Remain cautious until growth in top line sales improves (page 1 of 3)

US Markets
US equity markets saw a continuation of the rally that started in the second half of the previous week, with the S&P 500 running up 5.89%, as earnings reports brought some upbeat results. In fact we had several big names releasing surprising numbers. Microsoft, Citigroup and General Dynamics were among the highlights. But taking a closer look at the figures shows that the quality of earnings across the board was not as good as the earnings per share figures would suggest. Several companies, which reported net income growth, saw their revenues decline. This clearly shows that companies have been cutting costs and capital expenditure, and have been streamlining their business due to lower demand and also poor growth prospects in the near-mid term.

In the case of Citigroup it was the consumer who held up the numbers, as consumer loan and credit card profits rose to a record high of $2.2 billion with consumer taking advantage of the low interest rates. This increase in consumer debt is somewhat worrying, given the current economic environment and could potentially pose a problem to the US banks, if the economy remains slow. Citigroup has increased its loan loss reserves to $10.7 billion, due to the expectation of further losses from non-performing loans mainly in the telecommunication sector. Citigroup's size and its strong presence in retail banking provide certain stability against the volatile investment banking unit. Citigroup share price should appreciate as investors start to become more selective on the bank stocks and start to see seek value.

The oil sector continues to perform relatively well, helped by strong oil price. The fact that we continue to see prices in the $29-30 levels at the NYMEX, should continue to lend support to the share prices of the recommended stocks in the sector. These are Exxon Mobil (XOM, CSFB rating: Neutral), Noble Corp (NE, CSFB rating; Neutral) and Schlumberger (SLB, CSFB rating: Neutral). The oil price could see a decline if the US accepts the two step process in the UN resolution on Iraq, which would lower the risk of an imminent military intervention. There is also the possibility of OPEC raising its output If the basket of oil prices currently trading at $28.05, which is above the $25-28 target range, stays above this target range over an extended period. A possible moderate increase would be an adjustment to the seasonally growing demand in the Northern Hemisphere and should not lead to substantial weakness in the oil price. It is still very difficult for the OPEC to find the right balance in production and demand, due to the uncertainties on the demand side. Meanwhile we believe that positive momentum in the sector is likely to continue. The S&P oil sector sub-index has outperformed the broader S&P500 by 15.28%, losing 6.72% YTD and is likely to continue to do well with the perspective of crude oil prices remaining around the levels it currently trades at.

After last week's rally, we have issued a short note on Noble Corp, where we advise trading oriented investors, who have bought the stock at the $30 levels to consider taking partial profit, given the 20% share price increase the stock had over the last couple of days.

We maintain our cautious stance on the technology sector. The semiconductor book-to-bill ratio, which gives a view over the relation between products shipped and newly booked orders fell to 0.84 in September, from 1.22 in the previous month. This decline is mainly due to an almost 20% fall in bookings.