Focus on defensive, income paying stocks (page 1 of 4)

US Markets
• Recommendation update
Defence stocks have been hit in the 4th quarter. We believe this is mainly due to sector rotation. Investors are taking profits in order to invest in other sectors. Furthermore, in letting in the UN arms inspectors, Iraq has to an extent appeased the stock markets. Besides, according to Morgan Stanley & Co., defense stocks have the tendency to underperform the S&P500 in the fourth quarter. Budget timing means the biggest awards are less likely to occur in the last quarter of the year, so there are few positive triggers to buoy the sector. We remain positive on this industry, maintaining our BUY recommendation on General Dynamics Corp. (GD, $78.80, CSFB: Outperform). Firstly, we think the risk of a war on Iraq remains, and we believe the defence sector could benefit from it. Secondly, companies with military-related business should remain beneficiaries of the Bush administration. Finally, the group presents strong fundamentals and a low correlation with the S$P 500 on a five-year basis.

Boeing Co. (BA, $31.50, CSFB: Outperform) announced that the first launch of the Delta IV has been delayed. The launch was initially planned on Saturday November 16th. The next launch window has been planned for next Tuesday. The Boeing Delta IV Medium+ (4,2) rocket will deliver the W5 commercial telecommunications satellite to space for Eutelsat S.A. of France. The Delta IV family is composed of five launchers, able to launch any size, medium or heavy payload into space (source: Boeing Co.). We believe, if the launch were a success, this would increase BA's space & communications business, which accounted for approximately 17% in FY01. Nevertheless we do not think a potential success next Tuesday would significantly affect the stock price. This is more a long-term story, and the company could fully benefit from its new launchers in 2-3 years. However, a failed launch could be detrimental to the stock price.

Also, Boeing is in talks with SPEEA union (Society of Professional Engineering Employees in Aerospace) to renew a three-year contract, expiring on December 1st. It would give employees annual pay raises of 4% and require them to pay more for some health insurance plans. Union's leaders, who represent 18,000 engineers, recommended accepting the terms. We believe a smooth agreement would be considered a non-event and the stock price would not react strongly. We maintain our buy recommendation, due to attractive valuations, even if the risk of UAL's bankruptcy remains strong.

It was an eventful week for the technology sector, with Dell Computer (DELL, CSFB Rating: Outperform) releasing its figures. Expectations were quite high and so even if the company actually met analysts' forecasts, the market viewed it as a disappointment. One positive point for Dell was that the company had been able to increase its sales in a weak environment with most of its competitors still struggle. The resulting decline in DELL's share price shows us that expectations might still be too high with regards to the technology sector. Dell has been able to perform during the last quarter, thanks to growing sales in the server business, where revenue increased by 27%. The fact that businesses are scaling down on IT projects helps Dell, which is offering low-end server solutions, based on the Microsoft Windows operating platform. From this perspective DELL is a suitable partner for Microsoft (MSFT, CSFB Rating: Not Rated) in its strategy to provide operating platforms for all different kinds of computers, from desktops via servers to handheld devices.