Tuesday's Brew - Jan 30

Enjoy your fresh coffee with our summary and analysis of the market activity of the day and a medley of important information you should find useful. U.S. markets are mostly higher today, as the Federal Open Market Committee meeting kicks off. Tomorrow brings a slew of key economic news that should increase trading volatility.

OVERSEAS MARKETS

Japanese household spending declined 1.9% in December, which may keep the Bank of Japan on the sidelines regarding interest rates. Household spending has declined twelve months in a row in Japan, and this data only helps support the case to keep rates unchanged there. Equity investors found the data mildly positive, as the NIKKEI 225 edged upward 0.11%.

The Hang Seng jumped 1.11% Tuesday, while the SHSE-SZSE 300 Index declined 0.97% amid speculation that the Chinese government might continue with further monetary policy restraints. Indian and Pakistani markets were closed on Tuesday.

European shares were mostly on the rise today, with the DJ STOXX 50 Index 0.58% higher, while the FTSE 100 inched up 0.1%. The DAX jumped 1.06% today, possibly benefiting from the depreciating yen.

The most interesting international news these days is mostly coming out of South America, due to increasing anti-American sentiment and the potential for an adjustment to the sovereign debt situation. However, today was relatively quiet. The Brazil Bovespa Stock Index rose 0.94%, while the severely depressed Venezuela Stock Market Index drifted higher 0.15%.

ECONOMIC DATA & ANALYSIS

January consumer confidence was reported by the Conference Board today at 10:00 a.m. EST. A consensus of economists surveyed by Bloomberg saw the index measuring 110.0 compared to 109.0 in December. The actual measure slightly exceeded expectations, at 110.3. A recent report from the University of Michigan also showed confidence high among consumers, and lower gasoline prices have likely played a role in that regard.

However, we do not expect low gasoline prices to hold, while we estimate food prices will increase across the board. As we have outlined in the past, our view on food is based on rising demand for corn, and resulting price increase for its surrogates, wheat and soybean. As the price of feed increases, and we heard this again over the past two days from poultry producers Tyson Foods and Pilgrim's Pride, the price of proteins are likely to rise across the board as well. We anticipate food producers will pass price increases on to consumers, and thus inflation should be buoyed by rising food and gasoline prices. With an economic picture of health becoming more and more clear with each economic data bit, we expect the Fed will raise rates again in 2007. We anticipate hawkish commentary in the Fed statement tomorrow, and in the later release of the meeting minutes. We believe a sharp correction in equities between tomorrow and the release of the Fed meeting minutes is very possible. Weakness in the U.S. market would likely spread to high flying emerging markets and Europe in our view.

COMMODITY MARKETS

As we predicted, the many analysts forecasting the demise of natural gas were too early. In recent reports we mentioned that the many weeks of winter that lay ahead provided enough opportunity for weather to play short-term havoc with natural gas prices. We stated that we anticipated the recent drop in prices was overdone. Keep in mind, we still expect natural gas to weaken ahead of summer, until tensions with Iran escalate into conflict, but we felt it was too early for a trend to be sustainable. Today, nat gas is up 5%, while heating oil is 0.72% higher.

Remember, we told you last week that if refiners were transitioning early to produce gasoline over heating oil and other distillates, then we could be in for a surprise on heating oil supply in coming weeks, should the weather remain cold. WTI crude oil futures are up 0.87%, due to the weather and on secular geopolitical drivers that brought the price back from the depths of $50, as we predicted two weeks ago Thursday.

Today's news regarding Saudi Arabia that is grabbing headline attention is not worth noting, but we must clarify the situation to you, as we did in "Wake Up Call" this morning. The Saudi cuts grabbing headlines among naive reporters this morning are just follow through on the already agreed upon reductions. CNBC finally figured this out about a half hour ago, and clarified on why oil prices were not reflecting this dramatic news.

STOCK SPECIFIC NEWS
The long anticipated release of Microsoft's Windows Vista operating system brightens the view for the tech giant today, after its quarter reported last week was impacted by the product's delay.

UPS reported fourth-quarter EPS of $1.04, in line with the consensus view, as compiled by Thomson Financial. However, UPS shares are down 3.3% in morning trade as the company's guidance for '07 presented an expectation for EPS growth of 6-10%, to $4.10-$4.25. UPS shares are on the slide today because the analysts' consensus view was for $4.27 in 2007, according to Thomson Financial.

Procter & Gamble (PG) exceeded analysts' quarterly forecasts on revenues, and earned $0.84 a share, versus the $0.83 anticipated by analysts surveyed by Thomson Financial. P&G also raised its guidance for 2007, from $2.97-$3.02 to $2.99-$3.03, as it showed strength across product lines.

Merck & Co.'s fourth quarter report showed the pharmaceutical maker earned $0.50 before acquisition and restructuring charges, compared to analysts' consensus for $0.51, as compiled by Bloomberg. Thomson Financial showed consensus expectations at $0.50. Merck's results were hurt by weaker Zocor sales.

Others reporting earnings Tuesday include Wyeth, 3M Company, Allstate Corp., Colgate-Palmolive, Illinois Tool Works, Countrywide Financial, AFLAC Inc. and Chubb Corporation.

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