2008 Investment Recommendations

BASIC POINTS INVESTMENT RECOMMENDATIONS with my comments in italics at the end of each point.

1. Remain heavily underweight banks, particularly investment banks that have displayed monumental stupidity. Do not assume that a change at the top will automatically convert them into temples of wisdom, (unless it is accompanied by demands for the departing to repay bonuses based on bets that turned out disastrously). Better to assume that, like subprime-based CDOs, there are layers of rot that can make the entire product dangerous to your financial health.

Stay away from Canadian Banks for now. Especially the CIBC.

2. Remain overweight Emerging Markets, emphasizing those that are oil, gas,and/or food exporters.

I do not like investing in emerging markets.

3. Soaring food costs threaten stability for some Third World economies. We have been ardently endorsing India since we returned from our leave of absence a year ago. We are now more cautious, because a weak monsoon could be politically and economically destabilizing at a time of $4 corn and $10 wheat.

Stay away from Indian stocks or ETFs for now.

4. Remain heavily overweight gold—both stocks and the ETF. Gold is almost as good a protection against banking problems as SKF—the UltraShort Financials ETF—a security which may not be a suitable investment in some portfolios.

SKF-N is interesting or you can try HFD-T in Canada.

5. We continue to believe that the Agricultural stocks are the pre-eminent investment class of our time. Farm incomes are rising rapidly, and, in the US, farms and farm land are the real estate assets that are rising in value and are virtually immune to foreclosures. That means the leading Ag companies have great pricing power and minimal credit problems. We now hear suggestions that because food inflation has finally made it to the cover of The Economist, it is time to start moving toward the exits. Not so: We think that fine cover story could be the atonement—At Last!—for
the magazine’s famous 1999 cover: $5 Oil.

Look at CVL.UN-X

6. Remain overweight oil and gas producers, including the Alberta oil sands producing companies. As disappointed as we are with the new royalty schemes in that province, Alberta certainly remains more attractive than Nigeria or Angola—and much more attractive than Russia, Kazakhstan, or Venezuela.

Recommend COS.UN or how about HTE.UN?

7. We think it is time to begin accumulating the refiners that are equipped to handle heavy high-sulfur crude. The collapse of the crack spread has savaged refiners’ earnings, but that will eventually rebound. The Saudis have virtually turned out the Light, and less and less of the oil that the Gulf states will be lifting will be of the most desirable grades.

This makes Harvest Energy HTE.UN very interesting

8. Retain the base metals stocks that have long-life unhedged reserves in secure areas. Even if there is a global recession caused by global collapses of subprime paper and LBO loans, it will not be deep enough to drive base metal prices back to 2004 levels—but would be worrisome enough to push further mine development even farther into the future.

Take a look at MMP.UN-T

9. When borrowing, borrow where possible in dollars. When investing, invest where possible in other currencies.

Good idea.

10. Stagflation is a bad backdrop for bonds—and for non-commodity stocks. The central bankers could have headed it off had Wall Street behaved with a modicum of morality, but the Fed and its brethren are forced into sustained reflation because of the global solvency crisis. Corporate earnings for most sectors will not meet current optimistic Street forecasts, and rising inflation will reduce the market’s P/E.

Stay away from market index funds for now.

Harvest Energy Trust Recommended at These Levels

Harvest Energy Trust: Kicking Out Healthy Distribution
by Peter Everds

Harvest Energy Trust (HTE) is a Canadian Royalty Trust with upstream and downstream operations.

As many of you may know, HTE cut their distribution recently and their units, which were trading at $28.96 in early November, got a big haircut and are now trading around $20. At current prices, the trust is yielding 17.5%.

Right now the market is not acknowledging the bottom line cash flow increases because of higher crude and NG pricing, not to mention the increase in the crack spread.

Even in Canadian dollar terms, the increases in natural gas [NG] and crude futures [CL] are significant. On November 20th, Don Vialoux estimated that the price of crude in Canadian dollars had gained roughly 28% from the low in August. He also estimated that natural gas in Canadian dollars had gained 46% from the beginning of September.

We have seen a number of Investment Banks, including Merrill Lynch (MER) and Goldman Sachs (GS), start to revise their CL price decks up in the last couple of weeks and this will help HTE's estimates. Moreover, the price decks are being upped by pretty hefty amounts. FBR (FBR) just upped their 2008 CL price $20, from $60 to $80 per barrel.

The kicker for HTE is the refinery. After 2 months of maintenance the refinery is running at full capacity. The 312 crack spread has been trending higher, more than doubling in the last 8 weeks. It has gone from a low of around $7 to the current price of $14.61 At one point this year the refinery was contributing roughly 55% of cash flow. The refinery will start contributing substantially to the bottom line as seasonal pressures lead to an increased crack spread.

We are starting to get seasonal upgrades in refiners: For instance: "Bank of America raises Refiners to Buy from Neutral; Raises 2008 refining margin outlook"; Valero Energy (VLO) raised to Buy from Neutral; Price Target raised to $80 from $68; Western Refining (WNR) raised to Buy from Neutral; Pri ce Target raised to $38 from $35

The 3Q payout ratio [POR] was 86%. Under the reduced distribution, the POR would have been roughly 70%. This is pretty reasonable considering how bad the quarter was. 4th quarter POR, with the refinery limited for 2 months, should still be in the 70s. In the "if everything goes swell category", 2008 2nd quarter POR could be in the 50s, compared to 2007's 2nd quarter POR of 63%.

Technically, HTE is at 3 year lows and the RSI and MACD are indicating HTE is oversold (surprise). There is a nice little gap in the 25.5 area. The chart is very similar to HTE's chart last year including the November gap down. Hopefully, the results will be the same with the strong rally though the first half of the year.

Insiders have bought 36,000 units since the mid-November announcement of the distribution cut. If you want a refiner that is kicking out a healthy distribution, Harvest might be worth taking a look a

Target Prices for Canadian Royalty Trusts

Please click here to download a spread sheet summary of Canadian Royalty Trust (affectionately known as Canroys) target prices by various Candadian Investment Houses as of September 28, 2007. Investors should use this information to determine good entry points into Canroy positions.

This spread sheet is courtesy of THOR on the Yahoo Canroy board.

Please note that this link will only be available until November 30, 2007.

Harvest Energy Trust Recommended by Change Wave

Change Wave investments has put out a buy recomendation on Harvest Energy Trust. Click the title of this post and it will take you to the video interview.

What is interesting here is that they believe some of the Canadian Energy Trusts will start converting to the US Master Limited Partnership (MLP) structure.

I have written about this in previous posts and I quoted from a research paper written by UBS.

I plan on sending out this report to my email subscribers some time next week. If you want a copy please sign up on our list at www.investingfforincome.com.

I will be following this issue closely over the coming months.

I am still hanging with my portfolio

I sold 10,000 SDT.UN and 2,000 HTE.UN during this last correction in order to raise cash.

I am hanging on right now because the valuations in the oil and gas sector is compelling.

I am considering loading up on natural gas Trusts because they are so beat up.

Added to my Top Pick Holdings

I have acquired more units of Harvest and Crescent Point Energy Trust last week. I am hoping for a pull back so I can acquire more units.

I also picked up 40,000 shares of Plexmar just for the fun of it.

Harvest Energy Trust Upgraded by Canaccord

Harvest Energy Trust (HTE.UN : TSX : $29.62) - Buy - Target: $31.00
Bruce McDonald
Comment: Raising target price due to rising refinery margins

Refinery crack spreads have been rising significantly due to recent refinery outages. Harvest generates approximately 35% of its EBITDA from the North Atlantic Refinery. We have increased our EBITDA estimate for North Atlantic from $319 million to $377 million. Under the NYMEX forward strip, we now forecast 2007E cash flow of $7.37 per unit, representing a payout ratio of 62%, and a debt to cash flow ratio of 2.2 times.

Based on a conservative multiple of 5.0 times EV/EBITDA, we estimate the value of North Atlantic at $1.9 billion. The upstream business is trading at 5.8 times 2007E EV/EBITDA under the forward strip, compared with an average of 6.6 times for average large cap royalty trusts.

We maintain our BUY recommendation and have raised our 12-month target price from 29.00 to $31.00 due to higher refinery cash flow estimates. Our target price is based on a 2007E EV/EBITDA multiple of 5.0 times for the refinery business and a 6.0 times 2007E EV/EBITDA for the upstream business under the forward strip. Our upstream target multiple is a discount to the 6.9 times average target multiple for large cap royalty trusts, given Harvest's shorter upstream asset RLI.

Bought More Harvest & Crescent Point Today

Today I bought 2,000 units of Crescent Point (CPG.UN-T) and Harvest Energy Trust (HTE.UN).

I also bought 1,000 units of Vermillion Energy Trust (VET.UN-T) too.



Disclaimer;

We are not investment professionals. We often post our own opinions and identify them as such, we reserve the right to change our opinions. The fact that we sometimes disclose when we establish or sell a position in a company is no warrantee that we will publish every trade. We do not warrant that any information that we post is true beyond the fact that it came from whatever source we acknowledge. We may at anytime have or not have an interest in a stock that we discuss. Finally we advise every investor to perform their own due diligence on both the investment products they purchase as well as the people whose opinions or decisions they accept about investing.

Bought 1,000 Units of Harvest Energy Trust today

Today I added to my position of Harvest Energy Trust.

After the market close they annouced that they are maintaining their $0.38 per month distribution. This is one well managed trust.

Harvest & Crescent Point Energy Trusts Have High DRIP Participation

I was reading an RBC report today and noticed that Harvest and Crescent Point Energy Trusts have the highest DRIP (Dividend Re-Investment Plan) participation rate of the Oil and Gas Trusts.

Crescent Point has 30% of their dividends re-invested and Harvest Energy has 43% of their distribution re-invested.

This tells me that the shareholders have long term confidence in the management of these two trusts.

This is another reason why both of these trusts are my top picks.

Bought 1,000 Units of Harvest Energy Trust Today

I bought 1,000 units of Harvest Energy Trust today in my RRSP account. Harvest yields almost 17% and since the distribution is most likely 100% taxable I have decided to let the distributions compound tax free in my RRSP until 2011.

Oil Storage Down More Than OPEC Cuts

This is an interesting post from an participant in an Investor Village Message Board

If this analysis proves correct then I would definitely hold on to my "oily" income trusts such as Harvest and Crescent Point.

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According to March 13, 2007 Wall Street Journal the size of the drop in Oil storage levels have been:

1) IEA - Q4 93 million drop
2) EIA - 100 million in US since Oct
3) CGES - 160 million drop world in 6 months

It looks like all the estimates agree with each other, and in 6 months we fell 160 million.

How much of OPEC cuts made up that drop?

It takes 6 weeks for a drop in production to reach the market, so in the 10 weeks of 2007, only 4 weeks worth of cuts at 1 million a day are in the data. At 1 milion a day of lower production that will be about 30 million reduction reaching the market.

The other 6 weeks of 2007 had cuts from the end of 2006 and were at .5 million a day, so add another 20 million.

In 2006 we then had 3 months at much less than .5 average, but I will use .5 for this analysis, or 45 million.

Total OPEC cuts reaching the market are at best 95 million barrels (I suspect I am 20 million too high), while world inventories during this time dropped by 160 million.

If OPEC had been pumping at their max rate, world inventories would have dropped by 65 million barrels over the last 6 months.

What this says is that this winter world oil demand was higher than max world oil production capacity for the first time ever!

For 2007, world oil demand is projected to be up by around 1.5 million barrels a day, while production growth appears after depletion to be having a problem to grow.

OPEC has engineered a drop in stroage level such that going into 2007 Q3 this year without a storage cussion. With growth in overall demand, and cycle demand coming in during Q3/Q4, the swing in demand could be 3 to 4 million a day by Q4.

With 1 million of spare capacity, and questionable net growth in production, next fall will be interesting.

Market Crash?

I don't have a clue if this is the begining of a major correction. All I know is that companies that pay good dividends will get hurt the least. The reason is that those that own income producing assets are less inclined to sell them and loose the cash flow.

However, I took a big hit today as my total portfolio dropped $40,000 in value.

This is hard to take but if you pick up your ball and go home you will miss those days when ones portfolio rises.

I am hanging in for now.

I was hoping that Harvest Energy would have dropped further today as its my next acquisition target. I guess I am not the only one looking to buy Harvest.

Harvest Energy Trust has Outperform Rating from Royal Bank Financial

On Febraury 20, 2007 Royal Bank Financial placed an outperform rating on Harvest Energy Trust (HTE.UN-T). They now have a $28 target price.

What makes this rating interesting is that RBC Financial has the lowest ratings and target prices on all the Canadian Energy Trusts. They are very conservative on their assumptions.

They have done a detailed analysis of their refinery operation at Come-By-Chance Newfoundland.

Harvest presently pays $0.38 per month distribution which annualizes to a 16.3% yield at the $28 target price.

On my previous post I forecasted a distribution cut. However, their last press release indicated that their 2006 distributions were 100% taxable. This is interesting because for the next 4 years Harvest must payout 100% of their taxable income or they will attract the full corporate tax rate on any taxable retained earnings. Therefore, they may not cut their distribution that much in 2007.

You can read RBC's report by following the link provided.

Please perform your own due diligence.

Keep an Eye on Harvest Energy Trust HTE.UN-TSX

I have a special place in my heart for Oil and Gas trusts because of their juicy yields. Plus I feel it's a great way to play the increasing tightness of oil and gas supply. I like buying a business that produces a product that China wants.

Plus I get paid to wait for the fundamentals of peak oil to kick in.

I plan to add to my position in Harvest Energy Trust. I think we will see the low for Harvest at the begining of the oil and gas shoulder season which starts in March. I will probably add to my position then.

I have been concentrating on Harvest because I see it has unrecognized value in the trust sector because of its recent purchase of the Come-by-Chance refinery in Newfoundland. Most analysts will not take a chance on valuation metrics until they see a full quarter of revenues from the refinery.

This oil & gas trust is the closest thing to an integrated oil company we will ever see in the trust sector. It is yielding a wopping 17.3%.

I think there is a chance that they might cut their distribution and when they do I will be buying on the dip.