Close to bottom but still some distance from recovery (page 1 of 2)

US Stocks

Manufacturing capacity started its above average growth back in 1995, and hitting a high on 1998 with a rate of 7.3%. Although the rate of growth slowed in 1999 & 2000 due to the impact of the economic turmoil in Asia, but it remained above the average. The bulk of the increase came from three industrial groups:

-Computer & Office equipment
-Electrical Machinery
-Semiconductors & Related Electronic Components

From 1996 to 2000, the average capacity growth rates of the above groups were 46.5%, 27.4%, and 52.2% respectively, this compares with the average total industry growth of 5.4% for the same period.

The industry groups only made up a small percentage of the total industrial production (IP), combining for 14.4% of total IP as of 1999, as oppose to 48% for durable manufacturing, 40% for non-durable manufacturing, with the largest portion going to the electrical machinery at 8.5%.

The utilization rate for computers & office equipment was below 80% at the end of 1999, and was at 79% 4Q 2000. As for the other two groups, it is still above 80% but declining as demand slows.

The result will not only be inventory build-up, but idle capacity. The recent rate cuts should keep consumer spending up, working off the excess inventory. But it is unclear whether this is sufficient to deal with the slowing hi-tech investment spending. If not, then write-offs will further put pressure on an already fragile earnings base.

From an investment perspective, we know where the potential excess capacities are. Stay focused on quality companies with good value that have the cash flow and market share to overcome these problems i.e. IBM (IBM $96.18), Microsoft (MSFT $54 11/16), and industrial groups that have no capacity issue like RJR (RJR $56.10).

US Technology Stocks

Near-term investment sentiment remains depressed, and investors are still unsure about committing cash to buy technology stocks. With the quarterly company earnings reporting season currently in place, we advocate the conservative strategy of "sitting on the side-lines" as we believe prices will be trading without any clear and sustainable direction during the period.

On a year-to-date basis, the NASDAQ Composite index registered a negative performance of -25.5% (closing down -4.5% to 1840 last week). Looking into the week ahead, it is still relatively early to conclude if declining prices have found a floor as the strength of current sentiment may weaken further on any unanticipated negative company-related news ahead, and subsequently drive technology stock prices lower. As such, we maintain our cautious stance on NASDAQ in the near-term.

Maintain Hold on Nortel Networks (NT US, $14.05, CSFB rating: Buy) and remain cautious in the near-term. Earnings warning from NT sparked renewed jitters among already bearish investors and reinforced the demand-slowdown scenario within the telecommunications equipment market. NT's management now expects March-1Q01 sales to come in below expectations and a deeper EPS loss than anticipated. Competitive pressures have been exacerbated by a reduced end-demand environment and the resulting "buyers' market" have continued to squeeze margins thinner. Nevertheless, we believe NT is well positioned to significantly improve performance in 2002 and be one of the first few to break out from the prevailing depressed mode.

NT continues to boast the next generation product portfolio relative to all other system integrators.