A (Sub)Primed Pump

Recent actions by the Federal Reserve, the European Central Bank (ECB) and the Bank of England (BoE) have pushed interbank lending rates lower. And this morning, the Fed, pulling back the curtain even further in the Bernanke era, invited CNBC’s cameras to take a peak at its discussion of tightening mortgage lending requirements.

The Fed’s transparency move is an effort to restore confidence, but it seems targeted to retail investors. Credit market traders basically ignored that spectacle, but the reaction to central bank injections had immediate impact.

The ECB loaned a record EUR348.6 billion euros (USD501.5 billion) for two weeks at 4.21 percent Tuesday, following the first of four USD20 billion auctions by the Fed on Monday. The BoE held the first of two special operations Tuesday, offering GBP10 billion (USD20 billion) of cash for three months.

One-month and three-month euro London interbank offered rates subsequently posted their biggest daily declines since late 2001.

Banks still haven’t absorbed the full impact on their balance sheets of the subprime mortgage crisis. Many banks either own assets affected by mortgage losses, or they’re funding lines of credit to structured investment vehicles (SIV) that do and whose valuations are shaky or impaired. Either way, there’s plenty of uncertainty.

Ecstasy and Agony

One of the many companies to go public in the wake of South Sea Co had either the reckless courage or the wicked humor to tout itself as “a company for carrying out an undertaking of great advantage, but nobody to know what it is.”

It didn’t matter what was going on behind the scenes. Nobody knew, nobody cared; an exuberance flourished that would make Alan Greenspan blush.

As exuberant as things can get on the high side, the mood down low is dark and ominous. Back in 1929, investors leapt from Wall Street windows during history’s biggest stock market bust.

The deflation of the US housing sector has all the makings of an Irwin Allen-meets-Oliver Stone masterpiece.

Well, here we are, cold, sick of the 2008 election, wondering whom to blame for The Steroid Era, a little lighter on the brokerage statement and not knowing how long subprime will rule the mood. Merrill Lynch is rumored to be considering a pre-announcement of fourth quarter earnings, with the promise of another huge writedown implicit. We’re looking at a subprime-stained start to 2008, and it could seep into midyear.

Congress and President Bush are still haggling over the terms of a legislative fix that could help shore up underlying assets by firming up payment streams. Central banks have taken many steps since midsummer to boost liquidity, and those efforts seem to be having the desired effect, at least in the short term.

The sense five years ago–similar to the moods of 1711 and 1929–was that home prices would appreciate forever; in many cases, investors signed up for short-term teaser rates as low as 1 percent, looking to flip the property to the next aspirant to the ownership society.

And for a wonderful time, home prices went up. But the steep drop after the steady climb puts the tummies in the throats.

You could sell everything, then go short across the board. Call it the rock star approach: If we’re gonna go crazy with panic, let’s go out in style. Better to burn out than to fade away.

Another extreme shares an emotional starting point with the South Sea bubble: Back up the truck to grab as many bargains as you can.

There’s a word to describe people who act like that: irrational. At a time like this, composure wins.

The guiding principle for Canadian Edge since its inception in 2004 has been sustainability, a middle path charted below mania-stirred froth and above gloom-darkened waters. There are real, serious threats out there. Not knowing the depth and breadth of financial sector losses is a problem, but overreacting to that deficit could be fatal.

Succumbing to present fear is to ignore fundamental facts about the US economy. The job market is OK, unemployment is low, and wages are rising. Falling house prices will hold consumer spending down, but rising wages owing to favorable labor market conditions will offset that to some degree.

The global financial market will consume the dung pile that’s become the structured investment vehicle (SIV) market, not the other way around. But it’s a question of time, and likely some more pain, before banks consolidate their subprime exposure onto their balance sheets. Though it will take months to fully restore confidence in financial markets and get banks lending to each other again, the initial effect of central bank activity has been the intended one: Interbank borrowing costs are falling.

Solid, well-run income trusts make good, long-term investments. We’ve never chased the sexiest yields. We’ve always advocated accumulating the distributions paid by high-quality trusts over years, not just months. They can sustain distributions and make your monthly brokerage statement review at least a little easier to get through.

Stocks can make you feel rich, and they can make you feel poor. The middle path is lonely. When things are good, you’re the party pooper. When things are bad, your commitment is challenged. But low payout ratios and under-control costs help the best businesses weather storms like the one we’re experiencing.

Speaking Engagements

Escape the winter chill, groove on power trios with Roger Conrad, burn a high-quality cigar with Neil George, and reminisce about the good old days of The Iron Lady with Elliott Gue at The World Money Show at Orlando’s Gaylord Palms Resort, Feb. 6-9, 2008. Roger, Neil and Elliott will be there to talk infrastructure, partnerships, utilities, resources and energy, and to tell you what to buy and what to sell in 2008. Call 800-970-4355 or go to www.worldmoneyshow.com to register for free; refer to priority code 009859 to attend as Roger’s guest.

The Roundup

Oil & Gas

Advantage Energy Income Fund (AVN.UN, NYSE: AAV) cut its distribution to 12 cents Canadian per unit from 15 cents Canadian, citing the high Canadian dollar and sustained weakness in natural gas prices. The new distribution will be paid Jan. 15 to unitholders of record Dec. 31.

Advantage also announced an increase to its capital budget for 2008. The fund plans to spend between CAD130 million and CAD145 million, which should result in an annual production increase of between 32,000 and 34,000 barrels of oil equivalent per day (boe/d), weighted 62 percent to natural gas.

Advantage approved a 2007 capital budget of CAD120 million to CAD145 million on production estimates of 27,500 to 29,500 boe/d, weighted 66 percent to natural gas. Advantage Energy Income Fund remains a buy up to USD14.

Bonavista Energy Trust (BNP.UN, BNPUF) is paying CAD163 million in cash for producing properties in the Willesden Green area of Alberta and the Fireweed area in northeastern British Columbia, acquisitions that should boost production by about 7 percent. Current daily output from the acquired assets is 3,900 boe/d, 14 million cubic feet of natural gas, 700 barrels of gas liquids and 850 barrels of light crude oil.

The transaction increases Bonavista’s production to 57,000 boe/d. The acquired lands have proven and probable reserves estimated at 10.8 million barrels of oil equivalent. Hold Bonavista Energy Trust.

Penn West Energy Trust (PWT.UN, NYSE: PWE) announced the Alberta government has granted CAD6.5 million in royalty adjustments for a pilot project using carbon-dioxide injections to prolong production at its South Swan Hills project. Penn West is spending approximately CAD20 million to bring the project on stream, which is expected during the first quarter of 2008.

The investment is through Alberta’s Innovative Energy Technologies Program, a CAD200 million commitment over five years that provides royalty adjustments to projects that use innovative technologies to increase recoveries from existing reserves. Buy Penn West Energy Trust up to USD38.

True Energy Trust (TUI.UN, TUIJF) cut its distribution and put its Saskatchewan assets up for sale Monday. The company also announced the appointment of Wayne Chorney as CEO and director after the resignation of Chairman and CEO Paul Baay. William (Mickey) Dunn reassumed his role as chairman.

True’s cash distribution for December will be 8 cents Canadian per unit, to be paid Jan. 15 to unitholders on record as of Dec. 31, but the board of directors has set the distribution policy for the first quarter of 2008 at a monthly rate of 4 cents Canadian per unit.

True is divesting its Saskatchewan oil and gas assets to generate cash to pay down debt, to focus on its Alberta operations and perhaps to fund acquisitions there. After selling the Saskatchewan holdings, 2008 production is forecast to be about 9,000 boe/d, 40.2 million cubic feet per day of natural gas and 2,300 barrels per day of oil. Sell True Energy Trust.

Vermilion Energy Trust (VET.UN, VETMF) is boosting its monthly distribution to 19 cents Canadian per unit from 17 cents Canadian. Vermilion made 58 consecutive monthly distribution payments of 17 cents Canadian per unit since 2003.

But the trust’s payout ratio had dropped to less than 40 percent of funds from operations. Vermilion’s CAD182 million capital program for 2008 is based on a budgeted oil price of USD70 per barrel and a natural gas price of CAD6.75 per 1,000 cubic feet; oil is currently trading above USD90 and gas is around CAD7. Buy Vermilion Energy Trust up to USD40.

Business Trusts

Brookfield Real Estate Services Fund (BRE.UN, BREUF), formerly Royal LePage Franchise Services Fund, is increasing its 2008 annual distribution target by 4 percent to CAD1.25 per unit. The increase of 5 cents Canadian per unit will apply to unitholders of record on Jan. 31. Brookfield Real Estate Services Fund is a buy up to USD14.
 
GMP Capital Trust (GMP.UN, GMCPF) is launching an asset management business, GMP Investment Management, designed for wealthy individuals and institutions. GMP Investment Management plans to launch its first fund, GMP Diversified Alpha Fund, focused on multi-discipline strategies, in early 2008 and is contributing CAD20 million to get it started.

Since going public four years ago, GMP has steadily added asset management units to its existing stock trading and corporate finance divisions. Its network of stockbrokers now oversees CAD4.3 billion of client assets, and its private equity unit EdgeStone Capital Partners manages a CAD1.5 billion portfolio.

The Canadian hedge fund industry is viewed as in its adolescence, with 200 money managers overseeing USD30 billion. The US industry has about 9,000 players investing USD1.3 trillion. GMP Capital Trust is a buy up to USD24.

Real Estate Trusts

Cominar REIT (CUF.UN, CMLEF) will pay a special distribution of 2.5 cents Canadian per unit and is raising its regular monthly payout to 11.3 cents Canadian per unit from 11 cents Canadian. Hold Cominar REIT.

Natural Resources Trusts

Rogers Sugar Income Fund (RSI.UN, RSGUF) will pay 3.833 cents Canadian per unit to unitholders on record as of Dec. 31, payable by Jan. 30, up from 3.67 cents Canadian per unit. Rogers Sugar Income Fund is a buy up to USD4.