The DJ EUR Stoxx 50 closed the week roughly unchanged at 2208.25

US Equities

• Recommendation update
Fitch Ratings placed the debt of Countrywide Financial Corp. (CFC, $53.59, CSFB: Not rated) on rating watch negative due to concerns over MSR (Mortgage Servicing Rights) hedging risk, current MSR valuations and sub prime credit risk. CFC's valuation of its MSR at 178 bps is high relative to competitors such as Washington Mutual Inc. (WM, $35.52, CSFB: Not rated) at 74bps (source: Jefferies & Co.). We do not think CFC credit risk has changed. Hence, if this downgrade occurs, we do not believe it would have a significant impact on the stock price. CFC has large back-up on existing lines and most of its borrowings are short-term. At the end of fiscal year 2002, short-term borrowing represented 47% of total liabilities, while long-term borrowing represented 35% of total liabilities (source: Bloomberg). Currently Fitch has an 'A' rating on CFC, and could be downgraded to 'A-'. On the business side, we believe CFC should continue to demonstrate its ability to grow earnings, even on a cyclical downturn in loan origination volumes. However, CFC would have to continue to gain market shares from its rivals. In 2002, net revenue increased 71% to $4,519.47 million. We maintain our Buy rating on Countrywide Financial Corp.

General Dynamic Corp.'s (GD, $63.90, CSFB: Outperform) exposure to the business jet market remains the primary pressure on the stock price. Although the current stock price should reflect this weak industry, and the downside risk should be limited, we maintain our Hold rating on GD. Firstly, we do not think that the business jet industry would recover in the short-term. In trying to maintain significant sales volume of business jets, the company was forced to reduce its sales prices sharply, as GD's traditional customers remain at the sideline amid the current uncertainties. Secondly, even if GD's defence businesses would generate solid results, as defence budget increases, the company had in any case lost three of the largest program competitions decided on in 2002: Future Combat Systems, DD(X), and Deepwater.

On a positive note, GD's finances remain sound. The company has about $1.6 billion of net debt and a 23% net debt/capital ratio (source: JP Morgan), though the company has recently announced the acquisition of GM Defence, which could add $1.1 billion worth of debt (39% net debt/capital ratio) to its books. The acquisition is expected to be completed during the first quarter.

In the current market environment gold and gold mining company shares continue to offer a good opportunity to diversify. Based on our expectations that the gold spot price should reach USD 425-450 per ounce during the course of this year, an investment in a gold mining stock is a way to capitalise on the rising gold price. Gold mining companies over the last two decades have reduced their production as gold prices declined. They have entered in complex forward selling transactions in order to protect their assets and also to make profits on the volatility of the gold price.

As during the second half of the year 2001 gold prices started to strengthen, the gold mining companies began to reduce their so called hedge books, in order to raise their earnings sensitivity to the gold price. They are also starting to reactivate the mines that were shut down, in order to increase their production. This in a first phase leads to an increase in costs, reducing the mining company's earnings. This effect was also visible as our recommended stock in this industry; Placer Dome Inc. (PDG, $9.89, CSFB: Outperform) reported its 4Q02 results last Wednesday. Several one-time items impacted negatively on the company's net income. On the operating side Placer Dome benefited from the rising gold price. However the company's net earnings in our view were a bit disappointing, as the company did not preannounce that it would not meet the markets earnings expectations.

Placer Dome shares dropped below our stop-loss limit, which we increased to USD 10 from USD8, following the company's fourth quarter results. As a consequence we would not recommend Placer Dome to trading oriented investors, but maintain a favourable long term view on the stock. We would like the stock to consolidate over the next couple of trading sessions.
During the last week we also saw the gold price fluctuate between USD 340-355, which resulted in high volatility in gold mining stocks. We would like to see the gold price resume its upward trend and would in the meantime stay on the sidelines vis a vis gold mining stocks. However we have not changed our long-term stance on Placer Dome. We continue to see further upside in the stock, in the light of high gold prices. The fundamentals for gold remain strong and thus favourable for Placer Dome.

Europe
A recent study by SSSB looks at the performance of momentum based (buying if price and earnings trends are strong) versus contrarian based strategy (buying if earnings trend is strong but price trend weak), and finds that momentum strategy has provided greater returns in the long-term particularly when the macro environment is moving in the same direction. At the sector level, a contrarian strategy has proven to be profitable over the past six months. However, this is not reinforced at the stock level. Therefore, as we believe that after a possible war in Iraq, market fundamentals would still remain depressed, we would continue to focus on a momentum strategy. This means buying sectors, which have outperformed the market over the past six months and with their forward earnings increase above the rate of the DJ Stoxx. These would be sectors such as Software and Telecom.

One of the stocks we repeatedly highlighted in the telecom sector is Vodafone (VOD LN, GBP 117.75). In addition to a positive earnings revision ratio, Vodafone continues to gain market share, which is one of the investment themes we like, given the current difficult environment. CSFB upgraded Vodafone from neutral to outperform last week. As a result of the currently compelling consumer GPRS offer (Vodafone Live!), Vodafone is winning back share of adds in Europe after several quarters of decline. The costs of upgrading customers to GPRS are being partially offset by more 2G revenue whereas for the competition, the upgrade cycle threatens margins and market share. We continue to recommend accumulating the stock at around GBP 1.10.

Sanofi-Synthelabo (SAN FP, EUR 49.26) reported full year 2002 results in line with market expectations. Net profit came in at EUR 1.76bn (+28%), which equates to a 29% increase in EPS on a pre-goodwill basis to EUR 2.42 (CSFB expected EUR 2.36). This was slightly better than expected and reflects the better than anticipated expansion of the operating margin, which increased to 33.4%.

For 2003, guidance was given to match the growth in revenue and earnings achieved in 2002 which is above 10% for revenue growth and around 20% for EPS growth. We continue to like the stock, which currently trades at a 10% PE04 discount to the sector with expected above average EPS growth. Going forward, we believe comparisons should become more favourable and the performance of Plavix more apparent. It is important to mention that the sales figures understate the strength of the group's franchises as inventory build at US wholesalers in the 2H of 2001 led to stock workdowns in 2002 on two of its most important drugs Plavix and Avapro, which consequently led to sales slowdown over the latter part of 2002. This makes comparisons for the 3 and 4 Q tough. The only risk is the generic challenge to Plavix, which could come around late 2004. However, CSFB aligns a 1% chance that the challenge will be successful, which we believe is an acceptable investment risk.

TotalFinaElf (FP FP, EUR 124.8) reported an overall solid set of results. 2002 net income excluding non-recurring items decreased 17% to EUR 6.26bn. However, expressing EPS excluding non-recurring items in dollar terms translates to a decline of 8% to an EPS of USD 8.89, which compares very favourably with other major competitors reporting decreases between 24 and 32%.

TotalFinaElf's traditional strength in production growth did not disappoint and hydrocarbon production showed an expected increase of 10% for the full year. Up to 2007, the company confirmed its target of 5% growth per annum. This was slightly offset by the slower improvement in returns. The upstream underlying return target for 2005 was reduced by 2% to 16% due to the on-going negative impact of UK tax changes and the economic crisis in Argentina. The change in measurement from ROCE (return on capital employed) to ROACE (return on average capital employed) accounts for 0.7% of the reduction. In downstream and chemicals the targets for 2005 returns remain unchanged at 16% and 14% respectively.

We remain positive on the stock. TotalFinaElf trades on a 13.7x PER03 and 12.3x PER04 compared with an average of its peers in the US (BP, Exxon Mobil and Shell RD) of 16x PER03 and 14.6x PER04 respectively. This makes TotalFinaElf one of the cheapest supermajor. In addition, the 8% increase in its dividend raises the expected dividend yield to an attractive 3.6%. Along with TotalFinaElf, our other European play on high oil prices is ENI (ENI IM, EUR 13.906).

DaimlerChrysler (DCX GY, EUR 28.20) reported a significant improvement in profitability in 2002. The group's operating profit excluding non-recurring items increased to EUR 5.8bn. All divisions reported higher earnings and the successful implementation of the plan for increasing efficiency at Chrysler Group and Freightliner contributed to the increase.

Despite the difficult environment the group expects to increase earnings in 2003 slightly and targets a group turnover of EUR 151bn. We consider this target achievable as it is only 1% higher than the turnover achieved this year. Management's confidence is underpinned by strong and growing cash flow. Free cash flow was EUR 2.2bn in 2002, which is equivalent to a free cash flow yield of 7.9%. The dividend increased to EUR 1.50 which translates to an expected dividend yield of 5.3%, which should provide some downside protection. We continue to believe an entry level below EUR 30 as attractive for a long-term investment.