Very little reason for the US market to rally last week. But rally it did. (page 1 of 3)

US Equities

The April Institute for Supply Management's purchasing manager's survey was expected to come in at 47, but instead disappointed with a reading of 45.4. Any figure below 50 is generally considered to signal a contraction in the manufacturing sector.

Initial jobless claims rose to 448,000 exceeding consensus' estimate by 58,000. The first quarter productivity figure of 1.6% came in below expectations of 2%. According to our Chief strategist

On headline basis, 48,000 job losses in April were at the low end of expectations of job losses. However, exclude 32000 jobs added by governments, the private sector has shed 80,000 jobs. Job losses in February and March, which were estimated earlier at 396,000, are now seen at 477000. Together with 48,000 jobs lost in April, more than half a million jobs have been shed in the last three months. We have always maintained that the employment report is a lagging indicator for the last economic cycle but a leading indicator for the next one. If firms expect any slowdown to be fleeting, they would not lay off workers in droves (Source: CSPB regional Head of Investment Consulting)

We believe that there is very little to shout about on the fundamental front. Companies are still on the whole overvalued and analysts' forecasts are not coming down as promptly as we would like.

April's 16.5 million U.S. light vehicle sales were weak given the pricing environment. 0%, $500 "bonus cash", $1000 "friends & family" discounts, and "$5 per day leases" were not enough to overcome tired consumers, as well as their realization that such discounts are permanent, rather than occasional. Sales in April were down 6.3% y-o-y. The bright spot came from sales of light trucks, which were flat y-o-y, and light truck share at 53.7% of total sales, up from 52.2% m-o-m. However, Big Three (Ford Motor Co., $10.04, CSFB: Neutral; General Motors Corp., $35.80, CSFB: Neutral; and DaimlerChrysler AG, €29.08, CSFB: Outperform) inventory is 85 days, 90 days in truck and 76 days in car, both 24% above normal (source: Goldman Sachs). Therefore, higher incentives or production cuts could occur the following weeks, adding pressure on US carmakers. GM's sales were down 9% y-o-y with a 27.8% share, down 0.8% y-o-y, while F's sales declined 7% y-o-y with a 19.8% share, down 0.2% y-o-y. Hence, we do not recommend investing in neither GM nor Ford for the moment, preferring auto components suppliers, like Johnson Controls Inc. (JCI, $83.44, CSFB: Not rated). We believe JCI diversified customers worldwide would partly offset the current weak U.S. car industry.

With the war on Iraq being officially over, what would happen with U.S. defence stocks in the next months? Several events would drive U.S. defence contractors. Among them, there are:

- Individual military services are doing their own after-action assessments of the Iraq war, and these studies could be reported in July-September (source: Merrill Lynch), and influence the FY2005 U.S. Department of Defence (DoD) budget, which will be drawn in autumn.

- U.S. military is currently under a debate related to its transformation into a more "technology-oriented" army.

- In our view, the federal budget deficit would be the major issue for defence sector. If the economy does not show clear signs of recovery, and budget deficit increases, defence spending would probably be reduced.

- Budget over-run would be another key factor for new weapons programs, and would weigh on stock prices.

- Finally, in autumn, the Democratic candidates for presidential election campaign should be known, including his stance on the national security.

With a myriad of uncertainties, we recommend investing in defence companies involved in several major weapons programs, in order to diversify the risk.