Recent stock market volatility

May 20, 2010

Markets react to Germany's regulation announcement

In an effort to ease market instability, Germany today announced a ban against certain types of speculative financial trading. The short-term impact of this decision is that we expect to see continued market volatility in the face of uncertainty over efforts to manage global financial behaviours. Most European indexes reacted negatively to the news, closing in excess of 2.5% lower in trading. North American indexes however, reacted less forcefully.

As a measure of liquidity, the LIBOR/OIS spread has widened, but only marginally, to 25 bps. Over the longer term, we expect some forms of additional market regulation to be enacted, particularly in the U.S. and Europe. These restrictions should provide a more predictable foundation for market participants, likely leading to less volatility. We expect that more financial regulation and guidelines from Germany and the European Union will follow, as politicians and bureaucrats determine how best to implement the details.

William R. Horton, Jr., CFA
Chief Investment Officer
MD Physician Services Inc.

May 12, 2010

As an update to our commentary below, we have seen recent actions to support both the liquidity and stability of financial systems, with a focus on Europe. The initial response of global capital markets was positive.

Among the measures announced was one around special liquidity measures for certain U.S. dollar funding markets that will help improve liquidity conditions and prevent the spread of U.S. dollar strains to other markets. The second announcement related to a $1 trillion dollar loan package to help contain Europe's debt problem. This tells us that Central Banks show a willingness to take quick action to support liquidity in financial markets - a sign that conditions are not "stable" but that the banks are prepared to, and capable of, moving.

It is likely that capital markets will continue to be susceptible to periods of high volatility, on the upside and downside, as investors react to market news.

William R. Horton, Jr., CFA
Chief Investment Officer
MD Physician Services Inc.

May 7, 2010

Recent stock market volatility - with the Dow Jones dropping nearly 1,000 points, and the TSX down 450 points in the early afternoon of Thursday - may have left you worried and wondering about its potential effect on your investment portfolio. We want to reassure you that at MD, we continue to monitor market events and key trends carefully. We believe that, although the 2 to 5 year outlook for global economic recovery looks good, the short-term uncertainty about a sustainable recovery will make capital markets particularly susceptible to periods of high volatility. This week's heightened concern over sovereign debt of Greece, Portugal, Spain, Italy and Ireland is an example. The chances of market overreaction and heightened volatility are likely to remain high until these, and other issues, are resolved.

We follow a key indicator of liquidity as represented by the LIBOR/OIS* spread - a measure of health of the banking system. As you can see in the following chart, when liquidity is a global problem as we saw in October 2008, financial markets cannot function effectively. We saw this reflected in the LIBOR/OIS spread which peaked in October 2008. The recent problems with sovereign debt have not taken rates to the heights seen in the chart, and we are not seeing a repeat of 2008 in the current LIBOR/OIS figures. We continue to monitor this, along with other factors, as a way to gauge the impact of the sovereign debt problem on global credit markets.

Our portfolios - MD funds and pools - have no sovereign debt exposure outside of Canada and the U.S., and have very limited exposure to equities of Greece, Portugal, Spain, Italy and Ireland. In managing our funds, we are very careful about managing risk and exposure to volatile sectors.

During times of market volatility and continuing uncertainty, it's more important than ever to maintain a diversified portfolio. While diversification doesn't completely eliminate the risks of investing and losses are possible in a diversified portfolio, diversification still is the best defense against market volatility. We encourage you to work closely with your MD advisor to revisit your long-term financial plan and ensure that your current mix of investments matches the strategic asset allocation that is appropriate for your financial purposes.

If you'd like to read more information on macroeconomic issues that may affect your portfolio, please see the most recent issue of MD Perspectives - a quarterly publication that provides an overview of economic factors and implications for capital markets.

William R. Horton, Jr., CFA
Chief Investment Officer
MD Physician Services Inc.

* London Interbank Offered Rate / overnight index swap rate

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. To obtain a copy of the prospectus, please call your MD advisor, or the MD TradeCentre at 1 800 267-2332. The MD family of mutual funds is managed by MD Physician Services Inc.

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