Stick to a strict stop-loss policy (page 1 of 3)

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.