Quarterly Newsletter

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2005 Q3 Newsletter
September 30, 2005

The past three months have borne witness to remarkable tragedy. The destruction in New Orleans and the southern U.S. states has been massive, and so will be the rebuilding efforts in the coming months. Equity markets in the United States rose in the third quarter of 2005. The Dow Jones rose by 2.9%, the S&P 500 rose by 3.2%, and the NASDAQ rose by 4.6%. Downward pressure came from rising oil prices and rising interest rates, which lead to fears of a broader economic slowdown. In Canada, our equity markets were supported by continued strength in energy and other commodity prices. The S&P/TSX Composite Index increased 11.2% during Q3, touching highs not seen since Nortel dominated the benchmark in 2000.

Lawrence Decter Investment Counsel experienced a gain of 12.2% in Q3. In 2005 year-to-date, we have returned 13.73% overall.

Data Table

Top 10 Holdings

Of our top ten holdings, all ten increased in price in Q3, due in part to our heavy weighting in the energy sector. Some of the increases were truly outstanding for a three-month period. In particular, our biggest position, Acclaim Energy, gained an outstanding 33.7%. Encana did even better, gaining 40.4%.

Energy

Oil prices have continued to climb in Q3. Oil prices reached a new all time height of US $70.85 on August 28, 2005, the day Hurricane Katrina made landfall on the Gulf Coast of the United States. Hurricanes Katrina and Rita have damaged both oil and gas production in the Gulf of Mexico and it is uncertain when production and refining capacity will return to normal.

Natural gas prices have increased even more than oil prices, reaching $14.00+ per MCF.

In view of this outlook, we will continue to overweight energy and energy-related holdings into 2006. This will cause some near-term volatility in valuations but will enhance our overall returns. It is likely that strong oil and natural gas prices will continue over 18 months to 3 years.

Major Portfolio Changes

In Q3 2005, we made some major changes to our holdings. The rationale for selling some of our long time positions as well as some shorter term holdings is detailed below:

Exit

Canfor – The continuing failure to resolve the trade dispute over softwood lumber caused us to exit our Canfor position. We still like the company, but our patience is not unlimited. The Americans continue to reject the results of every trade panel under the NAFTA. As a result, prospects for Canfor and other lumber producers are diminished.

Terasen – We exited Terasen following a takeover bid made at $35.00 (CAD) by the giant US utility company Kinder Morgan. The share price quickly appreciated past the Kinder Morgan bid, and we sold our position with the thinking that upside potential would be limited in the near term.
Boyd Group Income Fund – After a distribution cutback in March, Q3 saw us finally exit Boyd Group Income Fund. The trust’s monthly distribution was set too high for its size, and its ability to generate sufficient cash for even the reduced distribution is questionable. There are times when a holding is simply too long of a time horizon. We decided to redeploy of the Boyd investment to other companies with better medium-term prospects.

Switches

Norske Canada to Birch Mountain Resources – Pulp and paper prices have been weak for several quarters and the macro outlook for the global pulp and paper industry is not positive for at least the next six to twelve months. Birch Mountain Resources is a limestone quarry operator located near major oil sands projects in the Athabasca region of Alberta. Limestone is essential in the creation of synthetic crude oil. We see great growth potential in this company, and they have a long reserve of limestone with little competition given their location.

Merger

Acclaim Energy Trust and Starpoint Energy Trust – In a “merger of equals”, these two medium trusts will merge into one of the largest energy trusts in the Canadian market. A new trust will form, as well as a spin-out exploration company. The Acclaim management team, one of the best in Alberta, will head up the trust. The Starpoint team will run the exploration company. Despite the recent appreciation in price of both companies’ shares, we like the prospects for both the new trust and the exploration company, and will continue to hold these investments. We expect that the income from the merged trust will increase steadily and that the new energy trust will continue as a major holding.

New Additions

Killam Properties – Based in Atlantic Canada, Killam is assembling a large portfolio of residential rental units. Atlantic Canada presents many opportunities for acquisitions, and for Killam to grow its revenue base. We like the prospects of a stronger Atlantic economy.

Sequoia Oil & Gas Trust – Sequoia was formed as part of the merger between Lightning Energy and Argo Energy earlier in 2005. Sequoia is smaller than many of the other oil & gas trusts on the Canadian market and is growing rapidly. Their recent acquisition of Dynamic Oil & Gas helped increase their cash flow per share, and we see Sequoia being a candidate for increasing their monthly distribution before the middle of 2006.

Outlook for Q4 2005 and 2006

The economy is struggling with higher energy prices. Central banks are still raising interest rates. The rising Canadian dollar will begin to damage Canadian manufacturers and exports.

One of the impacts of the hurricane destruction will be a massive rebuilding effort. This will provide significant economic stimulus in Q1 through Q3 of 2006. Some of the growth anticipated in Q3 and Q4 of 2005 will likely be shifted forward. For example, there will be benefits to our Norbord holdings from both higher prices and higher sales volumes for their sale product – OSB (Oriented Strand Board), a major component in construction.

Overall, the last quarter of 2005 will likely witness continued turbulence in energy prices and economic outlook.

We will continue to be nimble in managing investment as we endeavour to secure exceptional returns for our clients.

Sincerely,

Michael Decter
President and CEO