How Investors Can Benefit from Thomas Piketty s Insights?

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1 June 23 rd, 2015 How Investors Can Benefit from Thomas Piketty s Insights? Are P/E ratios too high or too low? A story of capital accumulation We argued at the beginning of the year (The Monitor, January 8, 2015) that the prospect of interest rate increases in the U.S. in 2015 and beyond would start weighting on stock prices and would likely lead to increased stock market volatility. Yet, we also argued that interest rates would only increase slowly and increase only if the U.S. economy improves. And, with this framework in mind, we expressed the opinion that, even if price/earnings ratios could conceivably somewhat contract when faced with the prospects of interest rate hikes, corporate earnings should grow as the economy expands, thereby supporting stock prices and yielding positive equity returns this year; our forecast, which we maintain, called for the S&P 500 to reach 2200 by year-end. We also believed that the equity risk premium could continue to contract as the U.S. economy expands, helping to compensate for unavoidable interest rate increases that are projected to occur in the not-so-distant future. For instance, researchers at Goldman Sachs estimate that today s equity risk premium is 4.5% and above its average of 3% since 2004 (see Figure 1). A smaller risk premium on equity would also support current P/E ratios as the discount rate used in the calculation of the net present value of future earnings which ultimately determines the value of stocks is the sum of the risk free rate and the equity risk premium. Figure 1. U.S. Equity Risk Premium, However, back in January, we had not addressed the question of whether current P/E ratios were fundamentally too high in the first place and whether we are at risk of a permanent correction or longlasting negative shock on equity valuation that could bring P/E ratios lower for a durable period of time. This will be the main topic discussed in this Monitor. Figure 2. S&P Forward Earnings Yield, U.S. 10-Year U.S. Treasury Bond Yield After all, trailing P/E, forward P/ E and CAPE P/E ratios (the latter computed using the earnings average of the last 10 years) are all, historically, at very high levels today with equity prices respectively trading at 18 times, 17 times and 27.4 times profits on June 23 rd, Yet, figure 2 above, which illustrates the relationship between the 10-Year U.S. Treasury Bond Yield and the S&P 500 Forward Earnings Yield (forward E/P or the inverse of the forward P/E ratio), shows that the two variables have rarely been so divergent and suggests that stocks are significantly undervalued. The Fed model, labelled as such by Ed Yardeni a few decades ago, stipulates that the two curves should converge for equity to be appropriately valued. And, for the most part they did, until the late nineties. A short review of recent history As the tech bubble developed in the nineties, the S&P 500 Forward Earnings Yield briefly undershot the 10-Year U.S. Treasury Bond Yield but the situation quickly changed when the bubble burst in 2000 and the Fed lowered interest rates after the 2001 recession. A few years later, the state of affairs reversed itself with the S&P 500 Forward Earnings Yield jumping above the 10-Year U.S. Treasury Bond Yield by a few hundred basis points. The situation persisted for several years with many analysts arguing that equity investors were suffering from post-bubble anxiety. When the financial crisis was at its nadir in 2008/09, stock markets collapsed again and the discrepancy between the two curves reached a new peak. 1

2 And although the S&P 500 Index strongly recovered in the following years, the Fed Model valuation gap remained unexpectedly wide for the entire period and even briefly surpassed 800 basis points in early Today, after three years of stellar stock market returns, the gap still stands at an unusually wide 350 basis points as the S&P 500 Forward Earnings Yield hovers around 6% while the 10- Year U.S. Treasury Bond Yield has been trading below 2.50% for the last few quarters. Had the S&P 500 Forward Earnings Yield followed the downward trend of the U.S. 10-Year Bond Yield, P/E ratios would be at least double, if not triple, what they are today. As US monetary policy is about to tighten, it is normal that investors hesitate and ask themselves whether current equity prices are sustainable and whether P/E multiples could soon enduringly return to their historical average; since 1978, the S&P 500 Forward P/E - measured by the price divided by the 12-month forward consensus expected operating earnings per share averaged In other words, could the normalisation of the Fed s (and eventually other central banks) monetary policies also bring about the normalisation of equity multiples? We believe that this is not going to happen; at least not in the current environment. To start with, no one is forecasting that the 10- Year U.S. Treasury Bond Yield will reach 4% any time soon. And, even at 4%, the 10-Year U.S. Treasury Bond Yield would still be below the S&P 500 Forward Earnings Yields by about 2%, leaving ample room for multiple expansion if the Fed Model valuation gap was eventually going to return to zero. Firm and investor behavior But most importantly, the easy money era, which we now have been living in for several years and which is expected to last several more years, is starting to have an increasingly significant impact on the behaviour of both firms and investors. In the eighties and nineties, some firms started to reallocate their factors of production to take advantage of an emerging globalisation trend facilitated by deregulation and newly signed free-trade agreements. The phenomenon gathered speed in the early 2000s after China joined the WTO. Labour became increasingly plentiful on a global scale and its greater availability lowered its cost dramatically. Moreover, at around the same time, interest rates were lowered by central banks globally to deal with the aftermath of the tech bubble, the uncertainty created by the bug of 2000 and, a little later, the events of 9/11 and the recession that ensued. Globalisation then accelerated as firms redeployed their capital in low labour cost jurisdictions. The lower cost of labour first encouraged firms to substitute capital and costly workers in the developed world, for labour intensive technologies in developing countries where labour costs were and to a certain extent still are - only a minor fraction of labour costs in the industrialized world. Capital owners were thus able to retain a much larger share of the value-added from production and the return on their capital thereby increased substantially. The low cost of lending capital that prevailed at the time only accelerated the process and allowed capital owner to further magnify their return. Standard economic theory would dictate that this process would continue until all labour is absorbed by the market and wages go back up. However, according to the International Labour Organization, a few hundred million workers are still looking for jobs globally, effectively putting a ceiling on wages and allowing firms to continue accumulating and redeploying capital in both developed and developing countries. As increasingly available technologies are also improving faster than ever, worker productivity is increasing faster than today s stagnant wages. The incentive of capital owners is then, not to hire more workers but, somewhat paradoxically, to use the cash surplus generated by their activities to finance further capital investment in order to pocket an increasing share of the value-added and thus hire less workers than they would otherwise. These massive resource reallocation strategies applied on a global scale by large corporations explain in part, in our view, the excellent performance of equity markets since the burst of the 2000 technology bubble: Total annualized returns have been 10% since March In a sense, the savings glut or surplus savings created by the spread of globalisation and loose monetary policies which is depressing the cost of lending capital is allowing firms to competitively redeploy their own massive surplus capital which would otherwise yield scant returns. These strategies are not necessarily embraced by firms to take advantage of growth opportunities but rather often simply employed for the sole purpose of appropriating a growing share of the income normally remunerating all factors of production; and, hence, allowing businesses to grow earnings for the exclusive benefit of their shareholders at the expense of other stakeholders even in the absence of revenue growth. This financial virtuous cycle could allow rent-seeking firms to also take advantage of numerous growth opportunities offered by globalisation to grow earnings significantly faster. But, the relevant point here is that firms do not have to. They can grow earnings simply by using the abundance of internally generated funds to cheaply finance the substitution of labour (and other factors of production) for capital which they own at that juncture and from which they ultimately derive an increasing share of gross margins. More cash is thus generated and appropriated by shareholders, that then allows for massive share buybacks and/or the implementation of other financial engineering structures (as will be discussed in more details below) which further provide firms with the ability to grow earnings and earnings per share at an accelerated pace. June 23 rd,

3 At the same time, as the process slows down the global absorption of workers into the labour force, the forces at work also slow wage growth which further helps the process of rent appropriation by capital owners. Figure 3 shows the divergent evolution of U.S. corporate profits and labour compensation as a share of U.S. GDP since 1980 and clearly illustrates that the reversal of fortune of U.S. workers at the expenses of shareholders accelerated after Figure 3. U.S. Corporate Profits and U.S. Labour Compensation as a % of U.S. GDP, The financial crisis of 2008/2009, and a reduced outlook for growth and investment opportunities at the time, temporarily put an end to firms capital accumulation strategies by momentarily sharply increasing the cost of capital. A limited number of firms with clean balance sheet and cash rich funds were still able to take advantage of opportunities at the expense of other more leveraged entities which had to struggle to borrow funds and/or dump assets at fire sale prices (think Warren Buffet). However, headwinds are now gradually subsiding and, as credit market conditions and the global growth outlook further improve, the process of capital accumulation by certain firms, well under way for a few years, is once again picking up speed. Figure 4 plots the positive evolution of U.S. corporate profit margins since Although the process was temporarily interrupted during the early nineties recession, after the burst of the tech bubble and, later on, during the financial crisis, the chart demonstrates its upward, albeit volatile, trend over the entire period. Figure 4. U.S. Corporate Profit Margins, So, where does that leave us today? We recognize that, at today s level, equity markets are no longer perceived as cheap by numerous investors who will likely penalize equity as U.S. interest rates gradually rise; or even as soon as they expect that rates will go up faster and/or earlier than they had first anticipated. As we first asked at the outset of the paper, is it thus time to sell before equity markets correct and settle at a lower valuation and lower P/E? We think not because other opportunistic investors (activist investors, private equity funds, hedge funds, pension funds, sovereign wealth funds, etc.) will be taking advantage of increased market volatility, and the corrections that this volatility will inflict on equity markets from time to time, to establish stronger positions in these markets. Incidentally, from a tactical point of view, we foresee such a correction over a short-term horizon; see our recent publication Some Entry Points Are Better Than Others. However whether or not these investors are truly conscious of the opportunity that is presented to them over a longer horizon, by deepending their equity holding, they will most likely over perform other investors who will choose to close their positions based on the historically-higherthan-average-p/e ratio-will fall-while-rates go-up premise. Using their balance sheet (cash, credit ratings and ability to borrow at low rates), financially advantaged firms and activist investors will continue resorting to financial engineering and technological innovations to expropriate other factors of production from the value creation process: workers will be replaced by machines, lenders of capital will be paid back at a discount when and if interest rates increase and even equity partners will be squeezed out by buyback programs or leveraged buyouts. Figure 5 illustrates the acceleration of U.S. corporate buybacks (also temporarily interrupted during the financial crisis) and dividend payments by firms in the S&P 500 since The chart shows the extent to which firms are increasingly able to return cash to shareholders, in particular under the form of buybacks, to increase return per share and concentrate ownership. Figure 6 shows the recent rapid progression in the number of industrial robots used in the world. Figure 5. S&P 500 Dividends and Buybacks, , in Billions of $US June 23 rd,

4 Figure 6. Industrial Robots in Operation Worldwide, in Thousands And the list of expropriated suppliers does not end there: The emergence of on-line retailers will reduce the demand for land and real estate, innovation will reduce the need for energy and its cost, multinational corporations will continue using complex transfer pricing and other tactics to reduce their tax liabilities and hence pay less for government services, etc. Moreover, capital optimising strategies are not limited to buybacks and leveraged buyouts nor to the increased reliance on robots for performing jobs that could have only been done by humans until recently. Firms can also identify in their value-chain which activities are less profitable and/or riskier (i.e., the more capital intensive activities per dollar of earnings) and look to divest of them or to outsource such activities to magnify their return per unit of capital. Large corporations can also streamline their capital structure by reducing their risks via their transmission to customers and suppliers who are less exposed and/or powerless to dodge the handover; the use of a fuel surcharge to clients in the transportation industry is one such common strategy that comes to mind. These financial engineering structures allow firms to minimize the amount of shareholder capital necessary to conduct profitable operations while maintaining risks constant or, said otherwise, to maximise returns by unit of capital deployed. Savvy investors understand the dynamic of the game being played by these firms or play the game themselves. Private equity groups and other activists, for instance, are buying up firms reluctant to act. As incumbent capital owners, their aim is to earn an increasingly larger proportion of the value-added typically afforded to the factors of production - workers, suppliers, lenders, landlords, governments and other expropriated capital owners as well as to hold a larger slice of the entire firm. Other investors would therefore be well-advised to retain or even increase their equity stake in such firms. These equity assets should eventually be trading at higher valuation, driven by both improved earnings and increased concentration; thus, making other stakeholders remorseful about their decision to have lost or sold too early - voluntarily or not - their claims on the future earnings of such companies. In our view, equity investment based on identifying firms who implement rigorous capital accumulation strategies should be particularly attractive to investors today. That is because capital accumulation is rendered more profitable in the current environment in which the borrowing of lending capital is being heavily subsidized by central banks globally. The strategy also carries a reduced amount of risk as long as central banks keep interest rates low and only increase them at a snail s pace; a promise which monetary policy-makers are frequently seemingly conveying to market participants in order to avoid market tantrums and disruptions as well as to help tame financial and economic headwinds. Combined with the possibility of using increasingly available technologies to reduce the labour intensity of the production process, the dynamic of expropriation is thus a profitable carry trade which allows capital owners to accelerate the process of capital accumulation. By also further driving down both wages and the cost of lending capital, it enhances the benefits of the strategy, its resilience and hence supports and validates higher equity multiples. It is important to remember that, even in a world economy grappling with persistent strong headwinds and growing below its potential, the strategy remains beneficial as slower growth maintains both wage growth and the cost of lending capital at a minimum; thereby both increasing the return and reducing the risk of the strategy. A consequence is obviously a world with growing inequalities across and within countries where the share of income is gradually concentrating in the hands of a small number of incumbent equity holders as stagnant income growth limits opportunities for outsiders such as bondholders and workers; a situation which, if pushed too far, admittedly carries its own risks. Moreover, risk divesting and capital minimizing strategies can also backfire as we saw during the financial crisis. The genesis of that crisis was the decision by banks in the late nineties and the early 2000s to convert their revenue model from a risky lending business (generating interest margins from holding loans) to one based on generating fees from loan origination and securitization. The strategy helped banks minimise their need to hold capital as securitisation reduced bank risks substantially and thus increased profitability at an accelerated pace. June 23 rd,

5 As a result, the share of the market capitalisation of the financial sector in the overall S&P 500 almost reached 23% in 2006 whereas it had been half of that until the mid-nineties; today it stands at around 17%. However, as risks were simply outsourced to other market participants during those years, banks incentives for underwriting financially sound loan eventually disappeared. From there, total risk in the economy expanded beyond what was sustainable until the financial system imploded; a lesson worth remembering as investors make their portfolio decisions for the future. A strategy for investors who ignore which firms are efficient capital accumulators Even if one ignores which companies will pursue efficient and prudent capital accumulation in the sense of avoiding overleverage over time we believe that the composition of one s equity portfolio still matters. First, investing in companies with lower price volatility and a lower debt-to-equity ratio increases the probability of holding shares in companies properly using the strategy described above. Such holdings would also most likely sharply reduce the volatility of one s equity portfolio relative to owning an indexed portfolio. It could thus also allow more daring equity investors to add some leverage to their low volatility and low debt corporations portfolio (for example, by marginally increasing the equity weighting in one s 50% equity and 50% bond portfolio), thereby enhancing returns without necessarily increasing risks beyond that of an indexed portfolio. Second, owning an indexed portfolio carries its own pitfalls. As investors, as well as advisers and analysts, generally do not know which stocks are overvalued, appropriately valued or undervalued, it may appear to be a sensible investment strategy to favour a low-fee indexed portfolio over an actively managed one. However, logic also dictates that by owning an indexed portfolio, investors by default, overweight overvalued stocks and underweight undervalued stock. When individual stocks return to their true long-term equilibrium value (as most will invariably do at some point), investors are bound to have favoured future under performing stocks at the expense of future over performing ones. And indeed, it is also been shown empirically that choosing the weights of each stocks in one s portfolio using alternative criteria - equal weights, random weights, weights determined by the inverse of a stock s volatility, etc. which are uncorrelated with the weights of each stock in an indexed portfolio (indexes are usually based on the relative market capitalisation of each stock), yields higher Sharpe ratios; in other words, such alternative portfolios yield higher returns than an indexed portfolio for the same level of risk. If one believes that this is logical, a portfolio composed of stocks which weights are determined by the inverse of their volatility and/or their debt ratio, as we suggested above, should over perform relative to an indexed portfolio; at least in terms of risk adjusted returns. This should be true regardless of the willingness or ability of these firms to engage in active capital accumulation. However, if one also believes, as we opined above, that low price volatility/low debt corporations have a higher probability of being efficient capital accumulators, the strategy would thus also potentially yield additional returns if such stocks are overweighed in one s portfolio. Moreover, note that this portfolio would not have to be actively managed to produce excess returns, other than necessitate a periodic rebalancing like any portfolio would require. Finally, as firms with such characteristics are also the most likely to return cash to investors without increasing their own leverage, the combination of share buybacks and dividend payments to shareholders by these firms can be used as a risk management tool. For instance, investor should be able to take advantage of these cash injections to reduce the leverage in their portfolio as market volatility increases or as one s risk tolerance evolves and/or simply to further increase their holdings and magnify returns over time. This being said, we do not expect equity markets to yield double digit returns over the next few years. The rising interest rates environment will, without a doubt, weight on stock valuation. However, as mentioned earlier, we expect corporate earnings to grow as the economic recovery takes hold. We also expect equity prices to be supported by stable discount rates because interest rates should be increasing at a snail s pace and only if the recovery indeed takes hold and because, if this happens, the equity risk premium has room to contract. With this investment analytic framework in mind, we are merely suggesting that in a world which will likely grow at a slower pace than its potential for the foreseeable future, investors who will be able and willing to tag along firms which will take advantage of a sustained period of exceptionally accommodating monetary policies to enhance their financial performance, will probably pocket a larger share of the returns. The game has already started but ain t over yet! Luc Vallée, Ph.D Chief Strategist T: ValleeL@vmbl.ca June 23 rd,

6 North American Forecasts 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q Real GDP Consumption Business investment Non-residential structures Machinery and equipment Residential construction Government spending Exports Imports Inflation Total CPI (y/y % ) Core CPI (y/y % ) Unemployment rate (%) * Employment Housing starts (in 000s) * Nominal GDP *Av erage rate for the period. Updated: June 2015 Canada Financial Forecasts Annual Average Q4/Q4 Canada 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 16Q4 Overnight Rate Target Month Treasury Bills Year Bond Year Bond Year Bond Year Bond United States Federal Funds Rate Target** Month Treasury Bills Year Bond Year Bond Year Bond Year Bond Canadian Dollar (US$/C$) Euro (US$/Euro) S&P 500 Index TSX Index Oil WTI (US$/barrel) Quarter-end data and annual av erages Updated: June 2015 * upper bound of the target range for the Fed funds June 23 rd,

7 Market Review: Bonds and Currencies INTERNATIONAL BONDS Benchmark 2-Year Yield Yield (%) Jun week -4 weeks -1 quarter - 1 year Jan U.S Canada Spread US - Canada Germany France Portugal Spain Belgium Netherlands Italy Switzerland UK Australia Japan INTERNATIONAL BONDS Benchmark 10-Year Yield Yield (%) Jun week -4 weeks -1 quarter - 1 year Jan U.S Canada Spread US - Canada Germany France Portugal Spain Belgium Netherlands Italy Switzerland UK Australia Japan PROVINCIAL BONDS Benchmark 10-Year Yield Current Spreads (b.p.) against Canada Jun Jun week -4 weeks -1 quarter - 1 year Jan Canada 1.71 Alberta British Columbia Prince Edward Island Manitoba New Brunswick Nova Scotia Ontario Quebec Saskatchewan Newfoundland & Labrador Currencies CURRENCIES Jun week -4 weeks -1 quarter - 1 year Jan (% chg) Canada (USD/CAD) Canada (CAD/USD) Australia (Australia/US$) U.K. (US$/ ) Japan (US$/Yen) Euro (US$/Euro) Mexican Peso (Peso/US$) Brazilian Real (Real/US$) Chinese Yuan (Yuan/US$) Data updated as at: 22/06/2015 June 23 rd,

8 Market Review: Fixed Income Charts % Year Federal Bond Yield Canada U.S. % Year Federal Bond Yield Canada U.S Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 % Canada - Yield Curve % U.S. - Yield Curve Jun-15-1 month -1 year Jun-15-1 month -1 year m 6m 2y 5y 10y 30y 0.0 3m 6m 2y 5y 10y 30y Yield Spreads in basis points (Canada minus U.S.) 19-Jun-15-1 month -1 year 3m 6m 2y 5y 10y Feb-13 May-13 Aug-13 Spread on 2-Year Federal Bonds (Can-U.S., in basis points) Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 June 23 rd,

9 Market Review: Stocks Exchange and Commodities Stock Market Summary Level Change (%) Jun w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan Canada S&P/TSX 14,653 15,658 13, S&P/TSX S&P/TSX Small Cap Index United States S&P 500 2,110 2,131 1, Dow Jones 18,016 18,312 16, Nasdaq 5,117 5,133 4, International U.K. - FTSE 100 6,710 7,104 6, Germany - DAX 11,040 12,375 8, France - CAC 40 4,815 5,269 3, Japan - Nikkei ,174 20,570 14, Hong Kong - Hang Seng 26,761 28,443 22, Russia - RST 967 1, Australia - ASX All Ordinaries 5,592 5,955 5, Brazil - Bovespa 53,749 61,896 46, S&P/TSX Sector Summary Level Change (%) Jun w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan S&P/TSX 14,653 15,658 13, Energy Materials Industrials Consumers Discretionary Consumers Staples Health Care Financials Information Technology Telecommunication Services Utilities Commodities Level Jun w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan London -- Gold (US$/once) London -- Silver (US$/once) Copper (US$/LB) WTI Crude Oil (US$/barrel) Natural Gas (Henry Hub) (US$/MMBTU) Data updated as at: 22/06/2015 June 23 rd,

10 Calendar of Major Economic Indicators KEY ECONOMIC INDICATORS WEEK OF JUNE 22, 2015 United States Date Time Release Unit Data for: LBS* Consensus Previous Jun 22 10:00 Existing Home Sales Millions May Jun 22 10:00 Existing Home Sales M/M May - 4.8% -3.3% Jun 23 8:30 Durable Good Orders M/M May % -1.0% Jun 23 8:30 Durable Good Orders Ex. Transportation M/M May - 0.5% -0.2% Jun 23 10:00 New Home Sales Thousands May Jun 23 10:00 New Home Sales M/M May - 1.6% 6.8% Jun 24 8:30 GDP (Annualized) Q/Q 1Q T % -0.7% Jun 24 8:30 GDP Price Index Q/Q 1Q T % -0.1% Jun 24 8:30 Core PCE Q/Q 1Q T - 0.8% 0.8% Jun 25 8:30 Personal Income M/M May - 0.5% 0.4% Jun 25 8:30 Personal Spending M/M May - 0.7% 0.0% Jun 25 8:30 PCE Core M/M May - 0.1% 0.1% Jun 25 8:30 PCE Core Y/Y May - 1.2% 1.2% Jun 25 8:30 Initial Jobless Claims Thousands June Jun 26 9:55 U. of Michigan Confidence - June F Consensus from Bloomberg L.P 06/15/2015 June 23 rd,

11 North American Economic Indicators CANADA Period Monthly Chg. (% or Level) Cumulative change Current Previous - 3 Month - 1 Year Gross Domestic Product (GDP) March 0.3% -0.1% -0.5% 1.5% Manufacturing Shipments March 2.7% -2.3% -2.8% -0.1% Housing Starts ( ' 000) * April Retail Sales March 0.9% 1.5% 1.0% 3.2% Trade Balance (M$) * March -2, , Employment ( ' 000) * * May Unemployment Rate * May Wages (avg. hourly earnings) May 3.1% 2.3% 2.0% 1.6% Total CPI inflation May 0.9% 0.7% 1.0% 2.4% Inflation ex-food & energy May 2.3% 2.3% 2.2% 1.8% Industrial Product Price Index (IPPI) April -0.9% 0.2% 1.1% -2.4% IPPI ex. energy April -0.6% 0.0% 0.3% 2.4% UNITED STATES Period Monthly Chg. (% or Level) Cumulative change Current Previous - 3 Month - 1 Year ISM - manufacturing * April ISM - Non-manufacturing * April Industrial Production * April Capacity Utilization Rate * April Consumer Confidence Index * May Retail Sales April 0.2% 1.5% 1.2% 1.5% Trade Balance (M$) * March -50,566-37,248-45,549-44,271 Housing Starts ( ' 000) * April 1, ,080 1,039 Existing home sales April -2.3% 6.5% 5.6% 7.2% Median price of ex. home sales April 3.8% 4.4% 10.7% 8.5% Non-Farm Payrolls ( ' 000) * * April Unemployment Rate * April Wages (avg. hourly earnings) April 1.9% 1.9% 2.0% 2.4% Total CPI inflation April -0.1% 0.0% 0.7% 2.0% Inflation ex-food & energy April 1.8% 1.8% 1.6% 1.8% Producer Price Index April -0.6% 0.5% -0.3% -4.2% - Ex-Food & Energy April 0.1% 0.5% 0.5% 2.0% * Level, * * Change in level for the last month, 3 months and 1 year, * * * Annual % change Data updated as at: 22/06/2015 This document is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of Laurentian Bank Securities (LBS), a wholly owned subsidiary of the Laurentian Bank of Canada. The author has taken all usual and reasonable precautions to determine that the information contained in this document has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze it are based on accepted practices and principles. However, the market forces underlying investment value are subject to evolve suddenly and dramatically. Consequently, neither the author nor LBS can make any warranty as to the accuracy or completeness of information, analysis or views contained in this document or their usefulness or suitability in any particular circumstance. You should not make any investment or undertake any portfolio assessment or other transaction on the basis of this document, but should first consult your Investment Advisor, who can assess the relevant factors of any proposed investment or transaction. LBS and the author accept no liability of whatsoever kind for any damages incurred as a result of the use of this document or of its contents in contravention of this notice. This report, the information, opinions or conclusions, in whole or in part, may not be reproduced, distributed, published or referred to in any manner whatsoever without in each case the prior express written consent of Laurentian Bank Securities. June 23 rd,