US Automobile industry, the momentum has not been reached as yet (page 1 of 2)

US Markets
U.S. carmakers, namely General Motors Corp. (GM, $34.42, CSFB: Restricted), and Ford Motor Co. (F, $8.74, CSFB: Neutral), are still under pressure from a weak U.S. economy. Despite the rate cut by the Federal Reserve, which would allow the companies to carry on with their 0%-loans, we believe this would not be enough to mitigate the downside risks. Each company still expects that sales would reach 17 million units (including heavy trucks) for the year. In October, sales were down 32% and 34% for GM and Ford respectively. Not surprisingly, market shares declined from last year's levels. GM's market share declined to 29.8% (including Saab) from 31.9%, while F's market share decreased to 22% (including Jaguar, Land Rover, and Volvo) from 24.2%. Moreover, we believe fears of war in Iraq would deter new buying. However, we expect that if the Iraq-issue is resolved on a diplomatic level, car manufacturers are likely to rebound significantly. Nevertheless, even if the upside prospects appear more promising than those of the downside, we believe the momentum has not been reached as yet. Hence, we would not recommend investing in this industry, given the near-term uncertainty, which could push stock prices down further. On a fundamental basis, GM and Ford appear more fragile than one would expect.

We do not believe there is a risk of bankruptcy. However, further downgrades could occur in the following months. Finally, in such markets we think fundamentals, and valuation should be the primary investment criteria. For GM at least, even If valuations seem attractive, fundamentals remain weak.

Microsoft last week began selling its Windows XP based Tablet PC, which will be produced by several PC makers. This new kind of portable computer, which should increase mobility, has enhanced functionality compared to the laptop, and allows users to write on the screen through handwriting recognition technology similar to the one used for Palm. The key advantage of this new Tablet PC is that it combines the functionality of the laptop with new functions, such as pen based input and easy access to wireless networks. In the near term we do not expect sales to be too impressive, given the weak-spending environment for PC's. But the creation of new application software could be a strong driver for the adoption of this new breed of PC. A software company has already developed a program to enable doctors to view patient records (downloaded via wireless LAN) and which would allow the prescription to be transmitted directly to the pharmacy from the Tablet PC. We believe that this new product has a strong chance of finding a market and growing its share, as it evolves and generates a return on Microsoft's $400 million investment. This product launch for which Microsoft will spend $70 million comes right in time to cover the setback Microsoft suffered in entering the mobile phone software market, as Sendo, a closely held UK company, drops Microsoft's platform in favour of Nokia's.

The Tablet PC is much closer to Microsoft's core expertise in the PC field, than the mobile phone is. As such, the importance of succeeding with the Tablet PC is more crucial to the company. However we believe that in the initial stages it will remain a niche product, but has the potential to grab substantial market share from the laptop in the next couple of years, as the independent research firm IDC expects a 42% of the portable PC's to be Tablet PC's in 2006. This is quite a positive outlook for Microsoft, as it should add $215 million in revenue by 2006, from the operating systems alone.