Canada's Changing Political Winds and the CANROYs

Includes: AAV, ERF, PBA, PDS, PGH, PWI
by: Investing The Middle Way

Today I’ll go a bit off the beaten path and venture a bit into the exciting world of, Canadian politics?!

Reuters reported on Dec. 14:

The chances of a quick election in Canada rose on Thursday when both the main opposition parties said they would not back the minority Conservative government in crucial votes early next year.

First, a little background on Canadian politics: Canada has a multi party, parliamentary system where the House of Commons holds much of the power. About one year ago, the Conservatives won a plurality (128/304) of seats in a general election and their leader, Stephen Harper, became the Prime Minister. Since the Conservatives are short of an absolute majority, they have what’s called a “minority government” which makes it difficult to pass legislation.

In December, the Liberals, the main opposition party, elected a new leader, Stéphane Dion. Dion wasted no time in voicing his opposition to the budget proposed by the government which led to the Reuters report above.

The investment angle (of course there is one) in all this again came from the Canadian Royalty Income Trusts (CANROYs). You’ll remember that a proposed change to tax the CANROYs by Finance Minister Flaherty resulted in a loss of ~$26B in the market cap of these trusts. The irate Canadian investors have dubbed it the “Halloween Massacre” base on the timing of the announcement.

The sad thing was that one of the promises by the Harper campaign was to leave the income trusts alone, not to mention that the Conservatives enjoyed wide support in the oil producing province of Alberta. It swept all 28 seats there on their way to victory.

So what if there is an early election? All politicians pander to voters when it’s crunch time and it’s no different in Canada. Retirees were badly hurt from this tax rule change and retirees vote if nothing else. So some relaxing of the rules seems likely. Ideas such as lengthening the waiting period form 4 years to 10 years, or providing a grandfather clause for existing oil/gas trusts have been floated around. Whatever actually happens, I think the worst news is out for CANROYs.

Of course the price of crude is a wild card. While I really enjoyed the gorgeous weather here in the Northeast last weekend, slackening demand and the prospect of a recession has really put a damper on energy prices. Crude (basis western Texas intermediate) has broken down a long term trend line and looking to test low 50’s in the near term. But crude is the most political commodity, I don’t think OPEC/Russia will standby to watch the price drop. I think Wall Street’s doubts in OPEC countries’ discipline to stick to production quotas were based on the previous cycles. Even if half of what Matt Simmons (of Twilight in the Desert fame) says is true, we won’t see $40 oil again.


Here’s a small list of CANROYs. Many are poised to re-test the November reaction lows, some have already dropped below (of course, they’ve been paying dividends along the way). I’m steering my portfolio towards more dividend paying names this year, so I’ve been taking positions with the intention to hold. If the changing political winds in Canada provide something more immediate, all the better.