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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 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. 

Webcast

Registration for our next webcast, scheduled for February 18, is now available! Director of Research John Derrick, portfolio manager of our China Region Fund (USCOX) Xian Liang and I will be discussing monetary easing policies in China and Emerging Europe.  Don’t miss it!

 

Sign me up for the webcast!

 

 

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.

Make sure you’re subscribed to our award-winning Investor Alert to receive the best insight on oil, gold and emerging markets!

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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Palladium Was the Winner in 2014
January 20, 2015

Near the beginning of every year, we update and publish what can safely be called our most popular piece: the Periodic Table of Commodities Returns.

Below are the latest year-end results, which show the historical performance of commodities from best to worst. A larger, high-definition version of the table is available for download.

The Perodic Table of Commodity Returns
click to enlarge

Last year we experienced one of the biggest commodity corrections in recent memory—the biggest since 1986, in fact—and we’re happy to put it in our rearview mirrors.

Base Metals Boasted Mettle

Ford's 2015 F-150 features a military-grade aluminum-alloy body and bed. Although it came in second overall, right behind palladium, nickel was the real standout of 2014. With a shabby 10-year annualized track record of -1.8 percent, the metal gained nearly 7 percent on the back of supply scares after Indonesia, the world’s largest producer, unexpectedly banned all nickel exports last January to meet domestic demand. By May, the metal had rocketed up more than 50 percent before cooling to 37 percent in July, when it was then the best-performing commodity.

Aluminum also managed to beat its 10-year annualized performance by close to 3 percentage points, owing to global production cuts and increased industrial usage of the metal in automobiles and aeronautics. The 2015 F-150, for example, is the first mass-produced truck in its class to feature an aluminum-alloy body. Because of these developments, Texas-based aluminum-producer Alcoa, which we own in our Global Resources Fund (PSPFX), enjoyed its best year since 2008, delivering 50 percent.

Precious Metals Pressured

Palladium, 2014’s top commodity, performed relatively according to script. For the year it was up 11.35 percent, compared to its 10-year annualized returns of 14 percent. Much like nickel, palladium was spurred by extenuating circumstances. Between January and June, a labor strike in South Africa, the world’s second-largest producer of the metal following Russia, halted production, which depleted reserves and sent palladium to a three-year high of $850 an ounce.

Although nickel doesn’t have an exchange-traded fund (ETF), we manage to capture this growth through a palladium ETF.   

The five-month labor strike in South Africa wasn't enough to boost platinum's performance to palladium levelsThe South African labor strike didn’t seem to help palladium’s sister metal, platinum, which ended the year down 11.79 percent. To combat and find solutions to years’ worth of flat sales, six South African platinum producers launched the World Platinum Investment Council in December. CEO Paul Wilson summed up the group’s mission:

To date, the investment potential of platinum has been largely overlooked. We believe that presenting the platinum investment proposition to a wider range of investors will result in it rightfully being considered favorably as an investment.

Silver had its second straight down year, falling 19 percent, despite record sales of Silver Eagle coins. According to the U.S. Mint, 44 million ounces were sold in 2014, outpacing Gold Eagle sales by 59 percent. The U.S. Mint’s stock of bullion completely dried up on Christmas Eve.

However, silver mining also accelerated to record highs last year. This, coupled with weak industrial use of silver in the first half of 2014, led to falling prices.

And then there’s gold, which also fell (slightly) for the second consecutive year. As I’ve already reported, even though the yellow metal dropped 1.72, it still remained a more reliable form of currency than any other globally, excluding the U.S. dollar.

Gold is Second Best Performing Currency of 2014
click to enlarge

Energy Feeling Sluggish

Besides crude oil, the biggest loser was natural gas. A particularly brutal winter in late 2013 helped make it the top performer for that year. But even though the polar vortex—remember that?—dragged frigid temperatures into the beginning of the new year, natural gas couldn’t quite manage to ignite the flame in 2014, which turned out to be one of the warmest years on record.

Natural gas remains the worst-performing commodity for the 10-year period, down 3.73 percent.

All three energy-related commodities—coal, natural gas and crude oil—showed up in the bottom five, their first time to do so since 2006.

Weighed down by crude oil, which tanked 46 percent in 2014, the energy component of the S&P Goldman Sachs Commodities Index (GSCI) lost 44 percent for the year.

Energy Had Largest Price Declines in 2014
click to enlarge

By all accounts, crude oil’s collapse was both unexpected and swift—and it looks as if the bottom has not yet been reached. Goldman Sachs recently reduced its six- and 12-month West Texas Intermediate (WTI) crude forecasts to $39 per barrel.

It’s disconcerting to recall that as recently as July, Brent oil set a record for trading between $107 and $112 per barrel for 12 consecutive months. It now trades for less than half that, at approximately $50 per barrel.

$500 Billion Peace Dividend for Global Consumers and Businesses
click to enlarge

The selloff is so extended now that crude’s weekly relative strength index (RSI) is at 8.5, which is even lower than its RSI during the 2008-2009 crisis. 

Year-over-Year Percent Change Oscillator: WTI Crude vs. U.S. Dollar
click to enlarge

Where’s the Global Demand?

In response to unraveling crude prices, several companies, from the small caps to the majors, announced they would be laying off workers in huge numbers. Schlumberger, the world’s largest oilfield-services company, will reportedly be letting go of 9,000 of its workers, or 7 percent of its workforce; Suncor Energy, Canada’s largest, will cut 1,000 members of its staff and slash $1 billion in capital spending.

Many more companies have had little choice but to cut costs by halting exploration and production. The U.S. oil rig count saw its largest one-week drop in six years, losing 74 last week alone. As disconcerting as all this might sound—especially the job losses—these decisions are necessary to rebalance supply and demand and stabilize prices.

After peaking at $10 per 1,000 cubic feet in 2008, prices for natural gas—remember, it’s the worst-performing commodity of the last 10 years—plummeted and never fully recovered, which is why you see a gradually diminishing number of gas rigs in the chart below.

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

When the shale oil revolution began in 2009, the number of rigs steeply ramped up, adding approximately 200 new rigs each year. And not just any rigs, but much more efficient, technologically-advanced pieces of machinery, capable of extracting crude from places that until now were inaccessible.

Nobel Price Winning Economist Robert Shiller on CNBCThat’s what American ingenuity has given the world: cheap oil and cheap fuel. Speaking on CNBC last week, Nobel Prize-winning economist Robert Shiller praised the U.S.’s drive and innovative spirit: “This country is proud of our oil technology and it’s been boosting our spirit, our animal spirits.”

But just as the U.S. has provided the world with plentiful oil, the rest of the global economy has cooled, especially Europe, choking demand.

“The global economy today is much larger than what it used to be,” World Bank Chief Economist Kaushik Basu recently stated, “so it’s a case of a larger train being pulled by a single engine, the American one.”

Tough Times Don’t Last Forever

Speaking to Fox Business last Monday, PSPFX portfolio manager Brian Hicks explained where we continue to see opportunity and value in this low-price environment:

Certainly the [oil] selloff is getting long in the tooth and we’re actually becoming more and more constructive as [it] continues… These prices are not sustainable [and] not high enough to replace production going down a few years from now. We think the stocks look very attractive here, and if you look at their performance to crude oil, they’ve actually been outperforming since mid-December.

Oil Producers Outperforming Crude for the 30-Day period
click to enlarge

Michael Waring, CEO and Chief Investment Officer of Toronto-based Galileo Global Equity Advisors, visited our office last week and reminded our team of the cyclical nature of the energy sector. We’ve been through similar downturns in crude oil, Michael noted—in 1986 and 2008-2009, most recently.

“I’ve seen this movie so many times, I already know the ending,” Michael said, suggesting that oil has tended to move back to its mean eventually.

The chart below shows the inverse relationship between crude and the dollar, going back to 1984. The current standard deviation spread between the two is clearly widening to 1985 and 2008-2009 levels. But as strong as the dollar or as depressed as oil got, both eventually reverted back to their means. 

30- Year Research in Oil and U.S. Dollar Volatility
click to enlarge

For the past 30 years, the 12-month rolling sigma or volatility for oil is ±30 percent 70 percent of the time; the dollar’s is ±9 percent. Today the odds are high that the dollar will correct and oil will rise. In 30 years, this is the third-widest gap between oil falling and dollar rising. But if you look over the same amount of time, you’ll see that oil has historically bottomed in February and subsequently rallied.

I cannot stress enough how greatly low gasoline prices have benefited consumers. They might also contribute to non-oil-services employment. According to BCA Research:

In the U.S., the decline in gasoline prices should boost household disposable incomes by around $150 billion this year, with an additional $30 billion coming from lower heating bills [and] decreased airline fares… The money spent, in turn, will generate additional demand for goods and services. This will lead to faster employment growth, translating into more income and spending.

Mark Your Calendars

  • I just presented at the 20th Anniversary Vancouver Resource Investment Conference 2015. I’ll be sure to inform you of the main takeaways from the conference.
    Watch my preconference interview with Vanessa Collette, host of Cambridge House Live.
  • This Wednesday, January 21, we will be hosting our first webcast of the year, “Bad News Is Good News: A Contrarian Case for Commodities.” The presenters include me, Director of Research John Derrick and portfolio managers Brian Hicks and Ralph Aldis. Don’t miss out on this special opportunity to gain expert insight on where commodities might be headed this year!
    You can register here.
  • On Wednesday, February 18, we will be conducting our second webcast, which will focus on China and Emerging Europe.
  • And finally, look out for our Shareholder Report magazine, which will be arriving in mailboxes soon!

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.

The Goldman Sachs Commodity Index is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

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 9/30/2014: Alcoa, Inc. 1.40%; Chevron Corp. 1.90%; Devon Energy Corp. 1.82%; EOG Resources, Inc. 2.13%; Ford Motor Co. 0.00%; Schlumberger Ltd. 0.00%; Suncor Energy, Inc. 2.13%.

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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Bad News Is Good News: A Contrarian View of China Investing
January 12, 2015
Year-of-the-Ram

When China celebrates its new year next month, we will transition into the Year of the Ram, also known as the Year of the Goat or Sheep. If you believe in luck, this could be a good sign. The ram comes eighth in the 12-zodiac cycle, and in Mandarin, “eight” sounds very similar to the words meaning “prosper,” “wealth” or, in some dialects, “fortune.” As you might imagine, the Chinese consider the number to be very lucky.

But of course successful investing involves so much more than luck. In a time when not only China but much of the rest of the world is trying to get its groove back, it’s important to be cognizant of the factors that shape the markets, including changing government policy. We often say that government policy is a precursor to change, so it’s important to follow the money.

With that in mind, I asked Xian Liang, portfolio manager of our China Region Fund (USCOX), to outline a few of the most compelling cases to remain bullish on the Asian giant.

Below are some highlights from our discussion.

A Healthy Balance Between Monetary and Fiscal Support

Good Luck in 2015

Back in October, I pointed out that one of the main contributors to the European Union’s sluggish growth is its inability to balance its monetary and fiscal policies. It has been eager to tax everything and everyone who moves. Waiting for European Central Bank (ECB) President Mario Draghi to act often feels a little like waiting for Godot. Investors’ patience is wearing thin.

China, on the other hand, is much more responsive and actively committed to making full use of both policies in its arsenal to spur its cooling economy.

On the monetary side, according to Xian, are interest rate cuts and a loosening of reserve requirements for certain deposits. The goal is to ease access to loans for businesses and individuals seeking to purchase big-ticket items such as homes. As a result, Chinese entrepreneurs have increasingly been able to start more businesses.

 

chinas-reduction-of-red-tape-has-increased-business-startups-despite-slowing-growth
click to enlarge

Jobs growth has been so robust, in fact, that the government has managed to attain its job creation target outlined in its current Five-Year period ahead of schedule and by a wide margin. The country has grown millions of jobs with great efficiency, even as GDP sags.

Although the Chinese housing market has stagnated in recent months, these new monetary measures will help it pick up steam. Already we’re seeing some improvement, with home property stocks moving higher.

Regulations are an indirect taxation of the economy, whereas deregulation unleashes entrepreneurial spirit.

Chinese-Housing-Market-Showing-Signs-of-Improvement
click to enlarge

On the fiscal front, the government is reportedly planning to spend $1.6 trillion over the next two years on infrastructure projects in various industries—300 separate infrastructure programs, to be exact, according to BCA Research.

As I pointed out last month, many of these projects will largely involve high-speed rail, both domestically and abroad. China has already secured multiple construction deals with countries ranging from Brazil, South Africa, Nigeria, India, Russia, the U.S. and others.

Government to Remain Accommodative

There are a couple of reasons the Chinese government has accelerated support to capital markets, according to Xian:

One, a significant deflationary threat has been driven by slumping energy prices. And two, there are potentially lower exports to commodity producing nations.

 

Indeed, sluggish global demand has contributed to China’s weak December purchasing manager’s index (PMI), which dropped to an 18-month low of 50.1. China has been quick to respond to lower PMI data with a drop in interest rates.

 

Chinas-Manufacturing-Industry-in-Slight-Contraction-Mode
click to enlarge

But Where There’s Bad News, Good News Is Often Not Far Behind

The silver lining to falling commodity prices is that since China is a net-importer of raw materials—crude oil especially—the country has been able to save tremendously on its oil and gas bills. Back in November, I reported that for every dollar the price of a barrel of oil drops, China’s economy saves about $2 billion annually. From its peak in June, crude has slipped close to $50—you do the math. This has served as a major wealth transfer from oil-producing countries into China’s coffers.

Oil Sinks, Airlines Take Flight

Speaking of crude, declining oil prices—they’re currently below $50 per barrel—have been good for airlines, Chinese companies included. As you can see, there’s been a clear inverse relationship between crude oil returns and airline stocks.

Low-Oil-Prices-Have-Benefited-Chinese-Airlines
click to enlarge

China is the largest investor in U.S. government bonds. The country has accumulated close to $1.3 trillion, so a strong dollar and falling oil prices benefit its economic flexibility.

More middle-class Chinese might be able to afford to travel abroad, specifically here to the U.S., where inevitably they will spend their money.

Chinese-Outbound-Travelers-Increasing-Every-Year
click to enlarge

According to Carl Weinberg, founder and chief economist of High Frequency Economics:

Chinese President Xi Jinping has estimated that there will be more than a half-billion Chinese tourists traveling to the West in the next 10 years. You can work out the impact if all of them came to New York and spent $2,000 or $3,000 each. That would be enough to add a half-percentage point to U.S. GDP every year over the next decade.

Reasonable Stock Valuation

Chinese stocks are currently valued below their own historical averages as well as those among other global emerging markets, making them both attractive and competitive.

“Odds favor mean reversion to continue,” Xian says. “The better the Chinese markets perform, the more global liquidity they might attract.”

Chinese stocks, as expressed in the MSCI China Index, are currently a much better value than those in the S&P 500 Index, trading at 10 times earnings whereas the U.S. is trading at 18 times.

Chinese-Stocks-Valuation-Has-Been-Attractive
click to enlarge

A-Shares Still a Huge Draw

Chinese A-Shares surprised the market by breaking out last summer, having delivered 66 percent for the 12-month period. It looks like a breakout from the long-term bear market.

Undervaluation-of-Chinese-Stocks-Indicates-Favorable-Risk-Reward
click to enlarge

What’s more, the upside is unlikely to have been exhausted. Although they aren’t as stellar of a bargain as they once were, they’re not yet overvalued, and retail and institutional investors might accumulate on pullbacks.

Emerging-Markets-Total-Returns-for-2014
click to enlarge

For the A-Shares market, USCOX has recently added exposure to A-Shares to capture more attractive valuation. In today’s environment, we believe the safer bets are investable H-Shares, which are driven by A-Shares and, in 2014, returned 15.5 percent. H-Shares comprise the vast majority of the fund’s exposure to Chinese equities, with further exposure gained through A-Shares exchange-traded funds (ETFs).

To the right you can see merely a sampling of the ever-popular emerging markets periodic tables, which will soon be available exclusively to subscribers of our award-winning Investor Alert.

The Ram Is the New Bull

As GARP (growth at a reasonable price) hunters, we’re prudently optimistic about the upcoming year and anticipate great things out of the world’s second-largest economy. China’s government and central bank are committed to jobs and manufacturing growth as well as policy easing. Its stocks are reasonably valued, and low commodity prices should continue to offset slowing global demand.

As Xian eloquently put it last month:

China’s leadership appears to be delivering on the promises it made in November 2013 at the Third Plenary Session, specifically the liberalization of the financial sector and reform of the role capital markets play in allocating resources. This leadership is determined and committed to putting China on the right path.

A Special Announcement

Please mark your calendars for January 21, as we will be conducting our first webcast of the year. We will be discussing the state of commodities, and as a loyal subscriber, you’ll be first to receive the registration this week. We’ll be following up with an emerging markets webcast on February 18 that will focus on China and Emerging Europe.

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.

The HSBC China Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives at more than 400 private service-sector companies.

The MSCI China Free Index is a capitalization weighted index that monitors the performance of stocks from the country of China.

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

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.

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 9/30/2014: Air China Ltd. 0.00%, China Eastern Airlines 0.00%, China Southern Airlines Co. 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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15 Charts to Keep Your Eyes on for ‘15
January 8, 2015

In anticipation of the new year ahead, I’ve pulled together 15 charts that we’ll be watching and might help guide our expectations for what 2015 has in store for us. After looking them over, be sure to share some of your own via Facebook, Twitter or Instagram.

A Not-So-Crude Trend

Crude oil has recently dipped below $50 per barrel for the first time since 2009, one of the reasons for which is the rise of oil production in the United States. The glut has already prompted many U.S. companies to halt or limit projects, especially those that make use of hydraulic fracturing, or fracking. With oil prices as low as they are, it’s possible even more companies will join them.

1.

The Rise of Oil Production in the United States
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The bright side, however, is that a bottom and subsequent rally might emerge as early as next month, if the 5-, 15- and 30-year trend stays in place.

2.

West Texas Crude Oil Historical Pattern
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Airline Stocks Taking Off

Low oil prices have certainly hurt companies involved in the exploration and production of oil, but cheap fuel has benefited many companies that consume barrelsful of the stuff, airlines included. Despite some turbulence, such as the October pullback and pre-election Ebola scares, airline stocks have continued to ascend.

3.

Airline Stocks at a 12 Year High
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PMI: The Economic Soothsayer

Gross domestic product (GDP) tells you where you’ve been. Only the global manufacturing purchasing manager’s index (PMI) can tell you where you’re headed. Our research shows that when the one-month PMI reading crosses above the three-month moving average, gains have been made in select areas six months afterward:

4.

Commodities and Commodity Stocks Historically Rose Six Months After PMI "Cross-Over"
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Since September of last year, the global one-month reading has remained below the three-month moving average.

5.

Global Manufacturing PMI's One-Month Moving Avergae Remains Below the Three-Month Moving Average
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We’ll be eyeing the global PMI closely this year because when the “cross-above” occurs, it’ll be time to act!

End of One Secular Cycle, Start of Another?

We might be nearing the end of another 30-year-or-so secular market cycle, which is both exciting and a signal for caution. Adjusted for inflation, each of the three cycles—1921-1949, 1949-1982 and 1982-2015—have risen successively in performance.

6.

Three S&P 500 Secular Market Cycles from the Last 100 Years
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This raises more than a few questions, two of which immediately spring to mind: When will this current cycle end? And will the next one follow the trend of even better inflation-adjusted returns?

Ruble Rubble

We all know Russia’s going through tough times. International sanctions, sliding oil prices and a collapsing currency have all contributed to dire economic straits.

7.

Russian Ruble Volatility Looks SImilar to Moves During 2008 Financial Crisis
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The Federation’s economy is expected to contract by almost 5 percent, and Standard & Poor’s recently announced that it could very well downgrade Russian debt to junk status within the next three months.

Whatever your opinion on Russia is, it’s important to acknowledge that ours is a global economy. It would be in our country and company’s best interest for Russia to transform itself into a more attractive place to conduct business.

BRICS of Gold

Many investors are aware that gold is often used as a safe-haven currency. We’re witnessing this fear trade unfold right now in most of the BRICS countries—Brazil, Russia, India, China and South Africa.

By year’s end, Russia had snapped up 130 tons of the precious metal, a 73-percent increase from 2013. Since India eliminated its 80:20 rule in November, which mandated that 20 percent of all imported gold must be exported before any new shipments could be brought in, gold demand has exploded. In South Africa, gold producers are currently leading a stock market rally.

And in China, wholesale gold demand has remained steady as its economy has slowed. Total withdrawals from the Shanghai Gold Exchange came in just shy of the record set in 2013.

8.

China's Wholesale Gold Demand in 2014 Was Just Shy of 2013 Record
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We’ll see if China can sustain its robust demand throughout the next 12 months.

Year of the Bull Market

Speaking of China, its A-Shares have rallied strongly since the summer despite the country’s slowdown. They continue to be undervalued and offer a favorable risk-reward profile.

9.

Undervaluation of Chinese Stocks Indicates Favorable Risk-Reward
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The rally in Chinese equities cannot be overstated. Over the past six months, China’s market capitalization has surpassed that of other BRIC countries combined.

10.

China's Market Value vs. Other BRIC Countries
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Brightest of the Bunch

Although gold had another down year in 2014, losing 1.7 percent, it still smoked all other major world currencies except for the U.S. dollar, whose mounting strength has put pressure on the yellow metal.

11.

Gold is Second Best PErforming Currency of 2014
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With the global downturn in effect, gold appears likely to remain an attractive investment.

Borrowing for Free

Bad news is often good news for gold: For the first time ever, the German 5-year and 10-year bond yields have fallen below zero, indicating unambiguous deflation in the eurozone.

12.

German Five-Year Breakeven Rate Gauges Inflation Outlook
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This means that German bondholders are effectively paying the government to hold on to its debt. As a result, international investors might look elsewhere for better performance—gold, for instance, or the U.S. municipal bond market, which was valued at $3.6 trillion by year’s end.

The S&P 500 Index Paying Dividends

Nearly 85 percent of companies in the S&P 500 currently pay a dividend, with dividends per share (DPS) having grown 11.3 percent in the past 12 months.

13.

More BLue Stocks Paying Dividends
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What’s more, FactSet analysts expect DPS to increase over 8 percent in the next 12 months, with the financial and consumer discretionary sectors to report double-digit growth.

Watch the Big Apple

As the U.S.’s largest company by net capitalization, Apple has had mixed results after launching its flagship devices. When it released the first iPhone back in June 2007, its stock surged 16 percent within the next month. More recently, however, Apple stock tumbled following reports that the iPhone 6 was prone to bending.

Will the Apple Watch, to be released sometime early this year, lead company stock higher? Or will it take a bite out of gains? We’ll have to wait and see, but for now, analysts are already making their product shipment forecasts for 2015.

14.

Estimated 2015 Apple Watch Shipments
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Don’t Fear Rising Rates

15.

Historically, Rising Interest Rates Have Helped Boost Stocks on Average

This one remains filed under “considerable time,” as we have no idea when or to what extent the Federal Reserve will decide to raise rates this year. I’ve previously written about how rate increases might affect Treasuries. But what about stocks? Historical precedent, going back to 1971, shows that stocks have on average increased by nearly 4 percent six months following a rate hike.

What other charts do you think are important to keep in mind as we embark on a new year? Again, you’re invited to share them via Facebook, Twitter or Instagram.

Past performance does not guarantee future results.

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.

The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500. The 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 NYSE Arca Airline Index is an equal dollar weighted index designed to measure the performance of highly capitalized companies in the airline industry. The XAL Index tracks the price performance of major U.S. and overseas airlines.

Shanghai Gold Exchange is a non-profit self-regulatory organization, approved by the State Council, organized by the People's Bank of China, and registered with the State Administration for Industry & Commerce, for the purpose of trading gold, silver, platinum and other precious metals.

BRIC refers to the emerging market countries Brazil, Russia, India and China.

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.

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 9/30/2014: Apple, Facebook.

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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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