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Morning Folks,
The markets are having a rough day today due to the US debt downgrade to AA+ from AAA by S&P. They remain AAA by the other two main ratings agencies: Moody's and Fitch. Banks and energy are selling off today while gold is very strong. While the decline is never welcome, a couple things must be noted: 1. Gold is going up in a down market. When we saw the market really fearful, everything went down, gold included. That is not the case today and indicates some rationality in the market, ie. not panic. 2. US bond yields are actually up. Huh???? you say. Yup. The downgrade by the S&P was a fiasco and I honestly view them with some derision. First, they missed a basic math calculation that amounted to $2 trillion. Kind of important! When the White House pointed this out, they turned around and emphasized the political dynamic as a greater reason to downgrade. OK, but maybe their debt and deficit position still necessitated the downgrade. OK, if true, then France should have been downgraded long before as they have deficits but more importantly a larger debt to GDP and higher social entitlement program not to mention the liabilities they are taking on in funding their profligate Euro neighbours in Ireland, Portugal, Greece...... Clearly, S&P was making a statement in order to try and be ahead of the curve regarding fiscal discipline but they have only really exposed their own incompetence and inconsistencies but this time on a grand scale.....
However, all this does not detract from the fact that governments have to get their spending under control and get to a more balanced fiscal situation.
As for the markets, there are some really interesting buys out there right now:
1. Imax: IMX, Has fallen in half. They are coming off a quarter but their next year proves to be full of blockbusters that will help the bottom line in addition to more theatres being rolled out. Earnings are expected to double from 2011 to 2012 at which point it will be trading at 10x earnings versus Cineplex at 16x.
2. Research in Motion: They are still profitable with earnings expected to be about $5/share this year so their P/E is 4.5x. New phones are being rolled out this next week and their growth in international markets keeps revenues going up rather than down. That said, there is no question that Apple is grabbing market share but there is a key to RIM and that is their market share and security. It would fit with Google very well. Subtract the approximate $6/share in cash RIM has and you get an installed base that is cheap with an IP portfolio that is significant. Nortel just sold their portfolio for $5 billion after the bidding started at $850mm. If RIM got the same for their portfolio, (about $9/share roughly), you are buying $5/share of earnings for $7/share.
3. Yellow Media Bonds: These bonds yield 11+%. They are priced in the mid 50's. They mature in 2017. They just cut their dividend to pay down debt. Therefore, the bonds should go up. But they didn't in this market. Yellow Media has a large base of stable cash flow even if it is mature.
Finally, here's a comment from International Forest Products on selling their wood to China. IFP.a is based in BC and the Pacific NW of the US. They sell lumber of varying types and grades. For the first time they sold more to China than to the US. Very interesting! It is what will happen to more Canadian companies over time as the mature American and European markets stagnate while the developing economies suck up resources to build roads, microwaves, couches, fridges, apartments, cars, bikes, etc. Canada is very well positioned to sell to these growing mouths to feed.
From Interfor's Q2 announcement last week:
Sales

Lumber shipments improved by 65 million board feet for the second quarter,
2011, up 24% over the same quarter, 2010 and by 114 million board feet for
the first half, 2011, up 21% over the first half, 2010. Increases reflect
the impact of strong export demand. Shipments were challenged by
weather-related logistical issues during the first quarter, 2011 but delays
associated with railcar, truck and container availability did not impact the
second quarter, 2011.

In the second quarter, 2011 shipments to China surpassed shipments to the
U.S. and for the first half, 2011 shipments to China more than tripled those
for the same period, 2010, driving the majority of growth in lumber sales
volume. North American shipments declined almost 10% for the first half,
2011 as compared to 2010, as the protracted downturn continued to impact
demand.
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