Today’s headline references a fictional work by leftist rabble rouser Michael Moore, Canadian Bacon, wherein an unpopular US president seeks to boost his domestic standing by fomenting conflict with our neighbor to the north.

His chief advisor, appearing on a reasonable facsimile of the late CNN offering “Crossfire,” raises suspicions with the rhetorical question, “When have you ever heard anyone say, ‘Honey, lets stay in and order Canadian food?’”

For the US-based investor, buying Canada right now, particularly income trusts and high-dividend-paying corporations, means accessing a relatively stable, low-beta play on a global economic recovery. It means benefitting from fundamental factors that support a strong and rising Canadian dollar as well as from tailwinds provided by speculators looking to play the next G-20 interest rate hike. It means owning solid businesses that pay sustainable distributions.

Make no mistake: Canada’s fortunes are tied to the US, and long-term recovery up there depends on normalization of economic activity down here. Nevertheless, Canada continues to diversify its export base, the world still demands its abundant natural resources, and fiscal and monetary authorities have left the country well able to cope with serious crises. And right now the loonie is rising while the buck sinks.

This is in large measure the result of a reawakening of risk appetite based on relatively positive third quarter earnings reports. Investors are shifting from low-yielding dollar assets into those from emerging markets and commodity-linked countries such as Canada and Australia. The gold spot price hit a new high in Asia overnight above USD1,071 per ounce, while crude oil touched USD75 a barrel for the first time in 2009 on Wednesday.

The US dollar surged in late 2008 after Lehman Brothers imploded because investors were hungry for its relative safety. But government spending on stimulus programs and stabilizing the financial system as well as the signs of nascent recovery around the world have revived risk-taking.

In fact, the Reserve Bank of Australia (RBA) last week became the first G-20 central bank to boost interest rates in more than a year based on its conclusion that the crisis has passed and that it’s time to unwind monetary stimulus efforts.

Australia’s economy is similar to Canada’s. The land Down Under exports wheat and raw materials. It depends on world demand for its products because its domestic economy is so small. When the recession struck, world trade diminished markedly. Like Canada and the rest of the world, Australia suffered.

But these extraordinary efforts are beginning to pay off. Australia is experiencing an increase in hiring, retail sales and house prices as well as surging business and consumer confidence. In Canada, employment rose by 30,600, six times more than forecast, on new jobs in construction and government, Statistics Canada said last Friday. The jobless rate fell to 8.4 percent from 8.7 percent in August.

StatsCan also reported a 7.2 percent rise in August building permits; an up-tick in factory sales; a larger-than-expected increase in spending by purchasing managers last month; and a third consecutive monthly increase in home prices.

According to JPMorgan Chase (NYSE: JPM), based on a measure that takes relative prices into account as well as the change in the value of the loonie versus Canada’s major trading partners, the Canadian dollar isn’t overvalued right now. In fact, based on the real effective exchange rate the loonie was more undervalued vis a vis the US dollar than at any time over the past 30 years. Because the US is Canada’s most significant trading partner the loonie/buck exchange rate is obviously important. But if you take account of other trading partners and prices, the Canadian dollar looks about as cheap as it was back in 2003. This suggests a Canadian dollar at par with the US dollar is less damaging than the consensus believes it to be to the Canadian economy.

There’s a great deal of speculation that the Bank of Canada (BoC) will follow the RBA and boost its target interest rate; this speculation–the loonie gained 2.7 percent against the US dollar in the five days following the RBA’s announcement, the best performance among the 16 most-traded currencies tracked by Bloomberg, and the yield on Canada’s two-year government bond rose to its highest level in 2009, signs that traders are moving their bets from the Australian to the Canadian–will provide a boost for US investors in Canadian equities.

The loonie and the Australian dollar both rallied on the “green shoots” story that took root in late winter and early spring. The Australian, however, has outperformed the Canadian relative to the US dollar by 58 percent (the Australian is up 28.4 percent, the Canadian 17.9 percent versus the buck) because of speculation the RBA would hike.

It’s important to note, however, the distinction between what speculators are, well, speculating and what the responsible authorities have said on the matter of a rate hike.

The BoC has conditionally pledged maintain its 0.25 percent target through June 2010; if the BoC’s inflation outlook changes materially, it will reassess. According to its website, the BoC “aims to keep inflation at the 2 per cent target, the midpoint of the 1 to 3 per cent inflation-control target range.”

The BoC employs a measure of core inflation, which excludes eight of the most volatile components of CPI and smoothes the effect of changes in indirect taxation on the remaining components, as its guide to policy decisions.

The BoC’s core index advanced 1.6 percent in the 12 months ended Aug. 31, 2009, a bit of a slowdown from the 1.8 percent rise recorded to July 31, 2009. The seasonally adjusted monthly core index edged up 0.1 percent from July to August after standing still from June to July.

Paul Jenkins, a senior deputy governor of the BoC, told The Vancouver Sun’s editorial board that the bank’s sole target remained a 2 percent inflation rate.

“Our policy framework is absolutely anchored in our inflation target,” Jenkins said. “So it would be a mistake to assume that simply because the housing market is stronger, maybe stronger than we had expected, that in and of itself would result in a move in our policy rate.”

The loonie last traded at par with the US dollar on July 22, 2008. StatsCan will release the September Consumer Price Index on Friday.

There remain good fundamental reasons for US investors to have exposure to the loonie–healthier banks, to begin with, as well as a streak of positive economic news and resources that make it critical to emerging markets such as China and India. The BoC will likely hold its target rate steady until July 2010. But that doesn’t mean you can’t benefit from the loonie’s momentum, which could carry it to parity and beyond by year’s end.

The BoC and Canadian exporters would certainly like to see it weaken a bit, although the recent data suggest the economy is kicking it back into gear even as the currency rises.

The Roundup

Yesterday Conservative Holding Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) became the latest Canadian high-yielder to announce a major structural move. The result: a major win for its investors, particularly those residing in the US.

Atlantic was never organized as an income trust and so wasn’t subject to the new tax slated to kick in Jan. 1, 2011. Nonetheless, it did face its own decision day of sorts in 2016, when the bond portion of its income participating securities (IPS) is slated to mature.

Were those bonds paid off at par value–either by refinancing or paying off in cash–the equity portion of the IPS would still offer a superior yield. But uncertainty over what management would do has undeniably hung over the price of Atlantic shares since Halloween 2006, just as it has unit prices of Canadian income trusts. And some remained concerned that the Canadian government would eventually come after the IPS structure as it had trusts.

Atlantic’s move this week should set the worries to rest, both about 2011 taxes and 2016 bond maturity. First, pending a shareholder vote on November 24 and subsequent approval by the Supreme Court of British Columbia, the company will convert its IPS shares into common stock on a one-for-one basis. As a corporation, Atlantic already pays income tax in the US–where essentially all of its operations are–and so not face additional levies.

Second, the IPS distribution will become entirely a common equity dividend. The amount will remain the same: A monthly rate of 9.12 cents Canadian per share. However, all of it will now be taxed as an equity dividend and so will not all be treated as a qualified dividend for tax purposes in the US.

Third, the company will maintain its current business strategy of investing in cash-generating energy projects. It’s also internalizing management for the first time, paying former manager ArcLight an aggregate total of CAD15 million over the next three-plus years to terminate the existing contract. That will cost money up front but ultimately save a lot more, particularly now that Atlantic has exercised the last of its right of first refusal asset purchases from ArcLight.

Fourth, Atlantic has now been pre-approved to apply for a New York Stock Exchange listing and expects to premier on the Big Board in the first half of 2010. This should greatly improve the stock’s visibility when it converts to a full-blown corporation and therefore its ability to make additional accretive acquisitions.

Like all income investments, Atlantic’s fate ultimately depends on how well its assets perform. And given the fact that it’s more a collection of investments than an operating company, how well management anticipates and shields its cash flows against volatile commodity prices, exchange rates and interest rates is also critical.

This deal, however, conveys one additional advantage that should help it immeasurably: a dramatic reduction in the leverage on Atlantic’s books, achieved with no impact on shareholders’ cash flow. In contrast, paying off the maturing bond portion of the IPS would have required a huge cash outlay and/or refinancing that could have been extremely expensive depending on where interest rates are in 2016.

This deal already has the approval of the company’s largest shareholder, Caisse de Depot et Placement de Quebec, the provincial pension plan manager that owns roughly 19 percent of the IPSes. It deserves a “yes” vote from all other Atlantic shareholders as well. And for those who don’t already own Atlantic Power Corp, it’s a buy up to USD10.

Elsewhere around the CE coverage universe, NAL Oil & Gas (TSX: NAE-U, OTC: NOIGF) has agreed to buy oil and gas producer Breaker Energy (TSX: WAV, OTC: BKRYF) for CAD310 million in stock.

The acquisition will boost NAL’s production and reserves and will also facilitate its conversion to a corporation. Daily production for Breaker this year will average the equivalent of 6,700 barrels of oil. The purchase will boost NAL’s proved-plus-probable reserves 32 percent about 96 million barrels.

Breaker shareholders will get 0.475 NAL units per share, which, as of the closing price for the October 9 announcement date, amounts to a 4.6 percent premium. NAL will assume CAD93 million of Breaker debt and CAD270 million worth of tax pools that can be used to reduce its tax burden.

NAL hasn’t announced a specific conversion plan, but management has indicated it will act before 2011. NAL Oil & Gas is a buy up to USD12.

Here are tentative earnings announcement dates for CE Portfolio recommendations, followed by the Roundup of news from How They Rate companies.

Conservative Holdings

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–November 5*
• Artis REIT (TSX: AX-U, OTC: ARESF)–November 11
• Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF)–November 12*
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–November 10
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–November 11*
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–November 3*
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–November 10*
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–November 5*
• Colabor Group (TSX: GCL, OTC: COLFF)–October 16*
• Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF)–October 27*
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–November 5*
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–November 6*
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–November 3
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–November 4
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–November 12
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–October 29*
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–November 4*
• TransForce (TSX: TFI, OTC: TFIFF)–October 23*
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–November 5

*Bloomberg estimate

Aggressive Holdings

• Ag Growth International (TSX: AFN, OTC: AGGZF)–November 13*
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–October 30*
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–November 4*
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–November 5*
• Enerplus Resources (TSX: ERF-U, NYSE: ERF)–November 13
• Newalta (TSX: NAL, OTC: NWLTF)–November 5*
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–November 6*
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–November 11*
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–November 5*
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–November 13*
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–November 4
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–November 10*

*Bloomberg estimate