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The Round Up is a comprehensive daily note produced by the RBS Warrants team providing an overview of market movements along with quality ideas for warrant traders and investors. This material has not been reviewed by Egoli.

United States Commentary

Early strength in US markets after Alcoa's better 2Q result and Initial Jobless Claims at their lowest levels since January, was pared back when after Warren Buffet commented that the economy is not yet in recovery and may need more stimulus. Dthe Dow closed up just 4.8pts on average volume.

Eco - Initial Jobless Claims 565K vs 603K expected, down from last weeks 614K and the first drop back below 600K since mid Jan. Continuing Claims 6883K vs 6710K expected and up on last weeks 6702K. Wholesales Inventories for May -0.8% vs -1.0%, ISCS Chain Store Sales -5.1% in June.

Financials – JP Morgan topped Dow gainers, up 2.8% and Bank of America added 1.1% as banks trimmed borrowing from the Federal Reserve' semergency lending facility over the past week and cut back on other programs designed to ease the financial crisis, pointing to signs of credit issues easing. Goldman Sachs also strong, up 3.4%, after being upgraded on potentially strong trading revenue.

Retail – Another weak Chain Store sales number for June, and specifically Gap Inc and Abercrombie & Fitch reported June sales declines that were steeper than analysts forecasts, as a rise in US unemployment and continuing falls in consumer confidence kept shoppers away from stores.

Pharma – The pharma stocks gave back the previous three sessions gains, Merck was the biggest Dow faller, down 3.7%, after a broker downgrade, and Pfizer, the world's biggest drugmaker, failed to keep it's patent on the hypertension drug Norvasc in Canada, down 2.2%.

Homebuilders – KB Homes led the homebuilders sector stronger overnight, topping the S&P 500 by jumping 9.3%, the builder that targets first-home buyers was upgraded by one broker, talking up "solid order trends" through the second half and the stock's valuation is "compelling".

Gaming – Casino shares had a strong night after one industry participant said that data from the Vegas strip showed gambling revenies in May were a "mild positive" for the industry. Wynn Resorts added 6.8%, Las Vegas Sands Corp put on 11% and Boyd Gaming rose 4%.

United Kingdom & Europe Commentary

The FTSE rose 0.45% or 18pts, bouncing off a 2 month low, as the miners reacted positively to Alcoa's results. The FTSE Eurofirst 300 was up 0.8%, the DAX climbed 1.3% and the CAC was 0.5% higher.

Euro Banks - Deutsche Bank gained 4.6%, UBS rose 2.9% and UniCredit was 2%. DnB Nor, which is due to publish its secondquarter results on Friday, climbed 3.7%.

Beverages - The beverages sector fell on Russian media reports that the Russian government was set to raise taxes on alcohol, including tripling the tax on beer, in what is one of the industry’s key growth markets. Carlsberg fell 1.1%, Heineken dropped 1.8%, Anheuser-Busch InBev slipped 1%, elsewhere, Pernod Ricard fell 0.1%, while Diageo and SABMiller were also lower in London.

Materials – Steelmakers ArcelorMittal and Salzgitter rose 2.3% and 2.4% respectively, while German engineering conglomerate MAN gained 3.8%.

Auto – Carmakers were higher on news that Chinese car sales rose 48% year on year in June as consumption was boosted by the government’s economic stimulus package. BMW was up 2.2%, Daimler added 2.7% and Fiat climbed 2.1%.

Resources Commentary

Miners – Fresnillo, up 10.1%, led the miners after a broker suggested silver stocks over gold stocks. BHP rose 0.15%, Rio added 3.8%, Anglo was up 5.6% and Xstrata ended 3.9% higher.

Energy – Crude rose slightly but is still trading at 7 week lows. Cairn Energy, off 1.8%, was lower again on the Indian tax increase and Tullow fell 0.4% after a broker downgrade. BP eked out a gain of 0.05% and Shell climbed 0.5%.

SPI Commentary

The SPI traded up 10pts or 0.27% to 3735. Open at 3710 with a low of 3705 and a high of 3745. Volume 19,374. Overnight the SPI trading up 13pts to 3748.

click on chart to enlarge

Upcoming Economic Events 

*Dates are indicative only and may change

Upcoming Dividends

MINI Investment Buy:

Paladin Energy (PDNKZJ) – Positive fundamentals

We believe the recent pullback in PDN to its uptrend line is a buying opportunity. The long-awaited Langer Heinrich Stage 3 project has recently been approved, allowing PDN to take the operation to 5.2Mlbpa. RBS research are bullish on the uranium sector with PDN well leveraged to upside. Play upisde in PDN trhough PDNKZJ

click on chart to enlarge

Langer Heinrich Stage 3 has recently been approved by the board of PDN which will take the operation from 3.7Mlbpa to 5.2Mlbpa at a cost of US$71m (US$47/lb). PDN may now look to a Stage 4 expansion to further increase production. RBS Research NPV on PDN increases by A$0.60 as a result of the Stage 3 expansion

Now that Kayelekera is also producing, PDN is diversified by both mine and geography, which reduces the company’s risk profile

RBS have a BUY recommendation on PDN with a target price of $6.04. This leaves ~40% upside to target price from yesterdays close, and the stock has recently pulled back to its uptrend line.

Buy PDNKZJ

MINI Trading Buy:

Origin Energy (ORGKZC) – RBS trading buy

RBS Research ORG analyst has a short term trading buy on ORG with an indicative close range of $14.20-14.87. The stock is off 18% over the past two months, underperforming the S&P/ASX 200 by 14% over the same timeframe. RBS Research believe that the current price is factoring in no value for ORG’s group's coal seam gas business plus half of its large bank account as well. The stock looks like great value, and yesterdays move was strong. Buy ORGKZC

Sentiment has turned very negative
Gas stocks in general have been weak over the past couple of weeks. RBS believe ORG’s weakness is due to a combination of concerns over the viability of ORG’s CSG JV with Conoco, a bit of coal seam gas fatigue after seeing another high-priced transaction occur (STO buying into ESG), a falling oil price, ORG being used as a funding vehicle for new issues, and a general switching out of defensives into higher-beta plays.

But investors have been rewarded when buying at these times
With nothing factored in for the APLNG JV with ConocoPhillips, we believe any progress, no matter how small, would be well received. Therefore, site selection over the next two to three months should be a positive. Also expect a solid reserves upgrade at either the quarterly production release on 31 July or the FY09 result on 19 August, and some form of project consolidation or co-operation is inevitable at some stage. In addition, NSW energy privatisation will be firmed up over the coming months, and any newsflow on this front is likely to focus the market on the potentially sizeable earnings accretion available.

Buy ORGKZC

RBS MINI’s over ORG

The Bear Cage:

S&P/ASX 200 index (XJOKZV) – Dow Jones breaks downside

Overnight the Dow Jones broke out through key support at 8200 and looks set to trade lower. With Alcoa set to kick off reporting season in the US, we believe there are risks to the downside and any falls in the US markets are likely to flow through to the local market. A great way to lock in recent profits or take a short view on the market is thorugh RBS SPI index shorts. Gain exposure to downside in the SPI thorugh XJOKZV.

S&P/ASX 200 index daily chart (XJO)

click on chart to enlarge

The XJO has formed a lower high and with the SPI trading down 62pts overnight the index looks to be rolling over.

Dow Jones Daily chart
 
click on chart to enlarge

Overnight the Dow was weak, closing near session lows and breaking thorugh key support at 8200. Expect 8200 to act as a new resistance level, and with the reporting season now here, any poor results are likely to act as a catalyst for further falls

How does an Index MINI Short work?

The price of an Index MINI short tracks the price of the nearest month SPI futures contract. The value of an index MINI short is calculated by taking the strike price of the MINI short and subtracting the current SPI futures level and then dividing by 100. The Index MINI short will move 1c for every 1 point movement in the SPI, and will increase in value as the SPI falls and decrease in value as the SPI rises. Therefore, if you think that the Index level will go down you may decide to buy an Index MINI Short.

Value of Index MINI Short = [Strike Price - Level of SPI Futures] / 100

The Strike Price is the amount that RBS funds on behalf of the Holder (in other words, it is the leverage incorporated into the Index MINI) and is the amount that a holder has to pay to RBS if they want to exercise the Index MINI. The strike price can be converted to a dollar amount by dividing by 100. Holders can choose from a range of Strike Prices, each of which provides a different level of leverage. Index MINI shorts trade between the hours of 10am to 4pm on trading days (although RBS will generally be quoting markets from 9:50am – 4pm)

Let’s see how an Index MINI works with an example:

Example: Trading a Index MINI Short – XJOKZV

click on table to enlarge

The first line in the table shows a position of 1,000 Index MINI Shorts purchased for a price of $3.23 where the Index was trading at 4000. The Strike Price of the Index MINI is 4323.15, with a Stop Loss Level at 4106.

The second line shows the outcome of a decrease in the Level of the Index Futures to 3900, a 100 point drop. The Index MINI price has increased to $4.23, with the Strike Price and Stop Loss Levels remaining unchanged. The sale of 1,000 Index MINIs has realised a 31% profit if sold on the same day. If the holder sells their Index MINI Shorts two weeks after the date of purchase the Strike Price has decreased to 4314.83, to reflect the two weeks funding costs. The sale of 1,000 Index MINIs at $4.15 has realised a 28% profit

The next two lines demonstrate the P&L impact if the SPI index were to rise to 4100, a 100 point rise

If the SPI index level were to trade at or above the stop loss level of 4106, RBS will buy back the SPI futures underlying the index MINI shorts and the holder will get back the difference between the strike price and the price which RBS buys the SPI futures back at. A stop loss event will only occur if the SPI futures hit the stop loss level between 10am and 4pm on a trading day. If the SPI futures were to gap through the strike price, then the holder will have no further obligation to pay additional funds or margin… thus losses are limited to the initial capital outlay

Hedging a diversified portfolio of shares with Index MINIs

The market value of 1 SPI Futures contract = SPI Index level x 25
Example: SPI at 4,000 = 4,000 x 25
= $100,000 (value of 1 SPI contract)

The Multiplier for Index MINIs is 100. This means that the price of one Index MINI is equivalent to one hundredth of the level of the SPI.

Now lets assume 2,500 MINIs (100 X 25) = 1 SPI Future contract
2,500 MINIs = 4,000 x 25
100 MINIs =4,000 x 1
1 MINI = 40 X $1
= $40 worth of index exposure

If you owned a diversified portfolio of shares worth $1,000,000 and want to hedge against the downside with MINI shorts.

The number of MINI shorts you must buy = $1,000,000 / $40 ($ value of 1 Index MINI)
= 25,000 MINI shorts needed to hedge portfolio

Note: The easy way to determine the index exposure of a MINI is to divide the spot index level by the MINI multiplier of 100.

Example: Index level at 4,000 = 4,000 / 100
= $40 market exposure

So… the formula for calculating the number of MINI shorts needed to hedge a $ value portfolio is:

What are the benefits and features of Index MINI shorts?

• Simpler than unlisted CFD’s – they are traded on, and supervised by the ASX.
• No maturity date thus minimising the concerns of rollovers or exercises.
• Leveraged participation in the movement of the Index on a one for one hundredth basis. (1c = 1 point)
• Funding Costs charged on a daily basis so that day-traders don’t pay intra-day.
• Limited recourse leverage and Stop Loss Levels protects Holder against losing more than initial Capital Outlay
• Most efficient way to hedge an existing portfolio by taking a short position over the overall Index.
• Do not have initial collateral requirements and do not involve margin payments
• Ability to lock in recent gains on a postfolio without realising capital gains tax

RBS MINI’s over XJO

The information contained in this report has been taken from sources believed to be reliable. RBS Equities Australia Limited (ABN 84 002 768 701, AFS Licence No. 240530) ('RBS Equities') does not represent that the information is accurate or complete and it should not be relied on as such. Any opinions expressed reflect RBS Equities' judgment at this date and are subject to change. RBS Equities and/or its affiliated companies may make markets in the securities discussed. Further RBS Equities 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 report and may, as principal or agent, sell such securities. RBS Equities may have acted as manager or co-manager of a public offering of any such securities in the past three years. RBS Equities' affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever. RBS, in preparing this report, has not taken into account an individual client's investment objectives, financial situation or particular needs. Before a client makes an investment decision, a client should, with or without RBS's assistance, consider whether any advice contained in the report 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 securities recommendation. For clients in the USA, RBS Incorporated does not accept responsibility for the contents of this report. This report is distributed in the U.S. solely to 'major institutional investors' as defined in Rule 15a-6 (US Securities Exchange Act 1934). Each US recipient by its acceptance hereof warrants that it: is a 'major institutional investor', as defined; understands the risks involved in dealing in the Securities or any related investments or instruments; and shall not distribute nor provide this report, or any part thereof, to any other person. Any US recipient wishing to effect a transaction in any security mentioned herein, or any related investment or instrument, should do so by contacting RBS Incorporated and not RBS Equities Australia Limited. For clients in the UK, RBS Equities (UK) Limited accepts responsibility for the contents of this research material. The warrants mentioned in this report are issued by RBS Australia Limited (ABN 78 000 862 797, AFS Licence No.247013).

The Product Disclosure Statement ("PDS") relating to these warrants is available upon request from RBS (1800 450 005) or on our website www.abnamro.com.au/warrants/circulars.asp. 2004 RBS Equities Australia Limited (ABN 84 002 768 701) A Participant of the ASX Group.

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