PLP December Update

Investing in Canada

Canada is of particular to beginning U.S. investors because of the fall in value in U.S. dollar and the rise in the Canadian dollar.  This is important because if any investment you made in Canadian stocks over the past 3 years that did not move in price at all still produced a 30% profit because of the fall in the U.S. dollar.  Additionally the Canadian dollar is expected to continue its rise in the upcoming years.

The climb in the Canadian dollar will continue because of two main factors.  The first and foremost is the global demand for raw materials that are sometimes called commodities.  Canada has a tremendous wealth of commodities including oil sands, minerals and wood products.  The world population of about 6 billion people shows no signs of slowing down in its growth or its demands for a better life.  For beginning investors time spent researching companies north of the U.S. border would be well spent.

The other factor is Canada’s low inflation rate of 0.9%.  This protects the value of a currency because the demand for dollars is kept in check.  The government is also making progress on the national debt.  Unlike the U.S. their debt is going down which relieves the burden on the children and grandchildren of their citizens.

This month I have included two articles from Investors Daily Edge from Fourth Avenue Financial.  Other articles from this source will be included for beginning investors at www.PlainLanguagePlace.com in the coming weeks.

O Canada!

By Dr. Russell McDougal

When many investors think of Canada, the first thing that comes to mind is the abundance of natural resources. Canada has natural resources like Florida has grains of sand and Texas has oil. It’s no surprise that the Canadian economy is largely resource based.

Canada has developed and nurtured an entire exploration and production infrastructure over the centuries. They have schools, institutions, markets and vast financial resources all dedicated to take advantage of their resource heritage. It is nothing short of phenomenal. What you may be surprised to learn is that they have taken this resource expertise to a global level.

Our northern neighbors haven’t been content to stay home and ply their trades only in their own country. They are more adventuresome than that. “Canadian know-how” has left few areas of the earth unexplored. They search for silver in Mexico and South America, gold in China, platinum in South Africa, diamonds in Namibia, oil in Indonesia, Iron in Sweden… well, you get the picture.

These guys are beyond good! Quite frankly, the Canadians are the world’s experts in the field of resource exploration and your opportunity lies alongside theirs.

The global economy is expanding rapidly and putting strains on most commodity supplies. Get used to it. Trees don’t grow to the sky, but they certainly can grow very big (check out the Redwoods of Western Canada). As an intelligent investor, you will want to have exposure to this secular bull market trend over the coming years.

If you want leveraged speculation in exploration you will want to delve into the arena of Canadian micro-cap companies. You may be surprised to learn that it is the talented, mobile and efficient junior mining companies that make the most resource discoveries, not the majors like Newmont or Barrick that most people are more familiar with.

You needn’t look for these companies on the NYSE because they’re not there. Their home typically starts out on the Toronto Venture Exchange or the Toronto Exchange itself. As success comes their way they will seek listings on the NASDAQ Pink Sheets, the NASDAQ or the American Exchange.

The goal is to invest in the most promising companies when they are quite small. A trusted source long ago said, ”Give some money to good people and very often they will discover something.” This sounds simple but it is actually quite profound. You stack the deck in your favor when you can tap into the talent pool of ‘good people’. That’s the key, not the size of the company.

Don’t make the mistake of thinking relative smallness in a company is a bad thing. There are innumerable thriving businesses with world class expertise that are too small for the big funds or institutional investors to get involved with. These are the companies with the potential to multiply in price once they start plying their trade and have exploration success. Of course, that’s the point when we’ll gladly sell shares to the ‘big boys’.

There is another reason for buying Canadian: dollar diversification. No matter how widely diversified your investments are in different sectors of the economy, you are not truly diversified if everything you own is based on the US dollar. Please don’t learn this lesson the hard way over the next 5 to 10 years.

Canadian stocks that were purchased in 2003 were bought with an exchange rate of 69 cents US for each Canadian dollar (called the ‘loonie’). Presently, it takes 90 cents US to purchase one Canadian Dollar. In other words, even if your investments were flat during this period you would have still made around 30% in three years on currency appreciation alone. Not bad considering that would not have been the primary reason for buying the stocks.

I am convinced that the US Dollar has trouble baked deeply into its cake. On the other hand, countries with treasure troves of natural resources ordinarily experience currency appreciation during commodity bull markets. I believe the dollar and the loonie will likely see parity before tool long. And considering the commodities supercycle we are currently in, I suggest the bull market in Canadian dollars still has many years to run.

You might be surprised how easy it is to set up a brokerage account that can efficiently buy Canadian stocks. I receive no consideration whatsoever for these recommendations, but I did want to pass along three brokerages that I have found to be exemplary:

1. Global Resource Investments 800-477-7853. (Full service brokerage house specializing in resources. Ask for Luke Smith or Ben Miller).

2. Charles Schwab & Co. 800-435-4000 (They have an efficient international investing department).

3. Pennaluna & Co. 800-535-5329 (Long established discount brokerage out of Idaho, with a special place in their hearts for mining stocks).

The bottom line... If you want to speculate in resource exploration, Canada is truly a speculators paradise.

Good Investing,

Rusty

Canada's Cool $100 Billion Market

By Andrew Gordon

The world’s fastest-growing oil boomtown is no longer Riyadh or Moscow. It’s the Canadian town of Calgary, Alberta. That’s where Canada’s biggest reserves of oil are – the Athabasca Oil Sands.

And what’s going on there now will determine how much and how expensive the gas and oil we consume for the next century will be.

At a 20% recovery rate, the Athabasca deposits weigh in at 35 million barrels – the second biggest reserves in the world, behind Saudi Arabia.

But 60% of these deposits are easily recoverable, using the new steam-assisted gravity drainage method of extracting bitumen from sand and clay. At a 60% recovery rate, this translates to 100 million barrels of oil. The Saudi fields don’t come close to this number.

At projected 2010 production levels (assuming 60% recovery), the oil from these sands should last…oh, only about 150 years.

The Athabasca field is the biggest thing to happen to global oil production since natural gas blow-offs began to be systematically captured in oil fields more than two decades ago.

Suncor, Syncrude and Shell produce most of the 760,000 barrels per day coming from the oil sands. But other oil companies are rushing to the region. It is projected that oil output will reach 2 million barrels per day by 2010… 3-4 million barrels by 2015… and 4-5 million barrels by 2020.

Apart from oil majors like Chevron, Petro-Canada and BP, Asian energy companies are also flocking to Athabasca in search of oil to feed their fast-growing home markets.  Korea National Oil, China Petroleum & Chemical Corp. (Sinopec) and China National Offshore Oil Corp. all have stakes at Athabasca.

The attraction of Athabasca is of course all about soaring oil prices. It costs $36 to $40 to extract the crude bitumen (a semi-solid form of crude oil) from the sands and then convert it to synthetic crude oil. With oil prices hovering around $70, that leaves plenty of profit on the table.

If crude should fall to $50, it’s still a profitable play for the oil companies.

Below $50? That’s bust territory – something the folks in Alberta have unpleasant memories of.

It happened in 1981. The big oil boom of the late 1970s suddenly went south – thanks to the Canadian government. It had just initiated a national energy policy that kept the price of oil in Canada below world market rates in an effort to promote self-sufficiency.

This time around I don’t believe a bust is in the cards.

The demand for petroleum and petro-products is much more stable now and not prone to dropping – despite what the economy does or what the US or Canadian government says.

Oil demand in North America is expected to increase by about 11 million barrels a year. That equates to a steady 1.5% pace.

So how should you invest in the hundreds of billions of dollars in oil revenues that will be coming out of Athabasca in the years ahead?

You could invest in one of the dozens of companies that are now planning nearly 100 oil sands mines (and in-situ projects) in Canada. But of course, there are bound to be winners and losers at Athabasca, no matter how good it looks.

Just consider the American gold rush in the 1800s. Not every gold prospector got rich... not by a long shot. But you can bet that the saloon keepers, the merchants who sold picks and shovels, and the company that made dungarees (does Levi’s ring a bell?) made out just fine.

Along these same lines, I have a better play on the Athabasca Oil Sands that can help you avoid the risk of picking a loser. Why not invest in the equipment suppliers to these companies?

After all, they’ll be spending a cool $100 billion at Athabasca over the next few years. And that’s the one bet you can bank on at Athabasca.

I’ve already written extensively in my newsletter, The Wealth Advantage about the single most important equipment supplier for the future development of the Athabasca oil sands deposits.

Good Investing,

 Andrew M. Gordon

Visit www.investorsdailyedge.com for further info on various subjects valuable to the beginning investor.

Thank You for your interest

Ken Mueller