NAB, RIO, WES

by Raymond Chan

ASX 200 up +0.40% on the back of strong gains by the Materials sector. Global Central Bank monetary easing has proven to be a shot-in-the-arm for commodities as prices continued their strong run throughout the week. Given our strong bias towards the resource sector, Australian equities outperformed overseas markets with US markets relatively flat and Asian markets generally lower. Meanwhile the US market near multi-year highs as positive housing data was offset by growth concern triggered by cautions comments from 'economic barometer' and international courier company FedEx.

The Shanghai market fell to a multi-year low, as investors remained concerned about the lacklustre growth in China following weak PMI manufacturing data and potential military tension between Japan and China over land title right of Senkaku (Diaoyu) Island (a 7 km tiny island with potential oil reserve underneath).

GOLD continued to perform strongly, nearing US$1,800 whilst iron ore bounced back sharply to around the US$110/t level. Meanwhile, Oil prices declined sharply after breaking through US$100/barrel last week as data showed higher U.S. inventories and Saudi Arabia, the world's biggest oil exporter, said it wants to see lower prices and will meet customer demand for its oil.

AUD/USD maintained a level around US$1.04 as commentators called on the RBA to cut interest rates by a further 50 basis points by the end of the year. The persistently high AUD and softening in retail has led to increased pressure for the RBA to cut rates at their next Board meeting on October 2. Inflation figures remain in the RBA's target range with room to cut rates if the Board deems appropriate.

Weakness in retail was highlighted by David Jones' FY12 result, which showed net profits in the year to July dropped 39.9%. The retailer put a price target of $612m price tag on its four flagship Sydney and Melbourne CBD properties in an effort to reassure investors of the company's underlying asset value. Rip Curl Group was also the latest retailer targeted by private equity suitors following the recent bid and subsequent withdrawal for Billabong International. In a statement by founders and major shareholders, Doug Warbrick and Brian Singer indicated the "received unsolicited approaches from several international organisations which have indicated a desire to invest in our company".

Fortescue Metals rallied strongly during the week as the company managed to renegotiate terms with financiers on its debt facilities with no significant covenants, break fees or repayments until November 2015. The news wasn't so good for MacMahon Holdings after a major issue with a Rio Tinto contract caused a large profit downgrade and resignation of Managing Director Nick Bowen.

From our Option Desk, here are the three option ideas:

Position One:                 Sell NAB October $26.01 Puts at 56 cents

Current Share Price:        $25.58 
Research Target Price:      $28.57

NAB will report their profit result on 31 October 2012 and trade ex-dividend on 10 November 2012.
The above position is a European option which ensures that early assignment cannot take place.


Position Two:                 Buy/Write in RIO - Buy shares at $53.97 and Sell November $58 Calls at 40 cents
Current Share Price:               $53.97
Research Target Price:             $96.54

The RIO share price was down 1.34% in London last night and about 2.7% in the USA....hence the shares should today trade lower than the suggested price in the above position.


Position Three:           Sell WES October $36 Calls at 15 cents

Current Share Price:        $34.41
Research Target Price:              $30.06

This sold call is 5% out-of-the-money and if assigned gives a 5% return in 29 days.You may only wish to consider this position if the underlying is owned. 


Disclaimer

Information/strategies/trading ideas in this blog is provided for general information purposes only and is not intended as an offer to enter into any transaction. Information contained in this blog is not necessarily complete and its accuracy cannot be guaranteed. Information/strategies/trading ideas here have been prepared without consideration of the investment objectives, financial situation or particular needs of any individual investor. Before a client/investor/reader makes an investment decision, a client/investor/reader should, with or without RBS Morgans' or the author’s assistance, consider whether any advice contained in this blog is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any recommendation without first having spoken to your adviser for a personal recommendation. The use of options may not be suitable for all investors. Potential investors are recommended to seek professional advice before embarking on any strategies mentioned in this blog. The information/strategies/trading ideas contained in this blog have been taken from sources believed to be reliable. Neither the author nor RBS Morgans Limited represent that the information is accurate or complete nor should it be relied upon as such. Any opinions expressed reflect the author’s judgment at this date and are subject to change and is not necessarily that of RBS Morgans'. RBS Morgans and/or its affiliated companies may make markets in the securities discussed. Further, RBS Morgans and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this blog and may, as principal or agent, sell such securities. The Directors of RBS Morgans Limited and Grosvenor Sydney office advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client/investor/reader in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our representatives may be remunerated wholly or partly by way of commission. Information in this blog is proprietary to its author and may not be copied as your own or used for any other purpose without the prior written consent of the author. RBS Morgans Limited (ABN 49 010 669 726 AFSL 235410) A Participant of ASX Group Principal Office: Level 29, Riverside Centre, 123 Eagle Street, Brisbane QLD 4000