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Portfolio Strategy & Quantitative Research Peter Gibson Managing Director Jeff Evans Executive Director

5533 5118 Tails in RORO World Presentation

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Page 1: 5533 5118 Tails in RORO World Presentation

Portfolio Strategy & Quantitative Research

Peter Gibson

Managing Director

Jeff Evans

Executive Director

Page 2: 5533 5118 Tails in RORO World Presentation

Click to edit Master title styleUnderstanding How the World Changed in

1998

20 Years of Challenges

Long Depression vs

Productivity Innovation Page 2

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Evidence

Page 3

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Selected Asset Classes 12-month ReturnsSelected Asset Classes 12-month Returns

(Oct 21, 2011 – Oct 19, 2012)(Oct 21, 2011 – Oct 19, 2012)

Source: CIBC World Markets Inc., Bloomberg

Page 4

7.17%

3.72%

1.35%

14.42%

18.33%

16.03%

5.07%

4.53%

0.48%

16.18%

4.83%

7.04%

0.0% 6.0% 12.0% 18.0% 24.0%

TSX Composite

CDN C10y Bonds

CDN 5-7y Bonds

CDN Cash

CDN High Yield Bonds

S&P 500

NASDAQ 100

US C10y Bonds

US 5-7y Bonds

US Cash

US High Yield Bonds

Gold

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Canada and US Equities, Bonds and T-bills Historical ReturnCanada and US Equities, Bonds and T-bills Historical Return

Source: Bloomberg and CIBC World Markets Inc. Page 5

CD

N E

quiti

es

CD

N C

10y

Bond

s

CD

N C

orp

AA

CD

N C

ash

0%

2%

4%

6%

8%

10%

12%

14%

5 Year 10 Year 20 Year

US

Equi

ties

US

C10

y Bo

nds

US

Cor

p AA

A

US

Cas

h

0%

2%

4%

6%

8%

10%

12%

14%

5 Year 10 Year 20 Year

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0.1

1

10

100

1000

Jan

-13

Jan

-20

Jan

-27

Jan

-34

Jan

-41

Jan

-48

Jan

-55

Jan

-62

Jan

-69

Jan

-76

Jan

-83

Jan

-90

Jan

-97

Jan

-04

Stock Real Bond Real Bill Real Series4

Source: CIBC World Markets Inc.

True Secular bear markets only occur 6 times in 160 years usually lasting 13-14 years. Lower stock returns & much higher volatility

recently 60% of individual stock returns resulted from market & sector NOT individual company fundamentals

Great Great DepressionDepression

& &

DeflationDeflation

““Painted Rates” Painted Rates”

very low & very low & stable with stable with

modest modest sustainable sustainable

growthgrowthSecular Secular

inflation & inflation & rising rising ratesrates

Bond Bond Market Market losseslosses

This This one one

started started in 1998in 1998

US Asset Classes Real Return

Page 6

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Why?

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Too Much Debt

The Reason Growth is Weaker, Returns are

Lower and Volatility is Higher

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US Debt to GDP Both Momentarily CLOSE to 100%US Debt to GDP Both Momentarily CLOSE to 100%

Source: CIBC World Markets Inc., BloombergPage 9

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Canadian Debt to GDPCanadian Debt to GDP

Source: CIBC World Markets Inc., BloombergPage 10

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How?

Page 11

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Click to edit Master title style1. Record U.S. Government Debt GDP

2. Record Consumer Debt 2/3 of Economic Growth Due Consumer

“Self-restraint from spending, but , not yet!”

3. Record Current Account Deficit

CONCLUSION: CANNOT INFLATE AWAY DEBT AND DEFLATION IS NOT AN

OPTION

+

+

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Keeping Bond Investors Happy Might Demand a Keeping Bond Investors Happy Might Demand a Dangerously Weak economy Dangerously Weak economy

Bond Yield Floors Also Exist Which Coincide With The Bond Yield Floors Also Exist Which Coincide With The Outright Risk of DeflationOutright Risk of Deflation

(The Relationship Between Stock Prices And Bond Yields Changed In 1998)

Interest Interest RatesRates

Stock Stock PricesPrices

Bond Yields (i.e. 4.5 – 5%)Bond Yields (i.e. 4.5 – 5%)

Economy Economy Dangerously Dangerously WeakWeak

( P/Es )( P/Es )

Interest Interest RatesRates

Stock Stock PricesPrices

( P/Es )( P/Es )

RatesRates

“Man is the only kind of varmint that sets his own trap, baits it, then steps in it” - Steinbeck

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750

850

950

1050

1150

1250

1350

1450

1550

1650

3.5

4

4.5

5

5.5

6

6.5

7

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03

U.S. 10-Year Bond Yield (left) S&P 500 Price (right)

The Positive Correlation Warned Loudly of the Risks of Deflation and a Potential Debt Crisis Starting in 1998

S&P 500 Price and Bond Yields

Fed cuts rates, stock market falls

(first time in 50 years)

Rates fall, stock prices fall anyway

Source: CIBC World Markets Inc.

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Source: CIBC World Markets Inc.

History States:

That Falling Bond Yields

and

Falling Stock Prices

Coincide with Deflation and Economic Depression

Monthly S&P 500 P/E levels from 2006-present

Monthly S&P 500 P/E levels from 2006-present

The Long The Long DepressionDepression

The Great The Great DepressionDepression

Two of the Two of the Worst Worst Stock Stock

Market Market Collapses Collapses

in 160 in 160 YearsYears

Only Times in History Previously: The Long Depression & The Great Depression Thus: Lower P/E’s, Average Returns &

Higher Vol

““We are not retreating we are advancing in We are not retreating we are advancing in another direction”-General MacArthuranother direction”-General MacArthur

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US Real Rates & Positive Bond Yield/Stock Price US Real Rates & Positive Bond Yield/Stock Price CorrelationCorrelation

JAN1

800

AUG

1806

MAR

1813

OCT

1819

MAY

1826

DEC1

832

JUL1

839

FEB1

846

SEP1

852

APR1

859

NOV1

865

JUN1

872

JAN1

879

AUG

1885

MAR

1892

OCT

1898

May

1905

Dec1

911

Jul1

918

Feb1

925

Sep1

931

Apr1

938

Nov1

944

Jun1

951

Jan1

958

Aug1

964

Mar

1971

Oct

1977

May

1984

Dec1

990

Jul1

997

Feb2

004

Sep2

010

-6

-4

-2

0

2

4

6

8

10

12

14

positive bond yield/stock px correlation and falling bond yield on annual basis M1 Mutiplier US Real Rates (RHS)

Long Depression Great Depression

Source: Bloomberg, U.S. Federal Reserve and CIBC World Markets Inc.Page 16

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Investment Implications

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P/E Differences Between 80’s/90’s and Today

1980’s / 1990’s After 2003

P

E

x

14%

e.g.:+5% p.a.due to falling interest rates

P = 18% p.a.

P

E

x

8% -

10%

Constantorfalling at 1% p.a.

P = 8% p.a.

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200

400

600

800

1000

1200

1400

1600

1800

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

0

5

10

15

20

25

30

35

S&P 500 index S&P 500 Adjusted P/E (RHS)

Index P/E

P/E COMPRESSION on Average S&P 500 Prices Up BUT S&P 500 P/E’s Down

Source: Bloomberg and CIBC World Markets Inc.

Expand, Compress, Panic…; (9 Times Earnings by 2015?)Also Since 1998: Risk Premia and Credit Spreads Increased

Price UP

BUT P/E Compression

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Source: CIBC World Markets Inc., Bloomberg

Page 21

TSX & S&P 500 Price Earning RatioTSX & S&P 500 Price Earning Ratio

0

5

10

15

20

25

30

35

40

Dec

-70

Dec

-72

Dec

-74

Dec

-76

Dec

-78

Dec

-80

Dec

-82

Dec

-84

Dec

-86

Dec

-88

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

S&P 500 P/E

TSX P/E

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Volatility and Opportunity In The Great DepressionVolatility and Opportunity In The Great Depression

010,000,00020,000,00030,000,00040,000,00050,000,00060,000,00070,000,000

Jan-30 Jan-32 Jan-34 Jan-36 Jan-38 Jan-40

Perfectly Correct

1930 1932 1934 1936 19381930 1932 1934 1936 1938

BondsBonds

TBillsTBills

EquitiEquiti

eses

BondsBonds

TBillsTBills

EquitiEquiti

eses

$1MM $60,470,000+50.7%+/-4.38

Source: CIBC World Markets Inc.

Required 88 perfectly correct switches in 10 years

Page 22

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Click to edit Master title styleAVOID TORPEDO’S

1980’s/1990’s

20 stock portfolio +30% but one torpedo

VERSUS

+6% ave and…Page 23

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Why RORO?

Low Returns,

Higher Volatility and

Partially Cancel Out

Forces TAA ! Page 24

Page 25: 5533 5118 Tails in RORO World Presentation

Click to edit Master title styleThe Long Term Problem Facing Pensions

SAS, Cash on Balance Sheets, +Correlation

Economy or Pensions

Higher Rates? NO

Page 25

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Pension Implications of Low Returns & Positive Correlation (Need for Twist)

IF TSX & S&P 500 return of 8.1% coincides with: 3% bond yield & $ Parity

i.e. TSX 13,150 S&P 500 1,480 Bond Yield 3%

Income & Growth = 3.76% (Asset Mix: 55/40/5)

Growth = 4.79% (Asset Mix: 65/30/5)

HALF of S&P 500 companies have pension net funding ratios of LESS than 70%

Page 26

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Previous Crisis Risks

Interest Rate Spikes

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Click to edit Master title style1833 Second Bank of United StatesWall Street NOW Unregulated !!!Economic Swings amplified

Central Bank no longer existsUntil 1912/1913 Federal Reserve ActMarket Frequently appears irrational

1837 SPIKESPIKE Panic

DepressionDepressionBank Failures, Crisis in confidencePayment in Specie stopped

1846 SPIKESPIKE Financing of Mexican WarSouthern Bond Default

1857 SPIKE SPIKE Panic of 1857 – 1860(3)

DepressionDepressionFailure of Ohio Life & Trust caused repatriation of European investments in US Rails massive business failures

1861 SPIKESPIKE

-------1861-1929 Industrial Trusts

US Civil war 1861-65

Railways and Robbers Barons---------

1869-71 SPIKE SPIKE Black FridayDebt Crisis/ Market Crash

End of Post Civil war expansion

Page 28

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Click to edit Master title style1873-79 SPIKE 100bpsSPIKE 100bps Panic

DepressionDepression (from 5% bond yield)

Failure of Largest US BankJay Cooke & Co. / Financial chaos in Europe/ Coinage Act of 1873/ Adoption of Gold Standard

1893-96 SPIKE 100bpsSPIKE 100bps DepressionDepression(from 3% bond yield)

Failure of US, Reading RailroadStock market collapseBanking Collapse Govt Deficit & Gold StdRun on Gold Repatriation of European investments

1900 Return to GOLD STANDARD

1901 Crisis

1903 Rising YieldsRising YieldsRichmans Panic

1906 San Francisco Earthquake & Fire

The long Depression 1873 – 1896 (23 years) EDISON GENERAL ELECTRIC & 50 yrs Finance Power

Deflation 1869 – 1896 Yet rising Global Industrial Production

Collapse Vienna Stock Market / 1890 Baring Brothers Bailed Out

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Necessarily Lower Rates

Event Driven

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Third Time Lucky? Secularly Lower Rates, Safe Third Time Lucky? Secularly Lower Rates, Safe Haven Status Haven Status

QEs, Operation Twists and Major EventsQEs, Operation Twists and Major Events

Source: CIBC World Markets Inc., Wikipedia

Page 31

400

600

800

1000

1200

1400

1600

1800

2000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1998 Russian

Financial Crisis

Dot-com

Bubble

September

11 Attacks

1997 Asian

Financial Crisis

2008 Financial

Crisis

European

Sovereign

Debt Crisis

2009 Dubai

Debt Crisis

August 2011

Stock

Markets Fall

Operation

Twist

QE1

QE2

QE3

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Source: CIBC World Markets Inc., Bloomberg

Page 32

1982 - Present

0

0.2

0.4

0.6

0.8

1

1.2

Aug-

82

Aug-

84

Aug-

86

Aug-

88

Aug-

90

Aug-

92

Aug-

94

Aug-

96

Aug-

98

Aug-

00

Aug-

02

Aug-

04

Aug-

06

Aug-

08

Aug-

10

TSX / S&P 500

TSX Annual Return: 9.7%S&P 500 Annual Return: 11.2%

Don’t Confuse Risk ON and Secular GrowthDon’t Confuse Risk ON and Secular GrowthTSX Versus S&P 500 (1982 - Present)TSX Versus S&P 500 (1982 - Present)

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Interest Rates and Individual Stocks

Vs

Fundamentals

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In Direct Contrast to 1950’s Buy and Hold

Even Recently 50-60% of Stock Returns Correlated with

Market Thus with Rates

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60% of the Return, on Average, from Individual US Stocks is the Direct Result of Rallies and Declines

in the S&P500 INDEX!!!

Source: CIBC World Markets Inc., Reuters

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Jan-

00

May

-00

Sep-

00

Jan-

01

May

-01

Sep-

01

Jan-

02

May

-02

Sep-

02

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Market Market + Sector

Page 35

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Linking Rates and

the Stock Market

Page 36

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Floor/Ceiling

The Most Important Source of Returns and

the Related

Risk On and Risk Off Environment

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* TPP - Equity returns are peak to trough, bond returns match equity peak to trough dates but Bond TPP are in brackets

Source: CIBC World Markets Inc., Bloomberg (Updated Jan 5, 2012. Data as of Jan04)

US Bond Yield Peaks (Ceilings) and Troughs (Floors) Have Defined the Stock Market Rebounds

and Collapses“Never forecast anything you can calculate”

TSX Buy & Hold 8.34% +109% -43% +168% -43% TSX +85% (Mar 11)

-10.3% since Mar 11, 2011

Bond B&H Canada 6.64%24.81%

(38.81% TPP*)17.33%

Page 38

100% SWITCHING US: 15.95% Canada 18.14%PERFECT US: 36.26% Canada 35.87%

70/30 REBALANCING US: 10.47% Canada 12.42%

(24.28% TPP*)

S&P 500 Buy & Holdsince 1998 low

4.67% pa +57% -50% +94% -57% + 101% (to Mar11)

Bond Buy & Hold 6.51% pa37%

(50% TPP*)20.17%

(32.26% TPP*)

0

200

400

600

800

1000

1200

1400

1600

1800

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

S&

P 5

00

In

de

x

.

0

1

2

3

4

5

6

7

8

9

Bo

nd

Yie

ld (

%)

.

S&P 500 (LHS) 10-yr U.S. bond yield

1995 ceiling

1997 ceiling

4.8% ceiling

0%

Term Structure

2002 ceiling

3.65%

4.1%

3.0% Desired long term average

2.0% Ultimate floor

BUY

3.5% Excess debt floorBUY

SELL2000 ceiling

SELL5.2% ceiling

4% 1997 floor BUY

2003 ceiling (5.9%)

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Bond Yield Floors – The Main Concern at Present is the Expected Inflation Component vs Default

Premium“Last Exit before Drug Inspection Station”

1997 – Can Bond Yields Fall Without Lower Inflation or Deflation?2010 – Bond Yield Floors: It Doesn’t Add Up

0

0.5

1

1.52

2.5

3

3.5

4

4.5

55.5

6

6.5

7

3% to 3.25%50bps

50 bps CDS Default Premia

200bps 10-year TIPS Expected Inflation Rate

50 bps CDS Default Premia

4% to 4.25%

If Expected Inflation Becomes

1%

50 bps IRP

50 bps IRP

If Expected Inflation 1.5%

100bps

Term Premium?

100bps

Term Premium

100bps

Term Premium?

Growing Debt Crisis

5% Floor

If U.S. was perceived as bankrupt & CDS Premia

expand 200bps

50 bps IRP??

100bps

Term Premium?

100bps to 200bps CDS Premia

Depending on TRP, TS

Deflation Still Bond Yield stuck

at 2% to 3%

2.5%

100bps

Term Premium?

100 bps IRP

50 bps CDS Premia

i.e. 450bps Expected Inflation

Current Floor in this Range Without Safe Haven

Reserve Currency Status

If Default Premia Expanded causing higher rates and much weaker

economic growth, higher rates for the wrong reason

Expected -200bps Deflation boosts real rate but usually a disaster for growth, therefore, REAL rate 4.00% to 4.5% with 2% Deflation &

200bps other components

Example Secular Inflation

7%

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- FACTOR 4 - - FACTOR 4 - U.S. Bond Yield Term StructureU.S. Bond Yield Term Structure

Source: CIBC World Markets Inc., Reuters

Page 40

Term Premium=0.50

Expected Inflation=2.15

Inflation Risk Premium=0.50

CDS Premium=0.70

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

11/2

4/20

09

1/24

/201

0

3/24

/201

0

5/24

/201

0

7/24

/201

0

9/24

/201

0

11/2

4/20

10

1/24

/201

1

3/24

/201

1

5/24

/201

1

7/24

/201

1

9/24

/201

1

11/2

4/20

11

1/24

/201

2

3/24

/201

2

5/24

/201

2

Term Premium Ex pected Inflation Inflation Risk Premium CDS Premium Nominal Bond Yield Safe Hav en Premium

Bond Yield

Safe Haven

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Cleveland Fed 10-year Inflation Expectations Estimate

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

Source: Cleveland Fed and CIBC World Markets Inc.

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Important US Bond Yield Reference Levels (Jan 2012) The US Safe Haven Advantage--The Key to Timing Stocks:

Combination of Yield Levels & ROE Trends

Source: Bloomberg and CIBC World Markets Inc. Page 42

Ceiling 4.1%

3% - 3.2%

2.5%

2.0% US Safe Haven Levels

1.67% Lowest level in 91,300 days (250 Years)

Buy Bonds if US$ Stable & ROE Falling

Excessive Debt “Floor”

Probable 20-30 year target level

Probable FED two year target if globally coord action

Better Range

TSX 14000 but getting close to ceiling

Buy US Stocks if ROE Rising

Extreme Risk IF S&P500 ROE Falling

RECOVERY

SAFE

HAVEN

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Confidence A

Delicate Balancing Act

QE Crucial but Diminishing Returns,

Housing Needs Time

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US M1 Money Multiplier US M1 Money Multiplier Diminishing Returns to QE ? Need TimeDiminishing Returns to QE ? Need Time

Source: CIBC World Markets Inc., Bloomberg

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US Housing InventoriesUS Housing Inventories

Page 45Source: CIBC World Markets Inc., Bloomberg

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U.S. Bank Security Holdings As % Of Bank Assets And U.S. Bank Security Holdings As % Of Bank Assets And U.S. 10y1y Yield Spread U.S. 10y1y Yield Spread

21

22

23

24

25

26

27

28

29

30

Jan-73 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

-4

-3

-2

-1

0

1

2

3

4

Securities as a % of Bank Lending US 1s10s

Source: Federal Reserve Board and CIBC World Markets Inc.

Page 46

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How the Yield Curve Flattens is Crucial

Tilt Flattens May Work If 35/65

Playing With Fire

Safe Haven Strategy

If 35% Economic Growth & If 65%

Flattens YES

But NOT Likely Favourable

+

++

Probably NOT Good Today

Flatten Yes BUT Not The Same As Tilt & Long End Down

May Contribute to Economic Growth

Flatten From Long End

~ 0%

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Source: CMHC, Teranet & National Bank

Page 48

Canada Housing Starts & Price IndexCanada Housing Starts & Price Index

0

50

100

150

200

250

300

350

Sep-

90

Sep-

92

Sep-

94

Sep-

96

Sep-

98

Sep-

00

Sep-

02

Sep-

04

Sep-

06

Sep-

08

Sep-

10

Sep-

12

(in th

ousa

nds)

0

20

40

60

80

100

120

140

160

180

CA Housing Starts (LHS)

CA Housing Price (RHS)

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Source: U.S. Census Bureau & Case-Shiller

Page 49

U.S. Housing Starts & Price IndexU.S. Housing Starts & Price Index

0

500

1000

1500

2000

2500

Sep-

90

Sep-

91

Sep-

92

Sep-

93

Sep-

94

Sep-

95

Sep-

96

Sep-

97

Sep-

98

Sep-

99

Sep-

00

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Sep-

11

Sep-

12

(in th

ousa

nds)

0

50

100

150

200

250

US Housing Starts (LHS)

US Housing Price (RHS)

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Source: STCA

Page 50

Canada Employment LevelCanada Employment Level

(in thousands)

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

Sep-

90

Sep-

91

Sep-

92

Sep-

93

Sep-

94

Sep-

95

Sep-

96

Sep-

97

Sep-

98

Sep-

99

Sep-

00

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Sep-

11

Sep-

12

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

CA Total

CA Construction

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Source: Bureau of Labor Statistics

Page 51

U.S. Employment LevelU.S. Employment Level

(in thousands)

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Sep-

90

Sep-

91

Sep-

92

Sep-

93

Sep-

94

Sep-

95

Sep-

96

Sep-

97

Sep-

98

Sep-

99

Sep-

00

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Sep-

11

Sep-

12

4,000

5,000

6,000

7,000

8,000

9,000

10,000

US Total

US Construction

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Ultimate Financial Risk

Page 52

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Five Factor AnalysisFive Factor Analysis

Source: CIBC World Markets Inc., Bloomberg

Page 53

Factor Rank*

Bond Yield•Current Ceiling: 3.65%•Current Bond Yield: 1.5% - Well below the ceiling•Bond Yield Momentum: Negative

1

Currency•Weekly Momentum: Positive•Monthly Momentum: Positive

1

ROE/GDP•S&P 500 ROE: Still up but losing momentum - Neutral•GDP: Remain positive low level – Neutral or Negative

4

Default Premium•Weekly Momentum: Positive•Monthly Momentum: Positive

5

Bid to Cover Ratio

•Weekly Momentum: Positive•Monthly Momentum: Positive•Though the momentums remain positive, they are diminishing

3

Overall 3

* Positive:1, Negative:5

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RORO

&

Rotations

(RORORO)Page 54

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Source: CIBC World Markets Inc., Bloomberg

Page 55

0

2

4

6

8

10

12

14

16

18

Dec

-70

Dec

-72

Dec

-74

Dec

-76

Dec

-78

Dec

-80

Dec

-82

Dec

-84

Dec

-86

Dec

-88

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

S&P 500 Yield

US 10y Bond Yield

Sustainable YieldSustainable YieldU.S. Dividend Yield v.s. 10 year Gov’t Bond YieldU.S. Dividend Yield v.s. 10 year Gov’t Bond Yield

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Source: CIBC World Markets Inc., Bloomberg

Page 56

Canada Dividend Yield v.s. 10 year Gov’t Bond Canada Dividend Yield v.s. 10 year Gov’t Bond YieldYield

0

2

4

6

8

10

12

14

16

18

20

Dec

-70

Dec

-72

Dec

-74

Dec

-76

Dec

-78

Dec

-80

Dec

-82

Dec

-84

Dec

-86

Dec

-88

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

TSX Yield

CA 10y Bond Yield*

* CA Long-Term Bond Yield is used during 1976 - 1982

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- FACTOR 3 - - FACTOR 3 - Income Statement

Source: Reuters and CIBC World Markets Inc.

Dividends Paid To Common Shareholders (Standardized)

Page 57

0.75

0.8

0.85

0.9

0.95

1

1.05

1.1

Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11

World S&P 500

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- FACTOR 3 - - FACTOR 3 - Income Statement

Source: Reuters and CIBC World Markets Inc.

Dividends Paid To Common Shareholders (Standardized)

Page 58

0.75

0.8

0.85

0.9

0.95

1

1.05

1.1

Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11

World S&P TSX

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S&P 500 and S&P 500 VAE S&P 500 and S&P 500 VAE (Value-Added Exporters)(Value-Added Exporters)

Page 59Source: CIBC World Markets Inc.

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TSX Financials, Info Tech and TelecomTSX Financials, Info Tech and Telecom

Source: CIBC World Markets Inc. Page 60

Sector Weights Trailing ROEΔ Ex. EPS growth Earning Surprise

FIN 29.7% 0.26 -1.7% 3.1%

IT 1.5% -0.78 19.8% -4.9%

TEL 4.2% 0.37 7.0% 5.3%

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TSX Equity Only NO Asset Allocation Here

Source: CIBC World Markets Inc., Reuters

Page 61

0

2

4

6

8

10

12

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

New TSX

New TSXAnnual Return 15.2% 5.0%Accumulated Return 863.9% 118.0%Annual Volatility 17.1% 15.7%

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S&P 500 Version 1 Equity Only NO Asset Allocation S&P 500 Version 1 Equity Only NO Asset Allocation HereHere

Source: CIBC World Markets Inc., ReutersPage 62

0

0.5

1

1.5

2

2.5

3

3.5

4

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

SPX Ver. 1 SPX

Ver. 1 SPXAnnual Return 10.5% 5.6%Accumulated Return 232.6% 93.2%Annual Volatility 18.0% 17.5%

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S&P TSX ROE Volatility IndicesS&P TSX ROE Volatility Indices

Source: CIBC World Markets Inc., Reuters

Page 63

0

0.5

1

1.5

2

2.5

3

9/30/199

8

9/30/199

9

9/30/200

0

9/30/200

1

9/30/200

2

9/30/200

3

9/30/200

4

9/30/200

5

9/30/200

6

9/30/200

7

9/30/200

8

9/30/200

9

9/30/201

0

9/30/201

1

9/30/201

2

0

0.5

1

1.5

2

2.5

ROE Vol

ROE Stable

ROE Vol/Stable

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S&P TSX Value & Growth IndicesS&P TSX Value & Growth Indices

Source: CIBC World Markets Inc., Reuters

Page 64

0

1

2

3

4

5

6

9/30/199

8

9/30/199

9

9/30/200

0

9/30/200

1

9/30/200

2

9/30/200

3

9/30/200

4

9/30/200

5

9/30/200

6

9/30/200

7

9/30/200

8

9/30/200

9

9/30/201

0

9/30/201

1

9/30/201

2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

CA Growth

CA Value

Growth/Value