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3/16/2010 9:35:45 AM Eastern Time

Reform of the Financial System has Arrived (Final Edition)
By Brian Sozzi, Research Analyst

At the very height of the meltdown in risk assets last year, to say there was clamoring for an overhaul of the financial system may be a gross misrepresentation. Investors wanted to tan the hide of executives who overstated the earnings power of a respective business, while Congress wanted to publicly flog bank executives who pulled in total compensation some 10x what Uncle Sam was cutting them annually. We sat through bank executives being raked over the coals for their lack of prudent business management (how were 40x leverage ratios prudent?) and watched as newly elected President Obama harped on the need to reform the financial system. We yearned for better protection of consumers, and an end to the "too big to fail" mantra. Yet, the inevitable arrival of financial reform seemed way out in the future. A bickering Congress would never get a bill passed according to many observers. In the meantime, risk assets have appreciated materially since March 2009. The S&P 500, for example, is only 9% shy of the pre-Lehman bankruptcy level and 26% from the pre-Bear Stearns hedge fund fallout high for the index.

The moment is now upon us to sit back and observe as our elected officials attempt to remake financial regulation. I think many would agree that a course of action is badly required to at least catch up to the financial wizardry of Wall Street minds. Notice I said catch up as the minds being shaped at top universities across the U.S., specifically those with Wall Street aspirations, are devoid of the feelings from the market rout of 2008/2009. The missing element, called experience, at such a precarious point in our nation's history, as I see it, will only serve to increase the innovation by the brightest minds in the desire to juice profits at the bulge bracket firms (and small regional players). After all, the wizardry will be needed as the Volker Rule, which appears in Senator Dodd's reform plan, essentially constrains risk taking by banks (prop trading) and even insurers. Don't think for a hot second that Goldman Sachs (GS) and others will not invent new products and services to help account for the part of their business the government is about to hatchet off. If anything is apparent to me in my readings of "The Partnership", which gives an in depth account of the history of Goldman Sachs, it's that the company is forever willing to forge ahead on innovation. The company is publicly traded, and has an obligation to its shareholders to bring in profits, either by increasing business in core operations or creating new ways of doing business.

Dodd Reform Plan

What Senator Dodd put forth yesterday, on balance, makes strides in advancing the oversight of systemically important institutions. Key aspects to the plan include:

* Creation of Consumer Financial Protection Agency, which will be housed inside the Fed but not regulated by the Fed.
* Creation of nine member council that has rule making powers, is headed by the Treasury, and has its own budget.
* Addresses "too big to fail."

From what we have observed, the plan has bi-partisan support. Why wouldn't it? What member of Congress would want to be seen as against financial system regulation following one of the biggest meltdowns in our history? Unfortunately, it creates another layer of government, one that may be slow to responding should a new crisis emerge. Another budget, more taxpayer dollars. Moreover, it will probably lead to higher fees from financial institutions and insurers. We are already seeing this unfold as the new credit card legislation took effect in February. Less risk taking places a potential lid on the growth potential of the U.S. economy. There is also a higher capital requirement for the banks, and aren't we trying to force the banks to lend more?

Areas of Interest

* The 10-year Treasury yield rose yesterday on the back of stronger than expected economic data in the U.S., but also likely as a result of China rattling its saber at the Obama Administration. Advancement of the 10-year Treasury yield bares close watch as the Fed is exiting the mortgage market at March end, interest rates remain very accommodative, and continued heavy note issuance is registered.
* What is the message being told by the Oil Index (OIX), which is 5% below the January high and looks poised to break below the 50-day moving average? The message, I think, is that the recovery will have its fits and starts (similar to what I voiced in yesterday's afternoon Hotline when highlighting the chart of FedEx).
* Chain-store sales, as measured by the ICSC/Goldman data, declined 0.4% from the prior week (week-ended March 13). But, it's important to note that for the week-ended March 6, chain-store sales increased a strong 2.9% from the week-ended February 27, with the latter measurement period reflecting generally poor weather. The data set today likely represents consumers waiting on the sidelines with respect to purchases of spring break related apparel and accessories and Easter seasonal; reasons for that temporary halt may reflect the pay cycle (for those getting paid every two weeks), desire to obtain the best possible price on seasonal goods, and unfavorable weather in the Northeast.

Gloves Getting Bloody
By: David Silver, Research Analyst

The gloves are coming off with Toyota (TM) and the now infamous blue runaway Prius.  After two investigations (one by Toyota and one by NHTSA), the company is announcing that there is no evidence that points to an unintended (and extended) acceleration.  The full report has yet to be released, but initial findings show that the brake would have had to been applied lightly and that the onboard computers indicate the brakes and accelerator were depressed about 250 times during the incident.  The engine is designed to stop accelerating when both the brake and accelerator are pressed; however, data indicates that the brakes were not pressed hard enough to get that result.  Toyota really better hope that the electronics are not an issue here; if it turns out that electronics are the problem, then the company will as Ricky Ricardo said "have a lot of escplainin' to do."

Analog Business, a Continuous Trend
By: Carlos Guillen, Research Analyst

Positive signs coming from the semiconductor industry continue trickling in. Last night Microchip Technology Incorporated (MCHP), a leading supplier of microcontrollers and analog chips, increased its revenue and earnings per share guidance for its March quarter. The analog space remains strong which is evident in most of the other companies in the space. Microchip said that it now expects revenue to increase sequentially by 8%, which puts revenue at approximately $270 million; earnings per share expectations were also increased to $0.42. This new guidance was much better than the prior guidance calling for revenue growth of 3% to 7% and earnings of $0.39 to $0.41. Moreover, the guidance was above the Street's estimate, which called for revenue of $264 million and earnings of $0.36.

Apparently the business is looking strong from all perspectives. In general the analog business continues its strong momentum. Demand for personal computers, smart phones, and flat panel displays is still strong despite what would normally be a seasonally weak quarter. Overall inventories remain low, and pricing is stable, representing a favorable environment for sustained revenue growth, at least in the short term. All in all, I believe 2010 will be a good year for the semiconductor industry as demand for PCs and handhelds will continue to boost revenues. Moreover, improving technologies are allowing the development of new products that are creating new markets. Some of these new market makers include devices such as net-books and tablets.

Final Note

Mixed signals are being gleaned from the latest reports on housing starts and building permits. Initially, futures reacted positively to starts and permits surpassing consensus forecasts for February. Tangible signs of economic activity are welcome. On the flip side of the debate, however, it may be better for housing market fundamentals if builders continue to work through the unsold inventory on their books as opposed to ramping up new builds. Should mortgage rates increase as the Fed exits the market at month's end, those newly built homes will be added to those previously sitting on the market and likely foreclosures that are on tap. Our homebuilder sector analyst David Urani is pouring through the results as we speak, and will go into greater detail in the afternoon Hotline report.

Long Idea: Lincare Holdings Inc. (LNCR) @ $42.25
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Trading Parameters
Entry Price	Entry Limit	Stop Loss	Trading Target	Target	Long-term Target	Options
$42.25	see comments	$38.00	N/A	$49	$52.00	N/A
Options Trade Parameters
Type	Option Symbol	Entry Price	Strike Price	Expiration Date
Call	LQN100821C0	$4.50	$40.00	8/21/2010

BACKGROUND: Lincare Holdings Inc., together with its subsidiaries, provides oxygen and other respiratory therapy services to home health care market in the United States. It provides home oxygen equipment, including oxygen concentrators, which are stationary units that provide a continuous flow of oxygen by filtering ordinary room air; and liquid oxygen systems, which are thermally insulated containers of liquid oxygen. The company also offers respiratory therapy services, such as nebulizers and associated respiratory medications that provide aerosol therapy for customers suffering from chronic obstructive pulmonary disease (COPD) and asthma; continuous positive airway pressure devices, which maintain open airways in customers suffering from obstructive sleep apnea by providing airflow at prescribed pressures during sleep; non-invasive ventilation that offers nocturnal ventilatory support for customers with neuromuscular disease and COPD; and ventilators, which support respiratory function in severe cases of respiratory failure. The company was founded in 1972 and is headquartered in Clearwater, Florida.

SKINNY: Lincare's incumbent strong position in the oxygen industry remains intact.  However, in an industry that by and large remains highly fragmented, the Company is well positioned to benefit from the inevitable industry consolidation.  The exit of many smaller players will likely be a boon to the Company's organic growth strategy.  As 2010 progresses, the Company is well prepared to make acquisitions that will be a prudent fit into its broader strategic growth objectives. As it stands, the healthcare industry is on the verge of dramatic changes due to pending legislation.  As such, the oxygen business will likely be impacted due to expected modifications in Medicare payouts. Management's emphasis on eliminating costs from the system, and the savvy usage of its capital, are sources of encouragement.  The stock has room to $49.00 and then $52.00 in the long-term.  Risk-averse investors should use $38.00 as a mental stop-loss.

Key Fundamentals
PEG	Book Value	Institutional Holdings	Price/Sales	Average Daily Volume	Shares Outstanding
1.12	13.801	109	109.7	109.70	65.71M
Market Value	Insider Activity	52-week High	52-week Low	Annual Earnings Estimate
2.77B	13 SELLS	42.44	19.71	2.53

Analyst Coverage
Credit Suisse – Reiterated NEUTRAL	Barclays Capital – Reiterated EQUAL WEIGHT	UBS – Downgraded SELL