Investing with the Thomsons - Thomson Reuters Inc.

Ok this is my non-energy play of the month! Unlike some of you I have never owned this stalwart, previously Cdn blue chip because it seemed always fully priced. With the recent market meltdown, it seems to have been beaten up unfairly. The merger with Reuters should account for over $1 billion in annual savings according to their press releases. This should increase margins. It is now a larger and more diversified supplier of news and professional data and publications. As well, you're investing with the billionare Thomson family and who wouldn't want to invest with this kind of pedigree?

It's valuation seems never cheaper. When it restores its regular dividend of $1.08 in November, it will yield 3.4% which has historically averaged 1.9% (it decreased its dividend during the merger to $0.91.) According to its 1st quarter report, all segments on a pro forma basis were growing strongly. Its forward P/E is 15 for what its worth.

The risk seems to be its Markets division which might be affected by the current market turbulence. I suppose a shrinking stock/bond/credit/real estate market has less need for data and information right? I think in volatile markets, information would be more valuable but we shall see as they will be reporting 2nd quarter results Aug. 12th. The Markets division contributed to profit in Q1 about 40% vs. 60% for the Professional division. Will this merger and its diversification prove to be TRI's saviour or downfall?

It has showed some bounce off it's July lows and I'm thinking of buying on any further weakness around it's earnings report!

Oye! The price of oil and OIH!

On second thought, I think the way to play this oil correction is still with the oil service companies. Many of the reasons for this are the same reasons we bought SLB. Long term oil production is in decline, more wells in addition to more complicated wells will be drilled in the future etc. etc.

I just took a quick look at the oil services index OIH vs oil price (USO as proxy) and confirmed my suspicion that not only the producers, but also the service companies like SLB haven't participated in the most recent leg up in the oil price. In fact, in the last year OIH has been flat while the oil price has doubled!

Interestingly the short term chart shows that OIH has fell in lockstep with the price of oil!
Short term can oil prices go lower? Probably. But relatively speaking OIH is cheaper than it has been in the last year. Thoughts?

The Risk to Commodities

I still believe we are in the midst of a commodities boom. Taking a page from technical analysts, this commodity cycle started around 2001 and the typical commodity cycle averages 17 years!

The contrary view assumes that a global recession would temper demand for all commodities and I can't argue with this but my predictive ability of a worldwide slowdown or worse isn't the greatest!

In my estimate though, the Fed cannot and will not increase interest rates because of slow growth and a weakened banking system. This won't prevent them from 'jaw-boning' about inflation though.

More interestingly on Nouriel Roubini's blog, he recently discussed how many other central bankers around the world have seen their exports suffer because of the fall in the $US. He believes that many of these countries will turn a blind eye to inflationary pressures and allow their currencies to devalue or keep up withe the devaluation of the $US. A race to the bottom comes to mind!

This concerted effort to gain a currency advantage is never good for inflation and dubious for sustained growth. I foresee these reasons for continued strength in commodities.

Also this article http://www.startribune.com/business/25638719.html?location_refer=Business:highlightModules:1
first posted on the Oil Drum speaks about foodstuff inflation and some of the reasons for it.

Tumultuous Times

So today the financials had another up day! In fact the Dow, S&P, and Nasdaq all finished strongly positive. This in spite of MER, EBAY, COF, MSFT, GOOG, and AMD missing earnings. Only IBM met expectations. I see the premarket futures trading is down for all of the indexes as I write this.

Normally, when bad news like MER's 9 billion in additional write downs, doesn't move the price down further, I would say that the bottom is near. The fact is however, that many of these companies reported after the close today so tomorrow we shall see the market reaction. Ebay reported yesterday and was severely punished today (-13%).

I still don't think the bottom of the markets are yet here. There is still a large housing overhang. Energy prices have yet to moderate. And credit is being drained from the system.

If the Fed and Treasury as well as Congress weren't so gung-ho to bailout the financials, the markets might have found the equilibrium faster. Instead we will continue with misallocation of capital via inflation and the taxpayer, and this will ultimately delay the recovery.

This is at a time when the US and Canada for that matter should be refocusing efforts on transitioning to a non-fossil fuel transportation/energy system. Even if peak oil is a decade away, the capital costs and time required to build out such infrastructure will be very large and long.

Do We Need Superman Bernanke?

I must admit that I've been following the banking crisis in the U.S. with a bit of Schandenfreude. (and not just because I've been short US financials) Every time a bank says they are well capitalized, they turn around and issue more stock. Every time an analyst says the worst is over, the estimates of write downs balloons further. I certainly don't envy Mr. Bernanke's position but he was at the helm when lending standards were loosened. So what is the role of the Federal Reserve? - Stable inflation or full employment? It seems that neither is being fulfilled right now. In fact it seems that the Fed's role is to bail out the banking elite while risking worse inflation on everyone. Bailouts are bad for the $US, bad for inflation, and engenders moral hazard. Let capitalism work with normal banking regulation and stop propping up investment houses and banks lest the US banking system should become sclerotic (an Economist word) like the Japan of the 90's.

This website has some good commentary that is spot on and includes a 2 minute testimony from Superman himself hedging about whether Fannie/ Freddie will get a bailout.

http://market-ticker.denninger.net/archives/2008/07/11.html

Smart phone bloodbath: NOK, RIMM, AAPL

http://blogs.wsj.com/deals/2008/06/27/mean-street-the-coming-smartphone-bloodbath/?mod=yahoo_hs

I don't know how to make a link work in a comment so here it is in a post.
Again, just one guy's opinion but worth reading.