Uncertainty continues in the U.S.

November 18th, 2008  by Cale McCulloch

Closing Data

Uncertainty continues in the U.S.

Overnight saw declines in the Dow Jones with the index finishing down 224 points on renewed speculation about the state of the global economy, and just how long this recession will be.

Although there was little data released over night to spark the sell off, Citi Group have said that they will be trimming a further 50,000 jobs worldwide to cut costs in the coming months. Although these may be among the biggest from any one company, the unlucky employees will not be alone as financial market participants continue to trim into 2009. Unemployment is a lagging indicator so we can expect the downsizing to continue for some time, although those in financial markets will likely be complete before the rest of the economy really gets started. Australia’s unemployment rate is presently 4.25% but is expected to rise as the economy slows. From these historically low levels some increase is inevitable however even if unemployment rises to 10% there is still 90% of us actively employed.

The Australian market did not escape the global sell off yesterday, falling some 95 points. However, one bright spot on the market could be found in the shares of Coca-Cola Amatil (CCL) which was approached by Lion Nathan (LNN) who launched a A$ 7.6 billion cash and scrip bid (roughly $11.25 p/share). We have not seen a great deal of corporate activity this year as credit markets froze. Companies were reluctant to spend cash that they had in the bank, much to the dispair of the Investment Banking community which could almost have changed their titles to Corporate Consultants. Their roles became one of advising on restructuring and efficiency rather than the valuing and buying of companies themselves. I am sure the Bankers where relieved yesterday to see the "Bear Hug" by Lion Nathan's bankers unfold. Having initially approached CCL on November 7 with an offer CCL rejected as insufficient, the news was leaked over the weekend and found its way into the news papers Monday morning, just in time for a new week of trading. The leak left the companies little choice but to make the talks public before trading commenced. Of course, the shares in CCL soared on the open, climbing as high as $12 per share before settling to close at $9.31 per share. Called a Bear Hug because of the affect it has on the target company, causing a sharp rise in the share price. Although being rejected it leaves CCL in a position where it will need to justify the rejection by showing the value in the company itself (above and beyond that of the bid price) to shareholders. Failing to do so will result in angry shareholders as was the case in the IAG rejection of QBE's offer last year.

The Australian share market looks set to open lower this morning with the SPI futures off some 100 points. But on a better note, Macquarie earnings for first half 2008 were broadly in line with analsyt forecasts, coming in down 43% at A$ 604 million.

Happy Investing!

Cale McCulloch

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

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