Mining Mega Deal

Phelps Dodge (PD) has just announced a take over offer for Inco (N) and Falconbridge (FAL).

The merger will create a super major mining company and create the largest nickel producer in the world. This is the largest mining deal in history valued at approximately $48 billion. PD is offering $80.13 CAN for the combined Inco/Falconbridge.

In an effort to have the deal complete as planned PD is buying # billion of Inco debt in the form of subordinated notes, this will give Inco the flexibility it requires to complete the Falconbridge takeover. Inco has raised its bid for FAL to $62.11 CAN from $46.80 this should trump the current offer for FAL from Xstrata Plc of Switzerland.

This deal will be an industry changing deal as it sets the standard regarding size for global competitors.

Oil Mergers

The energy sector was helped this week by the announcement that Anadarko Petroleum Corp has made a takeover offer for both Kerr-McGee Corp. and Western Gas Resources Inc. The two separate offers came on the same day and added substantial interest medium sized oil and gas companies. The Anadarko combined offers are for more than $21 billion and were at huge premiums to the closing share prices for both Kerr-McGee (40%) and Western Gas (49%). The take over will make Anadarko one of the largest independent oil & gas producers in North America.

The fact that Anadarko has offered such a huge premium has created a stir in the small to medium sized energy sector of the market as anticipation of additional consolidation moves investors into other potential candidates. At this point investors are being rewarded by owning just about any of this sector of the market. Time will tell which companies has assets and reserves that make them attractive take over targets. I would expect this sector to sell off over the next few weeks as cooler heads prevail not all of these companies are going to warrant a 40% plus premium.

Changes in Telecom:

The announcement today that Nokia and Siemens are going to combine their mobile networks operations will create the world’s second largest mobile telecom equipment company.

The new joint venture will has annual sales of $20 billion and corner approximately 20% of the global equipment market just behind the world leader Ericsson which currently has a 26% share. The companies expect cost savings of about $1.9 billion annually.

This combination is another is a series of consolidations in this industry and this will not be the last. This joint venture will put increased pressure on Nortel as it will leave it lagging well behind in market share. This is just another nail in the Nortel coffin laving the company in a seriously lagging position in a market where they had a real opportunity for leadership.

The problem at Nortel is that they do not have any credibility and that will be a major huddle that will have to be over come before any other company will be willing to take a run at them or partner with them.

Nortel may be the next big failure in the tech sector another casualty of over capacity and accounting tricks. Stay away!

Inflation, Inflation, Inflation

The economic news this week has been dominated by inflation concerns. The Federal Reserve has been talking up the inflation factor and investors have reacted by selling bonds and pushing up interest rates. The Consumer Price Index (CPI) for May was up 0.4% for the month and is 5.2% on a year to date basis. The core CPI which excludes food and energy was up 0.3% for the month and 3.1% year to date. The pace of change is building momentum and this is causing an increase in concern at the Federal Reserve. The Fed is not alone in being concerned about inflation pressure the European Central Bank (ECB) raised rates this week and sited inflation as the reason for the increase.

The Federal Reserve Chairman, Ben Bernanke, has been quoted as saying that “Inflation expectations, if they get high enough can create a self-fulfilling prophecy”. The Fed is concerned that the general expectation of future inflation has been increasing over the past few months and that is that sentiment persists then consumers will be more willing to accept higher prices. This willingness to pay higher prices will allow inflation to take hold in a much broader segment of the economy not just in energy and related sectors.

The New Federal reserve Chairman is also concerned about how the world perceives him and in order to make his position as an inflation fighter clear, I would not be surprised to see the Fed move rates by 0.5% at the next meeting June 28-29th. This would signal to the rest of the world that the Bernanke Fed will do what it takes to halt inflation.

It’s a small world after all:

The last week has really brought this statement to mind as the entire worlds equity markets react in concert. The global central banks have been focused on the increasing inflation pressure from higher energy prices. This inflation concern is causing the central banks to increase interest rates in an effort to reduce demand and slow economic growth.

It is interesting to see the reaction as investors move out of the commodity stocks on fears of a global slowdown. In many sectors the commodity prices were pushed well beyond their fundamental values due to hedge funds plunging into the metals and energy sectors.

The hedge fund industry has boomed over the last few years as they have been able to borrow in Japan with no cost and buy in North America reaping the benefits of cost free leverage. Now that Japan has signaled an end to the Zero Interest Rate Policy in the near future these hedge funds will no longer be able to leverage their portfolios with as much ease. The fall out of this has been a reduction in the amount of capital available to support markets in North America and to an extent Europe as well.

The current correction still has some downside but over the next few weeks there are likely to be some very interesting opportunities in the commodity producers such as base metals and precious metals.

Global demand may slow over the next year mainly in North America and Europe but the growth in Asia appears to be sustainable over the long term and this is region the commodity producers are leveraged to. It would seem prudent in the short term to wait for the markets to settle down a little before moving back in to equities.

Inflation concerns causing market volatility:

The Federal Reserve is signaling that inflation pressure is still a major concern. At every turn the FOMC members are talking tough on inflation. This hawkish rhetoric is keeping the bond and equity markets under pressure. The next CPI report will be on Wednesday June 14th this will be a major piece of information that will likely set the policy decision for the Fed.

The stock markets are selling off again today due to the Fed remarks and the rise in crude oil price which is feeding inflation concerns. Crude is trading around $72.00 again this morning.

It is interesting to note that the CEO of British Petroleum (BP) is talking about crude oil falling all the way back to the $35-$40 range over the medium term. This is a considerably different forecast from the rest of the market and if BP really believes this you should see their hedge book move to fully hedged over the next while to lock in the current high prices. I don’t think anyone is that bold but you never know will be interesting to see if Mr. Brown is willing to put his company where his mouth is.

Have you seen the Apple commercials lately? These spots are focusing on the Macintosh and pointing out the differences between Macs and PCs. This may be an indication that Apple is seeing an opportunity to capitalize on the Ipod phenomenon as a marketing edge for their computers. It will be interesting to see if the Ipod can bring in new Mac users.

What a week

This has been quite a week in the Nort American equity markts. The Dow and the S&P 500 are now back to their 200 day moving averages and this support level must hold or it could get very ugly.

The NASDAQ has already broken below the 200 day MA and looks like it could go a bit lower in the short term. This market has not looked very invitng for some time now and I would stay away.

The TSX compositre has been able to remain above the 200 day MA and still appears to have the potential to be the best performing market again this year.

There has been an increase in concern regarding inflation and the ECB has increased interest rates by 0.25% as a result. The Federal Reserve appears to be indicating that heigthened inflation pressure will force them to increase rates again this month. The anticipation of a rate hike has now pushed the yield curve into an inversion in the 2-10 year part of the curve this is signalling a recession in the US economy sometime late this year or early next.

Stay away from from companies that are dependednt on consumer spending and focus on the commodity producers ove the next few months, over weight oil and gas, base metals and precious metal stocks.