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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

The Best Time to Prepare Is While the Bull Runs
September 24, 2018

how to manage your risk

In case you couldn’t tell from the ubiquitous political ads and yard signs, midterm elections are right around the corner. Historically, volatility has increased and markets have dipped leading up to midterms on uncertainty, but afterward they’ve outperformed.

Of especially good news is that we’re entering the three most bullish quarters in the four-year presidential cycle, according to LPL Financial Research. The fourth quarter of the president’s second year in office, which begins next month, and the first and second quarters of the third year have collectively been the best nine months for returns, based on 120 years of data.

the next three quarters have historically been bullish for stocks
click to enlarge

It makes sense why this has been the case. Following midterms, the president has been motivated to “boost the economy with pro-growth policies ahead of the election in year four,” writes LPL Financial.

Government Policy Is a Precursor to Change

Should Republicans manage to hold on to both the House and Senate—which Wells Fargo analysts Craig Holke and Paul Christopher estimate has a 30 percent probability—it’s likely they’ll try to pass “Tax Reform 2.0,” with an emphasis on the individual tax side. We can also probably expect to see additional financial deregulation.

Cornerstone Macro is in agreement, writing that “the better Republicans do in the election, the more confidence investors will have that [President Donald] Trump could be reelected and the business-friendly regulatory practices will remain in place.” A GOP Congress, the research firm adds, would be supportive of banks and energy, specifically oil, gas and coal. Since Trump’s inauguration, the Dow Jones U.S. Coal Index has climbed nearly 60 percent, double the S&P 500’s performance.

Back from the dead: coal stocks have risen since inauguration day
click to enlarge

The more likely outcome, according to Holke and Christopher, is a divided Congress, with Democrats taking control of the House. In such a scenario, financial deregulation would slow, but Trump, who’s pushed hard for aggressive infrastructure spending, might find the support he needs for a bill from Democrats. This would help increase demand for commodities and raw materials, but “additional stimulus in an economy already near capacity may result in higher inflation, negatively affecting fixed income,” Holke and Christopher write.

On the other hand, higher inflation has historically meant higher gold prices. After climbing for 12 months, year-over-year change in consumer prices cooled in August to 2.7 percent, from July’s 2.9 percent.

Government policy is a precursor to change, as I often say. It’s not the party that matters but the policies, and there are ways for investors to make money however the midterms unfold.

Money Managers and Banks Are Adding Safe Havens at a Faster Pace

With the bull run now the longest in U.S. stock market history, there’s a lot of talk and speculation about when the next major pullback will happen. I’ve discussed a number of possible catalysts with you already, from record levels of global debt to the flattening yield curve. Recently I shared with you that Goldman’s bull/bear indicator hit its highest level in nearly 50 years.

Even as markets closed at fresh all-time highs, essentially ignoring the intensifying U.S.-China trade war, Bank of America Merrill Lynch (BofAML) called the bull run “dead” last week, due to slowing global economic growth and the end of monetary stimulus. “The Fed is now in the midst of a tightening cycle, ignoring structural deflation, focusing on cyclical inflation,” writes BofAML chief strategist Michal Hartnett.

Against this backdrop, a growing number of money managers hold a dim view of continued economic growth. September’s Bank of America Merrill Lynch Fund Manager Survey found that a net 24 percent of fund managers believe global growth will slow over the next 12 months. That’s the highest percentage of managers with such a view since December 2011, the height of the European debt crisis. Reasons given for this bearishness are the U.S.-China trade tensions and, again, the end of central bank accommodation.

Fund managers are raising their cash levels, Hartnett says, as well as their exposure to fixed income, which has traditionally been used as a safe haven in times of uncertainty. In July, the most recent month of Morningstar data, bond funds attracted the greatest amount of any asset class in the U.S., with taxable and municipal bonds seeing a collective $28.5 billion in inflows. U.S. equity funds, meanwhile, collected a little under $3 billion, and in fact have seen $11 billion in outflows in the 12 months through July 31.

Getting even more specific, U.S. actively-managed ultrashort bond funds were the biggest winner, attracting over $6 billion in July, according to Morningstar.

You can read more about short-term bond funds by clicking here.

Central banks added gold in first half at fastest pace since 2015
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Gold demand among central banks has also accelerated this year. According to the World Gold Council (WGC), banks added a net 193.3 metric tons of gold to their reserves in the first half of the year, an 8 percent increase from 2017. This was the most purchased in the first six months since 2015.

Watch my interview with Kitco News to learn why now might be a good time to follow the “Golden Rule.”

The Next Crisis Could Be Triggered by Passive Indexing

One of the biggest risks right now, I believe, is the explosion in passive, “dumb beta” indexing. Trillions of dollars have poured into products that track indices built not on fundamental factors like revenue, cash flow and return on invested capital (ROIC), but on simple market capitalization. A piling on effect has occurred, whereby multibillion-dollar funds are buying more and more of the most expensive stocks. This has resulted in overinflated valuations.

The big risk is when these funds rebalance, which could happen as early as the beginning of next year. Last year, junior mining stocks got crushed after the VanEck Vectors Junior Gold Miners ETF (GDXJ) restructured its portfolio. Imagine what could happen if all passive index funds did the same simultaneously.

Last week I wrote more in depth about the risks passive indexing poses. If you didn’t get a chance to read it, I invite you to do so by clicking here.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. The S&P 500 index is a basket of 500 of the largest U.S. stocks, weighted by market capitalization. The Dow Jones U.S. Coal index is a subindex of the Dow Jones U.S. Indices and seeks to track all stocks classified in the coal subsector (1771) of the Dow Jones Sector Classification Standard traded on major U.S. stock exchanges.

Cash flow is the total amount of money being transferred into and out of a business, especially as affecting liquidity. Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 6/30/2018.

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Are We Headed for a Passive Index Meltdown?
September 19, 2018

Without Googling, try to guess who said the following quote: “If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.”

Give up?

The speaker, believe it or not, is John Bogle, founder of Vanguard, which has been at the forefront of indexing. Bogle made the comment last year at the Berkshire Hathaway shareholder meeting, basically admitting that there’s a limit to the amount of passive investing the market can handle and still function efficiently.

The thing is, we’re testing that limit more and more every day as passive mutual funds and ETFs—those that seek not to “beat the market” but track an index—take up a larger slice of the pie. The share has increased dramatically in the past 10 years, rising from only 15 percent in 2007 to as much as 35 percent by the end of 2017.

Index funds have grown as a share of the fund market
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As for when passive investments will overtake the active market, Moody’s Investors Service estimates we’ll see this happen sometime between 2021 and 2024. Markets simply wouldn’t be able to function without active managers calling the shots—rewarding good corporate governance and punishing the bad—so Bogle’s what-if scenario of 100 percent indexing is, for now, purely hypothetical.

Nevertheless, the seismic shift into indexing has come with some unexpected consequences, including price distortion. New research, which I’ll get into below, shows that it has inflated share prices for a number of popular stocks. A lot of trading now is based not on fundamentals but on low fees. These ramifications have only intensified as active managers have increasingly been pushed to the side.

Watch Out for Rebalance Risk

This could end very badly for some investors, as I told CNBC Asia last week. It’s possible we could see a correction when it comes time for a number of multibillion-dollar funds to rebalance at year’s end. The same thing happened to the tech bubble in 2000, when everyone rebalanced after a phenomenal run-up in tech stocks.

And remember what happened to small-cap gold stocks last year when the massive VanEck Vectors Junior Gold Miners ETF (GDXJ) was forced to restructure its portfolio? They were knocked down despite having incredible fundamentals.

Take a look at the following chart. Internet commerce stocks—Apple, Amazon and the like—are up nearly eight times since May 2010.

Ecommerce is the second largest bubble of the last four decades
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This isn’t just the second largest bubble of the past four decades. E-commerce is also vastly overrepresented in equity indices, meaning extraordinary amounts of money are flowing into a very small number of stocks relative to the broader market. Apple alone is featured in almost 210 indices, according to Vincent Deluard, macro strategist at INTL FCStone.

If there’s a rush to the exit, in other words, the selloff would cut through a significant swath of index investors unawares. And just as Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”

A Huge Opportunity in Under-Indexed Stocks

Deluard’s research also suggests that passive index investors could be missing the hidden gems. After analyzing returns in the Russell 3000 Index, he found that stocks that are overrepresented in indices—again, think Apple—have been underperforming those in fewer indices. Despite lagging for the past five years, stocks that were in 75 indices or fewer returned more than 60 percent for the 12-month period, while the performance of stocks featured in 200 indices or more was around half that. Over-indexed stocks were also 2.5 times more expensive, Deluard found.

Stocks that are included in fewer indexes have outperformed over the last 12 months
click to enlarge

Whether we’re dealing with causation or correlation is probably too complex for me to get into here. The implication, as I see it, is that there’s huge potential for gains in stocks that are least loved by index providers. Talented active managers who are able to uncover these hidden gems and make the appropriate allocations are worth every cent investors pay them in fees.

In the Race to the Bottom, Everyone Ends Up Last

As I said earlier, a lot of trading now is based not on fundamentals but expense ratios. There’s been a race to the bottom to see who can provide the lowest fees. Fidelity appears to be first to introduce a no-fee fund—the catch being the investor must use Fidelity’s brokerage firm. Some industry experts now believe it’s only a matter of time before we see an index fund with negative fees.

You get what you pay for, as the saying goes, and buying cheap often comes with a high price in the long run. A tummy tuck in Tijuana costs a whole lot less than one in L.A., but you might end up having to pay far more in medical expenses should a mishap occur.

The same thinking applies with certain passive mutual funds and ETFs.

Recently Ray Dalio, billionaire founder of Bridgewater Associates, told CNBC that we’re in the “seventh inning” right now, and as such, investors should probably get “more defensive.” In addition, the Goldman Bull/Bear Indicator just hit its highest level since 1969.

Investors who feel this bull run might be getting long in the tooth would be prudent to make sure they have their recommended 10 percent weighting in gold and gold stocks, as well as a position in short-term, tax-free municipal bonds. Both assets have long been sought as safe havens in times of economic uncertainty and have performed well even when markets are down.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Russell 3000 Index is a market-capitalization-weighted equity index maintained by the FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks which represent about 98% of all U.S incorporated equity securities. The Nikkei 225 Stock Average is Japan's premiere stock index. It includes the top 225 blue-chip companies listed on the Tokyo Stock Exchange. The SET Index is a Thai composite stock market index which is calculated from the prices of all common stocks (including unit trusts of property funds) on the main board of the Stock Exchange of Thailand (SET), except for stocks that have been suspended for more than one year. The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. The S&P Homebuilders Select Industry Index represents the homebuilding sub-industry portion of the S&P Total Markets Index. The SSE Composite, which is short for the Shanghai Stock Exchange Composite Index, is a market composite made up of all the A-shares and B-shares that trade on the Shanghai Stock Exchange. The NASDAQ Biotechnology Index is a stock market index made up of securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as either Biotechnology or Pharmaceuticals. The Dow Jones Internet Commerce Index is designed to measure the 15 largest and most actively traded internet commerce stocks. The Goldman Sachs bull/bear indicator takes into account five factors: growth momentum (measured by the average percentile for U.S. ISM indexes), the slop of the yield curve, core inflation, unemployment and stock valuations as measured by the Shiller price-earnings multiple.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 6/30/2018.

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Is This Just the Calm Before the Storm?
September 17, 2018

Hurricane Florence

Photo: Earth Science and Remote Sensing Unit, NASA Johnson Space Center

Florence, now a tropical depression, made landfall in North Carolina on Friday, bringing with it destruction and calamity, the cost of which could top $170 billion, according to analytics firm CoreLogic. If so, that would make it the costliest storm ever to hit the U.S. To date, 2005’s Hurricane Katrina holds the top spot, costing an estimated $160 billion, followed by last year’s Harvey ($125 billion) and Maria ($90 billion).

Not to minimize the impact Florence will have on millions of Americans’ lives, but storms, even of this size, have rarely triggered major equity selloffs. According to research firm CFRA, in the last 15 years, the S&P 500 Index declined an average 0.2 percent in the month after a hurricane, but was up an average 3.9 percent in the subsequent three months. Home improvement companies such as Home Depot and Lowe’s could be beneficiaries, while insurance companies might take a hit.

Markets are subdued right now, with the S&P 500 having gone more than 55 days without a 1 percent move in either direction. Trading volumes are also lower-than-average, suggesting Wall Street is in wait-and-see mode before making major adjustments.

Could this just be the calm before the storm?

Consumers and Small Business Owners Are Feeling Good

Lehman Brothers headquarters at Rockefeller Center in August 2007
By David Shankbone - Creative Commons Attribution-Share Alike 3.0 Unported license.

Appropriately enough, Florence comes to us on the 10-year anniversary of Lehman Brothers’ collapse— the spark that set off the financial crisis—reminding us it’s never the wrong time to prepare for such a catastrophe. (I’ll have more to say on Lehman later.) That includes now, even as a raft of positive economic data was released last week. The University of Michigan consumer sentiment index climbed to 100.8 in September, against expectations of only 96.6. This was its second-highest reading since 2004.

What’s more, the NFIB Small Business Optimism Index soared to 108.8 in August, its highest level ever in the series’ 45-year history.

“As the tax and regulatory landscape changed, so did small business expectations and plans,” commented National Federation of Independent Business (NFIB) president and CEO Juanita Duggan.

Against this background, Nobel laureate Robert Shiller told Bloomberg last Thursday that the market “could get a lot higher before it comes down… It’s highly priced, but it could get much more highly priced. It’s a risky market now.”

Time to Get Defensive?

Ray Dalio has a slightly different perspective. The billionaire founder of Bridgewater Associates, the world’s largest hedge fund, reminded investors last week that we’re in the “seventh inning” right now, and as such, investors should probably get “more defensive.” Recently I shared with you that the global purchasing manager’s index (PMI) is steadily slowing down, falling to a 21-month low of 52.5 in August.

Again, markets have been relatively tranquil for a while now, but just as people on the East Coast were urged to prepare in anticipation of Florence, now might be the time to adjust your portfolio in advance of a possible market downturn. Last week, Goldman Sachs reported that its bull/bear indicator, which gauges the likelihood of a bear market, climbed to its highest point since 1969.

Goldman Bull Bear indicator at highest level since 1969
click to enlarge

Goldman analysts point out, however, that the indicator could be read to mean not that a bear market is right around the corner, but that a period of lower returns could be expected.

One of the ways investors could batten down the hatches, so to speak, is with gold, which historically has performed very well in September as we approach Diwali and the Indian wedding season. Last week I had the privilege to join Liz Claman on FOX Business’ Countdown to the Closing Bell, and I told her that, under the circumstances, gold is doing exceptionally well. The precious metal may be under pressure from a strong U.S. dollar and higher Treasury yields, but in Japan, Germany and elsewhere, government bond yields are negative, which has boosted gold demand.

Frank and Liz on Fox Business

While I’m here, I’d like to congratulate Liz and her show—Countdown placed in the top four business news programs this past quarter, reaching nearly 230,000 viewers, according to Nielsen Media Research. Liz continues her reign as the highest-rated female business news anchor on television. I’m very honored to be able to share my views with her and her audience, and to have appeared in her 2007 book, The Best Investment Advice I Ever Received.

What Caused the Lehman Brothers Bankruptcy: A New Accounting Rule

Lehman Brothers headquarters at Rockefeller Center in August 2007

Before my interview, Liz spoke with the very man who was called in to conduct forensic accounting on Lehman Brothers’ bankruptcy, Anton Valukas. The fourth-largest U.S. bank at the time of its demise, with $85 billion worth of mortgage-backed securities, Lehman resulted in global market-cap erosion of $10 trillion in October 2008 alone.

Among the most eye-opening comments Valukas made during his interview is that “the federal government knew everything Lehman was doing—its risk exceedances [and] the fact that they did not have a liquidity pool.” According to Lehman’s 10-K from November 2007, the bank was leveraged an incredible 30.7 times its net worth, up dramatically from 23.7 times only four years earlier.

“Why were there no prosecutions or civil suits?” Valukas asked. Simply put: “The government knew.”

Some of the blame is also owed to an accounting rule, FAS 157—also known as “mark-to-market,” or “fair value accounting”—that was enacted in November 2007. A year later, after Lehman had sent global markets in a tailspin, FAS 157 was already being fingered by some as the culprit. William Isaac, the former chairman of the Federal Deposit Insurance Corporation (FDIC), said before the Securities and Exchange Commission (SEC) that the bankruptcy was “due to the accounting system, and I can’t come up with any other explanation.” Steve Forbes, chairman of Forbes Media, called mark-to-market accounting the “primary reason” for the meltdown.

I’m in agreement, writing back in March 2009 that “a case could be made that the convergence of FAS 157, highly leveraged balance sheets and the loss of the uptick rule were the trigger that set off the financial meltdown.”

The Financial Accounting Standards Board (FASB) proposed more lenient accounting guidelines in March 2009—the same month the market bottomed and began to recover. Coincidence?

Government policy is a precursor to change
click to enlarge

So not only did the government allegedly allow the meltdown to happen, it then used taxpayer money to bail out the banks, which I believe exacerbated economic anxiety and sewed further distrust in the beltway party.

In my view, this contributed to two things: bitcoin, and the election of Donald Trump. Many people’s faith in traditional banking was obliterated, opening up the opportunity for a new type of currency, a cryptocurrency, to fill.

As for Trump, I wrote last year that the “bully,” as some call him, was elected to take on even larger bullies in the beltway party—career bureaucrats, regulators and other entrenched officials who make it their mission to oppose any Washington outsider who threatens to shake up the status quo. They were hostile to President Jimmy Carter, a fellow outsider, and today they're just as hostile, if not more so, to Trump.

The Short End Is Your Friend

On a final note, with interest rates on the rise, it’s important to stay on the short end of the yield curve when investing in fixed-income, as shorter-maturity yields are less sensitive to rate increases than longer-term bonds. This is one of five reasons why I think it makes sense to invest in municipal bonds right now.

To learn the other four reasons why munis might make sense, click here!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Goldman Sachs bull/bear indicator takes into account five factors: growth momentum (measured by the average percentile for U.S. ISM indexes), the slop of the yield curve, core inflation, unemployment and stock valuations as measured by the Shiller price-earnings multiple.

The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of U.S. consumer confidence levels conducted by the University of Michigan. It is based on telephone surveys that gather information on consumer expectations regarding the overall economy.

The NFIC Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 06/30/2018: The Homes Depot Inc.

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Minute with the Trader: Meet Michael Matousek
September 11, 2018

Meet Mike Matousek—head trader at U.S. Global Investors. With over 20 years’ worth of industry experience, Mr. Matousek is responsible for managing the trading desk and conducting rebalances for our ETFs and growth and large-cap mutual funds. In addition to advising the investment team about market behavior, he spends much of his day executing trades based on technical and quantitative metrics.

Mike joined U.S. Global Investors in January 2008 and was promoted to head trader not long after. Before joining our team, he was a proprietary trader and then director of institutional sales and trading for a broker-dealer, advising the firm’s hedge fund clients on technical trading strategy and implementation.

In this brief Q&A, Mike recounts how he found his way to U.S. Global Investors and shares his take on what it means to be a trader.

Tell us about your journey to become a trader. What drew you to the investment business?

When I was younger, I remember seeing news of the 1987 crash. Later, in my sophomore economics class, we studied the junk bond fiasco in the early ‘80s. I believe those events, along with the excitement of building wealth for clients and myself  in the capital markets, drove my interest early on in stocks and trading. As I gained experience, I started to learn I really enjoyed trading—specifically proprietary trading, or the art of pulling money out of the capital markets.

I traded for myself and started teaching others some of my strategies before becoming a full-time proprietary trader. My trading style in those days could be described as scalping, or trading for “quarters” on an intraday basis.

Then in 2001, when U.S exchanges started quoting the bid/ask prices in decimals, my trading profitability started to decline. I figured I needed to reinvent my trading style, so I enrolled in the Chartered Market Technician (CMT) program to learn more about technical and quantitative trading.  This was a real eye-opener. It showed me you always have to be seeking new and different ways to pull money out of the markets.

Once I passed the CMT program, I was one of only 500 CMTs in the world. Now I think there are about 3,000.

Eventually, I thought I was getting “burned out,” so I stepped away from trading and became a consultant for a sell side broker-dealer. I focused on trading strategy development and implementation for their hedge fund clients. It was a really fun position. I had the chance to meet with multibillion-dollar investment advisors and talk markets and trading strategies.

But eventually I began to miss trading, so when the company was purchased by another entity, it seemed like the right time to exit this part of my career path.

I started trading for myself again and was living in San Antonio when I came across the opportunity at U.S. Global Investors. They were looking for a derivatives/ETF trader for their hedge funds and mutual funds. Because San Antonio doesn’t have a huge financial district, and given my trading experience, I was a top candidate. I remember the director of human resources telling me it was hard to find someone with my experiences in “sleepy San Antonio.” Initially, I wasn’t sure if I was going to accept the offer, but one of my friends said, “You’ve got a chance to work with Frank Holmes! You’ve got to do that!” I figured it was a great opportunity, so I accepted.

ETFs have become increasingly popular in the last few years. What is your take on the shift from mutual funds to ETFs?

It’s funny—I was a proponent of ETFs even before I joined U.S. Global Investors. In fact, I started trading them back in 1998 and would write about them in a newsletter I was publishing as a hobby. I remember when I first started at U.S. Global, we were a “mutual fund shop.” At the time, there was a huge rivalry between mutual fund firms and ETF providers, with both sides claiming they had the superior product. Today, I manage our lineup of ETFs.

What should traders keep in mind for the remainder of 2018?

Everyone has a different view of what a trader is. My opinion is that traders are more short-term in nature. We generally don’t buy and hold something for a long period of time. But the trade can become “longer term” if the position continues to turn a profit. Admittedly, my background in proprietary trading and day-trading might skew my thoughts about this a bit.

Knowing that, I don’t believe in predictions. I don’t want to have an opinion, but I also want to follow the market direction with the least amount of resistance. 

So I believe for the remainder of 2018, traders need to trust the trend when it is heading in a particular direction. Stay invested, but always manage the risk. Risk is the only thing we can fully control.

There’s a saying in the industry: “Do you want to be right in your opinion—or make money?” Unfortunately, when people have opinions, pride steps in and bad decisions are sometimes made. I would rather make our investors’ money.

Want to stay on top of market trends? Subscribe to the award-winning Investor Alert newsletter for a weekly recap of the biggest market-moving events.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

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This Self-Made Billionaire Reminds Americans that Only Capitalism Creates Wealth
September 10, 2018
Mapping the belt and road initiatives progress

“Capitalism works” is how Ken Langone, billionaire co-founder of Home Depot, opens his new book, I Love Capitalism!: An American Story.

“Let me say it again: It works! And—I’m living proof—it can work for anybody and everybody…. Show me where the silver spoon was in my mouth. I’ve got to argue profoundly and passionately: I’m the American Dream.”

Last week, I had the privilege to attend the Cornerstone Macro Conference in New York. Langone’s presentation, moderated by Omega Advisers CEO Lee Cooperman, stood out as one of the highlights.

Growing up poor in Roslyn Heights, Long Island, the son of a plumber and a school cafeteria worker, Langone didn’t initially seem destined for greatness.

Mapping the belt and road initiatives progress

But like other self-made billionaires, Langone didn’t let his humble background stand in the way of his ambitions. Married with a toddler and another baby on the way, he quit a good-paying insurance position to try and make it on Wall Street—a “closed, Waspy world back in those bad old days,” as he describes it in I Love Capitalism

He managed to get his first Wall Street job, in institutional sales at broker-dealer R.W. Pressprich, after offering to get paid a secretary’s salary. The rest, as they say, is history.

Since co-founding Home Depot—which employs upwards of 400,000 people and hit $100 billion in sales for the first time last year—Langone has become a prominent philanthropist.

Remember hearing recently that New York University (NYU) would now be tuition-free for all incoming med students? That was made possible not because of socialism, but because of donations from capitalists like Langone. He and his wife gave the school $100 million after learning that the U.S. could face a serious doctor shortage in the coming years.

As he explained at the conference, only capitalism creates wealth, which is then freely redistributed. Socialism creates little to no wealth and redistributes poverty. People in Venezuela, sadly, are learning this lesson firsthand, as inflation there is forecast to hit an unbelievable 1 million percent by the end of the year.

I believe this is a lesson many Americans need to be reminded of, especially now as faith in capitalism is waning and interest in socialism is getting stronger, according to a Gallup poll in August. Capitalism “is not perfect,” Langone said on FOX Business last month, “but it’s the best out there.”

Check out our latest slideshow on the world’s 10 youngest billionaires!

Global Risks May Bring the Polish to Gold

Keep your eyes on the price of gold because the Fear Trade is about to heat up. And I’m not just saying that because the U.S. trade war with China is about to intensify even further, with tariffs on $267 billion worth of Chinese goods announced on Friday.

It’s been 10 years now since the start of the global financial crisis, and emerging markets are signaling trouble that some investors fear could have a spillover effect into developed markets. Last week, the MSCI EM Index, which consists of 24 countries, entered bear market territory after falling more than 20 percent from its January high.

EM currencies have been under considerable pressure so far this year, with some of them falling to record or near-record lows against the U.S. dollar. Other factors include global trade tensions and higher oil prices—both of which contribute to faster inflation. Rising U.S. interest rates are also making it harder for governments to pay off dollar-denominated debt.

Emerging market currencies have faced considerable turmoil this year
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The fear is that the EM slowdown could spell contagion, as we saw in the late 1990s with the Asian financial crisis. Although I don’t believe the current situation to be as bad as the one in 1997, it might prove prudent to ensure that your portfolio has the recommended 10 percent weighting in gold bullion and high-quality gold funds with a proven track record. In its latest report, research firm Metals Focus warns that global growth could take a hit should these markets continue to stumble, “with the resultant stock market impact encouraging investors to gradually rotate in favor of gold.”

We’re already seeing some slowdown in the global manufacturing expansion rate. The purchasing manager’s index (PMI) has been dropping steadily since its recent high in December 2017, and in August it fell slightly to 52.5 from a July reading of 52.8, with “confidence regarding the outlook for one year’s time [dipping] to a near two-year low,” according to IHS Markit, which compiles the monthly PMI data.

global manufacturing fell to 21-month low in august
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Last week gold was trading in the $1,200 an ounce range. But there’s even greater upside potential, I believe, as investors, especially those in emerging markets, seek a safe haven from their country’s weakening currencies against the dollar. Now could be a good opportunity to add to your exposure at an attractive valuation.

Another Emerging Market Crisis?

Turkey was among the fastest growing economies last year, expanding 7.4 percent, but it could be facing stagflation on higher inflation—consumer prices rose close to 18 percent in August—U.S.-imposed sanctions and a private sector debt crisis. The lira has lost more than 40 percent this year, and as I shared with you last month, President Recep Erdogan has urged his fellow Turks to convert gold and hard currencies into lira in an attempt to shore up the country’s troubled currency.

The worst performing currency in emerging markets so far this year is the Argentinian peso, off 50 percent as South America’s second-largest economy edges closer to recession. Investors were rattled last week when President Mauricio Macri’s administration unexpectedly enacted new export taxes and austerity measures, including ministry cuts, in an effort to balance the budget ahead of a $50 billion emergency loan from the International Monetary Fund (IMF). With interest rates at an eye-watering 60 percent, the highest in the world, economists surveyed by the country’s central bank forecast an economic contraction of nearly 2 percent in 2018.

And then there’s South Africa. Its economy has slipped into recession for the first time since 2009, having contracted for two straight quarters, according to the national statistical service.

south africa's economy slips into first recession since 2009
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Among the weakest sectors in South Africa during the second quarter was agriculture, which plunged almost 30 percent on lower production. The best performing sector was mining, which rose nearly 5 percent on increased production of platinum metals, copper and nickel.

Exacerbating all of this is historically high levels of debt. Debt in emerging markets stood at $63 trillion in 2017, up sevenfold from 2002 levels, according to the Institute of International Finance (IIF). And as I said earlier, higher U.S. interest rates make servicing this debt more expensive.

total emerging market debt in trillions
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American Workers Get a Raise

Speaking of interest rates, I believe it’s a near-guarantee that they’ll be hiked again this month after Friday’s positive jobs report. The U.S. added 201,000 jobs in August, beating economists’ expectations of 190,000. This is the 95th straight month that U.S. employers hired more people than fired—a record streak.

Americans got the biggest pay raise since the great recession
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What’s more, wages for American workers in August accelerated 2.9 percent year-on-year—right in line with official annnual inflation and marking the fastest pace of wage growth since the financial crisis.

This is good news indeed for retailers such as Home Depot. It’s also constructive for the U.S. economy as a whole. Second-quarter gross domestic product (GDP) growth is expected to be revised up to 4.4 percent from the earlier 4.2 percent, based on higher-than-anticipated consumer spending. And the Federal Reserve Bank of Atlanta now predicts GDP in the third quarter to expand at the same rate, 4.4 percent, spurred by strong consumer confidence, lower corporate taxes and deregulation.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets(EM) countries*. With 1,137 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2018: The Home Depot Inc.

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Net Asset Value
as of 11/15/2018

Global Resources Fund PSPFX $4.86 0.06 Gold and Precious Metals Fund USERX $6.41 0.13 World Precious Minerals Fund UNWPX $3.16 0.01 China Region Fund USCOX $8.21 0.18 Emerging Europe Fund EUROX $6.33 0.07 All American Equity Fund GBTFX $24.92 0.09 Holmes Macro Trends Fund MEGAX $18.50 0.09 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change