Blame Canada

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/05/2013

Cockeysville, Maryland

* * * For all of the folks who’ve suggested a little humility would be a nice addition to my character, don’t miss my story of yesterday’s golf-cart accident (below). Also, please note, I’m traveling all morning tomorrow to give a presentation at a conference in Delray Beach, Florida. So, look for the next Digest on Friday.

* * * "Porter! Look out!" Mike Palmer, my friend and colleague, yelled a second too late…

It was the most beautiful day of the entire fall – 75 degrees, not a cloud in the sky. We’d taken off from work early to play a round of golf at my club. We both hit perfect shots off the first tee box. Back in the cart, I’d cracked open a beer and set off down the fairway. Just as I was reaching to put my Miller Light back into the golf cart’s cup holder, I heard Mike yell.

WHAM!

We hit the curb with the cart’s right front tire. And, instead of bouncing off harmlessly, the tire caught, turned 90 degrees to the right, and yanked us sideways with surprising force. The entire cart jumped over the curb. All of this happened in about a third of a second.

I saw what was coming and immediately bailed out of the cart, jumping out to the left. Mike stayed with the ship, trying to save her. He should have saved his wallet instead. You see, where we jumped the curb, there wasn’t more than three feet of grass on the other side. And it was sloped steeply downhill... into a lake.

Splash!

The front of the golf cart hit the water. The rear wheels spun helplessly in the air. Mike rolled out the passenger side, covered up to his waist in black, muddy water. He also left his wallet at the bottom of the lake. And then, like a miniature, bourgeois Titanic, the cart slipped silently down into the muck- and leaf-filled pond. By the time the greens keepers had organized a rescue mission, not even the white top was visible on the surface.

* * * What do you say to the golf pro when you've wrecked a new cart into the pond? I said, "Sorry about that... I just tripped over the curb there... and the next thing you know, we were in the pond." He said, "No problem. Hope you’ve got an extra five grand laying around."

* * * Helping to ease my bruised ego, the notes from our readers yesterday bordered on friendly.

From Alliance member and longtime subscriber Ed Parker: "I’ve been reading the recent Digests, and I’m amused by the bi-polar distribution of sentiment. The single most important factor in my sticking with you is that you have always come across in your investment letters and extra-curricular writings as ‘real folks,’ people I would like to meet and most probably enjoy talking to… I am very glad that I took the plunge to become an Alliance member. It is one purchase that I've never regretted."

* * * Paid-up subscriber Ken McGaha is more… mercantile… in his assessment: "I enjoy the personal touch to your correspondence, as long as you continue to put cash in my pocket. Thanks for the profits!"

* * * Finally… some very happy news. We’ve help to create another millionaire – Robert Troyer. "I have passed the one million dollar mark in my portfolio and I give most of the credit to joining the Alliance. Keep up the outstanding work and I am already looking forward to the Alliance meeting next year."

* * * If you’ve got a better golf-cart story… any good riddles… or something you’ve just got to get off your chest, drop us a line. We will read whatever you send us: feedback@stansberryresearch.com.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Now… on to the train wreck in the markets today. Canada is moving to close the tax loophole for trusts!

American retirees had been making a killing buying Canadian income trusts, which distribute 90% of their earnings in dividends and pay essentially no taxes. The number of trusts tripled and their combined market value had soared 20-fold in six years, making the sector one of the best performing in the world. But like everything else in life, if it’s too good to be true… the government is sure to step in and take it away.

Canada’s Finance Minister Jim Flaherty announced that his Conservative party would attempt to pass legislation requiring that all companies applying for trust status pay the regular 31% corporate income tax. As a result, these firms will drop their applications. Companies with trust status now would maintain their tax-favored status for four years, until 2011.

We should have known. In the last election (January 2006), Flaherty’s Conservative party campaigned behind a promise to leave the trust laws unchanged. But now, Flaherty says too many companies applying to become trusts are "unsuitable" for the tax-advantaged structure. I’ll translate that for you. Both of Canada’s big telecom companies, Telus and BCE, recently applied to become trusts. If allowed, the change in corporate structure would have cost the government C$800 million per year. Just replace "unsuitable" with "untaxable" and you’ll have a clear understanding of what’s going on.

These Canadian political games hurt some of our recommended Canadian trusts, most of which were down by double digits this morning:

Enerplus Resources (ERF) down 14%

Penn West Energy Trust (PWE) down 12.15%

Provident Energy Trust (PVX) down 9.71%

A&W Royalties Income Fund (AW-UN.TO) down 14.80%

Boston Pizza Royalties Inc. (BPF-UN.TO) down 18.24%

TimberWest (TWF-UN.TO) down 7.20%

Harvest Energy Trust (HTE) down 14.51%

Fording Coal Trust (FDG) down 9.72%

Westshore (WTE-UN.TO) down 6.98%

What should you do if you own one of these royalty trusts? Steve Sjuggerud says to sell now, then wait to see what happens.

What do I think you should do? Unlike Steve, I think you should sit tight. I’d be surprised if the government shuts down the entire income-trust sector of its capital market. At the same time, the government can’t afford for every company in Canada to become a tax-exempt trust. The best compromise is one the Liberals suggested in the last elections: Suspend the creation of any additional trusts. I bet this idea is relaunched as a compromise position. And if that happens… today’s share prices will seem very attractive. That’s why I think it’s smart to hold, for now.

But… Steve is definitely the expert in this field, not me. If you’re going to sell, a good strategy would be to trade into high-quality Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs). These corporate entities don’t pay any taxes. They are typically high yielding because they must pay out 90% of their earnings to shareholders. Dan Ferris covers the REIT sector for us… two of his favorite REITs still are trading below his recommended "buy up to" price. Graham Summers profiled the best MLP in the United States back in 2004, before it closed on a big acquisition. As soon as the merger closed, the insiders started buying again – the chairman recently bought more than $50 million of stock on the open market. We think it’s still a great buy… and it’s yielding 6.7%. We’ve put up special links to all three recommendations on the Extreme Value website. We’re calling this select group of tax-advantaged American companies the "Canadian Income Trust Replacement Portfolio." If you’re trading out of your Canadian income trusts, these three picks are our best income ideas right now. If you’re not reading Extreme Value, you’re missing out on our safest, highest-returning newsletter.

Good investing,

Porter Stansberry

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