We reiterate our overweight position for pharmaceuticals (page 1 of 4)

US Stocks

Three-quarters of S&P500 companies have reported 1Q results, posting an average decline of 12.2% decline. While earnings for the current quarter are projected to grow 7.4%, that is less than the 9% growth predicted back in February. In the late 1990s, the annualized stock return was in the range of 11% to 18%. According to Ibbotson Associates, in the past 75 years, the average return on blue-chip stocks was approximately 11%. Now, they are forecasting that market returns will drop to an average of 9% to 9.4% annually over the next 20 years. A $100,000 nest egg today that earns an average of 11% a year would be worth nearly $800,000 in 20 years. The same portfolio will be valued at $560,000 if the average return decline to 9%.

Despite the dismal outlook then, the S&P500 index managed to rally from the September 11th low. Investors bought in with the expectation that when the economy turns, so would profits. Well, the market was right on the economy, it grew 5.8% for the 1Q, but profitability did not return. Inventory adjustments provided the bulk of the growth, with slower consumer spending expected, GDP growth will be at a pace of around 3% for the rest of this year.

Inflation remains tame, and the Fed is expected to keep its current neutral policy until a more sustained economic expansion is in view.

As mentioned in the last weekly, the lack of pricing power, overcapacity, and reduced capital spending coupled with a slower housing market may have contributed to the anaemic profit growth. A profit recovery perhaps will be delayed until the end of the year. Furthermore, the consumer optimism (U of Michigan) for this month fell to a 2-month low.

Investors are selling companies that are saddled with large debt exposure irrespective of whether that they have the adequate operating income to cover interest expense i.e. WorldCom (WCOM $3.27) & Tyco International (TYC $19.90). A month or so ago, WorldCom's management have arranged for a "poison pill" plan to block it from being swallowed up at a fire sale price.

-Alcon Inc. (ACL $32.75), develops/manufactures/markets eye care products. Trading slightly below its IPO price of $33.00
-Wal-Mart Stores Inc. (WMT $55.80) recent correction means buying opportunities at current levels
-Travelers Property Casualty Corp (TAP/A $18.80) provides property/casualty insurance. The stock is currently trading justabove its IPO price of $18.50
-Principal Financial Group Inc. (PFG $27.30) provides retirement savings, investment & insurance products and services.
PFG is the top 401(K) plan administrator in the US. Retirement service provides quality fee-based earnings that are like annuity income. Bank of New York (BK $36.83) is the world's largest custodian bank that gets its fee income from security processing and trust services.
-Goodrich Corp (GR $31.68) just reported its 1Q EPS fell 29% y-o-y due to a slump in sales to airlines. Settlement of its asbestos case is in advanced stage; the figure has gone up from $171 million in the 4Q'01 to $204 million. GR has a net available insurance of $662 million. The company should continue to benefit from the government defense spending, and it has the lowest valuation (P/E) among its peers.
US Technology

On a week-on-week basis, the NASDAQ Composite Index declined 7.4% to 1663, while the Philadelphia Semiconductor Index tumbled 11.7% to 514.73.

Weak investor sentiment prevailed throughout the week and reached a peak on Friday as hopes for a 2002 corporate earnings rebound within the technology sector faded once again.