Posts Tagged ‘resource rent tax’

Friday, 11th June 2010 Morning Wrap

Friday, June 11th, 2010

Morning Market Wrap

A broad recovery overseas gives positive lead for the ASX!

U.S. and U.K. markets surged higher overnight. The surge was sparked by China’s report that exports are up 48% and the British press reported that the Australian Government is close to compromising on on the Resources Tax. The sell-off in the previous session hinted of the liquidation of a hedge fund, though not confirmed at this stage. Volumes overnight were below average which may indicate that much of the move overnight was driven by short covering.

The SPI Futures is above the key level of 4500 the ASX is set to open sharply higher as the SPI closed up 68 points (or 1.6%) at 4,509. Key levels today are 4350 and 4550. Expect our market to trade higher, take this opportunity to hedge long positions ahead of the long weekend.

Note that both the prime minister and BHPs CEO have refuted the overnight British reports of a RSPT compromise, saying the dispute over the resource rent tax is ongoing and the government is not about to offer a compromise. The better than expected unemployment report yesterday (rate is now down to 5.2%), will be an added bonus for our markets today.

US stocks surged overnight on a short covering rally as hopes rose that the global economic recovery is still on track, boosted by returning a recovering euro and positive economic news in Asia. The Dow Jones industrial average vaulted 273 points, or 2.8 percent to 10,172, while in the broader market the S&P 500 index rose 31 points, or 3 per cent, to 1086 and the tech-heavy Nasdaq index climbed 59 points, or 2.8 percent, to 2218. The S&P energy sector gained 4.9 per cent, as BP shares jumped 12.3 percent to $US32.78 a day after posting a near 16 per cent decline.

In London, the FTSE 100 closed up 46 points, or 0.9 percent, at 5,132 points, while across in Germany the DAX 30 closed up 71 points, or 1.2 percent, at 6,056 points and in France the CAC 40 closed flat. The Euro bounced overnight to $US1.2105 and the Australian dollar rose more than 1 US cent higher  at over $US0.85, as Asian economic data buoyed investor sentiment on the global economic recovery.

China’s exports surpassed forecasts, unemployment rates fell in South Korea and Australia. Japan reported its economy expanded more than previously estimated in the first quarter. Chinese exports jumped 48.5%, the most in six years, but property prices also rose at a record pace up 12% last month.  Investors took the view that the data is confirming the economy is weathering the sovereign debt crisis in Europe. However it should be noted that there is a still a risk of the Chinese economy overheating, which will force the government to impose more stringent monetary tightening measures.

Asian markets were mixed with Japan’s Nikkei 225 index ended up 1.2 percent, at 9,542, off its lowest close since late November, key support is at 9,400 points. In Hong Kong stocks closed flat at 19,632. In China, the Shanghai Composite Index ended down 21 points, or 0.8 percent, to 2,562 points.

Oil prices rose for a third day buoyed by strong Chinese exports data and an upbeat energy demand outlook from the International Energy Agency (IEA). The NYMEX main futures contract, light sweet crude for delivery in July, rose $US1.10 to settle at $US75.48 a barrel.  Gold fell 1 per cent, as a sharp Wall Street rally and recovering risk appetite prompted investors to switch funds out of precious metals and into assets perceived as risker. Spot gold closed lower at $US122.80 o the NYMEX.

Key International Drivers

The US government reported that the number of new filings for unemployment benefits fell less than expected last week, while the international trade deficit widened slightly in April, pointing to a moderate economic recovery.

US markets regulator the Securities and Exchange Commission has approved new circuit-breaker rules on stocks trading in response to last month’s ‘‘flash crash’’.

The new rules will trigger when stocks move 10% up or down in a short period and in an attempt to smooth market volatility,  trading will be paused to enable the markets to settle.

The European Central Bank (ECB) kept its main interest rate at a record low of 1.0 per cent, while the Bank of England  (BoE) left its base interest rate at a record low of 0.5 per cent for the 16th consecutive month as the economic recovery remains fragile and public spending cuts are expected to hamper future growth

BP finally bounced despite fears that President Barack Obama will exact a heavy price from the British energy giant for the Gulf of Mexico oil spill.

The United States trade deficit expanded a notch in April, led by a surge in goods imports from China, government data showed amid a rising US outcry over Chinese monetary policy. New claims for US unemployment benefits fell to 456,000 last week, according to government data, in the latest sign of a slowly improving job market.

China is taking steps towards imposing its own resources tax, undermining the miners case against the RSPT tax here.

Markets Overview

Markets surged higher lead by Miners, Financials and Energy

SP500: up 2.9% at 1,087 – Above “Flash Crash” Lows
DOW up 2.8% at 10,172 – Above 10,000
NASDAQ: up 2.8% at 2,219

Dollar Index: lower at 87.01 on Higher Euro
A$ lower at 87.10 (above 10-month Lows)

FTSE: up 0.9% at 5,132 – Energy & Financials Lead Recovery
DAX up 1.2% – Still in Uptrend

CHINA: down 0.8% at 2,563 – 13-month Lows as Suport becomes Resistance
HSI up 0.1% at 19,632

Oil: up 2.1% ($75.48)
Short Covering Rally in Energy

Gold: down 1.0% at ($1,220)
Commodities Higher

SPI: At key Level 4500 ASX
SPIup 1.6% at 4,509

ASX News

The SPI Futures is above the key level of 4500 the ASX is set to open sharply higher as the SPI closed up 68 points (or 1.6%) at 4,509. Key levels today are 4350 and 4550. Expect our market to trade higher, take this opportunity to hedge long positions ahead of the long weekend.

Note that both the prime minister and BHP’s CEO have refuted the overnight British reports of a RSPT compromise, saying the dispute over the resource rent tax is ongoing and the government is not about to offer a compromise.  The better than expected unemployment report yesterday (rate is now down to 5.2%), will be an added bonus for our markets today.

AUD – higher at 84.84, above 10 months lows.

APK – Australian Power & Gas has secured a wholesale electricity supply agreement for its entry into the Queensland market, raised
its forecasts for customer growth and announced a convertible note facility to raise funds. Shares were up 24%.

ASX – the Stock exchange operator has committed approximately $32 million to the construction of a new data centre.

CTX – upgraded to Buy by UBS, expecting better-than-expected profit. Shares up 4.9%.

CWT – Challenger Wine Trust has forecast a 9% drop in the value of its vineyard properties as an oversupply of wine impacts grape prices.

MQG – has been named as one of the underwriters for the Agricultural Bank of China’s proposed IPO, which received approval from Chinese regulators on Wednesday and could raise between $24.72 and $37.08 billion.

OEC – shelves a planned capital raising because of volatile conditions on global equity markets.

SUE – Australian hedge fund Basis Capital has filed a $US1 billion lawsuit against Goldman Sachs and its Australian offshoot, saying it was misled after one if its funds bought a security packed full of US subprime mortgages that eventually contributed to its collapse.

WDC – preparing to launch a Australia’s first virtual shopping centre.

TCL – the tollroad operator said it completed its $542.3 million equity raising Thursday, however retail investors largely shunned the offer to help fund its $630.5 million acquisition of Sydney’s Lane Cove Tunnel with only 5% uptake from eligible retail investors. TCL said the 27.8 million new securities not taken up by retail investors in the 1-for-11 entitlement offer, failed to achieve the A$4.60 clearance price under a book build and will be taken up by underwriters UBS and sub-underwriters to the issue.

Economic Reports out today:- None

Market volatility will continue near term, some speculative accumulation is underway.
We the suggest trading strategy is to tighten stops. Be prepared to take profits, look for value stocks.

Market Summary

ASX – to open higher, giving opportunity to take profits ahead of the long weekend
US & UK/Europe – Positive Leads

US ADRs – Broadly Higher!!!…

BHP up 6.4% & RIO up 7.6%; AWC down 1.9%
ANZ up 6.6% & NAB up 6.9%
NEM up 0.8%, JHX up 1.9%, NWS up 4.5%

Commodities Stock Index up 4.1%
Gold Stocks Index up 1.1%
Oil Stocks Index up 5.3%

By Michael Hevern
Head of Research

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Friday, 4th June 2010 Morning Wrap

Friday, June 4th, 2010

Morning Market Wrap

Techs Boost US Markets ahead of the Jobs Report

US stocks rose, giving the Standard & Poor’s 500 Index its first consecutive gains since April, as speculation a jobs report tomorrow will bolster optimism in the economy overshadowed concern about slowing growth in China.

The SPI Futures is above the key level of 4400 the ASX is set to open higher as the SPI closed down 6 points (or 0.1%) at 4,480. Key levels for the SPI today are 4350 and 4550. Expect our market to trade flat, ahead of the US employments report tonight.

Techs lead the way in the US, but miners were hurt by concerns on Chinese demand. S&P500 mining index was down 1.1%. Coal and copper companies also plunged on the concern that demand from China will slow. S&P Finance index was down 1.2%. The S&P 500 Index increased 0.4 percent to 1,102, but is still below its 200-day moving average. The Dow gained 6 points, or 0.1 percent, to 10,255, with around two stocks rising for each that fell on US exchanges.

U.K. stocks rose, with the FTSE 100 Index climbing for the first time in four days, amid optimism the economic recovery in the US is broadening and energy stocks recovered 2.2% as bargain hunters stepped in; BP has lost a third of its value since mid-April. The FTSE is up 59, or 1.2 percent, to 5,211.

Chinese stocks dropped to a 13-month low, on concern bank fundraising and government efforts to cool the property market will hurt shareholder stakes and dent demand for resources. The Shanghai Composite Index lost 18, or 0.7 percent, to close at 2,552, the lowest since April 30 2009, and erasing an earlier 1 percent gain.

Oil prices finished higher after a mixed session, with NYSE main contract, light sweet crude for delivery in July, rising 0.5% to close at $US73.21 a barrel.

Gold was lower on weakening euro, with investors pulling out of gold as the euro bounces off of a four-year low. Gold for August delivery fell 0.1% to settle at $US1212 an ounce.

Key Drivers Overseas

Jobless claims decreased and service industries expanded in May for a fifth straight month, showing the US recovery is broadening. The Institute for Supply Management’s index of non-manufacturing businesses, which makes up almost 90 percent of the economy, held at 55.4 for a third month. Readings above 50 signal expansion.

There is speculation that the ECB is going to have to roll out some kind of debt guarantee program, suggesting Europe conditions may worsen. The Euro falls still around 4-year lows amid speculation this European Central Bank may need to take steps to boost liquidity in the financial system.

Forecasts for Non-Farm Payrolls probably rose by more than 533,000 workers in May, a fifth consecutive gain, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department’s report tomorrow. Of those, 178,000 will reflect private hiring, the survey showed.

Markets Overview

US markets Hold Ahead of Employment Report

SP500: up 0.4% at 1,102 – Techs Lead
DOW up 0.1% at 10,255 – Holds Above 10,000
NASDAQ: up 0.96% at 2,303

Dollar Index: higher at 87.17 on Lower Euro
A$ lower at 84.32 (above 10-month Lows)

FTSE: up 1.2% at 5,211 – Energy Recovers
DAX up 1.2 % – Still in Uptrend

CHINA: down 0.7% at 2,552 – 13-month Lows as Suport becomes Resistance
HSI down 0.2%

Oil: up 0.5% ($73.21)
BP Makes Progress on Oil spill in Gulf of Mexico

Gold: down 0.7% at ($1,212)
Commodities Mixed

SPI: Above Key 4400 ASX
SPI down 0.1% at 4,480

ASX News

The SPI Futures is above the key level of 4400 the ASX is set to open higher as the SPI closed down 6 points (or 0.1%) at 4,480. Key levels for the SPI today are 4350 and 4550. Expect our market to trade flat, ahead of U.S. employments report tonight.  Takover targets are discussed here…

AUD – weakens, still above 10 months lows.

AWC – wants to move contract pricing towards spot pricing over several years.

BOL – Boom Logistics was up 35%, after it confirmed it is the target of a $0.52/share takeover bid from a private equity group that values the company at $240 million.

JHX – Shareholders have overwhelmingly voted in favour of its final stage to domicile from The Netherlands to Ireland.

LEI – has won a $273 million, six-year contract in Mongolia.

QBE – says it has significant reinsurance protection in place for claims relating to the BP oil rig disaster
in the Gulf of Mexico.

Wheat – Planting in Western Australia was 60 percent to 70 percent completed while New South Wales was 70 percent to 90 percent sown, WA needs followup rains though. Commonwealth Bank of Australia this week reiterated a forecast for a 5 percent year-on-year drop in the national wheat area, resulting in a crop of 20 million to 21 million tons.

Xstrata – shelved spending on projects worth A$6.6 billion ($5.5 billion) in Australia, intensifying pressure on the government to wind back its proposed 40 percent RSPT tax on the super profits

Market volatility will continue near term, Non-farm payrolls figures will be key on Friday night.

We the suggest trading strategy is to accumulate, using covered calls and tight stops. Resources Rent Tax will continue to be topical. Remember to take profits.

Market Summary

ASX – to open flat
US & UK/Europe – mixed leads

US ADRs – Broadly Mixed!!!…

BHP down 1.8% & RIO down 0.8%; AWC down 2.8%
ANZ up 0.8% & NAB uo 1.5%
NEM down 2.5%, JHX up 1.1%, NWS down 0.3%

Commodities Stock Index down 0.2%
Gold Stocks Index up 1.2%
Oil Stocks Index up 1.1%

By Michael Hevern
Head of Research

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Thursday, 3rd June 2010 Morning Wrap

Thursday, June 3rd, 2010

Morning Market Wrap

Bargain Hunters Step into US Stocks

The US markets bounced overnight after a stronger-than-expected increase in pending house sales restoring investor sentiment towards the economy, up with the third biggest gain of the year.

The gains were across the board especially the Financial and Energy.  The President also indicated that the Unemployment figures due out on Friday will surprise to the upside.

The SPI  Futures is above the key level of 4400 the ASX is set to open higher as the SPI closed up 81 points (or 1.8%) for the SPI today are 4350 and 4550.  Expect our at 4,468.  Key levels market to trade higher, following upbeat US reports on the economic recovery.

The National Association of Realtors said its index of signed contracts for existing homes rose 6 per cent, ahead of estimates by economists, and due partly to a rush to meet a tax credit that expired in April.

The upbeat report provided some hope on the nation’s housing market, ad Financials rose accordingly.

Energy companies recovered after their sell-off of the previous session, where heavy losses were posted a day earlier when the U.S. government announced criminal and civil investigations into the Gulf oil spill.

The Dow gained 225 points, or 2.3 per cent,  at 10,249 and the the Standard & Poor’s 500 index rose 27 points, or 2.6 per cent, at 1098, while the Tech heavy Nasdaq composite index climbed 58, or 2.6 per cent, to settle at 2281.

European stocks fell on worries about the impact of the debt crisis on some of Europe’s banks, but rebounded later in their sessions on upbeat US housing data and a rise on Wall Street.

In the U.K. the FTSE index lost 12 points, or 0.23 per cent, to 5151, and in Europe Germany’s DAX closed flat at 5981.2; with the French CAC-40 index down 2 points, or 0.05 per cent, to 3501.

You can see from its chart that Germany remains strong with its uptrend intact. A rise in the euro from a four-year low saw investors putting their money to work.

Oil prices finished higher after a mixed session, with NYSE  main contract, light sweet crude for delivery in July, rising 28 US cents to close at $US72.86 a barrel.

Gold was flat as the euro strengthened, with investors are pulling out of gold as the euro bounces off of a four-year low. Gold for August delivery fell $US4.30 to settle at $US1222.60 an ounce.

Other metals also fell with Silver for July delivery fell 23.6 US cents to $US18.315 an ounce, while palladium for June delivery dropped $US9.35 to $US451.40 an ounce.  July copper fell 2.25 US cents to settle at $US3.0405 a pound.

US Markets

U.S. Markets Rise on Bargain Hunting as Key Levels Hold

SP500: up 1.2% at 1,098 – Energy & Financials Surge

DOW up 1.1% at 10,294 – Holds Above 10,000
NASDAQ: up 1.5% at 2,281

Dollar Index: flat at 86.77 on Higher Euro
A$ lower at 84.12 (above 10-month Lows)

FTSE: down 0.2% at 5,151– Financials Recover
DAX flat – Still in Uptrend

CHINA: flat at 2,571 – Support becomes Resistance
HSI down 0.2%

Oil: up 1.0% ($73.56)
Oil spill in Gulf of Mexico Still a Problem

Gold: down 0.1% at ($1,222.60)
Commodities Lower

SPI: Above Key 4400 ASX
SPI up 1.8% at 4,468

ASX News

The SPI  Futures is above the key level of 4400 the ASX is set to open higher as the SPI closed up 81 points (or 1.8%) at 4,468.  Key levels for the SPI today are 4350 and 4550.  Expect our market to trade higher, following upbeat U.S. reports on the economic recovery.

AUD – strengthens, above 10 months lows.

AXA – has extended an exclusivity agreement with NAB, as the NAB looks for ways to satisfy the competition watchdog in its attempt to buy the wealth manager.

CBH – has accepted a proportional takeover bid by the lead, zinc and silver miner’s largest shareholder, Japan’s Toho Zinc Co Ltd.

BANKS – Downgraded. Morgan Stanley remains cautious on sector, saying Australian banks still rely heavily on wholesale funding and revenue headwinds are significant. NAB is their preferred.  Targets cuts: CBA to $47.30 (vs $54.00), ANZ to $21.00 (vs $23.00), WBC to $22.90 (vs $27.30).  Goldmans also trimmed their banks tragets similarly.

FMG – says its unable to expand, citing banks are not prepared to fund the group’s proposed $18 billion Pilbara iron ore expansions due to the RSPT regime and will cost 30,000 jobs.
IAG -  cut its full year insurance margin guidance following a $365 million pre-tax charge relating to its UK business.
HSP – U.S. hospitals and diagnostic imaging centres operator Tenet Healthcare Corporation confirms it is in takeover talks

LEI – Friction due to board’s knocked back of a takeover bid for Leighton this year is likely to boil over, as  CEO Wal King and his fellow Leighton Holdings directors are headed for a showdown with directors of the group’s German parent, Hochtief, at a board meeting in Hong Kong on Sunday.

MTS – reported a 12.4% rise in annual net profit and forecast up to 8% earnings growth in the current fiscal year.

RIO – says it paid an average effective tax rate in Australia of 35.6% over the decade to the end of calendar 2009, in stark contrast to government reports.  CEO Tom Albanese said the new RSPT tax could lift the company’s effective tax rate in Australia to “well over 50%.”

VBA – facing more challenges with the new CEO saying it will overhaul its’ operation, which may lead cuts to several international and domestic routes.

Day two for miners presenting at the two day conference in Canberra.  The RSPT is the hot topic.

Market volatility will continue near term, Non-farm payrolls figures will be key on Friday.

We the suggest trading strategy is to accumulate, using covered calls and tight stops.  Resources Rent Tax will continue to be topical.

Market Summary

ASX – to open higher
US & UK/Europe – positive leads

U.S. ADRs  – Broadly Higher!!!…

BHP up 3.6% & RIO up 4.4%; AWC up 4.0%
ANZ up 2.7% & NAB up 3.0%
NEM up 1.9%, JHX up 3.1%, NWS up 3.3%

Commodities Stock Index up 3.7%
Gold Stocks Index up 2.2%
Oil Stocks Index up 3.4%

By Michael Hevern
Head of Research

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Wednesday, 2nd June 2010 Morning Wrap

Wednesday, June 2nd, 2010

Morning Market Wrap

Pessimism rules as bears take control late in the session.

After trading flat for the bulk of the day, the bears stepped in late to sell-off the markets, despite good US economic reports regarding manufacturing and construction from earlier in the day.

The SPI Futures is below the key level of 4400 the ASX is set to open lower as the SPI closed down 44 points (or 1.0%) at 4,366. Key levels for the SPI today are 4250 and 4450. Expect our market to trade lower, following the U.S.

The Reserve Bank (RBA) has left its cash rate at 4.5% and is sticking with its upbeat view on the economic recovery, which it says is on track despite recent turmoil in Europe and growing fears of a double-dip global recession. Though it did say it is reviewing the effects of Europe’s debt crisis, but the world’s growth prospects remained healthy

Financial and Energy sectors were the biggest drag, down over 2% on the day. The selling was triggered by the government on the possibility of criminal charges into the Gulf of Mexico oil spill and ongoing concerns about Europe’s financial sector. BP PLC was heavily hit because it operated the rig that caused the spill, it fell almost 15 per cent.

European stocks had a mixed day with continuing concerns over debt, and employment. In the 16 nation eurozone (EU), the unemployment rate rose to a record 10.1 per cent in April from 10 per cent the prior month, official data showed. Eurozone manufacturing activity slowed in May to a level not seen since the collapse of the US investment bank Lehman Brothers, in September 2008, according to a purchasing managers index (PMI) compiled from an industry survey.

In the U.K. London’s FTSE index closed down 25.13 points, or 0.48 per cent, at 5163, while in Europe Germany’s DAX closed up 16.94 points, or 0.28 per cent, at 5981 while in Paris, the CAC 40 index closed almost flat, down 4.48 points, or 0.13 per cent, at 3503.

The euro slid as low as $US1.2112, its lowest level since April 2006, before climbing back to $US1.2298.

Oil prices slid on concerns over slowing economic growth, particularly in China and the EU. NYSE main contract, light sweet crude for delivery in July, closed at $US72.58 a barrel, down $US1.39. In London, Brent North Sea crude for July dropped $US1.94 to settle at $US72.71.

Gold had its highest close in two weeks, in a flight to safety as the commodity was bought up after a report said European banks face sizeable write-offs. Gold for August delivery added $US11.90 to settle at $US1226.90 an ounce. In July contracts, copper lost 4.15 US cents to settle at $US3.063 a pound and silver gained 12.9 US cents to $US18.551 an ounce.

US Markets

U.S. Markets Sees Selling After Long Weekend

SP500: down 1.2% at 1,070 Energy & Financials Weigh
DOW down 1.1% at 10,024
Just Holds Above 10,000
NASDAQ: down 1.5% at 2,222

Dollar Index: Up at 86.85 on Lower Euro
A$ lower at 83.20 (towards 10-month Lows)

FTSE: down 0.5% at 5,163 – Financials Weigh
DAX up 0.3% – Europe Debt sitll Concerns

CHINA: down 0.9% at 2,568 – Suport beComes Resistance
HSI down 1.4%

Oil: down 1.9% ($71.90)
Oil spill in Gulf of Mexico Still a Problem

Gold: up 1% at ($1,224.90)
Commodities Lower

SPI: Below Key 4400 ASX
SPI down 1.0% at 4,366

ASX News

The SPI Futures is below the key level of 4400 the ASX is set to open lower as the SPI closed down 44 points (or 1.0%) at 4,366. Key levels for the SPI today are 4250 and 4450. Expect our market to trade lower, following the U.S. The Reserve Bank (RBA) has left its cash rate at 4.5% and is sticking with its upbeat view on the economic recovery, which it says is on track despite recent turmoil in Europe and growing fears of a double-dip global recession. Though it did say is reviewing the effects of Europe’s debt crisis, but the world’s growth prospects remained healthy

ABS – Australian Bureau of Statistics releases national accounts figures, including gross domestic product for the March quarter. The market forecast is for an increase of 0.5 per cent in the March quarter, down from 0.9 per cent for the December quarter.

AUD – weakens, towards 10 months lows.

AXA – has extended an exclusivity agreement with NAB, as the NAB looks for ways to satisfy the competition watchdog in its attempt to buy the wealth manager.

BANKS – Downgraded. Morgan Stanley remains cautious on sector, saying Australian banks still rely heavily on wholesale funding and revenue headwinds are significant. NAB is their preferred. Targets cuts: CBA to $47.30 (vs $54.00), ANZ to $21.00 (vs $23.00), WBC to $22.90 (vs $27.30). Goldmans also trimmed their banks tragets similarly.

DOW – Downer EDI share price plunged, as its Fitch credit rating was downgraded to one notch above junk bond status, after it reported a substantial cost blowout for a government train project and tax impairments on other assets. Its NSW train carriages project required an additional $190 million, while it will also book a $66 million impairment on other assets. Shares down 26% at $4.58.

JHX - will hold an EGM in Amsterdam for a shareholder vote on the second stage of its proposed move of its domicile to Ireland.

LEI – Friction due to board’s knocked back of a takeover bid for Leighton this year is likely to boil over, as CEO Wal King and his fellow Leighton Holdings directors are headed for a showdown with directors of the group’s German parent, Hochtief, at a board meeting in Hong Kong on Sunday.

MTS – reported a 12.4% rise in annual net profit and forecast up to 8% earnings growth in the current fiscal year.

RIO – says it paid an average effective tax rate in Australia of 35.6% over the decade to the end of calendar 2009, in stark contrast to goernment reports. CEO Tom Albanese said the new RSPT tax could lift the company’s effective tax rate in Australia to “well over 50%.”.

Miners will be presenting at the two day conference in Canberra.

Market volatility will continue near term, with pressure still to the downside.

We think the trading strategy is to accumulate, using covered calls and tight stops. Resources Rent Tax will continue to be topical.

ASX – to open lower
US & UK/Europe – US and Europe end lower


US ADRs – Broadly Lower

BHP down 3.4% & RIO down 2.9%; AWC down 3.2%
ANZ down 3.8% & NAB down 3.8%
NEM up 1.5%, JHX down 1.7, NWS down 2.7%

Commodities Stock Index down 3.7%
Gold Stocks Index down 0.6%
Oil Stocks Index down 5.1%%

By Michael Hevern
Head of Research

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No-Frills Budget Preview

Tuesday, May 11th, 2010

Today’s budget may take a back seat to the $1 trillion EU bailout package, but it will be key to the direction of our economy in the next few years and the political fortunes of the Rudd Government.

The Australian Government aims to provide some disclosure of what to expect before the actual night of the budget, and this budget is no different. There are a number of areas that will be focused on including, super, bracket creep, resource rent taxes, tobacco tax hikes and spending on health care and infrastructure.

Treasurer Wayne Swan is expected to reveal that the billions of dollars in debt is being paid off faster than expected. The headlines in the Sydney Morning Herald this morning are highlighting that the deficit will be lower than previously forecast, saying that the Treasurer is expected to announce that the budget will return to surplus as early as 2012-13, three years ahead of schedule. This was helped by the government’s $12 billion resource super profits tax.

Highlights:

Spending

The big ticket item is expected to be $7.4 billion in health care spending, with the focus on cheaper medicines and spending to improve hospitals, aged care, doctor training and elective surgery.

Superannuation will be lifted to 12 per cent by 2019, employer contributions will have to increase as a result.

Tax cuts in the form of addressing bracket creeps.

Tobacco tax hikes are expected to deliver $5 billion over four years.

Business incentives include company tax rates to be cut from 30 to 28 per cent from July 2011 and small businesses will be able to write-off assets up to $5000.

The most controversial topic is the Resource Rent tax which is set to increase the tax take by $9 billion in the short order. The government calls this a super normal profits tax and BHP and RIO are set to be the hardest hit by the changes. The 40 percent tax on resource profits will start from 2012 and raise $12 billion in its first two years.

Savings

Savings are expected to come from the shelving of the emissions trading scheme which will save $2.7 billion, also the axing of the home insulation program, saving $1 billion and the stripping of $1.9 billion in subsidies from pharmacies dispensing widely-used cholesterol and reflux drugs. Public sector spending may also see cuts.

Some other possible announcements include: Review on tax of Employee Share Schemes after last year’s ill advised attempt; Review over the reduction of taxes on bank interest; News on the progress of the National Broadband Network; Defense and boarder protection; Childcare; Educational training programs to address the workforce skills shortages.

Our View

The Rudd Labor Party will be looking to use the budget as an opportunity to claw back from the recent dismal opinion polls ratings. They will use the budget to highlight how Australia’s economy skirted the global recession on their watch and is well-placed to weather any fallout from the European sovereign debt crisis.

Australia is one of the best performing countries to emerge in the world economic meltdown resulting from the GFC. The share market winners are likely to include the: Health care sector; Infrastructure sector; Superannuation Providers and the Materials Sector, as investors and companies come to terms with the Resource Rent Tax implications.

By Michael Hevern
Head of Research

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Analyst’s Eye: Three Strikes – Short Circuit Recovery

Friday, May 7th, 2010

Global markets have undergone turmoil over the past few weeks, causing investors to re-evaluate their portfolios and trading strategies.

There are three key drivers: 1) “PIGS” cannot fly; 2) Election Season; 3) Resource Revaluations.

“PIGS” Cannot Fly

“PIGS” is the acronym used to describe the combined key ailing economies in the European Economic Union (EU). These countries: Portugal, Ireland, Italy, Spain and Greece combine to contribute 35% of the EU GDP basket. All of these countries are undergoing extreme stress with sovereign debt and have recently had their credit ratings downgraded.

The debt to GDP ratio is a measure of the capacity of a country’s ability to repay its debt. Debts have been ballooning with the debt/GDP ratios for Ireland at 14%, Greece and Spain at 11% and Portugal at 9%.

The EU has approved a $146 billion bailout package for Greece; however the consequential austerity measures of cutting of public spending, salaries and pensions and has caused civil unrest. The other countries in this group are likely to face similar reactions.

Investors fear contagion in this region and understandably the bears are likely to remain in control in these markets until there is some clear direction over how the debt issues can be resolved. The European Central Bank (ECB) met overnight and appears to be taking a “do nothing” approach, which will not help sentiment.

Election Season

Investors hate uncertainty and typically government elections lead to unease for investors. There are two key elections happening in the UK and Germany.

The UK elections are happening now and by all reports, the result is “too close to call”. The consensus is that either a hung parliament or minority government will be the result.

Germany will be undertaking state elections next week. There is uncertainty over the expected results. This result will have an impact on the ruling federal CDU-FDP coalition led by Chancellor Angela Merkel, as it stands to lose its majority in the upper house of the German parliament. This has added to the uncertainty in resolving the Greek sovereign debt bailout package, as the German government does not want to commit until the elections are over.

Given that the results of these key elections are unlikely to be clear cut, investors are likely to continue to choose to park their money in the near term, adding to the pressure on the equities markets.

Resource Revaluations

The Aussie markets have been battered over the past few weeks. The RBA increased interest rates again to 4.5% this week, which puts pressure on consumer spending and the cost of doing business. The financials sector started to feel the pinch this week, with the majors down around 10% from their recent highs and set to fall further today.

The other big news of the week was the much anticipated Henry Tax Review, which recommended a Resource Rent Tax. The new resources rent tax is set to increase the tax take by $9 billion in short order. The government calls this a super normal profits tax and BHP and RIO are set to be the hardest hit by the changes. The 40 percent tax on resource profits will start from 2012 and raise $12 billion in its first two years.

BHP, the world number one resources company with 51 percent of its assets in Australia, said the tax rate on its Australian earnings will increase to 57 percent in 2013 from 43 percent now. Analysts estimate that BHP and RIO will have to pay around $7 billion of the $9 billion tax take, resulting in BHP’s earnings being impacted around 25%, while little brother RIO’s earnings will be hit by around 17%.

Resources companies make up 9 percent of the economy and last week warned that a 40 percent levy and double taxation with payments to states would threaten $108 billion of planned investment. The government said it will compensate companies for the state royalties they have paid. The new regime will also give a tax concession for resource exploration, including geothermal power, affecting 4,300 companies.

The new tax regime will take time to implement, adding to market uncertainty.

Our View

The three strikes have combined to trigger a pullback in our market, after a spectacular recovery from the GFC since 2009. The materials sector is under pressure with: the turmoil in Europe resulting in the US dollar rising to 14-month highs against the Euro, which in turn puts pressure on commodities prices (as they are priced in $US); China’s tightening of monetary policies and the proposed resource rent tax; and now the plunging U.S. markets.

The current pullback will present some value propositions. Focus on stocks with potential M&A prospects. Though investors should be looking for some clarity in the resolution of the aforementioned issues, before considering reversing their bearish stance back to a more bullish view.

By Michael Hevern
Head of Research

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