of the century. Aside from all the why’s and wherefore’s about what went wrong with the merger, it also elicited the greatest number of marriage/engagement/divorce metaphors in the history of journalism.

That is quite some feat. We write of course, on the subject of the BHP Billiton/Rio Tinto story.

Aside from all the benefits that a takeover would have brought to BHP, the big point to take from it is that even mega companies are reluctant to add debt to their books at the moment. And it also gives an indication that if it is troublesome for the likes of BHP and Rio to raise money in this market, think about the smaller companies and how they must be faring.

An example of this is one of the companies in our Australian Small Cap Investigator (ASI) portfolio. Last week it released details of a new joint venture deal it had entered into. Three days later the window closed for shareholders to pick up more stock in a capital raising.

The result was that the company raised less than 40% of the capital is was hoping for. If it was twelve months ago we are sure they would have raised the full amount. Fortunately, the company in question does have a Plan B. But many small companies out there don’t. If they can’t borrow from banks and can’t raise additional capital from shareholders, it makes it very hard for smaller companies to invest in growing their business.

On the other hand, that is one of the reasons why rather than stepping back from looking at new investments for ASI, we are actually ramping up the coverage in the New Year.

The credit markets will eventually recover, but it may be slow. However, even before this becomes obvious to the market many small cap companies will have already taken advantage and should surge ahead in price.

In our view, we believe the next six months will be the best time in years to pick up undervalued small cap companies.

What is the big news this morning? We’ll need to think about that one for a while.

In the meantime there is the small matter of BHP Billiton [ASX:BHP] pulling out of the takeover of Rio Tinto [ASX:RIO].

Let’s be honest, it isn’t a major surprise. For some time the market has doubted that the deal would go through. Based on yesterday’s BHP share price Rio should have been trading closer to $90 a share rather than the $63.90 that it closed at.

Chairman Don Argus summed up the reasons for the decision:

“We have said that we would only seek to complete the transaction if it was in the best interests of BHP Billiton’s shareholders. While we have not changed our view of the basic industrial logic of the combination, or of the longer term prospects for natural resource demand growth driven by emerging economies, we have concerns about the continued deterioration of near term global economic conditions, the lack of any certainty as to the time it will take for conditions to improve and the risks that these issues imply for shareholder value.”

After Mr. Argus finishes his stint as BHP chairman he may want to consider giving the circus a try. Because that’s the best example of tightrope walking we’ve seen in a while.

In effect the statement reads, “Not making the acquisition is now good, but we still think the resources sector is going to boom… only not right now, but in the future. Honest.”

Now the story is over and the papers and web pages are stuffed stories about the “Bid Collapse” and “BHP scraps $150bn tilt at Rio Tinto” we think about what the real reason for backing out is.

After all, $450 million is a lot of money to spend on putting the deal together. And it is also a lot of money to just write off by backing out of the deal.

So, three points stand out. First, it is a crappy market for one resources company to be taking over another. Second, Rio Tinto has a big stack of debt - $9 billion due to be refinanced by next October. And third, when you combine the first two it just doesn’t make much sense to proceed… for now.

We’ve got no idea what is going on in the mind of Don Argus and Marius Kloppers, but we would be surprised to see BHP come back with a new deal once the market has steadied and once Rio has tidied its books up.

It may mean paying more. And they could even miss out all together if China Inc decides to have a go. But there is just as much chance of BHP picking up a leaner, meaner and possibly less indebted Rio at a later date even if it does involved paying a premium.

Better that than getting lumped with $70 billion worth of debt in a falling resources market.

Australia’s Apollo 13 ‘Moment’
“Is this a new $800 billion the Fed and Treasury are stumping up?” I asked Daily Reckoning editor Dan Denning this morning.

“Yep” he replied.

This time it is to support the credit card and mortgage debt collateralisation markets. Roll back the clock three months ago when the $700 billion TARP was first proposed and there was almost universal shock and alarm that the government could spend that much on bad debt.

Today $800 billion seems like a drop in the ocean. There’s no vote in Congress, no suspension of Presidential campaigning, no special TV programmes. In fact it doesn’t even make the top story on Yahoo! Finance.

We imagine it to be like the space race in the 1960s and 1970s. Everyone stood up and paid attention the first couple of times, but as more and more missions were scheduled the public took less and less interest. Until Tom Hanks got into trouble on Apollo 13 and the world watched again.

We’re not sure whether the market has had its “Apollo 13″ moment or not yet. With any luck last week was it.

The issue for Australia is not so much whether the US government can repay all its debts (clearly it can’t) but how closely the Australian federal government is watching. Is it picking up ideas, and working out ways to spend and increase government debt?

If it is like most governments it will try to get away with as much as it can, all in the ‘national interest.’

After re-reading the ASX circular on the new covered short selling regime it appears we made an error last week. Our assumption was that the daily report would show all ‘open’ short positions in a stock. This appears to be incorrect. Instead, in their wisdom, the ASX are only publishing the daily volume of short trades.

So, looking at today’s report for instance, a couple of points stand out. First is the daily short selling volumes are greater than we thought they would be if you compare it to the total volume traded in a stock.

BHP Billiton [ASX:BHP] had nearly three million shares traded short yesterday. Compared against the total number of outstanding BHP shares of 3.3 billion that only equates to less than 0.1%. However, when you compare the three million shorts against yesterday’s share turnover of about 18 million shares then this is nearly 17% of the daily turnover that is going short.

A more bizarre one is Fairfax Media [ASX:FXJ]. According to the short report over four million shares in Fairfax were traded short yesterday. Again, as a percentage of its total outstanding shares it is only 0.26%. Yet, as a percentage of yesterday’s traded volume of about 5.5 million shares it equates to 73%.

We just make the point out of a matter of interest. Remember that only ‘covered’ short selling is now allowed on the ASX. This means that the brokerage firm executing the trade must be satisfied that the short seller is able to deliver the stock on T+3. Also, as we understand it, the report only shows the gross amount and does not take into account short positions that may have been closed out intraday.

And we still do not have a problem either with the concept or the practice of short selling. After all, in order for a short sell to go through there must be someone else who is prepared to buy them. Hence the argument that short selling helps to add liquidity to the market.

There are many explanations for the seemingly high day-to-day shorting volumes. One is obviously those terrible hedge funds. Another is the retail investor using Contracts for Difference (CFDs). Another reason could be institutions reweighting portfolios. And another could be companies that are hedging their DRP schemes. In addition there are probably another dozen or more explanations.

The upshot of it is that the ASX will need to provide a more thorough short selling report that displays more meaningful information than what it is supplying at the moment.

ASX Renamed - Now Called the “$2 Shop”

This morning we were beaten to it by The Age newspaper. Damn the ruthless efficiency and timeliness of the printed press.

“$2 company has new meaning” reads the front page story. It tells us that 48 of the S&P/ASX200 companies are trading for less than $2. We did a similar check on the S&P/ASX100 index yesterday. Fifty-three of those companies are trading for less than $5.

Of course the actual dollar value of the share price is not always significant. The market capitalisation of the company is more relevant. But it’s certainly a far cry from the euphoria of last year. Remember when pundits were jumping up and down with excitement trying to pick which Australian share would be the first to break through the $100 barrier?

Leading the charge was Macquarie Group, CSL, Rio Tinto and Perpetual. Where are they now?

The chart below tells us the story.

From December 2006 all four of them led a charge towards the $100 level. Then October 2007 came along and spoilt the party. Since then, as you’re no doubt aware, the share prices have plummeted.

As of yesterday Rio Tinto was $75.20, Macquarie was $26.95, CSL was $36.95 and Perpetual was $35.26.

Templeton’s $1 Stocks MkII
But back to our original premise.

Company share prices are getting smaller and smaller by the day. Market caps are falling. In fact, some of the companies that used to be blue chip are now targets for inclusion in our Australian Small Cap Investigator report. More on that later.

You may have heard this story. In 1939 US investor John Templeton bought $100 worth of stock in every New York Stock Exchange listed share that was trading for less than $1. So the story goes, there were 104 companies that he invested in with 37 of them in bankruptcy.

Three years later he was in profit on 100 out of 104.

Unfortunately we don’t have the time or space to do the analysis on every share currently listed on the NYSE. So here’s what we have come up with. After taking into account inflation, 1939’s $1 is now the equivalent of $14.78.

The NYSE now has 3,619 US companies listed, which is double the amount listed on the Australian Stock Exchange (ASX). But it doesn’t include listings of overseas companies - or the thousands more that are traded on the NASDAQ.

So, how many companies are trading on the NYSE for less than USD$14.78? It would be a lot, so we won’t bother counting. But if we look at a narrower range of stocks, say the S&P500 it tells us the following story.

Of the 499 companies in the S&P500, a total of 142 are trading at the inflation adjusted equivalent of less than a Templeton dollar. And they aren’t all Mickey Mouse companies either. There are some big names in the mix: Western Union, Sara Lee, New York Times, Morgan Stanley, Motorola, Mattel and Intel.

To make the equivalent investment to Templeton, an investor today would need to stump up around USD$210,000.

Wall St is up 452 points in two days and we are trying to respond but struggling. After a 79 point rise early on the market is now flagging in low volume to be up 33 - Not as promising as the 92 point rise the SFE Futures. Resources outperforming +2.1% led by the big boys – BHP, RIO and FMG up 2.5%, 2.2% and 3.8%. The drop in the market from the open this morning has come in financials – they were up 1.6% and are now down 0.6%. The NAB has announced a new CEO following last week’s profit warning. They were up 2.1% first thing and are now down 1.3%. Stocks hitting fresh yearly lows today include TABCORP Holdings and Patties Foods.

Wall Street closed up 186. Up 189 at best. Up all session – closed on high. It was a good night for Financials +2%, diversified banks up 3.8% and Investment banks and brokerages +3.5%. Bush signed the Housing Bill that will save 15% of flailing home-owners – designed to reduce foreclosures. Fannie Mae and Freddie Macquarie Group up 5.3% and 3.7% after the Securities and Exchange Commission (SEC) extended the emergency limit on naked shorting until August 12^th. Oil had a good night – up 3.7% - which led to oil sensitive stocks falling - Automobiles down 3.8% and the Amex Airline Index down 4.9%. 2Q earnings on the S&P have dropped 24% verses a year earlier says Bloomberg – Ex financials earnings have gained 2.8% so far. Companies missing 2Q estimates: Garmin down 22%, Cisco down 1.12%, and Electronic Arts down 6.56% offset strength in Comcast which was up 4.64% despite posting below-expectation-results. The NASDAQ had an OK session closing up 0.44%.

• Both BHP and RIO up in ADR form overnight, 2.7% and 4.16% respectively.
• Metals mostly up overnight – Copper up 1.23%, Nickel up 3.9% and Zinc down 0.32%. Aluminium was unchanged.
• Oil price up $4.53 to $126.74 after a surprise 3.5m barrel fall in U.S. inventories.
• Gold down $13.60 to $902.90
• Bonds down with the 10 year yield up to 4.05% from 4.04%.

The big news this morning is that Brisconnections unit trusts (BCSCA) have listed today at a dollar and have traded at 48c. This is the company described by its own CEO as a natural short. That should put a few planned floats on the back burner for a month or twelve.

The other big news today is the National Australia Bank (NAB) announcing Cameron Clyne as John Stewarts replacement. Clyne currently heads the NAB’s New Zealand operations and will take over from Stewart on Jan 1 2009, but will become group CEO designate on October 1 to “ensure an orderly handover”. The fact that the appointment was internal suggests that either the NAB management has depth or it has a lack of options. Coming so close after the profit warning the market would be excused for a wry smile on the NAB statement that “Mr. Clynes appointment represented the culmination of an extensive succession planning exercise conducted over the last 18 months”. Nothing to do with the profit warning then. NAB was up but is now down 38c to 2509c.

Double Whammy for Woolworths: New Zealand’s Court of Appeal overturned a High Court ruling that would have allowed Woolworths and Foodstuff to make a takeover bid for The Warehouse Group in NZ. On another issue, the AFR reports that the ACCC is set to propose several major reforms from its grocery price inquiry, which will include a Grocery Watch price monitoring system. WOW down 9c to 2495c.

• ABC Learning has released a Trading Update: Expects FY08 Loss before tax $437m due to additional write-downs and provisions and it won’t pay a 2H dividend. Says it is compliant with all banking covenants and that the first three weeks of FY09 have been encouraging. ABS down 11% to 73c.
• Goldman Sachs and Southern Cross Securities sell 30m shares in Fortescue at 800c ($240m). 4.8% discount – on behalf of an early backer (KC Wong?) – offered to International institutions. KC Wong has 134m shares. He bought at prices of between 1 and 3c. Harbinger also thought to be a seller of 17.5% but more likely to do it to a buyer than to the market. Hasn’t done the share price any harm this morning. FMG up 47c to 887c.
• Alumina (AWC) interims are out – look good - 1H Net profit of $43.8m with underlying earnings off $152m, in line with 2H07. Declared an interim dividend of 12c and expects global demand to remain strong. AWC up 12c to 449c.
• Leighton Holdings (LEI) announced its John Holland division has been appointed construction partner for the $240m contract to strengthen the West Gate Bridge. LEI up 11c to 4236c.
• Just Group (JST) up slightly after saying it expects to announce a 3.5% rise in 2H sales with FY08 sales above the mid point of its guidance. JST up 9c to 326c.
• Asciano (AIO) flying – up over 10% - on speculation it may have cancelled plans for dilutive rights issue of over $1bn and be about to embark on asset sales instead. AIO up 49c to 415c.
• Australian Worldwide Exploration (AWE) has released their June Q report. June Q revenue of $254m, resulting in record FY revenues of $821m. AWE has net cash reserves of $339m, is debt free and is looking for growth opportunities. AWE up 5c to 359c.
• St. George Bank’s (SGB) board has re-endorsed its recommendation for the Westpac takeover offer during a two-day meeting that ended yesterday afternoon. SGB up 29c to 2700c and WBC up 19c to 2113c.
• Macquarie Infrastructure Group (MIG) up on the news that Macquarie has put it on their restricted list (can’t publish research recommendation or advise on it) prompting the rumour that it is one Macquarie satellite that will be privatised. MIG up 4c to 265c.
• Perilya (PEM) announced production numbers – June Q Broker Hill lead output 13,368 tons and Zinc output 28,344 tons. Metal output up 18.5% on the Q. PEM up 1c to 54c.
• Arrow Energy (AOE) have increased their net 2P reserves by 81%. AOE up 6c to 329c.
• ROC Oil (OSH) has released their Bidder’s Statement for Anzon Australia.  ROC down 0.5c to 149.5c.
• ConnectEast Group (CEU) announces EastLink average daily trips of 270,868 in the first 25 days.  CEU down 0.5c to 94c/
• ANZ CEO Mike Smith has told The Australian that the market has had “a correction that was needed” (don’t you hate that hindsight cliché) and investors had “lost sight of the fact that banks are still very profitable businesses” in this country. ANZ up 19c to 1629c.

WASHINGTON - The prospects for a quick economic recovery dimmed Thursday, with new data showing the US economy grew at a slower-than-expected rate this spring despite some oomph from tax rebate checks - and actually shrank late last year.

WASHINGTON - The US Labor Department said the number of newly laid-off people rose to 448,000 last week, the most in five years.

HOUSTON - Exxon Mobil Corp reported second-quarter earnings of $US11.68 billion Thursday, the biggest profit from operations ever by any US corporation, but the results were well short of Wall Street expectations and its shares fell.

WASHINGTON - Treasury Secretary Henry Paulson said today he expects “moderate” growth in the US economy this year and some stability returning to the housing market in a matter of months.

NEW YORK - MasterCard Inc said Thursday it posted a second-quarter loss because of a charge related to a settlement with rival American Express Co.

SAN FRANCISCO - Electronic Data Systems shareholders approved a tie-up with Hewlett-Packard, voting almost unanimously to go through with the $US13.9 billion ($A14.73 billion) takeover.

NEW YORK - Philip Morris International Inc announced today that it is buying Canadian cigarette maker Rothmans for about $US1.95 billion ($A2.07 billion).

NEW YORK - Standard & Poor’s Ratings Services today cut its ratings for all three of the US-based vehicle manufacturers further into junk status, citing worries about their mounting cash losses and the continued deterioration of the US vehicle market.

LOCAL NEWS

MELBOURNE - Budget airline Tiger Airways has axed its services to Darwin from Melbourne and Singapore, blaming high fuel and operating costs in Darwin for the decision.

SYDNEY - The Queensland government will take over Swiss company Xstrata’s self regulation of its heavy metal emissions control over Mount Isa.

SYDNEY - Unions have accused Telstra of dipping into the pay packets of up to 20,000 staff on individual employment contracts.

Stocks to watch on the Australian stock exchange today:

NAB- NATIONAL AUSTRALIA BANK LTD - down 76 cents, or 2.99 per cent, to $24.70
National Australia Bank Ltd has hit back at suggestions its announcement of a new chief executive today was prompted by last week’s revelation of dramatic credit-related writedowns.

ABS - ABC LEARNING CENTRES LTD - down 10 cents, or 12.12 per cent, to 72.5 cents
ABC Learning Centres Ltd will declare a full-year pre-tax loss of $437 million as the childcare operator books further charges on assets and makes catch-up payments.

AWC - ALUMINA LTD - up 28 cents, or 6.41 per cent, to $4.65
Alumina Ltd has forecast strong aluminium demand and prices but warned of cost pressures from energy use and consumables.

JST - JUST GROUP LTD - up 15 cents, or 4.73 per cent, to $3.32
PMV - PREMIER INVESTMENTS LTD - down 13 cents to $7.06
Takeover target Just Group Ltd heading for annual sales growth of seven per cent and an improved profit line despite a soft retail market, and says there may be opportunities for acquisition.

WHS - THE WAREHOUSE GROUP - down 55 cents, or 18.27 per cent, to $2.46
WOW - WOOLWORTHS LTD - up 16 cents to $25.20
Supermarket operator Woolworths Ltd’s potential bid for New Zealand retailer The Warehouse Group has been blocked by a NZ court.
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