We expect another volatile week ahead and recommend using strength to reduce positions (page 1 of 3)

Based on these assumptions markets are still not cheap. Poor economic data suggest that the ECB will have to lower interest rates before the end of the year or early next year.

United States

• Aerospace and defence sector overview
• A look inside Intel

Citigroup Inc. (C, $30.28, CSFB recommendation: Outperform) stock price continues to be under pressure from negative press. The company has been the subject of a negative news article on almost a daily basis. With probably more negative press to come as potentially more hearings, investigations, and lawsuits regarding alleged wrongdoing at the company's corporate and investment bank, we reiterate our hold recommendation. However we think that investors have over-reacted. We remain positive on Citigroup for the long-term, but expect stock price should remain volatile in the short-term. The company has sound fundamentals and a well-diversified business base. Furthermore, Citigroup should be one of the beneficiaries of an economic recovery.

Commercial aerospace stocks had another bad month in August, brought on by the weakness in the business aircraft market. The US Airways bankruptcy and Boeing's labour crisis put additional downward pressure on companies with significant civil aviation exposure. Meanwhile, defence stocks enjoyed a positive month, continuing their strong performance. Several factors such as the continued focus on the war against terrorism, positive political developments (the upcoming election and Congressional action on the fiscal year 2003 budget), and the continued likelihood that company guidance would still be conservative should act as positive catalysts for the group. However an improving economy could pose some risk to defence stock performance. Defence stock returns have historically had a mild negative correlation with the economic growth. Over the past 20 years, correlation between defence sector and GDP growth is negative (-0.33; source JP Morgan). Furthermore a number of issues could continue to put pressure on commercial aircraft, such as an invasion of Iraq, further terrorist attacks, and more airline bankruptcies.

Boeing Co. (BA, $37.21, CSFB recommendation: Outperform): while there have been some last minute attempts by government mediators to avert a strike by Boeing's machinist union, we think a work stoppage is likely. The company is standing firm on its key issue, which is job security. Job guarantee would constrain the company's ability to be competitive in an environment that would require a smaller labour force due to the cyclical downturn, and loss of market share vs. Airbus. In spite of Boeing's military division, which should provide a cushion, we reiterate our hold recommendation due to a severe downturn in the commercial aviation business and high chance of a strike.

General Dynamics Corp. (GD, $77.00, CSFB recommendation: Neutral) is also facing a weak civil aviation market. Concerns related to a multi-years declining jet market have risen. In the current market condition, we believe GD would not generate significant growth from its private jet unit. Furthermore the company lost several military contracts, which have increased pressure on the stock price. The company should be able to generate growth with its military business (50% in GD's figures in 2001). Among its units, information services, and combat systems should see higher profit. Buy.


Last Thursday Intel (INTC, $16.22, CSFB recommendation: Neutral) reported revised guidance, there was uncertainty in the market related to this revision, it would have resulted in rising volatility for technology stocks.