Thanks to the online edition of Moneysense magazine for naming The Market Guy to their list of “Best Canadian Investment Blogs.” Also thanks to Investor’s Digest Canada for a favourable mention. Needless to say I’m keeping the “Market Guy sucks” reviews to myself.

In this humidex-free edition:

• Feature: Come Fly With Me But Not For Free: Increasing Aeroplan’s Distributions
• Trading notes: Calpine Power Income Fund (CF.UN); Saxon Financial
• Market Guy Mailbag: DRIPs and Pizza Pizza
• Market Guy’s Closing Bell: Geldof, Live8…and dinosaurs?

Come Fly With Me But Not For Free: Increasing Aeroplan’s Distributions
This fall I will be teaching first-year psychology, among other classes. One of the lectures pertains to states of consciousness and deals with topics such as sleeping, dreaming, the effects of psychoactive drugs and lastly, hypnosis. Although the students seem to enjoy the discussion of how ecstasy and alcohol alter our neurochemistry and experience of reality, for the purposes of this column I’m more interested in hypnosis (more on this later). As I was preparing the lecture, my thoughts started to drift to a consideration of the recent Aeroplan initial public offering…and why not? The fund will have a number of compelling attributes. Let’s have a look:

• Brand recognition. How many on Bay Street have an Aeroplan card in their wallet right now? 75% 90%? You don’t think this matters?
  
  
• An offering of decent size. Contrary to so many of the $50 million to $100 million trust offerings, a $250 million deal is more likely to attract institutional interest. Size matters. 

• Canadians love customer loyalty programs. How many loyalty cards do you have in your house right now? I have close to ten. Don’t just include the credit cards. That old, beaten-up “get a sub free ” card counts. Aeroplan is expanding the number of reward options beyond free flights, and this should add to the appeal of membership. 
  

  Recipe for an income trust: A tiny piece of plastic, a formerly bankrupt airline, and a dream

  
  

• A business plan that makes sense. Here are a few tidbits: 1) Much of their revenue comes from financial partners who pay for the right to issue points (e.g., CIBC and their Aerogold and Aero Classic Visa cards). Aeroplan is trying to diversify their revenue stream by adding to the list of partners; 2) There is a 21-cent spread between what is paid for the points and what it costs to furnish the reward; 3) There is, on average, a 30-month lag between when points are sold and miles are redeemed. During the time period, Aeroplan is free to do whatever it wants with the money. Sweet deal. 

• Perhaps the most interesting factoid coming out of the prospectus relates to the number of miles expiring before they can be redeemed. This is known as breakage, and Aeroplan estimates the figure to be as high as 17% of all miles issued. This is astounding. Derek DeCloet of the Globe and Mail recently outlined the effects that a decline in breakage can have on distributable income. He’s right to advise caution.

But here’s something that I’d like to know: Who are these people failing to redeem free stuff? More importantly, is there a way to make money off them? Linking back to my psychology lecture, there must be a way for me to use my knowledge of hypnosis to convince others not to redeem their points, thereby enhancing or even increasing the number of miles that are never redeemed. This would lead to increased margins, distributable cash, and hopefully distributions. As always, it’s all about the cash.

This places me in the unusual position of arguing against free stuff. Given that Canadian Tire Options Mastercard should be offering me a commercial, this is not a position that falls within my comfort zone. However, my greed takes precedence here, so I feel an obligation to give it a shot. All I am saying is give greed a chance.

In order to run the plan, it’s necessary to consider a few points about hypnosis:

• People can’t be hypnotized against their will and it sure helps if the individual scores high in suggestibility. Well, approximately 10-20% of the population is extremely suggestible, 10% can’t be hypnotized, with the majority of people falling in between the two extremes. Those scoring high in suggestibility also tend to be able to immerse themselves completely in whatever they are doing. This makes sense, as the ability to concentrate and block out the outside world comes in handy during hypnosis. So where can highly-suggestible Aeroplan members be found? Hey, I can’t figure out all of this myself. You’re not really doing anything productive right now.so get on it. Although I will say this: One way of increasing suggestibility is to increase people’s expectation that they have the ability to be hypnotized. 

• Contrary to popular belief, hypnosis can induce people to perform self-injurious behaviours, although this has less to do with hypnosis and more to do with a tendency to follow the orders of an authority figure in certain contexts. Given the failure to redeem a reward is clearly harmful and likely against the best interests of clients, my success in increasing breakage will be in part dependent on the extent to which I am perceived as an authority figure.
• What happens if investors remember what occurred during their hypnotic experience? Surely they’d be upset remembering some putz with a website trying to make them give up free stuff. Plus, I’m not especially warm to the idea of a band of angry Aeroplan members burning down the Market Shack. Therefore, I need to initiate post-hypnotic amnesia, thereby protecting myself and ensuring a dandy dose of extra distributions for unit holders. That is, I need to plant a suggestion that investors will not remember what occurred during the hypnosis session.

With these factors in mind, I feel prepared enough to give it a whirl. Here’s a proposed script:

Well, at least I’ve done my part. The question is, will Air Canada find a way to screw it all up? Does anybody know if CEO Robert Milton is highly suggestible?

Hey Bob: You are not going to crash Aeroplan into the ground. You are going to concentrate on generating a steady stream of safe and predictable distributions.

So what is an investor to do? Here are a few negatives to consider:

• An opening yield of only 7%, which is the lowest I’ve seen on a new issue. After one day of trading, the units had appreciated 18%, reducing the yield to under 6%. This is lower than Yellow Pages (YLO.UN), one of my holdings. Well, Yellow Pages is a monopoly and a monopoly deserves to trade at a premium price. Aeroplan does not qualify as a monopoly. Heck, Riocan (arguably the gold standard of trusts) trades at a 6.3% yield. You’re telling me that Aeroplan deserves to trade at a lower yield than Riocan? As we say in the psychology business, that’s bonkers. 

• The fund has no track record as a publicly-traded entity. We have no idea if their projections are accurate and if their plans will pan out. 

• This is an entity having intimate ties with Air Canada, a company that recenty left their shareholders holding the bag. ‘Nuff said. 

• The company is expected to issue more units in the near future.

Fair enough, However in the final analysis, the business case for Aeroplan made sense to me and I placed an expression of interest at the issue price of $10 and 7% yield. However, apparently the issue was 4x oversubscribed and the dealers were unsuccessful in getting Air Canada to float more units. I was completely shutout and when I heard the news, my day was ruined. Hearing of the 18% pop on day one made the situation worse. My broker tells me that 90% of their clients received no allocation whatsoever. Apparently one of their larger investors received only 4% of his request. Hey, at least misery loves company. If I had received an allocation, I would have owned the units for about 30 seconds and promtly flipped them at the open. For those buying on the first day, you’d better hope distribution increases are in the offing to justify the current trading price. Maybe Robert Milton should learn hypnosis.

Trading Notes
Calpine Power Income Fund (CF.UN on the TSX)
I have eliminated my entire position at just under $10. The position was initiated in 2003 at roughly the same price and had been a steady performer. However, with some recent volatilty in the unit price, my returns are now based exclusively on the monthly distributions. Here’s the problem: the fund has been hit by their association with their corporate sponsor, Calpine Corporation in the US. The sponsor’s financial problems (insane debt, rumours of bankruptcy, etc.) had cast a pall over the Canadian fund and more questions than answers remain. Sure, the analysts have been “pounding the table” and providing solutions for all of the ten things that could go wrong with the fund if the sponsor renegs on their obligations. The sponsor itself issued a denial that chapter 11 was imminent, followed shortly by the power fund issuing a “business as usual” statement to the press. But who needs this kind of uncertainty and intrigue from a power income trust? The only time I want to hear about my power or pipeline holdings occurs when they have made an accretive acquisition or are confirming / raising distributions; that’s it. Inter Pipeline Fund (IPL.UN) never bothers me and that’s what makes our relationship work (OK, they’re having some issues with the crazy weather in Alberta…but that’s one time). I suppose it comes down to the old, “how can I love you if you won’t go away?”

Saxon Financial
OK, so this is more of a pre-trading note…but I’ve placed an expression of interest in the IPO of Saxon Financial, a value-focused investment management firm known for lower than average MERs and a stable of no-load mutual funds. However, institutional asset management is their bread and butter, providing the bulk of the firm’s revenue. Add a stable of private clients into the mix and you get a relatively diversified revenue stream. In less than five years, assets under management have grown from $2.5 billion to over $9 billion. The prospectus notes 50 consecutive months of net sales, positioning Saxon as one of only two Canadian firms to accomplish this feat. In terms of dividends, they are aiming at a payout ratio of 80% of trailing consolidated net income. The top dogs, Richard Howson and Robert Tattersall have each been in the business for over 30 years and are clearly the faces of the firm. Although going public will do wonders for their retirement funds, those worried about a quick cash-out should look to the employment agreements locking these guys up until at least 2010. Even so, the firm has been expanding their management team in order to facilitate succession planning. Sure, there is a case to be made against owning mutual fund companies, as investors are increasingly-enamoured with exchange-traded funds. However, Saxon’s low-fee structure and solid track record may leave it less vulnerable than its peers to the shift. Besides, I’ve been a holder of their small-cap fund for many years and it would be nice to recoup some of the fees by owning shares in the actual company.

Market Guy Mailbag
In the last column, I offered some thoughts on why I don’t use dividend reinvestment plans (DRIPs). In response, a reader offers the following:

Letter #1: Dave C writes
I agree with your comments about DRIPS.  Investors with substantial portfolios are better off retaining control of their cash flow.  However, I would point out that DRIPS are useful for younger investors.  If they choose some good quality names, they can accumulate a decent position without incurring brokerage commissions.  Also, having a DRIP discourages the trigger-happy from trading their positions.  They can also work for very young investors who don’t even know they have the plans.  I set up DRIP plans in trust for both of my sons when they were babies and put all their income into them.  Because it was their income, the investment income was not attributable to me, so it grew tax free.  By the time they were adults, they both had a substantial down-payment for a house.  The experience also taught them a lot about the merits of investing.

Good points. If the Market Gal and I ever decide to have kids and pollute the gene pool, we’ll keep these ideas in mind. In the meantime, let’s hope for a greater empahsis on investing and personal finance in school curricula.

Letter #2: Mark in Huntsville, Ontario writes 
I’m going to invest in the Pizza Pizza Royalty Income Fund…the prospects of receiving cash from all those pizzas is too hard to pass up.

Agreed. I’ve been complaining about a lack of places to put money to work and then, bang, all of a sudden I’m all over the market like Tom Cruise on Katie Holmes. I placed an expression of interest in Pizza Pizza and was, again, shutout. Perhaps I’ll have more to say about this another time. By now, many of you are getting close to reader fatigue and there’s no way I can be brief about pizza. It’s just not possible. Let’s just say this was the most entertaining prospectus that I’ve read in a while.

When it comes to discussing pizza, brevity is not the soul of wit.

The Market Guy’s Closing Bell
Remember the movie Jurassic Park and the character played by Jeff Goldblum? After discovering that a series of dinosaurs engineered to be female had somehow managed to breed, Goldblum’s character noted that “life finds a way.” In watching the current situation involving Bob Geldof’s Live8 concert and the inevitable scalping of tickets on eBay, I think we can conclude that money also finds a way. You can regulate it, roadblock it, tax it, repress it, and try to keep it out of the picture…but it always finds a way. Although this may frustrate the heck out of Geldof, it was also the most predictable outcome imaginable. Demand for the British concert: 2 million tickets; supply: 150 000 tickets. Enter capitalism. Geldof tried to keep money on the other side, but as though part of some osmotic reaction, the money found its way across the membrane. What a wonderful world in which we live. This is what I think about while waiting for baggage at the airport.

If you try and keep money out of the picture, The Market Guy will be making the same face as Jurassic Jeff (shown here).

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. He doesn’t understand Much Music anymore and recently listened to, and enjoyed, Paul Anka’s “Rock Swings.” The times they are a changing over at mail@marketguy.ca

In this meaty, full-flavoured edition:

• Feature: The Grave-Dressing of an Income Trust: Goodbye to Riocan
• Trading notes: Superior Plus Income Fund (SPF.UN); Enervest Diversified Income Trust (EIT.UN)
• Market Guy Mailbag
• Market Guy’s Closing Bell: Air Canada

The Grave-Dressing of an Income Trust: Goodbye to Riocan 
The remaining position in Riocan was eliminated at $18.69; and so marks the end of a beautiful relationship. I’d owned the units for 6 years and it was one of the most enjoyable investments of my lifetime. Sure, there were times when I doubted it.when I questioned its loyalty to the portfolio. But then it would go out and do something to make me fall in love with it all over again; a distribution increase here, an accretive acquisition there. In fact, I don’t think there’s an investment that consumed more space in this column than Riocan. I liked talking about it, thinking about it, and writing about it. I even enjoyed shopping at a local power centre, and looking up at the big sign that read, “Riocan owned and operated.” This never failed to make me smile. Here are some excerpts from previous columns:

From MG#3 in the summer of 2003:

“Market Gal is so used to me babbling on about the company, that she’s started pointing out many of the sites. It gives me a warm glow when she says, “That’s a Riocan property!” I just assumed she’d been doing the correct thing by ignoring me.”

And from a few months ago in MG#24:

“I have lost my ability to be rational about this company. Can you name a child Riocan? Is that possible?”

When I came home from work the other day and announced that I’d eliminated the position, she actually stopped watching Oprah, turned to me with a shocked look on her face and said, “Are you serious?” She was actually concerned and wanted to make sure that I was OK. I was pleased because anything that stops her from watching Oprah is a good thing.

To prove that I was fine, the other day we headed over to a Riocan-owned power centre in Ottawa. We had to pick up some things at Wal-Mart and grab a couple of Big Bacon Classics at Wendy’s. And do you know what? I was fine and experienced no pangs of guilt and no regrets. Given that I teach psychology, indulge me as I examine how this might be.

The Market Guy won’t be crying when he drives past this sign.

Steve Duck is a psychologist who researches interpersonal relationships. He notes that when an important relationship comes to an end, each party comes up with a story as to what happened and why the pairing had to be dissolved. Through the generation and subsequent telling of our story, we try to preserve our reputation and come to terms with the loss. He called this process, “grave-dressing.” In a sense, I’ve been doing a little grave-dressing on the Riocan sale. Here’s my story:

• The units trade at a decided premium to not only the other retail-focused REITs, but the entire Canadian REIT universe. Some of this premium is justified, given Riocan’s stellar track record, proven management, solid partnerships, long lease terms, high market cap, and diversified client base. However, at the time of sale, the yield was hovering just over 6.5%. That doesn’t afford much of a risk premium over bonds even though you’re undertaking equity risk.
  
  
• The sale also illustrates what those in behavioural finance refer to as “risk aversion in the domain of gains.” In other words, we like to protect our profits. I’ve been invested since the beginning of the REIT-run, so I’m happy to take some profits, rebalance the portfolio and reduce my risk.

• In early March, Riocan CEO Ed Sonshine exercised some options and then sold units at prices just over $19. Sure, there are many reasons for insider selling…but the top dog sure isn’t buying.

Thanks for the memories, Ed. You made $7 million in compensation last year. No wonder you’re smiling. The Market Guy is too.

Sometimes when a relationships ends, we secretly hope that things don’t work out so well for the other person. Or at least you hope that things work out better for you. For example, if I ever go to a high school reunion, there’s a certain ex-girlfriend that would make me smile is she’d managed to gain 250 pounds and develop a bizarre facial tick. OK, so maybe I’m being petty and a little extreme. Let’s make that 175 pounds and a bunion problem. But unlike many of the relationships that end, I hope for the best for Riocan. I want it to be happy, successful, and to bring joy into the lives of others. In fact, there’s a part of me that believes, maybe, someday, our paths might cross again. Perhaps if the situation is a little different, maybe the flames will burn just as bright as they have over the past 6 years.

Trading notes
Superior Plus Income Fund (SPF.UN on the TSX) 
I’ve cut my exposure to SPF by one-half, after paring the position at $31.53. The units have subsequently retreated to less than $30 and I’ve noticed some analyst downgrades, for whatever that’s worth. Like so many other business trusts, this one has had a fantastic run over the past couple of years. With distributions pegged at $2.40, the current yield is over 8%. The yield on my original purchase price is just shy of 11%. I still like the trust, its diversified revenue stream, rising distributions and proven management. So why trim the holding? I’m sounding like a broken record, but I’m just taking some profits and reducing my risk level.

Enervest Diversified Income Trust (EIT.UN on the TSX)
Although I found Riocan to be bloated and Superior to be worth a paring, that doesn’t mean that I’m swerving away from the sector. In fact, as the trust market was reeling at the end of March, I initiated a modest position in Enervest Diversified Income Trust. This is a closed-end fund that invests in, wait for it, income trusts. The units were purchased at a price of $7.58. Based on an annual distribution of $0.84, this represents a yield of over 11%. According to a recent news release, it’s anticipated that 58% of the 2005 distributions will not be considered taxable income, so this one goes into a non-registered account. Here are some other quick hits on the fund:

• With over 178 million units outstanding, liquidity is not a problem. I’ve seen a fair number of closed-end funds that don’t trade very much and sport fairly significant buy-ask spreads.  

• The management fee, which was reduced in 2002, now stands at 1.5% on the first $250 million of net asset value and 1.0% after that. This compares quite favourably to others in the sector. For example, the Sentry Select Diversified Income Trust (SDT.UN on the TSX) comes with a management fee of 1.5% and no reduction at any level of net asset value. These fees certainly beat the majority of mutual funds available, so I can’t complain. 

• Their portfolio is currently invested 20% in oil and gas royalty trusts, 17% in REITs, 16% in pipelines and utility trusts, with the remainder spread across resource, consumer, energy distribution and transportation trusts.

I know what some of you are thinking. Why not grab units of SCITI Trust (SIN.UN on the TSX), a closed-end fund that attempts to match the performance of the Scotia Capital Income Trust Index? With an MER of 0.42% and a yield of just over 9%, surely this makes sense. Not so fast, Chester . First, it has a much lower non-taxable component. Given that I’m going non-registered, taxation issues have to be considered. Second, the fund is float capitalization-weighted, so it leans heavily to the big trusts. For example, Canadian Oil Sands stands at almost 8% of the portfolio. Third, the Scotia fund is heavily biased to the energy sector. In fact, the fund is over 40% invested in oil and gas royalty trusts. I’m already well-represented in the patch. Pass.

Fair enough, but with the trust market behaving so erratically these days, why buy in? I continue to hold several individual names in the sector, so why grab a fund? Given the recent pullback and my paring of the higher-priced names, I wanted to put some money in play. I’m not saying it’s a buying opportunity, but I’m more curious than I was a few weeks ago. However, with the volatility, I’m not enthusiastic about placing bets on any sub-sector in particular. Plus, this is the busiest time of year for me at work. It’s made searching for value difficult. Meanwhile, Market Dad’s been confined to the house after having his gall bladder removed. On the negative side of things, he had his gall bladder removed. On the positive side, he’s had the time to obsess over the markets and make money by snapping up beaten-down trusts. While that’s been going on, I’ve begun marking 2000 pages of fourth-year research projects, grading oral presentations, and working on a special project for the dean’s office. The full-time job is impairing my trading activity. This is how resentments are born.

Who knows? Maybe the trusts will dip again in a few weeks when my schedule clears up. In any event, if I’m going to put some of my hard-earned money at risk, the diversified approach of a closed-end fund makes sense right now. I’ve only committed a modest number of funds to the purchase, so this is not a full commitment. Although the sector has bounced a bit, if a downward trend resumes, I’ll be more than happy to ante-up at lower prices. In other words, I’m dipping my toe in the water. It’s a little cool, but not too bad.

Markey Guy Mailbag
Here’s a sampling of what’s been coming through the inbox these days, each letter followed by my response:

Letter #1: New subscriber Ron K. writes

I have just discovered your wonderful site and have placed myself on your mailing list. I’m an old man who has been investing for years both in drips (bns, bmo and trp since the mid eighties) and income trusts. The vast majority of my income trusts are enrolled in their drip plans. Do you think that is a good stragety generally speaking. My rational is that as long as the distributions are maintained and I don’t sell I will be buying more shares at a lower cost base. In the past this has worked wonderfully for me regarding bmo and and bns. However banks never cut their dividends National Bank excepted. Looking forwared to your Newsletter.

MG: From an intellectual perspective, I like the idea of DRIPs for high yield equity names that generate predictable (and hopefully increasing) income streams. If it makes sense for quality common equities, it would seem to make sense for the quality trusts. Plus, you typically get these shares at a discount to market and I love buying quality on sale.

However, I have an even stronger preference for having the cash in my hand. I want to be able to use the cash how I see fit and I can’t always guarantee that I’ll want to use the dividends to buy more shares. In other words, I’m afraid of the DRIP commitment. For example, I currently have a position in TransCanada Corp (TRP on the TSX), but have no interest in adding shares either on the open market or via a DRIP. Rather, I’ll pool their dividend cash with that received from other names in order to initiate a new position or extend a favourite existing position. I find that with a DRIP I’m surrendering control over the cash.and that would feel wrong.

Keep in mind that your strategy has served you well for 20 years, so don’t let my idiosyncrasies hold any sway!

Letter #2: Loyal reader Dick from Edmonton checks in:

Congratulations, you have reached the zenith of Bill Simmons and Peter King — that’s right you were printed off at work and read in the bathroom.  Just thought you would enjoy this knowledge.

MG: Some would suggest these columns are best left in the bathroom. But thanks for making me laugh out loud.

Letter #3: Jack G. responds to MG#25, in which I indicated being uncomfortable about energy trusts yielding under 9%:

I have owned AET and PWI since their IPO’s in about 1996. Along with REF, REI ,ERF,YLO  and PEY, they have certainly been my best income performers…

I disagree with your 9% argument. I will agree with you if you are  talking about other low quality O/G trusts or almost all of the flakey business trusts. If you remember the early days, (circa- 1996), most of the O/G trusts came to market with a 15% yield or greater. However, after 8 to 10 years, the market now recognizes that, while they are still an equity, the good ones are not as risky as as first thought.

I still have to find and study your prior reports 1-24. I hope they are still available. Without seeing them, I will just ask if you have ever reported on PEY.UN.  I got into it very late but is now my largest holding. Unlike all of the other O/G trusts that grow reserves by buying mature properties and causing dilution. These guys live by the drill bit. They only pay out less than 50% of net income, and the rest goes into production development.

MG: With the names on your list, you’ve had one heck of a run. Beautiful. I agree that some of the advances in the royalty trust sector can be traced to growing respect in the market. As you mentioned, many of these names were yielding 15% quite recently and investors had just shy of zero enthusiasm. However, as I’m sure you’ll agree high energy prices and low interest rates have been the dominant factors at play here. Change either or both of these factors, and it’s back to no respect. What’s alarming to me is the speed at which changes in sentiment can occur. My becoming uncomfortable with yields under 9% is quite an arbitrary, almost emotional thing. Simply, this is the level at which my investing pendulum has shifted from greed to fear. This also gets back to the whole “risk aversion in the domain of gains” element that aided my sale of Riocan.

Your letter makes me think of the early days of the royalty trusts. Remember when Pengrowth and its 100% payout ratio, live by acquisition strategy was the standard-bearer? I had loaded up on the name to such an extent that it assumed a hefty overweight in my portfolio. All right, it was more than hefty.it was obese. Now their model seems old-fashioned and out of step with the Peyto’s, Bonavista’s and Zargon’s (among others) of the world. Peyto and the early adopters of the low payout, live by the drill bit model have increased confidence in the sustainability of the sector and clearly altered expectations of how royalty trusts are supposed to function. And after reading the recent profile of Peyto CEO Don Gray in Report on Business Magazine, I concur with their front page assessment, “What’s not to like?” Plus, you have to love Peyto for the following:

• it’s the lowest cost operator in the energy trust sector
• it sports an outstanding reserve life
• it exhibits a very low payout ratio
• there’s the possibility of distribution increases later this year

It sounds as though you’ve included Peyto as part of a diversified exposure to the energy trust sector. For myself, consider the following: I’m a fair number of years away from retirement. Market Dad worked for 34 years and has adamantly maintained that if you can do it, early retirement is the way to go. I like the sounds of that, and so I need a little extra yield from my investments to help me along the path. Anyway, Peyto is yielding just over 5%. Compare that with Bonavista at just under 11% or ARC at just under 10%. All three are generally considered to be high quality names. After recently eliminating my position in ARC, I’ve held on to Bonavista and its extra 500 points of yield. I’m not willing to gamble on Peyto’s unit price being able to make up for that spread. Of course, maybe I should hedge my bets and own Peyto, ARC and Bonavista. If that Goldman strategist is correct with his prediction of $105 oil, then you might as well pick royalty trusts by throwing a dart at the stock page.

Yes, previous columns are available. Use the column archive link located at the top-right of the website or click here.

Thanks for the great letter, Jack. Fun stuff.

Market Guy’s Closing Bell
Strangest two events occurring during the same week (also evidence that the apocalypse is upon us):

• Investors scrambling to unload the highest quality income trusts.
• Investors scrambling to get in on Air Canada ’s new debt and equity offering. The offering actually had to be increased to accomodate the demand.

New investors will need air-sick bags. First, when their investment tanks; and second if they receive a complimentary CD from Air Canada shill Celine Dion.

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. He’s currently shopping for a new BBQ. It must have porcelain-coated cast iron grills. It’s going to be a tasty season over at mail@marketguy.ca

In this action-packed edition:

• Feature: A consideration of income trust IPO’s
• Trading notes: ARC Energy Trust (AET.UN); RBC O’Shaughnessy International Equity fund

I remember when investing in income trusts was so much fun. There were only a limited number of names, so the sector was easy to follow. It was like remembering the names of Canadian sitcoms. Few people cared about income product, so you never felt like a victim of the herd mentality. Around the same time, a friend of mine had a financial advisor loading her up with biotech and semiconductor plays and he dismissed trusts as quickly as an invitation to a leprosy festival. Trusts were deemed to be a retail investor thing, not suitable for “real” investors who knew what they were doing. Meanwhile, all I had to do was stay invested, sit back and make money. It was a wonderfully intimate party and the gains were comfortably-paced. Unfortunately, the party has since been crashed by investors of virtually every stripe. And these party-crashers have an insatiable appetite. They want yield product and they want it bad. They’ll devour just about anything, even if it’s crap. Call them trust zombies. This has led to valuations becoming strained, especially among the larger trusts, making it harder to find true value.

Next time a zombie is trying to eat your brain, ask if they’ll take an income trust instead

But why wouldn’t investors run to the sector? Basically, the world has aligned itself perfectly for investing. In fact, every wish that a trust investor could possibly dream of has been granted in the last few months. Let’s review:

• The threat of marked interest rate increases? Not really a problem.
• Liability issues in Ontario? Removed by legislation.
• Inclusion in the S&P/TSX index? On the way!
• Just enough craziness in the world to keep energy prices high? Lunatics are plentiful!
• Enough analyst coverage? Firms are falling over themselves to cover the sector, even to the point of poaching each other’s talent.
• Institutional buying? Income trust mutual funds and closed-end funds are about as hot as season one of Miami Vice, just released on DVD…now that’s hot!
• New names to get excited about? There’s plenty of new product coming and that makes it easier to generate meaningful comparisons between names.

It’s absolutely perfect…and therein lies the danger. Here’s the flipside:

• The interest rate picture will change and when it does, it could get ugly. Look at what happened to the trust market last spring when even the whiff of an interest rate spike slapped unit prices silly. Serious pain.
• How much will inclusion in the index really be worth? It could be argued that the effects of inclusion have already been priced into the market.
• The words “raising target” and “multiple expansion” have been creeping into many analyst reports. In other words, they have no idea how to value these things.
• All that new money coming into the sector is great for prices, but indicates that investors may be chasing performance. This almost never ends well.
• New product is fantastic, although we may be getting to the bottom of the barrel. I feel the same way about reality TV, now that Pauly Shore is getting his own show on TBS.
• There’s always the possibility that governments will do something to screw things up…a truism if there ever was one.

So where does this leave the portfolio? Although I’m still overweight the sector and have unnatural attachments to many of the names, I’ve been paring back more in the past 6 months than ever before. I’m finding it harder and harder to find new names that I like. So to calm my tormented soul, I’ve had to find other ways of making money here…and the initial public offering (IPO) market for trusts has provided me with an effective way to do so.

Bring on the fresh meat: The bad ol’ days 
When most people think of an IPO, they seem to think about the dot-com days of 1999 and 2000. Remember all the stories about small web portal companies going public, making sudden millionaires out of CEO’s and financial backers? Did I say millionaires? Mark Cuban took Broadcast.com public in one the most successful IPO’s in stock market history. He eventually sold his shares and allocated some of his billions to purchase the Dallas Mavericks of the NBA. At least he knew enough to stay away from the NHL.

Even more remarkable about all those technology IPO’s, was that virtually anyone involved hit the jackpot. Receptionists, secretaries, gophers, the guy who watered the office plants; it didn’t matter. And shareholders were rewarded, albeit on a much smaller scale, with meteoric share prices that defied rational explanation. Did these things really happen? It seems so long ago. At least we have some great stadium names to remember and wax poetic about a bygone era. Let’s hope they never take away CMGI Field or 3-Com Park. Oh, they already have? Someone fetch me a tissue.

My reluctance to invest in technology stocks kept me from enjoying the party. While I did engage in some modest speculative trading (all right, I’ll come clean and call it day trading), I never maintained any significant tech positions and never participated in the tech IPO market. This owed much to 1) my lack of understanding of all tech investments. This ignorance continues to this day. I have no idea how to value these companies; plus, I prefer companies that have competitive advantages and pay dividends; and 2) my negative perception of IPO’s generally. When I thought of IPO’s, I couldn’t help but think of greasy, unscrupulous stock peddlers working out of poorly-ventilated basement offices with 25 other hacks using random phone number generators, each one desperately searching for the investing equivalent of the Glengarry leads. All right, so I have a vivid imagination. But you know what I mean.

Come to think of it, maybeBoiler Room (2000) nails the image. Plus, you get a pre-Gigli Ben Affleck trying to copy Alec Baldwin’s memorable performance from Glengarry Glen Ross(1992). You can guess how that worked out.

Fast forward to the trust IPO’s 
Since those crazy days, the IPO market has been rather anaemic, to say the least. There have been a few significant and highly-successful entries (e.g., Shopper’s Drug Mart, ING, etc), but it’s been new income trusts that have saved the investment dealers from eating dog food. It took two factors occurring simultaneously for me to become interested in IPO investing. First, the new product had to be coming from a sector that I knew well. New trusts satisfy this requirement quite nicely. Second, my participation had to be self-directed. In other words, I had to be able to resrearch the offering on my own and reach my own conclusions. No salespeople. Well, the discount brokerages seem to have taken care of this one.

Each of the major discount brokerages offers different services when it comes to new issues. A new issue describes any security that is being made available for the first time. This can involve common stocks, preferred shares, debentures, fixed income product, etc. However, it’s not only about IPO’s. Rather, new issues also include secondary offerings (e.g., a company with shares already trading on the exchange decides to raise capital by selling more shares to the public). When you find something that you’re interested in, you have to contact the broker to place an expression of interest. This means indicating the number of shares/units that you’d like to purchase. If it’s a hot deal, then you have to move quickly. The allocations procedure apparently observes a first-come, first-serve schedule. If you receive an allocation, there can be a wait of several days to weeks until the shares are sent to your account. Some deals take longer to complete than others, although they do offer a preliminary time frame when you place the expression.

There is considerable diversity in how the brokerages disseminate information about new issues and how they subsequently process expressions of interest. Some list all available new issues on their website, some are willing to email clients whenever new product becomes available, and some are willing to process orders online. The following table illustrates the differences:

TD Waterhouse is ahead of the others and has been for some time. However, Scotia McLeod Direct recently added email notification. When asked if they planned on extending more of their services online, a customer service representative seemed optimistic. Meanwhile, BMO Investor Line and RBC Action Direct indicated that no changes to their current procedures were expected. There’s nothing wrong with having to call your broker to see what’s available and place expressions of interest during the call…but I find it less convenient and far less enjoyable. And shouldn’t making money be enjoyable? Am I right, people?

My first attempts with trust IPO’s came in the summer of 2003, with the debut of Yellow Pages (YLO.UN on the TSX), and Enbridge Income Fund (ENF.UN on the TSX). Yellow Pages remains in the portfolio, while Enbridge was eliminated a while back. After that, I dabbled and subsequently dumped several other names including Atlantic Power and a few days ago, Keystone North America. The foray into Keystone (KNA.UN on the TSX) was supposed to be part of an IPO-double play with Spinrite (SNF.UN), Canada’s dominant yarn manufacturer. I actually wanted a substantial allocation to Spinrite, but it was sold out and I had to make due.

Zombies buying cemeteries…why not? 
Keystone claims to be the fifth-largest provider of funeral services in the United States, with 177 funeral homes and 9 cemeteries. I was able to get an allocation, but only 1/3 of the number of units that I wanted. Demand was very strong. Imagine that! Zombies pushing up the shares of a funeral company. Anyway, this suggested a pop on opening day.and that’s exactly what happened. I owned the units for about an hour and then sold them for a gain of roughly 13%. I had no intention of maintaining the holding and regarded this as nothing more than a candidate for flipping. I was not alone, as Andrew Willis reported in his Globe and Mail column, the day’s action came “To the delight of stock flippers everywhere.” If I can get the equivalent of 15 months worth of distributions for one hour of ownership, I’m making the trade.

However, I did actually look at the business and decided it was not something that I wanted to have in the portfolio. A flip is one thing, an investment is another. Here’s the central issue: I want my business trusts to be dominant in their sector. I want them to have some pricing power. Being the fifth-largest service provider in a highly-fragmented and competitive US market does not meet these criteria.

So what makes for a good flip? Well, a decent yield that is well-above average for the sector is a nice place to start. It also helps if the trust operates in a sector that is attracting plenty of investor interest. New issue business trusts are sizzling hot right now and Keystone has a demographic angle that never fails to leave some investors frothing at the mouth. Even though the baby boomers are a while from needing funerals, it always seems that someone is pumping these types of services as excellent long-term demographic plays. But to be honest, I’m not all that excited about investing based on demography. The problem with demographic plays is that everyone knows about them. When everyone knows about something, this shared knowledge changes the very character of that something. Business people are well aware of the population trends and if demand for a service is anticipated to be strong, then the market reacts accordingly. This means new businesses come into the field, driving up competition, lowering pricing power, and increasing investor risk. Look at the car companies. The baby boomers helped the automakers sell more cars than ever before. This could have been predicted by demography…but it sure wouldn’t have helped you to make money.

OK, so there are issues with new issues
When making an IPO play, you have to decide if it’s to be a flip or an investment. The only way to do that is to study the metrics of the deal and read the prospectus. Typically, the prospectus is available on the broker’s website or at www.sedar.com. Typically these things are a snooze, but they still manage to be infinitely more entertaining than Jay Leno.

If given the choice between reading a 200-plus page prospectus for a funeral company or watching one hour of Leno, you know what The Market Guy will be doing. Shouldn’t the move from Carson to Leno be considered one of the biggest downgrades of all time?

Studying the prospectus makes sense, until you consider one fairly significant problem: often you have to place an expression of interest before the final prospectus is issued. That means the details around yield and size of the offering may be subject to change and that can lead to some nasty surprises. When a deal is especially hot, there’s nothing to stop the parties involved from lowering the projected yield. For example, Keystone was originally marketed with a yield of 10.5%, but with strong demand, this was pushed down to 10%. That’s 50 basis points, which is a considerable move. The change was made after I’d already committed to the purchase. It all worked out, but this does illustrate one of the risks that I’m taking. I’d gone over the preliminary prospectus, so I was making as informed a decision as possible…even if the document was full of missing details.

In terms of secondary issues, the shares are usually made available at a price below market. This provides an incentive for participation and can help to get the deal done. However, I always keep in mind the risk that comes along with the time delay between placing the expression of interest and actually receiving the shares. If the stock runs into trouble in the interim, I can’t sell what I don’t yet own…and the commitment to purchase the shares, even if it means buying at an above-market price, is still firm. In any event, I’ve been able to extend a number of holdings, including Calloway REIT, Bonavista Energy Trust, and Inter Pipeline Fund via the secondary route.

Overall, I’ve found investing in trust IPO’s to be a useful way of squeezing a few extra bucks out of the sector. I know that it’s short-term trading behaviour and not investing. That’s why I only devote a small portion of investment cash to these types of activities. So far, it’s working. However, it’s conceivable that as this market continues to roar, the opening yields on trust IPO’s will continue to head south. As that happens, the potential for flipping decreases. In other words, any future expressions of interest may have to be for investment-worthy trusts. Then I’ll have to jump in with the rest of the zombies.

Trading notes
ARC Energy Trust (AET.UN)
I have eliminated my largest energy position, ARC Energy Trust at just under $20. The subject of an earlier paring at lower prices (see MG#23), it continued moving up along with just about every other energy name. I still love this trust. It has a relatively conservative payout ratio, proven management, low debt, decent reserve life, and a large market capitalization. In addition, when trusts are formally added to the S&P index, this one seems to be a logical candidate for inclusion. Simply, it’s top-notch and has the history and metrics that warrant trading at a premium valuation. In 2004, the trust returned almost 34% to investors (including distributions). And it was headed in the same direction to start 2005. But when I start seeing sub-9% trading yields on commodity-based trusts, I get nervous. I don’t care how low interest rates are or how many index players are going to be buying in. I don’t care about the strength in oil prices. At this point, it’s all about risk management and knowing when I need to leave the party. So it’s time to book some profits, consider myself one of the luckiest guys on the planet, and move on.

Keep in mind that I’m not eliminating my entire exposure to the energy sector. As I’ve said before, it’s a part of my blood now and I could never turn my back on it…no matter what it does. You have to stick with the ones you love, right? With positions in Bonavista, Acclaim, Real Resources, and several indirect holdings, I’m still well-represented in the patch. However, I’m now feeling more comfortable about my exposure and have addressed the three forms of risk identified in MG #23.

Dealing with the energy sector reminds me of Steve Irwin, the Crocodile Hunter guy on Animal Planet. He’s the guy who roams Australia in search of things that might kill him. Well, one time he found this impressive looking but very poisonous spider. So what does he do? Naturally, he gets down on all fours and puts his face about 4 inches away from the thing. Then he turns to the camera, and starts telling us more about the spider, its habitat, and behaviours. While he’s looking at the camera, the spider assumes an attack posture, which is the sort of thing that should provoke a serious Darwinian-skedaddle. Instead, Irwin grabs a stick and decides to start poking at the spider. Poke. Poke. Poke. Now the spider is really pissed, so of course Irwin looks away and starts talking to the camera again. I’m not sure what he said, but is was something like, “we’ve really got her angry now.” I’ve seen him do the same thing with snakes, crocodiles, and lizards and he does it every episode. Well, the energy sector is just like that spider. Appreciate it but don’t push your luck!

Don’t make any strange movements when approaching the energy sector.

RBC O’Shaughnessy International Equity
I have also added a new mutual fund position to the portfolio. Let’s welcome the RBC O’Shaughnessy International Equity fund. This fund started up in January and helps to diversify my portfolio a little away from the Great White North, where most of my investing dollars are allocated. I’ve been a holder of the Canadian and US value editions of this series since their 1997 debut and have been pleased with the performance, fee structure, and other metrics that I believe are important (see MG#22 for my take on selecting mutual funds). In fact, the O’Shaughnessy approach will take centre stage in a future column.

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. Who cares about the NHL? Pitchers and catchers are now reporting and will be available for all your steroidal needs. Get a different kind of juice over at mail@marketguy.ca

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

• Same Market Guy ..new look!
• Market Guy Mailbag
• Trading notes: Bonavista Energy Trust; Atlantic Power
• Buying a new TV.and other war stories
• Making the most of (and reducing the pain from) Boxing Day

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

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

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

Letter #1: Pat in Ottawa asks:

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

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

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

Letter #2: Jeff in Toronto writes:

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

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

Letter #3: Rob in Kingsland, Texas writes:

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

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

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

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

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

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

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

And so concludes this edition of the Market Guy Mailbag.

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

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

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

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

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

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

• provides some excellent development opportunities 

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

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

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

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

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

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

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

• A number of its power purchase agreements expire soon.
  

 

• They are majority owners of only 60% of their plants.
   

 

• Much of the distributions take the form of tax-unfriendly interest income.
   

 

• Their revenues are denominated in US dollars and the distributions are paid in Canadian dollars. Like many of you, I’m not comfortable with too much currency risk. They are starting with a 5-year hedge on currency exposure, which is great, but I’m not clear on what happens after that. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Audiotronic TV boy: ”Yeah, yeah?”

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

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

The tension builds.

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

Ozner: “What kind of free stuff?”

Audiotronic TV boy: “What would you like?”

Ozner: ”Hmm.”

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

Ozner and I (in unison): ”Deal.”

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

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

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

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

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

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

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

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

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

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

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

Happy New Year everyone!

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. Should old investments be forgot and never brought to mind? We’ll take a cup of kindness yet formail@marketguy.ca