But what kind of rally is it?

By David West

The jury is still out on whether the ongoing worldwide surge in equities is the first phase of a sustained recovery on its way to the next bull market, or just a bear rally. In fact, the investment industry (or at least the people I’ve been talking to) is more preoccupied with debating whether the market will soon retest the low it hit in the first week of March 2009, or whether it will fall, but not enough to retest those lows.

That there has been a global rally in equities is without question. Five weeks ago, in the week ended March 13, it all started. During that week, 21 of the world’s 22 most major markets gained ground, with China’s Shanghai Stock Exchange Index being the lone exception.

Four weeks ago, all 22 of said markets gained on the week. Ditto for three weeks ago, and two weeks ago. Last week, 16 of those markets rose, while six fell (we have yet to see about this week). And the six that fell were mostly the lighter-heavyweights, such as Belgium, Denmark and Australia. I don’t have a single Euro, krone or dollar invested there, and probably neither do you. So I’d still call that a continuation of the rally.

As I explained in my most recent column, this could still turn out to be a real bull market rather than just a bear market rally. The problem I’m having so far with declaring it to be so is that it hasn’t proven itself yet. As they say, the devil is in the details.

Take, for example, our own Toronto Stock Exchange. In the past five weeks, its Composite Index has gained 9.38%, 2.44%, 3.70%, 2.77% and 1.34%, for a total gain of 21.02%, good enough for 11th place, or smack in the middle of the 22 most major markets. But what has underpinned that gain?

It certainly hasn’t been the utilities stocks. The TSX’s utility sector has declined every week for the last 10 weeks. Consumer staple stocks haven’t had a weekly gain in eight weeks. Those are two sectors you’d expect to hold up better than the rest near a market bottom, and they’re just not doing it.

What we do know is that two bull markets ago in the late 1990s, the bull pulling the market up was tech stocks, and that the last bull market early in this millennium was led by energy stocks. My thanks to CIBC World Markets for the following data: 73% of the market’s trough-to-peak gain in the former was fuelled by tech stocks, and 43% of the gain in the latter was driven by energy stocks.

And therefore what we probably also know is that the next bull market, be it this rally or a future one, probably won’t be driven by tech stocks or energy stocks, simply because sectors don’t tend to repeat leading consecutive bull markets. Incidentally, the TSX tech sector has posted gains in each of the past three weeks, after dropping for five straight weeks before that. TSX energy stocks are on a four-week winning streak, after dropping for six straight weeks before that.

Metals and mining stocks have been performing the best recently, with a seven-week winning streak. But closer inspection reveals that it’s more the non-household name small caps that have been doing that heavy lifting.

Next up are financial and energy stocks, with four consecutive winning weeks each. Consumer discretionary, real estate and tech stocks have risen for the past three weeks.

As I said, this could be the real thing, but it’s way too early to tell. And there’s a huge risk of another big drop before it materializes. So on balance, you probably want to be very selective right now about your buying. In the meantime, I’ll keep watch for you.

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David West writes in his recent article about the best approach to analyzing common shares.

“The simple fact is that there are only two things that will increase the economic value of a common share. One is an increase in the amount of money a company makes each year. The other is an increase in its net asset value. Let’s take them one at a time.

First of all, let’s say a company is worth $1 million dollars, and in one year it makes a 10% profit, or $100,000. Assuming the company pays out the full $100,000 in dividends, the company is also worth $1 million at the end of that year.

Now suppose that company makes an 11% profit in the second year, perhaps through higher revenues or by lowering its expenses, and 12 % in the third year, and 13% in the fourth year. If it pays out all of those profits in dividends, the company will still be worth, in terms of assets, $1 million. But the common shares will be worth more, because the company is increasingly more profitable. A reasonable proxy for this contribution to the value of the common shares is the trend in the company’s net income over several years.”

For more the full articles is here.

David West, CFA, FCSI, has been in the investment industry for more than 20 years. David writes about income trusts and mutual funds for Canadian Business Online; he is also editor of two private financial advisory newsletters; is contributing editor to the MoneyLetter; and provides investment courses to major financial institutions

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The Canadian Press – MONTREAL – Bell Canada is being conservative in rewarding shareholders because of uncertainty in financial markets as it works to improve its wireless broadband services and accelerate its fibre optic investments, BCE (TSX:BCE) chief executive said Friday.

Canada’s largest telecom company will focus more on paying dividends than repaying debt now that its blockbuster takeover has died, but Cope said BCE will also spend millions on the new ventures and to upgrade its service.

“Seventy to 80 per cent of all of our capital is going to those broadband initiatives and initiatives that improve service and very little is going to some of our legacy investments,” Cope said in an interview.

While he said Bell has already spent $2.5 billion on capital, Cope declined to specify how much more can be expected next year.

Rolling out an expanded fibre network would extend its leadership in high definition TV and could eventually pave the way for introduction of Internet television, he added.

Cope said Bell’s overarching strategy is to lead the market in customer service, which will translate into generating sales that will consistently grow cash flow and increased dividends.

“We’re being prudent in terms of making sure we have a balance sheet that is prepared for whatever the capital markets may bring us over the next 12 to 18 months, which everyone would acknowledge is a little uncertain,” Cope said from Toronto.

Bell has $1.5 billion in bonds maturing in 2009 and more in 2010.

Cope acknowledged that reinstating its quarterly dividend of 36.5 cents and repurchasing just five per cent of its stock, or about 40 million shares, was less than some had anticipated.

“We think it’s the prudent one given the market environment,” he said.

The dividend was cut earlier this year, saving hundreds of millions of dollars, as the company tried to shore up its finances and pay down debt ahead of the takeover.

The reinstated dividend yields 6.88 per cent at Friday’s closing share price of $21.23, down 80 cents or 3.63 per cent on the TSX session.

Payment of the first dividend since the collapse of takeover deal by an investor group led by the Ontario Teachers’ Pension Plan will take place Jan. 15 to shareholders of record on Dec. 23.

BCE also scheduled what is likely to be a much-watched 2007 annual meeting of shareholders on Feb. 17 in Montreal. A second meeting for the 2008 year is expected later in the spring.

Although largely anticipated, the announcements disappointed analysts who had expected a larger dividend and a more aggressive stock repurchase.

Troy Crandall of MacDougall, MacDougall & MacTier had conservatively estimated 65 million shares would be repurchased. Others had foreseen 100 million

“I’m somewhat disappointed on the share buy back,” he said in an interview. “That does put a drag on EPS growth in 2009.”

A bigger concern, however, is the company’s delays in unveiling its overall strategy to grow Bell as a public company.

Greg MacDonald of National Bank Financial said the company needs to spend more time and resources on its wireline business to better compete with cable.

“Telephone companies are slipping further behind. You need to have a firm plan and you need to commit capital dollars,” he said in an interview.

Little additional spending is expected in wireless. Bell has already committed to upgrade its network in co-operation with Telus (TSX:T). Telus has indicated its share of the costs are $750 million next year.

MacDonald said he doesn’t foresee Bell immediately selling sizable assets, such as Bell Aliant (TSX:BA.UN), although CTVglobemedia could be sold.

While the takeover was scuttled by KPMG’s insolvency opinion, Cope denied that Bell made mistakes such as challenging the contesting bondholders all the way to the Supreme Court.

“I don’t think we wasted time anywhere. We really believed the transaction was going to close,” he said, adding he’s not aware of any time that the banks funding the transaction wavered from their commitments.

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