Market movement linked to mixed profit reports

Intel announced a 2002 capital spending plan 10-15% below consensus estimate, sparking worries over the implication on semiconductor equipment stocks. JP Morgan posted its first quarterly loss in 5 years as it wrote off loans to Enron and Argentina. Citigroup registered a 36% rise in 4Q profit, helped by healthy consumer business and earnings diversity. General Electric recorded a 9.7% increase in 4Q profit. Microsoft and IBM both reported a 13% decline in net income.

AMR recorded a loss of $5.17 per share for 4Q which was widely expected. The report reflects the company's focus on controlling costs, which is important for survival in the tough environment. Air travel has proven more resilient than expected. Increasing passenger traffic and reduced industry capacity are supporting load factors and unit revenues in the last few months. AMR and Delta remains our top picks in Airlines. They have the financial staying power to weather the difficult economic condition.

Europe continued to fall on recovery concern. Phone makers fell after Balda, a German phone component maker, missed profit forecast. Drug makers and utility stocks lent support to the market index as investors bet on defensive counters amid mixed signals about the recovery prospect.

Pinault-Printemps-Redoute slashed its 2001 profit target as it said business conditions deteriorated in North America. LVMH could come under pressure ahead of its results announcement this week. Siemens released positive phone sales figures. The company is starting to benefit from the massive job cuts it announced last year and the phone division is returning to profit. Detailed earnings report will be out this week.

Outlook
Market will remain edgy in the coming weeks when a range of IT Hardware and Semiconductor companies announce results. Earnings trend is expected to be weak. On average, semiconductor companies are projected to post a revenue decline of close to 20% for Q4. Although the timing of the recovery remains uncertain, companies that involve in technology and equipment upgrades may see improving demand later in the year. The potential market pullback could be an opportunity to build positions.

The Japanese economy continues to worsen due to sharply falling production and a downturn in domestic demand. Risks around the Japanese market are a banking crisis, more bankruptcies, and the recession in the U.S. Investors are recommended to continuing staying in quality blue-chips. Rating on autos is raised to 'overweight' as they have not fully discounted the weaker currency. The Japanese car makers are also increasing their share of the U.S. market, without substantially raising incentives as the U.S. makers have. Stocks that are likely to see upward revisions are Honda and Toyota.

The Football World Cup which will be held in Japan and Korea from 31 May to 30 June may be the next catalyst for the Japanese market. Previous World Cups show that the run-up to the tournament has generally been associated with a strong stock market. For countries that hosted World Cups in the past 40 years, the average outperformance in the 6 months before the tournament was 8.8% relative to the rest of the world, and those markets subsequently fell 6% relatively in the 6 months after the tournament ended. Popularity of football has grown significantly in Japan in recent years. Media companies, such as SKY Perfect Communications and TBS, may benefit as the broadcasting of the soccer games could attract more subscribers and advertising spending.