Uncertainty and nervousness likely to remain high

US Equities
Among our recommendations, Countrywide Financial Corp. (CFC, $53.16, CSFB: Not rated) The stock has a beta of 0.76 vs. the S&P 500. In the last quarter, the company reported an EPS of $1.94 in 4Q02 vs. consensus expectations of $1.922, driven by high loan production volume. Besides, we believe CFC's diversified business should protect earnings from volatility. In 4Q02, diversified operations represented 28% of CFC's pre-tax earnings. Management clearly said its goal to increase diversified operations to 50% until 2006. We expect Countrywide would outperform the market in the short-term, as long as rates remain stable, and U.S. mortgage origination does not drop quickly. The mortgage origination pipeline was down in December from November, but the company indicated that January mortgage applications are running higher than December. Hence we reiterate our Buy rating.

On February 3rd, President W. Bush unveiled its $380 billion FY 2004 budget proposal for the Pentagon. This represents a $15 billion increase from 2003 budget (source: JP Morgan). Major segments to benefit from this increase are ammo (+9% vs. 2003), and shipbuilding (+10%), while missile funding went down 10%. Among our recommendations, General Dynamics Corp. (GD, $65.75, CSFB: Outperform) had about a 30% exposure in shipbuilding in 2001. However we maintain our Hold rating on GD due to its business jet unit. We think this segment could generate further pressure on stock price. In 2001, GD's business jet sales represented 27% of total revenue (source: Bloomberg).

Currently we prefer Northrop Grumman Corp. (NOC, $91.69, CSFB: Outperform). NOC is a pure defence play and after the acquisitions it made in the last few years, the company should be well positioned to reap the benefits from the increase of technology in the army. Furthermore, like GD, Northrop Grumman has also exposure to shipbuilding, which represented 14% of NOC's total sales. On February 13th, the company will hold an investor conference. We do not believe the conference will throw up anything new, but a confirmation of a positive outlook for 2003. We maintain our BUY rating on the stock.

The oil sector saw quite an eventful week, with crude oil price moving up to over $35 a barrel for the West Texas Intermediate, pushed up by the war rhetoric from US President George W. Bush and Secretary Of State Colin Powell. This rise in oil prices has already started to build in a possible war premium that would result in the event of an attack on Iraq by the US. The situation however seems to ease partly, after Russia said it would back the plan by France and Germany to send more US weapon inspectors and also UN peacekeeping forces in Iraq. The three countries are backing each other to avoid a military intervention and give more time to the weapons inspectors. The tone has certainly risen and as a result we expect volatility in crude oil prices to remain high.

In the meantime, Venezuela's output is steadily rising, almost unnoticed, as the country continues to build up its production following its national strike. Venezuela's Energy and Mines Minister Rafael Ramirez said the country's output is 1.9 million barrels a day, a third of its regular production. The longer the delay on any attack on Iraq, the more time Venezuela has to get back to its old production levels. This would also help to ease the pressure on the crude oil side.

We expect the oil and oil service stocks to continue to follow the movements of the crude oil price and remain volatile. We continue to recommend accumulating our recommended stocks Exxon Mobil (XOM, CSFB: Neutral), Noble Corp. (NE, CSFB: Neutral) and Schlumberger (SLB, CSFB: Neutral) into weakness, as we expect the sector to do well over the medium term. We expect integrated companies to boost their production, supported by high oil prices. The growth in production will also directly benefit the service companies like Noble Corp and Schlumberger.


Gold had a good start into the week, peaking at $389.05 for the ounce. Then profit-taking activities started to weigh on the gold price. We expect the gold price to consolidate at levels around $370 an ounce over the next few days. However fundamentals for gold remain sound. And we believe that Placer Dome (PDG, CSFB: Outperform) still has more upside. The broad market is currently not fully discounting the actual gold price into the gold mining companies' earnings. But as gold mining companies and also gold analysts start upgrading their long-term gold price forecast, we should start to see this increasingly reflected in the gold mining stocks. We continue to rate Placer Dome a buy with a 12-months price target of $17.

Europe
• The DJ EUR Stoxx 50 closed the week 1.7% lower at 2133.60 - breaking the October lows

Uncertainty did not fade after US Secretary of State Colin Powell's speech to the UN on Wednesday. Although Mr Powell unveiled as expected further evidence that Iraq had breached UN resolutions, it is unlikely that this proved compelling enough. As tensions rise about a possible war with Iraq, the markets are likely to remain nervous for at least a while longer.

The announcement by the Financial Services Authority (FSA) for changes to the solvency regulations to minimize the forced selling of equities brought short-term relief for UK insurers and the FTSE but is evidence that the fall in the markets put the solvency ratios of especially the UK insurers into maybe bigger danger than previously expected.

The surprising 25bps rate cut by the Bank of England which brought the new key rate down to 3.75% - the lowest since 1955 - added to the uncertainty as questions were raised about how bad the state of the financial markets really are.

The European Central Bank left the rate unchanged at 2.75% but momentum is building for a further rate cut. We believe that as soon as the inflation breaks below 2% or if the financial conditions of the markets worsen, the ECB will reduce the rate. All this uncertainty led markets to new lows. After testing the October lows during the last weeks, the DJ EUR Stoxx 50 crossed this threshold on Friday to close below it. All the other major indices expect the CAC Index are also trading in ranges not seen since 1997.

DaimlerChrysler (DCX GY, EUR 27.22) announced 2002 preliminary results slightly below consensus estimates. Turnover came in at EUR 149.8bn (CSFB: EUR 148bn) and group operating profit excl. one-time effects at EUR 5.8bn (CSFB: EUR 6bn). The management proposed a dividend of EUR 1.5, which is EUR 0.50 higher than the one paid in 2001 but lower than expected after a magazine report last week raised hopes for a doubling of the dividend. We believe the higher dividend, which translates to a current dividend yield of 5.5%, adds to the attractiveness of the stock for an investor with a 12-18 months time horizon.

BNP Paribas (BNP FP, EUR 37.95) reported results slightly ahead of analyst's expectations. The group showed the benefits of its revenue diversification and posted solid operating earnings performance in 4Q 2002. 4Q net income came in at EUR 696m (-20% yoy, CSFB forecast: EUR 578m) and 2002 net income at EUR 3.3bn (-18%, CSFB forecast: EUR 3.15m). Driver of the results was its retail business, which reported a 5.6% higher pretax income at EUR 2.448bn. Retail banking in France shows signs of weakening but forecasts still point to a better performance than most neighbouring economies such as Germany and Italy in 03. On the negative side was the performance of the corporate & investment banking division which reported a 36% decline in pre-tax income to EUR 1.186bn based on the absence of recovery in the equity derivatives business.

Apart from the results the focus was on the on-going consolidation in France. The management said that a decision regarding the 16.2% stake in Credit Lyonnais (CL FP, EUR 53.4) (acquired for an average share price of EUR 54.7) would be taken at the appropriate time. BNP Paribas (and any other interested third parties) have basically time until first week of March to submit a counter-offer. They also stated that a US West coast acquisition is a priority for them and that they 'ruled out a tie-up with Societe Generale (GLE FP, EUR 50). On valuations, the stock is trading at a PE03 of 9.9x compared to the French banking sector of 12.4x and the European banking sector of 10.5x - a discount which we believe is too excessive. In addition, BNP Paribas comes with an expected dividend yield of around 3.5%.

Aventis (AVE FP, EUR 43.21) reported net sales of its core business for 2002 at EUR 17.591bn (+11.6% excl. currency effects) and a core business EPS of EUR 2.62 (+27%) in line with CSFB's expectations. The growth is in the range of its guidance. However, the stock dropped 6.7% after management lowered its guidance for 2003. Sales growth ex currencies is close to 10% and EPS growth between 14-19%. Although it was expected that Aventis would lower its guidance, the question remains if the market thinks that the company can deliver these figures. We believe by now the market should have discounted all the possible negatives: fears of decline in Allegra sales, inventory level's of Lovenox and worries of a delay to Ketek have all weighed heavy on investors' mind. We expect the stock to remain under further pressure at least in the short-term, but remain positive based on the attractive valuations and potential for pipeline upside.

Adecco (ADEN VX, CHF 40.25) reported a weak set of 4Q results and ended the day 2% lower. Q4 net income fell 68% to SFr37m well below CSFB's forecast of SFr100m. Part of it was due to a one off item, higher workers compensation costs in the US, higher bad debt provisioning and restructuring costs in Ajilon. The remaining shortfall comes from Adecco's US unit mainly owing to falling gross margins as a result of Adecco's over capacity as a result of its mistimed branch roll out in 1Q of 2002. A positive feature was the solid cash performance with net debt falling to SFr2.0bn versus CSFB's forecast of £2.3bn. In the conference call, Adecco announced that it has started to shut down some unprofitable branches and taken special charges and asset-write downs which we see as a positive. The stock has fallen sharply in the last two months and is now largely factoring in the weak outlook. While uncertainty continues we would like to highlight the three key reasons for our positive stance: Adecco is an early cyclical, very operationally geared and with forecasts moving to sensible ranges, any sign of a recovery should lead to a strong rebound.