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September 26th, 2018

Letter to Our Limited Partners Regarding August 2018


Fund Performance

This is a difficult letter to write as it conveys our disappointment over


our August results. What is most disappointing is that it involved the
simultaneous adverse movement of our biggest positions with the gold
miners lurching downward while our short position in Tesla whipsawed
upwards. Both positions were concentrated due to our strong conviction
that they represented exceptional opportunities. They still do exhibit
every bit of those perceived opportunities but that was not enough to
preclude a perfect storm of events that occurred in August. Regardless of
our continued confidence in these positions, the impact of August
warrants actions and a detailed response to the results.

Suspension of Management Fees:


Effective immediately we are suspending management fees
henceforth and until the Fund reaches parity with January 1, 2018.

Incremental Investment By General Partner:


As general partner I will be adding an additional personal
investment into the Fund of between $250,000 and $500,000 half of
which will be funded in the next week with the balance by end of
October. While the present value of my own investments in the Fund both
from inception and from those made in the past 12 months are valued
considerably less, I have full confidence that these investments will yield
a meaningful return and those made at this point in time can take
advantage of the current extreme and unsustainable circumstances which

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will create the set up for exceptional and outsized returns. The added
resources will increase our core holdings at these levels and all the
partners will proportionately share from the returns derived from these
incremental purchases.

Action in August:
First some commentary on what happened in August.

Tesla:
As you already know the Fund had a large short position in Tesla,
(TSLA). As much as we viewed Tesla to be an overvalued security, we
were drawn to it as a short candidate because we viewed it as a credit
troubled company that faced imminent competitive pressures and major
operational, leadership, and execution issues. We identified a series of
“credit fuses” set to go off in the near term that would be the catalyst
for a significantly lower stock price. These challenged credit conditions
also suggest that Tesla is a candidate for a debt restructuring through a
bankruptcy reorganization, conditions not reflected currently in the stock
price. On August 7, Tesla’s CEO Elon Musk engaged in what I believe to be
the most egregious, and fraudulent act of securities manipulation by
tweeting that Tesla would be going private in a $420/share bid that was
fully financed. There was no bona fide deal nor was there any financing
for this reckless statement but these facts only emerged two weeks after
the stock had exploded upward causing significant short term losses to
our Fund. Tesla’s stock has subsequently retreated and Elon Musk is now
the subject of multiple SEC investigations as well as a criminal probe by
the US Justice Department which in our opinion not only seals the fate of
Elon Musk, but also the fate of Tesla itself, as these investigations
virtually close all remaining access both public and private for
desperately needed fresh capital for a heavily indebted money losing
company. Below is a link to an interview with an analyst Gordon Johnson
which we urge you to view. Mr. Johnson is not an analyst we have spoken
to or worked with, but we concur with his analysis of Tesla’s
extraordinary circumstances including the potential that the company is

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engaged in fraud1. The analysis is insightful and affirming with respect to
our own investment position. We believe 100% in the Tesla short thesis
and we believe that ultimately Musk will go to jail for his brazen
manipulation of Tesla’s stock price last month.

Gold and the Gold Miners:


By now you have heard to the point of redundancy our thesis on
gold and the gold mining stocks. You were also aware how we believed
that the period of this asset’s underperformance and its imminent
rebound were at hand which is why we chose to take a very concentrated
and overweight position in the gold miners. Markets can go to extremes in
either direction and make fools of anyone on timing. Such was the case in
August when the miners quickly made for their largest single month loss
in over a decade during a year when they were already extraordinarily
cheap. But now they have never, ever been cheaper and the case to own
them and buy them and overweight them has never been more
compelling. There is no better way to see this than to look at the
following chart:

1 Gordon Johnson of Vertical Group, Interview: https://www.youtube.com/watch?v=VfpVkRgjg-


k

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The line depicts the Dow Jones Industrial Index divided by the value
of the oldest gold mining index known as the XAU. For point of reference,
in 2011 when the dollar price of gold bullion reached its high of $1,947
per ounce, the gold miners index XAU stood at 225. Today it is at 66. (In
1985 when the price of gold was $400, the gold miners index XAU was
50). The gold miners have never been cheaper than they are today and as
the history of the Dow/XAU ratio shows, these points of extreme (like
today) are ALWAYS followed by rapid and enormous reversals where the
rebound in the XAU is in the 100s of percent. The leveraged gold mining
etf which the Fund is long is trading at approximately one-tenth of the
price where we sold this same security two years ago. We fully expect

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that it will see this previous high again when this sector once more sees a
momentum of investor interest and funds flow from a long list of
contributing factors including a weakening dollar, the onset of global
economic weakness and solvency concerns, and inflationary pressures
from currency debasement to name just a few. As the chart shows, this is
an extraordinary circumstance and it will not last months, it will reverse
as quickly as it occurred because these extremes are not driven by
fundamental factors but by speculative factors where unwary trend
followers have shorted gold futures and gold miners without any
thoughtful reflection. These situations are ripe for sudden and significant
reversals because they must be bought back. Ironic that gold and the gold
miners gave up the ghost in August just as the nearly 10 month rally in
the dollar showed every sign of exhaustion. The chaos caused by the
dollar’s strength carried the seeds of its own demise and it has already
resumed the sort of fundamental decline that may be its undoing aided in
part by the senseless trade war initiated by the US and further abetted by
a world fighting back against the weaponization of the dollar. The dollar
based global reserve system set up by the US 75 years ago was always a
tax on the rest of the world. When the US decided more recently to use
the dollar as a weapon to beat its opponents with a powerful economic
stick using sanctions and threats of removal from the banking system, the
rest of the world took notice and set up alternate plans which remove the
use of the dollar as a trade currency and as a reserve currency.
Unthinkably, just this week even the US’s most important ally, the
European Union, joined the party to ditch the dollar2.

Meanwhile Russia and China stack record amounts of gold each


month making clear their intention to move gold to the center of their
financial reserve system. These are all hugely important factors to arrest
and reverse the downtrend in gold and the gold miners.

2https://www.zerohedge.com/news/2018-09-25/Europe-unveils-special-purpose-vehicle-
bypass-swift-jeopardizing-dollars-reserve

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The Way Back:
The way back from where the Fund stands presently is the same
way we got here: with the gold miners going up and Tesla going down.Two
years ago our largest position traded millions of shares daily for weeks
and months at a price that was exactly 10 times higher than where that
same stock is now, and that was concurrent with a price of gold at $1370?
How hard would it be for gold to go up by $175 or $275 or $375? These
would hardly be historic or meaningful moves in gold, but the effect on
the mining sector would be epic and historic. 10x is quite achievable just
as it was in late 2015 to mid 2016. Achieving just half that would make
this near term pain we have endured a worthwhile outcome. The same
holds for our short position in Tesla. That stock is not held up by
fundamentals but by hype and fraud served up by its CEO Elon Musk. The
business has never made a profit and never will. It is hopelessly impaired
by debt and that debt will need a restructuring within weeks or months
from today. A capital raise to save the equity is virtually impossible given
the ongoing criminal investigations now underway along with the
unknowable civil and criminal liabilities the firm faces. Any entity truly
interested in Tesla’s brand or products will wait to purchase it cleanly
from a bankruptcy court, and given that the capital structure of this
enterprise consists of more than $11 Billion in debt, there isn’t likely to
be any value ascribed to Tesla’s equity. Meanwhile the stock trades at
approximately $300/share which is fully imperiled in the weeks ahead as
the company faces a fully tapped out credit line, zero access to equity
markets, $3 Billion in accounts payable, another $1.1 Billion in bond
repayments and only $1 Billion in cash much of which are customer
deposits. Tesla is toast.

This recent period has been bar none the most challenging and
frustrating one I have ever endured in nearly 4 decades of investment
history, and I have been through my fair share of investment battles.
Defeat and failure are not part of my investment vocabulary. When I
encounter an investment setback I double down in both my thought
process and critical thinking as well as in my stamina. We are all in this to

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win and I won’t rest until everyone who is in this Fund sees a return on
their investment. I personally have the most at stake and I am about to
put more at stake in the days and weeks ahead. I do this from a position
of both opportunity and confidence in that opportunity. As disappointed
as we may be by focusing on a single point in time, I would urge a focus
on the opportunity we saw before and how that opportunity stands out
even bolder today. This opportunity got bigger, not more distant or less
likely and I intend to tightly grip this opportunity and harness it for our
intended mutual gain3.

We appreciated your continued confidence, and welcome your questions.

John Scurci
Partner and Portfolio Manager

3 Legal Disclaimer - Attention: The information contained herein is confidential and is intended
solely for the use of the intended recipient. Access, copying, distribution or re-use of this letter
by any other person is not authorized. If you are not the intended recipient please advise the
sender immediately and destroy all copies of this letter. Nothing presented herein should be
deemed to constitute a recommendation or an offer to sell any investment product. This letter
contains forward looking statements, as defined by SEC Regulation D, and the Investment Act
of 1940, which are the original ideas and best judgments of the authors. The conclusions
expressed herein are not guaranteed, and past performance is not predictive of future results.
Circular 230 Notice: Any written advice provided herein (and in any attachments) is not
intended or written to be used, and cannot be used, to avoid any penalty under the Internal
Revenue Code or to promote, market, or recommend to anyone, a transaction or matter
addressed.

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