US market liquidity and momentum driven (page 3 of 3)

With this decision Sweden, which is now the only EU member outside the Euro and Nato, delays any future referenda in Denmark and the United Kingdom.

As markets remained in consolidation mood, sector rotation from auto/tech into pharma continued. The pharma sector looks likely to have made a medium term bottom and we would reiterate Sanofi-Synthelabo (SAN FP; EUR 54.20) and Aventis (AVE FP; EUR 48.20).

Aventis and originator Genta have released positive phase III data on a cancer therapy called Genasense. Genasense is a drug that enhances the action of chemotherapy. CSFB applies a 66% probability that the drug will be approved by 1H 04 which would result in a EUR 0.01 increase in 04 EPS estimates.

During a presentation at the Frankfurt Auto Show, DaimlerChrysler (DCX GY; EUR 33.35) announced 9 new products in 04 at the Chrysler division and several new product launches at Mercedes in 04/05. The management's comment that 04 profits at Mercedes would be largely flat yoy, which would lead to a disappointment. In addition, the breakeven target on the operating level at the Chrysler division in 03 is looking challenging.

However, we believe that this is largely priced in and continue to like the stock on an 18-months horizon. DaimlerChrysler also announced the investment of EUR 1bn in China in a joint venture with Beijing Automotive Industry Corporation to build Mercedes cars and trucks in China, which we see as a positive in the long-term, but believe would put some short-term pressure on the stock.

We would use any short-term weakness as a buying opportunity, as we believe DaimlerChrysler provides an interesting combination between cyclical exposure and dividend yield (indicative dividend yield 4.5%).

This week's focus was on the luxury goods sector as Hermes (RMS FP; EUR 139), Bulgari (BUL IM; EUR 6.505) and LVMH (MC FP; EUR 53.70) reported. Whereas the results confirmed the improvement in trend in June to August, a further outperformance of the sector depends on the shift back to cyclicals.

We would reiterate The Swatch Group (UHR VX; CHF 134.50) as our preferred play of the sector combining attractive valuations, improving business mix and on going cost cutting initiatives.

Nokia's (NOK1V FH; EUR 13.72) midquarter update was not well received by the market. Nokia confirmed its previous forecast of mobile phone 3Q revenue to be 'flat or slightly down' compared to a year ago due to a drop in average selling price. Network sales will also be in line with guidance (down 15-20% yoy).

The market seemed to have expected a rebound in phone sales and seemed to be disappointed with the operating profit in the network unit, which has not yet managed to break-even. On the positive side was the announcement that EPS will likely be 'at the high end or slightly above' its previous forecast of EUR 0.15-0.17. After the recent outperformance of the sector we remain cautious, as we believe growth rates and profitability will be limited due to competitive pressure.

Our new trading buy SAP AG (SAP GY; EUR 113.03) suffered alongside the technology sector during the last couple of days and came under renewed pressure on Friday after Oracle released weaker than expected license revenue (6% yoy decline and 10% decline qoq). EPS was in line with expectations at USD 0.08. The area in which Oracle competes with SAP - applications business - came in weak in the US and the Asia Pacific while Europe was unusually strong.

The stock closed the week just above our stop-loss level. As we recommended SAP as a trading call we will be strict with our stop loss level and will be watching the stock closely for a possible removal from our list to protect the downside.

Fundamentally, we continue to like the stock for an investor with a long-term horizon. Whereas the difference in growth forecast and valuations between the hardware and the software sector is negligible, the higher margin and lower volatility favours the software sector.

SAP's valuation is in line with the sector and whereas the 3Q could remain difficult, the fourth and most important quarter for the company could provide an opportunity for earnings revision.