The Stock: Atlantic Power Corp.
Capital markets are difficult to predict at the best of times. However, forecasts are particularly difficult right now given worries about inflation that 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 down over 7 per cent in 2011. Usually the world's reserve currency wins out in times of global crisis, but the U.S. dollar is losing its standing as a haven trade. Now that the European Central Bank has raised its interest rate, the drag on the greenback could become more acute.
The loonie's rise against the U.S. dollar is hard on industrial exporters that depend on the U.S. market. Evidence of the squeeze is found in the deteriorating trends of stocks such as Magna International Martinrea International and Ag Growth International
Atlantic Power Corp. operates power generation and transmission facilities. This is the stuff of safe and stable dividends for conservative investors. However, all of Atlantic Power's assets and income streams are located in the United States - so a sliding greenback hurts. Although hedging programs mitigate the foreign exchange risk the firm must incur to meet Canadian-dollar denominated debt and distribution obligations, changes in the exchange rate can be costly.
Shares of this company, which converted from an investment trust in late 2009, have been in a Stock Trends Bullish category for over two years. After peaking at the beginning of February, though, the stock has retreated. 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 outlook, so a technical deterioration in the stock's chart doesn't necessarily mean it's time to abandon the stock. 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.
Investors still coveting Atlantic Power's distributions could consider various options trades 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 further 15-per-cent slide, but a prepared derivative investor can attempt to manage this profitably.
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.
Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. For more, go to stocktrends.ca