Asset Allocation February 15, 2008:

Over the past few months the pace of economic growth in the US has been deteriorating quite quickly. The US economy appears to be well on the way to an extended slowdown which will likely be labeled a recession as data is released over the next couple of months.

The US housing market continues to slow and prices are now falling in virtually all markets. The US consumer is not showing signs of giving up just yet, but really, how long can they continue to over spend when the main asset used to justify this consumption is rapidly declining in price.

Compounding the problems in the real estate sector is the ongoing credit crunch, the lack of access to credit has held interest rates from falling as much as they should. The credit markets are still in turmoil and nobody is certain how much more will have to be written off by financial institutions due to sub prime and other mortgages going in to default. The damage from the excess credit issued over the past five years or so will take a long time to repair in the mean time financial institutions will be overly cautious going forward in order to avoid compounding the damage.

The credit markets have been underpinning the growth in the equity markets and now that easy credit is no longer available the equity markets a reeling. Economic uncertainty has created the current bear market environment for shares globally. The bottom in the equity markets will likely be found at levels a lot lower than we are right now and a cautious approach will be required over the next 6 -12 months.

I have maintained a very conservative Asset Allocation and continue to recommend only a 20% exposure to equities, 50% in bonds and 30% in cash. This allocation should have relatively low volatility and preserve capital over the next year or so.

The equity portion should be remain allocated 30% Canada, 30% Asia, 20% Latin America, 10% Japan, 5% US and 5% Europe. Equity sectors to avoid include financials, home builders, consumer durables, autos, travel and tourism.  Sectors that have positive potential are gold, agricultural products and equipment, base metals, alternative energy and energy.

The bond portfolio should hold only government issued bonds with 30% 1-3 years, 30% 4-7 years and 40% 20 years plus. In anticipation of lower rates going forward.