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David A.

Rosenberg March 29, 2011


Chief Economist & Strategist Economic Commentary
research@gluskinsheff.com

MARKET MUSINGS & DATA DECIPHERING

Breakfast with Dave


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WHILE YOU WERE SLEEPING


Don’t look now but we are all of a sudden starting to get some mixed news out
of the once-hot manufacturing diffusion indices. No sooner did the Richmond
Fed index slide 5 points to 20 in March but the just-released Texas
manufacturing index published by the Dallas Fed dropped 6 points to 11.5. With
the stock market able, in recent weeks, to shrug off the “financial shock” from
all the global turbulence we have been seeing, the next question is how
investors will be coping with increasing signs of sharply slowing economic growth
in coming months and quarters.

Attention has to be paid on what is happening in Canada. The loonie has been a
constant surprise, not only fairing very well through all the global turbulence but
also the aftermath of the federal election announcement. The Canadian dollar
has remained above “par” each and every day since February 1st and the long
GOC bond yield at 3.7% is not only 80bps below U.S. levels but is now 7bps
lower than Germany, which is another country that retains very decent macro
fundamentals.

AMERICAN CONSUMER SPUTTERING IN Q1


The U.S. consumer spending and income report for February was a bit of a
mixed bag. First, personal income in the U.S. did eke out a 0.3% MoM gain in
February, but it was below expected and failed to keep up with the rise in
inflation, which are largely, but not exclusively, being driven by food and fuel
prices (accounting for half the increase). The personal consumption expenditure
(PCE) price deflator rose 0.4% MoM and as such real income ― straight up, net
of taxes and excluding personal transfers ― fell 0.1% in the first contraction
since last September.

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
March 29, 2011 – BREAKFAST WITH DAVE

Consumer spending did manage to exceed expectations with a 0.7% MoM gain
in nominal terms, but again, inflation ate into more than half that; therefore, in
real or volume terms, the increase was +0.25% after a flat January. And this
includes the sudden revival in auto sales ― we shall see if this lasts. But what is
apparent is that consumer spending is coming in around a 1% annual rate in
real terms so far in Q1 and we see from last week’s numbers on durables that
capital spending is suddenly running pretty close to zero growth.

One thing is for sure: between the horse trading being done at the federal level
to avoid a shutdown in Washington and the accelerated cutbacks at the state
and local government levels, we are not holding our breath on any fiscal help
from the government sector. Many forecasters have gone from a 4% growth
forecast for Q1 down to just over 2% and now even that latest estimate may be
overly optimistic.

BETTER NEWS ON HOUSING FRONT … BUT STILL NOT GOOD


U.S. pending home sales rebounded 2.1% in February after two awful months
but are still down 9.3% from year-ago levels. This has become a notorious
volatile indicator, and the trend is still extremely soft, though it does portend a
bit of rebound in coming months ― but not enough to break the primary path
which is visibly down. There are up to four million homes in foreclosure or in the
pipeline so to be talking about any housing recovery at this juncture is
premature, to say the least.

QE3 WILL COME BUT NOT AS EARLY AS MR. MARKET WOULD LIKE
Portfolio managers as a group are running their funds overweight equities by an
average of 67% relative to their typical benchmarks. And polls show that one-
third of them believe QE3 is coming this summer. We already know that this
Bernanke-led Fed is willing to be extremely aggressive, but as we saw in 2010,
the hurdle is high for quantitative easing. We need (i) signs of a double-dip, (ii) a
stock market correction of at least 15%, and (iii) deflation, not inflation. How on
earth will the Fed be able to do anything at all by then if headline inflation is
running north of 4% and the other central banks of the world are either
snuggling policy or moving in that direction ― unless the central bank really
wants to trash the dollar. We are certainly not inflationists and still see deflation
in credit, real wages and housing prices.

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March 29, 2011 – BREAKFAST WITH DAVE

Gluskin Sheff at a Glance


Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms.
0

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 December 31, 2010, the Firm We have strong and stable portfolio
managed assets of $6.0 billion. management, research and client service
teams. Aside from recent additions, our Our investment
Gluskin Sheff became a publicly traded
Portfolio Managers have been with the interests are directly
corporation on the Toronto Stock
Firm for a minimum of ten years and we
Exchange (symbol: GS) in May 2006 and aligned with those of
have attracted “best in class” talent at all
remains 49% owned by its senior our clients, as Gluskin
levels. Our performance results are those
management and employees. We have Sheff’s management and
of the team in place.
public company accountability and employees are
governance with a private company We have a strong history of insightful collectively the largest
commitment to innovation and service. bottom-up security selection based on client of the Firm’s
fundamental analysis.
Our investment interests are directly investment portfolios.
aligned with those of our clients, as For long equities, we look for companies
Gluskin Sheff’s management and with a history of long-term growth and
employees are collectively the largest stability, a proven track record,
$1 million invested in our
client of the Firm’s investment portfolios. shareholder-minded management and a
Canadian Equity Portfolio
share price below our estimate of intrinsic
We offer a diverse platform of investment in 1991 (its inception
value. We look for the opposite in
strategies (Canadian and U.S. equities, date) would have grown to
equities that we sell short.
Alternative and Fixed Income) and $10.2 million2 on
investment styles (Value, Growth and For corporate bonds, we look for issuers
1 December 31, 2010
Income). with a margin of safety for the payment
versus $6.5 million for the
of interest and principal, and yields which
The minimum investment required to S&P/TSX Total Return
are attractive relative to the assessed
establish a client relationship with the Index over the same
credit risks involved.
Firm is $3 million. period.
We assemble concentrated portfolios -
our top ten holdings typically represent
PERFORMANCE between 25% to 45% of a portfolio. In this
$1 million invested in our Canadian way, clients benefit from the ideas in
Equity Portfolio in 1991 (its inception which we have the highest conviction.
date) would have grown to $10.2 million
2
Our success has often been linked to our
on December 31, 2010 versus $6.5 million long history of investing in under-
for the S&P/TSX Total Return Index followed and under-appreciated small
over the same period. and mid cap companies both in Canada
$1 million usd invested in our U.S. and the U.S.
Equity Portfolio in 1986 (its inception PORTFOLIO CONSTRUCTION
date) would have grown to $12.9 million
usd on December 31, 2010 versus $10.6
2 In terms of asset mix and portfolio For further information,
H

million usd for the S&P 500 Total construction, we offer a unique marriage please contact
Return Index over the same period. between our bottom-up security-specific research@gluskinsheff.com
fundamental analysis and our top-down
Notes: macroeconomic view.
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 Canadian Equity and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses.
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March 29, 2011 – BREAKFAST WITH DAVE

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