2010 July 19 Breakfast With Dave 071910

8/8/2019 2010 July 19 Breakfast With Dave 071910

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David A. Rosenberg July 19, 2010 Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Breakfast with DaveWHILE YOU WERE SLEEPING

It really is a mixed bag to start off the week. Global investors are clearly taking a

punt on the upcoming European stress tests as the region’s equity market is up

fractionally thus far; as is the euro, which has rebounded 10% from the four-year

lows posted in May (have a look at Currency Investors Reassess Assumptions on

page C2 of the WSJ). Following Portugal’s downgrade last week, Ireland was cut

by Moody’s today to Aa2 from Aa1. Moreover, Hungary’s failure to come to fiscal

terms with the IMF and EU should start to renew concerns over Eurozone

exposure to the struggling eastern European countries. Alas, the markets are

managing to shrug off this news, apparently taking comfort in the recentsuccessful debt auction in Spain.

Meanwhile, Asian equity markets, which are far more cyclical, remain under

selling pressure (down 0.9% today — worst drubbing in two weeks), as are

commodities with oil riding a four-day losing streak. The resource-based

currencies are softer as well.

On the economic data front, it’s pretty sparse with only the Rightmove data

confirming that U.K. home prices are rolling over yet again (down 0.6% in July —

first decline this year). We also see that in the U.S.A., the FDIC had a busy

weekend, shuttering six banks — bringing the year-to-date tally to 96 (on track

for the most in 18 years). And, if there is one area of the U.S. economy that is

sure to keep the recovery under wraps, it is the state and local governmentsphere (see A3 of the WSJ — Strapped Cities Rent Police, Janitors).

We can’t help but think of last week’s front cover of Barron’s when we see this

article — Fall in Treasury Yields Poised to Continue. That Barron’s cover read

“Beware Bond Funds”, which really was the kiss of death for the litany of bond

bears out there. Recall that Barron’s also ran with Double Dip, Hell No! on

March 22nd, The Economy May Be Better Than You Think on October 20, 2008,

Buy Banks—Selectively on July 21, 2008, and of course, Buy GM on the June 2,

2008 front cover — about why GM's share price could nearly triple — it was a

great contrarian signal to actually run for cover!

There’s quite a bit for investors to chew on this week. Over and beyond the heat

of the earnings reporting season (Big Blue today), we have a few housing reports(National Association of Home Builders house price index today, housing starts

tomorrow, and existing home sales on Thursday), the BoC’s policy meeting on

Tuesday, Bernanke’s semiannual Congressional testimony on Wednesday and

the ballyhooed made-to-pass European bank stress tests on Friday (the release

may be after the market closes). The German Ifo report on Friday will serve as a

critical test for just how well the Eurozone economy is holding up (some of the

recent production data have been surprisingly firm).

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highest

level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports,

visit www.gluskinsheff.com

IN THIS ISSUE

• While you were sleeping: amixed bag to start off theweek — markets in Europeare rallying ahead of thebank stress tests results;Asian markets remainunder selling pressure

• What a roller coaster! In

June, the U.S. equitymarkets fell to 10-monthlows, then it powers aheadfor a week, closing gapsalong the way, and then,ends up diving once more

• Technology now a valuesector?

• Frugality hits the big-wigs

• Deflation pressures intact:shipping rates havecollapsed nearly 60%since May

• Disinflation momentumintact: in another raredevelopment, CPI down

three months in a row

• Pricing power in the retailsegments of the CPI report— the good and the bad

• UofM consumer sentimentindex: Sediment orSentiment?

• Double-dip … Whatflavour?

• Main street already seen the double-dip

• U.S. housing sector remainin a deep funk

• The economy hits a majorspeed bump

• Canadian leading indicators — not as greatas the headline imply



July 19, 2010 – BREAKFAST WITH DAVE

There have actually been some positives for the markets in recent days and

weeks.There have actually beensome positive developmentsfor the markets in recentdays…• The earnings season is going as planned thus far

• There has been some success in capping the oil spill

• Some calm in Europe after the springtime instability

• The shift in the public opinion polls towards the right

• China’s flexibility on the currency (though the yuan has barely risen)

• Obama’s overtures and shift in tone in the mid-East.

• And, the National Association of Business Economists continues to forecastsunny times ahead.

But we still have to ask the question — if things are as bright as the bulls would

have us believe, why is the IMF seeking another $250 billion in additional

commitments? More bad debts seem to be coming down the pike.

WHAT A ROLLER COASTER!

After a sharp slide to 10-month lows in June, the stock market then powers

ahead for a week, closing gaps along the way, and then, after failing to break

out, ends up diving once more. In a sign that a lot of good news is priced in — in

sharp contrast to views out there that the market had discounted a double-dip

recession – Friday’s negative action (all the 30 Dow stocks closed in the red

column!) occurred against a backdrop of “positive spin”, with regards to the

earnings backdrop. But this has certainly become a more discerning market —

just having headlines that three in four S&P 500 companies have beaten their

estimates are not good enough. (A year ago, bank earnings improvement on the

back of lower loan loss provisioning was being treated with glee, but now

investors are demanding that they see signs of top-line growth.) All the more so

when a proxy for nominal GDP — G.E.’s revenues — was off target and down

4.3% from year-ago levels. Gannett, the country’s numero uno newspaper, also

posted a 6% slide in print ad revenue. Citi's top-line was crushed 33% and also

missed analyst views (BoA's revenues also fell 11% YoY), and the Basel

Committee on Friday also issued a report stating that global banks need a

further capital raise ... hardly music to the ears of anyone still long the sector. In

a classic reminder that we are in a deflationary environment, Sanford Bernstein

cut Wal-Mart’s sales and profit outlook. Mattel, the world's largest toymaker,

missed on its bottom line and issued cautious guidance over the sales outlook.

Little wonder that even in a week that saw a mountain of supply, the yield on the

U.S. 2-year note sliced to a new all-time low of 57 basis points (this isn't Japan?),

the 10-year is back well below the 3.0% mark and the 5-year note under the

1.7% line for the first time since the recession’s depths 15 months ago. Mr

Bond is sending Mr Dow and Mrs Jones a somber message over the odds of

double-dip in double-day.

Page 2 of 12

… But we still have to askthe question: if things are asbright as the bulls wouldhave us believe, then why isthe IMF seeing another$250bln in additionalcommitments?




Friday’s slide in the major indexes took them back below their 50-day moving

averages and occurred on higher volume — a classic distribution day to close out

the week, which is a sign that institutional investors are bailing. It is abundantly

clear that the whippy rally coming off the July 4 th holiday was nothing more than

a short squeeze — short interest on the NYSE dropped 2.7% during the first half

of the month.

Friday’s slide in the major

equity indices in the U.S.took them back below their50-day moving averages …and it occurred on higher

volume

The pain trade remains the ongoing rally in the Treasury market, which never

really even sold off that much during that short-lived bounce in equity prices.

The reason why the earnings season isn’t generating sustained optimism is

because these are backward-looking numbers and the incoming economic data

are flashing a serious loss of momentum as the second quarter drew to a close.

What little we know this far about the third quarter from much of the weekly

indicators and regional manufacturing surveys strongly suggests that a further

slowing in the pace of economic activity is in motion. On the consumer side, the

University of Michigan sentiment survey hit an 11-month low in July, confirmed

by the 17-month low posted in the IBD/TIPP economic optimism index.

Back to the bond market, for all the talk of an eventual foreign buyers’ strike, we

did in fact see China dump $33 billion of Treasuries in May and even Japan cut

its holdings by 1%. But yet, the 10-year yield still managed to rally 43bps on the

month. Go figure — the locals must have been buying at a faster rate than the

Asia region was selling!

TECHNOLOGY NOW A VALUE SECTOR?

From growth to value in a decade. Indeed, those once infinite multiples during

the dotcom boom have been sharply compressed, to a 15x P/E and 13x on

forward earnings (see page 47 of BusinessWeek). The sector has not been this“cheap” in an expanding economy since 1992. It may well be worth a look.

FRUGALITY HITS THE BIG WIGS

Beyond the sporadic bouts of policy-induced spending growth in the past year,

what really fuelled whatever consumer recovery we had was due largely to a

pickup in outlays by the upper ends of the income strata. The paper wealth

gains in the equity market was the primary cause of this, and what Mr. Market

giveth, he is now taking away as confidence among the high-end shopper cohort

is beginning to fade. See Wealthy Sector of Buying Public is Cutting Back on the

front page of the Saturday NYT for an insightful take on the issue.

DEFLATION PRESSURES INTACT

The Baltic Dry Index has been maligned by the bulls lately — some claim itsdecline is more a reflection of excess supplies of shipping vessels as opposed to

a signal of slowing global growth. For the record, we don't care. Shipping rates

have collapses nearly 60% since the peak set back at the end of May and this is

a deflationary stand-alone event.

Page 3 of 12

The Technology sector in theU.S. has not been this“cheap” in an expandingeconomy since 1992




We know that Chinese imports of iron ore and coal fell sharply in June (by 8%

and 9% respectively). Construction steel prices are down 17% in China over the

past three months too (see page 79 of the Economist). And, spot benchmark

iron ore prices have plunged 18% in the past three weeks and by 36% since the

nearby peak in April.

U.S. consumer pricesdropped for a third month ina row in June (-0.1%) — roughly a 1-in-40 event…

So, something is clearly going on here beyond just the supply of freight ships.

See Chinese Economy Shows Signs of Cooling on page 4 of the weekend FT.

DISINFLATION MOMENTUM INTACT

In another very rare development, U.S. consumer prices dropped for a third

month in a row in June (-0.1%) — roughly a 1-in-40 event. This occurred in the

same month that average hourly earnings fell 0.1% — itself a 1-in-50 event. The

core CPI (which excludes food and energy) did rise 0.2% but this was really

+0.155% and outside of the 1.0% jump in tobacco prices, the core rose 0.1%.

On a year-over-year basis, the headline inflation rate was sliced from 2.0% to

1.1% in June, and from 2.7% at the turn of the year. The year-over-year core CPI

rate stayed at 0.9% — half the pace at the end of 2009.

Moreover, look for further disinflation momentum going forward in the U.S. The

core intermediate PPI (which removes the effects of food and energy) fell 0.4%

in June, the first decline since May 2009, and the core crude PPI tumbled 4.8%

— the largest decline since November 2008 — after a 1.6% falloff in May.

We mentioned above that a three-in-a-row decline in the CPI is a 1-in-40 event.

Well, the PPI has done the same and this is a 1-in-25 event. To have both of the

price measures decline in tandem for three months in a row is a 1-in-85 event!

The new normal — a recovery gripped with deflationary impulses.

So while the core service sector CPI is no longer trending down — it has stabilized

at a record low 0.9% — it is the same pace as core CPI right now and if that trend

ever reverts to where it was in 2002-03, then the core CPI inflation rate will drop to

zero and along with that, the long bond yield should drop towards 2.5%.

PRICING POWER IN RETAIL SEGMENTS OF THE U.S. CPI REPORT — THE GOOD AND THE BAD

• Grocery stores saw a 0.1% dip in June — this sector have not been able toraise prices since April.

• Toy stores are getting killed. Prices are now down four months in a row; -0.9%in June.

• This is NOT good news for FedEx; delivery service pieces tanked 0.9% in June,ending a streak of eight monthly increases. This was the steepest decline in ayear-and-a-half.

• While hotels successfully raised rates (the Montage in L.A. was fully booked this week), air fares dropped for the first time since February (-0.6%).

• Restaurants have very little pricing power — up 0.1% in June; nothing exciting here.

• Jewellery prices dipped 0.2% in June, the first decline since February.

Page 4 of 12

… And, the PPI has done thesame; to have both of the

price measures decline intandem for three monthsstraight is a 1-in-85 event!




• Anything in the retail sector that touches the housing market is losing pricing

power in a big way: appliances down 0.7% (negative for the fourth month in a

row), furniture down 0.9% and off in five of the past six months,

hardware/home improvement stores saw a 0.3% price decline, which was the

fifth slippage in a row.

• Drug prices at the retail level posted a rare decline in June (-0.01% to seconddecimal place).

But several other sectors are successfully raising prices of late:

• New car prices edged up 0.1% for the second month in a row; at least there isno deflation here. And, the used auto market is booming — up 0.9% in Juneand 0.6% in May. Same for auto parts, up 0.4% MoM in June, now rising for

three consecutive months and the 0.4% reading is the best print for the year.

• Hotels are raising rates — up 1.3% MoM and the fifth month of successfulprice increases.

• Clothing stores are passing along price increases too — up 0.8% in June on top of the 0.2% increase in May.

• Video/audio stores typically see flat to negative pricing, but in June, it posteda 0.4% print, which is the best month since September 2007.

• Bookstores posted a nice 0.3% gain in June — now up three of the past fourmonths.

• Admission to movie theatres are now up three months in a row (+0.9% in June)

• Hospital services — pricing starting to re-accelerate (up 0.6% in June, best in three months).

SEDIMENT OR SENTIMENT?

The dive to 66.5 in the University of Michigan consumer sentiment for July takes

the index back to August 2009 levels. Just awful. Even by November 2002 (12-

months after the recession ended in 2001) consumer sentiment was at 84.

Even with the bounce-back in the equity market, the volatility is crushing

confidence — along with increasing signs of slowing economic growth. A 9.5

point plunge in this indicator does not happen too often — you have to go back

to the aftermath of the Lehman collapse in October 2008 and before that in

September 2005 after Katrina. The decline we saw, believe it or not, was nearly

as big as the plunge we saw right after 9/11. Then, you have to go back to

August 1990, when U.S. troops began to amass in the mid-East for the eventual

war with Iraq (operation Desert Storm).

To put this latest dive into perspective it was twice as severe as the decline after

the October ‘87 crash — then again, the economy was booming at a 7.0% annual

rate in the fourth quarter of that year. And, then prior to that, guess what? We

endured such a decline in December 1980 when double dip concerns were

morphing into reality.

Page 5 of 12

The dive to 66.5 in the

University of Michiganconsumer sentiment for Julytakes the index back toAugust 2009 levels




As an aside, the “expectations” component, which is the part of the report that

tends to lead consumer spending, is now pointing to a visible slowing of 0.5-

0.75% at an annual rate in the second half of the year on spending. This metric

dropped 9.2 points, to 60.6, and has undercut the “recovery low” of 63.2 and

down to levels last seen in March 2009 when the economy was knee-deep in

recession. Buying conditions (for large household goods) sank to an eight-

month low of 120 from 139. Auto buying plans dropped to 129 from 139 — the

lowest since last February.

Let’s talk about what is normal and what is not. What is normal is that at this

stage of the cycle, a year into a supposed recovery, the UofM sentiment index is

sitting at 89.3. In recessions, the index averages out to be 73.8, and in

expansions, it is usually already sitting at 90.9, on average. Today we sit at

66.5. Could it be that we are still in a recession?

DOUBLE DIP ... WHAT FLAVOUR?

The growth rate on the ECRI leading index did it again! It sank further into

negative terrain, now at -9.8% during the week ending July 9, down from -9.1%

the prior week. This was the tenth deterioration in a row and the growth index is

now negative for six straight weeks. We have never failed to have a recession

with the ECRI at current levels but there is also inherent volatility in the index

that requires acknowledgment. Our reckoning is that in the past few weeks, the

index has gone from pricing in even-odds of a double-dip to two-in-three odds. It

may take a while, but Mr. Market will figure it out before long.

CHART 1: ECRI POINTING TO CLEAR HARD LANDING

United States: ECRI Weekly Leading Index Growth Rate

(percent)

1050505050

30

20

10

0

-10

-20

-30

Shaded region represent periods of U.S. recessionSource: Haver Analytics, Gluskin Sheff

All we hear from in the mainstream economics community is that double-dip

recessions are out of the question because they are “extremely rare” events.

The double-dip deniers say that this only happened in 1982 because of the

renewed sharp tightening by the Fed (as if we aren’t going to see a sharp fiscal

withdrawal this time around to take its place). What is it that these economists

and strategists don’t see?

Page 6 of 12

The growth rate on the ECRIleading index did it again! Itsank further into negativeterrain, now at -9.8% duringthe week ending July 9,down from -9.1% the priorweek




These “extremely rare” events have been the norm for the past 24 months:

negative nominal GDP growth; negative operating earnings; a massive

contraction in credit; a 30% slide in home prices (these same economists —

Bernanke too — were telling everyone that home prices never deflate over a 12-

month time span ... but they did this time!); a record-high duration of

unemployment.

The past 24 months have given us a lifetime of “extremely rare” events, but as

we suggested last week, these are only “rare” from the perspective of an analyst

that sees the past 24 months as a typical post-WW2 recession. In a balance

sheet recession, these extreme events are the norm, so the “extremely rare”

would be things like, expansion of private credit, strong inflationary pressures,

rapidly declining unemployment and rising interest rates.

Relying on indicators that have been useful in previous post-WW2 recessions is

like comparing the statistics of U.S. football teams versus the statistics of

Australian football teams. They may be called the same thing but they are

different sports. The economy is one sick puppy and we are seeing first hand

now what it looks like once the crutch of government support is taken away.

CHART 2: THE ECRI LEADING INDEX AS AN INVESTMENT TOOL

United States: ECRI Weekly Leading Indicator: Growth Rate

Bolded quadrant represent the phase we are currently in. The growth rate on the ECRI weekly leading index is

currently at -9.8%

Source: Haver Analytics, Gluskin Sheff

Phase III — Slowdown

(peak back to zero)

Phase I — Post-Recession

(trough to zero)

Phase II — Boom

(zero to the peak)

Phase IV — Recession

(zero to trough)

United States

S&P 500: +1.3%

VIX index: 25.8%

Top S&P 500 Sectors:

Telecom, Tech, Industrials

Bottom S&P 500 Sectors:

Materials, Cons. Discretionary, Utilities

Canada

S&P/TSX: 4.7%

CAD: -3.9%

Credit

Baa spreads tighten 11bps;

High-yield spreads widen by 13bps

United States

S&P 500: -6.3%

VIX index: 17.4%


Energy, Cons. Staples, Health Care


Cons. Discretionary, Industrials, Tech

Canada

S&P/TSX: -2.8%

CAD: 1.7%

Credit

Baa spreads widen by 60bps;

High-yield spreads widen

by nearly 100bps

United States

S&P 500: 12.2%

VIX index: -12.1%


Tech, Cons. Discretionary, Materials


Telecom, Utilities, Health Care

Canada

S&P/TSX: 8.9%

CAD: 0.8%

Credit

Baa spreads narrows by 37bps;

High-yield spreads

narrows by

over 200bps

United States

S&P 500: 22.4%

VIX index: -1.8%


Financials, Materials, Industrials


Telecom, Utilities, Energy

Canada

S&P/TSX: 14.0%

CAD: 3.2%

Credit

Baa spreads narrows by 34bps;

High-yield spreads narrows by over 150bps

Page 7 of 12




CHART 3: TWO QUARTERS FOLLOWING A MOVE IN ECRI INTO A RANGE

BETWEEN -5% TO -10%, REAL GDP AVERAGES ONLY 0.8%United States: Average Real GDP Growth Rate Two Quarters Following Various

Ranges in the ECRI Leading Index(percent change at an annual rate)

-0.6

0.8

1.3

3.5

4.3

4.9

-10.0% and Over-5.0% to -10.0%Zero to -5.0%5.0% To Zero5.0% to 10.0%10.0% and over

ECRI Weekly Leading Index Growth Rate Range

Source: Haver Analytics, Gluskin Sheff

MAIN STREET ALREADY SEEN THE DOUBLE DIP

It may be hard to believe following all the rampant government stimulus, but a

Time poll that was just published showed that 52% of the public believe the

economy is in “poor” shape, versus 38% rating it as “fair” and a mere 8% said

the macro backdrop was “good”. Only 43% see things getting “better” in the

next year (ostensibly Wall Street economists weren't counted in the poll).

What really caught our eye was the 67% who are “opposed” to more government

stimulus — only 24% are in “favour” of more support from Uncle Sam (obviously to

Paul Krugman's chagrin). Therefore, this means that fewer and fewer Americans

believe the interventions are working and as such, Ricardian Equivalence is likely

setting in (the laws of diminishing returns as it pertains to fiscal policy).

In the meantime, the Democrats are starting to show some signs of desperation

as the polls are now showing that both the House and Senate are up for grabs

this coming November (see Headwind is Stiffer and the Hill is Steeper for

Democrats on page 3 of the FT). President Obama's approval rating among

independents is all the way down to 37% (from 58% in early 2009).

HOUSING SECTOR REMAINS IN A DEEP FUNK

Page 8 of 12

Banks repossessed a record number of U.S. homes in the second quarter, so theheadline news of slower foreclosure notices was a bit misleading. The banks

took over 269,962 properties, up 5% sequentially and 38% from a year ago

(RealtyTrac data). In a normal year, banks repossess 100,000 homes — they

are on now track for over a million in 2010! And, more than 3 million

homeowners will receive at least one foreclosure notice (oh, but it would be far,

far worse without HAMP, right?).




So, the headlines last week read that foreclosure filings were down 7% YoY, but

it’s not the change but the continued astronomical levels that is the real story —

north of 300,000 for sixteen months in a row. It’s an unmitigated disaster.

And, the shadow bank inventory will inevitably flow into the market and continue

to depress real estate prices ... likely for years.

THE ECONOMY HITS A MAJOR SPEED BUMP

We will get to the monthly data in a moment, cut consider the most up-to-date

data for the second week of July:

• Bank credit contracted at a 7% annual rate.

• ABC consumer confidence slipped to a four-week low of -44 from -42.

• Mortgage applications for new home purchase fell 3.1%, the fourth straight

decline, to a new 14-year low.

• Railway carloadings in the U.S. (including intermodal) collapsed 13.9% to their

lowest level since January 9 th.

• Raw steel production slipped 1.7% and is down three weeks in a row to a

three-month low.

• Motor vehicle production sagged 14.8% YoY in the steepest downtrend since

November 21, 2009.

• Coal production fell 4.8% and is down to for three of the past four weeks –

lowest level since January 9, 2009.

This all follows a very bad May and June … so what we have is a downtrend in

the making, not a blip. Double-dip odds are clearly not zero.

• Household employment fell 301,000 after a 35,000 decline in May.

• Manufacturing output fell 0.4% in June for the sharpest decline since May

2009.

• ISM fell to 56.2 in June from 59.7, the low-water mark for the year

• The non-manufacturing index fell to 53.8 from 55.4, a four-month low.

• The NFIB small business sentiment index sagged from 99.2 to 89.0.

• The Conference Board’s measure of consumer confidence collapsed from

62.7 to 52.9.

• Retail sales fell 0.5%, the second decline in a row.

• The NAHB homebuilding sentiment index dropped to a four-month low of 17

from 22.

Based on these trends, it may be reasonable to assume that S.I.R.P. – safety

and income at a reasonable price – is pretty prudent portfolio to pursue.

Page 9 of 12

The level of foreclosure

filings in the U.S. has nowbeen north of 300,000 for16-months in a row




Page 10 of 12

CANADIAN LEADING INDICATORS – NOT AS GREAT AS HEADLINES IMPLY

While the Canadian economic data has turned a bit mixed lately, the market

remains nearly fully priced for a 25bps BoC interest rate hike this week and all

12 primary dealers are also calling for a hike.

Last week’s leading indicators data were case in point. The headline seemed

great, with a 1.0% MoM gain June, beating expectations and the upward

revisions to the May/April data added to the strength. Components were

strong as well, with eight of 10 increasing on the month.

The big caveat to this data is that they are reported on a smoothed basis (using

a five-month average), so it’s not really a real-time indicator, especially given

how dramatically the housing market has slowed over the past five months.

In fact, what the news headlines and some analysts missed, is that the

unsmoothed index (much more of a real-time indicator in our opinion) was very

weak, painting a much softer picture of the economic growth then the cheerful

headlines. On this basis, the June index fell 0.6% MoM, the largest decline since

March 2009.

The decline was broad-based with seven of the 10 components falling and six of

these were ‘real economy’ components — manufacturing hours, housing index,

new orders, furniture and appliances sales, durables goods, and manufacturing

finished products were all down. There are definite cracks in the housing

market, with the housing index slowed dramatically, from over 50% YoY early

this year to just 6%.

We continue to believe that second quarter GDP will line up on the soft side, at

under 3%, which is weaker than current consensus estimates. What will be

key for BoC policy going forward is how the second half of the year shapes up

– and early glimpses of data suggest a considerable loss of momentum.




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levels. Our performance results are thoseof the team in place.

Our investment interests are directlyaligned with those of our clients, as Gluskin

She ff ’s management and employees are collectively the largest client of the Firm’sinvestment portfolios.

$1 million invested in our

Canadian Value Portfolio

in 1991 (its inception

date) would have grown to

$11.7 million2 on March

31, 2010 versus $5.7

million for the S&P/TSX

Total Return Index over

the same period.

We have a strong history of insightfulbottom-up security selection based onfundamental analysis.

For long equities, we look for companies with a history of long-term growth andstability, a proven track record,shareholder-minded management and ashare price below our estimate of intrinsic

value. We look for the opposite inequities that we sell short.

For corporate bonds, we look for issuers

with a margin of safety for the paymentof interest and principal, and yields whichare attractive relative to the assessedcredit risks involved.

We assemble concentrated portfolios —our top ten holdings typically representbetween 25% to 45% of a portfolio. In this

way, clients benefit from the ideas in which we have the highest conviction.

Our success has often been linked to ourlong history of investing in under-followed and under-appreciated smalland mid cap companies both in Canada

and the U.S.

PORTFOLIO CONSTRUCTION

For further information,

please contact

questions@gluskinshe ff .com

In terms of asset mix and portfolioconstruction, we offer a unique marriagebetween our bottom-up security-specificfundamental analysis and our top-downmacroeconomic view.

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Notes:Unless otherwise noted, all values are in Canadian dollars.

1. Not all investment strategies are available to non-Canadian investors. Please contact Gluskin Sheff for information specific to your situation.

2. Returns are based on the composite of segregated Value and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses.




IMPORTANT DISCLOSURES

Copyright 2010 Gluskin Sheff + Associates Inc. (“Gluskin Sheff”). All rights

reserved. This report is prepared for the use of Gluskin Sheff clients andsubscribers to this report and may not be redistributed, retransmitted ordisclosed, in whole or in part, or in any form or manner, without the expresswritten consent of Gluskin Sheff. Gluskin Sheff reports are distributedsimultaneously to internal and client websites and other portals by GluskinSheff and are not publicly available materials. Any unauthorized use ordisclosure is prohibited.

Gluskin Sheff may own, buy, or sell, on behalf of its clients, securities of issuers that may be discussed in or impacted by this report. As a result,readers should be aware that Gluskin Sheff may have a conflict of interest

that could affect the objectivity of this report. This report should not beregarded by recipients as a substitute for the exercise of their own judgmentand readers are encouraged to seek independent, third-party research onany companies covered in or impacted by this report.

Individuals identified as economists do not function as research analystsunder U.S. law and reports prepared by them are not research reports underapplicable U.S. rules and regulations. Macroeconomic analysis isconsidered investment research for purposes of distribution in the U.K.

under the rules of the Financial Services Authority.

Neither the information nor any opinion expressed constitutes an offer or aninvitation to make an offer, to buy or sell any securities or other financialinstrument or any derivative related to such securities or instruments (e.g.,options, futures, warrants, and contracts for differences). This report is notintended to provide personal investment advice and it does not take intoaccount the specific investment objectives, financial situation and theparticular needs of any specific person. Investors should seek financialadvice regarding the appropriateness of investing in financial instrumentsand implementing investment strategies discussed or recommended in thisreport and should understand that statements regarding future prospectsmay not be realized. Any decision to purchase or subscribe for securities inany offering must be based solely on existing public information on suchsecurity or the information in the prospectus or other offering documentissued in connection with such offering, and not on this report.

Securities and other financial instruments discussed in this report, orrecommended by Gluskin Sheff, are not insured by the Federal DepositInsurance Corporation and are not deposits or other obligations of anyinsured depository institution. Investments in general and, derivatives, inparticular, involve numerous risks, including, among others, market risk,counterparty default risk and liquidity risk. No security, financial instrumentor derivative is suitable for all investors. In some cases, securities andother financial instruments may be difficult to value or sell and reliableinformation about the value or r isks related to the security or financialinstrument may be difficult to obtain. Investors should note that incomefrom such securities and other financial instruments, if any, may fluctuateand that price or value of such securities and instruments may rise or fall

and, in some cases, investors may lose their entire principal investment.

Past performance is not necessarily a guide to future performance. Levelsand basis for taxation may change.

Foreign currency rates of exchange may adversely affect the value, price orincome of any security or financial instrument mentioned in this report.Investors in such securities and instruments effectively assume currencyrisk.

Materials prepared by Gluskin Sheff research personnel are based on publicinformation. Facts and views presented in this material have not beenreviewed by, and may not reflect information known to, professionals inother business areas of Gluskin Sheff. To the extent this report discussesany legal proceeding or issues, it has not been prepared as nor is itintended to express any legal conclusion, opinion or advice. Investorsshould consult their own legal advisers as to issues of law relating to thesubject matter of this report. Gluskin Sheff research personnel’s knowledgeof legal proceedings in which any Gluskin Sheff entity and/or its directors,officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based onpublic information. Facts and views presented in this material that relate to

any such proceedings have not been reviewed by, discussed with, and maynot reflect information known to, professionals in other business areas of Gluskin Sheff in connection with the legal proceedings or matters relevant

to such proceedings.

Any information relating to the tax status of financial instruments discussedherein is not intended to provide tax advice or to be used by anyone toprovide tax advice. Investors are urged to seek tax advice based on theirparticular circumstances from an independent tax professional.

The information herein (other than disclosure information relating to GluskinSheff and its affiliates) was obtained from various sources and GluskinSheff does not guarantee its accuracy. This report may contain links to

third-party websites. Gluskin Sheff is not responsible for the content of any third-party website or any linked content contained in a third-party website.Content contained on such third-party websites is not part of this report andis not incorporated by reference into this report. The inclusion of a link in

this report does not imply any endorsement by or any affiliation with GluskinSheff.

All opinions, projections and estimates constitute the judgment of theauthor as of the date of the report and are subject to change without notice.Prices also are subject to change without notice. Gluskin Sheff is under noobligation to update this report and readers should therefore assume thatGluskin Sheff will not update any fact, circumstance or opinion contained in

this report.

Neither Gluskin Sheff nor any director, officer or employee of Gluskin Sheff accepts any liability whatsoever for any direct, indirect or consequentialdamages or losses arising from any use of this report or its contents.

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