MOPPX had a very strong start to the year, substantially outperforming its index and its
peers and regaining most of the underperformance of the last quarter.

Q1 1 Year
MOPPX +16.58% -8.6%
MSCI ACWI Ex USA NR USD + 10.31% -3.71%
Foreign Large Blend
 +12.33% -9.98%
Foreign Small/Mid Blend +10.24% -5.18%

This past performance is not indicative of future returns, for up-to-date performance
data please contact our transfer agent at 1-800-869-1679. See Note 1.

Note 1 
Mutual fund investing involves risk. Such risks associated with the Mercator
International Opportunity Fund (MOPPX) as well as applicable investment objectives,
charges and expenses must be considered carefully before investing. MOPPX Total
Annual Fund Operating Expenses is 2.20%. The Advisor has contractually agreed to
waive fees and/or reimburse expenses of the Fund to the extent necessary to limit total
annual fund expenses (excluding brokerage costs; underlying fund expenses; borrowing
costs such as (a) interest and (b) dividends on securities sold short; taxes; and
extraordinary expenses) at 1.65%. The waiver of fees and/or reimburse expenses is
scheduled to expire on February 28, 2019. This and other important information about
the Mercator International Opportunity Fund is found in the Prospectus, a copy of which
or current performance information may be obtained by contacting Mutual Shareholder
Services (“MSS”) toll free at 1-800-869-1679. We encourage you to read the prospectus
carefully before investing.

Market Volatility and China’s One Way Road.

Markets were whipsawed at the end of 2018 and the beginning of 2019. Fears of
impending recession drove a dramatic sell-off in global markets. But soon thereafter, a
strong jobs report combined with the Fed’s decision not to hike rates again lured buyers
back. Stocks rallied back with a vengeance.

At the end of last year, cash was king; having a defensive portfolio looked brilliant. The
problem was that investors who timed the correction correctly had to time the rebound
as well if they wanted to stay ahead. Chances are that the investor who was bearish in
December did not turn bullish in January.

Timing the market is akin to mind reading. It requires a special talent. For those who do
not have such talent, focusing on stocks’ long term fundamentals is a better proposition.
to be able to take advantage of them. Investors should also seize the opportunity to
reshuffle their portfolios. In a sell-off, the good goes down with the bad. All valuations
come down which greatly increases the relative attractiveness of strong companies.

In a correction, a portfolio manager has the opportunity to increase positions in stocks in
which he has strong conviction. At the same time, stocks with weaker fundamentals can
be let go without hurting the relative performance. I believe It is also a good time to add
to liquid blue chips. They are most likely to bounce back first.

Walls of Worries.

The danger lies in not properly assessing the nature of a sell-off. For example, one
would have been ill-advised to buy aggressively Japanese stocks in the wake of the
asset meltdown of 1989/90. Thirty years later, the Nikkei has still not recovered. Far
from it. To regain its all-time high, the Japanese stock index needs to go up another
70% to regain its value of three decades ago!

Fortunately, global markets are not trading at anything near the exuberant earnings
multiples experienced in Japan in the 1980’s. We have lots to worry about, not the least
a Chinese economy built on excessive debt. A global slowdown and trade tensions
have kept investors’ enthusiasm in check. The Chinese market is much below its
all-time high. European valuations continue to lag those of the US and Japanese stocks
are just starting to show signs of life.

There are legitimate concerns and investors have to navigate them. However, accidents
are more likely when markets are euphoric, not when everybody is focused on what can
go wrong.

The Biggest Long Term Risk.

In my view, the biggest risk to the global economy comes from China. Unfortunately it is
very difficult to assess the real state of its affairs. The official numbers are not
trustworthy and the problems are hidden. Everybody knows it. Market operators are not
fooled. The stock market continues to perform dismally in spite of the miraculously
stable economic numbers that always manage to be in line with the Communist Party’s

What if China is not actually growing at the official 6.4% rate? What if China were to
implode under the burden of its overall debt? Can the Chinese economy continue to
thrive under increasing government interference? These are legitimate long term
concerns. However, in the shorter term, global markets are more likely to experience a
relief rally ignited by the coming trade agreement between the US and China. I have
argued before( that China will
make major concessions because they have no choice. Their economy is too

A New Binary World.

As the world is stepping back from unchecked globalization, two major economic blocs
are gradually emerging. One bloc is based on the rule of law, the other is based on the
rule of Beijing. The first group of countries believes in free markets. The second group
believes in a command economy. There is some debate going on about how to make
free trade more fair in the “West”, but there is no question that the economies falling in
the Chinese orbit are being orchestrated from Beijing. This is what today’s trade
negotiations are all about. Forget trade deficits. The stakes are much higher. The US
administration is forcing China to decide how much free trade its economic model can

Is it realistic to believe these two visions of the world can coexist and interact? After all,
the Soviet economy survived – for a while – because it was cut off the rest of the world.
The Soviet economy was an autarky. It functioned without interacting with the free
world. The Chinese model is different. It is using limited freedom of enterprise and it is
highly dependent on exports. It is combining free markets with state run industries.
Above all, China’s economic miracle was achieved thanks to the open and welcoming
markets of the West. In contrast to the USSR, China’s model depends on interacting
with the world.

China’s Predator Economy.

For too long, China has acted as a fox in the hen house. The “West” expected that a
reforming China welcomed into the free system would gradually become more free,
which would benefit everyone. But as it turned out, China has exploited the free markets
while stubbornly refusing to play by their rules. The Trump administration is right to
demand a fair playing field. Theft of intellectual property, requirements that investment
partners share knowhow with their future competitors, the unfair subsidies of state
owned companies, as well as the impediments placed on foreign companies wishing to
repatriate profits are just a few examples of how China rigs the system.

This is not to say the Chinese Communist Party should be required to espouse a fair
and free market economy. It would be naïve to expect that to happen. But the West can
no longer afford to do business in China under the current de facto arrangement. Too
many US, European or Japanese companies have been burnt in China. There have
been too many cases of foreign companies trying to build a presence in China only to
find they are competing with their erstwhile “partners”. In order for mutually beneficial
trade to be sustainable, fundamental reforms are needed.

The Silk Road is a One Way Road.

The challenge going forward is to build trade practices that can accommodate two
different economic models. Internally, the Chinese domestic economy is going to have
to be more friendly to foreign corporations. Externally, there are challenges too. The
Chinese model does not limit itself to The Middle Kingdom. It is highly expansionist.
Globally, the Chinese economic model takes its inspiration from the Japanese Zaibatsu
or the Korean Chaebol and takes it to a governmental level.

A Zaibatsu – or a Chaebol – system is a group of financial and industrial conglomerates
that collectively controls a large part of the economy. Similarly, the Chinese state has
built a “conglomerate of countries” that controls large parts of the global economy.
Different countries cooperate on the basis of their comparative advantage and
specialization. But the initiative and final strategic vision always lies with Beijing.
In his book “Belt and Road”, Bruno Maçães describes how the Chinese economic model
works. “Under the Belt and Road, countries open their policy-making process to other
countries before and above opening their economies to foreign companies.” To give one
example, when China needed honey, it asked Kyrgyzstan’s government to export
400,000 tons of honey. Once a need is established – in this case lots of honey – detailed
negotiations on the financing and the production facilities are expected to follow.
Capital is made available to friendly countries, but must be used in ways that further
China’s industrial goals. When a Kazakh group partnered with China Nonferrous Metals
Industry Group for a copper and cobalt project in the Democratic Republic of Congo, the
financing was done by three Chinese banks. China also invested in infrastructure
projects in Kazakhstan where the government provides the capacity needed for the
refining of cobalt. All the cobalt is sent to China, where it is used in the manufacture of
the final product, batteries for electric cars.

One World, Two Economic Systems.

Already many countries in Asia are pushing back. India and Japan feel threatened by
China’s expansionism, especially since Chinese economic ambition is closely followed
by military buildup.

The Trump administration is trying to set rules that make possible trade with the
Chinese and its growing number of satellites. World prosperity and world peace will
depend on the ability of these two systems to agree upon more-or-less compatible and
mutually beneficial rules of engagement.

MOPPX Activity in Q1, 2019

We have made some new investments in the Mercator International Opportunity Fund,
adding mostly Japanese names to the portfolio.

We bought Fancl (0.96% of the fund), UUUM (0.89%), MonotaRo (1.03%) and Comture
(0.91%). Fancl is a well-known Japanese cosmetics company that is very popular in
China and among Chinese tourists in Japan. UUUM is Japan’s largest manager of
influencers on YouTube. MonotaRo sells machine tools, engine parts and factory
consumable goods online. Comture (0.91%) is a leading software service company that
is riding the wave of Cloud computing. The penetration rate of Cloud computing among
large Japanese companies is still estimated to be as low as 10%.

We made those investments after research trips to Tokyo, London and Dublin. Overall,
we noted that the outlook for those economies is better than what headlines lead us to
believe. The Japanese business climate is good, although not excessively bullish. In
the UK, Brexit is a never-ending political mess. It creates unwelcome uncertainties, but
business is still growing steadily. There were no signs of a recession, nor did we hear
management in London complain about the business environment. British businessmen
are reacting to the adversity caused by Brexit with their usual phlegm and
determination. Keep calm and carry on!

Mutual fund investing involves risk. Such risks associated with the Mercator International Opportunity Fund (MOPPX) as well as applicable investment objectives, charges and expenses must be considered carefully before investing. This and other important information about the Mercator International Opportunity Fund is found in the Prospectus, a copy of which or current performance information may be obtained by contacting Mutual Shareholder Services (“MSS”) toll free at 1-800-869-1679. We encourage you to read the prospectus carefully before investing.

Past performance does not guarantee future results. Loss of principal is possible. Investment returns and principal value of an investment in the Mercator International Opportunity Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. For up-to-date performance information please contact the fund’s transfer agent at 1-800-869-1679.
Investing in mid or small cap companies can be considered riskier than investing in large cap companies. In addition, the size of companies comprising an Index, although midcap by some country standards, could be considered small cap in the U.S. Currency risk involves the chance that the value of a foreign investment, measured in U.S. Dollars, will decrease due to unfavorable change in currency exchange rates. Arbor Court Capital, LLC serves as the Distributor for the Fund and is a member of FINRA and SIPC