Wednesday's Brew Dec 20

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 indicating a higher open, as international markets rebounded after a reversal of investment restrictions in Thailand.

OVERSEAS MARKETS

Global markets rebounded and are broadly higher today, following the naive and new Thai government's reversal of its restrictive investment policy. The reversal was not 100% effective, but removes restrictions from equity investment. The Thai SET Index bounced higher 11%, after the 15% drop on Tuesday. Confidence in the Thai government has decreased, the risk premium has increased, and investment flow is likely to be hampered over the medium term as a result.

Asian markets rebounded from the shock of the prior day, with the NIKKEI 225 increasing 1.4% and the Hang Seng rising 1.45%. Emerging Asian markets indices lost greater ground Tuesday than the developed Asian markets, and gained back less ground today as investors were reminded of the inherent risk of emerging market investment. India's BSE Sensex 30 Index decreased further today, down 0.31%, stressing the sensitivity of the Indian market at current valuation levels.

Europe and the U.K. are rebounding today as well, as the FTSE 100 climbs 0.28% through midday. The DJ STOXX 50 Price Index is 0.48% higher thus far. European stocks have benefited all year long from record merger and acquisition activity. European firms were involved in $1.27 trillion worth of deals in 2006, and this is a key driver for the stellar performance of world's investment banks as well. Indeed, by American standards, there is a large value add opportunity within European firms, making them more cost efficient or leak proof. However, there is something to be said for the European way of life, and it will be a shame to see that significantly less stressful lifestyle fade away.

ECONOMIC DATA & NEWS

Wednesday presents a rather light economic news day. The World Trade Organization's General Council will meet in Geneva. The Bank of England released the minutes of its December 6th-7th meeting, where it voted unanimously to keep its benchmark index at record high levels. The minutes indicated an expectation for inflation to "fall back in 2007," but also voiced concern that wage pressure may be increasing.

Today, the Federal Communications Commission will meet and might vote on AT&T's merger with BellSouth. Also, the NYSE Group will hold a special meeting of shareholders over its proposed combination with Euronext.

COMMODITY MARKETS

We believe inflation pressure is due to ease, as supply levels of metals and aggregates seem to indicate an adequate or even excess supply versus demand. As raw component costs decrease, cost of manufacturing production should ease, despite the recent PPI measure. Copper prices are leading commodities on the downside today, decreasing roughly 1.64%. Nickel is not far behind, down about 1.45%, while aluminum is higher 0.68%.

On inventory day, crude oil futures are rising roughly 0.36%, with heating oil up about 0.89% and natural gas 0.85% higher. Crude inventories are expected to show a decline in today's reported data, despite mild weather in North America. There is speculation that gasoline usage is benefiting as the weather encourages drivers in their shopping efforts and travel during the holiday season. However, gasoline futures, which reached a three-month high yesterday, seem to have already priced in that theory, as they are lower today by about 0.15%.

We have called for gold to decrease, as economic data seems to be pointing toward a soft landing for the American economy. Recent PPI results have weakened that argument, but we continue to anticipate a soft-landing scenario, barring geopolitical disruption. However, the likelihood of geopolitical disruption in 2007, and possibly by March-end 2007 seems to be increasing rapidly. Thus, gold regains its safe-haven appeal.

We took note of a recent Israeli Foreign Ministry visit to the White House, and have carefully watched movement and activity of the Bush Administration. It seems clear to us that the American government is attempting to reduce Asian demand for oil, through the sharing of nuclear technology with India and China. At the same time, we believe America has encouraged Saudi Arabia to reduce exports to Asia, as it has cut supply to the region by 8%. It is our view that America seeks to make clear to China that it needs America and Saudi Arabia more than it needs Iran. Russia is a step behind, but we expect future effort to increase Russian oil exports into China to help to keep China somewhat neutral. The Pentagon is rumored to be discussing a Persian Gulf military build, with the inclusion of a second aircraft carrier fleet to the region.

Iran has been preparing as well, lining up allies across the world, but the commitment of those allies remains questionable. Currently, England's Tony Blair is in the region attempting to drum up support against Iran. If you are interested in this topic and our view on it, we will voice our opinion through our new article, The Geopolitical Factor, to be published very soon.

STOCKS IN THE NEWS
A good deal of companies will report earnings on Wednesday, including Nike Inc., Fedex Corp., Paychex Inc., Bed Bath & Beyond, Jabil Circuit Inc., Carmax Inc., Biomet Inc., Family Dollar Stores, 3Com Corp. and AAR Corp. (disclosure)