Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.
- Amid Global Uncertainty, Pay Attention to this Manufacturing Index
- April 10, 2017
Last week I returned from Zurich, where I spoke at the European Gold Forum. Investor sentiment for the yellow metal was particularly strong on negative real interest rates and heightened geopolitical uncertainty in the U.S., Europe, Middle East and South Africa. A poll taken during the conference showed that 85 percent of attendees were bullish on gold, with a forecast of $1,495 an ounce by the end of the year.
The upcoming presidential election in France is certainly raising concerns among many international investors. On one end of the political spectrum is Marine Le Pen, the far-right National Front candidate who, if elected, might very well pursue a “Frexit.” On the other end is Jean-Luc Mélenchon, a socialist of such extreme views that he makes Bernie Sanders look like Ronald Reagan. I was shocked to read that Mélenchon has pledged to implement a top tax rate of 100 percent—and even more shocked to learn that he’s moving up in the polls. An insane 100 percent tax rate would surely return the country to medieval-era feudalism, which is just another name for slavery. All the wealth naturally goes to the very top, and corruption thrives.
It’s important to recognize that in civil law countries such as France, hard line socialism is much more likely to take hold. Just look at South Africa. While in Zurich, I had the pleasure to speak with Tim Wood, executive director of the Denver Gold Group and former associate of South Africa’s Chamber of Mines. According to Tim, the poor government policies of South Africa’s socialist president, Jacob Zuma, is driving business out of the country and has led to the resignations of several members of parliament. Tens of thousands of protestors have taken to the streets of Johannesburg demanding Zuma to step down, especially following his firing of Finance Minister Pravin Gordhan. The rand, meanwhile, has plummeted and the country was recently downgraded to “junk” status
One of the consequences of a weaker rand has been stronger gold priced in the local currency and higher South African gold mining stocks, as measured by the FTSE/JSE Africa Gold Mining Index. Among the gold companies that have seen some huge daily moves in recent days are Sibanye Gold and Harmony Gold.
South African gold stocks look very attractive in the short term. Over the long term, however, producers might find it increasingly difficult to operate efficiently and profitably in such a mismanaged jurisdiction.
PMIs Show Impressive Manufacturing Growth
It was an eventful week, to say the least. The U.S., for the first time, became directly involved militarily in Syria’s years-long civil war. Senate Republicans invoked the “nuclear option” to prevent a Democratic filibuster, allowing federal judge Neil Gorsuch to obtain Supreme Court confirmation. President Donald Trump met with Chinese leader Xi Jinping at Mar-a-Lago, the so-called “Winter White House,” to discuss trade and North Korea, among other issues.
And on Friday we learned the U.S. added only 98,000 jobs in March, down spectacularly from the 235,000 that came online in February. In response to this and the Syrian air strike, gold jumped more than 1 percent, touching $1,272 in intraday trading, its highest level in five months.
Fresh purchasing manager’s index (PMI) readings for the month of March were also released, showing continued manufacturing sector expansion in the world’s largest economies, including the U.S., China and the eurozone. All of Zurich was under construction, it seemed, with cranes filling the skyline in every direction. And when I flew back into San Antonio, sections of the international airport were also under heavy construction. This all reflects strong local and national economic growth in Switzerland and the U.S.
I especially like the Zurich Airport. I travel a lot, and it’s the only airport I know of where you can sit out on an open deck and watch and listen to the jets take off and land.
The official China PMI rose to 51.8, the fastest pace in nearly five years. Because the PMI is a forward-looking tool, this bodes well for industrial metals, as measured by the London Metal Exchange Index (LMEX). The Asian giant, as I’ve pointed out before, consistently ranks among the top importers of copper, aluminum, steel and more.
The U.S. Manufacturing ISM cooled slightly to 57.2, down from 57.7 in February. This still remains high on a historical basis. Because the U.S. is the number three producer of crude, following Russia and Saudi Arabia, oil prices have tended to track the country’s manufacturing index.
Trump Tackles U.S. Trade with China
Again, Trump met with China’s Xi, a man who can be considered the U.S. president’s counterpart in many more ways than one. In February, I included Xi in a list of four global leaders who have more in common with Trump than some people might realize. Last week the Brookings Institute compiled a list of the many “striking similarities” between the two men. Among other commonalities, they’re both nationalists; they’re both populists and have expressed a desire to fight corruption; they both have a rocky relationship with the press and intellectual community; and they both prioritize domestic affairs over foreign affairs.
None of this stopped Trump from being very critical of China on the campaign trail. He threatened to name the country as a currency manipulator and raise tariffs as much as 35 percent. It will be interesting to see what agreements, if any, can come out of this meeting between the two leaders.
Trump is not wrong to raise the alarm over U.S.-China trade. In 2016, the U.S. trade deficit with China stood at a whopping $347 billion. This is down slightly from $367 billion in 2015, but still a huge number. If you look at the total U.S. balance of payments since 1960, you get an even greater sense of the imbalance.
At the same time, world trade volume growth has improved in recent months, especially in emerging markets and Asia.
It’s important that Trump put ample thought into improvements on international trade. I’m not convinced tariffs and border adjustment taxes (BATs) are the solution. Look at what happened in the 1930s with the Smoot-Hawley Tariff Act. In an effort to “protect American jobs,” the U.S. raised tariffs on more than 20,000 goods coming into the country, many of them as high as 59 percent. Once the act went into effect in June 1930, a trade war promptly ensued and global trade all but dried up. Today, historians almost unanimously agree that the policy, which President Franklin Roosevelt later overturned, only exacerbated the effects of the Great Depression.
One of the biggest reasons why the U.S. has such a trade deficit is due to its abnormally high corporate tax rate. The country’s largest export is intellectual and human capital. Think Apple and Google, which are designs and ideas. The problem is that the dollars received in exchange for these goods and services are sitting in Ireland, or elsewhere, and are thus not counted in the official trade balance. Should the corporate tax rate decline to an average of around 18 to 20 percent, which is consistent with other developed countries, U.S. multinational companies would likely be more inclined to repatriate those profits and tilt the balance back in America’s favor.
Tax reform, therefore, is key in making sure the U.S. remains competitive on the world stage.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every invest. Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/16: Sibanye Gold Ltd., Harmony Gold Mining Co. Ltd.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.
The London Metals Exchange Index (LMEX) is an index on the six designated LME primary metals contracts denominated in US dollars. Weightings of the six metals are derived from global production volume and trade liquidity averaged over the preceding five-year period. The index value is calculated as the sum of the prices for the three qualifying months multiplies by the corresponding weights, multiplied by a constant. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.
The FTSE/JSE African Gold Mining Index is a market capitalization weighted index.
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- Lithium Suppliers Can’t Keep Up with Skyrocketing Demand
- March 23, 2017
Near the extinct volcano known as Monte Pissis, high in the Andes on the Chile-Argentina border, the air is thin and animal life scarce. It’s also a prime location for lithium, the silvery-white metal used in the production of lithium-ion batteries.
According to Sam Pelaez, an analyst on our team who recently visited the deposit, the seasonal meltdown of the snowy peaks collects lithium, sodium and other minerals from the soil and underwater hot springs, all of which flows down to the flats and settles—hence the name salt flats or, in Spanish, salares. Over long periods of time, with seasonal temperature variations, the salt builds a crust on top of the “lake,” making for a stunning landscape. Under the crust are high concentrations of lithium.
To extract lithium, Sam says, brine is pumped into large evaporation ponds, resulting in a higher concentration of metals. The brine is then trucked to a facility that extracts the lithium using chemical and metallurgical processes. The lithium carbonate or lithium hydroxide is sold to battery manufacturers, including Tesla.
“It’s possibly the most remote place I’ve ever been to,” Sam says, speaking of the deposit. The 3Q Project, as it’s called, is a five-hour drive from Fiambala, the nearest township, located in Argentina’s Catamarca Province. The province, and the one neighboring it, are known not only for their lithium salt flats but also gold deposits.
The 3Q Project, developed by Toronto-based Neo Lithium, is one of the largest salares discovered in recent decades, with remarkably low impurities when compared to other lithium deposits around the world.
Neo Lithium president and CEO Waldo Perez believes the project has the potential to be considered high-grade.
“The brine found in an open reservoir has the right chemistry for low-cost evaporation process, contains potash as a valuable by-product and lithium grades are equal or superior to all other known undeveloped projects and many producing mines,” Perez says.
41 Million Electric Cars by 2040
This past January, Tesla began mass producing lithium-ion battery cells at its 1.9-million-square-foot Gigafactory in Reno, Nevada. With Panasonic’s cooperation, the company expects to produce a mind-boggling 35 gigawatts of battery power a year by 2018, or about as much as the rest of the world’s current battery capacity combined. (A gigawatt, by the way, is equal to one billion watts.)
Cofounded in 2003 by serial entrepreneur and all-around genius Elon Musk, Tesla is arguably the world’s leading company involved in the production of energy storage units. But it’s certainly not the only one. China’s CATL, or Contemporary Amperex Technology Ltd., is quickly gaining ground and plans to surpass Tesla in terms of battery production by 2020. By that year, close to 85 percent of all lithium-ion batteries in the world will be produced in either the U.S. or China, according to Goldman Sachs, which sees the battery market climbing to $40 billion by 2025.
On a global scale, nearly 40 percent of all lithium supply is used in the production of batteries, including those that power battery electric vehicles (BEVs).
It should come as no surprise, then, that lithium demand is being driven, as it were, by BEVs, sales of which are expected to rise from 0.3 million in 2015 to 11 million by 2025, according to Morningstar. And by 2040, BEV sales could hit 41 million, representing 35 percent of all new automobile sales, according to Bloomberg New Energy Finance.
“We expect sales of electric and hybrid vehicles to push lithium demand growth 16 percent annually over the next decade, faster than almost any major commodity over the past century, from about 175,000 metric tons in 2015 to about 775,000 by 2025,” writes Morningstar analyst David Wang.
Wang continues: “Each electric vehicle uses roughly 28,000 grams of lithium in its battery, about 4,000 times as much as the seven grams used in a smartphone. Each hybrid uses roughly 1,900 grams, approximately 270 times as much as a smartphone.”
(Electric cars and hybrids also require more copper than conventional vehicles. The Tesla Model 3 uses three times as much copper wiring than a vehicle with an internal combustion engine.)
Morningstar estimates that lithium supply will struggle to keep pace with growing demand in the coming years, resulting in a 105,000-metric ton deficit by 2025. This supply-demand imbalance could raise the price of lithium significantly, “from $6,500 per metric ton currently to $10,000 by 2020,” writes Wang.
Who Are the Beneficiaries?
World lithium production is currently dominated by four companies: North Carolina-based Albemarle, Philadelphia-based FMC Corporation, Chile’s Sociedad Química y Minera and China’s Tianqi Lithium. Among these, Albemarle has the highest exposure to lithium, according to Morningstar. Just this month, the company raised its lithium demand forecast by the end of the decade, saying demand will grow by 30,000 metric tons a year, up from an earlier forecast of 20,000 metric tons.
For 12 months now, lithium stocks have been on a steady uptrend, outpacing their 200-day moving average.
But China is catching up. Its greatest advantage over the U.S. is its access to lithium. The Asian country, according to the U.S. Geological Survey, is the fourth-largest producer, having mined 2,000 metric tons in 2016 alone.
According to the International Energy Agency (IEA), China already leads the world in the number of electric two-wheelers and bus fleets. Working in the market’s favor is Beijing’s recent call for automobile companies to double their battery capacity between now and 2020. BEV ownership also entitles Chinese citizens to an exemption from acquisition tax and the excise tax, worth between 35,000 and 60,000 renminbi, or between $5,000 and $9,000. (In the U.S., tax credits for purchasing a BEV vary from $2,500 to $7,500.)
Trump to Scrap Fuel Economy Standards?
Meanwhile, President Donald Trump has ordered a review of corporate average fuel economy (CAFE) standards, which have mandated gradual increases in the fuel economy of cars and light trucks since 1975. Average fuel economy currently stands at 31.3 miles per gallon, as of February, and will need to reach 54.5 by 2025.
Overturning CAFE standards would mean automakers could produce vehicles with a lower fuel economy, for a lot less than hybrids and BEVs. This is a threat to BEV demand—and ultimately lithium— since they’re typically more expensive, with the Tesla Model 3 starting at $35,000. However, like all new tech, prices will likely drop significantly over time. By 2022, the cost of battery-powered cars is expected to be comparable to those with an internal combustion engine.
In response to Trump’s opposition to fuel economy regulation, about 30 U.S. cities, including New York, Los Angeles and Chicago, are reportedly planning to spend as much as $10 billion on new electric vehicles for police cruisers, trash haulers, street sweepers and more. Such a move is intended to show automakers there’s demand for BEVs, which also bodes well for lithium.
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.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2016: Neo Lithium Corp.
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- Why Commodities Could Be on the Verge of a Massive Surge
- March 8, 2017
After finishing 2016 up 25 percent, commodities are getting another boost from bullish investors. Investment bank Citigroup forecasts commodity prices will increase this year on strengthening demand in China and mounting inflation inspired by President Donald Trump’s “America First” policies. Commodity assets under management globally stood at $391 billion in January, up 50 percent from the same time the previous year, according to Citigroup.
Meanwhile, hedge fund managers significantly raised their bets that copper and oil prices have much further to climb, Bloomberg reported, with net-long positions in the Comex and Nymex markets surging to all-time highs.
In addition, global manufacturing activity has expanded for the past six straight months, a good sign for commodities demand going forward. As I shared with you earlier in the week, the global purchasing managers’ index (PMI) advanced to a 69-month high of 52.9 in February, with strong showings from the U.S. and eurozone.
Asia Looking for $26 Trillion: Asian Development Bank
As for China and the rest of Asia, a recent special report from the Asian Development Bank (ADB) calculates the cost to modernize the region’s infrastructure at between $22.6 trillion and $26 trillion from 2016 to 2030. This comes out to about $1.7 trillion a year in global investment that’s required to maintain Asia’s growth momentum, deliver power and safe drinking water to millions, connect towns and cities, improve sanitation and more.
Governments have devoted funds to support only some of the projects. Currently, 25 economies in the region are spending a combined $881 billion annually on such projects, leaving a substantial spending gap for global investors to fill. This is an unprecedentedly huge opportunity for commodity and materials investors.
To make investment more attractive, however, regulatory and institutional reforms will need to be made in the region.
China, for instance, announced plans to curb aluminum, steel and coal production in an effort to combat air pollution. According to the Financial Times, as many as 30 northern Chinese cities are expected to cut aluminum capacity by more than 30 percent, a move that’s seen as very favorable to the rally that’s already helped the base metal gain over 11 percent so far in 2017.
In the past five trading days, shares in leading aluminum producer Alcoa have surged on the news, jumping as much as 9.8 percent on March 1 alone. Since the November election, in fact, the company has gained more than 44 percent on optimism over President Trump’s pledge to spend $1 trillion on U.S. infrastructure.
$3.9 Trillion Still Needed in the U.S.
One trillion dollars sounds like a lot, but it falls remarkably short of the $3.9 trillion the U.S. needs by 2025 to rebuild its own aging infrastructure. That’s the estimate of the American Society of Civil Engineers (ASCE), which gave the nation’s overall infrastructure a D+ in 2013, with “poor” scores given to levees, roads, inland waterways, drinking water and more.
One of the most urgent areas for investment is the nation’s crumbling dams. According to energy news outlet E&E, about 70 percent of America’s 90,000 dams will be at least 50 years old by 2025, putting them near the end of their engineering lifespans. An estimated 15,500 American dams are now considered “high hazard,” meaning their failure could cause fatalities.
The cost of repairing and upgrading these structures is estimated to be around $54 billion.
According to E&E, 80 dams failed in South Carolina in the past two years alone, causing millions of dollars’ worth of property damage. And just last month in a high-profile case, more than 188,000 Californians had to be evacuated to avoid the collapse of the Oroville Dam, the nation’s tallest dam.
Like the ADB’s Asian infrastructure estimate, this has massive market potential. More than 80 percent of U.S. infrastructure, from schools to streets to sanitation, is in either private or municipal ownership. This means commodity and municipal bond investors will need to pick up where federal dollars leave off.
Curious about investing opportunities in commodities and resources?
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
The J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2016.
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- Disrupt... Or Get Disrupted
- March 6, 2017
Last week I was in Vancouver attending YPO EDGE, the annual summit for business executives from more than 130 countries. YPO, which stands for Young Presidents’ Organization, has roughly 24,000 members worldwide. Together, they employ 15 million people and generate a massive $6 trillion in revenue annually.
What I appreciate about YPO is that it stresses peer-to-peer learning. Those who think it’s all about networking and cutting deals are missing the point.
The theme this year was disruption—how innovative breakthroughs in technology, medicine, transportation, machine learning and more have transformed, and will continue to transform, the world we live and work in.
“Disrupt, or get disrupted,” John Chambers, executive chairman and former CEO of Cisco, said during his conversation with CNBC’s Tyler Mathisen.
Chambers was speaking specifically of what he calls the “digital era,” which will soon replace the information age. The internet of things is expanding very aggressively right now, but it’s still in its infancy. In 10 to 15 years, Chambers says, more than 500 billion devices worldwide will be connected to the internet. This will irrevocably change how we live our daily lives, conduct business, deploy health care, invest and more.
So what does this mean? For one thing, Chambers estimates that as much as 40 percent of companies now in operation around the world will not exist “in a meaningful way” sometime within the next two decades. To survive, companies will need to reinvent themselves by integrating digitization into the fabric of their business strategy. In the world Chambers imagines, every company will be, at its core, a technology company, and data will become the new oil.
After his presentation, I had the pleasure to share a few words with Chambers in private. I was amazed to hear that, during his tenure as CEO in the 1990s, Cisco had an unbelievable compound annual growth rate (CAGR) of 65 percent. I was even more amazed to hear that he managed to turn 10,000 of his employees into millionaires. I don’t know if that’s a record, but it wouldn’t surprise me if it was. He told me that he wouldn’t be able to do the same today because of our current tax laws. In any case, Chambers embodies all that makes America great—curious, innovative, forward-thinking and willing to share his share his success with his employees.
How to Pick Home Run Stocks, According to Moneyball
A lot of what Chambers talked about during his presentation reminded me of one such disruptor, Billy Beane, the former general manager of the Oakland A’s and subject of Michael Lewis’ 2003 bestseller Moneyball: The Art of Winning an Unfair Game, which was later turned into a 2011 film starring Brad Pitt. Despite being about baseball, it’s one of the best books on stock-picking ever written.
For those unfamiliar, Moneyball tells the story of the A’s’ famous 2002 season and Beane’s efforts to build a competitive team despite a lack of revenue and the recent loss of several key players, among other disadvantages. Making matters worse, conventional factors for selecting new players—long perpetuated by the “wisdom” of industry insiders—had grown stale, antiquated… and just plain wrong. Appearance, personality and other biased perceptions were still very much part of the selection process.
With little else left to lose, Beane focused on what he felt were better indicators of offensive performance, including on-base percentage and slugging percentage. This allowed him to cut through the biases and find overlooked, undervalued, inexpensive players. “An island of misfit toys,” as Jonah Hill’s character Peter Brand puts it in the movie.
Beane, in other words, became a value investor—one who depended not on emotion or “instinct” but empiricism and quantitative analysis. All of the picks who fell into his model were mathematically justified.
The strategy worked better than anyone expected. Although the A’s had one of the lowest combined salaries in Major League Baseball, they finished the year first in the American League West. Their winning streak of 20 consecutive wins that season remains the longest in American League history.
Longest Winning Streaks in American League Baseball History Team Number of Wins Season A’s 20 2002 White Sox (tie) 19 1906 Yankees (tie) 19 1947 Royals 16 1977 Mariners (tie) 15 2001 Red Sox (tie) 15 1946 Twins (tie) 15 1991 Source: MLB, U.S. Global Investors
Beane changed the game—literally. Today, nearly every club in the MLB relies on “sabermetrics,” or baseball statistics, to select players. This helps them develop a “portfolio” of constituents whose overlooked potential gives the club the greatest odds possible of outperforming the “market.”
Finding Frugal Miners
As active managers, we try to do the same. Like Beane, we use a host of quantitative, top-down and bottom-up factors to help us find the most undervalued precious metals and resource stocks.
One such factor, low SG&A-to-revenue, I shared with you back in September. “SG&A” stands for “selling, general and administrative expenses” and refers to the daily operational costs of running a company that are not related to making a product. It stands to reason that a company with lower-than-average expenses relative to its revenue might have wider margins than a company with oversized expenses, but few investors look at this metric outside of quants.
Using this factor, we found 10 names whose average returns in the first quarter of 2016 amounted to a phenomenal 88 percent—nearly double what the Market Vectors Gold Miners ETF (GDX) returned over the same three-month period.
Of course, a company must meet several other factors before it qualifies for our models, but this is just one example of the type of rigorous quantitative analysis we conduct.
Probability Is in the Pudding
In Moneyball, Lewis quotes Dick Cramer, cofounder of STATS, a sports statistics company: “Baseball is a soap opera that lends itself to probabilistic thinking.”
The world of investing is the same, and lately there’s been no better soap opera than watching the major indices hit near-daily all-time highs on hopes that President Donald Trump and the Republican-controlled Congress can lower taxes, slash regulations and find the money to invest in the military and infrastructure. On Monday last week, the Dow Jones Industrial Average posted its 12th straight day of gains, a winning streak we haven’t seen in 30 years. And on Wednesday, it tied a previous record, set in 1987, for the fastest 1,000-point move. It took only 24 trading days for the Dow to surge from 20,000 to 21,000. (Since then it’s fallen below that mark.)
But like baseball, investing lends itself to probability thinking, and here we have experience as well.
As I’ve said a number of times before, we closely monitor the monthly Global Manufacturing Purchasing Managers’ Index (PMI) because it’s forward-looking rather than backward-looking, like gross domestic product (GDP). As such, we’ve found a high correlation between the PMI reading and the performance of commodities and energy one, three and six months out. When a “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has historically signaled a possible uptrend in crude oil, copper and other commodities. Our research shows that between February 2007 and February 2017, the S&P 500 Energy Index rose 10.2 percent, 79 percent of the time after a “cross-above,” while the S&P 500 Materials Index rose 7.2 percent, 86 percent of the time. Knowing this helps us anticipate the opportunities ahead.
In February, the global PMI rose to 52.9, a 69-month high. It was also the sixth straight month of manufacturing expansion, which bodes well for commodities, materials, miners and other key assets we invest in.
Individual PMI readings for the U.S., eurozone and China—which together make up about 60 percent of global GDP—all advanced in February.
The eurozone’s reading of 55.4 was its highest since April 2011, with expansion being led by the Netherlands, Austria and Germany. The region is more optimistic about the future than at any time since the debt crisis, and the weakened euro has provided a welcome tailwind to help boost sales and exports.
China’s PMI held above 50.0, indicating industry expansion, for the seventh straight month in February on improved new order inflows, higher demand and greater optimism.
The U.S., meanwhile, ended the month with an impressive 57.7, its highest reading since August 2014. Of the 18 manufacturing industries that are tracked, 17 reported growth, including machinery, computer and electronic products, metals, chemical products and others. New orders rose significantly, from 60.4 in January to 65.1 in February, as did backlog of orders, which advanced a whopping 7.5 percent.
Mark Your Calendars!
Join me later this month in St. Petersburg, Florida, for the 19th Anniversary Investment U conference! I’ll be speaking on gold, airlines and infrastructure. Tickets are now available. I hope to see you there!
Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2016: Harmony Gold Mining, Northern Star Resources, Regis Resources, Sibanye Gold.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
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- Want to Find the Opportunities? Follow the Sentiment
- February 15, 2017
On Monday I had the opportunity to attend a conference at Goldman Sachs’ Dallas office. Among the dozens of money managers and investors who attended, a combined $1 trillion in assets was represented. The speakers were numerous, from famed economist Jan Hatzius, Goldman’s head of global economics, to Jeff Currie, global head of commodities research. Everyone was exceedingly smart and articulate, and I left the conference feeling recharged with much to think about.
One of the most fascinating takeaways was Goldman’s increased use of sentiment analysis tools. Basically what this means is sophisticated software trawls the internet in real time for public attitudes and opinions on companies, products, sectors, industries, countries—you name it. Sources can include press releases, news stories, earnings calls, blogs, social media and more. All of this data is gathered and analyzed, giving quants and other highly sophisticated investors a better idea of where tomorrow’s opportunities lie.
We have experience gauging sentiment using platforms designed by Meltwater and ScribbleLive, and I was pleased to see our efforts validated.
Goldman’s preferred system is Stanford’s CoreNLP, which is able to break down and analyze sentences in a number of different ways (and different languages to boot). Below is just a sampling of what the process looks like.
This strategy has been working well, Goldman said, and investors and managers plan to continue practicing it.
As I said, we take sentiment very seriously. In last week’s Investor Alert, we made note of the fact that the media’s use of the word “uncertainty” has soared to a record high since the November election. This is in line with recent movements in the Global Economic Policy Uncertainty Index, which is also now at all-time highs following Donald Trump’s election and Brexit in the U.K.
Goldman Bullish on Commodities
At the same time, small business optimism in the U.S., as measured by the National Federation of Independent Business (NFIB), soared to a 12-year high on the back of Trump’s election. At 105.8, its December reading was up a phenomenal five standard deviations. Much of this optimism was driven by Trump’s pledge to roll back regulations and lower corporate taxes, a point I’ve made several times already. Goldman echoed this thought, arguing the U.S. is behind the curve on cutting corporate taxes, compared to the average rate of the 35-member Organization for Economic Cooperation and Development (OECD).
Using its sentiment analysis tools, however, Goldman managed to come to these conclusions as early as November—which is the same month the investment bank turned bullish on commodities for the first time in four years.
Goldman’s line of reasoning? When business optimism goes up, capital expenditure (capex) also goes up, and when capex goes up, commodities tend to follow. I should add that the bank has historically been neutral on commodities, recommending an overweight position only four times in the last 20 years. So when it does become bullish, investors should pay attention.
Look at the Timing
But there’s more to the commodity investment case than sentiment. The timing looks ideal as well.
Below, take a look at the output gap, which measures the difference between an economy’s actual manufacturing output and its potential output. When the gap is positive, that means demand is high and output is at more than full capacity. When it’s negative, that means demand has shrunk and output is less than what an economy should be capable of producing.
You can see that the output gap in the U.S. is finally turning positive, therefore entering the third stage of the business cycle, the best for real assets. The third stage is expansionary, characterized as having high output and fast growth—not to mention traditionally higher returns. We all know that past performance is no guarantee of future results. But similar periods in the past—shaded in gray—were associated with commodity super-cycles, the most recent one being the 2000s commodities boom driven by emerging markets, particularly China.
So far this year, the Bloomberg Commodities Index has risen 1.7 percent, compared to a negative 3.4 percent for the same number of trading days last year. If you remember, commodities ended positively in 2016 for the first time in six years, so there should be further room to run.
The Global Economic Policy Uncertainty (EPU) Index is calculated as the GDP-weighted average of monthly EPU index values for the U.S., Canada, Brazil, Chile, the U.K., Germany, Italy, Spain, France, the Netherlands, Russia, India, China, South Korea, Japan, Ireland and Australia, using GDP data from the International Monetary Fund’s (IMF) World Economic Outlook Database.
Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.
The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.
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