Breakfast With Dave June 1

David A. Rosenberg Chief Economist & Strategist [email protected] + 1 416 681 8919

June 1, 2009 Economics Commentary

MARKET MUSINGS & DATA DECIPHERING

Breakfast with Dave WHILE YOU WERE SLEEPING It really is a whole new investing world when a Chinese manufacturing diffusion index can generate a gigantic melt-up in equity prices across the globe. But that is indeed what is happening. Even in the face of GM’s imminent bankruptcy filing, the news that China’s purchasing managers’ index came in at 53.1 in May from 53.5 in April (the CLSA comparable was 51.2 from 50.1) was enough to kick the MSCI Global index up 1.4% to its highest level since last November (markets had been led to believe for the past few weeks that a sub-50 reading was quite possible). Emerging markets advanced 2.6% and now up 55% from the lows. Russian equities soared 5.8%, helped out by the rising oil price (page A2 of today’s WSJ contains a healthy dose of scepticism over the longevity of the oil price rally given lingering weakness in global crude demand). Asian equities climbed 2.9%, led by a 4.0% surge in the Hang Seng index to 18,888 (now how lucky is that?). But gains were broad based right across the continent, with Japan up 1.6%, the Kospi rising 1.4% and the Shanghai index rallying 3.4%. European marts are up 2.7% (up now in five of the last six sessions) and again, practically every country is flashing green.

IN THIS ISSUE • Inflation fears overrated, in our view • Foreclosure crisis continues unabated … • … And troubled loans in general are still mounting • Signs of credit market improvement are still mixed • Retail investors caught the bounce — equity mutual funds posted a $12.3bln net inflow in April • Asia revival may be for real

Bonds are selling off, as one would expect, with the yield on the 10-year note up 6bps this morning to 3.53% as risk appetite gets whetted even further. This is further ratified in the commodity complex where oil has firmed $2.00/bbl to $68.29/bbl, copper has soared 3.5% and gold has risen nearly 1.0% to around $988/bbl as it closes in on the cycle highs. The dollar continues to lose ground, hitting its low-water mark for the year, and the flip side is big rallies in Asian FX (led by the Korean won and Taiwan dollar), the Euro (five-month high), Sterling (eight-month high), the Russian Ruble (sixmonth high) and the commodity currencies (notably the Aussie and Kiwi). CDS spreads, which gauge corporate bond risk in Europe also have come in 14bps to 710bps.

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

June 1, 2009 – BREAKFAST WITH DAVE

Elsewhere on the data front, it was all good. The European PMI came in better than advertised, at 40.7 in May from 36.8 in April (consensus was 40.5). The U.K. comparable improved to 45.4 from 43.1 in April too – best result in a year. And not only that, but UK home prices as measured by the Hometrack survey were flat in May – first time in 20 months that it did not show a decline. It also looks as though Treasury Secretary Geithner managed to soothe Chinese concerns over the U.S. fiscal situation — by most accounts we have seen regarding his trip to Beijing. And the data show that foreign central bank support for the Treasury market remains intact — custodial bond holdings at the Fed rose 3.3% in May to $69 billion, the third most on record. This has helped ease fears that the U.S.A. would be facing a credit outlook downgrade in the near future (as the U.K. experienced last week). Equity market still ripping: The late-day surge in the Dow pushed it up 1.1% for the session and 4.1% for the month. Over the last three months, it is up 20.4%, which is the best performance in such a short span since November 1998. For the S&P 500, it advanced 5.3% in May and 25% in the last three months, which is a feat last achieved in August 1938. Oh Canada! For the week, the TSX rose 3.8% and for the month the index was up 11.2% — the best performance since June 2000 and the fifth highest monthly gain in recent history (data back to 1984). The TSX has now risen three-months in a row, a feat last accomplished back in the spring of 2007. The monthly pattern is +7.4% in March, +7.0% in April and 11.2% in May and that is the best three-month performance ever. But note that in the past, when the TSX is up 10% or more, which only happened 5 times going back to 1984, the index usually takes a breather and is flat as a beaver-tail three months later. Global institutional investors still lagging behind this rally: See page 13 of today’s Financial Times – it cites a Barclay’s survey that shows: •

Only 17.5% believe “risky assets” have more room to rally

•

4.5% are believers in the V-shaped recovery

•

69% see a U-shaped or W-shaped recovery

•

60% see what we have experienced in equities as a “bear market rally”

•

91% are running positions that are “average” or “light” in terms of equity exposure (there is cash on the sidelines, but no conviction)

•

Just 9% are at limit or capacity in their equity investments

Critical test ahead for the Treasury market: not only is this a heavy data-week (see below), but on Thursday the Treasury is expected to announce the size of the 3, 10 and 30-year auctions for the following week (likely to be a $65 billion package). Awaiting the testing phase; the equity market has been moving in a sawtooth pattern since hitting its interim high back on May 8. We have said for Page 2 of 15

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some time that for there to be proof that the March lows were the lows, the market would have to successfully retest those lows as it did in March 2003 (though the July 2002 test did fail). With this in mind, it is encouraging to see that the folks at S&P are in general agreement with this premise, and Sam Stovall, who is the Chief Investment Strategist for the agency, found that typical retests usually see the stock market correct 7.0% from the interim post-trough highs; but the decline is closer to 14% on average after a “mega downturn” of the likes we saw from October 2007-March 2009. That would put 800 on the S&P 500 as the proverbial line in the sand. See What About the Valley After the Rally on page 4 of the Sunday New York Times business section. Big fiscal squeeze coming in the world’s 8th largest economy -California: It’s interesting that so many pundits dismiss the notion that we are in some form of economic depression because the policy response is so far more pronounced than it was in the 1930s. While there is an element of truth to that from a Fed policy standpoint, fiscal policy has so far been wholly ineffective and in fact, as California now takes a sharp knife to its social programs, historians may well look back at this as a classic policy error. Then again, the laws are such that state governments are not allowed to run operating deficits. See Deep Cuts Threaten to Reshape California on page 15 of the Sunday New York Times (front section). Gasoline prices are soaring and this may be one reason why the tax stimulus is not working — the savings are being siphoned into the gas tank: Indeed, U.S. retail gasoline prices have spiked 45 cents in the last month to $2.50/gallon — the equivalent of a $60 billion annualized pay cut (which basically offsets the reduction low-and middle-income workers are seeing come off their paychecks in terms of reduced withholding taxes). Best read of the weekend: For a truly wonderful indictment of the pro-labour and anti-market initiatives the White House is pursuing, have a look at Driving the Bond Markets to Ruin by James Glassman on page A17 of the Saturday New York Times. Keys for the week: It’s jam packed – Canadian real GDP today for Q1, the Bank of Canada policy statement on Thursday and May employment on Friday. We would advise against being long the Canadian dollar ahead of the BoC statement because there is little chance that it won’t be addressed. The loonie has rallied 15% in less than three months, double the increase in the commodity price index that matters most for the central bank (while oil, gold and copper have soared, wood products and natural gas – which represent 10% of Canada’s export base – have actually fallen). In other words, half of the Canadian dollar’s rally has been de facto monetary restraint on the overall (fragile) economy and as such is unwelcome and troublesome. In the U.S.A., there is a ton of data, from ISM today to nonfarm payrolls on Friday, and we will hear twice from Fed Chairman Bernanke too, with his Wednesday 10 a.m. testimony to the House Budget Committee likely to be a key event. The BoE and ECB also meet on Thursday. Page 3 of 15

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INFLATION FEARS OVER-RATED There is no sustainable inflation without the labour market coming along for the ride because wages/salaries are the most important variable in the corporate cost structure; and what we see, for the first time in recorded history, is wage deflation. Ask the auto workers, financial sector employees or those 200,000 public servants in California who are being asked to accept a 5% pay cut if there is inflation in their sectors. A just-released Hewitt survey also showed that 16% of U.S. companies have made base salary reductions so far in this recession, and a further 21% intend to follow suit. In the 2000-01 downturn that had the Fed consumed with deflation fear, the share of companies cutting base salaries was so negligible that Hewitt didn’t even publish the results (see page 47 of BusinessWeek – Cutting Salaries Instead of Jobs). How is the working class responding? By being thankful that they have a job (this is not the 1970s at all for those believing we are heading for some stagflation era – this is still about deflation, pure and simple). All anyone needs to know is that union bargaining power is now so weak that the number of Americans who were on strike in May totalled zero, nada, zippo; and that has been the case all year long. When we start seeing workers form a picket line and garnering concessions instead of giving them, we’ll start to reassess the inflation landscape. FORECLOSURE CRISIS CONTINUES UNABATED More homeowners than ever are falling behind on their mortgage payments, despite the most intense government efforts ever to stem the tide: We now have a situation where 5.4 million of the 45 million home loans in the United States are in some stage of the foreclosure process. The first-quarter Mortgage Bankers Association data show that 12.07% of all mortgages are in foreclosure or delinquent — up from 11.93% at the end of 2008. While the problem remains centered in California, Florida, Arizona and Nevada (a 46% share of new foreclosure activity), the problem is spreading geographically. TROUBLED LOANS IN GENERAL ARE STILL MOUNTING While the banking sector income statement is gaining relief from the supersteep yield curve, the balance sheet is still being undercut by a rising and record level of bad loans: According to just-released FDIC data, the share of the entire volume of loans and leases outstanding as of March, 7.75% were showing some signs of distress. That compares to a 6.9% share at the end of last year and 4.1% a year ago. If you’re definition of ‘green shoots’ is that the increase is slowing down, well then, go with that story. From our lens, the bigger story is that we are not even past the bottom of the business cycle and the loan quality in the banking system has already deteriorated to levels that far surpass the worst points of the 1990-91 recession (when delinquency rates hit a peak of 7.26%).

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In terms of sectors, the major culprit remains real estate – with an 8.77% latepayment rate. Construction and development loans are clearly in the worst shape with 17.68% of credit here going bad. The one area now with the greatest risk of playing catch-up is commercial real estate (including stores and offices), which, at 4.01%, is less than half the peak of the last negative real estate cycle in the early 1900s. The stress is evident in the fact that the charge-off rate for bad debts in the banking system just hit 7.79%, and to cover this, the FDIC reported that twothirds of the banks either cut or eliminated their dividends in the first quarter of the year. SIGNS OF CREDIT MARKET IMPROVEMENT ARE STILL MIXED Yes, corporate spreads, the TED spread, Libor-OIS spreads have all come in rather dramatically from their peaks, which is a good sign that liquidity in secondary markets is ample. The problem, of course, is that we have over $1 trillion of excess cash the Fed has created sitting on bank balance sheets instead of being re-circulated through the real economy. In the meantime, Fannie and Freddie mortgage bond yields are now soaring, and credit spreads are hardly tightening — widening more like it — in the commercial mortgage-backed securities market. And, while interest rate spreads have tightened in the secondary market, the reality is that nearly one million small-business owners, according to the USA Today, have been forced to find a new line of credit (credit card issuer Advanta stopped accepting new charges on Saturday). Bank-wide commercial & industrial loans contracted $8 billion in the May 20th week – and down $22 billion so far for the month. The outstanding level is now below $1.5 trillion for the first time since June 4, 2008, and the nonfinancial commercial paper market shrank $10 billion last week to $148 billion – the smallest it has been in three years (and $75 billion smaller than its prior peak). The banks continue to build up huge cash reserves (see below) – up another $35 billion last week to stand at a record high $1.13 trillion (almost 30% more than outstanding consumer loans).

Chart 1: COMMERCIAL PAPER MARKET IMPLODES United States Commercial Paper Outstanding: Nonfinancial Issuers ($ billion, seasonally adjusted) 225

200

175

150

125 06

07

08

Source: Haver Analytics, Gluskin Sheff

As a sign of how ineffective Fed policy has become, a study by JPM Chase shows that the central bank is “under water” to the tune of around 10% on its fixed-income portfolio — it would have to take a $5bln hit if it were forced to mark-to-market its book. The Fed has already purchased $480bln of MBS and another $130bln of Treasuries to help keep market rates low, and in recent weeks, the trend has moved in the other direction. See Fed Mortgage Efforts Prove Costly on page C3 of today’s WSJ.

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Chart 2: CASH ON THE BANK BALANCE SHEET HITS NEW RECORD HIGH United States Cash Assets: All Commercial Banks ($ billion, seasonally adjusted) 1200

1000

800

600

400

200 05

06

07

08

Source: Haver Analytics, Gluskin Sheff

RETAIL INVESTORS CAUGHT THE BOUNCE Private investors saw the potential for a market rebound very quickly after the lows were turned in — equity mutual funds posted a $12.3 billion net inflow in April — only the second positive inflow over the last year (this contrasts with a $27.2 billion net outflow in March). There is always potential for more money to be put to work, we would have to admit, because the year-to-date tally still represents a net outflow of $30 billion (almost the same amount as the $33 billion that was pulled out this time last year). So far in May, the weekly data point to less robust but still positive inflows into equity funds totalling just under $10 billion. Our “income-theme” seems to be catching on too because bond funds attracted a whopping $28.8 billion of net new inflows in April and that was on top of $19.9 billion in March. The last time we saw retail investors put this much money into the fixed-income market was back in July 2002, and far from being a “contrary negative” indicator for bonds, longer-dated yields did not hit bottom for almost another year. Remember – 25% of the household balance sheet is in equities; 30% in real estate; over 6% in consumer durable goods; 12% in cash and only 6% is in the fixed-income market. There are 78 million boomers, whose median age is 52 and will very likely be seeking cash flow as opposed to the pervasive focus on capital gains (which has lost them money in the past decade) as they focus on their savings strategy in the immediate leadup to their retirement years.

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Chart 3: REAL ESTATE DOMINATES HOUSEHOLD ASSETS United States: Share of household assets (percent, 2008 Q4)

Treasuries 0.4%

Other* 20.2%

Real Estate 31.2%

Non-government bonds 5.5% Consumer Durables 6.3% Cash 11.7%

Equities 24.7%

*Life insurance and pension reserves Source: Federal Reserve Board, Gluskin Sheff

ASIA REVIVAL MAY BE FOR REAL Unless the data are lying, we are seeing spreading strength across the continent, even Japan where industrial production rose a record 5.2% MoM in April; and there is a good chance that this solid performance will be followed by an 8.8% surge in May (though admittedly, the most recent figures on employment, prices and household spending were all quite soft). The Japanese government is also set to unveil its fourth fiscal stimulus package since last August — a $144 billion plan that includes tax cuts. India also posted a stronger-than-expected 5.8% YoY print in its real GDP for the first quarter. Korean production has jumped at a 15% annual rate over the past three month. The current BusinessWeek runs with an article titled The Surprising Strength of Southeast Asia — well worth a look.

Unless the data are lying, the Asia revival may be for real

This is all quite bullish for the commodity complex, which is now breaking out according to the charts. Gold, copper and oil have all broken above their 200day moving averages just as the U.S. dollar has broken below its trendline. The U.S.A. is still the largest economy in the world by far, but it is losing its dominance each year and the fact of the matter is that it is a mature servicedriven economy — health services, education services, recreation services and of course, financial services. Emerging Asia in general, and China in particular, are still the marginal buyer of basic materials, and their economic success is more critical to the outlook or commodities. The data speak for themselves – even with the number of miles travelled by motor vehicles in the U.S.A. down 1.2% YoY and declining now for 16 consecutive months, oil prices are fast approaching $70/bbl. Why? Because Chinese crude oil imports in April surged 2.3% sequentially and 13.6% on a YoY basis.

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Last December, I saw several reasons why the commodity complex looked attractive. The prospect of recurring bouts of currency devaluations is bullish for hard assets. Trade protectionism provides governments with the incentive to stockpile material. From a commodity perspective, fiscal policies involving infrastructure spending more than compensate for the hit to demand associated with declining U.S. consumer spending. China’s imports of refined copper rose nearly 150% YoY in April, as an added example, and soybeans by 55%. In the aggregate, imports of red meat and poultry in the developing world are expected to total 21 million tons this year (DoA estimates), creating a boom for the grains used as feedstock.

From a cyclical standpoint, what I didn’t count on was an early turnaround in Asian economic growth

From a cyclical standpoint, what I didn’t count on, but may be the most bullish reason of all for the commodity sector, was an early turnaround in Asian economic growth. While there is always room for healthy scepticism, no country has moved to stimulate its economy as much as China has, and it has the means (unlike the U.S.A.). The economic and credit data indeed suggest that China has turned the corner in its mini-recession, and if this is indeed the case, then the outlook for commodities is quite constructive even if we should expect some sort of profit-taking to occur near-term after the breathtaking rally of the last few months, which has seen the likes of copper, oil, gold and the CRB all test or pierce their 200-day moving averages. And the commodity currencies, like the Canadian and Australian dollars, have been taken along for the ride. Again, some giveback may be in order, but the fundamental trend is up in the resource sector. Chart 4: ASIA TO REMAIN THE GROWTH LEADER IN 2009* Real GDP (annual % change) 8

6.5

6

4.5

4 2 0 -2

-1.3 -1.4 -2.5 -2.8 -3.0

-4

-3.5 -3.7 -4.0 -4.1

-6

Japan

Russia

United Kingdom

Korea

Mexico

Malaysia

France

United States

Canada

Australia

Brazil

India

China

Germany

-5.6 -6.0 -6.2

-8

*IMF forecast Source: IMF, Gluskin Sheff

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Chart 5: ASIA TO REMAIN THE GROWTH LEADER IN 2010* AS WELL Real GDP (annual % change) 9 8

7.5

7 5.6

6 5 4 3

2.2 1.5

2

1.3

1.2

1.0

1

0.6

0.5

0.5

0.4

0.0

0 -1

-0.4 United Kingdom

United States

France

Russia

Japan

Australia

Mexico

Canada

Malaysia

Korea

Brazil

India

China

Germany

-1.0

-2

*IMF forecast Source: IMF, Gluskin Sheff

There are three observations worth making: First, emerging Asia already went through its restructuring and depression over a decade ago. They made the painful economic adjustments and political changes necessary to embark on a sustainable economic path. We doubt the U.S.A. will ever experience the true pain of such a restructuring as countries like South Korea, Indonesia and Thailand endured in the late 1990s. They have been on secular growth paths the past several years, and cyclical setbacks should be viewed in that context.

Emerging Asia already went through its restructuring and depression over a decade ago

Second, for all the talk about how “decoupling” ended up being a hoax – maybe, just maybe, it wasn’t. To be sure, after the Lehman collapse in September, the entire global economy imploded. Trade finance dried up completely, which wreaked extra havoc on the Asian economies. But we do know that the U.S. was technically in recession starting in December 2007 and so there was a nine-month period of time up until September 2008 that we can use as a microcosm — and during that stretch, we have news for you: China’s real GDP expanded at an 8.9% annual rate; India by 6.1%; Indonesia by 5.2%; the Philippines by 4.7% (and Russia by 3.5%; Brazil by 2.4%). So yes, growth slowed but was still intact and that is the major point. Now that we are past the worst point of the credit cycle and seeing as how the Asian economy has been the first region to show something more than faint pulse, the backdrop for the resource market has certainly improved and will continue on that path so long as the Asian economic pickup is not a ‘head fake’ (as an aside, the IMF expects China and India, followed by Brazil, to top the global GDP growth charts both this year and next). Chart 6: DECOUPLING WAS WORKING UNTIL …

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Real GDP (Q3 2008 / Q4 2007; annual % change) 8.9

China 6.1

India 5.2

Indonesia

5.0

Argentina

4.7

Philippines 3.5

Russia 2.4

Brazil Chile

1.7

Malaysia

1.6 0

2

4

6

10

8

Source: Haver Analytics, Gluskin Sheff

Chart 7: … LEHMAN COLLAPSED Real GDP (Q1 2009 / Q3 2008, unless otherwise noted; annual % change) 3.5

Philippines*

2.7

China Indonesia

2.0

India*

0.6

Argentina*

-1.2 -6.6

Chile Malaysia*

-10.0

Brazil*

-13.6

Russia -20.2 -24

-20

-16

-12

-8

-4

0

4

8

12

16

*Using Q4/Q3 2008 figures Source: Haver Analytics, Gluskin Sheff

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Third, we just endured the steepest world economic setback in 70 years and yet commodity prices across a broad front — gold, oil, copper, soybeans — managed to bottom at their highest “recession levels” of all time. Look at oil — it bottomed just above the $30/bbl mark, which in most other cycles in the past represented the peak, not the trough. This attests to the supply discipline by today’s resource companies compared to their predecessors, and affirms our belief that what we experienced last year was a severe cyclical correction in what is still a secular bull market — you can connect the dots on the chart and see that the CRB looks a lot like what the S&P 500 looked like in the months following the sharp 1987 collapse. It seemed like the end of the world in October of that year, and yet in retrospect it was just the 5th year in what proved to be an 18-year secular bull phase. Commodities seem to be in one of those long secular up-waves right now.

We just endured the steepest world economic setback in 70 years and yet commodity prices managed to bottom at their highest “recession levels” of all time

TABLE 1: COMMODITIES BOTTOMED AT HIGHEST RECESSION LEVELS EVER Where Commodities Bottomed This Cycle

Where Commodities Bottomed During Recessions (average of five recessions, except where noted)

Wheat Soybean Corn WTI Gold Copper Silver Lead Zinc CRB Spot (1967 = 100)

$4.86/bushel $7.59/bushel $2.72/bushel $30.81/bbl $712.50/oz $1.25/Lb $8.81/troy oz 61.72¢/Lb 57.42¢/Lb 302.34

Wheat Soybean Corn WTI Gold Copper* Silver Lead* Zinc* CRB Spot (1967 = 100)

$3.08/bushel $5.05/bushel $2.08/bushel $20.00/bbl $307.30/oz 0.70¢/Lb $5.76/troy oz 38.27¢/Lb 51.17¢/Lb 229.11

*Average of the last two recessions Source: Haver Analytics, Gluskin Sheff

This is ultimately very constructive for the Canadian equity market, where 47% of the TSX market cap is in resources, compared to just a 16% share in the S&P 500. It is also a bullish underpinning for the Canadian dollar, even if a pullback is likely over the near-term.

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Chart 8: TSX INDED GEARED MORE TOWARDS BASIC MATERIALS … Canada T S X C om pos i t e In dex Financials

29.2%

Energy

28.5%

Materials

18.6% 5.3%

Industrials Telecom

4.8%

Info Tech

4.6%

Cons. Discret

4.0%

Cons. Staples Utilities Health Care

3.0% 1.6% 0.4%

Source: Haver Analytics, Gluskin Sheff

Chart 9: … THAN THE S&P 500 United States S & P 500 C om pos i t e I n dex Info Tech

17.4%

Health Care

14.2%

Financials

13.2%

Energy

13.0%

Cons. Staples

12.1%

Industrials

10.2%

Cons. Discret Utilities Telecom Materials

8.9% 4.0% 3.6% 3.3%

Source: Bloomberg, Gluskin Sheff

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THE FRUGAL FUTURE IS A PRESENT DAY REALITY Great article in the Economist on the secular post-bubble shift from frivolity to frugality — Trading Down – From Decadence to Discounts. Very deflationary stuff. Between 2000 and 2007, the average American raised his/her consumption by 44% and this accounted for 77% of the overall growth in GDP. It wasn’t just a housing bubble; it was also a leveraged consumption bubble (this did not happen in Japan, by the way, which is why the situation now is even more troubling). Fully $500 billion of consumption was funded by taking cash out of the home during the bubble, and about $1 trillion of the windfall was used to purchase even more real estate and equity assets — it was all totally illusory but now we are paying the piper as spending patterns reverts to the mean. Real-life examples are Tiffany’s 62% plunge in its Q1 earnings at a time when ‘value’ recession-hedge retailers like McDonalds’s continued to ramp up earnings growth as it has done each year since 2003.

It wasn’t just a housing bubble; it was also a leveraged consumption bubble

I have been of the view for about a year now that the post-bubble world was going to involve a significant shift in consumer attitudes towards credit, homeownership and discretionary spending. This is clearly occurring in the automotive sector, where the 20% of three-car families are becoming two-car families, and the vast majority of two-car families are either downsizing to one vehicle or are doing everything they can to extend the life of their current car/truck/SUV. See Nation’s Love For New Cars On the Wane: Signs that Slump May Become New Normal on the front page of the Sunday New York Times. This secular decline in the automotive sector may be something the American taxpayer might want to be aware of as it is forced into the position of being a 70% equity stakeholder in GM.

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Materials prepared by Gluskin Sheff research personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Gluskin Sheff. To the extent this report discusses any legal proceeding or issues, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Investors should consult their own legal advisers as to issues of law relating to the subject matter of this report. Gluskin Sheff research personnel’s knowledge of legal proceedings in which any Gluskin Sheff entity and/or its directors, officers and employees may be plaintiffs, defendants, co-defendants or coplaintiffs with or involving companies mentioned in this report is based on public information. Facts and views presented in this material that relate to any such proceedings have not been reviewed by, discussed with, and may not reflect information known to, professionals in other business areas of Gluskin Sheff in connection with the legal proceedings or matters relevant to such proceedings.

Individuals identified as economists do not function as research analysts under U.S. law and reports prepared by them are not research reports under applicable U.S. rules and regulations. Macroeconomic analysis is considered 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 an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering document issued in connection with such offering, and not on this report. Securities and other financial instruments discussed in this report, or recommended by Gluskin Sheff, are not insured by the Federal Deposit Insurance Corporation and are not deposits or other obligations of any insured depository institution. Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. No security, financial instrument or derivative is suitable for all investors. In some cases, securities and other financial instruments may be difficult to value or sell and reliable information about the value or risks related to the security or financial instrument may be difficult to obtain. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall

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