Federal Reserve Chairman Ben Bernanke thought the US central bank’s still-bloated balance sheet would be far less engorged by this point in the aftermath of the Great Recession. But in August the Federal Open Market Committee (FOMC) announced a plan to roll proceeds from maturing mortgage-backed securities (MBS) into US Treasuries rather than allow its balance sheet to contract naturally. This week the FOMC crept ever closer to another round of “large-scale asset purchases,” the new term for “quantitative easing,” which itself is the 21st century form of money printing.

In its Aug. 10 statement the Fed noted that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” On Sept. 21 the central bank said, “Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months,” later repeating a pledge to keep interest rates “exceptionally low” for an “extended period.” The Fed’s benchmark rate has been at a range of zero to 0.25 percent since December 2008.

Rolling MBS into Treasuries simply prevented the central bank’s balance sheet from shrinking; it was, in the words of one observer, an “ever so slightly less contractionary” attempt to suppress interest rates charged to businesses and consumers. And though the potential consequences of such actions include the end of the world as we know it, brought on by hyperinflation, what seems far more likely right now is that another, ever so slight 25 to 30 basis points will be shaved off interest rates.

Fed moves to hold down mortgage rates were effective, but cheap financing alone hasn’t been enough to support a sustainable recovery for the US housing market. Tax incentives drove demand for awhile, but there’s little evidence of stability for home prices, much less growth. Recent data indicate that foreclosure filings are on the rise in areas where subprime activity was minimal. This trend suggests people are having trouble paying their mortgages because of job loss and extended periods of unemployment. Potential borrowers, too, are worried about job security or are unable to muster a down payment.

The two factors that are most important in the economic growth equation are jobs and income. If you want people to have money for them to spend and consequently boost economic growth, they need to have decent jobs that pay them well. The crisis and its aftermath have pulled the curtain back on and made more dramatic a long-term structural change in what’s becoming a global employment market.

The rate of job losses that prevailed during the rapid job growth of the late 1990s has remained steady, while the number of jobs created has nose-dived. Wages have stagnated in the 21st century. This is largely the result of a failure to sustain the pace of innovation that characterized the dot-com era. An end to that remarkable flurry of creativity was inevitable, statisticians will tell you. Rapid globalization in the aftermath of the Cold War means, too, that American workers are competing on price with workers in China, Malaysia, Thailand and Vietnam.

Questionable monetary and fiscal policy choices made as far back as 2001 were not fated. Nor must the present course of try, try again to apply countercyclical medicine to what is a long-term structural problem persist. Stock market levels and housing prices matter in terms of savings and retirement. But consumption accounts for more than 70 percent of the US economy, and people don’t pay for goods and services using stock gains or home equity (at least not since the housing bust). They pay for things using money they make from their jobs. The bottom line is quantitative easing and similar efforts that support asset prices do not help economic fundamentals.

The problem QE1 was able to address was a supply of capital; banks have loaded up on cheap cash and kept it in reserve or traded with it. They haven’t lent it largely because there isn’t much demand. The Fed is acting in a vacuum left by Congress and the Obama administration. Neither of the overtly political parts of the government can muster the will to propose another stimulus package.  

The long-term problems burdening the US economy are severe. The effectiveness of particular policy responses, monetary and fiscal, is debatable. The Fed hasn’t yet emptied its quiver; when its balance sheet begins to approach the level that some hardcore advocates suggest–how does $5 trillion sound?–that’s when QE2 will have launched in earnest.

The day after the Fed’s asset swap announcement in August investors gobbled up a benchmark 10-year Treasury auction, bidding it to the lowest yield on record, 2.73 percent. The sale was 3.04-times subscribed, more than the 2.96 in May and above the 2.73 four-auction average. Nobody sees a reason to sell the Treasury market right now. When it hinted in September that November may finally bring QE2 gold spiked to a new record, as the US dollar sank to 13-year lows against such currencies as the Thai baht and the Malaysian ringgit.

At some point the game of “signals” and the efforts of the long-distance mind-readers collectively known as “Fed Watchers” will turn to inflation and deciphering language and moves that indicate vigilance against rising prices. For now, however, the Fed maintains its view that inflation is “likely to be subdued for some time.” This is consistent with the downward revision of its economic forecast in August and similarly downbeat language about the big picture in its September statement; when aggregate demand declines, pressure on prices eases.

But the US government is still borrowing at the lowest rates it’s ever borrowed. Interest rates continue to trend downward. The problem remains, however, that overleveraged consumers neither need nor seem to want any more debt. And businesses won’t borrow–or hire–until they start seeing customers.

What’s clear now, however, is that emerging markets are showing increasing signs of decoupling from the US. Emerging Asia is headed for 9.2 percent GDP growth in 2010, trampling the expected 2.6 percent pace at which the developed world will expand. This is good for the commodities-focused economies such as Canada’s that are providing raw materials for this rapid growth. The Canadian dollar will rise on strong fundamentals, providing a nice kicker for US-based investors who invest in high-yielding stocks from the Great White North.

The Roundup

A subsidiary of Conservative Holding Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) has inked a deal with the Shield Infrastructure Partnership to design and build 18 Ontario Provincial Police facilities. Construction will begin shortly, with completion scheduled for the fall of 2012. Bird Construction Income Fund is a buy up to USD35.

RioCan REIT (TSX: REI-U, OTC: RIOCF) and Cedar Shopping Centers (NYSE: CDR), through their 80-20 joint venture (JV), are buying five primarily supermarket-anchored properties with gross leasable acreage of 678,000 square feet for approximately CAD92 million. Four of the properties are anchored by Giant supermarkets. Three of the properties are located in Pennsylvania, one in Maryland and one in Virginia. The JV will finance the purchase with a 10-year mortgage at 5.5 percent with a loan-to-value of approximately 55 percent. RioCan REIT is a buy up to USD20.

Here are tentative third-quarter earnings announcement dates for the CE Portfolio Conservative Holdings:

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–Oct. 28 (confirmed)
• Artis REIT (TSX: AX-U, OTC: ARESF)–Nov. 11
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–Nov. 10
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–Nov. 10
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–Nov. 9
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–Nov. 3
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Nov. 12
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)–Nov. 10
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–Nov. 11
• Colabor Group (TSX: GCL, OTC: COLFF)–Oct. 7
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–Nov. 2
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–Nov. 4
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–Nov. 12
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–Nov. 5
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–Nov. 2 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–Nov. 3 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Nov. 10 (confirmed)
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–Oct. 28
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–Oct. 26
• TransForce (TSX: TFI, OTC: TFIFF)–Oct. 29 (confirmed)

And here are third-quarter earnings announcement dates for CE Aggressive Holdings:

• Ag Growth International (TSX: AFN, OTC: AGGZF)–Nov. 12
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–Nov. 1 (confirmed)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Nov. 11
• Daylight Energy (TSX: DAY, OTC: DAYYF)–Nov. 4
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–Nov. 12
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Nov. 5
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)–Nov. 5
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–Nov. 5
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Nov. 9
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–Nov. 11
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–Nov. 10
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–Nov. 4
• Vermilion Energy Trust (TSX: VET, OTC: VEMTF)–Nov. 5
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–Nov. 4

Oil and Gas

Cenovus Energy (TSX: CVE, NYSE: CVE) has received the approval of the Alberta Energy Resources Conservation Board for three phases of expansion of its Foster Creek oil sands operation, which will boost production capacity to 210,000 barrels per day (bbl/d) from 120,000 bbl/d. Cenovus Energy is a buy up to USD30.

Crescent Point Energy (TSX: CPG, OTC: CSCTF) announced that fiscal 2010 exit production is expected to increase to more than 71,000 barrels of oil equivalent per day (boe/d) from 69,500 boe/d, an annual growth rate of more than 10 percent excluding acquisitions.

Crescent Point also announced a CAD375 million bought-deal offering of 10.25 million shares at CAD36.60 per, through a syndicate of underwriters co-led by CIBC (TSX: CM, NYSE: CM) and BMO Capital Markets. Crescent Point Energy is a buy up to USD40.

Real Estate Trusts

Artis REIT (TSX: AX-U, OTC: ARESF) has entered into an “equity distribution agreement” with Canaccord Genuity Corp under with the REIT will issue and sell 5.3 million units via “at-the-market distributions” through Sept. 19, 2012. The timing of any sale and the number of units actually sold are at the discretion of the REIT. Sales, if any, will be made at market prices. Proceeds will be used to fund ongoing development and acquisition activities, for repayment of indebtedness and/or for general working capital purposes. Artis REIT is a buy up to USD12.

H&R REIT (TSX: HR-U, OTC: HRREF) closed a previously announced offering of CAD125 million of 5 percent senior debentures due Dec. 1, 2018. Proceeds will be used to repay indebtedness, fund future acquisitions and for development of The Bow office tower. Hold H&R REIT.

Natural Resources

Teck Resources (TSX: TCK.B, NYSE: TCK) completed fourth-quarter coal-price negotiations with most of its regular customers, resulting in a CAD209 per tonne price for its highest-quality product. Teck also reported that that coal sales for the current quarter and the year are being hampered by temporary capacity constraints at Westshore Terminals Income Fund’s (TSX: WTE-U, OTC: WTSHF) British Columbia facility.

Management now expects third-quarter coal sales in the range of 5.2 million to 5.5 million tonnes, down from previous guidance of 5.8 million to 6.2 million tonnes. Sales for the calendar 2010 are expected to be in the range of 23 million to 23.8 million tonnes, down from a prior forecast of 23.5 million to 24.5 million tonnes. Westshore isn’t operating at its stated annual capacity of 29 million tonnes because of ongoing port and equipment improvements, which will continue to create problems until completion in 2011.

In the meantime Teck is diverting shipments to Neptune Bulk Terminals Ltd, in which it has a 46 percent ownership interest, and to Ridley Terminals. Teck Resources is a buy up to USD35.

Food and Hospitality

Empire Company Ltd (TSX: EMP.A) reported fiscal first-quarter (ended July 31) earnings of CAD81.6 million (CAD1.19 per share), up from CAD72.2 million (CAD1.05 per share) a year ago. Revenue was CAD4.04 billion, up 1.8 percent. Same-store sales for flagship grocery Sobeys increased 0.3 percent. Empire Company Ltd is a buy up to USD52.

Imvescor Restaurant Group (TSX: IRF, OTC: IRGIF) announced that CEO Ron Magruder has resigned. Imvescor is enmeshed in internal reviews of its operations and financial structure, processes that appear to have revealed the need for a change at the top. Imvescor, the former PDM Royalties Income Fund, owns franchised restaurants and corporate stores throughout Canada under the brands Pizza Delight, Mikes, Scores and Baton Rouge. CFO Bill Lane will be interim CEO until a permanent replacement is identified.

Imvescor reported third-quarter (ended July 31) system sales of CAD105.1 million, a 1.2 percent decrease from a year ago. System sales are down 2.3 percent year to date. Imvescor earned CAD1 million (CAD0.11 per share) in the quarter, compared with a loss of CAD32.6 million (CAD4.16 per unit) in the same period in 2009. Hold Imvescor Restaurant Group.

Transports

Canadian Pacific Railway (TSX: CP, NYSE: CP) is issuing USD350 million of 4.45 percent notes due Mar. 15, 2023. Proceeds will be used for a voluntary prepayment in 2010 of up to CAD650 million to the company’s defined benefit pension plans. Canadian Pacific Railway is a buy up to USD60.