Shifting Perceptions?

DOLLAR FIRM; OIL UP; STOCKS, BONDS DOWN

What a change one week makes! Oil moved up sharply last week closing at $55.42 on Iran and Nigeria tensions, reduced production from Mexico’s largest field and a U.S. proposal to build up the Strategic Petroleum Reserve. Stocks sold off; the Dow closed down 78.51 to close at 12,487. Bonds sold off; the 10-year Treasury yield was up 10bp to 4.879%. Gold was up $9 to $644.50. There is a growing consensus in the market that the Fed’s next move, if any, is more likely to be up then down. Apart from the surprise drop in existing home sales, all other economic news has been good lately. The prevailing feeling is that the slowdown in the economy overall may not big enough to tame inflation pressures. Fed inaction may be good for the dollar. The greenback seesawed throughout the week as the market awaited economic news, at the end firming up against the yen to ¥121.60/$ and against the euro to $1.2913/€. The housing market (and autos) is the Achilles heel of the economy. The subprime BBB- mortgage bonds have seen a 10 pt. decline over the last six months as some home values have dropped below mortgage principals in that segment. On HedgeStreet, oil and the euro dominated volume, followed by gold. This week, several contracts are going to be de-listed and the exchange is changing its trading hours to align them more closely with New York and Chicago commodity markets. The contracts being delisted are 30-year mortgage rates, wholesale gas, copper and heating oil. The new trading hours will be 8am to 4pm ET. By popular demand, currencies will go from three to four intraday closes at 10am, 12, 2pm and 4pm. This will allow more trading opportunities in all five currency pairs.

This week: Fed’s no-raise decision; FDIC moratorium on industrial banks expires, but will Wal-Mart get an ILC?; MS Vista hits the stores; earnings from Google, Verizon, Merck, P&G, Boeing, Time Warner and Exxon; Tokyo-NYSE tie-up?

ECONOMIC RELEASES THIS WEEK:
Tuesday: Consumer confidence at 110, the highest level since March 2002.
Wednesday: Advance Q4′06 GDP is expected at 3.0%, up from 2.0% in Q3 on strong personal saving, but a 6% decline in fixed investment, and strong exports. Chain deflator down to 1.7%. Chicago PMI at 52.0, and flat construction spending. Also released, crude inventories and FOMC policy statement (no change expected, but the read on direction – bias to raise – will be key).
Thursday: Personal income up 0.5%, personal spending up 0.7%. Claims at 318K. ISM at 51.5. Auto sales for Jan down to 5.4m, truck sales up to 7.4, total unchanged.
Friday: Nonfarm payrolls 150K consensus, 135K briefing.com, unemployment flat at 4.5%. Factory orders 1.5%. Michigan sentiment revision flat or down. 

BUSH GOES GREEN … FORD LOSES $12 BN in ‘06 … DAVOS SCHMAVOS

In the State of the Union address, Bush called for a 20% reduction in gasoline use by 2017 (why not 3017), spending on renewable energy (=new cash for farmers) and shifting the taxing of health insurance premiums from employers to employees in order to help those who purchase it individually (expect GM and Ford to shift health costs to the unions). The ethanol lobby is super happy; corn is currently trading at a multiyear high (the poor in Mexico cannot afford their diet staple - tortillas) and vodka has never been more expensive. In my next car, I’ll have drinking taps installed on the fuel tank (C₂H₅OH is pretty tasty, especially on the rocks and with lime) … Ford lost $12 bn in 2006, almost $2K on every car they sold. The CEO Mullaly said they expected to return to profitability by 2009 through increased sales of new models. Let’s see: lose $2K per vehicle, increase sales. Hmmm … Correction to last week’s report: John Kerry decided not to run for president. What he actually said was that at least he thought that he should not decide if he should run or not run, unless he decided to run or not to run … Al Gore gained another 15 pounds. Global warming was the cause … At Davos, the 2400 participants at the World Economic Forum came up with absolutely nothing, as always. The European air has not produced any original thinking since Albert Einstein left for Princeton in Dec 1932. 

Gold’s Quiet Ascent?

DOLLAR FIRMS UP; OIL DRIFTS DOWN

All eyes were on oil last week. Crude tested the $50 mark and ‘experts’ claimed oil will soon drop down into the $40s. U.S. crude inventories were up 3.4% and the Saudis ruled out a production cut. The dollar firmed up against the yen to ¥121.23/$ and was rangebound against the euro at $1.2963/€. The Michigan sentiment at 98.0 all but ruled out an early cut. Meanwhile over the last few weeks, almost unnoticed in the oil hoopla, gold has quietly regained all it lost in the first three days of 2007. Gold now stands at $635.50, nowhere near the May 2006 peak, but with technicals pointing up. In equity markets, the big stock rally in the Dow seems to be fizzling out, while most of the volatility is in the Nasdaq issues. The Dow rose 0.1% while the Nasdaq fell 2.1%. HedgeStreet followed the general market with the euro, pound sterling and crude oil accounting for more than 20% of the volume each. The action in the pound follows the surprise hike by the B of England a week ago. This week we have earnings announcements from McDonalds, J&J, Yahoo, eBay and Microsoft, Bush’s State of the Union, and the Senate may take up the minimum wage bill.

ECONOMIC RELEASES THIS WEEK:
Thursday: Existing home sales flat at 6.28m.
Friday: Durable orders at 3.5%, 0.0% ex-transport, as business investment stalls, but Boeing orders remain strong. New home sales slightly up at 1.050m, as unsold inventories are being reduced and prices sold are stabilizing.

HILLARY IN … SMU WANTS NO BUSH … FRENCH ELECTION

Hillary Clinton announced that she is in and in to win. The world acted surprised … What are we going to call Bill? First gentleman? Clearly not … The faculty of Southern Methodist University is against Bush’s Presidential Libary on its campus unless Bush agrees to put the “r”back in … France is to elect the new president in May. Between the two front-runners, Ségolène Royal likes cheese and socialism but hates America, Nicholas Sarkozy likes cheese and capitalism and does not hate America. Needless to say, Ms. Royal is the front runner … Massachusetts Sen. John Kerry is considering a run for president again. He has filed papers with the French Election Commission. He said “I don’t like Americans, plus I already had the beret, so why not?”

2007 – The Year of America

OIL DROPS ANOTHER 6%; DOLLAR, STOCKS UP

Oil plunged 6% last week approaching $51 before rebounding to $52.99. The dollar surged to ¥120.37/$ against the yen and to $1.2919/€ against the euro as the ECB left the rates unchanged and the Bank of England surprised with a hike. The ECB hinted at a rise at the next meeting citing strong growth prospects in the 13-nation euro zone. Meanwhile world stocks are to a rocky start, while the U.S. market remains buoyant. The Dow reached a new record of 12,556.08. In addition to cheaper oil, whose significance  should not be underestimated for the U.S. economy, there is more good news. The 10-year Treasury yield moved up 12 bp to 4.771% increasing the prospect of reverting the yield curve by the end of the year, especially if we have a Fed cut. Don’t count on it too soon. Tax revenues in the U.S. remain incredibly strong, and the cheaper oil and stronger dollar could help sustain business investment and personal spending. High growth overseas continues and will help U.S. companies, despite protectionism and nationalizations. The Congress can mess things up, but not much. So far, the earmark transparency bill was good, the minimum wage one and the rest totally inconsequential. Good. The gloom over Iraq is overdone. Even if we lose, they go back to killing each other, and we go back to business. On HedgeStreet, oil, the pound and the euro dominated trading. Core CPI contracts expire this week.

ECONOMIC RELEASES THIS WEEK:
Wednesday: PPI at 0.7%, core at 0.1%, continuing lower year on year trends of 1.0% overall and 1.8% for the core, down from a 15-year high of 6.9% in Sep 2005. Expectations are timid so upward surprise would not be good. Industrial production at 0.1%, capacity utilization at 81.6%.
Thursday: CPI at 0.5%, core at 0.2%, first rise in 4 months. Core remains at 2.6% year on year (off the 2.9% high) on sticky housing, medical and tuition costs, while energy price drops help CPI overall. Housing starts at 1.575m, building permits 1.510m, as the downward adjustment continues.
Friday: Michigan Sentiment at 93.0.

BROWNE OUT AT BP  … BEND IT LIKE BECKHAM

Lord Browne will step down as chief of BP.  Upper class pedigree and eloquent talk of alternative fuels did not stop the refineries blowing and investments souring. Running an oil company takes more than talk. But what a dresser … Beckham is coming to LA Galaxy. He sat on the bench at Real. Now he’ll play for illegal aliens and couch potatoes on ESPN2. But for $250m … An Internet picture showed a U.S. tank in Iraq sporting a slogan “Today Baghdad, tomorrow Paris!”. Bush should have come up with that in the first place.