Focussing on the central bank meetings of FOMC, ECB and BoE (page 1 of 3)

US Markets
Citigroup Inc's (C, $37.65, CSFB recommendation: Outperform) stock price has declined by 20.03% YTD, while S&P 500 Diversified Financial Services index has lost 20.10% and S&P 500 has declined by 21.53%. Citigroup share price has declined mainly due to weak US economic data and bad press. Nevertheless, recent history has shown that Citigroup management seems to have been forthcoming with the regulators as Citigroup CEO recently voluntarily met with New York Attorney General, Elliot Spitzer. Furthermore the company has officially decided to separate its brokerage and investment banking departments. Further details should in the near future be disclosed regarding the separation. At this point our main concern is exactly how the company would be able to generate revenues with an independent equity research unit. So far, we know that the company plans to use transfer pricing to allow corporate profits and earnings from the institutional area to support the research budget.

We do not believe that the rally we have been observing on Citigroup stock price would mitigate the downside risk. Headline, and credit risks remain. According to a study by Friedman Billings Ramsey, Chapter 11 bankruptcies have fallen since 4Q 2000. However the number of bankruptcies and the size of several credit problems have significantly eroded investors' confidence, putting credit concerns on the top of investment decision. Six of the 10 largest bankruptcies in history occurred in the last 12 months.

A bevy of syndicated lenders (JP Morgan Chase & Co., Citigroup Inc. etc.) have suffered significantly this year. We believe credit risk has not yet abated, as the economy remains weak.

Although the last better-than-expected earnings report should serve to sooth investors' nerves for the time being, we reiterate our hold recommendation on Citigroup Inc.

Last Friday a federal judge approved the settlement between Microsoft (MSFT, $53, CSFB recommendation: Not rated) and the Bush administration rejecting the latter's demands for stricter penalties. The approval of the settlement ends years of debate on Microsoft's business practices and quasi monopoly status. The seven plaintiff states wanted Microsoft to remove its Internet browser from the Windows platform in order to give the consumer the opportunity to choose his browser. Another measure the plaintiffs called for was access to more source codes of Windows, to enable competing products to be compatible with Windows. To MSFT, this would have been a serious infringement on intellectual property and would have sent out the wrong message, if it were not to be protected. However Microsoft will have to give the top 20 computer makers identical contract terms for licensing Windows, and will be penalised if they attempt to threaten them with retaliation if they are found to be offering products other than Microsoft products.

The result is quite satisfactory for Microsoft, even if the company will be under scrutiny to follow the terms fixed by the settlement. But now that the issue has been settled, Microsoft can continue to follow its strategy of diversifying into new areas of growth, such as server applications and software for mobile device applications. The .Net strategy may also involve certain acquisitions, which Microsoft could not pursue as long as long as the court ruling was pending. The result is definitely positive for Microsoft. The company is however not completely out of the woods, as it is still under investigation by the European Commission, which is still deliberating and is expected to issue a preliminary statement by the end of the year.