Tuesday's Brew - Feb 20

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. We welcome in the year of the pig, and wish our friends in Asia and those all over the world celebrating the lunar new year, happy new year! The S&P 500 and NASDAQ indices are modestly higher in early afternoon trade, while the Dow Industrials are lower. We do not expect much conviction from the market today, ahead of tomorrow's key Core CPI report at 8:30 a.m. EST.

OVERSEAS MARKETS

Various markets in Asia were closed today, as lunar new year is celebrated. Markets in China and Taiwan will be closed all week, while the market in South Korea was closed yesterday only. In Japan, the NIKKEI 225 was nearly unchanged today, as the Bank of Japan began a two-day meeting that will culminate with tomorrow's decision on the benchmark rate. The short-term government set benchmark rate is currently 0.25% in Japan.

European bankers and investors are hopeful that the BOJ might raise rates tomorrow, helping to lift the yen, and aid the competitiveness of European goods versus Japanese products. The broad reaching European DJ STOXX 50 Index was down 0.26% today, while the CAC 40 fell 0.46% and the DAX slipped 0.06%. In London, the FTSE 100 declined 0.50% today.

ECONOMIC DATA & ANALYSIS

The University of Michigan’s American Customer Satisfaction Index was reported today, and showed Publix, Kohl's and Costco ranked atop consumer preferences. The State Street Investor Confidence Index was also reported today, with a reading of 90.4, compared to a reading of 85.0 in January. The index measures confidence by looking at actual levels of risk in investment portfolios, and the recent measure shows an increase in confidence.

In geopolitical news, Vice President Dick Cheney met with Japanese Prime Minister Shinzo Abe today, where they likely discussed the North Korean Sham, I mean deal, agreed to last week.

COMMODITY MARKETS

Heating oil futures lead all commodities lower at this hour, down 3.25%. As warmer temperatures overcome much of the previously freezing Northeastern U.S., market players are anxiously anticipating the end of winter and decreased demand for heating fuels. Natural gas is also lower by 1.6% today. However, we must caution here, as Iran faces an important U.N. imposed deadline tomorrow.

Wednesday, the IAEA will report on Iran and let the world know whether it has complied with a U.N. resolution requiring it to halt uranium enrichment activities. In all likelihood, Iran will not have complied, and rhetoric is likely to intensify. Much has been going on behind the scenes as well. The USS Stennis steamed into the Persian Gulf this week, and the U.S. is better prepared now to defend the tight channel at the Strait of Hormuz, as well as the assets of oil producers Kuwait and Saudi Arabia. The Ayatollah Khomeini met over the weekend with Syria's Assad, while Condoleeza Rice met with Ehud Olmert of Israel. Thus, while fuel prices moderate, we believe they are tethered a bit by the ongoing geopolitical risk tied to Iran. Still, WTI Crude is down 2.9% in the early afternoon.

Gold is 1.75% lower today, as the dollar gains, due to the stable picture painted by Fed Chief Ben Bernanke last week in his testimony to Congress. In any event, we believe today's downward movement of most commodities, while representative of short-term conditions, does not reflect the direction we anticipate commodity prices will run over the longer term period we define over the next two years.

STOCK SPECIFIC NEWS
Corporate news has really taken the lead today, with several events kicking off across the nation and with key corporate earnings reports from important housing and consumer health barometers, Home Depot and WalMart.

The Consumer Analysts Group of New York kicked off its conference in Arizona today, with Kraft, General Mills and ConAgra among early presenters. Individually, EDS is holding an analyst meeting in New York, while Airbus is outlining its restructuring plan in Toulouse, France. Microsoft’s Bill Gates is scheduled to speak to the Canadian Chamber of Commerce in Ottawa on this day as well.

Home Depot and WalMart reported earnings for their respective fourth quarters this morning. Also reporting earnings today, look for Alltel Corp., Firstenergy, Genuine Parts and Hewlett-Packard.

Home Depot (HD) reported EPS in line with estimates, while posting a same-store sales decline of 6.6%. Recent housing data showed a sharp drop-off of starts in January, and housing investors will likely have a keen eye set on Home Depot today and Lowe's, which reports on Friday. Home Depot will not provide financial guidance until its annual investor conference on February 28th. HD shares were just slightly lower at the hour of our publishing, after starting the day approximately 1.7% down.

WalMart (WMT) reported quarterly EPS three cents ahead of Thomson Financial compiled consensus estimates, even before a $0.02 tax benefit. Revenues grew 10.9%, though they missed analysts expectations. The company provided a fiscal first quarter EPS guidance range of $0.68 to $0.71, generally above the $0.68 consensus compiled by Thomson Financial. WMT shares are up 3.0% in early afternoon trading.

Sirius (SIRI) and XM Satellite Radio (XMSR) have agreed to merge, but the deal faces serious regulatory obstacles, including an FCC provision against the merger. The company and analysts alike expect the expense structure to benefit from a combined entity. The problem is, if the only two providers of satellite radio services were to merge, a lack of competition might hurt the consumer. SIRI was up 7.6%, while XMSR was 10.9% higher in early afternoon trade. The increased benefit to XMSR is likely due to the structure of the deal, and the fact that going into it, XMSR traded at a valuation discount to SIRI (we base our valuation on trailing price-to-sales comparisons).

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