Replies to post #5178 on Sector Investing

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Charts on the the 30 Year T Bond Yield vs the 3 Month Treasury Note Yield - Note how uncommon it is to have the short term notes rising while the long term bond falls but until the short term yield is higher than the long term yield the yield curve is not inverted.

Yield Curve: The yield on the 30-year treasury bond minus the yield on the three-month T-Bills. When the yield curve spread is greater than 3.5% (very steeply upward sloping) it is bullish for stocks, and when the yield curve is negative (inverted) it is a bearish indication for stocks.
Formula: (Long Bond yield) - (T-Bill yield)
Gauge Elements: Magnitude
Updated: Weekly (as of Friday close)
Strategy
The yield curve will always be a factor in the future direction of the stock market, but it is most useful as an indicator when it becomes either very positive or inverted. Historically, an inverted yield curve has been followed by a recession and falling stock prices. A steep upwardly sloping yield curve with a spread of greater than 3.5% usually supports higher stock prices.

YIELD Curve A plot of treasury YIELDs across the various maturities at a specific point in time. At the front (left) of the YIELD curve are T-Bills with maturities of 12, 26 and 52 weeks. In the middle are Treasury Notes with maturities of 2, 5 and 10 years. At the end (right) of the YIELD curve are Treasury Bonds with maturities of 20 and 30 years. In a normal YIELD curve, YIELDs rise as the maturities increase. If the YIELD on shorter maturities is higher than that of longer maturities, then an inverted YIELD curve exists. An inverted YIELD curve is a sign of tight money and is bearish for stocks.





The Long Bond vs 3 Month Treasuries for a look at the Yield Curve - $TNX:$IRX - An inverted Yield Curve (Below 1.0) is extremely rare but even the long bond falling as the T Bill rises is unusual:

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From Briefing.com: Close Dow +30.15 at 10804.51, S&P +6.75 at 1206.83, Nasdaq +9.44 at 2051.04: Late-day buying, prompted by breaking biotech news and falling bond yields, coupled with new M&A deals and key CEO changes, were enough to counter higher oil prices... Upbeat news in Biotech (+5.0%), during a day that saw few market-moving catalysts, provided a strong leg of buying support heading into the close as market breadth turned modestly bullish...

The Biotech industry, which earlier held modest gains amid upbeat remarks about Genzyme Corp. (GENZ 57.80 +2.20), regarding stronger EPS growth and improving margins, soared following an interim analysis of Phase III trials from Genentech (DNA 54.83 +10.75)... Confirmation that DNA's Avastin drug (in combination with chemotherapy) aids in lung cancer survival was exactly what the doctor ordered to improve sentiment enough to return sellers to the sidelines and help the Dow climb back into positive territory for the year... While Treasurys were relatively unchanged most of the day, with yields above 4.5% contributing to the overall cautious sentiment, bonds attempted to rally amid uncertainty ahead of event risks tied to upcoming economic data...

The benchmark 10-year note closed up 8 ticks to yield 4.5%, somewhat offsetting interest-rate worries that loomed last week when bonds got hammered and recorded their worst weekly sell-off in 10-months... Pressuring equities most of the day, however, were rising crude oil prices ($54.95/bbl +$0.52), amid uncertainty of OPEC raising output quotas at this Wednesday's meeting in Iran... Meanwhile, IBM (IBM 91.89 +0.38) agreed to acquire Ascential Software (ASCL 18.29 +2.59) for $1.1 bln while Altria Group (MO 65.30 +0.16) expanded its presence into the world's fifth largest cigarette market with a $5.2 bln bid for Indonesian tobacco firm PT HM Sampoerna...

Walt Disney (DIS 28.00 +0.41) also made headlines when it named current President and COO Robert Iger as the successor to CEO Michael Eisner while AIG (AIG) announced that CEO Maurice "Hank" Greenberg could resign as early as this week... Fueled by both resurgence in M&A and new CEO appointments was OfficeMax (OMX 34.47 +0.31)... While OMX - the only notable earnings report today - handily missed Q4 expectations due to weak holiday sales, the market arguably ignored their disappointing results in favor of a statement from rival Office Depot (ODP 20.76 +1.57)...

ODP appointed former AutoZone (AZO 85.79 -12.51) CEO Steve Odland as Chairman and CEO, arguably increasing speculation that OMX could be acquired... Strength in Software and Semiconductor offset losses in Hardware and Disk Drive while Financial, Health Care and Consumer Staples were influential leaders to the upside... A JP Morgan upgrade on Williams Companies (WMB 18.60 +0.71) helped fuel widespread buying interest in Utility while strong gains in Delta Air Lines (DAL 4.62 +0.32), which announced a flurry of new low sales fares, provided a boost to Transportation...

Even the Materials sector, under pressure most of the day due to profit taking in Steel and a rebound in the dollar, eked out a slim gain... Potentially oversold conditions in the greenback lifted the currency to its best levels in more than a month against the euro (1.3365) and strengthened it against the yen (104.93) following news of a 28% year-over-year contraction in Japan's Jan. current account surplus...DJTA +0.6, DJUA +1.9, DOT -0.7, Nasdaq 100 +0.6, Russell 2000 0.6, SOX +0.6, S&P Midcap 400 0.8, XOI +0.5, NYSE Adv/Dec 1754/1587, Nasdaq Adv/Dec 1661/1453

3:20PM Previewing Jabil Circuit (JBL) 26.34 +0.26: After Thursday's close Jabil Circuit will report its fiscal Q2 (Feb) results. The company's track record suggests its should be able to at least match the Reuters Estimates consensus EPS estimate of $0.27. For perspective on the report and a glimpse of JBL's trading history leading up to, and following, its results for the past 7 quarters, be sure to visit Briefing.com's Looking Ahead page.

8:11AM LSI Logic ups guidance (LSI) 6.06: Company issues upside guidance for Q1 (Mar), sees revenues of $420-435 mln, consensus $408 mln, previous company guidance called for revs of $400-415 mln.

6:37AM Asyst Wins Multi-Million Dollar Spartan Sorter Order From Hynix Semiconductor (ASYT) 4.83: Hynix Semiconductor Inc. has selected Asyst's Spartan Integrated Sorter for Hynix's new 300mm fab in Ichon, South Korea. The multi-million dollar order from Hynix marks the first win for the Spartan Sorter in South Korea and the fifth major 300mm customer penetration for the Spartan Sorter since its first shipment less than one year ago.

6:31AM Powerwave to Acquire Selected Wireless Assets of REMEC Inc for $118 mln in cash/stock (PWAV) 7.76: Co has signed a definitive agreement with REMEC (REMC) to acquire certain product lines of REMEC's Wireless Systems business. The purchase includes certain selected assets and liabilities related to REMEC's Wireless business. These specific product lines include RF conditioning products, filters, tower-mounted amplifiers and RF power amplifiers. PWAV estimates it will achieve in excess of $50 mln in annual cost savings and that transaction will be accretive to EPS in the first qtr following completion of the integration activities.

6:27AM Research In Motion and Yahoo! Announce Worldwide Relationship to Bring Yahoo! Services to BlackBerry (RIMM) 60.63: Cos announce a new relationship to provide Yahoo! Messenger service to BlackBerry users around the world. Through this relationship, the companies plan to pre-install full-color, graphical Yahoo! Messenger clients on BlackBerry devices in the coming months. This new relationship builds on Yahoo!'s strategy of extending its core services beyond the desktop and RIM's strategy to provide a robust and expandable wireless platform in order to give customers a truly integrated communications experience. The companies also intend to provide a further enhanced Yahoo! Mail offering in the future.

4:07PM The Walt Disney Co (DIS) 27.97 +0.38: On Sunday, The Walt Disney Co announced Robert Iger will succeed Michael Eisner as chief executive. The timing of the news took the market by surprise as the Board was expected to vote in June, however, Iger's unanimous vote was not, as his name appeared to be at the top of a very short list. Eisner will step down in September a year earlier than expected, although remaining on the Board till 2006 after serving the company for 21 years. We added the stock as a suggested holding in our Active Portfolio on Friday, but in light of the news, felt compelled to outline the leadership issues at hand.

The news has sparked much conjecture with some agreeing that Iger is the best person for the job, while others suggest Eisner continues to pull the puppet strings at the company. The naysayers argue over the appearance of a lack of independence with regard to the search process. Former board members, Roy Disney and Stanley Gold, released a letter to the Board just last week alleging Eisner inappropriately participated in the interview process resulting in the withdrawal of some external candidates. The only name that has surfaced to date is current CEO of eBay (EBAY), Margaret Whitman, who withdrew her name on Friday after being interviewed.

The announcement came under direct fire from the former board members, who said in a letter, "We find it incomprehensible that the board of directors of Disney failed to find a single external candidate interested in the job and thus handed Bob Iger the job by default." Also stating, "The need for the Walt Disney Company to have a clean break from the prior regime and to change the leadership culture has been glaringly obvious to everyone except this board." Chairman George Mitchell said, Eisner was never present during any interviews with Iger and attended only part of a meeting with an external candidate.

So who is this man in the middle of a fire storm? Robert Iger, 54, was the president of Capital Cities/ABC, which Disney purchased back in 1995. He went on to head ABC Group and Disney International. To his credit, Iger took the flailing ABC network fourth in the ratings and turned it into a powerhouse. ABC, now poised to turn a profit, boasts some of top shows on TV today including "Desperate Housewives" and "Lost." Iger appears to be a good replacement for Eisner as a seasoned executive and with 10 years under his belt at Disney, he clearly understands its unique corporate culture. The new CEO is also credited with soothing sour relations between Eisner and Pixar's (00C0) CEO, Steve Jobs.

When Iger takes over the helm on October 1st, he faces numerous challenges. The new CEO must emerge from Eisner's shadow, staking his claim by laying out a clear long-term plan for growth. Two key issues on which he will be judged surround Pixar and ESPN. Pixar is the driving force behind Disney's character development over the past few years, therefore it is essential for Disney to repair relations and make a deal with the animation studio. Steve Jobs is in a great position as Disney's most important content generator, hence a possible deal may be costly. Additionally, after stealing the NFL from NBC back in 1998 for $9.2 bln, Disney's eight year contract is fast approaching the October 2005 deadline. The NFL is critical programming for ABC and ESPN driving subscriber fees and advertising revenue.

Disney's shares recently have been hampered by the negative publicity surrounding this issue, by announcing the succession ahead of schedule, the Board has eliminated this uncertainly in the financial markets. The stocks' reaction was favorable, although muted, as Iger was seen as a clear frontrunner and favored by Eisner. Both men will share the CEO position until September. The road ahead will be challenging. For the near term, Iger will need to ensure a smooth transition and maintain the positive momentum in operations. Iger's vision is likely to include improving Disney's creative capability by retaining top animation talent, international expansion, technological innovation, and developing new franchises. Looking further out, the new CEO's ability to realize growth from Disney's vast assets will be key to creating a legacy of his own. ---Kimberly DuBord, Briefing.com
11:39AM Ascential Software (ASCL) $18.29 +2.59 (+16.5%) The consolidation of the enterprise application software market continues. IBM's announcement that it will buy Ascential (for $18.50 per ASCL share) is a logical extension of the strategy that IBM has adopted as their core focus for almost ten years now: consulting and customized enhancement of an enterprise client's IT system. Ascential has become one of the premier vendors of integration software for complex IT systems. Already a reseller of Ascential products, IBM clearly knows the value of Ascential products in selling integration services.

IBM made the strategic decision to shift away from selling hardware and software as their core focus and towards becoming a consulting and contract software shop in the very early days of Louis V. Gerstner's term as Chairman and CEO. In retrospect, it was an absolutely essential shift to make and Gerstner's realization of the need was brilliant. The key idea driving the shift was the observation that the biggest challenge faced by enterprise clients was making all of their disparate systems interact efficiently and smoothly. The bigger the client company, the bigger this problem was (and still is). Legacy mainframe systems running COBOL programs first written 30 years ago needed to be integrated with the network of desktop PCs and, later, with servers that could provide internet access and instant updating. These technical challenges were extremely hard ten years ago - and, although more tools exist today, are still big challenges for enterprises.

Ascential's value in this space is their product line that essentially turns any and all data in an enterprise system into "metadata." The Ascential product line does this by acting as a sort-of "interpreter" standing in the middle of computer systems that cannot directly communicate with each other. Installing Ascential provides a standardized data format for the entire IT system that allows data to be collected by one system, stored in a database by another, and analyzed by yet another.

Since IBM's core strategy is now helping clients integrate their entire systems, adding Ascential as one of their own products makes very solid strategic sense. IBM has been a reseller of Ascential for several years and was even Ascential's largest customer in 2001, accounting for more than 10% of revenue.

We have been following the theme of consolidation in the enterprise software space for more than a year. Although we believe that, ultimately, the highest value will accrue to software vendors at the application level, the integration level also has competitive strength and the ability to retain pricing power. Once an enterprise successfully installs an integration software product, if it becomes essential to the daily "data flow" of the firm's operations, it is very hard for a customer to replace it easily. That puts pricing power on the side of the vendor, instead of on the customer's side. With pricing power shifting to the customer at all other levels of software, from operating systems, networking, and databases, the integration tools level and the application level are where the future of software profits lie.

Stocks of other large integration software vendors are also moving today, on the idea that the other integrators that compete with IBM will now need to acquire their own integration platform. These include the following companies: Informatica (INFY) +3%, Tibco (TIBX) +3%, BEA Systems (BEAS) +2.5%, Compuware (CPWR), Altiris (ATRS) +1.5%, Progress Software (PRGS) +1%, Quest (QSFT) +1%, BMC Software (BMC) +1%, and even the comparatively small SeeBeyond (SBYN) +2.3%. - Robert V. Green

11:13AM Lockheed Martin (LMT) 59.71 +0.22: The recent note authored by Defense Secretary Donald Rumsfeld outlined what should be the focus of the military. The new focus should be heading off threats prior to hostilities and serving a larger purpose of enhancing US influence around the world. This is certainly not a new idea in the post September 11 world we live in.

One of the issues at hand is the F/A-22 jet, which is dubbed the Raptor. It is probably the most advanced fighter that the US Air Force has in its arsenal, but the cost of each fighter is something that could choke a horse. The PBS show "Nova" noted that the cost of a F-22 would be about $100 million each.

A web site (www.f-22raptor.com) noted that if the Pentagon reduced the number of ordered planes to 160, the production cuts would start taking effect after the 2007 budget year and production could end by about 2010. The cutbacks, however, may be muted due to the expected build of the F-35 joint strike fighter.

The note also mentioned that there was something of a "dream capability" which would be an AC-130 gunship that would be unmanned and capable of hovering for several hours over a hostile area. The AC-130 is plane that Lockheed had been making for more than 40 years, but then retired the aircraft in 1995. Recent use of the plane in Dessert Storm and Operation Freedom has brought a renewed interest in the aircraft.

Overall, the story here is one that cannot be a total surprise to the investors in defense stocks. The huge price tag on each of the F-22s was always a point of contention, but the Air Force remains a proponent of the plane. A cutback should not effect the stock too much as it would not really begin to hit earnings until 2009 or 2010, as the total number would just likely cut the production at the end of the cycle.

So while this news might have inspired some analysts to trim some estimates, it would be estimates that are well off into the future and not the estimates for next year or even the year after. In this day and age of "what have you done for me lately?" and our incredibly short term focus, this news shouldn't be of great concern to shareholders.

10:31AM OfficeMax Inc. (OMX) 34.37 +0.20: The number three office supplies retailer finally released its fourth quarter results, which had been delayed due an accounting probe. The company reported fourth-quarter FY04 net income of $.7 million, or a loss of $0.02 per diluted share down from a profit of a nickel last year. Before the net impact of the sale of its paper, forest products, and timberland assets, and related financings, OfficeMax reported a net loss of $24.2 million, or $0.30 per diluted share. The bottom line, the results are fairly in-line with its preannouncement on Feb. 14th. Operating income for the year was $129 mln compared to $135 mln pre-announcement and $125 mln last year.

OfficeMax previously announced its would restate income for the first three quarters of last year after completing a probe that found employees fabricated $3.3 mln in rebates billed to suppliers. The probe resulted in the overstatement of operating income by $7 mln and the resignation of the CEO and the CFO, along with six employees. Shares have been on a wild ride over the past six months finally bottoming at the beginning of January. On March 1st, shares jumped over 3% on news the company completed its internal probe, which had begun in December.

During the fourth quarter, revenues rose 14.3% year/year to $2.69 bln, vs. the $2.37 bln consensus. Retail comps were 0.4%, with contract sales up 16% in total - stronger than expected. Operating margins sank from 3.5% last year to 1.8% for the quarter. Co noted higher promotional sales and lower vendor income. Last July, OMX announced it was selling its paper and timberland assets, along with changing its name to OfficeMax from Boise Cascade completing the transformation from a paper company to an office supply retailer. Assets were sold to Boise Cascade LLC, which OMX retains a 10% stake.

On the positive side, OMX said it intended to go ahead with a previously-announced plan to buy back $775-815 mln of common shares, but provided no timing. Interest in shares heightened recently on news a major shareholder sent a letter to the Board, urging a sale or break up of the company. Today, the market is likely to look past these results, focusing on the announcement from Office Depot (ODP) that Steve Odland will take over as Chairman and CEO. Odland, formerly of AutoZone, has a history of making acquisitions, which may increase conjecture that OMX may be sold. For now, we would urge caution as volatility is likely to continue. There remain a lot of unanswered questions, not to mention the company is operating without a CEO, CFO, and President of Retail. ---Kimberly DuBord, Briefing.com

9:45AM Page One - Market Still Languishing : There are no major mergers today. That has been rare for Mondays recently. Nevertheless, stock futures suggest a modest bounce following Friday's sharp drop.

Just for the record, there are a couple of less significant mergers. IBM will buy Ascential Software (ASCL) for $1.1 billion. That isn't a large deal, but does support the trend of consolidation in the software industry. Altria is also offering to buy an Indonesian tobacco company for $5 billion.

The bigger news is that Walt Disney Company has named a new CEO. The choice apparently has not pleased dissident shareholders, so the market reaction is uncertain.

Oil prices are still over $54 a barrel despite a statement this weekend from OPEC President Sheikh Ahmad Fahd al-Sabah that OPEC may raise production limits at its March 16 meeting. Bond yields are pushing higher again this morning as the 10-year yield is up to 4.56%. Both remain of concern to the stock market.

There are no economic releases today and the only major earnings release is from OfficeMax, which had a mixed report. The week ahead brings retail sales data tomorrow, and housing starts and industrial production on Wednesday. The major reports on the earnings calendar are from brokers such as Lehman, Bear Sterns, and Goldman Sachs.

The best news this morning is that there are not many earnings warnings. Briefing.com's Big Picture column today takes a look at a possible pickup in earnings warnings this quarter and in 2005. Earnings growth is slowing, particularly in key sectors such as financials, health care, and consumer discretionary. That increases the risk of warnings. Our overall view remains neutral. There will come a time when the market will have greater appeal. That time isn't quite yet. Dick Green, Briefing.com

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

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From Briefing.com: 6:40PM OmniVision Secures Key Design Win From Leading Handset Maker (OVTI) 25.98 +0.30: Co announced that it has secured a major design win to supply its OV9650 1.3 megapixel CMOS image sensors for use in upcoming, high volume camera phones of one of the world's largest handset makers. This follows a series of design wins for this sensor with other handset makers and marks a milestone for this product. "Last year, VGA cameras clearly led the camera phone market, but this year, 1.3 megapixel cameras are quickly gaining popularity," said Jess Lee, OmniVision's Director of Product Marketing. "These successive design wins of our OV9650 underscore our belief that 1.3 megapixel cameras will join VGA in dominating the camera phone market in 2005."

4:06PM Electronic Arts lowers FY05 rev and EPS guidance (ERTS) : Co now expects FY05 net rev to be $3.100-$3.125 bln, vs previous guidance of $3.275-$3.325 bln. Co expects non-GAAP EPS of $1.70-$1.72, vs previous guidance of $1.90-$1.95. Co expects GAAP EPS of $1.62-$1.64, vs previous guidance of $1.82-$1.87. "These results are clearly disappointing... While our new releases are performing reasonably well, they have not been able to offset a significant falloff in catalog sales."

3:00PM Treasuries Look to Fedaral Reserve : The market slumped lower, with no data in the hopper and a bevy of event risk waiting in the wings. The trade is all about tomorrow's FOMC and inflation reports. The market hung in one of the tightest ranges seen in some time (and previously in pre-jobs data trade or pre-Chairman Greenspan testimony trade). Light trade comes on the heels of Friday's low volume where "futures saw a very light volume [price]dip on Friday, which takes the edge off the move; still, the charts are bearish, but momentum readings are oversold and the ownership picture is tilted toward a long bias," according to one chart-master. The economic calendar tomorrow will be offering up this week's first round of inflation data with PPI (0.3% est) and core PPI (0.1% est). In addition to the inflation data, the FOMC will be announcing its decision on short-term rates at 14:15ET (for how rates may steer bank earnings, please see 12:50 ET comment). The market has a quarter point priced in and will be watching for any language changes in the statement. Given current economic fundamentals, JP Morgan believes the rise in core inflation is the key risk to the medium-term outlook. The firm notes, at present it is a positive as it reflects firming pricing power, but rising inflation risks could push interest rates higher. This week's key February reports are expected to confirm that core inflation continues to drift higher. The firm saying, the steady 25bp pace of tightening will be maintained at Tuesday's meeting. But the Fed may remove the measured language from the statement signaling the path ahead is less certain. The 10-yrs are currently -04/32nds yielding 4.523%.

9:09AM Gapping Up : ASKJ +16% (to be acquired by IACI; up in sympathy: LOOK +15%, MAMA +13%, GRU +11.3%, FWHT +7.5%, INCX +5.7%, INSP +3.9%), SDS +19% (Buyout firm in talks to buy Sungard for $10 bln - NY Post), ONXX +12.5% (positive clinical development), DNA +11% (possible beneficiary of SHR's cancer drug setback), TSRA +11.3% (guides higher), PCLE +20% (to be acquired by AVID), PDLI +8.1% (possible beneficiary of SHR's cancer drug setback), SYNC +7.6% (JP Morgan upgrade), OATS +7.1% (upgraded to Aggressive Buy at Keybanc), VION +6.7% (Cloretazine clinical data), DRL +5.8% (Wachovia upgrade), ABB +5.4% (to settle asbestos issue), TIVO +4.8% (to enter Japan market as early as 2006 -- Reuters), ELOS +4.8% (CIBC upgrade).... Small cap energy names moving higher: ABLE +7.6%, USEG +6.4%, GEOI +6.3%.... Under $3: VNWI +24%, RNAI +20%, NENG +15% (signs deal with MSFT), AVNX +10% (Alcatel contract).

7:10AM Entegris and Mykrolis announce merger (MYK) 13.15: Chip-industry suppliers ENTG and MYK to combine in what they call a merger-of-equals transaction that creates combined co valued at about $1.3 bln, w/ trailing annual revs of more than $650 mln. MYK holders to receive 1.39 ENTG shares for each MYK share, deal expected to close in calendar Q3. ENTG holders to own about 56% of combined company, MYK holders to own about 44%. Deal expected to be earnings-neutral in 2H of '05 ex items, and add $0.08 to EPS ex-items in calendar '06. New co, to be called Entegris, will be headed by CEO Gideon Argov, currently CEO of MYK; ENTG CEO James E. Dauwalter to serve as non-executive chairman.

6:53AM Ingram Micro reaffirms (IM) 16.50: Company issues in-line guidance for Q1 (Mar), reaffirms $0.28-0.30 vs. Reuters Estimates consensus of $0.29 on revs of $7-7.2 bln, consensus $7.13 bln. "We're pleased to reaffirm our first-quarter guidance, especially in light of recent market dynamics...Despite pockets of increased competition and economic softness in specific markets, our sales guidance reflects historical seasonal norms, even when excluding the additional revenues from the acquisition of Tech Pacific."

2:33PM Phelps Dodge Corp (PD) 105.80 -1.21: Copper eased off recent historical highs Monday, as the dollar made a significant move against the euro. Copper futures have been trading in-line with fluctuations in the currency markets along with rising demand expectations. Futures rose 1.6% last week to $3,292 per ton - the highest level since the contract began trading back in 1985.

It has been a volatile ride in terms of price activity for the commodity and copper producers as the market tries to anticipate demand, particularly from the world's largest consumer...China. Futures soared to a new high last week after China said spending on factories, roads, and other infrastructure increased during the first two months of the year. Fixed asset investment grew 25% to $51 bln, according to the National Bureau of Statistics, surpassing Beijing's forecasts of 16%. Prices are also being supported on expectations of an economic recovery in Japan and Germany.

Global consumption is forecasted to grow 5.3% in 2005 and 4.6% in 2006. Demand this year is believed to exceed supply for the third straight year resulting in a deficit of 259,000 tons, according to the International Copper Study Group. Several producers including the world's largest, Codelco, along with Freeport-McMoRan (00C) are boosting production, but most likely the additional output will not reach the market until 2006.

One of our suggested holdings in the Briefing.com Active Portfolio is Phelps Dodge (PD), which has returned over 30% during the last year. We remain committed to the name due to its low valuation, strong balance sheet, earnings momentum, and shareholder value. As the second largest producer, PD is highly leveraged to prices, as such analysts have been trying to keep up with the recent elevation. Just last week, Lehman raised its FY05 EPS estimate by 16% to $12.75 and by 27% for FY06 to $14.00. Back in Jan, Phelps beat consensus estimates by $0.23 for the Q4 with revenues up 70% year/year.

Share price volatility is likely to remain demonstrating the continued skepticism over the sustainability of prices. Shares reached a low around $60 back in May of 2004, on concerns that Beijing's attempts to slow growth would result in a significant drop-off in demand. This did not come to pass and almost a year later demand trends remains strong. Looking ahead, we feel with low inventory levels, continued demand trends particularly from China, constraints from scheduled mine depletions, tougher environmental standards, and restrained mine production will result in supply deficits sustaining prices. There has not been a major discovery of copper since the 1980's and with demand rates mentioned above, the market will more than absorb increasing supply and planned restarts of inactive mines. Therefore the risk remains to the upside for PD's shares, which are trading at a 9.5x price to earnings multiple. ----Kimberly DuBord, Briefing.com
12:26PM Time Warner Inc (TWX) $18.21 -0.49 -(2.6%) What to do with the AOL unit? That has to be the biggest headache at Time Warner executive offices. It probably feels a lot like having an obnoxious troublemaking young nephew come stay at your house for a weekend - and then stays all summer without getting a job, demanding meals and clean laundry, and throwing parties where all his friends come over and then wreck things and leave trash all over the front lawn. In fact, using this analogy, the police chief stopped by this morning and asked Uncle TWX to pay the kid's traffic tickets.

The settlement with the SEC announced this morning will cause a restatement of all of Time Warner's revenue from 00Q4 through 02Q2. That's nine quarters. A total of $500 million in revenue will be cut, all of which comes from incorrectly booked online advertising revenue at AOL division. For scale, the total TWX revenue during those nine quarters was about $88 billion, with the AOL segment contributing about $20 billion.

This settlement includes a payment of $300 million to the SEC, which is intended to go into a fund to compensate holders of TWX during the 00Q4 to 04Q2 period (then with the AOL ticker). Details of how to claim compensation are not yet known.

Although the details of what or how the revenue was incorrectly booked, have not yet come out, it is most likely that the problem is "more of the same," meaning incorrect booking of barter ads. Back in late 2002, more than $190 million of revenue at the AOL unit was restated. AOL had booked revenue based on the value of advertising space on AOL that was swapped for services, content, or other ad space from such internet firms as Monster.com and the infamous DrKoop.com. When the $190 million restatement occurred, AOL had said that the SEC investigation was still going continuing, but most investors have long forgotten about it.

Even if this settlement brings the barter-revenue issue to a close, AOL is still a problem child at Time Warner. As we stated on the InPlay page, there were some reports this morning that IAC/ InterActiveCorp would have liked to buy AOL instead of AskJeeves, but the $20 billion price tag was too much. The real problem Time Warner faces is that a real buyer for the entire AOL unit just doesn't appear to exist. Its a long way from the exalted position that AOL was in just five years ago, as the undisputed heir-apparent to the future of entertainment and media.

It is even hard for the Time Warner parent to find a good job for the troublesome unit. The press release detailing AOL's exploration of the internet travel market is not a "too-little, too-late" idea, it is a bad battleground to choose. The pricing power is entirely on the airline and hotel side, not the aggregator side. Furthermore, travelers are finally beginning to realize that air fares at Expedia and other sites are about $5 higher than what's available directly from the airline sites. We think the most likely scenario for this pilot business is one where AOL gives up after making little real progress. Kind of like when the unemployed nephew comes home and says "I quit my job today. What's for dinner?" - Robert V. Green

11:26AM IAC/ InterActiveCorp (IACI) $21.17 -1.12 (-5%) Barry Diller is known for his Internet acumen, and today, he made a move that will only serve to increase his already lofty status. IAC/InterActiveCorp (IACI) announced that it would purchase Ask Jeeves in a tax-free stock swap whereby Ask Jeeves shareholders receive 1.2668 shares of IACI for every ASKJ share. At current stock prices, it values Ask Jeeves at $1.85 billion net of cash.

IACI management noted in the release that they intend to repurchase on the open market at least 60% of the shares that will be issued in order to decrease the dilutive effect of the transaction. The increased number of shares that would be issued would serve to shrink EPS, a critical measure of stock ownership. The repurchase of the shares and subsequent retirement of the shares should lessen this effect. It can only be assumed that IACI isn't doing a 60%-stock and 40%-stock deal (which would have the same net result) is to provide ASKJ shareholders with a fully tax-free deal, if they want it. But it also allows Barry to change his mind later, if he wants, because the is no lasting obligation built into the currently existing repurchase plan.

Strategically, this move could help both companies. Ask Jeeves will now be just a division of IACI and will, if beneficial, be able to limit the amount of detailed information they have been reporting as part of earnings. Those details have not always been helpful, as a substantial portion of revenues come from Google relationship. Those worries may be lessened as Ask Jeeves can now push traffic to IACI brands, with less reliance on Google. IACI acquires a major search property that should help promote all its businesses, Internet and otherwise, as those sites will become the first answer that Jeeves provides.

Ask Jeeves is a technology company, not a media company, as their technology is used to power searches all over the web. Ask Jeeves benefits from the local search content that is part of IACI's CitySearch division. There has been a big push as of late to bring the advertising down to the local market, an effort that CitySearch is completely focused on.

Barry Diller has had a good history of see strategic value in Internet companies, but his real achievement is his track record of increasing their ability to execute. By adding Ask Jeeves to the IACI platform, Ask Jeeves' growth potential is certainly better than it would have been by itself. In addition, the ability to drive traffic to other IACI companies should help turbo-charge the results of the rest of the revenue mix as well.

8:59AM Page One - Early Fed Watch in a Torpid Market : Oil is still hovering near $57 a barrel and stock futures indicate a near unchanged open. There are no reported mergers, but one rumored one. That pretty much sums up the news to start the day. The market faces a difficult battle to generate any upward momentum, and may go in to Fed watch a day early.

The continued overhand of high oil prices is significant, not only for the economic impact, but also from a psychological standpoint. It is a hurdle for the stock market.

Merger activity is helping to offset that negative. The S&P 500 companies in aggregate have tremendous cash flow and are already sitting on a large amounts of cash. The urge to buy is irresistible to many CEOs. There are no major deals this morning, but there are published reports that IAC will buy Ask Jeeves for $2 billion dollars. Some of those Internet companies left for dead five years ago are roaring back. Many of the survivors have done just fine. There are also reports that Oracle is on the prowl again.

There are no economic releases today. The PPI data tomorrow will be watched very closely for any signs of inflationary pressures. Tuesday also brings the Fed's policy announcement. Another 1/4% hike in the fed funds rate is virtually certain, but there are concerns that the Fed will signal it might start raising rates even faster. The stock market has gone up on most of the recent days of the hikes, but the higher rates are starting to become a drag on the stock market. The 10-year note yield is up slightly today to 4.52%.

The stock market may very well drift today ahead of the Fed meeting tomorrow. Usually, it waits until the day of the meeting to go into Fed watch mode, but there is enough concern about the announcement tomorrow to overcome any pull from news today. It is hard to get excited about the upside potential for the market at this time. Dick Green, Briefing.com

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