Tuesday's Brew - Dec 12

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 indicate a slightly lower open this morning, ahead of today's Federal Reserve Open Market Committee meeting.

OVERSEAS MARKETS

After yesterday's strong recovery from last week's dive, Asian shares were mixed today. The NIKKEI 225 climbed 0.66%, as the Yen weakened against the dollar and the euro. However, what is likely to drive Japanese shares this week is anticipation of the tankan survey and what it might imply about the strength of the Japanese economy and future actions of the Bank of Japan. To get an early read on the tankan survey and other events this week, see "The Greek's Week Ahead."

India's BSE Sensex 30 Index dropped 3% after its Central Statistical Organization announced that industrial production growth at factories, utilities and mines grew 6.2 percent in October from a year earlier. This was a 10-month low, after gaining 11.4 percent in September.

European and U.K. markets were mixed this morning, with the FTSE 100 down fractionally, while the DJ STOXX 50 PR was up similarly. Retailers in Europe picked up steam today, on speculation that the holiday season has been jolly. Today, the European Court of Justice will consider a challenge against a German law that prevents investors from holding more than a 20% voting interest in companies. Mexico's markets are closed today.

ECONOMIC DATA & ANALYSIS

The Federal Reserve leads all headlines Tuesday, as it meets for the last time in 2006. It is widely anticipated that the Fed will leave interest rates unchanged, but the markets will be closely tuned to the coinciding official statement release by the Fed. In light of recent, less than inflationary wage and Core CPI data, we believe the market is hopeful the Fed might diverge a bit from its hawkish inflationary stance. Any sign or implicit language indicating the Fed might cut rates in the first half of 2007 would likely start a Santa Claus rally for the rest of the year and begin 2007 on a positive push.

At 8:30 AM EST, October international trade data was released. A survey taken by Bloomberg News showed consensus expectations for a narrowing of the gap by $1 billion, to $63.0 billion. Actual results indicated a much larger narrowing of the trade gap, to $58.9 billion. This could be viewed as a positive signal for the competitiveness of American producers, unless overall trade has declined, in which case this measure would be a concerning signal on the economy. Trade benefited from a decrease in the cost of imported oil and on 0.2% growth in American exports, which benefited a bit from a weaker dollar.

COMMODITY MARKETS

You know it's a dull day when lead headlines commodity news. OPEC meets Thursday, and we believe a market-moving decision to reduce production is possible (see "Greek's Week Ahead"). Lead inventory rose 5.4% today, easing concern about a supply/demand imbalance, and lead prices declined 1% on the London Metal Exchange. Nickel inventory increased 6.9%, and nickel was accordingly down about 0.9% today. A trend in metals inventory build may be an early indicator of a topping of the market, and possible sign of an easing of global demand and economic growth in major developed markets like the U.S. It's certainly worth paying attention to.

STOCKS IN THE NEWS

On the conference scene, General Electric, Hewlett-Packard, Merck, Safeway and Wellpoint will meet with investors and/or analysts. A slew of companies will report earnings on Tuesday, including Goldman Sachs, Best Buy, Dollar General, ADC Telecomm, Cooper Co. Inc., Martek Biosciences and ABM Industries.

Goldman (GS) posted record revenues and profits on strong M&A activity, and soared over analysts' consensus estimates, but the stock is down 0.6% in the pre-market. Over the past few days we have noticed several talking heads predicting a strong report for Goldman, and picking the stock as one for the future. Heck, we even considered making it the topic of a "Speculative Trade" article. However, we backed away, and for good reason.

What the talking heads and the idiots who just added it to their portfolios got wrong was, it is a stock for the past and present, but may not be a stock for the future. The economic and geopolitical outlook is not clear, and liquidity is due to dry some, so 2006 may not be representative of 2007. Its P/E ratio, which some fools call cheap, does not mean anything in a cyclical business. The market is dynamic and P/E alone cannot be the basis of your decision making. Unfortunately for investors, there are too many professionals who miss the big picture due to incompetence or ignorance. GS may perform well in the future, but it will not be on the catalyst of this earnings report as some thought. On the basis of technicals and an uncertain outlook, there is significant downside risk in the shares that investors must be prepared to endure should they buy. A soft landing will be a requirement for Goldman's continued strong performance, and this is possible, but beware the desperate portfolio managers who added this name in the last week in an effort to rescue their '06 performance. We hope you enjoyed your "Morning Coffee" and we wish you a good day trading. (disclosure)