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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.

This Industry Is Set to Post Record Profits on Lower Fuel Costs
December 14, 2015

Global Airlines are Expected to Post a Collective $33 Billion in Net Profits This Year

Everyone knows there are winners and losers in any bear market, including the recent commodity rout. Low crude oil prices have definitely hurt explorers and producers. Airlines, on the other hand, appear to be thriving.

According to the International Air Transport Association (IATA), a global airlines trade group, the industry is set to post a collective $33 billion in net profits this year—a record—on fuel cost savings and stronger passenger flight demand.

Want to know how significant a record this is? In 2014, profits came in at $17.4 billion—about half of what they are today.

What’s more, profits are expected to be even larger next year.

World demand grew 6.7 percent from a year ago, the IATA says, and is estimated to rise a further 6.9 percent in 2016. And with oil likely to stay relatively low, the group forecasts that airlines will spend $135 billion on fuel in 2016, down nearly a quarter from $180 billion in 2015.

This, coupled with improved fuel efficiency, is expected to contribute toward the group ending next year with estimated total net profits of $36.3 billion.

You can see below that global airline stocks have soared in recent years, especially in response to flagging oil, airlines’ largest expense.

Low Oil Prices Have Been a Huge Windfall for Airlines
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In the past, airlines were notorious for their inefficiency and tendency to destroy capital. These claims were probably exaggerated, especially by Warren Buffett, who has repeatedly decried the industry as a money-loser. What a lot of people don’t realize is that Buffett didn’t do as bad as he claimed.

Former US Airways CEO Ed Colodny explained in 2013 that after Buffett’s shares didn’t appreciate, he wrote down his investment and got out when he could.

“I think at the end of the day, he got all his dividends paid and his principal back,” Colodny said.  

In any case, airlines are now going into their third year of the present secular bull market. These often last much longer. We believe this cycle is different, in that the U.S. airline industry could easily create $20 billion of free cash flow this year and next. Low fuel costs have been the cherry on top.

Where Does Oil Go from Here?

Bloomberg Businessweek

Indeed, 2015 was not kind to oil and other commodities, with many of them slumping to multiyear and, in some cases, multi-decade lows.

Back in August, the cover of Bloomberg Businessweek featured a whole gaggle of bears, which delighted bulls. (There’s an old belief that the market will soon do the exact opposite of what the press predicts.) Yet here we are four months out, and the commodities rout has only extended itself further.

Crude oil is presently testing financial crisis support levels, making many investors wonder whether the bottom for black gold has been reached—or if more pain is to be expected.

There’s no shortage of analysts and experts right now sharing their (wildly divergent) predictions of where oil might be headed from here. Some are calling for $20 per barrel; others, such as legendary hedge fund manager T. Boone Pickens, $70 or more in the next six months.

We can’t say whether Pickens is right or wrong. It’s worth pointing out, though, that crude has pretty closely followed its five-year trading pattern, with 52-week lows reached in late November, early December. The short-term trend shows oil rallying sharply starting in January, according to Moore Research analysis.

West Texas Crude: Historical Patterns
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Here’s another way of looking at it. The following heat map shows that, in the last five years, the oil price historically popped in February after months of losses. What this means is that January might be a good time to buy.

Average Crude Oil Price Change by Month
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The oscillator below confirms that. Right now crude is down 1.2 standard deviations—already signaling a buy, but it might have further to fall, based on past incidences.

Average Crude Oil Price Change by Month
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One of the more balanced perspectives comes from energy strategist Dr. Kent Moors, who tempers his optimism with a dose of reality:

The Five Most Searched-For Trends by Visitors to ETFdb.com Right Now
We are not racing back to $100 a barrel oil. Absent the outlier of a geopolitical event that impacts supply, more subdued rises are in order. But we certainly do not need triple-digit oil to make some nice investment returns, especially in a sector that has been so oversold.

I agree. I’m not interested in adding my own forecast to the ever-lengthening list so much as I am in finding ways to make money at current prices.

As are other investors. Based on the most searched-for trends on ETFdb.com right now, you can clearly see what’s on their minds.

OPEC Members Revolt against Saudis as Oil Slips

One of the main reasons why prices are so depressed, of course, is that the world is awash in the stuff. The Organization of Petroleum Exporting Countries (OPEC), responsible for about 40 percent of global supply, just had its most productive month since 2012, pumping 31.7 million barrels in November. That’s 1.7 million barrels over its “official” production ceiling.

Crude slipped below $37 per barrel on the news, a seven-year low, which is about as low as prices can go for most American companies to stay profitable. (As of this writing, WTI crude sits at $35.20, Brent at $36.83.)

Brent Crude Oil Hasn't Hit 2008 Lows
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As expected, OPEC announced after its last meeting that it would keep oil production levels the same in its bid to force higher-cost producers (re: American frackers) to trim their own operations. Solidarity among its members has weakened further, however, as it becomes clearer and clearer to them that they underestimated the resilience of American oil producers.

Five OPEC members—Venezuela, Nigeria, Libya, Iran and Ecuador—are now in open opposition to the Saudi policy of unchanged production. That the cartel as a whole exceeded its production ceiling last month suggests that each member-nation is making its own rules up anyway, regardless of what was decided.

It’s estimated that OPEC is already pumping about 900,000 barrels a day more than is needed next year. And with international sanctions against Iran about to be lifted—in exchange for an agreement to halt its nuclear program—the country has promised to increase its own production from 3.3 million barrels a day to as many as 4 million barrels a day by the end of 2016.

OPEC is pumping 900,000 barrels of oil a day more than the world needs.

Venezuela in particular is in deep turmoil. Low oil prices have battered its currency and left its economy in tatters, with food shortages worsening every day. The International Monetary Fund (IMF) expects the South American country—which has the largest proven oil reserves in the world—to contract 10 percent this year and has declared it the worst-performing economy in the world right now.

In the recent parliamentary elections, rightfully fed-up Venezuelans responded by ousting members of Hugo Chavez’s United Socialist Party of Venezuela (PSUV), giving the opposition party, the more-centrist Democratic Unity Roundtable (MUD), a supermajority that could challenge President Nicolás Maduro.

This countrywide rejection of failed, far-left leadership is an encouraging sign that Latin America’s political ideology is finally shifting away from European-style socialist economic models of no growth. We’ve seen South American countries tax away growth and impose envy policies on the financial sector. Mining and oil executives have seen their cash flow confiscated by value-added taxes, leading to drops in capex and job creation.

But just last month we saw Argentina elect its first business-friendly president, Mauricio Macri, in decades. And now Venezuela is demanding change, so there’s hope.

As head of the cartel, Saudi Arabia hasn’t gone unscathed in the oil rout either. For the first time, the kingdom will tap international bond markets to make up for lost oil revenues.

Also in the hard-to-believe category is Alaska’s plan to institute an income tax for the first time in 35 years to “close a $3.5 billion dollar deficit the state is carrying,” according to Zero Hedge. The Last Frontier is known, of course, for giving all Alaskan residents an annual dividend based on oil revenue. In 2015, that amount was $2,072.

But since oil revenue has been cut in half, hard measures must be taken to keep the dividend running, Alaska Governor Bill Walker argues.

“This plan keeps the permanent fund permanent,” Walker tweeted last Wednesday.

And Yet Oil Demand Is Still Outpacing Supply

Crude oil reserves here in the U.S. are currently at levels not seen since 1972. That’s with a 65 percent decline in rigs in operation from a year ago, a clear indicator of how efficient American producers have become.

U.S. Crude Oil Stocks Still at High Capacity
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But some analysts have suggested the oversupply isn’t as bad as we might think. Tom Kloza, head of energy analysis at the Oil Price Information Service (OPIS) told CNBC this week that it’s important to think of oil supply in the context of population growth:

This is a glut in terms of the most crude oil we’ve ever had in North America. But if you measure it versus the population, it’s not altogether that much. We’ve had much more crude-per-population back in previous decades.

Kloza has a fair point. In 1970, at the height of U.S. oil production, the country’s population was just over 205 million and the total number of registered vehicles—passenger cars, motorcycles, trucks and buses—was 111 million, according to the Department of Transportation. Today the population hovers just north of 319 million and, as of 2013, the number of registered vehicles has more than doubled to 255 million.

World Crude Oil Demand Not Slowing Down
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It’s worth reminding ourselves that the U.S. isn’t the only growing country. Population is booming all over the globe. People continue to have babies—Chinese couples even more so now that the one-child policy has been lifted—and the global middle class is swelling rapidly. This helps oil demand continue to rise, as well as air travel demand.

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 NYSE Arca Airline Index (XAL) is an equal dollar weighted index designed to measure the performance of highly capitalized companies in the airline industry. The XAL Index tracks the price performance of major U.S. and overseas airlines.

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.

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What We’re Paying Attention to Following the Paris Attacks
November 23, 2015

Ten days ago, 129 lives were brutally cut short when assailants affiliated with the terrorist group ISIS, also known as the Islamic State, stormed Paris in a series of coordinated attacks. Along with the rest of the world, we were shocked and saddened as the tragic news unfolded, worsening as the night progressed. Our thoughts are with the victims’ families and friends.

For us, the atrocity struck especially close to home, as one of our portfolio managers, Xian Liang, was in the city at the time of the attacks. We’re extremely grateful he and his wife returned home safe and sound. I wish the same could be said for the victims in Paris that day, the 224 on the Russian jet brought down by an ISIS-built bomb, the hostages in Mali Friday, and many others whose lives have been affected by the global scourge of terrorism.

We Take Our Role as Fiduciaries Seriously

As money managers, it’s our duty and responsibility to be cognizant of such geopolitical events—large and small, good and bad—and to consider all of the possible ramifications. The consequences often reach far and wide, and can be felt in the short-term (changes in investor confidence) as well as the long-term (changes in government policy).

Early last year, for instance, we were quick to adjust asset allocations when Russia invaded and annexed Crimea. We anticipated that sanctions would be imposed on the country, and indeed they were, by the U.S., European Union, Australia and other international organizations. These sanctions, coupled with falling oil prices, contributed to the Russian ruble’s dramatic breakdown.

Diesel, the seven-year-old belgian shepherd who was killed recently during a French SWAT raid

Against these challenges, I’m impressed by how strongly Russian stocks have performed lately. Last Tuesday, the Micex Index jumped to an eight-month high in ruble terms. This is especially interesting since both Brent oil and the ruble are way down. It suggests that investors are showing approval of President Vladimir Putin’s involvement in Syria.

Putin is also benefiting from a strong public relations push. The Daily Mail writes: “Russia has shown its solidarity with the people of France in an unusual way—by donating a new puppy to carry on the memory of Diesel, the police dog killed by a suicide bomber.”

It should come as a surprise to no one that, following the tragedy in Paris, defense spending will likely increase. French President François Hollande has already told Parliament that France is at war and will “be merciless” in its pursuit of justice. The country wasted no time in striking back against ISIS and has begun bombing raids in Syria.

As early as last Monday, stocks of companies that manufacture weapons and fighter jets traded up.

War Stocks Rally Following Attacks in Paris
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We own Lockheed Martin, manufacturer of the F-35, F-22 and F-16 fighters; Boeing, manufacturer of the Tomahawk cruise missile, F-18 fighter and more; and Northrop Grumman, which was recently awarded the contract to build America’s next generation of long-range strike bombers. Raytheon develops and manufactures guided missiles.

The U.S. Navy plans to buy more Boeing F/A-18E/F Super Hornets in the coming years.

International Travel to Be Hit

Understandably so, the terrorist attacks will have an impact on international travel, immigration and border security. France immediately tightened its borders, and other European countries quickly followed suit. Meanwhile, Poland’s newly-elected government rejected the European Union’s quotas for accepting refugees from Syria, an attitude that’s echoed by more than 30 U.S. states. The House of Representatives just passed legislation to suspend the admittance of 10,000 Syrian refugees, though it’s likely to be vetoed.

This is the climate we find ourselves in right now. It has a huge effect, at least in the near-term, on perceptions of international travel.

“Most people are risk-averse,” Xian says. “When my wife and I left for the airport by taxi the morning after the Paris attacks, we agreed not to travel to Europe again any time soon.”

Others share Xian’s attitude. Paris has for years been the world’s top tourist destination, but the City of Lights has already seen a huge drop-off in tourists as people have delayed or cancelled travel plans. Hotel stocks were up 10 percent in October but will likely face headwinds as a result of Paris and Mali.

Gold, Diamond and Oil Declines Good for Manufacturers

Xian stresses the importance of having gold exposure as diversification. A good diversifier is any investment that’s expected to have a low correlation with the rest of your portfolio, and gold historically has little to no correlation with equities.

The yellow metal has traditionally been seen as a safe haven in times of war, but so far we’ve seen little movement. Year-to-date, gold is down nearly 9 percent, and it could possibly end 2015 in negative territory for the third straight year.

Even so, the yellow metal has performed better than other select world currencies for the year, including the Russian ruble (-10 percent), Australian dollar (-11 percent), euro (-12 percent) and Canadian dollar (-13 percent).

Gold and Diamonds Follow the Same Downtrend
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Diamonds have likewise struggled over the past four years, but with the recent news that Canadian miner Lucara discovered the largest diamond in 100 years, investors might show renewed interest. The massive 1,111-carat diamond was unearthed in Lucara’s Botswana project. Although the stone has yet to be assessed, it’s worth noting for comparison that a 100-carat diamond sold at Sotheby’s in April for $22 million.   

Gold and Diamonds Follow the Same Downward Trend
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These declines over the past three and four years have been good for jewelry companies such as Tiffany, which I wrote about last December. Gold and diamond supply is now less expensive, so the company has margin expansion.

The same can be said of oil. Low prices have hurt South Texas, the Middle East, Russia and Colombia, not to mention drillers and explorers, but they’ve been a windfall for the end consumer, including manufacturers and airlines. Falling energy prices are finding their way into the global engine of growth.

$500 Billion Peace Dividend for Global Consumers and Businesses
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Many analysts expect to see crude oil prices tick up on mounting tension in the Middle East. During past military engagements, oil has typically performed well since a lot is required to fight a war. We haven’t seen prices move just yet—oil still sits at $40 per barrel—but it’s something we’ll monitor closely. As I said earlier this month, the global purchasing managers’ index (PMI) turned up in October after bottoming in September, and in the past this has been followed by a jump in oil prices.

Oil Trends Typically Drive by Global Economic Activity
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Inflation Rousing from Sleep

We learned this week that the consumer price index (CPI) rose 0.2 percent in October, suggesting that inflation is finally picking up steam in the U.S. and giving the Federal Reserve further excuses to raise rates next month.

Based on the 2-year Treasury yield (0.89 percent) and the headline CPI (0.20 percent), real rates now stand at 0.69 percent. (Real interest rates are what you get when you subtract the CPI from the Federal funds rate.) I’ve often explained that gold responds positively when real rates turn negative, as you can clearly see in the chart below, so we’re eagerly awaiting stronger inflation.

Real Interest Rates and Gold Share an Inverse Relationship
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In a note this week, Drew Matus, an economist at UBS, wrote that inflation in the U.S. is poised to jump in the next couple of months. The CPI measures the price of a basket of goods to the price of the same goods a year ago, so inflation fell dramatically between November 2014 and January 2015 as energy prices plunged.

But “absent a similar move this year, those sharp price declines will drop out of the year-over-year data, resulting in a rapid, technical acceleration in overall inflation measure,” Matus says.

If such inflation occurs—possibly as soon as January or February, Matus points out—real rates could have a better chance of dipping into negative territory, which would be constructive for gold prices.

Thanksgiving is this week, and in light of recent events, I think we all have ample reason to express gratitude to friends and loved ones. Everyone have a blessed week!  

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.

Fund portfolios are actively managed, and 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 of U.S. Global Investors Funds as of 9/30/2015: Lockheed Martin Corp., The Boeing Co., Northrop Grumman Corp., Lucara Diamond Corp.

The MICEX Index is the real-time cap-weighted Russian composite index.  It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors.  The MICEX Index was launched on September 22, 1997, base value 100.  The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange.

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

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Net Asset Value
as of 11/24/2017

Global Resources Fund PSPFX $6.07 0.10 Gold and Precious Metals Fund USERX $7.39 0.03 World Precious Minerals Fund UNWPX $5.78 0.02 China Region Fund USCOX $11.95 -0.23 Emerging Europe Fund EUROX $7.07 -0.02 All American Equity Fund GBTFX $24.08 0.02 Holmes Macro Trends Fund MEGAX $21.36 No Change Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change