MAJOR PAPERS:

• According to sources, the Wall Street Journal reported that Countrywide Financial Corporation (NYSE: CFC) is under investigation for possible securities fraud. People close to the situation say the inquiry is in its early stages but it involves an inquiry into alleged misrepresentations of the company's financial position and the quality of its mortgage loans.
• The Financial Times reported that Credit Suisse Group (NYSE: CS) has teamed up with three leading academics to create products that will deal with the potentially lucrative hedge fund replication industry. The upcoming suite of products will attempt to mechanically replicate the returns of the major hedge fund strategies.

OTHER PAPERS:

• Rio Tinto Plc (NYSE: RTP) is expected to announce this week that its aluminum business is worth up to $20B more than current estimates, after a rise in aluminum prices; the UK Times reported that the statement could raise pressure on BHP Billiton Limited (NYSE: BHP) to increase its takeover bid for Rio.
• Asset manager Ameriprise Financial Inc (NYSE: AMP) is pairing up with MasterCard Incorporated (NYSE: MA), the Associated Press reported, to become a credit card lender for the first time, the two companies reportedly plan to announce today.

BHP Billiton (NYSE: BHP) closed of $73.64 Thursday.

BHP announced on Feb. 6 the offer of 3.4 BHP shares per Rio Tinto (NYSE: RTP) to create the world's largest mining company.

BHP overall option implied volatility of 45 is near its 26-week average according to Track Data, suggesting non-directional risk.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

MAJOR PAPERS:

• Mining companies BHP Billiton Limited (NYSE: BHP) and Rio Tinto Plc (NYSE: RTP) are not only competing over iron-ore customers, but they are not competing for investors as well, according to the Wall Street Journal's "Heard on the Street." BHP says 60% of their investors also own Rio shares; Rio puts the figure at 50%.
• Prices for the top 50 branded drugs increased an average of 6.73% in 2006 and 7.82% last year at wholesale, according to market research firm Delta Marketing Dynamics. Often targeted by politicians, pharmaceutical companies are undeterred, the Wall Street Journal reported.

WEB SITES:

• According to iSuppli sources, Apple Inc (NASDAQ: AAPL) has cut its 2008 NAND order forecast and informed suppliers that its demand growth will slow in 2008 vs. 2007.
• The Boeing Company (NYSE: BA) is considering suspending work on the short-range version of its 787 jet, the -3 shorthaul, in an attempt to get production of the long-range version, the long-range -8, back on track, Flight Blogger said.

Alcoa, Inc. (NYSE: AA) shares are rising today after a memo was disclosed which revealed that AA and Aluminum Corp. of China (NYSE: ACH) formed a special purpose vehicle, "with the intent to acquire up to 14.9%" of Rio Tinto's (NYSE: RTP) London-listed stock. The two had bought a 12% stake in Rio Tinto in January. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on AA.

After hitting a one-year high of $48.77 in July, the stock hit a one-year low of $26.69 in January. AA opened this morning at $36.01. So far today the stock has hit a low of $35.71 and a high of $36.42. As of 10:25, AA is trading at $36.05, up 54 cents (1.5%). The chart for AA looks neutral and improving, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.

For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $27.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in just two months as long as AA is above $27.50 at April expiration. Alcoa would have to fall by more than 23% before we would start to lose money.

AA hasn't been below $27.50 by more than a few cents in the past year and has shown support around $34 recently. This trade could be risky if the US economy continues to worsen, but even if that happens, this position could be protected by the support the stock might find around $28, where the stock bottomed out in January.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in AA, ACH or RTP.

In one of my recent posts on stock pricing, I received a comment from one of our more acerbic readers, who asks some good questions once he simmers down. He wonders why investors have not bid up the share price of Alcoa Inc. (NYSE: AA):

• "How come nobody has the hots for ALCOA? It is very cheap. . . There is mining stock merger-mania yet nobody is buying ALCOA in anticipation of it occurring to ALCOA as well. Are we gonna wait until it is too late?"
  

First of all, I should remind everyone that the price of a stock on any given day is a myth. It is worse than a myth, it is just a fleeting moment in time. I would call it semi-arbitrary most of the time.

Alcoa closed yesterday at $34.06, having a trailing P/E ratio of 11.5. That falls between its 52 week low of $26.69 and its high of $48.77. Also worthy of note, Alcoa has a yield of 2% which is about 10% higher than your average S&P stock. This seems positive.

Perhaps my friend is on to something. Alcoa is off its high considerably and has a lower P/E and higher yield then any of the indices. But its ROE of 15 and ROIC of 11 are all too average, not exceptional -- and these are important considerations. The P/B of 1.89 also seems average but the P/S of 1.03 looks very appealing.

MAJOR PAPERS:

• Battling Baidu.com Inc (NASDAQ: BIDU) in China with little success, Google Inc (NASDAQ: GOOG) is working with a Chinese company to offer free licensed music downloads, the Wall Street Journal reported. The new service is expected to be launched in several weeks.

OTHER PAPERS:

• BHP Billiton Limited (NYSE: BHP) raised its bid for mining company Rio Tinto Plc (NYSE: RTP) to more than GBP70B. Meanwhile, the UK Times reported that Rio's new Chinese shareholder was preparing a counter bid for Rio.
• The Washington Post reported that Time Warner Inc (NYSE: TWX) CEO Jeffrey Bewkes is expected to announce a plan today to sell or spin off Time Warner Cable Inc (NYSE: TWC). Bewkes also is likely to signal plans to break up AOL in the coming year.

WEB SITES:

• Berkshire Hathaway Inc's (NYSE: BRK.A) Warren Buffett told Fox Business that he has no plans to bail out Ambac Financial Group Inc (NYSE: ABK) and MBIA Inc (NYSE: MBI).

Rio Tinto (NYSE: RTP), an international mining company, rejected a buyout proposal from BHP Billiton (NYSE: BHP), the world's largest mining company on November 6. BHP has until Feb. 6 to make a formal bid or walk away for at least six months, according to a U.K. takeover panel review.

Alcoa (NYSE: AA) and Aluminum Corp of China announced a 9% stake in RTP on February 1.

RTP overall option implied volatility of 64 is above its 26-week average of 53 according to Track Data, suggesting larger movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

MAJOR PAPERS:

• The Wall Street Journal reported that U.S. and European antitrust regulators are expected to carefully scrutinize Microsoft Corporation's (NASDAQ: MSFT) $44.6B bid for Yahoo! Inc (NASDAQ: YHOO), which could possibly delay a completed deal for up six months.

OTHER PAPERS:

• Google Inc (NASDAQ: GOOG) is seeking to torpedo Microsoft's bid for Yahoo!, sources reported. The New York Times said Google has offered to help Yahoo! defeat the bid by creating a partnership between the two search engine giants
• Aluminum Corporation of China, Chinalco, and Alcoa Inc (NYSE: AA) have teamed up to complicate BHP Billiton Limited's (NYSE: BHP) courtship of Rio Tinto Plc (NYSE: RTP), Globe and Mail reported.

WEB SITES:

• According to sources, Tech Crunch reported that News Corporation (NYSE: NWS) may be putting together a "syndicate" in order to make a counter offer for Yahoo!.

MAJOR PAPERS:

• Australian resources firm BHP Billiton Limited (NYSE: BHP) is unlikely to up its $99.22B bid to acquire mining company Rio Tinto PLC (NYSE: RTP), according to the Wall Street Journal.
• Ten years after taking the reins at eBay Inc (NASDAQ: EBAY), CEO Meg Whitman is making plans to retire, reported the Wall Street Journal. Company president John Donahoe is the leading candidate to replace her.
• According to the Financial Times, Biogen Idec Incorporated (NASDAQ: BIIB) CEO Jim Mullen said the company could make a "large-scale acquisition" this year after it failed to sell itself.

WEB SITES:

• Finance companies including Citigroup Incorporated (NYSE: C) could sell proprietary investments in India as they struggle to shore up their capital after suffering losses in the subprime sector in the U.S., LiveMint.com reported.

Selling in Europe accelerated throughout the day. The fuel behind the drop appeared to be fear of a global slowdown and the impression that the Bush package to stimulate the economy would be too little, too late.

Watching the big markets in Europe left the impression of a simple and blind panic without a specific trigger. Investors simply wanted out, goaded by concerns that stocks have much further to fall. By the last hour of trading, the lemmings were running in force.

The German DAX was hit hardest, plunging 7.2% to 6,790. Shares in global mega-conglomerate Siemens (NYSE: SI) dropped 8.5%.

In the UK, the FTSE sold off 5.5% to 5,578. But there was real carnage among metal and mining companies. Both Rio Tinto (NYSE: RTP) and BHP Billiton (NYSE: BHP) dropped over 10%, killing over $25 billion in market cap. A recession would probably slow demand for commodities, driving the profits out of these companies. BHP has also talked about taking on tens of billions of dollars in debt to buy RTP. Such talk is not popular in times of tight credit.

The large banks in France, lead by BNP Paribas, fell through recent trading lows.

Hardly a single stock was spared.

Douglas A. McIntyre is an editor at 247wallst.com.

In a move that many customers may view as controversial, miner Rio Tinto announced Thursday that it intends to charge steelmakers market prices [subscription required] for some critical raw materials, despite the existence of long-term contracts, The Wall Street Journal reported.

Rio Tinto (NYSE: RTP), via a clause in existing contracts, plans to charge spot-market prices for 10% of the iron ore in its customers' contract. Market prices are currently attracting bids in the $180-190 per metric ton range, more than double the $75-$85 per metric ton cost for Rio's fixed contract customers, The Journal reported.

Robust economic growth in emerging markets in Asia (particularly in China and India) and Latin America, combined with solid economic growth in Europe and the Middle East has propelled major price increases in minerals, commodities, raw materials and metals during the past three years.

MAJOR PAPERS:

• According to the Wall Street Journal's "Heard on the Street," bears believe it may be too early to bargain hunt among financial stocks, as they think there may be more bad news to come after Citigroup Incorporated (NYSE: C) announced it took an $18B write down in Q4.
• Analysts who follow China's telecom sector believe there are a few prime picks, including China Unicom Limited (NYSE: CHU) and China Mobile Limited (NYSE: CHL), but are advising investors to think long term, the Wall Street Journal reported.

OTHER PAPERS:

• Iron ore talks with China's Baosteel have come to a halt after the company and its peers said price demands from miners BHP Billiton Limited (NYSE: BHP), Rio Tinto PLC (NYSE: RTP) and Companhia Vale do Rio Doce (NYSE: RIO) were "far too high," the Australian Financial Review said.

WEB SITES:

• MiningMx.com reported that BHP Billiton has reached an "impasse" with South Africa's government over the conversion of the company's exploration leases to new order mining rights.

MAJOR PAPERS:

• In what may be a sign of interest from large media companies looking to delve into the "content delivery space," the Wall Street Journal reported that EdgeCast Networks is set to announce it has raised up to $6M from Steamboat Ventures, The Walt Disney Company's (NYSE: DIS) venture-capital arm.
• Barron's "The Trader" section says they'd stay away from Federal National Mortgage Association (NYSE: FNM), even though the Bush administration's subprime-mortgage freeze program caused the stock to rebound some. Barron's speculates that Fannie should take an earnings hit in the range of $6.4B to $14B.

OTHER PAPERS:

• According to the UK's Telegraph, The Blackstone Group LP (NYSE: BX) is "in the middle" of putting together a consortium to make an offer for Rio Tinto PLC (NYSE: RTP).
• According to the Financial Times Deutschland, Deutsche Telekom AG's (NYSE: DT) T-Mobile is selling less than 700 of Apple Inc's (NASDAQ: AAPL) iPhones a day; this compares to the 10,000 iPhones the unit sold on a daily basis during Christmas.

Main market news here: Before the bell: UBS announces $10 billion in write-downs

Citigroup (NYSE: C)'s board is meeting early this week and could name former Morgan Stanley (NYSE: MS) executive Vikram Pandit as its next CEO, following Chuck Prince's resignation last month.

Private equity firm Blackstone (NYSE: BX) is expected to join with China's sovereign wealth fund in a bid for mining firm Rio Tinto (NYSE: RIO). Blackstone's bid follows a $140 billion offer from BHP Billiton (NYSE: BHP), which Rio Tinto rejected. If Rio Tinto accepted any bid from Blackstone, the private equity house is expected to divide up Rio Tinto's assets.

In an unprecedentedly large overseas acquisition in Japanese pharma, Eisai Co. of Japan announced a $3.9 billion deal to buy Minnesota drug maker MGI Pharma (NASDAQ: MOGN) to bolster its cancer treatment efforts.

Private equity may be dead, but it is not buried. The Blackstone Group (NYSE: BSX) is working on a bid to buy and split up mining company Rio Tinto (NYSE: RTP). Metals company BHP Billiton (NYSE: BHP) has already made an offer of its own.

According to The Telegraph, "the U.S. private equity giant is in the middle of putting together a consortium -- believed to include a Chinese sovereign wealth fund -- to mount the bid for Rio." Blacktone's plan would be to break Rio Tinto into pieces and auction them off.

Rio Tinto has a current market cap of over $150 billion, so the U.S. firm must believe that it can garner much more than that for the pieces. Rio's largest business is its iron ore operation.

The move is a sign that private equity may be making a comeback, but with a twist. So far there is no mention that bank loans will be part of the Rio bid. It would appear that most of the support will come from a fund run by an affiliate of the Chinese government.

Private equity may have found a new financial partner in overseas government funds.

Douglas A. McIntyre is an editor at 247wallst.com.