Morning Market Report, May 21, 2008

The market is struggling today – down 56. Down 40 as its best and down 92 as its worst. Not so bad considering the SFE Futures suggested a 76 point fall.

Dow down 199. Down 246 at its worst. The main themes included a new record oil price — one hedge fund predicts $150 this year and the weak US$ which has now hit a 24 year low against the Aussie. The reason for the big fall was core wholesale Inflation numbers (PPI) coming in ahead of expectations raising talk of “Stagflation” and the Chicago Fed says April economic activity was the slowest since 2001. Credit concerns resurfaced, one analyst suggests JP Morgan and Citigroup need to set aside $170 not $25bn for credit market losses and another said credit market crisis could extend into 2009 and beyond. Financials down 2.2% (they are 16.5% of the index). An Oppenheimer analyst said the credit crisis would extend into 2009 and perhaps beyond. Also suggested JP Morgan and Citigroup may have to set aside $170bn to cover losses against $25bn now. AIG said they now need to raise $20bn instead of $12bn. Lehman downgraded numbers on Morgan Stanley and Goldman Sachs. JP Morgan down 5%, Citigroup down 3.8%. Merrill Lynch, Lehman Bros and Goldman Sachs down 2.93%, 1.85% and 1.07%. Fannie Mae down 4.18%. Freddie Mac down 2.59%. MBIA down 4.62%. Ambac down 5.12%.

Both BHP and RIO down in ADR form overnight, 4.06% and 4.15% respectively. BHP and RIO both down over 6% in the UK.
Metals mixed overnight – Copper and Aluminium up 0.1%, Zinc down 0.6% and Nickel down 0.4%.
Oil price up $1.78 to $128.93 – It was the 10th time in the last 12 sessions crude prices have hit trading or closing records, if not both.
Gold up $14.40.
Bonds up with the 10 year yield down to 3.77%.

The A$ has hit a 24 year high. As long as the US economy continues to head into recession instead of pulling out of it the chances of a US interest rate rise are minimal and the A$ can rise.

The main story – QBE Insurance withdraws IAG takeover proposal – QBE Insurance has given its takeover offer for Insurance Australia Group (IAG) the flick after IAG formally rejected QBE Insurance’s (QBE) renewed and improved offer saying it undervalued the company. QBE was offering $8.7bn in cash and shares for IAG. IAG said this morning, “This represents a premium of only 10 percent based on the price of IAG and QBE shares the day before the announcement of discussions… IAG considers a 10 percent premium is insufficient given IAG’s value and the available synergies.” IAG shares sinking. GSJB Were maintain their BUY recommendation on QBE and 3000c target price, and rate IAG as a HOLD with a 425c target price. They say, “This is not a surprise given QBE had previously said that its offer was ‘final’ and that it would continue to stick to its ‘strict acquisition criteria’ of ensuring that all deals are EPS accretive in Year 1.” QBE down 5c to 2562c, IAG down 6.2% or 26c to 397c.

AWB Ltd (AWB) announced an 89% increase in 1H profit to $22.2m from $11.8m last year, in line with company guidance. AWB has a FY08 yield of 4% and trading on a PER of 14.4x. AWB up 7c to 345c.
Macarthur Coal (MCC) up after announcing it was ArcelorMittal who bought a 14.9% stake in the company at 2000c late yesterday when the share price was 1858c. MCC up 13.2% to 2080c.
Foxtel – owned 50% by Telstra (TLS), 25% News Corp (NWS) and the remaining 25% by Consolidated Media Holdings (CMJ) – announced it will defer refinancing due to less favourable conditions in the global markets. TLS up 3c to 482c, NWS down 10c to 2060c and CMJ down 9c to 346c.
GRD Ltd (GRD) has been awarded a contract by Bannerman Resources (BMN) to carry out feasibility studies for the Uranium Project in Namibia. BMN up 3.5%. GRD down 8c to 114c.
Iluka Resources (ILU) has given approval and agreed to capital expenditure of up to $420m for the Jacinth-Ambrosia project in the Eucla Basin in South Australia. MD David Robb is a resources bull saying, “I believe we are on the threshold of a new era for our industry, driven by the forces of growth and urbanization in emerging economies – most particularly China”. GSJB Were maintain their HOLD recommendation and 330c target price. ILU down 6.13% in the past month. ILU up 1c to 384c.
Lihir Gold (LGL) said it is on track to meet its previously stated full year production guidance of more than 850,000 ounces of gold. LGL management expects to produce between 700,000-770,000 ounces from its Lihir Island mine in Papua New Guinea in 2008, between 40,000 – 50,000 ounces from its Ballarat development project along with about 50,000 from Mt Rawdon and up to 70,000 from Bonikro. Most of the gold stocks up today on the back of a higher gold price. LGL up 3c to 334c.
Leighton Holdings (LEI), together with Bilfinger Berger AG’s Abigroup unit, has been appointed as a contractor for an Australian Capital Territory water project worth $300m. LEI up 25% in the past month but down 80c today to 5419c.
Funtastic (FUN) announced it has received a takeover proposal from a consortium led by private equity group Archer Capital. FUN up 31% to 71c, ABS down 1c to 142c.