Replies to post #5179 on Sector Investing

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Charts on the Yield Curve at the following two links:

http://stockcharts.com/charts/YieldCurve.html

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.



Among investment professionals an old rule of thumb is, "Don't fight the Fed." Monetary policy has a profound effect on interest rates, the economy and the stock market. The discount rate is one of the most important tools of the Federal Reserve. As a result, movements in the discount rate are widely analyzed for insight into the future direction of Fed policy, the economy, interest rates and the stock market. A simple model can often identify when Fed moves are likely to significantly affect the stock market.

Calculation & Significant Levels

Discount Rate Model: A model based on a range of values from 3 to -3. The list below details how to change the model to accurately reflect the economy and stock market.

When the Fed raises the discount rate subtract 1 (-1) from model.
When the Fed raises the discount rate subtract 1 (-1) from model.
When the Fed lowers discount rate add 1 (+1) to model.
Every change is effective for 6 months after which the point is dropped from the model.
When the Fed changes direction from raising rates to lowering rates, the model becomes a +2.
When the Fed changes direction from lowering rates to raising rates, the model becomes a -2.
Gauge Elements: Magnitude, Time
Updated: Weekly (as of Friday close)

Strategy

The model calculates a number ranging from -3 to +3. A positive number indicates the Fed has been accommodative, which is bullish for stocks. The larger the positive number, the more bullish this indicator becomes. It is also extremely bullish when the Fed reverses its policy from raising rates to easing. Conversely, a negative value from the model is a strong warning. It is also important to look for a confirmation in the other monetary indicators. For example, in late 1994 and early 1995 the Fed was raising the discount rate. However, the negative effect of this was offset by the significant rise in the treasury bonds which led to a stock market rise.

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From Briefing.com: 6:01PM Swing Trader : On Tuesday morning, the market gapped open above Monday's highs and that was pretty much the high of the session as sellers regained control. Semiconductors were one of the weakest groups throughout the day dragging the Technology sector down with it. Biotech also gapped higher initially after Monday's late-day buying spree, but failed to show a convincing follow through as it closed down on the day. Strong earnings from LEH helped the stock breakout above its 95 resistance area on high volume, but did little for the Brokers (XBD) as a whole. Watch for more earnings this week from BSC, MWD, and GS to spark some momentum...(continued)

Close Dow -59.41 at 10746.10, S&P -9.08 at 1197.75, Nasdaq -16.06 at 2034.98: High bond yields, oil prices near record highs, tech weakness and an Anthrax scare weighed on sentiment, diluting decent economic data and a strong earnings report from Lehman, and closed the major indices in negative territory... While Treasurys found early buying interest following smaller than expected gains in Feb. retail sales data, continued selling pressure again lifted yields on the 10-year note above an arguably undesirable 4.5%...
Feb. retail sales of +0.5% (consensus 0.6%) and retail sales ex autos of +0.4% (consensus +0.8%) came in below forecasts; gains just large enough not to raise inflation concerns, as upward revisions to January's data showed that consumer spending trends clearly remained strong... Meanwhile, Net Foreign Security Purchases checked in at $91.5 bln, well above Street expectations of around $58.5-59.0 bln, initially mitigating worries about foreigners' willingness to buy U.S. Treasuries... But upon further analysis, the second largest increase ever largely came from Caribbean banking centers (also known as hedge-funds) and not from the more notable central banks widely expected and accepted to finance the U.S. current account deficit...

As a result, the benchmark 10-year note fell to its worst levels of the session and closed down 8 ticks to yield 4.54% as surging oil prices also invited inflationary pressures... Crude oil futures closed at $55.05/bbl (+$0.10) amid ongoing oil supply concerns ahead of OPEC's final decision on production quotas at tomorrow's meeting in Iran... Confirmed reports midday that samples from a Pentagon mail facility tested positive for Anthrax also added to the eroding interest for equities, assisted in a negative reversal in market internals that never recovered...

Fed Chairman Greenspan's warning that rising budget deficits posed a major threat to economic expansion, as "the federal budget is on an unsustainable path," also added a sense of nervousness... Meanwhile, technology was weak across the board, with Semiconductor (-2.1%) pacing the way to the downside after Merrill Lynch said growth in semi space would likely be stalled for much of the year... Software, Disk Drive and Networking also lost in excess of 1.0% on the day while Telecom Services, Energy, Consumer Staples and Utility were influential leaders to the downside...

Financial was weak despite strength in Brokerage (+0.3%) after Lehman (LEH 96.19 +2.87) handily bear analysts' Q1 expectations while Food retail (-2.4%) closed lower after Albertsons (ABS 20.10 -0.77) missed analysts' Q4 expectations and guided FY06 earnings below consensus... Biotech also lost ground, led by weakness in Amgen (AMGN 58.61 -1.82), which lost a U.S. appeals court ruling over Enbrel, and profit taking in Genentech (DNA 54.00 -1.00) while a rally in Steel stocks (+1.9%) minimized losses in the Materials sector...

Retail (+0.3%), however, eked out a modest gain, led by strong follow through from Office Depot (ODP 21.70 +0.95) after it named a new CEO a day earlier... The dollar, which was weak early on after Feb. retail sales rose at a slower than expected pace, closed higher against the euro (1.3304) after the Treasury's TICS report surged to its second highest level ever... Separately, Jan Business Inventories rose a strong 0.9% (consensus 0.9%) and the Mar. NY Empire State Index checked in at 19.6 (consensus 19.9), but the dated inventories data and less noteworthy regional manufacturing survey were basically overlooked...DJTA -1.0, DJUA -0.5, DOT -0.4, Nasdaq 100 -0.9, Russell 2000 -0.6, SOX -2.1, S&P Midcap 400 -0.5, XOI -1.1, NYSE Adv/Dec 1120/2210, Nasdaq Adv/Dec 1162/1954

11:26AM Suspicious packages being investigated in DC postal facility; update on Pentagon mail scare : Fox News reports that suspicious packages are being investigated at a DC govt mail facility... B Street postal facility is closed until further notice, and the all-clear was given at a "news building".... Also, Fox News reports that the mayor of DC capital offered all workers at a local postal facility a three-day course of antibiotics Tuesday after it was determined that the post office had been the source of anthrax-tainted mail sent to two military mail facilities in Virginia a day earlier. The city's chief medical officer reported no cases of the illness in local hospitals, but called distribution of the antibiotics the "proper first step." On Monday, sensors at two military mail facilities in the Washington area detected signs of anthrax on two pieces of mail, but the mail had already been irradiated, rendering any anthrax inert. (See yesterday's 14:46 comment for the first mention of this, as well as anthrax plays CPHD, VICL, VXGN.PK, MEDX, AVAN, and UDTT.OB.)

10:13AM Sector Watch: Semi Index -SOX- continues to weaken breaks 50/200 day ema 422.72 -7.54: -- Technical -- The group opened on the plus side but quickly rotated lower and has recently pushed slightly below its 50 and 200 day ema at 424.85/424.21. The weakest performing components this morning are: MU -2.2%, NVLS -1.9%, TXN -1.7%, AMD -1.6%, XLNX -1.5%, AMAT -1.4%, BRCM -1.4%, LLTC -1.3%. Next support for the SOX is in near 421 with the late Feb reaction low at 419.57.

9:25AM Gapping Down : DCAI -18% (to merge with MDKI), ZICA -8% (reports Q4), GEOI -7.6% (profit taking after 44% move yesterday), ABLE -3.2% (profit taking after 25% move yesterday), HNR -3.2%, BOOM -2.3% (profit taking after 12% move yesterday).

9:14AM Gapping Up : Gapping up on strong earnings/guidance: PDLI +4.9% (also Smith Barney upgrade), ABIX +15%, IOTN +10%, SONS +3.9%, CMVT +2.1%, LEH +2%, RCL +2%... Other News: DNA +4.8% (positive Avastin news; Piper upgrade; Jefferies upgrade; tgt raised to $100 at CSFB), MDKI +49% (to merge with DCAI), TIVO +26% (Tivo and Comcast are discussing a partnership - WSJ), VIAC +7.3% (co and Genzyme announce collaboration agreement), CTIC +6.4%, ZOLL +5.6% (Piper upgrade), L +4.1% (to spin-off Ascent Media and Discovery), ORCT +3.9% (extends yesterday's 10% move), ONXX +3.3% (up on Avastin news; Lehman upgrade), PIXR +2.5% (new Disney CEO may mend fences; release of Incredibles on DVD today).... Under $3: CLTK +34% (to sell assets to Mimix), REDI +13% (signs 20 customers), GNTA +12% (leukemia drug gets orphan drug status), CMGI +11%, CIEN +2.6% (Smith Barney upgrade).

4:23PM Lehman Brothers Holdings (LEH) 95.88 +2.56: The Investment Banks and Brokerage group within the S&P 500 has far outpaced the rest of the Financial sector up 5.8% year-to-date. Investors have been flocking to these stocks since last November. This week the Brokers will report Q1 results, which are expected to be quite good driven by strong capital markets, increased merger and acquisition activity, and a robust IPO market. The top performing stocks within the group YTD are Lehman Bros (LEH) +10.7%, Goldman Sachs (00) +7.36%, and Morgan Stanley (MWD) +7.19%.

Lehman Bros is the first out the gate. The number five securities firm reported profits rose 31% in the first quarter on gains from fixed income trading and investment banking fees. Earnings came in at $2.91 per share, $0.71 better than the Reuters Estimates consensus of $2.20. Earnings rose 48% just since last quarter. Revenues soared 21.2% year/year and 32% quarter/quarter to $3.81 bln, topping consensus estimates by over 20%. Results for the quarter hit a all time record for the firm. Lehman attributed the record growth to strong market environment, driven by positive economic growth, improving corporate profits, strong corporate balance sheets, positive equity markets, and measured rate hikes from the Fed. Clearly, the positive momentum from the November period continued for the quarter.

Growth was broad-based across each of its three divisions. The bulk of its revenues are generated from its Capital Markets segment (70% of total), which grew 21% y/y and 48% q/q. The majority of the growth was driven by record fixed income business including mortgages and interest rate products. Investment Banking (18%) grew by 34% y/y and 12% q/q due to strong debt and equity underwriting. M&A activity declined 6% q/q due to record Q4, however, Lehman continues to expand its presence in this business with results the second best in four years. Lehman is involved in four of the top 10 deals in the US. Investment Management (11%) rose 5% y/y and down 3% q/q reflecting an increase in assets under management and market appreciation.

Pre-tax margins grew by 150 basis points from the fourth quarter to 34.3%. Return on common equity was 24.5% up from 21% last year. This was an impressive quarter as the company was able to leverage strong top line growth into profits. Lehman enjoyed resiliency across each of its business, and feels it's well positioned, with additional scale and higher market share, to maintain positive momentum. Expenses rose 19% including a 23% rise in head count, mostly on the front end within the Capital Markets business.

Lehman's blowout quarter, while partly company specific, provides quite positive expectations from its peers reporting throughout the week including Goldman and Morgan Stanley on Thurs. Bear Sterns (BSC), the sixth largest securities firm, comes out on Wed, but is expected to suffer lower profits due to reduced revenues from bond sales, investment losses, and trading.

This was truly a remarkable quarter for Lehman. Beating consensus estimates by a third, which are derived from analysts within the same business, shows just how phenomenal it was. The huge upside was driven by surprisingly strong fixed income activity. During its conference call, management's comments were quite bullish for the rest of the year driven by global economic growth and continued market share gains. Further, LEH expects capital markets to become a greater percentage of the global markets due to the growing acceptance of debt financing, as a substitute for bank borrowing. The company also noted that its M&A pipeline has doubled and its equity pipeline is now 30% higher than November levels. Although Q1 is seasonally a strong quarter, Lehman's share momentum and broad-based growth lays the ground work for growth ahead. Shares are trading at 12x forward earnings - in-line with its peers. ---Kimberly DuBord, Briefing.com
2:32PM Albertson's Inc. (ABS) 27.97 +0.38: Albertson's, the second largest food-drug retailer in the US reported Q4 results boosted by its purchase of Shaw's Supermarket and Bristol Farms. Albertson's reported earnings of $194 mln, or $0.52 per share adjusted for hurricanes and lease accounting. This is up from $130 mln, or $0.35 per share last year, but still a penny shy of the Reuters consensus estimate. The acquisition of Shaw's and a new national merchandising program, coupled with the recovery from the So. California labor strikes that ended in February of last year, helped increase revenues by 29.3% year/year to $11.08 bln above the $10.88 bln consensus.

Same-store sales for the quarter rose 5.3%. Albertson's was the only supermarket chain involved in the strike to regain its pre-strike market share. Despite top line growth, the company was unable to turn this momentum into profits, as it increased promotional spending and cut prices in order to entice customers back into stores. Gross margins held steady at 27.8%. ABS noted during its conference call, that despite higher spending it was able to maintain margins through higher profitability from Shaw's, along with its cost savings plan. ABS continues to face a challenging competitive environment, particularly in So Cal and Dallas/Ft. Worth markets, which both required more investment.

The company was on a buying spree last year with the acquisitions of Shaw's (April 04) and Bristol Farms (Sept 04). ABS noted both are going well with regard to the integration process even transferring several key Shaw's senior level executives into ABS. Bristol, a specialty retailer, offers ABS increased presence in So. California. Albertson's operates under banners including Acme Markets, Jewel-Osco, OscoDrug, and Sav-on.

The stock is likely to suffer downside pressure following the miss and reduced guidance for the full year. The latter is quite disappointing considering analysts already cut FY06 estimates following the company's preannouncement on Feb 25th when it lowered Q4 and FY05 guidance. It sees earnings for FY06 of $1.37-1.47 per share, excluding $0.04 in stock option expense, well below the Reuters Estimates consensus of $1.57. ABS expects full year comp store sales to be positive.

The competitive environment continues to be challenging for the drug and food retailers, particularly from heavy-weight Wal-Mart (WMT), which is knocking at customers' doors. This quarter, ABS was able to drive the top line through heavy promotion and acquisitions regaining lost market share, yet the company was not able to convert sales into earnings. We maintain our position that investors shy away from the group, as the outlook for the grocers remains challenging. Increased competition will drive retailers to lower prices and increase spending eroding margins. The only bright spot in the group is Whole Foods (WFMI), which has been able to drive growth through product differentiation, operational efficiency, and execution.---Kimberly DuBord, Briefing.com

12:02PM Travelzoo (TZOO) 50.77 +2.87: One of the most volatile stocks over the past year has been Travelzoo. The stock jumped from single digits to triple digits, then slid back to $50 a share only to make a recent run. It is safe to say that run came to an end on March 11, and was almost decapitated yesterday afternoon as the stock dropped from the $52 range to a handle that started with $48.

Late in the day, an SEC filing noted that Travelzoo CEO Ralph Bartel had sold shares in the open market, including sales on March 11 of 167, 879 shares at $56.31 and then yesterday he sold 517,121 shares at $48.08.

The sales should not really come as a surprise, as the CEO noted that he would be selling some of the shares that he owns. Before the sale, Bartel owned 84% of the outstanding stock of Travelzoo. That meant that there was a very thin float. The float, or number of shares actually available for trading, was often pointed to as the reason for the run-up in share price. The story was that as momentum players latched onto the idea they would dive in and force the shorts to cover, which would in turn bring in more momentum players. It was a day trader's playground.

This vicious cycle of shorting and covering and momentum players took the stock very high, very quick. Now with the CEO selling shares, but really not that many in the big picture of things, the stock is free to run around again. Shorts have new ammunition on their side as they point to the fact that the CEO was happy to get out around $50 a share, but this is of course the wrong type of thinking that got them in a short and cover scenario in the first place.

If no one else has noticed, let us be the first to inform the shorts, and other investors for that matter, on how Travelzoo trades. First of all, it does not trade based on fundamentals whatsoever. Any notion that this stock moves based on its revenues or earnings is a wrong notion. This stock moves on the whim of the momentum crowd and now that a proverbial shoe has dropped, there is less pressure on the stock from which short side momentum players can gain a foothold. Of course that shoe is the selling of shares by the CEO, but do note that only 685,000 shares caused the stock to drop around 20%. Now the power of the momentum swing is beginning to be understood.

Travelzoo has been the exact blueprint of what most wealthy entrepreneurs should do. Start the business with mostly their own capital, releasing a precious few shares to the public. Make sure the business sees some growth (nothing out of control, but growth just the same) and add to that a pinch of profitability and you have the recipe. The just deserts for following the recipe have been around $34 million for just 685,000 shares for Mr. Bartel. We would have to imagine that there will be several more layers put on his cake, and the bulls and the bears will continue to chase each others tail at the zoo.

10:56AM TiVo (TIVO) $5.82 +1.99 (+52%) Wait. Rewind that. This changes everything. TiVo announces a deal with Comcast today under which they will essentially license customized software for Comcast DVRs. This is an extremely smart shift in strategy - and one which is long overdue.

In an Ahead of the Curve article on December 4, 2004, entitled "TiVo: Increasing Loss/Subscriber Trend Not Good," we strongly questioned TiVo's strategy of focusing on their own TiVo-owned customer base instead of exploiting the extremely good business model of partnership deals, already proven by the DirecTV deal. In fact, we wrote "...the entire company should probably be adjusted to acquire as many partnership subscribers as possible, including more than those that DirecTV provides. That model holds promise, financially."

In addition, we specifically stated "a second partnership deal, perhaps with a cable vendor, needs to be established to provide leverage against DirecTV dictating terms when their contract expires" and "remaining capital could then be allocated towards subsidizing the operations of the company."

It seemed unlikely (then) that TiVo would adopt this strategy, however, based on statements by Cofounder-CEO Mike Ramsey, who was still clinging to the "lost dream" of revolutionizing TV. But then Ramsey "resigned" (plans to step down as soon as replacement is hired) and soon after President Marty Yudkovitz resigned. Did the board decide that Ramsey's vision really was a "lost dream?"

Seems accurate to view things that way, given today's announcement. This is a reversal of prior strategy. In addition, if you combine today's announcement with TiVo's "profitability" statements last week, however, a better picture of the TiVo emerges - with implications for the "TiVo-owned" customer base. That market is no longer top priority.

After last quarter's earnings report last week, we were baffled by TiVo's statement that they would reach profitability in 2006. Combined with the huge increase of rebates (as percentage of revenue, Q4 was 76% of revenue, versus Q3's 65%) and the disturbing trends of increasing expenses/subscriber as the company gets bigger, it seemed impossible for TiVo to become profitable - given the strategy of making the TiVo-owned customer the top priority. The cost of acquiring TiVo-owned subscribers was just too high. Many analysts agreed, as our Story Stock of March 11 described.

With this deal, however, it becomes clearer how TiVo can reach profitability. The Comcast deal has extreme leverage, since TiVo will not be building hardware boxes. This is a software-only deal. Licensing software is scalable. Although the financial terms of the deal have not been revealed, it can be assumed that Comcast will absorb the marketing costs to their base, and perhaps the servicing costs as well (answering the "this thing doesn't work" questions). The revenue to TiVo will probably come without high operational costs, unlike the TiVo-owned subscriber model. But the service won't begin until early 2006.

To reach profitability this year, there is only one obvious deduction, after putting together all of these "clues." Expenses are going to be cut harshly at TiVo, perhaps even in the current quarter. The huge marketing effort towards building the TiVo-owned base will be cut back. In the last six months, sales and marketing cost $25+ million. One year ago, sales and marketing for six months was just $8 million. The huge rebates to get TiVo subscribers to cross the line will be deemphasized. At 76% of revenue, it was a huge expense. That will slow the growth of TiVo-owned subscriber base, but who cares? The future for TiVo lies with deals like this.

The stock is up 50% this morning, but if TiVo announces layoffs in the marketing staff or an end to rebates, it will probably go up even more. But until the financial deal with Comcast is visible, accurately forecasting TiVo's financial future is hard. If it amounts to just $1.50 per month (DirecTV pays $1.30/month) per subscriber and TiVo gets 100% of Comcast's 8.5 million subscribers with digital cable, the total revenue would be $32 revenue quarterly. While that is double current revenues, 100% penetration is impossible. It implies that TiVo needs more of these cable deals - a lot more. They have made the right strategic shift, but they still have a long way to go. Its probably still better to just "TiVo" the stock chart and watch it later, unless you like the Speculative channel a lot. - Robert V. Green

9:04AM Page One - Trading Range and Choppy Conditions Continue : The market is looking for direction. Yesterday, the entire market rallied when Genentech announced results for its Avastin cancer drug. The market simply needed a push one way or the other. This morning, there is no major push yet.

Stock futures indicate a slightly lower open. Oil prices are at $55 a barrel ahead of the OPEC meeting on Wednesday. Bond prices are near flat as the 10-year note yield has temporarily settled near 4.50%.

The economic news remains good. February retail sales rose 0.4%, which was less than the expected 0.5%, but the January increase was revised upward from -0.3% to +0.3%. The level of sales in February was thus above expectations. Sales excluding autos rose 0.4% following an upwardly revised 1.0% in January, which reflects a good trend in underlying consumer spending. The March NY Empire State index was about as expected at 19.6, suggesting continued manufacturing growth.

The corproate news is light, but that isn't so bad. There aren't any significant earnings warnings to rattle the market. Lehman Brothers reported earnings of $2.91 a share, well ahead of the expected $2.20. Revenue was way ahead of expectations. Brokers continue to do well, supported by mergers and market conditions. Bear Stearns reports tomorrow morning, and Morgan Stanley on Thursday.

The late market move yesterday was surprising, and not based on solid fundamentals. It fits our definition of "choppy." We expect these choppy conditions to persist for the near term, with down moves just as likely as up moves. The trading range continues, as reflected in the chart below of the S&P 500 index for the past three months.



Dick Green, Briefing.com

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From Briefing.com: 6:30PM Swing Trader : -- Technical -- Markets opened lower and and sellers remained in control throughout the session thwarting any intraday attempt for a rally. Market Breadth was negative as Decliners outpaced Advancers 2.6 to 1 on the NYSE and 1.8 to 1 on the Nasdaq. Volume was notably higher on the indices, especially the QQQQ, which traded its highest volume since May 2004...(continued)

Close Dow -112.03 at 10633.07, S&P -9.68 at 1188.07, Nasdaq -19.23 at 2015.75: Historic highs in oil, downside guidance from GM and mixed economic data fueled broad-based weakness that closed the indices substantially lower and nearly every sector in negative territory... Crude oil was the focal point well before the market even opened, as prices fell below $55/bbl after OPEC raised output quotas by 500K barrels a day... But the release of disappointing oil inventories data at 10:30 ET was all traders needed to erase early weakness, as the king of commodities began its climb and quickly crowned a new all-time high of $56.46/bbl (+$1.41)...
The Energy Dept. reported a 2.6 mln barrel increase in crude oil inventories (consensus +2.0 mln), but sharper than expected declines in weekly gasoline inventories and distillates, which fell 2.9 mln barrels (consensus -1.0 mln) and decreased 1.9 mln barrels (consensus -1.5 mln), respectively, reversed previously muted inflation concerns following mixed economic data... But before investors could sift through the week's largest batch of economic reports, the market was rattled by a warning from General Motors (GM 29.03 -4.69)...

The world's largest automaker slashed Q1 forecasts to a loss of $1.50, versus prior forecasts of breakeven or better, due to sluggish sales in North America... More notably, while the larger than expected downward revision amounted to GM's largest quarterly loss since 1992, a sense of nervousness regarding further deterioration of GM's already poor credit rating (a notch above junk status) swept through the minds of both equity and bond traders, underpinning a firmly bearish bias for stocks... That said, corporate bond investors flocked to safer, more stable debt instruments like Treasurys, sending the 10-year note up 15 ticks to yield a more tolerable 4.48%...

But unlike most other days, when falling bond yields provided a level of buying support for stocks, the damage had already been done as buyers remained on the sidelines throughout the rest of the session... The benchmark 10-year note finished up 8 ticks, pulling back slightly on technical trade into the close, to yield 4.51%...

Meanwhile, the current account deficit in Q4 widened to a record $187.9 bln (consensus -$183.0 bln), from an upwardly revised $165.9 bln in Q3, news that only added to the overall negative tone, as the dollar weakened against every major currency, in particular, the euro (1.3417) and the yen (104.18)... Also, Feb. industrial production reached record levels with a rise of 0.3%, which were slightly below forecasts of 0.4% but above an upwardly revised Jan gain of 0.1%... Feb. capacity utilization checked in at a respectable 79.4%, a bit above expectations of 79.2%, but held below the 80% inflection point typically linked to bottlenecks and rising price pressures...

The other two pieces of economic data were Feb. housing starts, which hit a 21-year high with a stronger than expected 2.195 mln annual rate (consensus 2.030 mln), and Feb. building permits, which declined to a 2.074 mln annual rate and down from 2.132 mln a month earlier, but were relatively in line with forecasts of 2.070 mln... With regards to sector strength and weakness, the latter won outright as decliners outpaced advancers by a 2 to 1 margin... Pacing the way lower was Materials (-1.9%), dragged lower by weakness in Steel (-3.2%), Diversified Chemicals (-2.9%) and Paper (-2.3%)...

Auto Manufacturers (-7.8%) and Auto Parts & Equipment (-2.5%) were also very weak following GM's disappointment while weakness in Brokerage (-1.1%), despite strong Q1 earnings from Bear Stearns (BSC 102.18 -3.85), weighed heavily on Financial (-0.8%)... Bear Stearns handily beat analysts' Q1 (Feb) forecasts with earnings of $2.64 per share but the results failed to meet increased expectations following a much larger upside in earnings from Lehman Brothers (LEH 93.73 -2.46) yesterday... Biotech was also weak after FDA officials and Biogen Idec (BIIB 37.22 -0.85) warned that Biogen's MS drug Avonex can cause severe liver injury, including liver failure...

Other influential leaders to the downside were Telecom Services, despite Qwest's (Q 3.82 -0.04) sweetened $8.45 bln offer for MCI (MCIP 23.85 -0.18), Utility, Transportation, and Consumer Discretionary... The only notable sector gaining ground was Energy (+0.2%) due to historic highs in oil...DJTA -1.5, DJUA -0.7, DOT -0.4, Nasdaq 100 -1.1, Russell 2000 -0.6, SOX -1.0, S&P Midcap 400 -0.9, XOI +0.2, NYSE Adv/Dec 916/2423, Nasdaq Adv/Dec 1056/2028

9:17AM Gapping Down : GM -11% (guides lower; F -3.9% and DCX -2% down in sympathy), MSTR -13% (downgraded to Sell from Hold at Wedbush; tgt cut to $60; First Albany also downgrades), ABTLE -12.3% (asks for filing extension; in danger of delisting), TPC -12% (reports Q4), TIVO -6% (profit taking after 75% move yesterday), CMGI -5% (profit taking after 25% move yesterday), TELK -3.7% (Lehman downgrade), CPHD -3.7% (profit taking after 9% move yesterday on anthrax scare), IFOX -3.3% (reports Q4), AVCT -3.2% (profit taking after 14% move yesterday), UCL -3% (profit taking after 17% move in 2 weeks), BOOM -2.8% (profit taking after 50% move in 8 sessions), VECO -2.7% (misses by $0.04, guides Q1 EPS below consensus), SYMC -2% (EU approves VRTS acquisition), GOOG -1.1%.

8:59AM Gapping Up : RIMM +18% (co and NTP agree to resolve litigation; RBC upgrade), OPNT +21% (announces sistribution agreement with Cisco), KERX +20% (finalizes special protocol assessment agreement with FDA), SIGM +13% (reports JanQ; Needham upgrade), VISG +11% (resumed with a Mkt Perform and $6 tgt at Piper), IOTN +7.6% (entends yesterday's 11% move following Q4 report), NGAS +7.6% (reports DecQ), SHOP +4.2% (Piper upgrade), ELX +3.9% (JP Morgan upgrade), TOY +3.4% (Two suitors bid for all of Toys 'R' Us - WSJ), CPB +3% (upgrades from CSFB and Deutsche), FRO +2.9%, SONS +2.3% (positive Goldman comments).... Under $3: ANLT +15%, PRCS +10% (Medicare to cover prostate cancer drug - Reuters).

7:31AM General Motors lowers guidance (GM) 33.72: Co said it now expects to report a loss of approximately $1.50 (consensus $0.05) in the first quarter of 2005, excluding special items, compared to a previous target of breakeven or better. Co sees Y05 EPS of $1.00-2.00 down from prior guidance of $4.00-5.00, consensus $3.47. Co cites lower North American sales and production volumes, a tougher pricing environment, and a more car-based sales mix. At the same time, GM's other automotive regions and GMAC are all on track to meet or beat their 2005 net income targets. GM's previous first-quarter earnings guidance was based on North American vehicle-production volume of 1.25 million vehicles. Since then, production schedules have been reduced by approximately 70,000 vehicles. In addition, the pricing environment has been more competitive than expected in North America.

7:10AM Mortgage apps rise, avg 30-year rate highest since July : Mortgage applications rose for the first time in five weeks; the popular mortgage gauge rose 3.2%, moving to 727.6 from 704.8, according to the Mortgage Bankers Association. Average 30-year rates increased to 5.91% from 5.69%, 5.91% is the highest since July. The purchases index rose 2.5% to 462.8 last week, the highest since Dec 24. The refinancing index rose 4.2% 2267.5.

2:24PM General Motors (GM) 29.41 -4.31: General Motors is in a downward spiral and no one is willing to call the bottom any time soon. The automaker is suffering from lackluster sales and worse than expected pricing, both weighing on profitability resulting in continued market share losses within its North American operations. Rick Wagoner, the company's CEO called this market "our 800 pound gorilla," which clearly continues to beat its chest after the company slashed its earnings and cash flow guidance for the Q1 and the full year, taking its stock and the rest of the market down with it.

GM now expects to report a loss of approximately $1.50 (consensus $0.05) in the first quarter of 2005, excluding special items, compared to a previous target of breakeven or better. This will be the biggest quarterly loss since 1992. For the full year, it sees FY05 EPS of $1.00-2.00 down from prior guidance of $4.00-5.00 - not even in the same ball park with an already reduced consensus of $3.47. The automaker cited lower North American sales, high inventory, production cuts, a tougher pricing environment, and a more car-based sales mix. It did state, however, that its other automotive regions and GMAC are all on track to meet or beat 2005 net income targets.

To say first quarter sales were disappointing would be a drastic understatement. Feb car sales declined for the fifth consecutive month. Its previous earnings guidance was based NA vehicle-production volume of 1.25 million vehicles. Since then, production schedules have been reduced by approximately 70,000 vehicles. Profitability has always been an issue, but in Q1 co noted the pricing environment was even more competitive than expected. There are many factors impacting auto sales right now including high oil and gasoline prices. Yet, its competitors, particularly the Japanese automakers, have been able to generate stronger sales and profits. The main difference is that GM has an imbedded cost structure including pension and healthcare costs, growing in the high single-digits per annum.

The drastic drop in cash flow guidance sparked the most downside pressure in shares. The company went from a target of $2 bln to a deficit of $2 bln! Management stated during its conference call, that it took a big hit in the first quarter due to production cuts, but that cash flows should be positive for the rest of the year. What is important to consider here is that GM does not plan to change its strategy by driving growth through new products. Management stated it's "staying the course" on key products. As such, its capital expenditure budget will remain at $8 bln and will accelerate the rollout of several new models. Therefore, with a $2 bln deficit and capex likely to remain untouched, this Dow component may have to cut its dividend currently 6.84% at its next board meeting.

Standard & Poor's and Moody's both announced they are reviewing the company's debt rating with S&P changing its outlook to Negative today. The market is expecting a possible downgrade on GM's debt over the next few quarters. GM is the second largest borrower in the world outside the Financial sector with $43 bln in fixed-rate US dollar denominated bonds. Last year, net interest expense rose 26% to $12 bln. GM has been paying junk yields on bonds in order to attract investors.

The warning sparked several downgrades from Wall Street including a Sell from Neutral rating from Merrill Lynch. GM weighed on the entire market as the auto market makes up 3.7% of GDP. Several groups also traded lower on sympathy including auto part makers Dana Corp (DCN) and Delphi (00C), tires and rubber producers Cooper Tire (CTB) and Goodyear (GT), and auto resellers AutoNation (AN).

Considering North America accounts for 70% of total revenues, like Mr. Wagoner said, GM must "get this business right." We would recommend investors steer clear of shares because it's nearly impossible to catch a falling knife, yet alone one thrown by a giant irritated ape.---Kimberly DuBord, Briefing.com
2:16PM Bear Stearns Companies (BSC) 102.47 -3.56: Following Lehman's blowout results on Tuesday, Bear Stearns took the market by surprise reporting a strong first quarter as well. The upside for the number six securities firm, similar to Lehman, was driven by strength in the fixed income Capital Markets segment coupled with expense management. Bear reported Q1 earnings of $2.64 per share up 3% y/y - $0.30 better than the Reuters Estimates consensus of $2.34.

On the top line, revenues rose 6.5% year/year to $1.84 bln well above the consensus estimate of $1.7 bln. The company attributed the upside to the diversity of its franchise. Bear is divided into three business Capital Markets (76% of total revenues), Global Clearing (14%), and Wealth Management (9%). The Fixed Income business within the CM segment was able to maintain a slight revenue increase vs. difficult comps from last year. From last quarter, fixed income jumped 21% as its credit business produced record revenues propelled by credit derivatives, high yield, and distressed debt. Institutional Equities revenues were up 6.7% y/y and 4.6% q/q benefiting from rising international activity levels and increased sales and trading revenues. Despite upside on the top line, pre-tax income within this segment dropped 5.3% y/y and 16.5% q/q.

Global Clearing showed the strongest growth with revenues up 20%, as customers' balances increased significantly boosting net interest revenues. Margin debt and short balances also rose. Profit margins within this division improved significantly. Income from fee-based accounts, and higher performance from alternative asset funds, generated an 11% hike in revenues within its Wealth Management segment. Return on common stockholders' equity was 17.8% well below LEH at 24.5%. Bear was able to hold expenses in-line as compensation as a percentage of net revenues increased just slightly to 49.3% from 49.2% last year. Pre-tax margins widened to 31.5% up 220 basis points q/q and 70 basis points y/y.

After suffering declining revenues for three consecutive years back in 2001-2003, the brokerage industry turned around last year. Subsequent stock performance has been based on the positive growth picture with revenues likely to match last year up 7-8% in 2005, according to the Securities Industry Association. The positive momentum is being driven by prime brokerage in hedge funds, strong equity and debt issuance, along with an upswing in M&A activity. The SIA expects a 30% increase this year with deals reaching a trillion dollars.

The outlook remains quite good for the industry as the economy maintains its strength. The equity, currency, and commodity markets have all been quite volatile, in addition to big swings in the bond market, all of which are driving trading profits. People are interested in the markets again, boosting retail and mutual fund activity. The risk for the brokers is to keep up the strong pace set in the Q1. Further, stock returns have been quite impressive, as such shares are at risk for near-term profit taking. Despite upside results, BSC's shares are trading lower, which may be due to its business mix on expectations of slower fixed income growth ahead. ---Kimberly DuBord, Briefing.com

12:25PM Veeco Instruments (VECO) $14.52 +0.55 (+4.0%) How is it that a company that misses earnings by four cents and then guides earnings for the coming quarter significantly lower than current estimates is able to have the stock price rise by 4% on what would usually be viewed as extremely bad news?

The answer is relatively simple. The uncertainty surrounding Veeco's restatement of their prior three quarters is now lifted. Ironically, although the revenue restatement for those three prior quarters amounts to a change of only 2.3 million less over the nine month period, the picture of revenue growth is much, much different. The prior revenue picture, including the consensus estimate for Q4 looked like this: 94.5, 102.9, 92.4, 94.0. The restated revenue picture, with the Q4 actual looks like this: 90.9, 99.2, 97.4, 103.0.

The first revenue curve, that of the restatements and the expectations, looks like a growth company that has peaked and is more likely to show a flattening revenue trend going forward, rather than a growth trend. That demands a low multiple on earnings going forward.

The second revenue curve, however, that shows the restated results and the Q4 actuals, looks like a strong growth company that is just beginning to fulfill its potential. That type of scenario can demand a much higher multiple of future earnings, even when those earnings expectations have just been lowered.

In addition, the company's lowered guidance for Q1 2005 earnings is offset by their guidance of revenue of $85-90 million, whose upper range is higher than the current consensus Q1 revenue estimate of $87m. While such a revenue level for 05Q1 would be lower than the restated 04Q1, there is another added good piece of news.

Veeco's stated that orders taken were up, in Q4, by 24% over the prior quarter, indicating a pickup in demand. In addition, the rise in products in the high-brightness-LED wireless segment, to a level of 25% of Q4 revenue, makes it almost as strong a revenue component as data storage products, which were 29% of revenue.

When you put all of these pieces together, and combine it with the excellent way in which the restatements were handled (essentially blamed on a single employee in an acquired company who aggressively booked both revenue and shipments), you get a "reversal" of the impression of the company. Before this quarter and the restatement, the picture was of an "untrustworthy company without much of a growth curve in the "trying-to-rebound" data storage market. With the restatement and the revived demand picture going forward, including a larger component from the very healthy HB-LED wireless market, the picture is of a very reputable company with excellent potential.

And that's a company that misses earnings for the current quarter and guides earnings lower for the coming quarter gets the stock to rise by 4% on such news. The following table summarizes the restatement of the three prior quarters for Veeco. Item Q1
Restated Q1
Prior Q2
Restated Q2
Prior Q3
Restated Q3
Prior Q4
Revenue, $M 90.9 94.5 99.2 102.9 97.4 92.4 103.0
GAAP EPS -0.09 -0.02 -0.06 0.05 -0.07 -0.05 -1.88
EPS, X-charges 0.05 0.11 0.06 0.15 -0.02 0.05 0.03
Veeco will hold a conference call today, at 1:00 EST, to discuss the results. If you want to listen, the number for the call is 800-818-5264. The call is also available as a webcast at www.veeco.com. - Robert V. Green

10:09AM Research in Motion (RIMM) 76.61 +9.52: One of the albatrosses that have been around the neck of Research in Motion (RIM) was lifted today, as the company and NTP agreed tp settle all current litigation. There had been much concern that the lawsuit that NTP brought against RIM could have seriously damaged their business and even prevented them from using the technology in the United States.

As part of the settlement, RIM will pay NTP $450 million for a license to continue selling the popular BlackBerry. The amount relates to the settlement of past damages and includes the monies that were set aside in escrow for just such an event. The company noted that they expect to expense $313 million in the fiscal fourth quarter ended February 26, 2005.

The most important part of the settlement, the ongoing royalty rate, was not included in the release. The company stated in the release that further comments and details will be provided on the April 5, 2005 earnings conference call. This is subject to having a definitive licensing agreement signed at that time, so it is possible that we may not learn the royalty rate until some time after the earnings call.

The long and the short of it is that the deal was made almost entirely due to the fact that Good Technology, a competitor on the service front, entered into a similar agreement with NTP on Friday. This bolstered their claim to the Nth degree. Nokia had also applied to use the NTP patents last year as they moved to provide their own smart phone to the market. The settlement had to come after the Good Technology deal, and now NTP stands to receive similar royalty payments from any company that wishes to compete with RIM or Good. This, in effect, is a tax on any competitor that looks to come into the market, which also means that that they have to have better economics than RIM or Good to make the service work and to be attractive to investors and consumers alike.

One can easily argue that not only does this become a two horse race, with one horse way ahead of the other, it also limits the entrant field to a select few. Certainly service providers will get up and running in Europe, as they already are, but few will transition services to the US if they have to pay the royalty tax to NTP. It takes a cut right off the top line, and in order to maintain margins, companies would have to increase rates or fees, something that would not drive consumers to their products.

The next item of concern for RIM will be the competition in the hardware market. Several companies already are producing smartphones that have more features than any BlackBerry, including a model from Samsung that has an MP3 player and camera among its features. Once we see the complete convergence of the smartphone with other entertainment features, the question will be whether RIM can keep up with the advances in the hardware.

9:08AM Page One - Still Very Choppy : The weight of rising bond yields, high oil prices, and inflation concerns produced a steady slide in the indices yesterday. So far this week, it is one day up and one day down with still no clear direction.

This morning, futures suggest a near flat open. There is good news from OPEC, which has agreed to raise output by 500,000 barrels a day. That isn't a whole lot, but it helps, and oil prices are down about $0.35 but still hovering just below $55 a barrel.

There is bad news from General Motors. The company warned that it will post a loss of about $1.50 a share in the first quarter. Expectations had been for about a flat quarter. This is a big dollar impact on overall S&P earnings. It is a major warning.

The economic data is not all that significant. February housing starts unexpectedly rose to a 2.195 million annual rate, up from a 2.183 rate in January and above the expected 2.030 million rate. Housing starts are holding up very well given rising interest rates, but went through the 2.00 million rate level in late 2003. Overall, the trend is relatively flat and starts are likely to ease somewhat in the months ahead.

Bear Stearns reported earnings $0.30 ahead of the expected $2.34 for the quarter. That isn't really a surprise, however, as brokerage firms tend to readily beat estimates during good times. Right now, merger and acquisition activity is helping the industry. Yesterday, Lehman Brothers reported earnings $0.71 ahead of expectations. In other earnings news, Ross Stores beat by a penny, and Charming Shoppes missed by a penny.

It still looks very much like a choppy, trading range market for now. However, if warnings pick up, there is near-term downside risk. Dick Green, Briefing.com

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

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From Briefing.com: 4:07PM Silicon Labs transceiver chosen by SAGEM (SLAB) 29.02 -0.34: Co announces that SAGEM, a global provider of mobile phones, has adopted its Aero II transceiver for use across its GSM/GPRS handset platforms. This transceiver improves handset system performance while reducing the design time and bill-of-materials required for highly-integrated, feature-rich GSM/GPRS handsets.

Close Dow -94.88 at 10470.51, S&P -12.07 at 1171.71, Nasdaq -18.17 at 1989.34: Just a few Fed words was all it took to erase a day of modest gains, as the major averages closed near session lows... While this morning's PPI data initially provided investors with a tinge of optimism, as Feb core PPI of 0.1% (consensus 0.1%) - which excludes high energy costs - eased inflation fears, the language of the FOMC's policy statement declared a slightly different message...
As widely expected, the Fed raised the fed funds rate by 25 basis points to 2.75% for the seventh consecutive time and maintained a balanced risk assessment saying "policy accommodation can be removed at a pace that is likely to be measured"... However, additions to the policy statement that cited "pressures on inflation have picked up in recent months and pricing power is more evident" underpinned worries that producers are now more apt to raise prices to offset higher costs... The news unnerved the bond market and renewed fears of more aggressive Fed tightening, pounding Tresurys enough to lift yields on the benchmark 10-year note (-22/32) to 4.61% - levels not seen since last July - subsequently pummeling stocks, reversing a bullish bias and closing virtually every sector in the red...

Software (-2.4%) paced the list of laggards, following downside FY05 EPS and revenue guidance from Electronic Arts (ERTS 55.20 -11.15) and concerns ahead of Oracle Corp's (ORCL 12.50 -0.15) Q3 earnings report, as Technology was weak across the board... Interest-rate sensitive issues like Financial (-1.9%), Utility (-1.9%) and REITs (-2.2%) also got hammered after bond yields surged while Telecom Services (-1.2%), Consumer Discretionary (-0.8%), Industrials (-0.6%) and Health Care (-0.1%) also finished to the downside...

Energy ended the day lower as crude oil prices closed down 2.5% at $56.03/bbl (-$1.43) - a drubbing in the commodity that had temporarily lifted the indices to session highs ahead of the FOMC's report... Materials (-0.4%) traded higher throughout most of the session, lifted by strength in Steel and a weak greenback, but lost ground into the close as the dollar recovered lost ground... The dollar rallied against both the euro (1.3081) and the yen (105.56) as bonds became less attractive...

Homebuilding (+0.2%) however, amid better than expected Q1 earnings and upside FY05 guidance from Lennar (LEN 55.80 +0.93) and KB Home (KBH 118.25 +1.55), held onto modest gains despite higher bond yields... Transportation also posted modest gains, led by resilience in Airline (+1.0%) and upside Q1 guidance from railroad operator Union Pacific (UNP 69.43 +3.36)... Separately, reports that lawyers have begun talks to settle the government's fraud and racketeering case against cigarette makers minimized losses in Consumer Staples (-0.5%)...DJTA +0.1, DJUA -2.0, DOT -1.2, Nasdaq 100 -1.3, Russell 2000 -0.5, SOX -0.8, S&P Midcap 400 -0.5, XOI -1.8, NYSE Adv/Dec 964/2363, Nasdaq Adv/Dec 1183/1902

1:36PM Cypress Semi: Takachiho and Cypress Extend Distribution Agreement (CY) 13.39 +0.37: -- Update -- Cos reached a distribution agreement that will enable Takachiho to sell the complete range of Cypress products to the Japanese market

11:08AM Sirius Satellite to offer $250 mln of senior notes due 2015 (SIRI) 5.33 -0.06: Based upon its current plans, before giving effect to the proceeds of the offering, SIRIUS has sufficient cash on hand to cover its estimated funding needs through cash flow breakeven, the point at which the co's revenues are sufficient to fund expected operating expenses, capital expenditures, working capital requirements, interest and principal payments, and taxes. SIRIUS expects cash flow breakeven to occur in 2007.

9:07AM Gapping Down : ERTS -13.4% (guides lower; down in sympathy: ATVI -5.5%, THQI -5.2%, TTWO -5.1%, ELBO -3.9%), GDYS -10.6% (guides lower), NRG -2.4%, RETK -2.4% (to be acquired by Oracle; ends bidding war with SAP; apparently market not happy with the price), GM -2% (mentioned in WSJ), RIMM -2% (Microsoft licenses e-mail technology to Symbian - WSJ).... Small cap momentum energy names seeing some profit taking: USEG -4.7%, FUEL -2.9%, ABLE -2.8%, GEOI -2.1%.

9:06AM Gapping Up : WYE +2.9% (guides Q1 EPS above consensus), OVTI +7% (key design win from handset maker), TASR +7% (introduces new air cartridge), CTIC +5.4% (initiates Phase 3 trial for Xyotax), CY +5.4% (UBS upgrade), WGAT +4.4% (reports Q4), STTX +4.3% (guides higher), AGIX +4.2% (Needham upgrade), SDS +3.6% (extension of 25% move yesterday on takeover talk), LEN +3.5% (reports FebQ), NTGR +3.3% (started with a Buy at Smith Barney; tgt $20), BOOM +2.5% (extension of 23% move yesterday), UNP +2.4% (guides higher).... Stem cell stocks higher on CNN.com story: ASTM +10.4%, STEM +10.3%, VIAC +4.9%, GERN +4.6%..... Under $3: UHCP +49% (Heritage Food Group spin-off), ELTK +30% (reports Q4), EIDSY +21% (to be acquired -- WSJ).

4:05PM Union Pacific Corp (UNP) 69.71 +3.64: Shares in Union Pacific rocketed after this granddaddy of the rails raised its Q1 guidance by 50%. After a blowout 2004, rail stocks have continued their upward momentum this year with the S&P 500 Rail index up over 20%. UNP has been a laggard in terms of performance, but today the company sharply raised its guidance citing increasing volumes, higher yields, and less than expected impact from the storms out West. The revision highlights the enduring bull environment the rail industry is experiencing, which is likely to result in another year of record demand for transportation services creating a strong pricing environment.

UNP now expects Q1 earnings to range between $0.43-0.48 per share, up dramatically from its prior guidance of $0.25-0.35. This is well above the current Reuters Estimates consensus of $0.35. The reason behind the upside was stronger than projected revenue growth for the first quarter. It expects the top line should be up approximately 8%, vs. the previously forecasted growth rate of 4-6% y/y. CEO and Chairman Dick Davidson said during its conference call that overall network volume has increased along with better yields in the first quarter. It noted stronger shipment growth for agricultural products, coal, imports from Asia, and building materials. The only group below expectations has been autos.

During its Q4 conference call back in Jan, the company said it was nervous about the impact the severe storms in California and Nevada would have on earnings. It had to shut down five lines and declare embargoes on several major routes. But as the clouds dispersed, the picture did not look as bad as it anticipated. UNP said the storms would account for $60 mln in capital spending and $55 mln in lower operating income, this compares to its previous estimates of $100 mln for both.

Higher fuel costs remains one of the caveats to this bull story. UNP stated that partially offsetting this revenue growth has been higher than projected fuel prices. First quarter 2005 diesel fuel costs are expected to average $1.43 per gallon vs. the projected range of $1.30 to $1.35 per gallon. However, what is more telling is the spike in prices from last year, during which diesel averaged $1.02!

We first highlighted the Rails back in June of last year as continued capacity constraints in surface transportation coupled with strong overall demand was generating positive price appreciation for the rail operators. This bull environment was translating into positive profit growth for the industry. However, UNP was not as quick on the uptake, unable to leverage the strong growth due to continued operational issues including traffic bottlenecks coupled with labor and locomotive shortages. Today, UNP said the key to leveraging the market was getting velocity up and maximize it networks. The latter of which remains a challenge, as it's operating below optimal levels, which may limit margin expansion. The company is targeting operating margins of just under 10%, although excluding storms and fuel, it's slightly improved. The largest US railroad also noted that labor remains a challenge and it's experiencing line constraints. For Q1, it forecasts a 1% rise in freight volume.

The bottom line UNP is getting on board and the outlook for it, as well as the rest of the industry, looks bright as the pricing environment leads to continued profit growth. In terms of valuation, UNP trades at 22.2x foward earnings, Burlington Northern (BNI) at 15.9x, Norfolk Southern (00C) at 15.5x, and CSX (CSX) at 16.5x.----Kimberly DuBord, Briefing.com
1:51PM General Mills (GIS) 50.18 -1.34: General Mills, which has an impressive catalog of high quality, well established dominant brand names including Cheerios, Lucky Charms, Wheaties, Total, Häagen-Dazs and Betty Crocker, topped estimates with its Q3 results. The company reported earnings of $230 mln, or $0.58 per share down from last year, but excluding charges, certain taxes, and an accounting change, earnings were $0.74 per share. Despite coming in four cents above consensus, overall results were a mix bag of nuts.

GIS, which holds the number one or number two positions in 13 leading food categories, generated revenue growth of 2.6% year/year to $2.77 bln. Top line growth was quite disappointing coming in below consensus. Retail sales, which accounts for the bulk of revenues, was flat for the quarter at $1.93 bln as higher promotional spending offset 1% unit volume growth and positive pricing and mix. Bakeries & Food Service sales rose 11% to $413 mln. Its International segment was quite strong, gaining 13% to $429 mln, with forex gains adding 6%. GIS noted double-digit growth in cereal and snacks in Canada, in addition to solid performance in China and India.

While operating profits rose 6.8% and earnings were ahead of expectations, what the market will focus on is the flat retail growth. GIS was going up against very easy comps from last year during the height of the Atkins low-carb craze.

The cereal segment suffered a 9% drop in volume and its Pillsbury segment fell 4%. The drop-off was the result of its attempts to raise price points negatively impacting sales, while facing increasing competition from retailer's private label brands. There were some bright spots including an 18% jump in yogurt sales due to Yoplait Light and Go-gurt and a 7% rise in Snacks again driven by new products including Nature Valley Sweet & Salty Nut Granola bars.

General Mills did provide some comfort looking ahead by reaffirming its guidance for the full year. For FY05, it sees EPS of $2.85-2.95, ex items vs. Reuters Estimates consensus of $2.92.

Overall, Q3 was a mixed bag of nuts. We still like the name as the company has a strong track record of earnings growth with an average of +8% over the last five years, with the exception of FY01 when it purchased Pillsbury. GIS also recently launched a slew of new products, including adding whole grain to all its leading brand cereals to increase the health benefits. The company did reap some of the benefits this quarter, however, sales trends in its cereal segment are disconcerting.

Today's result is likely to cause downside pressure in shares. We feel over the longer-term, GIS offers solid earnings growth potential driven by price increases and sustained volume growth, with upside potential derived from new products, international markets, and distribution channels. GIS has consistently and successfully offered consumers healthy and convenient new products. Its management is known as one of the best in the industry. Shares are trading at 17.4x forward earnings vs. its competitors Pepsi (PEP) at 20.5x, Kraft (KFT) at 16.7x, and Kellogg (K) at 18.1x.----Kimberly DuBord, Briefing.com

11:54AM Compuware (CPWR) $7.45 +0.48 (+6.9%) IBM (IBM) and Compuware reached a major settlement this morning, which puts an end to the anti-trust and patent infringement lawsuit filed by Compuware and countersuits filed by IBM. The trial was already in its sixth week. In essence, IBM has won, because the settlement apparently involves only an obligation to purchase $400 million worth of software licenses and services over the next four years. There appears, from the press release, to be no payment for prior infringements or damages suffered by Compuware (as result of antitrust behavior).

The total revenue impact to Compuware is positive, particularly as the revenue trend has been clearly downward recently. Assuming equal allocation over the four years, the agreement amounts to $100 million per year. Compuware's trailing twelve month (TTM) revenue is $1.25 billion. This makes IBM revenue 8% of current revenue and (probably) makes it Compuware's biggest single customer.

However, the impact on earnings is much greater than the revenue boost. It can be assumed that IBM is not paying the best price for Compuware licenses and services, so it might add a little to gross margin expansion. However, the savings on Compuware's huge legal expenses will boost earnings tremendously. Compuware has GAAP TTM net income of $84 million, or $0.22 per share. The legal costs for this lawsuit alone in fiscal 2004 (per 10-K) were $45.0 million, almost $0.11 per share. Since estimates for CPWR earnings going forward (forward four quarters) is just $0.30, it is very likely that earnings estimates will be raised.

However, this deal also makes Compuware an ideal acquisition candidate for IBM. Suddenly, it is almost as if they get a $400 million discount on the price that anyone else would have to pay for Compuware. Since Compuware is an ideal acquisition target in the integration and system tools space, with a strong presence in mainframe functionality, it simply makes a lot of sense for IBM to follow-up on this settlement with an offer to buy the entire company. Someone is going to buy Compuware fairly soon, we think. It would be a good fit for the Symantec/Veritas combo or Computer Associates. It would be an even better fit for IBM. The odds on Compuware becoming a hot item in the acquisition arena just went up tremendously. - Robert V. Green

11:42AM Microsoft (MSFT) $24.22 +0.02 (0.1%) Today Microsoft made two key announcements that deserve a deeper analysis, as they both bring the investment picture into clearer focus.

The first of the two announcements is that the company is acknowledging a significant shortage of Xbox consoles in the retail channel. While this seems to suggest all they have to do is make more, there is a bigger story at work here. The idea is that the Xbox, after just a few years on the market, may be becoming the console of choice for gamers. This is a subjective idea, but it is clear that demand for the Xbox is outweighing the supply in larger than expected numbers.

Strong demand for the Xbox further underscores the progress that Microsoft is making towards its goal of moving to the family room from the home office. The Xbox console, while not Microsoft's first attempt at the home entertainment market, is certainly the most successful. Down the road, it may be possible for Microsoft to leverage its foothold in the home for additional products. In the near term, it seems inevitable that the company will focus more resources on the entertainment market, as it is now a serious contender with Nintendo and the very popular PlayStation.

The other item this morning from Microsoft is the deal they announced with Symbian. Symbian is a British company that developed a popular mobile operating system and today agreed to license synchronization software from Microsoft in an effort to win more corporate customers. The software called ActiveSync enables Symbian-powered handhelds to wirelessly receive emails via network computers running Microsoft's Exchange Server software. Handheld maker Nokia, which is by far the largest seller of Symbian-powered devices, has already signed the same licensing deal with Microsoft.

This development is clearly in response to the impact that Research In Motion (RIMM) has made in the corporate environment. The Symbian/Microsoft technology is not a true push-email technology, but will still compete with RIMM's BlackBerry technology. The most formidable part of this deal is that there are 20 million Symbian devices in service today, a number far greater than the total number of BlackBerry's in service.

Both of these developments have to be viewed as positives for Microsoft, even if the immediate impact on revenue is minimal. Microsoft has been "stuck in neutral" on many fronts, as it tries to settle the myriad lawsuits against it and continues its fight with the EU Commission. The fight with the EU is certainly the biggest drag on the stock as they could fine the company $5 million a day for failing to comply with previously issued court mandates. Once Microsoft's legals problems are resolved, the stock market may once again turn its attention to the strategic efforts Microsoft is making, two seeds of which were planted today.

9:04AM Page One - Obsessing Over the Wording While Rates Are Moving Higher : The market has gotten through the PPI report. Now, the concern is the Fed policy announcement this afternoon.

February PPI was up 0.4% and the core rate 0.1%. Those increases were about in line with expectations and there was little market reaction. The core rate was up 0.8% in January, however, and that still translates into a strong two-month gain. It is still not clear whether an uptrend in underlying inflation is developing.

Tomorrow morning, the February CPI data will be released. The core rate in CPI has been up 0.2% for four straight months and a similar gain is expected with the February data. If it is at 0.3%, the stock market may react negatively.

For now, however, the focus is on the Fed policy announcement this afternoon. A seventh straight 1/4% hike in the fed funds rate is almost certain. The market is obsessing over whether the words in the announcement might signal more rapid rate hikes ahead. Frankly, the market is getting too worked up over this. The Fed is going to raise rates further until they reach a neutral position, no matter what the statement says. The stock market is likely to be very volatile this afternoon regardless. It would be dangerous to read too much into the statement or the market's reaction.

The corporate news is mixed. Electronic Arts warned that FY05 profits would be lower than Wall Street expected. The stock of the interactive game company was down 14% in after hours trading, and other game makers were similarly hit. But homebuilder Lennar Corp had a very good report, General Mills had a good report, and Steel Techologies guided profit estimates higher for this quarter. That collection of news has helped the broader market, while the Electronic Arts news has weighed on the Nasdaq.

Regardless of the exact wording of the policy announcement this afternoon, interest rates are heading higher. Oil is still near $57 a barrel, and inflation is inching higher. That is not a ringing endorsement to dive into the stock market right now. Dick Green, Briefing.com

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MORNING WATCH, Mar. 23


By Frederic Ruffy, Optionetics.com
3/23/2005 6:15 AM EST


Stocks are set to open to the downside Wednesday following a stronger-than-expected reading from the latest Consumer Price Index [CPI]. Shares of Oracle edged lower following its earnings report. Approximately forty-five minutes before the opening bell on Wall Street, stock index futures hinted at a possible 20-point move lower in the Dow Jones Industrial Average ($INDU) and 6-point loss for the Nasdaq ($COMPQ).

The Consumer Price Index [CPI] rose .4% in February. The index, which measures the prices paid for a basket of goods on the consumer level, was expected to rise .3%. Excluding food and energy, the core-CPI rose .3%, compared to expectations for a .2% increase. The stronger-than-expected reading from the price index fanned inflation jitters, which sent bonds and stock index futures lower Wednesday morning.

Yesterday, stocks and bonds fell sharply at the conclusion of the Federal Reserve Open Market Committee [FOMC] meeting. After the FOMC announced another.25-point increase in its Fed Funds target, to 2.75%, and, for the first time in four years, mentioned that inflation is becoming a concern, bonds tumbled. The yield on the bench market ten-year Treasury note rose above 4.6% for the first time since July of last year.

The prospect of rising inflation and interest rates also sent stocks tumbling. The Dow Jones Industrial Average, which was up more than 40 points before the FOMC statement, lost 95 points on Tuesday.

The next piece of economic data is due out at 10:00 a.m. ET. Existing home sales data for February is released at that time. Economists expect to see a decline to 6.65 million units, from 6.8 million in January. Data on durable goods, weekly jobless claims, and new homes sales is released Thursday. Markets are closed Friday in observance of Good Friday.

Among the stocks to watch Wednesday, Oracle shares traded lower late yesterday after the software maker posted profits of 16 cents a share, compared to analyst estimates of 15 cents. However, revenues came up short of expectations. Total revenues rose from $3.054 billion to $3.09 billion. Some analysts were looking for as much as $3.15 billion.

In other stock news, Microsoft (MSFT) is expected to trade actively on news the software maker is under scrutiny for possibly not adhering to anti-trust regulations imposed by the European Trade Commission. General Motors (GM) might be trying to sell its GMAC Commercial Mortgage unit for approximately $1 billion, according to a report in the Wall Street Journal. MCI (MCIP) might be active today as the company’s board of directors meets today to discuss a recent takeover offer from Quest (Q).

In the options market, trading has been active lately and implied volatility is clearly on the rise. Yesterday, 3.2 million calls and 2.8 million puts traded across the six US options exchanges. Meanwhile, the CBOE Volatility Index ($VIX) rose .66 to 14.27. The market’s so-called fear gauge is now well above its February lows of 11.10 and at its highest levels since January 25.



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

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From Briefing.com: 6:07PM Swing Trader: A Relief Rally? : -- Technical -- The markets gapped higher Wednesday morning and managed to stage a decent uptrend throughout the session. Market Breadth was mixed as Advancers outpaced Decliners about 2.9 to 1 (a nice change of pace after multiple "bad breadth" days in March). New Lows, however, continue to exceed New Highs. Tomorrow marks the end of Q1, so we may continue to see an upward bias follow through headed into Friday's job report...(continued)

Close Dow +135.23 at 10540.93, S&P +16.05 at 1181.41, Nasdaq +31.79 at 2005.67: Bulls rallied behind falling oil prices, encouraging economic data, technology leadership, oversold conditions and an improving overall sentiment to lock in gains of more than 1.0% across the board... The Dow (+1.3%), aided by upticks in 29 of its 30 components, recorded its first triple-digit gain in nearly a month while the Nasdaq (+1.6%) closed above the psychological 2000 mark for the first time in more than a week...
Falling crude oil prices ($53.99 /bbl -$0.24), in the wake of strong inventories data, eased inflationary pressures ahead of tomorrow's Feb Personal Income and Spending report and Friday's March employment report... Crude oil inventories rose 5.4 mln barrels (consensus +2.5 mln) and distillates fell only 1.1 mln barrels (consensus -1.5 mln), offsetting a larger than expected 2.9 mln barrel decline in gasoline inventories (consensus -1.8 mln)... At their lowest levels of the day, oil prices were off as much as 3.2% (or down 9.5% from highs of $57.60/bbl reached just two weeks ago), before losses were pared in the last half hour of trading... Also contributing to the bullish bias was a final read on the Commerce Dept.'s Q4 GDP report, which checked in at 3.8%...

While the figure was left unchanged versus economists' higher expectations of 4.0%, the data signaled a pace of economic growth that was not too strong to warrant more aggressive Fed tightening at the FOMC's next meeting (May 3)... With the market arguably being oversold following three weeks of declines and a day that saw the Dow and S&P hit two-month lows and the Nasdaq mimic weakness not seen since last October, renewed buying interest and end of the quarter window dressing created bargain hunting opportunities in virtually every sector...

Information Technology (+1.6%) led the charge in the wake of better than expected Q2 earnings from Micron Technology (MU 10.48 +0.36), as all 10 economic sectors enjoyed gains of more than 1.0%... Strength in Computer Storage (+3.2%), after Morgan Stanley initiated coverage of EMC Corp (EMC 12.39 +0.41) with an Overweight rating, coupled with strong gains in Hardware (+2.5%), Software (+2.1%) and Networking (+2.1), also helped technology advance...

Internet Retail (+4.4%) and IT Consulting & Services (+6.8%) - two of this year's Top Ten worst performing groups - were the best performers, while Airlines (+2.6%) - another poor performer in 2005 - surged amid falling oil prices and a Merrill Lynch upgrade on AMR Corp (AMR 11.03 +1.10)... Financial (+1.1%), which got a boost amid a management shake-up at Morgan Stanley (MWD 55.28 +1.67), along with Health Care (+1.4%), Materials (+1.4%) and Energy (+1.5%), despite lower oil, were also influential leaders to the upside... Even Treasurys climbed, shrugging off modest selling pressure early on following the unrevised GDP figure, as the benchmark 10-year note finished up 4 ticks to yield 4.55%...

The only notable group that sold off was Multi-Line Insurance (-1.4%), led by weakness in American International Group (AIG 57.16 -1.04), which admitted to improper accounting practices and delayed its 10-K filing again... Meanwhile, the dollar inched lower against the euro (1.2923) and weakened against the yen (107.48) for the first time in nine sessions after Q4 GDP grew less than anticipated, lifting gold futures $429.50/oz. (+0.2%) toward their highest levels in a week...DJTA +1.7, DJUA +1.4, DOT +2.3, Nasdaq 100 +1.9, Russell 2000 +1.7, SOX +2.3, S&P Midcap 400 +1.2, XOI +1.3, NYSE Adv/Dec 2475/808, Nasdaq Adv/Dec 2128/945

9:10AM Gapping Down : CGTK -41% (says drug candidate failed to meet primary endpoint), TTEK -20% (guides lower), WAT -16% (guides lower; Merrill downgrade; Baird downgrade), APN -16%, LANV -11% (profit taking after 71% move yesterday), XPRSA -7.6% (guides Q1 EPS below consensus), ABTLE -7.2% (controller to resign; stock may get delisted), VARI -3.3% (Baird downgrade), RECN -2.4% (reports FebQ), TEVA -1.4% (adverse court ruling).... Under $3: FMDAY -25% (reports JanQ), CNR -9%.

8:59AM Gapping Up : TZOO +11% (Susquehanna upgrade), KOSP +20% (in settlement talks with BRL), ZOLT +11% (announces large wind energy contract), IMH +11% (REIT announces dividend), MERX +7.6% (beats by $0.11, guides MayQ above consensus), AMR +6.1% (Merrill upgrade), ORCT +5.3% (sets date for 3-for-1 split), INSP +4.1% (JP Morgan upgrade), ANTP +3.8% (bounces after 19% drop yesterday), LEXR +3.3% (prices convertible offering), CTIC +3.2%, JCOM +3.2% (jitters on tax concerns may present an entry point - Rodman; co sends email to analysts), BOOM +3.2% (recent momentum), RTP +2.9%, MU +2.8% (reports FebQ), APOL +1.7% (CSFB upgrade).... Under $3: JCDA +35% (wins contract from large telecom co), DFIB +17% (wins contract), TMTA +10%.

12:00PM MCI (MCIP) $24.20 +0.42 (+1.8%) MCI is trading up today and is currently above the value of the Verizon (VZ) bid. The market clearly believes that Qwest (Q) will increase their bid again in an attempt to prevail. We think this speculation is extremely risky, for several reasons. The first is that it is possible that Qwest simply won't make another bid, but there is no way to calculate that risk. However, there are ways to calculate what a successful Qwest might look like and then try to judge whether Qwest can actually put together a successful bid. We think the odds of Qwest being able to put together a bid the MCI board would accept are extremely high, which makes a speculative position in MCIP right now very risky.

First of all, unlike many other acquisition fights, the Qwest doesn't simply have to be higher than Verizon's. MCI has twice chosen a Verizon bid over a Qwest bid. The first VZ bid was more than 20% lower than Qwest's revised bid. The accepted VZ bid is still more than 10% lower than Qwest's. As we have pointed out in recent articles, the problem for the MCI board has been a lack of faith in the future value of Q stock. We tend to agree, as a combined VZ/MCI is a much more powerful telecom company going forward than a Q/MCI company. The nonstop decline of Q stock since the February 3 Qwest bid for MCI hasn't done much to strengthen a view that Q stock is good "currency" either.

Could Qwest convert their bid to an all cash deal? Such an offer would probably be hard for the MCI board to turn down, provided the This would be almost impossible to finance, given the current level of Qwest's debt, their unprofitability, and their eroding revenue trends. The long list of prior accounting problems wouldn't help sell bonds either.

Secondly, the acquisition agreement that MCI has already signed includes a $250 million breakup fee paid to Verizon if MCI changes their mind and accepts a new Qwest bid. That means that any Qwest bid would have to be at least $250 million higher than a Verizon bid simply to have a net equal result for MCIP shareholders. Since MCI has approximately 325 million shares outstanding, the breakup fee amounts to about $0.77 per share of MCIP. With the Verizon bid valued at $23.50, the real gap between the VZ bid and the current Q bid is actually just $1.73 per share, or 9.3%, not the 11% most people are quoting.

In addition, the new acquisition agreement signed between Verizon and MCI states that Verizon can call for a shareholder vote to approve their acquisition, without waiting for the MCI board of directors to call for a shareholder vote. This would place the decision on which bid is "better" squarely in the hands of shareholders. The proxy for such a vote could probably be legally structured to be an up/down vote on the Verizon deal only, and not a vote for one acquisition bid or the other. If that were the case, it is almost certain that Verizon could win a shareholder vote.

Finally, Verizon wants MCI and will have it. That determination is very clear. (We agree with the strategic value of MCI for Verizon - see Tuesday's Ahead of the Curve column for why.) As the much stronger financial entity, Verizon can easily top any increased bid that Qwest might make now. At best, Verizon might increase their bid by a $1.00 per share in cash, giving today's speculators a reward of just $0.30 per share. The more likely way Verizon would top any new Qwest bid would be to increase the ratio of VZ shares for Q stock. In fact, increasing the stock ratio to 0.5 would only increase the number of VZ shares issued by 30 million (from 132 million to 162 million). With 2.8 billion shares outstanding, such an increase is only a 1% additional dilution for Verizon - well worth it for the strategic value that MCI brings.

For all these reasons, the speculators betting that Qwest will increase their bid for MCIP who are taking positions today are not likely to see a lot of return from the purchases at the $24.20 level - even if they turn out to be right and Qwest submits another bid. Qwest's board is meeting today, in fact, and whether they throw in the towel or decide to try again might be known by the end of the day. - Robert V. Green
11:30AM MicroStrategy (MSTR) 54.95 -0.72: Many point to MicroStrategy as the stock that caused the actual bursting of the bubble way back in the year 2000. The stock dropped about 100 points in a single day, a drop that barely shows up when you take a look at a graph that covers the last five years. When one goes back a bit further, you can see that the stock was at levels that were nothing less than astonishing, but the stock subsequently fell back to earth, and remained there for a long time.

The reason the stock fell about 100 points in a single day was that it was not accurately reporting its revenues. The company was reporting the gross revenue as opposed to a more accurate net revenue number. At the time, many investors were using a price to sales valuation as they did not fully understand all the dot com's and other businesses that were out there. This valuation metric led many to try to do anything within their power to make that topline as large as possible. It should be noted that MicroStrategy was not the only company to do this - 24/7 Media was also guilty of this misleading reporting, and also fell significantly as investors realized what they were doing.

MicroStrategy is a maker of business intelligence software. That is a group that has seen a lot of interest lately. The software that the company makes helps companies mine the data that they have compiled on customers over the last several years. It also produces reports that help the company analyze customer behavior and basic business trends. This helps the company focus its efforts on the business lines or products that have the highest profitability or the highest amount of sales. This better understanding of its business and customers leads to improved performance and hopefully higher earnings.

The concept of data mining, combined with analysis and reporting tools is not really a new one and there are several competitors in the space. Companies such as E.piphany and Cognos are also in the space, and competition has become a bigger concern. As Briefing.com has been saying for some time now, the software industry has reached maturity, and another supporting argument is when companies like MicroStrategy begin competing with the Customer Relationship Management companies that are expanding into their core reporting and analysis business.

The MicroStrategy story is one that has split the opinions of many of the brokerage firms. A quick look at the Briefing.com upgrades/downgrades page shows that over the last month the stock has been upgraded 3 times, but downgraded 3 times as well. Recent management departures and the resignation of their auditors serves to further cloud the picture, something most analysts and investors do not like.

After reporting a blowout quarter in late January, the stock soared and has since slid back to the levels it was at prior to the earnings release. Simply put, the market was pleased with the good quarter, but expectations have waned and many are pointing to limited potential upside in future releases. This suggests that the stock will remain in a trading range as investors attempt to gauge where the business is headed.

10:40AM Chemical Stocks : Chemical stocks reaccelerated in January on expectations that demand would continue to drive companies' pricing power, resulting in further margin expansion, with the commodity cycle peaking in early 2006. The Diversified Chemicals group, which includes Dow Chemical (DOW), DuPont (DD), Eastman Chemical (EMN), Engelhard (EC), Hercules (HPC), and PPG Indus (PPG), was up 11% year-to-date by the beginning of March, but has since retraced a good deal of the upside. The question is where do Chemicals go from here?

Before we look ahead, let's take a look back. The industry has suffered from weak fundamentals over the past few years. Companies built out capacity in the 1990's for demand that never materialized, creating an overcapacity environment. Ever since, these companies including the largest, Dow and Nova Chemicals (Canadian, NCX), have been removing inefficient high-cost production capacity in order to compete with foreign producers offering cheaper products.

The environment finally started to strengthen going into 2004 and accelerated throughout the year. The industry is now is the second half of a cyclical upturn, which is expected to continue into 2006. One of the best ways to determine demand strength is through railcar loadings, as about 10% of rail tonnage is chemicals (over 40% is coal). Loadings have moved into positive territory following a drop-off at the end of Dec, which may be attributed to pre-buying by the converters and the Chinese New Year. A good indicator of economic activity is the Baltic Dry Index, which tracks shipments of bulk dry goods. This index peaked in Dec and has trended downward through Jan, and has now stabilized at its 50-day moving average. These indicators demonstrate the slower start to the year than expected. This in turn caused the pricing environment for polyethylene and ethylene to slow in the first few months after coming off a record Q4. Producers were expecting export demand to return quickly, but lower export and lackluster domestic demand caused the weakness in prices.

The weak dollar has exaggerated gains by the US producers, providing their products with a greater competitive advantage. DOW, the largest US manufacturer, is a great benefactor of the dollar as it has over sixty percent of sales overseas. Looking at Dow specifically, the company is enjoying considerable pricing power due to strong end-market demand. Its Q4 earnings (Jan) topped estimates by $0.15 as selling prices rose 28% y/y boosting gross margins by 120 basis points. This trend is likely to continue. Dow has done an admirable job cutting costs and diversifying its production internationally to lower-cost regions in order to offset energy price inflation. However, a key risk for Dow is its asbestos exposure.

The caveat to the story (there is always one) is the price of natural gas and oil. Natural gas represents 70%+ of cash costs of production for some commodity chemicals and prices have risen substantially over the last year. The chemical companies are consumers of gas, which is used in the production of the key building blocks of petrochemicals, as well as its derivatives including methanol, ethane, propylene, ethylene, and polyethylene. Switching costs is just too high for these companies and some may choose to just shut down older production plants if costs run too high. The diversified companies will be best positioned to pass through high costs.

It has been a slow start to 2005, and with cost headwinds, margin expansion may be limited for the first quarter. It all depends on the demand side of the equation. Dow's CEO called the recent lull in prices "an aberration," indicating the trend is already reversing itself as demand improved in March, resulting in stronger market conditions in Q2. We would suggest caution for the near-term, but if shares show exaggerated selling it may be a good point for longer-term investors to step in. The majority of these companies report Q1 earnings at the end of April. --Kimberly DuBord, Briefing.com

8:59AM Page One - Still Fragile, Even with a Bounce in the Dollar : Stock futures suggest an up open. We're not at all convinced that this bounce will be any more sustainable than the up open yesterday. The market remains fragile to any bad news.

So far, the news today is not bad. Hewlett-Packard has confirmed that Mark Hurd will be the new CEO. Bear Stearns and First Albany have upgraded the stock. Micron reported earnings and revenue above expectations for the fourth quarter, but many analysts expressed concerns about pricing power and margins for the company. CarMax reported earnings in line with expectations.

Oil continues to hover near $54 a barrel. According to the WSJ, Warren Buffett was told briefly in advance about a transaction that is now at the center of a regulatory investigation into an insurer he controls.

Fourth quarter real GDP was left at 3.8% with the second revision to the data, while the deflator (inflation measure) was raised to 2.3% to 2.1%. This data will have little impact, if any, on expectations for 2005 or the stock market.

None of the above alter the underlying concerns in the market about inflation. The PCE deflator in the personal income data tomorrow and the average hourly earnings data in the employment release on Friday have far greater potential to affect perceptions and move the market. The market will have a hard time advancing much ahead of the employment report.

Meanwhile, for those who haven't noticed, the dollar has rallied against the euro. After all the agonizing from the talking heads about the weak dollar and the supposedly bearish implications for the stock market, you would think there could be at least some notice of the turnaround (isn't this bullish?!).

As regular readers know, Briefing.com strongly disagrees with the idea that a controlled decline the dollar is bad for US stocks. In fact, a declining dollar increases US corporate profits. The weak dollar is absolutely not some sort of report card on the US economy mystically implying that the economy is actually weak despite 4% real GDP growth (compared to 1% Euro-area growth). The dollar was weak in large part because or relatively low overnight interest rates compared to euro rates, and is bouncing because US rates are on the rise. Investors should learn to ignore the ridiculous prattlings from the bears who could find only the weakness in the dollar to support their hopes that the US economy and stock market would crash. The dollar trends have actually correlated inversely with the short-term trends in the stock market due to the overriding impact of interest rates on each. Dick Green, Briefing.com

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

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From Briefing.com: 5:29PM Swing Trader: HSY, PH, PLMO, CYBX : -- Technical -- A relatively quite trading session after Wednesday's upward trend. Market Breadth was mixed with Advancers and Decliners about equal and New Highs/New Lows mixed as well. The SPY formed a Doji candlestick today, which after Wednesday's long white candlestick suggests indecision ahead of tomorrow's job data. Generally speaking, you'll want to see if today's high or low is taken out and then trade in that direction. Resistance for the SPY still lies at 118.57/118.73, followed by its 50-day sma (119.39). If things turn ugly, you'll want to watch the 200-day ema (116.16) and sma (115.42) for potential support areas...(continued)

4:25PM Nanophase Tech announces 3 new foreign patents (NANX) : Co announces it has been issued three new foreign patents for Siloxane Star-Graft Polymers, one in each of Great Britain, France, and Germany, which covers one of the co's fundamental nanoparticle coating technologies.

4:21PM MCI confirms receipt of revised Qwest bid (MCIP) : -- Update -- Co confirms it received a revised proposal from Qwest Communications to acquire the co. The revised offer comprises $13.50 in cash (excluding MCIP's March 15 dividend payment of $0.40 per share) and 3.373 Q shares (subject to adjustment under a collar which fixes the value of the Q shares at $14.00 provided Q's share price is between $3.32-$4.15) per MCIP share. MCIP's Board of Directors will review the revised proposal and respond accordingly.

4:04PM Transmeta names new President & CEO; announces agreement with Sony (TMTA) 0.91 +0.06: Co promotes Arthur L. Swift to President and C.E.O., effective immediately.... Co also announces that it has entered into a strategic alliance with Sony. Transmeta will provide engineering services to the Sony Group to accelerate and expand its adoption of Transmeta's LongRun2 technologies in products such as Cell derivatives, and engage strategic technology collaboration in other engineering areas.

Close Dow -37.17 at 10503.76, S&P -0.82 at 1180.69, Nasdaq -6.44 at 1999.23: Stocks failed to extend the market's best performance in 2005, as the indices closed out Q1 in the same fashion as it began - to the downside... But selling activity was limited, as reflected in the less than 0.1% decline on the S&P and modest losses on both the Dow and Nasdaq, as it appears investors will wait for tomorrow's employment report to dictate whether or not yesterday's rally is sustainable...
With regards to today's market action, higher oil prices, some negative corporate news and apprehension ahead of Friday's payrolls data discouraged buyers from fully embracing today's decent economic data and falling bond yields... Crude oil futures surged 2.5% to $55.40/bbl ($+1.41) after a Goldman Sachs analyst said, "oil markets may have entered the early stages of a 'super spike' period" and subsequently raised the upper end of his multi-year estimates range from $80/bbl to $105/bbl... Worries about inadequate refining capacity and a weaker dollar also assisted in the commodity's gains, preventing buyers from jumping back into the market to extend widespread gains...

Meanwhile, with the market closely watching economic reports - especially the March employment report - today's relatively encouraging data did not provide enough of a boost to attract buyers, as breadth figures were mixed all day and industry leadership finished in split fashion... Feb personal income was up 0.3% (consensus 0.4%) while personal spending was up 0.5% (consensus 0.5%), both decent from an economic standpoint... But investors focused more on one of Fed Chairman Greenspan's favorites - the core PCE deflator, which rose 0.2% but did not rise as high as many had expected (+0.3%) and checked in below January's gain of 0.3%, easing inflation fears...

Another report on the radar was the March Chicago PMI, which unexpectedly surged 6.5 points to 69.2 (consensus 60.5) - a new 17-year high... But the report took a back seat to tomorrow's national ISM survey, which will provide a more general measure of manufacturing conditions... Health Care (-0.7%), the worst performing economic sector, lost ground after the Dept. of Justice subpoenaed three medical device makers - Johnson & Johnson (JNJ 67.16 -0.89), Stryker (SYK 44.64 -2.79) and Biomet (BMET 36.30 -2.73) - regarding certain consulting contracts with orthopedic surgeons...

Weakness in shares of Biogen Idec (BIIB 34.51 -3.84), amid confirmation of a third Tysabri-linked nerve disorder, also weighed on the sector... Other economic sectors under pressure were Financial, Consumer Staples, Industrials and Information Technology... The latter succumbed to profit taking in the wake of yesterday's 1.6% surge on the Nasdaq, as Disk Drive (+0.9%) was the only sub-sector finishing higher... Upside Q3 EPS and revenue guidance from Western Digital (WDC 12.73 +1.56) prompted Merrill Lynch to upgrade the disk drive maker to Buy from Neutral...

Pacing the way higher, however, was Energy (+1.5%), benefiting from rising oil prices, while the Materials sector (+0.9%) was also strong amid increased copper price forecasts from Morgan Stanley, short covering in groups like paper, gold and steel and weakness in the dollar... The greenback extended yesterday's losses against both the euro (1.2961) and the yen (107.23) amid an unexpected rise in jobless claims, a better than expected inflation measure and arguably overbought conditions, as the dollar recorded its best quarter since 2001 with a gain of roughly 4.0% in 2005...

Retail (+0.5%) also showed modest strength, aided by speculation that JC Penney (JCP 51.99 +4.09) and Saks (SKS 18.03 +1.48) could be acquired, but Consumer Discretionary still finished relatively flat... Interest-rate sensitive areas like Utility (+1.0%) and Homebuilding (+1.0%) posted solid gains in the wake of falling bond yields... Treasurys closed higher, as yields on the 10-year note (+14/32) fell back through the 4.5% level (4.49%) for the first time since the FOMC's last meeting (Mar. 22), following an unexpected 20K rise in jobless benefits to 350K... The claims data, however, had little impact on equity markets ahead of tomorrow's more significant employment report...

Separately, Feb factory orders rose 0.2%, a bit less than an expected 0.5% gain, but the predictability of the report prevented it from having any influence on market activity...DJTA -0.5, DJUA +1.1, DOT -0.3, Nasdaq 100 -0.6, Russell 2000 -0.3, SOX -0.6, S&P Midcap 400 +0.4, XOI +1.5, NYSE Adv/Dec 1940/1366, Nasdaq Adv/Dec 1283/1799

3:13PM Treasuries Rally into Jobs Report on Short Covering : Treasuries close the session higher refusing to give up gains following the 350K initial jobless claims reading and staging a late day rally. The market fell back slightly on Chicago PMI but maintained its bid throughout the session ahead of the much anticipated jobs report tomorrow. The 2-10 curve is slightly steeper on the session at 72.7 basis points. As the quarter comes to an end, the 10-year posts its first quarter decline in three, mostly driven by inflationary expectations and the now infamous "conundrum" comment by Greenspan. On the quarter, the 10-year is lower in price higher in yield, the dollar is stronger, and the Fed raised its benchmark interest rate twice by a quarter of a point each time, things might just be making sense again. Q2 will be getting off to a roaring start tomorrow with nonfarm payrolls (220K est), unemployment rate (5.3% est), hourly earnings (0.2% est), average workweek (33.7 est), U of M sentiment (92.5 est), construction spending (0.6% est), ISM Index (54.9 est), auto sales (5.4M est), and truck sales (7.8M est). Chicago Fed President Moskow (a voting member) will be on CNBC at 8:50ET tomorrow giving his initial reaction to the jobs data. Other Fed officials speaking tomorrow include Boston Fed President Minehan at 12ET and NY Fed President Geithner at 19:30ET. All eyes are on tomorrow's nonfarm reading, please see 14:47 ET comment. The 10-yrs are currently 14/32nds yielding 4.490%.

2:00PM Computer Sciences announces $546.1 mln in previously unannounced federal contracts (CSC) 45.90 +0.21: Co announced today that since Jan. 1, 2005, its Federal Sector business unit has signed 50 previously unannounced contracts and subcontracts valued at approximately $546.1 mln during Q4 of CSC's fiscal year. The quarter ends on April 1, 2005. The agreements cover time periods ranging from six months to 12 years. Civil agencies accounted for 13 awards with a total value of approximately $84 mln. Department of Defense agencies accounted for 47 awards with a total value of more than $462 mln.

12:49PM Best performing stocks in Q1 : Best performing stocks over the past quarter: ABLE +283%, ELTK +261%, BOOM +207%, FORD +199%, GEOI +196%, MS +137%, BDCO +135%, TPE +130%, NSI +127%, DSTI +120%, ORCT +119%, GRU +113%, EDGR +107%, USEG +99%, OTD +99%, CYBX +96%, DHC +98%, INNO +96%, GIGA +95%, SVNX +88%, BASI +86%, MCZ +94%, SNHY +87%, MCX +84%, MVCO +81%, ESLR +63%.

11:23AM F5 Networks under pressure today, breaking under this week's low at 50.27 (FFIV) 50.22 -2.34: -- Technical --

9:28AM Gapping Down : ELN -57% (also multiple downgrades) and BIIB -9.4% are under pressure after another case of PML was found among patients treated with Tysabri.... Justice Dept issues subpoenas to medical device makers, Baird also downgrades all three: BMET -8.5%, SYK -7.2%, JNJ -1.5%... ZMH -9.2% (speculation that co may also receive a subpoena; Baird downgrade; Morgan Stanley downgrade)... Other News: SSTI -10% (guides lower), TRMM -10% (reports Q4), WMGI -6.3% (Baird downgrade), MNDO -6.2% (guides lower), UTSI -2.9% (delays 10-K), ANTP -2.2% (profit taking from 18% move yesterday), GOOG -1.4% (files 10-K; 2005 capex may be higher than expected - UBS)... Under $3: CNR -11.5%.

9:15AM Gapping Up : JCP +10% (speculation that an LBO is in the works; also see recent Briefing.com Survey comment), PCTY +17% (announces special committee to explore strategic alternatives; Nancy Pedot steps down as CEO), TKR +13% (guides higher), WDC +13% (guides MarQ higher; Merrill upgrade; up in sympathy: STX +3.6%), NYER +10%, JRJC +7% (announces US$10 mln stock repurchase program), MAGS +6.6% (signs $6.1 mln framework agreement with Israeli Ministry of defence), SUP +6%, ENWV +5.6% (signs development agreement for Homeland Security system), SHPGY +5.2% (BIIB/ELN news is good for SHPGY and SRA +4.4%), ENTG +4.3% (Merrill upgrade), CVTX +4.1% (Needham upgrade), TZOO +3.3% (extension of yesterday's 25% move), BOOM +1.9% (extension of yesterday's 6.3% move).... Under $3: BKHM +30% (amends agreement with Nortel), ARTX +6% (reports Q4).

6:19AM UTStarcom delays filing (UTSI) 11.84: Company delays filing of its Y04 10k as well as restated Y03 10k beyond the March 31, 2005 extended due date for Y04 10-K. Delay "is due to the Company's need to finalize its required review procedures and enable management to finalize its assessment of internal control over financial reporting as of December 31, 2004 as required under Section 404 of the Sarbanes-Oxley Act of 2002". UTSI expects to file both 10k's on or before April 15, 2005.

11:52AM Fiserv (FISV) $40.01 0.50 (1.27%) Fiserv is up this morning, partly due to an interesting report on the company from Legg Mason. The report draws parallels between Fiserv and the recently acquired SunGard Data Systems (SDS), which announced on Monday that it would be acquired for almost $11 billion by a consortium of private equity firms. The premium paid for SunGard amounted to approximately a 44% premium over the price of SDS before the firm announced on March 21 that they were in discussions regarding an acquisition.

The Legg Mason report compares the valuation metrics of SunGard before their acquisition was announced to the valuation of Fiserv currently. On almost every metric, from market cap, forward PE, revenue growth rates, operating margins, and free cash flow, the two firms were valued almost at identical levels. The deduction, therefore, is that Fiserv could command the same type of premium that SunGard was able to get, if someone were to acquire Fiserv now. Legg Mason calculates that an acquisition of Fiserv at the same valuation metrics as SDS received would imply a share price of $49. Legg Mason set their own price target at $46, based on fundamental growth primarily, not an acquisition, but they use it to underscore the latent unrealized value in the company.

This idea is clearly held by more people than Legg Mason, as FISV has risen sharply since Monday's SDS announcement, from the roughly $38 level of the week before. At $40, it is at the level FISV started the year at, but is currently below both the $46 target and $49 acquisition "value" set by Legg Mason.

Might someone actually acquire Fiserv? The company provides automated systems and services that process financial transactions. While SunGard also provides systems and service for automating financial transactions, Fiserv's offerings are focused on smaller banks and credit unions and insurance claims processing. SunGard's market is larger financial institutions, with more focus on investment transactions, account management, and trade settlements. Both companies offer software products as well as service bureau style back-office processing. The main difference between the two companies, however, is that SunGard is primarily product focused, while Fiserv is primarily service focused.

The driving trend in the financial industry is the automation of transaction processing. This trend is far from over, as many financial institutions still have labor-intensive operations. Fiserv's entire existence has been driven by the advantage clients see in hiring Fiserv instead of upgrading their own operations. Fiserv's valuable asset, therefore, as a possible acquisition target, is its entrenched position as an outsourced processor for more than 13,000 companies. SunGard was purchased because the investors clearly see how greater efficiencies can be achieved through automation in the coming years. Fiserv can benefit from those efficiencies by automating themselves for lower costs, while still charging the same fees to clients who won't leave. How much more profitable can it become? All it takes for Fiserv to be an acquisition target is someone at another buyout firm or a competitor with capital to start working a spreadsheet - and compare the possible returns versus the investment capital. That's probably happening at this very moment. - Robert V. Green
10:56AM eBay (EBAY) 37.20, -0.49: Would you believe that eBay handles more trading volume and transactions than the NASDAQ stock exchange? eBay has become the marketplace on the web worldwide and there appears to be no stopping its reach. As of the end of 2004, it had over 56 mln active users worldwide, up 36% y/y. That's equivalent to the entire population of Shanghai, Tokyo, Mumbai, Moscow, Mexico City, and New York City combined.

eBay is the most popular retail-shopping site on the net with local sites across the globe - a leader in almost a $2 tln addressable global market. Shares have stabilized after suffering downside pressure on the expectations that Q1 ASPs and conversion rates have bottomed and continue to improve. For some background here, eBay's revenue model is driven by average selling prices or ASPs. eBay's final value fees are based on a percentage of an auction's closing value, thus higher prices benefit its top line.

Share weakness was due to a drop in selling activity after the company raised prices, prompting a protest by sellers. Price changes in the past were easier to put through as the number of new sellers outpaced existing ones. Even though this dynamic has changed, sellers typically return to the site as profits are higher versus other venues. eBay increased promotional activity in order to entice sellers back. Getting past this hurdle is essential in share performance, which is likely to remain volatile until positive trends emerge. The pickup in activity is likely to accelerate growth into Q2, which is seasonally a weak quarter. Goldman Sachs forecasts Q1 US transaction revenue of 14% y/y - the fourth consecutive quarter of deceleration 24%, 29%, 32%, and 39%, respectively. The company reports on April 20th, which most analysts are expecting to come in-line with an incremental drop in operating margins. Seasonally speaking, Q3 and Q4 are strong due to back-to-school and holiday shopping, respectively.

The US is critical to its revenue and profit growth profile even though as a percentage of total revenue, it has declined from 75% four years ago to 41% today. eBay as a worldwide brand continues to gain traction. As such, international expansion is the key to growth over the longer-term. International revenue growth over the same time period was 168% and 121% - over 2x that of the US. The expansiveness of its reach and the ease of use attracts new users to its site. International transactions accounted for 15% of total revenues in 2001, but by the end of FY04 this number reached 37%. It's already a leading auction site in majority of international markets. It's already made headway into growth markets with a trading platform in India called Baazee.com and Each Net in China. Considering the size of the Chinese market, it offers considerable growth opportunities although execution will be critical. eBay's clearly committed to the challenge, budgeting $100 mln in capex this year.

The San Jose-based company will be able to drive growth through category expansion (from collectibles to mainstream products), geographies, and pricing formats. Due to the complexity of the business, it enjoys high barriers to entry. The company's success has been its consistent execution of its business model. It has virtually no inventory, a diversified revenue stream, and high margins that could hit 40%. Adding new categories beyond collectibles, global expansion, and integration of PayPal platform all drives up the incremental revenue for the company.

Using Reuters Estimates consensus, earnings are expected to rise 26% in FY05 and 32% in FY06, on revenue growth of 33% and 25%, respectively. Margins have continued to expand each year, from 24% in FY01 to 35% in FY04. The stock is currently trading at 23.2x cash flow per share vs. the sector average of 20x. Internet stocks typically do carry a richer valuation, so on a price to earnings multiple it trades at 59.9x current earnings and 47.2x forward. The continual shift from offline to online will drive growth for eBay as it expands its trading platform and efficiency worldwide. The key risks to watch are core US and intl transaction revenue trends, competition, progress in China, fixed price vs. auction mix, technical outages, and seasonality of earnings. ---Kimberly DuBord, Briefing.com

9:20AM Sanders Morris Harris Group (SMHG) 17.89: When looking at the brokers, its sometimes hard to get past the big boys like Merrill Lynch and Goldman Sachs, but there are other stories out there. On of those is Sanders Morris Harris Group. It is a Houston based broker that has been growing through acquisition .

A quick look at the last few press releases from the broker shows that they have been acquiring stakes in a number of companies. In late January, the company acquired a 20% stake in Chicago based Astor Asset Management. Astor has a unique strategy of using Exchange Traded Funds (ETF's) to manage the funds of its clients. Sanders also purchased 50% of Select Sports Group, a Houston based sports management firm that caters to athletes. The broker also purchased 69% of Charlotte Capital.

Clearly the expansion is an effort to increase the amount of assets under management. That is a key metric for any broker. Brokers want to have the amount of assets under management increasing as they generally charge a fee based on the percentage of money that they manage. Sanders Morris now manages in excess of $7 billion. There are other aspects of the business, not just money management that are growing as well.

Revenues for 2004 were $121 million, up from $103 million in 2003. There were strong results in both investment banking and trading. The balance sheet is reasonably strong, as the company has seen some consistent growth in the number of total assets. The cash position has been somewhat volatile, however. One of the most important measures for the investment banks, the one that is regarded as the main measure of value for the business, is price-to-book. At 2.3x for Sanders Morris, that is well above Southwest Securities, AG Edwards and even Morgan Stanley.

Much like its competitors such as Southwest Securities, the company has seen its fair share of M&A business, but being based in Houston, energy had been the name of the game early on. The firm has since expanded operations beyond the oil field, and now offers a well rounded platform of expertise.

While the liquidity (trading averages only 17,000 shares per day over the last three months) may scare some away, the growth has been undeniable. Not only has the company moved to acquire more assets, they are growing revenues at a rate that is somewhat rare among the brokers. As a result of this revenue growth, the firm trades at a healthy multiple. As the firm continues to expand its reach and operation, investors should become more willing to accept its relatively rich valuation and limited liquidity.

9:02AM Page One - Trading Range Continues : Stock futures suggest an up open. This follows the impressive gains yesterday. The market remains decidedly range bound, however, as good earnings growth and decent valuation are encountering concerns over rising inflation and interest rates.

The key news item this morning is that the February core PCE rose 0.2%. This is an inflation measure in the personal consumption expenditure (PCE) data that is released monthly and is a base for consumer spending in the GDP figures. The data is not often closely followed, as it lags other spending measures such as retail sales, auto sales, and data from chain stores. This month, however, it was closely watched. Federal Reserve Chairman Greenspan is known to follow it because it is a more comprehensive figure than CPI or most other inflation measures. It has implications for Fed policy.

The 0.2% increase for February is an ambiguous reading. A 0.3% increase in the January data had raised warning flags, but the measure had been up an average of only 0.1% the six months before that. So, while it is not quite as bad as feared, it may also be signalling a firmer trend. There was not a big market reaction.

The top line measures of a 0.3% increase in personal income and a 0.5% gain in spending for February were both pretty much as expected. There was also a jump in new claims for unemployment to 350,000 for the week ended March 25, but these numbers are volatile and the March payroll numbers tomorrow morning will be far more important.

There isn't much corporate news this morning. The Wall Street Journal is reporting the Qwest is going to raise its bid for MCI again. Johnson & Johnson has received a Department of Justice subpoena regarding certain consulting contracts. Western Digital raised earnings and revenue guidance for this quarter.

The rally yesterday was impressive. Most press reports suggested it was due to a drop in oil prices. That doesn't make much sense though, as oil ended down only 24 cents, and is up a similar amount this morning. It is still right at $54 a barrel. There may have been some quarter-end buying by money managers looking to report winners on their quarterly balance sheets. Or, there may simply have been some latent demand that burst through. As Briefing.com's Big Picture column discusses this morning, the focus has shifted from the positive to the negative this year. The recent emphasis on the negatives may have been overdone. It is still very much a trading range market. Neither the bulls nor bears are likely to hold sway for long periods. Dick Green, Briefing.com

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

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From Briefing.com: 6:10PM Swing Trader : -- Technical -- Markets managed to gap higher this morning, but the upward momentum was short-lived and wound up reversing within the first 1/2 hour of the session. What followed was a slow and steady downtrend that didn't stabilize until the final hour of trading. Market Breadth was negative as Decliners outpaced Advancers about 1.9 to 1 and New Lows exceeded New Highs. Energy - Oil related names were the strongest group today, extending their upward momentum for a 3rd consecutive session....(Continued)

4:45PM Weekly Wrap: The stock market held steady this past week, but the action was ultimately disappointing.

A rally in the bond market over the past week provided some fundamental support to the stock market. The 10-year yield ended last week at 4.58% and rallied to 4.45% by the end of this week. That shouldn't have been a huge boost to stocks, but it was enough to bring forth some occasional bargain hunting.

Apart from that, there wasn't a lot of good fundamental news. At times, there was some latent demand that burst through as the market hit the lower end of its three month trading range.

This was evidenced by the big rally on Wednesday. The S&P leapt 16 points that day. Early in the day, oil was down $1.50 a barrel, and every article about the market cited that as the cause of the rally. But oil ended down only $0.25 on the day, and more than reversed that decline the next day without any impact on the stock market. There was some money sitting on the sidelines looking for an opportunity to get back into the market, but there really wasn't any change in the fundamentals.

This suggests that there may not be strong followthrough to any near-term rallies.

Further supporting this conclusion was the action on Friday. The S&P futures were up strongly ahead of the employment release that morning. The data was disappointing. Nonfarm payrolls were up just 110,000 compared to expectations of a 220,000 gain. Average hourly earnings were up 0.3% compared to an expected 0.2% increase. Thus, growth was less than expected while the inflationary factor was up more than expected. That is not good news for stocks.

Yet, the stock market opened up strongly even after the data. The market was prepared to continue its mini-rally. The gains quickly faded, however, as the day progressed, and the S&P closed down almost 8 points on Friday. There was no followthrough even on a daily basis.

The rest of the data this past week was slightly bearish. Oil prices rose to $57.27 from a close of $54.84 last week.

There were very few earnings reports this week and none that impacted the broad market. First quarter earnings reports will start in earnest in a couple of weeks.

There were a small number of earnings warnings, as is typical at this time of the month. Cardinal Health, Best Buy, Biogen, Navistar, Cognos, Parket-Hannifin, and AmeriSource Bergen were among those saying this or next quarter's earnings would be lower than Wall Street forecasts.

There was little economic data this week of note, other than the payrolls data. Fourth quarter real GDP was unrevised at a 3.8% annual rate. The March ISM manufacturing index was as expected at 55.2, and the March ISM services survey was accidentally released on Friday (it was due on Tuesday) at a strong 63.1. The data was by no means all that disappointing, and it won't change economic expectations of continued strong growth, but it didn't provide any additional reason to buy stocks either.

As to sectors, the S&P was up marginally this week, but the technology heavy Nasdaq was down again. Oil, homebuilding, and steel were strong sectors. Those are not typically sectors that can lead the broad market higher. Key sectors such as insurance, computers, retailers (Wal-Mart) were weak.

Thus, although there were sporadic signs of resurgent demand this past week, it ultimately was yet another disappointing week for the stock market. It will take a renewed focus on a positive fundamental factor, such as good first quarter earnings report, to create a more sustainable boost to the market.

 
 Index       Started Week  Ended Week  Change  %Change  YTD  
 DJIA          10442.87     10404.30   -38.57   -0.4 % -3.5 %  
 Nasdaq         1991.06      1984.81    -6.25   -0.3 % -8.8 %  
 S&P 500        1171.42      1172.92     1.50    0.1 % -3.2 %  
 Russell 2000    615.27       611.55    -3.72   -0.6 % -6.1 %

9:16AM Gapping Down : TASR -12% (guides below consensus), BBY -3.2% (reports in line, guides MayQ below consensus), NATI -12% (guides lower), VISG -11% (JP Morgan downgrade), INFT -9.3% (continues recent slide), PGNX -6.6% (prices offering below current price), BKHM -6% (profit taking after 97% move yesterday).... Under $3: XYBR -48% (receives SEC subpoena; delays 10-K filing again), VCMP -9.3% (reports Q4), IPIX -5.2% (reports Q4).

9:08AM Gapping Up : Gapping up on strong earnings/guidance: RHAT +5.4% (also Baird upgrade), SIMC +38%, HTCH +2.8%.... Other News: SPPI +8.7% (started with a Buy at Wells Fargo; tgt $10), VSEC +7.4% (fuel tanker support contract), MKTX +6% (Bear Stearns upgrade), VIAC +5.2% (files 10-K), MTSN +3.2% (added to JP Morgan's Focus List; tgt $11), ANTP +2.7% (recent momentum), NOVL +2.7% (JMP Sec upgrade), NGPS +2.4%, ELN +2.2% (bounces after 54% drop yesterday), RIMM +1.4% (introduces BlackBerry in Poland; positive SG Cowen comments).... Under $3: INTD +34% (to be acquired by CORI), TMTA +15% (new President & CEO; announces agreement with Sony), CIEN +6% (settles patent litigation).

7:17AM Biogen Idec says investors should no longer rely on Feb 7 guidance (BIIB) : Co discloses in today's 8-K that: "As a result of the voluntary suspension of the marketing of Tysabri (natalizumab) by Biogen Idec and Elan Corp, as announced in a press release issued on Feb 28, 2005... investors should no longer rely upon the financial guidance that the co announced in a press release issued on Feb 7, 2005." Co issued FY05 guidance on Feb 7 of EPS of $1.60 through the low $1.70's.

6:30AM ATI Tech chosen by Samsung for DLP HDTV (ATYT) 17.29: ATYT announced today that Samsung has selected ATYT's Xilleon and Theater chips in their series of mainstream to premium HDTVs for the worldwide market, as a continuation of the cooperative alliance established in 2003.

12:43PM Trading Call of the Week -- Oppenheimer's Sosnick on JCP, also likes KSS

Trading Call of the Week goes to Bernard Sosnick at Oppenheimer, who was among the first to explain the appeal of JC Penney's financial restructuring, ahead of the stock's more than 8-point run peak-to-trough run over seven sessions that was aided by rumors that improving financials make JCP a buyout candidate.

Back on March 21, Sosnick was touting JCP shares, saying the company has potential to exceed estimates for '05 and '06, and trade in the $50 to $60 range, based on its ability to leverage earnings growth. He also noted at the time that JCP shares traded at only 13x his firm's '06 earnings estimate - a discount to others in its group.

On Wednesday, Sosnick followed up with a note explaining that JCP shares were starting to run on speculation that it was the target of a leveraged buyout. Sosnick noted that talk is often cheap, but said the speculation was being raised in the first place because of JCP's unusually favorable restructuring, as well as plans to buy back up to $6 bln of shares.

The following day, ahead of the stock's run to 5 1/2-year high of $53.44, Sosnick further explained the company's long-term operating margin potential could push EPS to the $5.50 to $6.00 range by 2008. He said that level of potential earnings would support a bid price of about $65 a share from an acquirer - above the high-end of his estimate range.

Amid a lot of takeover speculation among retailers, we wanted to know if there was ANOTHER retail stock Sosnick liked in the short-term. We thought he might give us another potential retail takeover candidate, given that the sector is suddenly rife with speculation. Instead, he told us he like's Kohl's (KSS), retail's one-time darling that has recently become a bit of a turnaround story.

Kohl's was perhaps the hottest retail stock from 1995 to 2000, outperforming even Wal-Mart (WMT) on a percentage basis in those years. Sosnick said the company had grown accustomed to posting 5% comp sales numbers on a monthly basis, and the company continued to buy accordingly - even when the economy slowed. But he says the company has made strides recently to carry the right amount of inventory. He adds that Kohl's is doing a better job with its advertising, and continues to expand outside of malls, taking market share from other department stores.

"And when the warmer weather comes, Kohl's is positioned with the right inventories in the right quantities, and will resume its status as one of the leading companies in retail," Sosnick told us, adding that it was a good sign for the April quarter that the company didn't have to undertake hefty winter clearances in February. His Q1 estimate is $0.40, vs. consensus of $0.37, based on the potential for stronger sales in April.

Sosnick recently told clients he sees KSS moving toward $60, from its current price of about $50. We note, however, that there has been some near-term technical weakness in KSS; we would NOT be willing to hold the stock below near-term support in the $50 area. We would even consider waiting until AFTER the company reports March comps to wade into the name. One additional note for traders is that there is near-term resistance for KSS in the $53 to $54 range.-- Mike Tarsala, [e-mail].


11:37AM April Fools: Historical Trends In April Now that the market is essentially flat today, after having run up a little bit this morning, we paused to look into the Stock Trader's Almanac to see if prior history showed any major trends for April Fools Day and the month of April. It does - and it is usually good on both counts.

According to data compiled by the Stock Trader's Almanac, the first trading day of April (whether it is actually April 1 or not) usually shows an up day for the Dow, with 8 of the past 10 years showing a positive close. In the year 2000, in fact, the first trading day in April was April 3, and the Dow showed a 300 point, or 3% rise. Most of the other years showed a rise or fall of less than 1%, which makes them "ordinary" trading days.

The month of April, however, is branded by the Stock Trader's Almanac as the best month for Dow historically. The average rise, since 1950, is 1.9%, with 34 up years and 21 down years. While the average percentage rise in April for the S&P 500 index, at 1.3%, is not the highest average monthly rise (November and December both average 1.7%), April is the second most consistent up month for the S&P 500. In 37 of the last 55 years, the S&P index has been up. Only December has been up more months, at 42 up months and just 13 down months.

If April does prove to be an up month, it means that the Dow would close above 10,503, the Nasdaq would close above 1998, and the S&P 500 would close above 1,181. If this happens, all three indexes would then be above the levels they had on November 1, 2004. Such an event would be yet another confirmation of the old adage on Wall Street, "the Dow from November 'til May, then go away."

This adage describes the strategy of investing in the market only from November 1 through April 30, and being entirely in cash for the May 1 to October 31 period. The Nov-Apr period has only had 12 down periods since 1950, while the May-Oct time period has had 22. Furthermore, the hypothetical back-tested portfolio calculated in the Almanac shows that $10,000 initial investment in the Dow during the Nov-Apr time periods only, would today be worth $492,060, while a $10,000 initial investment in the May-Oct time period would be just $9,682. (In each scenario, taxes are ignored and the value of the index at the end of the period is reinvested fully at the start of the next six month time period.)

Since the beginning of the composition of this Story Stock, the market indexes have all gone negative, reversing their early gains of the day. Whether this turns out to be the final direction of the overall market is, of course, uncertain currently. (For more on the Stock Trader's Almanace, see the Ahead of the Curve column of December 7, 2004.)

Whatever today's levels wind up being, however, it is worth remembering the other old adage in the market, "past performance is no guarantee of future performance." In fact, the only reliable historic trend in the market is that a reliance on historical trends can sometimes have disastrous consequences. If the market teaches anything over time, it is that there is never certainty at any time for the market's direction. Even when the market does wind up doing exactly what you predicted it would, it is risky to start believing that you have "figured it out" with certainty. When that happens, the market usually finds a way - eventually - to illustrate the foolishness of such strong faith in yourself. Happy April Fools Day. - Robert V. Green

9:08AM Page One - Stocks Were Ready to Rally : Stock futures suggest an up open. Frankly, this surprises us given that the payroll data is worse than expected in two key areas.

The March nonfarm payrolls rose 110,000. A gain of 220,000 was expected. This is obviously disappointing, but frankly, there is no reason to believe that labor market conditions fundamentally worsened in March. Payrolls have risen an average of about 200,000 over the past year. The March number indicates that a surge in employment is not occurring, but there is no reason to suspect that a new, slower trend has emerged.

More worrisome, in our opinion, is the 0.3% gain in average hourly earnings. This follows a modest 0.1% (revised) gain in February, but there has been a firming trend in recent months. If this cost factor continues to rise at a higher rate, it creates cost pressures that can lead to higher inflation rates. The market is showing little concern about this today, but another month or two of bad numbers and it could become important.

The bond market is rallying on the weak jobs number. The 10-year is up 15/32 and the yield has dropped to 4.42%. This is supporting the stock market, which continues to look at a solid up open. In our opinion, this is surprising. The jobs numbers is not greatly disturbing from a longer-term aspect, but it is always better for the economy to have more growth, so this one has to be defined as disappointing. It is not bullish. The gain in average hourly earnings is also clearly not bullish.

In fact, with the February payrolls release, the exact opposite in data was presented. The market understandably rallied big time. That month, payrolls were reported up 262,000 and average hourly earnings were (since revised) at unchanged. Payrolls were strong and earnings weak. That is bullish. This month payrolls were weak and earnings strong. These reversed conditions do not strike us as bullish, but the market is looking up today.

The market's response reflects the trading range nature of the market. Stocks rallied Wednesday, supposedly on a drop in oil prices. That decline has been more than reversed, but stocks did not reverse. Stocks had dropped enough that they simply needed a spark. The same is perhaps true today. Stocks were ready to rally, and the data isn't about to stand in the way. It remains very much a trading range market. Dick Green, Briefing.com

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From Briefing.com: 6:03PM Swing Trader: OIH, JBLU, SRNA : -- Technical -- A relatively choppy trading session throughout the morning session which turned into a strong uptrend for the afternoon. Market Breadth was mixed on the day. The SPY action still remains under its 20-day ema (118.52) and downtrend off the March 8 high, but majority of sectors and individual stocks continue to look short-term oversold at current levels. It's likely we will continue to chop sideways this week, favoring the trader who "buys near support" and "sells near resistance."...continued

Close Dow +16.84 at 10421.14, S&P +3.20 at 1176.12, Nasdaq +6.26 at 1991.07: Late-day profit taking in oil prices, coupled with some upbeat corporate news, was enough to reverse early nervousness and close the indices to the upside... Crude oil futures ($57.01/bbl -$0.26) had touched an all-time high above $58/bbl amid concerns that a 500K barrel-per-day increase in OPEC output still would not be enough to offset inadequate refining capacity and the growing demand for gasoline heading into the summer driving season...
But consolidation of gains in oil heading into the close of commodities trading - in the absence of earnings and economic data to offer additional influence on market activity - provided just enough of a spark to improve sentiment and help seven of the ten economic sectors close into positive territory... Telecom Services (+1.3%) paced the way following reports that Verizon Communications (VZ 35.60 +0.41) may pull out of its lower $7.6 bln offer for MCI Inc. (MCIP 25.08 -0.21), if MCI's board considers Qwest's (Q 3.79 +0.15) sweetened $9.0 bln deal to be "superior."... Financial (+0.8%), which accounts for about 21% of the S&P, had an even larger impact on overall sentiment...

Reports that mortgage giant Fannie Mae (FNM 51.51 -1.73) may have failed to properly account for the trusts it sets up to issue mortgage-backed securities initially weighed on the sector and countered news that HSBC Holdings (HBC 78.60 -0.02) may be considering a $75 bln bid for Morgan Stanley (MWD 58.31 +1.44)...

But when Morgan Stanley's Board approved the sale of its Discover credit card business - a move that could generate as much as $8-9 bln in proceeds - followed by NY Attorney General Eliot Spitzer saying a "civil resolution" with American International Group (AIG 53.13 +2.18) will "ultimately be achievable," buyers stepped back into the market... Two analyst upgrades on AIG also helped the large insurer erase much of last Friday's 8.0% drubbing, prompted by an expanded probe into AIG's improper accounting practices... Health Care (+0.6%) was also an influential leader to the upside, benefiting from strength in drug Distributors (+2.7%) ahead of Pfizer's (PFE 25.93 -0.22) analyst meeting tomorrow (9:00 ET).. Technology (+0.3%) closed modestly higher, as gains in Hardware and Internet were just enough to offset weakness in every other sub-sector while Consumer Staples, Consumer Discretionary and Utility also closed higher...

Energy (-0.6%), however, closed lower, despite confirmation that ChevronTexaco (CVX 56.90 -2.41) will buy Unocal (UCL 59.61 -4.74) for roughly $18 bln... The deal, widely anticipated by market participants, was priced below last Friday's closing price ($63) on UCL shares, did little to generate much excitement among investors... The Materials (-0.6%) sector was also weak as the dollar strengthened against major currencies...

The greenback extended its gains, hitting a 7-week high against the euro (1.2852) amid inflationary Fed speak and a reduction in the European Commission's 2005 growth outlook (to 1.6% from 2%) that further reiterated that central banks in Europe will likely not raise rates anytime soon... Meanwhile, there was no notable economic reports to sway the Treasury market in either direction, as technical trade and light volume kept bonds mired in relatively tight trading ranges... The benchmark 10-year note was off 2 ticks to yield 4.45%...DJTA +0.6, DJUA +0.2, DOT +0.7, Nasdaq 100 +0.5, Russell 2000 +0.3, SOX -0.4, S&P Midcap 400 +0.1, XOI -1.0, NYSE Adv/Dec 1699/1569, Nasdaq Adv/Dec 1422/1651

10:10AM Altair Nanotechnologies signs agreement with Advanced Battery Technologies (ALTI) 3.95 +0.39: Altair Nanotechnologies and Advanced Battery Technologies (ABAT.OB), a U.S. and Chinese-owned co with factories in Harbin, People's Republic of China, announced today that they have signed a mutually exclusive development agreement for lithium polymer batteries in China. This agreement covers the incorporation of Altair's battery electrode nano-materials into ABAT's existing polymer battery product lines. Terms of the agreement were not disclosed.

9:02AM Gapping Down : UCL -5.6% (to be bought by CVX; premium not as much as investors had thought), RIMM -2.7% (CRN reports that Microsoft's forthcoming Windows Mobile upgrade is designed to be a BlackBerry killer), NTIQ -10% (guides lower), ATPL -8.5%.... Under $3: AAII -13% (says it is likely to file for bankruptcy), IMNR -9% (auditors express a going-concern qualification).

8:55AM Gapping Up : KKD +9.6% (announces $225 mln financing), MWD +3% (speculation that HSBC Holdings is considering a bid for co), AIG +3% (Morgan Stanley upgrade), ENER +4.3% (extends recent momentum), CRIS +14% (announces second major collaboration with Genentech), SIMC +8% (extension of 66% move last week).... Small cap energy stocks are on the move on higher crude prices and the Unocal/CVX merger : BDCO +14%, GEOI +10%, MSSN +9.4%, FUEL +12%, IVAN +3.5%, USEG +3.8%... Under $3: SRXA +38% (announces new order for TRAC), NTOP +9% (co and Motorola expand joint relationship), PPHM +8% (positive clinical data on Tarvacin).

12:31PM Siebel Systems (SEBL) $9.31 -0.15 (-1.6%) Siebel Systems has been up sharply recently, having closed at $8.59 last Monday (March 28). Volume has been up sharply as well, with Thursday's 21.8 million and Friday's 28.0 million shares much higher than the usual 11 million daily volume. At noon, volume is almost 6 million, so higher than usual volume today is also likely. (This is unusual because SEBL has a history of showing much lower volume on Mondays.) Also unusual is much, much higher volume in SEBL options recently. A Reuters article on Thursday evening pointed out the very high daily volume in SEBL May $10 calls and attributed the volume to speculation that Siebel will be acquired soon.

The truly interesting datapoint about SEBL call options, however, is not the daily volume, but the open interest on the May $10 calls. The number now stands at 52,695 May $10 call options outstanding. This number dwarfs the open interest contracts for every other call and put options on SEBL. For example, the April $10 call option has only 9,237 open contracts and the May $7.50 put has 13,500 open interest contracts. The next largest May call options ($7.50 and $12.50) have open interests of just over 3,000 each. Someone is buying May $10 options in big numbers.

The conclusion that Siebel Systems is a possible acquisition candidate is a solid one, whether based upon options activity or an analysis of the maturation of the industry. (We prefer the latter approach.) We have written about why Siebel Systems has value as an acquisition several times in the past six months on the Ahead of the Curve pages.

There are some problems with SEBL as an investment opportunity, using an acquisition premise. The first is the eroding revenue trend and increasing loss of clients (see the Ahead of the Curve column of 26-Oct-04 "Siebel Systems Earnings Review" for more details on the client loss issue).

Somewhat problematic is the slightly high valuation of the stock. Trading at $9.31 with a 2005 consensus estimate of $0.29 EPS puts SEBL at a forward PE of 32, considerably higher than the average forward PE in the industry of around 22-24. The higher valuation is somewhat offset by the fact that Siebel has $2.2 billion in cash, with virtually no debt. With a market cap of $4.8 billion, this means the actual acquisition cost for Siebel's customer base is only $2.6 billion, since the acquirer can view the balance sheet almost like a "rebate" on the purchase price. Cash per share on December 31 was $4.36, or about 47% of the current $9.30 price.

We do think Siebel Systems is a prime acquisition candidate. The issue is "at what price." It would certainly be at a premium to today's levels, but we prefer the candidates with better acquisition premium opportunities (see the seven-part series of Ahead of the Curve columns entitled "Ent. App. SW Acq Candidates, which ran from January 10 through February 8 for those picks and the logic behind their selection.) Also of issue is "when?" Buying May $10 options on SEBL on an acquisition premise and having their acquisition announced on June 1 would be a tough way to be wrong. Nevertheless, whenever option activity picks up to high levels like this on a stock that is a prime acquisition candidate for other reasons, it is usually worthwhile to start watching the stock very closely. - Robert V. Green
12:17PM ChevronTexaco Corp (CVX) 57.52 -1.79: Big deal in the big oils on a day when the price of crude reaches new highs. ChevronTexaco announced it would acquire Unocal Corp (00C) for $18 bln in stock, cash, and debt assumption. The deal values Unocal at $62/share with its shareholders receiving either 1.03 shares of CVX, or $65 in cash for each share held. This deal has been rumored for some time accelerating shares in both companies. However, both stocks are down in the pre-market on a buy the rumor, sell the news trading mentality.

ChevronTexaco is offering 75% stock and 25% cash and will assume $1.6 bln in UCL's debt. CVX expects the deal to be broadly neutral to earnings per share and will only add to earnings on a cash flow basis. The rational behind the deal centers on boosting reserves. It has become increasing difficult, not to mention costly, to increase reserves for these companies. Finding and developing fields in more remote locations across the globe has led E&Ps to consider consolidation as a means to generate oil and gas reserve growth. The deal could boost CVX's reserves by 50%, according to industry analysts. Considering the high price of oil and the coffers of cash oil companies have on their books, more deals are likely to come. The companies most sought after would be the ones with the best production profiles.

Chevron's oil and gas reserves last year fell 6% to 11.252 bln barrels of oil due to asset sales and reservoirs tests in Africa and Asia. Reserves are a means of measuring an oil company's future earnings potential. Chevron, the second largest oil company behind Exxon Mobil (XOM) may feel some downside pressure in its shares, as the deal also highlights the fact that it's having difficulty developing its own assets. CVX's capex budget is forecasted to increase 20% from last year to $10 bln. Unocal's attractiveness resides in its Asian assets, which is the fastest growing energy market in the world. It owns the rights to pump oil and gas in Indonesia through 2028 where it started the first deepwater oil production in the West Seno field off of Borneo. CVX is already that country's largest producer. As the eight largest oil and gas company, UCL has 1.754 bln in reserves 50% of which are in Asia.

The deal is a discount to Unocal's closing price on Friday of $64.35, which brings up the question, why would UCL accept a discounted price? The company has been in play for some time, which has driven its shares up 54% since the rumors started back in Jan. There is some speculation that by accepting a lower price this puts the company in play, which in turn may prompt other potential bidders to step in. China's largest oil company, CNOOC (CEO) China National Offshore Oil Corp, has been rumored to be a potential buyer as it tries to increase production in order to meet soaring demand. The Financial Times suggested a price tag of more than $13 bln, with others speculating CEO may just make a bid for UCL's Asian assets.

This is the biggest oil deal in three years. Speculation over other potential deals in the energy patch is sure to continue, as consolidation is viewed as an alternative to exploration and production. This deal makes sense as there is a lot of geographic overlap between the two companies, in addition to cost benefits. Chevron is mostly an oil producer with over 72% of production, compared to Unocal which is mostly natural gas at 62% of total. Chevron expects to fully integrate the company within six months. This deal is expected to meet little resistance by regulators, and if completed, will be the largest oil merger since Phillips Petroleum bought Conoco (COP) back in 2002. ----Kimberly DuBord, Briefing.com

9:00AM Page One - Blah, Blah : This market has the blahs.

There was absolutely no followthrough to the early rally Friday. That is understandable, as the employment data that morning was not at all bullish. On Friday we wrote that the seemingly positive reaction initially was surprising. That the stock market ended the day and week lower was not.

This week brings little that is likely to change the tone. There are practically no earnings reports. Alcoa on Wednesday is the only one of note. The economic calendar is even more bare, with only the weekly new claims numbers on Thursday and the typically ignored wholesale inventories and consumer credit data that day as well.

That leaves a pre-occupation with oil as a likely market driver. That isn't good this morning, as oil prices are up yet again. Oil prices could decline, and provide a boost to stocks, but that is a risky bet to say the least.

So, the stock market blahs will likely continue this week. Earnings reports during the later weeks of April may provide a boost to the stock market. For now though, the action is likely to remain listless.

The news this morning includes a couple of "Merger Monday" items. HSBC Holdings (Hong Kong Shanghai Banking Corp. was the founding member) is reportedly looking to make an offer for Morgan Stanley. ChevronTexaco has agreed to acquire Unocal for about $18 billion. Once again, however, the extremely hot merger action has failed to light a fire under the broader market. Dick Green, Briefing.com

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From Briefing.com: Close Dow +37.32 at 10458.46, S&P +5.27 at 1181.39, Nasdaq +8.25 at 1999.32: The market extended yesterday's gains as falling oil prices and Pfizer's restructuring kept sellers in check...

Another day of profit taking (-1.7%) in crude oil futures ($56.05/bbl -$1.68) - a day after surging to all-time highs above $58/bbl - underpinned a positive tone that carried into the close... The commodity opened under pressure amid news of Saudi Aramco's plans to expand refinery capacity and closed even lower after Fed Chairman Alan Greenspan commented on higher inventories easing the oil price frenzy...

Roughly two hours before the close of trading, Greenspan spoke to a petrochemical conference... While he said that falling energy use is "virtually inevitable" and that the world's refining capacity remains "worrisome," the absence of any comments regarding monetary policy or oil's impact on economic growth, failed to more persuasively push equities or bonds in either direction... Treasurys, due to the lack of inflationary comments and notable economic reports, were range-bound all day and had little if any impact on market activity, as the benchmark 10-year note closed down 3 ticks to yield 4.46%...

Meanwhile, Pfizer's (PFE 26.92 +0.99) proposed $4.0 bln cost-cutting plan, during what the drug maker has dubbed a "transition year," was much larger than analysts expected (estimates were $2-3 bln)... So much so that investors viewed Pfizer's in-line Q1 guidance and a lower than expected FY05 earnings outlook with a grain of salt, as the news shed some new light on the improving health of a tarnished bellwether and provided a boost to blue chips across the board... Health Care (+1.8%) paced the way to the upside following Pfizer's restructuring while upbeat analyst comments on Sanofi-Aventis (SNY 43.14 +1.29) also provided a lift to Drug (+2.3%)...

Financial (+0.2%) also extended yesterday's gains, benefiting from strength in online brokerage following upbeat analyst comments... Morgan Stanley highlighted E*Trade (ET 12.02 +0.15) and Ameritrade (AMTD 10.74 +0.51) as solid buying opportunities in a group that has declined roughly 20% in 2005 amid persistent concerns about pricing pressure and choppy trading conditions...

Strength in Airline (+3.2%), following strong March traffic increases from the likes of Delta Air Lines (DAL 4.12 ++0.12), Southwest Airlines (LUV 14.30 +0.27) and American Airlines (AMR 11.15 +0.17) of 14.4%, 12.0% and 9.1%, respectively, helped Transportation close to the upside... Technology, however, was mixed, as modest gains in Semiconductor somewhat offset losses in Networking, Hardware and Software... Software was weak amid earnings warnings from the likes of Mentor Graphics (MENT 10.04 -3.61) and RSA Security (RSAS 11.32 -4.55) and a more unfavorable short-term outlook for the group... One bright spot was Google (GOOG 188.57 +3.28), which was upgraded by Lehman Brothers...

Energy (-1.3%) was the only economic sector closing to the downside, as late-day profit taking in oil prices erased early gains in the sector... Separately, General Motors (GM 29.21 +0.16) made headlines when its long term debt rating was cut by Moody's to Baa3 - a notch above junk status - temporarily pushing the indices to their lowest levels of the day... But the knee-jerk ended about as fast as it began, as such a decision, while negative, was arguably already anticipated by investors... DJTA +0.4, DJUA +0.7, DOT -0.2, Nasdaq 100 +0.5, Russell 2000 +0.1, SOX +0.1, S&P Midcap 400 +0.1, XOI -1.0, NYSE Adv/Dec 1854/1412, Nasdaq Adv/Dec 1602/1447

3:12PM Treasury Trade Remains Tight, Looks to GSE Testimony: : The market slid lower, gaining only some brief bumps on Greenspan and the negative credit rate actions on GM and Ford. The quiet session had been keyed on the potential for something from Greenspan regarding energy costs filtering down,inducing serious pricing pressure. The inflationary comments did not show-up in the prepared text, and therefore prices saw a slight relief bounce. The market was held captive by a lack of economic data and Greenspan speech potential keeping the market in very tight ranges across the curve. The dollar faltered at key technical levels, giving up its, largely short-covering driven rally mid-session (please see chart on 12:58ET comment). Even as, on the one hand, as the market fretted a bit over the inflationary aspects of oil prices, it chose to essentially disregard the possible outcome and stick close to its tight range. There are no economic releases on tap for tomorrow, but one potentially important and possible market moving event will be the weekly petroleum inventories data scheduled to be released at 10:30ET. The early Bloomberg consensus is for crude supplies to rise by 2.5M barrels in the week ended Apr 1 (please see chart on 13:31ET comment). The market will also be waiting for comments by Greenspan who will be testifying at 9:30ET on the regulatory reform of government sponsored enterprises (Freddie and Fannie) before the Senate Banking Committee. The potential for GSE regulation may disrupt the markets as caps on the groups activities may become a reality. The 10-yrs are currently -03/32nds yielding 4.468%.

10:28AM Software Sector Weakness : Following warnings from more than a half-dozen Software cos yesterday, Software group is under pressure today with Software Index down 0.7%. Names under pressure that did not issue warnings include: SNPS -4.7%, QSFT -4.6%, SRNA -4%, MCRS -3.3%, CDN -3.2%, RHAT -2.8%, SEBL -2.3%, ISSX -2%, WBSN -2%, MSTR -1.8%, MACR -1.6%, COGN -1.6%, ADSK -1.4%, BOBJ -1.4%, MERQ -1%, ADBE -0.8%... See 08:09 update for related commentary

10:03AM Altair Nanotechnologies and Bateman Engineering announce joint venture (ALTI) 4.22 +0.13: Co announced that it has signed a binding memorandum of understanding with Bateman Engineering BV to form a strategic joint venture. The new venture, "Altairnano-Bateman Titania, Inc." will leverage ALTI's proprietary and patented titanium dioxide pigment manufacturing process and Bateman's engineering expertise to focus on the worldwide development and manufacture of pigment products and services.

9:22AM Gapping Down : Gapping down on lowered guidance: RSAS -23% (also RBC downgrade; Raymond James downgrade), VNWK -20% (also Kaufman downgrade), MENT -19% (also Merrill downgrade; Wells Fargo downgrade), NMSS -18%, CIPH -23%, ATRS -10%, PLCM -7% (also First Albany downgrade; WR Hambrecht downgrade), MONE -7% ... Other News: FBR -20% (co-CEO to retire), ARTX -14%, NAVR -12% (downgraded to Source of Funds at ThinkEquity), ATPL -4.3% (continues yesterday's 11% drop), MWD -2% (Lehman downgrade).

9:07AM Gapping Up : Gapping up on strong guidance: NAPS +17%, SCUR +13%.... Other News: NVEC +12% (notified by the PTO of expected grant of key biosensor patent), MOBE +12% (receives equity investment from RSH, MOT), CTIC +9% (completes enrollment of NCI cooperative group Phase III trial of Trisenox), TIVO +7% (gets new advertisement deal with DirecTV), KOSN +7% (clinical trial update), STSI +4.8%, JCOM +4.3% (started with a Buy at Kaufman; tgt $46), ALTI +3.4% (extension of 14% move yesterday), EZPW +3.4% (extension of 13% move yesterday), TZOO +3.2% (bounces after 5% drop yesterday), NGPS +3.1%, GOOG +1.5% (Lehman upgrade).... Under $3: ANCC +14% (gets $1.6 mln contract), TGAL +14% (receives order), NTOP +10% (signs five year contracts w/ two broadband service providers; upgraded to Buy at Stanford; tgt $2.50).

1:43PM Fortune Brands Inc (FO) 84.25 +0.92: Fortune Brands and Pernod Ricard SA of France are in talks to buy Bristol-based Allied Domecq, the world's second largest liquor maker. The company, which has a market value of USD$13 bln, said it was in talks about a potential offer with the companies, but would not disclose details. The deal would double US sales for both companies adding brands including Malibu rum and Beefeater gin to their portfolios.

The purchase will give Pernod and Fortune the ability to better compete with the world's largest beverage company, Diageo Plc (DEO). The deal was not a big surprise with regard to Pernod, which is the third largest beverage company in the world, after it announced last month it had hired JP Morgan and Morgan Stanley to look into possible acquisitions. The deal could be structured several different ways including all three companies operating under one umbrella, or Pernod and Fortune could parcel out brands like Pernod and Diageo did back in 2001 when they jointly bought Seagrams. For Pernod, the attractiveness of Allied is its wine portfolio adding to its already successful Jacobs Creek brand. According to industry analysts, the deal would not increase competition for Constellation Brands (00C), which operates as small player in the spirits business and as the leader in the US wine market.

Fortune Brands is a well diversified consumer products company, which actually derives the majority of its revenues from its cabinet and faucet businesses including Aristokraft and Moen, respectively. By virtue of its scope of products from Home & Hardware, Golf, Office to Spirits & Wine, FO is a barometer for consumer spending trends. The Spirits & Wine business, which includes Jim Beam bourbon brand, accounts for just over 20% of sales. But this business is garnering renewed attention due to increased share gains and strong trends so far this year. A possible deal will only add to the momentum. This business is also highly profitable generating operating margins of 27% vs. overall at 17%. As such, even though revenues are only 20%, it makes up almost 30% of profits. Revenues rose 7.2% in FY04.

Earnings momentum remains quite positive, as the company has topped consensus estimates for the last eight consecutive quarters. It reports Q1 on April 21st before the open with consensus EPS of $1.03, up from $0.91 last year. We continue to like the story due to company's strength of its brands and breadth of products, combined with Fortune's large cap high quality status providing investors with low risk and long-term growth. The company is expected to achieve low double-digit earnings growth this year, which appears reasonable considering market share gains and new product launches. The risk with regard to its exposure to the housing market is already priced into shares. In addition, despite higher gasoline prices and rising interest rates, consumer spending still underpins economic growth. We will have to wait and see how this potential deal works out. The stock is now trading at a forward price to earnings multiple of 16.0x a discount to its peer consumer companies. ----Kimberly DuBord, Briefing.com
1:32PM Shaw Group (SGR) 22.06 -0.11: The Baton Rouge-based industrial company reported its Q2 results after Monday's close, topping estimates by two pennies. Shaw's businesses reach across many industries worldwide as a supplier of fabricated piping systems and construction services for the electric power, chemical, petrochemical, and refining industries. Earnings for the quarter came in at $9.7 mln, or $0.15 per share on revenue growth of 10.8% year/year to $763.5 mln. Revenues were a bit lighter than consensus estimates. Despite the beat, shares traded down in the after-market by 1.1%.

Shaw's backlog was down sequentially totaling $5.1 bln at the end of the February, 46% of which is expected to be converted during the next 12 months. Despite what the company calls strong momentum, the downward slope is a concern. Half of the backlog is within the environmental and the infrastructure sectors for Federal government agencies and commercial entities. About 35% of the work is for nuclear and fossil fuel power plants with another 13% attributed to chemical process industry facilities.

We recently wrote on the cyclical upturn in the chemical industry last week Wed, which Shaw benefited from this quarter. Management noted today a marked increase in activity pertaining to the recovery of the energy and chemical markets boosting revenues. Even though the company does operate worldwide, almost 85% of the top line is generated in the US with the next closest region being Asia at 8%. Gross margins were 9.2%, up 40 basis points year/year. The company announced it would sell 12.5 mln common shares using the proceeds to fund a tender offer for its 10.75% senior notes due in 2010 in order to delever the balance sheet and reduce borrowing costs. Shaw also noted potential acquisitional possibilities should they arise.

At first glance the quarter appears to be slightly better, but when taking a closer look the quality of earnings stands out as earnings benefited from contributions from other income. In addition, Shaw's backlog continued its downward trend after peaking in Q3 of last year at $6.0 bln declining sequentially for the last three quarters to $5.1 bln in Q2. This gives rise to execution concerns and sustainability of earnings. As such, the stock appears to be fully valued trading at 27.4x forward earnings above its five-year historical average of 21.9x. Over the longer-term, its proprietary products and end-market demand within the energy, chemicals, and power generation industries should drive earnings growth.----Kimberly DuBord, Briefing.com

12:07PM Verizon (VZ) $35.90 +0.25 (+0.7%) Verizon is up today, despite the press release that seems to imply they are willing to drop the acquisition of MCI (MCIP), if the board decides the current Qwest (Q) bid is better than the current Verizon bid for the company. While we think the statement is closer to "negotiations posturing" than any change in the desire to own MCI, it is also probably true that Verizon will not again raise their bid.

The MCI board now finds themselves in a lose/lose situation, ironically. If they choose the Qwest bid, having been pressured by large shareholders that this is their fiduciary duty, they may well face intense criticism a year from now, when the combined MCI/Qwest entity is struggling financially and comes up for sale again, probably at a lower price. In addition, MCI would have to pay Verizon its $250 million termination fee ($240 million fee, plus up to $10 million legal fees). At that time, would MCI directors face possible breach of fiduciary responsibility lawsuits if VZ stock is in the $45 range while the Q stock is below current levels?

On the other hand, if the MCI board accepts the current, unrevised Verizon bid, they face criticism and possible lawsuits for having accepted a "lower bid" for the company. They are already facing that criticism for having done so twice.

It all boils down to a decision over whether the "right" thing to do should be judged by short term or long term criteria. The Verizon letter to MCI summarizes the situation succinctly: "If the MCI board, capitulating to Qwest's artificial deadline, declares this bid to be `superior,' it would seem to us that the decision-making process is being driven by the interests of short-term investors rather than the company's long-term strength and viability."

The irony, of course, is that almost everyone on Wall Street "agrees" that the Verizon bid is the better bid, despite the math that shows the Qwest bid as "higher" currently. The issue is all about how to value the stock component of each bid and virtually no one thinks that a combined Q/MCI entity would be a stronger competitor than a VZ/MCI entity. In fact, the frankness with which this viewpoint is taken tells how deeply the viewpoint is held. An AG Edwards report issued on Friday called the Qwest bid a "big nickel" and the Verizon bid "a tiny dime," echoing the schoolyard arguments that the older students make to naive first graders.

We have written about this acquisition battle numerous times over the past month, both on the Story Stocks page and the Ahead of the Curve column. From the beginning, we have made two distinct points: a) Verizon needs the MCI enterprise customer base and the internet backbone network to leap ahead in the new age of telecommunications; and, b) since both bids are more than half stock, the "future value" of the stock is more important than the current value, and the MCI board has twice affirmed that, by choosing a lower "current value" Verizon bid. Based on the fact that the MCI board has twice selected the Verizon bid over a "higher" Qwest bid, it is clear they value VZ stock more than Q stock.

It is now hard to predict what the MCI board will do, but we still the correct perspective to view $4 billion worth of stock is the long term outlook and from that perspective, the Verizon bid is the one MCI should accept. All the MCI board has to do is convince everyone else that the long term perspective is the correct vantage point. (The Ahead of the Curve column of March 29, "Verizon Wins MCI And Grabs The Future" for more details and a listing of prior related articles.) - Robert V. Green

9:34AM Page One - Nothing to Get Excited About : The modest gains yesterday have set a decent tone for today. Futures suggest a higher open.

This is still a lull time in terms of news. There is nothing on the economic calendar for today. There are no major earnings reports. Yesterday after the close, Mentor Graphics, RSA Security, and Polycom warned. This morning, Tweeter, and Ethan Allen did as well, along with a few smaller companies. The broader market has not shown concern, however, as this is normally a heavy time for earnings warnings, and this is actually not a particularly worrisome list.

Oil remains a key factor for the market this week given the dearth of other news. This morning, it is down about $0.30 on reports that Saudi Arabia might increase output, but is still hovering just below $57 a barrel. Federal Reserve Chairman Greenspan will be speaking on energy prices today at 12:30 ET at the National Petrochemical and Refiners Association.

Pfizer has a an analyst meeting starting at 9:00 ET in which it will discuss its outlook. For more on this, please see the current Looking Ahead column.

First quarter earnings reports will start up heavily next week. Until then, the market tone is likely to remain restrained.Dick Green, Briefing.com

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From Briefing.com: 4:47PM Advanced Micro announces formation of Microprocessor Solutions Sector; consolidates existing microprocessor businesses (AMD) :-Update-

4:21PM UTStarcom files 2003 10-K/A with the SEC (UTSI) :UTSIE currently anticipates filing its 10-K for the year ended Dec 31, 2004 on or before April 15, 2005.

4:18PM Advanced Micro spinning off Flash unit (AMD) 17.06 -0.17:-Update- Spansion, the flash memory venture of AMD and Fujitsu, announces it has filed a registration statement with the SEC for a proposed initial public offering of its class A common stock. The number of shares to be offered and the estimated price range for the common stock have not been determined.

Close Dow -104.04 at 10403.93, S&P -13.97 at 1173.79, Nasdaq -31.03 at 1974.37: Widespread selling, sparked by higher bond yields, disappointing retail sales data and downside guidance, closed virtually every sector in negative territory, as all the major indices lost at least 1.0%... Volatility in Treasurys again played havoc with market sentiment, except today's arguably modest swings in bonds to the downside more than erased yesterday's late-day rally in equities, which was ignited primarily by just the opposite - a bond swing to the upside...
Today, bonds initially found modest buying interest, following weaker than expected March retail sales data, but meager indirect bidder participation (28.2%) in today's $15 bln 5-year note auction knocked the benchmark 10-year note (-8/32) to session lows and yields to their highs of the day (4.38%), further strengthening a negative tone first ignited by the poor retail sales figures... The 10-year note eventually closed down 5 ticks to yield 4.37%... March retail sales rose 0.3%, but checked in well below expectations of 0.8%, while the retail sales excluding autos grew just 0.1%, also below forecasts (+0.5%), following a revised 0.6% rise a month earlier...

While the weaker than expected March data may raise doubts about the trend in consumer spending, the numbers are not expected to greatly alter Q1 GDP estimates, which currently stand at about 3 1/2%... Also weighing on the markets was an earnings warning from Harley-Davidson (HDI 48.93 -9.84), which actually beat Q1 estimates by a penny, as well as downside guidance from the likes of Compuware (CPWR 6.00 -0.81) and Foundry Networks (FDRY 9.00 -0.45), which trumped upside Q1 guidance from Merck (MRK 34.52 +0.71) and McDonalds (MCD 31.22 +0.32)... Nine out of 10 economic sectors closed lower...

Pacing the way to the downside was the Materials sector (-2.7%), amid widespread weakness in Steel, Aluminum and Paper... Energy (-2.3%) was not far behind, as oil prices fell 3.2% to a 7-week low... Crude oil futures ($50.22/bbl -$1.64) extended yesterday's 3.4% sell off, amid better than expected builds of 3.6 mln barrels (consensus 400K) and 800K barrels (analysts expected levels to remain unchanged) in crude oil supplies and gasoline inventories, respectively... Falling oil prices, however, failed to lift overall sentiment due to the growing emphasis being placed on economic data, bond yields and upcoming corporate earnings growth...

Financial (-1.4%), Consumer Discretionary (-1.4%), Industrials (-1.5%) and Technology (-1.7%) were also an influential leaders losing ground... Pacing losses in technology was Semiconductor (-2.7%), which was weak after ASML Holding (ASML 15.28 -1.03) forecasted a decline in Q2 orders and following a report that showed global sales of chip equipment fell 2.5% in Feb. - the first such decline in 19 months...

Weakness in shares of Apple Computer (AAPL 41.04 -1.62), ahead of its Q1 earnings report after the close, dragged Hardware (-1.3%) down while every other sub-sector also showed losses in excess of 1.0%... Health Care (+0.5%), however, was the lone bright spot of the day, getting a boost from Merck's upside Q1 guidance and optimism that a U.S. District Court's long awaited decision may show that the patent on Eli Lilly's (LLY 57.12 +3.30) drug Zyprexa is valid and that challenges brought by generic drug makers are without merit...DJTA -2.7, DJUA -0.7, DOT -1.6, Nasdaq 100 -1.9, Russell 2000 -1.6, SOX -2.7, S&P Midcap 400 -1.4, XOI -2.2, NYSE Adv/Dec 969/2328, Nasdaq Adv/Dec 883/2198

3:52PM Biogen Idec announces positive 1-year data from SENTINEL trial evaluating addition of Tysabri to Avonex (BIIB) 36.40 -0.30:-Update- Co announces 1-year data from the Phase III SENTINEL trial, presented at the 57th annual American Academy of Neurology meeting, demonstrated that when Tysabri was added to Avonex in patients with relapsing forms of multiple sclerosis, the annualized clinical relapse rate was reduced by 54% over the effect of Avonex alone. In addition, these data, presented for the first time at a major medical meeting, demonstrated that the addition of Tysabri to Avonex resulted in significantly fewer new or newly enlarging T2-hyperintense lesions and gadolinium-enhancing lesions than Avonex alone, and that the proportion of Tysabri/Avonex patients who remained relapse-free was significantly higher than in the Avonex group.

9:28AM JupiterResearch Forecasts Portable MP3 Player Shipments to Achieve 'Critical Mass' Reaching 18 Mln in 2005 :JupiterResearch reports that U.S. shipments of MP3 players will grow 35% to 18.2 mln in 2005 and maintain a compound annual growth rate of over 10% through 2010, reaching an installed base of 56.1 million by then, up from 16.2 million in 2004. MP3 players will reach critical mass this year, fueling demand for digital music services and stores. "Apple shows no signs of losing momentum," said Michael Gartenberg, VP and Research Director at JupiterResearch. "The iPod is a consumer phenomenon. Apple dominates this sector and will dominate portable MP3 player growth over the medium term," added Gartenberg. Mostly due to the iPod's success, JupiterResearch has raised its near-term forecast, but projects that flash-based player shipments will surpass those of hard-drive models in 2007. "Historically, any new device or medium that reaches a U.S. household penetration of 15% to 20% creates a critical mass of customers for other products and services," said David Card, VP and Senior Analyst at JupiterResearch. "MP3 players will hit that mark this year. This is good news for both digital download stores and subscription music services. Subscription services and devices will fuel each other's growth," added Card.

9:09AM Gapping Down :HDI -11% (reports Q1; beats by a penny but lowers guidance; RBC downgrade), IMCL -8.8% (Erbitux delay; multiple downgrades), CPWR -11% (guides MarQ below consensus), WTSLA -8.4% (postpones 10-K), GRA -8.4% (CL King comments that asbestos bill may not be imminent), FDRY -8% (lowers guidance; downgrades from Merrill and BofA), ASML -6.1% (reports MarQ, but sees Q2 order intake down from Q1), PCLE -5.2% (guides lower; AVID -3% down in sympathy), IMDC -4.6% (FDA panel rejects IMDC's silicone breast implant; merger partner MRX -4.7% down in sympathy), SSCC -3.1% (guides lower), SGR -2.1% (prices secondary offering).

8:55AM Gapping Up :ELN +16.5% and BIIB +2% release positive data on Tysabri.... Other News: KOSP +7.5% (co and Barr announce settlement agreements), MCD +3.2% (guides above consensus), BWNG +18% (Thomas Weisel upgrade), DECK +2.5% (RBC upgrade), MWD +1.4% (reports of more top banker resignations).... Under $3: MCEL +18% (awarded contract from US Dept of Energy), BFLY +16% (reports March sales), TBUS +11% (co provides update).

8:32AM Marvell and Fuji Electric Hi-Tech to develop PDL products (MRVL) 35.08 :Marvell announces partnership with Fuji Electric Hi-Tech to develop and market point-of-load (POL) products for digital equipment like computers, networks and consumer electronics products.

8:15AM Novatel Wireless supplies Vodafone Portugal with Quad Band PC Card Modem (NVTL) 10.42 :Co announced it has supplied Vodafone Portugal with its Merlin U630 Wireless PC Card Modem. Using the Merlin U630, Vodafone Portugal's customers can have wireless high-speed broadband access worldwide. The Merlin U630 provides wireless broadband connectivity on UMTS 2100 MHz bands in Asia, Africa, Europe and the Middle East and GSM/GPRS 900/1800/1900 MHz bands across the globe. The Vodafone Mobile Connect Card enables remote workers to send and receive emails with large attachments, access the Internet and download files at speeds up to 384 kilobits per second.

4:01PM The Industrial Sector (OPENX) The Industrials sector of the S&P 500 has declined 6.3% year-to-date, after enjoying strong upside gains throughout 2004. We remain committed to our Overweight rating as stocks continue to look attractive due to their leverage to US economic growth, earnings momentum, increase in capital expenditures, increasing shareholder value, cash flow generation, stronger balance sheets, and dollar weakness.

General manufacturing activity in the first quarter expanded at a healthy clip supporting share prices. Positive ISM readings over the past few months indicate continued strength in the manufacturing sector. Nondefense capital good shipments and orders also remain positive. Our resident economist states that "..demand for manufactured goods does not look to be showing any significant slowing in early 2005 given the end of capital investment and tax incentives." Capital spending is expected to continue to pick up steam throughout the year, as companies utilize profit growth focusing on cash redeployment. Considering the economic environment and capital investment trends, the outlook for earnings remains quite positive. Moreover, a pickup in economic growth in Europe will further support gains.

In an environment of decelerating earnings growth, the industrials still offer considerable opportunities. Standard & Poor's estimates operating earnings growth of 18.1% vs. the broader market at 10.9% - only a slightly decline from last year's performance of 20.7%. This compares favorably to larger declines in operating earnings within the Discretionary, Energy, Technology, and Materials sectors. Yet growth comes at a price. The P/E multiple for the sector is 23.1x - a premium to the S&P 500 at 19.6x.

With regard to the specific sub-groups, the Airlines remain on the sell list for investors. With a strong economy and moderate capacity growth, carriers are seeing moderate pricing gains. Nevertheless, the high cost of energy will continue to weigh on the industry. These stocks are much more of a trading vehicle used by short-term market players to hedge fluctuations in oil prices. With regard to the Machinery group, all eyes will be earnings results from the likes of General Electric (GE), Eaton (ETN), and Caterpillar (00C) for indicators of a possible peak in the cycle. If this is the case, the market's focus will turn towards margin expansion, however, high steel costs could continue to put a drag on Q1 earnings. Near historical high valuations within the Airfreight and Logistic group may restrict near-term performance.

Strong demand for raw materials including metals, agricultural products, chemicals, forest products, and coal are driving rail shipment growth. Volume growth is expected to continue with auto shipments remaining weak. As such, we remain onboard with the Rail stocks as strong demand, improving utilization, and operating rates drive prices and profits. Aerospace and Defense remains a top performing group driven by end-market demand in both industries. Although high steel costs may impact shipbuilders in the near-term like General Dynamics (GD) and Northrop Grumman (NOC).

For now, the sector remains in a holding pattern, awaiting a catalyst that could come in the form of first quarter earnings results. As of mid-April, Industrials made up 11.8% of the S&P 500. ----Kimberly DuBord, Briefing.com
11:59AM The Goldman Sachs Group (GS) $111.20 -0.56 (-0.5%) If you are looking for a reason to be optimistic about the future of the market, focus on Goldman Sachs' announcement today that they have raised $8.5 billion in a new private equity fund, 30% of which is their own capital. There is only one reason to raise this much money in a private equity fund: to buy public companies because they are "cheap."

Usually, in the lifecycle of a company's valuation, the public market represents the top of the pyramid. It is in the extremely liquid auction marketplace that the highest value for a company can usually be found. The "traditional" way to create value is to build the fundamentals of a business to the point where a percentage of the company (ideally no more than one-third) can be offered to the public market. This "traditional" route views the IPO as the ultimate "exit plan."

A private equity fund uses a completely different approach. Such a fund targets public companies whose potential value has not been achieved in the public market. For whatever reason, poor management execution, excessive operational costs, problem subsidiaries, or just plain market indifference, the fund believes taking the entire company private is the best way to build value. In most cases, the fund's managers have a clear strategic vision for increasing the value of the company within a defined time period, often just two or three years. Once the plan for increasing value has been executed, the company is then brought back to the public market (or sold to an acquirer), where the fund expects the increased value to be both obvious and rewarded.

You could argue that any company purchased by a private equity fund ought to be undertaking the exact same strategic plan to increase value that the fund intends to take. Sometimes, however, the current management has no incentive to undertake such a risk, even if they see the same potential. In other cases, the fund's strategic plan may not be immediately obvious to outsiders. Each individual acquisition by a private equity fund is unique and the plan for creating value will be different for each target.

However, there is one "macro-level" principle that drives the creation of a private equity fund: the perception that the public market is not currently creating maximum value for shareholders. It is the purest application of the "buy low, sell high" mantra.

Why should this be encouraging for the rest of us? The market has gone nowhere this year, and last year's returns came only in the fourth quarter. For the past five quarters, four have been either flat or down. It would be extremely discouraging if the reason for this was eroding business fundamentals or declining GDP, because there is often nothing an investor can do about that. But the creation of Goldman's private equity fund, and particularly its size, implies that the reason for poor market performance lies with the market itself, not the underlying business potential of the future.

The creation of large private equity funds like Goldman's just means that Wall Street would rather buy public companies from you than sell a private company to you. Although it takes courage to keep looking for new investments while the overall market goes nowhere or heads down, the optimistic interpretation is that now is the time to start looking for undervalued stocks whose underlying business potential is still extremely good. That's what Goldman Sachs will be doing with their $8.5 billion. - Robert V. Green

10:56AM Harley-Davidson Inc. (HDI) 49.20 -9.57: It must be the thunderous cacophony emerging from a gleaming tail pipe that overpowers everything in its path that continues to attract riders to Harley's bikes. Well, actually, it's all that Harley-Davidson stands for quality, passion, and creating an unforgettable experience of motorcycling. This Milwaukee, Wisconsin-based company dating back to 1903 reported its Q1 guidance a penny ahead of expectations. Although, this was not a big surprise considering the company always beats expectations. The last time it only matched consensus was in the third quarter of 1998!

However, considering this success rate, shares are likely to suffer severe selling pressure after the company cut its FY05 guidance. Shares are already down over 7% in the pre-market. It now forecasts 5-8% growth, down from its previous guidance of mid-teens level growth due to weaker than expected domestic retail sales.

CEO Elect Jim Ziemer said due to weaker Q1 sales we feel it's prudent to limit short-term production growth, maintaining demand in excess of supply. As such, it now estimates shipments of 329,000 units, down from its previous target of 339,000. With 77,000 units shipped in the second quarter, 87,500 units in the third quarter, and 87,500 units in Q4. The revised shipment guidance represents 3.4% growth from 2004. Harley maintained its long-term unit growth projection of 7-9% per annum along with its earnings projection of mid-teens growth over the longer-term.

Even though the upside in earnings is likely to take a back seat to guidance, let's take a look at the quarter. The company reported earnings of $227.2 mln, or $0.77 per share up 13% from last year's period. On the top line, revenues rose 6.0% year/year to $1.24 bln, vs. the $1.23 bln consensus. Total shipments were 76.7k units - up 3.5% y/y.

Worldwide sales of motorcycles rose 2.8%. Growth was heavily weighted overseas with Europe and Japan up 20.6% and 10.6%, respectively. As a result, HDI benefited from currency gains for the quarter. US sales were down slightly. Sales in Parts & Accessories totaled $176.9 mln, up 4.6% y/y. Its Financing arm (HDFS) record $730 mln in loans, realizing a gain of $19.2 mln down from $25.2 mln last year. Credit losses grew slightly to 1.07% from 0.77% in 2004. Citing higher rates and a competitive environment, Harley expects HDFS income to be slightly lower y/y.

Gross margins for the motorcycle segment was 37.6% roughly flat with last year of 37.8%. The company noted cost pressures due to higher materials, primarily metal surcharges, On an operating level, margins rose 130 basis points to 24.2% due to lower costs.

Harley's success is built on the strength of its brand name worldwide. Historically, the second quarter is seasonally a strong period as warmer temperatures and spring fever lures consumers back into showrooms. Yet during its conference call, HDI said it expects earnings to be below last year of $0.82 vs. consensus of $0.92. According to industry analysts, dealers are confident in their sales projections for Q2 driven by new models including the 15th anniversary of Fat Boy and the new Street Rod and Sportster. So we will have to wait and see how sales trends shape up. Shares are trading near the bottom end of its historical range at 17.4x. For longer-term investors able to ride out near-term volatility, HDI represents a solid growth story at discounted valuations.----Kimberly DuBord, Briefing.com

9:20AM Page One - Whipsaw Risks : Treacherous - dangerously unstable and unpredictable. Whipsaw - to cause to move or alternate rapidly in contrasting directions. These two words define current market conditions. If you are looking to play short or intermediate-term moves in this market, you had better be ready to move quickly, and to watch the charts.

Since we went to a neutral stance on January 7 with the S&P 500 at 1190, the market has stayed in a fairly narrow trading range. Yesterday, it closed at 1188. That's fine, but the action within that trading range has been very volatile at times. Yesterday was one of those times.

The stock market was lower in the morning on fears that the minutes of the March 22 FOMC meeting would reveal heightened concerns on the part of members about rising inflation. It did. Yet, the stock market rallied sharply. It can be argued that there was good news in that the minutes implied that the Fed was not about to raise rates 50 basis points, but we're not buying it.

The minutes stated that the required amount of cumulative tightening may have increased, members noted that an accelerated pace of policy tightening did not appear necessary at this time. This implies that the Fed sees the fed funds rate settling at a higher neutral rate than they previously did, although they aren't prepared to raise rates more rapidly. That ultimately means higher interest rates. It is not good news, in our opinion.

The market rally reflected short covering, and perhaps some relief that the potential bad news is in the past. But it wasn't good news. This highlights what we have been saying for a couple of months - there is a significant risk of getting whipsawed under current conditions. There is no clear trend to play. The market is reacting to chart points and technical analysis as much as to fundamental news, if not more so. For all but active day traders, this is a very treacherous market. Most long-term investors should stay on the sidelines, hold their long-term positions, and wait for a better chance to ride a clear trend.

This morning stock futures indicate a slightly weaker open. After the close yesterday, Foundry Networks and Compuware warned. That's not too bad. This morning, Harley Davidson beat earnings estimates by a penny, and BB&T (a bank) reported in line. Oil is down another $0.40 this morning to about $51.50. It dropped sharply yesterday afternoon, but that was after the rally started, so it played only a supporting role.

March retail sales were reported to have risen 0.3%, and ex-autos the increase was just 0.1%. The data are slightly disappointing and, while not dramatic by any means, will raise some doubts about the trend in consumer spending. The 10-year note rallied yesterday, pushing the yield down to 4.36% this morning. There are a large number or earnings reports tomorrow, and many more next week. --Dick Green, Briefing.com

[ReturntoSender]

From Briefing.com: 4:41PM Texas Instruments beats by $0.01, issues in line guidance (TXN) 22.92 +0.16:Reports Q1 (Mar) earnings of $0.24 per share, $0.01 better than the Reuters Estimates consensus of $0.23; revenues rose 1.2% year/year to $2.97 bln vs the $2.99 bln consensus. TXN reports gross margin 44.9% vs 44.3% street expectations. Co issues in line guidance for Q2, sees EPS of $0.25-0.29 vs. $0.26 consensus; sees Q2 revs of $3.00-3.24 bln vs. 3.18 bln consensus. TI inventories declined slightly from Q4, a period in which they were significantly reduced by $100 mln. "The market environment is improving. We believe the inventory correction in TI's standard semiconductor products at distributors that began in the third quarter of 2004 is complete, as demonstrated by sequential growth in revenue and orders for these products. We expect that the inventory correction associated with our DLP products used in high-definition televisions and projectors will continue into the second quarter, although the rate of reductions should subside,"

4:13PM Novellus reports in line EPS, beats on top line (NVLS) 24.30 +0.52:Reports Q1 (Mar) earnings of $0.22 per share, in line with the Reuters Estimates consensus of $0.22; revenues rose 29.2% year/year to $339.7 mln vs the $335.8 mln consensus. NVLS reports gross margin 45.3% vs 47.2% Street expectations. "The business environment is challenging but we remain cautiously optimistic that capacity expansion will continue in a rational manner. We are comfortable with our product portfolio and continue to improve upon our position within the PVD product category."

4:11PM Sonus Networks guides Q1 below consensus (SONS) 3.67 -0.06:Co issues downside guidance for Q1 (Mar), sees revs of $30-$34 mln vs. $41.23 mln consensus. Co expects to report a net loss vs consensus of $0.01 profit. Co says "We are disappointed that our revenue is lower than anticipated. The revenue shortfall is due to schedule delays for the conversion of certain shipments to revenue and the late renewals of several annual maintenance contracts....While we expect to recognize revenue below our previous outlook, our business continues to be strong with robust order activity in the quarter that is expected to result in an order to revenue ratio that is modestly below 2. This follows our record order activity in Q4. I am pleased with the healthy demand for our next-generation packet voice solutions both in wireline and wireless networks, and the expanding number of service providers that have adopted Sonus solutions."

4:08PM Trident Microsystems reports in-line, ex items; revs below consensus (TRID) :Reports Q3 (Mar) earnings of $0.03 per share, excluding non-recurring items, in-line with the Reuters Estimates consensus of $0.03; revenues rose 4.9% year/year to $16.1 mln vs the $16.6 mln consensus.

Close Dow -16.26 at 10071.25, S&P +3.36 at 1145.98, Nasdaq +4.77 at 1912.92: Market closed in mixed fashion, as investors juggled economic concerns with mixed Q1 earnings reports and new M&A activity... Both the S&P and Nasdaq posted modest gains on the day, but not even strength from roughly two-thirds of the Dow's 30 components were enough to shrug off a thrashing in shares of 3M Company (MMM 75.90 -4.96)...
While the conglomerate actually beat analysts' Q1 forecasts by $0.02 and issued in-line FY05 guidance, lower than expected sales due to slowdowns in Europe and Japan - similar in scope to the reason IBM disappointed investors last Friday - as well as concerns about organic revenue guidance, kept the blue chip index under pressure throughout most of the day... However, today saw a slew of new deals hit the wires which helped lend some support to a market concerned about slowing economic growth... The two most notable deals of the day included Adobe Systems' (ADBE 54.77 -5.89) proposed $3.4 bln acquisition of Macromedia (MACR 36.72 +3.27) and GameStop's (GME 23.71 +2.10) plans to acquire Electronics Boutique (ELBO 55.21 +14.09) for $1.4 bln...

Meanwhile, better than expected results from the remainder of today's reports, coupled with the merger news, some notable rating changes and arguably oversold conditions following an average 3.8% trouncing for the major indices last week, helped eight out of ten economic sectors close to the upside... Pacing the way higher amid renewed buying interest after losses of 10.0% and 7.7% over the last three trading sessions, were Energy (+1.8%) and Materials (+1.5%), respectively...

The latter got a boost from huge gains in Steel (+5.7%), Gold (+2.7%) and Diversified Metals (+2.9%) while energy shrugged off a modest decline in crude oil prices ($50.37/bbl -$0.12) and benefited from strength in Oil & Gas Refineries (+2.9%)... Financial (+0.8%) was also an influential leader to the upside, following Banc of America's (BAC 44.70 +0.42) better than expected Q1 earnings and an upgrade on JP Morgan (JPM 34.45 +0.52)... Technology also traded higher, as a strong performance in Semiconductor (+0.8%) - following analyst upgrades on Applied Materials (AMAT 14.86 +0.36) and Intel (INTC 22.21 +0.09) - offset weakness in Software (-0.6%) and Hardware (-0.5%)...

Health Care (-0.8%) and Consumer Staples (-0.5%), however - two of the only sectors attracting buyers last week - became today's only notable laggards... Health Care succumbed to modest profit taking in everything from Health Care Facilities (-2.9%) and HMOs (-2.3%) to Drug Wholesalers (-2.3%) and Pharmaceutical (-0.7%)... Not even upbeat analyst comments and stronger than expected Q1 results from Eli Lilly (LLY 59.00 +0.93) were enough to lift Drug stocks...

Providing a modest boost to equities midday were comments from Fed Governor Bies, who said longer-term inflation expectations remain "well contained" and that consumer and business "confidence remains favorable" - remarks that improved overall sentiment in stocks but took some steam out of Treasurys... Following the news, the benchmark 10-year note (-4/32) gave up modest gains and eventually closed lower to yield 4.25%, even though traders had no notable economic data to sift through today...DJTA +0.7, DJUA +0.6, DOT +0.4, Nasdaq 100 +0.1, Russell 2000 +0.8, SOX +0.8, S&P Midcap 400 +0.6, XOI +1.5, NYSE Adv/Dec 1951/1342, Nasdaq Adv/Dec 1528/1543

11:36AM Floor Talk: Dividend Plays :In light of recent market weakness and coming seasonally slow period for the equity markets, talk of dividend paying stocks as a place to hold cash has been increasing. The following is a list of co.'s that may benefit as investors seek dividends/place holders: T, ABS, BBT, BNG, BMY, CG, CIN, C, CMA, ED, DCX, DD, FJC, KEY, MYG, MRK, NOK, NHY, POM, PTR, PCL, PGN, SBC, SNY, SLE, STO, UL, WM, BSET, FITB AND WDFC.

11:18AM Coca-Cola confirms settlement with SEC and decision by Dept of Justice to close its investigation (KO) 41.09 -0.19:Under the settlement, the co has agreed to maintain certain measures that the co implemented prior to or during the last two years and to undertake additional remedial actions in the areas of corporate compliance and disclosure. The settlement does not involve a monetary fine or penalty. In addition, the co was also informed that the Department of Justice has decided to close its investigation.

10:47AM Sirius Satellite confirms Martha Stewart agreement (SIRI) 5.28 +0.13:-Update- SIRI and MSO announce an exclusive 4-year agreement to create and launch a Martha Stewart-branded satellite radio channel. The channel will provide original programming specifically designed for women listeners and their families, 24-hours-a-day, seven days-a-week.

9:21AM Gapping Down :NRMX -21% (announces clinical results of Fibrillex), PRXL -20% (guides lower; Baird downgrade), INGP -12% (Nasdaq poised to purchase Instinet - FT), ADBE -6.8% (to buy MACR), BIOI -4.4%, BEAS -4% (Smith Barney downgrade), CHKP -3.7% (reports Q1, guides in-line), ANTP -3.1% (extension of Friday's 25% drop), GME -2.8% (to merge with ELBO), XRX -2.7%... Under $3: VNWI -9%, ATML -6% (guides lower).

9:05AM Gapping Up :CVTX +15% (meets primary endpoint in approval-enabling ERICA study; First Albany upgrade), PACT +12% (reports Q4), MACR +15% (to be acquired by ADBE), TIVO +7% (CNET reports that co in talks with GOOG and YHOO re possible merger), ONXX +6.7% (clinical data), CEGE +6.6% (clinical data; mentioned in Barron's), SANM +5.8% (Morgan Stanley upgrade), WGAT +5.5%, POTP +5.5% (positive clinical data), TZOO +4.2% (Legg Mason upgrade), GLW +4.1% (guides higher; up in sympathy: CIEN +3.1%, JDSU +2.7%)... Under $3: TMTA +21% (guides higher), PPHM +13% (clinical data), ACPW +12% (upgraded to Top Pick at RBC; tgt $6), ADSX +5.6%.

8:32AM Gamestop announces merger agreement with ELBO; expects to be 'significantly' accretive in 2H05 (GME) 21.60 :GameStop Corp. (GME) and Electronics Boutique Holdings Corp. (ELBO) announced that they have entered into a definitive agreement and plan of merger. The combined company, to be named GameStop Corp., will be a leading global video game retailer with annual revenues of approximately $3.8 bln. Under the terms of the agreement, ELBO shareholders will receive $38.15 in cash, plus the equivalent of 0.78795 shares of GME Class A common stock for each share of ELBO. Based on the closing price of GME's Class A common stock of $21.61 on Friday, 4/15, the stock component of the per share merger consideration is $17.03. The total merger consideration per share of $55.18 represents a 34.2% premium to the closing price of Electronics Boutique's stock as of Friday, April 15, 2005. The total transaction value is approx $1.44 bln with consideration consisting of approx 70% cash and 30% common stock. GME intends to fund the cash portion of the transaction through the issuance of $950 mln in senior bonds and excess cash. This transaction is expected to be significantly accretive to GameStop's fully diluted earnings per share in the second half of fiscal year 2005, and in fiscal years 2006 and beyond. The combined company expects to realize meaningful pre-tax synergies beginning in fiscal year 2006.

8:11AM Corning trades up 7.6% in pre-market on guidance (GLW) 11.10 :-Update-

1:07PM Bank of America (BAC) 44.60 +0.32: The third largest bank in the US reported earnings Monday before the open topping estimates through growth on the consumer banking side, along with its acquisition of FleetBoston Financial. Excluding merger and restructuring charges of $75 mln after tax, earnings were $1.16 per share up 18% from the fourth quarter and $0.19 better than the Reuters Estimates consensus.

The results were a bit lumpy with EPS including $659 mln in securities gains for what it called "repositioning for interest rate moves," tacking on an additional dime. In addition to another five cents added from loan loss reserve releases of $309 mln. Revenues soared 46.4% year/year to $14.2 bln vs the $13.8 bln consensus. Volume growth in loans and deposits generated a 1.5% rise in net interest income up 2% q/q. Core deposits rates were up less than its peers up 11 basis points.

Loans grew 2% q/q with BAC noting "equal strength in commercial and consumer," which is a good sign. On the consumer side, which makes up 63% of its total loan portfolio, home equity (+29%), and credit cards (+13%) made up the bulk in loan growth, although mortgages were roughly flat. Commercial activity was "broad-based" up 7% on an annualized basis from last quarter. Overall credit quality improved, albeit higher credit activity increased card losses.

Non interest income increased 3% q/q on higher trading profits and mortgage banking. On the downside were seasonal declines in consumer credit card income and services charges resulting from seasonal shopping patterns. Investment banking was a weak spot for the quarter, with IB-related assets up 3% on an average basis and fees falling 22% reflecting lower market activity. However, a volatile market helped with trading-related revenues, which were up 74%. While assets under management were $433 mln, down due to market declines and outflows.

On the expense side, non interest expenses, excluding merger and acquisitions, dropped 2%. Its efficiency ratio was 49%. BAC was able to reduce costs across the board with the exception of personnel (+5% q/q). With regard to its merger with Fleet, BAC stated its cost savings are on track reaching $43 mln in Q1 with a run rate of $437 mln.

Overall, it was another solid quarter from Bank of America. The upside was generated on the trading side, in addition to net interest income and continued expense controls. Loans, credit, and market-related activities were also better, offsetting weaker investment banking. Shares remain cheap as investors shy away from the Banks with interest rates on the rise. Performance will continue to be less about earnings and more about the markets' perceptions towards the Financial sector. We expect the group to regain some allure after rates steady. The stock is roughly flat since the beginning of the year after peaking last month now trading at 12x, vs. its peers at 13.2x. -----Kimberly DuBord, Briefing.com
1:02PM Trading Call of the Week -- W.R. Hambrecht's Hutchinson on FDRY ($8.68) and XXIA ($16)

A belated Trading Call of the Week goes to Ryan Hutchinson, analyst with W. R. Hambrecht, who demonstrated his knowledge of the networking industry with a fabulous note he put together on Foundry Networks.

Hutchinson went out on April 5, telling shareholders to beware of weakness in FDRY’s federal business, which makes up about a quarter of the company’s revenue. He noted that a preannouncement at Polycom, maker of videoconferencing devices, foretold of possible warning at FDRY for the same reason.

Sure enough, Foundry shares fell as much as 9% last Wednesday, following its profit warning, which the company attributed to weakness in both federal government orders and sales to North American business customers. Foundry’s stock has slipped more than 10% to-date since Hutchinson’s note.

Following his call, we wanted to know what other networking names Hutchinson was eyeing in the short-term. He told us he’s closely watching Ixia (XXIA), provider of high-speed performance testing and analysis systems for networking and communications equipment. Ixia’s products are used in the design, manufacturing and quality assurance stages of network equipment development.

Ixia has been a high-flier over the past eight months, rising to more than $19 a share in March, up from less than $6 a share in August. Yet the stock has sold off in recent weeks, and is now below $16 and under its 50-day moving average, due to worries about customer spending.

Recent warnings from Foundry and Extreme Networks (00C0), a customer and a past customer, respectively, seem to have reinforced shareholders’ worries about XXIA. Hutchinson says some shareholders are trying to “connect the dots,” thinking that the preannouncements mean XXIA’s revenue will be weak when it reports results on April 21.

Yet Hutchinson notes that XXIA’s revenue is dependent on the research and development budgets of networking-equipment customers, not their earnings. And he says that the R&D budgets of those customers have either stabilized on increased in recent quarters. He adds that new protocols in the industry (voice-over Internet protocol, a move from Internet protocol v. 4 to v. 6, and others) continues to drive a need for more testing equipment – and that XXIA remains the largest test and measurement provider.

Hutchison told us late last week that he expects XXIA to report another “record quarter”, and that subsequently, the stock should show upside from its current price, near $15.75.

We at Briefing.com think we would still only own XXIA with a stop-loss (perhaps somewhere around $15), just in case Hutchinson’s theory doesn’t play out. It’s not that we’re passing judgment on Hutchinson’s idea, it’s just that it can be more volatile than usual to trade stocks just ahead of earnings reports, and it's a good idea to take precautions – Mike Tarsala, [e-mail].

10:34AM Macromedia (MACR) $36.60 3.15 (9.42%) Adobe's (ADBE) acquisition of Macromedia is yet another strong confirmation that the enterprise software market is well into the consolidation phase. The acquisition premium for Macromedia could be viewed as "not all that high," particularly in light of the 60% premium that Computer Associates paid for Concord Communications just 10 days ago. Nevertheless, when a $13 billion company whose earnings growth forecast is 9% buys a $2.5 billion company whose earnings growth forecast is 27%, it is a pretty strong indicator of a consolidation phase.

At first glance, it seems like Macromedia's acquisition price is a little on the "cheap" side, given the small market premium. However, if the deal is deemed to be a tax-free stock swap (the announcement is mute on the subject), it provides an added benefit to MACR shareholders. In addition, considering that MACR traded at the $20 level just six months ago, this looks like a good exit plan.

Much is being made about how this combination might threaten Microsoft's dominance of the desktop document world. While that is possible, the bigger implication that investors should consider is how the entire landscape of the enterprise software world is changing. Although a lot of very large acquisitions have been made since the Oracle victory in court allowing them to have Peoplesoft, there are more to come. In fact, we are probably still in the first quarter of this major league game.

That means the more important forward looking issue is not how ADBE/MACR battles MSFT, but: who does this acquisition motivate to move faster? You can bet that at this very moment, there are a dozen or more conference tables crammed with management teams trying to figure out how to remain strong. There are also investment bankers on the phone trying to inject their own ideas into those discussions. A certain level of frenzy is now beginning and it is very possible that the best action in the market between now and August will be the enterprise software acquisition plays.

Here are just a couple of first thoughts on "who's next." At the tools level, Symantec/Veritas merger needs to add more muscle to their product suite, even though they haven't closed their own merger yet. Infosys (INFY) also needs to become stronger horizontally. Computer Associates' (CA) acquisition of Concord Communications is probably one a first step. IBM might even try to turbo-charge their stalled growth engine by more software acquisitions. Appetizing small fish for that crowd probably includes Mercury Interactive (MERQ), Citrix (CTXS), Compuware (CPWR), Tibco (TIBX), or Progress (PRGS).

At the application level, the acquirers are likely to be the large cap companies with minor presence in applications. Oracle (ORCL) is the best example, but they won't be the last tools company to buy their way into the more valuable application level. Our picks for the best targets at the application level were made in the Ahead of the Curve series of articles after the Q1 results reported in January/February. See the Briefing.com Ahead of the Curve column of 23-Feb-05 Ent. App. SW Acq. Candidates VIII: Update on Picks, for the details, including the methodology used to select them.

Two years from now, the enterprise software market will look completely different. Instead of the more than 200 companies of all sizes today, the remaining players will probably number around 50. Of those, only the top dozen or so will have meaningful market share. Now that this vision is sinking in, the possibility of a real frenzy developing between now and the fall is very high. Fortunately, there are still a lot of good acquisition candidates out there - we'll profile some more in upcoming articles. - Robert V. Green

8:51AM Page One - Bad, but not Horrible, as Economic Concerns Are Overdone : Stock futures were down sharply early this morning. They have come back as the open approaches. A near flat open seems likely.

Last week, concerns about a slowdown in economic growth intensified. Consumer spending, manufacturing output, and payroll growth all slowed in March. Yet, this doesn't mean the end of the world.

There are always bumps in any economic recovery, and the economy has been growing so strongly for so long now that investors are overreacting to any signs of weakness. Real GDP growth has averaged 3.1% since 1970. The economy probably slowed to a pace equivalent to that in the first quarter. Yet, that hardly means a recession is around the corner.

One month of sluggish consumer spending does not mean that the decades-long uptrend is suddenly over. A similar fear developed last summer, and the stock market dropped significantly. But consumer spending returned to a steady uptrend within a couple of months. There is no reason so suspect that consumer spending will suddenly stop in its tracks now.

Business investment will also support economic growth. Corporate cash flow is simply too strong. Real GDP growth will slow over time in response to higher rates, but the Fed will guide it towards its long-term trend rather than below it.

That will eventually lead to a market opportunity for investors. It may not be for a while, but with the price/earnings multiple on the S&P 500 at just 16.5 for operating earnings through the first quarter, a steadying in the economic outlook in a few months will make valuations appealing.

The news this morning shows that all is not bad. Earnings numbers from major companies such as 3M, Bank of America, Sun Trust, and Eli Lilly all beat expectations. Oil prices have dropped below $50 a barrel (good news no matter what some bears would have us believe). Briefing.com has advocated a defensive posture for months, and we still feel that way. The market could slide even further. But the bad news is overemphasized right now, and this too will eventually change.--Dick Green, Briefing.com

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From Briefing.com: 5:09PM GSI Lumonics issues downside guidance (GSLI) 8.22 -0.18:Co issues downside guidance for Q1 (Mar), sees EPS of $0.00 vs. $0.10 Reuters Estimates consensus; sees Q1 (Mar) revs of $64.0 vs. $72.16 mln consensus.

4:53PM Conexant reports in line, guides for Q3 (CNXT) :Reports Q2 (Mar) loss of $0.08 per share, excluding non-recurring items, in line with the Reuters Estimates consensus of ($0.08); revenues fell 30.4% year/year to $169.7 mln vs the $161.5 mln consensus. Co issues mixed guidance for Q3, sees loss of $0.05 vs. ($0.05) consensus; sees Q3 revs of $190 mln vs. $179.73 mln consensus.

4:50PM JDS Uniphase reaffirms Q3 guidance of -$0.02 in EPS and $155-$165 mln in sales (JDSU) :-Update-

4:40PM Power Integrations beats by $0.03; guides in-line (POWI) :Reports Q1 (Mar) earnings of $0.15 per share, $0.03 better than the Reuters Estimates consensus of $0.12; revenues rose 0.7% year/year to $34.4 mln vs the $32.1 mln consensus. Co issues in-line guidance for Q2, sees EPS of $0.12-0.15 vs. $0.14 consensus.

4:29PM hi/fn misses by $0.04 (HIFN) :Reports Q2 (Mar) loss of $0.06 per share, $0.04 worse than the Reuters Estimates consensus of ($0.02); revenues rose 25.9% year/year to $13.1 mln vs the $12.6 mln consensus.

4:25PM Motorola beats GAAP consensus by $0.09, issues upside guidance (MOT) 14.93 +0.21:Reports Q1 (Mar) GAAP earnings of $0.28 per share, $0.09 better than the GAAP Reuters Estimates consensus of $0.19; revenues rose 9.7% year/year to $8.16 bln vs the $7.72 bln consensus. MOT reports gross margin 32.7% vs 33.3% Street expectations. Co issues upside guidance for Q2, sees EPS of $0.23-0.25 vs. $0.22 consensus; sees Q2 revs of $8.30-8.50 bln vs. 8.07 bln consensus.

4:13PM Qualcomm beats by $0.02, issues downside guidance (QCOM) 33.21 +0.41:Reports Q2 (Mar) earnings of $0.29 per share, $0.02 better than the Reuters Estimates consensus of $0.27; revenues rose 13.6% year/year to $1.37 bln vs the $1.4 bln consensus. Co issues downside guidance for Q3, sees EPS of $0.24-0.26 vs. $0.28 consensus; sees Q3 revs of $1.26-1.36 bln vs. $1.46 bln consensus. Co issues downside guidance for FY05, sees EPS of $1.10-1.14 vs. $1.16 consensus; sees FY05 revs of $5.5-5.7 bln vs. 5.9 bln consensus.

4:03PM QCOM sees Q3 EPS $0.24-$0.26, vs $0.28 consensus :

4:20PM : Stocks finished lower across the board, as strong earnings failed to quash renewed inflation fears... While yesterday's encouraging core-PPI figure mitigated inflation fears, subsequently sparking a rally in stocks, today's higher than expected 0.4% rise in core-CPI - a better gauge of underlying inflation - reignited the possibility that the Fed may raise rates at a faster than measured pace (i.e. in 50 bp increments), preventing any sort of follow through for equities... The overall March CPI was up 0.6% (consensus +0.5%), the largest increase since last October...
Further highlighting concerns about the economy and weakening overall market sentiment was the 2:00 ET release of the Fed's Beige Book, which showed that "upward price pressures have strengthened" and that "high energy prices were already, or could soon be, damping consumer demand," as most regions reported some ability to pass on some cost increases to consumers... On a more positive note, however, were better than expected Q1 earnings from 16 of this morning's 23 S&P companies out with results (3 matched estimates while 3 missed)...

For instance, Intel (INTC 22.69 +0.06) and Yahoo (YHOO 34.66 +1.44) posted strong Q1 earnings and upside guidance, easing concerns of slowing technology demand... Also, a huge earnings surprise and raised FY05 outlook from Caterpillar (CAT 89.42 +4.47), coupled with strong results from fellow Dow components like JP Morgan (JPM 34.90 -0.05), Altria (MO 62.91 -1.21) and United Technologies (UTX 99.55 +1.28), provided investors with some reassurance that profit growth is not waning...

But even though operating earnings for the S&P 500 in aggregate may now rise above 10%, versus previous single-digit growth expectations of about 7-8%, today's disappointing inflation data underpinned a sense of nervousness that kept all 10 economic sectors in negative territory... Energy (-2.0%) - yesterday's best performing sector - showed no follow through buying interest and became today's largest laggard even though oil prices closed to the upside... Crude oil futures ($52.44/bbl +$0.15) climbed after the Energy Dept. reported an unexpected draw of 1.8 mln barrels in weekly crude oil inventories (consensus +1.4 mln) and a larger than expected decline of 1.5 mln barrels in gasoline inventories (consensus -275K)...

Materials (-1.9%), which were strong in overnight trading following better than expected Q1 GDP growth of 9.5% in China, closed lower amid profit taking due to strong year-to-date performance and slowing economic concerns... Technology (-1.0%), one of the few bright spots earlier in the day, amid strong quarterly results from INTC and YHOO, relinquished modest gains following the release of the Beige Book... Defensive-minded groups like Consumer Staples (-1.4%) and Health Care (-1.3%) were also influential leaders to the downside...

Not even a late-day rebound in Treasurys was enough to lift interest-rate sensitive sectors like Financial (-1.4%) and Utility (-0.9%) into positive territory... While the benchmark 10-year note was down as much 21 ticks (yielding 4.29%) following the stronger than expected read on core CPI, the market managed to push higher in the face of tomorrow's Senate testimony from Fed Chief Greenspan (10:00 ET)... The benchmark 10-year note finished the day up 1 tick to yield 4.21%...DJTA -1.6, DJUA -0.9, DOT -0.9, Nasdaq 100 -1.0, Russell 2000 -1.6, SOX -2.2, S&P Midcap 400 -1.6, XOI -1.8, NYSE Adv/Dec 835/2463, Nasdaq Adv/Dec 968/2110

10:44AM Nuance technology profiled in BusinessWeek Online (NUAN) 2.85 +0.10:In today's BusinessWeek Online is an article discussing voice verification on the phone. Caller-identification technology that software maker Nuance unveiled a year ago is already used by Canadian telcom Telus and is being tested by several US-based banks and credit-card cos, says Nuance CEO Chuck Berger. It works on a simple premise: Customers make a short voice recording. The next time they call, the technology compares their live voice's range and speed with the recording. The Nuance approach can save money for call centers. Co says voice software can verify an identity in less time, for between 10-15 cents per call vs about $5 for a live agent to ask personal ID questions (name, soc sec number, birthdate etc).

10:20AM FormFactor - - Relative Strength (FORM) 23.05 +0.88: -Technical- The stock has recently broke above its first half-hour trading range at 22.80 and looks to continue yesterday's strength above its 50-day simple moving average (22.96) towards its April highs near 24.00.

1:23PM Caterpillar (CAT) $89.68 +4.73 (+5.6%) Caterpillar's results today were absolutely stunning, particularly since you rarely see fully mature, extremely large companies whose market is also mature deliver such an incredible upside surprise. Not only did Caterpillar beat revenue estimates by $1.1 billion ($8.3 billion vs $7.2 billion estimate) and deliver a 20% earnings surprise, they significantly raised guidance for the full 2005 year. The guidance is for a 16-18% revenue increase over 2004 and EPS to be up 35-45%.

The current (before today's report) estimates for CAT for the 2005 full year are: $32.3 billion (7% over 2004) and EPS of $7.32 (27% over 2004). Using the middle of the percentage range given by CAT for 2005 results in guidance of $35.5 billion for revenue and $7.88 for EPS.

In general, Caterpillar isn't thought of as a "growth" stock, particularly since the were pretty much treading water from 1998 to 2002. For the last couple of years, however, business has been good, with demand for Caterpillar products rising both domestically and globally. The report today implies that the strong market conditions that have driven Caterpillar in the last couple of years are not only not leveling off, they are getting stronger.

Caterpillar placed the drivers for their higher guidance on the strong market conditions of the industries that need Caterpillar's core product lines of heavy construction equipment and earth-movers. Caterpillar reported strong demand coming from the following industries: a) mining, where rising precious metal prices are driving new investment; b) increased capital investment by utility companies, driven by higher profits ; c) still strong residential housing demand, in both the US and other countries; d) increased profits at trucking and shipping companies being reinvested in upgraded cargo moving equipment; e) government driven infrastructure projects.

The irony at the macro level, however, is what is really interesting about Caterpillar's report today. Everything that is driving Caterpillar's healthy fundamentals is also related to everything that is worrying the rest of the stock market.

Higher oil and gas prices, viewed as an eventual damper on overall GDP growth, is driving energy company construction projects. Rising inflation fears are dampening the willingness of investors to pay a multiple for a stock, but rising inflation is also driving precious metal prices higher. That in turn is driving new mining exploration projects, using brand new Caterpillar bulldozers. The ever-increasing trade deficit is often mentioned as a deep-seated worry, but all those imports have to be shipped here and the cargo containers are off-loaded using a Caterpillar-engine-driven crane. The rising budget deficit is another black cloud looming over the economy and depressing the stock market, but some of that borrowed government money is being used to rebuild highways across the company, with Caterpillar equipment. Projects like "The Big Dig" in Boston are turning Caterpillar into "The Big Cat."

The optimistic conclusion to draw from this scenario is that there is always a way to make money in the market. It simply requires looking in the right place and with the right perspective. Caterpillar is just one example that illustrates this principle. There are many more. If the overall market conditions are making you feel pretty depressed and you are pessimistic about the future, its time to start looking from a different viewpoint. From the right angle, you can make hay whether it is sunny or cloudy. You just gotta separate the wheat from the chaff and find the right combine to reap the harvest - today the "right one" says Caterpillar on the side in bold black letters over yellow paint. - Robert V. Green
11:20AM Honeywell International Inc. (HON) 36.27 -0.23: This was a strong start to the year for the industrial company, Honeywell. The Dow component reported organic growth of 6% and expanded profitability in three of four of its businesses. The result topped estimates by two cents earning $359 mln, or $0.42 per share up 24% year/year. Growth was broad-based with the top line expanding by 4.5% year/year to $6.45 bln, vs. the $6.39 bln consensus.

Its business is heavily weighed to the Aerospace and Automation & Control segments accounting for 70% of total sales, as the world's largest maker of airplane cockpit electronics. On the Aerospace side, sales jumped 9% to $2.5 bln driven by increased parts orders from Boeing and Airbus as global flying hours and the global freight business continued to rise. The Commercial unit gained 12%, while defense and space sales rose 5%. Segment margins swelled 180 basis points to 15.1% on strong volume growth and higher enforcement, both offsetting increased IT spending. During the quarter, HON won a 10-year maintenance agreement worth up to $125 mln from Singapore Airlines. Along with a maintenance and engineering service contract for the F-15 test systems worth more than $450 mln.

Revenue in the Automation & Control unit edged up 2% to $2.0 bln due to a 4% rise in its Life Safety & Security unit. HON completed its acquisition of Novar, the British industrial holding company, on March 31th for which it paid $1.53 bln. It also just announced (4/18) the acquisition of Zellweger Analytics, which manufactures toxic and flammable gas detection systems, expected to close in the second quarter.

Transportation increased 8% to $1.2 bln with its Turbo unit up 14% due to higher diesel penetration in Europe. Its turbochargers used to increase mileage and reduce pollution on gasoline-fuel cars have enjoyed strong growth making up almost half of the new diesel cars sold in Europe. Higher raw material costs offset increased unit volumes keeping margins flat. Co noted it has been "quite successful" in restraining commodity inflation through proactive pricing and productivity gains. The Specialty Materials unit posted a strong quarter. Excluding its divested Performance Fibers business, organic growth rose 5% driven by 11% growth in Chemicals. Price increases and productivity gains were able to counterbalance raw material costs, resulting in segment margins expansion of 180 basis points to 7.4%.

Overall segment profit margins expanded 100 basis points from last year to 11.6%. HON cited strong volume conversion, pricing gains and productivity. The market is hoping operating margins will return to prior peak levels reached in the late 1990's of 20%+. Honeywell commented on its conference call that an asbestos bill was jointly introduced to the Senate committee last night by Senators Spector and Leahy, which it believes will be a huge step forward in resolving a 20-year national crisis. Litigation costs for asbestos liability lawsuits have weighed on the company for some time.

Looking ahead, HON anticipates sales growth in Q2 of 8-9% to $6.9-7.0 bln, vs. consensus of $6.7 bln. It sees EPS of $0.49-0.51 - roughly in-line with consensus of $0.50 with minimal impact from Novar in the Q2. For FY05, it expects revenues to range between $27.3-27.6 bln above consensus of $26.9 bln as it includes the benefit of the contribution of Novar IBS. It forecasts EPS in the range of $1.95-2.05, which is consistent with its prior guidance, but does expect to come in at the high end, vs consensus of $2.02.

After restructuring its business, which included workforce reductions and streamlining operations, Honeywell is reaping the benefits. The cyclical recovery in the commercial aerospace and industrial industries has provided support and will continue to do so throughout the year. The outlook for the company, as well as shares, looks quite good driven by its strong financial position, revenue acceleration, and earnings momentum. New products, along with accretive acquisitions, and new orders from Airbus will provide further upside going forward. The stock is trading at 18.1x forward earnings near the high end of its historical average. However, the earnings portion of the multiple is likely to expand as the year unfolds. ---Kimberly DuBord, Briefing.com

8:46AM Page One - Mixed News: Good Earnings, Bad CPI : Stock futures signal a mixed open. The earnings news is undeniably good, the CPI data bad.

Intel gets top billing, and with this company we agree with the emphasis on a technology company. Intel is the focal point of the entire sector. The company reported a 21% increase in per share profits to $0.34 for the first quarter which was 3 cents ahead of expectations, and they also exceeded revenue expectations. Also very important was a sharp increase in their capital spending plans for 2005. They raised their forecasted range to $5.4 to $5.8 billion from a previous $4.9 to $5.3 billion. That will boost the semiconductor equipment sector.

There were many more good earnings reports. Altria beat the average analyst forecast from Reuters Estimates by a penny, General Dynamics beat by 13 cents, Honeywell beat by 2 cents, JP Morgan Chase beat by 11 cents, and United Technologies beat by 3 cents. There were very few warnings associated with second quarter earnings.

Overall, the earnings reports in aggregate continue to be outstanding. The vast majority of major companies are beating first quarter estimates (many by a large margin) and guidance on the outlook has been reasonably good. There is still a long way to go, but the early returns are encouraging.

March CPI brings offsetting bad news. The core rate was up 0.4%. This follows the more encouraging 0.1% March core PPI reported yesterday. An increase of this nature is clearly troublesome, and if it reflects the underlying trend, requires the Fed to remain vigilant against inflation. That means higher interest rates and slower economic growth. Ultimately, slower economic growth will reduce the current demand-pull inflation, but that is of little encouragement to the stock market today.

This puts the Federal Reserve Beige Book report on national economic conditions to be released this afternoon as even more significant. It could have a major impact on the stock market if it suggests increased inflationary pressures or significant signs of slower economic growth. The report is anecdotal in nature and covers impressions through early April.

The earnings news so far is good. It now appears as if operating earnings for the S&P 500 in aggregate for the first quarter will rise 11% or even more. Just a few weeks ago those forecasts were at 7% or 8%. The market remains concerned, however, about evidence of slower growth in the economy which has not yet had the time to reduce inflationary pressures.--Dick Green, Briefing.com

9:41AM Sierra Wireless (SWIR) Lehman Brothers downgrades Overweight to EQUAL-WEIGHT. Target $9 to $8. Lehman downgrades saying intensifying competitive pressure suggests their consensus view of a 2H05 sales recovery is unlikely. Firm's prior est of a 50% lift in Q2 card sales now seems optimistic given Kyocera's launch (VZ, Alltel) and channel inventory declines. Also, firm had expected sizeable HSDPA sales in 2H05, and while they believe SWIR is likely to be first to market, 5-10 additional vendors are also planning product, which may reduce ASPs.

9:28AM Integrated Circuit (ICST) Pacific Growth Equities upgrades Equal Weight to OVER WEIGHT. Pacific Growth upgrades ICST saying they expect in-line results and outlook, with acceleration coming alive in 2H05. Firm thinks INTC chipset intros, DDR2 memory adoption, new gaming consoles and new video product wildcard should drive seasonal 2H. They think these catalysts should drive the stock back to the low-mid $20's over the next several qtrs.

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From Briefing.com: 8:07PM Swing Trader: Signs of a Bottom in Place? : -Technical- The markets gapped open high off Wednesday's low and after some bullish mid-day economic data, it continued to trend higher throughout the afternoon. Market Breadth was mixed as Advancers outpaced Decliners about 2.7 to 1 and New Lows continued to exceed New Highs. So are there signs of bottom in place?...(Continued)

5:08PM Silicon Image beats by a penny (SIMG) :Reports Q1 (Mar) earnings of $0.09 per share, excluding non-recurring items, $0.01 better than the Reuters Estimates consensus of $0.08; revenues rose 38.2% year/year to $44.3 mln vs the $43.8 mln consensus.

5:00PM Broadcom on Conference Call: sees Q2 revs of approx $572-577 mln; Reuters consensus is $569.2 mln (BRCM) 30.40 +0.95:

4:48PM Broadcom beats by a penny, beats on top line (BRCM) :Reports Q1 (Mar) earnings of $0.23 per share, $0.01 better than the Reuters Estimates consensus of $0.22; revenues fell 4.0% year/year to $550.3 mln vs the $542 mln consensus. "Looking forward, we are experiencing a strengthening in customer orders, leading us to believe that many of the customer inventory issues that affected our fourth and first quarter results are now behind us."

4:45PM Silicon Storage Q1 in line, co guidance is for wider Q2 net loss; co is looking for new CFO (SSTI) 3.35 +0.20:Reports Q1 (Mar) loss of $0.14 per share, in line with the Reuters Estimates consensus of ($0.14); both reported and consensus losses include a $9.7 mln inventory adjustment, primarily due to a decline in the pricing of several of SST's products. Revs fell 17.3% year/year to $86.3 mln vs the $85.9 mln consensus. Co issues mixed guidance for Q2, sees loss of $-0.20-0.28 vs. -$0.13 consensus; sees Q2 revs of $88-90 vs. $86.35 mln consensus. Co says on April 18, 2005, the board started to search for a new CFO; Jack K. Lai will continue to serve as SST's chief financial officer until his successor is retained, at which time SST expects that Lai will transition to a different role w/in the company.

4:30PM SanDisk beats Q1 consensus by $0.07, gross margin above Street expectations (SNDK) 27.88 +0.91:Reports Q1 (Mar) earnings of $0.39 per share, $0.07 better than the Reuters Estimates consensus of $0.32; revenues rose 16.6% year/year to $451 mln vs the $469.2 mln consensus. Product revs rose 18% and royalty revenue grew 7% vs. yr ago. SNDK reports gross margin 44.3% vs 38.6% Street expectation. Co says shipments from 90-nanometer chips rose to more than 80% of Q1's captive supply, as yields exeed expectations.

4:30PM Pericom Semi reports in line (PSEM) :Reports Q3 (Mar) earnings of $0.01 per share, excluding non-recurring items, in line with the Reuters Estimates consensus of $0.01; revenues rose 1.0% year/year to $19.4 mln vs the $19.2 mln consensus.

4:29PM Pericom Semi reports in-line; provides outlook for Q4 (PSEM) :Reports Q3 (Mar) earnings of $0.01 per share, in line with the Reuters Estimates consensus of $0.01; revenues rose 5.2% year/year to $19.4 mln vs the $19.2 mln consensus. For Q4, Co expects revenues to be up within a range of 6-10% from the prior quarter depending on the strength of turns orders

Close Dow +206.24 at 10218.60, S&P +22.45 at 1159.95, Nasdaq +48.65 at 1962.41: Robust earnings, optimistic economic data and promising M&A deals charged up the bulls, as huge gains across the board erased Wednesday's weakness and lifted each of the major indices at least 2.0%... Better than expected Q1 earnings from the majority S&P companies out with results today (28 of 42) was the driving force behind today's broad-based rally...

In addition to upbeat Q1 reports from Nokia (NOK 16.38 +1.04), Motorola (MOT 15.90 +0.97) and eBay (EBAY 32.96 -0.15) last night, strong reports from a multitude of blue chips this morning - from Merck (MRK 34.34 +0.27) to Marriott (MAR 63.35 +1.15) - further alleviated concerns that profit growth is not slowing... The notion that the market may be oversold, as the major averages have averaged an 8.4% loss so far in 2005, also created bargain hunting opportunities as the Dow bounced off the psychological 10,000 level and soared more than 175 points for the first time since Nov. 4, 2004... Uplifting economic data also helped underpin a bullish bias and diminish recent indications of economic softness...

Initial claims fell 36K to 296K (consensus 329K) - the largest decline in more than three years - during a key week in which the April employment survey was conducted... A stronger than expected jump in the April Philadelphia Fed's index, to 25.3 (consensus 10.0) - the highest level since December - countered the recent plunge in the April NY manufacturing index and also raised doubts about whether economic growth has actually slowed as much as the market has recently thought...

Meanwhile, a $17.6 bln cash and stock deal for bankrupt Adelphia, a $14.2 bln buyout of Allied Domecq (AED 50.93 +0.81) and the $3.5 bln merger between the NYSE and Archipelago (AX 27.15 +8.39) - which will take the Big Board public - also contributed to an improved sentiment that closed all 10 economic sectors in positive territory... Energy paced the way higher, helped in part by a rebound in oil prices, while Industrials and Consumer Discretionary also surged more than 2.0%... While crude oil futures ($54.20/bbl +$0.17) were under pressure most of the day, amid reports that OPEC will increase oil production capacity, the commodity closed modestly higher amid news that militants attacked a security checkpoint in Mecca, Saudi Arabia...

Technology (+3.2%) was strong across the board, as gains in excess of 2.0% in everything from Semiconductor to Software helped the Nasdaq soar 2.5% -- the Composite's best one-day gain since Dec. 1, 2004... Transportation (+3.5%) also soared - recording its best performance in nearly two years - aided by stronger than expected earnings from United Parcel Service (UPS 70.61 +3.35) and Union Pacific (UNP 64.92 +1.59) as well as bargain hunting in air carriers Northwest Airlines (NWAC 5.94 +0.54) and Delta Air Lines (DAL 3.90 +0.25), even though both posted wider than expected losses...

Health Care (+1.4%) was also strong, taking full advantage of strong Q1 earnings from the likes of ABC, GDT, ROH and BAX... Financial - the most influential of the 10 economic sectors - was the worst performer, in the face of rising bond yields as well as a 94% drop in Q1 profits and FY05 EPS warning from MBNA (KRB 19.28 -3.83), but still managed a solid gain... Treasurys, however, were weak all day long, as the benchmark 10-year note finished near session lows, down 29 ticks to yield 4.30%... Bonds initially lost ground after weekly jobless claims plunged to a 10-week low, but they fell even further following an unexpected jump in Philly Fed...

Fed Chief Greenspan testified before the Senate Banking Committee on deficits and budget reform, but his comments had almost no impact on the bond market... Separately, Mar. leading indicators fell 0.4% - its seventh decline over the last 10 months - but as a lagging indicator providing a very false read on the strong economic momentum, the data have had little impact on market activity...DJTA +3.5, DJUA +1.3, DOT +3.4, Nasdaq 100 +2.9, Russell 2000 +2.4, SOX +2.8, S&P Midcap 400 +1.8, XOI +2.3, NYSE Adv/Dec 2416/881, Nasdaq Adv/Dec 2219/845

3:10PM ATMI sells its minority interest in Emosyn to Silicon Storage Technology (ATMI) 23.09 -0.18:Co announces that it has sold its 16.4% minority interest in the Emosyn smart card business to SSTI for $3.1 mln. In Sept 2004, ATMI announced that it had sold its Emosyn smart card business to SSTI through a newly formed subsidiary, Emosyn Int'l. ATMI had retained a 16.4% ownership position in that original transaction. Effective with the consummation of this current transaction, ATMI is selling that remaining portion, whereby Emosyn will become a wholly-owned subsidiary of SSTI.

10:22AM Forward Industries reports Q2 results (FORD) 12.88 +2.14:Co reports Q2 EPS of $0.27, vs $0.08 in 2Q04. Revs rose 125% to 11.24 mln, vs $5.0 mln YoY. "Based on our expectation that the strong demand for our products being bundled with certain of Motorola's and Nokia's handsets will continue through our third quarter, with difficulty in assessing periods beyond that time, coupled with the overall strength of our other product lines, and our belief in the success of our longstanding relationships with our OEM customers, we remain very optimistic about Forward's prospects for the remainder of the year..."

9:21AM Merck earnings color, quarter was in line (MRK) 34.07 :-Update- There was some confusion earlier regarding the Q1 EPS consensus for MRK. Reuters consensus is $0.62, which has been updated to reflect company's April 13 guidance of EPS of at least $0.62, and therefore comparable to the $0.62 MRK reported today. The other consensus number of $0.59 being talked about in the market does not appear to reflect the updated guidance.

9:19AM Gapping Down :Gapping down on disappointing earnings/guidance: DECK -10%, OMCL -26%, BE -23% (also multiple downgrades), AGYS -15%, KRB -10.2%, ENDP -7.5%, EYET -5.2%, GSLI -4.5%, TSCO -4%, FFIV -3.6%, MTSN -3.2%, MERQ -3.1%, VLO -2.7%, CTXS -2.5%.

8:59AM Gapping Up :Gapping up on strong earnings/guidance: NOK +5.8% (also Pru upgrade; up in sympathy: ERICY +3.7%), MOT +5.5% (also Smith Barney upgrade), WHR +5.4%, GDT +5.4%, UPS +4.8%, SGP +4.6%, SAP +4.5% (also Smith Barney upgrade), EBAY +2.5%, VRSN +11%, VDSI +11%, AVCI +11%, FORM +8.3% (also upgrades from CIBC and Needham)... Other News: AX +38% (to merge with NYSE; up in sympathy: LAB +14%, INGP +5.3%), POZN +34% (Phase III trial data for Trexima), DCLK +16% (to be acquired by Hellman & Friedman -NY Post; up in sympathy: TFSM +14%), JMDT +10.8% (buys Tetris game; guides higher), TASR +8.4% (receives UK order), ARBA +7.4% (partners w/ Sabrix), MOBE +5.5% (Apple to sell adapter), BOOM +5.4%, TLAB +2.8% (Goldman upgrade).

9:41AM Agilysys (AGYS) Raymond James downgrades Mkt Perform to UNDERPERFORM . Raymond James downgrades AGYS following warning. Firm says given the severity of the miss, they believe AGYS should be a source of funds, as earnings visibility has taken a serious hit, calling into question the co's ability to grow revenue and EPS in FY06 barring restructuring actions. Also, they think that due to much lower sales volumes, gross margins are likely to be negatively impacted by at least 50 basis points, and are surprised that what appears to be a 4% YoY revenue decline that has translated into an EPS decline of more than 70%.

9:40AM FormFactor (FORM) Needham & Co upgrades Hold to BUY. CIBC upgrades FORM following Q1 report, based on higher 2005-06 sales estimates as demand and capacity constraints appear more significant than previously expected. They note that gross margin is also outperforming on better volume, favorable mix and superior yields in new facility. Firm says they would accumulate the shares through 2Q for upside to guidance once new facility ramps.

9:40AM Anteon (ANT) Raymond James upgrades Outperform to STRONG BUY. Target $43. Raymond James upgrades ANT given firm's view that recent award activity, coupled with several unannounced contract wins and other deals that allocate ANT a high probability of success of winning, will drive accelerating organic growth. At roughly 19x their 2005 EPS estimate and a slight discount to peers, they believe the story is extremely attractive from a risk/reward basis.

9:39AM Precision Drilling (PDS) Raymond James upgrades Mkt Perform to OUTPERFORM. Target $85. Raymond James upgrades PDS based on the recent correction in the Oilservice stocks coupled with their increasing expectations for 2006 Canadian oilfield service activity. Firm increases their 2006 industry forecast based on continuing strength in commodity prices, which they believe will translate into increased oil field spending.

9:38AM Nokia (NOK) Prudential upgrades Neutral to OVERWEIGHT. Target $19. Prudential upgrades NOK following strong Q1 report, based on an improving operating outlook for FY05 and the co's ability to benefit from the solid WCDMA growth opportunity in 2005. Firm thinks the co appears to be seeing improving handset momentum as they head further into 2005. As the wireless handset mkt leader, they expect the co to benefit from the global growth in wireless handset sales and the ramp in WCDMA services over the next year.

9:34AM Vertex Pharm (VRTX) Needham & Co initiates BUY. Target $13. Firm believes that the co is poised at an upward inflection point in 2005 based on: 1) co guidance exceeding projections for new collaborative rev and HIV product sales, and 2) the potential for a stock catalyst from progress in the hepatitis C franchise in 2Q05 with reporting of data from the Phase 1 trial of VX-950 as well as completion of enrollment of the Phase 2b trial of Merimopodib.

9:33AM Cincinnati Fincl (CINF) Legg Mason downgrades Buy to HOLD. Legg Mason downgrades CINF following Q1 report, saying that although they anticipate very little underwriting margin erosion in 2005, limited premium growth and fairly significant book value contraction suggest that the shares are appropriately valued considering the co's short-term prospects.

9:32AM Sterling Banc (SBIB) Piper Jaffray upgrades Underperform to MARKET PERFORM. Target $12 to $13. Piper Jaffray upgrades SBIB following Q1 report. Firm says while the co is facing a flattening yield curve and increasing competition in Texas, they believe the the co is facing those challenges well as evidenced by the Q1 results.

9:31AM Applix (APLX) Wedbush Morgan initiates BUY. Target $7.5. Firm expects the co's robust rev growth will continue, driven by active sales force hiring and a strong product cycle. They also believe the co's products for enterprise planning, and for financial consolidation and reporting, will help the co maintain its rev momentum.

9:24AM Allied Defense (ADG) Friedman Billings upgrades Mkt Perform to OUTPERFORM. Target $22 to $25. Friedman Billings upgrades ADG saying the catalyst is the award of a Battlefield Effect Simulator contract worth $11 mln. Although a modest contract, firm says it should be the first of many as ADG replaces Diehl as the preferred supplier of the U.S. Military.

9:24AM Orthovita (VITA) Brean Murray initiates BUY. Target $6. Firm believes VITA is a buy at current levels, based on the co's broad synthetic biomaterial platform, solid development pipeline, 17 consecutive quarters of revenue growth, expansion of the direct sales force, and the projected growth in the orthopedic market. They note that the co introduced 29 new products in 2004, and believe sales should benefit in 2005. In addition, they expect the co to introduce at least 6-8 new products each year through 2007.

9:23AM eBay (EBAY) Janco Partners reiterates MKT PERFORM. Target $45 to $35. Firm believes the deceleration in eBay's U.S. market and continued weaker than expected conditions in Germany suggest some degree of saturation in eBay's most established and traditional markets. They continue to have concerns as to whether growth in the eBay power seller community is sufficient to drive sustainable revenue growth in the current range for eBay. Maintains Mkt Perform.

3:29PM McDonald's Corp. (MCD) 29.75 -0.19: A plethora of successful menu additions and most recently its new i'm lovin' it campaign has resulted in the world's largest restaurant chain achieving two consecutive years of positive same-store growth. With fast food a part of the American culture, McDonald's is secure in its market position as the world's largest restaurant chain. But, the owner of the golden arches has not rested on its laurels, revitalizing its business by expanding its menu aimed at offering customers products for a healthier life-style.

Results for the first quarter came in-line with expectations with earnings of $0.43 per share, excluding a one-time $179 mln tax audit settlement, up 7.5% from last year. The company raised its estimates just last week. Sales of higher price products like premium salads helped to drive revenue growth in the US +5.2%. Total consolidated sales grew 6%, excluding currency gains of 3%, to $4.68 bln. Its European operations have been a challenge, which the company has blamed on slow economic growth and higher unemployment. For the quarter, comp sales rose 6.6% due to price discounts, new one-euro menu options, better service, and an expanded menu offering topping the consensus of +2-3%. This was a significant turnaround from last year's period, which declined by 2.9%.

Same-store sales in March rose 6.8% up from 5% last year, which includes worldwide stores open at least 13 months. This was a standout month due to the new chicken product offering and an early Easter. Comp sales in Asia, the Middle East, and Africa rose 7.3% above the Briefing.com consensus of 4-5% and up from 2.7% last year. February comps rose 1.6% (vs +0.6% Briefing.com consensus) and Jan comps rose 5.2% (vs +2.5% consensus).

McDonald's has gone through considerable turmoil over the last year with the sudden death of its former CEO Jim Cantalupo, followed by the stepping down of Charlie Bell who also passed. Its success at weathering these leadership challenges speaks to the strength of its culture and depth of its management talent. This Oak Brook, Illinois-based company continues to move forward revitalizing its business on the top and bottom line. The new product offering raises, even sometimes doubles the average ticket price for a meal. New products this year include espresso drinks, which will be tested in some of its stores this summer, and possible deli sandwiches.

Overall, this was a strong quarter as McDonald's was able to drive top as well as bottom line growth. The reversal of fortune in Europe is a positive sign, now it must sustain the pace. Concerns over the tempo of growth, multiple expansion, and increased competition have weighed on shares. This Dow Industrial component is down 7.3% vs. the S&P 500 -5% and the DJI -6%. Shares trading at 15x forward earnings below its 5-year historical average of 17.8x. With its defensive characteristics, current levels offer investors a reasonable entry point to ride out this volatile market. However, be mindful that shares are currently teetering on the 200-day moving average a significant technical level. Performance throughout the year will be driven by the sustainability and trajectory of comps, improved profitability, and managing higher food commodity and energy costs. ---Kimberly DuBord, Briefing.com

12:33PM SAP AG (SAP) $39.29 +1.80 (+4.8%) SAP 2005 Q1 results add up to a single conclusion: the application level of the enterprise software market is the segment with the greatest demand and pricing power - and SAP is the dominant vendor in the space. SAP beat revenue and earnings estimates slightly, although currency gains helped earnings somewhat. Revenue was $2.2 billion versus consensus estimates of $2.18 and earnings were $0.27 versus $0.26 estimates. Every product segment showed strong growth from the year prior (except PLM).

Particularly encouraging was the growth in the SAP NetWeaver product line, which saw sales almost 4 times higher than a year ago (26 million euros versus 7 million euros). The reason that sales of SAP NetWeaver are so meaningful is that there is only one reason to buy it: to link multiple SAP products together on a single network platform. That means SAP is doing a good job of cross-selling into their single-SAP product customers and making them SAP suite customers. Those customers were will extremely hard for a competitor like Oracle or Siebel.

Also encouraging is the fact that growth had a strong driver from the US, in contrast to almost all other data points that show the enterprise software market as fairly flat overall. In fact, the implication it that the overall enterprise software market must be clearly declining, since SAP is showing growth in the 17% range and has the largest market share. In fact, this quarter increases SAP's market share lead against its self-defined peers (MSFT, SEBL, and ORCL/PSFT) to 38% from the year ago 34% share. SAP seems to be just slowly and steadily increasing its dominant position in this market.

It is very clear from these strong results like this that SAP is bucking the trends that other enterprise software vendors are facing. Enterprise software companies, particularly those without application level products, are experiencing pricing pressure, declining sales, and trends of maintenance revenue as a increasing percentage of total revenue. All of those elements are signs of a software company that has saturated the market its products. SAP's last few quarters have shown exactly the opposite of these overall marketplace trends.

In fact, the trends are so clear, that on the conference call, one one analyst expressed difficulty "reconciling" this quarter's results against the much more moderate guidance SAP gave for the coming quarter. SAP's response was that Q1 just happened to have great execution and that market conditions are too risky to justify raising guidance for Q2. However, to us, it looks more like caution on SAP's part and a conscious attempt to avoid the backlash that would occur if they missed raised guidance. If you disregard all management comments and just focus on the revenue and earnings trends, SAP is likely to beat estimates again next quarter.

When you add it all up, SAP is the company to beat in the enterprise application space, but no one is currently presenting a serious challenge. Siebel used to be a "contender" against SAP, but the company seems deeply stalled in the conversion from the traditional Siebel product to the new On-Demand CRM product. Oracle acquired Peoplesoft specifically because the Oracle products that compete with SAP proved ineffective. But the Peoplesoft products haven't shown any lasting competitive ability against SAP either. At the moment, it looks like SAP is simply go to get incrementally bigger, quarter-by-quarter, and become an increasingly harder company to compete against. Robert V. Green

10:56AM eBay Inc. (EBAY) 32.54 -0.61: Stronger than expected results from eBay added to the positive tone in the market before the open. The online retailer posted its first quarter after Wed's close with earnings of $275.5 mln, or $0.20 per share, excluding items - up 25% year/year and two cents ahead of the consensus. Earnings were assisted by acquisitions and currency gains. On the top line, revenues rose 36.5% year/year to $1.03 bln on par with expectations. Yet despite the headline beat, by the time the market opened the tone around eBay's shares turned negative pushing the stock lower by 2%.

Nevertheless, eBay started the year off on the right foot posting a solid quarter. Consolidated net revenues hit a record of $1.032 bln - up 36% y/y. The US accounted for 39% of total sales at $404.8 mln - up 20% y/y. Growth within the international market place outpaced the US, accounting for 38% of total sales up 52% to $393.8 mln. This trend is likely to continue with international outweighing the US by the end of the year. Its PayPal division continues to show strong growth trends up 47% y/y to $233.1 mln in revenues, registering 71.6 mln total accounts - up almost sixty percent.

The challenge the online auctioneer faces is driving growth and penetration in the more mature markets like the US and Western Europe. CEO Meg Whitman addressed this issue saying eBay was looking into new marketing strategies including partnerships with mobile phone VoIP providers, along with promoting its "Buy It Now" feature, in the upcoming quarters to entice online consumers to buy.

Now onto the various metrics used to decipher the growth environment for the quarter. eBay ended Q1 with 147.1 mln cumulated confirmed registered users up 40% since last year. Active users increased 34% to 60.5 mln, roughly equivalent to the population of the United Kingdom. New listings rose 32% y/y to 431.8 mln, including 32 mln in new eBay Stores listings. Since eBay's revenues is derived in part from a percentage of the final auction price watching GMV (Gross Merchandise Volume), or the total value of all successfully closed listings, is meaningful. This figure rose 32% to $10.6 mln. Its "Buy It Now," or fixed priced listing, represented 30% of GMV. eBay has been able to drive growth by raising the average price of goods sold through various means including adding security for funds transfer by way of PayPal.

Proforma operating income gained 28% to $367 mln with operating margins of 35.6% down y/y, but above the Streets' expectation of 33%. Operating expenses outpaced revenues by a slight margin for the quarter with sales and marketing expenses up 40%. This jump was expected as company focuses on optimizing its marketing spending. Reaching and maintaining an optimal level of G&A expenses as a percentage of sales, while growing its user base, will be essential to long-term profitability.

eBay generates an substantial amount of cash totaling $3.4 bln in cash and investments at the end of the quarter. Unfortunately, the company did not announce any plans to buy back shares only noting it plans to return value to shareholders when the time is appropriate. With shares down 22% post split and a softer period ahead, we would think current levels would appear attractive.

The market was looking for some upside guidance as a catalyst for shares, however, this did not occur. For Q2 and Q3 numbers were in-line. But for Q4, which is seasonally a strong quarter with holiday shopping, estimates were slightly below. Yet, it's reasonable to expect management to be conservative considering the seasonally slow period ahead, the possibility of currency fluctuations, and the already heightened level of expectations. For full details see InPlay.

For short-term investors there is really no reason to hold shares right now as the company approaches seasonally softer periods, which is likely to cause further volatility. Yet, we would suggest longer-term investors take advantage of any exaggerated selling to establish a position. The San Jose-based company will be able to drive growth through category expansion (from collectibles to mainstream products), geographies, and pricing formats. Due to the complexity of the business, eBay enjoys high barriers to entry, along with virtually no inventory, a diversified revenue stream, and profit growth that could hit 40%. Adding new categories beyond collectibles, global expansion (i.e. China and India), and integration of PayPal platform will all drive up incremental revenue for the company. The key risks to watch are core US and international transaction revenue trends, competition, progress in China, fixed price vs. auction mix, technical outages, and seasonality of earnings. ---Kimberly DuBord, Briefing.com

9:57AM Page One - A Bounce that Might Hold, for a While : Stocks tanked again yesterday. The major problem was the Federal Reserve's Beige Book. It made fairly innocuous and unsurprising statements about inflation such as, upward price pressures have strengthened. It also said that high energy prices were damping consumer demand for other goods. Other data has already made this clear, but hearing it from the Fed fueled the macro fears that had been hitting the market lately.

Earnings reports continue to be very good. Yesterday after the close, eBay and Motorola had excellent reports that will boost the technology sector. Yum! Brands, Capital One, and Allstate also produced very good reports. This morning, AmerisourceBergen, Cummins, Danaher, HCA, Ingersoll Rand, Marriott, Novartis, Textron, and Union Pacific were among the companies reporting earnings above Wall Street expectations. Two major companies, McDonald's and Merck, both reported earnings in line with expectations and gave comforting guidance.

It thus bears repeating that, overall, the earnings reports in aggregated continue to be outstanding. The earnings slowdown that was widely expected as been far less severe than feared, for both the first quarter data and the second quarter guidance.

There is also some good economic news this morning. New claims for unemployment for the week ended April 16 plunged 36,000 to a very low 296,000. This is data for the week in which the April employment survey was conducted. The BLS noted seasonal adjustments overstaed the drop, but it neverthelees raises the prospect of a strong payroll gain for April. If an increase of 200,000 or more is reported, it would greatly temper perceptions of the degree to which economic growth is slowing.

The market is obsessed with the worst possible outlook - slower economic demand that doesn't even reduce rising inflationary pressures. It is the reverse of the Goldilocks condition. Right now, economic prospects are seen as too cool to boost earnings, and too hot to allow inflation to subside. The worst fears are overdone, but it will take some time to work this out, and we continue to recommend caution. Today's bounce might hold short-term as there is no release on the horizon to underline inflation fears. There might even be an earnings season rally of modest proportions this month, but a sustainable rally is not likely at this time.--Dick Green, Briefing.com

7:13AM The Information Technology Sector (OPENX) The Technology sector sank in the first quarter down over 7% with April tacking on another 5% in losses. The market continues to sit on the sidelines awaiting further evidence of a recovery. Standard & Poor's forecasts 17.2% in operating growth this year following a 56% rise in 2004. Even though there are some positive signs, we are maintaining our Market Weight on the sector.

As expected, Semiconductors had a rough start to the year with the Philadelphia Semi Index down 3.7% in the Q1 and over 9% year-to-date. Following Intel's Q1 better than expected results (April 19th), the market breathed a sigh of relief. Concerns over the possibility of slowing economic growth sent the Tech sector on its tail following the early and significant disappointment from bell whether IBM along with a profit miss by Samsung Electronics. Intel's 25% profit growth, coupled with its upward revised capex guidance, outlined positive growth assumptions within the computer-hardware space. Assisting the outlook were other positive reports from Texas Instruments and EMC.

The Semi stocks will continue to move with the ebb and flow of market expectations. Taking an optimistic view of the industry, lean channel inventories and seasonal demand patterns should support growth leading to a recovery in the second half of the year. The trajectory and sustainability of the recovery will continue to be highly debated. Intel's earnings set the tone for the PC industry as its chips run more than 80% of PCs worldwide. The extent of seasonal slowdown in the PC market is a main area of contention within the analyst community.

Intel is facing numerous challenges within this space including increased consumer bias towards lower priced PCs could impact margins. For the near-term, the launch of 64-bit Pentium 4 processors in Feb could provide upward support. Longer-term, a potential catalyst in the replacement cycle will be the highly anticipated launch of Microsoft's operating system, Longhorn, in mid-2006.

Looking downstream, Intel's report and guidance provides support for the component manufacturers. These include makers of disk drives (Seagate, Western Digital, Maxtor), computer-graphics chip makers (NVIDIA, ATI Technology), video-game consoles and mobile phone chip makers (Cypress Semi), and timing devices (Integrated Circuit Systems). On the equipment side, capital spending has remained steady to slightly ahead following Intel's raised plans, along with Samsung, outlining a possible recovery in the second half of the year. Tokyo Electron, the world's second largest equipment producer, recently announced sequential order growth supporting this view. The market typically anticipates the recovery; therefore stocks could see upward appreciation in Q1.

The consumer segment will remain one of the bright spots in the sector driven by migration to digital technology. These products, which include handhelds, MP3 players, PVR/DVR, digital video cameras, AIS systems, and handsets may support some of the expected weakness in the PC segment. The NAND flash market will be a direct benefactor of this migration as devices require more storage functionality driving demand for memory cards (SanDisk and Lexar Media) and computer storage technology (M-Systems). Other emerging and existing products that will offer strong growth opportunities over the short and long-term, include gaming, gigabit Ethernet, storage, set top boxes and information appliances. These markets carry high growth, as well as higher risk profiles driving growth for diversified IC manufactures (Broadcom).

There are also still significant growth opportunities within the handset market, which also experienced an inventory correction. Q1 earnings brought some anecdotal evidence that channel inventories have declined from Q4 levels, which is a good sign for the handset makers. Yet, Texas Instruments commented that 3G handset sales accounted for part of its decline in wireless-related semi revenues, which may be viewed as bad news for Nokia - its largest customer. Concerns magnified following negative reports from Sony/Ericsson and Samsung Electronics. Yet, with the highly competitive nature of this market with only a handful of companies vying for every point in share, bad news for one, may mean good news for another. ---Kimberly DuBord, Briefing.com