We suggested two weeks ago that a rapid response by Canada to deteriorating economic conditions–along the lines of measures announced by the other seven G-8 nations–would give the sponsoring political party a strong platform to launch a governing-majority bid. Our reasoned assumption, based on his aggressive public statements, was that Prime Minister Stephen Harper would lead the effort.

For all his cunning, Mr. Harper proved himself doubly cold, though perhaps a little dumb, with the official fall economic and fiscal update delivered by Finance Minister Jim Flaherty on behalf of the minority government last Thursday. It was widely hinted that Mr. Flaherty would put off any stimulus plans until the February 2009 federal budget period, and there was no upside surprise there.

However, one new measure, included among other spending cuts designed to stave off a federal budget deficit, drew plenty of attention. The controversial proposal: tighten the belt by ending the practice of paying parties CAD1.95 for each vote they received in the most recent federal election. The move has the modest benefit of saving about CAD27 million a year; but the real impact is to cripple the Conservatives’ proximate rivals. Mr. Harper backed off almost immediately, his spokesman saying Saturday that the proposal wouldn’t be part of the mini-budget to be put before parliament for a vote next week.

Leaders of the Liberal Party, the New Democratic Party and the Bloc Quebecois–angered by the failure to include new economic stimulus plans in the update, insulted by what they perceive as the prime minister’s political power grab (an end to subsidies would hurt the opposition parties more than the Conservatives, who have been more successful in fundraising)–signed a formal agreement yesterday seeking to install a Liberal/NDP government with the explicit support of the Bloc. Although cash-poor relative to the Conservative Party, what the Liberal Party, New Democratic Party and Bloc Quebecois do have in the aggregate is parliamentary power. And they may exploit parliamentary procedure to bring down Harper’s minority government and establish a coalition with lame duck Liberal leader Stephane Dion in charge.

There’s nothing Mr. Harper can do to prevent the three opposition parties from opposing his budget; because budget votes are by definition matters of confidence, if it fails the government falls. The prime minister has one serious option to prevent a vote of no confidence, but the end of that path is pretty murky.

Mr. Harper could ask Governor General Michaelle Jean that Parliament be prorogued. When Parliament is prorogued, it’s still constituted–all members remain as members, and a general election isn’t necessary–but all legislation is expunged. The Governor General would then summon the body back to session.

Proroguing would prevent any confidence votes being held until Parliament reconvenes, most likely Jan. 26, the day before Mr. Flaherty is to deliver the 2008-09 federal budget. Proroguing may only delay Harper’s demise: The three-party coalition could still topple the government by voting against the budget. But the Conservatives would have nearly two months to rally the public–and to finally introduce, with some specificity, what it plans to do to stimulate the economy.

If the governor general doesn’t agree to suspend Parliament, the government will likely face a confidence vote Monday, Dec. 8. The government would lose because the Liberals, the NDP and the Bloc together have more seats in Parliament than the Conservatives. Assuming a vote of no confidence, Mr. Harper will visit Ms. Jean to request that she call another election.

At this point the Governor General has a choice: accept the coalition proposal, or send Canadians back to the polls. If she agrees to an election, Jan. 19 is the earliest one could be held.

If Jean refuses to call an election, she would turn over power to a coalition headed by Dion, who already agreed, in the wake of the Oct. 14 drubbing the Liberals took at the polls, to step down as party leader May 2, 2009. If Jean installs the coalition, Dion step down May 2 and hand off power to whichever Liberal succeeds him as party leader. The Liberals would take 18 cabinet posts and the NDP six, each appointed by Dion.

The first order of business for the coalition would be passing a large stimulus package, including new funding for infrastructure projects as well as assistance for automakers and other manufacturers.

Beyond that, there’s not much substance for investors to base expectations of a Liberal/NDP governing coalition. Liberal shadow finance minister Scott Brison said the coalition wouldn’t roll back the corporate tax cuts passed under the minority Conservative government. Even a CAD30 billion stimulus package won’t change that, nor will the NDP’s previous criticism of the cuts as benefiting only the energy and banking sectors.

All three members of the coalition have endorsed green initiatives, so there could be some negative impact on the oil and gas industry, particularly oil sands producers. The Canadian dollar took a steep dive yesterday in the face of all the political uncertainty, and the weakening could continue. But that could actually benefit energy producers because it would result in higher realized prices.

We’ll also be interested to know whether the Liberals’ affection for the income trust structure endures.

Bonterra Energy Income Trust is now Bonterra Oil & Gas (TSX: BNE, OTC: BNEFF). The name change is the final step in the income trust’s conversion to a corporation. Now a high-dividend paying corporation, Bonterra Oil & Gas is a buy up to USD30.

Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF) acquired 77 gross (58 net) sections of land with an average working interest of 75 percent, plus compression and pipeline infrastructure serving the existing 20 gross (14.6 net) producing wells in areas adjacent to its existing Elmworth property.

Daylight is paying CAD64.5 million for current production of 1,000 barrels of oil equivalent per day (boe/d), consisting of 92 percent natural gas and 8 percent natural gas liquids; the reserve life index is 11.0 years. The trust said it would fund the deal with cash, and that it has more than CAD150 million open on its existing credit facility, which was renewed Oct. 31.

Based on Daylight’s internal assessment of CAD12 million in value for undeveloped lands 1,000 boe/d of current production, 4.0 million boe of current proved plus probable reserves and the anticipated addition of approximately 750 boe/d during the first half of 2009 through uphole recompletions (at a cost of approximately CAD10 million), the deal works out to CAD52,500 per current flowing boe/d, CAD35,700 per flowing boe/d assuming uphole recompletions, and CAD12.98 per current proved plus probable boe of reserves.

Daylight Resources Trust, taking advantage of depressed prices in a down market to strengthen its long-term position, is a buy up to USD11.    

Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF) announced Nov. 25 that it was “cooperating fully” with a Dept of Justice investigation into whether Arctic engaged in anticompetitive behavior with regard to sales of ice to the US federal government. This investigation is related to a broader antitrust investigation of the packaged ice industry by the DoJ. Arctic Glacier Income Fund is a sell. 

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) has been added to the “watch list” for the Régie du bâtiment du Québec, Quebec board responsible for the safety of public buildings after concrete from the first level of a Montreal parking garage attached to a 14-story CAP REIT property fell onto the level below and killed a man. Canadian Apartment Properties REIT remains a buy up to USD15.

InStorage REIT (TSX: IS-U, OTC: INREF) is holding out for CAD4 a unit from Canadian Storage Partners; the unit of US-based self-storage warehouse operator TKG-StorageMart had made a hostile CAD3.75 per unit bid last week, but the two companies are now negotiating on a friendlier basis. InStorage’s board said in a statement that it would recommend unitholders accept a CAD4 offer should it be made. InStorage REIT is a buy up to USD3.25.

SFK Pulp Fund (TSX: SFK-U, OTC: SFKUF) plans to shut down its mill in Saint-Félicien, Que., for 20 days starting Dec. 19.The shutdown will result in a 20,000 ton output decline for the mill and will allow SFK to better manage its inventory and how it satisfies declining demand. Hold SFK Pulp Fund.

CI Financial Income Fund (TSX: CIX-U, OTC: CIXUF) reported November net sales of CAD140 million. Total net sales by subsidiaries CI Investments and United Financial Corp consisted of net sales of long-term funds of CAD132 million and net sales of money market funds of CAD23 million. There were CAD15 million in net redemptions related to several series of deposit notes, which use asset allocation strategies in which money is moved out of mutual funds when markets are declining. The company noted that assets under management were CAD53.7 billion and total fee-earning assets were CAD78.9 billion at Nov. 30. Hold CI Financial Income Fund.