lunch with dave 120710

8/8/2019 Lunch With Dave 120710

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David A. Rosenberg December 7, 2010Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Lunch with DaveWHILE YOU WERE SLEEPING

Mr. A. B. Normal: sorry,but there is really nothingnormal about this cycle

Deflation remains the

primary risk in the U.S.

IN THIS ISSUE

While you were sleeping:risk-on trade is back; wegot anotherannouncement effectlast night out ofWashington

Canadas investment-ledexpansion bodes well for

future growth: Canada hasmanaged to achieve theholy grail of sustainablegrowth and price stabilitywithout a massive dose ofpolicy steroids

Twelve years of nothing!

Bernanke on Sunday night, followed by Obama on Monday night.

I said just last week that this was an announcement-driven market. Even

announcements on items that should have already been discounted long ago

seem to have a very sizeable market impact. As we are seeing today.

We got another announcement effect last night out of Washington, and guess

what, it was President Obama who blinked first.

With the GOP leadership on side, President Obama now proposes:

To extend the Bush era tax cuts for EVERYONE for two years (where they willlikely get extended again is there ever a good time to take someones

parking pass from them?)

An extension of the 99 weeks of emergency jobless benefits for another 13months (now we see why the bulls loved Fridays dismal payroll report)

Even some relief on the payroll tax front (by 2 percentage points to 4.2percent or $120 billion of stimulus, roughly $1,000 of savings per

household for 2011, with over $2,000 of savings for high-end earners). Keep

in mind that the payroll tax deduction merely replaces Obamas Making Work

Pay (MWP) tax break in the 2009 stimulus bill. The current move to cut

payroll taxes for all workers, regardless of income, will pack a more powerful

punch to be sure (the stimulus here of $120 billion is double the size of

MWP).

The 15% tax rate on capital gains and dividends remains intact for two yearsas well.

The estate tax establishes a 35% top rate (lowest in 80 years without thechange, it would have jumped to 55%) after a $5 million tax-free allowance

per individual. Most Democrats will be holding their nose on that one.

The Alternative Minimum Tax (AMT) will be temporarily indexed for inflation.This will prevent 21 million Americans from unfairly entering into a higher tax

bracket.

All in, this should be considered a second stimulus bill (deficit commission

R.I.P.). While the big part was the Bush tax cut extension, which basically just

saves the economy from $400 billion of restraint over the next two years, all the

other measures (depreciation allowances for businesses, continuation of a

college-tuition tax credit, expansion of the earned tax credit, and among others)

actually nets the economy $300 billion of fresh stimulus over the next two years

(about 40% of the size of the first stimulus bill that was passed in 2009).

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


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December 7, 2010 LUNCH WITH DAVE

A Fed that is determined to boost asset prices, especially the equity market,and what this in turn implies for the cost of capital. One would ordinarily think that

all this pro-growth news wouldinvigorate the dollar

but in this new world of

investing, when the risk-on

trade is on, then rest assured

that the greenback falls back

A White House that begrudgingly will work with Congress to propose near-termfiscal measures to help improve the spending outlook.

One would ordinarily think that all this pro-growth news would invigorate the

dollar, but in this new world of investing, when the risk-on trade is on, then rest

assured that the greenback falls back slipping below the 100-day moving

average this morning. These Fed/Fiscal measures ensure that the beta and

speculative trade remains intact hence the big equity gainers are in Emerging

Markets, which is riding a five-day winning streak.

Commodities are also firming with oil prices powering ahead by 1% so far today

to over $90 a barrel. A headache, perhaps, for consumers, and a margin

squeeze for producers, but seemingly a small price to pay for all the renewed

government stimulus. Copper just hit a record high and the gold price has done

likewise this morning. Wheat is rallying again. Core inflation may stay contained

but headline inflation is likely to drift up into 2011. TIPS may not be that bad a

hedge, though we also believe that long-dated zeroes are very attractive right

now after this latest melt-up in yields.

Obviously, if the U.S. government opts for a series of fiscal measures that could

end up adding as much as $750 billion to the existing large public debt burden,

the fixed-income market is not exactly going to like it. The pay-go rules, which

supposedly would require savings of $350 billion to help defray the cost of these

new fiscal measures, are being swept under the carpet. While the lame-duck

Congress will undoubtedly vote "yea", what is the new Congress going to do

about the looming debt ceiling issue, which now will come earlier than previously

thought (especially the conservative segment of the GOP and the few Blue Dog

Democrats that are left)?

Theres really no sense in passing any moral judgment. The rest of the world is

moving towards austerity after already probing the outer limits of their deficit

finance capabilities. With the Fed stepping up to the plate and Bernanke hinting at

more QE later on, the Treasury has a captive market for its debt. Someone smart

must have known that QE2 was going to be a prelude for more fiscal easing and

hence more Treasury issuance. And the Fed probably does not mind at all that

fiscal fears in the bond market are now pushing retail investors into equities. As

Alan Greenspan told CNBC on Friday, this is where the central bank and the

government like to see the wealth effect on confidence and spending take hold.

Perhaps the announcement of the new fiscal agreement was timed in a week

that sees $66 billion of coupon issuance beginning with $32 billion of 3-year

notes today (to push more people out of the bond market and into riskier

assets). All that said, these reflationary initiatives are being put into place

because policymakers recognize that the primary trend is still one of deflation as

it pertains to core consumer prices, which ultimately has a 75% correlation to

the direction of long-term interest rates.

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Think about that for a second. The Bank of Canada did not triple the size of its

balance sheet. In contrast to most of the major central banks around the world,

from the Federal Reserve, to the Bank of Japan, to the ECB, to the Bank of

England, the Bank of Canada never did embark on a course of jeopardizing the

sanctity of its balance sheet through quantitative easing measures. And here

we have Ben Bernanke on 60 Minutes already contemplating QE3.

Even without all the massive

doses of policy steroids thatseem to keep the U.S.

economy afloat, it has been

the Canadian economy that

has been the one to not just

reclaim but actually pierce the

pre-recession peaks in both

employment and real output

The Bank did not allow policy rates to stay near-zero indefinitely, having boosted

them three times since early summer. The Bank has not ratified a depreciating

currency to stimulate the economy either. The Canadian dollar has actually

been remarkably stable in recent months despite all the global financial and

policy crosscurrents. In addition, the Federal government did not make

repeated attempts to sustain growth as has been the case south of the border.

We see just how fragile the U.S. recovery really is now that the entire outlook

comes down to whether a tax cut that always had a 10-year shelf life should be

extended. So, even without all the massive doses of policy steroids that seem to

keep the U.S. economy afloat, it has been the Canadian economy that has been

the one to not just reclaim but actually pierce the pre-recession peaks in both

employment and real output.

CHART 1: TWIN PEAKS LEVEL OF BOTH REAL GDP AND EMPLOYMENT

BACK TO ALL TIME HIGHS

Canada

Source: Haver Analytics, Gluskin Sheff

Real Gross Domestic Product

(tril lion chained 2002 C$, seasonally adjusted at an annual rate)

10987654321

1.35

1.30

1.25

1.20

1.15

1.10

Employment

(millions, seasonally adjusted)

10987654321

17.5

17.0

16.5

16.0

15.5

15.0

14.5

Not only that, but we are starting to finally see some signs that Canada is

catching on to classic supply side economics, which will lead to a moresustainable growth path than the government and consumption-led model the

United States is attempting to nurture through its ongoing array of Keynesian-

style demand policies. In fact, it was the lingering weakness in the U.S. economy

that was the principal cause of Canadas low 1% annualized GDP growth rate in

the third quarter. If not for a sharp deterioration in our net exports, real GDP

would have actually posted an impressive 4.5% expansion.

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The key factor behind this performance is business investment in machinery and

equipment, which surged at a 28.7% annual rate and on the heels of a 32.7%

run-up in the second quarter and a 17.8% boost in the first quarter. You have to

go back at least 13 years to see the last time Canadian companies made this

sort of spending commitment to the economy. Capital spending, of all the major

components of the economy, is the one that exerts the most durable and

perpetual impact on the economy, via job creation and productivity.

CHART 2: STRONGEST BACK-TO-BACK-TO-BACK INCREASE IN 13 YEARS

Canada: Real Business Investment in Machinery & Equipment (quarter-over-quarter percent change at an annual rate)

1098765432109876

50

25

0

-25

-50


While Canada has lagged the United States for much of the past decade in

terms of productivity performance, it is looking increasingly as though we are onthe precipice of an important reversal. Productivity growth, while still low, is

showing signs of accelerating, as one would expect with business capital

spending rising as a share of GDP for three quarters in a row, and at nearly 9%,

heading close to a record high. Our research shows that there is about a 4 to 5

quarter lag before stronger productivity growth begins to kick in and this will be

crucial in future Bank of Canada decisions if it means that Canadas non-

inflationary growth potential has improved. Based on some preliminary in-house

research of our own, it looks as though the positive supply-side investment

shock that Canada is now experiencing could soon result in Canadas potential

GDP growth rate rising into a 3-4% range which would be very constructive for

return on equity, the long end of the Government of Canada bond curve as well

as the Canadian dollar.

Indeed, some early and positive signs are coming to the surface. Think about it.

Over the past year, the Canadian economy expanded 3.4% and yet this growth

performance still managed to coincide with a decline in the core (excluding

food, energy and indirect taxes) inflation rate to 1.1% from 1.3% a year ago.

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CHART 3: CORE INFLATION VERY TAME

Canada: Consumer Price Index: All Items less Food, Energy & Indirect Taxes(year-over-year percent change)

1050505

6

5

4

3

2

1

0


This inflation performance has occurred even though the Canadian

unemployment rate has come down to 7.6% from 8.4% a year ago and on a

comparable U.S. basis, is actually now at 6.7% (on a seasonally adjusted basis).

Again, contemplate that. The last time our apples-to-apples unemployment rate

was at 6.7% was back in January 2009, when the U.S. was at 7.7%. Today, the

U.S. jobless rate is at 9.8%. To think that Canada managed to achieve a lower

jobless rate with declining core inflation and without the need for radical fiscal,

monetary, and bailout largesse is quite remarkable.

CHART 4: CANADA-U.S. UNEMPLOYMENT COMPARISON

(percent, seasonally adjusted)

Canada: R3 Unemployment Rate Comparable to the U.S. Rate(thick line: left hand scale)

United States: Official Unemployment Rate(thin line: right hand scale)

10505050

14

12

10

8

6

4

12

10

8

6

4

2


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Maybe this is why the Canadian dollar has improved towards par and has stayed

there despite all the angst surrounding Europe, which has triggered a so-called

flight to safety (though perhaps the loonie fits that safety bill today). While

Canada is certainly not without its blemishes, especially with respect to

consumer and provincial government balance sheets, total financial and

nonfinancial debt, at 180% of GDP, is fully 80 percentage points lower than it is

in the United States. Taking into account all debts, private and public, on- and

off-balance sheet, there is no comparison between the two countries when it

comes to debt ratio comparisons.

It wasnt Hank Paulson who

the Cameron government hiredas a fiscal consultant, but

former Canadian finance

minister Paul Martin

According to the June 6th edition of the U.K. daily The Telegraph (Britain to

emulate Canadas radical solution to tackle debt), it wasnt Hank Paulson who

the Cameron government hired as a fiscal consultant, but former Canadian

finance minister Paul Martin. Mr. Martin took Canada from the brink of financial

collapse in 1993 and five years later posted surpluses which lasted for more

than a decade: program spending relative to GDP was sliced from 17.5% to 12%

and revenues from 17% of GDP to 28%.. Anyone who tells you that a structural

deficit can be solved without help from the revenue side is purely delusional.

Canada has managed to achieve the holy grail of sustainable growth and price

stability but with not only far lower leverage than is the case state-side but with a

far lower unemployment rate and a higher industry capacity utilization rate to

boot (76.0% here versus 74.8% in the U.S.A. and without the export-led

benefit of a weaker currency). There would have been a time when a GDP

growth rate, like the one Canada has managed to post in the past year, coupled

with such tightness in the labour market, would result in increasing inflation

pressures. But that is hardly the case today. In fact, not only is core consumer

inflation tame, but finished goods producer prices are deflating and unit labourcosts in the business sector are running as flat as a beaver tail. One can only

imagine if the folks at the Bank of Canada shouldnt be doing high fives, but

that is definitely not Mark Carneys style.

If there is one financial variable that is responsible for all this success

especially when you look around the industrialized world and see all the basket

cases it is probably the Canadian dollar. While it is clearly a competitive

hurdle for domestic manufacturers, the loonies strength is not without its

benefits. We are a very big exporting nation, but guess what, we are also a huge

importer. The reality is that we import twice as much machinery and equipment

about $150 billion annually as we export. The stronger Canadian dollar has

dramatically reduced the prices that local producers pay for these imported

capital equipment, which is being deployed to raise productivity and hence ourfuture living standards. In fact, the cost of imported capital goods, on average,

is about 20% less expensive today for our companies with the Canadian dollar

near par than it was a decade ago when the loonie was sinking towards the 60

cent threshold.

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CHART 5: PRICES FOR MACHINERY & EQUIPMENT STILL DEFLATING

Canada: Implicit Price Deflator: Machinery & Equipment(year-over-year percent change)

10505050505

20

15

10

5

0

-5

-1 0


The Bank of Canada will likely serve up some cautionary words over the

economic outlook in todays press release. But there are some very important

domestic structural shifts taking place beneath the surface that are too complex

for a press release like the fact that Canadas capital stock, after seven years

of stagnation, is now starting to expand. These shifts already seem to be laying

the groundwork for future productivity gains, and the fact that the Federal

government did not blow a hole in our fiscal situation means that declining

corporate tax rates can help nurture this investment-led revival in the economy.

All of this is actually very constructive for the longer-run outlook for the Canadian

economy and our capital markets, and may help extend the TSX outperformance

relative to the S&P 500. An outperformance in Canadian dollar terms that has

been a feature of the landscape in seven of the past eight years and very likely

to persist considering the weakened state of Americas fiscal backdrop, Fed

balance sheet and the U.S. dollar.

CHART 6: HALFWAY THROUGH THE CANADIAN

STOCK MARKET OUTPERFORMANCE

(percent change)

*Dates reflect the trough (August 12, 1982) and the peak (March 24, 2000) in the S&P 500 Composite Index

Source: Bloomberg, Haver Analytics, Gluskin Sheff

-22.7

28.9

83.9

S&P 500

Composite

TSX Composite TSX (USD terms)

1391.4

621.3

522.3

S&P 500

Composite

TSX Composite TSX (USD terms)

March 24, 2000 to November 30, 2010August 12, 1982 March 24, 2000*

Then And Now

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It is not just about commodities, though the secular bull market and Canadas

exposure, which is triple the market cap representation in the S&P 500, doesnt

hurt either.

CHART 7: CANADIAN MARKET GEARED MORE TOWARDS COMMODITIES

Source: Bloomberg, Gluskin Sheff

3.1%

3.4%

3.6%

10.8%

10.9%

11.0%

11.1%

11.7%

15.3%

19.0%

Telecom

Utilities

Materials

Cons. Discret

Industrials

Cons. Staples

Health Care

Energy

Financials

Info Tech

0.7%

1.5%

2.7%

2.9%

4.4%

4.7%

5.8%

23.0%

25.2%

29.1%

Health Care

Utilities

Cons. Staples

Info Tech

Telecom

Cons. Discret

Industrials

Energy

Materials

Financials

S&P 500 Composite Index(percent, as of November 30, 2010)

TSX Composite Index(percent, as of November 30, 2010)

Its about

i. Yield, and at 2.7%, investors pick up a 70 basis point premium over theS&P 500 dividend yield.

ii. Banking sector stability, and in Canada the financials have a 30% marketcap share versus 15% state-side and the Canadian banks are more stableinstitutions with stronger balance sheets and much higher dividend yields

(3.9% compared to 1.2%) and none of them have cut their dividend in 18years.

CHART 8: CANADIAN BANKS ARE NUMBER 1

Source: World Economic Forum, Global Competitiveness Report 2010-11, National Post (Moodys Rates Canadas

Banks Tops, October 9, 2009)

Banks ranked on a scale from 1 (may need

government bailout) to 7 (sound)

4.4United States111

6.5South Africa6

6.5Chile5

6.5Lebanon4

6.5Australia3

6.4Hong Kong8

6.4Panama7

6.3Singapore9

6.3Malta10

6.6New Zealand2

6.7Canada1

ScoreCountryRank

4.4United States111

6.5South Africa6

6.5Chile5

6.5Lebanon4

6.5Australia3

6.4Hong Kong8

6.4Panama7

6.3Singapore9

6.3Malta10

6.6New Zealand2

6.7Canada1

ScoreCountryRank

Average Bank Financial Strength

(rating by country)

World Economic Forum, Global

Competitiveness Report 2010-11

Moodys Report,

September 2009

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CHART 9: CANADA OFFERS A YIELD PREMIUM

(percent)

2.7

3.9

1.5

2.0

1.2

0.6

Stock Market Di vi dend Yi el d Bank Sector Dividend Yi eld 2-year Government N ote Yiel d

Can ad a U .S.

Source: Bloomberg, Gluskin Sheff

iii. Resources, or in other words, what China is buying.iv. A pro-business federal government, one of the few in the industrialized

world, with a focus on lower corporate tax rates.

v. Fiscal probity also the only central government with a credible 5-yearplan to balance its books.

What global investors need most is a reliable currency that is unlikely to hurt

them. The only time in the past decade when investors got hurt being long the

Canadian dollar was during that awful post-Lehman collapse days of 2008 and

early 2009 when a U.S. recession morphed into a near-global depression. So

lets just say that beyond Black Swan events, it remains unclear as to whatwould otherwise derail a loonie supported by a supply-side pro-growth current.

Some may claim that the Canadian dollars ascent is a prime reason as to why

the trade picture has swung from surplus into deficit in recent years. But this

may just be a case of the capital account (surplus) driving the current account

(deficit). Canada is now on the global radar screen as a great destination for

foreign capital

i. On track for a record net foreign inflow over $90 billion into the Canadianbond market this year,

ii. More than $12 billion into the local equity market, andiii. More than $40 billion of foreign direct investment flows,It could well be that the large-scale inflows into Canada from abroad are helping

boost Canadian assets, wealth and spending which in turn is showing through in

higher imports. As mentioned above, not imports of spurious consumption

goods, but of productivity-enhancing and ultimately job-promoting capital

equipment.

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After all, the balance of payments has to balance but this is a time when it may

not be appropriate to blame the current account deficit on the Canadian dollars

strength. This strength symbolizes Canadas status in the world as being a

stable place to invest and at the same time help drive down the costs for the

$400 billion of imported merchandise that businesses and households annually

purchase from our foreign suppliers.

TWELVE YEARS OF NOTHING!

The bulls are out and armed with the Stock Traders Almanac and are going with

the mantra that December is the month to load up on stocks since this

particular month enjoys a Santa rally 77% of the time (versus 59% for the other

months) and the average gain is a top-ranking 1.65%.

Well, the next question is when to sell because we have had 12 Decembers

already and this market hasnt gained an inch of ground. Listed below are S&P

500 closing levels (what goes around comes around) the index is at the exact

same level where it closed out 1998:

December 28, 1998: 1,225

March 9, 2001: 1,233

January 6, 2004: 1,224

March 7, 2005: 1,225

June 13, 2006: 1,223

July 14, 2008: 1,228

April 23, 2010: 1,217

December 6, 2010: 1,223

MR. A. B. NORMAL

Sorry, but there is really nothing normal at all about this cycle. At this stage of

the recovery real GDP growth is typically humming along at a 5% pace and

accelerating, not 2%-and-change and in chronic need of Uncle Sams cheque

book. In that 17th month of expansion, payrolls are generally rising 200,000,

not 39,000. If you dont believe that consumers are forever changed in the

aftermath of the shock to their balance sheet in the past three years then think

again. The high-end may be holding in as they spend against their equity market

gains, but the rest are getting by solely on the virtue of Uncle Sams generosity,

which now comprises about one-fifth of personal income.

Be that as it may, you can see how attitudes have shifted because a mere 16%

of shoppers used a credit card on Black Friday which was below the 31% share

who did so a year ago (data from Americas Research Group). And the problemabout cash for a retailer is the reduced odds of seeing impulsive buying.

DEFLATION REMAINS THE PRIMARY RISK

The San Francisco Fed just published another great report titled The Breadth of

Disinflation.

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The fact that one of the most reliable research departments within the Fed

system could publish such a report two years into the greatest experiment with

fiscal, monetary and bailout stimulus and reflationary policies speaks volumes.

Frankly, what it tells us is that the 4.3% yield on the long bond is extremely

attractive in real terms.

The report found that prices are deflating now for 17% of the goods and services

that people consume evidence that price declines are widespread. At the

start of the recession, only 34% of the consumption basket was posting

disinflation or slowing price momentum. That number is now at 72% nearly

three of four items in the basket is disinflating. This is the same ratio we saw in

1981 but back then we had Volcker doing everything he could to kill inflation.

Today we have Bernanke doing everything within his powers from a 0% funds

rate to radical expansion of the central balance sheet to reignite inflation and all

he can do is throw matches on a wet towel.

Dont fight the Fed, indeed.

Since the first cut in the Fed funds rate on September 18, 2007

The S&P 500 has gone from 1,520 to 1,223. The unemployment rate has gone from 4.7% to 9.8%. Industry capacity utilization rates have gone from 81.5% to below 75%. The 10-year note yield has gone from 4.5% to below 3%. Housing starts have gone from 1.183 million units to 0.519 million. Median real estate values have gone from $210,500 to $170,500. Core inflation has gone from 2.1% to 0.6%.Well done!

Below we again highlight the appropriate SIRP strategy for such an environment:

1.Focus on safe yield: High-quality corporates (non-cyclical, high cash reserves,minimal refinancing needs). Corporate balance sheets are in very goodshape.

2.Equities: focus on reliable dividend growth/yield; preferred shares(income orientation).

3.Whether it be credit or equities, focus on companies with low debt/equityratios and high liquid asset ratios balance sheet quality is even more

important than usual. Avoid highly leveraged companies.

4.Even hard assets that provide an income stream work well in a deflationaryenvironment (ie, oil and gas royalties, REITs, etc).

5.Focus on sectors or companies with these micro characteristics: low fixedcosts, high variable cost, high barriers to entry/some sort of oligopolisticfeatures, a relatively high level of demand inelasticity (utilities, staples,health care these sectors are also unloved and under owned byinstitutional portfolio managers).

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6.Alternative assets: allocate significant portion of asset mix to strategies thatare not reliant on rising equity markets and where volatility can be used to

advantage.7.Precious metals: A hedge against the reflationary policies aimed at defusing

deflationary risks money printing, rolling currency depreciations,heightened trade frictions, and government procurement policies


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Gluskin Sheffat a Glance

Gluskin 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.

Our investmentinterests are directlyaligned with those ofour clients, as Gluskin

Sheffs management andemployees arecollectively the largestclient of the Firmsinvestment portfolios.

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.

$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.

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.

For further information,

please contact

[email protected]

Notes:Unless otherwise noted, all values are in Canadian dollars.

Page 15 of 16

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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IMPORTANT DISCLOSURES

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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.

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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.

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this report.

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