Top 10 Energy Stocks and an Overlooked Power Fund

1. MARKET STATUS

Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices.

A. The Short Version

Still trending down, invest only funds not needed for the near term expenses. While there may be rallies, even multi-week or month ones, the fundamental problems remain and there is no credible plan to fix them at this time.

B. The Detailed Version

In purely technical terms, there’s a decelerating downtrend that may or may not signal a bottoming. The S&P, the best overall index, is making higher lows, but has repeatedly failed to crack a still declining 50-day moving average. On February 10 it again failed, this time decisively so, leading many to anticipate continued decline.

If the market were a mental patient, the diagnosis would be depression combined with bipolar disorder, causing brief but intense periods of euphoria based on irrational hope of a magic, relatively painless solution suddenly appearing.

While volumes are written daily explaining the market, the current collapse the basic story remains the same. Stocks remain in a vicious downward cycle that works like this:

1. fear from the ongoing and clearly unsolved housing/credit crisis, which causes

2. declining consumer and business spending, which causes

3. declining earnings, which causes

4. rising unemployment,

5. which causes more fear and reduced spending, etc.

In sum, a failure of leadership causing an ongoing crisis in confidence that an effective solution is coming that will stimulate real sustainable growth and employment. Rather, we’re getting the usual spin, short-term bandaging and glorified forms of welfare to those who will not generate new wealth.

We need tax credits to those who invest in productive assets which then stimulate permanent job creation and growth. For example, when given a choice to buy equipment or pay those same funds away in tax, most will invest in the equipment, and the cycle begins to reverse.

C. A Summary of Recent Events

If you haven’t been following the market, here’s the essence of what’s happened since the ten-year lows of late November. There’s a decelerating downtrend that may or may not signal a bottoming.

1. The Good:

China announced stimulus plan, good for commodities (copper rose 15%), nickel, a component of stainless steel, bolted upwards, oil holding steady for near term. Hope remains for an effective stimulus plan while President Obama & Co. learn their jobs and seek advice from the same crowd that got us into this mess.

Overall stocks stay in a trading range, some leading indicators looking better (bond yields rising, commercial paper market improving, commodities stabilizing) lends some near term optimism. Progress on the bailout package also adds optimism. Prices action shows higher lows since late January.

2. The Bad

There are plenty of clouds on the horizon. The S&P, the best overall index, is making higher lows, but has yet to crack a still declining 50-day moving average. On February 10, it failed again, this time decisively, creating a pessimistic technical picture (for those into technical analysis). All the problems I’ve mentioned recently remain. For example, something like a quarter of all mortgages may go under in the coming year and as yet no solution.

As for destabilizing attacks and threats from Islamic terror and Russian adventurism, the question is WHEN, not if, they stage another major “event” as seen in New York, London, Bombay, or Georgia (see “The Islamic-Russian Wildcard Bonus?” in my December article “Top Energy Infrastructure MLPs…” at my site). Remember US Vice President Joe Biden’s campaign trail admission that the Obama administration’s resolve would be tested?

3. The Ugly

Jobs data has been terrible, but not worse than expected. Employment, however, is also a lagging indicator, meaning that it can continue to deteriorate when a turnaround is already in progress. Nonetheless, it badly undermines confidence and consumer spending.

In sum, we appear to be in the upper part of a near term trading range. No strong evidence for more than that at this time.

D. Ramifications for High Dividend Stock Investors

In sum, we’re in a near term trading range, with the overall trend continuing down with a retest of November lows likely. Continue to invest only with funds you don’t need for the next six to eighteen months at least. What you buy now may well go lower.

However, there is a lot of cash on the sidelines now, earning virtually nothing. There are big players and insiders buying many of the stocks I’m following that are clearly cheap and excellent long term values. As the past few months have shown, any glimmer of positive news brings buyers as everyone is waiting for the sign to jump in. So upside moves can and will be sudden and strong, even if short lived.

So if you can earn reliable dividends from 8-12 plus percent and more while you wait for recovery, ongoing investment makes sense. You just need to find the best bargain priced quality high dividend securities. I particularly refer to those I’ve mentioned earlier. Since we must be very selective now I focus only on my very favorites.

E. Why Energy Is the Best Sector for Reliable High Income and Appreciation

Here’s the basic thesis for income investors overweighting energy companies.

• Governments are doing everything they can to stimulate growth. There will be no growth without increased energy consumption.
• As part of their various stimulation packages, governments are printing lots of money, which will ultimately drive up commodity prices, particularly for vital commodities like energy.
• Besides macroeconomics and money supply, an additional boost will come with the Obama Administration’s focus on stimulating domestic oil and gas production, especially gas because it's cleaner.
• Many energy company stock prices are oversold to levels not seen since $20-$30 oil.
• For all the talk about renewable and green energy, we still have no serious replacement for oil and gas anytime in the next decade.
• Energy supplies remains vulnerable to OPEC supply cuts, Islamic terror, and Russian aggression (see my December article “TOP ENERGY INFRASTRUCTURE MLPS…”, for more on this in the section on “The Islamic-Russian Wildcard Bonus” that benefits all energy companies at http://highdividendstocksguide.blogspot.com ).
• There are many energy companies that pay reliable high dividends.

1. Big Integrated Energy Companies

While there are many solid businesses in this group, few pay dividends that really keep you ahead of inflation and taxes. One exception is BP plc (BP). While it isn’t the strongest of the group, its approximately 7% dividend is safely backed by a solid financials that will improve along with energy prices within the next year or so. BP is a Buy at 46, a Strong Buy under 41.

2. Energy infrastructure MLPs

All the below offer yields currently above 8.5%, which are backed by prospering businesses with reliable cash flows. The proof of this is that despite declining energy prices that have gutted the distributions of most Canadian Energy Trusts, these have all held their distributions steady. EPD actually raised theirs recently. They are bargains because they’ve been oversold amidst the general market decline, yet their revenues are more dependable and yields far higher than the overall market.

Also, many investors have wrongly believed that revenues of these energy distribution and storage companies are directly tied to energy prices. In fact most revenues come from simple volume moved or stored. Thus shares have been unfairly dragged down both by market sentiment and declining energy prices.

• Buckeye Partners (BPL) Buy under 38, Strong Buy under 35
• Enterprise Products Partners (EPD) Buy under 23, Strong Buy under 20
• Energy Transfer Partners (ETP) Buy under 35, Strong Buy under 30
• Kinder Morgan Energy Partners (KMP) Buy under 49, Strong Buy under 45
• ONEOK Partners (OKS) Buy under 46, Strong Buy under 42
• TEPPCO Partners (TPP) Buy under 25, Strong Buy under 20

In my last article, I introduced another favorite sector.

3. Canadian Energy and Income Trusts, and their American Counterparts, Stock/Bond Hybrids (EISs, IDSs, and IPSs).

CANADIAN ENERGY TRUSTS

Because their revenues, and hence distributions and stock prices, are directly tied to energy, these rise and fall with energy prices. Thus they were stars for both income and appreciation until energy prices began to drop in mid 2007. Most are down well over 30%, some over 50%, along with their distributions. They will be back with a vengeance with the inevitable energy price recovery, and that are now so low they are worth the diminished risk of further price declines. But that risk remains very possible.

Many rate are great buys at current prices, since dividend cuts appear finished or already priced in. More on these in a later article, but here are the strongest buys.

Enerplus Resources Fund (ERF)

The oldest and most well known of the Canadian Energy Trusts, its conservative, long term-focused management has slashed its dividend over 50% over the past months in order to preserve expansion projects and cut debt to preserve future prosperity. At the current price of around $19, it is selling for a bit over 60% book value and still yields over 9%. It’s one of the very best plays on energy’s recovery while you get paid handsomely for the wait. As one of the most well known, oldest and largest Canadian Energy Trusts, this one gets the most attention from institutions and funds that want to be in this kind of stock, since its one of the few that’s liquid enough for them, so it really tends to rise fast and drop slowly once energy is back in vogue. It’s a Buy under USD $22, a Strong Buy under $18 while energy remains down.

Vermillion Energy Trust (VETMF.PK)

With gas wells in Europe, as well as in Canada and Australia, Vermillion is uniquely positioned to benefit from what will likely be Russia’s ongoing periodic gas supply blackmail games to Europe. As proof of its strong fundamentals, it's one of the few Canadian trusts that has not cut dividends, and has issued strong guidance. Traditionally one of the lowest yielding trusts due to its strong fundamentals and low risk, it's been beaten down with the rest of the market and its sector and also provides yield far larger than its risk. With an annual distribution of USD $2.28 and current price under USD $20, yield is about 11%. It’s a Buy under $22, a Strong Buy under $20.

Primary Risks to These Include:

• Further declines in energy prices: Possible but not likely to be significant.
• Market Risk: As with any listed security, these will drop if the market continues to decline. Quite possible in the next year or so, but could be more than countered by rising energy prices.
• Currency Risk: With price and distribution set in Canadian dollars, the exchange rate with the US dollar effects these for good and bad. Most believe that the Canadian dollar is low compared to the dollar and has better prospects for appreciation, so this may be more of a bonus than risk
• Liquidity for Vermillion: Vermillion is thinly traded, so it doesn’t take much buying or selling to make the price move fast. The bad news is that getting out fast can be very expensive if there are no buyers and the market maker cuts the ask price drastically to protect himself. The benefit is that you can put in a lowball order 20% below current prices and have a real chance to get it if the market gets hit with another wave of sustained selling.

AN AMERICAN VERSION: THE ENHANCE INCOME SECURITY (EIS), THE INCOME DEPOSIT SECURITY (IDS), AND THE INCOME PARTICIPATION SECURITY (IPS)

In my prior article for January 2009 (see http://highdividendstocksguide.blogspot.com, “CD-Like safety, over 12% yields?! Atlantic Power Corp, and a high dividend investor's primer to stock/bond hybrids: The IPS, IDS, AND EIS”) I gave a detailed explanation of these, and briefly introduced my latest pick from this group, current recommendation, Atlantic Power Corp. Here’s the full story.

2. ATLANTIC POWER CORP. (ATPWF.PK)

Brief Profile

The firm (henceforth ATP) owns interests in and manages a varied portfolio of 14 independent, non-utility power generation facilities in the US, and an electric transmission line in central California. ATP sells electricity to established, investment-grade utilities under long-term power purchase agreements (PPAs). It’s one of the biggest, most diverse power income funds, and its equity partners in each of the projects are experienced in operating and maintaining the facilities.

Instead of common shares of stock, ATP issues Income Participation Securities (IPSs), which are simply a hybrid security made up of a share of common stock and a subordinated bond. The stock portion of the distribution is US $0.0383; the bond portion is $0.0529, totaling $0.0912 per month, or $1.0944 per IPS annually.

A. WHY

In short, what appears to be one of the best risk/reward combinations anywhere.

1. Very High Distribution

The price of the IPSs has followed the market, and thus is down over 30% from the mid-2007 from over US$10 to around $US 6.65. At this price the total monthly distribution of $US 0.0912, $1.0944 annual, is over 16%. Yields like this usually come only on securities with high risk of dividend cuts, default, bankruptcy, etc. Yet that doesn’t appear to be the case here.

2. Very Reliable Distribution

1. ATP sells its power under very favorable long term Power Purchase Agreements (PPAs) to investment grade, established utilities with investment grade credit ratings that have never defaulted on a PPA.

2. These PPAs typically mitigate risk by:

a. Substantial capacity payments based on the plant’s availability (not on actual demand or output) generally structured to cover fixed costs, capital, return on capital, and energy costs and other variable costs.

b. Pass through of fuel cost changes to the utilities.

c. Most projects have long term fuel supply agreements that correspond to the length of the PPA.

3. ATP has a very geographically diverse project portfolio, thus limiting exposure to any individual utility, market, regional regulatory or environmental conditions.

4. ATP claims to generate cash in excess of that needed for ongoing operations and distributions to investors, thus ensuring stable distributions. Actions supporting this claim include:

5. In November ’08, while stock markets were hitting new lows, the company actually raised distributions 8%.

6. In October ’08, the company announced that as a result of new currency hedges, cash on hand and projected future cash flows from existing operations would be enough to cover distributions to IPS shareholders through 2015, without including new cash flows from the pending Auburndale power plant purchase or future acquisitions.

7. On July 23^rd the company believed the shares to be such a good value that it announced it was repurchasing 4 million of the IPS or 8% of the total float, when the price was $US 8.53. This not only supported the share price, it also reduced outstanding debt from the bond portion of the retired IPSs.

8. Sector utilities can be very good bear market stocks because their power usage and hence revenues tend to be very stable even in bad times.

B. WHY NOT

Is this huge, safe dividend too good to be true?

1. High Payout Ratio:

Payout Ratio is the ratio of distribution to cash available for distribution after meeting needs for ongoing operations and existing obligations. Theoretically, the higher this is, the greater the risk of a dividend cut if the revenue stream falters.

Different industries have different levels of acceptable payout ratio. For example, Canadian energy trusts’ revenues vary with oil and gas, which can (and have recently been very volatile. Thus we like to see payout ratios below 70% (these days even lower). Since power companies tend to have very stable revenue streams, its acceptable for them to have higher payout ratios of around 80% or more.

As of September the payout ratio was in the high 80% range, and was recently reported to be almost double that for the fourth quarter. After repeated requests to the company’s investor relations department, I still haven’t gotten clarification on whether their payout ratio is as high as some have recently claimed (about 160%). I’d want to better understand how they can claim to so easily cover such a high payout ratio.

As mentioned above, the company claims it can and will cover the distribution to at least 2015. How can it be so confident with such a high payout ratio?

While I’m still checking, I suspect that there is a reasonable explanation for the 160% figure. Either it is either an error, or the figure is somehow distorted by some special condition here, either by the bond dividend portion of the distribution or some non-cash charge like depreciation expense (which can be very large for power companies) that should have been factored in but somehow wasn’t.

2. Market Risk

The price of the IPSs moves with the overall market, so if that continues to drop, so will the price. That’s unpleasant but not a problem as long as the distribution holds and you don’t need to sell.

3. Currency Risk

The distribution and unit price is set in Canadian dollars, and thus does vary with changes in the exchange rate with US dollars. That has both helped and hurt the shares. Overall I prefer the prospects of the Canadian dollar to that of the US dollar, so this is probably more of a bonus than a risk.

4. Liquidity/Thinly Traded

Average daily volume for the past three months is about 92,000 shares, and is usually below 60,000 shares. That means that it doesn’t take a lot of selling to drive the price down fast, as we saw at the end of ’08, and may yet see again in the near term. So again, this is not a stock for those who may need to sell soon. The benefit of this is that you can put in a lowball order another 20% below the current price and have a chance at getting it if the stock suddenly dives as it did in November.

5. Other Risk

The IPS bond portion is a subordinated bond, meaning there is more senior debt that gets paid first. As of September ‘08, there’s about US $340 million of it, compared to about $356 million of the IPSs’s subordinated notes. In a worst case scenario collapse, the IPS bond portion gets paid only after the more senior debt holders. Only after these does the common stock dividend get paid. This possibility seems remote even under current conditions, but it exists.

3. CONCLUSION

The above were my top picks in the best sector, Energy, for high dividend investors seeking reliable dividends between 7% - over 12% with excellent likelihood of capital appreciation within the next 12-24 months.

I also included a little known electric power fund that is really worth a look.

Unless the company has been outright lying, we have a rare case of a relatively safe 16% yield that is far greater than to the risks to the distribution or health of the company. The prices of the IPS units has varied with the overall market, and thus could conceivably drop a third or more as it already did in November.

So if you’re prepared to ride out the price volatility, Atlantic Power Corp seems to be one of the very best income plays available. ATP rates a buy up to USD $ 7.50 under these volatile conditions, a strong buy below USD $6.00.

What do you think? Comments welcome.

DISCLOSURE: The author holds positions in the above mentioned securities. For more on these and other high dividend stocks with reliable dividends backed by strong businesses, see http://highdividendstocksguide.blogspot.com.

Comments

[User 283977:]

Thank you very much for the highly useful information!

Feb 15 11:57 AM

[Iluvatar:]

Nice article. One comment: the $1.094 annual dividend for ATP is in Canadian dollars, so the yield is actually about 13%.

Feb 15 11:58 AM

[saluki65:]

First know that I own 5,500 IPS' of Atlantic Power for a number of years. I am underwater on these 'shares' and have tended to buy kore when it has been down. I have consistenly reviewed their financials and listened to their con calls. Am disturbed that their Q4 results won't be announced until theend of March.

The logical part of my brain says this is an outstanding opportunity. The emotional side asks myself "What don't I know or what am I missing?". Unless they are lying to us this appears as one of the most undervalued securities in the open market.

ATP does have the right to redeem the bond portion in the 4th quarter of this year. I look at this security as more of a bond equvelant with a call provision which does not bother me. If the bond portion is redeemed at about US$6.00 this implies a high yielding common stock that it seriously undervalued. I still wonder what am I missing?


On Feb 15 11:57 AM Bob Lunn wrote:

> Thank you very much for the highly useful information!

Feb 15 01:44 PM

[yellowhoard:]

The government in Canada really betrayed their constituency when they pulled the October surprise years back. I suspect that the US government will do the same as they look for fresh cash to feed the beast. Watch out MLP's.

Feb 15 04:42 PM

[Cliff Wachtel:]

Exactly. As governments start to print money to pay for various bailouts and devalue their currencies (they can get away with it, especially if they're all doing it) look out for price / wage controls, bans on holding precious metals, etc.

On Feb 15 04:42 PM yellowhoard wrote:

> The government in Canada really betrayed their constituency when
> they pulled the October surprise years back. I suspect that the US
> government will do the same as they look for fresh cash to feed the
> beast. Watch out MLP's.

Feb 16 03:45 AM

[Cliff Wachtel:]

I agree. I've made repeated inquiries to IR about their payout ratio yet no response. Hmmm. Also, if it makes you feel any better, ANYONE who owned pretty much ANY STOCK before the 4th qtr of '08 is also down. That's why I try to stay with stocks that have high,reliable dividends and I don't invest funds I may need in the next 12 mos. As long as the income keeps coming, we can wait and earn great returns. In this market, you can't depend on price appreciation no matter how good the business performs, since everything gets sold when the next bad news hits ( though bad results do get punished even worse).


On Feb 15 01:44 PM saluki65 wrote:

> First know that I own 5,500 IPS' of Atlantic Power for a number of
> years. I am underwater on these 'shares' and have tended to buy kore
> when it has been down. I have consistenly reviewed their financials
> and listened to their con calls. Am disturbed that their Q4 results
> won't be announced until theend of March.
>
> The logical part of my brain says this is an outstanding opportunity.
> The emotional side asks myself "What don't I know or what am I missing?".
> Unless they are lying to us this appears as one of the most undervalued
> securities in the open market.
>
> ATP does have the right to redeem the bond portion in the 4th quarter
> of this year. I look at this security as more of a bond equvelant
> with a call provision which does not bother me. If the bond portion
> is redeemed at about US$6.00 this implies a high yielding common
> stock that it seriously undervalued. I still wonder what am I missing?
>

Feb 16 03:51 AM

[Cliff Wachtel:]

Thanks for your kind words. Consider subscribing to the above blog for more.


On Feb 15 11:57 AM Bob Lunn wrote:

> Thank you very much for the highly useful information!

Feb 16 03:53 AM

[Cliff Wachtel:]

Your're right, my mistake. Thanks for the correction and kind words.


On Feb 15 11:58 AM Iluvatar wrote:

> Nice article. One comment: the $1.094 annual dividend for ATP is
> in Canadian dollars, so the yield is actually about 13%.

Feb 16 03:56 AM

[biomedlives:]

"We need tax credits to those who invest in productive assets which then stimulate permanent job creation and growth."

I'm not convinced that there's a strong, positive correlation between investment tax credits and job creation. After all, the fans of overseas outsourcing assure us that labor-saving equipment destroys many more jobs than outsourcing does. If we're interested in stimulating employment, why not enact a domestic jobs credit? Corporations might get credit for jobs they would create anyway, but, with an investment tax credit, they get credit for capital equipment they would buy anyway.


I second the comment "Thank you very much for the highly useful information! "

Feb 16 09:44 AM

[searcher:]

"Corporations might get credit for jobs they would create anyway, but, with an investment tax credit, they get credit for capital equipment they would buy anyway."

Neither would happen without a clear view toward a return on the subsidized activity. We are talking 'time frame' here. Presumably, the 'time frame' will allow a pull out of a stall dive in time before the economy hits the deck.

Feb 16 01:30 PM

[Loucleve:]

why complicate it? Just buy ENY which is the Canadian Income Trust ETF and much more diversified. KISS.

Feb 16 02:40 PM

[Loucleve:]

OOOPS, forgot one. The Pipeline ETF is BSR. It, however, has already moved up rather smartly. ENY is th eone.

Feb 16 02:43 PM

[Loup-Garou:]

Excellent article, with informative comments. Thanks.

For a couple of years I have thought the government might issue vouchers for gasoline, to avert social unrest in the U. S. Yesterday a comment on a blog expanded that to include food.

Which means the U.S. government will effectively subsidize/underwrite prices if crude goes "too high".

Feb 16 03:13 PM

[DuffBeer:]

Cliff,
A nice fresh take on income and divies. I like the fact you cover the good and the what if. Big thing you have skin in the game !!!!!
Cheers,
DuffBeer

Feb 16 05:41 PM

[Steve Ward:]

Anytime an investor relations department is evasive or un-communicative, something is wrong, very wrong.

Feb 16 07:40 PM

[ChipSeal:]

What? No mention of EGY? growing earnings, have a big pile of cash, drilling program internally funded, big news coming in Feb, more in early March, and two or three more announcements of drilling results by July. Reserves expanding big-time.
Do your own DD, you will be glad you did.
Disclosure: I am long EGY both as a shareholder and April call options. Good luck!

Feb 16 08:09 PM

[sligoo:]

ATP sure looks good to this retired yield hunter. How much of the dividend does the Canadian government take out in taxes?

Feb 17 12:54 PM

[watson:]

Anyone with a "working" brain knowes that Israel would leave islam alone if it were left in peace and not constantly attacked by muslems.


On Feb 16 08:06 AM mangiamillie wrote:

> Wachtel slid in the following incendiary remark, "As for destabilizing
> attacks and threats from Islamic terror..." under C2 of his thesis.
> If he's going to cast aspersions, why doesn't he mention Israel's
> invasion of Lebanon (euphemism: Lebanese war) or the Gaza massacre
> (euphemism: Gaza war)? Both are serious factors in destabilizing
> the Middle East.

Feb 17 01:13 PM

[Cliff Wachtel:]

Incendiary? Little ol' me? How? What aspersions? I don't think even the leaders of either Hamas or Hezbollah would disagree at all. Indeed, they'd thank me for the complement. Targeted attacks on civilians are meant to destabilize, darling. If this in turn drives up oil prices out of speculative fear, their Iranian puppeteers are ok with that.

I really try to stick to investment commentary and avoid politics. However, we all have a moral obligation to stand up to what Truman called “The Big Lie”. I didn’t think I was saying anything controversial to anyone, accept for the Jihad crowd.

Consider the following points, when you’re feeling calmer.

You’re right, Israeli military action, like any military action, destabilizes, and may well also drive up energy prices. However, this action is a response to Islamic attacks. Because the Israelis were obviously acting purely in self defense, even most of the Arab world and Europe refrained from serious protests, since this was a case of legitimate self defense against those openly committed to Israel’s destruction. Their Iranian supporters are ok with that too.

You’re also right about there being civilian deaths in Gaza and Lebanon during the Israeli actions. These indeed are facts, as are Israel’s efforts to minimize them, and Hamas’/Hezbollah’s efforts to maximize them by placing military assets in densely populated civilian areas. Calling civilian deaths an Israeli massacre is a blatant distortion.

No one ever referred to the mass deaths of German civilians in WWII as a massacre, because they were considered, rightly or not, unavoidable.

A massacre? That word is usually not used in connection to deaths resulting from legitimate self defense, especially when efforts were made by the attackers to minimize such deaths. Such appears to be the case with the allies in WWII, and with the Israelis in Gaza and Lebanon

Most unbiased people recognize that there is a distinction between Hamas and Hezbollah’s intentional rocket attacks on civilian areas, and Israel's sincere efforts to attack exclusively military targets.

It’s the Jihadists’ intentional placement of these in densely populated civilian areas that is the true cause of civilian deaths, since attacks will obviously draw Israeli counter attacks in self defense. Neither Hamas nor Hezbollah have ever expressed regret about this practice. They win either way. Either Israel doesn't respond to attacks, or they do, civilians get hurt/killed, the Jihadists’ get a PR victory, at least among those “inclined” to blame Israel even for defending itself.

Let’s focus comments on the article, politics.



On Feb 16 08:06 AM mangiamillie wrote:

> Wachtel slid in the following incendiary remark, "As for destabilizing
> attacks and threats from Islamic terror..." under C2 of his thesis.
> If he's going to cast aspersions, why doesn't he mention Israel's
> invasion of Lebanon (euphemism: Lebanese war) or the Gaza massacre
> (euphemism: Gaza war)? Both are serious factors in destabilizing
> the Middle East.

Feb 18 01:02 PM

[Cliff Wachtel:]

I agree. The devil is in the details. The credit has to be carefully structured to promote the desired kind of growth and employment that benefits America.


On Feb 16 09:44 AM biomedlives wrote:

> "We need tax credits to those who invest in productive assets which
> then stimulate permanent job creation and growth."
>
> I'm not convinced that there's a strong, positive correlation between
> investment tax credits and job creation. After all, the fans of overseas
> outsourcing assure us that labor-saving equipment destroys many more
> jobs than outsourcing does. If we're interested in stimulating employment,
> why not enact a domestic jobs credit? Corporations might get credit
> for jobs they would create anyway, but, with an investment tax credit,
> they get credit for capital equipment they would buy anyway.
>
>
> I second the comment "Thank you very much for the highly useful information!
> "

Feb 18 01:06 PM

[Cliff Wachtel:]

Good point, I'll look at that one. My concern with ETFs. like any basket of stocks, is the quality of the mix. I believe that since ETFs seek to mimic the performance of a given group, then along with the good you get the bad and the ugly. Generally, I prefer to try to research and go with only the best, even though a declining market will hurt these stocks too, at least the divy is safer, ( in theory). KISS is a good general principle.

As I tell my daughters, though, sometimes what starts with a KISS ends up with you getting... ahem, what you didn't really want.


On Feb 16 02:40 PM Loucleve wrote:

> why complicate it? Just buy ENY which is the Canadian Income Trust
> ETF and much more diversified. KISS.

Feb 18 01:16 PM

[Cliff Wachtel:]

Thanks, I'll look at that one.See my comments to the prior comment about ENY for the downside of ETFs.


On Feb 16 02:43 PM Loucleve wrote:

> OOOPS, forgot one. The Pipeline ETF is BSR. It, however, has already
> moved up rather smartly. ENY is th eone.

Feb 18 01:19 PM

[Cliff Wachtel:]

Thanks for the kind words, interesting point, want to ponder that one.


On Feb 16 03:13 PM Loup-Garou wrote:

>
> Excellent article, with informative comments. Thanks.
>
> For a couple of years I have thought the government might issue vouchers
> for gasoline, to avert social unrest in the U. S. Yesterday a comment
> on a blog expanded that to include food.
>
> Which means the U.S. government will effectively subsidize/underwrite
> prices if crude goes "too high".

Feb 18 01:21 PM

[Cliff Wachtel:]

Good point. Perhaps a happy ending. I recently recieved an email from the CFO, who says he had been away and only belatedly heard of my requests, and was very willing to speak. I'll be speaking with him soon, and will follow up.


On Feb 16 07:40 PM User 213076 wrote:

> Anytime an investor relations department is evasive or un-communicative,
> something is wrong, very wrong.
>

Feb 18 01:24 PM

[Cliff Wachtel:]

Excellent question. With Canadian trusts its 15%, and you can get a tax credit via IRS form 1116 as long as the stock is held in a taxable i.e. non IRA or other tax deferred account (otherwise you lose this credit). I'll avoid going into why because it gets technical. However, ATPWF is an IPS, not technically the same as an income trust and so one would have to check the tax status regarding Canada. Perhaps a I should follow up on this in a future blog.

On Feb 17 12:54 PM sligoo wrote:

> ATP sure looks good to this retired yield hunter. How much of the
> dividend does the Canadian government take out in taxes?

Feb 18 01:41 PM

[lorddarley:]

Atlantic Power units, which I acquired recently, make up a large position for me and crtain clients. A few points were not mentioned in Cliff W's article that were important to me when I decided to invest.

(1) On the plus side, they advise that their project debt is non-recourse to the parent. That's important in case one of the projects turns out to be a stinker. However, the loan documents for each transaction are not available, so I don't know if there are cross-default provisions (i.e. a failure under one project is a failure for all), which could be almost as bad. I'm hopeful that cross-defaults of that type are present, and will ask for confirmation at the next cc.

(2) Another plus. The looney is in the crapper. That's had the effect of saving lots of money, because the share dividend and the coupled 11% note are payable in looneys, while the revenue from projects is US dollars.

(3) On the "negative" side (or maybe it's positive if you like ballsy management), they bought Auburndale in November by cleaning out the credit line. The debt is reasonable, but there is little margin for error. This is not your grandmother's utility company.

Anyway, it's nice to see coverage on these units, which are obscure, but very promising.

LordDarley

Feb 18 08:25 PM

[lorddarley:]

One minor correction of a typo in that last post:

I'm hopeful that cross-defaults of that type are [NOT] present, and will ask for confirmation at the next cc.

LD

Feb 18 08:29 PM

[RSF_95:]

Just a couple of thoughts prompted by the article and earlier comments:

When considering a security like ATP, I find it helpful to maintain a very clear distinction between distribution yield (which includes interest on the bond component) and dividend yield. Based on the current payout and today's exchange rate and closing price (US $6.60), the distribution yield is 13.15%, while the dividend yield is a nice but undramatic 5.52%.

Per the company's press release re Q3 earnings, the payout ratio was a whopping 162% for the quarter and 72% for the 9 months ended 09/30/2008.

Of interest to US persons who hold the units in taxable accounts, my broker classifies the dividend as "ordinary," i.e., not eligible for the reduced US tax rate on "qualified" dividends. But then it also classifies the bond interest as ordinary dividends. As I read the relevant tax rule, dividends paid by foreign corporations are generally treated as being "qualified," but there are some exceptions. So, take a close look at your broker's year-end tax statement and consult your own tax adviser on how to report the dividends.

Feb 19 12:15 AM

[Mad Hedge F...:]

The longer crude stays below $40, the more production is being taken off the market. At this stage all 35 million barrels of storage at the Cushing, Oklahoma delivery point for west Texas intermediate are brimming with crude. The 709 million barrel Strategic Petroleum Reserve (SPR) is nearly full. And there is another 50 million barrels stored in supertankers at sea which is building by the day. Demand has collapsed so fast, that oil companies can’t shut down production fast enough. The scary thing about this is that when the next crude spike upward in crude comes, it will be worse than the last one. Take advantage of the current distress prices to accumulate oil infrastructure stocks. Kinder Morgan Energy Partners (KMP) has a PE multiple of 25 and a dividend yield of 8.3%. Enterprise Products Partners (EPD) has a $10 billion portfolio of fractionation facilities, storage, offshore drilling platforms, and 32,478 miles of product, natural gas, and crude pipelines, and carries a modest PE multiple of 12 X and a dividend yield of 9.2%. More expensive Kinder Morgan Energy Partners (KMP) with a PE multiple of 25 X and a dividend yield of 8.3% is also worth a look see.

Feb 20 12:36 PM

[macsmart:]

OK, Cliff...have you spoken with the CFO as yet? It would be much appreciated if you would report on what he said.


On Feb 18 01:24 PM Cliff Wachtel wrote:

> Good point. Perhaps a happy ending. I recently recieved an email
> from the CFO, who says he had been away and only belatedly heard
> of my requests, and was very willing to speak. I'll be speaking with
> him soon, and will follow up.

Feb 25 10:32 AM