special report year ahead 121609

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David A. Rosenberg December 16, 2009Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Special Report Year Ahead: Can YouHandle the Truth?

Its that time of the year when sell-side research departments publish their

Year-Ahead Reports (as I once did in the not-too-distant past); as do all the

financial magazines.

After countless emails and

phone conversations, I

realized that there was a

high expectation that I

publish a year-ahead

report

I realized after countless emails and phone conversations (in that order) that there

is a very high expectation that I publish one too. I honestly have no intention of

publishing a specific set of forecasts in my current role as the Chief Economist and

Strategist for Gluskin Sheff for public consumption the granularity of myrecommendations is reserved for our Investment team and our client base. Be

that as it may, I am more than happy to comment on what I see as an emerging

consensus and my general view on the direction of the economy and the markets

in the coming year without getting into too much detail or numerical forecasts,

which are the domain of the sell-side macro teams globally.

At the outset, let it be known that when I read everyone elses year-ahead

prognostications, all I can think of is, where do I store this stuff for a year so I

can look back and say That was so wrong!. Its not that the reports are always

bullish every year; it is that they seem so contrived. And, as I mentioned in the

December 10th edition of Breakfast with Dave, this year, probably like most

years, there seems to be a remarkable level of agreement. Based on my

reading, here is what I conclude the consensus views are as we head into 2010:

Having read various Year-

Ahead Reports, it sure

seems like there is a

remarkable level of

agreement for 2010

Muted recovery, but positive growth, for sure! No risk of a double dip. Equity markets up! A barbell strategy of domestic multinational blue chips and emerging market

equities.

The U.S. dollar isneutral, but we did locate more bulls than bears (so muchfor the carry trade thesis).

Positive on commodities for the most part. Concerned about government balance sheets, and therefore Bearish on long term government bonds because they are the competition

and, after all, who would tie their money up for 10 years at 3.5% when youcan lose 22% in stocks? And, therefore

Bullish on spread product (as long as its not long-term). And, therefore Really comfortable with high yield (just for the coupon and the view that

default rates will come down).

Certain that volatility will not be an impediment. The Fed will begin to raise rates in the second half of the year, but that this

will have no impact since they will still be low.

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc. is one of Canadas pre-eminent wealth management firms. Founded in 1984 and focused primarily on high networth 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,

visitwww.gluskinsheff.com


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December 16, 2009 SPECIAL REPORT YEAR AHEAD

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Perhaps inflation is a consensus forecast but deflation is the present day reality

and often lingers for years following a busted asset and credit bubble of the

magnitude we have endured over the past two years. The fact that Chinas

voracious appetite for basic materials will continue to exert upward pressure on

commodity prices does not detract from this view, especially given the

widespread excess capacity in the manufacturing sector and the new frugality

that has gripped, and in many cases, been embraced by the retail sector. Higher

raw material prices, owing to developments in Asia as opposed to demand

pressures here at home, will prove to be a sustained source of profit margin

compression for many sectors and companies linked to finished consumer

goods and services.

Perhaps inflation is a

consensus forecast, butdeflation is the present

day reality

So, much of what I have read in various Year-Ahead Reports predict corporate

earnings, GDP growth here and abroad, interest rates and relative values of

currencies. As I mentioned earlier, the error term is bound to be very wide in this

new paradigm (since WWII) of a secular credit collapse. GDP growth in 1934

was 10%, but the Depression wasnt over until 1940.

Since 1989, the Japanese stock market has had no fewer than four 50%-plus

rallies and there still has been no period of growth that can be called a

sustained expansion. Today, we have our own special set of conditions and it is

bound to be tricky as is typical during a post-bubble credit collapse, no matter

how intense the government reaction. Prematurely committing to the risk trade

is probably going to be the most lamentable action over the next few years.

Suffice it to say, we believe that the dominant focus will be on capital

preservation and income orientation, whether that be in bonds, hybrids, hedge

fund strategies, and a consistent focus on reliable dividend growth and dividend

yield would seem to be in order. To reiterate, I see the range of outcomes in the

financial markets and the economy to be extremely wide at the current time.

But one conclusion I think we can agree on is the need to maintain defensive

strategies and minimize volatility and downside risks as well as to focus on

where the secular fundamentals are positive such, as in fixed-income and in

equity sectors that lever off the commodity sector.

We believe that the

dominant focus thiscoming year will be on

capital preservation and

income orientation

This, in turn, underscores my primary focus of favouring Canadian dollar

based investments over the U.S. because at no time in my professional life

have the downside risks economic, fiscal, financial and political been so

low on a relative basis and the upside potential so high as is the case today.

The near-2,000 basis point gap this year between the TSX and the S&P 500

the former leading should be taken in the context of being just past thehalfway point of a secular (ie, 16-18 year) period of outperformance. Northern

exposure never felt this hot.


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Gluskin Sheffat a Glance

Gluskin Sheff+ Associates Inc. is one of Canadas pre-eminent wealth management firms.Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to theprudent stewardship of our clients wealth through the delivery of strong, risk-adjustedinvestment returns together with the highest level of personalized client service.OVERVIEW

As of September30, 2009, the Firmmanaged assets of$5.0 billion.

Gluskin Sheff became a publicly tradedcorporation on the Toronto StockExchange (symbol: GS) in May2006 andremains 65% owned by its senior

management and employees. We havepublic company accountability andgovernance with a private companycommitment to innovation and service.

Our investment interests are directlyaligned with those of our clients, asGluskin Sheffs management andemployees are collectively the largestclient of the Firms investment portfolios.

We offer a diverse platform of investmentstrategies (Canadian and U.S. equities,Alternative and Fixed Income) andinvestment styles (Value, Growth and

Income).1

The minimum investment required toestablish a client relationship with theFirm is $3 million for Canadian investorsand $5 million for U.S. & Internationalinvestors.

PERFORMANCE

$1 million invested in our Canadian ValuePortfolio in 1991 (its inception date)

would have grown to $15.5 million2

onSeptember 30, 2009 versus $9.7millionfor the S&P/TSX Total Return Index

over the same period.$1 million usd invested in our U.S.Equity Portfolio in 1986 (its inceptiondate) would have grown to $11.2 millionusd

2on September 30, 2009 versus $8.7

million usd for the S&P500TotalReturn Index over the same period.

INVESTMENT STRATEGY & TEAM

We have strong and stable portfoliomanagement, research and client serviceteams. Aside from recent additions, ourPortfolio Managers have been with theFirm for a minimum of ten years and wehave attracted best in class talent at all

levels. Our performance results are thoseof the team in place.

Our investmentinterests are directlyaligned with those ofour clients, as Gluskin

Sheffs management andemployees arecollectively the largestclient of the Firmsinvestment portfolios.

$1 million invested in our

Canadian Value Portfolio

in 1991 (its inception

date) would have grown to

$15.5 million2 on

September 30, 2009

versus $9.7 million for the

S&P/TSX Total Return

Index over the same

period.

We have a strong history of insightfulbottom-up security selection based onfundamental analysis. For long equities, welook for companies with a history of long-term growth and stability, a proven trackrecord, shareholder-minded managementand a share price below our estimate ofintrinsic value. We look for the opposite inequities that we sell short. For corporatebonds, we look for issuers with a margin ofsafety for the payment of interest andprincipal, and yields which are attractive

relative to the assessed credit risks involved.

We assemble concentrated portfolios our top ten holdings typicallyrepresent between 25% to 45% of aportfolio. In this way, clients benefitfrom the ideas in which we have thehighest conviction.

Our success has often been linked to ourlong history of investing in under-followed and under-appreciated smalland mid cap companies both in Canadaand the U.S.

PORTFOLIO CONSTRUCTION

For further information,

please contact

[email protected]

In terms of asset mix and portfolioconstruction, we offer a unique marriagebetween our bottom-up security-specificfundamental analysis and our top-downmacroeconomic view, with the notedaddition of David Rosenberg as ChiefEconomist & Strategist.

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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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IMPORTANT DISCLOSURES

Copyright 2009 Gluskin Sheff + Associates Inc. (Gluskin Sheff). All rights

reserved. This report is prepared for the use of Gluskin Sheff clients andsubscribers to this report and may not be redistributed, retransmitted ordisclosed, in whole or in part, or in any form or manner, without the expresswritten consent of Gluskin Sheff. Gluskin Sheff reports are distributedsimultaneously to internal and client websites and other portals by GluskinSheff and are not publicly available materials. Any unauthorized use ordisclosure is prohibited.

Gluskin Sheff may own, buy, or sell, on behalf of its clients, securities ofissuers that may be discussed in or impacted by this report. As a result,readers should be aware that Gluskin Sheff may have a conflict of interest

that could affect the objectivity of this report. This report should not beregarded by recipients as a substitute for the exercise of their own judgmentand readers are encouraged to seek independent, third-party research onany companies covered in or impacted by this report.

Individuals identified as economists do not function as research analystsunder U.S. law and reports prepared by them are not research reports underapplicable U.S. rules and regulations. Macroeconomic analysis isconsidered investment research for purposes of distribution in the U.K.

under the rules of the Financial Services Authority.

Neither the information nor any opinion expressed constitutes an offer or aninvitation to make an offer, to buy or sell any securities or other financialinstrument or any derivative related to such securities or instruments (e.g.,options, futures, warrants, and contracts for differences). This report is notintended to provide personal investment advice and it does not take intoaccount the specific investment objectives, financial situation and theparticular needs of any specific person. Investors should seek financialadvice regarding the appropriateness of investing in financial instrumentsand implementing investment strategies discussed or recommended in thisreport and should understand that statements regarding future prospectsmay not be realized. Any decision to purchase or subscribe for securities inany offering must be based solely on existing public information on suchsecurity or the information in the prospectus or other offering documentissued in connection with such offering, and not on this report.

Securities and other financial instruments discussed in this report, orrecommended by Gluskin Sheff, are not insured by the Federal DepositInsurance Corporation and are not deposits or other obligations of anyinsured depository institution. Investments in general and, derivatives, inparticular, involve numerous risks, including, among others, market risk,counterparty default risk and liquidity risk. No security, financial instrumentor derivative is suitable for all investors. In some cases, securities andother financial instruments may be difficult to value or sell and reliableinformation about the value or r isks related to the security or financialinstrument may be difficult to obtain. Investors should note that incomefrom such securities and other financial instruments, if any, may fluctuateand that price or value of such securities and instruments may rise or fall

and, in some cases, investors may lose their entire principal investment.

Past performance is not necessarily a guide to future performance. Levelsand basis for taxation may change.

Foreign currency rates of exchange may adversely affect the value, price orincome of any security or financial instrument mentioned in this report.Investors in such securities and instruments effectively assume currencyrisk.

Materials prepared by Gluskin Sheff research personnel are based on publicinformation. Facts and views presented in this material have not beenreviewed by, and may not reflect information known to, professionals inother business areas of Gluskin Sheff. To the extent this report discussesany legal proceeding or issues, it has not been prepared as nor is itintended to express any legal conclusion, opinion or advice. Investorsshould consult their own legal advisers as to issues of law relating to thesubject matter of this report. Gluskin Sheff research personnels knowledgeof legal proceedings in which any Gluskin Sheff entity and/or its directors,officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based onpublic information. Facts and views presented in this material that relate to

any such proceedings have not been reviewed by, discussed with, and maynot reflect information known to, professionals in other business areas ofGluskin Sheff in connection with the legal proceedings or matters relevant

to such proceedings.

Any information relating to the tax status of financial instruments discussedherein is not intended to provide tax advice or to be used by anyone toprovide tax advice. Investors are urged to seek tax advice based on theirparticular circumstances from an independent tax professional.

The information herein (other than disclosure information relating to GluskinSheff and its affiliates) was obtained from various sources and GluskinSheff does not guarantee its accuracy. This report may contain links to

third-party websites. Gluskin Sheff is not responsible for the content of anythird-party website or any linked content contained in a third-party website.Content contained on such third-party websites is not part of this report andis not incorporated by reference into this report. The inclusion of a link in

this report does not imply any endorsement by or any affiliation with GluskinSheff.

All opinions, projections and estimates constitute the judgment of theauthor as of the date of the report and are subject to change without notice.Prices also are subject to change without notice. Gluskin Sheff is under noobligation to update this report and readers should therefore assume thatGluskin Sheff will not update any fact, circumstance or opinion contained in

this report.

Neither Gluskin Sheff nor any director, officer or employee of Gluskin Sheffaccepts any liability whatsoever for any direct, indirect or consequentialdamages or losses arising from any use of this report or its contents.

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special report year ahead 121609

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