Canadian Energy Trusts: The Best Long Term Income and Dollar Hedge? (Part 2)

Part 7B of The Income Investor’s Collapsing Dollar Survival Guide

1. MARKET STATUS

See Part 7A.

2. UPDATE: THE CASE FOR AND AGAINST THE US DOLLAR

See Part 1, Part 2, and Part 7A of this series for the full story.

3. WHAT MAKES A HIGH YIELD STOCK USD INFLATION RESISTANT?

See Part 3 for the full details, but here’s the summary.

We’re seeking stocks of strong companies that mostly earn and distribute a high dividend in a non-USD currency and have a dominant position in a market for an essential product or service.

In this installment, we’ll begin exploring opportunities in the best single country in the world for stocks that combine high reliable dividends and USD hedge, Canada.

4. WHY THE CANADIAN DOLLAR IS ONE OF THE BEST U.S. DOLLAR HEDGES

For those seeking to diversify out of the USD, the CAD is one of the best alternatives. See Part 7A for the full story.

A. Grand Banks

The short version is that the Canadian banking system is among the healthiest in the world. It mostly avoided the entire subprime mess. While they feel some effects of the worldwide slowdown, banking and real estate are stable, credit is available, there is no major bailout needed from the government.

Thus supply of CAD will not be expanding by orders of magnitude, unlike the USD, for massive bailout programs, and the CAD should retain its purchasing power far better.

B. The Loonie Is a Commodity Based Currency

Because commodity exports are such a large part of the Canadian economy, the CAD tends to follow prices of energy, and other key commodities like grain and iron ore, etc. Thus they have all fallen together in the current slowdown.

However, as world populations continue to expand, even less than robust recovery will ultimately drive essential commodities higher. Higher commodity prices and far less expansion of the CAD money supply will support a long term appreciation of the CAD against the USD.

Of course, there are other factors influencing how the CAD and USD fare against each other and other currencies, and the Australian Dollar shares much of the CAD’s USD hedge characteristics. Nonetheless, the CAD is a compelling hedge against the USD.

5. Canadian Oil and Gas Producer Income Trusts - The Big Picture

The best of these already have the price and dividend cuts behind them, still pay high yields at current prices, and probably will continue to do so even if there are further dividend cuts. They will likely double or triple both yields and prices as energy inevitably recovers. Thus for those who can wait 12-18 months, these stocks have the highest likely price appreciation potential of any high dividend stock.

In addition to further temporary energy price declines, risks to these include currency risk (the CAD falls further) and overall market risk (shares move down with the overall market). Some of these are thinly traded, and thus can be extra volatile in either direction. There is also some uncertainty about how tax changes in 2011 will affect these trusts.

The recovery of both price and dividends, however, is only a matter time.

As noted in Part 7A, current prices for oil and gas are about USD 40 and 4. These prices are well below global reserve replacement costs for oil and gas are about USD 80 and USD 8, and also below production costs for many unconventional sources like deep ocean wells, Canadian tar sands, and shale oil properties. Falling energy prices are causing future supply cuts as existing and developing production sites are being scaled back or shut down.

For all the talk about wind, solar, and other alternative sources, they simply aren’t ready to begin seriously replacing traditional fossil fuels (coal included, but that’s a later discussion).

This global supply destruction makes new highs in energy prices inevitable, and the longer prices stay down, the greater the ultimate price spike that must follow. Also, all of the selections below sell at large discounts to book and net asset value, and are thus takeover targets.

Last year shareholders of PWI got about 30% over market value for their shares in a takeover.

Thus the rewards of current yields and very strong potential for robust price recovery more than justify the near term further downside risk.

Note: Canada has a 15% withholding tax for US shareholders, which can be recovered as a tax credit by submitting IRS form 1116 with your tax return.

All amounts quoted are in U.S. Dollars unless otherwise noted. All stock symbols are New York Stock Exchange unless otherwise noted. Yields are as of the day prior to publication.

6. Energy Income Trusts – Specific Recommendations

Take only partial positions until energy prices appear to have stabilized, but be ready to load up on these as the market begins to show interest. Both prices and distributions will soar as energy recovers, giving you high yields and capital gains.

A. Advantage Energy Income Fund (AAV)

Buy under 3, Strong Buy under 2.5 ONLY IF YOU DON’T NEED THE INCOME and are willing to speculate on the price and dividend recovering, or a possible takeover.

AAV recently suspended dividends until further notice. It chose to use cash to continue development and not jeopardize present survival or future growth. That was the smart move. Because AAV is heavily levered to energy prices, both yield and price will soar fast when oil and gas prices recover, which is likely within the next 24 months.

Natural gas is 67% of output, and is the cleanest fossil fuel, is widely available, and there are plenty of power plants set up to burn it. Thus it’s the quickest, cheapest green fix, and it will benefit more than any other fuel in the near term from the move to cut carbon emissions.

AAV is greatly expanding production and reserves at low cost. For example, it has recently hit a massive new reserve at its Montney Shale property in Alberta, which almost triples its annual oil and gas production at a very low finding and development cost of CAD 3.48 per barrel of oil equivalent. With close to 450 other drilling sites, the picture could get even better.

The recent dividend suspension spurred a selloff from its base of income investors, driving the price back to all-time lows around USD 2.28, meaning that AAV now sells for about 20% of net asset value of reserves. This extreme bargain price (along with its early conversion to a corporation) will ultimately bring in growth investors, and also makes it a prime takeover candidate.

B. ARC Energy Trust (AETUF.PK)

Buy under 13, Strong Buy under 10. Yield 19% prices in dividend cut, which with current payout ratio around 40% seems unlikely unless energy falls much further.

Like its brethren, it has suffered multiple distribution cuts – 4 since August alone.

However, Q4 results blew out expectations. In short, earnings, reserves, and payout ratio improving, debt and costs falling. The good news includes:

• Reserves up: Proven reserves (at least 90% chance of development) up 5%, probable reserves (at least 60% development chance) up 60%. Proven reserve life extended to 10.4 years.
• Costs down: Finding, Development and Acquisition costs (FD&A) for proven reserves cut 40%.

C. Claymore/SWM Canadian Energy Income Fund (ENY)

Buy under10, Strong Buy under 8. For those that want to buy a basket that attempts to mimic this sector. Unfortunately, many good assets are not widely traded enough for this fund, which is why I prefer to cherry pick individual stocks.

D. Enerplus Resources Fund (ERF)

Buy under 20, Strong Buy under 16. Yield over 9%. Along with Vermillion (mentioned below), ERF is the safest bet on energy for high income and dollar hedge.

At current dividend levels, its payout ratio is a very conservative 29% of Q4 distributable cash flow, making further cuts unlikely barring a radical further decline in energy prices. Management has been here before, having profited even during the major energy price decline a decade ago. Debt/equity is only 15%. Annualized cash flow is about double that of debt payments – among the lowest debt burdens in the industry.

Over the past year, ERF increased its diversified and high quality overall proven reserves by 10% to 9.4 years. Oil sands reserves are up 70%. At current prices ERF sells for about half its asset value, and that’s BEFORE considering the oil sands properties.

With low debt and operating costs, ERF can stay profitable even with oil around USD 10, making this one of the safest energy bets.

Its upside potential is enormous. As the most well known in its industry, it’s a favorite among large investors, and its shares are the first to be bought and last to be sold. When its shares peaked in 2006 at USD 60, it was a smaller company, without the vast natural gas, oil sands and shale assets it has since acquired.

E. Peyto Energy Trust (PEYUF.PK)

Buy under 8, Strong Buy under 6.Yield 36% at current price around USD 6.5 even after the recent 20% dividend cut from USD 0.15 to 0.12, prices in more cuts.

Long term survival appears assured. Proven reserves up 16.9% and are now up to 17 years, and industry best. Debt remains modest even with this expansion, and operating costs are among the lowest in the industry.

F. Provident Energy Trust (PVX)

Buy under 4, Strong Buy under 3. Yield over 14%.

As of this writing Q4 results were not yet available. Proven conservative management, and at current prices sells for around half of book value and 24% of sales, is worth the risks.

G. Vermillion Energy Trust (VETMF.PK)

Buy under 19.25, Strong Buy under 18.25. Yield over 9.5%.

Along with ERF, Vermillion is the top choice of the group for a bet on energy for income and USD hedge. A testimony to its strength, it is the ONLY one that has not needed to cut distributions.

Global production up 5%, debt cut in half and soon to be entirely eliminated upon completion of pending sale of its stake in Verenex (VRNXF.PK). Global diversification has helped it take advantage of much higher gas prices in Europe and Asia than in North America. Low payout ratio of just 33% leaves abundant cash for development, acquisitions and distributions. The firm believes distributions can be maintained with oil and gas at USD 40 and 3.85.

While deep energy price declines could hurt the distribution, Vermillion executives own around 9% of the company, so they’re well motivated to keep shareholder interests in mind.

Disclosure: I have positions in most of the above mentioned investments.

Comments

[Conan the B...:]

Mr. Wachtel: what are your thoughts on the 2011 Canadian Law which will remove the Trust Status of the CanRoys?

The dividends are great, may continue to be great or may not depending on the above status.

I have no qualms whatsoever about buying them for their potential as pure Oil companies with great assets. The Loonie will go up again and will help their stock prices... Total agreement, but as dividend plays past 2011, I have qualms.

Thanks for the Venerex symbol. I saw some news on it but couldn't find a symbol to use.

Mar 26 12:47 PM

[change is t...:]

Cliff, very valuable article. I got burned by the Canroy's last year by both the stock decline and dividend cuts. HTE was my favorite, but it's not on yours or anyone's list. Buying too soon can be worse than buying too late. Now the Canroy's are good turnaround plays. A while back they were good dividend plays.

AAV is a very good bet for all the reasons mentioned and, at this time with a low price, a good way to blend appreciation potential with income. The wild card and the one thing you did not mention about Canroy's are tax law issues. This uncertainty is troubling because it keeps buyers away.

What I am gathering is, even with high yield dividend stocks, making money now means you have to be willing to trade them. Frequently. Buy and hold, in this market is like getting poisoned.

Mar 27 04:03 AM

[GD:]

In reading your articles, I find continued optimism, with little background of the ongoing chemistry/events of of the market.

You avoid commenting on the impact at the end of 2010 [21 months from now]. These investments may surprise in the "interim" by changing to corporate structure, thereby reducing divs etc.
Also not discussed[even if the trusts do not convert], is the impact of US investors paying tax in th30%+ range on the divs.
Following the follwoing Board will give insights as to the furture of the CANROYS
www.investorvillage.co...

For me, I'm out of Canroys for good , untill I see the results of 2011

There are numerous othe US trust opportunites that good buys right now-BPT, CRT, NRT, PBT etc. Also BP looks good.

Mar 27 07:58 AM

[casey00001:]

On 3/26/07 (yesterday) You said the following would be forthcoming.
"See Part B for full details on each and a look at how the new Canadian tax laws for 2011 will likely affect them." Where is this analysis? I don't see it here in part 2.

Mar 27 08:35 AM

[Dividend Gr...:]

Cliff,

You seem to be a big believer in Canadian Income Trusts. I do not like the 2011 Tax Change, which could lead to distributions taxed very unfavorably for US investors.
I also do not like the volatility in Canadian Trust distributions. It's true that some of them spot double digit yields, but if distributions are cut the yield on cost end up less than a CD..
I feel much more comfortable buying the solid energy plays such as CVX, XOM and BP which are dividend achievers and have a proven track record of raising dividends and buybacks. They offer more solid and dependable dividend income stream in addition to the dividend growth potential and preferential tax treatment on their dividends.

Mar 27 08:37 AM

[Michael H:]

Interesting comparisom about Candian and Aussie economies

Mar 27 09:35 AM

[Cliff Wachtel:]

True.I ran out of room - SA keeps me to about 2500 words. As you can imagine, it's not a short topic, needs its own article, at least.
Better to give it the full treatment than a superficial one. Stay tuned. Cliff

On Mar 27 08:35 AM casey00001 wrote:

> On 3/26/07 (yesterday) You said the following would be forthcoming.
>
> "See Part B for full details on each and a look at how the new Canadian
> tax laws for 2011 will likely affect them." Where is this analysis?
> I don't see it here in part 2.

Mar 27 09:36 AM

[Cliff Wachtel:]

ran out of room. will give full treatment in next installment. Sorry but SA limits me to about 2500 words. Cliff


On Mar 27 08:35 AM casey00001 wrote:

> On 3/26/07 (yesterday) You said the following would be forthcoming.
>
> "See Part B for full details on each and a look at how the new Canadian
> tax laws for 2011 will likely affect them." Where is this analysis?
> I don't see it here in part 2.

Mar 27 09:40 AM

[Cliff Wachtel:]

i'll get into it in detail in the next article. short version is that they remain at least as good as their US counterparts and still have the usd hedge. Many also have pools of tax credits and other means of delaying the effects of the new regime. more concerned about the quality of the revenue stream. also, when energy gets scarce again, canada may want to encourage investment into this sector, so its not inconceivable that further changes to the law may again give producers more favorable treatment than other businesses. cliff


On Mar 26 12:47 PM paultaut wrote:

> Mr. Wachtel: what are your thoughts on the 2011 Canadian Law which
> will remove the Trust Status of the CanRoys?
>
> The dividends are great, may continue to be great or may not depending
> on the above status.
>
> I have no qualms whatsoever about buying them for their potential
> as pure Oil companies with great assets. The Loonie will go up again
> and will help their stock prices... Total agreement, but as dividend
> plays past 2011, I have qualms.
>
> Thanks for the Venerex symbol. I saw some news on it but couldn't
> find a symbol to use.

Mar 27 09:46 AM

[svosavvy:]

I agree with cliff's latest comment, laws were meant to be changed. I take a wait and see approach, on 2011. Someone in gov't or lobbies may actually wake up to the idea that money would massively flow out if severe structural changes to the tax law were allowed to take place. I believe to the opposite of an above contributor about the USA mlp structure. I think that is a competitive model that canroy's may wish to peg themselves against as a viable competitive model. I would also add that a good management is priceless in these times, and would humbly add that it will be a real challenge to make money on oil priced in usd though increasing in price, may get offset by input costs priced in the cad which may strengthen in light of future usd weakness. Long canroys

Mar 27 10:56 AM

[svosavvy:]

To clarify, "laws were meant to be changed" I meant that in the context of "rules are made to be broken"

Mar 27 11:11 AM

[macsmart:]

I'd love to know what Cliff thinks of BP. As a previous owner of many Canroys, I've slowly been getting out of them and switching to MLP's. But BP is paying a very handsome dividend. A lot of BP is natural gas though, and that worries me.


On Mar 27 07:58 AM GD wrote:

> In reading your articles, I find continued optimism, with little
> background of the ongoing chemistry/events of of the market.
>
> You avoid commenting on the impact at the end of 2010 [21 months
> from now]. These investments may surprise in the "interim" by changing
> to corporate structure, thereby reducing divs etc.
> Also not discussed[even if the trusts do not convert], is the impact
> of US investors paying tax in th30%+ range on the divs.
> Following the follwoing Board will give insights as to the furture
> of the CANROYS
> www.investorvillage.co...;pt=m
>
> For me, I'm out of Canroys for good , untill I see the results of
> 2011
>
> There are numerous othe US trust opportunites that good buys right
> now-BPT, CRT, NRT, PBT etc. Also BP looks good.

Mar 27 11:41 AM

[searcher:]

It's been stated before that gas wells deplete more rapidly than an oil well; thus gas production requires the utmost in efficient drilling and gathering, assuming reserves are well assured. Thus gas dependents need close to a 'production line' mentality with repeatable techniques and crews that can excell. When a gas dependent is running close to the wind and falling prices guts their margins then they run the risk of reducing crews and losing expertise in the mundane but vital.

Mar 27 02:25 PM

[adelante:]

good article from Gordon Pape posted 23 March:
The Canada Report, seemed cautiously optimistic on Canada’s economic and market prospects for 2009.
www.moneyshow.com/inve...

[excerpt] People need to be cautious with the energy trusts, for three reasons. First, many of them rely heavily on natural gas for revenue, and gas prices have been plunging. Second, Canada's income trust tax kicks in on January 1, 2011, and at this point no one is clear about what the impact will be on distributions. Third, some of the trusts have already announced they will convert to corporations before the tax takes effect. Based on the examples we have seen to date, that will probably mean a distribution cut (perhaps a large one), and a drop in the share price.
My two favorite trusts right now are TSX: VET.UN and TSX: CPG.UN.

Q. Which ones would you not buy right now, and why?
A. I would steer clear of the "gassy" trusts such as Advantage Energy Income Fund (TSX: AVN.UN) and Peyto Energy Trust (TSX: PEY.UN).

Q. Which are your favorite sectors right now?
A. I think the energy sector will lead the way back in Canada. Buy EnCana (NYSE, TSX: ECA) as a conventional oil and gas play and Suncor (NYSE, TSX: SU) for oil sands exposure. The pipeline companies, particularly Enbridge (NYSE, TSX: ENB) and TransCanada (NYSE, TSX: TRP), offer excellent yields plus good capital gains potential.

Mar 27 02:49 PM

[dual cit:]

Spoken just like a bean counter NOT an ecomomist. You got your ass handed to you today with the loonie and certainly have for the last 12 months. How is it going to turn up with the deficit spending that is now happening in Ottawa? Canada has nothing to sell but oil and lumber. Oil is in over supply and who's using lumber these days.

As for the Canadian banks, I've had this ongoing debate with one of your top economic strategists with one of those banks up there who simply made the argument that the C-banks were always requiring more money down on home purchases (which we all know is BS) and that Canadians have more equity in their homes. My argument was and still is that this is like saying we are having pretty good weather for the size of the town. Homes prices do not sell for long above two and a half median incomes. Canadians median home price is now higher than that of the US and yet its median income is lower. Now do you honestly think that "higher" equity in the average Canadian home's home is going to last to much longer ?

Mar 27 05:17 PM

[jarco:]

Q. Which are your favorite sectors right now?
A. I think the energy sector will lead the way back in Canada. Buy EnCana (NYSE, TSX: ECA) as a conventional oil and gas play and Suncor (NYSE, TSX: SU) for oil sands exposure. The pipeline companies, particularly Enbridge (NYSE, TSX: ENB) and TransCanada (NYSE, TSX: TRP), offer excellent yields plus good capital gains potential.

Oil Sands exposure is a major problem. Cost of production, let alone environmental concerns, exceeds anticipated revenue at currently projected barrel quotes. The use of NG to fuel the process while at unusually low BTU prices will further hamper profits.

NG exports to the US have dropped and its not from pricd structure rather domestic Tar Sands needs

Mar 27 06:12 PM

[oilsands:]

Cliff, again thanks for a fine article. Look forward to more discussin of this valualbe investment niche.

sometime your thoughts on pipelines would be appreciated.

Mar 27 06:56 PM

[svosavvy:]

Look, yeah nat gas sucks right now. I would look to the future, the cap and trade future. The current administration cannot fall on their sword on this one right now there's too much other stuff going on at the moment, but, they can use strong toothless language. The only alternative to coal right now is nat gas, I wouldn't be surprised to see a form of an inconvenient truce. One that says we (industrials) promise to pollute less (burn less coal and more nat gas.)

Mar 27 08:48 PM

[max12345:]

First of all, we are still one full One Year and 9 Months away from January 2011. There is plenty of time to collect 15-20% Canroy income distributions for one full year and still get out 9 months in advance, if one really wants to worry about the fact that the new tax law will (may) knock the unit price down.

And during the next one year the likelihood is almost infinitely (???) greater (o.k. maybe only five times greater) that oil (as well as gas) prices will go way up (rather than any further down...though of course anything is possible) thereby doubling the share price of most Canadian energy income trusts. Whereas it's almost impossible for the share price of Exxon Mobil or Chevron to double because they are just too darned big (and mastodontic)

Secondly as I said in another post to one of Cliff Wachtel's earlier articles quoting Yogi Berra (I believe he was the one to say it) "it's not over til it's over". Meaning that the 2011 changes to Canadian tax law have been hotly contested in the past and that it cannot be a foregone conclusion (or be excluded) right NOW that in January 2011 Income Trust tax law will definitely be either X or Y.

The political economy of the income trust issues is quite complicated (plenty of room for the luminaries of both the left and the right in both politics and within the economy to continue to battle one other ad nauseum for at least another decade) and so it may still play out in different ways. Not to mention that if Canadian seniors get annoyed enough at losing their special benefit (and they are fuming already) they will boot out of office any government or party doing the wrong stuff.

Finally worrying too much in general about what is going to happen or not in two years time is a bit like worrying about how one will deal with a Climate Change Catastrophe or a Nuclear War. (o.k. the former may take twenty years instead)

Of course they may both happen and we may all be vaporized (by the latter) but I am not losing any sleep over it. And it would definitely not deter me from investing in lots of Australian uranium stocks. (quite the contrary)

And this strange joke seamlessly brings me to another interesting point. Yes it's true that Canadian income trusts (and Canadian investments in general) are a great investment for the reasons Cliff has so clearly and kindly spelled out for all his "actively seeking alpha" readership.

But another great investment (for very similar -though not entirely the same- sorts of reasons) is Australia.

I bought some Rio Tinto in December and it is already up 100%. (not too bad!) And another short term plus factor in favour of investing in Australian commodity stocks (as a supplement to investing in Canadian energy stocks) is the Chinese commodity super-hoarding shopping spree going on right now...(as if there were no tomorrow...which could well prove right) and their fiscal stimulus package. Which should at least maintain a good portion of the demand for all of those relatively just around the corner Australian commodities.

Not that it really makes all that much difference -though transportation costs do matter- if all of that stuff were to leave from Eastern Brazil and Vale do Rio Doce and Minas Gerais sorts of places instead...but Perth is just "a shot away" from Eastern China and that makes it even easier and cheaper. (So Aussies duly beware)

Unfortunately however, Australia does NOT have a well-developed income trusts sector as Canada does.

But one easy play for those who may be interested in betting on Australia and its commodity sector (and is there any other of true significance?) is Aberdeen Australia Equity Income closed-end fund (IAF).

They have some of the best Australian commodity companies in their portfolio... (as well as some very solid banks, at least as solid as the Canadian banks since equally less prone to hanky panky in the recent past)....they do a bit of light hedging...(simple puts and calls) (no leveraging) and at the current share price of USD 7 / share they now manage to pay out a fat dividend (quarterly) of 15% p.a.

Their IPO price back in 1987 was 10, over the years it has reached 15 a couple of times and it is now trading at 7. (an all time low) So if Australian commodity prices will go up (and they certainly will unless India and China both close up shop) it should go back up to at least 11....at least for a while at some point sooner or later...thus also providing a good reasonably predictable exit point. Plus there is also a (very) positive rather than a negative currency risk.

So if you really want to worry about those CanRoys just buy some of this CEF instead and sit back, relax and collect your 15% per annum for a couple of years and then sell out at 30% above what you now will buy at. (and if you really feel grateful for this wonderful advice, please don't forget to also send me a small cut of your near-certain profits) (you can address it to Virtual Max 12345/
c/o Virtual Reality)

Mar 28 04:47 AM

[Cliff Wachtel:]

Patience. Comments on taxes are coming in Part 7C ( SA has about a 2500 word limit, and its not a topic for a just a few paragraphs).

Most of these distributions are considered qualified dividends by the IRS, thus at 15% (not 30%+) for now, though its unclear if Pres Obama will leave that in place, at least once the stock mkt recovers. He's more "tax and spend" than "invest and build/trickle down," though if he is not the ideal president for income investors.

I didn't think I was especially optimistic, certainly not in the near term, though I do believe long term these are among the best investments for risk vs reward (BUT that's above average risk for way above average reward). Again these stocks are traditionally volatile, though IMHO betting on well run energy companies that focus on long term health rather than short term share performance is a more than reasonable risk, short term prices be damned.

Thanks for your comments, I don't mind being criticized regarding legitimate concerns (it's how I've managed to stay married!). Cliff

Will check out the site.


On Mar 27 07:58 AM GD wrote:

> In reading your articles, I find continued optimism, with little
> background of the ongoing chemistry/events of of the market.
>
> You avoid commenting on the impact at the end of 2010 [21 months
> from now]. These investments may surprise in the "interim" by changing
> to corporate structure, thereby reducing divs etc.
> Also not discussed[even if the trusts do not convert], is the impact
> of US investors paying tax in th30%+ range on the divs.
> Following the follwoing Board will give insights as to the furture
> of the CANROYS
> www.investorvillage.co...;pt=m
>
> For me, I'm out of Canroys for good , untill I see the results of
> 2011
>
> There are numerous othe US trust opportunites that good buys right
> now-BPT, CRT, NRT, PBT etc. Also BP looks good.

Mar 29 12:16 PM

[Cliff Wachtel:]

As long as I get my yield, short term price movements don't get me too down, these stocks are not for short term trades. Dividend cuts DO get me down, but will accept to preserve the long term viability of the company.

As for the loonie, being energy (and other commodities) based is also just fine, since I'm very bullish on energy. Cliff


On Mar 27 05:17 PM User 328493 wrote:

> Spoken just like a bean counter NOT an ecomomist. You got your ass
> handed to you today with the loonie and certainly have for the last
> 12 months. How is it going to turn up with the deficit spending that
> is now happening in Ottawa? Canada has nothing to sell but oil and
> lumber. Oil is in over supply and who's using lumber these days.
>
>
> As for the Canadian banks, I've had this ongoing debate with one
> of your top economic strategists with one of those banks up there
> who simply made the argument that the C-banks were always requiring
> more money down on home purchases (which we all know is BS) and that
> Canadians have more equity in their homes. My argument was and still
> is that this is like saying we are having pretty good weather for
> the size of the town. Homes prices do not sell for long above two
> and a half median incomes. Canadians median home price is now higher
> than that of the US and yet its median income is lower. Now do you
> honestly think that "higher" equity in the average Canadian home's
> home is going to last to much longer ?

Mar 29 12:31 PM

[Cliff Wachtel:]

Oooooh. I'm making note of that one for a future piece on Australian income opptys. Great post, lots of good ideas here. Thanks


On Mar 28 04:47 AM max12345 wrote:

> First of all, we are still one full One Year and 9 Months away from
> January 2011. There is plenty of time to collect 15-20% Canroy income
> distributions for one full year and still get out 9 months in advance,
> if one really wants to worry about the fact that the new tax law
> will (may) knock the unit price down.
>
> And during the next one year the likelihood is almost infinitely
> (???) greater (o.k. maybe only five times greater) that oil (as well
> as gas) prices will go way up (rather than any further down...though
> of course anything is possible) thereby doubling the share price
> of most Canadian energy income trusts. Whereas it's almost impossible
> for the share price of Exxon Mobil or Chevron to double because they
> are just too darned big (and mastodontic)
>
> Secondly as I said in another post to one of Cliff Wachtel's earlier
> articles quoting Yogi Berra (I believe he was the one to say it)
> "it's not over til it's over". Meaning that the 2011 changes to Canadian
> tax law have been hotly contested in the past and that it cannot
> be a foregone conclusion (or be excluded) right NOW that in January
> 2011 Income Trust tax law will definitely be either X or Y.
>
> The political economy of the income trust issues is quite complicated
> (plenty of room for the luminaries of both the left and the right
> in both politics and within the economy to continue to battle one
> other ad nauseum for at least another decade) and so it may still
> play out in different ways. Not to mention that if Canadian seniors
> get annoyed enough at losing their special benefit (and they are
> fuming already) they will boot out of office any government or party
> doing the wrong stuff.
>
> Finally worrying too much in general about what is going to happen
> or not in two years time is a bit like worrying about how one will
> deal with a Climate Change Catastrophe or a Nuclear War. (o.k. the
> former may take twenty years instead)
>
> Of course they may both happen and we may all be vaporized (by the
> latter) but I am not losing any sleep over it. And it would definitely
> not deter me from investing in lots of Australian uranium stocks.
> (quite the contrary)
>
> And this strange joke seamlessly brings me to another interesting
> point. Yes it's true that Canadian income trusts (and Canadian investments
> in general) are a great investment for the reasons Cliff has so clearly
> and kindly spelled out for all his "actively seeking alpha" readership.
>
>
> But another great investment (for very similar -though not entirely
> the same- sorts of reasons) is Australia.
>
> I bought some Rio Tinto in December and it is already up 100%. (not
> too bad!) And another short term plus factor in favour of investing
> in Australian commodity stocks (as a supplement to investing in Canadian
> energy stocks) is the Chinese commodity super-hoarding shopping spree
> going on right now...(as if there were no tomorrow...which could
> well prove right) and their fiscal stimulus package. Which should
> at least maintain a good portion of the demand for all of those relatively
> just around the corner Australian commodities.
>
> Not that it really makes all that much difference -though transportation
> costs do matter- if all of that stuff were to leave from Eastern
> Brazil and Vale do Rio Doce and Minas Gerais sorts of places instead...but
> Perth is just "a shot away" from Eastern China and that makes it
> even easier and cheaper. (So Aussies duly beware)
>
> Unfortunately however, Australia does NOT have a well-developed income
> trusts sector as Canada does.
>
> But one easy play for those who may be interested in betting on Australia
> and its commodity sector (and is there any other of true significance?)
> is Aberdeen Australia Equity Income closed-end fund (seekingalpha.com/symbo...).
>
>
> They have some of the best Australian commodity companies in their
> portfolio... (as well as some very solid banks, at least as solid
> as the Canadian banks since equally less prone to hanky panky in
> the recent past)....they do a bit of light hedging...(simple puts
> and calls) (no leveraging) and at the current share price of USD
> 7 / share they now manage to pay out a fat dividend (quarterly) of
> 15% p.a.
>
> Their IPO price back in 1987 was 10, over the years it has reached
> 15 a couple of times and it is now trading at 7. (an all time low)
> So if Australian commodity prices will go up (and they certainly
> will unless India and China both close up shop) it should go back
> up to at least 11....at least for a while at some point sooner or
> later...thus also providing a good reasonably predictable exit point.
> Plus there is also a (very) positive rather than a negative currency
> risk.
>
> So if you really want to worry about those CanRoys just buy some
> of this CEF instead and sit back, relax and collect your 15% per
> annum for a couple of years and then sell out at 30% above what you
> now will buy at. (and if you really feel grateful for this wonderful
> advice, please don't forget to also send me a small cut of your near-certain
> profits) (you can address it to Virtual Max 12345/
> c/o Virtual Reality)
>
>
>
>
>
>
>
>

Mar 29 12:37 PM

[Cliff Wachtel:]

Its on the way when I get to the energy infrastructure trusts. Like I said, there's a LOT of great investments in Canada, and I stick to about a 2500 word limit. thanks for your kind words, Cliff


On Mar 27 06:56 PM oilsands wrote:

> Cliff, again thanks for a fine article. Look forward to more discussin
> of this valualbe investment niche.
>
> sometime your thoughts on pipelines would be appreciated.

Mar 29 12:39 PM

[Harold Goodman:]

Two questions:

Why don't you include PGH on your list of recommended energy trusts?

Why aren't you concerned that all the Canroys will get slaughtered by the upcoming change in tax regulations in 2011, and when do you believe that investors will start dumping them in advance of this?

Mar 29 03:32 PM

[User 386546:]

Cliff,

I find your articles insightful and stimulating. I would like to know what criteria you use to determine buy/strong buy recommendations on stocks and your hedge postions.

Thanks.

Mar 31 05:34 PM

[antiquary:]

Judging by the size of some of these comments, you could add the remainder of your article in a comment and avoid the 2500 word restriction, though I imagine SA would not be amused.

Apr 05 12:33 PM

[Cliff Wachtel:]

Unfortunately, their dividends are generally so low as to be self defeating for income investors, leaving you nothing after real inflation and taxes. Yes, if you wait (and wait) they slowly grow the dividend, so at some point (?) perhaps you actually have a return on your principal that leaves you with some real return. Overall, however, the low single digits are ok for helping preserve capital, but inadequate for income. To get ahead with these stocks, you need price appreciation, and hope you don't need the cash until then.


On Mar 27 08:37 AM Dividend Growth Investor wrote:

> Cliff,
>
> You seem to be a big believer in Canadian Income Trusts. I do not
> like the 2011 Tax Change, which could lead to distributions taxed
> very unfavorably for US investors.
> I also do not like the volatility in Canadian Trust distributions.
> It's true that some of them spot double digit yields, but if distributions
> are cut the yield on cost end up less than a CD..
> I feel much more comfortable buying the solid energy plays such as
> CVX, XOM and BP which are dividend achievers and have a proven track
> record of raising dividends and buybacks. They offer more solid and
> dependable dividend income stream in addition to the dividend growth
> potential and preferential tax treatment on their dividends.

Apr 06 05:11 PM

[Cliff Wachtel:]

Probably.Given the butchering they gave the title of my last post, changing it from:GO LOONIE! A FOREX TRADER’S MUST-KNOW ADVICE FOR HIGH-DIVIDEND INVESTORS to something like CONSIDER THE CANADIAN DOLLAR AS A USD HEDGE or something equally soporific, it appears that they can get rather serious at times.


On Apr 05 12:33 PM antiquary wrote:

> Judging by the size of some of these comments, you could add the
> remainder of your article in a comment and avoid the 2500 word restriction,
> though I imagine SA would not be amused.

Apr 06 05:15 PM