David A.

Rosenberg November 22, 2010

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

MARKET MUSINGS & DATA DECIPHERING

Breakfast with Dave

WHILE YOU WERE SLEEPING
IN THIS ISSUE
Equity markets are currently selling off across Europe, but much, though not all,
of Asia did rally in overnight trading (Hang Seng, Shanghai and the Singapore • While you were sleeping:
Straits were notable decliners). The Nikkei advanced 0.9% and has emerged of risk aversion trades for the
most part are unwinding
late as a global outperformer, helped by the modest weakening of the yen. The
given that Ireland has
JGB market has sold off on the back of this move to Japanese equities — the 10- succumbed to EU and IMF
year yields spiked 7bps today to 1.125%, though they are flat to lower here and pressure for a rescue
across Europe so far this morning. package; gold and silver
continue to look good in
Risk aversion trades for the most part are unwinding now that Ireland has this environment of ever-
declining level of faith in
succumbed to EU and IMF pressure for a rescue package for its beleaguered
the integrity of the global
banks — details and conditions of which are still pending (market chatter is financial system
assistance totalling $130 billion). Wasn’t it just a week ago that Ireland said it
didn’t need any external help? And wasn’t it just eight months ago that the • Reality check: with 20-20
hindsight, it is now clear as
Europeans said that the ESFS (European System of Financial Supervisors) was a
to what caused everyone
bazooka that was never going to have to be tapped (shades of Hank?). to hyperventilate back in
early September regarding
Gold and silver continue to look good in this environment of an ever-declining the prospects of a
level of faith in the integrity of the global financial system (gold is up 24% for the sustainable recovery
year and silver has gained 65%). At the same time, some of the commodity • Five risks to the outlook:
currencies are taking it on the chin — New Zealand’s kiwi was just hit by a China, European debt
downward revision to its credit rating outlook by S&P 500 to “negative” from concerns, massive
“stable” and the Canadian loonie has been trading a tad more softly of late, too. tightening in U.S. fiscal
Sterling and the euro are receiving a bid from the pending Irish bailout and the policy, gasoline prices in
the U.S. and the expiration
renewed risk-on trade to kick off the week is bolstering the emerging market FX
of many extended benefits
market as well. in the U.S.

Now that an Irish rescue plan is priced in, the question is whether attention now • Deflation coming: the year
turns to Portugal and Spain. There is also a lot of good news priced in to the started out with the U.S.
core consumer inflation
coming U.S. holiday shopping season and retailers have bulked up this year on rate at 1.8% YoY; now its
inventories and staffing. One possible snag — see Holiday Drivers Face Higher at a record low of 0.6%
Gas Prices in today’s WSJ. Equity market bulls are anticipating a pick-up in job
creation even though it has been productivity gains and labour cost cutting that
have both underpinned the corporate profit revival. Sentiment is still very
bullish, if not complacent. The investment community thinks the lame-duck
Congress will have no choice but to prevent the myriad of tax changes from
seeing the light of day come January 1st — the Bush tax cuts, jobless benefits,
payroll tax goodies, estate taxation and the AMT (Alternative Minimum Tax).

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November 22, 2010 – BREAKFAST WITH DAVE

Equities are at the high end of the 14-month range and only offer value if we do
manage to see double-digit earnings growth in the coming year, which I find Equities are at the high end
unlikely. Corporate bonds are fairly-valued but are no longer cheap. Long-dated of the 14-month range and
U.S. Treasury bonds look very good north of 4% with core inflation heading only offer value if we do
toward zero plus the fact that the security is universally detested, which is good manage to see double-digit
news from a contrary standpoint. The yield on 2-year AAA-rated muni’s is 119% earnings growth in the
of comparable Treasuries, which has only happened two other times in its 20- coming year, which I find
year history, according to Bloomberg, and each time it presented a nice buying
unlikely
opportunity. Supply issues are real but default risks seem to be way overdone.

State and local government cutbacks are a higher prospect than haircuts for
bondholders and as such those companies that have a relatively high
concentration of sales geared towards the lower levels of government may well
be nice “shorting” candidates. So long as China does not overdo it on its
tightening moves — raising reserve requirements is indeed preferable to interest
rate hikes — then commodity prices in general should remain on an uptrend
even if a corrective phase should be expected after the QE2-related surge of the
past few months. There is enough evidence supporting the notion that the Asian
economy has decoupled from the U.S. consumer, and therefore, basic materials
should still be a core holding in any given investment portfolio.

Once we get through this lame-duck session, we will then confront the real deal,
which is an even more polarized legislature. If there is a potential crisis lurking,
it would be in April when the United States hits its prescribed debt ceiling (have
a glance at the article in today’s WSJ titled GOP Ranks Fray on Vote to Raise
Debt Limit), and the GOP (Tea Party members, in any event) is looking for major
budgetary concessions in return for an extension. Shades of 1995? Read Paul
Krugman’s article today for more (There Will be Blood). This prospect is bullish
for volatility and the VIX index right now is quite inexpensive.

REALITY CHECK
While the economic data in
Well, with 20-20 hindsight, it is now crystal clear as to what caused everyone to the U.S. may look a little
hyperventilate back in early September regarding the prospects of a sustainable better, frankly, I doubt that
recovery, just as it seemed as though the equity market was going to head into a we have anything close to
new and lower range. sustainable economic
growth on our hands
First, the Federal Reserve began advertising what became known as QE2 or the
second stage of its quantitative easing program. Then, the mid-term elections in
the U.S. promised to replace uncertainty with gridlock, and the mantra in the
markets was that “gridlock is good”, though I don’t necessarily agree with that
assertion. Then practically everyone believed that the economy could find legs
in the aftermath of the dramatic slowing we saw in the second and third
quarters, especially with the further easing in Fed policy, and while the economic
data may look a little better, frankly, I doubt that we have anything close to
sustainable economic growth on our hands. For those who think we do, I believe
they have to answer for why it is the U.S. economy needs another $600 billion of
asset buying by the Fed or why it is that the extension of the Bush tax cuts is
somehow so vital for the near-term macro backdrop.

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It’s because the economic environment, and not just in the U.S. but in the The economic environment,
developed world as well, is extremely fragile. That is the point. There’s no and not just in the U.S. but in
denying that the stock market rallied spectacularly from the August lows through the developed world as well,
to early November, but it has been a rally based on a lot of speculation and a lot is extremely fragile
of hope, and I’ve never found hope to be a particularly useful investment
strategy. All that said, since the exhaustive moves of November 4th in virtually
every asset class, the markets have been pricing in the likelihood that the Fed
and Congress actually have precious little to offer in terms of providing any
stimulus in the near future. In fact, the political shift from left to right is
characterized by a powerful move toward budget cutting both in Washington and
at the State Houses. Apparently, the political will is being heard that the voters
want their government to practice a frugality similar to what they are attempting
in their own households.

So what I think is being underestimated by the growth bulls is that the fiscal
What I think is being
disarray at the state and local government is a major headwind for the U.S.
underestimated by the
economy, at 13% of GDP it is the second largest contributor to spending outside
growth bulls is that the fiscal
of the American consumer. We will all probably look back a year from now at disarray at the state and
what Cisco had to say last week about how its sales were pinched by the huge local government is a major
cuts from the state and local government sector and come to the conclusion headwind for the U.S.
that this was an important inflection point. And, I want to remind everyone Cisco economy
proved to be a critical inflection point for the stock market in both 2000 and
2007. History doesn’t rhyme, but...

In retrospect, we are coming off a period of extreme positive sentiment where it

was extraordinarily difficult and took tremendous courage to lean against the
consensus on both the direction of the markets and the economy. But, the
extremes now seem very clear, which I expect to be reversed in the intermediate
term, and the divergences at the recent “failed high” in early November are very
reminiscent of what we saw in September 2000 and again in October 2007.
Therefore, I think it would be a mistake to superimpose the rally since the end of
August into the beginning of 2011. There are still plenty of risks, from the
political strife in the U.S., to the renewed fiscal concerns in Europe, to the
intense volatility in the foreign exchange markets, to the rising municipal default
risks south of the border, that it would be totally appropriate, in my view, to
expect some sort of reversal in these risky pro-cyclical trades that worked so well
through most of September and October in advance of the Fed meeting and mid-
term elections.

This begs the question, how well will the economy do without continued life-
How well will the U.S.
support from the government? What if the actions of the government add to the economy do without
contraction that has been ongoing in the private sector? There is still scant continued life-support from
evidence of a vibrant organic recovery 17 months into the statistical GDP the government?
bounce from the lows. At least initially, the reversal of all the risk-on trends in
the markets that dominated the landscape for the past two months suggests
that the pullback that became apparent after the peak in April is likely to be
sustained over the intermediate term.

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The U.S. economy is fragile, with real GDP growth likely to slow to a 1.5% annual
rate this quarter, below the consensus view of 2.6%. The negative fiscal shock Based on momentum and
we are likely to see early in 2011 could well trigger something closer to zero sentiment extremes
growth in the first quarter. In other words, we will very likely again be debating a achieved at the nearby
double-dip scenario in coming months. highs, it seems likely that
the stock market will be on a
In the meantime, core producer prices (which removes the effects of food and declining path, at least
energy) just came in at -0.6% in October, and core consumer prices was through year-end
negative as well to the second decimal place, so evidence of any sustained
inflation at the final stage of production is hard to find. Odds makers should
note that seeing both of these metrics decline in the same month is precisely a
1-in-441 event — we just witnessed history. The labour market picture remains
confusing with a plethora of conflicting data points of late, but nothing on this
file looks very promising. The housing market cannot get out of its own way.
Gasoline prices are pennies away from hitting $3 a gallon. Heavy cutbacks are
coming from state and local governments in the U.S. (see State Tests Limits of
Spending Cuts on the front page of today’s WSJ and States Weigh Ending
Medicaid on page A6 of today’s WSJ). Extended/emergency jobless benefits are
about to lapse at a $70 billion cost to personal income over the next five
months.

Now to the market backdrop. Based on momentum and sentiment extremes

achieved at the nearby highs, it seems likely that the stock market will be on a
declining path, at least through year-end. The number of new lows on the NYSE
rose dramatically last week and the share of stocks trading above their 50-day
moving averages has declined in the past three weeks from 90% to 70%. In
other words, there is less momentum supporting the market than meets the eye
and this same development occurred at the April highs as well.

More fundamentally, the S&P 500 has been locked in a rough 1,000-1,200
range now for 14 months. Most pundits still believe we are in a cyclical bull
market but that is not the case — it has been a sideways market now for over a
year. Moreover, after testing support in July, the market hit resistance levels in
November, so it would seem logical to expect the index to make a run at the low
end of the range. The only question is whether support will hold up once again.

RISKS TO THE OUTLOOK

1. China is getting more active in its policy tightening moves as inflation China is getting more active
pressures intensify. It’s not just food but wages too. Headline inflation, at in its policy tightening
4.4%, is at a 25-month high. The People’s Bank of China (PBOC) just hiked moves as inflation pressures
banking sector reserve ratios by 50 basis points to 18.5% — the second
such increase in the past two weeks and the fifth for the year. This could
intensify. It’s not just food
well keep commodity prices under wraps over the near-term. but wages too
2. European debt concerns will not be fully alleviated just because a rescue
plan has been cobbled together for Ireland as it deals with its banking crisis.
The focus will now likely shift to other basket cases such as Portugal and
Spain. Greece has a two-year lifeline before it defaults. This saga is going
to continue for some time yet.

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3. Massive tightening in U.S. fiscal policy coming via spending cuts and tax
hikes. This is the part of the macro forecast that is not given enough Gasoline prices are about six
attention. See States Raise Payroll Taxes to Repay Loans on page A5 of the cents shy of re-testing the
weekend WSJ.
$3-a-gallon threshold for the
4. Gasoline prices are about six cents shy of re-testing the $3-a-gallon first time since mid October
threshold for the first time since mid October 2008. On a national average 2008
basis, prices at the pump are up 26 cents from a year ago — effectively
draining about $25 billion out of household cash flow. Tack on the coming
extended and emergency jobless benefits that lapse at the end of the month
and you are talking about at least another $30 billion of lost income for the
personal sector in the four quarters. These two effects come to a 1.5
percentage point negative influence on fourth quarter GDP.
5. Many goodies will expire at the end of the year and question marks linger
over whether they will be extended. These range from the Build America
Bond program that subsidized municipal issuance, the Bush-era tax cuts,
the extended/emergency jobless benefits, and the little-known Obama tax
benefit called the Making Work Pay Credit. The last initiative could be
another $61 billion hit to consumer spending; most individuals don’t even
realize they are receiving this money as it is typically received by a reduction
in federal withholding from each paycheck, typically $60 per month or so.

FRUGALITY R.I.P.?
Well, that appears to be the case according to the lead article in this week’s
Barron’s (Off to the Mall). The thesis is that household balance sheets have
moved into much better shape and, as such, the consumer will “soon could be
spending freely.”

Then again, this may be a case of wishful thinking. Only in America is “saving” a Only in America is “saving” a
dirty six-letter word. The Barron’s article is worth reading but what is interesting dirty six-letter word
is that it comes on the heels of a nifty little report out of the New York Fed titled
Have Consumers Become More Frugal?

The conclusion of the NY Fed paper?

“Yes. Holding aside defaults, they are indeed reducing their debts at a pace not
seen over the last ten years” and added that “taken together, the mortgage and
non-mortgage series reported here indicate a change in consumer behaviour
other than delinquency and default.”

Yes, indeed. The crushing blow to household sector balance sheets during the
intense asset price declines of 2008-09 lingers on in terms of the effect it has
exerted on consumer attitudes towards discretionary spending, homeownership
and credit demands.

In the aggregate, household net worth is $12.2 trillion lower today than it was
three years ago at the pre-recession peak — an unprecedented decline of
18.5%. That is about $100,000 per household of lost net worth. Not even a
flashy bear market rally in equities has come close to making up for the wealth
destruction of the down-cycle. We must therefore invoke the Permanent Income
Hypothesis espoused by the legendary Milton Friedman.

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As the realization sets in to households that this loss of wealth is permanent,

and that not even recurring quick fixes by the government and the Federal
Reserve can stop human nature in its tracks, then what happens is that the
changes in consumer behaviour become more entrenched.

CHART 1: NO IMPROVEMENT IN HOUSEHOLD NET WORTH

United States: Household Net Worth
(12-quarter percent change)
60

40

20

-20

-40
55 60 65 70 75 80 85 90 95 00 05 10

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

Baby boomers are indeed shifting from denial to acceptance that their
retirement nest egg is going to be a whole lot smaller than they believed during
the period of linear extrapolation of double-digit growth in real estate valuation Baby boomers are indeed
during the peak of the bubble years. And, this in turn is exerting an ongoing shifting from denial to
impact on the household budget decision-making process. Pundits that do not acceptance that their
see the collapse of housing values and net worth as a critical inflection point, as retirement nest egg is going
it pertains to the discretionary segment of the consumer pie, are missing out on to be a whole lot smaller
something extremely important and are highly likely to draw dangerously than they believed
mistaken conclusions.

The ratio of household net worth to disposable personal income has gone all
the way from 639% at the bubble highs to 472% today. This is where the ratio
was in 1966, 1972, and 1986, when the savings rate was in an 8-10% band
with near consistency. The savings rate is in a rising trend currently, though
not in a straight line up (what is?). At 5.5%, it still has a way to go before it
reaches that level consistent with where the net worth/income ratio is
currently. The savings rate may be a residual from the national accounts data,
but it is still the most behavioural of all the pieces of economic data that come
our way every month or quarter.

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CHART 2: HOUSEHOLD NET WORTH TO DISPOSABLE INCOME NOW AT

472% COMPARED TO 639% AT THE BUBBLE HIGHS
United States: Household Net Worth as a Percent of Disposable Personal Income
(percent)
640

600

560

520

480

440
90 95 00 05 10

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

Owners’ equity in the home has collapsed to below $7 trillion from the peak of
$13.5 trillion. This is a key reason for the decline in net worth and a crucial
factor behind the still uncomfortably high level of mortgage delinquencies and
defaults.

I read a report from my friend and former colleague Richard Bernstein who,
along with others like Brian Belski and Jim Paulsen, claim that this recovery is
turning out to be quite similar to what we saw coming out of the 1990 and 2001
recessions. The difference, of course, is that those recessions barely registered
in terms of declining economic activity, so it would stand to reason that the
recoveries would be tepid. Ordinarily, a decline of what we saw in 2008 and the
first half of 2009 would have been met with a bungee-jump type of recovery so
in fact, the renewal this time around has been extremely tepid and
disappointing.

We see no reason why anyone should sugar coat a situation where employment
is down 7.5 million from where it was when the recession began (down 5.4%).
That is completely abnormal. The number of full-time jobs is down by more than
10 million and after five consecutive months of decline, the level is back to
where it was in December 1999.

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CHART 3: THE CURRENT LEVEL OF FULL-TIME JOBS IS

NOW BACK TO LEVELS SEEN BACK 1999
United States: Full-Time Employment
(millions)
122.5

120.0

117.5

115.0

112.5

110.0

107.5
99 00 01 02 03 04 05 06 07 08 09 10

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

Full-time jobs are the source of sustained confidence and income, and it is
against this backdrop that personal income excluding government handouts is
still $350 billion lower today than it was at the peak. Now how normal is that?

CHART 4: EXCLUDING GOVERNMENT TRANSFERS, PERSONAL INCOME

IS STILL $350BLN LOWER THAN IT WAS AT THE PEAK
United States: Personal Income Excluding Government Transfers
(US$ trillion)
10.6

10.4

10.2

10.0

9.8

9.6
07 08 09 10

Source: Haver Analytics, Gluskin Sheff

Only by the good graces of a declining labour force as discouraged job-seekers

drop out of the market like flies has the unemployment rate managed to avoid
being above 12%. And, only by the long and generous arm of Uncle Sam, who
now contributes about 20% to the personal income pie, has the consumer
managed to buy much more than pasta, soap and toothpaste this cycle
(strategic mortgage defaults have been an equally vital source of stimulus).

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CHART 5: SHARE OF PERSONAL INCOME FROM UNCLE SAM’S

GENEROSITY AT RECORD HIGHS
United States: Current Government Transfers as a Percent of Personal Income
(percent)
19

18

17

16

15

14

13
05 06 07 08 09 10

Source: Haver Analytics, Gluskin Sheff

One added response to my friends listed above. Keep in mind that heading into
the second year of a post-recession recovery the pace of economic activity is
typically running at a 5% annual rate and accelerating; not running in a 1-2%
band and generating recurring talk of a double-dip. Sorry, there is nothing
normal about a household balance sheet contractionary cycle.

With the growing support of the Tea Party, the days of fiscal stimulus seem
behind us. This is why the Ben Bernanke is becoming much more aggressive —
he feels he is the only sheriff in town to prevent the deflation. But all $600
billion of bond buying at the short- and mid-part of the Treasury curve does is
boost GDP growth by 0.25 percentage point and thereby puts a mere two-tenths
of a percentage point dent in the 9.6% unemployment rate. And, as we can see
in all the asset classes, QE2 was already priced in before the fact and since the
last FOMC meeting we have seen equities, bonds and the U.S. dollar all reverse
course to varying degrees.

CHART 6: STATE AND LOCAL GOVERNMENT EMPLOYMENT CONTRACTS

United States
(year-over-year percent change)
4

-1

-2
99 00 01 02 03 04 05 06 07 08 09 10

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

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CHART 7: STATE AND LOCAL GOVERNMENT SPENDING AS WELL

United States: Real State & Local Government Consumption & Gross Investment
(year-over-year percent change)
6

-2
99 00 01 02 03 04 05 06 07 08 09 10

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

DEFLATION COMING
The year started out with the U.S. core (excluding food and energy) consumer
inflation rate at 1.8% YoY; now, it is at a record low 0.6%. This has occurred even
with massive government stimulus, U.S. dollar weakness, a commodity boom and
an ongoing inventory cycle. Imagine what would happen if these developments
reversed course. But the reality is that if the deceleration of the past eight months
persists, then the core inflation rate will become the core deflation rate by the
second quarter of next year. Hence Bernanke’s quest for QE2.

This last down-leg in the core inflation rate has not been due to lower rents
either. We recall all too well when a litany of pundits were calling for higher
inflation because the deceleration was all due to the rental component and that
once this component stabilized or turned around we would see the core inflation
rate reverse course. Bad call.

Excluding shelter, core consumer prices actually deflated 0.05% (to the second
decimal place) and this followed a 0.03% dip in September. The last time this
metric declined in successive months was back in November-December 2008
when the financial system and the economy were imploding. Now, it is simply a
case of a listless recovery failing to redress the vast amount of excess capacity
overhanging the macro scene. In the last three months, 70 basis points has
been shaved off the core excluding shelter inflation rate, which now sits just a
snick south of 1.3% YoY. Back in March, the month the Fed was supposed to be
shrinking its balance sheet if you believed what it had to say a year ago, this rate
was at 2.4% or 110 basis points higher than it is today. Good thing Bernanke et
al did a re-think.

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And, the deceleration has been very broadly based. Core goods prices have
declined 0.24% for two months in a row, despite what commodities and the
dollar have done. The YoY trend is now basically flat — it was 2% last March.
Core services (which exclude energy) have been rising by only 0.1% or lower now
for four months running and the YoY pace of 0.8% is a record low.

CHART 8: SERVICES EXCLUDING ENERGY SERVICES AT A RECORD LOW

United States: CPI Services Excluding Energy Services
(year-over-year percent change)
20

16

12

0
60 65 70 75 80 85 90 95 00 05 10
Source: Haver Analytics, Gluskin Sheff

The intensity and broad-based nature of the disinflation momentum in the U.S.
is quite striking and, I believe, will ultimately prove to be a vital source of support
for the bond market. Just take a look at these sectors that are either deflating
or disinflating:

• New car prices dipped 0.2% MoM last month, the first decline since April.
• Used car prices were down 0.9%, the second falloff in a row and the first
back-to-back decline since the depths of despair in March-April 2009.
• Despite the surge in food costs, grocery chains only managed to raise prices
0.1% last month.
• Higher cotton prices have yet to filter through — apparel prices at the retail
level fell 0.4% and are down in each of the past three months.
• Appliance prices deflated 1.2% in October, the second decline in as many
months; furniture prices are down five months in a row. Clearly, the housing
market has yet to stabilize or these items would still not be falling in price.
• Hotels saw a 1.3% price slide — negative now for three months in a row.
• Electronics prices dropped 0.1% in October and have deflated for four
months running.
• Recreational services prices were off 0.3% and down for two months in a row.

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CHART 9: RECREATION SERVICES ARE STILL DEFLATING

United States: Consumer Price Index: Recreation
(year-over-year percent change)
4

-1

-2
95 00 05 10
Source: Haver Analytics, Gluskin Sheff

• After deflating for just the second time ever in September, education prices
were flat in October. The three-month trend, at -0.5% at an annual rate, is
the lowest this metric has ever been — for most of the past decade, the price
trend here was locked in a 6-8% band, and now it is negative. Goes to show
how desperate the colleges are to draw in cash-strapped students.

CHART 10: PRICE OF EDUCATION IS FALLING

United States: Consumer Price Index: Education
(year-over-year percent change)
7.50

6.75

6.00

5.25

4.50

3.75

3.00
95 00 05 10

Source: Haver Analytics, Gluskin Sheff

• Medical care goods, long a source of inflation, managed just a 0.1% price
increase in October. Medical services were held to a 0.2% gain.
• Communication service prices fell 0.2% in October and are down three
months in a row.
• Tobacco prices dropped 0.3%, the first decline since February.

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• Toy prices slid 0.5% and have fallen now in seven of the past eight months.
• Personal care products slipped 0.3%, the second decline in a row.
• Despite higher fuel costs, airfares have been held to less than a 0.2%
advance in each of the past two months.
• Jewellery prices fell 0.7% in October and are down in three of the past five
months.
• The price of sporting goods was flat after three months of decline. Ditto for
reading materials.
This is getting pretty exhausting.

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client of the Firm’s investment portfolios. shareholder-minded management and a
We offer a diverse platform of investment
strategies (Canadian and U.S. equities,
Alternative and Fixed Income) and
investment styles (Value, Growth and
1 September 30, 2010
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
Equity Portfolio in 1991 (its inception
date) would have grown to $9.1 million
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.
investment portfolios.
For long equities, we look for companies
with a history of long-term growth and
stability, a proven track record,
$1 million invested in our
Canadian Equity Portfolio
share price below our estimate of intrinsic
in 1991 (its inception
value. We look for the opposite in
date) would have grown to
equities that we sell short.
$9.1 million2 on
For corporate bonds, we look for issuers
with a margin of safety for the payment
versus $5.9 million for the
of interest and principal, and yields which
S&P/TSX Total Return
are attractive relative to the assessed
Index over the same
credit risks involved.
period.
We assemble concentrated portfolios —
our top ten holdings typically represent
between 25% to 45% of a 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-followed

on September 30, 2010 versus $5.9 million
and under-appreciated small and mid cap
for the S&P/TSX Total Return Index
companies both in Canada and the U.S.
over the same period.
$1 million usd invested in our U.S. PORTFOLIO CONSTRUCTION
Equity Portfolio in 1986 (its inception In terms of asset mix and portfolio For further information,
date) would have grown to $11.8 million construction, we offer a unique marriage please contact
usd on September 30, 2010 versus $9.6
2
between our bottom-up security-specific questions@gluskinsheff.com
million usd for the S&P 500 Total fundamental analysis and our top-down
Return Index over the same period.
macroeconomic view.

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 Canadian Value and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses. Page 14 of 15
November 22, 2010 – BREAKFAST WITH DAVE
IMPORTANT DISCLOSURES
Copyright 2010 Gluskin Sheff + Associates Inc. (“Gluskin Sheff”). All rights
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readers should be aware that Gluskin Sheff may have a conflict of interest
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accepts any liability whatsoever for any direct, indirect or consequential
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Page 15 of 15