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Interview with Martin Braun of Adaly Investment Management Corp.

Martin Braun is the President/CEO & lead portfolio manager at Adaly Investment Management Corp.

Martin Braun is the President/CEO & lead portfolio manager at Adaly Investment Management Corp.

Biography: Martin Braun, M.B.A., CFA is the President/CEO & lead portfolio manager at Adaly Investment Management Corp. (AIMC)

Martin began his career at Richardson Securities (later Richardson Greenshields) in 1981, joining that firm’s research department. Over the next seven years he covered the financial services and real estate sectors, among others.

In 1988, he joined Gluskin Sheff + Associates. During his 10 years there, he was responsible for the analysis and management of Canadian and U.S. equity portfolios.

In 1999, Martin co-founded Trapeze Asset Management Inc. Over the next seven years, as President and a portfolio manager at Trapeze, he launched and managed the Adaly Opportunity Fund and later The Strategic Opportunities
Master Fund.

Martin left Trapeze to form AIMC in September 2006.

Adaly’s strategy, according to Mr. Braun is to:

research and analyze companies, assess their prospects and weigh them against expectations. We also are value-oriented, so in our make-or-break decision we look at the stock price versus what we have concluded the company is worth. We never pay up, and sell when the valuation is stretched. We find the ideas everywhere and anywhere. It could be a theme we believe in, or a management team we really like, or a recommendation by a brokerage house, or came off a screen we ran, or just a name we know well that goes up and down in price and is now at a point that appeals to us.

Q: Mr. Braun, in the face of the recent volatility in the stock market, and gold hitting new all time highs – what would be you’re view of gold moving forward (is this the end of the bull run or does gold have a ways to go)?

A: Like everything else, I really don’t know where gold goes. It is a crowded trade in my world, but perhaps on a global scale less so. It makes sense to buy gold when central banks are sacrificing their currencies to stimulate on an unprecedented scale. But on the other hand, the velocity of money has collapsed, which explains why GDP has dropped as much as it has. Also, overcapacity is everywhere you look (labour markets, factory utilization, etc.), which restrains price levels. So though gold should continue to rise in nominal terms over the long-term (it always has), it might be done for now. The problem in forecasting anything is sentiment - it is extremely powerful, and can drive markets (including the gold price) to levels that have no fundamental support. That factor alone reduces forecasting to pure guesswork.

Q: On a related note, what is your call on the TSX going into year end and early next year - are we in for a correction or is this liquidity fulled rally going to continue? How are you gearing the fund to reflect this opinion?

A: I don’t follow the TSX – it is a junior market that is resource-based but also heavily weighted in the 5 big banks. Between these two polar opposites is a hodge-podge of companies in various industries. Canada attracts foreign capital when commodity prices are rising. Also, the weakness in the US banking system has increased ownership in our banks. When we invest in Canadian stocks we are really investing in just the stocks themselves and their individual characteristics, without any regard to the Canadian market in total.

Q: Given the glut of inventory in natural gas and crude sitting at approximately $75, what are your thoughts and predictions regarding the energy sector going forward?

A: We invest in individual companies. So though the outlook for oil and natural gas prices is unappealing to us, we will invest in energy companies if the growth and profit stories triumph over the weak commodity backdrop. Also, as hedge fund managers, we have no problem short-selling oil and natural gas through the futures markets (as we do), or individual companies and ETF’s that are really just proxies for the commodities.

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction and one sector that you believe to be oversold and due for a bounce and why?

A: Clearly, in Canada, the obvious sector that is a candidate for being overbought (short-term) is precious metals. The only other one that I would consider overbought is our banks. With such a strong advance, identifying an oversold sector is hard. But one could argue that energy services has underperformed and could offer good value as the operators reposition themselves and their equipment in more attractive markets (such as international, shale plays, etc.).

Q: Lastly, can you please highlight 1-2 stocks/themes that you think offers the best value moving forward and your reasons for liking it?

A: Despite gold stocks being extended, the fact that gold is well north of $1000 an ounce means that there are many gold resources around the world that are economic now, versus just over two years ago when gold was sub-$700. Even if gold corrects to $1000 (down almost 20% from the high), these resources can be brought into production and generate good cash flow and IRR’s. We spend a lot of time these days looking for junior companies that are drilling up precious metal properties, and reporting exciting results – but haven’t gone through the roof yet. A second theme is how technology has improved the economics of developing oil and gas fields. A few cycles back companies discovered horizontal drilling. Now they have discovered new ways of fracturing the rock off the horizontals. As a result, formations like the Bakken, the Montney, the Cardium, the Viking and the Shaunavon (all well-known prior to this) suddenly have an appeal they never had before. The companies that play in this new high-tech world of energy exploration have been and will continue to be big winners.

Thank you Mr. Braun!

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