Q:  Would you describe your investment philosophy? What are your core beliefs in money management? A : The core belief of the Monetta Fund’s investment philosophy is the focus on “Identifying Changing Expectations”, or the ICE Approach. We believe that the financial markets are more efficient today than at any time in the past, both in terms of real-time information and regulations. Therefore, we start with the assumption that stocks are fairly valued and a stock price reflects its true worth at any point in time. The main factor behind the price movements is the change in expectations and that’s where our focus is. We believe that volume and price direction tend to be harbingers of news in advance of its actual occurrence. Stock price movements are driven by supply and demand factors. Since the supply is limited, it’s the demand, or the volume, that determines price direction. We don’t believe in setting price targets. It is difficult to measure at what point a stock will meet resistance and prefer to sell a stock as it starts going down rather than at some arbitrary price point. Overall, the market itself is our leading indicator with volume indicating the degrees of institutional interest. We don’t normally have an opinion about the direction of the market; we focus more on sector movements rather than predicting general market movements. Q:  In other words, you let the market lead you, and you follow it. A : That’s true. People often use the term “smart money,” which to us means multiple buyers of the same stock. Multiple buyers drive stocks higher. My job is to make sure that I’m part of that smart money. A company that is cheap doesn’t mean anything other than it has faced significant business challenges. Most investors unnecessarily complicate the stock market with excess information when they should primarily focus on supply and demand. The more demand there is for a limited amount of stock, the higher it will go. It’s that simple. There are many reasons that could enhance the volume or the interest in the stock, including improving cash flow per share, a new contract, new business, margins, or changes in guidance. The bottom line is the price movement that is mostly dependent on the degree of institutional interest, which indicates a change in expectations. Since we believe that stocks are generally efficiently priced, volume and price direction tend to be the first indicator that something is changing and precedes the change in fundamentals. Q:  How does that philosophy translate into an investment strategy? A : To identify changes in expectations, we use a combination of the leading and lagging indicators. Near term relative strength, price direction and volume are key short-term drivers while, in the longrun, improving earnings and fundamental drive superior long-term results. We constantly monitor improving relative strength by sector and identify individual stocks within a sector that indicate greater institutional interest. The top down screening process starts by observing sector-relative price movement. We then screen for securities that are trading at new highs over the past three to six month period. We are attracted to companies that demonstrate above average trading volume as the price moves through key technical levels. A declining price trend indicates a lack of institutional interest. As a stock price declines from it’s high on increased volume, this is a caution sign. This decline indicates that investors are starting to lighten up on a position. At this point we need to determine if this is normal profi ttaking or the prelude to a more substantial decline. Technically, we pay attention to price movement relative to the 200-day moving average and the 75-day moving average. These critical support levels, in conjunction with excessive volume, impact the sell decision. We’re not value investors and we don’t try to buy something that investors consider cheap. The objective is to own growth companies for which there is increased buying interest. Once we identify buying interest, we then review analyst estimates and company guidance, focusing on nearterm improving earnings trends. We don’t believe we can add a lot of incremental value by rehashing fundamentals or forecasts of individual analysts. What I want to see is increased buying interest that indicates more investors believe that positive changes are occurring. That’s when I want to get on board. Another style differentiator is the comparisons we do to our peers. We track the top performing funds in our investment category and monitor those stock holdings that are doing well. Their investment activity gives us insight into their outlook on a company’s prospects. We review these holdings and, based on our investment criteria, decide to invest with them or against them. Q:  Could you explain the structure of your research process? How do you fi nd ideas and how do you turn them into holdings? A : The research process begins with a day-to-day analysis of the market, the sectors and the top performing stocks within that sector. In other words, we monitor the money fl ow daily. We use technical screens to identify stocks that are trading at new three to six month highs, with above average volume and improving earnings expectations. We then review the extent of institutional ownership and how positions have changed. The degree of institutional ownership is crucial in determining future volume and interest. For example, to launch a rocket into space, you need a lot of fuel and power to get it up through the atmosphere. likewise, the fuel in the stock market is volume, and you need a lot of volume to move a stock up to a new high. The period of demand/volume increases is usually when you realize big price movements as institutional ownership increases. As price declines on high volume, so does our degree of confi dence that this company will continue to report numbers that will exceed quarterly earnings expectations and the company will raise guidance. We also review company and analyst reports, looking for key words such as improving, higher and raising. We review year-over-year comparisons of earnings, sales and margin growth. This gives us a feel that fundamentals are going in the right direction. The most critical factor is sales, as we believe that without top line growth, it’s just a matter of time before a company’s earnings and margins are squeezed. Company guidance is critical. We place greater importance on company guidance than on anything else. due to increased disclosure requirements, management is likely to be more conservative with guidance to avoid shareholder disappointments that may lead to time consuming lawsuits. Q: Can you give us some specifi c examples of stock picks that illustrate your research process? A : Jacobs Engineering, for example, is a stock that traded at a three-month high in April. The stock price has moved up through its 200-day and 50-day moving average, from a double bottom. volume was a little lower than ideal, but acceptable, with 36% of shares owned by institutions. More importantly, Jacobs raised its 2008 earnings estimate and increased backlog. Also, based on the review of institutional ownership, this is a preferred stock pick by top managers in our sector. Cleveland Cliffs is another example. Based on their last earnings report, revenues surged 43%. Analyst expectations have been raised and higher margins are expected. The stock has done very well since March on higher volume levels. Institutions own approximately 50% of the float and the stock is a common holding among the category leaders. An example on the sale side is Las Vegas Sands, the gaming company. It did very well for us until October of last year, when they reported concerns about the company’s longer-term outlook due to a slowing economy. The stock began to gap down on tremendous volume. This was an automatic sale and a good opportunity to book profits. Q:  How do you approach the construction of the portfolio? What is your benchmark index? A : We believe in a diversified equity portfolio. We typically start with positions of about 1%, so we usually hold between 90 and 110 securities. Although a large company weighting has a home run potential that can enhance the performance over the short term, we believe that over the long term, risk is better contained with a diversified portfolio. We tend to avoid small-cap companies because volume and price movement can be misleading. Therefore, we focus more on mid-cap and large-cap companies. In terms of sector weightings, we are currently overweighed in industrials and technology, while being underweight in financials and health care. Fund weightings are compared to the S&P 500 Stock Index, which is our benchmark index. Q:  What would be a reason to sell a stock? A : Nothing is a quicker indicator of trouble than the unusual price weakness. On the sell side, our first alert is a 10-percent decline of a stock from its high. At that point, we review the recent news, the trading volume levels, and the performance relative to the market and the industry sector. An analyst downgrade alone will not trigger a sale, but the lower company guidance will. Securities are also reviewed at key technical points, which could result in a partial sale. After a stock run-up, we expect some profit-taking and price consolidation as it establishes a new trading base. Stocks that decline on above-average volume are always a concern and, coupled with lower company guidance, represent an automatic sale. Wide swings in daily price movement with little upward momentum could also lead to a sale. Other reasons for selling a stock include management changes, a buyout offer, or a position size that could significantly affect the overall portfolio return. Q:  What’s your view on risk? A : The most important part of our risk control is the diversification and the sell discipline that captures gains or cuts losses. Accepting losses is the best device to insure safety of capital and to reduce risk. Those two components go hand-in-hand and are critical for maximizing long term returns. Overall, our primary objective is to exceed the S&P 500 Index over the 3, 5 and 10 year periods. The second objective is to be in the top quartile of our peer group every year. Our focus is on performance, one year at a time, which should lead to above-average results to the benchmark and our peer groups over the long term. Our basic investment approach is to invest in the companies and sectors that the market leads us to, based on increasing volume and higher price levels. We focus on companies with higher earning guidance and increased institutional interest. We believe momentum is a leading indicator and we tend to follow the leader. It is usually the second mouse that gets the cheese and I like being the second mouse.