Wednesday's Brew - Oct 18

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. Equity futures are sharply higher this morning across the board, as the Consumer Price Index was in line with consensus estimates. There was concern built into the market that CPI might provide verification of an excessive inflationary environment indicated by the PPI yesterday. Today's results should provide some relief to equities in the short term. However, CPI may lag PPI and today's news was not a surprising positive either. After August's numbers were released, the equity markets began a substantial rise as investors speculated Fed rate reductions might be on the horizon. Now, with that foundation somewhat undermined by the Core PPI, stocks should have a more difficult time climbing higher with conviction.

We reiterate our view that a sideways trading pattern is most likely for a couple more months, until it becomes clear whether the economy is headed for recession or soft landing, and whether inflation is under control. We continue to recommend some allocation into gold shares for medium term investors, but we have sold out of our short-term based investment in gold. The sector could see some weakness in the very near term, based on the CPI number, at least until North Korea tests another nuclear device or tests the resolve of the global community otherwise.
OVERSEAS

Britain's FTSE 100 index was up 0.3 percent by midday on Wednesday, headed by commodity-dependent stocks as the market recovered from yesterday's biggest one-day fall in 17 trading sessions. Bank of England minutes seemed to indicate another UK rate rise was probable for November. The Nikkei average ended 0.25 percent higher on Wednesday after a pause in U.S. market rising trend led the Nikkei average down to start the day.

ECONOMIC NEWS

The government released its Consumer Price Index, providing relief to concerned equity markets. Yesterday's PPI data indicated the core PPI, excluding volatile food and energy prices, rose 0.6%, higher than the expected 0.2%. Though Core CPI should lag PPI movement, but also could benefit from lower energy prices, it was in line with consensus, indicating a rise of 0.2%. In August, both overall and core CPI rose 0.2 percent.

On Wednesday, the Mortgage Bankers Association will report on its most recent refinancing index. Its previous report showed strong refinancing activity that we speculated was driven by mortgage bankers pushing variable rate loan holders into fixed rate mortgages. Also, the National Association of Home Builders released its index for sales of new, single-family homes for October. Bloomberg's poll saw consensus at 1.64 million, down from 1.67 million in August. Actual housing starts surpassed expectations, reaching 1.77 million. However, markets this morning look focused on new permits data. The pace of building permits fell, measuring at an annual pace of 1.62 million in September, compared to the 1.73 million rate in August. Economists expected this sign of builder confidence in the market to slow to only a 1.72 million rate. It's possible that the housing construction sector may begin to influence employment in a more meaningful way if housing firms reduce the rate of construction to meet market demand reduction.

COMMODITIES

A day ahead of the emergency meeting of OPEC in Qatar, with inventory data on tap for today, oil started lower. The Energy Department will provide its weekly update on U.S. crude-oil, distillate and gasoline stocks at 10:30 AM. Today, the market is focused on recently strong inventory data, indicating supply levels are adequate. As the news passes, the market is likely to look toward tomorrow's beginning of the emergency OPEC meeting. We expect oil to trade in a tight range near-term. Over the medium term, Iran should again take the spotlight, as the U.N. moves towards sanctions. Iran's response is likely to be more refined than Korea. However, rhetoric from Israel should begin to take the spotlight, as it appears to be preparing for an attack on Iran's facilities. (see geopolitical discussion below)

GEOPOLITICAL SPOTLIGHT

Korea appears poised to follow up its recent fizzle of a nuclear test with a bigger and better bomb. Japanese and South Korean intelligence indicates similar preparations to the first test now taking place in the North. Yesterday, North Korea held a large torch lit rally of defiance. The true test here will be the first time a North Korean vessel is intercepted at sea, and North Korea's response to this "act of war."

Above we mentioned Israel's preparations for action against Iran. Though our associate's site www.ERISfile.com goes into more detail about this topic, we have paid attention to it here as well as it poses threat to equities. We theorize that Israel's invasion of Lebanon was more likely an effort to weaken and test Hezbollah's abilities than an effort to rescue a kidnapped soldier. Israel is currently preparing a large scale effort into Gaza that it states would be to "combat missile capabilities" within the occupied territory. Clearly, an attack on Iran could spur the Iranian backed fronts led by Hamas and Hezbollah into action, and one might theorize that Israel's attack on Iran has already begun through its actions on Hezbollah and Hamas. Assuming this is in fact reality, then an Israeli attack on Iran seems more likely than unlikely, and equity and commodity markets are not pricing it as such.

STOCKS

The earnings scene remains hot on Wednesday, with reports from Abbott Laboratories, Aztar, eBay, JP Morgan Chase, Apple Computer and AMR Corp. SIGA Technologies (SIGA) announced that its SIGA-246 is the first drug ever to demonstrate 100% protection against human smallpox virus in a primate trial. It was effective in monkeys treated both before infection and 24 hours after infection. SIGA shares were up approximately 155% in early trading. IBM posted Q3 EPS of $1.45, compared to prior year period results of $0.94, exceeding consensus estimates of $1.35. IBM shares were up about 5% in early trading. JP Morgan Chase & Co. posted Q4 EPS of $0.92, beating prior year results and analyst expectations for $0.86 a share. However, JPM shares were down roughly 2% in early trading, as it warned that Q4 investment banking did not appear to be as strong as Q3. Although we exited our short-term investment in Yamana Gold (AUY) this morning, we continue to favor gold shares and AUY over the medium and long-term horizons. We hope you enjoyed "Today's Morning Coffee" and wish you a good day trading. (disclosure)