That Canada’s immune system is relatively strong doesn’t mean that it, too, won’t get sick. Quarterly earnings reports from the Big Five banks and today’s 75 basis point interest rate cut by the Bank of Canada (BoC) are further confirmation that, though the country enters this period of economic crisis on sounder footing than most, Canada’s economic road will be bumpy and it won’t go unscathed.

But Canada has been in budget surplus for 10 years; fiscal balance is now an ethos among the political leadership, and voters have grown to expect it. And prudent budget management means the country is in better shape than most to take on additional and significant fiscal spending measures to stimulate its domestic economy.

Though there’s much disagreement over which specific measures qualify, there’s a general consensus about the elements of effective fiscal stimulus legislation: It must be timely, targeted and temporary. And Prime Minister Stephen Harper is the best hope right now for a timely, targeted and temporary stimulus package. Political developments during the last couple days suggest the melodrama has subsided and that the minority Conservative government will have an opportunity to present its plan to goose the economy.

Stephane Dion has now stepped down from the Liberal leadership post, and new interim party leader Michael Ignatieff wasn’t behind the ill-conceived coalition plan announced in the wake of the government’s Nov. 27 fiscal and economic update. Liberal member of Parliament Bob Rae, a potential rival to Ignatieff for the permanent leadership, ended his bid Tuesday with a promise to cooperate with Ignatieff. The Liberals have also chosen to appoint a new leader immediately rather than wait until a scheduled May convention.

The Big Five

Only one of Canada’s Big Five banks, Bank of Nova Scotia (TSX: BNS, NYSE: BNS), looked out to 2009 and saw clearly enough to issue a profit forecast.

All, however, remarked on the unprecedented level of market volatility, weakening job and housing markets, and the retrenchment of the US consumer–factors that will contribute to softer results for consumer banking.

Bank of Montreal (TSX: BMO, NYSE: BMO) provided the bright spot, reporting a 24 percent increase in net profit to CAD560 million; that rise was made possible, of course, because BMO had significant trading losses and credit writedowns a year ago.

Bank of Nova Scotia’s earnings dropped 67 percent to CAD315 million, CIBC (TSX: CM, NYSE: CM) reported a 51 percent decline to CAD436 million, Toronto-Dominion (TSX: TD, NYSE: TD) said profit fell 7.3 percent to CAD1.01 billion, and Royal Bank of Canada (TSX: RY, NYSE: RY) reported a 15.4 percent slide.

RBC, though it didn’t comment on its own prospects, issued a dire outlook for the year ahead. RBC expects Canada’s economy to expand by just 0.3 percent next year; the contrast with a 1 percent GDP decline in the US is, however, further indication of the relative strength of the economy up north.

RBC also announced Monday that it’s issuing CAD2 billion in common equity at CAD35.25 a share; the new issue, coupled with a previously announced CAD525 million preferred share issue, will bring the bank’s Tier 1 capital ratio to 10.1 percent, up from 9 percent.

The other four are likely to follow RBC’s lead; a few weeks ago the Tier 1 capital levels of Canadian banks were among the highest of their global peers at 9.7 percent. Since then, banks in the US and Europe have received capital injections via government initiatives and dilutive stock offerings, bringing their Tier 1 ratios into the low double-digits.

In its statement announcing a deeper-than-expected 75 basis point cut on its benchmark interest rate, the Bank of Canada said:

The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated. Global financial markets remain severely strained. Measures taken by major governments are beginning to encourage credit flows, although it will take some time before conditions in financial markets normalize. In addition, a series of recently announced monetary and fiscal policy actions will also support global economic growth.

The BoC’s target rate is now at its lowest level since 1958, and the central bank also declared for the first time that the Canadian economy is in recession. Conditions had evolved as expected through the summer and into the early fall–it’s clear now that we’re dealing with a “before Sept. 15” and “after Sept.15” situation: Sept. 15 is the day Lehman Brothers declared bankruptcy, setting off the Great Credit Crisis of 2008 and hampering business activity for the balance of 2008 and into 2009. Lehman’s fall was the catalyst, but evidence suggests that we were in an environment waiting for a catalyst; it could have been any number of old-school names falling that could have set off what became a global panic.

Global financial markets remain severely strained, said the BoC, and it will take time for conditions to begin to normalize in response to stimulus measures taken by major governments around the world. The statement also noted that Canada has some protection from the negative drag from global economic and financial developments.

“The depreciation of the Canadian dollar will continue to provide an important offset to the effects of weaker global demand and lower commodity prices,” the bank said. “As well, money markets and overall credit conditions in Canada are responding to significant and ongoing efforts to provide liquidity to the Canadian financial system.”

Canada’s inflation rate is now expected to come in below the forecast from the BoC’s October Monetary Policy Report. The BoC had projected a core inflation rate of 1.7 percent in the first half of 2009, dropping to 1.6 percent in the second half before expanding to 1.9 percent in 2010.

ARC Energy Trust (TSX: AET-U, OTC: AETUF) has cut its distribution by 25 percent to CAD0.15 per unit per month from CAD0.20. ARC made the cut so it would be able to fund the majority of its 2009 capital budget and anticipated distributions with cash flow. The 2009 development budget–which includes significant resources devoted to the Montney gas play–remains intact. ARC Energy Trust remains a buy up to USD30.

Baytex Energy Trust (TSX: BTE-U, NYSE: BTE) has wound back its distribution to the level it was at the beginning of 2008, from CAD0.25 to CAD0.18 per unit, effective with the Jan. 15 payment for December operations. The trust also announced a 2009 capital budget of CAD160 million. Baytex Energy Trust is a buy up to USD20.

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) raised CAD75 million through a convertible debenture issue led by, among others Scotia Capital. Proceeds will be used to reduce outstanding borrowings under Daylight’s existing credit facilities. The debentures will bear a 10 percent interest rate. Daylight Resources Trust is a buy up to USD10.

Northland Power Income Fund (TSX: NPI-U, OTC: NPIFF) is paying a special distribution on top of its regular December payment; the fund announced it would pay unitholders CAD0.04 in addition to the regular CAD0.09 to unitholders of record Dec. 31. Northland plans to maintain the CAD0.09 per month payment through 2009, a total of CAD1.08 annualized. Northland Power Income Fund is a buy up to USD14.

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) signed a deal with Rhodia for spent acid regeneration services after an explosion damaged its plant in Beaumont, Texas. Under the agreement, Rhodia will process the spent acid that Chemtrade would normally process at its Beaumont facility until mid-February 2009. Buy Chemtrade Logistics Income Fund up to USD13.

Precision Drilling Trust’s (TSX: PD-U, NYSE: PDS) acquisition of Grey Wolf (AMEX: GW) has been delayed by the postponement until Dec.23 of a shareholder vote on the offer. The vote delay was sought so Grey Wolf shareholders could gain a better understanding of how Grey Wolf convertible notes will be treated in the deal.

An amendment to the deal clarifies the intention that Grey Wolf convertible notes don’t convert into Grey Wolf stock before the merger. The cash that would have been paid would instead be retained by Precision to be applied toward the purchase of the Grey Wolf convertible notes that Precision will be required to make following the merger.

Precision Drilling CEO Kevin Neveu and Grey Wolf CEO Tom Richards said the delay isn’t an indication of second thoughts on the merger and that integration of the companies continues. Precision Drilling Trust is a buy up to USD20.