The document provides an end-of-year summary and outlook for 2017 from an investment manager. It discusses: 1) Continued political turmoil and uncertainty in Europe that contributed to volatility in currency and bond markets. 2) Expectations that the US Federal Reserve will continue raising interest rates in 2017 and that Janet Yellen will not be reappointed as chair. 3) Anticipation that proposed US infrastructure spending and tax cuts under Trump will boost the economy and US dollar.

1. December 19, 2016
Dear Investors,
As 2016 winds down to a close, let us take a moment and look at opportunities in commodities, past and
present.
Two characteristics most important to successful trend-following are patience and adherence to your
rules. The past year was full opportunities in the markets if you were patient with your trades and you
followed your money management strictly. The year started with Europe in turmoil and closed with
Europe in greater turmoil causing a lot of volatility in the currency markets and bond markets. We don’t
anticipate this to stop anytime soon as mainstream politicians are being tossed out all over Europe and
the USA. Any connection to the old order is an almost unbearable burden to carry into any campaign.
Established parties, especially those of the moderate Center-Left, are tumbling.
A snapshot of Europe currently looks like this: the latest domino to topple is Italy as the Prime Minister,
Matteo Renzi, recently resigned after losing a referendum on constitutional reform: Francois Fillon is the
favorite to win the French elections next year; in March 2017, the Dutch voters may give anti-European
Union parties a much greater voice in their parliament; in September or October 2017, German voters
may rebuke Chancellor Angela Merkel and the Christian Democratic Union (CDU) which she leads.
We put the odds at 60% that Merkel will not be Chancellor of Germany in 2018. If the elections in
France and Germany swing toward an anti-EU bent, the Euro versus the U.S. dollar could move through
parity on the back of increased political fragmentation and uncertainty set against rising rates and
inflation pressure in the United States.
However, currency markets have been difficult to trade due to governmental manipulation in the US,
Japan and Europe where we saw major trend reversals due to policy change/manipulations. However,
this strong monetary/ fiscal stance by some of the world’s most powerful economies seems to be
subsiding. We did have opportunities in the currency markets in the Absolute Momentum Strategy,
especially in the Japanese Yen and Euro currencies toward the end of the year.

2. (Through DEC 15th
)
With a lens on the US Federal Reserve and specifically on Janet Yellen (as her term as Chair expires
early in 2018), we do not expect her to be reappointed. The Securities and Exchange Commission (SEC)
will get a new Chairman in 2017, as will the Commodity Futures Trading Commission (CFTC). The
leadership shifts in these three key financial regulators will accentuate the move to lighter touch
regulation. The Federal Open Market Committee (FOMC) had a two-day meeting ending on this
past Wednesday (December 14, 2016) with a +0.25 rate hike. Prospects of fiscal stimulus have raised the
odds of possibly three or four more hikes in 2017. The Eurodollar deposit maturity curve has moved
sharply steeper to reflect these changes in rate hike probabilities and Treasury note and bond yields
have risen. And, we note again, a higher U.S. federal funds rate might push the U.S. dollar further
upward against the Euro and Japanese Yen.
(Through DEC 15th
)
The FED has started raising interest rates because it seems that there is confidence that the economy is
finally on solid footing given recent unemployment and GDP numbers and Trump policies which appear
to be bullish for the economy. When interest rates rise, US Treasury futures prices fall. When the
economy strengthens, interest rates are likely to rise for reasons such as increased demand for loans,
asset allocation out of bonds into stocks, and increased likelihood of interest rate hikes by the Federal
Reserve Board. The Absolute Momentum Strategy has been short the bond markets for the past few
months as we have seen the bond markets selling off. When looking at the 30 year bond chart we
suspect that the run on the bond markets is not over. However, any debt ceiling compromise among
the different factions within the Republican Party could very well roil both equity and bond markets.

3. US 30 Year Bond (2007- December 2016)
There is a general consensus that an infrastructure spending bill will pass Congress in 2017, leading to
significant economic stimulus in 2018 and beyond. The US economy is more like a cruise liner than a
speed boat in that it often stays on a path of strengthening or weakening for several months to a few
years. This causes broader moves in interest rates that are spread over considerable time periods as
opposed to very short periods.
In the grain markets, we saw fund buying in early summer which drove prices in corn and soybean
complex up 23% and 40%, respectively, in under just three months. We say the driver of these moves
was fund buying because nothing of fundamental importance triggered these moves as we saw bumper
crops here in the USA. We were at the farm conference (Wisconsin Technology Days) in July and the
farmers to whom we spoke were ecstatic when prices were inflated. I hope they locked in those prices!
(…and called our Ag Hedge division because those prices didn’t last long.) The Absolute Momentum
Strategy participated in both markets and rode the market up and then turned around and sold the
market as it came back down to earth.
Soybean chart

4. (Through DEC 15th
)
Looking ahead, there is a good reason to be concerned that agricultural options might be underpriced.
La Niña’s are associated with periods of exceptionally high realized volatility in corn, soy and wheat
prices. This was the case during the most recent La Niña episode, which concluded in 2011, when soy
and wheat implied volatility was around twice the current level, while implied volatility on corn
occasionally spiked to around 1.5x its current level. There is little doubt that the world is headed into a
La Niña. Central and East Central Pacific Ocean sea surface temperatures have already fallen from a
peak of +2.3°C above normal in December 2015 to 0.7°C below normal by the end of September 2016
and they have almost certainly fallen further since. La Niña episodes, in general, have also correlated
with lower prices for agricultural goods. Perhaps this shouldn’t come as too big of a surprise given that
most markets tend to be more volatile on the way down than on the way up. What might save corn, soy
and wheat this time is that their prices are already depressed owing, in part, to the strength of the U.S.
dollar (USD). Should the U.S. currency continue to strengthen, which is a distinct possibility given
potential consequences of President-elect Trump’s proposed fiscal stimulus, agricultural products prices
may indeed have further to fall from a US dollar perspective.
Sugar was a difficult market for the program to trade having been “whipsawed” quite a bit. We entered
one Coffee trade, however it was a false breakout and exited soon after with a loss. Cotton was a “softs”
strong market in 2016 with a series of nice trades in a market that supplied strong trends. The same
holds true for “softs” sectors in 2017 in that La Niña will be a driving force in price volatility with a focus
on South America where much of the soft markets are concentrated. La Niña is correlated with wetter-
than-normal weather in Brazil and the Central Andes while leading to much drier-than-normal
conditions in coastal Chile and Peru.
(Through DEC 15th
)
Spring grain rally
Subsequent correction

5. After a strong bear market in 2015 in both Natural Gas and Crude Oil, both found a floor in 2016. Not
much activity here. The few trades we did participate in were due to bounces off these lows. Much of
the year was spent in a rather tight trading range.
(Through DEC 15th
)
Gold and Silver have slid from its post-election November 10th
close of $1261 and $18.82 respectively. As
of this morning as we write this letter, February Gold and March Silver are currently trading at $1164
and $16.02 down -7.6% and -14.8%, respectively, in a little over one month. It’s interesting that as these
moves have taken place, volume has consistently dropped. When you see a trending market have
decreasing volume behind it, it’s important to note that there is a real lack of credibility behind the
move. If we see a break in the stock market from their all time highs, precious metals could see strong
moves from these depressed levels. In the chart below, Gold made a big run up early in 2016 because of
uncertainty in Euro, driving safe haven buying. Copper has been really strong since the Trump election
mainly due to his rhetoric on building up the USA infrastructure. The Absolute Momentum
Strategy participated in this initial move in copper in mid-November and already booked some profit.
(Through DEC 15th
)

6. The Absolute Momentum Strategy is finishing 2016 strong. One of the main reasons is because of the
strong US Dollar and weakening bond prices. The Absolute Momentum Strategy is primarily a medium
to long-term rule based trend following program, with a stock index day-trading overlay. It currently
looks for break-out trends in 21 different commodity markets, in six sectors of the economy and trades
in three different time frames. It has zero correlation to a traditional stock and bond portfolio and was
designed to act as a hedge against any substantial stock market correction.
Finally, Walsh Asset Management wishes you and yours a Happy Holidays and a prosperous New Year!
Warm Regards,
Bill Reavis
Walsh Asset Management
breavis@walshtrading.com
619-672-8587 (office)
224-512-9613 (fax)
An investment in futures contracts is speculative, involves a high degree of risk and is suitable only for persons who
can assume the risk of loss in excess of their margin deposits. You should carefully consider whether futures
trading is appropriate for you in light of your investment experience, trading objectives, financial resources, and
other relevant circumstances. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.