Friday, January 18, 2008

Three bad days, and 2007’s gains are gone

That’s the title of today’s headline article in the Globe’s Report on Business. That’s also the way that Canada’s Finance Minister would like Canadians to save for retirement, when he condemns income trusts on the basis that we cannot become a “nation of coupon clippers”.

Implicit in that statement is that Jim Flaherty, an ambulance chasing insurance litigator who favours jailing the homeless, would prefer that Canadians saving for retirement become a nation of stock speculators or a nation of day traders.

The problem with the stock market at large is that it is premised largely on the greater fool theory, in which you attempt to buy low and sell high, provided you can find someone willing to provide you with your investment gain. Unfortunately the broad market is captive to investor sentiment at any point in time, which can turn on a dime, as it has these past three days, wiping out in three days all the returns that investors experienced during the entirety of 2007.

This is what makes income trusts unique, in that their returns are largely derived from the distributions that are paid on a monthly basis. Never will you read a headline in the Globe that says “Three bad days and 2007’s distributions are gone”. Once paid, these distributions are irrevocable.

Doesn’t that sound like the more prudent way to provide retirement income and peace of mind? With the traditional common share investment in a corporation, the investor looks to the market for his/her return, whereas with the income trust investment, the investor is looking to the company for his/her return. Income trusts are a buy and hold strategy as opposed to a buy and sell strategy.

Income trusts had grown over the past 10 years to a $235 billion market, as a result of the dramatic decline in interest rates and the fact that Canada has an aging population, of whom 75% do not have employer pensions. Stephen Harper solemnly promised he would never tax income trusts, but as with most of his promises, he promptly broke it. The reasons he cited are all fabricated nonsense, as income trusts do not cause tax leakage or weaken our economic growth or prosperity .

Income trusts however do cause headaches. Headaches for the likes of Dominic D’Alessandro of Manulife and Paul Desmarais Jr of Power Corporation/Great West Life, who were having a difficult time selling their investment wares like annuities and Income Plus in the face of the broad and growing popularity of income trusts.

In addition, corporations like CI Financial who had adopted the income trust model were provided with a higher valuation by the marketplace. This higher valuation was accorded by the market to income trusts. because investors place a premium on companies who were more disciplined in the payout of their earnings and who would only do acquisitions that would be accretive to earnings. Meaning acqusitions that increase the monthly distributions, rather than decrease the monthly distributions.

This caused a problem for companies like Manulife and Power Corporation, since they certainly liked the idea of enhancing their valuations by converting to income trusts but the idea of embracing these new ground rules of financial discipline was anathema to them. For example, Power’s acquisition of Putnam Investments which was not accretive to earnings, would not have been permissible by investors, had Power been an income trust.

As such, the Harper government has become the instrument of big business and the big Lifecos and made himself the arbiter of which investments will be available for the 75% of Canadians who must fend for their own retirement and which ones will not, meanwhile hypocritically and most unjustly allowing the Pension Funds who manage the retirement income for the 25% of Canadians to own income trusts in their private equity portfolios free of the new 31.5% tax. How can this be considered a Tax Fairness Plan? Harper then took this inequity even further by allowing the privileged 25% to split their pension income, but not the 75%, resulting in tax savings of up to $12,000 a year.

Would it surprise you to learn that every person, namely every politician and every bureaucrat who was involved in this policy’s design was a member of that exclusive 25% club?

And to think that this whole policy flip flop that was designed to serve the bespoke policy objectives of Manulife and Power Corporation and the like was perpetrated on the complete falsehood of tax leakage. All in order that you too can be the proud owner of retirement investments where all it takes is three bad days and all of last years’ gains are gone. Poof.

Perhaps Stephen Harper’s next occupation could be working in a boiler room operation, swindling unsuspecting investors from their life savings. He would come well recommended for that job, having swindled $35 billion form Canadians during his first nine months as the Right Honourable Prime Swindler of Canada


iron driver said...

Excellant post Brent.Very astute comparison of the zero sum stock market game to the true ownership of an income trust unitholder..What a crying shame the con's are killing them.

nineofiveland said...

Excellent .. I'd suggest emailing this to 2 or 3 friends .. a great summary!

thanks Brent