In a great deal of situations, you understand information that's being given only in hindsight. Many people forget this about stock prices. "It's the market makers!" "It's a pump-and-dump!"
Yeah, it's possible. But mostly, it's information that the market is giving to you. This goes doubly for consumer prices. Wonder why gas is at $2 a gallon? Supply and demand, with a big nod toward the fact that a Valero Energy
So the information transmitted in the rapid drop among Canadian oil and gas stocks, particularly the royalty trusts, in the last few weeks must mean something, right? Yes, perhaps. The important thing for investors to figure out is whether it means something rational, or if it is an overreaction. I vote for the latter.
The royalty trusts are prized by many investors for their income-generating capabilities -- they pay off upwards of 8% in dividends and capital returns each year, and they pay out monthly. So, what does the rapid 18% haircut in companies like Enerplus
Not really. There are some issues here, most notably interest rates and currency risk. The Canadian dollar, after a long climb against the U.S. bone, has shown some weakness as of late, thus lowering the value of the trusts' earnings to American investors. As importantly, a reduced exchange rate lowers the value of the shortest-term dividend streams. In addition, Canada recently lowered its funds rate, while it seems most likely that the next move in the U.S. will be to raise interest rates. In rising interest-rate environments, higher-yielding equities can become less attractive.
But all of this seems to me to be little more than a bit of baying at the moon. Oil and gas -- especially gas -- remain in high demand with incredibly strong pricing power. Market prognosticators are usually best served in their roles of making tea leaf readers look insightful, but given the recent reductions in proven reserves at Royal Dutch
Bill Mann owns none of the companies mentioned in this article.