This is the beginnings of jittery markets
Any chance we see some spillover, just from the reality shock that markets go both ways? US markets LONG overdue for some 2% plus down moves
Income trust shock waves sink Toronto stocks
Wednesday November 1, 6:23 pm ET
By Jonathan Spicer and Blaise Robinson
TORONTO (Reuters) - Toronto's main stock index spiraled down 2.4 percent on Wednesday after Ottawa's plan to tax income trusts sent shock waves through the market and forced big companies to rethink plans to convert to trusts.
The Toronto Stock Exchange S&P/TSX composite index (TSX:^GSPTSE - News) closed down 294.20 points at 12,050.39, its biggest downward point-swing in two and a half years. Overall, nine of the TSX index's 10 main groups were down, led by telecoms and energy.
The index forfeited more than half its gains from a bullish October in a single day as investors fled the once-booming income trust sector, which makes up about 11 percent of the TSX's total market value.
"There is a knee-jerk reaction out there. You got a lot of mutual funds that might be experiencing cash-ins because the media headlines make the masses want to liquidate at whatever the cost," said Irwin Michael, portfolio manager at ABC Funds.
The government announced late Tuesday afternoon that it would tax distributions by income trusts, which avoid most corporate taxes by paying the bulk of their cash flow directly to investors.
"Markets can handle good news, bad news, but they can't handle not knowing what the news is, and the government's paper was relatively short and lacking a number of details," said Peter Chandler, senior vice-president at Canaccord Capital in Montreal.
"So, in that uncertainty, the market votes for the line of least resistance, which was to the sidelines."
The tax-advantaged income trusts had become the darlings of Bay Street as institutional and retail investors embraced their rich yields. Telecom giants Telus Corp. (TSX:T.TO - News) and BCE Inc. <BCE.TO were poised to convert to trusts -- and they led Wednesday's retreat.
Telus dove C$8.78, or 13.5 percent, to C$56.15, while BCE plunged C$3.60, or 11.4 percent, to C$28.10.
The S&P/TSX income trust subindex (TSX:^GSPRTCM - News), which tracks the prices of 75 of the 253 trusts in the market, was down 12.4 percent.
The drop represented a loss of more than C$20 billion in market value for the income trusts, and more than C$24 billion including BCE and Telus's losses.
Ottawa said trusts that begin trading from now on will face the tax in their 2007 fiscal year, while existing trusts will have a four-year transition period. The minority Conservative government won backing for its plan from two of the three opposition parties on Wednesday.
"Foreign investors may now look at Canada as a little less secure place to invest because of the government policies that are flip-flopping," said Robert Lauzon, executive director and head of trading at Middlefield Capital Corp. in Toronto.
"So this may roll into a bit of a weakness in the TSX in general -- not only trusts -- because of the way the international investment community views our government and policies."
The retreat spared few sectors, as trust-heavy oil and gas producers lost 5.1 percent, led by Penn West Energy Trust (TSX:PWT-U.TO - News), down C$6.09, or 14.4 percent, at C$36.12, and Canadian Oil Sands Trust (TSX:COS-U.TO - News), down C$2.71, or 9 percent, at C$27.41.
Some of that money may have migrated to banks, which pay hefty dividends and are seen to benefit from the crackdown on income trusts' tax advantage. The big six banks gained, led by Bank of Nova Scotia (TSX:BNS.TO - News), up 80 Canadian cents, or 1.6 percent, at C$50.10.
The TSX said the number of trades hit a record 614,188, topping the previous mark of 477,674 reached on June 13. Market volume was a very heavy 486 million shares worth a C$10.3 billion. Decliners outpaced advancers 1,182 to 463. The blue chip S&P/TSX 60 index (^TSE60 - News) closed 10.41 points lower, or 1.5 percent, at 693.00.
In the United States, the Dow Jones industrial average (^DJI - News) fell 49.71 points, or 0.41 percent, to close at 12,031.02. The Nasdaq composite index (NASDAQ:^IXIC - News) slid 32.36 points, or 1.37 percent, to close at 2,334.35.
($1=$1.13 Canadian) |
