Income trust fallout

Nov. 2,2006 10:00am

The market closed yesterday in Toronto down 294 points a substantial fall that wiped out about 20 billion dollars in paper shareholder wealth. Without a doubt this was a major shock to many market participants.Pension funds and investors who were heavily exposed to income trusts or to equity shares that reflected companies on the brink of converting to income trusts were most strongly affected. Those whose portfolios had largely avoided these assets would have been spared much of the carnage.

The rationale for this action by the minority Conservative government seems reasonable enough-closing a major tax loophole that apparently threatened to cost the federal treasury considerably in terms of lost tax revenue in the years to come. Also by acting they have created a more level playing field for dividend paying corporations who were in a disadvantageous position in competing with income trusts.

However, this cuts little ice with those Conservative party voters and fund raisers who were whacked by the unanticipated change particularly since the Conservatives had promised during the election campaign less than a year ago not to tax income trusts.

In the long run this may not affect the Conservative vote that much but if the oil patch comes to view the Conservatives as traitors to their cause this may damage them in Alberta, in Calgary in particular, in a few seats.A lot will depend on how many investors lost substantial money and how angry they will be come next election.

Now it will be interesting over the next few days and even today to see how much, if at all, the market recovers as investors look for bargains among the stocks that lost substantial and excessive value yesterday.

Given that markets always overreact to bad news there are likely to be some bargains out there, if one takes a longer view time horizon than 24 hours into account.On the other hand once spooked markets can develop bearish sentiment that may prolong the slump. So far this morning its now 10:20 the market is down by 29 points.