Lunch With Dave 110609

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David A. Rosenberg November 6, 2009Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Lunch with Dave U.S. Payrolls: 10-PlusOCTOBER U.S. NONFARM PAYROLL REPORT THE BOTTOM LINE

All we can say is that if the overwhelming consensus is correct that the

recession is behind us, then what we have on our hands is the mother of all

jobless recoveries and whatever economic growth is being squeezed into the

system comes courtesy of the most dramatic intervention by the government in

recorded history, including the New Deal 1930s era. President Obama is now

running fiscal deficits that would have made FDR blush.

If the consensus is

correct that the

recession is behind us,

then what we have on

our hands is the mother

of all jobless recoveries

While nonfarm payrolls

in October were not that

far off the consensus, it

did contain troubling

signposts

But while Uncle Sam can try to stimulate spending on autos and housing and

even mortgage credit via the myriad of policy measures that have beenundertaken, the return to job creation is as elusive as ever. It is hard to fathom

that, according to the White House estimates earlier this year, the stimulus was

supposed to help cap the unemployment rate at 8.5%. Here we are today with

both an unemployment rate and a fiscal deficit-to-GDP ratio both north of 10%.

While real GDP did manage to rebound at a 3.5% annual rate in Q3 stagnant if

not for the government incursion those dual 10%-plus figures cited in the

previous sentence highlight the fact that GDP is not the only barometer of a

nation's economic health.

TODAYS EMPLOYMENT REPORT CONTAINED SOME TROUBLING SIGNPOSTS

While the government can try to induce people to spend, no recovery can be

sustained without a resumption in job growth and Octobers employment data

contained some troubling signposts.

While the -190,000 headline nonfarm payroll print was not that far off the

consensus, and while there were upward revisions to the prior two months (of

over 90,000), the major problem is that the Establishment Survey, at this time,

is missing a very important part of the story, which is the strain that the small

business sector continues to face. Small businesses have less cash on the

balance sheet, less access to credit and less exposure to overseas growth

dynamics compared to large companies. The Establishment Survey (nonfarm

payrolls), has a large company bias that the companion Household Survey

does not have. If you look at the historical record, you will find that at true

turning points in the economic cycle, the Household Survey leads the

Establishment Survey. This has always been the case heading into expansions

and into recessions.

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc. is one of Canadas pre-eminent wealth management firms. Founded in 1984 and focused primarily on high networth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highest

level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports,

visitwww.gluskinsheff.com


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November 6, 2009 LUNCH WITH DAVE

THE HOUSEHOLD SURVEY

To say that thehousehold employment

survey was horrible

would be an

understatement

To say that the Household survey was horrible would be an understatement.

This survey showed a net job destruction of 589,000, bringing the decline to 1.8

million over the past three months more than what was lost in the entire 2001

tech-wreck-recession. All of the decline was in full-time employment, and while

the bulls out there will undoubtedly point to the fact that temp agency hirings

are on the rise during the last three months, finding placements for part-time

workers is not a cause for celebration. Certainly not when the number of those

working part-time for economic reasons jumped 105,000 or at a 15% annual

rate, as was the case in October.

DIFFUSION INDEX STILL SHOWING WEAKNESS IN PAYROLLS

If there were even nascent signs of an improvement in labour market dynamics,

then we would be seeing the workweek begin to rise. Instead, it stayed at a

record low 33.0 hours last month. We would also see the nonfarm payrolldiffusion index embark on an uptrend, but instead it fell back to a three-month

low of 33.8 from 37.5 in September. The corresponding diffusion index in

manufacturing dropped in October, to 18.1 from 22.9. Therefore, we are trying

our best to wrap our heads around this notion that we are actually in some

durable recovery phase when two-in-three companies are still shedding jobs,

and more than four-in-five are doing so in the manufacturing sector.

In the Feds latest press

statement, they said

that any increases in

interest rates would

depend on the path of

resource utilization

code for the

unemployment rate

The unemployment rate

is now at 10.2% and the

U6 rate (the broadestmeasure of

unemployment) is at

17.5%

FED ON HOLD INDEFINITELY

Fed Chairman Bernanke hinted loudly that any interest rate increases in the

future would be dependant on the path of resource utilization code for the

unemployment rate. And in October, even in the face of a dip in the labour force

participation rate (which should be going in the opposite direction in a real

recovery), the headline (U3) measure of the unemployment rate still managed torise to 10.2% from 9.8% in September the highest level since April 1983. But

the labour market slack story does not end there the broader U6 measure

(which marginally attached workers and those working part-time for economic

reasons) soared to an all-time high for the series, to 17.5% from 17.0% in

September. In other words, more than one in six Americans are either

unemployed or under-employed, despite the most dramatic monetary and fiscal

efforts by a government anywhere to reverse a collapse in private sector credit.

IMPLICATIONS FOR THE FINANCIAL MARKETS

The bottom line here is that the Fed is staying put indefinitely and that should

help anchor the fixed-income market.

The further loss of manufacturing jobs (-61,000) and decline in the diffusion

index (not entirely consistent with the ISM) is likely to encourage the

Administration to sustain its policy of benign neglect when it comes to the U.S.

dollar. This should help anchor gold and commodities.

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The stock market has had a history this year of shrugging off weak employment

report after weak employment report because the expectation is that we will see

further rounds of fiscal stimulus, so its hard to say what equity investors will do

with this latest piece of data. We find it hard to believe that nurturing a policy that

risks taking the government debt-to-GDP ratio above 100% in the next three-to-

four years is deserving of the P/E multiples currently underpinning equity market

valuation. It should not be lost on anyone that the S&P 500 has managed to rally

over 60% from a low during which payrolls have declined 2.8 million, and that this

is without precedent. Lets define normal as the norm of prior 60% rallies and

whats normal is that by now the economy is not only standing on its own two feet

but has already generated over two million net new jobs.


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Gluskin Sheffat a Glance

Gluskin Sheff+ Associates Inc. is one of Canadas pre-eminent wealth management firms.Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to theprudent stewardship of our clients wealth through the delivery of strong, risk-adjustedinvestment returns together with the highest level of personalized client service.OVERVIEW

As of September30, 2009, the Firmmanaged assets of$5.0 billion.

Gluskin Sheff became a publicly tradedcorporation on the Toronto StockExchange (symbol: GS) in May2006 andremains 65% owned by its senior

management and employees. We havepublic company accountability andgovernance with a private companycommitment to innovation and service.

Our investment interests are directlyaligned with those of our clients, asGluskin Sheffs management andemployees are collectively the largestclient of the Firms investment portfolios.

We offer a diverse platform of investmentstrategies (Canadian and U.S. equities,Alternative and Fixed Income) andinvestment styles (Value, Growth and

Income).1

The minimum investment required toestablish a client relationship with theFirm is $3 million for Canadian investorsand $5 million for U.S. & Internationalinvestors.

PERFORMANCE

$1 million invested in our Canadian ValuePortfolio in 1991 (its inception date)

would have grown to $15.5 million2

onSeptember 30, 2009 versus $9.7millionfor the S&P/TSX Total Return Index

over the same period.$1 million usd invested in our U.S.Equity Portfolio in 1986 (its inceptiondate) would have grown to $11.2 millionusd

2on September 30, 2009 versus $8.7

million usd for the S&P500TotalReturn Index over the same period.

INVESTMENT STRATEGY & TEAM

We have strong and stable portfoliomanagement, research and client serviceteams. Aside from recent additions, ourPortfolio Managers have been with theFirm for a minimum of ten years and wehave attracted best in class talent at all

levels. Our performance results are thoseof the team in place.

Our investmentinterests are directlyaligned with those ofour clients, as Gluskin

Sheffs management andemployees arecollectively the largestclient of the Firmsinvestment portfolios.

We have a strong history of insightfulbottom-up security selection based onfundamental analysis. For long equities, welook for companies with a history of long-term growth and stability, a proven trackrecord, shareholder-minded managementand a share price below our estimate ofintrinsic value. We look for the opposite inequities that we sell short. For corporatebonds, we look for issuers with a margin ofsafety for the payment of interest andprincipal, and yields which are attractive

relative to the assessed credit risks involved.

We assemble concentrated portfolios our top ten holdings typicallyrepresent between 25% to 45% of aportfolio. In this way, clients benefitfrom the ideas in which we have thehighest conviction.

Our success has often been linked to ourlong history of investing in under-followed and under-appreciated smalland mid cap companies both in Canadaand the U.S.

PORTFOLIO CONSTRUCTIONIn terms of asset mix and portfolioconstruction, we offer a unique marriagebetween our bottom-up security-specificfundamental analysis and our top-downmacroeconomic view, with the notedaddition of David Rosenberg as ChiefEconomist & Strategist.

$1 million invested in our

Canadian Value Portfolio

in 1991 (its inception

date) would have grown to

$15.5 million2 on

September 30, 2009

versus $9.7 million for the

S&P/TSX Total Return

Index over the same

period.

For further information,

please contact

[email protected]

Notes:

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Unless otherwise noted, all values are in Canadian dollars.

1. Not all investment strategies are available to non-Canadian investors. Please contact Gluskin Sheff for information specific to your situation.2. Returns are based on the composite of segregated Value and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses.


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IMPORTANT DISCLOSURES

Copyright 2009 Gluskin Sheff + Associates Inc. (Gluskin Sheff). All rights

reserved. This report is prepared for the use of Gluskin Sheff clients andsubscribers to this report and may not be redistributed, retransmitted ordisclosed, in whole or in part, or in any form or manner, without the expresswritten consent of Gluskin Sheff. Gluskin Sheff reports are distributedsimultaneously to internal and client websites and other portals by GluskinSheff and are not publicly available materials. Any unauthorized use ordisclosure is prohibited.

Gluskin Sheff may own, buy, or sell, on behalf of its clients, securities ofissuers that may be discussed in or impacted by this report. As a result,readers should be aware that Gluskin Sheff may have a conflict of interest

that could affect the objectivity of this report. This report should not beregarded by recipients as a substitute for the exercise of their own judgmentand readers are encouraged to seek independent, third-party research onany companies covered in or impacted by this report.

Individuals identified as economists do not function as research analystsunder U.S. law and reports prepared by them are not research reports underapplicable U.S. rules and regulations. Macroeconomic analysis isconsidered investment research for purposes of distribution in the U.K.

under the rules of the Financial Services Authority.

Neither the information nor any opinion expressed constitutes an offer or aninvitation to make an offer, to buy or sell any securities or other financialinstrument or any derivative related to such securities or instruments (e.g.,options, futures, warrants, and contracts for differences). This report is notintended to provide personal investment advice and it does not take intoaccount the specific investment objectives, financial situation and theparticular needs of any specific person. Investors should seek financialadvice regarding the appropriateness of investing in financial instrumentsand implementing investment strategies discussed or recommended in thisreport and should understand that statements regarding future prospectsmay not be realized. Any decision to purchase or subscribe for securities inany offering must be based solely on existing public information on suchsecurity or the information in the prospectus or other offering documentissued in connection with such offering, and not on this report.

Securities and other financial instruments discussed in this report, orrecommended by Gluskin Sheff, are not insured by the Federal DepositInsurance Corporation and are not deposits or other obligations of anyinsured depository institution. Investments in general and, derivatives, inparticular, involve numerous risks, including, among others, market risk,counterparty default risk and liquidity risk. No security, financial instrumentor derivative is suitable for all investors. In some cases, securities andother financial instruments may be difficult to value or sell and reliableinformation about the value or r isks related to the security or financialinstrument may be difficult to obtain. Investors should note that incomefrom such securities and other financial instruments, if any, may fluctuateand that price or value of such securities and instruments may rise or fall

and, in some cases, investors may lose their entire principal investment.

Past performance is not necessarily a guide to future performance. Levelsand basis for taxation may change.

Foreign currency rates of exchange may adversely affect the value, price orincome of any security or financial instrument mentioned in this report.Investors in such securities and instruments effectively assume currencyrisk.

Materials prepared by Gluskin Sheff research personnel are based on publicinformation. Facts and views presented in this material have not beenreviewed by, and may not reflect information known to, professionals inother business areas of Gluskin Sheff. To the extent this report discussesany legal proceeding or issues, it has not been prepared as nor is itintended to express any legal conclusion, opinion or advice. Investorsshould consult their own legal advisers as to issues of law relating to thesubject matter of this report. Gluskin Sheff research personnels knowledgeof legal proceedings in which any Gluskin Sheff entity and/or its directors,officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based onpublic information. Facts and views presented in this material that relate to

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Any information relating to the tax status of financial instruments discussedherein is not intended to provide tax advice or to be used by anyone toprovide tax advice. Investors are urged to seek tax advice based on theirparticular circumstances from an independent tax professional.

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Lunch With Dave 110609