Don’t expect to get any mortgage relief tomorrow. That’s the message from the Government. The banks are being coy. They can afford to be as everyone else is arguing on their behalf.

We’ve written before that we aren’t in the habit of telling people how to run a business. So we won’t break that habit. The individual banks should be in the best position to know what is and isn’t affordable for them to do.

But, it does seem as though they have been given a free kick. The expectation is that the banks won’t lower interest rates tomorrow if/when the Reserve Bank of Australia (RBA) cuts the Cash Rate by either 0.25% or 0.50%. Chances are that the banks will pass something on. It probably won’t be the whole lot.

The interest rate markets have priced in a 95% certainty of a 0.50% rate cut.

But considering all the talk of them potentially passing on nothing, a cut of 0.12% will be dressed up as extreme generosity by the banks.

Don’t get us wrong. We have questioned for some time how wise it is for the RBA to be cutting rates while inflation remains so high. Does the RBA really need to cut rates or is it just pandering to the share market?

An Interest Rate Cut That Won’t Make a Difference
We are a little bit confused about the rationale for cutting rates. Is it to reduce the funding costs for banks? Or is it to prevent the economy from falling into a recession?

Either way we can’t see that it is going to do anything to address the problems. Supposedly the problem in the credit markets is twofold. First is that banks are reluctant to lend to each other and to clients. Second is that they cannot get an accurate price for various credit securities held on their books.

An interest rate cut by the RBA wouldn’t seem to be the solution to either of these issues. Sure, it has the potential to give them access to funding at a marginally lower rate, but unless the banks are prepared to take on more risk by writing new loans then all it does is add to the banks’ bottom line.

Are banks prepared to take on additional risk? Anecdotally the answer seems to be no.

Considering we have been told by the banks, regulators and government that Australian banks are superbly capitalized then cutting rates would hardly likely to have much impact.

Now we’ll see how this bailout actually works. Or if it works. It didn’t do much to spark the market on Friday. The Dow fell 157 points. The ASX 200 futures pointed towards a one-percent fall at the opening today. Below, you’ll find our two-month forecast for the market (please include a pinch of salt).

–With Congressional action out of the way, expect to see Central Banks step forward and fire en masse at the forces of chaos. The RBA meets Tuesday. Judging by the action the currency markets (the Aussie dollar at a 14-month low), the market is pricing it at least a 50 basis point cut from the current cash rate of 7%.

–Will it make any difference? “A difference to whom?”, is probably the better question. It’s not very likely Aussie banks are going to pass on the rate cut to you. But if it makes the banks more likely to lend to one another, well then yes, it will make a difference.

–By the way, it’s a bit of a surprise the Fed didn’t cut rates on Sunday in the States. We expected a more coordinated international volley of rate cuts prior to Monday’s opening in Asia. But so far, nothing. Bernanke must be keeping his powder dry for an intra-day rate cut. You know, one of those days when the Dow is down a few hundred points before noon because another bank or insurance company fails.

–While we’re on the subject of banks, the IMF’s report on Australia released a few weeks ago provided three notable conclusions: Australian banks are dependent on international markets for about 40% of their funding, mortgages make up a large part of Aussie bank loan portfolios, and Aussie house prices are not terribly overvalued.

–The first conclusion has the most relevance for the market today. The IMF says the increase in the cost of funding highlights the vulnerability of Aussie banks to lock-ups in the short-term debt markets. The IMF reckons Australian banks have about $220 billion in short-term loans from foreign lender with maturities of 90 days or less. The big four account for $160 billion of that short-term lending.

–The means the entire Aussie banking system has to roll over about 20% of GDP every three months from foreign lenders. Do you think it’s easy to raise that kind of money easy in the current conditions? The IMF is pretty understated about it, but puts it this way, “This highlights the dependence of Australian banks on a stable international funding environment, which in current circumstances cannot be taken as a given.”

–And what’s the second vulnerability of the Aussie banking system? It’s the massive growth in mortgage lending. You can see it on the chart below. It shows that over 50% of the banking system’s loans are mortgages. But what does it mean?

–Well, it means the boom in house prices was fuelled by a mortgage lending boom. It’s a positive feedback loop. More lending leads to higher prices which leads to more lending which leads to higher prices. The IMF says much of it is driven by investors.

–”Investor activity in the residential property market has been a key driver of the recent property boom), with many investors pursuing the negative gearing strategy that is allowed by Australian tax rules. As a result, about one-third of all mortgage loans are for investor housing.”

–A deep contraction in bank lending would, presumably, end the feedback loop. It’s possible, of course, that investors give up on shares and move back into property as an asset allocation decision. But if banks cut off funding for investors in property, where does that leave house prices? Without new money being lent to support investors and first time buyers, shouldn’t Aussie house prices fall?

–The IMF, surprisingly we reckon, says house prices are only over- valued by between two to fifteen percent, depending on which model you use. Why the big difference? Different house price models use different variables (interest rates, affordability, immigration etc). But in general, the IMF doesn’t see a huge bubble in property prices. Hmm.

–What’s the risk? Well so far the default rates on Aussie mortgages are low compared to their American cousins. That means the banks probably don’t face big losses on their huge mortgage loan portfolios. We say ‘probably’ because confidence is a delicate quality. It can vanish quickly, both from a borrower’s and a lenders perspective.

–If the Aussie banks have trouble funding operations because global credit markets remain tight, we doubt even a full percentage point interest rate cut by the RBA will spur the banks into increasing local mortgage lending. Without that lending, it’s hard to see how property prices can climb. And if they’re not climbing, they’re either going nowhere in inflation adjusted terms…or falling.

–Here’s a quick forecast for you. Investors are going to crowd into government bonds waiting for the stock market to bottom. They will push yields on short-term U.S. Treasuries back toward zero. A huge reservoir of cash will build up as people wait to see how the bailout goes. The major indices are in for a few more 3-4% down days.

–Before the end of the year, perhaps after the election in the U.S. is resolved, you’ll see a big short-term rally in stocks and commodities. Those cash reservoirs will be deployed back into shares. Over sold blue-chips that generate a lot of free cash flow will be worth a look, as will be the mining juniors (who’ve suffered massive amounts of punishment.)

–But don’t forget about the big down days. The New York Times reported that AIG has already used US$61 billion of the $85 billion lent to it by the Federal Reserve a few weeks ago. AIG was supposed to use the Fed life line to engineer an orderly sell-off in its assets. But that doesn’t seem to have happened.

–Instead, the company has spent $53 billion “shoring up” its structured finance and securities lending business. What does that even mean? Uh oh.

–Moody’s heard the news and downgraded AIG’s unsecured debt on Friday. If other ratings agencies follow that move, and if other types of AIG debt are downgraded, the company is going to have trouble borrowing again and may have to hit up the Fed for more money.

–And remember, AIG sold credit-default swap insurance to investment banks and other parties. That insurance allowed those parties to load- up on mortgage-backed investments that otherwise (without the default insurance) would have been too risky. Without that insurance, those parties have to sell their mortgage-backed assets.

–It was the near collapse of AIG that brought the financial markets to the very brink of systemic crisis. Don’t be surprised if AIG is in first in line for some of Treasury Secretary Paulson’s $700 billion slush fund. And don’t be surprised if the markets begin to lose confidence that the Plan is going to work.

The last time we talked about the iron junior market was in the first half of the year. Since then, most of the best quality reserves have been bought out. China’s playing for keeps now. Midwest (ASX:MIS) went for a 53% premium. Portman (ASX:PMM) got a 19% better offer three weeks ago.

But there are still good reserves out there.

In fact, most of the iron plays out side of Fortescue (ASX:FMG), Rio Tinto (ASX:RIO) and BHP (ASX:BHP) are now back to pre-boom levels.

Guess what? You get to start from the ground floor again. So here’s a quick money-map of the iron sector. There are three to look at this month, for three different reasons.

For sheer volume overall Gindalbie (ASX:GBG) wins. It simply has more iron. The company is sitting on a bunch of scattered tenements. The best is the Karara reserve, with over 500 million tones of economically mine-able iron.

A little more organized is Mount Gibson (ASX:MGX). It’s the latest fending off takeover rumours. The company’s producing - but it’s finding more iron than its digging up. According its last reserve statement from last month it added another 2 million tonnes of iron to its reserves.

Atlas Iron (ASX:AGO) just upgraded its indicated resource by 756 million tonnes yesterday. That’s not necessarily all money in the bank. It’s just a huge upgrade in a market that doesn’t care at the moment.

Kris Sayce has an over-sold, under-loved favourite iron play too. He just told his premium small-cap readers about it.

By the way, here are two to avoid: Strike Resources (ASX:SRK) and Territory Resources (ASX:TTY). They’ve both had recent troubles with loans or financing. In this credit (and equity) market, that’s not worth the risk for retail investors. Juniors need financing.

Buy $3 in Cash for $1

And on that note, there’s one more to look at. Cape Lambert Iron (ASX:CFE).

We’ve only looked at this briefly, so we could be wrong. You’re welcome to inform us if you know better at moneymorning@moneymorning.com.au.

But after selling its major iron project to China Metallurgical, the company reckons it is sitting on $400 million in cash. It can invest that in new iron projects, or it can develop anything other current prospects.

It’s trading at a market cap of $116 million today. According to the last annual report, it has $5 million in debt.

That means $395 million in cash is selling for $116 million. At face value, you can buy $3 for $1.

Cape Lambert jumped 30% yesterday. A big shareholder is trying to replace the board. So the company is shaking things up. It’s organising a $100 million payout to shareholders too. Even those don’t seem to warrant such a massive discount to this kind of liquidity though.

What we like about it most? Basically, the stock has its finger on the investment trigger. Right now, when mining projects are selling cheaper than they have in 4 years, it has a mountain of cash to buy them with.

Australia’s Earnings Outperform

Meanwhile, Australia’s earnings outperformed expectations at the latest annual report. Punters expected the trade balance to be $200 million in August. It came in at almost $1.4 billion.

It’s still a coal and iron story. It will be until exporting contracts are renegotiated. Cheaper oil imports helped too.

The Aussie dollar, meanwhile is trading at a 14-month low. We’ll say it again. Australia is the most undervalued stock in the global market.

The cheapest energy usually wins. That’s what history tells us anyway. Coal, oil and gas have always been cheaper than the rest. We had big North Sea reserves churning out black goop all through the 90s. The cheap oil kept other energies from getting started.

Now we have $94 oil in a global recession. That’s how scarce things are. But governments and central banks worldwide are flooding the global economy with money. French leader Nicholas Sarkozy is proposing a 300 billion Euro bailout now. Central banks worldwide have been flooding the economy with new money all week.

The problem? They’re like a smallish 6-year old trying to negotiate a full-size fire-hose. They can’t quite control where the liquidity goes.

It’ll go where it’s treated best. Some will head to gold or safety.

But some of it (combined with high levels of saved Asian cash) will probably return to the energy sector through speculators at some point. Peak oil will still be around when the banking crisis is over.

That’s a while away yet. But it’s time to start looking through ideas now. And the alternative energy sector has developed a lot since the last round of cheap money.

Ausra’s an interesting company. It isn’t listed, unfortunately. But we like the idea at face value. Its solar panels are cheaper than the expensive, mainstream photovoltaic technology.

Gordon Brown confirms that to all intents and purposes all UK savings are guaranteed to £50,000 per depositor per financial group. This is a reaction to the the Irish governments decision to guarantee all depositor savings at 100% for 2 years which has ignited a flood of scared monies seeking refuge within Irish banks that have operations within the UK. This has resulted in increasing calls from media commentators and politicians for the UK government to follow suit with a similar 100% blanket guarantee.

As reported in the Independent - The Liberal Democrat leader Nick Clegg last night said his party would support a blanket guarantee for all deposits in the British banking system. He said: “We will co-operate fully with the Government in passing depositor protection legislation next week. “But today a copper-bottomed guarantee that all people’s money in British banks is safe must be the priority. Then, in the longer term, all parties must work together to find common solutions for a re-regulation of the City.”

The Irish Times Reports - David Cameron also urged the Labour government to produce legislation as early as next week to protect people’s savings and deposits, ensure quick payout’s and allow everyone “the comfort and security of knowing that whatever happens, their money is safe”.

However some commentators are making the mistake of comparing a small country such as Ireland which sits under the Euro umbrella which is on the periphery of the worlds financial system against the UK with its own currency and is one of the primary centres for international finance. The Irish liability for the 100% guarantee is estimated at some $560 billion. This is set against the total liability to the UK government for the £50,000 guarantee which is estimated at $1.8 trillion. However a 100% guarantee of ALL depositors would multiply the exposure. It is difficult to estimate the total liability but at a rough guide it would be in the region of $4.5 trillion as it would encompass all foreign depositors whether they are individuals, corporations, banks or even other governments. The magnitude of exposure of twice UK Gross Domestic Product would given a worse case scenario of total financial meltdown could really prove apocalyptic for the UK economy, we would be talking along the lines of the Weimar Republic when Germany was forced to print ever increasing amounts of money to cover the financing of the growing debt mountain which lead to hyper inflation and a collapse of the German economy into a prolonged depression and a public loss of confidence in democracy, eager for a fascist dictator to rescue them from the economic abyss.

The current UK government debt is officially put at some $1 trillion, a financial collapse of the financial system would see this explode to as much as $6 trillion as guide as to how much risk the country would be put under and therefore a risk of a collapse in sterling which would further intensify the crisis by several orders of magnitude. The situation would be far worse then the cost of rebuilding a collapsed financial system following the failure of most of the banks, therefore this explains government reluctance to date to explicitly raise the savings limit from £35,000 per depositor whilst repeatedly alluding to NO retail bank would be allowed to go bust and that no depositor has lost a penny to date, which is true, however in the face of total collapse of the banking system the government would put the countries financial survival first which is how it should be.

Therefore many commentators need to revisit their conclusions in arriving at the suggestion that the UK should follow the lead of a small country such as Ireland due to the potential consequences of a loss of confidence in sterling. Similarly those agreeing with bailouts should recognise that there is no free lunch and in the long-run the cost will be greater than the benefit of preventing bankrupt banks from going bankrupt. All countries that announce huge bailouts will experience subdued economic activity and higher inflation for many years proportionate to the level of bailouts as a % of GDP.

Countries Can Go Bankrupt Too!

Whilst we ponder the deepening financial crisis where individuals are going bankrupt, corporations are going bankrupt, and lately the biggest banks in the world are going bankrupt. Savers should not forget that countries can also go bankrupt as the Germany of the 1920’s clearly illustrated that was saddled with huge debt burden following the end of World War 1 resulted in hyper-inflation and the systematic destruction of the value of savings as the German government printed money in response to Allied government demands for payment of War reparations, similarly governments now declaring ever larger bailouts and more importantly unlimited savings guarantees that if push comes to shuv would effectively bankrupt the said countries should their bluff ever be called. For the only way such guarantees could be financed would be by printing near unlimited amounts of money which would lead to hyper inflation and a collapse in the value of the currency and hence value of savings and the the whole economy. Therefore bailouts of the kinds that are being proposed are highly dangerous as they could lead to literally an out of control cascading currency collapse and loss of confidence in FIAT currencies which would result in a barter system economy, thus extreme economic deflation along the lines of the 1930’s Great Depression.

In that light, the Irish decision is seen as a highly risky short-term attempt to bolster the collapsing Irish banking system, which would bankrupt Ireland should they have to actually pay out on their promise.

However Ireland’s action in part is highly selfish as the country is part of the EURO single currency mechanism and thus creates a huge problem for the other European countries that are witnessing a flight of capital, or mini-runs on their banks in favour of the the Irish banks with 100% guarantees, as all savings fall under the umbrella of the EURO single currency therefore money deposited with Irish banks is effectively collectively insured by all EURO countries in the form currency stability, which under normal conditions market forces would lead to a selling of the currency that is extending its liabilities which obviously is not happening in Irelands case due to the under-writing of Irelands currency by the whole of the EURO block. This will undoubtedly lead to actions amongst other EURO countries or by the European Commission in an attempt to reverse the Irish decision due to the impact on the whole of the European Banking System.

The Irish action is in many ways reminiscent of what followed the great crash during the 1930’s as governments sought to protect themselves by taking actions that destroyed international capital flows and trade. Therefore this could set in motion a chain reaction amongst governments where the net outcome would be to hasten the already trend in motion towards an economic depression as the global credit freeze turns into a credit ice age, especially if the next step is taken where savers suddenly realise that countries could also go bankrupt given the risk under written!

Gordon Brown realising the ramifications of the Irish decision has been calling on the Irish Government to comply with European Union competition law by reversing its decision, however what is likely to happen is that cry’s will go out across Europe to match the Irish guarantee which will meet much resistance from Germany that still bares deep scars from the consequences of hyper-inflation and therefore will be fully aware of the consequences of such action. It will be interesting to see what the outcome will be, for the more countries that follow Irelands example the more likely that the Euro will suffer in relative terms.

UK Banks with 100% Guarantees

The UK government does offer a 100% guarantee on several UK banks which includes National Savings and the Post Office as well as nationalised bank of Northern Rock which has become the toxic waste dump for nationalised mortgage backed securities such as those from Bradford and Bingley who’s savers also have temporarily 100% guarantee.

• National Savings
• Post Office
• Northern Rock
• Bradford and Bingley - temporary
• Irish banks for 2 years

And again savers should not forget that the first £50,000 is secured at 100% amongst all UK banks under the FSCS (the Financial Services Compensation Scheme).

United States $700 to $820 Bailout Plan

The amended and inflated bailout plan was passed by the Senate yesterday and also looks set to be passed by the House of Representatives today. The key problem with the plan is that a. It is not enough to do the job, and b. That the US Treasury will not be paying market prices, as the whole problem with the frozen mortgage backed securities market is that the banks are not pricing their mortgage securities at the market price as if they were then they would be bankrupt. Therefore despite whatever spin the politicians put on the bailout plan, the US tax payer will be looking at an instant loss of some 50% or more on the price paid. The only positive from the revised bank is the increase in FDIC depositor guarantee from $100,000 to $250,000.

ALLGREEN PROPERTIES, citi maintain BUY with target price $0.8($1.16)

CAPITACOMMERCIAL TRUST, nom maintain STRONG BUY with target price $2.33

CAPITARETAIL CHINA TRUST, jpm maintain OVERWEIGHT with target price
$1.55
($1.52)

CAPITALAND, citi maintain SELL with target price $3.11($3.90)
CAPITALAND, cl maintain BUY with target price $4.82(from $5.45)
CAPITALAND, jpm maintian OVERWEIGHT with target price $7

CREATIVE, mac maintain UNDERPERFORM with target price $4.20($5)

FIRST RESOURCES, citi maintain BUY with target price $1.09($1.42)

INDOFOOD AGRI, csfb maintain OUTPERFORM with target price $1.50($2.40)

NOL, db maintain BUY with target price $3.08
NOL, gs maintain SELL with target price $2

PAN HONG, cimb downgrade to NEUTRAL with target price $0.21($0.51)

PARKWAY, cimb maintain OUTPERFORM with target price $1.46

SGX, dbs downgrade to SELL with target price $4.80($7)

SINGTEL, daiwa maintain HOLD with target price $3.84
SINGTEL, mac maintain NEUTRAL with target price $3.5

SPH, jpm maintain OVERWEIGHT
SPH, nom maintain NEUTRAL with target price $4.34

STARHUB, daiwa maintain OUTPERFORM with target price $2.94

ST ENGINEERING, citi maintain BUY with target price $3.20

TOTAL ACCESS COMMUNICATION, uob maintain BUY with target price BT 55.43

WILLAS-ARRAY, ocbc downgrade to SELL with target price $0.09($0.18)

WILMAR, csfb upgrade to OUTPERFORM with target price $3.88($4.80)

WINGTAI, citi maintain BUY with target price $1.20($2)
WINGTAI, uob maintain BUY with target price $1.35($1.90)

YANLORD LAND, cimb maintain OUTPERFORM with target price $1.32($3.07)

Giralia Resources NL (ASX:GIR) is an exploration company with projects in Australia, Indonesia and USA. The company is mainly focused on exploration for precious and base metals.

Like many of the resources and metals-related stocks of the materials sector of the ASX, GIR has been hammered in the past quarter. It lost two-thirds of its value between early July and end of September.

The reason is that the financial crisis that may lead to a global economic crisis threatens investors. They expect a slower demand from emerging countries and this weighs strongly on base metals prices, and therefore on base metals explorers and producers.

Of course a further decline is possible in the coming months. Especially if more bad news convinces investors that the economic slowdown is worse than expected.

However there are currently opportunities for a technical rebound in obviously oversold stocks. This is the case here with GIR.

Click to Enlarge

It hit a long-term support line two days ago, on September 30 (point D on the chart). This support has been valid for more than one year now. It is built by the higher lows posted since August 2007 (points A, B and C). It’s a strong basis for the upcoming price development, as the negative momentum has lost most of its power. A consequence of this bearish trend completion is that the technical oscillators left their “oversold” area.

The Relative Strength Index (RSI) and the Money Flow Index (MFI) have indeed bottomed and have already started to curve upward. By crossing above their respective signal line, they have just triggered bullish alerts yesterday.

A retracement of the 66% decline occurred between June and September (points E and D) is therefore expected. The first intermediary resistance line might be the 23.6% Fibonacci ratio, but the main target for a rebound after such a fall is likely to be directly the 38.2% ratio, around $1.65. Yesterday the price closed at $0.99.

Meanwhile, the banking sector is huddling together for warmth. Or so the rumours go. Commonwealth Bank (ASX: denied making a bid for Bankwest this morning. Instead, it has “been pursuing its own growth strategy on corporate finance.”CBA)

That means CBA getting as far from the money markets and deposits as possible.

The takeover bid didn’t happen. But it raises a good point. Is consolidation the next step for the Australian banking sector?

Fortescue Bounces for the Second Time this Year

Three things happened in the iron sector this week you should know about.

One: Fortescue (ASX:dipped below $5 for the second time this year. It bounced for the second time this year too. We haven’t taken a serious look at the company today. So that’s no prediction or recommendation. Just a fact you might be interested in.FMG)

Two. BHP (ASX:BHP) got approval from the ACCC on the Rio (ASX:RIO) bid. More on how that fits in below.

And three: Chinese companies decided to boycott Vale’s (NYSE:RIO) demands for higher iron prices.

Let’s deal with number three first. Vale must have been feeling sheepish it didn’t ask for more money when it was negotiating iron contracts mid-year. It got around 20% less than Rio or BHP.

So now it’s reneging. Last month it raised iron prices without asking. By no less than 20%. It’s like a restaurant charging you $20 for a $17 plate of spaghetti after you’ve ordered it. “Sorry. You know how inflation is these days.”

It’s really not surprising that China finally got fed up. Marketwatch reports that Chinese steel firms are boycotting Vale, the world’s biggest iron miner. They’re looking for alternatives.

Alternatives, eh? What do you get when you take Vale out of the iron sector? It’s a pretty simple equation.

Iron ore production - Vale = Australia.

BHP and Rio Move Closer to Merger

There’s an obvious problem with that, though. Top line players in Australia don’t actually have any advantage. Vale’s asking for more. But Rio and BHP have already asked for more and gotten it.

The three big guns hunt in packs. Contract negotiations fall into place pretty quickly once one big gun gets a price. We read somewhere about the possibility of an ‘iron OPEC’ earlier in the year. To be honest, the world already has one. It’s just not official yet.

NEW YORK - Pessimism about a protracted economic downturn washed over the financial markets on Thursday, sending stocks plunging and seeing further tightening in credit markets.
News of declining factory orders and a seven-year high in jobless claims stoked fears that the US Government’s financial rescue plan won’t ward off a recession.
The Dow plummeted 348.22 points, or 3.22 per cent, to 10,482.85, while the broader S&P500 fell 46.78 points, or 4.03 per cent, to 1,114.28.
The NASDAQ, which carries tech and more recently listed heavyweights, lost 92.68 points, or 4.48 per cent, to 1,976.72.

LONDON - European stock markets fell on Thursday following disappointing economic data from the United States and a decision by the European Central Bank to maintain interest rates at current levels.
In London, the benchmark FTSE 100 index dropped 89.3 points, or 1.8 per cent, to 4,870.3.

FRANKFURT - In Germany, the benchmark DAX 30 index lost 145.7 points, or 2.51 per cent, to 5,660.63.

PARIS - In France, the benchmark CAC 40 index gave up 91.26 points, or 2.25 per cent, to 3,963.28.

TOKYO - Japan-listed shares fell more than 1.8 per cent on Thursday, hitting a three-year low on worries about the financial crisis despite the US Senate approving a mortgage debt bailout.
The Tokyo Stock Exchange’s benchmark Nikkei 225 index shed 213.5 points, or 1.88 per cent, to 11,154.76.

HONG KONG - The benchmark Hang Seng index fared better, lifting 194.9 points, or 1.08 per cent, to 18,211.11.

WELLINGTON - New Zealand-listed share prices rose more than one per cent on Thursday, but investors remained cautious over the US rescue package after it was passed by the Senate.
The benchmark NZX 50 index rose 44.68 points, or 1.4 per cent, to 3,232.64 on light volume.
After an hour’s trade today, the NZ market had dropped 64.223 points, or around two per cent, to 3,168.42 at 0800 AEST.

SYDNEY - Local stocks may trade lower today after US equities markets fell by close to four per cent, while Europe suffered less but also was in the red.
The key Wall Street indices all were down, as were commodities, including oil, gold, silver, and copper.
At 0800 AEST, the December Share Price Index futures contract on the Sydney Futures Exchange was down 95 points at 4,680.
In economic news today, the Australian Industry Group and Commonwealth Bank will release their Australian Performance of Services Index (PSI) for September.
The TD Securities/Melbourne Institute will release its Inflation Gauge for September.
Contact Uranium Ltd will hold its annual general meeting in Perth.
Ellerston Capital Ltd will hold a general meeting in Sydney.
In Sydney, Climate Change Review head Professor Ross Garnaut will address the Committee for Economic Development of Australia on “Australia in a low emissions economy”.
Yesterday, the benchmark S&P/ASX200 index lost 33.5 points, or 0.69 per cent to 4,761.1, while the broader All Ordinaries shed 40.4 points, or 0.83 per cent to 4,774.1.

NYMEX

Oil prices closed at their lowest level in two weeks on Thursday, tumbling below $US94 a barrel on doubts that a revamped financial bailout plan will be enough to avoid a protracted economic slump, and revive dwindling US energy demand.
Light sweet crude for November delivery fell $US4.56 to settle at $93.97 a barrel on the New York Mercantile Exchange — crude’s lowest settlement since September 16.
Prices earlier jumped as high as $US100.37, but eased back later as traders digested the details of the revised bailout package.
Oil prices have fallen about $US15, or 13 per cent in the past month as traders’ concerns about waning global energy consumption have outweighed supply threats caused by Gulf coast hurricanes and militant attacks in Nigeria.
The slump in energy demand has accelerated beyond the US.
In India, domestic oil product sales totaled 2.41 million barrels per day in August, the lowest level this year, according to Barclays Capital research.
In the same month, Japan’s oil demand fell by 8.4 per cent.
Significant gains by the US dollar against the euro have also helped push down prices.
Recent data shows that US fuel demand is falling while supplies rise.

COMEX

Commodities prices plunged on Thursday as a rapidly strengthening US dollar and more gloomy readings on the economy compelled investors to dump positions in gold, grains and energy.
Gold for December delivery dropped $US43, or 4.8 per cent to settle at $844.30 an ounce on the New York Mercantile Exchange, after earlier dipping as low as $US833.50.
December silver shed $US1.65, or 12.9 per cent to settle at $US11.12 an ounce, while December copper sank 16.2 cents, or 5.8 per cent to $US2.6275 a pound.

ALLCO COMMERCIAL REIT, csfb maintain NEUTRAL with target price
$0.6($0.88)

ALLGREEN, csfb maintain NEUTRAL with target price $0.68($1.01)

CAPITACOMMERCIAL TRUST, csfb downgrade to UNDERPERFORM with target
price
$1.26($2.79)

CAPITALAND, csfb downgrade to UNDERPERFORM with target price
$2.78($5.16)
CAPITALAND, ocbc resuming coverage with HOLD with target price $3.71

CAPITAMALL TRUST, csfb downgrade to NEUTRAL with target price
$2.58($3.50)

CHINA HONGXING, cimb upgrade to OUTPERFORM with target price $0.53

CHINA XLX, ms maintain EQUAL WEIGHT with target price $0.46

CITY DEV, csfb maintain UNDERPERFORM with target price $7.26($9.54)

COMFORT DELGRO, ml initial coverage BUY with target price $1.70

KEPPEL LAND, csfb downgrade to UNDERPERFORM with target price
$2.48($5.04)

KS ENERGY, gs maintain NEUTRAL

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A tale of two big mining industry takeovers: one with a realistic result, the other where fairyland still rules. The realistic one was Xstrata, the most acquisitive mining group in the world pulling its $US11 billion ($A12.6 billion) bid for Lonmin, the big platinum miner based in South Africa, but headquartered in London. In Australia, BHP Billiton welcomed the decision by the competition regulator not to block its 3.4 share bid for Rio Tinto, and BHP and Rio shares stormed higher. A case of desperate investors here not understanding the changes happening overseas, or eternal optimists, led by the BHP board? Xstrata said it does not intend to make a takeover offer for Lonmin because of “extreme volatility and uncertainty in the financial markets”. The “lack of clarity and certainty regarding the future availability of credit introduces significant risks” into financing for any bid, Switzerland-based Xstrata said in a statement. Xstrata is believed to have lined up a $US15 billion (around $A19 billion) loan from a group of banks to finance its proposed 33 pounds ($A73-a-share) offer and refinance existing debt. Xstrata had to commit to the bid by tonight, our time, or withdraw. It chose the latter staged a very prudent retreat. After pulling the bid, it snapped up more than 14% of Lonmin for just over 19 pounds a share  and now has an all but controlling 33%. It’s not the only big international bid to have been killed off by the credit crunch and lending freeze. Last month a private equity group called off a $A4.2 billion offer for UK events publisher, Informa and HSBC bailed out of a year-long effort to buy 51% of the Korean Exchange Bank for $A8 billion after failing to get the deal finalised and with worries about the global outlook. Xstrata had built up a 10.7% in Lonmin, but refused to buy any more, even as its target share price sank under the proposed offer price, a good sign of the concern Xstrata was having about the outlook for finance and for commodities. It snapped up the extra shares after the bid was withdrawn and Lonmin’s price fell. Despite that Xstrata’s price fell 1.9% in London by the close. Lonmin replaced its CEO on Monday without warning. Ian Farmer, formerly the chief strategic officer is the new boss and he will drive the company’s review of its existing operations and performance. Bloomberg estimates that Xstrata has spent about $US28 billion in four years on acquisitions, boosting sales eightfold. It has also ended attempted transactions. The company broke off talks to buy Brazil’s CVRD (Vale), the world’s biggest iron-ore exporter, in April. Xstrata also terminated moves to buy Australia’s WMC Resources in 2005 and Canada’s LionOre Mining International last year after higher bids from rivals. In Australia, the market was dragged higher by the news that the ACCC would not oppose the proposed BHP Billiton bid for rival Rio Tinto

Rio shares surged, up $A10.50, or 12.43%, at $95.00, after hitting a high of $98.60. BHP Billiton shares were up $A1.75 or 5.6% at $32.75, after hitting a high of $33.40. The 3.4 BHP shares for every 1 Rio share offer was worth $111.35, a still substantial premium to the actual Rio price and a sign of continuing market scepticism.

But BHP shares tumbled 4% in London on the Xstrata news and the worsening outlook for commodities and the global economy.

The ACCC noted that its review of the planned merger had raised “significant concerns”.

“While significant concerns were raised by interested parties in Australia and overseas, the ACCC found that the proposed acquisition would not be likely to substantially lessen competition in any relevant market,” chairman Graeme Samuel said in a statement.

BHP said in a statement:

“BHP Billiton today welcomed the decision by the Australian Competition and Consumer Commission that it does not object to BHP Billiton’s proposed acquisition of Rio Tinto.

“We are very pleased to have received notice that the ACCC will not object to our proposed acquisition of Rio Tinto.

“We have long believed in the benefits of the combination of BHP Billiton and Rio Tinto. Our strategic rationale has always been based on the combined company having an incentive to produce more products, more quickly, to deliver to customers.” BHP Billiton’s Chief Commercial Officer, Alberto Calderon, said.

“Confirmation that the ACCC does not object satisfies the Australian merger control pre-condition of BHP Billiton’s proposed offer for Rio Tinto. In July, the U.S. Department of Justice also announced it would not oppose the transaction. The offer remains subject to the pre-conditions as disclosed in Appendix 1 of the announcement on 6 February 2008.”

The ACCC said in August that market inquiries had raised concerns the merged entity might lessen competition for iron ore and drive up prices of the valuable commodity.

Rio Tinto is the world’s second biggest producer of iron ore, while BHP Billiton is the third largest.

“The ACCC’s inquiries indicated that the merged firm would be unlikely to limit its supply of iron ore given the uncertainty it would face in relation to the profitability of this strategy and the risk that limiting supply would encourage expansions by existing and new suppliers as well sponsorship of alternative suppliers by steel makers,” Mr Samuel said.

Strong opposition to the merger has emerged from steel makers in Asia and Europe amid concerns a combined entity could have enormous control over global iron ore and other resource commodity prices.

“In relation to the supply of iron ore in Australia, market inquiries indicated that steel makers in Australia are unlikely to face higher iron ore lump and iron ore fines prices, based on a move from export parity pricing to import parity pricing,” Mr Samuel said.

The European Commission, the EU’s antitrust regulator, resumed its assessment of the proposal late last month after suspending its investigation in August, to await further information from BHP Billiton.

The commission is expected to rule on the proposed transaction on January 15, 2009.

That is likely to be the deciding factor in whether the bid goes ahead.

BHP says it has a “committed banking financing facility” from a group of banks lead by Barclays Capital, BNP Paribas, Citigroup Global Markets, Goldman Sachs International, HSBC, Banco Santander and UBS.

UBS is a basket case, Santander is bedding down Alliance and Leicester and the parts of Bradford and Bingley it bought at the weekend, Citigroup is coping with taking over Wachovia in the US, Barclays Capital is swallowing most of the US business of Lehman Brothers and Goldman Sachs is coping with being a fully regulated bank and not an investment bank.

And on top of that, there’s hardly any lending going on and won’t be in the New Year if the bid gets the big tick and happens.

An Investment Philosophy for the Next Leg Up in the Resource Boom

If you think of Australia as a stock, it looks like a pretty good play. Assets on the balance sheet this year have ballooned by 25%, or $32 billion. Earnings this year are set to rise by over 40% to more than $200 billion. It sounds as though the company is doing rather well.

The assets we’re talking about are new investment in resource projects. The earnings are mineral exports. They’re both good indications that Australia is feeding the world’s developing powers, and getting paid handsomely for it. It’s one of the best businesses in the world.

Meanwhile our share market is down 30% from its high. Our currency has fallen around 19% from its high too. Australia the country is undervalued on the global stage.

The fall hasn’t come without reason. But as credit markets have unwound, Australian investments have suffered more than those in the US or Britain. Yet Australia the country is backed by tangible assets that have real value. And earnings are at record highs.

It’s an opportunity that international investors - specifically Asian economies with high rates of savings - will only pass up for so long. So we’re suggesting an unpopular strategy for next year. Begin accumulating good mineral and energy investments now.

That isn’t quite as simple as it used to be. Markets are less forgiving than they were between 2003 and 2006. The main problem is that the worst symptoms of the credit crunch aren’t over yet.

You can still invest intelligently in the ongoing resource boom. We’re nearing the best possible time to do that. But you’ll have to adjust your strategy. Your focus should be on looking for mining and energy firms with three indispensable traits.

The Three Ps

Above all else, a good miner in 2008 needs a quality project. That means, at the very least, a profitable resource of material in the ground.

Even better would be a quality reserve. As you may or may not know, there’s a difference between the two. A resource is simply what material is located in the underground deposit. A reserve is by definition a resource mine-able at break-even or better, economically speaking.

There’s no point buying a cheap stock with no deposit. But there’s no point overpaying for raw material. That’s the least of your worries though. We’ve seen good reserves trading for less than 20% of their real value. If you look hard enough, you’ll find a good one at the right price.

Slightly more difficult is finding a company run by people who can bring the project through to production. So to simplify things we suggest you invest in a firm run by a management with two qualities.

1. At least two decades of experience dealing with their company’s commodity.
2. Decades of experience financing mining projects.

Directors need to know what the highs and lows feel like in their chosen market. That means both geology and marketing. Avoid inexperienced teams that have gotten high on the recent fumes of the commodity boom. Some projects won’t be profitable at any price. It’s up to management to drop these, not approve them. An experienced team knows when to cut losses, and when to forge onward.

One of the greatest threats to a mining stock’s share price is a lack of funding. Getting funding depends on talented financiers with good contacts.

That leads us to our last trait. Finance is crucial, especially in the junior market at the moment. Indeed, one of the reasons many good projects are trading at a fraction of their value is because they’ll never find the money. They’re living a pipe dream.

When is the current meltdown over?

Today is another difficult day for the S&P/ASX 200, and little by little there are many stocks that become oversold. Investors are actually waiting for signals that could convince them to come back on the market and to take advantage of a rebound.

Obviously the timing for a rebound has not come yet. The bad news coming out from the US is not over. And equity markets can remain oversold for a while. This argues for a further decrease on the S&P/ASX 200. After 4 years and a half of continuous rise between March 2003 and November 2007, the investable benchmark for the Australian equity market has now retraced 50% of this bullish trend. Take a look at the chart below to see what I mean.

Click to Enlarge

The coming weeks should be particularly sensitive as the global equity markets are on the edge (lows of the year, 50% retracement of the 2003/2007 bullish trend). The news from Wall Street about potential new collapses will keep investors nervous and anxious therefore markets will remain volatile. Large swings and strong rebounds and pull backs may be expected on the near-term.

The weekly chart shows the 50% retracement of the bullish trend occurred between March 2003 and November 2007 (between points A and B on the chart). This support level has already been hit in early August (point D), generating a small rebound.

Today the price closed below this 50% retracement level. It’s an additional bearish sign and may confirm (the lowest closing price this year has been posted at 4,552.30 on September 18) that the support is cleared. Another false break signal is improbable therefore the price action will move further down. With the price support broken here, where is the next low? More on that in a moment.

Rebounds are difficult to assess right now. The price action rebounded in early September but was unable to gain positive momentum. New longs entered the market, but it was not enough to convince the rest of the market to fly back into the ASX 200 stocks. As a result, the technical indicators which were moving up since mid-July again triggered bearish signals.

This is the case with the MACD which crossed below both its signal line and the 0 line. It is also the case with the Momentum indicator which peaked and turned downward to cross below the 100 level. Consequently it is more than likely that the Index will fall lower on the near-term.
What could be the next target for this price action?

Where is the new low?

The new target will be the 61.8% Fibonacci retracement which is set around the level of 4,300 points. There will be a probable rebound as it is the last significant support level. Indeed, the 61.8% ratio also corresponds to a previous high which had been posted in March 2005 (point E). Previous highs become new lows therefore some buying interest should appear at this level.

Ultimately, there is another support at 3,500 points, which was a previous high level posted in June 2001, February and March 2002 (points F and G). On the upside, the current resistance line goes through the highs posted in early November 2007 (point B) and in May this year (point C).

The index is setting up for a mighty rebound. That means individual stocks will rebound as well. It will be impressive. But between now and then, we’d expect further declines in confidence from the U.S. banking crisis to lead to lower lows here on Australian stocks. We’ll be biding our time and building a list of rebound stocks to trade when the new lows are put in, or some other external event triggers an unlooked for reversal.

New items in the Senate Bailout Bill, SEC relaxes market-to-market rules

By the time the Australian market opens for trading on Thursday, the U.S. Senate will have voted on its version of the Paulson bailout bill. However, the Senate version of the bill has some new bells and whistles not included in the version that failed to pass the House. Two of the main measures added seem aimed more at shoring up political support for the bill, rather than improving the chances that the plan will actually work. But let’s take a look at them anyway.

First, the Senate wants to temporarily increase Federal insurance on deposits in U.S. commercial banks from US$100,000 to US$250,000. You might wonder what an increase in Federal deposit insurance does to improve the quality of assets on bank balance sheets. The answer is, “it doesn’t.”

But the increase in what the FDIC can offer is designed to make the Paulson plan more difficult to oppose in the House. Who is against providing ordinary savers more insurance for their life savings? Anyone? There is also the question of confidence.

By increasing FDIC insurance to $250k, you reassure (hopefully) people that there’s no need to remove their money from the bank. Here the Feds aim to prevent a run on banks by depositors that leads the bank to fail. This is what happened first at Indy Mac in July and at Washington Mutual earlier this week.

Depositors took out a whopping $16.5 billion from WaMu between September 15th and the end of the month. That kind of run is a serious drain on a bank’s capital. It’s a scenario the Congress wants to avoid by increasing FDIC insurance. It does nothing to improve bank balance sheets, unless, by restoring confidence, it prevents a huge drawdown in a bank’s assets (its deposits).

SEC relaxes market-to-market rules

Meanwhile, to address the value of those damaged assets that Henry Paulson can’t wait to get his hands on, the SEC clarified its stance on Tuesday with regard to mark-to-market accounting rules. This move is designed to give banks some wiggle room when it comes to valuing their damaged assets. The higher the banks can value the assets at, the less likely they are to have to take losses on those assets or sell them to meet capital requirements. They can stay in the game.

Here are some excerpts from the SEC’s clarification. Emphasis added is our own:

Can management’s internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?

Yes. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable….This can, in appropriate circumstances, include expected cash flows from an asset. Further, in some cases using unobservable inputs (level 3) might be more appropriate than using observable inputs (level 2); for example, when significant adjustments are required to available observable inputs it may be appropriate to utilize an estimate based primarily on unobservable inputs. The determination of fair value often requires significant judgment.

How should the use of “market” quotes (e.g., broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?

Broker quotes may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security. In a liquid market, a broker quote should reflect market information from actual transactions. However, when markets are less active, brokers may rely more on models with inputs based on the information available only to the broker.

Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?

The results of disorderly transactions are not determinative when measuring fair value. The concept of a fair value measurement assumes an orderly transaction between market participants. An orderly transaction is one that involves market participants that are willing to transact and allows for adequate exposure to the market. Distressed or forced liquidation sales are not orderly transactions, and thus the fact that a transaction is distressed or forced should be considered when weighing the available evidence. Determining whether a particular transaction is forced or disorderly requires judgment.

And so on.

How does one make an estimate of an assets value based on “unobservable inputs?” How is one to reasonably estimate future cash-flows on a mortgage-backed security when house prices continue to fall? When a “market does not exist for a security” doesn’t that mean no one is willing to buy it at the current price? Why is that disorderly?

It is not overly-transparent account rules that have brought the banking system to its knees. It’s the fact that so many global banks own securities tied to the value of U.S. houses.

No bailout plan in the world is going to force banks to lend, even if they can get rid of their bad assets. More importantly, no bailout plan in the world is going to reverse the fall in American house prices (or even arrest in). Until someone comes along with a plan that severs the connection between residential American real estate and the banking system, the system itself remains on the edge of crisis. More on why the plan must fail below. But first…

When will the current meltdown end? The short answer is, not yet. There’s probably another few hundred points to go.

Yesterday was another difficult day for the S&P/ASX 200. Little by little, stocks are becoming oversold. Investors are actually waiting for signals that could convince them to come back on the market and to take advantage of a rebound.

Obviously the timing for a rebound has not come yet. The set of bad news that come out from the US is not over. And equity markets can remain oversold for some time before recovering. This argues for a further decrease on the S&P/ASX 200.

After a 4 and a half year rise between March 2003 and November 2007, the benchmark for the Australian equity market has now retraced by more than 50%.

The weekly chart tells that story (between points A and B on the chart). This support level had already been hit in early August (point D), generating a small rebound. Yesterday the price closed below this level. It’s an additional bearish sign and may confirm (the lowest closing price this year was 4,552.30 on September 18) that the support is cleared.

That means lower share prices for a little longer.

Click to Enlarge

The price action rebounded slightly in early September, but was unable to gain positive momentum. A few profit taking trades or new long positions built up but it was not enough to convince the rest of the market to move back into the ASX 200 stocks. As a result, the technical indicators have triggered bearish signals since mid-September.

The MACD has crossed once again below its signal line. So too the 40-day Momentum indicator. It has peaked and turned downward to cross below the 100 level. On the very-short term, the 5-day Stochastic Momentum Index has also turned bearish.

It’s more than likely that the Index will fall lower before any significant bounce back.

Click to Enlarge

So what’s the next target?

As mentioned in our last update (September 17), the new target will be the 61.8% Fibonacci retracement which is set around the level of 4,300 points. Expect some sort of rebound there. It’s the last significant support level.

Indeed, the 61.8% ratio also corresponds to a previous high from March 2005 (point E). Previous highs become new lows therefore some buying interest should appear at this level. We’ll re-assess at that stage. Until then it’s probably a good idea to be a spectator, not a speculator.