Friday's Brew - Jan 26

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. U.S. markets are broadly lower today, as robust durable goods orders and encouraging new home sales, combined with inflation levels above Fed target, means a rate cut is likely off the table, in our view. However, if inflation recedes, we could be experiencing an extremely soft landing, and eventually equity markets should reflect that health.

OVERSEAS MARKETS

Shares in China were impacted today by news out of the World Economic Forum in Davos, Switzerland. In a speech to some of the world's most influential people, Chinese Central Bank Deputy Governor Wu Xiaoling, said that China would impose environmental rules on manufacturers in order to improve the efficiency of energy usage, impact pollution, and slow China's economic growth. That last part displayed to Chinese investors that the government means business, and that it intends to restrain inflation. Further rate increases are widely expected within China, and it's clear that the government is concerned about inflation and acting upon it. As a result, the Hang Seng fell 1.88%, but the Shanghai and Shenzhen 300 Index climbed 2.45% as the massive force of speculation is hard to slow, though not so tough to crash.

The Philippine SE Index sank 3.4%, after a big rise higher in recent trading. We believe the volatility seen within the hot markets of mainland China, Vietnam, the Philippines and others, is indicative of trading within markets where valuation is stretched and extra sensitive to news. Thus, we feel that many of the world's emerging markets are highly exposed to the risk of severe correction.

Europe is broadly lower today also, with the DJ STOXX 50 down 0.81%. Most of Europe's major markets are experiencing similar declines. With Hugo Chavez now threatening to send the American Ambassador home, The Venezuela Stock Market Index is down another 1.28%, but we recommend you not look for value there. Despite the sharp drop experienced in Venezuelan shares over the last few weeks, investing there is analogous to trying to catch a falling machete, let alone a knife.

ECONOMIC DATA & ANALYSIS

December Durable Goods data was reported this morning, and showed a very strong 3.1% rise, compared to an increasing consensus view for a rise of 3.0% and versus revised November growth of 2.2%. Even excluding very strong demand for commercial aircraft, durable goods orders were healthy across many industries, including automobiles. The strength of orders was widely unexpected just two weeks ago, and recent signs from other economic data led Economists surveyed by Bloomberg to gradually raise their forecasts for durable goods, in our observation.

We have seen the same kind of increases for GDP, which is scheduled for advance report next week. It is now clear to most that a rate cut is off the table, and we may even see another rate increase, should inflation prove troublesome. If not, then this was the softest landing anybody could have asked for, and the economy and equity markets should reflect that health in 2007.

Still, keep an eye on housing and its interrelated risks with inflation, mortgage rates, defaults and foreclosures. December new home sales were reported at 10:00 a.m. EST, and, as we expected and outlined in "The Greek's Week Ahead," showed the effects of active marketing and price reduction among home builders that we mentioned previously. In other words, we expected new home sales to show up better than existing home sales results.

New home sales for December increased 4.8% to an annual pace of 1.12 million. The consensus view posted by Bloomberg expected new home sales of 1.052 million, compared to revised higher November sales of 1.069 million. December housing starts data previously reported gave us some insight into this growth.

COMMODITY MARKETS

Well, we told you this morning, and it's playing out today; natural gas is 2% higher, while heating oil is up 1.4% and crude is rising 1.05%, as a sweeping extreme cold freezes the Northeastern United States. Traders are very sensitive to weather patterns, and though we agree that natural gas should decline if the winter seems to be wrapping up prematurely, there are still significant weeks of winter left to play havoc with pricing. So, what I'm saying is the analysts predicting that natural gas prices are going to collapse, are too early, though they may be correct. Still, the floor for nat gas is limited with Iran hanging in the balance. We also outlined why in "Thursday's Coffee," and it's greatly due to the increasing substitution of natural gas for other energy and fuel sources. Also, global warming poses a medium term risk, should warming tip the balance, and lead to an extreme and swift change to colder temperatures. (If you are confused, review yesterday's article)

Nickel is up 1.9%, and Jim Cramer detailed the situation very well this week on his show "Mad Money." Nickel is widely used to harden other metal compounds, and the nickel market is a relative monopoly controlled by Companhia Vale ADS (RIO). Cramer listed RIO as one of a handful of international stocks he considers worth buying.

GEOPOLITICAL NEWS (not otherwise covered)

NATO ministers meeting in Brussels agreed to bolster their efforts to maintain control of Afghanistan ahead of a suspected planned Taliban offensive. The U.S. has committed another $10.6 billion toward the cause.

Meanwhile, Iran is rumored to be working toward firing off a satellite launching missile. This is yet another sign that Iran may be working hand-in-hand with North Korea. What if Iran, Syria, Venezuela and North Korea have decided not to wait their turns in line for a U.S. whipping. What if instead they have decided to come to the assistance of one another should one be engaged by the U.S. Did you know that such an agreement already exists between Syria and Iran? Well it does, and was signed quite a long time ago, when Iran realized it could organize some of our enemies. What if the rumored assistance of North Korea to help Iran test a nuclear explosive device is more than that. What if Iran with its millions in oil generated wealth has already purchased and controls nuclear weapons. What if it has already smuggled such weapons across the porous American border. What if Iran rushes its massive forces across the Iraqi border and is welcomed as liberator. What would stop Iran from forcing its way into Kuwait, and how would Saudi Arabia react. The answer is this, oil prices would skyrocket until we could restore the Middle East to stability, and while there is no doubt we are capable of doing so, a great deal of havoc and chaos could be accomplished before that.

STOCK SPECIFIC NEWS
Friday's earnings reports included Caterpillar, Honeywell International and Halliburton. Caterpillar (CAT) shares are up 2.6% in late morning trading, as it provided EPS guidance for 2007 that fell within the analysts' consensus range, as compiled by Thomson Financial.

GM announced today that it will delay its earnings report and restate earnings back to 2002. Everything is okay though, as GM previously understated its results and there was no impact to cash flows. Also, the company released news that it would report a profit for the fourth quarter. GM shares are down 0.9% in morning trading. The decline in GM may have more to do with Toyota than with its own news, as Toyota posted its vehicle production data for 2006 today. The company generated global production growth of 10%, and the gap between it and GM was just 162,000 vehicles. It seems like Toyota is likely to surpass GM as the world's largest automobile producer in 2007.

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