Stick to a strict stop-loss policy

US Equities

While continuing to show economic expansion, lower than expected U.S. industrial production numbers weighed on equities last Friday.

Industrial production was expected to increase 0.4% in October, but it increased 0.2%, compared with a revised 0.5% increase in September. Merrill Lynch reduced its 2004 profit forecast for General Electric Co. (GE, $27.88, CSFB: Neutral).

Coupled with this weaker-than-expected industrial production, GE stock price went below our stop-loss level of $28. We remove the stock from our trading-ideas.

We recommend investing in laggards, looking for attractive valuation, especially in small & mid cap companies, but a strict stop-loss policy, and recommend investors to take partial profit on the following companies.

In order to protect some gains, we raised our stop-loss levels on Aflac Inc. (CSFB: Neutral) to $34.20, on Masco Corp. (CSFB: Neutral) to $26.50, on Allstate Corp. (CSFB: Outperform) to $38.60, and on Goldman Sachs Group Inc. (CSFB: Not rated) to $93.

Share prices of pharmaceutical companies, as well as pharmacy benefit managers (PBM) rose sharply in the second half of the week, after US President George Bush stepped up pressure on Congress to pass a USD 400 billion Medicare legislation trying to break a stalemate on prescription-drug benefits for seniors.

Bush is pushing forward on a compromise that would also be backed by some key Democrats, which would allow private insurers to compete with Medicare to cover elderly and disabled patients. The USD 400 billion legislation would more than double Medicare's spending on its 41 million elderly and disabled patients in the next decade by increasing drug coverage and raising reimbursements for hospitals in rural areas.

A tentative deadline for a decision has been set for Tuesday November 18 by the negotiating panel.

The expanding Medicare's prescription drug benefit could be a windfall for drug makers such as Pfizer Inc (PFE, $34.08, CSFB: Outperform), biotechnology companies such as Neurocrine Bioscience Inc (NBIX, $49.32, CSFB: Outperform) and PBM's such as Express Scripts Inc (ESRX, $62.96, CSFB: Outperform) - three companies we are recommending as a Buy. All three stocks rallied on the news and we could see further momentum building up in the sector on the back of the positive news flow, and especially if Congress can agree on the bill in the coming two weeks.

Investors who recently bought positions in Express Scripts Inc, following our recommendation, could consider taking partial profit in the stock, as it rose 14.64% since the beginning of the month. Shares of Pfizer rose 7.85% in the same time.

The momentum built up could continue, as investors have shun the sector over the last three months amid concerns about slowing growth. We could see some profit taking today, just ahead of a possible publication of the bill on November 18, but a boost could again come from a speech aimed at building support for the bill that President Bush is scheduled to hold on Thursday, and which will be broadcasted.

Among our Small & Mid Cap recommendations the nickel mining company Falconbridge Ltd (FL CN, CAD 25, CSFB: Not rated) saw a strong rally since we added the stock to our recommendations on October 22. The stock hit our 12-months target price of CAD 26.50 on November 3, where we took partial profit and we took profit in the remaining position after the stock saw some weakness from this recent peak.

Falconbridge is a good example for the value that the small and mid cap can offer. The segment of companies with a market capitalisation of less then USD 5 billion has been outperforming the large cap S&P 500 year to date, thanks to the attractive valuations, and we expect the outperformance of these stocks to continue due to their more flexible management and quicker response to the changing economic landscape. The current uncertainties in the market about the economic outlook clearly are in favour of the small and mid cap segment.

We are maintaining our BUY on Carolina Group (CG US, $23.31) . We raised our target price to $30 from $28 and increasing our stop loss to $20 from $17.50. That would represent a potential upside of 28% and downside risk of 13%. Key takeaways for 3Q03:

Due to an investment loss within the company's investment portfolio, net interest expense was approximately $10mm above estimates. Increased promotional spending will carry on at least into 1Q04. However, shipment Volume came in much stronger than our expectations, promotional spending is bearing fruit AND Carolina Group still remains the most profitable tobacco company in the US with the highest per pack profitability of $0.50.

Our recommendation on Carolina Group is in line with our thematic play on companies with safe and high dividend yields. Carolina currently yields 7.8%.


European Equities

The DJ EuroStoxx 50 Index ended the week up by about 1% to close at 2656

• Review of 3Q results from Holcim, Eni, Siemens and Arcelor

On the economic front, the German ZEW research institute announced a bigger increase than expected. The expectations index increased to 67.2 from 60.3 in September, which was well above expectations.

The increase came on the back of rising stock markets and a weaker Euro. However, the current situation index remains roughly flat. As expected the 3Q GDP figures for Germany and France reflected a rebound in this quarter. The French GDP grew 0.4% and the German grew by 0.2% sequentially, which reflects the fastest quarterly rate since the 2Q last year. With the positive sequential increase in Germany the country has emerged from the technical recession.

Holcim (HOLN VX; CHF59.05) reported 9-months results above expectations on an operating basis. Net income after minorities increased by 8.2% in local currencies and by 0.8% in CHF to CHF 518m. Net sales were 5.4% lower in CHF at CHF 9.4bn impacted by the sharp decline in the value of the US Dollar against the Swiss franc. However, a positive was that sales rose in all three core segments (cement, aggregates and ready-mix concrete) compared to the first nine months of 2002.

The company was also able to lift its EBITDA margin in the 3Q from 27.4 to 27.6% despite unfavourable business conditions and seems to be on track to achieve its strategic objective of a 30% EBITDA margin by 2006

Holcim's numbers from the US still proved unsatisfactory. However the efficiency improvement programs embarked upon by the new management at Holcim US has begun to bear fruit. One of the most impressive aspects of this result is the sustained strength from Asia/Pacific region. CSFB upgraded its earnings forecast for 2003 and the following years and raised its target price from CHF 65 to CHF 70. We would consider a level of CHF 59 as still attractive. At the point of our recommendation we have set our target price at CHF 68.

ENI (ENI IM; EUR14.09) reported 3Q net income at EUR 955m (+3.7%), which is within the consensus range however slightly at the lower end. On an operating level, income increased by 2.3% to EUR 43m on the back of growth in hydrocarbon production and natural gas as well as higher refining and distribution margins. The appreciation of the Euro partly offset these positive factors.

Whereas its competitors struggle to grow in oil and gas production, Eni increased 3Q oil and gas output by 7.2% to 1.56m bbl per day, which makes Eni's full year production growth target of 6% achievable. Among the world's biggest oil companies only Total, which forecast annual growth of 5% comes close to Eni's growth. Eni remains a value play with a competitive position in the global Exploration & Production business, with interesting assets and with further restructuring potential. We maintain our BUY.

Siemens AG (SIE GY; EUR63.02) reported 4Q and FY 2003 results. It was a good set of figures, which were well ahead of expectations. Significant improvements are: 1) continued recovery in Information & Communications Mobile (ICM) and Information & Communications Network (ICN) which moved back to the black and 2) impressive operative performance in its Power Generation and Medical equipment divisions.

4Q net income came in at EUR 724m (expected EUR 597m), EPS at EUR 0.81 (expected EUR 0.65), sales at EUR 19.778bn (expected EUR 19.3bn) and operating profit at EUR 1.102bn (expected 1.102bn).

Siemens increased its 2003 dividend by 10% to EUR 1.1. On the outlook, Siemens expects 2004 sales to rise and maintains its margin targets.
We would expect some consolidation around the EUR 60 level before the share price pushes ahead further. We maintain our buy with a medium term target of EUR 63 with a potential upward bias as we believe Siemens is a good play on a capex recovery and could see upward earnings revisions.

Arcelor (LOR FP; EUR13.70) released 3Q report after market closed on Thursday. At first sight the figures seem to be at the top end of a relatively wide range of expectations with an 80 % increase in net income to EUR101m. The outlook given appears upbeat and confirms the improving industry environment, which is one of the reasons why we are positive on the company.

The management said that world steel markets are improving with steel demand ex China increasing by 1% in this financial year and expected to increase by 3% in 2004. Given the recent cut back in production of all the European steel makers and increasing demand this should pave the way for price increases. Arcelor expects prices to increase between 5 and 7% in 1Q 2004, which will help to offset gains in the cost of raw material.

Although the results do look good we would prefer to wait for the stock price to consolidate before entering new positions as the share price rose over 18% since the 24 October. We consider an entry of around EUR 12 as attractive for a long-term exposure.