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November 1, 2006 |
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Panic selling erupted in Canadian Investment Trusts yesterday as investors digested Finance Minister Jim Flaherty’s announcement that Trusts will start being taxed by 2011. However, after the initial wave of selling buyers quickly emerged to cushion the blow. At the end of the day Canada’s main index, the S&P/TSX Composite Index, was down by 2.38%, the S&P/TSX Income Trust Index was down by 12.11%, and the Canadian dollar was off by 1% versus the greenback.
While yesterday was a great day for speculators to quickly trade Canadian Trusts, it was not necessarily a good day to find bargains. Rather, since the carnage was quickly contained trusts did not become attractive on a book value basis. Moreover, by the end of the day there was already chatter that hedge funds and private equity firms were scouting potential targets (thus feeding speculation that the worst was over). For his part, forensic accountant, Al Rosen, went on RobTV’s SqueezePlay to try and talk some sense into people. Mr. Rosen’s point, without really having the chance to get specific, was that the premium trusts owned (compared to corporations) prior to the historic announcement should vanish, and despite yesterdays slide that premium has barely been dented. A recent report entitled ‘Income Trusts: Heads I Win, Tails You Lose’ touched on many of Mr. Rosen’s historical viewpoints. That this report was released before Mr. Flaherty’s announcement suggests that yesterday’s slide could be just the beginning. Business income trusts will likely suffer a 25% to 35% correction as an asset class. The accident can happen at any time and is most likely to occur when Canada enters recession. Income trusts are too risky for seniors and other conservative investors because the business model is flawed and rife with accounting problems. PDF FILE Notice how the statement ‘when Canada enters recession’ is prominently plugged into the paper’s first paragraph. To be sure, if no recession arrives an/or no bear market arrives, distributions may continue to paid, and investors will not question where the money is coming from. Outrage & Opportunities “Poor seniors yesterday watched in horror as $26 billion was wiped from the value of their favorite investments, with a good chance income trusts will continue to take a hit today” Toronto Sun Despite what you may think of Prime Minister Harper breaking his pre-election vow not to tax trusts, it is nonetheless ridiculous that some irate fund managers, analysts, and commentators blame the Canadian government for taking billions of dollars out of retiree savings. To be sure, while it is unfortunate that some investors will be hurt by the collapse in trusts, retired people should never have had their savings in stocks in the late 1990s, much less investment trusts today. Although I do not think that they are worth owning at current prices, the assets of The Consumers' Waterheater Income Fund and The Inter Pipeline Fund may be worth looking at. I think the only way you find opportune in the group is to uncover assets that have the potential to generate long-term returns. By contrast, I do not think that slopping off 30% from distributions and calling it a day is helpful, simply because some trusts have undercapitalized assets that are in need of a cash infusion while other trusts are trying to sustain ridiculously high payout ratios to earnings/cash flow. As for former Wish List company, Priszm, the trust was one of the few to come out with a press release yesterday. Priszm shares only lost 8.15% yesterday, and, unlike last year, are probably not at a level where Mr. Bitove is compelled to buy. Of the 20-companies listed yesterday none has become compelling from a book value perspective (SWS is at 0.99X book but has intangibles). The hunt continues... |
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