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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.

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
click to enlarge

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
click to enlarge

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"
click to enlarge

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
click to enlarge

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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Billions and Billions Pour into India and China
June 8, 2015
Indian-Prime-Minister-Narendra-Modi

It’s been a little over a year since Narendra Modi took office in India, and so far the results have been mostly positive for the South Asian country and the surrounding region. Among other achievements, Modi’s government has managed to enact important policy reforms, increase public investments in infrastructure, lower food inflation and generally open India up to business on a global scale.

CLSA’s chief equity strategist, Christopher Wood, gives the country accolades in his most recent newsletter. Wood writes that while “the halo effect has come off the Modi phenomenon” somewhat, India nonetheless remains “the most promising major emerging market story on a five- to 10-year view globally.”

Looking ahead, analysts forecast that India’s economy will expand between 7.5 percent and 8.5 percent for the 2015 and 2016 fiscal years, faster than any other G20 nation, including China.

India-Growth-Forecasts-for-2015-2016-are-strong
click to enlarge

This is growth that can be sustained for the long-term, a topic I wrote about last October. According to the International Monetary Fund, within the next decade and a half, “India will have the largest, and among the youngest, workforces in the world, and will need to create jobs for the roughly one hundred million young Indians who will enter the job market in the coming decade.” By 2050, India is expected to be the world’s second-largest economy based on purchasing power parity, following China.

Global investors recognize these positive data points and are piling into Indian equities, especially now that aggressive monetary easing in the country seems likely. CLSA’s Wood points out that $737 million a month on average have flowed into India-focused mutual funds since Modi took office last May, a dramatic reversal from the amounts seen prior to that.

Historically Low Interest Rates Help Push Chinese Equities Higher

Indeed, rate cuts have been constructive for not only Indian equities but also the Chinese market. As you can see below, easing cycles have historically coincided with strong market rallies in the MSCI China Index, a proxy for China H-shares, or stocks of Chinese companies listed on foreign exchanges. H-shares are one of the principal ways our China Region Fund (USCOX) has participated in the current bull market.

Chinese-Easing-Cycles-Have-Been-Bullish-for-Chinese-Stocksclick to enlarge

After three cuts in the most recent easing cycle, Chinese rates now stand at their lowest point ever, helping the index move higher in its quest to regain its November 2007 highs.

H-Shares Half as Cheap as Chinese Domestic Equities

Judging from the rally in H-shares, some investors might be concerned that the market is too expensive right now. On the contrary, H-shares, expressed below by the Hang Seng Index, are trading at a much cheaper multiple of 8.9 times estimated earnings to A-shares’ 17.4, a discount of 48 percent.

China-H-Shares-are-48-percent-cheaper-than-china-a-shares
click to enlarge

You can also see that both H-shares and A-shares have traded at much higher multiples in the past, evidence that the rally is not yet overdone.

When we compare this trading cycle with the previous major rally that occurred from June 2005 to October 2007, we see that the run-up has plenty of room to climb higher.

Shanghai-Composite-Index-is-Outpacing-the-Previous-Major-Bull-Rally
click to enlarge

“We might be in the middle of a bull market, not the end,” says Xian Liang, portfolio manager of USCOX. 

Like Indian equities, Chinese equities are attracting massive amounts of fund inflows. For the week ending May 27, global investors reallocated $4.6 billion to A-shares ahead of FTSE indexing.

Global-investors-reallocation-to-china-in-progress-what-about-you
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Last Thursday, the Shanghai Composite Index fell 6.5 percent, probably due to profit-taking. This represented the most significant correction since January, when the Chinese government curbed margin lending. It’s important for investors to look beyond the short-term noise and recognize that any correction this cycle could be seen as an opportunity to accumulate.

Again, USCOX continues to participate in this bull market through China H-shares and A-share exchange-traded funds. This helped the fund achieve a “golden cross” in January, which occurs when the 50-day moving average crosses above the 200-day moving average.

USGIs-China-Region-Fund-Achieved-a-Golden-Cross-on-January-2-2015
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Such technical indicators are seen as harbingers of strong growth. This particular move shows that the Chinese market has the support it needs to maintain upward momentum.

American Companies Buy Back $71 Billion of Stock in May Alone

As for American equities, they continue their trend of rewarding shareholders in the form of dividends and stock buybacks. Last week I mentioned that the amount in buybacks is expected to reach a staggering $1.2 trillion by year’s end, surpassing the all-time high of $863 billion set in 2007.

Stock market research firm Birinyi Associates reports that U.S. companies repurchased over $71 billion of shares in May alone.

May-Stock-Buyback-Amount-was-Second-Highest-in-17-Years
click to enlarge

One more compelling reason we find the domestic market so attractive, and offer investors the opportunity to participate with our All American Equity Fund (GBTFX). All of the holdings in GBTFX either pay a dividend or are currently buying back their stock.

Countless Jets Will Need to Be Replaced in the Coming Years

A final note I’d like to end on is the sheer number of jumbo jets that will need replacing in the coming years as domestic airlines seek to incorporate smaller, more efficient aircraft. Manufacturers Boeing and Airbus certainly have their work cut out for them and, in fact, face years’ worth of backlogs.

Domestic-Airlines-Seek-More-Fuel-Efficient-Aircraft-Older-Models-are-Put-to-Pasture

Business Insider recently shared a slideshow that reveals what happens when airlines retire older models in their fleet. Many of them end up at the Southern California Logistics Airport, where they wait to be resold, dismantled or put back into commission. You can view the slideshow here.

Total Annualized Returns as of 3/31/2015:
Fund One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
China Region Fund 6.63% 0.52% 5.14% 2.97% 2.55%

 

Expense ratios as stated in the most recent prospectus. The expense cap is a voluntary limit on total fund operating expenses (exclusive of any acquired fund fees and expenses, performance fees, extraordinary expenses, taxes, brokerage commissions and interest) that U.S. Global Investors, Inc. can modify or terminate at any time, which may lower a fund’s yield or return. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus (e.g., short-term trading fees of 0.05%) which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

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.

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 MSCI China Free Index is a capitalization weighted index that monitors the performance of stocks from the country of China. The Hang Seng Index is a capitalization-weighted index of 33 companies that represent approximately 70 percent of the total market capitalization of The Stock Exchange of Hong Kong. The Shanghai Stock Exchange Composite Index is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.

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 China Region Fund and All American Equity Fund as a percentage of net assets as of 3/31/2015: The Boeing Co. 0.00%, 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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Innovation and Efficiency Drive U.S. Oil Supply and Demand
March 30, 2015

Innovation and Efficiency Drive U.S. Oil Supply and Demand

Oil mounted a strong surge last Thursday as Saudi Arabia-led forces carried out a series of airstrikes against Houthi militants in Yemen, part of which is bordered by the Bab el-Mandeb strait, an important shipping “chokepoint.” For the first time in three weeks, Brent oil prices rose to $59 while West Texas Intermediate (WTI) crude closed above $51 after an incredible seven-day rally.

However, the conflict wasn’t enough to sustain the uptrend, and prices slipped today—WTI to $48.41.

“The significance of the conflict was overblown, at least in terms of its effect on oil,” says Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX). “There’s still too much supply.”

Indeed, U.S. crude oil supply is noticeably on the rise. As you can see in the chart below, the weekly crude reserves are significantly above the five-year average and sharply headed higher. 

U.S. Crude Oil Reserves
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Last week we learned that storage at Cushing, Oklahoma, reached 54.4 million barrels, a new high. Cushing is important to monitor because it’s the nation’s largest storage facility and serves as the pricing point for WTI. Since it was upgraded in 2011, maximum capacity now stands at 85 million barrels.

But if the current fill rate keeps up—2.12 million barrels a week—the cap could be reached as soon as this June, however unlikely that seems. Vehicle sales are up, as is the number of miles being driven on U.S. highways, and the busy summer travel season is fast approaching.

American Innovation to Thank

Simply put, technological advances such as hydraulic fracturing, or fracking, have made the oil-extraction process much more efficient than anything we’ve seen before. Amazingly, output continues to climb even as the number of rigs in operation has dropped for the fifteenth week.

U.S. Rig Count Falls for Fifteenth Week, but Oil Production continues to Climb
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“Productivity is up 50 percent over the last five years,” Brian says. “There’s already been some slowdown, but we’re still seeing the strong momentum from last year.”

That momentum could be enough to propel us toward 10 million barrels a day, something we haven’t seen in this country since 1970.

This incredible rise in efficiency has led some analysts to foresee a possible “storage crisis” in North America. It’s possible—though, again, unlikely—that we’ll eventually reach a point when there just isn’t any more commercial storage space. “Crisis” is certainly a loaded word, but such an event could serve as the catalyst that forces companies to make meaningful production cuts, which would help oil prices recover.

In the meantime, energy storage and transportation companies such as Kinder Morgan and Tsakos Energy Navigation are profiting in a world of abundant oil. Tsakos recently saw strong trading after it announced a dividend, and last week Morgan Stanley gave the company a “buy” rating.

Another area that’s benefited in this climate is the plastic packaging and container industry. Since oil prices began to go off the cliff last summer, returns for Graphic Packaging have climbed more than 20 percent; Sealed Air, 39 percent; and Berry Plastics, 42 percent.   

Demand Not Dissipating

At the same time that fracking has pushed daily U.S. oil output to 32-year highs, improvements to our vehicles’ internal combustion engines have increased the number of miles we can drive on a tank of gas to all-time highs.

Fuel Efficiency in U.S. Cars and Trucks is Trending Upward
click to enlarge

Requiring less fuel to get farther doesn’t mean demand is slipping. Quite the opposite, actually. Car and truck sales are expected to climb for the sixth straight year in 2015, a winning streak we haven’t seen in over 50 years.

U.S. Car and Light Truck Sales Return to Pre-Recession Levels
click to enlarge

Automobile pricing and information website TrueCar predicts that 17 million light-weight vehicles will be driven off car lots by the end of 2015, a 10-year high.

Since 2009—when sales plummeted to roughly 10 million units, their most depressed state since 1982—year-over-year sales growth has surged as the U.S. has pulled itself out of the recession. In each of the past 12 months, 200,000 or more new jobs were made available to Americans, the most since 1977.

Americans are not only buying more vehicles—some as new additions, others to replace aging clunkers—but they’re also taking them on the road more, especially now that national average fuel prices have fallen more than 31 percent from a year ago.

In fact, Americans drove a record 3.05 trillion miles on U.S. highways in January for the 12-month period, breaking the previous record set in November 2007. And with the busy summer travel season ahead of us, we should expect to see this number rise even more.   

Americans Drove a Record Number of Miles on U.S. highways in January
click to enlarge

Three trillion miles, by the way, is equivalent to taking more than 200 round trips to Pluto.

Airlines improving their fuel efficiency

That’s a lot of fuel being consumed—even if our vehicles are more fuel-efficient.

According to the Energy Information Administration (EIA), gas consumption in 2015 will rise 1 percent over the previous year to reach 9 million barrels a day—a little under the number of barrels of oil the U.S. now produces daily.

Add to that the fuel consumption coming from U.S. airlines, which are also working on improving fuel-efficiency. As I pointed out earlier this month, the number of miles flown on both domestic and international carriers is flying higher, along with the number of seats per flight.

Down Under

Last week I was in Melbourne, Australia, attending a conference for chief executives from all over the world. It’s always inspiring and exhilarating to meet and share ideas with so many other global innovators, thinkers and problem-solvers. This is ultimately what’s needed to cultivate the ideas that can lead to the sorts of life-changing advancements I discussed above.

Have a blessed week, and happy investing! 

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. 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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Global Resources Fund as a percentage of net assets as of 12/31/2014: Kinder Morgan, Inc. 0.00%, Tsakos Energy Navigation Ltd 0.00%, Graphic Packaging Holding Co. 0.00%, Sealed Air Corp. 0.0%, Berry Plastics Group, Inc. 0.0%,

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.

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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A Tale of Two Economies: Singapore and Cuba
March 26, 2015
A Victoria's Secret in the Toronto Pearson International Airport

It would be nearly impossible to find two world leaders in living memory whose influence is more inextricably linked to the countries they presided over than Cuba’s Fidel Castro and Singapore’s Lee Kuan Yew, who passed away this Monday at the age of 91.

You might find this hard to believe now, but in 1959—the year both leaders assumed power—Cuba was a much wealthier nation than Singapore. Whereas Singapore was little more than a sleepy former colonial trading and naval outpost with very few natural resources, Cuba enjoyed a thriving tourism industry and was rich in tobacco, sugar and coffee.

Fast forward about 55 years, and things couldn’t have reversed more dramatically, as you can see in the images below.

Cube in 1950, Singapore in 1950, Cuba today, Singapore today

The ever-widening divergence between the two nations serves as a textbook case study of a) the economic atrophy that’s indicative of Soviet-style communism, and b) the sky-is-the-limit prosperity that comes with the sort of American-style free market capitalism Lee introduced to Singapore.

Sound fiscal policy, a strong emphasis on free trade and competitive tax rates have transformed the Southeast Asian city-state from an impoverished third world country into a bustling metropolis and global financial hub that today rivals New York City, London and Switzerland. Between 1965 and 1990—the year he stepped down as prime minister—Lee grew Singapore’s per capita GDP a massive 2,800 percent, from $500 to $14,500.

Since then, its per capita GDP based on purchasing power parity (PPP) has caught up with and zoomed past America’s.

Lee Kuan Yew's Singapore Flourished while Fidel Castro's Cuba Floundered

Under Castro and his brother Raúl’s control, Cuba’s once-promising economy has deteriorated, private enterprise has all but been abolished and the poverty rate stands at 26 percent. According to the CIA’s World Factbook, “the average Cuban’s standard of living remains at a lower level than before the collapse of the Soviet Union.” Its government is currently facing bankruptcy. And among 11.3 million of Cuba’s inhabitants, only 5 million—less than 45 percent of the population—participate in the labor force.

Compare that to Singapore: Even though the island is home to a mere 5.4 million people, its labor force hovers above 3.4 million.

Singapore Had Third-Highest GDP Based on Purchasing Power Parity (PPP) Per Capita

Because of the free-market policies that Lee implemented, Singapore is ranked first in the world on the World Bank Group’s Ease of Doing Business list and, for the fourth consecutive year, ranked second on the World Economic Forum’s Global Competitiveness Report. The Heritage Foundation ranks the nation second on its 2015 Index of Economic Freedom, writing:

Sustained efforts to build a world-class financial center and further open its market to global commerce have led to advances in… economic freedoms, including financial freedom and investment freedom.

Cuba, meanwhile, comes in at number 177 on the Heritage Foundation’s list and is the “least free of 29 countries in the South and Central America/Caribbean region.” The Caribbean island-state doesn’t rank at all on the World Bank Group’s list, which includes 189 world economies.

Many successful international businesses have emerged and thrived in the Singapore that Lee created, the most notable being Singapore Airlines. Founded in 1947, the carrier has ascended to become one of the most profitable companies in the world. It’s been recognized as the world’s best airline countless times by dozens of groups and publications. Recently it appeared on Fortune’s Most Admired Companies list.

Singapore AIrlines

Xian Liang, portfolio manager of our China Region Fund (USCOX), notes that Lee’s key legacy is an emphasis on pragmatism and adaptability.

Lee was a great visionary indeed,” Xian says. “He achieved wonders, fast-tracking Singapore’s GDP growth to U.S. levels.

We at U.S. Global Investors honor the legacy of Lee Kuan Yew, founder of modern-day Singapore. He showed the world that when a country chooses to open its markets and foster a friendly business environment, strength and prosperity follow. Even on the other side of the globe, the American Dream lives on.

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 Global Competitiveness Index, developed for the World Economic Forum, is used to assess competitiveness of nations. The Index is made up of over 113 variables, organized into 12 pillars, with each pillar representing an area considered as an important determinant of competitiveness: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation.

The Ease of Doing Business Index is an index created by the World Bank Group. Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights.

The Index of Economic Freedom is an annual index and ranking created by The Heritage Foundation and The Wall Street Journal in 1995 to measure the degree of economic freedom in the world's nations.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 12/31/2014: Singapore Airlines 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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The Airline Industry Ascended to New Records in 2014
March 16, 2015

Just as the U.S. economy is in full-recovery mode, so too is the airline industry. It’s lately made an impressive about-face from only a decade ago and, in 2014, soared to several new benchmarks.

This industry is flying high again.

Airlines, Airplanes, Airline Industry Ascended to New Records in 2014, Jets

In 2014, a record 98 million passengers flew to foreign destinations on U.S. carriers. Meanwhile, 662 million traveled domestically by air, the highest number since 2007.

According to the U.S. Department of Transportation, the percentage of seats filled in 2014 climbed to 83.4 percent—another fresh record.

This year, the daily number of available seats for international-bound flights out of the U.S. will rise to an all-time high of over 350,000. That’s 20,000 more seats per day than were available just last year.

Daily Available Seats on International-Bound U.S. Flights at an All-Time High
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And the success stories just keep on coming. Air travel in March and April is typically strong, but this season is expected to be the strongest since before the recession.

U.S. Airline Onboard passengers expected to be highest since 2007
click to enlarge

I often travel through Houston, and it’s a good case study to illustrate the boom in air travel demand, domestic as well as international. In 2014, the city’s two main airports, the 46-year-old George Bush Intercontinental Airport—it was renamed in 1997—and William P. Hobby Airport, both broke passenger traffic records that had been set in the previous year. Intercontinental saw an increase of 9.2 percent in international travelers and 3.6 percent in domestic fliers, while Hobby’s total traffic for the year rose to 11.9 million passengers—an all-time high for the fifth straight year.

All told, over 53 million people from around the globe passed through these two Houston airports. And yes, you guessed it—that’s another new record.

Waxing Wanderlust

Some of the key factors driving this unprecedented air travel demand are an expanding U.S. economy, rising personal incomes and the highest consumer confidence level since before the recession.

U.S. Consumer Confidence at Pre-Recession Levels
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In a recent poll, the travel website TripAdvisor surveyed 44,000 people around the world on a number of travel-related issues. Of the Americans who participated, 67 percent reported that they were planning an international trip for leisure, up from 50 percent last year.

TripAdvisor also wanted to find out where participants had been in the last 12 months, where they planned on going in the next 12 months and what their dream destination was. Although Australia topped the list of ideal vacation spots, followed closely by the U.S., less than 5 percent said they had actually made the trip down under.

On the other hand, about 20 percent of respondents, or close to 8,800 people, said they had visited the U.S. in the last year, while the same percentage of people said they would likely travel to the U.S. in the coming months. 

Top Destinations for International Travelers: Past and Future
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Air travel between the U.S. and China is expected to increase now that multi-entry visas for citizens of both countries have been extended from one year to 10 years. International flights out of China have already been trending steadily upwards for years, a result of a growing middle class. The visa policy revision should help ramp up Chinese outbound air travel even more.

Chinese Outbound Travelers Increasing Every Year
click to enlarge

As I pointed out last month, Chinese travelers are the world’s highest spenders while on vacation. The average Chinese visitor spends between $6,000 and $7,200 per trip to the U.S. The visa revision is welcome news not only for airlines such as Air China, which we own in our China Region Fund (UXCOX), but also hotels, restaurants, car rental companies and others in the travel and leisure services industry.

It should also be a tailwind to luxury retailers that are increasingly setting up shop in international airports.

The “Sixth Continent” and Luxury Shopping

For the first time in 2013, more than one billion people traveled internationally, prompting luxury brand executives to name this cohort “the sixth continent.” With there being such a huge surge in captive consumers, we are entering a golden age of luxury shopping opportunities in airports that might very well supplant tacky souvenir shops and cell phone accessory kiosks. In many airports around the globe, you’re now just as likely to pass by a Coach—which we own in our All American Equity Fund (GBTFX)— or a Tiffany & Co.—held in our Gold and Precious Metals Fund (USERX)—as you are a Cinnabon.

A Victoria's Secret in the Toronto Pearson International AirportAccording to retail consultancy firm Verdict Retail, sales in airport gift shops are expected to grow 73 percent between 2013 and 2019, at which point the entire global market will be worth an astounding $59 billion. Leading the way are beauty products and alcohol, as shoppers seek to avoid value-added taxes and duties.

Paris-based advertising firm JCDecaux, after conducting a study of people’s airport spending habits in eight countries, found that the three most frequently purchased types of merchandise were fashion items, cosmetics & high-end fragrances and general accessories. This is a clear sign that luxury shopping while travelers await their connecting flights is becoming more of the norm rather than the exception.

Focusing on Shareholders

It’s easy to forget that between 2005 and 2008, about 70 percent of the U.S. airline industry was operating under Chapter 11 bankruptcy protection, including leaders such as Delta Air Lines, which we hold in our Holmes Macro Trends Fund (MEGAX). The industry’s recent recovery is in lockstep with many other once-struggling industries that were forced to consolidate and restructure their businesses following the 2007-2008 financial crisis.

How things have changed since then. As I pointed out last month, airlines posted some of their best earnings ever last year. Many are now turning their attention toward making investors happy by paying dividends, boosting earnings per share and buying back their stock. According to SEC filings, 10 U.S. airlines—including Delta and Alaska Air, which we also own in MEGAX—are collectively paying down massive amounts of debt.

U.S. Airlines Tackling the Mountain of Debt
click to enlarge

A recent Goldman Sachs equity research report finds that “U.S. airline stocks are trading at comparatively attractive valuations relative to the S&P 500. The discount is 48 percent.” It adds: “Not only are the U.S. airlines generating more growth, we expect their cash returns on cash invested (CROCI) to improve the most in 2015,” compared to previous years.

It will be challenging indeed for the industry to meet these expectations. Last year, after all, was “unusually strong,” according to management consultancy firm Oliver Wyman. But airlines have so far charted a very promising course.

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.

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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 China Region Fund, Gold and Precious Metals Fund, All American Equity Fund and Holmes Macro Trends Fund as a percentage of net assets as of 12/31/2014: Air China Ltd. 1.11% China Region Fund; Alaska Air Group, Inc. 1.29% Holmes Macro Trends Fund; Coach, Inc. 1.18% All American Equity Fund; Delta Air Lines, Inc. 1.28% Holmes Macro Trends Fund; Goldman Sachs Group, Inc. 0.00%; JCDecaux SA 0.00%; Tiffany & Co. 0.59% Gold and Precious Metals Fund; TripAdvisor LLC 0.00%.

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Share “The Airline Industry Ascended to New Records in 2014”

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