Investment Letter June 21, 2009

To Our Friends and Investors,

At Saddle Point Capital Partners, LP, we focus on market trends and very
importantly, on the correlations between asset classes. Trends matter because
that is where one gets the biggest edge against the market. Correlations matter
because they validate one’s fundamental theses about the markets and also
provide clues about important inflection points and shifts in themes.

At this time, we are very watchful of the relationship between the US Dollar and
the global equity markets. The US dollar was strongly negatively correlated to the
stock market during the earlier stages of the financial crisis and economic
downturn because the earlier stages of this crisis were focused on liquidity and
solvency issues. As such, the dollar repatriation/strength was the mirror of equity
weakness (dollar up 20%, stocks down 45% from July 08 to March 09).

This negative correlation maintained through the stock market rally beginning in
March, with the dollar weakening almost 15% while stocks rose almost 40%.


We believe the US Dollar is in a major bear market primarily because on the
margin, we are creating dollars and debt (relative to income) at a much faster
rate than any other country in the world. We also believe that there may be
political reasons as to why capital does not feel as welcome in the United States
currently as it has historically.

We also believe that it will be a shadow policy of our administration to weaken
the dollar as much and as fast as possible in an orderly manner - a falling
currency will sooner or later put a wind at the back of asset prices at the expense
of creditors. This is essentially the process that people are referencing when they
talk about “inflating away the debt”. We should also remember our history, and
the fact that FDR didn’t get the economy moving after the Depression until he
devalued the dollar by 40% in late1933. While devaluation would not seem to be
an option for the US, conceptually, such a devaluation (40%) would overnight go
a long way to solving our consumer and bank balance sheet problems.
Therefore, we believe it is likely that the dollar will be devalued systematically
over time to achieve some of the equivalent balance sheet and asset benefits
that would be associated with one time devaluation.

That stated; what we are watching for is a change in the recent negatively
correlated relationship between the dollar and the equity market, because this
will signal a likely new period of decoupling between hard assets and financial assets. We believe that this is going to happen, and once the dollar begins to
decline in concert with a declining equity market, there will be an environment in
which commodities and other hard assets outperform financial assets.

The Equity Market

We want to be bullish, but since the tendency is to underestimate how long
things take to play out, and because our work leaves us tepid at best about the
economy and markets, our concern is that we are early, possibly way early, in
the bottoming process. As such, we are becoming increasingly bearish as equity
prices rise in the face of a sluggish real economy and still battered consumer
sector. Note the DOW:GOLD ratio below which has increased with the market
rally since March from slightly under 7 to a mid 9 handle. It is interesting to note
that this ratio has widened about 37%, which is equivalent to the move in the
equity market.

At the last two major market and asset bottoms (after 1929 and 1980-81), this
ratio was well under 5, and close to 1:1, and we expect that before this cycle is fully played out, that the ratio will return to those levels that mark generational
bottoms for equity prices.

At present, people observe what seems to be a “disconnect” between the real
economy and the markets. We believe the real economy has it right and it’s only
a question of time. We still think it is a bear market rally, not a bottom.

A couple of key data points from late last week:

a) Last week there was a sharp drop in mortgage applications. With
income down, credit tighter and interest rates not going down, we don’t believe
that there is much help coming from the housing sector. Maybe the Fed can keep
rates down, maybe they can’t. More on that later. Anyway, so far interest rates
have been trending up and mortgage applications are down. And any recovery
without a strong real estate market seems unlikely given the structure of
consumer balance sheets and our dependence on consumer spending.

b) In addition, Federal Express reported very disappointing earnings and
guidance last week. This is not a good sign. This is a red flag if ever we saw one.
FDX is a leading transportation company, and we believe that their results are a
foreshadow of an economy that is doing much less recovering than the “green
shoots” crowd is discounting into equity valuations.
We still believe the “inflationists” are a bit ahead of themselves; that powerful
deflationary forces are at work; that income and velocity are way down; and, that
the financial markets are overly optimistic about both the real economy and
corporate earnings.

Examining some key considerations, we make the following observations:
a) the major stock indexes have rallied 40% off the March lows
b) the major indexes have reached their 200 day moving average
c) sentiment has been squarely balanced, the market is for sure long again
now,
d) valuations are very high historically,
e) there is a large disconnect between the market and the real economy.
f) the primary trend is down

In conclusion, we see the slowing of deterioration in the economy akin to a
sharply declining line hitting bottom and then bouncing modestly before drifting
gently sideways in a flatline, without any significant upslope. The market has
priced in a much more robust bounce, and only time will tell if this has been a
sucker rally like the one that followed the market decline in 1929, or if this is
really the generational buying opportunity that many hope it is.
ASSET ALLOCATION:

For a fund that is positioned to give investors with correlated net worth a chance
to earn a positive non-correlated return, this is where we have to step up to the
plate a little bit. We currently have 50% of the fund assets in short directional
positions in the US equity market.

As we make this final edit the evening of Sunday, June 21, here is our asset
allocation:

50% short US equity
10% long “commodity currencies” -- Australian and Canadian $
15% long gold and silver and the GDX (Blue Chip Gold/Silver Mining Index)
2% short US Treasury bonds via long TBT (double short bond ETF)
1% long options on USO (crude oil proxy ETF)
32% in highly liquid US $ money market funds

Regarding our currency and gold positions (we consider gold basically to be the
ultimate non dollar correlated currency), at the present moment, we believe these
positions to be correlated with the equity market and inflation trade in the near
term, and if we believe the equity market is going to decline, and therefore the
dollar will rally in the short term, then we would have risk associated with gold
and commodity currencies because these commodity prices would tend to fall
with a rising dollar. Thus we have a relatively lower allocation to these assets at
the moment. In addition, we are very wary of these commodity markets, such as
oil and copper, that are currently so long and vulnerable. A little dollar rally and
these markets could have a mini crash.