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A PERFECT CALM

Economic growth continues, and although this cycle has been the slowest recovery in post-war
history, the slower growth has allowed for a prolonged cycle. Inflation remains lowsince
peaking in 1980, the U.S. has experienced consistent disinflation. The latest PCE price index
figures showed a 1.6% rate, leaving inflation below the Feds preferred 2% level since '08, so
stimulus continues, keeping interest rates at low levels. The 10-year U.S. Treasury bond hovers
around 2.3% and rates in other developed nations are even lower. Unemployment in the U.S. has
fallen to 4.1%, near full employment for the economy.

And the variation in these statistics has been minimal. At the same time, the prolonged steady
growth has allowed for record corporate profits, led by record high profit margins. No wonder
that the stock market is at all-time highs and volatility is at all-time lows. If December is yet
another positive month for the S&P 500, it will have been the first time in history that all 12
calendar months were up. Perhaps just a quirk of the calendar, but its already noteworthy that
there have been 13 up months in a row, exceeding the former 11-month record stretch ending in
January 1959. The S&P 500 has also set a record for number of days (over 280 and counting)
without a 3% intraday decline. In 2017 there have been only 4 days with 1% or more declines, the
least in over 50 years. And the average daily absolute change has been a mere 0.3%, the lowest in
over 30 years. This steadiness seems almost too goodthe opposite of a perfect storm. A perfect
calm.

On The Radar

But investments are made looking to the future, not in the rearview mirror. So its our task to
determine whether the road forward is up, down or flat, and just how bumpy it may be along the
way. We first look to our macro overlays, which are designed to alert us to a recession and bear
market, respectively, to gauge the urgency to exit positions in order to limit the impact of a
significant market decline.

Todays market is a tricky one for value investors. Our macro models remain bullish; therefore,
we need to continue to scour our investment universe for undervalued positions in an attempt to be
fully invested. However, valuations appear fullmarkets are fairly priced or overvaluedso its
not easy to find a mix of undervalued stock holdings. And we are most certainly not willing to
alter our strict requirements for attractive absolute valuesstocks trading 20% or more below our
estimated appraised valuesunlike many investors currently trying to simply find relatively
attractive opportunities. The lack of volatility isnt helping. Normally we see many more
opportunities driven by the typical ups and downs. In a study we did early this year, we found that
for the 20 largest S&P 500 companies, in the last several years the normal annual drawdown, from
peak to trough, was around 17%. Smaller companies tend to be more volatile. In normal periods
we should witness our fair share of potential opportunities. But, as noted, this period has been
unusually steady, providing fewer opportunities.

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This study was a good reminder of how and why our process is designed to work. We wait for
bargains. They tend to come often, so usually we dont have to wait too long. We sell when
positions rise to FMV (fair market value), especially when they coincide with ceilings in our
TRAC work because we then become fearful of a potential double-digit decline. Not all stocks
bottom at the same time. Individual stocks often march to their own time line. Therefore, we
need to fully embrace a bottom-up mentality when our macro tools arent flashing negatively.
This study was also a reminder that we could potentially do better trading with our TRAC break
points rather than being subject to the inherent volatility of a buy and hold strategy. Most stocks
trade between undervaluation and fair value. Once a stock reaches fair value, since its best case is
to then track its growth rate, the stock becomes vulnerable to a decline until its undervaluation is
again sufficient to attract enough buying power to offset selling pressure.

We are always on the lookout for companies with consistent growing earnings streams. Those
whose steady businesses have FMVs that are persistently growing up and to the right but where
for any number of reasons, due to a temporary operational setback, the share price has fallen
sufficiently below our estimate of FMV.

Our preference is to own companies with competitive advantages where we expect those virtues to
allow for continued growth. As well as being undervalued, we want those companies to possess
strong operations and financials, all with a view to mitigate losses too. A few of our recent
selections were made when they corrected to floors in our work and were sufficiently undervalued,
in our view, to warrant a position. There are a number of others where our due diligence is
complete and we are merely awaiting a slightly lower price to justify a purchase.

Pristine Conditions

Our Economic Composite (TEC) is not alerting us to a recession. Similarly, our market
momentum indicator (TRIM) is not suggesting an imminent bear market. Since our alerts have
not triggered, nor do we see them triggering in the near term, were more confident about being
fully invested. Because there are still few excesses, the potential for central bank led quelling of
growth, and the global recession that accompanies, remains unlikely.

In our large cap only portfolios we have held an outsized cash position, while we scour for value
opportunities, which has restrained our returns. Because of the calm environment, and all-time
market highs, we are certainly seeing fewer opportunities that meet our criteria. In our All Cap
mandates, with the ability to cast a wider net, we have been able to find enough positions to be
fully invested in equity accounts.

The markets could keep rising as long as interest rates remain at todays levels or lower, corporate
tax rates head lower (as appears to now be the case with the tax bill about to pass) and the current
rate of economic growth remains intact.

Extended Forecast

Central banks are becoming more restrictive. The Fed is shrinking its balance sheet and is
considering further tightening. Interest rates have begun to rise, though still remain historically
low. The balance sheets of many governments have ballooned. Therefore, we continue to
diligently monitor some key economic statistics along with our macro tools to make sure we arent

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caught off guard when risk again rises to levels that can cause a substantial selloff. With the U.S.
GDP growth rate just upticking to 3.3% for the 3rd quarter, fears of an imminent economic decline
should wane. Leading economic indicators are strong and U.S. GDP growth in Q4 could reach
3.5%. Notwithstanding, growth could downtick in the latter half of '18 as the normal U.S. and
global inventory cycle causes a slackening. This inventory correction should not lead to a
recession as long as its met with easing by the authorities. Meanwhile, this quarter should be the
third consecutive quarter of over 3% U.S. growth, which hasnt occurred since '04. Hurricane
related rebuilding should help too. And the tax cuts, though phased in, should also bolster the
growth outlook.

With stock market valuations so elevated, the medium-term outlook for stocks in general is not
favourable. Its at this point in the cycle that we feel that bottom-up stock picking is essential to
help lessen the risk of holding positions that might succumb to negative revaluations.

As the economic cycle continues and unemployment shrinks, it portends the spectre of rising
inflation. Though demographics, technological advances, the Internet and sluggish growth have
all conspired to keep inflation low, at some point wage pressures should become a factor. This
may even be exacerbated by demographic changes as the ratio of workers to consumers is believed
to have peaked, even in places like China. Higher inflation could pressure interest rates higher
which would be anything but calming for the stock market.

Our Strategy

As noted above, bargains, especially large cap ones, are scarce, as a result of buyers factoring in
low interest rates and advancing corporate profits.

Nonetheless, we have been able to purchase a few holdings that passed our due diligence process.
We found a few positions with favourable earnings outlooks trading at wide enough discounts
from our estimates of their FMVs. Our objective is to continue to add more large cap positions to
our All Cap portfolios as we find compelling ideas and as our current smaller cap positions are
sold when they rise close to our FMVs.

With the occurrence of unexpected domestic and global events, volatility in the overall market is
bound to rise back to normal. This should make it easier for us to find companies in which we are
interested in investing that meet our criteria.

We still have over-weightings in precious metals and oil & gas. The gold price remains on buy in
our TRAC work and too close to the cost of production for the average producer. Oil has
jumped but it too should trade further above production costs. Global oil inventories are on pace
to revert to normal by Q2 of next year. As we mentioned last quarter, both commodities appear to
be in bull markets again. And we have been able to find individual stock holdings of producers
that we dont believe are reflecting todays commodity prices, let alone higher prices.

Our Portfolios

The following descriptions of the significant holdings in our managed accounts are intended only
to explain the reasons that we have made, and continue to hold, these investments in the accounts
we manage for you and are not intended as advice or recommendations with respect to purchasing,
selling or holding the securities described. Below we discuss each of our new holdings and
updates on key holdings if there have been material developments.
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All Cap Portfolios and Recent Developments for Key Holdings

Our All Cap portfolios combine selections from our large cap strategy (Global Insight) with our
best small and medium cap ideas. We generally prefer large cap companies for their superior
liquidity and lower volatility. Importantly, they tend to recover back to their fair values much
faster than smaller stocks, so they can be traded more frequently for enhanced returns. However,
our small cap positions are cheaper, trading far below our fair value estimates; therefore, our All
Cap portfolios currently hold a meaningful position in small caps.

Most of our small cap company holdings trade well below our estimate of their respective FMVs.
Although these smaller, less liquid holdings are potentially more volatile, the risk of permanent
impairment in our small cap holdings appears minimal while upside potential remains high.

Kirkland Lake Gold raised production guidance yet again and provided stellar ultra-high grade
drilling results from Fosterville, its core Australian mine. We still maintain a good size position in
Kirkland but given the run-up to our Net Asset Value estimate and another ceiling in our work, we
have reduced the position and would welcome a correction in the share price to once again add to
our position.

Manitok Energy is finalizing the arrangements for its previously announced financing to
amalgamate with Questfire Energy and refinance its debt. We anticipate a resolution shortly. A
refinancing of its debt obligations would be welcomed by all to relieve the concerns surrounding
its current bank lender which have overhung the market since mid-'15 when the lender unusually
requested that a material amount of its demand loan be repaid.

All Cap Portfolio Changes

In the last few months, we bought Cars.com and Sabra Healthcare REIT as well as a few new
large cap positions including Disney, Alaska Air Group, and Honda Motorall summarized in our
Global Insight portfolio review below. We sold Dollar Tree after it ran up to a TRAC ceiling,
close to our FMV estimate and eliminated Dicks Sporting Goods and GameStop after both fell
below TRAC floors. We have also reduced our Kirkland Lake Gold weightings again, and sold
some IAMGOLD as each ran up too. And we sold most of our small position in Pro Shares Short
S&P 500 for tax loss reasons, even though our preference may have been to remove the position
on a market correction.

The following are mid-cap companies we have recently purchased:

Cars.com runs one of the largest online auto marketplaces in the U.S. and was spun out of a larger
company, TEGNA, in May. The company is an important advertising medium for the
hypercompetitive auto industry as it influences a significant number of in-market car buyers who
are increasingly researching their cars online. The company has only penetrated about 50% of the
U.S. dealer market and management is reinvesting heavily into the company to highlight their
value proposition to dealers to drive greater dealer penetration and upselling opportunities.
However, we just sold Cars.com as it moved close to our FMV and right to a TRAC ceiling, and
since it now appears that another key competitor is likely to unduly impact Cars.com especially
given the winner-take-all nature of this industry.

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Sabra Healthcare REIT is focused on owning and investing in real estate serving the healthcare
industry. Its more than 500 skilled nursing and senior housing facilities, which benefit from triple
net leases, should experience demographic tailwinds over the intermediate and long term. Sabras
merger with Care Capital Properties diversifies Sabras tenant base, increases scale, and generates
annual cost savings of approximately $20 million. Because the price is depressed we are
collecting a sizable 9% yield while we wait for a recovery to our $30 NAV estimate.
Global Insight (Large Cap) Portfolios and Recent Developments for Key Holdings

Global Insight represents our large cap model (typically with market caps over $5 billion at the
time of purchase but may include those in the $2-5 billion range) where portfolios are managed
Long/Short or Long only. A complete description of the Global Insight Model is available on our
website. Our target for our large cap positions is more than a 20% return per year over a 2-year
period, though many may rise toward our FMV estimates sooner should the market react to more
quickly narrow their undervaluations. Or, some may be eliminated if they decline and breach
TRAC floors.

At about 80 cents-on-the-dollar versus our FMV estimates, our Global Insight holdings appear to
be cheaper, in aggregate, than the overall market. Because of the run-up in stocks, and that the
overall markets appear fairly valued, we are finding fewer investment opportunities and therefore
are holding much more cash than usual.

Twenty-First Century Fox has run up based on press reports that there are a number of suitors for
its various assets. Disney, for which a deal would be highly synergistic, is the leading candidate.
We see a potential deal as positive for Fox too. Significant scale is required to compete in the
digital era and we believe Foxs film assets will be better leveraged by Disney. Fox, as a 20%+
shareholder of Disney in the most likely deal scenario, would benefit over the long-term, while it
focuses on significant cash-generating assets such as Fox News and Fox Sports. Our sum-of-the-
parts estimate of Foxs value is $40.

CVS Health just announced the $69 billion acquisition of Aetna, one of the nations largest health
insurers. According to CVS, the combination will revolutionize the consumer health care
experience and is a natural evolution for both companies. CVS sees EPS accretion of low to
single digits in the second full year after the deal closes. Over time, significant synergies are
expected, but management provided no concrete details. We have mixed feelings about this deal.
At 18x '18 estimated earnings, Aetna doesnt come cheap (no first-year accretion is reflective of
this). And a pharmacy-PBM-insurer combination could introduce unforeseen risks rather than
opportunities (e.g., think of the cross-selling incentivization issues seen at U.S. megabanks). The
role that PBMs play in the health care chain is already under scrutiny; controlling the entire end-
to-end health care experience could invite even closer scrutiny. At current values, CVS is trading
well below our estimated FMV of $90. We do not expect this deal to materially impact our
valuation.

Global Insight (Large Cap) Portfolio Changes

In the last few months, we bought several new positions including Disney, Alaska Air Group,
Honda Motor and BMW. We sold Dollar Tree as it ran up to a TRAC ceiling, close to our FMV
estimate. We also eliminated Dicks Sporting goods as it triggered a sell signal falling below a
TRAC floor.
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As noted above, Walt Disney is the leading suitor for certain Twenty-First Century Fox assets,
including the 20th Century Fox film studio and U.K. satellite provider Sky Plc. On the surface, we
like the idea of this deal. We believe Disney currently has a sufficient library of movie and
television content (e.g., Lucasfilm, Marvel, Pixar, Disney Animation, etc.) to make a serious run at
Netflix with its planned streaming service in '19 but this deal would significantly enhance its
offering. Meanwhile, Disneys theme parks, cruise lines, and studios continue to fire on all
cylinders. ESPN subscribers continue to fall but we see the decline as stable and when we
quantify expected future losses, we still arrive at an estimated valuation of over $115.
We purchased shares of Alaska Air Group after the stock fell over 35% from early '17 highs while
the airline struggled with pilot staffing issues at Horizon Air, a price war in key inter-Cal markets,
and challenges with its integration of Virgin. After digging into these issues, were confident that
they are temporary. In fact, management has already taken steps to address each specific issue and
there are early signs of improved performance. For example, Alaska was second amongst its peers
for on-time performance during Q3 after being at the bottom of the pack as recently as Q1.
Management is confident they can reclaim the number one spot. Fares have likely bottomed too
but the current irrational pricing environment could persist into Q4. Our FMV estimate is $80.
As speculators push Tesla ever higher, we acquired two of the cheapestand highest qualitycar
companies in the world, BMW and Honda. BMW, the worst-performing Western OEM year-to-
date, has seen its share price struggle after missing street expectations for the most recent quarter.
Longer-term, we believe the outlook is positive. Potential positive catalysts in '18 include
increased production capacity for the X3 and further progress on its ACES (Autonomous,
Connected, Electric, Shared) initiative that will position the company for the future. Over in
Japan, Honda has lagged the Tokyo Stock Price Index by 40% over the last five years. We see
evidence that its struggling motorcycle business has turned the corner. Both companies have
strong free cash flow generation and are undervalued using conservative margin and growth
assumptions. Our FMV estimate for BMW is 100 and for Honda its 4,100.
Income Holdings

Short-term administered rates have been rising as the Fed begins to reduce its stimulus. But the
10-year U.S. government bond yield has been relatively stable around 2.3%. Rates are expected to
rise over time from todays levels. High-yield corporate bond yields have been relatively steady
recently too, and now sit at 5.7%. The spread to U.S. Treasuries remains at one of the narrowest
in history. Because we have been finding fewer attractive opportunities than usual for our income
accounts, we have been holding a larger than usual portion of the accounts in cash while we await
more favourable investment opportunities.

We recently bought Zargon 8% Convertible Debentures due December 31, 2019 (at a 16% yield
to maturityhigh given the substantial asset coverage), NGL Energy Partners 9% Preferred
Shares (a pipeline and logistics business with a yield just above 9%) and purchased Sabra
Healthcare REIT (with a 9% dividend yield) summarized above in our All Cap sectionwe
previously owned Care Capital REIT which was acquired last quarter by Sabra and were attracted
to the merged company, especially after it dipped in price.

We sold Northwest Healthcare 7.5% Convertible Debentures due September 30, 2018 because its
price rose (and corresponding yield dipped) and on the expectation that the company would call
this bond which it has now. And we parted with the Ruby Tuesday 7.625% May 2020 bonds after

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the company was acquired and we expected the bond to be redeemed based on the change of
control provision, in the months ahead, once the deal closes.

We continue to hold a number of undervalued income positions and collect outsized interest
income on these positions due to the depressed prices. Our income holdings have an average
current annual yield (income we receive as a percent of current market value of income securities
held) of over 8%.

Of note, regarding our top holdings in our income accounts: Enerdynamic Hybrid Technologies
debentures should benefit from its restructuring as we stand to receive a new short-term secured
debenture for most of our bonds value with the balance and all arrears in common shares which
should be valuable considering the substantial contract announcements the company has made;
Advantex Marketing International secured debentures are also being swapped for new secured
debentures and significant shares in the company which should also be valuable as we anticipate
the company recovering back to its profitability levels of a few years ago; and, Manitok Energy
collateralized notes should benefit too once it closes its announced financing.

Nothing But Sunshine

We reiterate what we noted last quarter, and hope to say it again next quarter, that the
complacency in the market continues. Volatility is still at historic lows. The market is
accentuating the positives and downplaying the negatives: North Korea, Chinese credit excesses,
election tampering, deteriorating retailers, rising default rates on consumer loans and bloated
government debt along with escalating corporate debt too. The calmness of the period remains
driven by ever-growing earnings, low inflation, low interest rates and few investment alternatives,
with no material economic excesses yet, allowing the central banks to bide their time before
clamping down, which they inevitably will.

Since the market seems to be forecasting only sunny days ahead, we need to be alert to negative
surprises. Citigroup, that tracks a Surprise Index, sees expectations at a highmeaning an
outsized correction could ensue from unanticipated negative shocks.

We are extremely aware that this economic cycle is stretched and keep watch for the end to the
bull market. We designed TRAC, TEC and TRIM to provide signals when negative
inflections are occurring to help predict the recession and the market panic that accompanies
negative growth. Until our alerts trigger, we intend to seek out and hold securities trading below
our estimate of their FMVs. We have found a few more lately but will not hesitate to hold cash in
lieu of compelling ideas even if thats clearly not our preference.

Herbert Abramson and


Randall Abramson
December 7, 2017

All investments involve risk, including loss of principal. This document provides information not intended to meet objectives or suitability
requirements of any specific individual. This information is provided for educational or discussion purposes only and should not be considered
investment advice or a solicitation to buy or sell securities. The information contained herein has been drawn from sources which we believe to be
reliable; however, its accuracy or completeness is not guaranteed. This report is not to be construed as an offer, solicitation or recommendation to
buy or sell any of the securities herein named. We may or may not continue to hold any of the securities mentioned. Trapeze Asset Management
Inc., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities named
in this report. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the
investment decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. E.&O.E.