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 tray, 9 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 globeinvestor.com. 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 mail@marketguy.ca