Build up long term positions rather than chase stocks

US Stocks

Arguments run both ways: Value investors want to buy cheap assets. They will be stomping mad if this is the bottom because assets never got cheap enough for them. The analysts/economists/strategists from Wall Street are probably keen that things improve as much out of conviction as much out of self-interest

There are not enough compelling reasons to believe this is a rally. But the reasons never are compelling at the bottom. Earnings growth rates are the primary determinant of stock prices over long periods of time. But at the same time, earnings are lagging, not leading indicators. After the last recession, it took four years until earnings on the S&P recovered to prior highs. Stocks were however cheap in other terms, like relative to book value, replacement value or assets. That being said we would not make a case for investing based on valuation. Especially since the rally is not value-driven. It is liquidity-driven.

The lack of E in the P/E would make the stock markets fairly expensive soon as the markets rebound. There are several developments that could still change the current sentiment-

1. The threat of Anthrax or other terrorist attack
2. Results that come in worse than expected
3. A reversal of the recent good economic figures
4. Higher unemployment

Sir John Templeton recently said the following in an interview:

'Since we never know when the bottom is, its probably best to aim at having never less than 50% of your money in stocks on a worldwide basis and the other 50% will sometimes be in bonds and sometimes be in stocks. So even though the odds are that we will see lower share prices in America and other nations, I still think you can hold 50% in well-managed portfolios
worldwide of common stocks.'

Please refer to recent US stock recommendations.

US Technology

On a week-on-week basis, the NASDAQ Composite Index gained 6.1% to 1703. So far, the index has recovered close to 22% from the year-low established on 21 September 2001. For the week ahead, we believe the continued up-move towards the 1750 level may encounter some resistance as investors turn cautious ahead of company earnings releases. As such, we are not eager to chase equity prices up during this time. Rather, we suggest to let the expected volatility die down a little during the week before accumulating technology stocks.

Yahoo! Inc (YHOO US $12.50 CSFB rating: HOLD) reported net revenues totalling $166.1 million for 3Q01, a decline from $295.5 million for the third quarter of last year. The company is expecting its 4Q01 revenue to come in the range of $160-$180 million, lower than analyst expectations of $190 million. With the online market in a deep slump showing no signs of revival, we believe the company continues to face serious challenges -- as online advertising sales still accounts for 80% total revenue. Though YHOO is attempting to enhance its revenue streams, the company has made little enhancements in diversifying its revenue inflows. The company has moved towards subscription based 'premium services' and is charging customers for extra mailbox storage space. Though YHOO is suffering from the troubled advertising market, it is still confident it can meet current estimates (operating profit of 5cents a share) for the full year. YHOO is presently trading at 8.23x price-to-sales. We recommend investors to avoid the stock for the time being.

Not surprisingly, Sun Microsystems Inc (SUNW US $10.04 CSFB rating: BUY) joined the group of companies blaming the September 11 terrorist attacks for a wider than expected loss with revenues ranging from $2.7-$2.9 billion (results were below expectations of $3.5 billion for the quarter). EPS will come in at between -$0.05 and -$0.07 from earlier estimates of a loss of $0.02 a share (CSFB). Although Sun has made serious efforts to maintain staff levels, the weak end-user market has forced the company to cut its workforce by 9% so as to reduce quarterly costs and expenses. The company has been hurt in all areas of its business due to the global weakness in demand for hardware Internet infrastructure equipment and high competition. Prior to the terrorist attacks in New York, Sun was already experiencing poor sales in Europe and Japan. At $10.04, SUNW is trading at 3.08x price-to-book and 1.78x price-to-sales. For those looking to buy into SUNW, we suggest accumulating the stock when price weakens to $8.50, and look forward to an improved 2002/03 stock performance.

Europe

Over the last three weeks equity markets gradually adopted a pro-growth stance, as investors were prepared to look beyond the current dismal earnings situation. Despite the panic selling after the US attacks we find it striking that cyclical consumer goods, technology and auto stocks gained 32.68%, 27.82% and 23.70% since the September 21, 2001 lows while healthcare stocks gained 13.90% and food & beverage stocks lost 0.6%. We believe that next year's growth expectations for many of these stocks are still too optimistic and we would be cautious chasing them at current levels. We remain concerned that eventual retaliation measures from terrorists could cause pain and fear again and hence destroy the current optimism. Additionally, this week marks the start of the earnings season of some of the major European technology companies. Given the strong rally of these stocks we see potential for profit taking on the back of the earnings release.

Sentiment will remain the key driver for markets over the next few months. Consequently, we would start building up long-term positions in weakness than chase stocks. Long-term investors who missed the opportunity three weeks ago will get another chance to buy into the market.

Sodexho Alliance (SW FP; EUR 52.40) benefited from a strong sales report and increasing optimism regarding the US economy. Sodexho continues to offer value and exposure to a recovery of the global economy. The strong cash flow generation will enable Sodexho to weather the current downturn and emerge in an even stronger position. The stock gained 13.67% last week.

Carrefour (CA FP; EUR 53.70) released 3Q01 sales figures. The French hypermarket LFL (like-for-like) sales grew 0.6% showing an improving trend and growing in line with the market for the first time this year. Among the big markets Spain was the only disappointment posting a 4.1% LFL decline. We believe that Q3 shows that a strong platform has now been put in place in France to enable Carrefour to regain above industry-average sales momentum in Q4 and into next year. Management did not change full year guidance and said that it was on track to meet its 8% sales growth target for 2001. We remain confident that the remainder of the year will go according to plan and maintain our view that Carrefour deserves to trade on a valuation equivalent to the average of its global peer group rather than a discount as at present. If Carrefour were to trade on a global sector average multiple on current valuations the shares would be at EUR 65.

Nokia (NOK1V FH; EUR 20.70) announced potentially one of its biggest GPRS deals to date, with China Mobile. The delivery is to take place in 4Q01 and will cover 2 million out of China Mobile's 52 million subscribers. We view this as another sign that operators start to show increasing confidence in the success of GPRS as the major operators have now launched several GPRS models in volume. Additionally, Nokia launched the 5510 model aimed at entertainment. The new model includes a music player, a radio, enhanced SMS functions and a number of games. The new phone, which is held horizontally with both hands, has a full keyboard split on each side of the centred screen. We believe that Nokia reflects value and remain positive on the stock from a fundamental long-term point of view (which is in contrast to a trading stance).

However ahead of this week's earnings release we expect the stock to remain volatile. CSFB is looking for 3Q01 EPS figures of EUR 0.14, which is at the bottom of the EUR 0.14-0.16 range given by the company. Network margins are expected to decline from 18.5% in September 2000 to 12% while mobile phone margins are expected to drop to 17% from 19.6% a year ago.

ING (INGA NA; EUR 31.25) issued a profit warning today. ING cut its 2001 profit forecasts to 5% from 17%, citing insurance claims and slowing sales following the September 11 terrorist attacks in the USA. ING said that the potential claims in connection with the reinsurance business have raised the total estimate of losses relating to the events to approx. EUR 600 million before catastrophe cover. The largest part of the claims will be charged against catastrophe provisions and retrocession contracts. As a result, the net effect on ING's profit and loss account for the year 2001 is estimated at EUR 150 million before tax and EUR 100 million after tax, representing 3% of last year's operational profit before tax.