US market liquidity and momentum driven (page 1 of 3)

US Equities

US stocks declined this week as consumer confidence, retail sales and jobless claims cast doubt that growth in the economy and corporate profits would meet expectations.

Retailers such as Home Depot Inc led the drop. A tape allegedly made by Osama bin Laden aired on Al-Jazeera television on the eve of the second anniversary of the September 11 terrorist attacks as well hit the stock market on raising concerns over more terrorist assaults.

On Thursday it would seem that the permabulls once again swept aside important economic data and continue to prop up the market. On a somber day as on the 2nd anniversary of 9/11, we would have believed that it was time to take stock and lock in some of those gains. However, investors appeared to be more concerned about missing out on the "next" up tick and continue to pile in.

Initial Jobless claims rose by 3000 after an upward revision to 419,000 for last week's figure. The recovery remains a jobless one and we believe such a recovery remains precarious and ominously close to an end, though we would be hard pressed to time it given the irrationality of the markets. A fundamentally driven market still eludes us and the rally continues to be liquidity and momentum driven.

A couple of brokers, including CSFB trimmed their estimates on Altria Group (MO US, US$41.02) on the back of lower domestic volumes in the second half of the year and Tax hikes in certain key European countries - namely France and Germany. Lower volumes and the Tax hikes are not news to us and we believe the pull back in MO's price in early August had already reflected this.

We have mentioned before that despite some near term legal concerns, our view is that of a US Tobacco industry with a legal profile in secular decline. We maintain our BUY rating on the stock, which is in line with our thematic play on US Equities with safe and high dividend yields. MO currently yields 6.63%.

Our other dividend plays are Carolina Group (CG US, US$23.04), which currently yields 7.9% and The Macerich Company (MAC US, US$37.84), which yields 6.03%.


Wells Fargo (WFC, $50.27, CSFB: Outperform) share price saw a decline after its competitor National City Corp (NCC, $30.43, CSFB: Underperform) reported that it expects a sizeable reduction in mortgage earnings as early as Q3. National City is largely exposed to mortgage financing, with around 60% of reported earnings derived from mortgage activities.

At Wells Fargo the level 17% of earnings as derived from mortgage activities and the company management recently confirmed that it is comfortable with this level. Hence we believe that for Wells Fargo as for other banks with lower exposure to mortgage activities, a possible drop in mortgage earnings can be overcome by improving market sensitive business contributions, such as commissions and fees.

Wells Fargo's share price recovered from the decline in Friday's trading session. We reiterate our Buy recommendation on Wells Fargo.

The oil service company Halliburton Co (HAL, $24.24, CSFB: Outperform) was in the news over the weekend for the company's work for the US troops stationed in Iraq. Dow Jones Newswire reported, citing an US Army spokesman that Halliburton's US government contracts to restore the oil production in Iraq and support troops is worth about $2 billion.

Halliburton reported in its second quarter earnings announcement that it executed logistics works for the US military in Iraq worth $292 million.