More Loonie Tunes
The Canadian dollar’s recent performance is an indication of two critical economic developments. Its rise coincides with increases in investor confidence and risk appetite. Also, however, and somewhat paradoxically, it’s being used as a hedge against inflation in the US–in other words, a type of safe haven.
The loonie is widely perceived as a “commodity currency,” its movement understood to be highly correlated–as is the Canadian economy–to conditions in raw materials markets.
A large portion of the Canadian economy is tied to the price of oil, which causes the price of this commodity to become a major driver in the value of the Canadian dollar. Other countries, such as Australia and New Zealand, are in similar positions due to their economic dependence on precious metals such as gold. All of these countries see money flowing in when their respective commodities rise, causing their currencies to appreciate.
Canada isn’t usually mentioned during conversations about petro-states. But the bulk of the imported oil consumed in the US comes from the Great White North. For example, in March 2009 the US consumed nearly 2.5 million barrels of Canadian crude per day, far more than the 1.9 million daily barrels the US purchased from Mexico, our next biggest supplier.
Canada is one of the 10 largest producers in the world; crude is Canada’s most exported product to the US and is tens of billions of dollars ahead of the next largest category, automobiles. And the US isn’t the only loyal buyer of Canadian oil. Japan imports nearly all of its crude oil, and is another important buyer of Canadian crude.
The loonie is a commodity based currency, so stronger commodity prices mean a stronger loonie.
The loonie’s approach to parity with the greenback is also happening because it’s seen to have intrinsic value rooted in raw materials. The historic monetary and fiscal moves of central bankers and politicians everywhere have left many questioning not whether we’ll experience a severe bout of inflation, but when.
History shows that massive growth in money supply at some point leads to inflation. It’s just a matter of how much and when. A long, severe recession can keep the lid on inflation, but at some point things turn around, hiring and spending increase, and lots of currency chases a diminished supply of goods, causing inflation.
Higher inflation means higher prices for hard assets like energy and other commodities. Indeed, these are among the first to rise, because they’re needed to produce and deliver finished goods.
Adding to the Canadian dollar’s strength relative to the US dollar and other currencies is the relative health of the Canadian financial system. Sound practices ahead of the financial crisis allowed credit to be more readily available amid the worst of the downturn, and the Bank of Canada (BoC) has for the most part avoided money-printing, or “quantitative easing.” Likewise, the Canadian federal government was in budget surplus for a decade before this recession, giving it ample room to stimulate the economy by ramping up spending.
A strong loonie, however, is problematic for the Bank of Canada and the Finance Ministry. It means Canadian exports cost more. The fear is a rising loonie will hamper the Canadian manufacturing sector’s recovery.
The best way to play Canada’s relative strength is to scale into income trusts and dividend-paying corporations via the High Yield of the Month recommendations in Canadian Edge. You’ll enjoy the upside as the economy recovers, and you’ll get paid on a regular basis by a solid business.
The CE Conservative and Aggressive holdings are basically “best of breed” businesses that know how to manage cash flow for the long-term sustainability of operations as well as payouts to investors.
If you’re simply looking to stick a toe across the border, consider CurrencyShares Canadian Dollar Trust (NYSE: FXC).
Any US-based investor long Canadian equities is also long the Canadian dollar, but another way to grab some upside is through a direct bet on the loonie.
CurrencyShares Canadian Dollar Trust is well off its lows now, but is likely to pull back from this short-term high. At some point the market will retreat as well, on profit-taking as investors look to make paper gains real and on the realization that we’ve run awful far, awful fast. The economy remains weak, and it seems unlikely we’ll see actual revenue and profit growth sufficient to justify current prices until late 2010.
Much of what’s powering recent good numbers–as acknowledged by the BoC in its July interest rate announcement and its subsequent Monetary Policy Report–as the “bringing forward” of consumer spending because of government incentives. The long-term creation value of this type of spending is questionable.
Likewise, will the US auto industry be able to maintain the sales pace absent “Cash for Clunkers?” Or will we see something like what happened in 2001-02, when Detroit offered 0 percent financing to goose auto sales, weak in the wake of the Sept. 11, 2001 terrorist attacks.
Sales soared from 16.1 million annualized units in September 2001 to 21.7 million in October, an annualized growth rate of 3,643 percent. Retail sales jumped 6.6 percent that month, 116 percent on an annualized rate, still a record today.
But auto sales dropped the ensuing three months, eventually coming back to around 16 million units; retail sales also fell each of the next three months.
At any rate, the loonie is elevated right now because of a short-term overreaction to what is undeniably better news on the economic front. The efforts employed by monetary and fiscal policymakers to fertilize these green shoots have also created an expectation in the market of rising inflation.
There will be an opportunity to step into the currency ETF at closer to 85 and enjoy its ride to parity. The long term includes a return to economic activity that’s at least proximate to what the West has experienced in the past as well as robust growth in the developing world. This means more demand for the raw materials Canada produces.
Short-term euphoria about the prospect of a quick snap-back for the economy will give way to despair over unmet expectations. But the long-term implications of US monetary and fiscal policy as well as long-term fundamentals for the global economy suggest such a dip is simply a chance to grab value.
Speaking Engagements
Roger Conrad is making the trip to the Great White North for The World MoneyShow Toronto, October 20-22 at the Metro Toronto Convention Centre.
Roger will, of course, discuss Canadian income trusts and high-yielding corporations as well as the utility universe.
Click here to register and attend as Roger’s guest.
The Roundup
Conservative Holdings
Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) reported a 2.9 percent decline in revenues for the second quarter, but earnings before interest, taxation, depreciation and amortization (EBITDA) increased 1.9 percent year-over-year. Cost-cutting measures accounted for most of the gain.
Internet revenue grew 10.4 percent, while the number of high-speed Internet customers rose by 7.9 percent and residential high-speed Internet average revenue per customer increased by 6 percent.
IT revenue declined 16.6 percent; IT equipment sales were down CAD11 million from the same quarter a year ago but are up CAD10 million for the first half of 2009 compared to the same period in 2008.
Local service and long distance revenue declined 3.2 percent) and 5.8 percent, respectively, with network access services (NAS) 4.3 percent lower than a year ago. NAS declines in the second quarter of 2009 increased by approximately 11,000 from the same period a year earlier, driven largely by increased business NAS declines including government contract losses.
Revenue from other sources, such as outsourcing services, declined 8.1 percent from the same quarter in 2008.
Capital expenditures in the second quarter of 2009 were CAD122 million, 4.3 percent lower than a year ago.
Distributable cash increased 1.8 percent, as the cash benefits of higher EBITDA and lower capital spending more than offset the loss of distributable cash from discontinued operations.
Management noted that it continues to evaluate its options regarding the 2011 trust tax; Bell Aliant will convert on or before Jan. 1, 2011, but the company “will have sufficient tax shelter to defer incurring an income tax liability for at least 18 months and as much as 24 months after conversion to a corporation.” Bell Aliant Regional Communications Income Fund is a buy up to USD25.
Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) grew total revenues by 8.7 percent in the second quarter to CAD48.2 million, helped by the contribution of its Sub-metering business and increased revenue from its Rentals business, including an average rental rate increase on most of the portfolio of 3.9 percent effective January 2009.
The Sub-metering business had negative EBITDA of CAD600,000 in the second quarter, due in part to actions taken in response to the March 24, 2009 Ontario Energy Board Bulletin regarding the deployment of sub-metering services in the Ontario apartment market.
EBITDA declined slightly to CAD34.4 million from CAD36.7 million a year ago because of higher losses on disposals in the Rentals business. Excluding the impact of equipment sales, EBITDA was up slightly to CAD39.4 million from CAD39.3 million in the second quarter of 2008.
Cash from operating activities decreased to CAD34.1 million in the second quarter from CAD37.9 million a year ago.
Distributable cash decreased by CAD4.6 million in the second quarter to CAD13.7 million, due primarily to the higher interest expense after Consumers’ refinanced CAD330 million in debt and increased capital expenditures by CAD1.6 million.
The fund’s payout ratio during the second quarter of 2009 was 116.9 percent, up from 87.2 percent a year ago. The customer attrition rate was 1.6 percent, up from 0.7 percent a year ago on higher losses to competitors. Consumers’ Waterheater Income Fund is a hold.
Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) reported year-over-year revenue growth of 2.2 percent on a 23.3 percent rise in throughput; the company generated net earnings of CAD36.2 million during the quarter and CAD64.5 million year-to-date, compared to CAD42.1 million and CAD74.7 million over the comparable periods of 2008.
Excluding the after-tax gain on an asset sale of CAD14.7 million included in the six months ended June 30, 2008, net earnings increased 7.5 percent during the six months ended June 30, 2009. Pembina continues to generate steady and rising cash flows from its portfolio of conventional oil and gas pipelines and oil sands infrastructure throughout this downturn.
Pembina’s Conventional Pipelines business unit contributed CAD38.5 million in net operating income during the second quarter, up from CAD37.7 million a year ago. The Oil Sands & Heavy Oil Infrastructure unit generated CAD20.9 million, up from CAD8.9 million during the same period of 2008. Midstream & Marketing contributed CAD23.1 million to net, down a bit from CAD25.4 million a year ago.
Management expects to convert the trust to a corporation in 2011, but sees no impact on the current distribution at least through 2013. And as long as it continues to add new assets to its portfolio profitably, it should have no problems well beyond that as well. Pembina Pipeline Income Fund is a buy up to USD16.
*Bloomberg estimate
Aggressive Holdings
Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) reported cash flow from operating activities for the second quarter of CAD6.8 million, down from CAD33.7 million a year ago. Distributable cash after maintenance capital expenditures for the period was CAD11 million (CAD0.36 per unit), down from CAD24.1 million (CAD0.72 per unit) a year ago. Revenue was CAD124.6 million in the period, down from CAD274.3 million, and EBITDA was CAD17.5 million, down from CAD30.3 million. Net earnings for the second quarter were CAD13.6 million, compared with CAD13.8 million in the same period in 2008.
Chemtrade experienced much weaker demand for its sulphur and sulphur products domestically as well as internationally as the global recession took its toll. Sulphur Products & Performance Chemicals generated revenue of CAD77.9 million, down from CAD127 million, and EBITDA of CAD15.2 million, down from CAD23.9 million in the second quarter of 2008. The division reported lower sales and margins for the period.
Pulp Chemicals reported second quarter revenue of CAD13.2 million compared with CAD14.4 million in 2008, reflecting reduced demand for sodium chlorate. The negative impact of the lower volume was partially offset by lower costs. EBITDA was CAD4.7 million, down from CAD5 million in 2008.
Much weaker demand from abroad reduced the International segment’s revenue to CAD33.5 million from CAD132.9 million a year ago. EBITDA for the quarter was CAD4.9 million compared with CAD8.8 million in the second quarter of 2008. Chemtrade Logistics Income Fund is a buy up to USD7.
*Bloomberg estimate
The loonie is widely perceived as a “commodity currency,” its movement understood to be highly correlated–as is the Canadian economy–to conditions in raw materials markets.
A large portion of the Canadian economy is tied to the price of oil, which causes the price of this commodity to become a major driver in the value of the Canadian dollar. Other countries, such as Australia and New Zealand, are in similar positions due to their economic dependence on precious metals such as gold. All of these countries see money flowing in when their respective commodities rise, causing their currencies to appreciate.
Canada isn’t usually mentioned during conversations about petro-states. But the bulk of the imported oil consumed in the US comes from the Great White North. For example, in March 2009 the US consumed nearly 2.5 million barrels of Canadian crude per day, far more than the 1.9 million daily barrels the US purchased from Mexico, our next biggest supplier.
Canada is one of the 10 largest producers in the world; crude is Canada’s most exported product to the US and is tens of billions of dollars ahead of the next largest category, automobiles. And the US isn’t the only loyal buyer of Canadian oil. Japan imports nearly all of its crude oil, and is another important buyer of Canadian crude.
The loonie is a commodity based currency, so stronger commodity prices mean a stronger loonie.
The loonie’s approach to parity with the greenback is also happening because it’s seen to have intrinsic value rooted in raw materials. The historic monetary and fiscal moves of central bankers and politicians everywhere have left many questioning not whether we’ll experience a severe bout of inflation, but when.
History shows that massive growth in money supply at some point leads to inflation. It’s just a matter of how much and when. A long, severe recession can keep the lid on inflation, but at some point things turn around, hiring and spending increase, and lots of currency chases a diminished supply of goods, causing inflation.
Higher inflation means higher prices for hard assets like energy and other commodities. Indeed, these are among the first to rise, because they’re needed to produce and deliver finished goods.
Adding to the Canadian dollar’s strength relative to the US dollar and other currencies is the relative health of the Canadian financial system. Sound practices ahead of the financial crisis allowed credit to be more readily available amid the worst of the downturn, and the Bank of Canada (BoC) has for the most part avoided money-printing, or “quantitative easing.” Likewise, the Canadian federal government was in budget surplus for a decade before this recession, giving it ample room to stimulate the economy by ramping up spending.
A strong loonie, however, is problematic for the Bank of Canada and the Finance Ministry. It means Canadian exports cost more. The fear is a rising loonie will hamper the Canadian manufacturing sector’s recovery.
The best way to play Canada’s relative strength is to scale into income trusts and dividend-paying corporations via the High Yield of the Month recommendations in Canadian Edge. You’ll enjoy the upside as the economy recovers, and you’ll get paid on a regular basis by a solid business.
The CE Conservative and Aggressive holdings are basically “best of breed” businesses that know how to manage cash flow for the long-term sustainability of operations as well as payouts to investors.
If you’re simply looking to stick a toe across the border, consider CurrencyShares Canadian Dollar Trust (NYSE: FXC).
Any US-based investor long Canadian equities is also long the Canadian dollar, but another way to grab some upside is through a direct bet on the loonie.
CurrencyShares Canadian Dollar Trust is well off its lows now, but is likely to pull back from this short-term high. At some point the market will retreat as well, on profit-taking as investors look to make paper gains real and on the realization that we’ve run awful far, awful fast. The economy remains weak, and it seems unlikely we’ll see actual revenue and profit growth sufficient to justify current prices until late 2010.
Much of what’s powering recent good numbers–as acknowledged by the BoC in its July interest rate announcement and its subsequent Monetary Policy Report–as the “bringing forward” of consumer spending because of government incentives. The long-term creation value of this type of spending is questionable.
Likewise, will the US auto industry be able to maintain the sales pace absent “Cash for Clunkers?” Or will we see something like what happened in 2001-02, when Detroit offered 0 percent financing to goose auto sales, weak in the wake of the Sept. 11, 2001 terrorist attacks.
Sales soared from 16.1 million annualized units in September 2001 to 21.7 million in October, an annualized growth rate of 3,643 percent. Retail sales jumped 6.6 percent that month, 116 percent on an annualized rate, still a record today.
But auto sales dropped the ensuing three months, eventually coming back to around 16 million units; retail sales also fell each of the next three months.
At any rate, the loonie is elevated right now because of a short-term overreaction to what is undeniably better news on the economic front. The efforts employed by monetary and fiscal policymakers to fertilize these green shoots have also created an expectation in the market of rising inflation.
There will be an opportunity to step into the currency ETF at closer to 85 and enjoy its ride to parity. The long term includes a return to economic activity that’s at least proximate to what the West has experienced in the past as well as robust growth in the developing world. This means more demand for the raw materials Canada produces.
Short-term euphoria about the prospect of a quick snap-back for the economy will give way to despair over unmet expectations. But the long-term implications of US monetary and fiscal policy as well as long-term fundamentals for the global economy suggest such a dip is simply a chance to grab value.
Speaking Engagements
Roger Conrad is making the trip to the Great White North for The World MoneyShow Toronto, October 20-22 at the Metro Toronto Convention Centre.
Roger will, of course, discuss Canadian income trusts and high-yielding corporations as well as the utility universe.
Click here to register and attend as Roger’s guest.
The Roundup
Conservative Holdings
Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) reported a 2.9 percent decline in revenues for the second quarter, but earnings before interest, taxation, depreciation and amortization (EBITDA) increased 1.9 percent year-over-year. Cost-cutting measures accounted for most of the gain.
Internet revenue grew 10.4 percent, while the number of high-speed Internet customers rose by 7.9 percent and residential high-speed Internet average revenue per customer increased by 6 percent.
IT revenue declined 16.6 percent; IT equipment sales were down CAD11 million from the same quarter a year ago but are up CAD10 million for the first half of 2009 compared to the same period in 2008.
Local service and long distance revenue declined 3.2 percent) and 5.8 percent, respectively, with network access services (NAS) 4.3 percent lower than a year ago. NAS declines in the second quarter of 2009 increased by approximately 11,000 from the same period a year earlier, driven largely by increased business NAS declines including government contract losses.
Revenue from other sources, such as outsourcing services, declined 8.1 percent from the same quarter in 2008.
Capital expenditures in the second quarter of 2009 were CAD122 million, 4.3 percent lower than a year ago.
Distributable cash increased 1.8 percent, as the cash benefits of higher EBITDA and lower capital spending more than offset the loss of distributable cash from discontinued operations.
Management noted that it continues to evaluate its options regarding the 2011 trust tax; Bell Aliant will convert on or before Jan. 1, 2011, but the company “will have sufficient tax shelter to defer incurring an income tax liability for at least 18 months and as much as 24 months after conversion to a corporation.” Bell Aliant Regional Communications Income Fund is a buy up to USD25.
Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) grew total revenues by 8.7 percent in the second quarter to CAD48.2 million, helped by the contribution of its Sub-metering business and increased revenue from its Rentals business, including an average rental rate increase on most of the portfolio of 3.9 percent effective January 2009.
The Sub-metering business had negative EBITDA of CAD600,000 in the second quarter, due in part to actions taken in response to the March 24, 2009 Ontario Energy Board Bulletin regarding the deployment of sub-metering services in the Ontario apartment market.
EBITDA declined slightly to CAD34.4 million from CAD36.7 million a year ago because of higher losses on disposals in the Rentals business. Excluding the impact of equipment sales, EBITDA was up slightly to CAD39.4 million from CAD39.3 million in the second quarter of 2008.
Cash from operating activities decreased to CAD34.1 million in the second quarter from CAD37.9 million a year ago.
Distributable cash decreased by CAD4.6 million in the second quarter to CAD13.7 million, due primarily to the higher interest expense after Consumers’ refinanced CAD330 million in debt and increased capital expenditures by CAD1.6 million.
The fund’s payout ratio during the second quarter of 2009 was 116.9 percent, up from 87.2 percent a year ago. The customer attrition rate was 1.6 percent, up from 0.7 percent a year ago on higher losses to competitors. Consumers’ Waterheater Income Fund is a hold.
Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) reported year-over-year revenue growth of 2.2 percent on a 23.3 percent rise in throughput; the company generated net earnings of CAD36.2 million during the quarter and CAD64.5 million year-to-date, compared to CAD42.1 million and CAD74.7 million over the comparable periods of 2008.
Excluding the after-tax gain on an asset sale of CAD14.7 million included in the six months ended June 30, 2008, net earnings increased 7.5 percent during the six months ended June 30, 2009. Pembina continues to generate steady and rising cash flows from its portfolio of conventional oil and gas pipelines and oil sands infrastructure throughout this downturn.
Pembina’s Conventional Pipelines business unit contributed CAD38.5 million in net operating income during the second quarter, up from CAD37.7 million a year ago. The Oil Sands & Heavy Oil Infrastructure unit generated CAD20.9 million, up from CAD8.9 million during the same period of 2008. Midstream & Marketing contributed CAD23.1 million to net, down a bit from CAD25.4 million a year ago.
Management expects to convert the trust to a corporation in 2011, but sees no impact on the current distribution at least through 2013. And as long as it continues to add new assets to its portfolio profitably, it should have no problems well beyond that as well. Pembina Pipeline Income Fund is a buy up to USD16.
- AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–August 5
- Artis REIT (TSX: AX-U, OTC: ARESF)–August 12
- Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF)–August 11
- Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–August 7*
- Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–August 11
- CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–August 12
- Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–August 6*
- Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–August 6
- Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–August 5
- Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–August 5
- Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–August 6
- Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–August 6
*Bloomberg estimate
Aggressive Holdings
Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) reported cash flow from operating activities for the second quarter of CAD6.8 million, down from CAD33.7 million a year ago. Distributable cash after maintenance capital expenditures for the period was CAD11 million (CAD0.36 per unit), down from CAD24.1 million (CAD0.72 per unit) a year ago. Revenue was CAD124.6 million in the period, down from CAD274.3 million, and EBITDA was CAD17.5 million, down from CAD30.3 million. Net earnings for the second quarter were CAD13.6 million, compared with CAD13.8 million in the same period in 2008.
Chemtrade experienced much weaker demand for its sulphur and sulphur products domestically as well as internationally as the global recession took its toll. Sulphur Products & Performance Chemicals generated revenue of CAD77.9 million, down from CAD127 million, and EBITDA of CAD15.2 million, down from CAD23.9 million in the second quarter of 2008. The division reported lower sales and margins for the period.
Pulp Chemicals reported second quarter revenue of CAD13.2 million compared with CAD14.4 million in 2008, reflecting reduced demand for sodium chlorate. The negative impact of the lower volume was partially offset by lower costs. EBITDA was CAD4.7 million, down from CAD5 million in 2008.
Much weaker demand from abroad reduced the International segment’s revenue to CAD33.5 million from CAD132.9 million a year ago. EBITDA for the quarter was CAD4.9 million compared with CAD8.8 million in the second quarter of 2008. Chemtrade Logistics Income Fund is a buy up to USD7.
- Ag Growth International (TSX: AFN, OTC: AGGZF)–August 12
- ARC Energy Trust (TSX: AET-U, OTC: AETUF)–August 7
- Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–August 6*
- Enerplus Resources (TSX: ERF-U, NYSE: ERF)–August 10
- Newalta Income Fund (TSX: NAL, OTC: NWLTF)–August 6*
- Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–August 7
- Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–August 12
- Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–August 12
- Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–August 13
- Trinidad Drilling (TSX: TDG, OTC: TDGCF)–August 11
- Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–August 6
*Bloomberg estimate
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