David A.

Rosenberg June 11, 2010

Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Breakfast with Dave

WHILE YOU WERE SLEEPING
IN THIS ISSUE
We are getting an important follow-through rally today on global equities.
Practically every region is in the green column. The key 1,040 technical level While you were sleeping:
global equity markets are
on the S&P 500 held, at least for now.
closing off the week in the
green column; cracks are
Treasuries are consolidating after the snapback in yields this week, though appearing in the global
there was a mild backup in yields overseas today. growth revival story
Labour pains in the U.S.:
Commodities are performing nicely with copper coming off its best week in
Jobless claims have now
three months and oil inching its way back to $75 a barrel. been above 450k for four
weeks running
The U.S. dollar is losing steam and while gold is up a tad, the nice bull run of
Housing heading into
the past few weeks seems to be fading. The euro is rebounding as the shorts
another deep funk
get covered until the next round of bad news, which seems inevitable.
Upside growth risks for
While an uneasy calm has suddenly appeared and a view is being born that Canadian Q2 GDP are
the dramatic fiscal tightening in Europe and recent tightening in financial subsiding
conditions will not cut into global growth, we were served a reminder today The Fed Flow of Funds
that the world expansion is more fragile than generally acknowledged. U.K. data contained a stream of
industrial production posted a surprising 0.4% MoM decline in April good news in terms of
balance sheet quality in
manufacturing output the consensus messed up on both the digit and the
the corporate sector
sign (+0.5%!). Just because China posted +50% export growth, New Zealand
raised rates and Australia posted a decent jobs report, doesnt mean cracks Surprising sector strength
arent about to appear in this global growth story of the past year and change. in the latest Fed Beige
Book
It is more fragile than commonly perceived. In fact, the Chinese data out
today inflation up to 3.1% in May from 2.8% and industrial production
slowing to 16.5% from 17.8% should also be raising some eyebrows over the
outlook for the both the economy and monetary policy for the country that
ignited the resumption of global growth back in late 2008.

It should be duly noted that as impressive as yesterdays gains were, this is

nothing more than a thinly traded technical bounce. The moving averages
have rolled over and volume yesterday was down across the board, lessening
the relevance of the overall advance. Yesterdays dramatic move a day after
a huge outside reversal attests only to the surreal degree of volatility
permeating the market. In the last month, we have endured daily swings of
200 points or more fully 80% of the time. The Dow has actually swung at least
100 points for 24 sessions in a row. For those who dont like to live in the wild
west, there is always the relative safety and calm waters in the bond market
and true hedge fund strategies.

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 net
worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highest
level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports, visit www.gluskinsheff.com
June 11, 2010 BREAKFAST WITH DAVE

Although we arent so hot on the income statement and the view that earnings
are going to new highs in the coming year especially with little prospect of It should be noted that as
more margin expansion, little pricing power and slowing nominal growth we impressive as yesterdays rally
think the corporate balance sheets are in great shape. The quality of the was in the U.S., it is nothing
balance sheet and the associated default/delinquency risks, carries with it more than a thinly traded
less uncertainty than the outlook for earnings hence the preference for technical bounce
spread product here. The Fed just reported that the nonfinancial corporate
sector has built up its cash hoard to a record $1.84 trillion up 26% from a
year ago and now representing a 47-year high of 7% of total assets. This does
nothing to help equity investors in their ROE assumptions but it sure is a
positive for bond investors because all they care about in the end is ...
receiving their coupon payments and being paid out at par upon maturity.

Moreover, there has been a dearth of supply of late with new-issue activity
declining for seven weeks in a row. Yet, the weekly mutual fund data show no
decline at all in what is increasingly proving to be a secular drive for income
from a 78 million-strong boomer population whose median age is 55, not 25
or 35 and prepped for capital appreciation strategies. Hate to break it to you
but that theme ended a decade ago.

LABOUR PAINS
U.S. jobless claims fell 3k in the June 5th week, to 456k, but from an upwardly The key here is that claims
revised 459k the prior reading. The key here is that claims have now been have now been above 450k for
above 450k for four weeks running and the four-week moving average has four weeks running
drifted up, to 463k, the highest it has been since mid-March. Over half the
time in the past, such a level of claims was consistent with net job loss so
barring any improvement, one would expect to see the June nonfarm payroll to
look a lot more like the tepid May report than what we saw in April, as far as
private payrolls are concerned.

CHART 1: TREND IN JOBLESS CLAIMS STILL VERY HIGH

United States: Initial Jobless Claims
(four-week moving average)

675

600

525

450

375

300

225
06 07 08 09 10

Source: U.S. Department of Labor, Gluskin Sheff

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June 11, 2010 BREAKFAST WITH DAVE

There is little doubt that claims are going to rise quite sharply over the near-
term as the fallout from the oil spill hits the data. Recall that in the six weeks
following the Katrina disaster in 2005, claims jumped by 133k over a six-week
time span. So expect to hear calls for a double-dip if claims surge above
500k and end up staying there.

Chart 2 puts the latest 463k reading on the four-week moving average into
some perspective.

CHART 2: PUTTING TODAYS 463,000 LEVEL ON

INITIAL JOBLESS CLAIMS IN PERSPECTIVE
United States: Initial Jobless Claims
(four-week moving average)

480
463
460
445 445

440

420
405
400
400
388 385

380

360
348

340 330 330

320
320

300
Desert Storm Mexico Asian Crisis LTCM/ Tech Wreck 9/11 Enron/ Fannie and Bear Stearns Lehman Now
Russian Crisis Worldcom Freddie Collapse

Source: U.S. Department of Labor, Gluskin Sheff

HOUSING HEADING INTO ANOTHER DEEP FUNK

Ivy Zelmans research is already showing a huge post-subsidy hangover in the
Ivy Zelmans research is
real estate market. Below is an email from a reader who says much the same.
already showing a huge post-
Housing-related investments are to be avoided at all costs.
subsidy hangover in the real
Dave, estate market
I appreciate your daily updates and a real life accurate analysis of
government statistics and CNBC spin.
For what it's worth, we are in the home inspection business, and things
here have indeed gotten very ugly.
After the tax credit expiration date came, the inspection spillover made
the first half of May very strong. (Once under contract they call us with
about 10-14 days to get the home inspection done.)
Since then things have dropped dramatically, from ~25-50%
depending on what state and area you are in. Since May and June are
usually the busiest months of the year, we were counting on continued
momentum from the regular market to take over after the expiration.
No such luck. This June is already shaping up to be much worse than
last year's bad numbers.

Hold onto your hat. We are. Take care, Ken

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June 11, 2010 BREAKFAST WITH DAVE

EXPORTS DOWN, IMPORTS TOO

There was not a whole lot of information in the U.S. and Canadian trade data
Upside growth risks for
that came out yesterday for April, but there was a whole lot of news beneath the
Canadian Q2 GDP are
surface.
subsiding
The U.S. trade deficit barely budged at $40.3 billion from $40.0 billion in March,
but the two-way trade flows did show a big decline in inflation-adjusted terms
a signpost that the V-shaped global demand recovery may be behind us. Real
exports sagged 2.5% MoM with a steep decline in consumer goods and stagnant
shipments of capital goods. At the same time, import volumes slumped 1.5%
and again the softness was centered in the consumer products segment.

Canada posted a very small surplus of $200 million, which was below the $600
million consensus estimate and again, two-way trade deflated with exports down
1% and imports down a sharper 2.2% (these are in nominal terms). In volume
terms, imports were flat while exports fell 1.6% in what was the second
contraction in the real trade balance in a row. Upside growth risks for Canadian
Q2 GDP are subsiding if fact, we are at 3.3% (annual rate) right now versus
3.6% as per the consensus and we believe the risks are to the downside,
especially in light of the weak May housing data.

As for the U.S., we have yet to even see the full effects of the stronger dollar and
weaker European economy hit the trade data just yet. The deficit is going to
soar again and this is downside risk to GDP growth going forward.

CORPORATE BALANCE SHEETS VERY COMPELLING

The Fed Flow of Funds data just came out for Q1 and contained a stream of
good news in terms of balance sheet quality in the corporate sector. Here are
the four major takeaways: The Fed Flow of Funds data
contained a stream of good
Debt-to-equity ratio for the nonfarm nonfinancial corporate sector fell to news in terms of balance sheet
55.0% from 57.1% in Q4 of last year. This metric is now down four quarters in quality in the corporate sector
a row and well below the cycle high of 79.5%.
Ratio of long-term debt-to-total debt edged up to a new high of 73.9% from
73.7%, the sixth straight increase. Companies ran down bank lines by
$108bln at an annual rate and tapped the bond market to the tune of
$413bln (at an annual rate) in Q1.
Liquid asset ratio (cash/equivalents normalized by short-term liabilities) rose
to 51.2% from 50.4% also sixth consecutive increase and the highest since
1956. We went into this recession at 38%.

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June 11, 2010 BREAKFAST WITH DAVE

CHART 3: PUTTING TODAYS 463,000 LEVEL ON

INITIAL JOBLESS CLAIMS IN PERSPECTIVE
United States: Nonfinancial Corporate Business:
Liquid Assets/Short-Term Liabilities
(percent)

70

60

50

40

30

20

10
55 60 65 70 75 80 85 90 95 00 05

Source: Federal Reserve Board, Gluskin Sheff

Capital outlays/internally generated funds rose to 99.4% from 94.4% still

below 100% for fifth quarter in a row. Net of capex, cash flow is still positive.
SURPRISING SECTOR STRENGTH
The Beige Book, as we have said in the past, is a timely and detailed account of
what is happening at the grass roots level across regions and sectors. This
latest version covered the six-week period up to May 28 when the corrective
phase in the equity market was in full swing and the escalating debt problems in
Europe percolating.

Yet, for the first time since October 2007, all 12 Fed districts reported improved
economic conditions, and we were also surprised at the broad strength across
industries contained in the report. We always look at the sectors mentioned in
the Beige Book and lump them into two categories strong/improving and
weak/deteriorating. We provide the lists below you may be surprised:

Strong/Improving:
Tourism
Steel
Autos
Consumer staples
Staffing firms
Commercial real estate
Metal fabrication
Petrochemicals
Airlines
Trucking

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June 11, 2010 BREAKFAST WITH DAVE

Rail stock
Agri-business
Food processing
Energy/mining
Home improvement
Jewellery
Autos

Weak/deteriorating
Construction
Media
Banking
Department stores
Medical supplies/pharma
Appliances

There are almost three strong or improving sectors for every one that was weak
or deteriorating. You would have never thought that the leading indicators and
the equity market were both rolling over as this book was being written.
Anyways, it never hurts to do a gut-check over ones view.

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June 11, 2010 BREAKFAST WITH DAVE

Gluskin She at a Glance

Gluskin She + 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 the
prudent stewardship of our clients wealth through the delivery of strong, risk-adjusted
investment returns together with the highest level of personalized client service.

OVERVIEW INVESTMENT STRATEGY & TEAM

As of March 31, 2010, the Firm managed
assets of $5.6 billion.
Gluskin Sheff became a publicly traded
corporation on the Toronto Stock
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public company accountability and
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Our investment interests are directly
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Gluskin Sheffs management and
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client of the Firms investment portfolios. shareholder-minded management and a
We offer a diverse platform of investment
strategies (Canadian and U.S. equities,
Alternative and Fixed Income) and
investment styles (Value, Growth and
1 31, 2010 versus $5.7
Income).
The minimum investment required to
establish a client relationship with the
Firm is $3 million for Canadian investors
and $5 million for U.S. & International
investors.
PERFORMANCE
$1 million invested in our Canadian Value which we have the highest conviction.
Portfolio in 1991 (its inception date)
would have grown to $11.7 million on
2
We have strong and stable portfolio
management, research and client service
teams. Aside from recent additions, our Our investment
Portfolio Managers have been with the interests are directly
Firm for a minimum of ten years and we
aligned with those of
have attracted best in class talent at all
our clients, as Gluskin
levels. Our performance results are those
Shes management and
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employees are
We have a strong history of insightful collectively the largest
bottom-up security selection based on client of the Firms
fundamental analysis.
investment portfolios.
For long equities, we look for companies
with a history of long-term growth and
stability, a proven track record,
$1 million invested in our
Canadian Value Portfolio
share price below our estimate of intrinsic
in 1991 (its inception
value. We look for the opposite in
date) would have grown to
equities that we sell short.
$11.7 million2 on March
For corporate bonds, we look for issuers
with a margin of safety for the payment
million for the S&P/TSX
of interest and principal, and yields which
Total Return Index over
are attractive relative to the assessed
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credit risks involved.
We assemble concentrated portfolios
our top ten holdings typically represent
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way, clients benefit from the ideas in
Our success has often been linked to our

long history of investing in under-

March 31, 2010 versus $5.7 million for the
followed and under-appreciated small
S&P/TSX Total Return Index over the
and mid cap companies both in Canada
same period.
and the U.S.
$1 million usd invested in our U.S.
Equity Portfolio in 1986 (its inception PORTFOLIO CONSTRUCTION
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usd on March 31, 2010 versus $6.9
2
construction, we offer a unique marriage please contact
million usd for the S&P 500 Total between our bottom-up security-specific
Return Index over the same period. questions@gluskinshe.com
fundamental analysis and our top-down
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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. Page 7 of 8
June 11, 2010 BREAKFAST WITH DAVE
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