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July 02, 2009

Index Summary

• The major market indices were lower this week. The Dow Jones Industrial Index (1) lost 1.87 percent. The S&P 500 Stock Index (2) declined 2.45 percent, while the Nasdaq Composite (3) finished 2.27 percent lower.
  
• Barra Growth (4) outperformed Barra Value (5) as Barra Value finished 2.66 percent lower while Barra Growth fell 2.26 percent. The Russell 2000 (6) closed the week with a loss of 3.12 percent.
  
• Through Thursday, the Hang Seng Composite (7) finished lower by 2.12 percent; Taiwan (8) rose by 3.16 percent, and the Kospi (9) advanced 1.22 percent.
  
• The 10-year Treasury bond yield closed at 3.5 percent, down 4 basis points for the week.
  

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Obama and the Market’s Carnival Ride

By Frank Holmes
CEO and Chief Investment Officer

We probably don’t have to tell you that being in the stock market in 2009 has been like spending six months on Coney Island’s Cyclone roller coaster—turn by turn a terrifying and exhilarating ride.

In the graphic below, the blue line shows the performance of the S&P 500 since Barack Obama became president on January 20, while the red line is the average performance of that index for each presidential term going back to Dwight Eisenhower’s first term in 1953.

The Presidential Election Cycle is one of the many commodity seasonal and other cycles that we monitor to help inform our investment decisions.

The typical pattern for the first five-plus months of a presidential term is mostly sideways as new administrations take shape and second-termers reshuffle people and set new priorities.

But President Obama didn’t have the luxury of an easing-in period, since markets were already in deep distress when he took the oath of office.

After a brief inauguration rally, the sharp downward trend continued until a bottoming-out in early March, with the S&P 500 falling more than 16 percent from the time the new president took his left hand off the bible.

I was in New York in early March, and never had I seen so much negativity among those in the investing world. Even members of the financial media, who are supposed to keep an arm’s length distance from the news, were openly in despair about the markets.

After the S&P 500 closed at a decade low on March 9, there came a series of events in Washington that gave me confidence at the time that we had finally seen the bottom.

On March 10, Congress let it be known that the uptick rule for short sales would be restored in some form. The same day, President Obama signed a $410 billion economic stimulus measure.

A couple of days later, at a committee hearing in the House of Representatives, the head of the board overseeing accounting standards said new guidance was coming on applying FAS 157’s mark-to-market rules—these rules compelled major banks and other financial companies to write down many billions of dollars worth of securities on their books, weakening them to the point that they required many billions of federal dollars just to stay alive.

Less than a week after that, the Federal Reserve announced it would buy up to $1.5 trillion in mortgage-related securities this year and another $300 billion in long-term Treasury debt. And soon after came the G-20 meeting in London, where the major countries of the world committed more than $1 trillion to a global recovery plan.

All of this good news injected optimism into the market. By the end of April, the S&P 500 was up nearly 30 percent from its March low and it gained another 8 percent by mid-June before flattening out at a level well above the average for this point in a presidential term.

Dramatic ups and downs can be exciting at an amusement park, but no one wants to see that kind of volatility in their investment portfolio.

More positive indicators are emerging, so as we start the second half of 2009, we are increasingly confident that the Cyclone-like thrill ride that has marked President Obama’s tenure so far will be replaced by steadier and more sustainable markets.

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The Leaders and Laggards table has been moved to the bottom of the page, click here to jump to it.

Domestic Equity Market

S&P 500 Performance Since 1921

*May through October performance using last two months of recession or next period following recession Source: Global Financial Data and Citi Investment Research and Analysis—U.S. Equity Strategy
	% Instances Market Up	% Instances Market Down	Average Gain
May through October	64.8%	35.2%	2.13%
November through April	68.5%	31.5%	4.93%
Since 1921 Period of Economic Recovery*	87.5%	12.5%	8.67%

The table above from Citigroup analyzes the “sell in May and go away” mantra employed by some students of the stock market. It has a special focus on the May through October periods since 1921, in years when the economy was in recovery from recession for at least two months.

For example, if the recovery began in July, there would be four months of recovery in the May through October period and the current year’s data would be used. If recovery began in October, then the data in the figure would be for the May thru October period of the following year.

As the figure shows, the May through October average S&P 500 gain for all periods since 1921 is less than half the average gain for all November thru April periods since 1921--2.13 percent vs. 4.93 percent. However, if you only include those May through October when the economy was recovering, the average gain is 8.67 percent.

If the economy begins to recover in the third quarter of this year as some economists predict, then history argues for above-average gains from May to October period.

Strength

• The special consumer services group--H&R Block--was the best performing group for the week, up 10 percent. The company reported fiscal fourth quarter earnings and fiscal 2010 earnings guidance in excess of consensus analyst estimates.
  
• The automobile manufacturer group—Ford Motor Company--was the second-best performer, up 5 percent. Ford reported vehicle sales for June that beat the consensus estimate and it posted market share gains on both a month-over-month basis and year-over year basis. The top sales analyst at Ford said in a conference call that the auto industry downturn appears to be nearing a turning point.
  
• The paper products group--International Paper Co.—outperformed the market, rising 4 percent. A major brokerage firm raised its earnings estimates and price target on the company to reflect better near-term results and the likelihood that we are closer to the next upcycle for containerboard pricing.
  

Weakness

• The multi-line insurance group was the worst performer, down 10 percent. The group was led down by American International Group Inc, who effected a 20-to-1 reverse stock split Wednesday. Also, on Wednesday the New York Stock Exchange said it erroneously posted a notice of suspension and delisting for AIG on its Web site.
  
• The casinos & gaming group underperformed, declining 9 percent. June gaming revenues for Macau declined 17 percent on a year-over-year basis, disappointing many. The decline was larger than the 10.2 percent year-over-year decline in May.
  

Opportunity

• Although the level of merger & acquisition activity is low compared to some earlier periods, there may still be an opportunity for gain in M&A transactions in 2009.
  
• The pull back in some commodity-related stock groups from the levels of three weeks ago might possibly provide an opportunity.
  

Threat

• Disappointing second-quarter earnings, should that occur, would be a negative for stock prices.
  
• Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.
  

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The Economy and Bond Market

Treasuries rallied again this week on generally weaker-than-expected economic data and comments from San Francisco Fed president Janet Yellen. Yellen said that the Fed funds rate could remain at zero for a prolonged period of time, maybe even for the next two years.

June employment data released Thursday showed deteriorating conditions as nonfarm payrolls fell 467,000, much worse than last month and worse than expected. Payroll weakness was across the board and touched virtually all sectors.

The charts below show how severe this recession has been. The first graph captures nonfarm payrolls for the last two recessions and current retracement this month. The bottom chart also highlights how difficult this recession has been, it reflects the average weekly duration of unemployment and is at the highest level in 60 years at 24.5 weeks.

Strength

• The ISM Manufacturing Index (10) rose to 44.8 and continues the recent global uptrend of increasing activity.
  
• China’s manufacturing index rose for the fourth month in a row to 53.2. This exhibits economic expansion for the country.
  
• The S&P/Case Shiller Home Price Index (11) registered modest improvements on a year-over-year basis.

Weakness

• Employment data for June was disappointing and threatens the possibility of a V-shaped recovery.
  
• Probably reflecting the job situation, consumer confidence in June backtracked, falling to 49.3 from 54.9 in May.
  
• Investor’s Business Daily reported this week that 10-year Treasuries suffered their worst quarterly performance in at least 12 years.

Opportunity

• Optimism continues to build and at some point becomes reinforcing; we may be near that tipping point.
  
• Global economic data continues to show incremental improvement, raising the odds of a sustained recovery.
  
  

Threat

• The massive increase in money supply and other global government policy measures could result in inflationary pressures leading to possible interest rate increases.

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Gold Market

For the holiday shortened week, spot gold closed at $929.80 per ounce, down $9.80 or 1.04 percent. Gold equities, as measured by the XAU Gold & Silver Index (12) fell by 2.64 percent for the week. The U.S. Trade-Weighted Dollar Index (13) gained 0.52 percent.

Strength

• China’s electricity output is expected to rise 2.37 percent in June over a year earlier, marking the first year-over-year increase since last October. This is mainly driven by the recovering economy, the National Development & Reform Commission said
  
• Turkey, the world’s third-largest manufacturer of gold jewelry in 2007, imported 4.1 tons of gold valued at $125 million in the past three weeks as the wedding season boosted demand
  
• According to Reuters, Abu Dhabi June gold sales have risen 30 percent from the previous month. The jump is from holiday buying and sales expected to stay robust into the first half of July.

Weakness

• From a contrarian standpoint, Barclays Capital said that commodity assets under management expanded by $34 billion in the current quarter. This is the second-largest increase on record only behind last year’s biggest jump of $43 billion during the same quarter. The odds of continued record-breaking assets under management in commodities are abating as investment inflows are beginning to stabilize.
  
• Investment inflows into gold-backed exchange-traded funds slowed due to stronger performance in other asset classes and a resurgence in risk tolerance. The largest gold–backed ETF’s holdings fell by 167 thousand ounces to 36.03 million ounces.
  
• The Commodities Futures Trading Commission is looking closely for signs of excess speculation in commodity markets to protect consumers and prevent price manipulation. Reports indicate that traders may be given a standard limit on positions.

Opportunity

• Scotia Capital states that increasing levels of investment demand for gold bullion will continue and to expect strong activity in physical gold buying. The company also said there will be further inflows into gold backed exchange traded funds during the second half of 2009 and into 2010.
  
• Analysts suggest a falling U.S. dollar, rising commodity prices and the prospects of high levels of inflation should compel investors to own gold and silver to hedge against financial uncertainties.
  
• China, the largest holder of foreign currency reserves, renewed its call for a stable U.S. dollar and has proposed to include the topic of a new global currency at the next G8 meeting. The People’s Bank of China will now allow banks to undertake settlement of cross-border transactions between Chinese exporters in Chinese yuan and have offered tax breaks to exporters who make use of this new settlement option. These are negative factors for the dollar and may cause a spillover in bullion purchases as the dollar faces downward pressure.
  
• CPM analysts have suggested that despite platinum’s falling levels in fabrication demand, demand is expected to rise as the world exits the present recession, and is also expected to be boosted by investment demand.

Threat

• The U.S. savings rate has gone from negative 3 percent in late 2005 to a positive 6.9 percent currently, the highest rate since 1993. Although saving money helps individuals pay down debt, it can also deepen the recession and may cause negative implications for global trade.
  
• According to Nouriel Roubini, this year’s 55 percent advance in oil costs, combined with widening budget deficits may cause another global slump.
  
• South Africa’s mineworkers union has said it is willing to lower its 15 percent wage increase demand, but still demands it moves beyond the 6.5 percent hike in wages that have been offered because it is below the country's inflation rate of 8 percent. Strike-related disruptions may occur if an agreement is not reached and may be a threat to the supply of metals and minerals this year.
  
• China is opposed to provisions in a new U.S. clean energy bill that will make it easier to impose trade penalties on nations that reject limits to global warming pollution. Such actions may ignite a protectionism theme between developed and developing nations.

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Energy and Natural Resources Market

Strength

• Japan's Ministry of Economy, Trade and Industry has forecasted crude steel production and steel product demand for the July-September quarter at 21.77 million tons, up 14.3 percent quarter-over-quarter.
  
• Chinese refinery throughput in May surged to a record 7.4 million barrels per day, up 12 percent on year-over-year basis.
  
• The Baker Hughes U.S. rig count increased by 11 rigs this week making this the third-straight week with a rise in the rig count. This is the longest consecutive rise in the rig count since August 2008.
  

Weakness

• After postponing the bidding rounds for one day due to a sandstorm, Iraq’s effort to attract investment to the oil sector met some resistance from prospective companies. Only BP and the China National Petroleum Corporation agreed to Baghdad’s terms, winning the bid for Rumaila field. Seven other oil and gas fields failed to attract bids.
  
• The International Energy Agency sharply reduced its forecast for world consumption and now expects global demand to grow at just 0.6%. This is the equivalent to 540,000 barrels per day and raises consumption from to 89 million barrels per day. The latest forecasts indicate that the demand would be lower by 3.3 million barrels per day as compared to previous 2013 estimates.

Opportunity

• Reports from the Australian press indicate that the China Iron and Steel Association (CISA) may be willing to discuss Rio Tinto's 33 percent price cut proposal for iron ore fines seriously after all. This follows CISA’s previous insistence on a 40-45 percent cut offer and comes a day after the June 30 deadline on some contracts.
  
• Analysts at Macquarie Securities say that signs of a gradual recovery in non-Chinese steel production are emerging with U.S. weekly steel production hitting its high for 2009 last week. However, it’s still only at 49 percent of capacity however.
  
• In Europe, Corus started up a blast furnace that has been idle for 10 months. Some European steelmakers are also starting to resume intake of raw materials such as coal and iron ore for the first time in many months.

Threat

• Reports from the Platts 4th Annual European Nuclear Power conference highlighted the numerous challenges that nuclear energy faces in most European countries. Regulatory constraints, a lack of experienced staff and an aging population are other major issues. Within Europe, it appears very likely that little building of new facilities will occur outside of Finland and France over the next 5 years.
  
• China 's Caijing magazine quoted an official of China's NDRC saying that China has bought 235,000 tons of copper so far this year, but stopped buying due to the increase in prices.
  

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Emerging Markets

Strength

• Both the official and CLSA China Manufacturing Purchasing Manager’s Index (14) rose for another month in June, reflecting a continued recovery and a sustained expansion of industrial activity in the country.
  
• South Korea’s exports posted the best reading in eight months, declining by 11.3 percent in June on a year-over-year basis. This is much better than the 28.5 percent drop in May. With imports decreasing 32.3 percent from a year earlier, the country is left with a record trade surplus of $7.4 billion.
  
• Interfax published monthly crude and gas output for Russian oil companies that showed an accelerated year-over-year increase in output growth. Russian crude output was up 1.4 percent in June on top of 0.9 percent rise in May and now sits at 9.89 million barrels per day. Despite oil analysts estimating a 3 percent decline for Russia’s oil output, it is up 0.6 percent year-to-date.

Weakness

• Thailand’s industrial production declined 10 percent in May, its seventh-straight month of decline. This is consistent with another 26.5 percent contraction in exports for the same month as little recovery in external demand was felt.
  
• Russian gross domestic product (GDP) fell 11 percent year-over-year in May 2009 and has fallen by 10.2 percent since January 2009. Investment contraction is the main driver of the deterioration in output, down 23.1 percent year-over-year in May, but consumption is also weakening. Government spending is now the only contributor to GDP, according to Citigroup.

Opportunity

• China approved a proposal to create another economic zone along the coastline of the Liaoning province, a traditional base for heavy industry. The proposal is part of an effort to propel growth in northeast China, which has lagged in economic development for the last 20 years. This new policy should benefit sea ports, ocean shippers and equipment manufacturers in the region.

• The medium-term outlook for commodity prices – a critical sector in Kazakhstan – remains positive. Although GDP will contract 2-to-3 percent this year on slowing domestic consumption. Resource exporting stocks should outperform by benefiting from rising oil and metals sales prices and a positive impact from 20 percent tenge devaluation, as shown in the chart below provided by Unicredit.

Threat

• Continuously weakening Chinese oceanbound container freight rates speak volumes for the country’s vulnerable exports. Worse-than-expected June data for U.S. employment only validates the lingering concern over U.S. consumption, which is linked to the fate of Chinese exporters. Going forward, the higher base in the third quarter of 2008 makes year-over-year comparison even more difficult for Chinese exports.
  
  • The Croatian Prime Minister unexpectedly resigned this week. The country’s government has been weighed down by a sharp economic contraction, dwindling budget revenues and a suspension of European Union membership talks due to a border dispute with neighboring Slovenia. Economic and political uncertainties compound risks and there is a high likelihood that the country will turn to the IMF for a bailout package, according to RGE monitor.

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Leaders and Laggards

The tables show the performance of major equity and commodity market benchmarks of our family of funds.

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Please consider carefully the fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in gold or gold stocks. Tax-exempt Income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Each tax free fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. Bond funds are subject to interest-rate risk; their value declines as interest rates rise.

These market comments were compiled using Bloomberg and Reuters financial news.

Holdings as a percentage of net assets as of 3/31/09:
Corus: 0.00%
BP: 0.00%
Rio Tinto: Global Resources Fund 2.19%
Ford Motor Co: 0.00%
H&R Block: 0.00%
International Paper Co: 0.00%
American International Group: 0.00%
AIG: 0.00%
Barclays Capital 0.00%
Scotia Capital: 0.00%

*The above-mentioned indexes are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.

(1) The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
(2) The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
(3) The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
(4) The S&P BARRA Growth Index is a capitalization-weighted index of all stocks in the S&P 500 that have high price-to-book ratios.
(5) The S&P BARRA Value Index is a capitalization-weighted index of all stocks in the S&P 500 that have low price-to-book ratios.
(6) The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
(7) The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
(8) The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
(9) The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
(10) The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.
(11) The S&P/Case-Shiller Index tracks changes in home prices throughout the United States by following price movements in the value of homes in 20 major metropolitan areas.
(12) The Philadelphia Stock Exchange Gold and Silver Index is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
(13) The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
(14) CLSA China PMI is based upon monthly replies to questionnaires sent to purchasing executives in over 400 industrial companies in China and measures China’s manufacturing activity.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The China Containerized Freight Index reflects fluctuations, supply and demand trends in the global shipping market and related markets.

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