Gis CMR 20060707

Independent Investment Research Since 1949
GLOBAL INVESTMENT STRATEGY

July 7, 2006
Equities, interest rates, currencies and business conditions for the major economies
Asset Allocation And Market Indicators

Model Weights
n
After a 1-month setback in May, the model rebounded in June. It has returned 36% over the last 12 months. The risk / reward tradeoff continues to suggest overweighting fixed-income instruments. Total equity weight has been cut slightly, to 32% from 33% last month. LATAM stocks remain overweighted at 11%. The total fixed-income allocation is 59%. Euro area bonds take up 27% spread across Germany, France, Italy and the Netherlands. Global equity risk has fallen slightly but remains at risky levels, meanwhile the global bond risk profile is in low risk territory. The model recommends maintaining 3% exposure to commodities, down from 9% last month.
% 100 80 60 40 20
Recommended Weights For July Equities: 32
% 100 80 60 40 20
% 100 80
Bonds: 59
% 100 80 60 40 20
60 40 20
% Cash: 6 12 10 8 6 4 2 % 12 10 CRB Futures: 3
% 12 10 8 6 4 2 % 12 10 8 6 4
BCA Research 2006
EDITORIAL BOARD Chen Zhao, Managing Editor chenz@BCAresearch.com

n Philip Hergel, Senior Analyst n Melanie Kermadjian, Research Analyst n Mathieu Savary, Research Analyst
8 6 4 2
2 2000 02 04 06
96
98
editor@BCAresearch.com n TEL 514.499.9550 n FAX 514.843.1763 n www.BCAresearch.com Copyright 2006 BCA Publications Ltd. All Rights Reserved. Refer to page 12.
BCA RESEARCH
GLOBAL INVESTMENT STRATEGY - ASSET ALLOCATION & MARKET INDICATORS JULY 7, 2006
PERFORMANCE
n
The models returns rebounded last month after a setback in May.

12000
CHART 2
Portfolio Total Returns

6400 3200 1600 800 400 200 100 12000 6400 3200 1600 800 400 200 100 12000 6400 3200 1600 800 400 200 100 12000 6400 3200 1600 800 400 200
BCA Research 2006
Month-to-month total returns were up almost 1% in June on a hedged basis. Unhedged, the portfolio was flat in June. This compares to 0.8% for G7 government bonds and flat performance for the MSCI global equity index. The models recommended overweight in Latin American stocks in June was a big contributor to the rebound in performance. The LATAM index we track rose over 4% in the month. Over the last 12 months, the model has returned 36%. By comparison, global equities have risen 17%, bond returns are in the red and the CRB futures index is up 26%.
Total Return Absolute Relative To Global Equities*
12000 6400 3200 1600 800 400 200 100
Total Return Absolute Relative To U.S. S&P 500
12000 6400 3200 1600 800 400 200 100
Total Return Absolute Relative To G7 10-Year Government Bonds
12000 6400 3200 1600 800 400 200 100
Total Return Absolute Relative To U.S. 10-Year Government Bonds
12000 6400 3200 1600 800 400 200 100
100 85 90 95 2000 05
* Source: Morgan Stanley Capital International data. Note: all series are US$ returns and rebased to January 1985 = 100.
BCA RESEARCH
WEIGHTS
n
The trend of shedding risk continues, but at a slower pace than in recent months. Boost fixed income allocations. Total equity weights now stand at 32% from 33% last month. There was a 2-percentage point reduction in LATAM stocks to 11% and U.S. equity exposure is also being cut by 1% to 7%. The high volatility in both bonds and equities in May led to a significant allocation to cash in June (13%). However, with conditions having settled down, the cash weight has been dropped to 6%. The model recommends a modest 59% allocation to bonds and the remaining 3% should go to commodities.
TABLE 1
Model Weights (as of June 30, 2006)

EQUITIES
U.S. Canada Japan Australia New Zealand Germany France Italy Netherlands Spain U.K. Switzerland Sweden Emerging Asia Latin America Total 7 (8) 1 (1) 0 (0) 0 (0) 0 (0) 2 (0) 0 (0) 0 (0) 0 (0) 1 (1) 3 (3) 2 (2) 0 (0) 5 (5) 11 (13) 32 (33)
BONDS
7 (6) 0 (0) 5 (5) 2 (6) 0 (0) 9 (5) 1 (0) 8 (14) 9 (4) 0 (0) 8(0) 10(5) 0 (0) N/A N/A 59(45)
CASH
3 (6) 0 (0) 0 (0) 1 (3) 2 (4) 0 (0) 0 (0) 0 (0) 0 (0) 0 (0) 0 (0) 0 (0) 0 (0) N/A N/A 6 (13)
CRB FUTURES
N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 3(9)
Note: Values in parentheses indicate last months allocation.
BCA RESEARCH
CAPITAL MARKET INDICATORS

CHART 3 CHART 4
Global Stock Market And Risk

1800 1400 1000 800 600 Risk Index
High Risk
LATAM Stock Market And Risk

1800 1400
Equities* 40-Week Moving Average
1500 1000
Latin American IFC Index 40-Week Moving Average
1500 1000
1000 800 600
500
500
Risk Index
High Risk
2 0 -2 -4 Value
Expensive Low Risk
2 0 -2
2 0 -2
Low Risk
2 0 -2 -4 -6 Value
-4
-4
-6
2 1 0
Fair
2 1 0
-1
Inexpensive
-1 Liquidity
1.5 1.0 .5 0 -.5 -1.0
Expensive Fair
Inexpensive
1.5 1.0 .5 0 -.5 -1.0
.5 0 -.5 -1.0 -1.5
Contracting Scarce Plentiful Explosive
.5 0 -.5 -1.0 -1.5 Momentum

Overbought
Liquidity 1 0 -1 -2 -3 Momentum 2
Overbought Explosive Contracting Scarce Plentiful
1 0 -1 -2 -3 2 1 0
1 0 -1
Oversold
1 0 -1
BCA Research 2006
1 0 -1 -2 96 98 2000
Oversold
-1
BCA Research 2006
-2
-2 2000 02 04 06
-2
96
98
02
04
06
* Morgan Stanley Capital International data.
Our measure of risk has receded recently, but the risk / reward tradeoff remains too high for the model to begin increasing weights to global equities.
The weight allocated to Latin American equities fell slightly for July, despite an improvement in the risk profile. The reason is that our expected return calculations, before adjusting for risk, have also fallen.
BCA RESEARCH
CHART 5
CHART 6
U.S. Stock Market And Risk

S&P 500 40-Week Moving Average 1600 1200 800 600 1600 1200 800 600 800
High Risk
Japanese Stock Market And Risk

2000 1600 1200 Topix Index 40-Week Moving Average 2000 1600 1200
800
Risk Index 4 2 4
High Risk
4 2 0 -2 -4
Risk Index
4 2 0 -2
2 0 -2 -4 2 1 0 -1 -2 1
Inexpensive Fair Low Risk
Low Risk
0 -2 -4 Value
-4 Value 2 1 0 -1 -2 Liquidity 1
Plentiful
2 1 0 -1
Expensive
2 1
Expensive
Fair Inexpensive
0 -1
1 0 -1 -2
Liquidity
Contracting Scarce Plentiful Explosive
Contracting Scarce
1 0 -1 -2 0 -1
0 -1
Explosive
-2 Momentum 2 1 0 -1 -2
Oversold
BCA Research 2006
-2
Overbought
Momentum 2 1 0 -1 -2
Oversold
BCA Research 2006
Overbought
2 1 0 -1 -2
2 1 0 -1 -2
96
98
2000
02
04
06
96
98
2000
02
04
06
Risk is starting to recede. Our fundamental measure of valuation remains in fair territory, while more traditional measures suggest the S&P 500 is an even better buy. Liquidity conditions are no longer deteriorating.
Risk fell significantly in June, but still not enough for our model to build exposure again in the Japanese market.
BCA RESEARCH
CHART 7
CHART 8
Global Bond Yields And Risk

% 7 6 5 4 10-Year Government Bond Yield 40-Week Moving Average % 7 6 5 4 % 8 7 6 5 4
U.S. Bond Yields And Risk

10-Year Government Bond Yield 40-Week Moving Average % 8 7 6 5 4 Risk Index
3 2 1 0 -1
High Risk
Risk Index
3 2 1
4 2 0
4 2 0 -2
High Risk
0 -1
Low Risk
-2
Low Risk
Value 1 0
Inexpensive Expensive Fair
Value 2 1 0 -1 1 0
Inexpensive Expensive Fair
2 1 0 -1
Bargain
-1 -2 1 0 -1 -2 Momentum 2 0 -2
Oversold
BCA Research 2006
-1 -2
Negative
Bargain
-2 Cyclical 1 0
-2
Cyclical 1 0 -1
Positive
Negative
1 0 -1 -2 -3 Momentum
Positive
-1 -2
-2 -3
Overbought
2 0 -2 06
3 2 1 0 -1 -2
Overbought
Oversold
BCA Research 2006
3 2 1 0 -1 -2 2000 02 04 06
96
98
2000
02
04
96
98
The risk profile for global government bonds has remained in low risk territory for several months. Bonds are inexpensive based on our valuation indicator, cyclical conditions favor a bond rally and technically, bonds are due for a bounce.
Risk is still low risk territory. Treasurys are bordering on bargain-level prices based on our valuation model.
BCA RESEARCH
CHART 9
CHART 10
Euro Area Bond Yields And Risk

% 8 6 4 10 Year Government Bond Yield 40-Week Moving Average % 8 6 3 4 2 % 5 4
Swiss Bond Yields And Risk

10-Year Government Bond Yield 40-Week Moving Average % 5 4 3 2
4 2 0
Risk Index
High Risk
Risk Index 4 2 0 4 2 0 -2
Low Risk High Risk
4 2 0 -2
Low Risk
-2 Value
Expensive
-2
2 1 1
Value
Expensive
2 1
1
Fair
0
Inexpensive
0
Bargain
Fair
0
Inexpensive
0
Bargain
-1
-1 Cyclical
Negative
-1 1.0
-1 Cyclical
Negative
1.0 .5 0 -.5
1 0 -1
Positive
1 0 -1 Momentum 2 0
Oversold
BCA Research 2006
.5 0 -.5 -1.0 2 1 0 -1 -2 -3
Positive
-1.0 Momentum 2 1 0 -1 -2 -3 06
2 0 -2 -4
Overbought
Overbought
-2 -4 06
Oversold
BCA Research 2006
96
98
2000
02
04
96
98
2000
02
04
The model is overweighting euro area bonds. A total of 27% is being allocated to these fixedincome markets. The risk reading for euro area bonds is very low which is prompting the overweight position.
These indicators suggest the Swiss bond market is looking attractive despite strong economic data recently. Valuations are fair even though yields have backed up in recent months. Furthermore, cyclical conditions are peaking based on our measure of cyclical activity.
BCA RESEARCH
TREND/RELATIVE PERFORMANCE
CHART 11 CHART 12
Global Equities (Absolute, In US$)

1300 1200 1100 1000 900 800 1300 1200 1.10 1100 1.05 1000 1.00 900 800 .95 .90 .85 700 700 .80 % 20 10 0 -10 -20 % 40 20 0 -20
BCA Research 2006
U.S. Equities (Relative To Global, In US$)

1.15 1.15 1.10 1.05 1.00 .95 .90 .85 .80 13-Week R.O.C. % 5 0 -5 40-Week R.O.C. % 10 0
BCA Research 2006
13-Week R.O.C.
% 20 10 0 -10 -20 % 40 20 0 -20
% 5 0 -5 % 10 0 -10
40-Week R.O.C.
-10 2000 02 04 06
96
98
2000
02
04
06
96
98
Note: Based on Datastream data. 13-Week Moving Average 40-Week Moving Average
Global equities held at their 200-day moving average, but these rates-of-change measures signal that prices remain vulnerable to more downside.
The U.S. market looks like it is set to outperform the global average. Both the 13-week and 40-week rates of change have bottomed.
BCA RESEARCH
CHART 13
CHART 14
Canadian Equities (Relative To Global, In US$)

550 500 .86 .86 450 .78 .78 400 350 300
Japanese Equities (Absolute)

550 500 450 400 350 300
.70
.70
.62
.62
.54
.54
250
250
.46 % 10 0 -10 % 20 0 -20 96 98 2000 02

BCA Research 2006
.46 13-Week R.O.C. % 10 0 -10 40-Week R.O.C. % 20 0 -20 06 % 20 10 0 -10 -20 % 40 20 0 -20 -40 96
13-Week R.O.C.
% 20 10 0 -10 -20 % 40 20 0 -20 -40
40-Week R.O.C.
BCA Research 2006
04
98
2000
02
04
06
Canadian shares have strongly outperformed the global average over the last few years based on common-currency returns. However, momentum has deteriorated over the last 12 months. The diverging trend between prices and these measures is unsustainable and suggests some weakness in Canadian relative performance.
The correction in Japanese shares has further to run based on these simple technical measures. However, the 13-week rate of change is somewhat oversold, therefore some consolidation might occur in the short term, before prices resume their decline.
BCA RESEARCH
10
CHART 15
CHART 16
New Zealand Equities (Relative To Global, In US$)

3.4
.18 .16 .14 .12 .10 .08 .06 .18 .16
G7 10-Year Government Bond Total Returns (In US$)

3.4 3.0
3.0
2.6
.14 .12 .10
2.6
2.2
2.2
1.8
.08 .06
1.8
1.4
% 20 10 0 -10 -20 % 40 20 0 -20 -40 96 98 2000
1.4 13-Week R.O.C. % 10 5 0 -5 40-Week R.O.C. % 20 10 0

BCA Research 2006
13-Week R.O.C.
% 20 10 0 -10 -20 % 40 20 0 -20 -40 06
% 10 5 0 -5 % 20 10 0 -10 96 98
40-Week R.O.C.
BCA Research 2006
-10 06
02
04
2000
02
04
13-Week Moving Average 40-Week Moving Average
The New Zealand equity market looks primed to outperform the global index in common-currency terms. These rates-of-change measures have bottomed.
Global government bond returns have had a seesaw action over the last year. But momentum suggests prices should firm.
BCA RESEARCH
11
CHART 17
CHART 18
Euro Area 10-Year Government Bond Total Returns (Relative To G7, In US$)
3.6 3.4 1.2 1.2 3.2 3.0 2.8 1.1 1.1 2.6 2.4 1.0 1.0 2.2 2.0 .9 .9 1.8 1.6 % 5 0 -5 % 10 0 -10 -20 96 98 2000 02
BCA Research 2006
U.K. 10-Year Government Bond Total Returns (Absolute)

3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 13-Week R.O.C. % 8 4 0 -4 40-Week R.O.C. % 15 10 5 0 -5 04 06
13-Week R.O.C.
% 5 0 -5
% 8 4 0 -4 % 15 10 5 0 -5 96 98
40-Week R.O.C.
% 10 0 -10 -20
BCA Research 2006
04
06
2000
02
These technical measures on euro area bonds suggest a period of outperformance is likely over the course of the next few months.
Gilts are becoming attractive. The model is recommending exposure to British bonds and part of the reason is due to improving momentum, such as the 13-week rate of change.
BCA RESEARCH
12
CHART 19
CHART 20
The New Zealand Dollar Exchange Rate

US$/ NZ$
The Swiss Franc / C$ Crossrate

US$/ NZ$
C$ /CHF 1.20 1.15 1.10 1.05 1.00 .95
NZ$ strengthening vs. US$ NZ$ weakening vs. US$
.65 .60 .55 .50 .45
.65 .60 .55 .50 .45
franc strengthening vs. C$ franc weakening vs. C$
C$ /CHF 1.20 1.15 1.10 1.05 1.00 .95 .90 .85
.90
.40
.40
.85
% 10 0 -10 % 20 10 0 -10 -20 96 98
13-Week R.O.C.
% 10
% 20 10
13-Week R.O.C.
% 20 10 0 -10
0
0
-10 % 20 10 0 -10 -20 06
-10 % 20 10 0 -10 -20 96 98

BCA Research 2006
40-Week R.O.C.
40-Week R.O.C.
% 20 10 0 -10 -20 04 06
BCA Research 2006
2000
02
04
2000
02
The kiwi seems to have found support around 61. Momentum suggests the currency could rally from here.
The global slowdown and general market instability argue for long Swiss franc positions over the C$. The franc is a flight-to-quality play, which should continue to benefit from market volatility. Meanwhile the loonie is tied to the global business cycle via commodity prices. These technicals suggest the timing is right for the CHF/C$ cross to appreciate.
Copyright 2006, BCA Publications Ltd. All rights reserved.

The text, images and other materials contained or displayed on any BCA Publications Ltd. product, service, report, e-mail or web site are proprietary to BCA Publications Ltd. and constitute valuable intellectual property. No material from any part of any BCA Publications Ltd. web site may be downloaded, transmitted, broadcast, transferred, assigned, reproduced or in any other way used or otherwise disseminated in any form to any person or entity, without the explicit written consent of BCA Publications Ltd. All unauthorized reproduction or other use of material from BCA Publications Ltd. shall be deemed wilfull infringement(s) of BCA Publications Ltd. copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. BCA Publications Ltd. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. BCA Publications Ltd. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights. Some of the data contained in this publication may have been obtained from Datastream International Limited, Lehman Brothers or from Standard and Poors (S&P). Copyright 2006 The McGraw-Hill Companies, Inc., S&P is a division of The McGraw-Hill Companies, Inc. All rights reserved.
1002 Sherbrooke St. W. Suite 1600, Montreal, Quebec H3A 3L6 editor@BCAresearch.com n TEL 514.499.9550 n FAX 514.843.1763 n www.BCAresearch.com
BCA RESEARCH
13
THE LAST WORD...

This section is intended to cover markets or assets that are not included in our Asset Allocation model, but nonetheless offer significant investment potential which should be considered as part of asset allocation strategy for a diversified portfolio. Topics will be chosen and analyzed on an ad hoc basis. Our objective is to provide clients with some investment insights to assist their asset allocation decisions.
LUMBER: A SPECULATIVE LONG WHEN INTEREST RATE CYCLE PEAKS

Lumber future prices have had a volatile few years. Two opposing forces have created a trendless market, but with huge volatility. On one hand, the ongoing Canada/U.S. softwood lumber trade dispute, together with the relentless climb in global policy rates have been big negatives for lumber. On the other hand, the global housing boom, despite cooling recently in some countries, has been a major plus for the lumber market. Deforestation has also reduced lumber supply. The net result of these opposing forces has been a virtual stalemate in prices with a seesaw pattern. Speculators should prepare to enter long positions in lumber when the Federal Reserve and other major central banks begin to switch policy back to reflating the global economy, likely in the first half of 2007.
n
$ 400 300
Lumber has not participated in the general commodity boom. Lumbers second contract relative to the CRB Raw Industrials index is at a 10-year low and at very oversold levels. The softwood lumber dispute between Canada and the U.S. is close to a resolution. An agreement in principle has been achieved, which will remove one major uncertainty and source of volatility in the lumber market.
200 % 8
There are some obvious risks to the lumber market. U.S. housing is cooling and weakness is beginning to seep into personal consump$ Price Of Lumber (2nd Contract) tion. Further policy tightening is still a possibility even 400 though we believe interest 300 rates are already at neutral levels. All of this means that 200 lumber may still weaken in the coming months before a rally % Global Policy Rates materializes.
8 6 4 2 Bullish Consensus On Lumber* % 80 60 40 20
Every reflation period since 1990 has marked a bottom in lumber. Rallies in lumber prices almost always occur with the first interest rate cut. Sentiment is currently at neutral levels and trending lower. The timing seems right for a reversal in policy rates to coincide with sentiment having fallen to washed-out levels.
6 4 2 % 80 60 40 20
BCA Research 2006
Bottom Line: The lumber market could be gearing up for a sharp rally on the first sign that the interest rate cycle is beginning to reverse. Philip Hergel Senior Analyst philiph@BCAresearch.com Melanie Kermadjian Research Analyst melaniek@bcaresearch.com
90
92
94
96
98 2000 02
04
06
* Source: Marketvane.net. Shown smoothed.

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Independent Investment Research Since 1949

GLOBAL INVESTMENT STRATEGY

Asset Allocation And Market Indicators

Recommended Weights For July Equities: 32

% Cash: 6 12 10 8 6 4 2 % 12 10 CRB Futures: 3

EDITORIAL BOARD Chen Zhao, Managing Editor chenz@BCAresearch.com

The models returns rebounded last month after a setback in May.

Portfolio Total Returns

Total Return Absolute Relative To Global Equities*

12000 6400 3200 1600 800 400 200 100

Total Return Absolute Relative To U.S. S&P 500

12000 6400 3200 1600 800 400 200 100

Total Return Absolute Relative To G7 10-Year Government Bonds

12000 6400 3200 1600 800 400 200 100

Total Return Absolute Relative To U.S. 10-Year Government Bonds

12000 6400 3200 1600 800 400 200 100

Model Weights (as of June 30, 2006)

Note: Values in parentheses indicate last months allocation.

CAPITAL MARKET INDICATORS

Global Stock Market And Risk

LATAM Stock Market And Risk

Equities* 40-Week Moving Average

Latin American IFC Index 40-Week Moving Average

1000 800 600

1.5 1.0 .5 0 -.5 -1.0

1.5 1.0 .5 0 -.5 -1.0

.5 0 -.5 -1.0 -1.5

Contracting Scarce Plentiful Explosive

.5 0 -.5 -1.0 -1.5 Momentum

* Morgan Stanley Capital International data.

U.S. Stock Market And Risk

Japanese Stock Market And Risk

Global Bond Yields And Risk

U.S. Bond Yields And Risk

Euro Area Bond Yields And Risk

Swiss Bond Yields And Risk

Global Equities (Absolute, In US$)

U.S. Equities (Relative To Global, In US$)

% 20 10 0 -10 -20 % 40 20 0 -20

Canadian Equities (Relative To Global, In US$)

Japanese Equities (Absolute)

.46 % 10 0 -10 % 20 0 -20 96 98 2000 02

% 20 10 0 -10 -20 % 40 20 0 -20 -40

BCA Research 2006

New Zealand Equities (Relative To Global, In US$)

G7 10-Year Government Bond Total Returns (In US$)

1.4 13-Week R.O.C. % 10 5 0 -5 40-Week R.O.C. % 20 10 0

% 20 10 0 -10 -20 % 40 20 0 -20 -40 06

BCA Research 2006

13-Week Moving Average 40-Week Moving Average

U.K. 10-Year Government Bond Total Returns (Absolute)

BCA Research 2006

13-Week Moving Average 40-Week Moving Average

13-Week Moving Average 40-Week Moving Average

The New Zealand Dollar Exchange Rate

The Swiss Franc / C$ Crossrate

NZ$ strengthening vs. US$ NZ$ weakening vs. US$

.65 .60 .55 .50 .45

.65 .60 .55 .50 .45

franc strengthening vs. C$ franc weakening vs. C$

C$ /CHF 1.20 1.15 1.10 1.05 1.00 .95 .90 .85

% 10 0 -10 % 20 10 0 -10 -20 96 98