Tuesday's Brew - Jan 9

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. Most major U.S. equity indices are trading broadly lower this afternoon, after having started the day on the upside, when they were benefiting largely from crashing oil prices. Oil tested the $54 level today before recovering some lost ground. We believe the weakness is due to several factors including the warmer than normal North American winter, and on expectations for a bearish inventory data release tomorrow. Still, we believe you should be looking for a base and an entry point here. First and foremost, there is Iran. Otherwise, it seems traders have not considered that a warmer winter, may mean a warmer and longer summer is in store, and weather forecasts have recently indicated that 2007 portends to be the warmest year on record.

A warmer, longer summer fuels increased gasoline usage, as drivers run vehicles with their air conditioners on, and from an earlier calendar start to a later calendar end date. Also, higher peak season temperatures, will lead automobiles to work even harder to cool vehicles, thus using more gasoline.

Clearly, summer has always been a time for storage build for natural gas, but as global warming concerns diminish the use of coal over time, natural gas fueled generation facilities grow in importance. While natural gas consumption is down this winter due to the warm weather conditions, we note that natural gas storage capabilities are limited, so summer build has a roof. Thus, we may not benefit over a long period from the light usage thus far this winter. We note that there are expansion projects under way to increase capacity and resolve that issue.

As summers lengthen and increase in temperature, we need more natural gas to fuel electricity production to cool homes and businesses. Thus, longer and hotter summers portend increased usage of natural gas during the summer, partly offsetting the impacts of warmer winters. Further, with limited storage capacity, we do not advantage as much as possible from the warmer winter, thus remaining at risk for shortage in future periods. Also, over the long-term, global warming threatens to disrupt warm ocean current flows like the Gulf Stream, which could lead to a severe and abrupt decrease in average temperatures across North America and Europe. In that event, we are likely to see severe shortages of natural gas. These are secular factors not on the minds of traders. I highly recommend viewing Al Gore's film on the subject. I found it enlightening.

OVERSEAS MARKETS

"Oh Magoo, you've done it again!" Today, Thailand's military government imposed further restrictions on foreign investment. The new rule limits foreign investment, either direct or through "local nominees" or proxies, to less than 50%. Thai nominees have 90 days to disclose their ownership positions and twelve months to comply with the new law.

Though on the face of it this seems like another bonehead decision, it may be that Thailand's regulators are not as naive as we have portrayed them in the past, and that these restrictive rules are meant to protect the instable government from outside influences that could help to overthrow it. This is somewhat evidenced by the industry sector targets of Thailand's new rules. The laws seem to be aimed to remove foreign industrial control of media, telecommunications, mining, aviation and agriculture. Clearly foreign control of media and telecommunications threatens the illegal government's control. It may view assets in mining, aviation and agriculture as strategic as well. In any event, the world clearly needs to pressure Thailand into free elections now, before it develops into another North Korea, in our opinion.

Thailand's SET Index dropped 2.69% today, and the only way we believe it will stop declining until most foreign investment is gone, is if the government uses foreign reserves to buy desperate sellers' shares or illegally manipulates the market. Clearly, there is no scenario favorable for investment in Thailand, outside of one that forecasts governmental change. Maybe the most important question for investors is, where will capital formerly invested in Thailand find a new home. Recent WTO entrant, Vietnam seems like a nice place nearby that could benefit from the movement of capital and business, and is at least worth looking into.

Mainland China exhibited its amazing strength again today, as the Shanghai-Shenzhen 300 Index rose again, increasing 3.22%. The Hang Seng dipped 0.66%, and in recent issues we have speculated that capital is flowing out of Hong Kong destined for the mainland for a few key reasons. There is a growing comfort level with investment in the mainland, apparent in PriceWaterhouseCoopers' recent report showing IPO funding into the mainland could exceed that of Hong Kong this year. Also, some Hong Kong listed firms have indicated interest in listing on mainland markets. Unsophisticated capital within the mainland, perhaps due to history and patriotic reasons, may prefer investment on mainland exchanges versus that of Hong Kong. Where the majority of capital flows, sophisticated capital will eventually find its way as well, we believe.

The NIKKEI opened after yesterday's holiday, and perhaps returned energized. The NIKKEI 225 increased 0.86%.

In Europe, the German market shrugged off the loss of one-fifth of the country's oil supply, after a distribution channel from Russia through Belarus was cut off due to a dispute between the nations and related firms. The DAX rose 0.52%, but we would expect its performance to begin to diverge from that of broader Europe, should a resolution seem delayed. Poland is also impacted, but the WSE WIG Index rose 0.51% today.

Broader Europe was higher, and the DJ STOXX 50 edged up 0.32%. The energy sensitive Russian RTS Index crashed 6.13%, as Russian markets reopened after the Christmas holiday. We believe the weakness in the Russian markets reflects the appreciation of investors that an unreliable oil and natural gas supplier in Russia will eventually be replaced by better sources. Thus, Russia's actions to penalize its political adversaries will eventually come back to hurt the Russian economy, in our view. This of course, depends on how far Putin's government pushes it, and if disputes are resolved quickly and fairly. Clearly though, the frequency of disruptions will frustrate nations dependent on Russian supply, and Germany's Merkel's comments today reflect that frustration.

The Venezuela Stock Market Index is down 18.66% today, after Hugo Chavez communicated his plans to nationalize telecommunications and utilities industries. For those who have become intoxicated with international returns over the past few years, Venezeula and Thailand remind us of the risks of investing in emerging markets.

COMMODITY MARKETS

We are placing the commodity discussion here today, due to the great detail of discussion already provided within the introduction and "Overseas Markets" sections. WTI Crude oil is markedly lower today, down 3%, to $54.41. One factor we have not already touched on is Goldman Sachs' recommendation to decrease the weighting of oil, and the actions of two key energy indices to reduce asset allocation in oil. We note, however, that Goldman Sachs' average oil price estimate for 2007 has been reduced to $69, still well above the recent $54 mark. We view these actions as reactionary, and inline with Wall Street heard mentality norms. It does not make sense to fight the tide, and the tide is flowing out of oil recently, but we expect OPEC to come to the rescue soon enough, and Condaleezza Rice is headed for the Middle East this week, which should put the spotlight back on Iran. We remain long-term oil bulls steadfast against this weak-minded capital flow activity.

Natural gas is up 0.13% today, as colder weather sweeps over the east coast of America. Copper is down again 0.81% and gold is down slightly 0.05%, as inflationary pressures seem lightened.

STOCK SPECIFIC NEWS

The economic calendar is quiet today, so we transition immediately to stock news. Tuesday launches the December-ended quarterly earnings season, with the report from Alcoa. Also reporting earnings on Tuesday are Supervalu Inc., Volt Information, Emmis Communications, Wd-40 Company, Ruby Tuesday Inc. and Audiovox.

Needham & Company kicks off its always exciting growth stock conference in New York, where presidential hopeful Rudy Giuliani will be a key speaker. In other corporate news, H&R Block will have its regular analysts meeting and union representatives of Alitalia will meet with a group of investors intending to make a bid for the airline. This has the potential to reignite the news wire and the tickers of airline companies.

(disclosure)