Rosenberg 3 21 11

8/7/2019 Rosenberg 3 21 11

1/24

David A. Rosenberg March 21, 2011Chief Economist & Strategist Economic [email protected]

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,

visit www.gluskinsheff.com

MARKET MUSINGS & DATA DECIPHERING

Breakfast with DaveBREAKFAST WITH DAVE FREE TRIAL IS ENDING MARCH 30

Since first publishingBreakfast with Dave when I started with Gluskin Sheff +

Associates back in May 2009, we had always notified our readership that the

report was going to be made available on a free trial basis. For clients of our

firm, the report is still going to be made available for free. But for non-clients, the

free trial period will finish by the end of March. At that time, the Breakfast (and

other meals) with Dave will become a paid subscription service with an annual

fee of CAD $1,000.

If you do plan on subscribing, we want you to know that the Breakfast with Daveresearch reports will look exactly the same but for security reasons will be using

a secure PDF format. This new security will require a FileOpen software plug-in

to be installed on your computer, and as part of the security process all

subscribers will require a personal registration file from Gluskin Sheff to be able

to open and read my Breakfast with Dave reports.

To subscribe immediately, please visit our new Research section on the

Gluskin Sheff website.

Watch for more news on these changes in my upcoming reports.

WHILE YOU WERE SLEEPING

Risk appetite is staging a comeback to kick off the week as investors respond tothe moves by Japan to contain the nuclear crisis, though the situation remains

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

against Gadhafi and his supporters, which thus far has met with success.

Equity prices are up sharply around the globe China and India being notable

exceptions while bonds are selling off (the announced AT&T purchase of T-

Mobile U.S.A. from Deutsche Telekom creating Americas largest mobile phone

company has been an added catalyst, though there are undoubtedly going to

be regulatory hurdles to clear). What the stock market doesnt 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 400,000bpd from 1.6 mbd two months ago and it looks like any normalization is way off

into the future six months if not longer.

IN THIS ISSUE

Breakfast with Dave freetrial is ending March 30

While you were sleeping:risk appetite is staging acomeback; equity pricesare up sharply around theglobe: Japanese yen isextending its loss

Equity market bounce-back dont get tooexcited

A long concern list Economic fallout Uranium price slide is

unlikely to last

Income theme still intact Reversal of fortune Looking for value? Try

Japanese stocks

Homebuilders in a secularbear market

Industrial productionsector screens techscreens well

Pricing power and profitmargin developments

8/7/2019 Rosenberg 3 21 11

2/24

March 21, 2011 BREAKFAST WITH DAVE

Page 2 of 24

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

worlds 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 Japanese yen is extending its losses now at Y81 after testing an

unprecedented high Y76.25 on March 17 and as such is removing the noose

from the neck of the countrys large-cap exporters. The Nikkei may well be the

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 Farrells 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 worlds 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 worlds 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%, andthe gains have been broadly based. Some of this is related to farm products on

U.S. weather conditions and rumoured corn buying in China. Some of it is related

to the rebuilding needs in Japan down the road (legitimate question of where

exactly the rebuilding takes place considering that there will be contamination

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

The Nikkei may well be themost inexpensive market inthe world and at book valuethere would seem to be littledownside from here if any

In the past four days,commodity prices havebounced back more than 5%,and the gains have beenbroadly based

8/7/2019 Rosenberg 3 21 11

3/24


Page 3 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 wont 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 todays FT).

CHART 1: GAS PRICES HOW BULLISH IS THIS?

LA CARBOB Regular Gasoline($/gallon)

1009

3.2

2.8

2.4

2.0

1.6

1.2

0.8

Source: Haver Analytics, Gluskin Sheff

8/7/2019 Rosenberg 3 21 11

4/24


Page 4 of 24

CHART 2: HIGHER FOOD & FUEL PRICES ARE DEPRESSING REAL WAGEGROWTH

United States: Real Average Weekly Earnings for Prod & Nonsupervisory Workers

(six-month percent change annualized)

10090807060504

12

8

4

0

-4


EQUITY MARKET BOUNCE-BACK -- DONT 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

yens strength provided some fodder for the shorts to cover.

But the intermediate trend lines have been broken, portfolio managers havelittle 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 Irans 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 Boards 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.

8/7/2019 Rosenberg 3 21 11

5/24


Page 5 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

potential lies for oil ... and there would seem to be more upside, just based on

geopolitical risks alone.

A LONG CONCERN LIST

There are still too many unknowns with regard to the nuclear fallout in Japan.

You read page A8 of the Sunday NYT (Japan Finds Contaminated Food Up to 90

Miles From Nuclear Sites) and Worries That Even the Perception of

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, lets 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 Cant 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.

Despite escalating growthrisks, the fact that Brent crudejumped to above $115 a barreltells you something aboutwhere the potential lies for oil... and there would seem to bemore upside, just based ongeopolitical risks alone

8/7/2019 Rosenberg 3 21 11

6/24


Page 6 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-

line before 1980), one could certainly build a view that emotions will run strong

on this file. So at least on a near-term basis, one would expect to see the

nuclear renaissance fade as an investment theme. Natural gas and coal prices

are 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 Japans 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

espousing for years now. The median age of the 78 million strong baby boomer

cohort is 55 and the era of capital appreciation strategies has swung towards

capital preservation and a focus on generating an economic rent especially

until more compelling value re-enters the equity market sphere.

With that in mind, it was encouraging to see six of the big U.S. banks take

advantage of the Feds 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.

So at least on a near-termbasis, one would expect to seethe nuclear renaissance fadeas an investment theme natural gas and coal prices arethe obvious beneficiaries

The median age of the 78million strong baby boomercohort is 55 and the era ofcapital appreciation strategies

has swung towards capitalpreservation and a focus ongenerating an economic rent

8/7/2019 Rosenberg 3 21 11

7/24


Page 7 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.

A more adequate substitute right now may be in the emerging market bond

sphere. Lets keep in mind that emerging market economies have held in very

well, especially considering how export-sensitive they are. But robust domestic

demand growth has helped pick up the slack. So, EM bonds may not be a bad

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. BuildAmerica 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.

EM bonds may not be a badplace to look they offer highyields and in many cases havestronger balance sheets thandeveloped countries

8/7/2019 Rosenberg 3 21 11

8/24


Page 8 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

distance of the 92 peak reached after Lehman collapsed. To show just how far

the market went in a classic case of shooting first and asking questions later, at

one point last week CDS spreads were priced such that Japan was viewed as a

greater default risk than Mexico or even Panama. I mean, there is no doubt that

Japan has a massive government debt loan (200% of GDP) and that is about to

get even larger but 95% of that debt is held by the countrys own residents.

We are always wary of front covers, but Barrons 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 Japans fiscal year-end is March 31st, historically a period

when companies often bring money home, so once we get through the seasonaleffects, 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 todays WSJ (Housing Gloom Doesnt 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 ratesdecline 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

NAHBs 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.

To show just how far themarket went in a classic caseof shooting first and askingquestions later, at one pointlast week CDS spreads werepriced such that Japan wasviewed as a greater defaultrisk than Mexico or evenPanama

8/7/2019 Rosenberg 3 21 11

9/24


Page 9 of 24

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

United States: S&P 500 Homebuilding over S&P 500 Composite(ratio)

1009

0.36

0.32

0.28

0.24

0.20

0.16


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 NOTUnited States: Industrial Production

Currentreading

10-yearAverage

Above/Below10-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 1.3Elec 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

8/7/2019 Rosenberg 3 21 11

10/24


Page 10 of 24

Currentreading

10-yearAverage

Above/Below10-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 -6.7Wood 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)

1005009590

6

5

4

3

2

1

0


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 cant

keep up with PPI food costs as the ratio has collapsed to May 1994 levels.

8/7/2019 Rosenberg 3 21 11

11/24


Page 11 of 24

CHART 5: DITTO FOR FOOD RETAILERS

United States: Food at Home CPI over Finished Consumer Goods PPI

(ratio)

1005009590

1.30

1.25

1.20

1.15

1.10

1.05

1.00


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 WORTHNOTING

United States: CPI: Full Service Meals & Snacks(year-over-year percent change)

10090807060504030201009998

4.50

3.75

3.00

2.25

1.50

0.75


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.

8/7/2019 Rosenberg 3 21 11

12/24


Page 12 of 24

CHART 7: HOTEL CPI LOSING MOMENTUM

United States: CPI: Other Lodging Away from Home including Hotels & Motels(year-over-year percent change)

100908070605040302010099

10

5

0

-5

-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)

1009080706

1.6

1.4

1.2

1.0

0.8

0.6


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.

8/7/2019 Rosenberg 3 21 11

13/24


Page 13 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)

1009080706050403020100

10

5

0

-5

-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

(year-over-year percent change)

1009080706

6

4

2

0

-2

-4


8/7/2019 Rosenberg 3 21 11

14/24


Page 14 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(year-over-year percent change)

1009080706

8

6

4

2

0


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(year-over-year percent change)

1009080706

5.5

5.0

4.5

4.0

3.5

3.0

2.5


8/7/2019 Rosenberg 3 21 11

15/24


Page 15 of 24

CHART 13: ESPECIALLY HMOs

United States: CPI: Hospital & Related Services(year-over-year percent change)

1009080706

9.00

8.25

7.50

6.75

6.00

5.25


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(year-over-year percent change)

1009080706

6

4

2

0

-2


8/7/2019 Rosenberg 3 21 11

16/24


Page 16 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


1009080706050403020100

6

4

2

0

-2


Despite FedExs announcement, delivery pricing trends are slowing down visibly.

CHART 16: DELIVERY PRICING TRENDS ARE SLOWING DOWN VISIBLY

United States: CPI: Delivery Services(year-over-year percent change)

1009080706050403020100

22.5

15.0

7.5

0.0

-7.5

-15.0

Shaded areas represent periods U.S. recession


8/7/2019 Rosenberg 3 21 11

17/24


Page 17 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 BETTERFOR SPORTING GOODS

United States: CPI: Sporting Goods


1009080706050403020100Source: Bureau of Labor Statistics /Haver Anal tics

6

4

2

0

-2

-4



CHART 18: DITTO FOR PETS PRODUCTS/SERVICES

United States: CPI: Pets, Pet Products and Services


1009080706050403020100

12

10

8

6

4

2

0



8/7/2019 Rosenberg 3 21 11

18/24


Page 18 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(year-over-year percent change)

1009080706050403020100

4

3

2

1

0

-1

-2



Housing remains in the dumps but interesting to see home

improvement/related CPI on a nice recovery path its 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


1009080706050403020100

4

2

0

-2

-4



8/7/2019 Rosenberg 3 21 11

19/24


Page 19 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(year-over-year percent change)

100908

10.0

7.5

5.0

2.5

0.0

-2.5

-5.0


Construction machinery

CHART 22: STRONG PRICING TREND IN THE CONSTRUCTIONMACHINERY AND EQUIPMENT SECTOR

United States: PPI: Construction Machinery and Equipment


100908

6

4

2

0

-2


8/7/2019 Rosenberg 3 21 11

20/24


Page 20 of 24

Agriculture equipment

CHART 23: THE PRICING TREND FOR AG EQUIPMENT

United States: PPI: Agricultural Machinery & Equipment


100908

7

6

5

4

3

2

1


Motor vehicle parts

CHART 24: MOTOR VEHICLE PARTS PRODUCERS SEEINGGOOD PRICING POWER

United States: PPI: Motor Vehicle Parts


100908

3.00

2.25

1.50

0.75

0.00

-0.75


8/7/2019 Rosenberg 3 21 11

21/24


Page 21 of 24

Jewellery manufacturers

CHART 25: JEWELLERS HAVE PRICING POWER

United States: PPI: Jewellery


100908

20

16

12

8

4

0

-4


Tobacco producers

CHART 26: PPI FOR TOBACCO PRODUCTS RUNNING AT A 7.5% RATE

United States: PPI: Tobacco Products(year-over-year percent change)

100908

10

8

6

4

2

0


8/7/2019 Rosenberg 3 21 11

22/24


Page 22 of 24

Power transmission equipment makers

CHART 27: POWER TRANSMISSION MAKERS PPI TRENDING UP

United States: PPI: Mechanical Power Transmission Equipment


100908

12.5

10.0

7.5

5.0

2.5

0.0

-2.5


Tires/tubing

CHART 28: GOOD PRICING POWER FOR TIRES

United States: PPI: Tires, Tubes, Treads and Others(year-over-year percent change)

100908

16

12

8

4

0

-4


8/7/2019 Rosenberg 3 21 11

23/24


Page 23 of 24

Gluskin Sheffat a Glance0Gluskin 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 December 31, 2010, the Firmmanaged assets of$6.0 billion.

Gluskin Sheff became a publicly tradedcorporation on the Toronto StockExchange (symbol: GS) in May2006 andremains 49% 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.

PERFORMANCE

$1 million invested in our CanadianEquity Portfolio in 1991 (its inceptiondate) would have grown to $10.2 million

2

on December 31, 2010 versus $6.5 millionfor the S&P/TSX Total Return Indexover the same period.

$1 million usd invested in our U.S.Equity Portfolio in 1986 (its inceptiondate) would have grown to $12.9 millionusd

2on December 31, 2010 versus $10.6

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.

We have a strong history of insightfulbottom-up security selection based onfundamental analysis.

For long equities, we look for companieswith a history of long-term growth andstability, a proven track record,shareholder-minded management and ashare price below our estimate of intrinsicvalue. We look for the opposite inequities that we sell short.

For corporate bonds, we look for issuers

with a margin of safety for the paymentof interest and principal, and yields whichare attractive relative to the assessedcredit risks involved.

We assemble concentrated portfolios -our top ten holdings typically representbetween 25% to 45% of a portfolio. In thisway, clients benefit from the ideas inwhich we have the highest conviction.

Our success has often been linked to ourlong history of investing in under-followed and under-appreciated smalland mid cap companies both in Canada

and the U.S.

PORTFOLIO CONSTRUCTION

In terms of asset mix and portfolioconstruction, we offer a unique marriagebetween our bottom-up security-specificfundamental analysis and our top-downmacroeconomic view.

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 Equity Portfolio

in 1991 (its inception

date) would have grown to

$10.2 million2 on

December 31, 2010

versus $6.5 million for the

S&P/TSX Total Return

Index over the same

period.

HHHHHHHFor further information,

please contact

[email protected]

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 si tuation.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.

8/7/2019 Rosenberg 3 21 11

24/24


Page 24 of 24

IMPORTANT DISCLOSURES

Copyright 2011 Gluskin Sheff + Associates Inc. (Gluskin Sheff). All rights

reserved.

This report may provide information, commentary, and discussion of issuesrelating to the state of the economy and the capital markets. All opinions,projections and estimates constitute the judgment of the author as of thedate of the report and are subject to change without notice. Gluskin Sheff isunder no obligation to update this report and readers should thereforeassume that Gluskin Sheff will not update any fact, circumstance or opinioncontained in this report.

The content of this report is provided for discussion purposes only. Anyforward looking statements or forecasts included in the content are basedon assumptions derived from historical results and trends. Actual resultsmay vary from any such statements or forecasts. No reliance should beplaced on any such statements or forecasts when making any investmentdecision, and no investment decisions should be made based on thecontent of this report.

This report is not intended to provide personal investment advice and itdoes not take into account the specific investment objectives, financial

situation and particular needs of any specific person. Under nocircumstances does any information represent a recommendation to buy orsell securities or any other asset, or otherwise constitute investment advice.Investors should seek financial advice regarding the appropriateness ofinvesting in specific securities or financial instruments and implementinginvestment strategies discussed or recommended in this report.

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 interestthat could affect the objectivity of this report. Gluskin Sheff portfoliomanagers may hold different views from those expressed in this report andthey are not obligated to follow the investments or strategies recommendedby this report.

This report should not be regarded by recipients as a substitute for theexercise of their own judgment and readers are encouraged to seekindependent, third-party research on any companies discussed or impactedby this report.

Securities and other financial instruments discussed in this report are notinsured and are not deposits or other obligations of any insured depositoryinstitution. Investments in general and, derivatives, in particular, involvenumerous risks, including, among others, market risk, counterparty defaultrisk and liquidity risk. No security, financial instrument or derivative issuitable for all investors. In some cases, securities and other financialinstruments may be difficult to value or sell and reliable information aboutthe value or risks related to the security or financial instrument may bedifficult to obtain. Investors should note that income from such securitiesand other financial instruments, if any, may fluctuate and that the price orvalue of such securities and instruments may rise or fall and, in some cases,investors may lose their entire principal investment. Past performance is notnecessarily a guide to future performance.

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.

Any information relating to the tax status of financial instruments discussed

herein 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.

Individuals identified as economists in this report do not function asresearch analysts. Under U.S. law, reports prepared by them are notresearch reports under applicable U.S. rules and regulations.

In accordance with rules established by the U.K. Financial Services Authority,

macroeconomic analysis is considered investment research.

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 discusses any legal proceeding or issues, it has notbeen prepared as nor is it intended to express any legal conclusion, opinionor advice. Investors should consult their own legal advisers as to issues oflaw relating to the subject matter of this report. Gluskin Sheff researchpersonnels knowledge of legal proceedings in which any Gluskin Sheffentity and/or its directors, officers and employees may be plaintiffs,defendants, codefendants or coplaintiffs with or involving companiesmentioned in this report is based on public information. Facts and viewspresented in this material that relate to any such proceedings have notbeen reviewed by, discussed with, and may not reflect information known to,professionals in other business areas of Gluskin Sheff in connection withthe legal proceedings or matters relevant to such proceedings.

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 tothirdparty websites. Gluskin Sheff is not responsible for the content of anythirdparty website or any linked content contained in a thirdparty website.Content contained on such thirdparty websites is not part of this reportand is not incorporated by reference into this report. The inclusion of a linkin this report does not imply any endorsement by or any affiliation withGluskin Sheff.

Gluskin Sheff reports are distributed simultaneously to internal and clientwebsites and other portals by Gluskin Sheff and are not publicly availablematerials. Any unauthorized use or disclosure is prohibited.

TERMS AND CONDITIONS OF USEYour receipt and use of this report is governed by the Terms and Conditions

of Use which may be viewed at www.gluskinsheff.com/terms.aspx

This report is prepared for the exclusive use of Gluskin Sheff clients,

subscribers to this report and other individuals who Gluskin Sheff hasdetermined should receive this report. This report may not be redistributed,

retransmitted or disclosed, in whole or in part, or in any form or manner,

without the express written consent of Gluskin Sheff.

YOU AGREE YOU ARE USING THIS REPORT AND THE GLUSKIN SHEFFSUBSCRIPTION SERVICES AT YOUR OWN RISK AND LIABILITY. NEITHERGLUSKIN SHEFF, NOR ANY DIRECTOR, OFFICER, EMPLOYEE OR AGENT OFGLUSKIN SHEFF, ACCEPTS ANY LIABILITY WHATSOEVER FOR ANY DIRECT,INDIRECT, CONSEQUENTIAL, MORAL, INCIDENTAL, COLLATERAL OR SPECIALDAMAGES OR LOSSES OF ANY KIND, INCLUDING, WITHOUT LIMITATION,THOSE DAMAGES ARISING FROM ANY DECISION MADE OR ACTION TAKENBY YOU IN RELIANCE ON THE CONTENT OF THIS REPORT, OR THOSEDAMAGES RESULTING FROM LOSS OF USE, DATA OR PROFITS, WHETHERFROM THE USE OF OR INABILITY TO USE ANY CONTENT OR SOFTWAREOBTAINED FROM THIRD PARTIES REQUIRED TO OBTAIN ACCESS TO THECONTENT, OR ANY OTHER CAUSE, EVEN IF GLUSKIN SHEFF IS ADVISED OFTHE POSSIBILITY OF SUCH DAMAGES OR LOSSES AND EVEN IF CAUSED BYANY ACT, OMISSION OR NEGLIGENCE OF GLUSKIN SHEFF OR ITSDIRECTORS, OFFICERS, EMPLOYEES OR AGENTS AND EVEN IF ANY OF

THEM HAS BEEN APPRISED OF THE LIKELIHOOD OF SUCH DAMAGESOCCURRING.

If you have received this report in error, or no longer wish to receive thisreport, you may ask to have your contact information removed from ourdistribution list by emailing [email protected].

Rosenberg 3 21 11

Documents

Transcript of Rosenberg 3 21 11