The market is doing it tough today – down 77 – as you might expect after Wall Street’s poor performance overnight. But its not all bad. The SFE Futures suggested a 104 point fall in the market this morning. We were marked off 101 first thing this morning and have rallied all day. It wouldn’t exactly surprise if Wall St decided overnight that it had over-reacted and rallied. It wouldn’t be the first time its dropped three hundred points and decided it was a mistake within 24 hours.

The Dow Jones closed down 294 or 2.2% overnight – It moved in 336 point range and fell the most in a month on speculation that the Federal Reserve’s quarter-point interest rate cut will not stop the US economy from going into recession. The market was hoping for a 50bp cut and on the basis of the Fed language was a bit surprised they didn’t get it. The Dow was up around 25 points before the Fed announcement that interest rates would be cut for the third consecutive month; it then went into freefall. The main reason for the heavy drop was that the Fed changed its language from the risks of inflation versus growth being “balanced” to higher risks of inflation and higher risks of slower growth.

Wells Fargo & Co. Chairman Richard Kovacevich said in an interview that he thought the Fed would cut rates by 75bp. Financials – on a bit of a run lately – all finished lower. Citigroup down 3% to $33.72 after trading as high as $35.29 prior to the announcement. They appointed a new CEO – they are the worst performer in the Dow this year down 38%. Bank of America fell 4% and Countrywide Financial lost 6.5%. Freddie Mac also had a terrible session closing down 6.1% after announcing their 4Q result will be just as bad as its 3Q $2.02bn loss – they don’t see a “short-term quick fix” to the housing market. The NASDAQ down 2.5%.

The FOMC cut rates by 25bp to 4.25% – the vote was 9 to 1 with the one dissenting voter wanting a 50bp cut. Main points were than economic growth is slowing, strains in financial markets have increased, inflation risks remain, recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation and the three rate cuts this year “should help promote moderate growth over time”. The Fed “will continue to monitor inflation developments carefully” (more rate cuts likely).

The main issue was that the Fed language changed from the “risks of inflation roughly balancing the downside risks to growth” to a statement that dwelled on the risks of slower growth whilst still mentioning continued inflation risks. The worst of both worlds. Housing market problems intensifying as well. The Fed language has reinforced the idea that the US economy is heading to recession so the market is surprised that the Fed didn’t cut by 50bp. hey are clearly more concerned about growth than the market thought. Next meeting on 29-30 January.

Resources down across the board… BHP down 92c to 4328c and RIO down 305c to 14345c. Metals mostly up overnight, Zinc up 2.1%, Nickel up 1.5% and Aluminium up 0.2%. Copper down 0.1%. Zinifex down 39c to 1494c. A bit odd that the price finished higher and not lower considering the market is concerned about the US heading into a recession. Woodside down 6c to 4731c. Gold up $3.60. Newcrest down 32c to 3288c.

  • Iron ore stocks down but relatively encouraged by the news that Steelmakers are going into mining – On Reuters today – India’s Tata Steel Ltd will invest $1 billion to $2 billion to develop an iron ore mine in Ivory Coast that could help the company boost its self-sufficiency in raw materials for steel-making. “We want to do everything very fast. We have to do exploration. We have to start planning and we have to start mining”. By comparison, ArcelorMittal the world’s largest steelmaker has a stated objective of 75 percent self-sufficiency. All good for the iron ore sector if steel companies are getting so concerned about supply. Confirms the BHP comments that the iron ore market will remain tight until 2015 at least.
  • Ten Network (TEN) have had their AGM. They say 2008 EBIT should exceed 2007. Q1 pretax up 14%… a little bit better than consensus forecasts. TEN down 4c to 283c.
  • Suncorp-Metway (SUN) have put out an update on the Sydney storms. They have had 9000 claims so far but they say it is not possible to give an accurate assessment of the total cost at this stage. SUN down 29c to 1916c.
  • A Babcock & Brown (BNB) consortium has bought a majority stake in MidCon, one of the largest natural gas transmission pipeline and storage systems in the U.S and is also the owner of the Natural Gas Pipeline Company of America. The Pipeline has an enterprise value of US$6.6bn, Knight Inc., who is the pipeline operator, will keeps in 20% stake. BNB said its direct commitment is 6% of the 80% acquired. BNB down 42c to 2802c.
  • Perpetual Trustees (PPT) have put out “Business operations and Strategy briefing” (69 pages). They have a new structure and presentations over the day on most divisions. Can’t spot any significant outlook or earnings comments. PPT down 75c to 6864c.
  • MYOB have had their investor briefing. They have upgraded earnings guidance and talk about strong cash generation. MYO up 11c to 151c.
  • Goldman Sachs JB Were have upgraded Orica to BUY. UBS Nominees have become a substantial shareholder today. Orica jumped yesterday after Dyno Nobel’s ammonia project was suspended with cost over-runs. They may now have to source from Orica and they also become a bit of a bid target. Credit Suisse has research out saying DXL’s pain is ORI’s gain. Merrill Lynch have cut their DXL target price to 240c from 260c and have downgraded earnings by 6%. They describe the suspension of the Moranbah project as very disappointing and going to the credibility of the management. Despite that they say BUY. ORI up 51c to 3091c. DXL down 6c to 213c… down from a high of 259c this week.
  • Macquarie Equities maintain their OUTPERFORM recommendation and 1198c target price on AMP after it announced the sale of its closed reinsurance and general insurance operations to Enstar Group for $585m. They say AMP has a “dominant position in the structurally attractive Australia superannuation market”. AMP down 21c to 1036c.
  • MEO Australia (MEO) up 7% on a gas find.
  • CSL bucking the trend – up 60c to 3670c ahead of a company briefing tomorrow. Some talk of a capital management initiative.
  • UBS Warburg cut its target price on Allco Finance Group (AFG) to 900c from 1150c despite maintaining their BUY recommendation after AFG announced it would partner up with Industry Funds Management. Their target price implies 10.3x their FY09e forecasts. AFG down 7c to 771c.
  • Envirozel (EVZ) does 0.5c ex dividend today.
  • On the diary in the US tonight we have import export prices, trade balance (expect $57bn deficit in October), crude inventories and treasury budget.

In the MARCUS TODAY newsletter today we have an article about the Rubbery Art of Estimation that pervades most of the broker research, and we highlight the risk of grabbing just the recommendation and target price without reading the guts. We also look at a couple more stupid questions. If you have a stupid question please email it to us.

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Peter Fray

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