Financial Jungle

Alright. Maybe I can fit a little sequel to the income trust series.

I’m not sure if anyone noticed, but there is a distinct divergence between prosperous and crummy trusts in the aftermath of the income trust tax ruling. The prosperous ones continued to flourish, while the crummy ones never quite recovered to their roaring days.

You heard of the old saying:

A rising tide lift all boats

As long as everyone was happy about receiving their 10+% yield, no one was questioning the sustainability of the underlying foundations that supported these yields. Alas, all good things must come to an end. The tide came and went. The Halloween upheaval exposed so many little elusive holes beneath some of the rottenest boats. The tax ruling announcement turned investors’ stomachs, and sure enough, most trusts retreated 15-20% the next morning.

As painful as it may be, I think Ottawa’s decision to plug the tax leakage was a blessing in disguise as it forced out the excess speculation in the trust market. Even the most relentless critics must admit; investors today (including myself) are more attentive to the quality of trusts. This is good! It serves as a wake-up call. Fussy unitholders put their trusts in a spotlight and make management more accountable to their actions. Wouldn’t you rather suffer a healthy 20% haircut today, than having your 10% yield tab shut tight during your golden years?

What do I mean by prosperous and crummy trusts? To illustrate, let’s contrast 2 strikingly different trusts: Canadian Oil Sand and Vault Energy Trust .

Now scrutinize Vault Energy 2006 cash flow statement and balance sheet. Folks, this is a textbook income trust that forensic accountant, Al Rosen, would love to hate!

• The $45.61 mil cash flow from operations is too cute when standing next to the $88 mil from capital expenditures and cash distribution.
• Switching over to their balance sheet, total assets are falling, total liabilities are rising, thus book value is falling.
• Outstanding shares are rising, which further dilutes the existing shares.

Still think all trusts are created equal?