Rally for the last week has been overdone

US Technology
For the week ahead, we expect investors to adopt a more cautious buying strategy ahead of the Fed's meeting on Tuesday (11-Dec-01).

Good news from Intel Corporation's (INTC US $33.24 CSFB rating: HOLD) mid-quarter update sparked a rally on Wall Street. Consensus estimates were expecting Intel to report earnings of 10 cents a share on sales of $6.2 to 6.8 billion, while the company unexpectedly raised its revenue guidance to $6.7 to $6.9 billion for the current quarter, 4Q01. The bullish expectations on Intel's revenue growth for the quarter was derived mainly from the outstanding results in rolling out it's Pentium 4 chip into the mainstream product line. With low microprocessor chip prices, higher processing (1.8 ghz) speeds, the launch of Windows XP and unanticipated higher orders during the holiday season, have provided credible reasons for the company to post strong results for the current quarter. However, we believe INTC's positive turnaround in expected results has mostly been priced in to the company's stock price already. INTC is presently trading at 8x price-to-sales and 6x price-to-book (Bloomberg). As such, we do not suggest to "chase" after the stock at these levels but would prefer to accumulate the stock on price weakness below $28.00.

Cisco Systems Inc (CSCO US $21.16 CSFB rating: BUY) brought good cheer to investors as well after CEO John Chambers reported that the company's November orders met expectations. He added that he expects the firm's core networking market to expand in 2002. Consensus estimates were expecting CSCO to post earnings of 5 cents a share on revenue of nearly $4.5 billion for 2Q01. Although John Chambers delivered encouraging news, he also tempered optimism on the firm's future outlook with continued caution, as the current slow economic condition still left the company with low visibility. With restricted demand vision, along with the current weak economy, CSCO adopted to continue focusing on controlling its profits, cash flow and productivity so as to help position the company to grab further higher market share in the periods ahead. CSCO is trading at 7.8x price-to-sales, and 5.6x price-to-book (Bloomberg). Buy CSCO on profit-taking days at around the $16.50 level.

Sun Microsystems Inc. (SUNW US $13.39 CSFB rating: BUY) reported that its fiscal second-quarter sales were on target to meet expectations for 2Q01. Revenue would be up modestly from the previous quarter of $2.26 billion. Although business appears to be improving slightly in the current quarter, the company also mentioned that chances of returning to profitability may be slim until the second quarter of 2002. The company is expected to report revenue of $12.8 billion with EPS of $(0.09) this fiscal year, down from previous estimates of $13.1billion (EPS of -$0.04). Again, details for the current quarter remains limited due to the soft economic condition. We would be comfortable accumulating the stock for a 12-month investment period below the $11.00 level.

Europe
After a two-week consolidation in the technology sector it was some relief to the market that companies such as Cisco, Intel, Oracle and AMD confirmed that their businesses were doing according to plan and reassured investors of credible signs for a stabilisation in the business. This is good news for the industry. However, at this point in time we believe that this is well priced and expect some profit taking in the days ahead.

Despite our more optimistic longer-term outlook for these stocks, this market continues to offer good trading opportunities. Investors should make use of these excessive price movements by selling at least a part of their holding with the intention to buy it back at lower levels. In the meantime funds should be switched into some of the neglected sectors such as pharmaceuticals or insurance stocks, which have underperformed the market by 9.6% and 3.7% respectively since the beginning of November. These sectors could benefit from a sector rotation.

Overall we are of the opinion that the environment for equities has improved and believe that 2002 could turn out to be a decent year for equities after almost two years of struggling. There is not too much room left for bonds after this year's rally and investors still hold significant cash that is yielding close to nothing. We remain convinced that these factors plus the low level of interest rates will help the economy and earnings to start showing signs of improvement. This leaves hardly any attractive alternative to equities. However, investors will need to focus on stock picking rather than broad investments and trading rather than buy-and-hold.

Russia announced its decision to reduce its oil exports (not production) by 150000 barrels/day. However, the OPEC failed to come up with a production cut over the weekend, which caused oil prices to drop on Monday morning. The oil price is likely to hover in the USD 18-20 until OPEC and non-OPEC countries will be able to find a consensus. We expect oil stocks to underperform until this situation clears. TotalFina (EUR 150.80; FP FP) remains our preferred oil stock because of valuation reasons.

Siemens (EUR 72.10; SIE GY) sold shares in Infineon on the market over the past few weeks reducing its majority stake to below 50%. In addition to that Siemens transferred 200 million Infineon shares in a non-voting trust, which reflects about 29% of Infineon's shares. As a consequence Siemens voting rights decrease to about 20% from 50.4% before these transactions. This concludes a commitment of both companies, which wanted to reduce Siemens' influence on business decisions in Infineon.

We view this positively as the new situation will enable fund managers to increase the combined holding of Siemens and Infineon in a portfolio. On a separate note Siemens confirmed its earnings targets for 2003 but remained vague in terms of 2002. The company expects earnings in fiscal 2002 (ending 30.9.02) to increase from last years. The recovery in the networks and handset division was pushed out by a year. This unit is not expected to produce black figures before the end of fiscal 2004. The stock gained 9.24% for the week.

Semiconductor stocks were the best performing stocks for the week. The gains were driven by announcements of Samsung and Hynix, which said that they were able to raise contract prices for DRAM by up to 20% in recent negotiations. This caused an almost 10% gain in DRAM prices. Infineon (EUR 27.31; IFX GY) was the main beneficiary and gained 24.5% for the week. Among all technology stocks semiconductor stocks have gained the most in recent weeks. In the short-term we recommend taking some profits out of stocks like Infineon, STMicroelectronics or Philips. We are very confident that these stocks can be bought at lower levels again.

Nokia (EUR 28.55; NOK1V FH) is giving an update on 4Q01 trading and its financial forecasts tomorrow. It is unlikely that the company will issue substantial news after the recent analyst day. The stock looks extended at the EUR 28-29 level and we recommend traders to reduce the position and buy it back in the mid-twenties. Nokia gained 9.40% for the week.

Usinor (EUR 14.44; USI FP) announced 3Q01 results. The company reported a loss of EUR 10 million versus expectations of a loss of almost EUR 85 million. Usinor said that steel prices are expected to increase next year driven by supply reductions and increasing demand. Steel prices are currently at a 20-year low. We feel confirmed that Usinor will report further good news in the near future as on December 12, 2001 further details about the merger with Arbed and Aceralia will be announced. It is this kind of positive news flow coupled with the cyclical nature of the stock that we like and reiterate our buy recommendation. Usinor gained 3% for the week.

Pechiney (EUR 57.50; PEC FP) has released details of its improvement plans. The company targets annual cost savings of EUR 450 million by the end of 2004. The savings will come from Aluminium (EUR 290 million) and from Packaging (EUR 160 million). Pechiney also said that operating earnings for this year would be in the range of EUR 520-540 million. Pechiney closed the week 5.50% higher.