Category Archives: Canroys

How To Invest Like China

Posted on by Nirav
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In the last post we saw that China was slowly diversifying away from it’s usual investments in US Treasury Bonds and investing in hard assets, natural resources and maybe other currencies.

There probably a very good reason why the world’s second largest holder of US Dollars is weaning itself away from bonds issued by the world’s largest debtor nation.  If you believe the Chinese know what they are doing, it might make sense to imitate their investment strategy.

While you don’t need to buy $80 Billion worth of gold, you might do well buying gold equal to at least 5% of your net worth. Gold is not an investment in itself but a historic store of value. Regardless what anyone tells you, the US Dollar is not a store of value. During times when governments print money hand-over-fist, gold typically does well. In fact, over the past 10 years, gold has appreciated against every single currency.

You can either buy the physical gold, gold ETF(GLD) & gold mining stock ETF (GDX), gold certificates or a custodial account. You can also buy silver and silver ETFs in a similar fashion. There was a recent Chinese news report recommending Chinese investors buy silver since its a better value than gold!

You can also exchange your US dollars directly for foreign currencies. Everbank currently has a Marketsafe BRIC CD, which invests in a basket of Brazilian Real, Russian Ruble, Indian Rupee and Chinese Remnimbi.  This CD doesn’t pay any interest but the principle is protected against loss! But if you’d rather take a risk and earn some interest, Everbank has a slew of CD products in several European and Asian currencies.

Another option are the CurrencyShare ETFs for Australian Dollars(FXA), British Pounds(FXB), Swiss Francs(FXF), Japanese Yen(FXY) and Euros(FXE).  Another ETF worth considering is UDN, an inverse US Dollar ETF, which is a basket of the above mentioned currencies. (However, inverse ETFs may not accurately follow the downward movement so you’re cautioned to do some research).

I do not recommend forex-trading as a means of hedging yourself against Dollar devaluation. Forex trading is a highly leveraged, zero-sum speculation. In a zero-sum game, a participant can only win at the expense of another participant. In fact, it may be considerably less than zero-sum becauase your brokerage can run your stops (which it can see) and effectively trade against you.

If you are thinking of investing in currencies, definitely check out Everbank’s free newsletter, the Daily Pfenning. It provides a very informative (and entertaining) look at global economics and investing. Actually, you should subscribe if you do any sort of investing! Everbank also has a low-cost custodial account for gold and from time to time (whenever the price of gold drops dramatically) they offer a MarketSafe (which means principle-protected) Gold CD. Sign up for the newsletter and they’ll inform you whenver they come out with new products.

If you have a penchant for natural resources, you should look into Master Limited Partnerships (MLPs) like Tortoise Energy (TYY) or Kinder Morgan (KMP). Both pay a juicy dividend that is considered a return of principle and thus non-taxable (although it does alter cost-basis). However both have appreciated significantly this year. Canadian Royalty Trusts like Enerplus Resources (ERF)  are also an option.

You can also buy natural resource stocks like Rio Tinto (RTP) or BHP Biliton(BHP). China has been trying to buy multi-billion dollar stakes in companies like these and is currently unsuccesful. If you think that a day may come where Chinalco will be successful, you might want to get in before that happens.

IRSA International (IRS) is an Argentinian company that trades on the ADRs.  It owns farm land, resorts, hotels and shopping malls in prime locations.  After decades of “quantitative easing” (another word for printing money) wreaked havoc on their economy and standard of living, Argentinians don’t trust banks or central bankers. They trust gold and farmland. The way the US economy is going, we too may come to that same conclusion. Just to be safe, I bought some of the stock. On the other hand, you might be better off buying farmland or a ranch for hunting. I’m pretty sure, buying farmland is next on China’s list!

Disclosure: I own ERF, TYY,FXA, IRS, Everbank MarketSafe Japanese REIT CD, GDX and physical gold/silver.

Time To Go Long The Dollar?

Posted on by Nirav
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Regular readers know I’ve been pretty pessimistic on the outlook of the US economy and bearish on the US dollar as well. However, since it seems like everyone is echoing the same sentiment, could it be that we’re due for a short (or medium) term spike in the US Dollar?

According to Lou Basenese, editor of the The Alpha Intelligence Alert, think it’s time to go long the USD.
Here are some of the reasons he cites:

1. Bernanke & Paulson Rediscover “Verbal Intervention.” Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke finally got off their duffs to defend the dollar. Paulson got things started in Qatar on Sunday. Speaking to the leaders of the Gulf oil states, he urged the countries to think twice about abandoning their dollar peg, as “ending the peg is not the solution to the inflation problem.” And Bernanke stepped up today. Speaking, via satellite, to an international monetary conference in Spain he insisted Fed policy will be a key factor, “ensuring that the dollar remains a strong, stable currency.” After such a long silence, this week’s tag team approach is nothing but a positive development.

2. The “Smart Money” is Cashing In. The smart money – Wall Street institutions – tends to be a great leading indicator. If you can figure out what they’re doing in time. Right now they’re sending a clear signal – take profits on your bearish dollar bets. Case in point, as the dollar met heavy selling on May 21, the smart money took almost $100 million in profits out of Currency Shares Euro Trust (NYSE: FXE). Enough to top the Wall Street Journal’s “Selling on Strength” screen. And this isn’t the first time the ETF recently made the list. All told, the increased selling activity indicates the smart money fears we may never see such high prices again.

3. George Soros Changed His Mind. Even the smartest investors are entitled to a mulligan. After bouncing roughly 3% off the March lows, in recent weeks, George Soros told the Wall Street Journal he is now “neutral” on the dollar. And expects it to strengthen over the next 12 to 18 months. Accordingly, he “greatly reduced his bets against the greenback.” Bottom line – we should pay attention when this hedge-fund phenom changes his mind. Here’s why, copied and pasted from my first article in defense of the dollar…

“A trader named Jean-Manuel Rozan once spent an entire afternoon arguing about the stock market with George Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed.”

“Two years later, Rozan ran into Soros at a tennis tournament. ‘Do you remember our conversation?’ Rozan asked. ‘I recall it very well,’ Soros replied. ‘I changed my mind, and made an absolute fortune.'”

My guess is he will make a fortune on this change of heart, too.

4. The Fed is Done. Okay. Maybe one more cut looms on the horizon. But after that, it’s time to get back to fighting inflation and hiking rates. Futures traders awoke to this same reality once revised GDP numbers were released May 29. They ratcheted up their bets that the Fed would raise rates in late October, putting the odds at 88%. Before the release, odds of an October hike stood at 70%. As I said last time, the Fed will hike again. Soon. And such moves will immediately strengthen the dollar.
5. Busted Rhymes and Tattered Clothing. The crickets are chirping among the rappers and super models. It’s been a long time since we’ve heard (even rumors) about the world’s fashionistas and rhyme-slingers extolling the virtues of the euro over the dollar. In other words, when pop-culture embraced the dollar hating, it signaled the inflection point. And it’s time for them to get caught on the wrong side of the trade for such foolish speculation.

6. The Retail Investor is (Blindly) Headed for the Slaughter. Sad as it may be, the retail investor tends to always show up late to the profit party. Right now they’re headed to the slaughter. The proof – the number and popularity of currency ETFs literally exploded in recent years. As one long-time advisor told an IndexUniverse.com reporter, “I’ve never seen this much interest in currency ETFs before…There’s just a pile of money coming into these funds now.” And that pile, according to my research, sits around $4 billion, despite most of the ETFs being less than two years old. This reminds me of my days back at Morgan Stanley. Whenever management decided to launch our own Small Cap Growth Fund for example, because the asset class was so “hot,” the asset class was too hot. It was time to recommend our clients take profits. And now that betting against the dollar is fashionable on Main Street, it’s time we head the other direction or risk getting burned like the rest of the performance chasers.

7. New President = Clean Slate. Whether Barrack “Haven’t-Been-to-Iraq-In-A-While” Obama or John “I-Have-Anger-Issues” McCain gets the nod, a new president will get a clean slate to establish their very own dollar policy. At least temporarily. And thanks to record crude prices, expect the new Commander-in-chief to move from the current administration’s weak lip service to more meaningful actions in support of the dollar.

8. We’re Still Not Decoupled. At least not from Europe. Doubts about euro-zone growth continue to pop up. The latest – a weaker than expected composite purchasing managers index reading, compiled by the Royal Bank of Scotland and NTC Economics. The measure from across the 15-nation euro-zone slumped to 51.1 in May, the worst in nearly five years. Bottom line – the European Central Bank is in a pinch. It can’t hike rates in the face of a slowdown. And it can’t cut rates with inflation running around 3.5%. In the end, the stalemate buys the dollar time to narrow the interest rate gap.

9. Institutions are Secretly Hedging their Bets. It’s not news that international stock funds significantly outperformed U.S.-focused funds over the last seven years. Or that the dollar decline aided their outperformance. However, few realize these very same funds are now protecting their portfolios against a dollar rally. Three of the top money managers in the business (Harris Associates, Dodge & Cox and Henderson Global Investors) are now hedging up to 55% of their currency exposure. A big jump, considering the international funds from Henderson and Dodge & Cox never hedged their exposure since opening in 2001.
And last but not Least…

10. The Dollar Decline is Getting Too Long in the Tooth. As I said before, “the cyclicality of the markets instructs us that the pendulum will eventually swing back the other way.” Combine that with Einstein’s theory of relativity and one thing is clear: Although the “real” value of our flat currency may never recover, its relative value certainly will. And with the worst of the financial crisis probably behind us, I stand by my conviction. The worst of the dollar weakness is behind us, too.

Consider this my second warning that the dollar will rise. And soon. That makes now perhaps the last opportunity to position your portfolios for maximum gain.

Good investing,

Lou Basenese

If you do feel like going long, Rydex Strengthening Dollar 2x Strategy (RYSBX) is a good way to enter this trade.

If the dollar does strengthen, there’s a good chance my commodity investments (includes gold and oil stocks) and foreign currency ETFs will decline. I might use RYSBX to hedge against the rising dollar.

Profiting From The Rise In The Price Of Oil

Posted on by Nirav
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As I mentioned 5 weeks ago when oil breached $115/barrel, demand for the black gold will cause the price to keep on rising. On Wednesday, I drove to USC where I had an interview at the Marshall School of Business for the full-time MBA program. While driving there, I heard that Oil had exceeded $133 per barrel. I had a great interview (where I spoke about my background, my interests, the state of the economy, what a moron George W. Bush is, and the current elections) and then proceeded to a friends’ place to spend the night.

I later heard that oil prices hit $135/barrel. That news was broadcast incessantly on all the news channels and I kind of felt that it was being overdone. Whenever everyones saying that the price of something is breaking all records, it usually pulls back. I think thats why the US Dollar had shown some strength this year. I woke up on Thursday and bought the ULTRASHORT OIL & GAS ETF (AMEX: DUG), it went up a dollar and I exited my position, happy to have made enough money to pay for my gasoline bill for this month.

After that I went to UCLA for a class visit. I attended a class on Risk Management. One of the case studies they discussed was a deal between Amoco (American Oil Company, which is now part of British Petroleum) and Apache (APA) involving the sale of an oil producing property. Amoco sold the property with a guarantee to pay Apache a certain amount of dollars if the price of oil dropped below a certain amount. On the other hand, they would participate in some of the profits if the price of oil exceeded a certain amount. This was managed through the use of Put and Call Options.

It was interesting to see how large companies managed to hedge the price of oil through options, and especially ironic since oil was all over the news that day. Its not too different from how you can hedge your own expenditures on gasoline and heating oil. If you’re bullish on the price of oil and are willing to bet on this movement, you can buy the United States Oil ETF (USO). You can also buy options on this too.

Similarly, if you’re bearish you can buy the ULTRASHORT OIL & GAS ETF (DUG). You can also invest in Oil Futures contracts, however, if you’re that brilliant I doubt you’d be reading this blog!

But making directional bets in any asset class requires a certain amount of knowledge, homework and commitment. Its much easier to invest in high-yield Canadian Income Trusts like ERF, PGH, AAV, HTE, PEY-UN.TO, etc. They pay out a pretty good dividend (over 8% for most of them) and that should theoretically go up as the price of oil & gas goes up. (I say theoretically since there is some uncertainty regarding the Canadian Governments’ taxation of these trusts, so there is a black cloud hanging over them).

So far I’ve been pretty happy with my investments. I had been buying more on dips. For those of you lucky enough to have bought AAV under $9 back in January, in addition to the monthly dividends, you’ve already seen a 40%+ appreciation in the stock price! (unfortunately I wasn’t one of the lucky ones!)

But there are many ways to profit from the economic news if you keep your eyes open. By the way, USC called me on Friday. I got admitted to their MBA program with a Fellowship (tuition remmission)! So now it’s time to decide between UCLA, USC and UCSD!

Oil Break $115 Per Barrel

Posted on by Nirav
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Oil just broke through $115 per barrel today. While this may come as a shock to many , I’ve been preparing for it for the past 2 years. All the signs of an oil shortage have been visible in the media, but most people have either been ignoring it, been in denial or been too focused on what Paris Hilton or Brittany Spears have been up to!

China and India together have  a third of the world’s 6.66 billion people. If 10% of these 2.2 Billion people start buying cars, that’s 220 million new cars on the planet ready to start guzzling more gasoline. I think thats the current number of cars in the US, so effectively the demand on oil is set to double over the next few years. And along with Tata Motors new $2,500 car, you can be sure that eventually atleast 20% or more of India’s and China’s population will be driving cars instead of cycles or mopeds that give 247 miles/gallon. That 247 number is  not an exaggeration. Owners of Suburbans should refrain from crying right now.

Based on the growing prosperity in just these two countries, the demand for the world’s resources is growing at a furious pace. Unfortunately, oil is a key component of prosperity and the global supply of it is somewhat stagnant. Despite a few  new oil fields being found here and there, new reserves are not keeping up with the depletion. According to one report, all the oil in Alaska would last the US for only 6 months.

If you think that gas prices are high at over $3.50 per gallon (I just paid $3.95 for mid-grade for my wife’s Acura TSX), wait until summer. There are reports that the refineries are absorbing the cost of high oil prices right now (and some of them have hedging contracts in place to mitigate this high price), but within a few months they’ll be passing this burden on to the consumers. Oil prices at the pump could very well hit $5 and if this trend continues, it could hit $8/gallon. 

In the UK, petrol (that’s what the rest of the world calls gas) costs about 1 pound per litre, which equates to $7.50-8.00 per gallon. Now you Suburban owners can cry now if you like. Or you can start investing in oil related investments like Canroys and oil drilling programs.

How I Made $2,667 In Passive Income In March ’08

Posted on by Nirav
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Finally I’m getting some traction with my passive income! After all, that’s what this blog is all about. The total for March 2008 is $2, 667.18, and I’m ecstatic to have broken the $2,500 per month barrier. If I can sustain it at $2,500 per month, thats $30,000 per year. While I’m not living in luxury, it’s definitely a great safety net to have. This represents a 11.9% jump from February’s passive income and it has been growing at a steady clip for quite a while now. Hopefully, I shouldn’t have a problem maintaining it.

Here’s the breakdown:

  • Online Income: $1645.30
  • Savings Accounts: $133.10
  • Real Estate Trust Deed: $0
  • Direct Oil Drilling Investment: $270
  • Dividends from Canroys: $517.71
  • Other Dividends: $113.38

The adsense revenue dropped from last month. It looks like I was smart-priced. Every other day my revenue would drop to a third of the regular amount, despite getting more traffic. Very strange, but if it keeps up, I expect April’s adsense revenue to drop even lower. I’ve rearranged some of the ads and substituted Adsdaq to try and compensate for this loss of revenue. Adsdaq is similar to adsense except that you state your eCPM (cost per 1000 impressions) price. If they can find an advertiser at that price, they’ll display their ads, else they’ll display an alternative ad code, which in my case is adsense.

On the other hand, Linkworth has done really well on my sites. March’s income was almost double of February’s and I expect April’s income to be atleast $150 higher. I’m very happy with their service and I strongly endorse it. It took a while to start getting income, but it looks like a winner so far.

Text-Link-Ads is also doing moderately okay although its taking more time than Linkworth. Note that you’re not allowed to use both of them on the same site, so see which one works better for you. Between the two, my favorite is currently Linkworth.

Amazon affiliate income has started to pick up and hopefully it will continue as I learn more about affiliate marketing and try out different techniques to boost it.

Surprizingly, I found out that I had earned ~$60 from Domain Embarking, a site that helps you earn money from parked domains. I had a few sites that were parked with Sedo.com. In over 2 years, I make about 24 cents with Sedo, but with Domain Embarking, now I’m making some money atleast. To be fair, the $60 was earnings for the year till date, so it could have been only $20 for March. I’ll find out how it does in April to get a better idea. Regardless, its still a whole lot better than the $0.01 per month I was making with Sedo.

Prosper is still handing out $25 signup bonuses to new lenders. When lenders who sign up through my link and fund their account, I get $25 too. That’s how I made the $175 in referral fees. I also made around $30-$35 last month in prosper loans but since they usually issue a statement around the 5th of the month, i’ll exclude that income. I usually get around $180-200 every month from the loans, of which 70% is return of principle. Calculating it manually is just too tedious.

I also made around $1,000 from my other investments and dividends. Some of the stocks pay over 10% in annual dividends. Two of the oil investments are paying 15-18%. The third oil investment is currently barely producing, but that seems like it will improve over the next few months and boost that portion of my income too. Also, as the price of oil stays around $100 per barrel, the monthly payout (which is typically delayed by 3 months) will increase a little bit.

The Federal Reserve will probably continue to keep dropping interest rates so my savings interest will probably keep dropping. Luckily its a small portion of my income so the $6 drop from last month isn’t very significant.

While I made this income, I also had some expenses that I should disclose as well.  I pay about $119.40 for annual hosting on Dream Host. It’s awesome and I strongly recommend it. They have one click install for wordpress, php forum software, mysql databases and other stuff. I’ve used GoDaddy in the past and I didn’t like their interface at all. Dream Host is a lot easier to use in my opinion. If you use coupon code “PassiveIncome” you’ll get $19.40 off the annual fee or you can use “Dividends” to get free domain registration. I also pay around $40 for domain registrations which I usually register with 1 and 1. At $6.99, they’re pretty cheap. On a monthly basis, these costs work out to less than $14.

I’ve also signed up with an automated article submission tool called Jetspinner that lets you create multiple unique versions of the same article for submission to article directories. This is a great method to created targeted backlinks to your site.  Jetspinner is free but its sister product Jetsubmitter costs $17 per month and automates the account creation and article submission to 500+ directories.

I also spend between $300-500 a year on financial articles, books, magazines and newsletters which works out to about $20-40 per month. So in all, my expenses are about $60 on average per month.

Having a side income that sufficiently large to allow you to pay the rent and put food on the top is a great stress reliever. As you can see, I have multiple streams of diverse income. If one of them drops off (like maybe adsense), my passive income doesn’t just totally disappear.

I hope I’ve inspired all of you to try and boost your passive income or maybe add new sources to increase your current income streams. Let me know how you’re all doing.

Gold Cracks $1000/Oz: Investing For A Recession

Posted on by Nirav
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gold bullion coins, krugerrands, maple leafs, australian gold nuggets, american golden eagle

Based on continuing weakness in the dollar, gold briefly breeched the $1000 level yesterday along with oil hitting an all time high of $111 per barrel. I had a really strong suspicion that we’d see $1000 gold by mid-March.

Despite what Bernanke and Paulson said last summer, the housing bubble has spread to other parts of the economy and subprime mess has not been contained. In a last ditch effort to prevent banks from collapsing, the Federal Reserve announced a bailout of Fannie Mae, Freddie Mac and other banks, promising to exchange bogus mortgages for Treasuries during a 28 day window. They named this Term Securities Lending Facility (TSLF) but it’s just a good old bail-out.

Of course, the stock markets loved this move because it means the Fed is going to prevent banks from failing. However, this $200 Billion bail-out doesn’t come without a cost. The Fed is going to have to print an extra $200 Billion to cover this deficit. But it was a clever move, because Bernanke didn’t have to cut interest rates before the 17th of March, when he’s slated to do so anyway. Another move like that might have created a panic in the markets instead!

Bloomberg reported today that OPEC is going to make about $927 Billion dollars from the sale of oil this year. That’s almost $1 Trillion dollars! Worldwide, sovereign wealth funds (SWF) are thought to be worth about $2.8 Trillion. Considering that the combined wealth of global nationalized assets is about $12 Trillion, that’s really impressive. It probably means that SWFs and OPEC will start buying up pieces of America, since they really can’t do much else with all those US Dollars. Of course, they could buy Treasuries, but it seems like everyone’s now realizing that they’re useless as the dollar keeps on devaluing. Meanwhile, the US government is helpless against stopping the sale of US assets. Our own SWF is negative $9 Trillion, so we have some catching up to do before we can actually buy anything. I think the government’s best bet is to make all those Trillion worthless by printing more and more dollars. Bernanke knows this and so far he’s doing a bang up job. Of course, this leads to severe inflation, but don’t say I didn’t warn you.

Considering how wrong our economic advisers have been so far, I think it’s safe to assume the 0.3% GDP growth that’s forecast for the year is a tad optimistic. While everyone’s still denying it, I think we’re already in a recession and along with inflation, that amounts to a 70s style stagflation scenario.

Considering that consumer spending has slowed down and is likely to continue, US companies are going to go through some tough times. How do you protect your stock investments then? You can’t sell them and move to cash, because the US dollar is sliding too. Coupled with inflation, your wealth is going to slowly (or maybe not so slowly) erode over the next several years.

Here are some investment ideas:

1. Diversify into foreign currencies: I like Australian Dollars, Swiss francs, Japanese Yen. Jim Rogers likes Chinese Remnimbi and Warren Buffett like the Brazilian Real. Take your pick.

2. Buy US giants with international exposure: Consumer staples have historically done very well over the past 60 years, regardless of the economic scenario. I like stocks with a decent dividend yield like Pfeizer (PFE), Johnson and Johnson (JNJ), Merck (MRK), Unilever (UNL), Proctor & Gamble (PG), Kraft Foods (KFT) and Anheuser-Busch (BUD).

3. Invest in agriculture: Bush’s moronic plan to reduce our reliance on foreign oil by substituting ethanol has only resulted in a surge corn prices. The economic growth in countries like China, India, Russia and Brazil is increasing the size of the world’s middle class. These people will be improving their diet and adding more meat and veggies. They’ll also be drinking more milk. There’s already surge in global prices of all of these soft commodities. There are quite a few ETFs that will help you profit from these trends, like PowerShares Agriculture (DBA) which consists of 30% soy, 28% wheat, 23% corn, 16% sugar, Van Eck Agribusiness (MOO) [8% Monsanto, 8% Mosaic, 8% Komatsu, 8% Potash Corp] and PowerShares Commodity (DBC) [33% crude oil, 20% heating oil, 14% wheat, 11% aluminum, 10% corn, 10% gold].

Along with this, a demand for fertilizer will result in compannies like Potash Corp (POT) doing very well. If you’d like to invest in milk, American Dairy (ADY) and Dairy Crest (DCG) are too suggestions, but I haven’t done much research on them.

4. Buy Gold: I don’t think it’s too late to start investing in gold. You can buy gold coins and bars, the gold ETF (GLD) or mining stocks (GDX).

5. Invest in Metals: The global boom is creating a huge increase in the demand for metals like copper, iron, aluminum, zinc, etc. Mining stocks like BHP and RIO have done very well. Indian company, Sterlite (STL) also looks like it has good long term prospects.

6. Invest in Infrastructure: Not only is America’s infrastructure collapsing, but global growth makes betting on infrastructure a safe bet. I like Brookfield Infrastructure Partners (BIP).

7. Invest in Oil and Gas: Major oil companies like Exxon-Mobile(XOM) have served its investors well for decades. I’ve also invested in direct oil drilling programs, which go out and drill wells with your money and give you a share of the proceeds. I also like Canadian Royalty Trusts that invest in oil fields. There a few new ETFs that buy heating oil and gasoline futures. I’d stay away from these as their performance is as yet unknown and they might be subject to backwardation and contango.

8. Invest in Water: Water pipes all over the US are breaking. Built after WWII, these pipes had a lifespan off about 50 years. As the nation replaces these pipes over the next several years, cast-iron pipe companies are set to make a killing. Check out NorthWest Pipe (NWPX) and the water ETF (PHO).

I don’t know about the rest of US, but Nevada and Southern California are going to face a huge water shortage in the next decade. Most of the water comes from Lake Mead and the tremendous population growth in Las Vegas and Henderson has tapped the limits on the lake’s capacity. Check out this photo:

Lake Mead Hoover Dam

Dont’ you think a company that owned the water rights in Nevada and California would make a decent amount of cash over the next few years.


Good News For Canroys?

Posted on by Nirav
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I’m a big fan of Canadian Royalty Trusts, also called Canadian Income Trusts or Canroys. But lately, they have been under a lot of selling pressure. Coupled with the sell-off in global equities is the overhanging tax change that the Canadian government implemented last year. According to the change, canroys will lose their tax-exempt status and from 2011 there will be the usual double taxation that affects most companies (except for US REITs).

Accordingly, the share prices of most canroys have dropped considerably from their peaks and their valuations have become quite attractive at these levels. But there’s some good news for canroys.

Growing discontent with the ruling Conservative party has created a situation where the Labor party might come into power. The Labor party has promising to either extend that conversion deadline to 2017 or to significantly decrease the trusts’ post-2011 tax rate. Either of these would represent huge positives for the trusts. This strange situation of the liberals becoming energy trust saviors has even encouraged many life-long conservatives from the Albertan energy patch to help bring down the current Conservative government.

If this becomes a reality, canroys should see renewed interest and a spike in the share prices. Lets see how it plays out. Till then, I’m happy to keep collecting my dividends!

Loonie Hits $1.09

Posted on by Nirav
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While I’ve been screaming about Australian Dollar parity, the Canadian Loonie has launched a stealth attack against the Almighty Dollar. After achieving parity on the 20th September, it’s rallied almost 10% since then. Today it hit $1.09 in after-hours trading.

But I’m not complaining. Last month I received over $440 from Canadian Royalty Trusts. As the US Dollar keeps dropping, my income from the Trusts keeping increasing! (Although in theory, since they sell oil and gas which are priced in US dollars, a strengthening of the Loonie squeezes their profit margins. But lets ignore that fact since oil is near $100/barrel and I expect gas prices to start creeping up too).

But before you start buying up CurrencyShares Canadian Dollar Trust (FXC) in excitement, you should consider that a strong Loonie is bad for the Canadian economy. Their exports are more expensive to foreigners which is a problem since they export a lot. And the strength of their currency is causing Canadians to drive south across the border in US and spend their money here! (Which funnily enough, is great for us).

U.S. analyst Dennis Gartman, who was among the first to predict the loonie’s ascent past parity five years ago on the simple premise that Canada “has stuff the world wants,” said the Canadian currency is now on such a roll that it may be difficult to reverse quickly.

“The Canadian dollar is like an aircraft carrier and you can’t stop that on a dime, it’s got a lot of momentum. It’ll stop when one of your major exporters closes shop and says he can’t compete anymore.”

Gartman has disagreed with critics of the high dollar, saying that in the long run a strong currency is good for Canada because it will force businesses to compete in the world despite the high currency.

However, he is not long the Canadian dollar and predicts any rise above US$1.10 will be unsustainable.

But I’m still long the Australian Dollar and I expect it to achieve parity within the next 12 months.

Where’s The Premium?

Posted on by Nirav
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Penn West Energy Trust (PWE) announced that it would be buying Canetic Energy Trust (CNE). They’re both Canadian Income Trusts that payout a decent yield. However, there’s almost no premium offered to CNE holders. Well okay, there is a 7% premium offered to CNE holders but  compared to the 30% premium that was offered to PrimeWest Energy Trust (PWI) by the state run utility company of Abu Dhabi, its pretty sad.

I can understand, why Abu Dhabhi is keen to get its hands on $5 Billion dollars worth of Gas. They simply want to get rid of their US Dollars! And afters today’s rate cut and the subsequent drop in the Dollar Index, I want to bail too!

I have a rather small stake in CNE and I’m happy with its 15% yield. In comparison, PWE only yields 13%. On the surface, I’d rather not exchange my shares. However, yield isn’t the only variable in this equation. You need to consider payout ratio and reserve life. There’s a good chance that PWE scores better on these criteria than CNE does. In that case, it would make sense to vote in favor of the take-over.

Earlier this year, Advantage Energy Trust (AAV) took over Sonic Energy Trust for almost no premium. But that was before the PWE deal and before energy prices were so high. And being a shareholder of AAV, I was extremely happy with the outcome. But now the shoe is on the other foot!

Being a shareholder in the acquired company, I think the premium is too small and I’ll probably just vote against it anyway. Let PWE come back with a better offer!

Buying A Stock For Its 16% Yield

Posted on by Nirav
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Since I decided to kick the old job (which was a hard habit to break), I’m going to be more reliant on my passive income. Part of my passive income comes from Canadian Income Funds, some of which pay out over 16% in annual yields. They pay out the dividends on a monthly basis and after tax (which the Canadian Government takes out at source) it still works out to over 1% per month. This is about 3 times what I get in my savings account!

Also, being enrolled in the dividend-reinvest program (also called DRIP) my dividends are used to buy more stock every month without paying a commission. Any best of all, some stocks offer a discount to the prevailing market price.

I added to my position in Harvest Energy Trust (HTE) yesterday. I calculated I have too much money in savings, even if I don’t have a job for the next year. So I decided to take a little bit of money (from my Bank of America account, which pays half a percent in interest) and buy something that yields 16.5% per year (just over 14% if you consider the Canadian Tax). While the monthly increase in my cashflow is not significant, its still a good optimization of my resources. And after all, leveraging and optimizing one’s resouces is how you get rich. Their DRIP offers a discount too.

If it drops a bit from here, then I’ll probably buy more, else I’ll buy Australian Currencyshares Trust (FXA), which pays out ~5.5% yield. If the Federal Reserve cuts the rate tomorrow and the Reserve Bank of Australia boosts it next week, we could see parity between the USD and AUD in fairly short order.

In the long run I think energy prices are heading higher and the USD is heading lower. Having the conviction to follow through with your beliefs is also an important factor to becoming rich. Either way, I’m pretty sure exchanging my USD for something else is a good idea.