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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.

The $330 Billion Global Tax Break
December 22, 2014

Warren Buffett: The ultimate contrarian investor.In an October 2008 op-ed in the New York Times, Warren Buffett famously advised: “Be fearful when others are greedy, and be greedy when others are fearful.”

Whereas most investors during that time of financial panic were dumping their freefalling U.S. equities, Buffett was snatching them up at such great volume that he imagined his personal, non-Berkshire Hathaway portfolio would soon be composed only of domestic stocks.

“I haven’t the faintest idea as to whether stocks will be higher or lower a month—or a year—from now,” he continued. “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.”

The same is true for oil prices. I can’t say when oil will begin to recover or by how much. What I can say is this: For far too many investors, by the time they gain back the confidence to put money into oil stocks again, the rally might have already taken off, making it challenging to capture the full benefit of the upswing.

In the 1860s Central Pacific Railroad Employed Over 12000 Chinese LaborersThink of it this way. Every Black Friday, merchandise is discounted to such an extent that thousands of bargain shoppers are willing to camp overnight in parking lots to be the first inside. When the doors open, people literally get pushed, shoved, elbowed and trampled on.

But too often, the stock market works in a curiously opposite way. When certain stocks drop in price, investors scramble for the exit instead of picking up the bargains.

Oil Extremely Oversold

Oil tycoon T. Boone Pickens recently told Mad Money’s Jim Cramer that oil would return to $100 within 12 to 18 months. Again, there’s no guarantee that this will happen—and keep in mind that it’s in Pickens’ self-interest that oil reach these figures again—but if it does, the most opportune time to participate in the oil trade could be now when stocks are at a discount.

Pickens’ prediction aside, there are sound reasons to believe that oil prices will be normalizing sooner rather than later.

For one, oil prices are currently below many countries’ breakeven prices. This could finally encourage the Organization of the Petroleum Exporting Countries (OPEC) to cut production, so long as Saudi Arabia got assurances from fellow members that they would comply with the cuts. Where they are right now, prices simply aren’t sustainable. According to Business Insider, oil rigs in the Permian Basin have fallen by nine; those in Williston by seven; and those in Marcellus by one.

Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), believes that the bottom for oil prices might have already been reached.

“Aggressive capex cuts in the oil industry right now will lead to lower supply in 2015 and 2016, increasing demand and pushing up prices,” Brian says. “Plus, there might be a positive seasonal trading session over the next few weeks, with a possible laggard rebound in January.”

Although past performance is no guarantee of future results, the chart below, which takes into account 30, 15 and five years’ worth of seasonal data for oil prices, illustrates Brian’s point. In the 30-year range, a steady decline in prices began in October and bottomed in February. This was followed by a substantial rally that carried us through the first and second quarters of the year. It’s possible the same will happen again early next year.

West Texas Crude Oil Historical Pattern
click to enlarge

“The theme going into 2015 is mean reversion,” Brian said in a Frank Talk a couple of weeks ago. “Oil prices are below where they should be, and hopefully they’ll start gravitating back to the equilibrium price of between $80 and $85 a barrel.”

Bad News Is Good News

While we wait for oil to revert back to its mean, however, the world can enjoy and benefit from inexpensive gas. Call it the “oil peace dividend.” Here in the U.S., the current average for a gallon of gas is $2.45. Just one year ago, it was $3.21 per gallon, $0.76 higher. Over the course of a year, those extra cents add up.

But the U.S. isn’t the only country that benefits from affordable fuel.

In an article titled “The Saudi Stimulus,” Jon Markman writes that the global economy is looking to save hundreds of billions of dollars on an annual basis:

According to EIA [U.S. Energy Information Administration] data, consumption of crude oil during the latest 12 months was 6.9 billion barrels. So the price drop from $107/barrel at the June 2014 high to $59 today represents a total presumptive savings of $332 billion per year.

In a time when China, the European Union and other major markets are trying to jumpstart their economies, a $330 billion tax break can only come as good news. It should help in stimulating spending and driving global economic growth.

The Weakening Russian Bear

It’s impossible not to discuss falling oil prices without also touching on Russia, half of whose budget depends on $100-per-barrel oil exports. In the past month alone, the federation’s currency has plunged more than 30 percent to 60 rubles to the dollar as Brent oil has slipped nearly 25 percent.

Russian Currency's Tumble Tied to Falling Brent Oil Prices
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President Vladimir Putin couldn’t have chosen a worse time to annex the Crimean peninsula because now the region must be subsidized with money Russia doesn’t really have at the moment. (That’s not to say, of course, that there was ever a good time to invade Ukraine, or that Putin could have predicted the dramatic decline in Brent oil prices.) But even before the ruble began to unravel, stocks in Russia’s MICEX Index had already taken a hit in July and fallen out of lockstep with other emerging markets.

Russian Stocks Decoupling from Emerging Markets
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There’s no lack of commentators making comparisons between the Russian Federation’s current tailspin and the country’s 1998 debt crisis. But a more apt comparison might be the lead-up to the collapse of the Soviet Union in 1991, given the many uncanny parallels between then and now involving oil.

Yegor Gaidar, acting prime minister of Russia between 1991 and 1994, wrote in 2007:

The timeline of the collapse of the Soviet Union can be traced to September 13, 1985… The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms.

As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive.

Today, Russia is similarly hemorrhaging capital as a result of international sanctions and crashing oil prices, prompted by both the American shale oil boom and OPEC’s inaction in stabilizing the commodity at last month’s meeting.

It’s unclear for how long Russia’s government can support its oil-dependent budget. During his press conference last Thursday, President Putin conceded that spending cuts were unavoidable, but that “under the most unfavorable external economic scenario, this situation may go on for about two years.”

Some readers might find that prognosis a little too optimistic. It could be that Russia is in for a much lengthier period of damage control.

USGI’s Emerging Europe Fund Resilient to Russia’s Woes

It states in our prospectus that “government policy is a precursor to change.” As such, we believe Russia poses too great of a geopolitical risk for our investors. Because of nimble active management, our Emerging Europe Fund (EUROX) now has minimal exposure to Russia, thereby avoiding losses as significant as the Market Vectors Russia ETF (RSX).

Historic Cost Trends in Gold Production
click to enlarge

MSCI Emerging Markets Europe 10/40 Index Country WeightsThis decision has also enabled the fund to outperform its benchmark, the MSCI Emerging Markets Europe 10/40 Index, which still maintained a 46-percent weighting in Russia as of the end of November. The index has consequently fallen more than 30 percent year-to-date, compared to EUROX’s 22.5 percent.

Since trimming nearly all of our Russian holdings, Turkey has replaced the beleaguered federation as our largest weighting in EUROX. The Borsa Istanbul 100 Index is currently up 16 percent year-to-date.

As anyone who watches the news closely knows, the situation in Russia is evolving rapidly day-to-day. We will continue to monitor events that could trigger opportunities in the region. In the meantime, check out EUROX’s current regional breakdown.

I would like to conclude by wishing all of our loyal shareholders as well as Investor Alert and Frank Talk readers a Merry Christmas, Happy Hanukkah and Season’s Greetings!

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.

For information regarding the investment objectives, strategies, liquidity, risks, expenses and fees of the Market Vectors Russia ETF, please refer to that fund's prospectus.

 

Total Annualized Returns as of 09/30/2014
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Ratio After Waivers
Emerging Europe Fund -14.44% -1.61% 3.21% 2.13% n/a
Market Vectors Russia ETF (RSX) -18.53 -2.23 n/a 0.71% 0.63%
MSCI EM Europe 10/40 Index -13.19 1.04% 7.01% n/a n/a

Expense ratios as stated in the most recent prospectus. 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.

EUROX vs. Market Vectors Russia ETF (RSX)

Investment Objective: The Emerging Europe Fund is an actively managed fund that takes a non-diversified approach to the Eastern European market. The fund invests in companies located in the emerging markets of Eastern Europe.

The Market Vectors Russia ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Russia Index. The Index includes companies that are incorporated in Russia or that generate at least 50% of their revenues (or, where applicable, have at least 50% of their assets) in Russia.

Liquidity: The Emerging Europe Fund can be purchased or sold at a net asset value (NAV) determined at the end of each trading day.

RSX issues and redeems shares at NAV only in a large specified number of shares, each called a “Creation Unit,” or multiples thereof. A Creation Unit consists of 50,000 shares. Individual shares of RSX may only be purchased and sold in secondary market transactions through brokers. Shares of RSX are listed on NYSE Arca Inc. (“NYSE Arca”) and because shares trade at market prices rather than NAV, shares of RSX may trade at a price greater than or less than NAV.

Safety/Fluctuations of principal/return: Loss of money is a risk of investing in the Emerging Europe Fund, as well as the Market Vectors Russia ETF. Shares of both of these securities are subject to sudden fluctuations in value, and when sold, may be worth more or less than their original cost.

Tax features: The Emerging Europe Fund may make distributions that may be taxed as ordinary income or capital gains. Under current federal law, long-term capital gains for individual investors in the fund are taxed at a maximum rate of 15%.

RSX’s distributions are taxable and will generally be taxed as ordinary income or capital gains.

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. 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.

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

The MSCI Emerging Markets Europe 10/40 Index (Net Total Return) is a free float-adjusted market capitalization index that is designed to measure equity performance in the emerging market countries of Europe (Czech Republic, Greece, Hungary, Poland, Russia, and Turkey).  The index is calculated on a net return basis (i.e., reflects the minimum possible dividend reinvestment after deduction of the maximum rate withholding tax). The index is periodically rebalanced relative to the constituents' weights in the parent index.

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.

The Borsa Istanbul Banks Index (XBANK) is a capitalization-weighted free float adjusted Industry Group Index composed of National Market listed companies in the banking industry. All members of the index are also constituents of the XUMAL Sector Index.

The Market Vectors Russia Index is a modified market cap weighted index that tracks the performance of the largest and most liquid companies in Russia. Its unique pure-play approach expands local exposure to include offshore companies that generate at least 50% of their revenues in Russia.

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

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 and Emerging Europe Fund as a percentage of net assets as of 9/30/2014: Berkshire Hathaway 0.00%, Cubist Pharma 0.00%, Market Vectors Russia ETF 0.00%, Merck & Co., Inc. 0.00%. 

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. 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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Greece’s Darkest Hour Before Its Dawn
November 6, 2014

“Much better than expected.”

That’s how John Derrick, Director of Research here at U.S. Global Investors, summed up his trip to Greece, the beleaguered country that hopes to put its financial woes behind it and rise again like the phoenix from the Mediterranean culture’s ancient mythology.

Last week I spoke with John about his trip, which took place following his visit to Turkey to meet with companies held in our Emerging Europe Fund (EUROX). Here are the highlights of our conversation.

So why do you say “better than expected”?

Greece has been in recession for six years now but it’s finally on track to turn things around. Its economy has stabilized and is beginning to improve since the crisis. It has a balanced budget. The projected GDP growth rate for this year is 0.6 percent, which doesn’t sound great, but it would be the first time since the end of 2008 that it’s been above zero. We’d like to see the purchasing manager’s index improve, though—it’s been below 50.0 for four of the past five months, indicating that the country’s manufacturing sector is still in contraction mode.

Turkish Banks Starting to Recover After a Disappointing September
click to enlarge

Greek citizens are fed up with austerity measures that were set in place to secure a multibillion-dollar bailout, and their egos were bruised after their country was downgraded last year from a developed market to an emerging market. But as the saying goes, the darkest hour is just before the dawn, and we’re now beginning to see a glimpse of the sunrise, so to speak. The painful adjustments have already been made, they’re behind Greece now, and the worst appears to be over.

Prime Minister Antonis Samaras, in fact, plans to ease out of the European Union’s bailout by the end of this year, which would be a whole calendar year ahead of schedule. In doing so, he might also siphon support away from anti-austerity candidates in the far-left Syriza party.

The mostly positive results from the European bank stress test seem to confirm that things are better than expected.

They do. There was a lot of anxiety going into the results, and there was this collective sigh of relief after they came back better than expected. Markets responded positively. Of the 25 banks that the European Central Bank (BCB) failed, only two were Greek: Eurobank and the National Bank of Greece. This shows that the Greek financial sector is trying to stabilize in a time when it’s predicted that the eurozone might face its third recession in six years.

The slump in the Greek shipping industry, very important to Greece’s economy, is partially to blame for the country’s current troubles. Has it improved any?

Not by much, unfortunately. I met with two shipping companies, Goldenport and Tsakos Energy Navigation. What I took away from these meetings is that dry bulk shipping rates are not recovering as expected. The industry is washed out, with many companies having been put out of business over the last three years.

The good news is that this is probably the time to accumulate these types of companies, as many of them are trading at attractive discounts to net asset values (NAVs). But it’s still a waiting game until rates head higher.

On the crude and product transport side, lots of boat supply companies are hitting the market in the next two years, and rates have recovered some. They might move modestly higher in the short term. Tsakos has talked about a master limited partnership (MLP) structure before, but that sounds like a 2016 event if it ever gets done.

Talk a little about the Greek retailing industry.

This was the best part of my visit to Greece. I met with two retailers, Jumbo and Fourlis, both of which are seen as survivors in a down economy, with very strong market share.

Jumbo, kind of like a low-end Target, has 40-percent market share in its category. I visited the store and its layout resembles an IKEA—there aren’t any traditional aisles, and you basically have to walk through the whole store to get out. Its key products are toys, seasonal items and stationery. One of the most popular retailers in Greece, Jumbo plays its cards pretty close to the chest. Its management team doesn’t go to or hold conferences—they don’t even do conference calls, actually. This hurts valuation, but the financials have been very strong.

As for Fourlis, it holds the IKEA franchise for the region and also owns a sporting goods franchise, Intersport, which is seeing positive year-over-year same-store sales. Besides home furnishings and sporting goods, it’s also involved in fashion and electronic appliances. The company’s been operating since 1950 and has locations not just in Greece but also Romania, Bulgaria, Turkey and Cyprus. With the recent Greek equity selloff, this is likely an opportunity.

Check out our Emerging Europe Fund (EUROX) for more 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.

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. 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 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.

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 as a percentage of net assets as of 9/30/2014: Eurobank Ergasias 0.00%, National Bank of Greece 0.00%, Goldenport Holdings, Inc. 0.00%, Tsakos Energy Navigation, Ltd. 0.00%, Jumbo S.A. 1.79%, Fourlis Holdings S.A. 0.00%, IKEA 0.00%, Intersport 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.

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Talking Turkey with John Derrick
October 28, 2014

Upon his arrival in Istanbul, John Derrick prepared his notes for the next two days’ worth of meetings while he spent a cool, drizzly afternoon outside a café, sipping coffee and watching ships cruise by on the Bosphorus. Separating Asia from Europe, the Bosphorus has long served as an important trading lane. Today it’s the second-busiest strait in the world, traversed by an average of 48,000 vessels annually, or roughly 132 per day.

A ship crusing the Bosphorus past IstanbulThis is just one of many observations and insights that John, Director of Research at U.S. Global Investors, returned home with following his visit to Turkey and Greece, where he met with companies held in our Emerging Europe Fund (EUROX) and sniffed out other potential investment opportunities.

As this was U.S. Global’s first visit to Turkey since May, I made sure to follow up with John about what he heard and saw.

So what’s changed since our last trip to the country?

Well, one major change is that Turkey has become our largest exposure in EUROX since we exited Russia. There’s a reason why it’s is such an attractive place to invest in. It has a relatively stable economy, despite the European slowdown and recent threat of ISIS. The International Monetary Fund (IMF) expects Turkey’s GDP growth to be about 3 percent this year, a little under what it was last year, but not by too much. Prime Minister Recep Tayyip Erdogan, who was elected in August, vows to make Turkey the world’s tenth-largest economy by 2023. This is probably a little too ambitious, but the country was able to grow its economy close to 230 percent between 2002 and 2013, so the goal might be achievable.

Like many other emerging markets, Turkish stocks had a rough September. Financials, which saw a nice rally this summer, took a tumble last month, but we’re starting to see some improvement. I had a very productive meeting with Garanti, Turkey’s second-largest bank and one of our top holdings in EUROX. Our discussion touched on a number of issues such as the threat of NPLs (non-performing loans), central bank policy and what actions Garanti might need to take if the lira weakens any further. The currency’s been banged up recently because of the strong dollar, but now that the dollar’s going through a correction, the lira is trying to stabilize.

Turkish Banks Starting to Recover After a Disappointing September
click to enlarge

I also was able to meet with Sabanci Holdings, another company in our fund. Part of our due diligence as investment managers, as you know, is catching up with such companies, meeting with their executives and top decision-makers, gaining tacit knowledge on their business models. Sabanci is a large conglomerate with interests in, among others, Turkish bank Akbank, tire manufacturer Brisa, cement maker Akcansa and Kordsa, which manufactures internal tire components. The company continues to do well and is expected to grow between 3 and 3.5 percent this year due to increased price competitiveness.

How does the Turkish telecommunications industry look?

Turkey, believe it or not, is third in the world in using smartphones for e-commerce, behind England and Germany, so the industry is pretty strong. I met with two of the country’s largest providers, Türk Telekom and Turkcell, the latter of which we own. Right now they mostly blame each other for being irrational players in the market, but they both offer potential opportunity. Türk Telekom has some legacy landline business and offers broadband. Although Turkcell has had an ongoing shareholder dispute that’s prevented them from paying a dividend for the last four years, it looks very promising that a resolution is near. It’s still six to nine months out, but hopefully we’ll see a dividend of between 20 and 50 percent of its market cap.

The Lounge Istanbul at Istanbul Ataturk International Airport, designed by Turkish Do&Co, takes luxuruy to a new level Describe the best experience you had during your stay in Turkey.

That would have to be Do & Co, self-described as “the Gourmet Entertainment Company.” They specialize in high-end, luxury airline and event catering, with additional business in restaurants, bars and airport lounges. Even though the company is based in Austria, Turkish Airlines is its flagship customer. I got to inspect the Lounge Istanbul in the city’s international airport and was awestruck by its lavishness. By far the nicest lounge I’ve ever been in. Even the fruit was arranged in an artful way.

Do & Co is a very attractive company, and I don’t mean that just from an aesthetic point of view. It’s a double-digit sales and earnings-per-share grower—it’s expected to grow 20 percent next year. It also has a reasonable valuation and pays a dividend. We’ll certainly keep our eyes on it.

So I hear you attended a San Antonio Spurs exhibition game! How did they do?

The Lounge Istanbul at Istanbul Ataturk International Airport, designed by Turkish Do&Co, takes luxuruy to a new level The Spurs performed well as always. They went up against Fenerbahçe Ülker in the Ülker Sports Arena, named for the wealthy family and food manufacturer, which makes Godiva Chocolate, among other products. Two of the people I attended the game with—investment professionals from Finansinvest, a Turkish banking and brokerage firm—generously gave me a jersey with “John” written on the back.

One of the highlights of the game was watching the audience’s reaction to the Spurs Coyote. Here in the U.S. we take sports mascots for granted, but I think initially the Turks kind of saw him as a curiosity. They were a little taken aback seeing him taunt the referee and dribble the ball with his “paws,” but they soon realized this was all part of the theater of American basketball. By the end of the game they were laughing at the Coyote’s antics.

For more on our Emerging Europe Fund, check out its composition. Also, make sure to look out for my chat with John about his visit to Greece.

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. 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 Borsa Istanbul Banks Index (XBANK) is a capitalization-weighted free float adjusted Industry Group Index composed of National Market listed companies in the banking industry. All members of the index are also constituents of the XUMAL Sector Index.

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 as a percentage of net assets as 09/30/2014: Turkiye Garanti Bankasi A.S. 3.31%, Turkcell Iletisim Hizmetleri A.S. 2.40%, Haci Ömer Sabanci Holding A.S. 1.96%, Ülker Bisküvi Sanayi A.S. 1.02%, DO & CO Aktiengesellschaft 0.00%, Akçansa Çimento Sanayi ve Ticaret Anonim Sirketi 0.00%, Kordsa Global 0.00%, Türk Telekom 0.00%, Brisa Bridgestone 0.00%, Akbank 0.00%, Finansinvest 0.00%, Turkish Airlines (Türk Hava Yollari) 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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As the Eurozone Stalls, China Cuts the Red Tape
October 27, 2014

Forty-four percent. That’s the alarming unemployment rate for those aged 15 to 25 in Italy, where I traveled recently to meet with other global chief executives and business leaders.

The reasons for Italy’s high youth unemployment? Tortuous red tape, high taxation and thuggish unions. Many of the CEOs at the event I attended noted that Italy is mired in unionization. This has created a restrictive jobs market that crowds out well-educated, aspirational young people, many of whom are forced to flee their homes and seek work elsewhere.

A penny-farthing economy on a precarious ride: Fiscal and monetary policy are imbalanced in the eurozoneBut “elsewhere” within the European Union is currently not much of an improvement. Even in Germany, the EU’s most reliable economy, train and airline unionists have gone on strike, bringing the country to a near-standstill. Incredibly, both Italy and France—where the youth unemployment rate stands at 24 percent—want the EU to foot the bill for their joblessness woes. Global investors’ patience has been stretched thin as European Central Bank (ECB) President Mario Draghi and German Chancellor Angela Merkel continue to bicker over how to resolve the region’s slowdown.

As I told CNBC Asia’s Bernie Lo, the EU’s default policy is to tax anything that moves. Led by pro-taxation economists such as France’s Thomas Piketty, Europe’s policies have become a sort of contagion resonating throughout the rest of the world. The eurozone countries have an imbalanced approach to jumpstarting their economies, relying only on monetary policy but failing to address fiscal issues such as punitive taxation and over-bloated entitlement spending.

You can see how disastrous the results have been: France and Germany’s industrial production has turned down recently. Their purchasing managers’ index (PMI) numbers are below the 50-mark line, indicating contraction. This trend is especially worrisome because Europe is a bigger trading partner with China than the U.S. is.

So what’s the solution?

The EU would do well to look east, specifically to China.

China Handing over Its Economy’s Keys to Capital Markets
Last week senior Chinese officials met in Beijing to resolve the sorts of problems the EU can’t seem to fix, let alone acknowledge. On the chopping block were regulations—hundreds of them. According to Premier Li Keqiang, 416 lines of red tape have allegedly either been abolished or eased in order to facilitate business growth in important sectors such as transportation, logistics and telecommunications. In June, Li vowed to slash an additional 200 measures.

The Chinese government also plans to relax oversight of key areas such as utilities and natural resources, land and the pricing mechanism of money. Gone is the government’s control over shale gas, coal bed methane and imported liquefied natural gas (LNG). The mining sector’s tax code has been reformed. And for the first time, private companies have been granted the license to ship crude oil.

It appears as if China is starting to see the light. They’re introducing competition back into their capital markets instead of strangling it, as the eurozone has done. Between January and September, 10.97 million new jobs were created in China, exceeding the government’s goal of 10 million in 2014 and beating the benchmark by an entire quarter, according to China’s National Bureau of Statistics (NBS).

As you can see below, new business start-ups in China have skyrocketed.

China's Reduction of Red Tape Has Increased Business Start-ups, Despite Slowing Growth
click to enlarge

These red tape-cutting measures, coupled with fiscal stimulus, are needed now more than ever. As promising as Premier Li’s promises are, China still faces deflation and declining real GDP growth. The Asian country’s economy is currently headed for its slowest expansion since 1990, the main culprit of which is the struggling real estate market.

Other problems also continue to hold China back, many of them deeply-rooted and systemic. The Ease of Doing Business Index ranks China 158 out of 189 economies in the “Starting a Business” category and an almost-dead-last 185 in the “Dealing with Construction Permits” category. According to the World Economic Forum’s most recent Global Competitiveness Report, the two most problematic factors for conducting business in China are access to financing and corruption, another issue Chinese officials are addressing this week.

These issues can’t and won’t be fixed overnight. But unlike the EU, China acknowledges them and is seeking innovative solutions. One of the only benefits to having a one-party system, as China does, is that you can’t shuffle off a set of problems to another party and then lay the blame at their feet when they go unresolved. You must think long-term.

Constructive Manufacturing News
Last week we were relieved to learn that China’s flash PMI came in at 50.4. Anything over 50 indicates growth in the manufacturing sector, but as I’ve discussed on numerous occasions, what really matters is that the one-month reading crosses above the three-month moving average. Such a “cross-above” historically means that commodities and commodity stocks perform better in the coming months. Based on our research, three months following a cross-above, there’s a 73 percent chance that the S&P 500 Index will rise more than 2.4 percent and a 55 percent chance that the S&P 1500 Energy Index will rise more than 0.7 percent.

As you can see, this crossover did indeed occur, the first time it’s done so since May. 

One-Month Reading for china's Flash PMI Crosses Above the Three-Month Reading
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Of course, flash PMIs are merely preliminary, and we won’t know the final results until later. But for now this is certainly positive news.

Emerging Asia Wins with Cheap Commodities
One of the reasons why Chinese manufacturing is picking up steam might be the recent collapse in commodity prices. Low commodity prices undeniably hurt certain stocks in the space, and we’ve felt the pain in some of our funds. The silver-lining, though, is that these low prices have helped non-Japan Asian companies get ahead, a tailwind for our China Region Fund (USCOX). Because labor continues to be relatively cheap in Asia, commodities tend to be the single-largest company expenditure.

Lower Energy and Food Prices Will Help Chinese Businesses
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Lower steel and aluminum costs benefit machinery, automobile and equipment manufacturers, as well as homebuilders, shipbuilders and oil and drilling equipment suppliers; falling corn and wheat prices are welcomed by food and beverage producers; cheap copper is good for construction and engineering, utilities and electrical equipment.

Then there’s oil and gas. Since June, Brent crude has corrected itself over 25 percent. Again, this is a headwind for petroleum companies and large net-oil-exporting nations such as Russia and Mexico, but cheap energy equates to huge savings for emerging Asian countries. 

Asian Markets Benefit Most from Lower Oil Prices
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One final bellwether of economic growth I want to touch upon is accelerated electricity generation and usage. In the past, Chinese Premier Li Keqiang has cited this as one of the more reliable indicators of economic activity because electricity is not easily stored and the data is difficult to manipulate. This month, energy production improved 4.1 percent year-over-year —not a huge cause for celebration, but a step in the right direction nonetheless. 

Increased Electricity Production in China Is a Reliable Indicator of Economic Activity
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With a more balanced approach to monetary and fiscal policy than the eurozone, China is able to be more productive.China Is a Long-Term Story
Compared to many eurozone nations, China is relatively young. Whereas the median age in Italy is 43 years, in China it’s 35. There’s huge growth potential in this region, especially now that Premier Li has resolved to cut red tape and balance monetary and fiscal policy. In 10 years’ time, the 35-to-45 cohort, a well-educated group with good salaries and credit, will expand dramatically.

Consider this: of the 1.35 billion Chinese citizens, about 618 million, nearly half, have access to the Internet. Of those, 302 million, nearly half again, shop online. These numbers will continue to grow, and with them, greater investment opportunity. Name one Western European company that, in recent years, has achieved the sort of success Alibaba, Tencent or Baidu has. Not in a Piketty economy.

I encourage investors who are seeking growth potential to check out our China Region Fund’s composition.

And to those who prefer a “no-drama” fund, please take a look at our Near-Term Fax Free Fund (NEARX).

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. Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. The Near-Term Tax Free Fund may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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 HSBC Flash China Manufacturing PMI is published a week ahead of the final HSBC China PMI every month. It analyzes 85-90 percent of the responses to the Final PMI from purchasing executives in more than 400 small, medium and large manufacturers, both state-owned and private enterprises.

The Doing Business Project, launched in 2002, looks at domestic small and medium-size companies and measures the regulations applying to them through their life cycle. By gathering and analyzing comprehensive quantitative data to compare business regulation environments across economies and over time, Doing Business encourages countries to compete towards more efficient regulation; offers measurable benchmarks for reform; and serves as a resource for academics, journalists, private sector researchers and others interested in the business climate of each country. 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.

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 9/30/2014: Alibaba Group Holding, Ltd. 0.42%, Tencent Holding, Ltd. 5.62%, Baidu, Inc. 2.44%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Past performance does not guarantee future results.

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New Economic Report Card Shows that the U.S. Still Has the Competitive Edge
October 16, 2014

America’s still got it.

That’s according to the latest Global Competitiveness Report, which names the U.S. the third-most competitive nation in the world, our highest ranking since 2008.

For 10 years now the World Economic Forum (WEF) has published its annual competitiveness report, which assesses the strength of 144 countries’ 12 “pillars,” including institutions, infrastructure, health and primary education and higher education. It then ranks these countries based on their overall ability to promote prosperity for their citizens.

Singapore retains its number two spot for the fourth straight year, while Switzerland leads for the sixth year in a row.

Top 20 Countries in 2013 - 2014 Global Competiveness Index
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From 2006 until 2008, the U.S. held the top position, but following the financial crisis, our ranking slipped to number seven in 2012.

This year, the WEF notes:

“U.S. companies are highly sophisticated and innovative, and they are supported by an excellent university system... Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy—the world’s largest by far—these qualities make the United States very competitive.”

You might be thinking: But wait, didn’t China’s economy just exceed our own?

Yes and no.

It’s true that, when U.S. and China’s economies are not adjusted for costs of living, the U.S. is still “the world’s largest by far.” Our GDP stands at around $16.8 trillion whereas China’s is $9.3 trillion.

But based on purchasing power parity (PPP), a calculation that factors in relative costs of living to make comparisons between and among countries “fairer,” China has indeed caught up with and surpassed the U.S.

China's Economy Surpasses the U.S.'s Based on Purchasing Power Parity
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This news might bruise some readers’ egos, but it’s actually a tailwind for both commodities and our China Region Fund (USCOX). China is such an important player in the global economy that it’s nearly impossible for any serious investor to see China’s ascent as anything but positive.

Below are some of the key takeaways from the Global Competitiveness Report.

Strengths

The economic report card gives the U.S. many accolades, including its capacity to attract and retain talented people from abroad. I always say that when people want to innovate and start businesses, they typically come here to the United States. The report reveals it’s relatively easy in the U.S. for “entrepreneurs with innovative but risky projects to find venture capital.” Our financial services are strong, and we have ready access to bank loans for sound business plans. When it comes to the ease of raising money by issuing shares on the stock market, we come in at sixth place, following Hong Kong, Taiwan, South Africa, New Zealand and Qatar.

The United States ranks high in company spending on research and development.Only Switzerland beats us in our capacity for innovation.

We score very well in our availability and corporate adoption of the latest technologies, as well as availability of scientists and engineers, quality of scientific research institutions and company spending on R&D. We rank eleventh in the number of patent applications filed under the Patent Cooperation Treaty (PCT), amounting to 149.8 per one million U.S. citizens.

In the business sophistication pillar, we excel above all other countries in our use of sophisticated marketing tools and techniques.

Areas for Improvement

It comes as no surprise that the top three most problematic factors for doing business in the U.S., according to the report, are tax rates, tax regulations and inefficient government bureaucracy. It’s for these reasons that some businesses, including Burger King, Medtronic and Chiquita, are in the process of moving their corporate headquarters to countries with friendlier tax rates—Ireland, Canada and Singapore, among others.

High tax rates, burdensome regulations and inefficient government bureaucracy are all cited as "problematic factors" for doing business in the U.S.To prevent such tax inversions from occurring, our tax code sorely needs amending. Our 35-percent corporate income tax rate is the highest among the 34 member nations of the Organisation for Economic Co-operation and Development (OECD), and we actually rank 32 out of 34 in the 2014 International Tax Competitiveness Index. Only Portugal and France fare worse.

Indeed, the Global Competitiveness Report shows that, to a large extent, taxes reduce the incentive to work: in this department we come in at number 37, just between China and Ghana. As for wastefulness of government spending, we rank number 73, trailing France by one point and China by 49 points. The report also shows that it can often be difficult for some businesses to comply with U.S. government regulations.

If our government were to simplify the tax code and ease regulations, there’s no doubt that the U.S. could once again claim top honor.

Other crucial areas for improvement include quality of electrical supply (we come in at number 24, following Barbados), soundness of banks (number 49), gross domestic secondary enrollment rate (59) and quality of math and science education (51).

Emerging Countries 

Some of the emerging markets that we track at U.S. Global Investors either made gains this year or maintained their positions.

Poland, for instance, held on to its rank of 43. The WEF noted the country’s “improvements… in institutions, infrastructure and education,” its “increased flexibility in labor market efficiency” and its “[c]ontinued structural reforms geared toward strengthening its innovation and knowledge-driven economy.” A well-educated population and secure financial market make Poland globally competitive, but to truly boost its innovative capacity, it needs to improve its infrastructure, soften regulations and make settling business disputes more efficient.

Greece jumped 10 spots to reach the rank of 81. Despite its high levels of government debt, the Mediterranean country has managed to improve the functioning of its goods and labor markets and reduce its budget deficit. However, its government is still inefficient and its financial market has yet to recover from the recent crisis that hit parts of Europe. A lack of access to financing is the most problematic factor for doing business in Greece.

Other key emerging markets that rose up the list were China, Malaysia, Thailand, Indonesia and the Philippines.

Keep Investing in America

Despite a few areas for improvement, the United States is still the preeminent place on earth to invest, with plenty of openings for growth. As we continue to recover from the recession, now is the most opportune time in years to place your trust in America’s future.

Our two U.S. equity funds, All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX), have been impacted by the global economic slowdown and growth scare. Cyclical stocks—the kind we focus on in these two funds—have lagged defensive stocks, by about 6 percent in the last month and a half.

Cyclicals are those types of goods and services consumers can afford to purchase when the economy is performing well. Examples include discretionary-type companies such as Apple, Priceline and Tesla Motors. Defensives, on the other hand, typically remain stable, even in times of market downturns. Examples include electricity, gas and food.

Cyclical Stocks Have Dropped 6 Percent in Last Month-and-a-Half Compared to Defensive Stocks
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This might sound like troubling news, but we view it as an opportunity. As you can see, a similar discrepancy between cyclical and defensive stocks occurred in April and May of last year, and yet mean reversion corrected it. We’re optimistic that such a turn will occur again, which means that now might be an ideal time to accumulate cyclicals.

Our Near-Term Tax Free Fund invests in the schools that keep America competitive.Another way to potentially capitalize on our nation’s successes is U.S. Global Investors’ Near-Term Tax Free Fund (NEARX), which invests in high-quality, U.S. municipal bonds. A significant portion of the fund is invested in health services, public schools and higher education, three of the 12 pillars that the WEF assesses. To keep these services operational and efficient, state and local governments rely on funding from the very bonds we invest in, which in turn improves Americans’ livelihood as well as the businesses they run.

Although past performance is no guarantee of future results, NEARX has delivered positive tax-free income for the past 13 years. The fund seeks preservation of capital and has demonstrated minimal fluctuation in its share price, with a net asset value (NAV) that has floated in the $2 range.

Near-Term Tax Free Fund Annual Total Return
click to enlarge

Because of its risk-adjusted returns, NEARX has earned the coveted five-star rating from Morningstar* for the five-year performance period and four stars overall. Check out its performance here.

To learn more about how you can help keep the United States competitive, I encourage you to request an information packet.

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.

Quarter End Average Annual Total Returns as of 09/30/2014
YTD 1
Year
5
Year
10
Year
Since
Inception
Gross
Expense
Ratio
Expense
Ratio
After Waivers
2.66% 3.26% 2.59% 2.97% 4.22% 1.21% 0.45%

Expense ratio as stated in the most recent prospectus. The expense ratio after waivers is a contractual limit through December 31, 2015, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest). 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 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.

Morningstar Rating

Overall/164
3-Year/164
5-Year/137
10-Year/103

Morningstar ratings based on risk-adjusted return and number of funds
Category: Municipal National Short-Term Funds
Through: 09/30/2014

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. The Near-Term Tax Free Fund may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that a decline in the credit quality of a portfolio holding could cause a fund’s share price to decline. Stock markets can be volatile and can fluctuate in response to sector-related or foreign-market developments. For details about these and other risks the Holmes Macro Trends Fund may face, please refer to the fund’s 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.

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Ratingä based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

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 Tax Foundation’s International Tax Competitiveness Index (ITCI) measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code. The ITCI considers more than forty variables across five categories: Corporate Taxes, Consumption Taxes, Property Taxes, Individual Taxes, and International Tax Rules.

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

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the funds mentioned as a percentage of net assets as of 09/30/2014: Burger King (0.00%), Medtronic (0.00%), Chiquita (0.00%), Apple, Inc. (4.35% in All American Equity Fund, 4.56% in Holmes Macro Trends Fund), The Priceline Group, Inc. (3.00% in All American Equity Fund, 3.03% in Holmes Macro Trends Fund), Tesla Motors, Inc. (2.09% in All American Equity Fund, 2.93% in Holmes Macro Trends 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. Past performance does not guarantee future results.

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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