Looking to better times ahead (page 1 of 4)

Though lower earnings will continue to add on to the volatility of the markets, one should be looking across the valley of disappointment to better times ahead.

US Stocks

Layoff announcements criss-crossed from industrial as well as technology companies, from DaimlerChrysler, ING Baring to Hewlett-Packard. A total of 133,000 job cuts were announced in December 2000. Companies are responding aggressively to the slowing economy by slashing cost, and this should provide a floor under the declining profit. Main Street is sending a message to Wall Street that management is serious about maintaining profit margins.

The latest manufacturing activities (January) fell to its lowest level since the end of the 1990-1991 recession. New orders and productions showed unusual low readings. In the 2H of 1999, the GDP was growing at a pace of 7% annual rate, and the last 6-month of 2000 was at an annual rate of 1.8%. We have witnessed a virtual collapse in economic growth. The industrial sector is experiencing no growth, whereas, the overall economy is rapidly slowing. The 4Q 2000 growth of 1.4% was the lowest since the 2Q of 1995. Furthermore, consumer confidence has taken a nosedive since last summer (143 July'00 to 114.4 Jan'01).

Perhaps the Fed has tightened for too long, realizing this mistake (belatedly as usual), Alan Greenspan has forsaken his hallmark gradualist approach in exchange for the quick and aggressive. As a result, we have seen a reduction of a full 1% point of the Fed fund rate in less than a month. The last time a cut of this magnitude occurred was during the more severe 1982 recession.

As Mr. Greenspan noted in his latest testimony that a lack of confidence can turn short, relatively painless recession into longer, more miserable one, as consumers snap their purses shut. Perhaps this is the reason that Mr. Greenspan is acting so aggressively in lowering rates, before this kind of psychology takes hold. Rather than what people are suggesting that he sees something the rest of us does not.

Improvement in monetary conditions, talks of tax cuts and regulatory rollbacks should continue to offset the drag from deteriorating profit growth. Though lower earnings will continue to add on to the volatility of the markets, one should be looking across the valley of disappointment to better times ahead.

Meanwhile, from a sector perspective, the defence, hospital management, and utility sectors look interesting, the following are stocks in each sector followed by CSFB:

Defence - new orders for aerospace equipment is picking up, so is the inventory build-up (from contracting levels) -

Boeing Company (BA $56.85) - strong buy CSFB
General Dynamics Corp (GD $69.88) - buy CSFB
Lockheed Martin Corp (LMT $36.40) - buy CSFB
Northrop Grumman Corp (NOC $86.90) - buy CSFB

Hospital management - higher payments from insurers offsetting increased labor costs -

HCA -The Healthcare Company (HCA $36.87) - buy CSFB
Tenet Healthcare (THC $44.09) - strong buy CSFB

Utility - the correction due to the power shortage crisis in California offer an opportunity. Furthermore, the Bush administration has refused to put a cap on rate charges -

American Electric Power (AEP $43.30) - buy CSFB
Dominion Resources (D $61.62) - strong buy CSFB
Duke Energy Corp (DUK $37.58) - strong buy CSFB
Entergy Corp (ETR $35.65) - buy CSFB
Exelon Corp (EXC $61.14) - buy CSFB
Pinnacle West (PNW $42.04) - buy CSFB
PPL Corp (PPL $42.48) - strong buy CSFB

US Technology Stocks

We do not expect the market to rally in the near-term in continued response to last week's 50-basis point cut in interest rates.