Friday's Brew - Oct 20

Enjoy your fresh morning coffee with our summary of the market outlook for the day and a medley of important information you should find useful. Dow and S&P 500 futures are down this AM with a weak EPS report from Caterpillar, while the NASDAQ is lower despite Google's strong results. Likely driving the market past the first half hour's trading, investors should begin to grow concerned about the Fed Open Market Committee meeting next week, and the possibility of a Fed rate hike.

OVERSEAS

The NIKKEI 225 and Hang Seng Indices both rose nearly 1% Friday, likely boosted by news that North Korea was not preparing a second nuclear test. According to South Korea's Yonhap news agency, North Korean leader Kim Jong-il told a visiting Chinese envoy that Pyongyang planned no further nuclear tests. Of course, North Korea's word is more than suspect, but its respect for China is not. The FTSE 100 and the DAX Indices across the pond were paring early gains, driven by U.S. futures weakness.

ECONOMIC CALENDAR

The schedule takes a break today, after a very busy week. However, we expect markets to begin looking ahead to next week's FOMC meeting and the possibility of a surprising rate hike. A rate hike surprise could be just the pill to remind the market of Octobers of the past, and we suspect would severely deflate markets. The concern alone should weaken stocks heading into the meeting.

So, why raise the red flag? This week's Core PPI numbers are not to be ignored, and data to follow will be closely watched for direction. Both the Core PPI and Core CPI came in above or at the top of the perceived Fed comfort range of 1-2%. The Core CPI numbers are expected by some and by this publisher to increase from this week's in line result. This is why we warn investors not to get too excited too early, as we expect sideways trading patterns to persist for a short while longer. The existing data is not decisive enough to drive the Fed to reverse course toward expansionary efforts, and that is what will eventually drive equities. If the Fed does surprise with a hike versus the expected continued pause, the downward trend would likely carry through for weeks of despair, and we believe this would position investors well for entry into early cyclicals like semiconductor and semi-equipment names. We will tell you when we like them, do not worry.

COMMODITIES

Perhaps the Saudis are readers of Wall Street Greek, as in previous issues we wrote that OPEC would need to surprise the market with a greater than expect production cut if it wanted to impact the price of oil. Low and behold, OPEC decided yesterday to cut production by 1.2 million barrels a day, compared to 1 million previously discussed. There remains some question of the will of the cartel members to obey their stated quotas, but we believe overall this news is effective enough to support the crude price.

Gold should benefit over the medium term from capital outflow out of equities for both safe-haven concerns and as an alternative investment to equities. Acting against the gold price today, North Korea has reduced the pressure and global concern. Over the medium term, however, we expect the North to react irrationally to the boarding of its vessels by the Japanese and Americans.

GEOPOLITICAL SCENE

Outside of what we have already discussed, Vladimir Putin meets today in Finland with European Union member nations, with energy expected to headline the schedule.

STOCKS

Google Google Google!!! Wow, Google was up 7.5% in pre-market activity, as it posted stellar EPS results overnight. Google (GOOG) posted EPS of $2.36, compared to prior year period results of $1.32, and exceeded the consensus estimate by $0.20. Citigroup raised its target price for GOOG to $600. However, Caterpillar put the fire out a bit this morning with a less than stellar result. Merck exceeded consensus by a penny on flat revenues. We hope you enjoyed "Today's Morning Coffee" and wish you a good day trading. Stay tuned to the site, as we may publish a stock specific idea later in the day. (disclosure)