Friday's Brew - Jan 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. U.S. equity markets have started the day in decline, after a December jobs report that is threatening to equity markets. See "Economic Data & Analysis" section below for details.

OVERSEAS MARKETS

China increased a restrictive policy to limit liquidity, announcing it will raise the portion of deposits it requires banks to reserve with the government by 0.5%, to 9%, starting January 15th. The reason for this is to contain economic growth and inflationary risk, while at the same time limiting speculative investment in real estate and securities markets. The Hang Seng reacted positively, rising 0.93%. Mainland Chinese shares were somewhat mixed, but mostly higher, with the Shanghai-Shenzhen 300 Index edging up 0.28%, after a very strong start to the year.

South Korean shares were pressured by an ABC News report that U.S. Defense Officials were concerned North Korea may be preparing for a second nuclear test. The South Korean KRX 100 Index declined 0.51%, and if the report proves to be true, it's probably safe to say you can expect more of the same. The NIKKEI 225 was likely impacted as well, and it declined 1.51%. South Korea and Japan are most threatened by an unpredictable and even criminal North Korean regime, and its shares should continue to provide evidence of that on news like this.

European shares started the day lower, and did not benefit any from this morning's U.S. economic data. A Europe region report today on consumer confidence proved strong, though directional change was negative compared to prior month data. The index which measures the confidence of executives and consumers, reached 110.1, near a six-year high, but below November's 110.3 result. At the same time, European unemployment came in at a record low 7.6% rate (data collection began in the early 90s). The DJ STOXX 50 Index was drifting down approximately 0.33% through midday trading, while the CAC 40 was 0.35% lower and the DAX 0.42% lower. The FTSE 100 was also down this morning, falling 0.38%.

There are a couple hot markets within Europe these days, if you have not noticed already. Since their addition to the EU, Romanian and Bulgarian shares have appreciated significantly. Today, the trend continues as the Bucharest BET Index was up 2.4%, while Bulgaria's SOFIX rose 2.88%.

ECONOMIC DATA & ANALYSIS

As we reported in this morning's early edition of "Wake Up Call," today's December Jobs Report is threatening to equity markets. Nonfarm payrolls came in significantly higher than expectations, and the previous month's data was revised higher as well. At 167,000, the rise in nonfarm payrolls exceeded the 115,000 consensus view significantly. Unemployment met expectations at 4.5%, but average hourly earnings exceeded expectations, rising by 0.5%, versus an expectation for a 0.3% increase. Combined, this data is threatening to markets today in our view, as it indicates economic health, in job growth, and inflationary pressure, in wage increases. It reflects a healthy economy, so why is that bad you ask. Because there are signs the economy is slowing, and the factor holding the Federal Reserve back from reducing interest rates is inflationary concern, as highlighted by this week's release of the December Fed meeting minutes. This data makes it less likely the Fed would cut interest rates in the near future, in our view, and thus provide fuel to the economy and the earnings of corporations.

Later today, Fed Chairman Ben Bernanke will chime in with his thoughts as he speaks to a group of economists in Chicago.

COMMODITY MARKETS

Gold is sharply lower this morning, down roughly 1.74%, after starting the year off well. As the dollar strengthens against currencies this morning on the economic report, it poses a more formidable foe to gold, at least for the day. We still think if you asked most economists today, they would likely agree that the Fed remains more likely to reduce rates in 2007 than do anything else. However, today's data adds some doubt to that scenario.

Secular factors continue to support gold investment in our view. As reserve levels increase among nations converting from dollars to euros, other currencies and gold, we see gold benefiting. As emerging markets rise, the global market becomes a fairer playing field, so to speak, and emerging market currencies eventually gain ground on the dollar. It's hard to stay on top of the hill, and the dollar is providing evidence of that, in our view. We have not even touched on the defensive benefits of owning gold and increasing global jewelry demand, especially within emerging markets like India.

STOCKS IN THE NEWS

Global Payments reported its fiscal second quarter earnings today with consensus expectations for EPS of $0.44, compared to $0.38 in the prior year period. Excluding options expense, the company posted in line EPS of $0.44, but the shares were down 16.6% in early trading. GPN lowered sales guidance for 2007, and reaffirmed its EPS guidance, which was below consensus expectations. GPN has a conference call scheduled for 10:30 a.m. EST. We hope you enjoyed your "Morning Coffee" and we look forward to providing "The Greek's Week Ahead" to help you with your planning process for next week. (disclosure)