Wednesday's Brew Ja 10

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. The Dow and S&P 500 indices are down slightly through morning trade, while the tech-heavy NASDAQ fights to stay above water on the strength of semiconductor shares.

OVERSEAS MARKETS

The NYSE, along with Goldman Sachs, General Atlantic and Softbank Asian Infrastructure Fund agreed to buy 20% of the National Stock Exchange of India Ltd. The 20% investment implies a value of $2.3 billion for India's largest exchange based on value of shares traded. The BSE SENSEX 30 declined 1.5% on the day.

Today marked yet another in the trend of declining shares in Hong Kong and rising prices in mainland China. Over the past few days, we have outlined our theory on this topic in great detail, and suggest you review prior editions of "Today's Morning Coffee" for those insightful thoughts. Briefly, we theorize that capital is flowing out of Hong Kong destined for mainland shares, and that the mainland is attracting capital from abroad at a greater rate as well. The Hang Seng fell 1.66% today, while the SHSE-SZSE 300 Index climbed 2.54%.

HSBC raised Australia to overweight and expressed a view favorable on South Korea, while lowering Thailand and Malaysia to underweight from overweight. All I can say is, it's about time on Thailand. Speaking of Thailand, the SET Index rose 0.9% today, as government spokesmen floundered on yesterday's announced new law, which is restrictive to foreign investment. Still, the damage is done, and it is clear this government is not foreign capital friendly. We recommended exit in recent weeks, until political change takes hold. Capital should flow out of Thailand to other regional markets, and we recommended consideration of new WTO entrant Vietnam was worth a look. The Ho Chi Minh Index rose 2.46% today.

In Indonesia, the Jakarta Composite dropped 3.96%, as it skidded in sympathy with other geopolitical hot spots. We recall, during the most recent Asian crisis, Indonesia was plagued by a weak market and a great deal of political unrest. Recent support of Iran's Mahmoud Ahmadinejad has not gone unnoticed by investors either it seems. Islam's largest population base is seen threatening to many westerners in a time of a religious clash of cultures.

European stocks didn't swallow geopolitical turmoil well today, as the DJ STOXX 50 slipped 0.8% and the FTSE 100 fell 0.57%. A Russian oil crisis combined with a highly anticipated and likely criticized television appearance by George Bush this evening, may cause many Europeans a sleepless night. There clearly is concern around the topic, and Europeans are wary President Bush's vision for the Middle East. However, the battered of World War II are in agreement that a nuclear Iran is not an acceptable option. It's just a hard pill to swallow, military confrontation with such a critical supplier of oil, and one so near the most critical supplier in Saudi Arabia.

ECONOMIC DATA & ANALYSIS

The economic calendar is better populated today than it was yesterday, with the 8:30 a.m. EST report of the November trade balance keying the news. November international trade was seen posting a $60 billion deficit, compared to a deficit of $58.9 billion in October, based on Bloomberg News data. The actual deficit measured at $58.2 billion, a 1% decline, marking the lowest level seen since July of 2005. Lower oil import prices and volume benefited trade, and the export growth rate exceeded imports in November. Exports likely benefited from a weaker dollar and global market development. Exports were led by demand for American made airplanes, automobiles and telecommunications equipment.

November wholesale inventories were reported at 10:00 a.m. EST, and showed a 1.3% increase for the month. This greatly exceeded the median view of 36 economists surveyed by Bloomberg News, which anticipated an increase of 0.5%, compared to a 0.8% rise in October. Sales for wholesalers only rose 1% in November, and the combined data indicate weakness in demand. This economic indicator, which is getting less spotlight today than the trade deficit, is more important, in our view. The deficit was partly influenced by oil prices, and does not reflect strength in the spending of U.S. consumers. The wholesale inventory result confers. This appears to provide further evidence that the economy is in fact slowing.

The Mortgage Bankers Association released its seasonally adjusted index of mortgage application activity, showing that mortgage applications soared 16.6% to 671.1 for the week ended Jan. 5. As mortgage interest rates declined for the first time in five weeks, refinancing increased as a portion of total activity, to reach 48.4%, compared to 48.1% in the week just prior. We would not take this as a sign of a rebound in housing, as we believe there was some pent up demand from the period just prior to the measured weak. I believe housing data may show some stabilization in the first month or two of 2007, before again reflecting a price and inventory bubble and trending lower for the the whole of the year. My theory is based on a view that industry players have fed market participants the "things will be better next year" pitch. I believe that buyers on the fence may have put off purchases for that hopeful view. I see this demand limited, and greatly outweighed by a still excess amount of homes on the market, and prices I view out of balance.

COMMODITY MARKETS
Wednesday brought the regular oil and distillates inventory report, which OPEC likely paid close attention to. Rumor has it that OPEC is considering an emergency production cut in light of recent price weakness. However, with high pressured geopolitical news benefiting oil bulls this week, as we mentioned in "The Greek's Week Ahead", OPEC may not need to act.

Crude oil futures are down 2.26%; heating oil is lower 1.18%; and gasoline is down 2.19%, after the weekly inventory report showed a greater than expected build in distillate inventory stocks. Distillate supplies increased by 5.4 million barrels, versus an expectation for a 2 million barrel build. The warmer winter has led to a great deal less demand for heating oil in the major Northeastern U.S. market. With the price of oil now testing $54 regularly, you would expect OPEC to announce an emergency meeting. We suspect that due to geopolitical concerns, and recent resiliency in the oil price, OPEC may wait a little longer before acting, in order to see if this is just a short term trade due to the desperate capital flows of energy funds in distress or in panic. However, we do expect some lip service from OPEC, in other words, public expression of concern without significant action.

STOCK SPECIFIC NEWS
In corporate news, Tiffany & Company held its annual holiday sales conference call before the market open today. The company reported holiday season same-store sales increased a better than expected 7%. Tiffany shares were down 1.9% in morning trade, as the company provided conservative revenue guidance, with a forecast for low double-digit growth. This compares with the company's growth rate of 15% through the Nov-Dec time frame.

Volkswagen CEO Martin Winterkorn is expected to provide his restructuring plan to the board of directors. Ashworth Inc. is the only company scheduled to report fourth quarter earnings on Wednesday.

You can receive "Today's Morning Coffee" in your email inbox at the moment we publish it to the site. All you have to do is write to us at WallStreetGreek@gmail.com, including your contact information, and we will add you to the distribution list. We respect your privacy, and never share your information with third parties. (disclosure)