The market continues to play havoc with even the most solid and recession resistant investments. Coupled with investors’ at least temporary love affair with the US dollar, that’s kept our favorite Canadian trusts under selling pressure.

The bright spot in all this is third quarter earnings. We now have results for all but one of my Portfolio trusts. With the Canadian economy shrinking in the third quarter, many of the numbers aren’t stellar. But they’re continuing to paint the picture of solid businesses that are weathering the crisis.

We’ve made a lot of Canadian business conservatism over the past few months and that’s certainly shown through in the numbers thus far. I reviewed roughly half of them in the November issue of Canadian Edge, e-mailed to you last Friday and now posted on the Web site www.canadianedge.com. You can access all of my information on individual trusts through the “Search” function on the Web site.

As everyone knows, the month of October marked a sharp deceleration in the US economy, as the impact of the lending freeze really hit home on businesses. By virtue of a much more conservatively run banking system, Canada has to date avoided the worst of the lending meltdown. In fact, as we pointed out in the November Feature Article, none of our recommended trusts have had any trouble borrowing money.

What we have seen is a number of trusts continuing to slash their debt exposure, and particularly their exposure to having to roll over large amounts of it in the near future. In fact, the top-up distribution rollback at ARC Energy Trust (TSX: AET-U, OTC: AETUF), the rollback of the increase and then some at Enerplus Resources (TSX: ERF-U, NYSE: ERF) and Provident Energy Trust’s (TSX: PVE-U, NYSE: PVX) cut this week all have to do with shepherding cash flow in a tough capital market in order to facilitate future growth without adding debt.

Looking ahead, however, it is likely that we’ll see further weakness in the Canadian economy. The odds of Chinese demand for Canadian resource output falling off a cliff are considerably less today after this week’s infrastructure build out announcement. China will get raw materials for the effort at much lower prices than it would have just a few months ago. But its presence in the market is a nice prop for Canada’s economy, which has been moving away from a dependence on exports to the US toward exporting to Asia in recent years. The eastern half of the country, however, is much more dependent on the US and Europe. And although the drop in the Canadian dollar has improved competitiveness overnight, there’s still a major drag from lower sales.

We generally avoided the kind of businesses that have been hurt by the strong Canadian dollar over the past couple of years. As a result, the CE Portfolio doesn’t have much exposure to the slowdown in the US right now.

The main exception is Energy Savings Income Fund (TSX: SIF-U, OTC: ESIUF), which has been relying on the US for the lion’s share of its recent customer growth. The good news is that the trust has been able to continue adding customers on both sides of the border, despite a higher attrition rate in the US. That’s likely one reason insiders are buying and management remains adamant the distribution is safe now, and should be sustainable well past 2011 as well. The third quarter payout ratio exceeded 100 percent including all marketing costs. But the key metrics still look healthy and this one is pricing in some pretty bad news that hasn’t happened yet. Energy Savings is a hold for those who already own it and a buy all the way up to USD20 for those who don’t.

Coming into this earnings season, I was fairly nervous about what power trust Macquarie Power & Infrastructure (TSX: MPT-U, OTC: MCQPF) would report and what management would do with the payout. The good news is cash flows came in right on target, with distributable cash flow per share rising 9.4 percent in the third quarter. The payout ratio surged to 133 percent as is usually the case seasonally. But management affirmed its target of 100 percent for the year, which includes capital spending. The Macquarie group continues to be under intense scrutiny in the financial press. This enclave of the empire, however, is segregated from the troubles of the parent, which have yet to play out anywhere close to what some have suggested. Macquarie is still a buy up to USD10.

Atlantic Power Income Fund’s (TSX: ATP-U, OTC: ATPWF) unique structure as basically a portfolio of power projects also has been pouring through the details to ensure I don’t miss anything whenever they report. This quarter’s edition appears to have raised a few eyebrows, as the payout ratio rose on a scheduled plant shutdown as it waits on an acquisition to close. Management, however, continues to affirm the payout, noting currency hedges put into place last month basically lock in dividend covering cash flows at least through 2014. Further, the payout ratio for the first nine months of the year is just 72 percent and Atlantic eliminated two other potential points of exposure by selling its auction rate securities at par and locking in natural gas supplies for several years at another plant. Atlantic remains a solid buy up to 10.

Energy infrastructure business Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF) certainly didn’t disappoint, rolling up a 132 percent increase in third quarter earnings as it added new infrastructure and enjoyed robust activity on its existing base. The trust remains on the hunt for more acquisitions and has affirmed its intention to pay big dividends well past 2011. Keyera Facilities Income Fund is a buy up to USD20.

Also in the low risk camp, Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF) posted an 8.8 percent boost in distributable cash flow per share. The trust posted both higher sales and margins, which rose to 60.5 percent of revenue. The key was continued robust growth in Internet revenue, which surged 38.4 percent even without counting acquisitions and other expansion. That’s a very stark contract with US directory business and a good sign the trust continues to weather the weakened economy. Yellow Pages Income Fund is a buy for those who don’t already own it up to USD12.

The fact that RioCan REIT (TSX: REI-U, OTC: RIOCF) reported strong numbers wasn’t a big surprise, as I pointed out in November issue. Neither were the strong results at Canadian Apartment REIT (TSX: CAR-U, OTC: CDPYF) and Northern Property REIT (TSX: NPR-U, OTC: NPRUF). Both came in with solid rent increases and occupancy rates, and held down leverage as well. Those are the key building blocks of REIT growth.

The Canadian property market is showing some signs of slowing, particularly in housing prices. Meanwhile, the red-hot oil sands property market may also be on the verge of taking a breather, as activity there slows and expansion plans are scaled back.

Canadian Apartment, Northern or RioCan, however, aren’t significantly exposed to this region. In fact, all three have a demonstrated record of weathering difficult times, which is why I picked them for CE earlier in the decade as that country’s property market was coming out of a more than decade-long slump.

The only REIT I have put in the Portfolio with significant oil patch exposure is Artis REIT (TSX: AX-U, OTC: ARESF). But investors can take comfort in the number. The third quarter payout ratio sank to just 64.3 percent as the company saw a 10.5 percent jump in distributable income per share on a 35.1 percent increase in revenue. Occupancy surged to 97.3 percent and the shares have enjoyed a huge wave of insider buying of late, as the shares have dropped. Coupled with their low price, that takes the risk out of owning Artis now, which remains a strong buy all the way up to the mid-teens.

On the higher risk side of the Portfolio, GMP Capital Trust (TSX: GMP-U, OTC: GMCPF) not surprisingly came in with very tough comparisons as the roughest conditions in decades continued. Nonetheless, the trust remained profitable and held market share in all of its key areas. The distribution has now been cut twice this year and a further drop can’t be ruled out as long as bad conditions last. Management will share the wealth with us when the Canadian markets improve. But this is one for the very patient only.

Trinidad Drilling (TSX: TDG, OTC: TDGCF) hasn’t fared much better than GMP in the marketplace. But the driller did continue to execute on its business plan of developing advanced rigs and contracting them out long-term to creditworthy producers. Third quarter revenue rose 18.2 percent and cash flow surged as utilization rates remained strong in both the US and Canada. This remains a great play for aggressive income investors looking for a play on drilling.

Finally, the rest of my energy producer trusts turned in their numbers. As expected, the bottom line figures were very strong, as realized selling prices remained robust. Unfortunately, those realized prices are now well above where natural gas and especially oil is now. That points to lower cash flow in the further quarter and into 2009, despite trusts’ policy of systematic hedging.

As we’ve pointed out, trusts by and large used their cash windfall from surging energy prices to fund new projects and to cut debt. And we continued to see considerable evidence of both in the third quarter. That’s alleviated the need to make dramatic dividend cuts thus far, the exceptions being trusts that need for cash to grow: ARC in the Montney area, for example.

One of the nice surprises thus far has been the fact that more leveraged gas players haven’t been cutting thus far. In the issue, I discussed Daylight Energy Trust (TSX: DAY-U, OTC: DAYFF). This week, we saw results from Advantage Energy Trust (TSX: AVN-U, NYSE: AAV) that mirrored Daylight’s: Rising production combined with debt reduction and aggressive hedging for a 54.4 percent payout ratio, and no mention of a potential dividend cut.

Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF) reported much the same with a 44 percent payout ratio on a 17 percent boost in production. It’s even more aggressively hedged than Advantage and management stated once again that the current dividend rate was sustainable.

Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) continues to cover its payout and capital spending comfortably with cash flow. The trust also has a greater ability to realize higher prices, due to operating in Europe and Australia as well as North America. The shares have come well off their highs, making now a great time to pick them up.

Penn West Energy Trust (TSX: PWT-U, NYSE: PWE) has also elected to hold its dividend stable. The trust’s results are somewhat hard to digest, given the large amount of merger activity undertaken by management. But insider buying and management’s assertion it’s on the lookout for takeovers—despite scaling back some capital spending—are pretty bullish signs for the trust’s future. It’s a buy up to USD30.

Finally, Provident Energy Trust (TSX: PVE-U, NYSE: PVX) turned in a 61 percent payout ratio on modest production gains and higher energy prices, despite lower midstream profits. The dividend cut of 25 percent this week appears directly related to management’s desire to slash the debt taken on in recent years for expansion. That was also the goal of the sale of its US operations in the Breitburn LP, which has now been challenged by buyer Quicksilver Resources. At this point, it’s too early to tell how deeply Provident—which was named as a secondary party in the suit—will be affected. At a share price well below where it traded when oil was under $20, however, Provident is definitely pricing in a lot. I’m sticking with it, but until we get a few more quarters of results, this one should be considered one of my more aggressive plays.

All told, the story with the energy trusts remains pretty much the same as it’s always been. Management has put safeguards in place to ensure survival and ultimate recovery, assuming energy prices do as I expect. But further drops in energy prices will put cash flows and possibly distributions under pressure.

That’s the nature of the game and no one should ever own an energy trust who isn’t prepared for some volatility in the distribution over time. If you’re not, you’re better off with the non-energy trusts in the Conservative Portfolio.

These trusts, however, are now priced where they were when oil was at $25 or less and natural gas was less than $3. We may get there, but that’s pricing in a lot that hasn’t happened yet–and probably won’t. In my mind, that’s certainly cheap enough to hang in there with what we own and a great buying opportunity for those who are light or aren’t in yet.