Tuesday's Brew - Jan 23

Al Gore and George Bush lock up in another battle for the attention of the populous on Tuesday. Al was enthused to see his global warming documentary, "An Inconvenient Truth," nominated for an Oscar, while President Bush will address the nation on the state of the union, which is rumored to show a timely switch in the administration's view on climate change. Strangely to us, through mid-afternoon trade, the U.S. markets are broadly higher ahead of the President's speech. We strongly anticipate an end of day downturn in equities.

OVERSEAS MARKETS

U.K. shares shook off news that industrial producer prices rose at a strong pace in December. The news sent the British pound appreciating against the dollar today, as it raises the specter of risk that further rate hikes are likely from the Bank of England. The FTSE 100 still inched up 0.15% on the day. The DJ STOXX 50 rose 0.14%, and there was not much change throughout European markets.

In the Middle East however, ahead of President Bush's State of the Union Address, concern levels were raised. Saudi Arabia's Tadawul All Share Index dipped 1.49%, but the DFM General Index in the U.A.E. jumped 1.7%. Rising oil prices likely played a role in the mixed performances. Also, the disruption in Lebanon, where a general strike led to street fires and caused a government warning of the potential for a coup attempt, kept its market closed.

The Venezuela Stock Market Index fell another 2.3%, after dropping sharply Monday on Hugo Chavez's radical nationalization plans. See yesterday's commentary...

ECONOMIC DATA & ANALYSIS

The Conference Board reported its December leading economic indicators index today. The index showed a 0.3% rise, compared to a revised November reading of no change. The growth exceeded the most recent Bloomberg consensus reading of 0.2%, and indicates the economy may show stronger growth in 2007 than previously estimated. Economists forecasts for fourth quarter GDP are on the rise, and are now providing a median estimate of 2.5% growth, versus 2.0% in early January, according to Bloomberg News. We view this news powerful, and believe the Fed is now clearly more likely to raise rates before cutting them. We still believe the Fed will likely keep rates steady at the end of its two-day meeting, which concludes on January 31st.

Today, the Federal Reserve Bank of Richmond reported on manufacturing within its region, and showed a contraction of manufacturing activity as well as slower service sector growth. However, the survey also showed improved expectations for 2007.

COMMODITY MARKETS

Commodities are broadly higher today as Middle East tensions rise. After receiving the complete order of anti-aircraft missiles it dealt for from Russia, Iran has begun military maneuvers involving missile tests. The USS Stennis continues to steam toward a February arrival into the Persian Gulf. Today, Nicholas Burns, undersecretary of state for political affairs said, "Iran is going to have to understand that the United States will protect its interests if Iran seeks to confront us."

We thought the statement was interesting, and may perhaps reveal intelligence or concern that Iran could be planning a preemptive strike. Mr. Burns also commented that the U.S. would protect its interests and allies in the region, which touches on our view that Israel may not find Iran's bull's-eye before oil producing Iraq, Kuwait and Saudi Arabia do. However, Iran continues to do its best to pull its neighbors into its corner without force, arguing that they should abandon alliances with the U.S. to form a strategic union to protect the region's interests.

Indeed, we believe Iraq would succumb to Iran quickly, through the aid of its Shiite populous. Iran could in fact be viewed as a liberator in Iraq. It would be interesting to see, in this day of Al Jazeera, what would happen on the streets of Pakistan in that scenario. We will soon publish an aforementioned article, Geopolitical Factor, reviewing the range of scenarios we see possible and the the risks we anticipate the market faces this year and next.

Gasoline, heating oil and crude oil are all higher today, each rising over 2%. Natural gas is up 1.6%, as cold weather continues across North America. The president's address tonight is likely to further outline efforts to wean the nation from its dependence on foreign oil. Even so, any conflict with Iran over the next two years would clearly precede our energy independence. Highlighting geopolitical risks, a handful of kidnappings in Nigeria has reaffirmed concerns in that region.

Corn is only 0.68% higher today, despite speculation that the president might urge further ethanol usage within the country. If Bush does so, it should raise concern at the Federal Reserve, because a supply demand imbalance within the market for corn has already started other surrogate foods, like soybeans and wheat, higher as well. If feed prices increase, we should see increases in the price of hogs and cattle too. Also, wild weather patterns pose risk, as we saw in the California freeze. It created nearly $1.0 billion in damages to citrus and other crops.

In the most recent PPI data, early signs of food driven inflation were apparent, and food prices have the ability to drive overall inflation. Thus, the Fed may be forced to slam the breaks on the economy due in part to rising food prices.

STOCK SPECIFIC NEWS
Companies reporting earnings on Tuesday include Bank of America, Johnson & Johnson, Wachovia Corp., United Technologies, Du Pont, Yahoo!, EMC Corp. and Burlington Northern. Wachovia Corporation, the fourth largest bank in America, posted EPS before merger charges, of $1.21, versus expectations for $1.18, as measured by Reuters. The 34% growth in earnings was driven by the company's acquisition of Golden West Financial and higher fee income. WB shares were up about a half of a percentage point through mid-afternoon trade.

Bank of America earned $1.19 a share before merger and restructuring charges, ahead of the $1.18 consensus view, according to Thomson First Call. Still, BAC shares were down 0.71% in afternoon trading.

This afternoon's big report will come from Yahoo!, but expectations are not high, as the company's efforts to catch up with Google in ad revenue are not expected to show progress until the summer. YHOO shares were down approximately 0.8% through mid-afternoon.

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