Global credit markets appear to be loosening a bit. Now it’s on to the next big worry: how badly the recent liquidity crisis has affected the global economy.

The good news is the stock market almost always bottoms long before the economy does. What’s required to make that happen is some degree of visibility about how bad things will get. Above all else, the markets hate uncertainty. And unfortunately at this point, there are a lot more questions than answers.

For some months, most of the news from the US economy has been troubling. But when China announced this week that its annual growth rate had slowed to “only” 9 percent from 10.1 percent, the worry factor revived and selling resumed, largely reversing last week’s bounce.

The Canadian market is affected by this in several ways. First, fears of a deep global recession—particularly one involving major resource importer China—have triggered massive selling of the commodities the country exports.

Oil has drop to levels we haven’t seen in more than a year. That’s certain to be bad news for major producers, particularly non-conventional ones such as Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF), which has also been experiencing soaring costs.

For most producer trusts, natural gas is by far the more important commodity, as it comprises a larger share of output. The fuel’s price is still well above where it began in the beginning of the year, but it’s well below its mid-summer peak. Meanwhile, prices for timber and other resources such as iron ore and zinc and agricultural inputs such as fertilizer have also plunged.

Falling resource prices have understandably raised concerns about the safety of producer trusts’ distributions. That, in turn, has sent trusts’ prices southward, in some cases below late 2001 levels when commodity prices were making their lows for the decade. For example, as I pointed out earlier this month, even large, very strong energy producers such as Enerplus Resources (TSX: ERF-U, NYSE: ERF) sell for less than they did when oil was at $30.

Second, though the Canadian economy has remained relatively strong, slowing US economic growth is taking a toll on some industries. Damage is particularly worrisome on companies doing considerable business here, whether it’s through US subsidiaries or via exports.

The latter has been the main factor behind the recent slides in Noranda Income Fund (TSX: NIF-U, OTC: NNDIF) and TimberWest Forest Corp (TSX: TWF-U, TWTUF), which make their cash by exporting zinc and forestry products, respectively. The former was likely one reason for the surprise dividend cut by Algonquin Power Income Fund (TSX: APF-U, OTC: AGQNF) this week as well as Arctic Glacier Income Fund’s (TSX: AG-U, OTC: AGUNF) complete elimination of its payout some weeks earlier.

Finally, the need to bail out failing US banks has had the perverse effect of turning a long overdue oversold rally for the US dollar into an unprecedented bloodbath for other currencies, with the Canadian dollar a major loser. It’s this third factor that’s having the most impact right now on US investors who hold Canadian trusts.

A falling Looney is good for many trusts’ business. In fact, because oil is priced in US dollars, the rising buck is actually offsetting some of the impact of plunging oil prices on producer trusts’ cash flows. But Canadian securities’ share prices and dividends are priced in Canadian dollars. Consequently, the US dollar’s more than 20 percent gains against the Looney since Jan. 1 have depressed both and added considerably to our pain in this crisis.

Despite the growing deficit and weakness of our economy, the US dollar is still the safe haven of choice. US government-backed securities are still acknowledged as literally free of credit risk and are the preferred way to hold US dollars, though interest rates are now very low. Foreign investors must “buy” dollars to buy Treasury paper.

Moreover, the more the dollar has risen, the tighter the squeeze it’s put on traders around the world who had been shorting it as part of elaborate hedging strategies. That, in turn, has spurred even more gains in the dollar versus other currencies and commodities as well.

The rising US dollar, weak US economy and falling commodity prices are all mutually reinforcing factors. And as long as they persist, our Canadian trusts are going to be swimming upstream in the marketplace.

The good news is trusts that remain solid as businesses will recover the lost ground, once the fear level subsides in the market. The long-term fundamentals for the US dollar, for example, have dramatically weakened during the current crisis, due to an unprecedented minting of new ones. And it won’t take much of a shift to completely reverse the past few months’ gains and then some.

We’ve seen this happen in miniature on good days in the market, only to retrace on days when economic worries wax again and money rushes back to “safety.” But we’ll see it a lot more as visibility on the global economy inevitably improves and the markets calm.

Meanwhile, trusts that continue to survive the stress tests underlying this bear market will continue to pay us very large dividends. As we noted earlier this month, the Canadian parliamentary elections are now over and the result is another Conservative Party minority government.

It’s still possible the trust issue will wind up being revisited before 2011, potentially in another election with a stronger Liberal Party leader. We’ve never counted on such a scenario. But if the conversions to corporations we’ve seen to date have been any indication, we don’t need to. Mainly, conversions of strong trusts unlock value.

Most important, a growing number of trusts have stated their intentions to remain big dividend payers no matter how they’re taxed starting in 2011. And for every trust like Algonquin that craters its shares with a shock dividend cut, many more will conclude the smart move is to take things more gradually and in a more shareholder friendly way.

The key to all of this, however, is earnings. Can these trusts remain viable during these ongoing stress tests in the macro environment, or will they falter?

Over the past few weeks, all of the Canadian Edge Portfolio trusts but two—Algonquin and GMP Capital (TSX: GMP-U, OTC: GMCPF)—have affirmed dividends at current rates. In Algonquin’s case, I remain concerned there may be a hidden risk that induced management to make such a drastic move as a 72 percent dividend cut.

Credit rater Standard & Poor’s has issued an opinion stating the opposite and has removed the trust from “credit watch negative,” upgrading its outlook to “very conservative.” And if Algonquin does follow through on buying more assets, it will be a good sign that the rater’s analysis is right and my worries are unfounded. In my view, however, the answers to these questions are only going to come with time. And for now, we’re far better off in a more stable enterprise such as Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF), for which I recommended making a swap on Tuesday.

The other dividend cutter this week is GMP Capital, which reduced its monthly payout to 5 cents a share. I kept GMP after its earlier dividend cut mainly because of its transparency as an enterprise and the fact that its demise was due entirely to market factors beyond its control. What’s happened since is market conditions have gotten worse and income from trading and other deals has shrunk further.

As I’ve said before, when you own GMP, your distributions are as linked to the business as its traders’ incomes are. Earlier this year when things were good, we got a big special dividend. Now with conditions horrendous, we’ve seen two dividend cuts.

In retrospect, the better move would have been to sell on the first dividend cut, as I’ve done with Algonquin this week. But at this point, given the nature of this business, GMP’s still dominant position in its key markets, and the fact that it can bounce back very quickly when macro conditions improve, I’m still going to recommend holding in there with it.

Beginning next week, we’ll be seeing third quarter earnings numbers, and the best indication to date of how the rest of our trusts are holding up to the stress tests. The announcement dates are listed below:

AltaGas Income Fund (TSX: ALA-U, OTC: ATGFF) Nov. 7
Artis REIT (TSX: AX-U, OTC: ARESF) Nov. 12
Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) Nov. 13
Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) Oct. 28
Canadian Apartment REIT (TSX: CAR-U, OTC: CDPYF) Nov. 7
Consumers Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) Oct 28
Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF) Nov. 7
Great Lakes Hydro (TSX: GLH-U, OTC: GLHIF) Nov. 3

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) Nov. 6
Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) Nov. 7
Northern Property REIT (TSX: NPR-U, OTC: NPRUF) Nov. 12
Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) Oct. 31
RioCan REIT (TSX: REI-U, OTC: RIOCF) Oct. 31
TransForce (TSX: TFI, OTC: TFIFF) Oct. 30
Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) Nov. 7

Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV) Nov. 13
Ag Growth Income Fund (TSX: AFN-U, OTC: AGGRF) Nov. 14
ARC Energy Trust (TSX: AET-U, OTC: AETUF) Nov. 7
Boralex Power Income Fund (TSX: BPT-U.UN, OTC: BLXJF) Oct. 31
Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) Nov. 7
Enerplus Resources (TSX: ERF-U, NYSE: ERF) Nov. 7
GMP Capital Trust (TSX: GMP-U, OTC: GMCPF) Nov. 6
Newalta Income Fund (TSX: NAL-U, OTC: NALUF) Nov. 7
Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) Nov. 7
Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) Nov. 7
Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) Nov. 5
Provident Energy Trust (TSX: PVE-U, NYSE: PVX) Nov. 7
Trinidad Drilling (TSX: TDG, OTC: TDGCF) Nov. 7
Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) Nov. 5

At this point, trying to predict what the numbers will be for most is pretty much speculation. In my view, energy trusts’ payout ratios will be somewhat higher than they were in the second quarter, though the impact of falling energy prices will be substantially offset by hedging. Meanwhile, there’s nothing to indicate numbers for REITs and infrastructure trusts—including very likely Algonquin—won’t be as solid as they were in the second quarter.

My intention remains to stick with trusts that show solid numbers in the third quarter. On the other hand, if any do truly falter, I’ll be cutting them loose and looking for more steady replacements.

The bad thing about waiting on hard numbers before selling in an environment like this one is you’re not going to get a good price. That was certainly the case with Algonquin, which basically gapped down at the open on Oct. 21 after making the dividend cut announcement after the close the evening before.

On the other hand, everything has been hit in the last couple of months, including the very strongest trusts. As a result, when you make a swap into something stronger, you can get a far lower price than normal. That’s what we’re getting in the power sector with Great Lakes Hydro. Most important, making decisions based on the hard numbers is the only way to avoid getting whipsawed out of good positions at bad prices, only to watch them rebound during the recovery you can’t get back into in time.  

This is a bi-furcated marketplace here in late October. On the one hand is what people buy when they’re worried about a total collapse. That’s basically the US dollar and US Treasury paper. On the other is basically everything else, from S&P 500 stocks to corporate bonds to Canadian income trusts.

Trusts have effectively become a high Beta trade on the S&P 500. That’s certainly not a situation we’ve seen before, and it won’t last forever either. But for the time being, when the US market has a good day, trusts will have one two or even three fold better.

The bad news is, of course, that bad days for the broad market are often doubly or even trebly bad for trusts. And when a trust does something unexpectedly negative like Algonquin did, the market’s reaction is quadrupled. Note that GMP has basically hung in there since its nearly equally dramatic cut, a pretty good sign that management has made its operations transparent enough to avoid surprises.

I can’t tell anyone for certain when the overall market will finally cast off the climate of fear and rally. What I can say, however, is we have a number of Canadian trusts backed by great businesses from a wide range of industries that are now being priced for depression-like conditions. I can also say that this is the case because many investors are extremely fearful about everything to do with the stock market and more than a few are liquidating their positions.

All crises of market confidence do eventually come to an end. Moreover, the big declines they’ve spawned have historically always reversed with a vengeance, just when emotions reached low ebb.

It’s almost certainly going to take more patience and a tolerance for more pain to hang in there until this one finally turns around. But it’s going to be well worth the effort.

As some of you have pointed out, I’ve laid some eggs over the past several months. Some of them were the inevitable consequence of holding anything but cash in this market. Some were unavoidable due to the strategy of holding on until we see real numbers indicating weakness. And some were simply bad calls.

I can’t promise anyone there won’t be some more difficult moments ahead in the Canadian trust universe. What I can promise you is our mission at Canadian Edge has never changed. That’s to provide the very best information on this sector available and, in particular, to recommend the best trusts for your portfolio for high, sustainable income.

If I’m half right on this market, we will see a quite rewarding recovery in coming months. And in the meantime, we have some of the most compelling values and yields on the planet at the best prices we’ve seen in years. Thanks again for sticking with us in these trying times.