More pain to come for global equities

USA

The Dow skidded below 8,000 for the first time since in two
months. Amidst mixed economic messages and corporate
pre-announcements, the markets gave up their rally attempt
that was in response to Iraq's consent to allow U.N. weapon
inspections back into the country.

Investors focused more on bad economic news - the first drop in industrial production this year, a fall in housing starts and permits, and a still-high jobless claims. Additionally, profit warnings from McDonald's, J.P. Morgan Chase, Celestica, Oracle,
Lucent and Electronic Data Systems put severe pressure on
stock prices and raised doubts about the earnings outlook.

Thomson First Call reported that the ratio of negative to
positive pre-announcements has been running higher in 3Q
versus the most recent quarters. An investment strategist
even suggested that earnings growth is the least predictable
in more than 60 years.

Adding problem to the stock market is that September/October is seasonally volatile. Investors will scrutinize the Federal Reserve's description of the economy for clues about interest rate direction in Tuesday's FOMC meeting.

Besides the unusually high ratio of negative to positive preannouncements,earnings are likely to improve this year but
might not be able to match the consensus. Second-quarter
earnings data from Standard & Poor's showed that reported
results were $6.80 a share, well-above the year-earlier level,
but was 30% below expectations of 2 to 3 months ago.

Europe

Equities markets slumped across the Continent on concerns
over economic growth in the U.S. and Europe and the pace
of corporate profits growth. Unexpectedly weak industrial
production figures and a loss from insurer Swiss Life added
to the gloom.

French industrial production fell 1% in July
versus an expected 0.2% rise. German industrial production
also fell 1% in July. The unexpected drop in U.S. industrial
output further undermined market hopes of an economic
upturn.

Also, Eurozone inflation breached the ECB's 2% target, climbing 2.1% in August, reducing hopes for an interest rate cut. The latest minutes from the Bank of England's monetary policy committee also ruled out the possibility of a cut.

The disappointing manufacturing data as well as the structural
problems in Europe are not supportive of the high earnings
estimate in the European markets. For continental Europe,
the IBES consensus for about 500 companies is +17% in
2002 and +25% in 2003 and much higher for Germany.

Falling industrial output and deflating prices are hardly
supportive of a rise in revenue. On the cost side, German and
Eurozone unit labor costs rose 1.6% and 3.5% respectively in
1Q. The macroeconomic backdrop should prompt ongoing
downward revisions of earnings. Evidence from comparable
periods in the past suggests that equities returns should will
be weak, utilities outperform and traditional cyclicals
underperform next year.


Japan

After falling to a new 19-year low recently, Japanese stocks
climbed as the central bank institutes direct purchase of
shares from financial institutions.

Many analysts heralded this historical move, believing it signals a U-turn of the monetary authority to bring about financial system stability, an improvement in share supply/demand conditions, and a reverse of the deflationary spiral over the medium- to longterm.

Effectively, the Bank of Japan has indicated that levels of
below 900 on the TOPIX index threaten the stability of the
financial system, which the Bank of Japan law requires it to
maintain.

Also, the Japanese dividend yield has overtaken the yield on government bonds. It is higher in real terms then the yield in other big markets. While most economic indicators suggest a bleak economic outlook, the "high" dividend yield, together with the plan of direct shares purchase, should certainly help to put a floor under Japanese equities.