Opening Up the Mailbag

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The mail has been piling up, so let’s open up the Market Guy Mailbag:

The first letter deals with the growing speculation that Manitoba Telecom (MBT on the TSX) will eventually convert to an income trust (see Mum’s the word on Manitoba Telecom from December). More fuel was added to the fire on January 27th, when the company announced that a shareholder had requested the issue be placed on the proxy circular for the annual meeting to be held in the spring. The stock immediately shot up over 9% to close around $50. That’s one heck of a move for this type of stock.

Letter #1: Gary in Winnipeg
Does this likely mean that a BCE takeover is not in the cards, and likely never will be… Will the bottom ever fall out of this thing?

Keep in mind, of course, that I know nothing. Having said that, a takeover is certainly more expensive than it was a few days ago. I’ve read some speculation that BCE won’t fight conversion and may in fact cheer from the sidelines. Fair enough.

MBT has cautioned investors that a shareholder proposal doesn’t necessarily mean that conversion to the trust structure will occur. And it could be a few months until we find out for sure. In fact, the board of directors may not make their feelings known until the proxy circular comes out. Andrew Willis of the Globe and Mail wrote about all the money managers traveling to Winnipeg trying to persuade the board and executives that conversion is the way to go. But here’s the thing: If the company fails to convert, the stock is going to be absolutely pummeled. It’s now trading in the low $50’s, but Scotia Capital thinks it’s worth $41 if they don’t convert and $60-65 if they do. Meanwhile, CIBC counters with $44 as equity and $55 as a trust. So if there is no conversion, the stock is extremely vulnerable and yes, I think the bottom would fall out.

The pain would be almost akin to what I experienced the other day. I came home from work to find the Market Gal and a friend watching “Oprah’s Birthday Party” on television. The special included guest appearances by Celine Dion and Jay Leno. Apparently John Travolta came in, serenaded Oprah, and then referred to her as a “national treasure.” I ran as fast as I could and retreated to my psychological safe place. If a young child ever asks me about hell, I can say that I’ve been there. And I don’t need Manitoba Telecom to proactively give me similar pain. I’m not rational enough to discuss my dislike of Leno and Dion…but I’m left with the same question offered by my buddy Dick in Edmonton: “After Pulp Fiction, what the heck happened to Travolta?” I have no explanation for any of this.

Take a moment to get in touch with your feelings. Oprah would have wanted it that way  

As I mentioned before, I would have been happy if Manitoba Telecom paid out the proceeds from the $650 million Bell put as a special dividend. Some analysts figured the dividend could have reached as much as $10 a share. I also would have no objection if they’d used the money to cancel shares. But the prospect of a trust conversion is just gravy. I think it’s going to be very difficult for the board to recommend another option without erasing hundreds of millions in market cap. And even if they are against conversion, they’ll be going against a significant number of their shareholders, which would make for an interesting fight. It’s almost a case of the cat being out of the bag.

As always, the essential question is, how can I make money here? I got in at just under $40 a share, although some stupid trading on my part shaved about a buck from the current gain. I’m seriously thinking of selling one-third of the position and letting the remaining shares ride. That way, I’d lock in some profits but still participate on any additional upside if conversion is announced. For now, this is a news-driven story that may take a few months to figure itself out.

Letter #2: Michael in Vancouver
I love the website, but I can’t believe you invest in tobacco stocks (seeSmoke ‘em if you got ‘em). Surely there are more worthy industries to invest in. What kind of ethical statement are you making?

I understand what you’re saying. But here’s the thing: If I want to invest in a worthy cause, I’ll make a charitable contribution or volunteer my time. For me, investing in the markets is about making money, not about making ethical statements. I can appreciate those who link their morality and investing dollar and I wish you the best. But I’d invest in the Springfield power plant if Mr. Burns could show me some decent cash flow, low debt and a nice payout. Besides, I don’t believe that investing in tobacco stocks is akin to supporting the product. 

On a side note, I have to say that I fell in love with your town about 3 seconds after I got off the plane. Here in Ottawa, we’ve been enjoying several weeks in a row of “exposed flesh will freeze in less than 5 minutes” warnings. I have a student from Vancouver who may have to go into therapy after a winter spent in the capital.

Letter #3: Bill in Mississauga
I really enjoyed your column on your worst investing experience. It actually helped. Let me tell you about my worst experience, although I’m sure it mirrors that of many of your readers. A few years ago, and on the advice of my financial advisor (we are no longer on speaking terms), I purchased 500 shares of Nortel at $98. I enjoyed the trip to $120 and thought about selling, but he kept telling me about bandwidth, optical something-or-others, and the merits of buy-and-hold investing. The stock peaked and then eventually went back below $100 and my advisor said it was a “temporary pullback.” $80 came and went. $70, $60, and so on, right down to the point when I had to insist he sell at $35. It was a horrible experience, but I stayed in the market and (thank goodness) now have a fairly diversified portfolio. I’m mainly in mutual funds because I can’t stand the volatility of individual stocks. Perhaps you could do a column on mutual funds?

Thanks for sharing your experience. Glad to hear you haven’t soured on the markets and that you’re aiming at diversification. I hate being upset with the markets, but in the end, we always make up and fall in love all over again. I’ve had many letters from people who are still in Nortel after buying much higher. They are finding it very difficult to get excited about the 2003-04 march to $10 and are quite nauseated with all the analysts jumping on the bandwagon.

The Nortel rise and fall reminds me of 1988 when Ben Johnson captured Olympic gold in the 100m. Remember how he accomplished what no expert thought possible: He shut Carl Lewis up and did so with a world record time of 9.79? Before that, my cornerstone sports moments had been the 1985 Blue Jays capturing their first division title and Gretzky to Lemieux with 1:26 remaining in game 3 of the 1987 Canada Cup. Anyway, the Johnson medal almost necessitated a national holiday. That’s all anyone talked about…especially two days later when the results of the drug test hit the airwaves. The medal was stripped away, handed to Lewis, and everything after that remains a blur. We’d just been subjected to a national colonoscopy and a bad case of emotional whiplash.

This sounds like the experience so many had with Nortel, JDS, and a host of other stocks. Pure ecstasy followed by serious pain. The other day a friend on mine was in line at the bank and overheard a couple talking about Nortel and perhaps “getting in!!” What’s old is new again and the analysts are tripping over themselves to recommend the stock (Gordon Pitts discusses the issue of Nortel hype in the Jan. 31 edition of the Globe and Mail). The turnaround at Nortel has been remarkable, but I just can’t get excited about a company that pays no dividend, operates in a very unpredictable market, and experiences violent swings in stock price. If I held a fund that owned Nortel, that’s fine. But I’m not interested in the stock itself.

Ben and Johnny (former Nortel CEO John Roth)…before kicking our collective groin

And sure, it’s only a matter of time before I write a column on mutual funds. Of course the “What I Learned about Investing by Watching Television in the 1980’s” column may have to come first. Stay tuned.

Letter #4: Shannon in Toronto
Thanks for mentioning the Canadian Tire Options Mastercard (MG # 7). By Christmas I had so many dollars on the card that I was able to get a number of presents for free. Keep the ideas coming. Your column is quirky, but in a good way.

Thanks Shannon! The debate I always have is this: Do I use my points for something big or do I grab lots of small stuff throughout the year? After grabbing a kick ass socket set in 2002, last year I went small and earned the following items free: 1 boot tray9 boxes of Kleenex, 1 bottle of glass cleaner, 2 jugs of windshield wash (Teflon), 3 Rubbermaid containers, 1 TV tray, 1 brake pad, 2 packs of spark plugs, 3 bags of charcoal briquets, 1 lawn sprinkler, 1 bottle of car wax, 1 jug of liquid fertilizer, 1 car headlight, 1 can of deluxe primer…OK, I’ll stop now.

Letter #5: Greg in Kanata
Where do you go for stock quotes?

If I want real-time information, I head to my broker sites. If 15-minute delayed will suffice, then it’s The site has a useful stocklist function that will allow you to generate a substantial list of favourite quotes (see the very top of their page). This is the easiest way to do it.

This next part is for market diehards only: In order that my browser loads up with stock quotes, I’ve gone at this a little differently. I first went to the globeinvestor main page, typed in a quote (e.g., BCE-T; the T is the appropriate exchange code for the TSX). When the quote popped up, I went to the address window at the top of the screen and continued the string (e.g., I’ll add a few ticker symbols so that it looks something like “BCE-T+NT-T+TRP-T” and so on and so forth). You can add up to 30 stocks. Then I copy this string, head to the Tools menu (I use Internet Explorer), select Internet Options, the paste the string into the homepage address box. Of coure you don’t have to use this as a homepage, and can simply add it to your Favourites. I currently monitor 90 stocks over 3 pages.

Letter #6: Bouch in Embrun (a mailbag regular)
Perhaps as your readership grows, your trading notes section could generate it’s own “mini-rally”, similar to the ones enjoyed by companies mentioned in Canadian Business and like publications.

I think a more likely scenario would involve my subscriber base eventually deciding to vote me off the island. But speaking of media-inspired rallies, I have noticed that thinly-traded small cap stocks often enjoy a brief pop after being identified as top picks on ROB-TV’s Market Call. I have to devote a column to that show. The fact that I haven’t already is just plain wrong.

This concludes another edition of the Market Guy Mailbag. Thanks for writing in.

Trading Note
I participated in the recently announced $115 million bought deal in Calloway REIT (CWT.UN on the TSX). This fast-growing real estate investment trust focuses on retail properties and has been on a buying binge as part of their relationship with First Pro Shopping Centres. First Pro seems to be Wal Mart’s developer of choice in Canada and the recent transactions will expand the number of Wal Mart’s in the Calloway portfolio to 16.

Under the terms of the bought deal, the units were priced at $13.75 with a mid-February closing. Within minutes of placing my expression of interest, the deal was completely sold out. I managed to secure a decent position, but only because I jumped on it so fast. The units are currently trading in the mid-$14 range, and I’m hoping to still be in a position to flip the shares when the deal closes (that is, sell as soon as I receive the shares in order to capture the spread. Under the terms of these secondary offerings, you can’t trade the shares until the deal officially closes). The other option is to hold the shares and maintain the position. I already own Riocan in this space, but Calloway has some interesting growth possibilities. We’ll have to see. The units currently pay $1.15, for a yield just north of 8% on my purchase price.

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. He didn’t get around to snowblowing this week, so a large snow hump resides at the end of his driveway. There’s always a hump over at

Random Thoughts to Close Out ’03

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In being retrospective, it’s common for us to exaggerate the extent to which the events of the past were predictable. That is, we typically convince ourselves that an outcome was inevitable and that deep down, we knew it all along. Sports fans refer to this tendency as Monday morning quarterbacking, psychologists speak of the hindsight bias, and doctors probably call it malpractice litigation. Whatever it’s called, it sure is popular in the financial pages at this time of year. Financial commentators, analysts, and ordinary investors speak of the year as unfolding exactly as it should have. The Dow behaved logically and anyone paying attention saw it coming. The fact of the matter is, I had no idea 2003 would unfold as it did and I’m not sure what 2004 will bring. I trust you are same. Now that I’ve inspired your confidence and completely de-legitimized my own writing space, let’s proceed with a post-mortem on the year that was and the portfolio that could have been. What worked, what didn’t, and how can I apply what I’ve learned to the year ahead?

The year 2003 saw the portfolio increase by over 27%. This is in-line with with the 24% advance of the S&P/TSX composite and the 25% lift in the Dow Jones Industrials. It looks good compared to the portfolio’s 17% return last year and the 12% generated in 2001. After a good year, don’t you find the air fresher, the colours brighter, and even your food tastes better? Or is it just me? More importantly, I came in 11th place out of 30 in my NFL pool, only 8 games out of the money. Market Dad placed 20th, so I get bragging rights until the new season begins in September. It’s important to have priorities.

My Best Investment Decisions of 2003:

1. Sticking with income trusts and dividend-paying stocks.

Talking about my TransCanada shares (TRP on the TSX) and financial stocks just isn’t as exciting as talking about trusts. So let’s talk about trusts. Is there anything more satisfying than looking at your monthly statements and seeing the cash flowing in? In 2003, every sector of the trust market advanced nicely and there were some wonderful investing opportunities. There wasn’t nearly as much value to be had as last year, but investors didn’t seem to mind. New issues were eagerly snapped up and it actually would have been a challenge to lose money here. I was thrilled with the distributions and unit appreciation of BFI (BFC.UN), Riocan (REI.UN), Inter Pipeline (IPL.UN), Calpine (CF.UN), Arc Energy (AET.UN), among others.

However, the prevailing wisdom for 2004 is that investors should be content with their distributions, and not much else. Very little capital appreciation is expected and that could be difficult for some investors to swallow. I’m totally content with the cash, but that’s just me. In fact, many predict strong headwinds for the sector, with possible increases in interest rates, lower energy prices, and investor dollars moving into growth stocks. The bulls counter that the issue of unlimited liability is being addressed, which should lead to the inclusion of trusts in S&P/TSX Index. This would increase the level of institutional participation, which is a very good thing. Also boding well for the sector is that many of the trusts are actually GDP rather than interest-rate sensitive.

In reality, who knows where rates are headed? With the Canadian dollar appreciating, the Bank of Canada has some flexibility to either maintain or actually reduce rates. A tame inflation picture and the US election should render the Fed about as talkative as Lt. Castillo from Miami Vice. This leaves me even more at ease with trusts. Besides, it’s really the pipeline and power trusts that are the most sensitive to rates and these represent only a small percentage of the overall trust market.

Lt. Castillo rarely spoke …and neither will the Fed in 2004  

Here’s the punchline: For now, I’m not so much a buyer of trusts, although I’m always on the lookout for value candidates (the sector is maturing to the point where it’s easier to determine the cheap from the pricey). However, I sure am an enthusiastic holder across each sector. As the year moves along, I’m eager to evaluate the new trust product that’s coming and will pare back on holdings that have become stretched.

2. Taking currency into account.

So the S&P 500 index was up 26% in 2003. Sounds like a great year, doesn’t it? A buddy of mine has a financial advisor who kept recommending US stocks all year long. Based on what happened to the S&P, it sounds like a good call, right? Well hold on there Pedro! If you’re a Canadian, you need to consider the effect of currency valuation. Because of the 22% appreciation of the Canadian dollar, Canadians owning the average stock in the S&P started 22% in the hole. So in order to match the 26% return offered by the S&P index, your American stocks had to appreciate by 48%. In any investing universe, that’s a tall order. Sobering, isn’t it? For some investors, this realization might provoke a scene like in Cast Away when Tom Hanks lost Wilson. Sheer agony. As a result, most of the US index products had underwhelming years to say the least. For example, the iUnits S&P 500 index fund basically broke even. My preoccupation, obsession, and love affair with Canadian income product kept me largely removed from the US market in ’03, and for that, I’m quite thankful.

Looking ahead, most commentators seem to be calling for continued weakness in the US$. What’s been pressuring the greenback? Among other things, the US budget deficit is at its highest point in 50 years and Bush seems content to run up the tab. I’m still trying to get my head around the fact that Republicans have become the spenders and the Democrats the fiscal conservatives. Also against the buck is the decision by the US to abandon a strong dollar policy and it’s unclear at what point (if any), they’d jump in to reverse the current trend. If my brain had been firing on all cylinders, I would have made money here. So let’s discuss…

My Worst Investment Decisions of 2003:

1. All that glitters is not gold…although gold sure did glitter

In order to capitalize on US$ depreciation, many investors flocked into gold stocks. Meanwhile I missed the entire rally. Is there an area of the market that inspires more devotion than the gold sector? The gold bugs have been out in full force the past few months, spreading the word. It’s almost as if they are part of a religion and anyone who doubts the bullish case for gold just doesn’t understand. I completely misplayed the sector a few years ago by selling about 5 minutes before the whole thing took off. It seems that a modest allocation to precious metals would be appropriate for a diversified portfolio. Perhaps the fact that everyone is all excited about it makes it somewhat less interesting.

If I were going to play the gold market, I’d probably go with the iGold units (XGD on the TSX). It’s an exchange traded fund that is currently invested in 14 of the larger Canadian gold companies, so if you’re into the juniors, keep moving. American Barrick (ABX) and Placer Dome (PDG) make up over 45% of the portfolio, which is kinda spooky. But the MER of 0.55% is hard to beat. I’ve been hearing about an investment vehicle by which you can move beyond the gold stocks and make trades specifically around the price of bullion. What an emotional ride that could be. Let’s just say I’m curious enough to pay attention.

2. Early profit-taking in the energy patch

For several years the portfolio had been dramatically overweighed to the energy sector. The results were very positive, but entering last year I wanted to book some gains and have a more balanced portfolio. What better selling opportunity than a war in the Middle East, a cold winter, and a natural gas shortage at home? It was the perfect storm. With the thermometer dipping, crude trading in the high $30 range and natural gas on a spike, I bailed on several holdings….and subsequently missed out on more significant gains. My selling focused on energy trusts, specifically those inter-listed in the US. The rationale was that American investors would create powerful selling pressure once energy prices dipped. Little did I think that Iraqi “insurgents” would keep blowing up their own pipelines, we’d start hearing about China’s emerging appetite for oil, and the US economy would perform much better than expected? As a result, American investors kept taking the inter-listed trusts higher and higher. I missed out. Looking back, I should have gradually sold into the rally, rather than eliminating these positions entirely. An added benefit of such a strategy is that I could have spread my tax burden around. In any event, I held ARC (AET.UN) throughout the year and it performed exceptionally well, thereby dulling some of the pain of a missed opportunity.

The trade I didn’t make…but should have
It was July and I was looking at convenience store operator, Alimentation Couche-Tard (ATD.B on the TSX) in advance of their quarterly release. This is the company that owns Mac’s, Becker’s and a host of other places. I’d been following the company for about a year and was ready to make an investment. I was logged into my discount broker, had filled out the order screen for a batch at $13.50. At that point the only thing between doing business and not doing business was the click of the mouse. This reminds me of that 1999-2000 discount brokerage commercial involving the investor in front of his computer, nervously looking at his order screen, then pacing around the room while he contemplated the trade? Finally he clicked on the order button, the trade was executed, and a mariachi band started playing? Well, for ATD there was no mariachi band because I never placed the trade. They subsequently released a fantastic quarter, made a huge, much lauded acquisition in the US and the stock is now trading over $24. I’m not sure what stopped me from making the trade, but every investor has been there. The mind tells you it’s a good deal, but the heart steps in and kyboshes the whole thing. Stupid heart.

It reminds me of the time Market Gal asked me to go see a Madonna concert in Montreal. I knew the baseball playoffs were coming. I knew the Jays were in first place. I knew I might miss a game. But she begged and pleaded and she looked really good while doing it, so the brain jumped out of the car and let the heart drive. I subsequently missed game 6 of the 1993 World Series. Yes, I missed Joe Carter’s 9-inning, series-winning shot. The most memorable sporting event of my lifetime and while it was happening, I was walking out of Olympic Stadium, packed in a crowd of people dressed like the Material Girl. I’ve often thought of how I might have reacted had I been sitting at home watching THE game. Would I have jumped up, sat there stunned, yelled? How many fist pumps? When would the tears of joy stopped flowing? I’ll never know. And to make matters worse, Dick in Edmonton has taken the incident as a permanent license to ridicule. If he writes my epitaph, it will surely read, “Here lays a man who missed game 6 to be at the Girlie Show Tour. Only now he rests in peace. What an idiot.”

Up until Game 6, the Market Guyhad seen every pitch of every playoff game the Jays had ever played. Learn from his mistake and just say “no.”  

By way of an update, ESPN Classic just replayed the entire series andMarket Gal had a chance to at least soothe some of the pain. She could have sat down and watched game 6, maybe made some nachos, and lied to me about how exciting it all was. She could have watched Joe hitting that 2-2 slider to left, then touching all the bases as he headed for home. She could have heard Sean McDonough’s indelible call: “Well hit down the left field line…waaaay back aaaannnnnd GONE!” But instead, she went into the other room and watched sitcom reruns and reality TV. I’m not bitter. Not bitter at all. Let’s just move on. Can we just move on? I need medication.

Back to Couche Tard. I suppose it’s better to regret the buy you didn’t make, than to regret the buy you did. It was that kind of year. Stupid heart.

Who isn’t being sued?
If you’re having a good year, it leaves some time to stop and appreciate some of the little things that otherwise might have been regarded as noise. The Martha Stewart saga gained steam, an Italian dairy went sour, and just about everyone tried to avoid Elliot Spitzer (or is it Ness?). 

But was there anything more satisfying than watching video from Tyco’s Sardinian retreat? I mean haven’t you always wondered what a $2 million toga party would look like? I especially enjoyed hearing of Jimmy Buffett’s $250 000 performance fee (not my choice booking for toga party, by the way) and the ice sculpture of Michelangelo’s David urinating vodka. The only thing missing was Bluto Blutarsky of Animal House and Caligula playing on a big screen. I laughed out loud when they played clips of all this at former CEO Dennis Kozlowksi’s larceny trial. He must have squirmed more than a 10-year old on the last day of school. The best quote to come from the whole mess was offered by some legal commentator who said, “This could be devastating in front of the jury.” Just like a broken leg could affect the play of your quarterback.

Tyco and Togas and Tips…Oh My!

As long as we’re dabbling in the oozing hubris file, let’s not forget Lord Conrad Black, who after resigning in disgrace as the chief executive of Hollinger boasted, “I made 50 million bucks yesterday.” Let’s give thanks for the financial enema that he is about to receive.

Christmas tree ornament giver of the year award
To Market Gal (also the winner of this year’s award for going above and beyond the call for the portfolio when she insisted her boss rent a BFI garbage bin). The ornament combines a stock exchange facade with a stock chart and computer keyboard. What could be more festive?

There surely is a Santa Claus when the Market Guy gets an ornament like this  

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. Over the holidays he became addicted to the Food Network. There’s always a tasty morsel over