Asset Allocation December 15, 2007:

The Canadian dollar continues to hold in just below par to the US and appears to have the momentum to maintain this level going forward. I would expect the loonie to trade in a range of 96 cents to $1.05 to the US over the next 6 – 12 months. The recent inflation data from the US is starting to reflect the higher prices of energy products and food which is likely to keep the US Federal Reserve from lowering interest rates over the next few months. The increased inflation pressure will be the key factor for the Federal Reserve when deciding interest rates.

There are still a number of negative influences affecting the US economy and growth will likely be lower than expected over the next few quarters making forecasting interest rate much more difficult. The credit crunch is much more severe than most economists had forecast and the lack of easy access for borrowers will keep the US consumer on the sidelines for the first half of 2008 at least. The US real estate sector is also deteriorating much more than most had hoped for. The decline in house values is much more wide spread than seem even just a couple of months ago. This will negatively impact the US consumer as well keeping spending under pressure until prices stabilize, which is not likely to happen in the short term.

Canadian investors have an opportunity to diversify in to global markets as the risk of negative currency changes has been dramatically reduced. Last month I suggested adding some US investments on a limited basis and I maintain that position this month as well. Investors should be cautious as there are a number of sectors that are likely to perform poorly over the next 12 months or so. The financial services sector is one that I would avoid which most institutions have only started to recognize the fallout from the poor lending practices. The write offs from exposure to subprime mortgages, Asset Backed Commercial Paper and SIV’s are going to be a lot larger than anyone can imagine, there are still billions more in problem loans and investments that have not surfaced yet.

The construction sector including home builders, building product manufacturers and durable goods companies will see sales plummet over the next few quarters as home buyers stay away waiting for prices to fall and then stabilize, which may not happen till late 2008 or early 2009.

The December asset allocation remains 50% equity, 20% bonds and 30% cash.

The equity portion of a portfolio should be allocated 30% Canadian, 30% Asian, 20% Latin American, 10% Japanese, 5% American and 5% European equities.

The bond portion should be equally allocated in 1-3 year Government Bonds due to the extreme volatility in the bond market.