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[jacksterr]

“Who Do You Trust?!” “Who Do You Trust” . . . except in this case we are not referring to the 1950s game show hosted by Groucho Marx, but rather the high yielding Canadian “trusts” that have entered the investment world in ever increasing numbers over the past few years. More specifically, we are referring to last year’s “Halloween Surprise” when the Canadian government decided to tax those income trusts. Indeed, the “now you see now you don’t” switcheroo on the tax status of the income trusts was a total surprise to the investment community and the concurrent “fall out” (read: decline) has been devastating for many investors. Plainly, we have returned from our weeklong sojourn to Canada where we met with companies, portfolio managers, presented at the CFA forecasting dinner, and conducted seminars for our financial advisors. And just like the Canadian question du jour was, “What do you think about energy, as well as your so called stuff-stocks?” . . . the question back here in the States has been, “What’s up with the Canadian income trusts?” Regrettably, while we have seen many arguments like this inference from Reuters’ Randall Palmer that the Canadian government might chance its stance: “OTTAWA (Reuters) - A committee of Canada's House of Commons will decide this week whether to reexamine the government's decision to tax income trusts, especially whether a four-year tax holiday for existing trusts is long enough,” …as well as the open letter to Canada’s Finance Minister (James Flaherty) attached to the end of this report, we think the Harper/Flaherty tax decision stands as stated. All the attendant “noise” is just political posturing. If correct, this has ramification for many of the Canadian income trusts. For example, last week a number of income trusts announced substantial dividend reductions, as well as one announcement that a trust was converting back to a corporation. Yet the news didn’t stop there. U.S.-based Ventas (VTR/$43.18) made a takeover bid for Canadian income trust Sunrise Senior Living (SZR.UN/C$14.85), which raised takeover speculation in Boralex Power Trust (BPT.UN/C$9.69). Clearly there is value in many of the income trusts, even under the new taxation schedule, but investors seeking income are advised to closely examine each trust on its own merits. Nevertheless, we are pondering a much more macro question than income trusts. To wit, for years we have been steadfastly bullish on Canadian equities and the Canadian dollar. Since the “Halloween Surprise,” however, we have been wondering if said “surprise” is/was a watershed event. We have seen a number of watershed events over the past four decades. Our definition of a watershed event is, “An event marking a unique or important historical change of course or one on which important developments depend.” Currently we are torn on the subject. Manifestly, the world’s insatiable demand for Canada’s natural resources is unstoppable, in our opinion. Still, such a major, and abrupt, policy change by the Harper government raises the question, “Will non-Canadian investors view such a change as ‘unfriendly’ and turn their investment intentions elsewhere?” If so, this would divert capital flows to Canada, at least at the margin, with negative implications for Canadian equities. Reinforcing the sense that this could be a watershed event has been the Canadian dollar’s weakness, which began its “slide” concurrent with the “October Surprise.” Unfortunately, as of yet we still have no answer and continue to ponder the Canadian question content in the knowledge that sometimes to decide not to decide is indeed a decision. Other watershed events under consideration are Thailand’s alarming decision to implement “capital controls” and Sam Zell’s surprising decision to sell his flagship Equity Office Properties (EOP/$52.51/Underperform) since we consider Mr. Zell the smartest real estate investor in this country. Turning our attentions to this country finds most of the equity indexes we monitor little changed for the week with the outlier being the NASDAQ 100’s (NDX/1796.81) 2.60% loss. Things were not so tame in the commodity markets, however, where copper lost another 6.12%, zinc shed 8.71%, and tin rallied 10.23% (all basis the LME). Meanwhile, the grains remained firm with corn rising 2.70%, yet unleaded gasoline declined 3.50%, crude dipped below $50/bbl., and natural gas climbed 9.25% as “things” continue to get curiouser and curiouser. Curiouser indeed, as our mailbox lit up questioning if crude’s break below $50 was enough to bring about the “bottom” we spoke of in last week’s letter? Hereto we are uncertain, but our sense remains that crude oil is close to a bottom despite rumors that Saudi Arabia is pressuring oil prices to bring Iran to its knees. Bolstering this “bottoming” sense one need only to look at the crude oil chart at the end of this report from the good folks at “thechartstore.com” who opine, “Once in a while, one needs to step back and look at the big picture, in this case the channel on the inflation-adjusted chart of spot crude. Nothing has been violated.” We agree and have repeatedly noted that while warm weather has had a hand in pressuring energy prices, the real culprit has been Goldman Sach’s (GS/$210.29) mysterious reweighing of its much institutionally indexed commodity index (GSCI). Recall that in late July 2006 Goldman cut the gasoline weighting in the GSCI from 7.3% to 2.5% and staged those cuts incrementally right into the November elections. Again, just a few weeks ago, Goldman once more rejiggered the GSCI, cutting the energy component by 50%, causing one Wall Street wag to ask, “Why in an energy-centric economy does Goldman keep reducing the energy weighting in the GSCI?!” As for the economic figures during our absence, the skein is still coming in stronger than expected. Admittedly there remains a “whiff” of the fox-trot economy (fast/fast followed by slow/slow) as last week’s Empire State Manufacturing Index was reported much softer than estimated, which was in sharp contrast to December’s much stronger than expected figures. Ditto the National Association of Homebuilders report came in two points higher than expected, the University of Michigan’s consumer confidence “popped” by six points better than consensus (to 98), the Philly Fed shocked at 8.3 (five points higher than expected), and the PPI rose 0.4% more than anticipated to 0.9%. These events did not go unnoticed by the bond market, which saw the yield on the 10-year T’Note tag its highest level since October 2006 (4.78%). All of this continues to suggest that the 2007 surprise might just be that the economy reaccelerates and the Fed rather than lowering interest rates either holds them steady or actually raises them. And speaking of “raising,” it sure didn’t take the Democrats long to try and raise taxes as they are proposing an energy package that would roll back billions of dollars worth of oil drilling incentives and raise more billions by boosting federal royalties paid by energy companies for offshore production. Nonetheless, as the astute Lowry’s organization states, “Despite changes in the political winds, and stern warnings from our new Fed Chairman, the internal condition of the stock market remains strong.” We agree, even though we don’t understand it or trust it, which is why we continue to choose our investment ideas pretty carefully. Many of the names we have been using have a yield, like our recent recommendation on Strong Buy-rated Williams Partners L.P. (WPZ/$39.30), where growth is pretty assured, driven the parent company, and our fundamental analyst expects EBITDA to increase from $59 million to $217 million, in turn ramping its cash distribution from $1.73 to $2.41 per share. Other, higher beta, names from Raymond James research universe that we were asked about last week include: Covanta (CVA/$21.87/Strong Buy); American Medical Systems (AMMD/$20.26/Strong Buy); Verifone (PAY/$37.65/Strong Buy); and Syniverse (SVR/$13.64/Outperform). The call for this week: We have learned over the years that when you see a headline, a picture, and chart on the front page of a newspaper you are typically near an inflection point. Well while it’s not exactly the FRONT page, Friday’s Wall Street Journal, on the front page of section C above the fold, we got a headline (aka, “Who Is Hurt By Oil’s Fall”), a picture, and a chart. We think oil stocks are bottoming, a sense confirmed by the action of various energy-centric indices (XLE, XOI, OSX, etc.). For more conservative investors, we have been using 5.6%-yielding Blackrock Global Energy (BGR/$26.99), which despite its rally from our original recommendation still trades at a 5.6% discount to its net asset value. And yes, we still like the Canadian Oil Sands names mentioned in last week’s report.