Chris Kuflik - ScotiaMcLeod Montreal

There are many similarities that can be drawn between the markets of 2011 and those last year. There are, however, a number of differences as well. We will present some of those similarities and differences and how it could affect your portfolio in the near future.

With June more than half finished, I cannot help but think back to last year at this time, and as the great Yogi Berra said, “It’s like deja vu all over again”. While we did not have to endure another nerve wracking “flash crash” in May 2011, like we all lived through in May 2010, it is rather interesting when you begin to stack up the similarities that exist.

What a difference a few weeks makes. In April to early May investors shrugged off weakening economic data during earnings season. Now with little earnings, news markets have been focused on any weak data as well as renewed global economic risks. These have caused global markets to correct in the last month. Similar to 2010, sovereign debt issues and weak growth in the Western world have dominated the headlines.

Over the course of the past few weeks, Greece has been in the news often, and it has not been for their picturesque views of the Mediterranean Sea. Rather, it's the government instability, lowered credit rating, austerity measures, and riots that have been at the forefront of the Greek news. This past weekend the EU finance ministers met to set tough new rules for additional loans for Greece. There has been much speculation about how this whole situation will be resolved, due to the many hurdles facing Greek politicians, including a non – confidence vote on Tuesday night, but more troubling news that has come out of this situation is the risk of a financial contagion spreading. This is due the exposure that other countries around the world have to Greece. While it is true that the Greek economy is a small part of the entire Euro zone’s GDP, many European banks hold significant amounts of Greek debt. A recent MarketWatch article titled "Greece poses $41 billion risk to U.S. banks" states that “U.S. banks had total exposure of $41 billion to Greece by the end of 2010, according to the latest figures from the Bank for International Settlements issued June 9. Most of the financial commitments appear to be indirect. About 83% is tied to “guarantees” that range from protection for sellers of credit derivative contracts to other obligations owed to third parties. Still the data are murky, according to economic consultant Kash Mansori." That seems to be a rather staggering amount of money to not be sure exactly where it is or what it has exposure to. In addition to this exposure, many US banks and money market funds have been a significant source of short term funding to European banks. The risk with this has arisen as some of the largest French banks were recently put on credit watch by Moody’s due to their direct credit exposure to Greek debt. You should note that we have not seen a comparable report for Canadian financial institutions.

In the US, politicians, after having been distracted by a congressman’s twitter antics, will re-focus on the budget deficit and the struggling US economy. These politicians were warned by Ben Bernanke last week to stop grandstanding and increase the debt ceiling. In an attempt to push their views, some politicians have been holding the economy hostage. Should this debt ceiling not be increased, the US government could technically default on their debt. We believe that despite the posturing that has occurred, the ceiling will be increased before the deadline. In addition, the US economy faces another potential uphill battle – the end of QE2. The question that investors are currently asking themselves is “Is the US economy strong enough to stand on its own without government stimulus?” We shall find out in the next few months.

While there are many serious economic problems and challenges facing investors today, most global markets have only pulled back from their recent highs. This phenomenon is primarily due to the following: good corporate profits, inexpensive financing and mergers and acquisitions. Little attention currently seems to be being paid to the difficult economic backdrop. We expect the high degree of volatility that we have witnessed in the last few weeks to remain. Currently we will continue to hold and will accumulate high income securities, when warranted, in the future, assuming that politicians do not mess things up. As a precaution, we will continue to employ tight stop losses to protect our portfolios in the event that the economic or corporate outlooks take a turn for the worse.

Chris Kuflik

Associate Director, Wealth Management

Wealth Advisor

514-287-2931

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