Uncertain outlook to keep US markets volatile (page 1 of 3)

US Stocks

The direction of the US economy still remains an uncertain event and continues to impact US equity investments with high volatility.

Remain positive on International Business Machines (IBM US, $105.70, CSFB rating: Hold, CSPB MG V Buy Recommendation). The company reported mixed Jun-2Q01 results with revenue that fell below expectations (0% year-on-year growth) to $21.6 billion, while EPS of $1.15 matched analyst forecasts. Hardware (40% of total sales) and software (14% of total sales) revenue fell below expectations at -5% YoY contractions, while Global Services revenue (41% of total sales) surged +7% YoY. With Europe (including Middle East and Africa) contributing 27% of total sales and Asia contributing 20%, the impact from a stronger US-dollar (foreign currency translation effects) reduced total sales by 5% (Bloomberg). Nevertheless, with a wide technology product offering and sustained brand leadership, we believe the company is well positioned to withstand the present IT slowdown. As such, we maintain IBM as a core holding candidate and would look to accumulate more of the stock below $100. Short-term price at $112.00 and 12-month price target at $122.00.

Positive on RJ Reynolds Tobacco Holdings (RJR US, $50.65, CSFB rating: Buy, CSPB MG V Buy Recommendation). RJR reported June-2Q01 results with revenue growing 10% YoY to $2.3 billion and EPS of $1.26 (above expectations of $1.25). We continue to like RJR as an attractive valuation play (12.7x price-to-earnings, and 0.6x price-to-sales and price-to-book). With the company's cash position remaining strong at $2.6 billion, and with an additional $300 million allocated for share repurchases (over the next 12 months), we believe RJR's stock price should attempt to stabilise at around the $45.00 - $50.00 range. We maintain our Buy recommendation on the stock and view any price weakness below $50.00 as an opportunity to accumulate for a 12-month investment performance (maintain price target at $72.00).



US Technology

Remain cautious on technology stocks. On a week-on-week basis, the NASDAQ Composite Index fell 2.6% (closed at 2029) on continued weak sentiment due to frustrations that an earnings recovery for technology companies will have to be "pushed-out" to 2002. Nevertheless, positive news comments from Nokia Corp (NOK US, $19.20, CSFB rating: Strong Buy) and Broadcom Corp (BRCM US, $41.00, CSFB rating: Hold) of a potential rebound in sales growth in 4Q01 helped smooth out negative sentiment during the week.

Over the last 13 weeks, the NASDAQ Composite Index has been trapped in a tight trading range between 2325 and 1943. Investors remain uncommitted to technology investments and trading activities continue to be direction-less. Looking ahead, we believe the index still has three potential downside risk levels: (a) 1976 or -2.6%, (b) 1945 or -4.1%, and (c) 1756 or -13.5% from current levels. Taking this price-risk scenario into consideration, and the fact that companies continue to have limited visibility ahead, we remain cautious on technology issues in the short-term.

For long-term investors who own the Nasdaq-100 Index Tracking Stock (QQQ US, $41.65), we recommend the following accumulation strategy to capitalise on potential near-term market weaknesses and be positioned for any subsequent rebound in price (and sentiment) as we approach 4Q01.

Positive on Micromuse Inc (MUSE US, $15.52, CSFB rating: Buy, CSPB MG V Buy Recommendation List) in the long-term (1-3 years) but cautious in the short-term (1-3 month).