David Rosenberg 07-28-10

8/9/2019 David Rosenberg 07-28-10

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David A. Rosenberg July 28, 2010 Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Breakfast with DaveWHILE YOU WERE SLEEPING

We are writing this in the wee hours of the morning and thus far it is a pretty

mixed picture. European bourses are flat-ish but Asia posting some nice gains

(up 0.9% to a 10-week high, no less), especially the Nikkei, which rallied 256

points or 2.7% to 9,753 on the back of some positive earnings reports and a

positive response to the loose capital standards recommended by Basel III. For

a perspective on this, the Nikkei was 9,846 back on December 26th, 1983, so

it’s truly encouraging to see the Japanese market climbing back to levels

prevailing 27 years ago. The Shanghai index is breaking out and registered a

2.3% advance today, cutting its losses for the year to less than 20%. Creditdefault swaps overseas continue to improve.

Even with all these flashy gains in the Asian risk trade and a slightly softer tone

to the dollar, bond yields are down a tad in the early going (outside of Japan,

that is, as the JGB yield popped nearly 4bps today to stand at the lofty level of

1.075%). This is a big story – despite the 9% in the S&P 500 since early July,

the yield on the 10-year note has not budged at 3%. (It would seem that Mr.

Bond is either looking at the economy through a different lens or is focussed on

the incoming data while Mr. Dow and Mrs. Jones are salivating over the earnings

reports.)

The commodity currencies are starting to sputter a bit here too. The Aussie

dollar succumbed to lower-than-expected inflation data (consumer prices were+0.6% in Q2 versus +1% in Q1 and below consensus views of +0.9%), the Kiwi

was hit by a report showing lower business confidence and the loonie dipped on

a release indicating that consumer confidence is down now for two months

running.

On the commodity front, gold is about to face a critical test of the 200-day

moving average while copper has gone the other way and has broken out to the

upside. Oil is trapped in a range between the 50-day and 100-day moving

averages. If you strain your eye, you may be able to detect an uptick in the

Baltic Dry Index … until recently, as maligned an economic indicator by the

growth bulls as the ECRI index.

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

• The risk trade is intact

• Comments on the market

• Home prices get anartificial lift

• Poor in Richmond

• The corner of Wall and

Main

• Chain store sales stillbelow target

• Thoughts on the long-termoutlook for inflation



July 28, 2010 – BREAKFAST WITH DAVE

MARKET COMMENT

A whole 1 point decline in the S&P 500 and for the bears it was like winning in

extra innings after a three-week losing streak (and in contrast to the rally days,

volume on the NYSE expanded 10% yesterday). We received all sorts of emails

yesterday that Barton Biggs had reloaded the gun and moved from 50% to a

75% weighting in equities. Maybe that was the kiss of death. Maybe we have

again stalled out around the 200-day moving average. Or maybe the market is

simply the most overbought it has been in nearly three months, according to

some oscillators.

We recall a survey that we

saw over the weekend that

PM’s are now 68% weighted

in equities in their balanced

funds

Perhaps, like Barton, everyone has gone long the market again and we recall a

survey that we saw over the weekend that PM’s are now 68% weighted in

equities in their balanced funds. We can also see from the CFTC data that the

net speculative position (futures and options) at the Merc has swung from a net

short position of 40,000 contracts in mid-June to a net long position of 3,300

contracts currently. That sort of move will certainly move the needle. Ditto for

the 1.2% decline in NYSE short interest over the past month. In the past two

weeks, Market Vane bullish sentiment on equities has moved up 5 points. It’s

all good. Meanwhile, consumer confidence has rolled back to a five-month low

(what does Main Street know, anyway?).

Earnings on the surface seem to be doing just fine but at the same time, we can

see that the economy slowed visibly as Q2 came to a close and the July data are

telling us to expect a slightly different tone to Q3 guidance. There was a nifty

article on Market News yesterday showing how 82% of the corporate universe

beating EPS estimates is standard fare and that only 68% are doing so in terms

of revenues (a figure lower than we saw in the second quarter of 2008 when the

economy was knee-deep in recession). Sales are up the grand total of 9% YoY and this being compounded off a -14% trend this time last year – so margins

continue to stretch out to the limits and one has to wonder how long that is

going to last. Who knows? Maybe profits end up going to 100% of national

income and labour’s share totally vanishes.

I was asked yesterday in an interview how I respond to criticism for missing the

surge in the equity market. Well, for one thing, those that were long in 2009 got

their clients killed in 2008 and it’s still not even a wash. Second, I was

recommending credit and commodities last year, not cash, and these strategies

played out well. There are always ways to make money without having to go

whole hog into the stock market (if you think I’m bearish, there are others who

make me look like Jim Carrey – have a read of “Doomsday Shelters Making a

Comeback ” on page 3A of the USA Today).

More to the point – we can get 80% rallies in a secular bear phase, and to be

totally honest, I have never billed myself as a market timer. There are others

here at GS+A that do that much better than me. The Nikkei has enjoyed

260,000 rally points in the past twenty years and the market is still down

70%. If you partake of these bear market rallies, know when to get out – or at

least sell call options and collect the premium. It is amazing how people are still

Page 2 of 12

Earnings on the surface

seem to be doing just finebut at the same time we can

see that the economy

slowed visibly as Q2 came to

a close




stuck in this belief that the 80% rally off the lows is still somehow a prevailing

market condition – the S&P 500 peaked on April 26 th and even with the

recovery of the past few weeks, the S&P 500 at 1113, with all due respect, is no

higher now than it was on November 16 th of last year.

Through all the zigs and zags, this market has done diddly squat now for over

eight months. You were better off clipping coupons, even at these low bond

yield levels. And as for that 80% rally from March/09 to April/10, we wonder

aloud how many are going to remember it once we retest the lows – the market

rallied 50% in the opening months of 1930, as an example. Do you ever hear

anyone today talking about the great rally of 1930? Does anyone today ever

have much to say about 1930, or if they do, is it a fond memory? Well, the

market rallied 50% at one point that year. There’s not much left to say on this

one.

9% of American households

rate business conditions as

being “good”

For the time being, it probably pays to treat the market as a 1040-1220 decision

box as far as the S&P 500 is concerned. Even after the 9% rally of the past two

weeks, it is still at the halfway-point of this well-defined range of the past ten

months. What is amazing is how Main Street and Wall Street have diverged in

recent weeks. The market has rebounded nicely and all we see now is optimistic

prognostications about the outlook because of an earnings season that seemed

to contain most of its growth in April which was three months ago – meanwhile,

what did we see in the July consumer confidence report? That 9% of American

households rate business conditions as being “good”.

Are you kidding me? That’s all we get with a 0% funds rate, a near 10%

deficit/GDP ratio and a $2.3 trillion Fed balance sheet? By way of comparison,

back when Lehman failed in September 2008, 13% believed business

conditions were “good”, and when Bear Stearns failed in March of that year, the

ranking was at 16%. In the wake of the 9-11 tragedy, it was 19%.

Meanwhile, 44% give the business background a “bad” rating, so the ratio of

growth bears to growth bulls in the survey is nearly five-to-one; we doubt you will

ever see that sort of ratio among surveyed economists or strategists. Now

maybe these people polled by the Conference Board don’t know the first thing

about the economy, but last we saw, it is consumers that command a 71% share

of GDP so their opinions will count if they translate into (in)action.

Those that do not see how abnormal this so-called recovery has been, consider

that in expansions, consumer confidence averages 102; in recessions, it

averages 71; and we are at 50.4 as of July. So basically, the level of consumerconfidence is 20 points below what the average level is during a recession and

yet virtually everyone dismisses double-dip risks out of hand. Maybe there is no

double-dip because we never really fully emerged from the recession that we

know officially began in December 2007 – that was certainly the message out of

yesterday’s confidence report.

Page 3 of 12

44% give the business

background a “bad” rating,

so the ratio of growth bears

to growth bulls in the survey

is nearly five to one




HOME PRICES GET AN ARTIFICIAL LIFT … BUT GOOD NEWS FOR RENTS

The Case-Shiller home price index managed to come in a better-than-expected

print of +0.47% in May on top of a 0.6% lift in April. This is not the start of a new

uptrend since the inventory backlog is still massive and instead reflects the

effects of the last gasp of demand during the spring as the government tax

credits were about to expire (the index is based off a three-month average). No

reason to get excited – especially knowing that average new home prices

collapsed almost 10% in June.

Meanwhile, housing demand continues to weaken and we saw that in the Q2

Census data, which showed the homeownership rate dropping to a decade-low

66.9% from 67.2% in Q1 and 67.4% a year ago. It will take years to mean revert

to the traditional 64% rate and during that time, one would have to believe that

the direction of the demand and supply curves will lead to deflation in

residential real estate as opposed to any sustained price appreciation. The level

of vacant homeownership units for sale is stuck just below 2 million and units

that are empty and being held off market for “unspecified” reasons (the shadow

inventory) jumped 3.2% to a record 3.74 million units.

This puts the total vacant supply at 5.7 million units or nearly 8% of the stock if

ownership units are compared to a pre-bubble norm of just above 5%. That is

an excess of around 2-1/2 million units, which is a huge overhang. On the bright

side, rental demand rose 0.9% and occupancy here is up three quarters in a row

to 37.1 million units. The apartment vacancy rate, which peaked at 11.1% in

last year’s third quarter, has stabilized near 10.6%. Other data from MFP

Research show the vacancy rate now down to 6.6% form 8.2% at the end of

2009 – perhaps this is why the Bloomberg apartment REIT index is up 23% YoY,

double the trend for the entire REIT space.

POOR IN RICHMOND?

The Richmond Fed manufacturing index has followed in the footsteps of the

other regional industrial readings in the direction of weakness, not strength. The

diffusion index slipped to a four-month low of 16 in July, from 23 in June, 26 in

May and the nearby 30 peak in April – the month when the equity market

peaked.

Prices paid slowed to 1.59% annual rate from 2.31% in June, the low-water mark

of the year and even in the face of the recovery in raw material costs; and prices

received index also softened to a 1.45% annual rate from 2.39% -- again,

suggesting as was the case with the Dallas Fed Index that we are kicking off the

third quarter with margin compression.

As an aside, new order volume sank to 12 from 25 in June and well off the 41

nearby high in April. And the Richmond Fed survey index for services showed 0

for retail sector revenues and the employment index swung from 2 to -6 –

contraction in other words, for the first time since March. These numbers, sorry

to say, are not conducive to a prolonged stretch of beta/risk/cyclical

outperformance. These data are consistent with a 3-point decline in the July

Page 4 of 12

For all the talk of how great

the transports are doing, we

couldn’t help but notice thattraffic is starting to slow

The Q2 Census data showed

the homeownership ratedropping to a decade-low

66.9% from 67.2% in Q1 and

67.4% a year ago




ISM index (Richmond Fed has a historical 77% correlation with it) – so stay

tuned for the data release on August 2nd.

For all the talk of how great the transports are doing, we couldn’t help but notice

that traffic is starting to slow – according to the ATA, the truck tonnage index fell

1.5% in June after a 0.2% dip in May As we said earlier, a lot of this great Q2

earnings news was frontloaded into April – but at least the bulls have another

three months to fret over the Q3 profit reporting season.

THE CORNER OF WALL AND MAIN

Main Street is not feeling the love that Wall Street is, that is for sure. Consumer

confidence as measured by the Conference Board slipped to 50.4 in July from

54.3 in June – the lowest since last February and about half the level that is

typical of an economy out of recession. The “expectations” component, that

leads consumer spending growth, was the real link, having slipped to 66.6 from

72.7; the “present situation” component dipped to 26.1 from 26.8.

The details of the report were very soft. Plans to buy a home slipped to 1.9 from

2.0., the lowest since December 2009, and before that, it was in the 1982

recession. Everyone seems to be of the view that employment is going to be key

but out of the confidence data we see that the “jobs hard to get” subindex rose

to 45.8 from 43.5 to stand at a four-month high.

As an aside, Canadian consumers are feeling a little downbeat too with

confidence down 3.7 points in June to 80.0 – the second monthly decline in a

row.

CHAIN STORE SALES STILL BELOW TARGET

The weekly sales data just came out and showed a 0.7% decline and so far into

July the YoY trend is running at +2.7%, which is fractionally below the +2.9%

gain that was planned at the start of the month by the retailers.

Discount stores are doing fine, especially food. The Redbook survey cited

“sluggish business” for the rest of the sector and that consumers seem

“unmotivated” even with back-to-school items already “arriving in stores in

recent weeks”. In a sign of these frugal times, many retailers are offering

“Christmas in July” promotions, hoping to attract shoppers to get their holiday

purchases done early. Who knows? Maybe it will start snowing too.

Page 5 of 12

In a sign of these frugal

times, many retailers are

offering Christmas in July

promotions

Main Street is not feeling

the love that Wall Street is,

that is for sure




THOUGHTS ON THE LONG-TERM OUTLOOK FOR INFLATION

Let me start out by saying that I do not believe that bonds are any “better" an

investment than stocks, at least in principle. They both have their advantages.

It is safe to say that the bull

market in bonds will end

reasonably close to the point

in time that inflation (or

deflation) bottoms

For bonds, the advantages are that they provide an income stream – the

principal and the interest payments are guaranteed in the case of most

government securities; and in the case of the corporate sector, it inevitably

comes down to the quality of the credit and the longevity of the company in

question. In addition, the yield at the time of purchase is almost always at some

significant positive spread over CPI inflation.

Stocks represent ownership in corporations that have assets and strive to make

a profit, often paying out a portion of the profit in the form of dividends and

retaining earnings to grow the business and increase the dividends in the

future.

But the primary purpose of this comment is to suggest what things may look like

when the Great Bull Market in Bonds, which began in 1981 with 30-year

Treasury Bonds yielding 15.25%, finally comes to its glorious end.

For starters, I think it is safe to say that the bull market in bonds will end

reasonably close to the point in time that inflation (or deflation) bottoms. This is

because we have determined that by far the major economic factor that

correlates consistently with the direction of market-determined interest rates, at

least for long term Treasury Bonds, is CPI Inflation (headline and core).

The bond market, like politics, is an emotional issue and not well-liked in general

by Wall Street because it has a negative correlation to the stock market most of

the time. For a growth bull, the bond is the "enemy". The economic environment

that most favours the long end of the bond market tends to be low or no growth

and bonds have traditionally been an asset allocation decision that is bearish on

the stock market.

As a result, fear mongering often takes the place of thoughtful and objective

analysis when it comes to bond market commentary. One way or another, the

long end of the bond market has continually been characterized as high risk for

the last 30 years that it has been outperforming the S&P 500. That’s a little

unfair – after all, it is the benchmark risk free asset for funding actuarial liability

when taken to the extreme of a 0% Coupon Treasury Strip.

Let’s move on and make a sensible and objective effort at making a long-termforecast for core CPI Inflation. Based on our analysis, we could well see core

inflation receding from around 1% now to near 0% in the next 12-to-24 months,

which would imply an ultimate bottom in the long bond yield of 2.5% and 2% for

the 10-year T-note. We should add that as long as the Fed funds rate remains at

zero, reverting to a normal shaped Treasury curve would generate similar results

for the long bond and 10-year note at the point at which the inevitable "bull

Page 6 of 12

We could well see core

inflation receding from

around 1% now to near 0% in

the next 12-to-24 months,which would imply an

ultimate bottom in the long

bond yield of 2.5% and 2%




flattener" reaches its climax. As we saw in Japan, this will take time, but yields

at these projected levels will very likely come to fruition in coming years.

So what will be the cause of the next secular uptrend in inflation or

hyperinflationary shock? It pays to look back at history. Prior to the inflation of

the 1970s-early 1980s, periods of very high inflation were primarily associated

with war. Increased credit demands to fund the war effort combined with the

drop in productivity that goes along with blowing everything up is an inflationary

stew.

What is perhaps most

important to recognize is

that whether it is war, OPEC

or rampaging Baby Boomers,

history supports the notion

that high inflation, at least at

the core CPI level, tends to

occur in brief bouts

Wars were typically followed by brief periods of deflation followed by stable

prices until the next war. In the 1970s several factors other than war led to the

brief bouts of hyperinflation and they are much debated. What is perhaps most

important to recognize is that whether it is war, OPEC or rampaging Baby

Boomers, history supports the notion that high inflation, at least at the core CPI

level, tends to occur in brief bouts.

A quick look at the core CPI chart shows that for all but a brief period since

WWII, inflation has been well below 5%. But it was the period from 1970 to

1980 that contained all readings above 5%. Coincidentally, this was the period

in which the Baby Boomers were buying their first refrigerators to go along with a

bungalow as they formed their households.

By 1983, core CPI was back down to 5% and never looked back, but the

psychological damage was already done. Inflationary expectations were

indelibly etched into the mindset of the Baby Boom cohort. So everyone

positioned themselves for inflation by leveraging up their asset purchases.

Inflationary expectations were the rationale for overconsumption and depleted

savings rates.

What resulted was an interesting dichotomy. Asset prices inflated during the

1980s, 1990s and into the 2000s. Although the secular bull market in equities

ran out of steam early in the last decade, most other asset prices (particularly

residential real estate) went parabolic into the peak of the secular credit cycle in

2007.

Core CPI on the other hand, has been continually slowing since the peak of

13.6% in 1980 and even at the peak in the ratio of household debt to

disposable income in 2007, was running no higher than 3%. Unlike geopolitical

disruption or demographic shocks, asset bubbles and the credit cycle tend to

have an important secular behavioral impact on society and therefore, theeconomy.

The credit collapse of the 1930s around the globe dramatically altered social

norms related to consumption, speculation and saving. Those who were adults

with families in the 1930s shunned debt and believed in “pay as you go” for the

rest of their lives. By way of comparison, the inflationary shock of the 1970s

enticed the Baby Boomers into a spending and speculative binge. Rather than

Page 7 of 12

Core CPI on the other hand,

has been continually slowing

since the peak of 13.6% in

1980




save, they executed a failed strategy of speculating their way to a dignified

retirement.

Now the clock has run out and household behavior is poised for a dramatic

change. If the 55 year-old Boomer resolves to work longer and harder, cut the

budget to save more and liquidate debt, can we really expect the politics to

maintain the status quo? This type of behavior from the developed world will

exert enormous deflationary pressure. In addition, the huge amount of debt and

entitlement expansion that has occurred at the government level, particularly in

response to the financial crisis, will be an enormous drain on economic growth

as taxes are raised to service the debt and budgets are dramatically cut.

Now the clock has run out

and household behavior is

poised for a dramatic

change

For this reason, it is appropriate to consider the possibility that the next secular

uptrend in inflation must await the rebuilding of the household and government

balance sheets to levels that launched the last uptrend. That, by the way was

about 30% debt to disposable income in 1950, 60% in 1970, and realistically, it

could take a generation to get back to that range from current levels of around

125%.

The outlook is not entirely dependent on the behavior of the developed world’s

consumers and governments, however, if we are really trying to envision the next

20 years, the emerging market consumers (in places like China and India) have

extremely low debt levels and high savings rates. Changes in emerging market

consumer behavior should be, on balance, a source of counteracting inflationary

pressure. Then again, the forces that most contributed to disinflation in the

last three decades were globalization and technological innovation that lead to

dramatic improvement in productivity and lower unit costs.

There is no reason to doubt that these forces will continue to be moderately

supportive in the near future, even if higher marginal tax rates and reduced

labour mobility (due to the fact that one-in-four Americans with a mortgage have

negative net equity in their home and are thus "stationary") end up constraining

the noninflationary growth potential in the United States (and Europe).

While the disinflation from 1980 to 2007 was mostly supply-side related, the

deflation pressure now is coming from the demand side – a deficiency of

aggregate demand caused principally by the contraction in credit (40% of the

private market for securitized consumer and mortgage loans has vanished over

the course of the past two years).

So, putting it all together, it is reasonable to conclude that prices are most likely

to be stable for a generation. By stable, I mean flat and perhaps oscillating

around plus or minus 2% (look at Japan, where there has been no such

downward price spiral – the CPI sits right where it was 18 years ago).

Because the economy is still gripped with overcapacity in several sectors, real

estate and labour in particular, we may be headed towards an outright

deflationary backdrop over the near- to intermediate-term, but a deflationary

spiral seems overly pessimistic considering all the good things in the mix,

Page 8 of 12

Changes in emerging market

consumer behavior should

be, on balance, a source

of counteracting inflationary

pressure




including a reflationary policy backdrop which certainly helped establish a price

floor in Japan in recent years.

That said, a “V” shaped recovery has always been off the table from our

perspective because we still have so far to go in the secular credit collapse, so

all the balance sheet expansion that the Fed has done and will do in the future

should continue to offer up little more than an antidote. In turn, a reversal

of CPI or core CPI trend to the upside for the next couple of years seems like a

low- probability event, particularly given the demographic and retirement

pressures that increasingly favor savings over spending in the broad consumer

sector.

A “V” shaped recovery has

always been off the table

from our perspective

And what about the end of the Great Bull Market in Bonds? It could come pretty

soon. You heard right. Long-term Treasury Bond yields could reach a secular

bottom in the next couple of years. And what will it look like?

Well, rates will likely be much lower than anyone expects and, as typically occurs

at secular market peaks, the public will probably swear by long bonds at the

primary lows in yields. After all, what other safe investment has delivered

inflation plus 2% or much better, guaranteed, in the past 30 years? But in order

for the public to adore 2.5% yielding long Treasury Bonds, it will first have to

believe in stable or modestly deflating core CPI as a long-term forecast. At last

count, households still have a near-3% long-run inflation expectation according

to the most recent University of Michigan survey.

The public will also need to be fed up with risk and, judging by the performance

of stocks and real estate in recent years, who could blame them? And for the

Baby Boomer at 55 or 60, “Gambler’s Ruin” isn’t an option. We can see that

they are already voting with their feet as the mutual fund flows clearly indicate –

increasingly towards income and away from capital appreciation strategies.

Finally, the public will probably need to be afraid to be out (of the bond market,

that is). That will most likely be due to a “flight to quality” as we continue suffer

the secular bear market in stocks and real estate and suffer the economic

setbacks of renewed recession sooner than many pundits think.

One last thought on stocks: Like I said before, bonds are not better than

equities. They are different. Every asset class has its time to be the leader. It

goes without saying that the best time to allocate to equities is at the point of

maximum pessimism and when the market is trading very inexpensively as it

was at previous post-war secular bear market bottoms.

We know that historically, that “moment” has coincided with valuations below

10x on trailing “reported” earnings and dividend yields above 5% as measured

by the S&P 500 Index. Note that while many a pundit cites the consensus as

being $96 EPS for “operating” earnings for 2011, it is closer to $76 on a true

“reported” basis (so apply a 10x or even a 12x multiple on that estimate!).

Page 9 of 12

And what about the end of

the Great Bull Market in

Bonds? It could come prettysoon




Page 10 of 12

We also know that the conventional wisdom is oh, so wrongly linear at inflection

points, so not only is the market cheap at these secular lows, but the future is

much brighter than generally perceived. Pulling the trigger at that magic moment

when bonds have peaked (yields have bottomed) and stocks can’t hurt you

anymore, with dividend yields secure at twice the Treasury rate, would be nice.

But you never know for sure at the right time, or you think you know for sure but

are too early.

For now, we are not even close. Sentiment toward long bonds and inflation are

still extreme and recent survey data show the typical balanced institutional

portfolio manager with a 68% allocation towards equities. As for bonds, the

yield on 30 year Treasury was recently core CPI plus 3%; 4% for a BBB corporate

bond; and a 6% real yield in the BB space. The S&P 500, meanwhile, sports a

P/E multiple of close to 15x and the dividend yield is barely over 2%.

In this light, it would seem highly appropriate to maintain a SIRP – Safety &

Income at a Reasonable Price – strategy for the near- and intermediate-term,

while keeping a close eye on the exit plan from this recommendation, though

that could still be a few years down the road.

Sentiment toward long

bonds and inflation are still

extreme and recent survey

data show the typical

balanced institutional

portfolio manager with a

68% allocation towards

equities




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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-followedand under-appreciated small and mid capcompanies 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. Preliminary unaudited estimate.

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

3. 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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David Rosenberg 07-28-10