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Latest Update - February 1, 2011

Good morning et bonjour Canada,

Canadian Equity Commentary from Steve Uzielli

Note that we announced changes this morning in the Guided Portfolios due to sector re-allocation, making a greater shift toward cyclicals versus defensive sectors. In the U.S. Core Guided Portfolio we are selling Colgate Palmolive and buying JP Morgan Chase. In the North American Core Guided Portfolio we are also selling Colgate and buying JP Morgan, but in addition, we are also selling Rogers Communications and buying Crescent Point Energy. Please see your inbox for more details in the "Changes" emails distributed earlier this morning.

Highlights from the Daily Edge:

· Scotia Capital’s fertilizer analyst Ben Isaacson notes that: Canpotex implemented a $30/mt price increase for all new potash sales to SE Asia and Latin America, reflecting new base export prices of $460/mt CFR (standard) and $475/mt CFR (granular). After adjusting for shipping costs, we estimate the new export price is about $430/mt (FOB Vancouver) - in line with our 2011 estimate. Keep in mind that China is only paying ~$370/mt (FOB Vancouver) in 1H/11. The price hike is consistent with Canpotex's strategy to raise international spot prices (contracts will follow) to be more in line with domestic prices.

The next data point for international potash prices will be the 1H/11 India settlement (Feb.). We previously thought India would pay between $410/mt to $420/mt for 1H/11, but have moved this higher to 420/mt to $430/mt. The immediate price hike is positive for Canpotex members (Potash Corp (POT), Mosaic Co.(MOS), Agrium Inc. (AGU)), as well as for K+S - all rated 1-Sector Outperform. Our thesis that potash-levered stocks will have the most torque in 1H/11 is playing out as expected. Potash remains our preferred nutrient for 2011.

· In a separate note, Isaacson reported on his concerns regarding food price inflation and implications for fertilizer stocks: World food prices have now exceeded peak levels not seen since mid-2008. Back then, the result of excessive food price inflation was hoarding, line-ups, riots, food export bans, increased government stockpiling, falling import tariffs, and price controls on both crops and staple food items. Ultimately, crop and/or food price controls can result in an inability of fertilizer producers to continue implementing price increases successfully. The threat of fertilizer demand destruction rises when governments implement policies to curb excessive food price inflation. We maintain our fertilizer sector overweight call, for now. Producers should post near-record earnings over the coming quarters, on both strong volumes and margins. We continue to believe that potash-levered stocks will have the most torque over the next several quarters. However, over the mid-term we are concerned that excessive food price inflation, among other factors (new capacity, improved global grain production and inventory levels, and valuations that are starting to look rich), could plateau further momentum in the fertilizer sector.

· Regarding the impact of Egypt's political unrest on Agrium Inc (AGU), Isaacson wrote: Agrium's owns a 26% stake in MOPCO ($280M investment), with state-owned MISR Oil Processing Company having a majority stake. An initial stake of 60% was reduced to 26% due to pushback from the Gov’t. We estimate Agrium's MOPCO gas cost is $1.00-$1.50/mmBtu. Currently, the complex produces 675,000 mt/y of urea, or 175,000 mt/y of urea net to Agrium. By early 2012, MOPCO should triple capacity to about 2M mt of urea (with small excess ammonia available for sale), with no additional AGU investment required. We spoke to Agrium, which believes "there is no perceived risk" to MOPCO currently. Agrium also stated that a contingency plan is in place. The plant is located ~200km north of Cairo, on the Mediterranean Sea, with production from the plant directed into Europe. We do not foresee potential negative MOPCO developments as having a material impact on AGU given that the asset represents between 10˘ and 13˘, or less than 2%, of our 2011E EPS. Accordingly, we maintain our 1-SO rating and $110 one-year target price.

· Scotia Capital energy analyst Mark Polak comments on Imperial Oil (IMO) which reported Q4/10 operating EPS of $0.92, well above consensus of $0.65 (range of $0.45-$0.79) and our estimate of $0.68. s

CFPS was also strong at $1.22/share, versus our estimate and consensus of $0.91. The beat was largely the result of better-than-expected downstream refining margins. Upstream results were in line with expectations, with net production of 253 Mboe/d, slightly above our estimate of 246 Mboe/d. Planned capital expenditures for 2011 range from $4.0-$4.5 billion, with the company announcing that it plans to spend a total of $35-$40 billion on growth projects over the next decade. Kearl construction is now over 50% complete with start-up on schedule for late 2012 (110 Mbbl/d initial development capacity), but no update on costs were provided. We maintain our 3-SU rating and $40/share one-year price target.

In terms of companies reporting results:

None to report today


Outside of earnings related news, I would highlight the following items:  

· In a report on Bloomberg, Cisco Systems Inc. (CSCO) said that Internet traffic over mobile devices will increase 26-fold by 2015, driven by consumers watching video on smartphones and tablet computers. Connection speeds will rise 10-fold by that time from last year to keep up with the demand.

· Uranium prices rose 4.3 percent in the past week and gained $10.50 in January, the biggest month- on-month increase for the nuclear fuel since June 2007, according to Ux Consulting Co. Uranium-oxide concentrate for immediate delivery traded at $73 a pound in the week to yesterday, according to the company. The spike in prices is attributed to higher rainfall in northern Australia which compelled Energy Resources of Australia Ltd., a subsidiary of Rio Tinto Group, to halt production for up to 12 weeks.

· Oil prices are lower today, bucking the generally positive trend for most other commodities after easing of recent fears that unrest in Egypt could force closure of the Suez Canal, thus adding 10 -15 days to transportation from the region. Reports from the region suggest traffic is "moving normally".

On the economic front, today’s notable releases include:

· None to report today

U.S. Economics and Market Commentary

U.S. economic releases today: at 10:00 am watch for Construction Spending M/M for December (est. +0.1%); ISM Manufacturing for January (est. 58.0); ISM Prices Paid for January (est. 73.5); Domestic Vehicle Sales for January (est. 9.42 million); Total Vehicle Sales for January (est. 12.6 million).

As of Monday, January 31st, 217 companies in the S&P 500 had reported Q4 financial results. Of those, 71.6% reported positive earnings surprises. So far, adjusted earnings are tracking towards U$22.79 per share, a 36% YOY increase when compared with earnings of U$16.80 in the fourth quarter of 2009.

There are 20 companies in the S&P 500 reporting financial results today. The only company on our Recommended List that reports today is Pfizer Inc.

Pfizer reported Q4 earnings of U$0.47 per share excluding one-time items. Consensus was U$0.46 per share. Pfizer is forecasting a profit of U$2.16-U$2.26 per share, below the current consensus of U$2.30 per share. The stock is down in early trading on the news.


Credit Suisse Comments

Global Equity Strategy - We believe there will be more deflation in peripheral Europe. On our calculations, Greece, Spain and Portugal need wages to fall 7%, 3% and 2%, respectively, to restore competitiveness versus core Europe. Thus, the consensus nominal GDP growth estimates in Portugal (at 0.8%) and Spain (at 2.1%) look too high. Ultimately we think about a third of Greek and Irish government debt has to be written off (yet, this seems largely priced in). We strongly believe this is not a systemic crisis as: 1) Europe in aggregate looks stable; 2) Spain survives; and 3) core Europe to continue to support peripheral Europe. They are upgrading Greece from "underweight" to "benchmark". Greek equities look cheap on both a price to book and Credit Suisse HOLT. They would avoid domestic Spain where consensus nominal GDP and sales look too high. They would stay underweight continental Europe but have a positive view on Germany. Germany will continue to grow strongly (GDP 3%+) as monetary policy remains too loose.

Intel Corp. (INTC U$21.46, Outperform, Target U$28) - Credit Suisse are updating their earnings estimates to reflect the design error related to its ICH chip announced yesterday, the closure of its IFX-WLS acquisition, and the McAfee Inc. (MFE) acquisition that is expected to close March 1st. Credit Suisse analyst, John Pitzer views the design error as relatively minor with negligible impact to full-year revenues. INTC has resolved the issue and expects to resume shipments of updated chipsets late-Feb; full volume by April. Calendar year 2011 EPS has been lowered to U$2.06 from U$2.15. "Outperform" rating is maintained. Intel trades at 8.7 times 2011 EPS ex-cash; Free cash flow yield of 8%.

ExxonMobil Corp. (XOM U$80.68, Neutral, Target U$84) - Exxon reported Q4 EPS of U$1.85 against consensus of U$1.63 per share. International Exploration & Production (E&P) was significantly stronger than expected. XOM's U.S. E&P Earnings beat Credit Suisse analyst Edward Westlake's forecasts by 8%. This margin beat came through two sources: 1) higher crude realizations in the U.S. and 2) higher international gas realizations. The Downstream beat expectations both in the U.S. and International. Excluding asset sales, XOM generated cash flow from operations of U$13 billion versus Westlake's forecast of U$11.8 billion. Robust cash generation supports his increased U$84 per share target price (up from U$76). Westlake believes cash flow can continue growth as XOM brings on the next wave of projects such as Kearl, Lower 48 onshore liquids, West Africa liquids, and finally gets some Kashagan cash. Earnings and cash should also be helped by his positive longer-term call on U.S. gas prices and improved downstream/chemicals contribution. His 2011 EPS estimate rises to U$7.29 from U$6.81 per share. XOM earned U$6.11 in 2010.

McKesson Corp. (MCK U$75.17, Outperform, Target U$89) - MCK beat consensus by U$0.10, reporting U$1.22 per share versus consensus of U$1.12 per share. Credit Suisse analyst Glen Santangelo notes the results were solid across the board with margins coming in stronger than expected in both the Distribution & Technology segments. Distribution operating margins of 1.74% continues to benefit from generic launches & robust branded price inflation. Management now expects fiscal 2011 operating margins above the 1.88% recorded in fiscal 2010. Management raised their fiscal 2011 guidance range by U$0.10, the same magnitude of the beat. Credit Suisse have raised their fiscal 2011 and 2012 EPS estimate to U$4.97 and U$5.55 from U$4.86 and U$5.47, respectively. Despite the recent strength in the shares, Santangelo expects these results to be well received and the shares to trade higher off these results. He reiterates his "outperform" rating.


World Markets

Happy Investing!

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ScotiaMcLeod is a division of Scotia Capital Inc. ("SCI"). This report has been prepared by SCI on behalf of the Investment Executive. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accept liability whatsoever for any loss arising from any use of this report or its contents. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same.

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