Reuters reported this week that sovereign wealth funds (SWF) could top the wish-list of General Motors’ management as the reconstituted US automaker contemplates the mechanics of an initial public offering (IPO) of new shares. The new GM is considering making “cornerstone” stakes available to very large institutions capable of holding for the long term and providing ballast against what are likely to be volatile stock market and operating conditions.

The mention of “sovereign wealth fund” and “General Motors” in the same report seems likely to spark another chapter in the saga over foreign ownership of key US assets in the 21st century. The history of SWFs and state-owned entities (SOE) operating and investing within the territorial boundaries and in close proximity to interests of the US is long, longer than you might imagine given events portrayed in the mass media in recent years.

But don’t fall prey to demagogues, regarding this issue or any other. Emotion is the enemy of the investor.

Despite mountains of evidence to the contrary, politicians and members of the media have been able to stoke suspicion of foreign investors when their capital gets close to US assets. In 2007 Senator Charles Schumer (D-NY), along with many other Congressional colleagues, acting in concert or in their own particular misguided interest, scuppered a deal that would have left ownership of several major US port operations in the hands of Dubai Ports World. DP World is a major global operator of port facilities, with operations in more than 30 countries, which traffic goods to and from the US.

Day-to-day operations at the US facilities would have remained largely in local hands. But DP World is owned by Dubai, one of the seven city-states that comprising the United Arab Emirates (UAE), and financing for the Sept. 11, 2001, terrorist attacks was routed through the UAE. Though DP World made sense from a business perspective, it made more sense from a political perspective for Sen. Schumer and others to use the emotional connection as a weapon against an already wounded President George W. Bush.

The DP World controversy forms a critical turning point in The Rise of the State: Profitable Investing and Geopolitics in the 21st Century, a new book I co-authored with Yiannis Mostrous and Elliott Gue. (Elliott Gue and I will be signing copies of The Rise of the State on Friday afternoon at the San Francisco Money Show, and I’ll be discussing the origins, recent proliferation and future role of SWFs and SOEs during a workshop on Saturday. Click here for details.)

The dynamics this time around aren’t as simple. But the risk of a similarly damaging inward focus is as high today as it was three and a half years ago. Heavy involvement by investors of the “cornerstone” type, it’s hoped, would indicate to the market a level of confidence in GM by major institutions.

But the controversy over the 2009 bailout that started the company down its new path is likely to be roused again. Populists from both ends of the political spectrum will argue that selling GM to an SWF means subsidizing gains for foreigners; others are likely to protest pension-fund involvement because their investment could be seen as a bribe of the Obama administration.

Agricultural Bank of China Ltd (Hong Kong: 1288), subject of the largest IPO to date in 2010 at USD22 billion, established 11 such cornerstones before hitting the market in mid-July. As Reuters notes a GM IPO would also privatize a substantial government-owned company.

The rationale for SWF involvement in the GM IPO is simple. Entities such as Qatar Investment Authority (QIA) and Kuwait Investment Authority (KIA), both among the 11 cornerstones of the Agriculture Bank of China IPO, are stable investment vehicles run by institutional professionals. They are not de facto piggy banks to serve the whims of Arab sheikhs. Nor was DP World the instrument of UAE-funneled terror. Its operational record suggests the contrary, in fact.

We want GM to make and sell cars in growing markets. In November 2009 China became the world’s largest auto market; and McKinsey & Company has forecast that the Middle Kingdom’s car market will grow tenfold between 2005 and 2030. To maintain good relations with the Chinese, penetrate a pivotal market and to establish ties with one of the world’s most active, best-capitalized investment vehicles, soliciting China Investment Corp (CIC), for example, is a good idea.

CIC has already made its presence felt in North America. In the post-Great Recession world CIC has helped Canadian resource companies restructure balance sheets and further growth plans at the same time, specifically with coal, copper and zinc miner Teck Resources (Toronto: TCK/B.TO, NYSE: TCK) and oil natural gas producer Penn West Energy Trust (Toronto: PWT-UN.TO, NYSE: PWE).

The hope is that US officials play it smarter this time around. SWF capital was readily received during the early days of the financial crisis, perhaps a sign of hubris surrendering to desperation as the US banking system teetered.

We conclude in The Rise of the State that China’s emergence does not threaten the US, nor does the activity of sovereign wealth funds or state-owned entities generally. The evolution of the world economy and global investment is complex; no single entity, event or individual is accountable for all that’s going well or for all that’s going wrong.

China and the entities it sponsors, like Middle Eastern SWFs and SOEs are playing the game as it’s been laid out. There is also a great deal of common interest among the US and major institutional investors, of which QIA, KIA and CIC are inarguably apart culturally, evidenced by the people who make day-to-day decisions for the funds and by their performance as investors; they have proven to be hands-off.

Beware carnival barkers with short-term agendas at odds with your long-term wealth-building arguing otherwise.

The Roundup

Another earnings season is in the books. Results from Canadian Edge Portfolio Holdings confirm that we’re exposed to high-quality assets that generate consistent, sustainable dividends–whether trust or corporation.

We’ve also seen encouraging signs in the CE How They Rate coverage universe, where earnings, though not as consistently robust as Aggressive and Conservative Holdings’, indicate the Canadian economic recovery is on course.

As always, we’ll be looking for developments that could impact results as the third quarter rolls along, and we’ll train the same eyes on the numbers come next reporting season. In the meantime, here’s a final set of How They Rate third-quarter highlights.

Natural Resources

Teck Resources (TSX: TCK/B, NYSE: TCK) reported a 54 percent decline in net income, from CAD570 million (CAD1.17 per share) to CAD260 million (CAD0.44 per share). Management noted that “a very large non-cash gain on debt revaluation due to exchange rate fluctuations” impacted second-quarter 2009 results; excluding these one-off items year-ago earnings would have been CAD0.44 per share. Revenue was up to CAD2.1 billion from CAD1.7 billion. Operating profit (before depreciation and amortization) was CAD985 million, up 17 percent sequentially. Operating results for the quarter were solid; coal production was 40 percent higher on a year-over-year basis, and sales were almost 30 percent higher, reflecting a recovery in the steel industry. Production was at an annualized rate of 24 million tonnes, 1 million tonnes higher on an annualized basis from last quarter. Management expects this pace to continue.

During its conference call to discuss results management noted that Teck has reduced overall debt by CAD7.7 billion since the Fording Coal acquisition. The company reinstated its dividend last quarter, paying CAD0.20 per share on July 2. Teck Resources is a buy up to USD35.

Energy Services

Phoenix Technology Income Fund’s (TSX: PHX-U, OTC: PHXHF) ambition to expand internationally and to continue to innovate its drilling technologies drove management’s decision to trim the payout from CAD0.085 per month to CAD0.04 in Oct. 2009. While confirming its intent to convert to a corporation on Jan. 1, 2011, management also announced that the current monthly rate, in effect since the Nov. 2009 payment, will be maintained.

Distributable cash for the second quarter was CAD3.5 million (CAD0.13 per unit); quarterly distributions of CAD3 million (CAD0.12 per unit) made for a payout ratio of 88 payout ratio. The six-month payout ratio was 66 percent. Management boosted its CAPEX budget to CAD42 million in anticipation of sustained, healthier demand for its services. Management anticipates increasing geographic diversification–horizontal and directional services operations in Russia commence in September–and rising demand in Canada and the US to boost revenue for 2010 and into 2011. The industry-wide trend toward horizontal drilling favors Phoenix for the long term. Phoenix Technology Income Fund is a buy up to USD8.

Energy Infrastructure

TransCanada Corp (TSX: TRP, NYSE: TRP) reported net income of CAD285 million (CAD0.41 per share) for the second quarter, compared to CAD314 million (CAD0.50 per share) a year ago. Operating revenue was CAD1.92 billion, down from CAD1.98 billion for the second quarter of 2009. Six-month net was CAD581 million (CAD0.84 per share), compared to CAD648 million (CAD1.04 per share) for the first six months ended June 30, 2009.

Operating revenue for the first six months ended June 30, 2010, were CAD3.88 billion, compared to CAD4.15 billion a year ago.

During its second-quarter conference call management noted that its “core business of pipe and energy continued to perform well in the quarter in a very difficult environment.” The company’s CAD22 billion capital plan remains on track. TransCanada Corp is a buy up to USD37.

Westshore Terminals Income Fund (TSX: WTE-U, OTC: WTSHF) shipped 6.1 million tonnes of coal in the second quarter, up 20 percent from 5.1 million tonnes during the same period in 2009. If current trends persist through the second half of the year Westshore total throughput volumes could beat the 23.5 million tonne record set in 1997.

Coal loading revenue was down 9 percent to CAD52.1 million on a decline in the average loading rate and despite the 20 percent volume increase. The average loading rate in the second quarter was CAD8.50 per tonne, down from CAD11.28 per tonne a year ago. Operating expenses increased year over year from CAD16.6 million to CAD21.3 million on higher throughput, increased costs resulting from the integration of a new stacker/reclaimer and implementation of an automation project. Administrative expenses were CAD6.6 million, up from CAD1.3 million on a rise in management incentive fees. The six-month payout ratio was 98.2 percent.

Management has still not committed to a plan for 2010, stating in its earnings announcement: “The Fund is currently exploring possible changes to its structure as a result of these rules. Further announcements of the Fund’s intended actions will be provided at a later date when planning has been finalized.” Westshore Terminals Income Fund is a buy up to USD16.

Health Care

Extendicare REIT (TSX: EXE-U, OTC: EXTEF) reported second-quarter revenue of CAD514.4 million, up 2.8 percent from a year earlier, while adjusted funds from operations (AFFO) were up 44 percent to CAD35.3 million (CAD0.43 per unit). Distributions in the first half of 2010 were CAD34 million (CAD0.42 per unit), approximately 57 percent of AFFO operations for the same period.

Earnings before interest, taxation, depreciation and amortization (EBITDA) from US operations improved by 3.5 percent, while EBITDA from Canadian operations improved by 17.4 percent. Earnings from continuing were CAD14 million (CAD0.17 per diluted unit), down from CAD29.5 million (CAD0.40 per diluted unit) a year ago, reflecting an after-tax loss on derivative financial instruments and foreign exchange items compared to a gain on such items in the second quarter of 2009. The 2010 second quarter also includes after-tax charges of CAD1.7 million on a decline in the fair value of two Canadian nursing homes and an impairment charge on a previously closed US center. Buy Extendicare REIT up to USD10.

Transports

Canadian National Railway (TSX: CNR, NYSE: CNI) reported adjusted earnings per share (EPS) of CAD1.13 in the second quarter, beating year-ago EPS CAD0.76 on a stronger-than-expected economic recovery. Revenue was up 18 percent year over year to CAD2.09 billion on higher volumes in all commodity segments. Growth here was also the result of a higher fuel surcharge owing to year-over-year increases in applicable fuel prices and higher volumes as well as higher freight rate, partly offset by negative currency impacts.

Carloads rose 27 percent year over year, while revenue ton miles, which measure the relative weight and distance of rail freight, were up 15 percent. On an annualized basis, revenues increased 40 percent in Coal, 39 percent in Automotive, 33 percent in Metals and Minerals, 25 percent in Intermodal, 6 percent in Forest Products and 6 percent in Petroleum and Chemicals. Revenues declined 1 percent in Grain and Fertilizers.

Operating expenses rose 7 percent, while the operating ratio (operating expenses as a percentage of revenue, a key measure for rails) improved to 61.2 percent from 67.3 percent. Canadian National generated free cash flow of CCAD958 million in the first half of 2010 compared with CAD463 million in the comparable period of 2009. Debt-to-total capitalization ratio was 36 percent, down from 40.6 percent in the year-ago quarter.

Canadian National firmed guidance for 2010 to “25 percent” from CAD3.25 per share in 2009, from a prior forecast of “double-digit” earnings growth. Canadian National Railway is a buy up to USD60.

Canadian Pacific Railway (TSX: CP, NYSE: CP) reported second-quarter net income of CAD166.6 million. Adjusted EPS were CAD0.92, up 96 percent from the second quarter of 2009. Total revenue was up 20 percent to CAD1.23 billion, as volume growth on better-than-expected economic activity drove results. Canadian Pacific’s operating ratio improved 430 basis points to 77.8 percent.

Volumes were such that even an 11-day closure of CP’s main transcontinental line in June due to flooding in Alberta and Saskatchewan–which cut about CAD0.12 per share from earnings–couldn’t prevent an expectations-beat. The floods, which prevented the delivery of some loads, reduced revenue by about CAD23 million. Roughly half of the delayed loads will be delivered in the third quarter. CEO Fred Green, during CP’s second-quarter conference call, noted that the railroad is well-positioned for the second half of the year, but that markets are likely to remain volatile. Carloads were up by 20 percent in the quarter, with improvements across all segments except grain, which was affected by the flooding. Canadian Pacific Railway is a buy up to USD60.

Jazz Air Income Fund (TSX: JAZ-U, OTC: JAAZF) remains uncommitted to a post-conversion dividend policy. “It remains to be seen,” answered CFO Allan Rowe when asked during the company’s second-quarter conference call whether a payout ratio in the range of 70 to 80 percent will be maintained after Jazz becomes a corporation. For what it’s worth, the payout ratio for the most recently concluded quarter was 63.9 percent.

Jazz reduced bank debt by CAD115 million during the second quarter and also put up cash to secure the order of 15 new planes. DCF was CAD28.8 million, while revenue of CAD359 million was down 3.9 percent from CAD373.6 million a year ago. It was a similar refrain for Jazz in the second quarter: lower billable block hours, less traffic and unfavorable foreign exchange rates. Net income was down 38.6 percent, to CAD15.6 million from CAD25.4 million. Jazz Air Income Fund is a hold.