RBC Dominion Securities David Simpson B Comm FMA

RBC Dominion Securities David Simpson, B. Comm, FMA, FCSI, APM VP, Investment Advisor RBC Dominion Securities Life In the Midst of the Great Global Credit Crisis 3/5/2021 November 12, 2008 1

RBC Dominion Securities Topics • • Market Overview • Housing • Credit • Economy • Currency • Equity Markets • Oil & Gas Markets • Trust – In the system • Questions November 12, 2008 2

RBC Dominion Securities NEW STOCK MARKET TERMS CEO: Chief Embezzlement Officer. CFO: Corporate Fraud Officer. BULL MARKET: A random market movement causing an investor to mistake himself for a financial genius. BEAR MARKET: A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no satisfaction. VALUE INVESTING: The art of buying low and selling lower. P/E RATIO: The percentage of investors wetting their pants as the market keeps crashing. BROKER: What my broker has made me. STANDARD & POOR: Your life in a nutshell. STOCK SPLIT: When your ex-wife and her lawyer split your assets equally between themselves. FINANCIAL PLANNER: A guy whose phone has been disconnected. MARKET CORRECTION: The day after you buy stocks. CASH FLOW: The movement your money makes as it disappears down the toilet. YAHOO: What you yell after selling it to some poor sucker for $240 per share. INSTITUTIONAL INVESTOR: Past year investor who's now locked up in a nuthouse. PROFIT: An archaic word no longer in use. November 12, 2008 3

RBC Dominion Securities Market Overview – Where We Were • Crisis erupts in money markets (Summer 2007) • Economy growing, but below long-term potential • Inflation rising, boosted by energy costs • Policy initiatives considered sufficient to contain financial crisis • Falling interest rates, fiscal relief sufficient to buoy economy • Bonds expensive/stocks at or beneath fair value November 12, 2008 4

RBC Dominion Securities Market Overview – Where We Are Now • Lower rates/fiscal package/targeted policy responses prove insufficient to unclog credit pipeline • Crisis spreads from money market, through banks into global economy • U. S. and global economy in recession • Inflation tumbling • With time, current initiatives should dampen crisis. Lots more policy initiatives to come? • Bonds expensive/stocks at cheapest levels since mid-1970’s November 12, 2008 5

RBC Dominion Securities Housing: Primary Issues Weighing on the Market • Prices in the US down almost 20% from the peak • More downside expected into 2009 – (30 -35%) • Problem now is one of inventory, access to credit, and demand • Canada likely to weaken, but unlikely to follow the US • Less Subprime/Exotic Mortgages • CMHC insurance protects banks from large losses • Stronger banking system It’s big, but the global economy has absorbed some huge hits over the past two decades. November 12, 2008 6

RBC Dominion Securities Housing: A Wave of Defaults November 12, 2008 7

RBC Dominion Securities Housing: And Likely More to Come … November 12, 2008 8

RBC Dominion Securities Housing: An Intractable Overhang November 12, 2008 9

RBC Dominion Securities Housing: The Crisis November 12, 2008 10

RBC Dominion Securities Housing: Bust Isn’t Over, But It Is Well Advanced November 12, 2008 11

RBC Dominion Securities Housing: Where Is the Low for U. S. Home Prices? November 12, 2008 12

RBC Dominion Securities Housing: In Detroit Homes Cost About as Much as Cars November 12, 2008 13

RBC Dominion Securities Housing: Look What $1. 75 USD Buys You! November 12, 2008 14

RBC Dominion Securities Housing: US Consumer in a Bind November 12, 2008 15

RBC Dominion Securities Housing: Canadian House Prices Have Peaked November 12, 2008 16

RBC Dominion Securities Housing: Take Your Pick! November 12, 2008 17

RBC Dominion Securities Housing: Canadian House Prices Cooling Off Quickly November 12, 2008 18

RBC Dominion Securities Housing: A Comparison of Bubbles November 12, 2008 19

RBC Dominion Securities Housing: Snow Birds – Future? November 12, 2008 20

RBC Dominion Securities Credit: Primary Issues Weighing on the Market • Markets for all sorts of credit seized, but have begun to recover • Governments are desperately trying to “unfreeze” credit markets, as this is the lifeblood of the economy • Canadian government has been forced to follow the rest of the world to ensure that our banking system is protected • Equity markets are highly correlated to credit markets November 12, 2008 21

RBC Dominion Securities Forrest Gump Explains Mortgage Backed Securities: • Mortgage backed securities are like boxes of chocolates. Criminals on Wall Street stole a few chocolates from the boxes and replaced them with turds. Their criminal buddies at S&P rated these boxes AAA Investment Grade chocolates. These boxes were then sold all over the world to investors. Eventually somebody bites into a turd and discovers the crime. Suddenly nobody trusts American chocolates anymore worldwide. • U. S. Treasury Secretary Henry Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for 700 billion dollars until the market for turds returns to normal. Meanwhile, Hank's buddies, the Wall Street criminals who stole all the good chocolates, are not being investigated, arrested, or indicted. • Mama always said: "Sniff the chocolates first, Forrest. " November 12, 2008 22

RBC Dominion Securities Credit: Glass Half Full November 12, 2008 23

RBC Dominion Securities Credit: Glass Half Empty November 12, 2008 24

RBC Dominion Securities High Correlation Between Credit and Stocks November 12, 2008 25

RBC Dominion Securities Credit: Other Areas Only Beginning to Deteriorate November 12, 2008 26

RBC Dominion Securities Economy: US Unemployment Rate Headed to 8% November 12, 2008 27

RBC Dominion Securities Economy: No Recovery Until Well into 2009 • Depth of recession depends on policy response • Unemployment rate headed towards 8% • Further Fed easing seems likely • Additional fiscal stimulus package in the works November 12, 2008 28

RBC Dominion Securities Economy: A Canadian Recession At Hand • Canada not immune from impact of slowing U. S. economy • Commodity prices softening, home prices cooling and credit conditions tightening • Weaker C$ provides some offset Canada still in an enviable position, but risks are rising November 12, 2008 29

RBC Dominion Securities Economy: Job Losses Ahead for Canada November 12, 2008 30

RBC Dominion Securities Economy: Storm Clouds Gathering Globally • European growth at a standstill –slowest in 10 years • U. K. economy in recession as housing/consumer face significant headwinds • Japan’s economy fragile • India and China slowing Pace of global growth slowing = weak commodity prices November 12, 2008 31

RBC Dominion Securities Economy: Chinese Growth at Chinese Five Year Low – Inflation Fears Fading November 12, 2008 32

RBC Dominion Securities Economy: China Feels The Impact of Globalization November 12, 2008 33

RBC Dominion Securities Economy: India Cuts Rates As Growth Slows November 12, 2008 34

RBC Dominion Securities Economy: The Recession of 2008/09 November 12, 2008 35

RBC Dominion Securities Economy: Post-Bailout U. S. Debt Load Still Manageable November 12, 2008 36

RBC Dominion Securities Economy: Federal Deficit Inevitable November 12, 2008 37

RBC Dominion Securities Currency November 12, 2008 38

RBC Dominion Securities Currency: C$ Driven by Oil and US Outlook November 12, 2008 39

RBC Dominion Securities Currency: Loonacy? November 12, 2008 40

RBC Dominion Securities Currency: Canadian Dollar November 12, 2008 41

RBC Dominion Securities Markets: Where to Hide? November 12, 2008 42

RBC Dominion Securities Markets: Are We There Yet? U. S. financial landscape significantly altered • • Bear Stearns bought by JP Morgan • Goldman Sachs and Morgan Stanley converted to deposit-taking institutions • European/UK financial system also affected –Kuwait, India, Iceland, Hungary & Russia all under pressure • Greatest government intervention since the 1930 s Fannie Mae/Freddie Mac in conservatorship Lehman Brothers bankrupt, AIG nationalized Merrill Lynch sold to Bank of America, Wachovia, Wa. Mugone November 12, 2008 43

RBC Dominion Securities Markets: Government Intervention November 12, 2008 44

RBC Dominion Securities Past Bear Markets (Peak to Trough Declines (DJIA)) November 12, 2008 45

RBC Dominion Securities Equity Markets – Roadmap for Recovery? November 12, 2008 46

RBC Dominion Securities Oil – Demand Collapses November 12, 2008 47

RBC Dominion Securities Oil – Don’t Lose Sight of the Long-Term November 12, 2008 48

RBC Dominion Securities Oil – Supply/Demand Balance November 12, 2008 49

RBC Dominion Securities Oil – Costs Continue to Climb November 12, 2008 50

RBC Dominion Securities Oil Bubble? An Interesting Comparison November 12, 2008 51

RBC Dominion Securities Trust: Key and Currently Lacking in the System • Along with credit, counter-party risk is at the heart of the problem • Banks need to be able to hedge their risks in order to feel confident about expanding their balance sheets • Hedges are no longer trusted and thus banks have lost their willingness and ability to lend • Policy responses are designed in part to rebuild trust November 12, 2008 52

RBC Dominion Securities Looking Forward 2009/10 Risky Business 1. Global financial system remains frozen 2. The “R” word –recession risks rising in U. S. , Europe, U. K. , Japan –Canada slowing 3. Cost/effectiveness of Treasury rescue plan 4. Further fallout from credit crisis 5. Geopolitical factors/protectionism/China/Russia 6. U. S. elections – now complete November 12, 2008 53

RBC Dominion Securities Reasons to be Optimistic 1. Massive fiscal and monetary policy response - total $6 trillion to date 2. Financial system beginning to thaw 3. Main Street is panicking and smart money is buying 4. More to come via interest rate cuts and further fiscal stimulus –and oil price cut in half November 12, 2008 54

RBC Dominion Securities Reasons to Be Realistic 1. Risk of depression/financial market meltdown now very low but credit markets still dysfunctional. 2. US in recession – how long and how deep? 3. World economy on the brink of recession – how long and how deep? 4. Canada will not be immune. 5. Equity and Credit Markets remain highly volatile through 2009. Multiple retest of the lows. Massive deleveraging continues. November 12, 2008 55

RBC Dominion Securities Summary 1. Worst of the credit crisis is behind us -economic “crisis" now unfolding 2. Depth/duration of the downturn will depend on policy response –pretty impressive to date 3. US consumer deleveraging could take years to play out 4. Deflation a near term concern juxtaposed with inflationary fears 5. Stock markets will bottom long before credit crisis ends or economies bottom November 12, 2008 56

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