Merrill Lynch's recent survey of portfolio managers indicates that US equities have lost their luster. Not only do more fund managers think that the earnings outlook is worse than it was a month ago, but more managers view the quality of earnings with a jaundice eye. Merrill's recent survey shows 51% of fund managers would prefer to underweight US equities. This compares to 40% last month and only 29% in March. Potentially equally alarming, 30% view the US as having the worst quality of earnings in terms of volatility, predictability and transparency. The US was second only to Japan.

Some details of the US respondents taking the survey:

• 97% expect corporate profit growth in improve. None expect profits to deteriorate.
• Almost 30% believe global earnings per share will increase more than 10%.
• Increasing sales (51%) and lower costs (39%) are believed to be the two biggest drivers of global earnings growth. Ironically, 73% of respondents forecast that industrial commodity prices will be higher in 12 months.
• The repayment of debt is the most important use of company cash flow, according to 49% of respondents. Repurchasing equity is a distant second at 21%.
• 66% expect global core consumer inflation will be higher in twelve months, with 5% indicating "a lot higher". Not surprisingly, 93% see global short-term rates higher in 12 months. With 10% saying "a lot higher."
• Valuations appear about right. 44% of managers believe global equities are fairly valued, with 20% seeing equities overvalued and 34% undervalued. The outlook for the next 12 months is also balanced: 17% of respondents think equities will get more overvalued, and a similar 17% believe equities will become more undervalued.
• 24% indicated that cash positions were currently overweighted verses 7% being underweighted. 23% have zero cash, with another 23% holding 4% or less.
• In 12 months, 80% of fund managers believe world stock markets will be higher, 24% expecting double digit gains. Economic-sensitive sectors are the favorite among 71%. More than half expect equities will outperform bonds.
• If the market fell 10%, 71% would be buyers and only 2% indicated they would be sellers. But if equities rose 10%, 32% would sell into the strength and 15% would continue buying.
• Managers are more risk adverse. 22% have a lower level of risk in there portfolio, with only 7% having a higher than normal risk level. Yet, managers are more inclined to increase (34%) the level of risk over the next year; only 5% intend to reduce risk. Additionally, managers are working with a shorter time horizon. 29% report their time horizon is shorter than normal, with 7% indicting its longer.
  

Outside the US, a few outliers include:

• 73% of South African mangers view the market overvalued. Appropriately 67% report that they are overweight cash and 67% have 10% or greater amount in cash.
• Europe is considered by the most to be undervalued. Forty-eight percent of UK respondents viewing markets undervalued. Forty-one percent from Eurozone feel the markets are undervalued.
  

Survey questions comparing how regional managers view different regions yield some interesting results

• 54% of Japanese managers view Japan as the region with the most favorable outlook for corporate profits. As a group Japan was cited by only 16% of the managers.
• 27% of the US managers think the US is the best place for corporate profit growth, but received only 19% of the vote by the group at large.
• Emerging markets are the runaway leader with 39% of respondents.
• US was voted the least favorable by the group - 32%.
• US is also the most overvalued - 60%. Only 9% see the US as the most undervalued.
• 65% view the dollar as overvalued, even 51% of US managers. 66% view the euro as undervalued.
• Only 24% of all respondents expect assets to return 8% or more over the next decade, only 3% expect double-digit returns.
• On a global scale respondents are underweight technology and telecom, overweight financials, basic materials, and general industrials.

Tuesday afternoon provided aftermarket traders a bit of whiplash. Almost immediately after the close, Oracle announced fourth quarter results. While EPS fell 20% from the year ago period, results were better than analysts' estimates. However, on the conference call Oracle tempered the euphoria by forecasting EPS in the first quarter of only 6 to 7 cents. Analysts had expected nine cents, while revenues will be 15% to 25% last year's levels.

After Oracle released earnings, Advanced Micro and Apple announced that they would miss analysts' estimates for the current quarter. Instead of the $820 to $900 million in revenues for the quarter as was predicted when the quarter started, AMD will only post $620 to $700 million to the top-line. Considering AMD previously said it would reach breakeven at the upper part of the previous range, it will now post a "substantial operating loss."

Like AMD, Apple announced that current quarter results would be lower than previously forecasted. Apple expects to earn only 8 to 10 cents per share on $1.4 billion to $1.45 billion in revenues. Apple had previously expected to earn at least 11 cents on $1.6 billion in revenue. Apple attributed the shortfall to lower-than-expected sales to advertising firms, which "have been hit hard" and were reducing their investments in new computers. Last week Adobe said the lack of spending by advertising firms would cause earnings to be below estimates. Apple also blamed demand in Europe and Japan as being "particularly weak."

Besides the continued slowdown in technology reflected in Tuesday's earnings announcements, anecdotal evidence of a troubled economy continues to mount. In a move to avoid bankruptcy, UAL, the parent of United Airlines, will cut pay for over 11,000 workers, or about 13% of its workforce. UAL will reduce employee compensation by 5% during the first year, and then receive an average raise of 7% the next year and an 8% raise in the third year. This is expected to save UAL $430 million. These reductions are only for non-union employees.

For those of us actually having to buy real goods instead of the governments CPI basket, we are going to be hit with further increases in health care costs. Consulting firm Hewitt Associates is reporting that preliminary HMO premiums for 2003 will be up 20% on average. This follows this year's 15% increase. Co-pays are also increasing. The number of plans with a $15 co-pay jumped from 11% to 24% in the last year, while $10 co-pays slid from 64% to 58%.

Commercial real estate in Boston continues to decline. "The good news is it's getting worse slower," according to Tamie Thompson, a principal at Spaulding & Slye/Oncor. "We haven't bottomed out yet. Everyone's hoping by mid-2003 to see some firming up." Boston vacancy rate has almost doubled during that past year to just over 10%. Additionally, leases representing about 25% of the space will expire between 2003 and 2006.

Credit quality also continues to deteriorate. Monday, Standard & Poor's said it is likely that the total number and the dollar amount downgraded to junk status would match or exceed last year's record. Only 7% of the credit ratings have positive outlooks, while 29% have negative outlooks. Diane Vazza, managing director at S&P, said the economic recovery is "painstakingly slow" and "the improvement in credit quality is going to be very, very gradual."

The future of 3G took another hit this week when Detica, a UK-based consulting firm, announced that a recent survey found more than 40% of the mobile phone users have no interest in the enhanced services that 3G promises. Amazingly, they view a mobile phone as just a phone. Also in the 3G world, the European mobile phone company, mmO2 announced pricing for its first trial. After testing the network since the beginning of the year in the Isle of Man, it will soon commence charging for the service. mmO2 plans on "testing a number of pricing strategies during the trial in order to look at price elasticities." The initial pricing strategy will call for a £44 a month for the typical customer. This will be in addition to the £34 a month for voice service. The application that mmO2 believes will lead to the success of 3G is multimedia messaging. They see users swapping pictures along with text messaging. We continue to view this as an application that very few will be willing to pay the cost necessary for the service providers to recoup their huge investments.