We reiterate our overweight position for pharmaceuticals

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.

Leading companies within the technology sector that reported during the week had 5 main updates in common:

(1) met earnings expectations through aggressive cost cutting initiatives,
(2) sales growth below expectations,
(3) management has a negative outlook for the year,
(4) implementing more cost cutting initiatives, and
(5) improvements to come mostly in 2003.

For example, Lucent Technologies Inc (LU, $4.65, CSFB rating: Hold), Applied Micro Circuits Corp (AMCC, $6.27, CSFB rating: Hold), Amazon.Com Inc (AMZN, $16.91, CSFB rating: Buy), AOL Time Warner Inc (AOL, $18.72, CSFB rating: Buy), and Openwave Systems Inc (OPWV, $5.89, CSFB rating: Buy) all reported narrower losses for the March 2Q02 period and met (or exceeded) expectations due to lower costs factors. Nevertheless, their stock prices fell as investors were disappointed with the puny sales growth for the period, as well as the weak guidance from the companies' management for the rest of the year.

At the extreme end of disappointments, JDS Uniphase Corp (JDSU, $4.53, CSFB rating: Strong Buy) commented that they do not know when demand will recover and expects to miss estimates for the June 4Q02 period. We believe this is the basic underlying problem we have at the present time, and that is, front line technology-oriented business leaders are clueless as to when demand will return. While analysts and investors alike may be convinced that we are near a bottom (or have reached a trough) to a depressed earnings regime, recovery is still uncertain and the potentials for a stagnating growth outcome for the year is threatening reality.

Given the deteriorating expectations for a recovery in the near-term, we believe bullish technology investors will turn cautious again. And, while we believe nervous investors will continue to exit the technology sector over the next few weeks, we are more concerned with the likelihood that fresh money will not flow into technology stocks for some time to come until a credible recovery story emerges from the sector. Meanwhile, we believe short-term value-investors will potentially be active again when the NASDAQ Composite Index revisits the lows established in September 2001 (potential downside risk of 16.5% from the current index level). As such, we remain cautious over the next few weeks and suggest staying on the sidelines for the time-being.

Europe

Looking at the scorecard for last week's sector performance offers a dire picture. Only food & beverage (+1.36%) and healthcare (+0.87%) stocks finished the week in positive territory while the other 16 sub-sectors posted losses. The fact that defensive stocks post positive performances in this environment underlines the ongoing shift into safety. The 1Q02 reporting season made investors aware that what is to come in the months ahead is anything but spectacular. Last week's disappointing IFO figures seem to reflect the growing concerns about the recovery of the economy and hence the delay in improving earnings. The German Business Climate index posted its first decline in six months against expectations of another increase.

With the traditionally slow summer months approaching fast there is no positive trigger in sight for equity markets. Markets will, at best, remain in the ranges established since early November 2001. The current desire for reliable growth and attractive valuation is best met by pharmaceutical stocks, in our view. The medium term implied growth rate (MIGR) for the sector has fallen to 10.20% from a recent peak of 16%. The 5 and 10 year average MIGR is 13% and 10.8% respectively. Meanwhile the compound average growth rate delivered by the sector over the last 10 years has been 14.80%. Given the demographic development over this period we think the market is too pessimistic here. With lead indicators not expected to move much higher from current high levels, a period of pharmaceutical outperformance could be near.

Sanofi-Synthelabo (SAN FP; EUR 70.25) reported a sales increase of 20% to EUR 1.86bln on a comparable basis. The sales growth of its top three drugs was very reassuring. The three best selling products Plavix, Avapro and Stilnox, posted a sales increase of 36%. The most encouraging point was the 48% sales growth of Plavix, the main reason for the stock's recent weakness. CSFB's discussions with the management imply that the growth of Plavix is indeed even stronger than shown in the figures. The management reiterated its growth forecast of 25% for the year. We are very confident with the stock and reiterate our buy recommendation at current levels. The same applies for Aventis (AVE FP; EUR 77.75), which is scheduled to report on April 30, 2002. Sanofi-Synthelabo gained 2.20% for the week while Aventis was little changed.

LVMH (MC FP; EUR 57.25) reported a sales growth of 8% to EUR 2.95bln. A strong recovery in champagne (+32%) boosted the wines and spirit division. The company's troubled units such as DFS and Sephora posted sales declines ahead of expectations. LVMH reiterated its forecast of a significant jump in operating profit. We believe that the company is on track to break even at DFS and Sephora and reiterate our buy recommendation with a price target of EUR 63. The current strengthening of the Yen acts as a positive to the stock. LVMH gained 1.3% for the week.

Excluding one-time items TPG (TPG NA; EUR 24.47) posted an 11.7% increase in net profit to EUR 143 million. Our investment rationale is tied to its safety stemming from the mail business and its cyclical exposure to express and logistics. In express the company reported an operating profit increase of 23.5%, which was ahead of expectations. Despite being early in the cycle we are beginning to see some recovery in volumes and yields. We continue to like TPG for its defensive cyclical exposure at reasonable valuation. The stock lost 1.33% for the week.

Infineon (IFX GY; EUR 20.90) reported a narrower than expected 2FQ02 loss of EUR 108 million (CSFB; -119 million) and an operating loss of EUR 178 (CSFB; EUR -193 million). However, the tone during the press conference was guarded as the company said that the full-year operating loss would still be close to EUR 1bln. We believe that the medium-term fundamentals for the chip industry look the best among the technology sectors despite concerns regarding seasonal weakness in demand and prices for DRAM in the second quarter. Separately, the SEMI book-to-bill ratio for March came in at 1.04, which was the first quote above unity in 16 months. This signals prospects for an improving industry revenue picture in the months ahead. The stock remains 'Buy'. However, in the short term we see the upside capped to EUR 25 due to the lingering threat of Siemens placing new shares in the market if the stock gains significantly. Infineon declined in line with the sector and lost 11.33% for the week.

Serono's (SEO VX; CHF 1250) earnings report was somewhat disappointing. The company missed consensus estimates at all levels by a small margin. Serono reported a drop in net profit of 3.5% to USD 69.5 million while sales climbed 6.4% to USD 342 million. Rebif continues its strong growth in Q1 posting an increase of 45.7% to USD 115.30. The main reason for the slight disappointment in the figures is mainly due to higher advertisement spending for Rebif and lower financial income. We believe the market is too focused on a quick boost in earnings by Rebif. There are costs involved in positioning the product for a long-term success and hence we remain of the opinion that today's investments will be tomorrow's earnings. We believe that the stock's 10.65% decline for the week is overdone.

Stora Enso's (STERV FH; EUR 14.35) earnings report was broadly in line with expectations. 1Q02 net income dropped 43% to EUR 161 million or EUR 0.18 per share. Pretax profit was EUR 241 million, 11% above the consensus, which can be explained by better than expected net financials. Operating profit of EUR 274 million was broadly in line with expectations. The company's outlook remained rather cautious, saying that a clearer uptrend was needed to have a positive impact on earnings. We believe that these cautious statements appear to be more backward looking rather than forward looking. We view the improvements in fine paper and consumer packaging as a confirmation that a demand recovery is on its way. Further Stora Enso reports of turning pulp prices and implementation of a 5% price increase for uncoated fine paper. These are clear signs of recovery, in our view. Stora Enso closed the week 2% lower.

Vodafone (VOD LN; GBP 1.0950) finally reported the long-awaited Key Performance Indicators (KPI). The company added 1.33 million new subscribers globally in the first quarter. This was slightly below the average expectations of around 1.40 million. The report confirmed the strong weakness in Germany where subscriber numbers fell by 399,000 due to prepaid churn. Italy and Spain managed to offset the German trend with strong subscriber numbers and ARPUs. Vodafone said that ARPU levels could be maintained in Q1 and is looking for an increase during the course of the year. While we see no trigger that could bring the stock significantly higher in the short term we believe that the stock is cheap and currently prices earnings growth of close to zero for the next years. We believe this is too negative and expect the stock to recover from current depressed levels later in the year. We leave the stock as a Hold on our recommendation list and review the stop-loss