Key Market Facts

August 15, 2003

Level YTD Indices     S&P 500 990.67 12.60% DJIA 9321.69 11.75% S&P/TSX 7390.55 11.73% Currencies / Commodities CAD / US 1.3865 -11.90% US / EURO 1.1247 7.25% Gold $US 364.70 4.74% Crude Oil $US 31.05 -0.48% Natural Gas $US 4.848 1.23% Interest Rates Canadian Bank Rate 3.25% 0.25% Canadian Prime Rate 4.75% 0.25% Fed Funds Rate 1.00% -0.25% Us Prime Rate 4.00% -0.25%

Merck & Co. plans to spin off 100% of Medco Health Solutions, their pharmaceutical benefits management unit. At the close of business August 19, 2003 all Merck shareholders will be entitled to 0.1206 shares of Medco common stock for each share of Merck common stock. As a result you will see the price of Merck fall by approximately the same amount as the value of the Medco shares.

Merck & Co. is the worlds second largest global, research-driven, pharmaceutical products and services company. Merck discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health, directly and through its joint ventures.

I recommend holding Merck and selling Medco. The spin off of the Medco unit is a net positive for Merck as management will now be able to focus entirely on the higher margin, core pharmaceutical business. The increased visibility into the pharmaceutical business will allow investors to better determine the profitability and dynamics of the companies prescription drug business.

Due to Medco’s past questionable accounting and business practices and their historic reliance on the Merck pharmaceutical unit, I do not believe that standing alone Medco would be a good investment and should therefore be sold.

For Canadian resident tax purposes, the fair market value of the Medco shares received in non-registered accounts will be considered as a foreign dividend and taxed at marginal tax rates similar to interest income. However, if certain criteria are met and Merck and the shareholder file elections with CCRA by a specific deadline, then it is possible that this foreign dividend can be excluded from Canadian taxation.

Recently, when large US corporations have gone through a spin-off they have filed elections that were accepted by CCRA. Merck is going to file and there is a good chance that they will be accepted however it isn’t 100% guaranteed. Please consult with your accountant or tax advisor if you are unsure as to how to treat this transaction.

I currently recommend both Merck & Co. and Pfizer. They are the worlds leading pharmaceutical companies. The main investment risks with Merck are: 1) ongoing investor concern about Merck’s shallow new drug pipeline, 2) generic competition 3) regulatory risk. Pfizer also experiences risk 2 and 3 however they do have a significant number of new drugs in their pipeline. Pfizer however does trade at a much higher relative valuation (PE multiple) to Merck.

Recent Volatility in Rates

Long-term interest rate in both Canada and the US have been on a roller coaster ride since the end of the Iraq war.

Prior to the war, long-term rates had moved down from their opening year levels. Once the war was underway 5-30 year rates in both Canada and the US spiked up by 20-40 basis points and then leveled out until the end of the war. Once the war was behind us, the focus globally centered on economic growth or the perceived lack of growth in both the US and Europe. This led to a downward spiral of approximately 100 basis points in 5-30 year bond rates over a 60-day period.

As quickly as bond rates fell they reversed themselves returning close to the mid April levels. Currently, 10 year yields for Canadian and US Treasuries are 5.00% and 4.55% respectively. The reversal was primarily a result of the better than expected economic and corporate earnings numbers that were released since mid June. The volatility in rates appears to have been driven by the general uncertainty in the overall condition of both the European and to a greater extent, US economy, post Iraq.

Going forward we will see slightly higher long-term rates in both Canada and the US as the economies continue to improve however I expect short-term rates will remain low in both countries for the balance of this year and into early 2004.

Critical Illness Insurance

Critical Illness insurance is one of three types of Living Benefits: Long Term Care, Disability and Critical Illness. Each type will be covered over the next three newsletters.

Critical illness insurance provides peace of mind and the financial means to deal with the diagnosis and recovery of as many as 22 illnesses, such as cancer, heart attack, stroke, Alzheimer’s disease or a severe accident. Statistics show that:

• 1 in 4 Canadian will have a heart condition in their lifetime.
• 1 in 3 Canadians will develop a life threatening cancer.

As medical science advances, the chances of surviving once fatal illnesses are increasing along with the burden of funding the treatment.

• 72% of males and 77% of females who develop cancer will survive.
• Over 80% of heart attack patients admitted to hospital survive.
• 95% of first time heart attack victims survive.
• 75% of stroke victims survive.

Disability insurance often has a 90-day waiting period before any benefits are paid. Critical illness insurance can bridge this period by providing a lump sum cash payment to you after surviving usually 30 days from the time you are diagnosed with the illness. This lump sum payment is used at your discretion. Whether it is for treatment of the illness or a family vacation the choice is yours. If no claim is made the premiums may be refunded at death or upon expiry of the policy. Please contact me directly at 604 257-7055 if you have any interest in this product.

Did You Know?

A yield curve shows the relationship between yield and maturity dates for a set of similar bonds, usually government, at a given point in time. A normal or positive sloping yield curve occurs when long-term interest rates are higher than short-term interest rates. It indicates positive growth in the economy. The steepness of this curve is affected by currency fluctuations and inflation expectations. An inverted or negative sloping yield curve is when long-term interest rates are lower than short-term interest rates. This is normally a sign that interest rates are going to decline and the
economy is going to slow down.

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