Everyone waits for Friday:

Investors are all waiting for the Jobs report which is due at 8:30 Friday morning. I would expect to see a relatively small number on Friday somewhere around 100,000 new jobs for the month of July.

Teck has increased its offer for Inco to $82.50 per share and has added a second option which is a combination of stock and cash. This option is $40.00 cash plus 0.5821 of a Teck share, the original offer of 1.1293 Teck shares plus a nickel for each Inco share is still on the table.

This new Teck offer has increased speculation that more bidders will develop to compete with both Teck Cominco and Phelps Dodge for Inco. Inco shares are currently trading over $86.00. I would be tempted to sell Inco as the current price is well ahead of any previously mentioned valuations.

A small Canadian brewer Sleeman Breweries (ALE-T) has been put up for sale and they are expecting at least four bidders will compete for the company. This could be a very interesting speculation and has the potential to move higher over the short term as investors get positioned for the bidding war to develop.


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Inflation is the top topic today:

Fed Chairman Ben Bernanke is in from of the Senate Banking Committee today and it appears that inflation will be on everyone minds. The CPI was released earlier today and showed an expected 0.2% increase for the month and is now up 4.3% year over year. The surprise is that core inflation was up more than expected coming in 0.3% for the month of June and is now up 2.7% year over year. This pretty much puts the icing on the cake for an increase in interest rates on August 8th.

Yahoo released quarterly earning and they were in line with expectations, but the company announced a delay in the eagerly awaited update to tier ad placement program moving the launch out to next year. The investor disappointment has shaved $6.00 off the share price and it still looks expensive.

Falconbridge shareholders should be selling as the takeover companies are yelling.

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Phelps Dodge increases bid for Inco:

Phelps Dodge has increased its bid for Inco by $2.50 to $00.00 the new offer is intended to help Inco fend off a competing bid for Falconbridge.

Inco has increased its bid for Falconbridge by $1.00 in an effort to fend off the competing bid by Xstrata. The Xstrata bid is an all cash offer of $59.00 per share the Inco bid is a combination of Inco shares and cash and is currently calculated at approximately $62.00.

Falconbridge shareholders should consider the option of selling their shares as there is a risk that the takeover will become mired in a legal battle and be delayed to the point where the small amount of gain will not be worth the wait.

Inco shareholders should also consider selling into the market as the convoluted takeover by Phelps Dodge may also be held up by legal arguments by Tech Cominco regarding the proposed Inco poison pill.

Once these takeovers become contentious and the offer prices reach a substantial premium to the rest of the sector it is prudent to bail and look for other opportunities in the sector.

The mid tier commodity producers look very attractive on a relative valuation to the large producers. These companies such as LionOre (LIM-T) and Aur resources (AUR-T) are likely to be takeover candidates themselves in the near future.

Take the money off the table and let the institutions wait around for the dust to settle. There is a substantial risk these deals will fall apart.



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Xstrata increases offer for Falconbridge:

Swiss mining company Xstrata has increased its takeover offer for Canadian nickel producer Falconbridge to $59.00. The all cash offer is only slightly higher than the current competing bid by Inco. The Inco offer is a combination of stock and cash currently stands at approximately $58.00.

The consolidation in the global base metal mining business is heating up as the major players try to diversify their production into different metals in the belief that metal prices will remain at elevated levels longer term.

The Inco bid has been enhanced by the offer for both Inco and Falconbridge by Phelps Dodge. The Phelps bid is valued at approximately $80.00 a share for the combined Inco/Falconbridge but is not dependent on Inco acquiring Falconbridge.

This story is only part way through as Inco is very likely to top the Xstrata bid with assistance from Phelps Dodge. Stay tuned.

What Now

The recent market volatility has created a lot of uncertainty and fear as investors second guess themselves. The uncertainty is being heightened by the talk of inflation pressure increasing due to higher fuel prices and the potential for higher interest rates as a result.

Investors should be looking at this market decline as an opportunity to refocus their portfolios to take advantage of the next upswing. This is a time to be cautiously greedy and patiently waiting for share prices to get back to levels that represent good long term value. There will be some excellent opportunities created by this decline and the best strategy to utilize in this type of market is to be ready to act.

The global economy remains in a strong growth trend even as there are signs that the US economy is starting to slow. The US economy is likely to see a recession as the Federal Reserve continues to increase interest rates in an effort to reduce inflation pressure. Investors should be looking at sectors that are not dependent on the US economy for profit growth.

The Canadian market contains many companies that are in a position to benefit from global growth that is not centered in North America. Investors will be well rewarded for selling shares of companies that are depend on the strength of the North American economy and moving into companies that are supplying products to the global growth region Asia.

There are a number of sectors that are well positioned to capitalize on the long term growth in Asia. The global demand for base metals is driven by the increase in infrastructure and housing demand that is being created by the transformation of China and India from an agricultural to industrial societies.

The creation of wealth is being reinvested in homes, highways and power facilities to supply the needs of a newly created middle class. The pace of change is picking up speed and the trend appears to be very well entrenched with the potential to last for years into the future. The demand will remain strong as millions more people will be participating in this over the next few years.

The Canadian mining sector is attracting global attention as seen in the recent take over activity with Phelps Dodge the largest copper produce in the world trying to buy Inco/Falconbridge in an effort to be a global player in the nickel business as well. While at the same time Falconbridge is trying to fend off a takeover by Xstrata of Switzerland. This takeover activity is driven by the belief that metal prices will remain at elevated levels for a lengthy period of time and that the premiums being paid to buy these companies will be justifiable over the long term.

The Economy this Week

The economic news this week has been quite mixed as investors focus on what the Federal Reserve will do at their next meeting in August. The consensus opinion remains tilted towards a rate hike of 0.25% with 60% of those surveyed still expecting the Fed to focus on fighting inflation.

The Labor Department released the non-farm payrolls report today and the number of jobs created in June was well below the forecast of 175,000, coming in at only 121,000. There were some indications that the number could be substantially higher due to ADP survey that was released on Wednesday which forecast 350,000 new jobs in June.

The US economy appears to be slowing but the non-farm report also showed an increase in average hourly wages of 0.5%. This is 3.9% higher on a year over year basis the largest increase since 2001. The increase in earnings could be an indication of increased inflation pressure or it could be that businesses are seeing the economy slowing and have chosen to increase the number of hours worked with the same workforce.

The pace of consumer spending is falling as indicated by the recent chain store sales data which was much lower than expected falling 0.7% for the week ended June 30th. Chain store sales for the month of June were down 0.4%, this is the second month in a row of declining sales. The reason cited is higher gasoline prices which have been consistently impacting the consumer’s ability to buy. Higher energy prices are only part of the story as home prices have been falling as well and this is dramatically reducing the consumer’s ability to borrow to consume.

The Federal Reserve will receive a number of other reports on the economy before their August meeting and if the data continues to show a weakening economy they may have to rethink their stance on inflation in the short term rather than move rates too high at a time of a decrease in demand. At this point I believe the Fed will err on the side of caution and leave rates unchanged in August due to the consistent reports of economic activity declining.

The day North Korea blinked:

It appears that North Korea has failed at holding the world hostage. The recent missile tests have not been nearly as successful as they had hoped. This is a very good thing for Japan and South Korea as this failure may keep North Korea from being over aggressive going forward.

The global equity markets have no reacted dramatically to the news as most investors now realize that North Korea is mainly all talk with little ability to follow through on their threats. The market in North America are down at the start of the day but are likely to be in positive territory by the close as investors shrug off the current threat.

The North Korean government has been holding the US hostage with threats of nuclear action and in the past the US and others have paid North Korea in the form of aid to back off. This recent missile test has reduced N. Korea’s ability to continue to demand payment. This will prove to be very beneficial for the rest of the world as tensions will be much lower now that North Korea has proven they are not nearly as much of a threat as they had indicated.

The bigger news this week will end up being the non-farm payroll report on Friday, the market is expecting 170,000 will have been created for the month of June anything higher will increase the potential for an increase by the FOMC in August, stay tuned.

A slowdowns’ a comin:

The US economy is showing signs of slowing and the recent interest rate increase by the FOMC will hasten the arrival of a recession.

Auto sales at all the American companies are well below expectations with sales at Ford down 6.9%, Chrysler down 13% and GM down 34% from a year ago. High fuel prices are having some impact but it appears that generally the consumer is not feeling as confident.

The slowdown in the real estate sector is having a major impact on the consumer, the wealth effect from home price increases has been a driving force in consumer demand. It appears that is coming to an abrupt end as higher interest rates make mortgages unaffordable to a larger and larger segment of the market.

The economic coming slowdown will have a wide ranging impact on share prices as consumer demand slows profit growth will be very hard to come by. Profit growth has been the main driving force over the past four years of the bull market. The expectations have been for double digit growth in earnings and that is not a sustainable rate. Be prepared for a considerable number of disappointments over the next few weeks as earnings announcements are released.

Investors should also be prepared for two other potential shocks to the markets. I believe there is a very high potential for a major blowup in the hedge fund sector that will have a spill over effect in to all markets. The world has been a wash in cheap money due to the Zero interest rate policy in Japan, that is coming to an end as it does these hedge funds will be squeezed and they will then make mistakes. Be on the look out when these highly leveraged accounts get even more aggressive in an effort to maintain their performance in the face of higher cost capital. This could come to a very ugly end.

The second potential shock is from the current investigation in to option pricing the high tech sector is going to come under increased scrutiny due to option back dating investigation. There are going to be a few companies whose abuse of this strategy will be so blatant that the executive will end up in jail. This investigation comes at a time when there very little to support the current prices and will end with a huge sell off in this sector. Be careful.