Be a smart shopper

US Stock

So far, apart from durable goods orders, majority of the economic data seems to come in line or better than expected. The economic background appears to be quite sound and further deterioration should be capped by the Fed's move in cutting 150 b.p. Yet, the stock markets continued to go lower with every bit of negative economic and earnings news. The reasons for further decline seem to be no longer valid, as the hefty valuations are being reversed, and bond yields have come off to a one-year low. Furthermore, there is a trend towards stabilization of profit margins as corporations drastically reduce costs.

The initial stock market reaction to the latest Fed Fund rate cut was that the Fed has not yet done enough to restore confidence in the economy. We have seen the "non-tech" defensive stocks being sold-off since the beginning of March. Month to date the performance is as follow:

-DJIA -9.4%
-NASDAQ -10.4%
-SOX +18.6%

The SOX (Philadelphia Semiconductor Index) did exceptionally well, as they were the first to correct due to lower earnings prospect. Perhaps this is the sign that we are looking for; that the stock markets are nearing the bottom of this brutal sell-off, which started a year ago.

With the 1Q ending, and the ritual of the pre-announcement warnings upon us, no doubt there are skeptics out there who think that we not at the bottom yet. But from the First Call consensus estimates, recovery has been delayed further back to the 4Q this year, and any earnings decline should be well reflected.

If the stock exchange is a department store, and the stocks are the merchandises, then it will be the only store in the world that customers run away from a sale. Perhaps they will only come back when these items are no longer selling at marked-down prices, but rather at an inflated one!

Several stocks were highlighted during last week's morning calls, they are recommended to long term investors because they offer attractive valuations.

-Pfizer Inc (PFE $37.53)
-Amgen Inc (AMGN $56 3/16)
-WorldCom Inc (WCOM $16 7/8)
-Texas instruments Inc. (TXN $38.81)
-Apple Computer Inc (APPL $23.00)

So, be a smart shopper; be selective and go for bargains.


US Technology Stocks

With the NASDAQ Composite index closing up 2% to 1928 on Friday last week, many investors have begun to speculate over the weekend that a potential bottom has formed and that the current environment might be suitable for buying technology issues again. We, on the other hand, do not believe so.

Looking into the week ahead, we believe the battle between the raging bear and the sluggish bull will continue, and as such, it is still relatively early to call for a bottom on technology stock prices at the present time. Though we believe prices are in oversold territory, the risk still exists for weak sentiment to drive prices deeper into bear country. As such, we advocate further investment patience for more price stability (during the week) before concluding the establishment of a near-term floor leaders in selected technology segments.

Near-term Neutral on Sun Microsystems (SUNW US, $18.25, CSFB rating: Buy). Last week, SUNW introduced its new mid-range (as well as mid-priced) UltraSparc III products which we believe should help improve the company's competitive position within the mid-range server segment. Nevertheless, CSFB's channel checks have indicated that the server market remains weak. We expect the slowing US economy and the subsequent suspension of IT spending will remain the greatest demand risk factors to SUNW's earnings growth for the year. In late February 2001, the company announced that they will miss 3Q01 sales and profit forecast due to a severe decline in end demand. With visibility ahead still clouded and forward looking economic conditions uncertain, we believe SUNW's stock price will be hard pressed to perform over the near term. SUNW is expected to report 3Q01 results on 13 April 2001. Revised First Call Consensus estimate for SUNW's March quarter results is currently at $0.08 a share. In terms of valuations, SUNW presently trades at multiples of 29x Price to Earnings, 3x Price to Sales and 6x Price to Book (source: Bloomberg). We do not recommend buying SUNW at the current time for any short-term trading scenario. Rather, we suggest strategic investors who are looking to build a fresh position within the technology space to adopt a 3-tiered accumulation strategy and buy SUNW for an improved 2002 investment performance.

Data Networking Segment* Buy Levels
Sun Microsystems T1 = $17.00
(SUNW, $18.25, CSFB rating: Buy) T2 = $13.50
T3 = wait
Average Purchasing Price $15.50

*3-tiered structured buying strategy
T1 = 1st tier buy level
T2 = 2nd tier accumulation level
T3 = 3rd tier accumulation level

Europe

Sentiment feels as grim as it was euphoric a year ago and valuations are looking almost as cheap as they looked expensive then. Adding to the gloom in Europe, the Ifo economic research institute's index of western German business confidence fell in February more than expected, reaching a 20-month low. The closely watched index fell to 94.9 from 97.5 in January, which was well below consensus estimates of 97.

The Swiss National Bank cut its key rate by 25 basis points leaving the European Central Bank (ECB) as the only major central bank not reducing rates to counter an economic slowdown. However, optimism of a quick ECB rate cut eased after the German government today said import and factory prices increased more than expected in February, driven by higher oil prices. The ECB's policy panel will meet on Thursday. The next meeting after that is scheduled for April 11. The ECB has expressed a shift in thinking over the last week and it now seems more willing to acknowledge the risks to Euro area growth emanating from the slowdown in global demand. In our view, the ground is being prepared for an interest rate cut.

Zurich Financial Services (ZURN SW, CHF 528) said the 2000 results were disappointing and below its own expectations. This was the second time in six weeks that Chief Executive Rolf Hueppi told investors earnings would fall short of his forecast. Although stated earnings for 2000 (USD 2.1bn) were below prior expectations, they had been boosted by both a combination of a post-tax USD 350m release of reserves and a USD 215m run-off profit. This apart, 2000 earnings would have been USD 1.5bn. ZURN expects its 2001 normalised profit (adjusted for cyclical trends) to fall to USD 1.8-2bn due to lower investment income, the strength of the USD, a weakening US economy, an unexpected need to strengthen reserves for future insurance losses and its continued e-commerce expansion. ZURN will exit the reinsurance business by spinning off its Zurich Re division by the end of the year. In addition, it will sell other non-core and under-performing assets worth up to USD 4bn and cut costs. Zurich's US unit, Farmers Insurance Group, and Bank of America agreed to form a partnership to develop and sell insurance and banking products in the US. The main goals are cost synergies and higher product penetration. ZURN shares were heavily traded and fell 23% for the week and 46% year-to-date. We downgraded ZURN to a hold on Friday, March 16. CSFB issued their first official comment on Friday last week downgrading the stock to hold from buy and removing it from the CSFB focus list. While we will be reviewing ZURN this week, we stick to our HOLD recommendation for the time being.

Phillips (PHIL NA, EUR 30.56) warned that profits from its semiconductor division would fall 10% and that both its components and consumer electronics units would post a loss in Q1 2001. PHIL is affected by the tough macro-environment for wireless, PCs and consumer electronics in the US in a dual way as a slowdown in system sales is compounded by the over-capacity situation that has emerged in components such as semiconductors, displays and storage systems. Long-term clients are advised to hold positions given a potential recovery in chip manufacturing late 2H01. Recent pristabilisation in DRAM prices is a first indication that the storm is weakening.

Nokia (NOK1V FH, EUR 29.47) set ambitious targets at its annual general meeting stating that it aims to boost its handset market share to 40% from 32% last year without, however, setting a time frame. It also said that it targets 35% of the global market for third-generation wireless networks. Ericsson (LMEB SS, SEK 58.5) lowered its forecast for industry sales this year to between 450m and 525m handsets as fewer people replace their phones. This brought Ericssons' forecast in line with Nokia's reduced numbers (450-500m). We retain our HOLD on both stocks.
Swisscom shareholders approved the purchase of a 25% stake in its mobile phone unit by Vodafone (VOD LN, GBP 1.94). Vodafone is expected to finance the USD 2.6bn deal in a cash and share transaction. Vodafone will expand its reach and reaffirm its number 1 position in Europe.

We a take loss of 13.28% on Nordea (NDA1V FH, EUR 6.80) since it broke our stop-loss level at EUR 6.53. Given the continued uncertainties in the fundamentals of future earnings from banking divisions, we decided to execute our stop-loss level.