Wareham Weekly Insights

The big picture
China key to global recovery

The global economic recovery has begun, but sustaining it will require stepping up U.S. exports
to Asia, says the International Monetary Fund’s chief economist. In an IMF report, Olivier
Blanchard predicted that consumer spending, which accounts for 70% of the U.S. economy,
will not return to pre-crisis strength quickly. He called on China to reduce the trade imbalance
and import more goods from the U.S.

Federal Reserve Chairman Ben Bernanke declared Friday that the U.S. economy is on the verge of a long-awaited recovery after enduring a brutal recession and the worst financial crisis since the Great Depression. The U.S. housing market showed encouraging signs in July. Although new-home construction and permits fell, single-family-home starts remained strong, rising 1.7% in July after a 17.8% surge in June. Sales of U.S. existing homes rose to their highest level in nearly two years as cheaper prices and the availability of tax credits continued to entice buyers. In Canada, inflation is at a 56-year low, with declines in the price of gas, cars and shelter partly offset by higher food costs. With consumer spending remaining weak, some economists say it could take two years of recovery before companies begin to raise prices.

Markets
Stocks tumble, then rebound

World markets rallied following steep losses on Monday, when fresh concerns about a U.S.
economic recovery sent indexes around the world tumbling. Stocks rose after a rebound in Chinese equities and an uptick in U.S. manufacturing offset a disappointing weekly jobs report.

Canada is not likely to block sale of Nortel, says the Globe and Mail, since the government is
only required to review foreign takeovers for businesses over $312 million – Nortel’s balance
sheet assets are $149 million. Oil is on track for a strong gain this week as the price per barrel approaches the highest levels since October 2008 when it closed at $75.22. The $US 3 billion
cash-for-clunkers program will shut down on Monday, the government said Thursday. As of Thursday, the program has recorded more than 457,000 dealer transactions worth $1.9 billion in rebates. Meanwhile, Hyundai Canada will offer up to $1,000 on clunkers traded in for new
vehicles. Ten months after its initial rescue deal with UBS, Switzerland sold its 9% stake in its
largest bank for US$5.1 billion, making a profit of US$ 1.1 billion on its investment.

Our recommendation
Rebalance portfolios to buy low, sell high

Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, says the market trend remains upward in the short term despite economic risks on the horizon. Although market valuations are not excessive at current levels, they are already pricing in a significant rebound in earnings in 2010. A period of consolidation or a range bound market allowing time for fundamentals to catch up with share prices is likely to occur over the coming months. Profit taking also would not be unexpected; recall that September, on average, is historically the worst month for equity investors.
Fixed income. Chris Kennedy, Associate Director, Portfolio Advisory Group, highlights the desk’s current recommen-dations as follows: Term Call – below benchmark duration.
Sector Call – underweight Canadas, overweight Municiaps, neutral on Provincials and
Corporates. Currency Call – favour the C$, as well as the A$, which is expected to
outperform. Alternative Strategies – underweight high yield, overweight Emerging Markets
Debt, neutral on inflation protected bonds.
Portfolio strategy. When market volatility leads to large shifts in the weights of individual holdings, we recommend clients rebalance portfolios to maintain a discipline that encourages profit taking on strength, while adding on weakness in other positions that may have underperformed.



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