Wake Up Call Jan 18

Good Morning. This is your wake up call for Thursday January 18, 2007. The time is 9:30 AM EST, and markets are mixed. The S&P 500 and Dow indices are opening up, but the higher beta shares within the NASDAQ have that index drifting lower in early activity. Economic data released this morning in CPI, housing starts and jobless claims, when taken on the whole, provide a picture of a healthy economy where inflation remains the highest risk, in our view. Thus, we believe the Fed is less likely to reduce rates, and is increasingly more likely to perhaps hike rates if current trends continue.

Asia:
Hang Seng Index +1.06%; Shanghai/Shenzhen 300 +0.35%; NIKKEI 225 +0.63%; BSE SENSEX 30 +0.61%; Ho Chi Minh +1.88%

U.K. & Europe:
DJ STOXX 50 Index +0.59%; FTSE 100 +0.8%; CAC 40 +0.72%; DAX +0.44%; Russian RTS Index +0.35%


KEY HEADLINE NEWS

• December CPI data was released at 8:30 a.m. today, and consumer prices rose 0.5%, compared to a Bloomberg consensus for a 0.4% increase. The result was greatly impacted by higher energy prices in December. More importantly, Core CPI, excluding food and energy, increased 0.2%, in line with Bloomberg's consensus and was comparable to no change in November. The trailing 12-month increase of core prices through December was 2.6%, compared to 2.6% in November and 2.9% in September. So, with no surprise from the Core CPI number, the impact of this data should be relatively null, depending on if you are an optimist or a pessimist, or a bull or a bear. It seems to us, the Fed will remain in a position of inaction, and may even be more likely to hike rates than to reduce them based on our interpretation of the existence of a positive information bias. However, we find food prices threatening to the inflationary outlook. Food prices, which account for one-fifth of CPI, were unchanged in December, but yesterday's PPI data showed an increase on the wholesale level. Also, the price of corn, wheat and soybeans have been on the rise of late due to imbalance on the supply/demand scale. Citrus prices are rising as well, after the freeze in California, and this is only likely to make matters worse.
• Wall Street Greek is issuing a buy recommendation for oil today, after an anticipated bearish inventory report at 10:30 a.m. Based on CNBC commentary, analysts are mostly expecting the weekly report to show a draw down in crude and a build in distillates and gasoline stocks today. We believe oil prices have based, and after exhibiting price strength in the face of OPEC's resistance to further production cuts, we view all bearish catalysts priced in. Meanwhile, upward driving catalysts are quietly sneaking up on the market. Today, an IEA report showed that non-OPEC producing nations would not meet previous forecasts for 2007, due mainly to problems in Ecuador and Cuba. Venezuela is nationalizing its energy industry and moving toward a dictatorship, while openly supporting Iran. Iran is seeking allies to pressure the world into its corner in its argument for nuclear development. Russian energy policy has been clever and menacing, while Nigerian rebels continue to threaten production operations within the African nation. We would be buying oil now, and especially on any inventory weakness that may be reported this morning.
• The Bank of Japan opted today to keep interest rates unchanged at 0.25%. The yen is under pressure against the world's currencies, and the NIKKEI is up on the news. Rumors abound that the bank was pressured into its inaction by the government, and Bank members defended the decision on the basis of mixed data. They pointed toward pending data on GDP and consumer spending, expected in the near term, to provide more basis for conviction. Rumors about government pressure are exacerbated by the fact that the nine government appointed seats at the bank's decision making panel are up for grabs in April.
• December housing starts rose 4.5%, increasing to an annual rate of 1.642 million, compared to a consensus expectation for 1.565 million. Building permits increased 5.5%, and indicate a solid forward housing indicator. Some of the strength in housing can be attributed to the unseasonably warm weather this winter, and we predicted earlier this year, and reiterate now, that an early year uptick would be followed by a second leg lower in the housing market. This is increasingly a contrarian view when compared to most of the expert opinions we have seen expressed.
• Weekly jobless claims for the week ended January 13th decreased from last week's low level, to 290,000. The measure was well below consensus expectations for a 315,000 result, and provided evidence of a healthy job market.

We urge you to read our section within the sidebar, entitled "Headline News", for further important information for traders and investors. (disclosure)