It’s your future. How will you spend it?You’re making RRSP invest-

ments to help you plan for the

next phase of your life. But

have you sampled enough

experiences to know how

you’d really like to spend your

future?

Starting January 22nd, visit

bmoinvestorline.com/

giveaway for your chance to

WIN a world of new experi-

ences with the Go Your Own

Way Giveaway!

InSiteInSiteW I N T E R 2 0 0 7

Headwinds and Turbulence—An Outlook for 2007

by Dr. Sherry Cooper

Canada and the United States are facing economic headwinds,creating turbulence for financial markets on both sides of theborder. These winds are unlikely to dissipate any time soon.

Housing is the headwind for the U.S. economy. New and existinghome sales are now recording double-digit declines compared to lev-

els a year ago, causing the inventory of unsold homes to surge to its highestlevel in more than a decade. In the meantime, new and existing home pricesare deflating. Reflecting these trends, the first gust of the housing headwindreduced residential investment, cutting 0.7 percentage points from Q2 U.S.GDP growth of 2.6% annualized.

The second gust is still a gathering storm. Lower home sales and constructionactivity should eventually lead to slower sales of home furnishings and appliances, along with job layoffs in the construction and real estate sectors.Meanwhile, mortgage equity withdrawal has reined-in after supporting bothhome sales and general consumer spending for years.

However, there are offsets to this headwind. Lower energy prices are sparkingspending just in time for the holiday shopping season, and business capitalspending should remain buoyant as corporations boast the healthiest balancesheets in years. We look for U.S. economic growth to keep to the mid-2% rangethrough to next spring, just in time for a pair of quarter-point Fed rate cuts.

The Fed’s current pause is expected to persist for nearly a year despite thehousing headwind, as the U.S. central bank keeps an eye on lingering pricepressures. The Fed’s preferred inflation measure, the core PCE price index, iscurrently running at an 11-year high of 2.5% year-over-year (over the 2% limitof the Fed’s “comfort zone”) and critical leading indicators such as unit labourcosts are accelerating. The U.S. bond market had been rallying as the Fedstopped hiking rates in late June, but is now partially reversing course as infla-tion proves stubborn. Meanwhile, U.S. equity markets have been buoyed bythe decline in energy prices and the prospect of a soft landing in the U.S. econ-omy. The major U.S. stock indices have recently hit record or multiyear highs.As the full force of the housing headwind is felt early next year, U.S. bondyields should edge downward, but economic growth worries might weighheavier on U.S. equities. continued on the back page

Go yourown waygiveaway

Go yourown waygiveaway

Freedom ofChoice -ExploringYour RRSPContributionOptionsWhen you’re ready to contributeto your BMO InvestorLine regis-tered account this year, you havenumerous ways to do so – quicklyand easily.

1) USE ONLINE OR

TELEPHONE BANKING

You can top up your RRSP as easilyas you pay bills online. Just useyour Internet or telephone bankingservice to add BMO InvestorLine toyour list of payees. Contribute asmuch and as often as you wish.

2) SET UP PRE-AUTHORIZED

CONTRIBUTIONS

Enrolling in a pre-authorized planoffers many advantages. Forstarters, you avoid the yearly rushto make the RRSP deadline.

You can set a convenient paymentschedule that suits your needs.And you benefit from dollar-costaveraging, rather than trying to time your contribution to themarkets.

3) TRANSFER YOUR RRSPs

FROM OTHER F INANCIAL

INSTITUTIONS

By consolidating your invest-ments with BMO InvestorLine,you simplify your investing

activities and gain a consolidatedview of your portfolio. You candownload a Transfer Form atbmoinvestorline.com.

4) DEPOSIT CASH, CHEQUES

OR SECURIT IES AT ANY

BMO BANK OF MONTREAL

BRANCH

You can stop by the nearest BMOBank of Montreal branch to makea deposit. To deposit securitiesinto your BMO InvestorLineaccount, simply complete the“Power of Attorney to TransferStock or Bond (LF255)” form,and return it with the endorsed

certificates to BMO InvestorLine or a BMO Bank ofMontreal branch.

5) APPLY FOR AN

RRSP LOAN

If you are short oncash and still want to contribute to yourRRSP this year, youcan apply online for anRRSP Loan. Visit theRRSP Centre under theEducation Centre at bmoinvestorline.comto apply now.

To access any of the above Forms,visit the Apply Now page underQuick Links at bmoinvestorline.comand Download General Forms.

N E E D M O R E TA X T I P S ?Go to bmoinvestorline.com and access the

Tax Corner for all the tax information you

need. Get tax tips and strategies from

articles written by third-party experts,

get answers to Frequently Asked Questions,

and even file your taxes with Intuit’s

QuickTaxWeb at 25% off the regular price.

In a year where financial markets havebeen decidedly volatile and have test-ed the resolve of investors, I ampleased to report that in our annualperformance review, the Heavy

Hitter®* Select, Index and Tax EfficientModel Portfolios, available exclusively to

BMO InvestorLine clients, have all posted positivereal returns over the past 12 months to September30, 2006. Overall, returns in the Select, Index andTax Efficient categories have ranged from a high of10.6% for the all-equity Aggressive Growth IndexPortfolio to a low of 2.1% for the all-fixed-incomeCapital Preservation Select Portfolio.

Markets have been buffeted by a myriad of investorconcerns including high energy prices, rising inter-est rates, slowing economic growth and uncertaintyabout the outlook for inflation. On the geopoliticalfront, the ongoing conflict in the Middle East and

its implications for the global economy continues to challenge investors. During 2006, the month ofMay was especially brutal for equities around theworld with emerging markets, in particular, suffer-ing significant losses as the MSCI Emerging MarketsIndex (in C$) plunged by 12.0%. In North America,the S&P 500 Composite Index and the S&P/TSXComposite Index also posted negative returns of -4.4% and -3.6%, respectively, during the samemonth. Moreover, the bond market was not immuneand has also suffered considerable fluctuations. For example, monthly returns for the Scotia Capital Universe Bond Index have ranged from alow of -1.0% in October 2005 to a high of +2.1% inJuly 2006.

It can be difficult to remain calm in times of marketvolatility but, as the results of the Heavy HitterModel Portfolios demonstrate, a well-diversifiedportfolio is better able to withstand whatever blows the economy delivers. Here, we’ll look at howthe Heavy Hitter Select Model Portfolios performed.

>HEAVY HITTER SELECT

MODEL PORTFOLIOS –

ANNUAL PERFORMANCE

REVIEWIn our annual review of the Heavy Hitter SelectModel Portfolios, returns have ranged from a high of 9.3% for the all-equity Aggressive GrowthPortfolio to a low of 2.1% for the all-fixed-incomeCapital Preservation Portfolio, as shown in Table One. With the exception of the CapitalPreservation Portfolio, the portfolios have outper-formed the 1-year GIC index and have deliveredpositive real returns by outpacing inflation, asmeasured by the Consumer Price Index, over each of the past 1-, 3-, and 5-year periods. TheCapital Preservation Portfolio outperformed theabove indices over the 3- and 5-year periods andmatched the inflation rate of 2.1% over the 1-yearperiod. The investment returns for all the portfoliosare shown in Table One. It is interesting to note thatduring the 12-month period ending September 30,2006 when 1 in 10 mutual funds delivered negativereturns, all of the underlying Heavy Hitter funds in

>ALL HEAVYHITTER MODELPORTFOLIOSDELIVEREDPOSIT IVE RESULTSIN 2006 by Ranga Chand

the Select Model Portfolios deliv-ered positive results. Returns forthe Heavy Hitter Funds in theSelect Model Portfolios rangedfrom a low of 1.6% for the TDMortgage Fund to a high of 15.0%

for the Trimark Fund, a globalequity fund.

Given the overall strong perform-ance of equity markets, the port-folios with a higher equity

weighting have posted higherreturns. As shown in Table Two,the average monthly return forthe Select Model Portfolios hasranged from a low of 0.2% for theCapital Preservation Portfolio toa high of 0.8% for the AggressiveGrowth Portfolio. However, acomparison of the best monthlyreturn versus the worst monthlyreturn also reveals the increasedvolatility of the more equity-heavy portfolios. For example,over the past 12 months, the best monthly return for theAggressive Growth Portfolio was 4.5% and its worst monthlyreturn was -4.2%, for a spread of8.7%. In contrast, the spread forthe Capital Preservation Portfoliowas only 1.9%.

For more information on theHeavy Hitter Model Portfolios,sign into your account online andcheck out Model Portfolios underResearch. Or to purchase one of the Heavy Hitter ModelPortfolios, check out ModelPortfolios under Trading.

Ranga Chand is widely recog-nized as one of Canada’s leadingeconomists and mutual fund ana-lysts. He is also the Founder andPresident of the research and con-sulting firm Chand, Carmichael &Company Limited.

*Refer to the legal section ofInSite for full Mutual Fund disclaimer.

For annual performance reviews on the Heavy Hitter Index and Tax Efficient Model Portfolios, visit bmoinvestorline.com/EducationCentre/SpecialReports.html

The Upside of Downside Risk Management

Market-linked GICs offer the potential for higherreturns not normally associated with capital preservation.

Although market-linked GICs have been around sincethe early 1990s, their popularity grew significantlyfollowing the high-tech correction inthe early 2000s. Investors, weary of exposing their portfolios tovolatile equity markets,turned to investments thatoffered the potential forequity-like returns with-out equity-like risk.

UPSIDE POTENTIAL OF

MARKET-L INKED GICS

Market-linked GICs pro-vide you with the opportu-nity to earn potentially high-er returns than those offered ontraditional GICs, while maintain-ing the security offered through aguarantee on your principal investment.

Market-linked GICs appeal to security consciousinvestors who want upside potential without thedownside risk. The upside potential of a market-linked GIC is usually tied to the performance of oneor more stocks, mutual funds or stock indices. Theunique risk-return profile offered by these invest-ments is not easily attainable by retail investors.

RISK MANAGEMENT WHEN YOU NEED IT

If you are inching closer to retirement, you are proba-bly learning aboutthe increasingimportance ofmanaging risk inyour portfolio. Asyou may be draw-ing your primarysource of incomefrom your invest-ments, and sinceyou will likely live longer than past generations, it iscritical you have enough money to enjoy those years.

With interest rates near all-time lows, you will need todiversify with investments that offer the potential forhigher returns. However, if you have a short time frameto retirement, you may not want to take the risks nor-mally associated with investments that traditionally

offer higher returns. Negative returns can havedetrimental effects on your portfolio and its

ability to keep the income flowing at arate needed to sustain your lifestyle.

Market-linked GICs, with theirpotential for high returns and theirprincipal guarantee, may be agreat option for your uniqueneeds.

DIVERSIF ICATION

OPPORTUNIT IES

As market-linked GICs are ideal forinvestors approaching or in retire-

ment, they can also be quite appropri-ate for other investors. Their unique risk-

reward profile makes market-linked GICs agreat tool for increasing the level of diversification inany investor’s portfolio.

Spreading a portfolio among many asset classes canreduce the impact that a negative return in any one of them has on the whole portfolio. This concept works well when asset classes move independently of each other. If returns on asset classes move in lock-step with one another – as they have started to do inrecent years – the benefits of traditional diversificationare lost when markets decline. Market-linked GICs can

provide a cushion againstthese declines when it isneeded most. At the sametime, they can contribute tothe upside when markets aredoing well.

Market-linked GICs areoffered by BMO TermInvestments under the nameBMO Progressive GICsTM. For

more information on BMO Progressive GICs, visit yourlocal BMO Bank of Montreal branch. To learn moreabout BMO Term Investments, visit bmo.com.

“Market-linked GICs pro-vide you with the opportunityto earn potentially higherreturns than those offeredon traditional GICs...”

InSite is published quarterly by BMO InvestorLine Inc.,and is distributed with BMO InvestorLine account state-ments. To request additional copies of this issue, pleasesend an email to insite@bmoinvestorline.com. To viewpast issues of the newsletter, visit the Education Centreat bmoinvestorline.com.

Please send comments and suggestions toinsite@bmoinvestorline.com.

The articles in this newsletter are prepared as a generalsource of information. They are not intended to providelegal, investment, accounting or tax advice, and shouldnot be relied upon in that regard. If legal or investmentadvice, or other professional assistance is needed, theservice of a competent professional should be obtained.

The information contained in this newsletter is based onsources believed to be reliable, but its accuracy cannot beguaranteed. The views expressed and information provid-ed in the articles are attributable solely to the authors.

*Commissions, trailing commissions, management feesand expenses all may be associated with mutual fundinvestments. Please read the prospectus before investing,including the mutual funds in the Model Portfolios. Theindicated rate[s] of return is [are] the historical annualcompounded total return[s] including changes in [shareor unit] value and reinvestment of all [dividends or distri-butions] and does [do] not take into account sales,redemption, distribution, or optional charges or incometaxes payable by any security holder that would have

reduced returns. Mutual funds are not guaranteed, theirvalue change frequently and past performance may notbe repeated.

BMO InvestorLine is a member of BMO Financial Group.†As ranked by The Globe and Mail, 2002, 2003, 2004,2005 & Feb.4, 2006; by Gómez Canada Q1, Q3 2002 &Q2, Q4 2003; and by Watchfire GómezPro, Q2 2004.®Registered trade-marks of Bank of Montreal, usedunder licence. ®†”Heavy Hitter” is a registered trade-mark of Chand, Carmichael and Company Limited, usedunder licence. TMTrade-mark of Bank of Montreal, usedunder licence. BMO InvestorLine Inc. is a wholly ownedsubsidiary of Bank of Montreal. Member CIPF and IDA.

5122168 (01/07)

®

Headwinds andTurbulence— An Outlookfor 2007continued from front page

The headwind in the Canadianeconomy is the decline in real netexports (exports minus imports),reflecting the strong Canadiandollar and the slowing U.S econo-my. The goods and services tradebalance, after adjusting for pricechanges, has moved froma record surplus in Q12002 (before the looniesoared) to a record deficitin Q2 2006. As a share ofGDP, this represents ashift of nearly 9 percent-age points, which is ahefty prolonged head-wind. In Q2 2006 alone,the deterioration in netexports carved a whop-ping 3.4 percentage points fromQ2’s Canadian GDP growth, leav-ing it at just a 2% annual rate.

Although some commodity pricesare declining, which is setting upa period of underperformance(versus the U.S.) for the Canadiandollar and the TSX, the lingeringimpacts of past appreciation in the

loonie and the unfolding U.S. eco-nomic slowdown will keepCanada’s economic headwindblowing. Again, there is an off-set—decent domestic demandgrowth. Compared to south of theborder, the combination of lowerinterest rates and strongeremployment trends have keptconsumer spending and housingmore buoyant, while the commod-ity boom has been a boon for relat-ed-industry profits. Meanwhile,Canada’s superior fiscal position

is providing more leeway for taxcuts and spending hikes.

The Bank of Canada has been morecautious than the Fed since bothcentral banks started tighteningback in 2004; the Bank is cognizantof the effects of the decline in netexports and has kept an eye on the

stark regional and industrial skewto Canada’s economic and inflationperformance. Canadian interestrates are well below those in theU.S. and are likely to remain sodue to lower inflation and the sur-plus position in our budget andcurrent account. We look for theBank to follow the Fed’s rate-cut-ting lead, particularly as CanadianGDP growth languishes in the 2% range.

We expect the Canadian and U.S.economies to land softly during

2007, as their respectiveheadwinds subside.Late in the year,improving economicprospects should provepositive for equity mar-kets on both sides of theborder, but the absenceof a more severe eco-nomic downturn andmore aggressive centralbank easing will make

for a more challenging environ-ment for bonds. Nevertheless,yields will likely remain tuckedunder their recent cyclical highs.

Dr. Sherry Cooper is GlobalEconomic Strategist, ExecutiveVice-President, BMO FinancialGroup and Chief Economist, BMO Nesbitt Burns.

“...the lingering impacts ofpast appreciation in theloonie and the unfolding U.S.economic slowdown will keepCanada’s economic head-wind blowing.”