Volume 1, Issue 2, Spring 2008

Alfred Capital
Management, LLC
Quarterly Newsletter

First Quarter Review

We are in a period of acute financial wealth destruction. If you can preserve your capital in a period of wealth destruction,
you’re doing pretty well.”
-George Soros

This past quarter was Alfred Capital’s first complete quarter of operation. Needless to say we didn’t receive a warm reception from
the equity markets. January and February marked the worst calendar year start for the U.S. stock market in 75 years. Many of the
most successful investment managers called this quarter one of the most difficult market environments they had faced in 20 plus
years of investing. It seemed every week a new piece of negative news came out – bank writedowns, hedge fund implosions, the
collapse of Bear Stearns – each one providing investment managers new ways to lose money.

This quarter provided a treacherous market environment in which to open a new firm. Most investors make their biggest mistakes
during times of significant volatility, and this quarter provided more than its fair share of volatility. However, we look at the current
market differently. Where others see uncertainty and risk, we see a great opportunity to distinguish ourselves from our peers. Mar-
kets historically aren’t very efficient during times of upheaval and change. So, this is precisely when brilliant investors distinguish
themselves from their peers. We feel that our strong emphasis on disciplined capital preservation and endowment style asset alloca-
tion give us the correct framework to deliver value to our investors through all market cycles.

Swimming Upstream
Our contrarian thinking on the current crisis meant that there were many times throughout the quarter when we had the pervasive
feeling that we were swimming against a strong current. The Alaskan salmon migration offers a constructive comparison. Every
year, the five species of Alaskan salmon travel hundreds of miles upstream -- up to 3,500 feet in elevation -- to their respective
spawning grounds. The journey is challenging due to the massive amount of energy required to swim so far against the natural en-
ergy of Alaska’s rivers. To make things even more interesting, predators like bears and fishermen frequently pick off the hard-
working salmon that manage to avoid other pitfalls. Contrarian investing offers similar challenges and rewards. Buying assets that

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others are selling requires a longer-term investment mandate, strong conviction in the soundness of the
positions, and a degree of immunity from market sentiment. Oftentimes it is precisely at the time that it
seems hardest to buy a position that in hindsight provided the most attractive entry point for long term
investors.

Asset Class Strategies

Equities
During the first week in January, we noted the increase in intensity in selling pressure and hedged our
equity exposure in most portfolios with less than a 10 year time horizon. These hedges were very timely
and helped cushion our portfolios against falling prices. More importantly, they gave us the confidence
and protection necessary to do the difficult and important work
of buying quality investments at depressed prices. With this
fundamental tenet in mind, we began buying great companies
near the lows in mid January.

With our new purchases we are favoring stocks with interna-

tional earnings over domestic earnings, large cap stocks over
small cap stocks and have become agnostic when choosing be-
tween growth and value. However, all of our purchases are
high quality, unleveraged companies with clean balance sheets
and stable cash flow. Many of these companies, including
Google and Giant Interactive, are sitting on billions of dollars of
cash with no debt. Having a strong balance sheet during a re-
cessionary period eliminates much of the downside risk built
into a stock. In addition to clean balance sheets we prefer com-
panies that are engaged in real innovation, offer solid secular
growth prospects, have experienced and competent manage-
ment, and are situated firmly in industries that our global macro
process has identified as offering above average prospects in the
next 3, 5, and 10 year periods. We scaled in to new positions
this quarter in each of our five major investment themes: tech-
nology, agriculture, telecommunications, solar power and infra-
structure. We will go into greater detail on a few of these
themes a little later in this newsletter.

Bonds
Our bond strategy hasn’t changed much – we are focusing on
domestic bonds with high credit quality and short duration, and
international treasury bonds. Our concern about the ongoing
credit crisis has kept us away from riskier debt and our concern
about inflation and continued rate cuts has kept us on the short side of the yield curve. Longer-term bonds
are far more sensitive to inflation concerns than are shorter duration bonds. While we have benefited
from our bond exposure over the quarter we stopped buying domestic bonds once valuations reached un-
tenable levels. With yields on short term treasuries hovering around 2% and faced with rising inflation
expectations, we don’t believe it makes sense to increase our domestic bond allocations at the present
time. We are, however, still buyers of international bonds.

In our first quarter newsletter we predicted that a series of interest rate cuts by the Federal Reserve would
leave the federal funds rate near 3% by year end. Unfortunately we were not pessimistic enough. The
collapse of Bear Stearns and the continued credit market malaise prompted the Fed to act decisively in the
first quarter lowering the federal funds rate to 2.25%. We think it would be imprudent of the Fed to lower
the benchmark rate much further from where it presently stands. It is unclear whether the market will
respond to further rate cuts and at the present time we view inflation as an equal risk to growth.

Though we are concerned that a decline in municipal revenue will hurt states’ balance sheets and are con-
cerned about the solvency of municipal bond insurers, we will also begin to look at municipals this quar-
ter as the yields have actually surpassed the yields of similar duration treasuries, a rare occurrence and
probably one that will be short-lived.

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Real Assets: Commodities and TIPs
One of the most interesting shifts in the global economy is occurring right under our noses. The last 30 years of globalization were
defined by amazing export-led growth in the developing world combined with the incredible deflationary impact of a billion new
workers in the developing world entering the global labor force. With more workers competing for access to capital, wages paid to
low skilled workers fell dramatically. Consumers around the world benefited immediately from lower prices of goods, but the other
major beneficiary - workers in China, India, Brazil and elsewhere - are just now beginning to increase their standard of living. This
emerging middle class is consuming vast quantities of energy, purchasing big ticket consumer durables and rapidly increasing its
caloric intake. It is clear that the deflationary forces of rapid globalization are now being replaced by inflationary forces, with enor-
mous implications for investors.

This change is perhaps most evident in commodity futures prices. Prices have risen on everything from agricultural commodities
(wheat, corn, sugar, rice and soybeans), to industrial metals (aluminum, copper, nickel and zinc), precious metals (gold, silver and
platinum) and energy (natural gas and crude oil). Some of the price increases are the result of a weak dollar, but fundamentally the
price increases are being driven by an enormous increase in demand. In light of these shifts, our firm will continue to overweight
inflation-resistant real assets: Treasury Inflation Protected Securities (TIPs), commodities, and infrastructure assets.

REITs
Equity REITs have been noticeably absent from many of our portfolios since early 2007. As a central part of our endowment alloca-
tion we have been watching the equity REIT market closely for an opportunity to increase our allocation back up to normal levels.
As we discussed in our previous newsletter, REITs had outperformed equities for 7 straight years (2000-2006) and by early 2007
valuations looked rich and yield spreads were negative. Heading into the second quarter of 2008 REITs are in a different place.
Prices have come down 15% since their peaks and the yield spread is back over 1% for the first time since 2004. Of course much of
the increase in the yield spread is accounted for by the drop in the 10-year treasury yield to under 4%. While we still believe that
commercial REITs face significant headwinds in a slowing economy, we will look for opportunities to buy REITs that represent
good long term values for our investors.

Cash and Currency

Cash management is a big theme on the minds of many of our investors. With CD and savings account rates sitting under 3% and
headline inflation pushing 4%, leaving money in a bank now entails a negative real interest rate, a prospect that has many investors
concerned. In the current market environment we believe that now is not the time to be reaching for yield with “enhanced” money
market accounts or other “cash alternatives.” We have instead chosen to reduce our cash allocation and cycle most of our cash into
treasuries, commodities and other asset classes. We hope to have the opportunity to increase our cash allocation as soon as real
yields turn positive again.

On the currency front we have begun to buy Chinese currency exposure as well as the Swiss Franc, Japanese Yen, and Australian
dollar. The Australian dollar offers an attractive yield and its central bank will likely continue raising rates in order to contain the
explosive growth of its commodities-driven economy. The Japanese Yen and Swiss Franc are safety plays. The Japanese Yen, in
particular, should benefit from the continued unwinding of the carry trade. China also finds itself in an interesting situation. It is
being consistently deluged with hot money inflows as investors and speculators are expecting further currency appreciation. The
Chinese government is trying to maintain the competitiveness of the local economy, which is still growing at a double digit clip,
while simultaneously curbing rampant domestic inflation. Annualized inflation for the first quarter of the year in China is running at
roughly 13%. This is well outside of China’s target of 4.8%. Until now the Chinese government has chosen to implement price con-
trols and other measures rather than combating inflation using monetary policy. However, the renminbi (RMB) has already appreci-
ated 4.3% this year and just passed the psychologically important 7 RMB/USD mark for the first time. What remains to be seen is
how much China will rely on exchange rate policies to fight inflation instead of other measures such as price controls and increasing
bank reserve requirements. We are expecting to see continued appreciation of the RMB which will serve as a useful currency diversi-
fier.

Best Ideas: Agricultural Commodities

Entering 2008, our top idea was agricultural commodities. Our core agricultural commodities position finished the quarter up 10%
and offered a nice hedge against falling stock prices. In spite of the run up in prices we continue to believe that the strong fundamen-
tals underlying this theme have not abated and we will maintain a strong exposure to agricultural commodities within our commodi-
ties allocation.

Unfortunately there is a flip side to our investment success. The United Nations Food and Agriculture Organization list of countries
that have endured food riots in the past 6 months is getting longer and longer: Burkina Faso, Cameroon, Egypt, Cote d’Ivoire, China,
Mauritania, Mozambique, Indonesia, Haiti, Senegal and the Philippines have all experienced food riots. This concerns us first and
foremost as human beings. In a world that has plenty of food to feed everyone on the planet, it is a shame that the world’s poorest

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still can’t obtain enough food. This also pains us as investors because even a cursory review of world his-
tory reveals a disturbing link between famines and violent revolutions. For example, the price of bread in
France rose by 88 percent in 1789. The ‘bread riots’ that resulted are commonly pointed to as one of the
central causes of the French Revolution. We will continue to monitor the effect of food prices closely hop-
ing that they don’t lead to a dramatic increase in political upheaval and widespread starvation.

Best Ideas: Infrastructure

We like infrastructure as a general theme. The amount of money that will be spent on bridges and roads
worldwide over the next 30 years is staggering. Some estimate that China will spend as much as 128 bil-
lion on water infrastructure in the next 5 years alone. The infrastructure bill for large emerging economies
such as India and China should run in to the trillions in the next few years. So, we’ve begun to take a closer
look at this segment to uncover new ideas. We’ve purchased a water-infrastructure focused ETF, a global
infrastructure ETF, as well as an ETF that gives us exposure to steel companies. For direct plays we have
looked closely at Chicago Bridge & Iron (CBI) and Jacobs Engineering, and deemed CBI to be a better
value. We will be looking to accumulate shares in CBI because we believe it has the makings of a tremen-
dous investment.

Best Ideas: Solar Power

We’ve remained steadfastly bullish on solar power despite the mini bubble we warned about in last quar-
ter’s newsletter. Right on time, solar stocks suffered a severe correction
that began in early January. With most solar stocks down 30-50% from
their peaks even as revenues continue to rise by 100% per year, we have
begun accumulating stakes in those companies that are most attractively
positioned. Rising oil prices, the development of more efficient photo-
voltaic conversion technologies, and the possibility of falling polysilicon
prices later in the year could be the necessary catalyst for a sustained rally
in these names. Our top pick is Suntech Power and we’ve added it to
many portfolios in the first quarter. We believe Suntech Power is the best
positioned and most attractively valued player in the solar space. The de-
velopment of alternative energy sources has come to the forefront in re-
cent years and we see this trend accelerating as we move forward.

Second Quarter Market Outlook

We expect continued slowing in the broader economy, weak home prices
as foreclosures continue to flood the market and a meaningful deteriora-
tion in the unemployment picture. What remains to be seen is if a con-
sumer slowdown in the U.S. is enough to slow world GDP growth. The
U.S. consumer still makes up 18% of world GDP and the Chinese middle
class at 2% isn’t quite ready to shoulder the full burden of the global econ-
omy.

Conclusion
The second quarter could offer as many surprises as the first quarter. While we won’t make any specific
predictions, we can promise that we will continue to focus on capital preservation. As always, please call
or email. We enjoy hearing from you. We quietly released our new website in early April. You can now
find us at www.alfredcapitalmanagement.com. There you will find more information about our firm and
our investment strategies as well as a link to our blog. Feel free to stop by and leave a note.

Michael S. Alfred Ryan S. Alfred

April 17, 2008

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