This morning the Bank of Canada (BoC) removed its “conditional commitment” to keep its overnight interest rate at the lowest possible level and stopped its other liquidity-enhancing activities, suggesting the possibility of a June increase and ending the central bank’s extraordinary efforts to stimulate economic activity. The benchmark will remain at 0.25 percent.

What condition is the condition in? The BoC’s Tuesday morning statement indicates inflation is on the creep, faster than the BoC anticipated. We’ll have to wait until Friday morning’s release of March consumer price index (CPI) numbers by StatisticsCanada, but it’s likely the headline number approached 2 percent in March, if it didn’t surpass it.

The central bank’s aggressive shift is more evidence that Canada is evolving away from its G-7 peers at least in the early aftermath of the Great Recession. “Global economic growth has been somewhat stronger than projected,” noted the BoC, “with momentum in emerging-market economies increasing noticeably.” At the same time, Canada’s recovery is “proceeding somewhat more rapidly” than forecast in the BoC’s January Monetary Policy Report.

On the other hand, fiscal and monetary stimuli are still required in other developed economies. Expectations for growth in “major advanced economies” remain “relatively subdued.” “Balance sheet adjustments” and withdrawal of fiscal stimulus by some governments projected for later this year imperil the budding recovery in these economies. The US is among the economies that still require extraordinary measures of support from government.

Canada’s post-crisis trajectory is illustrated most dramatically by the relationship between the Canadian dollar and the US dollar. The loonie soared past parity today after flirting with USD1 throughout April. Though the prospect of a July start to the hiking cycle had long ago been priced into the currency relationship, this morning’s statement from the BoC changed the terms of the debate from “when” to “how much.”

And it provided a dramatic contrast with the minutes of the most recent Federal Open Market Committee (FOMC) meeting on US interest rate policy, which reveal more concern for deflation than inflation.

Buy Canada: Carry It Northward

Economists will point out that some inflation is actually positive; it suggests that producers have the ability to raise prices without hurting demand, or that an increasing number of people–perhaps because rising prices allow producers to hire more workers, who then, in turn, feel freer to spend–demand the same amount of goods.

The inflation level that suggests a growing and healthy economy is the subject of much debate among economists. The BoC’s monetary regime is built on “inflation targeting”–it establishes a goal for the year-over-year rate of change in price measures. The ideal level is 2 percent within “the 1 to 3 percent inflation-control target range.”

The BoC relies on total CPI inflation but also looks at core inflation, which strips out food and energy, “as an operational guide” because it “provides a better measure of the underlying trend of inflation and tends to be a better predictor of future changes in the total CPI.” In February core CPI rose 2.1 percent, though the broader, headline number was a more subdued 1.6 percent. 

Governor Mark Carney and his colleagues at the BoC had said from the beginning of the cycle that took its benchmark from 4.50 percent in late 2007 to 0.25 percent by April 2009 that it would hold the rate at the lower bound through the second quarter of 2010 depending upon what was happening with inflation.

All in all, the BoC’s move is an indication of the strength of Canada’s recovery and more proof that its economy is more and more exposed to the new engines of global growth, specifically China and India. Their hunger for natural resources is a boon for Canada, despite the unfortunate adjustments a stronger currency forces on exporters.

The BoC concluded its comments on interest-rate policy by noting that the “extent and timing [of its rate hikes] will depend on the outlook for economic activity and inflation,” leaving some room to hold steady until July–or longer, if the data on the economy and CPI dictate otherwise.

The BoC’s problem appears to be fundamentally different from what monetary authorities south of the border are dealing with; the state of prices in the US is worrying, indeed, but not for the reasons many would have you believe.

As the FOMC noted in its most recent statement on interest rates, energy prices are on the rise, contributing to a rise in the headline consumer price inflation (CPI) number. But the measure of core inflation–which strips out volatile food and energy–was “in contrast…quite low.” According to the FOMC:

Although rising energy prices continued to boost overall consumer price inflation, consumer prices excluding food and energy were soft, as a wide variety of goods and services exhibited persistently low inflation or outright price declines.

FOMC members observed, in other words, “a slightly greater deceleration in consumer prices than had been expected.” There may be some “flation” going on, but in the US it’s of the “de” variety–the variety that characterized the early, destructive years of the Great Depression.

The fed’s benchmark interest rate is going to stay near zero for the foreseeable future, perhaps well into 2011, in order to encourage aggregate demand. The BoC is going to start raising Canada’s borrowing rates, probably as soon as June. This means there’s more upside ahead for US investors who put their money to work north of the border.

The Canadian government’s perceived prudence stands in stark contrast to the profligate federal government of its southern neighbor. Canada’s dollar is also in favor because of its close connection to commodities–it’s seen to be backed by something more than simply “faith” and “credit.”

Employment trends are stronger up north, and the real estate market remains at least tethered to reality. Significant headwinds–adjustments to a stronger currency, which means exports are less competitive, and still-weak demand from the US, which still accounts for more than two-thirds of total trade–remain for the Canadian economy. But early signs indicate a growing relationship with the East is paying off already.

If you’ve been long Canadian income trusts and high-yielding corporations you’ve been long the loonie and have enjoyed its flight back to parity. If you haven’t, there’s still time to establish positions in Canada-based companies that pay high yields and are on course for sustainable growth over the next decade because of increasing exposure to emerging economies in Asia.

You Cruise, You Win

Roger Conrad and his KCI Investing colleagues have been combing the globe for their next luxury investment cruise: Any ports of call must be ripe with investment potential, of course, but they must provide a rich slice of the world’s treasures and unique insights into human luxury. And after the brutal year we just finished, who couldn’t use some luxuriant down time learning how to prepare their portfolios for what this next decade has in store.

Save the dates: Thursday, October 21, through Monday, November 1, 2010. Explore the wonders of Turkey and the Greek Isles while learning about the newest investment strategies from Roger, Elliott Gue, Yiannis Mostrous and GS Early.

While you enjoy unfettered access to the finest minds in investing today, Seabourn Cruises will upgrade the way you think about luxury cruising as you are feted aboard the brand new Seabourn Odyssey. From its all-included open bar of premium liquor, wine and beer to its almost better than 1-to1 staff-to-passenger ratio, to its maximum capacity of only 450 passengers, you will understand why it immediately jumped to the top of the luxury cruise line ratings charts when it hit the water in 2009.

For those of you lucky enough to have sailed with this keen crew in the past, you know you are in for a meticulously planned journey into the business, investment and cultural offerings of the region. KCI in partnership with Joseph H. Conlin Travel Management is offering this journey solely to KCI subscribers and their friends.

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The Roundup

As reported in Tuesday’s Flash Alert, Provident Energy Trust’s (TSX: PVE-U, NYSE: PVX) months of strategic deliberations have come to a head. Management announced a transaction to spin off its remaining oil and gas production operations and combine them with Midnight Oil Exploration (TSX: MOX, OTC: MDOEF) into a new intermediate oil and gas producer.

Provident will continue as a pure-play natural gas liquids (NGL) infrastructure and services business. Distributions going forward will be paid solely on profits from these operations, which depend on fees that fluctuate with commodity prices to some extent. Management plans to hold the payout at the current rate of CAD0.06 per share per month at least through the end of 2010.

The deal will require a two-thirds affirmative vote from current Provident unitholders and Midnight shareholders. Meetings will be held in May, with a closing of the arrangement expected on or about Jun. 30, 2010.

Provident’s move is yet another step in its multi-year transformation from a combination energy producer and midstream company with assets in both the US and Canada to a much more conservative, dividend-paying entity.

Management still hasn’t set a post-conversion distribution, citing the impact of commodity prices on the bottom line. It has, however, set the stage for paying generous dividends going forward, as cash flows from midstream energy are far steadier than those from production.

As for the upstream business, Provident unitholders will receive 0.12225 shares of the new company, giving us 81 percent of the total equity. That percentage will likely fall in coming months, as funds and other large institutions sell to reinvest in dividend-paying equities. That’s because the stated purpose of the new company is growth, making it unlikely to pay dividends.

Ultimately, however, this piece of the company is likely to prove quite valuable. Midnight’s management, which will run the new enterprise, starts out with 13,000 barrels of oil equivalent per day production (34 percent liquids) with significant new development opportunities including 334,000 acres of undeveloped land in key areas.

These long-life assets, weighted toward oil, exhibit low decline rates. This combination should do well on its own going forward, as energy prices trend higher on rising global demand and as the US economy inches its way back to health.

But it may not stay independent long, given its promise and profitability. The same actually goes for the remainder of Provident, which will be one of the largest pure plays in North America on NGL.

Judging from the ups and downs in Provident today, the market’s initial reaction to this deal seems to be confusion. Ultimately, however, this should be a value-creating deal, in which current unitholders continue to get a big income stream as well as a play in a growth company.

Provident has been undervalued as a combined midstream/production company, mainly because of the market’s love of pure plays. This deal creates two solid ones with the potential to produce big profits either independently or through takeovers.

We’ll have more on the company in the May issue, as well as following its May 13 earnings announcement. Provident will move to the Energy Infrastructure group in How They Rate following the completion of the spinoff.

In the meantime, Provident Energy Trust is still a buy up to USD8.

Here’s other news from around the Portfolio, including first-quarter announcement dates, and items from the How They Rate coverage universe.

Aggressive Holdings

• Ag Growth International (TSX: AFN, OTC: AGGZF)–May 7
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–May 5 (confirmed)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 10 (confirmed)
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–May 6
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–May 7
• Newalta Income Fund (TSX: NAL, OTC: NWLTF)–May 11
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–May 7
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–May 5 (confirmed)
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–May 13
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–May 13 (confirmed)
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–May 6
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–May 7

Conservative Holdings

Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) is buying Hudson Energy Services, a privately held energy marketing company, for a sticker price of CAD304.2 million. Hudson operates in New York, New Jersey, Illinois and Texas, focusing on small to mid-size commercial customers. Management expects the deal to boost distributable cash by more than 10 percent per unit.

To fund the deal Just Energy is raising CAD330 million via an offering of 6 percent convertible extendible unsecured subordinated debentures; CAD295 of the purchase price is due in cash at closing, while over 12 months after the deal closes Just Energy will make quarterly installments of CAD9.2 million. Total costs of the deal, including financing costs, will approach CAD330 million. Just Energy Income Fund is a buy up to USD14.

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–April 29 (confirmed)
• Artis REIT (TSX: AX-U, OTC: ARESF)–May 12 (confirmed)
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)–May 14 (confirmed)
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–May 4 (confirmed)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–May 13
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–May 12 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–May 11 (confirmed)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–May 7
• Colabor Group (TSX: GCL, OTC: COLFF)–April 29
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–May 4 (confirmed)
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–May 13
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–May 14
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–May 12 (tentative)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–May 11 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–May 12
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–April 29
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–April 29 (confirmed)
• TransForce (TSX: TFI, OTC: TFIFF)–April 23 (confirmed)
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–May 6 (confirmed)

Oil and Gas

Advantage Oil and Gas (TSX: AAV, NYSE: AAV) announced Monday that its Glacier natural gas plant–part of the company’s all-in effort to develop its Montney reserves–came on stream ahead of schedule and is producing 50 million cubic feet per day (MMcf/d), or 8,300 barrels of oil equivalent per day (boe/d).

Management expects completion of the gathering and processing facilities to reduce operating costs at Montney from CAD8.25 per boe to approximately CAD2.75. Advantage’s current production capability at Glacier, including all new wells tested to date in the Upper and Lower Montney zones, exceeds 90 MMcf/d.

Trading at a price-to-book ratio of 0.93 and price-to-net asset value of 0.43, Advantage Oil and Gas is a buy up to USD7.

Baytex Energy Trust (TSX: BTE-U, NYSE: BTE) has acquired assets producing approximately 900 barrels of heavy oil per day in the Lloydminster area of southwest Saskatchewan. Baytex is paying the CAD40.9 million purchase price with its revolving credit facility.

Management expects the acquisition to add 2 percent to funds from operations per share for 2010. Baytex Energy Trust is a buy up to USD32.

Bonavista Energy Trust (TSX: BNP-U, OTC: BNPUF), in conjunction with the recent CAD228 million acquisition of high-quality, long reserve life natural gas assets near its Whitecourt property in west central Alberta, is boosting its 2010 capital budget to between CAD530 million and CAD560 million.

The new assets are expected to add 6 percent to current production, bringing Bonavista’s boe/d to 67,000, 63 percent of which is weighted to natural gas, and 8 percent to total proved plus probable reserves. Operating costs are approximately CAD6 per boe, and on-site processing facilities make the acquisition all the more compelling. Bonavista Energy Trust is a buy up to USD22.

Energy Services

Phoenix Technology Income Fund (TSX: PHX-U, OTC: PHXHF) is now providing horizontal and directional drilling services in Siberia.

The Russian subsidiary will commence operations in the third quarter of 2010 with initial capacity of three jobs. Phoenix has made special effort to buy and incorporate “resistivity while drilling” systems, which allow operators to perform drilling-related measurements downhole and transmit information to the surface while drilling a well and are preferred by producers in Russia.

This is an enormous advantage for Phoenix: Russia is the second-largest horizontal drilling market in the world, and few services providers are able to meet this demand. Phoenix Technology Income Fund, diversifying geographically and setting up for solid, long-term growth, is a buy up to USD8.

Financial Services

Toronto-Dominion Bank (TSX: TD, NYSE: TD) has acquired assets and liabilities of three Florida banks in a deal worth USD3.8 billion brokered by the Federal Deposit Insurance Corp (FDIC).

Toronto-Dominion Bank said it acquired the assets and liabilities from Riverside National Bank of Florida, First Federal Bank of North Florida and AmericanFirst Bank from the FDIC. The acquisitions expand TD’s footprint in the Northeast US and establish a foothold in Florida.

The new assets include loans of USD2.1 billion; under a favorable purchase and assumption agreement with the FDIC, TD is shielded from a portion of potential loan losses.Toronto-Dominion Bank is a buy up to USD65.

Health Care

Extendicare REIT’s (TSX: EXE-U, OTC: EXTEF) US subsidiary, Extendicare Health Services Inc (EHSI), has been subpoenaed by the US Dept of Health and Human Services (DHHS) Office of the Inspector General, as part of an investigation into the possible submission of claims that may be in violation of the US Social Security Act and requesting documentation relative to the general operations of eight skilled nursing centers located in eight of the 12 US states in which EHSI operates covering a period from Jan. 1, 2007, to Jan. 1, 2010.