Manager Quarterly Commentary as of June 30, 2010

Much like the Vice Fund, The Generation Wave fund has the benefit of being a niche fund  and as such, has a solid well-defined mission that seeks to beat the S&P 500Index  over the long-run. 
-Jeff Middleswart, Portfolio Manager, USA Mutuals Generation Wave Growth Fund

We continue to actively manage the portfolio and have been active sellers of several positions.  We eliminated six positions entirely in the quarter.   As shared in earlier reports, we continue to  focus on companies that can finance themselves, turn-around plays acquired at attractive prices, and dividends to help enhance returns, while continuing to focus more on the Baby Boomer themed companies.  The fund outperformed the S&P 500 Index (click here for most recent performance).  Our biggest laggards were foreign financials acquired earlier at what appeared to be attractive prices, but have continued to suffer due to market volatility and fears of portfolio problems.  These still appear well-financed and cheaper than the domestic financial firms.  Our best performers were debt restructuring firms acquired in 2008 and 2009.  We still own positions in these, but have been taking profits as historically this is an area that attracts significant competition after a few quarters of high returns, resulting in lower returns down the road. 

Positions Eliminated:

Bank of America Corp (BAC):  We sold the remaining shares of our BAC position at a profit during the quarter.  While the US banks have rallied based on a wide interest margin and less fear of liquidity issues, we still see that little has been done to correct the growing foreclosure problem or the huge amount of commercial real estate debt.  These problems should return to the forefront of the news, especially in California where BAC has heavy exposure.  We believe we can find less risky situations and were happy to take the gain.

BB&T Corp (BBT):  This is the same story as BAC - a US Bank that recovered in 2009 and produced a profit on the sale of our remaining position. 

ENER1 (HEV):  This company develops lithium batteries and was a position we wanted to eliminate.  It has historically been dependent on raising external funds and has never posted a profit.  When it received a new round of financing in the quarter the stock rallied and we sold all of HEV.  We sold this position at a loss.

MBIA (MBI):  We had been eliminating this position in 1Q 10 and finished the remainder in 2Q for a profit.  This was similar to the banks in that survival was a major risk in 2009 and the fund acquired it at low prices.  We did not like some recent attempts by management to move quality assets to a separate company and still believe there is considerable risk in insuring municipal bonds in these days of government budget problems. 

OSI Pharmaceuticals (OSI.F):  This position was bought out in a tender offer for a gain.

Wisdomtree Trust Japan:  This was a position that did not meet our core focus at this time.  It is an ETF that invests in Japanese securities and there are good arguments that Japanese stocks are cheap after a 20-year bear market.  However, given that we want to reduce ETF usage and focus more on US baby boomers, we sold this position for a loss in the period. 

During the quarter our three best performing stocks were:

Encore Capital Group  (ECPG)-This is a company that buys defaulted consumer receivables for fractions of face value and then attempts to collect some percentage of principal on them.  There was a growing supply of defaulted receivables to purchase since 2008.  Tax credits, unemployment payments, and federal programs aimed at debt relief all enabled people to resolve some of their debt troubles.  In some cases, people simply didn’t know they owed the money because of moving or a divorce and not receiving the bill until the collection agency called.  This industry often has seasonality to it based on tax refunds.  It also has a boom-bust cycle as high returns are normally based on buying receivables for very low prices, and those initial high returns are squashed when too many competitors enter the market and bid up prices.  We have been taking profits on this position.

Portfolio Recovery Associates (PRA) –This is very similar to Encore described above.  We have also been taking profits on this position.

Market Vectors Gold Miners ETF (GDX) –  This is a collection of gold mining companies and was an inherited position that largely tracks the price of gold.  Given the level of unrest in the international bond markets and the reality that real interest rates are negative, we were comfortable holding this position.  We did take some profits in the quarter and we do not consider this a core holding. 

 
During the quarter our three worst performing stocks were:

Myriad Genetics (MYGN) – is a small position and was down in the period.  One of our goals with our healthcare names is to own a large collection of big pharmaceutical companies like Bristol Myers Squibb that are at low valuations and have a history of paying sizeable dividends.  These companies often seek to grow by acquiring smaller firms with some promising technology.  This is what happened with the OSI Pharmaceuticals mentioned above.  MYGN has some characteristics we like to see in that the company has been profitable,  cash flow positive, and has a balance sheet with a large cash balance and no debt.  We believe that at some point it could become an acquisition target and in the meantime is currently trading for less than 11x forward earnings net of the cash.

ING Group (ING) – is a worldwide insurance and financial company with large operations in Europe.  The stock was down in the second quarter due to concerns over its attempt to monetize some insurance operations, capital level concerns with new world financial regulations, and portfolio concerns given European debt uncertainty.  We believe the stock is undervalued and should continue to rebound as the new regulations are laid out.  We’re still comfortable that this security is cheap enough to continue holding it at this point. 

Nomura Holdings (NMR) –is a Japanese financial firm that acquired Lehman Brother’s Asian operations.  Downdrafts in the Chinese market have not helped and neither has NMR’s slow pace of profit recovery.  It is cheap for a financial at less than book value for some high-quality assets.  It also pays a dividend. 

The focus of the fund:

We continue to hold approximately 23% of the fund in the larger pharmaceutical companies such as Pfizer, Eli Lilly, and Bristol Myers.  We feel  these companies offer low valuations and attractive dividends.  We also believe drug companies may use their cash flows to acquire new companies with promising drugs to replace those losing patents.  They will also likely continue to consolidate to reduce costs and grow EPS via cost-cutting and share repurchases. 
We have also been acquiring large profitable bio-tech companies with some solid growth potential such as Amgen and Gilead Sciences.  Each of these have large pipelines along with existing products on the market and have been producing real growth. 

The financial stocks in the fund have been turning over.  Our focus is on niche plays that will emphasize people saving money for retirement and insurance.  Several of the new purchases have been made below book value and have a history of paying solid dividends and may in fact be acquisition targets.  In the case of investing, we believe that discount brokers will continue to take market share and offer a platform for individuals to purchase mutual funds, stocks, bonds, CDs, and ETFs at very low transaction costs.  Asset inflows should help drive growth and higher market share should mean greater volume too.  

To go along with our primary themes of saving money for retirement and health care, we believe that more Boomers will spend more time at home.  Companies such as Comcast for cable and internet and Kroger for people eating at home more frequently look like very good values to us.  As of this writing, each pays a dividend and is a dominant player in their industries as well as carrying attractive balance sheets. 

Past performance is not a guarantee of future results.

Fund Holdings and sector allocations are subject to change at any time and are not recommendations to buy or sell any security.  Please click here for the fund’s holdings.

Opinions expressed are those of the portfolio managers and are subject to change, are not guaranteed and should not be considered a recommendation 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.

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

Earnings per share (EPS) is calculated by taking the total earnings divided by the number of shares outstanding.

Book value is the net asset value of a company, calculated by subtracting total liabilities from total assets.

Forward Earnings is a company's forecasted, or estimated, earnings made by analysts or by the company itself