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TORONTO (GlobeinvestorGOLD)—While the Canadian dollar is still high, risk-orientated investors might be interested in the 8.00% CorTS Trust Corning Notes, currently trading at about $24 (U.S.) and yielding 8.33 per cent. These trust securities, which are actually a derivative product, trade like a stock on the New York Stock Exchange and pay semi-annual dividends June 1 and Dec. 1.
The 8.00% Corporate-Backed Trust Securities (CorTS) Class A Certificates, principal amount $25 per certificate, began trading on Aug. 13, 2001. They are asset-backed securities, the underlying asset in this case being the 8.3% Medium-Term Notes due April 4, 2025 issued by Corning Inc.. CorTS were issued by Structured Products Corp., a Delaware company incorporated as an indirect, wholly owned, limited-purpose finance subsidiary of Salomon Smith Barney Holdings Inc.
The trust securities are redeemable by the company on or after April 4, 2005 under a call warrant at $25, plus any accrued and unpaid interest, although no assurances are given that the company will redeem any certificates at that time or prior to the stated maturity date of the underlying Medium-Term Notes. There are only 1.546 million certificates outstanding, so risk investors should take into consideration that the market is very thin. The trust notes also depend on the wellbeing of Corning Inc. and U.S. interest rates.
With the Canadian dollar around 72 cents U.S., risk tolerant investors who purchase this security could benefit from a possible temporary sell-off of the Canadian dollar.
Short-term technical indicators suggest that the Canadian dollar's rally is over for the time being, and the 13.7-per-cent advance, which began Dec. 31, 2002, could suffer from a significant short-term pullback. The appearance of a Thursday, May 1, exhaustion-gap higher opening, and a two-day island reversal top on May 8, confirm a trend reversal could be at hand. An exhaustion gap, as witnessed on the chart, usually occurs at the end of a significant market move and can be followed by an island reversal. A breakaway gap to the downside would complete the island reversal pattern and further confirm the potential of a significant trend reversal. In addition, Monday's intraday high of 70.96 cents U.S. completed a bullish short-term double bottom pattern traced out from March to mid-April, even though the dollar has vaulted higher.
During the Canadian dollar's climb, two technical studies exhibited negative divergence, signaling caution should be considered. Although the moving average convergence/divergence oscillator (MACD) signals a buy mode, the study has been declining while the dollar has been rising, suggesting a change in direction. Also, as the dollar's price advanced, volume declined, suggesting that speculators are entering the market. Declining volume with a rising price is usually a good indication that the move higher is illegitimate. Thus, both studies warn of an impending peak. Add to the mix the stochastic indicator, a technical study that observes closing price trends and is used to identify overbought and oversold areas, and you can conclude that the dollar is in overbought territory.
From March to the end of April, the dollar also traced out a bearish rising wedge, which will likely guide the currency's next course. On a pullback, the first support will be offered by the rising wedge's upper trend line at 69.36. A close below this support line and a subsequent close below the lower trend line at 68.60 will see the Canadian dollar fall back to the wedge's technical measurement target of about 67.70. If the dollar can trade above the 66.52-to-66.62-cent breakaway gap without completely filling it, then another rally could follow. While it could take a few days to a few weeks for the trend to reverse to the downside, the technical studies confirm a defensive posture should be adopted until the overbought condition is alleviated.
In the longer term, however, a six-year chart (not shown) indicates that the Canadian dollar has bottomed and broken out of a long-term downward trend. It now appears it could be entering the formative stages of a new bull-market stage, though it will have tough sledding at the 72-to-75-cent range, and consolidation there is likely. Having traced out a longer-term, lopsided double bottom, the dollar could head for a possible minimum technical target of about 76.46 and a possible maximum target of 77.68 over the next 18 months.
The trust securities could be an interesting play, with potential capital gains working to offset the currency risk, while the high dividend yield provides U.S. dollar income.
Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.