Equity Strategy October 26, 2007:

The Canadian equity markets were able to shrug off some pretty negative news this week. The Alberta Government released its new formula for royalty calculations and the oil industry is going to pay substantially more over the long term. If this had been announced at almost any other time the energy sector would have been smoked, but with oil at $92.00 a barrel nobody seems to care.

They will care down the road when oil slides back a bit and the reality of a much slower build out of the energy sector develops due to increasing pressure on the energy sector. There has been an incredible expansion of energy industry infrastructure that has put Alberta on the forefront of growth in the country. The problem has been increasing costs at many levels; labor, materials and currency are all taking a toll on the attractiveness of these mega project developments. Add in higher taxes and royalties and the aggressive expansion plans are very likely to be scaled back or postponed. Canadian investors would be wise to be cautious investing in the energy sector over the short term until the full impact of the new royalties is understood.

The Canadian dollar continues to surprise moving to higher and higher levels. The pundits' are coming out of the woodwork to predict extreme levels for the loonie. I think it will be very difficult for the Canadian dollar to move past the $1.05 level which is viewed as the watershed high reached 30 years ago. I would not be surprised to see the dollar touch that level and then sell off back to the $1.00 level and continue to trade in that range for a few months.

I have been advising to avoid US and European investments over the past year or so largely due to the high risk of currency erosion. The loonie appears to be at or very near a high which has reduced the potential down side to investing out side of Canada. Slowly diversifying in to US and European investments looks more rewarding now that at any time in the past two years.

In the US stay with the leaders such as Apple and Microsoft which have released surprisingly strong quarterly earnings results and appear to be very well positioned to continue strong bottom line growth going forward.