The FTSE 100 falls whilst other European markets retest their autumn lows

(DJ EUR Stoxx 50 3.8% away, Dax Index 4.4% away, CAC 40 Index 8.4% and SMI only 0.95%)

United States
With the earnings period continuing this week, volatility in the U.S. stock market should continue as earnings expectations are revised. Hence, we remain cautious whilst we await more clarity in companies' outlooks for 2003.

Last week, diversified financials sector led the market down as JP Morgan Chase & Co. (JPM, $23.81, CSFB: Outperform) reported a 4Q02 loss of $0.200 per share (consensus expected a loss of $0.094 per share), due to write-offs related to the Enron bankruptcy and reserves to cover the cost of lawsuits. Although we believe JPM stock price would remain weak in the short-term, we reiterate our long-term buy rating due to current low valuations (current P/E ratio at 14.26x, and P/B ratio at 1.15x), and an attractive gross dividend yield of 5.71%. JP Morgan Chase has significant exposure to investment banking. In 2002, the investment banking business accounted for 28% of total operating profit ($1,365 million), decreasing from $2,918 in 2001, and from $3,586 in 2000 (source: JP Morgan). Due to this exposure, JPM is our turnaround play in this industry.

Citigroup Inc. (C, $35.79, CSFB: Outperform) also reported its quarterly figures last week. Due to its well-diversified operations, Citigroup reached a 4Q EPS of $0.470, slightly better than expected ($0.459). This profit was driven by its consumer business, which accounted for 60% of C's income in 2002, while private client services represented 5%, global corporate & investment banking 22%, and global investment management 13% (source: Citigroup). We have a BUY rating on Citigroup, as we believe the company is one of the safest plays in the diversified financial sector. However, this should not wipe out the risk that consumer spending could weaken over the coming months, affecting Citigroup's earnings.

Lastly within the diversified financials sector, Countrywide Financial Corp. (CFC, $54.28, CSFB: Not Rated) reported an EPS of $1.94 in 4Q02 vs. consensus expectations of $1.922, driven by high loan production volume. A potential increase in rates or a drop in the overall volume of U.S. mortgage origination would put pressure on CFC's earnings. However, we believe CFC's diversified business should protect earnings from volatility. In 4Q02, diversified operations represented 28% of CFC's pre-tax earnings. Currently we have a BUY rating on Countrywide Financial.

The earnings releases coming out of the healthcare sector last week were rather mixed. On the positive side were AmerisourceBergen (ABC, $55.35, CSFB: Outperform) and Pfizer (PFE, $30.25, CSFB: Outperform), which we both recommend as a BUY.

AmerisourceBergen reported slightly better than expected earnings, with an EPS of $0.82, one cent higher than forecasted. In the same quarter a year earlier the company had reported an EPS of $0.67. The company benefited from a 14.5% increase in revenues and improved operating margins due to merger related synergies and economies of scale. We expect the company to be able to improve its profitability, thanks to its newly implemented technology platform, which should allow the company to improve inventory management and reduce its costs. AmerisourceBergen should be able to continue to grow its revenue steadily. The drug distribution market is expected to grow at a 11-14% rate per annum, which matches the company's expectations forecast. Revenue growth will also partly be helped by price inflation for drugs, however this could be less than in the past, as Medicare reforms could put some pressure on the pricing policy of the pharmaceutical companies.

We expect further benefits from the company's restructuring efforts, such as more efficient inventory management and consolidation of distribution facilities, which should result in an improvement in the operating margin. We continue to be positive on the company and see a good long-term opportunity, based on the restructuring efforts and the resulting improvement in profitability.

Pfizer beat estimates by one cent, reporting a $0.48 EPS, compared to the $0.33 one year earlier. This was mainly a result of solid growth in the company's core drug sales. However, for the current year the company lowered its earnings guidance, in order to include the loss in earnings related to the disposal of non-core assets, such as the Schick Wilkinson razor business, which it sold to the battery maker Energizer Holdings (ENR, CSFB: Neutral). Pfizer expects a full year EPS of $1.80 (prior forecast $1.84), which would represent a 13.2% year on year increase. The company should continue to see solid growth over the next two years. It has a broad portfolio with a low patent expiry risk. Through the acquisition of Pharmacia Corp, which should see its final settlement during the first half of this year, Pfizer expects to achieve annual cost savings of $2.5 billion. And with a consolidated annual research and development budget of $7 billion (as of the last annual report of the two companies) the company should be in a strong position to negotiate the licensing of new potential blockbuster drugs from biotechnology companies, which would secure Pfizer's long-term growth.

We had added Pfizer to our US Buy List last week and we have a 12-months price target of $37.

Among our recommendations, the following companies will report their quarterly results:
- Northrop Grumman Corp. (NOC, $90.25, CSFB: Restricted) on January 28th; expected EPS $1.664,
- Boeing Co. (BA, $31.01, CSFB: Outperform) on January 30th; expected EPS $0.708.
- Exxon Mobil Corp. (XOM, $32.69, CSFB: Neutral) on January 30th; expected EPS $0.496.
- Noble Corp. (NE, $34.09, CSFB: Neutral) on January 30th; expected EPS $0.387.
- Philip Morris (MO, $38.90, CSFB: Not Rated) expected EPS $0.924.
- Gillette (G, $30.44, CSFB: Not Rated) expected EPS $0.337.

Europe
• The DJ EUR Stoxx 50 declined 6.5% to close the week at 2234.56

Downgrades continued at a fair pace during January triggered by cautious 1Q outlooks given by companies, which have already reported. On a sector level: telcos continue to enjoy positive earnings revisions, technology continue to see more downgrades than upgrades but pressure on earnings seem to have eased, financials remain under pressure, defensives are mixed with tobacco and utilities showing good earning revision patterns, but food & beverages show signs of weakness and consumer cyclicals such as autos and general retail show a weakening of their relative strength demonstrated over the last 18 months.

Sanofi-Synthelabo (SAN FP, EUR 47.48) released full year 2002 sales figures in line with CSFB's expectations. Consolidated sales came in at EUR 7,448m, which is an increase of 14.8% on a reported basis and 12.8% on a comparable basis (excluding structural variances and forex movements). Developed sales, which represent the worldwide presence of the company's products on the market reached EUR 9,585m (+14.5% on a comparable basis). It is important to note that the figures understate the strength of the group's franchises as inventory build at US wholesalers in the 2H in 2001 led to stock workdowns in 2002 on two of its most important drugs, Plavix and Avapro, and led to sales slowdown over the latter part of 2002. This makes comparisons for Q3 and Q4 tough. Going forward, comparisons should become more favourable and the performance of Plavix should become more apparent. As expected, the group reiterated its net profit pre-goodwill growth guidance for 2002 of 'over 25%'. CSFB expects 26% when profit figures are released on 18th February.

The sharp derating, which the stock experienced over the past weeks suggests that the market is increasingly focusing on the growth outlook for 2005 when patent challenges for Plavix and Ambien could undermine the growth outlook. However, we believe the share price reaction is overdone as the earliest Plavix could face competition is towards the end of 2004, and CSFB attributes only a 1% chance that the generic challenge will succeed. Sanofi-Synthelabo - historically trading at a premium to the sector - trades currently at a 9% discount on a PE basis (PE03 16.7x vs sector PE03 18.3).

LVMH (MC FP, EUR 37.87), the luxury goods maker, reported better than expected 4Q sales. 4Q sales rose 7.8% to EUR 3.84m vs consensus estimates of EUR 3.57bn. Excluding currency, sales increased by 16%. In 2002 sales grew 4% to EUR 12,690m. 2002 operating profit rose by at least 25% according to management. The Louis Vuitton brand, which is LVMH's most profitable unit, grew an impressive 23% yoy and was helped by a new mega-store opening in Tokyo. The Japanese account for more than 60% of sales of the Louis Vuitton brand. We believe the result shows that management's new strategy to focus on its profitable core business has started to bear fruits and that the exclusive luxury brands are able to keep growing in a difficult economic environment. After the results, consensus upgrades can be expected, which should support the stock in the short term. We continue to believe that LVMH is a strong player in a sector, which should be able to outperform the market for another year once sentiment recovers.

UK's Competition Commission ordered Vodafone (VOD LN, GBP 1.1475), mmO2 (OOM LN, GBP 49.75), France Telecom's Orange (OGE FP, EUR 7.85) and Deutsche Telekom's T-Mobile to cut charges by 15% from fixed line phones to their UK mobile network by July this year followed by further cost cuts by inflation minus 15% for Vodafone and mmO2, and by inflation minus 14% for Orange and T-mobile in the years through July 2006. The new ruling is as expected and would result in mobile termination rates falling by 27% this year (to March 04). According to CSFB this would mean 5% off mmO2's EBITDA forecast and less than 1% off Vodafone's EBITDA forecast to March 2004. However, Vodafone considers challenging the ruling in court. We believe the upturn in the earnings cycle, which is most established in mobile companies such as Vodafone should continue to support the stock.

CSFB upgraded the telecommunications equipment sector from neutral to overweight. According to CSFB the bottom in the current carrier investment cycle is nearing and restructuring efforts should offset declining revenue in 2003. In addition they expect that the sector will return to modest GDP-plus growth in 2004 and 2005.

Nokia (NOK1V FH, EUR 13.55) reported 4Q sales figures, which came in at the bottom of the range given by management at EUR 8.8bn (range given EUR 8.8 - 9bn). Pro forma EPS of EUR 0.26 was above the range given (EUR 0.23 - 0.25). Handset sales were in line at EUR 6.7bn, but margins in the mobile phone unit strong at 24.7% (consensus 24.1%). Network sales in line at EUR 2bn with margins at 0.9% (consensus 0%). Cash flow was strong at EUR 8.8bn at the end of the 4Q mainly driven by an improvement in operating cashflow as well as a reduction in long-term receivables and lower capex. As was expected, Nokia proposed a share buy back which corresponds to approx. 4.7%% capital. Guidance for the first quarter is for pro forma EPS of EUR 0.15 - 0.19. Whereas the management sees phone sales grow by around 0 - 9%, they do not expect an improvement in the network market.

Ericsson (ERICB SS, SEK 7.25) will report on 3 February and Alcatel (CGE FP, EUR 6.59) on 4 February.

In addition we expect this week earnings report from Vodafone (VOD LN, GBP 1.1475) on the 27 January, from SAP (SAP GY, EUR 84.28) and Stora Enso (STERV FH, EUR 10.25) on the 30 January.