Despite a slight pullback over the last month, the Canadian Edge Portfolio is up more than 20 percent for the year, with many holdings doubling and more off the March 9 lows.

What’s changed? First, the credit crunch that paralyzed the markets in the second half of 2008 has eased dramatically. Trusts and high yielding corporations across the board are now raising capital at a blistering pace, both equity and debt.

Even the weakest credits like Enterra Energy Trust (TSX: ENT-U, NYSE: ENT) have been able to roll over debt on terms that offer them at least a fighting chance of making it. Meanwhile, stronger fare like High Yield of the Month Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) are borrowing at some of the lowest rates in their history.

Second, Asian economies’ growth appears to have bottomed out. That’s particularly important for Canada, as countries like China have emerged as major markets for the country’s natural resource exports. And it’s why prices of many commodities have steadied and begun to rise, despite the weakness of what has historically been the major market for them, the US.

At the height of the financial panic, oil prices fell more than 70 percent below their summer 2008 highs. More than any other currency except perhaps the Australian dollar, the Canadian dollar moves in tandem with the price of oil. As a result, oil’s plunge took the Canadian dollar down to a multi-year low in the neighborhood of 75 US cents by early March.

Since then, however, oil has rebounded sharply and the Canadian dollar along with it. That’s had the salutary effect of pushing up the US dollar value of Canadian securities and the distributions they pay, providing US investors with an effective dividend increase and reversing the effective dividend cut, caused by the falling loonie last year.

As we’ve tracked in Canadian Edge’s weekly companion Maple Leaf Memo, all is far from perfect with the Canadian economy. Last month, the Bank of Canada warned that the country’s financial system remains “under significant stress” from the global recession, stating banks could see a “significant increase in losses” from loans should Canadian unemployment continue to rise.

The industrial sector of the eastern provinces is still reeling from the demise of the US auto industry, long a consistent market for a range of companies housed north of the border. The country’s non-resource exports are also potentially threatened by the recovery of the Canadian dollar, which makes them less competitive relative to US rivals. So is the historically US-dependent tourism industry, as a higher loonie makes a Canadian vacation less attractive for consumers already struggling in tough times.

The risk a surging currency poses to so many sectors of the Canadian economy has raised the risk that Canada’s central bank may intervene to hold down its value. That’s likely one reason the loonie seemed to at least temporarily run out of gas last month after hitting a high of around 92 US cents. And such worries may keep a lid on its value in the near, despite its strong link to oil prices.

Finally, there’s the price of natural gas, which has remained stubbornly weak despite a sharp rise in the price of oil and natural gas liquids. Investors remain focused on US stockpiles of the fuel, which are approaching all-time records. Demand for gas to generate electricity and run industrial facilities remains low across North America, while sharp cuts in output have yet to have a significant impact on supply.

The latter is no doubt in large part due to the fact that this is a “shoulder” season for gas, between the peak demand times of winter and summer. But until there’s a clear sign that supplies have tightened and demand is stabilizing, there won’t be a recovery for natural gas prices, which are now approaching a historically wide price spread with oil at a current level of more than 18-to-1.

Historically, spreads that wide have eventually narrowed with a vengeance. In fact, we saw it happen in the first half of 2008, for example, as gas prices nearly tripled off late 2007 lows, far outpacing even oil’s historic rise.

Unlike oil, however, gas is a regional market, not a global one. And while the fuel is two and three times more expensive in supply stretched Asia and Europe, there’s a huge surplus here, and no real way to export it to those other markets. That’s because all of the operating liquefied natural gas facilities in the US are designed to import, rather than export.

Eventually, we’ll see the capability to reverse the process. In fact, US gas shale reserves have the capability to make this country the Saudi Arabia of natural gas, and producers of all stripes phenomenally more prosperous than they are today. Getting there, however, is going to require a huge investment in liquefied natural gas (LNG) export infrastructure, and we’re not there yet.

That means natural gas and gas producers will sink or swim depending on what happens in this market. It’s hard to imagine gas prices sinking much below current levels, which are well below production and development costs for the shale gas that’s the bulk of future supply.

EnCana Corp’s (TSX: ECA, NYSE: ECA) move last month to shut in an additional 200 million cubic feet plus of daily natural gas output is a clear sign that even the larger players are pulling back. Many smaller producers are already out of the game and are increasingly likely to be joined by others who either sell out to someone else at a fire-sale price or else file Chapter 11. Drilling rig counts are already moving toward historic lows.

But again, this market is all focused on demand, which in turn is ruled by recession worries. And as long as that’s the case–and until we do get real LNG exporting capability in North America–gas prices are going to remain weak. And that means producers of gas will remain weak, as well as all those companies in related businesses.

Uncertain Times

For us investors, it all adds up to an overall environment that’s still highly uncertain. Sooner or later, the good things happening now are going to overwhelm the bad ones. Until then, however, even our favorite Canadian trusts and high-yielding corporations are likely to get bounced around by shifting sentiment every time the global economy seems to take a step back.

The good news is we still have our ace in the hole: We own strong businesses that have proven their value through some of the toughest conditions in 80 years.

This month, I’ve kept Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) and Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) as holds. The primary reason is I still have questions about their underlying business strength that are only going to be answered with the passage of time.

In Consumers’ case, I have increasing confidence that something will be worked out with the Ontario government that will allow its Stratacon unit to continue growing its sub-metering business. The problem per se seems to be that some companies in the business–acting with apartment landlords who cover tenants’ energy costs–were installing sub-meters without first gaining tenants’ permission. That in turn provoked complaints, which prompted regulators to act.

On the other hand, there’s still tremendous incentive to install these smart meters. From regulators’ point of view, the technology is a major step forward for efforts to save energy, and therefore reduce emissions of carbon dioxide as well.

From apartment owners’ standpoint, it’s a way to control one of the major costs of doing business–i.e., paying the winter utility bill of renters. Canadian Apartment Properties REIT management, for example, made statements supportive of sub metering in a recent conference call.

Ironically, renters are the only players not directly incentivized to save energy and therefore allow sub-metering. But here too there’s room for compromise, as landlords can offer better rates for those who agree to help conserve.

Long experience has taught me that nothing can be taken for granted where regulators are concerned. That’s basically why I’ve sticking with a hold rating on Consumers’ Waterheater until we get more details, despite a price that’s reflecting a steep dividend cut that may or may not occur.

As I’ve pointed out, Consumers’ Waterheater has already shielded itself financially from a worst-case in the regulatory arena. Rather, what’s at stake is its ability to outgrow 2011 taxation enough to be able to hold its distribution at the current level. That’s what management has stated its intentions are. But the ability to follow through likely depends on how fast Stratacon will be able to grow.

If Stratacon comes up short, we’re almost surely going to see a distribution cut, just as we saw with the Yellow Pages Income Fund dividend announced in May. Yellow’s management too had stated many times that it intended to convert to a corporation in late 2010 without cutting its distribution, simply by growing into a large enough cash cushion to absorb the new taxes.

The recession’s impact on its “vertical media business” didn’t take down the company. But it did force some recalculating about just how much growth Yellow could really count on in the current environment from these business lines, which it had been counting on to provide the additional growth. As a result, management reasoned that it was best off trimming the distribution to a level that would absorb the 2011 tax and using the surplus cash until then to bring down debt.

I hate dividend cuts. But if management’s forecast proves on the mark, Yellow should have no problem covering the current rate of 6.67 cents a month–a rate of 15 percent on the current share price–well past 2011. In fact, as the economy improves and debt is brought lower, the distribution rate is likely to rise again going forward, and particularly once the conversion to a corporation is made.

What we don’t really know, however, is how much the recession is affecting Yellow’s bottom line now. The directory business appeared to be very strong in the first quarter, in large part thanks to the company’s rapid expansion on the Internet. This is one area that vastly differentiates Yellow from the directory businesses in the US.

The question, though, is whether that remained the case in the second quarter. I’m also concerned about just much worse things might be getting in the vertical media operation, given the fact that much of it revolves around consumer-dependent auto and real estate industry advertising. And this is only going to be answered when we see Yellow’s second quarter numbers, which are projected for release on Aug. 6.

The good news about Yellow is it’s apparently having no problems raising capital to refinance and/or pay off debt. A CAD260 million offering of five-year bonds came off with a modest interest rate of 7.3 percent, thanks to solid investment grade ratings. Most of that cash will go to repay CAD200 million outstanding under a credit facility. The company has also been actively repurchasing some of its higher cost preferred shares, even as its revs up spending on its online directory offerings.

In my view, that’s strong cause for optimism. But again, until we see the hard numbers, Yellow Pages Income Fund is going to rate a hold, just as Consumers’ Waterheater Income Fund is.

Portfolio Watch

As for the rest of the Canadian Edge Portfolio, everything is pretty much a buy for those who don’t already own them. In fact, I’m only changing my buy target on one of them, TransForce (TSX: TFI, OTC: TFIFF), raising it to USD6.

As a fast-growing provider of transport services, TransForce has been directly in the path of the market and economic storms hitting over the past two years. Times are likely to stay tough for a while. For example, while the company is able to pass along rising gasoline prices directly to customers, higher transport prices overall are a deterrent to shipping, which can hurt sales.

The company, however, is sticking to its long-term objectives of expanding its business with acquisitions of smaller niche players as it consolidates what has historically been a fragmented industry. And the current environment continues to provide opportunities to advance its objectives.

The dividend yield of nearly 7 percent is well protected with cash flow and is the highest in the transport business, with no 2011 risk since TransForce has already converted to a corporation. TransForce is a buy up to USD6.

Below is a brief roundup of the rest of the Portfolio picks. Canadian Apartment and Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) are the July High Yield of the Month entries.

Ag Growth International (TSX: AFN, OTC: AGGZF) and Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) are highlighted in the Feature article as non-energy commodity plays.

As a general note, my strategy is to build a portfolio of at least 10 to 12 trusts in increments over time. One way to do this would be to first allocate how much money you wanted to invest in Canada, then resolve to invest it in three increments in a basket of trusts: tThe first immediately, the second in a month or so and the third a month after that. Another option would be to simply buy the High Yield of the Month selections as they appear each issue, as they represent what I believe to be the best buys of any month.

However you do it, the goal is to have a rough balance over a range of holdings. Conservative yield-seekers will want to focus more on the Conservative Holdings, while those who want to share in the growing value of Canada’s natural resource bounty will want to train their fire on the Aggressive Holdings.

Conservative Holdings

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) pulled off a successful CAD100 million debt offering last month for seven-year paper at a rate of 6.94 percent. That’s a spread in the 350 basis point range to US Treasury debt, a solid affirmation of the energy infrastructure company’s many strengths.

The stock’s still cheap, yielding over 13 percent and at barely book value. There’s little recession risk, and it could profit from higher commodity prices as well. Buy AltaGas Income Trust up to USD20.

Artis REIT’s (TSX: AX-U, OTC: ARESF) share price is something of a barometer for investor hope and fears about energy markets. But as earnings continue to demonstrate, its 13 percent plus yield is actually quite insulated from the troubles in the oil patch where its properties mostly are.

Not as high-percentage as our other REITs but with greater growth potential, Artis REIT is a buy up to USD10.

Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) has lost some Bay Street support in recent months as its share price has risen. But its nearly 13 percent distribution is rock solid, and its recent biomass investment gives the power company a lot of potential upside. Buy Atlantic Power Corp up to USD10.

Bell Aliant Regional Communications Income Fund’s (TSX: BA-U, OTC: BLIAF) sale of its stake in X-wave in the US will provide cash to meet capital needs and hold down debt.

The company’s rural phone franchise looks solid as ever, as is its 11 percent plus yield. Buy Bell Aliant Regional Communications Income Fund up to USD25.

Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) is ideally positioned to grab contracts being handed out by the Canadian government as stimulus.

The shares have pulled off the level where there had been some insider selling, yielding another buying opportunity for this engineering and construction powerhouse yielding over 7 percent. Buy Bird Construction Income Fund up to USD30.

CML Healthcare Income Fund (TSX: CLC-U, OTC: CMLIF) maintains unanimous bullish sentiment on Bay Street, as it expands its medical testing franchise throughout Canada as well as the US, where it’s very well positioned for the first installment of health care reform.

Yielding over 8 percent, CML Healthcare Income Fund is a buy up to USD13.

Colabor Income Fund (TSX: CLB-U, OTC: COLAF) has been tough for some readers to buy, while some may be put off by the fact its website’s principal language is French. But steady volume under the COLAF over-the-counter symbol is a pretty clear indication that others are getting in to this exceptionally well-placed distributor of food and other perishables.

Yielding nearly 11 percent, Colabor Income Fund is my preferred food services play and a buy up to USD10.

Great Lakes Hydro Income Fund (TSX: GLH-U, GLHIF) isn’t part of the sale of parent Brookfield Asset Management’s (TSX: BAM/A, NYSE: BAM) Ontario electricity distribution assets.

Rather, it’s likely to continue benefiting from asset pass downs from the parent as it grows its base of cash generating renewable energy production. Buy Great Lakes Hydro Income Fund, yielding almost 8 percent, up to USD16.

Innergex Power Income Fund (TSX: IEF-U, INRGF) had no real news to report last month but also appears headed for another solid quarter producing carbon free power. Yielding nearly 10 percent, Innergex Power Income Fund is a buy up to USD12.

Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) is still generating solid cash flows from its processing assets, as the production areas around it continue to defy the depressionary conditions in much of Canada’s energy patch.

We may or may not see another boost in the nearly 10 percent dividend before 2011, but the current payout is solid. Keyera Facilities Income Fund is a buy up to USD20.

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) may be gearing up to make another asset purchase, after amassing a CAD200 million credit facility–CAD85 million of which is now drawn–over the past six weeks.

If true, we could be looking at an increase in the distribution, which was last raised in early 2008 following the Clean Power Income Fund acquisition. If not, however, we still have a yield of 15 percent that management has affirmed for the rest of the year at least.

Buy Macquarie Power & Infrastructure Income Fund, now trading at barely book value, up to USD8.

Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF) has completed the acquisition of Talisman Energy’s (TSX: TLM, NYSE: TLM) Cutbank midstream gas gathering and processing facilities for CAD300 million. The new assets will generate fee income with no direct commodity price exposure and operating costs flowing through to big energy company customers, a hallmark of all of Pembina’s assets.

In the past, major asset expansions at Pembina have triggered dividend boosts. This time, management appears to be shepherding the cash to be able to maintain the current 10 percent plus rate after 2011 taxation kicks in. Either way, it works out well for Pembina shareholders. Buy Pembina Pipeline Income Fund up to USD16.

RioCan REIT’s (TSX: REI-U, OTC: RIOCF) offering of 10.3 million trust units generated some CAD150 million of new equity capital. After using much of that to slash debt, the REIT’s debt-to-asset ratio will fall under 56 percent, well below its 60 percent limit.

It will also have CAD250 million plus in cash on hand and another CAD193 million in available credit, putting management in prime position to make another big acquisition. In the meantime, the 9 percent plus yield has been consistently increased. Buy RioCan REIT if you haven’t already up to USD15.

Fund Alternatives

EnerVest Diversified Income Trust (TSX: EIT-U, OTC: ENDTF) is up slightly from my initial recommendation, as its once-huge discount to net asset value continues to narrow. That’s welcome news, but ultimately the fund’s fate will depend on what happens to Canadian markets.

I expect good things and rate EnerVest Diversified Income Trust–yielding more than 16 percent–a buy up to USD12.

Select 50 S-1 Income Trust has now merged into Sentry Select Canadian Income Fund. My advice is still to cash out at the first opportunity, which looks like it’s going to be automatic. For more information, call the fund at 888-730-4623.

Series S-1 Income Fund (TSX: SRC-U, OTC: SRIUF) will benefit from a merger of other closed end funds in the Citadel Group family, by increased economics of scale. The fund sells at a -9.9 percent discount to net asset value, which should close if the deal is approved in a June 29 vote. Buy Series S-1 Income Fund up to USD10.

Aggressive Holdings

ARC Energy Trust (TSX: AET-U, OTC: AETUF) has made it quite clear by this time that it will cut its distribution rather than ratchet up debt or abandon plans to develop its promising Montney Shale development.

Higher oil prices have definitely helped stabilize cash flows, as the fund is about equally balanced among fuels. But continued weakness in gas is a concern, and no one should own ARC without being willing to hold though another dividend cut in the near term to realize what should be huge returns over the next 12 to 18 months. Buy ARC Energy Trust up to USD17.

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) is heavily focused on natural gas and therefore faces the risk of sharply lower realized selling prices as long as gas prices remain this low.

The good news is management has played it very conservative regarding debt and its distribution and continues to expand output, most recently by closing the purchase of Intrepid Energy and its 2,400 barrels of oil equivalent per day output and 75,000 acres of undeveloped land.

Again, gas prices will call the tune here, but I’m looking for new highs eventually beyond the old one of USD17.47. Buy Daylight Resources Trust for big gains and cash flow up to USD11.

Enerplus Resources (TSX: ERF-U, NYSE: ERF) has also been very successful raising capital, issuing CAD325 million in long-term debt at competitive spreads.

The cash increases flexibility for paying off existing debt and maintaining stability for this the oldest of the Canadian energy producer trusts. The shares have surged since early March but I see a lot more ahead. Buy Enerplus Resources up to USD25.

Newalta Corp (TSX: NAL, OTC: NWLTF) still looks well-placed to ride out the extreme weakness among its major customers in heavy industry and the energy patch, even as it boosts market share in the heavy waste recycling business.

That’s why I’ve continued to own it through some very hard times, and it’s why I look for the recovery launched in March to continue. Buy Newalta Corp up to USD5.

Paramount Energy Trust’s (TSX: PMT-U, OTC: PMGYF) aggressive hedging is not only keeping its head above water with gas prices at very low levels, it’s also providing support for acquisitions of distressed properties, such as the ongoing purchase of Profound Energy (TSX: PFX, OTC: PFXYF).

In my view, there’s still risk of a dividend cut if gas prices stay low long enough. But this well-managed outfit is definitely well-positioned for at least a triple when gas finally gets off the mat. Buy Paramount Energy Trust up to USD5.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) still has a credibility problem on Bay Street and Wall Street, judging from the 10 hold recommendations, three sells and zero buys. And unfortunately, the only way the trust will overcome that is by putting up strong numbers.

The good news is the trust is still executing its strategy, and the shares are actually up for the year, more a testament to how cheap they were in early 2009 than anything else.

Again, it’s all about energy prices. But selling for barely half net asset value, Penn West Energy Trust remains a buy up to USD15.

Peyto Energy Trust’s (TSX: PEY-U, OTC: PEYUF) very low costs mean it’s certainly capable of producing natural gas profitably long after most competitors have packed it in. That’s a big reason why it was able to successfully offer new equity last month to pay off debt.

As is the case with all gas-focused producer trusts, the 15 percent-plus dividend can’t be considered 100 percent safe with gas under USD4 per million British thermal units. But if you want a bet on gas, this is about as high-percentage as it gets, and upside is no less than a double over the next 12 to 18 months, or a return to mid-2008 highs. Peyto Energy Trust is a buy up to USD12.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) does have one lingering worry in a dispute with Quicksilver Resources (NYSE: KWK) over its former BreitBurn Energy Partners LP (NSDQ: BBEP) unit. But of all my energy producer trusts, its core business is easily the best protected against continued weakness in natural gas prices, by virtue of its gas liquids midstream assets.

Yielding over 13 percent and selling for a fraction of net asset value of its oil and gas production assets alone, Provident Energy Trust is a buy up to USD6.

Trinidad Drilling (TSX: TDG, OTC: TDGCF) was not only able to raise CAD140 million for growth by issuing equity last month, it also improved profitability by moving four currently unused rigs to Mexico, where they’ll be immediately under fee-generating contract with cash coming in starting in the third quarter.

To be sure, business is bad. But as always, Trinidad is finding a way to prosper as it waits on recovery that could easily triple its share price. Trinidad Drilling is a buy for aggressive investors up to USD5.

Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) has encountered unexpected challenges selling its stake in Libya-focused oil and gas developer and explorer Verenex Energy (TSX: VNX, OTC: VRNXF).

The bottleneck is the Libyan government, which has stated interest in a counter-bid to Chinese giant China National Petroleum Corp, but now appears to be moving down a more confrontational path, alleging some improprieties with Verenex’ initial contract four years ago.

Ultimately, this is probably about cashing out the Libyan government more profitably. But until a deal is in the bag, Vermilion is best considered on its value not including Verenex.

The good news is there’s certainly plenty to value from what’s arguably the strongest Canadian trust. Last month, for example, Vermilion announced the purchase of an 18.5 percent stake in the Corrib field off the coast of Ireland from Marathon Oil (NYSE: MRO). The trust will pay CAD100 million at closing, expected later this year, and will make another payment of CAD135 to CAD300 million, depending on when the first commercial gas is produced.

The project is expected to be up and running by the end of 2011 and will boost Vermilion’s overall annual output as much as 30 percent based on current estimates. The project is operated by 45 percent owner Royal Dutch Shell (NYSE: RDS/A) and is 36.5 percent owned by giant Statoil Hydro ASA (NYSE: STO). It’s the latest move in Marathon’s exit from the region and Vermilion’s ongoing European expansion.

The move would obviously be made easier by a successful sale of Vermilion’s 42 percent of Verenex. But the staggered payment terms–coupled with the trust’s low existing debt–mean it should be easily financed. Management states the move will “position Vermilion well for an eventual conversion to a corporation.” That’s a good sign for the distribution, which has thus far survived the dramatic ups and downs of energy prices.

The share price has been up and down over the past month. But for those who don’t yet own it, Vermilion Energy Trust is a buy up to USD28.