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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.

Here's Your Guide to What the Influencers Are Saying about Commodities
September 8, 2015

A few legendary influencers in investing are making huge bets right now on commodities, an area that’s faced—and continues to face—some pretty strong headwinds. What are we to make of this?

I already shared with you that famed hedge fund manager Stanley Druckenmiller made a $323-million bet on gold, now the largest position in his family office fund. It’s also come to light that George Soros recently moved $2 million into coal producers Peabody Energy and Arch Coal. Meanwhile, activist investor Carl Icahn took an 8.5-percent position in copper miner Freeport-McMoRan, which we own.

These giants of the investing world have just given huge endorsements for gold, coal, copper, and precious metals

My friend Marc Faber, the widely-respected Swiss investor and editor of the influential “Gloom, Boom & Doom Report,” is now plugging for the mining sector and precious metals. Speaking to Bloomberg TV last week, Faber claimed that investors are running low on safe assets and suggested they revisit mining companies:

If I had to turn anywhere where… the opportunity for large capital gains exists, and the downside is, in my opinion, limited, it would be the mining sectors, specifically precious metals and mining companies… like Freeport, Newmont, Barrick. They’ve been hammered because of falling commodity prices. Now commodities may still go down for a while, but I don’t think they’ll stay down forever.

Late last month, Freeport became the first major miner to announce production cuts in response to depressed copper prices, which have slipped around 19 percent since their 2015 high of $2.95 per pound in May. This reduction should remove an estimated 70,000 tonnes of copper from global markets, according to BCA Research, and eventually help support prices.

Platinum and palladium miners in South Africa, a leading producer of both metals, also announced job cuts and mine closures, as platinum has slipped more than 16 percent this year, palladium a quarter.

But Marc sees opportunity, as I do. In my keynote speeches earlier this year I suggested that 2015 would see a bottom in cost-cutting due to divesture and slashing of capital expenditures, and that in 2016 we should see higher returns on capital.

Furthermore, using our oscillators to measure the degree to which asset classes are overbought and oversold, we find that commodities are extremely oversold right now and currently bouncing off low negative sentiment. The smart money is buying.

When asked if he thought commodities had reached a bottom, Marc had this to say:

I would rather focus on precious metals—gold, silver, platinum—because they do not depend on industrial demand as much as base metals and industrial commodities.

Marc was referring, of course, to China, the 800-pound commodity gorilla, as I’ve often described the country. The Asian powerhouse is currently responsible for nearly 13 percent of the world’s commodity demand, followed by the U.S. at a little over 10 percent.

China's demand for commodities is huge
click to enlarge

But as I discussed recently, China is transitioning from a manufacturing-based economy to one that emphasizes services, consumption and real estate. Commodity demand is cooling, therefore, and we can expect it to cool even further. Aside from the strong dollar, this is one of the key reasons why prices have plunged to multi-year lows.

Commodities Seeking an Upturn to Global Manufacturing

The JPMorgan Global Manufacturing PMI continues to decline as well. Since its peak in February 2014, the reading has fallen 4.5 percent. The August score of 50.7, just barely indicating manufacturing expansion, is the sixth consecutive monthly reading to remain below the three-month moving average.

I’ve shown a number of times in the past that when this is the case—that is, when the one-month reading is below the three-month trend—commodity prices have tended to trade lower. Unlike other economic indicators such as gross domestic product (GDP), the PMI is forward-looking and helps investors manage expectations. Based on our own research, there’s a strong probability that copper and crude oil prices might dip three months following a “cross below.”

The opposite has also been true: Prices have a stronger probability of ticking up three months after the one-month crosses above the three-month.

Commodities and commodity stocks historically rose three months after pmi "cross-above"
click to enlarge

This is why we believe prices will have a better chance at recovery after the global PMI crosses above its three-month moving average.

I have great respect and admiration for Druckenmiller, Soros, Icahn and Marc—all of whom are clearly bullish on commodities—but we would prefer to see global manufacturing growth reverse course.

In the meantime, low commodity prices are a windfall for many companies in Europe, Japan and the U.S. Metals and other raw materials are at their lowest in years, which is the equivalent of a massive tax break for the construction and manufacturing sectors.

Low gold prices are also expected to generate high demand in India as we approach fall festivals such as Diwali and Dussehra, not to mention weddings. According to estimates from Swiss precious metals refiner Valcambi, demand could reach 950 tonnes by the end of the year, compared to 891 tonnes in 2014.

Emerging Markets Might Have Found a Bottom

It might be challenging for the global PMI to cross above the three-year moving average since Chinese manufacturing has slowed, but there’s burgeoning strength in other emerging markets, many of them unexpected: the Philippines, Myanmar, Ethiopia. The Czech Republic has the highest PMI reading among emerging Europe countries and the fastest-growing economy in all of Europe.

An interesting chart from Morgan Stanley suggests that emerging markets might have found a trough and are ready to turn up. Assuming that August 24, 2015 was the bottom, the bank compares the recent bear market to five previous ones and finds that it’s tracking a similar price action as 1995, 2002 and 2011. It’s also much less severe than 1998 and 2008.

A contrarian thesis: have emerging markets found a bottom?
click to enlarge

Additionally, Bloomberg reminds us that by 2050, 3 billion people will enter the middle class, nearly all of them in the developing world. Emerging markets might be struggling somewhat right now, but they’re still very much our future.

U.S. Travelers to Spend Big This Labor Day Weekend, but Airline Stocks Are Reasonably Priced

This Labor Day weekend, Americans were projected to spend a whopping $13.5 billion, according to the U.S. Travel Association (USTA). This figure included spending on goods and services as people traveled by automobile, jet or some other means to visit friends and family. Air travelers alone spent $2.9 billion, if expectations were accurate.

Luxury in the air: delta is now offering private jet upgrades to select passengers

The International Air Transport Association (IATA) released air travel demand figures for the month of July, noting that demand continues to be robust both domestically and internationally. All global markets saw growth in July, with domestic flight demand rising 5.9 percent year-over-year. At an eye-popping 28.1 percent, India posted the strongest growth.

As GARP (growth at a reasonable price) investors, we still find airline stocks attractively priced, as do many others. Barron’s recently made note of this, stating: “Major airline stocks are trading 9.4x our 2015 EPS (earnings per share) estimates and 9.0x our 2016 EPS estimates, below their historical trading range of 10x – 12x.”

We own a number of these carriers in our funds: Delta Air Lines (which announced a $5-billion stock buyback program in May), Alaska Air, and JetBlue in the Holmes Macro Trends Fund (MEGAX); Ryanair (which just hit a new 52-week high) and Aegean Greece in the Emerging Europe Fund (EUROX). We also own several names in the aircraft manufacturing and airport services areas, including Pegasus Hava Tasimaciligi, Wizz Air Holdings and TAV Havalimanlari.

The Iran Nuclear Deal Could Be a Boon to Boeing and Airbus

On a final note, if you’ve been paying attention to the news, you’re probably familiar with the pending nuclear deal with Iran. When implemented, trade barriers will be lifted for the first time in decades. Whether you approve or disapprove of the deal, you have to recognize that this could be a huge opportunity for many companies that, up until now, have been cut off from doing business with the Middle Eastern country.

One area that’s in dire need of an overhaul is Iran's aging jet fleet. The average age of the United Arab Emirates’s planes is 6.3 years. In Iran, meanwhile, it’s 27 years. These are ancient relics!  

Iran nuclear deal: a huge opportunity for Boeing and Airbus?
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The total number of jets that will need replacing is estimated to be 400—and cost $20 billion.

Aircraft manufacturers Boeing and Airbus already have a growing backlog of new aircraft orders—10,000 jets altogether, according to the Wall Street Journal—and the Iran deal has the potential to increase it even further.

We also see it as an opportunity for energy companies in particular that the median age of Iran’s educated population is 28 years—this is a market with promising growth potential.

You might have seen headlines that energy officials from Iran and Saudi Arabia secretly met to cooperate on trying to get crude oil prices stable at between $70 and $80 per barrel. Oil prices spiked this past week in response, but as far as we can tell, this is only chatter. Don’t bet on rumors, but rather on good government monetary and fiscal policy, excellent management and undervalued stocks.

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

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

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.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund (MEGAX) and Emerging Europe Fund (EUROX) as a percentage of net assets as of 6/30/2015: Peabody Energy Corporation 0.00%, Arch Coal Inc. 0.00%, Freeport-McMoRan Inc. 0.00%, Newmont Mining Corp. 0.00%, Barrick Gold Corp. 0.00%, Valcambi SA 0.00%, Delta Air Lines Inc. 0.00%, Alaska Air Group Inc. 0.00%, JetBlue Airways Corporation 0.00%, Ryanair Holdings plc 0.00%, Aegean Airlines SA 0.00%, Pegasus Hava Ta??mac?l??? SA 0.50% Emerging Europe Fund, Wizz Air Holdings plc 0.00%, TAV Havalimanlar? Holdings 1.09%, The Boeing Co. 1.50% Holmes Macro Trends Fund, Airbus Group SE 0.00%.

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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China’s Economy Is Undergoing a Huge Transformation That No One’s Talking About
August 31, 2015

The photo you see below was snapped recently in Beijing. It might not be that special to some readers, but in my 25 years of visiting the Chinese capital, I’ve never seen a blue sky because it’s always been blotted out by yellow smog. Beijing is clearly undergoing a massive transformation right now. This might please proponents of the green movement, but it’s ultimately harmful to the health of China's manufacturing sector.

Blue skies ahead? A cyclist pedals through Tiananmen Squar in Beijing

On the other hand, blue skies could be ahead for China’s service industries.

Misconception and exaggeration are circling China’s economy right now like a flock of hungry buzzards. If you listen only to the popular media, you might believe that the Asian giant is teetering on the brink of economic disaster, with the Shanghai Composite Index’s recent correction and devaluation of the renminbi held up as “proof.”

Don’t get me wrong. These events are indeed significant and have real consequences. They also make for some great, sensational headlines, as I discussed earlier this month.

But what gets hardly any coverage is that China’s economy is not weakening so much as it’s changing, much like Beijing’s skies. Take a look at the following two charts, courtesy of BCA Research:

China's Economy is Shifting Away from Manufacturing More Towards Services
click to enlarge

You can see that the world’s second-largest economy has begun to shift away from manufacturing and more toward consumption and the service industries. While the country’s purchasing managers’ index (PMI) reading has been in contraction mode since March of this year, the service industries—which include financial services, insurance, entertainment, tourism and more—are ever-expanding. The problem is that the transformation has not been fast enough to offset the massive size of the manufacturing sector.

the Czech Republic's PMI came in at an impressive 57.50 in July up from 56.90 in June

Just as a refresher, the PMI is forward-looking and resets every 30 days. It helps investors manage expectations. Consider this: The best-performing country in our Emerging Europe Fund (EUROX) is the Czech Republic—which also happens to have one of the highest PMI readings. Coincidence?

In China, overseas travel, cinema box office revenue and ecommerce are all seeing “explosive growth,” according to BCA. The country’s once-struggling real estate market is also robust. The government just relaxed rules to permit more foreigners to purchase mainland property.

But you’d be hard-pressed to come across any of this constructive news because it’s not particularly good for ratings.

A recent Economist article makes this point very clear:

The property market matters far more for China’s economy than equities do. Housing and land account for the vast majority of collateral in the financial system and play a much bigger role in spurring on growth. Yet the barrage of bearish headlines about share prices has obscured news of a property rebound. House prices have perked up nationwide for three straight months. Two months after the stock market first crashed, this upturn continues.

“Commodity Imports Have Actually Been Quite Strong”

Again, China’s transformation from a manufacturing-based economy to one that focuses on consumption has real consequences, one of the most significant being the softening of global commodity prices. As I told Daniela Cambone on last week’s Gold Game Film, gold’s Love Trade has become not a No Trade, but a Slow Trade. We’ve seen demand cool along with a decline in GDP per capita, the PMI readings and China’s M2 money supply growth.

Below you can see the relationship between China’s M2 money supply growth and metal prices. Since its peak in late 2009, money supply growth has been dropping year-over-year, driving down metal prices.

China's falling money supply since 2009 peak has driven down metal prices
click to enlarge

Money supply growth tends to be a “first mover.” When it has contracted, the PMI has usually followed. Recently, this has hurt economies that depend on China as a net buyer of raw materials, including Brazil, which supplies the Asian country with iron ore, soybeans and many other commodities, and Australia.

Australian Dollar and Brazilian Real Retreat with Drop in China's Money Supply
click to enlarge

When M2 money supply growth and the PMIs are rising, commodity prices can also rise. But that’s not what’s happening. It’s important to recognize that when new orders for finished products fall, there’s less consumption of energy to manufacture and ship. Again, this might make the greenies happy, but it’s ultimately bad for manufacturing.

I’ve said several times before that China is the 800-pound commodities gorilla, and it continues to be so. The country currently consumes about a quarter of the total global output of gold. For nickel, copper, zinc, tin and steel, it’s around half of world consumption. For aluminum, it’s more than half.

These are huge figures. But investors should know that Chinese imports of these important metals and materials still remain strong. Tom Pugh, a commodities economist at Capital Economics, told the Wall Street Journal last week that the market has it wrong about China, that the drop in demand has been overstated:

If you look at Chinese commodity imports over the last few months, they’ve actually been quite strong. A lot of it is just that people thought China would continue to grow at 10 percent a year, ad infinitum, and now people are just realizing that’s not going to happen.

Reuters took a similar stance, reporting that “there were at least 21 commodities that showed increases in imports greater than 20 percent in July this year, compared to the same month in 2014.” Weakening demand has been caused by a number of reasons, including “structural oversupply” and “the impact of the recent volatility in equity markets.”

But it’s important to keep things in perspective. Compared to past major market crashes, China’s recent correction doesn’t appear that bad.

China's Crash is Big, But Not the Biggest

Any bad news in this case can be seen as good news. I think that in the next three months we might see further monetary stimulus, following the currency debasement nearly three weeks ago. We might also see the implementation of new reforms in order to address the colossal infrastructure programs China has announced in the last couple of years, the most monumental being the “One Road, One Belt” initiative.

Dividend-Paying Stocks Helped Stanch the Losses

As investors and money managers, it’s crucial that we be cognizant of the changes China is undergoing. With volatility high in the Chinese markets right now, we’ve raised the cash level in our China Region Fund (USCOX), and after the dust settles somewhat and the right opportunities arise, we’ll be prepared to deploy the cash. We’re also diversified outside of China.

We managed to slow the losses during the Shanghai correction by being invested in high-quality, dividend-paying stocks.

According to daily data collected since December 2004, the median trailing price-to-earnings (P/E) ratio for the Shanghai Composite Index constituents currently sits at 48.6 times earnings. If it reverts to the mean, risk is 32 percent to the downside for the index. Currently, the P/E ratio of our China Region Fund constituents sits around 16 times. This suggests that USCOX has less downside risk and is cheaper than the Shanghai Composite.

Median Trailing Price-to-Earnings Ratio for Shanghai Composite Index Constituents
click to enlarge

We seek to take advantage of the trend toward consumption by increasing our exposure to the growing service industries—technology, Internet and ecommerce companies (Tencent is one of our top 10 holdings); financial services (AIA and Ping An Insurance); and enviornmental services (wastewater treatment services provider CT Environmental).

Golden State Warriors guard Klay Thompson unveiling the KT Fire ANTA EARLIER THIS YEAR

Rising sports participation among white collar workers in China is very visibile these days. Xian Liang, portfolio manager of USCOX, says that his friends back in Shanghai share with him, via WeChat, how they track their daily runs using mapping apps on their phones.

With that said, an attractive company is Anta Sports, an emerging, innovative sportswear franchise. Fans of the Golden State Warriors might recall that guard Klay Thompson endorsed its products earlier this year.

We believe the China region remains one of the most compelling growth stories in the world and continues to provide exciting investment opportunities. 

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

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.

M2 money supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

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.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund and China Region Fund as a percentage of net assets as of 6/30/2015: Tencent Holdings Ltd. 6.52% China Region Fund, AIA Group Ltd. 1.92% China Region Fund, Ping An Insurance Group Co. 3.28% China Region Fund, CT Environmental Group Ltd. 0.52% China Region Fund, ANTA Sports Products Ltd. 0.57% China Region Fund.

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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China Not Immune to Contagious Quantitative Easing and Massive Printing of Cheap Money
August 17, 2015

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Renninbi

First it was the U.S. Federal Reserve. Then, in 2013, Japan launched what became known as Abenomics. The European Central Bank (ECB) followed suit in 2014. And now the People’s Bank of China has joined the parade.

All of them in some way stimulated economic growth by initiating monetary quantitative easing (QE) programs.

The media and politicians applauded them for their QE plans. All of them, that is, except for China. Instead, we’ve only seen a flurry of negative headlines.

I often tell investors to follow the money, which currently is cheap to borrow. Cheap money is good for stock prices, but not for retired folks who have most of their savings in term deposits with low interest yields.

Most important for commodity investors is the powerful correlation between China’s money supply and commodity prices. The money supply peaked in 2011 and has been falling along with commodity prices.

On Monday, China unexpectedly trimmed the value of its currency, the renminbi, 2 percent, the most in two decades. In the days since, many analysts and “experts” have irrationally turned sour on the Asian country, similar to the extreme bearishness toward gold in the last month.

But investors last week came home to the yellow metal after China announced it had increased its gold reserves by an additional 19 tonnes in July, boosting its total holdings to 1,677 tonnes (nearly 54 million ounces). This helped prices rally 1.4 percent on Wednesday to reach $1,124.46, a three-week high.

Investors should likewise return to China when they realize that the global reaction to the renminbi devaluation has been hugely overblown. I agree entirely with my friend Addison Wiggins, who writes in his Daily Reckoning newsletter:

The market is up in arms about this currency move. And frankly most things that I read from the market have it all wrong…

They make China out to be the big, bad villain—calling this move manipulation or a “currency war.” And while EVERYTHING that central banks do is indeed manipulation or a “currency war”—why don’t we hear those terms thrown around the ECB or the U.S. Fed?

To help cut through the noise and get a more balanced picture of devaluation's causes, effects and possible ramifications, I chatted with our resident Asia expert Xian Liang, portfolio manager of our China Region Fund (USCOX). Below are some of the highlights.

As you know, we follow currencies very closely in our investment team meetings because we’re aware that government policy is a precursor to change. Having said that, why did China decide to devalue the renminbi?

There are several possible reasons, the first one being economics—specifically, to stimulate economic growth and ease liquidity in the financial sector. A weaker renminbi can help make Chinese exports cheaper for foreigners and imports dearer for locals, creating the incentive for a “net inflow” of money. July data shows that economic activity remains worse than expected. China’s purchasing managers’ index (PMI) reading for the month is one example, but fixed-asset investments, power generation and exports were all down.

chinas-manufacturing-pmi-falls-to-two-year-low-in-july
click to enlarge

Deflationary pressure also intensified in July, and the renminbi in trade-weighted terms—that is, against a whole basket of major trading partners’ currencies, not just the dollar—has soared to record highs. This is because of a de facto peg to the dollar, making Chinese goods and services uncompetitively priced to world customers.

Another reason is domestic politics. Chinese policymakers want to resurrect their reformist image among domestic intellectuals and the middle class by yielding more power to market forces to determine its currency exchange rate, which offers some compensation for July’s aggressive, command-and-control intervention in the A-Share market.

And then there’s international politics. It’s well known that China wishes its currency to be included in the International Monetary Fund’s special drawing rights basket, along with the U.S. dollar, euro, British pound and Japanese yen. Chinese policymakers are actively demonstrating to the IMF their commitment to “a more market-determined exchange rate,” a critical step toward eventual renminbi internationalization.

Many countries have devalued their currencies lately—Japan, Germany, France and others. Business Insider, in fact, just shared a Goldman Sachs chart showing how miniscule the renminbi’s depreciation really is compared to other emerging countries’ currencies. And yet China gets singled out in the media! Why is everyone so hard on China?

Renminbi-depreciation-not-nearly-significant-as-other-emerging-markets-currencies
click to enlarge

What’s usually not mentioned in all the news and editorials we’ve seen is that China hasn’t resorted to currency devaluation in 20 years. For the last decade, the renminbi was largely moving in a single direction—up—because China was tired of being dubbed a currency manipulator and it would like to foster consumerism.

As the second-largest economy in the world, China is interested in transforming its growth model from investment-driven to consumer-driven, and some investors might wonder how the devaluation will affect consumption. Today, the richer Chinese middle class is made up of big spenders, both home and abroad, and a weaker renminbi translates to weaker purchasing power for them. It might also have larger implications for global tourism, global consumer goods and global property. So the difference between China and, say, France is pretty significant.

Chinas-Central-Bank-Trims-the-Renminbi-2-After-10-years-of-Gains
click to enlarge

A lot of people think the Federal Reserve will hike interest rates this year—maybe even as early as September—though I’ve expressed doubts about that. Will the devaluation have any effect on the Fed’s decision?

To the extent that it weakens its own currency, China exports deflation to the U.S. and can help the dollar’s strength. Lower inflation and a stronger dollar reduce the incentive or rationale for any imminent Fed rate hike. So yes, you can almost say this is China’s silent protest against the widely anticipated September hike. China seems to be reminding Janet Yellen that in today’s interconnected world, unilateral monetary policy action by the U.S. without first considering global dynamics might not be the smartest thing to do. In effect, it’s saying: “Here’s a preview of what could happen if you insist on hiking rates this year.”

Is this a sign of further reforms? What else can we expect?

The devaluation does indeed herald back to the days of major Chinese reform. In fact, it occurred one day after China approved a comprehensive plan to reform its state-owned enterprises to make them more market-driven, similar to those in Singapore. So at least the government welcomes the perception that the devaluation has more to do with long-term structural reform and less to do with short-term expediency.

Investors are being bombarded with bad news about China right now. There have been some very negative headlines. Where’s the good news in all this?

Here’s the simple answer: A weaker currency not only helps Chinese exporters but also U.S. consumers. Whether you buy things made in China or are planning your next vacation there, you’ve got money to save now. Opportunities have also been expanded for U.S. retailers and manufacturers that source from China, not to mention U.S. airlines. And if you’re in the camp that believes this devaluation is the start of a new “currency war,” then it might be time for gold to shine.

Gold’s Safe Haven Status Never Disappeared

Countries with largest gold holdings

Indeed, gold tends to benefit the most when there are global currency fluctuations. Last week was no exception, as the metal had its best week since June. Many analysts, it seems, prematurely declared that gold has lost its safe haven status because it fell to five-year lows during the height of Greece’s and Puerto Rico’s debt crises.

But as I explained last month, gold is behaving this way not because it’s lost anything. Instead, there are external forces at work here, including the strong U.S. dollar, fears of rising interest rates and a slowing global economy, not to mention possible price manipulation. Despite these powerful headwinds, gold managed to hold strong the week before last as media giants’ stock plummeted, erasing $60 billion in stock value.

Speaking of gold and mining, I’ll be in Lima, Peru during the first week in November to attend the Mining & Investment Latin America Summit, where I’m scheduled to deliver the opening keynote address. I’ll be speaking on mining around the world, macro trends and opportunities and challenges in the upcoming year. For those of you interested in attending, you can register here. I’d love to see you there!

Airports Get 400,000 Views!

As you might imagine, I spend a lot of time in jets and airports. Last year I took over 100 flights, and this year it looks as though I’ll take just as many, if not more. I’m not the only one, as Airlines for America, an industry trade group, estimates that 222 million passengers will have flown on U.S. carriers this summer. It’s for this reason we created a colorful slideshow that celebrates the eight busiest airports in the world. As of this writing, it’s been viewed on Business Insider nearly 400,000 times! Check out the slideshow for yourself and then share with us your favorite airport story.

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The 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.

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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China’s Market Correction in Three Easy Charts
July 15, 2015

The sheer size and importance of China’s equity markets cannot be overstated. Second in size only to the New York Stock Exchange, the combined value of the Asian country’s stock markets, according to the Wall Street Journal, is $14 trillion and change. Or at least it was in May, a month before markets fell more than 30 percent. The Shanghai Composite Index alone gave up $2 trillion in value. To put this in perspective, the gross domestic product (GDP) of debt-troubled Greece is around $200 billion.

Shanghai Composite Index Loses 30 Percent in Three Weeks
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So how did this happen? The answer has a lot to do with the quantity and quality of investors.

In most major economies, stock markets trading is dominated by professional money managers. But in China, between 80 and 90 percent of the domestic A-share market is made up of retail investors, many of them novices who sought to participate in the yearlong bull run. An eye-popping 40 million new brokerage accounts were created in the one-year period ended in May. The Communist Party, by comparison, gained only a little over one million new members in the same period. At the peak, accounts were being added at a rate of over three million per week.

Shanghai Composite Index Loses 30 Percent in Three Weeks
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For many of these first-time or relatively inexperienced investors, the price of entry was margin lending. Cosmic amounts of it. Near the end of June, 2.08 trillion yuan ($335 billion) worth of borrowed funds flooded the Shanghai and Shenzhen markets. Margin lending as a percentage of total market cap rose to as high as 20 percent. In the U.S., it’s about 2.5 percent.

Margin Lending, in Trillions of Chinese Yuan
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This combination—millions of new accounts mixed with unprecedented leveraging—greatly contributed to the selloff. As you can see above, this leverage is now unraveling as investors are forced to sell in order to meet margin calls.

Beijing has responded with a host of measures to prevent the market from sliding any further, one of the most significant being a ban on huge institutional shareholders from selling until the Shanghai Composite rises above 4500. As of this writing, it’s just above 3800 after breaking a three-day rally.

The good news is that some analysts believe the worst might be behind us. Financial services firm UBS takes the position that, as massive as the correction was, it shouldn’t have a “major” economic impact.

In the meantime, we have raised the cash level in our China Region Fund (USCOX) and are ready to deploy it when the right opportunity arises.

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

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange. The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of 300 A-share stocks traded in the Shanghai and Shenzhen stock exchanges.

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

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Global Investors: You Should Be Paying Attention to this Economic Indicator
July 13, 2015

Reality set in for investors last week: Tremors are shaking up the global markets.

A “no” vote from the Greek referendum last Sunday, the vast stock market selloff in China, and the volatile movements in the price of U.S. crude oil have made it clear the worldwide economy is collectively riding the brakes. The 3.5-hour halt in trading on the NYSE also added to investors’ unease.

It's been hard to ignore the wild market headlines this week.

Last week on BNN TV, Canada’s leading business station, I explained that an important forward-looking economic indicator we closely monitor at U.S. Global Investors can help make sense of this slowdown: the global manufacturing purchasing managers’ index (PMI), which we've written about many times. Coupled with this, our portfolio managers recognize that during highly volatile markets adjusting cash levels in our funds is key.

In addition to our own macro models, BCA Research , a highly respected independent research company, pointed out that PMIs in developing economies have plunged to new lows.  The International Monetary Fund also revised downward its global growth forecast for 2015. On this account, bad news is good news, as central bankers are scrambling to stimulate economic growth.

Emerging Markets Manufacturing PMI is Plunging
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As active managers, we have raised our cash levels looking for opportunities in a sloppy market, particularly in our China Region Fund (USCOX). This allows us to mitigate risk and deploy that cash when stocks look attractive per our model, which focuses on factors like high returns on invested capital, sales per share growth and dividend per share growth.

The Trend is Your Friend

It’s common for investors to look at gross domestic product (GDP) when making decisions about how to deploy capital. Unlike GDP, which looks back or in the rearview mirror, PMI is forward-looking. PMI gathers data such as global output, new orders, exports, prices and employment, making it a reliable indicator for both commodity performance and business activity. ISM, or Manufacturing Institute for Supply Management, is the U.S.-specific calculation of PMI.

Take a look at global PMI. It has continued on a three-month downtrend for the month of June.

Global Manufacturing PMI Continues Its Downtrend
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Similarly, PMI in the U.S. peaked seven months ago but has since been modestly declining. The threat of rising rates has been a contributing factor, and although Federal Reserve Chairwoman Janet Yellen stated Friday that the U.S. is on track to raise rates in September, many agree that this date is too soon.

U.S. Manufacturing PMI Declines After Peak
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Card Counting: Using the PMI Pattern to Your Investing Advantage

Understanding PMI is one way investors can use patterns to improve their chances of positive returns in the market – just like card counting in a game of Blackjack.

When looking at PMIs, a reading of 50 or above indicates manufacturing expansion, while a reading below 50 indicates a slowing economy. PMIs for individual countries like China and Greece are negative right now, meaning that manufacturing activity is contracting.

Our investment team’s research has shown that when the one-month reading crossed below the three-month trend, there was a significant probability that materials, energy and commodities would fall six months later. Conversely, when it crossed above, manufacturing activity would ramp up, which greatly improved the performance of commodities such as copper and crude oil, along with the materials and energy sectors.

Commodities and Commodity Stocks Historically Rose Six Months After PMI "Cross-Above"
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The Great Shift in Seasonal Oil

As I explain in our Managing Expectations whitepaper, using seasonal patterns, along with global PMI, is another way to understand trends in the market and the world at large.

Historically, the hurricane season in August/September has shut down the supply of oil offshore, leading to a peak in relative price around this time. But as you can see in the chart below, the new technology of fracking and a corresponding increase of U.S. onshore production, have led to a surplus, drastically shifting the shorter-term seasonal pattern in oil.

U.S. Manufacturing PMI Declines After Peak
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Staying Nimble During Changing Landscapes

Professor of Mathematics at the University of Oxford, Marcus du Sautoy, said it best:

“Although the world looks messy and chaotic, if you translate it into the world of numbers and shapes, patterns emerge and you start to understand why things are the way they are.”

The global markets right now indeed appear “messy and chaotic,” but curious investors and fund managers realize that specific tools and patterns help them navigate through the complexity and intensity of constantly changing landscapes.

In fact, it is the agile active management and the use of these investment tools that landed two of our funds in Investor’s Business Daily’s “Weekly Review” section last week.  This particular section of IBD is a screened list of top-rated stocks for the week, along with the top-performing funds that own these particular stocks. Our Holmes Macro Trends Fund (MEGAX) and Global Resources Fund (PSPFX) are recognized for owning nine of these top stocks.

Subscribing to our award-winning Investor Alert newsletter is one way investors can stay on top of geopolitical and economic events that could affect their investments.  We’d really appreciate it if you’d share our publication with your friends and colleagues!

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

Past performance does not guarantee future results.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

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 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

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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Net Asset Value
as of 09/25/2017

Global Resources Fund PSPFX $5.78 -0.04 Gold and Precious Metals Fund USERX $8.02 0.06 World Precious Minerals Fund UNWPX $6.69 0.06 China Region Fund USCOX $10.96 -0.46 Emerging Europe Fund EUROX $6.94 -0.06 All American Equity Fund GBTFX $24.34 0.10 Holmes Macro Trends Fund MEGAX $19.99 0.03 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change