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In light of the recent volatility in the Equity markets, we thought that it would be an opportune time to provide you with some commentary on our views with regards to the partnership.

We would first like to look at the US Market and then comment on Canada and markets in general.

The week of May 22, 2006 started off on Tuesday with some pretty good news. Core Inflation, the Producer Price Index, was announced up 0.9% in April, though it was only 0.1%, excluding Food and Energy, where economies expected 0.2%. That was a very good report and people were happy that inflation was contained.

That appeared to be a “Head Fake” on Wall Street though, because the Consumer Price Index (CPI) was much worse than anticipated. Specifically, the CPI was up 0.6% in April, but the core rate (excluding Food and Energy) was up 0.3%. Both the overall rate and the core rate were 0.1% higher than economies expected. They expected 0.5% on the overall CPI and 0.2% on the Core Rate.

That is why the market had another relapse on Wednesday. The perception is that we’ll read the economic tealeaves and that will determine Federal Policy. It appears that most think the Fed will now increase rates when they convene on June 29^th, where most assumed rate increases were done.

Housing starts have fallen for the third straight month along with new Jobless claims. The most recent week’s level came in at 367,000. Housing cannot continue to decline at this level because it accounts for a large part of the US economy. This is one reason why the Fed might want to put the brakes on (our guess is one more ¼ point). Interest rates do not discipline a financial system – financial crises do.

Our portfolio should and will likely feature increasing international diversification in foreign currency terms.

We still feel we must continue to diversify our asset mix with a percentage of commodities.

The Asian Crisis of 1998 was the first generation, or causal force, of a chain reaction that explains much of the movements in Interest Rates, Assets Prices and Currencies that followed. The Asian Crisis had a deflationary impact, reducing US inflation and contributing to the explosion price-earning multiples in the US Equity Markets. The US Federal Reserve was determined to fight the deflation threat, so its posted bubble Interest

Rate cuts went deeper than ever. These “emergency” Interest Rates re-inflated all asset categories, with the Real Estate sector benefiting the most. They also introduced Synchronized GDP Growth, eventually boosting demand for Commodities. Commodity prices marked their secular 25-year lows during the four years after the Asian Crisis (1998-2002), which discouraged exploration and development – and the effects of this reduced supply are now shaking the global economy. Of course, China also became a massive consumer of Commodities.

So, the deflationary shocks over emerging economies are generating inflationary impacts through Energy and, as the US dollar falls, Imports. The price of Gold is telling us that the European Central Bank, the Bank of Japan and the Federal Reserve need to raise rates further.

Which Stock Markets are falling the most?

The most volatile Markets tend to be those that have risen the highest in recent years, often because of soaring Commodity prices or explosive Economic growth. That is why Canada’s benchmark index, the S&P/TSX Composite Index, has done poorly, falling 6.4% over the past eight days. But if that sounds awful, spare a tear for oil-rich Norway, whose benchmark index has tumbled 12.5% over the same time period. Also for Brazil, whose benchmark index is down 10.1%.

Are there any places to hide as the Market falls?

Cash is king right now. Among stock in the S&P/TSX Composite Index, it was not just Commodity producers that got hit last week; just about everything got caught in the downturn. True, Energy and Materials took the biggest hits, falling 9.1%, and Information Technology fell 8.8%. Only Utilities are up – by 3.6%. Meanwhile, Bonds are on shaky ground. If interest rates rise, as many investors fear, Bond prices will fall.