What Does Rio Tinto's Takeover of Alcan Mean for the Rest of the Industry?

Afterburners... that was the cheesy little phrase I turned on Thursday: http://www.cnbc.com/id/19726884.

A good amount of credit for easing private equity collapse fears was due to the huge Alcan (AL) buyout offer from Rio Tinto plc (RTP). It was the 'art of the deal' on mega steriods. Options players in AL did amazingly well today as I noted in my options report on Thursday: http://www.cnbc.com/id/19726900

As I've repeatedly mentioned with skepticism, the markets had a chance to rally due to massive amount of available liquidity, and due to the bears' failure to do what they're supposed to do. As Bob Stovall, the head market strategist at S&P told me on Thursday, bears are holding lots of cash, short interest has been high, there were increasing odd lot short sales (small timers) and put open interest also jumped. Bob said technical analysts at S&P see 1600 to 1650, as the next likely target for the S&P.

I also talked to Gary Shilling, who was actually tending to his bees, and away from the office when he picked up his cell phone. He said subprime and foreclosures remain a huge negative. From one day to another Gary says it is hard to explain these moves in the market, but over the longer term he sees trouble ahead for the U.S. economy, and stocks. Gary, by the way, says his bees are doing well, with good honey yields - no massive die off. The guy's got the magic touch with a solid portfolio management business, and with bees.

I agree with both Bob and Gary. The market sure looks like it wants to skyrocket, and 1600 to 1650 is a good target range (albeit wide). One of these days, however, the market will run into a brick wall. When was the last time housing collapsed and the economy didn't find itself eventually in recession? Thanks to global liquidity the move to recession has been slowed but all cycles eventually change whether bad or good. Didn't we learn back in 2000 that the rules don't change - that it's never 'different this time'?

The RTP bid for Alcan was simply amazing. Cash - $38 bln. That's a huge chunk of change. Alcoa (AA) had no choice but to drop its AL bid. Checkmate. AA is now sitting like left over macaroni salad in the sun on a picnic table, and will attract a great deal of attention that it doesn't want. What fascinated me was the numbers that Credit Suisse (CS) ran on Thursday, saying that if BHP Billiton (BHP) coughed up $55/shr for AA, the deal would be 9% accretive to earnings.

Will a $55+ takeout of AA happen? Open interest in the August, and October 50 calls were both exceeded by very strong volume which is the first time speculators have moved in a swarm to the 50 strikes. Most bets had previously been placed in the 45 strikes, so it appears the Alcoa is not long for this world in its present form. Only Alcoa CEO Alain Belda, and his golden parachute know for sure. Then again, maybe he doesn't even know what's being cooked up at this point.

How many major aluminum companies are there? There are not a heck of a lot of big players, so with Alcoa left flapping in the wind, it's hard to imagine that BHP, or one of the others who have missed AL, will take a combined RTP/AL combo sitting down.

Disclosure: I own Reynold's Wrap aluminum foil, honey (though not Gary Shilling's honey which must be great), and hold no shares of the companies I write about.