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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.

Amid Global Uncertainty, Pay Attention to this Manufacturing Index
April 10, 2017

There a lot construction Zurich now

Last week I returned from Zurich, where I spoke at the European Gold Forum. Investor sentiment for the yellow metal was particularly strong on negative real interest rates and heightened geopolitical uncertainty in the U.S., Europe, Middle East and South Africa. A poll taken during the conference showed that 85 percent of attendees were bullish on gold, with a forecast of $1,495 an ounce by the end of the year.

The upcoming presidential election in France is certainly raising concerns among many international investors. On one end of the political spectrum is Marine Le Pen, the far-right National Front candidate who, if elected, might very well pursue a “Frexit.” On the other end is Jean-Luc Mélenchon, a socialist of such extreme views that he makes Bernie Sanders look like Ronald Reagan. I was shocked to read that Mélenchon has pledged to implement a top tax rate of 100 percent—and even more shocked to learn that he’s moving up in the polls. An insane 100 percent tax rate would surely return the country to medieval-era feudalism, which is just another name for slavery. All the wealth naturally goes to the very top, and corruption thrives.

South African President Jacob Zuma

It’s important to recognize that in civil law countries such as France, hard line socialism is much more likely to take hold. Just look at South Africa. While in Zurich, I had the pleasure to speak with Tim Wood, executive director of the Denver Gold Group and former associate of South Africa’s Chamber of Mines.  According to Tim, the poor government policies of South Africa’s socialist president, Jacob Zuma, is driving business out of the country and has led to the resignations of several members of parliament. Tens of thousands of protestors have taken to the streets of Johannesburg demanding Zuma to step down, especially following his firing of Finance Minister Pravin Gordhan. The rand, meanwhile, has plummeted and the country was recently downgraded to “junk” status

One of the consequences of a weaker rand has been stronger gold priced in the local currency and higher South African gold mining stocks, as measured by the FTSE/JSE Africa Gold Mining Index. Among the gold companies that have seen some huge daily moves in recent days are Sibanye Gold and Harmony Gold. 

South African Gold Stocks Rand Weakness
click to enlarge

South African gold stocks look very attractive in the short term. Over the long term, however, producers might find it increasingly difficult to operate efficiently and profitably in such a mismanaged jurisdiction.

 

PMIs Show Impressive Manufacturing Growth

It was an eventful week, to say the least. The U.S., for the first time, became directly involved militarily in Syria’s years-long civil war. Senate Republicans invoked the “nuclear option” to prevent a Democratic filibuster, allowing federal judge Neil Gorsuch to obtain Supreme Court confirmation. President Donald Trump met with Chinese leader Xi Jinping at Mar-a-Lago, the so-called “Winter White House,” to discuss trade and North Korea, among other issues.

And on Friday we learned the U.S. added only 98,000 jobs in March, down spectacularly from the 235,000 that came online in February. In response to this and the Syrian air strike, gold jumped more than 1 percent, touching $1,272 in intraday trading, its highest level in five months.

Fresh purchasing manager’s index (PMI) readings for the month of March were also released, showing continued manufacturing sector expansion in the world’s largest economies, including the U.S., China and the eurozone. All of Zurich was under construction, it seemed, with cranes filling the skyline in every direction. And when I flew back into San Antonio, sections of the international airport were also under heavy construction. This all reflects strong local and national economic growth in Switzerland and the U.S.

I especially like the Zurich Airport. I travel a lot, and it’s the only airport I know of where you can sit out on an open deck and watch and listen to the jets take off and land.

Panoramic Zurich Airport

The official China PMI rose to 51.8, the fastest pace in nearly five years. Because the PMI is a forward-looking tool, this bodes well for industrial metals, as measured by the London Metal Exchange Index (LMEX). The Asian giant, as I’ve pointed out before, consistently ranks among the top importers of copper, aluminum, steel and more.

Industrial Metals Tracked China Manufacturing PMI
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The U.S. Manufacturing ISM cooled slightly to 57.2, down from 57.7 in February. This still remains high on a historical basis. Because the U.S. is the number three producer of crude, following Russia and Saudi Arabia, oil prices have tended to track the country’s manufacturing index.

Crude Oil Has Mostly Tracked US Manufacturing ISM
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Trump Tackles U.S. Trade with China

Again, Trump met with China’s Xi, a man who can be considered the U.S. president’s counterpart in many more ways than one. In February, I included Xi in a list of four global leaders who have more in common with Trump than some people might realize. Last week the Brookings Institute compiled a list of the many “striking similarities” between the two men. Among other commonalities, they’re both nationalists; they’re both populists and have expressed a desire to fight corruption; they both have a rocky relationship with the press and intellectual community; and they both prioritize domestic affairs over foreign affairs.

None of this stopped Trump from being very critical of China on the campaign trail. He threatened to name the country as a currency manipulator and raise tariffs as much as 35 percent. It will be interesting to see what agreements, if any, can come out of this meeting between the two leaders.

Trump is not wrong to raise the alarm over U.S.-China trade. In 2016, the U.S. trade deficit with China stood at a whopping $347 billion. This is down slightly from $367 billion in 2015, but still a huge number. If you look at the total U.S. balance of payments since 1960, you get an even greater sense of the imbalance.

Can Trump Balance US Trade
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At the same time, world trade volume growth has improved in recent months, especially in emerging markets and Asia.

World Trade Volume Growth Headed Right Direction
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It’s important that Trump put ample thought into improvements on international trade. I’m not convinced tariffs and border adjustment taxes (BATs) are the solution. Look at what happened in the 1930s with the Smoot-Hawley Tariff Act. In an effort to “protect American jobs,” the U.S. raised tariffs on more than 20,000 goods coming into the country, many of them as high as 59 percent. Once the act went into effect in June 1930, a trade war promptly ensued and global trade all but dried up. Today, historians almost unanimously agree that the policy, which President Franklin Roosevelt later overturned, only exacerbated the effects of the Great Depression.

One of the biggest reasons why the U.S. has such a trade deficit is due to its abnormally high corporate tax rate. The country’s largest export is intellectual and human capital. Think Apple and Google, which are designs and ideas. The problem is that the dollars received in exchange for these goods and services are sitting in Ireland, or elsewhere, and are thus not counted in the official trade balance. Should the corporate tax rate decline to an average of around 18 to 20 percent, which is consistent with other developed countries, U.S. multinational companies would likely be more inclined to repatriate those profits and tilt the balance back in America’s favor.

Tax reform, therefore, is key in making sure the U.S. remains competitive on the world stage.

 

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

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 12/31/16: Sibanye Gold Ltd., Harmony Gold Mining Co. Ltd.

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 ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

The London Metals Exchange Index (LMEX) is an index on the six designated LME primary metals contracts denominated in US dollars. Weightings of the six metals are derived from global production volume and trade liquidity averaged over the preceding five-year period. The index value is calculated as the sum of the prices for the three qualifying months multiplies by the corresponding weights, multiplied by a constant. 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 FTSE/JSE African Gold Mining Index is a market capitalization weighted index.

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7 Reasons to Be Bullish on Emerging Europe
March 28, 2017

7 Reasons to Be Bullish on Emerging Europe

1. Eurozone PMI at a Six-Year High

For the month of March, the preliminary purchasing manager’s index (PMI) for the eurozone reached 56.7, its highest reading since April 2011. Significant gains were made in new work and backlogs of work, employment and service sector job creation.

Eurozone PMI and GDP Holding Steady
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2. European Economic Sentiment Holding Above Its Long-Term Average

For the month of February, the Economic Sentiment Indicator (ESI)—which measures industrial confidence, services confidence, consumer confidence, construction confidence and retail trade confidence—posted a score of 108, safely above its 26-year average of 100.

Europe's economic sentiment indicator still rising above its long-term average
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3. Emerging Europe Manufacturing: Full Speed Ahead

When Western Europe is performing well, Eastern Europe typically benefits by proxy, as the latter exports to the West. With a thriving manufacturing industry that’s attracted top international corporations such as Mercedes-Benz, GM, Audi, Bosch, Lego and Nestlé, just to name a few, Hungary led all others in February, posting a PMI of 59.5.  

Emerging Europe Manufacturing SEctor Looks Strong
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4. The Migration Crisis Has Abated

Mediterranean sea arrivals into Europe have fallen to 2,731 a month, from a high of 220,000 in October 2015. This is important because concerns of immigration and terrorism have largely driven recent secessionist and anti-European Union sentiment, most notably among far-right hopefuls such as the Netherlands’ Geert Wilders and France’s Marie Le Pen.

Refugee Crisis is an Overstated Risk
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5. Trump and OPEC May Have Helped Russian Stocks

The election of President Donald Trump, who has repeatedly praised Russia and its leader Vladimir Putin, as well as crude oil production cuts by the Organization of Petroleum Exporting Countries (OPEC), may have helped Russian stocks shrug off recent declines in the price of Brent oil. With the country coming out of recession, BCA Research just overweighted Russian equities, the ruble and credit relative to other emerging European states.

Russian Stocks Shrug Off Brent... Trump to Thank?
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6. Poland Making Good on Promise to Support Families

The Polish economy has lately benefited from increased social spending and wage hikes. The government delivered on its Family 500+ program, giving each family with more than one child 500 PLN ($130) per child per month. This has doubled some families’ disposable incomes and led to a recent surge in new private housebuilding starts. What’s more, Poland is currently experiencing a baby boom, which should support economic growth in the years to come.

Private Housebuilding Starts in Poland Have Recovered Strongly
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7. Attractive Valuations

Finally, European stocks look very attractive compared to U.S. stocks, down slightly more than one standard deviation. This should be especially enticing for investors who believe American stocks are too expensive right now.

Euro Area at Historically Inexpensive Valuations
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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.

The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The Economic Sentiment Indicator (ESI) is a composite indicator made up of five sectoral confidence indicators with different weights: Industrial confidence indicator, Services confidence indicator, Consumer confidence indicator, Construction confidence indicator Retail trade confidence indicator. The economic sentiment indicator (ESI) is calculated as an index with mean value of 100 and standard deviation of 10 over a fixed standardized sample period.

The MSCI Russia Index is designed to measure the performance of the large and mid-cap segments of the Russian market. With 21 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Russia.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of September 2002, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

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

The Shiller PE ratio, also known as the P/E 10 ratio, is a valuation measure, generally applied to broad equity indices, that uses real per-share earnings over a 10-year period.

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.

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 12/31/2016.

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Strategist: Keep Calm, Tax Reform Is On Its Way
March 27, 2017

keep calm tax reform

Stocks had their worst day in months last Tuesday. The S&P 500 Index retreated more than 1 percent for the first time since October, and the small-cap Russell 2000 Index gave back more than 2 percent for the first time since September. As of Friday, the Dow Jones Industrial Average was down nine out of the past 10 days.

Throwing a monkey wrench into the Trump rally was fresh uncertainty House Republicans could successfully repeal and replace Obamacare, one of their headline campaign promises for seven years now. Failure to do so, it’s believed, could seriously push back tax reform. And the promise of tax reform—along with deregulation and infrastructure spending—is arguably what’s driven the Trump rally.

This uncertainty was confirmed Friday when President Donald Trump asked House Speaker Paul Ryan to pull the new health care bill from consideration—a stunning setback for the new president, who largely ran on his credentials as a master negotiator and closer.

Trading the “Trump Slump"

The thing is, the selloff was a huge overreaction. That’s the opinion of Marko Papic, geopolitical strategist with BCA Research, who visited our office last Thursday and briefed us on the investment implications of the domestic and European political climate. As always, Marko dazzled us with his deep intellect, quick wit and infectious enthusiasm.  

In his view, the market rally that immediately followed the election of President Donald Trump is still the “right” response. Among the companies that saw impressive returns were domestic, small-cap names, which have the most to gain (and less to lose) from Trump’s pledge to lower corporate taxes, slash regulations and raise tariffs. Small business optimism, meanwhile, posted its highest readings since 2004.

Small Businesses Investors Still Faith Trump
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Investors, according to Marko, are making too much of the Obamacare issue. Regardless of its failure to be repealed, tax reform is on its way. On Friday, Treasury Secretary Steven Mnuchin reassured Americans that we could still expect “comprehensive” tax reform by August. It’s also worth recalling that, even though he failed to reform health care during his eight years in office, President Bill Clinton still managed to tackle tax reform with the Omnibus Budget Reconciliation Act of 1993.

 

Does President Trump Lack Political CapitalIncreasing the likelihood that tax reform and infrastructure spending can be brought to light is, paradoxically, President Trump’s historically low approval rating. As you can see, he significantly trails the average rating of nine previous presidents during their same weeks in office. Congress’ job approval fares even worse at 28 percent, as of February.

What this means is the sound of the clock ticking is deafening. Midterm elections are less than 20 months away, and Trump could very well be a one-term president. According to Marko, this gives Trump tremendous political capital among those who share his vision and urgently wish to pass legislation toward that end.

Trump is seeking high growth now, not in 2020 or 2024, and I think it’s a mistake for investors to dismiss him,” Marko said, adding that the president’s goal of 4 percent GDP growth is more than attainable. But how?

Get Ready for Inflation

I’ve written about the inflationary implications of Trump’s more protectionist policies before. Over the past 30-plus years, free trade agreements (FTAs) such as NAFTA have certainly been easy on consumers’ pocketbooks. But the downside is that many U.S. companies have found it challenging, if not impossible, to compete with overseas companies whose operating expenses are a fraction of the cost, forcing them to shut down or move production out of the country.

There’s disagreement among economists and policymakers about the extent of FTAs’ impact on jobs and wages here in the U.S., but the case can be made that they’ve been negative. Certainly this is the case Trump and his supporters made during his campaign.

In the chart below, I compare U.S. wages as a percent of GDP between 1970 and 2013 and the KOF Globalization Index, which measures the economic, social and political dimensions of globalization on a scale from one to 100. The closer to 100, the more globalized a country is. As you can see, there’s at least a strong correlation between rising globalization and falling wages in the U.S.

Is Globalization Blame Lower Wages
click to enlarge

Trump’s director of the National Trade Council, Peter Navarro, argued in January that “there is no question” the U.S. needs a border adjustment tax (BAT) to bring jobs back and grow wages:

“Would you rather have cheap subsidized… goods dumped into Walmart and not have a job and not have your wages go up in 15 years, or would you like to pay a little bit more—not much—a little bit more, and have a job and have your wages going up? I think the American people are going to make that choice.”

Whether you agree with Trump and Navarro on this point, it’s important to recognize that inflation is poised to surge in the coming years. Consumer prices rose 2.7 percent year-over-year in February, the seventh straight month they’ve advanced. And if Trump manages to restrict immigration and raise trade barriers, we can expect prices to rise even more—along with manufacturing activity, wages and ultimately GDP growth.

Bullish on Europe

A final thought I want to share from Marko’s visit is his bullishness on Europe right now. “Forget about what you see in the news about Europe,” he said, “and look at the data.”

He has a point. For one, the Markit Flash Eurozone PMI, released Friday, showed the region’s manufacturing activity growing at its fastest pace in six years. For the month of February, its PMI rose to 56.7.

Terrorism remains a concern, as we saw in London last week, but the Syrian refugee crisis is emphatically done. Also overblown are Euroscepticism—or criticism of the European Union and its currency, the euro—secessionism and Trump-like populism. Geert Wilders’ far-right, anti-Muslim Party for Freedom (PVV) failed to secure an electoral victory in the Netherlands last week. Meanwhile, in France, the far-right Marie Le Pen still struggles to close the gap between herself and her two rivals, former prime minister of France François Fillon—currently being investigated on charges of corruption—and the socialist Emmanuel Macron.

Marie Le Pen No Trump
click to enlarge

With only one month remaining before France’s presidential election, Le Pen trails both rivals by about 20 points, throwing her candidacy into doubt. At this point in the U.S. presidential election, Trump had proven himself a very competitive candidate, trailing the much more politically experienced Hillary Clinton by single digits.

The key risk, according to Marko, is the upcoming Italian election, to be held no later than May 23. More and more, Italians are turning against the euro, and Euroscepticism is alarmingly high relative to other European Union countries. Whereas productivity is rising in Germany, France and Spain, Italy’s has stagnated since 2000.

Whatever happens, it’s important to monitor the eurozone’s PMI because, as I’ve often pointed out, it’s a precursor to commodities demand.

 

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

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 12/31/2016.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.

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.

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 KOF Globalization Index, which measures the economic, social and political dimensions of globalization, observes changes in the globalization of a series of countries over a long-term period. Based on 23 variables, the KOF Globalization Index 2016 covers 187 countries and relates to the period 1970 to 2013. The Index comprises an economic, a social and a political component and measures globalization on a scale from 1 to 100.

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Disrupt... Or Get Disrupted
March 6, 2017

disrupt or get disrupted

Last week I was in Vancouver attending YPO EDGE, the annual summit for business executives from more than 130 countries. YPO, which stands for Young Presidents’ Organization, has roughly 24,000 members worldwide. Together, they employ 15 million people and generate a massive $6 trillion in revenue annually.

What I appreciate about YPO is that it stresses peer-to-peer learning. Those who think it’s all about networking and cutting deals are missing the point.

The theme this year was disruption—how innovative breakthroughs in technology, medicine, transportation, machine learning and more have transformed, and will continue to transform, the world we live and work in.

Moneyball movie poster

“Disrupt, or get disrupted,” John Chambers, executive chairman and former CEO of Cisco, said during his conversation with CNBC’s Tyler Mathisen.

Chambers was speaking specifically of what he calls the “digital era,” which will soon replace the information age. The internet of things is expanding very aggressively right now, but it’s still in its infancy. In 10 to 15 years, Chambers says, more than 500 billion devices worldwide will be connected to the internet. This will irrevocably change how we live our daily lives, conduct business, deploy health care, invest and more.

So what does this mean? For one thing, Chambers estimates that as much as 40 percent of companies now in operation around the world will not exist “in a meaningful way” sometime within the next two decades. To survive, companies will need to reinvent themselves by integrating digitization into the fabric of their business strategy. In the world Chambers imagines, every company will be, at its core, a technology company, and data will become the new oil.

After his presentation, I had the pleasure to share a few words with Chambers in private. I was amazed to hear that, during his tenure as CEO in the 1990s, Cisco had an unbelievable compound annual growth rate (CAGR) of 65 percent. I was even more amazed to hear that he managed to turn 10,000 of his employees into millionaires. I don’t know if that’s a record, but it wouldn’t surprise me if it was. He told me that he wouldn’t be able to do the same today because of our current tax laws. In any case, Chambers embodies all that makes America great—curious, innovative, forward-thinking and willing to share his share his success with his employees.

How to Pick Home Run Stocks, According to Moneyball

A lot of what Chambers talked about during his presentation reminded me of one such disruptor, Billy Beane, the former general manager of the Oakland A’s and subject of Michael Lewis’ 2003 bestseller Moneyball: The Art of Winning an Unfair Game, which was later turned into a 2011 film starring Brad Pitt. Despite being about baseball, it’s one of the best books on stock-picking ever written.

Moneyball movie poster

For those unfamiliar, Moneyball tells the story of the A’s’ famous 2002 season and Beane’s efforts to build a competitive team despite a lack of revenue and the recent loss of several key players, among other disadvantages. Making matters worse, conventional factors for selecting new players—long perpetuated by the “wisdom” of industry insiders—had grown stale, antiquated… and just plain wrong. Appearance, personality and other biased perceptions were still very much part of the selection process.

With little else left to lose, Beane focused on what he felt were better indicators of offensive performance, including on-base percentage and slugging percentage. This allowed him to cut through the biases and find overlooked, undervalued, inexpensive players. “An island of misfit toys,” as Jonah Hill’s character Peter Brand puts it in the movie.

Beane, in other words, became a value investor—one who depended not on emotion or “instinct” but empiricism and quantitative analysis. All of the picks who fell into his model were mathematically justified.

The strategy worked better than anyone expected. Although the A’s had one of the lowest combined salaries in Major League Baseball, they finished the year first in the American League West. Their winning streak of 20 consecutive wins that season remains the longest in American League history.

Longest Winning Streaks in American League Baseball History
Team Number of Wins Season
A’s 20 2002
White Sox (tie) 19 1906
Yankees (tie) 19 1947
Royals 16 1977
Mariners (tie) 15 2001
Red Sox (tie) 15 1946
Twins (tie) 15 1991
Source: MLB, U.S. Global Investors

Beane changed the game—literally. Today, nearly every club in the MLB relies on “sabermetrics,” or baseball statistics, to select players. This helps them develop a “portfolio” of constituents whose overlooked potential gives the club the greatest odds possible of outperforming the “market.”

Finding Frugal Miners

As active managers, we try to do the same. Like Beane, we use a host of quantitative, top-down and bottom-up factors to help us find the most undervalued precious metals and resource stocks.

One such factor, low SG&A-to-revenue, I shared with you back in September. “SG&A” stands for “selling, general and administrative expenses” and refers to the daily operational costs of running a company that are not related to making a product. It stands to reason that a company with lower-than-average expenses relative to its revenue might have wider margins than a company with oversized expenses, but few investors look at this metric outside of quants.

Using this factor, we found 10 names whose average returns in the first quarter of 2016 amounted to a phenomenal 88 percent—nearly double what the Market Vectors Gold Miners ETF (GDX) returned over the same three-month period.

Top 10 Gold Names Based on SG&A-to-Revenue
click to enlarge

Of course, a company must meet several other factors before it qualifies for our models, but this is just one example of the type of rigorous quantitative analysis we conduct.

Probability Is in the Pudding

In Moneyball, Lewis quotes Dick Cramer, cofounder of STATS, a sports statistics company: “Baseball is a soap opera that lends itself to probabilistic thinking.”

The world of investing is the same, and lately there’s been no better soap opera than watching the major indices hit near-daily all-time highs on hopes that President Donald Trump and the Republican-controlled Congress can lower taxes, slash regulations and find the money to invest in the military and infrastructure. On Monday last week, the Dow Jones Industrial Average posted its 12th straight day of gains, a winning streak we haven’t seen in 30 years. And on Wednesday, it tied a previous record, set in 1987, for the fastest 1,000-point move. It took only 24 trading days for the Dow to surge from 20,000 to 21,000. (Since then it’s fallen below that mark.)

Dow Jones Industrial Average Ties Record for Fastest 1,000-Point MOve
click to enlarge

But like baseball, investing lends itself to probability thinking, and here we have experience as well.

As I’ve said a number of times before, we closely monitor the monthly Global Manufacturing Purchasing Managers’ Index (PMI) because it’s forward-looking rather than backward-looking, like gross domestic product (GDP). As such, we’ve found a high correlation between the PMI reading and the performance of commodities and energy one, three and six months out. When a “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has historically signaled a possible uptrend in crude oil, copper and other commodities. Our research shows that between February 2007 and February 2017, the S&P 500 Energy Index rose 10.2 percent, 79 percent of the time after a “cross-above,” while the S&P 500 Materials Index rose 7.2 percent, 86 percent of the time. Knowing this helps us anticipate the opportunities ahead.

Commodities and Commodity Stocks Historically Rose Three Months After PMI Cross-Above
click to enlarge

In February, the global PMI rose to 52.9, a 69-month high. It was also the sixth straight month of manufacturing expansion, which bodes well for commodities, materials, miners and other key assets we invest in.

Individual PMI readings for the U.S., eurozone and China—which together make up about 60 percent of global GDP—all advanced in February. 

Manufacturing Activity Accelerates in U.S., Eurozone and China
click to enlarge

The eurozone’s reading of 55.4 was its highest since April 2011, with expansion being led by the Netherlands, Austria and Germany. The region is more optimistic about the future than at any time since the debt crisis, and the weakened euro has provided a welcome tailwind to help boost sales and exports.

China’s PMI held above 50.0, indicating industry expansion, for the seventh straight month in February on improved new order inflows, higher demand and greater optimism.

The U.S., meanwhile, ended the month with an impressive 57.7, its highest reading since August 2014. Of the 18 manufacturing industries that are tracked, 17 reported growth, including machinery, computer and electronic products, metals, chemical products and others. New orders rose significantly, from 60.4 in January to 65.1 in February, as did backlog of orders, which advanced a whopping 7.5 percent.

Mark Your Calendars!

Join me later this month in St. Petersburg, Florida, for the 19th Anniversary Investment U conference! I’ll be speaking on gold, airlines and infrastructure. Tickets are now available. I hope to see you there!

 

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

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 12/31/2016: Harmony Gold Mining, Northern Star Resources, Regis Resources, Sibanye Gold.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

The 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.

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What These Four Global Leaders Have in Common with Trump
February 2, 2017

President Donald J. Trump was elected on promises to “Make America Great Again,” and since January 20 he’s already signed a number of executive orders to tighten border security and ease regulations. Whether you approve of his actions or not, no one can deny that many of Trump’s policies are a sharp departure from American politics of the last 70 years, which has emphasized globalism and interventionism.

It isn’t until we look at the bigger picture, though, that we realize Trump’s ascent is in line with a nationalistic wave that’s spreading across the globe, from Asia to Europe and beyond. As investors, it’s important that we familiarize ourselves with these global policymakers, thought leaders, mavericks and disruptors. Government policy, after all, is a precursor to change.

Below are four such leaders who have more in common with Trump than you might realize.  

1. Narendra Modi – India

Narendra Modi’s 2014 campaign slogan, “Good times ahead,” is in many ways cut from the same idealistic cloth as “Make America Great Again.” Indeed, the similarities between Modi and Trump are numerous. Both men have made it their top goals to strengthen economic growth by deregulating key industries and taking a protectionist approach to manufacturing, reflected in their respective “Make in India” and “America First” policies. A former tea merchant, Modi has often been described as a Hindu nationalist, with alleged goals to replace secularism with Hinduism as the guiding principle of Indian government and society. Like Trump, he’s interested in “draining the swamp” of public corruption. To that end, Modi took an extreme measure in November, eliminating all 500 and 1,000 rupee banknotes—90 percent of the nation’s currency—one of the effects of which was a sharp decline in December’s gold demand.   

Modi's Demonetization Scheme Impacted India's Gold Imports in December 2016
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2. Xi Jinping – China

Upon taking leadership of the People’s Republic of China in 2013, Xi Jinping made it his mission to crack down on corrupt “flies” (rank-and-file party officials) and “tigers” (senior officials) who were suspected of lining their pockets with black money. Since Xi began to “drain the swamp,” courts have prosecuted more than 200,000 officials on corruption-related charges and disciplined hundreds of thousands more. His campaign, which has been wildly popular with the masses, hit Asian gaming capital Macau particularly hard. Before the crackdown, Macau, a special administrative region of China, was adding the equivalent of a Las Vegas Strip every year in revenue, according to the Wall Street Journal. More recently, Xi instructed senior officials to lead by example, warning them there were “no forbidden areas in intra-party supervision, and no exceptions.”

Macau's Gaming Revenue Took a Hit from Chinese Anti-Corruption Measures
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3. Mauricio Macri – Argentina

It might be hard to believe now, but Argentina once ranked among the top 10 wealthiest nations in the world, following the U.K., U.S. and Australia. Following years of rule by the far-left Justicialist Party, however, the South American country languished in corruption and stagnation. In November 2015, voters said “no, gracias” to further leftist rule by electing businessman and two-term Buenos Aires mayor Mauricio Marci as president. It was an upset victory for the people of Argentina, who have seen their once-prosperous nation deteriorate under decades of Marxist policies. Since being sworn in, Macri has made business growth and the economy a number one priority, loosening regulations in the telecommunications sector, easing currency controls, cutting energy subsidies and eliminating tariffs.

Can Mauricio Macri Make
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4. Nigel Farage – United Kingdom

Not all disruptors need to be presidents or prime ministers. As founder and once-leader of the populist, right-wing UK Independence Party (UKIP), Nigel Farage has already made a lasting impact on the United Kingdom. The former commodities trader was instrumental in the campaign to leave the European Union (EU), and following the referendum’s passage, Farage invoked the 1996 sci-fi action film “Independence Day” by declaring June 23 “our independence day” from failed socialist rules, regulations and immigration policies. Reportedly close to Trump, Farage was the first British politician to meet with the then-president-elect after the November election and has since come out in full support of his more controversial policies, including the “extreme vetting” of refugees.   

Brexit Pounded the POund
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Honorable Mention, Looking Ahead

These five global mavericks, Trump included, are certainly not the only ones in power right now, and we can expect to see more in the months and years ahead. Emboldened by Brexit and Trump, other nationalistic candidates are rising in European polls, with several major elections coming up this year in France, Germany, Hungary, the Netherlands and elsewhere.

Among the candidates with a reasonable chance to gain control is Marine Le Pen, president of France’s Front National Party, which takes a hard Euroskeptic stance. (She is, in fact, daughter of its founder, Jean-Marie Le Pen.) If elected president of France in May, Le Pen pledges many dramatic changes, including withdrawing from  the Schengen Area, which eliminates border controls and passports among 26 European countries; giving priority to French citizens with regard to jobs and housing; reintroducing the death penalty and boosting spending on prisons; and issuing a “Frexit” referendum to quit the EU.

 

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