Sell Encana Corporation

I attended the Encana AGM a few weeks ago. I have attended the Encana AGMs the last couple of years and my first impression is that they have made it very difficult to attend their AGMs with security screening exceeding any other company AGMs I have attended.

They also schedule the AGM at the exact same time and date as Cenovus which made it difficult as a shareholder to attend - most shareholders owns shares of both Encana and Cenovus since the split and the Encana AGM was not well attended by shareholders.

On September 10, 2009, Encana reignited plans to proceed with the split of the corporation into two independent energy companies. An integrated oil company Cenovus Energy was created, which split off EnCana's oil sands and downstream assets. Post its corporate split, Encana's estimated upstream production is roughly 100% natural gas focused - a very bad move with gas prices below $2!

 

In my view with the lack of any concrete plan, Encana’s success with material liquids growth is not optional given its dry gas weighting, time is not a luxury the company can necessarily afford for gas prices to recover. Encana may need to consider an oil or liquids weighted acquisition that would augment its organic prospects with a more immediate and concentrated development fairway which plays to its execution strength. My rating is a Sell!

 

The Future of Investing: Alternative Hedging Investing!

Driving the change and demand for accessible alternative investments was the 2008 market crash and the three years of ensuing volatility. It became obvious that relying solely on the wait-for-growth approach, also known as a long-only approach, was a mistake. Even with a well-rounded stock portfolio, analysts realized long-only investing placed investors’ wealth at too much risk.

Today, while the market volatility is not near the levels of 2008/2009, returns remain depressed and alternative investments provide a new vehicle for higher returns not tied to traditional equity markets.

Do You Need A Covered Call ETF?

Investors are taking a renewed interest in a strategy abandoned during the recent recovery; the covered call. A covered call consists of going long on an underlying security while selling call options on the same underlying security. This has the effect of generating additional income (the premiums received from selling options), which helps to offset some losses when markets are falling. When markets are rising, however, the call options sold can come “in-the-money,” offsetting gains generated by the long position in the underlying security. ETFs employing the covered call strategy have lagged behind traditional beta funds as markets headed higher, but have sharply outperformed the broad market during the recent period volatility and declining equity prices. 

Covered call strategies can also pair a long position with a short call option on the same security. The combination of the two positions can often result in higher returns and lower volatility than the underlying index itself.

Bearish about market prospects for 2012

Welcome to my last post of 2011.  Unhealthy global government balance sheets and structural economic problems as a result of years of excess and financial engineering have created a dangerous negative feedback loop in 2011 which I expect to cause recessions around the globe in 2012. This December post outlines this negative feedback loop and explains why I expect a difficult market environment in 2012.

In summary global governments are carrying more debt than ever and raising question as to whether or not a second — and perhaps even more dangerous credit crisis — is inevitable. The clock is ticking and every second, the world takes on more debt. In 2001, global government debt totaled $18.2 trillion. Fast-forward a decade, and the figure now totals nearly $44 trillion, an increase of 140 percent (more than 9.0% a year).
According to The Economist, global sovereign debt is forecasted to grow an additional 7% in 2012 reaching a historical high of $47 trillion

One of the problems with economic crises is that mainstream economists and financial experts
don’t see them coming. That’s exactly what happened in the fall of 2008, when the financial crisis kicked off in the United States. Since that time, governments have continued to spend, all while production has slowed and unemployment has skyrocketed. As we enter the fourth year of the post-crisis environment, there is no sign of growth that is impressive enough to get us out of the negative feedback loop in which governments have continued to operate. A negative feedback loop takes hold when massive government debt loads, a weakening financial system and a slowing economy feed off each other, interrupted by Federal Reserve and other central bank reflationary attempts. The result of this rising debt means more government interference, a further slowdown in the already debilitated economic environment and the possibility of further citizen uprisings in some countries.

As noted, I am very bearish about market prospects for 2012 and I will be adding more non correlated alternative investments to my portfolio.  See my next post The Future of Investing: Alternative Hedging Investing!

TransAlta still Underperforming!

Although 2011Q3/11 results seem decent, the numbers was driven by earnings from energy trading, rather than the company’s core business of electricity production.  In addition, during a conference call TransAlta noted that maintenance costs are likely to increase in 2012E, as the company positions its fleet for the eventual retirement of its legacy coal fired assets. Continuing a trend that began at the 2010 Investor Day, TransAlta is now providing cash flow guidance rather than EPS guidanceand now also appear to be focused on cash flow as opposed to

earnings growth targets.

Also TransAlta did not provide an update on the pending arbitration regarding its decision to remove the Sundance 1 and 2 units from service. At current levels, the shares are fully valued and my rating is Underperform.

Annaly Capital one of the best risk/return plays in the financial sector.!

Annaly Capital has performed remarkably well through the entire financial crisis of the last several years and has consistently paid quarterly dividends yielding above 15% per annum!

During last week U.S debt crisis I added to my holdings in NLY!

Annaly (NYSE: NLY) manages real estate related investment securities:

• mortgage pass-through certificates
• collateralized mortgage obligations
• agency callable debentures
• other interest earning securities backed by mortgage loans

NLY Principal business objective is todistribute income to stockholders from earnings on real estate securities. NLY is taxed as a real estate investment trust (REIT), so has no federal income tax on taxable income that is distributed to stockholders.

NLY should continue to perform well in a low interest rate, low inflation environment.

My Conclusion

•Very low probability of the Fed raising short-term rates
•The gov’t will do everything in their power to prevent another meltdown of MBS market-> good for NLY’s portfolio
•Very high dividends with low interest rate risk

NLY remains one of our favorite risk/return stories for 2011 - particularly given recent macroeconomic
weakness. Shares are attractively valued at 1.05x current book value, relative to the forward dividend yield of roughly 16% we expect in the year ahead.

Proposed changes related to the taxation of SIFTs and REITs.

This follows on the heels of announced changes only 7 months ago and continues along in a series that first began with the Oct-31-06 "Halloween Surprise".

Interest And Rent Paid Within A Stapled Structure Will No Longer Be Deductible For Tax Purposes – Broadly speaking, a stapled security involves two separate securities that are “stapled” together such that the securities are not freely transferable (tradable) independent of each other. Stapled structures in-place on or before July 19, 2011 will have a one-year transition period to July 19, 2012 before the amendments apply. During this transitory period, interest and rent payments between legal entities within the stapled structure will continue to be deductible expenses.

The proposals include changes in respect of:

· publicly-traded stapled securities of SIFTs, REITs and corporations;

· excluded subsidiary entities under the SIFT regime;

· non-portfolio property of a corporation under the SIFT regime; and,

· tax installments for SIFTs.

Depending upon the circumstances, eliminating these deductions could materially increase taxable income and cash taxes payable, thus diminishing the tax efficiency of the entire stapled structure.

For example , InnVest REIT is likely to face a growing cash tax expense, beginning in Q3/12. I expect the rate of growth in cash taxes to outstrip the rate of pre- and post-tax AFFO for a number of consecutive years. In the near-to-medium term, the effective cash tax rate (measured as a percentage of pre-tax AFFO) appears unlikely to exceed 20%, although over the long-term, I believe it could break above this level.

Time to Sell Cineplex Inc. (CGX-T)

Cineplex Inc. (CGX-T) has had a good run for me (up over 60% in two years) and now I believe it is due for a correction!

Despite hits such as The Hangover Part II and Kung Fu Panda 2, second-quarter industry box office sales fell short of high expectations. As a result, I am scaling back my financial forecasts for Cineplex Inc.

I purchased the stock when it's dividend yield was close to 8% - currently it is paying 5%. While Cineplex remains good core media holding for investors, other companies with higher yields serve up a better bang for a investor's buck.

Canadian industry box office for the final week of Q2/11 was released. The reported YoY increase for Q2/11 was +1.7%, which compares to revised Q2/11 box office revenue estimate for Cineplex of +2.1% on a “same-store” basis, or +3.1% on a total basis. Despite the modest YoY increase, industry box office performance in Q2/11 was disappointing considering high initial expectations for a more meaningful YoY increase, perhaps in the “low-teens”. Exhibit 1 provides a summary of weekly Canadian industry box office for Q2/11 as well as recent YoY quarterly box office trends for Canada and the “same-store” box office growth and “same-store” forecast for Cineplex through 2012E.

I see better returns elsewhere in the other sectors because;

 (i) relative returns within the coverage universe; is  at 9.1x FTM EV/EBITDA, a valuation premium to the U.S. peers that is at the high end of the historical range;

(ii) little room for further box office disappointment in H2/11 at current valuation levels; and

(iii) potential negative news flow related to premium VOD.