Holiday Hodgepodge

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In this “very special, deluxe, supersized” holiday edition:

Same Market Guy ..new look!
Long-time readers may have noticed a few changes to the web site. The goal was to give the page a more updated, eye-appealing look. Besides, I like the colour blue. Thanks to my buddy Ozner for all of his ideas and free labour.

Also, I’ve received a fair number of comments on how to improve the content of the site. By far and away the #1 piece of feedback goes something like this: write more columns. Fair enough. In order to do so, I’ll have to move away from the lengthy columns that are organized around a central theme, to columns that touch on a wide variety of issues; call it hodgepodge. Of course the What I Learned about Investing by Watching Miami Vice column will be lengthy and highly-focused, so stay tuned for that one.

Market Guy Mailbag
I really enjoy hearing from you and try to respond as quickly as possible. Here’s a sampling of some recent correspondence:

Letter #1: Pat in Ottawa asks:

What do you think about Yellow Pages (YLO.UN)?

Gotta love an investment that allows you to make money from lawyers, doctors and other professionals. I was able to get in at $10 on the initial public offering and first mentioned the trust in MG#10. The units are currently trading above the $13 mark. The yield on my originally invested capital is over 9%, but with significant price appreciation, new investors capture less than 7%. The distributions are largely taxable, so keep that in mind if you have the option of going registered. Here’s what I like: The trust continues to raise distributions, is dominant in eastern Canada, offers excellent liquidity, and is a logical candidate for inclusion in the S&P Canadian index when that whole situation is sorted out. However, I’m uncomfortable with so many of these business trusts and REITs with sub-7% yields. Clearly, many of these names have come a long way and are due for a breather. I’m holding, but have no plans to add to the position anytime soon.

  Instead of giving the Market Guy the finger, why not let your fingers do the walking?

Letter #2: Jeff in Toronto writes:

How is your portfolio doing? With all your discussion of income trusts, it must have been a good year. My plan is to withdraw 10% each year and the trusts have helped me do that and grow the portfolio at the same time.

Good stuff, Jeff. When I updated my files last week, the portfolio was up 28% in 2004. I’m thrilled, excited, delighted, and moderately aroused.

Letter #3: Rob in Kingsland, Texas writes:

I’m an active investor in Canadian trusts and was wondering if you could steer me towards a resource providing detailed trust analysis. I’ve been searching and have found little. Thanks!

It’s good to hear from you, especially since yours is the first letter from Texas and I’m a fervent Cowboys fan. In terms of Canadian trusts, I rely heavily on the research put out by the Canadian discount brokerage firms. Readers have commented positively on the trust coverage from CIBC Investor’s Edge (research from CIBC World Markets), TD Waterhouse, and Scotia McLeod. I don’t really pay attention to their buy and sell recommendations, but I do review the number-crunching. If you’re a transplanted Canadian and have an account with a Canadian brokerage, accessing this information shouldn’t be a problem. If you’re not, then check with your broker to see what they can provide (and if they are the US division of a Canadian operation, all the better).

If you’re comfortable with balance sheets and quarterly reports, most trusts have their own website that can be mined for information. At the very least, you’ll get an idea about payout ratio and many of the other key metrics. Standard & Poors (www.stabilityratings.com and head to the various “subtopics”) and Dominion Bond Rating Service (www.dbrs.com and head to “Income Funds”) also publish some useful information. Beyond that, much of my knowledge of trust product is cobbled together from what I read in the Globe and Mail (and their business site www.globeinvestor.com) and what I see on Report on Business Television (www.robtv.com). The channel has three shows that might be of interest, although each is basically a cross between information and entertainment; let’s call it “infotainment”, rather than detailed analysis. Trust factor is on Fridays and is always about trusts. Market Call occasionally focuses on trusts. Squeeze Play offers some trust content whenever host Kevin O’Leary finds a compelling story. All of these programs are archived in the “watch past videos” section of the website.

I just re-read this answer and realized that I’m clearly not a well man. Here’s an open call to all readers: Why not contribute to my sickness by telling me where you get your research on trusts?

Letter #4: Let’s head to Edmonton, where my buddy Dick writes:

Hey, just read your newest Market Guy (MG #23). Even though you mention oil without mentioning me (a serious oversight on your part by the way — I mean, other than investors, who is more affected by the price of oil in your life other than me???) it was, in my honest opinion, your best written effort yet.  Made me laugh, made me think, made me all warm and tingly inside (yes — the Yankee effect), just an excellent column. And yes this.was my sad attempt to get into a future column.

Well, it worked. As I’ve said before, most of my friends read the column just to see if they’ve been mentioned. True, more than investors are affected by the spike in energy prices. Dick works for the Alberta government and seems to get a raise every few weeks. In fact, strong energy prices have left the Alberta coffers flush with cash. And we here in Ontario can hardly wait to get our hands on all of that Alberta money. Of course I’m needling the omnipresent worry among Albertans that Pierre Trudeau will awake from the dead. For them, the National Energy Program is like a meal at Burger King; you just can’t get rid of the nasty aftertaste.

And so concludes this edition of the Market Guy Mailbag.

Trading notes
Bonavista Energy Trust (BNP.UN)
You might recall the previous edition of The Market Guy (#23) in which I expressed concern regarding plus-$50 oil and detailed some of my recent profit-taking in the patch. Oil in fact rose to around $55, but has since come back to the low-$40 range.

In the decline, the price of some trusts were hit harder than others. Among the worst hit was Bonavista Energy Trust with a decline of over 13%. Just as the units started to recover, the trust announced a $414 million deal to acquire some natural-gas weighted properties in northern British Columbia. The deal is being financed through bank debt, a $281 million equity issue, and $135 million of 6.75% convertible debentures.

I decided to participate in the equity issue and will receive my units at $25.85, upon the closing of the acquisition. With the units already trading above that price (thanks to a bout of cold weather in the northeast), my dilemma is this: Do I flip the units and capture the spread? Or do I regard this as an opportunity to initiate a long-term holding? From my perspective, the dip in the price of oil has lessened some of the risk of holding energy names, especially if you’re focusing on quality. Let’s take a look at Bonavista.

Here are some key factors to consider about their recent acquisition:

  • its modestly accretive. In the trust world, if a press release announcing any kind of acquisition doesn’t include the word “accretive,” then I’m not interested. I don’t want empire-builders; I just want the cash.  

  • increases the natural gas weighting of the trust to 58% 

  • provides some excellent development opportunities 

  • improves the reserve-life of the trust. Upon closing the deal, the proved plus probable reserve life will grow around 10% to 8.8 years. That’s still a tad under the average for the sector. But given Bonavista’s track record, I’m less concerned that I might be.

Fair enough. So what else should I be thinking about?

  • Bonavista sports a payout ratio of less than 60%, comfortably below what most of its peers have been paying out. Of course once the exchangeable shares are included, the payout ratio, although still conservative, appears less stellar. This low ratio is characteristic of many of the new breed of royalty trusts (e.g., Peyto, Harvest, Zargon) that hold back more of their cash to fund exploration and drilling. This approach makes it cheaper to add to production and, in theory, should reduce volatility.  

  • the overwhelming majority of the distributions are taxable. Therefore, it makes sense to throw it in the RRSP. Also on the plus side, being registered means you won’t have to sit down and calculate the adjusted cost base upon selling. I hate doing that.

So what’s the punch line? I really like the trust, but my concerns about the energy patch remain. Stay tuned! The truth is, I haven’t decided what I’m going to do. And so long as the spread remains, there’s no significant pressure for me to decide.

Atlantic Power (ATP.UN)
I participated in the $320 million initial public offering of Atlantic Power (ATP.UN on the TSX). This trust has ownership interests in 15 facilties (14 in the US, 1 in Jamaica), with a focus on natural gas-fired plants. The plants are spread across the US and I like this geographic diversity. Most of their power purchase agreements are medium to long term and involve creditworthy customers. In terms of stability of distributions, DBRS has assigned a preliminary rating of STA-3.

With an IPO price of $10 and forecast distribution of $1 per year, my yield would have been 10%. I say would have been because I blew the trust out of the portfolio. Here’s why:

  • A number of its power purchase agreements expire soon.
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  • They are majority owners of only 60% of their plants.
     
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  • Much of the distributions take the form of tax-unfriendly interest income.
     
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  • Their revenues are denominated in US dollars and the distributions are paid in Canadian dollars. Like many of you, I’m not comfortable with too much currency risk. They are starting with a 5-year hedge on currency exposure, which is great, but I’m not clear on what happens after that. 

So then why did I participate in the IPO? With an opening yield of 10%, I believed that investors were being adequately compensated for undertaking these risks. However, I also believed the opening spread between Atlantic Power and its counterparts would start to narrow, eventually reaching a point at which the story was no longer compelling. In fact, the price of the units advanced by over $1 (which also happens to be the forecast annual distribution) in just a few weeks. Anytime a stodgy power trust advances the equivalent of a year’s distributions in only a few weeks, it’s time to consider profit-taking. Given the proliferation of the trust sector, it’s become much easier to make comparisons betweem trusts. Looking for those trusts that apper to be trading at what I consider to be an unreasonable discount has been a great way for me to spice up my returns in the sector. Here’s a tasty morsel: given that I just sold the units, the capital gains tax won’t be payable until April of 2006. Heck, there might even be NHL hockey then.

  You’ll see Sens-Leafs before the Market Guy pays taxes on his sale of Atlantic Power.

Buying a TV.and other war stories
My intention for the column was to detail my plans for tax-loss selling, but given the performance of the portfolio over the past year, that column would be highly Seinfeldian, as in a column about nothing. Couple this with the fact that many of us have been in the stores trying to find good deals on holiday stuff and you get a portion of the column shifting from the financial markets to the consumer goods markets. And so with that…

As I’ve mentioned before, the Market Gal and I recently moved into Market Shack version 2.0. With any move, there are always a few of your older items that looked great in the old place, but just don’t seem to work in the new place. For example, our old 27″ GE television wasn’t large enough for the new family room. So I started researching televisions, and quickly realized that it’s not as simple a process as I remember. There are so many options (almost too many) that it’s difficult to keep all of the information straight. So I hit a number of consumer review sites on the Internet and after several hours of poking about, settled on a 32″ Sony Wega flat screen (we’ll go LCD or plasma once the prices come down and they work out some of the kinks). I browsed a few retail sites and learned about pricing and eventually decided to head over to Future Shop.

Anyway, we hovered over the Wega and as usual, I wavered, hummed, hawed, talked myself out of the purchase, talked myself back into the purchase, and just about annoyed the crap out of Market Gal. She sighed, rocked back and forth, looked around, sighed again, and placed her hands on her hips. It’s like clockwork.

When it comes to buying stocks and funds I’m very decisive and quite opinionated. But trying to buy a TV, mattress, heck, even a new filing cabinet and I act like I’m making the most important decision of the century. Buying a new car deserves its own column, so let’s just move on. Anyway, Future Shop TV boy comes over and the haggling begins. You should also know that I don’t like haggling. I consider myself to be a somewhat below average haggler. In fact, one of my resolutions for 2004 was to become a more effective haggler. So me and TV boy go back and forth for a while, he seemingly bored with the whole thing. Despite a few of my protestations and his two trips to consult with the manager, $50 off the price seemed the best that could be hoped for. I couldn’t even get him to deal on the s-video cable. The man was a stone. I called my buddy Ozner in Barrhaven, a man known much for his haggling, and much for his acumen with all things electronic. He suggested it was a fair deal. So we made the purchase at $849 and arranged for pickup in a few days (they didn’t have any in stock).

Early the next day, the newest Future Shop Flyer arrives and wouldn’t you know it? The TV I had just purchased (and didn’t even have in my home yet) was going on sale for $789. Here’s the thing: During late high-school and early undergrad, I worked at Zellers. If there’s one thing that I learned, it was that salespeople know what’s in tomorrow’s flyer. If I was made to know such things while working in pets and hardware (a natural combination, don’t you think?), then surely TV boy at Future Shop knows his terrain equally well. And what about his supervisor? He spoke with his supervisor twice during our haggling and the supervisor most definitely knew about the sale. I was not pleased. Future Shop has a price match program stating that if you come across a cheaper nationally advertised price of the same item within 30 days of your purchase, they’ll refund the difference. Fair enough, but it still rendered the previous night’s haggling completely useless. My time had been wasted and I was going to have to go back to the store to get the price match; more wasting of my time. Plus, they didn’t even have the TV in stock; even more wasting of my time.

Once again, enter my buddy Ozner. He calls me up and suggests that we hit Audiotronic, as their new sales flyer was coming out. Lo and behold, they were selling the Wega for $789 and had a batch on the floor. At that point, Ozner decided to step in and take control of the haggling wheel. He gets $10 off on the TV and 50% off the s-video cable. Not much, but that’s an extra $30 to me because of his 30 seconds of haggling. If an investment paid you $30 for 30 seconds of ownership, would you take it? This is how I process the world.

Fair enough, so we buy the TV, load all 165 pounds of the beast into the car and then head to the nearest Future Shop to cancel the order from the previous night. As we’re canceling the order, the cashier gets on the phone and calls the Future Shop TV boy that I had dealt with. Remember, he was the guy that didn’t tell me about the sale and really didn’t seem very interested in me at all. Upon hearing of my cancellation, the guy was suddenly struck by the lighting bolt of motivation. He asked why I was canceling and I was upfront about it.

Future ShopTV boy: “Oh, I was going to call you about the sale.”

Now I have moments of unbelievable stupidity…but I’m not that dumb. Then I told him about my dealings with Audiotronic. Apparently, mentioning Audiotroinc to generic TV boy at Future Shop is like breaking out a can of kryptonite for Superman. All hell breaks loose.

Future Shop TV boy: “Whatever their price is, I’ll beat it by $100″

There are only so many moments in life when you realize the balance of power has shifted in your favour. It usually provides a rush and is accompanied by an inflated sense of self-esteem. You’re moving along with no power and then suddenly the world turns on a dime. Needless to say I was more than happy to share news of my $779 deal and 50% off s-video cable.

Future Shop TV boy: “I’ll beat that by $100. I don’t want to lose you as a customer.”

This was good. This was very good. This is how it should have been 18 hours before when I was standing in front of the guy. Ah, the joys of leverage. So, it was back to Audiotronic. Ozner and I were on a roll and we wanted to push it; he took the lead.

Ozner: “You know that TV we just bought? “

Audiotronic TV boy: “Yeah, yeah?”

Ozner: “Well, FS is willing to beat your price by $100. You have two choices: Either refund the money or match the price. “

Audiotronic TV boy: “I’ll be right back.”

The tension builds.

Audiotronic TV boy: “Here’s what I can do for you. I can’t match $679, but I can do $689 and some free stuff.”

Ozner: “What kind of free stuff?”

Audiotronic TV boy: “What would you like?”

Ozner: “Hmm.”

Audiotronic TV boy: “How about this battery charging kit?”

Ozner and I (in unison): “Deal.”

So let’s review: I started at $899 plus cable and ended up paying $689, 50% off the cable, plus free stuff. This is Market Guy-approved.

Audiotronic TV boy: “Do me a favour? I’ll put on a card that we were willing to go $649. Take that back to Future Shop and see them sweat. We hate them.”

  VS.  
Let it be a long hate, my friend.

Making the most of (and reducing the pain from) Boxing Day
For my international readers, Boxing Day is basically a day off for Canadians to eat leftover turkey and hit the big box stores looking for bargains. It’s the biggest shopping day in our country. Here’s what I learned from this year’s Boxing Day shopping experience (investors are more than welcome to skip to #7):

  1. Get there early. I’m not talking about getting to Best Buy and standing in line at 3:30am like some people. That reeks of desperation and actually makes me feel sad. Instead, get to your most important store for their opening. Besides, an early start might give you a shot at getting home before lunch. For me, this is the holy grail of Boxing Day. 

  2. Check the flyers in advance and make a list. This will help you prioritize and plan your travel route. Plus, it will allow you to divide up the shopping list. Division of labour is a wonderful thing. 

  3. Stay hydrated. I like this one. The Market Gal and I always bring some bottled water and leave it in the car. Remember, the key is to get out of the crowds as quickly as possible and having to stop for a tasty beverage runs counter to this goal. 

  4. When looking for a parking spot, start at the farthest spot in the lot. Just about everyone else will be looking close to the store and getting jammed in traffic. Let them sit in the mess while you park and get into the store. So you might have to walk those extra 30 seconds. After stuffing your face over the holidays, trust me, you need the exercise. 

  5. Don’t bring items for exchange or return. It amazes me that people still try to do this. When rejected by the store, these customers complain about having traveled great distances, and endured considerable hardship to come on December 26th to return their $20 item. What annoys me is that their incessant whining holds up the line and keeps me in the store longer than I need to be. This is not positive and will some day provoke an incident most unpleasant. 

  6. If any songs by Celine Dion come over the store speakers, and you’re stuck in a long line, remain calm. Retreat to your mental safe place. It will soon be over. 

  7. If you’re an investor in the retail REIT space, laugh yourself silly whether the stores are full or not. As always, why own the retailer when you can own the retailers landlord? I own Riocan (REI.UN on the TSX) and Calloway (CWT.UN on the TSX). Calloway has been the top performing REIT in 2004, returning nearly 50% to investors. I’m actually laughing with joy as a write this. Riocan is, well, Riocan. I have lost my ability to be rational about this company. Can you name a child Riocan? Is that possible? If only I weren’t so nervous about some of these valuations.

Happy New Year everyone!

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. Should old investments be forgot and never brought to mind? We’ll take a cup of kindness yet formail@marketguy.ca