This is the second time in the past 2 months that governments’ interference with the market has cost me money. There are many other covert operations, but that’s for a different article. The two times that I am discussing were in plain view for all to see.
The first occurrence was on November 1. The Canadian government announced that it was removing preferential tax treatment for income trusts. An income trust is a business entity, which receives very favorable tax treatment and pays the majority of its cash flow out to shareholders. Dividend yields of 10-14% are quite common. Many oil and gas companies, in Canada, are formed as income trust. Thus, over the last few years investors have enjoyed large capital gains along with their dividends.
The Canadian government believed that it was losing too much revenue as more companies restructured into income trusts. So, on November 1 the Canadian government announced that it was removing preferential tax treatment of income trusts. This announcement crushed the income trusts to the tune of C$20 billion in market value. The S&P/TSX income trust sub-index lost 12.4% that day. The Toronto Stock Exchange composite index was down 2.4% – that’s the equivalent of nearly 290 Dow points.
Personally, I took a haircut as one of my holdings Enerplus Resources (ERF) dropped 14% that day. It followed that up with another 10% drubbing the next day. I wrote an article “Navigating Thru a Trading Fiasco” about how I handled that situation. Enerplus has recovered somewhat from its ultimate lows, but it still has another 15% to go get back to its close before the announcement. When government reaches too far – people lose money.
The second occurrence happened on December 19; when Thailand’s central bank imposed controls on the flow of speculative inflows into the country. The “hot” money has lifted its currency to a nine year high. In an effort to halt the strengthening of their currency, the bank invoked a measure that would require investors to keep their money in Thailand for at least a year or face stiff penalties. That was their intent. What happened was that it sparked the largest one day-drop on the Thailand stock exchange since 1997. At one point, the index plunged as much as 19.5%.
I don’t own any stock on the Thai stock exchange, but I do own a basket of stocks designed to capture the emergence of Brazil, Russia, India and China (collectively known as BRIC). The selling in Thailand spread out to other emerging markets including BRIC. Fortunately before the day was over, Government officials back down from their statement and modified the rules to exclude equities. By then the damage was done. The markets recovered some of its losses, but a new risk premium has been established for Thai stocks. Many investors won’t be coming back. Just like in Canada – the government reached too far and many people paid dearly.
The third occurrence has not happened yet, but our new Speaker of the House, Nancy Pelosi, and her crew are putting the wheels in motion. Once again it will be the people, who pay the price. House Democrats are targeting billions of dollars in oil company tax breaks. All we need is more money going to the government for their pet projects. It has been awhile, but the last time I checked Exxon-Mobil was not responsible for setting oil prices. Gas prices are increasing due to decades of neglect. We haven’t built a new refinery in the U.S. since the 1970’s. How about regulatory relief? Oh yea, what about the demand exerted by emerging countries entering the industrialized era. Can Chevron slow their desire for better living conditions?
Congress should focus its energies on incentives to spur renewable energy development or tax breaks for conservation. More than likely, the government will once again over step its bounds and make it difficult for the little guy trying to make a buck.