In its statement announcing the April number StatsCan concluded, “Declines in manufacturing, the energy sector and retail trade were the main contributors to the April decrease. Increases in the activities of real estate agents and brokers and wholesale trade mitigated the drop.”

Canada’s economy shrank 5.4 percent in the first quarter of this year, its fastest pace of contraction since 1991. That followed a 3.7 percent decline in the fourth quarter of 2008. The Bank of Canada expects the economy to contract a further 3.5 percent in the second quarter of 2009.

The US and Canada are still in recession; jobs are still being lost; factories are still closing. But the April GDP number is good news in the sense that Canada is establishing a base from which to recover in the second half of the year. Although monthly GDP numbers for May and June could actually be worse than April’s as the severe curtailment of auto production, a critical component of Canada’s manufacturing sector, continues, the worst is clearly over.

The China Factor

We’ve noted China’s growing influence on the global as well as the Canadian economy on several occasions. Many observers continue to look with wonder at oil’s rise during the last several months, perplexed by falling demand and rising inventories in the US. They’re not looking in the right direction.

In its June Commodity Price Index report, Scotia Capital, the investment banking and research arm of Bank of Nova Scotia (TSX: BNS, NYSE: BNS), concludes that China is leading the global recovery in oil and base metal demand and that the Asia-led super-cycle is gaining new momentum.

China’s dependence on foreign oil has now surpassed that of the United States: According to Scotia Capital, China relied on imports for 57 percent of its petroleum production in May, while the US imported 55 percent of its needs. China’s import dependency was less than 40 percent in 2003 and averaged 50 percent in 2008.

China is spending billions to acquire foreign oil producers and construct vast storage facilities to safeguard future needs.

Much of China’s demand has come from new car owners. In May, the government said sales increased by 54.7 percent year-over-year to 812,178 vehicles. In 2008, China sold more cars last year than the US and is forecast to see another 10 percent rise this year.

Scotia’s Commodity Price Index rose 2.2 percent in May, paced by advances in the oil and gas index, which was up 4.4 percent month-over-month. The metals and mineral index surged 4.2 percent month-over-month in May, with gains in base metals, gold, silver and uranium.

China’s imports of refined copper and iron ore were at record levels in the first four months of 2009; China’s industrial activity has re-accelerated in the past three months on the government’s aggressive infrastructure spending program. A recovery in the domestic housing market has also pushed up demand for metal-intensive appliances.

Exports of commodities and resource-based manufactured products accounted for 44.3 percent of Canada’s merchandise exports from 2003 to 2007 and 50.9 percent in 2008, of which almost a quarter was energy. China’s drive to build its strategic oil stockpile in the next several years will have profound implications for the global economy, overwhelmingly positive ones for Canada.

It’s All About Dividends

Maple Leaf Memo and the main vehicle it supports, Canadian Edge, attempts to provide a comprehensive view on investing. Macroeconomic trends, arcane financial statistics and domestic and global politics make for good reading and provide context for actionable advice.

But at the end of the day, that advice is what matters. And our basic guidance is to focus on solid businesses with healthy balance sheets that have withstood historic stress since this recession got going in late 2007. We’re interested in companies that generate sustainable dividends.

Here, courtesy of Barry Ritholtz’s The Big Picture, is third-party confirmation of the wisdom of this approach:

The raison d’être of investment or wealth management is to maintain, or hopefully improve, one’s standard of living, i.e. to earn a real return on the investment amount. This sounds easy enough if one considers that the S&P 500 Index (and its predecessors prior to 1957) delivered a nominal return of 8.7% per annum from January 1871 to June 2008. With an average inflation rate of 2.2% per annum over the period, this meant a real return of 6.5% per annum.

Yes, I can hear many readers arguing that much better returns can be generated by “playing” the market cycles, especially given the fact that the S&P 500 has made no headway since 1998. Ah, the art of market timing! Perhaps, but keep in mind that very few people have succeeded in consistently outperforming the market over any extended period of time, especially once costs and taxes are factored in.

Let’s go back to the total nominal return of 8.7% per annum and analyze its components. We already know that 2.2% per annum came from inflation. Real capital growth (i.e. price movements net of inflation) added another 1.8% per annum. Where did the rest of the return come from? Wait for it, dividends – yes, boring dividends, slavishly reinvested year after year, contributed 4.7% per annum. This represents more than half the total return over time!

Click here to see the graphic illustration of these points.

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

Oil & Gas

Avenir Diversified Income Trust (TSX: AVF-U, OTC: AVNDF) has agreed to make an offer to acquire Ridgeback Exploration, a privately held oil and gas explorer with assets concentrated in the Peace River Arch area.

The total value of the deal is approximately CAD22.5 million, including assumed debt, transaction costs and future asset retirement obligations. Avenir’s offer is subject to certain conditions, including the deposit of not less than 66.67 percent of the outstanding Ridgeback shares. The acquisition will be funded from Avenir’s available bank lines.

Ridgeback produces 660 barrels of oil equivalent per day (boe/d), comprised of 35 percent light and medium oil. As of Dec. 31, 2008, Ridgeback had proved plus probable reserves of 1.7 million barrels of oil equivalent (80 percent proved). Its assets include an undeveloped land base of 50,000 net acres and a proprietary seismic database valued at CAD1.5 million. Avenir will also enjoy use of Ridgeback’s tax pools of CAD30.3 million.

Based on the acquisition costs adjusted for land and seismic value, Avenir is paying CAD10.89 per boe on a proved plus probable basis. Management expects the transaction to be about 8 percent accretive to cash flow per unit based on current commodity prices. Avenir Diversified Income Trust is a hold.

Pengrowth Energy Trust (TSX: PGF-U, NYSE: PGH) announced that it will amend its US tax entity classification to be reclassified as a corporation for US federal income tax purposes. Pengrowth had been classified as a partnership for US federal income tax purposes, but the recent signing of the fifth protocol to the US-Canada tax treaty ratifying an increase in withholding tax from 15 to 25 percent for partnership distributions effective Jan. 1, 2010 instigated a of its US tax reporting.

US-based Pengrowth unitholders would have become subject to the 10 percentage point increase in withholding tax on their monthly distributions had Pengrowth remained a partnership. The withholding tax rate is not set to increase for unitholders of a Canadian trust treated as a corporation for US federal income tax purposes.

US unitholders will now receive a form 1099; a schedule K-1 will be issued for 2009, covering the period up to June 30, 2009.

The effect of Pengrowth’s election to be treated as a corporation for US federal income tax purposes for US unitholders will be as though such unitholders had disposed of their Pengrowth trust units for shares of Pengrowth.

The deemed disposition amount will be equivalent to the closing price of Pengrowth trust units listed on the New York Stock Exchange on the close of business on June 30, 2009. According to its statement announcing the election, it is Pengrowth’s understanding that US unitholders may recognize a gain but not a loss on their US tax returns as a result of the reclassification.

Pengrowth won’t issue a form 1099 or K-1 in respect of the deemed disposition; if you own Pengrowth, you must calculate and report the transaction on your 2009 US federal income tax return. Consult your tax advisor for a full and complete discussion of the tax implications of this transaction. Pengrowth Energy Trust is a hold.

Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) has reached agreement with Marathon Oil (NYSE: MRO) on the purchase of Marathon International Petroleum Hibernia Ltd, which holds Marathon Oil’s 18.5 percent stake in the Corrib natural gas development offshore Ireland.

The final sale price will range between USD235 million and USD400 million, subject to the timing of first commercial gas at Corrib. An initial payment of USD100 million will be made at closing, with the remaining balance due at the time of first commercial gas. Vermilion will fund the acquisition from available cash flow. Vermilion Energy Trust is a buy up to USD28.

Electric Power

Canadian Hydro Developers’ (TSX: KHD, OTC: CHDVF) 197.8 megawatt (MW) Wolfe Island wind facility commenced commercial operations on June 26, 2009. The CAD478 million facility, the second-largest of its kind in Canada, was completed on schedule.

Wolfe Island, located near Kingston, Ontario, is expected to generate approximately 594 gigawatt hours of renewable energy on an annual basis. The wind farm has a 20-year contract with the Ontario Power Authority for the purchase of electricity and renewable energy certificates. The facility will also receive USD10 per megawatt hour for 10 years under the Canadian federal government’s ecoENERGY for Renewable Power program. Fast-growing Canadian Hydro Developers is a buy up to USD4.

Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF) has inked a 40-year power purchase agreement with the British Columbia Hydro and Power Authority for the Fitzsimmons Creek Hydroelectric Project.

The Fitzsimmons Creek Project is a run-of-river hydroelectric facility currently under construction with an expected capacity of 7.5 MW. Construction began in July 2008 with a budget of CAD33.2 million; the project, on time and on budget, is projected to become operational before the end of 2010. Innergex Power Income Fund is a buy up to USD12.

Real Estate Trusts

Artis REIT (TSX: AX-U, OTC: ARESF) is raising CAD40 million through a bought-deal convertible debenture offering. The Series E Debentures will bear interest at a rate of 7.5 percent per year and will be payable semi-annually on June 30 and December 31 until maturity on June 30, 2014.

The debentures will be convertible at the option of the holder into Artis units at any time prior to maturity at a conversion price equal to CAD9.30 per unit. The debentures aren’t redeemable by Artis until after June 30, 2012. Artis REIT is a buy up to USD10.

Natural Resources

SFK Pulp Fund (TSX: SFK-U, OTC: SFKUF), as of June 30, will be in breach of the interest coverage ratio included in its credit agreement. SFK Pulp is required to maintain an interest coverage ratio of 2-to-1; the fund is attempting to negotiate an amendment and is “reasonably confident” that it will reach a satisfactory agreement with its lenders.

SFK Pulp also announced that it will record a USD2.8 million provision in its quarterly results for the period ending June 30, 2009, as a result of Fraser Papers’ (TSX: FPS, OTC: FRPPF) recent bankruptcy filing. Sell SFK Pulp Fund.

Information Technology

Research in Motion (TSX: RIM, NSDQ: RIMM) is negotiating with China Telecom (NYSE: CHA) to offer BlackBerry devices in China. The carrier is working on plans to expand its handset selection for its next-generation mobile network.

China Mobile (NYSE: CHL) has been offering BlackBerry service in China since 2006, but it hasn’t offered any BlackBerry handsets for individual consumers. Research in Motion is also negotiating with China Mobile to offer these devices.

According to The Wall Street Journal, China Telecom CEO Wang Xiaochu said that the company plans to launch 30 new third-generation mobile phones between June and August 2009. Research in Motion is a buy up to USD70.

Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF), through Yellow Pages Group, announced another medium term note offering.

Pursuant to this offering, Yellow Pages will issue CAD90 million of 6.85 percent Series 8 Notes dated Jul. 3, 2009; the notes will mature Dec. 3, 2013. Net proceeds will be used for general corporate purposes, to repay indebtedness outstanding under Yellow Pages’ commercial paper program and to repay an amount of CAD50 million under its term credit facility. Yellow Pages Income Fund is a hold.

Health Care

Extendicare REIT’s (TSX: EXE-U, OTC: EXTEF) US and Canadian subsidiaries have amended their credit facilities.

The trust’s US unit, Extendicare Health Services, has reduced its credit facility to USD70 million from USD120 million, “in line with anticipated near-term capital requirements.” The facility was due in October 2009 for a two-year term to June 2011, with an option to extend it for a third year upon satisfaction of certain conditions. At Extendicare Health Services’ option, the interest rate is either the euro dollar rate, with a floor set at 2 percent, plus a margin from 4 percent to 4.75 percent or the US prime rate plus a margin from 3 percent to 3.75 percent.

Extendicare’s Canadian subsidiary, Extendicare Inc, also amended its credit facility to issue a US dollar letter of credit facility of up to USD22.2 million, in addition to the existing CAD70 available under the facility. Hold Extendicare REIT.