Thanks for thanksgiving

November 28th, 2008  by Lou Muddaris

Closing Data

	current	change	%
Dow Jones	8726.61	247.14	2.9%
NASDAQ	1532.1	67.37	4.6%
S P 500	887.68	30.29	3.5%
FTSE 100	4226.1	73.41	1.8%
Nikkei 225	8373.39	160.17	2.0%
SPI Futures	3664	96	2.7%
All Ords	3,528.00	48.6	1.4%
Oil	54.05	-0.15	-0.3%
Gold	808.5	-10	-1.2%
Silver	10.22	-0.05	-0.5%
Aluminium	1740	-9	-0.5%
Copper	3742	176.5	5.0%
Lead	1176	-10	-0.8%
Nickel	10205	95	0.9%
Tin	13105	105	0.8%
Zinc	1274.5	64	5.3%

With the U.S. market closed we saw European markets rally and more importantly our sister index, the Canadian TSE Composite index rally. Like our index it has 75% of its value composed of financials, energy and raw materials. Indeed, the Canadian dollar moves in step with our dollar. Being cynical, I sometimes wish the U.S stock market didn't exist. No, I'm not a Michael Moore disciple, I just know we wouldn't be in this financial mess and we certainly wouldn't be witnessing wild 400 point hourly swings. And no I won't mention their foreign policy.

The BHP party and the RIO hangover

BHP

Yesterdays AGM went amazingly smoothly with most shareholders admiring the board's ability to admit they had a made a near fatal mistake as they certainly dodged a nuclear bomb. The key points:

1. The CEO, Maurius Kloppers was less upbeat than usual saying uncertainty in the commodities market would mean they would not be immune from its effects. He warned shareholders conditions in commodity markets were deteRIOrating (sorry!) badly and they were ready to close loss making operations.(Good, that will reduce supply eventuating in a pick- up in prices).
2. They are "ready to pursue acquisitions, especially firms weakened by the financial crisis and we are not ruling out any metal miner, except gold as potential targets.
3. Chairman Don Argus said they are considering a share buyback and still looking at some of Rio's assets if and when available. He also admitted that if they had bought RIO then their gearing would be an untenable 48%.

The markets will be on high alert for their next target. It will be a top tier, with low cost assets, worth more than a billion, and in the black…basically a big elephant. (Somebody whisper OZL?)

RIO

Guys never look a gift horse in the mouth.

They still have a mountain of debt of which $15 billion has to be refinanced by next year and at present are paying just 2%. They have already raised $3 billion this year and have monthly cash flows of $1.5 billion. They could sell their 75% stake in Coal and Allied which would raise between $8-10 billion. Despite all this some analysts are saying there is a possibility they could go for a rights issue, dramatically cut back on spending or even reduce dividend payments. On a more minor note they are sure to be selling non-core assets such as salt, borates (thought that was Ali Gee) and packaging assets. The irony is BHP can now "cherry pick' their assets.

RIO's board acted like the guy who bought the winning lottery ticket but refused to cash it in. The market is certainly split on the present valuation of RIO. I believe once the BHP/RIO arbitrage unwinds we should rally.

"Irrational Exhunerance"? - Never say never

In yesterday's Fox Report some of our more prudent readers suggested I was just a little over exuberant in declaring the lows were now set in. Whilst we are positive on the markets going forward it must be stressed that in such unpredictable and surreal times that a retest or the recent lows cannot be ruled out and maybe that should be protected.

We certainly recommend writing calls today and even more "aggressive" ones as they expire on Dec 18th.

Should you feel nervous that the market may retest lows we would suggest you talk to your Adviser about buying some Put protection.

And finally

Many of readers are also asking how can the U.S. keep spending literally trillions of dollars without going bankrupt? Where is all this money coming from? It's very simple, it's called Treasury Bonds. The U.S. just keeps issuing more bonds (IOUs) which foreign investors and countries just keep buying although they are receiving very low returns, like 1% for a 1 year bond. You could argue the U.S. is technically bankrupt but it will never happen as the rest of the world just has to keep financing them. It's a bit like if you have a $10,000 debt you are worried, if you have a $5 million debt the bank is worried.

Have a great week end.

Quote of the date: The average woman would rather have beauty than brains because the average man can see better than he can think"

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

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