After a long period of bad news the newsflow turned slightly more positive (page 1 of 3)

US Markets

Since the last high, on August 22nd, S&P 500 lost more than 14%. Among the index, gold (6.84%), healthcare suppliers (+4.64%), agricultural products (+3.97%), and casinos & gaming (+0.70) were the industry groups with a positive return for the period, while 43 groups with a return lower than the S&P 500 drove the market down. We think a rebound in the near-term is quite possible. Negative sentiment reached a level where we feel a large part of the bad news has already be priced in, and stabilisation on even a single U.S. economic figure could set off a rebound.

However we still believe this in no way signals a bull run, and remain cautious over the medium to long term. Fears of a U.S. economy on the brink of deflation, the risk of war, and concerns over fishy corporate accounting are well and truly alive. Furthermore we believe dividends offered by the companies do not offset the downside risk.

In the case deflation, financials as well as companies with large borrowings like General Electric Co. (GE, $24.47, CSFB recommendation: Neutral) or Ford Motor Co. (F, $9.63, CSFB recommendation: Outperform) should be especially vulnerable. Rather, we would rather recommend investing in companies with low debt levels, low betas, and high dividend yields like The Macerich Co. (MAC, $31.04, CSFB recommendation: Not covered).

If there are indeed beneficiaries from a war with Iraq, defence-related companies like General Dynamics Corp. (GD, $82.19, CSFB recommendation: Neutral) or Northrop Grumman Corp. (NOC, $126.76, CSFB recommendation: Restricted) are well positioned as the need to replenish military stockpiles arise. Oil services companies like Schlumberger Ltd (SLB, $39.82, CSFB recommendation: Neutral) should also incur custom in the form of reconstruction. According to SASI, besides oil service companies, they believe building companies like Caterpillar Inc. (CAT, $37.50, CSFB recommendation: Outperform) or Deere & Co. (DE, $45.01, CSFB recommendation: Outperform) would be also benefit from the rebuilding of Iraq's infrastructure.

On the food and beverage front, Philip Morris (MO US) has taken a drubbing as the company last week announced that they were lowering their profit forecasts to reflect additional promo spending. The second of such hikes this year. The move comes as MO attempts to curb the growth of discount brands and counterfeit products, which have seen a resurgence as the US economy continues to sputter. The price gap continues to increase between MO's premier brands and the deep discount players. We reiterate that MO remains operationally sound unlike its rivals at RJR and believe that the stock will remain relatively resilient over the current squall. We believe that MO will undoubtedly remain weak, but should start to show that it is of good breed as the promo spending starts to bear fruit come the end of 1Q03. That said, we would watch the stock over the next couple of trading sessions to revaluate our position on MO and possibly come up with some option strategies. For investors who already own the stock, we would recommend they sell into strength if the stock does turn around over the week.

Southwest Airlines (LUV US, USD12.73, CSFB recommendation: outperform) has also been going through a rough patch with the stock down 8% on Friday to USD12.73. We would like to reiterate our positive stance on the best performing stock in the US airline industry. Here is also some food for thought: 1) LUV's share price took a pounding on the lead up to Gulf War I, but appreciated 70% through March 1991.