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Weekly Market Strategy

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Since April 2008, our investment thesis has been predicated on a rebounding U.S. dollar, materially slower global growth, and falling inflation. The culmination of these events has dealt a severe blow to resource sectors and resource-based indices. The U.S. dollar and U.S. equities are outperforming their global peers as the flight to quality is benefitting large cap U.S. equities. U.S. equity outperformance should last as long as the S&P 500’s relative earnings momentum improves. Stalling U.S. import growth and plunging commodity prices should be more painful to earnings outside the United States thus sustaining the S&P 500’s earnings advantage in 2009. Moreover, US$65/bbl oil and US$2/gallon gasoline prices will roughly translate into a US$100 billion gift to U.S. consumers according to Scotia Economics. Although we believe the bulk of the U.S. dollar’s upward adjustment is done, we believe the S&P 500 and defensive and early cyclical sectors will continue to outperform. Value has also overtaken Growth in terms of performance, and this new leadership could last well through 2009. Value-style and Growth typically exchange leadership every three-four years, on average, as trend tend to be of longer term nature. We believe investors should stick with an S&P 500/Value bias as long as central banks are easing and deflation remains enemy number one. We believe equity indices have bottomed for 2008 and expect a rally to emerge in late 2008 and early 2009. Even in the darkest and gloomiest bear markets, 20%-30% bear market rallies are not uncommon. The last week of October ended on a somewhat upbeat tone, but this optimism remains fragile. We would sell this rally near the 1,050 (S&P 500) and 10,500 (TSX) levels.