David A.

Rosenberg October 27, 2009

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

MARKET MUSINGS & DATA DECIPHERING

Special Report: Learning to Love the Loonie

If there is one thing that Canadians are never happy with (in addition to their
local hockey team) it is the Canadian dollar. When it was flirting near that record If there is one thing
low of 62 cents nearly a decade ago, everyone lamented the future of the Loonie Canadians are never
and closer ties to the U.S. were being recommended from various corners of Bay happy with, it is the
Street. It was too expensive to buy anything that was imported, it was too costly Canadian dollar
to make that annual trip to Florida, and tickets to a Broadway play were
prohibitive. We felt poorer. We must have been doing something wrong.

But we did nothing wrong back in those days because it was 100% a U.S. dollar
story. The U.S. was home to the Internet mania and all the global capital flow
that came with it and Robert Rubin, Treasury Secretary at the time, was carrying
out an overtly strong dollar policy partly to keep inflation at bay in what was an
overheating U.S. economy. Moreover, commodities were in a bear market, and
since the U.S. is a net raw material importer, this too provided impetus to the
U.S. dollar rally. I recall all to well telling clients that the Loonie was actually
either holding its own or appreciating against the global basket of non-U.S. dollar
currencies. People would just roll their eyes because who cares about other The strength in the
currencies when most of our trade and travel is with the U.S. That, of course, is Canadian dollar is not
true, but it misses the point; the weakness in the CAD was the flip-side of the only a USD story
strength in the U.S. dollar. The fact that we were outperforming the other major
currencies was a reflection that we were not doing anything wrong.

CHART 1: CANADIAN DOLLAR NOT JUST A USD STORY

Canadian Dollar
Versus USD Versus Six Major Currencies ex USD*
(US$/Canadian cents) (1992 = 100)
110 130

105 125
100 120
95 115
90
110
85
105
80
100
75
70 95

65 90
60 85
98 00 02 04 06 08 98 00 02 04 06 08

*A weighted average of bilateral exchange rates for the Canadian dollar against the currencies of Canada's major
trading partners. The six foreign currencies in the basket are the U.S. dollar, the Euro, the Japanese Yen, the U.K.
Pound, the Chinese Yuan, and the Mexican Peso.
Source: Haver Analytics, Gluskin Sheff

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc. is one of Canada’s 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
October 27, 2009 – BREAKFAST WITH DAVE

Fast-forward to today. Canadians are now fretting about a strong currency.

After all, it is going to crush our manufacturing sector, kill our export base and Remember, when
undermines our domestic competitiveness. Even the Bank of Canada currencies move in any
commented on how the strength in the CAD is dampening our growth prospects, direction, there are
cutting its medium-term GDP growth forecast. going to be winners and
losers
Let’s all step back and take a deep breath. Remember, when currencies move
there are going to be winners and losers. For years when the CAD was trading
around 60 cents, exporters did indeed reap the rewards, while importers were hit
hard by the rising costs of their purchases. Our competitiveness and exports to
the U.S. did improve, but we needed that source of growth as an antidote to the
pain from all the budget belt-tightening during the 1990s as we got our fiscal
house in order. Of course, there was no shortage of complaints from the
snowbirds on how their travel costs to Florida had become prohibitive. Today’s
strong Canadian dollar is obviously going to pose a tremendous challenge to our
exporters, but hopefully they made strides in improving productivity and getting
their house in order when they were sheltered by those years of CAD depreciation.

While Canada is a large exporter, we also are a huge importer. At $400 billion The rise in the Canadian
annually, we import as much as we export and the cost of these imports are now dollar is good in many
going down; a very good thing from a profit margin perspective. The Canadian respects — it improves
dollar’s ascent is good many respects, even if it is a roadblock for our purchasing power and
manufacturing sector, which is only 12% of the economy. Our purchasing power standard of living
and standard of living is actually going up as a result.

Now, why is the Canadian dollar back near parity against the greenback? There
are valid reasons for the Canadian dollar to be going up at this time, and quite
likely for the next several years. As Canada had to rely on a soft currency in the
1990s, make no mistake that cleaning up the budgetary mess in the U.S. is going
to require a similar strategy. I would contend that the Obama Administration is
already carrying out a policy of ‘benign neglect’ when it comes to the U.S. dollar.

CHART 2: CANADA IN BETTER SHAPE THAN THE U.S.

(as a percent of GDP, 2009 forecast)
100 Debt 95 -12 Deficit -11.2

90
Canada -10
Canada
80 United States
United States
-8
70
64
inverted scale

62
60 -6

50
-4 -3.4
-2.8
40

-2
30 26 -0.9

20 0
Gross Federal Debt Gross External Debt* Current Account Deficit Budget Deficit
*Using 1Q 2009 figures
Source: Haver Analytics, IMF forecast, Gluskin Sheff

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October 27, 2009 – BREAKFAST WITH DAVE

Moreover, commodities have come out of the rubble caused by the Lehman
Commodity prices have
collapse and have resumed their upward trend, accentuated by the powerful
now resumed their
secular growth dynamics in emerging Asia, which were dented, but not derailed, upward trend …
during the depths of the credit crisis.

CHART 3: COMMODITY PRICES BOTTOMED AT PREVIOUS PEAKS

CRB Spot Index (1967 =100)
500

450

400

350

300

250

200

150

100
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

TABLE 1: COMMODITIES BOTTOMED AT

HIGHEST RECESSION LEVELS EVER

Where Commodities Bottomed Where Commodities Bottomed

This Cycle During Recessions
(December 2007 to current) (average of five recessions)
Wheat $4.86/bushel Wheat $3.08/bushel
Soybean $7.59/bushel Soybean $5.05/bushel
Corn $2.72/bushel Corn $2.08/bushel
WTI $30.81/bbl WTI $20.00/bbl
Gold $712.50/oz Gold $307.30/oz
Copper $1.25/Lb Copper* 0.70¢/Lb
Silver $8.81/troy oz Silver $5.76/troy oz
Lead 61.72¢/Lb Lead* 38.27¢/Lb
Zinc 57.42¢/Lb Zinc* 51.17¢/Lb
CRB Spot CRB Spot 229.11
(1967 = 100) 302.34 (1967 = 100)
*average of the last two recessions
… and this benefits
Source: Haver Analytics, Gluskin Sheff
Canada since it has 3x
Canada has three times the exposure to commodities than the U.S., so just as the exposure in
this was an albatross during much of the 1990s when basic material prices commodities than the
were in decline, they are now providing a major impetus to the positive Canadian U.S.
dollar theme.

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October 27, 2009 – BREAKFAST WITH DAVE

CHART 4: COMMODITY PRICES AND

THE CANADIAN DOLLAR MOVE TOGETHER
1.10 480
R = 0.65
1.05
430
1.00

0.95
380
0.90

0.85 330
Canadian Dollar
0.80 (US$/C$: left hand side)
280
0.75

0.70
230
0.65 CRB Futures Index
(right hand side)
0.60 180
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Source: Haver Analytics, Gluskin Sheff

CHART 5: CANADIAN EQUITY MARKET

GEARED MORE TOWARDS BASIC MATERIALS
Equity Sector Weightings
(percent)
S&P 500 Composite Index TSX Composite Index

Info Tech 18.6% Financials 31.0%

Financials 15.3% Energy 28.6%

Health Care 12.9% Materials 18.7%

Energy 12.3% Industrials 5.4%

Cons. Staples 11.5% Cons. Discret 4.2%

Industrials 10.2% Telecom 4.0%

Cons. Discret 9.1% Info Tech 3.6%

Utilities 3.6% Cons. Staples 2.6%

Materials 3.5% Utilities 1.5%

Telecom 2.9% Health Care 0.5%

Source: Bloomberg, Gluskin Sheff

Finally, according to Moody’s and the World Economic Forum, for the second
year in a row, Canadian banks ranked number one in the world. After all, during
this cycle, no Canadian bank failed, went cap-in-hand to the government, or
even cut its dividend. While we certainly did experience a housing mania
(2003-07) our banks never suffered the same default experience that their
counterparts did in the U.S. Call it good luck. Call it good management. Call it a
combination of the two.

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October 27, 2009 – BREAKFAST WITH DAVE

TABLE 2: ACCORDING TO THE WORLD ECONOMIC FORUM REPORT,

Canadian banks are
CANADIAN BANKS ARE NUMBER 1 …
ranked number 1 in the
Banks ranked on a scale of world …
1 (may need government bailout) to 7(sound)
Rank Country Score
1 Canada 6.8
2 Sweden 6.7
3 Luxembourg 6.7
4 Australia 6.7
5 Denmark 6.7
6 Netherlands 6.7
7 Belgium 6.6
8 New Zealand 6.6
9 Ireland 6.6
10 Malta 6.6
40 United States 6.1
Source: World Economic Forum, Global Competitiveness Report 2008-09

TABLE 3: DITTO IN THE MOODY’S REPORT

Average Bank Financial Strength … Another strength for
(rating by county) Canada since it has
double the financial
sector representation
than the U.S.

Source: The National Post (“Moody’s Rates Canada’s Banks Tops”, October 9, 2009)

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October 27, 2009 – BREAKFAST WITH DAVE

CHART 6: CANADA’S DEFAULT EXPERIENCE DIFFERENT FROM THE U.S.

Credit Ratios Mortgages in Arrears as a percent of Total Mortgages
(percent) (percent)
3.5 5.5

Canada 5.0
2.9
3.0 United States
4.5

2.5 4.0
2.3
3.5
2.0
3.0

2.5 United States

1.5

2.0
0.9 1.0
1.0
1.5

1.0
0.5
0.5 Canada

0.0 0.0
Total Allowance / Total Loans Loan Loss Reserve / Total Loans 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: Fox-Pitt Kelton (FPK), RBC Research, UBS Research, Mortgage Bankers Association

At over 30%, Canada’s TSX index has double the financial sector representation Canada’s current pro-
than the S&P 500. So, it goes without saying that Canada’s pro-market market Conservative
Conservative government is likely going to follow policies that attract global government is likely
capital than is the case with a left-leaning government south of the border. going to follow polices
that attract global
CHART 7: HALFWAY THROUGH THE CANADIAN capital …
STOCK MARKET OUTPERFORMANCE
Then ... … And Now
August 12, 1982 - March 24, 2000* March 24, 2000 to October 15, 2009
1600 80

1391.4 63.3
1400
60

1200

40
1000

800 20 14.7
621.3
600 522.3
0

400

-20
200

-28.5
0 -40
S&P 500 Composite TSX Composite TSX (USD terms) S&P 500 Composite TSX Composite TSX (USD terms)

*Dates reflect the trough (August 12, 1982) and the peak (March 24, 2000) in the S&P 500 Composite Index
Source: Haver Analytics, Bloomberg, Gluskin Sheff

Indeed, Canada is now witnessing a capital inflow boom of historic proportions.

Foreign investors plowed a net $5.1 billion into the Canadian stock and fixed-
income markets, and year-to-date, have added a record $67.4 billion of
Canadian securities into their portfolios. The fact that Canada has become a
beacon for global capital flows is something, I think, we should be proud of.

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October 27, 2009 – BREAKFAST WITH DAVE

CHART 8: FOREIGN INVESTORS REDISCOVER CANADA

Canada: Net Foreign Purchases of Canadian Stocks and Bonds
… And indeed, that is
(12-month total, C$ billions) what is currently
happening; in August,
60
5-year high!
foreigners invested
50 $5.1bln into Canadian
40
securities

30

20

10

-10

-20

-30

-40
2006 2007 2008 2009

Source: Statistics Canada, Census Bureau, Gluskin Sheff

In its latest policy statement, the Bank of Canada said that “persistent
strength in the Canadian dollar” is going to “slow growth and subdue inflation
pressures.” So, in return for softer economic growth coming from a more I think it is time for
challenging export outlook, what we get back is lower “inflation pressures.” Canadians stop resisting
The winner here is anyone who is seeking to borrow money to buy something and start embracing this
because the stronger Loonie will prevent the BoC from taking the interest-rate new era of Canadian
punchbowl away any time soon.
dollar strength

For Canadian businesses, the silver lining is that it will be easier to attract talent
today compared to a decade ago when the Loonie was sinking. Call it the reverse
brain drain. Whatever it is, it is a good thing from a productivity standpoint, which
is the cornerstone to our standard of living. That is why I think we should embrace
this new era of Canadian dollar strength as opposed to resisting it.

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October 27, 2009 – BREAKFAST WITH DAVE

Gluskin Sheff at a Glance

Gluskin Sheff + Associates Inc. is one of Canada’s 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 June 30, 2009, the Firm managed
assets of $4.5 billion.
Gluskin Sheff became a publicly traded
corporation on the Toronto Stock
Exchange (symbol: GS) in May 2006 and
remains 65% owned by its senior
management and employees. We have
public company accountability and
governance with a private company
commitment to innovation and service.
Our investment interests are directly
aligned with those of our clients, as
Gluskin Sheff’s management and
employees are collectively the largest
client of the Firm’s investment portfolios.
We offer a diverse platform of investment equities that we sell short. For corporate
strategies (Canadian and U.S. equities,
Alternative and Fixed Income) and
investment styles (Value, Growth and
1 September 30, 2009
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
Portfolio in 1991 (its inception date)
would have grown to $15.5 million on
2 followed and under-appreciated small
September 30, 2009 versus $9.7 million
for the S&P/TSX Total Return Index
over the same period.
$1 million usd invested in our U.S.
Equity Portfolio in 1986 (its inception
date) would have grown to $11.2 million
usd on September 30, 2009 versus $8.7
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
Sheff’s management and
of the team in place.
employees are
We have a strong history of insightful collectively the largest
bottom-up security selection based on client of the Firm’s
fundamental analysis. For long equities, we
investment portfolios.
look for companies with a history of long-
term growth and stability, a proven track
record, shareholder-minded management
and a share price below our estimate of $1 million invested in our
intrinsic value. We look for the opposite in Canadian Value Portfolio
in 1991 (its inception
bonds, we look for issuers with a margin of date) would have grown to
safety for the payment of interest and $10.0 million2 on
principal, and yields which are attractive
relative to the assessed credit risks involved. versus $5.3 million for the
We assemble concentrated portfolios S&P/TSX Total Return
— our top ten holdings typically Index over the same
represent between 25% to 45% of a period.
portfolio. In this way, clients benefit
from the ideas in which we have the
highest conviction.
Our success has often been linked to our
long history of investing in under-
and mid cap companies both in Canada
and the U.S.
PORTFOLIO CONSTRUCTION
In terms of asset mix and portfolio For further information,
construction, we offer a unique marriage
please contact
between our bottom-up security-specific questions@gluskinsheff.com

fundamental analysis and our top-down

million usd for the S&P 500 Total
macroeconomic view, with the noted
Return Index over the same period.
addition of David Rosenberg as Chief
Economist & Strategist.
Notes:
Unless otherwise noted, all values are in Canadian dollars.
1. Not all investment strategies are available to non-Canadian investors. Please contact Gluskin Sheff for information specific to your situation.
2. Returns are based on the composite of segregated Value and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses. Page 8 of 9
October 27, 2009 – BREAKFAST WITH DAVE
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