| Rodrigo C.

Serrano, CFA
| SIPA | Columbia University
Master of International
Affairs ’14 Candidate

| New York City, NY
| 01-305-510-0181
| rcs2164@columbia.edu

March 25, 2014; Published 5:55am

Opening position: at Market Open today
• Tactical Short SPY: $33,000 – (reducing S&P 500 exposure)
o Sentiment implies limited upside.
o Technicals showing relative weakness
o Second year of presidential cycle has historically seen weakness,
followed by strength later in the year.
o Stop buy set @ 1,890; buy limit @ 1,785

Allocation adjustments: - To be completed at Market open today.
• Increasing exposure in EEM from ($22,491 to $40,000) & FRAK from ($8,260 to $24,000)
• Reducing exposure in IVW from ($48,909 to $40,000), and OIL from ($40,738 to $16,000)

• Increasing exposure in GDX from ($14,603 to $32,000)
• Reducing exposure in CHIX from ($47,925 to $40,000)

* Non-exact sums are held shares x prices as of 3/21/14
* Updated holdings will be updated this weekend on RCS Investments website

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Notwithstanding macro developments, the
S&P 500 remains trading in a constructive
but increasingly neutral manner. Since late
February it has moved little. The main battle
line has become the 1,850 level, one that I
specifically mentioned in my prior investment
strategy report. While the bears have been
repeatedly battered, their persistent defense
at this juncture implies that the near-term
outlook has become more clouded. This is
understandable given highly unpredictable
developments, such as Russia's annexation of
Crimea, and its possible reverberations across
the global economy (Europe especially).
Furthermore, news flow from China has been
rather bearish of late and may be giving
investors pause.

Looking ahead, from a short-term perspective, should 1,850 not hold, 1,838 will be a post to monitor. A break
below this level would open the way for a demanding battle for the bears as they enter a bullishly saturated area (1,836-
1,815), which is occupied by both the 50-day (1,832) and 100-day (1,815) moving averages. 1,815 also happens to be a
level that served as notable resistance and support during late-November and mid-January respectively. A break below
this area would suggest that the environment remains clouded, in which case major support would be found at 1,770-1,780.
This level marks the primary upward trend and served as the foundation for early-February's rally that has taken us to our
present level. The bullish scenario would see the index break its prior all time high near 1,880, giving the bulls a clear shot
at achieving the 1,900 level. At this point, there may be pause for some back and fill.

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Covered in my prior report, equity markets may potentially be riding a "sentiment air pocket," caused by markets
continuing to price in a rebound in U.S. economic data over the spring. U.S. equity indices have mostly held up despite an
awful March in terms of economic data vs. expectations, implied by a plunging Citi Surprise Index. Other sentiment data
proposes that investors are positioned for positive surprises over the coming months. While it is increasingly likely that
April does vindicate the bulls' postulation, scope for significant equity index appreciation may be constrained. On the
other hand, if data fails to satisfy, indices may re-price for a lower economic trajectory quickly.

Meanwhile, El-Erian, Chief Economic Advisor at Allianz, recently contended
that investors have become rather
complacent, thoroughly focused on whether the U.S. economy will rebound or not. They are failing to account for
increasing geopolitical risks, such as Turkey, Iran, Iraq, North Korea, and Syria. I would throw China/Philippines in there
given their recent escalation

Overall the sentiment picture remains a detrimental factor for further, significant equity market appreciation. There
lacks a notable wall of worry that characterizes bull markets with plenty of room to run. This means that a significant
downturn in economic activity (or even a soft patch) or a negative geopolitical surprise could damage market sentiment
and technicals. There seems to be limited upside but noteworthy downside.
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The overall exposure of the portfolio remains tilted toward a bullish macro progression. This would entail continued
recovery in Europe, a rebound in U.S. economic data, and a rebound in emerging market equities. However, I have slightly
increased the bearish exposure of the portfolio by way of a tactical short position on the SPY (more on that below).

The most profitable positions for the portfolio have been the short on Chinese financials (CHIX), which has gained
roughly 16% since the position’s initiation. News of the increasingly shaky state of the banking system and the possibility
of large amounts of assets (loans) invested into questionable investments, along with higher funding costs from the advent
of internet finance, have helped. The fund’s second best position was the copper short (JJC), which was entered into on
January 27. A combination of slowing Chinese economic activity, complemented with news that the metal has been used as
collateral has helped this position. The worst holding has been the recently entered small gold miners position (GDX).
Janet Yellen’s rather hawkish tone (“around 6 months”) during her first FOMC meeting led markets to begin pricing in a
scenario of higher real interest rates. This is bearish for gold. The fund’s second worst position has been in emerging
market equities (EEM). This is likely due to worries of Fed tapering, coupled with structural problems (in the case of
Brazil), and weak economic performance in Asia (China and South Korea comprise roughly 35% of the ETF holdings).

Changing conditions in the macro landscape call for some minor adjustments. Among the notable changes to the
bullish macro positions: Emerging market equities (EEM) have taken a beating recently. I am taking advantage of these
low levels, which coincidently are near the bottom of a large multi-year channel. Furthermore, news of fiscal stimulus being
readied in China may result in the ETFs largest country allocation to perform well over the coming months. I am also
increasing exposure in FRAK (fracking companies). Russia’s annexation of Crimea has led to a major rethink in European
energy policy. The intrusion into Ukrainian territory has, in a way, created a rift in the structure of the globalized
economy. Europe will begin siding more with the U.S., while Russia and China will realize their similar geo-political
situations with the West. I see Europe’s energy re-think as a boon for the long-term prospects of the U.S. energy industry.
Notable bearish macro position changes include an increase in my gold miners position. While, gold has suffered a set back
due to Yellen’s hawkish remarks, I look at European and Japanese central banks as increasingly willing/(forced?) to
further loosen monetary policy (QE??). Furthermore, if Chinese economic activity continues to deteriorate, we may see
spillover effects into the rest of the global economy. Finally, I am reducing my short in Chinese financials (CHIX) to
capture some gains. I will maintain a sizable position as I think there will be continued negative news flow.

While the overall portfolio remains tilted towards a bullish macro outcome, I am slightly increasing bearish expos-
ure by establishing a small tactical short position on the S&P 500. Various factors have coalesced that make the risk/reward
acceptable. The lack of a wall of worry (see above) suggests limited upside even if economic data improves. Second, lead-
ing technical indicators suggest that February’s rally may be weakening. Finally, the 2nd year of the presidential cycle has
been rather volatile for equities before, likely due to market adjustments forecasting the November results
. The declines
have sometimes been significant in the past. Couple this historical tendency with the fact that we haven’t had a correction
in more than two years and the other aforementioned technical reasons (+ worsening bad macro news flow) and I see this
period as a good time to practice “better safe than sorry.” In case my investment turns sour, I have flagged 1,890 as the
level to bow out (roughly 1.7% loss; depending on entry price at market open). If we do have market turbulence, I will exit
the trade at 1,785 (roughly 4.0% gain). Finally, in passing, I have initiated an “inflation watch.” Higher food prices, a low
U.S. vacancy rate, & possible wage pressures may result in an inflation scare in the 2nd half of the year. More to come.


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