Friday's Brew - Feb 16

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. While the S&P Small Cap 600 Index is higher at this hour, most major U.S. indices are modestly lower today, ahead of the three day weekend. In these times, we find it hard to expect traders to hold stock through any weekend, let alone a three-day one.

Wall Street Greek has correctly predicted the second leg lower in housing, the demise of sub-prime lenders and the bottom of oil prices at $50. So, you should be asking, what is the Greek predicting now. You should be noting our relatively near term concerns about food and energy inflation and our medium term view that a complicated war is in our future over the next year or two. We expect oil prices to find much higher ground during that time span, as Sunni and Shiite factions clash in Iraq, Saudi Arabia and Iran. We foresee Muqtada al Sadr returning to Iraq with an Iranian army that would be viewed as liberator. We anticipate Iran's invasion of Iraq would put Saudi Arabia on alert, and that Saudi facilities would be targeted by Iranian missiles. Imagine a war between two of the world's most important oil producers, and think about the interests of China, Russia and the United States. An attack on Iran carries a heavy burden on those who initiate it, and a heavy responsibility to contain it. But, you still have time to benefit from a generally rising market in the short term, as the Fed seems to have solid control of the current economic situation.

OVERSEAS MARKETS

China surprised markets today, as it ordered a new tightening of reserve requirements for lenders to take effect on February 25th. China raised the required capital reserve to 10% of deposits from 9.5%, just instituted earlier this year. Small banks will be required to keep 10.5% of deposits in reserve. Even so, Chinese indices inched higher on the day, as the Hang Seng rose 0.14% and the Shanghai and Shenzhen 300 Index appreciated 0.3%.

Ahead of an approaching rate decision day for the Bank of Japan, the NIKKEI 225 fell 0.12%. Merrill Lynch cut Indonesian stocks to underweight from overweight, but the Jakarta Composite Index edged up 0.22% anyway.

European markets slipped modestly lower today, with the DJ STOXX 50 down 0.11%. In London, the FTSE 100 dipped 0.21%.

Interestingly enough, the Nigerian Stock Indices In climbed 2.67% on the same day the U.S warned that attacks in Nigeria may expand and become more violent.

ECONOMIC DATA & ANALYSIS

January housing starts were reported down 14.3%, to an annual pace of 1.408 million, well below the Bloomberg consensus expectation for 1.6 million homes and the 1.642 million started in December. This news sort of shocked the market today, raising concerns that housing could still impact the economy in a big way. Every time the housing market has declined in the past, the economy has slipped into recession, and the market has a good memory of that. Not to say I told you so, but I told you so. If you have been paying attention, we have been warning you of our view that housing would have a short uptick to start the year and then experience a second leg lower due to the still high level of inventory and bubble we see in prices. We found a piece of data within today's report especially troublesome. As all other data indicated a slowing housing trend, the number of housing units authorized but not yet started actually increased 2.9%. We believe this may portend a distressed situation for smaller leveraged home builders, as orders are accepted that cannot be completed. We anticipate layoffs from home builders to increase over the months ahead, and to see some smaller, leverged home builders seek bankruptcy protection this year.

The January producer price index provided some relief for the inflationary outlook, as core PPI, excluding food and energy, rose just 0.2%, in line with expectations. Year over year producer price growth was 1.8%, below the 2% level that the Fed fears. Even so, CPI will add some more color to the picture soon enough. Remember, we warn that food and energy price increases could impact prices across the board, and force the Fed to act on inflation. Such a cost of living increase, combined with a tightening Fed, could be destructive to economic growth.

The Reuters/University of Michigan February consumer sentiment survey measured 93.3, below the Bloomberg consensus view for a reading of 96.5, and below the January reading of 96.9. Ironically, while the data seems right in line with the Fed's expectations, equity markets took no solice in that fact today.

COMMODITY MARKETS

Natural gas is rocketing higher again today, up 3.9% at this hour. Nickel leads all commodities for the second day in a row, rising 5.6% today, as the supply demand dynamic for the metal remains very tight. Most commodities are higher today, reflective of a secular trend that should persist, which is increasing global demand, as large emerging markets in India and China grow rapidly.

WTI crude oil futures are up over 2% today, as geopolitical tensions persist. Russia threatened to end a 20 year intermediate nuclear missile treaty, due to the plans of NATO and the U.S. to build a missile defense shield in Eastern Europe. The rift between super powers, Russia & China and the United States should be very concerning to the world community.

STOCK SPECIFIC NEWS
Regulators announced today that they were strongly considering bringing criminal charges to former executives of Apple, Broadcom and others. With the three day weekend ahead, traders should look to unload holdings. Thus, we anticipate stocks will close mildly lower today.

(disclosure)