introduction to craven capital llc

CRAVEN CAPITAL LLC

- Fortress Portfolio -

Craven

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Craven Capital

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www.cravencapital.com 1

A Stable Strategy for Uncertain Times

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Fortress Portfolio Executive Summary Craven

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Overview

Monumental uncertainty exists in the global marketplace and will continue.

• Financial crisis, emanating from excess and easy credit in the early 2000s…

• Morphed into a global banking crisis, which has…

• Expanded into an ongoing sovereign debt crisis

The Uncomfortable Realities:

We are navigating through the most severe balance sheet recession since the Great Depression

The interventionist actions of policy makers have arguably made the situation worse, and the

possibility exists for a second, and possibly more serious, global credit crisis / economic recession

Market uncertainty will continue as developed nations deleverage debt and adjust to the most serious

demographic transition in the history of mankind

Given the backdrop of Lehman, AIG, Madoff, the Eurozone and, more recently, MF Global and PFGBest,

it is hard to know who to trust with your investment dollars.

Objective

Our objective is to provide target returns 5%+ over the 10-year Treasury’s “risk-free” rate (approximately

8%-12% net of fees), with low levels of comparative risk

Competitive Edge

We utilize a combination of strict stock selection / acquisition to generate above average dividend yield

while managing risk & enhancing return through the diligent use of call and put option trading

Depth of Investing Experience

Our management team has a combined 50+ years of portfolio management experience, including

security selection and asset allocation for private clients’ portfolios.

Fortress Portfolio

March 2012

Fortress Portfolio Investment Philosophy

Expect the unexpected…know who you are dealing with

and where your money is!

We believe that:

• Investors have lost faith in banks and other traditional asset managers

• High-quality companies that pay dividends will be best positioned going forward both to survive

and thrive in an uncertain global environment

• Portfolios must be adequately prepared and positioned to profit from heightened volatility forecast

for the immediate future

• A reliable custodial relationship is vital to ensure maximum security and protection of assets

We are guided by core principles:

• We have a fiduciary duty to treat you with respect and provide high-level service and civility while

protecting your assets with the utmost care

• You cannot eat relative performance; therefore, we seek an absolute return on your investments

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Fortress Portfolio Methodology & Thinking

Knowledge Refined

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It has been said that if you don’t

know where you’re going, you will

probably end up somewhere else…

We believe that if you don’t know

where you are now, it’s impossible

to even know where you are going!

We look at the world & the markets from multiple levels, filtering the various and diverse

inputs to ascertain the appropriate action going forward.


WE BELIEVE THAT WE ARE IN THE MIDST OF A SECULAR BEAR MARKET…SIMILAR TO THE 60s & 70s

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DURING TIMES LIKE THESE, THE ONLY CERTAINTY IS UNCERTAINTY… THE ONLY CONSTANT IS CHANGE!!!


THIS SECULAR BEAR MARKET COULD EXTEND FOR MOST, IF NOT ALL, OF THE CURRENT DECADE

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WHERE DO WE GO FROM HERE...? ONE THIS IS CERTAIN…MORE VOLATILITY IS INEVITABLE!


P/E RATIOS HAVE A WAY TO GO….DOWN

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PRICE / EARNINGS RATIOS WENT PARABOLIC IN THE LAST BULL MARKET (1982 – 1999)


IS IT REASONABLE TO ASSUME THAT PRICE / EARNINGS RATIOS MAY GO EQUALLY PARABOLIC… IN REVERSE DURING THIS BEAR MARKET…

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ESPECIALLY IN A “TRIPLE D” DEVELOPED WORLD….DOMINATED BY: - DEBT DELEVERAGING -

- DESTRUCTIVE DEMOGRAPHICS - - DOUBTFUL GOVERNMENT POLICIES -

????

Fortress Portfolio Analysis & Timing Craven

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Wall St. wants you to believe you can’t time the market…

when they do it all the time!

Graphs courtesy of Jeff Clark – S&A Short Report -

Is it any wonder that investors are rattled?


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We pay very close attention to what is happening in and to the market…


Short term technicals give reason

for concern…


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…but does it make sense to lend your money to the greatest debtor in history for 10 years

to receive 1.5% when the published inflation is running at almost double that amount?


When the interest rate is effectively zero, how

much higher can Treasuries go?

Potential

Blow Off

Top?

Fortress Portfolio

March 2012

Fortress Portfolio Investment Philosophy

- Comprises 20 mega-cap “Fortress” stocks exhibiting the following general characteristics:

• Dominate their marketplace

• Derive consistent and reliable free cash flow

• Have a long history of dependable and in many cases, increasing dividends

• Are typically resistant to market shocks, defined as trading in a range of 20% +/-

- Manages risk by writing covered calls within the following parameters:

• Target exercise price – 10 - 20% above prevailing market price (out of the money)

• Premium income - averaging 2% or higher of the acquisition price

• Frequency – 2x or more per calendar year, depending on market conditions

- Enhances returns through harvesting additional option premium by selling unleveraged naked puts

The Fortress Portfolio provides a sustainable

dividend flow, enhanced through

prudent & timely option trading

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Fortress Portfolio

March 2012

Fortress Portfolio Investment Process

- Stock selection:

• Screen for key group of 20-30 “Fortress” stocks

• Formulate an ideal target price for each position

• Exercise discipline and patience by waiting for the market to provide the optimum buying opportunity

- Options trading / risk management:

• Sell uncovered (naked) puts against target acquisition positions when market conditions dictate

• Sell covered calls against portfolio positions to generate additional premium income

• Employ stop losses (typically 20%) to provide downside market protection against severe downtown

• Trade volatility index (VIX) opportunistically to enhance protection under extreme conditions

- Sell discipline – positions to be held until:

Enhanced risk-adjusted returns rely upon a combination of

stock selection, option writing and rigid sell discipline

• We are called away

• We are stopped out

• We determine the position’s characteristics are no longer consistent with our “Fortress” stock

selection standards

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Fortress Portfolio

March 2012

Fortress Portfolio Risk Management / Controls

• Position size: Limited to 5% of portfolio

• Rebalancing: As and when appropriate relative to position size

• Stop Loss: 20% stop loss per position (non-market) based on acquisition price

(may be converted to trailing or tightened to <10% in extreme conditions)

• Review / replace: When characteristics are no longer consistent with “Fortress” standard

Management of risk is a core priority

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Fortress Portfolio Covered Call Writing Explained

The main option strategy used in our Fortress Portfolio is known as covered call writing. It is one of the best income

generating strategies available in the market today. By selling covered calls, you get other investors to pay you up

front for the right to buy your shares at a higher price. It is possible to generate income on each position as frequently

as 2-4 times per year, especially in volatile markets like we have now. It is considered to be a conservative, low-risk

strategy that can generate consistently high returns.

In a nutshell, the strategy involves buying a stock and selling someone else the right to buy it from you at a

higher price sometime in the future.

Example:

• You buy 1,000 shares of Intel for $25 / share ($25,000)

• You sell me an option to buy the stock from you for $28 on or before January 19, 2013

• I pay you $.50 (50 cents) per share for the right to buy from you until 1/19/13

• I am hoping the stock will increase above $28.50 between now and then (to cover my option price and provide a profit)

Scenario 1

• I am right and the stock increases to $29. I make $.50 per share ($29 - $28 + $.50 for the option)

• You make $3.50 per share ($28 - $25 + $.50) = 14% return in just over 6 months

• Including dividends received during that time ($.42) your total return is $3.92 per share = 15.7%

Scenario 2

• I am wrong and the stock does not reach or exceed $28 before 1/19/13. I lose the $.50 per share option price

• You keep your stock and the $.50 / share for the option sold = 2% return in just over 6 months (approx. 4% per year)

• Including dividends received during that time ($.42) your total return is $.92 per share = 3.68% (approx. 7.36% per year)

• You continue to own the stock and are able to sell another set of options to generate additional return

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In both scenarios, you…the option seller…make a positive return

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Fortress Portfolio Naked Put Writing Explained

A secondary strategy used in our Fortress Portfolio is known as naked put writing. Don’t worry, it is not as bad as it

sounds. In fact, it can be a very powerful strategy during volatile times like now. By selling naked puts, you get other

investors to pay you up front for the right to sell their shares to you at a certain price. It is considered to be an

effective, low-risk strategy for generating income from cash positions, without actually owning (that is, being “naked”)

the stock.

In a nutshell, the strategy involves collecting money now in return for giving someone the right to sell you

their stock at a certain price sometime in the future.

Example:

• I bought 1,000 shares of Intel for $20 / share ($20,000) during 2011. It is now trading at $25.

• I want to protect myself from the stock falling below my acquisition price of $20

• You sell me an option that entitles me to sell you my stock (put it to you) for $21 on or before January 19, 2013

• I pay you $.70 (70 cents) per share for that right as “insurance” to cover me in the event my stock falls in value below $21

• You are happy to own Intel at any price below $21

Scenario 1

• I am right and the stock decreases to $20. I paid you $.70 and sold to you for $21 so my gain is $.30 / share

• You are obligated to buy the shares from me for $21. Your cost, after allowing for the option premium, is $20.30

• You now own the stock, are entitled to the dividends and can write covered calls against your position

Scenario 2

• I am wrong and the stock does not fall in price before 1/19/13. I lose the $.70 per share option price that I paid you

• You had allocated $21,000 to buy the stock in the event that it was “put” to you, which it wasn’t

• You keep the $.70 / share for the option sold = 3.33% return in just over 6 months on your $21,000

• You are now able to use that money to sell another set of options to generate additional return

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In the worst case outcome, you own the stock at a price which is attractive to you. In

the best case, you made the equivalent of 6%+ per year on your committed cash.

Fortress Portfolio Call / Put Selling In the Market Craven

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Patience will usually pay off…especially in a secular bear market.


We look to sell puts (and buy target

stocks) here

We look to sell covered calls here

Fortress Portfolio

March 2012

Fortress Portfolio Call / Put Selling in Action

This slides illustrates an actual client example in which both calls and puts were sold during 2011.

* The above chart is intended to illustrate the trading methodology over a stated period. It is not intended to portray prospective returns. Past performance is never a guarantee of future performance and it should

not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities / transactions in the above illustration.

Symbol Company Name Target Alloc. Share No. # Put Price Open Mth. Prem. Close Prof. Prem. Open Mth. Prem. Close Prof. Prem. Totals

Fortress Stocks 9/12/2011 10/24/2011 11/25/2011 12/22/2011

INTC Intel 20.83 25,000 1200 12 20.00 1.30 Jan 1,560 0.33 0.97 1,164 0.32 Jan 384 0.04 0.3 336

MDT Medtronic 31.25 25,000 800 8 31.00 2.20 Jan 1,760 0.92 1.28 1,024 0.71 Jan 568 0.09 0.6 496

MSFT Microsoft 25.00 25,000 1000 10 25.00 2.30 Jan 2,300 0.65 1.65 1,650 1.29 Jan 1,290 0.35 0.9 940

PBCT Peoples United Bank 12.50 25,000 2000 20 12.00 1.66 Feb 3,320 0.90 0.76 1,520 0.90 Feb 1,800 0.30 0.6 1,200

PEP Pepsico Inc. 62.50 25,000 400 4 62.50 5.00 Jan 2,000 2.76 2.24 896 2.20 Jan 880 0.20 2 800

PFE Pfizer 17.86 25,000 1400 14 17.00 1.00 Jan 1,400 0.44 0.56 784 0.43 Jan 602 0.03 0.4 560

PG Proctor & Gamble 62.50 25,000 400 4 62.50 3.60 Jan 1,440 1.42 2.18 872 2.52 Jan 1,008 0.18 2.3 936

TOT Total 50.00 25,000 500 5 45.00 4.80 Jan 2,400 1.50 3.3 1,650 2.05 Jan 1,025 0.35 1.7 850

STO Statoil 20.00 25,000 1200 12 20.00 1.85 Jan 2,220 0.35 1.5 1,800 0.35 Jan 420 0.10 0.3 300

225,000 89 18,400 11,360 7,977 6,418

Income $18,400 $11,360 $7,977 $6,418 $17,778

Yield 8.18% 5.05% 3.55% 2.85% 7.90%

Symbol Company Name Buy

Price Alloc. Share No. # Call Price Open Mth. Prem. Close Prof. Prem.

3/25/2011 8/5/2011 12/19/2011

VXX 29.80 29,800 1000 10 32.00 5.65 Dec 5,650 Called 2,200 5,650

Income 254,800 $7,850 $25,628

Yield 26.34% 10.06%

Fortress Portfolio - Writing Covered Calls / Selling Naked Puts - Illustrative Study: 3/25/11 – 12/22/11*

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Fortress Portfolio

March 2012

Fortress Portfolio Performance

Symbol Company Name Div. Yield

Mkt.

Price at

5/17/10

Mkt.

Price at

4/27/12

Buy

Price

Date

Acquired Alloc.

Share

No.

Divs.

Paid /

Share

Total Div.

Income

Call

Prem. /

Sh.

Total Opt.

Prem.

Income

Total Div. +

Opt. Prem.

Income

Stock Value

Change

since acq.

% Inc. in

Stock

price

Total Port.

Growth (ex.

Divs/Opt. Prem.)

Total Port. Val

(inc.. Divs/Ex.

Prem.)

Total Port. Val

(inc.. Divs &

Prem.)

Fortress Stocks

ADP Automatic Data Processing $1.58 2.77 42.12 57 41.67 5/18/2010 250,000 6000 2.57 15,420 2.57 15,420 30,840 15.33 36.80% 342,000.00 357,420.00 372,840.00

CL Colgate Palmolive $2.32 2.35 83.81 98.55 62.50 250,000 4000 0 0 0 36.05 57.68% 250,000.00 250,000.00 250,000.00

HSY Hershey $1.52 2.25 48.05 67.48 50.00 5/17/2010 250,000 5000 2.40 12,000 2.40 12,000 24,000 17.48 34.96% 337,400.00 349,400.00 361,400.00

INTC Intel $0.84 2.96 22.02 28.41 20.83 5/20/2010 250,000 12000 1.31 15,720 1.31 15,720 31,440 7.58 36.37% 340,920.00 356,640.00 372,360.00

JNJ Johnson & Johnson $2.28 3.52 63.88 64.8 50.00 250,000 5000 0 0 0 14.80 29.60% 250,000.00 250,000.00 250,000.00

KFT Kraft $1.16 2.94 30.55 39.4 27.78 7/2/2010 250,000 9000 2.03 18,270 2.03 18,270 36,540 11.62 41.84% 354,600.00 372,870.00 391,140.00

KO Coca Cola $2.04 2.66 53.41 76.82 62.50 5/17/2010 250,000 4000 3.27 13,080 3.27 13,080 26,160 14.32 22.91% 307,280.00 320,360.00 333,440.00

LLY Eli Lilly $1.96 4.72 34.01 41.49 31.25 250,000 8000 0 0 0 0.00 0.00% 250,000.00 250,000.00 250,000.00

MCD McDonalds $2.80 2.86 70.14 97.88 62.50 250,000 4000 0 0 0 0.00 0.00% 250,000.00 250,000.00 250,000.00

MDT Medtronic $0.97 2.56 42.53 37.93 31.25 8/24/2010 250,000 8000 1.65 13,200 1.65 13,200 26,400 6.68 21.38% 303,440.00 316,640.00 329,840.00

MO Altria $1.64 5.08 21.70 32.3 20.83 5/20/2010 250,000 12000 2.75 33,000 2.75 33,000 66,000 11.47 55.04% 387,600.00 420,600.00 453,600.00

MSFT Microsoft $0.80 2.50 28.94 32 25.00 5/26/2010 250,000 10000 1.17 11,700 1.17 11,700 23,400 7.00 28.00% 320,000.00 331,700.00 343,400.00

PBCT Peoples United Bank $0.63 4.71 14.80 13.38 12.50 10/26/2010 250,000 20000 0.95 19,000 0.95 19,000 38,000 0.88 7.04% 267,600.00 286,600.00 305,600.00

PEP Pepsico Inc. $2.06 3.07 66.75 67.05 62.50 5/26/2010 250,000 4000 3.50 14,000 3.50 14,000 28,000 4.55 7.28% 268,200.00 282,200.00 296,200.00

PFE Pfizer $0.88 3.78 16.11 23.3 17.86 5/17/2010 250,000 14000 1.38 19,320 1.38 19,320 38,640 5.44 30.48% 326,200.00 345,520.00 364,840.00

PG Proctor & Gamble $2.10 3.21 63.38 65.5 62.50 5/20/2010 250,000 4000 4.11 16,440 4.11 16,440 32,880 3.00 4.80% 262,000.00 278,440.00 294,880.00

TOT Total $1.30 2.57 48.15 50.49 50.00 5/17/2010 250,000 5000 4.79 23,950 4.79 23,950 47,900 0.49 0.98% 252,450.00 276,400.00 300,350.00

VZ Verizon $2.00 4.97 28.66 40.23 31.25 5/17/2010 250,000 8000 3.93 31,440 3.93 31,440 62,880 8.98 28.74% 321,840.00 353,280.00 384,720.00

WMT Walmart $1.46 2.47 52.73 59 50.00 2/25/2010 250,000 5000 2.46 12,300 2.46 12,300 24,600 9.00 18.00% 295,000.00 307,300.00 319,600.00

XOM Exxon Mobil $1.88 2.18 63.27 86.19 62.50 5/17/2010 250,000 4000 3.20 12,800 3.20 12,800 25,600 23.69 37.90% 344,760.00 357,560.00 370,360.00

64.14 6/1/2010 5,000,000 281,640 281,640 563,280 6,031,290.00 6,312,930.00 6,594,570.00

Av. Yld. 3.21

Inc. / Yld. 5.63% 5.63% $563,280 20.63% 26.26% 31.89%

Fortress Portfolio - Illustrative Composite: Performance from 5/17/10 - 4/27/12 *

* The above chart is intended to illustrate the trading methodology over a stated period. It is not intended to portray prospective returns. Past performance is never a guarantee of future performance and it should not be assumed that

recommendations made in the future will be profitable or will equal the performance of the securities / transactions in the above illustration.

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• Each portfolio is customized as to timing / positioning so performance will vary from client to client

• Target 5%+ above 10 year Treasury (approximately 8-10% net of fees)

• Actual cash on cash returns per position can be significantly higher

Fortress Portfolio

March 2012

Fortress Portfolio Sample Fortress Companies

- Typical Fortress Stock Characteristics -

Automatic Data Processing, Inc. (ADP)

• Technology-based outsourcing solutions to employers, vehicle retailers and manufacturers worldwide

• Record of consecutively increasing dividends for 36 years

• Increased dividend payout 14.5% annually over the past 10 years

Johnson & Johnson (JNJ)

• Research, development, manufacture and sale of health care products worldwide

• Record of consecutively increasing dividends for 49 years

• Increased dividend payout 13% annually over the past 10 years

Microsoft Corporation (MSFT)

• Develops, manufactures, licenses and supports software products and services for computing

devices worldwide

• Record of consecutively increasing dividends for past 6 years

• Increased dividend payout 11.4% annually over the past 5 years

Exxon Mobil Corporation (XOM)

• Engages in exploration, production, sale and transportation of crude oil and natural gas; manufacture,

sale and transportation of petroleum products

• Record of consecutively increasing dividends for the past 29 years

• Increased dividend payout 7.1% annually for the past 10 years

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Fortress Portfolio Client Profile Craven

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• Average Account Size: $500,000 - $2,000,000

• Optimal Account Size: $5,000,000

• Client Profile: - Risk averse but desiring additional return beyond Treasuries / Munis.

- Uncertain about current economic environment (deflation vs. inflation)

- Worried about current political policies and directions

- Wary of “Wall Street” banks and wire-houses

- Seeking guidance and direction but agreeable to discretionary manager

- Prefer to own individual stocks as opposed to funds / structured products

- Realistic in their expectations of return

- May be financially sophisticated or unsophisticated but open to learning

• Client Profile Summary: Outlines the type of questions we typically ask of new clients

Clients typically exhibit some or all of the following characteristics:


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Fortress Portfolio Client Profile Craven

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The better the questions, the more appropriate the solutions!


Fortress Portfolio Next Steps Craven

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1. Personal / phone conference: During which the concept and practice is explained. If done via phone conference, it can be

accompanied by a simultaneous slide or web presentation and / or access to our website.

Personal conferences are either held in our offices or offsite at the client’s convenience.

2. Paperwork: The necessary data is collected from the clients who also provide current account statements

(if they are moving accounts from a broker / advisor). The relevant account opening account

opening paperwork is prepared / submitted (along with firm ADVs) to the client for review

and execution.

3. Asset transfer Initiated: Signed paperwork is received, reviewed internally and then submitted to the qualified

custodian (typically Charles Schwab & Co.) for their review. Upon acceptance, Schwab will

initiate an internal request to the existing broker / agent to transfer the account assets to the

new client account. This is usually a painless process which requires no client involvement.

4. Account opened: Once the account paperwork is reviewed and approved by the custodian, the client account

is opened and an account number issued.

5. Asset transfer complete: Contemporaneously with the account opening process, the asset transfer request form is

submitted to the current custodian (typically via the ACAT system). Depending upon the

speed and diligence of the transferring custodian, the assets are typically delivered within 5-

10 business days.

6. Management commences: Once the account is opened and the assets transfer is complete (or wire received), the client

is informed and formal investment management commences. Management fees are 1% of

assets under management which are typically paid monthly in advance via direct debit from

the account.

7. Online access: Clients have complete access to all account activity via their online Schwab link. They can

see all transactions in real time should they wish to do so. In addition, they can follow our

current (sometimes irreverent) thinking on our website blog titled “It’s 3 a.m. and…”.

Typical new client “on-boarding” experience…


Fortress Portfolio Client Asset Security Craven

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At Craven Capital we are always concerned about counterparty risk at every level:

Adviser

Custodian

Company

Exchange

We urge our clients to ask questions of us and of all their advisers. We live in challenging times and we

believe that clients should challenge those who provide services to them to ensure that their interests

and beliefs are aligned and that their thinking is current and coherent…so that they can respond to the

constant changes that we are all facing.

We also believe that clients should be consciously concerned about institutional risk and its potential impact

upon the assets within the custody of those institutions. In this regard, we try to monitor institutions with

whom our clients have custodial relationships to make sure that, to the fullest extent possible, their

assets are where they should be…and not “hypothecated” in support of the custodian’s trading desk or

their favorite prime brokerage clients. While we cannot control the markets, we can at least try to be certain that our client assets are as secure and protected as they can be.

Finally…a word about the security of client assets….


Fortress Portfolio Contact Details Craven

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Questions or account inquiries?

Please contact:

Brian Macnish

Managing Principal

Craven Capital, LLC

11 Hanover Square

6th Floor

New York NY 10005

Ph. 212-797-0217

Email: [email protected]


introduction to craven capital llc

Economy & Finance

profit financial crisis

profit price earnings

profit short term technicals

global banking crisis

mf global

global marketplace

ongoing sovereign debt

security selection