Thursday, December 9, 2010

The facile Fabrice Taylor

Facile: adj, arrived at without due care or effort; lacking depth; "too facile a solution for so complex a problem"

How totally facile for Fabrice Taylor to argue in this month’s Alberta Venture magazine (see below) that income trusts must have caused tax leakage on the basis that their market valuations increased upon their announced conversion to trusts? Rather than confront the government to prove its own case about tax leakage, Fabrice Taylor would prefer to forage around looking for arguments that hold no water. These conversion announcements increased the value of these companies for the simple fact that cash in investor’s hands is worth considerably more than cash residing inside of companies, the evidence of which is everywhere you look. Why would National Bank’s stock price rise on the announced increase in their dividend, was it because of tax leakage? Why did Inco pop when they announced their special $10 dividend, was it because of tax leakage? When these trusts’ values increase upon their announced conversion back to corporations mean that they are causing tax leakage? What about the REAL tax leakage that occurred from the foreign leveraged buyout of Prime West Energy by Abu Dhabi Energy etc etc. Is that what Fabrice Taylor meant by good riddance, that its better for foreigners to own Prime West than taxable Canadians?

And to think, Fabrice calls himself an equity analyst? Clearly he is not. Although In a previous life, I am certain that Fabrice Taylor must have been the Lead Prosecutor at the Salem Witch Trials:

Why you won’t miss the income trust
Goodbye, and Good Riddance 01, 2010
by Fabrice Taylor

Of all the great fibs to roll off the Bay Street assembly line, none is more laughable than the assertion that income trusts didn’t cost the government anything. The claim was usually made – and in fact still is – by the people who sold and ran trusts and funds, even though it’s demonstrably not true.

After all, every time a publicly traded company announced that it was becoming a trust, its stock market value would shoot up 20 to 30 per cent. Where did that extra value come from? Obviously, it represented the government’s share of the company’s cash flow. What the company used to pay to its silent partner in Ottawa it was now paying to investors, who were therefore willing to pay more for the shares.

Now, of course, the shoe is on the other foot. Trusts and funds are converting back into corporations and, inevitably, their stock market values are falling, along with their distributions.
Should investors mourn the loss of income trusts? The knee-jerk answer is yes, especially in a yield-starved environment. But even a cursory analysis shows that while income trusts and funds appeared to create a lot of value, many of them actually managed to destroy it.

Let’s take a look at oil and gas royalty trusts. Invented by the late Marcel Tremblay, the father of Enerplus Resources Fund, in 1986 they caught on slowly at first before exploding in popularity. They became so popular, in fact, that at one point there were more than 200 of them, constituting 20 per cent of the Canadian economy.

These vehicles, on the surface, look like winning investments for much of the asset class’s history. But while there were winners, there were also enough losers to show that this idea is something of an illusion. The fact is that most oil and gas royalty trusts were born at the beginning of a great and long boom in oil and gas prices, which boosted the revenues and profits of even those with the most incompetent management teams. Distributions rose but only because oil and gas prices thrived.

How do we know this? Because almost without exception, the reserves of these trusts fell over time on a per-unit basis. Investors were holding finite assets that had no chance of being around for the long term. Yes, distributions went up, but they wouldn’t have if commodity prices hadn’t gone up. They would have fallen and, given the trend, these trusts would have disappeared.

In some cases, production per unit also fell along with reserves. Again, commodity prices – and in some cases debt – put these investments back on side. Now, of course, the tide has gone out and we can see who’s been skinny-dipping.

Pengrowth Energy Trust, for instance, took on a lot of debt and issued lots of units to buy up assets and grow. It didn’t do so in an accretive way to shareholders but got away with it because of higher energy prices. When these fell, the trust brought in a new CEO who promptly cut distributions and sold a bunch of new units to pay down debt. Investors were not only diluted by new units, but they also lost a big chunk of their income.

What’s more, Pengrowth used to have a contract with an external management team that sucked tens of millions of dollars away from investors for doing little else than riding a wave in commodity prices that the management team had no control over. And yet that contract, along with the desire to be bigger, encouraged the trust, and others, to make large acquisitions at high prices without creating value. In 2000, Pengrowth had three barrels of oil equivalent for every unit. Eight years later it had less than half that.

The oil patch decries the loss of the trust structure, and why not? Exploration and production companies loved them because they could sell them tired old wells at a high price. We know this because of the fact that few trusts could build reserves on a per-unit basis, the benchmark of success in oil and gas. We don’t need to explain why the trust sector itself loved it.

You would have been better off holding Imperial Oil, a big, diversified and conservative oil company, than a basket of oil and gas trusts over the past decade. First, many trusts have large tax pools that they’ll use to shelter income. These will eventually disappear. Second, trusts are not run by people who know how to run an E&P business. Most are run by financial engineers, not reservoir engineers. Many will stumble, and some will fail outright.

As such, there’s no need to mourn the loss of the income trust, especially when you consider that government coffers are going to get a healthy injection that will (one hopes) help pay down deficits and debts. As an investor, you’re probably better off without them anyway.

Fabrice Taylor is the Prairie Trader. He is an award-winning journalist and equity analyst.


Dr Mike said...

Believing in Jim Flaherty`s tax leakage claim as Fabrice Taylor has done is like believing in religion , it requires a leap of faith , no proof , no tangible evidence , just blacked-out pages.

Well done Fabrice.

Dr Mike Popovich

Anonymous said...

At the bottom, it indicates that he is an "award-winning" journalist. Would that have been for fiction?

What an idiot, cast in the mold of Judy WasSillyAsLies, Diane IrkqsomeHeart and Al Rodent...


Bruce Benson said...

Too bad there is not a law to outlaw idiots. Fabrice Taylor takes the cake. Can you say "Priceless"? Oh, one more lap dog for the CCCE.

Anonymous said...

Fabrice is full of Fabreeze.
Since he is a CFA and a claimed equity
anal-yst. Fabreeze has been a trust basher for years.
So why does he not with his suppose
equity anal-yst skillsets come out with a overview of this theory he has from this article and cover the claimed tax leakage from this fraud Harper/Flaherty/Carney government.

Just in time for business Christmas reading.


Anonymous said...

In fact Brent when oil and gas companies first started to split into explore cos and trusts they went down in value as investors did not believe in trusts. It took a year or so for the splits to prove that there was more value as a trust and an explore co and the announcements started to result started to go up in value. About a year later all sorts of trusts started to appear in many industries.


Brent Fullard said...

Thanks Richard.

None of the facts support the spurious claims of people like Fabrice Taylor, whose only mission is to distort and conflate the true facts in order to absolve Flaherty’s actions and gain him political cover.

It's either that, or to prove themselves incompetent as reporters and/or incompetent as supposed "equity analysts".

Brent Fullard said...
This comment has been removed by the author.
Dr Mike said...


It`s great for you to make all of these "generality-type" statements , that might or might not apply depending upon the individual situation.

The proof of tax leakage was in the figures supplied by Jim Flaherty that all of us received---these figures were blacked-out---maybe you can answer me this , why were they blacked-out , was it because thy were so sensitive that the economy might fall or were they hiding something??

Answer me one more , why did the Privy Council recall these same blacked-out pages & order those holding them not to further disseminate any copies??

The real shame in all of this was the harm done the small investor who did nothing more than believe their PM.The gov`t attempted to downplay the damage by making these same believers out to be poor investors.

Hell the PM is a trained economist , why would we not believe him.

People`s ability to buy groceries & house themselves has been threatened , so what about that.

It`s fine for you to make blanket statements with no proof.

If you can tell me what was on those blacked-out pages & show me this proof , then I am all yours,

Dr Mike Popovich

PS--Tax leakage was the only reason given by the gov`t for taxing trusts , nothing else---the least we deserve is the proof.

Kid Leduc said...

T'other day in the House of Comedy it was asked 'What's worse: a lie or a cover-up?'

Story: "Low-income seniors still face costly policy change, documents show"

Story says: "...Liberal MP Gerry Byrne has since obtained internal memos from Ms. Finley’s department suggesting the plan is only on hold for seniors in specific situations, but otherwise remains government policy.

“The House has been given false information,” Mr. Byrne said Thursday as he asked Ms. Finley about the documents in the House of Commons. “What is worse: a lie or a cover-up?”

I can answer that. Any income trust investor can answer that question. Any senior who is eroding his or her capital because their retirement savings were falsely de-capitalized by this Government can answer it.

What is worse: a lie or a cover-up?

The answer is 'A lie and an cover-up is worse than a lie or a cover-up.' Which is what Flaherty did when he lied to the Finance Committee and submitted a blacked-out report.

Someone should tell Mis-Finley that she has a long way to go to make a senior Cabinet minister in this Government.

crf said...

Fabrice Taylor is obviously much better than a free market in determining any company's value.

Anonymous said...

Fabrice Taylor writes:

Let's forget about the publicly available evidence which you will argue is flawed. Instead, I ask a much simple question: did the government risk votes and an electoral defeat just to make a change in policy that adds no value to itself? Any sentient human being should be able to see that there was tax loss to government and, of far greater importance, that those losses were about to multiply. You'd have to be prepared to accuse the civil service of an enormous conspiracy to argue otherwise.

Let me make it even easier for you and illustrate the sheer absurdity of your breathless tirade: Let's assume that the government announced an end to corporate taxation. What do you think stock prices would do? Here's a hint: They would go up. They'd go up a lot. How much? By the present value of the government's stream of income from that company. And they would go up even if every company eliminated its dividend or declared that it wouldn't pay one. Are you with me or is this over your head?

So to argue that stocks went up (by 20- 40 points) only because of distributions or higher distributions is not a rookie mistake. It's DUMB. The distributions were higher because investors were getting the government's share of the profits. Hence, tax leakage.That's why investors paid that much more for these securities, unless the buyers of income trusts were too dumb to figure it out, but I don't expect you're prepared to call yourself dumb, are you?

Obviously in some cases cash paid out imposes discipline on management and prevents waste and poor investment choices. There is some value there and it may be reflected in a higher share price upon conversion. But it ain't worth 20 or 40 points. How do you know what makes National Bank's stock go up? Here's a quote regarding an analyst's views for your edification: "While the dividend increase was double what he had been expecting, the target price increase was due mostly to other factors. He increased his 2011 earnings forecast to $6.30 a share, up from $6.05 a share, introduced a 2012 earnings forecast of $6.60 a share."

And by the way, one of the best performing real estate stocks on the TSX this year is Mainstreet Equity, which pays no dividend because management thinks - and investors agree - that it can earn more on retained earnings than investors can with dividends. The evidence is indeed everywhere you look, and by not looking for it before you start ranting you expose your ignorance.

In a previous life Brent Fullard must have been.... Brent Fullard, exactly who he is today. Better luck next next time.

Brent Fullard said...


I have a better idea: No, lets not forget about “the publicly available evidence”, as you suggest.

What publicly available evidence are you even talking about? The only evidence that was made publicly available were the 18 pages of blacked out documents......that the government subsequently demanded be returned, since they actually served to corroborate our case that the government’s analysis was flawed for the reasons that Professor Stanbury and Dennis Bruce can elaborate on.

You seem to want to argue the tax leakage case on merely intuitive grounds rather than confronting the hard facts of the situation that are readily available from folks like Dennis Bruce. Obviously you prefer intuition to facts and the discipline of rigorous analysis performed by the likes of Dennis Bruce whose work was the only collaborative work conducted on the question of tax leakage WITH the Department of Finance.

Obviously you have a very high opinion of yourself and nothing but ridicule and disdain for anyone who deigns to disagree with you. Sadly, you have even less regard for the facts. Facts that are readily available for anyone with an open mind. Facts that have been availble since November 25, 2005 when Dennis Bruce published The tax revenue implications of income trusts, during the Goodale consultative round in the fall of 2005.

As for my breathless tirade, let me make it even simpler for you. There is more tax collected by the government, in toto, from the taxation of trust distributions by corporations so formed, than there is from those corporations if they remain as corporations. The analysis of Dennis Bruce proves it beyond a shadow of a doubt. Sorry if you don’t like that conclusion, but facts are facts, whereas your arguments are mere speculation based on flawed intuition.

Your argument of tax leakage is premised on only looking at the taxes collected at the company level and not in toto, that is by looking at the company AND the investor.

Meanwhile why is the tax only levied on publicly traded income trusts and not ALL income trusts if trusts were deemed to be so pernicious? Was that ignorance on the government’s part or was that a special carve out designed to enrich the pension funds like OMERs who bought Tearnet and will pay no tax, or billionaires like the Thomson family who bought Sleep Country and will pay no tax, or groups like Abu Dhabi Energy who bought Prime West and will pay no tax?

Please expain the merit of that enormous public policy anomaly, since you are wrong to suggest that the trusts have “gone” from the scene, rather than into the hands of others who were the beneficiaries of this blatant tax arbitrage. You do know the meaning of tax arbitrage I suppose? Maybe not?

Your comment about Mainstreet Equity is simply an example of single data point journalism. Whereas I cited a number of examples concerning the value that the market ascribes to cash being distributed to shareholders as opposed to horded by management, for the simple fact that one example does not make a case and since any one example has many co-variants going on at once, as you correctly point out with regard to National Bank. Thank you for stating the obvious. It shows there is hope for you in grasping the less obvious, like the fact that this policy is a total crock, as per this more insightful piece by Professor Stanbury. Perhaps you might like to ridicule him?

The false arguments that led to the tax on income trusts
The PM, some corporate CEOs, and government advisers argued that the reason for killing income trusts was 'tax leakage.' The evidence suggests far different motives.

Published November 8, 2010
The Hill Times

Anonymous said...

There are a couple or truple of obvious things that indicate Fabrice is fabric-ating his story. First: REITs are essentially the same as income trusts but REITs carry on without the hindrance of double-taxation.

Second: energy trust got their start by buying old, boring and predictable oilfields that the majors were no longer interested in. But what happened is that the Ma and Pop Investors got to like the yields of energy trusts and the swarthy corpusculence ones of the Patch felt threatened as the swarthy bunch dislikes fair competition -- besides that Canadian politicians are easy, eh?

Turdly, because of the logic of dividend tax credits, the SIFT tax will produce more tax revenue only if Canadians are stupid enough to hold income trust units in their registered accounts and to read the Globe.

crf said...

Fabrice, you are arguing like a lawyer again: avoiding the crux of the argument.

Trusts shifted who pays the tax from the company to the trustees. The net return to government ought to have been similar. You just ignore that entire point.

A clear, public analysis by government ought to have been done, so that best decision on trust tax policy made.

Maybe the best policy would have been to tweak the way trusts were taxed?

Instead the government went nuclear: it just blew up the trusts.

And it justifying its decision with invective and bluster. Anything but evidence and analysis.

Your analysis is just, to put in mildly, crapola. There is nothing behind it but your own dilettantish imaginings. If there is something behind it, quote the peer-reviewed literature in economic journals.

In other words DO YOUR FUCKING JOB. Don't make up a shit salad and pretend you ought to be praised for serving it to Canadians in a national newspaper.

Anonymous said...

There seems to be no end to Canadians' stupidity, I just can't believe that trash writer is getting paid a living wage for such crap.