The Bank of Canada (BoC) held its target overnight rate steady Tuesday. The BoC removed its “conditional commitment” to keep its target overnight rate at its effective lower bound in April. Over the next three policy meetings it boosted the rate from 0.25 percent to 1 percent, where it currently stands. In its October rate policy statement the BoC noted

While the Bank expects that private demand in advanced economies will become sufficiently entrenched to sustain the recovery, the combination of difficult labour market dynamics and ongoing deleveraging in many advanced economies is expected to moderate the pace of growth relative to prior expectations. These factors will contribute to a weaker-than-projected recovery in the United States in particular.

Following up a day later with its quarterly Monetary Policy Report (MPR), the central bank, reiterating the above paragraph in full, also concluded that the global recovery would unfold more slowly than previously expected; that the Canadian economy was entering a period of “more modest growth;” and that a return to full capacity and the 2 percent inflation target would occur by the end of 2012.

Data released since the Oct. 20 MPR, particularly in the US, the primary locus of BoC concern, underscore the BoC’s cautious outlook. Below, via a widely circulated image, is just about all you need to know about the recovery and its discontents. Courtesy of the fine folks at Calculated Risk, here’s the story of the Great Recession in employment terms:

Source: Calculated Risk

If the Canadian economy is a three-legged stool, one leg is the domestic economy, the other two the US and the emerging Asian economies.

Although Canada’s domestic well-being rests more and more every day on what happens across the Pacific, more than 70 percent of its economy consists of commerce with its southern neighbor. The US-Canada relationship is still the biggest bilateral trade relationship on the planet. Although last week’s US employment report was hardly inspiring–particularly in light of the challenge defined by the image above–there are signs that elusive private demand is at least no longer withering.

The Bureau of Labor Statistics reported Friday that total manufacturing jobs fell by 13,000 in November, making it the fourth consecutive month with a small decline. But on Wednesday the Institute for Supply Management’s (ISM) monthly survey of manufacturing companies revealed a score of 57.5 for employment; any number over 50 in the ISM protocol indicates more companies are adding workers than are reducing employment. A number as high as 57.5 suggests that a large number of companies are hiring. November is the eighth straight month with an ISM employment number above 56–the first time in nearly 40 years there’s been a streak this long. Reconciling the difference between the BLS report and the ISM survey could mean an upward revision to the November payroll numbers.

The employment situation in Canada is markedly different than in the US, as you might expect given the relative strengths possessed by our northern neighbor heading into the recent madness, including the glaring absence of a subprime problem that wrecked the domestic housing industry. At the headline level the comparison could hardly be more favorable to Canada: The unemployment rate in Canada is down to 7.6 percent, more than two full percentage points lower than in America and the lowest rate in more than two years.

What has to happen is that firms begin using the easy capital they’ve built up during this period of low rates to invest more in equipment and people. Fixed business investment has finally started to play a role in the recovery, at least in the Great White North. Along with its otherwise disappointing GDP report for third quarter Statistics Canada reported that business investment in plant and equipment recorded its strongest three-month increase so far in 2010, as investment in machinery and equipment expanded 6.5 percent.

If we see follow-through in the ISM figures, then we’ll see the seeds of a return to normalcy in the US and an era of resource-driven growth for Canada. In the meantime, an emergent universe of high-yield corporations, born through the death of the Canadian income trust sector, provides a great way to build wealth for US-based investors no matter the economic conditions. Check out the chart below comparing the performance on a total return basis (distributions plus capital gains or losses) of the S&P 500 (white line) against the S&P/Toronto Stock Exchange Composite Index (red line) and the S&P/Toronto Stock Exchange Income Trust Index (green line) in US dollar terms since the debut of Canadian Edge in July 2004. (We used a prettier version of this chart in the December issue of CE, which is available now at www.CanadianEdge.com and includes the most thorough run-down of the implications of income trust conversions and how to profit you’ll find anywhere.)

Source: Bloomberg

The period depicted includes numerous sector-specific events such as the initial trust tax threat that bubbled over during Thanksgiving weekend 2005 and the Halloween massacre in 2006. And it includes, of course, the meltdown of the subprime-pumped US housing market in 2007, the implosion of Lehman Brothers in September 2008 and the March 2009 Great Recession lows.

The present uncertainty is nowhere near as intense as what we dealt with from 2007 to early 2009. Monetary authorities have proved that they’ll step in to prevent dislocation in the financial system along the lines of what happened in the aftermath of the Lehman debacle. There will be no more failures of that magnitude. Of course questions can be raised about the medicine applied and what kind of withdrawal it’ll cause, but the proposition remains the same: This picture tells me that high-yielding Canadian corporations–former income trusts–are one solid vehicle for US investors to protect and build wealth for the long term.

Deal or No Deal

A deal announced Monday evening will extend the so-called Bush era tax cuts for two years, avoiding the automatic expiration of reduced rates on dividend and capital gains income at midnight on Dec. 31.

The other part of the Congressional Republican-White House quid pro quo: Unemployment benefits, which expired last week, will be continued for another 13 months. The deal also includes a temporary 2 percent payroll tax cut to replace the Obama administration’s “Making Work Pay” tax credit included in the 2009 economic stimulus package.

The fact that Congressional Republicans and the White House have reached agreement is only half the story. Democrats, who control the House and the Senate throughout this lame-duck session, will study the package on Tuesday. There’s no guarantee they’ll vote in favor of this compromise.

In any case, what we get is two more years of political footballing on this issue. Needless to say it will be a major topic–sooner than most of us would like, too, as there are already presidential debates on the docket–in the 2012 campaign. As was the case in the early 2000s, the market is unlikely to fully price what it perceives to be a temporary situation. The data suggest the advantaged rates for dividends and capital gains were never fully reflected in share values because of the sunset provision. The new deal is nothing more than another sunset.

We’ll continue to enjoy the advantaged rates for the next two years, no question about it. But it’s likely the market reaction to President Obama’s late-Monday announcement will be muted.

BP and the Oil Sands

BP Plc (NYSE: BP), emerging from April’s Macondo disaster in the Gulf of Mexico, is putting up the first USD2.5 billion in costs to start up the Sunrise oil sands project in Alberta. The move is sure to draw even more scrutiny to the controversial oil sands given BP’s starring role in the biggest oil spill ever.

BP estimates peg production life for Sunrise–home to approximately 3 billion barrels, with production capacity of 200,000 barrels per day–at 40 years. The company expects 60,000 barrels per day of production by 2014. Output from Sunrise is destined for BP’s Toledo refinery, which was made part of the Sunrise joint venture package. The refinery will be optimized to handle bitumen.

This investment is part of a larger strategy to make big investments in a few select areas. BP’s partner on the project is Husky Energy (TSX: HSE, OTC: HUSKF), which is majority owned by Hutchison Whampoa Ltd (Hong Kong: 0013, OTC: HUWHY).

The Roundup

The backbone of Canada’s performance during the Great Recession has been its financial system, anchored by the Big Five banks. They didn’t escape the downturn unscathed, as some had significant exposure to exotic spawn of “structured” finance that nearly led to the destruction of the global financial system. And some had exposure to plain-old retail banking in the US.

Perhaps no other fact illustrates the subtle shift in Canada’s relative strength in the global pecking order than what’s come of that US retail banking exposure. One of Canada’s Big Five, No. 2-ranked Toronto-Dominion Bank (TSX: TD, NYSE: TD), now has more branches south of the border than it does in the Great White North. It took advantage of weakness (and favorable Federal Deposit Insurance Corp-negotiated terms) to consolidate and grow operations in its East Coast operations. Management now hopes to grow annual US consumer banking earnings to CAD1.6 billion within three years; quarterly income for the unit was CAD265 million.

Meanwhile, a Financial Times headline Monday evening (the online version) noted that the US Treasury had priced what remains of its USD45 billion stake in former global power turned ward of the state Citigroup (NYSE: C), closing the books on a profitable investment. Citigroup, by the way closed the 2006 trading year at USD55.07 a share. The government got USD4.35 per for its last 2.4 billion shares, a 1.25 percent discount to Monday’s close.

Yet, all favorable comparisons to US banks aside, what we’re looking for out of the Big Five is dividend growth. Only one major Canadian bank–the sixth biggest, in fact, in terms of assets–boosted its payout this earnings season, National Bank of Canada (TSX: NA, OTC: NTIOF). That fact earns it inclusion in the Canadian Edge How They Rate coverage universe, where it will now occupy its rightful place among the Big Five Six.

In addition to its first dividend increase in nearly three years and the first from any of the Big Six in two, National Bank reported fourth-quarter net income of CAD287 million (CAD1.66 per share), up from CAD241 million (CAD1.39 per share) a year ago. National Bank beat a consensus forecast of CAD1.57 per share. Adjusted earnings (excluding one-time items) were CAD1.63 per share, beating an estimate of CAD1.55. Revenue was steady at CAD1.1 billion.

National Bank’s investment banking unit saw a 29 percent drop in fourth-quarter net, caused in part by a CAD15 million charge to cover severance pay, as the bank is reorienting its operations around equity sales in the energy and mining sectors. Personal and commercial banking profit rose 34 percent to CAD145 million on loan growth. Wealth-management earnings grew 19 percent to CAD31 million. For fiscal 2010 National Bank earned a record profit of CAD1.03 billion, up 21 percent from CAD854 million in fiscal 2009.

National Bank set aside CAD37 million for credit losses in the quarter, down CAD17 million from a year ago, while gross impaired loans decreased by CAD38 million to CAD369 million.

As part of the restructuring of its business that led to the CAD15 million charge–the bank laid off 35 National Bank Financial employees, mostly in Toronto–Montreal-based National Bank will no longer provide loans for large corporate customers outside Quebec, training its sights on small- and medium-sized companies beyond provincial borders instead.

The bank will continue its full slate of services to business of all sizes within Quebec, where it’s the largest commercial bank and the second-largest financial institution after Desjardins Group.

National Bank’s Tier 1 Basel II capital ratio remained unchanged at 14 percent. National Bank of Canada, the member that makes it the Big Six and new to Canadian Edge How They Rate coverage, is a hold.

The 12 weeks ended Oct. 31, 2010, were decidedly mixed for the original Big Five, but Bank of Montreal (TSX: BMO, NYSE: BMO) closed out the reporting season on an up note, posting a 14 percent rise in net income. Continuing themes articulated in the fourth-quarter reports of its peers, BMO was strong on the domestic front but weak in wholesale banking, which includes capital-market operations.

Profit for the quarter was CAD739 million (CAD1.24 per share), up from CAD647 million (CAD1.11 per share) in the fiscal fourth quarter of 209. Cash earnings were CAD1.24 per share, up from CAD1.13 a year earlier and better than a consensus estimate of CAD1.21 per share. Revenue was up 8 percent to CAD3.23 billion.

Loan-loss provisions were down 34 percent from a year ago to CAD253 million.

US retail banking earnings fell 21 percent to CAD37 million. Profit at BMO Capital Markets fell 17 percent to CAD216 million, as higher revenues (up 3 percent) from investment gains, debt underwriting fees and advisory fees were offset by higher credit-loss provisions and higher expenses from expanding its business. The division hired more than 450 investment bankers and analysts this year. Trading products revenue was up 26 percent sequentially but only 1 percent about year-earlier levels. Private client cash earnings jumped 25 percent to CAD133 million on a 9 percent revenue increase, driven by higher deposit spreads in its brokerage business and more mutual fund assets. Bank of Montreal’s Tier 1 capital ratio as of Oct. 31 was 13.5 percent. Bank of Montreal is a hold.

Bank of Nova Scotia (TSX: BNS, NYSE: BNS) contributed positively to the mix, beating Bay Street expectations with net income of CAD1.092 billion (CAD1.00 per share) in the fourth quarter, up from CAD902 million (CAD0.83 per share) a year ago. Cash earnings–another name for adjusted earnings, which exclude one-time items–were CAD1.02 per share, beating Street expectations of CAD1.00 per share. Revenue was up 4 percent to CAD4 billion.

Loan-loss provisions fell 39 percent to CAD254 million from CAD420 million a year earlier. Scotiabank’s CAD0.49 per share quarterly dividend will remain unchanged.

Net interest income rose 7 percent to a record CAD2.3 billion, driven by growth in residential mortgages, and reverse repos and deposits with banks. Other income rose 4 percent to CAD1.7 billion on higher securitization revenue, securities gains, higher mutual-fund revenues and the contribution of R-G Premier Bank of Puerto Rico, which it acquired in a Federal Deposit Insurance Corporation-assisted transaction.

Net income from domestic operations rose 13 percent to CAD567 million, while its international bank earned CAD363 million, up 28 percent from last year, partly from acquisitions. Investment banking unit Scotia Capital reported net income fell 23 percent to CAD273 million on revenue of CAD724 million. Non-interest expenses rose 6 percent to CAD2.18 billion, mainly on salaries, branch expansion and acquisitions.

Scotiabank continues to expand operations in high-growth markets, recently inking deals in Chile, Brazil, Thailand and China. It’s reportedly talking more deals with parties in Uruguay and Vietnam. Although the model is a riskier than the North American focus of most of its peers, Scotiabank has shown its ability to execute.

The bank’s Tier 1 capital ratio rose to 11.8 percent as of Oct. 31 from 10.7 percent. Bank of Nova Scotia is a buy up to USD55.

Net income for Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) fell 22 percent to CAD500 million (CAD1.17 per share) from CAD644 million (CAD1.56 per share) a year ago. CIBC earned CAD1.68 a share excluding items, beating the CAD1.63 per share consensus Bay Street estimate. Revenue rose 13 percent to CAD3.25 billion. For the full year, the bank earned CAD2.45 billion, up from CAD1.17 billion in 2009.

The fourth-quarter bottom line was hurt by CAD239 million from losses tied to a structured credit business–collateralized loan obligations, collateralized debt obligations, and credit derivatives–that it’s exiting, along with capital repatriation costs. CIBC, the hardest hit among Canada’s banks during the financial crisis, has posted CAD10.9 billion in debt-related writedowns since the collapse of the US subprime market in 2007. The bank has been unwinding the debt-related securities that led to the charges.

Non-interest expenses rose 11 percent to CAD1.86 billion on advertising, professional fees and some severance costs. CIBC set aside CAD150 million for bad loans, down 65 percent.

Earnings from CIBC’s consumer-lending business rose 23 percent to CAD576 million, while its investment-banking business posted a loss of CAD56 million, compared with CAD160 million profit a year earlier. Revenue for the unit fell to CAD238 million from CAD503 million, mostly because of a higher loss from the structured credit run-off business, lower new equity issues revenue, lower revenue from fixed income and foreign exchange trading and higher mark-to-market losses on corporate loan hedges. Wealth management, excluding its interest in TD Ameritrade, earnings rose 22 percent to CAD118 million. TD Ameritrade contributed just CAD33 million in the fourth quarter, compared to CAD59 million in the same period a year ago. With its contribution, earnings slipped 3 percent to CAD151 million from CAD156 million.

Loan-loss provisions fell to CAD150 million from CAD424 million a year earlier, while CIBC’s Tier 1 capital ratio rose to 13.9 percent from 12.1 percent a year ago. Canadian Imperial Bank of Commerce is a hold.

Profit for Royal Bank of Canada (TSX: RY, NYSE: RY), the country’s biggest bank, was down 9.4 percent to CAD1.12 billion (CAD0.74 per share) from CAD1.24 billion (CAD0.82 per share) a year ago. Adjusted earnings were CAD0.84 per share, missing the CAD1.01 consensus Bay Street estimate. This was Royal Bank’s fifth consecutive miss. Revenue declined 3.4 percent to CAD7.2 billion. Royal Bank set aside CAD432 million for bad loans, about half the amount from a year earlier. Non-interest expenses rose 5.9 percent to CAD3.8 billion.

Earnings for RBC Capital Markets fell 34 percent to CAD373 million from CAD561 million a year earlier on declines in sales and trading. Trading revenue overall fell 48 percent to CAD656 million. Canadian consumer banking earnings rose 6.7 percent to CAD765 million on increased lending and lower loan-loss provisions. International banking, which includes North Carolina-based RBC Bank, posted a loss of CAD157 million, the 10th consecutive money-losing quarter for the unit, on a 2 percent decline in revenue to CAD534 million.

Insurance fell 74 percent to CAD27 million on a CAD116 million loss on the October sale of its US life insurance business, Liberty Life Insurance. Wealth management profit rose 8.7 percent to CAD175 million from a year earlier, providing a bright spot in an area where management is concentrating growth efforts. Revenue at its Canadian wealth-management business–the biggest chunk of which is RBC Dominion Securities, Canada’s largest brokerage–increased 6 percent to CAD384 million. Assets under management rose 6 percent to CAD261.8 billion, and assets under administration were up nearly 4 percent to CAD521.6 billion. Assets under administration at its US and international asset-management business rose 6 percent to USD322.1 billion.

Net income was CAD5.22 billion for the year, up 35 percent driven by record earnings in Canadian banking. The bank’s Tier 1 capital ratio was flat at 13 percent. Royal Bank of Canada is a buy up to USD55.

Canada-based but increasingly US-focused Toronto-Dominion Bank (TSX: TD, NYSE: TD) reported that net income for the period ended Oct. 31 dropped 1.6 percent to CAD994 million (CAD1.07 per share). Cash (or adjusted) earnings, which exclude one-time items, were CAD1.38 a share, missing a CAD1.46 consensus estimate. Higher expenses ate into profit in the fourth quarter, though management expects that rate of growth here to slow.

Non-interest expenses jumped 5.4 percent to CAD3.26 billion because of higher rent and marketing. Investment banking profit declined 74 percent to CAD95 million in the quarter. Domestic consumer banking net income was up 24 percent to CAD773 million on higher volumes in banking, financing and real estate lending; revenue for the unit was up 10 percent. US retail profit more than doubled to CAD265 million on stronger revenue; growth here was driven by higher loan and deposit volume as well as better spreads and the impact of recent acquisitions. Wholesale banking earnings dropped to CAD95 million from CAD372 million on lower fixed income, credit and equity trading, and lower underwriting fees, partly offset by improved currency trading, investment banking income, and gains in the investment portfolio.

For the full year Toronto-Dominion earned CAD4.64 billion, up from CAD3.12 billion a year ago. Management set aside CAD404 million for loan-loss provisions, down 22 percent from a year earlier. TD’s Tier 1 capital ratio rose to 12.2 percent from 11.3 percent. Toronto-Dominion Bank is a hold.