Two years after it succeeded the G7 as the world’s primary venue for economic cooperation the G20 is running into a reality that limited its predecessor and is only more constraining since China, India, Brazil and 10 more interests took seats at the big table: Different national conditions demand different policies.

Here’s another stark fact: When you’re biggest economy on the planet you can do pretty much as you please, and describe it in whatever terms you choose. Thus the US Federal Reserve embarks on a second round of quantitative easing, despite the damage it may do to the US dollar and the implications for other countries that already do or would like to export their way to economic health.

Turning to another front with important implications for investors, in the wake of a resounding defeat in Nov. 2 midterm elections Congressional Democrats and President Obama are more likely to pass and sign a bill that merely extends preferential tax rates on dividends and capital gains rather than enact a permanent policy. Events of the last 24 months have also re-shaped the debate on this issue.

Uncertainty surrounding the global economy, the financial system, and the fundamental health of what remains the world’s most important market is exacerbated by tensions at the international level and within domestic US politics. The threat of a trade war is destabilizing, and the American political situation will likely mean another two years debating the Bush tax cuts.

The calm in the center of these storms remains Canada, whose economy remains on a sustainable path and whose currency stands to benefit from US dollar debasement and rising commodity prices.

In his public turn before this week’s G20 Summit in Seoul Canadian Prime Minister sought to remind his peers about the unity of ’08 and the positive outcomes of their cooperation. At that time coordinated rate cuts, capital infusions, asset purchases and bailouts stabilized then gradually resuscitated a global financial system gone hypothermic. The down-the-line impact of the credit freeze had been felt almost immediately and in nearly every economy of significance. It was a common problem deserving of a common response.

But different countries entered the crisis with different sets of positives and negatives. Some were already saddled with enormous public debt. Others reigned in spending, balanced books and paid down deficits when times were good, setting themselves up to provide effective countercyclical measures. And obviously the US financial system, more than any other, abetted by a long, bipartisan list of elected officials and agency heads, led the world to the brink.

This final item can’t be overemphasized: The massive build-up in real estate–inventory, prices, securitizations–during the middle part of the last decade represents an extraordinary misallocation of capital and resources. It will take a long time to work through its consequences. 

Canada, on the other hand, never experienced a subprime real estate bubble. It ran balanced budgets for the decade ending in fiscal 2008 and made a dent in its federal debt. Constructive relations between major financial institutions and government regulators make for a stable, unspectacular banking system that’s more utility-like than casino-like. And its ample commodities, including the oil sands, separate it from its old G7 peers.

The bottom line is many countries have recovered and are on sustainable growth trajectories. The US, on the other hand, still isn’t producing enough jobs to reduce unemployment. And the Fed is still worried about deflation. In a briefing with reporters after a meeting with Mexican President Felipe Calderon ahead of his appearance before the full Summit in Seoul Mr. Harper observed that “under the circumstances” QE2 is the Fed’s only short-term option to kick-start a struggling economy. There are two circumstances to which Mr. Harper, a shrewd political operator, likely alludes.

For its part, the Fed cut its target overnight rate to its lowest possible level in December 2008. Its primary tool for meeting its “dual mandate”–that it pursue policies that promote “full employment” and “price stability”–is useless right now. And the Canadian prime minister knows, perhaps better than any other world leader, that political chasms make the prospect of more fiscal stimulus legislation not just unrealistic but downright laughable.

Given that his country is the No. 2 in the largest bilateral trade relationship in the world it stands to reason that Mr. Harper is familiar with the broad contours of US domestic politics and the economy and. It’s his job to know what’s happening with his country’s largest trading partner and to nourish the relationship. However tempting it is to describe Mr. Harper’s defense of the Fed’s QE2 program as a junior partner doing as he should, it must be noted that the prime minister really doesn’t screw around when it comes to pursuing his own best interest.

His bottom line is that a healthy US economy is good for Canada. Right now US policymakers are left with QE2 as the only viable option to get the domestic economy growing at a pace that brings down unemployment. This, they believe, is the best contribution they can make to the global economy, which includes a lot of countries that need Americans to consume their output.

The express goal of QE2, stated by none other than Fed Chairman Ben Bernanke in no less a forum than the Washington Post, is essentially to boost asset prices, including those for stocks:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

In this construct a weaker dollar, however foreseeable, is an unintended consequence. Prime Minister Harper is saying the right things right now, primarily because he can afford to. Canada is fundamentally sound, the world wants and needs its resources, and his political support for a beleaguered but critical senior partner will eventually be rewarded.

The last two years have clearly been unkind to Democrats, perhaps none more so than President Obama. The Huffington Post, a widely followed news and commentary aggregator aimed at Blue America, reported Thursday morning that White House Senior Advisor David Axelrod conceded that President Obama would sign a compromise bill that extends Bush-era reductions in dividend and capital gains tax rates for all taxpayers for two years. The political environment has shifted as a result of the Nov. 2 midterm Congressional elections, explained Axelrod, and policy must be made within this new reality.

Attempting to walk back his comments for the benefit of supporters on the left appalled at the appearance of caving to Republicans, Axelrod later said, “We believe that it’s imperative to extend the tax cuts for the middle class, and don’t believe we can afford a permanent extension of tax cuts for the wealthy.” That sounds a lot like the temporary two-year extension for everyone implied in the HuffPo report. If Congress doesn’t act before Dec. 31, the cuts will expire and investors will pay tax on dividends and capital gains at ordinary top marginal rates. Nobody wants that.

As we enter the lame-duck period for the 111th Congress we’re essentially preparing for two more years of uncertainty on of this issue, which could have been solved as part of the first fiscal stimulus debate back in 2009. “The Bush tax cuts” will clearly make an interesting topic for the first presidential debate of the 2012 cycle, now only a couple months away.

Indeed, 2008 seems like a long way’s off.

The bottom line for income investors: Congress is likely to pass and President Obama will sign a bill that, with one hand, extends preferential tax rates on dividends (and capital gains) for all taxpayers for two years and, with the other, jerks the market around by ensuring this potato will stay hot through the 2012 election season.

As for quantitative easing, it’s fraught with potential problems, not least of which is a potential race to the bottom featuring the world’s major currencies. Governments that choose to boost domestic economies by making their exports more attractive on the global marketplace have to keep their currencies low relative to the US dollar, the reserve currency and the grease for the global economy. If other countries undertake currency weakening measures such as quantitative easing the desired effect of rising exports won’t materialize. All you’re left with is inflation, which is likely to show up first in rising oil prices.

Scared about America’s potential debt implosion? Personal responsibility demands that you protect yourself and your portfolio. Buy Canada as a hedge against the collapse of the US dollar–specifically Canadian income trusts that will soon be high-yielding corporations and those that have already made the transition. And enjoy another two years of preferential rates; the high payouts should at least mitigate some of the aggravating uncertainty.

The Roundup

We’re off and running on third-quarter earnings reporting season, and thus far the numbers for Canadian Edge Portfolio recommendations have been solid. The November Portfolio Update includes details for the following Aggressive and Conservative holdings:

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)
• Davis+ Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)
• Daylight Energy (TSX: DAY, OTC: DAYYF)
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)
• Macquarie Power & Infrastructure (TSX: MPT-U, OTC: MCQPF)
• Newalta Corp (TSX: NAL, OTC: NWLTF)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)
• Phoenix Technology Income Fund (TSX: PHX-U, OTC: PHXHF)
• TransForce (TSX: TFI, OTC: TFIFF)
• Yellow Media (TSX: YLO-U, OTC: YLWPF).

Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CWIUF), returning to the Portfolio as an Aggressive Holding, and stalwart Conservative Holding RioCan REIT (TSX: REI-U, OTC: RIOCF) are covered in November’s High Yield of the Month.

ARC Energy Trust (TSX: AET-U, OTC: AETUF), Daylight Energy Ltd (TSX: DAY, OTC: DAYYF), Newalta Corp (TSX: NAL, OTC: NWLTF) and Phoenix Technology Income Fund (TSX: PHX-U, OTC: PHXHF) are discussed in Energy: Focus on Output, the November Feature.

Canfor Pulp Income Fund(TSX: CFX-U, OTC: CFPUF)is the subject of an Oct. 26 Flash Alert, while Colabor Group (TSX: GCL, OTC: COLFF), an early reporter, got its treatment in the October Portfolio Update.

Results for Perpetual Energy (TSX: PMT, OTC: PMGYF) and Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF) were the subject of Tuesday’s Flash Alert. We’ll have coverage of third-quarter results for remaining Portfolio companies in Flash Alerts throughout the cycle.

We’re also keeping track of what happened during the 12 weeks ended Sept. 30 in the How They Rate coverage universe. Highlights are below.

Oil and Gas

Canadian Oil Sands Trust (TSX: COS-U, OTC: COSWF) reported that cash from operating activities exceeded distributions by CAD88 million in the third quarter and by CAD343 million for the nine months ended Sept. 30. The trust generated CAD0.68 per unit, up from CAD0.44 a year ago, more than enough to cover the recently increased (but soon to decrease) monthly distribution of CAD0.50 per unit.

In late October Syncrude, the operating joint venture of which the trust owns 36.7 percent, revised its outlook for 2010 production down to 105 million barrels within a revised range of 102 million to 108 million from an original estimate of 115 million barrels. Management cited maintenance issues as the cause for the downward adjustment.

Earnings fell 31 percent year over year to CAD171 million (CAD0.35 per unit). The trust earned CAD0.51 in the third quarter of 2009, while Bay Street was looking for CAD0.19 per unit for the current period. Sales volumes averaged 96,000 barrels a day in the quarter, down 17 percent from a year earlier. Revenue fell 7.9 percent to CAD745 million.

Canadian Oil Sands will convert on or about Dec. 31. Management has already warned that the CAD0.50 per unit monthly distribution will be cut. The major variable is the price of oil. Canadian Oil Sands Trust is a buy up to USD26.

Cenovus Energy’s (TSX: CVE, NYSE: CVE) third-quarter operating earnings declined 63 percent to USD159 million (USD0.21 per share) from USD427 million (USD0.57 per share). Cash flow was USD509 million, down 45 percent from USD924 million. Net earnings were USD223 million, up from USD101 million last year.

Management now expects full-year cash flow–the best indicator of the ability to boost production–to be between USD2.2 billion and USD2.4 billion, down from previous guidance of USD2.4 billion to USD2.8 billion.

Realized natural gas prices were 37 percent lower in the third quarter of 2010 than a year ago. The company also paid higher royalties on its Foster Creek production.

Production from the Foster Creek and Christina Lake oil sands projects increased 25 percent for the quarter. Management will pay a fourth-quarter dividend of USD0.20 per share on Dec. 31 to shareholders of record Dec. 15. Cenovus Energy is a buy up to USD30.

Nexen (TSX: NXY, NYSE: NXY) reported third-quarter earnings of CAD534 million (CAD1.02 per share), up from CAD122 million (CAD0.23 per share) a year ago. The profit included a net gain of CAD522 million on the sale of heavy oil assets. Cash flow rose 28 percent to CAD485 million (CAD0.92 per share).

Management expects 2010 production to come in within its forecast range of 230,000 to 280,000 barrels of oil equivalent. Nexen is a buy up to USD25.

Electric Power

TransAlta Corp (TSX: TA, NYSE: TAC) reported net earnings for the third quarter of CAD38 million (CAD0.17 per share), compared to CAD66 million (CAD0.34 per share) for the same period in 2009. Management said the decrease in earnings was primarily due to “poor market conditions.”

Weak electricity prices in Alberta hit merchant generation and energy trading businesses, while lost production from the decommissioning of TransAlta’s Wabuman 4 unit was also a factor. Strong availability across the fleet and increased generation gross margins from the acquisition of Canadian Hydro mitigated some of these problems. Cash flow from operations was CAD230 million, up from CAD194 million a year ago on favorable changes in working capital.

Fleet availability increased to 91 percent from 83.9 percent a year ago. TransAlta expects total fleet availability to be in the range of 89 to 90 percent for 2010 compared to 85.1 percent in 2009. TransAlta Corp is a buy up to USD22.

Business Trusts

IESI-BFC Ltd (TSX: BIN, NYSE: BIN) reported a 62.5 percent jump in revenue to CAD436.3 million from CAD268.4 million in the third quarter of 2009, driven largely by the acquisition of Waste Services. Excluding this impact revenue was up 15.7 percent.

Excluding the impact of foreign exchange, organic gross revenue grew 6.5 percent in Canada, driven by core price (2.7 percent) and volume growth (4.2 percent). US organic gross revenue increased 3.9 percent, driven largely on a core price growth of 1.5 percent. US volume increased 1.2 percent. Adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) were CAD126.3 million in the third quarter, up from CAD79.4 million a year ago. Excluding the impact of foreign exchange, adjusted EBITDA was up 53.1 percent. Free cash flow for the quarter was CAD63.3 million, up from CAD38.5 million a year ago. IESI-BFC Ltd is a hold.

Natural Resources

Barrick Gold Corp (TSX: ABX, NYSE: ABX) enjoyed a record third-quarter profit on better-than-expected gold production and lower cash costs. The price of gold has soared nearly 30 percent in the past year, recently touching USD1,400 an ounce. But the price, in management’s view, is well supported. Demand for gold in China and India remains strong, central banks continue to be net buyers of gold, and exchange-traded gold holdings are at record levels. And Barrick CFO Jamie Sokalsky said during a conference call to discuss results that Barrick sees supply from gold mines contracting.

Barrick reported third-quarter cash flow of USD1.3 billion, the third quarter in a row cash flow has exceed USD1 billion. The company earned USD837 million (USD0.85 per share) on sales of USD2.8 billion. Adjusted earnings were USD829 million (USD0.84 per share), up from USD473 million (USD0.54 per share) a year ago. Production ran ahead of management plans, as Barrick pulled 2.06 million ounces of gold at lower-than-expected total cash costs of USD454 an ounce. Barrick Gold is a buy up to USD50.

Labrador Iron Ore Royalty Income Fund (TSX: LIF-U, OTC: LIFZF) reported royalty income for the third quarter of CAD40.6 million, up from CAD15.5 a year ago. Adjusted cash flow for the quarter was CAD85.9 million (CAD2.68 per unit), up from CAD18.8 million (CAD0.59 per unit) in 2009.  Net income was CAD64.4 million (CAD2.01 per unit), up from CAD13.6 million (CAD0.43 per unit).

Results were helped by “substantial increases in prices” for concentrate and pellets above levels recorded in the third quarter of 2009. Sales volume was lower than expected because of the timing of shipments; this should correct in the fourth quarter.

Equity earnings from Iron Ore Company of Canada (IOC) were CAD38.1 million (CAD1.19 per unit) as compared to CAD3.3 million (CAD0.10 per unit) in 2009. The increase resulted mainly from the substantial price increase from last year’s level.

Management noted that although volatility remains, “the general tone remains positive.” IOC expects to sell all the iron ore it can produce over the balance of 2010, though the strength of the Canadian dollar against the US dollar will be somewhat of a drag. Demand from Asia remains strong, and the rest of the world–save North America, which remains relatively weak–is gradually ramping up economic activity. Spot iron ore prices, though still below the peak reached in the second quarter of 2010, remain about double 2009 levels. Labrador Iron Ore Royalty Income Fund is a buy up to USD60.

Teck Resources (TSX: TCK/B, NYSE: TCK) reported adjusted earnings of USD467 million (USD0.79 per share), up from CAD337 million (USD0.59 per share) a year ago. The increase was driven by higher prices for coal and base metals.

Earnings attributable to shareholders of the company were USD331 million (USD0.56 per share) in the third quarter, down from USD609 million (USD1.07 per share) a year ago. Third-quarter 2010 earnings included a USD340 million charge related to refinancing of a portion of company debt. In 2009 third-quarter earnings included a USD311 million foreign exchange gain on Teck’s US dollar denominated debt compared with USD26 million this year.

Revenue from operations was a record USD2.5 billion in the third quarter, up from USD2.1 billion a year ago. Stronger copper prices offset an 18 percent reduction in sales, resulting in similar revenue to a year ago. Coal revenue increased by USD281 million on higher coal prices. Zinc revenue increased by USD111 million, primarily on higher zinc and lead prices and higher volumes. A weaker US dollar partly offset higher commodity prices in each business unit. Teck Resources, which has gotten expensive, is a hold.

Energy Services

Mullen Group (TSX: MTL, OTC: MLLGF) reported a 17.1 percent rise in consolidated revenue in the third quarter, as the company’s Trucking/Logistics segment benefited from acquisitions and the Oilfield Services segment enjoyed stronger demand. The latter was driven by increased drilling activity, more transportation of fluids, and the need for well servicing. Companies also re-started oil sands projects. Funds from operations were CAD47.5 million, up 30.1 percent from a year ago.

Management was pleased that the third quarter “continued the trend of strengthening demand for the majority of services provided by Mullen Group’s business units.”

Operating income for the quarter was CAD55 million, up 19 percent from a year ago. Net income was CAD28.4 million (CAD0.36 per share), down CAD2.5 million, or 8.1 percent from the CAD30.9 million (CAD0.39 per share) generated in the third quarter of 2009. The decrease owes to a CAD14.1 million year-over-year decrease in unrealized foreign exchange gains and a CAD1.8 million increase in income tax provisions. These items were offset by the CAD8.8 million increase in operating income, a CAD4 million change in the fair value of investments, and a CAD600,000 decrease in depreciation expense. Mullen Group is a buy up to USD15.

Food & Hospitality

A&W Revenue Royalties Income Fund (TSX: AW-U, OTC: AWRRF) reported same-store sales growth of 1.7 percent for the third quarter–the 30th consecutive quarterly increase–and 2.8 percent year to date. Royalty income for the 12 weeks ended Sept. 30 was up 4.6 percent to CAD5.7 million; it’s up 8.2 percent for the year. Growth in same-store sales and additions to the royalty pool drove the increase. Cash expenses, interest and taxes decreased by CAD2,000 in the quarter but are up CAD71,000 year to date.

Distributable cash per unit was CAD0.372 for the third quarter and CAD1.036 for the first nine months of 2010, an 8.2 percent increase from year-ago levels. The fund distributed CAD0.318 per unit in the third quarter and has paid CAD0.848 in 2010. The third-quarter payout ratio was 85.4 percent. Management also announced a second special distribution for 2010, in the amount of CAD0.10 per unit to be paid Nov. 30. A&W Revenue Royalties Income Fund is a buy up to USD18.