Quarterly Newsletter

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2004 Q3 Newsletter
September 30, 2004

The 3rd Quarter of 2004 proved to be a turbulent one for investors. The Dow Jones was down 3.4% and the TSX was up 1.4% for the quarter. Our overall results were excellent with a gain of 7.3%. Our progress in the 3rd Quarter allowed us to reach a gain of 12.2% for the first nine months of 2004.

Canada’s economy continues to outperform the U.S. economy. Canada is experiencing better job growth than the U.S. as well as a Federal Budget in surplus and positive trade balance. The key risk to Canadian economic prospects is a rising dollar that could hurt the Ontario manufacturing base. As well, a minority Parliament could produce excess spending pressure on the Government of Canada.

Data Table

Three investment strategies worked well for us in the 3rd Quarter of 2004. These strategies were:

  1. Investing in oil and gas ($50 a barrel of oil and $7.00 per mcf gas)
  2. Investing in forestry, steel, and base metals based on China’s growth and demand for commodities
  3. Investing in growth-oriented income trusts

Let us examine the results in each area:

Oil & Gas

Data Table

As you will note, our oil and gas trusts gained between 8% and 15% while our other energy holdings gained between 1% and 33%. Gains have continued in October with the continuing rise in energy prices. We anticipate a continuance of progress for our energy holdings with a gradual decline of oil prices from current levels.

Forestry / Base Metals – China Demand

Data Table

Clearly, Algoma Steel has been a terrific performer. We await the outcome of the pending sale of Noranda to Minmetals of China. We are hopeful that the resolution of the trade dispute with the U.S. over softwood lumber will benefit Canfor. Duties will be reduced and a refund paid if the dispute is successfully resolved.

Growth-Oriented Income Trusts

Data Table

We continue to favour trusts with a solid business and growth prospects.

Not all of our business trusts performed well. Two disappointments were Boyd Group and Great Lakes Carbon. In each case, earnings have not kept pace with earlier forecast. We continue to closely monitor these trusts and may reduce our holdings if improvement in earnings is not evident.

Data Table

One area of difficulty has been small-cap equities. We continue to monitor each of our positions with a view to exit.

Prospects for the 4th Quarter are mixed. The uncertainty of a close Presidential election will be resolved (hopefully without the Supreme Court) in November. It is likely that the high price of oil will lead to some “demand destruction” and lower prices. On a positive note, inflation and interest rates remain at historically low levels and the demand from China is lifting many of our investments. Our overall assessment of prospects for the economy and for investment remains cautiously optimistic for Q4 of 2004 and for 2005. The positive aspects such as job growth and low inflation more than offset the negative of higher energy prices and a higher Canadian dollar.

Sincerely,

Michael Decter
President & CEO
Lawrence Decter Investment Counsel Inc.
MD/cl