Technology stocks rise, but fundamentals remain weak

United States

American International Group, Inc. (AIG, $65.00, CSFB recommendation: Strong buy) share price is reacting to market concerns about the aircraft leasing operation and portfolio holdings in US Air bonds. Stock price is under pressure as a result of the bankruptcy of U.S. Air. According to the company, AIG has no exposure to U.S. Air, and its aircraft fleet, the newest in the business, is currently fully leased for this year and next year. Furthermore, bond holdings are less than 0.5% of AIG's total assets.

Company's stock price could be under some pressure by a report from Moody's that describes the U.S. life insurance industry's exposure to some of the more colourful corporate events that have been highlighting in the news, i.e. Enron, Worldcom, and others. AIG was listed as having the largest exposure, $1.8 billion of the total $23 billion of exposure in the industry. According to the company, it only represent roughly 1% of the company's U.S. life insurance assets, and less than 0.5% of total assets. Furthermore, the company has already written down its holdings in Enron and Worldcom. We believe the stock market has over-reacted to the news. We remain positive on the company for the long-term investment and we believe current level should represent a good opportunity to build positions.

Boeing Co. (BA, $37.50, CSFB recommendation: Buy) The company is currently suffering from a few issues. First, since August 15th, BA is in talks with its largest union on a new collective bargaining agreement. The company is highly exposed to a strike and if this happens, stock price could go lower. The management announced it would stop the production of civil airliners in this case. Second BA could have delivery problems with commercial aircraft. Concerns related to airlines industry emerged after U.S. Airways chapter 11 filing. Furthermore American Airlines announced it will 'seek every opportunity to defer or cancel new deliveries'.

This could be the first wave of reorganization in this industry and Boeing Co., being the largest commercial aircraft maker, would be the most exposed. We believe there is a significant downside risk for the following months ($34.00) and stock price should remain volatile. Although we like the company due to its new organisation and its exposure to U.S. government defence expenses, we reiterate our hold recommendation.



US Technology Sector

On a week-on-week basis, the NASDAQ Composite Index gained 4.21% to 1361.01.

Technology stocks regained some ground, despite a continuing low earnings visibility for most of the technology companies. The semiconductor capital equipment maker Applied Materials (AMAT: $14.70; CSFB: Hold) reported its quarter results on August 13, which gave disappointing sales figures. The company expects sales to decline by 5%-15% for the quarter and does not see a rebound in sales later this year. Applied Materials customers are chip makers such as Intel and foundries in Asia, which have cut their capital expenditure plans for this year, as they face weak demand for their chips. With the decline in consumer confidence for the month of July and a decline in the economic outlook according to a University of Michigan survey, and the Fed opening the doors for a possible cut in interest rates the caution is rising, when it comes to the growth expectations for the next year.

Corporate clients of hardware and software companies might get even more cost sensitive before IT spending recovers. But in the current market where aggressive price cut are common to gain new orders there is a risk of commoditizing some of the products, such as PC's, PC peripherals, as well as servers. This means, that it might be difficult for the manufacturers to regain on the pricing, when growth resumes. Dell Computers is very aggressive in cutting prices to gain market share. The company's result shows, that it has been growing its sales on the expense of its competitors. Dell is not only getting bigger in the PC business, but is also increasingly a presence in the low-end server market. Meanwhile, however, the market for hardware is likely to remain weak and is expected to see a recovery only in the second half of next year. Given this timeframe, the recent rally in technology stocks does not appear well funded and could run out of steam quite soon.

Europe Equities

On a week-on-week basis, the Dow Jones Euro Stoxx 50 Index lost 1.29% to 2713.96.

Eastern Europe is seeing its most important flooding for decades, which rises questions about the cost arising for the insurance companies. The German insurer Allianz AG (ALV GR: EUR124.52; CSFB: Hold) says it is too early to estimate payouts, as a lot of customers didn't yet call in their claims. Allianz has 3 million clients in the region with property insurance that includes damage from flooding and another 480,000 clients with other policies covering floods.

A German newspaper reported, citing Allianz AG's chief economist, the flooding in Germany may cause 15 billion euros in damage and those in Austria 4 billion euros. Most of these cost however will probably be at the Government expenses, due to a lack in coverage for flood damage in the affected region. Allianz will probably have the greatest loss, which might reach 100 million euros according to a BNP Paribas estimate, as after taking over the old East German monopoly insurer DVAG (the largest insurer in East Germany and through its subsidiary RAS, operating in Austria and Italy). In a first comment Generali (G IM: EUR20.02; CSFB: Hold) does not expect significant losses, the same for Zurich (ZURN VX: CHF137.25; CSFB: Hold) and AXA (CS FP: EUR13.49; CSFB: Buy).

It will depend on how much of the claims are reinsured. Swiss Re (RUKN VX: CHF133.75; CSFB: Buy) and Hannover Re (HNR1: EUR22; CSFB: Not Rated) expect losses to be limited as well, as the regions with high risk exposure have no flood insurance, due to the very expensive risk premium.

The mobile telecommunication operator Vodafone is negotiating to take over Vivendi's part in the Vizzavi Web portal 50-50 joint venture, which is expected to generate revenue from the next generation of mobile phones. Vizzavi should offer features like high-speed Internet connections to download content from Vivendi's media units. Mobile telecom operators have seen their margins erode with the high competition in the market, and have to offer new added value services, which generate revenue while giving the customers an incentive to use their phones.

The success of this mobile Internet portal is dependent on the deployment of third generation mobile communication (3G) networks, which will probably take longer than initially expected. Vodafone is, however, continuing to build on the future of mobile communication as it sees potential in the mobile Internet portal, especially with the broad customer base Vodafone has world-wide.