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Markets expecting a double bottom

AS investors watch the world markets with great interest, a double bottom scenario is looking more and more likely. Historically these are excellent buying opportunities in the share market, specifically for blue chip stocks.

At present, the market is on a knife edge with military strikes centred on Afghanistan and speculation of further terrorist attacks towards the United States. Uncertainty is gripping the market at present, with investors biding time and waiting for some clear direction.

It was unsurprising that US stocks softened as investors reacted to the US actions in Afghanistan, which also were an excuse to unwind some of the unrealistically solid increases in stock prices over the past two weeks. The falls in most indices were moderate and the markets are looking forward to key retail trade and consumer sentiment on Friday. Consumer sentiment is a key barometer of the US economy at present. The Dow Jones Industrial Index closed Monday at 9067 points, dropping 51 points.

Australian stocks were flat in mid-morning trade on Tuesday as investors held off buying despite subdued losses on Wall Street following the launch of US-led air strikes against the Taliban.

Foodland

Perth-based grocer Foodland Associated has stumbled at the home straight with its plans to bid for rival supermarket chain Woolworths New Zealand. Foodland shares fell 6 per cent after the outcome of a Select Committee report to the NZ Government was negative for the proposed takeover.

The NZ Government was forced to take legislative action after an appeal court ruling on Foodland subsidiary Progressive’s bid to buy Woolworths NZ plus 10 other acquisitions.

The appeal court ruling on the case brought by Foodland rival Foodstuffs meant that the bid would have to meet a tougher new competition test.

This decision has come out of left field for Foodland management. The operation’s finance general manager Chris Bennett has come out saying that the NZ Government’s action could not be justified. Foodland believes that Foodstuffs is doing this for its own commercial reasons, and not for any principled reason.

A Progressive/Woolworths NZ merger has clear benefits in terms of market power, store rationalisation and overhead cost reduction. There may not be significant cost reductions in the medium term, as the process of changing the market in terms of market share trends and supplier relationships will take time. However, on a longer term basis, the merger should have significant advantages.

The proposed bid of Woolworths NZ was the main reason for an increase in the share price of 40 per cent in recent months, and the retracement recently provides investors with a good opportunity.

The share price performance may be choppy in the short term as these legal decisions are handed down, and an equity raising is expected to accompany the purchase of Woolworths NZ.

Despite the concerns in NZ, Foodland still provides a low price earnings multiple at a rate of 12 times, consistent cash flow, benchmark supermarket margins in WA and relatively secure food earnings.

This is in addition to a fully franked dividend yield of 4.8 per cent.

Peter Hayes

Investment Manager

Authorised Representative

ABN AMRO Morgans Limited

Phone: 9261 0836; Fax: 9261 0889

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