Investing Daily

Markets north of the border are closed Tuesday in observance of Canada Day, a federal holiday marking the joining of the British colonies of Nova Scotia, New Brunswick and the Province of Canada into a federation of four provinces (the Province of Canada being divided, in the process, into Ontario and Quebec) on July 1, 1867.

(Here’s a less-official, more-entertaining explanation.)

Canada can also celebrate what’s been a great first six months of 2008.

Two weeks ago, we wrote of an emerging disparity between North America’s major equity markets, noting that Canada’s economy will never decouple from the US but that the major indexes tracking the respective financial markets are reflecting economic realities. The S&P/TSX Composite Index, about half of which constitutes energy-leveraged stocks, has basically held its ground in US dollar terms in 2008, posting a first-half gain of 0.8 percent. The S&P 500, reflecting the relative dominance of US financials in its composition, is off 13.4 percent.

Meanwhile, the marker we’re most cheered by and the source of our own Canadian celebration, the S&P/TSX Income Trust Index, is up 15.3 percent during the first six months of 2008.


Source: Bloomberg

It, too, is heavily weighted to oil and gas stocks. The difference maker thus far in 2008, as far as Canadian energy trusts are concerned, is the rebound in the price of natural gas. Natural gas-focused trusts Advantage Energy Income Fund (NYSE: AAV, TSX: AVN.UN) and Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) have both generated 2008 returns in excess of 50 percent on the strength of natural gas.

Advantage, weighted 67 percent to gas, peaked well before the Halloween 2006 income trust tax announcement and continued to slide; Paramount, which is 100 percent focused on gas, traded above CAD23 before hitting a bottom around CAD6 at the end of 2007.  


Source: Bloomberg

This year’s gains are heartening, but at the same time, they raise the question of when the celebration will end. It’s a question raised in the June 2008 issue of Canadian Edge: How do you treat an investment that’s really taken off?

That query is best framed by two interrelated megatrends: Asia’s emergence and the concomitant energy bull market. Emerging markets and developing economies have accounted for nearly 95 percent of the increased demand for oil since 2003. Commodity prices are tightly linked to globalization; rapid growth in emerging-market economies, particularly in Asia, is driving most of the gains.

The emergence is best described by sustained growth in per-capita income, rapid industrialization and more intensive use of commodities in production. A 2007 Bank of Canada working paper concluded that “industrial activity in Asia now appears to be the dominant driver of oil-price movements.” And China alone will be the world’s largest energy consumer by 2010.

We’ll know soon enough the impact of slowing G7 growth on the emerging economies. But the forces at work in Asia—and in other emerging regions—will be difficult to contain. At any rate, Canada will be a critical supplier of energy.
 
How to Be a Billionaire

Stephen Schwarzman is the co-founder and chairman of The Blackstone Group, a featured speaker at elite events such as the annual World Economic Forum in Davos, Switzerland and, in 2007, one of Time magazine’s 100 most influential people in the world.

In a post kicking off the second half of 2008, self-described foolish idealist Barry Ritholtz yearns for a return to rationality won hard by thorough, unforgiving self-appraisal.

Then he points us to Schwarzman’s diagnosis of the current market malaise: It’s the accountants, silly! Here’s Barry:

 
(Italics are his.)

FAS 157 took effect Nov. 15, 2007, still in the early stages of the global credit crisis brought on by the meltdown of the US subprime mortgage market. It requires that certain assets held by financial companies—including those among the alphabet soup of complex, structured products such as collateralized debt obligation (CDO)—be marked to market. The company holding such assets must value the assets at the price it could sell the asset on the open market.

FAS 157 disallows, in most cases, the valuing of an asset based on a theoretical, computer-generated price. But the market for CDOs, for example, has dried up. So banks must mark the value of such assets down, perhaps all the way down.

The billionaire’s argument is that it just isn’t fair. Click here for the rest of the story.     

Barry for PM

Were an election held today, Barack Obama would be the next prime minister of Canada.

Speaking Engagements

“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.

The natural setting is, however, among the most exciting in the US. Venture west for the San Francisco Money Show Aug. 7-10, 2008, and conduct your own field study.

Neil George, Elliott Gue and I will discuss infrastructure, partnerships, utilities, resources and energy, and 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.

I also have a special invitation for readers to join me and my colleagues Elliott Gue, Gregg Early and Neil George aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please call 877-238-1270.