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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Global Investors: You Should Be Paying Attention to this Economic Indicator
July 13, 2015

Reality set in for investors last week: Tremors are shaking up the global markets.

A “no” vote from the Greek referendum last Sunday, the vast stock market selloff in China, and the volatile movements in the price of U.S. crude oil have made it clear the worldwide economy is collectively riding the brakes. The 3.5-hour halt in trading on the NYSE also added to investors’ unease.

It's been hard to ignore the wild market headlines this week.

Last week on BNN TV, Canada’s leading business station, I explained that an important forward-looking economic indicator we closely monitor at U.S. Global Investors can help make sense of this slowdown: the global manufacturing purchasing managers’ index (PMI), which we've written about many times. Coupled with this, our portfolio managers recognize that during highly volatile markets adjusting cash levels in our funds is key.

In addition to our own macro models, BCA Research , a highly respected independent research company, pointed out that PMIs in developing economies have plunged to new lows.  The International Monetary Fund also revised downward its global growth forecast for 2015. On this account, bad news is good news, as central bankers are scrambling to stimulate economic growth.

Emerging Markets Manufacturing PMI is Plunging
click to enlarge

As active managers, we have raised our cash levels looking for opportunities in a sloppy market, particularly in our China Region Fund (USCOX). This allows us to mitigate risk and deploy that cash when stocks look attractive per our model, which focuses on factors like high returns on invested capital, sales per share growth and dividend per share growth.

The Trend is Your Friend

It’s common for investors to look at gross domestic product (GDP) when making decisions about how to deploy capital. Unlike GDP, which looks back or in the rearview mirror, PMI is forward-looking. PMI gathers data such as global output, new orders, exports, prices and employment, making it a reliable indicator for both commodity performance and business activity. ISM, or Manufacturing Institute for Supply Management, is the U.S.-specific calculation of PMI.

Take a look at global PMI. It has continued on a three-month downtrend for the month of June.

Global Manufacturing PMI Continues Its Downtrend
click to enlarge

Similarly, PMI in the U.S. peaked seven months ago but has since been modestly declining. The threat of rising rates has been a contributing factor, and although Federal Reserve Chairwoman Janet Yellen stated Friday that the U.S. is on track to raise rates in September, many agree that this date is too soon.

U.S. Manufacturing PMI Declines After Peak
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Card Counting: Using the PMI Pattern to Your Investing Advantage

Understanding PMI is one way investors can use patterns to improve their chances of positive returns in the market – just like card counting in a game of Blackjack.

When looking at PMIs, a reading of 50 or above indicates manufacturing expansion, while a reading below 50 indicates a slowing economy. PMIs for individual countries like China and Greece are negative right now, meaning that manufacturing activity is contracting.

Our investment team’s research has shown that when the one-month reading crossed below the three-month trend, there was a significant probability that materials, energy and commodities would fall six months later. Conversely, when it crossed above, manufacturing activity would ramp up, which greatly improved the performance of commodities such as copper and crude oil, along with the materials and energy sectors.

Commodities and Commodity Stocks Historically Rose Six Months After PMI "Cross-Above"
click to enlarge

The Great Shift in Seasonal Oil

As I explain in our Managing Expectations whitepaper, using seasonal patterns, along with global PMI, is another way to understand trends in the market and the world at large.

Historically, the hurricane season in August/September has shut down the supply of oil offshore, leading to a peak in relative price around this time. But as you can see in the chart below, the new technology of fracking and a corresponding increase of U.S. onshore production, have led to a surplus, drastically shifting the shorter-term seasonal pattern in oil.

U.S. Manufacturing PMI Declines After Peak
click to enlarge

Staying Nimble During Changing Landscapes

Professor of Mathematics at the University of Oxford, Marcus du Sautoy, said it best:

“Although the world looks messy and chaotic, if you translate it into the world of numbers and shapes, patterns emerge and you start to understand why things are the way they are.”

The global markets right now indeed appear “messy and chaotic,” but curious investors and fund managers realize that specific tools and patterns help them navigate through the complexity and intensity of constantly changing landscapes.

In fact, it is the agile active management and the use of these investment tools that landed two of our funds in Investor’s Business Daily’s “Weekly Review” section last week.  This particular section of IBD is a screened list of top-rated stocks for the week, along with the top-performing funds that own these particular stocks. Our Holmes Macro Trends Fund (MEGAX) and Global Resources Fund (PSPFX) are recognized for owning nine of these top stocks.

Subscribing to our award-winning Investor Alert newsletter is one way investors can stay on top of geopolitical and economic events that could affect their investments.  We’d really appreciate it if you’d share our publication with your friends and colleagues!

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Past performance does not guarantee future results.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

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

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$8 Trillion Alternative Energy Boom Is a Win for Copper
June 29, 2015

Here’s a bit of energizing news: In 2014, for the first time in four decades, the global economy grew along with energy demand without an increase in global carbon emissions.

That’s according to energy policy group REN21’s just-released Renewables 2015 Global Status Report, which attributes this stabilization to “increased penetration of renewable energy and to improvements in energy efficiency.”

What this means is that as the world’s population continues to grow, and as more people in developing and emerging countries gain access to electricity, the role alternative energy sources such as wind, solar and geothermal play should skyrocket. Between now and 2040, a massive $8 trillion will be spent globally on renewables, about two thirds of all energy spending, according to Bloomberg New Energy Finance. Solar power alone is expected to draw $3.7 trillion.

$8 Trillion in Renewable Energy Spending by 2040. A Boon for Copper.

This is good news indeed for copper, necessary for the conduction of electricity in all energy technologies, whether they be traditional or alternative. The use of some carbon-emitting fossil fuels—coal, for instance—will likely drop off over the years, but copper will remain an irreplaceable component in our ever-expanding energy needs.

Global copper consumption is poised to increase not just because electricity demand is growing. New energy technologies typically require more of the red metal than traditional sources. Each megawatt of wind power capacity, for instance, uses an average of 3.6 tonnes of copper. Electric trolleys, buses and subway cars use about 2,300 pounds of copper apiece. Where we’ll see the most significant growth, though, is in the production of hybrid and electric cars, which use two to three times more copper than internal combustion engines.

Each NEw Generation of Car Needs More Copper Wiring
click to enlarge

Leading the way in electric vehicle technologies, of course, is billionaire entrepreneur Elon Musk’s Tesla Motors, whose $5-billion Gigafactory is currently under construction in Reno, Nevada. When production begins on its lithium-ion batteries, it will consume biblical amounts of base metals and other raw materials—so much, in fact, that some analysts question whether world supply can meet demand. Besides needing a constant stream of lithium and nickel, the factory will consume a staggering 17 million tonnes of copper, 7,000 tonnes of cobalt (today, worldwide supply is 110,000 tonnes), 25,000 tonnes of lithium (about a fifth of worldwide supply), and 126,000 tonnes of raw graphite (a little over a third of global supply). To keep up with such demand, nine new graphite mines will reportedly need to be opened.

This should come as welcome news for industry-leading base metals mining companies Freeport-McMoRan, Rio Tinto, Lundin Mining and Glencore, the last one of which we own in our Global Resources Fund (PSPFX).

Airlines Stocks Could Climb as High as 50 Percent

Solar Impusle 2

Automobiles aren’t the only types of transportation that are looking to renewables. The world’s first circumnavigation of the globe by an aircraft powered entirely by the sun is in its third month. The wings of Solar Impulse 2, whose span comes slightly under that of an Airbus A380, is covered by over 11,600 photovoltaic cells. Next year, Alaska Airlines plans to demonstrate a flight using only renewable jet fuel made from forest residues.

As for the entire airline industry, a recent Barron’s article announces that within 12 months, shares of the nation’s top four carriers could rise as much as 50 percent. Among the changes that “have left the industry in the best financial shape in decades,” according to Barron’s, are “consolidation, cost cuts and fee hikes,” not to mention cheaper fuel.

Manufacturing in China Declining, but Eurozone Could Pick Up the Slack

To be sure, copper and other base metals face some strong headwinds right now, not least of which is the strong U.S. dollar. As you can see, the red metal and the greenback have an inverse relationship.

Under Pressure: U.S. dollar Continues to Weigh on Copper
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The Thomson Reuters GFMS Survey estimates that the incentive price for new copper production is $3.50 per pound, a level unseen since March 2013. Although global copper mine production increased around 1.5 percent year-over-year in the first quarter of 2015, we might see a copper supply deficit in the next 10 years.

Many base metals, copper especially, rely heavily on orders from China, the top purchaser of the red metal. The world’s second biggest economy accounts for 40 percent of all copper consumption, but this figure might be threatened the longer its manufacturing sector remains at lukewarm levels. Although the preliminary purchasing manager’s index (PMI) reading rose slightly in June to 49.6, it’s still below the important expansion threshold of 50.

China's Manufacturing Output Stabalizes as New Order Improves SLightly
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About 60 percent of the copper China purchases goes toward the property sector, an area that’s finally starting to show signs of life after almost a year of falling prices.

A bright spot for copper demand, however, is the eurozone, whose own flash PMI hit a 49-month high of 54.1. The expansion was led by Germany and France, which saw output rising at its sharpest rate since August 2011.

Flash Eurozone Purchasing Managers' Index (PMI) Hits Four-Year High in June
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Copper Keeping It Cool for Billions Around the World

In the coming years, more and more people all over the globe will gain access to electricity, a growing percentage of which we will derive from renewable sources. In an interview with The Gold Report, my friend Gianni Kovacevic—whose 2014 book, My Electrician Drives a Porsche?, is an indispensable and entertaining resource on this topic—reminds us that by 2035, nearly two billion people will have an electricity bill for the first time.

Think about the impact that will have on all of our resources. Many of these people live close to the equator. When they begin to have more wealth, they live in more comfort. One of the first things they acquire is an air conditioning unit, or a refrigerator as they eat a protein-based diet. However, whether it’s a need or a want, the backbone of their future consumption footprint is energy, and, more specifically, electricity.

And along for the ride, whether in fossil-fuel power plants or wind turbines, will be copper.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in specific industries, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

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 HSBC Flash China Manufacturing PMI is published a week ahead of the final HSBC China PMI every month. It analyzes 85-90 percent of the responses to the Final PMI from purchasing executives in more than 400 small, medium and large manufacturers, both state-owned and private enterprises. The Markit Flash Eurozone PMI is typically based on approximately 85%–90% of total PMI survey responses each month and is designed to provide an accurate advance indication of the final PMI data.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Global Resources Fund as a percentage of net assets as of3/31/2015: Tesla Motors Inc. 0.00%, Freeport-McMoRan Inc. 0.00%, Rio Tinto plc 0.00%, Lundin Gold Inc. 0.00%, Glencore plc 2.96%, Airbus Group SE 0.00%, Alaska Air Group Inc. 0.21%.

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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Clearing Up CNBC's Haze
May 13, 2015

Yesterday on CNBC, I was asked about my investment firm’s previous investment in Uranium One, “Were you in a position to benefit from approval of this deal at the same time that you were writing checks to the Clinton Foundation?” 

My answer was clear. I said, “No.”

It would be unusual for any Chief Investment Officer to recall from memory the specific dates of ownership of an individual security among thousands of investments over a decade-long time period. I was not asked to provide this detailed information in advance. Nevertheless, while I was being bombarded with questions from three different anchors, what I said was absolutely correct:  U.S. Global Investors invested in Uranium One early and sold it long before the events in question by CNBC and other media sources. The graphic that CNBC showed on-screen during my interview included a single, incomplete factoid.

These are the facts and the timeline:

  • U.S. Global Investors, a firm that specializes in commodities and natural resources, first invested in Uranium One’s predecessor, UrAsia Energy Ltd. in 2005.
  • UrAsia was acquired by Uranium One in 2007.
  • U.S. Global Investors sold all positions in Uranium One in 2007.
  • U.S. Global Investors did not hold any positions in Uranium One in 2008, 2009 or 2010, the year the Uranium One acquisition by ARMZ was approved by the Committee on Foreign Investment in the United States.
  • U.S. Global Investors re-invested in the company in the first quarter of 2011 and sold all positions before the end of the second quarter of 2011. We exited the position when uranium prices began to decline after news of the Japanese nuclear tragedy.
  • As one can see from the charts below, our investments in uranium reflect the historical price movements of the heavy metal.

Uranium Oxide Price per Pound
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Uranium Oxide Price per Pound
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When I give educational workshops to investors I always talk about the importance of gratitude. Giving back to those less fortunate is how I demonstrate gratitude. Gratitude is the single driving force behind U.S. Global’s charitable contributions.  We have a long history of charitable contributions to many organizations. The Clinton Foundation is only one on a long and varied list.

As I said during my appearance on CNBC, our donations to Clinton charitable organizations and our investments in Uranium One are separate events. One has nothing to do with the other. Any claims to the contrary are not only offensive, but patently false.

Anyone can access public filings of our fund holdings and can confirm the facts for themselves. https://www.sec.gov/edgar/searchedgar/mutualsearch.htm

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Americans Take 3-Trillion-Mile Road Trip as Dollar Corrects and Commodities Rebound
May 11, 2015

The busy summer travel season is at our doorstep and with that comes stronger fuel demand.

Back in March I shared the fact that Americans drove a record 3.05 trillion miles on U.S. highways in January 2015 for the 12-month period, with even more expected this year. Now the International Air Transport Association (IATA) revealed that international passenger traffic in March rose 7 percent from the same time a year ago. Except for Africa, every region around the globe recorded year-over-year increases in air traffic.

Americans Driving and Flying More

Last week, West Texas Intermediate (WTI) crude oil prices reached a 2015 high, rising above $60 before cooling to just below that. It marked the eighth straight week of gains.

Investment banking advisory firm Evercore makes the case that the recent oil recovery is closely following the average trajectory of six previous cycles between 1986 and 2009. Although no one can predict the future with full certainty, this is indeed constructive for prices as well as the industry.

WTI-Crude-is-Closely-Tracking-the-Average-of-the-Previous-Bottoms
click to enlarge

Because oil remains in oversupply, the recent rally owes a lot to currency moves. The U.S. dollar, which has weighed heavily on commodities for around nine months, declined to its lowest point since mid-January. We might be seeing a dollar reset, which should finally give oil—not to mention gold, copper and other important commodities—much-needed breathing room.

The oil rig count continued to drop in April and is now at a five-year low. According to Baker Hughes, 976 rigs were still operating at the end of the month, down 11 percent from 1,100 in March and 47 percent from 1,835 in April 2014. Eleven closed last week alone. This spectacular plunge has had the obvious effect of curbing output and helping oil begin its recovery from a low of $44 per barrel in January. Production appears to have peaked in mid-March at 9.42 million barrels per day and is now showing signs of rolling over.

As I’ve mentioned before, price reversals have historically occurred between six and nine months following a drop in the rig count. The number of rigs operating peaked in October and oil started to bottom in January.

Even though domestic oil inventories still stand at near-record levels—according to the Department of Energy’s weekly report, they’re at their highest level for this time of year in at least 80 years—the rate at which storage facilities are being filled is beginning to slow.

For the first time since November 2014, stockpiles declined at Cushing, Oklahoma, the nation’s largest storage facility and the pricing point for WTI.

Net Free Credit Hits Another Record Low
click to enlarge

China Continues to Stimulate Its Economy with Weak PMI Trend

Like oil, select industrial metals are making a welcome resurgence. Both zinc and copper have risen above their 50-day moving averages, with copper staging its strongest rally in about a decade.

Net Free Credit Hits Another Record Low
click to enlarge

Besides the dollar depreciation, much of this growth derives from the hope that manufacturing in China, the world’s biggest purchaser of copper, is set to pick up. The HSBC China Manufacturing PMI fell for the second consecutive month in April to 48.9, which indicates contraction in the manufacturing sector. But global investors and commodity traders are optimistic that China’s central bank will launch a fresh round of fiscal stimulus to spur purchasing and manufacturing. I’ve observed in the past that the Asian country is quick to respond to economic indicators such as the purchasing managers’ index.

Because of its ubiquity in building construction, electronic products and transportation equipment, copper is a useful barometer of economic growth.

Several mining companies that have exposure to the red metal are performing well year-to-date. Colorado-based Newmont Mining Corporation is up 38 percent for the year; Australia-based Northern Star Resources, 40 percent. We own both names in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX).

Agribusiness stocks have also drawn investors’ attention lately, as mergers and acquisitions (M&A) chatter has intensified.

Last Friday, Syngenta, the giant Swiss producer of not only seeds but also herbicides and insecticides, formally turned down a $45 billion takeover by rival Monsanto. As I’ve discussed before, such offers and deals have typically made the stock of the company being considered for purchase more attractive.

Which Countries Would Suffer the Most if Greece Defaulted on Its Debt
click to enlarge

We own both Syngenta, up 33 percent year-to-date, and Monsanto in our Global Resources Fund (PSPFX).

Ramped-up M&A activity has also in the past suggested that a bottom has been or will soon be reached. We saw this in the oil industry, with Halliburton acquiring Baker Hughes last November and Royal Dutch Shell taking over rival BG Group in April.

As Yogi Berra quipped: It’s déjà vu all over again.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Past performance does not guarantee future results.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. 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.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

The Chinese HSBC Manufacturing PMI is a composite indicator designed to provide an overall view of activity in the manufacturing sector and acts as an leading indicator for the whole economy. When the PMI is below 50.0 this indicates that the manufacturing economy is declining and a value above 50.0 indicates an expansion of the manufacturing economy.

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, Gold and Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of 3/31/2015: Baker Hughes Inc. 0.23% in Global Resources Fund; Newmont Mining Corp. 1.10% in Gold and Precious Metals Fund, 0.06% in World Precious Minerals Fund; Northern Star Resources Ltd. 5.52% in Gold and Precious Metals Fund, 0.59% in World Precious Minerals Fund; Syngenta AG 3.07% in Global Resources Fund; Monsanto Co. 3.17% in Global Resources Fund; Halliburton Company 0.00%; Royal Dutch Shell PLC 2.97% in Global Resources Fund; BG Group PLC 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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These Signs Point to an Airline Industry Secular Bull Market
April 6, 2015

These Signs Point to an Airline Industry Secular Bull Market

The week before last I was in Melbourne, Australia, attending a conference for chief executives from all over the world. While there, I spoke with many of my peers about the airline industry, which is currently in a­ three-year bull run as measured by the S&P 500 Airlines Index.

I was surprised to learn that several people incorrectly assumed that the airline industry is included in the consumer discretionary sector of the S&P 500 Index. It does seems as if it belongs there, along with travel, hospitality and leisure. But the industry actually qualifies as an industrial.

Regardless of which sector airlines belong in, the fleet has flown past both industrials and consumer discretionaries for the five-year period.

Airlines-Flew-Past-Industrials-and-Consumer-Discretionary
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Not only that, but airlines were the best-performing industry in industrials for the one-year, three-year and five-year periods.

Airlines: The Best-Performing Industry in the Industrials Sector
As of April 1, 2015
Percent Change
1-Year 3-Year 5-Year
Airlines +45% Airlines +288% Airlines +142%
Professional Services +21% Building Products +109% Road & Rail +134%
Commercial Services & Suppliers +19% Aerospace & Defense +75% Aerospace & Defense 93%

A misconception held among some investors is that airline stocks are outperforming right now only because fuel costs are down. Fuel, after all, accounted for about 30 percent of carriers’ operating costs in 2014. The implication, some believe, is that when oil prices begin to recover, airlines will be first to feel the pinch.

This isn’t necessarily the case. The industry is in a much more rational business environment than it was a decade ago. Over the last five years, fundamental changes have taken place, including consolidation, new sources of revenue, better fuel efficiency and additional seats, that have helped airlines excel even when oil is $100 per barrel or more.

In fact, airline stocks for the four industry leaders—United Airlines, Delta Air Lines, American Airlines and Southwest Airlines—began their recent ascent even before oil prices began to plummet 50 to 60 percent starting last summer.

Airline-Stocks-Defied-High-Fuel-Costs
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And because most airlines hedge their fuel, they’re still locked into $100-per-barrel oil prices and therefore haven’t yet felt the full benefits of lower fuel costs. American is one of the few that doesn’t hedge.

Airline research analyst Helane Becker of financial services firm Cowen Group writes:

American participates in 100 percent of the decline in jet fuel prices. The current per gallon price is $1.78, and American uses 4.4 billion gallons of jet fuel annually, so every $1 change in oil [saves the company] approximately $105 million per month.

Contributing to American’s diminishing operating costs is its purchase of dozens of new aircraft—99 delivered last year, 112 expected this year—that will replace older, less-fuel efficient jets. This should help the company save millions not only in jet fuel but also maintenance fees for many years to come.

It should also be noted that new baggage-tracking technology has led to a dramatic decrease in lost and mishandled luggage, helping airlines all over the globe save billions and keep passengers happy. Even as the number of worldwide passengers has steadily increased year-over-year—exceeding a record three billion in 2013—there’s been a drop of 61 percent in missing bags since the peak in 2007. As a result, carriers save a collective $18 billion a year.

Downtrend-in-Lost-and-Mishandled-Baggage-Saves-Airlines-18-Billion-a-Year
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Free Cash Flow

Often it’s not enough to look just at a company’s revenue for any given timeframe to determine its strength. A more precise metric is free cash flow, which tells you how much cash the company has in the bank after taxes and all operating expenses have been paid. In other words, it’s what the company is “free” to spend.

The higher a company’s free cash flow yield, the better. When the yield is higher, the company is more likely to plow that extra cash back into its growth or declare a dividend. American, for instance, began paying a dividend last summer; Alaska Airlines, the summer before last.

Last year, Delta announced a stock buyback plan worth $2 billion and a dividend increase of 50 percent. At this May’s Bank of America Merrill Lynch Industrials Conference, the company is expected to make a similar announcement—another buyback authorization and a possible dividend boost of 25 percent.

As you can see below, U.S. airlines’ free cash flow is expected to reach a record high this year and each subsequent year. Domestic carriers have never had this much cash potential on their hands—cash that can be used to grow and improve their businesses as well as reward shareholders. 

Downtrend-in-Lost-and-Mishandled-Baggage-Saves-Airlines-18-Billion-a-Year
click to enlarge

If we look at individual companies’ free cash flow, three of them—Delta, Southwest and United Airlines—are expected to have yields above an impressive 10 percent in 2015.

US-Airlines-Estimated-2015-Free-Cash-Flow-Yield
click to enlarge

An airline industry report by J.P. Morgan stated last week:

We believe in the persistence of cash flows and the presence of a good structural model. The sector has begun to show us their success instead of repeating “trust me”… [T]he cash is real, the margins are real, the buybacks are real.

In light of this success, some analysts are concerned that airlines, flush with cash for the first time in recent memory, will increase capacity too quickly and outpace demand.

Two main arguments can be made here. For one, the industry is highly correlated to a nation’s GDP, and carriers have historically avoided growing faster than the economy by too wide of a margin. The second argument has to do with what experts believe is an imminent pilot shortage in the U.S.

Pilot Shortage Ahead?

More sunshine, less stormy wheather

The Federal Aviation Administration (FAA) mandates that all pilots must retire at age 65, which should open up many commercial airliner positions over the coming years. But because the starting salary with a regional carrier is around $20,000 per year, fewer and fewer would-be aviators can justify the typical $50,000-a-year flight training, not to mention the required 1,500 hours of flight time before they can even be considered for a position.

You might be wondering why carriers aren’t able to make up the difference by recruiting more pilots out of the military. The reason is because a greater number of people are being trained now to fly drones than jets—and piloting a drone doesn’t count toward commercial flight hours.

This all might sound like troubling news, but it actually has the effect of encouraging discipline, reining in excessive spending and curbing carriers from growing too exuberantly. They can always increase seat capacity—to a certain extent, of course—but generally they’re not going to spend money needlessly on new aircraft if there are fewer people available to pilot them.

Read more about the airline industry:

  • Global Airline Stocks Soaring, and Not Just Because of Low Oil Prices
    Although it’s true that fuel is carriers’ top operating expense—they collectively spent $48 billion on fuel in 2013—there’s more to the industry’s recent bull run than the low price of oil. In fact, airlines are in a better position now to manage an increase in oil prices than they have been in recent memory, for a number of reasons.
  • The Airline Industry Ascended to New Records in 2014
    This year, the daily number of available seats for international-bound flights out of the U.S. will rise to an all-time high of over 350,000. That’s 20,000 more seats per day than were available just last year.
  • Why This Airline Just landed in the S&P 500 Index
    Joining rivals Southwest Airlines and Delta Air Lines, American Airlines is the newest member of the prestigious club for the nation’s largest companies by market capitalization. Not bad for a company that, only four years ago, found itself in bankruptcy court.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 500 Industrials Index comprises those companies included in the S&P 500 that are classified as members of the GICS industrials sector. The S&P 500® Consumer Discretionary Index comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector. The S&P 500 Airlines Index is a capitalization-weighted 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 12/31/2014: Delta Air Lines, Inc.; Alaska Air Group.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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.

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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