MARKETVIEWS April 14, 2006 THE WORM HAS TURNED THE END OF THE BULL MARKET IN BONDS

A very significant event has occurred. The fall of interest rates which started in the early 1980s has ended. The era of constantly lower cost of money is over. A review of this term trend will help with our understanding of what lies ahead.

As a banker in the mid 1970s I recall my father being excited that he could buy Government of Canada bonds at 8%. His experience was 5%. What was occurring was the long term rise in rates that did not stop until 1983. I recall in 1982 an issue of Canada 18% 5 year bonds, extendable for an additional 5 years, being a “hard sell”. That was the end of that cycle that started in the 1960s.

US 30 year treasury bonds are yielding above 5% today! What’s the big deal? Looking at the chart below, 5% is above the declining resistance trend, it appears a major reversal is about to occur.

Are we a little early on this call? Perhaps. We may be ahead of the crowd but most trend reversals are not generally recognized until way after the event.

This MARKETVIEWS will include a number of charts from the US Federal Reserve demonstrating what has been happening. I hope they help see the way.

The previous US Federal Reserve (the FED) Chairman, now Mr. Bernake, Mr. Greenspan spoke of “the conundrum”. He was referring to the fact that although the US central bank had moved maturity rates up, the rates on the long maturity bonds had not moved as well. This caused an inverted interest rate curve where short rates were above long rates. At the time the FED was moving up short rates it was also increasing money supply. The fed was buying back US Treasury Bonds and putting more cash in the system. Unfortunately, the supply of bonds for sale was decreasing causing rates to drop or remain static, causing this conundrum. An analogy would be: applying pressure on your brakes to slow your car while, with your other foot pushing on the gas pedal. The net result will be a car that needs repairs and overheated brakes that will fail when you really need them.

While the FED is still doing the same thing now, there is a supply of bonds coming into the market (probably from China/Japan) pushing up the rates. A primer on bonds: as rates rise the price of a bond falls. As supply increases rates increase, as demand increases rates fall.

2

A look at the grey areas above shows that the actions of the FED have delayed any meaningful recession, but to do so they have had to inject more and more money into the system. Where does it take us? I think it will be an inflationary bubble and a decline in the purchasing power of the dollar. the US dollar. Unfortunately it will take all the other currencies with it, eventually.

Where have we seen inflation so far? Real Estate, Commodities, oil and gas, precious metals, art, second homes, cars. Where have we not seen it? Electronics, clothing, shoes, anything that can be imported with a high labour component. North America and Western Europe have benefited from the relatively cheap labour of Asia. How long does that last. The pressure on China to revalue their currency would end this free ride and expose the hidden inflation. We would see rapidly rising prices in the other consumables we buy so cheaply today.

Looking at the markets we can identify the place we should be to protect our wealth as best possible. Remember that this shift is a long term change in market direction and will have significant .

3 CURRENCIES

CANADIAN DOLLAR

Canada is continuing to benefit from is abundant natural resources. As long as world wide demand is strong, our dollar will continue to rise against the other currencies, not only the US dollar, but the Euro and Yen. This strength will be moderated by the Bank of Canada to try to reduce the negative impact it is having on the Manufacturing sector exporting to the United States. Is a par dollar possible?

4 EURO

The Euro is also due to strengthen against the US dollar. A possible run up to $1.49? As stated earlier it may not move against the Canadian Dollar as they move in tandem. The Euro costs $1.40 Canadian and could get cheaper.

5 YEN

Having bounced off support the yen appears headed to 100 yen to the US$ from the present 118 level, a 15% move.

This bodes well for the suggested long of the Japanese market index. (Note Nikkei comments later)

6 MARKETS

TOKYO NIKKEI INDEX

The Japanese market, as well as the European markets, has performed well in the last two years. Japan coming out of approximately 20 years of deflation is finally showing signs of positive growth. Most Japanese fled the equity markets bringing the Nikkei 225 index down to 8,600 from 39,000, preferring to sock their savings away in the banks and bonds. This drove domestic interest rates virtually to zero. That savings is now slowly migrating back into the equity markets and real estate. The Nikkei index has been telling us this since March 2003.

Recently the Nikkei index appears to have broken out on the upside and target is the 21,000 level.

A move of this magnitude coupled with the Yens strength could provide handsome returns in the next year.

7 GERMANY

DAX index

FRANCE

CAC index

Both markets, Germany and France have performed well in the last 3 years but not for Canadian investors, handicapped by a very strong Canadian dollar. With the possibility of the Euro outperforming the Cdn. dollar, there may be further profits to be made here.

8 TORONTO

The Toronto equity market has had a great run since 2003 as well, powered by natural resource . Moving up against overhead resistance it is due for a pull-back. My guess is that it will be lead by the Bank stocks as the market finally grasps the fact that interest rates are headed up. The decline could be tempered by continuing high commodity prices supporting stocks in the oil/gas, and metals sectors.

9 NEW YORK

S&P 500 INDEX

10 NASDAQ INDEX

The broader US markets appear to have run their course to the upside since 2003. These markets never achieved new high status, as opposed to Canada and Europe, and are ready for a pullback. The exception is the Dow Jones 30 Industrials. (DJI) The DJ industrials have broken through the long downtrend and may continue higher. We will see a rising New York market with no breadth. I would expect to see investors losing money as the narrow market heads higher. Other than just avoiding the US market a strategy of purchasing’ the Dogs of The Dow’ would be the route I recommend.

GOLD

Gold is the anti US Dollar. In the last 5 years the dollar has dropped 50% against gold. The US Dollar has fallen even more against other commodities including oil. A quick look at the increase of currency in circulation (chart earlier) will show the debasement of the US Dollar. The Canadian Dollar has not faired much better. As long as voters elect governments that print more money we can comfortably hold gold and watch it appreciate. If oil was purchased for gold it would be the same price as it was in 2003,

11 GOLD AND PRECIOUS METALS

12 COMPLACENCY IN THE MARKET

The VIX index

The VIX index is a measurement of volatility in the US broad market (S&P 500 index) reflecting the relationship between the numbers of Call Options purchased to the number of Put Options purchased. It is assumed that call buyers are optimistic and put buyers are pessimistic. A very high number suggest a market that is sold out and al low ratio indicates a very complacent or comfortable market. Both extremes are usually wrong. Looking at the next chart with the S&P 500 index overlay the extremes occurred at market turns. At present the VIX would support a market turn-down, with lower prices ahead.

13

The VIX index with the Standard & Poors 500 index

As always your comments are appreciated. These are only my opinions and we will wait to see how correct they are.

Best regards,

John Housser Brant Securities Limited 416 596 4555

The material contained herein is for information purposes only and it is not to be construed as an offer or solicitation for the sale or purchase of securities. The information does not consider the specific investment goals and financial situation of the recipient of this document. Readers should consult with their professional advisor regarding the suitability of investing in any securities or pursuing any investment or business strategy, which may be described herein. Charts courtesy of Reuters

14