The question of whether the US will fall into recession–or how deep the one the world’s largest economy inevitably suffers will be–animates all forms of financial media these days. Those debates are easy content for CNBC’s Money Honeys, Goldilocks advocate Larry Kudlow, The Big Picture blogger Barry Ritholtz and countless others who follow such matters.

Those of you who are tired of the drama–desiring simple solutions for the problem of how to deploy your investment cash–can look north to our boring neighbor Canada.

Canada has returned 11 percent-plus compounded annual return during the last three years, and the country’s relatively strong economic fundamentals and resource wealth underpin a compelling argument for continued dominance.

The will it/is it/how deep argument in the US is fact- and data-driven. Whether you subscribe to the Kudlow school, fall back on Big Media’s oversimplified “two consecutive quarters of GDP decline” or wade through the National Bureau of Economic Research’s five-prong analysis, the prevailing feeling is uncertainty.

Half of Europe is growing wildly, stoking fears of inflation. The other half is stagnant, choked by strict monetary policy. The European Central Bank is walking that high-wire. Currencies in Asia, particularly Japan and China, are appreciating, and domestic interest rates are rising as well.

The US subprime crisis and the concomitant credit crunch will impact Canada. But, as the feature story in the February Canadian Edge details, the economy up north is well able to withstand a downturn.

• The Bank of Canada (BoC) has held inflation at a low, steady rate in recent years, an accomplishment that allows it more room than the US Federal Reserve to cut interest rates to spark growth without igniting inflation.
• Growth of both jobs and wages has been consistently strong over the past couple years, fueling steady growth in consumption and a healthy real estate market.
• The BoC has noted that Canadian banks’ “loan-loss performance has been good, and their exposure to the US subprime-mortgage market and to leveraged loans appears to be small and manageable.” And it forecasts “the deterioration in the quality of bank loans should be limited,” even in the face of growing US weakness.
• While US subprime mortgage defaults have soared to double-digit percentages, Canada’s have remained well below 2 percent since the BoC began keeping records in 2002.

Canada faces major challenges from a weak US. First, it’s still heavily dependent on US markets for exports. There’s little doubt a prolonged recession in the US would trigger a drop in Canadian exports and, therefore, negatively impact the country’s growth. But the impact would be far less than the Wall Street consensus and investment markets are pricing in.

Energy and commodity exports have found eager markets overseas, particularly in Asia. The US percentage of Canadian exports has fallen from the mid-80s to a recent low in the mid-70s despite a continuing overall rise in Canadian exports to the world. The main reason is surging demand from Asia.

Border Tensions

The honorable intention of preserving the environment could soon collide with existing international trade rules, and the conflict could have a distinctly North American flavor.

The 2007 Energy Independence and Security Act prohibits the US government from buying fuels that emit more greenhouse gases (GHG) during their production and use than conventional petroleum-based fuel. The law was drafted in response to US Air Force plans to build its own coal-to-liquids fuel plants.

But production of Canada’s oil sands consumes large amounts of energy, resulting in anywhere from 14 percent to 40 percent more GHG emissions than conventional oil production, the US is by far Canada’s largest oil export market, and the US Dept of Defense is the world’s largest single buyer of light, refined petroleum.

Lawyers have warned that, although the new restrictions apply equally to domestic and imported fuels, such policies could be seen as an unfair restraint on trade if they had a disproportionate impact on oil sands exporters. The US could end up being accused of de facto discrimination based on where these petroleum deposits are found.

The US could justify the law on the limited environmental grounds permitted in World Trade Organization rules, but little legal precedent has been established. The US may be reluctant to argue for wide exceptions because its exporters could suffer under similar restrictions in other countries.

Speaking Engagements

It’s time: Vegas, baby! Neil, Elliott and I will head to the desert paradise May 12-15, 2008, for the Las Vegas Money Show at Mandalay Bay. Go to http://www.lasvegasmoneyshow.com or call 800-970-4355 and refer to priority code 010583 to do the “what happens here stays here” thing as my guest.

The Roundup

Oil & Gas

ARC Energy Trust’s (TSX: AET-U, OTC: AETUF) 2007 bottom line suffered as the strong loonie chipped away at the price of oil in Canadian dollar terms, but the company still reported a 7 percent profit rise on high oil prices.

Fourth quarter net income was CAD106.3 million (51 cents Canadian per unit), up 87 percent from CAD56.6 million (28 cents Canadian per unit) for the fourth quarter of 2006. Revenues were CAD338 million, up from CAD292.5 million a year ago.

ARC reported 2007 net income of CAD495.3 million (CAD2.39 per unit), up from CAD460.1 million (CAD2.28 per unit) in 2006. Revenue before royalties ticked up slightly to CAD1.25 billion from CAD1.23 billion in 2006.

ARC said the price of oil in US dollars increased by 9 percent for the full year of 2007, while the Canadian dollar equivalent increased by 3 percent. And higher oil prices were partially offset by lower realized natural gas prices compared to 2006.

Production averaged 62,723 barrels of oil equivalent per day (boe/d) in 2007 compared to 63,056 boe/d day in 2006. Of that, oil production decreased slightly to 28,682 boe/d from 29,042 boe/d in 2006.

Natural gas production was 180.1 million cubic feet per day (MMcf/d) in 2007, essentially unchanged from the 179.1 MMcf/d in 2006. ARC forecast 2008 oil and gas production to average approximately 63,000 boe/d.

ARC, an early adopter of the trust format, also indicated it’s closer to reverting back to a corporation in anticipation of the 2011 tax on trust distributions. “Management and the board of directors continue to review the impact of this tax on our business strategy, and while there has not been a decision as to ARC’s future direction at this time, we are of the opinion that the conversion from a trust to a corporation may be the most logical and tax efficient alternative for ARC unitholders,” read a statement attributed to CEO John Dielwart as part of ARC’s earnings release. ARC Energy Trust is a buy up to USD25.

Electric Power

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) reported 2007 revenue of CAD122.8 million, up from CAD90 million in 2006. The increase was driven by the contribution of the assets the fund acquired in its takeover of Clean Power Income Fund, higher power prices and increased power production.

Operating income was CAD23.3 million, up from CAD10.6 million for 2006. These factors were partially offset by a CAD10.2 million increase in operating costs. The revenue increase was also offset by a CAD2.6 million increase in administrative expenses.

Distributable cash for 2007 was CAD48.8 million (CAD1.21 per unit), up from CAD34.1 million (CAD1.133 per unit) in 2006. The fund distributed CAD42.9 million (CAD1.03 per unit), up from CAD30.4 million (CAD1.012 per unit) in 2006.

The payout ratio for 2007 was 88 percent, down slightly from 89 percent in 2006. The fund reported a debt-to-capitalization ratio of 38.8 percent as of Dec. 31, 2007. Total power production for the year was 1,687,059 megawatt hours (MWh), compared with 1,227,214 MWh last year as facilities achieved high overall availability and capacity factors.

Leisureworld Senior Care LP, in which the fund holds a 45 percent equity interest, reported a 5.6 percent increase in revenue and 7.2 percent increase in income from operations on improved occupancy, greater use of higher-cost facilities and increased government funding. Average total occupancy for the year was 98.4 percent, up from 95.3 percent in 2006. Average preferred occupancy was 83.2 percent, up from 79 percent. 

Macquarie Power & Infrastructure Income Fund is a buy up to USD12.

Gas/Propane

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) is buying four run-of-river hydro projects from Plutonic Power Corp for CAD4.5 million. The projects, in various stages of development, range from 6.5 megawatts (MW) to 24 MW. AltaGas expects to sell the power generated to British Columbia Hydro through the latter’s Clean Power Call process.

AltaGas has issued 180,433 special warrants for AltaGas trust units valued at CAD24.94 per special warrant to Plutonic Power. The special warrants automatically convert to AltaGas units on a one-for-one basis Jan. 1, 2010. AltaGas Income Trust is a buy up to USD28.

Real Estate Trusts

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF, CAP REIT) reported funds from operations (FFO) increased 10.5 percent to CAD72.3 million (CAD1.197 per unit) from CAD65.4 million (CAD1.157 per unit) for 2007. FFO for the fourth quarter was up 15.8 percent to CAD19 million (30.1 cents Canadian per unit) from CAD16.4 million (27.8 cents Canadian per unit).

Operating revenue for the year ended Dec. 31, 2007, was up 8.4 percent to CAD294 million from CAD271 million in 2006. Operating revenues in the fourth quarter of 2007 rose 11.3 percent to CAD77.2 million from CAD69.4 million a year ago.

Net operating income for 2007 rose 10.2 percent to CAD155.6 million from CAD141.2 million. For the fourth quarter, net operating income was up 13.6 percent to CAD40.3 million.

Average monthly rents increased to CAD913 from CAD886 for 2006, and occupancy was up to 97.8 percent from 97.2 percent. Distributable income was CAD73.1 million (CAD1.21 per unit), up from CAD66.2 million (CAD1.17 per unit) a year ago; for the fourth quarter, it rose to CAD19 million (30 cents Canadian per unit) from CAD16.4 million (27.8 cents Canadian per unit) a year ago.

CAP REIT’s payout ratio improved to 91.3 percent as of Dec. 31 from 94.1 percent a year ago. The REIT reported a net loss for 2007 of CAD50.2 million (83.1 cents Canadian per unit), compared to net income a year ago of CAD720,000 (1.3 cents Canadian per unit) because a noncash charge to earnings of CAD51.8 million was recorded relating to temporary differences between the accounting and tax basis of CAP REIT’s assets and liabilities. The charge has no impact on distributable income or FFO.

For the fourth quarter, net income increased to CAD9.1 million (14.5 cents Canadian per unit) compared to a net loss of CAD210,000 (0.4 cents Canadian per unit) a year ago. The REIT’s debt-to-book ratio as of Dec. 31, 2007, was 61.6 percent.

The weighted average interest rate of its total mortgage portfolio was 5.37 percent at Dec. 31, and the weighted average term to maturity was 5.5 years. Canadian Apartment Properties REIT is a buy up to USD20.

Business Trusts

Yellow Pages Income Fund’s (TSX: YLO-U, OTC: YLWPF) fourth quarter profit rose 39 percent to CAD157 million (29 cents Canadian per unit) from CAD113 million (21 cents Canadian per unit) a year earlier. Revenue for the quarter was up to CAD412.5 million from CAD378.9 million.

Earnings before interest, tax, depreciation and amortization (EBITDA) increased to CAD221 million from CAD197 million. Distributable cash increased by 11.6 percent in the quarter to CAD176.3 million, and 10 percent on a per-unit basis to CAD0.33 per unit.

Full-year 2007 earnings rose 22 percent to CAD527.7 million from CAD431.9 million in 2006, while revenue increased 17 percent to CAD1.6 billion. Cash distributions were increased by 3.7 percent to CAD1.13 from CAD1.09 effective Dec. 17, and distributable cash improved by 15 percent over 2006 to CAD700.5 million, and nearly 12 percent on a per-unit basis to CAD1.32 a unit.

The company maintained guidance for 2008, with revenue expected to climb between 4 percent and 5 percent and earnings from the directories business expected to grow by between 4 percent and 7 percent. Online revenue is expected to grow by 30 percent.

Yellow also announced it’s purchased Thunder Bay, Ontario-based TBayTel’s directory business for an undisclosed amount. Yellow has been producing the TBayTel directory, which has a circulation of more than 120,000, since 1982. Yellow Pages Income Fund is a buy up to USD16.