Asset Allocation September 15, 2007:

The ongoing credit crisis appears to be spreading, the Asset Backed Corporate Paper sector in Canada is in disarray, the Corporate Paper Market in the US is showing signs of freezing up as well. The fifth largest mortgage lender in England required a bail out from the Bank of England in order to avoid a disaster due to a liquidity squeeze.

All of these problems have developed over the past month or two and are a direct result of overly aggressive lending practices combined with a huge decrease in global liquidity. Central Banks around the world are trying to increase cash in the financial system in order to avoid a total freeze up of transactions but so far it appears to be too little too late for many institutions.

Over the next few months it will be very difficult to predict how wide spread and deep this credit crunch will become. It seems to me that we have a lot of pain to go through before this is over. In order to be in a position to capitalize on the coming price declines a larger than normal cash position will be required. It will be prudent to sell in to any market rally, do not I repeat do not buy the dips as the markets are all heading lower, this is a bear market.

The asset allocation going forward should reflect this bearish nature with a maximum of 40% in equities, a maximum of 20% in bonds and a minimum of 40% in cash.

The equity portion should be diversified 30% Canadian, 30% Asian, 20% Latin American and 20% Japanese. Avoid financial stocks of any type and in any region they are all in for more negative surprises. Avoid the US and European markets the potential for a recession in these regions is increasing daily. Asian growth will slow but it will remain positive and seems to be the only beacon of optimism at the moment.

Preserving capital will be the paramount concern over the next 12 months or so, investors will need to be looking at the potential for a return OF capital not the return ON capital.