Income Strategy November 27, 2007:

The US economy is showing increasing signs of slowing; the credit crunch is having a much deeper impact than most analysts had forecast creating many problems for both companies and individuals looking for credit. The housing sector is not stabilizing and continues to deteriorate in most regions due to over supply of new homes and additional inventory from foreclosures in the resale market.

The recent information regarding the US consumer is not looking very positive the recently released Conference Board Survey of Consumer Confidence dropped 8.3% in November falling to 87.3 well below the economists forecasts of 91.3. This is the seventh drop this year and brings the index to the lowest level in over two years.

The confidence data is being felt in the retail sector as indicated by the volume of shoppers out on Black Friday, the number of people shopping was up but the average amount spent was down. The consumer appears to be interested only if the items are drastically discounted and the discounting has started much earlier this year than in recent holiday shopping seasons.

The federal reserve is likely going to be forced to lower interest rates later this year and in to the beginning of 2008 in order to soften the blow of the inevitable pending recession. There is a consumer driven slow down coming and it will not be short or soft, it will be protracted and it will be a very hard landing so hang on to your hats this is only just beginning.

The Bank of Canada will be forced to lower rates as well later next year as the Canadian dollar will be forced higher as US interest rates decline putting additional downward pressure on the US dollar. The Canadian economy will not continue to expand if the Canadian dollar moves up to new highs next year. There is commonly a delay as the export and manufacturing sectors attempt to adjust to the new currency exchange but inevitably they will have to cut back on production at a greater and greater pace as global sales volumes continue to decline.

Investors should be very cautious regarding bond investments at this time, there is considerable uncertainty in the financial services sector and spreads are likely to widen over the next few months, the credit crunch is going to have a much larger impact than we see currently. I would suggest going with Government of Canada bonds in the 4-7 year for new investments.