Rob Black's Marketwrap for Monday: Gold, Citigroup, Continental Air, Charles Schwab in Focus

Includes: C, SCHW, UAL
by: Rob Black

Stocks fell to their lowest levels in a month as oil surpassed $70 a barrel and gold rose the most since September 2001, increasing concern that higher commodity prices will hurt the economy.

Dow down 63 points (0.57%) to 11073 
Nasdaq down 14 points (0.64%) to 2311
S&P 500 down 3 points (0.29%) to 1285 

Gold rose to a 25-year high in New York, and silver topped $13 an ounce, on concern that a dispute over Iran's nuclear ambitions may lead to a disruption in oil exports, boosting global energy costs and spurring inflation.

Citigroup (NYSE:C), the world's biggest financial-services company by market value, reported a better- than-expected 3.6 percent increase in first-quarter earnings, led by record revenue at its securities unit and international bank.

Wachovia (NASDAQ:WB) and SunTrust Banks (NYSE:STI) said earnings growth slowed in the first quarter as rising short-term interest rates eroded profit from loans. 

SunTrust Banks  said profit increased 8 percent, the smallest gain in more than two years for the No. 3 bank in the U.S. Southeast, as borrowing costs rose and demand for consumer loans fell.

Wal-Mart (NYSE:WMT), countering criticism for not providing most employees health-care coverage, said it would reduce the cost of some medicines and shorten the time before part-time workers become eligible.

Columbia Entertainment made an unsolicited $1.68 billion bid for Aztar Corp., owner of the Tropicana casinos in Las Vegas and Atlantic City.

Good problem to have is Continental's (NYSE:CAL):Continental Airlines, the top- performing airline stock this year, was downgraded to ``underweight'' by Lehman Brothers after the shares exceeded the firm's 12-month price forecast. 

Tyco (NYSE:TYC) will pay $50 million to settle allegations that the company inflated results by more than $1 billion during the tenure of former Chief Executive Officer Dennis Kozlowski.

Of Note . . .  It is interesting to see that the money manager for Bill Gates has joined the board of directors for Pacific Ethanol (NASDAQ:PEIX). Dislike him for a lot of things but Bill Gates is good at making money.

Eco Speak . . .  Manufacturing activity in the New York area slowed in April. The bank's Empire State Manufacturing index fell to 15.8 in April from a revised 29.0 in March. The decline was larger than expected. Economists were expecting the index to fall to 24.5 from the initial estimate last month of 31.2. All major subcategories fell in April, with unfilled orders dipping below zero. Prices held relatively steady.

Financials . . . Charles Schwab (NYSE:SCHW) net income jumped 68% as client trading grew in response to rising markets and fees grew off a higher asset base. Improved client asset flows, higher equity valuations, and increased trading activity all contributed to making their first quarter 2006 net revenues the highest in over five years. The company said it earned $243 million compared to $145 million a share a year ago. CFO Chris Dodds said, "Improved client asset flows, higher equity valuations, and increased trading activity all contributed to making our first quarter 2006 net revenues the highest in over five years."

REITs . . .   REIT stocks gained 14.5% (per NAREIT) in 1st quarter 2006, an unexpectedly strong showing. The stocks have pulled back a bit since then and are now up 8.9% YTD (led by apartment REITs, +14.0%) as of this writing. Price targets imply 14.2% of additional upside, of which 10.1% is price appreciation and 4.1% is dividend yield, which given the recent pullback may be aggressive.  Improving fundamentals, global liquidity and increased pension fund allocations support view that money will continue to flow into the stocks towards those with the best growth. Expect the group to tread water near term, however, given rich valuations, the bond market backup and general economic uncertainty. In 2nd half 2006 though, the market should begin to price in accelerating earnings.

Metals . . . Prudential upgrades U.S Steel (NYSE:X) to Neutral.  The firm raised their price target to $60.

Stillwater Mines should benefit from surging prices in platinum and palladium markets. While the company does employ a hedging strategy for both metals, a relatively small amount of production is constrained by a ceiling price. Thus margins have improved with the run up in PGM prices. Management is aggressively enacting measures to change the company's high cost structure. Specifically management is attempting to increase production levels and employ selective mining in order contain costs and increase volumes.

Energy . . . Crude oil prices hit $70 again this morning, the highest level for nearly eight months, as Iran's pursuit of its nuclear program heightened fears the U.S. might take military action against the oil-producing nation. Iran, the 4th largest oil producer, has formed battalions of suicide bombers to hit U.S. and British targets should the Persian Gulf country's nuclear sites be attacked, the Sunday Times reported. Iran's President said the Middle East nation will use its power to serve its "friends,'' the Iranian news agency said yesterday. Another concern is the shut-in of more than 500,000 barrels per day in OPEC producer Nigeria following militant unrest.  The loss of high quality Nigerian crude will become more and more of an issue as the U.S. driving season, which begins in May, approaches.  Light sweet crude is particularly sought after by refiners during the spring and summer as it provides a high yield of gasoline. Oil at $70 a barrel, is not, and I repeat, is not, good for stocks.

JP Morgan downgrades Massey Energy to Neutral.

Transocean received a two-year contract worth roughly $248 million from Reliance Industries Ltd. The deal calls for Transocean to re-activate a semi-submersible rig for drilling operations offshore India.

Kinder Morgan Energy Partners bought assets including two rail terminals and a dry-bulk storage and loading operation in southern California and the Texas Gulf Coast area for a total of $63 million.

Suntech Power (NYSE:STP) was chosen to provide solar energy system for Beijing Olympics. The company will  supply a 130 Kilo Watts of  solar energy system for Beijing's main stadium for the 2008 Beijing Olympic Games.

Transports . . .  Genuine Parts reported income of $113.9 million up from $106.6 million in the same period during 2005. The distributor of replacement parts chalked up quarterly sales of $2.55 billion, up about 9% from the prior year's $2.34 billion, as NAPA sales rose 7%.

J.B. Hunt reported income of $49 million compared with $47.5 million in the year-earlier period. Revenue in the three months ended March 31 rose 10%. "Barring a downturn in the economy, something current forecasts are not suggesting, we would expect the remainder of 2006 to mirror the recent past and to continue to reflect demand outpacing supply," according to a statement from the company. []

Moody's Investors Service on Thursday cut its ratings on JetBlue (NASDAQ:JBLU) deeper into junk territory, citing poorer-than-expected operating results and challenges in executing its growth strategy.

Lehman Brothers cut Continental Airlines to underweight citing valuation.

Alaska Air upgraded to Equal-Weight from Underweight at Lehman- tgt to $37 from $32 based on valuation

Consumer Products . . . Eastman Kodak (EK) plans to raise prices on consumer and professional films between 3% and 17%, depending on the product, beginning May 1. The company also said it will raise prices on selected motion-picture films betweem 3% and 5%. Kodak said over the past year it has absorbed "unrelenting increases" in raw materials costs.

Leisure . . .  Harrah’s signed a letter of intent to purchase the Casino Magic Biloxi in
Mississippi from Pinnacle Entertainment. In addition, HET sold their currently closed Lake Charles property as well as an additional license in Louisiana  While little in the way of financial information was provided in the press release, analysts are positive on the transaction as the deal 1) relinquishes HET from a potentially expensive and difficult ROIC project in Lake Charles and 2) increases exposure in Mississippi, a lower tax rate and in our opinion, more stable jurisdiction.

Media . . .  XM Satellite (XMSR) plans to sell $600 million of senior notes due 2014 and senior floating rate notes due 2013.  XMSR said the deal will simplify the company's capital structure and are expected to lower its ongoing interest costs and extend the maturity dates of its debt portfolio.

CIBC cuts their target on Yahoo (NASDAQ:YHOO) to $37. The firm believes the company is a secular growth story, with its strong position and growth in branded advertising counter balanced by search market share losses to Google and that the company faces increased competition in most verticals and regions saying that the company needs to innovate quickly to avoid share erosion.

RealNetworks (NASDAQ:RNWK) prevailed in a patent infringement lawsuit brought against it by Ethos Technologies.

First Albany raises their target on Tivo to $18. The firm is saying the legal win is a material positive.

AOL formed a tie-up with China's number two media company. Shanghai Media Group will provide material for a Chinese language version of aimed at Chinese speakers in the United States.

I dig reading Barron’s as they often bring up arguments that you need to hear.  Barron’s did a classic job when they took on Tivo's (NASDAQ:TIVO) legal win, Barron’s says that investors may be expecting too much from a co with a tough road. Tivo could be acquisition bait yet its share of DVRs is on course to be passed this year by Scientific-Atlanta/Cisco and Motorola.  If the patents do hold up and cable companies are forced to license the technology than A $1 per month per subscriber fee could give TiVo $194 million in extra revenue per year by the end of the decade if it can grab half of the 32.3 million cable subscribers who'll have DVRs by then -- a big "if." Until that happens, TiVo will have to contend with a fiercely competitive market.  The article concludes by stating that the best exit strategy for Tivo may be a buyout.

Ferris Baker downgrades Tivo to Sell. They believe TiVo's recent stock price movement had been more a function of trading dynamics than fundamental valuation.

RBC notes that Comscore released its March US search data, which showed Google's (NASDAQ:GOOG) US market share at 42.7% (up from 36.4% in 3/2005. They see little to stop Google from reaching 70% market share eventually.

Retail . . . Restaurant earnings should be strong with in-line or better performance pretty much across the board. Quick Service Restaurant [QSR] companies have enjoyed the best sales trends and are likely to be most confident about guidance. Recently increased gasoline prices may prompt some caution about guidance changes even with a good March quarter.  Companies most likely to beat estimates include Yum! Brands (NYSE:YUM) (see full text for tax rate discussions) and Starbucks.
It is not obvious to us that any company is likely to miss earnings. Even for those for which we are worried about sales, such as Applebee's or Domino's, we expect earnings to be in line with expectations.  Yum! Brands has emerged as the favorite of our Outperform-rated stocks. Yum has just lapped its 2005 Sudan dye issue that marked the start of a year of underperformance in China. Domestically, Yum is performing strongly at Taco Bell and KFC. Yum has also been aggressively repurchasing shares. The stock has lagged the group, running essentially flat for the past year.  Rising gasoline prices may trigger more investor concerns about consumer spending. Restaurant spending has historically been quite resilient and defensive and we expect this to remain the case. The QSR sector is positioned to continue to benefit from trade down if consumer pressures grow.

Berkshire Hathaway has agreed to buy sports clothing maker Russell for $18 a share in cash.

Citigroup analyst Deborah Weinswig said Wal-Mart's (WMT) stock is "compelling" at current levels, citing the belief that the retailing giant was nearing an inflection. Weinswig reiterated her buy rating and $60 price target. She said she believes that "structural, operational and merchandising initiatives should begin to manifest themselves through improved sales and profitability growth as soon as the second half of 2006."

Wal-Mart (WMT) is phasing out sales of firearms in about a quarter of its stores, calling it a decision based on soft demand.  Gun violence and Wal-Mart's gun sales were linked in a Sheryl Crow song released last fall. When the retailer refused to carry the album, it drew criticism for censorship. The company is trying to change its image and is running ads in Vogue magazine.

McDonald's (NYSE:MCD) conceded that many of its menu items in the U.S. have higher levels of fat than those in its overseas restaurants. McDonald's CEO said recent coffee sales have 'Skyrocketed'.

Healthcare. . .  St. Jude Medical (NYSE:STJ) won FDA approval for its Merlin Patient Care System, a universal programming device for its implantable heart defibrillators and pacemakers. The medical device maker said that the computerized Merlin system allows doctors to more efficiently monitor and program the heart devices.

Technology . . . Oracle (NASDAQ:ORCL) is studying whether to launch its own version of the Linux operating system and has looked at buying Novell or Red Hat which are the two companies dominating Linux.

Goldman Sachs analyst Rick Sherlund cut his rating on Red Hat (RHAT) to underperform. Sherlund said Red Hat is on a "collision course" with Oracle and International Business Machinesfollowing its acquisition of JBoss. Sherlund said it is likely that Oracle, in particular, will partner with another Linux distributor and become more of a competitor to Red Hat.

WR Hambrecht notes that Nanotechnology companies are beginning to mature from development companies into commercial revenue companies. They expect Altair Nanotechnologies and Harris & Harris could move up significantly as news comes out over the next few months.

EMC should show continued strength from its high-end product line as well as software and is poised to launch a refreshed mid-range product cycle. Moreover, investors misunderstand EMC’s strong position with its customers in the technically complex storage systems business – which has enabled it to continue to gain share by focusing on what its customers need to enhance productivity, control IT costs and maintain competitive advantages.

Sony (NYSE:SNE) has adopted Synopsys’s alternating aperture phase-shift mask technology to enhance manufacturability of its high- performance chips.

Bookham slumped 22.2% after saying that it expects gross margin and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the third quarter to come in lower than originally forecast due to unexpected costs related to the shift of certain manufacturing operations to a facility in China.

AMD is subpoening Microsoft (NASDAQ:MSFT) in antitrust case against Intel.  AMD is miffed that MSFT's develop software for the Intel 64-bit microprocessors and helped advertise it.

Echostar (NASDAQ:DISH) lost a patent case with Tivo and a jury awarded Tivo $74 mln.  If TiVo's "time warp" patent ultimately withstands all challenges, it will be interesting to see how operators and set-top box manufacturers respond.

Flextronics announced a $250 million stock buyback.