January 18, 2011

Dear Investor:

Is happiness really 2010 in our rearview mirror? Or can we anticipate more of the same for
the New Year, which is now upon us? These questions and many others were topics of our
internal discussions at Longview Capital Group (LCG) as we reviewed the outcomes of the
last 18 months when we delivered our last Letter to Investors mid-year 2009. As it turns
out, many of the same concerns plaguing investors at that time are still prevalent today.
Taken directly from our previous letter in 2009: “the stock market is experiencing volatility
– per diem – and the economy promises nothing but uncertainty in the near-term. A great
deal of anxiety has been revealed by investors about how and where to place their capital
for either protecting wealth or continuing to build wealth, which is appropriate and
understandable. The objective of the enclosed information is to provide investors with our
view of the economy, looming concerns regarding the actions and reactions of the current
government activity, and the resulting opportunities created as a part of an alternative
investment strategy.” Ironically, our message has not changed – certain variables and
indicators, yes – however, the message is still relative, consistent, and on point. Our
continued objective herein is to provide updated data to assess the volatility and uncertainty
of the stock market, provide insight into economic indicators we follow, and reinforce what
we have been saying for more than two years – alternative investments provide
opportunities to create necessary diversity in uncommon times for fundamental reasons.

To borrow a memorable quote created during the 1992 presidential campaign* with our own
spin on it, “It’s not the economy, stupid. It’s the stock market.” Understanding the
difference between the two may provide some answers to the apparent disconnect that
exists among reality and the market. We are constantly hearing about the battle or divide
between Main Street and Wall Street, so it is not a surprise that volatility and uncertainty
reside within our current environment based on the separate vantage points.

* “It’s the economy, stupid” was a phrase made popular by campaign strategist James Carville during Bill Clinton’s 1992 presidential campaign.

305 REGENCY PARKWAY, SUITE 305 MANSFIELD, TEXAS 76063 TEL. 817-593-2000
What sense can be made of the rising stock market when you consider high unemployment
(9.3%), unimaginable deficits, continued quantitative easing (now version QE2), on-going
stimulus, and flat interest rates (0%)? Even amid the positive signs that are revealing
themselves, the reality is that Main Street does not buy it – they do not see it and they do
not believe normalcy and stability are just around the corner. So, why the rise in the
market? The simplicity of the answer might stun most people. Profit creation and profit
taking. Keep in mind; the economy is not the market. The stock market is stripped of
emotion and does not care about you or the effect it has on you – it craves profit and profit
alone. Wall Street is not Main Street. In a pure capitalist system, you do not need to have
an alignment of interests – logic and empathy are not factors. The stock market can stay
irrational longer than most people can stay solvent.

Looking back on 2010, several descriptive terms come to mind – it was definitely a tale of
two halves – making bipolar one of the more accurate qualifiers. The first half was
characterized by the sovereign debt crisis across Europe, the looming double dip recession,
a Flash Crash, bond yields dropping to two year lows, and a dollar surge. The second half
was more positive and featured a market turnaround in July, strong economic data fueled
investor optimism, bond yields rose, and the dollar dropped. If we heard it once, we heard
it a billion times from all participants: “We are cautiously optimistic and just seek to survive
2010. Things will change in 2011.” We agree with the latter statement, unquestionably,
things will change in 2011; however, going back to the opening questions: “Is happiness
really 2010 in our rearview mirror? Or can we anticipate more of the same for the New
Year, which is now upon us?” More importantly, what does it mean as we examine and
determine the ongoing concerns and the lingering effect of a year that is in the not so
distant past?

The completion of 2010 did not constitute the end of all things bad and the start of all
things good. There are very real concerns and issues still widespread for 2011. Applying a
simple macro view, we are still left to deal with an overvalued stock market that has been
overbought, a rally that is not sound or sustainable (based on the Fed’s ability to inflate
asset prices), the impact to long-term interest rates with QE2, a debt crisis that is still
impending for Europe, Japan, and the US (with pressure already being felt in the US
municipal bond market), financial sectors have not been solved (money printing is still
occurring and mark-to-market has been suspended), the Fed’s use of quantitative easing
and when it ends, and finally, the Chinese economic bubble that could burst in 2011 and
pose a major threat to the global economy.

   

    2  Longview Capital Group © 2011

By having awareness of these concerns, one can begin to understand the necessity of how
to navigate the current environment and why it is important to continually monitor the
issues we are facing. Comprehension of certain leading economic indicators can provide us
with beneficial information and data that allows us to connect the dots as we maneuver
through the volatility and uncertainty. The following indicators provide a broad view of the
activities that cultivate the current environment, and require the pursuit of further research
and study into the micro-level details beyond what we provide in order to effectively apply
metrics and strategies.

The Consumer Price Index (CPI) is how inflation is measured. CPI is an important economic
indicator for investors due to the finality of the numbers being actual and not projected.
Investors – especially fixed-income investors – should always note the rate of inflation in an
effort to understand their investment returns. If projected yields are less than inflation, it is
impossible to truly grow wealth (Figure 1.1).

Employment is a simple measure of growth and recovery. Recently, overall employment

gains were insufficient to even keep pace with job demands from population growth.

Furthermore, these gains were concentrated in low-wage, low-productivity industries,

aggravating job seekers. Unemployment has stood at or above 9 percent for a record 20

months now, which is the longest spell since the Department of Labor began reporting this

statistic in 1948. The labor market is not out of the woods yet, either. Private forecasts

predict unemployment to stay above 9 percent at least through 2011 (Figure 1.2).

Figure 1.1 Figure 1.2

The Federal Funds Rate (FFR) has a direct impact on the value of the dollar and the amount
 
of lending allowed for new economic activity, which implies the correlation between the FFR

and the market. Given that the rate is so close to zero, it disallows the Federal Open

   

    3  Longview Capital Group © 2011

Market Committee (FOMC) to ease monetary policy by reducing the rate, thus stimulating

spending (Figure 2.1).

Considered the most important indicator, is the Gross Domestic Product, which is the

broadest measure of the state of the economy. Real GDP in the United States increased at

an annual rate of 2.6% in Q3 2010. This increase is primarily due to positive contributions

from personal consumption expenditures, private inventory investment, nonresidential fixed

investment, exports, and federal government spending that were partly offset by a negative

contribution from residential fixed investment. Imports, which are measured as a

subtraction in the calculation of GDP, increased. The key figure to pay attention to is the

growth rate of the GDP. Typical US economic growth hovers around 2.5-3% annually and

deviations from this range can have a significant impact (Figure 2.2).

Figure 2.1 Figure 2.2

Oil Prices and Forecasts are used as a gauge of the demand and cost of goods – specifically,

gasoline, which has a much more dramatic impact overall. The rise in commodity pricing is

less a projection and more a lesson in Economics 101. Globally, demand is projected to

outpace supply, which tightens reserves. Price signals indicate a shift in consumption toward

transportation fuels and emerging markets. Climbing consumption in China, India, and the

Middle East (where fuels are subsidized) means that consumers might not be subject to

price signals until costs rise high enough to begin scrutinizing the subsidies themselves. Oil

prices hit a two-year high in Q4 2010, and are expected to continue to rise throughout 2011

(Figure 3.1).

Treasury Note and Bond Yields represent the money investors make on US Treasury notes

and bonds, which are the instruments used to pay for the US debt ($13 Trillion). During Q4

   

    4  Longview Capital Group © 2011

2010, the Federal Reserve Board of Governors announced a second round of quantitative

easing (QE2). They did this in order to combat concerns over tightened credit, moderate-

income growth, high unemployment, and lower housing wealth. As a result, the FOMC

stated that their intention was to purchase $600 billion of long(er)-term securities through

the second half of 2011. Rates on 10-year treasuries have increased approximately 90 basis

points, from 2.57 to 3.47, and appear to be trending up. The most direct way that Treasury

bond yields affect investors is through their influence on fixed-rate mortgages (Figure 3.2).

Figure 3.1 Figure 3.2

Given the ongoing concerns and issues coupled with the data provided by economic

indicators, it is not terribly difficult to detect mixed signals regarding reality, the market,

normalcy, and stability. These signs do not paint a clear picture. This is why, as a portion of

their overall investment strategy, investors must maintain an alternative investment

allocation in order to effectively navigate unprecedented times.

An alternative investment is an investment product other than traditional investments such

as stocks and bonds. The most common alternative investments include commodities, real
estate, private equity, emerging markets, and hedged or absolute return strategies. The
fundamental aspect of an alternative investment strategy is to minimize downside risk
within a portfolio. Using non-correlated asset classes adds neutralization and counterbalance
to a traditional portfolio consisting of stocks and bonds. Alternative strategies have the
following advantages:

   

    5  Longview Capital Group © 2011

  Investments are represented by tangible assets

 Modest to negative correlations with traditional investments (stocks and

bonds)

 Increased portfolio diversification

 Goal is to provide positive returns irrespective of the market direction

We believe that now is an opportune time to explore the alternative investment options that
are available (and on the horizon), which may allow investors to protect and continue
wealth building in this uncommon investment climate. Our current focus is centered on
Commodities, Real Estate, and Life Settlements for fundamental reasons:

Commodities – Throughout 2010 commodity prices rose. Our research indicates that within

the next two years demand will begin outpacing supply, and as a result domestic

investment opportunities are increasing. Aside from projected supply and demand curves,

there are a few other factors that lead investors to be bullish about the price of oil through

2011. If OPEC does not increase production as global consumption recovers, prices will rise

(they are not slated to meet until June 2011). The increasing popularity of the automobile

in Japan, China, and India combined with the projected growth in emerging markets (from a

global perspective) adds to the already increasing demand pressure. Additionally, the

second round of quantitative easing will more than likely increase money supply, fuel

inflation expectations, and drive oil prices higher. LCG monitors activities at both global and

regional levels to understand the macro-level movements, which in turn drives domestic

opportunities for investments in local production – and we have seen an increase in notable

deal flow.

Real Estate – There are varying opinions and forecasts pertaining to commercial real estate

for 2011. What we do know is that there is inherent confusion in the market, which creates

opportunity. We are seeing an increase in CMBS delinquencies despite the incremental

growth of property values and liquidity in the CMBS market. Time is not anyone’s friend in

this environment – as the cycle continues, the cost basis on certain tangible assets cannot

be ignored as an investment opportunity. We predict that activity will start to percolate late

Q3 into Q4 2011. By leveraging our network of real estate experts and professionals we are

   

    6  Longview Capital Group © 2011

able to directly source opportunities concentrated on truly distressed assets (bank-owned,

geographically suppressed, etc.) with solid fundamentals.

Life Settlements – A non-correlated asset with inherent asset value. Life Settlements

provide true diversification because they are immune from fluctuations in the stock and

bond market, fuel prices, and business cycles. Because the key factors affecting the yield

are initial discount and time, rather than economic conditions, exceptional returns can be

realized without a parity of risk to investment capital. LCG is very selective about how we

invest in this space.

LCG’s goal is to provide investors with effective alternative strategies and premium

alternative products. We look forward to further discussing ways to align your investment

goals with our investment options and continuing to provide you with our insight into the

economy and the changes that will continue to create additional opportunities.

Regards,

Derek D. Thornhill C. Bradley Chapman

Managing Partner Managing Partner

For more about Longview Capital Group visit our website at www.longviewcg.com

The information set forth herein is being furnished on a confidential basis to the recipient and does not constitute an offer, solicitation or recommendation to sell or

an offer to buy any securities, investment products or investment advisory services. Such an offer may only be made to eligible investors by means of delivery of a

confidential private placement memorandum or other similar materials that contain a description of material terms relating to such investment. The information and

opinions expressed herein are provided for informational purposes only. An investment in Longview Capital Group or any LCG Fund is speculative due to a variety of

risks and considerations as detailed in the confidential private placement memorandum of the particular transaction or fund and this letter is qualified in its entirety

by the more complete information contained therein and in the related subscription materials. Nothing contained herein constitutes financial, legal, tax, or other

advice.

This may not be reproduced, distributed or used for any other purpose. Reproduction and distribution of this letter may violate federal or state securities laws.

   

    7  Longview Capital Group © 2011