Economic data is now not only showing positive signs as far as rates of decline slowing, but certain important indicators are showing positive month-over-month and year-over-year changes, in Canada, the US and China.

February gross domestic product (GDP) in Canada registered a 0.1 percent decline, the seventh straight month of contraction, but this number represents an improvement over the 0.7 percent shrinkage for January. As BMO Capital Markets deputy chief economist Doug Porter noted, perhaps paying homage to 1960s era folk singer/novelist Richard Fariña:

The good news is that the setbacks are poised to become much less severe in the next few quarters, with the mild February result a taste of what lies ahead. That view is bolstered by the fact that more up-to-date figures–both in Canada and the US–are signaling a less-intense decline, or even some improvement.

Following an incredibly intense three-month plunge in Canadian output from November to January, the mild February decline seems like a relief–a version of “been down so long, it feels like up” to the economy. While by no means out of the woods just yet, the deepest declines for the economy increasingly look like they are behind us.

In the US, pending sales of existing homes posted their first back-to-back gain in almost a year in March, and construction spending ended a six-month slide. According to the National Association of Realtors (NAR), the number of Americans signing contracts to buy previously owned homes jumped 3.2 percent after a 2 percent gain in February. The NAR’s index of pending home sales hit 84.6 in March, 1.1 percent above year-ago levels.

US Federal Reserve Chairman Ben Bernanke, in remarks prepared for delivery today to the Join Economic Committee of Congress, said:

[T]he recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing…

The housing market, which has been in decline for three years, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes have firmed a bit recently, though both remain at depressed levels. Although some of the boost to sales in the market for existing homes is likely coming from foreclosure-related transactions, the increased affordability of homes appears to be contributing more broadly to the steadying in the demand for housing.

Mr. Bernanke also noted that economic activity overseas is showing signs of picking up, a conclusion supported by recent data out of China. The China Federation of Logistic and Purchasing’s (CFLP) Purchasing Mangers Index (PMI) for April came in at 53.5, up from 52.4 in March. The CFLP PMI troughed in November at 38.8. The expansionary threshold for PMI is 50.

PMI has been rising since December, suggesting managers are becoming more optimistic, likely buoyed by the Chinese government’s aggressive monetary and fiscal stimulus efforts.

As we’ve often noted, and as is rather obvious, Canada’s economy is heavily dependent on conditions in the US. In recent years, however, Canada has expanded traded relationships with China and other emerging markets. That conditions seem to be stabilizing in the critical US housing market and that domestic activity in China is picking up–which means rising demand for Canada’s commodities–are encouraging signs that February’s GDP improvement has legs.

Still to be resolved, though, is the financial system. We’ll know about the condition of US banks later this week when the results of the US Treasury Dept’s “stress tests” are made public, but indicators of credit conditions point at least to continued thawing.

London Interbank Offered Rates (LIBOR), for example, have come down to record-low levels. The three-month LIBOR fell below 1 percent for the first time on Tuesday; the previous all-time low was 1 percent in June 2003.

And the three-month euro and dollar and LIBOR spreads over market overnight interest rates (OIS)–measures of credit risk–have fallen to their lowest levels since Lehman Brothers’ September 15, 2008 implosion.

The Fed’s quarterly senior loan officer survey for the first quarter revealed that 39.7 percent of banks tightened credit standards for businesses, 5.7 percent considerably and 34 percent somewhat, with the balance unchanged. A total of 64.1 percent of banks tightened standards in the fourth quarter of 2008, and 83.6 percent did so in the third quarter of 2008. No bank eased standards, and none has eased since July 2007.

As for loans to consumers–and this is where “green shoots” will become healthy trunks–65 percent of banks, up from 45 percent, said they lowered credit limits to either new or existing credit card customers.

About 55 percent of the banks, somewhat more than the previous quarter, said they raised minimum required credit scores on credit card accounts. About 20 percent of banks saw weaker demand for consumer loans, “substantially less” than in the January survey.

So those are the second derivatives and the green shoots; now for some caution.

We’re nowhere near the activity levels–manufacturing, lending, consuming–that prevailed before the credit crisis took hold. In fact, measures such as the HSBC Clog Index still indicate a financial system in peril.

The HSBC Clog Index measures the aggregate level of stress in the system based on four factors: interbank stress, measured by the TED Spread and the LIBOR-OIS Spread; financial institution default risk, measured by US financial credit-default swap spreads; mortgage agency credit spreads, measured by credit spreads for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE); and equity volatility, measured by the Chicago Board Options Exchange Volatility Index, or VIX.

We’re still well above historical norms.

Source: Bloomberg

That’s not to say the significant rallies we’ve seen in the relevant indexes–the S&P 500, the S&P/Toronto Stock Exchange Income Trust Index–aren’t cause for good cheer. It’s important to note, however, that durable rallies usually climb a wall of worry, and this time around, as Mark Hulbert notes, the rapid sentiment shift is more reminiscent of “bear market rally” than “new bull.” Mr. Hulbert’s conclusion is rooted in a rather thin set of data, but as we noted April 14:

It’s good to understand the many pieces of information that impact equity prices and the value of your portfolio. It’s also possible to get overwhelmed by data. The most important discipline, however, is emotional: Don’t get too high on the upside (i.e., don’t get addicted to your winners; take profits) and don’t double down on losers (i.e., don’t get addicted to your losers; doubling down is good money after bad).

A little equanimity goes a long way.

Recent economic data is encouraging, and the S&P 500’s rally to positive territory for 2009 is undoubtedly reason for investors to be pleased. It’s unlikely we’ll probe this bear’s lows, but we will see profit-taking. Don’t get to complacent now, and don’t get too depressed when we test to the downside.

Speaking Engagements

Eight score and one year ago, with the onset of the California Gold Rush, San Francisco earned a reputation as a prospector’s town. It’s time again to seek paths to prosperity–and to enjoy one of the most beautiful natural settings in the US, if not the world.

Venture west for the San Francisco Money Show Aug. 21-23, 2009, at the The San Francisco Marriott and discover how Roger Conrad, Elliott Gue and GS Early can help you profit in these adventurous times.

Roger will discuss utilities, Canadian income and royalty trusts as well as his new service focused on exploiting the greatest spending boom in history, New World 3.0.

Elliott will detail the new direction for Personal Finance and provide his forecast on energy markets for 2009.

GS, a constant at PF for two decades, will be there to speak on emerging tech, nanotech and defense tech

Click here or call 800-970-4355 and refer to priority code 014310 to register as a guest of MLM.

The Roundup

Three more Canadian Edge Portfolio recommendations have now reported first quarter earnings, Conservative Holdings Consumers Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF), Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) and RioCan REIT (TSX: REI-U, OTC: RIOCF). Their respective reports are summarized below.

We’ll continue to update the numbers for other Portfolio companies as they become available, and we’ll provide some context for the numbers we have to date in the May Canadian Edge, available Friday afternoon.

Consumers Waterheater Income Fund’s (TSX: CWI-U, OTC: CSUWF) reported an 11 percent increase in first quarter revenue, but heavier debt expense and other cost increases took a bite out of the bottom line.

Revenue for the period ended March 31, 2009 was CAD49.2 million, up from CAD44.2 million a year ago, but net income declined to CAD4.3 million from CAD8.6 million. Distributable cash was CAD14.7 million, down from CAD18.1 million. The payout ratio rose to 108.6 percent from 88.3 percent in the first quarter of 2008. The decrease in distributable cash was due mainly to a CAD2.3 million increase in maintenance capital expenditures, operating losses in sub-metering business and higher interest expense. Management expects these factors to impact results for the next several quarters; the payout ratio will remain elevated.

Customer attrition for the period was 0.9 percent, consistent with rates seen in the third and fourth quarters of 2008. New installations have suffered along with Canada’s new home construction market, but a 3.9 percent rate increase helped cushion the impact.

Consumers’ acquisition of smart meter operation Stratacon added CAD3.4 million to total revenue, but a March 24 ruling by the Ontario Energy Board (OEB) barring smart meter installations in single-family homes will impair growth for the next couple quarter. Consumers and smart-meter industry groups are and will continue to press the OEB for a change in its ruling. Consumers Waterheater remains a buy for those who don’t already own it up to USD10.

Pembina Pipeline Income Fund’s (TSX: PIF-U, OTC: PMBIF) operating units generated a collective CAD116.1 million of revenue (net of product purchases) in the first quarter, up from CAD106.3 million during the first three months of 2008. Net income for the period was CAD28.3 million, down from CAD32.6 million a year ago; net was negatively impacted on a comparable basis because of costs incurred this year in Pembina’s pipeline maintenance program. Total throughput was up 21.6 percent.

Low commodity prices contributed to an 8.1 percent decline in throughput for Pembina’s Conventional Pipelines business, though revenue was basically flat. Oil Sands & Heavy Oil Infrastructure saw a 47.6 percent throughput increase and a 91 percent revenue increase. Net revenue for Midstream & Marketing was off by 14.4 percent due to lower volume on Pembina’s conventional system and lower commodity prices.

Pembina recently announced the acquisition of natural gas gathering and processing assets from Talisman Energy (TSX: TLM, NYSE: TLM) for CAD300 million in cash. The Cutback Complex is a sweet gas gathering and processing operation made up of three gas plants, nine compressor stations and about 300 kilometers of gathering systems. Pembina estimates the assets will be immediately accretive to distributable cash flow and will contribute CAD40 million to net operating income annually. Still the best way to play the oil sands, Pembina Pipeline Income Fund is a buy up to USD18.

RioCan REIT (TSX: REI-U, OTC: RIOCF) reported net earnings for the three months ended March 31, 2009 of CAD30.7 million (CAD0.14 per unit) compared to CAD30.3 million (CAD0.14 per unit) a year ago. Funds from operations (FFO) were CAD70.6 million, up from CAD68.3 million. Net operating income from rental properties increased CAD4.3 million and expenses declined by CAD1.8 million; gains on properties held for resale, meanwhile, declined by CAD1.7 million and interest expense increased by CAD2.3 million.

Same property net operating income (NOI) decreased by 0.1 percent year-over-year; the net vacancies of 125,000 square feet in the first quarter of 2009 impacted same property NOI negatively by approximately CAD1.2 million. Tenant bankruptcies resulted in RioCan recording approximately CAD1.6 million in higher provisions for bad debts as compared to the same period in 2008.

Portfolio occupancy increased to 97.5 percent from 96.9 percent at December 31, 2008, and the REIT reported that 91.7 percent of all lease maturities renewed in the first quarter at an average net rent increase of approximately CAD0.58 per square foot (including anchor tenants) and approximately CAD1.37 per square foot (excluding anchor tenants).

As at March 31, 2009, RioCan’s indebtedness was 55.7 percent of aggregate assets, meaning it could incur additional indebtedness of approximately CAD643 million and still not exceed the 60 percent leverage limit. Following the conclusion of the first quarter, RioCan completed net new funding for debentures and fixed term debt of CAD141.4 million. Based on these transactions, RioCan’s indebtedness would be 56.8 percent of aggregate assets, leaving it able to take on CAD502 million in additional debt. The REIT, as a matter of policy, won’t exceed 58 percent of aggregate assets. In addition, RioCan has three revolving lines of credit with total capacity of CAD293.5 million. RioCan REIT, weathering well the economic downturn and positioned to thrive once it subsides, is a solid buy up to USD15.

Following are first quarter reporting dates for remaining Portfolio companies.

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
• 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
• 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