Astor Asset Management Portfolio Update and Q2 2007 Review

Market Update

After a slow start to the year, the equity markets in the second quarter managed to rebound quite markedly, amid increased volatility. Economic fundamentals did strengthen as the quarter wore on, which helped offset hawkish Federal Reserve commentary and higher oil prices. To date, the market has reached all-time highs in the Dow Jones Industrial Average despite a weakening housing situation and fears that increased credit risk is just beginning.

Portfolio Update

With volatility increasing from Q1 against the backdrop of expanding economic conditions, the Astor models remained slightly below optimal long market exposure to equity indexes like the Nasdaq 100 (QQQQ) and S&P 500 (SPY). We tempered volatility in the portfolio with bond indexes like the Lehman aggregate (AGG) and Lehman short-term treasury (SHY). In more aggressive portfolios, we kept our allocations similar to last quarter in small, mid-cap and international indexes.

A GLANCE AT KEY ECONOMIC DATA OVER THE RECENT QUARTERS

The table above recaps some of the important elements to Astor’s economic model. The economic expansion was barely alive in the first quarter 2007 with GDP growing at the slowest pace since 2001. Once again the positive job numbers are a bright spot despite the slower economic growth. Money flows this recent quarter seemed to anticipate the rebound in economic growth (3.3% estimate for Q2) and took the S&P 500 index up strongly.

EMPLOYMENT

The economic data out of the labor market has really defied critics over the course of the year. With GDP growing as slow as it has been, quarter-to-quarter, it is quite miraculous that employment gains have been so consistent. The drawback, though, continues to be the lack of consistency in job gains, whether in government, retail, or financial services. This shows there has yet to be a defining trend in where labor is most needed. We feel the key to employment for the future really lies in housing, where financial service jobs could be negatively affected with further housing weakness.

GDP

GDP growth has been slowing for about a year now, but nothing like it did in the first quarter of 2007. Final GDP for that quarter was revised downward to a paltry +0.7%. Some of the reasons for the slowdown remain intact, with lower residential investment and higher energy imports. Last quarter also delivered another strong dose of consumer spending, but the one concern going forward is the health of the housing market and how it will affect the consumer. Refinances and cash-out mortgages have helped support the hard-working while wage gains have slowed.

THE MARKETS (i.e. MOMENTUM INDICATOR)

Luckily for most, the 2nd quarter of 2007 lacked some of the doomsday headlines that had been frequently seen in the beginning of the year. While volatility did increase, it was not at the breakneck pace that we saw in the first quarter. This likely contributed to the widespread gains in the market as investors bought equities now and asked questions later. The asset class shift to large caps has also continued with money flowing into the S&P 500 as well as the big techs of the Nasdaq. As the positive quarters continue to come in, the momentum indicator in our model remains pointing upward.

Final Thought - Rob Stein, Astor Asset Porfolio Manager

It was good to see the market bounce back in the second quarter of 2007 after getting off to a weak start at the beginning of the year. Usually it is those that take on the most risk who are rewarded in a bounce-back quarter like we just experienced.

However, accompanying the equity gains were economic fundamentals that have strengthened after declining for several quarters. A lot of this data convinced investors to buy stocks and sell bonds, which drove up yields. That movement, however, eventually became an enemy to equities, as the earnings yield on the S&P 500 was threatened to be eclipsed by the 10-year treasury note.

With bond yields now up over the last quarter alongside equity returns, the tug-of-war between risk and safety of capital has begun. Mix in an uncertain interest rate picture when it comes to the Fed and the upcoming quarter should be another one that sees volatility rise and returns be harder to come by than last quarter.

A final piece to the puzzle going forward is housing weakness, which appears to be in mid-cycle and may not recover for the remainder of the year. Several adjustable mortgages are resetting in the second half of the year and more foreclosures are likely which will put the resilience of the U.S. economy to its toughest test yet