ARMORED WOLF LLC

Monthly Newsletter May 2015

About Armored Wolf

Armored Wolf is an SEC-registered investment firm founded in 2008. The firm currently manages approximately USD294mm across a range of
investments for institutions and individuals. The firms team of 10 is led by its CIO, John Brynjolfsson, who previously spent two decades at PIMCO
where he launched and ran the USD80bn Real Return Platform.

Investment Objective

Armored Wolf manages global macro funds that seeks to profit from macro imbalances created
by global inflation and deflation. The firm utilizes liquid, real return strategies to generate
attractive, absolute, risk-adjusted returns while providing an active hedge against the wealth
destruction created by long-term inflationary trends.
The firm dynamically allocates to the following sector portfolios: (1) commodities; (2) global
inflation-linked bonds; (3) global event-linked bonds; (4) global equities; (5) emerging market
bonds; (6) emerging market foreign exchange; and (7) high yield. In addition, we use a Macro
portfolio comprised of top down, directional trades for each of the seven sectors. Capital is
allocated to the sector portfolios and the Macro portfolio by the Investment Committee which is
led by the firms CIO, John Brynjolfsson.

Contact

18111 Von Karman Ave. #525 | Irvine, CA 92612 | Phone: 949.333.7000 | info@armoredwolf.com

Chief Investment Officer - John Brynjolfsson

Crude Oil is Everywhere

Firm Facts (as of June 1, 2015)

Founded:
Firm AUM:

October 2008
$294 mm

Strategies Managed
Alpha Strategy
Hunter Strategy
Curian TIPS / Commodity Strategy
Eaton Vance Commodity Strategy
James Alpha Global Real Return Strategy
OFI European Inflation Protection Strategy
Virtus TIPS Strategy

Noting that April has 30 days, it follows that global output exceeds global
consumption by 1 million barrels per day. There is a supply/demand
imbalance globally.

Certainly oil is everywhere, here in Southern California. Earlier this

month, there was an under-sea pipeline that ruptured in Santa Barbara.
Following, local news reported globs of tar washing up on the Redondo
Beach, shutting down surf shops. Everywhere, obviously far extends
beyond surf shops. In fact, it extends far beyond Southern California.
I am, of course, referring to everywhere in terms of driving financial
markets and everywhere in terms of global inventories overflowing
traditional storage facilities.

Though the formatting is different, the picture painted by the US

Department of Energy (DOE) is no different. Take a look at this chart,
sent to me by Sol Steinberg, Founding Principal, OTC Partners in Chicago,
plotting DOE US inventory data. It shows the past five years of high and
low US Crude Inventories (X-SPR) together with this years breakout.

The IEA looks at global (OECD) inventories, and on May 13 concluded:

Preliminary data indicate that OECD stocks have continued on an upward
trend as they built by 35.8 mb in April. Crude stocks added an exceptionally
steep 36.4 mb led by still-soaring US holdings.

Source: OTC Partners / DOE US Inventory Data

This leaves us with an overhang of inventories, but more importantly,
the tautological imbalance involving the weekly supply of oil exceeding
the weekly consumption. Rising inventories arithmetically equate to
production exceeding consumption, week after week going on six months
now.

Source: IEA Investory Report

The peak in inventories above is notable, but hardly dispositive. In

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Monthly Newsletter May 2015

particular, rather than production decreasing, product inventories have

surged as they normally do ahead of the summer driving season. In addition,
the flattening of US Production in recent weeks has been offset by increases
in production in Saudi Arabia. Beyond Saudi Arabia the major and minor oil
exporters globally are experiencing extreme political stress, and pressure
to increase oil revenues by increasing production in response to the lower
global prices. To the extent their lifting costs are in the single digits a globally
competitive oil market equilibrium involves them continuing to pump until
the MARGINAL producer is forced (by lower prices) to reduce supply.

higher in global bond yields, led by Europe, surely put a scare into investors.
The immediate explanations, such as investors pricing out any deflation
threat, seem lacking. Position unwind is accurate, but why? Within the
context of an evolving US Federal Reserve interest rate paradigm shift, which
previously led to massive investor flows generally away from US Dollars and
generally towards both risky assets and safe bonds, ironically, the potential
signaling effect of the move is intriguing.
Investors like to consider asset markets in relation to economic growth. While
that probably does more harm than good, generally keeping growth in mind
is probably a good idea. So far in 2015, its disappointing. A weak Q1 in the US
is being followed by early disappointment so far in Q2. Unlike Q1, Europe is
now doing even worse relative to expectations, as is China, which is perversely
juicing the Chinese stock markets as investors expect large fiscal stimulus.
Beyond growth, inflation prints remain benign to ever so slightly starting to
pick up. Inflation expectations have backed off a bit after increasing some
earlier in the year.

Michael Dooley, of Cabezon Investment Group (among other distinguished

academic and NGO titles), made a related point at the recently convened
Drobny Global 2015 Santa Monica Conference. More specifically, he observed
that demand for oil in OECD countries peaked in 2005 and has been on a
declining trend since then. His conclusion is that long dated oil should be
sold. His case is solid.
In particular he points out that a) technology is allowing supply to be
created more and more cheaply. More specifically well data, from the
Bakken and Eagleford Light Tight Oil (LTO) regions of the US, shows drillers
are experiencing dramatically greater output per well, at dramatically lower
cost per well, sequentially year after year. Petroleum engineers are delivering
huge efficiency gains in Shale Oil., b.) demand globally is falling and c)
drillers are capping wells currently, which means that in addition to above
ground inventories being bloated, there are underground inventories that
can be, and will have to be tapped, before ground leases expire.

Along with inflation expectations, other recent moves have backed off as
well: bond yields, currencies, crude oil, copper and other commodities. Some
of these moves are in mixed patterns, but most are reassertions of main price
trends. Interestingly, moves seem unusually consistent across markets. Crude
and commodities up with the Dollar down is the most consistent. Many will
tell you that is logical and historically consistent, but it isnt. The relationship
varies. The same applies to stocks and bonds, which similarly hold an
inconsistent historical relationship. Related to cross asset moves, volatility is
generally increasing, but erratically.

The nexus that ties supply, demand, and price together intertemporally is
inventories. Though the IEA forecast that in the coming months supply will
drop, demand will increase, and inventories will stabilize at high levels,
they dont provide a mechanism by which supply will decrease, demand
will increase, and inventories will stabilize. Instead, Mike Dooley opines,
they work backwards. Inventories are full. Floating Storage (the fleet of
super tankers) is full. Therefore Inventories cant grow, and supply will equal
demand. The IEA doesnt say so, but I would suggest the mechanism for that
happening is the price mechanism. A price that equates the marginal cost of
production to the marginal unit of demand will shut down the operations of
all but the lowest cost, and financially secure, producers.

Within this backdrop, what is consistent is that large trends remain intact.
The largest of those is a strong US Dollar. While there are some changes, and
some reasons to think its different this time, vetting those differences reveal
that they are minor. As usual when many think its different this time going
with the trend has produced very favorable risk-adjusted returns historically.
This time should be no different. Relating that to the behavior across markets,
relative to the historical context, should illuminate the path to returns. As
the Fed shifts paradigm and investors rebalance their underweight Dollar
positions built up over many years, the real risk is probably underestimating
the trend. Now that prices have corrected, position sizes decreased, and
weak hands shaken out, the surprise would be a quick acceleration higher
We are positioned accordingly.
in the Dollar trend, for which we are positioned. The fireworks away from the
currency market are much harder to figure out, but are certainly interesting.
Guarding against more, potentially illiquid position unwinds is probably
wise, and were not talking about small, medium term positions, but the big
Currencies
Suspiciously interesting would be a great characterization of the financial ones (think equities and bonds).
markets currently. While the main, established trends that had been under
threat for 2-3 months reasserted themselves in May, an impulsive move
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Monthly Newsletter May 2015

S&P declining as its valuation rises. We expect the individual decliners to not
Global Equities
The global equities strategy recorded a negative performance in May due to only reclaim the previous two months losses, but to rise well beyond, to new
a strong headwind from the equity hedge as the S&P rose 105 bps on the highs as various events unfold over the next 6-12 months, and the companies
month, negative performance from a long position in a consumer staple after execute their business strategies.
reporting a weak quarterly earnings number (-8%), negative performance
from a long position in a consumer company that reported a weak quarterly
result as well as a change in CEO (-20%), and negative performance from
our airline positions (-9%) following market concerns about loss of capacity
discipline as discount carriers expand their growth plans at a faster rate than
previously planned.
These losses were partially offset by positive performance from a long
position in a specialty insurer that reported quarterly results and received a
positive initiation from a Wall Street firm (+6%), and a steep decline from a
short position in a consumer product company with concentrated exposure to
a single product that has failed to gain market traction (-24%).
As the market rose throughout the month, we reduced our net risk-adjusted
exposure to approximately 5%, or 19% on a notional basis. The difference
between the two exposure measurements is attributable to the fact that
many of the positions in the portfolio currently have betas to the S&P of under
1.0 (some actually closer to 0.0 than 1.0) due to their highly idiosyncratic
nature. Such positions have a lower hedging requirement, which reduces
our exposure to the hedging headwind from a rising market environment.
Unfortunately, when the market does rise, positions whose theses are more
event-driven do not always move on the same schedule, especially within a
monthly window, because they are more sensitive to specific corporate events
than broader market movements. Over time, we believe such positions will
appreciate in value, outpacing the hedge along the way, which is at the heart
of the Armored Wolf equity strategy.
At a high level, the hedge headwind was equivalent to 25% of the months
negative PnL, while the declines in the three worst-performing long
positions were equivalent to 73% of the months negative PnL. Due to the
nature of a well-hedged strategy, monthly performance will be especially
challenged when the strategy experiences negative mark-to-market losses
in large positions while the hedged index is rising. Looking forward, due to
the combination of positive macro environment, cushion from intrinsic value,
and upcoming catalysts for the companies whose stocks declined during the
month, the upside/downside is now even more asymmetric at the security
levelas well as the portfolio level due to long term expected returns of the
IMPORTANT DISCLOSURES

Investing in the bond, stock and commodities markets is subject to certain risks including market, interest-rate, issuer, credit, inflation risk and catastrophe or event-linked risk. Investing in foreign denominated and/or domiciled securities may involve heightened
risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Equities and currencies may decline in value due to both real and perceived general market, economic, and industry conditions. Corporate debt securities
are subject to the risk of the issuers inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity. High-yield, lower-rated, securities involve greater risk than higher-rated securities. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to
purchase or sell such securities. Armored Wolf may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. Additionally, this letter should not be construed as an
offer or the solicitation of an offer to buy or sell an interest in any Armored Wolf funds. This material contains the current opinions of Armored Wolf and such opinions are subject to change without notice. This material has been distributed for informational
3 contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be
purposes only. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Information
reproduced in any form, or referred to in any other publication, without express written permission. Armored Wolf, LLC, 949-333-7030. 2015, Armored Wolf.