Dear Investor:

The 2nd quarter of 2013 was an exciting quarter for us. We finally were able to realize gains betting on a large decline in the prices of precious metals in positions held open for as long as 15 months. Such bets were the driving force in aggressive and speculative portfolios allowing for net gains in excess of 30% and 85%, respectively. Standard portfolios also had an admirable quarter, up over 5.50% net of fees, guided by short(er)-term trading opportunities. All three strategies performances were more than satisfactory, compared to just a 2.25% gain for the S&P 500. In February of 2012, I made public my thesis that there was no reason to own gold. Under

ridicule, the theory of using gold as currency failed, and logic provided for better suited alternative investments to diversify out of currency risk. Ive uploaded the short essay in its latest format, here: http://www.scribd.com/doc/132225870/Gold. Further, I considered it advantageous to bet against the characteristics of precious metal investors: largely uninformed or misinformed, fanatical, and unwavering in their view despite evidence to the contrary. At the time, the two most popular ETFs for precious metals, GLD and SLV, were trading around $165.00 & $34.00 respectively. Though it took some time, the metals really accelerated to the downside in 2013, gold having experienced its largest quarterly decline since at least 1968, in the second quarter. On June 21, the last of the open positions under this thesis were closed out. I decided to close exposure to shorting the precious metals for two reasons. First, as the slow drip in price recently turned into a waterfall drop lower, sentiment also turned within the investment community, from a love of gold to a fear of gold. Essentially, investors in the industry became scared. Historically, buying fear is a profitable venture. Second, silver had given back the entirety of its breakout from 2010. Though I always favor fundamental and macro analysis to technical analysis, I thought it foolish to ignore such basic and strong technical evidence for at least an intermediate term bottom. Combined with the shift in sentiment and crowd psychology, it seemed to me that the risk profile of the trade had changed significantly. It was exhilarating, to say the least, witnessing the drop in price of gold and silver.

The S&P 500, sitting at 1606, is up over 12.50% for the year. At these levels, Im experiencing waning of my bullishness for the first time since the summer of 2010. Several points for the bullish case are running low on emphasis, or are no longer valid altogether. In my opinion, there is no more room for multiple expansion in the S&P500. Further, earnings and inflation growth are both troubled right now. Earnings for the S&P500 are expected to be about $105 for 2013. Since we moved off the bottom in 2009, Ive suggested a P/E multiple of around 15x-16x for the index. Thus, I expect the range of fair value to be somewhere between 1600 - 1700. Most importantly, though, is the change in one major factor in determining a P/E of 15-16, which is higher than the historic average. Since the financial crash in 2008, one of the main goals of the Federal Reserve has been to lower interest rates in order to produce inflation and force investors up the risk scale. These low rates certainly improved the prospects for stocks, and helped elevate the proper P/E multiple on the S&P 500. In late May, however, Ben Bernanke changed his tone considerably, for the first time allowing for the remote possibility of tapering of their easing programs earlier than scheduled. This change in tone caused repercussions immediately throughout various asset classes. Within treasuries, the yield on the 10 year UST rose to over 2.50% in June. The specter of higher rates affected stocks as well, causing prices to retreat. Specifically, stocks with bond-like qualities such as high dividend yields got punished more than others. The market we're

in now is one whose earnings growth has stalled, is likely fully valued, and is dealing with the prospect of rising interest rates. My approach in such a market will be more balanced than in the past, though still with a focus on buying cheap companies rather than shorting expensive ones.

simplest way to describe AAPL right now is, AAPL is hated by those whose trades last five days, and loved by those whose trades last five years. I recognize two main concerns as an AAPL investor: 1) Lack of innovation without Steve Jobs: Only a fool would believe Apple to be dead without Steve Jobs. Jobs constantly spoke to the fact that it was a team effort at Apple, despite his notorious attention to every detail. Apple is still a top 5 destination for engineers, competing with only a handful of other companies, such as NASA and Google. Further, Apple sports one of the worlds best technology focused R&D departments, which pioneered a technological revolution beginning only a decade ago. AAPL investors are growing anxious to witness another major innovation, rather than new iterations of existing products, like the S model iPhones or mini iPads. But having just experienced this technological revolution, its likely to take a bit of time to digest. In time, Im confident AAPL has the manpower, brain power, and money to surprise the world, again, again and again. 2) Crowd psychology: On its ascent to $700/share, Apple became the most beloved stock in the market. The euphoria present throughout its ascent was a symptom of a bubble, and not before long, the bubble burst. It fell almost 46% from top to bottom (thus far) and currently sits at a 44% discount from its all-time high. Should Apple recover its losses, there will be a considerable unwind of capital from those with a lack of conviction in the name. Its likely going to have to conquer a lot of overhead supply, a technical term referring to the shares bought throughout the decline by investors that will sell at a break-even, after initially suffering an unrealized loss. However, sentiment towards Apple has shifted from a euphoric positive to a harsh negative, and favors bulls willing to hold long enough to unlock the value in the companys stock. As with gold, Im very interested in buying the fear. In fact, the similarity between the two declines is shocking. (picture, below)

Apple, Inc. is and has been an anchor for long exposure since it first hit $420 in March. The

Unlike gold, though, there is a fundamental case to be built around Apple. The market is giving us, as investors, the following premise: You can invest in one of the coolest retail and technology companies, with arguably the most loyal customer base, and receive unlimited upside on your investment in this company. Your risk is having to wait a few years to recoup your investment should the company falter. As a man who fancies his ability to spot profitable wagers, this is one Im willing to take with excitement. At a share price of ~$400 (AAPL closed the quarter at $396.53), Apple has a current market cap of just less than $400 billion. The company is also returning $100 billion to investors by the end of 2015, via the newly enhanced capital return program. Thus, for every share you purchase at this price, youll get around $100 in return by the end of 2015 exclusively from the capital return program. Additionally, Apple has about $153 in net cash per share, and at current market prices, an operating value of about $247 per share (which together equal its market price of ~$400 per share). Lets assume that in an unfathomably disastrous scenario, Apples operating value gets cut in half by the end of 2015, to $123.5 per share, and its free cash flow throughout this period is $0. To paint a picture of just how unfathomably disastrous this scenario would be, understand that Apple is expected to generate about $44 in free cash flow per share for 2013. The new operating value, $123.5 plus its cash hoard of $153 per share, is equal to a market price of $276.5 per share. Throw in the $100 you received through Apples capital return program and you have $376.5 per share of value by the end of 2015, or less than 10% loss of capital from current market prices. This is the risk, versus the potential unlimited capital appreciation in one of the coolest retail and technology companies to ever exist. Such potential return versus what I perceive to be limited risk is what gets me excited.

Im happy to say that I have not felt compelled to venture outside of U.S. markets in quite some
time. Certainly this decision has saved portfolios from damaging losses. The iShares MSCI Emerging Markets Index ETF, a $34 billion ETF, ticker EEM, is down over 13% YTD, and almost 25% from its postfinancial crash high in 2011. Suffice to say, sentiment has shifted considerably here as well. Up until last week, EEM had strung together five consecutive losing weeks, crashing through key technical levels. This is indicative of at least a bit of capitulation. Additionally, emerging markets are now perceived with an unusually bearish view. As an example, consider the latest Bank of America Merrill Lynch Fund Manager Survey, which shows sentiment and allocation towards emerging markets hitting a new five year low. (For a picture graph, click here.) The only asset classes more hated than emerging markets are energy and commodities. Several emerging markets are beginning to trade at historically cheap valuations as well. Generally speaking, emerging markets are trading around 1.5x book value, compared to a 1.8x historic average and 2.15x for the U.S. On P/E, emerging markets are also trading at around a 30% discount to developed markets. Though some premium should be paid for the comfort of political security, better infrastructure and more trustworthy nations, the current discounts for emerging markets seem excessive. Like Apple, I believe there may be a fundamental case to make for emerging markets, which I am beginning to explore. There are three countries that have piqued my interest more than others: Korea, Israel, and Russia.

Though my favorite trade since early 2012 has now been closed out, Im confident the value of
our current holdings will appreciate substantially, and Im hopeful that new opportunities will arise throughout the second half of 2013.

Sincerely, Jarrett