Investing Daily

We’re on the ground at the Las Vegas Money Show, enjoying unusually mild, La Jolla-like weather in America’s Playground.

Several Canadian trusts--including Penn West Energy Trust, Paramount Energy Trust and Enerplus Resources--are exhibiting in the convention hall, and we’ll be tracking down representatives during our stay; we’ll pass along any insights we’re able to glean.

What’s remarkable thus far is the sheer number of self-directed investors making the rounds. Registration was up more than 30 percent for the show, which seems counterintuitive given the prevailing noise about the market and the economy.

At its most basic level, though, investing is an optimist’s endeavor: It’s inherently forward-looking. You must have some faith that things will improve if you’re going to lay out hard-earned cash for companies.

Short-term market gyrations and temporary economic setbacks aside, we do this to make money over time. The dips and depressions can be tough, but you’ve got to stay in the game.

Looking Forward

Canadian Edge began life in a still-expanding world of income trusts. Much has changed since July 2004--our understanding of Canada’s politics, what it means for the business climate and the economic fundamentals that underlie it all.

The Oct. 31, 2006, announcement that Canada would begin taxing specified investment flow-throughs (SIFT) at the entity level--effectively eliminating the advantage that allowed trusts to pass cash flow on to unitholders to be taxed in their hands--obviously had significant implications for CE and our readers.

CE is essentially an income-focused investment advisory, but as Warren Buffett famously said and as has always been the fundamental underpinning of what we do here, when you invest in a company, you’re buying a business. A steady dividend stream is a reliable route to building wealth--but first and foremost is what’s happening at the operational level.

Canada’s political dialogue in superficial ways mirrors the one down here: You have “liberals” and “conservatives,” seemingly intractable policy differences at the headline level, apparently irreconcilable regional priorities. What you don’t have, however, and crucially, is a vocal, powerful segment of the ruling class seriously advocating for a government you could drown in a bathtub. There’s a broad recognition that government can and should reconcile the inevitable inefficiencies a robust but imperfect market economy creates.

The bottom line is the Canadian economy is fundamentally sound, anchored by a solid balance sheet and ample natural resources. The federal government was running a CAD12.9 billion surplus for the 11 months ended Feb. 29, 2008. (That number will come down after CAD2.5 billion in year-end adjustments based on allocation of funds for public transit and a project to demonstrate how companies may be able to capture and store carbon emissions.)

Canada’s minority Conservative government also pushed through a five-year, CAD60 billion tax-cut package last year to help shield the world’s eighth-largest economy from a slowdown in the US. The plan included immediate reductions in personal income taxes and a 1 percentage point cut in the federal sales tax as of Jan. 1. In the end, the 2007-08 surplus will come in about 16 percent below the CAD15.29 billion posted for 2006-07.

Employment in Canada is not only growing, but the proportion of the adult population with jobs has reached a record high of 63.9 percent. In the US, this ratio has been dropping sharply, down 0.6 to 62.7 percent so far.

Retail sales are up 6.8 percent in Canada over this time last year. In the US, sales are up just 2.9 percent and growth is still slowing. Housing construction, a major creator of employment in recent years, has collapsed in the US to roughly half its peak level, down 29 percent just in the past year. It’s still rising in Canada, up 3.9 percent over the past year.

Home prices, a crucial indicator of household wealth because a home is the most valuable asset for most families, have plunged nearly 13 percent on average in the US over the past year, and the rate of decline has accelerated in recent months. By contrast, Canadian home prices are up by more than 5 percent over the past year. Auto sales, a useful index of consumers’ willingness and ability to make a big purchase, are down 7.7 percent in the US this year, to a 10-year low. They're up 6.1 percent in Canada to a new record.

And Canada, unusual among developed countries in the importance of natural resources and raw materials, now ranks with the world’s top five producers of 14 mineral commodities. Overall, commodities account for about half of Canada’s exports.    

With all that in mind, we’ve broadened our coverage of investment opportunities in the Great White North.

The original approach to Canada-based companies outside the income and royalty trust space centered on dividend payers. But we ignored that loose construct in our first discussion in the April 2007 issue of CE, recommending alternative power generator Canadian Hydro Developers, a long-term growth play on increasing awareness of and demand for cleaner sources of electricity.

We’ve added our non-trust recommendations to How They Rate coverage, grouped at the bottom of the table. The plan is expand the Canadian Edge universe, slowly, over time, building on the same principles that frame our trust coverage: Buy good businesses at value-based levels, and stick around for the long term.

Speaking Engagements

Be sure to wear a flower in your hair when you venture west to San Francisco. I’ll be heading to "The City" with Neil George and Elliott Gue Aug. 7-10, 2008, for the San Francisco Money Show.

Neil, Elliott and I will discuss infrastructure, partnerships, utilities, resources and energy, and to tell you what to buy and what to sell in 2008.

Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.