July 7, 2008 Executive Summary Strategy - CIBCWM.comresearch.cibcwm.com/economic_public/download/psjul08.pdf2 CIBC World Markets InC. Canadian Portfolio Strategy Outlook—July 7,

Executive Summaryby Jeff Rubin

Canadian Portfolio Strategy outlook

Strategy

Jeffrey RubinEconomics & Strategy

(416) [email protected]

Peter BuchananEconomics & Strategy


Avery ShenfeldEconomics & Strategy


Quentin BroadCanadian Equity Research


CIBC World Markets Inc. • PO Box 500, 161 Bay Street, BCE Place, Toronto, Canada M5J 2S8 • Bloomberg @ WGEC1 • (416) 594-7000C I B C W o r l d M a r k e t s C o r p • 3 0 0 M a d i s o n A v e n u e , N e w Yo r k , N Y 1 0 0 1 7 • ( 2 1 2 ) 8 5 6 - 4 0 0 0 , ( 8 0 0 ) 9 9 9 - 6 7 2 6

http://research.cibcwm.com/res/Eco/EcoResearch.html

Strategy's Recommended Asset Mix & TSX GICS Sector Weights

vs. Current Benchmark

We are lowering our TSX targets for both this year and next, in light of the latest changes to our economic forecast that paint an increasingly stagflationary macroeconomic environment, particularly south of the border. The combination of 1% real GDP growth, over-4% inflation, and some 200 basis points of Federal Reserve Board tightening will be challenging to large swaths of the stock market, particularly anything connected to the energy-exposed transport sector. While upgrades to our oil and natural gas price forecasts make us even more bullish on our hugely overweight position in energy stocks, we are reducing our equity weighting by four percentage points and moving them to cash. Our new market weight in equities is consistent with a lowered 14,300 target for the TSX Composite this year and a TSX Composite 15,250 target for the end of 2009.

At the same time we are adding another half percentage point of weighting to our already seven percentage points overweight position in energy stocks. Our new price targets call for an average $150 per barrel West Texas Intermediate next year and $200 in 2010. Similarly we have raised our natural gas target to $15/mnBtu for next year. With Canadian oil sands representing almost 70% of the world oil reserves open to private investment, we anticipate significant merger and acquisition activity in the sector.

We have also added another half percentage point of weighting to the agricultural chemical sub-sector of the materials GICS. Soaring demand for higher protein diets in China and India is lifting agricultural prices around the world and sending world fertilizer

demand through the roof. The ill-conceived diversion of America’s corn crop to ethanol production is only adding further fuel to already heated global fertilizer demand.

We are reducing weighting in both consumer discretionaries and in industrials. The auto component of consumer discretionaries looks particularly vulnerable, in light of the fact that we are likely to see new vehicle sales in the United States slump to as low as 11 million vehicles over the next two years. We are also reducing our exposure to industrials, and in particular, airlines. Triple-digit oil prices portend soaring losses throughout the North American, and indeed, world aviation industry.

July 7, 2008

“We are lowering our TSX targets for both this year and next, in light of the ... increasingly s t a g f l a t i o n a r y m a c r o e c o n o m i c e n v i r o n m e n t , particularly south of the border.”

ASSET MIX (%)Bench-mark

StrategyRecom-mend.

vsBench-mark

chg vs

mon. ago*

Stocks 53 53 0.0 -4.0Bonds 38 36 -2.0 0.0Cash 9 11 2.0 +4.0GICS SECTORS (%)**Cons. Discretionary 3.5 0.5 -3.0 -0.5Cons. Staples 2.3 2.3 0.0 0.0Energy 33.0 40.5 +7.5 +0.5Financials 25.0 22.5 -2.5 0.0 -Banks 14.0 12.0 -2.0 0.0 -Insur., REITs, oth. 11.0 10.5 -0.5 0.0Health Care 0.3 0.3 0.0 0.0Industrials 4.9 2.4 -2.5 -0.5Info Tech 4.9 4.9 0.0 0.0Materials 20.1 23.1 +3.0 +0.5 -Gold 8.2 9.2 +1.0 0.0 -Other Metals 5.4 6.4 +1.0 0.0 -Chemicals 6.0 7.0 +1.0 +0.5Telecom 4.6 2.1 -2.5 0.0Utilities 1.5 1.5 0.0 0.0

Note: Shading indicates recommended overweight.*chg in %-pt underweight/overweight from last month.

** Benchmark weights are for TSX Composite.

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CIBC World Markets InC. Canadian Portfolio Strategy Outlook—July 7, 2008

strategyA Time for Caution—Jeff Rubin and Peter Buchanan

Table 2 - Economic Forecast

Oil Set to Hit $200 by 2010

With oil topping $140 and natural gas prices up even more steeply this year, energy costs have become the number one topic on Wall Street and Main Street. We have revised down our 2009 US growth forecast to barely over 1% in view of this. The softer US growth picture has also prompted us to pare our targets for the TSX Composite to 14,300 and 15,250 respectively, for the end of this year and next. In line with that, we have shifted 4%-pts to cash from equities, on which we are now neutral. With more of the gains coming from the oil and gas sector than we had earlier anticipated, we have also added a half-point of weight to energy.

So far in 2008, energy stocks have climbed by nearly 20% in contrast with the TSX financial group’s double- digit retreat. Anxious to avoid the “inconvenient truth” that even $4/gal gasoline means unpopular lifestyle changes, politicians of all stripes have chosen to blame faceless speculators for West Texas’ rocket ride, rather than the real culprit—stagnant global supply alongside spirited demand growth (see StrategEcon, June 26, 2008, pages 4-8 and Chart 1). Notwithstanding the “outrage” of elected officials, those same factors point to even higher prices down the road. Demand pressures, emanating both from emerging Asia and increasingly from subsidized consumers in the oil producers themselves, should help to lift wellhead prices to $150/bbl on average next year and $200 in 2010 (Chart 2), revised up in both cases from our earlier expectations. And prices could approach those levels sooner, if the present Gulf of Mexico hurricane season hits exposed production heavily.

Table 1 - Equity Projections

Source: Federal Highway Administration, CIBCWM

Chart 1 - Americans Will Soon Drive Less

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08Q1 08Q2 08Q3 08Q4 2007 2008 2009Canada Real GDP Growth (AR) -0.3 0.7 1.2 3.0 2.7 1.1 1.9

Real Consumption Growth (AR) 3.2 2.1 2.6 3.0 4.5 4.0 2.8CPI - Headline (y/y) 1.8 2.2 3.0 3.5 2.2 2.6 3.3 - Core (y/y) ex taxes 1.4 1.5 1.6 2.3 2.1 1.7 2.1Unemployment Rate (%) 5.9 6.1 6.4 6.3 6.0 6.2 6.3

US Real GDP Growth (AR) 0.9 0.4 -0.4 2.3 2.2 1.3 1.3Real Consumption Growth (AR) 1.0 1.9 -0.6 1.9 2.9 1.5 1.5CPI - Headline (y/y) 4.1 4.1 4.7 4.8 2.9 4.4 4.1 - Core (y/y) 2.4 2.3 2.2 2.3 2.3 2.3 2.8Unemployment Rate (%) 4.9 5.3 5.8 6.0 4.6 5.5 5.8

World Real GDP Growth (% chg) - - - - 4.9 4.3 4.3

2006 2007 2008 2009TSX Composite 14,467 (6/30) 12,908 13,833 14,300 15,250

% total return 6.0 YTD 17.3 9.8 6.1 9.0

TSX Operating Earnings - index adj 717 809 1,003 1,123

- yr/yr % chg 12.0 (08:Q2) 13.2 10.4 24.0 12.0

S&P 500 1,280 (6/30) 1,418 1,468 1,235 1,275

-% total return, YTD (11.9) 15.8 5.5 (14.0) 5.4

Year-end

Latest

3


While further gains in energy prices are auspicious for oil & gas producers, they will make an already lopsided rally even more narrowly based, heightening the risk of further bouts of wrenching volatility, like that of recent weeks. Last year, energy and materials collectively accounted for about 80% of the TSX’s advance. In comparison, energy alone has more than accounted for the total increase so far in 2008.

Another danger is that the old adage of “a bit being good, a lot bad” applies to energy prices, given the potential risks from an overly steep rise to other market segments. WTI’s ride from $100 to $140 so far this year has produced a cash bonanza for Canadian producers. In the last month alone, analysts have tacked on a further 5%-pts to their previous 21% expectation for 2008 TSX earnings growth, largely due to the sizzling energy profit outlook (Chart 3).

While the oil patch counts its newfound cash, however, the systemic costs from oil’s blistering rally are about to become more apparent. The rise in gasoline prices in just the last six months will gobble up fully half of the $150 billion Washington is mailing out to consumers, hampering efforts to kickstart growth. Energy-driven inflation, moreover, means that both the Fed and Bank will have to tighten, even before the US economy has put the worst housing slump in decades fully behind it. While the odds are that Bernanke et al will hold their fire until after the election, we expect that a near-3% core CPI and over 4% headline will see the funds rate rise by 200 bps through the end of 2009 (Chart 4). Not having eased as aggressively earlier, the Bank of Canada faces less overt pressure for such a radical course shift. Even it, however, will probably have to tighten by 100 bps to protect its hard-won inflation-fighting credentials given the recent less-friendly CPI data.

Even with Washington helping out, monetary restraint, along with the drag on a savings-challenged consumer from gasoline costs and housing prices, will deal a lethal blow to the hopes for a fast bounceback in growth stateside. As with the shift to a smaller-sized vehicle fleet, it will take time for the economy to adjust to the effect of record energy prices. We’ve reduced our forecast for 2009 US GDP to a paltry 1.3%, in recognition of those lags (Chart 5). The US economy will continue to walk the fine line between growth and recession for a fair bit

longer. That will, in turn, take a toll north of the border. While the TSX may not be as correlated with US stock prices as it once was, the 0.7 correlation of the last five years still implies a fair amount of sensitivity.

strategy

Chart 3 - Expected 2008 TSX Index Earnings Growth Climbs to 26% on Energy & Materials

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"Bottom Up" Consensus, Earnings Growth in 2008 (%)

Source: Thomson Reuters

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+8%

Chart 4 - Oil Shocks Push Interest Rates Higher

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Chart 2 - Oil and Gasoline Price Forecast

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strategyFrom a growth standpoint, this energy shock, like previous ones, should prove to be a differentiated affair, and even our forecast for a bit over 1% US GDP growth implies a deep recession for some industries. No sector looks more vulnerable than autos, which makes up 11% of the TSX consumer discretionary group’s weighting. We have subtracted a half-point from that sector’s weighting, in recognition of strong Canadian-US trade links, and a matching amount from the industrial group, which contains the also very hard hit airline industry. We have offset those moves with matching half-point increases to our already overweight positions in energy and materials stocks.

Canadian Energy Stocks Best Way to Play Oil & Gas Prices

Promises of greater supply from Saudia Arabia have not so far dented oil’s 5-year long rally. As implied by our average wellhead price target of $150 next year and $200 in 2010 for West Texas, we remain dubious of OPEC’s ability to keep prices from reaching still-higher levels in the future. Exports from the world’s 15 largest global suppliers of crude fell by nearly a million barrels in 2007. While it’s possible the Saudis may have a bit more oil to put on the markets in the next few months, thanks to the just-commissioned 500,000 bbl/day Khursaniyah field, the world needs a hefty 4 million barrels per day of added daily capacity every year just to offset depletion. Any rise in Saudi production in the next three to four years is going to be largely offset by declining output in Russia, and other nations with fading megafields, like Mexico. Production there fell by 7% in 2007 and is currently running 10% below year-earlier levels.

While OECD oil demand is falling, that’s not the case globally, thanks in no small part to the fact that just half of the world’s population pays something approximating the going free market price for oil products. Nowhere is the wedge between production cost realities and what the consumer pays greater than in some of the larger oil-producing countries themselves, limiting their ability to supply more to fast-growing, energy-thirsty industrial power houses like China. Total Middle Eastern oil demand rose by a third of a million barrels in 2007, as much as in China which has quadruple the population. A third of the Middle East’s electrical generation comes from oil-fired facilities (Chart 6). Power users in the region pay as little as a fourteenth the rates charged North American households.

Table 3 — Valuations & Earnings Growth by Sector

Chart 5 - Oil Prices Help Slow US Real GDP Growth

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Real GDP Growth, % (LHS)

Avg WTI Oil, $US/bbl (RHS)

4-Qtr Fwd IndexEarnings Level Current Last Decade 2005 2006 2007 2008 (f)

Energy 392.7 4068 10.4 12.0 45.4 8.5 7.9 70.3Health Care 26.0 327 12.5 22.0 5.3 29.2 -38.8 6.5Financials 127.5 1612 12.6 12.0 13.8 17.3 11.3 -4.7Consumer Discretionary 67.9 976 14.4 15.7 2.3 18.2 12.5 -1.8Consumer Staples 97.1 1494 15.4 17.8 2.9 -1.2 -1.5 -1.0Telecommunications 55.8 882 15.8 29.8 5.9 30.8 28.4 -10.6Materials 234.7 3902 16.6 28.9 40.7 81.0 -2.5 76.9Utilities 116.4 1961 16.8 17.4 17.9 -1.6 52.7 4.2Industrials 65.0 1260 19.4 14.9 28.1 12.8 40.2 -24.8Info Tech 15.5 400 25.8 44.5 -40.1 47.0 154.4 64.0TSX Composite 1065.3 14467 13.6 16.1 31.2 13.2 10.4 24.0

Forward PE

Note: Indexes as of Jun 30th; 4-qtr fwd earnings are proj. 08:Q2 thru 09:Q1

TSX Op. Earnings (% ch)

5


strategyAlong with oil sands producers, gas-heavy junior producers have been among the strongest performers in the TSX to date this year. Rising gas prices will continue to benefit that sector, as well as larger gas-oriented producers. Natural gas demand globally has been rising three times as fast as oil, and we expect that strength to continue. In the US, greenhouse fears are making it difficult if not impossible to license new coal-fired generation capacity. That, long lead times for nuclear, and “clean coal’s” recent setbacks point to continued strong demand there for natural gas from utilities. Fast-rising Middle Eastern natural gas demand for power generation, tied to growing desalination needs, also threatens to cannibalize gas exports from that important producing area. That suggests North America may have trouble importing all the LNG needed to plug a growing gas supply gap.

The TSX energy index has climbed by nearly 20% in 2008, even as the shares of the major global integrated players have stagnated or fallen (Chart 7). The TSX energy sector is more levered to rising oil and gas prices, less to unrewarding gasoline refining margins than the “crude-poor” US majors, who are increasingly in the business of selling gasoline rather than producing crude. A rising tide of global energy nationalism is also eroding respect for property rights, making Canada’s stable political climate and legal safeguards for investors look all the more inviting.

In addition to an extra half-point on energy to reinforce our long-standing overweight of the group, we are also raising our recommended weighting of the materials group by a half-point to 23.1%. Fertilizer stocks have risen strongly in the last year, but likely still have headroom, given a lack of sizeable new capacity globally

Table 4 — Commodity Price Forecast

30-Jun 2005 2006 2007 2008 (f) 2009 (f)

Oil (WTI) $/bbl 140 57 66 72 125 150

Natural Gas (Henry) $/Mn Btu 13.19 8.89 6.73 6.97 13.50 15.00

Gold $/troy oz. 930 444 604 695 1000* 1050*

Copper $/lb 3.95 1.67 3.06 3.24 4.00 4.25

Aluminum $/lb 1.39 1.23 1.17 1.20 1.30 1.00

Nickel $/lb 9.91 6.71 10.98 16.86 11.00 9.50

Zinc $/lb 0.87 0.63 1.48 1.48 1.00 1.05

*Year-end

Average

Chart 7 - TSX Oil & Gas Group Outperforming US Integrateds in 2008

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Rebased, 2007 close = 100

Chart 6 - Oil’s Share in Power Generation

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strategyand continuing feisty growth in demand. Thanks, in part, to burgeoning meat demand from better-off third world consumers, global fertilizer use jumped by 5% in 2007. Fertilizer application rates in many key grain growing regions lag far behind North America, creating room for demand to grow further (Chart 8). Although zinc and lead prices have softened recently, albeit to still-quite-high levels historically, copper and steel remain at or near records. We expect that reconstruction in China’s earthquake-hit Sichuan region will buttress metals demand generally. As with oil, claims that speculation, rather than fundamentals, has been the dominant factor lifting prices look dubious. Stocks for most metals remain tight, suggest that speculators are not propping up prices by withholding supplies. Moreover, metals like cobalt and rolled steel

that are not traded on organized futures exchanges (and are consequently more difficult to bet on) have risen more than those that are traded in such markets (Chart 9).

Industrial and Consumer Discretionaries Most Vulnerable to Lengthier US Slowdown

We are reducing our exposure to the consumer discretionary sector. Auto parts represent the largest share of the capitalization of that market segment, after media. With a year-to-date decline north of 25%, that sector has been one of the TSX’s weakest performing sectors in 2008. And our forecast that US auto sales will decline further over the next few years (Chart 10) points to an even tougher operating environment for the industry. Pressure for price discounts from assemblers, who face deepening problems of their own in many cases, could further impair margins.

Table 5 - Fixed Income & Exchange Rate Projections

Chart 8 - Lower Fertilizer Use in Some Key Grain Producers Creates Headroom for Demand

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Chart 9 - Little Sign of Speculation: Exchange Traded Lagging Non-Exchange Traded Metal Prices

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rolled steel

*

**Tin, copper, lead, nickel, silver, gold, zinc, aluminum

Year-End

2007 2008 2009

B of C Overnight Target (%) 3.00 3.00 3.00 3.25 4.25 3.00 4.00

2-Year GOC 3.25 3.40 3.60 3.85 3.75 3.60 4.35

10 Year GOC 3.73 3.85 3.95 4.00 3.99 3.95 4.40

30-Year GOC 4.08 4.20 4.25 4.30 4.10 4.25 4.65

S&P TSX Cdn Bond Index (% YTD total return) 2.7 3.2 3.9 2.0 3.8 3.9 2.8

Fed Funds 2.00 2.00 2.25 2.75 4.25 2.25 4.00

10-Year US Note 3.97 4.20 4.30 4.35 4.03 4.30 4.65

C$ in US cents 97.9 100.0 103.1 105.3 100.2 103.1 101.5

US$/EUR 1.58 1.59 1.56 1.50 1.46 1.56 1.50

Yen/US$ 106 105 108 102 112 108 94

June 30/08

Sep 30/08

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7


An energy-related slowdown in the US could hurt the industrial sector in two ways. We have consequently taken a further half-point out of that sector, cutting our recommended allocation to 2.4%. Air travel, even in an efficient wide-bodied aircraft, uses about a third more energy than travelling the same distance in a car with two occupants. Fuel costs have accounted for nearly a third of the major Canadian carriers’ costs in recent quarters, making them tremendously susceptible to rising oil prices. Jet fuel costs, moreover, have risen by 90% in the last year—much more than gasoline prices. Nor are recent developments an unalloyed plus for the rails. Although higher energy prices improve the railways competitive position, they are exposed to a softer US economy on bulk freight revenues, and also to earnings risks from their US operations.

Still Too Early to Wade Back Into Financials

The financial group was among the TSX’s weakest performers in June, as an earlier rally fell flat. The recent decline has been broadly based, with the banks, insurers and real estate all giving up ground. While the sector has not been setting new lows for the year as it has in the US, we believe that downside risks will continue to exceed the potential upside for some time further. In view of this, we continue to recommend an underweight exposure.

Lows or near record lows in credit default swap metrics suggest sentiment in the troubled US subprime and Alt-A markets has yet to turn the corner (Chart 11). Adding to the potential for more housing stresses, the strain on credit quality from the softer economy and ever costlier energy poses a broad challenge to bank loan performance. Loss provisions at the five largest Canadian banks jumped by 74% in the second quarter, but levels are still about 50% below the highs reached during the 2001-2002 period. In addition, substantially flatter yield curve as the Bank of Canada and the Fed shift policy gears and switch to fighting inflation could also hamper interest arbitrage income.

strategyChart 10 - Number of Vehicles to Fall by 10 Million by 2012

Source: R.L. Polk Co., Federal Highway Administration, CIBCWM

Auto Scrapping vs. Sales

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Chart 11 - Credit Quality Indicators Retest Earlier Lows

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strategy

HISTORICAL PERFORMANCE: CIBC WM BENCHMARK AND ASSET CLASSES

(2) Market benchmark weight is the actual mix for stocks, bonds and cash held by the broad base of pension funds, segregated funds, mutual funds and insurance companies. This totals about $1 trillion of which pension and mutual funds are the biggest (45% & 37%) with life insurance and segregated funds at 11% & 7% respectively. The cash, stock and bond breakdown varies significantly among the 3 basic components such that the benchmark for any of the 4 categories may vary significantly from the published aggregate (eg. equities can vary from 10% for life companies to 75% for the other 3 categories). Data is Statistics Canada/Bank of Canada published data updated to current based on correlation analysis from the most recent partial actuals. The total return for the index will differ slightly from the summed weighted return for the sectors due to the weight shifts on a day-to-day basis.

(3) Equities by GICS sector benchmark weights are TSX data. Sector index levels are total returns.

All Asset Classes TSX Only

(1) Total return for the recommended portfolio is the index return multiplied by the individual asset mix or sector weight recommended by Economics & Strategy. Recommen ded portfolio weights for the current month appear in the front table.

PERFORMANCE OF STRATEGY PORTFOLIO VS BENCHMARK

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+58.8%

Asset Classes 2007 2008 YTD Last 3 Mos.Stocks (TSX Composite Total Return Index) 9.83 5.99 9.09 -Strategy Equity Portfolio 9.09 8.76 11.05Bonds (Bloomberg Cda Bond Index) 3.84 2.67 -1.05Cash (1-Month Bills) 4.07 1.35 0.61Total Market Benchmark(2) 7.22 4.29 -0.44 -Total Strategy Portfolio 7.20 5.16 5.48TSX Stocks by Sector (Total Return) (3) 2007 2008 YTD Last 3 Mos.Consumer Discretionary 4.22 -23.53 -10.74Consumer Staples -5.34 -4.65 1.47Energy 8.23 24.31 22.88Financials -1.63 -11.59 -3.32 -Banks -6.84 -9.48 -2.03 -Insurance, REITS, others 5.20 -14.06 -2.33Health Care -24.25 -13.00 -10.89Industrials 10.51 1.56 3.43Info Tech 48.22 1.50 3.11Materials 30.26 26.16 17.55 -Gold 5.73 21.22 6.62 -Other Metals 16.51 12.12 4.36 -Chemicals 113.26 56.72 49.00Telecom 19.87 -9.72 2.64Utilities 11.89 0.83 6.49*as of June 30/08

Total Return (%)*

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equIty researCh

TSX SECTORAL VIEWS BY FUNDAMENTAL EQUITY RESEARCH ANALYSTS FOR JULY 2008

Consumer Discretionary – B. BekCanadian media performance has been solid in H1/2008, but forward tone is more cautious, as U.S. recessionary concerns have begun to creep into the Ontario economy. As expected, specialty TV remains strong as advertising dollars and subscription increases continued their fast pace. Newspapers continue to struggle, especially in Metro markets. Internet advertising remains a small piece of the overall advertising pie in Canada, but is growing materially. Conventional TV remains an issue, although conventional TV players in Québec are benefiting from the uncertainty surrounding TQS (Bek: Communications & Media – Market Weight). Canada’s wireless penetration, at 62% (year-end 2007), still suggests that plenty of growth remains in the Canadian wireless market. While the new entrant risk is real, we believe that growth remaining in the Canadian wireless industry is significant and should be enough to absorb the emergence of new competitors (Bek: Telecommunication & Cable – Market Weight).

Consumer Staples – P. CaiccoSo far, 2008 looks like it could be the worst year for the Canadian consumer in over a decade. Our major trading partner is entering the early throes of a recession and our ability to sell to the Americans has been hampered anyway by the strong Canadian dollar. On top of that, Canadian retailers are facing a fierce new U.S competitor driven Supercenters, bringing a new level of price competitiveness to the market. Combine this with rising costs, and margins will be pressured (Caicco: Merchandising & Consumer Products – Market Weight).

Energy – R. Plexman, M.Bridges, B.Borggard, W.Lee & J. FetterlyWe believe that a powerful combination of fundamental and financial factors will keep oil prices high. We raised our WTI oil price forecasts for each of 2008 and 2009 from US$90.00/Bbl to US$105.00/Bbl. And with the turnaround in North American natural gas markets unfolding sooner than we had been expecting, we raised our AECO price forecasts from $8.00/Mcf to $9.00/Mcf and our Henry Hub price outlook from US$9.00/Mcf to US$10.00/Mcf for each of 2008 and 2009 (Plexman: Oil & Gas – Large Cap- Overweight). Following nearly two years of weakness, we believe Western Canadian Sedimentary Basin (WCSB) activity levels are poised to begin to recover in the coming months. While the magnitude and length of a recovery remains uncertain, given the meaningful strengthening in commodity prices in recent quarters, capital expansion announcements by numerous producers, our continued bullish outlook for natural gas prices and the modest softening of the revised royalty regime by the government of Alberta on April 10, we believe the outlook for the oilfield services sector has improved significantly in recent months (Fetterley: Energy Equipment Services – Market Weight). With the group trading at an average 2008E EV/DACF multiple of 5.7x and a P/NAV premium of 30%, from a long-term perspective, we believe the sector is reasonably valued at current levels (Bridges, Borggard and Lee: Oil & Gas Junior E&P – Market Weight).

Financials – D. Mihelic, R. O’Reilly, A.AveryWe expect banks’ earnings growth to slow considerably relative to prior years due to higher loan loss provisions and weaker capital market-related earnings (Mihelic: Banks & Lifecos – Market Weight). The weakness in Canadian REITs belies the healthy, strong fundamentals of the sector in Canada. Canadian economic growth is expected to remain positive in 2008. Vacancies are at record lows and new commercial space completions will be very low. Availability of debt financing, albeit reduced and confined to conventional mortgages, is still sufficient to provide for REITs’ and other conservative investors’ needs. (O’Reilly, Avery: Real Estate – Overweight).

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Health Care – M. ParisMore than 90% of the S&P/TSX Health Care Index is now driven by just three stocks, so company-specific news should continue to drive sector performance more so than broader macro trends. We maintain our Market Weight sector weighting, as we view the risk/reward profile for Canadian health care stocks as balanced (Paris: Health Care – Market Weight).

Industrials – M. Willemse, J. BoutNorth American vehicle sales have begun to show softness due to a variety of economic headwinds. Until U.S. auto sales show signs that they have hit bottom, the U.S. economy shows signs of a rebound, and the Canadian auto suppliers report favorable results with the high Canadian dollar, we believe investors may hold a cautious view on Canadian auto-related equities. Valuation multiple contractions are likely to occur prior to a recovery in the sector (Willemse: Automotive – Market Weight). Our Market Weight rating reflects the strong fundamentals in the steel sector offset by the potential for economic headwinds and rich valuations on peak earnings. Our only concerns for the sector would be related to a stabilization in steel prices, which may cause some momentum players to exit the industry. Steel prices have increased significantly in 2008 due to raw material cost pressures and limited import activity (Willemse: Steel – Market Weight). Even with a soft U.S. economy, robust growth in Asia should continue to drive demand for commodities. Barring a global recession, the outlook for the heavy equipment sector in 2008 is modestly robust (Bout: Capital Equipment – Market Weight). Our Market Weight rating on the Canadian rails reflects the mixed outlook for the global economy (more buoyant for international markets and muted for North America) (Bout: Railroads – Market Weight).

Information Technology – P. Lechem, T. CouplandConsolidation remains one of the foremost themes of the sector, with a high level of activity from strategic buyers (looking for incremental technology, customers, geographic reach or market share) and from private equity (eyeing the highly profitable and stable annual maintenance revenue streams) (Lechem: Technology-Software – Market Weight). While fundamentals appear relatively stable, we believe that a continued commodity price pullback and U.S. economic slowdown could serve to limit demand. To date, major engineering and construction firms have noted record backlogs and positive outlooks going into 2008. The one exception is a U.S. construction firm which stated that they expect a near-term slowdown in public infrastructure spending as a result of the current economic downturn and the increasing budget challenges facing state and local governments. We expect that this type of outlook could become more common if the U.S. economy continues to deteriorate (Lechem: Business and Professional Services – Market Weight). The technology hardware sector has started to benefit from growth in certain emerging markets and resurgence in capital spending in networking, although there may be a short-term pause given current macroeconomic conditions (Coupland: Technology Hardware – Market Weight).

Materials – J. Bout, H. Carreau, B. Cooper, D. Roberts, C. Hale-SandersWe are using our 2009 gold price forecast of $1,200/oz. to set our price targets. With gold prices rising much faster than the cost curve, we expect earnings figures for most companies to improve dramatically in 2008 and 2009. We believe this margin expansion will set the stage for a new influx of investors who will see the earnings power of the industry take hold while at the same time provide some degree of safety from general market mayhem (Cooper: Mining, Precious Metals – Overweight).

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Into the second quarter of 2008, metals and equity markets remained volatile, with daily swings instigated by the release of various economic indicators as the market seeks direction. Indicators continue to point to a deteriorating outlook for base metals demand in the Western World offset by strong emerging market demand (Hale-Sanders: Mining, Metals and Minerals – Market Weight). Our Market Weight rating on the sector reflects the diversity of commodities in it. We believe that a slowing U.S. economy will negatively impact styrenics and olefin/polyolefin demand. In fertilizers, pricing momentum for the three main nutrients (nitrogen, phosphate and potash) is due mainly to the tight grain market and declining inventories. Methanol prices seem to be stabilizing, with supply/demand relatively balanced (Bout: Chemicals & Fertilizers – Market Weight). Most companies in the Canadian paper & forest products industry are implementing plans for “cash preservation.” A key variable for investors is how much of a company’s asset base will remain intact over the next 12 to 18 months. Given the strong Canadian dollar, we expect ongoing rationalization throughout the Canadian forest products sector (Carreau, Roberts: Paper & Forest Products – Underweight). Utilities – A. PavaoWe have raised the weighting on the Canadian pipelines & utilities sector from Market Weight to Overweight. On the pipelines side, high commodity prices, strong demand growth and shifting supply sources are creating significant investment opportunities in North America that extend well into the next decade. In power, regional jurisdictions continue to focus on system reliability in addition to expanding generation and transmission capacity to keep up with demand growth. Dividend yields, adjusted for interest rates, are at peak historical levels and are bound to attract significant cash sitting on the sidelines as the worst of the credit crisis passes (Pavao: Pipeline, Utilities & Power – Overweight).

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Legal Matters: This report is issued and approved for distribution by (i) in Canada by CIBC World Markets Inc., a member of the IDA and CIPF, (ii) in the UK, CIBC World Markets plc, which is regulated by the FSA, and (iii) in Australia, CIBC World Markets Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, “CIBC World Markets”). This report has not been reviewed or approved by CIBC World Markets Corp., a member of the NYSE and SIPC, and is intended for distribution in the United States only to Major Institutional Investors (as such term is defined in SEC Rule 15a-6 and Section 15 of the Securities Act of 1934, as amended). This document and any of the products and information contained herein are not intended for the use of private investors in the UK. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of clients of CIBC World Markets Australia Limited. This report is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors; their prices, value and/or income they produce may fluctuate and/or be adversely affected by exchange rates. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of CIBC World Markets. Before making an investment decision on the basis of any recommendation made in this report, the recipient should consider whether such recommendation is appropriate given the recipient’s particular investment needs, objectives and financial circumstances. CIBC World Markets suggests that, prior to acting on any of the recommendations herein, you contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be con-strued as offering tax advice; as with any transaction having potential tax implications, clients should consult with their own tax advisors. Past performance is not a guarantee of future results. The information and any statistical data contained herein were obtained from sources that we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitute judge-ments as of the date of this report and are subject to change without notice. Although each company issuing this report is a wholly owned subsidiary of Canadian Imperial Bank of Commerce (“CIBC”), each is solely responsible for its contractual obligations and commitments, and any securities products offered or recommended to or purchased or sold in any client accounts (i) will not be insured by the Federal Deposit Insurance Corporation (“FDIC”), the Canada Deposit Insurance Cor-poration or other similar deposit insurance, (ii) will not be deposits or other obligations of CIBC, (iii) will not be endorsed or guaranteed by CIBC, and (iv) will be subject to investment risks, including possible loss of the principal invested. The CIBC trademark is used under license.

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Legal Disclaimers and Important Disclosure Footnotes

*“We have compiled our analysts’ views in accordance with the TSX sectoral breakdowns. We would note, however, that an analyst’s coverage universe might not correspond exactly with the constituents of the TSX sectors noted above. As such, we refer readers to CIBC World Markets “Canadian Research Review and Common Stock Universe” publication where each analysts’ specific universe is broken out. Analyst weightings are based solely on the specific constituents of that analyst’s universe and might not correspond with the constituent in the TSX sector breakdowns.”

Documents

July 7, 2008 Executive Summary Strategy - CIBCWM.comresearch.cibcwm.com/economic_public/download/psjul08.pdf2 CIBC World Markets InC. Canadian Portfolio Strategy Outlook—July 7,