Disappointing mid quarter updates have brought investors back to reality (page 1 of 3)

The upcoming week offers enough room for disappointment as crucial US macro data (ISM and employment report) and earnings reports of a few European big-caps (TotalFinaElf, Sanofi-Synthelabo, LVMH, L'Oreal, Arcelor) are on the agenda.

US Markets

Sentiment toward the global aerospace sector continues to be positive due primarily to significant buying in the U.S. It appears that money flows from the US are driving the overall flows into the sector. While the strength of money flows going into civil and defence segments is approximately the same, defence is currently more attractive as the stocks in that group are experiencing a higher level of money flow momentum. This should not come as a surprise considering that the correlation between the Aerospace & Defence sector with the S&P index is close to zero. Inflows should remain significant as long as U.S. economy does not clearly recover and other sectors remain volatile.

Boeing Co. (BA, $37.07, CSFB recommendation: Buy): we believe a strike by Boeing's machinist union is becoming increasingly likely based on news flow over the last few days. Rhetoric coming out of Boeing's largest labour union, International Association of Machinists & Aerospace Workers (IAM), suggests to us the company is taking a hard line on these negotiations and unwilling to compromise on the issue of job security, among others. As we said last week, it is difficult to predict the reaction of the stock price to a strike, but we think it is more important for Boeing to maintain its ability to cut costs over the long-term in what is likely to become a less labour-intensive business over time. Hold

Principal Financial Group, Inc. (PFG, $29.33, CSFB recommendation: Hold) announced that it is selling BT Financial Group to Westpac for AUD 900 million (approximately USD 500 million), with a potential additional payment of AUD 150 million (USD 80 million) contingent upon Westpac's ability to grow the retail fund management operation. The total after-tax proceeds to PFG should be approximately USD 750 million (excluding the contingent payment), which includes the consideration from Westpac plus a tax recapture and a gain on unwinding a hedge established when BT Financial was acquired by PFG in 1999. The lack of progress at BT suggests that management has correctly decided to exit the Australian market. We remain positive on the company for the long-term due to its good fundamentals and the quality fee-based recurring income. Hold

Citigroup Inc. (C, $32.75, CSFB recommendation: Strong buy) announced last Friday that it agreed to sell its New York headquarter for USD 1.06 billion, expecting to recognise a pre-tax gain of USD 830 million (approximately $0.16 a share). While the transaction should not affect 3Q'02 operating earnings, it should provide a cushion to fully diluted earnings in what has been a difficult quarter for the company/s capital markets businesses, as equity and M&A remain lacklustre and fixed income has weakened. We remain cautious for the short-term. In light of several legal issues in which the company is embroiled in, it is possible that instead of bringing the gain to the bottom line, it could be used to establish a reserve for legal costs. Hold

As the last quarter earnings have just ended, investors were looking for the recovery to be on the way. But with Intel (INTC: $16.67; CSFB: Buy), Nortel Networks (NT: $1.05: CSFB: Buy), Novellus Systems (NVLS: $24.46; CSFB: Hold) and Sun Microsystems (SUNW: $3.69; CSFB: Hold) guiding estimates down, they just confirmed what became more and more evident with key fundamental data declining.