Share prices go up and down daily. As income-oriented investors focused on collecting dividends over an extended time horizon, we’re more concerned with the long-term sustainability of the underlying business.

And second-quarter numbers suggest Canadian Edge Portfolio recommendations are riding out the worst global economy since the 1930s in relatively fine shape. Bottom lines have been aided by cost-cutting, as is the case for companies generally, but we’ve also seen outright revenue growth for a number of holdings.

While the recession has forced many income trusts to accelerate their plans for dealing with 2011 taxation, but the results have been encouraging: A growing number are converting while maintaining current distribution levels.

This trend, coupled with the ability of the businesses to maintain during difficult circumstances, suggests we’ll have a broad menu of high-yielding corporations in which to invest following implementation of the Tory government’s tax on trusts.

That being said, we may have reached a turning point in perception the last few days, not on income trusts or Canada in particular, but on the condition of the global economy. And this change could signal the beginning of a correction following the explosive, post-March 9 equities rally.

The focal point remains the US consumer, but views on his/her condition have changed.

The No. 1 criticism to emerge during the recent earnings season concerned the quality of the numbers being reported: The companies that beat expectations did so by cutting costs, not growing sales or revenue. This is unsustainable in the long term.

The Commerce Dept reported that US retail sales fell 0.1 in July, even with a boost from the government’s “cash-for-clunkers” subsidy. This was the first decline in seasonally adjusted sales in three months. And, into this emerging bear growl, last Friday the Reuters/University of Michigan preliminary index of consumer sentiment came in at 63.2 in August, below the 66.0 print in late July and the 68.5 economists were expecting and the lowest level since March. The index reached a three-decade low of 55.3 last November.

The surprising decline in the consumer sentiment survey underscored the nascent concern surrounding retail sales and the health of US consumers.

And Monday the Federal Reserve reported that US banks tightened standards on all types of loans in the second quarter:

In the July survey, domestic banks indicated that they continued to tighten standards and terms over the past three months on all major types of loans to businesses and households, although the net percentages of banks that tightened declined compared with the April survey. Demand for loans continued to weaken across all major categories except for prime residential mortgages. The fractions of domestic banks reporting additional weakening in demand in this survey were slightly lower than those in the April survey for C&I loans and home equity lines of credit, approximately the same for commercial real estate (CRE) and nontraditional residential mortgages, and slightly higher for consumer loans.

Moreover, these lenders expect to maintain strict criteria on lending until at least the second half of 2010.

In the words of Jack McHugh, contributor to The Big Picture, “If credit is the lifeblood of economic activity, then the US looks set to remain a couple of pints short until lenders once again start saying ‘yes!’ to loan applicants.”

The results of the Senior Loan Officer Survey suggest otherwise, but conditions in the financial system are returning to normal, a reality acknowledged by the Fed in its August 12 monetary policy statement.

The TED Spread–the gap between interbank lending rates and those of virtually risk-free three-month US Treasury bills–broke below 30 basis points for the first time since March 26, 2007 in early August. The TED Spread has closed by more than 400 basis points since peaking post-Lehman Brothers.

In mid-August the LIBOR-OIS Spread fell below 25 basis points, its lowest level since Jan. 24, 2008. The LIBOR-OIS spread measures the premium banks charge over what traders predict the Federal Reserve’s daily fed funds rate will average over the ensuing three months. It averaged 11 basis points in the five years to August 2007. It peaked at 364 basis points last October following Lehman Brothers’ mid-September implosion.

US high-yield bond spreads over Treasuries have halved to about 100 basis points from extremes of about 220 basis points in December. And credit rating agencies have trimmed expectations for the US high-yield bond default rate, forecasting a peak of about 13 percent this year rather 16 percent, a record established in 1933.

Troubled lender CIT (NYSE: CIT) may ultimately succumb to bankruptcy, but bondholders’ willingness to provide emergency financing, after the government refused more aid, is another sign private investors are less risk-averse. This was primarily a private bailout, a significant event in this credit cycle.

VIX, on its own a measure of  fear in the market, remains at historically elevated levels, but it, too, looks a lot better than it did at the height of the panic in late 2008.

Here’s the gray cloud inside this silver lining: Although corporate debt issuance rebounded in the second quarter, these improvements in traditional measures aren’t yet being matched by any acceleration of credit. Moves by central banks to create liquidity must eventually filter through the financial system into the real economy in the form of loans to households and non-financial corporations if this nascent recovery is to become self-sustaining.

Sound lending practices and a rising savings rate are solid foundations for the economy, although the short-term implications for domestic demand are negative. This is the conundrum we face in the wake of the worst financial crisis since the Great Depression. Credit is supply-and-demand driven, and right now consumer demand is depressed.

There’s no question that US consumers will be challenged to spend as much as they did when house prices were high, portfolios were fat, and credit was easy. Seventy percent of the US economy is devoted to consumption. Its impairment is going to constrain growth in the quarters ahead.

There’s no debate about whether efforts by monetary and fiscal authorities to hold down interest rates, keep credit flowing and boost final demand have fueled “economic growth.” They haven’t. Yesterday’s question was what would have happened absent these extraordinary measures; today’s question is when will these efforts no longer be required to prop up the economy. When we’ll see actual growth is still a question for tomorrow.

Your Shot at the Big Time

This could be your chance to get into the Octobox:

ENGLEWOOD CLIFFS, NJ–Citing a need to provide quality programming 24 hours a day, CNBC has extended an invitation to anyone who owns a suit to drop by the financial news network and be a guest expert, cohost a show with Larry Kudlow, or do whatever. “Don’t worry about what kind of shape your suit is in,” said CNBC president Mark Hoffman, who explained that his network’s studio has an iron and some old phone books that people can press their jackets on. “Just come on down, run a comb through your hair, and if you’re here by 8 a.m., we’ll have you on Squawk Box at 8:15 making stock picks. But don’t forget your suit!” Hoffman added that men of ruddy complexion with neck sizes exceeding 19 inches are not required to wear a tie.

Speaking Engagements

Roger Conrad is making the trip to the Great White North for The World MoneyShow Toronto, October 20-22 at the Metro Toronto Convention Centre.

Roger will, of course, discuss Canadian income trusts and high-yielding corporations as well as the utility universe. Click here to register and attend as his guest.

The Roundup

The numbers are in for Canadian Edge Portfolio holdings, and the bottom line is our selections have held up as well as any group of equities has throughout the most significant global downturn since the Great Depression. But that’s history.

Stripped down to deal with crisis-level conditions, our trusts and high-yielding corporations will enjoy outsized benefits once the US consumer gets back to something approximating his/her previous spending habits. We’ll look for these signs in the third quarter numbers.

Conservative Holdings

Artis REIT (TSX: AX-U, OTC: ARESF), potentially vulnerable because of its exposure to the energy patch, reported a 3.4 percent increase in second quarter revenue to CAD35.5 million; year-to-date, revenue is up 7.7 percent to CAD71.9 million. Funds from operations (FFO) thus far in 2009 is up 3 percent to CAD27.4 million (CAD0.83 per unit) from CAD26.6 million (CAD0.82 per unit).

Net operating income (NOI) increased 2.2 percent to CAD24.3 million; year-to-date, NOI is up 5.5 percent to CAD49 million. Same property NOI, excluding non-cash revenue adjustments, was up 6.3 percent in the second quarter, while year-to-date same property NOI is up 6.7 percent.

As of June 30, 2009, debt-to-gross book value was 51.2 percent, down from 51.6 percent as of Dec. 31, 2008. The REIT’s second quarter interest coverage ratio was 2.27, down slightly from 2.26 a year ago.

At the end of the second quarter portfolio occupancy was 96.2 percent, up from 95.8 percent at the conclusion of the first quarter. As a REIT, Artis is immune to 2011 taxation. The payout ratio remains just 68 percent, and Artis REIT is still a buy up to USD10 for those who don’t already own it.

Atlantic Power Corp’s (TSX: ATP-U, OTC: ATPWF) numbers reflected the value of management’s ability and focus on eliminating as many uncontrollable influences on profits as possible.

The company saw cash flows fall at some projects and rise at others, but the bottom line was an overall second quarter payout ratio of just 68 percent and 71 percent for the first six months of 2009. Those are the lowest rates in company history and back management’s affirmation of its monthly distribution at least through 2015.

The company also announced a favorable rate settlement for its Path 15 power line in California, successful asset dispositions and additions and low-cost hedging of natural gas that will further lock in hefty cash flows going forward.

Atlantic Power will face no new taxes in 2011, as it’s already organized as a corporation. The shares have surged but still yield more than 12 percent. Buy Atlantic Power Corp up to USD10.

Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) reported solid second quarter numbers that reflect the residual benefits of contracts negotiated in 2008, while margins were still high. Bird reported earnings per unit of CAD1.13, a 16 percent increase over year-ago numbers.

The task for Bird is to replenish its backlog in an environment much different from the one that set the stage for these results.

Net income for the three months ended June 30, 2009 was CAD15.9 million, a 16.5 percent increase from CAD13.7 million a year ago, primarily on improved margins. Revenue was CAD228.7 million, an 18.9 percent decline from a year ago. The decrease reflects the decline in contract awards and project delays resulting from the economic downturn.

Costs and general and administrative expenses (including amortization) for the quarter were CAD209.1 million, or 92.3 percent of revenue; this compares to CAD264.7 million, or 94.4 percent of revenue, in the second quarter of 2008.

Bird won CAD184.2 million in new construction contracts and “put in place” CAD226.6 million of construction revenue during the second quarter. The fund’s backlog of CAD982.8 million on March 31, 2009 declined to CAD940.4 million on June 30.

The payout ratio sank to just 40 percent and, though Bird hasn’t articulated its 2011 plans, that’s a good sign the dividend could easily hold after taxes should management go that route. Bird Construction Income Fund is a buy up to USD30.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) notched a 4.5 percent increase in FFO on higher average monthly rents and a still-strong occupancy rate. Second quarter FFO was CAD28.6 million (CAD0.43 per unit), up from CAD22.2 million (CAD0.34 per unit) a year ago.

Average monthly rent increased to CAD929 as of June 30, up from CAD919 last year. Occupancy was 97.5 percent. Management noted “continued strength in the rental residential sector in the majority of CAPREIT’s regional markets,” even though occupancy decreased from 98.2 percent a year ago.

Revenue rose 3.8 percent to CAD82 million on the combination of acquisitions and higher rents. NOI increased 4.6 percent, while same property NOI was up for the fourteenth straight quarter; NOI for properties owned at Dec. 31, 2007 increased 1.1 percent.

Distributable income was CAD23.5 million (CAD0.357 per unit), up from CAD22.6 million (CAD0.346 per unit) a year ago. The second quarter payout ratio was 78.4 percent, down from 80.5 percent.

The effective weighted average interest rate of CAP REIT’s total mortgage portfolio came down to 5.15 percent from 5.35 percent at the end of the second quarter of 2008; the weighted average term to maturity fell to 4.9 years compared to 5.1 years at the same time last year. Buy Canadian Apartment Properties REIT up to USD15.

CML Healthcare Income Fund’s (TSX: CLC-U, OTC: CMHIF) efforts to expand into the US paid off with expectations-beating second quarter numbers.

CML reported income of CAD25.9 million (CAD0.29 per unit), which was down slightly from CAD26.3 million (CAD0.29 per unit) a year ago. Revenue increased 12.9 percent to CAD133.9 million from CAD118.6 million in the second quarter of 2008; the increase is primarily the result of the acquisition of American Radiology Services, which contributed CAD7.7 million. CML generated distributable cash of CAD24.3 million and distributed 98.6 percent of it. Management attributed the high payout ratio to the timing of working capital changes.

According to a statement accompanying its earnings announcement, “CML Healthcare will continue to evaluate its options for the post-2010 tax regime.” Management also noted, “At this time the fund does not see any compelling reasons to make changes to its structure prior to 2011.” CML Healthcare Income Fund is a buy up to USD13.

Aggressive Holdings

Ag Growth International (TSX: AFN, OTC: AGGZF) reported second-quarter net earnings of CAD16.4 million (CAD1.28 per share), up from CAD7.5 million (CAD0.58 per share) a year ago. Sales rose 19 percent to CAD66.8 million from CAD55.9 million.

Demand for portable grain handling and aeration equipment remains strong, and Ag Growth also enjoyed the benefits of price increases announced in 2008. Gross margin as a percentage of sales for the three months ended June 30 was 42.5 percent, up from 34.3 percent. This reflects price increases as well as lower input costs across most product lines in 2009.

Selling, general and administrative expenses were CAD8.4 million, or 12.6 percent of sales, up from 12.1 percent on currency exchange factors and the establishment of international sales teams.

Ag Growth converted from an income trust to a taxable corporation on June 3, 2009. As of June 3 Ag Growth had future tax assets of approximately CAD69.8 million available to offset Canadian taxable income. For the period ended June 30 the company reduced its Canadian tax liability to zero through the use of CAD3.7 million of its future tax assets. Ag Growth International is a buy up to USD30.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) reported second quarter funds flow of CAD430 million (CAD1.05 per unit) in the second quarter, a 43 percent decline from 2008. The trust distributed CAD219 million to unitholders for a 51 percent payout ratio, consistent with year-ago levels.

Penn West reported a net loss of CAD41 million (CAD0.10 per unit) compared to net loss of CAD323 million (CAD0.86 per unit) in the second quarter of 2008.

Second quarter production averaged 180,601 barrels of oil equivalent per day (boe/d); 58 percent of this production was oil and natural gas liquids, 42 percent was natural gas. Operating netback was CAD25.64 per barrel of oil equivalent in the second quarter of 2009, down 46 percent from a year ago because of lower commodity prices. Penn West had capital expenditures of CAD140 million in the quarter, including the drilling of 12 wells with a 100 percent success rate. Penn West Energy Trust is a buy up to USD15.

Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) reduced second quarter interest expense per barrel of oil equivalent produced by 30 percent from year-earlier levels. That didn’t prevent cash flow from sliding in the face of sinking natural gas prices (84 percent of output). But coupled with proven reserve life of 17 years and the industry’s lowest production costs by far, it points to a company able to withstand the crisis in the energy patch far better than almost any rival.

The payout ratio has risen to 86 percent, a level that indicates some risk from a further drop in gas prices as well as 2011 taxation, which management has thus far not addressed definitively.

Peyto, however, continues to trade at a fraction of the value of its assets in the ground and that’s the bottom line on value for any energy trust. Peyto Energy Trust is a buy up to USD12.

Provident Energy Trust’s (TSX: PVE-U, NYSE: PVX) funds flow fell 71 percent to CAD49 million on the drop in commodity prices. The trust paid out 97 percent to unitholders, up from 55 percent.

Provident reported a net loss for the quarter of CAD80.1 million (CAD0.31 per unit), narrower than the CAD184.1 million (CAD0.72 per unit) realized in the second quarter of 2008.

Revenue for the second quarter was CAD305.9 million, down from CAD420.2 million a year ago. Upstream revenue was CAD78.9 million, down from CAD164.4 million. Midstream generated CAD314.5 million, down from CAD662.3 million.

Upstream cut its full-year production guidance to a range of 23,000 barrels a day to 24,000 barrels a day, from a previous forecast of as much as 25,000 barrels a day, citing unplanned downtime related to weather and third-party gas pipeline outages. Midstream contributed almost three-quarters of second quarter 2009 income, delivering much-needed cash flow as the production arm continued to be hurt by low oil and gas prices.

Along with its earnings numbers, Provident also announced the results of its “strategic review” and its intention to remain a “cash distributing energy enterprise.” Provident Energy Trust is a buy up to USD6.

In last week’s MLM Roundup, the discussion of Enerplus Resources’ (TSX: ERF-U, NYSE: ERF) second quarter included mistaken references in the final three paragraphs to “Vermilion Energy Trust.” We regret the error. Here is the corrected version.

Enerplus Resources’ (TSX: ERF-U, NYSE: ERF) second quarter operating results were in line with management expectations. Production averaged 94,501 boe/d, operating costs were CAD9.93 per boe, and general and administrative costs were CAD2.49 per boe.

Cash flow was CAD210.6 million for the quarter, a 42 percent decrease from CAD364.5 million a year ago. The fund reported a net loss of CAD3.6 million, reversing net income of CAD112.2 million in the second quarter of 2008.

Crude oil and natural gas revenues were marginally higher quarter-over-quarter, though the impact of increased oil prices was generally offset by lower natural gas prices and a slight decrease in production. Crude oil and natural gas revenues were CAD306.2 million, down from CAD734.4 million in 2008. The majority of the decrease in revenues in 2009 was due to the significant decline in commodity prices.

Enerplus’ payout ratio was 43 percent, reflecting a reduced distribution and decreased capital spending.

Enerplus also closed a CAD338.7 million senior unsecured note offering during the quarter, the proceeds of which were used to pay down bank debt. The fund has approximately CAD1.3 billion of available credit on its bank facility and a debt-to-trailing 12-month cash flow ratio of 0.7 times; it has ample room to pursue acquisition opportunities.

Enerplus continues to “develop plans for the conversion to a corporation by late 2010.” Management noted in its second quarter earnings report, “The conversion to a corporation would be a change to our legal structure only and not a change to our fundamental business model of being a distribution-oriented entity in the oil and gas industry.” Enerplus Resources is a buy up to USD25.