Tuesday's Brew - Jan 16

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. Major U.S. equity indices are relatively unchanged this morning, despite a weaker than expected New York region manufacturing report. Investors are likely awaiting news from corporate America, as earnings season gets into full swing this week, and should play a big role in the movement of stocks in the near-term.

OVERSEAS MARKETS

The SHSE-SZSE 300 Index climbed 2.91%, reflecting a bounce in mainland Chinese shares after a couple days of profit-taking last week. It appears a serious bubble wants to build in China, despite recent government efforts to restrain economic growth. A Central Bank report today showed that household savings growth has slowed, we speculate due to increased investment in Chinese shares. This seems to provide some evidence of growing euphoria around equity investment in mainland China, which can precede sharp market correction. The Hang Seng slipped 0.2% Tuesday, while the NIKKEI 225 drifted lower 0.04% ahead of the Bank of Japan's decision on interest rates scheduled for Thursday.

Shares in some Southeast Asian markets performed well today, with Vietnam's Ho Chi Minh Index rising 3.85% and the Philippine Stock Exchange PSEi Index increasing 1.7%. We reiterate our view that capital currently invested in protectionist Thailand will continue to find neighboring market prospects. We recently recommended investors consider Vietnam, the newest entrant to the WTO.

European shares are mostly lower today, with the DJ STOXX 50 falling 0.49% and the FTSE 100 slipping 0.45%. Developed Europe enjoyed solid performance in 2006, and capital may be looking for reason for change. Last week's action by the Bank of England to raise rates, and expectations that the ECB could do the same by March end, have left an air of caution in the European region. We believe continued merger and acquisition activity will soon remind the market about one good reason for continued hope.

In the Americas, commentary from Venezuelan officials indicated today that foreign investors might not receive fair value for their assets in the country as it follows through on its nationalization plan. We feel Chavez's government could be about to step over the line, and provoke U.S. government action upon it. If Venezuela wants to benefit alone from the sale of its oil, it would be wise for the nation to pay up now and avoid American retribution. However, Hugo Chavez seems to be full of himself, perhaps enough to believe he can challenge the United States in this matter. Recently, the U.S. had been expressing hopes to work with Chavez's government, as it cannot afford yet another confrontation with an oil producing nation. Oil bulls might want to take note of developments in Venezuela, as we view them significant enough to be the catalyst to turn the tide on oil prices back toward the $60s. It's clear a crisis is developing, where Iranian and Venezuelan oil could be cut off to the west. We continue to recommend oil bulls look for entry points as oil settles, while retaining enough liquidity to survive the slide should recovery take time. However, when the upside catalyst appears, we see significant power in it and plenty of opportunity to benefit from it. The Venezuela Stock Market Index is down 10% today, due to the direction of the Chavez administration.

ECONOMIC DATA & ANALYSIS

Last month, the regional manufacturing report from the Philly Fed initiated market concern about the slowing American economy, before a report from the Chicago area and the ISM eased worries. Today, the New York Fed posted its Empire State Manufacturing Index. A recent survey by Bloomberg News indicated economists' consensus expectations for a reading of about 20.0, compared to 23.13 in December. The actual measure of 9.1, was well below consensus, though still indicating a growing sector. The New York report continues the recent mixed message norm among economic indicators, but most data measuring forward outlook has shown expectation for a slowing economy in 2007, while current reports have indicated continued strength in many sectors of the economy.

The National Retail Federation released its Retail Sales Outlook Report, which forecasts retail sales excluding autos, gasoline and restaurants to increase 4.8% in 2007, compared to 6.3% in 2006. Later this week, two additional important readings on consumer health will provide more clarity into the outlook for 2007, and we advise you to read "The Greek's Week Ahead" to prepare.

COMMODITY MARKETS
Corn futures lead all commodities higher today, soaring over 5%, on the strength of bullish crop data released last week. The Agriculture Department released its January crop report on Friday, within which it reduced the 2006 domestic corn production figure to 10.535 billion bushels from 10.745 billion last month. This marked a sharper decrease than was expected by traders, and corn and its surrogates, wheat and soybeans, reacted strongly on Friday.

Natural gas futures are up 1.8% this morning, with a cold spell sweeping the Northeastern U.S. and a huge ice storm leaving much of the midwest frozen over. Weather sensitive natural gas is reacting, with much of the winter and the seasonal draw period, still ahead of us.

Crude oil is collapsing further today after OPEC commentary that surprised us. We expected OPEC to remain inactive concerning the prospect of further production cuts, but we anticipated it would cloak that strategic plan within a cover of the potential for further cuts. Instead today, OPEC ministers in Saudi Arabia and Nigeria both openly disclosed the consortium's plan to wait and see how a scheduled 500,000 barrel/day cut in February might impact the inventory picture. In our view, this was a critical flaw for the group's ultimate goal, higher oil. Crude is down 3.1% today as a result. However, we do not expect OPEC to allow oil to remain at current levels for too long or to allow oil to slip below $50. We believe that kind of price movement would force the group to act quickly and aggressively.

STOCK SPECIFIC NEWS
Tuesday's earnings schedule includes Intel Corporation, Wells Fargo & Co., U.S. Bancorp, Forest Labs Inc., Marshall & Isley, Freeport-McMoRan and Linear Technology. The Intel report follows Friday's announcement from rival AMD that its EPS would fall below expectations this quarter. AMD disclosed that despite strong unit volume sales, competitive pricing factors would limit its profit generating capability in the quarter. Intel will report after the close of the market on Tuesday, and its conference call will begin at 5:30 p.m. EST.

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