Quarterly Newsletter

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2005 Q4 Newsletter
December 31, 2005

Happy New Year! 2005 was a solid year for the Canadian economy and our capital markets. On the U.S. side, the Dow Jones Industrial Average rose in the fourth quarter of 2005 by 1.4% which did not redeem a disappointing annual performance of -0.6%. The Dow was essentially flat on the year. The broader S&P 500 Index rose by 1.6% on the quarter and 3.0% on the year, while the NASDAQ rose by 1.4% in Q4 and an uninspiring 2.5% annually.

The continued rise of interest rates in Q4 again buoyed fears of a broader economic slowdown in the U.S. In Canada, our equity markets were supported by continued strength in energy and other commodity prices. The S&P/TSX Composite Index increased 2.4% over the end of September’s great finish, and capped off the year with an impressive 21.9% gain.

Lawrence Decter Investment Counsel experienced a gain of 4.0% in Q4. In 2005, we returned 19.5% overall. This slightly lagged the performance of the TSX for the year. We do not hold gold stocks as we favour businesses less subject to commodity price speculation. In 2005, gold equities had a strong performance propelling the TSX to a strong year. We are, nevertheless, pleased with a fifth year of positive returns. Our five-year average is 15.10%.

Data Table

Top 10 Holdings

On average, our top 10 positions experienced a gain of 10.97% in Q4.

Of our top ten holdings, seven increased in value, two decreased, and one was unchanged. The outstanding performer was clearly Hudbay Minerals with its 75% return in the quarter, due in large measure to the run-up in zinc, copper and gold prices. Westshore Terminals’ disappointing performance was slightly mitigated by a 38 cent increase in its distribution and was caused by lower projected volumes. The lower volumes were caused by production delays as a result of the global shortage in the giant tires needed for mining trucks. Although negative for Westshore, this is a bullish indicator for the entire mining sector and illustrates the increase in activity over 2005. Acclaim Energy declined but we anticipate it recovering fully as soon as its merger with Starpoint is completed and it begins to trade as Canetic Energy Trust (CNE.UN) on January 5, 2006.

Energy

We remained committed to the energy sector in Q4 2005. Our long-standing thesis that the energy sector will provide above-average returns remains unchanged. In 2005, oil and natural gas prices both hit all-time dollar highs. Yet, we did not see much in the way of demand destruction as the global economy chugs along. Incremental energy demand from China and India will provide support for energy and other commodity prices in the coming months and years, and these prices will be reflected positively on the bottom line of many energy sector investments.

Mining

Zinc and copper prices reached record highs in Q4. Driven by expanding demand from China, these two key industrial metals experienced declining world inventories. It will be several years before new copper and zinc productions lead to a softening of their prices in world commodity markets. Our two top picks in the copper/zinc mining and smelting business were Teck Cominco and Hudbay. With gains of 19% and 75% in Q4 as noted above, they reflected the bullish market sentiment. Our other holding with exposure to these prices, Falconbridge, is merging with Inco to become a dominant nickel producer. We intend to hold the shares of the merged company.

Major Portfolio Changes

Switches

Birch Mountain Resources to Eveready Income Fund – Birch Mountain Resources simply got ahead of itself in pricing. Much of the growth in earnings for their long-term projects had been priced into the stock during Q4 and their stock price surpassed our target. We preferred the valuation of Eveready Income Fund to Birch Mountain and made the switch. Eveready is a rapidly growing company in the oilfield and industrial services industries. With existing cashflows from a blue-chip customer base, excellent margins, ample acquisition opportunity, and committed management, the long-term prospects for Eveready look very promising. Eveready derives much of its revenue from the Fort McMurray oil sands projects.

New Positions and Additions

Three positions to which we added through purchases in Q4 are the Yellow Pages Income Fund, HSE Integrated, and Armtec Infrastructure Income Fund. Our rationale for the expanded positions is set out below.

Yellow Pages Income Fund (YLO.UN) - Yes, the same yellow pages that land on your front step. As a trust, Yellow Pages has been a solid success. Now growing through acquisitions, we anticipate a distribution increase. We took advantage of the Goodale income trust meltdown to purchase more Yellow Pages.

HSE Integrated (HSL) - Similar to Eveready, HSE is a supplier to the buoyant oil and gas sector. It is also a growth-through-acquisition story. We are impressed with management and prospects over the next one to three years.

Armtec Infrastructure Income Fund (ARF.UN) - One of our passions is boring businesses that are essential. Armtec makes sewer pipe and culverts. These are both boring and essential, so we love Armtec. Much of Canada’s municipal infrastructure is aging and needs to be replaced. Armtec will benefit from this cycle of investment.

Outlook for 2006

The economy is struggling with higher energy prices. However, central banks in the U.S. and Canada are signalling an end to raising interest rates. The rising Canadian dollar will put pressure on Canadian manufacturers and exporters over the next 12 months.

Overall, the first quarter of 2006 will likely witness volatility in energy prices particularly natural gas and an economic outlook that improves. Risks to our positive view remain U.S. economy and government deficits.

We will continue to endeavor to secure exceptional returns for our clients through prudent investment.

Reminder on RRSP limits and deadlines

2005 contributions can be made until March 1, 2006 and the maximum contribution is $16,500. For those of you who like to put your contributions to work tax-free at the beginning of each year, your 2006 RRSP contributions can be made now and the 2006 maximum has been increased to $18,000.

Sincerely,

Michael Decter
President and CEO