Markets to be slow and trend-less ahead of Easter Weekend

US Stocks

Macroeconomics events: 3/26/02 durable good orders for February is expected to increase 1% vs. a 2% for the previous month. On the same day consumer confidence for March will also be made public, 98.00 is expected, an increase of around 4% since February.

Pfizer Inc. (PFE, $40.51, CSFB recommendation: Buy) presented disappointing test results relating to it's Zithromax WIZARD, during the American College of Cardiology (ACC) meeting. WIZARD documented a 7% favourable effect of Zithromax in mitigating reducing death in post-heart attack patients, although the results failed to achieve statistical significance. There was an early benefit associated with Zithromax therapy, which failed to sustain over the full course of the study. CSFB's Zithromax forecasts remains at $1.75 billion for 2002 (+16%) and $1.98 billion for 2003 (+13%) representing respectively 5% and 6% of current company's sales in total.

Furthermore Pfizer is a net beneficiary of Merck's recent Arcoxia New Drug Application (NDA) withdrawal. Pfizer possesses a strong line-up of advancing new product development initiatives, sustaining the company's position as one of the premier growth stocks in the U.S. major pharmaceutical sector. We remain confident on the company and below $40.00, stocks price represents an opportunity to accumulate. 12-months target price $54.00.

One of Pfizer Inc.'s competitors, Merck & Co., Inc. (MRK, $58.20, CSFB recommendation: Hold): has made public phase III clinical results released at Monday's ACC meeting. It highlighted attractive complementary LDL (low-density lipoprotein) lowering and HDL HDL (high-density lipoprotein) elevating attributes for use of Zetia in statin combination therapy. It is expected that fixed-dose Zocor/Zetia combination product line will be launched in late 2004. Zetia should clearly have a role in cholesterol therapy. Accumulate at these levels. 12-months target price $67.

Apple Computer Inc. (AAPL, $24.09, CSFB recommendation: Hold) announced it is raising prices on new iMac models by $100 to compensate for rising component prices, particularly flat screens, whose costs have increased 25% since January. The company also said that it had shipped 125K new iMacs to date, below consensus' 250K expectation for the current quarter. This flat screen price increases should negatively impact sales. We see good buying opportunities in the low $20s.

US Technology

On a week-on-week basis, the NASDAQ Composite Index lost 0.90% to 1851.39.

The last week's performance of the NASDAQ Composite was rather mixed, reflecting the news flow concerning on technology companies.

Two weeks ago we reported that the Chinese government was ordering as much as 700,000 CDMA mobile phones to give some incentives to the handset manufacturers to increase their output, as the Chinese telecom operators are deploying their CDMA network following to the demand. After the 3G hype in the year 2000 and the following burst of this 'bubble', the CDMA / UMTS technology seemed to become a chapter which would not be finished (operators in Europe do not have enough funding for the build up of the networks after having stretched their balance sheets to obtain the licenses).

However, the technology now looks like it has some chance to be implemented but at a slower pace and with lower penetration than initially expected. This trend is positive news for Qualcomm Inc. (QCOM $40.47; CSFB rating: Buy) which charges licensing fees for the usage of the CDMA technology (QCOM's proprietary technology). QCOM's share price should start to reflect this improved prospect of growing demand for CDMA in the mid-term.

Last week Brocade Communications Systems Inc. (BRCD $26.01; CSFB rating: Hold) announced that EMC Corp. (EMC $11.60; CSFB rating: Strong Buy), the leader in information storage, would use its SilkWorm family of fabric switches to network the EMC storage. The Brocade switches allow companies to network their servers with storage systems through a storage area network (SAN) so as to create a highly available and manageable environment for storage applications.

Both companies want to be able to provide their client with a SAN, which can optimize data availability and storage resources, while reducing the total cost of ownership. Though the corporate storage business is still facing a slowdown in IT spending, the co-operation of the two technology leaders in their respective area makes sense and should help to enable both companies to perpetuate their leadership. Reiterate trading buy recommendation on EMC (stop-loss level at $10.50, price-target at $15.00).


Europe

Volumes were pretty low through most of the week and the poor news flow did not manage to drive markets in either direction. The shift to a neutral bias by the FED was well communicated in advance and hence investors took some profit based on rising concerns about higher interest rates later in the year. This caused some pressure on selected industries such as the insurance stocks and the basic materials, which are negatively affected by potentially higher interest rates.

Taking into account indications of stronger than expected 1Q02 GDP growth in the U.S. and the high level of personal debts we believe it is very likely that the FED is going to reverse its extraordinary expansive monetary policy that it applied after the September 11 attacks. Given the question marks about the strength of the recovery we expect the FED to raise interest rates by a maximum 25bp in the first half of the year and see potential for Fed Fund rates to be between 2.5% and 3% by the end of the year (currently 1.75%). In Europe, we see much less potential for higher interest rates, as the ECB did not lower interest rates as aggressively as the FED. Our base case scenario here is 25bp for 2002 provided the oil price does not raise much further from here.

While we do not believe that these higher levels of interest rates will cause equity markets to correct strongly we recognise that earnings need to improve during the course of the year in order to provide significant further upside potential for equities. Despite some encouraging signs that earnings have hit the bottom it would be too early to take a more bullish stance at this point in time. Markets currently trade at the upper end of the range, which is why we see little upside (5%-7%) for the broader markets from current levels.

MAN (MAN GY; EUR 28.15) declined almost 7% for the week after the company announced that it would cancel its preferred stock and introduce a single common share structure to help increase the 'attractiveness' of the shares. MAN will convert close to 37 million preferred shares into common stocks and will cancel 7 million treasury stocks. One preferred stock will be exchangeable into one common stock for a payment EUR 3.30 per pref. share. With an ordinary share price of EUR 29.70 before the announcement the offer values the preference shares with a discount of 19% to the ordinary shares over the past three months, which results in an incentive of EUR 1.64 per preference share (taking the EUR 3.30 into account). We believe that the negative reaction of the stock market is due to speculation that preference shareholders might hold out for a better deal (i.e. lower cash payment).

While such a threat is real we believe that the market does underestimate the real point. The share conversion and the cancellation of the treasury stocks will cause the number of outstanding stocks to drop by 5%, increase liquidity in the ordinary stock and will most likely prevent MAN from falling out of the DAX 30 index (its weighting will be increased through the conversion). We remain positive on the stock and view the current weakness as a buying opportunity.

Roche (ROG VX; CHF 129) received support for Pegasys (hepatitis C) and Tamiflu (influenza) from the Committee for Proprietary Medicinal Products. This brings the company closer to the EU approval as the EU usually grants approval of products three months later. This announcement is crucial for Pegasys, which is seen as the only potential blockbuster (sales of more than CHF 1bln) that Roche currently has in its pipeline. After receiving the EU approval it will be very important for Roche to receive the FDA approval as soon as possible. This is just another confirmation that the news flow out of Roche is gradually improving after a year of transition. We reiterate our buy recommendation with a price target of CHF 140.

Stora Enso (STERV FH; EUR 14.80) declined 4.50% for the week. However most of the drop was due to the dividend payment of a EUR 0.45 or about 3% (the high dividend yield is one of our key investment points). CSFB has reiterated the bullish outlook on the sector. Increasing visibility with regards to the economic recovery provides the framework for a demand led earnings recovery according to the analyst.

1Q02 is expected to be the earnings trough followed by sequential earnings growth of 25% in Q2 and accelerating in Q3. Despite pulp prices being at 5-year lows paper prices have held up well as a result of supply management. Compared to the previous trough prices average about 30% higher and are only 7% off most recent highs.

With healthy prices in place the earnings recovery is not dependent on higher prices. What is needed to reach all-time-high earnings is an overall improvement in capacity utilisation rates of about 7%. This should be achieved in 2003. On the back of this development CSFB has downgraded 2002 earnings by 3% and upgraded 2003 by 3%. We remain positive on the sector and see the current weakness as a buying opportunity for Stora Enso.