Wednesday's Brew Ja 24

Enjoy your fresh coffee with our summary of the market activity and outlook for the day and a medley of important information you should find useful. U.S. equity markets are broadly showing their approval of the president's State of the Union Address, as stocks are rising across major indices. Don't miss our short-term buy recommendation on natural gas within the "Commodity Markets" section below.

OVERSEAS MARKETS

Recently positive economic indicators, including the Conference Board's leading indicators released yesterday and University of Michigan's measure of consumer sentiment released Friday, drove Asian exporters higher again today. Korea's KRX 100 climbed 1.35%, India's BSE SENSEX 30 rose 0.49% and Taiwan's TAIEX rose 1.06%.

U.K. economic growth, as measured by GDP, showed improvement of 0.8%, its greatest rate of growth since 2004. This might normally have concerned equity markets, raising the specter of a possible rate hike, but the minutes of the Bank of England's January meeting showed its recent hike passed by just one vote. This seemed to console the market, as the FTSE 100 rose 1.4%.

The Venezuela Stock Market Index is down again today 0.68%, after dropping sharply over the past two weeks on the recent policy decisions of Hugo Chavez's administration.

ECONOMIC DATA & ANALYSIS

Today allows Maria Bartiromo to utter her second favorite word, "Davos," which follows only "folks" on her list of linguistic loves. The World Economic Forum kicks off in Davos, Switzerland.

The Mortgage Bankers Association reported its survey of loan applications today. Last week's housing data and strong application numbers were overlooked by the market, as it focused on inflation concern. Today, the MBA reported that in the week ended January 19, U.S. mortgage applications declined. Loans for home purchases were down 8.4%, while refinance mortgages fell 9.6%.

Higher interest rates were widely blamed for the drop, as rates on 30-year fixed rate mortgages edged up 0.03 percentage points during the week. The increase for 15-year mortgages was just 0.01%.

We have another explanation for the decline, which we believe is just part of the longer term downtrend in housing and a saturated refinance market. As we also stated in "Wake Up Call" earlier this morning, we previously discussed the sales efforts of mortgage brokers, real estate agents and home builders. We published our opinion more than once now that salesmen would paint a rosy picture for skeptical buyers, using the "it will be better next year" sales pitch to encourage customers on the fence to pull the trigger on a home purchase or refinance. We have also noted several times that we anticipate a short-term uptick in housing early this year, before a second leg lower in 2007. Now, we must also note that economic data has been very encouraging since our view was first expressed, and this may help soften the downward trend we anticipate in 2007.

COMMODITY MARKETS

Two key data points got a second look Wednesday, as the Department of Energy reported on U.S. crude oil and distillates inventory. Recall that last week's numbers sent oil back to retest $50. We then issued our timely buy call on oil, forecasting the bearish data and predicting the subsequent price slide. We expected this week's data to be insignificant, due to its following of President Bush's State of the Union Address.

Still, crude oil inventory grew, but growth in distillates inventory, which includes heating oil, surprised the market today. With the onset of a cold spell last week, analysts had greatly anticipated a draw in distillates and heating oil. Distillate inventory grew by 700,000 barrels, where analysts had been expecting an 800,000 barrel decline.

Analysts and the market may be missing the whole story this morning. The distillates rise was greatly impacted by growth in gasoline supply, while heating oil actually declined. It may be that refiners are already undergoing maintenance to prepare for the summer driving season. If this is so, and the winter were to get suddenly colder, as is anticipated, then heating oil stocks could dramatically decrease over the next few weeks due to a lower degree of production. Heating oil inventory declined by 1.5 million barrels during the week. Gasoline inventory grew by 4 million barrels. Near contract heating oil futures are down 2.1% today, while crude oil is approximately $53.84, down 2.18%.

We think there is another opportunity... The recently higher price of oil and relatively low price of natural gas may have led many consumers to convert from heating oil to a natural gas fueled heating source. Now, heating oil did in fact show a decline this week, but whether there is conversion occurring or not, we expect natural gas to also show a draw tomorrow. Natural gas is down 2.74% today in sympathy with petroleum, and we believe a buying opportunity has been created due to the misinterpretation of today's oil data. In plain English, we would buy natural gas today for the short-term trade.

STOCK SPECIFIC NEWS
Earnings reports for Wednesday include McDonald's, Qualcomm, Conocophillips, Abbot Labs, Wellpoint, Ebay, Exelon Corp., General Dynamics and Corning.

McDonald's (MCD) is down 1.25% after its EPS report today; Advanced Micro Devices (AMD) shares are down over 8% after its report; Yahoo! (YHOO) is up 7.6% after announcing it will speed its "Project Pajama"; Broadcom (BRCM) is up about 4.2% after announcing an earnings restatement and a charge on options; ConocoPhillips (COP) is down fractionally after its EPS report.

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