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Cha-Ching! (Sound of Trust Units Crashing)
Alettermock2
Wednesday, October 18, 2006
Vol. 8 No. 208
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In Today's Letter:
Comment:
Cha-Ching! (Sound of Trust Units Crashing)
Offshore:
Swiss Inspires Singapore
Wealth:
Marriage of CME & CBOT
Currencies:
Bond vs. Euro
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Cha-Ching! (Sound of Trust Units Crashing)
Today's comment is by Eric Roseman, The Sovereign Society's Investment Director and editor of Commodity Trend Alert.
Dear A-Letter Reader:
Canadian trust units have been all the rage for investors this
decade. And it's easy to see why. Energy trust units are an excellent
way to play the oil and gas bull market, while receiving fat
distributions. Since 1999, if you invested in Canadian trust units you
earned a sweet 20% a year, including distributions. Trust units don't
pay corporate income taxes. Instead, they distribute their profits to
unit-holders every month.
Plus, the Canadian dollar, which hit a 125-year low against the U.S.
dollar four years ago, has gained a cumulative 30% since 2003. This has
just further boosted foreign currency-based returns.
But the higher an investment sector climbs, the harder the
inevitable fall. For trust units, that fall came in August. The entire
asset class crashed, resulting in some of the best bargains I've seen
in more than seven years.
From a multi-decade high of $77 a barrel in August, crude oil prices
have crashed 25%. And natural gas has been in a perpetual nosedive
since last January, down a dizzy 60%.
Commodities represent Canada's bread-and-butter in terms of overall
exports. If we excluded energy exports from the trade picture over the
last 18 months, the country would be suffering from a major economic
contraction. While resource-rich Western Canada is thriving, especially
Alberta, the manufacturing belt in Ontario and Quebec is hurting from a
strong currency and rising auto layoffs.
The way I see it, the world is still growing, China and India are
consuming record amounts of oil and U.S. interest rates will decline
next year amid a bear-market in housing. Despite talk of slowing oil
consumption, China just announced a 24% increase in oil imports through
August - some slowdown!
Commodities, which have corrected more than 15% since hitting
25-year highs in June, are starting to bottom this fall. This should
set the stage for another rally, especially for oil and gas as we
finish off the shoulder season (end of summer driving) and see colder
winter temperatures in North America and Europe. Plus, geopolitical
concerns, which have all but disappeared since August, remain a major
long-term wildcard for oil - the most politicized commodity of them
all.
The long-term Canadian energy story remains very compelling. In a
world marked by declining reserves, soaring exploration costs and
increasingly hostile producers in the Middle East and Africa, Canada is
reliable and "friendly" oil and gas. That's why I'm betting that
Canada's energy patch is a bargain this month following a drubbing over
the last eight weeks. I'm using this correction, perfectly normal in
the context of a secular bull market, to buy more great energy trusts.
For the first time since 1999, the benchmark Toronto S&P/TSX
Composite Index is ahead of Canada's income trust index. Six months
ago, the average energy trust in Canada paid an effective 8% yield.
Today, that average has risen 10.2%. And over the last 52 weeks, the
average energy trust has now declined 3.7% -- the first time ever the
index has logged a trailing 12-month decline. Year-to-date, energy
trusts are off 8%, trading 17% below their all-time high last summer.
If you're a value investor seeking high income, then this is the
best time in more than six years to buy selective Canadian energy
trusts. But, make sure you invest in the right companies. Many trusts
are starting to cut distributions amid sharply lower energy
prices. I'll discuss this in greater detail in the next TSI
issue and recommend one of the country's best managed energy trusts paying an 11% annual yield.
ERIC ROSEMAN, Investment Director
On behalf of The Sovereign Society
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Swiss Inspires Singapore
During
our recent European banking tour Sovereign Society executive director,
Erika Nolan, and I met with representatives of the new Singapore branch
of Bank Julius Baer, Switzerland's largest private banker. In little
less than a year after establishing a Baer branch in Singapore, the
staff has grown to nearly 100. This bank grew quickly because they
followed the money, as billions of euros flowed out of the EU to the
Far East, to Singapore and Hong Kong.
Singapore's growing reputation as a global leader in private banking
owes much to the Swiss financial model. The Asian city-state has
adapted Switzerland's banking secrecy laws, much of its tax and trust
policy and regulatory framework in a recent drive to reinvent itself.
Last November I attended a meeting of estate planners in Singapore and
learned about the modernizations of local trust, estate, and asset
protection laws.
Reeling from the Asian market collapse of the late-1990s, Singapore
leaders looked at other countries and liked what they saw in
Switzerland. One of the first changes was to strengthen the banking
confidentiality laws by imposing a sentence of US$78,000 or three years
in prison for disclosing information. Singapore also repealed taxes on
foreign investments earned abroad and reduced corporate taxes to
attract more businesses. Tax evasion, as in Switzerland, is not a
criminal offence in Singapore unless proof of fraud is found. It won't
be long before Singapore justifiably will be calling itself "the
Switzerland of the Far East."
BOB BAUMAN, Editor
LINK: http://www.swissinfo.org/
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The Best Business Model This Decade?
Are the publicly-traded derivative companies the best business models this decade?
I recommended the Chicago Board of Trade Holdings (NYSE-BOT) in my Commodity Trend Alert
(CTA) investment trading service back in May at $102.09 a share. Today,
I'm thrilled to learn that Chicago cross-town rival, Chicago Mercantile
Exchange (NYSE-CME) is buying CBOT for about $8 billion dollars. To be
honest, I'm also slightly disappointed because although my members are
up 53% on this trade since May, I feel CBOT might have been a $300
stock by 2008. That's how I felt back in April 2003 when I first
plugged CME at $46.75 in CTA. Today, it's a $500 stock and I'm still
long and strong.
The derivative exchanges remain totally misunderstood by the
investment herd, including Wall Street. That's because these companies
(CBOT, CME) don't require an expanding economy to make big profits.
Actually, the more volatility in the market, the better these companies
tend to perform. That's not the case with your average blue-chip stock.
The buyout news today makes the CME the world's largest
publicly-traded derivatives exchange in the world, harboring terrific
products, including T-bonds, precious metals, the grains, ethanol, base
metals, lumber, the meats, propane, milk, etc...
Since 2000, more traders and investors have entered the market for
futures and options, buying puts, and calls and straddles -- a whole
mish-mash of aggressive and defensive trading techniques to either
augment or mitigate market risk. Every time a hedge fund or an
institution buys or sells Treasury bonds, it heads to the CBOT -- the
world's largest government-bond trading platform.
ERIC ROSEMAN, Investment Director
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Bonds vs. Euro
Watch
out for the Producers Price Index (PPI) and the Consumers Price Index
(CPI). If yesterday's core PPI is an indication of what we might see
today in the core CPI, (which coincidently is the rate the Fed likes
better than that pesky producer one which includes real world stuff
like food and energy), then it's not a stretch to say bonds are looking
"pricey." But, even though Fed players have been warned, there isn't a
consensus on inflation concerns.
"Almost unnoticed among the hawkish voices last week was the change
in posture by the normally hard-line Bill Poole. The St. Louis Fed
president differentiated himself from the pack, saying inflation risks
have receded in recent weeks while growth is looking shaky. Poole told
Reuters rate cuts would be appropriate if 'all the news breaks on the
downside,' writes Caroline Baum of Bloomberg.
If bonds tank on today's news, indicating some inflation premium
moving back into the long end of the curve, then you should sell euro.
If core-CPI is tame, and bonds rally, soft Fed chatter will resume in
earnest, and you should buy euro.
It's an easy game, assuming you have a friend at Labor Department.
JACK CROOKS, Currency Director
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