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CIBC World Markets Inc. PO Box 500, 161 Bay Street, BCE Place, Toronto Canada M5J 2S8 Bloomberg @ WGEC1 (416) 594-70CIBC World Markets Corp. 300 Madison Avenue, New York, NY 10017 (212) 856-4000, (800) 999-67

January 3, 200

http://research.cibcwm.com/res/Eco/EcoResearch.ht

Strateg

Canadian Portfolio

Strategy OutlookJeffrey Rubin Peter Buchanan Avery Shenfeld Quentin Broad Yin Luo, CPA, CFAChief Strategist Senior Strategist Senior Economist Managing Director Executive DirectorChief Economist Executive Director Managing Director Canadian Equity Research Quantitative Strategy(416) 594-7357 (416) 594-7354 (416) 594-7356 (416) 594-7294 (416) 956-3291

[email protected] [email protected] [email protected] [email protected] [email protected]

EXECUTIVE SUMMARY

Strategys Recommended Asset Mix& TSX GICS Sector Weights vs. Current Benchmark

Jeff Rubin Chief Strategist

We are optimistic that 2007 will prove to be another

year of double-digit total returns for investors in thebroad Canadian equity market with the TSX compositeexpected to hit 14,250 by year-end. As a result we openthe year ten percentage points overweight stocks largelyoffset by a zero cash weighting. While returns will likelybe somewhat lower than the 17% yielded by the TSXin 2006, the markets overall performance will be thatmore notable this year in light of a weakening Canadianeconomy. The growing wedge between TSXperformance and Canadas economic performance willunderscore the extent to which the TSX has far more

leverage to strong world growth than weak North

American growth. Within the market, that divisionshould be apparent in the superior performance ofenergy, gold and base metals stocks over consumer andNorth American-focused industrial stocks.

A weakening North American economy is likely to makeCanadian banks a winner, particularly in terms of theirsuperior credit position versus US banks heavily miredin exposure to an imploding sub-prime market. Inaddition, bank stocks have historically been the biggestbeneficiaries within the TSX of interest rate cuts and we

expect multiple Bank of Canada rate cuts over the year.Those same rate cuts will push long Canada bond yieldsto record lows, with long Canada yields finishing up theyear around 3%. While underweight bonds as an assetclass relative to stocks, we remain overweight duration.

We will no longer be breaking out income trusts as aseparate asset class in 2007, in keeping with theirinclusion in the TSX Composite last spring. Instead, ourtrust holdings will be subsumed in each of our individualsector weightings within the TSX. This reduces our assetclass choices to the more traditional menu of stocks,

bonds and cash. At the same time we will be addingseparate weights to three TSX sub-groups: banks, goldsand other metals. The rationale behind this decision isthat these sub-sectors are as important if not moreimportant to total equity market performance than anumber of TSX GICS such as utilities and health carewhere we provide a strategic weighting.

ASSET MIX (%)

Bench-

mark

Strategy

Recom-

mendation

versus

Bench-

mark

chg vs

mon. ago*

Stocks 56 66 +10.0 0.0

Bonds 38 34 -4.0 -1.0

Cash 6 0 -6.0 +1.0

GICS SECTORS (%)**

Consumer Discretionary 5.2 1.2 -4.0 0.0

Consumer Staples 2.6 0.1 -2.5 0.0

Energy 27.9 32.4 +4.5 0.0

Financials 32.1 36.6 +4.5 0.0-Banks 16.0 19.5 +3.5 0.0

Health Care 0.8 0.8 0.0 0.0

Industrials 5.3 3.3 -2.0 -1.0

Info Tech 3.5 0.0 -3.5 0.0

Materials 16.1 18.1 +2.0 +1.0

-Gold 6.5 7.5 +1.0 +1.0

-Other Metals 5.3 6.3 +1.0 0.0

Telecom 5.0 5.0 0.0 0.0Utilities 1.5 2.5 +1.0 0.0

Note: Shading indicates recommended overweight.

*change in %-pt underweight/overweight from last month

** Benchmark weights are for TSX Composite

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CIBC WORLD MARKETS INC. Canadian Portfolio Strategy Outlook January 3, 20 07

STRATEGY

TSX to Hit 14,250 Despite Sluggish Canadian EconomyJeff Rubin & Peter Buchanan

Table 1 - Equity Projections

Continued strength in overseas economies should lever another year of double-digit returns to investors in thebroad Canadian equity market. Our 2007 year-end target of 14,250 provides a 12.7% total return on the TSX(Table 1), roughly double the return we expect from the bond market. Hence we begin the year with a significant10%-pt overweight in stocks and a 4%-pt underweight in bonds. We continue to hold zero cash, freeing upadditional room for our equity market overweight. Our overweighted equity position last year was the majorcontributor to our portfolios third straight year of outperforming the all-asset benchmark (see page 7). Althoughprojected equity market returns will fall short of those achieved in both 2005 and 2006, TSX performance will beall the more impressive when perceived against the backdrop of a visible deceleration in North American economicgrowth (Table 2).

Our forecast of 2.2% GDP growth will be the slowest in Canada since 2003, a year marred by both the SARSoutbreak in Toronto and power blackouts in Ontario. Fortunately for the TSX outlook, the indexs composition is avery poor reflection of the Canadian economy. For one, motor vehicles and forestry products, two significant butnow struggling segments of the countrys GDP, are hardly represented in the TSX at all. Forestry stocks have shrunk

from 4% of market capitalization 15 years ago to a scant 0.7% and as a result have become effectively irrelevantto index performance. While the auto sector is hugely overweight in the composition of both Canadian manufacturingand Canadian GDP, at over 10% and 4% respectively including spin-offs, its decidedly underweight when it comesto TSX representation accounting for only 0.8% of the index.

At the other end of the spectrum, mining and minerals, oil and gas and financial services carry relatively hugeweighting in the TSX relative to their weighting in the Canadian economy (Chart 1). In the case of energy, thesector is almost ten times as important to the TSX than to the economy. Mining and minerals is about four timesas important in TSX market cap than in GDP while banks and financial services is about three-and-half times moreimportant in the stock market than in the economy.

Table 2 - Economic Forecast

2005 2006 2007

TSX Composite - level 12,908 (12/29) 11,272 12,908 14,250

-% total return 17.3 YTD 24.1 17.3 12.7

TSX Operating Earnings - index adj 647 775 884

- yr/yr % chg 13.8 (06:Q4) 31.1 19.7 14.1

S&P 500 - level 1,418 (12/29) 1,248 1,418 1,500

Year-end

Latest

06Q3 06Q4 07Q1 2005 2006 2007

Canada Real GDP Growth (AR) 1.7 1.2 2.4 2.9 2.7 2.2

Real Consumption Growth (AR) 4.2 2.5 2.7 3.9 3.8 2.8

CPI - Headline (y/y) 1.7 1.3 1.4 2.2 2.0 2.1

- Core (y/y) ex taxes 2.1 2.2 2.1 1.6 1.9 2.0

Unemployment Rate (%) 6.4 6.3 6.5 6.8 6.3 6.5

US Real GDP Growth (AR) 2.0 2.2 2.1 3.2 3.3 2.2

Real Consumption Growth (AR) 2.8 4.0 1.8 3.5 3.2 2.5

CPI - Headline (y/y) 3.3 1.9 2.3 3.4 3.2 2.6

- Core (y/y) 2.8 2.6 2.5 2.2 2.5 2.0

Unemployment Rate (%) 4.7 4.5 4.9 5.1 4.6 5.1

World Real GDP Growth (% ch) - - - 4.9 5.0 4.6

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STRATEGY

Those are all fortunate traits in terms of expected stock market performance. The market underweight in forestryand autos is lagging the rest of the economy, while metals, energy and banking are all leading sectors of theeconomy.

Energy and base metals are much more finely tuned to world economic growth than North American or Canadiangrowth. All the more so in recent years, with overseas economies like China becoming much larger base metalsand energy consumers. (As we noted last month, China currently accounts for over 100% of the annual increase inmost base metals consumption). Indeed, TSX index gains have had a much closer correlation with global GDP (0.59)than with Canadian GDP (0.37) over the last two decades (Chart 2).

Equally compelling is the gap between index earnings growth and the likely growth of pre-tax corporate profits in

the Canadian economy this year. The latter is projected to rise by only 6%, following an expected 7% increase in2006. While profits remain high as a share of the national income pie, year-over-year gains in pre-tax profits havedecelerated sharply from double-digit territory to the mid-single-digit range in recent years (Chart 3). In contrast,TSX operating earnings are expected to grow by 14% this year, twice the rate of profit growth in the economy in

general.

Compositional differences once again explain thevery different earnings outlook. Sectorally, banksenergy and metals firms are among thoseexpected to lead in earnings growth this year andshould outperform current market expectations

(Table 3). Buoyed by rising oil and uranium prices,we expect energy sector earnings to grow nearlytwice as fast as TSX earnings as a whole. Earningsin the financials and materials sectors are alsoexpected to be strong, beating currentexpectations. The outlook for earnings issomewhat more restrained in the consumer sectoras well as the info-tech sector (Table 3, Chart 4).

Chart 3 TSX Earnings Outpace Canadian Total

*incl companies reporting as of Nov 1

0

5

10

15

20

25

30

35

40

Q2-03 Q4-03 Q2-04 Q4-04 Q2-05 Q4-05 Q2-06

S&P TSX

Operating

Earnings

Total CDN

Corporate

Operating Profit

y/y % chg

Q3*

Chart 1 TSX Weights versus Canadian GDP Shares

0

5

10

15

20

25

30

35

Share of Cdn GDP Share of SPTSX

%

For/Wood Oil, Gas Mining/ Fin'l/Ins. Mot.Veh.

/Paper & Prod. Minerals RE Serv. & Parts

Chart 2 TSX Tracks Global Growth

0

0.1

0.2

0.3

0.4

0.5

0.6

Cdn Real GDP World Real

GDP

-30

-20

-10

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30

40

1986

1989

1992

1995

1998

2001

2004

2007

F

0

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2

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6

S&P TSX (L) World Real GDP (R)

Y/Y % chg1986-2006,

Correlation with TSX

Y/Y % chg (Avgof Monthly Closes)

0

0.1

0.2

0.3

0.4

0.5

0.6

Cdn Real GDP World Real

GDP

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S&P TSX (L) World Real GDP (R)

Y/Y % chg1986-2006,

Correlation with TSX

Y/Y % chg (Avgof Monthly Closes)

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STRATEGY

Overweight Financials and Energy Stocks

Our two largest overweights remain the energy and financial sectors. Oil prices firmed to an average US$62 inDecember and should set new record highs in 2007 on dwindling supply growth and still resilient global demand,particularly in oil-producing countries themselves where oil prices are massively subsidized. Moreover, by the endof the decade, Canadian oil sands will likely become the single largest source of net new supply, replacing deep-water fields. That, and the fact that Canada now accounts for almost 60% of the worlds oil reserves open toprivate investment (see December Monthly Indicators, pages 4-5) suggests that Canadian energy properties, andthe companies that own them, will be hotly pursued by international firms relying increasingly on unconventionaldeposits for reserve replacement.

Our top pick within the energy sector remains uranium stocks. Having seen the market take out our earlier pricetarget of US$70 before the years end, we are raising our forecast for uranium oxide to US$100 per pound overthe next 12 months. With the US/Russian agreement on reprocessing nuclear weapon grade fuel set to expireearly next decade, the market will be facing a growing supply gap (Chart 5). Mine production will not only have to

Table 3 Valuations & Earnings Growth by Sector

Chart 4 TSX Earnings Growth in 2007

Chart 5 Higher Prices Needed to CloseLooming Supply Gap

MineProduction

Diluted MilitaryStockpi les

Other SecondarySupply

2003 05 07 09 11 13 14 17 19

20

40

60

80

0

000 tonnes /yr

ProjectedReac

torDemand

TotalSu pply

Source: Euratom, 2005. Assumes unchanged uraniumand enrichment costs.

MineProductionMineProduction

Diluted MilitaryStockpi les

Other SecondarySupply

2003 05 07 09 11 13 14 17 19

20

40

60

80

0

20

40

60

80

0

000 tonnes /yr

ProjectedReac

torDemand

TotalSu pply

Source: Euratom, 2005. Assumes unchanged uraniumand enrichment costs.

4-Qtr Fwd Index

Earnings Level Current Last Decade 2005 2006 2007

Financials 153.6 1949 12.7 10.9 12.8 15.5 12.9

Energy 233.3 3164 13.6 13.0 54.5 12.1 24.2

(Energy-cash flow basis) 418.7 * 3164 7.6 ** 5.4 ** 31.1 15.0 20.0

Industrials 80.0 1154 14.4 15.6 19.7 13.9 11.9

Materials 160.5 2406 15.0 27.5 23.3 99.3 11.9

Telecommunications 54.8 855 15.6 34.7 2.4 32.8 9.2

Utilities 115.3 1857 16.1 13.9 10.4 20.1 8.1

Consumer Staples 100.5 1696 16.9 17.0 2.4 3.1 -4.9

Health Care 28.6 528 18.4 49.7 -6.1 3.3 -6.4

Consumer Discretionary 61.9 1273 20.6 18.6 6.5 14.7 -8.0

Info Tech 6.3 266 42.3 32.3 260.9 -50.2 14.8

TSX Composite 898.2 12908 14.4 17.9 26.2 19.7 14.1

*Forward cash flow **Price to Fwd Cash Flow

Forward PE

Note: Indexes as of Dec 29th; 4-qtr fwd earnings are proj. 06:Q4 thru 07:Q3

TSX Op. Earnings (% ch)

-20

-10

0

10

20

30

40

Ener

gy

Mat

eria

ls

Indu

stria

ls

Cons

umer

Disc

retio

nary

Cons

umer

Sta

ples

Heal

thCar

e

Fina

ncia

ls

Info

Tec

h

Tele

com

Svc

s

Utili

ties

TSX

Com

posit

e

CIBC WM Projection

Analysts' Consensus

% chg

Source: CIBC WM, Thomson Analytics

+91%

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STRATEGY

keep pace with rapid demand growth generated from new Asian reactors, but will also have to compensate for thdepletion of military stockpiles that have in recent years, been a significant source of global supply. We also recommenan overweight in oil stocks at the expense of natural gas stocks. While the North American natural gas market facesupply depletion, US gas demand is falling more rapidly as a result of both a warming climate and the shift offshorof major industrial users of natural gas like the petro-chemical industry.

Financials represent our other large overweight sector. This year we have broken out banks, the largest componenof the sector, as a separate sub-category. We continue to favour banks with a 3.5%-pt overweight, expecting theto once again lead the financial sector in performance, as was the case last year. While Canadian banks may seemexpensive relative to their US counterparts in terms of forward earnings multiples, US banks are at much greater risto a potential blow-up in the sub-prime market, particularly for mortgages (see upcoming January Monthly IndicatorsAnd the higher dividend yields of some US money centre banks is a reflection of higher Treasury bond yields whicin the 10-year part of the yield curve are more than 60 bps higher than a comparable Government of Canada yield

Over the last five years, dividend payouts in the financial sector have risen by 120% compared to a 75% increase fothe TSX as a whole. The growing attraction of bank dividends has made bank stocks a natural alternative to incom

trusts, particularly now that future issuance in the trust sector will be constrained by Ottawas new tax measures otrusts. Moreover strong earnings and a market desire for yield should prompt many banks to raise their dividends 2007.

Adding a Percentage Point to Gold

We are adding a percentage point of weighting to gold stocks, which we have broken out separately from the reof the materials GICS sector this year due to the fact that their weighting has recently grown to over 40% of thsector. With an over-80% inverse correlation with month-to-month moves in the trade-weighted US dollar in thlast decade, gold is the most likely of any commodity to benefit from expected US dollar weakness in 2007. Thlatter is becoming all the more likely given further erosion in record American current account deficits and increasinevidence that Russia as well as some OPEC producers may start diversifying their foreign currency holdings awa

from the greenback. At a minimum it suggests that there will be reduced selling of gold by central banks as mosseek to contain, if not reduce, US dollar exposure in their foreign reserves. Our 12-month target price for gold US$700 per ounce, which creates considerable upside for gold stocks on the TSX. All the more so given that recenhedge book reduction has boosted the sectors leverage to higher bullion prices. In addition we are maintaining ouoverweight in base metals stocks, given still reasonably good economic prospects for the world economy in 200and strong commodity prices (Table 4).

Table 4 Commodity Price Forecast

29-Dec 2005 2006 2007 (f)

Oil (WTI) $/bbl 61 57 66 80

Natural Gas (Henry) $/Mn Btu 5.50 8.89 6.73 6.50-7.00

Gold $/troy oz. 632 444 604 700*

Copper $/lb 2.87 1.67 3.06 3.10

Aluminum $/lb 1.29 1.23 1.17 1.20

Nickel $/lb 15.47 6.71 10.98 14.00

Zinc $/lb 1.95 0.63 1.48 2.10

Uranium $/lb 64 28 47 100*

*12-month target

Average

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STRATEGYPortfolio overweights in energy, financials, gold and utilities are offset by underweights in info-tech and consumerstocks. While the info-tech sector did surprisingly well last year on the back of the performance of its largest firm,success was very unevenly distributed within the sector. Share prices of about 40% of TSX info-tech firms endedup down over the last year. And valuations continue to trade at huge earning multiples compared to the rest ofthe market. Consumer groups, staples and discretionaries are vulnerable to a consumer-led slowdown in the NorthAmerican economy that is likely to take its cue from a tanking US housing market. The tourism/hospitality sectorsub-group faces additional challenges from tighter Canada-US border restrictions and an elevated loonie, as wellas potential increases in airline fares and vehicle operating costs given our oil price forecast.

Falling Bond Yields Should Boost Demand For Trusts

While our trust holdings are now subsumed in our equity portfolio, it remains noteworthy that the trust marketcontinues to offer good value in the wake of the sell-off precipitated by Ottawas surprise announcement at theend of October to commence taxing new trusts in 2007 and existing trusts by 2011. We ended last year by puttingback an overweight on trusts and were rewarded with a significant rally in December that had halved earlier losses.With average yields above 9%, the sector will continue to hold appeal, particularly for income-oriented investors.

And Ottawas recent clarification of expansion rules for trusts gives some room for growth over the next fouryears, particularly for oil and gas royalty trusts.

The demand for yield product is likely to grow even stronger in 2007 following anticipated interest cuts by theBank of Canada. While still only vaguely hinted at in the yield curve, we expect the Bank to begin easing by theend of the first quarter and continue throughout the year, cutting rates by as much as 100 basis points (Table 5).An expected 50-bps drop in long bond yields encourages us to go long duration in our bond portfolio, but weremain wary of historically tight credit spreads going into a projected record year of defaults in the US sub-primemortgage market.

Table 5 - Fixed Income & Exchange Rate Projections

Year-End

2005 2006 2007

B of C Overnight Target (%) 4.25 4.00 3.50 3.25 3.25 4.25 3.25

2-Year GOC 4.03 3.65 3.40 3.20 3.86 4.03 3.25

10 Year GOC 4.09 3.85 3.60 3.40 3.98 4.09 3.50

30-Year GOC 4.14 3.95 3.70 3.50 4.05 4.14 3.65

S&P TSX Cdn Bond Index (% YTD tot return) 4.0 1.7 4.0 6.4 6.5 4.0 6.7

Fed Funds 5.25 5.25 4.75 4.50 4.25 5.25 4.50

10-Year US Note 4.70 4.50 4.35 4.25 4.39 4.70 4.30

US$/C$ 85.8 85.1 85.8 86.2 86.1 85.8 87.0US$/EUR 1.32 1.34 1.36 1.34 1.18 1.32 1.33

Yen/US$ 119 117 113 110 118 119 109

Sep

30/07Dec 29/06

Mar

31/07

Jun

30/07

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STRATEGY

HISTORICAL PERFORMANCE: CIBC WM BENCHMARK AND ASSET CLASSES

(2) Market benchmark weight is the actual mix for stocks, bonds and cash held by the broad base of pension funds, segregated funds, mutual fundsand insurance companies. This totals about $1 trillion of which pension and mutual funds are the biggest (45% & 37%) with life insurance and

segregated funds at 11% & 7% respectively. The cash, stock and bond breakdown varies significantly among the 3 basic components such thatthe benchmark for any of the 4 categories may vary significantly from the published aggregate (eg. equities can vary from 10% for life companiesto 75% for the other 3 categories). Data is Statistics Canada/Bank of Canada published data updated to current based on correlation analysisfrom the most recent partial actuals. The total return for the index will differ slightly from the summed weighted return for the sectors due tothe weight shifts on a day-to-day basis.

(3) Equities by GICS sector benchmark weights are TSX data. Sector index levels are total returns.

All Asset Classes TSX Equity Only

(1) Total return for the recommended portfolio is the index return multiplied by the individual asset mix or sector weight

recommended by Economics & Strategy. Recommended portfolio weights for the current month appear in the front table.

PERFORMANCE OF STRATEGY PORTFOLIO VS BENCHMARK

2005

Index

Close

Dec 29th

Index

Level

Asset Classes 2006 2005

Stocks (TSX Equity Total Return Index) 26,630 32,005 20.18 24.13

Income Trust Index (CIBC W M Total Return) 254 247 -2.40 28.07

Bonds (S&P TSX Cdn Bond Index) 1,140 1,186 4.00 6.45

Cash (1-Month Bills) 3.2 4.1 3.88 2.27

Market Benchmark - - 11.64 15.13

--Strategy Portfolio - - 11.86 17.76

Income Trust Groups (Total Return) 2006 2005

Business 240 219 -8.50 15.01

Oil & Gas 359 337 -6.11 51.33

Power & Pipe 183 176 -4.16 7.54

REIT 200 254 26.96 24.12

TSX Stocks by Sector (Total Return) 2006 2005

Consumer Discretionary 1,198 1,449 20.87 9.81

Consumer Staples 1,723 1,817 5.49 -1.09

Energy 3,235 3,547 9.67 63.43

Financials 1,921 2,293 19.35 23.93

Health Care 537 540 0.48 -2.65

Industrials 1,081 1,264 16.92 17.89Info Tech 210 268 27.33 -15.77

Materials 1,861 2,657 42.81 15.32

Telecom 876 1,080 23.31 13.54

Utilities 2,236 2,577 15.26 38.29

Total Return as

of Dec 29/06 (%)

Level

10.2710.9

17.76

11.86

15.13

11.64

0

5

10

15

20

2006 2005 2004

Strategy Portfolio Market Benchmark

Total Return %

(1)

18.90

26.90

14.4815.17

24.1320.18

0

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10

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25

30

2006 2005 2004

Strategy Portfolio Market Benchmark Equity Only

Total Return (%)

(1)

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EQUITY RESEARCHTSX SECTORAL VIEWS BY FUNDAMENTAL EQUITY RESEARCH ANALYSTS FOR JANUARY 2007

Consumer Discretionary B. BekOur thesis for Canadian Media for the past four years has focused on the eventuality of M&A and consolidation, especiallyamong the broadcast players. Looking past the M&A thesis and focusing on fundamentals, our advertising growth estimate

for 2007 sits at a solid 4.2%, on track with our 2006 estimate of 4.3%. We maintain our Market Weight stance on thecommunications & media sector given our views on valuation. M&A will likely drive valuations higher, but our view onfundamental valuation gains remains more modest (Bek: Communications & Media Market Weight).

Consumer Staples P. Caicco, R. PiticcoCanadas first Wal-Mart Supercenters hit the Ancaster, Stouffville and London markets. The entry of the combineddiscount grocery and general merchandise format has been looming for many months, and the stocks of Canadiangrocery retailers have been pressured by the uncertainty. Investors are anxious to see the new format and assess theimpact it will have on the established players. Though the Canadian market is much better developed in the discountspace than its counterparts that were hit so hard by the Supercenter format in the US, questions remain. Specifically,we are most interested to see the scope and nature of Wal-Marts perishables offering, which we believe will be indicativeof the formats ability to take market share from the existing players (Caicco: Merchandising & Consumer Products Market Weight). Companies within our universe are generally pursuing acquisition opportunities and internationalmarket expansion as key mechanisms for top-line growth. The strong free cash flows and healthy balance sheets meanexecution is limited to finding suitable value-enhancing targets. With both fuel margins and milk-cheese spreads on thedecline, those opportunities are likely to increase. To the extent they dont materialize, we expect capital will be returned toshareholders in the form of increased dividends and/or share buy-backs (Piticco: Consumer Products Market Weight).

Energy R. PlexmanCommodity prices have corrected sharply in the past month. Consequently, we have lowered our oil price forecasts toUS$60.00/Bbl for 2007 (from US$68.00/Bbl). We have also lowered gas prices from US$9.00/Mcf to US$7.25/Mcf for2007. We still believe that gas prices will recover as higher winter demand works through excess storage. However, thelow base price makes our prior targets look optimistic (Plexman: Oil & Gas Overweight).

Financials D. Mihelic, R. OReilly

Fundamentals have remained strong, with ROEs expected to continue in the high teens. Loan growth continues to berobust in Canadian retail banking, while the credit quality is still benign. We expect stabilization to modest improvementin net interest margins in Canada based on an expected steepening of the yield curve. Relatively rich dividend yields andsolid earnings growth should support valuations in 2007 and 2008 (Mihelic: Banks - Market Weight). We believethat shopping centre and diversified commercial property REITs currently offer the best combination of attractive currentyield and moderate risk for the next 12 months. Those REITs that invest in shopping centre, industrial and office propertiescurrently provide attractive sustainable distribution yields averaging 7.5%. REITs should benefit from generally firmoccupancies, continuing contractual rent step-ups, lease renewals or rollovers at market rental rates that match or exceedin-place rents, and accretive property acquisitions (OReilly: Real Estate Market Weight).

Health Care - J. WalewiczAs over 50% of the S&P/TSX Health Care Index is driven by just three stocks, company-specific news will drive sector

performance more so than broader macro trends. We maintain our Market Weight sector weighting, as we view therisk/reward profile for the dominant Canadian health care stocks as balanced. For the remainder of the year, the majorCanadian health care companies face key business milestones that will drive sector performance. In our view, the diversityof the Canadian health care space demands that investors continue to focus on stock selection (Walewicz: HealthCare Market Weight).

Industrials M. WillemseMost forecasting services predict flat-to-declining North American light vehicle sales in 2006. WardsAuto.coms NorthAmerican light vehicle production estimate is for 3.699 million vehicles in Q4/2006 (an 8.7% decline year over year),including 2.252 million units at the Big Three (an 11.5% decline year over year). Longer term, we expect continuedmarket share erosion for GM and Ford, bringing renewed urgency for the parts suppliers to increase their content per

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EQUITY RESEARCHTSX SECTORAL VIEWS BY FUNDAMENTAL EQUITY RESEARCH ANALYSTS FOR JANUARY 2007

vehicle and/or diversify their customer base, particularly with the import-based OEMs. We are encouraged by the upcominglaunches of new platforms, including the GM pickups, the GMC Acadia, and the Ford Edge. Recent progress by the BigThree in reducing legacy costs in the US is also encouraging (Willemse: Automotive Market Weight). The

fundamentals in the steel sheet market have been of concern over the past few months and will likely remain so for thenext three to six months due to high inventories, soft demand in automotive and housing markets, and still too many smallplayers. However, most other steel sectors (plate, structural beams, tubulars) are experiencing relatively stronger demand,suggesting that some over-supply issues in other markets may be easier to manage (Willemse: Steel Market Weight).

Information Technology - P. Lechem, T. CouplandCanadian software stocks have enjoyed a strong end to 2006, driven by: 1) the typical seasonal year-end rally; 2) generallyimproving fundamentals; and, 3) a heightened level of takeover speculation. We see 2007 as benefiting from more ofthe same, with rising cash balances being used for acquisitions and share repurchases, and ongoing restructuring/costcontainment helping deliver bottom line improvements. However, while we see room for the sector to move higherthrough the course of the year, there has been a prolonged rally since mid-2006, which has pushed valuations to thetop of the trading range, and which might limit further increases through the first half of 2007 (Lechem: Technology-Software Market Weight). Now that the US has prohibited online gambling, there is a lot of speculation as to howthe industry will evolve from here. In the short-term it will be difficult for companies to quickly adapt and lower theirfixed cost base in line with the lower revenue. For this reason, companies with significant US business will most likelysee hard times ahead until they can restructure their business in line with these new developments. Outside the issue ofUS legislation, the online gaming market has continued to post strong results even in the seasonally weaker period(Coupland: Technology-Online Gaming Market Weight).

Materials J. Bout, H. Carreau, B. Cooper, D. Roberts C. Hale-Sanders,Gold has rebounded from the mid-US$500 per ounce range in early Q4/06 and is well poised to continue its upwardmovements through 2007. We believe the high for gold in 2006 of US$740 per ounce will be breached in 2007. Longer-term fundamentals remain in place for gold to move upward driven by a scarcity of deposits and strong physical and investmentdemand. We continue to recommend an Overweight stance on the sector with an expectation that smaller-cap stocks willoffer the best returns (Cooper, Humphrey: Mining, Precious Metals Overweight). We believe that the base metalssector is attractive on both an absolute value basis and relative to the overall market. The current extended period of highmetals prices is poised to change the way investors look at base metals shares. Our bullish outlook towards share pricesreflects the substantial cash flows expected to accrue to the various base metals equities over the next two years, whichwould suggest that many of the companies could have approximately 50% of their current market capitalization as net freecash by the end of 2008. This should result in increased growth opportunities, more industry consolidation, and increasedpotential for capital returns to shareholders (Hale-Sanders: Mining, Metals and Minerals Overweight). We have aMarket Weight rating on the Chemicals and Fertilizers sector, reflecting the diversity of commodities in the sector. We believea slowing US economy will negatively impact the olefin/polyolefin and styrenics industry. We expect agricultural demand in2007 to be stronger, especially for corn as export demand for corn and corn for ethanol is increasing rapidly. We expectmethanol prices to remain robust due to supply/demand tightness and growth in non-traditional demand (Bout: Chemicals& Fertilizers Market Weight). Although most pulp and paper prices are approaching peak levels, the profitability ofmost paper & forest products companies remains weak, largely due to the strong Canadian dollar and generally high prices

for fiber, chemicals, and energy. The cyclical correction in building materials prices has started to materialize. Given that theglobal economy is well into the current cycle and cost pressures persist, a catalyst for upward revision in share prices is notobvious. While the sector as a whole appears historically cheap on a range of valuation metrics, we think it may remaincheap for some time (Carreau, Roberts: Paper & Forest Products Underweight).

Utilities M. Akman, A. PavaoWhile valuation is not cheap on a P/E basis, it is fair on a yield basis. With long bond yields rebounding slightly inOctober since moving down in early July, the sectors relative yield now stands at 81% versus a near-term historicalaverage of 80%. We have published research suggesting that, with the dividend tax cut recently implemented by thefederal and provincial levels of government, relative yields could move down below 70%. Thus, we foresee modestupside potential in the stocks (Akman, Pavao: Pipeline & Utilities Market Weight).

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0

20

40

60

80

1/1/04 7/1/04 1/3/05 7/1/05 1/2/06 7/3/06 1/1/07

TSX 60 Est. Real ized Vol (%)

TSX 60 GARCH Forecas ted Vol (%)

Options Implied Vol (%)

QUANTITATIVE STRATEGYQUANTITATIVE TACTICAL ASSET ALLOCATION (QTAA) STRATEGY by Yin Luo

Exhibit 1. Macro Factor Contribution QTAA

Source: CIBC World Markets Quantitative Strategy

Exhibit 2. Market Volatility

Stocks/ Stocks/ Bonds/

Factor Cash* Bonds* Cash*

Yield spread 2 NA 2

Equity Yield Gap NA 1 NAU.S. Equity Yield Ratio 5 NA NA

TSX Dividend Yield 1 1 NA

Change in 3-Month T-Bill Yield NA 3 NA

TSX GARCH Volatility 3 3 NA

Change in TSX GARCH Volatility 3 NA NA

Oil Price 3 3 3

CRB Commodity Index NA 1 NA

Canadian Dollar 1 NA 1

Put-Call Ratio 5 5 1Leading Economic Indicator NA 3 NA

M3 Money Supply NA 3 3

ISM Index 2 NA NA

Probability of Outperformance 80% 85% 41%

* 5 indicates the strongest positive contribution to outperformance, while 1

means the strongest contribution to underperformance.


The equity market was up again in December 2006, outperforming both bonds and cash. The utilities and healthcare sectors went up more than 4% in the month, while the industrials and energy sectors were down. Energy andcommodity prices were down. Interest rates barely moved.

Our QTAA strategy uses a statistical technique called logit model to make asset allocation decisions. Our QTAAmodel (see Exhibit 1) is currently suggesting stocks outperform cash (probability = 80%), which in turn outperformsbonds (probability = 59%).

We recommend overweighting stocks and underweighting bonds. The market has been quiet over the holidayseason. We expect the market volatility to rise slightly in January (see Exhibit 2).

Note: From a modeling perspective, we use the S&P/TSX Equity Index as our main benchmark and treat income trusts as a

separate component in our TAA and sector rotation strategy.

QUANTITATIVE SECTOR ROTATION STRATEGYCompared to the recent average, our quant model assigns more weight to revision, quality, and growth factorsand reduces weight on momentum, value, and market-related factors for January 2007.

Our QED model suggests overweighting the materials, information technology, industrials, and telecom servicessectors. We also recommend underweighting the energy, consumer staples, financials, and health care sectors. Forquant stock-specific analysis, please refer to our QED Model Monthly Forecast, January 2, 2007 for individual stockrankings.

Exhibit 3 provides our QED model ranking for the 10 GICS sectors, using the bottom-up approach on a capitalization-weighted basis. Exhibit 4 decomposes the QED score for each sector by the six sources of alpha: value, growth,momentum, analyst revisions, quality, and market.

The positive rating on the materials sector is balanced other than quality, all other six sources of alpha are positive.The information technology section benefits from strong sector momentum. Valuation on the sector is also attractive.The industrials sector benefit from strong sector alpha, reasonable valuation, and strong growth. Positive momentum,growth, and attractive valuation contribute to the overweight recommendation on the telecom services sector.

We recommend underweighting the energy sector, due to negative quality. The consumer staples sector isunattractive, due to negative quality and expansive valuation. The low growth rate and negative revision contributeto the underweight position for the health care sector. The financials sector suffers from expensive valuation.

Our QED model performed well in 2006. In our non-sector-neutral model, the top-ranked stocks (decile 10)outperformed the bottom-ranked stocks (decile one) by 30.9% (see Exhibit 5). In our sector-neutral model, thetop-ranked stocks (quintile five) outperformed the bottom-ranked stocks (quintile one) by 20.8%. Our QED modeladded value in eight of the 10 sectors in 2006.

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Last Last Last Last LastQED Model Performance (%)

1Month 3-Month 6-Month 12-Month 6-Year

5

Energy 8.6 16.2 13.0 18.0 60.5Materials (2.8) 10.5 6.7 28.8 44.2

Industrials 6.4 33.0 38.7 62.5 64.8

Consumer Discretionary (1.0) 12.9 18.2 33.8 49.9Consumer Staples 6.6 11.8 17.1 37.8 26.1

Health Care 11.6 (3.1) (13.1) (21.3) 8.7Financials (4.1) (2.1) (8.1) (13.3) (1.8)

Information Technology 6.5 18.0 34.0 31.9 31.6

Telecommunication Services 4.1 (42.6) 51.5 60.8 67.3Utilit ies 0.2 9.0 20.7 0.8 11.1

CIBCWM Quant Universe2

Non Sector Neutral Portfolio (Decile 10 - Decile 1)3

(1.1) 15.8 23.4 30.9 60.6

Sector Neutral Portfolio (Quintile 5 - Quintile 1)4 2.7 11.1 12.8 20.8 37.4

Note:

5. Annualized returnSource: CIBC World Markets Quantitative Strategy

4. The performance is calculated as the return differential between the top-ranked quintile and the bottom-ranked quintile, controlling for sector balance.

1. Sector performance is calculated using our QED model ranking of the stocks in the sector. Stocks in the sector are ranked by their QED score at the end of

each month and divided into five quintiles. Stocks in each quintile are equally weighted. The performance is calculated as the return differential between the top

ranked quintile and the bottom ranked quintile.

2. CIBCWM Quant universe includes more than 400 Canadian stocks listed on the TSX.

3. The performance is calculated as return differential between the top-ranked decile and the bottom-ranked decile, without controlling for sector balance.

(0.12)

(0.08)

(0.04)

0.00

0.04

0.08

0.12

0.16

0.20

Energy

M

aterials

Industrials

Consumer

Discretionary

ConsumerStaples

HealthCare

Financials

Information

Technology

Telecomm

unication

Services

Utilities

Market

Sector Specific

Quality

Analyst Revisions

Momentum

Growth

Value

QED Score

QUANTITATIVE STRATEGYQED Model Methodology

This section provides a briefoverview of our QED modelmethodology. For a more in-depthdiscussion on model methodologyand back tests, please refer toQuantitative Strategy QuantitativeEquity Dynamic (QED) Model: AnIntroduction , dated August 3,2005.

In essence, the QED model is amultivariate model, based on paneldata economics, to forecast stockreturns (or alpha).

The QED model is first estimated on27 alpha factors from six categories

(value, growth, momentum, analystrevisions, quality, and market). Westrive to find factors that are nothighly correlated, have high Tstatistics, are jointly statisticallysignificant, and more importantly,provide excellent out-of-sampleforecasting ability.

We then use macroeconomicvariables to build a dynamic timeseries model to forecast the factorreturns (or returns from a unit

exposure to the various alphafactors). The weightings in the QEDmodel are dynamically adjustedbased on the economic and marketenvironment. Two other methods,simple moving average andexponentially weighted movingaverage, are also used to predictfactor returns.

The QED model is rigorously back-tested with true out-of-sampleportfolio simulations. Based onmonthly rebalancing, the

annualized spread between the topdecile and the bottom decile isabout 66% before transactioncosts, and positive over 85% oftime.

The real power of our QED modelis, however, on stock selections.Please refer to our monthlyQuantitative Strategy Outlook orweekly QED Model Forecast fordetails.

Exhibit 4. Sector QED Alpha Decomposition


Source: CIBC World Markets Quantitative Analysis

Exhibit 5. QED Model Performance

Exhibit 3. Sector/Size QED RankingMarket Cap Wgt in TSX QED Rating Relat ive

Sector/Size QED Ranking # of Stocks ($Mlns) Comp (%)* (10=Best) Rating**

Energy 40 294,205.00 23.6 3.2 0.62

Materials 57 214,921.80 17.2 8.7 1.70

Industrials 16 67,976.40 5.5 6.5 1.26

Consumer Discretionary 21 58,774.90 4.7 5.5 1.07

Consumer Staples 13 36,153.30 2.9 3.8 0.73

Health Care 8 10,479.30 0.8 4.3 0.84

Financials 24 417,330.70 33.4 4.2 0.81

Information Technology 10 51,775.80 4.1 8.1 1.58Telecommunication Services 4 65,230.10 5.2 6.4 1.25

Utilities 5 15,888.70 1.3 4.3 0.84

Total TSX Composite 198 1,232,736.00 98.8 5.1 1.00

TSX 60 56 974,899.80 78.2 4.9 0.96

TSX MidCap 48 133,859.10 10.7 4.6 0.90

TSX SmallCap 94 123,977.00 9.9 6.2 1.21

Non-TSX Composite 232 71,016.10 NA 5.6 1.10

Total Universe 430 1,303,752.00 NA 5.2 1.02

* The sum of all sector weights may not equal to 100%, because we exclude companies in the process of being taken over.

** A relative QED rating above one indicates buying/overweighting signal. Sector relative ratings are relative to

the TSX Composite Index, while the size relative ra tings are relative to the whole universe.Source: Bloomberg, CompuStat, CPMS, IBES, S&P, TSX, CIBC World Markets Quantitative Strategy


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Analyst Certification: Each analyst of CIBC World Markets whose name appears on the front page of this research reporthereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the researchanalysts personal views about any and all of the securities or issuers discussed herein that are within such analysts coverageuniverse and (ii) no part of the research analysts compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed by the research analyst in the research report.

Conflicts of Interest: CIBC World Markets equity research analysts are compensated from revenues generated by variousCIBC World Markets businesses, including CIBC World Markets Investment Banking Department. CIBC World Markets had, hasor may aspire to have an investment banking, merchant banking, lending or other credit relationship with the company that isthe subject of this report and may have received compensation from the subject company in connection with transactions thathave not been publicly disclosed. CIBC World Markets or its shareholders, directors, officers and/or employees, may have a longor short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivativeinstruments based thereon. The reader should assume that CIBC World Markets may have a conflict of interest and should notrely solely on this report in evaluating whether or not to buy or sell the securities of the subject company. Information regardingCIBC World Markets Inc.s rating system and its policies and procedures regarding the dissemination of research is available atcibcwm.com or by contacting one of our client advisers in your jurisdiction.

Legal Matters: This report is issued and approved for distribution by (i) in Canada by CIBC World Markets Inc., a member ofthe IDA and CIPF, (ii) in the UK, CIBC World Markets plc, which is regulated by the FSA, and (iii) in Australia, CIBC WorldMarkets Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, CIBC WorldMarkets). This report has not been reviewed or approved by CIBC World Markets Corp., a member of the NYSE and SIPCand is intended for distribution in the United States only to Major Institutional Investors (as such term is defined in SEC Rule15a-6 and Section 15 of the Securities Act of 1934, as amended). This document and any of the products and informationcontained herein are not intended for the use of private investors in the UK. Such investors will not be able to enter intoagreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in thisdocument are meant for the general interests of clients of CIBC World Markets Australia Limited. This report is provided foinformational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any

jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable foall types of investors; their prices, value and/or income they produce may fluctuate and/or be adversely affected by exchangerates. This report does not take into account the investment objectives, financial situation or specific needs of any particula

client of CIBC World Markets. Before making an investment decision on the basis of any recommendation made in this reportthe recipient should consider whether such recommendation is appropriate given the recipients particular investment needsobjectives and financial circumstances. CIBC World Markets suggests that, prior to acting on any of the recommendationsherein, you contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Since the levels andbases of taxation can change, any reference in this report to the impact of taxation should not be construed as offering taxadvice; as with any transaction having potential tax implications, clients should consult with their own tax advisors. Pasperformance is not a guarantee of future results. The information and any statistical data contained herein were obtained fromsources that we believe to be reliable, but we do not represent that they are accurate or complete, and they should not berelied upon as such. All estimates, opinions and recommendations expressed herein constitute judgements as of the date othis report and are subject to change without notice. Although each company issuing this report is a wholly owned subsidiaryof Canadian Imperial Bank of Commerce (CIBC), each is solely responsible for its contractual obligations and commitmentsand any securities products offered or recommended to or purchased or sold in any client accounts (i) will not be insured by theFederal Deposit Insurance Corporation (FDIC), the Canada Deposit Insurance Corporation or other similar deposit insurance

(ii) will not be deposits or other obligations of CIBC, (iii) will not be endorsed or guaranteed by CIBC, and (iv) will be subject toinvestment risks, including possible loss of the principal invested. The CIBC trademark is used under license.

2006 CIBC World Markets Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the priowritten permission of CIBC World Markets is prohibited by law and may result in prosecution.

Legal Disclaimers and Important Disclosure Footnotes

*We have compiled our analysts views in accordance with the TSX sectoral breakdowns. We would note however that an analystscoverage universe might not correspond exactly with the constituents of the TSX sectors noted above. As such, we refer readers toCIBC World MarketsMonthly Canadian Research Review and Common Stock Universepublication where each analysts specificuniverse is broken out. Analyst weightings are based solely on the specific constituents of that analysts universe and might not correspondwith the constituent in the TSX sector breakdowns.

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