Goodale gets taste of market psychology.

Finance minister finds himself in income trust investors' doghouse.

Gyle Konotopetz Business Edge

When it comes to understanding what makes stock markets crazy, some folks just don't get it. Strangely enough, that includes Canada's finance minister.

Ralph Goodale just doesn't get it.

In September, Goodale triggered a massive selloff in the income trust sector when he said Ottawa was probing the sector over concerns about its tax advantages compared to conventional corporations. The feds also took the drastic measure of discouraging companies from converting into trusts by nixing the process of advance tax rulings for prospective trusts.

Now, with the S&P/TSX income trust sector down about 12 per cent since Goodale began to rain on the income trust parade, the finance minister has been showing his thin skin as he tries to play down the government's impact on the sector. He is citing other market factors such as concerns over commodity prices and interest rates for the carnage.

Don't buy it. The minister's attempts at damage control smack of desperation and are quite laughable.

Since the minister has become a key player in the Canadian stock market as a result of the income trust fiasco, perhaps he should go back to school and take a crash course in stock market psychology.

Yes, that's what this is about. Psychology. That's what drives the market, and by hanging income trust investors out to dry and creating an ominous cloud of uncertainty over the sector, Goodale created a bubbling cauldron of negative emotions.

Thanks to Ottawa, trust has become a four-letter word on the street.

In a futile attempt to remove the spotlight from the trust sector, Goodale has also pointed to the weak broad market. Well, that doesn't cut it either.

While the trust sector has taken a hit in the 12-per-cent range since Goodale spooked trust investors, the Canadian stock market's benchmark index, the S&P/TSX Composite index, is down only two per cent over the same period.

Even some of the most respected trust models in the oil and gas sector have been getting shellacked. A classic example is Peyto Energy Trust (TSX:PEY.UN), one of the most respected royalty trust plays on the TSX. Peyto is down almost 30 per cent since Goodale targeted the income trust sector. That's a loss of almost a billion dollars in market cap in less than two months for the one-time darling of the trust sector headed by CEO Don Gray.

The minister points out that trust investors continue to receive their monthly cash distributions (trusts, unlike corporations, pay profits to unitholders in the form of income). Well, that's not much consolation if your investment has been hammered the way Peyto and other companies have been.

What Goodale apparently needs to learn is that the stock market abhors uncertainty and uncertainty is the market's worst enemy. And that's essentially what's been weighing on the income trust sector.

Although it appears Ottawa's alterations to the trust sector will be minor, in which case this sector may regain its wild popularity, investors aren't prepared to make that bet, and why should they?

Goodale can talk all he wants about other factors weighing on the market, but there is only one true catalyst behind the carnage. It's about the state of mind of the income trust investor and the trust investor is an ornery character these days. He is spitting mad. He is consumed by fear, by anxiety, by panic.

Until Ottawa sets the record straight and sheds light on what changes may be instituted, the sector that has become a source of income for many retirees will remain in the doghouse. And on Bay Street and main street, Ralph Goodale will remain in the doghouse. The minister is about as popular these days as one-time CEO John Roth when Nortel Networks Corp. hit the skids at the height of the dot-com craze five years ago.

By the way that Goodale has been desperately fighting back against his critics, it's apparent he's not exactly enjoying his stay in the doghouse. Income trust investors can only hope that a squirming minister will help move the consultation process to a quick resolution.

* BLACK'S HANGOVER: Disgraced media tycoon Conrad Black's recent foray into the oil and gas sector has been a major bust thus far.

Many junior oil and gas stocks have been tanking lately but few have been pounded as hard as Black-pool Exploration Ltd. (TSXV:BPX.A), a Calgary company that stunned the oilpatch by electing Black to its board in June.

When Blackpool announced Black was getting involved as a director and shareholder, shares in Blackpool doubled in a flash as the market embraced the news of a big name coming onboard an unheralded oil and gas play.

It didn't seem to matter to investors that Black was - and still is - the subject of an investigation by a grand jury in the U.S. over his dealings as CEO of Hollinger International.

However, it seems the lights have been doused at this party. Shortly after Black was elected to Blackpool's board, he resigned amid pressure from the TSX Venture exchange. Since then, shares in Blackpool have been languishing in the 35-cent range, a far cry from an intraday peak of $1 in early July.

* GUT-CHECK TIME IN THE OILPATCH? In recent years, oilpatch investors could hit paydirt by throwing darts at the oil and gas sector, but they may now have their work cut out in picking winners. Or at least that's the word from Peters & Co. analyst Andrew Boland, who believes the oil and gas sector is facing a number of operational challenges that could play havoc with performance.

"I believe this is going to be a very difficult winter for E&P (exploration and production) companies," says Boland.

Boland is an analyst with a keen eye for the technical side of the business. He has a PhD in geophysics and has worked in the industry with three companies, including Shell Canada Ltd., before becoming an analyst.

"The cost of (drilling) services is going to go up and access to services is going to be more challenging," says the oil and gas analyst. "And all this is happening at a time when there's a record level of activity. You can layer on top of that regulatory delays associated with landowners and the EUB (Alberta Energy and Utilities Board).

"The fact that things are getting more difficult was highlighted in EnCana Corp.'s (ECA) third-quarter report and conference call. They made it quite clear to everyone that the cost structure base is moving up, the difficulty in getting things done is increasing and they lowered all their estimates. And I think we're going to see everyone across the board doing that."

As a result, Boland is cautiously picking his spots, which, in his case, means sticking to his guns by touting the same three top picks for several months. For his favourite stocks, see Pro's 3 Stars, Page 14.

* SAGE WORDS: "Life is short so eat dessert first."

- Jim Dines, editor of the Dines Investment Letter.

Hot Stock

Royster-Clark Inc.

TSX:ROY.UN $10.08 Up $2.58 (+34.5 per cent) on 15.7 million units (based on weekly stats through Nov. 11 for Canadian stocks over $1) Hey, you vanquished income trust investors, maybe there is a Santa Claus. With unit prices in a tailspin since the grinch in Ottawa, Finance Minister Ralph Goodale, set his sights on the sector, some of the battered trusts have become attractive takeover targets. Calgary fertilizer giant Agrium Inc. sent an early Christmas gift to unitholders of Royster-Clark in the form of a $325-million cash ($10 per unit) hostile bid for the Toronto agriculture products producer. Royster-Clark encouraged unitholders not to make any "rush" decisions. Yeah, sure, easy for them to say.

Cold Stock

Grande Cache Coal Corp.

TSX:GCE $2.07 Down $1.68 (-44.8 per cent) on 18.8 million shares (based on weekly stats through Nov. 11 for Canadian stocks over $1) A year ago, the hot money pushed shares of Grand Cache to the stratosphere in a sizzling metallurgical coal market. But the Calgary company has taken its lumps since then, with its shares down almost 90 per cent from the 52-week high of $17.47. The latest selloff was triggered by quarterly financials that showed a net loss of $10.5 million or 26 cents per share. The company's operations have been bogged down by shipping delays, which shouldn't be too shocking to stockholders. Shipping woes have long been a thorn in the side of coal companies.

(Gyle Konotopetz can be reached at gyle@businessedge.ca)