Saddam effect to impact markets

US Equities

Companies such as Halliburton Co. (HAL, $25.46, CSFB: Outperform), which got a no-bid government contract for as much as $7 billion of reconstruction work in Iraq, could see their stocks lifted by investors' optimism.

We believe this news would offset the fact that Halliburton may not be reimbursed for as much as $61 million ($0.14 per share) of potentially inflated fuel costs uncovered by a U.S. Defense Department auditor, after the company failed to fully analyse the price it was charged by a Kuwaiti supplier.

Furthermore, Halliburton said that more than 97% of asbestos claimants voted to accept a reorganization plan, clearing the way for a $4.2 billion settlement (source: Bloomberg). This news led up stock price 3.12% last Friday. We maintain our Buy rating on Halliburton and our target price of $27.

For the coming weeks, we remain focused on companies with high dividend yields and on small & mid caps.

Graco Inc. (GGG, $39.43, CSFB: Not rated), a mid-cap company supplying technology for the management of fluids, announced a 70% increase in its regular quarterly dividend from $0.0825 to $0.14 per share. Furthermore, a special one-time dividend of $2.25 per will also be paid on March 25, 2004, to shareholders of record as of March 11, 2004 (source: Bloomberg). We rate the stock as a Buy.

We believe our recommended U.S. banks, Wells Fargo & Co. (WFC, $57.01, CSFB: Outperform), Bank of America Corp. (BAC, $75.85, CSFB: Outperform), and Hibernia Corp. (HIB, $23.35, CSFB: Neutral) offer attractive dividend yield for long-term investors. These companies give a gross dividend yield of 3.16% for WFC, 4.22% for BAC, and 3.08% for HIB.

For aggressive investors, we reiterate our Buy rating on MBNA Corp. (KRB, $24.86, CSFB: Outperform) after bankruptcy filings for November declined an adjusted rate of 3.3% y-o-y (source: CSFB). As the U.S. economy is recovering, we believe this credit card company would continue to benefit from lower default risk. CSFB anticipates that filings should decrease about 5-7% in 2004.

Europe

European indices increased around 0.5% during the week but remained short of the new year-high levels they crossed the week before.


• We added France Telecom to our recommendation list as we believe that telecoms should see a re-rating in 2004 when investors start locking in profits on cyclicals.


• We remain positive on our energy cum dividend yield plays Total and Eni and recommend to hold on to positions in cyclicals such as Siemens, JC Decaux, Adecco, Holcim and The Swatch Group

European indices increased around 0.5% last week but remained short of the year-high levels they have crossed the week before. The gains came even with the Euro trading above USD 1.22 during the week. This could reflect that investors slowly are getting used to a stronger Euro and on the other hand that stronger overall growth is expected to outweigh the impact of a weaker US Dollar.

While in the US the Dow Jones Index managed to clear the 10,000 level, the Dax Index traded above the 3,900 level shortly on Friday but retreated slightly to close at 3860.13. The Dax Index was supported by a better than expected reading of the ZEW confidence index among institutional investors.

The index climbed to 73.4 from 67.2 in November (expectations were for 71.7). This should bode well for this week's reading of the closely followed IFO Business Climate Index. The index is expected to increase to 96.5 in December with the current assessment component expected to come in at 84.4 and the expectation component at 109. Looking at the technicals, the uptrend in the DJ Euro Stoxx 50 remains intact and renewed attack towards key resistance 2700 and 2730 is likely.

Especially given the news of Saddam Hussein's capture over the weekend we could expect the positive momentum to extend in the short-term.

The energy and telecom sector were among the sectors, which posted the best performance during last week. Energy was driven by a 7.5% increase of the WTI Crude Oil Spot Price during the week. We believe oil price forecasts were revised down to fast during recent months and as such we would expect upward revisions to broker's forecast.

In fact, last week Merrill Lynch upgraded their oil price forecast as well as their earnings target for European oil companies for 03 and 04. Our two favourite companies - Total (FP FP; EUR 140.90) and ENI (ENI IM; EUR 14.731) - increased by 2.9% for the week. Total managed to close again above the EUR 140 level and Eni, which lagged performance so far reached a new year-high on Friday after having posted a 7% gain during the last 3 weeks.

We maintain our positive stance towards theenergy sector and would like to reiterate that Total and Eni continue to offer an attractive dividend yield with Total's indicative dividend yield currently at 3.2% and Eni's at 5%.

With regards to the telecom sector, we added France Telecom (FTE FP; EUR 21.57) to our recommendation list. We believe that telecoms should see a re-rating in 2004 when investors move out of cyclicals. In addition, telecoms is a sector that is relatively insulated from exchange rate fluctuations.

France Telecom is the integrated company with the largest exposure to wireless through Orange. Should growth in the mobile industry accelerate next year, this would enable Orange to forecasts leading to further EPS upgrades in France Telecom.

Management credibility is high and given the scale of cash generation in the sector, we believe confidence in management will be one of the most important investment criteria in 04. Valuations look attractive: the stock is trading on a 2004E FCF yield of 16.5% vs the European telecoms sector on 12.0%; and on a 2004E PE of 11.7x, vs the sector on 12.4x. We attach a relatively conservative target price of EUR 24.50 (+15%) and a stop loss of EUR 19.60 (-8%).

Aventis (AVE FP; EUR 49.82) increased byl 2.2% over the week on the back of several news items: 1) the company announced the long awaited sale of its blood products business to the Australian company CSL for a total of USD 925m. 2) it also sold its generic drug business to Ranbaxy Laboratories in India.

The sale brings Aventis closer to their target of getting rid of non-core business. Aventis' sale of Rhodia is still outstanding but expects it to be completed by the end of 04. 3) On Monday, a study on its cancer drug Taxotere also showed beneficial results, which increases the chance of approval by late 04.