Friday's Brew - Jan 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. The Dow, S&P 500 and NASDAQ indices are down slightly in early trade, while the shares of small and mid-cap firms are showing strength, after an earnings warning from AMD and other technology news offsets strong December retail sales data.

OVERSEAS MARKETS

As the dollar strengthens against the currencies of some Asian net exporters to the U.S., shares in Asia are rising. The Hang Seng climbed 1.18% today, while India's BSE SENSEX 30 soared 3.12%. The NIKKEI 225 rose 1.3%. Indian stocks were boosted by its government's approval of a reduction in banks' minimum bond holding requirements. Mainland Chinese shares gave back ground for the second day in a row, as the SHSE-SZSE 300 Index fell 2.59%. The Financial Times reported that the Chinese government is blocking approvals for new mutual funds and the banking regulator is calling for a halt to loans for share investments. The Chinese issues have a lot of ground they could give back, and we are officially suggesting investors take profits now and lighten up on mainland China for the near term.

After yesterday's strong activity on ECB and Bank of England rate decisions, European shares seem lackadaisical today. The DJ STOXX 50 is up 0.12%, while the FTSE 100 is down 0.16%. Greece's ASE General Index is up 1.16% in the face of an explosion at the U.S. embassy in Athens. This indicates that the market does not view the act of terrorism as a sign of ongoing threat against Greek interests, and it may indicate a market decision that al-Qaeda was not involved. The investigation is still underway.

The Venezuela Stock Market Index has steadied, rising 0.66% in morning trade, but Hugo Chavez has all day to say or do something insanely ridiculous.

ECONOMIC DATA & ANALYSIS

Friday brings intensification of economic focus, as December retail sales were reported at 8:30 a.m. Retail sales increased 0.9% during the key holiday period, versus Bloomberg News' consensus expectation for a 0.7% increase, and compared to a revised 0.6% rise in the November period (previously 1.0%). This indicates a resilient consumer in the face of a weakening housing market. Sales at building materials and garden supply stores declined 1.1%, reflecting that continued weakness.

Partly offsetting the positive data from retail sales, December import prices increased 1.1%, compared to a consensus view for an increase of 0.7%, and versus a 0.2% rise in November. The price increase was mostly attributed to higher December fuel and energy prices, but excluding that data, prices still rose 0.2% versus a 0.1% increase in November. Clearly, import pricing should benefit from lower oil in the January period.

November business inventories is scheduled to be reported today, and the consensus view is for a 0.3% increase, compared to a rise of 0.4% in October.

COMMODITY MARKETS
At $51.94, WTI crude oil futures for February delivery seem to have discovered technical base. Rumors abound that OPEC is in emergency mode, and considering an emergency meeting or further production cuts. In "Wake Up Call," we argued that OPEC is not likely to act in the near term unless oil slips further or remains at current levels over a week or so. Our view is based on chatter coming out of OPEC. The group's president recently said that its currently agreed upon reductions have not been 100% applied, and that upon implementation of another 1/3 of its planned reductions, their price goals might be met. Also, OPEC is rumored to be imploring non-member oil producers to also reduce production. Our view is that, excluding some lip service, OPEC will likely show some patience here.

STOCK SPECIFIC NEWS

Last quarter, we suggested investors begin looking at early cyclical technology stocks, including semiconductor and semi-equipment names, as the two industries tend to lead market recovery. We suggested ignoring valuation, as we believe the time to buy these stocks is when earnings are weak, but before cyclical demand picks up. We warned that an important threat to the shares was near-term earnings, and we even advised investors to consider waiting until after the third quarter earnings reports to buy in. At the same time, we advised investors to reconsider their holdings ahead of the fourth quarter EPS reports. Today, AMD, down 11.6% in early trade, is showing you why.

AMD warned that their profit margins had weakened and that EPS in Q4 would not meet expectations. Two things to note: first, yes you should be reconsidering your holdings before this earnings season, and considering lightening up on your cyclical tech stocks. However, not for long... I suggest buying on earnings weakness, if you detect a technical bottom. Take a closer look at AMD's press release, and you will find that margins were down due to price competition. Volume on unit sales was strong, we believe on a combination of the coming new business cycle and a computer upgrade cycle spurred by the introduction of Microsoft's new operating system. New order trends will tell you which technology stocks are in the best competitive position, and take note for your buy list.

We suggest you tread softly around Apple (AAPL), as we smell a rat. If Steve Jobs were not considered such a great pioneer for the American technology industry, the media would be ostracizing him on a daily basis. Ignorance is not an excuse for crime, and thus, Jobs' defense that he did not realize accounting complications, would not exonerate him from any wrong-doing in our view. Also, I highly doubt that Jobs, a very intelligent man, did not understand the economic benefits of his alleged suggestions concerning his options grants. I believe the disbelief around Jobs' potential guilt today provides evidence of how hard AAPL shares could fall if regulators take action against him and he is lost to Apple. I would sell these shares right now, and AAPL is currently trading 2.2% lower today.

The bond market closes at 2 p.m. Friday, in advance of the Martin Luther King holiday. On Saturday, Condoleezza Rice works on her own legacy and possibly works on better setting the stage for a confrontation with Iran, as she begins a trip to the Middle East.

(disclosure)