Following Canada's Lead
04/27/2010 1:00 pm EST
Mark Skousen, editor of Forecasts and Strategies, says the Canadian economy is on a roll, and so is the loonie, and he finds a stock that’s a play on both.
Last month, when I spoke at the Vancouver MoneyShow, I felt a positive change in attitude as soon as I crossed the border. While there seems to be universal pessimism about the future of the United States, Canadians are upbeat, and not just because they won the gold medal in Olympic hockey.
Unlike the United States, Canada has its act together. Its major banks did not fail during the financial crisis of 2008, and the Canadian dollar now is selling again at a par against the buck.
Yes, Canada had its own stimulus package and is running federal deficits, but among industrial nations, Canada has one of the lowest debt ratios to [gross domestic product].
The Heritage Economic Freedom Index for 2010 gave this report on Canada: “Elaborate social and welfare state programs swell overall government expenditures. Government spending also has increased slightly due to implementation of a significant stimulus package. However, good fiscal management and federal budget surpluses have enabled the economy to undertake stimulus measures without undermining fiscal soundness and long-term economic competitiveness.”
Michael Walker, founder of the influential free-market think tank, the Fraser Institute, in Vancouver, told me that in 1994, Canada faced a major financial crisis similar to the one we are facing today. Canada was running huge deficits, inflation and government spending were getting out of control, and the Canadian dollar was falling rapidly. The Fraser Institute held a major conference on the Canadian fiscal crisis, highlighted by a talk by John Fund, editorial writer for The Wall Street Journal.
He followed up with an editorial in the Journal on the “Canadian peso,” and the Canadian dollar fell three and a half cents in one day. The collapse of the “loonie” caught the attention of the prime minister and other government officials, and they decided to act. “Enough is enough,” he said.
During the next few years, they cut the deficit and the size of government from 53% of GDP to today’s 40%. Now, Heritage’s Economic Freedom Index shows Canada ahead of the United States. And while I was there, the loonie hit parity with the US dollar.
We are profiting from Canada’s success story by investing in Enerplus Resources (NYSE: ERF) to take advantage of Canada’s stable policies, and from higher oil prices (now more than $80 a barrel). The well-run Canadian oil and gas trust rose last month, benefiting from a rising Canadian dollar and higher oil prices.
Enerplus maintains about 12 years of reserves, debt is modest, and it has a payout ratio of 61% from earnings (thus making its 18 cents per month payout sustainable). It has accumulated enough tax credits and deductions to offset all tax liability for the next three years. (ERF closed below $25 Monday and yielded 8.8%—Editor.)