Investor Letter Global Macro

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					January, 2007
                                       An Open Letter To Clients


Happy New Year!

2006 was a remarkable year for the global markets. The venerable “Dow Jones” made a new all time
high in US dollar terms while the Canadian markets, buoyed by certain generally higher comm odities
and merger activity, marched towards the 13,000 point level. Oil prices stabilized in the $60 US range,
uranium virtually doubled in price while gold and silver continued to shine. Even though the US
housing market has cooled considerably as the Federal Reserve Board increased short term interest
rates, the broad based markets appear to have taken it in stride apparently shrugging off any
suggestion of a major slow down in the economy.

“Chindia” and “BRIC” have been added to our vocabulary, the former representing the economic
powerhouse of China and India, and the latter folds in Brazil and Russia to round off the acronym. I
view this as a sign of the times. A major economic shift continues right before our eyes as the “BRIC”
steams along, representing an ever-increasing percentage of the global economic activity. America,
Europe and Japan aren’t the only games in town anymore. As these nations evolve into economic
powerhouses, one must conclude their political influence will increase as well.

But as this global expansion continues, one might ask what it means to the world. With a global
population that has tripled in the last 50 years, joined by an apparent embracement of capitalism and
increasing per capita incomes of previously down trodden nations, where do we go from here? Can
such an expansion maintain its momentum? What are the risks that could derail this “goldilocks”
scenario?

Though there are many risks, at the top of my list is the disequilibrium of global finance. The United
States continues to go deeper into debt on all fronts and a rapidly declining currency relative to perhaps
the Japanese Yen or Chinese Renminbi (their domestic currency), is not out of the question. The US
national debt is on its way to 9 trillion dollars. Their annual trade deficit (what they import from
foreigners compared to what they sell to foreigners) is over $800 billion dollars per year. The
consumer, especially those in the “sub prime” category are facing significant financial challenges as
evidenced by the rapid increase in housing foreclosures. Dr Marc Faber, a macro economist whom I
consider to possess one of the great minds of our time, recently suggested framing 30 year US bonds
as their current values may be inflated away over that time line. Surely at some point the rest of the
world will be less likely to accumulate IOU’s from a society whose balance sheet appears to be running
amok, according to Dr. Faber. As interest rates increased last year, housing starts declined as did their
values. The likelihood of Americans being able to extract ever increasing amounts of equity from their
houses is doubtful which indeed will effect consumer spending.

In my humble opinion, other areas of concern are the burgeoning derivatives market, geo political
concerns surrounding the civil war in Iraq (not to mention potential conflict between Israel and Iran),
peak oil, global warming and the ensuing rapid aging of many countries’ populations.

On the global warming issue, I highly recommend that clients watch a documentary titled “An
Inconvenient Truth” by former Vice President Al Gore. I’m sure it’s available at your favourite movie
rental store and is in a word, shocking. The higher temperatures are big news and forecasters suggest
that 2007 will be the hottest on record.

Though the aforementioned is a serious list that raises concern, I maintain that a properly placed
portfolio will weather any storm on a long-term basis. Unexpected market downturns, often swift and
deep, create opportunities for patient and wise investors.

This past year also delivered a surprise to Unit Trust investors. On October 31 st , Finance Minister
Flaherty announced that the government is taking action to stop the conversion of corporations to this
type of business arrangement. Unit Trusts are essentially flow-through entities that ultimately have
incomes taxed in the hands of the investor as opposed to being taxed at the corporate level. The
Government decided that tax revenues from corporations would fall precipitously if they allowed
Corporate Canada to morph into “Trust Canada”. The Conservative party had originally made this one
of the planks in their platform; that is, not to change the tax arrangement on these business
arrangements. As an investor and advisor, I think it would have been more appropriate to place a
moratorium on new trust conversions and have a more open debate and dialogue before making such
dramatic changes to our tax code. The new rules will take effect in 2011 so there is still plenty of time
for things to change.

During 2006 I also was able to continue on the path of reducing the number of families that I personally
assist in their financial planning. Though change can be difficult, it made the most sense for all
concerned as it leads to a better level of service. However, I am selectively adding new clients.
Consistent with the emphasis I place on family, I readily accept and assist clients’ family members. I
am also selectively accepting referrals from other professionals in the community as well as my existing
client base. I thank those of you who have referred clients to me in the past.

This past year I continued to attend conferences and seminars. I was fortunate to have been able to
attend the Berkshire Hathaway (Warren Buffett fame) annual shareholders meeting in Omaha, the San
Francisco Hard Asset Conference and numerous meetings with mutual fund managers and
representatives. I continue to frequent the same web sites as last year. In particular,
www.financialsense.com is a refreshing and informative website anchored by Mr. Jim Puplava. Jim
typically has 3 or 4 hours of broadcasts each week interviewing authors, market analysts and he
provides a weekly recap on market activities. This year I plan on attending the Berkshire Hathaway
meeting at the start of May, our bi annual Dominion Securities meeting in late May and the Canadian
Seniors Advisor course in Toronto in October. As more of my clients are retired or approaching
retirement, I’m hoping to learn more about Seniors issues and their respective solutions to challenges.

I will be on vacation from January the 8th through the 14th, and from March 28th through April 3r d. Erin
Hooper will be here to assist you should you require immediate attention. For my RRSP clients, I’d like
to remind them that this year’s deadline for tax year 2006 deductible contributions is Thursday March
1st . I will have select evening and Saturday appointment dates available to meet with clients.

As always, if you have any questions, concerns or would like to book an appointment, please feel free
to contact myself or Erin Hooper. I can be reached at 519-252-3517 or john.davies@rbc.com while
Erin can be reached at 519-252-3671 or erin.hooper@rbc.com. On behalf of Erin and myself, thanks
again for your continued support and all the best to you and your family in 2007.



Sincerely,


John D Davies, CFP

				
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