High Gold Prices Help Miners Push Dow Further: Spread Trading Update

Posted on | November 9, 2009 |

It appears as if Friday’s worse-than-expected American unemployment figures were shrugged off today, with Wall Street rallying on the back of takeover news and stimulus support at the G20 meeting.

A number of events contributed to Wall Street’s euphoric mood this afternoon. We had finance ministers at the G20 meeting vowing to maintain their economic stimuli and the International Monetary Fund claim that low US interest rate expectations have transformed the US Dollar into a funding currency for carry-trades.

The G20 meeting helped erase fears over what may happen to the global economic recovery if governments prematurely removed their economic stimuli while the IMF’s statement contributed to further US Dollar weakness – add one and two together and you get a recipe for a mining sector rally that’s driven by higher metal prices.

By 3:30pm (London time), the Dow Jones Industrial Average had advanced by 116.31 (+1.16%) to 10139.73, while the broader S&P 500 was 13.43 points (+1.26%) above its previous close at 1082.73. The Nasdaq fared relatively better, up 25.02 points (+1.45%) to 1755.78.

Broad US Dollar weakness encouraged investors to increase their exposure to precious metals, particularly gold, which hit a new record high of $1,111.7 an ounce today.

Not surprisingly, Gold miners outperformed this afternoon. Barrick Gold rallied 3.6% to $43.13 while Freeport-McMoRan Copper & Gold surged 4.6% to $83.24.

Deal news may have also added to the excitement. Kraft Foods formally announced a hostile takeover bid for Britain’s Cadbury this afternoon - offering shareholders at the British confectioner 300p per share in cash plus 0.25489 new Kraft shares for each Cadbury share.

The terms were the same as Kraft’s initial takeover approach in September. Kraft’s share price has fallen since then, which means that Cadbury is now being valued at £9.8 billion or 717p a share - 3.9% lower than Kraft’s original £10.2 billion bid.

‘We remain convinced of the strategic merits for both companies of combining Kraft Foods and Cadbury’ said Irene Rosenfeld, the Chairman and CEO of Kraft Foods, in a regulatory statement released this afternoon. ‘We believe that our proposal offers the best immediate and long-term value for Cadbury’s shareholders and for the company itself compared with any other option currently available, including Cadbury remaining independent.’

Cadbury’s Chairman Roger Carr was disappointed with Kraft’s proposal, however. He said, ‘The repetition of a proposal which is now of less value and lower than the current Cadbury share price does not make it any more attractive. As a result, the Board has emphatically rejected this derisory offer and has strengthened its resolve to ensure the true value of Cadbury is fully understood by all.’ [1]

Cadbury’s share price edged 0.3% higher to 760p a share in London while Kraft’s shares dropped 1.3% to $26.45.

There were a number of other companies in the spotlight this afternoon. Electronics retailer RadioShack was among the New York Stock Exchange’s best performers, surging 13.7% to $20.17 after unveiling plans to sell Apple’s iPhone 3G and iPhone 3GS at some of its stores in the Dallas-Fort Worth and New York metropolitan areas beginning later this month.

Elsewhere, Ariad Pharmaceuticals jumped 10.6% to $2.4 after JPMorgan Chase raised its recommendation on the drug maker from ‘neutral’ to ‘overweight’, saying two of the company’s cancer-fighting drugs could ‘ignite investor interest and drive meaningful share price appreciation’ in the next three to six months.

This might be a good stock to keep on your watch list. The world’s largest steelmaker ArcelorMittal also benefited from an upgrade, its shares climbed 3.33% to $24.52 after MF Global raised it from ‘neutral’ to ‘buy.’ [2]

[1] Source: London Stock Exchange regulatory news filing ( 9 November 2009)
[2] Source: Bloomberg News ( 9 November 2009)

By Anthony Grech, Research Analyst, IG Index.

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