Financial Rescue Package narrowly defeated

September 30th, 2008  by Cale McCulloch

Closing Data

Dow Jones down 778 @ 10,365	NASDAQ down 200 @ 1,983	Gold up 5.9 @ 894.4
Oil down10.49 @ 96.29	FTSE down 270 @ 4818	Silver down 0.478 @  13.025
Copper down -351 @ 3460	Lead down 137 @ 1806	Zinc down 78.25 @ 1664
Aluminum down 49 @ 2391	Nickel down 610 @ 16,165	Tin down 210 @ 17,985

Financial Rescue Package narrowly defeated

The title says it all – Congress have rejected the current proposal to rescue the Financial System with the majority (228 vs 205) voting against the plan. It is important to note that Congress will reconvene to vote again on a revised plan later in the week.

The reality is that until there is some clarity as to what will need to be removed from the proposal (or added) to make it go through later this week we will see continued uncertainty. The market last night was heavily sold as a result of this, and in actual fact it could be something very simple to get this through, or not….. The harsh truth is that you, me and the rest of the investors in the market just do not know! If there was clarity last night it may have been a different story and the market could have gone either way (up or down that is).

We do live in unusual times, after all it is not every day that you can wake up in the morning and check the news to see which banking giant has collapsed over night. This morning it was Wachovia Corp, which tumbled 82 percent after it was bought by Citigroup.

Australian markets are set to fall sharply on the open, with the December SPI futures closing at 4510, a 300 point discount to yesterdays close.

Banks aside, what else is happening on the market at the moment that you should be aware of?

As I am sure you are aware, BHP are attempting to buy RIO in an all Scrip (share) offer of 3.4 BHP for 1 RIO share. However, the ratio of where the two are trading is more like 2.75 BHP for 1 RIO, and so if the merger goes ahead there is significant profit to be made by holding RIO (last at 95.50, with the merger price based on yesterday’s close somewhere around 120).

The takeover attempt has allot of regulatory hurdles to overcome, the biggest being the ACCC ruling later this week (due Wednesday) as to whether the merged entity will be anti-competitive.

There is a lot of planning and strategic moves that go into a takeover, most recently BHP's move to stall the European Takeover Commissions investigation, they did this by failing to deliver the requested documents to the panel by a specified date. This served 2 purposes, firstly it has made the share price of RIO fall faster relative to BHP showing the RIO holders that the Bid has some power over the price, and secondly that it means the Australian panel will release their findings before the EU. The reason the latter is significant is that BHP has political power in Australia, and with the main stalling point for the commissions being the combined Iron Ore assets of the two companies and more specifically the ability of the merged entity to dominate the market in a way that will be destructive to major steel makers globally. But, with the Ore being in Australia, if the Australian panel deems the takeover to be fine, the UK panel will be unlikely to reject the proposal, given the assets in question are located in Australia.

BHP have been quick to reassure the investors that market turmoil will have no affect on the current bid and are still progressing with the plan. Another point to be noted that will also partially explain the widening gap between the prices is the relatively thin volume traded in RIO compared with BHP. Beware that the process will be lengthy, but if you are currently holding BHP and would be willing to trade the stock in for RIO, and possibly take a Put Option over RIO incase approval is not granted this week by the ACCC, then there is potential for profit as the relative valuations return to a point closer to the 3.4:1 bid ratio. Finally, with regards to the price of BHP falling on the open, I would not be scared of taking a loss and rolling into RIO as it too has fallen just as far (actually further as a result of the inflated price after the bid was made).

Advice for today: Go out and get some sunshine, it will make you smile (watching your screen won’t).

Share Market Predators (Unsolicited Offers)

Please be aware of predatory share bids that may arrive in the mail, if you receive one please contact your Broker to discuss it. The most recent have been for Wesfarmers and Perpetual. It is not in your best interest to accept these offers as most are priced well below market. Take no action.

Written by Cale McCulloch

Yesterday Market Fox commented about short selling and ASIC. Our comments were in no way a criticism of ASIC. Freeman Fox fully supports the regulatory body in its legislative and supervisory roles within the Australian Financial System. We believe that the Australian Financial System is well served by ASIC and the ASX and the system is as good as any in the world due to the efforts of both these organizations.

Neil Gynther, Head of Stockbroking

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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