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Contributors: Douglas McIntyre Jon C. Ogg

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Friday, June 30, 2006

New York Times DealBook Summary 6/30/2006

Stocks: (BA)(EMC)(RSAS)(PD)(FAL)(N)(CD)(VE)(SYMC)

NY Times DealBook reports that Boeing spin-off aircraft parts company Spirit AeroSystems has filed for an IPO. The company plans to raise about $500 million.

DealBook reports that shares in storage company EMC fell to a 52-week low on news it was buying RSA Security for $2.1 billion. There may have been a rival suitor. According to BusinessWeek, it was online security company Symantec.

According to DealBook, several institutional investors have said they do not support Phelps Dodge's purchase of Falconbridge and Inco. Atticus, a hedge fund that owns 6% of the company has voiced its doubts as has Neuberger Berman.

DealBook reports that Cendant has sold its travel services business, TravelPort, to the Blackstone Group for $4.3 billion.

Bidz.com, the online jewelry business, has cut back its IPO, dropping the number of shares for sale by half to 3 million.

DealBook say that French company, Veolia, the world's largest water company, has bought Brambles Industries, a trash collection firm, for $1.1 billion.

Douglas A. McIntyre

EMC and a Changing Security Landscape


EMC (EMC) is being punished this morning after announcing its acquisition of RSA Security (RSAS). Its shares are down 7% or more, and this puts it at right at the bottom of what looks like a $10.00 to $14.00 trading band that has been in place for about 3-years.

After forming some internal opinions and after browsing over numerous research reports, the reasoning behind this drop would seem to be the price that EMC paid for RSA. It isn't the $28.00 cash, it is the $2.1 Billion. All in all that actually is not overly expensive when you compare the valuation of RSA to others in the data security industry (see DOUG's ARTICLE from yesterday), so this may just be creating another opportunity.

This will take some time for EMC to fully absorb and digest, but it will ultimately round out EMC's product offering. It looks like the street decided that since RSA at the buyout price is about 8.5% of the size of EMC and trades at a higher earnings multiple than EMC, then they should sell EMC off at close to the same rate. No one can give you a bottom tick prediction, but this feels a bit remedial.

This merger also has many industry ramifications. If you consider the marriage of data and storage, it actually endorses the model that Symantec (SYMC) has chosen with its old acquisition of Veritas. That stock was mutilated after it made that transaction and has never been able to recover. Even though this ultimately means more competition for Symantec and the landscape, this deal may make investors revisit the Symantec business model now.

This also puts other smaller security players into play with storage and other hardware providers. Microsoft (MSFT) has long been a quiet outside deal-maker in security, which is no surprise since they are the NO. 1 TARGET for any hacker in the world. Hewlett Packard (HPQ) has been expected to do security deals, as has IBM (IBM). Cisco (CSCO) has done security deals, as has Juniper (JNPR). CNET ran an article long ago discussing the coming trend of consolidation in data security players (LINK HERE).

So, what security companies could be looked at?

Entrust (ENTU) is a name that is being tossed around as a potential target, and it is down 50% from its 52-week highs and has a paltry $190 million market cap that would be easier than breathing for a large company. It doesn't help that Entrust has been losing money, but that could be fixed potentially by a larger parent.

Aladdin Knowledge Systems Ltd. (ALDN) is another name that has been tossed around as a takeover name before. They are based in Tel Aviv, Israel and there have been hopes that someone would acquire them for literally years and years. It has a meager market cap of $287 million and a fairly low P/E multiple of 20.00 and an even lower forward earnings multiple of about 17.35 based on consensus estimates.

VASCO Data Security (VDSI) is another name that has been elusive. It has a lofty earnings valuation with a 40 P/E, but would probably not require a ridiculous premium to acquire and has some valuable digital certificate operations that could easily be integrated into a larger hardware or software vendor's product offerings. It also has a substantial insider ownership, so IF they were convinced that this was the right fit then the deal could happen smoothly.

ActivIdentity Corp. (ACTI) is another name that is up marginally on hopes that they will be more attractive. Unfortunately they are not profitable, have been a poor performer, have had very sporadic revenues, and may need more of a consumer play to take traction.

Blue Coat Systems (BCSI) was a name thought of for a while as a candidate, but they have now entered their own deal to acquire Network Appliance's (NTAP) NetCache business.

Trend Micro (TMIC) has been an elusive company. It is based in Japan and has had a security deal with Microsoft for email security, but it is largely not thought of by many. It also has a large value at $4.5 Billion, but it hardly trades in the US at all.

Check Point Software (CHKP) is the name that has been elusive and probably would not benefit from this. They are perhaps the world leader in firewalls and corporate data security, based in Israel. The company had a failed private deal over US national security concerns and over protectionism, and they may actually have to go make some outside transactions of their own to be competitive and attractive again.

In the US, McAfee (MFE) is another name that may be left out of the deal landscape. The company is thought of as a bit maxed-out, and it may be on hold until the next PC upgrade cycle has taken hold. It is worth $3.9 Billion today and has a P/E of 28.9 based on trailing numbers, and it has had "issues" in the past.

In truth, this deal new acquisition of RSA by EMC validates the combined offering model. It will heat up competition in other areas as well, and companies that have sluggish patterns and that aren’t able to adapt may have a hard time hanging out with the big boys.

There is also a myriad of private companies in the US, Europe, Israel, EU, and Eastern Europe that have been fertile recruiting grounds and quiet takeover bait for years now. Many of these companies are completely unknown, and they will stay that way. They also offer (or attempt to) many of the same offerings as many of the public companies above.

Just because one deal occurs does not guarantee more deals to come. Even with the caveats, there is still a greater chance of other deals coming to fruition. The landscape is changing, so do some homework on your own to see which others will benefit. If nothing else, you can at least expect this to keep the rumor mill active.

This merger of course will have ties into the Data Storage and related sectors, but that is another story.

Jon C. Ogg
June 30, 2006

Why The GM Deal With Nissan/Renault Is Dead On Arrival

GM's largest shareholder, Kirk Kerkorian has been in touch with the heads of Nissan and Renault about buying a minority stake in the U.S. auto company and creating a three-way international alliance to build and market cars. GM's stock opened the day up sharply, but began to fall off almost immediately.

It won't happen.

Although Nissan's stock is off its April/May highs, it is still well above its two year bottom of early 2005. Sales of Nissan's vehicles in Japan have caused the company's shares to move down. However, the company still says it will sell 4.2 million vehicles in fiscal 2008. Carlos Ghosn's turnaround if Nissan is legendary in the car business, notwithstanding its current issue.

Ghosn is also now chairman of Renault and the European car company has cross ownership with Nissan with each owning shares in the other. The company's stock is doing unusually well, and Ghosn's presence at the company has helped it be viewed as a substantial force in the European auto industry. The company is now the 10th largest auto maker in the world with 2005 sales of 2.553 million cars.

GM, with its massive labor problems and junk-grade debt is hardly an attractive partner for tow smaller but more stable can companies. GM's situation may have improved, but a 2007 strike by the UAW is still a possibility if the union makes a last stand to protect jobs.

Additionally, and perhaps more important, GM's financial condition and falling market share are the most important hammers the company has in dealing with the UAW. An alliance that improves GM's short-term financial situation exacerbates the ability of the company to rebuild its North American operations by giving the union a bargaining chip.

Although they may be tempted, a partnership with GM is not in the cards for Nissan or Renault. Carlos Ghosn is too smart for that.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

Growing with Accenture

Stocks: CTSH - IBM - ACN

By William Trent of Stock Market Beat

Consulting firm Accenture (ACN), which is on our Watch List, reported strong earnings Thursday after the market close. The outsourcing market appears to remain strong, which has positive implications for other Watch List names including IBM and Cognizant (CTSH).

Fiscal third-quarter net income advanced 2.5 percent to $496.1 million, or $0.56 per share, from $484 million, or $0.51 per share, in the year-ago period. Analysts were expecting $0.46. The year-ago results included a benefit of $66 million, or 8 cents per share, related to the company’s 2001 reorganization into a corporation from groups of partnerships. Revenue rose 6.8 percent to $4.81 billion from $4.5 billion last year and compared favorably to analyst estimates of $4.43 billion. Consulting revenue rose 6 percent to $2.66 billion, and outsourcing revenue gained 11 percent to $1.75 billion.

Accenture shares have tumbled about 11 percent in the three months since its last earnings report on March 28, when the company surprised investors with a $450 million charge for losses expected on a computer system project for the British health care system. The Standard & Poor’s 500 Index fell 4 percent during the same period.

New bookings, a key indicator of future revenue, were $5.57 billion in the third quarter, the highest in nine quarters, Accenture said.

Accenture said it now expects full-year 2006 revenue growth at the upper end of its earlier forecast of 9 percent to 12 percent. It expects full-year net income per share of $1.55 to $1.57, including a $140 million tax benefit recorded in June.

For the fourth quarter, Accenture forecast revenue of $4.2 billion to $4.35 billion and net income of 52 to 54 cents per share. Analysts are forecasting profit of 38 cents per share, before items, and revenue of $4.27 billion.


Sell Side Comes to Investing Epiphany

By William Trent of Stock Market Beat

Comments from Merrill Lynch semiconductor analyst Joe Osha, found via Tech Trader Daily.
The worse the data points get, the more bullish we become, and we think that the key lesson of the last six months is that the value of data point investing in semiconductor stocks has now been eliminated.

Markets are amazingly efficient at arbitraging excess profit opportunities away, and we’ve seen it in semiconductor stocks before. Ten years ago all one had to do was correctly call the inflection point in industry revenue growth, and the stocks would follow. By 2001 investors had started to figure that out, and over the next several years the relationship broke down. Few semiconductor analysts bother with the sweeping sector calls that used to be so popular, as the market has figured out that adding value that way become almost impossible.

Data point investing in semiconductor stocks is now headed for a similar fate, in our view. Consider the fact that no amount of channel checking would have turned up weakness in January despite the fact that January was the selling opportunity. Meanwhile, publicly available SIA data showed the industry hitting dangerously high unit shipment levels, and valuations were too high as well.

There are too many investors taking too many airplanes to Taiwan and China, and the exercise is now undifferentiated and valueless. Oddly enough, some of the tools that used to work better – watching industry data closely, and paying attention to valuation – seem to be working better. No doubt that we’ll see another shift in semiconductor stock behavior that will render those measures useless as well. For now, though, the formula for success seems to favor watching earnings multiples and SIA data, and staying off those flights to Taipei.

We will set aside our confusion over why published industry sales data does not constitute a “data point” in Osha’s parlance. Or, for that matter, why the P/E multiple for a stock does not count as a “data point.” It seems amazing that an equity analyst would suddenly realize that valuations (earnings multiples) and macroeconomic data such as that delivered by the SIA are more important to an investment thesis than some random tidbit gleaned in a channel check. (For the uninitiated, a channel check is basically asking someone who buys semiconductors “how’s business?”) If there was ever an anomaly in the stock market, it was a time when valuations didn’t have an enormous impact on investing returns. On the other hand, perhaps we’re being too harsh on Osha. His pay - no, his very job - is driven by what tiny edge he can glean for hedge fund managers that none of the other sell side analysts were able to glean.
For the most part, hedge fund managers are not investors - they are traders. For traders, a moment’s swing in sentiment due to a slow sales day at one customer is enough to jump in for a quick profit. All the better that they get the data from the sell side - that leaves more of the 20 percent incentive pay for their own profits.

If you are an investor rather than a trader, you are less likely to be concerned by the weekly fluctuations in this or that. If you are a dedicated investor, you paid very close attention to the valuation when you bought, and were probably aware of the potential short-term downside to that valuation. You are less concerned about whether customer X ordered fewer semiconductors today than you are whether customer X is consistently ordering fewer semiconductors. You’ll suffer the first couple of points of downside waiting for the trend to become apparent, but you won’t waste buy and sell commissions trading on each wiggle in a volatile chart.

To some extent the whole concept of trading tech stocks is an ongoing bubble-era hangover. We used to be able to make so much money in tech stocks we believe that if we only try harder we will be able to do so once again. So we jump on the plane to Taiwan and interview factory workers to see whether they assembled more iPods today than they did yesterday. Thing is, it ain’t the bubble anymore. In fact, the tech bubble was only the tech bubble because the growth days in semiconductors were already gone and nobody believed it.

When Osha wonders what changed when “Ten years ago all one had to do…” he need look no further than the same old SIA data. It would have given the right data then - although acting on that data would have (and did) make some investors look stupid. For a while. But Osha still hasn’t learned.

He goes on to say:
Now, of course, the negative data points are myriad, although we’re mystified as to how much value-add there can be with the SOX down 22% from its January peak and valuations now reasonable. With a seasonal uptick in PC build activity beginning to show up, the predictable appearance of negative wireless data points justifying a trade into PC stocks has been especially amusing to watch.

Only to someone who still thinks in terms of the bubble can believe that valuations are now reasonable. The chart shows how much growth trends have slowed. In fact, if you take the April 1996 number and the April 2006 number you will find an average annual growth rate of just over five percent. Nominal. GDP has grown faster on a nominal basis, with less volatility. Just about any industrial segment - chemicals, steel, homebuilders - has had more growth in the last 10 years than semiconductors. So don’t tell us semiconductor valuations are reasonable until their P/E ratios are similar to those of Dow Chemicals (8.7), US Steel (12.7) or Toll Brothers (5.1). ‘Til then, you’re living in dreamland.

Note: That is not to say we think semiconductor valuations will head straight to zero. The vast majority of investors were at the same kegger Osha went to, and are still as hung over. The industry remains cyclical and thus will have ups and downs within that longer-term valuation compression. So we’ll keep on watching that SIA data, and we’ll try to call those turning points. Just don’t expect us to hang on for more than a few months. We’d rather miss a little upside within a wiggle than participate in more of the longer-term downtrend.


PC Market Still Slowing

By William Trent of Stock Market Beat

Thus spake Lenovo.

While the news is likely no surprise to DELL’s investors, it may be one for those who own Hewlett-Packard. Furthermore, the delays to Microsoft’s Windows Vista continue to cause many to wonder whether businesses will alter their PC replacement plans in order to do a more comprehensive upgrade at a later time.

Passive component maker Walsin Technology Corporation (WTC) said that lower-than-expected demand from the PC sector has affected the company’s performance in the second quarter and it regarded July to August as the key indicator for this year’s business outlook, according to DigiTimes.

Meanwhile, industry analysts at IDC expect notebook computer shipments to grow in Asia, though not enough to offset a decline in the US and Europe.


Cendant's Dissolution Continues

Stock Ticker: CD

Cendant Corporation (CD-NYSE) announced a definitive agreement to sell Travelport, the Company's travel distribution services subsidiary, to an affiliate of The Blackstone Group for approximately $4.3 billion in cash and is expected to close in August 2006. The proceeds from the sale of Travelport had already been earmarked for most of the funds to reduce its Realogy and Wyndham debt levels, targeted at an approximate $750 million for Realogy and $600 million for Wyndham.

Cendant now expects to simultaneously spin-off its Realogy and Wyndham Worldwide subsidiaries in late July. This is part of an ongoing restructuring in Cendant that is actually dissolution of the company as we know it.

It is unfortunate that they are not going to use proceeds to return cash to shareholders, but they are trying to shore up their balance sheet so units are attractive. Cendant is essentially 4 different operations and each of those operations includes many facets.

The stock is up 4% pre-market on this news, but its shares are still hovering close to its 52-week lows of $15.16 and around the same lows of about 3-years. The company is honestly trying to do the right thing, but if they really ant to reward the shareholders they need to return more cash. After running many different scenarios a few months ago and trying to smooth out some of the ups and downs in units, Cendant (a BAIT SHOP member) has what is derived as a break-up value or "sum of the parts value" of between $19.00 and $22.00. The shares have been stuck mostly under $16.50 since mid-May and it is exceeding more and more difficult to find anyone that truly likes the company.

What is important is that they are full of small units and divisions that are fairly predictable and have a long operating history. They are perfect for private equity firms, and that is why Blackstone is in this deal this morning. There will probably be more and more of these, but hopefully Cendant will read this and start returning more cash to holders so that the sum of the parts actually gets returned to shareholders. Their annual meeting of shareholders is August 29, 2006, and we should have some much more clear valuation estimates by then.

This corporate structure and the dissolution process is not very clear to most, and it is not without risk. Difficult deals to understand have a hard time finding much love on the street, and that is what has contributed to the steady weakness in Cendant. The entire combined operation after the break-up and dissolution in the coming 3 to 12 months (or however long it takes) still seems to have more projected returns than risks. If something happens to private equity money in the next 3 months, then this belief and perceived valuation will come in considerably. Based on the funds that have been and continue to be raised the perceived risk of that happening is still fairly low.

Cendant is supposed to mean “change,” and that should live up to the name. Most likely in a few months the company will not look like it does today. If it handles these divestitures and spin-offs properly, it will also offer a reward to those investors that are willing to enter complex investment situations with some patience and understanding. Cendant has been perceived as a dead-money stock for a many years, but there still appears to be a favorable risk vs. reward matrix for the right investor.

Jon C. Ogg
June 30, 2006

KMG Chemicals: An Odd Secondary Offering

Stock Ticker: KMGB

KMG Chemicals (KMGB-NASDAQ), a specialty chemicals maker (in Pentachlorophenol Products, Creosote, Animal Health Products, and Agricultural Products), today announced that a public offering of 2,800,000 shares of its common stock has been priced at $7.00 per share.

This is an interesting offering, at a substantial discount in a name most have not heard of. KMG Chemicals (KMGB-NASDAQ) closed yesterday at $8.08, and this trades actually under 4,000 shares per day on average. The company only has a $71.1M market cap

The offering is 1,500,000 shares from KMG, 1,087,984 from David Hatcher, Chairman and CEO and 212,016 from Valves Incorporated of Texas, whose President is Fred C. Leonard, an outside director of KMG.

KMG will use the proceeds for working capital, to fund future acquisitions and for general corporate purposes. Boenning & Scattergood served as lead book-running manager with Sterne, Agee & Leach as co-manager.

Because this is so thinly traded the shares priced at a substantial discount. This is so small that it will likely not even show up on anyone's radar, but a pricing at that discount is reminiscent of the old Reg.-S private placements done overseas in the mid-1990's where shares were sold by companies and directors at a substantial discount.

Jon C. Ogg
June 30, 2006

Pre-Market Notes for June 30, 2006

(AAPL) Apple disclosed that its own internal options granting probe showed some options granting may have been mishandled, including options to Steve Jobs; stock down 2.8%.
(ACUS) Acusphere noted as positive value in Business Week.
(ACN) Accenture $0.50 EPS vs $0.46e.
(ACV) Alberto Culver noted as having higher breakup value in Business Week.
(ANDE) Anderson's filed to sell 2.2M shares.
(BDY) Bradley Pharma says FDA extended review period for Polyphenon.
(CA) Computer Associates announced options irregularities in internal probe; announced $2B share buyback.
(CD) Cendant is in a deal to sell its Travelport unit for $4.3B to a Blackstone-led group; stock up 2%.
(CELG) Celgene gets FDA approval for Revlimid as a combination treatment with Dexamethasone; stock up 1%.
(CEPH) Cephalon received FDA "approvable" for Fentora; stock up 10%.
(DNDN) Dendreon says their study indicates Provenge treats prostate cancer.
(DVN) Devon noted as takeover candidate in Business Week.
(EMC) EMC down 4.8% after paying $2.1 Billion for RSA Security.
(EQUIX) Equinix gets grand jury subpoena over stock options granting.
(EXAR) Exar CFO is retiring.
(GBE) Grub & Ellis 10M share secondary looks to have priced at $9.50.
(HH) Hooper Homes -$0.01 EPS vs -$0.01e.
(HLTH) Emdeon raised guidance shortly before yesterday's close.
(IART) Integra LifeSciences is acquiring private Kinetikos Medical for $40M cash.
(IPXL) Impax Labs settled its Solvay litigation for $23M.
(ME) Mariner Energy CFO is leaving the company in August.
(NR) Newpark terminated former CEO and CFO.
(PALM) Palm down 9% after beating earnings but issuing soft guidance.
(PCU) Southern Copper positive article in Business Week.
(PDE) Pride International disclosed it found improper payments to overseas government officials.
(PRGO) Perrigo received tentative FDA approval for Norvasac.
(RIMM) Research-in-Motion up 4.8% after beating earnings.
(RSAS) RSA Security rose again after EMC confirmed it would acquire RSA for $28 per share.
(SABA) Saba Software down 16% after posting an unexpected loss.
(SI) Siemens is purchasing Bayer's Diagnostic Unit for approximately $5.3 Billion.
(SNN) Smith & Nephew disclosed a DOJ price fixing subpoena as part of industry-wide probe.
(STZ) Constellation Brands $0.31 EPS vs $0.31e.
(ZICA) ZI Corp announced resignation of CFO.

AAPL tgt cut from $77 to $68 at B of A.
AATI started as Buy at Jefferies.
AKAM started as Accumulate at ThinkEquity.
BAX cut to Sector Perform at William Blair.
CA cut to Negative at Susquehanna.
CZN raised to Buy at Merrill Lynch.
ELNK reitr Outperform at CSFB.
FOXH reitr Buy at First Albany.
HEW raised to Buy at Citgroup.
KR raised to overweight at Lehman.
ONXX raised to Buy at B of A.
PGIC started as Neutral at Goldman Sachs.
POR started as Sell at Goldman Sachs.
PQE raised to Peer Perform at Bear Stearns.
RATE raised to Buy at Jefferies.
S reitr Overweight at JPMorgan.

May Personal Income at 8:30 AM;
May Consumer Spending at 8:30 AM;
June Consumer Sentiment released at 9:45 AM;
June Chicago PMI at 10:00 AM.

Reminder today is quarter-end.

Microsoft, Just Shoot Me

Microsoft was hit with back-to-back bad news recently.

First, Office 2007 will be released late this year and not in the Fall. Maybe. Microsoft is now releasing products late on an ever-increasing basis. The company's new operating system, Vista, has also been hit with delays. Aside from the embarrassment of having major software releases constantly delayed, there is another, more important, impact.

A look at Microsoft's public filing shows the extent to which the OS and Office products drive the huge majority of the company's operating income. Continued late releases are bound to catch up to the company's financials as customers wait to upgrade to new versions. Sales could certainly be hurt in the fourth quarter of this year.

In addition, Microsoft lost another key employee to Google. This adds to the public perception that Google has the hot hand in software development and consumer sentiment and that Microsoft has seen its best days.

If the delayed release in software hits the topline and earnings this year, Microsoft's stock could drop below $20 for the first time since 1998. The stock has already been as low as $21.46 over the last 52-week period.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

Looking Ahead- Reflections on the 3Q

By Yaser Anwar of Equity Investment Ideas

The markets are entering a period of seasonal vulnerability.

The third quarter is generally a weak one for stocks. In the period after World War II, the S&P 500 has posted an average loss of 0.1% between July and September.

Since 1928, the average third-quarter gain for the “500” has been only 1.1%. Market upturns generally resume in earnest in the fourth quarter, which has, historically, been the strongest.

The Standard & Poor’s Investment Policy Committee target for the “500” by year-end remains 1385.


Tweaking The Foreign Allocation

By Yaser Anwar, CSC of Equity Investment Ideas

S&P Equity Strategy believes recent global stock market volatility is fueled by concerns that major central banks, fearing increased cost pressures, will overshoot and raise interest rates too much, stifling global economic growth in the second half of 2006.

Investors are worried that this will lead to a dramatic slowdown in global earnings growth. Thus, the current P/E contraction.

Global equities are experiencing their first major correction since the beginning of the current bull market in October 2002, with the S&P/Citigroup World Index down 11% from May 9 through June 21. S&P believes this volatility is shifting global risk-reward ratios and warrants several allocation changes.

The S&P Investment Policy Committee has decided to increase the allocation to developed international markets to 12% from 9%.

In the Model ETF Portfolio, this group is tracked by iShares MSCI EAFE (EFA). Since developed markets represent the largest international equity asset class, we believe greater exposure is warranted.

Also, Europe and the United Kingdom make up about two-thirds of developed international markets. Europe and the U.K. also have among the most attractively valued markets and offer a dividend yield higher than those of other developed markets.


European Stock Market Report 6/30/2006


Stocks in Europe were higher at 5.30 AM New York time.

The FTSE was up .8% to 5,837. Barclays was up .4% to 613.5. BP was up 1.1% to 634. British Air was up .5% to 340.75. BT was down .1% to 562.5. Diageo was down .8% to 908.5. Prudential was up .5% to 594.5. Reuters was up 1.9% to 383.25. Unilever was up .4% to 1200. Vodafone was up .9% to 116.

The DAXX was up 1.2% to 5,646. Allianz was up .5% to 123.07. BASF was up 1.1% to 62.34. Bayer was up 4.6% to 35.85. DaimlerChrysler was up 1.1% to 38.41. Deutsche Bank was up 1.6% to 87.49. Deutsche Telekom was up .7% to 12.48. Siemens was up .5% to 67.83. SAP was up 1.1% to 164.78.

The CAC 40 was up 1% to 4,929. Alcatel was up 1.9% to 10.02. AXA was up 1.1% to 25.58. France Telecom was down .1% to 16.55. ST Micro was up .7% to 12.57. Thomson was up .8% to 12.75. Vivendi was down .5% to 27.08.

Douglas A. McIntyre

Media Digest 6/30/2006


According to Reuters, MasterCard may have violated European antitrust rules by restricting competition among banks.

Reuters writes that Apple has announced that it found irregularities in its stock option grants, including on to Steve Jobs that was later cancelled.

The Wall Street Journal writes the Chrysler will introduce a new version of the Dodge Challenger based on the 1970s icon.

Reuters also writes that Arcelor shareholders will vote on a business combination with fellow steelmaker Severstal.

Reuters also reports that Reseach In Motion, maker of the Blackberry, posted better than expected earnings. Sales rose 35% to $613 million.

The Wall Street Journal reports that Chrysler plans to introduce an employee discount pricing plan for all customers.

WSJ also reports that EMC has agreed to but RSA Security for $2.3 billion.

The New York Times writes that Ford Motor plans to shift its focus away from hybrids and develop cars that us a range of fuels like ethanol to consume less gasoline.

The NY Times also reports that Boeing will take a second quarter charge of as much as $1.15 billion, part of which is to settle ethics charges with the U.S. government.

Douglas A. McIntyre

Asia Markets 6/30/2006

Asian markets were sharply higher.

The Nikkei was up 2.5% to 15,505. Canon was up 2.4% to 5610. Daiwa Securities was up 4.3% to 1830. Fuji Photo was up 1.3% to 3840. Japan Air was down .3% to 285. Hitachi was up 1.9% to 756. Honda was up 2.4% to 3630. NEC was up 3% to 610. NTT was up 3.5% to 561000. Docomo was up 2.4% to 168000. Sharp was up .9% to 1808. Softbank was up 2.6% to 2565. Sony was up 2.2% to 5050. Toyota was up 4.2% to 5990. Toshiba was up .8% to 747.

The Hang Seng was up 2.3% to 16,225. China Mobile was up 3.9% to 44.25. China Netcom was up .7% to 13.55. China Unicom was up .7% to 6.85. HSBC was up 1.7% to 135.9. Lenovo was up 1% to 2.575. PCCW was flat at 5.5.

The KOPSI was up 2.5% to 1,285.

The Straits Times Index was up 1.8% to 2,430.

The Shanghai Composite was flat at 1,672.

Douglas A.. McIntyre

Thursday, June 29, 2006

Microsoft pushes back Office 2007 release (MSFT)

By William Trent of Stock Market Beat

Microsoft (MSFT) pushes back Office 2007 release: Financial News - Yahoo! Finance
The world’s biggest software maker said it will now aim for a launch of Office 2007 to business customers by the end of 2006 rather than an earlier autumn target. Microsoft also said it would delay the general availability of the Office upgrade to early 2007 from its previous January target.
It should come as no surprise, really, as Microsoft is known for serially delaying new products. Furthermore, with the Vista operating system delayed what was Office 2007 supposed to run on anyway?
For the record, we feel about Office as we feel about Vista: Microsoft needs to get them right so delays are better than half-baked products. However, longer-term it will be crucial for Microsoft to get more effecient use of its R&D budget. It needs to release reasonably significant upgrades on an ongoing basis rather than having huge overhauls every 4-5 years. In short, it needs to get smaller because that is the most likely way to get more nimble.


Red Hat Woes a Modest Positive for Oracle


By William Trent, CFA of Stock Market Beat

We knew Oracle was doing much better in applications after having had trouble digesting acquisitions. We know their main target is SAP. But open source models are something of a threat to all of the existing software vendors, so today’s disappointing Red Hat performance, attributable in part to their acquisition od JBoss.

As Marketwatch noted:
Early this month, Red Hat bought JBoss for around $350 million in cash and stock. The deal aimed to help accelerate a shift towards service-oriented architecture.

JBoss was a maker of open-source middleware products, which are designed to help different software applications work together. The products, including application servers, compete against offerings from the likes of Oracle Corp. (ORCL), BEA Systems (BEAS), and International Business Machines Corp. (IBM).

Plus, having some of the smaller players help clean up the excess capital (translation: buy up some of the extra companies) out there saves Oracle the trouble and gets the industry to a sustainable structure faster.


Stocks That Missed The Rally

Among the most widely held stocks there are a few that missed the rally today. This is usually a sign that they are viewed poorly by Wall Street or may be trading at such high multiples that further gains are not likely near-term. Either way, stocks that did not have on rally caps are probably not candidates for appreciation any time soon.

The Nasdaq was up slightly less than 3% today. Some stocks that trade a lot of shares were up much less:

Microsoft (MSFT) +1.34%
Oracle (ORCL) +1.1%
Sirius (SIRI) +1.5%
Ebay (EBAY) +1.77%

The Dow was up slightly less than 2%. A few widely traded stocks missed the boat:

Ford (F) +.63%
Tenet (THC) -1.8%
GE (GE) +1.03%
Boston Sci. (BSX) -.06%
Home Depot (HD) +.83%
AT&T (T) +1.06%
Time Warner (TWX) +.99%
Sprint/Next (S) +1.06%

Douglas A. McIntyre

A Tale of Two PDA's: RIMM Slapping PALM

Palm (PALM) is trading down about 8.5% after reporting earnings. It beat projections at $0.25 EPS and $403.1M revenues when compared to $0.23 and $401+M street estimates. That is not that much higher than estimates and that is a often a problem for the street, but Palm is really being punished because it issued soft guidance for the coming quarter. Its sequential revenues will be down to a range of $380M to $385M and will be $0.18 to $0.19 EPS on a non-GAAP basis, which is under the street consensus estimates.

Analysts were hoping that Palm would actually guide revenues sequentially higher, not lower. It looks like that Q-phone from Motorola that many are saying is a look-alike may be biting into their operations. Palm shipped 623,000 smartphones and 495,000 handheld computers during the quarter.

Research-in-Motion (RIMM) has initially risen 3.3% after-hours, and that is after it was initially down over 1% after Palm showed dismal numbers. RIMM posted revenues of $613.1M and earnings of $0.68 EPS on a GAAP basis and $0.70 non-GAAP, both of which were above expectations. Analysts were expecting $0.65 EPS and revenues of $602 million. The company shipped 1.2M devices in the quarter, but said BlackBerry subscriber accounts grew by 680,000 in the quarter.

Nokia (NOK) is issuing its smartphone that is said to be the R-I-M alternative, but that is not yet out in the US. The company projected revenues of $620M to $650M, with GAAP EPS of $0.67 to $0.73, or $0.69 to $0.75 before option expensing. The street is looking for next quarter numbers to be about $0.72 EPS (non-GAAP) and about $636 million in revenues.

Jon C. Ogg

Market Wrap Up for June 29, 2006

Depite a 25 basis point hike, the FOMC was the market's friend today as the committee signalled what felt like a downgrade on the economy and noting housing markets had slown.

DJIA 11,190.80 (Up 217.24, 1.98%)
NASDAQ 2,174.38 (Up 62.54, 2.96%)
S&P500 1,272.87 (Up 26.87, 2.16%)
10YR Bond 5.2%

Neoware (NWRE) was the blow-up du jour with its shares being hit 41% to close at $11.78 after a revenue warning and what is implied as a quarterly loss.

Tenet Healthcare (THC) closed down 1.8% at $7.10 after settling its old Medicare charges, but it had been up over 5% earlier in the day.

A very positive upgrade 3Com (COMS) after it exceeded earnings yesterday helped COMS rise 15%to close at $5.10.

Both Red Hat (RHAT) and ATI Tech (ATYT) fell afetr earnings guidance failed to impress. RHAT fell 6.4% to $23.40 and ATYT fell 11.9% to close at $13.65.

RSA Security (RSAS) rose considerably after the New York Times reported that EMC (EMC) or another company would soon announce a pending merger. RSAS issued a release stating the company was in talks, but could not assure that a deal would be completed. It rose 18% to close at $22.88.

The awaited and hot IPO of Aventine Renewable Energy (AVR) actually turned out to be NOT SO HOT. AVR priced at $43.00, but that took out all of the juice. The original 7.75 million shares were boosted to 8.5 million and then ultimately to just over 9 million shares. The price range was originally $37.00 to $40.00, and that was raised to $40.00 to $43.00 before it priced at $43.00. it closed at $38.37 on the day. Those underwriters that priced the deal better get ready for some angry calls.

Monsanto (MON) ran over 8% after beating earnings estimates to close at $83.16.

Also, the IPO of GMARKET (GMKT) went only so so. It priced its ADS at the top of its $13.25 to $15.25 range. It opened over $19.00 and closed at $15.10.

Keep in mind that tomorrow is the ahead of the Fourth of July holiday, and many of the A-Team traders will head out for a few days. The holiday is on next Tuesday, and many will be out an extra day and not be back until next Thursday. Tomorrow is the end of the quarter, but a lot of today's strength may have been added to by fund managers adding to positions ahead of the long weekend.

Jon C. Ogg
June 29, 2006

Shuddering After Reading Shutterfly's IPO Prospectus

Shutterfly, one of the leading online photo services, has filed to come public via an IPO. This was one of the first online photo sites, and one of its backers is Jim Clark, co-founder of Netscape. It has filed to raise up to $92M from stock sales, although we'll have to wait to see how many shares actually get sold and at what price.

According to the prospectus Goldman Sachs, JPMorgan, Piper Jaffray, and Jefferies are underwriting the offering. The company was evaluating its alternatives just yesterday, and now we know what avenue they have chosen to reach their "liquidity event."

The prospectus says that 17.820 Million shares were outstanding as of March 31, 2006; but that exlcudes 3.198 million shares issuable upon options with exercise prices of $4.41, 1.755 million shares from the 1999 stock option plan, 1.358 million shares exercisable for the 2006 option plan, 0.116 million and 0.0408 million other shares.

For 2005, the company posted revenues of $83.9M and net income of $28.9M, butthis was inflated from a tax benefit. Its first quarter 2006 revenues were $16.88M (compared to Q1 2005 of $13.15M) with quarterly net income of -$1.668M (compared to -$683K for Q1 2005). That loss would have been wider had it not been for a tax benefit from income taxes, and that was not available in prior quarters. A tax provision was also directly responsible for $24.06M of the company's $28.9M net income in 2005.

Why is it losing more money? Quite simply it is because costs are up in all major areas and the revenue gains are not off-setting these. Also, it is in the same barrel now with all other tech companies as it has to expense these stock options. The company is highly dependent on seasonality, with 49% of 2005 net revenues coming in the fourth quarter.

The company also expects to need much larger capacity that has not yet been built to meet 2007 demands and has estimated $30 million to $35 million for capital expenditures in the second half of 2006 and first part of 2007. It also has dozens of competitors to the tune of Hewlett Packard, Eastman Kodak, Wal-Mart, Target, Yahoo!, AOL, CNET, Google, Walgreens and a couple dozen others in the US alone.

After looking through the prospectus, it starts to feel like the entire document is a risk factor. The RISK FACTORS section goes from page 8 through page 26. Companies have to list their perceived risks, but this went on and on. The growth rates for the company are slowing at th etime it has said it needs to rapidly increase cap-ex costs. It didn't list "Seeing the dead" or "Being visited by the Price of Darkness" as risks, but it felt like it was going to. This also listed an unspecified number of shares that would be available for additional sales as "immediately after this offering," "45 days after the offering," "90 days after the offering," and "180 days afterthe offering;" which is faster than the traditional 180 lock-up period of many IPO's. It is also bring a $28.5 Million deficit in total stockholders' equity, although this is often true of many Internet and IT-related IPO's.

Maybe this is the sort of IPO the street wants, and maybe it isn't. Unfortunately, it reads in the prospectus as though you are buying into a nearly artificial income and into a RISK FACTOR more than an operating company with legitimate profits. Hopefully they won't lose our pictures after they read this.

Jon C. Ogg
June 29, 2006

New York Times DealBook Digest 6/29/2006


According to DealBook, Millard Drexler, the CEO of J. Crew, saw his $10 million investment in the company from three years ago grow to $84 million after the recent IPO.

DealBook writes that RSA Security said it was in talks about a strategic transaction, largely believed to be a sale of the company to EMC.

DealBook also writes that Winn-Dixie Stores has submitted a plan to its bankruptcy judge to emerge from Chapter 11. The program would wipe out the value of all shares held by existing shareholders.

DealBook reports that Kimco Realty is considering buying New Plan Excel Realty Trust which is primarily in the shopping center business. Kimco may also be looking at Pan Pacific Retail Properties.

DealBook also reports that Archstone-Smith, an apartment company, is buying Deutsche WohnAnlage which sells residential properties for $649 million.

DealBook writes that online photo sharing site Shutterfly has filed for an IPO. The company plans to raise $92 million.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com.

25 Basis Point Hike, But Markets Like Economic Commentary

The DJIA and other index rallies were based on the overall commentary contained in the FOMC statement. It feels like a small downgrade to the economy, and maybe the Fed is learning to not just look in the rearview mirror.

We'll have to see if these moves hold because so many initial reactions to planned FOMC meeting announcements get reversed.

Here is the commentary from the FOMC website:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.

Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 6-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Dallas.

Boeing's Hard Landing (BA)

Things have been going extraordinarily well at Boeing recently. Since the ethics scandal that lead to the departure of its CEO, the company has been posting good numbers and take share from its arch-rival Airbus. Recent news that Airbus is having trouble with its super-jumbo ject could be further positive news for Boeing, which is building a super-jumbo of its own.

Boeing's achievement is highlighted by its 2005 results and the first quarter of this year's numbers. Last year, revenue rose 5% to $54.854 billion. Operating income was up 36% to $3.083 billion. The March quarter showed operating profit stronger than any of the three that predated it. With revenue of $14.204 billion, operating profit came in at $815 million.

But, the things that can trip up one company in an industry can trip up another.

Boeing said it would take charges totaling over $1 billion in the second quarter of this year. Of this $615 million will go to settle charges with the U.S. government over criminal charges for hiring a former Air Force official and taking documents on Lockheed Martin's rocket program.
The balance, however, is probably more troubling. The company may take a charge of as much as $500 million for the late delivery of surveillance planes to Australia and Turkey.

So, product delays are not just a problem at Airbus.

Bank of America now estimates that Boeing will have a loss of $.41 a share instead of an anticipated profit of $.81. That's a big swing.

Boeing's shares trade at $81.78, up from less than $50 less than two years ago, and near the 52-week high of $89.58.

In all probability, that means the stock has more room to fall than rise, and any piece of bad news could take a chunk out of Boeing's market cap.

Douglas A. McIntre can be reached at douglasamcintyre@gmail.com. He does not won shares in companies he writes about.

Does 3Com's Report Justify Its Rally?

3Com (COMS) stock is performing well today, up over 10% at $4.89, after its earnings report that showed strong results from the Huawei partnership (H-3C) and announcing yet another restructuring (job cuts and facility closures). The company lost $0.01 on EPS before restructuring and other charges and posted revenues of $255.3M. The loss was -$0.04 after items, but the street was expecting -$0.04 EPS and $176.55M in revenues. Even with slightly under-street revenues, there was relief that the picture may be getting better.

This UBS analyst upgrade from Long Jiang lifting the rating from a Neutral up to a Buy is likely contributing to these excessive gains. Pre-market the stock was only up about 3%, but then after this upgrade the shares made a steady march to its 10%+ gains on the day. This is an interesting upgrade, and after reading the research note it looks more like a sum of the parts valuation (he says $6.40 value now) than a call that is endorsing the old legacy 3Com before Huawei. Without the additional analyst push this would probably not be as strong as it has been today. The FOMC decision hasn't yet posted and there has already been double the normal trading volume with 150 minutes until the close.

The Huawei partnership, H-3C, is now 51% owned by 3Com and is perhaps the only good thing going on there at the company. Since it is majority-owned by 3Com, they now get to count the revenues from the partnership since it is the majority holder. That is why the company had revenues grow 44% year-over-year. The company's job cuts are in the lagging Secure Converged Networking (SCN) segment, which saw a 6% drop in segment revenues. This shows there is still a steady erosion in the legacy 3Com business.

3Com ended the quarter with $864 million in cash, cash equivalents and short-term investments (including the consolidated cash, cash equivalents and short-term investments of H-3C which totaled $169 million).

The company believes the restructuring supports long-term profitability and long-term growth and will focus on reducing components of the SCN operating segment cost structure to achieve future profitability. It will close approximately 21 facilities around the world and cut 250 full-time employees (15 percent of its SCN headcount). It will also focus on its sales, marketing and services efforts and will record restructuring charges of approximately $10-$13 million. These charges are expected to be recorded principally during 3Com's first and second quarters of fiscal 2007 (the next 2 quarters). Shouldn't the focus have been this newer thought process all along? Machiavelli would say to instill all the changes in the village at once.

Scott Murray, 3Com's president and CEO, said, "I am pleased with the progress that we have made in the past quarter in moving 3Com toward a profitable business model. H-3C delivered strong results, and we have continued to reduce the operating loss of our SCN business through solid cost control.....We believe that the cost realignment announced today will be a significant part of achieving our goal of future profitability."

3Com has been a serial restructurer. It has restructured so many times you would compare it to a Motorola or Gateway of the old days, but we are not comparing these names and not even providing tickers on them to avoid distractions. To prove a point, we are talking about the company that spun-off Palm (PALM). The company had 3,900 employees at the end of March, 2003 and had thousands more back in the 1990's. What you have to wonder is how much of the Huawei JV sales are actually tied to or indirectly a result of the current SCN sector that is still spiralling downward. This is the hardest question to answer. If the answer is "Not Very Much" then why doesn't the company just jettison that whole segment? or why nottry to go find a buyer for it? It is a declining business. The reasons may be very clear.

Does this headcount reduce the dead weight? Will there be further dead weight they can trim? There has to be some. It looks like the Chairman (Benhamou) is paid $100,000 and is no longer well thought of on the street, even though he is no longer the face of the company. Under his watch they lost the data communications war with Cisco (CSCO) and others, went through restructuring after restructuring, lost Billions of dollars in market cap, and even spun-off Palm. maybe they could even try a name change to H-3C.

Will the old legal fight between Cicso (CSCO) and Huawei ever creep back up? Cisco was suing Huawei in 2003 because so much of the core router was reportedly identical in many cases down to the source code. This was resolved in July of 2004. Huawei agreed to make many surface and interface changes and to stop selling the products at issue and only sell new modified versions. So what prevents more look-alikes down the road, and what prevents Cisco from wanting to try to block 3COM's efforts as the H-3C joint venture starts to take more sales? Some in the US have referred to the H-3C routers as "the poor man's Cisco router without the support." If "the poor man's router" starts to take away too many sales from the rich man's salesforce what will prevent a re-initiation of this fight. It was resolved in 2004, but the verbage back at the time of the resolution just didn't feel the same as other resolutions between other companies. This is not predicting a legal issue will arise, but it is simply alerting that there is at least a remote possibility of it down the road. If it does, then who do you think has deeper pockets to fight it?

They carry almost no debt and the balance sheet is still manageable, but the core balance sheet has contracted through all the restructurings and through each stock-drop. The intent is not to just batter this company while it is trying to get up off the floor, but there are still issues. The stock is up 52% from the 52-week lows and up over 60% from the lows in the last 18-months. The stock would have probably been up on its own and with the market today, but it would appear that at least a large portion of the gains today are probably tied to this one influential upgrade from UBS.

Jon C. Ogg
June 29, 2006

The Great Independent Research Debate

By Chad Brand of The Peridot Capitalist

There is a very simple reason why Peridot Capital does its own research; there are very few people I trust more than myself to implement my investment philosophy. As much as so-called "independent" research claims to be such, experienced investment professionals know that research is often far from independent. All you have to do is ask yourself, is there reason to believe that this research is independent?

In the case of a buy-side firm like Peridot, there is every reason to believe that our research is independent because it is solely used internally to make investments on the behalf of clients. If clients do well, the company will prosper, and if they do poorly, clients will leave.But what if a company doesn't manage money? What if they are solely in the business of selling research? Do they have to be independent? What is keeping them from doing whatever it takes to sell the product? After all, selling research is their only line of business. It's the same reasoning that some journalists print things that might not be completely accurate. They are in the business of selling papers, or magazines, or whatever their product is. How do tabloids stay in business? Is it because their stories are always accurate? No, it's because people buy them.

I decided to write this piece after reading a transcript of testimony given by Kim Blickenstaff, CEO of Biosite (BSTE), a small medical diagnostics company based in San Diego. Her testimony was part of a Senate Hearing this week entitled "Hedge Funds and Analysts: How Independent is their Relationship?" Below is an excerpt:
"In the ten months from February to December 2002, the number of shares [of Biosite] controlled by short sellers increased from 690,000 to 7.1 million shares, which represented nearly 50% of our outstanding stock.During this same period, Sterling Financial Investment Group, a Florida-based research firm, issued at least seven negative research reports on Biosite, each carrying a Sell/Sell Short recommendation, and an $11 target price. We believe that these reports contained numerous inaccuracies or false and misleading statements, which ultimately lent volatility to the stock's performance, thereby harming many of our long-term, fundamentally-based investors."

There are many issues I have with this testimony from Biosite's CEO.First, short sellers do not "control" shares of stock. They borrow shares from other investors and immediately sell them in order to raise cash proceeds. The investors who have sold the stock short no longer control the stock, they simply owe it to someone, and will have to buy it back at some point in the future to repay the loan.

Second, Blickenstaff claims that negative research reports issued by Sterling between February 2002 and December 2002 were successful in "harming many of our long-term, fundamentally-based investors." This is interesting given that Biosite stock was $18.37 on February 1, 2002 and closed December 31, 2002 at $34.02 per share. So, even as the number of shares sold short increased more than 10-fold, the stock price soared by 85 percent. How exactly long-term investors in Biosite were hurt by this I'm not exactly sure. Sounds like these types of investors should beg short sellers to target their stocks!What can we take away from all of this?

One, short sellers do not cause stock prices to go down. If a stock can rise 85% as half the outstanding shares are being borrowed and immediately sold, such as argument is easily discounted as silly.Two, independent research is not always independent. Merely listening to Sterling's negative view on Biosite stock (which did prove to be inaccurate) would have lost you a lot of money if you were in fact a long term investor who wanted to "invest" (versus "trade") in BSTE shares.

Three, if you are an "investor" then you should, by definition, have a long-term view. Traders focusing on the short term probably were hurt by these negative research reports because they likely caused a quick drop in the stock price upon being published. In the short term, any kind of report can influence stock prices, accurate or not.Over the long term, however, company fundamentals will matter above all else. Since the research Sterling published turned out to be incorrect, the stock price went up, not down. That is why someone who bought the stock in February before all the short sellers and negative reports came out of the woodwork, and held it throughout all of this sketchy behavior, would have made 85% on their investment in less than a year.

Hopefully you can see why people should do their own research and invest for the long term. If your analysis proves accurate, you will make money, no matter whatever anyone else out there is doing. That is the philosophy I use when managing my clients' money, but it is valuable for anyone who doesn't want to be adversely affected by the inherent conflicts of interest on Wall Street, whether you are a Peridot client or not.


Mixed Signals for Consumer

By William Trent of Stock Market Beat

With the end of the second quarter a day away, this morning’s announced revisions to first-quarter GDP are old news. Yet they are interesting in light of the differences between the story they tell and today’s other news. As has been the case for some time, the strength in GDP was driven by the consumer. In fact, 3.53 of the 5.6 percentage points of GDP growth were due to increased personal consumption expenditures.

Against this backdrop, Advanced Auto Parts saw its shares plunge as much as 20% early Thursday as the No. 2 U.S. parts retailer slashed its second-quarter profit forecast, citing the impact of soaring gas prices and rising interest rates on customer spending.
“We believe that macroeconomic factors, including higher energy prices, ever-higher interest rates, and higher required credit-card payments are further reducing discretionary income for our lower- and middle-income customers and has unfavorably impacted customer traffic,” said Chairman and CEO Mike Coppola.

The weakness also affected other companies in the industry, including our Watch List component Autozone.

Consumers most likely to be buying their own auto parts tend to be those at the lower end of the income spectrum, where higher interest rates and gas prices hurt the most. Yet buyers of new cars are also stepping back, as the New York Times reports.

The pattern was set last summer when General Motors introduced employee-discount pricing for everyone. Ford and Chrysler followed suit, buyers flocked to dealerships and sales soared.
That cleared a lot of inventory off dealer lots. But sales slumped once the deals were gone, taking Detroit’s market share to the lowest level in history.

With inventories bulging again and Asian companies making record sales, Detroit automakers are now seeing that they must offer another eye-popping round of promotions to clear out all the cars and trucks that have been sitting too long on dealer lots.

It’s a habit the Detroit auto companies, which lost billions of dollars last year in North America, would like desperately to break so they could earn a profit in their primary business.
Despite all of Detroit’s claims to have abandoned the fire-sale mentality of the past, the companies’ actions suggest otherwise.

While the article does note that Asian brands continue to do well, and many of those vehicles are produced in the US, some of those models are imports and higher sales of them acts as a drag on GDP. In the first quarter of 2006, auto and auto parts production accounted for 0.60 percentage points of growth.

The death of the consumer has been predicted for some time, and has repeatedly been wrong. For all we know, it may never happen. But today’s indications from the automotive group, which is one of the larger consumer spending areas, are worth noting. And it is easy to measure the impact. If the consumer merely continues to spend the same amount - not even cutting back but just not spending more - GDP growth would be cut by more than half. So if you are making the bet that consumer spending will continue to be strong, be sure to keep in mind what that means.


Good For Consumers, But for Garmin?

By William Trent of Stock Market Beat

We have written several times about how the digital navigation market appears finally to be taking off, which has certainly helped shares of Garmin (GRMN) over the last couple of years (see chart below). We have also noted the increasing competition from major consumer electronics companies such as Pioneer and Sony. An article caught our eye today that shows how far the competition is going.IBM Embedded Speech Technology to Drive Pioneer In-Car Navigation System: Financial News - Yahoo! Finance

“Speech recognition is at the beginning of a tidal wave in cars,” said Karen Rubin, director of product planning and marketing for navigation, Pioneer Electronics (USA) Inc. “Drivers can now enter destinations, search for points of interest, and access their music on the built-in hard drive using their voices.”

All of this is clearly good for consumers, who will have more choices than ever when considering a new digital navigation system. Whether Garmin will be able to maintain its stock performance
against competition is open to question.


Dell's Baby Steps (DELL)

Dell (DELL) announced two initiative recently that show how desparate the company is to create any positive news. The company launched a new IT service plan called Platinum Plus. With this program, companies can use Dell to support their computers, whether they bought them from the PC giant of not.

The other news is that Dell will begin to ship computers with Advanced Micro Devices (AMD) chips.

Both of these initiatives are aimed at Dell's corporate customers. The IT service plan is only useful to big companies, and most consumers cannot tell the difference in performance between an AMD or Intel (INTC) powered product. It might be important to some corporate IT managers.

But, Dell's most significant problem recently is the sales of its computers to consumers, not corporations. The company has also fallen short on customer service which has encouraged the company to hire a new head of customer service.

Dell is betting big on the corporate market, but it may be the wrong gamble.

In the quarter ending May 5, 2006, operating income actually fell to $949 million from $1.174 billion in the same period a year ago. Operating income in the Americas and Europe was hit hardest, but the increase in Asia, up only $3 million from last year to $136 million, was embarrassing given the company's push in China.

In the quarter, enhanced services like training and enterprise support were 10% of Dell's revenue, and this business is growing. Servers and networking were 9%. But, these lines of business which are primarily for businesses are still too small to have a marked impact on the company's topline and operating income.

The problem at Dell is simple. Desktop PC sales are dropping. They were 36% of revenue in the May 5 quarter down from 40% a year ago. Laptop computers, which are now 26% of revenue, picked up some of the desktop drop, but the business needs to turn itself around.

Dell can open all the new enterprise initiatives it wants to, and move from one chipset to another. Until customer service improves, and the cost of PCs stops dropping like a stone, Dell's stock is likely to stay near its 52-week low.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

A Business Model That Ought to Take Off

By William Trent, CFA of Stock Market Beat

Tom Evslin writes about a new business model for sharing WiFi access.

FON is a commercial/cooperative worldwide WiFi access network. Huh? Actually it’s an interesting idea and a great laboratory for pricing models.

Foneros are members who’ve agreed to share their Internet access through their WiFi routers. If you’re a Fonero, you can be a Linus and allow other Linuses to use your access free in return for free use of all FON hotspots. Or you can be a Bill and charge nonLinuses for use of your access. Currently the rate is 3 Euro/day. The Bill keeps half and FON keeps the rest.
(For my readers who are not up on blogosphere ingroup jokes: “Linus” refers to Linus Torvalds who started development of Linux, the open source operating system; “Bill” is Bill Gates who charges for his operating system – and puts the resulting profits to good use.)

You become a Linus or a Bill by installing special sharing software on your existing Linksys (subsidiary of Cisco) WiFi router. To encourage growth of the network, FON is offering special Linksys routers – they call them “social routers” - with sharing software preinstalled for $5 in the US and 5 Euro in Europe (not available elsewhere). Shipping and VAT are extra ($8 to US). There is a penalty if you don’t add your new router to the network to discourage freeloaders from taking advantage of the subsidized router offer.

Aliens are members like me who are not sharing a router. We aliens always have to pay the 3 Euro/day fee for access to hotspots. If we sign on to a Linus hotspot, FON gets all of our fee. If we sign on to a Bill hotspot, the Bill gets half.

So FON itself has a real business model although one that has yet to be proven. I am going to become a Linus as soon as my social router arrives. Then other Linuses can share my Internet access free and I can log on free at any FON hotspot, even those that belong to Bills.

Here’s where the pricing gets interesting. Remember, I can choose to be either a Bill or a Linus. In my case the choice is easy. My location is isolated and few people will use my connection. But I travel so free access to other connections is valuable to me. If I lived in a more urban setting, I might have decided to be a Bill and see if my revenue offset the roaming charges which I would have to pay as a non-sharer. If you don’t ever travel with a WiFi equipped PC or other device, you clearly want to be a Bill.

This business model could cause open source/crowdsourcing to take off even faster. Consider movie downloads. If the studio sets up a hosted site it can control who downloads the movie and how much they pay, but have to be able to supply enough storage and bandwidth to accommodate the users.

The illegal model, such as bit torrent, spreads the storage and bandwidth to multiple users who “share” their files, along with their storage space and connection.

An interesting business model would be to allow users to buy a version of a movie that was authorized for resale. Then they could be compensated for their storage and bandwidth and relieve the studios of this burden. Everyone could be a winner, and distribution costs would likely plummet.


Can Cable Trump The Telco Video Card?

Stocks: (T)(TWX)(VZ)(CMCSA)

Comcast has announced that it will buy thePlatform, a digital media video company with customer including Comcast itself, the Wall Street Journal, ABC News and Starz.

It is a safe bet that the purchase was as much to form relationships with thePlatform's customers as to get the technology.

Cable firms like Comcast now seem to take seriously the threat posed by AT&T, Verizon and others as they prepare to offer television over their fiber networks. Try as they might, the cable firms have not been able to get the federal government to stop the march of the telcos into services that compete with cable TV.

If you can't beat them, join them.

Systems like the one offered by thePlatform allow video to be sent over the internet to televisions. So, the web-based content that most people watch on their PCs can now be routed to the television set as well. Most video on the internet makes it to the PC and no further, and this eliminates potential customers who do not want to watch TV or movies on a PC screen.

As the Wall Street Journal pointed out, Comcast has one large advantage over the telcos. It already pays them a huge sum for programming on its cable TV system, so it has access to the content providers to get offerings for the new IPTV intiative.

For the last year or so, it seemed that the large regional telephone companies had caught the cable guys flat-footed in the internet video delivery business.

Well, look again.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does now own stock in the companies he writes about.

EMC's Slow Expansion

Stocks: (EMC)(RSAS)(CHKP)

EMC announced within the last few days that it was buying Isreali content management outfit ProActive Software Solutions and that it would also spend $500 million in China. The investment will be made between now and 2010. The company said it was making the move because the pool of tech workers in China is one that EMC wants to tap, but the cost factor of using workers outside the U.S. is certainly a the heart of the move. EMC is making similar moves in India.

As a digital storage company, EMC's products are at the heart of the growth, or lack thereof, of technology products at big company's. EMC's CFO recently said that the company's quarter that ends in June may not be as good as previous forecasts. This took a stock that was already in bad shape and made matters worse. After trading between $10 and $14 most of the last two years, the stock is now at the low end of that range at $11.25.

The stock may be too low.

From 2003 to 2004, revenue grew 32%. From 2004 to 2005, revenue grew 17% to $9.664 billion. Operating profits also grew impressively each year, and hit $1.48 billion for the entire year 2005.

Wall Street was disturbed that the March 2006 quarter had a topline of $2.551 billion and operating income of $303 million.

Now word comes that EMC is buying RSA Security for $1.8 billion. The company has valuable assets in the secure digital software market and would add significantly to the products EMC could market to large enterprises. The company also had revenue of $310 million last year and operating income of over $35 million. So, EMC would be paying a 4.5 time prices to sales ratio according to YahooFinance!. RSA competitor Check Point tades at nearly eight times sales.

EMC's appetite for reasonably priced acquisitions to build its business may turn out to be the catalyst that drives the company's revenues back to double digit growth. And, if labor costs for the company's software and IT employees drop due to EMC's moves into India and China, the stock may look cheap at $11.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not own securities in companies he writes about.

How to Evaluate the Implosion in Neoware

Stock Ticker: NWRE

Shares of Neoware (NWRE) are being flogged after its earnings and revenue warning, with shares down 39% in pre-market trading. This company had gained almost 50% last September after raising guidance and at one point had risen almost 4-fold over the last two-years, so it looks like a "Live by the sword, Die by the sword" scenario here today.

Neoware was the first Successful independent "pure-play" thin client solutions provider for computing across enterprise level corporations that run on Windows, mainframe, Linux, UNIX, and other operating systems. This is turn lowers enterprise level overall computing and per-employee costs. Many have tried in this arena and most have failed, but until now Neoware has survived and its shares had thrived. What a difference a day makes.

So what changed?

Neoware said this quarter's revenues are expected to be in the range of $23 to $24 million compared to $23 million in the prior year June quarter; and Fiscal June 2006 revenues are expected to be in the range of approximately $107 to $108 million, compared to $79 million in the prior fiscal year. The problem is that the June quarter estimates are $30.7M on the street, and the lowest revenue target was still over $29 Million. The fiscal 2006 street estimates for revenues are also $114M, but that is this quarter-end so is only noting the drop this quarter. Earnings were not even mentioned, and we will not get some longer-term plans and goals for some time.

According to the company’s press release: Revenues for the June quarter were impacted by lower than expected sales to certain existing customers in the U.S. and Europe during the last two weeks of the quarter. Sales growth from new customers did not increase enough to offset these lower than expected sales to existing customers. The Company remains confident in its market and opportunity. Management and the Company's Board are working together to finalize a 2007 operating plan which contains initiatives designed to increase sales to existing customers and generate increased sales to new customers. We anticipate that the plan will be completed and approved by the Board within the next few weeks.

The company is also not hosting a conference call until 4:00 PM EST today to discuss this, which is a pretty bad choice if they wanted any shot at some stock stabilization today. Most companies get the conference call out of the way ASAP on blow-ups like this. It is pretty evident that the company was not expecting a 30+% stock scalping this morning.

So what lies ahead?

You can expect the analyst at Oppenheimer that just issued a BUY rating last week to be caught off guard and a downgrade can be presumed, and a boutique initiation earlier this month with an OUTPERFORM rating can be expected to be cut. Lehman also just initiated the company with an OVERWEIGHT rating last month, so you will likely see a cut there as well. Last month Needham had indicated the quarter was on track after the stock had started faltering. The company even raised $75M in a secondary offering back in February, but that was a full quarter ago and it would be arguable that a company this size could know exactly if it would see a slowdown.

This morning’s stock drop eliminates essentially all of the gains that were in the stock from the last year, and it had already sold off 30% or so from recent highs. It may also put in a new much lower trading band until the company gets on its feet, and it may even be a considerable time before the stock ever sees a $20-handle again. The 52-week low was $10.19 and it traded under $7.00 two-years ago.

You can expect at least one class action suit to be filed before the end of trading tomorrow, and since they had a secondary only 4 months ago you should expect more than one of these suits.

As noted above, the analysts look like they will all be caught off guard so don’t be shocked when you see downgrade after downgrade.

Is this the end or a huge opportunity?

History would indicate that huge blow-ups in shares require at least some patience before piling in. This operation is NOT disappearing any time soon, but that does not mean that there will not be seasonal bumps. What has happened is that there have been soft sales across many areas from the Joe Q. Consumer all the way up to enterprises, but it doesn't mean some aren't doing well. There are many factors out there, but perhaps the one thing that has pushed out orders is the next upgrade cycle delay resulting from Microsoft's (MSFT) perpetual delay in Windows Vista and some general spending contractions seen in other tech-land areas.

This company will get back on its feet, but rarely do you just have a huge blip like this followed with an instant turnaround back to boom times. Patience is still the best avenue, even if you end up paying a bit more down the road.

The interesting thing to add here in this particular case is that this company has been successful enough and is in enough existing businesses that it may be considered a potential takeout candidate down the road as well. That does not mean a predator would step in immediately and offer a 25% premium to this morning's discounted price. No one would accept the buyout because all of the recent shareholders would essentially be punished. After a certain period of time, these old shareholders gradually get replaced with newer shareholders that own the shares at a lower price. This has been on an internal Bait Shop WATCH LIST, but has never been able to be thought of as takeover bait because the valuations were too excessive.

As of June the company had 3.8M shares of its 18+M share float in the short interest. That is over 10-times its average daily volume, and about 21% of its float. We do not yet know what it will say regarding earnings, but you can bet those will be down as well. The company had a high-30's P/E and had a market cap of $399.7M based on the $20.19 close yesterday. This is going to bring these numbers back in-line with the sector as the company may be reaching a maturing and excessive growth vacuum. So don't be afraid to use some caution and patience here and forget about trying to use the old ratios to determine multiples, because those will all be out of whack. After the dust settles and whenever the overall environment is starting to look like there is light at the end of the tunnel is when you want to revisit this name with conviction. Until then, this may just be a leveraged trading instrument for fast money rather than a play for traditional value and long-term investors.

Jon C. Ogg
June 29, 2006

The Wheels Come Off, Again, In Detroit

Stocks: (GM)(F)(DCX)

At the beginning of the year, GM was a poster child for the bankruptcy of a big American auto maker and Ford was considered in decent shape with the Ford family repeatedly saying the Chapter 11 was not an option.

The landscape has shifted. Ford's debt was recently downgraded by S&P, and even the company CEO admits that the turnaround he has championed is not on track.

What happened between the beginning of the year and now is that incentives have returned. The Big Three have repeated renounced incentives as an option to stimulate sales, but with inventories up and sales down, all three car makers are moving to zero percent financing or employee pricing for all customers.

One would think that with Ford cutting over 10,000 employees through buyouts and GM dropping over 30,000 hourly workers that the hundreds of millions of dollars in annual saving would be enough to get the car markers' North American operations back into the black.

But, the drop in SUV sales and pick-up truck purchases is pounding the American manufacturers and the hurt to Ford is particularly acute due to the high percentage of these big gas inefficient vehicles in its mix.

GM has the slight advantage of having its price-per-vehicle up about 5% in the first five months of this year. That at least gives the largest car company a small buffer.

Chrysler, due to its parent Daimler Benz, has the advantage of a company that owns the Mercedes line of cars and other businesses.

Ford's stock has been beaten like a red-headed mule. The shares have dropped from a 52-week high of $11.19 to the current low of $6.34. The company's market cap is an appallingly low $12 billion. This for a company with annual revenue of over $177 billion.

If the next few months show that Ford's big SUV and truck sales continue to drop, the stock has not seen its bottom.

Douglas A. McIntyre can be reached at douglasamcintyre@gmail.com. He does not won shares in companies he writes about.

Google Gets Creative (GOOG)

:By Yaser Anwar of Equity Investment Ideas

The concept of interactive TV in a two-screen environment. Meaning with the TV and either a computer or web-enabled portable device.

The Pew Internet & American Life Project reports that 17% of Americans were online when they last watched TV.

The service goes something like this: Jane watches TV with her laptop nearby. When she clicks over to a particular program her laptop "hears" a snippet of the audio, matches it to its database of audio samples, and identifies it as a particular episode.

From there, it creates an ad-hoc social community of other viewers watching the same thing, so Jane can discuss the broadcast on message boards and view complementary content -- a gossip column about the characters' real-life antics or photos of the cast at the Emmys. When a commercial for Steve Carrell's latest film interrupts the show, the computer picks up the audio and serves an ad listing the nearest theater and showtimes.

Their system doesn't rely on connecting the PC to the TV through a cord or wireless connection, but instead uses an ambient audio "listening" technology using the microphone commonly installed on new computers.

Source: Advertising Age


Semiconductor Oversupply Continues

By William Trent, CFA of Stock Market Beat

Although we have frequently noted what we view as alarmingly fast growth in semiconductor equipment purchases relative to the end demand for semiconductors, it looks as though the supply will continue to grow unabated for a while. DigiTimes reports:
Semiconductor Manufacturing International Corporation (SMIC) will sign a fab construction contract with the Wuhan city government (Hubei province, China) and the pure-play foundry will increase its monthly 12-inch wafer capacity by 25,000 wafers after the completion of construction in 2007, according to company officials. SMIC reportedly gained US$3 billion in investment aid from the Wuhan government for the new fab construction.

Furthermore, although some manufacturers including pure-play foundry Taiwan Semiconductor Manufacturing Company (TSM) are slowing their expansion plans by postponing equipment delivery, DRAM makers are still looking to continue with their expansion plans, according to sources at equipment makers.

Meanwhile, wafer maker Wafer Works will expand its 6-inch silicon wafer monthly capacity in Taiwan by 20% to 300,000 wafers in the third quarter. The company will mainly focus on 4- and 5-inch silicon wafer production at its China subsidiaries but will also supply 6-inch wafers for China-based customers.

This expansion has mild implications for semiconductors for two reasons: Wafer Works is a small company and it also manufactures wafers for solar cells. It is currently running at full capacity, and we doubt their capacity increases will be broadly felt.


Pre-Market Notes for June 29, 2006


S&P FAIR VALUE -$1.90.

(AAP) Advanced Auto parts lowered guidance.
(ALXN) Alexion reported its bypass graft drug study failed again to meet statistical primary endpoints.
(AM) Amer Greetings $0.25 EPS vs $0.25e; said expenses are running higher this year than it planned for later this year.
(ARRO) Arrow Intl $0.31/R$122.3M vs $0.33/$121M(e); sees next Q $0.390-0.41 vs $0.39e.
(ASN) Archstone-Smith Trust will acquire DeWAG for $649M.
(ASYT) Asyst Tech gets stock options probe.
(ATYT) ATI Tech $0.16/R$652.3M vs $0.15/$662M(e); sees next quarter revenues soft; stock trading down 5%.
(BIIB/ELN) Biogen and Elan get Tysabri approved in the EU for MS.
(BMY) Bristol Myers gets FDA approval for SPRYCEL for myeloid leukemia that has resisted treatment and another type of resistent leukemia.
(BP) BP Amoco was accused by U.S. CFTC of secretly and illegally corning part of the propane market in 2004.
(CI) Cigna upped its share buyback plan by $500M.
(COMS) 3Com -$0.04 EPS vs -$0.05e.
(CPA) Copa has its 6.5+M secondary todat.
(CREL) Corel $0.38 EPS vs $0.34e; thinly followed.
(DELL) Dell made some reorganizational changes to N.American sales operations that hadn't been announced.
(DISK) Image Entertainment -$0.01 EPS vs $0.04e.
(DUK) Duke Energy is seperating its gas and power businesses into 2 seperately traded public companies.
(EQR) Equity Residential sells its Lexford Housing Division for approximately $1.1B.
(FWLT) Foster Wheeler enters license contract in China with Shanghai Boiler Works.
(GIS) General Mills $0.61 EPS vs $0.61e.
(GOOG) Google announced "Checkout" to eliminate the need for multiple passwords.
(HILL) Dot Hill will pay $3.35M for alleged past damages and Crossroads will dismiss legal claims.
(IFS) Infrasource registered 10+M shares for holders.
(IHS) IHS $0.23 EPS vs $0.22e.
(JBL) Jabil said it authorized $200M for share buyback plans.
(LLTC) Linear tech disclosed stock options probe.
(LTD) Limited announced $100M share buyback plan.
(MERX) Merix $0.17 EPS vs $0.14+e.
(MON) Monsanto $1.21 EPS vs $1.18e.
(MU) Micron $0.12 EPS vs $0.10e; revenues tad shy; sees flat guidance on revenues;
(MVSN) Macrovision announced a stock option probe.
(NWRE) Neoware lowered revenue guidance; stock DOWN 34%.
(OSG) Overseas Shipholding sells 2 vessels for $168M.
(PAYX) Paychex $0.32 EPS vs $0.32e.
(PFE) Pfizer will make a cheaper generic version of its own Zoloft anti-depressant to fend off generic competitors after it loses patent protection this month.
(RHAT) Red Hat $0.07 EPS after $7.6M charge on options vs $0.09; R$84M vs $83.3M(e); stock down 5%.
(RSAS) RSA Security trading up 16% on NYT reports of impending sale to EMC or another bidder.
(SIRI) Sirius up almost 1% on CIBC call (see below).
(SRDX) SurModics and AbbeyMoor Medical to jointly develop products to treat various diseases of the prostate.
(SYMC) Symantec is reportedly being asked for $1 Billion according to the WSJ; some of this was previously disclosed in prior months.
(THC) Tenet Healthcare is paying $725M in settlement with the Department of Justice into Tenet's receipt of certain Medicare outlier payments before 2003.
(VOCL) VocalTec announced it is changing its CFO and its CTO.
(WOR) Worthington $0.53 EPS vs $0.43e.

(AVR) Aventine priced its IPO at $43, at the high end of an already raised range.
(GMKT) GMARKET priced its 9.1M share IPO at $15.25, at the high-end of its range; YHOO owns large portion of GMKT.
(BIDZ) Bidz.com IPO has been delayed due to market conditions.

ALVR started as Accumulate at ThinkEquity.
AMP raised to Neutral at B of A.
AUXL started as Buy at Soleil.
BRL started as Outperform at CSFB.
BSX cut to Sell at Citigroup.
CAG raised to Neutral at CSFB.
CAKE added to new buy list at Goldman Sachs.
CPX started as Neutral at B of A.
DUK raised to Overweight at Lehman.
FCFS started as Buy at Jefferies.
FRX started as Outperform at CSFB
HOT added to new buy list at Goldman Sachs.
HSE cut to Sector Perform at CIBC.
IGT raised to Overweight at JPMorgan.
LVLT started as Equal Weight at MSDW.
MCD raised to buy at Merrill Lynch.
NDAQ raised to Outperform at Thomas Weisel.
NIHD started as Outperform at FBR.
NOK reitr Buy at Citigroup.
NTPA started as Buy at ThinkEquity.
RD raised to Sector Perform at CIBC.
REG raised to Overweight at JPMorgan.
S cut to Mkt Perform at Wachovia; stock down 1.5%.
TCO raised to Overweight at JPMorgan.
TLM raised to Outperform at CIBC.
URBN maintain buy but tgt cut to $22 at B of A; ests cut at Lehman.
VLO raised to Buy at Merrill Lynch.
XRAY started as Equal Weight at MSDW.
YSI started as Buy at Merrill Lynch.

CIBC issued a report raising Sirius (SIRI) sales targets and lowered XM (XMSR) sales based on trailing data and shortages at XM; no rating changes and both stocks reiterated Outperform.

Weekly Jobless Claims at 8:30 AM.
Weekly Nat Gas inventories at 10:30 AM EST.
Q1 final GDP released at 8:30 Am.
FOMC decision due at 2:15 PM EST with a 100% chance of a rate hike.

European Stock Market Report 6/29/2006

Stocks: (BCS)(BP)(BAB)(BT)(GSK)(UN)(UL)(VOD)(AZ)(BF)(BAY)(DCX)

European markets were sharply higher at 5.15 New York time.

The FTSE was up 1% to 5,737. Barclays was up 1.6% to 604. BP was up 1.2% to 626. British Air was up .8% to 337.5. BT was up 1.6% to 233.75. GlaxoSmithKline was up 1% to 1482. Prudential was up 1.7% to 584. Reuters was up 1.6% to 372.75. Unilever was up .7% to 1182. Vodafone was down .2% to 112.75.

The DAXX was up .8% to 5,502. Allianz was up 1.5% to 120.59. BASF was up 1.3% to 60.58. Bayer was up 1.6% to 33.86. DaimlerChrysler was up 1.2% to 37.44. DeutscheBank was up 1% to 84.71. Deutsche Telekom was up .2% to 12.27. Siemens was up .9% to 89.03.

The CAC 40 was up 1.1% to 4,827. Alcatel was up .5% to 9.71. AXA was up 2.1% to 25.17. France Telecom was up 1% to 16.45. ST Micro was up 1.3% to 12.46. Vivendi was up .7% to 26.89.

Douglas A. McIntyre

News Digest 6/29/2006


According to Reuters, the Federal Reserve is set to raise rates for the 17th consecutive time.

Reuters also reports that Google will release its new online payment service today. It will be called Google CheckOut.

The Wall Street Journal writes that a federal judge has approved a Yahoo! click fraud settlement in which the internet company was accused of not providing adequate protection for fruadulent clicking on ads on its service.

The Wall Street Journal reports that traders from BP illegally cornered a portion of the U.S. propane market in 2004 causing prices to rise in seven million homes.

The WSJ also writes that Ford is hitting stronger resistance that it thought several months ago. The company is trying to restructure its North American operations to get them profitable again. The company's SUV sales have been hurt by rising gas prices.

The WSJ reports that Tenet will pay $725 million to settle charges that it manipulated Medicare to get higher payments.

The WSJ writes that Symantec is fighting a U.S. tax bill of $1 billion involving Veritas Software, a company it acquired.

The WSJ reports that Pfizer will introduce a generic version of Zoloft now that its patent has run out.

The New York Times reports that Detroit car makers are introducing incentives as inventories rise. Chysler is introducing employee pricing. Some incentives from the Big Three could be worth over $5,000 for certain cars. Chrysler may also offer no interest financing to match Ford and GM.

The NYT reports that music companies EMI and Warner Music have each launched bids to take the other over.

RSA Security, which put itself on the market a few months ago, may be sold to EMC in the near future. The deal could be worth $1.8 billion.

Douglas A. McIntyre

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