Long Short Macro Fund08-10-2015

Outsized gains in financial markets are made by identifying significantly undervalued or overvalued assets, whose fundamentals are changing. The timing of the purchase or sale of these assets should depend on when the technical trends confirm a shift in sentiment toward or away from these assets. Major gains are made by maintaining a postion for a signifacnt portion of the move.

Long-short equity strategies and macro investment strategies have significantly underperformed long-only financial portfolios over the past 5 years. Historically, the best time to invest in specific investment strategies is when they are the most out of favor. The time to invest in long-short equities and macro investment strategies is now.

Currently, most macro strategists continue to embrace Keynesian economic models; even though, the models have failed miserably in the last 2 credit cycles. Macro analysis needs to take into account levels of debt and effects of credit cycles on the economy. We are now deep into the third extreme and unproductive credit cycle in the past 15 years. Determining when the fundamentals behind this credit cycle turn will be very important for all portfolios.

The Federal Reserve’s Quantitative Easing (QE) and Zero Interest Rate Policies (ZIRP) have encouraged investors to allocate their largest percentage of net worth to U.S. financial assets in history. After 6 years of ZIRP nearly $60T in debt and $30T in equities have been priced off of 0% T-Bills; all financial assets are now close to their highest historical valuations vs. GDP. Therefore, long term projected returns of balanced long-only financial portfolios are at their lowest levels in history. This does not mean the stock market has to fall; it simply means the risk is at historical levels and alternative strategies should be considered. It also means delivering any alpha going forward that is not directly correlated to a bull market in stocks and or bonds could prove to be very significant.

With 30 years of professional experience, I have developed a unique set of skills which should allow me to outperform long-only investment strategies for the foreseeable future. Unique top down macro investment skills are based on a thorough understanding of credit cycles as understood by the Austrian School of Economics and observed in the real financial world. Bottoms up stock picking skills include significant experience in value, momentum, balance sheet and short selling research. Trading skills include a lifetime’s experience in short term trading and long term position trading. I also have 25 years of experience in the commodities markets with a focus on metals, grains and energy.

LSMF Proposal

To build a financial fund which can perform in all market environments. Over the past 20 years financial markets have changed; most traditional financial products have not adapted

to the extreme volatility in financial assets observed in recent history. Will generate out-performance through superior stock analysis and well timed limited macro bets.

Long Short Equity - A flexible structure which accounts for extremes in valuations which have been observed over the past 3 credit cycles. When valuations are low allocations to stocks should increase; when valuations are high as they are currently hedging strategies should increase. Available allocations would range from 100% long to market neutral. Currently the Long-Short portion of this fund would be market neutral. Performance will be driven by superior stock picking abilities and the obvious inability of passive funds to analyze the securities held within.

Macro - Outsized gains in financial markets are made by identifying significantly undervalued or overvalued assets, whose fundamentals are changing. The timing of the purchase or sale of these assets should depend on when the technical trends confirm a shift in sentiment toward or away from these assets. Major gains are made by maintaining a position for a significant portion of the move. No more than 20% exposure to any macro trade. Currently, the macro position of the fund would be a 10% long portfolio of Gold Mining equities. My current portfolio of producing miners is down 15% YTD vs. minus 35% for the HUI index, using the strategy outlined above. My average miner is selling at a fraction of book value, cash flow positive or significantly net cash positive and has long life assets. This group is quite simply the cheapest group of stocks I have seen in my 30 year career. The other 10% of the macro would be short economically sensitive over leveraged equities.

Risk control -- maximum exposure any individual equity 4%- maximum exposure to any sector 20%- maximum exposure to any macro based call 20%

Lower cost structure than the average hedge fund.

Operating Structure - Open to a partner who would be responsible for CIO, marketing and administration. Also open to discussing the structure to meet partner’s needs and or

Current Macro Outlook

Global monetary policy is the most aggressive in the history of the world, global demand is deteriorating. Meanwile, financial assets are selling at the highest valuations to GDP in history.

• QE effectively restored housing, debt and equity valuations to levels associated with ‘bubbles” in the past. ZIRP has encouraged investors to allocate their assets in record amounts to financial assets in search of yield.

• All financial assets are selling at or near the highest valuations vs. GDP in history. After 6 years of ZIRP nearly $60T in debt and $30T in equities are now priced off of 0% T-Bills; yet, real economic output has severely lagged the appreciation in financial assets. At current historic valuations long only balanced portfolio’s have poor long term risk reward potential.

• The Federal Reserve and Wall Street economists projections of how QE would help the real economy have been consistently revised lower over the past 6 years. 2015 GDP forecasts are now being revised lower. The effects of outsourcing on incomes, the understated inflation on the true cost of living and the recent “ACA”’s effect on the cost of business are all impeding growth.

• The government appears to be using Behavioral Economics to influence investors perceptions about the state of the economy and effectiveness of policies. Numerous economic statistics do not add up; while dismal productivity may be the reason, too many government officials have openly praised Behavioral Economics, to dismiss an intentional effort of misleading the public.

Wilshire 5,000 vs Nominal GDP

Wall Street analysts claim the market is fairly valued; yet, the Wilshire 5,000 vs nominal GDP is at it’s second highest level in history, trailing the peak of the in-ternet credit cycle only. Measured by the mean PE, the S&P 500 is at the highest

valuation in history.

The Federal Reserve and Wall Street analysts claim equity valuations are in line historically.

Simple analysis proves these statements inaccurate. Currently, valuations of all U.S.

financial assets vs. GDP are at levels that were identified as “Bubbles” in the past. Financial

engineering (stock buybacks and repeated one time charges) are over inflating earnings. In the last 2 excessive credit cycles, lofty future

earnings projections were not met. When this current credit cycle reverses, current earnings projections will not be met. At the same time ZIRP are continuing to support financial asset

prices. With all financial assets being priced off of a 0% T-Bill, any move in interest rates may

effect all financial assets. It can not be ruled out that the Fed chooses to follow Europe into a

NIRP at some point in time, potentially pushing all financial assets even higher.

The Federal Reserve, Wall Street analysts and mainstream media routinely neglect to mention debt outstanding when discussing the economic and financial outlook.

Total Credit Market Debt Outstanding (TCMDO) vs. nominal GDP remains close to the peak established during the housing credit cycle of 2008 and above

the peak of the roaring 20’s credit cycle. Therefore, any economc or financial downturn will carry signifcantly more risk than normal.

TCMDO to GDP remains near the highest level in history, which means the economy remains

extremely leveraged historically. A drop in economic activity would be just as devastating to financial assets and the real economy today as it was in 1929 or in 2008. On the other hand a 3% increase in interest rates on $59.3T in TCMDO would result in a $1.78T increase in interest

expense for the economy. Neither outcome has been discounted by the markets. The amount of debt outstanding will put pressure on the Fed to

dial QE back up if economic growth dissapoints or asset prices fall significantly.

One of this credit cycle’s excesses is clearly in corporate debt. When Michael Milken invented the

junk bond market, his theory was to finance high risk businesses ventures at an interest rate which would compensate investors for historical default rates. Investors would need a positive spread over

Treasuries plus the historical default rate to be compensated for their risk. Currently, junk bond

yields are at their lowest levels in history and below their historical default rates. This financial asset sector is clearly significantly vulnerable to a credit cycle reversal. Covenant-lite securities will prove to be a disaster during the next downturn.

In 2014 $1 Trillion in corporate debt was issued of which only $40B was directed to capital spending.

Highly leveraged companies priced at record valuations with exposure to strapped consumers

will be short sales during the next credit downturn. Companies who have borrowed money to buy

back stock and neglected capital spending will be exposed to increased financial risk!

Total Credit Market Debt Outstanding to GDP

Merrill Lynch High Yield Index Yield

The Federal Reserve’s projections of future economic growth have been consistently wrong since before the last financial crisis. Yet, Wall Street analysts and mainstream media continue to embrace their forecasts. The Federal Reserve appears unwilling to figure out why their models are not working. There are three long term structural reasons why I believe the Fed’s projections will continue to disappoint.

1) Between 2000 and 2012 America sent 66,000 manufacturing plants offshore. Besides the 15 MM well paid jobs, these manufacturing plants also had a multiplier effect on demand in the communities surrounding them. Outsourcing has helped U.S. corporations avoid regulatory and health care cost disadvantages of operating in the U.S. and has led to record profit margins of U.S. corporations. The negative side is middle class wage growth has not kept up with inflation. Since, the average consumer is not in a position to increase their consumption, aggressive monetary policy is not stimulating final demand.

2) The Government has been underestimating the true cost of living increases since the “Boskin Commission”. While the financial markets are not concerned with this underestimation, in the real world consumers are being squeezed. The average American’s cost of living has been consistently rising over the past 2 decades while his real wage has not. This is having serious economic consequences on consumption expenditures. The cost of producing a barrel of oil, a bushel of corn or an ounce of Gold have all risen substantially over the past decade. College tuition costs continue to soar. Housing prices are approaching their past “Bubble” peak, shutting first time buyers out of the market. The cost of renting a home has risen significantly; yet, owners equivalent rents embedded in the CPI have not registered these increases.

3) The cost of healthcare has been rising rapidly for decades, healthcare spending is now over 17% of GDP. Instead of bringing down the cost of healthcare and reducing the burden paid by small businesses, the “ACA” has increased costs further. Currently, the average cost of health insurance a business must pay for hiring a U.S. worker is $11,500; in Germany it is $3500 and some countries $0. The CPI is not registering the true out of pocket health care expense of individuals and businesses.

Personal Consumption Expenditures YOY

Despite the most aggressive monetary and fiscal policy in the history of the United States, nominal GDP, Personal Income and Personal Consumption Expenditures remain at levels associated with recessions in the past:

Nominal Personal Income YOY

The Affordable Care Act “ACA” has increased the out of pocket expense of healthcare for consumers and small businesses significantly. These increases are being incorrectly reported as real economic growth by the Bureau of Economic Analysys “BEA”. By definition increased health insurance premiums are inflation

not real economic growth.

Forbes projects the out of pocket health care expense of the average American consumer to rise from $4360 in 2013 to $4782 in 2014 and $5138 in 2015 (or 9.6% and 7.4% increases). Meanwhile, the government is using a 1.06% inflation rate for healthcare when computing real GDP. The CPI is not picking up these out of pocket increases either. The Affordable Care Act “ACA” has accelerated the trend to push the rapidly rising cost of healthcare to the consumer and to the small business owner. It has significantly raised deductibles to consumers and insurance premiums to the “unsubsidized” consumer and small business owners. While this should limit utilization of health care going forward and slow the increase in health care inflation going forward, it takes significant disposable income out of the consumers pocket in the short term. It also fails to make America more competitive in a global economy. The “ACA” is a clear positive to the profitability of the healthcare industry and is a clear negative to the potential growth rate of the U.S. economy. To put this in perspective, the projected increase in out of pocket healthcare expenses between 2013 and 2015 will likely be greater than the projected savings from falling gasoline prices.

Reported annual health care inflation embedded in GDP.

Actual out of pocket health care costs to consumers

ONE CHART SAYS IT ALL

Since 2000 we have had a President from each party. During this time corporate profit margins and corporate profits as a share of GDP have grown to records. Meanwhile, U.S. median household income flatlined. Government policies have directly influenced this outcome.

Around 2,000 2 things occurred; the repeal of Glass-Steagall and the beginning of the major trend to outsourcing. In 2014 a third policy was implemented that is benefiting corporate profits and hurting disposable income. The Affordable Care Act has clearly benefited health care corporations at the expense of the middle class. Q1/15 healthcare earnings were plus 20% YOY. The average out of pocket health care expense (insurance plus deductibles) of people who do not receive the subsidy (including small business owners) is plus $1500 over the past 2 years. Nominal April retail sales were up .9% YOY (a level only seen in recessions in the past). The Wall Street Journal is currently reporting another expected double digit premium increase for 2016.

The consumer does not have the nominal income to drive nominal PCE any higher. Corporations are using record low interest rates to buy back record amounts of stocks at record high valuations against record high profit margins as they lay off workers and outsource jobs to get around the higher costs of the “ACA”. Why are economists forecasting accelerating economic output?

Current real time economic indicators are over estimating economic growth. Government officials appear to be applying behavioral economics when releasing economic statistics. When the current credit cycles turns real financial cash flows

will matter; perceived economic conditions will become irrelevant.

Since I have been in the business, the two most important economic releases have been Non Farm Payrolls (NFP) and the Purchasing Manager Index’s (PMI), because they were real time indicators which correctly forecasted economic growth. Currently, 90% of macro economists are calling for an acceleration in GDP and pointing to strong PMI’s, NFP’s and Initial Jobless Claims reports. The correlation between these real time economic statistics and real economic output has broken down over the past few years. Every roll over in nominal GPD over the past 50 years was preceded by a break in the PMI’s. Current PMI’s and NFP’s historically correlate to 7% nominal GDP growth. Unfortunately, nominal GDP growth has only been lower than now once in the past 50 years. One series is obviously wrong. There is $59T in debt which needs to be serviced and needs accelerating nominal GDP growth to keep this credit cycle growing.

The government appears to be intentionally using Behavioral Economics as part of macroeconomic policy. The theory is similar to George Soro’s theory of reflexivity. Higher asset prices and glowing economic reports are supposed to encourage more consumer and capital spending. Instead, corporate America has plowed excess cash flows and cheap financing into share buybacks. Internal Fed surveys are not confirming the current surge in small business creation which the NFP assumes through its Birth-Death model. The quality of government statistics currently reminds me of 2 of my previous shorts; Worldcom and Countrywide Credit; yes, it is that deliberate. My experience is nobody cares about accounting fraud while they are making money; it becomes very important during down cyles.

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Temporary help is considered a good leading indicator for employment. The American Staffing In-dex is currently down 2.3% YOY. This index did a remarkable job of forecasting the ‘08 downturn.

Employment in the Temporary Help Services category of the Non Farm Payrolls report is currently running plus 5.5% YOY. It also did a remarkable job of forecasting the ‘08 economic downturn. The correlation between these two surveys has totally broken down recently. One is clearly warning of a

risk of recession the other is signalling all clear! One is wrong!

The Big Lie: 5.6% Unemployment

by Jim Clifton Chairman and CEO of Gallup

Here's something that many Americans -- including some of the smartest and most educated among us -- don't know: The official unemployment rate, as reported by the U.S. Department of Labor, is extremely misleading.

Right now, we're hearing much celebrating from the media, the White House and Wall Street about how unemployment is "down" to 5.6%. The cheerleading for this number is deafening. The media loves a comeback story, the White House wants to score political points and Wall Street would like you to stay in the market.

None of them will tell you this: If you, a family member or anyone is unemployed and has subsequently given up on find-ing a job -- if you are so hopelessly out of work that you've stopped looking over the past four weeks -- the Department of Labor doesn't count you as unemployed. That's right. While you are as unemployed as one can possibly be, and tragically may never find work again, you are not counted in the figure we see relentlessly in the news -- currently 5.6%. Right now, as many as 30 million Americans are either out of work or severely underemployed. Trust me, the vast majority of them aren't throwing parties to toast "falling" unemployment.

There's another reason why the official rate is misleading. Say you're an out-of-work engineer or healthcare worker or construction worker or retail manager: If you perform a minimum of one hour of work in a week and are paid at least $20 -- maybe someone pays you to mow their lawn -- you're not officially counted as unemployed in the much-reported 5.6%. Few Americans know this.

Yet another figure of importance that doesn't get much press: those working part time but wanting full-time work. If you have a degree in chemistry or math and are working 10 hours part time because it is all you can find -- in other words, you are severely underemployed -- the government doesn't count you in the 5.6%. Few Americans know this.

There's no other way to say this. The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.

And it's a lie that has consequences, because the great American dream is to have a good job, and in recent years, Amer-ica has failed to deliver that dream more than it has at any time in recent memory. A good job is an individual's primary identity, their very self-worth, their dignity -- it establishes the relationship they have with their friends, community and country. When we fail to deliver a good job that fits a citizen's talents, training and experience, we are failing the great American dream.

Gallup defines a good job as 30+ hours per week for an organization that provides a regular paycheck. Right now, the U.S. is delivering at a staggeringly low rate of 44%, which is the number of full-time jobs as a percent of the adult population, 18 years and older. We need that to be 50% and a bare minimum of 10 million new, good jobs to replenish America's mid-dle class.

I hear all the time that "unemployment is greatly reduced, but the people aren't feeling it." When the media, talking heads, the White House and Wall Street start reporting the truth -- the percent of Americans in good jobs; jobs that are full time and real -- then we will quit wondering why Americans aren't "feeling" something that doesn't remotely reflect the reality in their lives. And we will also quit wondering what hollowed out the middle class.

Gold Mining equties are at historically low valuations vs. the price of Gold at the same time the long term ability for the Federal Reserve to normalize monetary conditions and thus fight inflation

is clearly debatable!

Gold is a legitimate asset class which has significantly outperformed equities and bonds at different points in time. In the 1930’s Gold equities were the best performing industry. As government after government officially devalued their currencies against Gold and the cost of doing business fell due to deflationary pressures, the Gold industry became the most profitable of all industries. During the 1970’s Gold rose as investors protected themselves from runaway inflation, which occurred after a prolonged period of extremely easy monetary policy in the late ‘60s and early ‘70s. During the 70’s there was a 2 1/2 year bull market in stocks where Gold lost 40% of its value before the bull market in Gold resumed. A similar setup could be near.

Since Gold topped in the fall of 2011, the bear case presented by Wall Street analysts was the Fed would print until the economy accelerated and then would normalize interest rates. Gold is now 3 years into a bear market. Janet Yellen has publicly stated real interest rates will remain negative for a long period of time. WIth record global monetary policy and deteriorating global demand, the severe underweighting of Gold by U.S. investors appears naive. Gold is as attractive today as it was at the top of the Internet credit cycle.

Gold equities are the cheapest in history vs. the price of Gold. A major reason for this is the cost of mining Gold increased from the $300 level at the beginning of the bull market to over $1,000; the cost of producing all commodities also increased substantially over the past decade. The recent drop in energy prices and the cost of mining should increase Gold mining margins substantally. In the late 70’s Gold equities produced some of the largest outsized returns in the history of the U.S. financial markets. The current significant correction in Gold and historic undervaluation of Gold Equities in an environment where the Fed has lost its ability to fight inflation in traditional ways appears to be an opportunity for value investors. Last fall numerous physical delivery Gold exchanges opened in Asia, potentially setting up a scenario where Gold is priced in Asia instead of London and New York.

(Thomas) Garic Moran

1436 Peachtree Battle Ave, Atlanta Ga. 30327

404-272-8311 garic@comcast.net

Experience: 30 years of professional experience in the financial markets including trading, portfolio manage-ment, sales and management

Objective: Start Macro/Long Short Equity Fund or Trading position with Long-Short Fund

Skill Sets: Macro-economic strategist, Stock Analysis (value, balance sheet, momentum and short selling), Portfolio Management, Commodity and Stock Trading

2003-Present Independent Commodity Trader/Investor

• traded personal commodity account for past 13 years; $5,089,143 profit

• long positions emphasis on precious metals markets

• short term trading, position trading and macro investing

• successfully analyzed and shorted housing and financial stocks 2006-2008; $2,507,246 profit. Country Wide Credit was my largest short position.

2001-2003 President - Southernfood Specialties (Internet Gourmet Bakery)

• managed 45 employees

1991-2001 General Partner - Hawkeye Partners LP Atlanta, Ga.

• long-short equity hedge fund

• bought undervalued and under owned sectors with improving fundamentals

• shorted overvalued and over owned sectors with deteriorating fundamentals

• used short term trading strategies to enhance performance

• top down macro investing as well as bottom-up individual equity analysis

• 1991-1996 one of top performing hedge funds in industry; including 45% gain in 1994 with market neutral portfolio in flat market

• raised $250MM

• 1997-1999 shorted internet and technology stocks prematurely. Worldcom was my largest short position.

1985-1991 Stock Broker - Smith Barney Atlanta, Ga.

• #1 in training class

• Presidents Club 1990

• bought Nikkei Put Warrants @ $3 sold @ $45 for Phoenix Hedge Fund

Education:

1980-1984 Washington & Lee University

• B.A. Economics, cum laude