Technology stocks rise, but fundamentals remain weak (page 1 of 2)

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.