JOHN W. HENRY & CO./MILLBURN L.P.
(a Delaware Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial position of John W. Henry & Co./Millburn L.P. (the “Partnership”) as of June 30, 2006, and the results of its operations for the six months ended June 30, 2006 and 2005. The operating results for the interim periods may not be indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2005.
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. INVESTMENTS
As of June 30, 2006, the Partnership had investments in ML JWH Financials and Metals Portfolio LLC (“JWH LLC”) and Millburn Global LLC (“Millburn LLC”) (“Trading LLCs”, collectively) of $11,033,944 and $11,033,945, respectively. At December 31, 2005, the Partnership had investments in JWH LLC and Millburn LLC of $11,365,776 and $11,365,775, respectively. The majority of revenue and expenses of the Partnership have been derived from its investments in the Trading LLCs.
Condensed statements of financial condition and statements of operations for JWH LLC and Millburn LLC are set forth as follows:
| | June 30, 2006 | | December 31, 2005 | |
| | (unaudited) | | | |
| | JWH | | Millburn | | JWH | | Millburn | |
| | LLC | | LLC | | LLC | | LLC | |
| | | | | | | | | |
Assets | | $ | 11,444,033 | | $ | 11,158,078 | | $ | 11,871,748 | | $ | 11,448,400 | |
| | | | | | | | | |
Liabilities | | $ | 410,089 | | $ | 124,133 | | $ | 505,972 | | $ | 82,625 | |
Members’ Capital | | 11,033,944 | | 11,033,945 | | 11,365,776 | | 11,365,775 | |
| | | | | | | | | |
Total | | $ | 11,444,033 | | $ | 11,158,078 | | $ | 11,871,748 | | $ | 11,448,400 | |
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| | JWH LLC | |
| | For the three
months ended
June 30, 2006 | | For the three
months ended
June 30, 2005 | | For the six
months ended
June 30, 2006 | | For the six
months ended
June 30, 2005 | |
| | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | |
Trading Profits (Losses) and Interest Income | | $ | 365,634 | | $ | 2,054,595 | | $ | 462,233 | | $ | (540,940 | ) |
| | | | | | | | | |
Expenses | | 273,674 | | 271,224 | | 510,464 | | 527,013 | |
| | | | | | | | | |
Net Income (Loss) | | $ | 91,960 | | $ | 1,783,371 | | $ | (48,231 | ) | $ | (1,067,953 | ) |
| | Millburn LLC | |
| | For the three
months ended
June 30, 2006 | | For the three
months ended
June 30, 2005 | | For the six
months ended
June 30, 2006 | | For the six
months ended
June 30, 2005 | |
| | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | |
Trading Profits (Losses) and Interest Income | | $ | (289,031 | ) | $ | 686,051 | | $ | 890,819 | | $ | (25,937 | ) |
| | | | | | | | | |
Expenses | | 137,071 | | 253,152 | | 572,099 | | 540,030 | |
| | | | | | | | | |
Net Income (Loss) | | $ | (426,102 | ) | $ | 432,899 | | $ | 318,720 | | $ | (565,967 | ) |
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership invests indirectly in derivative instruments by investing in the Trading LLCs but does not itself hold any derivative instrument positions. The nature of this Partnership has certain risks, which can not all be presented on the financial statements. The following summarizes some of those risks.
Market Risk
Derivative instruments involve varying degrees of off-balance sheet market risk. Changes in the level or volatility of interest rates, foreign currency exchange rates or the market values of the financial instruments or commodities underlying such derivative instruments frequently result in changes in the net unrealized profit (loss) as reflected in the respective Statements of Financial Condition of the Trading LLCs. The Partnership’s exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Partnership, through the Trading LLCs, as well as the volatility and liquidity of such markets in which such derivative instruments are traded.
The General Partner, Merrill Lynch Alternative Investments LLC (“MLAI”), has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of the Advisors selected from time to time for the Partnership, calculating the Net Asset Value of the Advisors’ respective Trading LLC accounts as of the close of business on each day and reviewing outstanding positions for over-concentrations both on an advisor-by-advisor and on an overall Partnership basis. While MLAI does not itself intervene in the markets to hedge or diversify the Partnership’s market
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exposure, MLAI may urge Advisors to reallocate positions or itself reallocate Partnership assets among Advisors (although typically only as of the end of a month) in an attempt to avoid over-concentration. However, such interventions are unusual. Except in cases in which it appears that an Advisor has begun to deviate from past practice and trading policies or to be trading erratically, MLAI’s basic risk control procedures consist simply of the ongoing process of advisor monitoring and selection, with the market risk controls being applied by the Advisors themselves.
Credit Risk
The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the-counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may also require margin in the over-the-counter markets.
The Partnership, through the Trading LLCs, has credit risk with respect to non-performance of its counterparties and brokers, but attempts to mitigate this risk by dealing almost exclusively with Merrill Lynch & Co., Inc. (“Merrill Lynch”) entities as clearing brokers.
The Partnership, through the Trading LLCs, in its normal course of business, enters into various contracts with Merrill Lynch Pierce Fenner & Smith Inc. (“MLPF&S”) acting as its commodity broker. Pursuant to the brokerage agreement with MLPF&S (which includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLPF&S, these receivables and payables are offset and reported as a net receivable or payable and included in the Trading LLC’s Statements of Financial Condition under equity in commodity futures trading accounts.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
MONTH-END NET ASSET VALUE PER SERIES A UNIT
| | Jan. | | Feb. | | Mar. | | Apr. | | May | | Jun. | |
2005 | | $ | 358.46 | | $ | 348.10 | | $ | 331.64 | | $ | 320.87 | | $ | 337.99 | | $ | 363.01 | |
2006 | | $ | 362.06 | | $ | 345.38 | | $ | 366.89 | | $ | 397.66 | | $ | 389.16 | | $ | 360.54 | |
MONTH-END NET ASSET VALUE PER SERIES B UNIT
| | Jan. | | Feb. | | Mar. | | Apr. | | May | | Jun. | |
2005 | | $ | 290.90 | | $ | 282.50 | | $ | 269.14 | | $ | 260.40 | | $ | 274.30 | | $ | 294.60 | |
2006 | | $ | 293.78 | | $ | 280.25 | | $ | 297.70 | | $ | 322.67 | | $ | 315.77 | | $ | 292.55 | |
MONTH-END NET ASSET VALUE PER SERIES C UNIT
| | Jan. | | Feb. | | Mar. | | Apr. | | May | | Jun. | |
2005 | | $ | 226.75 | | $ | 220.20 | | $ | 209.79 | | $ | 202.98 | | $ | 213.81 | | $ | 229.63 | |
2006 | | $ | 229.00 | | $ | 218.45 | | $ | 232.05 | | $ | 251.52 | | $ | 246.14 | | $ | 228.04 | |
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Performance Summary
All of the Partnership’s assets are invested in Trading LLCs. The Partnership receives trading profits (losses) as an investor in the Trading LLCs. The following commentary describes the trading results of Trading LLCs.
January 1, 2006 to June 30, 2006
January 1, 2006 to March 31, 2006
The Partnership’s overall trading was profitable for the quarter. The Partnership experienced gains in three of the four sectors, with the largest gain in the stock indices sector.
The stock indices sector was the most profitable for the Partnership. At the beginning of the quarter, the Partnership continued to hold long positions in all 15 traded markets which benefited from strong worldwide equity markets. The Nikkei 225 (up 3.3%) was the most profitable stock index traded as it rose to an over five year high after sustaining high intra-month volatility. In the middle of the quarter, most indices lost profits but rebounded by the end of the quarter. Successful trading in the major U.S. indices contributed positively, with the S&P 500 and Dow Jones Industrial Average, at five year highs and the Russell 2000 at all-time highs.
The metals sector posted a gain as the Partnership was well positioned to capture the sector’s sustained upward trend. Precious metals, gold and silver bolstered the Partnership’s returns as investors sought the safety of these markets when tensions in Iran increased over its nuclear program. Long positions in the base metals copper, zinc and aluminum added to profitability. Industrial metals slumped mid-quarter. The metals sector bounced back at the end of the quarter due to a strong performance from silver and copper. Silver, for May delivery, closed the month at $11.66, its highest level since September 1983. An 18.52% gain for silver was driven largely by the anticipation of the launching of a silver exchange traded fund by Barclays Capital. Copper rallied to an all time high with a 13.84% gain at the end of the quarter. The metal’s rally has been fueled by speculation that increased worldwide economic growth (particularly in China) will reduce inventories and potentially trigger supply shortfalls.
The interest rate sector posted a profit for the Partnership. The beginning of the quarter was difficult due to losses made in long positions in ten year notes in the Japanese, German and U.S. markets. However, gains were recaptured mid-quarter due to short positions in the Eurodollar and Euribor contracts. Short positions in the U.S. Treasury two-year and ten-year notes contributed with modest profits as traders stepped up bets that the U.S. Federal Reserve will raise interest rates at least two more times by June. Gains continued through the end of the quarter as the Partnership had short positions in nearly every instrument it traded in the sector. The majority of the gains were made through short positions in the U.S. and German bonds across the yield curve. Yields on the U.S. Treasury ten-year note rose to the highest level since May 2004 after the U.S. Federal Reserve lifted its target rate for the 15th consecutive time and hinted there may be more increases.
The currency sector posted losses for the Partnership. Losses were particularly attributed to short positions in the Swiss franc and Japanese yen. Short position in the Japanese yen was the worst performing position for the Partnership after the Bank of Japan Governor, Toshihiko Fukui said a seven-year bout of deflation has almost ended and the central bank will gradually raise interest rates from zero percent, resulting in the Japanese yen rising over 2.50%. The Euro proved to be difficult as the market moved against the Partnership’s long position. The Canadian dollar and Mexican peso were especially challenging as both currencies suffered sharp reversals versus the U.S. dollar. Traders drove the Canadian dollar lower on concerns that Canada’s interest rate disadvantage with U.S. will widen. In Mexico, the Bank of Mexico cut rates, further weakening the currency versus the U.S. dollar.
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April 1, 2006 to June 30, 2006
The Partnership’s overall trading was not profitable for the quarter. The Partnership posted gains in the metals and interest rate sectors with the currency and stock indices sectors posting losses.
The metals sector posted the highest gains for the Partnership as many markets raced to all time multi-decade highs. Returns were buoyed by the gold, copper and aluminum markets. Copper and aluminum were driven by global construction demand particularly in China as well as certain mining and supply disruptions. Gold moved higher as investors flocked to its safety in light of increased U.S. inflation and conflict in Iran over its nuclear capabilities. Long positions led the way mid-quarter and copper raced to all time highs on May 11th then fell throughout the remainder of the month as traders grew concerned that the worldwide economy may slow demand for the industrial metal. Aluminum and gold detracted from performance as the strong upward trend in most metals reversed mid-month. The quarter ended with poor returns from copper and gold. Copper’s losses stemmed from a -16.8% four day mid month reversal which caused the Partnership to cut all copper positions. Gold was down as a strengthening U.S. dollar eroded the precious metal’s appeal as an alternative investment.
The interest rate sector posted a profit for the Partnership. Gains were attributed to short positions in 16 of the 18 instruments traded. Top performers were the German 10-year note, U.K. Long Gilt and the U.S. 30-year Treasury bond as all three markets fell for the fourth consecutive month. Signs of growth and indications that the central banks in all three markets will raise rates spurred yields higher and prices lower. Difficult trading mid-quarter was due to short positions in all 18 instruments traded, especially in the German and Japanese 10-year notes. Both the German and Japanese government bonds posted their first monthly gain of 2006 when investors flocked to the relative safety of government bonds as commodities and stock indices struggled. The quarter ended with negative results holding short positions in 15 of 18 instruments traded. The U.S. 10-year Treasury note posted its sixth consecutive monthly decline and the downward trend persisted.
The currency sector posted losses for the Partnership. The general trend in the market was the weakening U.S. dollar on concerns over inflation and the current account deficit. Profits were posted in long positions in the Euro vs. the U.S. dollar and the British pound vs. the U.S. dollar. A trade that was short the Japanese yen against the U.S. dollar was a major detractor. April saw the Japanese yen strengthen 3.4% vs. the U.S. dollar, the most since October 2004. Currencies posted a limited gain for the Partnership mid-quarter. Long positions in the British Pound and Euro were the hardest hit by quarter’s-end. The British pound dropped -1.14% versus the U.S. dollar on speculation that the U.S. Federal Reserve would continue to raise rates faster than the Bank of England. Although the Euro was down only -0.14% against the U.S. dollar, the Partnership posted losses when the Euro plunged more than -3.00% over the course of seven days. After the sharp drop, the Partnership’s systems cut nearly all exposure causing the Partnership to miss the 1.80 % rally on the final two days of the quarter.
Trading in stock indices were the least profitable for the Partnership. Several markets in Asia recorded gains, such as Taiwan’s Taiex and Hong Kong’s Han Seng Index. However, the negative performance can be attributed to poor trading in the Dow Jones EuroStoxx Index. A gradual increase in long exposure in the Dow Jones EuroStoxx profited as the index’s rallied but gave back the profits and more when the Euro Stoxx reversed direction at the beginning of the quarter. Remarkably, 19 out of 20 stock indices traded suffered losses mid-quarter. Only a short position in the NASDAQ 100 produced a small gain. Across the board, stock indices fell on fears that liquidity will be pulled from the global economy as American, European, Japanese and Emerging Market Central Banks all appeared poised to hike rates further. Only the Hang Seng and NASDAQ 100 were able to post marginally positive returns at quarter’s end, resulting in just two positive markets out of 19 traded. Stock indices world-wide were down only to rally at the end of the quarter when the U.S. Federal Reserve hinted it may soon end its run of rate increases.
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January 1, 2005 to June 30, 2005
January 1, 2005 to March 31, 2005
The Partnership was unprofitable for the first quarter of 2005. In the beginning of the quarter, many trend-following programs experienced difficulty, as larger trends which started in the fourth quarter reversed during the quarter. Global equity markets sold-off after rallying in December. The U.S. dollar began strengthening and metal markets also sold-off. Throughout the remainder of the quarter, many longer-term trend-following programs experienced difficulty, as markets remained quite range bound and choppy.
The currency sector began the first quarter with a loss, as the U.S. dollar strengthened against various other currencies. Gains achieved in exposure to the Japanese yen were outweighed by losses in the Euro, Canadian dollar and Australian dollar. At mid-quarter, gains generated in exposure to the Australian dollar and Polish zloty were outweighed by losses in the Euro, Japanese yen and Swiss franc. At the end of the quarter, gains generated in exposure to the Japanese yen and Swiss franc were outweighed by losses in the Polish zloty, Brazilian real, and Australian dollar.
The metals sector also posted losses, as markets sold off on slower growth estimates in 2005. Both exposure to industrial and precious metals detracted from performance. The sector gained during the quarter as markets rallied in both the precious and industrial sub-sectors, particularly gold, copper and aluminum. However, the sector ended the quarter with a loss as gains in non-precious metals such as aluminum and copper were offset by losses in silver and gold contracts.
A loss was posted for the stock indices sector, as markets reversed and sold off. Major losses were from exposure to the United States and Asia. During the quarter, a gain was posted, as exposure to Asian equities and selected U.S. equities posted gains. A loss was realized at the end of the quarter as exposure to U.S. equities and Asian equities contributed to the bulk of losses.
The interest rate sector was the poorest performing sector for the first quarter. The beginning of the quarter had gains generated in exposure to Japanese, U.S. and European fixed income. Toward the end of the quarter, gains were generated at the front end of the U.S. curve, while losses were experienced in exposure to European and Japanese fixed income. Losses were mainly from exposure to German and Japanese fixed income instruments. Profits were made from short exposure to Eurodollar and U.S. Treasury note contracts.
April 1, 2005 to June 30, 2005
Gains were posted in the interest rate and currency sectors, while losses were incurred trading in stock indices and the metals sector. There were net trading profits overall.
Trading in interest rates provided the greatest amount of gains for the Partnership, posting gains throughout the quarter. A sell off of stocks and an increase in bond investments during the quarter sparked a rally in interest rates. Long exposure to European bonds and a rally in the bond market attributed to profits.
The currency sector posted a gain for the quarter, despite losses incurred early in the quarter. Losses early in the quarter were posted as currency trading continued to be challenging and the U.S. dollar remained in a tight range. The U.S. dollar strengthened based on the widening interest rate differential versus many developed countries. Exposure to the Euro, Japanese yen and Swiss franc were the main drivers of performance.
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Trading in stock indices was unprofitable for the Partnership, despite profits posted the latter half of the quarter. Weak U.S. economic data and disappointing earnings reports sent global equities lower early in the quarter. Long exposure to European and Asian stock indices generated gains which outweighed losses from exposure to the U.S. markets.
The metals sector posted the largest losses for the Partnership during the quarter. Base metals took a step back causing losses in aluminum and copper. Gold and silver prices showed volatile price behavior which also generated losses. Slight gains posted mid-quarter due to exposure to precious metals, but weren’t enough to outweigh the losses for the quarter. The metals sector continued its decline as gold sold off due to a strengthening U.S. dollar.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 4. Controls and Procedures
MLAI, the General Partner of John W. Henry & Co./Millburn L.P., with the participation of the General Partner’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership as of the end of the period of this quarterly report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Partnership’s internal controls or in other factors that could significantly affect these controls subsequent to the date of this evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Partnership nor MLAI has ever been the subject of any material litigation. Merrill Lynch is the 100% indirect owner of MLAI, MLPF&S and all other Merrill Lynch entities involved in the operation of the Partnership. Merrill Lynch as well as certain of its subsidiaries and affiliates have been named as defendants in civil actions, arbitration proceedings and claims arising out of their respective business activities. Although the ultimate outcome of these actions cannot be predicted at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management that the result of these matters will not be materially adverse to the business operations or the financial condition of MLAI or the Partnership.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
None.
Item 5(a). Recent Sale of Unregistered Securities: Uses of Proceeds from Registered Securities
Not applicable
Item 6. Exhibits
The following exhibits are incorporated by reference or are filed herewith to this Quarterly Report on Form 10-Q:
31.01 and
31.02 Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 31.01
and 31.02: Are filed herewith.
32.01 and
32.02 Section 1350 Certifications
Exhibit 32.01
and 32.02: Are filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| JOHN W. HENRY & CO./MILLBURN L.P. |
| | By: MERRILL LYNCH ALTERNATIVE |
| | INVESTMENTS LLC |
| | General Partner |
| |
| |
Date: August 14, 2006 | | By | /s/ BENJAMIN WESTON | |
| | | Benjamin Weston |
| | | Chief Executive Officer and President |
| | | (Principal Executive Officer) |
| | |
| | |
Date: August 14, 2006 | | By | /s/ MICHAEL L. PUNGELLO | |
| | | Michael L. Pungello |
| | | Vice President and Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
| | | | | | | | |
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