Tuesday's Brew - Oct 24

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. Stock futures are down across the board today, as we expect stocks to be pressured ahead of the two-day Federal Open Market Committee meeting, which begins today.

OVERSEAS

The NIKKEI 225 average of Japanese shares slipped fractionally 0.05%, while the Hang Seng Index rose 0.35% overnight. In Japan, a cell phone price war kicked off by Softbank Corp. impacted rival KDDI Corporation's shares. In Dow fashion, the NIKKEI is flirting with superficial resistance around the 17,000 round number level. After the close, in action that could impact U.S. semiconductor chip makers, Elpida Memory Inc., the world's fifth-largest DRAM chip maker, said it swung to a quarterly profit that beat market expectations.

Stocks in the U.K. and Europe were lower across the board this morning, as the American Fed seems to be spoiling parties worldwide. The FTSE 100 and DAX indices were both down ever so slightly, while the IBEX 35 was down the most, slipping 0.38%. Europe's fall is the first in three days, and is likely being driven by mining companies as BHP Bilton, the world's largest metal producer, posted lower production. Copper and gold prices are also weakening of late, as North Korean tensions weaken and as inflation concerns have faded some. We expect the Fed to reignite that fire over the next couple days, supporting precious metals.

ECONOMIC NEWS & EVENTS

On Tuesday, the FOMC, the policy making arm of the Federal Reserve, begins its closely watched two-day meeting to discuss interest rates. Last week's inflation-measuring data is likely to bring out hawkish comments from Fed officials, but most economists expect rates to be held in check as a result of the meeting. There seems to be a small possibility of a Fed rate hike of 25 basis points, but this would be a shock to equity markets and send equities down-spiraling. In between meetings, regional Fed chiefs have not been shy about their concern regarding inflation, so that could be viewed as forewarning of a rate hike. Be prepared for that possibility, as we expect it would have a lasting impact on equities over the coming month.

The Treasury will sell $20 billion of two-year notes Tuesday. Across the pond, the European Union Affairs Minister and World Trade Organization head will hold a news conference.

GEOPOLITICAL NEWS & EVENTS

The fasting month of Ramadan ends on the Muslim holiday of Eid al-fitr, depending upon the appearance of the new moon. Hopefully one of the bloodiest periods since the invasion of Iraq will come to an end in concert. China is backing off statements that North Korea apologized for its nuclear test, perhaps appeasing the sensitive North Korean government's pride. It appears China is now impacting the North in a positive way, but we expect covert activity will continue with brash remarks limited.

Welcome back Iran into the spotlight. Just when we thought you were a fading trend, President Ahmadinejad reminds us he is atop the rock charts and here to stay. Today, opening the show for Mahmoud, the Supreme Leader, Ayatollah Ali Khamenei told worshipers to beware U.S. and Israeli plots to divide Arab nations. He is clearly concerned about the forming of a coalition of the willing, pre-Iraq style, since it is clear China and Russia will oppose any U.N. military effort against Iran. President Ahmadinejad yesterday stated that Iran has improved its nuclear effort ten-fold in the past year. He also vowed his nation would not retreat "an inch" over its nuclear program.

COMMODITIES

With the tension building in Iran, we believe you can expect near-term stabilization in gold and crude oil prices. We anticipate the Fed will also impact capital flow from equities back into commodities and commodity sensitive shares, with at minimum, hawkish inflationary commentary, and at maximum, a rate increase this week. Clearly, this would be extremely negative for stocks or at least mildly negative in the near-term on commentary alone. The Fed has the ability to drive capital back to where it came, commodities, if it is loud or aggressive in its commentary or action.

STOCKS

The utility sector has been a clear beneficiary of commodity price reduction, as margins have likely expanded with unhedged portions of cost decreasing, while rates charged remain stable or rising. Beware a possible short-term reversal for the sector, should commodity prices rebound. As long as inaction persists, however, commodities could remain limited on the upside and a downward trend could continue; utilities continue to benefit in this scenario.

On the earnings front, Altria Group Inc. and Bellsouth Corp. are scheduled to report. DuPont (DD) reported today and looks set to open higher after posting EPS before one-time items, of $0.49 versus $0.33, $0.04 ahead of analyst consensus (by Thompson Financial). Results were impressive as they occurred despite higher raw material costs. DD was up about 1.8% in pre-market activity. Lockheed Martin (LMT) earned $1.46 a share, handily beating consensus of $1.24, and raised guidance this morning to $5.60-$5.80 for fiscal 2007. Analyst consensus measured $5.66. LMT shares were up about 1.9% in the pre-market. We hope you enjoyed your "Morning Coffee", and wish you a good day trading. Keep your eye out again today for a potential "Speculative Trade" idea, similar to our post on Friday.