Friday's Brew - Jan 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. Perhaps finally realizing that we have had a great deal of very positive economic news recently, the S&P 500, Dow Industrials and NASDAQ have all recovered from early losses, and are now up fractionally.

OVERSEAS MARKETS

Shares in the U.K. overlooked retail sales data for December that indicated better consumer spending than was expected, despite recently high inflation. The FTSE 100 index dipped 0.05%, instead reacting to ongoing concern about inflation and the Bank of England's possible action to combat it. Recall, the bank hiked rates unexpectedly last week. The DJ STOXX 50 edged higher 0.13%, while the CAC 40 increased 0.62%.

In Asia, mainland Chinese shares and those in Vietnam, the two best performing markets within the global community this year, both shot back up today. The Shanghai and Shenzhen 300 Index rocketed up 3.41% as speculation and exuberance abounds in mainland shares. Vietnam's Ho Chi Minh Index soared 4.06%.

Well, it was nice to go a full weak without seeing a significant financial policy blunder out of Thailand... Let's keep our fingers crossed though, eh. South Korean shares fell 1.58%, as concerns about the American technology market grow. Shares of Samsung Electronics Co., the world's second largest semiconductor maker, fell 1.7%. Several other news items may have contributed to the Korean move, including the Chinese testing of a missile that successfully destroyed a satellite. Theoretically, this could take away an American strategic advantage, and thus hurt South Korea in any conflict with the North. Separately, North Korea and the group of six agreed to renew talks regarding the North's nuclear program. This should help South Korean shares going forward, if the market believes the parties' interests are sincere.

ECONOMIC DATA & ANALYSIS

After the U.K. posted December retail sales of 1.1%, exceeding expectations for a 0.6% increase, investors in America were looking for a key consumer reading as well. The January consumer sentiment report from the University of Michigan was released this morning. Bloomberg's consensus expected a measure of 92.4 compared to 91.7 in the December reading. The actual reading of 98.0 blew away estimates, and marked its highest point since January of 2004. Recently strong housing and jobs data, as well as lower gasoline prices are likely behind the jump in confidence.

COMMODITY MARKETS

Natural gas is up 2.4% today on weather mayhem across the globe. Europe faces hurricane force winds, while America braces for a new set of approaching storms. CNBC noted that NOAA reported a weakening of El Nino could lead to lower than previously forecast temperatures in February. While inventory remains more than sufficient to insure no danger of shortage, barring some unforeseen catastrophic event, natural gas prices have trended lower throughout the late fall and early winter. However, prices have since steadied.

With storage capacity limited, seasonal warmth has limited benefits, and therefore, a mild winter season does not insure the same storage excess for the winter that follows. Also, working in the secular favor of high natural gas prices, increasing demand for hydrogen generation and other fuels, in turn increases demand for natural gas. As oil and coal are replaced in an environmentally interested America, natural gas demand should increase, in our view. That said, if the winter continues at an abnormally warm pace, natural gas prices are threatened, as are the shares of firms participating in the industry. Heating oil is up 1.14% as well today, and it may be that investors who were long these energy commodities are taking profits and reversing positions.

The following paragraph repeats our discussion this morning in "Wake Up Call." In yesterday's issue of "Wake Up Call," we advised you to buy oil now. We went out on a limb and said that we would aggressively buy oil on any inventory induced price weakness, and you saw that prediction play out. The "quiet catalysts" continue to creep up on the market, and we retain our conviction. WTI crude oil is inching higher this morning, up 0.24%, and it appears to have found a base.

Despite a strong EPS report from Schlumberger this morning, the stock prices of big oil companies may come under some short-lived price pressure, as the House passed legislation to roll back a tax subsidy. On the face of it, you might assume this could push the prices of some oil firms, whose shares have not fallen as far as the price of oil, to make up some ground. If not for the presidential veto, we might have advised careful and selective entry into oil stocks, but it is clear to us that this bill will die before becoming law. The bill carries an attractive lure, however, in that it promises to return economic value taken from energy firms, to help create value in alternative energy sources. However, Republicans argue that it increases the cost of domestic production, thus raising reliance on foreign oil. It appears to us that Congress wants this president's legacy to go on record with a fair amount of vetoes. Up until now, the president has had an easy going of it, due to Congressional support. So, WSG advises buying into oil and using any weakness created by this legislation to buy into oil stocks as well.

Foods futures investors appear to be taking profits this morning, as corn and wheat are both trading lower. Now, we do not profess to be an expert in this field, yet, but let's look further down the food chain. If feed prices increase, we would expect the price of protein to rise as well, as cattle ranchers' cost of production increases, if under hedged. Hogs and cattle futures are both lower this morning, but this is at least worth looking into to find an under-exploited investment opportunity related to the ethanol effect on corn demand.

STOCK SPECIFIC NEWS
There are a slew of earnings reports to talk about today. Companies reporting include Citigroup, Schlumberger, Motorola, Suntrust Banks, Regions Financial, Johnson Controls and Keycorp.

Citigroup, the nations largest bank earned $1.03 a share in the fourth quarter, exceeding estimates for $1.00 a share, as compiled by Thomson Financial. The bank also approved a 10% boost to its dividend. However, C shares were down 0.75% on the day, as the detailed discussion during the conference call revealed a very complex and evolving operating environment and strategy, in our view. The market favors clarity and simplicity.

Schlumberger reported earnings today, posting revenue growth of 33% and EPS of $0.92, versus expectations for $0.83, based on a Bloomberg survey. SLB shares were up 4.3% in morning activity.

IBM earned $2.26 per share from continuing operations, versus the consensus view for $2.19, based on data from Thomson Financial, as it benefited from cost cutting. IBM gained approximately $0.06 from tax benefits this quarter, and its shares are down roughly 4% in early activity, due to market disappointing hardware sales.

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