A short rally, but uncertainties on fundamentals remain over the short term (page 1 of 2)

US Stocks

Among the largest companies Lockheed Martin Corp. (LMT, $65.60, CSFB recommendation: Buy) stock price gained 41% reflecting the higher defence expenses from the Bush administration since September 11th attacks. In spite of a low beta vs. the S&P 500 we do not recommend the stock due to an extremely high valuation. Current P/E is at 32x while the sector has a P/E of 25x. We prefer Boeing Co. (BA, $41.00, CSFB recommendation: Buy) due to stronger fundamentals.

The company has 3 major divisions: 1. Commercial aircraft, 2. Military aircraft & missiles and 3. Space & communication. The commercial aircraft division is the largest one, generating roughly 3 times the sales volume of the second one (military aircraft & missiles). Due to a weak civil aircraft business and a commercial aerospace recovery stock price should remain low and volatile as long as the U.S. economy remains slow. However, according to the current valuation (P/E at 12x), we believe current stock price represent an attractive long-term investment, as well as a recovery play when the civil aviation business picks up next year.

JP Morgan Chase & Co. (JPM, $26.35, CSFB recommendation: Buy): Although stock price is cheap, we believe it would remain weak and highly volatile. First the company is suffering from a lack of revenue growth. For example JPM's EPS before extraordinary items varied quarterly from $0.180 to $0.500 (the highest) y-o-y with the lowest at $-0.180, mainly due to a weak capital market business. Second, JP Morgan Chase & Co., being one of the largest lenders in the U.S. is exposed to further company bankruptcies. U.S. Airways Group Inc. (U, $2.45, CSFB recommendation: Hold) just announced it has filed for bankruptcy to help reorganise more than $7.83 billion of debt as losses worsened after the September 11th terrorist attacks. JPM was owed $71.4 million for a loan. Third, JPM would probably face lawsuits after Enron's bankruptcy. The company is under a Senate's investigation seeking if JPM helped Enron hiding debts. Finally JP Morgan Chase & Co. is exposed to headline risks, which could brake stock price according to investors' uncertainty. We do not believe that all above could spell the end of JPM. Nevertheless for the near-term we reiterate our hold recommendation.

We are more positive on Citigroup Inc. (C, $34.31, CSFB recommendation: Strong buy) than on JP Morgan Chase $ Co due to stronger fundamentals and a well-diversified business. Like JPM, headline risk remains high and regulatory/legal issues may not dissipate for several months. C could have to contend with lawsuits from Enron's shareholders, bondholders and pension funds. Like JPM, we recommend to hold the stock. However for investors capable to resist high volatility, we think Citigroup Inc. is an extremely diverse global franchise, capable of steady growth.

US Technology Stocks

On a week-on-week basis, the NASDAQ Composite Index gained 4.68% to 1306.12.

The last week's highlight was the long awaited earnings report of Cisco Systems (CSCO: $13.12; CSFB rating: Buy), which is seen as a bellwether for the technology industry. The company was able to make its numbers and on a pro forma base beat consensus forecast. The pro forma EPS of 14 cents was 2 cents above analyst estimates, according to First Call, but after charges, the earnings per share in fact would have been 2 cents below estimates. However the result was seen as positive, as the company gave a very conservative flat to slightly upside sequential sales guidance for the coming quarter.