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October 30, 2015

Third Quarter 2015 Investor Letter Review and Outlook

Over the past few months, S&P volatility exacerbated by sector rotation has taken investors on a harr owing round trip. The consensus view of the cause of the correction has been well-mapped by now; a maelstrom of fears overwhelmed the market during Q3, including:

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A weakening China, where the new question is not whether but how severe the slowdown of the wor ld’s foremost growth machine will be. In August, we saw for the first time the limits of the Chinese government’s ability to manipulate the economy as animal sp irits triumphed over central plan ning. While the situation has stabilized somewhat since, the downside scenario for China seems more intimidating than ever before;

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Janet Yellen may have inadvertently checked herself and the Fed into the Hotel California. It is increasin gly difficult to see how the Fed c an justify rai sing rates in 2015, particularly considering recent employment weakness in the U.S. (an unwelcome surprise) and similar sof tness in manufa cturing figures. Unlike the concerns that weighed on the Committee earlier in the year – that a rate hike might damage the fragile environment outside of the U.S. – recent data undermining consensus U.S. growth assumptions requi res different ana lysis. If the U.S. consumer is weaker than had previously been believed, the Fed needs to be careful not to push the w orld into a recession. Ms. Yellen cannot a fford to get this wrong;

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With 2016 looming on the horizon, market participants see some inexperienced, unserious candidates leading on the GOP side and economically unfriendly Democrats on the other. Republicans in th e House are now a lso deeply divided and relying on Pa ul Ryan’s leadership to pull them back from the brink. None of this increases market confidence;

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