Good Morning –

I would like to address the recent, transitional and short-term performance in the All-Climate Portfolio.

The portfolio seeks to produce above-average, risk adjusted returns, in any market environment, while exhibiting less downside volatility than the S&P500. While it has accomplished the latter, short-term performance has been frustrating. I am disappointed but not discouraged – let me explain.

The All-Climate Portfolio is a process that invests money in a “trend-following” manner. It has been shown time and time again that investing in trends works, and works well, however, trends do not develop overnight.

We were able to begin trading in to the process in mid June this year, the 18th to be exact. We invested only a smaller portion of your portfolio at that time due to entering the process during a period in which few new trades were being generated; and this continues to be the case. You see, a trend-following system generates trades in to the respective market when it discovers what it believes to be a “trend in the making.” Since most markets within which the All-Climate Portfolio participates began their move earlier than mid June, the process will wait to be fully invested until a major move is “in the works.” Investing at the present highs could be a great strategy but the model is showing us that it is not a great time to be “long” in the market. If, on the other hand, the market decides to run further, the model will likely jump on board and participate with higher moves.
(Bear in mind that the S&P500 fell over 5.75% between 6/18/2013 – 6/24/2013 (in just 6 days), while the All-Climate Portfolio fell approximate 1/2 of a percent during this same time period.)

Also – as with any investing system (literally “ANY”), whipsaws can create temporary havoc. And the trend-model we utilize has had a couple of these in the short run. It has temporarily affected performance and it will again in the future… they are unavoidable for any investor or system. And as far as “buy and hold” goes, none of us (as far as I know) care to participate in a possible repeat of what happened between 10/2007 – 2/2009… a 61% decline in the S&P500.

Interestingly, higher markets have coincided with the Fed Chairman’s recent comments regarding Quantitative Easing. I don’t want to rain on anyone’s party, however, things are beginning to “respond” a bit different in recent days. Initially, QE went just fine when the Fed created more money… so the Fed was encouraged to keep at it, despite the fact that the “real” economy didn’t respond much at all.

But now is a different story. The last few QE moves that oversees central banks have tried have utterly failed. Take Japan – the country’s massive QE effort (equivalent to ours on a relative basis) has now resulted in some of the worst declines and volatility in several years. The Nikkei 225 futures plunged more than 3,300 points in the most two recent weeks… that’s a 21% move! (Sometimes it really pays to look at the futures markets!)

Further, Japan’s national debt has just climbed into the stratosphere. Thanks to its quantitative easing and frenzied borrowing, Japan’s official national debt has just broken 1 quadrillion yen. That’s right, quadrillion. That’s a one followed by 15 zeroes. How much is that? Well, the average American would have to work for 250 million years to earn one quadrillion cents.
It’s a lot.

By the way, if you would like, read the story on the front page of Friday’s Wall Street Journal. It reads, “China’s Gleaming Ghost Cities Draw Neither Jobs Nor People.”

The Bank of England’s (BoE) most recent move also seems to be backfiring. The public statement that the BoE could “ramp up” its $574 billion QE program designed to drive the British currency down and bond prices up, had the exact opposite effect… which marked the second time in the past few months that monetary policy not only failed completely – it actually hurt the very markets it was supposed to help.

Here in the U.S., the Dallas Fed President Richard Fisher noted in a speech a few days ago that the Fed is now buying virtually every mortgage backed security the industry is issuing… as well as others being sold by third parties. His conclusion – “The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot.” What Mr. Fisher is saying is… we are in a situation that’s virtually impossible to get out of. If you are not familiar with this term, click here (http://en.wikipedia.org/wiki/Gordian_Knot.) Considering the massive increase in the size of our balance sheet and that the Fed has “effectively” cornered key portions of the bond market, may lead to only one possible conclusion… untying this Gordian Knot could prove to be a disaster.

The mere mention of a possible future tapering of QE caused key parts of the bond market to suffer their worst declines since the credit market collapse of 2008. When tapering actually begins… pay close attention. It could lead to real chaos in the market and in turn, profit opportunities for the All-Climate Portfolio.

As for those of you with equity holdings, stay tuned. With QE back-firing in Japan… back-firing in the U.K. … and in my opinion on its last legs here in the U.S. … things could get very interesting in the not too distant future.

I believe the following clip accurately describes the “real” economic environment; take a look:

Video: Easy Money Policy Lead World Greatest Credit Collapse

So – while not hitting it just right “timing-wise” in beginning our venture in to the All-Climate Portfolio, I am not the least bit discouraged that you will greatly benefit over the next several months and years to come.

As always, please feel free to contact us with any questions.

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