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Further fall in rates spurs market

THE US market has been anticipating a 50 basis point cut by the Federal Reserve, which has pushed the Dow Jones and the Nasdaq on large rises lately. If the Federal Reserve drops by 50 points Tuesday, the cash rate will be two per cent, the lowest rate since the early 1960’s.

Most interestingly, it would also reduce the rate below the core CPI figure, implying a negative real short rate. Markets are not expecting a quick reversal of the low range on short rates, with futures markets expecting the rate to be around 2pc into the middle of next year before rising gently thereafter. This view could be at risk if the downturn proves to be as short and shallow as Wall Street is expecting.

The big question for markets generally is whether all this monetary easing will work as it usually does. A rise in liquidity has usually followed Federal Reserve easings and this is generally positive for equity markets. The aggressive stance taken by the Federal Reserve this year has been justified by the fact that real rates have stayed higher for longer than normal.

Rates in Australia will not change as a result of the expected cut in the US, despite the fact that the RBA meets on Tuesday. The case for a further easing in Australia is strong, but the timing is not good for a rate cut this week. General consensus is against a rate reduction this month, but there is expectation of a rate cut in December. This will help spur the Australian market and hopefully provide a strong Christmas rally.

Asia Pacific Specialty Chemicals Ltd

APS Chemicals is a Sydney-based business that is a leading supplier of speciality chemicals to the food, plastics, building products and health care industries, and supplies specialty chemicals to laboratories. This company has been embroiled in shareholder and board disputes for the past six months, with a minority shareholder successfully organising a re-arrangement of the board and the management.

The recent disruption within the company has resulted in a merger offer being launched on APS Chemicals by Symex Holdings Limited. Symex Holdings Ltd is a relatively new company on the ASX listing in August 2000 and has a relatively strong balance sheet and low gearing. After the merger, Symex should continue to grow and expand its products both here and internationally.

The new board has encouraged this merger proposal and the new merged entity will generate turnover of approximately $280 million.

The good news for potential investors of APS Chemicals is they can receive total consideration from accepting the merger proposal of $0.55 per share. This consideration includes 30 cents as a capital return and 25 cents as a fully franked dividend. The current share price is 58 cents, and potential investors can take advantage of this offer as a possible tax effective investment.

APS Chemicals expects to be able to apply to the Supreme Court in December for an order to convene a meeting of shareholders to approve a scheme of arrangement.

The merger is expected to be completed by February next year, which would give any investor an opportunity to take advantage of the 45-day rule regarding fully franked dividends.

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