October 10, 2008

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Table of Contents » Click on title to go to that section
» Index Summary	» Gold Market
» Fund Performance Link	» Energy and Natural Resources Market
» Domestic Equity Market	» Emerging Markets: China Region
» Economy and Bond Market	» Leaders and Laggards
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Index Summary

• The major market indices were lower this week. The Dow Jones Industrial Index (1) fell 18.15 percent. The S&P 500 Stock Index (2) lost 18.20 percent, while the Nasdaq Composite (3) finished 15.30 percent lower.
• Barra Growth (4) outperformed Barra Value (5) as Barra Value finished 18.62 percent lower while Barra Growth declined 17.52 percent. The Russell 2000 (6) closed the week with a loss of 15.65 percent.
• For the week, the Hang Seng Composite (7) finished lower by 17.17 percent; Taiwan (8) lost 10.65 percent, and the Kospi (9) fell 12.55 percent.
• The 10-year Treasury bond yield closed at 3.87 percent, up 16 basis points for the week.

In the Market for Buying Opportunities?

By Frank Holmes, CEO and Chief Investment Officer

These past few months have been grueling for everyone involved in the markets, from professional fund managers to individual investors. But, as another wild week comes to a close, we are seeing signs that it may be time to look ahead rather than dwelling on the negativity that has clouded markets recently.

In a timely piece of research, Barclays Capital asserts that equity valuations are at levels that historically deliver high long-term returns. While Barclays’ “Buying Opportunity of a Generation?” report does not call today the bottom in the bear market, it suggests the low may come in the next two or three weeks.

Trailing price-earnings ratios for global equities have been slashed in half since last year, as seen in the chart below. This is true regardless of whether financials are included in the calculation. In October 2007, the Factset Work Equity Index (10) generated a trailing P/E ratio of 18; that has now fallen to nine times earnings.

Barclays made another important observation: The de-rating has been in response to the deteriorating economic climate. Basically, there’s been a traffic jam of inflation and credit shocks that has generated a global financial panic.

As usual, equity markets have fallen to discount a serious drop in corporate profits. The 50 percent decline in P/E ratios is in line with historical patterns.

I found it particularly interesting that profits tend to fall 15 to 25 percent during a typical cyclical recession – but when a recession overlays a financial crisis, the fall in profits is 30 to 60 percent.

Next Thursday, Oct. 16, I will be joined by my portfolio management team in hosting an exclusive webcast: “Enduring the Global Financial Crisis.” We’ll discuss the impact of the credit crunch on equity and bond markets, and we’ll look ahead to prospects for commodities and emerging markets.

Please join us for this special event Thursday at 4 p.m. Eastern time (3 p.m. Central time). And if you have questions for us, feel free to e-mail them to webmaster@usfunds.com in advance of the webcast.

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Volatility Disguising Value

A special note from the portfolio managers of the Global Resources Fund (PSPFX) and World Precious Minerals Fund (UNWPX)

Stock market volatility climbed to record levels this week as the Volatility Index, or VIX (11), closed at an all-time high of 70. The spike in volatility is a reflection of the fear and uncertainty surrounding the global financial crisis, which has gripped credit markets and become a major concern for both Wall Street and “Main Street.”

However, it’s not just the investment banker or the subprime borrower feeling the sting of frozen credit markets. Junior gold-mining companies rely on capital to finance their exploration projects.

These miners have been hit hard by the credit crisis as a worldwide rush by leveraged hedge funds to acquire U.S. dollars has caused asset valuations for many junior mining stocks to decouple from their underlying gold resource base.

This decoupling has hurt the performance of the World Precious Minerals Fund, which holds many junior mining stocks.

Energy stocks also have been hit hard recently. After leading the market for several years, the S&P 500 Energy Index (12) has become the worst-performing subindex thus far in the second half of the year, declining 48 percent.

Much of this decline has occurred in the last two weeks. In fact, the last two trading days—October 9 and 10—rank as the two largest single-day declines in S&P 500 Energy Index’s 20-year history.

This spike in volatility due to forced liquidations has even hit world-class stocks like Exxon Mobil, which fell nearly 20 percent for the week. Though swift and severe, the volatility presents long-term investors with an excellent risk-adjusted opportunity to put money to work in both the precious metals and energy sectors.

For instance, the ratio between gold bullion and the Philadelphia Stock Exchange Gold and Silver Index (XAU) reached an extreme 8.4:1 this week. This divergence can be a signal that bullion is now overbought or that stocks are extremely cheap on a valuation basis.

According to calculation by Canaccord Adams, gold in-situ valuations—meaning the sum of the company’s resources divided into its market cap—for junior mining stocks show that market prices for an ounce of gold in the ground has fallen by nearly 50 percent over the past six months.

This aberration is unsustainable since gold production profiles for established mining companies are in decline and there is more certainty in buying existing reserves from acquiring a junior instead of gambling on making a new discovery.

For energy and natural resources, the secular story remains for a couple of reasons.

The global credit squeeze has delayed and even canceled many of the new “green field” projects. Any further delays or disappointments will only put a greater strain on supply.

These projects are particularly vulnerable, given their long lead times and requirement of millions of dollars in upfront capital.

Additionally, OPEC is generally expected to cut production to support falling oil prices when the cartel meets next month. Given the continued substantial decline in global crude production outside from the North Sea, Mexico and Russia, a production cut from OPEC would be supportive of prices going forward.

Additionally, demand for tangible assets and valuable natural resources should return in 2009 as the financial crisis subsides in response to massive government stimulus.

This week, the International Energy Agency (IEA) September report showed the agency is still calling for a positive demand growth of nearly 700,000 barrels a day in 2009. This would bring total global consumption of oil to 87.2 million barrels a day, despite facing incredible economic headwinds.

Lastly, when looking at the chart above, the price-earnings ratio for the S&P 500 Energy sector has compressed to its lowest level in 10 years, at just six times next year’s projected earnings.

Clearly, energy stocks have already discounted much of the bad news recently, and we would maintain that valuations are at levels that provide compelling risk-reward metrics, which presents an opportunity for long-term investors.

The Leaders and Laggards table has been moved to the bottom of the page, click here to jump to it.

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Domestic Equity Market

Strength

• The real estate services group was the only industry group that was positive for the week, up 6 percent, led by its single member, CB Richard Ellis Group Inc. The company laid off an undisclosed number of employees in a national restructuring program.
• The fertilizer and agricultural chemical group was among the better-performing groups for the week, declining 5 percent—a relatively good performance in a very weak market. Monsanto Co., the largest member of the group, reported earnings in excess of the analyst consensus estimate. The company said that key drivers for the quarter were higher sales of branded Roundup herbicides and soybean seeds and traits.

Weakness

• The automobile manufacturer group was the worst performer, down 49 percent. General Motors Corp. and Ford Motor Co. were both down sharply this week. On Thursday, Standard & Poor’s placed both companies on review for a further downgrade in their credit ratings. On Friday, both companies made statements, meant to reassure concerned investors, that they were not considering filing for bankruptcy.
• The investment bank and brokerage group was among the underperformers, declining 36 percent. The Goldman Sachs Group Inc. was down 31 percent, and Morgan Stanley was 60 percent lower, both affected by the global credit crisis. Moody’s said it might downgrade the two investment banks, citing a weakening outlook for the capital markets that will affect profits next year. Also, some investors were concerned that Mitsubishi UFJ Financial Group Inc. might not complete its planned $9 billion investment in Morgan Stanley.

Opportunity

• Although the level of merger and acquisition activity has slowed when compared with the first half of 2007, there may still be an opportunity for gain in M&A transactions in 2008.
• The government “rescue” plan passed by Congress last week could possibly help ease the credit crunch.

Threat

• A continuation of the credit crunch presents a threat to the economy.
• Slowing economic growth in the U.S. presents a threat to the domestic component of corporate earnings.

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The Economy and Bond Market

Bond yields ended the week mixed as long-term yields moved higher while short-term yields continued to benefit from a flight to quality. Global coordinated central bank cuts and more liquidity injections around the global failed to restore calm to the markets.

Strength

• The Fed cut interest rates by 50 basis points.
• The Fed was not alone in cutting interest rates as the European Central Bank, Bank of England, China, Hong Kong, Canada, Sweden, Switzerland, Australia, South Korea and Taiwan all cut rates this week.
• Fed fund futures are now pricing in an additional 25-basis-point rate cut from the Fed.

Weakness

• Iceland is facing serious financial difficulties and is looking for outside assistance.
• The consumer pulled back in September, as same-store sales data were generally weak.
• The magnitude of the bailout continues to rise on an almost daily basis, fueling concerns of currency debasement and potentially inflationary ramifications.

Opportunity

• The Fed is likely to take a cautious approach and may cut interest rates in the near future to bolster confidence.

Threat

• Inflation is likely to slow with global economic growth, but with central banks around the world pushing money supply higher, inflationary pressures in 2009 can’t be ruled out.

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Gold Market

For the week, spot gold closed at $849.90 per ounce, up $14.35 or 1.72 percent. However, gold equities, as measured by the Philadelphia Stock Exchange Gold and Silver Index (XAU) (13) fell 10.29 percent for the week. The U.S. Trade-Weighted Dollar Index (DXY) (14) continued to climb higher, gaining 3.34 percent.

Strength

• Precious metals have well outperformed other commodities since the September financial turmoil unfolded.
• The SPDR Gold Trust, the largest gold exchange-traded fund, added 16 percent to its gold holdings, which now total 763.9 tons. The fund ranks eighth among worldwide gold holdings, with more gold than China, Russia and the UK.
• In an effort to bolster the global economy, a coordinated effort by several world nations was launched. Central banks in the U.S., England, the eurozone, Australia, China, Korea, Taiwan and others lowered lending rates. The move lessens the appeal of paper currency and boosts the appeal of gold.

Weakness

• Oil continued its decline off July highs, despite globally coordinated rate cuts and further liquidity injections. Investors apparently were not convinced that the move was enough to bolster the world's economy.
• Chinese gold production increased 5.22 percent in the first seven months of the year. It is now 152.51 tons over the same time period last year.
• Platinum futures fell for the eighth time in 10 days in Tokyo as investors moved out of metals and into cash. The futures are now down 58 percent from record highs set in March.

Opportunity

• Citigroup analysts believe that gold is “badly mispriced” and stands to gain, regardless of the outcome of policy actions. Central bank sales and production output, as well as other forces that have supported gold for the last half-decade, remain intact. The analysts believe gold could double or triple from current levels.
• BlackRock analysts affirmed Citigroup’s belief, citing a shortage of mineral deposits, political instability and power constraints as support for a long-term positive outlook for gold and platinum prices.
• Central bank gold lending has essentially dried up as, by nature, gold lending is an unsecured transaction and counterparty risk remains in focus. This apparent bullion shortage could squeeze remaining shorts and boost the price of gold.

Threat

• The ratio between gold bullion and the Philadelphia Gold and Silver Index of mining stocks reached an extreme 8.4 to 1.0 this week. Some investors view this divergence as a signal that bullion is now overbought or the stocks are extremely cheap.
• Bomb scares and threats of violence threaten to dampen gold sales throughout the Indian festival seasons. The Associated Chambers of Commerce and Industry in India expects more people to stay at home and e-shop, instead of shopping outdoors where most gold sales take place.
• The Chilean government announced that its copper production would increase 23 percent by 2012. With copper prices down 45 percent since the end of June, increased supply in this slowing economy threatens to further drive down the price of copper.

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Energy and Natural Resources Market

Strength

• Spain may record the highest growth in liquefied natural gas use this year among top importers of the cleaner-burning fuel after LNG imports rose 23 percent, led by demand from power plants.

Weakness

• U.S. aluminum major Alcoa is expecting demand from all of its North American end markets to be down this year versus last year, and the company is reining in costs, said Klaus Kleinfeld, president and CEO.
• Chinese steel mills, the world's biggest producers, are cutting demand for iron ore and asking miners to postpone deliveries because of slower sales and a lack of credit, said Mt. Gibson Iron Ltd., an Australian producer.
• The Baltic Dry Index (15), a measure of shipping costs for commodities, fell to its lowest since June 2006 as slowing economic growth curbed demand for raw materials and led to a surplus of vessels for hire.
• The price for crude oil produced by the Organization of the Petroleum Exporting Countries (OPEC) fell below $80 for the first time since October 2007 on Wednesday, according to data released by OPEC on Thursday.
• The International Energy Agency (IEA) on Friday cut its oil demand growth forecast for 2008 to the lowest rate in 15 years, citing economic weakness and "a spiraling liquidity crisis." In a monthly report, the agency, adviser to 28 industrialized countries, reduced its 2008 demand growth forecast by 250,000 barrels per day (bpd) to 440,000 bpd. This represents a 0.5 percent growth rate—the lowest in percentage terms since 1993. The report adds to evidence that slowing economies and the worsening financial crisis are reducing oil consumption.

Opportunity

• OPEC would cut oil output at its December meeting only if prices fell below $80 a barrel, a source for the group said. Several members have recently voiced concern about demand and the falling price. Nigeria’s minister was the latest, saying this week the group may need to intervene to balance markets.

Threat

• The copper market is expected to see a surplus of about 100,000 metric tons in 2008, growing to around 275,000 metric tons in 2009, the International Copper Study Group (ICSG) said in a report on Wednesday. A deficit for the first half of 2008 of about 125,000 metric tons is expected to be overshadowed by a 235,000 metric ton surplus in the second half, owing to seasonally weaker second-half consumption and a downturn in global markets, the report said.
• The global nickel market will be in a 110,000-metric-ton surplus in 2009, with a sharp pickup in output outweighing a slower recovery in usage, the International Nickel Study Group (INSG) said.
• With just two exceptions, China has officially halted all of its coal-to-liquids (CTL) projects due to environmental and economic concerns. In a notice posted on its Web site on September 4, the National Development and Reform Commission (NDRC) said that, apart from two projects operated by the ShenHua Group, none could go ahead before receiving official approval, because CTL is "a technology-, talent- and capital-intensive project at an experimental stage with high business risks".

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Emerging Markets: China Region

Strength

• Interest rate cuts were enacted in Hong Kong, China, Taiwan and Korea in an effort to support economic growth in the face of a global slowdown.

Weakness

• The MSCI Asia Pacific Index (16) suffered its largest weekly loss - 17 percent - since the index was first created in 1987.
• For the second straight month, car sales in China declined. Sales in September declined 1.4 percent to 552,800. Although traffic controls are partially responsible for the decline, a larger factor is the stock market decline, which is causing a negative wealth effect on consumer spending.

Opportunity

• China is holding its annual Ruling Party Summit this weekend and will focus on continued policy support for the nation’s 730 million farmers. In its effort to maintain a harmonious society, policymakers will address the growing income gap between rural and urban workers. This may mean additional social-program spending and improved infrastructure in rural parts of China.

Threat

• Japan, armed with close to $1 trillion in foreign-exchange reserves, indicated that it is ready to help nations running out of funds as the global financial crisis grows.

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Leaders and Laggards

The tables show the performance of major equity and commodity market benchmarks of our family of funds.

Weekly Performance
Index	Close	Weekly Change($)	Weekly Change(%)
Gold Futures	849.00	+15.80	+1.90 %
Oil Futures	80.60	-13.28	-14.15 %
Korean KOSPI Index	1,241.47	-178.18	-12.55 %
10-Yr Treasury Bond	3.87	+0.16	+4.28 %
Natural Gas Futures	6.66	-0.70	-9.53 %
XAU	100.56	-11.53	-10.29 %
S&P/TSX Canadian Gold Index	228.31	-7.95	-3.36 %
DJIA	8,451.19	-1,874.19	-18.15 %
S&P BARRA Growth	439.90	-93.45	-17.52 %
S&P Energy	338.68	-113.10	-25.03 %
S&P 500	899.22	-200.01	-18.20 %
Nasdaq	1,649.51	-297.88	-15.30 %
S&P BARRA Value	456.81	-104.53	-18.62 %
Hang Seng Composite Index	1,959.77	-406.29	-17.17 %
Russell 2000	522.48	-96.92	-15.65 %
S&P Basic Materials	153.49	-27.79	-15.33 %

Monthly Performance
Index	Close	Monthly Change($)	Monthly Change(%)
Gold Futures	849.00	+86.50	+11.34 %
10-Yr Treasury Bond	3.87	+0.25	+6.84 %
Korean KOSPI Index	1,241.47	-223.51	-15.26 %
S&P BARRA Value	456.81	-169.98	-27.12 %
DJIA	8,451.19	-2,817.73	-25.00 %
Russell 2000	522.48	-194.68	-27.15 %
S&P/TSX Canadian Gold Index	228.31	+4.45	+1.99 %
S&P 500	899.22	-332.82	-27.01 %
S&P BARRA Growth	439.90	-159.90	-26.66 %
Nasdaq	1,649.51	-579.19	-25.99 %
S&P Energy	338.68	-158.12	-31.83 %
XAU	100.56	-17.25	-14.64 %
Oil Futures	80.60	-21.98	-21.43 %
Natural Gas Futures	6.66	-0.74	-9.96 %
S&P Basic Materials	153.49	-67.47	-30.53 %
Hang Seng Composite Index	1,959.77	-755.06	-27.81 %

Quarterly Performance
Index	Close	Quarterly Change($)	Quarterly Change(%)
Russell 2000	522.48	-147.96	-22.07 %
DJIA	8,451.19	-2,777.83	-24.74 %
S&P BARRA Value	456.81	-160.31	-25.98 %
10-Yr Treasury Bond	3.87	+0.05	+1.44 %
S&P 500	899.22	-354.17	-28.26 %
Gold Futures	849.00	-103.10	-10.83 %
Nasdaq	1,649.51	-608.34	-26.94 %
S&P BARRA Growth	439.90	-188.01	-29.94 %
Korean KOSPI Index	1,241.47	-295.96	-19.25 %
S&P Basic Materials	153.49	-94.64	-38.14 %
S&P Energy	338.68	-272.29	-44.57 %
Hang Seng Composite Index	1,959.77	-1,110.61	-36.17 %
S&P/TSX Canadian Gold Index	228.31	-113.26	-33.16 %
Oil Futures	80.60	-61.05	-43.10 %
XAU	100.56	-86.81	-46.33 %
Natural Gas Futures	6.66	-5.64	-45.88 %

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Please consider carefully the 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.

An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is 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 percent to 10 percent of your portfolio in gold or gold stocks. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas and banking industries. In particular, the fund will invest at least 25% of its net assets in the following industries: energy equipment and services; oil, gas and consumable fuels; and commercial banking. However, the fund will not invest more than 50% of its net assets in any one of those industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

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. Bond funds are subject to interest-rate risk; their value declines as interest rates rise.

These market comments were compiled using Bloomberg and Reuters financial news.

Holdings as a percentage of net assets as of 6/30/08:
Barclays PLC: (0.00%)
CB Richard Ellis Group Inc. (0.00%)
Monsanto Company: Global Resources (1.13%), All American Equity (0.95%), Holmes Growth (1.03%)
General Motors Corp (0.00%)
Ford Motor Co (0.00%)
Goldman Sachs Group Inc. (0.00%)
Morgan Stanley: All American Equity (0.97%)
Moody's: (0.00%)
Mitsubishi (0.00%)
SPDR Gold Trust: Gold and Precious Metals (2.43%), World Precious Minerals (0.07%), Global Resources (0.03%), China Region (0.17%), Global MegaTrends (0.84%)
Citigroup (0.00%)
BlackRock (0.00%)
Alcoa: Global Resources (0.05%)
Mt. Gibson Iron Ltd (0.00%)
Exxon: (0.00%)

*The above-mentioned indexes are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.

(1) The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
(2) The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
(3) The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
(4) The S&P BARRA Growth Index is a capitalization-weighted index of all stocks in the S&P 500 that have high price-to-book ratios.
(5) The S&P BARRA Value Index is a capitalization-weighted index of all stocks in the S&P 500 that have low price-to-book ratios.
(6) The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
(7) The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
(8) The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
(9) The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
(10) The Factset World Equity Index is designed to represent approximately 90 percent of the investable stocks in the global market.
(11)Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.
(12) 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.
(13) The Philadelphia Stock Exchange Gold and Silver Index is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
(14) The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
(15) The Baltic Dry Freight Index is an economic indicator that portrays an assessed price of moving major raw materials by sea as compiled by the London-based Baltic Exchange.
(16) The MSCI Asia Pacific Index is a capitalization-weighted index that monitors performance of stocks from the Asia-Pacific region.

The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
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.

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