Canada’s official data agency reported Wednesday that the pace of decline in its broad measure of economic activity slowed in May to 0.1 percent, the smallest in a series of nine consecutive declines. And the shift from a 0.9 percent drop in April is the largest month-to-month change in either direction since December 1965.

The leading index aggregates 10 indicators–housing, employment, the stock market, money supply, the US Conference Board’s Leading Economic Index, average workweek hours, new durable goods orders, shipments and inventories of finished goods, furniture and appliance sales, and other durable goods sales–that together represent all of the major categories of gross domestic product. The composite leading indicator is used to forecast economic conditions in the months ahead. Stock markets, for example, usually begin to decline before the economy declines and usually begin to improve before the economy starts to recover.

The May change reflects a 2.6 percent increase in the unsmoothed index (meaning the data hasn’t been averaged or otherwise manipulated so the curves on a graph, for example, are smooth and free of irregularities), the largest such gain in 30 years. This follows an initial 0.8 percent unsmoothed upturn in April. Eight of the 10 unsmoothed components rose in May, led by double-digit increases for housing, the stock market and orders for durable goods.

Source: Statistics Canada, Bloomberg

The housing component of the composite index, which includes both starts and sales, moved from a decline in April to a 1 percent gain in May as existing home sales continued to recover. The Canadian housing market has been written off by many observers as a delayed version of the US market. But in May existing home sales rose 8 percent on a month-over-month basis, bringing the total rebound in sales since January to 43 percent. Home prices are now up 0.4 percent year-over-year. Low borrowing costs, more affordable prices in many markets and some pent-up demand after the post-Lehman Brothers credit/sales freeze have provided some heavy duty support for housing. This could be an early sign that the correction in Canadian housing may be nearing an end.

The stock market component–the S&P/Toronto Stock Exchange Composite Index–rose by 3.2 percent on a rebound in commodity prices and a rally for the financials services sector.

While there were few positive advances in May, that the composite indicator showed such a dramatic improvement (although only dramatic slowing) is encouraging.

Although the housing index was among those factors driving the big turn, consumers remain cautious; furniture and appliance sales declined, as did other durable goods. And manufacturing continues to slide. “Despite steep cuts in output, shipments continued to fall faster than inventories of finished goods,” Statistics Canada noted. “New orders remained weak, especially for exports and capital goods.

StatsCan’s leading indicator is well correlated to gross domestic product for the same month, suggesting the “official recession” Canada entered into in the three months ended March 31 could already be nearing an end. StatsCan reported that GDP contracted by 1.4 percent in the first quarter, the worst result since 1991. This, though it actually bested consensus expectations of a 1.7 percent decline, means Canada has entered into the conventional media’s definition of recession as it’s the second consecutive quarterly GDP decline.

Canada is still among the strongest, if not the strongest, of the world’s developed economies. The government hasn’t had to bail out its banks, it has a strong balance sheet, and the country is blessed with significant resources to export once the global economy returns to more normal growth. These factors make “The Canada Trade” highly attractive from a US investor’s perspective.

In its early June GDP report, StatsCan placed much of the blame for the torpor on “lower spending in Canada and the United States, particular business investment in plant and equipment.” This led to a sharp decline in Canada’s exports and imports. StatsCan added that real GDP contracted at an annualized rate of 5.4 percent in the first quarter, compared with a 5.7 percent decline in the US economy. The Bank of Canada (BoC) had forecast a 7.3 percent annualized rate.

The market actually reacted positively to the Monday announcement, seeing the expectations-beating GDP number as yet another “green shoot.” It certainly is another instance of “better but not necessarily good.”

Another positive note for Canada in today’s leading economic indicator story: The US leading indicator held steady after more than a year of consistent declines.

Meet the New Boss, Same as the Old Boss

After two hastily arranged meetings on Tuesday, Prime Minister Stephen Harper and Liberal Party Leader Michael Ignatieff seem to have put a lid on a simmering conflict that, logically or not, threatened to boil over into a summer election nobody wants.

Doing his best Stephane Dion, Mr. Ignatieff demanded to see the minority Conservative government’s plan to reform Employment Insurance, specifics about how infrastructure funds allocated in Canada’s stimulus package have been spent and will be spent over the next several months, and a plan to return to fiscal balance. Mr. Dion’s successor as Liberal leader hasn’t made any specific EI recommendations, other than to tacitly endorse the Bloc Quebecois’ and the New Democrats’ non-starter proposal to make released workers eligible for benefits if they’ve put in 365 hours; this is a budget buster that Mr. Harper simply won’t consider. And toppling the government at this point would only delay efforts to help Canadians and the economy.

According to recent polling the Liberals have overtaken the Conservatives in terms of national support, but not by a margin that suggests they can win anything more than a weak minority government. Fundraising under Mr. Ignatieff has improved, but the party still lags the Conservatives as far as money in the bank and overall campaign preparedness are concerned. And Canadians don’t want a fourth federal election in five years.

Mr. Ignatieff has his own strengths, reflected in his party’s rising fortunes. This makes his mimicry of Mr. Dion’s idle threats and prompt back-downs particularly quizzical.

A former academic prone to dramatic, illogical, and fallow threats to bring down what is already, since June 2008, the longest-standing minority government in Canada since 1867: This would be Mr. Ignatieff’s Dion-ysian road to ruin.

In the words of Canadian political observer Tom Clark, host of CTV Newsnet’s Power Play, “I think Michael Ignatieff took a big stick and drew a line in the sand. And then he took that stick and erased parts of the line big enough that you could drive a prime-ministerial limousine through. Look, there’s not going to be an election over this.”

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The Roundup

Oil & Gas

Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV) announced Monday that it has reached agreements to sell CAD252.6 million worth of assets and that it will raise CAD102 million through a bought-deal plan to issue new units. The moves are being made to repay debt and fund development of Advantage’s Montney Shale natural gas assets.

The oil and gas assets will be sold in two packages. A CAD176 million package currently produces the equivalent 5,900 barrels per day, about 82 percent natural gas. A second package priced at CAD76.6 million produces 2,200 barrels per day, 56 percent gas.

Advantage is also selling 17 million units at CAD6 per to a syndicate of underwriters. If an over-allotment option is exercised, the fund will raise CAD117.3 million.

Proceeds of the asset sale and unit issuance, about CAD348 million, will be used to pay down the fund’s credit facility; Advantage will then draw on the facility to fund its Montney activity. Sell Advantage Energy Income Fund.

Enterra Energy Trust’s (TSX: ENT-U, NYSE: ENT) credit facility has been renewed until June 25, 2010. The interest rate on the renewed facility is the London Interbank Offered Rate (LIBOR) plus 3 percent. The estimated rate as of June 2009 is 3.7 percent.

A second-lien facility, which had been in place but was never drawn, has been terminated at Enterra’s request. Sell Enterra Energy Trust.

Harvest Energy Trust (TSX: HTE-U, NYSE: HTE), through a subsidiary, has agreed to acquire Pegasus Oil & Gas (TSX: POG-A, OTC: PGSUF), which operates two Central Alberta properties with combined production of 600 barrels of oil equivalent per day.

Pegasus A share holders will receive 0.015 Harvest units for each share owned, B share holders 0.15 Harvest units per share owned. The total value of the transaction, including Pegasus debt assumed by Harvest, is CAD18.7 million. Harvest is paying approximately CAD31,100 per flowing barrel of oil equivalent. Hold Harvest Energy Trust.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) CEO Bill Andrew told investors last week that his company would convert to a corporation sometime in 2012.

“Prior to the end of 2012, we will convert. You will probably see us convert some time between the end of 2011 and the end of 2012,” said Mr. Andrew. Because of its existing tax credits and tax pools Penn West will be able to maintain its current distribution level following imposition of the entity-level tax on trusts.

The Canadian government has designed the Tax Fairness Act such that trusts are heavily incentivized to convert before 2013. Penn West Energy Trust is a buy up to USD15.

Electric Power

Algonquin Power Income Fund (TSX: APF-U, OTC: ) announced last week a plan to convert into a corporation, Algonquin Power Inc.

According to the plan of arrangement, unitholders will receive common shares of Algonquin Power Inc. in exchange for their trust units of the fund on a one-for-one basis. Upon completion of the transaction, the shares of Algonquin Power Inc will be listed on the Toronto Stock Exchange. Unitholders will continue to receive the same monthly dividend on their Algonquin Power common shares as they would have received as distributions on their units in the fund, CAD0.24 per unit annually. The number of common shares of Algonquin Power outstanding immediately after completion of the transaction will be exactly the same as the number of fund trust units outstanding immediately before the transactions.

As a result of the conversion transaction, Algonquin Power Inc will have additional tax benefits (credits, pools) of approximately CAD192 million in addition to the existing tax attributes of the fund. Algonquin Power Income Fund is a buy up to USD3.

TransAlta (TSX: TA, NYSE: TAC) plans to design, build and operate a 72 megawatt (MW) wind power plant in southern Alberta at a cost of CAD135 million.

Construction is planned to commence in the first quarter of 2010, and commercial operation is expected to begin by early 2011.

The Ardenville wind farm will incorporate 23 new three-megawatt wind turbines and an existing operating 3 MW machine. Once the full 72 MW are in production, the wind farm will provide an annual average of 228,000 megawatt hours per year, enough electricity to meet the needs of approximately 28,000 homes. Hold TransAlta.

Natural Resources

Tree Island Wire Income Fund (TSX: TIL-U, OTC: TWIRF) has received official notification from its lenders about its non-compliance for the April 2009 with its earnings before interest, taxes, depreciation and amortization covenants under its credit agreement. The lenders haven’t yet exercised any default-related rights.
According to its statement, Tree Island “is actively seeking to renegotiate the terms of the credit facilities with its lenders, however, there is no assurance that such attempts will be successful or that any amendment to the credit facilities will be agreed upon. A failure to obtain waivers, modifications or concessions could result in the lenders pursuing the remedies provided for under the credit facilities. Accordingly, the fund is also reviewing alternative options for raising capital.” Sell Tree Island Wire Income Fund.

Financial Services

CI Financial (TSX: CIX, OTC: CIXUF) announced a plan for 16 proposed mergers among its funds that includes the elimination of two smallest retail brand names. Subject to approval of investors in 13 of the merging funds and two of the continuing funds at meetings set for Aug. 10, the mergers are to be completed in mid-August. Hold CI Financial.

Home Equity Income Fund (TSX: HEQ-U, OTC: HEITF) will convert to a corporation, Homeq Corp, on June 30. Each existing trust unit will be exchanged for one common share of Homeq.

The conversion is part of Home Equity’s previously announced plan to continue its operating subsidiary, Canadian Home Income Plan Corp, as a bank called HomEquity Bank.

The income fund will pay a final cash distribution of CAD0.12 per unit on June 29. The income fund had been paying CAD0.06 per unit per month; Homeq will pay a quarterly dividend of CAD0.07 per share. Sell Home Equity Income Fund.

Newport Partners Income Fund (TSX: NPF-U, OTC: NWPIF) announced last week that it is “unlikely to be in a position to make the interest payment due on June 30, 2009 on its Subordinated Unsecured Convertible Debentures.”

The fund is currently in default under its senior secured credit facility and is contractually prohibited from paying interest on the debentures while it’s in default under the facility, except with the lenders’ consent. Newport Partners Income Fund is a buy up to USD0.50.

North West Company Fund (TSX: NWF-U, OTC: NWTUF) reported a fiscal first quarter profit of CAD16.1 million, up from CAD15.2 million a year ago. Although overall sales rose 9 percent to CAD345.6 million from CAD315.5 million in 2008, same-store sales declined 0.4 percent. Food sales were generally robust, offsetting weaker general merchandise sales, particularly in big-ticket, durable goods like furniture and appliances.

North West operates 225 stores under the trading names Northern, NorthMart, Giant Tiger, AC Value Center and Cost-U-Less. North West Company Fund is a buy up to USD16.

Transports

Aeroplan Group (TSX: AER, OTC: GAPFF) renewed its CAD650 million credit facilities, CAD500 million of which is drawn and CAD150 million is committed and available. The new secured credit facilities consist of a bridge loan of CAD100 million that matures June 19, 2010, as well as a term facility of CAD300 million and a revolving facility of CAD250 million that both mature on April 23, 2012.

Interest rates on the renewed facilities have been amended to the Canadian prime rate plus 2.5 percent and Bankers’ Acceptance and LIBOR rates plus 3.75 percent. The applicable debt service ratio covenant has also been amended to a maximum of 2-to-1. Sell Aeroplan Group.