THE MKC GLOBAL REPORT

MANAGER’S COMMENTARY
January 2010
“By all means, trade the bounces and wring out every penny of profit you can.
But please remember my Main Street friends and don't be fooled by the
revitalized bottom-callers. In the real world, "V"-bottom recoveries after market
crashes are like Santa Claus and the Easter Bunny. They're true only in the minds
of children, and whoever's left in the Wall Street cheerleading crowd.”
– Alan Farley
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What a year. 2009 simply flew by, but as interesting as it was, I am looking forward to 2010 even more. The idea of continuing
to expose new investors to managed futures is exciting. In my opinion, aside from the 1970s this may be the most interesting
time to invest. Through their policies and actions; Geithner, Bernanke, Greenspan and President Obama have all but
guaranteed interesting and volatile markets for many years to come.

The low volatility seen this past year in the stock markets will most likely come to an end in 2010. In determining how this
year will play out, it may prove prudent to observe historical price action during comparable times of investor psychology.
Several years of the Dow Jones since 1900 and Japan’s Nikkei Index since 1989 have possessed similar qualities to what has
transpired in the past 24 months. These periods did not occur during secular bull markets and all ended with the same fate,
their subsequent declines averaged about 40%. Without material changes, our current market’s future will prove no different.

With that said, the current stock market advance could continue into the summer. When Dubai requested a debt standstill two
months ago, the world markets shook briefly, but punched right through the news to higher prices. A bullish reaction to very
negative news shows the health of a market and suggests its strength can carry it even further. This ability to ignore poor news
could be partially attributed to the fact that Abu Dhabi, Dubai’s wealthier neighbor, has enough money to pay off Dubai’s
debt several times over if needed. In fact they lent Dubai $10bn. Nonetheless, the market’s reaction was impressive.

Markets will ultimately go where they need to regardless of current headlines (like Dubai), but if the current events reinforce the
underlying fundamentals and market direction, an exaggeration of the current price trend can occur. If we get a negative
catalyst when this market tops the result could be dramatic. What could be such a mechanism? Something that stretches its
tentacles deep into global finances: Eastern Europe, UAE and Vietnam.

Yes, it is true that these are topics the financial media has covered. They are not complete unknowns or rogue waves to hit the
global markets. However, any disruptions caused by these regions could be large enough to move global markets regardless of
recent attention. Chances are a serious deterioration in the above regions has not been fully priced into the markets at this
point.

The situation in Eastern Europe received a lot of press in early 2009 but has since died down, aside from increased coverage
recently of Greece and their debt situation. Western Europe has a large amount of financial interests in the Eastern Bloc:
Ukraine, Latvia, Estonia, Hungary, Czech Republic, Poland and Lithuania. These countries were financially on the brink early
last year when Hungary and Latvia turned to the IMF for rescue packages. A financial collapse in these countries could
significantly impact Western European banks and that would be felt worldwide. Swedish banks alone lent out $75 billion to
Latvia, Lithuania and Estonia. Any major problems with these countries during a topping out of equity markets will exaggerate
downward moves in global markets.

Many people have been addressing the possibility of a Greece default these past weeks. The issue is complex, but unlike most
other countries through history Greece cannot devalue their currency or inflate away their debt as they have little influence
over the Euro. They have borrowed in a currency that they cannot control. As more attention is given to Greece, the more I
think back to Countrywide Financial in March of 2007, the first of a long string of major financial companies to show serious
problems. Countrywide began the snowballing of bankruptcies and takeovers in the early stages of the subprime crisis. With
many countries facing large debt problems, maybe Greece will be the new Countrywide, the first country to default.

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Watching the impact of Greece on the foreign exchange markets has been interesting. The problems at hand are weighing
heavily on the Euro. As the U.S. Dollar index began to rally in late 2009, the Euro stood out from the other currencies as the
weakest, followed by the Swiss Franc and British Pound Sterling. This scenario is a good example of a recent trade taken for
the MKC Global Fund. As the last two months passed, one could see the various foreign currencies stall and get weaker in
terms of the U.S. Dollar with the Euro leading the way. As more currencies turned, we recently initiated a short position in the
Euro. The risk-reward ratio was in our favor for shorting a foreign currency, the fact that the Euro declined first and declined
the fastest made it a safer position than others.

As a firm believer that stock markets can anticipate large events, I monitor global stock markets constantly. As of the middle
of January 2010, most worldwide indices continue to advance together, except for those of Greece, UAE, Vietnam, Portugal,
Ukraine, Italy and Ireland. Most declined about 30% since last October. This divergent price action deserves attention. When
global markets topped in 2007 there was one country’s stock market that preceded the others; Vietnam. Vietnam’s Ho Chi
Minh stock index topped in early March of 2007, beginning its decline seven months before Europe, U.S. and other Asian
indices. Some might remember it declining 23 days in a row in 2008. Before that, their stock market rally exceeded most others
around the world advancing over 400% from early 2005 alone. Although China and India’s stock markets received most of the
attention, Vietnam outperformed both on the way up and down. Typically if a broad sector trend reverses, the first market to
turn within that transitioning sector will generally make the largest move, like Vietnam.

In regard to the 2007 peak in global equity prices, Vietnam’s index was the canary in the coal mine. Could the factors that
caused their stock market to turn first still be influential? If they are, the same seven month lag would indicate May 2010 as the
peak in stocks for the rest of the world. A large degree of flexibility needs to be employed when using this type of comparison
or analysis. Although that date may very well prove to be a smart exit point, look for a top in the middle half of the year. Any
market top will most likely be drawn out and take several months to turn.

As I have stated many times before, I believe there will be some sizeable stock market declines in the coming years. It is of
paramount importance to generate positive returns, not just preserve wealth during these periods. In 2008, I maintained a
portfolio split between shorting the S&P 500, commodities and foreign currencies. I look forward to positioning the MKC
Global Fund in a manner to take full advantage of the next decline. The opportunities ahead of us are exciting.

For now, I will cut this particular Commentary short and include an article that I wrote a few weeks back for ZeroHedge.com
on the residential real estate market.

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Bottom in Home Prices, a Decade Away

Humans are an optimistic breed by nature. There are some pessimists (or “realists” as they prefer to be called) among us; but
on balance humans believe in a better future. This ensures that investment professionals will continue to track investor
psychology for many years to come. When the naturally optimistic demographic becomes a group of Doom and Gloomers (or
vice versa), we take notice. The same is true for participants in the real estate as well as stock markets.

The general public seems to believe the bottom in housing has arrived; however, I believe no one will make any money on
their real estate investments for the next decade. There may be an exception or two with a fixer-upper or a foreclosure, but
buying a home for your primary residence under typical circumstances will be a net loser. The real estate market has absolutely
no sustainable drivers for a price floor, let alone price appreciation. With taxes, interest, maintenance and insurance, you are
guaranteed to lose money, especially when compared to what you could be paying in rent for comparable property.

In addition to the typical rosy outlook for the future, humans have a consistent tendency to only remember the recent past-
consistently forgetting important lessons from history. Home owners and real estate investors alike were all too accustomed to
consistently rising real estate prices until 2006, when the subprime mortgage issues and real estate bubble began to take hold.

Few people realize that home prices in the United States have only risen in a sustained manner twice in the last 116 years.
Edward Kim, hedge fund manager of 2GTT, LLC, brought this fact to my attention and I know very few other people who
are aware of this reality. This data can be found below in the American House Price Index created by Robert Shiller. Other
than the two aforementioned periods, all others have either seen declining home values or periods of stagnant or volatile

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prices with a net zero change. In 116 years, only twice have home values appreciated in any rolling 8-year period, adjusted for
inflation. The chart below shows data to 2006, the index now stands at about 146 for Oct. 2009.

In determining what the next decade will bring in terms of real estate prices, one must look at a number of fundamental
factors to determine when a major bottom will occur. In addition to watching the price levels of real estate, we should also
observe the mortgage markets, interest rates, home affordability, housing inventory, new construction, mortgage applications
and the rate of home sales. Also, following the stock prices of home building companies may shed further light into the state
of the industry, as the stock market proves to be an effective tool at discounting news and can be a leading indicator of major
industry turns. Determining an accurate view of these aspects should clarify the future of the residential real estate market.

Home Builder Stocks: The stocks of home builders have been weak and declining since August of 2009 while the broad stock
market has rallied substantially. When these stocks cannot keep up with the broader market, there could potentially be a
problem for that stock’s immediate future.

Mortgages: The issues now lay with prime mortgages, as standard 30-year fixed loans are being defaulted on as people lose
their jobs. Home values continue to decline putting more home owners “underwater”, owing more than the home’s value.
Also, adjustable rate mortgages have just begun to hit their reset dates, forcing the owner’s monthly mortgage payment higher.
This number of adjustable rate mortgage resets will increase each month until they peak in mid-2011.

Rate of Home Sales: Moderation in the rate of decline in home sales has occurred, slowing down into Feb. 2009, but has since
picked up. 2008 marked the lowest number of home sales since 1999; but due to stimulus packages, optimistic thoughts of a
housing bottom and home buyer tax credits, this important factor has reversed for the worse.

Mortgage Applications: Mortgage purchase applications are declining rapidly; “cliff dive” was the comment of one analyst. As
of January 2010, the MBA Purchase Applications Index is at the lowest rate since 1997.

Interest Rates: Mortgage rates are currently very low, and it is a great time to acquire debt; unfortunately the drivers for higher
interest rates in the future are quite strong. Nobody knows when long-term interest rates will rise, because interest rates move
in very long-term cycles. We will have to wait years for rates to raise, peak and then decline to meet this component of the real
estate bottom model.

Home Affordability: With all other criteria being equal, declining home prices mean affordability is rising. The important
question to ask is how affordable are homes and will they get even more reasonably priced? All the other criteria here suggest
they will. The National Association of Realtors releases its NAR Affordability Index every month. According to this index (the
data is available from 1988); we currently have homes that are the most affordable on record. This index only once, for one
month, dipped below 100 (over 100 means affordable and under 100 means unaffordable). It now sits adjusted at 145 and
unadjusted at 176, the highest levels on record. Only once before has the index ever showed that homes were unaffordable!
Barry Ritholtz of The Big Picture points out, if the index can’t indicate when homes are overvalued, how can we conceivable
use it to determine when homes are affordable?

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Inventory: Currently real estate inventories are high. In early 2009, Credit Suisse estimated that inventories would rally to 11
months worth of supply placing them at the highest level since at least 1988. This is insignificant compared to the “shadow
inventory”. The shadow inventory is comprised of all properties/units that will be on the market, but are not yet listed. This
number is estimated to be extremely high and is comprised of several items: bank owned properties (including Fannie Mae and
Freddie Mac) that have not been put on the market yet and the number is rumored to still be growing, foreclosures in process,
new condos in high-rise towers not yet listed and current property owners waiting for a rebound in prices to sell. Amherst
Securities Group, LP estimates there are 7 million units in shadow inventory or 135% of a full year of existing home sales.

Housing Starts: Since 1959 (with some exceptions), whenever the number of housing starts dropped below 1,000,000 it
signaled at least a temporary low in housing prices. As of March 2009 housing starts dipped to 510,000.

Observing the rental market will be necessary as well. Currently, rental vacancies are at 30-year highs, depressing rents. If the
real estate market cannot make a bottom due to the consumer wanting to own their own home, it could make a bottom from
an investment valuation standpoint of income potential. Unfortunately, this also is changing for the worse. As residential
rentals rise in number and their corresponding rents fall, home values themselves must decline to warrant any investment.

A tiny part of a large series of needed inputs to the real estate bottoming model is unfulfilled. Real estate, like long-term stock
market cycles, takes many years to play out. I continue to be shocked, as people comment as to why they should buy a home
(or even worse a condo) now more than ever before. I am convinced that if this data were for any other industry, people
would feel the same way I do. We are brainwashed with the belief that owning your own home is the American Dream.
However, when people are conditioned into believing a home should be the cornerstone of their portfolio, they blind
themselves to the overwhelmingly negative data.

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