Tuesday's Brew - Dec 19

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 lower open today ahead of key housing data and after an Asian market meltdown begun by Thailand's move to impose investment controls.

OVERSEAS MARKETS

Thailand moved in a restrictive manner today, and learned a lesson as its equity markets collapsed. The Thai SET 50 Index sank 15.8%, while the SET Index fell 14.8%. Thailand imposed investment controls, whereby foreign investors will now be able to put only 70% of funds transferred to Thailand to work in investments. Then, after the sale of their investment, international investors will only recoup all of their funds if they maintain the proceeds within the country for a year following investment divestiture. Otherwise, the funds will be subject to a 10% penalty of the original investment.

This kind of restrictive behavior, which occurs as a result of a poorly thought out attempt to stabilize and strengthen the currency, actually acts in the opposite manner, as it drives capital out of Thailand and into other less restrictive emerging markets. In this globally developing marketplace, Thailand is but one of many options for investors seeking emerging market opportunity. Thailand comprises only 2.5% of the market value of the MSCI Emerging Markets Index.

International investors ran for the exits in panic that the behavior might spread, but we expect the reaction of the Thai equity market will discourage other emerging market decision makers from similar action. Even the Thai regulators indicated they might take action to restore confidence in their equity markets. We recommend they replace the genius who came up with the idea for starters.

The Hang Seng Index fell 1.2% and the NIKKEI 225 slipped 1.1%, while concern about markets that are viewed as less sophisticated caused them to dropped to a greater degree. Vietnam's Ho Chi Minh Stock Index fell 2.5%, while Pakistan's Karachi 100 Index declined 2.7%. Perhaps due partly to valuation sensitivity, India's indices were all down over 2%.

The contagion threatens American markets at the open, and has carried as far as Europe already. The FTSE 100 Index has declined 0.63% through morning trading, while the European blue chip DJ STOXX 50 Index was down 0.71%. In fact, most major markets around the globe are down or have already closed down today.

ECONOMIC DATA & NEWS

Even outside of the international panic, today was already portentous, with two important economic releases on the slate. November housing starts were reported at 8:30 a.m. After October's numbers showed a sharp drop in housing and permit data, there was serious concern coming into November. However, since then, Toll Brothers reported the sighting of a possible flattening of market activity. Today's data, combined with home builder Hovnanian's earnings report yesterday, should provide enough information to sway the market's viewpoint either way.

November housing starts were expected to rise to an annual rate of $1.54 million, compared to $1.49 million in October, according to a consensus polled by Bloomberg News. The actual starts number came in at an annual rate of 1.588 million, ahead of expectations. Still, the stock market is likely to remain concerned, as housing permits fell 3% to 1.506 million, making a nine year low. Since this is the forward looking indicator, markets should remain burdened by the housing sector and its potential impact on consumers.

With the closely viewed CPI data already released last week, some of the steam may have been taken from the market-moving potential of the Producer Price Index, released today. We would not expect PPI to be a lasting market-moving factor, due to the dominance of the American service sector in driving GDP, but we believe it is still well worth watching for verification of the CPI data. Core PPI, excluding volatile food and energy, rose 1.3% today, versus expectations for a 0.2% rise, stirring market concern that inflation may still threaten the economy.

We believe global economic growth and raw material shortage are likely driving the increase in producer prices and squeezing American producers, but the service sector continues to drive the American economy and inflation should not threaten it, at least not in the near-term. Eventually, however, if persistent or not mitigated, rising producer prices could impact consumer prices. This would be dependent upon foreign producers' ability to maintain labor cost levels. We believe that eventually, though not soon, low cost Asian producers will see labor protests, unions and rising costs of labor. At that point, producer prices would rise more significantly, driving global inflation. We should note that we believe that day is still far off.

On the Fed tour, Dallas Fed President Richard Fisher will provide his year-end address on the economy today. Internationally, the Bank of Japan wraps up its two-day policy meeting, which will be capped off by its decision on whether to raise interest rates. It will also release its regular monthly report. Japanese shares were enthused last week by relatively positive data from the Tankan Survey, which showed signs of economic growth and decent capital investment expectations for 2007.

In interesting geopolitical happenings, Syrian President Bashar al-Assad will meet with high level Russian officials in Moscow concerning Middle Eastern issues. There has been a great deal of jostling, or travel of significant officials within the Middle East of late. We believe there is a clear positioning taking place ahead of an inevitable confrontation we see concerning Iran. Due to the rise of potency of the geopolitical factor within the capital market line, we are going to dedicate a weekly article to geopolitical happenings, entitled The Geopolitical Factor. Be prepared for tomorrow's economic calendar by reading "The Greek's Week Ahead."

COMMODITY MARKETS

Natural gas is down roughly 1.5% today, due to the abnormally warm weather in North America. Crude oil has also declined 0.63% this morning, to $61.82 a barrel. Sugar leads all commodities, up approximately 4.6%. Sugar and corn have benefited from increasing demand for ethanol, which is produced from sugar cane in Brazil.

STOCKS IN THE NEWS

InterActive Corp. will convene an investor conference call after the market open, through which it is expected to provide an overview of its key business drivers. Reporting earnings, look for Morgan Stanley, Cintas Corp., Darden Restaurants, Circuit City Stores, Factset Research Systems, Chaparral Steel Co., Nordson Corp., Palm Inc., Progress Software, Christopher & Banks and Scholastic Corp. We hope you found value in your "Morning Coffee," and we wish you a good day trading. (disclosure)