Why we love BHP...

April 16th, 2009  by Neil Gynther

Closing Data

	current	change	%
Dow Jones	8029.62	109.44	1.4%
NASDAQ	1626.8	1.08	0.1%
S P 500	852.06	10.56	1.3%
FTSE 100	3968.4	-20.59	-0.5%
Nikkei 225	8742.96	-99.72	-1.1%
SPI Futures	3800	48	1.3%
All Ords	3,694.00	-4	-4.0%
Oil	49.26	-0.25	-0.5%
Gold	893.5	1.5	0.2%
Silver	12.8	0.035	0.3%
Aluminium	1469	-3	-0.2%
Copper	4750	168	3.7%
Lead	1502	77	5.4%
Nickel	12400	995	8.7%
Tin	11600	500	4.5%
Zinc	1448.5	47	3.4%

The US markets closed in positive territory last night with the DOW up 109.44 points and the NASDAQ gaining 1.08 points. Gains were led by anything to do with Real Estate -homebuilders, building products, building services and Real Estate Investment Trusts.

Market breadth was positive and trading volume was moderate. On the NYSE, winners beat losers three to two and on the Nasdaq, advancers topped decliners three to two. In five weeks, the Dow gained 22%, its biggest consecutive five-week run on a percentage basis since 1933, when it gained 31%. The run up followed a rout that left the Dow and S&P 500 at 12-year lows and the Nasdaq at 6-year lows.

The benchmark index for US stock options slid to the lowest in more than six months. The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 4% to 36.17. The index, which measures the cost of using options as insurance against declines in the S&P 500, is down from a record 80.86 in November yet still almost double the 20 average over its 19-year history.
In today's economic news, the Fed's "Beige Book" periodic reading on the economy showed that overall activity stayed weak or got worse. However, five of the 12 districts showed a slowdown in the pace of decline and a few more districts showed certain parts of the economy were stabilizing.

Europe was weaker, led down by Financials after UBS reported a third quarter loss and announced further job cuts.

Gold was up $1.50 to $893.50 an ounce while oil fell 25 cents to close at $49.26 a barrel.

Chinese growth figures are announced today. A figure above 6.5%  would be viewed very favorably by the market. There is talk of 8% and if this is correct, it would account for the strength in base metal prices on the London Metal Exchange over the last week.  If metal prices keep rising at these rates Oz Minerals and RIO may not have to sell off part of the Farm!!

This market may be splitting into two sections going in different directions. Financials led the charge at the end of March and it is this sector we believe was overbought. We stand by our call that a pull back is due, but believe the Financials will be most affected. There is commentary and figures coming out of the States that indicate the economy is starting to stabilize and, in some areas, grow. If Chinese growth figures are good then we have probably seen the lows in Resources.

Why we love BHP today...

BHP Billiton is currently trading at $33.50
BHP, the world’s largest diversified miner will be the greatest beneficiary of any upturn in the world’s economies. BHP has an excellent portfolio of long life assets, and a track record of delivering. The company is well positioned for continued Asian Expansion and analyst’s price targets have increased to $38 per share. The commodity slump has obviously brought significant pressure on many miners. Some have gone into liquidation. Some close (OZL) and others have significantly cut production as demand and prices have fallen. BHP is positioned to take advantage of an upswing in the commodity market.

Covered Call Strategy

As you can see from the graph, BHP is making new highs on each uptick and is not going to previous lows. We think BHP has found its base around the $32/$33 level and will continue to find new highs on each up trend. BHP currently sits in an upward trending channel. The stock should find support at current levels, and if the market pulls back further it may find support around $32. The premium that can be received for an aggressive call option will protect the trade all the way to $32.15

Risks

We believe the present rally has been too far, too fast,  but this has mainly been fuelled by the financials. We believe this sector is due for a pull back. With Chinese growth beginning to look better and signs that the USA is slowly starting to recover we believe that the Resource sector has found its lows.

 The risk associated with the strategy is that the share price falls past the point of protection that the sold call option provides (another way of looking at this is as the effective purchase price), this would be $32.15 per share.

Markets have been wild as you are all aware, but barring any change in the fundamentals of the company, BHP is a company we are happy holding for the long term and can continue to sell call options  in the future.

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

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