV, agreed to buy a majority stake in its only German music television rival, Viva Media AG, in a transaction that values the broadcaster at 308.8 million euros ($373 million).

Quotes of Note . . . ``There's a big fear of the effect interest rates will have on economic growth in the U.S. When interest rates rise, earnings growth has to be reassessed.'' van den Bos, who oversees $1.7 billion in stocks at ING Investment Management.

Gurus . . . Dick McCabe, chief technician for Merrill, notes that most major trend-related momentum indicators such as the annual rate of change in the S&P 500, the New York Stock Exchange (NYSE) new high list, the percent of stocks above their 200-day moving average, and NYSE average daily volume peaked in January or February. Because these measures typically hit their highest levels six to 12 months before the final peaks of the major averages, the implication is there should be one more new high in the averages.

Bill Dudley, chief economist for Goldman Sachs, says the Fed tightening process will begin on the 30th and the Fed will tighten four times or 100 basis points. He expects the economy will slow going forward, which will cause the Fed to take a break from tightening during the first half of 2005. Two wild cards are energy and productivity.

Eco Speak . . . The number of people filing for unemployment insurance rose in the latest week. Initial weekly jobless claims rose 13,000 to 349,000, while the four-week average of initial claims rose 1,000 to 344,250. Economists prefer the four-week average over the more volatile weekly number, which is subject to large revisions and can be skewed by one-time factors such as weather or holidays. In fact, a department official said this week's figure may show an exaggerated increase following last week's decline, which was sharper than it would have been because state unemployment offices were closed in observance of the funeral of former President Ronald Reagan.

Orders for new durable goods fell for the second straight month in May. Orders for goods that last more than three years fell 1.6 percent to $189.1 billion. The decline was unexpected. Wall Street economists had forecast a 1.4 percent gain in May durable goods orders. Shipments of durables fell 0.7 percent while unfilled orders rose 0.4 percent. New orders fell a revised 2.6 percent in April, compared with the previous estimate of a 3.2 percent decline.

Sales of new homes in the United States rose 14.8 percent in May to a record seasonally adjusted annualized rate of 1.37 million. The increase was much larger than expected. Economists were expecting a sales rate of about 1.12 million in May. Estimated sales in April were revised higher to an annual rate of 1.19 million from 1.09 million. The number of new homes for sale on the market fell about 0.5 percent to 372,000, representing 3.3-months of sales at the May pace. New-home sales surged in the Northeast and the South. Sales rose about 53.2 percent in the Northeast to 121,000. This is the biggest gain since March 2003. Sales rose about 20.3 percent in the South to a record 663,000, the biggest gain since July 1995. The median sales price rose 1.5 percent year-over-year to $198,400.

Market Comment . . . Here are several favorable developments in recent weeks.

The outlook for economic growth and NIPA-based corporate profits is still being underestimated.

We note several favorable developments in recent weeks. The outlook for economic growth and NIPA-based corporate profits is still being underestimated.

• U.S. economic data continues to show a powerful acceleration. Industrial production grew at a 7.5% annualized rate (in unit or real terms) in the three months through May. The forward-looking diffusion indices (ISM, Philly Fed, Chicago PMI) indicate continued economic acceleration (each well above the critical mid-point level).

• Expect second half U.S. growth to be even faster than the first half (4.9% annualized vs. 4.5%), based on the contributions from job growth, corporate investment spending and some recovery in inventories.

• The bond market re-pricing in April and May went relatively smoothly. Interest rate futures (and we think market expectations) have now priced in substantial rate hikes in 2004 and 2005, resolving our concerns about interest rate complacency.

• Oil prices have fallen over 10% from their high. Supply is greater than demand and is growing faster, undercutting the bearish arguments based on oil at $50 per barrel. In gold terms to compensate for the change in the value of the dollar, oil prices have fallen from 9.1 barrels per ounce on May 14 to 10.5 now, but are still remain nearly 50% above the long-term ratio of 16 (which translates to $25 per barrel). U.S. oil inventories including SPRO are their highest since at least 1983. Bear Stearns’ oil analyst Fred Leuffer has shown that the high inventory levels are consistent with a $24-$28 oil price.

• The yield curve remains steeply upsloped, indicating significant monetary stimulus. The 2003 tax cuts are likely to remain in effect until at least 2008, allowing the private sector to grow faster than it would have.

• Recent data keeps showing that Japan is accelerating and China is growing strongly.

• In mid-June, the House of Representatives passed a bill on international taxation which included corporate tax reductions and a provision to drastically reduce the tax rate on corporate capital repatriation (to 5.25% from 30% or more.) Though the bill still has to be re-approved by the Senate and then merged in a House-Senate conference, it has a chance of enactment and would be both pro-growth and pro-dollar.

Financials . . . Allied Capital said that the Securities and Exchange Commission is conducting an informal investigation its portfolio company Business Loan Express. The company said the probe involves allegations made by short sellers of its stock over the past two years. "Over the last two years, we have consistently refuted frivolous allegations made by short sellers based upon false and misleading information and distorted facts," said Bill Walton, Allied's chairman and CEO, in a press release. "We welcome the opportunity to fully cooperate with the SEC, provide all the facts, and demonstrate once and for all that the short sellers' allegations are false."

UBS downgrades Senior Housing to Neutral from Buy based on valuation, saying the recent surge in share price gives them caution; firm notes that in recent weeks the stock is up almost 16% versus 7% for Healthcare REITs overall, they believe the stock is now fairly valued. Also, while cap rates for assisted/independent living and skilled nursing have remained flat over the last 18 months, firm says an increase in financing costs may modestly compress investment spreads/earnings in the near-term; also, yield-hungry investors may begin to shift capital to investments with similar yield attributes that provide better earnings visibility. Target is $17.

Education . . . Corinthian Colleges traded lower after the U.S. Department of Education reportedly uncovered violations in obtaining federal loan at the for-profit provider of higher education's Bryman College campus. The Financial Times, citing sources familiar with the situation, said the DOE has revoked the school's ability to receive advance payments on student loans as a result. Bear Stearns reiterated its "outperform" rating, saying the stock's reward vs. risk profile was still attractive, but cut its price target to $33 from $44. "While the improprieties appear to be isolated to this particular campus, no other schools are reportedly under investigation, and the financial impact is minimal, investors may have less tolerance for regulatory risk in light of the legal/regulatory issues plaguing competitors ITT and Career Education," analyst Jennifer Childe said.

UBS out on Corinthian Colleges commenting on an article in Financial Times saying COCO's Bryman College campus in San Jose, CA violated Title IV rules in pursuit of financial aid for student. The article reports that the DOE has revoked the school's ability to receive advance payments on its student loans. Firm thinks this school has over 600 students. Article states inspectors discovered school officials helped students manipulate financial aid documents to get the maximum awards. It further states that investigators found admissions officers assisted students in claiming extra dependants to obtain additional financial aid. UBS thinks COCO shares will trade down today, as this news may cause investors to question the stock and the sector.

University of Phoenix Online posted net income of $8.2 million, or 48 cents a share compared with $4.4 million, or 27 cents a share in the same quarter in 2003. The average estimate was for earnings of 41 cents a share. Looking ahead, the online education provider said it expects to earn 42 cents a share in the fourth quarter, in line with the current consensus estimate of 10 analysts polled by First Call. For 2004, Phoenix Online is forecasting earnings of $1.55 compared with the First Call estimate of $1.48 per share. The group's results and outlook came in a statement which also gave third quarter results for Apollo Education Group. Both companies are listed separately but wholly-owned by the Apollo Group.

Apollo Group reported earnings of $0.56 per share, $0.05 better than the Reuters Estimates consensus of $0.51; revenues rose 36.5% year/year to $497 million versus the $480.2 million consensus. The company also issues upside guidance for 4th quarter (Aug), sees EPS of $0.48 versus consensus of $0.48, and revenues of $483-486 million versus the Reuters consensus of $487.1 million. The firm sees 2004 EPS of $1.83, vs the Reuters consensus of $1.78, and revenues of $1.78-1.79 billion versus the consensus of $1.78 bln.

Jefferies downgrades Career Colleges, Corinithian Colleges, and ITT Education to Underperform from Buy, as they expect continued pressure on these names in the short-run due to the potential for additional negative headlines as well as a lack of demand by investors to hold these names going into the qtr-end. The firm also downgrades Education Management, Strayer, and Universal Technical Institute to Hold from Buy. While they believe there is less risk with these 3 stocks, as there are no lawsuits or investigative matters clouding the stories, firm says investigations into the other education comapny's should cast a shadow over the entire group.

Transports . . . FedEx reported continuing EPS of $1.33 (or $1.36 including a one time tax benefit offset by a penny from re-alignment costs) in line with its pre-report two weeks ago. Our sense is results would have been even better ex. unusually high plane engine maintenance costs and a fuel drag in the quarter. Management introduced a 1st quarter 2005 EPS guidance range of $0.90-$1.00 with the mid range 19% above consensus of $0.80 but increased full year guidance by only 5% to $4.20-$4.40 (from $4.00-$4.10). Management has set an easy bar to jump over during the remainder of 2005. Ground profitability has decelerated somewhat into difficult

comparisons while Domestic and Intl. Express and LTL profitability has clearly improved. FDX is both a strong secular and cyclical story, with more upside to come driven by improving volumes leading to better margins. Total domestic overnight and deferred y-o-y package growth

was positive for the first time since 1st quarter 2004 and believe is gaining momentum with the acceleration of package weights further boosting yields. Anticipate a continued domestic Express volume recovery over the next few quarters as historically the Express market recovers after heavier freight.

Defense & Aerospace . . . Wachovia downgrades Titan to Underperform from Market Perform, as they have become less comfortable that the co will reach a plea agreement with the Dept of Justice regarding the Foreign Corrupt Practices inquiry before Lockheed Martin's Friday June 25 drop dead date. Firm says the announcement of an agreement (not the final agreement) is necessary, or LMT has indicated it will walk away from its $20/share cash offer and pay the $60 mln breakup fee. While they have no specific knowledge of the DoJ outcome, firm's industry sources have increasingly suggested that the deal may not happen. Also, firm notes that over the last few months, TTN has lost several senior managers, and if TTN remains independent, they will need to rebuild some mgmt capability, which suggests some reduced confidence in their 2005 estimates.

Consumer Durables . . . American Standard expects 2nd quarter EPS to come in at the "top end" of its previously guided range. In April, the company estimated earnings of 67-72 cents per diluted share versus the consensus of $0.70. Company issues upside guidance for 2004 (Dec), sees EPS of $2.17-2.27 vs. Reuters Estimates consensus of $2.16.

Retail . . . Rite Aid raised its fiscal 2005 earnings outlook to a range of $121 million and $167 million. Its prior forecast was for a profit of $112 million and $157 million. The pharmaceutical retailer updated the outlook after reporting first-quarter earnings of $63.3, or 10 cents per share, well ahead of a loss of $38.8 million, or 8 cents per share, a year ago. The average estimate of analysts was for earnings of 5 cents per share in the first quarter. Revenues for the 13-week first quarter rose 4.9 percent to $4.2 billion with same-store sales up 5.4 percent. The first-quarter results include a $4.6 million store closing and impairment credit.

JP Morgan initiates coverage on the sporting goods retail sector, with The Sports Authority at Overweight and Dick’s at Neutral. For TSA, with the Gart Sports merger now behind the co, firm believes the "new" TSA will begin to focus more on organic growth as opposed to acquisitions, which should allow for solid EPS growth and, over time, promote a reduction in the 17% discount the stock has historically received relative to its peers. Also, given TSA's inexpensive valuation, they believe downside is limited and expect multiple expansion as the co extracts synergies and gains scale. For DKS, firm sees a premier sporting goods retailer led by a strong management team, but at 19.4x 2005 EPS, they do not find the stock compelling at current levels and would prefer a better entry point to buy the shares.

Lazard downgrades Gap Stores to Hold from Buy based on valuation. The firm is saying the recovery in operating margins to peak 1999 levels by 2005 is now priced into the stock. The firm also believes that the Gap brand may be decelerating, as their sources have reported that some Gap units are cutting back on labor hours, which could be a leading indicator of decelerating momentum; and firm expects EPS to decelerate to 16% in 2005 and 15% thereafter, from 29% projected in 2004 and 91% in 2003. Target is $27.

UBS says that Bed Bath and Beyond reported better than projected 1st quarter results. Pessimists, and they seem in abundance around this name, will point to the two year comp trend slowing, but maybe that is because there was little else to point to on the negative side. Firm liked what they saw and even if the stock was not down in the aftermarket, they reiterate their Buy recommendation.

Barron's Online highlights Target, a company that has long been a favorite among Main Street shoppers and on Wall Street, too. Shares of the self-described "upscale" mass-market retailer have surged almost 20% so far this year, topping the Standard & Poor's Retail General Merchandise industry group by seven percentage points and the S&P 500 by a whopping 18 percentage points. But Target, known for its red bull's-eye logo, may have more room to run. First, it's surpassing its main competitor, Wal-Mart Stores, in growth of sales and operating margins. Target should continue to gain market share from department stores and other discounters, thanks to what's perceived as a superior shopping experience. Fran Radano, a senior equity analyst with Gartmore Global Investments, notes that Target sells compelling products in a different, "cleaner" atmosphere than Wal-Mart offers. But what could really spur the stock price is the closing of the Marshall Field's sale - and a possible sale of Mervyn's, too. Target will use the proceeds from the Field's sale to pay down debt and repurchase stock, having authorized a $3-billion buyback a couple of weeks ago. That program should last two to three years and add six cents per share altogether to Target's earnings during that time. Although it's selling at a premium to its 15% projected annual long-term earnings growth rate, it's fairly valued by other measures. For example, it's trading below its median 20.4x forward earnings for the last five years, according to Thomson Baseline. And, it's well below Wal-Mart's 22.5x estimated fiscal 2005 earnings estimate of $2.38 per share.

Drugs . . . Morgan Stanley upgrades Schering-Plough to Overweight from Equal-Weight. The firm is saying the company possesses the greatest amount of operating leverage among stocks they follow, triggered by Vytorin and a stabilization in the base business. Firm views Vytorin as a lay-up within the Global Cholesterol class, and they expect FDA approval for Vytorin next month. Stability in SGP's base business will be key to an eventual turnaround, and they have already seen signs that PEG-Intron's share of the Hep C market is stabilizing and believe that a waning impact from the FDA's Consent Decree should unleash significant operating margin leverage in late 2005 and beyond. Target is $25.

Banc of America cuts Abbott Labs 2004-05 estimates slightly below consensus after ABT issued a press release stating its Citizen's Petition regarding Synthroid has been denied by the FDA The firm had expected the petition to lead to the convening of an FDA advisory panel to further establish guidelines for generic approval, and delaying launch of a generic until 2005; but while ABT reiterated its 2004 EPS guidance of $2.24-$2.31 (citing Synthroid's low relative cost), firm nonetheless believes that generics will likely take share. Target is $46.

Hotel & Leisure . . . JP Morgan reiterates their Overweight ratings on Int'l Game Tech and WMS Industries, as after several frustrating false starts, they believe there is a more than reasonable chance slots legislation will be introduced in Pennsylvania next week. According to their sources in the Senate, all unresolved issues, including permissive language relating to Native American casinos, local distribution of tax revs, and the issue of one license per operator have been cleared up; firm also understands that both the House and the Senate have the necessary votes to pass. Firm notes that in particular this legislation is positive for WMS, because sales to Pennsylvania are not included in any of their estimates.

Media . . . Cnet News reports that Ask Jeeves said it will phase out its paid-inclusion program altogether in the coming months. The terminated service allows marketers to pay an annual fee of $30 to submit a Web address into its search engine. Industry leader Yahoo is also considering nixing certain fees for commercial Web sites that seek to ensure exposure in the site's free search results. Yahoo launched a service in early March that offers marketers swifter inclusion into its search index with both an annual flat-fee for site review and a "per click" rate. Critics say paid inclusion can blur the lines between editorial content and advertising. Yahoo rival Google does not offer a paid-inclusion program and its executives have denounced for-fee indexing because of its potential to skew results.

The WSJ reports Gemstar-TV Guide International has agreed to pay $10 million to the Securities and Exchange Commission to settle charges stemming from allegations the company overstated its revenue from 1999 to 2002. The company had been accused of overstating revenue by nearly $250 million, but as part of the settlement the company neither admitted nor denied the charges. The company said it will pay the $10 million from funds already set aside and expensed in connection with a previous announcement related to class-action litigation.

Napster, a division of Roxio, and Best Buy announce a major strategic marketing alliance to drive new subscribers to Napster and deliver a range of digital music experiences to Best Buy's customer base. Best Buy will promote Napster as its leading digital music service through comprehensive in-store marketing activities as well as extensive broadcast, print and online advertising. Best Buy will also market a co-branded version of Napster which will be made available to customers online through Bestbuy.com. In connection with the transaction, Best Buy will receive Roxio stock with a value of up to $10 million over the term of the agreement and Napster will engage with Best Buy in jointly funded marketing activities.

Roxio upgraded to Buy from Neutral at Robinson Humphrey.

America Online agreed to acquire online marketer Advertising.com for $435 million, extending its advertising footprint on the Web. America Online, a unit of Time Warner Inc., said the all-cash transaction will allow the company to reach more than 140 million Internet users. "Online advertising is showing very strong growth across the industry, and the acquisition of Advertising.com underscores AOL's determination to strengthen its competitive position," said Jonathan Miller, Chairman and CEO of America Online Inc. Although this move could raise competitive concerns in the space, size of the deal and AOL comments on strong industry growth could offset these fears, as market looks for further M&A activity in the group. Look for potential reaction in e-advertising names including Docbleclick, 24-7 Media, Modem Media, Aquantive and Digital Impact.

Netflix started with a Buy at Jefferies. A $34 price target based on 1) Accelerating business momentum, 2) View that short-term margin pressure should Yield long-term benefit, 3) Co pioneering and dominating the online DVD rental market.

Microsoft and Ask Jeeves are joining the rush to boost storage space for Web-based e-mail, in advance of a service expected from Google. Microsoft this summer plans to increase the storage available for free accounts on its MSN Hotmail service to 250 megabytes, up from two megabytes; a premium Hotmail service, priced at $19.95 a year, will offer two gigabytes of storage, up from 10 megabytes. Ask Jeeves, is increasing the storage of its My Way, iWon and Excite sites to 125 megabytes of free storage from six megabytes each. Microsoft and Ask Jeeves are joining the rush to boost storage space for Web-based e-mail, in advance of a service expected from Google Inc. Microsoft this summer plans to increase the storage available for free accounts on its MSN Hotmail service to 250 megabytes, up from two megabytes; a premium Hotmail service, priced at $19.95 a year, will offer two gigabytes of storage, up from 10 megabytes. Ask Jeeves, of Emeryville, Calif., is increasing the storage of its My Way, iWon and Excite sites to 125 megabytes of free storage from six megabytes each.

Pacific Growth initiates with an Equal Weight noting that while Sina.com is perhaps the most powerful Internet brand in China with over 100 million registered users. The firm has concern that a number of changes in MII regulations and expansion of the MISC billing system could accelerate churn in the commodity-type SMS services. Firm is waiting for evidence that SMS turmoil has bottomed in 2nd quarter before becoming more positive. SINA is trading at 21x firm's 2005E EPS of $1.68, and 7.4x firm's '05E revs of $270m and 7.3x EV/Sales, which Pac Growth believes is a justified premium to China peers at 16.6x, 5.8x and 5.2x, respectively.

Legg Mason initiates XM Satellite with a Buy rating and $35 target. The firm believes that analysts and many investors are significantly underestimating XMSR's growth potential over the long-term. Also, firm notes that the co has a significant lead over the competition in terms of form factor, price, and functionality of its products, and they note that the co has very strong OEM relationships; while a significant amount of growth is already priced into the stock, firm believes the company will show upside to estimates over the next several years. Firm also starts SIRI with a Hold rating; while they believe that analysts and investors are significantly underestimating the company's growth potential, and they believe there is upside potential to the subscriber consensus over the long-term, firm does not believe the stock is undervalued due to the company's high cost structure and higher cost of capital.

Telecom . . . AT&T lowered its 2004 financial outlook, citing price pressure and recent changes in FCC policies. Following the news, Bear Sterns lowered its rating of the company to "underperform," calling the magnitude of the revision "unexpected" and saying the outlook reflects "worsening industry fundamentals." JP Morgan maintained its "underweight" rating on the company's stock, saying it expects the news to prompt "selling pressure across [the] industry."

The WSJ reports Nextel won a hard-fought battle with federal regulators when Federal Communications Commission Chairman Michael Powell agreed to give the company a lucrative chunk of telecommunications spectrum in exchange for fixing interference problems with public-safety equipment. The Co will be awarded 10 megahertz of spectrum in the 1.9 gigahertz band. The deal, according to Nextel's latest proposal, is valued at about $5.4 billion, including how much the co will spend to upgrade public-safety equipment and the value of the spectrum it is turning in to the government to ease congestion.

Bear Stearns downgrades AT&T to Underperform from Peer Perform in response to worsening fundamentals, including: 1) the magnitude of the company's revised guidance was above expectations, 2) business Services revenue is being pressured by the company's more aggressive pricing tactics as well as continued competitive pressure from other industry participants, 3) RBOC aggressiveness is evident in the small- and medium-sized business marketplace, and 4) recent regulatory events in conjunction with ongoing RBOC competition and technology substitution are conspiring to create significant pressure for AT&T Consumer Services. CSFB downgrades T to Underperform from Neutral and cuts their target to $14 from $18.

CSFB downgrades MCI Inc (MCIA.pk) to Underperform from Neutral and lowers price tgt to $10 from $14 after AT&T's reduction to its outlook, saying that 1) MCIA has limited ability to respond to expected price war with AT&T, 2) Any potential M&A interest will be delayed until visibility improves, 3) MCIA is equally exposed to the business and wholesale local access pricing issues. Firm lowers 2004 revenue estimate to $20.0 billion (down $470 million) and EBITDA estimate to $1.7B (down $350 million).

Lehman upgrades Crown Castle to Overweight from Equal-Weight and raises their target to $18 from $16. They believe that strong wireless fundamentals will drive robust demand for tower leases well into 2005 as carriers continue investing in both network quality and wireless data.

CIBC comments on AT&T's warnings last night. While problems are widely known, the severity of the guidance cut was surprising - the firm is lowering already below consensus numbers accordingly. The company's dividend yield of 6% and 2005 free cash flow yield 20% look enticing, but the firm remains worried that the stock could be a value trap, as EBITDA is expected to fall 30% Year over Year.

SoundView downgrades Vodafone to Neutral from Outperform and cuts their target to $23.50 from $32, as information from contacts suggests the company will be more aggressively pursuing 3G than they had originally expected. The firm's analysis of 3G in Japan concludes that 3G brings additional cost, but little extra revenue. Also, firm notes that Hutchison 3G, the only remaining greenfield operator in Europe, is now beginning to gain increased traction in the U.K. market, and VOD has announced several high-profile mgmt losses and firm has learned of departures of other key staff and of poor working relationships between senior directors.

IT Services . . . The WSJ reports IBM settled lawsuits with about 50 current and former California workers who blamed workplace hazards for their cancers, damping fears that their cases would spur a widespread legal assault on the technology industry. The terms of the settlement were undisclosed, and as plaintiffs agreed to dismissals with prejudice, the suits cannot be refiled. IBM still faces more than 100 cases in New York and other states alleging that employee cancers or birth defects in workers' children.

Network Equipment . . . Soundview upgrades Ericsson to Outperform from Neutral and raises their target to $40 from $30. The firm calls the stock their top pick due to an improved outlook for infrastructure rev growth in 2nd half 2004 and 2005. The firm raises their 2004 global infrastructure numbers to 12% Year over Year from 8%, citing big-bucket mobile voice pricing, Western European wireless capex expansion, and the rapid acceleration of U.S. 3G.

Semiconductors . . . ATI Technologies reported net income of $48.6 million, or 19 cents a share, up from 6 cents a share in the year-earlier period, and above the average analyst estimate of 17 cents a share. Revenue rose 38 percent to $491.5 million, exceeding analyst forecasts of $465.7 million, amid strength in sales of desktop PC chips, as well as for the handheld and digital TV markets. Gross margin percentage grew 2.7 percentage points to 35.3 percent. Looking ahead, the graphics chip maker expects fourth-quarter revenue of $510 million to $550 million, vs. current analyst projections of $494.6 million.

JP Morgan out positive on Omnivision saying the 4th quarter results beat their above-consensus expectation by a penny. Gross margins of 40.3% exceeded expectations due to higher yields. OVTI generated $18 million of cash from operations, in part by running down inventory in anticipation of a new product launch. Firm notes that quality of earnings is good. As expected the accounting issues appear to be modestly benign in nature (upward revision of $0.04 EPS to 2004 earnings), of known scope, and they appear to have been resolved. According to the firm the only material impact may be the legal costs associated with shareholder lawsuits, which the company believes are without merit. 1st quarter 2005 guidance of $0.29 - $0.31 EPS on revenue of $95 - $100 million was reaffirmed. 1st quarter guidance of $0.29 - $0.31 EPS on revenue of $95 - $100 million was reaffirmed. The market reacted negatively to this guidance originally, but firm believes OVTI is being conservative in view of the uncertainty associated with the new chipset that moves them into the higher-resolution DSC market (e.g. CCD territory). The new sensors could fuel another leg of DSC-related growth. Firm is reiterating Overweight rating saying that at a 2005 P/E multiple of 9.9x, OVTI looks to be significantly undervalued as the leading CMOS sensor provider in the rapid-growth digital sensor market.

Software . . . Banc of America upgrades Microsoft to Buy from Neutral and raises their target to $35 from $28.50 based on the following: 1) further top-line acceleration, 2) multiple expansion as the core business reaccelerates, and 3) near-term catalysts from an improving IT spending environment and resolution of cash deployment issues; firm believes that the co is entering a new phase of growth as overhang issues related to Upgrade Advantage and cost containment abate, which should lead to easier compares in the future.

Microsoft considered taking a minor stake in PeopleSoft to help the company fend off a $7.7 billion hostile takeover bid by Oracle according to an e-mail from Microsoft founder Bill Gates made public on Wednesday. Gates' email, written a day after Oracle announced on June 6, 2003, that it would seek to take over rival PeopleSoft, also said Microsoft should consider buying Germany's SAP. "Thinking about this PeopleSoft bid by Oracle made me wonder if we should approach them and suggest a minority investment to bolster their independence in return for a modest platform commitment," Gates wrote to Microsoft Chief Executive Officer Steve Ballmer... Another thought that came to mind is that its (sic) time we bought SAP," Gates wrote. "Given our view of the need to strengthen our platform and willingness to use value to do it seems interesting."


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


--------------------------------------------------------------------------------

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

[ReturntoSender]

From Briefing.com: 5:58PM Thursday After Hours prices levels vs. 4 pm ET: The after hours has firmed following several positive earnings pronouncements from noteworthy firms. Presently, the S&P futures, at 1142, are 3 points above fair value, and the Nasdaq 100 futures, at 1495, are 4 points above fair value.

The below table lists the most notable developments of the evening.

Company Stock Move Reason for Move
Forest Labs (FRX) 56.60 -0.95 (-1.7%) Specialty pharmaceutical maker says that a study conducted by its European partner found its antidepressant drug Lexapro no more effective than a placebo in children; The study is the latest in a controversy over whether drug companies have suppressed negative study results in kids with depression; Last month, Eliot Spitzer opened an investigation of GlaxoSmithKline (GSK), charging that the company may have withheld data from tests that show the dangers of antidepressant use by children

Nike (00C) 74.25 +1.85 (+2.6%) Athletic apparel company delivers a 23% increase in Q4 (May) EPS to $1.13 (consensus of $1.08) and a 17% rise in revenues to $3.49 bln (consensus of $3.31 bln); According to CEO Phil Knight, revenues and EPS grew at their best rate in 5 years; Gross margins - at 23% - were the highest in Nike's history; Briefing.com has been positive on NKE in our Story Stocks page for over a year; Stock is up 28%

Paychex (PAYX) 35.40 -1.29 (-3.5%) Payroll processor misses the Q4 (May) Reuters consensus estimate by a penny, coming in at $0.20 (year/year growth of 5%); Revenues, however, rose 14% to $330.4 mln (consensus of $329.6 mln); Legal expenses increased greatly due to a dispute over a software license agreement at its Rapid Payroll unit; Company's primary competitor in the US, ADP, is down 2% tonight

Silicon Image (SIMG) 11.70 +1.46 (14.3%) Semiconductor company raises its Q2 (June) revenues guidance, saying it will grow 16-20% sequentially versus 8-13% earlier; The forecast brings the sales range to $41.6-43.1 bln (consensus of $39.8 bln); Management added 'our bookings remain strong and we expect Q3 (Sept) revenues to grow 5-10% sequentially over the raised Q2 (June) numbers;' This is the second consecutive quarter Silicon Image has increased its targets

Verity (VRTY) 12.40 -0.36 (-2.8%) Small-cap software name shows upside to the Street's top and bottom-line estimates in its Q4 (May) report, but issues weaker than expected EPS guidance for Q1 (Aug); Company said it sees EPS of $0.04-0.07 (consensus of $0.10) on revenues of $33-35 mln (consensus of $32.6 mln); This is the second quarter in a row Verity has cut its EPS forecasts; Stock is trading below its 50 and 200-day simple moving averages

Tomorrow, the revision to final Q1 GDP, June Michigan Consumer Sentiment, and May Existing Home Sales are all due out. There are no earnings reports scheduled to be released.

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

6:13PM Amgen receives positive results on Neulasta (AMGN) 54.61 +0.39: Co announced data from a Phase 3 study showing that administration of Neulasta in the first and subsequent cycles of chemotherapy significantly lowers the rate of infection, as manifested by febrile neutropenia, hospitalization and the use of intravenous anti-infectives in breast cancer patients receiving moderately myelosuppressive chemotherapy. The results will be presented by one of the study's lead investigators, Lee Schwartzberg, M.D., medical director of The West Clinic, Memphis, Tenn., in a plenary session tomorrow at the Multinational Association of Supportive Care in Cancer (MASCC) Annual Meeting.

11:32AM Gold tops $400 for first time in 2 months : Gold stocks are very strong today as gold traded above $400 per ounce for the first time in two months. Gold is being helped by recent weakness in the dollar due to an unexpected decline in durable goods orders and a rise in initial jobless claims. RGLD +7.0%, EGO +5.9%, BGO +5.2%, CDE +4.3%, GLG +3.7%, KGC +3.6%.... A small cap name worth a look is Gammon Lake Resources (GRS 6.96 +0.16), a Nova Scotia based exploration co with properties in Mexico. The chart looks strong as it's been showing a strong uptrend going back to last fall and has avoided the choppiness of many other gold stocks. Also, the co was recently added to the S&P/TSX Composite Index, the S&P/TSX Small Cap Index and the Global Industry Classification Standard Sector Materials Index. Also, the stock is liquid with a 250K avg daily volume. Mkt cap $364 mln, float 40 mln.

10:37AM Xyratex IPO prices below range (XRTX) 14.00: Britain's Xyratex, which provides data storage and storage process technology, prices its IPO at $14, below the expected $15-$17 range. The co sells its Storage and Network Systems products exclusively to OEMs. The co has long-term, strategic relationships with its customers, which include Network Appliance, Seagate and Western Digital. These three customers comprised 78% of sales last year... The co has posted strong revenue growth, having increased sales from $83.6 mln in FY99 to $333.8 mln last year, for a CAGR of 41.4%. With 28 mln shares outstanding, the co's market cap is $392 mln, or just 1.2x sales. The low price/sales valuation appears to be a results of fairly thin margins and that the co is just barely profitable, excluding non-cash equity compensation. As a side note, it's probably worth keeping an eye on XRTX when any up/downside guidance is announced by this co's customers (NTAP, STX, WDC) due to its concerntration of sales to these customers.... This is a 7 mln share deal, led by CSFB and will begin trading this morning.

3:21PM Micron Technology (MU) 14.40 -0.06: Micron Technology printed Q3 EPS of $0.13 on revenue of $1.117B (+52.4% Y/Y) vs. Reuters Research consensus at $0.07 on $1.132B.

Gross margin increased 2,504 bps Y/Y to 34.7%, driven by increases in average selling prices across product lines. Operating margin increased 3,433 bps Y/Y to 10.0%.

The following table shows price multiples and Y/Y growth rates for MU compared against the semiconductor components group. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
Micron Tech (MU) 1.6 (27.7) 2.1 1.9 1.5 39.1 45.7 22.9
Cypress Semi (CY) 1.0 25.9 1.8 1.5 1.3 19.4 30.4 15.2
Infineon Tech (IFX) 0.8 103.0 1.2 1.3 1.2 17.9 (0.6) 12.5
Advanced Micr Dev (AMD) 0.6 (70.2) 1.3 1.0 0.9 61.0 48.4 11.6
Atmel (ATML) 1.2 n/a 1.8 1.5 1.3 18.7 33.2 13.5
Intel (INTC) 3.0 13.9 5.8 5.2 4.7 17.8 14.3 10.7
ESS Tech (ESST) 1.3 7.2 1.8 1.3 1.1 5.0 73.3 19.9
National Semi (NSM) 3.1 22.4 3.8 3.1 2.8 18.6 46.9 11.3
OmniVision Tech (OVTI) 0.8 3.7 2.7 1.9 191.9 41.4
Ramtron (RMTR) 1.7 (16.1) 2.3 n/a (7.9) n/a
STMicroelectronics (STM) 1.5 59.7 2.5 2.1 1.9 16.2 23.9 13.6
Texas Instruments (TXN) 2.3 24.2 3.9 3.2 2.7 20.9 32.3 15.8
Zoran (ZRAN) 1.2 (11.2) 2.9 1.9 1.6 66.3 77.2 20.2
Semiconductor Components 2.5 29.6 4.2 n/a 18.3 n/a
*P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of June 18, 2004.
**P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of June 18, 2004.

Good quarter. Revenue momentum should continue to build over the next few quarters, driven by recovery in end markets, and the ramping of production for over a dozen digital still camera design wins as well as a number of mobile phone design wins. The company is positioned to materially improve margins over the coming quarters due to migration to advance process technologies, and scale economies on existing and new products including CMOS image sensors. MU shares trade at a modest discount to peers and, based on our inverted EVA/DCF model, are priced for sustained upper teens revenue growth from F06 assuming 30% operating margin.--Ping Yu, Briefing.com

2:12PM ATI Technologies (ATYT) 18.41 +1.62: ATI Technologies reported Q3 results before the open. The designer of 3D graphics and digital media silicon solutions printed EPS of $0.19 on revenue of $4931.457 (+38.2% Y/Y) vs. Reuters Research consensus at $0.17 on $459.53MM.

Results driven by strength in notebook discretes, consumer products, DTV and hand-held products. Company claims a 73% share of the notebook discrete market, 36% of the desktop discrete, and a greater than 50% share of the overall market.

By product segment, components revenue increased 60.5% Y/Y to $389.596MM (79% of sales); boards declined 20.4% to $87.703MM (18% of sales); other increased 406.5% to $14.158MM (3% of sales). By geography, Asia-Pacific revenue increased 56.3% Y/Y to $409.691MM (83% of sales); U.S. increased 1.4% to $65.641MM (13% of sales); Europe declined 59.5% to $10.030MM (2% of sales); Canada increased 51.8% to $6.095MM (1% of sales).

Gross margin increased 270 bps Y/Y to 35.3%. Operating margin, excluding extraordinary items, increased 506 bps Y/Y to 12.5%.

Guided for Q4 revenue of $510-550MM (approximately +40.0-44.5% Y/Y). Consensus is at $0.19 on $486.31MM. Gross margin is expected to be in the upper half of target range of 32-35% for Q4 and to trend between 34-38% over the long-term.

The following table shows price multiples and Y/Y growth rates for ATYT compared against peers in the semiconductor and computer systems & peripherals groups. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
ATI Technologies (ATYT) 1.7 22.1 2.2 2.0 1.9 47.1 42.6 7.4
Broadcom (BRCM) 3.0 (55.5) 7.6 5.5 4.6 58.4 60.5 19.7
Conexant (CNXT) 1.0 (16.0) 2.8 1.8 1.5 34.1 89.4 23.3
Creative Technology (CREAF) 0.7 18.0 1.3 n/a 3.8 n/a
nVidia (NVDA) 1.2 38.8 1.8 1.6 1.5 9.1 14.3 7.2
Intel (INTC) 3.0 13.9 5.8 5.3 4.8 17.8 14.2 10.7
LSI Logic (LSI) 1.1 (23.1) 1.6 1.5 1.3 (0.3) 14.1 12.1
STMicroelectronics (STM) 1.5 59.7 2.5 2.1 1.9 16.2 23.9 13.6
Texas Instruments (TXN) 2.3 24.2 3.9 3.2 2.7 20.9 32.3 15.8
Trident Microsystems (TRID) 4.2 n/a 5.8 5.9 4.0 (8.0) 2.5 48.2
Zoran (ZRAN) 1.2 (11.2) 2.9 1.9 1.6 66.3 77.2 20.2
Semiconductors 2.5 29.6 4.2 n/a 18.3 n/a
Computer Systems & Peripherals 1.0 17.6 1.5 9.5
Blended 1.5 21.1 2.3 12.0
*P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of June 18, 2004.
**P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of June 18, 2004.

ATYT shares have risen almost 26% since December, trade at a modest discount to peers and, based on our inverted EVA/DCF model, are priced for sustained upper 30% revenue growth from F06 assuming 19-20% operating margin.

Expectations are relatively high but see only modest downside risk given that the company is well positioned to capitalize on the transition to PCI Express. Multiple OEMs, including Dell, Gateway, Hewlett-Packard, IBM and NEC Packard Bell have already selected ATYT products for their PCI Express platforms. Overall, growth is expected to be paced by a number of new desktop and notebook products slated for the market this fall, the conversion to full high definition solutions in the digital TV market, and the growth of multi-media enabled phones in the handset market. Operating margins should continue to improve as the company migrates to 0.13µ, 0.11µ and 90nm process technologies, due to scale economies, and from increased royalties from partners including Qualcomm.

We continue to think ATYT can command a premium valuation given the above average growth rate for the space, emerging product and geographic market opportunities, and the company's improving competitive position, and would continue to add on weakness.--Ping Yu, Briefing.com

9:31AM OmniVision (OVTI) 16.06: OmniVision reported Q4 results after the close. The designer of CMOS-based image sensors used in products including camera phones, digital still cameras, bar codes, security systems, and automotive and medical devices published EPS of $0.34 on revenue of $99.673MM (+149.5% Y/Y) vs. Reuters Research consensus at $0.32 on $101.65MM.

The company shipped 20.9MM (+20.1% Q/Q) CameraChips in Q4, up from 10.7MM in Q3. Sales to original equipment manufacturers accounted for 80% of sales; distributors 20%. Camera phone revenue accounted for over 60% of sales. Camera phone shipments are still predominantly VGA but sales of new 1.3 megapixel products are increasing. Digital still camera revenue accounted for approximately 20% of sales.

Gross margin increased 181 bps Y/Y to 40.3% due to improved production yields despite average selling prices declining Q/Q from $5.38 to $4.76. Operating margin increased 772 bps Y/Y to 30.1%.

Guided for Q1 EPS of $0.29-0.31 on $95-100MM (+104.3-115.1% Y/Y) vs. consensus at $0.32 on $103.65MM.

Audit committee and independent legal counsel found errors principally with the timing of revenue recognition for certain sales. but no evidence of wrongdoing. Company reports revenue on a sell-through basis; errors due to one distributor delaying reporting of sales, and the recording of revenue based on delivery to customer rather than upon shipment of products.

The following table shows price multiples and Y/Y growth rates for OVTI compared against peers and the semiconductor components group. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
OmniVision Tech (OVTI) 0.8 3.7 2.7 1.9 191.9 41.4
Agilent (A) 1.2 203.4 1.9 1.7 1.6 10.7 19.4 10.7
ESS Tech (ESST) 1.3 7.2 1.8 1.3 1.1 5.0 73.3 19.9
Micron Tech (MU) 1.6 (27.7) 2.1 1.9 1.5 39.1 45.7 22.9
National Semi (NSM) 3.1 22.4 3.8 3.1 2.8 18.6 46.9 11.3
STMicroelectronics (STM) 1.5 59.7 2.5 2.1 1.9 16.2 23.9 13.6
Zoran (ZRAN) 1.2 (11.2) 2.9 1.9 1.6 66.3 77.2 20.2
Semiconductor Components 2.5 29.6 4.2 n/a 18.3 n/a
*P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of June 18, 2004.
**P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of June 18, 2004.

Shares trade at a discount to peers and, based on our inverted EVA/DCF model, priced for sustained upper teens growth from F06 assuming static operating margin. We would continue to accumulate.

Worldwide shipments of mobile phones are expected to exceed 500MM in 2004. The attach rate of cameras to phones is over 90% in Japan, 60% in Korea, 30% in Europe and negligible in the U.S. and the rest of the world. CMOS-based image sensors used in cameraphones are expected to grow from approximately 14MM units in 2002 to 99MM units in 2007 (47% CAGR) according to iSuppli. Worldwide shipments of cameraphones are forecast to increase from approximately 20MM in 2002 to approximately 300MM in 2007 (70% CAGR) according to IDC.

OVTI has captured over 100 camera phone design wins but is shipping to very few customers in Japan and has yet to ship to Nokia. Japan-based firms and Nokia together account for over 50% of the market for mobile phones.

CMOS-based image sensors used in digital still cameras are forecast to grow from approximately 8MM units in 2002 to 42MM units in 2007 (39% CAGR) according to iSuppli.--Ping Yu, Briefing.com

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

[ReturntoSender]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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


--------------------------------------------------------------------------------

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

[ReturntoSender]

Why is volatility so low in financial markets?

http://www.economist.com/agenda/displayStory.cfm?story_id=2785044

DRIVING to his mum’s at the weekend with his two daughters, Buttonwood took a wrong turn and briefly ended up at Waterloo railway station. Daughter number one suggested that her dad was lost (and not for the first time, said the grin). Ah no, came the reply: if you know that you’ve taken a wrong turning you can’t be lost. Alas, the riposte proved less than devastating. If you knew where you were, she came back, then you wouldn’t have taken a wrong turning. Leaving aside the quality of the repartee in the Buttonwood household, which is clearly uncommon high—and the fact that there seems to be no word in English for not being lost but not knowing precisely how to get somewhere—the exchange was really about uncertainty. Your columnist knew where he was, but he wasn’t certain about the direction he should take.

The Chicago Board Options Exchange maintains the VIX. The Federal Reserve gives information on monetary policy.

Much like financial markets, in other words. We know, more or less, the price of financial assets at any moment, assuming that there are liquid markets for them, but we can’t be certain of those prices. Any number of things could intervene to make them worth more or less: the economy could, as it were, take a wrong turn. That uncertainty is measured by the volatility of financial assets, ie, how much they move around.

More accurately, the best measure of such uncertainty is “implied volatility”. Very roughly, this is the amount of price movement which sellers of options (which grant the buyer the right but not the obligation to buy or sell something) expect to see in the underlying asset on which the option is based. This expected movement is the single most important piece of information in setting the price of options. For the buyers of options, it can be seen as the price of insurance against bad outcomes in financial markets. And this price has been falling sharply almost everywhere, making financial markets much more attractive than they would otherwise have been.

Implied volatility in equity markets is now extraordinarily low. The closely watched VIX, an index of the implied volatility of options on America’s S&P 500 stockmarket index, is close to its lowest in seven years. The VIX recently peaked in August 2002, when it climbed to 45, and its lowest in April this year, when it fell to 14. It is now trading at a sniff over 15, and has squeaked above 20 on only a handful of occasions this year.

As go equities, so go interest rates. There are myriad ways of looking at this. But perhaps the best, because it is the most liquid, is to look at options on the swaps market. This market allows people to “swap” fixed interest payments for floating ones. And the price of an option to pay or receive a fixed rate of interest in dollars for ten years has been falling sharply of late. Indeed, the boffins at Goldman Sachs now reckon it is at its lowest for more than three years.

Of course, there are good reasons why the markets’ fears of price swings in general might be smaller now than in late 2002, when, among other things, fears about the fragility of corporate America were at their height. Corporate profits have been astonishingly robust; and they have continued to grow strongly this year. This is in large part because the American economy has been so strong—and the longer it grows, the more comfortable markets are in assuming that it will continue to do so. In particular, they seem confident of the Federal Reserve’s brilliance in weaning the American economy off its ultra-loose monetary policy. Understandably, perhaps: under the stewardship of Alan Greenspan the Fed has, after all, deftly steered the economy through all manner of troubles these few years past.

Whether it will be able to do so this time round is, however, a moot point. Inflation is rising, and the Fed has arguably been tardy in pushing up rates to ward it off. The Fed used to act pre-emptively, because if it waited until inflation began to show, it would be much harder to stuff the genie back in the bottle and the damage to the economy from having to increase interest rates was that much greater than it would otherwise have been. If the Fed is late in acting this time round, neither bond nor equity markets are likely to be hugely attractive at current prices. There are also worries aplenty, to name but a few, about events in the Middle East; about the high price of oil; about terrorist attacks in general; and about a possible slowdown in China. While still small, the chances of a really nasty storm—perhaps even the “perfect storm” that was supposed to be a once-in-a-generation event but turns out to be rather more frequent—seem higher than they were at the start of the year.

Buttonwood is almost certainly in a very tiny minority on this, but it is not even certain that inflation is a greater worry than deflation, for all that this is dismissed by most as last year’s story. The recovery in America is built on debt, a huge fiscal stimulus and demand from Asia, especially China. It would be surprising if there were not a few inflationary pressures. But what would happen if China in particular slowed, the fiscal stimulus ran out, and interest rates made the debt burden more expensive? All three are happening or about to happen. Which is not to say that deflation is about to be unleashed on the world, but that the risks of it are not as small as you might suppose. There is—or should be—a lot more uncertainty than the markets seem to be allowing over the direction of the global economy in general and the path of interest rates in particular.

So why then is volatility so low? Jim Bianco, who runs an eponymous research firm, suggests an answer of beguiling simplicity. Many people—at hedge funds and banks in particular—are selling options to earn money from the fees for doing so. For those doubting Thomases who think the market is much too efficient to be affected by a few banks and funds selling options, it is worth bearing in mind that in the early 1990s one man single-handedly drove the implied volatility on Japan’s Nikkei-225 average from 22% to 11% by dint of selling 34,000 options on it. Selling options is a splendid way of making money when markets behave themselves—and indeed such a strategy has made huge profits for those that have done so over the past couple of years.

The problem comes when markets misbehave, which happens far more frequently than the sellers of options allow for. The name of the man who sold those Japanese options was Nick Leeson. And both he and Barings, the bank that he bankrupted, really were lost. They met, as it were, their Waterloo.

[ReturntoSender]

Amateur Investor Weekend Stock Market Analysis (6/26/04)

Expect a volatile week next week as there is a Federal Reserve Policy meeting and also it will be the end and the 2nd Quarter for the Institutional Money. The Nasdaq was much stronger last week versus the Dow and S&P 500 mainly due to the strength in the Semiconductors.

The Semiconductor Holders (SMH) got rather oversold just over a week ago as the %K Line in association with the Slow Stochastics dropped way below 20 (point A) and rallied this week. The SMH's stalled out near their 50 Day EMA (blue line) on Thursday and Friday. The key short term level to watch next week is around 36.75 (point B). If the SMH's can hold support around 36.75 and rise above their 50 Day EMA then look for the next area of significant upside resistance near 38.40 which is where their downward sloping trend line (solid brown line) and 100 Day EMA (green line) reside at. For me to become bullish on the Semiconductor sector I still think the SMH's must clear the high made in late May near 39 (point C). Meanwhile if the SMH's fail to hold support next week near 36.75 look for them to rollover quickly and drop back to the 35.75 level (point D).



Depending on what the Semiconductors do will likely influence the technology laden Nasdaq. The Nasdaq has now broken above its downward sloping trend line (solid brown line). If the Semiconductors can continue to rally look for the Nasdaq to either rise up to the 2055 (point E) or 2080 (point F) levels. Meanwhile if the Semiconductors come under some selling pressure and the Nasdaq reverses look for initial support around 1980 which is where its 50 Day EMA (blue line) and 100 Day EMA (green line) reside at. If the Nasdaq drops below 1980 the next key support area would be around 1960 (point G) which is where it has held support three separate times during the month of June.



The S&P 500 which tried to break out of its prior 10 day trading range (TR) reversed strongly to the downside on Friday probably in response to weakness in the Banking sector. If additional selling pressure occurs next week in the S&P 500 look for support in the 1118 to 1123 range which coincides with its 50 Day EMA (blue line) and 100 Day EMA (green line). Meanwhile if the S&P 500 reverses and can break above the 1145 level then look for a rise back to the March high near 1160 (point H).



As mentioned above the Banking sector (BKX) is heavily weighted in the S&P 500 and depending on how the Banks act next week will likely have a significant impact on the S&P 500. The Federal Reserve meeting will also come into play next week as well and it will be interesting to see how the BKX reacts to any rate increase. There are two possible scenario's for the BKX next week as it has been in a trading range (TR) over the past two weeks. Either the BKX will break above the 98.25 area which will have a positive impact on the S&P 500 or it will drop below 96 and retest its 200 Day EMA (purple line) around 95 which will have a negative impact on the S&P 500. Like I said above the outcome of the Federal Reserve meeting may allow for the BKX to breakout of its trading range strongly in one direction or the other.



Another thing I have been watching is the Volatility Index (VIX) of the S&P 500 and have been monitoring two trends. First during the past 6 months when the VIX has dropped to 14 or below this has eventually led to selling pressure in the S&P 500 (points I). This past week the VIX dropped below 14 on Wednesday (point J).

The second thing that I'm seeing is the divergence developing between the VIX and its %K Line in association with the Slow Stochastics. In April we saw the same type of pattern develop in which the VIX trended lower (point K) as the %K Line began to trend higher (point L) which eventually led to a strong upward move in the VIX and a strong downward move in the S&P 500 (points I to M). Thus is the VIX getting close to making a significant upward moving like occurred in late April which could lead to additional selling pressure in the S&P 500?



The Dow tried to break out of its 10 day trading range (TR) this week but also reversed strongly to the downside on Friday. If additional selling pressure occurs in the Dow next week the key support area to watch is in the 10260 to 10300 range which coincides with its 100 Day EMA (green line) and 50 Day EMA (blue line). If the Dow drops below 10260 that could spell trouble with an eventual retest of its 200 Day EMA (purple line) near 10080. Meanwhile if the Dow reverses itself and can break above 10480 then I would look for upside resistance at its April high near 10575 (point N).



As mentioned in the beginning next week is going to be very interesting and may get rather volatile especially from Wednesday on due to the Federal Reserve meeting and the end of the 2nd Quarter for the Institutional Money.

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.

[ReturntoSender]

InvestmentHouse Weekend Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- Indexes closed mixed, poised for next week.
- GDP pulled lower by surging imports, Michigan sentiment rises.
- Fed ready to raise rates, but cautious of Japan lesson.
- Good finish to a solid week as semiconductors come to life.
- Big week, market ready to run ahead of the actual news.
- Subscriber Questions.

Stocks hold gains ahead of important week.

The major indexes finished mixed with semiconductors, techs and smaller caps closing higher, DJ30 and the large cap SP500 closing lower. In the end they all closed around the highs for the week, mostly maintaining the solid gains that occurred when the market suddenly found volume on Tuesday and Wednesday. Not blowout volume, but a return to solid trade after a couple of months of low volume drift.

Why are we not throwing Friday volume into that mix? Because volume was snoozing until the close. It was the final day for the rebalancing of all of the Russell indexes, however, and though funds had 10 days to accomplish the feat, it appears that they, much as teenagers writing a term paper, waited until the night before to do their homework. NASDAQ volume was a sleepy 1.2B with less than 30 minutes left. It finished at 2.67B. NYSE experienced an uptick as well, coming in at 1.8B. Stocks went wild at the close with massive market on close orders sending stocks down, up and then back to where they were just moments before.

That volume left things looking different at the close versus 20 minutes earlier. Before that influence, however, stocks were mostly holding steady on lower volume, down from the session highs but holding up as they moved into another weekend filled with high anxiety about the stepped up Iraq violence. After a nice move Tuesday and Wednesday, stocks stood by their gains as they took a breather, and are poised to move higher Monday and Tuesday ahead of the FOMC meeting and the Iraq handover. If stocks do continue the move as we anticipate, that will put NASDAQ near the April highs. At that point and when the anticipation becomes fact, the market may have a bit of a struggle.

That is one reason we issued several alerts taking some interim option gains that were building up nicely as stocks had moved up well last week but started to falter over lunch. It was worth locking in some solid gain ahead of the weekend and we will look at doing the same ahead of the mid-week headlines on a further move. We still anticipate a move up into that news barring any major Iraq or other geopolitical event, and that will rack up more gains that we will look at banking ahead of the news.

THE ECONOMY

Final Q1 GDP 3.9%, below 4.4% expected.

It all depends upon where you get your news as to what view you have of the economic data that comes out. Many stories we saw on GDP only talked about how it was below expectations and down for the second straight quarter (4.1% final in Q4). That of course is not the best news for the economy, but it is not the negative impression that many of the stories left you with as they left out key facts that complete the picture.

The primary story is how GDP is calculated. GDP measures production here in the US. In Q1 consumers bought a lot of imported goods. A lot. Imports are deducted from GDP because they are not created domestically. The US consumer, however, buys foreign and domestic goods with equal enthusiasm when he or she feels confident about the future. IN Q1 the import purchases were much greater than expected, so much so that they were the primary cause of the fall in GDP from 4.4% to 3.9%. Without the imports, GDP would have been right up with expectations.

This always causes a lot of angst with economy watchers who refuse to factor in consumption of foreign goods as an indication of a strong domestic consumer. In addition there are other indications than the consumer; the big surge in imports masks them in final GDP. Thus the headlines about a weak GDP are somewhat disingenuous, but when you are in a political campaign year, the 'facts' are often adjusted to fit the purposes of the writer.

Not that the economy is surging, but it is not crumbling either.

ECRI's weekly leading index slid again the past week, continuing the string of lower indications the past month. As noted last week, this does not mean the expansion is over, it just means it is slowing from a very solid pace. New home sales surged in May, existing home sales (84% of the market) jumped 2.6%, corporate profits were up 2.1% in Q1 over Q4, much better than the 1.4% reported in May. That was slower than the huge 7.6% jump in Q4, but the pace is still solid overall.

It is important to remember that the economy moves ahead in spurts and then pauses, all the while maintaining its trend. In our society of instant information, we spend way, way, way too much time looking at not just the trees, but the individual twigs and leaves as well. The daily, even hourly, economic reports tend to obscure the bigger picture if we don't keep grounded in the bigger picture.

We continue to see signs of slowing ahead, but not a catastrophic drop in the economy. There is some uncertainty as to the future with the Fed about to embark on a rate hiking move, and that has, based on our surveys of businesses, put a bit of a slowdown on future investment. It has not stalled it, but uncertainty is the hemming in the strength of the expansion as some plans for investment and hiring are put off a bit longer just to see what happens. The Fed's history of killing off expansions casts a long shadow

The Fed's tightrope walk.

While the world is certain inflation is rising in the US, there are many undercurrents that the Fed has to be concerned with, and from what we hear from our friends at the central bank, the Fed is aware of them.

High energy cost paradox.

One that we have discussed in the past month is the paradox of higher energy prices. Oil prices have finally hit a peak and are hovering between $36 and $38/bbl. All of that production has had some impact and we anticipate it will continue to weigh on prices a bit more. They are still high, however, high enough to crimp the economy. Higher energy prices can pass through to consumer prices at some point. They have not in the last few price spikes, but that is always a threat. Higher consumer prices caused by rising energy prices can be called inflation, but it is not the textbook definition, i.e., more dollars chasing fewer goods. Energy price hikes are different from other price increases, however, because they work to slow the economy. Thus if the Fed raises rates because prices rise as a result of rising energy prices, that has basically a double if not even further magnified slowing effect on the economy. Just ask the 1970's Fed that raised rates to combat rising energy prices. All we got were incredibly high interest rates to go along with an incredibly depressed economy.

The Japan lesson.

The Japanese depression is the other undercurrent the Fed has to factor in. We swung from deflation fears to inflation fears in just about record time. Deflation was still a topic de jour the second half of last year, even among FOMC governors. Now it is not mentioned. Much.

Not many remember or ever knew or cared, but before Japan really went down the rat hole in the 1980's it looked as if it was recovering. After the first stock market bust similar to the US market's April to May 2000 plunge that took NASDAQ down 40%, the Japanese economy slumped as well, but then stabilized and appeared to be rebounding. The Japanese central bank was ready to stave off inflation that could crimp the recovery, so it hiked interest rates gradually. Problem was, the economy was not nearly as strong as they thought. The problems that gave rise to the collapse were deep rooted; the secular downtrend was in place, and the apparent recovery was just a bounce back in a bigger downtrend. The rate hikes simply put a few more bullet holes in an already declining economy.

The Fed is aware of what happened in Japan. Here in the US the pundits like to say that the US reacted differently, lowering rates rapidly and injecting fiscal stimulus into the system with tax cuts. That is true. As we noted during the recession and slow recovery, however, the Fed was behind the curve in lower rates, never getting ahead of real rates to the downside and thus providing incentives to borrow until after the fiscal stimulus had come into play. That helped prolong the decline and mitigated the recovery.

Now we are now 21 months from the market bottom, the true measure of when to start the clock for an economic recovery. We have had some very strong economic growth rates and the economy has expanded nicely, but we also have major problems facing us. We are at war, we have the threat of nuclear attack here at home, federal spending remains out of control. It is sickeningly ironic that our leaders ask us to sacrifice when their proposed highway bill has so much extravagance and pork in it. They say the entrepreneurs must sacrifice but at the same time funnel tax dollars to feed the fat man as President Reagan called the federal government.

The point: while everyone is concerned about inflation, we see signs of slowing economic activity down the road. Just look at commodities prices. The CRB peaked in March and has been trending lower since. The CRB industrials index did likewise. Commodities indicate that China has in fact slowed its economy, and as we are arguing, the US economy is slowing as well. Right now it is not an immediate problem, but with sustained higher energy costs that are working to slow the economy already, a series of rate hikes could accelerate the slowing already occurring. The growth rates have been impressive, but we have come through some very strange times. Stock prices started out at relatively high P/E's when the recovery began. There is another world war of sorts ongoing, and that has a way of bleeding economies. While there may be signs of near term price increases that need to be recognized and addressed, there are also big macro currents that raise the possibility of another undulation lower. Thus clamping down on growth by rate hikes is not the way to rectify the perceived price problem. Instead, actively promote supply with incentives to continue investing in the US. That way you address the price issues by increasing supply, and you also build up economic activity to help stave off any bigger picture macroeconomic downturn.

For now that is not even a consideration. There are two different camps in this political fight: making tax cuts and current stimulus current or cut it back, redistribute it, and then increase federal spending even more with national healthcare, etc. Both sides need to figure out spending is the real problem and slash federal spending. Cut the spending and let the taxpayers decide where their money should best be spent. The way both sides are racing to spend our money, that won't happen anytime soon.

THE MARKET

Stocks fought off the weaker GDP number and showed some early strength. While they backed off by the close, they did not roll over and they did not give up their higher volume gains from earlier in the week. The large caps and blue chips had a harder time late in the session, but overall stocks are poised to continue the move that started mid-week on rising volume.

The big difference in the market last week was the resurgence of the semiconductors. They rallied off some support at 450, paused after breaking the 50 day EMA, and are now heading toward the 200 day SMA (488) where they failed twice in the past month. Another good rally puts SOX right at that resistance. Whether it breaks through or fails will key the rest of the market's move. We anticipate the rally to resume ahead of the FOMC and Iraq handover Wednesday, and that would put SOX at the 200 day SMA and perhaps a bit beyond toward 500. Just as with the April highs on NASDAQ and SP500, that won't be easy for SOX to break through, at least on the first try. Volume will have to be even better than last week to clear those next levels.

Again, it is set up to move higher to try the next levels early this week, but moving significantly past those levels will be difficult unless there is a true change of market character.

Market Sentiment

Bulls vs. bears: Bulls backed off last week to 54.6% after hitting over 56% the prior week. 55% bullish advisors is a bearish sign, but the market rallied in any event. As noted last week, there was the 'indicators don't work anymore' feeling on the floor, and that is often the signal that at least near term there is enough pessimism to start a move higher. With bulls still near the 55% level and bears still low at 18.6% (20% is considered bearish), sustained upside will be hard to come by. Still, remember that these are secondary indicators. Price and volume action along with leadership stocks are the primary indicators as to the market's next move. Last week saw a good volume resumption of the rally that has some more upside in it.

VIX: 15.19; +0.38
VXN: 18.96; -0.4
VXO: 14.89; +0.5

Put/Call Ratio (CBOE): 0.68; +0.02

NASDAQ

One of the market leaders last week, NASDAQ posted another gain Friday, just eclipsing the early Junee highs. In good position to make a run at the April highs heading into the FOMC meeting.

Stats: +9.9 points (+0.49%) to close at 2025.47
Volume: 2.671B (+55.72%). Huge volume in the last few minutes made it look like an accumulation session. Before that surge, however, volume was 1.2B, well off pace from earlier in the week.

Up Volume: 1.728B (+968M)
Down Volume: 904M (+24M)

A/D and Hi/Lo: Advancers led 1.41 to 1. Not bad breadth for a slow session.
Previous Session: Advancers led 1.09 to 1

New Highs: 168 (+41)
New Lows: 84 (+54)

The Chart: (Click to view the chart)

Once again rallied over the Junee high (2024) to 2033 before backing off at the close. Held the break over the Junee high but it was hard to quantify the action with the huge late volume surge. Before that surge volume was light, so the move was pensive. It has, however, left the NASDAQ in good position to continue the break higher. The initial targets are the late April high (2059) and early April high (2079). From there it is a matter of whether the move can gain additional strength.

The large cap techs put together a decent move itself though volume again eased, coming in well below average on QQQ. NDX, the full strength measure of the large cap techs showed solid volume heading into the weekend. QQQ and NDX have formed nice patterns and are ready for a break higher early in the week.

S&P 500/NYSE

The large cap names along with the blue chips took the hardest beating, falling back hard late as a lot of money moved around in the Russell rebalancing.

Stats: -6.22 points (-0.55%) to close at 1134.43
NYSE Volume: 1.817B (+30.29%). Huge volume jump late in the session. With less than a half hour left volume was just over 1B. Thus the selling was not distribution.

Up Volume: 841M (+240M)
Down Volume: 938M (+158M)

A/D and Hi/Lo: Advancers led 1.22 to 1. Very modest breadth but still positive even on a downside session.
Previous Session: Advancers led 1.06 to 1

New Highs: 149 (-56)
New Lows: 30 (+7)

The Chart: (Click to view the chart)

Again cleared the early Junee high (1142) on the high, but was unable to hold the advance. It was holding up well until when it fell off the table with all of the market on close orders. It managed to hold roughly at the 10 day EMA (1134) and the 2004 down trendline. Despite the late dump lower, this leaves it in good position to move higher early this week. A 16 point move to April high (1150) with the January to March highs (1158-1163) realistically in range as well given NASDAQ still has plenty of upside before it gets to hits April high.

DJ30

The blue chips were hammered on the close similar to SP500 with the likes of GE and XOM getting clubbed. It fell through the 10 day EMA (10,390), but it is hanging on in the recent range. Unlike NASDAQ, it gave back its gain from mid-week. It is still holding up and ready to move with the rest of the market if SP500 and NASDAQ can recover and resume the break higher.

Stats: -71.97 points (-0.69%) to close at 10371.84
Volume: 308 million shares Friday versus 214 million shares Thursday. Big volume on both upside and downside moves, again with much of the volume and movement coming at the close basically requires you to toss out the volume for this index as well.

The Chart: (Click to view the chart)

THIS WEEK

Big week in all respects. The market broke higher on solid volume last week, paused, and is set to resume the move ahead of the Wednesday FOMC announcement regarding interest rates and the Iraq handover. The latter is not like, say Y2K, that was over on a date specific. It is an important date, however, for the effort in Iraq. The economic data is also huge with ISM, personal income and spending, consumer confidence, and the June employment report. All of this comes before the July 4 three-day holiday, another date brought up as a possible terrorist threat.

That is a lot to digest at any time. We still anticipate stocks moving higher in anticipation of the Wednesday events as they continue to price in the possibilities on the idea of the events. Once they are here we have to see how the markets react. Key resistance lies ahead at the April and January highs; again, volume will have to be much improved for the indexes to take those levels out and continue higher.

In addition, the second half of July is never really kind to stocks. They move up into earnings, rally some on the first solid results, but then run out of steam. Q3 estimates are being written higher toward 26% already, so guidance will have to be good to keep stocks moving higher. We don't see anything to change the pattern this time around, but as always, if the market shows strong volume pushing higher, we will let the market lead the way.

What we are going to focus on this week are stocks that have made good moves and in the softer market Thursday and Friday have pulled back to test those moves. When they start back up they have proven the breakout as they have passed the test. Those show very good support and often cruise right on up in a rally. We won't turn down good patterns of any sort, but with the market already having run well and with the potential to run up to the big news Wednesday and then pullback, we don't want to into too many new positions that don't have much time or room to run.

Again, we won't pass up great patterns making strong moves, however. Why? Because leading stocks making strong moves in good patterns are one of the top indicators of what the market is going to do. Further, those stocks move farther and faster, and hold up better if the market does hit some rocks. It all goes back to seeing the big picture of what can happen and what is likely to happen, but also being smart enough to know that the market is the final decision maker. Take what the market gives and be happy with that.

Support and Resistance

NASDAQ: Closed at 2025.47
Resistance:
2024 is the June high. Not totally broken here.
2050 represents some prior price points and has stopped NASDAQ the last time it tried that level.
April high is 2080.
2089 is the February closing high. 2112 is the early January high.


Support:
2000 is the top of the late 2003 base.
1998 is the January/April down trendline.
The 18 day EMA (1992)
The 200 day SMA (1975).
1925 is some support.
1900 to 1890.
The April lows (1880, 1878).

S&P 500: Closed at 1134.43
Resistance:
1142 is the June high.
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 March/April down trendline at 1133.
The 18 day EMA (1130).
1125 is key support.
The 50 day EMA (1124) and the 50 day SMA (1119).
1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100.
The 200 day SMA (1096)

Dow: Closed at 10,371.84
Resistance:
Late April peaks at 10,478 to 10,512
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high

Support:
The 18 day EMA (10,348)
The January/April down trendline at 10,315
The 50 day EMA (10,294) and SMA (10,255).
Price support at 10,250
The 200 day SMA at 10,148
March low at 10,007. Then 9900-9850.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

June 28
- Personal Income, May (08:30): 0.5% expected and 0.6% prior
- Personal Spending, May (08:30): 0.8% expected and 0.3% prior

June 29
- Consumer Confidence, June (10:00): 95.0 expected and 93.2 prior

June 30
- Chicago PMI, June (10:00): 64.5 expected and 68.0 prior
- FOMC Meeting (2:15): Expecting a 25 basis point rate hike as forecast by the Fed funds futures contract.

July 1
- Auto Sales, June: 5.6M expected and 5.7M prior
- Truck Sales, June: 8.0M expected and 8.5M prior
- Initial Jobless Claims, 06/26 (08:30): 349K prior
- Construction Spending, May (10:00):.5% expected and 1.3% prior
- ISM Index, June (10:00): 61.2 expected and 62.8 prior

July 02
- Non-farm Payrolls, June (08:30): 240K expected and 248K prior
- Unemployment Rate, June (08:30): 5.6% expected and 5.6% prior
- Hourly Earnings, June (08:30): 0.3% expected and 0.3% prior
- Average Workweek, June (08:30): 33.9 expected and 33.8 prior
- Factory Orders, May (10:00): 1.5% expected and -1.7% prior

SUBSCRIBER QUESTIONS

Q: How long do we hold a stock?

A: We will hold stocks as long as they are making money or are continuing the pattern/move that made us inclined to buy into it. Even for solid, well-performing stocks, the market can throw you a fast one when you least expect it, so our basic rule is that if the stock fails to make or continue the move that was the reason we bought it for or if it drops 7% to 8% below our purchase price we will sell it. That avoids the big loss when things get rocky, preserves our capital, and keeps us in the game.

That said, once we have invested and the stock has made the desired (initial) move, we like to let it run as long as it shows good price/volume action and no topping signs. This, of course, is done with an ever-present eye on market conditions. Seventy-five percent of stocks follow the market, and even though an issue may be outperforming the market, if the market pulls back, so might our stock as it follows the crowd. We like this rule of thumb: if you have a stock that is up 20% and it starts to sell back on rising volume, sell some positions and lock in some profits you already have. A sign that a stock is getting ready to sell back is if it races higher and then reverses, both moves on high volume and if the volume is higher than any high volume day when the stock was moving up. That's the sign of a climax run, and means a big sell-off is coming. Again, keep an eye on the market, too, for it can pull back a good stock prematurely in the midst of a solid run.

On the other hand, a leading stock will run higher and then make a routine pullback to test the 10 or 18 day EMA. It makes a series of runs higher, typically 4 to 5, after a breakout, forming little arrowheads or pyramids. We won't buy into these runs after the third bounce, and typically like to pick up the stock on the first test (our favorite) or the second test.

We like to track leading stocks on the reports for potential long term positions. If the market trends higher, these leaders will be the ones to provide strong returns once they reach breakout points. Stocks will rise and fall in their runs as described above, and we have to recognize when they are distributing through higher selling volume and reversals off of tops versus lighter volume, routine pullbacks to near support. On long term holds, violations of the 50 day moving average is a significant shift in character for a stock. If a stock can't recover over its 50 day EMA fairly quickly on good volume (which means that institutions are buying at the support level) we will typically close out a position. Of course, with options we will sell long before it fades that far; case in point is Friday when we took some interim gains on the way up.

[ReturntoSender]

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

Strong Sectors: Computer Storage, Construction, Semiconductors

Weak Sectors: Retail, S&Ls, Gold

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


--------------------------------------------------------------------------------

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

[ReturntoSender]

Technical Analysis: Nasdaq At Resistance
By Paul Shread

http://www.internetnews.com/bus-news/article.php/3375301

The Nasdaq (first chart below) closed right at 2040 resistance today. It's hard to imagine the first rate hike in four years as cause for celebration, but stranger things have happened. 2013-2014 is important support for tomorrow. If either of those levels go tomorrow, support is 2007, 2000 and 1990, and resistance is 2060 and 2079. Expect volatility. One plus heading into the announcement is that put-buying was unusually high for an up day; one confused market lately. The S&P (second chart) faces resistance at 1137-1138, 1140-1142 and 1147-1150, and support is 1132, 1130, 1128, 1125 and 1120. The Dow (third chart) faces resistance at 10,440 and 10,485, and support is 10,340-10,370, 10,300-10,307 and 10,254. And the all-important banks (fourth chart) are clinging to support heading into the Fed announcement.

[ReturntoSender]

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

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

Weak Sectors: textiles, specialty retail, autos

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

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

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

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

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

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


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

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

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

The FOMC statement reads:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


--------------------------------------------------------------------------------

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

[ReturntoSender]

MORNING WATCH, July 1
By Jody Osborne, Optionetics.com
7/1/2004 9:15:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10648

Post rate hike trading looks to be flat at the open, though economic news could sway traders. Individual stock news this morning could take a toll on Yahoo (YHOO) and Emulex (ELX), though software stocks are seeing a bump in pre-market trading. The Fed decision to raise rates by 25-basis points didn’t hinder stocks Wednesday, but there still is plenty of economic news left to digest today and Friday.

Though traders were pleased to see the word “measured” used in the Fed statement, volume remained moderate during Wednesday’s session. Traders will get some further key data on the economic front this morning in the form of the ISM Index and construction spending. Of course, Friday’s jobs report is also a very important release. Jobless claims rose a bit more than expected last week, with 351,000 claims filed. Economists were not pleased to see a third consecutive rise in continuing claims either.

Shares of Yahoo are looking weak before the bell after the Internet company was downgraded to “Hold” from “Buy” at Smith Barney. The broker feels that the stock is properly valued at its current price, though Smith Barney raised its price target to $36.50 from $33. Yahoo closed Wednesday’s session at $36.40, reaching a new 52-week high at $36.51 intraday.

Shares of Emulex are also down sharply in pre-market trading after the storage networking supplier warned that fourth quarter earnings would fall short of expectations. Original estimates were for earnings per share near 25-cents, but ELX lowered this to 18-cents a share. Revenues are also expected to come in 15 percent below original forecasts. The company is blaming weak demand from two of its main customers for the shortfall.

Oracle (ORCL) CEO Larry Ellison has put attention on software stocks this morning. Mr. Ellison stated last night that Oracle is looking at several companies besides PeopleSoft (PSFT) as possible acquisitions. This has benefited shares of Business Objects (BOBJ), BEA Systems (BEAS) and Siebel Systems (SEBL). Oracle has been in a hostile take over bid of PSFT for months now.

It will be interesting to see how the markets fare today following the Fed announcement. Stocks rose after the initial news Wednesday, but volume wasn’t particularly heavy. Nonetheless, stocks might benefit from knowing that the Fed still plans on using baby steps to raise rates. Of course, there is plenty of other news that could impact trading, including second quarter earnings which will be flowing as July moves along.

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

[ReturntoSender]

From Briefing.com: 10:00AM : The market has sold off in the past 15 minutes as we head into the 10 ET economic releases...The Nasdaq is leading the market lower on weakness in semiconductors which are currently down -2.42%...Construction spending came in at 0.3%, well under the 0.7% consensus, while June ISM Manufacturing came in at 61.1, down slightly from May's figures of 62.8...Auto and truck sales are due throughout the day and can be seen in real time on our In Play page...NYSE Adv/Dec 1513/1090, Nasdaq Adv/Dec 1211/1182

8:31AM Amkor guides Q2 outlook to approx. $0.06 from $0.17-0.22 prior forecast (AMKR) 8.18: Company revises guidance, now sees Q2 EPS of $0.06, vs the Reuters Estimates consensus of $0.10 and prior guidance of $0.17-0.22, due to lower than anticipated gross margin growth of 19% (prior guidance called for 24% margin growth) from a "very unfavorable product mix"; sees revenues of approx $492.5 mln (based on 6% sequential growth) vs the Reuters consensus of $492.3 mln.

8:30AM Initial Claims 351K vs 343K consensus :

8:29AM Cabot Micro forms alliance with NanoProducts Corp (CCMP) 30.61: Co announced that it has entered into a strategic alliance with NanoProducts Corp, a privately-held technology leader in nanoscale particles and related nanotechnology products. As part of the alliance, CCMP and NanoProducts will collaborate to develop nanoscale powders and particles for use in fine finish polishing applications, including CMP slurries. In addition, CCMP has obtained a minority equity stake in NanoProducts for an investment of $3.75 mln.

8:07AM Novatel Wireless and Lucent announce agreements in Europe (NVTL) 26.50: Co and Lucent (LU) announce an agreement with Orange to supply Merlin U530 3G UMTS PC card modems to support Orange's 3G Mobile Office Card in the UK and France. Orange currently serves over 50 mln customers across the world, including more than 33 mln in France and the UK, combined... Co also announce they will supply TMN, the leading mobile operator in Portugal, with Merlin U530 UMTS PC card modems for the operator's UMTS network. With 5 mln mobile subscribers, TMN holds over 50% market share in Portugal.

7:10AM Nokia and STMicroelectronics introduce new camera-module standard for mobile devices (NOK) 14.54: Co and STMicroelectronics (STM) announce that they are releasing a comprehensive specification for camera modules, aimed at standardizing this increasingly important component in mobile devices. The specification, dubbed Standard Mobile Imaging Architecture, or SMIA, will cover all aspects of the modules. The SMIA specification is offered for free to the mobile imaging industry.

7:06AM Trident Microsystems guides Q4 below consensus (TRID) 11.37: Company issues downside guidance for Q4 (Jun), sees EPS of $0.02 ex items vs. Reuters Estimates consensus of $0.03 on revs of $12.6 mln vs the Reuters consensus of $13.45 mln.

7:00AM Biomet beats by a penny, guides; declares dividend & share repurchase (BMET) 44.44: Reports Q4 (May) earnings of $0.37 per share, $0.01 better than the Reuters Estimates consensus of $0.36; revenues rose 18.5% year/year to $447.2 mln vs the $431.2 mln consensus. Company issues guidance for Q1 (Aug), sees EPS of $0.34-0.35 vs. Reuters Estimates consensus of $0.36 on revs of $412.6-444.3 mln vs. the Reuters consensus of $4.28.2 mln. Company also announced that it has declared a cash dividend of $0.20 per share payable July 23, 2004. The Board also authorized the repurchase of 2.5 mln shares of BMET's outstanding Common Shares to be automatically purchased in equal increments over the next twelve months, irrespective of market conditions.

6:41AM Monster Worldwide employment index shows rise in online job demand in June (MNST) 25.72: Demand for workers and related online job recruitment activity across the United States increased in June, according to the Monster Employment Index, marking six consecutive months of growth in 2004. Industries with the greatest increase in Online Job availability include Finance & Insurance, Professional/Scientific & Technical Services, Agriculture, Construction, and Transportation.

6:35AM QLogic reaffirms Q1 guidance (QLGC) 26.59: Company issues in-line guidance for Q1 (Jun), reaffirms non-GAPP EPS of $0.34-0.37 vs. Reuters Estimates consensus of $0.36.

6:20AM Emulex guides below consensus (ELX) 14.31: Company issues downside guidance for Q4 (Jun), sees non-GAAP EPS of $0.18 vs. Reuters Estimates consensus of $0.25 on revs of $85-86 mln vs the Reuters consensus of $101.4 mln.

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

[ReturntoSender]

Very Negative Technical Damage
By Harry Boxer, The Technical Trader (www.thetechtrader.com)

http://www.thetechtrader.com/closing/index.php?HTTP_REFERER=(none)

The second half of the year started off with a very negative down session. Stocks opened lower, dropped sharply all morning, bounced around mid-day, rolled over again in the early afternoon and with a couple of hours to go reached their lows for the day. We had what I would consider a corrective rally back to resistance that basically failed to break out, and the market backed off again late in the session.

Net on the day, the Dow was down 102, the S&P 500 down nearly 12, Nasdaq 100 about 27, the Composite 32, and the SOX Index down more than 18 or nearly 4 percent today, and that really put pressure on Nasdaq all day.

Advance-declines confirmed the negative session although it was a lot worse on Nasdaq than on New York. Nasdaq had a 21 to 9 negative plurality of advances to declines, and about a 3 to 2 negative plurality on the New York. However, up/down volume was very negative by nearly 4 to 1 on New York, and more than 4 to 1 on Nasdaq. Total volume on New York was about 1.45 billion, Nasdaq was about 1 ¾ billion. So increasing volume to the downside – not a good sign.

As indicated, the SOX and the SMH semi-conductor group in general were very weak today. Broadcom (BRCM) was down $1.78, the SMH down $1.42 as a result, and Intel (INTC), QLogic (QLGC) and most major semi-conductor stocks had a very negative day today.

Software stock Astea (ATEA) was up 69 cents in a snapback mode but on low volume. Nanogen (NGEN) had a particularly strong day today up 48 cents on 3.6 million and is looking very attractive as it broke out above a 2-month resistance level today. Taser (TASR) snapped back on a contract announcement after morning losses, and closed up about half a point. And low-priced Zonagen (ZONA), on positive drug news, was up 2 points today on heavy volume, a leading percentage gainer on Nasdaq.

Stepping back and reviewing the overall patterns, we saw very negative technical damage today. The Nasdaq and S&P broke down below their rising moving averages on their hourly charts, took out several layers of minor support including one important level of support around the 1487-90 zone on the Nasdaq 100 and the 1130-31 area on the S&P 500 before moving lower, and then tested secondary important support which did hold. The 1477-80 zone held, and the market snapped back off of that on the NDX. The S&P 500 rallied off lows of the last couple of weeks which were down around the 1122-23 zone, and then snapped back; but if there is any downside follow through in the next few days, the market is going to be in trouble, and we will be watching that carefully.

TheTechTrader.com will be closed tomorrow ahead of the 4th of July holiday and back again on Tuesday. A restful holiday weekend to everybody!

Good trading!

Harry

[ReturntoSender]

Real Time Market Volume Updates:

http://www.marketvolume.com/content/products/mktsum/mktsum.asp

[ReturntoSender]

Long Term BPCOMPQ vs AMAT/COMPQ rato vs VXO. The same vs AMAT and the COMPQ below:

&r=8154>
&r=3728>
&r=4616>

&r=2970>
&r=8154>
&r=2970>
&r=4616>
&r=2970>

[ReturntoSender]

Amateur Investors Weekend Stock Market Analysis (7/3/04)

The main sector I'm focusing on right now is the Semiconductors as the Semiconductor Holders (SMH) ran into strong resistance this week along their downward sloping trend line (solid brown line) established from the January high. The SMH's then sold off strongly on Thursday and then broke short term support on Friday at their June low near 35.75 (point A). Although the SMH's could bounce a bit early next week the path of least resistance suggests that the early May low near 34.50 (point B) is where they are headed.



Furthermore the 34.50 level (point C) is a key longer term support area for the SMH's as this is where their 38.2% Retracement Level (calculated from the October 2002 low to the January 2004 high) comes into play at. If the SMH's retest the 34.50 area and can hold support then this would be a positive sign for the longer term. However if they break below solidly below 34.50 then they will likely drop back to their longer term 50% Retracement Level near 31.50 (point D).



Some other sectors to watch are the Banks (BKX) and the Broker/Dealers (XBD). The BKX so far has held support above its 200 Day EMA (purple line) near 95 but has encountered resistance over the past month near 98.25 (point E). If the BKX breaks below its 200 Day EMA this would likely lead to an eventual retest of its May low near 91 (point F) and would have a negative impact on the S&P 500. Meanwhile if the BKX can hold support above its 200 Day EMA and eventually break above its previous resistance level near 98.25 then this would have a positive affect on the S&P 500 in the longer term.



The Broker/Dealers (XBD) have a key longer term support area near 120 and this level must hold for them to be constructive. If the XBD breaks below 120 that would spell trouble for the market. Meanwhile if the XBD can hold support near 120 and eventually break above the 130 area which is where its 100 Day EMA (green line) resides at then this would be a positive for the market.



As far as the major averages the Dow is at a critical short term support area near 10260. If the Dow breaks below 10260 this could lead to a drop back to its 200 Day EMA (purple line) near 10080. Meanwhile if the Dow is able to hold support near 10260 and begins to reverse to the upside look for resistance around the 10450 area.



The Nasdaq also came under selling pressure on Thursday and Friday but so far has remained above its 50 Day EMA (blue line) and 100 Day EMA (green line) which are in the 1980 to 1990 range. If the Nasdaq fails to hold support near 1980 then its next level of downside support would be at the June low near 1960 (point G). One disturbing thing that I'm seeing in the Nasdaq is that its %K Line in association with the Slow Stochastics made a lower high (point H) as the Nasdaq moved higher in late June (point I). This type of negative divergence usually isn't a good sign.



Meanwhile the Volatility Index (VXN) which tracks the Nasdaq 100 still needs to be watched for a significant break above the 20.75 area (point J) which could lead to a substantial upward move like occurred this past March (points K to L) and April (points M to N).



The S&P 500 so far has held support above its 100 Day EMA (green line) near 1120 and it will be critical for it to hold support near this level next week. If the S&P 500 breaks below 1120 this could lead to a quick drop back to its 200 Day EMA (purple line) near 1090.



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.

[ReturntoSender]

Determining Trend Strength for the SOX and SMH using ADX and Aroon Indicators vs the NAMO:





On the ADX the level of the black line indicates the strength of the trend. That is to say the higher it is, the stronger the trend. Usually, when it is below 20, this suggests that we have a trading-range market while if it is higher than that, it suggests a trending market. The direction of the trend is indicated by the -DI and +DI indicators. When +DI is above -DI, the trend is up; when -DI is above +DI, the trend is down. You would notice how when the trend is weak (i.e., ADX is below 20), +DI and -DI often flip-flop around each other.

Another indicator which can be used for this purpose is the Aroon. When the red line (AroonDown) is above the green line (AroonUp), the trend is down; when the opposite is true, the trend is up. The strength of the trend can be measured by the distance between the two lines. These explanations from Vesselin

I only took minor liberties and added the NAMO chart which is suggestive of an overbought market above the horizontal line at 25 and suggestive of an oversold market below -25.

RtS

[ReturntoSender]

BRKS - Orderly selling or "wild gyrations?"

[ReturntoSender]

MORNING WATCH, July 7
By Frederic Ruffy, Optionetics.com
7/7/2004 6:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10676

Stocks may recover some of Tuesday’s losses after crude oil prices edged lower and shares of the world’s largest pharmaceutical company moved higher. Yesterday, the Dow Jones Industrial Average ($INDU) lost 63.5 points and the Nasdaq Composite Index ($COMPQ) tumbled 43.2, or 2.15%. One hour before the start of trading Wednesday, however, futures pointed to modest gains in both the Dow and Nasdaq. At the same time, investors may remain a bit cautious following disappointing earnings news and ahead of a few high profile profit reports due out after the close of trading Wednesday.

Earnings pre-announcements continue. Yesterday, tech stocks sank following warnings from Veritas Software (VRTS) and Conexant (CNXT). Early Wednesday, Peoplesoft (PSFT) is in the spot light after the software maker warned that its second quarter profits will fall short of expectations. Meanwhile, Accenture (ACN) reported a 60% increase in third quarter profits, but said that fiscal 2004 results would fall short of analyst estimates. Secure Computing (SCUR), Netopia (NTPA), JDA Software (JDAS), and Ascential Software (ASCL) also issued earnings warnings after the close of trading yesterday.

Concerns over profits may be offset somewhat by a drop in crude oil prices. Yesterday, market jitters rose after prices rose to a five-week high near $40.00 a barrel on Tuesday. Early Wednesday, however, crude fell 60 cents to $39.05 a barrel.

There is no economic news to report Wednesday morning.

Pfizer (PFE) gained before the opening bell after the world’s largest drugmaker said it was expanding a discount drug program. The move will allow millions of uninsured Americans to buy products like the Lipitor cholesterol treatment at a reduced cost.

After the close of trading today, Yahoo (YHOO) is expected to announce profits of 8 cents a share. Dow component Alcoa (AA) releases its profit report, which is expected to include earnings per share of 47 cents. Analysts expect Genentech (DNA) to post earnings of 19 cents per share.

In the options market, traders were a bit more defensive yesterday. As both the Dow and the Nasdaq moved lower, the CBOE Volatility Index ($VIX) rose 1.17 to 16.25. The Nasdaq Volatility Index ($VXN), meanwhile, surged 2.22 to 22.11. The rise in the two volatility barometers indicates that market jitters are rising, and that the options market is beginning to price in the prospect of greater volatility going forward.

[ReturntoSender]

Investors Intelligence vs the SOX

[ReturntoSender]

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

http://www.optionetics.com/articles/article_full.asp?idNo=10683

Stocks end with mild gains on a rather uneventful trading session. The Dow ($INDU) was able to rise 20.95 points Wednesday to 10,240.29. The S&P 500 ($SPX) added 0.19 percent to 1,119.33. The Nasdaq ($COMPQ) saw a gain of 2.65 points, or 0.13 percent, to 1,966.08. Volume was moderate, with the NYSE trading 1.32 billion shares and the Naz turning over 1.76 billion shares. Market breadth was positive on the Big Board by a 20-to-12 margin, but negative on the Naz by a 14-to-16 margin.

The major market indices saw little movement Thursday, trading in a rather tight range. The bulls were unable to rally stocks following a sharp decline on Tuesday. The market got further earnings warnings this morning from the likes of PeopleSoft (PSFT) and JDA Software (JDAS). However, PSFT shares gained 1.84 percent on the session following an initial drop. JDAS shares also recovered from its low of the day, but still fell 7 percent. After declining more than 5 percent on Tuesday, the CBOE GSTI Software Index ($GSO) lost just 0.20 percent on Wednesday.

Shares of Yahoo (YHOO) gave up nearly two percent Wednesday ahead of the company’s earnings announcement after the bell. The company met earnings estimates, but this wasn’t good enough and the stock is taking a beating in after hours trading, down more than 10 percent. This could put more downside pressure on the tech sector come Thursday, with the Nasdaq 100 Trust (QQQ) off 30-cents after hours. Another stock warning after the bell today was Siebel (SEBL) and this will also produce some selling on Thursday as well.

The fear indices have come off their lows achieved a few weeks ago and tomorrow’s open could see another rise for these indices. The CBOE Market Volatility Index ($VIX) did fall on Wednesday after hitting resistance at its 200-day moving average on Tuesday. The Nasdaq Volatility Index ($VXN) continued to move higher today and is about 10 percent from its resistance. It will be interesting to see if this level is reached Thursday and if resistance holds.

Economic news has taken a back seat to earnings data, but this doesn’t mean there isn’t economic data to digest. On Wednesday, consumer sentiment, chain store sales and mortgage applications all improved. Thursday will see data for chain store sales for the month of June, as well as consumer credit and jobless claims data. However, unless these reports stray far from expectations, they shouldn’t impact trading.

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

[ReturntoSender]

FX Street - Financial Market Forecast:

http://futures.fxstreet.com/Futures/content/100480/content.asp?menu=review

RtS

[ReturntoSender]

MORNING WATCH, July 9
By Frederic Ruffy, Optionetics.com
7/9/2004 6:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10691

Stocks may rebound on Friday following an upbeat earnings report from the world’s largest company by market value. So far this week, the Dow Jones Industrial Average ($INDU) has fallen 110 points and the Nasdaq Composite Index ($COMPQ) has suffered a 72-point, or 3.5% loss. However, one hour before the opening bell, stock index futures on the Dow rose 25-points and futures on the Nasdaq gained a little less than ten points.

General Electric (GE) may help to lift the Dow Jones Industrial Average after the company posted better than expected earnings early Friday. The Dow component, and largest company be market value, said earnings in the most recent quarter totaled 38 cents a share, which was one penny better than estimates. General Electric also said that it now expects earnings per share growth of 10 to 15% during the year 2005.

Among other stocks to watch, Yellow Corp. (YELL) may gain after the transportation company said earnings for the quarter ended in June would top estimates. Newmont Mining (NEM) is set to fall after the gold mining company warned that an error would force a restatement of 2002, 2003, and the first quarter 2004 results. Storage Technology (STK) may also open lower after the maker of storage devices said that second quarter profits may be below expectations.

The economic calendar is light today. A report on wholesale trade is due out at 10:00 a.m. ET. The report is expected to show a gain of .5% increase, following a .1% gain during the month of May. Crude oil prices are rising above $40.00 a barrel after the government warned that terrorists may be planning a large scale attack on US soil. Gold also rose, and is now trading above $407.00 a troy ounce.

In the options market, the market decline this week has triggered a bit of defensive activity. For one, the CBOE Volatility Index ($VIX) is reading 16.20, up from 15.20 a week ago. Meanwhile, trading was active yesterday, with 2.1 million puts traded across the six US options exchanges, and 2.2 million calls. The total put-to-call ratio subsequently finished the day reading .90. The ten-day average of this ratio has now edged higher during five of the past six trading sessions and is at a three-week high of .79.

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

[ReturntoSender]

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

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

Weak Sectors: health care supply, consumer finance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


--------------------------------------------------------------------------------

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

[ReturntoSender]

How to Recognize a Housing Bubble


by John Mauldin
July 9, 2004
How to Recognize a Housing Bubble
The Sub-Prime Mortgage Markets
And the Envelope, Please
The Twin Hinges of Housing Prices
Old Friends, Wedding Bells and San Francisco



Today we take a final look at the housing market. Are we in a bubble or is it merely a period of overheated prices which will cool off? Is it the right time to buy (or sell) a home? If there is a bubble, how would we spot it?

A little full disclosure. Thinking about the housing markets for the past few weeks has been somewhat more than an academic exercise. I sold my last home a little more than four years ago, for family reasons unrelated to valuations or markets (time to downsize). I decided to lease for a time. My thought was to wait until a recession created a drop in values in the type of homes I wanted, and accompanied with low rates, would buy that perfect home. We would get the deal of the century. I persuaded my wife to go along with such an idea.

Because homes values have not really risen in my area (Fort Worth, Texas), I have lost no gain on a home. Renting, even after tax, has been relatively cheap. But now my wife is getting a desire to nest. She wants to turn her creative powers to work on her own home.

"How long," she wonders, "are we going to have to wait? So what if we can get a 15% better deal? Are we going to rent for another 2-3 years, waiting for your recession to come about? Further, if we buy, we are not going to sell for a long, long time. You tell me that a long, long time will cover that 15% and more. Why does everything have to be about a profit or making the most money? Homes are not over-valued in our town. I want a home now." Ouch.

So we come to this last e-letter on housing with a personal stake in the question of housing prices. Let's see where the facts and ruminations take us.

"And so you see I have come to doubt
All that I once held as true.
I stand alone without beliefs
The only truth I know is you" Paul Simon, 1965

For many Americans, the "you" in the above Simon and Garfunkel Song could be said to be their home. It is what they have come to believe in, their one piece of the rock that they can count on to anchor their investment portfolio. It provides cash in a time of trouble, retirement savings and shelter. What better, more felicitous combination could there be?

Let's review a few facts from the last three e-letters on housing.

Housing is strongly related to consumer confidence. It is part of the American psyche, warp and woof of our economic contentment. For every dollar of increase in US home prices, consumer spending rises 15 cents, as compared to the influence offered by the stock market, where consumers spend 2 cents for every dollar rise in stock market capitalization.

Home prices for many areas of the United States have barely kept up with inflation, while in other areas it has risen 100% in just the last five years. There is a strong correlation to outsized growth in home prices in with high levels of regulation. That is because increased regulation artificially decreases the housing supply.

Overall, in terms of the last two decades, housing prices have not risen all that dramatically when compared to national incomes, especially as lower rates have reduced the cost of monthly payments. But in a few areas, especially on the coasts, median priced homes are simply no longer affordable by an average family. In some areas, less than 20% of the country could afford an average house. Further, housing prices have risen by 30% more than inflation in the last five years, which is a cause for concern.

On the other hand, the demand for housing will be reasonably strong over the next decade due to an increase in the number of households primarily from immigration and from boomers buying second homes.

Last week, we looked at data which showed that national home prices have fluctuated from high to low relative to average national income over the past almost 40 years. Using this index, you can feel relatively "safe" in buying a home when the ratio is low. When comparing the average income to home average prices, we find that today the ratio is on the (quite) high end of the scale, implying that either home prices will drop relative to income or that income will rise relative to housing over the next few years. Given the recent lack of any real upward trajectory of income, the study points to housing price weakness.

Also from last week, "In 1950, the average new house was 983 square feet and cost $11,000. In 2000, the average new house was 2, 265 feet and cost $205,000. In 1950, there were 3.37 people per household, and now there is but 2.6. In 1950, only 6% of homes had a two-car garage. In 2000, 65% had two-car garages and 17% had three (or more) garage spaces.

"In 1950, the average cost per square foot was $11. Today it is $91. Much of that is inflation, as inflation alone would increase prices to $76. The actual value of a square foot today is far more however. I grew up in one of those 1950 homes. No air-conditioning (in hot-as-hell Texas summers!), one bathroom, rudimentary appliances, heating was a space heater in the main room. And three young kids and two bedrooms. I truly enjoyed my youth, but I am not nostalgic for the old homestead."

A Harvard study showed us that owning a home was somewhat cheaper after-tax than renting. Not in all places, of course, as many readers noted. But we are speaking of national averages.

Almost 70% of US citizens own their homes, up sharply from 63% over the last 10 years, plus the population has grown. This is partially responsible for the increase in demand, but such growth in the percentages of those who own homes is unlikely to persist in the future.

The Sub-Prime Mortgage Markets

Why has there been such an increase? First, as rates have come down, homes have become more affordable. Further, the growth in so-called sub-prime mortgages has been quite large. Fed Governor Ed Gramlich offers the following data in a speech last May. (www.federalreserve.gov/boarddocs/speeches/2004/20040521/#table1.) Sub-primes loans grew by 25% per year over the nine years from 1994-2003. In 1994 sub-prime loans accounted for 4.5% of all mortgage loans. In 2000, it was 13.2%. In 2003 it was up to 8.8% of all mortgages.

(Side note: Inside Mortgage Finance shows the volume of sub-prime loans has risen from a total of $17 billion in 1995 to over $195 billion today. And no money down loans have ballooned from les than $1 billion to $80 billion in that time - NY Times and Weldon's Money Monitor.)

A great deal of sub-prime lending was to minority and first time buyers, which I contend is a very good thing. The relationship between home ownership and the overall quality within a given neighborhood is very high. Interestingly, the data shows that the sub-prime share of the number of home purchase loans is not all that different from lower income (10.9%) to middle income (11.2%) to higher income (9.0%).

There is a disconcerting increase in the mortgage delinquency rate, but this is to be expected as the number of sub-prime loans increase. There is a reason those who get sub-prime loans pay higher interest rates.

In the world of prime mortgages, the serious delinquency rate is 1.12% and dropping. By serious they mean over 90 days or in foreclosure status. That is about 1 on every 100 households. Given the number of divorces, unexpected job losses and the normal vicissitudes of life, that is pretty good. The total number of all prime loans which are 30 days or more past due is 3.96% (which includes the serious the serious delinquency loans.)

But the sub-prime world tells a different story. The serious delinquency rate for 2003 was 7.36%, with over 16% of sub-prime loans being over 30 days or more past due. But that also means that the large majority of sub-prime loans are also healthy.

One can make an argument that the "heat" on many housing prices has begun to fall. Housing prices in the US have only risen 1.5% this year, about in line with inflation, and many areas are experiencing a fall in prices. Greg Weldon notes that the mean price for new homes sales in May was down $5,800 and the median price of homes sold was down 9.9%.

And the Envelope, Please

So, there are lots of facts that should make us nervous and others which give us reason to be a housing bull. But that still does no answer the question, is there a housing bubble?

I believe the short answer is "no" for all but a few areas of the US. Over the long-term, I think most homeowners will see reasonable returns from their homes. But that does not mean you should rush out and buy an investment house or that housing prices cannot drop significantly from where they are today.

What goes into the price of a home? What makes one location costly and another only a few miles away cheap?

Housing is shelter. It is a roof over our heads, and there is a simple shelter factor that fits into the basic cost of housing. How much does it actually cost to build a home? What would it cost to rent a similar shelter? How "comfortable" is a home?

Housing prices fluctuate with school districts. It fluctuates with local amenities. Beach front costs more than inner city. We value the relative safety of the neighborhood. Housing prices are a function of how much we value our time, as homes closer to where we work are generally higher than those which cause a two hour commute. We also value the neighborhood and the ambience. Are you looking for certain types of neighbors?

Our homes, for better or worse, make a statement, and "statement" adds (or subtracts) value. Some people are willing to pay significantly more for a home in the "right" (read rich) neighborhood than for a similar home only a few miles away. In fact, they might be able to get a clearly superior home (in terms of size and construction value) within a short driving distance, but the status of the location means more than the size of the home. Of course, over longer periods, that local status of a neighborhood can change dramatically.

The operating costs of a home figure into the cost of a home. Older homes which require more maintenance and cost more to heat and cool typically sell for less per square foot than a new energy efficient home on the lot next door. High local tax rates can hurt the value of property. Real estate sales commissions figure into costs and realized returns.

Are the home prices in a town so high that those providing the basic services cannot afford to live there? If there are long commutes involved, it will increase the cost of fire, police and city workers as well as for things as prosaic as restaurant staff and other local business employees.

What about the weather climate, recreational opportunities, and availability of local jobs? For me, I want to know about the variety and quality of the local restaurants. Are mountains or beaches a big deal to you? Is it a second home for those get-away periods?

In short, there are a thousand things that go into the value of a home. But all those things do not create some intrinsic, guaranteed value.

At the end of the day, the price of a home is subject to supply and demand. In the late 80's, the housing slump was a result of over-supply and falling demand. Many areas, especially on the coasts, saw a drop in values of 20% or more.

Home prices have nothing to do with replacement costs. In Houston in the 80's, home prices fell to a fraction of what they had been only a few years earlier. Had there been a housing bubble? No. There was simply no demand.

The Twin Hinges of Housing Prices

The culprits? Employment and actual demand, or lack thereof. And it is upon the twin hinges of employment and demand that housing values swing.

High employment creates demand for housing. Rising unemployment is typically bad for housing. But, you ask, why did not the recent downturn create a housing slump?

Because, in the first instance, the recession was not all that severe in terms of jobs. Secondly, lower rates and creative financing made it possible for many who had a job and were renting to be able to afford a home. Demand never really dropped, and as noted above, there was no over-supply, as home builders carefully monitored their supply situation, as opposed to earlier recessions.

Let's look at one exception. San Jose saw its home values drop as Silicon Valley saw a serious rise in unemployment following the dotcom bust. To the south, San Diego saw nowhere near the problems, and home values rose, especially as millions of people over the past few years poured into southern California.

Given all we have looked at over the last few weeks, what would I predict about the future of home prices over the next 10-15-20 years? Except for bubble areas (which we will discuss below), I would think that average US home prices would rise in line with inflation. Near-term, the recent rapid rise over inflation suggests a slowing of increases or even a retreat back to "trend."

Further, as I think the next recession will be more severe than the last one, and that the new demand created from low rates and creative sub-rime financing will probably not be anywhere near the level of the last recession, we could see a short-to-medium term drop in home values. In some areas where employment drops too rapidly, home values could also drop significantly.

After the recession and over time, the increased demand from a growing number of households and an economic recovery will serve to bring home prices back to the rising trend.

What does that mean in practical terms? Let's say your area is not one where there is a bubble and home values in your neighborhood still drop 20% in the next recession. If you do not need to move or sell, while you will be uncomfortable in the interim, over time values will rise and you will pay down your mortgage. If you have to sell at the wrong time, you will lose money over what you could get today. If you know you are going to need to sell within the next few years, you might want to consider what your local market will look like during a recession.

If your area is somewhat immune to employment and demand fluctuations, then your decision would be different. Think of homes which appeal to retiring boomers in very desirable retirement areas. There are a lot of wealthy boomers looking for that perfect spot for the golden years.

I would also expect that mortgage interest rates will drop during the next recession, which will help bolster sagging values.

How to Recognize a Housing Bubble

I recently was invited for drinks to a home in La Jolla, California. I think it is the most spectacular home I have ever been in. Recently built at a cost a many millions, it is sitting on the highest and most spectacular view of California coast from Santa Barbara to the tip of Baja. What is such a home worth? If my friend was forced to sell it quickly tomorrow, perhaps not what it cost him to build. Perhaps much less in a fire sale.

But because of the unique nature of the home, it is also possible that a Bill Gates could walk up and offer to double his costs in one day, just to have that one of a kind, nowhere else view. Pocket change for Bill. And my friend and his creative wife (who was responsible for the beauty of the home) have no intention in selling their dream home, so speaking of value and bubbles is somewhat irrelevant. If they sold at double their costs, would that be a bubble in local values?

But when we speak of bubbles, we are not speaking of the special homes in one of a kind situations. Those will always be worth what someone will pay. We are talking about the homes in your neighborhood.

As noted over the past few weeks, most areas of the country are not in a housing bubble. Let's think about what we mean by bubble. The NASDAQ in 1999 and 2000 was a bubble. Gold and silver in 1980 was a bubble. Japanese stocks in 1989 were a bubble. The characteristics of most bubbles are a final rapid price rise and then a quick drop. It is accompanied by rampant speculation and lots of stories about why "this time it's different."

Bubbles are different in character from a normal bear market. Prior to a normal bear market, valuations get high, the economy softens and then prices fall. After a typical bear market, the economy recovers, earnings increase over time and GDP growth and inflation do their magic, and stock prices recover. Maybe it is a few years and maybe it is 10 years, but they do recover.

But in a bubble, market valuations do not just get high. They get ridiculous. And the resulting collapse will take decades to recover, if ever. It will be many decades before the NASDAQ sees 5,000 again. The New York Stock Exchange Index, however, with a far larger representation of stable older companies, is only 7% off its all time high. It merely went to high valuations as opposed to a bubble. It is entirely possible that we could see new highs on the NYSE within a decade or less (give or take a year) from its top.

All real estate is local, and you need to determine for yourself if your home values are part of a bubble and subject to a decades long valuation problem, or simply subject to the normal ebb and flow of prices.

If home values are rising in line with reasonable demand and positive local circumstances, then there is probably not a bubble. Prices could be over-heated, but that does not mean a bubble. It might be simply high valuations. Above trend increases will eventually modify and even drop during the eventual recession, but that is part of the normal ebb and flow. Over time, long term home investors will see their equity increase.

But if you have seen a significant rise in your area, I would look at the source of the demand. Is it from people who want to move in to your area and live there long-term? Or is it from speculators who use cheap leverage to buy property with the intent to flip it quickly? Is it from people who are moving in with the intent of living in the neighborhood for a few years and then moving on, hoping to double their money? Did they buy the most home they could possibly afford on an ARM mortgage?

Real estate can be a great way to get rich slowly. In nearly every area, there are locals who know the market and invest. Who is doing the buying in your area? Is it the old time locals who know the market? Or is it a bunch of newcomers who have only known rising prices? Are they buying homes to tear down and then build "spec" property at ever larger values?

What does it really cost to replace a home? Is the bulk of the cost in materials and labor, or is it in land?

As I look around the country, I think much of what bears might call a bubble I see as simply very valuations. Barring a depression, or a very long and deep recession, time should cure the problem of valuation. You might not get the returns you expect. In fact, you might not get any real returns. Looking back at historical data, there are lots of times in every area of the country where housing prices suffered.

Ultimately, you buy a home because it is where you want to live and it suits your lifestyle and financial abilities.

And speaking of homes and values, let me recommend a great publication called International Living. My old friend Bill Bonner started publishing the letter over 25 years ago. They write of homes you can buy all over the world that are still great values for the more adventurous. It is fun to read and dream. You might want to take a look at it. For $49, it is fun and if you have a thought of buying a home outside of the US, it is worth the price. The following is a link to their promo page: http://www.agora-inc.com/reports/IL/WILVE714

Old Friends, Wedding Bells and San Francisco

I am speaking three times at the next Money Show event in San Francisco. You and a guest qualify for FREE admission on September 22-24, 2004, at the San Francisco Marriott. Attend over 150 FREE educational workshops, 14 panel discussions, and general sessions focusing on economic and investment presentations and browse over 100 exhibits... all FREE. For complete details or to register online click the link below or call 800/970-4355 today. Don't forget mention me (John Mauldin) and Thoughts From The Frontline, along with priority code 003336. See you there. http://www.moneyshow.com/main/main.asp?site=sfms04i&cid=default&sCode=003336

This next Monday, Henry, my oldest son (all 265 pounds of muscle and brains) is getting married. That is always a special time for a Dad. It does remind us of family and relationships, but also that we are getting a little older. Such events always cause a little reflection upon my own life journey.

And that reflective bent was intensified last night. I went with my bride and some friends to watch Paul Simon and Art Garfunkel at their reunion concert tour. If you can get to one, buy the best ticket you can. It is an investment in nostalgia that has huge dividends. It is their 50th anniversary of knowing each other, and as Paul put it, their 48th anniversary of fighting. But last night, it was nothing but perfect harmony. Throw in a set by The Everly Brothers, and this aging child of the 60's hippy was transported to a time when there was little fat on his body and much more hair.

And then they sang Old Friends. The lines, written in 1968, hit home.

"Can you imagine us years from today
Sharing a park bench quietly?
How terribly strange to be seventy.

"Old friends, Memory brushes the same years
Silently sharing the same fear."

Yes, in 1968, it was terribly strange to think about 70. Yet, today, it seems like 70 is just around the corner. But Old Friends make 70 not such a bad thing.

Your glad he has a lot of Old Friends analyst,

John Mauldin
[e-mail]

Copyright 2004 John Mauldin. All Rights Reserved

If you would like to reproduce any of John Mauldin's E-Letters you must include the source of your quote and an email address ([e-mail]) Please write to [e-mail] and inform us of any reproductions. Please include where and when the copy will be reproduced.

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staff at Millennium Wave Advisors, LLC may or may not have investments in any funds cited above.


http://www.investorsinsight.com/article.asp?id=jm070904

[ReturntoSender]

InvestmentHouse Weekend Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- Oversold bounce helped along by GE earnings.
- Wholesale inventories rise, adding to debate about slowing economy even as GE sees happy days.
- Indexes split above and below support as techs breakdown while consumer, medical and industrial stocks hanging onto key levels.
- Early summer rally is over and now stocks have to finish the selling and regroup.
- Subscriber Questions.

Low volume rebound accomplishes little.

Some further selling would have done the market good, taking SP500 down for a full test of its 200 day SMA in a steady barrage of selling. That could have set up a decent relief bounce from the selling. As it turned out Friday, what seemed to be out of place optimism by GE managed to spark a modest rebound on the heels of a week of selling brought on by fears of a weaker economy, earnings warnings, and disappointing earnings results and guidance.

The rebound was modest. Volumes were sharply lower and half of the gains were given away. All the market could manage on the heels of the GE and SAP earnings was a timid rebound, hardly a counter to the previous two weeks of selling. NASDAQ and SP500, both below their 50 day SMA, barely challenged them Friday. A gap higher, a modest run early to get within view of the resistance, then backing off to mid-range for the session. Again, not much of a rebound and certainly not on the level of the higher volume selling sessions leading up to the bounce.

What Friday did was relieve some of the selling pressure that had built up as the indexes gave up the early summer rally. Thursday we said a further sell off would set up a better rebound. Instead, GE�s earnings forestalled further selling and took some of the heat off. Indeed if you listened to CNBC, Bloomberg or other financial stations you would have thought the day was a solid return to accumulation. The price/volume action, leadership stocks, and the weak action below resistance by NASDAQ and SP500 sum up a fairly lackluster upside session, particularly when juxtaposed with the recent selling. It will take a lot more for NASDAQ to set back up and ready itself for a rebound, but SP500, DJ30 and SP600 are still above their 200 day SMA. Another test of those levels and a more substantial bounce is next.

THE ECONOMY

GE tops revenue expectations by a billion, sees the �best economy in years.�

Happy days are here again. GE posted strong results and guided higher for the current quarter, gushing it was the best economy the company had seen in years. Its results certainly indicate such, and GE is in just about every business there is. You can�t get a better economic indicator. While software companies notoriously receive earnings late in the quarter and the failure to book them can kill the quarter as we have just witnessed. GE is a much broader measure of the economy with 9 of its 11 business units posting gains.

Thus GE is a better snapshot of the economy: even though things slowed in the last part of June, the economy still remains on a steady growth path. In the short term the market has overstated the slowdown, moving from full speed ahead to imminent stagnation. No expansion is straight line. The expansion surged at a blistering pace, slowed some in Q1 and Q2, but as we have stated, it will pick up late in Q3 and into Q4 as businesses rush to take advantage of the final chance at $100K expensing and bonus depreciation. Thus we are in a slower cycle in a continuing upside economic move.

Wholesale inventories jump, but what is the cause?

May inventories climbed 1.2% (0.5% expected) and April inventories were revised up to 0.2% from 0.1%. With the recent spate of weaker economic data, this had the financial station pundits sputtering about slower buying leading to rising inventories. Backpedal a month and this inventory rise would have been interpreted as inventory building, something craved by economists ever since the recession. Indeed, there has never really been a lot of inventory building during the expansion. Companies have kept inventories lean relative to the rate of growth. This is one of the larger inventory gains, and because it came after two weeks of softening economic data it is interpreted as a slowing economy.

Sales did ease, posting a 0.5% gain versus 0.9% in April. That decline along with the rise in inventories moved the stock to sales ratio up for a change (1.13 months versus 1.12 months in April). Was it lack of sales? We don�t believe so. As we reported early in the year, manufacturers were starting to stockpile raw materials needed to produce their goods, particularly lumber and metals. With prices rising and supplies getting squeezed they wanted to be sure they had the stock on hand and at a relatively reasonable price. Thus there has been inventory building at the wholesale level to hedge against these problems. Indeed, it was durable goods (lumber, metals, hardware) that produced the gain, rising 1.5%, the highest gain since another 1.5% gain in November 1999. In 1999 the build was in fact based on a slowdown as the economic cycle was peaking.

THE MARKET

Technology continued to suffer with weak bounces by NASDAQ, NASDAQ 100 and SOX that could not recover the 200 day SMA. SOX is nowhere close to that. Indeed, it is setting up a very negative pattern with all of the moving averages lining up one on top of the other, 200 day MA on top, then the 50 day, the 18 day, and the 10 day. SP500 is still above its 200 day SMA, fairing a bit better with its medical stocks, but still unable to recover its 50 day SMA. These are facing a lot of overhead supply and resistance, and have been under distribution the past week as they broke below support on rising trade. NASDAQ still has a lot of work ahead of it before it can recover and set up the foundation for another move higher.

On the other side of the fence is DJ30, DJ20 (transports), and smaller cap indexes. Those are still holding over their 200 day SMA (the latter easily), and that technically leaves them in a decent position to stage a rebound. The 50 day MA is a key institutional support level as institutions will use this level to buy into stocks they want if they are still inclined to accumulate shares. The 200 day MA is a level of last support. Institutions have already failed to support stocks at the 50 day; they are not in a more aggressive accumulation mode. If they don�t step in at the 200 day MA stocks are really in trouble. Breaches of the 200 day SMA typically lead to further selling as the big money is not interested in supporting stocks. As seen last week on NASDAQ, when volume rises on the breach, not only are institutions not supporting stocks, they are actively selling them.

At a minimum this leaves the market in a continuing base that started early in the year. The recent breakdown in NASDAQ necessitates some rebuilding before it can complete its base. We can get a jump off the 200 day SMA by SP500, DJ30 and the Russell 2000 (small caps), but they too have work to do on their bases after selling back on rising volume the past week as well.

Market Sentiment

VIX: 15.78; -0.42
VXN: 22.35; -0.33
VXO: 15.49; -0.56

Put/Call Ratio (CBOE): 0.75; -0.16. The bounce pushed the put/call ratio lower. While still in the high end of the range, it has not shown the steady purchase of excess puts, i.e., a ratio of 1.0 or better on the close. One such close last week, but with the CBOE, it typically takes 3 or so such sessions. The bounce Friday took some of the pressure off the downside speculation.

NASDAQ

Modest rebound on low volume, tapping toward the 50 day SMA but backing off again, unable to break the resistance.

Stats: +11.01 points (+0.57%) to close at 1946.33
Volume: 1.398B (-24%). Big drop in volume as techs tried to recover. Distribution resurfaced last week as the index broke down, and the buying was light as it attempted a recovery. Classic relief bounce action after a high volume sell off.

Up Volume: 971M (+635M)
Down Volume: 388M (-1.052B)

A/D and Hi/Lo: Advancers led 1.37 to 1. Very modest upside gains considering the nasty downside breadth preceding the move.
Previous Session: Decliners led 3.32 to 1

New Highs: 52 (+7)
New Lows: 121 (-10)

The Chart: (Click to view the chart)

Another wave at the 50 day SMA (1966) on the intraday high and then falling back once more. Unlike Thursday it did not completely roll over on rising volume. It held half its gain on the session, but that was about it. Low volume, modest breadth, inability to hold its gains. A decent bounce but no recovery. Still in deep water, below the 200 day SMA (1983) and the 2004 down trendline for starters. A lot of damage was done last week. NASDAQ may still be ready to try another bounce toward the 200 day SMA in another oversold bounce continuation, but that would most likely only set up another downside test.

NASDAQ 100 closed below its 200 day SMA, showing a doji as well. It too could attempt another rebound toward the 200 day, setting up further selling as well. QQQ is showing signs of attempting a bounce back from the selling, and that would entail a test of the break below the 200 day.

SOX rebounded to 451, right at near resistance. It is still buried below its 200 day SMA (488) and has major overhead resistance. Many beaten down stocks, e.g., NVLS, KLAC, started bouncing Friday, not unusual after the butt kicking they have had this month. A move to 465 looks about right.

S&P 500/NYSE

Modest rebound on below average volume, holding easily over the 200 day SMA as it tries to set up a bounce toward 1120ish.

Stats: +3.7 points (+0.33%) to close at 1112.81
NYSE Volume: 1.187B (-15.14%). Volume dropped well below average as the large caps managed their own small bounce. The bounce hardly erases the prior distribution that pushed it below its 50 day MA.

Up Volume: 735M (+442M)
Down Volume: 436M (-663M)

A/D and Hi/Lo: Advancers led 1.72 to 1
Previous Session: Decliners led 1.9 to 1

New Highs: 116 (-40)
New Lows: 144 (+3)

The Chart: (Click to view the chart)

Held over some old support at 1106 and bounced on low volume. The 50 day SMA (1118) was not even tested on the high (1115.57). After distributing 3 of the past 5 sessions the large caps are attempting to put together a bounce back in relief toward the 50 day EMA (1123). Given the same distribution, however, a test of the 200 day SMA (1101) is still ahead. As noted last week, this pattern was not bad, and indeed was one of the better index patterns in the market. It was unable to make the breakout move when it was there, and it broke down from the pattern. Not a complete breakdown overall, however, as it is still above the 200 day SMA.

The SP600 (small caps) rebounded to the 50 day EMA, moving over that level intraday but then backing off by the close. They too suffered some heavy selling last week, but as they started from a new high, they are still in decent shape.

DJ30

Gapped below the 200 day SMA (10,182) but then fought back once more. Once again it was stalled by the 50 day SMA (10,233), tapping that level on the session high. It is still being pinched between the 200 day on the bottom and the 50 day EMA (10,292) and the 2004 downtrend (10,285) from above. Critical level for the blue chips. GE reported strong earnings but could muster just a fractional gain. If they fail here, 10,000 to 9900 is easy. Looks as if it will try a move up toward 10,300 before heading lower again.

Stats: +41.66 points (+0.41%) to close at 10213.22
Volume: 161 million shares Friday versus 181 million shares Thursday.

The Chart: (Click to view the chart)

THIS WEEK

Some key indexes have dug themselves into serious holes while others are playing with the same shovels. An attempt to climb out Friday was weak at best. Some are saying that after earnings or when they are mostly over stocks will start to rally. Possibly. If the actual earnings trump the warnings and the earnings to date and provide strong guidance that could offset the current worries about a so-so economy ahead leading to lower earnings growth. Some big earnings reports from big names could help pull that off, but for now some solid earnings from GE and SAP, two big companies, could not spark anything serious. It is still too early for that as thousands of reports have yet to hit the wire.

While there is some plausibility to that view, and while we are still expecting more of a relief bounce, if it carries past key resistance ahead we will be surprised. While some were waiting for a summer rally, we think it has already come and gone and that stocks will struggle through to the end of summer. It will rally and stall, banging around in a range that continues to trend lower. SP500 still has to test its 200 day SMA, and after a continuation of the Friday relief bounce we feel it will make that test.

That does not mean there won�t be opportunity, it is just going to be within a range. A continued relief bounce will set up some more downside plays, something we wanted to see Friday, but when stocks gave back half their move, the set up was not as sweet. Again, another relief move and there will be more ready for entry.

There are still stocks and sectors holding up quite well, e.g., medical, energy, consumer, as money rotates out of technology. The economy is still expanding and consumers are confident and spending, and that continues to drive these stocks. We have been weeding positions, focusing on those that are holding up versus the market. Leadership is eroding with more quality stocks cracking support in what were decent pullbacks to test prior moves higher. At the same time there are some outstanding stocks that are looking, well, outstanding. They continue to ignore the market, making their own wake. Obviously we are focusing on those as our upside plays. Leaders are one of the top indicators for the overall market. Combined with the distribution and breakdowns by NASDAQ and SOX along with SP500�s struggle, the market is going to have to regroup, base some more, then try another move down the road.

Again, a further rebound will most likely occur and that will then set up some more downside plays. As always we will watch what the market actually does; if volume surges on the upside when JNPR or some other horse announces huge earnings and strong guidance, the story changes. Right now the market is not forecasting that scenario, but we have seen a big name turn the market�s fortunes. With all of the overhead it would have to be a hell of a report.

Support and Resistance

NASDAQ: Closed at 1946.33
Resistance:
The 50 day SMA at 1966.
The 200 day SMA at 1983.
The 2004 down trendline at 1980.
The 50 day EMA at 1984.
2024 is the June high.
2050 represents some prior price points and has stopped NASDAQ the last three times it has tried that level.

Support:
1925 is some support.
1900 to 1890.
The April lows (1880, 1878).

S&P 500: Closed at 1112.81
Resistance:
The 50 day SMA at 1117.
The 50 day EMA at 1124.
1125 was key price support.
The March/April down trendline at 1127
1142-1146 are the June highs.
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:
1106 is a May 2002 top and represents some early 2001 lows.
The 200 day SMA (1101).
1096 to 1100.
1090 is the March low.

Dow: Closed at 10,213.22
Resistance:
The 50 day SMA at 10,233.
The January/April down trendline at 10,290
The 50 day EMA (10,292).
Late April peaks at 10,478 to 10,512
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high

Support:
The 200 day SMA at 10,182
March low at 10,007.
9900-9850.

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the �Economy� section.

July 13
- Trade Balance, May (8:30): -$48.3B expected and -$48.3B prior
- Treasury Budget, Jun (2:00): $16.3B expected and $21.2B prior

July 14
- Export Prices ex-ag., June (8:30): 0.2% prior
- Import Prices ex-oil, June (8:30): 0.4% prior
- Retail Sales, June (8:30): -0.7% expected and 1.2% prior
- Retail Sales ex-auto, June (8:30): 0.3% expected and 0.7% prior

July 15
- Business Inventories, May (8:30): 0.5% expected and 0.5% prior
- PPI, June (8:30): 0.2% expected and 0.8% prior
- Core PPI, June (8:30): 0.2% expected and 0.3% prior
- NY Empire State Index, July (8:30): 28.0 expected and 30.2 prior
- Initial Jobless Claims, 07/09 (8:30): 333K expected and 310K prior
- Industrial Production, June (9:15): 0.1% expected and 1.1% prior
- Capacity Utilization, June (9:15): 77.7% expected and 77.8% prior
- Philadelphia Fed, July (12:00): 25.0 expected and 28.9 prior

July 16
- CPI, June (8:30): 0.2% expected and 0.6% prior
- Core CPI, June (8:30): 0.2% expected and 0.2% prior
- Michigan Sentiment-Prelim., July (9:45): 97.0 expected and 95.6 prior

SUBSCRIBER QUESTIONS

Q: Could you please give me a clue as to what an "ascending or descending triangle" refers to?

A: An ascending triangle forms when prices, in tracing their daily or monthly pattern, move up and down between support and resistance to form a "shape" that looks like a triangle or a pie wedge. The point or tip of this shape is on the right side of the pattern, as prices become compressed between support and resistance. Resistance is the high prices the stock cannot yet break through (forming a horizontal "ceiling"), and support is an up trendline that develops as the low prices --on the pattern dips-- move higher and higher. This is what gives the pattern its triangle shape with the point or tip at the right side. Prices become compressed in this part of the pattern.

The stock traces this pattern as it hits a high and moves back down, finding support and bouncing back up again to that previous high. Typically it will move back down again, finding the support once more, then bouncing back up to hit the ceiling of resistance. This is the resistance the stock has to break through, and one of the reasons we like this pattern so much is because breakouts from such patterns can be strong. The pattern gets squeezed into the tip of the triangle and upon breakout can explode upward. Interestingly, there is an opposite pattern called a descending triangle, which can result in the same kind of move downward. We like to play those, too.

You can look at a chart of TRBS in April through June 2004 and see a triangle form with the lows moving up the 50 day EMA with a constant top near 44. The stock make a strong volume breakout as the pattern pinched off.

Our stock seminars go into more detail about this and other technical patterns. Check them out if you are interested. The new, updated version will be out at the end of summer!