The collapse of Lehman Brothers made worse what was already an historically difficult period in credit markets. The demise of a venerable Wall Street institution with critical ties to global banking heavyweights set off a chain reaction, an economic crackup that now trails only the Great Depression in terms of depth and breadth. Credit–this lesson learned for many in the Hard Knocks School of Economics–is the lifeblood of the economy.

There are in fact signs that the worst is over. But the worst was unlike anything most of us have ever seen. Bank of Canada Governor Mark Carney, in a public speech last week, advised his audience, “Just as you don’t count your chickens before they are hatched, we shouldn’t presume that green shoots today guarantee a bumper crop tomorrow. It is a long, anxious time between the appearance of seedlings and the harvest.”

With just about every release of economic data, there’s ample opportunity for “on-the-other-hands,” “buts,” “howevers,” and other qualifiers.

Canada Mortgage and Housing Corp reported that Canadian housing starts rose in May on construction of both single- and multiple-unit homes, although these figures are an improvement from particularly bad April numbers.

On the other hand, the Canadian Real Estate Association said the average sale price of a home sold through the multiple listing service reached a new record of CAD319,757, up 0.4 percent from May 2008, when the previous record was set.

Statistics Canada reported June 19 that Canadian retail sales fell in April, contrary to the consensus expectation. But it was the first drop in four months; economists expected a 0.1 percent increase.

StatsCan reported June 15 that Canadian factory sales fell in April; however, the decline wasn’t as steep as economists expected. A rebound in transportation equipment sales offset declines in most other areas. Factory sales declined 0.1 percent from March to CAD41 billion. Economists had predicted factory shipments would decrease 1.7 percent.

Canada’s economy cut jobs for the sixth time in seven months and recorded the highest unemployment rate in 11 years in May, although the loss of 67,200 positions in the three months ending in May was smaller than the 232,000 jobs lost during the previous three months.

We see similar hints that the weakness is easing a bit elsewhere.

Unemployment in the US could approach 10 percent before long, but the Conference Board’s Leading Economic Index rose in May for a second consecutive month, and a regional factory gauge climbed more than forecast in June. A slowdown in factory deliveries, which signals an increase in orders, jumps in building permits and stock prices, a gain in consumer confidence and a widening spread between long- and short-term interest rates paced the advance in the leading index.

The Purchasing Managers Index (PMI) of China’s manufacturing sector stood at 53.1 percent in May, down 0.4 percentage points from April. But it was the third consecutive month the PMI was above 50 percent; a reading of above 50 suggests expansion, while one below 50 indicates contraction. PMI bottomed in November at 38.8.

Falling exports and profits, industrial over-capacity, and rising unemployment are making it harder to revive growth in China, but Chinese authorities will spur domestic demand, including purchases of home appliances and automobiles, “on all fronts.” The government will also guide “stable and healthy” growth of the property market.

A return to health for the US economy will obviously benefit Canada, the other half of the largest bilateral trade relationship in the world. And China’s efforts to stimulate its economy as well as its stockpiling of critical resources have already driven commodity prices higher, indirectly boosting parts of Canada’s economy.

These mixed bags suggest the global economy’s freefall has been stunted, simultaneously that 40 percent to the upside post-March 9 was too much, too soon. But don’t mistake short-term profit-taking for reassertion of the panic that gripped global markets from September to March. We may now be in the early stages of a correction that could equal this irrationality, though not likely the math. It makes sense to book gains where you can, not to liquidate and stuff your cash in the mattress.

Don’t get too high on the upside. Don’t get too low on the downside. Stick with solid, stress-tested businesses.

Dear Prudence

In one of a series of articles focusing on Canada’s financial sector, Andrea Hopkins of Reuters reports that some analysts suggest the very factors that protected the country from the worst of the global crisis may prevent it from enjoying the rebound as much as it could:

“Our bank is 177 years old. I’ve been here 38 years,” said Scotiabank Chief Executive Rick Waugh. “We are small ‘C’ conservative, which means we kept our leverage low and our assets well-diversified…We’ve survived a lot of things.”

TD’s Clark is perhaps the poster boy for caution, famous for pulling his bank out of structured credit after deciding he did not understand credit default swaps. He had to battle against his own bankers and scathing analysts to do it, but he got out of the market two years before it sank competitors.

“It cost me hundreds of millions of dollars to exit,” Clark recalled. “But I think that if you want to run a bank, you don’t get paid to say ‘yes,’ you get paid to say ‘no.’”

And there’s the rub. Observers wonder if the very prudence that saved the Canadian banks will prevent them from capitalizing on their place atop the global banking heap.

Hartt, who heads a government advisory committee looking into the credit crunch, points to Clark’s bet against structured credit as evidence Canada may remain more prudent than powerful.

“This is admirable stuff, but I don’t think it turns into world leadership.”

One Regulator to Rule Them All

In Canada, contrary to all other members of the G-7, each province and territory has responsibility for setting securities rules. This is about to change.

Finance Minister Jim Flaherty announced yesterday the creation of a transition team charged with unifying Canada’s multiple regulators into a single national entity.

Mr. Flaherty has asked the team to present a plan, after consultations with Canada’s 13 regional regulators, within a year. The transition would take three years once provincial authorities are on board.

Mr. Flaherty said during a press conference announcing the initiative, “Such a regime will allow quicker, more decisive action and improved coordination with domestic and international financial sector regulators.

“The Canadian Securities Regulator will also have a formal financial stability mandate.” Mr. Flaherty has also argued that a single national regulator would cut costs and improve efficiency.

Doug Hyndman, the chairman of the British Columbia Securities Commission, will head the office, while Bryan Davies, head of Ontario’s Financial Services Commission from 2002 to 2005, will be vice-chair.

Ontario, Canada’s most populous province and home to the country’s largest capital market, supports the idea. But other provinces, notably Quebec, have sought to harmonize their rules while stopping short of a centralized system. A common regulator might shift more financial power away from Montreal, Quebec’s biggest city, to Toronto, Ontario’s capital and the home to Bay Street, Canada’s equivalent to Wall Street.

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The Roundup

Oil & Gas

Advantage Energy Income Fund’s (TSX: AVN-U, NYSE: AAV) lenders have agreed to extend the company’s CAD710 million in credit facilities, which include a CAD20 million demand operating loan facility, a CAD630 million extendible revolving credit facility and a CAD60 million liquidity facility.

Applicable interest rates are based on the Canadian prime rate, the US base rate, the London Interbank Offered Rate, or bankers’ acceptance rates. The fund chooses its option, subject to certain basis point or stamping fee adjustments ranging from 1.5 percent to 6.9 percent depending on the fund’s debt-to-cash flow ratio.

The CAD60 million liquidity facility will, subject to renewal, expire on Oct. 31, 2009. The only financial covenant is a requirement for Advantage to maintain a minimum cash flow to interest expense ratio of 3.5-to-1, determined on a rolling four-quarter basis. Sell Advantage Energy Income Fund.

EnCana (TSX: ECA, NYSE: ECA) announced last week that it had hedged about 1.4 billion cubic feet of natural gas per day, about 35 percent of its production, at USD6.21 per thousand cubic feet for the 2010 gas year (Nov. 1, 2009 to Oct. 31, 2010).

An aggressive hedging program drove solid first quarter 2009 results for Canada’s largest energy company; these new hedges add to cash flow certainty and help the company meet its capital investment and dividend commitments. At USD6, EnCana expects a 20 percent rate of return on its natural gas projects. EnCana is a buy up to USD55.

Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF) closed a private offering of a total of CAD325 million of senior unsecured notes to a group of fourteen US and Canadian institutional investors.

The offering included three separate transactions, a USD225 million, 12-year note at 7.97 percent repayable anytime between 2017 and 2021; a USD40 million six-year note at 6.82 percent repayable in 2015; and a CAD40 million six-year note at 6.37 percent repayable in 2015.

Enerplus will use the proceeds to repay a portion of its outstanding bank debt and will increase the availability under our bank facility. Enerplus Resources Fund is a buy up to USD25.

Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) had expected to know by now the fate of Verenex (TSX: VNX, OTC: VRNXF), of which Vermilion owns 42.4 percent.

Back in February, CNPC International Ltd, a wholly owned subsidiary of China National Petroleum Corp, agreed to offer CAD10 per share to acquire Verenex; according to the terms of an exploration and production sharing agreement entered into by a Verenex subsidiary, its joint venture partner and the Libyan National Oil Corp, a change of control of Verenex is subject to the approval of the Libyan National Oil Corp.

The Libyan National Oil Corp had indicated publicly its intent to match the terms of the acquisition offer, but now it appears the Libyans, through the General People’s Committee, are looking to either drive the offer price lower or a CAD46.7 million consent fee higher.

Verenex has advised Vermilion that it’s reassessing its operations and expenditures in light of these continuing delays. Verenex does have sufficient cash reserves to fund anticipated programs over the next few months.

Verenex and CNPC had hoped to secure the necessary consent by Aug. 24. While Verenex continues to engage Libyan Naitonal and the General People’s Committee, meeting this target is increasingly unlikely. Vermilion Energy Trust is a buy up to USD28.

Electric Power

Primary Energy Recycling Corp (TSX: PRI-U, OTC: PYGYF) board has rejected offers to purchase the company, including one by manager of the fund Epcor Power LP (TSX: EP-U, OTC: EPCPF), submitted by an April 2009 deadline under its strategic review.

Alternatively, the board announced it will suspend distributions and that Primary Energy will be recapitalized, resulting in the conversion of the company’s outstanding 11.75 percent subordinated notes, including those held separately as well as those held as part of Primary’s enhanced income security, into newly issued common shares. The company will also seek a new amortizing senior debt facility and will look to restructure the management agreement with Epcor to give Primary greater control of the company. Hold Primary Energy Recycling Corp.

Gas/Propane

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) is issuing CAD100 million of senior unsecured medium-term notes. The notes carry a coupon rate of 6.94 percent and mature June 29, 2016.
The unsecured medium-term notes are rated BBB by Standard & Poor’s and BBB (low), positive trend by Dominion Bond Rating Service. Net proceeds will be used to pay down existing bank indebtedness and for general corporate purposes. AltaGas Income Trust is a buy up to USD20.

Parkland Income Fund (TSX: PKI-U, OTC: PKIUF) is acquiring the fuel distribution business of Columbia Fields Ltd for CAD34.5 million. Columbia specializes in home heating oil, bulk petroleum and biofuels and operates bulk fuel terminals on Vancouver Island and the Sunshine Coast region of British Columbia.

Parkland will issue class C limited partnership units valued at CAD2 million and will use cash on hand and its existing credit facilities to fund the transaction. (Class C limited partnership units receive the same monthly distributions as fund units, have voting rights and are convertible into regular fund units.)  Parkland is increasing its credit line to CAD265 million from CAD169 million.

The deal–which Parkland CEO Mike Chorlton expects to be immediately accretive to earnings–should close on or about June 16, 2009 with an effective date of June 1, 2009. Parkland Income Fund is a buy up to USD9.

Real Estate Trusts

Calloway REIT (TSX: CWT-U, OTC: CWYUF) is issuing CAD75 million of senior unsecured debentures on an agency deal basis. The debentures will carry a coupon rate of 7.95 percent and will mature on June 30, 2014. Calloway intends to use the net proceeds from the offering to pay down amounts outstanding under its current credit facilities. Dominion Bond Rating Service has rated the offering BBB with a stable trend. Calloway REIT is a buy up to USD12.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) has filed to buy back up to 10 percent of its public float (approximately 6.3 million units) at market prices during the period from June 25, 2009, to June 24, 2010. CAP REIT will cancel any units it buys under this normal course issuer bid. Canadian Apartment Properties REIT is a buy up to USD15.

Cominar REIT (TSX: CUF-U, OTC: CMLEF) is raising CAD50 million via a bought-deal financing with a syndicate of underwriters. The REIT will sell 3.3 million units at CAD15.20 per; the underwriters have an over-allotment option to purchase 493,500 additional units. Proceeds will be used to pay down debt. Cominar REIT is a buy up to USD14.

Lanesborough REIT (TSX: LRT-U, OTC: LRTEF) announced last week that “due to the weakness of 2009 rental housing operations in its major market of Fort McMurray, Alberta it is omitting its quarterly distribution for the quarter ending June 30, 2009 in the previously planned amount of $0.06 per trust unit.”

Occupancy and rental rates on Lanesborough’s 1,167 apartments in the oil sands hotbed have declined along with drilling and exploration activity in the region. Of course, Lanesborough’s ability to pay a distribution in the future depends on a renewal of oil sands activity.

Lanesborough will continue with a previously announced plan to sell CAD150 million in assets in an effort to reduce debt; two properties are under contract for sale. Hold Lanesborough REIT.

Natural Resources

SFK Pulp Fund’s (TSX: SFK-U, OTC: SFKUF) request for aid from the Quebec provincial government has been turned down. SFK has entered into agreements with AbitibiBowater and other suppliers for short-term supplies of wood fiber for its Saint-Felicien mill in Quebec. The company continues to work on long-term supply agreements.

Said CEO Pierre Gabriel Cote, “We are disappointed with the Quebec government’s response to which we had filed an application for assistance backed by a solid business plan. The situation remains difficult, given the market price for wood fiber in Quebec, the market price for northern bleached softwood kraft mill pulp, the strength of the Canadian dollar and the decline in global demand for pulp. We continue to take every necessary step to handle these challenges.” Sell SFK Pulp Fund.

Tree Island Wire Income Fund (TSX: TIL-U, OTC: TWIRF) has agreed to sell 12.5 acres of land at its Richmond, British Columbia manufacturing facility for gross proceeds of approximately CAD10.5 million. The transaction is expected to close on or about July 2, 2009. Sell Tree Island Wire Income Fund.

Energy Services

Cathedral Energy Services Income Trust (TSX: CET-U, OTC: CEUNF) will transfer its electric line, or E-line, operations to the US and discontinue providing that service to the Canadian market. E-Line collects data from wells during oil and natural gas exploration. The oilfield services company said it expects to transfer the E-line services over the next few months and will develop a third US base of operations during the third quarter.

Management believes the US market “offers increased utilization and operating margins superior to that currently being realized in Canada.” Cathedral Services also announced that it has resumed providing directional drilling services in the Marcellus Shale formation in the eastern US. The company will open a new operations center in Pennsylvania in the third-quarter. Cathedral Energy Services Income Trust is a buy up to USD5.

Trinidad Drilling (TSX: TDG, OTC: TDGCF) is moving four existing, under-utilized rigs from its Canadian operations into Mexico under long-term, take-or-pay contract. The rigs are contracted to work at a utilization rate of 100 percent for an initial term of 18 months, with a further 18-month extension option.

The rigs selected for redeployment are part of Trinidad’s existing Canadian fleet and aren’t currently under contract or working. Minor enhancements will be made to the rigs in order to prepare them for the Mexican climate and the specific work conditions they will be operating in. These enhancements are expected to total CAD8 million.

The rigs are anticipated to be operational in Mexico beginning in the third quarter of 2009, with all four rigs drilling in Mexico by the end of the year. The costs associated with relocating the rigs into Mexico and demobilization back to Canada within the first 18 months will be paid by the operator. Trinidad Drilling is a buy up to USD5.

Information Technology

Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) is raising CAD260 million in an offering of medium term notes. The offering will be made through one of its divisions, YPG Holdings, and proceeds will be will be used for corporate purposes and to repay debt, including that outstanding under its commercial paper program and CAD200 million under its term credit facility.

Yellow Pages will issue CAD260 million of 7.3 percent notes dated June 25 maturing Feb. 2, 2015. Yellow Pages Income Fund is a hold.