You can’t claim to cover anything to do with Canada and not discuss last week’s employment report from the country’s official data agency. And the numbers are remarkable. But there are a couple worrying trends below the headline figure that bear a little extra scrutiny, specifically decreases in hours worked and average pay.

According to Statistics Canada’s June 2010 Labour Force Survey, though, the domestic economy generated a little more than 93,000 jobs last month, almost five times more than the consensus estimate and completing the best three-month run of job creation since 1976. At these levels you would normally see job creation in the US somewhere in the 300,000 to 400,000 per month range.

The Canadian economy has created more than 300,000 jobs in 2010, numbers that are typically seen for the entire 12 months during years of robust growth. The unemployment rate dipped below 8 percent, to 7.9 percent, for the first time since January 2009. In the next couple months Canada is likely to pass the pre-recession total jobs peak. The US, which has shed 7.6 million jobs since 2007, won’t pass its pre-recession employment peak for another five years, and then only if overall economic growth returns to its long-term trend rate.

This is yet another sign that Canada is, ever so slightly but enough to make a difference, evolving out of almost total dependence on the US for its economic vitality. Notable in the June Labour Force Survey is that the manufacturing, the sector most tied to US economic activity, actually reported a decline. More jobs are being created in the service sector, including retail and wholesale trade; business, building and other support services; health care and social assistance; automotive repair; and personal care services. This reflects a longer-term trend of rising wealth and standard of living.

But hours worked actually declined 0.25 percent in June, the first decline in three months, the second in the last six. And average hourly earnings were down 0.6 percent month over month, on the heels of a 0.4 percent decline in May. Although the average wage was 1.7 percent higher last month than it was in June 2009, wages have declined in Canada for four of the past five months, even as the unemployment rate has come down. Average pay is at its lowest level in nine months.

Yet, demonstrating in still another way its relative strength in the global economy, Canadians continue to consume. StatsCan reported a CAD500 million trade deficit for May, following a CAD300 million deficit in April. A deteriorating trade balance is a drag on gross domestic product (GDP), but in Canada’s case in May it reflects the impact of surging domestic demand–a better-than-expected jump in exports was offset by an even more impressive gain in imports.

Canada’s labor force participation rate is up to 67.4 percent, its highest level in a year, and the employment-to-population ratio improved in June to 62.1 percent. Although they’re taking home slightly less, more Canadians are on the job. It’s important to note, too, that oil and gas explorers and producers are loath to stick out their necks on hiring given the fragile state of the global economic recovery.

Second-quarter earnings for the group are likely to be solid, less impressive on year-over-year comparisons but still indicative of a strong recovery. The uncertainty that crept up during the latter half of the quarter, triggered by softer economic data and violent curiosities such as the Flash Crash, likely won’t show up much on corporate bottom lines. New capital is flowing into certain segments of the market. Nevertheless, a return to pre-recession oil and gas development levels awaits confirmation that the US will avoid a double-dip and that the global recovery will endure. That’s when the Canadian economy will run on all cylinders.

Initial jobless claims in the US have hovered around 450,000 a week all year. A quarter of the job losses have been in construction; these jobs aren’t coming back anytime soon. Another 25 percent were manufacturing jobs. Gains in productivity and low rates of capacity utilization suggest these jobs won’t be back soon, either. Productivity and capacity, as well as low figures for hours worked and uncertainty among corporate decision-makers indicate hiring won’t pick up enough to account for new entrants to the US job force for some time.

What the present data mean for Canada is that Bank of Canada (BoC) Governor Mark Carney is unlikely to boost interest rates again following the June 1 25 basis point hike to 0.5 percent. It’s always better to add jobs than to subtract from the wage force, but the decline in hours worked equates to more than 40,000 job losses, or almost half of the total created. The Canadian dollar popped on the StatsCan release and other measures of interest rate expectations registered noticeable spikes. But the the BoC is likely to find that the balance of factors remains in favor of cheap money right now.

When we say Canada is better off than the rest of the developed world it’s important to keep in mind that this is all relative. Canada is better positioned because of its fiscal health, financial stability and resource wealth to prosper amid what will be a jarring shift in the global economic growth profile, which has its ground zero, it seems, in the US employment market.

Deflation, deflation, deflation: Fiscal austerians and die-hard Keynesians agree it’s the No. 1 threat to the American economy right now. They both argue, too, that the Federal Reserve ought to be doing more to prime the pump; although the overall monetary base may have grown exponentially and alarmingly in recent years, the “multiplier” system–the way money gets circulated into and through the real economy–is broken.

It’s not that policymakers want banks to make loans they don’t think will ever be repaid; excess risk-taking got us into this mess. But we do want banks to do more than simply hold newly created reserves in their vaults. We want them to make loans that will help businesses, ultimately, hire new workers. Simply increasing the monetary base hasn’t worked and won’t work in the future. Penalizing them for not loaning is unlikely to lead to the types of lending that will support long-term growth.

Banks do want to lend to solid businesses. However, consumption is weak, investment is weak, and exports are weak; the remaining way to create opportunities on the demand side–to get solid businesses to want to borrow–is through additional federal fiscal stimulus spending, including tax credits for new hiring. That’s a difficult political sell for a US administration already on its heels on a number of issues. And November mid-term elections loom, meaning vulnerable Congressional Democrats won’t do much to aggravate already unhappy voters back home. Fed Chairman Ben Bernanke has at his disposal several tools he can use to stimulate the lending cycle. According to the die-hard Keynesian Paul Krugman, “[The Fed] can buy longer-term government debt. It can buy private-sector debt. It can try to move expectations by announcing that it will keep short-term rates low for a long time. It can raise its long-run inflation target, to help convince the private sector that borrowing is a good idea and hoarding cash a mistake.”

Here’s one final data morsel. The average payroll growth rate at peaks in the Institute of Supply Management manufacturing index is 3 percent, and it will typically continue to accelerate for another six months after hitting a high before reversing. On the high end we’ve seen 5.3 percent growth, on the low 1 percent. Sobering, then, that payroll growth was negative 1.1 percent at the recent ISM peak, reality brought to us by Gluskin + Sheff Chief Economist David Rosenberg. Rosenberg concludes:

This means that not only will we never get back to the old pre-recession highs in employment, but that the jobless rate is going to grind ever higher in coming quarters and, in turn, that means so long as the laws of supply and demand are still relevant as far as the labour market is concerned, wages move from disinflation towards outright deflation.

Now more than ever you need investments that generate cash. And there’s no better way to build wealth over the long term than with high-quality dividend-paying equities, which can be found in abundance in Canadian Edge.

The Streets of San Francisco

Roger Conrad and David Dittman will be patrolling the San Francisco Marriott Marquis during the San Francisco Money Show August 19-21 for Maple Leaf Memo readers who are interested in learning more about Canada’s growing global presence, who want to learn how to apply the tools we use to identify viable high-yielding business in the Great White North to establish sustainable income streams around the world, who want to know the latest on income trust conversions and who are curious about what the activities of sovereign wealth funds (SWF) such as China Investment Corp (CIC) say about the future of the world economy.

Eight score and two years ago, with the onset of the California Gold Rush, San Francisco earned a reputation as a prospector’s town. It’s time again to seek paths to prosperity–and to enjoy one of the most beautiful natural settings in the US, if not the world. Click here or call 800-970-4355 and refer to priority code 019366 to register as a guest of Maple Leaf Memo.

The Roundup

Leading off second-quarter reporting season in impressive fashion, Conservative Holding Colabor Group (TSX: GCL, OTC: COLFF) reported a 66.7 percent jump in its earnings per share. The eastern Canada-based distributor of food and other items operates a largely recession-proof business that’s stood up well to continued economic pressures, even as the company has continued to expand its market reach.

Earlier this year Colabor announced the loss of a major customer, which hit sales 13.6 percent from year-ago levels. Sales also fell 2.6 percent excluding this contract, which management attributed to “typical post-recession lag in the recovery of distribution-segment sales related to the food service industry.” Cash flow margin, however, rose to 3.66 percent from 3.52 percent the year before, reflecting tight control of operating expenses.

That was a major factor pushing up profits and enabled the company to cover its quarterly distribution with a low payout ratio of 79 percent of cash flow. It also helped Colabor reduce the amount of its CAD100 million credit line outstanding from CAD62.1 million at the end of the first quarter to just CAD20.5 million now. The balance sheet was further strengthened by the issue of CAD50 million in convertible bonds, pushing the total debt-to-cash flow ratio down to just 0.66, versus a maximum allowed of 3-to-1.

That adds up to considerable funds available to resume the company’s pace of acquisitions. Management views the second half of 2010 as “encouraging due to the gradual improvement of economic conditions and the resulting effect on discretionary spending, including spending on meals taken away from home.”

Looking ahead, the company’s biggest challenge will be replacing the volume lost to the recession, which its strong financial position gives it the wherewithal to do. There’s no 2011 risk, as it has long since converted to a corporation. And coverage of the 9 percent-plus dividend should continue to improve. Colabor Group remains a buy up to USD12 for those who don’t already own it.

Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF) unitholders who’ve held out for an improved offer will be rewarded for their patience: Parent Boralex Inc (TSX: BLX, OTC: BRLXF) has boosted its offer “in light of changing market conditions.”

Boralex has boosted the annual interest rate on the convertible debentures to be issued to exchange for income fund units to 6.75 percent from 6.25 percent and has reduced the conversion price to CAD12.50 per Boralex share from CAD17 per share. The new conversion rate is approximately 8.0 Boralex shares, up from 5.88235, for each CAD100 principal amount of debentures income fund holders receive in lieu of their units. The new offer is open until 7:00 p.m. Montreal time July 30.

We described the previous offer as a good one for Boralex Power Income Fund unitholders–a decent price given recent operating problems and an opportunity to participate in Boralex Inc’s growth. The problem is US brokers, in whom we have little faith in their ability to reliably track the convertible. If your broker is confident they can track these new convertibles, by all means stick in there. We’ll pick up coverage of Boralex Inc, in place of Boralex Power Income Fund, once the deal is finalized. If, on the other hand, you’ve ever had a problem collecting a dividend from a Canadian trust–or anything other than a New York Stock Exchange- or Nasdaq-listed stock for that matter–this is probably not something you want to hold past July 30.

Our advice is to sell Boralex Power Income Fund sometime this month, the closer to CAD5 the better.

Aggressive Holdings

Here are second-quarter earnings announcement dates for Aggressive Portfolio recommendations:

• Ag Growth International (TSX: AFN, OTC: AGGZF)–August 12
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–August 4 (confirmed)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–July 28
• Daylight Energy (TSX: DAY, OTC: DAYYF)–August 5
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–August 10
• Newalta Income Fund (TSX: NAL, OTC: NWLTF)–August 6
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–August 6
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–August 12
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–August 12
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–August 13
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–August 11
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–August 6

Conservative Holdings

Innergex Renewable Energy (TSX: INE, OTC: INGXF) has submitted eight proposed wind farm development projects in response to a request from Hydro-Quebec Distribution. Hydro-Quebec plans to purchase 250 megawatts (MW) worth of wind power generated by plants constructed under the program. Each of the Innergex plants would produce 24.6 MW after they come on line in December 2013. Innergex will develop the projects in partnership with local organizations and municipalities, which will own between 30 percent and 50 percent of each respective facility.

Innergex has interests in three wind farms with combined net installed capacity of 121 MW presently operating in Quebec, while three more, with total capacity of 103 MW, are already under construction. Hydro-Quebec will likely announce winners under its new round of bidding by the end of 2010. Innergex Renewable Energy is a buy up to USD10.

Yellow Pages Income Fund’s (TSX: YLO-U, OTC: YLWPF) Trader unit has acquired privately held CanadianDriver.com, an online magazine that’s published more than 11,000 articles on automotive topics, including new car reviews, test drives and industry news.

Trader anticipates the content will aid car buyers as they search for potential targets using its platform. It also adds to the company’s audience and opens up new advertising opportunities. Yellow Pages Income Fund is a buy up to USD8.

Here are second-quarter earnings announcement dates for Conservative Portfolio recommendations:

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–July 29 (confirmed)
• Artis REIT (TSX: AX-U, OTC: ARESF)–August 11 (confirmed)
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)–August 11
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–July 28 (confirmed)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–August 11
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–August 9 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–August 10 (confirmed)
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)–August 13
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–August 12
• Colabor Group (TSX: GCL, OTC: COLFF)–July 7 (confirmed)
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–July 28
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–August 5
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)–August 13
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–August 6
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–August 4 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–August 9 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–August 6
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–July 29
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–July 29 (confirmed)
• TransForce (TSX: TFI, OTC: TFIFF)–July 29 (confirmed)
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–August 6

Oil and Gas

Equal Energy (TSX: EQU, NYSE: EQU) closed the sale of non-operated, deep sour gas and related infrastructure assets in west central Alberta for net proceeds of CAD24.3 million. Combined with the CAD35.9 million generated by an equity offering that closed July 9 Equal now has CAD60.2 million in cash on its balance sheet.

Equal’s lending syndicate, following an annual review, has boosted the company’s borrowing base from CAD110 million to CAD125 million. The interest rate in the renegotiated facility is the London Interbank Offered Rate (LIBOR) plus 2.5 percent, down from LIBOR plus 3 percent under the previous arrangement. As of June 30 Equal had bank debt of CAD66 million. Hold Equal Energy.

Pengrowth Energy Trust (TSX: PGF-U, NYSE: PGH) is buying the 82 percent of Monterey Exploration (TSX: MXL) it didn’t already own, taking a significant step into the prolific Montney shale gas play. Pengrowth is offering either 0.8298 of a Pengrowth trust unit per Monterey share; or 0.8298 of an exchangeable share of Pengrowth Corp, with each exchangeable share being exchangeable for one Pengrowth trust unit, per Monterey share. The purchase price is equivalent to approximately CAD8.30 per Monterey share based on the 10-day (through July 9) volume-weighted average price of CAD10 per Pengrowth unit. Total consideration for the current transaction of CAD366 million includes CAD30 million of Monterey debt. Accounting for the prior purchase of 18 percent of Monterey–at an average price of CAD0.96 per share–Pengrowth is all in for CAD375 million.

Monterey has developed Montney reserves in the Groundbirch area of northeast British Columbia, where it holds a 90 percent operated working interest 19 net sections of concentrated acreage in what’s described as the thickest, most prospective area of the Montney formation. Management forecast 2010 and 2011 production of 6,000 barrels of oil equivalent per day (boe/d) and 10,000 boe/d, respectively, and reported a proved plus probable reserve life index of 10.8 years based on expected 2010 exit production. Pengrowth Energy Trust is a buy up to USD10.

Electric Power

Northland Power Income Fund (TSX: NPI-U, OTC: NPIFF) broke ground on a CAD176 million, 100.5 megawatt wind farm in Quebec. The Mont Louis project will operate under a 20-year power purchase agreement awarded by Hydro-Quebec back in 2004. Hydro-Quebec will also reimburse CAD30 million of the overall construction cost.

Northland plans to raise CAD120 million in the credit market to cover the majority of the plant’s cost, with closing anticipated in September. Northland Power Income Fund, which will convert to a corporation without cutting its dividend, is a buy up to USD13.

Real Estate Trusts

Crombie REIT (TSX: CRR-U) revealed plans to buy 11 Sobeys-focused retail properties for CAD102 million with Empire Company Ltd (TSX: EMP/A, OTC: EMLAF), parent of the ubiquitous Canadian grocery outlet. Crombie is issuing on a bought-deal basis 2.67 million units at CAD11.05 per for gross proceeds of CAD29.5 million. An Empire subsidiary is also buying 1.86 million exchangeable units at CAD11.05 for another CAD20.5 million.

The 11 properties are 100 percent leased; Sobeys, Canada’s second-largest retail grocer, will occupy approximately 95 percent of the total acquired space on lease terms averaging 20 years. Crombie REIT is a buy up to USD11.

H&R REIT (TSX: HR-U, OTC: HRREF) is issuing CAD100 million of 10-year, 5.9 percent convertible unsecured subordinated debenture on a bought-deal basis. Net proceeds will be used to repay debt, for acquisitions and for general trust purposes. Hold H&R REIT.

Lanesborough REIT (TSX: LRT-U, OTC: LRTEF) is selling a 102-suite apartment building in Moose Jaw, Saskatchewan, for CAD6.6 million. Lanesborough will see CAD3.2 million of that cash and use it to pay down debt. Sell Lanesborough REIT.