Dogs Breakfast With Dave 011211

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David A. Rosenberg January 12, 2011Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc. is one of Canadas pre-eminent wealth management firms. Founded in 1984 and focused primarily on high networth 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,

visitwww.gluskinsheff.com

MARKET MUSINGS & DATA DECIPHERING

A Dogs Breakfast with DaveWhile Bob Farrells rule number nine warns us to be wary of widespread

consensus opinions, it may well turn out that all the bullish Wall Street analysts

end up being correct that 2011 proves to be another wonderful year. But the

one thing we can assure you, as was the case in 2010, is that it will not be a

straight line up. In fact, we would argue that there are more headwinds,

potholes, and event risks this year than there were last year.

Enjoy the picture show.

CALL IT THE WILE E. COYOTE MARKET

Source: The Road Runner and Wile E. Coyote," celluloid painting by Chuck Jones, 1980


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January 12, 2011 A DOGS BREAKFAST WITH DAVE

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THE FED IS VERY CONCERNED

The staff forecast incorporated the assumption that new fiscal actions, some of which had

not been anticipated in its previous forecast, were likely to boost the level of real GDP in2011 and 2012. But, compared with the November forecast, a number of other conditioningassumptions were less favorable: House prices and housing activity were likely to be lower,while interest rates, oil prices, and the foreign exchange value of the dollar were projected tobe higher, on average, than previously assumed. As a result, although the staff projectionshowed a higher level of real GDP, the average pace of growth over 2011 and 2012 was littlechanged from the November forecast, and the unemployment rate was still projected todecline slowly.

Indicators of production and household spending had strengthened, and the tone of the labormarket was a little better on balance. The new fiscal package was generally expected tosupport the pace of recovery next year. However, a number of factors were seen as likely tocontinue restraining growth, including the depressed housing market, employers continuedreluctance to add to payrolls, and ongoing efforts by some households and businesses todelever. Moreover, the recovery remained subject to some downside risks, such as thepossibility of a more extended period of weak activity and lower prices in the housing sectorand potential financial and economic spillovers if the banking andsovereign debt problems

in Europe were to worsen.

Others pointed to downside risks to growth. One common concern was that the housingsectorcould weaken further in light of the considerable supply of houses either on themarket or likely to come to market. Another concern was the ongoing deterioration in thefiscal position ofU.S. states and localities, which could lead to sharp cuts in spending andincreases in taxes. In addition, participants expressed concerns about a possible worseningof the banking and financial strains in Europe, which could spill over to U.S. financialmarkets and institutions, and so to the broader U.S. economy.

(The Minutes from the December 14, 2010 Federal Open Market CommitteeMeeting, released on January 4, 2011)

CHART 1: LOOK AT THIS THE TWO-YEAR MOVE IN OIL PRICES

Oil Price: West Texas Intermediate

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

-100

-50

0

50

100

150

200

250

70 73 76 79 82 85 88 91 94 97 00 03 06 09

(2-year percent change)


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CHART 2: OIL IS BEING DRIVEN IN PART BY SPECULATIVE FERVOUR

Net Long Speculative Position on Oil


CHART 3: RECORD LEVEL OF VACANT RESIDENTIAL REAL ESTATE

United States

Source: Census Bureau

-100

-50

0

50

100

150

200

250

'95 '97 '99 '01 '03 '05 '07 '09

(thousands of contracts)

8

9

10

11

12

13

14

89 91 93 95 97 99 01 03 05 07 09

10

11

12

13

14

15

16

17

18

19

20

89 91 93 95 97 99 01 03 05 07 09

Total Vacant Housing Units

(million units)

Total Housing Vacancy Rate

(percent)

Record High!


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CHART 4: HOUSE PRICE DEFLATION NOT OVER

United States: Case-Shiller Home Price Index Composite 10

Source: Robert Shiller (Irrational Exuberance), Haver Analytics

CHART 5: HOUSING IS STILL THE LARGEST ASSET ON THE BABY-BOOMER BALANCE SHEET

United States Share of Household Assets

*Life insurance and pension reserves

Source: Federal Reserve Board

(percent, 2010 Q3)

Consumer Durables

6.7%

Real Estate

26.5%

Equities

22.3%Cash

11.2%

Other*

25.9%

Non-government

bonds

4.4%

Treasuries

1.6%

80

100

120

140

160

180

200

220

240

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

(not seasonally adjusted, January 2000 = 100)

Long-termtren

d


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CHART 6: UNEMPLOYMENT STILL A MAJOR PROBLEM

United States(percent)

*Includes all marginally attached workers and those em ployed part-time for economic reasons.

Source: Bureau of Labor Statistics

CHART 7: NOT ONLY ECONOMIC, BUT SOCIAL TOO

United States: Civilians Unemployed for 27 Weeks or Over


Source: Bureau of Labor Statistics

3

4

5

6

7

8

9

10

11

94 96 98 00 02 04 06 08 10

6

8

10

12

14

16

18

94 96 98 00 02 04 06 08 10

U6 Unemployment Rate*Official Unemployment Rate

Record High

Levels!

Still high currently

at 9.4%!

0

1

2

3

4

5

6

7

'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08

0

5

10

15

20

25

30

35

40

45

50

'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08

As a percentage of total unemployed(percent)

Total(millions)

Record

High!Record

High!


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CHART 8: UNEMPLOYMENT RATE AT RECORD HIGH AMONG THE YOUNG AND ADULT MALES

United States Unemployment Rate (percentage)



CHART 9: STATE & LOCAL GOVERNMENT CUTBACKS REMAIN A KEY MACRO RISK

United States(year-over-year percent change)


Source: Bureau of Economic Analysis, Bureau of Labor Statistics

0

2

4

6

8

10

12

'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08

5

10

15

20

25

30

'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08

16- 19 YearsMen between 25-54 Years

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

'90 '93 '96 '99 '03 '06 '09

-2%

-1%

0%

1%

2%

3%

4%

'90 '93 '96 '99 '02 '05 '08

Employment: State & Local GovernmentReal Gross Investment: State & Local Government


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CHART 10: TICK TOCK WILL THE DEBT CEILING BECOME AN ISSUE IN APRIL?

United States

($ trillion)

Source: U.S. Treasury Department

CHART 11: THE WORLD IS AWASH IN DEBT

OECD: Gross General Government Debt-to-GDP Ratio

(percent of nominal GDP)

Shaded bars represent OECD estimates

Source: OECD

3

4

5

6

7

8

9

10

11

12

13

14

15

'92 '94 '96 '98 '00 '02 '04 '06 '08 '10

Public Debt Outstanding:

Statutory Debt Limit

Government Securities

Outstanding Subject to

Debt Limit

64

6970

7274 73 74

72

70 7071

7375

7675

73

79

96

100

90

55

60

65

70

75

80

85

90

95

100

105

'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11


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CHART 12: DEFAULT IS AN OPTION

Percent of the Time a Country is in Default Since Its Independence

(share of years in default since independence)

*For countries that became independent prior to 1800, the calculations are for 1800-2006

Source: National Bureau of Economic Research Working Paper Series: This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises,

Carmen M. Reinhart and Kenneth S. Rogoff

CHART 13: DEFAULT RISKS HIGH & RISING IN THE EUROPEAN PERIPHERY

10-Year Government Note Yield

(percent)


3

6

1113

1617

23 24

33

3739

51

Italy Netherlands Portugal Germany Turkey Austria Romania Spain Poland Hungary Russia Greece

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

99 00 01 02 03 04 05 06 07 08 09 10

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

01 02 03 04 05 06 07 08 09 10

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

01 02 03 04 05 06 07 08 09 10

Portugal GreeceIreland


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CHART 14: OUT OF LUCK!

Ireland

Source: Statistical Office of European Communities, Central Statistics Office

CHART 15: FOOD INFLATION BIG NEWS FOR EMERGING ASIA

CRB Spot Commodity Price Index: Foodstuffs

(index, 1967 = 100)


Source: Commodity Research Bureau

15

20

25

30

35

40

45

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

3

5

7

9

11

13

15

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Total Domestic Demand ( billions)Unemployment Rate (percent)

16-year high!

6-year low!

0

50

100

150

200

250

300

350

400

450

'70 '75 '80 '85 '90 '95 '00 '05 '10


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CHART 16: CHINAS INFLATION BACK ON THE RISE

China: Consumer Price Index

(year-over-year percent change)

Source: China National Bureau of Statistics

CHART 17: POLICY TIGHTENING IN CHINA LIKELY HAS FURTHER TO GO

China

Source: Peoples Bank of China

-2

0

2

4

6

8

10

'05 '06 '07 '08 '09 '10

7.0

8.5

10.0

11.5

13.0

14.5

16.0

17.5

19.0

'06 '07 '08 '09 '10

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5

'06 '07 '08 '09 '10

Deposit Rate: 3-month Certificates of Deposit

(percent per annum)

Reserve Requirement Ratio: Small/Medium

Depository Institutions (percent)


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CHART 18: IS THE CHINESE STOCK MARKET TELLING US SOMETHING ABOUT EM GROWTH?

China: Dow Jones Shanghai Index

(index)


270

290

310

330

350

370

390

410

Jul/10 Aug/10 Sep/10 Oct/10 Nov/10 Dec/10 Jan/11


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Gluskin Sheffat a Glance0Gluskin Sheff+ Associates Inc. is one of Canadas pre-eminent wealth management firms.Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to theprudent stewardship of our clients wealth through the delivery of strong, risk-adjustedinvestment returns together with the highest level of personalized client service.OVERVIEW

As of September30, 2010, the Firmmanaged assets of$5.8 billion.

Gluskin Sheff became a publicly tradedcorporation on the Toronto StockExchange (symbol: GS) in May2006 andremains 49% owned by its senior

management and employees. We havepublic company accountability andgovernance with a private companycommitment to innovation and service.

Our investment interests are directlyaligned with those of our clients, asGluskin Sheffs management andemployees are collectively the largestclient of the Firms investment portfolios.

We offer a diverse platform of investmentstrategies (Canadian and U.S. equities,Alternative and Fixed Income) andinvestment styles (Value, Growth and

Income).1

The minimum investment required toestablish a client relationship with theFirm is $3 million.

PERFORMANCE

$1 million invested in our CanadianEquity Portfolio in 1991 (its inceptiondate) would have grown to $9.1 million

2

on September30, 2010 versus $5.9 millionfor the S&P/TSX Total Return Indexover the same period.

$1 million usd invested in our U.S.Equity Portfolio in 1986 (its inceptiondate) would have grown to $11.8 millionusd

2on September30, 2010 versus $9.6

million usd for the S&P500TotalReturn Index over the same period.

INVESTMENT STRATEGY & TEAM

We have strong and stable portfoliomanagement, research and client serviceteams. Aside from recent additions, ourPortfolio Managers have been with theFirm for a minimum of ten years and wehave attracted best in class talent at all

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

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

For long equities, we look for companieswith 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 inwhich 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

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

Our investmentinterests are directlyaligned with those ofour clients, as Gluskin

Sheffs management andemployees arecollectively the largestclient of the Firmsinvestment portfolios.

$1 million invested in our

Canadian Equity Portfolio

in 1991 (its inception

date) would have grown to

$9.1 million2 on

September 30, 2010

versus $5.9 million for the

S&P/TSX Total Return

Index over the same

period.

HHHHHHHFor further information,

please contact

[email protected]

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.


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Page 13 of 13

IMPORTANT DISCLOSURES

Copyright 2011 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 ofissuers 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 personnels knowledgeof legal proceedings in which any Gluskin Sheff entity and/or its directors,officers and employees may be plaintiffs, defendants, codefendants orcoplaintiffs with or involving companies mentioned in this report is basedon public information. Facts and views presented in this material that relate

to any such proceedings have not been reviewed by, discussed with, andmay not reflect information known to, professionals in other business areasof Gluskin Sheff in connection with the legal proceedings or mattersrelevant 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

thirdparty websites. Gluskin Sheff is not responsible for the content of anythirdparty website or any linked content contained in a thirdparty website.Content contained on such thirdparty websites is not part of this reportand is not incorporated by reference into this report. The inclusion of a linkin this report does not imply any endorsement by or any affiliation withGluskin Sheff.

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 Sheffaccepts 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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Dogs Breakfast With Dave 011211