There’s a scene in the movie adaptation of John Irving’s The World According to Garp where Robin Williams’ TS (“Terribly Sexy”) Garp and his wife are checking out a home they’re interested in buying. As the couple and their agent approach the property, a twin-engine plane slams into the house, thus, from Garp’s point of view, making it “disaster proof” because another similar calamity is unlikely given the odds.

(That’s what’s commonly referred to as the “gambler’s fallacy.”)

Variations of the following histogram have been floated here, but we first came upon it here. It will require a helluva Santa Claus Rally to pull 2008 out of the rare company it’s currently keeping, but we take at least some solace that the last 11-plus months have formed an outlier–a disaster–second to only one.

Each block in the histogram represents a calendar year’s worth of stock returns, going back to 1825. The dark block on the far left–out there with 1931–represents 2008. That’s how historically bad this year’s been.

A recent chart of the S&P/TSX Income Trust Index will inspire similar nausea.

We’ve clearly plumbed the depths at these levels.

There’s good news, however, from a different source drawing on data similar to that used to construct the histogram. According to financial planning and management firm ICMA Retirement Corp, for the 82 years ended Dec. 31, 2007, the S&P 500 Index posted 59 positive calendar-year returns and 23 negative years. The frequency of returns skews to the positive: 72 percent of the time the S&P 500 Index had positive years, while 28 percent of the time it went negative.

The S&P 500 returned an average of 21.27 percent over the positive years and shed 13.34 percent over the negative years. Overall, the average return for the period is 10.36 percent.

Two other broad gauges of market conditions shed some light on what to expect in coming months.

The TED Spread, the difference between the yield on the three-month US Treasury bill and the three-month London Interbank Offered Rate (LIBOR), spiked to 463 basis points in mid-October. But this particular measure of banks’ willingness to lend slipped below 150 basis points for the first time since before the Sept. 14 Lehman Brothers collapse on Monday on hopes historic Federal Reserve rate cuts and promises of more US government spending will unlock credit.

As you’ll note in the graph below, the TED Spread is still at historically high levels; in the year before the credit crisis began in August 2007, it averaged 38 basis points. And the recent spread is more a function of declining three-month LIBOR because the yield on three-month T-bills is basically zero.

Conditions in the interbank lending market seem to be improving. Whether and how soon the volume of lending activity begins to reflect this concerted stimulation of demand will determine the course and duration of the recession.

The VIX, or the Chicago Board Options Exchange Volatility Index, hit 81.4 Nov. 20. It, too, remains at historically lofty levels but has come down significantly, to below 45 Monday. A normal reading is around 20.

VIX is widely referred to as the “fear index.” It’s actually a measure of the implied volatility of S&P 500 Index options; a high value corresponds to a more volatile market and therefore more costly options, which can be used to offset risk. If investors see high risks of a change in prices, they require a greater premium to insure against such a change by selling options.

And so the fear seems, too, to be receding.

The three pictures above illustrate an ugly 2008–and though Lehman Brothers certainly stands in well as the twin-engine plane crashing into the house, the calamity seemed well underway prior to Sept. 14. The TED Spread “broke out” from its historical range during the summer of 2007; it makes intuitive sense that in a credit-based economy a dramatic seize-up in lending will cause a slowdown in activity. 

As we hurtle toward 2009, there’s another set of figures that describes the epicenter of financial crackup that’s led us to recession: US home-sale numbers.

And we’ll have to muster our most Garpian optimism here: The median resale price for US homes fell 13 percent year-over-year–“probably the largest price decline since the Great Depression,” according to National Association of Realtors Chief Economist Lawrence Yun–and volume slid to an annual rate of 4.49 million, lower than forecast.

Home resales were forecast to fall to a 4.93 million annual rate from an originally reported 4.98 million in October. Sales dropped 10.6 percent year-over-year. Resales averaged 5.67 million in 2007 and, before yesterday’s report, fluctuated around a 4.96 million rate in 2008. The number of previously owned unsold homes on the market at the end of November represented 11.2 months’ worth at the current sales pace, up from 10.3 months’ at the end of October.

Recent actions by the Fed have already had a dramatic impact on US mortgage rates–the average rate on a 30-year fixed-rate loan fell to a five-year low of 5.18 percent in the week ended Dec. 12–and that could lead to a clearing out of the inventory backlog. Low borrowing costs have certainly drawn potential buyers out of the woodwork, but lending standards have tightened. Resolving this tension will be critical to getting a consumption-based economy consuming again.

The mid-September TED Spread spike and the lending lockup that followed made worse what were already difficult economic conditions; it was a signal that businesses’ and consumers’ ability to borrow and spend would be further hampered.

Whether 2008 proves the buying opportunity of a lifetime depends on your perspective, literally: Where are you on your investment horizon? If you’re looking out three, five, 10 years, the record suggests better days ahead for your portfolio. If you have shorter-term needs for your cash, preservation of capital is key.

What we see, however, is that a repeat of 2008 isn’t likely. Much of the earnings decline suggested by the extent of the economy’s slowdown is priced into the market, the cost of credit should come down and the smell of fear is dissipating.

Now, the banks must begin lending. Credit is cheap, but lending hasn’t picked up yet. When it happens, housing prices will stabilize then begin to recover. That’s when the economy will grow again.

We’re taking an abbreviated run through the Canadian Edge coverage universe in this holiday-shortened week, focusing exclusively on news from Portfolio holdings.

Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF), in addition to its regular payment, will pay a special distribution of approximately CAD0.10 per unit to unitholders of record on Dec. 31. The final amount of the special distribution will be based on income generated by the fund for the year ended Dec. 31, 2008, and will be at the high end of the previously announced range of CAD0.05 to CAD0.10 per unit. Energy Savings will announce the final amount of the special distribution in January. Energy Savings Income Fund is a buy up to USD10.

Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) announced plans to spend CAD262 million on capital projects in 2009, a 15 percent increase from 2008 levels. About CAD150 million will go to the construction of the Nipisi and Mitsue pipelines, and CAD9 million will go to Pembina’s oil sands projects. Pembina is budgeting CAD95 million for new connections and upgrades; another CAD9 million is expected to be spent on midstream and marketing initiatives. Financing for the capital program will come from undrawn and additional credit facilities and cash flow from operations. Pembina Pipeline Income Fund is a buy up to USD18.

Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) boosted its available credit on a bank facility established in May 2008 from CAD250 million to CAD450 million.

The facility, which matures in May 2011, will be used to refinance Yellow’s medium-term notes that mature in April 2009. Combined with Yellow’s revolving bank facility, the fund has available credit of CAD1.15 billion.

Yellow’s management also reaffirmed its distribution policy and its annualized cash distribution of CAD1.17. Yellow Pages Income Fund is a buy up to USD10.

Ag Growth Income Fund (TSX: AFN-U, OTC: AGRFF) will pay a special year-end distribution of an estimated CAD0.24 per unit on Jan. 30, 2009, to unitholders of record as of Dec. 31, 2008. Ag Growth will announce the precise amount of the distribution in January. Buy Ag Growth Income Fund up to USD25.

ARC Energy Trust (TSX: AET-U, OTC: AETUF), as of Dec. 22, is now a member of the S&P/TSX 60, one of Canada’s leading stock market indexes. ARC Energy Trust is a buy up to USD30.

Enerplus Resources (TSX: ERF-U, NYSE: ERF) cut its distribution again, from CAD0.38 per unit per month to CAD0.25, and also announced a reduction in its planned capital budget for 2009. Enerplus will spend CAD300 million next year, a 45 percent cut from 2008 levels. Roughly CAD240 million will be spent on conventional oil and gas projects in Canada, about CAD35 million in the US. CAD25 million will go to oil sands operations.

Discussing the distribution cut, Enerplus management said in a statement, “We intend to preserve our financial strength and maintain flexibility in order to position us to take advantage of future opportunities to add quality assets in an increasingly attractive acquisition market.” Enerplus Resources, with one of the strongest balance sheets in the industry and a long track record of developmental success, remains a buy up to USD30.

Newalta Income Fund (TSX: NAL-U, OTC: NALUF) unitholders have approved Newalta’s conversion to a corporation. The name of the new corporation will be Newalta Inc. The fund also announced that the final order from the Court of Queen’s Bench of Alberta on the conversion has also been obtained.

The exchange of trust units of Newalta Income Fund for common shares in the capital of Newalta Inc., on a one-for-one basis, is expected to occur Dec. 31, 2008. The common shares of Newalta Inc. will begin trading on the Toronto Stock Exchange, under the symbol “NAL,” on or about Jan. 7, 2009. Newalta Income Fund is a buy up to USD13.