Share Market Wrap 9th Nov 07

While there have been rumours that BHP has been contemplating a merger with RIO, the rumour is now official following the announcement last week by BHP that it had written to the board of RIO outlining its plans, RIO has rejected the offer, but are open to sell at the right price. Irrespective, the question that has to be asked is whether a merger between these two entities is really good for Australia and for investors. BHP is already the biggest mining company in the world, and a merger with RIO would decrease competition and in turn cause potential concerns for steel prices not only for Asian steel producers but the rest of the world. I also don’t foresee any significant benefits for investors if the merger goes ahead. While it will mean there will be one less mining company in the top 20 shares on the Australian market, it also means that investors will potentially miss out on the individual opportunities presented by these companies. Let me explain… BHP has risen 860% since December 1998 while RIO has risen 532%. This year to 31 October 2007, BHP has risen 81.93% while RIO has risen 47.85%. What this highlights is that if I invest in each of these companies separately, it is highly likely I would make much more money than if I invested in a single merged entity.

So what can we expect in the market?

In the past month I have stated that the market would display signs of volatility and unpredictability up until 1 November, and that during these times we could expect a number of false triggers. In my report on 26 October, I also stated it was possible that the current fall may continue for another week to around 1 November with the market falling to between 6480 and 6300 points. However, what actually occurred is that rather than continuing to fall the All Ordinaries Index rose on 26 October and continued to rise until 1 November achieving a new all time high of 6873 points. It was not until last Thursday when the market fell below the low of 22 October to 6537 points that we could confirm the move up to 1 November was a false trigger. The market now needs to fall for one to two weeks into a short term low from the all time high achieved on 1 November, and given that it has already been falling for 6 trading days up until last Friday, the current fall should be over soon. The good news is that I still believe the market will be bullish until Christmas. There is also a high probability that the market will move up very fast from the low and present some great buying opportunities.