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The week's market direction seems likely to be dictated by corporate earnings news and President Bush's State of the Union Address. About one-quarter of the S&P 500 Index is scheduled to report results this week, with big names like Yahoo!, Texas Instruments, Microsoft, Caterpillar, Du Pont and Wachovia Corp. on the slate. According to Thomson Financial, aggregate earnings results this quarter have thus far exceeded expectations.

As far as expectations go, well, even Republicans like me have to admit our president has not met them except in cases where they were low to begin with. This year's stoic faces from the Democrat camp should include more than just Ted Kennedy. As a matter of fact, the usually respectful speech, where the typical show of dissension extends only as far as the holding of applause, could digress to downright booing. On Tuesday night, it might be hard to discern Washington's proudest evening from a Philadelphia Eagles home game.

Based on the President's radio address on Saturday, it seems his key focus will be to push health care tax deductions, a permanent extension of the temporary tax breaks the president has initiated and social security reform. Rumor has it energy could come up again like last year, and the topic of Iraq seems certain to draw the ire of the majority of Democrats.

What we believe will garner investors' attention is Iran, unless President Bush has learned from his now infamous mention of the "Axis of Evil" in that speech we will never forget, post 9/11. I think the president may avoid alerting Iran of its potentially impending fate, considering our second air craft carrier fleet has yet to reach the Persian Gulf. However, if he does mention Iran, I believe you can expect a volatile market on Wednesday and sharply rising oil prices. I strongly believe this president considers confronting Iran during his tenure, just keeping his word. And if he's going to start that fire, he would probably prefer to finish it before he leaves office. That's why I strongly believe the bombing of Iran's nuclear facilities and whatever havoc that may follow will happen in 2007. I believe that any indication of that in his speech, or any "Axis" level speak will be enough to concern oil traders, and drive the return of normal negative correlation between equities and energy.

Also, I expect the President to take the opportunity to bring the fear of God, or at least the American military machine, to Hugo Chavez and his nationalization scheme that threatens to steal the assets of American firms.

The weekly schedule...
After good news from the Philly and New York Federal Reserve branches last week, Chicago chimes in with its monthly economic report on Monday. Also, the Conference Board will report its December leading economic indicators index, with a consensus view for a 0.3% increase, according to a Bloomberg News poll, compared to a 0.1% rise in November. Barron's reported a consensus forecast for an increase of 0.2% in December. We think that with the Fed and the markets clearly focused on inflation now, any reading out of line on the high side is likely to spook the market, for fear of spurring a Fed rate hike. Speaking of the Fed, San Francisco Bank Chief Janet Yellen is scheduled to speak in Nevada on Monday, and might bring some light to the Fed's initial reaction to the leading indicators data. Look for reports from American Express and Texas Instruments to start a busy earnings week.

Tuesday, Redbook Research reports on weekly sales at chain-stores, discounters and department stores. ICSC-UBS Store Sales will also be reported Tuesday, but we do not expect a major surprise in either of the consumer spending metrics. The Federal Reserve Bank of Richmond will report on manufacturing within its region Tuesday, but Richmond has much less impact on the market than Chicago, reporting on the previous day. Al Gore and George Bush lock up in another battle for the attention of the populous on Tuesday. Al will be waiting to see if his global warming documentary, "An Inconvenient Truth," is nominated for an Oscar, while President Bush will address the nation on the state of the union, which is rumored to show a timely change in the administration's view on climate change.

Companies reporting earnings on Tuesday include Bank of America, Johnson & Johnson, Wachovia Corp., United Technologies, Du Pont, Yahoo!, EMC Corp. and Burlington Northern.

Wednesday will allow Maria Bartiromo to utter her second favorite word, "Davos," which follows only "folks" on her list of linguistic loves. The World Economic Forum kicks off in Davos, Switzerland.

Two key data points will get a second look Wednesday, as the Department of Energy reports on U.S. crude oil and distillates inventory. Recall that last week's numbers sent oil back to retest $50. We issued our buy call on oil, forecasting the bearish data and predicting the subsequent price slide. We think this week's data will be insignificant, due to its following of President Bush's State of the Union Address.

The second bit of aforementioned important data is the Mortgage Bankers Association survey of loan applications. Last week's housing data and strong application numbers were overlooked by the market, as it focused on inflation concern.

Earnings reports for Wednesday include McDonald's, Qualcomm, Conocophillips, Abbot Labs, Wellpoint, Ebay, Exelon Corp., General Dynamics and Corning.

December existing home sales will be posted on Thursday at 10:00 a.m. EST, and the consensus view according to Bloomberg is for 6.25 million, versus 6.28 million in November. Indications have been that the housing market has strengthened in early 2007, but we expect housing to see a second leg lower later this year. Also, we continue to theorize that new home sales will outpace existing sales, as home builders accept the reality of necessary price cutting at a faster pace then home owners. Also, home builders are adept at providing incentives to prospective purchasers, where existing owners are much less active despite the desperate pushing of commission hungry real estate agents.

The Kansas City Federal Reserve Bank will report on the state of its manufacturing sector on Thursday. Finally, the help-wanted advertising index will be posted, but this metric is in need of a makeover, as it excludes on-line services like Monster and Career Builder. Finally, the EIA inventory report on natural gas is due for release. A recent cold front covering much of the nation has helped natural gas prices to strengthen, and normal seasonal draw news is likely in this report, in our view.

Thursday's earnings schedule includes Microsoft, AT&T, Dow Chemical, Occidental Petroleum, Amgen, Bristol-Myers Squibb, Cardinal Health, Lockheed Martin, Baxter International, Kimberly-Clark, Franklin Resources, Hartford Financial Services and Southern Company.

At 8:30 a.m. EST Friday, December Durable Goods are scheduled for release, with the consensus view seeing an increase of 1.6%, versus revised November growth of 1.6%. December new home sales, set to be reported at 10:00 a.m. EST, should show the effects of active marketing and price reduction among home builders that we mentioned previously. The consensus view posted by Bloomberg, sees new home sales of 1.052 million, compared to November sales of 1.047 million. In other than economic news, NATO ministers are scheduled to meet in Brussels. Friday's earnings reports include Caterpillar Honeywell International and Halliburton.

Source: This Week: Eye On Earnings