No major disappointments in Europe regarding 4Q01 figures.

US Stocks

The consensus is for no change on Wednesday's FOMC. The 4Q results will remain the dominant factor. The costs of lay-off are still showing up in the current earnings reports, the next 3 - 6 months will be crucial, if the unemployed fail to find employment within this period, consumption and bad debt will be negatively effected.

JP Morgan Chase (JPM $34.99) closed below $35.00 on last Friday due to its exposure to Kmart, price levels getting attractive. Our buy range is $32 to $35

Adding the following stock on our watch list:

CVS Corp. (CVS $28) is close of our buy level of $26, the company will be announcing 4Q on Feb-5-02 of $0.239, a 53% decline from a year ago.

For this week, earning publications will be issued for Park Place entertainment (PPE) Jan-29-02 -$0.049 & Aflac Inc. (AFL) Jan-31-02 $0.341

US Technology

On a week-on-week basis, the NASDAQ Composite Index rose 0.38% to 1937 after an encouraging speech by Fed Chief Alan Greenspan and some positive earnings surprises.

Last week, Amazon.com (AMZN US, $14.44, CSFB rating: Buy) and EMC Corp (EMC US, $19.90, CSFB rating: upgraded to Strong Buy) surprised investors with better than expected numbers and gave a relatively nice outlook for the second half of the year as their businesses appeared to be improving. Besides AMZN and EMC, other technology companies like Compaq Computers (CPQ US, $11.95, CSFB rating: Buy), Nokia Corp (NOK US, $23.12, CSFB rating: Strong Buy), Cisco Systems (CSCO US, $19.13, CSFB rating: Buy) have also reiterated the similar views, along with pick-ups in order inflows.

For the week ahead, we expect the positive sentiment (based on the improving company outlook) to be tested by the macro economical data that is to be released.

Potential downside risk to the Nasdaq Composite Index is initially expected to be at 1830 (or -5.5% away from present levels).

Looking further ahead, we expect technology issues to be relatively sober on the company news front as most technology companies have already completed their earnings reporting for the quarter. With this in mind, we will now focus on the stocks that have delivered and/or raised expectations, as well as targeting companies that posses good potentials to deliver above average growth rates. As an example, we are focusing on EMC, which gave an encouraging outlook with an upside bias. Though we are cautious in the short-term on the overall technology space, as well as the storage sector, EMC's positive guidance lends us temporary support to improve our views on the sector in the medium term.

We believe the storage area network (SAN) is one of the increasingly important parts of the corporate IT infrastructure. The rapidly growing data flow over the corporate networks, broadband access, intranets etc require not only a huge storage capacity, but also the management of this stored data. SAN is breaking up that bottleneck. And, companies like EMC, Brocade Communications (BRCD US, $35.57, CSFB rating: Hold), Qlogic Corp (QLGC US, $47.73), Veritas Software (VRTS US, $45.22, CSFB rating: Strong Buy) or Emulex Corp (EMLX US, $44.39, CSFB rating: Hold) are the major players within the segment. We believe that the SAN industry is big enough to accommodate more than one winner (out of those names) due to the fact that there are only few overlaps in the respective product portfolios. Nevertheless, while our views are improving in the SAN segment, we are still cautious on buying the stock at the current time. For example, BRCD's (one of the favourites that is expected to release earnings on February 27th) stock price has risen over 175% since its low on September 29th of last year. We like the company, but we don't like the stock price. Conclusion: Short-term Hold, and wait for profit-taking activities to lead prices lower.


Europe

Mr. Greenspan's slightly more optimistic tone during a senate hearing and Nokia's earnings report managed to turn around the cautious sentiment that prevailed earlier in the week.

Traditionally the first ones to report, technology companies posted a string of earnings. Overall, there were no major disappointments regarding the 4Q01 figures. However, the outlook statements of most companies did not deliver what many investors hoped. An eventual recovery in this industry is not likely to happen before the second half of the year. In some cases we might even have to wait until next year. As reflected in Ericsson's earnings report it remains the network equipment sector where the recovery seems to be the most difficult.

Apart from the consensus view of an improvement in 2H02 or 2003 there is another trend that might raise questions about the strength of such a recovery. Despite reporting earnings slightly above consensus and providing cautiously optimistic outlooks, companies (especially for 2H02) continue to cut back aggressively on capital expenditure. One might wonder why these companies cut back on capex if they see demand for their products increasing over the next 6-12 months. One possible explanation is of course that a lower capex helps to maintain margins.

However, the more negative explanation could as well be that these companies do not believe too much in a strong recovery. Under this perspective the earnings reports from telecom operators such as Vodafone, France Telecom and Orange, scheduled for this week might give some further insight how the industry will develop in the months ahead. We do not expect to see a change in focus of telecom operators. For the time being these companies put priorities on repairing balance sheets and increasing profitability rather than building up new networks. Therefore we continue to recommend owners of Ericsson (80% of revenues from networks) shares to switch into Nokia (80% of revenues from handsets).

Despite the concerns highlighted above we remain positive on a selective number of technology stocks. At this point of the cycle semiconductor stocks and a few other companies that have a strong competitive advantage (e.g. Nokia, SAP) are poised to benefit first from a recovery. However, thoughts like above are very important at this stage of cycle. They tell us that there are still question marks about an eventual recovery. Consequently, stock picking and investment discipline, such as stop-losses and profit-taking are important to achieve good returns in this environment. The current market remains suitable for trading rather than buy-& hold strategies.

Companies reporting last week included Infineon, STMicroelelectronics, Ericsson, Siemens and Nokia. While the first three companies reported earnings more or less in line with expectations their outlook remained very cautious, especially in the case of Ericsson (ERICB SS; SEK 47.70) and STM (STM FP; EUR 35.61).

Infineon (IFX GY; EUR 23.86) was more confident about a recovery in DRAM prices and mobile phone chips and confirmed that there were no plans of issuing new shares at this point in time. Infineon remains our preferred semiconductor stock. We are confident that the bottom in wireline and smart cards has been reached and see DRAM prices on a sustainable recovery path. At current price levels, Infineon is traded at a discount to the sector and is the most leveraged play to a recovery in the chip industry.

Siemens (SIE GY; EUR 71.10) reported a FY 1Q02 net profit of EUR 538 million, which was well ahead of all expectations. 14 out of 16 units posted positive results among them was the handphone division that benefited from strong demand in lower-priced units. Siemens said that further restructuring might cause further lay-offs in the months ahead. Last week's announcement of Tyco to split into four independent companies might not be in the cards for Siemens yet. However, in order to avoid this, management will have to prove that the current conglomerate structure is able to improve profitability further. We are confident that this will drive further restructuring and reiterate our buy recommendation on Siemens with a price target of EUR 80.

Nokia's (NOK1V FH; EUR 26.40) earnings report offered very little comfort for the bears. The company reported 4Q01 EPS figures of EUR 0.24, which was well ahead of the highest estimate of EUR 0.21 in the market. Although revenue and profits exceeded forecasts, we see the cash flow as the strongest element of the figures. Excluding the one-off tax receipt, free cash flow amounted to EUR 1.6bln, equivalent to 18% of sales.

Most importantly, Nokia dispelled the major fears that had weakened the stock ahead of the figures. The company noted that it had no excess inventory of product in the channel, that China was likely to be more resilient in 2002 than financial analysts had forecast and that it was more confident of its 15% revenue guidance than it had been at Capital Market Day in November.

1Q02 sales are expected to drop between 6%-10% and EPS guidance was given in the range of EUR 0.15-0.17. Estimates for global handsets sold were not lowered as widely expected and remained at 420-440 million. Nokia plans to introduce more than 20 new models in 1H02 of which several are equipped with colour screens.

We reiterate our buy recommendation on Nokia. Despite the undisputed leadership Nokia continues to trade at a discount to its peer group. In addition, the implied growth rate of 15% on margins of 16-17% looks undemanding to us. Even if the stock is likely to remain volatile (1Q02 will be weak) we see little downside risk from current levels. This offers opportunities to long-term and short-term investors.