Asset Allocation November 15, 2007:

The strong Canadian dollar is offering Canadian investors an opportunity to diversify in to additional global markets as the currency risks have been substantially reduced. The loonie has been trading at or near record levels since the end of October and it appears that a top has been achieved, the surge to $1.10 US is likely the high water mark for the current bull market.

Over the past two years I have been advocating that investors stay away from the US and European markets due in large part to the high currency risk as it appeared that the Canadian dollar was entering a sustained bull market, over the past few months the US dollar has entered a sustained bear market which has pushed the loonie to new all time highs. The US dollar appears to be consolidating and that should limit further increases in the Canadian dollar going forward.

There are still a number of potential problems in the US market so investors have to be selective when looking at moving in to this market. The US economy is starting to show signs of slowing due to the air coming out of the real estate bubble and the consumer reducing spending on concerns regarding the downside in housing prices. The financial services sectors in North America are only just beginning to come to terms with the losses from loans in the real estate sector and the derivative investments created during the housing boom. The escalation in subprime loans over the past two years is coming home to roost in a major way and the Asset Backed bonds and Corporate Paper that are collateralized with these mortgages is collapsing globally. There is still a lot of pain to come in this sector and it may take many quarters of write offs before it is complete.

There are a couple of sectors that appear to offer some potential for capital growth the technology sector has been performing reasonably well since the summer sell off and the leadership companies have the brand recognition that should support sales and earnings growth going forward. The energy sector should hold up well with crude oil prices staying high and possibly moving higher over time. The major multi national oil companies should see reasonable earnings growth and may benefit from a weak US dollar.

A broad based position in Europe appears to offer a reasonable potential for capital growth, but only with limited exposure to the financial services sector which has many of the same problems as those in North America.

The November Asset Allocation has changed slightly increasing equity exposure by 10% to 50% with bonds remaining at 20% and cash reduced to 30%. The increase reflects a cautious approach to diversifying in to other markets.

The equity portion should now be allocated 30% Canadian, 30% Asian, 20% Latin American, 10% Japanese, 5% American and 5% European. The Asian economies continue to drive demand for products and materials produced in Canada and Latin America, that growth does not appear to be slowing and should support higher equity prices going forward.

The bond portion of a portfolio should still be positioned in a conservative manner with equal allocations in one, two and three year terms. Stay with Government of Canada or Provincial Bonds as the risk of negative surprises in the corporate sector remains high.