To be sure, the Liberals’ plan–if enacted–would scale back 2011 trust taxes to 10 percent, a wildly bullish event. Recent polling indicates the Conservatives are still in the lead but have slipped well short of the 40 percent threshold needed to win a majority. If that holds, we can at least look forward to another election in the near term, presumably with a stronger Liberal Party leader.

In the here and now, however, there’s an infinitely more important verdict due out this month: how individual businesses are faring in the face of growing economic stress tests, especially the escalating global credit crisis.

Thanks to a solid banking system, more conservative business practices and a healthy natural resource market, Canada up to now has been weathering the economic crisis well. That was the upshot of what were–with a few exceptions–very strong second quarter earnings results. Canadian corporations and trusts also seem to be having no trouble getting access to needed credit.

Earnings numbers from the third quarter of 2008 will be less favorable than those in the prior period. Natural resources producers—including energy—are the most vulnerable to posting disappointing numbers. The reason is simply the steep decline in oil and natural gas prices during the past three months, a casualty of growing concerns about the health of the global economy.

Even a deep recession won’t kill off the resource bull market that began in the late 1990s. In fact, it’s certain to discourage the level of conservation, movement to alternatives and new discoveries needed to switch the balance of market power from producers to consumers. But the threat of a deep downturn has already delivered a lot of pain to investors in energy producer trusts. And the actual bite of a steep economic decline will surely bring more.

Even industries not directly exposed to energy prices are likely to wind up taking a hit. We’ve already seen damage to Canadian trusts and corporations that depend heavily on sales to the US. But a real slowdown in Canada would surely claim victims in other industries as well, with finance, hospitality, transportation and real estate high on the list.

The bad news is third quarter earnings aren’t likely to be the low watermark for this cycle. They will offer solid clues as to which Canadian trusts and companies are still hanging tough and which are decidedly weakening. As always, they’ll be my cue about what to keep and what to unload.

There’s a silver lining to this dark cloud engulfing the world’s financial markets: Strong businesses always recover. And with so much bad news already built into prices, their rise will be swift. Our job now is to ensure we’re focused on those good businesses, many of which are paying their highest yields in years.

Hanging in there—even with good businesses—means we must be patient. Days like Black Monday, Sept. 29, are rare–thankfully. But as long as there’s at least one major bank failing every week, this market will be vulnerable to them. And on such days, not even the strongest are immune from sickening losses.

Such is how markets work out their excesses. And until the global financial system reaches some stability, there’s absolutely no way to avoid the turmoil. Just remember that throughout market history, value has always reasserted itself.

Good stocks are occasionally down for uncomfortably long periods of time. But sooner or later, the buyers came back to quality, and the losses become a distant memory. Finding, buying and holding good businesses has always been the key to long-term stock market success. And no matter how bleak things look now, that’s just as true as it ever was.

First the bad news: CE Portfolio recommendations took on a lot of water last month, one of the worst in memory for global financial markets. And with the broad-based S&P Toronto Stock Exchange Trust Composite down well more than 20 percent for the quarter, only three CE holdings were in positive territory: Northern Property REIT (TSX: NPR-U, OTC: NPRUF), RioCan REIT (TSX: REI-U, OTC: RIOCF) and Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF), while a handful of other REITs and energy infrastructure trusts held losses to single digits. Now the good news: All of our holdings continued to pay their distributions and they appear to be in good health as businesses. As always, I’ll be scrutinizing third quarter earnings to see if the numbers are starting to tell us a different story. But strong businesses are ensured a strong recovery when global credit markets return to normalcy, and that’s where we want to be. Meanwhile, I’m adding another very high yielding and quite inexpensive trust to the mix: Consumers Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF).

The October High Yield of the Month from the Aggressive Portfolio is Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF). The trust is a model for stability in the otherwise extremely volatile oil and gas production business and now yields more than 11 percent. The Conservative Portfolio play is Consumers Waterheater Income Fund, which dominates Ontario’s waterheater rental market and has made a play in advanced meter reading as well.

Note that How They Rate now features the following trust groups:

Here are advice changes. Note that I’ve changed buy prices on a number of trusts this month to reflect Canadian dollar weakness, the disaster hitting the credit markets and the likelihood of slower economic growth in North America.

Price and yield information is updated every 15 minutes in both Portfolio tables. Use this service as a reality check when errors occur with US quotes-based services.

Column four of the table shows dividend frequency and the most likely way each trust will minimize 2011 taxation. “Foreign” indicates non-Canadian income, which is not taxed. “Pools” indicate tax pools used primarily by energy producers, which shield income dollar for dollar. “Depreciation” indicates businesses with large non-cash expenses that can be used to shelter cash flow. “None” indicates no visible method of avoiding 2011 taxes, though some trusts have stated their intention to simply outgrow their future liability and maintain distributions.

Bonavista Energy Trust (TSX: BNP-U, OTC: BNPUF)—Hold to Buy @32. Like all oil and gas producer trusts, this one will realize lower selling prices in the third quarter than the second. But it’s built a very sustainable business, and the price reflects a much lower price of oil and gas.

Connors Brothers Income Fund (TSX: CBF-U, OTC: CBICF)—Hold to Sell. Connors is being bought by a private capital firm for the sum of CAD8.50 per share in cash. A vote on the deal isn’t until November, with close thereafter. Given the shares’ weakness before the deal was announced, failure to close would be a disaster. Even if it does succeed, US investors are better off getting their cash without going through the merger process.

Harvest Energy Trust (TSX: HTE, NYSE: HTE)—Buy @20 to Hold. The slowing US economy may delay the turnaround at the refinery, even as falling oil prices hit revenue.

Oil and gas producer trusts are the most vulnerable sector to a global economic slowdown. All have taken hits over the past month as energy prices have headed lower. Importantly, however, these trusts have already been severely stress tested over the past two years, and have measured up to the challenges. As a result, even if energy prices should fall considerably further, their underlying businesses will remain healthy and poised to rebound when energy again heads higher. The strongest trusts are even better protected. I review the producer sector and highlight the best of the bunch. I also rate my Portfolio picks by risk.

Canada’s banking system has proven far stronger than its counterpart in the US over the past couple years. But neither it nor the country’s economy and stock market have proven immune to the US economic contagion. CE Associate Editor David Dittman examines the relationship between credit market turmoil and trusts’ share prices through an interesting prism, the TED Spread—the spread between yields on Treasury Bills and Eurodollars—and shows why that’s a hopeful portent for our favorites.

This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section.

Dividend Watch List—Three trusts cut distributions last month versus six increased them. The cutters were: Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF), Sun Grow Horticulture Income Fund (TSX: GRO-U, OTC: SGHRF) and ARC Energy Trust (TSX: AET-U, OTC: AETUF), which rolled back the second half of a two-part “top-up” distribution increase delivered to share the windfall from the first half 2008 surge in natural gas prices.

In contrast, Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) gave its long-suffering shareholders something to cheer about by maintaining its distribution level despite shuttering two woodwaste-fired power plants. Finally, Eveready Income Fund (TSX: EIS-U, OTC: EISFF) has actually restored a cash dividend as part of its conversion to a corporation, proving again that conversions can actually be positive for dividends.

Bay Street Beat—How the Canadian analyst community views trusts, including our favorite trusts.

The following is a regular repeat from prior issues.

Use our live quote feed on the How They Rate Table for US dollar prices of trusts intra-day. For other information, go directly to a trust’s website by clicking on its name in the table. Clicking on the Toronto symbol (suffix “.UN”) will take you to the web site of our Canadian partner Toronto-based MPL Communications (133 Richmond St. West, Toronto M5H 3M8) www.adviceforinvestors.com, which has price charts and access to press trust releases. For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on income and royalty trusts. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto  Globe & Mail features the “Globe Investor” section with all the latest news on trusts. Dominion Bond Rating Service is the pre-eminent credit rater for trusts. The Bank of Canada Web site features a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.

Note the NAFTA challenge to the Government of Canada’s “Tax Fairness Plan” is heating up. Interested investors should contact: http://www.naftatrustclaims.com. Also, for late filers, the Income Trust Tax Guide has all the backup you need to file distributions as “qualified dividends.”

Roger Conrad
Editor, Canadian Edge