Economic data lifts US stocks (page 1 of 3)

US Equities

On Tuesday, Wells Fargo & Co. (WFC, $55, CSFB: Outperform) is expected to report a $0.93 EPS vs. $0.84 a year earlier. We believe WFC's will report good results, although loan businesses could decrease from last quarter due to increasing loan rates. We maintain our Buy rating on Wells Fargo.

On Wednesday, analysts would wait for Aflac Inc.'s (AFL, $35.52, CSFB: Neutral) to report a profit of $0.46 a share, compared with $0.45 y-o-y. AFL is struggling to report growth in the U.S., which weighs on its stock prices. However, the company reported the last quarter's better-than-expected growth in Japan.

This market accounts for about ¾ of AFL's total sales (source: Bloomberg). On the one hand, after a 12%-gain in stock price since our recommendation on April 29th, we would advise to take some partial profits on Aflac. We will increase our stop-loss to $34.20 from $28, securing an 8%-profit.

American International Group Inc. (AIG, $61.08, CSFB: Outperform) will report its quarterly earnings on Thursday. Consensus forecast $0.977 EPS, up from $0.70 a year earlier. We maintain our Buy rating, and our stop-loss at $57.

Last week, press reports indicated the NYSE could impose disgorgement of around $150 million, plus fines, on the five specialists under investigation for improper trading activity. The NYSE will seek compensation for investors after finding the specialists drove up costs by stepping into trades in which orders could have matched without intervention.

Spear Leeds & Kellogg (SLK), a subsidiary of GS, is the second-largest NYSE specialist firm by volume and is involved in the investigation. This would impact Goldman Sachs Group Inc. (GS, $87.17, CSFB: Not rated). Merrill Lynch estimates SLK's specialist business has produced revenues of approximately $250 million - $300 million this year, and accounts for about 2% to 3% of GS's YTD net revenues of $12 billion. This would increase GS's stock price volatility.

We maintain our target price at $95 and our stop-loss at $80. The other firms under investigation are Van der Moolen Holding NV, LaBranche & Co., FleetBoston Financial Corp.'s Fleet Specialists, and Bear Wagner Specialists LLC, majority owned by Bear Stearns Cos.

The drug maker Merck & Co (MRK, $48.63, CSFB: Neutral) is scheduled to report earnings on October 22, before market opening. We are expecting a USD 0.85 per share before items, up from USD 0.78 in the same quarter last year. This will be the first quarterly resut since the spin off of Medco Health Solutions.

Merck's report will represent the pharmaceutical business on a standalone basis and we will therefore be looking to get greater visibility on the company's profit margins in the pharma business. Merck historically trades at a discount as a result of the lower profitability related to the low margin Medco unit.

Thus it will be important for the management to build up investor confidence by reporting improving profitability and a clear roadmap to growth in order to eliminate the persisting valuation discount to its peers.We reiterate our positive stance towards Merck based on the attractive valuations and the indicated dividend yield of 3.04%. A good set of earnings numbers could bring some momentum into Merck's share price.

Share prices in the technology sector are likely to be volatile, as the earnings season progresses. Earnings expectations for the companies in the sector are high and accordingly there is a risk of disappointment.