On the eve of the September Federal Open Market Committee statement, we have positioned our portfolio for volatility with an expectation of “no change” in Fed policy. In the past, a “no change” in Fed policy has been received by the equity markets as bullish, as easy money from the Fed has been a driving force for rising asset prices. However, ever since the August 19th FOMC minutes which singled out Greece and China as a concern for global growth, a paradigm shift has taken place on how the markets will react to Fed policy. Now a “no change” in policy reflects the Fed’s concern of the strength of the US and global economy rather than being viewed as accommodative, while a tightening will be negative forcing a further deleveraging in the markets. In other words, we view the Fed Minutes as negative for equities regardless of what the Fed decides to do.

We continue to expect the Fed will not tighten but for reasons not usually discussed. A Fed tightening would make it more difficult for the global economy to pay back their massive debt. The US Treasury debt is approaching $19 trillion and currently 71% of all tax revenue is spent servicing this debt and paying for entitlements. A rise in interest rates would cripple the Treasury's ability to finance this debt, as China is now a net seller of US treasuries, selling $30 billion in August alone. Japan’s record debt to GDP ratio of 250% is unsustainable if interest rates begin to rise and the great Euro experiment will begin to collapse as interest rate rise. Furthermore, most of the growth seen in China has been fueled by People’s Bank of China lending to speculators first in real estate and then their stock market. As asset prices deflate PBOC non-performing loans will increase crippling their economy. In short, the Fed can’t raise rates but rather needs an overheated US economy to generate tax revenue to pay the US Treasury’s enormous debt.

As we wrote in our last email, “a close above 1960 on the S&P would cause us to cover our short” which we did on the close Thursday, September 15th at an equivalent index price of 1978 for a small profit. Today, September 16th we sold the S&P on the close at an equivalent price of 1995.50 and bought the German 10yr bund at an equivalent yield of 0.78%, interest rates move in opposite direction to price. In the long end of the global bond market, we expect European rates to soften due to quantitative easing and we will be looking to buy US treasuries if they back up to 2.375%. Currently, we are short the S&P, long the German bund and hedged up in a synthetic option to the long side in $Yen and are 67% invested.

Modeled performance since inception, May 2012, net of all fees is +156.34%
In 2012 modeled performance (7 ˝ 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 24.23% with an 8% Hurdle rate