Over the last year, overseas tensions drove the price of oil higher and had many people worried. Lately, the price of oil has plummeted on economic growth concerns.

Well, Alcoa (NYSE:AA) managed to meet on earnings, and beat on revenue. All in all, I'd say that's pretty good. I'll also say it's a darned good thing Alcoa came in good. After a day like yesterday, investors needed some good news, or at least some "not bad" news.

The S&P 500 dropped below support at 1,320, though only by a point. Volume wasn't particularly heavy, so we shouldn't read too much into the 1,319 close. In fact, yesterday had all the makings of a bear trap: negative headlines, a drop through support, right at the outset of earnings season.

Of course, we will need to get some more positive earnings news to turn the tide. And we will have to wait for Thursday when JP Morgan (NYSE:JPM) and Google (Nasdaq:GOOG) report.

Now, here's some reader mail.

You might be wondering why Iran has so many dollars, and how it got them.

After all, Iran is a sworn enemy of the United States, and vice-versa, so where did they get these dollars?

The answer is simple. Iran is one of the 12 member states of OPEC. And while the United States actually buys most of its oil from Canada, all oil contracts are settled in dollars.

That’s gotta be a thorn in the side of countries like Iran, and Venezuela. These folks make no bones about hating America.

But I don’t think that trading in dollars for gold is done so purely out of spite.

Look at what happened the preceding 5 years before Iran allegedly began dumping dollars for gold:

2011 is starting off with a bang. Stocks are up big today. And the catalysts are coming from every angle. China's manufacturing index is expanding, despite measures to slow inflation, Bank of America (NYSE:BAC) settled some of its mortgage put-back exposure, oil is higher as growth expectations improve, price targets for Apple are higher, and China has said it will continue to buy Spanish debt.

Each of these news items I've listed addresses an important point of uncertainty. If China can grow its economy at the same time it attacks inflation, then the global economy continues to enjoy Chinese demand for raw materials. That's a clear benefit for resource economies like Australia and Canada, and even benefits American and German exports.

There’s a region of North America home to just 20 million people, but it’s also one of the top 20 biggest economies. It has some of the most massive - truly unmatched - amounts of resources like timber, coal, gold, oil, as well as renewable electricity-generation capabilities such as hydroelectric and geothermal power.

It already supplies much of California, Idaho, Washington and Oregon with water and electricity. And it’s home to three of the per-capita richest cities in North America.

I’m talking about an as-of-yet un-unified region known as Cascadia.

This region joins the Canadian and American Northwest into one single Pacific coast area encompassing the cities of Seattle, Portland and Vancouver.

For years - decades even - a small secessionist movement has kept the hope of a unified, independent Cascadia alive.

I hope you all had an enjoyable long weekend. I also hope you enjoyed the”subscriber’s only” market analysis video that TradeMaster Daily Stock Alerts Jason Cimpl shared with us on Friday.  

 

Every Friday, Jason makes a video for his TradeMaster members where he shares his top-notch chart analysis and provides a forecast for the coming week that includes everything from the”big picture” view to specific entry points on his top stock recommendations.

 

Jason has identified virtually all of the important turning points for a variety of assets over the last year. His TradeMaster readers made money when natural gas prices bottomed in October of 2009. They were ready when the U.S. dollar bottomed in December 2009. They caught big moves in oil and were perfectly positioned for the tech stock breakout that started in March 2010. They even made money when the stock market sold off on the European debt news.

The AP is reporting that China has trimmed its holdings of U.S. Treasury’s by $5.8 billion in January. I’m sure members of the doom and gloom economic faction will point to this as solid evidence that the U.S. is losing its ability to fund spending and is inching ever closer to default.   

 

In my opinion, this line of thinking is completely unrealistic.   

 

China still holds $889 billion in T-bills. It’s clearly not “dumping” American debt. And as I discussed last week, there is evidence that China is moving to more direct investments in the U.S.  

 

China’s state-run investment company, the China Investment Corporation (CIC), is already involved in a buyout offer for shopping mall owner General Growth Properties (NYSE:GGP) through Brookfield Asset Management (NYSE:BAM). 

AEterna Zentaris Inc. (Nasdaq:AEZS) said Friday the Canada-based company had completed the sale of its Quebec City property for $7.1 million in cash. The proceeds will fund the biopharmaceutical company’s Phase 3 program with cetrorelix in benign prostatic hyperplasia, the company said Friday. Shares of AEterna Zentaris were up about 6% in pre-market trading, with shares at $1.06 ahead of the bell.

For all the chatter surrounding wind, solar, biomass and other “green” energy sources, the world still runs on old-fashioned fossil fuel — and will to an even greater degree into the distant future. The U.S. Energy Information Administration presages daily world petroleum consumption will grow to 97 million barrels in 2015 to 118 million barrels in 2030, from 83 million barrels today.

Growing demand for petroleum and its distillates is as old as the industry itself. In recent years, the demand has quickened a step or two; hence, the five-fold increase in per-barrel prices over the past decade.

No one likes to pay higher prices, but higher prices spur entrepreneurs to bring new oil supplies to market. One notable entrepreneur actively seeking new supplies is Oilsands Quest Inc. (AMEX: BQI), a Calgary-based energy exploration and development company whose business is extracting oil from oil sands.

And there's potentially a lot of oil for Oilsands to extract. Canada's oil sand reserves lie under an expanse of real estate larger than Florida, putting it on par with Saudi Arabia's reserves. But unlike the Saudi's reserves, which flow relatively freely, Canada's oil from sand often requires high-pressure steam — produced by burning vast amounts of natural gas — that's injected into the ground to separate the viscous bitumen from the sand to which it adheres.

Oil at $30 a barrel provides little incentive to pressure-wash sand for oil. Oil at $100 a barrel is another matter. Today's prices have inspired oil sands projects valued at $100 billion, further cementing Canada's position as the number one crude-oil supplier to the United States.

Oilsands is working to assure that the United States's petroleum thirst remains well slaked. The company owns a 100% interest in the Saskatchewan Oil Shale exploration, as well as lesser projects in the Alberta oil sands, giving it the largest contiguous lease on oil sands in Canada, if not the world. The company has forged ahead with an ambitious winter drilling program to prove reserves ahead of a 10,000-barrel-per-day pilot project scheduled to start up in 2009, with a subsequent target of 100,000 barrels per day. The company has four rigs turning in Alberta and Saskatchewan to delineate an estimated 1.5 billion barrels of contingent reserves.

The global turmoil in credit markets is not only creating havoc among large investors, it is now making it especially difficult for Canadian small-cap companies to raise new capital.
 
And that is nowhere more clear than in Calgary’s oilpatch, where many junior energy companies are financially stretched, says Scott Carscallen, a specialist in Canadian small caps at Toronto-based Howson Tattersall Investment Counsel Ltd.
 
Howson Tattersall manages the Saxon Mutual Funds group. The firm's parent company, Saxon Financial Inc. (TSE: SFI.TO) has more than C$13 billion under management.
 
After a recent summer tour in the Calgary oilpatch, Carscallen says it is no secret that many small-cap energy companies are stretched financially.
 
"They have exhausted their bank lines of credit as a result of over-aggressive spending and are experiencing production declines as they lack the necessary capital to support their exploration programs," he notes in his review of the small-cap oil industry in July.
 
As well, he says, the juniors are more heavily geared to natural gas production and have been hurt by the lower commodity price.
 
If that were not enough, the proposed new Canadian tax regime for income trusts, including oil and gas royalty trusts, "has lowered the market value of these juniors as many were looking to the larger royalty trusts to acquire them at premium valuations." 

(Income trusts in Canada became an attractive way for Canadian and U.S. investors to get higher returns because the tax liability flowed through to investors, lowering the higher taxes on the corporation while taxing individuals at a lower rate. However, the Canadian government has since moved to tax these income trusts at the same rate as corporations.)
 
Despite these setbacks, Carscallen still insists there are some interesting opportunities by looking for what he calls “quality names” that have strong balance sheets, a good inventory of low-to-medium risk projects and have low finding and production costs. As well, Carscallen says these quality companies trade close to their net asset value.
 
As far back as January, Carscallen said he and the firm were substantially adding to their energy weighting and would continue to do so. In all, the portfolio has 18 names in the energy sector to ensure diversification. 
 
Two of their favorites are Breaker Energy LTD (TSE: WAV.A.TO) and Burmis Energy Inc. (TSE: BME.TO).

At the half-way point of 2007, Canada’s small-cap fund managers have extended their winning streak.

For the third consecutive quarter, the country's small-cap managers outperformed their counterpart large-cap managers, according to Russell Investment Canada's report for the second quarter ended June 30. (Based in Tacoma, Russell Investment Group says it advises institutional clients with total assets of over C$2.0 trillion. Russell follows 31 small-cap Canadian funds and 75 large-cap ones.)
              
Kathleen Wylie, Russell's senior research analyst, said in her review that the median small-cap manager returned 7.1% during the most recent three-month period, compared with the median large-cap manager return of 6.4%.
              
That is largely because Canadian small-cap managers won out by having a smaller weight in the broadly underperforming Canadian financial services sector. Small caps had an average of 14% in that sector, compared with 30% for large cap.
               
As well, small-cap managers on average had roughly 12% of their portfolios in the positive consumer discretionary sector, compared with only a 5% weight by large-cap managers.
              
Wylie noted that despite the rally in resource prices such as oil and base metals in 2005 and most of 2006, small-cap managers still lagged their large-cap counterparts.
               
"However, we're half-way through the year and I'm still more encouraged by the active management environment (among small-cap managers) now than I have been in the last couple of years when the market was dominated by resource stocks," she said. 

Technology is a sector often overlooked in the Canadian small-cap market, which is precisely why small-cap specialists Martin Dufresne and Patrick Potvin, portfolio managers at Montreal-based Fiera YMG Capital Inc., have been steadily boosting their holdings.
 
"We are finding select stocks that trade at modest valuations relative to the companies' growth prospects," Dufresne said after finishing a recent evaluation of the sector based on what he described as “industry reports by sell side analysts, meetings with managements and internal research.”

Generally, said Potvin, "our strategy is to sell off low growth or disappointing companies and put the proceeds into those companies that we consider have a more promising growth profile."

As a result, according to Potvin, the portfolio managers say they have been reducing holdings of companies that have become large cap and parlaying the proceeds into smaller caps that "generally tend to have higher growth prospects."
 
Fiera YMG has roughly C$21-billion under management, of which about C$6-billion is in Canadian equities. Dufresne and Potvin manage a number of small-cap Canadian portfolios including the Millennia III North American Small Company fund. This is part of the segregated family of funds managed by Fiera YMG for Desjardins Financial Security.

The Millennia III North American Small Company fund has almost 50% in the U.S. equity market via futures contracts linked to the Russell 2000 Index (NYSE: IWM). The rest is invested in Canadian small caps and managed by Dufresne and Potvin.

These days, Canadian small-cap specialist Martin Ferguson admits he is in a pretty good but somewhat careful mood about the coming prospects for the Canadian equity market.

Ferguson, director and small-cap portfolio manager at Calgary-based Mawer Investment Management Ltd., says he expects Canadian small caps to deliver at least single-digit returns over the next 12 months.

While Ferguson expects that is in line with larger-cap companies north of the border, he adds that much hinges of the U.S. economy and whether it “rebounds from its moribund 0.7% annualized growth for the first quarter of 2007 and that interest rates do not rise meaningfully from here." 

As a result, Ferguson says his approach to the Canadian small-cap market is “cautious, but not bearish."

Ferguson personally handles about C$1-billion of the C$4.7 billion that Mawer has currently under management. And he believes one of the main drivers in coming months will be merger and acquisitions.

"Despite the recent hike in interest rates, many stocks remain more attractive than fixed income alternatives,” he says in his latest outlook.
 
In choosing Canadian small caps, Ferguson says he looks for companies with a market cap of C$500-million or less at the time of his first purchase. They must also ideally have significant competitive advantages, with management that must "have a thorough knowledge of the business and be financially astute."

In the fashion world, last week is often so last year. But having the coolest – and latest – clothes at times seems almost to be part of the very genetic make-up of many folk.

And for retailers that can continually hit the sweet spot and have the right clothing and accessories on their racks, continually ringing cash registers is the reward.

For investors, that means a stock that will never go out of style on you. And that seems to be the case with one of Canada’s most successful clothing chains, Le Chateau Inc. (TSX: CTU.A).

Le Chateau was founded in Montréal in 1959 by Herschel H. Segal, who remains at the helm today. Le Chateau specializes in selling contemporary fashion clothing, accessories, and footwear to what it calls “style-conscious women and men.” Its merchandise is sold exclusively through more than 190 Canadian signature stores, and five retail locations in the United States, largely in the New York City area. The company has more than 2,800 employees who turn out over 2.5 million high quality garments a year, much of that made in its own Canadian production facilities.

If you want to play in the fashion word, you need to have relentless focus. And that’s something Le Chateau has, if you go by its own description of its activities: “Our brand's success is built on quick identification of and response to fashion trends through our design, product development and vertically integrated operations.”

The real eye-opener lies with the impressively non-fickle results of Le Chateau's long-term results. They are solid enough as to qualify as timelessly fashionable for the value-seeking set, and here, of course, I refer to investors, not fashionistas.

The last thing most small cap investors think of when they look north of the border is for opportunities is Canada’s emerging software industry.

Other than Corel Corp. (Nasdaq: CREL), once a titan in Canada’s equivalent of Silicon Valley outside the country’s capital Ottawa, Canada is not seen as a hotbed of high-technology. But oddly, it is becoming increasingly so. Since the famous worldwide high-tech meltdown in 2001, Canada’s industry has been struggling to recover. And, in recent years, it has recovered considerably. The Conference Board of Canada, the Ottawa-based equivalent of the New York-based board, said just recently in its review of the software industry that nearly two-thirds of emerging software companies reported profits last year, while computer and other technology hardware makers saw their profits soar.

"Profit levels for Canadian computer and electronic product manufacturers nearly doubled last year," it said. Profits hit C$2.1 billion in 2006, with the surge due primarily to dropping capital and material costs. This year, profit margins are forecast to reach 6%, which is just below where they stood during the tech boom (although in real dollar terms, far short of the C$4.3 billion the Canadians profited in 2001).

"This industry is smaller and leaner than it was at the height of the tech boom," says Louis Theriault, director of the Conference Board’s industrial outlook division.

Meanwhile, PricewaterhouseCoopers in Toronto said in a similar review of the fledgling industry that 63% of emerging Canadian software firms were profitable last year, adding that's "good news" and in line with the 65% in 2005, and 56% in 2004.

The report, based on its fourth annual survey of software firms, found that as in past surveys, chief executives officers of these firms continued to predict significant revenue increases for the year ahead.

"However, while the majority of CEOs reported revenue increases of at least 10%, many fell short of their forecast," they found.