Today's Coffee - Feb 8

Enjoy your fresh coffee with our summary and analysis of the market activity of the day and a medley of important information you should find useful. U.S. markets have mostly drifted lower at this hour, but without conviction. The slide was begun this morning by weak housing and sub-prime lending news out of Toll Brothers, HSBC and New Century Financial. This is certainly not a surprise to us, as we have been warning you about the risk in sub-prime lenders for some time now. We ran a search of our blog for "sub-prime" and here are some articles within which we mentioned the risk of owning sub-prime lenders. We hope you are also aware of our view that housing is due for a second leg lower this year, due to a still high degree of inventory and our view that rates will rise.

OVERSEAS MARKETS

There was significant activity overseas today. The Bank of Japan reported that bank lending increased 1.8% in January, versus the prior year, equaling the increase of December. The lack of growth combined with recent data that showed wages decreased may keep the Bank of Japan on the sidelines regarding rate change. The NIKKEI 225 was unchanged on the day.

The Bank of Korea today left interest rates unchanged, on the support of a recently weak consumer price rise. The bank raised rates three times in 2006 to cool the economy. The KRX 100 declined 0.38% today. Chinese shares seem to have found solid footing, as the Shanghai and Shenzhen 300 Index climbed 1.7% and the Hang Seng rose 0.27%.

The Bank of England and European Central Bank both left rates unchanged today, but ECB President Jean-Claude Trichet, signaled in a later press conference the likelihood of a March rate hike. The exact words that are being interpreted as a clear sign he will act were "strong vigilance remains of the essence so as to ensure that risks to price stability over the medium term do not materialize.'' Most European shares weakened as a result. The DJ STOXX 50 dipped 0.91%, while the FTSE 100 fell 0.36%.

ECONOMIC DATA & ANALYSIS

Wholesale inventories declined in December, indicating to us a combination of cautious purchasing and better than expected sell through. Wholesalers experienced a sales increase of 1.8% during the month, while their inventory-to-sales ratio declined to 1.17 in December, from 1.19 in November. We expect that recently solid GDP growth and other positive economic indicators will provide wholesalers with confidence to restore inventories.

Weekly initial jobless claims came in at 311,000, versus the economists' consensus view for 312,000, as compiled by Bloomberg. The result falls below the 314,000 average of the past year, and indicates a still healthy job market, in our view.

COMMODITY MARKETS

Natural gas leads all commodity futures on the upside today, firing 1.08% higher on the fuel of an inventory report that showed a draw of 224 Bcf, versus consensus expectations for a draw of 218 Bcf. The combination of the late, but frigid onset of winter and escalating geopolitical tension regarding Iran, have combined to drive oil and nat gas higher in recent weeks. Heating oil is up 0.46% at this hour, while gasoline and brent crude are relatively unchanged.

Iran warned again today that any attacker on its sovereign territory would pay a costly price. We cannot help but sense a degree of sincerity in the statements out of Iran, when compared to the braggadocio that was expressed from Iraq. Iran has been preparing for conflict for quite some time, and has established alliances with Syria, North Korea and Venezuela, while creating less well-understood friendships with Indonesia and Malaysia. We wonder if North Korea is not protecting itself now with the new round of talks begun in Beijing. It is not out of the question that North Korea has not sold nuclear weapons to Iran, and would position itself to avoid the whip of the United States should a weapon be used upon Americans or American interests.

Yesterday, we reiterated our forecast regarding commodity driven inflation, led by food and energy prices. Today, corn and wheat are each up over 1.0%, while soybean is 0.5% higher. The impact of increasing feed prices has yet to hit protein prices with conviction, so we believe you still have a good opportunity to take advantage of a rise we anticipate within cattle and hogs, and poultry as long as bird flu remains on the sideline. Clearly, the onset of bird flu would just exacerbate a price rise in competing proteins.

STOCK SPECIFIC NEWS
Retailers across the nation reported January sales data today, accrediting relatively strong results to a faster pace of gift card redemption. Retailers were also thankful for the onset of colder temperatures that allowed them to sell through inventory of winter items. Thomson Financial aggregates the expectations and results of 55 retailers, and the data showed that the companies grew same-store sales at a rate of 3.9% in January, versus expectations for an increase of 3.1%. Some of the more notable winners were: Saks +11.4%; Nordstrom +11.1%; and The Limited +11.0%. Some of the losers included: AnnTaylor -10.2%; Chicos FAS -3.5%; and Abercrombie & Fitch Co -6.0%.

HSBC said the sub-prime market in the U.S. has weakened more than was expected, and blames rising rates, increased delinquencies and its own managers for writing risky loans. Toll Brothers compounded the impact of the news, with its earnings report showing Q1 home-building revenue fell 19%. TOL also raised the red flag by indicating that its backlog was 30% off its prior year level.

Pepsico reported earnings about in-line with estimates today, while raising its guidance. Still, PEP shares are down about 2.1% at this hour, as its guidance is still a penny below consensus levels, as compiled by Thomson Financial. Also, CNBC's Bill O'Brien highlighted the issue of relatively weak performance from Pepsico's orange juice and Gatorade products.

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