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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.

Disrupt... Or Get Disrupted
March 6, 2017

disrupt or get disrupted

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

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

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

Moneyball movie poster

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

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

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

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

How to Pick Home Run Stocks, According to Moneyball

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

Moneyball movie poster

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

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

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

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

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

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

Finding Frugal Miners

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

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

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

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

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

Probability Is in the Pudding

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

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

Dow Jones Industrial Average Ties Record for Fastest 1,000-Point MOve
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But like baseball, investing lends itself to probability thinking, and here we have experience as well.

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

Commodities and Commodity Stocks Historically Rose Three Months After PMI Cross-Above
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In February, the global PMI rose to 52.9, a 69-month high. It was also the sixth straight month of manufacturing expansion, which bodes well for commodities, materials, miners and other key assets we invest in.

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

Manufacturing Activity Accelerates in U.S., Eurozone and China
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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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This Natural Gas Opportunity Is Years in the Making
February 27, 2017

Last week I was in beautiful Argentina with a diverse team of investors and mining executives, including my good friend Frank Giustra; Ian Telfer, founder of Silver Wheaton and current Chairman of the Board of Goldcorp, which has sizeable investments in Argentina; and Serafino Iacono, Chairman of the Board of Pacific Exploration and Production (formerly Pacific Rubiales), which is active throughout South America. Together we toured various natural gas and crude oil mining projects in Tierra del Fuego, Mendoza and Santa Cruz, where we had the opportunity to speak with Governor Alicia Kirchner, elder sister to former Argentinian president Néstor Kirchner.

meeting with santa cruz governor alicia kirchner

One of the highlights of the trip was meeting with current president Mauricio Macri in Buenos Aires. Macri, as you might know, was elected in late 2015 on his credentials as a businessman and former mayor of Buenos Aires. His administration ends more than a decade of socialist rule by Kirchner and his wife Cristina Fernández, who was indicted this past December on corruption charges.

Even with Macri at the helm, corruption remains a problem in Argentina. The South American country currently ranks 95th in Transparency International’s 2016 Corruption Perceptions Index.

But economic conditions are improving. After contracting 1 percent in 2016, country GDP is expected to grow as much as 2.8 percent this year. Macri’s mission to make Argentina great again has already led him to abolish currency controls, return to world credit markets, attract foreign investors and set in motion a plan to reduce the fiscal deficit. After that, he hopes to get around to tax reform. In the meantime, there’s the energy sector.

A Plan to End Natural Gas Imports by 2022

Since 2008, Argentina has been a net importer of hydrocarbons, mainly natural gas, which represents more than half of the country’s energy matrix. Prices are low right now, so the economic impact is not detrimental. Should prices begin to rise substantially, however, it could destroy the economy. As such, my friends and colleagues were invited to help develop the fields and prevent further overreliance on imports. The government, in fact, wants to end them altogether by 2022.

Argentina Import Natural Gas Meet Demand
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Production declined mainly because of underinvestment during the two Kirchner administrations. Stringent regulations forced companies to sell product in the domestic market at a discount to international prices. Capital dried up to reinvest in the fields, and the natural decline of well production drove the overall output down. Making matters worse, companies lacked access to capital markets due to the Argentina sovereign debt default in 2001.

Goldcorp Chairman Ian Telfer me

As I said, the country is fabulously rich in hydrocarbons such as natural gas and petroleum. It’s estimated to have the world’s third-largest natural gas reserves and, according to the independent research Wilson Center, it “could possibly be the country with the most promising shale prospects outside of the United States.” Its most promising formation is Vaca Muerta (“Dead Cow”), located in the Neuquén basin, which has been compared to Texas’ prolific Eagle Ford play in terms of depth and thickness.

YPF, the government’s oil company, has already done exceptional exploration work, so there are numerous areas ready to be developed. This is the opportunity for us.

Having seen the projects firsthand and spoken to policymakers, I’m confident Macri can help open up Argentina’s energy sector and streamline production. Upon taking office, one of the president’s first acts was to slash the previous administration’s energy subsidies, which cost the government more than $51 billion over the past 13 years. Electricity bills in Buenos Aires rose a reported 500 percent as a result, but the move allowed the government to save a much-needed $4 billion in 2016 alone.

End Government Energy Argentinas Inflation Soaring
click to enlarge

Policy Change in the U.S. Has Also Had Amazing Consequences

As for the U.S. energy sector, crude exports have never been stronger. After Congress lifted the U.S. oil export ban in December 2015, exporters didn’t hesitate to turn on the spigots. Now, for the second week as of February 17, the U.S. sent more than 1 million barrels of crude onto world markets, filling the gap created by the Organization of Petroleum Exporting Countries (OPEC) in December when it agreed to trim production.


US Now Petroleum Exporting Country
click to enlarge

Producers are also ramping up activity. In the week ended February 17, companies pumped more than 9 million barrels a day for the first time since April 2016. The recent weekly record of 9.6 million barrels a day, set in July 2015, could be tested if producers continue their upward trend.

Daily US Oil Production 9 Million Barrels
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Even with increased output, prices continue to creep up. From its low of just over $30 a barrel last February, Brent crude has climbed 88 percent.

Brent Oil Above Mid Long Term Moving Averages
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Happy investing!

 

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.

The Corruption Perception Index was created in 1995 by Transparency International. It ranks almost 200 countries on a scale of zero to 10, with zero indicating high levels of corruption and 10 indicating low levels. Developed countries typically rank higher than developing nations due to stronger regulations.

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: Silver Wheaton Corp.

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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Want to Find the Opportunities? Follow the Sentiment
February 15, 2017

more and more, quants are using sentiment analysis tools

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.   

CoreNLP

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.   

Uncertainty is Soaring
click to enlarge

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).

The U.S. has lagged in cutting corporate tax rates
click to enlarge

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.

Output Gap Suggests We are transitioning into the third stage of business cycle
click to enlarge

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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It Might Be Time to Grab the Commodities Bull by the Horns
January 25, 2017

Commodity investors have had to endure a dry spell for a while now, but those days are starting to look as if they might be behind us. We see encouraging signs that a bottom has been reached and a new commodities super-cycle has begun, as global manufacturing expansion and inflation are finally gathering steam following the financial crisis more than eight years ago.

As a group, commodities had their first positive year since 2010, ending 2016 up more than 11 percent, as measured by the Bloomberg Commodity Index.

commodities end positively for the first time in six years
click to enlarge

A large percentage of this growth occurred in the days following the U.S. election, suggesting the reflation trade is officially in motion, which should be supported in the coming weeks and months by President Donald Trump’s pro-growth policies.

Just this week, Trump signed executive orders to proceed with the controversial Keystone XL and Dakota Access pipelines, emphasizing that the steel to be used in their construction will be American-made. Following the announcement, stock in energy infrastructure company TransCanada, which is expected to resubmit plans for the pipeline after it was rejected by the Obama administration, immediately hit a new high, while shares of several steel companies traded up.

Between Election Day and Inauguration Day, the commodities index rose 5.4 percent, with double-digit growth in crude oil (up 17.1 percent), copper (10.5 percent) and iron ore (17.7 percent).

commodities up double digits since trump's election
click to enlarge

Of the 14 commodities that we track in our ever-popular Periodic Table of Commodity Returns—which has been updated for 2016 and is available for download—only two ended the year down: corn and wheat. All this, following the group’s worst annual slump since the 2008 financial crisis.

The Periodic Table of Commodity Returns

Investment Banks Turn Bullish on Commodities

Back in May, Citigroup was first to say that the worst was over for commodities, and in December it made the call that most raw materials were poised to “perform strongly” in 2017 on global fiscal stimulus and economic expansion.

Now, for the first time in four years, Goldman Sachs has recommended an overweight position in commodities, following reports that revenue from commodity trading at the world’s 12 biggest investment banks jumped 20-25 percent in the fourth quarter of 2016 compared to the same period in 2015.

As reported by Bloomberg, Goldman’s head of commodities research, Jeffrey Currie, drew attention to the “cyclical uptick in global economic activity,” which is “driving demand, not only for oil but all commodities.”

“U.S. and China are focal points where we’re seeing the uptick,” Currie continued, “but even the outlook for Europe is much more positive than what people would have thought six months to a year ago.”

Indeed, manufacturing activity continues to expand at a robust pace, with January’s preliminary purchasing managers’ index (PMI) for the U.S. and the eurozone registering an impressive 55.1 and 54.3, respectively. We won’t know China’s January PMI until next week, but in December it improved at its fastest pace in nearly four years. As I shared with you earlier this month, the global manufacturing PMI expanded for the fourth straight month in December, reaching its highest reading since February 2014. I’m optimistic that it will expand again in January.

Global Manufacturing Climbs to 34-Month High in December 2016
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Again, we closely monitor the PMI, as our research has shown that it can be used to anticipate the performance of commodities and energy three and six months out. It looks as if the world’s big banks have begun to acknowledge this correlation as well. With the health of global manufacturing trending up, we see commodities demand following suit in the coming months.

Number of Auto Sales Hits an All-Time High

Case in point: auto sales. Last year marked a new record high, with 88.1 million cars and light commercial vehicles driven off of car lots. That figure was up 4.8 percent from 2015.

Global Auto Sales Reached a New Record in 2016
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China was the standout, which increased sales 13 percent and saw 3.2 million new units sold. It should be noted, however, that sales were assisted by a 50 percent tax cut on smaller vehicles, which is no longer in place.

China sold a record number of automobiles in 2016
click to enlarge

But consider this: Here in the U.S., the average age of cars and light trucks continues to creep up and is now 11.6 years, as of January 2016, according to IHS Markit. Improvements in quality is the main reason for the increase.

Even so, these aging vehicles will need to be replaced in the next few years, meaning domestic auto sales should remain strong. This bodes well for platinum and palladium, both of which are used in the production of catalytic converters.

But what about electric cars, which have no need for catalytic converters since they’re emissions-free? As I’ve shared with you before, electric cars—the demand for which continues to climb—use three times more copper wiring than vehicles with a conventional internal combustion engine.

There’s always an opportunity if you know where to look!

 

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 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.

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.

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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Holiday Edition: Here Are the Top 6 Frank Talk Posts of 2016
December 27, 2016

Good Tidings we bring to you and yours

This year has been one for the history books. Donald Trump was elected as the 45th president of the United States, gold had its best quarter in a generation, Warren Buffett decided he likes airlines again and voters in the United Kingdom elected to leave the European Union. Loyal readers of the Investor Alert newsletter and my CEO blog Frank Talk know that we covered it all, too.

As we head into the New Year, I want to share with you the six most popular Frank Talk posts of 2016. Before I do that, however, I think it’s important to note one recurring theme I write about that continues to help our investment team and shareholders better understand the movement in commodities and energy: the purchasing managers’ index (PMI).

Using PMI as a Guide

As I explain in this January Frank Talk, our research has shown that PMI performance is strongly correlated with the movement in commodities and energy three and six months out. PMI forecasts future manufacturing conditions and activity by assessing forward-looking factors such as new orders and production levels.

When a PMI “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. The reverse is also true. When the monthly reading crosses below the three-month moving average, the same commodities and materials have in the past retreated three months later.

In the three months following a “cross-above,” oil rose about 7 percent, 75 percent of the time, based on 10 years’ worth of data. Copper, meanwhile, rose more than 9 percent most of the time.

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

In November, the JPMorgan Global Manufacturing PMI reading clocked in at 52.1, a 27-month high. This shows that sector expansion has extended for a sixth straight month, which is very encouraging news. Following OPEC's recent production cut, we believe the decision is constructive for energy in the near-term, while a rising PMI is good news for the long term.

JPMorgan Global Manufacturing PMI Continues Upward Momentum
click to enlarge

We are finally seeing major media outlets and other Wall Street thought leaders recognize the importance of PMI as well.

2016 In Review: The Top 6 Posts

Every year I have the opportunity to engage and educate curious investors through my Frank Talk blog, and I am grateful to all of my subscribers who continue to stay engaged with the stories I share. Below are the top six Frank Talk posts of 2016 based on what you found most fascinating. I hope you enjoy this brief recap.

1. Gold Had Its Best Quarter in a Generation. So Where Are the Investors?

In April we were pleased to report that gold was having its best quarter in 30 years—rising 16.5 percent year-to-date at the time. During the first quarter, the yellow metal had its best three-month performance since 1986, mostly on fears of negative interest rates and other global central bank policies.

What we noticed, however, was an anomaly in terms of investor interest. Retail investors were very bullish on bullion but remained bearish on gold stocks.

This was a missed opportunity. Even though gold stocks have retreated since the summer, the NYSE Arca Gold Miners Index is still up 40 percent for the 12-month period. Over the same period, the S&P 500 Index is up only 10 percent, with the Trump rally driving most of it.

As you can see in the oscillator below, gold is currently down more than two standard deviations. In the past, this was a good time to accumulate, as mean reversion soon followed.

Gold vs. 2-Year Treasury Yield Percent Change Oscillator
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The 2-year Treasury yield, meanwhile, is looking overbought and set to correct, based on our model. The math suggests a nearly 90 percent probability that mean reversion will occur over the next three months, with yields falling and the gold price rising back to its mean.

What’s more, ICBC Standard Bank recently highlighted the growing costs of higher yields, which are being overlooked. Net interest payments on the nearly $14 trillion of U.S. debt will amount to around $250 billion this year—or 1.4 percent of U.S. gross domestic product. “If we apply an 80 basis point increase to the net interest forecasts,” the bank writes, “then by 2026 the Treasury would be paying an additional $185 billion in interest annually, and interest will have increased to 3.3 percent of GDP.” This could strengthen the investment case of gold.

2. What Brexit Is All About: Taxation (and Regulation) Without Representation

Just three days before U.K. voters went to the polls, I shared my thoughts on why those betting on the “stay” campaign might be surprised to find Eurosceptical Brits prevailing in the Brexit referendum. British citizens voted to exit the EU on June 23, a move that many were not expecting. One of the main grievances of voters was the heavy burden of EU regulations, which are decided by unelected officials in Brussels with little to no cost-benefit analysis.

According to Open Europe, a nonpartisan European policy think tank, the top 100 most expensive EU regulations set the U.K. back an annual 33.3 billion pounds, equivalent to $49 billion.

33.3 Billion Annual Cost of teh EU's Top 100 Regulations on U.K. Businesses

3. 11 Reasons Why Everyone Wants to Move to Texas

As a “Tex-Can”—born in Canada, living in Texas for the past 26 years—I am so blessed to call Texas my home. Although we are global investors, often focusing on macro-economic issues and government policies, I enjoyed writing this piece highlighting 11 reasons why Texas is truly a remarkable place to live. Did you know if Texas were its own nation, its economy would be about the same size as Canada’s?

The Global Scale of America's Economy
click to enlarge

4. Did OPEC Just Cry Uncle?

Back in October, the Organization of Petroleum Exporting Countries (OPEC) tentatively agreed to a production cut at its meeting in Algiers. Officials announced a “plan” to limit daily production, but I warned investors not to get too excited over OPEC’s decision at the time, since nothing was set in stone. Some OPEC members were already wavering, with Iraq questioning output numbers and Nigeria moving to boost production.

Fast forward to December. For the first time since 2008, OPEC has agreed to a crude oil production cut, renewing hope among producers and investors that prices can begin to recover in earnest after a protracted two-year slump.

5. Use This Tax Strategy Like the Top 1 Percent

Many people might have the impression that the top 1 percent of society—those making over $521,411—deal mainly in exotic investments such as derivatives, fine art and rare French wines. The truth is actually a lot less exciting—they invest in munis. Muni bond income, after all, is entirely exempt from federal and often state and local taxes—a feature that should appeal not just to money-saving, high-net worth individuals but to all investors.

 

 

 

Wealthiest U.S. Households Own an Increasing Share of Municipal Debt
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6. Romania Did This, And Now It's Among the Fastest Growers in Europe

In July I wrote a piece highlighting a country I don’t always discuss—Romania. At the end of last year, and after years of tepid growth, Romania’s government moved to revise its tax code. The country reduced the value added tax (VAT) rate from 24 percent to 20 percent, lowered the income withholding tax rate, nixed a controversial “special construction” tax, simplified deductibles and exempted certain dividends from corporate income tax.

The changes have worked much faster than expected. In the first quarter of 2016, Romania grew 4.3 percent year-over-year, beating the 3.9 percent analysts had expected, and up 1.6 percent from the fourth quarter of 2015.

Keep Calm and Invest On

I want to end on one final point. Trump recently responded to the Berlin Christmas Market massacre—the perpetrator of which was just shot dead by police in Italy last week—saying the event validates his past support of banning Muslims from entering the country and creating a Muslim registry for those already in the U.S.

I’ve said before that people too often take President-elect Trump literally but not seriously, and I think this is one of those cases. I don’t believe he will literally ban all 1.6 billion Muslims from coming into the country, nor does he literally mean it. More likely such a ban would resemble President Jimmy Carter’s temporary cancellation of Iranian visas in response to the hostage crisis, but that’s mere speculation. The issue of Shia-Sunni relations alone is far too complex, with the schism as deep and nuanced as when Protestants broke from the Catholic Church in the 16th century.   

But let’s say for a moment that Trump somehow succeeds in implementing a complete ban and creating a registry. These plans would not come cheap. One team of researchers estimated a ban would cost the U.S. economy at least $71 billion a year in lost spending on tourism, education and more. As for a registry, the similar National Security Entry-Exit Registration System (NSEERS)—created in response to 9/11 and dissolved this month by President Barack Obama—cost taxpayers about $10 million a year.

New rules, laws and regulations associated with a ban and registry would also add to our already bloated list of rules, laws and regulations. Trump has said he is committed to axing regulations. I’m all for limiting the regulatory burden, but I wonder what Trump (and incoming Homeland Security secretary John Kelly) would need to cut and streamline to offset the additional rules and costs.

This is the very definition of the law of unexpected consequences, and it’s important to be cognizant of “the negatives of Trump’s anti-globalization ideas,” in the words of billionaire money manager Bill Gross. It’s for this reason that investors should remain diversified, in gold, equities and tax-free municipal bonds.

To all of our readers around the world, I wish you robust health, buckets of wealth and tons of happiness in the New Year!

 

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Net Asset Value
as of 11/22/2017

Global Resources Fund PSPFX $5.97 0.03 Gold and Precious Metals Fund USERX $7.36 No Change World Precious Minerals Fund UNWPX $5.76 0.03 China Region Fund USCOX $12.18 0.03 Emerging Europe Fund EUROX $7.09 0.04 All American Equity Fund GBTFX $24.06 -0.05 Holmes Macro Trends Fund MEGAX $21.36 -0.06 Near-Term Tax Free Fund NEARX $2.21 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change