Zacks Analyst Blog Highlights: ArthroCare and Priceline.com.

CHICAGO -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day, the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: ArthroCare (Nasdaq:ARTC) and Priceline.com (Nasdaq:PCLN).

See the latest posts to the Analyst Blog by visiting: http://at.zacks.com/?id=2673

Here are highlights from Tuesday's Analyst Blog:

Another Take on the Fed

After 17 straight increases the Fed decided enough is enough for the time being. Below is the Fed Statement (in italics) and my translation of what it means.

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Self explanatory.

"Economic growth has moderated 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."

The Fed has acknowledged that the economy is slowing down. The economy right now is reflecting the effects of the increases in Fed Funds rates of several quarters ago. Monetary policy works with long lags, and what we are seeing today is more a reflection of the Fed raising rates from 4.0% to 4.25% last year, rather than the increase from 5.0% to 5.25% in June.

The cooling of the housing market has been gradual so far, but the housing market tends to move in slow motion. There is a significant risk that the housing market decline may start to accelerate. An implosion in the housing market could be enough to throw the economy into recession. While given the strong corporate profit outlook, I don't think it is going to happen. However, the flexibility to respond to a big slowdown is not there the way it was in 2001-2002. A vicious circle could be very vicious, and the Fed wants to avoid this possibility.

Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

A more dovish statement than I had expected. Inflation pressures moderating over time may be more of a hope than a good prediction. If inflationary expectations start to rise, it will be tough to reverse them. The current data seems to suggest that inflation is accelerating, not moderating. However, the key might be the undefined term, "over time." I suspect that it could be measured more in quarters than in months. Yet they see the risk of a serious slowdown in housing causing a recession as being a bigger threat than inflation running hotter than they would like.

Nonetheless, 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.

A pause does not mean done, however, given the dovishness of the pervious paragraph, don't look for the upward march of rates to resume at the September meeting, however, if we don't see inflation moderating or at least stop accelerating, we might see another increase at the following meeting.

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; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

This is the first Fed meeting I can recall where the decision was not unanimous. In other words, the decision to stop was not a slam-dunk; there are serious risks to either path. I find it very interesting (and a little disturbing) that the market has sold off on being given what it apparently wanted. Maybe it is just "buy on the rumor, sell on the news." The bond market is acting as you would expect.

ArthroCare Target $55

ArthroCare (Nasdaq:ARTC) reported better-than-expected first quarter top and bottom-line results on better Sports Medicine and ENT performance. Management reiterated its 2006 guidance and expects at least 20% revenue growth in 2007. Our revenue and EPS estimates increase on the quarter upside and slightly improved margin expectations.

We continue to believe the company has a solid outlook with upside potential. Our target remains at $55.00, roughly equal to 35x 2007 EPS. We retain our Buy recommendation.

Stellar Results at Priceline

Priceline.com (Nasdaq:PCLN) reported stellar second quarter results with gross bookings up 63% year-over-year. Earnings per share were up 15% year-over-year and $0.04 ahead of our estimate.

The company's international business expansion and increased retail offerings continue to be the primary drivers of its overall growth. We still believe the shares trade at an attractive value. We maintain our Buy rating and our $35 target price.

See the latest posts to the Analyst Blog by visiting http://at.zacks.com/?id=2645

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