Tuesday, July 29, 2008

"A few crazy ones still linger" take Derek DeCloet for example


Truly pathetic journalism. Aimed to mislead and not to inform.




Jim Flaherty, trust investors' best friend. Seriously
By: DEREK DeCLOET
Globe and Mail
July 29, 2008

Leslie Lundquist has been an Albertan since birth, a Calgarian since the age of two and a Conservative for as long as she can remember. Or at least she was until the Tories put a chokehold on income trusts. Would she ever vote for them again? "Not as long as Harper and Flaherty are there," says Ms. Lundquist, who runs the Bissett Income Fund, one of the largest mutual funds devoted to - you guessed it - Canadian income trusts.

We say "largest," but in the shrinking trust sector that isn't saying much any more. Money has been pouring out of all kinds of assets since the credit crunch began - hedge funds, emerging markets, U.S. stocks - but for trusts, it merely opened the wound a bit wider. Investors have pulled more than $2-billion out of trust-related funds since the end of 2006, and that's just what we see from the industry's public data.

In Ms. Lundquist's case, what was a $1.1-billion fund two years ago was down to $810-million by the end of March, through no fault of her own, because the returns have still been good. So, yeah, it's no wonder she's still furious. But even angry people can see the silver lining, and it's this: At a time when no politician wants to talk about them and few investors want to touch them, income trusts are - dare we say it? - due for a comeback.

Actually, while the investing public has been running from trusts, in fear of the Terrible Mr. Flaherty and his new tax, most trusts have been doing just fine all along. True, they got absolutely crushed on Nov. 1, 2006, after his shock announcement. But what if you'd invested at the close of business that day? The S&P/TSX income trust index has returned 26 per cent, including all distributions. That beat the TSX composite (up 15.3 per cent), the Dow Jones industrials (down 13 per cent in Canadian dollars) and just about any other stock index that matters.

That's right. When the grinning Finance gnome was on CBC Newsworld justifying his decision, that was the moment to buy. Of course, it's partly a matter of rising oil prices, because the trust index is even more heavily exposed to energy than the TSX composite. Leaving that aside, though, the feds' crackdown did have some useful, albeit unintended, consequences, Ms. Lundquist says. It also served to flush out some of the low-quality junk (and, as importantly, prevented investment bankers from flogging more of it).

There were about 40 takeover offers for trusts in the year after the Halloween surprise but not very many of the targets will be missed, despite all the gnashing of teeth. Is it really a tragedy that Spinrite Income Fund, a yarn factory, is no longer publicly traded? Granby Industries? Associated Brands? Osprey Media? Some of these companies were wealth-destruction machines almost from the day they went public. Now they're in private hands, where they belong.

A few crazy ones still linger - the income trust that's based on a hydroponic vegetable-growing operation comes to mind - and a few others are too toxic for even private equity to touch. But for the most part, the trust market now looks much more like it was always intended to: a place for real estate, energy, and a small number of decent businesses like Yellow Pages whose need for capital reinvestment is small.

Come 2011, the roster will shrink some more, but maybe not as much as you think. In the oil patch, there's still lots of talk about finding ways to slide around, or at least soften the impact of, the trust tax. "I wouldn't be surprised if they're the last to say die. They're the most angry and they probably feel the most betrayed," Ms. Lundquist says. (Mike Tims, chairman of Peters & Co., a Calgary investment bank, confirms this: "I think we're going to see a bunch of innovations between now and 2011.")

And here's the kicker: Many trusts are far cheaper now than when everybody loved them and Bay Street was pumping them out as fast as it could. Take Yellow Pages. Pre-2006, it was an acquisition-mad company that issued billions of dollars in new units to buy stuff, and investors just couldn't get enough, even if it traded at 13 times EBITDA (earnings before interest, taxes, depreciation and amortization). Now it doesn't make the front page any more; all it does is make money and the multiple has shrunk to 8∏ times, using Bloomberg data. Yet nobody cares.

Who'd have thunk it? By attacking income trusts, Jim Flaherty may have created a once-in-a-generation investment opportunity in ... income trusts.

10 comments:

Anonymous said...

Is it April Fool's Day already? Or just another "Trick or Trick" maneuver... courtesy of Derek DeClueless...

M

Truth in Trusts said...

email sent to DeCloet this morning
Mr. DeCloet

I get so frustrated when I read or hear the simplistic analyses of you "experts" in the MSM. http://www.theglobeandmail.com/servlet/story/LAC.20080729.RDECLOET29/TPStory/Business
The extent of your research is to do some income trust index calculations and then conclude that the "income trust index has returned 26 per cent, including all distributions" since Nov.1, 2006. Unfortunately the vast majority of Canadians were invested in the trusts themselves and not the index. More on that later.

Let's not forget that Stephen Harper said before he was elected that he would not touch the income trusts. Indeed Mr. Harper stated regarding the Liberals attempt to attack the trusts:

"That kind of arrogance cannot go unanswered. There is just no justification for what amounts to a Liberal government attack on investors, and especially on seniors.

The government continues to overtax Canadians and run multi-billion dollar surpluses, yet their first instinct is to attack an investment vehicle that can make the difference between bare survival and a dignified retirement for millions of Canadians." Stephen Harper byline, National Post, Wednesday, October 26, 2005

Mr. DeCloet, in another questionable piece of analysis you state: "There were about 40 takeover offers for trusts in the year after the Halloween surprise but not very many of the targets will be missed, despite all the gnashing of teeth....Now they're in private hands, where they belong."

Yes they are in private hands, where they are paying no taxes which is precisely why they will be missed! In fact those 40 companies distributed $1.316 billion in annual distributions ( http://tiny.cc/7c4BO ). The annual taxes on those distributions are lost forever.

Now that is tax leakage that can be proven, unlike the 18 blacked-out pages that Flaherty used to "justify" his tax leakage calculations.

As for as your income trust index calculation:

At the close of business July 18, 2008 the income trusts were down $20.557 billion from their Oct. 31, 2006 close. Included in that total is Fording which is up $6.864 billion and Canadian Oil Sands which is up $7.654 billion since Oct. 31, 2006. Without Fording and COS the remaining 194 trusts are down $35.075 billion since Oct. 31, 2006. 152 trusts are down and 44 trusts are up.
http://tiny.cc/HzXYt


In summary:
Harper lied and "attack(ed) an investment vehicle that can make the difference between bare survival and a dignified retirement for millions of Canadians"
Income trusts are down $20.557 billion from their Oct. 31, 2006 close
Annual taxes on $1.316 billion of distributions are gone due to takeouts by private firms
"Jim Flaherty may have created a once-in-a-generation investment opportunity in ... income trusts."

After seriously crippling or outright destroying many senior's retirement plans, I somehow do not think that those people see this as an opportunity.
LesP

Anonymous said...

Which trust investors is he talking about? It is like saying that someone who destroys real estate values in a neighbourhood by raising taxes is somehow a hero for making the houses cheaper to buy. There is still the question of taxes idiot!

GL

Anonymous said...

BOYCOTT the Globe.

They are a mouthpiece for their owners....BCE, Teachers' and Torstar, all of who benefit from this trust tax in one significant way or another.

Concerning the Globe, M said it best.....they are clueless.

cancelmyglobe said...

I think Jerry White was probably right about these "financial" writers when he suggested that they live in their parent's basement .. totally clueless.

Next they will be telling us that harper lying is really an opportunity to find truth or something equally stupid.

I lost money .. big time .. and it's never coming back.

Robert Gibbs said...

No wonder I lapsed my Globe subscription.

What a Dick!

Robert Gibbs said...

After seriously crippling or outright destroying many senior's retirement plans, I somehow do not think that those people see this as an opportunity.

LesP

July 29, 2008 8:50 AM
-----------------------------------

It is like saying that someone who destroys real estate values in a neighbourhood by raising taxes is somehow a hero for making the houses cheaper to buy.

GL

July 29, 2008 8:56 AM
-----------------------------------

So well said, if I may say so myself.

Robert Gibbs said...

Email sent to DeCloet this afternoon...
-----------------------------------

July 29, 2008


Re: Jim Flaherty, trust investors' best friend. Seriously
Globe And Mail
Published: July 29, 2008


Dear Mr. DeCloet:

Although I don't wish to be abrasive, I can't help but describe your article noted above as repugnant and insensitive to the millions of income trust investors who were so adversely affected on October 31, 2006 - and who will also be further devastated in the near future - by the Conservative government's and Finance Minister Jim Flaherty's income trust policy.

To so many investors, seniors and retirees, this was an 'epic' betrayal of trust and an ill-conceived policy, as evidenced by the many financial experts who have denounced it and the resultant foreseeable adverse consequences.

Having now expressed my discontent with your article - and especially your headline - I, of course, expect no reticence on your part, but perhaps you could find your humility long enough to review - and perhaps publish (edited or not) - the following commentary concerning the Conservative's income trust policy.

Regards,

Robert Gibbs

...Previous blog comment attached...

Robert Gibbs said...

And DeCloet's response...
(Note: Letter to editor submitted.)
-----------------------------------

Dear Mr. Gibbs,

Thank you for your note. I agree that the Conservatives' trust policy hurt a lot of investors, and the losses incurred after Oct. 31 have been written about -- at length -- in this newspaper and elsewhere. The point of today's column wasn't to revisit all of that, but to look at the state of the trust market as it exists today. I don't write the headlines on my columns, by the way. An editor does.

As to your commentary, I can't help you but if you submit it as a letter to the editor (letters@globeandmail.com), perhaps they will publish it.

best regards,
Derek DeCloet

Robert Gibbs said...

Another LBO Of A Canadian Income Trust

Fording Canadian Coal Trust To Be Bought By Teck Cominco

Brenda Bouw, THE CANADIAN PRESS
July 29, 2008 (EDIT)

VANCOUVER - Teck Cominco Ltd. pulled the trigger on a deal to buy the assets of Fording Canadian Coal Trust for about US$14 billion.

Tuesday's bid is for US$12.4 billion in cash and shares worth about C$1.5 billion.

Don Lindsay, president and CEO of Teck Cominco said the structure of the deal is key because of the tax advantages, and the fact the company already owns 20 per cent of Fording.

Teck expects to reap more than US$3 billion in tax benefits from the transaction based on established rules covering the acquisition of Canadian resource properties. It will fund the cash portion largely from a US$9.8-billion loan facility it has arranged with a syndicate of banks.

The deal follows what Fording described as an extensive review of strategic alternatives, particularly in light of the need to address our income trust structure before 2011.