Maple Leaf Memo
The Business Outlook
The Bank of Canada (BoC) surprised many observers June 10 by holding interest rates steady rather than cutting in the face of slowing US and global economic conditions.
“Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations,” read the BoC’s statement announcing its decision to stand fast. “However, the balance of risks to the Bank’s April projection for inflation in Canada has shifted slightly to the upside.”
The BoC cited higher energy costs as offsetting the impact of weaker demand on inflation, making current monetary policy “appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 percent inflation target.”
The results of the BoC’s Business Outlook Survey, a quarterly poll of approximately 100 senior business managers chosen to reflect the composition of Canada’s GDP, suggest concerns about rising prices have filtered down to managers who make buy and sell decisions on a daily basis, confirming the BoC’s and Gov. Mark Carney’s June reticence to cut and signaling similar steadfastness, perhaps even a 25-basis-point hike, in next Tuesday’s rate announcement.
The balance of opinion (the percentage of firms expecting greater price increases minus the percentage expecting lesser price increases) for input costs actually reached a record high in the summer 2008 survey, which was conducted May 20 to June 13, based largely on continuing strength in the price of oil, other energy commodities, base metals and food.
Fifty-one percent of respondents anticipate input costs to increase at a greater rate than in the past year, while 35 percent expect the same rate and 13 percent a lesser rate.
On the output end, 42 percent expect prices for their products or services to increase at a faster rate than they had in the previous 12 months. A lower rate of product price increases is expected by 22 percent, while 36 percent expect to keep the same rate of price increases. The balance of opinion on output costs was lower than for input costs because some firms “still feel unable to pass through higher costs because of competitive pressures.”
Expectations about inflation as measured by the Consumer Price Index also bounced, again owing to higher energy costs. The percentage of firms anticipating inflation to be more than 3 percent over the next two years rose to 36 percent, higher than in any previous Business Outlook Survey. The percentage forecasting inflation within the BoC’s target range of 1 to 3 percent fell from 80 percent in the April survey to 63 percent.
The spring survey showed signs of what’s become a rock-and-a-hard-place for markets and central bankers: slowing growth combined with rising inflation. Expectations for future sales growth slipped into negative territory for the first time since 2001, and labor and capacity pressures eased. But inflation expectations jumped to their highest levels since the aftermath of Hurricane Katrina in the fall of 2005.
Inflation expectations are up, but there are encouraging signs about the strength of the Canadian economy relative to other developed nations. While the positive numbers reflect regional differences–resource-focused western Canada is strong; manufacturing-heavy eastern Canada is weak–the overall picture suggests strong commodity prices and expectations of still-healthy domestic demand are offsetting to an important degree the impacts of a weak US economy.
The balance of opinion on sales activity (the percentage of firms expecting faster growth minus the percentage of firms expecting slower growth) moved back into positive territory; 37 percent expect better sales growth, while 33 percent expect a lower rate in the next 12 months. And employment expectations remained unchanged from the previous survey, with 44 percent expecting higher staffing levels and 11 percent expecting reduced payrolls. The number of firms complaining of labor shortage problems went back up to 40 percent from 30 percent in the spring survey.
“Despite the recent slowdown in real economic growth in Canada, the results of the summer survey do not suggest widespread weakness across Canadian firms,” the BoC survey release said. “Firms have however become increasingly concerned about pressures on input costs and inflation.”
Dispatches from Hokkaido
Our colleague Elliott Gue, editor of The Energy Strategist and the free, biweekly e-zine The Energy Letter, is attending this week’s meeting of the Group of Eight (G8) major industrialized nations in Japan.
Elliott will be reporting his observations and analysis of the summit’s events on KCI Investing’s blog, At These Levels. On Monday, he wrote of the technologically advanced, environmentally friendly design of the event’s International Media Center and also reported the evolution of a portable, small-scale fuel cell for residential use.
The G8’s discussions have focused on the impact of energy costs and rising food prices on the global economy, carbon-emissions cuts and the strains showing in the world’s financial system. Elliott will have a lot more to say on these and other matters; check At These Levels for updates on what’s shaping up to be a critical meeting of world leaders.
Volatile Oil
Energy trusts came down hard Monday on oil’s retreat below USD140 per barrel and continued to slide Tuesday along with the commodity price.
The key point to bear in mind, however, is that realized selling prices–the actual cash each producer brings in for the oil and gas it produces–are still well below the spot price. And the management teams of the energy trusts within the Canadian Edge Portfolio have accounted well for volatility in the commodity market.
According to the US Energy Information Administration (EIA), between mid-November and early December 2007, the spot price of West Texas Intermediate (WTI) crude fell by almost USD12 per barrel, from USD99.16 on Nov. 20 to USD87.45 on Dec. 5. It then rebounded by Jan. 2, 2008, to USD99.64. By early February, the WTI price was back down to USD87.16 but then spiked to more than USD110 on March 13. The monthly average WTI price for March 2008 was USD105.46.
We saw similar volatility in the second quarter. The spot price of WTI increased from USD122 per barrel June 4 to USD145 per barrel July 3. Global supply uncertainties, combined with significant demand growth in China, the Middle East and Latin America, are expected to continue to pressure oil markets.
The EIA forecast WTI prices, which averaged USD72 per barrel in 2007, to average USD127 per barrel in 2008 and USD133 per barrel in 2009.
As the table below illustrates, energy trusts are maintaining conservative payout ratios amid a volatile environment, locking in prices well below the parabolic price of oil.
*Average realized price for oil/gas produced during the first quarter of 2008. Source: Company Filings
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 800-832-2330.
The Roundup
Gas/Propane
Peak Energy Services Trust (TSX: PES.UN, OTC: PKGFF) has signed a two-year deal with Sunshine Oilsands to supply camp, catering and wastewater services for approximately 600 workers as well as other peripheral support equipment for Sunshine’s operations in the Alberta oil sands region. Peak expects the contract to generate CAD18 million in revenue.
The trust plans to spend CAD6 million to CAD7 million on capital expansion requirements specific to the project, financed through the combination of operating cash flow and the use of existing credit facilities. Hold Peak Energy Services.
Business Trusts
CI Financial Income Fund (TSX: CIX.UN, OTC: CIXUF) reported net sales of CAD442 million in June 2008, assets under management of CAD67.8 billion and total fee-earning assets of CAD102.7 billion as of June 30, 2008. It was CI’s highest-ever net sales number for the month of June.
CI subsidiaries CI Investments and United Financial Corp had combined gross retail sales of CAD1.1 billion, with net sales of CAD442 million consisting of CAD415 million in long-term funds and CAD27 million in money market funds. In the last five months, CI has posted gross sales of CAD5.5 billion and net sales of CAD1.9 billion. CI Financial Income Fund is a buy up to USD25.
Pipeline Trusts
Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF) reported the successful, on-schedule completion of the Horizon Pipeline; the CAD400 million project was substantially finished July 1. Pembina now has 775,000 barrels per day of fully contracted synthetic crude oil transportation capacity in three distinct pipelines serving customers in the Athabasca oil lands region.
The Horizon Pipeline is the largest pipeline project ever undertaken by Pembina. It will be operated under the terms of a 25-year, extendable transportation agreement providing Pembina a fixed return on invested capital and full recovery of operating costs. Pembina projects that the Horizon Pipeline will contribute incremental net operating income of CAD45 million per year over the 25-year contract term, commencing on Aug. 1, 2008. Buy Pembina Pipeline Income Fund up to USD18.
Natural Resources Trusts
Fording Canadian Coal (NYSE: FDG, TSX: FDG.UN)–which owns 60 percent of the Elk Valley Partnership, the world’s No.2 exporter of metallurgical coal, crucial for making steel–fell more than 16 percent late last week on pressure from declining coal futures. European benchmark coal plunged as much as USD25 a ton last Wednesday to below USD200, which sent US benchmark coal falling by USD20 a ton.
Fording said earlier this year that its average contracted coal price for the 2008 coal year, which began April 1, had nearly tripled to CAD275 per ton from CAD93 in the year-earlier period. Sell Fording Canadian Coal.
Non-Trusts
Toronto-Dominion Bank (NYSE: TD, TSX: TD) will take a pretax charge of about CAD96 million for the improper pricing of credit index swaps by a senior trader who has since left the London office of its TD Securities unit. The amount of the charge exceeds the CAD93 million in wholesale banking profit TD reported in the second quarter.
But it’s a relatively small loss compared to the billions of dollars in writedowns taken at US, European and other Canadian banks as a result of weak credit markets, and TD’s navigation of the credit crunch thus far has instilled a measure of confidence in its risk management that should prevent a selloff. Toronto-Dominion Bank is a hold.
The Bank of Canada (BoC) surprised many observers June 10 by holding interest rates steady rather than cutting in the face of slowing US and global economic conditions.
“Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations,” read the BoC’s statement announcing its decision to stand fast. “However, the balance of risks to the Bank’s April projection for inflation in Canada has shifted slightly to the upside.”
The BoC cited higher energy costs as offsetting the impact of weaker demand on inflation, making current monetary policy “appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 percent inflation target.”
The results of the BoC’s Business Outlook Survey, a quarterly poll of approximately 100 senior business managers chosen to reflect the composition of Canada’s GDP, suggest concerns about rising prices have filtered down to managers who make buy and sell decisions on a daily basis, confirming the BoC’s and Gov. Mark Carney’s June reticence to cut and signaling similar steadfastness, perhaps even a 25-basis-point hike, in next Tuesday’s rate announcement.
The balance of opinion (the percentage of firms expecting greater price increases minus the percentage expecting lesser price increases) for input costs actually reached a record high in the summer 2008 survey, which was conducted May 20 to June 13, based largely on continuing strength in the price of oil, other energy commodities, base metals and food.
Fifty-one percent of respondents anticipate input costs to increase at a greater rate than in the past year, while 35 percent expect the same rate and 13 percent a lesser rate.
On the output end, 42 percent expect prices for their products or services to increase at a faster rate than they had in the previous 12 months. A lower rate of product price increases is expected by 22 percent, while 36 percent expect to keep the same rate of price increases. The balance of opinion on output costs was lower than for input costs because some firms “still feel unable to pass through higher costs because of competitive pressures.”
Expectations about inflation as measured by the Consumer Price Index also bounced, again owing to higher energy costs. The percentage of firms anticipating inflation to be more than 3 percent over the next two years rose to 36 percent, higher than in any previous Business Outlook Survey. The percentage forecasting inflation within the BoC’s target range of 1 to 3 percent fell from 80 percent in the April survey to 63 percent.
The spring survey showed signs of what’s become a rock-and-a-hard-place for markets and central bankers: slowing growth combined with rising inflation. Expectations for future sales growth slipped into negative territory for the first time since 2001, and labor and capacity pressures eased. But inflation expectations jumped to their highest levels since the aftermath of Hurricane Katrina in the fall of 2005.
Inflation expectations are up, but there are encouraging signs about the strength of the Canadian economy relative to other developed nations. While the positive numbers reflect regional differences–resource-focused western Canada is strong; manufacturing-heavy eastern Canada is weak–the overall picture suggests strong commodity prices and expectations of still-healthy domestic demand are offsetting to an important degree the impacts of a weak US economy.
The balance of opinion on sales activity (the percentage of firms expecting faster growth minus the percentage of firms expecting slower growth) moved back into positive territory; 37 percent expect better sales growth, while 33 percent expect a lower rate in the next 12 months. And employment expectations remained unchanged from the previous survey, with 44 percent expecting higher staffing levels and 11 percent expecting reduced payrolls. The number of firms complaining of labor shortage problems went back up to 40 percent from 30 percent in the spring survey.
“Despite the recent slowdown in real economic growth in Canada, the results of the summer survey do not suggest widespread weakness across Canadian firms,” the BoC survey release said. “Firms have however become increasingly concerned about pressures on input costs and inflation.”
Dispatches from Hokkaido
Our colleague Elliott Gue, editor of The Energy Strategist and the free, biweekly e-zine The Energy Letter, is attending this week’s meeting of the Group of Eight (G8) major industrialized nations in Japan.
Elliott will be reporting his observations and analysis of the summit’s events on KCI Investing’s blog, At These Levels. On Monday, he wrote of the technologically advanced, environmentally friendly design of the event’s International Media Center and also reported the evolution of a portable, small-scale fuel cell for residential use.
The G8’s discussions have focused on the impact of energy costs and rising food prices on the global economy, carbon-emissions cuts and the strains showing in the world’s financial system. Elliott will have a lot more to say on these and other matters; check At These Levels for updates on what’s shaping up to be a critical meeting of world leaders.
Volatile Oil
Energy trusts came down hard Monday on oil’s retreat below USD140 per barrel and continued to slide Tuesday along with the commodity price.
The key point to bear in mind, however, is that realized selling prices–the actual cash each producer brings in for the oil and gas it produces–are still well below the spot price. And the management teams of the energy trusts within the Canadian Edge Portfolio have accounted well for volatility in the commodity market.
According to the US Energy Information Administration (EIA), between mid-November and early December 2007, the spot price of West Texas Intermediate (WTI) crude fell by almost USD12 per barrel, from USD99.16 on Nov. 20 to USD87.45 on Dec. 5. It then rebounded by Jan. 2, 2008, to USD99.64. By early February, the WTI price was back down to USD87.16 but then spiked to more than USD110 on March 13. The monthly average WTI price for March 2008 was USD105.46.
We saw similar volatility in the second quarter. The spot price of WTI increased from USD122 per barrel June 4 to USD145 per barrel July 3. Global supply uncertainties, combined with significant demand growth in China, the Middle East and Latin America, are expected to continue to pressure oil markets.
The EIA forecast WTI prices, which averaged USD72 per barrel in 2007, to average USD127 per barrel in 2008 and USD133 per barrel in 2009.
As the table below illustrates, energy trusts are maintaining conservative payout ratios amid a volatile environment, locking in prices well below the parabolic price of oil.
|
Small Realization |
||
|
Company
|
Q1 Price/BOE*
|
Q1 Payout Ratio
|
| Advantage Energy Income Fund | USD62.52 | 53% |
| ARC Energy Trust | 66.67 | 60 |
| Daylight Resources Trust | 63.25 | 40 |
| Enerplus Resources | 62.10 | 75 |
| Penn West Energy Trust | 64.94 | 58 |
| Peyto Energy Trust | 56.41 | 63 |
| Provident Energy Trust | 60.04 | 59 |
| Vermilion Energy Trust | 76.24 | 33 |
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 800-832-2330.
The Roundup
Gas/Propane
Peak Energy Services Trust (TSX: PES.UN, OTC: PKGFF) has signed a two-year deal with Sunshine Oilsands to supply camp, catering and wastewater services for approximately 600 workers as well as other peripheral support equipment for Sunshine’s operations in the Alberta oil sands region. Peak expects the contract to generate CAD18 million in revenue.
The trust plans to spend CAD6 million to CAD7 million on capital expansion requirements specific to the project, financed through the combination of operating cash flow and the use of existing credit facilities. Hold Peak Energy Services.
Business Trusts
CI Financial Income Fund (TSX: CIX.UN, OTC: CIXUF) reported net sales of CAD442 million in June 2008, assets under management of CAD67.8 billion and total fee-earning assets of CAD102.7 billion as of June 30, 2008. It was CI’s highest-ever net sales number for the month of June.
CI subsidiaries CI Investments and United Financial Corp had combined gross retail sales of CAD1.1 billion, with net sales of CAD442 million consisting of CAD415 million in long-term funds and CAD27 million in money market funds. In the last five months, CI has posted gross sales of CAD5.5 billion and net sales of CAD1.9 billion. CI Financial Income Fund is a buy up to USD25.
Pipeline Trusts
Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF) reported the successful, on-schedule completion of the Horizon Pipeline; the CAD400 million project was substantially finished July 1. Pembina now has 775,000 barrels per day of fully contracted synthetic crude oil transportation capacity in three distinct pipelines serving customers in the Athabasca oil lands region.
The Horizon Pipeline is the largest pipeline project ever undertaken by Pembina. It will be operated under the terms of a 25-year, extendable transportation agreement providing Pembina a fixed return on invested capital and full recovery of operating costs. Pembina projects that the Horizon Pipeline will contribute incremental net operating income of CAD45 million per year over the 25-year contract term, commencing on Aug. 1, 2008. Buy Pembina Pipeline Income Fund up to USD18.
Natural Resources Trusts
Fording Canadian Coal (NYSE: FDG, TSX: FDG.UN)–which owns 60 percent of the Elk Valley Partnership, the world’s No.2 exporter of metallurgical coal, crucial for making steel–fell more than 16 percent late last week on pressure from declining coal futures. European benchmark coal plunged as much as USD25 a ton last Wednesday to below USD200, which sent US benchmark coal falling by USD20 a ton.
Fording said earlier this year that its average contracted coal price for the 2008 coal year, which began April 1, had nearly tripled to CAD275 per ton from CAD93 in the year-earlier period. Sell Fording Canadian Coal.
Non-Trusts
Toronto-Dominion Bank (NYSE: TD, TSX: TD) will take a pretax charge of about CAD96 million for the improper pricing of credit index swaps by a senior trader who has since left the London office of its TD Securities unit. The amount of the charge exceeds the CAD93 million in wholesale banking profit TD reported in the second quarter.
But it’s a relatively small loss compared to the billions of dollars in writedowns taken at US, European and other Canadian banks as a result of weak credit markets, and TD’s navigation of the credit crunch thus far has instilled a measure of confidence in its risk management that should prevent a selloff. Toronto-Dominion Bank is a hold.
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