The Bank of Canada (BoC), content to let the effect of its 425 basis points’ worth of cuts to its target overnight interest rate propagate through the economy, spelled out the principles it will adhere to in entering into any “quantitative” or “credit” easing but stopped short of committing to such behavior in an annex to its April Monetary Policy Report (MPR).

The BoC will open up the figurative printing press, but only on condition of further, and what now seems unlikely, erosion of economic activity.

Last week’s MPR noted significant deterioration in the Canadian and global economies since the BoC’s January Monetary Policy Report Update, and, in carefully chosen words, placed much of the blame for that deterioration at the foot of US policymakers.

The BoC said the relative strength of Canadian business and consumer balance sheets made the domestic economy less sensitive to dislocations in the global system, but stressed the need for cleansing of bad assets from the books of major financial institutions. Absent a prompt and effective implementation of programs designed to fix the US banks, in other words, recovery will be delayed and its quality impaired.

Long considered a junior partner in the North American economy, Canada has during the current financial crisis/recession won global praise for the soundness of a banking system that steered clear of subprime loans and the fiscal discipline of a government that allowed significant stimulus measures.

Although continuing weakness for the US automakers and a still-languishing housing market will be a short-term drag for Canada’s economy, any incremental improvement will have even greater impact for the Great White North.

The US and Canada still comprise the largest bilateral trading relationship in the world, but that dynamic is changing–Canada is becoming less dependent on its southern neighbor, and will benefit as emerging Asia, China in particular, assumes a prominent role in global economic growth.

For example, Canadian National Railway’s (TSX: CNR, NYSE: CNI) recent announcement that it plans to transport oil sands production via rail opens up significant opportunities for the country to diversify export partners for what looms as an important piece in the global energy pie in coming decades. CN’s “Pipeline on Rail” will allow it to efficiently move bitumen, diluted bitumen or synthetic crude to North America and to Asia.

Recovery in other developed economies will be “more delayed and more gradual” than in the US, but the BoC forecasts that economic growth in China will “remain robust.” Chinese authorities have embarked on aggressive monetary and fiscal stimulus efforts, which, combined with efforts by other emerging economies, will lead to rising global demand for a critical element of Canada’s economy–commodities, including oil and gas.

The Case for the Loonie

The Canadian dollar has eased back this morning after notching a string of gains against the US dollar. Before the Swine Flu scare, the loonie was ascendant amid signs of increasing risk appetite. The threat, legitimate or media-driven, of a pandemic drove investors to safe havens yesterday and in early trade today, but over the longer term the Canadian currency is poised to bounce significantly off recent lows.

Part of the loonie’s winning streak can be traced to the BoC’s stance on quantitative easing–that it won’t immediately create money out of thin air reduced the threat of an inflationary spiral.

As our colleague George Kleinman noted in the Canadian Currents article for the April Canadian Edge:

There has never been a case of successful quantitative easing in economic history. It has always–repeat: always–led to higher inflation sometime in the future. The only question is when it will start and how bad it will get. Higher inflation is bullish for commodities and therefore bullish for the Canadian dollar.

Longer term the Canadian dollar should appreciate, perhaps dramatically. The question is the timing…

Since trading at its all-time high of USD1.10 (one Canadian dollar got you 1.10 in US dollars; now it only gets you USD0.81) in November 2007, the loonie has continually registered a pattern of lower highs…

This is a bearish pattern, a classic downtrend, and until a new higher high is registered, the trend remains down for the Canadian dollar. There’s no reason to rush in.

This pattern will change with a move above 82.50 on the weekly chart, the first higher high. It would then be confirmed with an eventual move above 85 even, a second higher high. What we’re ultimately looking for is a stair-step pattern of higher lows and higher highs…

As the chart below indicates, the loonie closed at 83.11–above George’s critical 82.50 level–on April 15, and we are seeing higher lows.

Source: Bloomberg

Prior to the Swine Flu scare, there were short-term signs of renewed appetite for risk, among them the loonie’s modest rally. This morning’s release of the Conference Board’s sentiment index provides at least some support for the idea that this Swine Flu interruption will give way to a resumption of increased risk-taking.

Source: Bloomberg

According to a Bloomberg survey of 62 economists, confidence was projected to rise to 29.7 from 26 in March; the Conference Board measure actually rose to a five-month high of 39.2.

Any US investor long Canadian equities–including income and royalty trusts and high-yielding corporations–is, de facto, long the loonie. You can play the currency and collect regular distributions via the Canadian Edge Portfolio.

Generation of Swine

Profits, that is: How to generate profits from this outbreak, and Elliott Gue spells out a few ideas in this Monday post to At These Levels.

Speaking Engagements

There are few better places to combine work and play than Sin City: Join Canadian Edge, Editor Roger Conrad and The Energy Strategist Editor Elliott Gue for The Money Show Las Vegas, May 11-14, 2009, at The Mandalay Bay Resort & Casino.

With Elliott’s and Roger’s sage advice, this is one trip to Vegas that won’t make a wreck out of you.

To attend as Roger’s guest, click here or call 800-970-4355 and refer to promotion code 012649.

The Roundup

Earnings season is in full swing, though only one Canadian Edge Portfolio recommendation, Conservative Holding TransForce (TSX: TFI, OTC: TFIFF), has reported thus far.

TransForce reported a 14 percent decrease in first quarter revenue from year ago levels, from CAD526.3 million to CAD452.4 million. Revenue excluding fuel surcharges for the three months ended March 31, 2009, was CAD422.2 million, down 10 percent from CAD469.5 million during the same period in 2008.

Operating income was CAD44.5 million, down from CAD56.9 million in the first quarter of 2008. Excluding a one-time first quarter 2008 gain, operating income was off 15 percent. Cash flow from operations CAD33 million, compared with CAD45.7 million a year ago.

Earnings per share of CAD0.04, although down from CAD0.22 in the first quarter of 2008, beat a consensus analyst estimate of a CAD0.01 per share loss.

The sharp falloff in economic activity and corresponding decline in freight demand during the fourth quarter of 2008 and the first three months of 2009 has had an obvious impact on TransForce’s results, although effective cost controls mitigated somewhat the detriment to the bottom line.

Going forward, TransForce will continue to reduce debt, but will also look for opportunities to grow the business via tuck-in acquisitions. TransForce forecast 2009 cash flow after interest expense, income-tax expense, dividends and capital expenditures in the range of CAD100 million. That the Canadian dollar is significantly off its highs, fuel costs are lower, the cost of capital has come down, and the US and Canadian governments are pumping billions into their respective economies should allow TransForce to meet its upside targets for 2009. Given the uncertainty surrounding North American economic activity, however, TransForce is a hold.

Conservative Holdings

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–May 7
• Artis REIT (TSX: AX-U, OTC: ARESF)–May 13
• Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF)–May 14
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–May 7
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–May 6
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–May 12
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–May 7
• Consumers Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF)–May 1
• Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF)–May 15
• Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF)–May 12
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–May 7
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–May 5
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–May 6
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–May 12
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–April 29
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–April 29
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–May 7

Aggressive Holdings

• Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV)–May 14
• Ag Growth Income Fund (TSX: AFN-U, OTC: AGGRF)–May 8
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–May 8
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 11
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–May 7
• Enerplus Resources (TSX: ERF-U, NYSE: ERF)–May 8
• Newalta Income Fund (TSX: NAL, OTC: NWLTF)–May 6
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–May 8
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–May 6
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–May 7
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–May 7
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–May 6
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–May 8

Here’s the roundup of news impacting Portfolio and How They Rate companies.

Oil & Gas

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) is buying an unnamed, privately held producer for CAD109 million.

The target currently produces approximately 3,000 barrels of oil equivalent per day (boe/d), most of it from properties within Daylight’s core West Central Alberta area. The acquisition boosts Daylight’s daily production by 13 percent. The assets comprise an estimated 6.9 million barrels of oil equivalent of proved plus probable reserves, 94 percent of which is natural gas.

Daylight’s offer consists of consists of 7.25 million units and CAD32 million of cash and assumed net debt of approximately CAD25 million. Daylight Resources Trust is a buy up to USD11.

Suncor Energy (TSX: SU, NYSE: SU) reported a first quarter net loss of CAD189 million (CAD0.20 per share), compared to net earnings of CAD708 million (CAD0.77 per share) in the first quarter of 2008.

Excluding unrealized foreign exchange impacts on the company’s US dollar denominated long-term debt, mark-to-market accounting losses on commodity derivatives, and costs related to start-up or deferral of growth projects, first quarter 2009 earnings were CAD227 million (CAD0.24 per share), compared to CAD805 million (CAD0.87 per share) in the first quarter of 2008.

Cash flow from operations was CAD479 million in the first quarter, down from CAD1.2 a year ago.

The decrease in earnings was primarily due to lower price realizations, as benchmark commodity prices were significantly weaker in the first quarter of 2009 compared to the same period in 2008. This was partially offset by increased margins in Suncor’s downstream business segment and reduced oil sands royalty expenses. Suncor Energy is a hold.

Talisman Energy (TSX: TLM, NYSE: TLM) is spending USD1.1 billion to develop two offshore oilfields in Vietnam. The two fields, part of Talisman’s joint exploration project with state-owned oil firm Petrovietnam, should come into commercial production by September 2011. Combined production is estimated to be 35,000 barrels per day. Talisman Energy is a buy up to USD12.

Electric Power

Algonquin Power Income Fund (TSX: APF-U, OTC: AGQNF) and Emera (TSX: EMA, OTC: EMRAF) are buying California-based electrical generation and regulated distribution utility assets from NV Energy (NYSE: NVE) for about USD116 million.

Algonquin and Emera are forming California Pacific Electric Company (Calpeco) to operate the acquired assets.

Algonquin and Emera will seek debt financing through Calpeco to cover about half the cost, and each company will kick in equal equity contributions to cover the remainder.

Emera has agreed to a treasury subscription of about 8.5 million trust units of Algonquin at a price of CAD3.25 a unit, which is expected to represent 9.9 percent of the outstanding units after the subscription.

Funding under the private placement is planned to occur simultaneously with the acquisition and Algonquin intends to use the proceeds to largely fund its part of the equity commitment for the deal of about CAD27 million.

Algonquin expects is share of Calpeco’s operations to add about CAD15 million of revenue. Hold Algonquin Power Income Fund.

Gas/Propane

Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF) and Universal Energy Group (TSX: UEG, OTC: UEEGF) have struck a definitive agreement whereby Energy Savings will acquire the outstanding shares of Universal.

According to terms of the deal, each outstanding share of Universal will be exchanged for 0.58 of a share of a subsidiary of Energy Savings; each of these shares will be exchangeable into one Energy Savings trust unit at any time at the option of the holder, for no additional consideration. The exchangeable shares will pay a monthly dividend equal to 66.7 percent of the monthly distribution paid on an Energy Savings unit. This deal structure will allow Universal shareholders to receive the consideration under the arrangement on a tax-deferred basis for Canadian income tax purposes.

Energy Savings is paying a premium of approximately 42 percent for Universal, which markets natural gas to customers in Ontario, British Columbia and Michigan and owns an ethanol production facility in Saskatchewan. Energy Savings Income Fund is a buy up to USD10.

Real Estate Trusts

H&R REIT (TSX: HR-U, OTC: HRREF) has closed a CAD425 million, 42-month construction facility for The Bow, a two-million square foot office building in Calgary, with a syndicate of lenders. This financing means H&R has fulfilled all the conditions of the private placement with Fairfax Financial Holdings, under which Fairfax has agreed to purchase at par CAD200 million of 11.5 percent debentures.

EnCana (TSX: ECA, NYSE: ECA) will lease the entire office building; H&R expects operating income in the first full year of occupancy (2012) to be CAD94.3 million. H&R REIT is a hold.

Energy Infrastructure

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) is issuing CAD200 million of senior unsecured 7.42 percent medium-term notes maturing April 29, 2014. Proceeds will be used to pay down existing bank indebtedness and for general corporate purposes.

And Standard & Poor’s has raised AltaGas’ credit rating from BBB- positive to BBB stable. S&P noted that the upgrade reflects the trust’s increased exposure to long-term contracted gas infrastructure business, prudent financial practices, and effective strategy execution. AltaGas Income Trust is a buy up to USD20.