Palos Weekly Commentary

							                    Issue 3




January 21, 2011

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 Portfolio Management

Hubert Marleau
Co-Founder
                                                                     Palos Weekly Commentary
Charles Marleau, CIM
President & Senior Portfolio Manager
                                                                      Palos Income Fund                                retailer warned that its holiday sales were below
                                                                     By Charles Marleau, Tommy Nguyen & Yarith Chhiv    expectations. Our view is the problem can be
Tommy Nguyen, CIM
Senior Portfolio Manager
                                                                                                                        fixed and the bonds will recover, although we are
                                                                     Last week, our traders participated in one event- monitoring the situation closely.
Yarith Chhiv, ENG, FCSI, FRM, CIM, DMS                               driven idea and two risk arbitrage trade ideas.
Portfolio Manager | Risk Manager
                                                                     Palos traders bought-long Wendy's/Arby's group, Our position in Equal Energy’s 8% busted
Stuart Dunn                                                          Inc. On January 20th, WEN reported that it convert due 2011 is being taken out at a premium
Senior Portfolio Manager
                                                                     would spin-off Arby's. Based on our analysis, of 102 ½ with the proceeds of its new issue. We
Adam Smalley, MBA, CPA                                               WEN is valued at 7.1x (EV/EBITDA) versus its bought that convert several months ago between
Sub-Advisor
                                                                     peers group at 8.9x. Past deals in the sector have at 98 ½ anticipating the premium takeout. We
Karim Babay, MBA                                                     been done at 1.1x revenue or 8.6x EV/EBITDA. expect Equal will redeem its 8 ¼% busted
Sub-Advisor
                                                                     Applying the consensus estimate for Arby's convert due 2012 later this year, which we also
David Bilodeau, DMS, FCSI                                            EBITDA of $55m and an 8.0x take-out multiple own.
Sub-Advisor
                                                                     creates a potential acquisition price of
Denis Paquette, FRM, CAIA, DMS                                       approximately $440 million. The analysis  Palos Rendez-Vous Fund
Sub-Advisor
                                                                     translates into a potential value of $5.45 per By Joel Raby
Joel Raby, CFA, MBA                                                  share for WEN. On Friday, WEN closed at
Sub-Advisor
                                                                     $4.78. Furthermore, our traders participated in News on the economic front has been
                                                                     two risk arbitrage opportunities: Novell Inc and encouraging. Recent data on factory orders, job
 Contacts                                                           Pediment Resource. Both situations have very creation and a host of other indicators suggest a
Brendan Dunn                                                         appealing gross and annualized returns.            slow and steady recovery. Like Goldilocks’
Vice President, Business Development                                                                                    porridge…not too hot, not too cold. If anything,
Robert Sands                                                          Palos Credit Fund                                we may be gaining some traction. Whatever
Chief Compliance Officer                                             By Adam Smalley & Karim Babay                      happened to the double-dip recession?
Margaret Dunphy                                                                                                         Meanwhile, corporate earnings, the key
Vice President, Investor Relations                                   The high yield market continued its melt up last component of intrinsic value, continue their
Sarah Tschudin
                                                                     week despite a volatile equity market. New upward trend, posting more positive surprises
Assistant Trader                                                     issues were the focus with secondary trading than disappointments.
Palos Management Inc.
                                                                     very light. The fund participated selectively in
1 Place Ville Marie, Suite 1812                                      these new issues including Vanguard Health 7 Putting a price on those earnings requires fuel,
Montreal (QC) H3B 4A9, Canada
T. +1 (514) 397-0188 F. +1 (514) 397-0199
                                                                     ¾% Senior Notes ’19, which traded up on the namely liquidity. And liquidity is abundant.
www.palosmanagement.com                                              break. The fund took a mark-to-market loss on a Retail investors shunned equities these past
                                                                     bond position of a specialty retailer after that several years, purchasing short-term paper and
 Media Contact

Alexandra Kaneb
                                                                      Chart 2: Palos Fund
Director, Business Development                                         Our Funds                                           FundServ    NAVPS      Weekly Returns   YTD Returns
akaneb@palosmanagement.com                                             Palos Income Fund L.P.                               PAL 100   CA $10.27      -0.85%          0.17%
T. +1 (514) 397-0188 ext: 289
                                                                       Palos Merchant Bank L.P. (Nov 30, 2010)              PAL 500   CA $11.60         ---          0.00%
Disclaimer: No part of this publication or its contents may be         Palos Majestic Commodity Fund L.P. (Jan 21, 2011)    PAL 600   CA $12.74      -1.43%          -0.31%
copied, downloaded, stored in a retrieval system, further
transmitted, or otherwise reproduced, disseminated, transferred,
                                                                       Palos Credit Fund L.P.                               PAL 900   CA $10.42      -1.19%          1.26%
in any form or by any means. This publication is proprietary to        Palos Rendez-Vous Fund - RRSP                        PAL 201   CA $8.01        0.08%          1.16%
Palos Management Inc. The information and opinions contained
herein have been compiled or arrived at from sources believed          MVest Opportunity Fund, LLC                                       ---            ---             ---
reliable but no representation or warranty, express or implied, is
made as to their accuracy or completeness. The information             Palos International Equity Income Fund PLC - CAD               CA $6.62        0.50%          0.73%
contained herein is not necessarily complete and its accuracy is
not guaranteed by Palos Management Inc. If you have received
                                                                       Palos International Equity Income Fund PLC - EUR               EUR 8.08       -2.97%          0.69%
this communication in error, please notify us immediately by           Palos International Equity Income Fund PLC - USD               US $8.19        0.46%          1.49%
electronic mail or telephone. The overall views expressed in this
report are prepared by Palos Management Inc.


PALOS MANAGEMENT INC | WEEKLY COMMENTARY
                    Issue 3

                                                                     bond funds in record numbers. Those flows have
                                                                     begun to reverse field. Short-term real interest
                                                                     rates (after inflation) are negative. Holding cash
                                                                     has become expensive. The pickup in economic
                                                                     activity will inevitably lead to rising borrowing
January 21, 2011                                                     needs. Commodity prices are firm, with a
To subscribe to our Newsletters                                      moderate pickup in inflation still ahead. The end
www.palosmanagement.com/register                                     of the thirty year bull market in bonds is on the
                                                                     horizon.
 Portfolio Management
                                                                     We also see a stealth-like pressure building on
Hubert Marleau
Co-Founder                                                           institutional money to re-examine its foray into
                                                                     alternative investments. The widely-acclaimed
Charles Marleau, CIM
President & Senior Portfolio Manager                                 Yale endowment model, which tacked alternative
                                                                     investments such as commodities, hedge funds,
Tommy Nguyen, CIM
Senior Portfolio Manager                                             real estate and private equity strategies alongside,
                                                                     and in place of, public equities has not lived up
Yarith Chhiv, ENG, FCSI, FRM, CIM, DMS
Portfolio Manager | Risk Manager                                     to promise. Not the fault of the practitioners at
                                                                     Yale, who always insisted that their approach
Stuart Dunn
Senior Portfolio Manager                                             was as much art as it was science,
                                                                     notwithstanding        consultants’       presenting
Adam Smalley, MBA, CPA
Sub-Advisor                                                          otherwise. We see a multi-year re-direction into
                                                                     the stock market as a distinct possibility.
Karim Babay, MBA
Sub-Advisor
                                                                      Risks, Hedges and Opportunities
David Bilodeau, DMS, FCSI
Sub-Advisor
                                                                     An article recommended by Hubert Marleau

Denis Paquette, FRM, CAIA, DMS
Sub-Advisor
                                                                     Bank of Canada
                                                                     Monetary Policy Report Summary
Joel Raby, CFA, MBA
Sub-Advisor
                                                                     January 2011
                                                                     See next page.
 Contacts

Brendan Dunn
Vice President, Business Development

Robert Sands
Chief Compliance Officer

Margaret Dunphy
Vice President, Investor Relations

Sarah Tschudin
Assistant Trader

Palos Management Inc.
1 Place Ville Marie, Suite 1812
Montreal (QC) H3B 4A9, Canada
T. +1 (514) 397-0188 F. +1 (514) 397-0199
www.palosmanagement.com
                                                                        Chart 1: Market Data
                                                                         The Markets                                   Value       5D Chg    YTD Chg
 Media Contact
                                                                         S&P 500 Total Return Index                  1,283.35      -0.70%      2.10%
Alexandra Kaneb                                                          S&P TSX Composite Total Return Index        13,258.57     -1.50%     -1.30%
Director, Business Development                                           S&P TSX Venture Total Return Index          2,265.58      -0.20%     -1.00%
akaneb@palosmanagement.com
T. +1 (514) 397-0188 ext: 289                                            MSCI All Countries World TR Index (CAD)     3,060.61      -1.00%      1.70%
                                                                         US Government 10-Year                         3.40%        0.08%      0.11%
Disclaimer: No part of this publication or its contents may be           Canadian Government 10-Year                   3.33%        0.06%      0.21%
copied, downloaded, stored in a retrieval system, further
transmitted, or otherwise reproduced, disseminated, transferred,         Crude Oil Spot                             US $89.15       -$2.39     -$2.23
in any form or by any means. This publication is proprietary to
Palos Management Inc. The information and opinions contained
                                                                         Gold Spot                                 US $1,341.00    -$19.50    -$80.40
herein have been compiled or arrived at from sources believed            US Gov't10-Year/Moody BAA Corp. Spread       277 bps        0 bps      8 bps
reliable but no representation or warranty, express or implied, is
made as to their accuracy or completeness. The information               USD/CAD Exchange Rate Spot                 US $1.0069    -$0.0030   $0.0049
contained herein is not necessarily complete and its accuracy is
not guaranteed by Palos Management Inc. If you have received
                                                                         JPMorgan US High Yield Index*                365.12        0.10%      1.60%
this communication in error, please notify us immediately by
electronic mail or telephone. The overall views expressed in this        Subject to one-day lag.
report are prepared by Palos Management Inc.


PALOS MANAGEMENT INC | WEEKLY COMMENTARY