Market Wrap Up - Feb 2

U.S. markets were mostly higher today, as the S&P 500, S&P 600 and NASDAQ all rose, while the Dow Industrials dipped slightly on the day. We believe the market has digested the Fed's statement, and is now considering the risk inflation poses to interest rates, which in turn could pressure housing and the American consumer. All eyes will be on inflation from here on out, and the next reporting of the CPI and PPI will likely have major impact on equity markets.

OVERSEAS MARKETS

Mainland Chinese shares tumbled today, as the Shanghai and Shenzhen 300 Index fell over 4%. Momentum flow turned negative this week, as the index fell 8.6%. An increasing amount of media attention about the performance of Chinese shares both this year and last, and the Chinese government's efforts to curb speculation, set the cogs of correction in motion. The Hang Seng Index climbed 0.65% though, and the NIKKEI 225 improved 0.16%. South Korea's KOSPI Index finished the week off well with a rise of 2.19% today.

M&A played a significant role in last year's strength within European markets, and signs that it might continue in 2007 were well received by investors this week. European shares got the M&A craving today, as a rumor spread that private equity firms were considering acquiring U.K. supermarket chain J Sainsbury Plc. The DJ STOXX 50 rose 0.37%, while the FTSE 100 climbed 0.46% on the news.

ECONOMIC DATA & ANALYSIS

After an unexpected rock solid report showed a revised higher 206,000 non-farm jobs created in December, January non-farm payrolls were seen increasing by 150,000, according to Bloomberg. In the past and today, we have observed significant revisions to data provided by this report, so its reliability is somewhat questionable. Today's data showed 111,000 new jobs were added in January. Ironically, a mild number was probably favorable for equities today, as a tight labor market threatens to add wage inflation pressure to rates and markets.

Unemployment increased to 4.6% in January, above the consensus view that unemployment would mirror December's rate of 4.5%. We believe the most important information within the report today was average hourly earnings. The Fed will want to see tame wage inflation, and the market will view any significant increase in wages threatening to interest rates and equity and bond markets. Average hourly earnings increased just 0.2%, versus the higher consensus view for a 0.3% rise, according to Bloomberg. Overall, we view this report mildly positive to equity markets.

December factory orders were released at 10:00 a.m. EST, with the consensus view for a rise of 1.9%. This report gives more complete information than last week's durable goods orders report. Factory orders grew 2.4% in December, and a solid 2.2% excluding transportation equipment. This is yet another sign of a firming economy and accurate Fed. Still, we reiterate our concern that inflation may require some attention this year.

Finally, the University of Michigan provided its report on January consumer sentiment, which measured at 96.9, below the 98.0 result expected by a consensus compiled by Reuters. Despite falling short of expectations, the reading still reflects strong consumer confidence.

COMMODITY MARKETS

Crude oil is up approximately $8 since we suggested you buy at the bottom set two weeks ago Thursday. Brent crude oil was up again today roughly 2.98%, benefiting from yesterday's implementation of OPEC production cuts and a weather forecast from Weather Derivatives that indicates heating oil consumption could be 36% above normal in the week ahead. Also, recent GDP growth infused oil's most significant driver, actual consumption demand. Encouraging economic strength from the U.S. and China has traders rethinking global demand requirements versus supply constraints.

Soybean futures were up 2.1% today, as farmers increase corn acreage at the expense of soybean acreage. Meanwhile, demand from China continues strong. The USDA indicates that advance orders from China are 34% above last year's level, while U.S. soybean crops are expected to be reduced by 6.5 to 7 million acres this year, according to a client survey in early December by Strategic Marketing Services. This all plays into our food inflation hypothesis, where ethanol driven demand for corn, and China's growth, converting the country into a net importer of grains, lead to higher food prices across the board. Feed costs are increasing for hog and cattle ranchers, and this portends to increasing expenditures for the American consumer at the local supermarket.

GEOPOLITICAL TOPICS
Tehran is hosting a meeting of the Non-Aligned Movement, during which Iran is expected to display its nuclear progress. We believe this effort is designed to instill confidence in the group that Iran can stand up to the pressure of the United States and Europe.

Today, Iran denied an IAEA diplomat's statement that it was aggressively building up an underground uranium enrichment facility. And while a second U.S. carrier fleet enters the Persian Gulf, U.S. Defense Secretary Robert Gates denies planning a war against Iran. Seems like a lot of naive lying is going on, while the two sides try to convince the other that they are not preparing for war. It's naive because both sides know the other is preparing, while they attempt to best position themselves for conflict, in this analyst's opinion. The question remains, will Iran preempt an American or Israeli strike, with a surprise of its own.

STOCK SPECIFIC NEWS
Chevron and Simon Property Group reported earnings today. Our Superbowl XLI pick is the Indianapolis Colts, even minus the seven point spread, but we recommend you see http://www.mondaymorningmehta.com/ for a more detailed analysis of the American classic.

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