We recommend focusing on our themes especially the 'energy' and 'dividend paying' themes

US Equities

• Recommendations update

Last week, Johnson Controls Inc. (JCI, $74.40, CSFB: Not rated) decreased 2.75%, mainly due to Ford's announcement of a 17%-reduction of its production for the second-half of the year. Currently we maintain our BUY rating, and our stop-loss level of $72. JCI has consistently reported solid financial performance, and we believe this should continue in a weak automobiles sector due to its diversified portfolio of customers. Part of the Big Three (Ford, GM, and DaimlerChrysler) accounted for 39% in total sales in 2002 (10% Ford, 15% GM, and 14% Daimler Chrysler). Its second unit, Controls Group (auto battery), which accounted for about 25% in total sales, should also be able to mitigate an earnings decline. Furthermore, car interiors are able to be modified over a few years, as opposed to other components like power-trains, which are developed to remain unchanged for as long as possible. Each model overhaul gives JCI an opportunity to upgrade interior features and add content, which helps offset the pressure on profit margins. Despite our positive stance on JCI, we believe the stock price would remain weak for the coming weeks. The shares reflect an industry under pressure, which would limit the upside in the short-term.

Recent actions by Fitch Ratings (see CS Weekly, Feb. 24) have refocused investors on the question of mortgage servicing rights (MSR) valuations. The value of MSR, an asset that is required under GAAP, differs across firms. Investors have noticed that Countrywide Financial Corp.'s (CFC, $54.38, CSFB: Not rated) MSR value, at 1.2% of the servicing portfolio, is higher than those of other lenders, such as Washington Mutual Inc. (WM, $33.53, CSFB: Not rated), with MSR amounting to 0.9%. In a scenario where CFC would have to reduce its MSR to 0.9%, Morgan Stanley estimates a target price at $69, which is still higher than our conservative target price of $61. In other terms, this decrease would reduce yearly EPS by $1.14 to $6.64 expected, based on 2001 annual report. Hence, we believe a decrease in MSR would have a negative impact on CFC stock price in the short-term, but our positive outlook on CFC' s business remains intact vs. its peers, even if the company has just announced an 8%-fall in its mortgage origination. BUY

Gold mining stocks saw further profit taking, as gold prices continued to decline and dropped on March 13 on the news that the US would consider giving Iraq more time to disarm peacefully. The issue however, has not been resolved yet and today, March 17, a tentative deadline for Iraq to disarm, is driving gold prices higher again, with the spot climbing towards the $345 per ounce levels.

The three major North American gold mining stocks Newmont Mining (NEM, $25.09, CSFB: Neutral), Barrick Gold (ABX, $14.65, CSFB: Outperform) and Placer Dome (PDG, $9.23, CSFB: Outperform), after the recent share price correction, are trading at the their lows of August and October 2002.

In this respect the stocks are looking increasingly interesting, as the fundamentals supporting the expectation of spot gold reaching prices of $425-450 during this year remain unchanged. The decline in the US Dollar makes the purchase of gold more attractive for non US Dollar investors.

We removed Placer Dome from our US Buy List at $10, as we saw that profit taking would lead to a decline, without changing our overall positive stance towards the company. We believe that an investment in Placer Dome should be trading oriented, given the degree of volatility in this stock. In our view the timing is good for a repurchase of Placer Dome.

The company is reducing its hedge books and is increasing its production, in order to capitalise on rising gold prices. Initially the increase in production had led to higher costs, as we have seen from the company's latest quarterly results, but it will boost the company's profits over the medium term. In our view Placer Dome is the most attractive of the three major North American gold mining companies mentioned above, both in terms of valuations and in terms of outlook.

The focus in the healthcare and drug sector continues to be the debate about Medicare reforms. However the negative news flow coming from individual companies is also hurting the sector.
For long-term investors this offers a good opportunity to buy into companies with good growth outlook and a strong product pipeline. Pfizer (PFE, $28.95, CSFB: Outperform), which we recommend as a BUY, offers such an opportunity. Through its acquisition of its competitor Pharmacia Corp (PHA, $40.13, CSFB: Outperform) Pfizer will be able to strengthen its drug portfolio further by adding the arthritis painkiller Celebrex, which is expected to generate sales of almost $3 billion in 2003.

Through the acquisition of Pharmacia, Pfizer expects to generate merger related synergies, but it will also be able to spread its patent expiry risk further, and the company will in fact be able to rest easy until December 2006.

Pfizer is a highly profitable company, which should be able to grow its profits by 15-18% per year. Based on this outlook, including good earnings visibility, due to low patent risk, current valuations are indeed very attractive. The stock trades at a 16x its expected 2003 earnings and has healthy operating margins of 34.3%. Taking a conservative approach, we have a 12-months target for the stock of $37.

EUROPE

• The DJ EUR Stoxx 50 closed the week 4.5% higher at EUR 2079.71.

• Despite the technical rebound we saw during the last two days, we believe the risk remains on the downside.

What a week! After seven consecutive days of decline and touching new all year lows amidst profit warnings from Volkswagen (VOW GY; EUR 29.50) and Alstom (ALS FP, EUR 1.27), markets rebounded sharply during Thursday and Friday last week. As the rebound was not a news driven rally, its sustainability remains questionable. Although hopes for a peaceful solution in the Middle East might have increased towards the end of last week, the rally was more dominated by short-covering, hence a correction of technically oversold positions. Unless a definitive course of action and outcome with regards to the Middle East is known, uncertainty will continue to drive markets and the risks remain on the downside.

If we take a step back and concentrate on fundamentals, the
picture does not look too rosy either. According to a recent study from SSSB, top-down earnings growth forecast for 2003 stands at 5% (reduced from 10%) whereas bottom-up forecasts stand at 20%. This suggests that estimates need to be downgraded further in the course of the coming months.

In addition, besides the strong Euro and high oil prices, the structural impediments are only being slowly addressed. Last Friday, German Chancellor Gerhard Schroeder announced plans to restrict welfare benefits and make it easier for companies to fire workers. Although the reforms will address some of the failings of the German labour market and are therefore to be welcomed, they stop a long way short of the radical overhaul Germany needs.

Given the above we recommend focusing on our themes especially the 'energy' and 'dividend paying' themes.

CSFB upgraded their 2003 oil forecast for Brent from USD 22 to USD 26 and for WTI from USD 23 to USD 28.50, which moves them to around USD 3-4 per barrel above consensus for 2003. According to CSFB, the increase reflects low inventories following disruptions to the Venezuelan supply, a very cold winter in North America and a view that there is now a greater likelihood of supply disruptions in the event of war in the Middle East.

Given uncertain geopolitics, we stick to our 'energy' theme and reiterate our positive stance on TotalFina (FP FP; EUR 120) and ENI (ENI IM; EUR 12.481). In addition to providing an oil price hedge, both of these stocks come with an attractive dividend yield of 3.8% and 6% respectively.

CSFB published another piece in which they reiterate the attractive risk-reward ratio for French banks. We would like to reiterate our call on BNP Paribas (BNP FP; EUR 38.34) and Societe Generale (GLE FP; EUR 48.86). Besides being well capitalised (tier 1 ratio stood at 8.1% at the end of last year for both compared with an average of 7.7% for the sector) and highly cash-generative, both of them have built strong franchises in most of the markets and segments in which they operate. In addition, their business mix is well diversified with around 60% retail, 15% asset management and 25% corporate and investment banking. BNP Paribas is trading on a 8.6x 03 PER and Societe Generale on 9.6x. This compares to 9.4x for the sector, which remains low due to the cheap valuations of UK bank. With an expected dividend yield of 3.5% for BNP Paribas and 4.7% for Societe Generale, both of the stocks are included in our stock picks under the theme 'dividend yield'.

In addition, the French banking regulator approved the take-over of Credit Lyonnais (CL FP; EUR 54) by Credit Agricole (ACA FP; EUR 14.3). This makes a counterbid by BNP Paribas very unlikely and at the same time increases the attractiveness of Societe Generale as the next possible take-over target.

Roche (ROG VX; CHF 79.9) announced over the weekend that it obtained approval for the marketing of Fuzeon (drug for AIDS treatment) in the US. The launch was expected in the first quarter and its realization supports the fact that Roche has demonstrated in the last months that it is competitive in both clinical development and marketing of specialist drugs. We reiterate our Buy.

As expected, Nokia (NOK1V FH; EUR 13.44) gave a rather bearish mid quarter update and narrowed its 1Q guidance towards the lower end of the range. In particular, Nokia expects Mobile Phones sales to be at the lower end of its earlier guidance 0 - 9% and EPS guidance was revised down from EUR 0.15- 0.19 to EUR 0.15-0.17. The new guidance for Networks is also below consensus at a decline of 15-20% and continues to disappoint. Due to weaker than expected volumes and higher 3G costs, management expects a 'substantial pro forma loss' (incl. Restructuring charges) in this quarter. This is especially negative news for Ericsson (ERICB SS; SEK 5.6). We remain cautious on the whole sector as with the current delay in improvement if end demand we believe the sector will continue to struggle for some time to come.