| Trade friction and energy leverage has led to an | | | | were also weakened earlier this year when Canada |
| unprecedented Canadian policy of "speak loudly and | | | | announced that it would not contribute to the |
| carry a big piece of lumber" policy towards the | | | | American-led missile defense program even though |
| United States. | | | | 90% of Canadian citizens live within 100 mile of the |
| The long running dispute over American tariffs on | | | | border between the two countries and Americans |
| Canadian lumber escalated to the point last week | | | | purchase 85% of total Canadian exports. |
| that Canadian Prime Minister Paul Martin indirectly | | | | What's going on? Part of the answer is that the vast |
| linked settlement with continued U.S. access to | | | | majority of Canadians oppose the policies of the |
| Canadian energy supplies. Meanwhile, Canadian Natural | | | | Bush Administration. The issue is sensitive in many |
| Resources Minister John McCallum was off to China | | | | areas across Canada that are highly dependent on |
| to meet with Chinese oil, mining and forestry officials. | | | | the lumber industry and Mr. Martin and his party are |
| This is serious business. Part of the 1994 NAFTA | | | | preparing for national elections expected early next |
| Free Trade Agreement guaranteed that Canada | | | | year. It is always a vote getter to poke a stick in |
| would remain the favored supplier to the U.S. It might | | | | the eye of the elephant to the south. |
| surprise you to learn that Canada supplies 17% of | | | | How to Play |
| U.S. oil imports, 16% of our natural gas and nearly all | | | | While Canadian-American relations have seen better |
| of our hydroelectric power. The Canadian | | | | days, the energy boom has certainly been beneficial |
| government owns the vast majority of the country's | | | | to investors in Canadian markets. The Canada iShare |
| energy resources and Canada exports more than 1.5 | | | | (EWC) tracks the MSCI Canada Index that has 40% |
| million barrels a day to America representing 8% of | | | | exposure to Canada's energy and materials sector. |
| U.S. consumption. | | | | While the S&P index is up only 3%, the Canada |
| China's Lengthening Reach | | | | iShare is up 16.6% year to date and 28.8% over the |
| Meanwhile, China's aggressive moves in Canada's | | | | past twelve months. |
| energy sector are raising eyebrows in Washington. | | | | Speaking of timber, it is smart to have some timber |
| Chinese government has earmarked $100 billion for | | | | exposure in your portfolio and I have had timber |
| overseas acquisitions of oil and gas. The Chinese are | | | | REIT Plum Creek Timber (PCL) in our core portfolio |
| going on a buying spree investing in Canadian energy | | | | for over two years. Here is why I like it. First, timber |
| companies and recently plunked down $2 billion to | | | | is a great inflation hedge and over the past 100 |
| build a thousand mile pipeline from Alberta tar sands | | | | years has risen 3% above the average annual |
| to port on the west coast and onward to Beijing and | | | | inflation rate. Secondly, timber is not correlated to |
| Shanghai. While the oil reserve numbers for Saudi | | | | stocks or bonds and thus is a great "shock absorber" |
| Arabia are under scrutiny, Canada has recoverable | | | | to cushion your portfolio when shares are declining. |
| reserves of roughly 175 million barrels. Much of it is in | | | | During the 1970s bear market, timber rose in value |
| oil sand that is processed profitably at oil prices of | | | | while stocks went down. Thirdly, from 1973-2000 |
| $20 or higher and T. Boone Pickens thinks that | | | | timber yielded an average annual return of 15%. Last |
| Canada's oil sand production could reach 6 million | | | | but not least, timber valuations are attractive after |
| barrels a day | | | | some declines during 2000-2002 especially relative to |
| There are now about 1 million ethnic Chinese residing | | | | real estate prices. During 2004 Plum Creek was up |
| in Canada and China is now Canada's second largest | | | | 23% and this year it has traded between $34 and |
| trading partner. Last month, Chinese President Hu | | | | $39 finishing last week just over $35 with an |
| Jintao visited Canada and declared that the two | | | | attractive dividend yield of 4.3%. |
| countries had upgraded their relations to a "strategic | | | | It behooves the U.S. to negotiate a settlement to |
| partnership". | | | | the lumber dispute as soon as possible and lock up |
| The US's Waning Grasp | | | | Canadian energy sources before the Chinese get the |
| This Chinese-Canadian power play puts America in | | | | jump on us. Investors can't do much about improving |
| real jam. You could write a book about the long | | | | Canadian-American relations but they can improve |
| simmering lumber dispute but a Nafta panel recently | | | | their portfolios by adding exposure to timber as well |
| ordered the U.S. to return $5 billion of collected tariffs | | | | as to Canada as both an energy and China play. |
| to Canadian lumber companies. Relations with Canada | | | | |