London Capital Management Commentary

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WEES HOTEL Situated where Baxter Beach is today.

SEPTEMBER 2006

As a time for new beginnings, and a renewed focus on goals and clear directions, September runs neck and neck with January for top honours. Whether it’s the back-to-school shuffle or increased traffic, e-mails, meetings and phone calls, intensity picks up as summer fades. Fall reminds us the current year is drawing to a close and a new one is just around the corner.


SEPTEMBER’S CALENDAR CRUNCH

Capital markets aren’t immune to calendar psychology. Investors have renewed intensity as they seek direction in September and October. Should the market signs disappoint in early fall, history has conditioned us to brace for market turbulence. That said, the positive momentum displayed by most markets in August and the first two months of the third quarter signaled good news so far.

In Table One, you’ll see most global equity and fixed-income markets posted solid gains in August. Bond markets were in positive territory as yields fell – a reaction to some weaker-than-expected economic news. Equity markets took the weaker economic outlook in stride, drawing comfort from lower interest rates, the higher probability of a positive shift in monetary policy direction and continued strong corporate earnings.

Table 1– Summary of major market developments

Market returns

August

Year to date

S&P/TSX

2.1%
7.1%

S&P500 (US$)

2.1%
4.4%

S&P500 (C$)

-0.1%
-0.5%

NASDAQ

4.4%
-1.0%

Russell 2000

2.9%
7.0%

FTSE 100 (U.K.)

-0.4%
5.1%

NIKKEI 225 (Japan)

4.4%
0.2%

EAFE (C$)

0.0%
6.7%

Canadian Bond Market

1.7%
2.3%

World Bond Market (US$)

1.5%
0.2%

*local currency (unless specified); price only

In Canada, the S&P/TSX posted its second consecutive monthly gain with a 2.1 per cent rise after a 1.9 per cent increase in July. Table Two summarizes sector level performance in Canada. In August, strength in the S&P/TSX index was broad, with eight of 10 sectors in positive territory, led by information technology and telecom services.


Table 2 - Sector level results for the Canadian market

S&P/TSX sector returns

August
Year to date

S&P/TSX

2.1%
7.1%



Energy

-2.8%
6.4%

Materials

2.3%
23.0%

Industrials

3.5%
3.1%

Consumer discretionary

2.7%
4.4%

Consumer staples

5.7%
-0.4%

Health care

-4.2%
-6.6%

Financials

4.8%
4.8%

Information technology

9.6%
-5.2%

Telecom services

9.4%
7.9%

Utilities

1.8%
-5.3%

*price only



THE AMERICAN CONSUMER AND
THE U.S. HOUSING MARKET

As we approach the end of the third quarter, economists contemplate whether we’re at, or merely approaching, a transition point.

Since spring, developments in the United States have brought the positive trends of continuing economic expansion, stable inflation and strong corporate profits into question. These developments include:

- Slowing U.S. economic growth

- Signs of accelerating inflation

- High gasoline prices

- A rapidly softening U.S. housing market

These developments affect the U.S. consumer and shouldn’t be ignored. Consumer spending accounts for over 60 per cent of the U.S. economy, which is the world’s largest (almost half of the G7 total).

U.S. home sales are down sharply from last year, unsold inventories are up to record levels and prices are declining in many previously hot markets, with further price declines expected. This weaker U.S. housing market is an integral part of a slowing growth and is anticipated to create credit quality problems. Consumers are expected to lose the positive wealth effect of rising house prices and equity withdrawal opportunities from mortgage refinancing and home equity lines of credit.

The opposite is true in Canada, where housing start forecasts are being revised upwards and existing home sales are on track to set another annual record.

Based on the wide array of economic data being released, financial markets reflect a wide range of views on where future U.S. growth and inflation are headed. Main line forecasts generally predict a U.S. economy that faces increased challenges, but tempered with a call for economic growth that will slow but not end the current expansion.

While still quite low, the risk of recession has increased and heightened the intense focus on economic data, further blurring the lines between trends and random economic noise. Ultimately, the question will be which, and not if, economic developments will sway markets and set the tone for fall 2006.

BACK TO SCHOOL AND BACK TO BASICS

The passing of Labour Day can remind you it’s simply time to stow away your white shoes, or it can trigger a rapid acceleration of every aspect of your life. Regardless, planning and balance remain sure-fire ways to respond to calendar pressures.

Likewise, investors continue to be well served by a financial plan emphasizing a disciplined, long-term approach to building balanced, diversified portfolios. With such an approach in place, investors can focus on all of the other day-to-day challenges that the flip of the calendar might imply.

The views expressed in this commentary are those of London Capital Management Ltd. (“London Capital”) as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances. London Capital is a subsidiary of London Life Insurance Company. London Life and London Capital are members of the Power Financial Corporation group of companies.

Posted: September 2006

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