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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.

Get Ready for Commodity Liftoff: Global Manufacturing Just Made a HUGE Move!
November 9, 2015

Global PMI Just Crossed Above Its Three Month Moving Average

By most standards, October was an explosive month, with domestic equities recording their biggest monthly gains in four years.

But the most exciting news was that the global purchasing managers’ index (PMI) reading for the month of October rocketed up to 51.4, almost a point higher than September’s 50.7. Not only does this represent the strongest monthly surge in nearly two years, but the index shot above its three-month moving average for the first time since March.

As Donald Trump might say: This is going to be huge.

Global-Manufacturing-PMI-Crosses-Above-Its-Three-Month-Moving-Average
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We monitor the global PMI very closely because in the past it has reliably anticipated how commodity prices might behave in later months. Our own research shows that when a PMI “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has signaled a possible spike in certain commodities, materials and energy. Three months following previous breakouts, copper had an 81 percent probabilty of rising approximately 7 percent, while crude oil jumped 7 percent three quarters of the time.

Commodities-And-Commodity-Stocks-Historically-Rose-Three-Months-After-PMI-Cross-Above-Cross-Below
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Indeed, oil prices have tended to track the global PMI pretty closely. With manufacturing exploding off the launch pad, could oil be very far behind?

Upturn-In-Global-Manufacturing-PMI-Could-Be-A-Tailwind-For-Crude-Oil
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What’s more, domestic equities are strongly correlated with global PMI readings. Investment research firm Cornerstone Macro shows that in five separate incidences since 2001, a PMI liftoff after hitting a bottom was soon followed by a rally in the S&P 500 Index.

A-Bottom-In-The-Global-PMI-Has-Marked-An-Inflection-Point-for-Domestic-Equities
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A similar trend can be observed in world equities. In the past, the MSCI World Index has rallied when the global PMI turned up.

The-Beginning-Of-An-Emerging-Market-Rally-Starts-With-An-Improvement-In-The-Global-PMI
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Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), agrees that the PMI reading is promising.

“It’s definitely constructive for commodities going forward,” he said.

One of our holdings in PSPFX, by the way, had a huge jump this week. British Columbia-based Sunridge Gold announced that it would be selling its 60 percent interest in the Asmara Mining Share Company, holder of the Asmara Project in northeastern Africa, to Sichuan Road & Bridge Mining Investment Development, a Chinese company, for $65 million. Sunridge jumped 41 percent this week alone and for the year is up 71 percent.

Did I mention that U.S. Global Investors is the largest holder of Sunridge stock (by a very wide margin)? That’s the power of active portfolio management.

So When Will Liftoff Occur?

As exciting as this news already is, we believe the real commodity liftoff should occur when the U.S., Europe, China and global PMIs all score above a 50.0, with the one-month readings above the three-month trends.

Of those regions, China is the only one whose reading still trails below the 50.0 level. For the month of October, it came in at 48.3, up from 47.2 in September.

But like the global PMI, the China PMI crossed above its three-month moving average, suggesting that manufacturing activity is contracting at a slower pace and preparing to reverse course into expansion mode.

It’s crucial that China’s PMI move above 50.0, as the Asian giant is the top driver of global commodities demand. We believe that once purchases, new orders and exports gain further momentum, commodities might have the fuel they need to skyrocket.

Heading Down Under

I’m nearing the end of my worldwide conference tour, which kicked off the week before last at the 2015 New Orleans Investment Conference.

Last week I was in beautiful Lima, Peru—the third-largest city in the Americas—where I attended and spoke at the Mining & Investment Latin America Summit.

Downtown-Lima-Peru

During this leg of the trip I managed to gain some tacit knowledge by visiting the Mineral MuseumAndrés del Castillo as well as downtown Lima, which is currently undergoing lots of construction and rapid population growth.

Frank-Holmes-Visiting-Mineral-Museum-Andres-Del-Castillo-Lima-Peru

Right now I’m in Melbourne, Australia, getting ready for the International Mining and Resources Conference. Stay tuned for my thoughts and insights on what I saw and heard during my travels!

 

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.

This news release may include certain “forward-looking statements” including statements relating to revenues, expenses, and expectations regarding market conditions. These statements involve certain risks and uncertainties. There can be no assurance that such statements will prove accurate and actual results and future events could differ materially from those anticipated in such statements.

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.

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.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.

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 (PSPFX) as a percentage of net assets as of 9/30/2015: Sunridge Gold Corp. 1.59%, Sichuan Road & Bridge Mining Investment Development Corp. Ltd. 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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Have Commodities Reached an Inflection Point?
November 2, 2015

Iceberg, Nominal Interest Rates and Real Interest Rates

Last week the Federal Reserve announced it would delay the interest rate liftoff yet again, but while everyone seems concerned about nominal rates—the federal funds rate, in this case—real rates have already risen about 5 percent since August 2011. This “invisible” rate hike is much more impactful to commodity prices and emerging markets than a nominal rate hike, which is simply the “tip of the iceberg.”     

Since July 2014, the U.S. dollar has appreciated more than 20 percent. This has had huge implications for net commodity exporter countries, both developing and emerging, which typically see their currency rates fluctuate when prices turn volatile.

But why does this happen?

The main reason is that most commodities, including crude oil, metals and grains, are priced in U.S. dollars. They therefore share an inverse relationship. When the dollar weakens, prices tend to rise. And when it strengthens, prices fall, among other past ramifications, as you can see in the chart below courtesy of investment research firm Cornerstone Macro.

Dollar-Appreciation Spikes Almost Always Lead to International Currency Crises
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Indeed, commodities have collectively depreciated close to 40 percent since this time a year ago and are at their lowest point since March 2009. We might very well have reached an inflection point for commodities, which opens up investment opportunities.

Net Commodity Exporters under Pressure

The number of developing and emerging markets that are dependent on commodity exports has risen in recent years, from 88 five years ago to 94 today, according to the United Nations Conference on Trade and Development (UNCTAD). Many of these countries—located mostly in Latin America, Africa, the Middle East and Asia—have a dangerously high dependency on a small number of not only commodity exports but also trading partners.

For many suppliers, China is the leading buyer. But the Asian giant’s imports have been slowing as its economy transitions from manufacturing to services and housing, forcing many net commodity export countries to rethink their dependency on China.

China's Services Industry Surpasses 50 Percent GDP
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This is the position Indonesia finds itself in right now. As much as 50 percent of its total exports consists of crude oil, palm oil, copper, coal and rubber, all of which China has historically been a vital importer. A stunning 95 percent of Mongolia’s exports flow into its southern neighbor, according to the World Factbook. And for Chile, commodities represent close to 90 percent of total exports, about 25 percent of which goes to China.

But countries needn’t have such a high dependency on commodities for their currencies to be affected. The Australian dollar, for instance, has a positive correlation with iron ore prices.

Australian Dollar Tracks Iron Ore Prices
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About 98 percent of the world’s iron ore supply is used to make steel. So important is the metal to the state of Western Australia, where most of the continent’s deposits can be found, that every $1 decline in prices results in an estimated $49 million budget loss.

The same relationship exists between the Peruvian sol and copper. Peru is the fourth-largest copper producer in the world, preceded by Chile, China and the U.S.

The Peruvian Sol Tracks Copper Prices
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The Russian ruble, Canadian dollar and Colombian peso all follow crude oil prices. (Russia is the third-largest oil producer in the world; Canada, the fifth-largest; Colombia, the 19th-largest.)

Russian Ruble Tracks Oil Prices
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Canadian Dollar Tracks Oil Prices
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Colombian Peso tracks Oil Prices
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It’s important that we see stability in emerging market currencies, which would help support resources demand. We’ve seen some stabilization in the Chinese renminbi after it was depreciated in August, but a few others are down pretty significantly.

Currency Depreciations Against the U.S. Dollar for the 12-Month Period
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Global Manufacturing Could Reverse Course Sooner Than You Think

I’ve shown a number of times that commodity demand depends on manufacturing strength, as measured by the J.P. Morgan Global Purchasing Manager’s Index (PMI). This indicator has steadily been trending lower. Although the reading is still above the neutral 50.0 line, commodity prices have reacted negatively.

Commodities are Highly Correlated to Global PMIs
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Cornerstone Macro believes both the Chinese and global PMI are “likely” to rise in October, leading to a full year of upside potential. If true, this is indeed welcome news, but it’s worth remembering that the PMI looks ahead six months, meaning it’ll take approximately that long for commodities to recover.

In any case, now might be a good time for investors to consider getting back into commodities and natural resources since we could be in the early innings of an upturn.

“You want to buy commodity stocks when they’re out of favor, because they are cyclical,” Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), told The Energy Report last week. “If you look out 12, 18, 24 months from now, those equity values should reflect equilibrium commodity prices and move significantly higher from here.”

Conference Hopping

Last week I returned from the 2015 New Orleans Investment Conference, widely considered as the “World’s Greatest Investment Event,” where I participated in an investment panel and presented a speech. For 41 years, this event has attracted some of the world’s most distinguished speakers—from Margaret Thatcher to Steve Forbes to Dr. Ben Carson—and this year was no exception. Among the attendees were respected Fox News commentator Charles Krauthammer, “Gloom, Boom & Doom Report” publisher Dr. Marc Faber and James Rickards, author of “Currency Wars.”

This week I'm in Peru for the Mining & Investment Latin America Summit, and next week I’ll wrap things up in Melbourne, Australia, at the International Mining and Resources Conference.

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.

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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New Study: We're Nowhere Near Peak Coal Use in China and India
September 15, 2015

Resource investors, take note: By 2025, just 10 years from now, energy consumption in Asia will increase a whopping 31 percent. A whole two-thirds of that demand, driven largely by China and India, will be for fossil fuels, most notably coal.

That’s according to a new research piece by financial services group Macquarie, which writes that the estimated rise in fossil fuel demand is equivalent of “three times Saudi Arabia’s current (all-time-high) oil production.”

Change-in-Primary-Energy-Consumption-Between-2014-and-2025
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Macquarie’s research is in line with BP’s “Energy Outlook 2035,” released earlier this year, which predicts that more than half of the world’s energy consumption will come from China and India by the year 2035.

Chinese Indian Demand Fossil Fuels Coal Grow Next

Many readers might approach this news with a healthy dose of skepticism. Haven’t we been told that fossil fuels are falling out of favor? Aren’t governments placing caps on coal use to appease environmentalists and climate change crusaders?

It’s true that coal demand in China has declined a huge 6 percent so far in 2015, the result of anti-air pollution laws that temporarily restricted not just coal use but also factory operations and the amount of driving you can do. Last month I shared a striking photo of a man cycling through Beijing, a brilliant blue sky overhead—something I’ve personally never seen in my 25 years of visiting the city. As most people know, Beijing is notorious for its noxious yellow haze, and the government has been pressured lately to act. In Shanghai, authorities plan to close and relocate 150 factories in preparation for the proposed Shanghai Disneyland, the thinking being that the “Happiest Place on Earth” must have clear blue skies. 

I think we all agree that clean air is preferable to smog, but there needs to be a balanced approach to environmental policy that’s also business-friendly.

“Coal producers within China are definitely facing a consistent push by the government for clean energy,” says Xian Liang, portfolio manager of our China Region Fund (USCOX).

To get a better sense of the biblical quantity of raw materials China currently consumes, check out this infographic courtesy of Visual Capitalist.

Can India Pick Up China’s Slack?

Today, China and India collectively consume about 60 percent of all coal produced in the world. In absolute terms, consumption is expected to continue expanding as their populations balloon and the energy-thirsty middle class expands. In other words, as the energy pie gets much bigger, each slice should likewise grow.

By 2025, Macquarie writes, coal will still play a dominant role in China’s energy mix.

Coal-to-Remain-the-Dominant-Energy-Source-in-China-by-2025
click to enlarge

It’s possible that if China’s coal consumption dramatically declines, India will be there to fill the hole. Macquarie estimates that by 2025, India’s energy demand will rise 71 percent, with coal taking the lead among oil, gas, hydro, nuclear and others. The south Asian country is already the second-largest importer of thermal coal, and it might very well surpass China in the coming years. Macquarie writes:

Although all energy use will rise [in India], coal is the major theme as consumption and local production are both set to almost double by 2025 on the back of large-scale coal power plant construction plans.

The group adds that, unlike China, India has no present interest in reigning in its use of coal. Most emerging markets, India included, recognize that coal is an extremely affordable and reliable source of energy, necessary to drive economic growth.

Even if these predictions don’t come to fruition, the consensus is that we haven’t yet seen peak coal use in Asia. Estimates vary depending on the agency, but everyone seems to agree that demand in the medium-term will rise before it retreats. A 2014 MIT study even suggests that Chinese coal consumption could rise more than 70 percent between 2012 and 2040.

Consensus-We-Havent-Seen-Peak-Coal-Use-in-China
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Follow the Smart Money

With prices at multi-year lows and coal producers under pressure, some big name investors have used this as an opportunity to accumulate shares in depressed stocks. Recently I shared with you that influential billionaire investor George Soros just took a $2-million position in coal producers Peabody Energy and Arch Coal.

Maybe he’s on to something, if Macquarie’s research turns out to be accurate.

No one can deny that fossil fuels, and coal in particular, face many headwinds right now, including government policies intended to limit their use. The strong U.S. dollar has created havoc for commodities such as oil and coal, just as it has for American companies with business activities in foreign countries. And with many central banks around the globe continuing to devalue their currencies against the dollar, a strong greenback might be the “new normal” for a while.    

Also like oil, coal is facing oversupply issues, as producers had not anticipated a slowdown in emerging markets.

But there and elsewhere, coal will continue to play a vital role in providing affordable, reliable energy for decades to come.

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.

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 6/30/2015: Peabody Energy Corporation 0.00%, Arch Coal 0.00%.

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Here's Your Guide to What the Influencers Are Saying about Commodities
September 8, 2015

A few legendary influencers in investing are making huge bets right now on commodities, an area that’s faced—and continues to face—some pretty strong headwinds. What are we to make of this?

I already shared with you that famed hedge fund manager Stanley Druckenmiller made a $323-million bet on gold, now the largest position in his family office fund. It’s also come to light that George Soros recently moved $2 million into coal producers Peabody Energy and Arch Coal. Meanwhile, activist investor Carl Icahn took an 8.5-percent position in copper miner Freeport-McMoRan, which we own.

These giants of the investing world have just given huge endorsements for gold, coal, copper, and precious metals

My friend Marc Faber, the widely-respected Swiss investor and editor of the influential “Gloom, Boom & Doom Report,” is now plugging for the mining sector and precious metals. Speaking to Bloomberg TV last week, Faber claimed that investors are running low on safe assets and suggested they revisit mining companies:

If I had to turn anywhere where… the opportunity for large capital gains exists, and the downside is, in my opinion, limited, it would be the mining sectors, specifically precious metals and mining companies… like Freeport, Newmont, Barrick. They’ve been hammered because of falling commodity prices. Now commodities may still go down for a while, but I don’t think they’ll stay down forever.

Late last month, Freeport became the first major miner to announce production cuts in response to depressed copper prices, which have slipped around 19 percent since their 2015 high of $2.95 per pound in May. This reduction should remove an estimated 70,000 tonnes of copper from global markets, according to BCA Research, and eventually help support prices.

Platinum and palladium miners in South Africa, a leading producer of both metals, also announced job cuts and mine closures, as platinum has slipped more than 16 percent this year, palladium a quarter.

But Marc sees opportunity, as I do. In my keynote speeches earlier this year I suggested that 2015 would see a bottom in cost-cutting due to divesture and slashing of capital expenditures, and that in 2016 we should see higher returns on capital.

Furthermore, using our oscillators to measure the degree to which asset classes are overbought and oversold, we find that commodities are extremely oversold right now and currently bouncing off low negative sentiment. The smart money is buying.

When asked if he thought commodities had reached a bottom, Marc had this to say:

I would rather focus on precious metals—gold, silver, platinum—because they do not depend on industrial demand as much as base metals and industrial commodities.

Marc was referring, of course, to China, the 800-pound commodity gorilla, as I’ve often described the country. The Asian powerhouse is currently responsible for nearly 13 percent of the world’s commodity demand, followed by the U.S. at a little over 10 percent.

China's demand for commodities is huge
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But as I discussed recently, China is transitioning from a manufacturing-based economy to one that emphasizes services, consumption and real estate. Commodity demand is cooling, therefore, and we can expect it to cool even further. Aside from the strong dollar, this is one of the key reasons why prices have plunged to multi-year lows.

Commodities Seeking an Upturn to Global Manufacturing

The JPMorgan Global Manufacturing PMI continues to decline as well. Since its peak in February 2014, the reading has fallen 4.5 percent. The August score of 50.7, just barely indicating manufacturing expansion, is the sixth consecutive monthly reading to remain below the three-month moving average.

I’ve shown a number of times in the past that when this is the case—that is, when the one-month reading is below the three-month trend—commodity prices have tended to trade lower. Unlike other economic indicators such as gross domestic product (GDP), the PMI is forward-looking and helps investors manage expectations. Based on our own research, there’s a strong probability that copper and crude oil prices might dip three months following a “cross below.”

The opposite has also been true: Prices have a stronger probability of ticking up three months after the one-month crosses above the three-month.

Commodities and commodity stocks historically rose three months after pmi "cross-above"
click to enlarge

This is why we believe prices will have a better chance at recovery after the global PMI crosses above its three-month moving average.

I have great respect and admiration for Druckenmiller, Soros, Icahn and Marc—all of whom are clearly bullish on commodities—but we would prefer to see global manufacturing growth reverse course.

In the meantime, low commodity prices are a windfall for many companies in Europe, Japan and the U.S. Metals and other raw materials are at their lowest in years, which is the equivalent of a massive tax break for the construction and manufacturing sectors.

Low gold prices are also expected to generate high demand in India as we approach fall festivals such as Diwali and Dussehra, not to mention weddings. According to estimates from Swiss precious metals refiner Valcambi, demand could reach 950 tonnes by the end of the year, compared to 891 tonnes in 2014.

Emerging Markets Might Have Found a Bottom

It might be challenging for the global PMI to cross above the three-year moving average since Chinese manufacturing has slowed, but there’s burgeoning strength in other emerging markets, many of them unexpected: the Philippines, Myanmar, Ethiopia. The Czech Republic has the highest PMI reading among emerging Europe countries and the fastest-growing economy in all of Europe.

An interesting chart from Morgan Stanley suggests that emerging markets might have found a trough and are ready to turn up. Assuming that August 24, 2015 was the bottom, the bank compares the recent bear market to five previous ones and finds that it’s tracking a similar price action as 1995, 2002 and 2011. It’s also much less severe than 1998 and 2008.

A contrarian thesis: have emerging markets found a bottom?
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Additionally, Bloomberg reminds us that by 2050, 3 billion people will enter the middle class, nearly all of them in the developing world. Emerging markets might be struggling somewhat right now, but they’re still very much our future.

U.S. Travelers to Spend Big This Labor Day Weekend, but Airline Stocks Are Reasonably Priced

This Labor Day weekend, Americans were projected to spend a whopping $13.5 billion, according to the U.S. Travel Association (USTA). This figure included spending on goods and services as people traveled by automobile, jet or some other means to visit friends and family. Air travelers alone spent $2.9 billion, if expectations were accurate.

Luxury in the air: delta is now offering private jet upgrades to select passengers

The International Air Transport Association (IATA) released air travel demand figures for the month of July, noting that demand continues to be robust both domestically and internationally. All global markets saw growth in July, with domestic flight demand rising 5.9 percent year-over-year. At an eye-popping 28.1 percent, India posted the strongest growth.

As GARP (growth at a reasonable price) investors, we still find airline stocks attractively priced, as do many others. Barron’s recently made note of this, stating: “Major airline stocks are trading 9.4x our 2015 EPS (earnings per share) estimates and 9.0x our 2016 EPS estimates, below their historical trading range of 10x – 12x.”

We own a number of these carriers in our funds: Delta Air Lines (which announced a $5-billion stock buyback program in May), Alaska Air, and JetBlue in the Holmes Macro Trends Fund (MEGAX); Ryanair (which just hit a new 52-week high) and Aegean Greece in the Emerging Europe Fund (EUROX). We also own several names in the aircraft manufacturing and airport services areas, including Pegasus Hava Tasimaciligi, Wizz Air Holdings and TAV Havalimanlari.

The Iran Nuclear Deal Could Be a Boon to Boeing and Airbus

On a final note, if you’ve been paying attention to the news, you’re probably familiar with the pending nuclear deal with Iran. When implemented, trade barriers will be lifted for the first time in decades. Whether you approve or disapprove of the deal, you have to recognize that this could be a huge opportunity for many companies that, up until now, have been cut off from doing business with the Middle Eastern country.

One area that’s in dire need of an overhaul is Iran's aging jet fleet. The average age of the United Arab Emirates’s planes is 6.3 years. In Iran, meanwhile, it’s 27 years. These are ancient relics!  

Iran nuclear deal: a huge opportunity for Boeing and Airbus?
click to enlarge

The total number of jets that will need replacing is estimated to be 400—and cost $20 billion.

Aircraft manufacturers Boeing and Airbus already have a growing backlog of new aircraft orders—10,000 jets altogether, according to the Wall Street Journal—and the Iran deal has the potential to increase it even further.

We also see it as an opportunity for energy companies in particular that the median age of Iran’s educated population is 28 years—this is a market with promising growth potential.

You might have seen headlines that energy officials from Iran and Saudi Arabia secretly met to cooperate on trying to get crude oil prices stable at between $70 and $80 per barrel. Oil prices spiked this past week in response, but as far as we can tell, this is only chatter. Don’t bet on rumors, but rather on good government monetary and fiscal policy, excellent management and undervalued stocks.

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.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund 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. 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 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.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund (MEGAX) and Emerging Europe Fund (EUROX) as a percentage of net assets as of 6/30/2015: Peabody Energy Corporation 0.00%, Arch Coal Inc. 0.00%, Freeport-McMoRan Inc. 0.00%, Newmont Mining Corp. 0.00%, Barrick Gold Corp. 0.00%, Valcambi SA 0.00%, Delta Air Lines Inc. 0.00%, Alaska Air Group Inc. 0.00%, JetBlue Airways Corporation 0.00%, Ryanair Holdings plc 0.00%, Aegean Airlines SA 0.00%, Pegasus Hava Ta??mac?l??? SA 0.50% Emerging Europe Fund, Wizz Air Holdings plc 0.00%, TAV Havalimanlar? Holdings 1.09%, The Boeing Co. 1.50% Holmes Macro Trends Fund, Airbus Group SE 0.00%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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What Airlines Can Teach the Energy Sector about Adversity
August 6, 2015

Learning to cope with adversity can help build stronger people and companies

If you’ve studied psychology, and specifically behavioral finance, you might be familiar with the concept of adversity quotient (AQ), which measures how well someone is able to face and cope with, well, adversity. It looks at how we use the tools given to us in order to survive and recover from setbacks.

To get a better idea of AQ, picture two soldiers who have recently returned home from war. Both are jaded, shaken and physically and emotionally scarred. And yet only one of them truly manages to cope with what he did and saw on the field of battle. He attends school, obtains a degree, gets married and becomes a loving husband and father. Maybe he even starts his own business.

Keeping in mind that there are numerous factors outside our control, both internal and external, it’s constructive to consider what steps could be taken in this hypothetical scenario to confront adversity and not only survive but thrive. Why was one soldier more successful than the other?

The same question can be applied to companies facing adversity. Right now, many companies have to deal with one of the worst commodities bear markets in recent memory and an overbearing U.S. dollar, among other challenges.

When the greenback gains in strength, it squeezes the value of overseas sales and hurts exports. The dollar is up 20 percent for the one-year period, compared to the S&P 500 Index, up around 9 percent.

U.S. Dollar vs. the S&P 500 Index
click to enlarge

Like the soldier with the higher adversity quotient, some companies and industries are more nimble and better able at thriving in different climates, even one as challenging as now. 

Record Earnings Season for Domestic Airlines

Domestic airlines, for instance, posted their first-ever $5 billion in net quarterly profits, with the four industry leaders alone generating a combined $4.99 billion, according to aviation reporter Terry Maxon of the Dallas Morning News. It’s now estimated that carriers will manage to beat this amount in the third quarter by as much as $1 billion.

Not bad for an industry that only 10 years ago was mired in plunging margins and multiple bankruptcies.

Learning to cope with adversity can help build stronger people and companies

Investment analysts are taking note. In a recent report, S&P Capital IQ writes that, although several airlines’ stock prices have declined this year, “airline execs have learned from past costly mistakes on adding too much capacity.” The financial information provider “forecasts 2015 as a record profitability year, driven by revenue growth and the benefits of lower oil prices.”

Airlines have managed to stay ahead, but other industries haven’t fared as well. Once all companies have reported this quarter, we might end up seeing the first decline in bottom-line earnings since the third quarter of 2012. And for the first time since the second and third quarters of 2009, we might have two back-to-back declines in revenue. According to the Financial Times, 10 of the largest multinational American companies, including Apple, General Motors, IBM and Amazon, have seen sales revenue drop a combined $31 billion so far this year.

Because of the greenback’s strength, real imports are outstripping real exports, leading to a decline in net exports.

Net Exports Fall After U.S. Dollar Appreciates
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The spread between the two might very well widen, or at least hold steady, in the coming weeks and months. Many central banks began to loosen monetary policies around the same time that the Federal Reserve ended its own quantitative easing program back in October. It’s now seriously considering raising interest rates at a time when other banks have lowered them. From a monetary policy standpoint, the growing divergence between the U.S. and the rest of the world could contribute to the dollar’s continued appreciation against other world currencies.

These so-called “currency wars” are part of the reason why equities in Europe and Japan, both of which slashed rates in 2014, are outperforming the American market for the one-year period.

Low Oil Prices Dragging Down Energy Companies

The sector whose earnings growth has been affected the most by the strong dollar is energy, which dropped 57 percent year-over-year in the second quarter. Oil, priced in dollars internationally, has lost more than half its value in the past 12 months and has taken many energy companies down with it.

2015 Second Quarter Earnings Growth, So far
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As I write this, West Texas Intermediate crude sits at about $44 per barrel, the lowest it’s been since March. For the one-year period, a combined $1.3 trillion has been wiped out from the valuation of companies listed in the MSCI World Energy Index. Some of the worst-performing stocks in the S&P 500 Index for the one-year period are energy-related: Southwestern Energy is down 56 percent; Consol Energy, 65 percent; Ensco, 69 percent; and Chesapeake Energy, 70 percent.

What will these energy companies do to survive this huge commodities downturn? What’s their AQ? Remember, 70 percent of U.S. airlines were operating under Chapter 11 bankruptcy protection between 2005 and 2008. Today, they’re posting record earnings. They managed to turn things around through consolidation and by restructuring their business models.

Energy companies might need to do the same in the meantime as we wait for oil and other commodities to recover.

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The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The MSCI World Energy Index is an unmanaged index composed of more than 1,400 stocks listed on exchanges in the U.S., Europe, Canada, Australia, New Zealand and the Far East. The MSCI World Energy Index is the Energy sector of the MSCI World Index.

Fund portfolios are actively managed, and 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 of U.S. Global Investors Funds as of 6/30/2015: Apple Inc., General Motors Co., IBM.    

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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