Analyst upgrades

• Baird upgraded Con-Way (NYSE: CNW) and Old Dominion (NASDAQ: ODFL) to Outperform from Neutral due to the benefits of a likely bankruptcy of YRC Worldwide (NASDAQ: YRCW). Old Dominion's target was raised to $40 from $26 and Con-Way's was raised to $42 from $22.
• Citigroup upgraded Pride International (NYSE: PDE) to Hold from Sell as it believes higher valuation levels are warranted with the upcoming spin-off of Seahawk Drilling. Citi raised its target on shares to $25 from $18.
• Jesup & Lamont upgraded FedEx (NYSE: FDX) to Buy from Hold with a $63 target as it believes the worst is largely behind the company.
• Hewitt Associates (NYSE: HEW) was upgraded to Neutral from Underweight at JPMorgan.
• ArvinMeritor (NYSE: ARM) was upgraded to Buy from Neutral at Goldman.
• Abercrombie & Fitch (NYSE: ANF) was upgraded to Buy from Neutral at SunTrust.

This morning, Goldman Sachs felt it prudent to up its view of the U.S. auto sector to Attractive from Neutral. The brokerage stated that it would use any current weakness as an opportunity to build positions. If, like me, you are questioning Goldman's strategy, the firm explained, "Despite the significant rally in auto shares since the February lows, we think we are still in the middle phase of a cyclical rebound in the auto sector."

In its note to clients, Goldman Sachs predicted, "improved affordability, improving confidence and significant pent-up demand as likely to offset the impact from gas prices and deliver significantly more upside in the space as auto sales gain momentum."

Analyst upgrades:

• Merrill upgraded Kraft Foods (NYSE: KFT) to Buy from Neutral citing progress in the company's turnaround plan, execution, and 2009 earnings growth.
  
• Thomas Weisel raised Express Scripts (NASDAQ: ESRX) to Overweight from Market Weight and believes the company's core business remains strong and that valuation is attractive.
  
• Friedman Billings upgraded shares of Symantec (NASDAQ: SYMC) to Outperform from Market Perform on valuation after checks indicated the company should meet Q2 expectations.
• NeuStar (NSR) was upgraded to Outperform from Neutral at Baird.
  
• UBS raised Advance Auto Parts (NYSE: AAP) to Neutral from Sell.
  
• Goldman upgraded Royal Dutch Shell (NYSE: RDS.A) to Buy from Neutral.

Analyst downgrades:

• Friedman Billings downgraded shares of Zions Bancorp (NASDAQ: ZION) to Market Perform from Outperform and lowered its target to $33 from $43 following the company's Q3 results, as they believe near-term credit trends and concerns surrounding its securities portfolio will limit upside. Shares were also downgraded at JP Morgan to Neutral from Overweight due to deteriorating credit trends.
  
• Banc of America cut Monster (NASDAQ: MNST) to Neutral from Buy to reflect a lack of margin stability and their belief consensus estimates remain too high.
  
• Barclays downgraded Avis Budget Group (NYSE: CAR) to Equal Weight from Overweight citing the global economic slowdown and refinancing risk.
• Johnson Controls (NYSE: JCI), Luxottica (NYSE: LUX) and ArvinMeritor (NYSE: ARM) were cut to Neutral from Buy at Goldman.
  
• Luxottica was also downgraded at HSBC to Neutral from Overweight.
  
• JP Morgan cut AuthenTec (NASDAQ: AUTH) to Underweight from Neutral.

Analyst initiations:

• Janney Montgomery believes Gladstone Capital's (NASDAQ: GLAD) management team and lower portfolio investment risk profile warrant a premium valuation. The firm started shares with a Buy rating and $13 target.
• CommVault (NASDAQ: CVLT) was initiated with a Buy rating and $14 target at Cantor, as the firm finds the stock attractively valued given its secular growth rate potential.
  
• KeyBanc is positive on Papa John's (NASDAQ: PZZA) management team, growth potential, cost initiatives, and differentiation. Shares were assumed with a Buy rating and $30 target.
• Arris (NASDAQ: ARRS) was initiated at Jefferies with a Hold rating and $7 target.
  
• Rigel Pharmaceuticals (NASDAQ: RIGL) was initiated at Banc of America with a Neutral rating and $21 target.
  
• Morgan Stanley started Hansen Natural (NASDAQ: HANS) with an Equal Weight rating.

As soon as Washington Mutual (NYSE: WM) evaporated, the natural question was: "Who's next?" And after its stock plunged 38% during the day, it now looks like the next one to go will be Wachovia (NYSE: WB). This time the buyer could be Citigroup (NYSE: C),

With $120 billion in adjustable rate mortgages (ARMs) it got through its Golden West Financial acquisition, Wachovia is particularly vulnerable to the capital-eroding impact of a drop in their value. But if Citi bought Wachovia, it would get a stronger presence on the East Coast and its well-regarded retail banking management.

Citi is not the only firm to talk merger with Wachovia -- prior to its decision to turn itself into a bank holding company (BHC) on Sunday, Morgan Stanley (NYSE: MS) was in merger discussions with Wachovia. I just wonder how any deal could be struck with Wachovia that would not involve those nasty ARMs. And if those ARMs are involved in a deal, how can the acquirer avoid those nasty digestion problems that have sent Wachovia shares into a dive.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

MOST NOTEWORTHY: McClatchy News, Ansys and Fortune Brands were today's noteworthy downgrades:

• Deutsche Bank downgraded shares of McClatchy (NYSE:MNI) to Sell from Hold after transferring analyst coverage as they believe leverage issues will continue to pressure the stock.
  
• Jefferies downgraded shares of Ansys (NASDAQ:ANSS) to Hold from Buy on valuation and their belief that a slow U.S. manufacturing economy may be impacting sales cycles at the margin.
  
• Fortune Brands (NYSE:FO) was lowered to Market Perform from OUtperform at Wachovia following its lowered 2008 outlook.

OTHER DOWNGRADES:

• Goldman removed ArvinMeritor (NYSE:ARM) and NYSE Euronext (NYSE:NYX) from the Conviction Buy List.
  
• Citigroup cut BJ Services (NYSE:BJS) and Weatherford (NYSE:WFT) to Hold from Buy.

Fed rate cuts help people who hold adjustable rate mortgages (ARMs) but they're less valuable to people seeking new mortgages.

That's because ARM rates reset periodically -- e.g., every year -- based on an index plus a lender's margin -- the amount a lender adds to the index, usually two percentage points or four percentage points, to set the actual interest rate of the ARM. The most common index for ARM adjustments is the one-year U.S. Treasury bill.

Last Friday, the one year treasury rate was at 1.88% -- down 3.04 percentage points below the 4.92% rate it was at in April 2007. The Fed's rate cutting has lowered the rates at the reset periods for those who already have adjustable rate mortgages. So a person who paid 2% plus the 1-year t-bill rate in April 2007 would have paid 6.92% during the last year and enjoyed a reset to 3.88% as of last week.

Countrywide Financial (NYSE: CFC) is already in deep trouble because of defaults in its subprime loan business, but who would have guessed that some of its higher-quality loans would get into trouble just as quickly?

The Wall Street Journal writes that, "Some loans classified as prime when they were originated are now going bad at a rapid pace." These loans are known as option adjustable-rate mortgages. They allow borrowers to pay very little in the first few years of the loan period. But an analysis prepared for The Wall Street Journal by UBS AG shows that 3.55% of option ARMs originated by Countrywide in 2006 and packaged into securities sold to investors are at least 60 days past due. That delinquency rate is worse than other mortgage companies offering similar products.

The really big trouble with these loans could begin in 2009, when more of them reset to higher rates.

The news points out two issues that have been largely masked as Wall Street and the media focus on the subprime mortgage mess. The first is that poor lending practices may have allowed a number of middle class home buyers to take on debt that they almost certainly could not repay unless housing prices continued to move up sharply for another five to ten years. The other is that if the mortgage default rates are bad today, the problem could worsen in a year or two.

The bottom line is that one of the largest drags on the US economy, which is housing prices and mortgage payment problems, may not bottom out for another 24 months.

If that is true, the recession that may be coming could be longer and deeper than investors would care to imagine.

Douglas A. McIntyre is an editor of 247wallst.com.

As of today, there's a new airline in the skies: Virgin America. That's right folks: British Billionaire Richard Branson has expanded his Virgin Atlantic fleet across the pond. The new San Francisco-based start-up will use a fleet of Airbus A320's to fly two routes: San Francisco to J.F.K in New York and San Francisco to Los Angeles International.

While Virgin America will only open with those two routes, they plan on ramping its schedule fast. In the next three months, Virgin will add Las Vegas and Washington Dulles to the schedule and move up to a total 10 U.S. destinations a year from now. The fleet plans to service 30 destinations within the next five years.

First Solar (NASDAQ: FSLR) implied volatility elevated as FSLR rallies 14%.

• FSLR, a manufacturer of solar modules with an advanced thin semiconductor process that significantly lowers solar electricity costs, is recently up $15.20 to $111.57.
  
• FSLR announced five new customer agreements for a total of $1.3 billion.
  
• Cowen reiterated its Outperform rating on FSLR. Banc of America reiterated its Buy rating and raised its price target to $115.
  
• FSLR August option implied volatility of 66 is above its 21-week average of 52 according to Track Data, suggesting larger price risks.

Gamestop (NYSE: GME) calls active as GME rallies on unconfirmed takeover speculation.

• GME, a video game and entertainment software retailer, is recently up $0.80 to $42.35.
  
• Unconfirmed chatter is circulating that Amazon.com, Inc. (NASDAQ: AMZN) is looking into buying GME.
  
• GME call option volume of 4,846 contracts compares to put volume of 783 contracts. GME August option implied volatility of 43 is above its 26-week average of 36 according to Track Data, suggesting larger price risk.

Option volume leaders today are: ArvinMeritor, Inc. (NYSE: ARM), Apple Inc. (NASDAQ: AAPL) and Baidu.com, Inc. (NASDAQ: BIDU).

Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.

MOST NOTEWORTHY: Blockbuster Inc (BBI), Molson Coors Brewing Co (TAP), Illumina, Inc (ILMN), and ARM Holdings plc (ARMHY) were today's more noteworthy upgrades:

• Citigroup upgraded Blockbuster Inc (NYSE: BBI) to Buy from Hold based on valuation, improving box office visibility and their belief that the lower-priced online-only rental product will help improve costs.

• Molson Coors Brewing (NYSE: TAP) was upgraded to Buy from Neutral at UBS based on valuation, volume strength and pricing.

• Matrix believes strong demand for genetic analysis equipment is boosting profits for Illumina (NASDAQ: ILMN), upgrading shares to Strong Buy from Sell; Matrix sees upside to their Intrinsic Value Calculation of $50/share.

• ARM Holdings (NASDAQ: ARMHY) was upgraded to Overweight from Underweight at JP Morgan to reflect the strength in the high-end handset market...

OTHER UPGRADES:

• Bristol Myers Squibb Co (NYSE: BMY) was upgraded to Buy from Hold at Citigroup.

• RBC Capital raised Sapient Corp (NASDAQ: SAPE) to Outperform from Sector Perform.

• Sandler upgraded Chemical Financial Corp (NASDAQ: CHFC) to Hold from Sell.

• UBS raised WESCO International, Inc (NYSE: WCC) to Buy from Neutral.

• Piper Jaffray upgraded shares of Omnicell, Inc (NASDAQ: OMCL) to Outperform from Market Perform.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: Today's most noteworthy upgrades were Reynolds American, Inc (RAI), PRA International (PRAI), Wendy's International (WEN), 3M Company (MMM) and PMC-Sierra, Inc (PMCS):

• JP Morgan upgraded shares of Reynolds American Inc (NYSE: RAI) to Neutral from Underweight to reflect the company's solid 2007 outlook and improved cigarette mix.

• Baird raised PRA International (NASDAQ: PRAI) to Neutral from Underperform.

• Wendy's International (NYSE: WEN) was upgraded to Neutral from Underweight with a $26 target at Prudential.

• 3M Company (NYSE: MMM) was upgraded to Overweight from Neutral at Prudential...

OTHER UPGRADES:

• Bear Stearns upgraded shares of ArvinMeritor, Inc (NYSE: ARM) to Outperform from Underperform.

• Roth Capital raised WPT Enterprises (NASDAQ: WPTE) to Hold from Sell.

• Soleil upgraded the semiconductor sector to Overweight from Underweight, believing a recovery in fundamentals is likely over the next 6 months and expecting shares to outperform over the next 12 to 18 months.

• First Albany upgraded shares of Xilinx, Inc (NASDAQ: XLNX) to Buy from Neutral to reflect operating leverage and the end of the inventory concern.

• Wachovia upgraded shares of Agco Corp (NYSE: AG) to Market perform from Outperform.

• Deutsche Bank raised Dover Corp (NYSE: DOV) to Buy from Hold.

• Corning (NYSE: GLW) was upgraded at Goldman to Buy from Neutral with a $31 target.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).