Lunch With Dave 100509

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

October 5, 2009 Economic Commentary

MARKET MUSINGS & DATA DECIPHERING

Lunch with Dave WHILE YOU WERE SLEEPING The action in the equity markets is rather mixed with Europe and U.S. futures up but most of Asia squarely in the red column today – and off for the third session in a row (the cyclically sensitive Korean Kospi index sagged 2.3% -- its worst showing in 7 weeks). The weekend G7 meeting in Istanbul did not break new ground and the dollar is softening in the aftermath. The MSCI emerging market index is trading down to a three-week low. It’s quiet on the economic data docket this week but what is key for investors is the start to the Q3 earnings season, (Bloomberg consensus is for a -23% YoY reading on operating EPS which would be a record 9th decline in a row), beginning with Alcoa on Wednesday, and the blockbuster $78 billion sale of U.S. Treasury securities (covering four auctions). No big shift in commodity markets but the faltering Baltic Dry Index and the fact that open interest (from Bloomberg) jumped 6.6% in Q3 (biggest increase since early 2008) may be nearterm warning signs. Lots of talking heads on the wires, with Nouriel Roubini warning that the equity markets have “gone up too much, too soon, too fast”; George Soros saying that several U.S. banks are “basically bankrupt”; and Alan Greenspan talking from both sides of his mouth that GDP growth in Q3 could be better than 3% and at the same time lamenting the weakening job market backdrop. To show how confused even the reporters are, the WSJ ran with Greenspan Foresees a Rise in Unemployment and the FT ran with Growth Could Pass 3%, Says Greenspan). The Maestro did warn us a while ago in an interview that “I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said.” Good to know he sticks with that mantra long after his tenure as Fed Chairman.

IN THIS ISSUE • A look at Friday’s employment data • Will we ever move from deflation to inflation? • Fed’s reserve creation showed through as cash on bank balance sheets • Latest data points not encouraging – green shoots are turning brown this fall • Market has been driven more by technicals than by fundamentals • Shift in savings behaviour seem secular in nature • Attitudes towards credit, homeowership and discretionary spending are undergoing a profound change

MORE FACTOIDS WORTH NOTING FROM FRIDAY’S EMPLOYMENT DATA Last week, we found that two critical ingredients to the recession call – employment and real personal income excluding government transfers – are continuing to hit new cycle lows. So, if this is what’s deemed by the masses to be a recovery, like the one in 2002, it is a limbless recovery – missing one arm and one leg. You can’t get very far with that. Nonfarm payrolls in the U.S. slid 263,000 in September, but the details were even more sombre. The Household Survey showed a massive 785,000 plunge in September, and employment on this score has now slid by 1.2 million in the past two months. Sustainability is the key and there can be no durable recovery without net job creation and organic wage growth, which were both lacking in Friday’s report. In fact, the combination of the workweek edging back down to retest the all-time low of 33.0 hours and the near-stagnation in hourly wages Please see important disclosures at the end of this document.

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October 5, 2009 – LUNCH WITH DAVE

dragged the proxy for personal income down 0.2% MoM (in nominal terms) and the YoY trend is getting perilously close to deflation terrain, at +0.7% from +0.8% in August and +1.2% in July. Civilian employment is down 4.3% YoY and that too is a record in the post-WWII era; remember, the Household survey leads the cycle and typically bottoms and peaks before the Payroll survey does. This survey showed a 785,000 plunge in employment in September, and never before has a recession ended with civilian employment declining this much (on average, it goes down around 70,000 or almost negligible the month the recession ends). In the last three months, the Household survey shows that civilian employment has plunged 1.33 million. At the time of the end of the 2001 recession, the three-month rally was -3,000 – we hadn’t even entered the jobless recovery at that point. There has never been a time, ever, when a recession ended during a span when the economy lost 1.33 million jobs. So all the calls that the recession is over may have been a tad premature. If the jobs data are correct, and the recession is in fact not over, this entire 60% rally is at risk of unravelling.

So all the calls that the recession is over may have been a tad premature.

There were absolutely no redeeming features in the data. The private nonfarm diffusion index sank to 31.9 in September from 34.9 in August (the manufacturing diffusion index fell to 22.9 from 28.3 in August) which means that for every company adding to their staff loads, more than two are cutting back. The labour force contracted by 571,000 and has plunged now by 1.1 million since May. That again is a sign of the labour market seizing up, which is very disturbing when you consider all the government efforts to stem the tide last quarter – from housing subsidies, to cash-for-clunkers, to mortgage modifications. The fact that initial jobless claims have peaked and rolled over – modestly by historical standards – tells only half the story which is firings. It is so painfully obvious from the data what is lacking most, is new hiring, especially in the small business sector which accounts for half of the job creation in the United States. The average duration of unemployment rose to 26.2 weeks – a half year! – from 24.9 weeks in August; the median spiked to 17.3 weeks from 15.4. It is so difficult now to find a job that a record 36% of the ranks of those unemployed have been searching with futility now for at least six months. In “normal” recessions since 1950, this ratio peaked at just over 20%. It is nearly double that today. In number terms, we are talking about 5.4 million Americans who have been out of work – but looking – for at least six months. This is troubling. The U6 measure of the unemployment rate, which is the most inclusive definition of the labour force and takes into account the fact that we have a record 9 million people working part-time because they have been pushed off full-time payrolls, hit a new high of 17.0% in September from 16.8% in August. The gap between this rate and the ‘official’ rate of 9.8% is at a record of seven percentage points. The historical norm is closer to four percentage points and so the concept of mean reversion – Bob Farrell’s first market rule to

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remember – suggests that the unemployment rate is going to be setting new highs for the post-WWII era before too long (the prior high was 10.8% in November-December of 1982). So the chances that we see a 13% peak unemployment rate this cycle is far from a ludicrous proposition at this point; and just in time for the mid-term elections. The index of aggregate hours worked, which combines hours worked with the number of bodies at work, seemed to be carving out a bottom in July and August; however, it was a false bottom because this critical ingredient into GDP fell 0.5% in September, to stand at its lowest level in six years. For Q3, aggregate hours worked actually contracted at a 3.0% annual rate, so basically, what is keeping the economy afloat is continued strong productivity gains. But productivity growth alone cannot possibly lead the economy into a sustainable recovery -- labour input at some point is going to have to kick in. For Q3, aggregate hours worked actually contracted at a 3% annual rate so basically, what is keeping the economy afloat, is continued strong productivity gains. But productivity growth alone cannot possibly lead the economy into a sustainable recovery, labour input at some point is going to have to kick in.

…productivity growth alone cannot possibly lead the economy into a sustainable recovery…

Take note that the Bureau of Labor Statistics (BLS) also announced a preliminary estimate regarding the benchmark revisions that get published every February and they suggest an additional 824,000 jobs were lost in the year to March 2009, which would put the cumulative decline at over 8.0 million (versus 7.2 million currently, which, even in percent terms – down 5.2%, is the worst in 64 years). Many of these jobs are never coming back, either. The share of the unemployed who are not on layoff is at record 54.3% as of September. In prior recessions, this ratio would barely pierce the 40% mark. In number terms, we are talking about 8.5 million Americans who have lost their job due to permanent shutdowns, a figure that is double what you typically see at the peak of the recession. Full-time employment is down 10.5 million from the late-2007 peak. Many of these folks have lost their job permanently; but over the past two years 2.8 million have managed to at least find part-time work. Even with this surge in part-timers, total employment relative to the size of the population sagged to a quarter-century low of 58.8% in September. Looking at the demographic split, we can see the new game that families are playing. Parents are working longer to keeping their kids out of a job – but look at the bright side, at least their education will be paid for. Amazingly, employment among those 55 years of age and older rose 69,000 in September while all the other age cohorts combined lost an aggregate 854,000 On a YoY basis, the older age category is up 1.4% while everyone else is down 5.5% so it is so painfully obvious that the aging boomers are either coming into the workforce or are not leaving their jobs as early as their predecessor did – and this in turn is creating a huge unemployment headache for the younger generation because the youth unemployment rate has jumped to a record 26%.

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Reasons I hear why the market shrugged off the payroll Non-Farm Payroll report 1. A bad number was already priced in post-ADPs 2.

Employment is a lagging indicator

3.

The weaker the data, the bigger the V-shaped recovery

4.

Weak data ensures more accommodative policies which will keep "excess liquidity" conditions flush

5.

The jobs data were "distorted" by 53k drop in government workers (ostensibly civil servants don't shop).

6.

Job loss is great news for cost cutting and margin expansion.

7.

Quarterly earnings season is upon us and likely to far surpass expectations.

My opinion: There is more complacency and risk in the equity market now than there was back in January. I think the boost to output from auto production is over. I think the ISM has peaked. I think there is a nontrivial chance we see zero percent real GDP growth in Q4 (consensus is around 3%). DEFLATIONARY PRESSURES REIGN The question is when will we ever move from deflation to inflation. Everyone looks at the Fed’s bloated balance sheet but the problem is that the reserves the central bank has created are sitting as cash on banking sector balance sheets and not being re-circulated into net new credit creation which suggests that velocity is still contracting. Not only is velocity contracting, but so are the broad monetary aggregates. From a labour market standpoint, there cannot be inflation without accelerating wages, and the economy is now operating at a level that is equivalent to 10 million jobs short of full-employment. So basically, what this means is that we are anywhere from five to 10 years away from seeing any sustained increase in inflation. Indeed, the article on page A2 of today’s WSJ cites a Rutgers study suggesting that we will not see 5% on the unemployment rate again until the end of 2017; Global Insights has a 5.75% jobless rate occurring no sooner than 2019 (see It Will Be Years Before Lost Jobs Return – and Many Never Will). In turn, this implies that the chances that we get to $83 on S&P operating EPS, which the equity market is in effect now discounting a doubling from current levels, could take at least that long to occur (five to 10 years). Again, this means that income-focused investment strategies are going to remain critical in terms of generating adequate real risk-adjusted returns for the foreseeable future. To repeat, the employment/population ratio (the “employment rate”) has fallen to a quarter-century low of 58.8%; it peaked at 63.4% in 2007. To get back to a cycle high, we need to create more than 10 million jobs. Before that happens, deflationary pressures are going to trump whatever inflationary risks arise from the Fed, Congress and the White House.

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The last time the ratio was this low was back in December 1983. Back then, household debt per capita was $9,900; today it is six times larger at $58,000. At the margin, one has to wonder what is going to be paid for first. The debtservice payments coming out of the paycheck are looking increasingly vulnerable. Default rates are extremely likely to worsen for the foreseeable future; groceries will not be sacrificed; however, credit will. In the aggregate, household debt-service payments absorb 13.1% of total disposable income. The good news – that is down from the 13.9% peak set in 2007. But there is actually very little progress when one considers all the efforts by the Fed, Congress and the Administration to force loan modifications, bring interest rates down and transfer income to low and middle-income households. History shows that re-expansion of the consumer balance sheet and the onset of a sustainable new economic cycle does not take hold until this debt-service ratio hits 10.5% -- so basically, we are barely one-quarter of the way through the deleveraging process needed to bring interest charges into alignment with income-generating capacity. Again, this is going to prove to be a highly deflationary process in terms of what it implies for U.S. consumer demand. CREDIT STILL CONTRACTING; BANKS BUYING BONDS Last week’s Fed data showed continued declines in not only money velocity but actually we are seeing outright contraction in the monetary aggregates. Despite the fact that the Fed has been bolstering bank reserves of late in a rather aggressive fashion, and this has in turn sparked a 52% annualized boost to the monetary base on a 13-week rate of change basis, we see M1 running at -6.8%; M2 at -3.5%, and MZM at -3%. Commercial bank lending has been down or flat in each of the past sixteen weeks. In the past three months, it has contracted at a record 16% annual rate – business lending (C&I loans) -21.7%, consumer 7.9%; mortgage -9.9%. So what are the banks doing with all their cash? The latest data indicate that the Fed’s reserve creation showed through as cash on bank balance sheets ballooning $182 billion in September (+64 billion just in the last week) on the month to an all-time high of $1.076 trillion. The banks, instead of finding new creditworthy borrowers in private sector to lend to, are basically lending the Fed’s reserve creation right back to Uncle Sam. If you’re wondering who is funding the deficit – it is the major banks; they bought $31 billion of government bonds last week of September – bringing monthly pickup to $52 billion (fourth highest on record). LATEST DATA POINTS NOT ENCOURAGING – GREEN SHOOTS ARE TURNING BROWN THIS FALL • Mortgage applications index 2.8% for the week of September 25th (with the refinancing index down 6.2%). • Initial jobless claims jumped 17,000 to 551,000 for the week ended September 26th, well above consensus projections was 535,000. Initial Page 5 of 13

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claims for the prior week were revised up, yet again, this time from 530K to 534K. • Consumer confidence not only surprised to the downside in September but

the Conference Board index actually fell to 53.1 from 54.5 with both the ‘present situation’ and the ‘expectations’ component failing to build on the August rebound. Historically, by the time the S&P 500 rebounds 60% from the trough, the confidence index is sitting at 92; the month recession ends, the index is, on both an average and median basis, sitting at 72. • Consumer buying plans receded significantly. According to the Conference Board Consumer Confidence Survey, plans to buy a home fell to 2.3% from 3.0% (the effects of unwinding the $8,000 tax credit?); plans to buy a major appliance slipped to 23.8% from 26.2% in August (what happened to cash for washer-dryers?) – a level last seen in January; auto intentions slid to 4.4% from 5.3%, the lowest since last March (when the market was hitting 12-year lows) – the post cash-for-clunker hangover. • The ISM index fell in September for the first time this year, from 52.9 to 52.6 in September. We are certain that the ISM has very likely peaked (as auto production crests) because the best leading indicator for the index lies in two of the components -- orders which dropped to 60.8 from 64.9, and inventories which rose to 42.5 from 34.4. In other words, the orders/inventory ratio tumbled to 1.43 from 1.89 in August. That is the largest one-month decline in the ISM orders/inventory ratio since December 1980! The ISM was 53 that month – the next month it went to 49.2 (is that in the market?) and seven months later, we were in the early stages of the famed double-dip recession (which nobody saw coming at the time). • Auto sales collapsed 35% in September to 9.2 million annualized units (below consensus calls of 9.5 million), a 35% slide from 14.2 million August - - TIED FOR THE SECOND WORST MONTH FOR AUTO SALES IN THE PAST 28 YEARS! • Indeed, it pays to note that real personal income excluding government transfers fell 0.3% in August to a new cycle low. As we saw in 2002, there is no V-shaped recovery that occurs without incomes rising (and a 26x trailing and 16x forward P/E ratio is discounting something that's pretty good). • Now, nominal consumer spending did rise 1.3% in August and real (inflation adjusted) expenditures rose 0.9% – thanks to the cash-for-clunkers program which incentivized consumers to fund their outlays by dragging their savings rate down to 3% from 4%. This is Uncle Sam at his best trying to play around with Mother Nature because the natural course of events will keep the savings rate on a discernible uptrend, especially when one deploys a demographic overlay to the analysis. The government can step in sporadically as it just did, but it can't reverse the trend -- only briefly disrupt it. When we do the calculation, if households had not run down their savings rate as they did in August as they were lured into the auto market, we have news for you --

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nominal consumer spending would have barely eked out a 0.1% advance and in real terms we would have seen a 0.2% contraction. • Total factory orders fell 0.8% MoM – again, well below consensus estimates for a flat reading. Core capex shipments (non-defense capital goods excluding aircraft – a proxy for business investment) were revised down to show a -2.0% MoM reading. The re-stocking theme remains an illusion – in fact, inventories are still subtracting from GDP – as manufacturing inventories fell 0.8% MoM which was the 12th decline in a row. All of this, combined with the sharp 0.5% in the aggregate hours worked index in September suggests that (i) the Q3 “bounce” was likely no better than a 2.5% annualized increase in real GDP and (ii) there is so little momentum and so little visibility that it is highly likely we may see 0% real GDP performance in Q4. The consensus, meanwhile, is much closer to 3.0 to 3.5%. This is eerily similar to what happened coming out of the recession at the end of 2001 and into 2002 – a huge rally in equities and risk assets in general, lots of hype over a V-shaped recovery and 3.5% growth expectations for 2002Q4. What did we end up seeing? A 0% growth GDP quarter and the S&P 500 going back to new lows (at 776). MARKET IN RETREAT The stock market may appear to have performed admirably following the release of those horrible employment numbers on Friday, but in fact, all that happened was that the S&P 500 tested the 50-day moving average, at around 1,050, and bounced off as the program traders took charge. Again, a sign of a market that has been driven more by technicals than by fundamentals, and the fundamentals as far as the economy is concerned, are poor. This is now so evident with the impact of government programs subsiding and the administration now considering whether or not to extend housing and employment insurance relief measures or even unveil yet another round of new stimulus. Alas, the polls show that the public has no stomach for additional fiscal largesse, with all deference to Paul Krugman, at a time when the deficit/GDP ratio is running at unprecedented levels of 12%.

… the polls show that the public has no stomach for additional fiscal largesse…

So let’s first evaluate what the markets are flashing: • It may be too early to declare the onset of the corrective phase, especially

since we thought we were there back in June and early July, but the S&P 500 has declined now for four days in a row and a lower finish now for two straight weeks (first time since July that has happened). While the market did come back on Friday, breadth was awful with two stocks declining in the NYSE for every stock that advanced. • This has not been well advertized but the Russell 2000 small-cap index has

declined in seven of the past eight sessions and sagged 3.1% for the week. In terms of sectors, it should be duly noted that the sector that finished with the smallest declines was the consumer staples group. • The CRB index has basically done nothing since June and the raw industrials

have broken down. Copper is trading at a two-month low, to little fanfare. Oil Page 7 of 13

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prices slumped 5.0% last week. The Baltic Dry Index is also behaving very badly right now. • Credit default risk is back on the front burner, with CDX spreads widening out

13.5bps over the past week to 112.5bps – the sharpest move in three months. There is a growing sense out there that the toxic problems on bank balance sheets have still not been fully ameliorated, despite the tinkering by the government. Indeed, this got little attention, the FDIC closed another three banks at week’s end, bringing the number to 98 for the year; as many as in the past 15 year combined. Nice to see that the credit crunch is over! • The VIX index is now in a visible breakout pattern – flirting with one-month

highs. • The Yen has been firm – now at an eight-month high – and Sterling and the

Euro have been weakening. These should be treated as more evidence of a defensive signposts, this time stemming from the FX market. • The bond market is telling the economics community to start cutting their

growth forecasts, but nobody seems to be listening. Real rates (10-year TIPS) are at six-month lows of 1.5% and the yield curve has flattened dramatically in recent weeks. Bonds are trading as if they expect a 20% correction in the stock market. • Overseas, we see interest rate spreads between Germany and the peripheral

countries widening – Greek 10-year bond yields moved out 20 basis points relative to German Bunds last week. Yet another sign of heightened risk aversion that should not be dismissed. SHIFTS IN SAVINGS BEHAVIOUR SEEM SECULAR IN NATURE We are impressed at the resolve of the retail investor – understanding the risk involved in chasing an incredible rally driven by technicals and sentiment. Investors pulled a net $8.9 billion out of equity mutual funds over the four weeks ending September 23rd while plowing $45.9 into bond funds (according to the Investment Company Institute). Demand for income-generating assets, even in this period of very low interest rates, is very strong and we say that because California is coming with a $4.5 billion follow-up after that hugely successful $8.8 billion sale of 1.25-1.50% yielding short-term notes a few weeks ago. Some may say that this is a form of capitulation and shun the fixed-income market as a result. We actually believe that we are in a period where savings-constrained boomers who have only 7% of their assets in bonds will be expanding their exposure to the fixed-income for several years to come. This move will in turn drive yields to new lows in the future even in the face of large-scale deficits, not unlike the United States in the 1930s and Japan in the 1990s. Perhaps what we have on our hands is a retail investor who now understands risk. Perhaps we have a retail investor who has been burnt twice by new paradigm bubbles seven years apart. Perhaps the retail investor sees that 60 is quickly Page 8 of 13

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approaching, and that the focus can no longer be strictly on capital appreciation, but that safety and income at a reasonable price is actually a very prudent investment style; or perhaps the retail investor already had the charts on his billboard that Floyd Norris used in his column on page B3 of the Saturday NYT (the title says it all: Great Year, but S&P Closes in on its Worst Decade. THE U.S. CONSUMER IS IN HUNKER-DOWN MODE Now, there is no question that when you give anyone a freebie they are going to take it, so to say that cash-for-clunkers was successful because it induced a brief spurt in auto sales really misses the point. The only way a program really works is if it provides a spark for something that is ongoing. The fact that auto sales sagged 35% in August is testament to the new U.S. consumer who is showing a tremendous capacity to change his and her over-spending and over-consuming habits. The typical Wall Street economist sifts through the data like a robot, tweaking numbers here and there and basically doing little more than reporting what the numbers are doing but nowhere do we see adequate analysis over what is termed ‘behavioural economics’. The economists are so focused on the minutia or the background noise that they can’t see the forest past the trees. They can’t see that attitudes towards credit, homeownership and discretionary spending are undergoing a profound change. As they focus myopically on the ISM index, they don’t see that households now understand that they have to shrink their balance sheets and alter their budgets. This is a secular theme, which means that it will last years, and frankly, this move towards frugality was gaining traction months before Bear Stearns and Lehman went down for the count. (As an aside, and we have said this before, it is not about being a perma-bear or a perma-bull, but about being totally realistic and honest regarding what a post-bubble credit collapse world really looks like. Japan had no fewer than four of these massive rallies since its bubble burst and the Nikkei is still down more than 70% from its prior peak.) While thrift is still considered a ‘bad thing’ by most economists who crave a consumer-led revival, we would be happy to open that for debate. It would be much more heartening to see a revival fuelled by capital investment but when over one-third of manufacturing capacity is sitting idle, that may be a stretch; and considering that exports comprise little more than 10% of GDP, the foreign sector is hardly going to be adding a whole lot of torque to the GDP data, at least over the intermediate term. Looks like we are left with government. This secular frugality theme was on our minds when we saw Flat Holiday Sales? Retailers Say They’ll Take It on page B1 of the Saturday NYT. Is this what a 65% surge in the S&P retailing index from the lows has priced in? A flat sales growth at the most important time of the year. And this would be flat over a 2.0% YoY decline in 2008, which was the weakest holiday showing in 40 years. A holiday study just published by Nielsen found that 85% of Americans are going to be spending the same or cutting back this year compared to what was the worst holiday season since the late 1960s. This is incredible and shows how the near-

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60% surge in the equity market over the past five months has been totally divorced from economic reality. The NYT article hit home because it concluded that “people are also continuing to nest in their homes.” We were on top of this about two years ago. And here we are, and the article says that the best-selling item this holiday shopping season is expected to be – get this – “cookware and other kitchen sundries.” Can there be any worse news for the restaurant sector? Husbands are going to be buying their wives a new roasting pan for Christmas and wives are going to be giving their hubbies a fryer. Luxury goods are expected to fare poorly (jewellery, sporting goods, vacations), and it looks like we may see some very deep discounting in the apparel space (NPD Group is calling for a 4-5% YoY decline this year – see Sales Hanging on By a Thread on page A8 of the Investor’s Business Daily). Ditto for toys, the specials are starting early – Wal-Mart is bringing back its $10 toy section back to all its stores and we’re not even close to Halloween yet. Moody’s reported last week that the holiday shopping period “may be more promotional than anticipated, as consumers have learned to delay shopping in anticipation of higher markdowns”. Now that is definitely a deflationary mindset. DENNIS AND DON It’s always phenomenal when you can join Dennis Gartman on the same stage one day and then sit at the head table with Don Coxe the very next day. Two of the best brains in the industry, and gifted speakers to boot; both have been mentors to me. So it is with a huge degree of relief to me to see Dennis talk about how he has a bond-bullion barbell on and is a big fan of commodities and a secular bear on the dollar. When the discussion came down to the political backdrop in the United States and the drift to the left, I was in total agreement with his views that this too will play a role in the U.S. dollar depreciating to new lows. Don has very similar views as I do on the U.S. equity market but refused to be classified as a bear because there are so many other investing opportunities lurking – especially in commodities and in the agribusiness in particular where he has been early and right. And Don stated emphatically “what we call emerging markets are not really emerging markets any more – they have emerged!” At one point in his speech, Don asked out to the crowd what city won the bid for the 2016 Olympics to which someone cried out “Rio”. It was hard to tell if Don was surprised or even disappointed, but from our lens, the decision (with Chicago placing last in the very first round, no less) was a complete ratification of his view of emerging markets joining the industrialized world; that the U.S.A. may indeed be in the sunset of its hegemony in many respects. To think of the repudiation of the President (do we dare mention Oprah too?) who, despite a deep agenda including Healthcare, Iran, Afghanistan, and the economy, had the time to fly on Air Force One to Copenhagen with an entourage to make the case for Chicago. But to put a positive spin on the result, it is more a validation of the strides that Lula has made to bring Brazil and its increasingly entrepreneurial Page 10 of 13

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economy and greater social stability into the new world order (in addition to the Olympics, the World Cup soccer games are also coming to Brazil in 2014). As the Sunday NYT aptly put it (see page 9 of the front section), Brazil, with the help of course from Mr. Chavez, has become "the economic and political leader of South America".

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$1 million invested in our Canadian Value Portfolio in 1991 (its inception date) would have grown to $9.3 million2 on August 31, 2009 versus $5.1 million for the S&P/TSX Total Return Index over the same period.

PERFORMANCE

Our success has often been linked to our $1 million invested in our Canadian Value long history of investing in underfollowed and under-appreciated small Portfolio in 1991 (its inception date) 2 and mid cap companies both in Canada would have grown to $9.3 million on August 31, 2009 versus $5.1 million for the and the U.S. S&P/TSX Total Return Index over the PORTFOLIO CONSTRUCTION same period. In terms of asset mix and portfolio $1 million usd invested in our U.S. construction, we offer a unique marriage Equity Portfolio in 1986 (its inception between our bottom-up security-specific date) would have grown to $10.8 million fundamental analysis and our top-down 2 usd on August 31, 2009 versus $8.4 macroeconomic view, with the noted million usd for the S&P 500 Total addition of David Rosenberg as Chief Return Index over the same period. Economist & Strategist.

For 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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October 5, 2009 – LUNCH WITH DAVE

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