Zyblock January 2011

INVESTMENT STRATEGY I RESEARCH
Equity Strategy
Another Positive year for Equities
RBC Dominion Securities Inc.

Myles Zyblock, CFA (Analyst) (416) 842-7805 myles.zyblock@rbccm.com
January 2011
Priced as of market close EST on January 14, 2011.
All values in U.S. dollars unless otherwise noted.
For Required Conflicts Disclosures, please see page 29.
Equity Strategy Summary
Macro Backdrop: Recovery still rolling forward
¾ Economic growth is likely to remain positive and near trend. Business spending, international trade and
gradual improvement in the labor market will offer key pillars of support. Trade tensions and lingering
financial fragility offer important downside risks.
Market Outlook: Maintain a positive bias
¾ Technical indicators are unwinding from overbought and this process probably needs a bit more time to play
out. Nevertheless, stabilization in leading domestic and international macro data, supportive policy settings
and reasonable valuations argue for additional upside in share prices on a 6-9 month basis.
Sector Strategy: Dial down the defense
¾ We raised the economic sensitivity of our portfolio, recently upgrading Industrials and downgrading
Consumer Staples, Utilities and Telecom. We are currently overweight Energy, Info Tech and Health Care
and look for a Q1 pullback to add more cyclicality.
Stock Selection Strategy: Pay for progress
¾ Stock-selection is making a comeback. Performance correlation across asset classes and within the equity
market has started to moderate, offering a clue that investors are loosening their grip on the near complete
“risk on” and “risk off” focus. We prefer companies that can deliver on both the top- and bottom-line, provide
dividend growth and have some foreign exposure.
Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 2

Macro Backdrop: Trend growth ahead
GDP Growth Outlook (Next 6 – 9 6

Source: RBC Capital Markets, BEA
5.0
months) 3.7
4 3.2 2.9 2.6
2.3
Above Average 2 1.6 1.7
0.9 0.6
0
Average (~2.75%) X -0.7 -0.7
-2
Below Average & Positive -4

-4.0
-4.9
-6
Recession -6.8
-8
Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10
▲/▼ Directional Bias. Source: RBC Capital Markets
Real GDP (qoq% chg, annualized)
Robust business spending, a better trade balance and an improved jobs market are likely to support
GDP. The new tax initiatives, particularly the payroll tax cut, could offer an important additional pillar
of support in 2011.
Capacity use and the inflation rate are too low for the Fed to stop short of completing its $600 billion
asset purchase program.
Growth will probably average near 3% over the next few quarters while escalating trade tension, armed
conflict in Asia and lingering financial fragility offer key downside risks.

Macro Backdrop: Key supports for 2011 are government & investment
2.5
2.0 Fiscal drag turns negative The federal government has offered important
1.5 by Q4, 2011 support for GDP during the recovery.
1.0
0.5 The 2010 federal budget deficit was ~$1.3 trillion,

0.0 or 10% of GDP.
-0.5
-1.0 State and local government finances are messy.

-1.5
-2.0
Source: RBC Economics, Macroeconomic Advisers
Federal outlays have turned negative on a y-o-y
Q2-2009 Q4-2009 Q2-2010 Q4-2010 Q2-2011 Q4-2011 Q2-2012 Q4-2012
basis.
Fiscal Stimulus (percentage points, quarterly annualized rate)
ARRA Impact Obama Tax Package Impact Net Fiscal Stimulus
However, a spending slowdown will be more
than offset by the new tax initiatives.
22
Investment spending growth has been Investment rate is barely keeping

20
unmatched since the early-1980s. up with depreciation rate.
18
Yet, the investment rate is barely keeping up

16
with the depreciation rate.
14
Low capital costs, robust cash flows, easier

12
lending standards and the accelerated
depreciation tax credit will extend the capex 10
recovery. 8
Jan-47 Jan-52 Jan-57 Jan-62 Jan-67 Jan-72 Jan-77 Jan-82 Jan-87 Jan-92 Jan-97 Jan-02 Jan-07
Gross Private Domestic Investment as a % of GDP Depreciation as a % of GDP

Macro Backdrop: Labor market will define the pace
10 100
109
8 80
Today’s
On jobsother
par with gains are on
6 60
107 par with other “jobless
“jobless” recoveries.
recoveries”. 4 40
105 2 20
0 0
103
-2 -20
101 -4 -40
Source: RBC Economic Research -6

Leading indicators like -60
99 Source: RBC Capital Markets, BLS, Haver Analytics profits …
t-12 t-10 t-8 t-6 t-4 t-2 trough t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 t+20 t+22 t+24 -8 -80
U.S. Private Payroll Employment Jan-67 Jan-73 Jan-79 Jan-85 Jan-91 Jan-97 Jan-03 Jan-09
Dec-1982 Feb-1992 Jul-2003 Dec-2009 Total Private Payrolls (yoy% chg) (LS) S&P 500 Earnings (yoy% chg) (RS)
28 6
40
Source: RBC Capital Markets, ISM, NFIB
35
18 4 30
Small business hampered by
25 government…could Obama’s recent swing to
8 2 20 the center be a game changer?
15
10
-2 0
…temp jobs, ISM 5
-12
employment sub-indices -2
0
and overtime hours argue
)
)
)
)
)
)
)
s( %
(%
(%
(%
(%
(%
(%
(%
%
s(
r
tes
r
ion
ty
les
r
se
bo
bo
he
xe
bli
s
for more jobs gains.
Sa
Ra
lat
La
La
Ot
Ta
ine
ila
Inf
va
or
of
of
t
&
us
es
Po
-22 -4
t/A
st
ty
v't
eB
er
ali
Co
Go
s
Int
Co
rg
Qu
&
La
ce
l
cia
an
ro
an
ur
f
Source: RBC Capital Markets, BLS
Fin
Ins
on
titi
-32 -6
e
mp
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Co
NFIB: Single Most Important Problem
US Temp Help Services (yoy% chg, Adv 6mo) (LS) US Total Nonfarm Emp (yoy% chg) (RS)

Macro Backdrop: The message from reliable leading indicators
80 18
Source: RBC Capital Markets, Conference Board Inc.
15
Current reading = 57.0
70
Recent maximum = 60.4 (Apr, 2010) 12 LEI < 0 Î GDP recession
9
60 6
50 0
-3
40 -6
-9
Current reading = 6.2
30
ISM < 50 Î IP recession -12 Recent maximum = 11.6 (Mar, 2010)
Source: RBC Capital Markets, ISM, Haver Analytics
ISM <42 Î GDP recession -15
20 -18
Jan-50 Jan-55 Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
US Recessions ISM Manufacturing Index US Recession Periods (Defined by the NBER) US Conference Board LEI (yoy% chg) (LS)
65 40
ISM Non-mfg <50 Î GDP recession 30

60 ECRI <-6.9 Î GDP recession
20
55
10
50 0
-10
45 Current reading = 3.3
-20 Recent maximum = 24.0 (Dec, 2009)
40 Current reading = 57.1
-30
Recent maximum = 57.1 (Dec, 2010) Source: RBC Capital Markets, Haver Analytics
Source: RBC Capital Markets, ISM
35 -40
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08
US Recessions ISM Non-Mfg Index US Recessions ECRI Weekly Leading Index Growth Rate (Avg, %)

Market Outlook: Maintaining a positive bias
Market Outlook (Next 6 – 9 months) Risk Rating

High
Overweight
Market Weight + X▲ Neutral
Market Weight
Market Weight - Low
Underweight
▲/▼ Directional Bias. Source: RBC Capital Markets
10%
8%
Source: RBC Capital Markets, Bloomberg
2010 was a year of “risk on” and “risk off”.
6% We have raised weights twice since early
4% October.
Technical indicators are unwinding from
2%
0%
overbought, and this process might need more
-2%
time.
-4%
-6%
However, stabilization in the economic outlook
-8%
and a supportive Fed argue that equities are
-10%
likely to be higher on a 6-9 month view.
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10
S&P 500 2010 Monthly Returns

Market Outlook: Business cycle + Fed Î Higher Share Prices
60 3.5
* Based on the ISM Mfg and Non-Mfg Indices and Initial Unemployment Claims.
ISM services turned up in August and its

So urce: RBC C ap ital Ma rkets, ISM, D ep t. of Lab or, Have r A nal ytics
40
2.0 manufacturing counterpart started to act better
in September.
20
0.5
Meanwhile, the 4-week moving average of initial
0
UI claims has been on an improving track since
-1.0 the third week in August.
-20
-2.5
The collective message from the macro data
-40
argues against recession, a signal that has
usually proved positive for equities.
-60 -4.0
Jan-55 Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
S&P 500 (yoy% chg) (LS) RBC Business Cycle Indicator* (RS)
1.0
The business cycle’s message has never been 0.8
more important for equities in at least the past

0.6
50 years.
0.4
0.2
Business cycle indicators are usually most
reliable when the underlying profile for the 0.0
market is flat (U.S. in last decade) to down -0.2

(Japan since 1989). * Based on the ISM Mfg and Non-Mfg Indices and Initial Unemployment Claims.
So urce: RBC Ca pital Marke ts, ISM, D ept. o f Lab or, H aver Ana lytics
-0.4
Rolling 10-yr Correlation: S&P 500 Returns and RBC Business Cycle Indicator*
Long-run Correlation

Market Outlook: Business cycle + Fed Î Higher Share Prices (cont’d)
2.60
Source: RBC Capital Markets Quantitative Research, Bloomberg, Haver Analytics
NOTE: Earnings estimates reflect monthly observations, while prices are captured daily. Valuations have expanded alongside inflation
14.5
2.40
expectations, contrary to the traditional
finance view.
2.20
13.5
2.00
1.80
12.5
1.60
11.5 1.40
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
S&P 500 P/FE (LS) 10-Year Implied Inflation Rate (RS)
30.0
10yr Bond Yield < 5%
Correlation = +62.6%
Policy “reflation”, or an upward drift in inflation 25.0
10yr Bond Yield ≥ 5%
Correlation = -77.7%
as Yield ↑ P/E ↑
expectations, is positive for the equity market
S&P500 PE Ratio (from 1/1936-4/2010)
as Yield ↓ P/E ↑
when realized inflation is hovering near 0%. 20.0
15.0
10.0
5.0
0.0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
10-Yr Avg Bond Yield (from 1/1936-4/2010)

Market Outlook: Earnings gains + “OK” Value Î Higher Share Prices
80
Source: RBC Capital Markets, BEA, Consensus Economics
Note: Forecast Based on FRB, Consensus Economics, and RBC Economics estimates for input variables. Our macro model incorporates nominal GDP,
60
labor costs, interest expenses and productivity
40
growth.
20 Currently, the model’s growth profile is

consistent with our $90 EPS target for 2011.
0
-20
-40
US Corp Profits (yoy% chg) Corporate Profits Model
110
Source: RBC Capital Markets, Thomson
Sell-side bottom-up numbers are above ours
100
for both 2010 and 2011. 96.1
90.0
90
84.6
82.0
80
The sell-side data imply 130 bps of margin
expansion in 2011, more than double our 70
expectation. 60
60.8 60.8
50
40
2009 2010 2011
RBC Estimate ($) Consensus S&P 500 EPS ($)

Market Outlook: Earnings gains + “OK” Value Î Higher Share Prices (cont’d)
30 35
Source: RBC CM Quantitative Research, First Call Source: RBC CM Quantitative Research
30
25 Most standard valuation
metrics sit near the mid-point +1 STD
25
20 +1 STD of their 30 year ranges.
20
Long-term Average
15
Long-term Average
15
10
-1 STD -1 STD
10
5
5
0 0
Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
Price-to-Forward Earnings: S&P 500 Price-to-Earnings: S&P 500
2.5 6
Source: RBC Capital Markets Quantitative Research
Source: RBC CM Quantitative Research
5
2.0
+1 STD 4
+1 STD
1.5
Long-term Average 3 Long-term Average

1.0
0.5 -1 STD -1 STD

1
0.0
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 0
Price-to-Sales: S&P 500
Price-to-Book Value: S&P 500

Market Outlook: Will main street return?
7.0
Equity mutual fund managers have burned down

cash levels to a 25-year low.
6.0
6%
5.0 Retail remains an important net seller of equities

and buyer of bonds (recent data show a slight
3.7% change).
4.0
3.0
Source: RBC Capital Markets, Haver Analytics, ICI
Retail probably comes back into equities when
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 the labor market message is more constructive.
ICI: Liquidity Ratio: All Equity Funds (%)
500 600 400

r= 0.72
400 Retail is likely to remain 400 300
300 absent in the equity market

until… 200 200
200
0 100
100
0 -200 0
-100 -400 -100
-200
…the jobs…they
market shows
feel more
Source: RBC Capital Markets, Haver Analytics, ICI -600 much more job
improvement.
security. -200
-300 Source: RBC Capital Markets, ICI, BLS
Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 -800 -300
ICI Equity Fund: Net Inflows (12-mo moving total, $bil) Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
ICI All Bond Funds: Net Inflow (12-mo moving total, $bil) US Nonfarm Payrolls (mom chg, 000s) (LS) ICI: Equity Fund Net Inflows (bil.$) (12-mo sum) (RS)

Market Outlook: The corporate cash mountain & some of its uses
10 $40,000
9 $30,000 $25,455
$20,650
Highest cash levels since $20,000 Large positive
8
the 1950s. $10,000
delta.
7
$0
6
-$10,000
5 -$20,000
-$21,506
4 -$30,000
-$40,000 -$37,302
3 As of December 8, 2010.
Source: RBC Capital Markets, Standard & Poor's
NOTE: Excludes Farms.
Source: RBC Capital Markets, FRB -$50,000
2 2007 2008 2009 2010
Jan-52 Jan-57 Jan-62 Jan-67 Jan-72 Jan-77 Jan-82 Jan-87 Jan-92 Jan-97 Jan-02 Jan-07
Net Change in S&P 500 Dividends ($ millions)
US Nonfinancial Corporate Liquid Assets as a % of Total Assets
$200.00 1,800
$180.00 $172 1,600 $1,540

$158 $1,416
$160.00
1,400
$140.00
1,200
$114
$120.00
Solid growth off of a 1,000
$100.00 $90 $90 low base. $879
$779
$78 800
$80.00
$636
$55
$60.00 $48 $48 600
$31 $35
$40.00 $24 400
$20.00
Source: RBC Capital Markets 200
$0.00
Q3,'07 Q4,'07 Q1,'08 Q2,'08 Q3,'08 Q4,'08 Q1,'09 Q2,'09 Q3,'09 Q4,'09 Q1,'10 Q2,'10 -
2006 2007 2008 2009 2010
S&P 500 Share Repurchases ($ Bil)
US M&A Activity ($ billion)

Canadian Equities: CRB + S&P 500 Î TSX Outperforms…again
100
80 A simple econometric model that includes the

60
CRB and S&P 500 as inputs explains more than
70% of the annual return variation in the TSX.
40
20
¾ The CRB is a good proxy for the TSX’s
0
resource-heavy global exposure.
-20
-40 ¾ The S&P 500 is a proxy used to capture

-60 the strong economic and financial market
-80 linkages between the two countries.
Estimated TSX (yoy% chg) Actual TSX (yoy% chg)
TSX (yoy% chg) Expected Annual Growth in CRB (yoy% chg)

15 10 5 0 -5 -10 -15
Variables Coefficient t-stat
Expected Annual 15 21.7 18.8 15.8 12.8 9.9 6.9 4.0
S&P 500 (yoy% chg) 0.77 23.4 Price Performance 10 17.9 14.9 11.9 9.0 6.0 3.1 0.1
CRB (yoy% chg) 0.59 14.4 S&P 500 5 14.0 11.0 8.1 5.1 2.2 (0.8) (3.8)
Constant 1.25 (yoy%chg) 0 10.1 7.2 4.2 1.2 (1.7) (4.7) (7.6)
2 -5 6.3 3.3 0.3 (2.6) (5.6) (8.5) (11.5)
R = 0.70
-10 2.4 (0.6) (3.5) (6.5) (9.5) (12.4) (15.4)
Source: RBC Capital Markets -15 (1.5) (4.4) (7.4) (10.4) (13.3) (16.3) (19.2)
Source: RBC Capital Markets
Let’s say the CRB and S&P 500 both appreciated

by 10% over the next 12 months. This model
argues that the TSX would then be up by ~15%.

Sector Strategy: Dial down the defense
Overweight………………………..Underweight
Health Care, Telcos, Consumer

Technology, Energy Discretionary, Utilities,
Materials
Chronology of Recent Changes

01-Dec-09 Downgrade Financials to Market Weight
01-Mar-10 Upgrade Health Care to Overweight
Upgrade Consumer Staples to Market Weight
Downgrade Consumer Discretionary to Market Weight
05-May-10 Downgrade Materials to Underweight
19-May-10 Upgrade Energy to Overweight
Downgrade Consumer Discretionary to Underweight
07-Jun-10 Upgrade Consumer Staples to Overweight
Downgrade Industrials to Market Weight
02-Jul-10 Downgrade Industrials to Underweight
Upgrade Telecom to Market Weight
Upgrade Utilities to Market Weight
01-Dec-10 Upgrade Industrials to Market Weight
Downgrade Consumer Staples to Market Weight
Downgrade Telcom to Underweight
Downgrade Utilities to Underweight
Sector Strategy: Raise the portfolio’s economic sensitivity
80 70
* The S&P 500 Cyclicals Index is a cap-weighted index comprised of those stocks in the Energy, Industrials, Consumer
60
Discretionary, Materials and Info Tech indices in the S&P 500. The S&P 500 Defensives Index is a cap-weighted index
comprised of those stocks in the Consumer Staples, Health Care, Utilities, and Telecom Services indices in the S&P 500. 65 The relative earnings outlook for cyclical stocks
40 60
outperform alongside brighter economic
conditions.
20 55
0 50 Regression analysis argues that forward

-20 45 earnings estimates for Telecom, Utilities,
-40 40
Consumer Staples and Health Care are least
sensitive to changing economic conditions.
-60 35
-80 30
Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
Earnings Estimate Revisions: S&P 500 Cyclicals* minus Defensives* (3mma) (LS)
ISM Mfg Composite Index (RS)
80
* The S&P 500 Cyclicals Index is a cap-weighted index comprised of those stocks in the Energy,
70 Industrials, Consumer Discretionary, Materials and Info Tech indices. The S&P 500 Defensives Index is
75
a cap-weighted index comprised of those stocks in the Consumer Staples, Health Care, Utilities, and
Telecom indices.
70
Return spreads usually favor cyclicals absent a 50
65
red flag raised by leading economic data like the 30 60
ISM.
55
10
50
-10 45
40
-30
35
Source: RBC Capital Markets Quantitative Research, ISM
-50 30
S&P 500 Cyclicals* / Defensives* (yoy % chg) (LS) ISM Mfg Composite Index (RS)

Sector Strategy: Industrials are a recent upgrade
22 50
Capex rate is barely keeping up with 40

Earnings outlook remains
20
the depreciation rate. strong.
30
18 20
10
16
0
14
-10
12 -20
-30
10 Source: RBC Capital Markets Quantitative Research
-40
8
Jan-47 Jan-52 Jan-57 Jan-62 Jan-67 Jan-72 Jan-77 Jan-82 Jan-87 Jan-92 Jan-97 Jan-02 Jan-07 RBC CM Consensus Estimate Revisions Index: S&P 500 Industrials minus Composite Equal Weighted
Index (3mma)
Gross Private Domestic Investment as a % of GDP Depreciation as a % of GDP
50 80
16 Source: RBC Capital Markets, Global Financial Data Inc.
Chinese industrials lead 28 * Machinery & Equipment = cap-weighted composite derived by combining Electrical Comp. &
40 Equip, Contr & Farm Mach., and Industrial Machinery groups.
by 4 months. 70
11 30
18
20
60
6
10
8
0 50
1
-10
-2
-4 40
-20
-12 -30 30
-9
-40
Feared collapse in machinery
Source: RBC Capital Markets Quantitative Research, First Call, ISM earnings is fading.
-14 -22 -50 20
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11
Shanghai SE Industrials / 'A' Shares Composite (yoy% chg, 3mma, Adv 4) (LS) 12-Mo Consensus Fwd Earnings: Machinery & Equipment / S&P500 (yoy % chg) (LS)
S&P 500 Industrials / Composite (yoy% chg) (RS) ISM New Orders (adv 6mo) (RS)

Sector Strategy: Consumer Staples/Telcos/Utilities are a recent downgrade
700 50
Source: RBC Capital Markets, Dept. of Labor, Haver Analytics
650 0.30 40
600 30
550 0.25 20
500 10
450 0
0.20
400
-10
350
-20
0.15
300
-30
250
-40
200 0.10
-50
Unemployment Insurance: Initial Claims, 4-wk ma (000s) (LS)
S&P 500 Consumer Staples/Composite (RS) RBC CM Consensus Estimate Revisions Index: S&P 500 Consumer Staples minus Composite Equal
Weighted Index (3mma)
60 0.14 0.18
40 r = 0.86
0.13 0.17
20
0 0.12 Utes and Telcos are the 0.16
-20 same trade!

0.11 0.15
-40
-60 0.10 0.14
-80
0.09 0.13
-100
Source: RBC Capital Markets Quantitative Research Source: RBC Capital Markets, Haver Analytics
-120 0.08 0.12
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11
Estimate Revisions Index: S&P 500 Telecom minus Composite S&P 500: Telecom / Composite (LS) S&P 500: Utilities / Composite (RS)
Estimate Revisions Index: S&P 500 Utilities minus Composite

Sector Strategy: Remain overweight Technology
0.70 1600
0.65 1500
Tech stocks have positively resolved from a
0.60 1400
long-base pattern, much like resources did from
0.55 1300
their base between 1998 and 2002.
0.50 1200
0.45 1100
0.40
Positive resolution 1000
of long-base The sector shows dividend growth and share
0.35 900
pattern. repurchase leadership, benefits from a strong
0.30 800
0.25 700
tech spending cycle, is inexpensive and is
0.20
Source: RBC Capital Markets, Haver Analytics
600
among the more globally-focused sectors.
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
S&P 500: Info Tech/Composite (LS) S&P 500 Composite (RS)
0.70 0.35 100

0.60 0.30 80
60
0.50 0.25
40
0.40 0.20
20
0.30 0.15
0
0.20 0.10
Long-term earnings -20
0.10 outperformance, but 0.05
-40
Source: RBC CM Quantitative Research, First Call stocks have lagged. Jan-10 Apr-10 Jul-10 Oct-10 Jan-10 Apr-10 Jul-10 Oct-10 Jan-10 Apr-10 Jul-10 Oct-10
0.00 0.00
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 S&P 500 Relative Estimate Revisions (Group minus Composite)
Info Tech / S&P500 (LS) 12-Mo Consensus Fwd Earnings: Info Tech / S&P500 (RS) Software & Services Technology Hardware & Equipment Semiconductors & Semi Equipment

Sector Strategy: Remain overweight Energy
0.52 150 70
Source: RBC Capital Markets, Haver Analytics Source: RBC Capital Markets, JPM, Haver Analytics
0.50 Oil prices supported by 65
0.48
100
global growth… 60
Energy sector relative
0.46
performance breaking a 50
55
0.44 two-year downtrend. 50
0.42 0
45
0.40
40
-50
0.38
35
0.36
-100 30
0.34 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
Crude Oil Prices (yoy% chg) (LS) Global Mfg PMI (RS)
S&P 500 Energy / Composite
120 100
Source: RBC Capital Markets Quantitative Research, Haver Analytics 150
100 80
Oil leads forward
80 60
earnings estimates by 4 100
40
60
months!
20
40
50
0
20
-20
0 0
-40
-20
-40 -50
-60
Estimate revisions
-80 have bottomed.
-60 Source: RBC Capital Markets Quantitative Research
-100
-80 -100 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
RBC CM Consensus Estimate Revisions Index: S&P 500 Energy minus Composite Equal Weighted Index
S&P 500 Energy Forward Earnings (yoy% chg) (LS) Crude Oil (yoy% chg, Adv 4 mo) (RS) (3mma)

Sector Strategy: Market Weight Financials
0.032 0.70
Source: RBC Capital Markets Trend & Cycle Research Source: RBC Capital Markets, Haver Analytics
0.030 0.65
0.028
The post-bubble “Nifty 0.60
Fifty” experience. The post-bubble Tech
0.55
0.026
experience.
0.024
0.50
May '75
0.45
0.022
0.40
0.020
0.35
0.018 Jan '04
0.30
0.016
0.25
0.014 Nov '74 Oct '02
0.20
0.012 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Jan-73 Jan-74 Jan-75 Jan-76 Jan-77
S&P 500 Bear Market S&P 500 Info Tech / Composite
S&P 500 Bear Market Coca Cola / S&P 500
0.40 55
Source: RBC Capital Markets, FRB, BEA
Today’s Financials are more

+1.5 Std Dev
0.35 likely to be trading, rather 50
than trending, vehicles. The Financial industry is still

0.30 45
in the process of working off a
40
fundamental excess.
0.25
0.20 35
?
0.15 30
Mar '09
0.10 25
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Mar-65 Mar-70 Mar-75 Mar-80 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Mar-10
S&P 500 Bear Market S&P 500 Financials / Composite Commercial Banking: Assets: Total Loans as % of GDP Trend +/- 1 Std Dev

Sector Strategy: Summary recommendations
U.S. Current Recent Change Comments

Equity Sectors Recommendation (Dec 1, 2010)
Energy Overweight None A prime beneficiary of the global economic recovery. Clean balance sheets, robust
dividend growth and enticing value complement the macro story.
Health Care Overweight None Positive estimate revisions and deep value. The sector usually outperforms as index
earnings growth slows.
Information Overweight None Leader in top- and bottom-line delivery accompanied by robust profitability metrics.
Technology Positive estimate revisions and a shareholder friendly sector while awash in cash.
Consumer Staples Market Weight Downgraded from Struggles to keep up when labor market improves and commodity prices remain elevated.
Overweight Provides a hedge against financial market turmoil.
Industrials Market Weight Upgraded from Fundamental supports found in global economic recovery and a strong capex cycle.
Underweight Valuations remain somewhat challenging.
Financials Market Weight None Inexpensive and benefitting from declining loss rates, but loan demand and wholesale
businesses remain sluggish.
Telecom Services Underweight Downgraded from Relatively high dividend yields might not be able to offset the deterioration in estimate
Market Weight revisions and sluggish top-line growth.
Utilities Underweight Downgraded from Fundamental delivery has lagged and estimate revisions are now deteriorating.
Market Weight
Consumer Underweight None Displays stretched valuations at a time of near-peak margins. A stronger labor market
Discretionary recovery would limit downside risk.
Materials Underweight None Valuations look stretched while estimate revisions remain in negative territory.

Style & Stock Selection Strategy: Stock picking is making a comeback
Recommended Style Bias Over the Business Cycle
We’re Correlations within and across
Quality here asset classes are dropping.
Fundamental Growth
Momentum Quant models have been
working better.
Stability Emphasize growth as valuation

spreads have collapsed and
Traditional
index earnings growth
Value
moderates.
2.2 0.6
Small caps are

2.1
0.6
outperforming despite
2.0
better growth abroad.
0.6
1.9
Most common growth
0.6
1.8
benchmarks have
1.7 been outperforming. 0.6
1.6
0.5
1.5
1.4 0.5

1.3 0.5
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
S&P 500 Pure Growth / Pure Value 50 DMA Russell 2000 / S&P 500 50 DMA

Style & Stock Selection Strategy: Performance correlations moderating
1.0
0.8
Correlation between broad asset classes has
loosened a bit.
0.6
0.4
0.2
For example, the correlation between stocks and
bond yields has declined from 0.83 to about 0.20
0.0
since July 2010.
-0.2
-0.4
-0.6
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
60-day Correlation: S&P 500 & 10-yr Treasury Yield
0.91
Performance correlation between stocks within

0.78
the market has declined from 0.79 to 0.54 since
July 2010.
0.66
These data tell us systemic factors are being 0.54
awarded incrementally less weight in the

decision tree as the economic cycle has 0.42
matured.
0.30
Average Correlation of S&P 500 Stocks vs. Index (60-Days Trailing)

Style & Stock Selection Strategy: Looking for something in addition to value
100 60%
Source: RBC Capital Markets Source: RBC Capital Markets Quantitative Research
Period when Low Quality outperforms High Quality
Feb 09 - Apr 10 50%

Sep 02 - Jan 04
Oct 00 - Jan 01
10 40% Collapse in valuation spreads

Dec 91 - Jun 92 Dec 98 - May 99 is forcing investors to look
30% for other factors.
Jul 86 - May 87
Jul 82 - Mar 84
20%
1
Jun 80 - Apr 81
“Low quality” rallies usually
last 10-12 months.
10%
0 0%
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08
US Recessions U.S. High Quality / Low Quality S&P 500 Earnings Yield Spread: High Yield Quintile minus Composite (%)
18 60
16 40
14 20
Better ranked names have outperformed by ~870
12 0 basis points since April 2010.
10 -20
More factors are working and

8 -40
this is a good sign for stock
pickers.
6 -60
Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
US # of Factors "Working" (12mma) (LS) US Higher Quality/Lower Quality Index (yoy% chg) (RS)

Style & Stock Selection Strategy: Growth is taking leadership
40 -60
Source: RBC Capital Markets Quantitative Research, Global Financial Data Inc.
30 -40 Company-specific growth is likely to become

-20 more important now that valuations have
20
0
collapsed and lost their importance as a key
10
20
differentiator.
0
40
-10
60
-20 Common growth benchmarks 80
-30 usually outperform as index 100

earnings growth fades.
-40 120
Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11
S&P Citigroup Growth / Value (yoy% chg) (LS)

S&P 500 Operating Earnings (yoy% chg, inverted scale) (RS)
Dividend Growth
Growth related metrics – such as dividend Price / Book Value
growth, earnings and revenue momentum – Revenue Momentum
remain near the top of the factor leader board. Earnings Surprise
Earnings Momentum
S&P 500 Composite
Value metrics dominated the performance derby Price / Earnings
9-12 months ago. Earnings Stability
Earnings Growth
Confidence of Earnings Estimates

As of December 31, 2010.
Total Return Stability Source: RBC Capital Markets
4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14%
S&P 500 Factor Performance (3 month % chg)

Style & Stock Selection Strategy: Russell 1000 growth with income screen
Russell 1000 Screen by Sector

Market Div. Payout 5-yr
Float Yield Ratio Dividend % Revenues
Stocks that made the screen scored
Name Symbol Price ($M) (%) Growth Foreign relatively well on the following
ENERGY
Halliburton Co HAL $40.83 37,136M 0.9 22.6 7.1 64% criteria:
Conoco Phillips COP $68.10 100,054M 3.2 45.2 12.1 33%
Chesapeake Energy Corp CHK $25.91 16,943M 1.2 18.2 10.0 0%
MATERIALS ¾ Fundamental momentum
Cliffs Natural Resources Inc CLF $78.01 10,567M 0.7 9.4 20.6 55%
Newmont Mining Corp NEM $61.43 29,867M 1.0 10.8 4.2 100%
PPG Industries Inc
INDUSTRIALS
PPG $84.07 13,705M 2.6 45.0 3.3 51%
¾ Dividend growth
Parker-Hannifin Corp PH $86.30 13,923M 1.3 23.7 14.0 41%
Deere & Co DE $83.05 35,106M 1.7 26.2 12.9 36%
Norfolk Southern Corp NSC $62.82 22,827M 2.3 36.3 24.5 0% ¾ Growth
CONSUMER DISCRETIONARY
Nike Inc NKE $85.42 33,133M 1.5 26.5 16.3 66%
Home Depot Inc HD $35.06 57,457M 2.7 49.2 15.9 11%
Time Warner Inc. TWX $32.17 35,686M 2.6 36.0 18.0 30%
CONSUMER STAPLES
Walgreen Co WAG $38.96 36,068M 1.8 26.8 21.3 0%
Smucker (Jm) Co SJM $65.65 7,816M 2.4 32.8 9.7 11%
Molson Coors Brewing Co TAP $50.19 8,088M 2.2 26.0 11.7 98%
HEALTH CARE
McKesson Corp MCK $70.38 17,811M 1.0 13.6 24.6 9%
UnitedHealth Group Inc. UNH $36.11 39,719M 1.4 7.0 51.9 0%
AmerisourceBergen Corp ABC $34.12 9,394M 1.2 15.4 59.5 0%
FINANCIALS
American Express AXP $42.92 51,666M 1.7 26.9 9.2 32%
Travelers Cos Inc TRV $55.71 25,654M 2.6 19.3 8.4 6%
Raymond James Financial Corp RJF $32.70 4,086M 1.6 23.9 14.3 N/A
INFO TECH
Applied Materials Inc AMAT $14.05 18,654M 2.0 32.5 20.1 81%
Intl Business Machines Corp IBM $146.76 182,329M 1.8 23.0 25.9 58%
Texas Instruments Inc TXN $32.50 38,160M 1.6 20.3 39.9 89%
TELECOM
Telephone & Data TDS $36.55 1,823M 1.2 32.1 5.1 N/A
AT&T Inc T $29.38 173,636M 5.9 74.3 6.1 0%
CenturyTel Inc CTL $46.17 14,001M 6.3 79.9 86.6 0%
UTILITIES
OGE Energy Corp OGE $45.54 4,439M 3.3 45.6 1.8 N/A
Wisconsin Energy Corp WEC $58.86 6,881M 2.7 42.1 12.8 0%
Entergy Corp ETR $70.83 12,814M 4.7 42.5 9.5 0%
Source: RBC Capital Markets Quantitative Research. As of December 31, 2010.

Style & Stock Selection Strategy: TSX Quantitative Screen
TSX Quantitative Screen

Market Div. Payout 5-yr RBC
GICS Float Yield Ratio Dividend % Revenues Analyst
Name Symbol Sector Price ($M) Growth Foreign Rating
Barrick Gold Corporation ABX Materials $53.12 52,910M 0.9 15.1 18.7 97% O
AGF Management Limited AGF.B Financials $19.49 1,399M 5.3 72.0 13.3 1% O
Cogeco Cable Inc. CCA Cons.Disc $41.02 945M 1.7 22.2 46.9 19% SP
Canad'n Imp Bank Of Commerce CM Financials $78.33 30,780M 4.4 57.0 7.0 13% O
Canadian Tire Corp. Ltd. 'A' CTC.A Cons.Disc $68.19 5,386M 1.6 17.4 8.8 0% O
Canadian Western Bank CWB Financials $28.36 1,890M 1.8 21.4 20.6 0% SP
Laurentian Bank Of Canada LB Financials $48.06 1,150M 3.2 31.7 6.0 0% SP
Magna International Inc. 'A' MG Cons.Disc $51.91 10,947M 0.8 12.5 8.2 81% O
Nexen Inc. NXY Energy $22.80 11,984M 0.9 13.2 18.5 81% SP
Jean Coutu Group Inc. A PJC.A Cons.Stap $9.63 1,145M 2.3 32.3 13.8 N/A SP
Sun Life Financial Inc. SLF Financials $30.11 17,224M 4.8 61.5 9.5 59% SP
TELUS Corporation T Telecom $45.48 14,646M 4.6 58.7 19.6 0% SP
Note: O = Outperform; SP = Sector Perform; U = Underperform.
Source: RBC Capital Markets Quantitative Research. As of December 31, 2010.
Stocks that made the screen scored relatively well on the following criteria:
Fundamental momentum
Dividend growth
Value

Required Disclosures
Conflicts Disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to
provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,
clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J
2W7.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Distribution of Ratings
Distribution of Ratings
RBC Capital Markets, Equity Research
Investment Banking
Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY[TP/O] 676 50.10 193 28.55
HOLD[SP] 609 45.10 133 21.84
SELL[U] 65 4.80 9 13.85
Conflicts Policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to https://www.rbccm.com/global/file-414164.pdf or send a request to RBC CM
Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We
reserve the right to amend or supplement this policy at any time.

Required Disclosures
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considered a long-term ‘sector perform’ or even an ‘underperform’ might be a short-term buying opportunity as a result of
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INVESTMENT STRATEGY I RESEARCH

RBC Dominion Securities Inc.

Macro Backdrop: Recovery still rolling forward

Market Outlook: Maintain a positive bias

Sector Strategy: Dial down the defense

Stock Selection Strategy: Pay for progress

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 2

GDP Growth Outlook (Next 6 – 9 6

Below Average & Positive -4

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 3

0.5  The 2010 federal budget deficit was ~$1.3 trillion,

-1.0  State and local government finances are messy.

 Investment spending growth has been Investment rate is barely keeping

 Yet, the investment rate is barely keeping up

 Low capital costs, robust cash flows, easier

Gross Private Domestic Investment as a % of GDP Depreciation as a % of GDP

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 4

Source: RBC Economic Research -6

and overtime hours argue

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 5

ISM Non-mfg <50 Î GDP recession 30

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 6

Market Outlook (Next 6 – 9 months) Risk Rating

Market Weight - Low

S&P 500 2010 Monthly Returns

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 7

 ISM services turned up in August and its

 The business cycle’s message has never been 0.8

more important for equities in at least the past

market is flat (U.S. in last decade) to down -0.2

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 8

S&P 500 P/FE (LS) 10-Year Implied Inflation Rate (RS)

when realized inflation is hovering near 0%. 20.0

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 9

20  Currently, the model’s growth profile is

US Corp Profits (yoy% chg) Corporate Profits Model

RBC Estimate ($) Consensus S&P 500 EPS ($)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 10

Long-term Average 3 Long-term Average

0.5 -1 STD -1 STD

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 11

 Equity mutual fund managers have burned down

5.0  Retail remains an important net seller of equities

500 600 400

300 absent in the equity market

-100 -400 -100

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 12

$180.00 $172 1,600 $1,540

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 13

80  A simple econometric model that includes the

-40 ¾ The S&P 500 is a proxy used to capture

Estimated TSX (yoy% chg) Actual TSX (yoy% chg)

TSX (yoy% chg) Expected Annual Growth in CRB (yoy% chg)

 Let’s say the CRB and S&P 500 both appreciated

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 14

Health Care, Telcos, Consumer

Chronology of Recent Changes

0 50  Regression analysis argues that forward

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 16

Capex rate is barely keeping up with 40

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 17

0 0.12 Utes and Telcos are the 0.16

-20 same trade!

0.5 The 2010 federal budget deficit was ~$1.3 trillion,

-1.0 State and local government finances are messy.

Investment spending growth has been Investment rate is barely keeping

Yet, the investment rate is barely keeping up

Low capital costs, robust cash flows, easier

ISM services turned up in August and its

The business cycle’s message has never been 0.8

20 Currently, the model’s growth profile is

Equity mutual fund managers have burned down

5.0 Retail remains an important net seller of equities

80 A simple econometric model that includes the

Let’s say the CRB and S&P 500 both appreciated

0 50 Regression analysis argues that forward

Stability Emphasize growth as valuation

Performance correlation between stocks within

These data tell us systemic factors are being 0.54

30 -40 Company-specific growth is likely to become

Growth related metrics – such as dividend Price / Book Value

Value metrics dominated the performance derby Price / Earnings