Trend profile: Atlantic Power Corp.

Trend: Capital markets are an unwieldy, complex circuitry that is difficult to predict even in the best of times. However, the charge currently overloading its circuits – a compound of inflation plays showing in the precious metal shine and the high prices of commodities, fuel, and food – can be traced to U.S. fiscal and monetary excesses that have put the greenback in a weakened state.

 

The U.S. Dollar index is now down over 7 per cent in 2011, a significant slide considering the percolating sovereign debt struggles that continue to challenge the future of the Euro and the devastating effects of nature on the Japanese economy. Usually the world’s reserve currency wins out in times of global crisis, but the U.S. dollar is losing its full cache as a safe haven trade. Now that the European Central Bank has raised its interest rate, the drag on the greenback could become more acute as the dollar index takes out its 2009 low and threatens to slip further to the depths of its pre-recession bottom.

 

For Canadian equity investors the materials and energy sector bounty of the slumping U.S. dollar is moderately counterbalanced by drains on other sectors and stocks adversely squeezed by exchange rate changes. The loonie’s rise is typically hard on industrial exporters highly dependent on the U.S. market and the domestic tourism industry. Evidence of the squeeze on some industrials is found in the deteriorating trends of stocks like Magna International (MG), Martinrea International (MRE) and Ag Growth International (AFN). Exchange rate changes tax exporting enterprise with competitive and operational challenges, so investors should understand how a weak U.S. dollar, and by extension a strong Canadian dollar, may adversely affect certain stocks.

 

The Trade: Atlantic Power Corporation has a good business. It operates power generation and transmission facilities, selling electricity to utilities. This is the stuff of safe and stable dividends for conservative investors. However, all of Atlantic Powers’ assets and income streams are located in the United States – a sliding greenback has a negative impact on this investment. Although hedging programs mitigate the foreign exchange risk the firm must incur to meet Canadian dollar denominated debt and distribution obligations, changes in the US/CAD exchange rate can be a costly administrative expense.

 

Its stock, converted from an investment trust in late 2009, has been in a Stock Trends bullish category for over two years – currently in the top 15 among the longest running bull trends on the TSX. After peaking at the beginning of February, though, the stock has retreated, its share price change in the red for seven of the last eight weeks. It is now in a Stock Trends Weak Bullish category, alerting trend investors that the share price has dropped below support along the intermediate term trend line.

 

Most shareholders of Atlantic Power have a long-term income oriented outlook on this holding, so a technical deterioration in the stock’s chart is not particularly worthy of abandoning thoughts. But during the latter stages of the loonie’s run-up in 2007 the stock did enter a long-term bearish trend. Given the likelihood of an extended bearish outlook for the greenback, shareholders might be preparing for a similar turn now.

 

 

The Upside: Investors still coveting Atlantic Power’s distributions could consider various options trade setups that would add to income flow and manage downside risk. A share price drop below the next major support level at $13.85 could risk a further15 per cent slide, but a prepared derivative investor can attempt to manage this profitably.

 

The Downside:  A change in the tenor of U.S. monetary policy – the end of quantitative easing – may spell stability for the greenback in the short term and ease this strain on the stock.