As we end the month of February, we recognize there are three scenarios the markets are most likely to take in the coming months. The first scenario is the global easing of short term interest rates in Japan, Europe and China will support global equity markets. US interest rates will move in the opposite direction as the markets tighten for the Fed, but US equities will continue higher as the Fed tightening is seen as confirmation of US economic strength. The second scenario is that global easing will support global equity markets. US short term rates will move higher as the markets tighten for the Fed but US long term rates will move lower on relative value to the global bond market while US equities grind higher. In scenario three, the global easing of short term interest rates in Japan, Europe and China is not helping the global equity markets because of their concern with deflation. US short term interest rates will stay low as the markets recognize the Fed will not tighten and long term rates will come done on relative value and concern over global deflation. In this scenario, US equities come under pressure.

We fall somewhere between scenarios 2 and 3. What we do know is in 2014, the Chinese bought a record $185 billion of US notes and bonds. We therefore believe the Chinese are the relative value traders in the global bond market, as they seek yield for their excess capital. We do not expect the Fed will tighten short term interest rates while the CPI is below 2%. Some have argued that recent deflation in the US is temporary as oil prices will begin rising again. What becomes evident from the Rig Count is that only rigs that are economically feasible are still up and running and few new rigs are being built. In spite of this, US production continues to rise. For this reason we expect the price of oil to remain low and the CPI to continue under 2% for some time. Consequently, we like being long US bonds and look for the opportunity to buy US equities and the US$. In late January, we got out of rhythm with the S&P and mistakenly took ourselves out of our long term S&P position, which cost us 7.5% in profit and increased volatility in our P&L.

Modeled performance since inception, May 2012, net of all fees is +122.33%
In 2012 modeled performance (7 ½ mo.) net of all fees was +12.46% with a 10% Hurdle rate
In 2013, modeled performance net of all fees was +19.73% with a 10% Hurdle rate
In 2014, modeled performance net of all fees was +56.42% with a 10% Hurdle rate
In 2015, modeled performance net of all fees is +7.24% with a 8% Hurdle rate