Looking to lock-in short-term gains for the tech stocks

US Stocks

Positives:

-victories on the military front
-strong retails sales for the month of October
-consumer sentiment according to the University of Michigan survey showed a rise so far in November
-the dollar has firmed in recent months
-corporate earnings may be reaching bottom
-oil prices is at two year low

This burst of optimism has seen investor poured cash into equity funds.

The Taleban is retreating in Afghanistan, but neither Osama Bin Laden nor his terrorist network al-Qaeda has been captured or destroyed. The 7.1% rise in the advanced retail sales was powered by zero financing of auto sales. Consumer confidence is fragile and would deteriorate with any setbacks in the military or economic front. Japan is sinking into a recession again, and in the US, there is a whiff of deflation, not only in prices, but also in production, and employment. The low oil price is a result of declining demand due to a global slowdown. Sales may have stabilized, but companies are still giving low guidance for the 4Q and claiming 2002 is too murky to call.

Furthermore, many stock valuations remain high by historic standards. The observation is that stocks have corrected substantially from the top; it should be the bottom. The fact that stocks could have fallen so much and still be expensive, is perhaps a reflection of how perceptions went beyond irrational exuberance back in 1999-2000.

Looking back with the P/E from September 30 2001 based on trailing 1-yr earnings. The chart dates back to 1882, with a 10-year interval, and a P/E of 5 with an increment of 5

Though the current P/E is below the levels of March 2000, it is still high by historical standards. In fact, since 1950 only about 5% of the monthly observations are above the Sep-30-01 value. Current P/E is only slightly below the pre-1929 crash level. It is certainly not cheap, and it is not a time to be brave, but safe.

Viewed in that light, the 'Global Value Opportunities' offering or value stocks in general may be a good way to balance the risks of staying invested in growth stocks or in tackling what is likely to be another volatile year for equities in 2000.


US Technology

On a week-on-week basis, the NASDAQ Composite Index gained a further 3.8% to 1898.

We have been highlighting (for 2 weeks) the increased risk that NASDAQ stocks will potentially weaken on profit-taking. Though stock prices have continued to rally, the rate of appreciation has slowed which we believe indicates a potential short-term exhaustion in positive buying sentiment. We continue to believe that the risk remains high at current levels as short-term investors would be looking to sell on profit-taking and potentially take stock prices temporarily lower. We recommend investors to be cautious in initiating any new investments at the current time. We recommend investors who bought technology stocks like Intel Corp (INTC US, $30.63, CSFB rating: Buy), Cisco Systems (CSCO US, $20.02, CSFB rating: Buy), and Dell Computers (DELL US, $26.60, CSFB rating: Buy) to SELL a portion of their profitable holdings and lock-in short-term gains.

We believe price volatility on stocks listed on NASDAQ will remain high as we approach the year-end. This also suggests that there will be ample opportunities to BUY again at lower levels.

Two weeks ago, we highlighted a strategy called "Zero-Cost Averaging" to help reduce risk in a volatile investment environment. This week, we would like to highlight the same strategy to take-profits on the NASDAQ-100 Index Tracking Stock (QQQ US, $39.37).


Europe

Global equity indices have enjoyed spectacular gains since they reached the lows on September 21. This happened in tandem with economic news deteriorating and companies posting weak earnings and bleak outlooks. It seems appropriate to wonder whether equity markets have once again run ahead of themselves. We continue to believe that markets will eventually give back parts of the gains made over the last two months. However, in the short-term markets do not follow the rational pattern of fundamental analysis but are driven by other factors. Equity markets are pushed higher by a combination of low interest rates, high cash levels and momentum trading rather than by economic and profits forecasts. While we believe that the latter will finally come into play again and lead markets lower we expect the former to remain the prevailing market force for the rest of the year. Under this aspect we see only limited downside risk for markets at this point in time and would use a likely profit taking over the days ahead to buy equities for trading purposes.

Given the strong momentum in the market and the growing risk appetite of investors to bet on an economic recovery next year we would prefer growth and cyclical stocks to defensive sectors such as food & beverage or utilities. However, we do not recommend adopting a buy and hold strategy at this point in time. Profits should be taken once the momentum appears to be fade.

Oil stocks came under massive selling pressure this week after the OPEC made production cuts conditional to cuts by non-OPEC countries. OPEC offered to cut 1.5bln barrels/day if non-OPEC was prepared to lower its production by 500000 barrels/day. While non-OPEC countries have so far committed about half of it, the ball remains with Russia, the largest non-OPEC producer. Russia only signalled 30000 barrels so far. However, even if non-OPEC comes up with an offer to cut 500000 barrels/day (which remains a big 'if') the OPEC decision marks a sharp shift to a much more fluid supply side dynamic with a sharp increase in the downside risk of the oil price. Consequently our positive stance on oil needs to be revised. While we continue to rate TotalFina (FP FP; EUR 142) 'Buy' because of its below-peers valuation and positive synergy effects we would reduce overweight positions to neutral. TotalFina will report earnings on November 21, 2001.

Vodafone (VOD LN; GBP 1.87) announced a strong set of figures saying that proportionate EBITDA rose to GBP 4.8bln and turnover increased by 32% to GBP 13.5bln. This was ahead of consensus. The strong number were driven by a large margin gain in Central Europe (mainly Germany) where EBITDA margins rose from 30% to 44% in the first half of Vodafone's fiscal year. Customer growth as well as the customer mix was also ahead of the company's expectations. However, goodwill amortisation amounted GBP 6.7bln, which included an impairment charge of GBP 4.75bln for Arcor, Lusacell and China Mobile. Vodafone said that no further acquisitions are planned for this fiscal year. We continue to like Vodafone but believe the stock is now trading at the upper side of the range.

Infineon (IFX GY; EUR 23.15) reported a mixed bag of earnings for the fiscal fourth quarter. Results showed high inventory write-downs and restructuring charges, which led to an EBIT loss of EUR 882 million. Excluding these one off-items financial performance was more or less in line with expectations. The positive surprise though was a more solid balance sheet with net cash exceeding EUR 500 million by end-September. The possibility of new equity financing over the coming quarters has now receded significantly. In the near term we expect Infineon to be well supported from the increase in DRAM spot prices even though we question the sustainability of this recovery. We continue to like Infineon as an aggressive semiconductor play as the valuation gap with key comparables remains significant. The closure of this gap will depend on the development of the DRAM prices or eventual joint ventures to be announced in this field.

Nokia (NOK1V FH; EUR 28.45) announced that they would be licensing their software to other handphone makers. The fact that it will be launched well before Microsoft's solution, which is facing different obstacles is a big success for Nokia. It will enable Nokia to receive a license fee for every handphone equipped with Nokia software. It would also bring Nokia up the value chain, which would allow it to be valued closer to a software company. Nokia remains our core holding in the technology sector in Europe. We believe that the recent implementation of GPRS will trigger a big replacement market. However, like most technology stocks Nokia looks extended as it is pushed up by the momentum rather than by fundamentals.

Siemens (SIE GY; EUR 68) reported a good set of earnings well exceeding analysts' expectations. The most surprising part was the performance of the telecom infrastructure units ICN (fixed line) and ICM (mobile), which posted a profit compared to a consensus loss. The fact that Ericsson and Alcatel reported big losses in these units underlines the good performance of Siemens. The industrial businesses posted a mixed performance. The cyclical element of these businesses might well increase investors' attention for the stock. Looking at 2002 figures the stock is expensive. However assuming that businesses like Power Generation and Transport have improved valuation for 2003 looks attractive. We see still quite some risks in Siemens' strategy but believe that various analysts will have to raise estimates. Coupled with the high momentum in the market this could lead the stock higher. We view the stock as an attractive trading buy at current levels.