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Investing In Energy

07/15/08 09:55:52 AM
by Koos van der Merwe

With the price of oil reaching new highs, is investing in Energy Savings Income Fund the way to go?

Security:   SIF.UN.TO
Position:   Accumulate

Energy Savings Income Fund is an open-ended, limited purpose trust. Its business involves the sale of natural gas and electricity to residential and commercial customers under a long-term, irrevocable fixed-price contracts. The company is currently paying a dividend of Canadian $1.48 per share, up from C$1.07 per share in 2007. At the current price of $13.25 this is an 11% plus return.

What are the risks involved? The trust plans to convert away from its current income-trust business structure within the next two years in response to the federal government's proposed legislation to tax cash distributions of income trust. However, the company is exploring several options for a new structure remaining a high income yielding investment vehicle. Constant payment is assured because the company's revenue stream comes from existing customers and is guaranteed under fixed price contracts.

FIGURE 1: ENERGY SAVINGS INCOME FUND, DAILY. Note how the price dropped from $16.89 to $12.47 on the Halloween announcement.
Graphic provided by: AdvancedGET.
Figure 1 shows how the price has dropped from $16.89 to $12.47 on the Halloween announcement by Canadian Minister of Finance James Michael Flaherty, and this after the Prime Minister of Canada, Stephen Harper, made a preelection promise that income trusts would not be taxed. The moral of this story is not to trust politicians, especially when they make preelection promises.

Of course, the price rose to fill the gap, and by November 2007 it reached a high of $17.66, higher than its price of Halloween eve. Note how accurate the relative strength index (RSI) has been in calling price movement.

Figure 1 also shows a head & shoulder formation with a target price of $10.66, but support line A-B does suggest support at $12.64. This is confirmed by the RSI, which is close to being oversold.

In today's market, the yield paid by the Energy Savings Fund is very attractive. One should not forget, however, that although "energy" appears in the name, the company is not involved with oil, and therefore will not benefit by a rising oil price. However, the chart does look promising as a future speculative investment, with an pleasant yield as a perk. At around $12.64, the stock price could be an attractive short-term buy.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

Address: 3256 West 24th Ave
Vancouver, BC
Phone # for sales: 6042634214
E-mail address:

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