Maple Leaf Memo
Stephen Harper’s Conservative Party faces a changed political landscape in 2007.
Harper won a minority government last January 23 on Liberal corruption, improving government accountability and tax cuts. The environment and foreign policy were back-burner issues during the winter 2006 campaign, but they could be important ballot questions in a 2007 campaign, as Harper himself has acknowledged.
Has a year in power made Canadians comfortable enough with Harper to trust his party with more power? Defeating Liberals is one thing, electing Conservatives another.
Do Canadians really want to give Harper a majority?
Stephane Dion took the opportunity of his first question period appearance in Parliament as Liberal leader to define his opponents: He used phrases like “far right” and “neo-conservative ideology” in attacking the Tories.
Harper’s government introduced the Clean Air Act, which critics saw as containing some good measures on improving air quality but as totally inadequate on climate change. Harper said the environment remains a major challenge and promised a revamped environmental plan.
Dion has said he’ll support the Kyoto Protocol if the Liberals form a government.
The Liberal government committed Canadian troops to serve in Afghanistan, but Harper has made the issue his own. Harper told CTV News that he’d rather lose an election than fail to stand by families who have lost sons and daughters there. But it’s another issue on which Harper and his party currently find themselves on the wrong side of public opinion.
Foreign policy isn’t traditionally a major voting driver in Canadian elections, particularly since the end of World War II. But Canadian soldiers are fighting and dying overseas once again; in a December 3 Strategic Counsel poll for CTV and The Globe and Mail, 61 percent of respondents opposed sending troops to Afghanistan, while 35 percent supported the move.
In Western Canada, 45 percent support and 51 percent oppose, while in Quebec, there’s 23 percent support and 75 percent opposition. The Bloc Quebecois had talked about trying to topple the Harper government over Afghanistan. The New Democratic Party wants to take Canadian troops out of a combat role. The Liberals were divided during the spring vote on extending the mission to February 2009.
The Tory decision to weaken the tax advantage of income trusts may or may not become an election issue. Political observers have noted some anger over that decision in Alberta, home to many oil and gas royalty trusts. The Coalition of Canadian Income Trusts (www.canadianenergytrusts.ca/) is going to make sure voters know as much about the issue as possible.
A report (www.canadianenergytrusts.ca/documents/CompleteReportDec2006FINAL.pdf) commissioned by the coalition was the first salvo in a CD10 million public education campaign.
Among its key findings, the report shows that energy trusts indirectly generate more tax revenue to all levels of government than other energy corporate entities. Energy trusts also made acquisitions of more than CD35 billion in the past five years and invested CD15 billion on development and optimization activities during the same period. And trusts indirectly generate 30 percent of the federal taxes produced by the oil and gas sector, twice as much as they represent in sector revenues.
The report looks at increased capital efficiencies, lower cost structure, greater economic activity and increased government revenues that result from production enhancements of assets acquired by the trusts.
Market Notes
The Toronto Stock Exchange’s main index advanced 14 percent for 2006. Resource stocks led the way, with the metals and mines sector surging 60 percent.
Wall Street’s major indexes posted healthy gains for 2006, with the Dow Jones Industrial Average rising 16.29 percent, the S&P 500 adding 13.62 percent and the Nasdaq Composite up 9.52 percent. That’s the best showing since 2003, when the Dow closed up 25.3 percent, the S&P 500 gained 26.4 percent and the Nasdaq rose 50 percent.
One big story early in 2007 will be whether the Federal Reserve’s attempt to guide the economy to a soft landing will be successful. 2006 will go down as a year of transition for the central bank; the Fed left rates unchanged at its last four meetings following a string of 17 straight increases that began in 2004.
The Fed hopes to avoid slowing the economy too quickly, but it remains vigilant about inflation. The rise in stocks in recent months in part telegraphs Wall Street’s confidence in the central bank’s ability to execute a soft landing, though the inversion of the yield curve has thrown some cold water on that sentiment.
Beyond inflation and interest rates, investors will keep close tabs on the housing market. A slowdown has touched off fears that some consumers will be reticent to continue spending as heavily.
The RoundupThe news has been light because of the recent holidays. Things should pick up considerably this week as companies try to start the new year with a bang.
Look for the latest Portfolio advice this Friday in the January issue of Canadian Edge.
Happy New Year’s!
Conservative Portfolio
TransForce Income Fund (TIF.UN, TIFUF) has signed a share purchase agreement to acquire all outstanding shares of US-based Westfreight Systems and Westfreight Holdings. The acquisition is subject to customary conditions and approvals and is expected to close early this month. The acquisition complements TransForce’s heavy-haul and full-load segment operations as well as cross-border energy sector services. Westfreight focuses on primary service lanes between Alberta and the Texas and Oklahoma regions. The company’s fleet moves a variety of heavy and related oilfield equipment, and it generates annual revenues of approximately USD47 million. TransForce’s expansion is clear proof that it intends to continue business as usual for the time being. The stock remains at risk to weakness in the Canadian transport sector. But given the acquisition and the hit taken by the shares, TransForce is now a hold.
Aggressive Portfolio
Avenir Diversified Income Trust (AVF.UN, AVNDF) projects maintaining its target payout ratio of 75 to 80 percent for 2007, taking into account a status-quo scenario at current distribution rates with no new external growth required. Each of Avenir’s business segments is reported to be at or ahead of budget with the fourth and first quarters traditionally being Avenir’s strongest. The 2007 base budget provides for a cash flow split of approximately 40 percent oil and gas production and 60 percent financial services and real estate based on our current projections for commodity prices and the USD/CD exchange rate.
Avenir doesn’t expect to pay corporate income tax in 2007 nor in the following four years until the imposition of the proposed tax on trusts in 2011. The 2007 base budget didn’t include planning for 2007 acquisitions in view of the trust tax uncertainty; however, with the recent release of the “undue expansion” guidelines, Avenir–as are all trusts–is now in a better position to determine how the proposed legislation may affect its plans going forward. Avenir also announced the start of construction on a new 43,000 square foot Landmark Theatre development project in Red Deer, Alberta. The CD12.5 million project should provide a levered annual return of approximately 11.3 percent to the trust and be operational in September 2007. The Landmark Theatre lease will be for a 20-year term. Avenir has approximately 625,000 square feet of leasable properties with a 100 percent occupancy rate. The trust’s moves are encouraging, and its share price is now at a low level, given the value of its assets. Because it’s still a very small player in oil and gas production, you’re far better off with one of our more conservative production plays. Avenir is still a sell.