Recommendation update

Stock price declined sharply since the beginning of this month due to profit taking, which is the general trend for the sector. Since beginning of July, S&P 500 Aerospace & Defence index declined 7.55%.

Since September 11th, the index increased 20.58% vs. -15.67% for the S&P 500 index. We believe current stock price reached its fair level although Boeing's P/E ratio (12x) remains lower than sector's P/E ratio (27x). Defence business should remain one of the best performers for the second half of the year. The macro environment remains solid for defence stock given the positive multi-year outlook for U.S. defence budgets. Commercial aerospace business also outperformed the market. Nevertheless, we are less positive for commercial satellite for 2H02 than defence sector due to a slower-than-expected economic recovery. This should affect new satellite orders as the investors rectify their expectations, reducing or cancelling new satellite orders. Besides, recent merger announcement between Boeing's space and communications and military aircraft divisions should not have a significant impact on costs.

It is seen as an internal political move. The reorganisation was driven by internal timing and it is not due to near-term financial issues. The company believes it would be able to put the right resources in the most efficient areas through this change. This merger was made to serve customers better, but this should not affect stock price. Boeing's commercial aircraft unit should remain weaker than its other businesses. The company just announced 2Q commercial aircraft deliveries of 112, just above the 110 delivered in 1Q02. 2H02 could be lower due to the current downturn in commercial aircraft. Furthermore, earnings in this business could also be reduced due to lower profit margin. Finally, the company is not protected against a strike. Recently Boeing's largest union, the International Association of Machinists, agreed to give leaders the authority to call a strike if contract talks fail with the company. For short-term investors we recommend to reduce, taking partial profit. Stock price could decline further if new aircraft orders drop for the 2H02 or if a strike is called.

Whirlpool Corp. (WHR, $63.09, CSFB recommendation: Hold): Helped by superior retailer alignment, Whirlpool's North American sales growth has surpassed core major appliance industry unit shipments over the past five quarters by a range of 240 basis points to over 900 basis points. It now appears that 2Q industry shipments through May approximated 10%, with June results to date at similar levels. These data points imply that WHR's domestic sales growth should exceed 10% for the quarter, which is slightly higher than market expectations. A $1.462 2Q EPS is expected. The company should announce its second quarter results on July 16th. Nevertheless, we remain cautious on the company due to its exposure in Latin America, given the economic and political unrest in the region. Hold


Finally, several financial companies among our recommendation list are expected to make public their quarterly results on July 17th:

JP Morgan Chase & Co. (JPM, $30.21, CSFB recommendation: Buy):
$0.652 estimated EPS vs. $0.180 y-o-y,

Citigroup Inc. (C, $36.35, CSFB recommendation: Strong buy):
$0.771 estimated EPS vs. $0.710 y-o-y,

Bank of New York Inc. (BK, $32.04, CSFB recommendation: Buy):
$0.508 estimated EPS vs. $0.520 y-o-y.


US Technology Stocks


• High volatility likely, as the earnings season approaches.


On a week-on-week basis, the NASDAQ Composite Index lost 5.17% to 1373.50.

We have seen a lot of mixed information over the past weeks, as some analysts revised their growth forecasts for the semiconductor capital equipment sector. They are still expecting growth, but fear a possible delay in capital expenditure plans from contract manufacturers, if the expectations for the growth in the overall economy are not improving significantly. We have seen signs that the semiconductor equipment sectors metrics are improving, and capacity utilisation and book-to-bill ratios are rising, pointing to recovery. But it seems so far that this is primarily driven by a technological upgrade cycle, and not yet by a solid and sustainable growth in end demand. This is crucial for starting a recovery in the technology sector. We certainly have early signs of that recovery, but there are still some risks, that the negative sentiments in the market and the lack of confidence may delay the up turn.

Near term, we will continue to see investors staying at the sidelines as the earnings season approaches. This coming week we will have a couple of big names reporting. We expect volatility in the share prices to remain very high, reflecting the uncertainties about the outlook and about the reporting companies forecasts for the next quarter. Despite the significant share price decline over the past months, the market is still expecting a recovery scenario for the second half of this year, or at latest in early next year. It will be crucial for the cyclical recovery to extend on a broader base and to have positive guidance for the next six months. Without confidence being restored, the potential upside in the market could be limited. We remain cautious and would not be buying aggressively into the earnings season, as this would be risky in the current volatile environment.

Changes to Recommendation List During the Week

Deletion

US Stocks

Pfizer Inc. (PFE US), recommended at US$39, stop loss US$ 33, closing July 11th US$ 31.03

Merck & Co (MRK US), recommended at US$ 58.10, stop loss US$ 44, closing July 11th US$ 43.57

Travelers Property Casualty (TAP/A US), recommended at US$ 18.59, stop loss US$ 15.50, closing July 11th US$ 15.06

Goodrich (GR US), recommended at US$ 31.92, stop loss US$ 25, closing July 11th US$ 23.33

Becton Dickinson (BDX US), recommended at US$ 34.95, stop loss US$ 30, closing July 11th US$ 28.99

US Tech Stocks

Amgen (AMGN US), recommended at US$ 60, stop loss US$ 35, closing July 11th US$ 32.53

Applied Biosystems Group (ABI US), recommended at US$ 21.95, stop loss at US$ 16.30, closing July 11th 15.29

European Equities


• European markets posted the biggest weekly declines since September 11, 2001. The Euro STOXX50 fell 8.82% for the week on slightly higher than average volumes.


• Growing accounting issues on both sides of the Atlantic and little conviction in tackling them by the US government provide no reason to turn positive on equity markets.


• Insurance stocks remain caught in a vicious cycle. As long as equity markets decline solvency margins and balance sheet quality decline. The Euro STOXX Insurance Index declined 10.78% for the week.


• SAP pre-announced a 2Q02 loss and reduces full-year revenue forecasts. We change our rating to HOLD.

European markets underperformed US equities as European stocks got into the tailspin of the US problems. Macroeconomic news is deteriorating as seen in the German industrial output figures last week. The industrial output in May declined by 1.3% compared to April, which was well below the consensus of +0.3%. Additionally, German unemployment figures rose to the highest level in three years.

Apart from macroeconomic weakness, things are heating up in other fields as well. The pressure on corporate governance increases by the day. French regulators started an investigation into financial information released by Vivendi Universal (EX FP; EUR 18.31) since January 2001 while Telefonica (TEF SM; EUR 8.73) came under investors' scrutiny as the company said it would have had to publish a loss of EUR 7.18bln in 2001 if it had reported under US accounting standards compared to a profit shown under Spanish practises.

Last but not least unsuccessful corporate leaders feel the pressure of investors as the German opposition party CDU called for the resignation of Deutsche Telekom's (DTE GY; EUR 11.32) CEO Ron Sommer due to serious strategy errors.