The Bank of Canada (BoC) kept its benchmark interest rate at 0.25 percent today and reiterated its “conditional commitment” to keep it there until the end of the second quarter. But amid more evidence that the global recovery is strengthening, the central bank sent the strongest signals yet that July 20, 2010, will mark the start of a modest rate-hiking cycle up north.

The BoC was more precise with its inflation forecast and said again that the pace of global growth is stronger than the central bank estimated in the October Monetary Policy Report. At the same time, Canada’s central bank acknowledged that “the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.”

It’s important to keep in mind that the primary objective of the BoC is to keep inflation near 2 percent, the midpoint of its 1 percent to 3 percent target range. In fact, the BoC’ describes its inflation-control system as “the cornerstone of the Bank’s monetary policy framework.”

The BoC noted today that core inflation–which excludes volatile food and energy prices–was “higher than in recent months.” The consensus among economists is that inflation hit 1.6 percent in December, after being below zero through much of the summer and part of the fall. The BoC projects that inflation will return to its 2 percent target range by late 2011, though today the BoC specifically said “the third quarter” as opposed to the “second half” of the year.

In addition to the statement announcing the rate decision–the substance of which will be fleshed out in Thursday’s Monetary Policy Report–the central bank also announced today that it will cut back certain extraordinary public market operations it put in place at the height of the global financial panic. This decision is based on reduced demand from the private sector for such assistance and demonstrates that confidence in the system is returning.

The central bank released a new schedule for its term Purchase and Resale Agreements (PRAs) to match maturities more closely to the end-of-June date when its conditional commitment to keep rates unchanged expires. Conceding, as it did the in the interest rate announcement, that the recovery is still on at least questionable (though no longer fragile) footing, in the term PRA announcement the central bank repeated it “remains committed to providing liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets.”

But even though the bank believes that the private sector won’t drive demand until 2011, July will be the time to tap the brakes by boosting borrowing costs. A series of modest hikes, the hope is, will keep Canada on pace to grow about 2.9 percent this year and 3.5 percent in 2011 while easing back up into the inflation-target range.

Today’s statement also included the observation that a strong Canadian dollar, in addition to still-weak demand from the US, continue to be “significant drags” on economic activity. Complicating Mark Carney’s calculus is the fact that the loonie will look even stronger next to the US dollar if the BoC starts hiking rates ahead of Ben Bernanke and the Federal Reserve. This would further hamper Ontario’s already crippled manufacturing complex.

The bank is set to release its next decision on interest rates on March 2.

Surveys Say

Two other, lower profile BoC publications caught our attention during the past week,

the fourth-quarter Business Outlook Survey, which involves interviews with senior management at about 100 companies, and the Senior Loan Officer Survey, which looks at business lending practices.

For the Business Outlook Survey, 70 percent of executives said sales growth will quicken over the next year, while another 21 percent expect it to slow. The gap of 49 percentage points nearly matched the 53 in the last survey, the biggest since the question was first asked in 1998. Executives on balance said for the second quarter since mid-2007 that credit conditions had eased; 26 percent of executives said loans were easier to get, compared with 13 percent who said they were harder. In the last report, the gap was 4 percentage points.

“The results of the winter survey provide some evidence that confidence in the recovery is growing,” noted the BoC. “Respondents still expect the recovery to be gradual.”

As for the Senior Loan Officer Survey, credit conditions eased for the first time since the second quarter of 2007. The so-called balance of opinion on overall conditions was negative 8.7 percentage points; readings less than zero indicate looser conditions.

The percentage of executives who said they would have “some” or “significant” trouble meeting a surprise jump in demand rose to 29 percent from a record-low 22 percent. The balance of opinion on adding to payrolls in the next year was 40 percentage points, the highest since the first quarter of 2007. For investment in machinery and equipment, the balance of opinion was 17 percentage points, the highest the third quarter of 2008.

Most respondents expect inflation to stay within the BoC’s target range; 61 percent–up from 49 percent in the third quarter–expect inflation to remain at the lower end of that range, near 1 to 2 percent. Some 20 percent expect inflation of 2 to 3 percent.

About 26 percent of firms reported “some difficulty” meeting increased demand, up from the third quarter, and 3 percent reported “significant difficulty.” Still, capacity pressures remain historically low, and demand is expected to rise very gradually this year. This is consistent with the view expressed by the BoC in today interest rate announcement that Canada’s economy is still operating well below capacity.

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The Roundup

This is a big week for earnings announcements by S&P 500 companies. Among the more than 50 that will reveal fourth-quarter 2009 numbers are Internet search giant Google (NSDQ: GOOG) and financials Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS). Reporting season for the CE Portfolio doesn’t get underway in earnest until February.

One How They Rate company announced conversion plans during the past week; not only will oil and gas producer Enterra Energy Trust (TSX: ENT-U, NYSE: ENT) become a corporation, though. The resulting entity will have a new name, too, Equal Energy. The new moniker is a deliberate attempt to manifest management’s commitment to maintaining a balanced production profile.

Enterra suspended its distribution in mid-2007 and embarked on an aggressive campaign to remake itself; new managers were brought in, debt was cut, and the business was stripped down to make it more suitable as a junior exploration-and-production company. Although this technically qualifies as a “cut-less” conversion, there was no distribution to be cut. And management has made no mention of any intention to resume paying. This is a growth-only situation.

Interesting, however, was the reaction of the unit price: Enterra bounced from a Friday close of CAD2.16 to as high as CAD2.87 during Monday trading on the Toronto Stock Exchange, a rally of about 33 percent. The shares were off 13 percent today, still almost 10 percent above Friday’s close. This suggests, again, that conversion announcements won’t be met with immediate selling.

Investors are beginning to differentiate among trust-to-corporation conversions.

Enterra, for example, began to re-orient itself more than two years ago with the distribution suspension and management shakeup. Today its balance sheet is lighter on debt by more than 50 percent and its asset base is much more rational given is productive capacity. It doesn’t pay a dividend and so isn’t of great interest for the income-focused CE Portfolio. Enterra Energy Trust–which hopes to be Equal Energy by mid-May–is a hold.

Here’s the news from Portfolio companies, including tentative earnings announcement dates, and a brief look at what’s happening in the How They Rate coverage universe.

Conservative Holdings

AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) has agreed to make a CAD0.80 per share offer to acquire Landis Energy Corp (TSXV: LIS); the offer price represents a 6.7 percent premium to Landis’ Jan. 14 closing price. The deal is valued at CAD22 million, which AltaGas will fund with existing credit lines.

Landis develops underground natural gas storage facilities. The company focuses primarily on Atlantic Canada. AltaGas entered the storage business in 2009 through the acquisition of a 5.3 billion cubic feet facility in Sarnia, Ontario. AltaGas Income Trust is a buy up to USD20.

Just Energy Income Fund’s (TSX: JE-U, OTC: JUSTF) waterheater unit, National Home Services (NHS), has reached a financing agreement with Home Trust Company according to which Home Trust will provide the capital necessary to install National Home waterheaters in consumers’ homes.

NHS will receive an amount equal to the five-year cash flow from each NHS waterheater customer rental contract discounted at an agreed rate. Home Trust will then receive the customer payments on the contracts for the five years. The residual rental payments over the life of the asset, which is forecast to be 15 years, will revert to NHS.

Home Trust has committed to the arrangement for the next 12 months. The initial funding, expected to close at the end of January, will be for approximately CAD45 million. 

This financing arrangement will allow Just Energy to grow its waterheater business without calling on existing capital sources or cash flow. Just Energy Income Fund is a buy up to USD14.

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–February 26
• Artis REIT (TSX: AX-U, OTC: ARESF)–February 12
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)–March 31
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–February 3 (confirmed)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–February 12
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–February 9 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–February 24 (confirmed)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–March 4
• Colabor Group (TSX: GCL, OTC: COLFF)–February 25
• Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF)–February 24
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)–February 12
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–March 16
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–February 5
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–February 18 (confirmed)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–March 2 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–March 2
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–March 3
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–February 9 (confirmed)
• TransForce (TSX: TFI, OTF: TFIFF)–February 25 (confirmed)
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–February 12

Aggressive Holdings

Daylight Resources (TSX: DAY-U, OTC: DAYYF) revealed, along with its announcement that first-quarter distributions will amount to CAD0.08 per unit per month, that it will provide a proposal to unitholders to convert to a dividend-paying corporation no later than its May 2010 annual meeting. Daylight Resources Trust is a buy up to USD11.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) and Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) completed their recently announced asset swap. Crescent Point received approximately 3,500 barrels of oil equivalent per day (boe/d) of high-quality production, 86 percent of which is from the Lower Shaunavon crude oil resource play, approximately 172 net sections of undeveloped Lower Shaunavon land, and proved plus probable reserves of 27.5 million boe.

Penn West received Crescent Point’s 100 percent working interest in the Pembina Cardium play, a 50 percent working interest in Crescent Point’s Dodsland Viking play and CAD434 million in cash.

Buy Penn West Energy Trust up to USD20, Crescent Point Energy Corp up to USD40.

• Ag Growth International (TSX: AG-U, OTC: AGGZF)–March 16
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–February 11
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–February 19
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–March 2 (confirmed)
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)–February 26
• Newalta (TSX: NAL, OTC: NWLTF)–March 5
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–March 10
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–February 18
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–March 10 (confirmed)
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–March 11
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–February 26
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–February 12

Real Estate Trusts

Crombie REIT (TSX: CRR-U, none) is issuing on a bought-deal basis CAD45 million of convertible unsecured subordinated debentures. The debentures will mature June 30, 2017, and bear interest at a rate of 5.75 percent. Each CAD1,000 principal amount is convertible into approximately 65.3595 units of Crombie, at any time, at the option of the holder, representing a conversion price of CAD15.30 per unit. The REIT will use the net proceeds from this offering to repay debt and for general trust purposes. Crombie REIT is a buy up to USD10.

Energy Services

Peak Energy Services Trust (TSX: PES-U, OTC: PKGFF) and its senior lenders have agreed to extend the deadline for Peak’s capital restructuring to January 22 and the deadline by which the lenders must receive approvals of any credit and risk-management arrangements connected with the capital restructuring to January 28.

Peak also announced that Deans Knight Capital Management has extended the maturity date on its CAD3 million bridge loan to Peak until March 31. Hold Peak Energy Services Trust.

Transports

Aeroplan Group (TSX: AER, OTC: GAPFF) is issuing 6 million cumulative rate reset preferred shares at CAD25 per share, for gross proceeds of CAD150 million. Groupe Aeroplan Preferred Share, Series 1 will pay annual interest of 6.5 percent for the initial five-year period ending March 31, 2015. Sell Aeroplan Group.
New Flyer Industries (TSX: NFI, OTC: NFYIF) reported fourth-quarter 2009 orders for 711 buses (753 equivalent production units, or EUs) for a total of USD308 million. This total order activity consisted of new firm and new option orders of 506 buses (531 EUs) and exercised options of 205 buses (222 EUs).

The company’s order backlog as of Dec. 31, 2009, was 8,990 EUs, up slightly from the 8,949 EUs in the backlog as of Oct. 4, 2009. The dollar value of the order backlog as of Dec. 31, 2009, was approximately USD3.9 billion.

Currently, there are approximately 13,200 EUs in New Flyer’s new potential order pipeline or bid universe for heavy-duty transit buses, a moderate increase from the approximately 12,300 EUs reported as of October 4, 2009.

During the first quarter New Flyer won a contract with a US customer for up to 500 buses of varying lengths and propulsion systems, representing a minimum value of approximately USD173 million should all buses be purchased. Hold New Flyer Industries.