Outlook remains uncertain with little reassurances from companies (page 1 of 3)

US Stocks

The 2Q reporting season is pretty much done. We can look back on it and say:

1. It was pretty bad
2. Very few companies offered much in terms of reassurance for 3Q and beyond

On the other hand, investors put US$10.6 billion into equity funds in June, down from US$18.1 billion in May. Yet the market rallied since July 24, 2001, with the NASDAQ being the best performer, up close to 5.5% thanks to positive comments from Craig Barrett, CEO of Intel Corp., and Merrill Lynch & Salomon's upgrades on semiconductor stocks and the call on the bottom of the chip industry.

The inventories to sales ratio declined in May, the data are consistent with the view that the worst of deceleration in the manufacturing sector is probably behind us. But a look at the comparison of the national NAPM (National Association of Purchasing Management) manufacturing and non-manufacturing surveys yielded some interesting results:

• The manufacturing sector continued to decline in July

• The rate of decline accelerated during the month as new orders softened somewhat from June and inventory liquidation accelerated

• Manufacturers continued to reduce payrolls and capital expenditures in cost cutting efforts.

• Though the Prices Index appears positive as most manufacturers are enjoying lower raw material costs, but it is also indicative of deteriorating pricing power for their finished goods

• Comments from purchasing and supply managers in July reflected a sense of relief with regard to energy prices

• The two most used words were "slow" and "flat." There were a few respondents expressing a sense of optimism and they were from construction-related industries

• Decreased activity in the non-manufacturing economy compared to June

• New orders decreased and order backlogs shrank more rapidly in July than in June

• Exports increased while imports decreased for the sixth month in July

• Employment was reduced and inventories continued to decline

• Prices decreased in July for the first time since February 1999, and the Non-Manufacturing Inventory Sentiment Index indicated that purchasing and supply executives felt somewhat less discomfort with the level of inventories in July than they did in June

• Increased business activity in July was reported by 21 percent of purchasers, compared to 30 percent in June

Stay with the sectors with relatively better earnings visibility as stated in the last weekly.


US Technology

Cautious on technology stocks. On a week-on-week basis, the NASDAQ Composite Index inched up 1.8% (closing at 2066) and maintained its direction-less trading behaviour.

Looking into the week, we expect investors to stay cautious ahead of Cisco Systems' (CSCO US, $20.05, CSFB rating: Buy) profit reporting on Tuesday (7-Aug-01). While we expect CSCO to post results inline with expectations, we believe investors will be focusing more on CSCO's revenue guidance for the quarters ahead, as well as any commentaries by management as to the state of the overall technology environment over the next six to twelve months. For those who own CSCO's stock and have been looking for an exit opportunity, we suggest trimming a portion of holdings on price strength at $24.00.

Neutral on Intel (INTC US $31.68. CSFB rating: HOLD).