With the U.S. stock market up 70% from the March 9, 2009 lows, historic 4-quarter P/E ratios at better than 20x earnings and forecasts for a 30-40% earnings recovery in 2010–  very high expectations are built into today’s stock prices.  30-40% earnings growth in 2010 is very unlikely considering that as of September 2009 year-over-year revenue for the S&P 500 was down 10.8%. 

In order to achieve earnings of this magnitude, either sales growth comes back strongly or companies continue to pare costs.   Strong sales growth looks increasingly unlikely after weak holiday sales (don’t be fooled by the “same-store” sales numbers – there are less stores around this year than last so total sales were weaker than the headlines reported) and only tepid inventory rebuilding to date.  The consumer makes up nearly 70% of the economy, and with savings/debt reduction the new norm (revolving credit was down better than 9% YTD through November 2009), it’s unlikely we see a big return to spending any time soon. 

So, are company’s going to continue aggressively cutting costs to generate this earnings growth?  It’s difficult to see how they could given the magnitude of jobs taken out of the economy since the downturn started nearly 2 years ago (better than 7 million) and stable to rising commodity prices.

What has held equity prices at such lofty valuations over the last three quarters has been government intervention, plain and simple.  A relaxing of reporting standards for the banking sector, incentives for home purchases, cash-for-clunkers and other short-term spending initiatives all have served to prop up the economy in the short-run, but cloud the longer-term picture.  Strong organic, or naturally occurring, growth is what is needed to sustain a recovery and that is something we don’t have, nor are likely to have, in the foreseeable future.

The one factor that could give corporate earnings growth another short-term artificial boost is the potential for write-ups in the financial sector.   To the extent that they’ve written down a lot of debt over the past few years due to bad collateral and unstable markets, might more stability in the credit markets induce banks to revalue their troubled assets upwards over the coming year? 

We certainly hope not and believe that if anything the fragility of bank balance sheets continues to be under-reported.  Yet we can’t rule such moves out.  After all, who would have thought big banks would have the audacity to repay TARP funds within months after receipt in order to pave the way for renewed executive bonus payments.  Short-term thinking continues to dominate decision-making, regardless of long-term ramifications.

So, almost needless to say, we remain defensively positioned again this quarter in both our model portfolios, and managed accounts.  While optimistic sentiment has been a formidable headwind to our views of late, the situation is eerily similar to early 2007 – the problems are staring market participants in the face, yet they refuse to acknowledge them.

The financial markets continued to heal during the final quarter of 2009, with the broad U.S. stock market gaining an additional 5.9% - as defined by the Russell 3000 stock market index.  Corporate spreads tightened aggressively and riskier credits are once again borrowing; signaling a sense of normalcy, or perhaps even complacency, returning to the investment world.

As is usual coming out of a recession, and has been the case since this rebound commenced in March 2009, growth stocks generally continued to fare far better than their value-oriented counterparts across the capitalization spectrum (as seen in the table below).  On the growth side of the spectrum, the larger the capitalization of the company, the better it generally performed in Q4, as larger companies are viewed as having more exposure to foreign markets and with the dollar depreciating their foreign currency revenues translate into more U.S. dollars.  Conversely, small and micro-cap stocks continued to struggle, probably owing to both all-domestic revenue exposure, and poorer propects for credit.

(Sidenote Commentary: It’s a true tragedy that in times of economic turmoil small companies (which are the engine of economic growth over the long-term) are both crowded out of the financial system and treated as second-class citizens when it comes to economic stimulus.)

From a dollar perspective, developed foreign markets struggled to keep pace with their U.S. contemporaries during the quarter but emerging markets continued to tack on excess gains (most are pegged to the dollar in some way) with the Vanguard Emerging Markets Index fund up 8.31%.

Natural resource shares held a strong bid throughout the quarter as purchases from China highlighted demand and gold sped higher on enthusiasm over central bank buying.  We have a hunch precious metals will continue to be well-bid throughout the coming years, as paper money continues to devalue against hard assets.

Mirroring stocks, bond credit risk was well compensated throughout the quarter with corporate spreads collapsing in both the high-grade and high-yield sectors.  The easy money has been made here – though a strong argument can be made for continued investment.

Economically real U.S. GDP came in at 2.2% (final revision) in Q3, 2009, much below the historical 7% average recession rebound.  Of the third-quarter total, most analysts conclude that better than 90% was government induced – cash for clunkers, first-time homebuyers, and public work projects.  As reinforced by recent jobs data, this is a slow, slow recovery and there should be plenty of concerns remaining over its buoyancy once stimulus begins being withdrawn – yet that doesn’t seem to be the case with the markets.

Financial markets continued to move steadfastly higher throughout the quarter with only brief pullbacks to punctuate the advance.  Analyst upgrades set the tone while better than expected headline economic data often masked continued deterioration below the surface, yet was given the benefit of a doubt.  Worse than expected data was either completely ignored or cast in a positive light – typically that the Fed would refrain from tightening rates for an extended period.

Notably, as the market has moved higher, far beyond what we perceive as fair value, technical trading has come to the fore as traders and investors alike become enamored with support and resistance levels, channels, and moving averages.  Trading technicals is all nice and good, but highlights the short-term confusion amongst participants.  “I don’t want to miss out on possible upside here, but I’m not real convinced of the longer-term value proposition at these levels…I know I’ll just go along with the others.  Unfortunately, the end result once again is an unsustainable rise in asset class correlations.  Dollar down, gold prices higher, bond prices higher, equities prices higher.  Rinse and repeat.  Of course again it will end badly – the question is when.  ‘Nuff said.

Well my friends, after six and a half long years and a lot of nail-biting along the way, the time has come for a major change of positioning based on our operating earnings model for the S&P 500 index.  This quarter we’re initiating a “sell” rating on the broad market with a buy target of 724, a full 30% lower than current levels.

If you recall our model is predicated on the belief that a good indicator of market value can be derived from the latest four quarters of operating earnings, lagged a quarter – so today’s valuations stem from earnings released for Q1 2009.  Contrary to popular opinion, our historical backtests show that the market doesn’t typically price in earnings until one full quarter after they’re released. Standard opinion remains that the market is forward looking, digesting news before it’s released.  We haven’t found evidence of that.

Based on 20+ years of quarterly data, our model suggests that operating earnings, lagged one quarter, explain roughly 74% of the broad stock market level with a standard error of just shy of 200 points.

From early 2003 through the end of 2008, the model seemed to have broken down as reported operating earnings suggested much higher levels for the market than we were able to achieve.  In hindsight, our interpretation is that market participants were not drawn in by what may be found to be artificially high operating margins during the period – inflated by an unstable amount of leverage in the system.  Instead, they skeptically discounted these margins, keeping a lid on market appreciation.

Time will tell, as at current levels, the market is now implicitly pricing in a resumption in these historically high margins.  Funny how that works.

A couple of side notes – if we do happen to achieve the current level of earnings being proffered by Wall Street analysts, fair value six months forward would be close to 1300 – a better than 20% leap from current market levels.  Yet at today’s valuation we’re pricing in about $46 of rolling operating earnings – again about 20% higher than realized earnings of $39.79. 

We know for certain that next quarter’s input to our model is $38.30, so one thing’s for sure - the next few quarters of earnings announcement will be crucial in determining future direction; and a lot of growth is already baked in the cake.

Proprietary Valuation Model Says "Buy" - but be Cautious

We haven’t updated readers on the recommendations gleaned from our S&P 500 valuation model since the first quarter of 2008.  A lot has changed since that time and we thought it appropriate to visit this gauge once again.

A bit of background is in order first.  We’ve developed a “fair value” estimate of the S&P 500 using historical operating earnings going back to 1988.  At the time the model was constructed we also tested “as reported” earnings but found that operating earnings, lagged one quarter, explained more of the current level of S&P 500 index values.  When the market moves lower than one standard deviation below current “fair value” our model flashes a buy rating.  When the market moves more than one standard deviation above fair value, the model signals a sell rating.

As shown in the graph above, over the long-term our model has had notable success in signaling appropriate times to move into, and out of, the broad stock market.  It suggested a purchase in late 1995 and a subsequent sale in early 1999 – avoiding much of the tail end of the internet bubble and subsequent bust.

Yet the last five years have been frustrating, as our approximation of fair value ran far, far ahead of the market.  Our model has had a buy rating on stocks now since early 2003.  Even the sharp downturn in earnings to date has not triggered a sell signal.   What’s been at work here?

Others have noted the elevated profit margins of recent years amongst the companies that make up the S&P 500 index.  Historically (back to 1948 or so) these margins have averaged between 6.5% and 7%.  However, from 2003 into 2008 these margins expanded from 8% to 11%.  In hindsight, the lagging index values were likely telling us that these operating margins were unsustainable – hence stocks weren’t accorded full value for the earnings they were generating.

As we move our way through a severe credit contraction one can most assuredly state that profit margins will diminish going forward.  So, it’s likely our valuation model will begin to display better results in the future.

At present our model estimates fair value for the S&P 500 at about 965 likely decaying to 885 next quarter and 860 by the end of the year, based on current consensus future earnings estimates.  From there analysts expect a strong rebound in earnings, roughly 50% year-over-year for next June.  Though the recent rally has likely priced this profit rebound in, we’re skeptical of the magnitude and would remain defensively biased until trailing four-quarter earnings actually begin to turn up.

To be clear, if earnings come in as expected, our model will not flash a sell rating over the next two quarters.  However further downward revisions to future earnings expectations, which in our opinion are likely, will cause our model to move to a sell rating.  In our opinion, a cautious stance is warranted at this time.

The U.S. Treasury Department’s recently unveiled Public Private Partnership Investment Program for Legacy Assets offers a unique approach to helping rid bank balance sheets of “toxic” assets, but am I missing something?  It looks like a recipe for almost certain future taxpayer losses – borne by the FDIC.

Here’s how the Treasury lays out the process for Legacy Loans:

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

So in the case of the private investor, he’s putting up about 7% of the capital and receiving 50% of the profit.  This serves to generate more interest in the program from private investors, but also has the “benefit” of inflating bids on what are likely to be poor quality assets – after all perhaps I can afford to bid a bit higher since I only need to put up $6 today. 

Isn’t that what got us into the housing crisis in the first place - terms that were too easy for the buyer and thereby incentivized speculation? Did our leaders learn nothing, or is this program meant to intentionally deceive the general public into believing that there is a profitable way of providing aid to the banking system?

More importantly, when has it ever been sound business judgment as a creditor (which banks were in the case of the housing crisis and the FDIC is in the case of the PPPIP) to lend money on a highly leveraged basis to fund a really risky investment?

From an implementation perspective it looks like there are also plenty of ways to game this from the seller’s perspective by either setting up a private entity to bid on your own assets or encouraging interested parties to do so.  Let’s walk through an example. 

Let’s assume a “legacy asset” is on the bank’s books for $0.50.  The bank sets up a partnership and bids $0.84 for the assets in question.  The bank puts up $0.06, government puts up $0.06 and FDIC insures $0.72.  So effectively the interested party has:

1.      Taken toxic assets off the bank’s balance sheet for a cash outlay 12% of what they’re currently on the books at.

2.      Enabled the bank to write the value back up from $0.50 to $0.84 on their balance sheet.

3.      Retained ½ any future upside in value

4.      Have downside limited to the $0.06 put up.

Mark our words, the PPPIP will end in another tragic loss for taxpayers.

We haven’t had a chance to post in awhile, but I wanted to convey my sentiment and thoughts on current events in the markets and economy as a whole.

Economy

·        Jobless claims - released today and came in at a loss of 524,000 jobs in December.  That translated into a national unemployment rate of 7.2%, the highest level in 16 years, but neglects those prospective employees who “want a job but have stopped looking” (the Augmented Unemployment Rate) which rose to 10.4%. The job losses were widely spread across industry sectors and the hours worked component fell to 33.3 hours/week – the lowest level since the early 1960’s.  The bigger story in our opinion is the continued downward revisions to prior months.  All this suggests continued deterioration in the months ahead.

·        Other Economic Statistics – uniformly terrible and getting worse, except statistics that are being driven more by short-term commodity price movements.    

·        Auto Bailout – bad idea and sets a terrible precedent.  These are companies and unions which have been apprised of their un-competitiveness for years and have either chosen not to make the tough decisions, or didn’t recognize the severity of their plight – either case is unforgiveable.  Let them go – that’s what bankruptcy courts are for.  Do we think there will be a bigger bailout coming? – almost certainly.

·        GMAC - was given “bank” status a few weeks back in order to be able to accept funds under the TARP program.  They received a loan at 8%.  The next day they offered a promotion offering 0% interest to auto buyers.  So now the government is subsidizing car & truck purchases.  Nice.

Markets

·        Difficult First Half, At Least – just don’t see how the market can make an exerted rally in the face of an economy in free-fall and precipitously falling earnings expectations.  The wall of worries is just too high at this time.

·        Stocks Not Cheap – with 2009 earnings expectations for the S&P 500 falling to roughly $42/share based on analyst “top-down” forecasts, at current levels of 900 the S&P is trading at a p/e of roughly 21.  This is by no means cheap.  Historically the market has bottomed in the range of 15 times earnings which suggests further possible downside to maybe 630, some 30% below today.  We’ll be the first to recognize that we may not need to test these levels, but we’d place the odds of the market dropping 30% substantially higher than those of it rising 30%.

·        Own Some Gold and Hard Assets – printing loads of money has always been inflationary and with countries around the world all likely to behave similarly the best hedge against losing value is to own gold and other hard assets such as long-lived commodities (metals, energy, timber).

·        The Opportunities are In the Credit Market – when one ponders bonds and credit instruments as investments the thought typically turns to low risk and low returns.  Yet venturing into these areas - corporate bonds, preferred stocks, and virtually any sector other than treasuries, agencies, and mortgages - might be well worth the effort.  Back of the envelope, today's opportunities look to be in the range of 15-20%+ annual returns over the coming 5-10 years, probably greater than stocks.  At this time we’re moving up the corporate credit structure (away from stocks and into credit instruments – both senior and subordinated).

·        Municipal Markets – not a fan.  This slowdown is going to wreak havoc on municipalities.  Not only are tax receipts likely to be down, the ability to refinance credit has been severely impaired.  Look for federal bailouts here as well.

After three quarters of grinding lower, it’s not clear the ultimate loss of wealth at the bottom of this market cycle will be the most painful aspect for investors.  Instead it could very well be the time it takes to get there.

We all expect the market to go up and the market to go down.  We’re conditioned to follow the well-worn mantra - “Investing isn’t about timing the market, but time in the market”.  That’s a great catch phrase for a logical philosophy but perhaps better suited to boom, rather than bust, times.  After all, how much time are we talking about - 5 years, 10 years, 50 years, or 100 years?  Here we are 75% of the way through the decade with a stock market that has delivered 14.3% cumulatively (as defined by the Russell 3000 index); or 1.8% annually – before taxes and before fees.  Perhaps we should have invested in Twinkies, canned apricots, frozen vegetables or cases of motor oil as the consumer price index (even arguably under-reported) has advanced 24.5% over the same time period.

What we’re not conditioned for, as families or as a country, is the prospect of reducing our long-term dreams based on diminished expectations.  Rethinking what it means to “retire”, or live a convertible life in old age as individuals and recalibrating our role in the world economy as a nation. Yet before this downturn’s run its agonizingly slow course, that’s what many citizens, and the United States as a nation, will have to face. 

Unfortunately this realization doesn’t come quickly for our leaders who are more apt to provide short-term props ad hoc to keep the inevitable at bay.  Ultimately, what purpose do the taxpayer rebates in the president’s “Economic Stimulus Plan” really serve?  Or accounting rules and guidelines that allow investment banks to defer financial losses on instruments that can’t be sold by terming them “tier 3” assets?  Far better to take our lumps and clean our closets today, even if it means stock prices decline a further 20-30% from today’s levels.  Over the long-term the end result may remain the same, but perhaps by taking our punishments now, opportunities for the long-term investor would be enhanced and increasing optimism for a prosperous future would instill confidence - resulting in higher stock market valuations.

Just a thought – but hey, what do we know anyways? 

In the meantime all eyes remain glued to this slow motion train wreck we call the U.S. economy and to the marvelous feats of frivolity administered by those in control.

This quarter we’re removing nine funds from our recommended list and adding six.. In our opinion the best opportunities are likely to be found in the U.S. small and mid-cap growth sectors, natural resources/energy, Africa/Middle East region of the emerging markets – each of which has shown resiliency in the market turbulence to date.  We suggest remaining overweight “growth” funds relative to “value” at this juncture as well.

For those who believe the bear market has further to run, we continue to recommend modest positions in the Grizzly Short and Prudent Bear funds - maybe 15-30% stakes in aggregate. Even without “alpha”, or risk-adjusted excess return, the reduced day-to-day portfolio volatility afforded by these funds make them prudent investments.   We continue to advise against owning real estate investment trusts (REITs), high yield bonds, and other instruments heavily dependent on issuing securities to fund their operations – typically financial service companies.

Opportunities are developing in the preferred stock and fixed income arenas as credit conditions continue to deteriorate.  Municipal bonds look extremely timely from a strategic perspective, especially for investors nearing retirement in higher-tax states such as California. Though it wouldn’t surprise us to see spreads widen out further (relative to treasuries) over coming months, the combination of historically wide tax-adjusted yield spreads and the high probability of tax rate increases after the election really shift the decision from “if” to “when” investors should make purchases.

Over the next quarter we will also be looking at opportunities in the convertible preferred, trust preferred, exchange-traded debt, convertible debt and closed-end fund spaces.  While often illiquid, these securities trade on the major stock exchanges and can be purchased through most brokers for commissions similar to those paid for common stock.  As is often the case when markets collapse, these less liquid sectors have been abandoned by underwriters, market-makers and investors alike, leaving solid long-term potential for those willing to conduct the research, step in to buy and hold for years to come. 

For those interested in researching indenture provisions and company capital structures themselves, we recommend a great free resource – QuantumOnline.com.

Changes in Fund Recommendations

We’re not going to elaborate on every change we made this quarter but will provide a bit of color for what we consider to be the more interesting edits to the list.

Hennessy Focus 30 (HFTFX): this is a “swing for the fences type fund”; it’ll likely leave you either jumping for joy (homerun), or crying in yourself to sleep (strike out).  The fund’s extremely concentrated with investments in just 30 companies and a handful of industries so it’s likely to see some drastic moves from time-to-time.  Yet the long-term performance is pretty impressive, assets haven’t ballooned to levels that hinder manager Neil Hennessy’s ability to be nimble, the expense ratio is fair and it’s available as a no-transaction fee fund through Fidelity, Schwab and TD Waterhouse.  Only buy in small amounts (maybe 5-10% of your portfolio value) with a plan to hold it for years to come and you’ll likely be well rewarded.

Loomis Sayles Mid Cap Growth (LAGRX):  Momentum investments have been working since late last year and this fund has capitalized.  With investments like MasterCard and First Solar it’s easy to see that the main risk to performance is a change in investor bias from growth, back to value.  Like Hennessy, this is a reasonably priced offering in sector being favored by the market presently but vulnerable – don’t load up too heavily on it.

PIMCO Commodity Real Return (PCRAX) - A: Returns have been stellar in 2008 after a trying first four years in which the fund trailed the natural resource sector by nearly 60% cumulatively.  Unlike most natural resource funds, the PIMCO offering uses a derivative-based strategy for implementing its views.  Specifically it buys and sells contracts tied to commodity prices which could expose fund shareholders to counter-party credit risk that we would vet prior to investing.

Janus Contrarian (JSVAX):  Fund’s value-oriented style is now out of favor – time to move on.

An interesting article published about a week ago by James Montier of Societe Generale in London made its way to my inbox via the weekly John Mauldin’s “Outside the Box” e-Letter.  I thought I’d share it with you and provide a few thoughts of my own.

Before we get started though, John Mauldin’s free pieces – “Outside the Box” (published Monday) and “Thoughts from the Frontline” (on Friday) are really worthwhile readings for those wishing to stay up on non-traditional thinking and analysis as it applies to the financial markets.  Very focused, opinionated, and to the point. You may not agree with everything written, but I assure you it will make you think.  I encourage you to sign up if you have an interest.

In Mr. Montier’s commentary, he makes a strong case that Wall Street stock analysts are behind the curve with regards to earnings revisions for corporate America in this downturn.  It’s not the first time – in fact Wall Street analysts have routinely lagged reality.

“They only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly.”

Mr. Montier goes on to make two additional points.   Most fundamental stock analysts base their assessments, at least in part, on corporate guidance.  Unfortunately companies themselves have a hard time recognizing reality. Instead they’re consistently more optimistic about their own companies than the overall economy.

Finally, in all likelihood the market hasn’t gotten anywhere close to pricing in the severity of this unfolding recession – we’ve likely a good deal further to go, and a good deal more pain to endure, for that to happen.

Our opinion precisely.  It’s simply astonishing to hear analyst after analyst present their views that the worst case has already been priced into the market.   Hello – earth to McFly! 

To think we slide right through without significantly lower earnings is simply laughable.  Facts to consider:

·        For all the talk of delinquencies and foreclosures over the past few months, we’re just now entering the high-season of increased resets among adjustable-rate mortgages.

·        The consumer has little in the way of savings, having become reliant on the “Home as ATM” phenomenon to maintain an extended lifestyle over the past few years.  Simply removing this increased spending without additional savings will drop GDP noticeably.

·        Financial services companies have a long way to go before their balance sheets are back in order.   Think many, many quarters.   While there is growing concern over Sovereign Wealth funds buying stakes in many of these concerns, they’ll likely look less like geniuses and more akin to the Japanese Real Estate investors of the 1980s in a few years.

·        Non-financial companies are just beginning to feel the pinch of higher input prices and reduced demand.  If one hasn’t noticed layoffs, and good sized ones at that, are a daily occurrence in the financial press.

So, the stock market is already pricing this in, huh?  We’ll continue to take the other side of that bet.

Most of our selected funds continue to turn in solid relative performance in a down market, and that’s great.  With our current downturn showing a bounce early in Q2, now is a good time to review your portfolio.  This quarter we’re taking five funds off our selected list and recommending selling four of them.

We’d recommend looking at the following sectors for inclusion in portfolios at this time: bear market funds (small positions only), Africa/Middle East (low correlation w/ U.S.), Mortgage & Municipal Bonds.

Changes in Fund Recommendations

Deletions

Kinetics Paradigm (WWNPX) – Great fund, wrong time in our opinion.  While the fund’s bias towards global financial exchanges has added real value over the past few years, it’s likely the sector will come under increasing pressure as the slowdown builds.  We’re moving elsewhere in managed accounts and the Pariveda Wealth Advisor models.

Delafield (DEFIX) – relative out-performance has decelerated.  While the fund may continue to be a worthwhile hold over the coming quarters we’re taking it off our recommended list.

Bridgeway Small Cap Growth - N (BRSGX) – it’s extraordinary growth bias makes it susceptible to further losses in a bear market.  Will be a solid choice when the economy bottoms.

Alpine International Real Estate (EGLRX) – faced with a severe credit crunch, nothing good will come of the global real estate sectors for the next few years in our opinion.  Yields are still too low to make the sectors, at home or abroad, attractive.

Cambiar Conquistador (CAMSX) – the team here has shown they’re not savvy at investing for a down market.  As such, there’s no compelling reason to continue holding, so move on.

Additions

Jordan Opportunity (JORDX) – Concentrated, but management looks adept at searching out opportunities in both up and down markets.  While it’s probably worth the transaction fee needed to enter, plan to hold for the long-term and don’t place more than 10% of your investible assets here.

Janus Mid Cap Value Inv. (JMCVX) – Another timely offering from Janus (this time from the value side of the shop).  This is a solid long-term offering that seems to be positioned well for the downturn.  We like many of the individual stock names that currently make up the portfolio.

Royce Dividend Value Service (RYDVX) – Royce has long been a quality small cap value shop and, while the fund is relatively unknown, the management team isn’t.  We like the prospects for this offering.  Given the 50% weighting in financial service companies and the fund’s ability to hold up quite well so far this year, we think it’s got good prospects for solid capital appreciation as the current storm lifts.

Grizzly Short Fund (GRZZX) – a complement to BEARX, the Grizzly Short fund has been turning in far superior risk-adjusted returns over the past quarter and a half.  While the fund focuses more on the small cap sectors of the market, and performance relative to BEARX may trail off, it’s a good diversifier.  There’s nothing more frustrating for an investor than to get the macro call wrong and stumble on the implementation.  Diversifying among even bear market funds provides this.  Recognize that the market sensitivity of BEARX is roughly -0.80 while GRZZX sports a more volatile -1.10 beta.