Relaunching July 2008!

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In order to satisfy at least 3 or 4 people, this site will resume polluting cyberspace very soon. The fact of the matter is, the world is currently experiencing a shortage of blogs and naturally I want to be part of the solution. Besides, it’s time for this site to experience an extreme makeover. For those of you fond of torment, confusion, and nausea, let the countdown begin. Until then, please DO NOT sign up via RSS…this feature won’t be fully operational for a few days. Stay tuned!

A Day in the Life of Business Television

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In this “celebrating the 20th anniversary of Rick Astley’s debut single, Never Gonna Give You Up” edition:

  • Feature: A Day in the Life of Business Television
  • Trading Notes: throughout the column are trading notes on TransCanada Corporation, Bank of Montreal, Sun Life Financial, and PH&N Total Return Bond Fund.

It’s been several months since I’ve had a chance to update the website and I’m feeling guilty about it. So what better way to get myself back into the game by overcompensating and doing something completely insane? So I’ve decided to spend a full day watching nothing but business television. Yup, I’m going to watch an entire programming day of Canada ‘s Business News Network and keep a running diary of what’s going on. By the way, their live broadcasting day is 13 hours long. When mentioning the idea to a number of people, the reactions included the following:

  • “you’re kidding, right?”
  • “that’s pretty fu*%ed up”
  • “why would anyone want to read that?”

I realize this represents a test of endurance for me as author and you as reader. At times it’s not going to pleasant and we’re all going to want to give up. But we have to plug along, keep the dream alive, and finish this even if it kills us. It is our collective destiny. In terms of the technicalities, I should mention that I can switch to other channels only when BNN is repeating a segment or heading to commercial. The first channel that I switch to must be CNBC. This keeps the focus on business television. If CNBC is also at commercial, then all bets are off. With that, let’s begin:

7:52am: BNN-TV takes the Bloomberg TV feed until 8:00 . Let’s just say that Bloomberg TV has all the personality of a turnip.

7:53: CNBC is telling us that high net worth individuals world-wide have assets totalling $37.2 trillion, up 11% since 2005. The highest growth has come from Singapore, India, Indonesia, and Russia. These are the kind of factoids that have become staples of business television. For example, the other day BNN was interviewing some pizza expert who told us that 30% of the cost of producing a pizza goes towards cheese. Based on my last experience at Pizza Pizza, I figured it would be more like 5%. That pie had one hell of a receding cheese line. Anyway, apparently the spot price for cheese has increased dramatically over the past year. I need to know these things.

7:59: BNN is about to begin the broadcasting day. I remember when this network started in 1999. In the moments before they went to air, I was close to spontaneous combustion. Imagine an 8-year old on Christmas morning and you have the idea. I almost needed sedation. The Market Gal, not really understanding how much the channel was going to inconvenience her over the years that followed, just ignored me.

BNN television: As The Market Guy keeps telling his wife, the ticker tells a story. She’ll never believe him.  

8:00: Here we go. Linda Sims leading off. It’s entirely possible that Market Dad has a non-sexual crush on Linda Sims. When I mentioned the prospect of doing a running diary, he mentioned her 2 or 3 times. Maybe he has a thing for the grey streak in her hair. Think John Davidson from the 80s, only in female form. No, I’m not suggesting that Market Dad had a thing for John Davidson. Let’s not get off on the wrong foot here.

8:02: Canadian dollar up to 94.20 cents. I’ve been picking up $US with every 2 cent move over 90 cents. This is more for travel purposes than anything else. We took a trip to New Hampshire a few weeks back and with the exchange rate and no sales taxes to speak of, the $US prices on goods are actually cheaper than we’d pay in Ontario. I don’t know if I can bring myself to buy clothes in Canada as long as this is going on. Although Market Gal is still encouraged to buy at Reitman’s (yes, I still hold a position).

8:08: Top story involves a possible gold merger between Yamana, Northern Orion, and Meridian. I couldn’t care less. We saw Live Free or Die Hard last night and the plot revolves around a lunatic taking down the computers of the world. Naturally mayhem ensues and Bruce Willis has to save the day. The movie does make one think of the value of hard assets such as gold. However, I’m still scoring low on the paranoid index, gold stocks don’t pay a dividend, and I can’t bring myself to research the wedding stats from India . But hey, India now has all those high net worth folks…hmmm. Nah!

8:10: The first of what should be 5000 E*Trade commercials. The other day I was on their website and noticed their “10-Second Advantage,” which promises to complete your trade within 10 seconds. I especially enjoyed the following disclaimer:

“This offer does not apply in fast markets, if exchange opening is delayed, during trade halt situations, or in the case of system failures. “

In other words, the offer is invalidated whenever anything that might actually lead to a delay happens. Thanks E*Trade!

8:25: Lou Schizas makes his first appearance. He typically handles viewer questions and always brings some technical analysis to the table. Besides, every network must have a middle-aged, glasses-wearing, balding guy behind the desk. CNN has Ali Velshi, CNBC has Ron Insana and Steve Leisman, and we have The Scheezer. And yes, I’d put money on the fact that his buddies call him The Scheezer. Although it’s entirely possible that guys named Lou don’t require a nickname. Can we get a ruling on this?

8:31: CNBC is debating on whether or not the Fed will move to weighing overall inflation more than core inflation. A former fed governor says no. I could very well be the only Canadian psychology instructor who is actually interested in this.

8:36: Back on BNN, Mark Bunting is updating international markets. Good night in Hong Kong, Tokyo, and Australia. Right now my international holdings are focused in the Mac Cundill Recovery C Fund and the O’Shaughnessy International Equity Fund. The former does some currency hedging, while the latter does not. I like having both approaches in play. Sure, the fees are higher than those offered by an ETF, but I can’t argue with their investment philosophies and performance.

And while we’re here, we all know that most actively managed funds struggle to outperform their associated indices. Most years only a small minority of managers are able to outperform, let alone do it over time. Well guess how many index-ETFs outperform their index? That would be about zero. If you’re investing in an index-ETF, it has management expenses and tracking error. So it’s basically impossible to match the index, let alone outperform. Underperformance is being locked-in right at the time of purchase. I’m just tossing this out there, given that an increasing number of folks are switching to ETFs and ETFs alone. Personally, I use both index-ETFs and actively managed funds. That way I get the near index returns of the index ETF and at least an opportunity to beat the index with some actively managed entries. So far so good.

8:43: CNBC is talking about Michael Moore’s new film, “Sicko.” Joe Kernen is telling us that any form of socialized medicine is contrary to what the United States is all about. I could be really sarcastic right now.

8:51: BNN is interviewing the head of the Aeroplan Income Fund. It has a $4.1 billion market cap, is trading over $20 and returned over 50% in the past year, not including distributions. I remember thinking it was too expensive when on its first day of trading it popped 18% off the IPO price of $10. What’s the punch line? I’m just a putz with a website.

9:10: Talk has shifted to the BCE bidding process that supposedly concluded a couple of days ago. Let’s revisit the top 5 words or phrases that analysts, commentators and potential bidders have used to describe the BCE auction process:

1. “needlessly complex”
2. “botched”
3. “broken promises”
4. “interference”
5. “potential conflicts”

This also doubles as the list to describe the Canadian government’s treatment of investors. Yes, BCE has now confirmed every suspicion that it functions like the government. Beautiful.

9:18: Amanda Lang joins us from Chicago where she is reporting on the jury deliberations in the Conrad Black trial. My interest has now reached a solid 2 out of 10.

9:28: CNBC is telling us that Onex is part of a group purchasing Allison Transmissions from GM for over $5 billion. Onex CEO Gerry Schwartz is married to Chapters Indigo head Heather Reisman. Note to Heather: The first thing on your “To Do” list should be updating your pricing to reflect the stronger Canadian dollar. There’s no reason to see $13.99 Canadian, $9.99 US on the same book when our dollar is trading at 94 cents.

9:30: North American markets are now open. To celebrate, I’m grabbing some pineapple.

9:39: TSX up 70, Dow down 12, Nasdaq up a fraction. My interest in the Nasdaq hovers between a 0 and 1 out of 10. It’s full of high valuations, cut-throat industries, and almost no dividends. Other than that I’m sure it’s fantastic.

9:45: My Rogers digital box just cut out and has to reboot. That gives me time to check some analyst ratings on the Internet. As it happens, this morning’s Daily Edge at Scotia McLeod lists Rogers as their top pick in the cable sector. The report notes that digital penetration has reached 55% of basic cable. I wonder how many of that group had their digital boxes cut out this morning.

9:59: Pat Bolland at the desk. For some reason I can’t remember if he still goes with the whole “bowtie on Fridays” thing. If not, we may have to start a petition.

10:04: In what has to be the least-surprising ruling of the year, the Supreme Court of Canada unanimously upholds the ban on tobacco advertising. BNN gives us a Rothmans quote. If anyone trades off this news, I’d be very surprised.

10:08: CNBC is teasing us with the question, “what’s black and white and a really bad investment?” Newspaper stocks! No kidding.

10:09: Both financial networks are at commercial, so I switch over to TV-Tropolis and get the first laugh out loud moment of the day. They’re playing reruns of the CTV 80s classic series, Night Heat. The heavily-synthesized music, over the top acting and attempts to render 1980s Toronto as gritty and you get pure retro-Canadian TV. And I love every minute of it.

From the theme song: “I feel the night heat, I feel your heartbeat, something ain’t right, there’s too much heat in the night.” They don’t write lyrics like that anymore.  

10:22: Market Gal makes her first appearance. She’s on vacation but thankfully has a full-day planned and won’t be giving me too much grief for doing the diary. I mentioned my excitement about Night Heat and she replied, “Isn’t that the one with Carroll O’Connor?” That was In the Heat of the Night. Now all we need is a show titled, In the Night of the Heat.

10:23: Another E*Trade commercial on BNN. I’m going to see this commercial 500 times today. I think BNN only has 10 commercials in rotation at any one time. For some reason this reminds me of WKRP in Cincinnati and their sales manager Herb Tarlek. Who could forget their top clients, “Red Wigglers, The Cadillac of Worms” and “Ferryman’s Funeral Home?”

10:31: CNBC reporting that natural gas inventories are higher than expected and the spot price is now down over 4% to less than $7 a unit. Remember a couple of years ago when it was trading over $14? Here’s hoping you didn’t lock in your supply when those marketing company trolls were in your neighbourhood trying to scare everyone back in 2005. In any event, there has to be a point when natural gas investments are going to be value plays.

10:49: BNN continuing to chat about energy prices and the fact that oil is now over $70 a barrel, with long-term contracts trading at record levels. My top holding in the energy sector remains Bonavista Energy Trust (BNP.UN on the TSX). It’s not the cheapest, but operationally it continues to deliver. I want a company of decent operators who are committed to a sustainable model.

10:54: CNBC interviewing an analyst who uses price to sales as a key valuation metric and host Mark Haines notes the similarities with the approach used by James O’Shaughnessy, the guy who manages billions for RBC, and a healthy portion of my mutual fund dollars. I’m a big fan of O’Shaughnessy’s book, What Works on Wall Street, although you really need to be interested in the markets to make it a worthwhile read.

11:15: Another E*Trade commercial. It’s entirely possible that by the end of the day I’ll be shoving an ice-pick into my temple.

11:17: CNBC is really focusing on Apple’s iPhone and the whole “smartphone” phenomenon. One of their guests just commented that, “you can do a lot more with your phone than just talk into it.” To be honest, that’s about all I want to do with my cell phone, but I’m obviously running counter-trend.

11:22: CNBC now wading into the immigration debate that’s gripping the US Senate. I find that CNBC focuses more on politics than other financial networks, but I really wish they’d devote more attention to how political considerations affect the stock market. When I’m tuned to business television and they’re talking politics, the only thing I care about is how the politicians are going to influence the performance of my portfolio. In Canada, this means asking “how is the Canadian government going to make my investing life more difficult today?”

11:30: BNN switches to Kim Parlee and the show, Talking Tax. Meanwhile, Market Gal unexpectedly calls in during the middle of a Tim Hortons run. I’m going with the Ham and Swiss combo, Canadian maple donut and a Diet Coke. I’m feeling more and more Canadian with each passing moment. It’s official: I’m now ready for Canada Day. And for the record, I still think Tim Horton’s stock is pricey.

11:38: Talking Tax rolling along with questions related to selling a cottage, tax-loss selling on investments, and other meat and potatoes stuff. This gives me the chance to check some additional analyst reports on the Net. CIBC World Markets noting that the popularity of an initial public offering of master limited partnership units (Spectra) may have left several other pipelines and utilities undervalued by comparison. Speaking of that…

Trading Note
TransCanada Corporation (TRP on the TSX)

I’ve been a holder of TRP for seven years now, having initiated the position just after they cut their dividend back in 2000. At that time the stock tanked and was a glaring value candidate. Over the past several years I’ve added to the positon several times, at prices ranging from the mid-teens to the early $30 range. Recently the stock surged past $40 and I decided to pare 30% of the position on valuation issues. With interest rate concerns running high, the stock has since come back to $36 and is starting to look intriguing again. Even after paring back, it’s still one of my top 5 holdings. Back to the diary…

11:59: We’re nearing the 4-hour mark and I’m surprisingly fresh. Scratch that, they just aired another E*Trade commercial.

12:10: Market Gal popped in, noting that Sue Herrera of CNBC “is not as blonde” as she used to be. I may need to bribe Market Gal to hang around for a while.

12:14: CNBC is discussing the performance of wine-maker Constellation Brands and noted that high end wine sales are strong, but so are sales of something called the “Two-Buck Chuck.” Time to Google. Ah, Trader Joe’s in the US offers a number of low-price California wines that are called, “Two-Buck Chucks.” I love the Internet.

12:19: Gold up $7.10. I know very little, but I do know this: I’d make a horrible trader.

12:22: More about the iPhone. I’m definitely not an early adopter of technological product and this thing is extremely expensive…but it does look exceptionally cool. Although what’s the deal with the 4-8 hour battery life? Isn’t that like having a car with a 10-litre gas tank?

It’s cool, it’s multi-functional, and it’s going to be very popular…but the Market Guy isn’t ready for an iPhone  

12:27: BNN’s Michael Kane just presented the following factoid: Poland is concerned about governmental red tape and has established 7 committees to investigate the issue. I didn’t know the BCE board was doubling as the Polish government.

12:30: Market Call begins, arguably BNN’s flagship program. Paul Harris of Avenue Investment Management is in the chair to answer viewer questions about large caps. I’m not very interested in the top picks or even the opinions offered by the guest. Rather, I use the information as an opportunity to learn more about different companies and as a starting point for additional research. It’s also useful in monitoring changes in sentiment on the market or individual stocks.

12:40: Let’s agree to eliminate the phrase, “I’ll hang up and listen to your comments” from the Market Call vernacular. This needs to go away.

12:50: Harris recommends investors look abroad for their exposure to financial services. I don’t know enough about international financials, so I’ll use mutual funds to gain exposure. However, I am comfortable maintaining specific positions in Canada. Speaking of that, time for another…

Trading Note
Bank of Montreal (BMO on the TSX)

Over the course of my life, I’ve tried to live by a certain code. Specifically, I’ve found it useful to live according to a number of guidelines that help to improve my chances for success. Here are 4 examples:

  • only use credit cards that give you points
  • never under any circumstances trust a Blue Jay’s bullpen
  • try to enjoy every sandwich (this one courtesy of Warren Zevon)
  • in a low-interest rate environment, never pass up a 4% yield on a Canadian bank stock, especially when it’s trading above it’s average yield, exhibits a relatively low price to book ratio (always an important valuation metric for banks) and is despised by analysts.

BMO exhibits all of the characteristics associated with the latter, so I nibbled on a small opening position at just over $67. Sure, the bank is experiencing some revenue growth issues, but relative valuation and rumblings from management leave me optimistic. Anyway, the trade expands my direct bank holdings to TD and BMO, with indirect holdings spread across several mutual funds. Back to the diary…

1:12: Paul Harris scores a 3 on the Market Call Smugness Index (MCSI). Put in perspective, Brian Acker scores a 10, Ross Healy an 8, Sandy McIntyre a 3. David Driscoll isn’t smug. He just hates 95% of the stocks that people ask about and doesn’t relish talking about crap. Personally, I think this is positive because guests who love everything aren’t especially useful.

1:22: CNBC talking about the iPhone again. There are concerns in the US about the ability of AT&T’s network to handle the traffic. The analyst says they need a G3 iPhone. How about a day’s worth of battery life? That might be good.

1:25: Harris’s top picks are E-Bay, Allied REIT and Sceptre Investments. I’ve now hit the first psychological lull of the day. I need some fruit.

1:27: Michael Hainsworth is a good host for Market Call and asks some decent questions. It’s essential to have a host who isn’t afraid to challenge statements, knows the subject matter, and probes a little bit. In other words, you need the exact opposite of Larry King.

1:29: I really wish Market Call would throw up a board that offers some bullet-points on the investing philosophy of their guests. That would be a great lead-off for the show and would add some context for the opinions that follow. Hey, this stuff matters.

1:32: It’s day 58 since the Conrad Black trial began. BNN is back to Chicago and an update from Amanda Lang. At least Market Gal isn’t around right now. Every time Amanda appears on camera I get the, “you think she’s cute.” Russell Crowe needs to put out a film in order to balance things out.

1:34: Pat Bolland has taken his jacket off. The business channel must be getting down to business.

1:53: Andrew Bell reporting on Dundee REITs decision to sell all of its eastern assets to GE and switch to being a smaller, western Canada REIT. There are concerns that Dundee ‘s management contract will cost investors between 90 cents and $1.35 a unit. I’m a holder of Dundee, but may sell in advance of the transaction. It’s been a good run and one of the best investments that I’ve made in the last 5 years. But the valuation discount that followed the REIT has all but disappeared. Artis (AX.UN) seems to be the consensus discount candidate in the REIT space.

2:00: If I weren’t doing this diary, there would be serious competition for my viewing dollar. Two stations are currently showing Star Trek reruns. I haven’t been this torn since AMC was playing Fast Times at Ridgmont High and Space was showing The Terminator. Spicoli or Sarah Connor? How can you go wrong?

2:10: The US Federal Reserve is about to make its decision on interest rates. CNBC is on it like spit and has two anchors and a commentator in studio and 3 other reporters on remote. With 6 people opining, they’ll probably let each person talk for about 8 seconds at a clip, so that should be fun. They’ve added the graphic “FED DECISION IMMINENT” on screen. All we need is some important music and we’ll have ourselves an event.

2:15: The Fed has left interest rates unchanged. They dropped the word, “elevated” from their description of core inflation, but aren’t convinced that it’s under control. I think this also describes Lindsay Lohan. Anyway, the CNBC crew is analyzing the announcement like it’s the Zapruder film. High oil prices, moderating growth and the adjustment in housing prices are seen as preventing the Fed from raising rates. No surprises here.

2:24: I’m one more E*Trade commercial from needing some caffeine. Let’s make it tea in my New York Stock Exchange mug. We’re almost 6.5 hours into the diary. Market Gal just came down to offer, “you’re insane.”

2:43: In response to a report about iPhone customers waiting in line for hours before the product launch, BNN anchor Marty Cej remarks that, “nerds travel in herds.” That remark would ordinarily cost him a 500% increase in the amount of spam headed to his inbox. However, all those who know how to spam are in line waiting for iPhones.

2:45: One of the BNN graphics notes that the Fed decision will be coming out at 2:15. I’ll have to watch for that. OK, I’m getting punchy

2:49: I wonder if there’s going to be an appearance by CIBC chief economist Jeff Rubin, and if so, will he be sporting a mullet? He’s the Barry Melrose of Bay Street.

  If there’s one thing that 13 hours of business television needs, it’s more mullett!  

2:58: CNBC just mentioned that they went 58 minutes without mentioning the iPhone. Maria Bartiromo, the so-called “Money Honey” makes an appearance. She highlights that McDonalds is one of the day’s laggards. Perhaps if they offered the BLT bagel all day, things would be different.

3:02 : Bartiromo notes that Michael Moore will be appearing in the next hour, and the graphic suggests, “First on CNBC.” Sure, he’s first on CNBC if you neglect his appearance on Letterman, the Daily Show, and just about everywhere else. Other than that, CNBC has him first.

3:05: It’s 19 degrees in Ottawa and my neighbour’s air conditioning just came on. Someone get David Suzuki on the phone.

3:20: It’s time to place a call to my buddy Bouch. He’s worked at a gas station, managed the accounts for a courier company, sold life insurance, and starred in his own adult film. OK, so I made one of those up. He’s now running the small business portfolio at a branch of one of the big 6 banks. If there’s one thing that I’ve learned from our conversations, it’s that the banks always get their money. As a shareholder, that brings warmth to my heart and a spring to my step.

3:37: Speaking of porn, CNBC will be interviewing one of the honchos for the company that publishes Blender, Stuff, and Maxim magazines. Between high tech gadgets and this stuff, the testosterone levels of the day have just peaked.

3:46: Bartiromo now interviewing Michael Moore in front of the NYSE. Apparently they couldn’t get him into the exchange so they had to move outside. There’s something fishy about the whole thing. Anyway, Moore hanging around Wall Street is quite a sight. I haven’t been this uncomfortable since Rafael Nadal won the French Open wearing capri pants.

Moore is promoting his film, “Sicko” and wants people to divest their holdings in private health companies, as he deems the profit motive incompatible with the providing of health care services. Bartiromo states that if she gets sick, she wants to get treated in the good old US of A. Moore counters with, “well you work for CNBC and have a great health plan,” but wonders about the 47 million Americans who lack coverage. Some great TV going on here.

4:00: Markets closed, but the business television machine continues to roll along. TSX finishes down 26, Dow down 5, the dollar up over a cent. It was a mixed bag for the financials. Speaking of that, time for another…

Trading Note
Sun Life Financial (SLF on the TSX)

I’ve initiated a small position in Sun Life Financial at roughly $50. It’s trading at a higher than average historical yield, is just off its high yield, exhibits excellent valuation metrics nearly across the board, and sports a growing dividend. Historically the company has turned in lower earnings growth and return on equity than many of its peers. This has left the shares trading at a justifiable discount. However, the company has been making a number of improvements that should narrow the spread. I’m just nibbling here…no rush. Back to the diary…

4:11: TV-Tropolis is running Beverly Hills 90210. The digital guide description reads, “Brenda sneaks around with Dylan without her parents knowing; Steve takes a job at the Peach Pit.” I must resist.

4:31: BNN is discussing Starbucks and the fact that the coffee company isn’t doing as well since it decided to open stores in less affluent neighbourhoods. You mean those near the poverty line aren’t waiting 10 minutes to pay $7 for a cup of coffee? Who would have guessed? Meanwhile Market Gal just came by with some fresh strawberries. Good call.

4:37: BNN news ticker still reporting that the Fed will be releasing their decision at 2:15. I’ll have to tune in.

4:45: We’ve gone the entire day without the Harper government releasing a new policy that screws with investors. Damn, I just jinxed it. I feel like the idiot who speaks to the pitcher during the 8th inning of a no-hitter. Now I’m going to be on edge until bedtime.

4:54: Research in Motion beats the street on stellar subscription additions. Good for them, but I just don’t care. I can’t bring myself to buy such an expensive stock even if there’s growth behind the numbers. We also learn that by 2008, half of the world will live in cities. In the years ahead there’s going to be a lot of government spending on infrastructure, that’s for sure. Hmmm, that might be something for an investor to care about.

5:00: CNBC is switching to Kudlow and Company, which always seems to include a fair amount of “everything in the US economy is just great because we’re Americans” approach, with the daily proviso that the Democrats must be stopped because (to paraphrase) “they hate America.” They also make heavy use of 4 panellists at a time, which leads to exceedingly quick points, occasional yelling, and not much depth. This is all irrelevant because it’s now time for my favourite show on BNN: Squeeze Play with Amanda Lang and Kevin O’Leary. She’s in Chicago, he’s in Toronto.

I find O’Leary to be one of the best things about BNN, in large part because he always keeps the focus on how each issue relates to making money. He’s also endlessly entertaining and his use of language is certainly unique for a business channel. For example, dividends aren’t just beneficial; they are “succulent.” Government interference isn’t just annoying, it’s “evil and sinister.” He also exhibits an excellent on-screen dynamic with Amanda, in large part because she’s not afraid to challenge the big guy and he seems to enjoy the challenge. I also like the show because they let the guests talk, which isn’t always the case on television.

Today’s guests include Andrew Pyle of Scotia McLeod and Andy Busch of BMO to talk about the Fed decision. Pyle doesn’t see inflation risks, but does see stagnation, while Busch notes that we didn’t learn anything new today. He expects no change in rates for a while and also suggests that the private equity party may be nearing an end.

Busch asserts that for now, cash is king. Interestingly enough, my biggest holding is cash, which I’ve parked in a high interest savings account yielding over 4%. Anyway, Busch also recommends buying $US as “it’s going to be a grind getting to parity.” Meanwhile Pyle is favouring energy, a few bonds on the front end, and the avoidance of consumer discretionary stocks.

Even though my fixed income investments have been hit lately, I’m not going to forget why I own bonds in the first place: to diversify my holdings and moderate the risk of my portfolio. Speaking of bonds, here’s a…

Trading Note
PH&N Total Return Bond Fund
You may recall that in the last edition of the column, I was debating on how best to increase the fixed income portion of my portfolio. I settled on the iShare Canadian Bond Fund, but also decided to maintain an existing position in the TD Canadian Bond Fund. Several readers emailed asking that if I absolutely had to have an actively managed bond fund, why didn’t I sell my units in the TD Fund and switch to the PH&N offering, which sports significantly lower expenses (MER of only 0.59%) and a stellar performance record. Well, I’d dismissed the PH&N offering because my broker was charging a ridiculous fee to purchase PH&N funds. I refuse to pay a fee when buying mutual funds. It’s not happening. Well, a few months ago I opened another brokerage account with a firm that doesn’t charge for PH&N funds. So I dumped TD Canadian Bond and picked up the PH&N Total Return Bond. So now I have a core, actively managed bond mutual fund and a solid, passively managed bond ETF. Done! Back to the diary…

5:30: Technical issues mean they aren’t able to interview bond guru Bill Gross, which sucks big-time. Gross is a good get for the program, especially on Fed announcement day. So they talk about Conrad Black (Kevin refers to Lord Black as being a modern-day “Napoleon”) and then, surprise, the iPhone. We learn that the device may have a 300 imprint, meaning that you can only charge it 300 times before it becomes dysfunctional. We also learn that once the battery is spent, you have to send it back to Apple. It’s not as simple as pulling out the battery and replacing it yourself. Yeah, I’m going to spend $500 on that. I’ll wait a few years until all of the bugs are worked out and it’s retailing for $129.

5:45: Now they’re talking about companies that donate to charity. Kevin offers the following: “The DNA of a corporation is to make money for shareholders….the only charity they should concern themselves with is shareholder wealth.” He believes that shareholders are welcome to donate their profits, but that companies shouldn’t be doing it for them. He also notes that CEOs should have to call shareholders and ask if it’s OK to donate some of the profits to charity. After all of this, Amanda notes that Kevin is “delightfully predictable.” I agree.

  Kevin on the environment: “Saving the planet is very important because we live here, but we have to make money Amanda. There’s no point being on the planet without money. That’s a miserable place. The cavemen tried it and it didn’t work.”

6:05: CNBC is offering Mad Money starring ex-hedge fund manager Jim Cramer. I liked him as a guest host on the CNBC morning show Squawk Box. He was opinionated, charismatic, and always dynamic. His current show amplifies these characteristics but adds segments that include a range of sound effects, heavy background music, funky camera angles, and a completely over-the-top, exaggerated delivery. It’s clearly designed to appeal to young traders, speculators, and those with attention issues. Thanks, but I’ll pass.

6:10: Meanwhile BNN has Stars and Dogs with Andrew Bell and Kim Parlee. They start the show debating the wisdom of investing in a particular stock. One presents the case for the bears, while the other adopts the role of the bulls. The producer then selects a winner. Basically they are illustrating a decent investing practice: consider both the plusses and minuses before putting your hard earned money to work. We often get caught up in the excitement of the moment and fail to consider the downside. Behavioural finance clearly demonstrates our tendency to be overconfident and this can sabotage our chances of investing successfully.

6:15: Now they’re chatting about Le Chateau, a star clothing retailer that focuses exclusively on young people. The stock is up 51% over the past year. I’m always concerned about a retailer that focuses on a single age group. Although our hosts are telling us that 50-year olds are trying to look 19, and Le Chateau is more than happy to accommodate.

6:30: BNN presents The Business News with Howard Green. He’ll be updating the business news highlights of the day. Not a bad recap show and Howard asks some good questions. However, at this point I have a pretty good idea about the stories of the day, so I may have to spend the next hour contemplating my position in time and space…or my NFL fantasy draft. I’ll let my frontal lobe decide. Frontal lobe? Anyone in there? Right now I feel like Homer when he said, “Brain, you don’t like me and I don’t like you, but let’s just do this!”

6:50: E*Trade commercial still in the lead, but wait, coming up on the inside is that Xerox mute button, “surprised you even get it,” “bye bye bonus” commercial…and down the stretch they come! Whichever wins should be taken out to the back of the barn and shot.

7:05: Market Gal suggests Chinese food! I’m not sure if MSG is really going to help my brain right now…but what the hell. In addition to about 3 other items, we’ll get one of those token veggie dishes, you know, one of those dishes that you get to convince yourself that you’re not eating crap? You eat 1/5th of a green pepper, 1/10th of a celery stalk, ignore those midget corn thingies and call it a day?

7:08: I’m officially enjoying Howard Green’s tie and I think my hair is going to look exactly like his in about 10 years.

7:20: Howard just told us that after the break, he’ll be returning with “a little dope on the Fed.” Peace out, smack yo, Ho G!

7:30: Hey, it’s another edition of Market Call, only in half-hour form. And the guest, Robert Lauzon of Middlefield Capital is here to talk about uranium stocks. I think he looks a lot like Bruce McCulloch of Kids in the Hall. I called in Market Gal for a second opinion and she disagreed. But she once confused Jimmy Buffett with Warren Buffett so her vote gets a zero weighting.

  Good to see Bruce doing positive things with his new identity.  

7:40: I have no interest in uranium stocks. On the plus side, I keep expecting Rob to get up and start signing, “these are the Dave’s I know, I know, these are the Dave’s I know.”

7:50: I’m obsessing over this, but someone has to call in and ask him why Dave Foley hasn’t asked him to appear as a guest on All-Star Poker or whatever that show is called. I could have used this half-hour to actually learn something about uranium.

8:00: Now it’s time for Money Talk with Patricia Lovett-Reid, a certified financial planner. It’s a personal finance show that does a good job of covering some the basics and always makes me think of how vital it is for everyone to be more sophisticated about money. If I ruled the world, personal finance would be more prominently involved in the formal education of our young people. It seems strange to have kids who know the value of Pi, can tell you the capital of Manitoba, and know how to recite Shakespeare…but don‘t know about asset allocation, compounding, or how to get the best rate on a mortgage.

8:14: Now Patty is giving us some advice about holding a successful garage sale. Next up is a consideration of disability insurance. Geez, they’re covering some ground.

8:30: The final show and the final half-hour of our journey. Unfortunately it just happens to be the show that I’m least interested in: Strictly Legal, a show about legal advice for personal business owners. Or at least that’s what the digital guide says. This is the only BNN show that I’ve never seen and it’s really going to test my attention span. I completed a law degree a few years back, but had to force myself to finish up before heading over to psychology. I may start having flashbacks.

8:32: For some reason they’re dealing with the “big issues that face this country.” OK, I’m definitely not ready for this…and I’m not sure they are either.

8:51: Ticker go by fast, pretty red and green, guest say “something something.”

8:55: I’ve watched over 13 hours, close to 800 minutes, and probably 42 E*Trade commercials. I’m exhausted, about 20 minutes away from having a Lord of the Flies moment, and only about 2% of you are actually still reading this. So it’s time to bid adieu. Let me leave you with one final thought: If I can spend 13 straight hours watching business television, here’s hoping those of you reading the column just for the goofiness can spend an hour per week learning about investing and personal finance. Hey, maybe start reading the business section of the Globe and Mail or your favourite daily. Poke around the Internet and learn about the money issues that are most relevant to you, whether it’s retirement planning, saving for your child’s education or learning about constructing a diversified portfolio. Head to the Financial Webring Forum and enter the section devoted to beginners. You have to start somewhere…and the knowledge adds up over time. It’s all about empowerment. And for the sake of whatever you call a god, have some fun with it. More ideas as we move ahead.

9:00: Thanks everyone! I’m going to bed.

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…so do your homework before making any investment decisions. Basing any decisions on his column would be really, really stupid. He was disappointed in Wendy’s new burger, The Baconator. Send your beefs to mail@marketguy.ca

Opening up the Mailbag

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n this bloated, gas-filled, pass the Zantac edition:

  • Feature: Opening Up the Mailbag; topics include income trust taxation, oil and gas investing, business trust uncertainty, Canadian REIT trading, bond fund choices, the joy of high-interest savings, and fun with the big banks.
  • Market Guy’s Closing Bell: Mugs and chains and markets, oh my!

My inbox is stuffed with notes pertaining to everyone’s favourite topic: the recent Conservative decision to tax income trusts. The reactions that I’ve read so far include the following: anger, disappointment, depression, resentment, disillusionment, itching, rashes, full body hair loss, projectile vomiting, gigantic eyeball, tail growth, possession by the Prince of Darkness, and the condition known as hot dog fingers. I feel your pain. We’ve been down similar roads before (see this column from 2005, which feels weird to read now. It’s been such a roller coaster since then) but none have been quite like this. Clearly, it’s time to open up the old Market GuyMailbag…but first, let’s deal with some thoughts arising from the last edition of the column (MG #32).

Letter #1: Duncan in Toronto writes:
I think the column on what you learned about investing from watching Miami Vice was inspired! Pieces like that give me hope, in a strange sort of way.

MG: It’s just part of my never-ending efforts to make this world a better place. It’s a burden that I must bear and a bear that I must cross.

Letter #2: Dan in parts unknown writes: 
OK, so you mentioned buying Reitman’s and the fact that you like their commercials. Writing about women’s clothing commercials may necessitate the removal of the “guy” from “ Market Guy .”

MG: Good one. Yes, I enjoy the Reitman’s (RET.A) commercials. I also miss the Canadian Tire couple, consider myself a pottery enthusiast (I don’t know enough to be considered a “buff”), welled up during a Wonder Years re-run on TV-Tropolis, and have openly wondered why Abba can have Mamma Mia, but there’s still no musical based on the stylings of the Village People. To balance things out, I will now work on the car, watch some TSN, and research several heavy equipment makers.

  It was a great series. Remember the episode when Winnie was in an accident, kept Kevin at a distance, but he wouldn’t be denied seeing her, so he climbed the side of her house and they both mouthed, “I love you” through her bedroom window, while Bob Seger’s “We’ve Got Tonight” played in the background. Oh shut up! Here’s theYouTube clip.

Letter #3: Bob in Montreal writes:
I’ve been a conservative voter since the Diefenbaker days and had been feeling good about the early returns from the current Harper government. Finally, we have some decisive leadership and some fresh ideas. Then along comes their decision to tax the trusts and I have the worst investing day of my lifetime. I expect politicians to break promises from time to time and appreciate the difficult nature of the governing enterprise. However, this broken promise has cost me dearly and I can’t get past it. I’m going to have to hold my nose when voting for another party, but I don’t see how I can reward Harper for this most ill-conceived action. I also don’t understand their rationale for punishing investors at a time when so many of us are looking for yield to help fund our retirements. This is a slap in the face to seniors and the investing public. What are your thoughts? I have to assume that your readers feel the same way. Keep up the good work.

MG: Thanks Bob. I’m not going to harp on this, in large part because this is well-travelled ground and others have identified the issues in more eloquent fashion that I ever could. OK, maybe I will harp on it. Here are a few thoughts:

In taxing the trusts, the Conservatives have been arguing that the situation changed once BCE and Telus announced conversions and Encana was on the way. The fact of the matter is we all knew that eventually, some larger corporations were going to convert to the trust structure. It was only a matter of time. Several commentators had been calling for BCE and a number of other companies to make the switch for many, many moons. Heck, there were even rumours of a big bank floating one of their divisions into a trust. The trajectory was clear and I’d like to think that Harper and Flaherty were following the markets when they promised not to tax the trusts. So by saying the situation changed, either they were being dishonest, stupid, or ignorant. At least when it comes to the income trust issue, the Conservatives presented themselves as Scarlet Johansson, but we ended up with Paris Hilton; definite downgrade all around.

I also find it interesting that some people are suggesting that by taxing the trusts, the Conservatives had the courage to do what the Liberals failed to do all along. Well, if the Conservatives really were a courageous lot, then why didn’t they support the Liberal suggestion of inhibiting the business trusts? Or even just stay on the sidelines while the Liberals performed their various consultations? Instead, they presented themselves as the righteous defenders of income investors and framed the Liberal approach as targeting the savings of seniors. They established the taxation of trusts as a fundamental point of difference between themselves and the Liberals…and then introduced a scheme that went far beyond what the Liberals had been hinting at in the first place. Plus, in the days after the announcement, the Conservatives spent a fair amount of time trashing the Liberal record on trusts. Let me get this straight: They claimed the high road in protecting the trusts and then claimed the high road in trashing the trusts; this is completely, utterly untenable. Instead, shouldn’t they be apologizing to the Liberals and suggesting that, “hey, you guys were right and we should have backed you when you tried to do something about trusts a year ago…sorry about that.” So now our list of dishonest, stupid, and ignorant has a new member: incompetent.

On an issue level, I’m not convinced about the productivity and tax-loss arguments that have been raised by the anti-trust lobby. This year I’m supervising a host of fourth-year honours essay projects and students are required to use the empirical evidence to substantiate a central claim. If the Conservatives were enrolled in my class, they would have failed the project. They have yet to provide a clear and empirically substantiated rationale for making these moves. All of this being said, I have come to understand why it’s desirable to avoid the Canadian market being dominated by business trusts and creating a market that’s unusual on the world stage. I also appreciate that many investors had come to rely too heavily on trusts and were not paying adequate attention to having a truly diversified portfolio. However, the manner in which the trusts were dealt with leaves me feeling even more cynical about politicians and policy makers than I ever thought possible. Plus, we still don’t have clarity on how all of the different sectors in the income trust universe are to be regarded by the tax people. So we continue to be faced with considerable uncertainty. In the next election I’m hoping for a candidate named, “None of the above.”

  Upon seeing an income trust investor bending over, Prime Minister Stephen Harper and Minister of Finance Jim Flaherty prepared their thumbs for action.

Letter #4: Martin in Hamilton writes:
Thanks for the column…very unique. Anyway, I’m guessing that you’re upset about the whole trust taxation situation and won’t be voting conservative in the next election. I just can’t see how they’ll be able to deal with the fallout from investors. The income trust coalition will be working hard to unseat Harper in Alberta , and with all of the royalty trusts based there, I can see a rough ride. Let’s hope so….bunch of bastards.

MG: The fact of the matter is, the Conservatives could nominate a houseplant in Alberta and it would still get elected. How about a philodendron appearing as “Phil O’Dendron” on the ballot? Sounds like a winner to me. Harper and Flaherty are smart enough to know this, so all of the campaigning by the income trust advocates is for naught.

The other element is that most of the electorate couldn’t give a rat’s ass about what’s good for investors. The Conservative’s poll numbers barely budged in the weeks after the decision came out. Plus, all of the stories of income trust investors losing tens of thousands of dollars were often met with, “must be nice to have all that money to lose.” Certainly the majority of my friends and colleagues don’t care about this stuff. As my buddy Lamont in Hamilton so aptly put it, “I only read your column to see if I’ve been mentioned.”

And let’s be honest…money has a short memory. If the Conservatives eliminated capital gains taxes (or moved decisively in that direction), the majority of investors would be humping Harper’s leg in no time. As Kevin O’Leary reminds us, it’s all about the money. Besides, many of the trusts have recovered significantly and the overall Canadian market is up since late October. This whole episode has actually been a bonanza for those holding traditional dividend-paying stocks, which tend to be widely held. In other words, the effects of the decision have been significantly reduced over the past few months.

  Ladies and gentleman, the new Conservative Member of Parliament from Calgary Southwest: Mr. Phil O’Dendron!

Letter #5: Dick in Ottawa writes 
I’ve recovered some of the losses, but still lost 9% of my portfolio thanks to Flaherty. How did you make out? What about Market Dad?

MG: Well, diversification offered some protection and my losses the day after the tax announcement tallied just over 3%. Market Dad was hit a little harder and this made for one of his better phone rants, followed by a tour de force rant over dinner. It should be noted that retired guys can be counted on for three things:

  • Keeping a kick-ass lawn.
  • Clearing the driveway after a snowfall, way before anyone else in the neighbourhood.
  • Offering highly-enjoyable rants.

Come to think of it, they’re also really good at writing letters, with Market Dad firing off a beauty to his local MP. Our MP (Pierre Poilievre) was quoted in the Globe and Mail downplaying the income trust issue. He said income-splitting would make up for any capital losses incurred as a result of the income trust decision. In other words, we beat the crap out of you but it’s OK because we sent flowers the next day.

Letter #6: Norm in Edmonton writes:
I’m invested in ARC, Enerplus and a host of other oil and gas trusts. I have no idea what I should be doing with these investments, given Flaherty’s bombshell. Do you still hold any of these trusts? I resent being placed in a position of having my investing strategy so heavily dependant on the actions of government. I have yet to figure out why the oil and gas sector wasn’t exempt from these changes, especially given the obvious benefits for investors and the productivity of the sedimentary basin. Any comments would be appreciated. Please write your column more often.

MG: Thanks for the feedback Norm. I’ll do my best. I share your frustration over government interference in the capital markets (whether it’s by Conservatives, Liberals, Hobbits, or Klingons) and abhor the uncertainty that this government has created. As mentioned, I can understand the desire to control the growth of business trusts. However, the case against oil and gas royalty trusts makes very little sense. The trusts were making economical a host of fields that were of little interest to traditional oil and gas companies who have very different expectations for their wells. In other words, converting to a trust made real differences in terms of how business was conducted in the patch. The model also promoted capital spending, production, Canadian ownership, various efficiencies, and considerable investor interest in the juniors. What’s the punch line? The trust structure was well-suited for the oil and gas sector.

However, there’s no reason to pine about what should be, when it clearly won’t be. So how am I conducting myself as an investor? Perhaps surprisingly, I haven’t made any changes to the oil and gas trust allocations in my portfolio. I’m guessing 2007 will see plenty of activity via mergers, acquisitions, and other corporate events. However, unit values will continue to be dominated by the prices for oil and natural gas. In other words, it’s a case of same old, same old. In any event, I still believe the oil and gas trusts represent the best way for me to have energy exposure for my portfolio. I’m still being paid every month and will continue to hold. My largest holdings in the sector include Bonavista (BNP.UN) and PennWest (PWT.UN). I’m kicking the tires on a couple of names (one with a natural gas focus) and will consider initiating a position if prices continue to slide. As always, I’m looking for a conservative business model, relatively low payout ratio, below average debt, solid property base, and a decent valuation. Even with the new tax regime coming, these are still a few of my favourite things. I simply remember my favourite things, and then I don’t feel so bad. On a portfolio level, even a new purchase will leave me underweight energy.

Letter #7: Jane in Toronto writes: 
Do you still own Yellow Pages or any other business trusts? I’m worried about their ability to sustain the payout.

MG: As always, keep in mind that I’m just a putz with a website. That being said, it’s entirely possible that in advance of the new taxes in 2011, many trusts (business and royalty) will be able to grow their distributable cash per unit to a point where taxation won’t make a difference. Some will be able to do this and some won’t. We’re also left with possible mergers, private equity takeouts, conversions to the corporate structure or some other entity, or business as usual. In other words, there’s a lot of uncertainty. The only thing we know is that it’s going to take a while to figure these things out.

My exposure to business trusts has been light for some time, however October 31st saw me with three positions in the sector: Yellow Pages (YLO.UN), Interpipeline Fund (IPL.UN), and the closed-end Sentry Select Diversified Income Trust (SDT.UN). Over the past two months I’ve liquidated my position in Yellow Pages and pared back my exposure to Sentry. Yellow Pages used the trust structure better than anyone, and were always able to use their premium valuation to fund acquisitions and handle their debt. Now it’s hard to tell if they’re just another media company with few growth prospects, a fair amount of debt, and an indifferent marketplace. The position was originally obtained in 2003 at the IPO price of $10. I took my profits just south of $13 and enjoyed the 3 years of tasty, wonderful, increasing distributions…but it’s time for me to move on. I’ve heard speculation of a private equity takeout, but can’t govern my portfolio on speculation. In terms of Interpipeline, it’s really an energy infrastructure trust and it’s still not clear how these will be treated under the new tax regime. There are similar structures operating south of the border, so let’s hope the Conservatives remember this when drafting their legislation. I’ve held the position for 4 years and continue to like their assets.

I pared back my holdings in the Sentry closed-end fund, largely because I still want some exposure to the broader trust market but don’t feel like making too many individual picks. This fund is managed by uber-trust guru Sandy McIntyre, a frequent guest on ROB-TVs Market Call. In addition to some business trusts, his fund is allocated to REITs, energy trusts, and infrastructure plays. Of particular interest is that he chooses business trusts with defensive characteristics; this resonates with me. I also like that SDT.UN is a closed-end fund, so the manager won’t be forced to liquidate positions in order to fund redemptions. In any event, much of the original position was acquired at prices south of $4 and this has been a solid investment from the beginning. There are other options in this space, including several funds designed to track the trust index. However, these funds are heavily tilted to the energy names and I’m not interested in being overweight oil and gas. It’s going to be challenging for many of these funds to carve out a new identity given the new world order. However, I’m going to let Sandy show me what’s he’s made of by maintaining a position in his fund…albeit a smaller one than I had entering 2006.

  Market Gal doesn’t find Sandy’s commentary to be very exciting. When she finds something boring, it’s usually a good investment.

On a somewhat tangential note, here’s a little something that I’m not reading about: current payouts are largely dominated by return of capital and other income. After converting to a corporation, many trusts may decide to remain as high yielding equities that pay dividends. As such, we need to remember the nature of the dividend tax credit. Even with a substantial reduction in payouts to account for the added taxation, the dividend tax credit will help blunt the impact. If investors fail to appreciate this, then we may have some decent buying opportunities. Am I wrong about this? Hey, yield is important and that’s not going to change anytime soon. Let’s not go off and do something half-cocked (or fully-cocked, for that matter).

Letter #8: Carole in Huntsville writes: 
After Flaherty’s decision, I bought shares in Riocan and plan on holding for the long term. Do you hold any REITS at the moment?

MG: I thought about piling in on the REITs, as many of the names that are likely to be exempt from the tax measures were down in the very early going after the announcement. By the time I got around to it, the rebound was already taking place and I missed a decent opportunity. I have substantial exposure to the REIT market, with names such as Calloway (CWT.UN), Primaris (PMZ.UN), Extendicare (EXE.UN), and Dundee (D.UN) in the portfolio. Dundee was one of 2006’s top performers in the sector and speaks volumes of acquiring positions in overlooked REITs with high quality assets and improving balance sheets. The challenge will be finding more of same. There may be some opportunities in some of the junior names.

In terms of Riocan (REI.UN), I really like their recently-announced collaboration with Chartwell Seniors Housing (CSH.UN) and the joint venture with Ramco in the States. These guys are doing everything possible to grow their business and making some smart and creative bets along the way. I only wish the units were a bit cheaper.

Letter #9: Kelsey in writes: 
How do you approach fixed income investments? Do you hold any funds or ETFs or do you purchase specific bonds?

MG: This was a very timely email. As regular readers of the column may know, 2006 was a year of profit-taking in Canada and continuing efforts to maintain a diversified portfolio. On several occasions this meant deploying freshly-minted profits into international markets (e.g., the RBC O’Shaughnessy International Equity Fund and the recently closed Mackenzie Cundill Recovery C). Overall, I’m pleased with how it all turned out.

However, over the past few years I’d let the portfolio grow without paying much attention to my fixed income investments. Like many of you, I’ve owned TD Canadian Bond and TD Canadian Real Return Bond for years (I’m not smart enough to establish a ladder of specific bonds, so I’ve gone the fund route). They’ve been rock solid and provided my portfolio with some diversification and stability. But as the portfolio grew, the percentage allocated to fixed income was decreasing each and every year. New money was always being sent elsewhere and bonds were clearly in the periphery. Noticing that my portfolio was becoming unduly influenced by my equity investments, I decided to make a purchase in the bond market. The easiest thing to do would be to plough more funds into my existing holdings and call it a day. However, I decided to take the path of most resistance and poke my way around the GlobeFund and Morningstar databases.

To begin, there are several fund options covering specific bond types and durations, but again, I’m not smart enough to time the fixed income market. Instead, I was looking for a fund providing exposure to a wide variety of corporate and government bonds of long and short durations. I also wanted lower than average expenses and a decent track record. As always, I used my Fantastic Five criteria for selecting funds.

My screening turned up the usual suspects including a couple of actively managed offerings from PH&N and TD. Also on the list was the iShares Canadian Bond Index Fund (XBB on the TSX), an exchange traded fund designed to track the Scotia Capital Bond Universe Index. After letting the choices percolate on the gray matter, my options were narrowed to my existing TD fund and the iShares fund. So which would it be? Both offer a diversified portfolio of bonds and exhibit average volatility scores for the asset class. Both have lower than average MERs (TD = 1.07%, iShare = 0.3%), top quartile performance across 3-year and 5-year terms, and exhibit solid ratings. Of course the iShare is an ETF so any purchase comes with broker commissions, so that needs to be factored into the cost picture.

Given all of this, would I merely add to my existing holdings in the TD fund or initiate a new position in the iShare? Which fund was worthy of my new capital? Would the iShare be granted the honour of standing in my portfolio, fighting for goodness, truth, and the pursuit of wealth? Had it earned the right of being included alongside other longtime portfolio builders such as TransCanada (TRP on the TSX)? Was it worthy of being part of a proud tradition of investing? In the battle of the bonds, in this fracas of fixed income there can be only one. Given the considerable similarities between the two funds, it all came down to fees and the iShare begins the year with a 77 basis point advantage. With these funds yielding around 4%, that’s a lot of ground for the actively managed fund to cover. I’ll maintain my existing holding in the TD fund, but the new capital goes to the iShare at a price of $29.

  Congratulations to the iShare. You’re now in the registered portion of theMarket Guy’s portfolio.

Letter #10: Ben in parts unknown (wouldn’t it be so much better if we knew where Ben was from?) writes: 
E*Trade’s Cash Optimizer account yields 4.15%, so ING is old news and the ING Guy is a shadow of his former self. Put a fork in him, he’s done.

Nice to see some big news since my last column on this issue (see MG #31). ING still leaves the big banks in their dust, but have done little to remain competitive with so many of the new high savings entries. E*Trade’slatest initiative has really upped the ante. ING’s behaviour is really disappointing, as they were the pioneers in the market and really showed us some love back in the early days. You also have to be impressed by E*Trade’s $9.99 commissions on stock trading (provided you have $50 000 in assets or are an active trader). Keep the cash in their high interest account until it’s time to trade and then simply transfer the money to the brokerage account. Where’s the downside? Keep in mind, of course, that when it comes to money, we should have no loyalties. If another firm offers a consistently better arrangement, then drop E*Trade faster than Lindsay Lohan downs a shot.

Letter #11: Michele in Stratford writes: 
Do people write in about the banks? Being a Canadian, you must own one, or several, or all. I’m holding Scotia and CIBC and have been very satisfied with their performance. Love the column, although I don’t understand many of the pop culture references.

MG: Thanks Michele, you’re not alone. Most people struggle to tolerate the pop culture references so not understanding them is probably a more peaceful place in which to be. Anyway, a couple of years ago everyone hated CIBC. It was the year in which the bank faxed customer information to a small business in the States, negotiated the Enron settlement, was embroiled in a bizarre sex scandal involving the Toronto Maple Leafs (OK, I made that one up), and was essentially a laughingstock. The shares underperformed and analysts were writing about the lengthy period of time it was going to take for CIBC to regain favour with investors. Well, guess which of the big banks had the best performing stock in 2006? Yup, CIBC (and the analysts still don’t really like it). Before that it was Royal that everyone disliked, owing much to the bank’s missteps south of the border. Of course the stock lagged for a brief period, received poor ratings, and subsequently outperformed. So which of the big banks is currently in the doghouse? That would have to be Bank of Montreal. The stock underperformed in 2006, trades at a modest discount to the sector, and offers the highest yield. Their last quarter was disappointing and raised concerns about earnings growth and risk profile. All of this bad news makes the stock interesting…let’s just say it’s on my watch list. I’d really like it to head lower.

I currently own TD and have for many years. The stock underperformed for a while, outperformed for a while, and was middle of the pack in 2006. It trounced BMO, edged out BNS, but lagged Royal and CIBC. Fair enough…and I’ll take it.

The Market Guy’s Closing Bell
Each and every year the Market Gal tries to get me in the holiday spirit by purchasing investment-related stocking stuffers. One year it was a holiday ornament of a stock chart; another year it was a series of reframed pics from some of my annual reports; this year she came through with the following delightful, highly festive items:

 
For the market geek in your life: A NYSE mug and keychain! It shows you care enought to send the very best.
 

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…so do your homework before making any investment decisions. Basing any decisions on his column would be really, really stupid. He recently purchased a fondue pot. The pot is nice, but fondue is really all about the sauces. Go ahead and be saucy over at mail@marketguy.ca

What I Learned About Investing by Watching Miami Vice

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In this high-fat, carb-filled, cheese-covered, extra mayo edition:

  • Feature: What I Learned About Investing by Watching Miami Vice
  • Market Guy Mailbag: Ticker symbols and performance; PC Financial’s Interest Plus account; Why take profits in the patch?; What the heck were you thinking with Superior Plus?
  • Trading Notes: Reitman’s; Futuremed Healthcare Income Fund
  • The Market Guy’s Closing Bell: Thoughts that have nothing to do with anything

Before we begin, here’s a special thanks to Rob Carrick of the Globe and Mail, for a favourable mention of this space in one of his columns. I’m pretty sure that a few years ago I saw Rob at an Ottawa-area Gap. I tapped Market Gal on the shoulder and said, “Hey, I think that’s Rob Carrick.” Because he’s never been on Oprah, she had no idea who he was. Meanwhile, I think his columns should be required reading for anyone interested in Canadian investing and personal finance. There’s at least one good idea in every column.

Feature: What I Learned About Investing by Watching Miami Vice 
In a time before dating, car payments, and any sense of responsibility whatsoever, there were the early years of high school. I was a geek and a nerd. I wore flood pants and striped shirts. I listened to Def Leppard and Journey. I carried an Adidas bag and straight A’s; and I wore a Blue Jays cap about 10 years before wearing caps was considered acceptable. It was the best of times…it was the worst of times.

Among the best of times, I’d have to include Friday nights at 9pm. For at that time, my buddy Crazy George and I were enjoying a combination pizza with anchovies, a 2-litre of Coke, and the latest episode of Miami Vice on NBC. On the surface, it was a show about two vice cops and their largely futile attempts to curtail the drug trade in 1980s South Florida. However, it was much more than the sum of its parts. It was a show in which the city and the music were as important to the narrative as plot and character. It was a show that captured an era and yet established a style of its own. It was a show that introduced the greatest cop combo of all-time, James “Sonny” Crockett (Don Johnson) and Rico Tubbs (Philip Michael Thomas). It offered the coolest lieutenant ever, the laconic to the point of being mono-syllabic, Martin Castillo (Edward James Olmos). It gave us scenes of movie quality, such as the scene with Crockett and Tubbs driving down the late night streets of Miami trying to head off Calderon, the man who killed Tubbs’s brother. I can still see the street lights bouncing off the hood of Crockett’s black, Daytona Spyder all the while “In the Air Tonight” by Phil Collins blasts in the background. And during the part of the song when the drums kick in, we’re witnessing pure, perfect, unadulterated cool. I remember the many, many times that I tried to replicate the scene. Unfortunately I was driving my mom’s baby blue Dodge Shadow, driving through afternoon suburbia and heading to McDonald’s…but we’re nit-picking here.

Meet Crockett, Tubbs, and the Daytona Spyder…or as the Market Guy knows them, “Friday nights during the mid-1980s.”  

At this point, you’re probably wondering what the heck all of this has to do with investing. Well, it was during the run of Miami Vice that my experiences with the investing world started to become richer and clearly rooted in my life and sense of self. At the dawn of the 80s I was all about GICs and cash. By the end of the decade, I was in mutual funds and on the verge of trading individual stocks. It was a decade in which I had one of the most important educational experiences of my lifetime…the stock market simulation project in grade 12 economics class. It was a time in which Market Dad littered the coffee table with broker reports and the Financial Post. It was a time in which the markets crashed and then began a rise, the likes of which we may never see again. So as I reflect on these formative experiences of my entertainment and investing lives, I can’t help but wonder if there are overlaps to be explored. So with that, let’s begin a consideration of What I Learned about Investing from Watching Miami Vice. To facilitate the process, I’ll use some of my favourite quotations and scenes from the series…and if all of this tries your patience, keep in mind that I could have devoted 3 columns to this topic. Also keep in mind that I’m focussing on the TV-series and not the recently-released movie starring Colin Farrell and Jamie Foxx (which was surprisingly dull). So, here we go:

Brenda: “How do you go from this tranquility to that violence?” 


Crockett: “I usually take the Ferrari.”

 

Ah, Crockett enjoying a tender moment with a date and coming out with one of the better lines from the series. Just once I’d love to deliver a line like that. Crockett lives in a seedy, violent, pessimistic world in which the bad guys keep coming and the good guys rarely win. In order to survive, he tries to be practical and control what he can. When it comes to the markets, I try to do the same thing. I can’t control the US growth rate or Canadian interest rates or the price of oil. So I’m not going to be trading around every data release, every jihad, or remark from a Fed governor. Besides, that just racks up trading costs and undermines the performance of my portfolio. I’d rather let specific investing fundamentals and diversification lead the way. Another favourite line from Crockett is “People in stucco houses shouldn’t throw quiche.”

“No, YOU wait a second. Now, you might have commendations up the ying-yang in the Bronx , or New York, or wherever the hell it is 
you’re from, but this is Miami, pal, where you can’t even tell the 
players without a program. Down here, you’re just another amateur.” 

-Crockett to Tubbs

 

As a newcomer, Tubbs had much to learn about working undercover in the Miami drug scene. He needed time to acquaint himself with the people, the procedures and the overall feel of the place. Similarly, I receive dozens of notes from new investors asking how I got started, where I get my information from etc. In other words, people want a copy of my “program.” Well, on the plus side, the information that I use is readily available to everyone. For example, each morning after feeding the cats I read the Globe and Mail Business section. I watch ROB-TV a lot. I browse the stories onglobeinvestor.com and a variety of other news sites. I read company reports, websites, and announcements. I read books on investing. Occasionally I’ll drop in on the Financial Webring Forum, a discussion board for do-it-yourself investing in Canada. Doing a little bit of each has, over time, helped me to learn some of the language of investing, some of the alternatives, and some of the ways that I can profit. It takes time and effort, but the rewards can be life-altering.

I also do strange things that are clearly outside the realm of normality. Earlier this summer I was in Toronto for a conference. Immediately after leaving the train, I walked around Bay Street in order to soak up the mirth. After a few minutes, I found myself outside the TSX media centre, the site of my one and only appearance on ROB-TV. Back in the day when the centre was open to the public, I managed to get myself into a background shot when they were interviewing some fund manager. Market Gal was sitting off to the side and had a peculiar “I married an idiot but he’s having so much fun that I’ll put up with this” look on her face. These are the things that I do with my free time.

As an aside from the aside, ROB-TV will be broadcasting live from BCE Place in Toronto for the week of September 18th. Yes, Market Call and Squeeze Play will broadcast in front of a live audience. If I lived in Toronto, I’d be on top of this like spit. Are they going to allow heckling? So if Ross Healey is on Market Call, can we hiss every time he suggests that income trusts are a Ponzi scheme? Market Gal is convinced that I have a crush on Amanda Lang, so how pissed would she be to see us in the same room? If I had the chance to speak with Kevin O’Leary, how much of an idiot would I sound like? For the first time since the Blue Jays were a playoff team, I wish that I lived in Toronto. They’re also holding a contest called “Lunch with Lou” in which the winner gets to hang out with ROB-TV personality Lou Schizas. For some reason, this made me laugh out loud and I’m not sure why. Yes, I have tenure.

“Unless I inherit about fifteen million dollars, I don’t stand a chance in this town.” 

- Rico Tubbs

 

That was one hell of a tangent…now you know what it’s like to be in one of my classes. Back to Vice: Tubbs spent much of his time undercover as Rico Cooper, a mid-level cocaine dealer with an occasional Jamaican accent and a turquoise Cadillac. Whether he was the cop or the dealer, Rico knew clothes, wine, and ladies…all of which seemed to be in decent supply. From this I learned the importance of capital. However, unlike Tubbs I learned that it’s possible to have a chance by starting with only a modest amount of cash. It’s all about saving, understanding the importance of compounding (especially in the early years of a portfolio), and being patient. The important thing is to stay invested and realize that money can work 24 hours a day…you can’t.

It should be noted that Tubbs was the greatest sidekick in TV history. First, he was always there when needed. I can’t tell you how many plot lines revolved around Tubbs trying to keep Crockett from going over the edge (a Vice staple). Second, he was really good for laughs…even if a fair number of them were unintentional and involved his love scenes. Third, Crockett tried to kill him and yet, he remained loyal. To be fair, Crockett had lost his memory in a boat explosion and assumed the role of his undercover alias, a drug dealer named Sonny Burnett…some great episodes here.

“The natural order of the streets has been disturbed. I must do what I can to restore it.” 

- Lt. Castillo

If you could mix Clint Eastwood, Yoda and a rich-man’s David Carradine you’d have Castillo. He commanded respect, dominated the room with only a look, and could even carry an episode from time to time. Castillo believed there was a natural order of the streets and he was particularly adept at knowing when to intervene and when to leave things alone. Similarly, I regard diversification as representing the natural order of my portfolio. It is an arrangement that, if disturbed, must be restored. Sometimes that means paring back on holdings or sectors that are beginning to disproportionately influence the direction of my worth. For example, over the past year I’ve pared back on my energy holdings and directed some of the profits to cash and international investments. Other favourite lines from Castillo include, “Don’t ever come up to my face like that again” and “I can kill 20 men in 6 minutes.”

Crockett: “Uh, let me get this straight, now….You let this guy just walk out. He didn’t tie you up, he didn’t pull a gun…” 

Zito: “Shut up, Crockett.” 

Switek: “Look, I had to take a whizz, okay?”

Zito and Switek were the clumsy, dim-witted, yet somehow sharp-shooting team B to Crockett and Tubbs’ team A. Unfortunately, when they tried to carry an episode it was sheer torture. Anyway, the dialogue in this particular scene comes after the bumbling pair lose track of a key witness. This led to Crockett and Tubbs heading to the everglades to locate the witness who just happened to have a daughter recently kidnapped by the creepy guys from Deliverance and a bunch of Colombian dealers. In the end, all of their butts were saved by a toothless elderly man with an elephant gun; in other words, just another day in South Florida.

Anyway, back to our bumbling idiots who let the witness get away. This reminds me of the various times that I’ve failed to keep up to date on the happenings of an investment. Sure, buying quality makes you feel better if you don’t go over every quarterly report as if it’s the Zapruder film. Index investments can make the job even easier. However, being a do-it-yourself, small investor means being disciplined and paying attention to your portfolio. You need to show your portfolio some love now and again, so that it can grow and thrive. Abraham Maslow, a famous humanistic psychologist believed that human beings strive for a psychological state known as self-actualization. To be self-actualized is to have achieved your potential. I believe that money needs to achieve its potential and to deprive it of the opportunity is wrong and sad. I can’t tell you how many times that I’ve failed to give my money the love and respect that it so clearly deserves (to gain a sense of the nasty, horrible, unspeakable things that I’ve done, have a look at two columns devoted to my worst investing experience: MG#12 andMG#13). To reinforce the point…

“You better stay clean because if you don’t, I’m gonna be on you like a baaaaad rash.” 

- Tubbs

 

Tubbs was great for laughs but had a temper…and if you crossed him, you were in for a world of hurt. However, he was usually smart enough to pick his battles. Similarly, when a company disappoints, try to separate the noise from the facts. Is the disappointment based on temporary factors or have the fundamental reasons for making the investment changed? If you’re not sure, be extra vigilant. Decreasing margins, increasing debt, higher payout ratios, customer decay, expiring contracts, regulatory investigations, and cost over-runs are all cause for concern. Be aware of the trends. If the factors are temporary and the stock gets hit, there may be a buying opportunity. If the factors are more long-lasting and symptomatic of management issues or a general decline in the business, ask yourself if there are better places for your money. In order to tell, you need to be on the company like a bad rash. If this doesn’t pique your interest or fit into the schedule, there are thousands of mutual funds and index products from which to choose.

  “I promised myself that when the Dow broke 1400, I’d buy myself a present.” 

-Cocaine-dealing financier, Charlie Glide

Wow. Since that line, the Dow has gained 10 000 points. And since that time we’ve survived a market crash, 9/11, many a jihad, and Shakespeare in Love winning the Best Picture Oscar over Saving Private Ryan (not to mention Arnold Schwarzenegger, Jesse “The Body” Ventura , Gopher from the Love Boat and Cooter from Dukes of Hazzard all being elected to political office). In any event, the quote illustrates the importance of staying in the markets and occasionally rewarding yourself for a job well done.

  Tubbs (undercover): “I’m looking to invest this at a good profit” 

One-note bad guy: “Well a money market will yield you 10%”

Remember when GIC’s were paying double digits? I remember the last GIC that I owned and complaining to my parents that I was renewing for 5-years at 8.75%. Today, what would I do to earn 8.75% for 5-years, 100% guaranteed? Perhaps the question is more accurately framed as, “whatwouldn’t I do?” I don’t really have a point here.

“That’s the trouble with always trying to do the right thing, Marty. Sometimes the right thing smells bad.” 

-Reese to Castillo

 

This is what I should be saying when Market Dad gives me that look of disappointment when I tell him that I’m paring back on my energy holdings. Paring back to maintain a diversified portfolio sometimes feels wrong and smells bad. But it has to be done. Similarly, sometimes I’ve made mistakes, been forced to admit it, and experienced the stench of doing the right thing and blowing the holding out the door. Other quotes from the series that reinforce the same point include the Crockett classic, “The secret to success, whether it’s women or money, is knowing when to quit. I oughtta know; I’m divorced and broke.”

   
     
  Tubbs: “The moss on a damn tree is supposed to tell us where the road is at?” 

Crockett: “Can I help it if the moss doesn’t know which side of the tree to grow on?”

Tubbs: “And the sun is in the wrong place? Hey, Jack, let me tell you something. I may not be an astronomer, but I know one damn thing. The sun is NEVER in the wrong place.”

 

Crockett and Tubbs were lost in the swamp and to find their bearings, were using the old saying, “moss always grows on the north side of the tree.” What do I take from this exchange? The sun is never in the wrong place and I should never try to convince myself that a fully-valued stock is a cheap stock. Investors do this all of the time. The endowment effect illustrates that we ascribe more value to items that we possess simply by virtue of our possession. In other words, the item becomes more valuable to us simply because it’s ours. The absolute value of the item doesn’t matter; it could be a car or a ballpoint pen. Our neighbourhood holds an annual garage sale and it was a one-day testament to the endowment effect. You’ve seen it before: That snow globe that you wouldn’t pay 25 cents for is going for $5; a dinged-up piece of furniture that someone bought 8 years ago from Zellers should be going for $5, but they’re asking $50 and wonder why it’s still there at 2:30 in the afternoon. The endowment effect impairs our ability to participate effectively in the marketplace and leads to suboptimal economic decision-making. Anyway, the lesson for our investments is to always look to the fundamentals and relative valuations. The numbers have never heard of the endowment effect.

Crockett: I need to know something, Caroline. The way we used to be together. I don’t mean lately, but before. It was real… wasn’t it?” 

Caroline: “Yeah, it was. You bet it was.”

OK, so I put this one in here because it’s the only real dialogue from the “In the Air Tonight” scene that I wrote of earlier. It’s Sonny calling his estranged wife, in large part because he’s been betrayed by a friend and doesn’t know which end is up. When it comes to my portfolio, a couple of thoughts come to mind. I frequently feel as though I’ve lost my bearings. At such times, I try to lean on an investing philosophy that helps to guide all that I do in the marketplace. It helps to lend a sense of direction and purpose to the portfolio. However, we should all articulate an investing philosophy that goes beyond “buy stocks that are going to go up.” Better would be something like, “invest in a diversified batch of companies that pay you a decent, growing dividend and add to positions when the shares are trading at either a reasonable absolute or relative valuation.” Hey, it’s a start.

That was fun. To close out this portion of the column, here are my favouriteMarket Gal reactions as we watched season 1 of Miami Vice on DVD:

  • Speaking of Tubbs: “Ewww, he’s in his underwear!” She was visibly shaken. 

  • During one episode, a woman that Crockett was falling for betrayed him and tried to have him killed by a psychopath played by Ted Nugent. During the final scene, the police are coming to take her away and so she looks at Crockett, hoping that maybe he’ll set her free. His response? He looks straight ahead, puts on his cool, black shades and doesn’t say a word. Meanwhile, “Cry” is playing in the background. I asked, “how cool is that?” No response. I said again, “how cool is that?” to which she offered, very impatiently, “yes, it was cool!” 

  • And finally, she noticed that Tubbs was carrying a handbag, a la Seinfeldian European carry-all. She noted that “He’s carrying a man purse. That’s just wrong. Cops don’t carry man purses.” Then after a brief pause, “Crockett wouldn’t carry a man purse.” That last part sealed it.
Crockett would listen to classic rock, drive a fast boat, and wear mesh shoes. According to the Market Gal, he would not carry a purse.  

The Market Guy Mailbag
Letter #1: Mike in Kanata
 sends along an interesting snippet from the world of behavioural finance. He found an article titled, “Study ties company names to stock performance” on the cbc.ca website:

“Shareholders are more likely to purchase newly offered stocks that have easily pronounced names, a pair of Princeton University researchers say. Adam Alter and Danny Oppenheimer found that a stock’s performance immediately after an initial public offering appears to be linked to how easily investors can pronounce its name and stock ticker symbol. “This research shows that people take mental shortcuts, even when it comes to their investments, when it would seem that they would want to be most rational,” said Oppenheimer, an assistant professor of psychology.”

Thanks for sending, Mike. I also enjoy the research investigating how other, seemingly irrelevant factors influence stock performance. For example, the number of hours of sunlight, various seasonal patterns, astrological issues, etc. Combining all of this with some fundamental and technical analysis may reveal that we need to purchase value investments that have broken above their moving averages on a sunny day in January, having the ticker symbol, “SEX.”

Letter #2: Loyal reader and self-described “old fart” William had a few things to say about my recent bout of profit-taking in the energy sector. In particular, he finds it incredulous that I would go against the advice of oil and gas crazed Market Dad

I can’t believe you would diss Market Dad that way. Here is the man who gave you life, instructing you with his lifetime of experience and you have the gall to take profits in the Energy Patch. What were you thinking? You buy good energy trusts like PennWest and you forget them!!! You sell them after you die, should you be so lucky!!! Advantage, you sell. No great loss. Daylight too. PennWest and COS , you don’t sell. What you do is buy AOG.UN and have all distributions tax deferred for another 6 years. You find me a better deal and I might thank you. You would have to stop all of the silly selling of units just because they have gone up in price that you pass off as profit- taking. It’s a trust, Man! Can’t you see that it isn’t an ordinary dull equity? It pays you to hold on to it. What could be better?

Andrew Carnegie said, “Put all of your eggs in one basket, and then watch that basket!” Market Dad has it right. The reason I’m upset at how you have treated your father is that my own children, the flesh of my body, talk to me about diversifying their portfolios. Di-worsify, I say! The energy bull still has strong legs and those who doubt it will suffer the pangs of remorse; thankless children even more-so.

Even though you should suffer a plague of mosquitos; No! Wait! This is Ontario in the summer so we all have that curse. Perhaps a plague of really hungry but silent mosquitos who are as large as chick-a-dees and as hungry as really hungry flying pests. That’s what should happen to people who diss their energy bull fathers.

BTW, Love your blog sort of thing.

I have nothing to add…except that William gets the “best email of the summer” award. OK, I do have something to add…I’m more apt to pare back holdings in a volatile sector like energy than a more stable sector such as financials. I’ve seen how energy corrections can be so brutal, violent, and swift. Investors get completely abused and wake up wondering what happened. Serious pain. So, I’ll always have investments in the sector but will also make sure to protect some of the gains along the way.

Letter #3: Barbara in Cornwall writes:

Thanks for writing about high interest savings accounts. There’s another option that just came out a few weeks ago from President’s Choice. They have what’s called an Interest Plus Savings account that’s paying 4% as long as your balance is over $1000. It’s a new account that’s different from their regular high interest savings account.

Thanks Barbara. For more information, here’s a link to the PC Financial page. Shortly after I wrote the column on high interest savings, ING raised their rates and PC introduced a new product. Who knew the world of high interest savings could be so exciting?

Letter #4: Derek feels bad about my profits in Superior Plus vaporizing in a matter of days. He is curious about one thing, though:

I wondered how you came about to owning this stock…It seemed to have a very hefty payout ratio combined with high debt, which seemed to make it unattractive. A recent income trust article in Canadian business magazine confirmed this…I would like to know your initial logic for buying this POS besides the high income if there was any?

The position was initiated several years ago and if I include distributions, I may have come out even on the deal. I don’t feel like making the calculations until we get close to tax season. My reasons for buying the trust were simple: a history of increasing distributions, a strong position in their market, a decent valuation and management with a proven track record. True, the payout ratio was pushing 100% and left very little margin for error. However, they had always been able to navigate through these waters before and gained an impressive reputation.

In terms of payout ratios, we need some context. I believe that Pengrowth may be useful in this regard. I owned Pengrowth for many years and it was one of the most profitable investments of my lifetime. In the early days, they were one of only a handful of royalty trusts and considered top drawer. Sure, they had an extremely high payout ratio…but few cared. We knew the distribution and unit price was going to bounce around a lot…but we knew the rules and accepted the risk. At the time, the high payout ratio was considered a plus because more money was being returned to investors. Similarly, in the early days Superior was considered top drawer among a very limited number of business trusts. The low payout ratio model hadn’t been invented yet and so investors made use of what was available…and it worked very, very well. Since that time, much has changed. We now operate in a different environment and the low payout approach is king. We’re not willing to tolerate reductions in distributions and will severely punish those who disappoint. As the low payout approach became a possibility, it also became a litmus test for my own investments. However, I made an exception with Superior because of their positive history. That was stupid.

As for the debt, yes, I should have been more mindful of how it was compromising the company’s resilience. As they went on an acquisition binge, the leverage was piling up; add in a really warm winter and the accompanying decline in propane sales and the trust was crushed. I had been rationalizing each and every quarterly report and was filled with a sense of invulnerability and undue optimism. Simply, I was dumb and had to pay the dumb tax….again.

All of this being said…I will still invest in a trust with a relatively high payout ratio if the numbers are headed in the right direction and the unit price is trading at a decent price. For example, I’ve written several times about my purchases in Dundee Real Estate Investment Trust. Their payout ratio has been over 100% for a while now. However, management has been moving in the right direction and the ratio is in steady decline. Meanwhile, the units have recently traded at a discount to the rest of the sector. That discount is quickly disappearing, especially since the REIT has been busy adding office properties in red-hot Western Canada …and the purchases have been accomplished without the company taking on crazy amounts of debt. The analysts have taken notice and with the extra attention has come solid unit performance. I believe it’s been one of the top-performing REITs in the country this year.

Trading Notes
Reitman’s (RET.A on the TSX)
Earlier this summer I initiated a position in Reitman’s, a Canadian retailer specializing in women’s apparel. The company operates over 800 stores under the Reitman’s, Smart Set, Pennington’s, Addition Elle, R.W. & Company, Cassis, and Thyme Maternity banners. A few notes:

  • They’ve been around for 80 years, 60 as a public company. 

  • The dividend yield is just under 3% and has increased 300% in the last 3 years

  • Reitman’s is actually pronounced “Rightman’s,” not “REIT-mans”…but nobody seems to care.  

  • The financial position of the company seems to be quite strong. The debt to equity ratio is under 0.3. Their cash position is on the rise.  

  • Same-store sales and revenues are headed in the right direction. The most recent quarter saw the company record a charge for a retroactive Quebec income tax assessment. Excluding this charge, earnings per share would have been up roughly 15%. 

  • They have no plans for international expansion. Thank goodness…a retailer that isn’t interested in getting slaughtered in the United States. 

  • Let’s be honest…the have cool commercials. 

  • In order to be closer to their vendors, the company has an office in Hong Kong. 

  • The company has placed a focus on private label merchandise, meaning that items are manufactured specifically for Reitman’s. These items provide a higher average mark-up than branded products. However, given the company’s substantial buying power, they’ve been able to offer these products at attractive prices.  

  • On the downside, they use dual-class shares and the company is tightly controlled by the Reitman family. I’ve never been a fan of this approach. 

  • Also on the downside, this is retail and women’s retail at that. Competition is fierce and being caught behind the trends can lead to a build in inventories that inevitably leads to a sagging share price. However, the company’s different banners appeal to different types of consumers (e.g., Addition Elle caters to plus-size women; Cassis will focus on 45-60 year olds, etc.) and this may spread the risk around.

Market Gal is a devoted fan of the stores and we’re in there at least twice a month. I don’t mind going in because they usually have chairs just outside the fitting rooms…an oasis for boyfriends and husbands. I should also mention that shopping with the Market Gal can be quite an experience. In most stores, she complains about never finding the right size or she gets angry everytime she looks at the twigs that are staffing the place. An exit usually involves a “did you see how thin she was???” or “We’re never coming here again. They only have stuff for size one’s!” or “The prices are ridiculous.” I just agree and do what I can to avoid the shrapnel. As a wise-man once said, “If mama ain’t happy, ain’t nobody happy.” At Reitman’s, she never gets upset, never gets angry, always finds her size, appreciates the obvious attempt to staff people of different body shapes, and usually leaves with a bag of stuff. Besides, it will be very gratifying each time she makes a purchase and I’ll know that a portion of the cash is going into my pocket. It’s almost as if I’m being paid each time she goes shopping. I suppose it’s following the wisdom of sage-investor Peter Lynch…invest in what you know. 

Futuremed Healthcare Income Fund (FMD.UN on the TSX)
I have eliminated my holdings in Futuremed Income Fund at a price of $13.32. The holding was initaited at the IPO price of $10. Originally I’d planned on holding this one for a while, but had second thoughts as the unit price continued to advance. Overall, I earned the equivalent of 3.5 years of distributions in less than 6 months, and in capital-gain, tax-friendly fashion. With only a limited history as a trust, such dramatic early gains, and a stretched valuation, I felt better about taking money off the table. I did not, asMarket Dad suggested, plow the money back into the energy sector.

The Market Guy’s Closing Bell
Here are a few closing thoughts that have nothing to do with anything:

  • On Wednesday, August 17th, the trading volume in XS Cargo Income Fund was 1 unit. How does that work? I really need to know. 

  • Scott’s, the lawn care people, offer a service that will send you an email reminder of when it’s time to fertilize your lawn. 

  • It’s official: I appreciate the Tiger Woods era but I’m not necessarily enjoying it. How many times do we need to see him make mincemeat out of the competition at a major on Sunday? We really need someone to step up and at the very least, make it interesting.
  • In the hallway just outside my office, a bat just flew by. I’m chairing the departmental recruitment committee again this year and we may have found a new slogan: “Carleton University: We have bats!”

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…so do your homework before making any investment decisions. Basing any decisions on his column would be really, really stupid. Why is it that every car dealership has a business manager named Vera? Send answers to mail@marketguy.ca

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