Tuesday's Brew - Dec 5

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. S&P 500 and NASDAQ index futures indicate a higher open today, while the Dow looks to open lower.

Economic productivity and labor cost data released at 8:30 are impacting the market today. We found the data moderately positive, as it appears a Fed concern has been alleviated in labor cost pressure on inflation. Also, news from Toll Brothers is being seen in a positive light this morning, as comments from the home builder's chief indicate a light may be present at the end of the tunnel, maybe....

Of concerning note, however, we took notice of a talking head this morning who suggested that the housing market has yet to fully adjust its labor force for its new weaker environment. Unemployment data set for release Friday may start to better reflect the weakness in two of America's most important manufacturing sectors, housing and autos. Finally, HSBC indicated that housing weakness is taking a toll on consumer credit strength. Overall, concern weighs on the market that recession remains a significant possibility for 2007 and/or 2008.

OVERSEAS MARKETS
Asia saw mixed markets today, with the NIKKEI 225 slipping 0.23%, while the Hang Seng Index climbed 1.29%. Rising oil and renewed economic concerns seemed to cause the Japanese drift, while secular trends continue to drive Chinese and Indian shares higher. India's market reached a new record high Tuesday. A great majority of Europe's markets are up slightly this morning as the secular trend pushing merger activity and the EU's strength in competing with America continue to drive value add.

ECONOMIC NEWS & DATA
In economic news, third quarter productivity data was released at 8:30 AM EST. A survey of economists by Bloomberg News estimated a 0.4% rise versus a 1.2% gain in the previous three months. The actual productivity measure showed a 0.2% rise, lower than expected and raised concern that demand for U.S. product is weakening. Labor costs in the third quarter, adjusted for productivity, rose just 2.3%, at a rate lower than expected, easing concern that wages might pressure overall inflation.

The Institute of Supply Management released its non-manufacturing index for November, which measured at 58.9, compared to 57.1 in October. The measure above 50 indicates expansion of the critical service sector, which dominates American GDP over manufacturing output. October Factory Orders are set for release at 10:00 AM, and the consensus sees a 4.2% decrease, as compared to a 2.1% rise in September.

COMMODITY MARKETS

Crude is up 0.9% today, on speculation OPEC might cut production further at its meeting on December 14th in Nigeria. Iran and Venezuela have already expressed their interest in reducing production, however, their interests are suspect. Venezuela cannot even meet its current quotas and Iran has made a push to sell crude in euros. Part of the reason OPEC may consider reducing output is due to the recent drop in the dollar, since OPEC nations generally sell crude in dollars. Iran should be unaffected as a seller in euros. Clearly, Iran and Venezuela are working in concert to burden the U.S. economy in an effort to sway the 2008 presidential elections toward the less threatening Democrats. At the same time, perhaps they feel a burdened U.S. economy is less likely to allocate current spending toward defense and an assault on Iranian nuclear facilities or a broader resulting conflict.

Recent comments from the Saudi oil minister are more concerning, and indicate Saudi interest in reducing output. The Saudis recently met with Vice President Cheney, and we speculate they see a current production cut helping to make up for a production increase that would be necessary should conflict occur between Iran and the United States.

STOCKS IN THE NEWS
The Lehman Brothers Global Technology Conference kicks off today at the Fairmont Hotel in San Francisco. A widely followed earnings report from home builder Toll Brothers was released today. TOL reported its fiscal fourth quarter, earning $1.07 per share, versus analysts' consensus of $1.06. The result compared rather poorly to the prior year number of $1.84, but the market was enthused by positive commentary from CEO Robert Toll. He indicated that he believed the housing market may be "bouncing around a bottom." We point out that markets do not move up and down in a smooth pattern, and housing results may have only found a temporary plateau. In fact, we believe there will be another leg lower. Also reporting earnings on Tuesday are Autozone Inc., Pall Corp., Sanderson Farms, Angelica Corp., Copart Inc., Financial Fed Corp., Novell, Photronics and Wind River Systems. (disclosure)