Key Market Facts

July 31, 2002

Level YTD Indices     S&P 500 911.64 -20.59% DJIA 8736.59 -12.82% S&P/TSX 6605.42 -14.09% Currencies / Commodities CAD / US 1.5836 -0.58% US / EURO 0.9771 9.00% Gold $US 305.20 9.39% Crude Oil $US 27.02 36.19% Natural Gas $US 2.95 14.94% Interest Rates Canadian Bank Rate 3.00% 33.33% Canadian Prime Rate 4.50% 20.00% Fed Funds Rate 1.75% nil Us Prime Rate 4.75% nil

The market behaviour over the past four months has tested the resolve of the most disciplined of investors. Although reevaluation of a company’s financial condition is part of the ongoing process of investing, weeks such as those we recently experienced cause us to reevaluate not only the data provided but the standards by which it is reported.

The current crisis in corporate confidence, particularly in the US, has made all investors reassess the basis upon which their investment decisions are made. A question being posed over and over again is if in using an aggressive accounting approach a company is only able to produce 10-12% growth in earnings, then what will the numbers look like under more stringent standards of earnings reporting? Such questions cause individuals to sell now in a panic, evaluate later, and then either buy back or wait and see.

Historically when the market is feverishly selling off, all companies are affected, the good with the bad. Those with strong fundamentals, sound balance sheets and positive net free cash flow will lead the market when it turns around, the others will either wither away never to be seen again or they will come back at a slower than average rate of growth.

Over the past few weeks there have been many examples of irrational trading behaviour. Companies such as Johnson and Johnson, Citigroup and Berkshire Hathaway have experienced 24.5%, 28.1% and 15.0% swings in price respectively within just the month of July. Every piece of news that hits the news wire, regardless of its validity or source, seems to move the corresponding stock in one extreme or another. These are significant swings for companies whose volatility is normally average to low. Over the past couple of months, low volatility stocks have been few and far between.

It is natural as an investor during a period of increased volatility to feel jittery about the market and to become more cautious. Historically, the period after a market decline is not a time to be extra cautious. In fact it is prudent to stick with your disciplined approach to investing through good markets and bad. The market is not predictable and over time there are as many positive days as negative ones. An investor should always be cautious when investing, not just during bear markets, so as to ensure that their asset allocation is appropriate for them.

If you are feeling disturbed or alarmed about the volatility that your investment portfolio is experiencing then this would be a good time to reassess your tolerance for risk and the asset allocation of your portfolio. The process by which you select your investments should not be directed by the day-to-day market volatility. It should be part of your long-term investment strategy and financial plan. If for one reason or another you don’t feel that your current plan is suited to your investment objectives and risk tolerance level, then it should be adjusted accordingly.

I invite all my clients to please contact me to review your investment mix to determine whether it is still in line with your investment objectives.

Income Trusts Remain Strong in Turbulent Markets

Income trust units were not completely unaffected by the volatility in the overall market this month; however they have faired relatively well and have been a good place to keep a portion of your investment portfolio. Although Canadian interest rates did move higher in the first half of 2002, the outlook for future increases this year is unlikely given the perceived weakness of the US economy.

The prices of income trust units are sensitive to both changes in interest rates and changes in the underlying commodities associated with the trusts. If interest rates remain low and commodity prices stable, the tax-preferred treatment of the distributions on many of these unit trusts continue to make them attractive investments. Currently, the pre-tax yields on most of the income trusts range between 8-12%.

As there are currently a number of income trust units available to the investor, I have included with this newsletter a summary of information on those covered by RBC Investments, some of which you may currently hold in your portfolio. For more specific information on which income trusts may be most suitable for you please contact me directly at 604 257-7055.

Relocated
We have been in the new location of RBC Dominion Securities Inc. now for two and a half weeks. The transition went smoothly however if you have any questions or concerns about anything specific to your account please do not hesitate to give me a call and we can straighten it out.

Upcoming Events
What would you like to hear?

2002 Contribution Deadline is March 1, 2003

As part of my ongoing effort to provide you with information that is useful when making financial decisions, over the next six months I would like to host a number of seminars covering topics of interest to you, your family or your business.

I would like your feedback on which of the topics listed below is something you would like to learn more about and would be interested in attending. Please send me an email at kathy.findlay@rbc.com or call me directly at 604 257-7055 to state your preferences. Also please provide me with your preferred time either noon or 4-5pm.

1. Investment Strategy
2. Insurance
3. Estate Planning
4. Investing for US Income
5. Professionally Managed Products
6. Income Trust Units
7. Tax Planning
8. Investing for Canadian Income

If you have a topic that is not listed above that you would like to know more about please also send it along and I will do my best to accommodate that request either one on one, or if interest warrants, as part of a seminar.

Did You Know?

EBITDA – Earnings before interest, taxes, depreciation and amortization. An acronym repeatedly used in the financial press. Some companies represent this figure as “cash” earnings; however it is not the same as real operating cash flow. EBITDA leaves out too many expenses to be used as a measure of profitability as it neglects to look at variations in accounting methods, cash required for working capital, debt and other fixed payments and capital expenditures. It is not a measure of cash flow as it does not measure actual cash flowing into a company. Cash flow from operations or free cash flows are better measures for this.

RBC Dominion Securities Inc. is a member company under RBC Investments. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities which are affiliated. Investment Advisors are employees of RBC Dominion Securities Inc. Member CIPF. ?Trademark of Royal Bank of Canada. RBC Investments is a registered trademark of Royal Bank of Canada. Used under licence.©Copyright 2003. All rights reserved

RBC Dominion Securities Inc. and its affiliates may have an investment banking or other relationship with some or all of the issuers menioned herein and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. RBC Dominion Securities Inc. and its affiliates also may issue options on securities mentioned herein and may trade in options issued by others. Accordingly, RBC Dominion Securities Inc. or its affiliates may at any time have a long or short position in any such security or option thereon.

Insurance products are offered through RBC DS Financial Services Inc and RBC DS Financial Services (Ontario) Inc. (« companies ») The companies and RBC Dominion Securities Inc. are member companies under RBC Investments and are separate corporate entities which are affiliated. When discussing and selling life insurance products, Investment Advisors are acting as Insurance Representatives of RBC DS Financial Services Inc or RBC DS Financial Services (Ontario) Inc.