The Correction and Its Discontents

By David Dittman • June 17, 2011 • Canadian Edge Weekly

The S&P/Toronto Stock Exchange Composite Index officially entered correction territory yesterday, as early in the day it fell to 12,834.64, 10.1 percent below its April 2011 high. Because of its connection to oil and that commodity’s connection to growth, the Canadian dollar is perceived as a “risk” trade in the global financial context. US investors who are long Canadian assets are therefore experiencing an even greater shock during this selloff, as price declines are exacerbated by negative currency impacts.

It’s important to keep in mind right now that the market had carried many Canadian Edge recommendations well past value-based buy targets, featured in the Conservative and Aggressive Portfolio tables and the How They Rate coverage universe table. The result of all this selling in recent weeks is a lot of opportunities to establish positions in solid businesses poised to build wealth for income investors over the long term.

The Struggle for Meaning that’s playing out in the popular financial media this week focuses on Greek debt, the end of QE2 and slowing US growth. Each day a new data point causes the selloff/rebound. Thursday morning’s relatively positive initial jobless claims numbers for the week ended Jun. 11 and May new housing starts provided a little momentum for a modest gain that looks set to leave major indexes with their first weekly gains in two months.

At least three important questions are begged: Is there more selling on the horizon? Is this an oversold bounce? Are we looking at a major reversal? Keep in mind, too, that the preceding hyperlink, to a site run by a guy who knows what he’s talking about, is ultimately for entertainment purposes only. Whatever the resolution of these debates, our concern is primarily results generated by the businesses in which we invest. We’re concerned about dividend sustainability and dividend growth; share-price growth always follows. These are the steps to building wealth over the long term. Importantly, CE’s Aggressive and Conservative Holdings delivered.

As Roger Conrad details in today’s Flash Alert to CE subscribers only three of the 35 companies in the Portfolio turn in what can be described as disappointing quarterly numbers during the recently concluded reporting season. But we focus on high quality as well as high yield; these companies are poised to rebound from their first-quarter travails and, along with the other 32 Holdings, post solid second-quarter results.

Concerns about metastasizing Greek debt problems and slowing growth in key markets have investors selling the loonie and other similar currencies in favor of what remains the world’s safe-haven, the US dollar. But there’s plenty of evidence to suggest the causes of this hiccup are isolated; consider the impact, for example, of disrupted Libyan oil production on US growth, dependent as it is on free-flowing petroleum, or of Japan’s earthquake/tsunami/nuclear disaster on supply chains around the world.

A lot of this selling is driven by emotion, which maintains a strong hold on investors still spooked by the events of 2008. It doesn’t hurt that much airtime and many headlines are dominated by the voices of doom decrying the disaster around the corner, when an employment crisis in our faces threatens to saddle the US with a Japan-style period of lost decades. Meanwhile, as independent researcher Jim Bianco noted this week in a discussion of the Chicago Board Options Exchange Volatility Index, the measure of market angst known widely by its nickname, the VIX, which is strangely calm amid the selling, “For more than two years, the the bears have made the headlines and the bulls have made the money.”

The noise can be entertaining, if you understand it as noise and accept it as entertainment. But this is a conscious choice that requires discipline. Investing for income and long-term total return requires that you march to the beat set by on-the-ground results.   

Canadian Oil Sands Constrained by US Politics

A committee of the Rebpublican-controlled US House of Representatives passed a bill this week that would force the Obama administration to issue a ruling on a proposed extension to a key pipeline system that crosses the US-Canada border. In light of the fact that the highest-profile opposition to the project comes from a Republican Senator from Nebraska, and that speeds up an already years-long process by a matter of a few whole months, this is clearly a politically motivated gesture designed to put the Democratic president on the defensive about gas prices. It’s not that Mr. Obama doesn’t deserve to be on the defensive for other energy or broader economic issues; on this one, however, the GOP seems to be reaching.

Because of this international dimension, the decision to permit construction of the Keystone XL pipeline, a 1,661-mile extension to an existing 2,147-mile line connecting the Athabasca oil sands region in Alberta to refineries in Illinois and Oklahoma, is in the hands of the State Department. A coalition of environmental and ethics groups is pushing back from the left, via a lawsuit in naming Secretary of State Hillary Clinton as a defendant an seeking disclosure of documents related to her department’s review of the project. Secretary Clinton has already previously indicated that she’s “inclined” to support Keystone XL.

Consider, too, that during the weeks leading up to the Organization of Petroleum Exporting Countries’ (OPEC) exciting June meeting President Obama allegedly conspired with Saudi officials to arrange a swap of easily processed, low-sulphur crude from the US Strategic Petroleum Reserve to European refineries in exchange for harder-to-refine heavier, high-sulphur crude that the Desert Kingdom produces in abundance but that can’t be turned into usable fuels by proximate refiners.

The shortfall in low sulphur crude for European producers is a result of the interruption of Libyan oil supply. And it’s more evidence that the US needs to shift its dependence to North American sources, be they bound by American or Canadian borders.

The Roundup

Earnings season for Canadian Edge Portfolio Holdings, as of yesterday, is finally over. We cover first-quarter results for Northern Property REIT (TSX: NPR-U, OTC: NPRUF), the last reporter, in today’s Flash Alert.

Here’s where you can find summaries of earnings report for other Holdings, followed by a compilation of reporting dates for second-quarter numbers.

Conservative Holdings

Aggressive Holdings

Following are estimated (in most cases) and confirmed (for a couple) second-quarter reporting dates for the CE Portfolio. We’ll update the list as official dates are announced.

Conservative Holdings

  • AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Jul. 29 (estimate)
  • Artis REIT (TSX: AX-U, OTC: ARESF)–Aug. 11 (estimate)
  • Atlantic Power Corp (TSX: ATP, NYSE: AT)–Aug. 9 (estimate)
  • Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Aug. 5 (estimate)
  • Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPUF)–Aug. 9 (estimate)
  • Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Aug. 10 (estimate)
  • Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–Aug. 9 (estimate)
  • Cineplex Inc (TSX: CGX, OTC: CPXGF)–Aug. 12 (estimate)
  • Colabor Group Inc (TSX: GCL, OTC: COLFF)–Aug. 4 (estimate)
  • Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Aug. 10 (estimate)
  • Extendicare REIT (TSX: EXE-U, OTC: EXETF)–Aug. 5 (estimate)
  • IBI Group Inc (TSX: IBG, OTC: IBIBF)–Aug. 4 (estimate)
  • Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Aug. 10 (confirmed)
  • Just Energy Group Inc (TSX: JE, OTC: JUSTF)–Aug. 12 (estimate)
  • Keyera Corp (TSX: KEY, OTC: KEYUF)–Aug. 3 (confirmed)
  • Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Aug. 5 (estimate)
  • Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–Aug. 5 (estimate)
  • RioCan REIT (TSX: REI-U, OTC: RIOCF)–Jul. 29 (estimate)
  • TransForce Inc (TSX: TFI, OTC: TFIFF)–Aug. 1 (confirmed)

Aggressive Holdings

  • Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–Jul. 28 (estimate)
  • Ag Growth International Inc (TSX: AGF, OTC: AGGZF)–Aug. 11 (estimate)
  • ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Aug. 4 (estimate)
  • Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Jul. 28 (estimate)
  • Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–Aug. 3 (estimate)
  • EnerCare Inc (TSX: ECI, OTC: CSUWF)–Aug. 9 (estimate)
  • Enerplus Corp (TSX: ERF, NYSE: ERF)–Aug. 5 (confirmed)
  • Newalta Corp (TSX: NAL, OTC: NWLTF)–Aug. 5 (estimate)
  • Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Aug. 12 (estimate)
  • Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–Aug. 4 (estimate)
  • Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–Aug. 10 (estimate)
  • Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Aug. 10 (estimate)
  • PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–Aug. 5 (estimate)
  • Provident Energy Ltd (TSX: PVE, NYSE: PVX)–Aug. 11 (estimate)
  • Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–Aug. 9 (estimate)
  • Yellow Media Inc (TSX: YLO, OTC: YLWPF)–Aug. 5 (estimate)

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