Equity Strategy July 27, 2007:

Global equity markets have had a very rough week falling dramatically in all areas.  The S&P/TSX composite index is down approximately 5.25% from the all time high set July 19th. The Dow Jones Industrial Average was down 4.2% this week with the financial sector showing signs of breaking down with stocks like JP Morgan gapping lower and a very similar situation with Citibank as well.

When investors look back on 2007 they will likely point to the Blackstone IPO as the turning point, Blackstone (BX-N) traded at $38.00 the first day and has fallen aver since closing this week at$24.30. The hype surrounding the debut of this issue should have been a signal that this would be a pivotal event. The talking heads at CNBC thought this was going to be the best IPO in years and no even they could get in to the private equity gravy train, wrong!

When the people that were credited driving the market that became the private equity phenomenon decided to sell out it wasn’t because they thought there was lots of money left to make and share, it was because they could see the end of the game was just around the corner. History repeats itself as strong hands sell to weak hands as has happened over and over again, the more things change the more they stay the same.

The Blackstone issue came at a time when the massive liquidity build up was about to end due to the collapse of the sub prime mortgage market and Collateralized Debt Obligation (CDO) market. The merger and acquisition mania is over, so what will drive the equity markets higher?

In the short term nothing, a bear market has started and a bear usually last around 18 months. So be ready for a very ugly year and a half in the North American equity markets.

Going forward interest rates in the US are likely to increase a little faster and a little further than those in Canada, putting more pressure on the economy and likely causing a US recession early next year. Lower inflation in Canada will allow the Bank of Canada a little more room to maneuver and the slow down will be less dramatic and shorter. Global demand for commodities will likely remain robust and this will also help to dampen the effects of higher interest rates in Canada. The risks for the producing companies are increasing as the US dollar falls, all producers will see profit growth slow.

Investors should remain cautious of the US markets over the next few months as volatility will likely remain high as confusion regarding the US dollar, Federal Reserve interest rate policy, sub-prime mortgages, US housing market and inflation all conspire to reduce investor optimism. This will make the US market far less attractive for Canadian investors.

Canadian investors should continue to hold a diversified portfolio of commodity stocks as core holdings, global demand will remain strong. The energy sector would include names such as Suncor (SU-T, $95.1, 403-269-8100, www.suncor.com) for oil sands exposure and EnCana (ECA-T, $62.59, 403-645-2000, www.encana.com) for exposure to natural gas. In the base metal sector Teck Cominco (TCK.B-T, $46.41, 604-687-1117, www.teckcominco.com) offers exposure to a wide array of metals including copper, zinc and gold. In the gold sector the ishares Gold sector ETF (XGD-T, $69.95, 1-866-474-2737, www.ishares.ca) offers a diversified portfolio of 38 gold producers or the StreetTracks Gold ETF (GLD-N, US$65.57, 1-866-320-4053, www.streettracksgoldshares.com) which invests directly in bullion.

If the Canadian dollar continues to increase relative to the US dollar companies that import products from the US will benefit, Finning (FTT-T, $29.19, 604-691-6444, www.finning.com) the largest Caterpillar dealer should see an increase in profitability as it imports parts and equipment form the US and sells in Canada, Britain and South America. The company recently announced record quarterly earnings and a number of major equipment contracts in the tar sands. Finning is very well positioned for strong earnings growth going forward, benefiting from both a strong Canadian dollar and strong global demand for commodities.

The strong Canadian dollar relative to a weak US dollar should offer positive benefits to Canadian consumers and offer corporations an opportunity to cost effectively invest in new productivity enhancing technology enabling them to maintain a competitive position in the global market place. In the short term there will continue to be a negative effect on the manufacturing and export oriented segments of the economy, investors will be well served to avoid investing in these sectors until the dollar stabilizes or shows signs of retreating.

It is with great sadness that I report the passing of Herb Doman at 75 years of age; Mr. Doman was a one of a kind Canadian entrepreneur starting with only an eighth grade education and one truck he built a forestry empire that at it’s peak was valued at over $1 billion. Herb will be remembered by the people Vancouver Island as a driven businessman who over riding concern for his employee came through time and time again, his efforts kept industry on Southern Vancouver Island vibrant long past the peak in the forest industry in the province over all.

This very interesting local legend will be missed by an entire community and we all pass on our condolences to his family.