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ob report
> Pizza Guy Recommends Selling
legend has it that joe kennedy,

july 2011 inside this issue

Pizza Guy Recommends Selling > Page 1 OB Model Portfolio > Page 3 Odlum Brown in the Community > Page 4

father of the late U.S. President JFK, knew it was time to get out of the stock market before the 1929 crash when he received stock tips from a shoe-shine boy. His thinking was that by the time the shoe-shine boy was excited about the stock market, there was probably nobody left to buy and drive the stock market higher. It turned out he was right. Recently, I received a tip that may be indicative of another market peak. Although, it was related to real estate and was a recommendation to sell not buy. The tip came from my local pizza delivery guy. When he arrived with the pizza I had ordered for my sons, he asked if I was interested in selling my home in Vancouver. He told me that he had contacts in China and that I should seriously consider selling because he could get me a very good price. Equally remarkable, a client who lives nearby had a Chinese person show up at his door with a cash-stuffed suitcase to express interest in his home.

with prices up 55 per cent from their trough to a level 29 per cent above the prior peak. Today, the average selling price of a home in Vancouver is nearly 11 times the average Vancouver familys household income. Nationally, the home price-to-income ratio is 4.4 versus the long-term average of 3.5 times. Given the severely unaffordable state of the Vancouver real estate market, it is hard to make an investment case for owning a home. Still, to take advantage of the high prices, someone fortunate enough to own a home has to downsize, relocate to a region with lower real estate prices, or rent. Those options do not appeal to my family. Still, it is worth understanding the drivers behind the housing boom, as the exercise can provide insights into managing overall risk in investment portfolios. Cheap credit in Canada has played a key role in the appreciation of Canadian home prices. The Bank of Canada has been reluctant to raise interest rates due to a concern that such a move would drive up the value of the Canadian dollar and make life even tougher for Canadas exportoriented companies. Banks have aggressively pursued loan growth and consumers have willingly taken on leverage. Psychology has also played a part, as explained by Governor Mark Carney at a recent speech in Vancouver. Specifically, he said, the risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear greed among speculators and investors and fear among households that getting a foot on the property ladder is a now-or-never proposition. Now that Canadian consumer leverage is on par with American and British consumers, it is quite possible that the virtuous cycle of borrowing and bidding up home prices will slow or even reverse.
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I thought housing prices were irrational and out of sync with the general level of incomes when we bought our first home in 2002. With Vancouver homes roughly tripling in price since then, my wife likes to remind me that we would still be renting and waiting for a correction if it was not for her. Fortunately, I followed her intuition and thankfully I dont make a living predicting real estate markets. Nonetheless, with Chinese money flooding into the city, the pizza guy offering to broker homes, and people approaching homeowners with suitcases full of money, it is fair to say that the situation is getting a little crazy. The pizza guy might be right. According to Demographia International, Vancouver is the third most unaffordable place to live, besides Hong Kong, China and Sydney, Australia. Nationally, Canadian home prices have risen 31 per cent from their trough in early 2009, to stand 13 per cent above their pre-crisis peak. In Vancouver, the recovery has been even stronger,

Member-Canadian Investor Protection Fund

P L AT I N U M M E M B E R

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> Pizza Guy Recommends Selling

average vancouver home prices
(january 1977 to may 2011) 1400

If you are like me and

1200 IN THOUSANDS ($) 1000 800 600 400

$1,223,421

my family, and are not interested in selling your home, you can limit your China risk by making sure that your investment portfolio is sufficiently diversified and not overly geared to cyclical stocks that are highly correlated with growth in China.
200 0 2011 2010 2010 2009 2009 2008 2007 2006 2006 2005 2004 2003 2003 2002 2001 2000 2000 1999 1999 1998 1997 1996 1996 1995 1994 1993 1993 1992 1991 1990 1990 1989 1989 1988 1987 1986 1986 1985 1984 1983 1983 1982 1981 1980 1980 1979 1979 1978 1977
Source: Real Estate Board of Greater Vancouver

Likewise, there is reason to believe that the surge in Chinese housing demand in Vancouver will ultimately abate. To understand why, one has to start with Chinas reaction to the financial crisis. Similar to other countries around the world, the Chinese feared the worst when the financial crisis hit. They reacted by implementing very stimulative monetary and fiscal policies. On the government spending side of the equation, Chinas fiscal stimulus was twice as big as the U.S. program relative to the size of its economy. Money printing and credit expansion has been equally grandiose. In figurative terms, China threw a ton of gas on the economic fire and it came roaring back. Because China exports a lot of goods to the rest of the world and runs a huge merchandise trade surplus, there is significant upward pressure on the Chinese currency. China prints a large amount of money to offset this bias, and that money finds its way into the Chinese banking system. Over the last two years, Chinese lending has expanded by 60 per cent, and some of that money has been invested in Vancouver real estate. Chinas stimulus policies have worked so well that the country now has a serious inflation problem. Chinese authorities are worried that rampant food and energy inflation, in particular, will cause social unrest. Accordingly, the Chinese government is tightening monetary policy aggressively by raising interest rates, increasing

bank reserve requirements, and letting their currency appreciate. There is typically a 12-18 month lag before changes in policy have an economic effect; therefore, slower growth is to be expected. There is also ample concern about bad loans in Chinas banking system, as much of the stimulus spending went toward uneconomic projects. Most pundits believe that the situation is manageable. Whether or not that proves to be correct, the combination of tighter monetary policy and the high number of problem loans probably mean that credit creation in China will moderate. That, in turn, may curtail Chinese demand for Canadian homes. From an overall portfolio perspective, including real estate holdings, it is clear that Canadians, Vancouverites in particular, have a lot of exposure to developments in China. If you are like me and my family, and are not interested in selling your home, you can limit your China risk by making sure that your investment portfolio is sufficiently diversified and not overly geared toward cyclical stocks that are highly correlated with growth in China. That is what my family has done, and it is the way the Odlum Brown Model Portfolio is positioned. murray leith, bcomm, cfa vice president and director, investment research

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> OB Model Portfolio

compound annual returns 1 (for the period ended june 15, 2011)
3 MONTH Odlum Brown Model Portfolio S&P/TSX Total Return Index S&P 500 Total Return ($CDN)
1

1 YEAR

3 YEAR

5 YEAR

10 YEAR

15 YEAR

since inception 2

-0.2% -3.6% -0.9%

14.5% 11.8% 10.3%

2.1% -1.3% -1.7%

4.3% 5.9% -0.3%

9.1% 7.7% -2.0%

14.8% 8.7% 3.9%

15.1% 9.5% 6.1%

Except for 3-month period. 2 December 15, 1994

it has been a tough couple of months for equity investors, with stock markets correcting due to concerns that global growth will slow. The S&P/TSX Composite Index has fallen close to 10 per cent from its April high, while the U.S. S&P 500 Index has dropped roughly six per cent, in Canadian dollar terms. Cyclical stocks have been hit the hardest, which is why the Canadian stock market has fallen more than its U.S. counterpart. Cyclical Energy and Materials stocks constitute almost 50 per cent of the Canadian benchmark equity index, three times their representation in the U.S. equity yardstick.

We own a large number of foreign stocks because it is easier to find high quality stocks trading at attractive valuations outside of Canada. We are also more diversified, with an emphasis on less cyclical sectors, because the valuations are better in those areas and we expect global growth to slow. Global growth is moderating because the positive effect of policy stimulus is abating. In the developed world, governments are being pressured to implement fiscal austerity. In emerging economies, tighter monetary policy is being applied to combat inflationary pressures. The disasters in Japan have taken a toll on global growth, as did the run-up in commodity prices and interest rates earlier this year. Fortunately, with Japan rebuilding, interest rates down significantly, and commodity prices easing, global growth should pick up in the second half of the year. We believe that the Odlum Brown Model Portfolio is well-positioned from both defensive and offensive perspectives. The less cyclical, high quality businesses that we own should perform relatively well in a slower growth environment, and yet these same businesses are well-positioned to pursue growth strategies given their excellent cash flow generation and strong balance sheets. As long as the global economy continues to expand, and we think it will, we believe the Model will produce absolute and relative returns that are competitive to other alternatives. Due to space limitations, we are unable to publish a full listing of the securities in the Model. However, we publish a monthly report with that information, including a commentary on recent trading activity. For a copy, please contact your Odlum Brown Investment Advisor or Portfolio Manager, or visit the Odlum Brown Client Centre at odlumbrown.com.

The Odlum Brown Model Portfolio was established on December 15, 1994 with a hypothetical investment of $250,000. The Model provides a basis with which to measure the quality of our advice. It also facilitates an understanding of how we believe individual security recommendations could be used within the context of a client portfolio. Trades are made using the closing price on the day a change is announced. Performance figures do not include any allowance for fees. Past performance is not indicative of future performance.

ob model has better balance

ob model weight s&p/tsx weight difference

Technology Consumer Staples Health Care Cash Industrials Utilities Consumer Discretionary Telecom Financials Materials Energy Total

11.5% 11.5% 7.8% 3.3% 8.2% 3.1% 4.5% 2.9% 24.4% 9.1% 13.7% 100.0%

1.9% 2.7% 1.3% 0.0% 6.0% 1.7% 4.3% 4.5% 29.8%

9.6% 8.8% 6.5% 3.3% 2.2% 1.3% 0.2% -1.6% -5.4%

20.8% -11.7% 26.9% -13.2% 100.0%

The Odlum Brown Model Portfolio has fared a bit better than the overall Canadian market, given that it is more diversified and exposed to foreign stocks. In fact, the Models makeup is considerably different than the S&P/TSX Composite Index. As highlighted in the table, the Model is significantly overweight in the Technology, Consumer Staples and Health Care sectors, and meaningfully underweight in the Materials and Energy sectors. More than 40 per cent of the Model is invested in high quality foreign companies that have significant competitive advantages and strong balance sheets.

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> Odlum Brown in the Community

presents

MJT Odlum Brown Golf Classic PGA of BC Junior Championship

July 25 July 27, 2011 Surrey, BC Odlum Brown lends its support for the sixth consecutive year as Tournament Partner of the 10th annual MJT Odlum Brown Classic PGA of BC Junior Championship at Northview Golf and Country Club. The tournament, which draws top golfers from across the province and has a cut after 36 holes, is endorsed by the British Columbia Golf Association and eligible top finishers receive exemptions into the BC Bantam, Juvenile and Junior Championships. The MJT Odlum Brown Golf Classic PGA of BC Junior Championship takes place at Northview Golf and Country Club (6857 - 168th Street) in Surrey. For more information, visit maplejt.com

Harmony Arts Festival

July 29 August 7, 2011 West Vancouver, BC Odlum Brown has supported the Harmony Arts Festival for over a decade and 2011 marks the firms 10th year as the presenting sponsor. For over 20 years, the festival has showcased the finest in creative and local talent in both performance and visual arts and continues to be a premiere summer arts festival. The Harmony Arts Festival turns the West Vancouver Ambleside waterfront and John Lawson Park in to a 10-day open-air celebration of the arts. Visitors of all ages can enjoy art exhibitions, the Art Market, artist talks and demonstrations, studio tours, childrens programs, seniors concerts, daytime and late night concerts at the Garden Stage, and nightly performances as part of the Sunset Concert Series. All events are free to the public. Experience the excitement and sounds of the 21st Annual Harmony Arts Festival. For more information, visit harmonyarts.ca

Odlum Brown VanOpen

July 30 August 7, 2011 West Vancouver, BC Odlum Brown is proud to continue its support as the title sponsor of the 2011 Odlum Brown VanOpen. In partnership with Tennis Canada, the United States Tennis Association, the ATP Tour, and International Tennis Federation, the Odlum Brown VanOpen is Canadas only major professional world ranking event to host both a mens and womens competition simultaneously, with over 140 professional tennis players competing for prize money and valuable world-ranking points. The Odlum Brown VanOpen takes place at the Hollyburn Golf and Country Club (950 Crosscreek Road) in West Vancouver. For ticket information or event details, visit vanopen.com

MusicFest Vancouver
August 5 August 14, 2011 Various Vancouver venues For over a decade, Odlum Brown has been a proud sponsor of MusicFest Vancouver. The firm is pleased to continue its support as a Gold Corporate Sponsor and presenting sponsor of the Gala Opening Concert. The festival begins August 5 with the Odlum Brown Gala Opening Concert featuring Sarah McLachlan and the Vancouver Symphony Orchestra at the Orpheum Theatre. Led by guest conductor, Leslie Dala, McLachlans glittering program will feature a collection of her classic hits and new favourites and be her firstever appearance with the VSO. MusicFest Vancouver is an exciting 10-day festival that celebrates classical, world and jazz music. The 2011 season will host 45 concerts and events by hundreds of talented international and local artists at eight venues throughout Vancouver. Explore extraordinary music from around the world and across Canada. For more information, visit musicfestvancouver.ca

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