Rosenberg 3 21 11

David A.
Rosenberg March 21, 2011

Chief Economist & Strategist Economic Commentary
research@gluskinsheff.com
MARKET MUSINGS & DATA DECIPHERING
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Japanese stocks
Risk appetite is staging a comeback to kick off the week as investors respond to
the moves by Japan to contain the nuclear crisis, though the situation remains • Homebuilders in a secular
bear market
very serious (see below), continued threats of more coordinated FX intervention
to weaken the yen, and the U.S.- European war now being waged through the air • Industrial production
against Gadhafi and his supporters, which thus far has met with success. sector screens — tech
screens well
Equity prices are up sharply around the globe — China and India being notable • Pricing power and profit
exceptions — while bonds are selling off (the announced AT&T purchase of T- margin developments
Mobile U.S.A. from Deutsche Telekom — creating America’s largest mobile phone
company — has been an added catalyst, though there are undoubtedly going to
be regulatory hurdles to clear). What the stock market doesn’t see, however, is
that the oil price is still moving steadily higher and not occurring amidst
burgeoning demand as much an escalating supply premium due to shuttering
production in Libya and Bahrain. Libyan production has fallen to below 400,000
bpd from 1.6 mbd two months ago and it looks like any normalization is way off
into the future — six months if not longer.
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March 21, 2011 – BREAKFAST WITH DAVE
The powder keg that receives little attention is Bahrain (see more below) where
the government has declared a state of emergency after Saudi Arabia sent in
troops to quash the Shiite protestors, who are also either of Iranian descent or
Iranian supporters. Any tensions affecting the Saudi regime would have even
more dramatic implications for the oil price seeing as the country is by far the
world’s largest crude exporter. It will be interesting to see how excited the U.S.
Administration will be over the prospect of spreading democracy to that part of
the world.
The Nikkei may well be the
The Japanese yen is extending its losses — now at Y81 after testing an most inexpensive market in
unprecedented high Y76.25 on March 17 — and as such is removing the noose the world and at book value
there would seem to be little
from the neck of the country’s large-cap exporters. The Nikkei may well be the
downside from here if any
most inexpensive market in the world and at book value there would seem to be
little downside from here if any — certainly after a collapse last week on par with
the October 1987 meltdown — we have a market priced in already for several
quarters of negative economic growth. But if Bob Farrell’s Rule 1 on mean
reversion comes into play, then coming back into line with the performance of
the global market from here would suggest 20% upside to Japanese equities.
And if there is a clear winner from all this mess (outside of the Prius), it is
liquefied natural gas because Japan was already the world’s top importer and
this status will accelerate and be a key driver of pricing as the country searches
for a substitute for a damaged nuclear grid.
Markets are responding to all the news over the weekend, which does appear to
be constructive. Japan is making headway on its nuclear fight with radiation
levels down and power being restored to parts of the Fukushima Daiichi plant.
And there are early signs of some auto production (Nissan in particular) being
brought back on line. To repeat, the air strikes by the allies over the weekend,
which have decimated Libyan military targets, are reinforcing the positive tone of
the markets. Be that as it may, investors should not take their eye off the ball
because there is very likely going to be lingering problems that could well affect
the global economy and the markets from radiation fears and particularly the
contaminating impact on food supply for the world’s third largest economy. This
can only exacerbate the accelerating inflation in global food prices. Moreover,
we were already hearing reports of stresses being placed on the Japanese
banking system (as an example, Mizuho Financial has been forced to shut down
all of its 38,000 ATMs due to the earthquake). While the news in Libya is
constructive, again we have to reiterate that the real hot spot is what is
happening in Bahrain.
In the past four days, commodity prices have bounced back more than 5%, and In the past four days,
the gains have been broadly based. Some of this is related to farm products on commodity prices have
U.S. weather conditions and rumoured corn buying in China. Some of it is related bounced back more than 5%,
to the rebuilding needs in Japan down the road (legitimate question of where and the gains have been
exactly the rebuilding takes place considering that there will be contamination broadly based
concerns in the affected areas). Security of supply and the realization that
having inventory on hand by global businesses should also help underpin
demand for raw material in general. Of course there is likely to be an ongoing
Page 2 of 24
large geopolitical risk premium in the oil price (crude is up 2% so far today with
WTI at $103/bbl and up 13% YTD), which is great news for energy companies
and the drillers but the impact on profit margins for the overall corporate sector
is definitely a cloud and a hurdle for still-optimistic earnings projections for the
balance of the year. After nearly two years of raised guidance, analyst EPS
upgrades and earnings misses to the high side, look for a reversal starting as
early as the coming quarter. It won’t be long before we hear consumer
discretionary companies lamenting the fact that gasoline prices have soared
40% over the past year.
What we know with certainty is that we are in a period, yet again, like last year,
of heightened market volatility. The Dow has seen eight 100+ point moves in the
past eighteen sessions; this compares with just two in the prior eighteen trading
days. The case for relative-value trades — hedge funds that truly hedge and
focus on capital preservation while simultaneously delivering solid risk-adjusted
returns — is very strong in view of the current and prospective period of
heightened market turbulence.
Precious metals are firming today as well with gold making new highs, breaking
fractionally above the prior peak posted on March 2nd. There seems to be a new
buyer in town — Iran (see page 17 of the today’s FT).
CHART 1: GAS PRICES – HOW BULLISH IS THIS?

LA CARBOB Regular Gasoline
($/gallon)
3.2
2.8
2.4
2.0
1.6
1.2
0.8
09 10
Source: Wall Street Journal /Haver Analytics
Source: Haver Analytics, Gluskin Sheff
Page 3 of 24
CHART 2: HIGHER FOOD & FUEL PRICES ARE DEPRESSING REAL WAGE
GROWTH
United States: Real Average Weekly Earnings for Prod & Nonsupervisory Workers
(six-month percent change annualized)
12
-4
04 05 06 07 08 09 10
Source: Bureau of Labor Statistics /Haver Analytics
EQUITY MARKET BOUNCE-BACK -- DON’T GET TOO EXCITED

Between the put-to-call ratio and the 40% share of stocks trading below their 50-
day moving average, the U.S. stock market became hugely oversold on a short-
term technical basis. Plus we had the skew from the quadruple-witching session.
And the cease-fire announced in Libya and the FX intervention to reverse the
yen’s strength provided some fodder for the shorts to cover.
But the intermediate trend lines have been broken, portfolio managers have
little cash to put to work, and according to a ML-BAC survey, heading into March,
we had a net 67% of global portfolio managers overweight equities against their
normal position. Plus, the world is still a very uncertain place. Beyond Japan, we
have the ongoing debt turmoil in Europe, we have Yemen plunging deeper into
crisis, the Bahrain government moving forcefully against the Shiite
demonstrators, which undoubtedly has caught Iran’s eye, and, of course, the
policy tightening by India and China, which are destined to remove considerable
liquidity from the financial system and dampen growth. GDP growth forecasts
are now coming down after four months of increases and equity analyst EPS
upgrade-downgrade ratio fell in February for the first time since last September
(1.28x in February from 1.38x in January). The Conference Board’s coincident-to-
lagging index has stalled out and we see that the U.S. ECRI weekly leading index
dipped 0.4% in the March 11th week, the second weekly decline in the past
three weeks.
None of this is very bullish. This is a market in corrective mode, so adding to

positions now is fraught with risk. Keep in mind that even with the two-day
recovery, the U.S. stock market was still down 1.9% for the week and off 4.8%
from when all the turbulence began overseas.
Page 4 of 24
In another sign that the market complexion has completely changed, the VIX
index also jumped 22% last week. Despite escalating growth risks, the fact that
Brent crude jumped to above $115 a barrel tells you something about where the
Despite escalating growth
potential lies for oil ... and there would seem to be more upside, just based on risks, the fact that Brent crude
geopolitical risks alone. jumped to above $115 a barrel
tells you something about
A LONG CONCERN LIST
where the potential lies for oil
There are still too many unknowns with regard to the nuclear fallout in Japan. ... and there would seem to be
You read page A8 of the Sunday NYT (Japan Finds Contaminated Food Up to 90 more upside, just based on
Miles From Nuclear Sites) and Worries That Even the Perception of geopolitical risks alone
Contamination Could Taint Food Products and you can see why the effects of
this catastrophe are so far-reaching. The weekend WSJ reported that “miniscule
quantities” of radiation from the Japanese nuclear disaster were detected at a
monitoring station in Sacramento ― people who think this is going to just blow
over are clueless.
Moreover, let’s not forget about all the geopolitical risks in the Middle East. Just
because these developments have moved to page 6 (of the weekend WSJ, for
example), like Bahrain Razes Key Monument, Saudi King Unveils Perks Amid
Unrest and Egypt Reformers Wary Before Vote, does not mean they are
unimportant insofar as what they imply for: (i) the oil price, and (ii) equity risk
premia. The tensions in Bahrain are escalating and likely being fuelled at least in
part by Iran, which would like nothing more than for the turmoil to trigger
instability in Saudi Arabia. A Shiite-led government in Bahrain would be an
unmitigated disaster for the United States (which has a naval base there) and
would most likely send the oil price north of $150 a barrel. Have a look at A
Mideast Triangle on the front page of the Sunday NYT Week in Review section.
ECONOMIC FALLOUT
There is no doubt that global supply chains in the tech sector and in the auto
industry will be affected by the nuclear catastrophe ― see Stress Tests For the
Global Supply Chain on the front page of the Sunday NYT business section ― as
well the article titled A Crisis That Markets Can’t Grasp (this is every bit as much
a Black Swan event as Lehman was). GM has already said it will stop some work
at two European facilities and is considering output cuts in Korea. Honda also
said it will suspend vehicle production as it awaits its suppliers. According to the
WSJ, 30% of its suppliers for its four- and two-wheeled vehicles in the affected
area will be ceasing production indefinitely. Even stock market stalwarts like
Caterpillar said late last week that disruptions to its Japanese supply chain
would exert a dampening influence on its assembly plants elsewhere.
URANIUM PRICE SLIDE IS UNLIKELY TO LAST

Yes, it is true that “dozens” of nuclear reactors (as per the weekend WSJ)
operate on fault lines. Over the near-term, all the angst over nuclear energy and
its safety could put new development on the back burner (but not indefinitely ―
and the weekend FT editorial section seems to get it). But nuclear energy is not
going to go away and the plunge in uranium prices is likely overdone (down 27%
last week), in my opinion.
Page 5 of 24
But for political reasons (see what is happening in California right now, plus
officials in both India and China are reassessing plans for any new nuclear
power plants; Germany is temporarily shuttering seven facilities that went on- So at least on a near-term
line before 1980), one could certainly build a view that emotions will run strong
basis, one would expect to see
the “nuclear renaissance” fade
on this file. So at least on a near-term basis, one would expect to see the
as an investment theme —
“nuclear renaissance” fade as an investment theme. Natural gas and coal prices
natural gas and coal prices are
are the obvious beneficiaries.
the obvious beneficiaries
The commodity complex has come back strong ― much more so than equities.
Most estimates we have seen indicate that the rebuilding of Japan’s damaged
infrastructure will come to nearly $200 billion (far exceeding Kobe) or over 3% of
GDP, which means that in 2012 we can expect to see a growth boom but from a
more depressed level of economic activity. That is going to require a lot of raw
materials, including copper, steel, zinc, nickel and lead. Gold will remain a safe
haven and will benefit from a further move by real short-term U.S. interest rates
into negative terrain ― we have identified a near-50% historical inverse
correlation between the real Fed funds rate and the gold price. News of sharply
higher Chinese imports is lending a bid to the agriculture complex, especially
corn (rebounding more than 10% on Thursday and Friday).
INCOME THEME STILL INTACT

After being sent some of the comments on the blog ZeroHedge, it occurred to
me that there are so many ignorant folks out there who still think of me as a
“perma bear”. That is really a myopic view of the overall strategy I have been
The median age of the 78
espousing for years now. The median age of the 78 million strong baby boomer
million strong baby boomer
cohort is 55 and the era of capital appreciation strategies has swung towards
cohort is 55 and the era of
capital preservation and a focus on generating an economic rent ― especially
capital appreciation strategies
until more compelling value re-enters the equity market sphere. has swung towards capital
preservation and a focus on
With that in mind, it was encouraging to see six of the big U.S. banks take generating an economic rent
advantage of the Fed’s decision to lift its restrictions on Friday and announce
dividend hikes ― these and another three that are mulling it over will help
generate an additional $10 billion of income to investors in these institutions for
the remainder of the year (and the ability to pay out dividends is contingent on
the banks meeting some very stringent stress tests).
Even Cisco is finding religion ― or maybe the limits to its future growth. The
company announced that it will begin to pay out a quarterly dividend of six cents
a share (the company has $40 billion in cash and liquid assets on its balance
sheet), following the trail in the tech space blazed by the likes of Microsoft and
Oracle.
REVERSAL OF FORTUNE
If you have been invested in high-yield bonds for the past two years, then
congratulations are in order.
The sector generated a net positive return of 58% in 2009, 15% in 2010 and
even with the recent giveback, over 3% so far in 2011.
Page 6 of 24
But the complexion of the junk bond market has begun to shift, and this shift
actually started before the flare-ups in the Middle East and North Africa, let
alone the disaster in Japan. In recent months and weeks, the return of ‘cov-lite’
and ‘PIK toggle’ loans was an early sign that a bit too much giddiness was re-
entering this space. And prior to last week, new issue activity was running amok
― up 33% from a year ago. The demand was certainly there with investors
ploughing over $10 billion into high-yield funds year-to-date which was set to
eclipse ― shatter, more like it ― the huge $31.5 billion net inflow in 2010.
Moreover, as a sign that investors were getting a tad too greedy in their search ―
try stretch ― for yield that the share of new issuance this year that was being
accounted for by CCC-rated debt was 24%. This compares to 17% in 2010 and
11% in 2009 when the marketplace was far more discerning and selective. But
high-yield spreads, having reached their historical norm of around 500 basis
points, have begun to widen again given all the global turmoil and attendant
growth risks, and the price, at 103 (as per the Citi high-yield index), is very close
to the record high of 105 hit in January 2004.
So the prospect of more price appreciation and spread narrowing now seems
much more limited than at any other time since the credit rally began over two
years ago. The weekend WSJ cites a variety of large fund managers who are now
in the process of cutting their exposures to bonds rated below single-B. Issuers
also see how the landscape has changed and as such we are seeing deals being
pulled and on a week-to-week basis, new supply cratered 75% last week. So
what is a fixed-income investor going to do? Well, they are already voting with
their feet ― a 14-week run of inflows into high-yield corporate bond funds came
to a thundering stop last week as $470 million was redeemed.
EM bonds may not be a bad
A more adequate substitute right now may be in the emerging market bond
place to look ― they offer high
sphere. Let’s keep in mind that emerging market economies have held in very
yields and in many cases have
well, especially considering how export-sensitive they are. But robust domestic stronger balance sheets than
demand growth has helped pick up the slack. So, EM bonds may not be a bad developed countries
place to look ― they offer high yields and in many cases have stronger balance
sheets than developed countries. Hybrids or balanced funds are very
appropriate for the environment we are in currently.
What about municipal bonds ― a pariah just a short three months ago? State
after state is either raising taxes, cutting spending or going after their public
sector unions in order to redress their fiscal mess. In the first two weeks of
January, the sector was turning in a 2.4% net loss and the turnaround since has
been impressive enough that the muni market is now up 0.1% for the year. Build
America Bonds, “pre-refunded bonds” and revenue bonds backed by a non-
cyclical cash stream look quite attractive. See Municipal Bonds: Avoiding the
Next Blowup on page B9 of the weekend WSJ for some ideas of how to secure a
4.8% yield on an AA+ rated piece of paper.
Page 7 of 24
LOOKING FOR VALUE? TRY JAPANESE STOCKS

This was true before the massive tsunami and earthquake, and just as true now
― yes, GDP is about to take at least a 2% hit but keep in mind that the Japanese
stock market more than fully reflected that prospect at mid-week when it slid
20% in what was the worst decline over such a short time frame since the 1987
crash. Implied volatility on the Nikkei soared from 21 to 70 ― within striking To show just how far the
distance of the 92 peak reached after Lehman collapsed. To show just how far
market went in a classic case
of shooting first and asking
the market went in a classic case of shooting first and asking questions later, at
questions later, at one point
one point last week CDS spreads were priced such that Japan was viewed as a
last week CDS spreads were
greater default risk than Mexico or even Panama. I mean, there is no doubt that priced such that Japan was
Japan has a massive government debt loan (200% of GDP) and that is about to viewed as a greater default
get even larger but 95% of that debt is held by the country’s own residents. risk than Mexico or even
Panama
We are always wary of front covers, but Barron’s may well have this one pegged.
Global markets are now priced at twice book value, double what it is in Japan.
The weekend WSJ made the point that on a 10-year cyclically smoothed basis,
the Nikkei is trading at a P/E multiple of 14.5x, which is about the cheapest the
market has been in over 40 years. As the weekend WSJ points out, the Japanese
and U.K. equity market capitalization levels are roughly the same and yet global
mutual funds and ETFs have 25% less of their assets in Japan (Morningstar
data).
It looks as though the $25 billion coordinated FX intervention effort has been
successful in arresting the strength in the yen (repatriation concerns were likely
overdone to begin with) and what makes this round durable is that it was
accompanied by a huge round of liquidity infusion by the Bank of Japan. And
keep in mind that Japan’s fiscal year-end is March 31st, historically a period
when companies often bring money home, so once we get through the seasonal
effects, it would seem as though the yen will continue on its new weakening
trend ― a much-needed development to offset the deflationary effects from the
nuclear tragedy.
HOMEBUILDERS IN A SECULAR BEAR MARKET

The U.S. housing market remains in the doldrums and as the chart of the group
relative to the S&P 500 illustrates, what we have in the past three years is a
succession of lower highs. A woeful under performance to be sure — and a
sector best to be avoided. But the entire residential real estate sector is not
nearly in as bad shape — especially the rental market and there is a nifty piece
on page C1 of today’s WSJ (Housing Gloom Doesn’t Extend to Rentals)
explaining how supply-demand conditions have improved dramatically with
vacancy rates down to 6.6% from 8% a year ago. While homeownership rates
decline towards the long-run mean, occupancy in the multi-family sector is
coming off the best increases in a decade (58,000 in Q4 according to Reis). The
NAHB’s index of sentiment for the rental sector has also improved to a five-year
high as well. And that is because the demographics and foreclosures and
decline in homeownership rates imply nearly one million new rental households
annually over the next half decade, which is a significant development
considering the available supply on hand right now.
Page 8 of 24
CHART 3: RELATIVE PERFORMANCE OF THE S&P 500 TO THE S&P

HOMEBUILDERS
United States: S&P 500 Homebuilding over S&P 500 Composite
(ratio)
0.36
0.32
0.28
0.24
0.20
0.16
09 10
Source: Haver Analytics
INDUSTRIAL PRODUCTION SECTOR SCREENS – TECH SCREENS WELL

From the U.S. industrial production report, identifying sectors that are running
flat out in terms of capacity utilization rates (spot vs. 10-year average).
Communications equipment; computers/peripherals; machinery; metals,

chemicals, and electrical equipment screen well. Food/beverage makers
deserve honourable mention.
TABLE 1: WHICH SECTORS ARE RUNNING FULL STEAM, WHICH ARE NOT
United States: Industrial Production
Current 10-year Above/Below

reading Average 10-year average
(percent) (percent) (ppt difference)
Communications Equipment 81.0 67.0 14.0
Apparel and Leather 84.6 73.0 11.6
Computer and Peripheral Equipment 86.3 76.1 10.2
Machinery 81.4 73.6 7.8
Computer and Electronic Products 76.7 71.4 5.3
Fabricated Metal Products 78.8 75.0 3.8
Chemicals 76.4 75.1 1.3
Elec Eqpt, Appliances & Components 80.0 78.9 1.1
Mining 88.4 87.9 0.5
Food, Beverage, & Tobacco Products 78.3 78.0 0.3
Furniture and Related Products 73.5 73.6 -0.1
Manufacturing 74.3 74.8 -0.5
Total 76.3 76.9 -0.6
Page 9 of 24
Current 10-year Above/Below

reading Average 10-year average
(percent) (percent) (ppt difference)
Aerospace 69.9 70.7 -0.8

Textile and Product Mills 70.4 71.3 -0.9
Paper 80.2 81.1 -0.9
Semiconductors and Related Equipment 74.0 75.0 -1.0
Petroleum and Coal Products 86.3 88.1 -1.8
Miscellaneous Durable Goods 71.4 73.7 -2.3
Primary Metal 71.8 74.9 -3.1
Motor Vehicles and Parts 65.6 69.2 -3.6
Electric and Gas Utilities 78.0 84.7 -6.7
Wood Products 64.5 71.8 -7.3
Plastics and Rubber Products 67.3 75.6 -8.3
Printing & Related Support Activities 63.5 73.9 -10.4
Nonmetallic Mineral Products 56.8 69.0 -12.2
PRICING POWER AND PROFIT MARGIN DEVELOPMENTS IN THE U.S.

Airlines have pricing power with CPI up 2%-plus for two months in a row, problem
is that jet fuel costs are rising much more rapidly. The ratio between the two is
back to where it was in September 2008.
CHART 4: MARGIN PRESSURE MAY BE SQUEEZED FOR AIRLINES

United States: Airline Fare CPI over Jet Fuel PPI
(ratio)
6
0
90 95 00 05 10
Ditto for food retailers as prices are up 0.8% MoM and an impressive +7.2% at a
seasonally adjusted annual rate over the past three months but retailers can’t
keep up with PPI food costs as the ratio has collapsed to May 1994 levels.
Page 10 of 24
CHART 5: DITTO FOR FOOD RETAILERS

United States: Food at Home CPI over Finished Consumer Goods PPI
(ratio)
1.30
1.25
1.20
1.15
1.10
1.05
1.00
90 95 00 05 10
Restaurant inflation is at +1.6% YoY, while wholesale food inflation is at +7.4%;

again, the margin squeeze here is worth noting.
CHART 6: RESTAURANTS -— THE MARGIN SQUEEZE HERE IS WORTH

NOTING
United States: CPI: Full Service Meals & Snacks
(year-over-year percent change)
4.50
3.75
3.00
2.25
1.50
0.75
98 99 00 01 02 03 04 05 06 07 08 09 10
Hotels had decent pricing power through much of 2010, but pricing power here
is down two months in a row and the year-over-year trend is slowing down.
Page 11 of 24
CHART 7: HOTEL CPI LOSING MOMENTUM

United States: CPI: Other Lodging Away from Home including Hotels & Motels
10
-5
-10
99 00 01 02 03 04 05 06 07 08 09 10
Apparel prices fell 0.9% MoM in February, snuffing out a three-month increase.
Margins must be getting crushed — see the apparel CPI ratio to cotton yarns PPI,
which are now at record lows.
CHART 8: MARGINS MUST BE GETTING CRUSHED

United States: Apparel CPI over Cotton Yarn PPI
(ratio)
1.6
1.4
1.2
1.0
0.8
0.6
06 07 08 09 10
Footwear CPI was down 0.4% in February and down now for three of past four
months; jewellery was flat in poorest pricing performance since last October.
Page 12 of 24
CHART 9: FOOTWEAR PRICES NOW DOWN 3 OF THE PAST 4 MONTHS

United States: CPI: Footwear
(4-month percent change at an annual rate)
10
-5
-10
00 01 02 03 04 05 06 07 08 09 10
New auto prices jumped 1% in February, and posted its best month since
October 2009 and ended a four month string of declines. Note that the price
trend is rising; the industrial production data also showed another 4% MoM
increase in February, so volumes have been strong too.
CHART 10: NEW AUTO PRICES JUMPED

United States: CPI: New Vehicles
6
-2
-4
06 07 08 09 10
Page 13 of 24
Auto parts pricing is doing even better than new vehicle pricing.
CHART 11: AUTO PARTS PRICING IS DOING EVEN BETTER

United States: CPI: Motor Vehicle Parts & Equipment
8
0
06 07 08 09 10
Medical care — goods and services — are disinflating fast, especially hospital
and related services … especially the HMOs.
CHART 12: MEDICAL CARE SERVICES ARE DISINFLATING FAST …

United States: CPI: Medical Care Services
5.5
5.0
4.5
4.0
3.5
3.0
2.5
06 07 08 09 10
Page 14 of 24
CHART 13: … ESPECIALLY HMOs

United States: CPI: Hospital & Related Services
9.00
8.25
7.50
6.75
6.00
5.25
06 07 08 09 10
There is a steady growth in movie theatres ticket pricing, which is up

sequentially three months running and the year-over-year trend back above 2%.
And toy stores down 0.1% in pricing, down in four of past five months. Note that
electronics stores saw a 0.5% CPI increase in February — this is the second
month in a row of positive pricing and the best since October 2007.
CHART 14: STEADY GROWTH IN MOVIE THEATRE PRICES

United States: CPI: Admission to Movies, Theatres, & Concerts
6
-2
06 07 08 09 10
Page 15 of 24
Book stores saw a price increase of 0.3% MoM and are now up for three months
in a row, and the year-over-year is trend rebounding nicely.
CHART 15: BOOK STORES REBOUNDING NICELY

United States: CPI: Recreational Reading Materials
6
-2
00 01 02 03 04 05 06 07 08 09 10
Despite FedEx’s announcement, delivery pricing trends are slowing down visibly.
CHART 16: DELIVERY PRICING TRENDS ARE SLOWING DOWN VISIBLY

United States: CPI: Delivery Services
22.5
15.0
7.5
0.0
-7.5
-15.0
00 01 02 03 04 05 06 07 08 09 10
Shaded areas represent periods U.S. recession
Page 16 of 24
The pricing trends for sporting goods and pets products/services looking much
better. Just look at the charts below.
CHART 17: PRICING TRENDS LOOKING MUCH BETTER

FOR SPORTING GOODS …
United States: CPI: Sporting Goods
6
-2
-4
00 01 02 03 04 05 06 07 08 09 10
CHART 18: … DITTO FOR PETS PRODUCTS/SERVICES

United States: CPI: Pets, Pet Products and Services
12
10
0
00 01 02 03 04 05 06 07 08 09 10
Page 17 of 24
CPI for sundries (proxy for drug store pricing power) also looking a tad better.
CHART 19: PRICING TRENDS FOR SUNDRIES ALSO LOOKING BETTER

United States: CPI: Personal Care Product
4
-1
-2
00 01 02 03 04 05 06 07 08 09 10
Housing remains in the dumps but interesting to see home

improvement/related CPI on a nice recovery path — it’s been nearly two years
since we saw two months of back to back gains.
CHART 20: PRICING POWER COMING BACK FOR HOUSE FURNISHINGS

United States: CPI: Household Furnishings and Operation
4
-2
-4
00 01 02 03 04 05 06 07 08 09 10
Page 18 of 24
From the U.S. PPI report, the sectors below have the most compelling pricing
trends.
Food producers
CHART 21: FOOD PRODUCERS SEEING GREAT PRICING POWER
United States: PPI: Finished Consumer Foods
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
08 09 10
Construction machinery
CHART 22: STRONG PRICING TREND IN THE CONSTRUCTION
MACHINERY AND EQUIPMENT SECTOR
United States: PPI: Construction Machinery and Equipment
6
-2
08 09 10
Page 19 of 24
Agriculture equipment
CHART 23: THE PRICING TREND FOR AG EQUIPMENT
United States: PPI: Agricultural Machinery & Equipment
7
1
08 09 10
Motor vehicle parts

CHART 24: MOTOR VEHICLE PARTS PRODUCERS SEEING
GOOD PRICING POWER
United States: PPI: Motor Vehicle Parts
3.00
2.25
1.50
0.75
0.00
-0.75
08 09 10
Page 20 of 24
Jewellery manufacturers
CHART 25: JEWELLERS HAVE PRICING POWER
United States: PPI: Jewellery
20
16
12
-4
08 09 10
Tobacco producers
CHART 26: PPI FOR TOBACCO PRODUCTS RUNNING AT A 7.5% RATE
United States: PPI: Tobacco Products
10
0
08 09 10
Page 21 of 24
Power transmission equipment makers

CHART 27: POWER TRANSMISSION MAKERS PPI TRENDING UP
United States: PPI: Mechanical Power Transmission Equipment
12.5
10.0
7.5
5.0
2.5
0.0
-2.5
08 09 10
Tires/tubing
CHART 28: GOOD PRICING POWER FOR TIRES
United States: PPI: Tires, Tubes, Treads and Others
16
12
-4
08 09 10
Page 22 of 24
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 questions@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.
Page 23 of 24
IMPORTANT DISCLOSURES
Copyright 2011 Gluskin Sheff + Associates Inc. (“Gluskin Sheff”). All rights In accordance with rules established by the U.K. Financial Services Authority,
reserved. macroeconomic analysis is considered investment research.
This report may provide information, commentary, and discussion of issues Materials prepared by Gluskin Sheff research personnel are based on public
relating to the state of the economy and the capital markets. All opinions, information. Facts and views presented in this material have not been
projections and estimates constitute the judgment of the author as of the reviewed by, and may not reflect information known to, professionals in
date of the report and are subject to change without notice. Gluskin Sheff is other business areas of Gluskin Sheff.
under no obligation to update this report and readers should therefore
assume that Gluskin Sheff will not update any fact, circumstance or opinion To the extent this report discusses any legal proceeding or issues, it has not
contained in this report. 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
The content of this report is provided for discussion purposes only. Any law relating to the subject matter of this report. Gluskin Sheff research
forward looking statements or forecasts included in the content are based personnel’s knowledge of legal proceedings in which any Gluskin Sheff
on assumptions derived from historical results and trends. Actual results entity and/or its directors, officers and employees may be plaintiffs,
may vary from any such statements or forecasts. No reliance should be defendants, co—defendants or co—plaintiffs with or involving companies
placed on any such statements or forecasts when making any investment mentioned in this report is based on public information. Facts and views
decision, and no investment decisions should be made based on the presented in this material that relate to any such proceedings have not
content of this report. been reviewed by, discussed with, and may not reflect information known to,
professionals in other business areas of Gluskin Sheff in connection with
This report is not intended to provide personal investment advice and it the legal proceedings or matters relevant to such proceedings.
does not take into account the specific investment objectives, financial
situation and particular needs of any specific person. Under no The information herein (other than disclosure information relating to Gluskin
circumstances does any information represent a recommendation to buy or Sheff and its affiliates) was obtained from various sources and Gluskin
sell securities or any other asset, or otherwise constitute investment advice. Sheff does not guarantee its accuracy. This report may contain links to
Investors should seek financial advice regarding the appropriateness of third—party websites. Gluskin Sheff is not responsible for the content of any
investing in specific securities or financial instruments and implementing third—party website or any linked content contained in a third—party website.
investment strategies discussed or recommended in this report. Content contained on such third—party websites is not part of this report
and is not incorporated by reference into this report. The inclusion of a link
Gluskin Sheff may own, buy, or sell, on behalf of its clients, securities of in this report does not imply any endorsement by or any affiliation with
issuers that may be discussed in or impacted by this report. As a result, Gluskin Sheff.
readers should be aware that Gluskin Sheff may have a conflict of interest
that could affect the objectivity of this report. Gluskin Sheff portfolio Gluskin Sheff reports are distributed simultaneously to internal and client
managers may hold different views from those expressed in this report and websites and other portals by Gluskin Sheff and are not publicly available
they are not obligated to follow the investments or strategies recommended materials. Any unauthorized use or disclosure is prohibited.
by this report.
TERMS AND CONDITIONS OF USE
This report should not be regarded by recipients as a substitute for the
exercise of their own judgment and readers are encouraged to seek Your receipt and use of this report is governed by the Terms and Conditions
independent, third-party research on any companies discussed or impacted of Use which may be viewed at www.gluskinsheff.com/terms.aspx
by this report.
This report is prepared for the exclusive use of Gluskin Sheff clients,
Securities and other financial instruments discussed in this report are not subscribers to this report and other individuals who Gluskin Sheff has
insured and are not deposits or other obligations of any insured depository determined should receive this report. This report may not be redistributed,
institution. Investments in general and, derivatives, in particular, involve retransmitted or disclosed, in whole or in part, or in any form or manner,
numerous risks, including, among others, market risk, counterparty default without the express written consent of Gluskin Sheff.
risk and liquidity risk. No security, financial instrument or derivative is
YOU AGREE YOU ARE USING THIS REPORT AND THE GLUSKIN SHEFF
suitable for all investors. In some cases, securities and other financial
SUBSCRIPTION SERVICES AT YOUR OWN RISK AND LIABILITY. NEITHER
instruments may be difficult to value or sell and reliable information about
GLUSKIN SHEFF, NOR ANY DIRECTOR, OFFICER, EMPLOYEE OR AGENT OF
the value or risks related to the security or financial instrument may be
GLUSKIN SHEFF, ACCEPTS ANY LIABILITY WHATSOEVER FOR ANY DIRECT,
difficult to obtain. Investors should note that income from such securities
INDIRECT, CONSEQUENTIAL, MORAL, INCIDENTAL, COLLATERAL OR SPECIAL
and other financial instruments, if any, may fluctuate and that the price or
DAMAGES OR LOSSES OF ANY KIND, INCLUDING, WITHOUT LIMITATION,
value of such securities and instruments may rise or fall and, in some cases,
THOSE DAMAGES ARISING FROM ANY DECISION MADE OR ACTION TAKEN
investors may lose their entire principal investment. Past performance is not
BY YOU IN RELIANCE ON THE CONTENT OF THIS REPORT, OR THOSE
necessarily a guide to future performance.
DAMAGES RESULTING FROM LOSS OF USE, DATA OR PROFITS, WHETHER
Foreign currency rates of exchange may adversely affect the value, price or FROM THE USE OF OR INABILITY TO USE ANY CONTENT OR SOFTWARE
income of any security or financial instrument mentioned in this report. OBTAINED FROM THIRD PARTIES REQUIRED TO OBTAIN ACCESS TO THE
Investors in such securities and instruments effectively assume currency CONTENT, OR ANY OTHER CAUSE, EVEN IF GLUSKIN SHEFF IS ADVISED OF
risk. THE POSSIBILITY OF SUCH DAMAGES OR LOSSES AND EVEN IF CAUSED BY
ANY ACT, OMISSION OR NEGLIGENCE OF GLUSKIN SHEFF OR ITS
Any information relating to the tax status of financial instruments discussed DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS AND EVEN IF ANY OF
herein is not intended to provide tax advice or to be used by anyone to THEM HAS BEEN APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES
provide tax advice. Investors are urged to seek tax advice based on their OCCURRING.
particular circumstances from an independent tax professional.
If you have received this report in error, or no longer wish to receive this
Individuals identified as economists in this report do not function as report, you may ask to have your contact information removed from our
research analysts. Under U.S. law, reports prepared by them are not distribution list by emailing research@gluskinsheff.com.
research reports under applicable U.S. rules and regulations.
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David A.

Rosenberg March 21, 2011

MARKET MUSINGS & DATA DECIPHERING

Breakfast with Dave

• Uranium price slide is

WHILE YOU WERE SLEEPING • Looking for value? Try

Please see important disclosures at the end of this document.

CHART 1: GAS PRICES – HOW BULLISH IS THIS?

EQUITY MARKET BOUNCE-BACK -- DON’T GET TOO EXCITED

None of this is very bullish. This is a market in corrective mode, so adding to

URANIUM PRICE SLIDE IS UNLIKELY TO LAST

INCOME THEME STILL INTACT

LOOKING FOR VALUE? TRY JAPANESE STOCKS

HOMEBUILDERS IN A SECULAR BEAR MARKET

CHART 3: RELATIVE PERFORMANCE OF THE S&P 500 TO THE S&P

INDUSTRIAL PRODUCTION SECTOR SCREENS – TECH SCREENS WELL

Communications equipment; computers/peripherals; machinery; metals,

Current 10-year Above/Below

Current 10-year Above/Below

Aerospace 69.9 70.7 -0.8

PRICING POWER AND PROFIT MARGIN DEVELOPMENTS IN THE U.S.

CHART 4: MARGIN PRESSURE MAY BE SQUEEZED FOR AIRLINES

CHART 5: DITTO FOR FOOD RETAILERS

Restaurant inflation is at +1.6% YoY, while wholesale food inflation is at +7.4%;

CHART 6: RESTAURANTS -— THE MARGIN SQUEEZE HERE IS WORTH

CHART 7: HOTEL CPI LOSING MOMENTUM

CHART 8: MARGINS MUST BE GETTING CRUSHED

CHART 9: FOOTWEAR PRICES NOW DOWN 3 OF THE PAST 4 MONTHS

CHART 10: NEW AUTO PRICES JUMPED

CHART 11: AUTO PARTS PRICING IS DOING EVEN BETTER

CHART 12: MEDICAL CARE SERVICES ARE DISINFLATING FAST …

CHART 13: … ESPECIALLY HMOs

There is a steady growth in movie theatres ticket pricing, which is up

CHART 14: STEADY GROWTH IN MOVIE THEATRE PRICES

CHART 15: BOOK STORES REBOUNDING NICELY

CHART 16: DELIVERY PRICING TRENDS ARE SLOWING DOWN VISIBLY

CHART 17: PRICING TRENDS LOOKING MUCH BETTER

CHART 18: … DITTO FOR PETS PRODUCTS/SERVICES

CHART 19: PRICING TRENDS FOR SUNDRIES ALSO LOOKING BETTER

Housing remains in the dumps but interesting to see home

CHART 20: PRICING POWER COMING BACK FOR HOUSE FURNISHINGS

Motor vehicle parts

Power transmission equipment makers

Gluskin Sheﬀ at a Glance

OVERVIEW INVESTMENT STRATEGY & TEAM

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