ECB expected to cut rates by 25bp (page 1 of 2)

US Stocks

Cisco's Chief Executive John Chambers said that the first few weeks of this quarter (1Q) are meeting Cisco's forecast (0% to -5%) and are beginning to see signs that business is stabilizing. This is certainly comforting news because two weeks ago when CSCO announced its 4Q results, the CEO said that long-term visibility was still challenging, but remained cautiously optimistic that a bottom maybe achieved within the next one to two quarters in the US. This is the same person who said CSCO would grow 30% to 50% in the next 5 to 10 years. Not to mention two months ago, John Chambers said that it was the worst time to go ahead with any sort of restructuring.

Mr. Chambers sure does remind us of a brilliant fund manager whose investment acumen cannot go wrong during the bull market.

Last checked, CSCO was selling at over 52x EV/EBITDA. As for the announced reorganization, CSCO is a company well known for its financial engineering. Be it growth in earnings through the purchase of other companies with stocks, off balance sheet vendor financing (last estimated figure to be closer to US$1 billion), the use of pro forma earnings, and cash flow from stock options being exercised. We doubt that this practice would change anytime soon. Until CSCO comes up with a credible plan to improve its organic growth, we will remain skeptics.

The government has appointed a judge to read and decide a remedy on the Microsoft case. A breakup is still possible, but chances are low at this stage of development. In order to avoid a trail on the bundling issue, an out-of-court settlement is likely. Microsoft has shipped its newest operating system on last Friday, but wide availability of XP is not expected until October 15, 2001. The XP is not involved in the original lawsuit, but the principle of co-mingling the O.S. with other functionality from Microsoft is. Depending on how MSFT is willing to open its architecture and compatibility with third party software, an injunction ordered by the Justice Department will certainly hurt sentiment. Even if no injunction is being ordered, the acceptance of XP in its present format, and that of the Xbox will put MSFT to a severe test. Despite the 5% movement on last Friday, we stick to our view that MSFT is a buy around the $55 to $57 levels.


Europe

Despite German GDP coming to a standstill in Q2 the German business confidence index for July improved for the first time since reaching its all-time high in May 2000. The euro's resilience and ongoing evidence that inflation pressure in Europe is easing offers now more room for the ECB to lower interest rates to help the European economy. The fact that the ECB has lowered interest rates only once this year reflects a higher rate reduction potential than in the US. This will support European shares going forward despite higher correlation of European equity markets to US interest rates.

The improved interest rate outlook does cause us to turn slightly more positive on European equity markets. However, there is no reason to turn outright bullish as we still see no evidence that earnings show any bottoming signs and the issues of inventory overhang and lack of demand in the manufacturing industry remain unsolved. Hence, we do not believe in a strong and sustainable rally until there is more clarification about the 3Q01 earnings. Even though markets do widely anticipate weak results we expect the months of September and October to be volatile again.