The Long Riders

Any advisor labeling anything but the shortest-duration, government-backed debt a safe haven after the onslaught of uncertainty unleashed by last week’s action in the US equity markets is the financial industry equivalent of Chip Diller plaintively wailing, “All is well…,” as the citizens of Faber rush the homecoming parade route in a Delta-induced frenzy.

That’s not to say there aren’t ways to navigate your way through the panic-choked streets. And you don’t need some regimented goofball shouting platitudinous misdirections.

What’s required is a consistent approach to investment decisions; it’s a pounded-on theme in Canadian Edge and a simple instruction: Buy solid businesses.

If you’re invested in the stock market, that commitment must be long and deep. Growth over time is the key; and for income investors, it’s truer still because you’ve got to give your dividends a chance to accrue.

Let’s take a long view of the massive end-of-July slide. Since the correction that bottomed out in July 2006, the Dow Jones Industrial Average is up 25.3 percent. Going back to the last similarly depressing month–July 2004–it’s up more than 40 percent, even after coughing up 547 points in four days spanning two weeks…so far.

There’s no telling today of the eventual extent of the credit-market crunch. A 120-jump off the open for the Dow Jones Industrial Average became a 150-point loss after American Home Mortgage, the 10th-largest US mortgage lender, said it may have to liquidate assets after missing margin calls.

The significance here is that American Home Mortgage has said it doesn’t play in murky subprime waters; its loans are of the Alt-A variety, better but not quite prime. Still, the impression is the murk could spread.

How long it takes to play out and whether it becomes more than just a correction are questions made for cable-TV, sound-bite debates over when the Dow will top 14,000 again and financial-press think pieces on macroeconomic contagions.

At any rate, if it gets to the point where enough (financial) lives are at stake, Federal Reserve Chairman Ben Bernanke (escorted by Treasury Secretary Henry Paulson) will cross into that most obvious intersection of politics and central banking, pave a new road of liquidity and tow wrecked sectors off for a bailout. It’s interesting to wonder whether and how moves like that will unfold.

Another way to navigate the uncertainty is to focus on sectors with unique fundamentals that will steady your ride.

The CE Portfolio is grounded in well-run companies paying sustainable distributions. It’s easy to find the biggest-yielding trusts; you must take another couple steps and look at payout ratios, increases in outstanding shares and debt ratios.

A low payout ratio, as well as a record of distribution increases, indicates a conservative management team that takes account of unpredictability, like the 2011 tax on distributions imposed by Canada’s minority Conservative government. Trusts that keep the monthly payment rational are better positioned to deal with the new demand on cash flow.

And nobody likes to get diluted, nor do they like it if a trust’s borrowing to meet its monthly commitment.

A couple examples: Energy Savings Income Fund has increased its distribution by 132 percent during the past five years, boosting it 22 times without a single cut. Its payout ratio is 84 percent, which is actually high by CE standards.

Portfolio bellwether ARC Energy Trust has ratcheted its monthly payout up 59 percent in the same period, with three increases and no cuts. It maintains a 67 percent payout ratio.

The S&P 500 index fell 3.2 percent in July, the widely followed benchmark’s worst month since July 2004. But those who hold Energy Savings, ARC Energy and/or other trusts of like quality will get decent consolation prizes: monthly distribution checks.

“Reliable” doesn’t mean “guaranteed,” but it’s a pretty good substitute. Whether that’s enough for you is a matter of your risk tolerance, investment objectives and time horizon.

StatsCan’s Numbers

The consumer is still driving the economic bus north of the border: Statistics Canada reported yesterday that retail sales grew by 2.5 percent in May, the biggest monthly rise since November 2001. Business was more than just a backseat driver, though, as wholesale trade rebounded from April’s 2 percent decline with a 1.4 percent increase.

Combined wholesale and retail trade normally make up about 12.5 percent of GDP; that share has jumped to 32 percent of overall economic growth during the last six months.

Annual GDP growth came in at 0.3 percent, getting back in gear after a no-growth April. The Bank of Canada is expected to base a September interest rate hike on the below-the-headline numbers.

What’s interesting about the May numbers is that energy–widely touted (in this space, too)–as the defining segment of the Canadian economy was an anchor in the period. Falling natural gas prices and the subsequent drilling slowdown hurt the energy patch, but the whole picture is one of a deepening, broadening economy.

The Canadian dollar backed off after getting as close to parity with the US buck as it’s ever been last week; the StatsCan data provided the tune for a resumed march to one-to-one.

The Roundup

Two CE Portfolio recommendations, Conservative denizen Bell Aliant Regional Communications Income Fund and Aggressive play Precision Drilling, announced second quarter earnings results during the past week. Updates are provided below.

And we’ve also compiled dates for other Portfolio trusts’ announcements; as always, we’ll provide breakdowns here. For trust-specific advice for these guys, consult the Portfolio tables at www.canadianedge.com.

Conservative Portfolio

Algonquin Power Income Fund (APF.UN, AGQNF) will release second quarter results Aug. 9.

AltaGas Income Trust (ALA.UN, ATGFF) will announce its second quarter earnings Aug. 8. The trust also announced it’s signed an agreement to sell its 33.3335 percent interest in the Ikhil joint venture to AltaGas Utility Group for CD9 million.

The sale completes AltaGas’ divestiture plan of non-core production assets and, combined with the previous sale of Cedar assets, will reduce debt by more than CD20 million. No gain or loss is expected to result from the sale, which is effective July 1, 2007, and is subject to normal regulatory approvals. AltaGas Income Trust is a buy up to USD26.

Arctic Glacier Income Fund’s (AG.UN, AGUNF) earnings release will fall on or about Aug. 14.

Atlantic Power Corp (ATP.UN, ATPWF) plans to release second quarter earnings on Aug. 14.

Bell Aliant Regional Communications Income Fund’s (BA.UN, BLIAF) second quarter results illustrate a steady shift in focus from traditional telephone to broadband services. High-speed Internet subscriptions were up 21 percent year-over-year to 642,434, while local access lines declined by 94,000 to 3,264,763.

Local and long-distance revenue declined by CD3.8 million, or 1 percent, and CD4.8 million, or 3.9 percent, respectively, in the three months to June 2007, compared to the second quarter of 2006, as Internet turnover rose by CD8.3 million. Overall operating revenue for the period reached CD825.4 million, up 1.3 percent year-over-year.

Earnings before interest, taxation, depreciation and amortization were CD358.1 million, a 4.1 percent increase, and net income was CD305.2 million. Results were helped by the sale of the fund’s telephone directory business.

Three-month capital expenditures were CD143.4 million, up 0.9 percent for the year-ago period. Still effectively transitioning from landlines to the new age, Bell Aliant Regional Communications Income Fund is a buy up to USD30.

Boralex Power Income Fund (BPT.UN, BLXJF) is set to announce results for the second quarter on Aug. 3.

Energy Savings Income Fund (SIF.UN, ESIUF) will release quarterly numbers Aug. 9.

Keyera Facilities Income (KEY.UN, KEYUF) will report on its second quarter results Aug. 8.

Macquarie Power & Infrastructure Income Fund (MPT.UN, MCQPF) is going to announce results for the second quarter on Aug. 8.

Northern Property REIT (NPR.UN, NPRUF) will announce second quarter earnings Aug. 14.

Pembina Pipeline Income Fund (PIF.UN, PMBIF) is announcing its second quarter results today; we’ll have a breakdown of the numbers in next week’s MLM.

RioCan REIT (REI.UN, RIOCF) reports on second quarter activity tomorrow, Aug. 2.

TimberWest Forest Corp (TWF.UN, TWTUF) releases second quarter numbers tomorrow, Aug. 2.

Yellow Pages Income Fund (YLO.UN, YLWPF) will announce its second quarter earnings on Aug. 9.

Aggressive Portfolio

Advantage Energy Income Fund (AVN.UN, NYSE: AAV) will release second quarter results on or about Aug. 14.

ARC Energy Trust (AET.UN, AETUF) will report on second quarter numbers tomorrow, Aug. 2.

Enerplus Resources (ERF.UN, NYSE: ERF) is going to announce its second quarter results Aug. 3.

Newalta Income Fund (NAL.UN, NALUF) will report on or about Aug. 14.

Paramount Energy Trust (PMT.UN, PMGYF) is going to announce results of its second quarter on Aug. 10.

Penn West Energy Trust (PWT.UN, NYSE: PWE) will report on second quarter results after the close of trading today; we’ll have an update next week.

Peyto Energy Trust (PEY.UN, PEYUF) will report second quarter results Aug. 8.

Precision Drilling (PD.UN, NYSE: PDS) reported net earnings for the second quarter of CD26 million (20 cents Canadian per unit), a 71 percent decrease from the CD88 million (70 cents Canadian per unit) for the same period a year ago.

Revenue in the quarter was down 45 percent from CD223.6 million a year ago to CD122 million; revenue in the contract drilling services segment decreased 50 percent, and the completion and production services segment was down 36 percent. Cash flow fell 33 percent to CD229.1 million (45 cents Canadian per unit) from CD339.6 million (89 cents Canadian per unit).

Precision plans to spend around CD275 million on property, plant and equipment in 2007. Precision has traded near a 52-week low in the wake of its obviously distressing results, but its great balance sheet and solid reputation will allow it to position well for the eventual rebound in the natural gas market. Precision Drilling remains a buy up to USD30.

Provident Energy Trust (PVE.UN, NYSE: PVX) will provide a report on second quarter activity on Aug. 8.

Trinidad Energy Services Income Trust (TDG.UN, TDGNF) will announce second quarter numbers on Aug. 9.

Vermilion Energy Trust (VET.UN, VETMF) is going to report on second quarter earnings on Aug. 7.