Morning Market Report

The market is up 43. Not terribly impressive considering the 2.5% rise on Wall St. The SFE Futures suggested a 67 point rise in the market this morning.

The Dow Jones was up 283 overnight – It moved in a big 290 point range and posted its biggest one day gain in four years on the back of takeover activity and better-than-expected earnings results (biggest gain was 378 points on Oct 15th 2002). The big news was Rio Tinto making their first takeover bid in seven years offering $38.1bn for Alcan, the offer tops the previous bid made by rival Alcoa Inc and is a whopping 65% above the price of Alcan before the Alcoa bid, and if successful, would make Rio Tinto the world’s largest producer of aluminium. Retailers closed higher after Wal Mart (up 1.15%) announced store sales increased by 1.6% in June and 6.9% at their wholesale distribution business Sam’s Club warehouse. Intel had a big night (up 5.8%) after brokers suggested they may report better-than-expected 2Q sales. The Dow Jones and S&P 500 both increased by 2% and closed in record territory. The last time the NASDAQ closed 1.8% higher was back in February 2001. It still has 86% to go if it is to reach the record of 5,048.62 it set back in March 2000 (in other words it is still 46% off the top). Other than that the reason for the big rise is a bit of a conundrum. Looks like somebody simply stuck a lot of money into the market. In which case it could easily fade away again. Noticeably the futures only suggested a 67 point rise this morning.

Resources going great guns today…BHP up 69c to 3941c. The All Resources index up 1.4% against a market up 0.7%. RIO understandably down 159c to 10225c. It was down 2% in ADR form overnight and down 4.5% in the UK. They are paying US$101 per Alcan share, up from the US$73 a share from Alcoa. The market is thinking they have overpaid in the short term, others see it as a long term buying opportunity. Metals mostly down overnight, Nickel down 0.3%, Aluminium down 1.2% and Copper 1.5%. Zinc up 1.9%. Zinifex up 35c to 2035c. Oil price down 22c to $72.58 after the Energy Department announced higher-than-expected US gasoline inventories. Woodside up 67c to 4762c. Gold up $6.20. Newcrest up 47c to 2437c.

One commentator described the rally on Wall St as a “melt-up”. The main driver appears to be the strong consumer spending message delivered by the retailers in their monthly store sales numbers, talk of a switch out of bonds and the RIO bid for Alcan. But there is nothing too specific. More excuses than reasons. On that basis the rally may just have been a significant buying program, in which case it is not a reflection of any change in market outlook and it will fade as fast as it arrived. Just about everything is up today, BHP Billiton (BHP), Harvey Norman (HVN), Wotif.com (WTF) and Oxiana (OXR) have all hit 52 week highs.

• RIO Tinto (RIO) has bid for Alcan after all. The bid is worth US$38.1bn, (significantly bigger than the $34bn being talked about and higher than the $28.8bn offer from Alcoa) the new company is to be called RIO Tinto Alcan with their headquarters in Montreal, Alcan CEO Dick Evans will run the merged company and Rio expects the deal will be earnings positive in year one. Our basic conclusion is that the deal will propel RIO eventually and any short term weakness is an opportunity to buy. The bid is also a massive endorsement of RIO’s belief in the extension of the commodities cycle and on that basis it is good for the whole resources sector. For a discussion on the deal and why it is happening you can go to Marcus Today.
• Alcoa have withdrawn their bid for Alcan. There are suggestions that BHP may now bid for Alcoa. Why not?
• UBS Warburg have upped their recommendation on Alumina (AWC) to “neutral” from “reduce” and on the back of RIO’s bid for Alcan. They suggest that a logical buyer for AWC is its joint venture partner Alcoa meaning…don’t expect a takeover premium. AWC up 30c to 870c.
• Fortescue Metals (FMG) have announced plans to raise US$300m via an institutional placement. JP Morgan and Southern Cross Equities have been appointed joint lead managers of the 3 day book build process. FMG last traded at 3950c. Their presentation is a worthy read for those of you wanting to hear the optimistic tack on the outlook for China and for a good look at what Fortescue are building. .
• The AFR reported this morning that Leighton Holdings (LEI) are negotiating with Dubai-based Al Habtoor Group to take a sizeable stake in their company. The Al Habtoor Group is the one of the largest construction companies in the region and the AFR suggest the stake could be worth up to $2bn. LEI responded to the article this morning saying “Leighton is pursuing a range of growth initiatives, which build on our current strategic framework”. LEI is up 158% since 1 January 2007 and today is up 85c to 4290c. JP Morgan warned yesterday that they are a company in an inherently high risk and low margin business that just happens to be in a boom. LEI was up 137% last financial year. They have a target price well below the current share price.
• Tabcorp (TAH) announced this morning the appointment of acting CEO Elmer Funke Kupper to replace sacked Matthew Slatter as their CEO (as expected – the low risk option). TAH says they will now concentrate of extracting value from their current assets instead of making acquisitions. The internal appointment is a positive of sorts. TAH up 5% in the past month.
• MFS Ltd (MFS) up 14c to 591c after announcing they are in the final stages of purchasing UK based long haul travel retailer Travelbag.
• Commonwealth Bank (CBA) up 51c to 5566c. They have raised $1.465bn from the issue of 7,325,000 PEARLS IV hybrid securities.
• Consolidated Minerals (CSM) up 8c to 318c after announcing NPAT for 2006/07 will be around $30m-$31m compared to a loss last year.
• Plan B (PLB), the boutique management company made an impressive debut yesterday closing 41% above its IPO offer price at 140.5c. PLB hopes to be the beneficiary of Australia’s superannuation industry and is on the lookout for acquisitions. PLB unchanged today.
• Uranium stocks should get a lift from the news that the re-opening of the flooded Cameco Cigar Lake mine in Canada will be delayed again from late 2010 to 2011.

There is so much to read on the RIO deal for Alcan this morning. We have a concise summary in the MARCUS TODAY newsletter this morning. We also have an article pointing out why stockbrokers never say SELL….and can you blame them?

THE MORNING MARKET REPORT is provided by the MARCUS TODAY daily stockmarket newsletter. You can subscribe for a free five-day trial here.