Summary of this week's Strategy Note
In our June Portfolio Strategy report, we raised our 12-month TSX target to 16,400 from 15,000. The increased target was purely a function of higher earnings estimates. The upwards earnings revisions for the TSX were the sharpest we have seen in many years. In consequence, we have seen marked outperformance by the TSX year-to-date relative to the indices south of the border. In contrast, for the US, for example, we have seen consistent downgrading of earnings estimates for the S&P 500, largely in the financial and consumer sectors.

Post-midyear, the US indices had another bout of panic induced by fears over the solvency of Fannie Mae and Freddie Mac and the actual takeover of IndyMac Bank by the Fed with its assets of $32 billion. The market weakness saw the S&P 500 reach a new 52-week low, while the TSX fell in sympathy, giving up just over 60% of its 3,100 point gain since January 25. Consequently, this week's Strategy Notes are devoted to the valuation of bank stocks in such an environment.

We conclude that, despite the strong oversold rally in the banks over the last three days of last week, it is premature to be thinking of moving to a more neutral weighting in the Canadian banks. In much the same way as they had a strong rally in the spring, but went on to new lows, we expect further such instances over the balance of the year and believe that we will have the opportunity to buy the banks at or below the levels they attained in the early part of last week.

Changes to Canadian Equity Model Portfolio
Since our last Strategy Note, we increased our holdings in Petro-Canada (PCA : TSX), Husky Energy Inc. (HSE : TSX), Imperial Oil Ltd. (IMO : TSX), Suncor Energy Inc. (SU : TSX), Talisman Energy Inc. (TLM : TSX), Nexen Inc. (NXY : TSX), Research In Motion Ltd. (RIM : TSX), Potash Corp. (POT : TSX) and CAE Inc. (CAE : TSX), while reducing our positions in Toronto-Dominion (TD : TSX), Royal Bank of Canada (RY : TSX) and Enbridge Inc. (ENB : TSX).