Pengrowth deal invigorates Energy Trusts:

Pengrowth Energy has announced they will buy $1.04 billion of oil and gas assets from ConocoPhillips Co. The deal meets the proposed new rules on energy trust expansion laid out by the Federal Government. The Government has set an arbitrary limit to the expansion of an energy trust to 15% of existing equity.

The Pengrowth - ConocoPhillips deal is a mix of debt and equity with approximately 65% of the funds raised by debt financing and 35% by the issuance of equity. The additional 20 million units will add about 9% to the current equity outstanding at Pengrowth.

The additional assets will increase oil & gas production by 27% to 100,000 barrels per day and proven reserves by 22%.

The deal is the first since the October 31st announcement by the Finance Minister that income trusts will be subject to income taxes in 2011 and placed a restriction of 15% on the increase in equity by a trust. The new reality in the income trust sector is that the companies will be expanding by issuing debt and there seems to be an appetite by Canadian Banks to get involved in this new stage of expansion in the energy sector.

It seems to be business as usual in the energy trust sector unless the Government changes the rules again when they finalize the process in the next few weeks. It seems appropriate to look at energy trusts with low debt levels as the most likely to have the potential to expand and grow under the new rules. Trusts with high debt levels will be severely restricted going forward and are likely to be left behind by investors.


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Time to Prepare for Year End:

This is the time of the year to sit down and review your portfolio. The review should be as objective as possible with the goal of weeding out the losers and concentrating on the winners. The idea is to go over all of your decisions and decide what went right and what went wrong, do not use this as a session to beat yourself up.

Remember that not every investment is going to work out the way you want, but if you can learn from those decisions then the investment wasn’t a total loss. There are two types of capital, real and mental, the cost of losses in real capital can be easily calculated, the cost of losses in mental capital is very much harder to quantify.

The mental capital we expend in making investments can be much more expensive that the real capital over the long term so we have to manage that segment carefully or we run the risk of trading paralysis due to uncertainty and lack of conviction.

One of the best ways to retain mental capital is to sell the losers! I don’t mean the ones that are just underwater, I mean the ones we fret about and worry about, the ones that hold us back from making new investments. If you are holding any investments that you a HOPING will recover sell them now sell them today, hope is not an investment strategy. One more thing do not ever add to a losing trade, averaging down is an almost guaranteed method of going broke.

The decision to sell is often the hardest one to make especially when you take a loss, but by ridding your account of the bothersome holdings it will free up an amazing amount of mental capital that you can compound into winning trades next year.

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Canadian Banks start reporting Year End results:

The Bank of Montreal (BMO) is expected to report quarterly and year end results today. The expectation is that the BMO will come in with $1.25 per share for the quarter slightly below the $1.30 in the third quarter. BMO is expected to increase the dividend by approximately 12% to $2.78 per share annually.

The Canadian banks have been one of the more stable sectors in the market and have seen a lot of interest by investors looking for income. The banking sector has a long history of increasing dividend payouts over time and is viewed as stable high income common share investments.

The recent changes by the government regarding taxation of income trusts has increased the attractiveness of bank shares due to the potential for higher income as profits grow. This increased interest has pushed bank shares higher over the past month and in many cases the share price is becoming over valued. Investors should be cautious and not become over exposed to this sector as any disappointment in earnings will have a negative impact on the share price, expectations have become a little too bullish for my liking.

The rest of the banking sector reports over the next two weeks with the Royal and National Banks on November 30th, CIBC December 7th, TD and Bank of Nova Scotia on the 8th.

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Violence in Iraq watch out for an oil price spike:

The escalation in violence in and around Bagdad is likely to have a spill over effect in the rest of the region. The sectarian violence is based on the two main Muslim sects and the different views have been causing problems for centuries.

The religious fighting appears to be pushing Iraq into a civil war and because the war is based on differences in religion it is quite likely to spread to other countries in the region. When the violence spreads you can be assured that there will be disruptions in the supply of oil out of this region to the rest of the world.

Investors should be prepared for higher oil prices in the near future owning oil producers that are not dependent on the Middle East for supply are an excellent hedge against a spoke in crude oil prices.

The Canadian market offers a number of producers to choose from, I would look first at companies with long life reserves such as Suncor (SU), PetroCanada (PCA), Canadian Natural Resources (CNQ) and Nexen (NXY). All of these companies have the majority of their properties in safe secure areas of the world.


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International Nickel Ventures (INV-T):

Nickel prices remain elevated and appear to be in a long term bull market due to an increase in demand from Asia. Investors in a potential nickel mine coming on stream in the next few years will be rewarded from the continued high commodity prices.

International Nickel Ventures has just released an update on the potential resource in their Brazilian property. The Santa Fe and Iproa nickel deposits which are located in Goias state of Brazil. The property is being developed as a joint venture with Teck Cominco (TCK.B-T) 25% and International Nickel 75%.

The data from the completed 55,000 meter 4100 hole drill program shows an inferred resource of 109 million tonnes grading 1.11% nickel. This is an increase of approximately 20% from previous results due in large part to the inclusion of peripheral areas not previously explored.

International Nickel is well funded with $17.5 million in cash available to meet future obligations this equates to approximately 50 cents per share in cash. The expertise available from the joint venture partner Teck Cominco adds to the potential for success in the development of this property.

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Another Mining Mega Merger:

Freeport-McMoRan Copper& Gold Inc. (FCX) has made a takeover offer for Phelps Dodge Corporation (PD) the deal has an estimated value of $26 billion. Phelps Dodge shareholders will receive $88.00 in cash and 0.67 common shares of Freeport-McMoRan for each Phelps Dodge share tendered, the cash portion represents about 70% of the total offer.

The combined company will be the second largest copper producer on the planet with combined reserves of 75 billion pounds of copper, 41 million ounces of gold and 1.9 billion pounds of molybdenum (moly). The new company has annual production capacity of 3.7 billion pounds of copper, 1.8 million ounces of gold and 69 million pounds of moly.

The combination will have very strong cash flow of $5.5 billion annually and revenue of approximately $16.6 billion. The company will be geographically diverse with operations in North & South America, Africa and Indonesia. The Freeport-McMoRan Grasberg Mine in Indonesia is the worlds largest copper & gold mine when measured by reserves.

This merger will create a global powerhouse in the production of base metals and will enhance the potential for future growth opportunities.

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The Future on track for CP Rail:

CP Rail has increased its guidance for the coming year by approximately 13% raising earnings forecast to $4.30 – $4.45 per share up from the previous estimate of $3.95 per share.

The company expects revenue to increase 5-6% with both load volume and prices forecast to rise. The company is seeing strong demand well into 2007 this increase along with continued emphasis on productivity enhancements should add to the bottom line on a consistent basis.

The Canadian railways are in an excellent position for growth as the global demand for materials and grains supports the expansion of service across the country. CP Rail (CP-T) is an attractive buy with good long term potential for capital growth and increased dividend income.

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A new Political landscape what now:

The recent mid term elections have changed the political landscape for the coming two years which will create opportunities for investors going forward. The Democrats will try to focus the congress on areas they feel are important to their constituents.

The Democrats have indicated that they are going to investigate the major oil companies and this could create a lot of uncertainty for investors. The US oil companies are likely to come under increased pressure which will force global investors to look at other markets for energy exposure.

The Canadian energy stocks are likely to benefit from the increased global exposure and there will be an opportunity for investors to capitalize on this over the next few months. Companies such as PetroCanada (PCA-T), Suncor (SU-T) and EnCana (ECA-T) are all well positioned to attract international interest if the US congress becomes aggressively negative on the US energy producers.

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Flaherty makes the worst tax decision in history:

The Federal Government announced that they are changing the rules regarding Income trusts and these entities will be required to pay tax at the same rate as corporations. The credibility loss from this decision will have long term ramifications for the Canadian capital markets.

The Government has proven that they can not be trusted, investors can not be confident when they make a decision to invest in Canada that the rules will not be changed, even when the Government has stated emphatically that they would not make any changes. Capital will be very hesitant to flow into Canada and that will restrict economic growth over the longer term.

I believe that one of the over riding reasons for this change is the fear by the Federal Government that the Provincial Governments would end up with a larger share of the tax revenue if a large number of companies were to convert to a trust structure. This announcement is all about the fear of sharing power when power goes to the Government with the largest share of the tax pie.

The Government has just handed individual investors who are investing for income a 15% reduction in the value of their investments and a potential 50% reduction in their incomes. The tax grab by the Federal Government is an over reaction to the potential revenue loss due to conversions by corporations to trusts.

The smoke and mirrors of a change to the income splitting rules for those with pension income will not appease anyone who is seeing their income drop by as much as 50%.

The Government is likely to fall victim to the “law of unintended consciences” with the change on income splitting. I would be amazed if a tax lawyer and a constitutional lawyer do not get together and challenge this rule as unconstitutional on the basis of age discrimination (which it is). When they are successful then every married taxpayer will be able to file jointly and the Government will be in the position to see revenue drop dramatically as a result.

The political fall out will be dramatic as investors of all ages react with disgust to these changes, realizing that their standard of living will be effected and their plans forever changed and not for the better.

The conservative government has just assured itself of a defeat in the next election (and so they should) and will go down in history as one of the shortest terms in office. The reaction will be swift and severe the next time Canadians go to the polls, which is now likely sooner rather than later.

What a stupid move, you would think that with all the high priced help they have available Stephen Harper and Jim Flaherty would be able to make better long term decisions.


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