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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.

Try Not to Kick Yourself When You See this Fund's One-Year Return...
April 12, 2018

Try not to kick yourself when you see this funds one year return

I’m very pleased to share with you that our Holmes Macro Trends Fund (MEGAX) beat its benchmark, the S&P 1500 Composite Index, for the 12-month period as of March 31. Whereas the benchmark returned 13.73 percent for the period, MEGAX returned an impressive 17.15 percent. We also have very favorable expectations for the fund for the remainder of this year and beyond because of its model that emphasizes returns on invested capital (ROIC) and growing revenues.

Holmes Marco Trends Fund MEGAX beat its benchamrk
click to enlarge

MEGAX seeks to identify strong sectors, and within those sectors, to identify companies that have the greatest potential for growth. We like to lean toward the “growthier” small- and mid-cap components of the broader S&P 1500, which covers about 90 percent of total market capitalization of the U.S. stock market.

An Appetite for Well Managed Companies

Specifically, we focus on companies that have a high ROIC as well as revenues that appear to be growing faster than their peers. We overweight companies whose shares are currently being accumulated by institutional investors and underweight names that, according to our technical overlay, show investor appetite is waning.

Finally, we omit companies that have low margins and low revenue per employee.

Can the energizer rally keep going and going

As an example of how we put our strategy into practice, we added Energizer Holdings last quarter after the company reported strong net earnings in fiscal year 2017. After taxes, the Energizer bunny reported $201.5 million in sales, or an incredible $3.27 per share. That’s up 58 percent from $127.7 million in 2016 and after a net loss of $4 million the previous year. In 2017, gross margin as a percent of net sales was 46.2 percent, an improvement over the 43.6 percent margin in 2016.

The position was well made, as Energizer charged up nearly 25 percent in the first quarter, making it one of the top performing stocks in the mid-cap S&P 400 Index. Can the Energizer rally “keep going and going”? We’ll continue to study the bunny very closely.

Small Business “On Fire”

Our emphasis on smaller-cap, domestic-focused names has worked especially well as concerns over tariffs and global trade have lately hurt a number of shares of large multinationals with high exposure to foreign markets. As I shared with you just this week, small-cap stocks, as measured by the S&P 600 Index, finished positive for both the first quarter of 2018 and the turbulent month of March. They outperformed large-cap S&P 500 Index names as well as mid-cap stocks, represented by the S&P 400 Index. Please note, though, that small-caps, while they have higher returns here, also have a history of higher volatility than large- and mid-caps.

small-caps outperformed large- and mid-caps
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Consider what small business owners themselves are saying. The most recent monthly Index of Small Business Optimism, conducted by the National Federation of Independent Business (NFIB), came in at 107.6, the second-highest reading in the survey’s 45-year history. And 32 percent of small business owners say now is a good time to expand, the highest percentage ever. This optimistic comes in response to corporate tax cuts and the Trump administration’s pledge to roll back regulations.

Interested in learning more? I urge you to visit the Holmes Macro Trends Fund (MEGAX) page today!

 

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. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Total Annualized Returns as of 3/31/2018:

Fund One-Year Five-Year Ten-Year Gross Expense
Holmes Macro Fund (MEGAX) 17.15% 8.69% 4.20% 1.68%
S&P 1500 Composite Index 13.73% 13.21% 9.68% n/a

Expense ratio as stated in the most recent prospectus. 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.

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

The S&P 1500 is a composite index that includes securities that account for 90% of the total market capitalization of the United States' stocks. The index includes small, mid and large cap stocks. The S&P 500 measures the value of stocks of the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite. Standard & Poor's intention is to have a price that provides a quick look at the stock market and economy. The S&P Mid-Cap 400 Index tracks a diverse basket of medium-sized U.S. firms. A mid-cap stock is broadly defined as a company with a market capitalization ranging from about $2 billion to $10 billion. The S&P Small-Cap 600 Index consists of 600 small-cap stocks. A small-cap company is generally defined as a stock with a market capitalization between $300 million and $2 billion.

You cannot invest directly in an index.

The Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. Return on invested capital gives a sense of how well a company is using its money to generate returns.

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

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Holmes Macro Trends Fund (MEGAX) as a percentage of net assets as of 3/31/2018: Energizer Holdings Inc. 2.47%.

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Worried About Rising Rates? I Believe this Strategy Could Be the Answer
March 21, 2018

Worried about rising rates I beleive this strategy could be the answer

With interest rates continuing to creep up, there’s a changing of the guard at the Federal Reserve. In my travels and during conferences, I’ve spoken with many fixed-income investors who wonder how they can best prepare for the uncertainty these changes might bring. I’ll share my favorite idea below, but first, a few words on the new head of the Fed, Jerome Powell.

The U.S. Senate voted in January to confirm Powell as the next chair of the U.S. central bank, and I don’t believe I’m alone in seeing his appointment as a political compromise. Although he has vowed to stay the course with former chair Janet Yellen’s cautious rate hikes—something President Donald Trump was in favor of—Powell is a skeptic of financial regulations.

To be clear, he’s expressed approval for some of the Fed's oversight of the financial market, but he’s also pointed to areas where he thinks regulation may have become too burdensome—especially to small regional and community banks. In his November confirmation hearing, he said he supported “tailoring” regulations to fit the institution.

This is a welcome and refreshing change in thinking. If you recall, during one of her final speeches at the Jackson Hole symposium in August, Yellen defended the strict, broad-based financial regulations put in place after the financial crisis—Dodd-Frank included. But as I shared with you this week, Congress and President Donald Trump are now working to roll back many of the provisions of the mammoth 2010 financial reform law.

Wealthy, Yet “Annoyingly Normal”

Jerome Powell nominated Donald Trump Novemeber 3 2017

A former lawyer, businessman and investment banker, Jerome Powell gained experience working in the public sector in President George H.W. Bush’s Treasury Department. After Bush’s presidency came to an end, he joined the private equity firm Carlyle Group, where he enjoyed a very lucrative career. The latest financial disclosure from June 2017 shows his net worth at between $19.7 million and $55 million, making him the wealthiest Fed chair since banker and economist Marriner Eccles, who held the position from 1934 to 1948.

Despite his vast wealth, Powell is known among friends and colleagues as being frugal and “annoyingly normal.” A resident of Chevy Chase, Maryland, he regularly rides his bike the eight miles between home and work.

Powell Expected to Be More Flexible Than His Predecessors

He also has a reputation for being bipartisan and unafraid to stand up to members of his own party. In 2011, when congressional Republicans were threatening to allow the government to default on its debts if their policy wish list was not met, Powell met with a number of GOP lawmakers, urging them to reconsider their strategy by pointing out the serious risks involved.

“In my experience, the best outcomes are reached when opposing viewpoints are clearly and strongly presented before decisions are made,” Powell stated in a March 2017 speech at the West Virginia University College of Business of Economics.

Unlike his immediate predecessors—Yellen, Ben Bernanke and Alan Greenspan—Powell is a lawyer by training, not an economist. However, colleagues are reassured that his five years serving as a governor of the Federal Reserve Board have adequately prepared him for the top job.

In fact, his unique background might very well make him more flexible and less entrenched when it comes to economic theory. The Fed and its members tend to be highly academic in nature, and Powell’s pragmatic, real-world style could prove to be a valuable asset.

As I said earlier, Trump reportedly is a fan of Yellen’s gradual rate hikes—they’re less likely to derail the monster stock bull market than a more aggressive policy—and I imagine this contributed to his decision to pick Powell.

Managing Risk with the Near-Term Tax Free Fund (NEARX)

With Powell set to carry out the Fed’s process of raising short-term interest rates and gradually unwinding a $4.2 trillion portfolio of mortgage and Treasury securities, fixed-income investors are contending with big risks. Adding to these are the prospects for higher inflation as a result of faster economic growth.

So what are we doing at U.S. Global Investors to manage our funds in the face higher yields?

Our Near-Term Tax Free Fund (NEARX), which offers tax-free municipal income, appears to be well-positioned to minimize the impact of rising yields by keeping a short duration. Traditionally, shorter duration funds have outperformed longer duration funds in periods of rising rates. Longer-term funds, conversely, have done better when rates were in decline.

Additionally, in an effort to mitigate the impact of Fed rate increases on the front end of the curve—where we are largely positioned—we are tactically employing a cash buffer as well as maintaining exposure to floating rate notes. This defensive positioning is designed to help safeguard investor’s capital while still providing an attractive risk-adjusted yield income.

We wish Jerome Powell the best of luck! In the meantime, learn more about the Near-Term Tax Free Fund (NEARX) by clicking here!

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. Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. 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.

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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The Many Uses of Gold
March 14, 2018

The many uses of gold

As our loyal readers know, at U.S. Global Investors we carefully monitor the price of gold. We pay close attention to the macro drivers moving the yellow metal, like government policy and cultural affinity spurring demand globally. We also monitor the micro drivers, like company management and quant factors that make one gold stock superior to the next.

Gold’s qualities make it one of the most coveted metals in the world and a popular gift in the form of jewelry – this is what I call the Love Trade. From the beginning of the Indian wedding season in September until Chinese New Year in February, the price of gold tends to rise due to higher demand from the two biggest consumers of gold, China and India.

The Love trade China and India gift gold for weddings and other celebrations

On the other hand is the Fear Trade, driven by negative real interest rates and the fear of poor government or central bank policies that could result in currency devaluation or inflation. This fear triggers people to buy gold as a hedge against possible negative returns in other asset classes, which in turn, pushes the gold price higher. 

Gold in a Portfolio

We believe gold is an essential part of a portfolio due to its history as a protector against inflation. I’ve always recommended a 10 percent weighting in the metal, 5 percent in gold bullion or jewelry, and 5 percent in gold stocks, mutual funds and ETFs.

In fact, current economic conditions make an even greater case for gold. The stock market is still on a historic bull run, and the tax reform bill is helping ratchet up share prices. It’s important to remember that the precious metal has historically shared a low-to-negative correlation with equities. For the past 30 years, the average correlation between the LBMA gold price and the S&P 500 Index has been negative 0.06.

Gold has also performed competitively against many asset classes over the past few decades, as seen in the chart below. This makes the metal, we believe, an appealing diversifier in the event of a correction in the capital markets or an end to the bull market.

Gold has performed very competitively against a number of asset classes over the years
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Our investment team brings knowledge and experience in a variety of fields, with one of the most notable being gold. As such, we have written numerous pieces about the precious metal. One of our most popular is the Many Uses of Gold slideshow that outlines eight different uses of gold, other than in your portfolio. From dentistry to electronics and space travel to currency, gold remains widely used in everyday life.

We believe it’s important to truly understand the asset class you are investing in, and we hope this slideshow does just that. Explore gold’s many uses here!

Explore the many uses of gold slideshow

 

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

The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

The LBMA Gold Price is the global benchmark prices for unallocated gold delivered in London. The auctions are run at 10:30 am and 3:00 pm London time. The final auction prices are published to the market as the LBMA Gold Price AM and LBMA Gold Price PM.

Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management. Correlation is computed into what is known as the correlation coefficient, which has value that must fall between -1 and 1.

The Bloomberg Barclays Short Treasury Bill Index tracks the market for Treasury bills issued by the U.S. government.

The Bloomberg Barclays US Aggregate Bond Index, which until August 24, 2016 was called the Barclays Capital Aggregate Bond Index, and which until November 3, 2008 was called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Bloomberg L.P. since August 24, 2016, and prior to then by Barclays which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States. 

The MSCI USA Net Total Return Index is a market capitalization weighted index designed to measure the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in the United States.

The MSCI EAFE Net Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.

The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The index was originally launched in 1998 as the Dow Jones-AIG Commodity Index (DJ-AIGCI) and renamed to Dow Jones-UBS Commodity Index (DJ-UBSCI) in 2009, when UBS acquired the index from AIG. The S&P GSCI (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time. It is a tradable index that is readily available to market participants of the Chicago Mercantile Exchange.

Diversification does not protect an investor from market risks and does not assure a profit.

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The Historic Bull Market Faces Off Against Steel Tariffs
March 12, 2018

the historic bull market faces off against steel tariffs

Friday marked the ninth anniversary of the stock bull market, the second longest since World War II following the spectacular run in the 1990s that finally met its match when the tech bubble burst in March 2000. The current expansion, which some consider the “most hated bull market in history,” has largely been fueled by extraordinarily accommodative monetary policy in the form of massive money printing and near-zero interest rates. It’s withstood a number of significant headwinds, including a relatively slow economic recovery, the collapse in the price of oil and other commodities, ongoing conflict in the Middle East and an especially nasty presidential campaign cycle. If it can avoid dropping more than 20 percent in the next six months, it will become the longest-lasting ever.

can this bull market become the largest in history
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No doubt you’ve heard before that bull markets don’t die of old age. I can’t say for sure what will end this particular business cycle—no one can—but we’re seeing huge shifts in monetary and fiscal policy right now that investors can’t afford to ignore. As I often say, government policy is a precursor to change.

Unintended Consequences of Steel Tariffs

For one, the decade-long era of easy money is coming to an end. The Federal Reserve is unwinding its enormous balance sheet, its enormous balance sheet, which carries some risk.

us steel demand by industry

Meanwhile, the Trump administration is ratcheting up its protectionist trade policies. After surprising markets in recent days with plans to impose tariffs on steel and aluminum imports, President Trump signed the authorization Thursday afternoon, applying taxes broadly to all countries except Canada and Mexico. It was greatly feared that Canada, the number one supplier of steel and aluminum to the U.S., would be included, but it appears someone managed to change the president’s mind. When former President George W. Bush imposed a steep 30 percent tariff on steel imports in 2002, Canada was likewise spared.

The 2002 tariff, by the way, had some serious unintended consequences that critics of Trump’s policy hope are not repeated. A report put out by the Consuming Industries Trade Action Coalition (CITAC) found that about 200,000 Americans, in every U.S. state, lost their jobs in 2002 as a result of higher steel prices, representing some $4 billion in lost wages. More people, in fact, lost their jobs than the total number of people working in the domestic steel industry itself. Not surprisingly, a quarter of lost jobs occurred in steel-consuming industries such as machinery and equipment, automotive and parts manufacturers.

To be clear, U.S. steel companies did benefit from the tariffs, with profits in the first three quarters of 2002 rising $2.1 billion. This growth was offset, though, by a $15 billion decline in profits for steel-consuming companies.

Today, representatives of those same industries warn that the current tariffs could do more harm than good.

Roy Hardy, president of the Precision Metalforming Association, claims that they “will damage downstream U.S. steel and aluminum consuming companies.” Hardy estimates the tariffs could cost the U.S. economy 146,000 jobs this year alone, a figure that—as was the case in 2002—outnumbers the 140,000 Americans currently employed by the domestic steel industry.

As many as 107 House Republicans expressed deep concerns last week, writing in an open letter to the president that the “new taxes in the form of broad tariffs would undermine” the “remarkable progress” made by the tax overhaul. Meanwhile, outgoing Republican Senator Jeff Flake of Arizona said he would introduce a bill that would block Trump’s tariffs.

The tariffs come at a time when domestic steel producers’ balance sheets are steadily improving. According to Bloomberg data, the industry posted net profits totaling $2.5 billion in 2017, up from $60 million in 2016. The group lost a whopping $2.5 billion in 2015, with Pittsburgh-based U.S. Steel contributing the heaviest losses at $1.6 billion. 

domestic steel industry has seen three straight years of rising profits
click to enlarge

In the coming days and weeks, the tariffs should serve to boost domestic steel production and employment. The Wall Street Journal reports that U.S. Steel has plans to reopen a blast furnace in Granite City, Illinois, and call back 500 workers. This follows an announcement by Century Aluminum that it will double its workforce to 600 at a Kentucky smelter.

I’m pleased to hear this news but remain skeptical on the long-term impact. The U.S. now faces retaliation from its trading partners, from China to the European Union.

A Recession in the Near Term Doesn’t Look Likely

Despite some of the negativity, I see no cause for alarm with regard to the U.S. economy. The country added a whopping 313,000 jobs in February, the most since July 2016 and the 89th straight month of gains—a new record. Economists had anticipated only 200,000. Earlier, Moody’s chief economist Mark Zandi called the job market “red hot,” adding that with “government spending increases and tax cuts, growth is set to accelerate” even more.

One of the most historically reliable economic indicators currently looks very healthy. The Conference Board Leading Economic Index (LEI) opened 2018 on sure footing, posting a 108.1 in January, up a full percent from the previous month. The reading reflects “an economy with widespread strengths coming from financial conditions, manufacturing, residential construction, and labor markets,” the Conference Board writes.  

According to FactSet, a record number of S&P 500 companies have issued positive earnings per share (EPS) guidance for 2018. The financial data firm classifies positive guidance as an EPS estimate that’s higher than the mean estimate before the guidance was issued. As many as 127 companies shared positive EPS guidance for the year, more than double the 10-year average of 49 companies for the same period. FactSet attributes this optimism to tax reform, an improving global economy and weaker U.S. dollar.

record number of s and p 500 companies issued positive guidance for 2018
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And it’s not just large S&P 500 companies that are feeling confident. January’s Small Business Optimism Index found that a record percentage of small business owners are eager to expand. Thirty-two percent of owners said that “now is a good time to expand,” the highest such reading in the survey’s 45-year history.

Could Fertility Be a Leading Economic Indicator?

On a final note, a new study lends additional credibility to the theory of “wisdom of crowds,” which states that large groups of people are smarter and better at analyzing data than an elite few. In one recent example, I showed you how investors accurately predicted the election of Donald Trump as far back as July 2016.

But could declining fertility rates predict the next recession? A team of researchers from the University of Notre Dame thinks so, and they have some compelling evidence to support their idea.

Granted, there's nothing unique about the idea that birth rates drop during and after economic downturns. Married couples have tended to put off expanding their families when they see friends and neighbors being laid off and a greater number of foreclosed homes in their neighborhoods.

What makes this study worth discussing is that it suggests conceptions, those that result in live births, noticeably begin to drop months before a recession strikes. This pattern, according to the study’s authors, can be observed in recessions beginning in 1990 and 2001, as well as the Great Recession.

united states conception rates began to fall months before a recession
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Above, you can see the percent change in conception rates tumbled sharply sometime before GDP growth began to stall or even reverse course. Conception, then, could be used to anticipate recessions just as well as any other economic indicator.

In fact, conception rates could end up being even more accurate “in situations where employment significantly lags the overall economy, and where conceptions lead the economy,” the authors write.

So how are families able to anticipate and act on economic trends more reliably than professional economists? Again, the wisdom of crowds prevails. Everyday people no doubt sense the tremors before the earthquake by hearing things in their firms and comparing observations with friends and acquaintances. There’s no way to quantify this, of course, but live birth records in the U.S. are readily available.

You might be wondering what the data tells us about the economy’s health in the near term. Sadly, the study makes no mention of this. But in January, the Pew Research Center reported that U.S. fertility rates fell to 62 births per 1,000 women of childbearing age in 2017—a new all-time low.

Before you begin to panic, though, it’s important to know that there are different ways to measure fertility, which could skew the data. Also, the drop in fertility could just be further evidence that young adults are choosing to delay starting a family.

Regardless of the rate, people will continue to have babies, increasing the need for even more raw materials and resources.

Craving even more expert insight on global markets, gold, cryptocurrencies and behavioral finance? Join thousands of other curious investors like you and sign up to receive my award-winning CEO blog, Frank Talk! It's FREE!

 

 

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

The S&P 500 Index is a stock market index that tracks the 500 most widely held stocks on the New York Stock Exchange or NASDAQ.

The Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of ten key variables.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2017.

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An Olympian's Guide to the Market Selloff: Seeking Rewards In High-Risk Situations
February 12, 2018

Frank Holmes Robert Friedland

Today I’d like to share a few words about the Olympics, but first, two words: Don’t panic.

The stock selloffs last Monday and Thursday were the two biggest daily point drops in the history of the Dow Jones Industrial Average, but in terms of percentage point losses, they don’t even come close to cracking the top 10 worst days in the past 10 years alone.

After a year of record closing highs and little to no volatility, it was expected that the stock market would need to blow off some steam. Last Monday, the CBOE Volatility Index, or VIX, surged nearly 116 percent, its biggest one-day increase since at least 2000.

volatility returns to the markets
click to enlarge

As I explained last week, the selloff appears to have been triggered by a number of things, including the positive wage growth report. This stoked fears of higher inflation, which in turn raised the likelihood that the Federal Reserve, now under control of newcomer Jerome Powell, will raise borrowing costs more aggressively than expected to prevent the economy from overheating.

Also contributing to the uncertainty was news from the Treasury Department that the U.S. government plans to borrow nearly $1 trillion this year, compared to almost half that last year. In the first quarter alone, the Donald Trump administration will issue $66 billion in long-term debt, the first such boost in borrowing since 2009, as the U.S. Treasury seeks to cover budget deficits brought on by higher entitlement spending, not to mention the recently passed tax overhaul.

On Friday, the S&P 500 Index briefly plunged below its 200-day moving average before rebounding in volatile trading.  

stocks plunge below their 200-day moving average
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With stocks down more than 8 percent from its closing high on January 26, we're closing to entering correction territory. Historically, it’s taken four months for stocks to recover from a correction, according to Goldman Sachs analysis. By comparison, a bear market, which is generally defined as more than a 20 percent drop, can take up to two years.

I’m not saying a bear market is imminent—only that it might be time to reevaluate your tolerance for risk and, if appropriate, act accordingly. It’s times like these that highlight how important it is to be diversified in a number of asset classes such as gold, commodities, municipal bonds and international stocks.

Diversity Is Key in Volatile Times

I remain bullish on the U.S. market, but there will always be risk—even in a booming economy. This is one of the biggest reasons why I recommend a 10 percent weighting in gold and gold stocks, with additional diversification in commodities, international stocks and other asset classes.

But to get the greatest benefits, it’s important to rebalance at least once a year, based on your risk tolerance.

Last week, gold was under pressure from surging Treasury yields. Since its 52-week low in September, the 10-year yield has increased almost 40 percent. Not only is it at a four-year high but it’s also above its five-year average of 2.1 percent.

north american shale activity expected to drive global well demand
click to enlarge

Keep in mind that fundamentals remain robust. The U.S. economy is humming along. Unemployment is at a 17-year low, and wage growth is finally bouncing back after the financial crisis. The global manufacturing sector began 2018 on strong footing, with the purchasing manager’s index (PMI) registering 54.4 in January.

Like an Olympic cross-country skier, take the long-term approach and keep your eyes on the prize.

A Year for Olympic Record-Breaking

Before it even began, this year’s Winter Olympics was breaking records. A historic number of athletes, around 3,000, qualified to compete for an unprecedented 102 medals. For the first time ever, an African country—Nigeria—will be represented in the bobsled category, making this also the country’s first visit to the Winter Games. And not only is this South Korea’s first go-round hosting the Winter Olympics, but PyeongChang could be among the coldest host cities ever, with wind chills in some cases dropping temperatures to an arctic negative 25 degrees Celsius, or negative 13 degrees Fahrenheit.

pyeongchang winter olympics 2018

One record that won’t be broken, though, is the cost to host the Games. South Korea spent an estimated $13 billion to bring the rugged, mountainous ski destination up to Olympic standards, building not just stadiums and arenas but also rail, roads, energy infrastructure and more. Amazingly, newly-constructed wind farms in Gangwon Province will generate more than enough energy to power the 16-day event, according to Hyeona Kim, a project manager with the PyeongChang Organizing Committee for the 2018 Olympic Games (POCOG).

Thirteen billion dollars sounds like a lot, but it pales in comparison to the record-breaking $50-55 billion Russia spent to host the Sochi Olympics in 2014.

Sochi Gets Soaked in Debt

Sochi is the most expensive Olympics ever—Winter or Summer. But because Russia’s original price bid was $16 billion, it’s also among the most expensive in terms of cost overruns, according to a 2016 report by the University of Oxford. Looking just at Winter Games, only Lake Placid in 1980 has a bigger cost increase. (The 1976 Summer Olympics in Montreal is biggest of all at 720 percent over budget.)

five most expensive winter olympics by cost overruns
click to enlarge

To put Sochi’s overrun in perspective, the average cost per event is now estimated at $223 million, or a mind-boggling $8 million per athlete.

Contributing to the budget bust was Russia’s need to boost the region’s electricity capacity by as much as 800 percent, leading to the construction of 49 new energy projects. As one deputy minister put it, the undertaking was the country’s largest since Stalin’s time.

Of course, this all raises the question of what economic benefits, if any, hosting the Olympics brings to a city. It took Montreal 30 years to pay off its debt. The 2004 Summer Games in Athens—the birthplace of the Olympics—is now partially blamed for triggering the Greek debt crisis. And in Rio de Janeiro, Brazil, host of the 2016 Summer Games, a number of multimillion-dollar stadiums and arenas sit unused and have become eyesores. (PyeongChang, by contrast, plans to raze the stadium it built for opening and closing ceremonies after the Games are complete.)

Like any other type of investing, there’s no reward without some risk—and, as last week has proven, it’s all about how you manage it.

A Case Study in Good Financial Planning

One city that got it right was Los Angeles.

For many of you, California might not immediately come to mind as a shining example of good fiscal management. But when the city was awarded the Olympics for 1984, the reins were turned over to Major League Baseball (MLB) commissioner Peter Ueberroth, who had previously founded and run a successful travel company. Under his leadership, the 1984 Summer Olympics became the first privately financed Games. A committee was set up that operated more like a corporation. Financing came from private fundraising, corporate sponsorships, TV deals and more.

It certainly didn’t hurt that L.A. was already a highly developed metropolitan area with world-class infrastructure, but Ueberroth urged fiscal restraint and rationality. The results were better than anyone could have anticipated. Remember Sochi’s $8 million price tag per athlete? L.A. ended up spending only around $100,000 per competitor (in 2015 dollars), among the best records ever in Olympic history.

What’s more, the L.A. Games turned a tidy profit, netting the city more than $225 million, all of which was plowed back into the U.S. Olympic Committee. As recently as 2016, those profits were still helping athletes gear up for Olympic glory, according to Ueberroth himself.  

In 1984, Ueberroth was selected as TIME’s Person of the Year for developing “a new model for the Games” and proving that “in a free society, anything is possible.”

Last week I had the chance to speak with Peter Smyrniotis of Market One Media Group about cryptocurrencies, blockchain technology and initial coin offerings (ICOs). Watch the interview by clicking here!

 

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Net Asset Value
as of 10/23/2018

Global Resources Fund PSPFX $4.95 -0.08 Gold and Precious Metals Fund USERX $6.87 No Change World Precious Minerals Fund UNWPX $3.48 -0.02 China Region Fund USCOX $8.08 -0.13 Emerging Europe Fund EUROX $6.25 -0.03 All American Equity Fund GBTFX $25.04 -0.20 Holmes Macro Trends Fund MEGAX $17.84 -0.16 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change