Morning Market Report

The market is down 63 – that compares to the 69 point fall the SFE Futures had predicted. Gold’s weak. Property trusts struggling ahead of a likely interest rate rise this afternoon.

The Dow Jones closed down 108 – Wall St. moved in a relatively large 128-point range and finished the session lower for the first time in three sessions on the back of profit taking and broker downgrades. A Commerce Department report showed orders at US factories increased by 2.3% in December, up from a 1.7% gain in November and slightly below the 2.5% increase economists had predicted. Job cuts announced by US employers increased by 19% in January from last year. Credit card companies copped a hit overnight – American Express fell 3.4% – after UBS advised clients to sell the stock on concerns a recession would lift defaults amongst consumers, Wells Fargo (down 8%) and Wachovia (down 10%) also closed down after Merrill Lynch cut their recommendation to “sell” from “neutral” saying both companies valuations didn’t fully reflect their risk profile. The NASDAQ fell 1.2% – Google said that Microsoft Corp.’s $44.6bn bid for Yahoo Inc. is an attempt to gain illegal control of the internet. Microsoft rebutted yesterday saying the acquisition would make them a “strong number two competitor” behind Google. Google fell 4% to $495.43 a share, still down 33% from its record high of $741.79 on November 6. It been a volatile couple of months, the Dow index is still 10.8% below its record close of 14,165.53 set on October 9, but is up 8.6% from its low last month.

The US market closed near its lows and a little bit distracted by the come from behind last minute win by the NY Giants who knocked off the Patriots who had won 18 games in a row and 99% of the 19th game. Just that last 1% that let them down.

RBA MEETING TODAY – Interbank futures predict a 92% chance of Reserve Bank increasing interest rates by 25bp this afternoon. Under the new communication policy of the RBA the decision will be published at 2.30pm and will be accompanied by a short statement (à la the FOMC).

Main news this morning (which was out yesterday afternoon) is the realization after a press conference from the China Aluminium Corporation yesterday that the Chinalco/Alcoa purchase of a stake in RIO is not part of a bid block or a pre-cursor to a counter-bid but a “strategic investment” designed to make money and that it really shouldn’t impact or influence the BHP decision due tomorrow on whether to bid for RIO or at what price. This is why the BHP and RIO share prices fell over yesterday after an early mark up and partly why the market went from being up 180 yesterday to up 25. Obviously the implication is that Chinalco would like their £60 back plus more so BHP should raise their bid, but it doesn’t look like they are going to wield any leverage to insist on that and will sell the shares to BHP “if we make money”. On the back of that the RIO price fell (just) 1.3% in the UK from £56 to £55.27. BHP up 51c this morning to 3983c and RIO down 30c to 12781c. Metals mixed overnight, both Copper and Aluminium up 0.4%, Nickel down 3.3% and Zinc down 0.2%. Zinifex down 27c to 1048c. Oil price up $1.04 to $90.07. Woodside up 30c to 4827c. Gold down $3.80. Newcrest down 33c to 3576c.

• Retail sales numbers up 1.6% and ahead of the 1.1% expected have strengthened the case for the RBA to raise interest rates this afternoon. This is offset to some extent by a weak building approvals number down 11.6%.
• Fortescue Metals confirmed yesterday afternoon in a speeding ticket response (see below) that it has held “confidential discussions with a range of potential strategic equity investors however none could be considered concluded or at a stage requiring specific disclosure”. It follows talk in the South China Morning Post that China Investment Corp (Chinese sovereign fund) and China Shenhua Group (coal miner) have been in talks to buy a 15.85% stake in FMG (US$2bn of stock). It also said Harbinger Capital Partners (US-based investment fund) would be the seller of the stake. FMG was up 68c to 718c yesterday (10.46%). Its all-time high is 875c. In the last two months you could have sold them at 875c and bought them back at 475c. One of those stocks where the faithful will not be shaken – in hindsight it was a monty to be bought on the dips just on the inevitable return of sentiment. FMG up 7c to 725c.
• News Corp (NWS) released earnings numbers this morning. The result was described as positive and “solid” by most analysts. NWS down 33% in the past month but up 3% in the past week and up 52c today to 2264c.
• Murchison Metals (MMX – iron ore) up 3% this morning after deciding not to extend its bid for Midwest Corporation. They say that in talks with Midwest there was no realistic prospect in the short term of reaching an agreement on terms. Sinosteel has bought a near 20% blocking stake but is not likely to bid itself. MIS is down close to 5% this morning.
• The Commonwealth Bank is putting to bed a few of the market jitters about its results next week. They are a pivotal set of results considering the recent US bank losses and fears of sector contagion. CBA up 2% to 5007c.
• Westpac Bank is down just 21c to 2603c after a “funding update” that addresses concerns about the credit market impact on its market positions. Not much in there to worry about.
• Ausenco (AAX) announced this morning the acquisition of Pipeline Systems Inc for US$32.9m to diversify its earnings. AAX will use both shares and cash to pay for PSI. AAX down 3c to 1226c.
• Allco Finance Group (AFG) told investors yesterday it will postpone its Global Transport & Infrastructure Fund because the initial investor was reluctant to proceed. Despite the disappointment, Allco said the decision shouldn’t have any material impact of its earnings. AFG down 8c to 288c.
• Valad Property Group (VPG) also announced yesterday it had entered into a strategic alliance with Kimco and raised $200m by selling convertible notes. The stock fell 21% last year but is up 3% this week. VPG down 20c to 102c.
• UBS Warburg upped the target price on Bradken (BKN) to 890c from 850c with a BUY recommendation after it announced results yesterday. They say the stock is now trading on 12.1x, which is a 10.4% discount to Bradken’s historical one year forward PER of 13.5x. BKN down 38c to 725c. Macquarie have downgraded BKN today by 7% and 9% and have a NEUTRAL recommendation and a target price of 741c.
• UBS Warburg cut their recommendation on MFS Ltd (MFS) to NEUTRAL from BUY and their target price to 99c from 159c saying the company received a disappointing price for its stake in the Stella Group. They intend to review their earnings forecasts when the company announces their strategic review. MFS last traded at 99c.

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