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David A. Rosenberg January 12, 2011Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
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
MARKET MUSINGS & DATA DECIPHERING
A Dogs Breakfast with DaveWhile Bob Farrells rule number nine warns us to be wary of widespread
consensus opinions, it may well turn out that all the bullish Wall Street analysts
end up being correct that 2011 proves to be another wonderful year. But the
one thing we can assure you, as was the case in 2010, is that it will not be a
straight line up. In fact, we would argue that there are more headwinds,
potholes, and event risks this year than there were last year.
Enjoy the picture show.
CALL IT THE WILE E. COYOTE MARKET
Source: The Road Runner and Wile E. Coyote," celluloid painting by Chuck Jones, 1980
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THE FED IS VERY CONCERNED
The staff forecast incorporated the assumption that new fiscal actions, some of which had
not been anticipated in its previous forecast, were likely to boost the level of real GDP in2011 and 2012. But, compared with the November forecast, a number of other conditioningassumptions were less favorable: House prices and housing activity were likely to be lower,while interest rates, oil prices, and the foreign exchange value of the dollar were projected tobe higher, on average, than previously assumed. As a result, although the staff projectionshowed a higher level of real GDP, the average pace of growth over 2011 and 2012 was littlechanged from the November forecast, and the unemployment rate was still projected todecline slowly.
Indicators of production and household spending had strengthened, and the tone of the labormarket was a little better on balance. The new fiscal package was generally expected tosupport the pace of recovery next year. However, a number of factors were seen as likely tocontinue restraining growth, including the depressed housing market, employers continuedreluctance to add to payrolls, and ongoing efforts by some households and businesses todelever. Moreover, the recovery remained subject to some downside risks, such as thepossibility of a more extended period of weak activity and lower prices in the housing sectorand potential financial and economic spillovers if the banking andsovereign debt problems
in Europe were to worsen.
Others pointed to downside risks to growth. One common concern was that the housingsectorcould weaken further in light of the considerable supply of houses either on themarket or likely to come to market. Another concern was the ongoing deterioration in thefiscal position ofU.S. states and localities, which could lead to sharp cuts in spending andincreases in taxes. In addition, participants expressed concerns about a possible worseningof the banking and financial strains in Europe, which could spill over to U.S. financialmarkets and institutions, and so to the broader U.S. economy.
(The Minutes from the December 14, 2010 Federal Open Market CommitteeMeeting, released on January 4, 2011)
CHART 1: LOOK AT THIS THE TWO-YEAR MOVE IN OIL PRICES
Oil Price: West Texas Intermediate
Shaded region represent periods of U.S. recession
Source: Haver Analytics, Gluskin Sheff
-100
-50
0
50
100
150
200
250
70 73 76 79 82 85 88 91 94 97 00 03 06 09
(2-year percent change)
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CHART 2: OIL IS BEING DRIVEN IN PART BY SPECULATIVE FERVOUR
Net Long Speculative Position on Oil
Source: Haver Analytics, Gluskin Sheff
CHART 3: RECORD LEVEL OF VACANT RESIDENTIAL REAL ESTATE
United States
Source: Census Bureau
-100
-50
0
50
100
150
200
250
'95 '97 '99 '01 '03 '05 '07 '09
(thousands of contracts)
8
9
10
11
12
13
14
89 91 93 95 97 99 01 03 05 07 09
10
11
12
13
14
15
16
17
18
19
20
89 91 93 95 97 99 01 03 05 07 09
Total Vacant Housing Units
(million units)
Total Housing Vacancy Rate
(percent)
Record High!
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CHART 4: HOUSE PRICE DEFLATION NOT OVER
United States: Case-Shiller Home Price Index Composite 10
Source: Robert Shiller (Irrational Exuberance), Haver Analytics
CHART 5: HOUSING IS STILL THE LARGEST ASSET ON THE BABY-BOOMER BALANCE SHEET
United States Share of Household Assets
*Life insurance and pension reserves
Source: Federal Reserve Board
(percent, 2010 Q3)
Consumer Durables
6.7%
Real Estate
26.5%
Equities
22.3%Cash
11.2%
Other*
25.9%
Non-government
bonds
4.4%
Treasuries
1.6%
80
100
120
140
160
180
200
220
240
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
(not seasonally adjusted, January 2000 = 100)
Long-termtren
d
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CHART 6: UNEMPLOYMENT STILL A MAJOR PROBLEM
United States(percent)
*Includes all marginally attached workers and those em ployed part-time for economic reasons.
Source: Bureau of Labor Statistics
CHART 7: NOT ONLY ECONOMIC, BUT SOCIAL TOO
United States: Civilians Unemployed for 27 Weeks or Over
Shaded region represent periods of U.S. recession
Source: Bureau of Labor Statistics
3
4
5
6
7
8
9
10
11
94 96 98 00 02 04 06 08 10
6
8
10
12
14
16
18
94 96 98 00 02 04 06 08 10
U6 Unemployment Rate*Official Unemployment Rate
Record High
Levels!
Still high currently
at 9.4%!
0
1
2
3
4
5
6
7
'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08
0
5
10
15
20
25
30
35
40
45
50
'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08
As a percentage of total unemployed(percent)
Total(millions)
Record
High!Record
High!
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CHART 8: UNEMPLOYMENT RATE AT RECORD HIGH AMONG THE YOUNG AND ADULT MALES
United States Unemployment Rate (percentage)
Shaded region represent periods of U.S. recession
Source: Haver Analytics, Gluskin Sheff
CHART 9: STATE & LOCAL GOVERNMENT CUTBACKS REMAIN A KEY MACRO RISK
United States(year-over-year percent change)
Shaded region represent periods of U.S. recession
Source: Bureau of Economic Analysis, Bureau of Labor Statistics
0
2
4
6
8
10
12
'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08
5
10
15
20
25
30
'48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08
16- 19 YearsMen between 25-54 Years
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
'90 '93 '96 '99 '03 '06 '09
-2%
-1%
0%
1%
2%
3%
4%
'90 '93 '96 '99 '02 '05 '08
Employment: State & Local GovernmentReal Gross Investment: State & Local Government
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CHART 10: TICK TOCK WILL THE DEBT CEILING BECOME AN ISSUE IN APRIL?
United States
($ trillion)
Source: U.S. Treasury Department
CHART 11: THE WORLD IS AWASH IN DEBT
OECD: Gross General Government Debt-to-GDP Ratio
(percent of nominal GDP)
Shaded bars represent OECD estimates
Source: OECD
3
4
5
6
7
8
9
10
11
12
13
14
15
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10
Public Debt Outstanding:
Statutory Debt Limit
Government Securities
Outstanding Subject to
Debt Limit
64
6970
7274 73 74
72
70 7071
7375
7675
73
79
96
100
90
55
60
65
70
75
80
85
90
95
100
105
'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
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CHART 12: DEFAULT IS AN OPTION
Percent of the Time a Country is in Default Since Its Independence
(share of years in default since independence)
*For countries that became independent prior to 1800, the calculations are for 1800-2006
Source: National Bureau of Economic Research Working Paper Series: This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises,
Carmen M. Reinhart and Kenneth S. Rogoff
CHART 13: DEFAULT RISKS HIGH & RISING IN THE EUROPEAN PERIPHERY
10-Year Government Note Yield
(percent)
Source: Haver Analytics, Gluskin Sheff
3
6
1113
1617
23 24
33
3739
51
Italy Netherlands Portugal Germany Turkey Austria Romania Spain Poland Hungary Russia Greece
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
99 00 01 02 03 04 05 06 07 08 09 10
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
01 02 03 04 05 06 07 08 09 10
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
01 02 03 04 05 06 07 08 09 10
Portugal GreeceIreland
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CHART 14: OUT OF LUCK!
Ireland
Source: Statistical Office of European Communities, Central Statistics Office
CHART 15: FOOD INFLATION BIG NEWS FOR EMERGING ASIA
CRB Spot Commodity Price Index: Foodstuffs
(index, 1967 = 100)
Shaded region represent periods of U.S. recession
Source: Commodity Research Bureau
15
20
25
30
35
40
45
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
3
5
7
9
11
13
15
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Total Domestic Demand ( billions)Unemployment Rate (percent)
16-year high!
6-year low!
0
50
100
150
200
250
300
350
400
450
'70 '75 '80 '85 '90 '95 '00 '05 '10
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CHART 16: CHINAS INFLATION BACK ON THE RISE
China: Consumer Price Index
(year-over-year percent change)
Source: China National Bureau of Statistics
CHART 17: POLICY TIGHTENING IN CHINA LIKELY HAS FURTHER TO GO
China
Source: Peoples Bank of China
-2
0
2
4
6
8
10
'05 '06 '07 '08 '09 '10
7.0
8.5
10.0
11.5
13.0
14.5
16.0
17.5
19.0
'06 '07 '08 '09 '10
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
3.5
'06 '07 '08 '09 '10
Deposit Rate: 3-month Certificates of Deposit
(percent per annum)
Reserve Requirement Ratio: Small/Medium
Depository Institutions (percent)
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CHART 18: IS THE CHINESE STOCK MARKET TELLING US SOMETHING ABOUT EM GROWTH?
China: Dow Jones Shanghai Index
(index)
Source: Haver Analytics, Gluskin Sheff
270
290
310
330
350
370
390
410
Jul/10 Aug/10 Sep/10 Oct/10 Nov/10 Dec/10 Jan/11
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Gluskin Sheffat a Glance0Gluskin 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.
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.
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.
Our investmentinterests are directlyaligned with those ofour clients, as Gluskin
Sheffs management andemployees arecollectively the largestclient of the Firmsinvestment portfolios.
$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.
HHHHHHHFor further information,
please contact
questions@gluskinsheff.com
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.
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IMPORTANT DISCLOSURES
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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.
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