JORDX Quarterly Newsletter

The Jordan Opportunity Fund is founded on the premise that making money in the market requires intellectual flexibility expressed in ways that defy style-boxes. We believe superior long-term investing is about judgement, not methodology.

• 1st Quarter 2012: 1st Quarter Investment Outlook

  • First Quarter 2012 Investment Outlook

    What an extraordinary year for equities was 2011! The S&P 500 Index closed at 1257.60, exactly two tenths of a point lower than its close on December 31st, 2010, one year ago. For this flat performance, investors were subjected to a dramatic journey: equities began the year rising 9% to their highs in May, capping a 100% gain in the two years since the March 2009 low, only to confront severe turbulence in the late summer, brought on by the U.S. debt ceiling crisis and the European sovereign debt crisis. Panic gripped investors in August and September, causing U.S. equities to drop over 20% by the beginning of October. The strong fourth quarter rally brought the market right back where it started the year! A long distance traveled for no mileage gained.

    The negative risks for equities in 2012 are amply chronicled by the media and investment strategists. The European sovereign debt crisis is again at the top of the list of worries, and with the expectation of a U.S. deficit and debt crisis recurring soon, along with the potential prospects of a hard economic landing in China and other emerging economies. A resulting contraction in record high U.S. corporate profit margins is widely expected. Yet we believe the potential for strong U.S. equity returns in 2012 is meaningful and that the risk/reward opportunity for investors is very positive. While the range of outcomes for the next twelve months is unusually wide, particularly due to the influence of policy and political considerations, historical precedents suggest that 2012 has the potential to reward investors.

    Our accounts performed poorly this year, along with most categories of active investors. Our stocks lost too much ground early in the year and failed to catch up, as investor favor veered sharply away from earnings momentum and growth stocks to slow growing high yielding equities and bonds, in the expectation that the economy would stall in the months ahead. As the New Year unfolds, we believe that growth stocks will return to favor, and that cyclical forces gripping investors with persistent fears will abate.

    The Economy and Interest Rates

    While Japan and Europe certainly had difficult economies in 2011, and the emerging markets slowed materially, global growth was reasonable at about 4%. The U.S. experienced moderate growth, but ended the year on a high note of probably greater than 3% growth in the fourth quarter. Because of global de-leveraging, the potential to turbo-charge growth with high credit growth is absent. But with most populations (outside of Europe and Japan) still growing and productivity improvements still strong, the natural bias for growth still exists, especially in the U.S.

    The hyper growth of emerging markets in the last ten years has been extraordinary, and among its many manifestations was the secular boom in commodity prices, as billions of new consumers entered the global economy. The sheer magnitude of Chinese consumption of industrial commodities has been enormous and created many intermediate distortions in the supply/demand dynamics of many products.

    In the last twelve months, inflation in emerging economies has sharply accelerated, which, in turn, provoked monetary tightening conditions in these markets. Interest rates rose and credit availability declined, resulting in a poor investor climate despite strong growth. The Chinese, Indian and Brazilian equity markets all declined about 20% in 2011. In fact, the Brazilian economy actually stalled in the third quarter, registering no growth quarter-to-quarter, struggling with very high interest rates.

    So the question arises, will the emerging economies experience a “hard landing” in 2012, as the Chinese real estate market finally becomes unglued, and years of ramping up industrial capacity and commodity production take their toll? This is certainly possible, especially when one considers the extremely high ratio of Chinese residential real estate prices in the big metropolitan areas as a percentage of average annual income (up to 35 times in some areas, compared to 5 times in much of Germany). While a period of adjustment is likely, we believe that the economic decelerations of the hyper-growth economies will be orderly, especially if one views such a slowdown as already substantially discounted by investors.

    The one probable outcome of an emerging market slowdown is lower commodity prices. The decline has already begun, with gold prices, steel prices, coal prices, agricultural prices, and many other commodities, already falling. But this, in turn, will reduce inflation and should produce a better investment climate.

    In addition to slowing emerging market growth, we will still face the formidable economic headwinds of the European contagion crisis and the prospect of U.S. growth facing a decline in fiscal stimulus, as payroll tax and unemployment benefits eventually expire, along with accelerated depreciation, and other temporarily stimulative policies. Furthermore, the potential of further downgrades of U.S. Treasury debt remains in the wake of no political progress in deficit reduction.

    But arrayed against these economic worries are many important positive factors. The most important factor is probably the natural momentum of the U.S. economy, which was clearly accelerating in the fourth quarter. The U.S. working age population has continued to grow, many cyclical industries have been experiencing trough conditions for years, and interest rates remain at historic lows. For example, the housing industry appears to demonstrating early signs of a potential improvement, as housing starts and home sales have gotten better. It is important to remember that almost three years after the economic trough in the U.S., consumer confidence is still near historic lows. There is a lot of room for improvement from these levels.

    Loan growth in the U.S., which remained stubbornly flat during much of the recovery due to economic deleveraging, is showing several months of improvement. Credit conditions are still tight, but U.S. banks have recapitalized, and are looking for customers. The Federal Reserve Bank’s declaration that the currently historically low interest rates will persist for a long time, should eventually restore borrower confidence.

    The epic profitability and productivity of U.S. corporations is another major factor which will enhance economic growth in 2012. This profitability, and strong liquidity, will eventually result in an improvement in job creation. This may have already started, given the big decline in unemployment claims in the fourth quarter. In 2012 U.S. corporate profits may be buffeted by a less favorable currency backdrop (during most of 2011, the dollar was down year-over-year), and the probable slowing of global growth, but American corporations have demonstrated dramatic productivity gains and the economy may be gaining some momentum, which should offset slowing overseas.

    While sentiment has become so negative on 2012 prospects, we believe that the probabilities favor continuing moderate growth, and continuing low interest rates. This should provide a positive backdrop, despite periodic scares related to global macro events which the media will focus on.

    The Stock Market

    Despite the disappointing year experienced in 2011, we believe that equity prospects for the next twelve months are quite favorable, notwithstanding that periodic crises will grip the headlines from time to time. The primary reasons for our sanguine outlook are 1) excessive investor pessimism; 2) continuing positive monetary background; 3) positive trends in corporate profits; 4) very attractive valuations; and 5) the dearth of attractive investment opportunities compared to equities.

    The savings rate in the U.S. is approximately 4%, which annually creates an enormous amount of funds to flow into investment vehicles, especially when banks pay nothing on short term deposits. In 2011 these investment flows went mostly into bonds, while domestic equity mutual funds experienced persistent outflows. Corporations, flush with funds from strong profits, remained domestic equities’ strongest fans, investing $255.2 billion in equities in the year ended September 31st, according to Ned Davis Research. Corporate insiders are also strong buyers of stocks. But the public and institutional investors remain averse to stocks, and the stream of liquidation from domestic equity mutual funds continued without abatement into the end of the year. Even hedge funds have reduced their equity exposure to levels near the market lows in 2009, according to the ISI Hedge Fund Survey.

    It is clear that investors are gloomy and fearful of equity prospects. Consider some of the recent indications of pessimism, despite record corporate profits and low interest rates and the best performing stock market in the world in 2011: 1) according to Ned Davis, in late 2011 equity correlations of the S&P 500 stocks reached a forty year high, eclipsing the 1987 highs, reflecting extraordinary risk aversion among investors; and 2) the relationship between bullish Rydex Nova mutual funds and bearish funds reflects continuing bearish positioning among traders. The very high S&P 500 correlation readings (measuring the level of correlation of stocks to the Index) are near or well above levels seen at the major stock market bottoms of 1987, 1990, 1998, 2003, 2009 and 2010.

    

    Historically presidential election years have produced positive returns for equities (with the notable exceptions of 1940, 2000 and 2008) as the political process tended to produce increased stimulus, in addition to the stimulative aspects of the election process itself.

    Corporate profits reached record levels in 2011, yet the stock market’s ten year return is close to the lowest on record. The S&P 500 Index is expected to have produced 16.5% profit gain in 2011, and 10% revenue growth, though the S&P 500 Index was flat for the year, highlighting further multiple compression. In the fourth quarter, the trend in earnings revisions have been negative, reflecting a growing expectation that the European debt crisis will hurt multi-national corporate profits as the Euro weakens. While a deceleration of profit growth may occur, there has been material improvement in the U.S. economy during the last quarter.

    One of the significant influences on corporate profit margins is change in compensation expense. Compensation as a percent of GDP is currently near multi-decade lows. Job creation in the U.S. has improved recently, with the unemployment rate dropping to 8.6%, but this high level of unemployment suggest that wage pressure will not imminently hurt profit margins. Margins have also been aided by low interest expense, but, given continuing monetary accommodation, interest expense is unlikely to rise materially in the near future.

    Valuations for U.S. equities continue to be low, particularly as corporate profits probably rose 16.5% in 2011, while the stocks were generally flat. Adjusted for low interest rates, equity valuations are very attractive. In 2011 investors were driven by fear, as headline events dominated investor sentiment. We expect investors to soon react to the low potential returns available in the fixed income markets, and return to equities as confidence builds.

    One final noteworthy factor for stock performance is our expectation of significant increases in corporate dividends. While S&P 500 dividends have grown in 2010 and 2011, they remain below the levels of 2007 and 2008, and the dividend pay-out ratio is at a sixty year low. As stated above, S&P profits are at record levels and corporate balance sheets are in excellent shape. We expect that dividend growth will be a major theme for the next several years.

    Strategy

    The key elements are our current strategy are to 1) emphasize large cap U.S. equities and domestically focused growth themes; 2) overweight consumer discretionary, technology and financials; and 3) reduce or avoid exposure to commodity themes. We also have very little exposure in the defensive sectors that performed well in last year’s flat market. Our portfolios are concentrated in sectors where we expect superior and improving earnings growth and where investors are least exposed.

    We have increased our holdings in consumer discretionary by adding to our lodging holdings, while reducing retailers. We have maintained large positions in media companies. We favor consumer discretionary because the majority of consumer spending is driven by the top earners who have much higher employment rates and levels of discretionary income. Gasoline prices are off their highs, and households have made significant progress in deleveraging. Thanks to record low interest rates, housing, which is consumers’ largest cost, has become most affordable relative to income in fifty years. Tax increases are a potential worry for discretionary consumer spending, but current trends in Washington suggest that any major tax hikes will not occur until after the election. The expiration of the payroll tax cut may dampen spending later this year, but the economy should have enough momentum to return to normal Social Security contributions.

    Technology continues to be one of our most significant themes. Mobile computing and rapid internet expansion continue to drive tremendous earnings growth and appreciation potential. The technology sector has consistently produced the best earnings throughout 2011, and we expect growth to continue in 2012. And remarkably, many technology stocks continue to sell near trough valuations based on price to sales, price to earnings and price to book. While technology stocks may be over-owned in institutional portfolios, and there are some signs of slowdown in enterprise spending due to the European crisis, growth opportunities remain abundant with important new product cycles, such as the new Apple iPhone.

    Our most recent significant overweighting has been our focus on financials, and especially regional banks. While European banks are struggling with excess leverage and sovereign debt issues, U.S. banks have achieved strong capital positions and appear poised to benefit as domestic loan growth accelerates while credit quality continues to improve. Due to the financials’ underperformance in 2011, this sector is the most under-owned by institutions and hedge funds.

    We have de-emphasized commodity related themes because of our growing belief that the ten year bull market in commodities has largely run its course, with many years of excess growth in emerging economies. 2011 witnessed a significant deceleration in emerging country economic growth, and we expect this deceleration to become more pronounced this year, as rising wages and high commodity costs restrain growth to more moderate levels.

    We remain wary of Europe, which is probably experiencing a mild recession due to the sovereign debt crisis, and view the chronic lack of leadership in Europe as another reason to invest in the U.S. While the sovereign debt crisis is not over yet, it is clear that the European Central Bank has significantly increased its monetary stimulus and expanded its balance sheet. We expect that the crisis in Europe will begin to abate this year.

    We continue to emphasize large capitalization stocks because after a decade of massively underperforming the returns of other major asset classes, they are beginning to materially outperform. We believe investors are recognizing that many large cap U.S. stocks have good earnings growth, superior balance sheets and earnings quality, and compelling low valuations.

    In our opinion, growth stocks have become incredibly cheap, as investors did not reward earnings growth in 2011. This has provided an important investment opportunity for us in 2012!

    Please click here for the Fund's top ten holdings as of December 31, 2011. Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security.

    Please click Glossary for investment definitions.

    The views in this newsletter are those of the Fund manager as of December 31, 2011, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

     

    ---

    Past performance is not a guarantee of future results.

    References to other mutual funds should not be interpreted as an offer of these securities.

    An investment in the Rydex Money Market Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

• 4th Quarter 2011: 4th Quarter Investment Outlook

  • Fourth Quarter 2011 Investment Outlook

    With very few exceptions, the Third Quarter was a disaster for capital assets around the world, as investors reacted with horror to the political paralysis in Europe and the United States in the wake of crushing sovereign debt issues. On August 5th, Standard & Poors rating agency downgraded the credit rating of U.S. Treasury debt for the first time in history, following the debt ceiling political debacle. Simultaneously, Greece's national liquidity challenges deteriorated further, inducing the spreading contagion fears among the other weaker European economies. Credit default swap prices for the peripheral European country credit instruments exploded. Global stock markets suffered a massive eleven-day waterfall decline, while U.S. Treasury yields dropped to record lows in the flight to quality. The drop in U.S. yields was quite ironic, as the credit downgrade of these securities helped unleash the current crisis.

    Throughout this period of crisis, Germany and Greece vaulted into the headlines for weeks, as the European Union struggled with the implementation of a sovereign debt bailout plan. The reluctance of Northern European economies to bailout their partners in Southern Europe, has escalated the crisis to measurably slowing global economic activity and igniting the pervasive fear that we are cascading back into recession. During the quarter, the German stock market, as measured by the DAX Index, declined 34% peak to trough.

    Our accounts did very poorly in the quarter. While we expected some market volatility during the negotiations around the U.S. debt ceiling, we did not think that the global capital markets would get so "unhinged" in the wake of record corporate profits in an environment of continuing aggressive monetary ease. Our portfolios have been exposed to high economic sensitivity, and, as recession fears have proliferated, these sectors have been subjected to extreme pressure.

    We believe there is the potential for an equity rally in the Fourth Quarter, if there is a confluence of the extreme equity selloff, record low interest rates, record profits, low valuations, and if investors expect the global economic environment to be dire in the next twelve months.

    The Economy and Interest Rates

    "The U.S. stock market (S&P 500 Index) declined 14% in the third quarter. Most foreign markets were much worse. Many markets have retraced significant portions of the gains from the bear market low in March of 2009."

    During the summer months global economies suffered a pronounced slowdown, as worries over the European sovereign debt crisis turned to panic immediately after U.S. Treasury securities were downgraded. Measures of manufacturing activity from Chicago to China registered worrying sequential declines, after decelerating in the first half. Equity markets suffered two-week waterfall declines everywhere.

    Activity clearly decelerated during the quarter, especially as consumer sentiment plunged due to the U.S. debt ceiling crisis, and many investors feel the U.S. is going straight into a deep double-dip recession. The return of a deep recession would indeed be a worrisome outcome, given the strained fiscal and monetary conditions in the U.S. Most of the available easy economic stimulus has already been applied.

    The arguments for recession are manifold in the current environment: the Federal Government is running out of resources to stimulate the economy, given our already extreme deficit condition. Political paralysis prevents the assertion of creative and effective economic policies. Federal, state and local governments are being forced to restrain spending due to the fiscal distress. The housing market has not started to meaningfully improve. Our trading partners are in disarray, especially in Europe and Japan. And finally, there is too much debt everywhere you look, and deleveraging is killing growth.

    While current economic growth has been much slower than most expected, we believe that the current pace of economic activity in the U.S. does not suggest an imminent recession. The most important reason that a recession may not be imminent is the extreme accommodative positioning of monetary conditions. Short term interest rates are still near zero, notwithstanding the credit downgrade, long bond rates have continued to decline, and money supply is starting to expand vigorously (i.e. M2 has risen 10% year-over-year). The Federal Reserve remains vigilant in its accommodative course, notwithstanding political pressure to do otherwise. And recent economic data has been more positive, at least sequentially. Recent Richmond and Philadelphia Fed Surveys, while still negative, both climbed materially month over month. Also, Chicago's Purchase Managers' Index rose from 56.5 in August to 60. Q2 GDP was revised to 1.3% (vs. estimates of 1.2%), and jobless claims dropped 37,000 in the last week of September to the lowest level since April 2nd. These sequential improvements do not correspond with investors' fears that the economy is falling into a deep recession.

    Secondly, substantial deleveraging has already occurred in our economy, and vast areas of pent-up demand are building after many years of below grade growth. This is especially evident in the housing market, which, while remaining depressed, is now offering the most affordable home buying opportunities seen in many decades. Meanwhile, household formation continues to expand with population growth. Annual automobile production remains well below normal levels, and automobile pricing (including financing) relative to income is about as attractive as at any time since 1980. That the consumer is in better shape is evident in the fact that credit card delinquency rates are near record lows, partly due to tight lending standards. Inventory-to-sales ratios are near multi-decade lows.

    Third, record corporate profits should eventually result in greater investment in capital spending and employment growth. The deficit crisis and policy confusion have contributed to corporate hesitation to expand. As worries of the slowdown proliferate, politicians are pressured to ease some of the regulatory burdens that companies face, as President Obama recently did in relaxing environmental regulations.

    Thus, the normal structural causes of recessions, such as inverted yield curves, tight monetary policy, excess inventory building, and runaway inflation, are not currently present. While the 2008-2009 recession occurred despite accommodative monetary conditions due to the Lehman crisis, corporate balance sheets, especially among banks, have had three years of dramatic improvement since then, and can better withstand renewed liquidity pressure.

    Global issues do weigh heavily on current economic prospects. The Eurozone is likely falling into recession, due to the sovereign debt crisis and prevailing fiscal austerity policies. Incredibly, the European Central Bank (ECB) raised interest rates as recently as July , and maintains a tight monetary policy relative to present conditions. But declining stock prices and depressed sentiment will eventually force policy makers to push to stimulate the economy. And the ECB has plenty of monetary firepower at its disposal.

    Emerging market economic growth has been decelerating due to high inflation and rising interest rates. But commodity prices have dropped sharply in recent months, and this may allow for some easing of monetary policy. Brazil recently cut interest rates. Declining gasoline prices and lower interest rates should help to stimulate consumers globally.

    During the panic driven third quarter, U.S. Treasury bonds surged to near record levels, and with Ten Year Treasury notes at record highs (i.e. with yields at record lows), despite U.S. deficit problems and the credit downgrade. Lower-grade credit instruments rose in yield, causing credit spreads to widen sharply. The widening credit spreads have been caused by plunging sentiment and daily negative news about the Greek credit crisis. Recently, the German government began to take steps to mitigate the European banking crisis, and, as it and other Eurozone nations move proactively toward resolution in the months ahead, we believe credit spreads may drop. Monetary policy in the U.S. should remain very accommodative.

    The Stock Market

    The U.S. stock market (S&P 500 Index) declined 14% in the third quarter. Most foreign markets were much worse. Many markets have retraced significant portions of the gains from the bear market low in March of 2009. We believe that this dramatic decline may set the stage for a equity rally in the Fourth Quarter.

    The selling began in late July as the debt ceiling negotiations became dysfunctional. Despite the passage of the debt ceiling bill, the market continued to decline sharply when Standard & Poors downgraded the credit rating of U.S. Treasury securities. By the time that the market stopped declining on August 10th, it had declined 18% in eleven days! Such an intense decline in such a short period is a rare event in stock market history, and is usually characterized as a "waterfall decline". According to Ned Davis Research, there have only been twenty-two other such instances (greater than 15% declines in 11 days) in the U.S. stock market since 1929, and historically equity returns were good for the next 63 and 126 day periods. Excluding the data from the 1930's, during the Depression, the data is very favorable for stocks, with the notable exception of October 2008. The point of these emotional declines is that investors become convinced that the worst outcome is now probable. More often than not since 1932, such declines marked important bottoms.

    Most of the dramatic readings that we look for in major stock market bottoms have occurred in the third quarter selloff:

    1. The Volatility Index (VIX) surged to 48 in August, marking high panic levels.
    2. Down/Up volume climaxed at 97:1 on August 8th, indicating climactic selling.
    3. Investor sentiment has become pervasively negative: as of 9/28/2011 the ISI Hedge Fund Survey indicates invested positions at their lowest level since April 2009; other investor surveys also show a sharp rise in bears.
    4. Asset price correlations have been very high. Historically this has occurred near market bottoms, when high fear levels drove most asset class prices down together.
    5. According to Sentiment Trader, the percent of cash to total assets position of Rydex Funds (active traders), is at very elevated levels, consistent with important market bottoms in the S&P 500 Index for the period of 1997-2011.

    Furthermore, the third quarter selling of equities has been accompanied by massive outflows from equity mutual funds. Given the dearth of other attractive investments in a record low interest rate world, these funds represent potential buying demand should equities' relative performance improve. And corporations continue to be large buyers of equities through buybacks and mergers & acquisitions.

    Equities continue to be very attractive on a valuation basis, as Price/Earning ratios are very low, especially compared to Treasury-bond yields. The S&P 500 dividend yield is at the highest levels since 1981, except during the lows of 2008-2009.

    This relationship is particularly compelling, considering that investors generally get nearly nothing for savings left in a bank or money market fund.

    Strategy

    The performance of our economically sensitive holdings was very disappointing in the third quarter, as political and financial uncertainty in the U.S. and Europe led investors to fire-sell economically sensitive stocks into the end of the quarter. We feel the aggressive selling may indicate that many investors anticipate a coming economic contraction similar to the 2008-2009 period. Bond yields certainly are discounting such a scenario, as 10-year Treasury rates hit a new record low in September. With the seasonal summer headwinds behind us, any small improvements in the economy, even slower rates of deceleration, could easily encourage equity investors and lead a long-overdue allocation of bond fund flows into stocks. Should this occur, we believe our largest sector weightings, including those highly levered to the economy, may outperform as expectations are reset away from an economic disaster, especially with valuations near trough levels. The industries that may benefit include consumer discretionary, technology, energy, and agriculture.

    During the past decade, U.S. consumers faced a housing bust, credit crisis, and the near-constant headwind of higher commodity prices. Now gasoline prices are well off their highs, households have deleveraged to the lowest levels in 17 years, and the household savings ratio is 5.5% (up from 1% in 2005). With these overhangs now largely behind us, high unemployment remains as an anchor on consumer confidence. However, the majority of consumer spending is driven by the top earners who have much higher employment rates and levels of discretionary income. Moody's Analytics indicates that the top 20% of income earners account for 60% of consumer spending. We have focused our consumer-oriented portfolio towards companies with high-end, aspirational brands and potential growth opportunities in international markets. Furthermore, retail sales growth has been largely better than expected in the past few months, with many retailers still reporting low to middle-single digit percentage gains in same-store sales. ISI's retailers survey, released weekly, increased at the end of September to the highest levels since the early spring. We believe retail spending, especially in the high-end, could continue to come well ahead of recessionary expectations.

    We have retained an overweight position within the technology sector, and remain positive on the beneficiaries of the growth in mobile computing. In the past year the best-received mobile computing products have largely been high-end smartphones and iPads, as no company outside of Apple has been able to introduce a compelling tablet at competitive prices. However, that should be changing in the next few months as lower-priced tablet products are introduced, such as the new Amazon Fire. At prices low enough to be a common gift item, these tablets should have a hugely successful holiday season, further accelerating the trend of media consumption on mobile devices. We believe the earnings of our mobile-related holdings could outpace those of their technology peers, many of whom have recently reduced second half guidance. Our primary mobile beneficiaries include original equipment manufacturers, component and equipment suppliers, and e-commerce companies that may profit from these trends by focusing on social media and/or local advertising.

    While we expected the price of oil price to stay below the spring highs as we began the third quarter, we believed it would remain in a much tighter range and did not expect it to break below $80 in the near future. However, the European financial crisis and worldwide slowdowns in GDP growth caused much more pressure on oil and other commodities than we had estimated. However, while WTI (West Texas Intermediate) oil prices in the mid-to-high $70 range surprised us, this should still lead to a continuation of spending by oil producers (especially when international "Brent" crude prices are still above $100/barrel). Many exploration and production companies are still discussing capital budgets for next year being around this year's levels, and the U.S. rig count just made a new high for the year last week. While we expect a deceleration in oil demand as economic growth slows around the world, we believe the corresponding reduction in oil service activity may not be nearly as bad as service stocks are currently discounting. Using trough price/earnings valuations from 2009, the stocks are discounting 2012 earnings 30-50% below current estimates, and we feel these equities could recover if investors become more comfortable with earnings trajectories that are much higher than they would be in a repeat of 2008-2009.

    Despite reports throughout the third quarter of disappointing crop yields and low levels of expected production, our agriculture-related stocks were very weak in the month of September (after significantly outperforming in July and August). First, grain prices were dragged lower with other commodities, and later weaker export sales combined with higher old crop inventory estimates erased the earlier relative stock price gains versus the broader market. While the recent inventory numbers were a negative surprise, which pushed the estimated U.S. corn stocks-to-use (inventory to demand) ratio from 5.4% to 6.9%, it is still the second-lowest level in 15 years. The projected global corn stocks/use ratio remains the lowest since the 1973/1974 crop year. Furthermore, we expect the data to improve incrementally going forward. We believe the USDA will revise new crop production numbers lower in the next two months, due to both lower acres harvested and realized yields. China is also likely to respond to the recent weakness in grain prices and ramp up imports from the U.S. It is now more profitable for China to import corn than source it internally, with the arbitrage opportunity at its largest level in over a year. Our holdings in fertilizer and machinery companies have been pressured by lower grain prices, but as prices recover we anticipate investors' focus will return to the robust fundamentals being driven by record levels of U.S. farm profitability.

    After trimming our positions in media companies early in the summer as trends slowed, we have recently added a couple of names that are among the most levered to the opportunity to distribute existing content through online/mobile channels. Also, while a much weaker economy would lead to significantly lower levels of spending on advertising, we are encouraged by the fact that next year's spending will be buoyed by both a presidential election and Summer Olympics. We believe earnings next year should be much more resilient than what's being discounted in the stocks.

    We have retained small positions in several financials, both in credit card issuers and insurance writers. While concerns over the holdings of U.S. and European banks and brokers have weighed on the entire financial sector, we feel there could be a sharp recovery in the relative performance of non-bank financials if European leaders cut rates, inject liquidity into their banking systems, and manage to reduce sovereign debt interest rates. In the meantime, our holdings have low levels of exposure to European bank and sovereign debt. We expect any potential write-downs to have nominal impacts on book value, which should lead to outperformance versus their peers.

    Suffering the absolute market declines in the third quarter, and the dramatic relative declines in our portfolio in the last two weeks, has been humbling. Yet, in reviewing market volatility and our strategic approach during volatile periods during the last three decades, we feel confident that this period of panic selling has the potential to yield strong returns in the months ahead.

    Please click here for the Fund's top ten holdings as of September 30, 2011. Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security.

    Please click Glossary for investment definitions.

    The views in this newsletter are those of the Fund manager as of September 30, 2011, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

     

    ---

    Past performance is not a guarantee of future results.

    References to other mutual funds should not be interpreted as an offer of these securities.

    Fund holdings and sector allocations are subject to change at any time and should not be interpreted as an offer of these securities.

    An investment in the Rydex Money Market Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

• 3rd Quarter 2011: 3rd Quarter Investment Outlook

  • Third Quarter 2011 Investment Outlook

    The building global negative news in the first quarter turned equity investors into sellers in the second quarter. The delayed economic effects of the Japanese earthquake and the enormous rise in gasoline prices became very visible in the global economic deceleration witnessed this spring. Adding to this, central banks in the larger emerging economies tightened monetary policy, and the European sovereign debt crisis re-emerged for the second summer in a row, as worries over the European peripheral economies have exploded once again.

    The “soft patch” in the U.S. economy became painfully evident in the second quarter as a succession of Purchasing Manager and employment reports indicated a significant sequential slowdown. The S&P 500 dropped just under 1% during the quarter, thanks to a huge rally in the last week of June (though it is still up on the year, outperforming most foreign equity markets). While the S&P was dropping, its profits reached record levels, despite many segments of the U.S. economy still limping after the great recession.

    While we had expected some equity market volatility in the quarter, our stocks nevertheless fared poorly during the correction. Our technology and materials stocks experienced painful declines as investors digested the decelerating economic news by punishing economically sensitive stocks. We believe these stocks, and the stock market have the potential for strong gains in the second half of the year, if economic momentum re-accelerates. During the last several quarters we had worried that economic expectations were too high; now that expectations have significantly adjusted, we believe that prospects for favorable surprises have sharply improved.

    The Economy and Interest Rates

    "Prospects for a choppy stock market this summer remain due to the significant deceleration in the economy during the first half, and getting through the upcoming earnings season, when forward earnings prospects may be adjusted lower."

    As we noted in previous outlooks, sharp and sustained rises in gasoline prices usually cause an economic deceleration, as consumers and businesses cope with higher prices at the pump. Gasoline purchases rose to almost 11% of total retail sales, limiting consumer discretionary spending. Furthermore, the delayed impact of the Japanese earthquake manifested itself in disruptions in the manufacturing supply chain, hurting automobile sales. Thus, retail sales have been slower and the economy only grew 1.9% in the First Quarter, and appears to have grown at a slower rate in the Second Quarter.

    With monetary tightening in the emerging economies and sovereign debt fears and austerity in Europe, global growth expectations have been revised lower. Europe continues to be beset with the crisis in Greece and the banking problems of the peripheral economies, now potentially including Italy, and the impact of emerging fiscal austerity. The highly leveraged European banking system is straining under the potential of sovereign defaults. Yet while European Central Bank President Jean-Claude Trichet recently declared the current European banking crisis as a “code red” in terms of risk, the ECB has recently been tightening, not loosening, monetary policy. In fact, the balance sheet of the ECB has recently declined to levels close to those during the 2008 financial crisis, which suggests that Europe has a lot of room to ease to relieve current financial strains. Thus, while Federal Reserve Chairman Bernanke insists that there are no current plans for a “QE 3” in the United States, there very well could be significant quantitative easing in Europe in the months ahead. The ECB is still, astonishingly, expected to raise interest rates in July, to combat inflation. Trichet is scheduled to retire in November, adding to the mix of current uncertainty.

    Meanwhile, emerging economies from China to India to Brazil have tightened sharply to combat rising inflation, especially from energy and food prices, and also from real estate speculation. Many indicators suggest that emerging economic growth is already slowing, and that a pause of monetary pressures may occur in the second half of the year. Equity markets in all these economies have suffered in the first half, already discounting a substantial slowdown. The Chinese, Indian and Brazilian equity markets have all declined approximately 18% from their twelve month highs.

    We believe the biggest contributor to the economic slowdown is the rapid rise of oil prices in the last year, significantly caused by the “Arab Spring” social upheaval in the Middle East. High materials prices have caused elevated headline inflation readings throughout the world, including the developed economies of the U.S., Europe and Asia. This is occurring despite the fact that these economies still face the strong deflationary influences of high unemployment and low industrial capacity utilization. This creates quite a monetary conundrum between the central bank hawks and doves, with Bernanke fighting deflation and Trichet fighting raw material-induced inflation. There is substantial evidence that materials inflation may be starting to ease on a cyclical basis, helped by the recent release of petroleum from the strategic reserve stockpiles.

    

    Now that gasoline prices appear to be easing, and automobile production is set to increase, we feel that the odds for an economic re-acceleration in the second half are good. Critical to this would be more accommodation on the monetary front, especially from Europe. And while “QE 2” has officially ended, Chairman Bernanke has indicated that he is prepared to use other tools, if further accommodation in the U.S. is necessary. It is noteworthy that with the recent decline in energy prices, that gasoline demand growth, while still slightly negative year-over-year, is improving sequentially. Additionally, as the major supply-chain disruptions caused by the Japanese earthquake ease, there should be a global snap-back in industrial production growth in the third and fourth quarters, as parts become available again.

    Economic growth in the U.S. has also been constrained by the lack of loan growth, notwithstanding record low interest rates. But debtors’ desire to borrow and creditors’ willingness to lend remain very depressed in the aftermath of the collapse of the real estate bubble. This is evident in the low monetary velocity readings in the U.S. economy. But the potential for improvement in the second half is very credible given that consumers have already deleveraged significantly, and there are some signs of modest improvement in the real estate market. The overhang of the inventory of unsold homes remains high, but several years of housing starts at sixty-year lows may be starting to absorb some supply. U.S. households have spent over four years reducing debt, bringing the Household Debt to Disposable Personal Income Ratio to fifty-five year lows. Thus the potential for pent-up housing demand to re-emerge is meaningful. In May, pending home sales rose 8.2% sequentially and 13.4% year-over-year.

    Another significant positive factor for the U.S. economy is the fact that corporate profitability is at record levels and corporate cash as a percent of total assets is at fifty-year highs! Corporations have been cautious about hiring, especially with Citigroup’s Economic Surprise Index almost down to the levels it reached during the financial crisis. Eventually, this low-yielding cash is likely to be deployed, either through dividends, buybacks, capital spending or hiring.

    

    Between mountains of corporate cash, lower gasoline prices, improving consumer liquidity and excessive pessimistic consumer sentiment, we now believe that the potential for positive economic surprises, during the remainder of the year, is quite meaningful.

    The Stock Market

    Prospects for a choppy stock market this summer remain due to the significant deceleration in the economy during the first half, and getting through the upcoming earnings season, when forward earnings prospects may be adjusted lower. Additionally, political posturing over the debt ceiling may cause further turmoil. Despite these short term headwinds, we believe that the stock market will witness an advance for the remainder of the year. We are increasingly bullish because 1) investor sentiment has once again become excessively bearish; 2) corporate profits appear very strong, while valuations have contracted significantly; 3) corporate cash levels are enormous, and have the potential to support dividend growth, buybacks and mergers and acquisitions; 4) interest rates in the developed economies appear likely to remain low; and 5) commodity price pressure appears to be abating, which should help both consumers and flows into financial assets.

    

    Investors have been confronted with a lot of negative economic news in recent months, as is clearly illustrated in the Citigroup Economic Surprise Index, which has declined to negative levels close to the 2008 recession lows, as noted above. This index is a three-month rolling average of deviations of economic data surprises. One interpretation of this negative reading is that the U.S. is about to go back into recession. We believe that this is unlikely because of record corporate profits and liquidity, improving consumer liquidity, and the potential abating of the negative economic headwinds discussed above, such as high gasoline prices. But this economic deceleration has succeeded into making most investors excessively bearish and liquidating equities, which could set the stage for a positive move back into stocks later this year. Here some examples of negative investor sentiment:

    1. Equity mutual fund flows turned sharply negative in May, reaching levels close to the levels near the August and November, 2010 stock market lows. According to Lipper Fund Flows, equity outflows (including Exchange Traded Funds) reached $26 billion in June! Periods of excessive fund redemption usually coincide with stock market bottoms.
    2. Large speculator futures positions indicate that speculators are now net short the S&P 500 Index, the Nasdaq 100 Index and the Russell 2000 Index, indicating aggressive trader pessimism.
    3. The ISI Equity Managers Survey of invested positions is at its lowest levels in five years, and the ISI Hedge Fund Survey also indicated low invested positions.
    4. On June 29, CNBC reported that according to its “All American Economic Survey”, Americans had become a “nation of pessimists”, with consumer expectations reaching their lowest point since the last recession. This is a common occurrence two years after a low in stocks. Witness sentiment and equity declines in both 1992 and 2005.
    

    These indicators show that many investors have already moved to the sidelines, and if growth prospects improve, they will likely return to equities.

    An enormous positive factor for equities is the stunning performance of corporate profits, especially in an economy that has been weak. S&P500 profits recently reached all-time highs. This has occurred because these companies benefit greatly from global economic growth, continuing low wage pressure, excellent productivity and record-high profit margins. While this strong momentum may abate somewhat in the next few quarters, the economic cycle for developed nations is still young historically. These strong corporate profits are significant in that they will support increases in hiring, capital spending and returns to shareholders, thus helping both the economy and the capital markets.

    According to Ned Davis Research, the long term average Price Earnings multiple on the S&P500 is about 17 times. Consensus estimates for 2012 earnings are about $103, which would put the S&P500 forward year PE at under 13 x, indicating significant potential upside to the stock market at just average valuations. Furthermore, equities should sell at higher valuations when interest rates are low, as they are currently. Interest-rate adjusted valuations of equities are extremely attractive. Finally, with emerging market equities underperforming due to local inflation problems, U.S. equities appear relatively more attractive than other markets. This is especially true in times of social unrest, as we are currently witnessing in Greece, the Middle East and many other parts of the world.

    We would also posture that the current fear and loathing associated with the U.S. housing market and the banking sector may abate in the months ahead, providing an additional important tailwind to stocks. As noted above, banks loans and the housing market have been performing poorly this year, but consumer liquidity has sharply improved. And there are early signs that both housing and bank loans may be getting better. In the first half, the combination of high gasoline prices and declining home values was a sure deadly toxin for consumer sentiment, and explains why Americans are currently so pessimistic. Surely, if these pressures abate, it is likely the economy and the stock market will respond.

    Certainly, the environment is not without risks. We worry about the European sovereign debt issue, emerging market inflation, Middle East turmoil, the U.S. budget and debt ceiling debate, and potential currency crises, just to name a few concerns. But the high current anxiety readings suggest that much of these fears are already priced into the market, and the next major economic surprise just might be positive!

    Strategy

    Our performance in the second quarter suffered due to the abrupt deceleration of the economy, causing many of our economically sensitive holdings, especially in technology and materials, to decline. We have maintained substantial holdings in our mobile computing theme and in semiconductor capital equipment stocks. First quarter earnings for these holdings were generally very strong, but the sell-through of non-Apple tablet computers was disappointing, as we will discuss below. This has caused inventories of components to grow more than expected. When economic data turned soft in the second quarter, investors turned aggressively negative on these volatile stocks. Our materials holdings, especially in agricultural products, also suffered due to declines in grains prices at the end of the quarter. We believe that these short-term negative trends will be reversed in the second half of the year due to a re-acceleration of the economy and strong fall product cycles.

    Our largest relative industry overweight in the portfolios continues to be in agricultural stocks, which performed poorly in the quarter due to the late-quarter sell-off in agricultural commodities. This sell-off was accelerated by an unfavorable June crop report by the USDA. Despite a significantly downward revision to estimated grain inventory levels by the USDA in early June, grain prices have materially underperformed as investors have focused on improved weather conditions and the prospects for higher levels of planted acreage. These conditions have led to the USDA to now expect 92.3m acres of corn to be planted, up from 90.7m in their last report. These most recent estimates are based on survey work completed in early June, and do not take the flooding of the past few weeks into account (i.e. they have not adjusted for acreage that’s been damaged and will never be harvested). We believe the current government crop projections are overly optimistic, and need to be revised lower in coming months. In addition, demand estimates should increase to account for stable feed usage and sharply higher exports (which have increased recently as prices declined and supplies tightened in foreign markets). Grain inventories (as a percentage of demand) are still in the low end of their historical ranges, and emerging markets’ demand continues to stress supply levels. Furthermore, fertilizer prices recently made 18-month highs despite the decline in grain prices. The earnings outlooks for our holdings in fertilizer, seed, and agriculture equipment manufacturers remain extremely positive, as U.S. farmers’ profitability is at the second-highest level in the past 15 years.

    Mobile computing remains one of our favorite themes, albeit one that exhibited a great deal of volatility in the past few months. We have trimmed positions to focus solely on the leading beneficiaries of the shift towards smaller, more robust mobile computing platforms (and the associated consumption of much higher levels of data and video). While the iPad has continued to take market share and still has demand levels exceeding supply, tablets from other vendors have struggled due to a lack of differentiation, high price points, and confusing marketing efforts. We expect this market to see a step-function improvement in demand this fall season, as new higher-functionality tablets (at lower price points) become available. Also, while smartphone component orders have been reduced recently, we believe much of this has to do with the extreme market share shifts being seen away from Nokia and Research in Motion (Blackberry) towards Apple and Android-based phones. As additional 4G-capable phones (and marketing campaigns by the cellular network companies) are rolled out this summer, we anticipate they’ll drive an acceleration in device upgrades and therefore revenues for our associated semiconductor equipment and component providers.

    Our media holdings have continued to benefit from an improving advertising environment and the proliferation of content across multiple distribution platforms. The pricing (on a cost per impression, or CPM basis) for upfront ad inventory sold in June for broadcast and cable networks increased 10-12% from last year, which exceeded expectations and should help accelerate revenue growth for our media companies. Also, in the past few weeks we have seen additional positive developments in the increasing competition among distributers to access the most popular television and movie content. Sony Pictures pulled 250 movies from the Netflix streaming service in an effort to increase pricing, Warner Bros. signed a distribution agreement with the largest online video company in China (Yoku.com), and the HBO Go iPad app was introduced as a way to compete with the mobile computing apps offered by cable companies and streaming services. Pricing is likely going to continue to improve as more companies compete to distribute content worldwide, whether it will be sent to consumers’ living room, desktop computer, tablet, or smartphone.

    The additions to our portfolio this quarter include oil service and consumer stocks, and given our estimates for oil prices, we expect both groups to outperform. We are expecting oil prices to remain range-bound for the near future, given a deceleration in demand, increased production, and government intervention (somewhat offset by an acceleration in the economy). However, oil prices remaining near the current high levels will still be in the sweet spot for oil service, as oil producers will still aggressively grow drilling budgets, but without oil prices pushing to significant new highs and creating more demand destruction. Without extreme boom and bust cycles, producers will sustain high levels of capital spending in response to global demand. The rig count is near a record high, and service companies could be entering a prolonged period of 20-30% (plus) earnings growth as their pricing and margins materially improve on top of accelerating volume growth.

    The combination of an improvement in economic growth, sustained low interest rates, a possible stabilization in the housing market, and significantly lower gasoline prices will likely allow for higher levels of consumer spending. We have added positions in a few select growth-oriented retailers, focusing on ones with accelerating same-store sales growth and well-controlled inventory levels.

    We have also initiated positions in several insurance stocks, due to the prospects for stronger earnings, low valuations, and low levels of institutional ownership. Property and casualty insurers could be entering a strong pricing cycle after the numerous worldwide disasters in the first half of the year, which could compound pricing gains as new hurricane loss models are being adopted by the industry. As an added benefit, the financial sector is among the most unloved and under-owned in the market, and could quickly see a rebound in relative performance with an improvement in credit conditions. We believe improved earnings, combined with price/book valuations near the low end of historical ranges, should provide solid returns, which could be exaggerated if portfolio managers seek to fill underweight positions in financials.

    In conclusion, our outlook for the remainder of the year is encouraging, with significant potential for appreciation in our favored sectors.

     

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    Past performance is not a guarantee of future results.

    Earnings growth is not a measure of the Fund's future performance.

    Fund holdings and sector allocations are subject to change at any time and should not be interpreted as an offer of these securities.

    Please click here for fund holdings as of June 30, 2011.

    The views in this newsletter were those of the Fund manager as of March 31, 2011, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

    S&P 500 Index - An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

    Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. The S&P 500 is a market value weighted index - each stock's weight is proportionate to its market value.

    NASDAQ 100 - An index composed of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. This index includes companies from a broad range of industries with the exception of those that operate in the financial industry, such as banks and investment companies.

    Russell 2000 - An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small cap stocks in the United States.

    It is not possible to invest directly in an index.

    Price to Earnings Ratio (P/E) - A valuation ratio of a company's current share price compared to its per-share earnings.

    
    

    Calculated as:	Market Value per Share
    	Earnings per Share (EPS)

    
    

    Price to Book Ration (P/B) - A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.

    
    

    Calculated as:	Market Value per Share
    	Earnings per Share (EPS)

    
    

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

• 2nd Quarter 2011: 2nd Quarter Investment Outlook

  • Second Quarter 2011 Investment Outlook

    In the First Quarter ending March 31, 2011, global growth has continued to advance with the stimulative benefits of unprecedented monetary and fiscal stimulation in the developed world economies and continued robust growth in the emerging nations. But the backdrop of strong economic growth has been confronted by new unexpected headwinds, which, combined with already high commodity inflation, may decelerate the recovery trajectory and create new challenges and opportunities for investors.

    The big surprises of the First Quarter were clearly the massive earthquake in Japan and the multiple violent uprisings across the Middle East. The equity markets weathered this storm of bad news with some volatility, but, thus far, muted capital losses. The U.S., most of Europe, and China had mid to low single digit equity returns. Many of the emerging markets declined, as rising inflation had a greater negative impact in these regions. And Japan plunged about 20%, as measured by the Nikkei 225 Index, in the days following the earthquake, but recovered to close down only 5% for the quarter, leaving it near its twenty-year lows. Finally, the quarter ended with U.S. and Allied jets strafing Gadhafi's military under the no-fly zone mission. Thus, it has been a very eventful First Quarter!

    With all this bad news, coming only two years after one of the biggest financial crises ever, one might have expected greater trauma for investors. But these shocks are occurring against a background of enormous economic healing in battered economies and explosive corporate profitability, growing savings and continuing extremely low developed world interest rates. The events of the First Quarter have complicated the investment landscape, but have not likely derailed it, and in fact, may have also created new opportunities. We still see excellent prospects for earnings growth and capital appreciation this year, notwithstanding the growing complexity of the international economic landscape.

    The Economy and Interest Rates

    "All of this remarkably bad news is not necessarily bad for the U.S. stock market, which has been one of the best global markets year-to-date."

    During the summer of 2010 there was an economic scare when the developed economies hit a soft patch and Europe experienced the onset of its sovereign debt crisis. But the economy started to rebound in the late summer, and then got a big turbo boost with the Federal Reserve Bank announcement of the $600 billion "QE 2" program of buying financial assets early in the Fourth Quarter. Chairman Bernanke's objective to re-enliven the "animal spirits" of the capital markets and produce at least a temporary increase in inflation in hope of warding off the dreaded deflation, vaulted the capital markets and re-accelerated the economy. Furthermore, Federal fiscal stimulus has been running at full throttle as the annual budget deficit of $1.5 trillion approached 10% of nominal Gross Domestic Product (GDP). During this period U.S. consumer spending and nominal GDP achieved record levels (by comparison Japan's nominal GDP is roughly where it was in 1992).

    Part of the magic of the current economic acceleration is the clear direct consequence of nearly record low interest rates and historic high deficits as a percent of GDP. The government is borrowing 40% of every dollar it spends. While consumer spending has been reasonably strong in the last two years (following the recession), U.S. wages and salaries are well below their previous highs in 2008. The difference can be found in the explosion of U.S. Transfer Payments, which appear to have risen about 30% since the beginning of 2008, due mainly to extensions of unemployment payments. But the policies appear to be working, as the unemployment rate has thankfully dropped below 9%, and unemployment claims are decelerating steadily. The economy grew 3.1% in the Fourth Quarter.

    During this time corporate profits have surged, resulting in a corporate boom that has meaningfully improved corporate balance sheets, and improved the prospects of expanded hiring plans for the broad economy. Corporate America will need to take up some of the slack, as fiscal stimulus starts to be withdrawn, especially with the challenging fiscal circumstances of state and local governments.

    Another government stimulus that will soon begin to be withdrawn is the "QE 2" program, which is set to expire in June. The program has been very successful thus far and has contributed materially to re-liquifying the financial system, through higher equity prices; although it has had little effect on interest rates, with the 10-year yield having risen over the last six months.

    But the liquification has left major imbalances in our economy, namely the out of control federal deficit, financially precarious state governments, and now the unexpected surprises of Japan's catastrophes and the surge of oil prices above $100 due to Middle East turmoil. Adding to uncertainty, we also face a potential Congressional showdown over the budget in coming weeks. We are of the opinion that the Federal Reserve will likely delay any potential plans to tighten monetary policy any time soon.

    We feel the most important variable on economic momentum for the rest of this year will probably be the trend of oil prices. Gasoline prices have risen over 100% in two years, and, historically, this magnitude of increase has caused consumers to materially slow spending. And with the crisis in the Middle East ongoing, oil prices continue to rise.

    Finally, the triple catastrophes of earthquake, tsunami and nuclear meltdown in Japan have crippled one of our most important trading partners. Japan accounts for 5% of US exports and 6% of imports. The massive blow to electricity generation in Japan is staggering, and the timetable for the grid to return to a more normal operating rate is unknown. The implications of this global economic, as well as humanitarian, disruption will not be known for awhile. The rebuilding of Japan will be a stimulative event, but there will probably be many business disruptions before the rebuilding commences.

    Assessing all these divergent economic influences has complicated the economic and interest rate outlook. They may slow the economic momentum that was building in the Fourth and First Quarters. We believe the recovery will continue, but probably in the 2.5 to 3.0 % range, which is somewhat disappointing for this stage of the economic cycle. And interest rates, as the Federal Reserve has gotten used to saying, could remain "exceptionally low for an extended period of time".

    The Stock Market

    All of this remarkably bad news is not necessarily bad for the U.S. stock market, which has been one of the best global markets year-to-date. While we remain somewhat cautious because stocks have had a very sharp two-year advance and could be vulnerable to further corrections this year, our outlook remains positive and we expect gains for the remainder of the year.

    We expect the bull market to continue because U.S. equities are one of the most attractive investments available to investors. Bonds and bond funds did extremely well during the last several years, but currently are very expensive on a yield basis and relative to the growing prospects of rising inflation. The Producer Price Index last month rose at a 5.6% annual rate and high yield bond spreads versus Treasuries are near historic lows. With real estate continuing its sluggishness, it has not provided an attractive alternative to equities. Foreign equities have also been mostly underperforming U.S. equities, due either to significantly high inflation (for example, the three month inflation rate, annualized, in Brazil is 9.6%) and high interest rates, or the unique problems in Japan and the Middle East.

    Other than the federal budget deficit, the U.S. equity story is attractive versus the uncertainty and trauma currently being experienced abroad. Corporate profit growth among U.S. companies has been incredibly strong due to rebounding demand, very effective cost control, and the continued weakness in the U.S. Dollar. Our political and economic systems, while facing challenges, continue to work reasonably well compared to the spreading riots witnessed overseas. Even aside from these macro factors, many U.S. companies are benefiting from unique product momentum in technology, media and other industries.

    During the last few years in the aftermath of the scary financial meltdown, the savings rate in the U.S. increased and is currently at about 5.6%. Most retail investors have been nervous about equities and invested the majority of these savings in bond products, especially mutual funds. Starting in December of last year, this began to change as investors are, once again, allocating money to equity based mutual funds. In January and February equity mutual funds attracted $33 billion, versus a $38 billion outflow for the full year of 2010. This follows the old saying "money goes where it is treated best".

    Other factors influencing the market include sentiment and interest rates. Sentiment is somewhat neutral currently. Retail investors are becoming generally bullish, while professional investors are quite cautious. Interest rates, while challenged by modest headline inflation, do not appear likely to move sharply higher soon given current Federal Reserve policy and current global crises. It is noteworthy that this is the third year of the Presidential Cycle, during which the stock market has historically posted double digit positive returns. Thus, while we are neutral in the short term in view of the overbought condition of the stock market and recent economic headwinds, we remain bullish for the year.

    Strategy

    Given our views on the macro environment and the economy, we have maintained the majority of our holdings in our favorite investment themes (and have added several positions as well). Many of our investments reported better-than-expected earnings for the most recent quarter, especially within technology and media. In fact, technology had among the best earnings of all sectors, which drove earnings estimates higher and provided us with even more conviction in our bullish view. Within technology, we have identified three primary attractive themes: mobile computing, telecom network equipment, and semiconductor capital equipment.

    The iPad/iPad2's incredible popularity and continued sellouts have demonstrated again how powerful the wave of mobile computing is, and how quickly consumers will respond when presented with compelling products at reasonable price points. Our holdings include several component suppliers for these mobile devices, and we expect them to see accelerating revenue and earnings growth in the second half of the year (especially as new lower-priced tablets arrive). As consumers continue to upgrade to more powerful smartphones and tablet devices (running on 3G & 4G networks), we expect mobile data and video traffic to continue to grow at an exponential rate. Cisco has estimated annual worldwide mobile data traffic is due to increase 26-fold to 75 exabytes from 2010-2015. To put that in perspective, that is the equivalent of 19 billion DVDs. This data traffic burden will require new and upgraded broadband networks, which should benefit our investments in optical equipment suppliers. These stocks were very volatile during the past quarter, especially after some reports of orders being delayed and inventories needing to be worked down. While telecom equipment order patterns are traditionally volatile, we expect strong demand trends to re-emerge in the months ahead. Our selection of semiconductor equipment manufacturers could also participate in these trends, particularly as chip sizes are being reduced to lower the cost and improve the performance of mobile computing devices.

    Many semiconductor capital equipment companies appear to be in the early innings of a multi-year cycle that could increase their earnings power versus prior cycles, while their valuations are near the bottom end of the range in the past ten years. Semiconductor companies have completed a prolonged transition to larger wafer sizes, which had allowed them to spend much less on manufacturing equipment for each dollar of revenue. With the next wafer transition over four years away, the ratio of capital expenditures to revenue (capital intensity) is sharply re-accelerating, and could increase significantly before reaching the average level of the past twenty-five years. The equipment companies are benefitting not only from strong cyclical trends, but secular growth as well. Capital intensity is likely to increase even further as transistor sizes continue to shrink and more computing power is packed into chips designed for mobile devices.

    Agriculture remains one of our favorite investment themes, where longer-term trends continue to point to lower grain inventories and higher levels of required investment in yield improvements. Burgeoning population growth in developing markets, shrinking arable land acreage, and increasingly protein-intensive diets are all contributing to a tight supply/demand outlook. These views were further justified by this week's reports published by the NASS (National Agricultural Statistics Service). The Prospective Plantings report indicated that while planted acres will increase versus prior years, the total number was about inline with expectations (despite prior fears that farmers would plant too many acres in response to high grain prices). The Grain Stocks report showed estimated U.S. corn and soybean inventories were below estimates and down 15% and 2% from last year, respectively. As a percentage of demand, inventories of these grains are estimated to be at their lowest level in 40 years. International demand has remained strong as well, and does not appear to be pulling back in response to higher prices. China has recently placed large orders for U.S. corn, and has become a net importer of soybeans and corn in recent years. When China has made similar transition in other commodities, their import activity has accelerated in following years as they struggle to meet internal demand. Farmers have a clear incentive to maximize their production and profitability, which we believe could directly benefit our investments in fertilizer, seed, and equipment manufacturers.

    We have recently added to our positions in media companies. We continue to be big believers in the ‘content is king' theme, and see the prices of media (especially digital & video) rising significantly in coming years as more and more companies scramble to sign deals for the rights to distribute content through devices such as internet-connected TV's and DVD players, smartphones, tablets, etc. Recently, both Starz and Showtime announced they are pulling some new content from Netflix. Part of the motivation behind this move was that Netflix has become more competitive with both companies by bidding to sign their own exclusive content. This is likely going to be a continuing trend as distributors attempt to distinguish their service on something other than price. Another positive development for our media companies in the last few months was their reported Fourth Quarter results, which showed revenue and earnings upside surprises as advertising activity and rates have improved significantly. We expect these trends to continue and look for ad revenues to surpass pre-recession levels as the economy continues its recovery.

    Our airline holdings underperformed in the First Quarter, which was disappointing given accelerating revenue growth trends. While rate increases have helped mitigate the earnings impact from higher fuel prices, they have not been able to completely offset them yet. Once oil prices (and likely the political situation in the Middle East and North Africa) stabilize, we believe investors may focus again on capacity reductions and improved pricing power. The domestic airline industry is now flying fewer annual seats than in the year 2000, which means fewer unsold seats and higher revenues per plane. US Airways' CEO recently said that February's revenue acceleration was the biggest the airlines have ever seen for this time of year.

    One group of stocks recently added to the portfolio includes companies best positioned for higher levels of coal utilization (and prices) in coming years if demand continues to grow for non-nuclear energy after the earthquake/tsunami in Japan, and the German shut down of seven of its oldest nuclear reactors for inspections. Additionally, they have ramped up their coal-fired plant utilization. Similar reactions are expected by other governments around the world, who may be materially delaying any new nuclear capacity (if not also shutting down older plants as well). As Japan and other countries have relied further on available capacity at coal-fired power plants, coal prices have rallied about 10% since the earthquake. We expect pricing to remain robust, particularly in the international (seaborne) markets, and believe select U.S. coal miners will take advantage of their export capacity and may see a material improvement in their average selling prices. Our portfolios now also include positions in a few railroads, which could benefit from these same trends. Additional coal shipment volumes will further boost earnings, at the same time railroads are taking share from truckers and seeing higher overall exports (being boosted by dollar weakness and developing market economic growth).

     

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    The views in this newsletter were those of the Fund manager as of March 31, 2011, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

    Past performance is not a guarantee of future results.

    Earnings growth for a Fund holding does not guarantee a corresponding increase in the market value of the holding or the Fund.

    Before investing you should carefully consider the Jordan Opportunity Fund's investment objectives, risks, charges and expenses. This and other information is in the prospectus. Please read the prospectus carefully before you invest.

    Mutual fund investing involves risk. Principal loss is possible. The Fund's investment parameters are diverse and as such may be subject to different forms of investment risk such as non- diversification risk, concentration risk, small- and medium- sized company risk, interest rate risk, high yield bond and foreign securities risk, and lastly, the Fund may use derivatives such as options to increase its exposure to certain securities. Please see the prospectus for a more detailed discussion of the risks that may be associated with the Fund.

    Click here for fund holdings as of March 31, 2011.

    Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security.

    Nikkei 225 – A stock market index for the Tokyo Stock Exchange (TSE). It has been calculated daily by the Nihon Keizai Shimbun (Nikkei) newspaper since 1950. It is a price-weighted average (the unit is yen), and the components are reviewed once a year. You cannot invest directly in an index.

    Producer Price Index (PPI) – The Producer Price Index is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. You cannot invest directly in an index.

    Capital Expenditure is the funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations.

    Capital Intensity – For semiconductor manufacturers, it is a measure of how much it costs to generate each dollar of revenue. It is calculated by dividing total semiconductor capital expenditures by total semiconductor revenues. For example, in the past twenty-five years the ratio has ranged from 9-34%, meaning it has cost $0.09-$0.34 in capital expenditures for each $1.00 of semiconductor revenue. Semiconductor capital equipment manufacturers benefit from rising capital intensity levels, as they capture a larger share of overall industry spending.

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

• 1st Quarter 2011: 1st Quarter Investment Outlook

  • First Quarter 2011 Investment Outlook

    Thankfully 2010 produced another year of double digit returns for most global equity markets, as global economies continued to recover from the severe recession in 2008-2009. While the stock market was fairly volatile through the end of August, the market spent the last four months of the year essentially rising the entire time. Interestingly, the S&P 500 Index ended close to the levels predicted by many Wall Street strategists, and thus it was a year that it did not pay to be contrary. Despite widespread discussions of the declining dollar, the dollar actually rose slightly during 2010, but experienced a wide range during the year.

    Emerging market equities put in a mixed year and underperformed stocks from many of the developed countries, notwithstanding much slower growth rates in Europe, Japan and the U.S. Inflation has been a growing problem for the emerging economies, as countries from Brazil to China and India have experienced rapidly accelerating inflation. Rising inflation has been brought on by explosive moves in commodity prices, with everything from oil and gold to wheat and corn experiencing sharp advances. Agricultural commodities were especially strong due to worldwide droughts and poor harvests. Thus, the countries which have been regarded as the most promising emerging economies, China and Brazil, actually experienced negative and flat equity returns respectively in 2010.

    Bonds also experienced a mixed year, with long term U.S. treasuries closing the year with single-digit returns, despite Federal Reserve intervention through an additional significant round of quantitative easing, and the fact that bond funds received the overwhelming amount of mutual fund flows during the last two years.

    The Economy and Interest Rates

    "We believe that the economy will slowly re-accelerate, helping corporate profits, while interest rate increases will not be sufficient to derail the recovery or the bull market."

    The economic recovery continued throughout 2010, but economic momentum decelerated sharply in the middle of the year, due to both worries of the European banking crisis and the ending of some of the stimulus spending programs. In addition, there were significant concerns about the potential expiration of the Bush tax cuts. This prompted the Federal Reserve to initiate another round of quantitative easing, which has stimulated both asset price recoveries and greater consumer spending. Consumer confidence was further aided by the year-end extension of the Bush tax cuts, and a temporary reduction in payroll taxes, starting in January. Since the end of August through December 31, 2010, the S&P 500 rose 20%, significantly improving consumer sentiment.

    But many long term challenges remain and pose ongoing risks to the recovery. Importantly, job creation has remained very disappointing, and the unemployment rate of 9.8% continues at multi-decade highs. And the housing price recovery appears to have stalled, with the S&P Case-Shiller home price index dropping sequentially for the last three months. While mortgage interest rates are near historic lows, they have started to rise again, along with most longer term interest rates. This rate rise may be offsetting some of the positive effects of the latest round of quantitative easing. Further straining consumers' wallets are recent sharp increases in gasoline and food prices.

    Other worries abound in the global economy. The European banking crisis has abated, but sovereign default risks remain an ongoing issue, and the weaker European economies, such as Spain, Portugal, Ireland and Greece, remain very challenged. And the big miracle economies of China and Brazil, and others, are starting to exhibit signs of strain, especially recent very sharp rises in inflation. Furthermore, commodity inflation tends to hit emerging economies much harder, because manufacturing economies are more energy intensive, and the percent of consumer expenditures on food consumption is significantly higher than in the west. Many emerging economies are thus experiencing significantly rising interest rates.

    While we expect emerging market economic expansion to slow in 2011, we expect developed economies to mildly accelerate. This should occur due to continuing balance sheet repair among consumers and the banking system, a return of cyclical consumption to more normal levels, especially for automobiles and houses, and ongoing federal stimulus and quantitative easing. We also believe that we will see signs of employment improvement during the year, as corporations, which are solidly profitable, increase hiring. We expect interest rates to continue to rise and return to more normal levels, but at a moderate pace. There is always the possibility of a dollar-related currency crisis that could upset the interest rate backdrop, but there do not appear to be any indications currently that such a crisis is eminent.

    The Stock Market

    We believe that the economy will slowly re-accelerate, helping corporate profits, while interest rate increases will not be sufficient to derail the recovery or the bull market. Nevertheless, similar to the beginning of 2010, we are somewhat cautious starting 2011 because the stock market is once again very overbought and investor sentiment is excessively bullish.

    Here is a list of short term negative considerations for U.S. equities as we start the new year:

    1. The stock market has advanced for four months without a 5% correction, rising almost every day in December, and ended the year in a very overbought condition.
    2. The put/call ratio and most other sentiment measures ended 2010 with excessive levels of investor euphoria and complacency. The percent of bullish advisors is at multi-year highs.
    3. Interest rates are rising.
    4. The Volatility Index (VIX) returned to its lowest levels of the last three years, reflecting both investor complacency and the extreme lack of price volatility during the fall rally.
    5. While the major equity indices have pushed to higher highs in the last month, the number of stocks posting new highs has lagged, a negative divergence indicating a potential loss of momentum.
    6. Credit-default swaps on European debt instruments are making new highs.

    These considerations cause us to enter 2011 with a sense of caution, but not alarm, as we believe that the bull market should continue as the economy improves. Corporate profit growth is outstanding and balance sheets are in good condition. As we noted above, it is likely that the massive defensive flow of retail investor money into bond funds will shift into investments in equities. Over the last three years, bond mutual funds have received $644 billion of inflows, while $268 billion has been withdrawn from domestic equity funds. This trend may be already beginning, with meaningful outflows from bonds funds having started in November. Rising interest rates should encourage asset shifts from bonds into stocks.

    While equity mutual funds have experienced enormous outflows during the last two years, emerging market funds have been the recipients of large inflows, which accelerated in 2010, until recently. As with bond funds, we expect that this trend will also reverse in favor of U.S. equity funds. U.S. equities currently have better valuations, earnings visibility and higher margins than many foreign stocks. Additionally, it appears that the U.S. economy is currently accelerating, while Europe continues to struggle with its sovereign debt crisis, and the emerging economies may start to decelerate due to rising rates and inflation. Finally, U.S. corporations are in excellent condition to increase dividends and stock buybacks.

    Strategy

    Our largest portfolio weightings remain in agriculture and food-related investments, which have benefitted from corn, soybeans, and wheat prices all ending the year trading at or near two-and-a-half-year highs. Steadily growing emerging market demand and production shortfalls have combined to drain inventories and leave the supply chain with very little slack to absorb future supply disruptions. For example, corn inventories (as a percentage of demand) are projected by the USDA to reach their lowest level since the 1995/96 harvest, and soybean inventories are projected to fall near their lowest levels of the past decade. Rebuilding these stock levels and avoiding further shortages will likely require increased expenditures in fertilizers, seeds, and equipment, which should leave our related holdings well-positioned for further gains in 2011.

    We continue to be bullish on gold and gold producers, due to our expectation for another significant move higher in gold prices during 2011. Many commodity prices are trading close to multi-year highs, which has stoked inflationary fears for many investors. As inflationary pressures continue to rise and investors seek to shift out of paper assets into hard assets, gold should be one of the primary beneficiaries. Additionally, gold is still trading well below its inflation-adjusted level from 1980. The ongoing European sovereign debt crisis will likely continue to pressure the European Central Bank to pump liquidity into the European banking system, further helping gold prices. Furthermore, earnings growth trends and positive earnings estimate revisions should cause gold mining stocks to appreciate significantly in the next twelve months.

    We have become increasingly positive on the proliferation of mobile computing in the past few months, and have hence added new positions in the component suppliers of smartphones and tablet computers. Consumers are looking to bring all of the convenience and speed of a desktop internet experience with them on the go, which is becoming easier to accomplish with iPhones and Android-powered smartphones. The next leap in mobile computing is being made possible with the rollout of 4G wireless networks by carriers such as Verizon and AT&T. Many of these carriers will look to offer much-improved video and data services on tablet computers, within a market that was opened up by the runaway success of the iPad in 2010. Over fifty new tablet devices are expected to be introduced in the first half of this year, which should lead to a level of price competition that drives an acceleration in adoption far beyond what most analysts expect. We believe final tablet unit sales will be close to double the initial market expectations of 40-50 million, leading to the potential for significant upside surprises in revenues and earnings for suppliers of mobile microprocessors, flash memory, and wireless baseband chips. The increasing burdens placed on wireless networks by mobile computing growth will also require higher investments in broadband capacity, and we remain bullish on the optical networking equipment companies as well.

    The primary thesis behind our investments in media companies and content creators has not changed; we continue to believe these companies have very positive long-term outlooks as they raise prices to a number of distributors (both in cable and online) for access to their content. We expect improved monetization of online video through more premium access fees (such as those charged by Hulu Plus) and additional advertising time slots being sold. The improving U.S. economy will also serve as a tailwind for this industry as advertising rates keep recovering.

    Finally, we have maintained our positions in airlines, as we expect their returns on capital to improve materially in the next few years, while at the same time earnings volatility is greatly reduced. Management teams in this industry are finally being led by executives that are focused on profitable investments (or reductions) in capacity, not strictly trends in market share. As industry capacity and capital expenditures are maintained at low levels, these companies should generate cash flows far exceeding the levels of the past decade, allowing them to appreciably reduce debt levels (and potentially increase the valuations placed on their equity). One of the more bullish developments for the industry that could occur in 2011 would be the government approval of fuel surcharges being tied to ticket sales, which would allow these companies to make great strides in improving earnings visibility and reducing volatility without the use of expensive and complicated fuel hedges.

    Therefore, we believe that there are many attractive equities to buy and hope for another good year of stock appreciation.

     

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    The views in this newsletter were those of the Fund manager as of December 31, 2010, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

    Past performance is not a guarantee of future results.

    Before investing you should carefully consider the Jordan Opportunity Fund's investment objectives, risks, charges and expenses. This and other information is in the prospectus. Please read the prospectus carefully before you invest.

    Mutual fund investing involves risk. Principal loss is possible. The Fund's investment parameters are diverse and as such may be subject to different forms of investment risk such as non- diversification risk, concentration risk, small- and medium- sized company risk, interest rate risk, high yield bond and foreign securities risk, and lastly, the Fund may use derivatives such as options to increase its exposure to certain securities. Please see the prospectus for a more detailed discussion of the risks that may be associated with the Fund.

    Click here for fund holdings as of December 31, 2010.

    Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security.

    The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index.

    S&P/Case-Shiller Home Price Indices are the leading measures for the US residential housing market, tracking changes in the value of residential real estate both nationally as well as in 20 metropolitan regions. The indices are calculated monthly and published with a two month lag. New index levels are released at 9am Eastern Standard Time on the last Tuesday of every month.

    The Volatility Index (VIX) - The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge".

    Cash Flow - 1. A revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities - financing, operations or investing - although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments. This holds true for both business and personal finance.

    2. An accounting statement called the "statement of cash flows", which shows the amount of cash generated and used by a company in a given period. It is calculated by adding noncash charges (such as depreciation) to net income after taxes. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company's financial strength.

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

• 4th Quarter 2010: 4th Quarter Investment Outlook

  • Fourth Quarter 2010 Investment Outlook

    We witnessed a very satisfactory rebound in equity prices in the Third Quarter as favorable economic and capital market trends reasserted themselves. Visions of the European sovereign debt contagion and the "uncontrollable" BP oil spill have disappeared from the front page news to be replaced by moderately improving economic data, excellent corporate profits, and the peaking of the excessively fearful investor sentiment.

    The Third Quarter rebound occurred almost entirely during the month of September, with US equities rising almost 11% in one of the strongest Septembers in stock market history. U.S. Treasury bonds, which had surged to near record levels, peaked in August, climaxing on deflation fears. Our holdings continued to perform well, especially during the rally off the August lows.

    We continue to have a positive outlook for the stock markets, particularly after the lengthy consolidation we have experienced over the last five months. This consolidation caused elevated fear levels among investors that we believe should set the stage for further advances. The Third Quarter also experienced what may have been a climactic surge into defensive bond funds and away from stock funds. We believe that this trend will reverse.

    The Economy and Interest Rates

    "Stock market behavior this year has evolved with the volatility, yet positive bias, that we expected and described in our previous outlooks, but the timing of the significant moves..."

    While the economy has continued to recover from the worst recession since the 1930's, its pace decelerated sharply this summer due to the expiration of some important government stimulus programs, weak loan growth, and fears relating to the European sovereign debt crisis. As negative economic data proliferated in July and August, extremely positive corporate profits were ignored, causing stock prices to decline and investor sentiment to plunge to near record lows, which has historically marked important stock market bottoms. We believe that much of the disappointment resulted from elevated expectations on the heels of the initially rapid economic recovery and spectacular stock market rally experienced from the lows of March 2009. Thus, a period of consolidation and weaker data does not necessarily indicate that we are about to experience a double dip recession.

    Despite the summer "soft patch", economic activity has improved recently, as unemployment claims have started to decline, company activity surveys have risen, home prices remained stable and retail sales continued to expand moderately. Importantly, the Federal Reserve, in its most recent policy statement, articulated a concern for low inflation levels in the economy and stated that inflation may be too low to be consistent with stable economic growth. The implication is that the Federal Reserve will conduct monetary policy with a view towards increasing inflation to more normal levels, presumably through quantitative easing. Hopefully, this will be a critical signal to encourage borrowers and lenders to commence a new credit expansion cycle.

    Another noteworthy development in the Third Quarter was the stampede of investors into bond funds, sending long term Treasury rates almost to the recession lows of 2008 and two year notes to record lows. In the extreme low interest rate environment, large companies considered offering 100 year bonds for sale to capture the low interest rate frenzy. These fear levels in the intermediate and long ends of the yield curve are unsustainable. While we expect low short term rates to continue, as that remains the Federal Reserve’s policy, intermediate and long term interest rates should rise to more normal levels given that the economy has been expanding.

    Our economic outlook continues to be for modest growth. While the economy faces the headwinds of state and local fiscal contraction, ongoing unwinding of excess consumer and business leverage, and the likelihood of higher taxes, it is aided by the extremely accommodative monetary and fiscal stimulus, as well as pent-up demand from several years of contraction. This is especially apparent in automobile and other large purchases, and the enormous cash hoards sitting on the sidelines. Finally, money supply growth, which had been stubbornly weak during the recovery, has started to improve.

    The Stock Market

    Stock market behavior this year has evolved with the volatility, yet positive bias, that we expected and described in our previous outlooks, but the timing of the significant moves has been quite abrupt. We remain positive and expect equity prices to generally advance in the Fourth Quarter and into next year. It is remarkable that despite the big recovery in stock prices since the 2009 lows, many large groups of investors continue to be very negative on the growth prospects for corporate profits and the return prospects of stocks. For example, in the last three years, investors have withdrawn approximately $221 billion from equity mutual funds, while pouring $590 billion into bond funds at a time when bond yields are near record lows. This investment pattern of selling stocks to buy bonds continued in the Third Quarter. According to Ned Davis Research, bonds are currently at 55-year highs as a percentage of household and pension trust financial assets.

    While bonds are expensive, stocks appear generally cheap. Given super low interest rates and near-record corporate profits, the present valuation of stocks gives almost no credit for future earnings growth or generally improving news. At the same time, the savings rate has risen to 5-6%, creating ample funds for investment. While much of the incremental savings, and funds withdrawn from equity mutual funds, have gone into bonds, we expect the asset flow trends to reverse meaningfully into stocks in the years ahead. This reversal may occur due to one or more of the following: 1) stocks are cheap and bonds are expensive; 2) economic and profit trends have improved; 3) inflation will likely return to normal levels, especially with the Federal Reserve's help from quantitative easing; and 4) the technical profile of equities has improved, spurring better demand.

    Importantly, investor sentiment readings got to extreme levels at the August stock market lows, creating a successful test of the June decline. Many sentiment measures registered levels close to the pessimism witnessed at the time of the March 2009 lows. We believe that many of these pessimistic investors will soon want to get back into the stock market. Finally, equity correlations have been very high in the Third Quarter, especially during the month of September, which is often regarded as being reflective of risk aversion, and contrarily, a bottom.

    Strategy

    We added to our agriculture-related investments in the past few months, and trends continued to improve throughout the summer. Corn and wheat were among the grain prices which rallied recently to 52-week highs. The rally was partially due to near-term shortages in several countries, but more importantly, due to concerns over the current harvest and estimated ending inventory levels. Much like the oil price spikes in late 2000 and early 2003, we believe that while the grain price rallies in 2008 and 2010 have been exacerbated by short-term shortages, they are underscoring the underlying structural supply and demand imbalances building in global markets. Further investments in yield-improving products and equipment are required due to robust demand growth, especially from emerging markets.

    Our portfolios continue to have overweight positions in media companies. Recent advertising developments have been supportive of our bullish outlook, with cable network trends stable or improving heading into the fall, and with broadcast network trends accelerating. The most important long-term driver for these companies remains the improved monetization of their original content, and we expect further battles between content providers and distributors. A few of the latest developments include contract disputes between Fox and Dish Network, following a similar one between CBS and Comcast. Also, new deals are being signed to distribute video content in a number of different platforms on an almost daily basis. For example, Netflix signed several new contracts with movie studios to expand their digital streaming library, and the new Apple TV product will allow for individual shows from Fox, ABC, and Disney to be rented for ninety-nine cents. Given that the list of distributors keeps growing (especially in wireless platforms) and they are fighting over a limited number of desired movies/television shows, we expect these disagreements to result in higher prices for content access across the board.

    The airline industry is another area where we added to positions during the summer months. After mergers such as Delta/Northwest, United/Continental, and the newly announced Southwest/Airtran, management teams will likely be even more disciplined with respect to capacity additions, and fares are likely headed higher even with only nominal increases in demand. Also, a recovery in business travel has boosted average fares for the industry, given the fact that average business fares are 3-5 times more expensive than leisure rates. Improving yields and better expense management have resulted in much-improved earnings outlooks for the airlines, and valuations remain very reasonable (price/earnings in the mid-single-digit range). Free cash flows have been surprisingly strong as well, which should allow for increasing debt retirements and much-improved balance sheets in coming years.

    We have retained our investments in gold producers, as we maintain our belief that gold is attractive as an alternative asset/currency. It remains under-owned by investors despite debates in the media over whether or not gold is currently in a 'bubble.' Gold should benefit as well from a new quantitative easing program that could be announced by the Federal Reserve in coming months, which should further pressure the U.S. Dollar as more dollars are printed to purchase bonds, mortgages, or other financial assets. This process could be repeated in other countries, especially in Europe. Given the appreciation in gold prices this year, which has far exceeded the flattish trends in oil prices, we expect gold miners' profit margins to expand and allow for considerable profit growth.

    One of our new investment themes is centered on the optical networking equipment companies. Telecommunications carriers such as AT&T, Verizon, and smaller regional carriers are just starting to come out of a capital expenditure spending trough, which was caused by the recession. Carriers have been running utilization rates at significantly higher levels to delay investments in an uncertain economy, while traffic growth has continued at a very rapid pace and has been largely unaffected by economic trends. Cisco estimates that Internet Protocol traffic will grow at a 40% Compound Annual Growth Rate (CAGR) from 2008-2013, led by a 131% CAGR in mobile data traffic, driven by demands of smartphone users. Optical equipment directly addresses the need for more capacity, both by increasing the amount of data that can travel over a fiber optic cable, and by providing more flexibility to the network. There has been a considerable improvement in industry pricing trends in the past year, as demand levels have spiked and consolidation has taken less efficient supply out of the market. More benign pricing declines combined with explosive demand growth and operating leverage should lead to much better-than-expected profitability for the leading optical equipment providers. We expect higher earnings estimates, reasonable valuations, and the potential for a multi-year spending cycle to bode very well for these new holdings.

    In conclusion, we are optimistic that corporate profits should continue to improve and that the stock market may experience healthy valuation expansion in the months ahead.

     

    ---

    The views in this newsletter were those of the Fund manager as of September 30, 2010, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

    Past performance is not a guarantee of future results.

    Before investing you should carefully consider the Jordan Opportunity Fund's investment objectives, risks, charges and expenses. This and other information is in the prospectus. Please read the prospectus carefully before you invest.

    Mutual fund investing involves risk. Principal loss is possible. The Fund's investment parameters are diverse and as such may be subject to different forms of investment risk such as non- diversification risk, concentration risk, small- and medium- sized company risk, interest rate risk, high yield bond and foreign securities risk, and lastly, the Fund may use derivatives such as options to increase its exposure to certain securities. Please see the prospectus for a more detailed discussion of the risks that may be associated with the Fund.

    Click here for fund holdings as of September 30, 2010.

    Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security.

    The Price to Earnings (P/E) Ratio reflects the multiple of earnings at which a stock sells.

    A correlation coefficient is a measure of the interdependence of two random variables that ranges in value from -1 to +1, indicating perfect negative correlation at -1, absence of correlation at zero, and perfect positive correlation at +1.

    Free Cash Flow is a measure of financial performance calculated as operating cash flow minus capital expenditures.

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

• 3rd Quarter 2010: 3rd Quarter Investment Outlook; Jerry Jordan-Interview

  • Third Quarter 2010 Investment Outlook

    The global equity markets suffered sharp losses in the second quarter, after reaching new recovery highs in April. The reversal in investor sentiment was triggered by the return of contagion fears in the wake of the sovereign debt crisis in Europe, the emerging economic deceleration in China, and the shock of the British Petroleum oil spill disaster. Several doses of disappointing U.S. economic news helped to turn investor expectations negative. That said, we believe that this should allow for higher prices over the next six to 12 months in our portfolio companies.

    We had entered the second quarter with a cautious outlook, feeling that investor expectations had become too optimistic in light of the gains of the previous 12 months. Despite exceptionally good corporate profits experienced in the first quarter, stocks had risen 75% from the bear market low the previous year. We stated that we expected a volatile price environment to occur. Our aggregate outlook for the year was, and continues to be, positive. Now that the market has experienced a meaningful correction of the previous year’s gains, we believe that the risk/reward relationship for many stocks is becoming positive again. We continue to believe that the stock market may experience higher highs later in the year and into 2011.

    While our accounts have suffered modest year-to-date declines in line with that of the market, our relative performance has improved sharply in the last two months after we repositioned the accounts in what we feel are higher quality and more defensive equities. We continue to believe that higher quality and large capitalization stocks have the potential to outperform for the remainder of the year and thereafter.

    The Economy and Interest Rates

    “While we expect the stock market to recover from its recent decline, we expect a significant change in market leadership with a sharp tilt in favor of large capitalization growth stocks...”

    Economic momentum abruptly decelerated in the second quarter. The sovereign debt crisis in Greece dominated the headlines, but housing activity, retail sales, employment, and consumer confidence all experienced significant disappointments during the quarter. A big contributor to the sequential declines was the ending of various government stimulus programs, such as the first-time homebuyer credit, along with the general lack of a meaningful increase in loan demand. Also contributing to poor business sentiment were concerns of elevated regulation by the Obama administration, and the prospects of higher taxes in 2011. Additionally, the ECRI Weekly Leading Index, which has been very accurate in forecasting economic activity, suffered a sharp decline in June.

    These conditions, along with the overbought condition of the equity markets, caused stocks to experience sharp declines, further dampening consumer sentiment. The bond market experienced another flight to quality with yields on Treasuries dropping across the curve. The two-year Treasury yield has gone to a new low, possibly reflecting low confidence in the continuation of the recovery. Credit spreads and the cost of credit default swaps have risen. Especially noteworthy is the growing credit concern regarding states and municipalities, especially as federal stimulus payments begin to decline.

    Despite these worrisome economic headwinds, we expect the U.S. economy to continue to expand this year, but at a more modest rate. While employment has not begun a meaningful recovery, some of the preconditions for a recovery are emerging. The most significant precondition is robust corporate profitability and balance sheets. As noted above, corporate profits in the first quarter were exceptional and significantly above expectations. Profit margins have had a remarkable recovery and troughed at a higher level than usually occurs during recessions. Miraculously, U.S. corporate profits are on track to soon reach the record levels achieved in 2006. Despite worries of deflation (which we share), U.S. nominal GDP is already back at record levels. Further, corporate cash holdings have surged, possibly portending both increases in capital spending, employment, dividends, and share buy-backs.

    In the recent Federal Open Market Committee statement following its June meeting, the Federal Reserve noted the recent deceleration in the economy, and continued to indicate that monetary conditions would remain accommodative for an extended period of time. Thus we believe that the interest-rate backdrop should remain supportive of the economy and investments for the foreseeable future.

    The Stock Market

    The steep declines in stock prices in May and June have caused the evaporation of investor optimism that was so pronounced in the first quarter. The painful declines have also been accompanied by sharp breaks in important moving averages, although generally on light volume. We have witnessed a succession of high momentum days in both directions, with a profusion of 90% up and down volume days. In fact, in early June there was a 120:1 down/up volume day, a rare event.

    While the stock market is clearly in a corrective trend, with the S&P 500 having declined 15.5% from its April highs, we believe that the market should begin rising again as investors reset earnings expectations to somewhat lower levels due to the headwinds that we have discussed. The case for higher stock prices is premised on the continuing favorable interest rate environment, good but decelerating earnings growth trends, and cheap valuations. With Treasury bonds yields so low, it is hard to make an argument against owning blue chip stocks selling at 10-13 times earnings, growing at more than 5%-10% and yielding more than 2%. There are abundant numbers of large capitalization equities that fit this description.

    We are concerned about the potential for deflation due to the profound debt burdens of the Western economies, in addition to adverse demographics due to aging populations. While a lot of the excessive private debt has been restructured, it has been replaced with massive government debt. The long-term outcome of these imbalances will depend on policy initiatives deployed over the next few years. For now it appears that we will be moving from an environment of fiscal stimulus to fiscal austerity, but with plenty of monetary “quantitative easing” to attempt to lessen the pain.

    Strategy

    While we expect the stock market to recover from its recent decline, we expect a significant change in market leadership with a sharp tilt in favor of large capitalization growth stocks, and an underperformance of small capitalization stocks and emerging markets. We believe that such a rotation could occur due to the deceleration of global economic growth, excessive outperformance by small caps and emerging markets during the last 10 years, and very attractive valuation and quality characteristics of large caps.

    Media- and advertising-related stocks are now among our largest holdings. Advertising rates have only begun to rebound from the lows of the past few years, and recent television ad-rate auctions have been better than expected. The leading media companies all sell below average market multiples, have strong cash flows, and stable dividends. However, what is most interesting about the media companies are the assets they own. They have created the content that is becoming more valuable every day. Technology companies are fighting each other to find new ways to distribute movies, TV shows, sporting events, music, etc. to the consumer. While many new platforms of distribution are being developed (iPads, smartphones, Internet-enabled TVs, etc), there are only a few companies that own the content being distributed. As the scarcity value of this content increases, we expect the creators to benefit through possibly higher prices for content access and greater usage of advertising (especially on mobile devices). While this trend has only just begun, we have seen increasing evidence in support of this thesis recently, including News Corp’s decision to charge for online news access, Hulu’s subscription service, and rumors of Google developing a payment system for premium online content.

    Another focus of our large-capitalization strategy is in companies whose earnings can withstand another economic deceleration. We own high-quality stocks with what we believe are strong balance sheets, solid cash flows, and defensible income streams. This group includes consumer staples producers, health care, and select mega-cap technology companies. While the outlook for many health care companies has become more opaque as governments around the world look to reduce spending, we have focused primarily on the beneficiaries of increased health care coverage with less reimbursement risk (diagnostics providers, distributors, and drug manufacturers that serve unmet needs). While technology companies’ earnings are generally more correlated with economic trends, our holdings are in corporations with unique products entering new cycles, which should provide some level of insulation from slower GDP growth. Also, with valuations at or near 10-year lows in many cases, these companies should be able to better weather potential reductions in earnings guidance in coming months.

    We have increased positions in value-oriented retailers and apparel producers, which should benefit from any decelerations in economic growth due to the likelihood of consumers trading down to lower-cost brand names (yet ones that still offer a high value proposition). Many of these companies are experiencing revenue growth rates in the high-single digits to low-double digits, which could prove resilient even in a weaker economic environment. In addition, these select retailers’ earnings per share have already met or exceeded the highs from the past few years, while valuation multiples have compressed significantly.

    Trends in agriculture have marginally improved recently, and we continue to be bullish on the long-term fundamentals for grain pricing and related machinery manufacturers. Despite excellent planting weather, forecasts for the current harvest have been reduced recently, and inventory estimates for corn and soybeans have been reduced several times in the past month due to lower yields and higher demand. There is also an important catalyst that could occur before the end of the summer: Congress is reportedly discussing a revision to the Biofuels Law and could increase the required amount of ethanol in gasoline from 10% to as much as 15% (over the course of several years). This would materially add to corn demand in the United States, potentially by over 10%. Another important development from the past few months is the sharp increase in China’s corn imports from the United States (their first large purchase in four years). Their commitments have reportedly already come close to one million tons of corn, due to drought conditions, low crop yields, and depleted inventories.

    Gold producers are the only other commodity-related stocks in our portfolios, as gold’s unique position as a store of value should allow its outperformance to continue. Fiat currencies worldwide will continue to be printed by governments who need to devalue their debt and support asset prices. Even European leaders may be forced into some form of quantitative easing in coming months, which would help provide needed liquidity to their banks as austerity programs are being implemented. As additional money is printed to purchase toxic financial securities, gold’s relative value should appreciate because new supplies are much more difficult and expensive to find and produce.

     

    ---

    The views in this newsletter were those of the Fund manager as June 30, 2010, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

    Past performance is not a guarantee of future results.

    Before investing you should carefully consider the Jordan Opportunity Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus. Please read the prospectus carefully before you invest.

    The Fund’s investment parameters are diverse and as such may be subject to different forms of investment risk such as non- diversification risk, concentration risk, small- and medium- sized company risk, interest rate risk, high yield bond and foreign securities risk, and lastly, the Fund may use derivatives such as options to increase its exposure to certain securities. Please see the prospectus for a more detailed discussion of the risks that may be associated with the Fund.

    Click here for fund holdings as of June 30, 2010.

    Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security.

    The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Economic Cycle Research Institute, or ECRI, is an independent forecasting group based in New York. ECRI publishes several leading indexes designed to predict changes in the economy. The ECRI Weekly Leading Index is one of these indexes. You cannot invest directly in an index.

    Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g., depreciation) and interest expense to pretax income.

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

• 2nd Quarter 2010: 2nd Quarter Investment Outlook

  • Second Quarter 2010 Investment Outlook

    When we exited 2009, a year which witnessed some of the biggest equity gains in history, we expected a return of volatility and significant sector rotation, followed by further gains. The stock market did indeed suffer a sharp correction in the second half of January, with the S&P 500 declining 9% from its highs. While the decline was sharp, it ended quickly after two weeks, and the market resumed a steady advance before the S&P 500 finished the quarter up 6%. But rotation did not occur, as the consumer discretionary and technology sectors continued to lead the advance. Commodity and late cycle sectors continued to lag relatively, as they did in the Fourth Quarter. Emerging markets also lagged relative to the U.S. and other developed market bourses, with a notable decline in the Chinese market of 5%, as measured by the Shanghai SE A Share Index.

    Given this market backdrop, our positions lagged materially, after having performed so well last year. Energy stocks and Chinese growth stocks, two areas we particularly favored, performed poorly on a relative basis. Most of our investment themes we believe are long-cycle growth stories, whereas stocks that have benefited strongly from short term stimulus, such as retailers, continued to outperform. We expect that the market will return to the longer cycle themes, as long as the economy continues to recover and confidence builds.

    We remain cautiously bullish on the stock market, and believe it should eventually end the year higher. Near term, however, we feel some caution is warranted given the big advances experienced in the last twelve months and the fact that the level of general optimism is reaching high levels. Many stocks that have led in the advance in the last six months now have neutral valuations at best, and very high earnings expectations.

    The Economy and Interest Rates

    “The economic recovery is proceeding largely as we expected, with sharp percentage GDP gains that are mostly a function of activity returning to more normal levels”

    The economic recovery is proceeding largely as we expected, with sharp percentage GDP gains that are mostly a function of activity returning to more normal levels after the extreme declines in 2008 and early 2009. Retail sales and durable goods orders are rebounding, and vehicle sales are rising meaningfully. Even the housing market has stabilized and prices are showing modest improvement. Internationally, Europe has been surprisingly weak, but is improving, while emerging economies, led by China, are showing vigorous growth. And global trade has increased sharply, with global exports surging at a 21% annual rate, led by stunning recoveries in Japan and in other Asian exporters.

    We expect the economy to keep improving throughout the year, as confidence rebuilds. There is a lot of room for improvement, as U.S. consumer confidence remains near multi-decade lows. Despite the sharp recoveries of stock prices, the shrunken equity value of residential real estate and consumer debt de-leveraging continues to depress sentiment. And money supply growth has been surprisingly weak, along with bank loan activity. These are areas that we expect to improve and may lead the next leg of recovery.

    The short-term interest rate picture in the US remains on hold, as the Federal Reserve Bank kept the federal funds rate near zero, despite the almost 6% gain in GDP in the Fourth Quarter. But long-term interest rates have started to rise again, particularly in the wake of recent weak U.S. Treasury auctions and faster economic growth. We believe that the Federal Reserve should not begin to tighten until the end of the year, as it may be reluctant to tighten before it can assess the impact of the expiration of some of the credit market relief programs that expired at the end of the First Quarter.

    Even though we expect 10 year interest rates to continue rise modestly, we do not feel that it will derail the economy or the stock market, except for a temporary setbacks, at which point interest rate pressures should moderate. Right now a lot of stimulus is still being thrown at the economy, and some interest rate adjustments should soon be appropriate.

    The Stock Market

    Our outlook on the stock market remains cautiously optimistic, following last year’s huge gains. We believe that both the economy and equity prices may improve as the year progresses. While corporate profits have been stellar in the Fourth Quarter, and could remain so through the First Half, we believe that expectations may have gotten too optimistic in the wake of equity gains. This is especially true given the inability and reluctance of businesses and consumers to employ leverage in the current environment.

    The technical momentum of the stock market remains very strong, as evidenced by the rising Advance/Decline Line, the high number of stocks above their moving averages, the high number of new highs, and very few new lows.

    But the stock market is very overbought, as evidenced by the very high year-over-year rate of change, which is at levels that has generally provoked a period of volatile consolidation, notwithstanding potential further gains. Most investor sentiment measures show signs of complacency, and there has been a surge of ETF (exchange-traded funds) buying in recent weeks, which may reflect a lot of short covering. Additionally, if interest rates continue to rise in the long-end of the curve, this could also exert short-term pressure on stocks. In conclusion, we believe that the risk/reward in pressing the bet on top-performing stocks is not favorable at the moment. In fact, when a period of volatility resumes, we think there is the potential for significant rotation into what we consider "longer-themed growth stocks", which we will discuss in our Strategy section below.

    Strategy

    We continue to invest in industries and sub-sectors that we think may likely benefit from secular trends that we see developing over the next several years, if not the better part of the decade. While many companies (especially within the consumer discretionary sector) have seen sales recover to pre-crisis levels, we believe out-performance from here will require secular growth. In our opinion, our equity holdings have longer-term growth opportunities that should drive earnings momentum well ahead of the S&P500, while many have P/E valuations below the market multiple.

    Recently we have increased exposure in the media, telecom, and value-oriented retail industries. Our holdings in these sectors offer earnings growth potential that could surpass S&P500 earnings projections in coming years, as new revenue streams come online, expense cuts drive operating leverage, and high cash levels are used to repurchase shares. We believe we are witnessing the beginning of a sea change within media, where companies will increasingly charge for access to their content (especially online), and/or use advertising to better monetize their assets. One recent example was announced by Viacom in early March, when it removed "The Daily Show" and "The Colbert Report" videos from the free site. Instead, Viacom will host the content on a company-owned website (Comedycentral.com), where they’ll receive all related advertising revenues. Also, select telecom operators should see significant cash flow improvement as capital expenditures are wound down from extremely high levels in the past five years, allowing for potentially higher dividends, share repurchases, and shareholder returns. Finally, we expect consumers to continue to trade down and stay with lower-priced retailers (especially in the lower and middle classes), as ongoing debt de-leveraging should weigh on discretionary income for years to come. Our holdings in value-oriented retailers are well-positioned to possibly benefit from these trends and outgrow their peers.

    We remain bullish on the long-term trends in agriculture, as worldwide production should struggle to keep up with demand growth in coming years. Emerging market population growth and food substitutions for fuel (i.e., corn-based ethanol) will continue to suppress inventory levels. Without extremely favorable weather conditions (as seen in 2009), production shortfalls may become much more common as 2010 progresses and especially into 2011. Our investments, including fertilizer producers, machinery manufacturers, and grain processors, should benefit from farmers’ attempts to improve yields. Our portfolios also include several packaged-food companies, which we expect to benefit from higher grain prices by actively hedging raw materials exposure and raising their own prices, which should allow for margin expansion.

    Our energy-related investments (in producers and service companies) have underperformed oil prices recently, partially due to the weakness in natural gas. We expect natural gas prices to stabilize in coming months as we head into the shoulder season (with less hydroelectric output and increased gas switching), which should improve the relative performance of our holdings. Demand growth for oil products has accelerated in the last two months, which should continue as the economy recovers further, supporting higher oil prices and increased expenditures in exploration/production activities. Also, earnings estimate revisions for the oil services industry have recently started to inflect positively relative to other sectors, which should portend a resumption of strong performance.

    Healthcare is another area of focus with potentially attractive long-term growth characteristics, particularly after the passage of the Health Care Reform Bill. 32 million additional individuals will have access to healthcare insurance by the end of the decade, which may drive higher prescription, diagnostic test, and screening volumes. Based on this, we anticipate most of our holdings could substantially appreciate in the near-term, even before the benefits of the Reform Bill.

    While our portfolios are positioned somewhat defensively, we expect to have an opportunity to regain relative momentum in the months ahead after the stock market experiences a consolidation process.

     

    ---

    The views in this newsletter were those of the Fund manager as March 31, 2009, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

    Past performance is not a guarantee of future results.

    Before investing you should carefully consider the Jordan Opportunity Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus. Please read the prospectus carefully before you invest.

    The Fund’s investment parameters are diverse and as such may be subject to different forms of investment risk such as non- diversification risk, concentration risk, small- and medium- sized company risk, interest rate risk, high yield bond and foreign securities risk, and lastly, the Fund may use derivatives such as options to increase its exposure to certain securities. Please see the prospectus for a more detailed discussion of the risks that may be associated with the Fund.

    Click here for the Fund's top ten holdings as of March 31, 2010. Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security.

    The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Shanghai A-Share Stock Price Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares listed on the Shanghai Stock Exchange that are restricted to local investors and qualified institutional foreign investors. The index was developed with a base value of 100 on December 19, 1990. You cannot invest directly in an index.

    The Price to Earnings (P/E) Ratio reflects the multiple of earnings at which a stock sells. Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expenses to pretax income.

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

    The VIX is the ticker symbol for the Chicago Board of Options Exchange Volatility Index, a popular measure of the implied volatility of the S&P 500 Index.

    The put-call ratio is a popular tool specifically designed to help individual investors gauge the overall sentiment (mood) of the market. The ratio is calculated by dividing the number of traded put options by the number of traded call options. An increase in traded put options signals that investors are either starting to speculate that the market will move lower, or starting to hedge their portfolios in case of a sell-off.

     

• 1st Quarter 2010: 1st Quarter Investment Outlook; Jerry Jordan — Interview

  • First Quarter 2010 Investment Outlook

    2009 was a remarkable year for investors across the spectrum of assets and asset classes (with the exception of high-quality government bonds). With the aggressive aid of the global monetary and fiscal authorities, financial assets were reliquified with successive injections of monetary and fiscal stimulus, especially through the newly favored technique of "quantitative easing. " Asset appreciation was enormous for the year, and much more dramatic from the first quarter lows. Commodities and emerging markets did the best, but high-yield bonds and equities in developed markets posted historic recoveries. The worst investments, high-quality government bonds, posted double digit declines as intermediate and long-term interest rates rose.

    Our positions experienced significant gains in 2009, both absolutely and relative to benchmarks, notwithstanding the consolidations in many of our holdings in the fourth quarter. In the final quarter, our holdings in energy and other commodity stocks lagged the broad market, despite positive performance of underlying commodity prices (i.e., crude oil advanced over 10% during the quarter).

    Our outlook for 2010 is positive, but is tempered by our expectation of substantial volatility during the year. We expect the U.S. and global economies should experience significant economic acceleration during the year, due to continuing stimulus and easy comparisons. But stocks have had enormous advances and valuation levels in many sectors and regions are neutral at best even given our optimistic expectations for profits. Furthermore, we expect interest rate pressure to continue on the long end of the curve, and, eventually, to spread to short-term interest rates, which currently remain near zero.

    The Economy and Interest Rates

    “As we have done this year, we will look to reduce exposure to our favorite groups if they become overbought, and add to positions if they become oversold, both absolutely and relatively.”

    Given the magnitude of monetary and fiscal stimulus thrown at the global economy, one might observe that the pace of recovery in 2009 was quite modest, notwithstanding China’s strong performance. By year end, industrial production and bank lending in the major developed economies was still hovering near cycle lows, even as the recession officially ended. But importantly these indicators have started to improve, now that confidence is building with the recovery in asset prices. Most noteworthy is that by the middle of the fourth quarter, economic reacceleration became visible across a broad spectrum of indicators including employment, durable goods, trucking surveys, corporate profits, housing activity, and commodity prices.

    In an economic recovery cycle it is only natural for visible economic improvement to meaningfully lag the recovery in asset prices. This should be especially true given the shock of the financial crisis last year, and the magnitude of asset declines and the extended balance sheets of many borrowers. Furthermore, most of the U.S. government stimulus spending is scheduled to occur in 2010. Historically, the more dramatic an economic decline is, the more intense the recovery generally is, as a function of sequential comparisons. Therefore, we should expect accelerating economic strength this year in the United States.

    Given that the recession has ended and economic momentum is beginning to be visible, it is reasonable that interest rates could start to rise. This is already occurring in the intermediate and long maturities of the fixed-income markets. It is also clear, however, that short rates may remain low for a protracted period, because the Federal Reserve has continued to declare this policy in recognition of the weak underpinnings of the economic recovery. We expect that the recovery in 2010 should be strong enough for the Federal Reserve to begin to raise short rates before year end.

    The Stock Market

    The recovery of the stock market from its first quarter low was one of the most dramatic gains in U.S. stock market history, with the S&P 500 rising almost 70% in the 10 months following the March bottom. And the advance has been largely uninterrupted, except for the modest corrections witnessed in June, September, and October. And while we anticipate a big recovery in corporate profits in 2010, several factors cause us to expect an increase in market volatility, thereby tempering our enthusiasm.

    Sentiment measures for owning equities currently reflect excessive optimism and complacency. For example, the Investors’ Intelligence survey of investment advisors recorded a low level of bearish advisors, on a four-week moving average, not seen since the middle of 1987. Put/Call ratios have reached multiyear lows. The "VIX " Volatility Index has been grinding down at low levels, reflecting the decline in option premiums demanded by investors, which reflect investors’ current high appetite for risk.

    The supply/demand data for U.S. equities has been disappointing. We started the year with a "mountain of cash " in cash and cash equivalents. And while this "money mountain " is still huge, according to the ISI Group the amount has declined by over $670 billion since it peaked this year. Equity issuance by companies, especially banks, has reached record levels, over $200 billion. U.S. corporate bond issuance also reached a record. And money has been flowing out of, and not into, equity mutual funds (except in the last weeks of the year).

    The internal technical condition of the stock market has remained very good, however, with market breadth (the number of advancing issues less declining issues) continuing to confirm the higher highs of the U.S. equity indices. The number of new highs has also remained robust.

    Another major positive for equities is the likelihood for strong corporate profits in 2010. The profits recovery in the second half of 2009 has been steep, and the positive revisions in earnings estimates for 2010 are the highest in many years. Also, S&P operating profits bottomed at a higher recessionary level than might have been expected cyclically, due to the unprecedented decline in selling, general, and administrative costs, as businesses aggressively cut costs in the wake of the financial crisis. Another major positive for the S&P 500 is that roughly half of the index’s revenues are non-U.S. and thus exposed to higher growth foreign economies. Finally, corporate cash levels have improved sharply in the last year.

    Therefore, we approach 2010 with the expectation of potentially rewarding opportunities in many equity sectors, but recognize that after the large gains achieved in 2009 that investors will need to deal with the headwinds of an overbought market, excessive optimistic sentiment, and rising interest rates.

    Strategy

    Because the stock market ended 2009 in an overbought condition, we expect that 2010 will witness increased price volatility and greater sector rotation. Repeatedly in the past few years, industries with strong fundamentals have often experienced prolonged periods of weak relative performance, only to soon return to a leadership position. We expect this market action could continue. As we have done this year, we will look to reduce exposure to our favorite groups if they become overbought, and add to positions if they become oversold, both absolutely and relatively.

    Healthcare was one of the best-performing sectors in the fourth quarter, as more details emerged about the healthcare bill and investors realized it should not have a material negative impact on profitability for most companies. This move was in-line with our prior expectations, and we have taken advantage of the recent strength to realize profits and reduce exposure to the group. We are still bullish on the earnings prospects for our remaining holdings, particularly as millions of newly insured individuals should begin to contribute to volume growth. Our healthcare investments are focused on exposure to higher prescription growth, market-leading biotechnology products, and high-tech devices with strong patent protection.

    Additionally, we remain underweight in U.S.-based technology companies. While growth has been solid, valuations appear stretched and bullish sentiment toward the group has rarely been higher. We expect our rotational theory to resolve itself negatively for many of the high-focus technology names in the first half of 2010.

    Two areas which we have recently added that have underperformed, but appear attractive, are consumer staples and financials. While consumer staples traditionally offer defensive characteristics such as a history of stable growth, many of these investments have low valuations and high dividend yields which could amplify returns. From food manufacturers to low-cost retailers, we have selected companies that we believe can outperform due to expected margin improvements coupled with revenue growth of one to two times gross domestic product (GDP). Large capitalization banks are another industry group that has trailed the market during the past three to six months. We have recently added back a select group of bank stocks, as we expect decreasing loan loss reserves, stronger balance sheets, the removal of equity issuance overhangs, and increased merger and acquisition activity should contribute to stronger performance in the coming year.

    We remain bullish on the outlook for commodities, as the effects of global quantitative easing will likely be even more pronounced this year than in 2009. As the lagged effects of expansionary monetary policy work through the economy, growth should accelerate and spare capacities in many commodities may shrink materially. Another factor contributing to economic growth (and commodity demand) should be the long-awaited ramp of stimulus-driven infrastructure spending in the second quarter and beyond. Supply increases will likely trail demand growth, as many producers are hesitant to increase capital expenditures after the economic collapse of 2008. Prices of oil, natural gas, coal, metals, and grains should all benefit from tighter supply-demand balances, as should our holdings in production companies and their equipment/service providers.

    Select Chinese growth stocks remain overweight positions in our portfolios. The majority of the companies are consumer-oriented and offer exposure to a burgeoning middle class in China. They offer attractive earnings growth, forward P/E multiples that we think could reach the high single-digits or better, a history of solid cash flows, and high net cash positions. These stocks have been trading at significant discounts to both the U.S. and Shanghai stock markets, and a narrowing of that valuation gap combined with strong earnings growth could lead to considerable outperformance. Our holdings include leading companies in Internet advertising, online gaming, software, and consumer products.

     

    ---

    The views in this newsletter were those of the Fund manager as December 31, 2009, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

    Past performance is not a guarantee of future results.

    Before investing you should carefully consider the Jordan Opportunity Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus. Please read the prospectus carefully before you invest.

    The Fund’s investment parameters are diverse and as such may be subject to different forms of investment risk such as non- diversification risk, concentration risk, small- and medium- sized company risk, interest rate risk, high yield bond and foreign securities risk, and lastly, the Fund may use derivatives such as options to increase its exposure to certain securities. Please see the prospectus for a more detailed discussion of the risks that may be associated with the Fund.

    Fund holdings are subject to change at any time and should not be considered recommendations to buy or sell any security.

    Current and future portfolio holdings are subject to risk.

    The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index.

    The Price to Earnings (P/E) Ratio reflects the multiple of earnings at which a stock sells.

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

    The VIX is the ticker symbol for the Chicago Board of Options Exchange Volatility Index, a popular measure of the implied volatility of the S&P 500 Index.

    The put-call ratio is a popular tool specifically designed to help individual investors gauge the overall sentiment (mood) of the market. The ratio is calculated by dividing the number of traded put options by the number of traded call options. An increase in traded put options signals that investors are either starting to speculate that the market will move lower, or starting to hedge their portfolios in case of a sell-off.

     

• 4th Quarter 2009: 4th Quarter Investment Outlook; Jerry Jordan—Interview

  • Fourth Quarter 2009 Investment Outlook

    The equity markets continued to surge globally in the third quarter and, unlike the second quarter, experienced almost little volatility. The S&P 500 Index rose during nine weeks of the quarter, and the down weeks witnessed only shallow declines as investors broadly reacted to the realization that the recession appears to have ended. The global markets also advanced nicely, but, interestingly, the Asian markets began to underperform as more developed markets, such as the United Kingdom and Germany, produced stellar returns. The beginning of the global exodus from defensive cash positions appears to be well under way.

    We were pleased with our portfolio results during the stock market advance, benefiting from sharp recoveries in energy, industrial, financial, and technology sectors. As the stock market ended the quarter in a significant overbought condition, we have reduced exposure in some of our extended holdings in anticipation of opportunistic entry points later in the fourth quarter. Our intermediate outlook for equities remains positive as economic momentum improves and monetary conditions remain highly stimulative. But we expect the rate of advance to moderate meaningfully as valuations in many markets have approached neutral levels.

    The Economy & Interest Rates

    “What is significant about widespread global economic improvement is that it is occurring in the wake of one the most violent and abrupt declines in industrial production in economic history.”

    On September 15 Federal Reverse Chairman Ben Bernanke declared that the recession was likely over, as the effects of enormous monetary and fiscal intervention worldwide have created a very visible impact on the credit and capital markets. With the help of central bank guarantees and cash infusions, banks and financial institutions have been able to raise record amounts of capital and have returned to a position where they can again lend money to help grow the economy. The fiscal stimulus efforts, such as the cash-for-clunkers program, have jump-started auto production from abysmal levels and buoyed retail sales. Industrial production everywhere appears to be improving. The housing markets have been stabilizing and have risen in some areas. As of September 30, 2009, the S&P 500 Index has rallied 62% from its March 9 lows and is up 17% year to date. Clearly, things have gotten better.

    What is significant about widespread global economic improvement is that it is occurring in the wake of one the most violent and abrupt declines in industrial production in economic history. Because of increased leverage in the economy and the acute global interdependency of markets, the collapse of the credit system last year forced factory floors everywhere to drastically reduce production. Companies cut costs and employees at record speed. Fortunately, global central bankers were largely unified in their correct strategy approach of unprecedented monetary intervention. So the credit market’s “cardiac arrest” has been averted, where do we go from here?

    We believe that the U.S. and global economies should experience substantial improvement over the next several quarters, at a minimum, because: 1) this historically happens after very sharp contractions; 2) the stock market’s enormous rally appears to be essentially forecasting the improvement; 3) low interest rates are punishing savers and rewarding borrowers; and 4) after many months of severe global contraction, there is a lot of pent-up demand. 

    While China and much of Asia rocketed out of the economic quagmire earlier than the rest of the world, and the Chinese stock market bottomed earlier and rallied more than most markets, it is quite noteworthy that the Chinese stock market was actually down in the third quarter, after having doubled from its October 2008 low. China has aggressively “restocked” its economy with its stimulus plan, which was visible in significant purchases of raw materials in the last six months. However, there is some anecdotal evidence this process is somewhat complete, with the result that sequentially economic momentum in China may be flattening. While this may be the case and might explain the radical recent underperformance of Chinese equities, there is very little evidence to support the premise that Chinese growth will slow sharply in the months ahead. The Chinese economy merely needs to absorb this inventory, which may explain why commodity prices have been flat or down for the last few months.

    Even if the Chinese economy decelerates for a few months from the torrid growth earlier this year (7.8% GDP in the second quarter), the rest of the industrialized world has only recently experienced industrial reacceleration and other economic improvement. U.S. industrial production had its first up-tick in July and August and remains down 10.8% year over year. Similar trends have been apparent in many other developed economies. The restocking of inventories associated with moving industrial production back to more normal levels in the industrialized world is thus only beginning. Therefore, we expect economic activity to quicken in the months ahead and commodities to rise, as global demand improves.

    The risks to our economic outlook appear largely in the potential for higher levels of inflation to ignite from all the monetary stimulus. While prices of commodities have had big rallies from their lows, there is little evidence of inflationary pressure at this time, and the output gap remains wide. Also, somewhat concerning is that loan growth continues to be very weak and money supply has been contracting recently, but the economic recovery is still very young and these data points should improve sharply in the next nine to 12 months.

    Regarding interest rates, it is interesting that long-term Treasury bonds rallied in the third quarter, after their big decline in the first half of the year, which reflects that the economy is still weak and inflation is quiescent. Corporate bonds rallied sharply on the improving perception of credit risk. We believe that Treasury rates should eventually begin to rise again if the U.S. economy’s improvement becomes more visible and sustainable.

    The Stock Market

    We have been very bullish during the last six months and have benefited from the sharp bullish advance this year, especially from the March lows. While we remain bullish at present and expect the stock market to push higher in the months ahead, the sheer magnitude of the huge advance in the last six months has rendered the risk reward in owning equities less favorable. Thus we have reduced exposure in some extended positions and will seek to be more tactically opportunistic in the months ahead, as the possibility of a correction has increased.

    Our overweight positions in our favorite themes have been justified over the past few months, as many of our holdings exhibited strong absolute and relative performance in the third quarter. Economic data continued to surprise to the upside, confirming our bullish thesis for energy and raw materials. However, we believe the most likely outcome in the near term will be a moderation in some of the high frequency economic data that can influence stock prices in those groups. In August the ISM New Orders Index reached 64.9%, the highest level since December 2004, and, statistically, further gains from here will be difficult. While GDP and industrial production levels will likely continue to increase, leading indicators such as new orders could decelerate once low inventory levels are replenished.

    As noted above, China’s inventory restocking period is likely behind it.  Commodity prices may come under some pressure as China reduces imports and works through its reserves. While there may be a transition back towards demand being led by the recovery in OECD (Organisation for Economic Co-operation and Development) countries, the changeover could lead to some volatility in prices. Energy and raw materials remain among our favorite ideas over the next 12 to 24 months, but we’ve reduced some extended positions. Also, while we have decreased exposure to base metals, we have added to investments in precious metals, particularly in gold miners. Our expectation for higher gold prices is based not necessarily on further U.S. dollar weakness, but the continued excess printing of money by governments worldwide.

    We have increased exposure to health care, as we anticipate some group rotation by investors into less economically sensitive sectors. While there has been some concern about the impact of a new health care bill on health care companies’ profitability, the new regulations will likely have little to no negative impact on the fundamentals of our holdings. In fact, the Obama administration’s policies may benefit some health care segments, such as companies that provide the technology behind the implementation of electronic medical records (where we have initiated new positions). Many other growth-oriented health care stocks are cheaper on a relative basis than they were in the first half of the year, and they remain at attractive absolute valuations. We have continued to focus on companies with strong intellectual property, including ones specializing in biotechnology and diagnostic equipment.

    During the third quarter we eliminated our financial holdings, as we expect loan losses and high provision levels to remain an earnings headwind for the industry. We used those proceeds to increase our holdings in select technology stocks, particularly ones based in China. Many of these companies are selling at P/E valuation discounts to the U.S. and Shanghai market averages, have more cash than debt, and have been growing revenues well in excess of 20% annually. As investors search for strong secular growth (which is becoming harder to find in a slow-growth economy), these stocks could see significant multiple expansion. The industries in which we have initiated or added to positions include online gaming, online advertising, software, and pollution control. 

     

    ---

    The views in this newsletter were those of the Fund manager as September 30, 2009, and may not reflect his views on the date this report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investments in the Fund and do not constitute investment advice.

    Past performance is not a guarantee of future results.

    Before investing you should carefully consider the Jordan Opportunity Fund's investment objectives, risks, charges and expenses. This and other information is in the prospectus. Please read the prospectus carefully before you invest.

    The Fund's investment parameters are diverse and as such may be subject to different forms of investment risk such as non- diversification risk, concentration risk, small- and medium- sized company risk, interest rate risk, high yield bond and foreign securities risk, and lastly, the Fund may use derivatives such as options to increase its exposure to certain securities. Please see the prospectus for a more detailed discussion of the risks that may be associated with the Fund.

    Fund holdings are subject to change at any time and should not be considered recommendations to buy or sell any security.

    Current and future portfolio holdings are subject to risk.

    The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index.

    The Price to Earnings (P/E) Ratio reflects the multiple of earnings at which a stock sells.

    The Jordan Opportunity Fund is distributed by Quasar Distributors, LLC.

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