ECB cut by the expected 50bps - market reaction was moderate

Reasons for the Council's decision were 'the evidence that inflationary pressures are easing somewhat and downside risks to economic growth have not vanished'

US Markets
• Recommendation update

Several news items, which we believe will have a direct impact on Boeing Co. (BA, $33.40, CSFB: Outperform), were released last week. Firstly, Boeing's union for engineers and technical workers approved a three-year contract. The contract includes annual wage increases of 4% and requires them to pay more for certain health insurance plans. With this agreement, we believe the company will be able to focus on its businesses. Secondly, Air Force officials are reviewing all major weapons and electronics programs after learning of a $690 million overrun on the Lockheed Martin Corp. F/A-22 fighter. This could negatively impact Boeing Co. in the near-term. BA is one of the top F/A-22 subcontractors, providing parts of the fuselage and wings, and could make the news with other military programs. Finally, UAL Corp (UAL, $0.93, CSFB: Underperform), the parent company of United Airlines, failed to obtain the $1.8 billion loan guarantee from the Air Transportation Stabilisation Board. UAL's likely bankruptcy should not affect BA's fundamentals. The company does not see further write-downs on aircraft leases to UAL Corp. In October, Boeing took a $158 million charge to write down the value of aircraft leased to airlines, including UAL.

Furthermore, according to BA's CEO, United Airlines would keep flying even if it files for Chapter 11. Boeing is still expecting to deliver 275 to 285 (vs. 380 expected in 2002) aircraft next year, and has only one aircraft planned for UAL. Furthermore, through Boeing Capital Corp., the company has a $1.267 billion ($1.59 per share) exposure to UAL. This represents 11.4% of Boeing Capital's portfolio, financing about 10 777-aircraft by UAL. The risk is if UAL defaults on finance obligations, Boeing will have to seek out new customers. However, demand for 777 remains, and Boeing should not have to write down the entire amount. We maintain our BUY rating on Boeing for the long-term.

Citigroup Inc. (C, $37.56, CSFB: Outperform) would also be impacted by the potential UAL bankruptcy. Citigroup and other banks, including JP Morgan Chase & Co. (JPM, $24.43, CSFB: Outperform), have lent a total of $2 billion to the airline company. According to people familiar with the matter, they will most likely seek court protection. On a fundamental basis, we do not believe that a UAL bankruptcy would have a strong impact on Citigroup. The financial institution is well diversified and should be able to digest this potential loss. However we think the UAL affair could put pressure on Citigroup's stock price in the near-term. In any case, profit taking after a 41% rise since October 10th is not unexpected. Hence we maintain our HOLD rating on Citigroup.

The gold spot price rallied over the week, peaking at $329 an ounce last Friday. It is not the demand for physical gold that drives the price, as global demand is 12% lower than last year, but it is the fact that mining companies continue to reduce their hedging programs thus reducing the selling pressure on gold.

Gold being an attractive asset class has also served to move prices up. The current low interest rate environment in the US, global economic uncertainties and several political issues support the attractiveness of gold as a way to diversify one's portfolio. Gold is negatively correlated to equities, which smoothens the volatility of the entire portfolio in these very volatile equity markets. Gold has outperformed the S&P 500 significantly and is actually up 17% year to date.

We believe an investment into gold is best done through a gold mining stock. We believe Placer Dome (PDG, $10.44, CSFB rating: Outperform), on which we have a BUY recommendation, is a very good way to invest in the gold mining sector. The company's stock has a -0.02 beta versus the S&P 500 and should continue to benefit from the upward trend in the price of gold, and as a consequence also from the fact that the company is reducing its hedging program and gains higher sensitivity to gold price. We expect gold prices to remain firm over the next six to twelve months and continue to view the Gold mining sector, and more specifically, Placer Dome, as a good investment opportunity. Our 12-month price target for Placer Dome is $17.

Some interesting opportunities for value oriented investors can currently be found in the healthcare sector. AmerisourceBergen (ABC, $62.31, CSFB rating: Outperform), the second largest wholesale drug distributor in the US and No1 distributor of generic drugs will continue to benefit from the increasing demand for generic drugs. The company's operating margins should not be impacted by the sale of generics, as they are comparable to the margins achieved with branded drugs. In fact, the restructuring efforts at AmerisourceBergen should improve the company's profitability. Even taking a conservative approach regarding the drug price increases, the company shares trade at a price to sales of 0.15x and a price to book of 2x. Given good earnings visibility, the 13% revenue growth for 2003 and an improvement in operating margins through restructuring, we view the price to earnings ratio of 15.8x as inexpensive. We believe therefore, AmerisourceBergen offers a good investment opportunity at current levels.

Tenet Healthcare (THC, $18.40, CSFB rating: Neutral) is another very attractive stock in terms of valuations. Trading at a price to book of 1.52x, a price to sales of 0.63x and a 2003 price earnings of 7.25x, the hospital company looks currently undervalued. We have taken a very conservative approach in analysing the stock given the fact that the company is in the midst of reviewing its pricing policy following an investigation into two physicians accused of over-billing their patients. Currently, several hospitals in California are also under investigation for their pricing practices. It is however very difficult to decipher the complex Medicare reimbursement rules and thus not possible to estimate if the hospitals did actually overcharge for treatment. The hearings will commence in January and we expect to get more details then.

European Equities
•The Euro STOXX50 closed the week 4.7% lower at 2531.66
• CSFB downgraded European mobile sector and Vodafone to market neutral and neutral respectively
• We added DaimlerChrysler to our recommendation list. This buy call is based on attractive valuations and future restructuring benefits

Further reasons why the market expected action from the central bank was given by less positive numbers coming out of Germany at the beginning of the week. The Eurozone service sector activity index climbed modestly to 50.8 in November from 50.1 the previous month, with France, Spain and Italy all showing improvement, but overall growth was nearly stalled due to the sharp contraction in Germany. Retail sales in the Eurozone's biggest economy fell 0.7% in October from September, missing forecasts for a flat figure.

After we ended our trading call and reduced equity weightings in Europe from 15% to 12% in our global Asset Allocation, we decided to take our remaining stocks Axa (CS FP; EUR 14.39), Nokia (NOK1V FH; EUR 18.46)) and the exchange traded fund XMTCH (Lux) on MSCI EURO (XMMSE SW, EUR 72.80) off our trading list as we believe these stocks might have run its course during the last two months. After investors were focused on beta and high-risk stocks since beginning of October, we believe that attention will shift back to earnings forecast for the coming year.

Nokia (NOK1V FH; EUR 18.46) has started its Year End Strategy meeting in Dallas last Monday where it toned down its recent statement that handset sales could grow between 10%-15% next year depending on economic developments. Nokia's CEO said that next year's sales growth would be in the region of 10% or slightly more and reiterated its 2002 target of 400 million units. Next year's growth will be driven by a strong replacement cycle, which will account for more than 50% of total sales. Nokia expects its market share to be closer to 40% by the end of the year versus 37% last year and reiterated that a share buyback remained an alternative to reduce the high cash pile of currently about EUR 8bln. There are no major acquisitions planned. Nokia's forecasts on the networking sector remained very cautious. The company expects the networking market to decline 20% this year and 10% next, which compares to a more or less flat market forecast in 2003 of Ericsson (ERICB SS; SEK 8.4).

Although this week's mid-quarter update by Nokia could surprise on the upside, we see the short-term upside in Nokia in a range of EUR 20-22 and would reduce positions whenever the stock trades close to these ranges.

CSFB downgraded the European mobile sector to market weight after most of the stocks have outperformed by 50% since early October and seemed to have reached fair value. Using the same arguments, CSFB also downgraded Vodafone (VOD LN; GPB 1.17) from outperform to neutral. Vodafone failed in an attempt to gain control over Cegetel and announced that it will put plans for a possible share buy-back on hold as it would like to maintain financial flexibility for a possible bid for the rest of Cegetel. Despite Vodafone increasing its stakes in Cegetel from 32% to 44% by acquiring SBC's equity interest, it does not seem to be an optimal solution for the long-term. We retain our "hold"rating on the stock.


We added DaimlerChrysler (DCX GY; EUR 33.75) to our recommendation list. DaimlerChrysler is mainly a value play where we see upside potential once the benefits from the restructuring plan and the product regeneration for Mercedes and Chrysler come through next year. At current valuations the stock trades at 12-year lows on most multiples, which reflects a solid buffer for potential disappointment of car sales figures in the months ahead. At current levels the market attaches absolutely no value to the Chrysler brand. Given the potential improvements after the tough restructuring measures this year we believe this is too pessimistic. Even if Chrysler was valued at half the average of the OEMs we would receive a value of about EUR 10 not taking into account any other improvements in the group. We have basically added the EUR 10 to the current price and arrive at a target price of EUR 46, which is about 35% above the current level.

We consider last week's news that US auto sales fell 13% in November as a buying opportunity as our call is mainly based on valuation and restructuring benefits. Obviously weaker car sales in the months ahead would cause volatility in the stock but CSFB's valuation model has already taken into account a 6% year-on-year drop in US car sales for next year. DCX's November sales fell 12% yoy but gained 10% compared to October 02.