September 8, 2014 (Monday)

Since Inception - June 18

,
2014:
Equity/Futures Account: +3.82%
FX Currency Account: +22.78%

Benchmark: S&P 500: +1.98%









Positions:

1) **NEW** Short US Treasury (short ETF: TLT initiated 9/4/14) The deteriorating Euro zone macro theme, likelihood
of ABS purchase program, the difference in yield between the German Bund, and the general lack of alternative
for global investors creating a force large enough to push U.S. yields lower have been the cornerstone of the
previous thesis.

But now the pretension of expected stabilization in the Eurozone economy may end this relationship and if so, the
money flow into U.S. treasuries will likely abate. With rate hike in the U.S. possible next year, that has made me
reconsider the position. On Wednesday (9/3/14), I closed out the position and took a loss on it as I felt momentum
had shifted in the trade (a move of nearly 10 basis-point). As I write this note, the yield on the 10-Yr is trading above
2.45%, and that's why I decided to short treasuries ahead of the employment report on Friday and as part of a
longer-term thesis. Thus, I added to the long-held short gold position because if this is the rise in yields that the
market has finally been waiting for, then gold will continue to severely underperform.

The S&P 500 has had an inverse relationship with treasury yield. I suspect that the relationship would reverse if rates
were to rise quickly which may encourage me to increase the short position on the S&P 500. Longer-term, higher
rates bring worries over the size of sovereign debt. Overall, the 70% increase in global sovereign debt (from $30
trillion to $52 trillion) is supported by little more than half the growth when the debt load was much lower.

This may become a serious headwind as the presumption of progress on the fiscal side in this country in the last few
years is built on artificially suppressed rates and short-term measures. The CBO estimates that every 1% rate
increase would cost an additional $100 billion a year in interest payments on the outstanding debt of $17 trillion.
Thus, each incremental increase in rates going forward will claim a larger share of cash flow for debt servicing.
With GDP heavily dependent on government spending (with recent GDP numbers benefiting from an uptick in
government spending as well), national debt in a higher interest rate environment may be the headwind that the
market has yet to focus on.



2) **New** Short MSCI South Korea (initiated 9/4/14) As I explored a possible derivative trade off the belief that
recent weakness in the yen is the start of another leg lower for the currency, it led me to look at the neighboring
country of Korea. As I looked more closely into the country, I realized that the doom-and-gloom sentiment once
used to describe Japan was just as evident in South Korea.

I saw three major headwinds for the country: 1) weaker yen 2) over-reliance on chaebol and the subsequent lack
of diversification, and 3) demographic time-bomb.

Korea is a trading powerhouse. It derives 55% of its GDP from exports and is the seventh largest exporter in the
world. The majority of goods that fall into that export figure are electronic & electric equipment and automobile
and transportation equipment. That puts South Korea in direct competition with Japanese multi-nationals that play
in a similar field (the likes of Sony, Toyota, and Honda) who are again getting a renewed boost from the yens
weakness, likely to come at the expense of Korean rivals.

This exposes a structural issue within the South Korean economy. The chaebol system (chaebol refers to a family-
controlled conglomerate) has made South Korea the 12
th
largest economy in the world but its also its biggest
threat. In order to bring about quick modernization and economic growth, since the 1960s, the South Korean
government has groomed companies within certain sectors of the economy via protectionist policies and state
subsidies.

This path has helped bring rapid growth to South Korea and allowed companies like Samsung, Hyundai, and LG to
become giants on the world stage. The development is eerily similar to Japans zaibatsu (Japanese version of early
conglomerates which led to the formation of Mitsubishi, Nissan, Mitsui, etc).

The economy that was ultimately created was one dominated by very few players. Thus, the countrys reliance on
too few companies to be its drivers of growth gambles its economic fate in their hands. Subsequently, the over
dominance by the chaebols stifles competition, creativity, innovation and entrepreneurship (which is
excruciatingly low for a country of its size) and although the effect of, lets say, lower creativity is difficult to
quantify, without a doubt the longer-term implications are negative.


To grasp how sorely the Korean economy is in need of diversity, one just needs to look at the components that
make up the weighting of the KOSPI Index. By industry, Electronic & Electric Equipment accounts for 29%, and
KOSPI Transport Equipment accounts for 16%. In total thats 45%. The top 20 companies with the largest market cap
amount to 49% of the KOSPI Index (Samsung alone accounts for 18%). If you break it down further by chaebol
ownership, for example, Samsungs Lee family controls 3 out of the 20. More comprehensively, 4chaebol families
(Samsung, Hyundai, LG, and SK) control 12 of the 20 largest companies, or roughly 40%.

Samsung Electronics recently reported disappointing shipment numbers for its flagship Galaxy smartphone. Q2
earnings were disappointing due to declining smartphone sales (revenue declined from 57.46 trillion won to 52.35
trillion won) and the outlook for the second year is likely to be worse. With the expected launch of the iPhone 6 in
September Apple going after the category of larger screens' turf that Samsung has dominated since the launch
of its Galaxy flagship line and other trinkets such as Apple iWallet theres a chance that Samsung will lose a
tremendous amount of market share.

That should serve as a reminder of how vulnerable South Korea is in terms of how concentrated its economy is
around a few companies. Technology is an extremely competitive space where an advantage or leadership can
quickly turn on its head within a single cycle. Margin compression is the name of the game since all devices quickly
become commoditized through competition and saturation. It's scary that Samsung Electronics alone makes up
17.5% of the KOSPI or 21% of the assets in the ETF: EWY (Samsung as a holding company roughly accounts for one
quarter of South Koreas GDP).

As for the auto industry, South Korean companies such as Hyundai and Kia (Hyundai Motors and Hyundai Mobis
account for 7% of the weighting in the index) have been able to gain market share in the last decade from their
Japanese rivals through aggressive pricing that was partly aided by the strengthening yen. But now the situations
have reversed and Japanese carmakers should be able to compete better on price (every 1% weakening in the
yen boosts Japanese automakers operating profits by 2-6% - which is significant given that Toyota exports roughly
2 million vehicles that it produces domestically).


As a society, the intense focus Koreans put on education produces far more negative outcomes for quality of life
and demographics. It props up the inexcusably high suicide rate (the highest in the world) and fuels the corruption
in its educational system. The intense competition and structural education issues focused on entrance exams for
its prestigious SKY universities have created an arms race where parents are forced to spend additional disposable
income on hours of private lessons outside of normal school hours. Its normal for Korean students starting from 12
years of age to have an additional 6 hours of tutoring after school. The OECDs global study of students that are
happy at school puts Korea in last place which corresponds with Koreas suicide rate of 38.3 per 100,000.

All of this fuels additional downward pressure on the birth rate on top of the usual pressures that take place in
developed/developing countries. The cost of raising a child in such a competitive environment is astronomical.
Thus, South Koreas birthrate is actually lower than Japan and equally South Koreas working age population is
falling by 1.2% annually (the fastest decline among OECD) and it will see the biggest jump in its elderly population
compared to any other of the top 20 economies (61% versus 10% today). In essence, South Korea sees Japan
when it looks into the mirror in fact, one could make the case that the demographic issues of Korea are worse.

The breakdown of the weighting in the Korean indices and within what the instrument I have access to ETF:EWY (I
hope to explore other ways of expressing this bet), makes it a compelling longer-term short. But what makes the
trade more attractive is that the country as a whole seems to be oblivious to its problems and the image it sees in
the mirror is eerily similar to Japan.

3) US Equities (short ETF:SPY initiated 8/18/14) ???? I wrote a question mark because I don't have the answer,
and am rather confused about risk/reward nature of U.S. equity market. With my mind leaning more on the
negative side, I have initiated a small short position on the S&P 500. Deteriorating fundamentals in the Eurozone
and tepid growth in Japan/China may pour cold water on the idea that U.S. can continue to buck the trend.

However, Im afraid of being heavily skewed to the short side because other half of the positions in the simulation
are based on the premise that central banks (ECB and BOJ) would unload their last bazooka in hopes of reversing
the ominous threat of secular stagnation/deflation. And on the backdrop of such accommodative environment,
equities globally can continue to climb higher. But on the flipside, I do wonder whether weve reached the limits of

financial engineering and such scenario even being a remote possibility scares me very much. Overall, my view
on equities as of today is a work-in-progress.

4) Long USD/JPY (initiated 8/20/14) - it was only a matter of time before the yen moved lower on the backdrop of
dollar strength as well as the divergence in central banks' policies -- they've been in different stages of easing for
quite some time now. The prospect of additional easing seems more likely to combat the continued lukewarm
data points in Japan. Kuroda may be publicly positive and appear to be excited about Japans growth prospects,
but inspiring confidence is part of his job as he is trying to amplify the effect of his policy being downbeat would
have the opposite impact.

USD/JPY cross has been on the radar for a while as it's been in a tight trading range since February of this year. The
position was initiated as it broke out of consolidation and given how long it has consolidated, it will retest and likely
close higher above the previous high of 105.43.

It is likely that this move might be the next leg lower for the yen part of the larger macro move that has occurred
since late 2011.

5) Short German DAX (short ETF:EWG initiated 8/18/14) Flipped the position from being long and shorted the
DAX as insurance against Putin (a peace deal where Putin washes his hands clean of Ukraine goes against all that I
know about Russian history and the man I studied in college an extended analysis on this was written for 8/27
update and have been archived on scribd) and against continuing deterioration in economic conditions in the
Eurozone. The bet is that it is more likely for the DAX to break 9000 than it is likely to hold the line.

Finally, to reference George R. Martins Game of Thrones, Winter is coming and Putin will likely play one of his
trump cards with his most prized weapon natural gas.

6) Short EUR/USD (initiated 6/17/14) The short euro trade has been the most highly concentrated (and the longest
held) position since I began this trading simulation. The divergence in central banks policies (Fed vs. ECB) and the
growing divergence in economic data points have been the main reasons for holding a negative view on the

euro against the U.S. dollar since May of this year. And that as the economic realities become worse, the chances
of QE in the Euro zone will increase. On the flipside, contrasting Fed policy will strengthen the U.S. currency, further
fueling the weakness in the Euro. I believe short EUR/USD trade has been one of the few macro trades where all
elements of the trade (historical analysis, policy analysis, economic data, trends/technicals and etc) all line up
favorably to be short.

With the announcement of the bond-buying program (ABS) today, I wouldve normally closed out most of the
position and booked profits on the immense gains the trade has yielded since June. However, what stops me from
doing so is Draghis comment that further additional measures and instruments will be considered. Now that the
ECB is on this unprecedented path, the path of least resistance to fix the European malaise will continue to
disproportionately fall on monetary policy and not on government policy/structural reform.

As I wrote in the detailed commentary about the changing political winds in Europe (8/27/14 update), the end
game for the Euro zone continues to look bleak and, frankly, even in the absence of the ABS announcement
today, in the long-run, shorting the Euro against the dollar certainly is a great way to reflect the long-term negative
prospect for the currencys future.

7) Short Gold (short ETF:GLD initiated 6/17/14) Golds reputation/status as a safe haven asset has suffered in
recent years. Ive been bearish when it broke the major support of $1600 in early 2013 and I believe gold still hasnt
proved its purpose or worth.

For one, it fails to be insurance when theres a geopolitical issue. Two, the U.S. dollars ascent on the backdrop of
the declining Euro will continue to be a headwind for gold (ultimately, gold is a hedge against debasement in the
U.S. dollar). Third, gold doesn't yield anything thus in a search-for-yield environment, gold is not attractive
especially if Europe and other parts of the world show signs of deflation. Fourth, on the other hand, if rates do
normalize and Fed policy becomes more hawkish, gold wont have a leg to stand if real rates are high again
because gold doesn't yield anything. Finally, the doom and gloom narrative has been discredited enough that
both thematic and fundamental story for gold are broken. Often the precursor to a broken story is the price action
which is another broken one for gold.

9/8/14 Platform Snapshot (Optimized for viewing on iPhone, iPad, or Android)











Trading Account Rules:
1) Starting Account Size:
a. Cash equities/futures/option: $10million
b. Forex: $10million

2) For the cash account (non-forex), macro views will be reflected using listed equity indexed ETFs with deep liquidity/volume and
net assets of $1 billion or greater in order to best represent the odds of the strategy being scalable (single-stock, company
specific stocks will not be traded).

3) Most of the speculative positions can also be accurately expressed using futures, but because the volume is more constrained at
different times and because the platform fails to take volume into consideration (hence the trades' impact on the actual price),
the use of futures will be limited. Positions that I deem to be core/longer-term would be better expressed via equities. But for
commodities such as crude oil, silver, copper, etc., they will solely be expressed through the futures contract market due to
contango/decay issues that most commodities ETFs suffer.

4) The overall goal is to identify attractive opportunities with goals of holding the positions for multi-week/month periods.
Importance will always be put on liquidity and risk exposure. Also, being able to realistically liquidate all positions by end of
trading day or vice versa, scale up risk, will be an advantage of the strategy.

5) Daily updates will be simple and short, as youll receive a time-stamped screenshot of the account summary where detailed
positions and P/L will be all within a single image.


6) Leverage for spot currency position will be used sparingly with average position being 2.5x the underlying cash value with
stringent risk management in mind.