What Happened

1
What Happened What Now?
2
Agenda

• What Happened?
• Credit Crunch
• The Response
• Where Are We Now?
• Recession timeline
• Investment Cycle
• What Do We Do Now?
• Asset Class Review
• Security Review

3
The Credit Crunch in a Nutshell

• Over Investment in U.S. Housing (1997-2006)
• Cheap credit and aggressive lending practices led
  to the largest housing boom in U.S. history
• U.S. Sub-Prime Mortgage Crisis Begins (2007)
• Rising mortgage rates and falling housing prices
  led to defaults on the highest risk mortgages
• Complex Financial Instruments Implode
• Values of financial instruments linked to the
  sub-prime mortgages such as ABCPs, CDOs, MBSs,
  etc. and derivatives tied to these securities
  plummet
• Write-Downs
• U.S. financial institutions began to report
  massive losses and write-downs as the value of
  mortgage-related assets fell. (IMFs most recent
  estimate of losses US1.4 trillion)
• Freeze-Up of the Credit Markets
• With the balance sheets of financial giants
  compromised, access to credit began to shut down.
  A global freeze in the credit markets followed.
  Banks were afraid to lend to each other.
• Crisis of Confidence, Panic Selling, and
  Spreading to the Real Economy
• Lack of credit hurt real businesses, investors
  just wanted out of everything and we are going
  through a nasty economic slowdown and
  experiencing negative wealth effect. The U.S.
  consumer is tapped.

4
What a Bubble Looks Like .
U.S. Housing Prices Adjusted for Inflation Since
1890
Examples of bubbles Not a new
phenomena 1630s Tulipmania 1720s South Sea
Bubble ______ Mississippi
Scheme Recent Examples 1970s Nifty
Fifty 1980s Japan Inc. 1990s Tech
Bubble 2000s U.S. Housing
Source Lotsoff Capital Management
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When the Bubble Burst,Global Banks Felt the Pain
6
Investors Hit Panic Button Following Lehman
Failure
Bloomberg Financial Conditions Stress Index
Bear Stearns Hedge fund collapse
Northern Rock nationalized by Britain
Bear Stearns acquired by JP Morgan Chase
Lehman Brother collapses
Source Bloomberg
7
Volatility Spikes
Source Bloomberg, Lotsoff
8
Equity Markets Plunge
9
Corporate Spreads Explode
2096 basis points on Dec 31
Source ML U.S. High Yield Master II Index
U.S. Treasuries 5 -10 Years Index, Marrett Asset
Mgt
10
Global Growth Estimates Sink
11
Commodity Prices Collapse
Commodity prices continue to tumble on plunging
global growth expectations but gold has bounced
12
The Canadian Dollar Sinks with Oil
13
How Bad Was It?
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Nowhere To Hide
Source Bloomberg
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• The response?

16
Strong Policy ResponseU.S. Govt Throws in the
Kitchen Sink

• U.S. Pledges top 8.5 Trillion
• TARP other Congressional Funding 1.15
  Trillion
• Federal Deposit Insurance Corp guarantees of
  bank-to-bank loans 1.8 Trillion
• Term Auction Facility others 3.45 Trillion
• Commercial Paper Funding Facilities 1.8
  Trillion
• Federal Housing Administration 300 Million
• Other
• Obama Stimulus plan (500-700 billion)
• Oil moves from tax to stimulant

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Adding up The Global Bailout
Benelux Countries44bn, 2 GDP
Britain450bn, 21 GDP
Germany151bn, 7 GDP
IrelandLoan guarantees only
Russia209bn, 12 GDP
Spain111bn, 8 GDP
US 850bn, 5 GDP
Switzerland66bn, 15 GDP
France50bn, 2 GDP
South Korea80bn, 9 GDP
China586bn, 16 GDP
Japan68bn, 1 GDP
India41bn, 5 GDP
Source Business Week Dec 1, 2008
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Strong Policy ResponseGlobal Central Banks
Co-ordinate Cuts
Central banks cut rates to record lows with
expectations for additional cuts in the near
future
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• Where are we now?

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U.S. RecessionIts Official. It started in
December 2007
Source DundeeWealth Economics
21
U.S. RecessionsRecessions Are Bad for Cdn
Equities
December -35.03
Source DundeeWealth Economics
22
U.S. Recession But This One Should Last Longer
Than Most
Source National Bureau of Economic Research
(www.nber.org/cycles), Dundee Securities
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U.S. RecessionWhy It Should End In Late Summer
2009
Reasons why Dr. Murenbeeld expects the recession
to end late summer 2009

• House prices should stop declining by mid-2009
• Government programs already announced i.e.
  TARP, CPFF, TALF (7.76 trillion) will begin to
  have an impact in 2009-Q1 and beyond
• Significant infrastructural spending, minimum
  700bn, should start around mid-year 2009 maybe
  sooner
• If the recession started in Dec 07, it will be
  of 18-20 months duration (economic surveys
  suggest April 08 Jun 09, or 14 months!)
• Oil prices now stimulative not taxing!

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U.S. RecessionEquity markets are forward looking
SP/TSX Index tends to bottom 5 months before the
end of a recession
25
The Emotional RolleroasterWhere are we in the
Cycle?
Source Westcore Funds / Denver Investment
Advisers LLC, 1998
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• What do we do now?

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Asset Class ReviewCash is Dear
Near 0 means Return OF Capital with no Return ON
Capital
Source Bloomberg
28
Asset Class ReviewGovt Bonds and GIC rates are
Low
Historically low interest rates means Return of
Capital plus inflation and not much more
Source Bloomberg
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Asset ReviewCorporate Bonds Spreads are
Attractive
Riskier corporate bonds are pricing in plenty of
risk. Spreads are twice previous peaks.
Source ML U.S. High Yield Master II Index
U.S. Treasuries 5 -10 Years Index, Marrett Asset
Mgt
30
U.S. EquitiesSeriously Undervalued
Source DundeeWealth Economics
31
Canadian EquitiesSeriously Undervalued
Source DundeeWealth Economics
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What Stocks should do well

• Focus on stocks with
• Strong balance sheets
• High profitability
• Low valuations
• Plenty of companies trading at levels below
  10-Year ago levels

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What Funds Perform Best Following a Market
Bottom?
Source Morningstar, DundeeWealth
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U.S. Equity MarketsMarkets Can Go Sideways for a
While
CAGR Compound Annual Growth Rate
Pause in Order? An economy post bubble needs time
to heal
8 years 24 CAGR
16 years -1 CAGR
18 years 16 CAGR
8 years 0 CAGR
13 years -10 CAGR
24 years 10 CAGR
Source Bloomberg, Dundee Private Client Research
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Investing Implications

• Passives Strategies Should be Less Effective
• Index closet index strategies
• Buy hold strategies
• Need Active Managers
• Willing to buying on weakness and sell into
  strength
• Willing to find leadership stocks
• Time to be Proactive
• Make sure you are comfortable with your asset
  allocation and fund selection

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Asset Class Review

• Investors should have diversified portfolio with
  all asset classes. But here are some observations
  regarding the traditional three.
• Cash may be suitable for nervous investors, but
  with zero percent interest, investors should
  expect no returns
• Longer-term government bonds are safe but
  investors should expect no returns after
  inflation. Corporate bonds yields are at
  attractive levels vs govt bonds. Investors
  should focus on highest quality corp bonds first.
• Equities are priced at attractive levels, but how
  much bad news is discounted in the market?
  Remember equities tend to bottom before the end
  of the recession
• Larger core equities are historically the first
  to recover. Expect those companies with strong
  balance sheets, good profitability and low
  valuations to do best.
• Small and mid-cap companies do better later in
  the cycle.
• If the equity markets are in a longer-term
  trading range, then investors need to be more
  active rather than passive

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What to Do?

• Investors should
• Review your goals
• Review your asset mix (stocks vs bonds vs cash)
• Review your portfolio (ensure you are positioned
  with the right securities for the recovery stage)
• Need to be pro-active, need to take an active
  approach to investing
• Dollar Cost Averaging Good way of rebuilding
  positions

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Conclusion

• We now know what happened
• We know what caused the bubble why it burst
• We know there has been a strong response to the
  crisis
• We know that a lot of bad news has been
  discounted by the riskier asset classes and
  safe asset classes
• We also know historically which assets classes
  have performed best coming out of market bottoms
• Investors need to review their portfolios to
  ensure they have the right mix for 2009.

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Important Information

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  considered an indication of trading intent of any
  funds managed by Goodman Company, Investment
  Counsel Ltd. These views are not to be
  considered as investment advice nor should they
  be considered a recommendation to buy or sell.
• This document is for advisor use only and is not
  to be distributed or reproduced without the
  consent of Goodman Company, Investment Counsel.
  Dynamic Funds is a division of Goodman
  Company, Investment Counsel Ltd.