Tuesday, October 16, 2007

Conservatives signal foreign takeovers OK until next year

"The idea is to have something in the new year on the national security issue. Not this year," says Finance Minister Flaherty.
Source: Reuters

As if Canadian small investors in Royalty Trusts haven't been beaten down enough, the Conservatives signal foreign-owned entities that their money is still good in Canada, and Royalty Trusts can still be had at deep discounts if they move quickly.

The following chart study looks at two time periods of equal length.

The first period looks at 235 trading days prior to the October 31st, 2006 announcement. The second time period examines the period from October 31st, 2006 to October 15, 2007, also 235 trading days.

The difference in the 'before' and 'after' charts illustrate how government policy can distort markets and favor one set of market investors over another. The question is why? What advantage does the Conservative Income Trust policy have to Canadians? How does allowing foreign-owned entities buy Canadian assets from Canadian investors help the country in the long term?

Plainly put, why are foreign investors favored over Canadian investors? Foreign entities can structure deals to avoid Canadian corporate tax, domestic small investors cannot.

Before the October 31st, 2006 announcement the three energy indexes (blue, green and magenta lines) positively correlated the price of oil (red line). As the price of oil rose or fell, the indexes moved in the same direction.

Not so after the announcement. Not only did the TSX Energy trust index (green line) flatline, but the TSX energy index (non-Royalty Trust businesses - magenta line) also showed a slower rate of appreciation as the oil price increased. Why? Possibly uncertainty induced by a unpredictable Conservative government.

The market uncertainty doesn't exist in the United States where the S&P Energy index (blue line) continues to track the price of oil as it moves up.

Clearly the Conservative policy has failed to meet it's objective of stemming tax leakage if favored foreign investors can still avoid a Canadian corporate tax bill and Canadian investors cannot. The policy has destroyed Canadian small investor wealth and market confidence. And foreign investors have a green light to avoid the national security test if they act fast.

How is any of this good for Canadians?

Treating the symptoms. Two Jims in a Jam!
Trust Takeovers to October 1st, 2007
The environment has now turned quite good for Private Equity