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Gold Glimmers as the Pool of Negative-Yielding Debt Surges
March 18, 2019

Gold Glimmers as the Pool of Negative-Yielding Debt Surges

It was a tragic week, to say the least. It began with a fluke Ethiopian Airlines crash, which led to the grounding of all Boeing 737 MAX 8 jets worldwide, and ended with a hateful terrorist attack in Christchurch, New Zealand. On behalf of everyone at U.S. Global Investors, I want to extend my deepest sympathies to all those who were affected.

I’ll have more to say on airlines in a moment.

For now, I want to share with you a tweet by Lisa Abramowicz, a reporter for Bloomberg Radio and TV who often comments on the “fear” market.

“The pool of negative yielding debt has risen to a new post-2017 high of $9.2 trillion,” she writes. “Mind boggling at a time when the global economy is supposedly still recovering.”

Since Lisa tweeted this last Wednesday, the value of negative-yielding bonds has ticked up even more, to $9.32 trillion. This is still below the 2016 high of $12.2 trillion, but, as Lisa said, mind-boggling nonetheless. It also indicates that investors fear global economic growth is slowing.

The Pool of Negative-Yielding Bonds Has Climbed to a New High
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The yield on Japan’s 10-year government bond is back in negative territory, trading at negative 3 basis points (bps) today, while Germany’s was trading at a low, low 8 bps.

As I’ve explained to you before, low to negative-yielding debt has historically been constructive for gold prices. The yellow metal doesn’t have a yield, but in the past it’s been a tried-and-true store of value when other safe haven assets, such as government bonds, stopped paying you anything. In the case of Japanese bonds right now, investors are actually paying the government—and that’s before you factor in inflation.

This is just one of many reasons why I recommend a 10 percent weighting in gold, with 5 percent in physical bullion and jewelry, the other 5 percent in high-quality gold stocks and funds. Remember to rebalance at least once a year.

For more on gold, watch my interview last week with Daniela Cambone, live from Kitco’s New York studio! Click here!  

Aircraft Are Safer, Easier to Fly

Back to the Ethiopian flight. I’m confident we’ll soon learn what malfunctioned in the 737 MAX—both last week and in October during Indonesia’s Lion Air flight—so that accidents like this may never happen again.

Having said that, I think it’s important to keep in mind that commercial air travel today has never been safer in its approximately 100-year history. In 2017, the safest year for aviation on record, not a single life was lost in a commercial plane crash, despite more than 4 billion people around the world taking to the skies on scheduled passenger flights. You would be hard-pressed to find another major global industry, one that operates 24/7, with such an impressive safety track record.

Commercial Air Travel Has Never Been Safer
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This is all largely thanks to continuous improvements in aviation technology. Over the decades, aircraft have progressively gotten safer and easier to fly, according to one aeronautics professor at MIT.

“The automation systems that we have on airplanes have demonstrably made airplanes safer,” R. John Hansman, director of MIT’s International Center for Air Transportation, told Boston’s WBUR radio station last week.

And the technological advancements continue today, with artificial intelligence (AI) and the internet of things (IoT) already starting to change the way we fly.

Consider Aireon. Founded in 2011, the aerospace tech firm is responsible for developing a next-generation airline tracking and surveillance system that has the capacity to measure every aircraft’s speed, heading, altitude and position—all in real-time. Using as many as 66 satellites, Aireon’s team gathers data broadcast by tiny transponders, which all U.S. and European planes will be required to carry by next year.

Aireon diagram

It was the company’s data, in fact, that ultimately convinced the Federal Aviation Administration (FAA) to join the rest of the world in temporarily grounding the 737 MAX.

“Take a Ride on the Airline Stocks,” Writes the National Bank of Canada

In light of the accident, a number of research houses and brokerage firms released notes to investors reassuring them that Boeing’s troubles should have only minimal impact on the airline industry as a whole.

Shares of Boeing, the largest company in the Dow Jones Industrial Average by market cap, surged as much as 2.5 percent on Friday after it was announced that the jet manufacturer plans to roll out a software update for the MAX 8 and 9 within the next 10 days—much sooner than initially expected.

Analysts at Raymond James point out that the “737 MAX 8/9 aircraft are still a small part of overall fleet for most U.S. airlines, which in off-peak travel season can likely be covered by higher utilization of existing fleet or delays in certain aircraft retirements.”

Vertical Research’s Darryl Genovesi, an expert in airline revenue, says that he believes the 737 MAX grounding will have an “immaterial” effect on U.S. airlines’ first-quarter earnings per share (EPS). And if the grounding is extended into the second quarter, or into the second half of the year, we may even see higher EPS due to a supply demand imbalance.

Genovesi writes that Vertical’s models indicate that, in the event of an extended grounding, “system RASM [revenue per available seat mile] would increase by ~200 bps… This would be ~3 percent accretive to second-quarter EPS, on average, across the group including a ~9 percent EPS boost for Alaska Airlines, JetBlue and Spirit Airlines and low-single-digit boost for American Airlines, Delta Air Lines, United Continental and Allegiant Air, partially offset by a low-single-digit EPS reduction for Southwest Airlines.”

Southwest has the largest number of 737 MAX 8s in the world, with a reported 34 planes in its fleet.

Air Canada the Leading Carrier in the Country
click to enlarge

Finally, looking at the Canadian market, the National Bank of Canada says that both Air Canada and WestJet Airlines “remain constructive despite the recent turbulence.”

“The negative news has not changed the overall positive trend in [Air Canada’s] stock,” analyst Dennis Mark writes.

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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.

The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index measures the stock of debt with yields below zero issued by governments, companies and mortgage providers around the world which are members of the Bloomberg Barclays Global Aggregate Bond Index.

Earnings per share (EPS) is the portion of a company's profit allocated to each share of common stock. Earnings per share serve as an indicator of a company's profitability.

A basis point one hundredth of one percent, used chiefly in expressing differences of interest rates.

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 (12/31/2018): The Boeing Co., Alaska Air Group Inc., American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc., Southwest Airlines Co., Spirit Airlines Inc., Allegiant Travel Co., JetBlue Airways Corp., Air Canada.

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What Headwinds? Airlines to Book Their 10th Straight Year of Profitability
January 28, 2019

Summary:

  • Despite the government shutdown, airlines beat on earnings and offer exciting guidance for 2019.
  • Global airlines are expected to log their 10th straight year of profitability—an industry first.
  • With incomes expanding worldwide, air travel demand is projected to outpace economic growth for the next couple of decades.

What Headwinds? Airlines to Book Their 10th Straight Year of Profitability

Domestic airlines weren’t exempt from the rout that hit stocks in December, the market’s worst month since the Great Recession. Shares of all four major U.S. carriers—American, Delta, United Continental and Southwest—saw double-digit losses. Delta ended December down 17.8 percent, its worst month since October 2009, when it gave back 20.3 percent.

The losses appeared to extend into the new year. On January 3, Delta forecast slightly slower revenue growth on concerns of a global economic slowdown, not to mention the partial U.S. government shutdown. In its first month, the shutdown—which ended Friday as President Donald Trump signed a bill to extend spending for three weeks—cost the U.S. aviation industry about $105 million, according to consulting firm ICF. Delta’s stock lost almost 9 percent for the January 3 trading day. Shares of the other three major airlines fell as well, though not by as much.

I believe the selloff was overdone, and the market seems to have agreed. Investors who bought the dip were rewarded. From January 3 to January 25, Delta shares recouped about 4.5 percent. Over the same period, the NYSE Arca Airline Index soared about 14.7 percent.

Ancillary Revenues Helped Offset Higher Fuel Costs in 2018

Much of this enthusiasm was driven by better-than-expected full-year and fourth-quarter earnings reports from a number of domestic carriers.

For 2018, United reported an impressive earnings per share (EPS) of $7.70, up 9 percent from 2017. This came even while total fuel costs were 34 percent higher. The carrier is now projecting an EPS of between $10 and $12 this year, based not just on increased demand but also growing ancillary revenue.

As a reminder, “ancillary revenue” includes all non-ticket items such as baggage fees, assigned seating, credit cards, loyalty programs and more. According to consultancy firm IdeaWorks, such fees on a global scale stood at a mind-boggling $92.9 billion in 2018, an increase of 312 percent since 2010. Of that amount, the “big four” U.S. airlines netted close to $27 billion. Taken together, these additional revenues have helped airlines offset rising fuel and labor costs.

global airline ancillary revenue represented an even larger share of total revenue in 2018
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Delta said as much in its own earnings report. For 2018, operating revenue was up 8 percent year-over-year to $44 billion “on an increasingly diverse revenue base, with 52 percent of revenues from premium products and non-ticket sources” (emphasis mine). The Atlanta-based carrier reported $1 billion in profits in the fourth quarter, an unbelievable increase of 240 percent from the same three months in 2017. That amounted to an EPS of $1.49, compared to $0.42 the previous year.

American also reported stellar earnings, and CEO Doug Parker tantalized the market with exciting guidance for this year. “At the midpoint of our guidance, 2019 diluted earnings per share, excluding special items, would increase approximately 40 percent versus 2018,” Parker said. Shares of American popped as much as 6.4 percent on the news.

10th Straight Year of Profitability?

Despite the recent spike in market volatility, I believe the investment case for global airlines looks favorable going forward. I’m not alone. In a press release dated January 23, Moody’s Investors Service stressed that although economic growth could be slowing worldwide, airlines are well-equipped financially for the next 12 to 18 months. The ratings agency writes that “the global passenger airlines industry is stable on steady operating margins, supported by higher passenger volumes, mixed growth in pricing and modestly lower fuel costs.”

If all goes according to plan in 2019, the global airline industry will have achieved something it’s never managed to do—that is, log 10 consecutive years of profitability. In its 2019 outlook, the International Air Transport Association (IATA) believes this will be the case, with net profits estimated at $35.5 billion, slightly ahead of 2018’s $32.3 billion. “An industry first,” the Geneva-based trade group tweeted on December 27. “2019 forecast to be 10th consecutive year of profitability for the global airline industry.”

Long-Term Outlook: Air Travel Demand Could Outpace Economic Growth

Looking ahead even further, 10 to 20 years, I think that airlines could be a profitable way to participate in the expansion of incomes around the world. In about a decade, an estimated 200 million people—many of them concentrated in developing countries such as China and India—are expected to join the middle class and, for the first time, be able to afford the cost of airfare, according to a new report by consulting firm Oliver Wyman.

Air travel has historically been tied to change in a country’s or region’s gross domestic product (GDP), but there’s reason to believe that demand will actually outpace economic growth. For the past decade, air passenger traffic growth—as measured in revenue passenger kilometers (RPFs)—has already been faster than GDP growth on an annual basis. Analysts at Boeing now believe this trend will continue for the next 18 years. With a 6 percent compound annual growth rate (CAGR), African countries are projected to undergo the greatest expansion of any other region, followed by Latin America and Asia. Highly developed regions such as Europe and North America will likely see the weakest change year-to-year, but even then, air travel demand growth is expected to be faster than economic growth.

air passenger demand projected to outpace economic growth in every region
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More Than a Billion Indian Passengers by 2040?

For a moment let’s look just at India, currently the second most populous country on earth. One of the world’s fastest growing regions, it’s expected to replace the U.K. this year as the fifth largest economy. According to the Federation of Indian Chambers of Commerce and Industry (FICCI), which hosted the Global Aviation Summit this month in Mumbai, India today has the world’s seventh largest aviation market with 187 million passengers. By 2022, it could be the third largest.

And if the trend continues, India could very well be the largest aviation market in the world with around 1.12 billion passengers flying to, from and within the South Asian country. That’s an incredible sixfold jump from 2018.

projection of total passengers to
click to enlarge

To accommodate so many passengers, the fleet size of scheduled airlines would need to expand dramatically. The FICCI believes the number of aircraft in India could swell from 622 in 2018 to as many as 2,360 by 2040.

This, of course, would benefit manufacturers such as Boeing, which FORTUNE just named as the most admired aerospace company in its annual list of the “World’s Most Admired Companies.”

Boeing Just Unveiled Its Self-Driving Air Taxi

The jet maker recently showed off the progress of its planned self-driving air taxi, which it is building in cooperation with ride-hailing company Uber. “Uber Air,” as it’s called, is a battery-operated, autonomously flying vehicle, with a range of about 50 miles. Morgan Stanley Research estimates that the market for “autonomous urban aircraft” could be as large as $1.5 trillion by 2040. Boeing, which is projected to have a 40 percent market share of all aircraft by 2025, is well-positioned to take the lead in this exciting new technology.

Finally, please take a moment to subscribe to the U.S. Global YouTube page, where we regularly share the latest episodes of Frank Talk Live and Gold Game Film, as well as trading tips and much more. Happy investing!

The S&P 500 Index (Standard & Poor's 500 Index) is a market-capitalization-weighted. index of the 500 largest U.S. publicly traded companies by market value, The index is widely regarded as the best single gauge of large-cap U.S. equities. The NYSE Arca Airline Index is a rules-based index designed to measure the performance of highly capitalized companies in the airline industry.

Ancillary fees/revenue, in the airline industry, is revenue from non-ticket sources, such a baggage fees and on-board food and services, and has become an important financial component for low-cost carriers. Diluted earnings per share (EPS) is a calculation used to gauge the quality of a company's EPS if all convertible securities were exercised. Operating margin measures how much profit a company makes on a dollar of sales, after paying for variable costs of production such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company's operating profit by its net sales. The compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance assuming the profits were reinvested at the end of each year of the investment's lifespan. Revenue passenger miles (RPMs) and revenue passenger kilometers (RPKs) are measures of traffic for an airline flight, bus, or train calculated by multiplying the number of revenue-paying passengers aboard the vehicle by the distance traveled. The FORTUNE World’s Most Admired Companies study surveys top executives and directors from eligible companies, along with financial analysts, to identify the companies that enjoy the strongest reputations within their industries and across industries.

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 of12/31/2018: American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc., Southwest Airlines Co., The Boeing Co.

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.

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Talking Tech With Pulitzer Prize Nominee Michael Robinson
November 28, 2018

Michael Robinson, chief technology strategist of Money Map Press, is a lot of things: devoted son and father, technologist, avid skier and gun enthusiast, accomplished blues guitarist, Pulitzer Prize nominee.

Readers of his popular newsletters know him for his mantra, "The road to wealth is paved with tech.” As editor of Strategic Tech Investor, Nova-X Report and Radical Technology Profits, Michael has helped curious investors get in early on small-cap and micro-cap names involved in biotech, defense, cannabis research and more.

I got to see Michael’s presentation at the Black Diamond Investment Conference in October and was impressed by his energy, interesting life story and deep knowledge of niche markets.

Below are snippets from our recent discussion, which touches on topics ranging from trap shooting to cannabis legalization to blockchain technology.

Tell us about your start in military tech and biotech.

I grew up in a military household. My dad was a Marine Corps officer, and later he became the senior military editor at Aviation Week & Space Technology. He was among the earliest to write about the Strategic Defense Initiative (SDI), popularly known as Star Wars. So as a high schooler, I was exposed to all of these exotic defense technologies—materials, sensors, warheads and the like—which really gave me a leg up.

My dad and I ran a high-tech military newsletter in the 1980s. This put me in a position to visit Silicon Valley pretty regularly and talk with scientists and CEOs about cutting edge tech—materials that made battleships and submarines quieter, for example.

As a young auto analyst and reporter, I managed to break some big tech stories because I was willing to look away from the mainstream. The biggest story I did actually led to the firing of two executive vice presidents, which cost the bank close to $80 million. The New York Times and Wall Street Journal ended up having to cover the story, so that helped put me on the map.

I got involved in biotechnology later through my work at what was then the Oakland Tribune. The biotech sector was brand new in the mid-80s, and I was in California where it was all happening. While there, I did a five-part series on Betaseron, the first FDA-approved biotech drug to treat multiple sclerosis (MS).

How did you make the leap to the financial world?

That just felt like the natural next step. Every time I left a Silicon Valley presentation on some new tech, I would think: "That's really cool, but how can you make money off of it?" So even though I consider myself a technologist, I'm always looking at the financial angle.

What’s more, I served on the advisory board of a venture capital company. The experience gave me a different way of evaluating startups than a standard financial analyst, who might be trained only to do ratio analysis and things like that. There's nothing wrong with ratio analysis, but it's not going to give you the kinds of insights and instinct you need to figure out which companies really have it together and which don’t.

You’re known to have a strong interest in guns and shooting. Did that come out of your dad’s military background?

I never really thought of it that way. I just love shooting guns. Mostly these days I shoot trap and skeet. I joined the National Rifle Association (NRA) because I wanted to qualify as a Triple Distinguished Expert in pistols, rifles and shotguns. Shotgun was the most difficult, I thought.

The amount of concentration that's required to shoot at a high level really appeals to me. You have to block out all distractions. In that respect, shooting is a lot like investing. One of the things I remind readers and clients is to separate the signal from the noise. You can't become a good shot if you can't block out all the external distractions and things. Similarly, investors must learn to block out short-term market noise before they pull the trigger, so to speak.

Who would you say are your biggest influences?

Besides my dad, I would have to say the renowned economist Milton Friedman. I had the great pleasure to interview him once for the American Enterprise Institute (AEI). I remember he had a portrait of himself done, but his wife wouldn’t let him hang it up on the wall in their Nob Hill condo. It’s funny—here’s one of the world’s greatest economic thinkers, a Nobel Prize winner, and he had his portrait just sort of propped up in a corner somewhere.

In any case, Friedman was a huge influence on the way that I think about economics. In my freshman year when I was signing on to be an economics major, I remember reading about how iconoclastic he was, how out of step he was with the rest of the economics community, which was very Keynesian at the time. I learned the true value of contrarianism from studying him and looking at things like freedom to choose. Ayn Rand was another huge influence in that respect.

Michigan just voted to legalize recreational cannabis, making it the first Midwest state to do so. Is this a tipping point?

I think the tipping point probably occurred in 2016, when as many as nine states had cannabis legalization on their ballots. That year is also when we launched our investment report, the Roadmap to Marijuana Millions. All 30 of the stocks we recommended made money. The reason I say that is not to brag about our track record, but to point out that we saw large numbers of new investors coming in, willing to take the risk, wanting to be early and understand the industry.

Michigan, for me, was an affirmation of this critical mass. It’s also a reminder of what we need more of to attract institutional investors: initial public offerings (IPOs), mergers and acquisitions (M&As), up-listings to major exchanges.

Obviously the biggest catalyst would be something out of Washington—an effort to reclassify marijuana off of Schedule I, for instance. I would love to see that happen, as would my dad, the Marine Corps officer, but I don’t believe the support is there right now.

You recently argued that blockchain technology should not be used for voting, for reasons involving secrecy and anonymity. In what industries do you see its application making the most sense?

Literally everything. Supply chain management is a huge area that could benefit from blockchain. Look at the oil industry, which still uses this old paper-based system. Companies that have already shown interest in blockchain are British Petroleum (BP) and Royal Dutch Shell, among others.

Counterfeit goods is a problem that runs in the hundreds of billions of dollar every year. Blockchain can help with that. You can use it to tag and identify goods early on, and then they can be tracked with some kind of a distributed ledger.

Or look at financial services. Frank, you’ve pointed out a number of times before that JPMorgan Chase CEO Jamie Dimon has criticized cryptocurrencies, and yet the bank was quietly investing millions upon millions.

Speaking of cryptocurrencies, they’re down significantly this year. Do you think now is a good time to buy, or is more pain ahead?

I fear about jumping in right now. Are we at the bottom of bitcoin? I don't know. One thing I do know is that this crypto selloff may be healthy in the long-term. There’s been an insane number of initial coin offerings (ICOs), which have really hurt bitcoin and Ethereum. We need to sweep out some of the smaller coins because 2,000 cryptos is more than the world can possibly absorb. There has to be a shakeout.

Total currency market capitalization
click to enlarge

You work on several newsletters. Can you describe them for our readers and explain what value they bring?

The main value they bring is making our readers a lot of money. For starters, we have Strategic Tech Investor, which is our free service. The idea is to give investors the rules they need to succeed and not be so emotionally-driven. Because it's free and it's open format, we want to educate investors, and hopefully they'll develop an interest in my investing style and decide to subscribe to one of our paid services.

That brings us to the Nova-X Report and Radical Technology Profits.

Nova-X focuses on mid-cap stocks and the lower end of large-caps. We feel that's a good comfort zone for entry-level investors who are looking for big trends and ways to make money that aren't necessarily household names. We try to get to market early.

Radical Tech is our premium service. It’s designed for much more savvy, much more aggressive people. We swing for the fences more than we do with Nova-X. The focus is on any kind of cutting-edge technology—small-caps and even some micro-caps.

As long as my readers make money, I know I'll do well. I take breaks from time to time, but for the most part I'm up well before dawn screening charts and looking at articles—anything to make our readers as much money as I can.

I want to thank Michael for his time and enthusiasm. Be sure to check out his newsletters!

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.

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 9/30/2018: BP PLC, Royal Dutch Shell PLC.

 

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Freezing Temperatures Could Heat Up Natural Gas Prices
November 19, 2018

Midterm Elections Gridlock Was the Best Possible Outcome

Here in San Antonio, the temperature hit a bone-chilling low of 27 degrees last Wednesday, breaking a 102-year-old record for mid-November. An out-of-state visitor, Cornerstone Macro’s Head of Portfolio Insights Stephen Gregory, speculated that the Central Texas temperature, ordinarily mild this time of year, was down more than three standard deviations. I didn’t make the calculation, but my guess would be about the same.

With temperatures so low, it’s perhaps no surprise that natural gas had one of its best days in years. Its price popped almost 18 percent last Wednesday—before falling nearly as much on Thursday. The Energy Information Administration (EIA) reported that natural gas storage in the lower 48 states was below the five-year average as of October 31. This, combined with a stronger-than-expected start to winter, prompted traders to push prices to a four-year high of $4.84 per million British thermal units (MBtu). Meanwhile, natural gas futures trading hit an all-time daily volume record of 1.2 million contracts, according to CME Group.

Natural gas prices exploded
click to enlarge

Freezing temperatures increase demand for heating, much of which is provided by natural gas. In January of this year, when temperatures fell below the average in many parts of the U.S., demand reached a single-day record of 150.7 billion cubic feet, according to the EIA. I can’t say we’ll beat this record again in the coming months, but forecasts for more freezing weather this Thanksgiving week and beyond should support additional moves to the upside.

What kind of moves? Says Jacob Meisel, chief weather analyst at Bespoke Weather Services, the price could get to $7 or $8 per MBtus, levels we haven’t seen since 2008. “This looks like a capitulation move today, but if cold weather really takes off, the sky is the limit,” Meisel told CNBC.

Oil Selloff Steepest in Three Years, “Overdone”

Natural gas wasn’t the only commodity that broke records last week. On Tuesday, West Texas Intermediate (WTI) crude oil ended an extraordinary 12 straight days of losses, settling at a 2018 low of $55.69 per barrel, down more than 27 percent from its 2018 high in early October. Triggered by concerns of a global demand slowdown, the plunge is oil’s steepest in three years, and a stunning reversal from last month’s calls for $100-per-barrel crude.

The bears appear to have overreacted, though. “Crude-oil-position liquidations have never been this extreme, indicating the purge in WTI futures is overdone,” writes Business Intelligence strategist Mike McGlone, adding that petroleum markets have “never experienced a comparable decline over a similar period.” 

World Needs the Equivalent of Another Russia’s Worth of Crude

Again, the oil selloff halted last Tuesday, the same day the International Energy Agency (IEA) announced its estimate that U.S. shale will need to add the equivalent of Russia’s entire oil production by 2025 to prevent a global shortage. In its flagship “World Energy Outlook 2018,” the Paris-based group says that world oil consumption will increase significantly in the coming decades due to “rising petrochemicals, trucking and aviation demand.”

“U.S. shale production, which has already been expanding at record pace, would have to add more than 10 million barrels a day from today to 2025, the equivalent of adding another Russia to global supply in seven years—which would be an historically unprecedented feat,” according to the IEA.

Jets fyling high

The U.S. produced 11.7 million barrels of crude per day in the week ended November 9. That means shale producers would need to ramp up output to at least 21 million barrels in seven years, if the IEA’s estimates are accurate.

I think this would be a challenge, but a real possibility. The reason I think this is because the U.S. fracking industry continues to prove it can produce more with less. According to a recent report by the EIA, U.S. crude oil and natural gas production increased in 2017, despite there being fewer wells. This is thanks in large part to horizontal wells, which “contact more reservoir rock and therefore produce greater volumes” of oil and gas. Although more expensive to drill, horizontal wells are growing faster than traditional vertical wells. In 2017 they accounted for 13 percent of total well drills, up from only 10 percent three years earlier.

Also in the IEA’s outlook: By 2040, emerging markets, led by China and India, will account for 40 percent of global energy demand, up from 20 percent in 2000. Below, note how the European Union is expected to be displaced by India and Africa in terms of energy demand within the next couple of decades.

Emerging markets will account for 40 percent of global energy demand by 2040
click to enlarge

I believe only the U.S. fracking industry would be able to meet this demand. Russia and Saudi Arabia are pumping at record levels right now, but production cuts of as much as 1.4 million barrels per day are being discussed among members of the Organization of Petroleum Exporting Countries (OPEC) to firm up prices. If cuts do go into effect, U.S. producers can be expected to fill in the supply gap.

“It can happen but would be a small miracle,” said Fatih Birol, the IEA’s executive director.

U.S. Shale “More Profitable Than Ever”

Normally, ever greater supply would weigh on prices and weaken profitability. Based on new data, it looks as if the U.S. fracking industry has changed the game.

According to Reuters, “U.S. shale firms are more profitable than ever after a strong third quarter,” according to the agency’s analysis of 32 independent producers. “These companies are producing more efficiently, generating more cash flow and consolidating in a wave of mergers.”

Nearly a third of these 32 companies “generates more cash from operations than they spent on drilling and shareholder payouts, a group including Devon Energy, EOG Resources and Continental Resources. A year ago, there were just three companies on that list,” Reuters writes.

Thanksgiving Travel to Hit 13-Year High

On a final but related note, this week is Thanksgiving, the busiest travel season of the year in the U.S. The American Automobile Association (AAA) predicts that the number of travelers on Thanksgiving Day, by auto and air, will top 54.3 million people, an increase of almost 5 percent from last year, and the highest volume since 2005.

Similarly, Airlines for America (A4A) believes U.S. Thanksgiving air travel demand between last Friday and November 27 will climb to an all-time high of 30.6 million passengers. “It is thanks to incredibly accessible and affordable flight options that more travelers than ever before are visiting loved ones, wrapping up year-end business or enjoying a vacation this Thanksgiving,” commented A4A Vice President and Chief Economist John Heimlich.

Thanksgiving 2018 US air travel demand estimated to rise 5 percent from last year
click to enlarge

While I’m on the topic of aviation, A4A also reported that U.S. airport revenues have grown faster than the consumer price index (CPI) as well as the number of air passengers and aircraft departures. From 2000 to 2017, airport revenues rose 87 percent, double the pace of U.S. inflation. Increased growth came thanks to a number of resources, from taxes and fees to the Passenger Facility Charge (PFC) and Airport & Airway Trust Fund (AATF).

US airport revenues have grown faster than flights passengers and inflation
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According to Fitch Ratings, “strong overall performance for U.S. airports should continue undeterred for the foreseeable future.” Over 90 percent of the airports Fitch currently rates have a “Stable Rating Outlook,” signifying continued stability deep into 2019.

Curious to learn more? Explore our latest slideshow, “How Do Airports Make Money?”

 

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.

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 9/30/2018.

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.

 

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Midterm Elections: Gridlock Was the Best Possible Outcome
November 12, 2018

Midterm Elections Gridlock Was the Best Possible Outcome

Celebrated value investor Benjamin Graham, who mentored a young Warren Buffett, liked to say that the market is a voting machine in the short term, a weighing machine in the long term. Last week the market voted to reward stocks in the aftermath of the midterm elections, which gave Democrats control of the House and left the Senate in the hands of Republicans. This all but guarantees that gridlock will be the status quo in Washington, at least for the next two years.

A divided Congress might very well be the only time gridlock is a positive. Corporate gridlock can hold a company back from growing, and there’s not a soul alive who enjoys sitting in bumper-to-bumper traffic. The congestion in Austin, just north of our headquarters, is legendary, costing commuters as much as 43 hours a year. (This congestion could be improved with better infrastructure, which I’ll get to in a second.)

The truth is that markets favor divided government. Both Republican and Democratic presidents have had the greatest effects on stocks when Congress was split and gridlock prevailed, according to Bank of America Merrill Lynch data. Granted, such leadership makeups are rare, occurring for only a combined 11 years in the past 90, so I’ll be curious to see if the trend holds true.

Stock markets have generally thrived under a divided government
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But in the short term, markets showed a lot of enthusiasm. The S&P 500 Index advanced more than 2 percent on Wednesday, marking the best post-midterm rally since 1982. Stocks got slammed only after the Federal Reserve announced more rate hikes were forthcoming.

I want to remind you that we’ve already entered the three most bullish quarters for stocks in the four-year presidential cycle. Average returns in the fourth quarter of year two have historically been 4 percent, followed by 5.2 percent in the first quarter of year three and 3.6 percent in the second quarter.

Record Votes, Record Campaign Spending

Voter turnout was abnormally high for a midterm election. Here in Texas, nearly 53 percent of registered voters cast ballots—a very strong showing thanks in large part to the much-publicized and heavily funded Senate race between Senator Ted Cruz and Congressman Beto O’Rourke.

Indeed, a whole lot of cash passed hands this cycle. For the first time in U.S. history, more than $5 billion was spent during a midterm election by candidates, political parties and other groups, according to the Center for Responsive Politics (CRP). That’s up almost 40 percent from spending levels in 2014. The biggest independent donor was billionaire Sheldon Adelson, founder and CEO of Las Vegas Sands, and wife Miriam, who shelled out more than $113 million in support of Republican candidates.

More than 5 billion was spent on midterm elections far surpassing previous totals
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Because it’s such a massive amount, it might help to put $5.2 billion into perspective. An estimated 113 million Americans participated in the midterm election, a new record, meaning roughly $46 was spent on each voter.

Here’s another way to look at it. Between the House and Senate, 470 seats were up for grabs. That comes out to an incredible $11 million per seat.

Big Winners: Infrastructure and Cannabis

Like every election cycle, this one is sure to have some huge consequences—not least of which is House Democrats’ pledge to turn up the heat on President Donald Trump. Representatives Maxine Waters, Adam Schiff, Elijah Cummings and other staunch critics of the president are expected to lead key oversight and intelligence committees that could open investigations into Trump’s finances and handling of White House personnel changes as soon as this January.

My hope is that Democrats and the president can agree to come together on areas of common interest. That includes infrastructure. Remember the $1 trillion infrastructure plan? Remember “Infrastructure Week”? It’s possible we could finally see a spending bill of some kind, as both the Democrats and Trump support the idea. This would be a massive tailwind for raw materials, commodities and energy.

Materials and construction services stocks—including Vulcan Materials, Martin Marietta Materials, Quanta Services and AECOM—jumped in response to the election outcome.

Can the new congress make infrastructure stocks great again
click to enlarge

As I’ve shared with you before, U.S. infrastructure is badly in need of a spit shine. Last year, the American Society of Civil Engineers (ASCE) gave the country’s roads, bridges and waterways a D+ while noting that there’s a $2 trillion infrastructure funding gap between now and 2025. Because this affects all Americans, it shouldn’t be turned into a partisan issue.

Another winner last week was the U.S. cannabis industry, which is expected to be worth some $75 billion by 2030, according to Cowen & Co. Michigan voted to legalize recreational marijuana, the 10th state to do so, while Missouri and Utah voters approved medical marijuana. Pot stocks, led by Canadian grower and distributor Tilray, surged on the news.

Tilray jumped nearly 6 percent last Tuesday, another 30 percent on Wednesday following the ouster of now-former Attorney General Jeff Sessions. As the head of the Department of Justice, Sessions strongly opposed legalization. Industry advocates hope the next permanent AG will be more open to relaxing federal law.

Oil Notched a 10th Straight Day of Losses

As recently as last month, it didn’t look as if anything could stop oil from heading even higher. Friday, however, marked the 10th straight day of losses for West Texas Intermediate (WTI), as inventories continue to build and the U.S., Russia and Saudi Arabia produce at record or near-record levels.

Oil slipped into bear territory
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Down more than 20 percent from its recent high of $76 in early October, oil was trading below $60 a barrel friday and is now considered to be in a bear market.

Although bad news for producers and refiners, lower oil prices are good for nearly everyone else, including net importer countries and airlines. As I told CNBC Asia’s Akiko Fuijita last week, when oil prices have fallen below their 50- and 200-day moving averages, quant traders especially have poured money into airlines.

Jets fyling high

It’s important to note, too, that demand remains very strong, outpacing capacity growth. According to a report by the International Air Transport Association (IATA) dated October 19, airline passenger load factor climbed to a 28-year high in August. Global load factor, a measure of an airline’s capacity usage, rose to 85.3 percent for the first time since 1990.

Watch my CNBC Asia interview 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 S&P 500 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. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2018.

 

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Net Asset Value
as of 03/22/2019

Global Resources Fund PSPFX $4.51 -0.07 Gold and Precious Metals Fund USERX $7.38 -0.14 World Precious Minerals Fund UNWPX $2.79 -0.04 China Region Fund USCOX $8.50 -0.19 Emerging Europe Fund EUROX $6.59 -0.16 All American Equity Fund GBTFX $23.42 -0.49 Holmes Macro Trends Fund MEGAX $16.70 -0.31 Near-Term Tax Free Fund NEARX $2.21 0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change