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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.

Innovation and Efficiency Drive U.S. Oil Supply and Demand
March 30, 2015

Innovation and Efficiency Drive U.S. Oil Supply and Demand

Oil mounted a strong surge last Thursday as Saudi Arabia-led forces carried out a series of airstrikes against Houthi militants in Yemen, part of which is bordered by the Bab el-Mandeb strait, an important shipping “chokepoint.” For the first time in three weeks, Brent oil prices rose to $59 while West Texas Intermediate (WTI) crude closed above $51 after an incredible seven-day rally.

However, the conflict wasn’t enough to sustain the uptrend, and prices slipped today—WTI to $48.41.

“The significance of the conflict was overblown, at least in terms of its effect on oil,” says Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX). “There’s still too much supply.”

Indeed, U.S. crude oil supply is noticeably on the rise. As you can see in the chart below, the weekly crude reserves are significantly above the five-year average and sharply headed higher. 

U.S. Crude Oil Reserves
click to enlarge

Last week we learned that storage at Cushing, Oklahoma, reached 54.4 million barrels, a new high. Cushing is important to monitor because it’s the nation’s largest storage facility and serves as the pricing point for WTI. Since it was upgraded in 2011, maximum capacity now stands at 85 million barrels.

But if the current fill rate keeps up—2.12 million barrels a week—the cap could be reached as soon as this June, however unlikely that seems. Vehicle sales are up, as is the number of miles being driven on U.S. highways, and the busy summer travel season is fast approaching.

American Innovation to Thank

Simply put, technological advances such as hydraulic fracturing, or fracking, have made the oil-extraction process much more efficient than anything we’ve seen before. Amazingly, output continues to climb even as the number of rigs in operation has dropped for the fifteenth week.

U.S. Rig Count Falls for Fifteenth Week, but Oil Production continues to Climb
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“Productivity is up 50 percent over the last five years,” Brian says. “There’s already been some slowdown, but we’re still seeing the strong momentum from last year.”

That momentum could be enough to propel us toward 10 million barrels a day, something we haven’t seen in this country since 1970.

This incredible rise in efficiency has led some analysts to foresee a possible “storage crisis” in North America. It’s possible—though, again, unlikely—that we’ll eventually reach a point when there just isn’t any more commercial storage space. “Crisis” is certainly a loaded word, but such an event could serve as the catalyst that forces companies to make meaningful production cuts, which would help oil prices recover.

In the meantime, energy storage and transportation companies such as Kinder Morgan and Tsakos Energy Navigation are profiting in a world of abundant oil. Tsakos recently saw strong trading after it announced a dividend, and last week Morgan Stanley gave the company a “buy” rating.

Another area that’s benefited in this climate is the plastic packaging and container industry. Since oil prices began to go off the cliff last summer, returns for Graphic Packaging have climbed more than 20 percent; Sealed Air, 39 percent; and Berry Plastics, 42 percent.   

Demand Not Dissipating

At the same time that fracking has pushed daily U.S. oil output to 32-year highs, improvements to our vehicles’ internal combustion engines have increased the number of miles we can drive on a tank of gas to all-time highs.

Fuel Efficiency in U.S. Cars and Trucks is Trending Upward
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Requiring less fuel to get farther doesn’t mean demand is slipping. Quite the opposite, actually. Car and truck sales are expected to climb for the sixth straight year in 2015, a winning streak we haven’t seen in over 50 years.

U.S. Car and Light Truck Sales Return to Pre-Recession Levels
click to enlarge

Automobile pricing and information website TrueCar predicts that 17 million light-weight vehicles will be driven off car lots by the end of 2015, a 10-year high.

Since 2009—when sales plummeted to roughly 10 million units, their most depressed state since 1982—year-over-year sales growth has surged as the U.S. has pulled itself out of the recession. In each of the past 12 months, 200,000 or more new jobs were made available to Americans, the most since 1977.

Americans are not only buying more vehicles—some as new additions, others to replace aging clunkers—but they’re also taking them on the road more, especially now that national average fuel prices have fallen more than 31 percent from a year ago.

In fact, Americans drove a record 3.05 trillion miles on U.S. highways in January for the 12-month period, breaking the previous record set in November 2007. And with the busy summer travel season ahead of us, we should expect to see this number rise even more.   

Americans Drove a Record Number of Miles on U.S. highways in January
click to enlarge

Three trillion miles, by the way, is equivalent to taking more than 200 round trips to Pluto.

Airlines improving their fuel efficiency

That’s a lot of fuel being consumed—even if our vehicles are more fuel-efficient.

According to the Energy Information Administration (EIA), gas consumption in 2015 will rise 1 percent over the previous year to reach 9 million barrels a day—a little under the number of barrels of oil the U.S. now produces daily.

Add to that the fuel consumption coming from U.S. airlines, which are also working on improving fuel-efficiency. As I pointed out earlier this month, the number of miles flown on both domestic and international carriers is flying higher, along with the number of seats per flight.

Down Under

Last week I was in Melbourne, Australia, attending a conference for chief executives from all over the world. It’s always inspiring and exhilarating to meet and share ideas with so many other global innovators, thinkers and problem-solvers. This is ultimately what’s needed to cultivate the ideas that can lead to the sorts of life-changing advancements I discussed above.

Have a blessed week, and happy investing! 

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.

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 of 12/31/2014: Kinder Morgan, Inc. 0.00%, Tsakos Energy Navigation Ltd 0.00%, Graphic Packaging Holding Co. 0.00%, Sealed Air Corp. 0.0%, Berry Plastics Group, Inc. 0.0%,

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. 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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Why This Airline Just Landed in the S&P 500 Index
March 23, 2015

For the first time in its 84-year history, American Airlines was cleared for landing in the S&P 500 Index.

Joining rivals Southwest Airlines and Delta Air Lines, the once-beleaguered carrier 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.

S&P 500 Economic Sectors

But in a classic Cinderella-story transformation, American succeeded at charting a new course for itself. In 2013 it merged with U.S. Airways, making it the biggest airline group in the world. The company now has a market cap of nearly $37 billion and controls 627 active jets in its fleet.

American’s ascension is a perfect reflection of the now-robust airline industry as a whole. As recently as a decade ago, about 70 percent of U.S. carriers were operating under Chapter 11 bankruptcy protection. Fast forward to 2014, and the industry saw its most profitable year ever. To generate more revenue and save money, airlines have aggressively implemented new policies in the last few years, including adding additional seats on aircraft, streamlining operations and focusing on fuel-efficiency measures.

American Airlines stock is already up more than 51 percent for the 12-month period, compared to the S&P 500’s 14 percent, and is currently trading close to all-time highs. Its inclusion in the S&P 500 should further help its stock price climb higher, as many funds that track the index will now be compelled to purchase shares.

American Airlines Joins Southwest and Delta in the S&P 500 Index
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Low oil prices have benefited American more so than some of its competitors, as the carrier didn’t buy derivatives on fuel and was therefore not locked into higher prices before they began to tumble last summer.

Many analysts predict that the next airline to join the S&P could be United Continental.

Dollar Overbought, Gold Oversold

In a recent Frank Talk I revisited the relationship between the U.S. dollar and gold. For the ninth straight month, the greenback has strengthened, which has weighed heavily on the yellow metal. The inverse relationship between the two is key to understanding the Fear Trade.

As I discussed in the blog post, the dollar is extended—the greatest standard deviation in a decade—and it appears due for a correction.

Gold vs Dollar 3-Month Percent Change Oscillator
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Conversely, the gold selloff is overdone and looking for a rally.

Next week we’ll be looking out for the latest consumer price index (CPI), or inflationary number. It’s important to be aware of this number because the inflation rate has a large influence on gold prices.

The weekend before last I presented at the Investment U conference in St. Petersburg, Florida, where I had the pleasure of hearing Oxford Club’s natural resources strategist, Sean Brodrick, speak. He reminded his audience why so many investors see gold as a safe haven, saying that, unlike the dollar, “gold will never go to zero.”

As always, I advocate that 10 percent of your portfolio consist of gold: 5 percent in bullion and 5 percent in gold stocks, then rebalance every year.

Munis Still Make Sense

Safety is part of the reason why the municipal bond market is today worth $3.65 trillion. To determine just how safe munis have been for investors, Moody’s looked at more than 54,000 municipal bond issuers and 5,600 high-yield corporate bond issuers between 1970 and 2011. What they found is that only 71 muni issuers defaulted, whereas corporate bond defaults for the period rose to more than 1,800.

What’s more, even lower-rated munis have historically had better credit quality than high-rated corporate bonds. In a similar study, Moody’s reported that since 1970, “adequate” Baa-rated munis have had a default rate of 0.30 percent. But of the corporate bonds that received the highest, “extremely strong” rating, 0.50 percent failed to meet their obligations.

Munis had a stellar 2014, delivering positive returns all 12 months of the year. This helped the asset class outperform both corporate bonds and high-yield corporate bonds.

Munis Delivered Better Returns Than Corporate Bonds in 2014
click to enlarge

 

A Victoria's Secret in the Toronto Pearson International AirportRightfully so, many bond investors are concerned of what might happen to their holdings when the Federal Reserve decides to raise rates, which could happen sometime this year. When interest rates rise, bond prices drop. For this reason, the bond market reacted positively to Fed Chair Janet Yellen’s announcement last Wednesday that a rate hike wouldn’t occur just yet. Short-term munis are where investors want to be when rates inevitably increase.

Recently we’ve also seen a spike in bond yields. John Derrick, portfolio manager of our Near-Term Tax Free Fund (NEARX), has prudently put fund assets to work, using the following oscillator, among other tools, to determine the most opportune times to deploy capital.

Note that we’re using the two-year Treasury as a proxy for interest rate moves. Munis have tended to track these macro trends.

ROlling 100 Day Percent Change Oscillator: 2-Year Treasury Yield
click to enlarge

NEARX has delivered 20 straight years of positive growth in a variety of interest rate environments. Out of 25,000 equity and bond funds, only 30 have done this. Since 1999—the first year he began managing the fund—John has achieved this rare feat by picking only investment-grade munis with short-term maturities. Short-term bonds are less sensitive to rate increases than longer-term bonds that are locked into rates for greater periods of time.

In Various Interes Rate Environments, NEARX Has Had 20 Straight Years of Positive Returns
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To learn more about what municipal bonds can do for your portfolio, check out our latest infographic. Remember to share with your friends!

Why Investing in Short-Term Municipal Bonds Makes Sense Now

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.

Total Annualized Returns as of 12/31/2014
  One-Year Five-Year Ten-Year Gross Expense Ratio Expense Cap
Near-Term Tax Free Fund 3.07% 2.64% 2.98% 1.21% 0.45%

Expense ratio as stated in the most recent prospectus. The expense cap is a contractual limit through December 31, 2015, for the Near-Term Tax Free Fund, on total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest). Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

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

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

The 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 S&P Municipal Bond Index is a broad, market value-weighted index that seeks to measure the performance of the U.S. municipal bond market.

The Bloomberg USD High Yield Corporate Bond Index is a rules-based, market-value weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable, corporate bonds. To be included in the index, a security must have a minimum par amount of 250MM.

The Bloomberg U.S. Corporate Bond Index is a rules-based market-value weighted index engineered to measure the investment grade, fixed-rate, taxable, corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. corporate issuers. To be included in the index, a security must have a minimum par amount of 250MM.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Near-Term Tax Free Fund as a percentage of net assets as of 12/31/2014: American Airlines 0.00%, Southwest Airlines Co. 0.00%, Delta Air Lines, Inc. 0.00%, United Continental Holdings, Inc. 0.00%.

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.

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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Africa Could Mine Its Way to Prosperity if It Addressed Instability
February 17, 2015

Last week I attended the Investing in African Mining Indaba in Cape Town, South Africa, as both a presenter and a student seeking opportunities. One of the highlights of the conference was former Prime Minister Tony Blair’s keynote address, during which he offered some crucial advice to African governments: To attract and foster a robust mining sector, a commitment to fiscal stability must be made.

Goods Trade with Africa in 2013

Since 2009, Blair has run the Africa Governance Initiative, which counsels leaders in countries such as Rwanda, Sierra Leone, Liberia, Guinea and others.

Simply put, without fiscal stability and predictability in taxation, capital will be unwilling to flow into any country—African or otherwise—for exploration and production. If a government changes its tax policy every three years or so, that instability discourages the inflow of financing. This is bad for Africa.

“The mining sector remains absolutely vital for Africa’s future,” Blair said, “and even with the sharp declines in [commodity] prices, there are tremendous opportunities and there will be, no doubt, an adjustment and reshaping of the face of mining within Africa over these next few years.”

I shared the following map last week, but it’s worth showing again, as it supports Blair’s point. Central and Southern Africa, especially, are extremely commodity-rich and maintain a large global share of important metals and minerals such as platinum, diamonds and gold.

In 2014, China Channeled Over $100 Billion into 156 Countries and Regions Around the Globe
click to enlarge

Fiscal instability is also bad for investors in Africa. If foreign investment is not respected by a government, if it is punitively taxed or arbitrarily confiscated, further investment will not flow into that country. Politically, African nations need to recognize that seemingly faceless investment institutions represent real people’s hard earned dollars.

In Zambia, for example, a huge 12 percent of the country’s GDP comes from mining, an industry that employs 10 percent of all Zambians. Yet its government has increased, rather than cut or at least eased, restrictive royalty taxes on mines. In the case of open pit mines, royalties were raised from 6 percent to a crippling 20 percent.

Speaking to Reuters, a mining industry spokesperson speculated: “Mining companies are not going to put another dollar in [Zambia]” if the government continues to be unreliable.

Less Friction, Fewer Disruptions

This is proof positive of what I frequently say: Government policy is a precursor to change. In the example above, the tax policy is leading to change that could very well hurt Zambia’s economy. With mining being such a strong contributor to its GDP, it seems the government would want to make it easier, not more challenging and costly, for international producers to conduct business there.

The less friction and fewer disruptions there are, the easier it is for money to flow.

But Zambia’s isn’t the only African government that’s placing roadblocks in front of miners. The Democratic Republic of Congo is in the early stages of hiking royalties on mines and revising its mining code. And in his recent State of the Nation Address, South African President Jacob Zuma announced that foreigners could no longer own land in the country, which raises the question of what implications, if any, this might have on U.S. and Canadian companies that own and operate South African mines. Zuma’s announcement comes at a time when persistent electricity shortages have stymied mining activity and rumblings of a miners’ strike similar to the one last year that brought platinum and palladium production to a five-month halt are intensifying.    

At the same time, many governments in Africa are waking up to see that they’re going to have to provide the sort of stability and consistency Prime Minister Blair outlined if they hope to attract the capital necessary to fund and develop their mining opportunities.

Miners Giving Back

A strong mining sector doesn’t just benefit the native country, either. It’s a global good that benefits all. In another presentation at the African Mining Indaba, Terry Heymann of the World Gold Council convincingly showed that the economic output of the global gold mining sector far exceeds the collective aid budget of world governments. Gold mining, he said, created and moved as much as $47.3 billion to suppliers, businesses and communities in 2013, compared to governments’ $37.4 billion.

Many gold mining companies take a more direct approach to helping the communities in the countries they operate in, including Randgold Resources, which works primarily in Mali. In an interview during the African Mining Indaba, CEO Mark Bristow detailed his company’s involvement in the fight against Ebola and other epidemics that have hit the West African country:

Our doctors, the Randgold doctors, run a technical committee meeting every day where we coordinate with the [Malian] health authorities, and we help manage the deployment of energy. Now that we’ve eradicated the second [Ebola] outbreak, our big focus is on prevention and education.
Goods Trade with Africa in 2013

Bristow explained that the company had sponsored the development of an educational film about Ebola, before highlighting other company achievements:

We were part of the Neglected Tropical Disease Initiative rollout… We’re very big on the AIDS programs around the country. We brought the malaria incident rate around our mines down by more than four times.

Because Randgold is the largest employer in Mali, Bristow suggested, he feels a moral obligation to partner with his host country and make it a healthier, safer place to live and work.

During the same interview, he insisted that Randgold, which we hold in our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), has a “solid five years ahead of us,” citing the fact that the company holds no debt and managed to replace all the ounces it mined in 2014 at $1,000 long-term gold price. It also increased its dividend 20 percent.

Despite bullion’s price hovering just above the relatively low $1,230 range, Randgold has delivered 16 percent year-to-date.

This is in line with gold mining stocks in both the NYSE Arca Gold Miners Index and FTSE Gold Mines Index, which are outperforming the return on bullion.

Gold-Mining-Stocks-Outperforming-Bullion-Year-to-Date
click to enlarge

As I mentioned back in July, when mining stocks do well, bullion has tended to follow suit. This also shows that producers are successfully adjusting to a $1,200-per-ounce environment by scaling back on capital spending, selling off assets, putting exploration on hold and engaging in mergers and acquisitions—which in the past has signaled that a bottom in spot prices might be reached. B2Gold Corp. closed on its deal to buy Papillon Resources in October; we learned in November that Osisko Gold Royalties is taking over Virginia Mines; and last month it was announced that Goldcorp would be purchasing Probe Mines.

Weak Currencies, Low Fuel Prices

Speaking with Kitco News’s Daniela Cambone during last Monday’s Gold Game Film, I commented on some of the macro events aiding gold mining companies such as Randgold:

Mark Bristow has just hit the ball out of the park. He benefits from a weak Mali currency and he benefits from a weak euro because everything is priced in euros. He’s also benefited from weak oil prices.

Indeed, many miners not operating in the U.S. are the beneficiaries of a weak local currency. The West African CFA franc, Mali’s currency, is off 20 percent; the South African rand, 40 percent; the Canadian dollar, 15 percent.

Low energy prices are also helping gold producers, just as they’re helping companies in other industries, airlines especially. In most cases, fuel accounts for between 20 and 30 percent of gold miners’ total operating costs. Because Brent oil is currently priced around $60 per barrel, gold producers are seeing significant savings.

The Gold Demand

This Thursday marks the Chinese New Year, a traditional occasion for gold gift-giving. Chinese demand for the yellow metal was strong in 2014, as 800 tonnes flowed into the country. Over half of the global gold demand, in fact, was driven by the world’s two largest markets, China and India.

Chinese-and-Indian-Growth-Has-Spurred-Market-Infrastructure-Development
click to enlarge

Historically low real interest rates are also driving investors into gold and gold stocks. As I told Daniela:

When you look at real interest rates out of the G7 and G10 countries, the only one with a modest increase is the U.S. dollar. Any time you get this negative real interest rate scenario, gold starts to rally in those countries’ currencies. Now what’s really dynamite is the gold mining companies like Goldcorp, which pays a dividend higher than a 5-year government bond.

Emerging Markets Webcast

Make sure to join us during our webcast tomorrow, February 18. USGI Director of Research John Derrick, portfolio manager of our China Region Fund (USCOX) Xian Liang and I will be discussing reflationary measures in China and emerging Europe. Don’t miss it!

Time-Tested History of No Drama - Near-Term Tax Free Fund - U.S. Global Investors

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.

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.

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 NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.

The FTSE Gold Mines Index Series encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold.

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. Note that stocks and Treasury bonds differ in investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features. A fund’s yield may differ from the average yield of dividend-paying stocks held by the fund.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund, World Precious Minerals Fund and China Region Fund as a percentage of net assets as of 12/31/2014: B2Gold Corp. 0.28% World Precious Minerals Fund; Goldcorp, Inc. 1.03% Gold and Precious Metals Fund; Osisko Gold Royalties 0.00%; Papillion Resources 0.00%; Probe Mines 0.00%; Randgold Resources Ltd. 2.30% Gold and Precious Metals Fund, 1.43% World Precious Minerals Fund; Virginia Mines, Inc. 1.14% Gold and Precious Metals Fund, 10.35% World Precious Minerals Fund.

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

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Global Airline Stocks Soaring, and Not Just Because of Low Oil Prices
February 12, 2015

The airline industry is notoriously competitive. There’s even an old joke: If you want to make a million dollars in the airline business, you need to start with two million.

That joke might have run its course, however, as carriers all over the globe have been posting some of the most impressive earnings in commercial aviation’s 100-year history.

Airplane flying through pink sunset. Jets. U.S. Global Investors.

Revenue growth in the U.S. was “unusually strong” in 2014, achieving the best margin performance in the past 10 years, according to management consulting firm Oliver Wyman. The Dow Jones U.S. Airlines Index grew more than 87 percent during the year, and we’ve seen global airline stocks, as measured by the NYSE Arca Global Airlines Index, gain significant ground since 2012 and reach all-time highs.

Global Airline Stocks Posting All-Time Highs - Jets - U.S. Global Investors
click to enlarge

Some investors might approach this rosy news with a dash of skepticism. Oil prices have fallen over 50 percent since the summer, after all, and conventional wisdom says that as soon as they start to rise again, airlines will be one of the first industries to be negatively affected.

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.

Additional Seating

It only makes fiscal sense. The more seats an airline has, the greater the likelihood is of generating more revenue in airfare. The decision to increase seat density has helped carriers significantly lower their cost per available seat mile (CASM).

With greater seat density, carriers have had improved success at meeting and surpassing their breakeven load factors, or the necessary number of filled seats for companies to recoup operating costs. Currently, the breakeven load factor for large domestic airlines is 79 percent, meaning around three quarters of all available seats on every flight need to be filled. According to the most recent data from the U.S. Bureau of Transportation Statistics, the load factor was an exceptional 85 percent in 2014, an increase of 1.2 percentage points from the previous year and 12 percentage points from 10 years ago.

As you can see, this has resulted in the industry’s best annual performance for the 10-year period:

Domestic Airline Load Factor Exceeds Breakeven Load Factor - Jets - U.S. Global Investors
click to enlarge

Ancillary Revenue

Another way carriers have managed to beat expectations is through ancillary, or non-ticket, fees. Baggage fees, priority boarding, Wi-Fi, on-board meals and other fees are increasingly responsible for making up a large chunk of airlines’ earnings, allowing them to remain profitable in a highly competitive industry.

According to airline consulting group IdeaWorks, global ancillary revenue for 2013 was $31.5 billion. That’s up from $2.45 billion in 2007, which is about what Delta alone—which we own in our Holmes Macro Trends Fund (MEGAX)—generated in 2013 from such fees.

More so than major network carriers, low-cost value carriers increasingly depend on non-ticket fees to stay in the air, if you compare ancillary revenue as a percentage of total revenue in 2007 and 2013:

Ancillary Revenue as a Percentage of Total Revenue
Annual Results - 2013 Annual Results - 2007
Spirit Airlines 38.4% Ryanair 16.2%
Wizz Air 34.9% Vueling 14.2%
Allegiant Air 32.6% Allegiant Air 12.8%
Jet2.com 27.7% Air Deccan 9.0%
Ryanair 24.8% easyJet 8.8%

A Growing Middle Class

Arguably the most important factor contributing to airlines’ recent uptrend is the emergence and expansion of the middle class in the developing world. Air travel demand is strongly correlated with improved incomes. Spots around the world where we’re seeing some of the greatest surges in middle class growth are Africa, China, India and Southeast Asia.

Suvanaphumi Airport, Bangkok, Thailand. U.S. Global Investors. Jets.

This has led to advancement in worldwide revenue passenger miles, or the number of miles flown by commercial airlines. The most recent annual data from the Bureau of Transportation Statistics shows that over 1.1 billion miles were spent in the air in 2013, a 3.6-percent increase over the previous year.

The Organization for Economic Cooperation and Development (OECD) estimates that the middle class could increase from 1.8 billion people in 2010 to 5 billion in 2030.

Owing to a developing middle class as well as increased seat density and non-ticket fees, airlines are expected to post a collective profit of around $25 billion this year, up from $20 billion in 2014, according to the International Air Transport Association.

Also helping margins expand are low oil prices, which have stayed below $55 per barrel since the end of December. But even when prices do begin to rise, the industry should be in a good position to fly through the turbulence. 

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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.

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 Dow Jones U.S. Airlines Index measures the performance of the portion of the airline industry which is listed in the U.S. equity market. Component companies primarily provide passenger air transport. Airports and airplane manufacturers are not included.

The NYSE Arca Global Airlines Index is a modified equal-dollar weighted Index designed to measure the performance of highly capitalized and liquid U.S. and international passenger airline companies identified as being in the airline industry and listed on developed and emerging global market exchanges.

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 and China Region Fund as a percentage of net assets as of 12/31/2014: Delta Air Lines, Inc. 1.28% in Holmes Macro Trends Fund; Spirit Airlines 0.00%; Wizz Air 0.00%; Allegiant Air 0.00%; Jet2.com 0.00%; Ryanair 0.00%; Vueling 0.00%; Air Deccan 0.00%; easyJet 0.00%.

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

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7 Things about Saudi Arabia You Need to Know
January 29, 2015

A week ago we learned that the king of Saudi Arabia, Abdullah bin Abdulaziz Al Saud, passed away at the age of 90. Following the announcement, crude oil immediately spiked 2.5 percent over uncertainty of how this might affect the Middle Eastern kingdom’s position on keeping oil production at current levels.  

But the new leader, King Salman bin Abdulaziz Al Saud, has already tamped down this uncertainty, stating that Saudi Arabia will hold to the decision made at last November’s Organization of Petroleum Exporting Country (OPEC) meeting.

All of this speculation just shows that Saudi Arabia is indeed the 800-pound gorilla when it comes to oil. Until very recently, it was the world’s top oil producer and exporter, before the American shale boom catapulted the U.S. into first place. Now, however, with prices less than half of what they were in July, many U.S. oil companies have been forced to shut down rigs, effectively slowing down output.

Total Number of U.S. Oil Rigs in Use Sharply Declining
click to enlarge

These events got me curious to dive deeper into Saudi Arabia’s economy and the extent to which it’s dependent on crude revenues. Below are some of the most interesting facts, gathered from a September case study by Richard Vietor and Hilary White of Harvard Business School.

1. Despite beliefs to the contrary, Saudi Arabia requires a breakeven price of $80 per barrel of oil. True, the stuff is easy and inexpensive to extract in Saudi Arabia’s desert—the prevailing notion is that one need only stick a straw in the ground and oil comes gushing out—but to afford its bloated social spending program, the government needs prices to be much higher. Right now, oil revenues make up a whopping 90 percent of the country’s budget.

OIl Rigs

2. Recognizing that its economy and energy portfolio are too oil-dependent, the kingdom is seeking ways to diversify. Before his death, King Abdullah ordered that other sources of energy be pursued, including nuclear and renewable energy. State-owned Saudi Aramco, the largest oil producer in the world, is currently ramping up exploration for natural gas. The company estimates that only 15 percent of all land in the nation’s borders has been adequately explored for the commodity.

3. Saudi Arabia is nearing completion of a 282-mile high-speed rail line connecting the holy cities of Mecca and Medina. It’s unclear how many Saudis will use the trains, though, since fuel prices are extremely low as a result of government subsidization. Prices are so low, in fact—a gallon of diesel is less than $0.50—that it has led to excessive and wasteful use of energy resources that could be reserved or exported instead.

Haramain High Speed Railway

4. Saudi Arabia maintains a strong pro-business climate to reel in foreign investors. It offers low corporate taxes (20 percent), no personal income taxes and attractive perks, including land, electricity and free credit. Because of these efforts, the country boasts the highest amount of foreign investment in the Middle East—$141 billion in the past five years alone.

5. Saudi Arabia, believe it or not, has the largest percentage of Twitter users in the world. One of the main reasons for this is that more than half of its 29 million citizens are under the age of 25. As is the case in India, which also has a high percentage of young people, this is seen as an opportunity for the country’s future productivity.

Saudi Arabia twitter users

6. However, the kingdom has high unemployment among not just young people but also women. About 30 percent of working-age young people are without jobs; the figure is 34 percent for women. The country also has a shockingly low labor force participation rate of 35 percent. Saudi Arabia relies on cheap migrant workers, who now make up about 30 percent of the population.

7. A vast majority of Saudis work for the government. Only about 10 percent of working Saudis are employed by private companies. Why? Workers can make either $400 a month on average in the private sector, where working conditions tend to be dubious at best, or $2,000 a month in the public sector. In 2011, about 800,000 new private-sector jobs were created, but of these, 80 percent went to foreign workers.

But this trend is not restricted to Saudi Arabia. As you can see in the chart below, here in the U.S., government jobs growth has broadly outpaced all other industries over the years.

U.S. Government Jobs vs Private Sector Jobs, by Industry
click to enlarge

This saps intellectual capital from the real engine of innovation and ingenuity, the private sector. A robust private sector is necessary to create and foster successful companies such as Apple, held in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX). The tech giant’s iPhone 6 sales led the way to a record earnings report of $74.6 billion—the largest corporate quarterly earnings of all time.

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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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund and Holmes Macro Trends Fund as a percentage of net assets as of 12/31/2014: Apple, Inc. 3.52% All American Equity Fund, 5.37% Holmes Macro Trends Fund; Saudi Amarco 0.00%; Twitter, Inc. 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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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