| November 14, 2008 |
If you would like more information on our funds, feel free to contact our Institutional Services Representatives:
Michael Dunn • (210) 308-1287 • mdunn@usfunds.com
Jennifer Alberding • (210) 308-1277 • jalberding@usfunds.com
Index Summary
- The major market indices were lower this week. The Dow Jones Industrial Index (1) fell 4.99 percent. The S&P 500 Stock Index (2) lost 6.20 percent, while the Nasdaq Composite (3) finished 7.92 percent lower.
- Barra Growth (4) outperformed Barra Value (5) as Barra Value finished 7.17 percent lower while Barra Growth declined 5.32 percent. The Russell 2000 (6) closed the week with a loss of 9.74 percent.
- For the week, the Hang Seng Composite (7) finished lower by 3.26 percent; Taiwan (8) fell 6.11 percent, and the Kospi (9) declined 4.07 percent.
- The 10-year Treasury bond yield closed at 3.74 percent, down 6 basis points for the week.
The Coming Week May Be Critical to the Recovery
By John Derrick, director of research
We have pointed out several times that we think the recovery from the current recession will be U-shaped, with several tests of the low before a likely bottom is reached and a sustainable rally can begin.
According to research from JP Morgan this week, the next week or so could be an important period of time for the stock market.
This research is based on the S&P 500’s intraday low of 838 on October 10, which had been the index’s lowest point prior to Thursday’s intraday low of 818.
JP Morgan examined more than a century of bear markets to look for recovery patterns and came up with a few interesting observations. It found that market bottoms are almost always retested, and that such retests result in a new low about 40 percent of the time.
History shows that three-quarters of the retesting events occurred within 44 days of a bottom, so if the October 10 low in fact marked a bottom, a retest (which could create a new low) should be expected prior to November 23.
The longest span for retesting a low was 104 days in 2002. A repeat of that extreme case would schedule the retest for January 22, 2009.
Of course, JP Morgan makes no promises that October 10 is the pivotal date. One of its causes for concern is market volatility, as measured by S&P’s intraday swings. As an example, Thursday’s swing – a high of 913 and the 818 low – was more than 10 percent of the index’s value.
The rolling 20-day intraday volatility reached 7 percent and is currently running around 5 percent, as noted on the above chart. JP Morgan says that level has to come down to 3 percent to attract institutional investors who are now sitting on the sidelines.
If the current trend continues, the 3 percent level would be reached, you guessed it, on November 23.
This week’s research reinforces the U-shaped bottom that we’re envisioning. The past three bear markets have followed that pattern, as you can see on the charts below
Another measure that points toward possible market capitulation is the CBOE’s Volatility Index (VIX) (10), also known as the Fear Index. The VIX hit a number of all-time highs in October before peaking late in the month. It has since fallen roughly 25 percent, suggesting that investor fear may be ebbing and raising the chances of a sentiment reversal.
Stock market volatility hasn’t been confined to the U.S. The chart below shows that the extreme downside volatility in the Asia region ex-Japan has exceeded the Asian financial crisis in 1997 and the Russian default in 1998 that led to the collapse of the Long-Term Capital Management hedge fund.
The potential for mean reversion in equity prices is substantial as the chart above displays. Using the last two crises as our guide, the rebound toward the mean tends to occur over a short period of time and with great alacrity. Just to return to the mean in the near term would require a positive move greater than 30 percent.
The opposite situation is in effect in the chart above. Short covering, deleveraging and forced repatriation have been significant factors in the U.S. dollar appreciation and emerging market depreciation, driving the U.S. dollar to an upside extreme. When this deleveraging cycle runs its course, mean reversion will take effect for both the dollar and emerging market stocks.
Warren Buffett recently took the initiative to offer investors some good advice -- “Be fearful when others are greedy, and be greedy when others are fearful” – and some good perspective – “The market will move higher, perhaps substantially so, well before either economic sentiment or the economy turns up.”
These words of wisdom from the Oracle of Omaha definitely hit home in today’s markets, and give us reason for optimism.
The Leaders and Laggards table has been moved to the bottom of the page, click here to jump to it.
Domestic Equity Market
Strength
- The agricultural products group was the best-performing group for the second week in a row, up 15 percent this week. In the prior week, the group’s single member, Archer-Daniels-Midland Co, reported quarterly earnings which handily beat the analyst consensus estimate. The company said that its oilseeds processing operating profit increased on improved global crushing and origination margins, improved margins for value-added products and increased equity earnings of its Asian affiliates.
- The oil & gas refining & marketing group was the second-best performer, up 6 percent. The group was led by Sunoco Inc. which reported quarterly profits significantly above the analyst consensus estimate. The company attributed the strong results to very strong refining margins due to falling crude oil prices and reduced industry production related to the Gulf Coast hurricane activity.
Weakness
- The industrial real estate investment trust (REIT) group was the worst performer, down 49 percent, led by its single-member, ProLogis. The world’s largest warehouse developer said it would cut its dividend by more than one-half to retain cash, cut costs by 20 to 25 percent, and halt new construction beyond the $8.2 billion of projects in its development pipeline. These moves reflect the impact of slowing sales of consumer goods and pessimistic corporate outlooks on demand for warehouse and factory space. The company’s CEO resigned.
- The telecom wireless services group was among the under-performers, declining by 21 percent. Its largest member, Sprint Nextel Corp, reported a quarterly loss in earnings in addition to a net loss of 1.3 million subscribers. The company also offered voluntary buyout packages to an undisclosed number of its workers in an effort to reduce labor costs.
Opportunity
- Although the level of merger & acquisition activity has slowed when compared to the first half of 2007, there may still be an opportunity for gain in M&A transactions in 2008.
- Governmental efforts to inject capital into the nation’s financial system could, in time, help to restore more normal lending conditions.
Threat
- A continuation of tight credit conditions presents a threat to the economy.
- A slowing global economy poses a threat to earnings and stock prices.
Near-Term Tax Free Fund - NEARX • Tax Free Fund - USUTX
The Economy and Bond Market
Treasury yields fell again this week as global economic data continued to paint a gloomy picture. October retail sales fell 2.8 percent, which was the worst showing in at least 16 years. Initial jobless claims rose to 516,000 virtually matching the spike in jobless claims seen after 9/11.
Strength
- China announced a $586 billion stimulus plan to boost their economy.
- Import prices in the U.S. fell 4.7 percent in October and on a year-over-year basis have declined significantly.
- Chinese inflation also fell in October hitting a 17-month low.
Weakness
- October retail sales fell 2.8 percent, which was the worst showing in at least 16 years.
- Initial jobless claims rose to 516,000 virtually matching the spike in jobless claims seen after 9/11.
- Germany’s economy contracted 0.5 percent in the third quarter and is likely a precursor to a broader European recession.
Opportunity
- We are beginning to see signs of a recovery in the credit markets which could be the catalyst to boost virtually all asset classes.
Threat
- Like the stock market many economic indicators are at most extreme readings in decades. This pervasiveness and magnitude of the current economic malaise may still be underestimated.
Gold Market
For the week, spot gold closed at $742.10 per ounce up $5.45 or 0.74 percent. However, gold equities, as measured by the XAU Gold & Silver Index (11) slid lower, losing 5.82 percent for the week. The U.S. Trade-Weighted Dollar Index (12) moved slightly higher, gaining 0.53 percent.
Strength
- Saudi Arabia experienced a record high in gold demand with over $3.5 billion spent on the precious metal in the last two weeks. Additionally, their market participants see demand going higher.
- London-based online gold brokerage BullionVault confirmed that British are rushing to buy gold amid their own financial crisis. The company has grown over 475 percent in the last year, servicing 40,000 British customers and another 30,000 from around the world.
- Gold production out of South Africa, the world’s largest precious metal producer fell 18 percent in September from a year ago.
Weakness
- The SPDR Gold Trust gold holdings continue to shrink after its record October 13 peak. They now hold 748.94 metric tonnes versus the 770 held on that record day.
- The U.S. Treasury’s recent auction of their 30-year bonds failed to garner as much demand as in previous auctions. The ratio of bids to securities sold fell from 2.40 in the last auction to 2.07 currently.
- Additionally, foreign central banks purchased only 18.2 percent of the securities sold versus the 42.9 percent in the prior auction. If foreign central banks pull back on treasury purchases, this may push rates higher but would also signal less confidence in the dollar.
Opportunity
- The China Gold Association said that the country should diversify its reserves to include more bullion as a hedge against a falling dollar since they are among the largest overseas holders of U.S. Treasuries. Vice Chairman Hou Huimin thinks the nation should have five to six times their officially announced 600 metric tonnes of gold.
- It was suggested in one research note today that China should buy the gold which the IMF intends to sell. China would get the gold at relatively low price and the IMF would have a quick cash injection to help struggling economies at a critical time of need.
- Bank Credit Analysts are watching credit spreads, the price of gold and currency volatility for signals that the global credit market crisis has ended. Specifically, they are looking for slowing advances of the dollar which would mean a rebound for the price of gold.
Threat
- International diversified mining stocks were dealt another blow this week when China announced that it would raise the value-added tax on metal ores beginning in 2009. The tax would affect imports and domestic producers and cut demand from foreign miners.
- The VM Group noted that of the more than 1,100 metric tonnes of gold held in exchange-traded funds (ETFs), about 750 to 800 metric tonnes were purchased at prices below $750 an ounce. If gold was to breach $600 an ounce, a lot of investors would then be underwater on their purchase and this might lead to redemptions.
- Morgan Stanley analysts lowered their gold industry view from “attractive” to “in-line” as they expect gold to remain “range-bound,” trading between $700 and $800 per ounce through 2009. Gold Fields Mineral Services pushed back their $1,000 per ounce forecast by year-end. However, they still expect gold to attain such levels within the next six months.
Energy and Natural Resources Market
Strength
- China announced a $586 billion stimulus package which will boost spending through 2010. Outlay s include: infrastructure, earthquake reconstruction and public transportation; all of these are very commodity intensive.
- According to Platts, around 25 small steel mills in Northern China are preparing to resume production as falling raw material costs may make steel production profitable again.
- The price of scrap steel doubled from $140 per metric tonne to approximately $280 per tonne last week.
- The Ux Consulting Company announced that spot uranium prices have jumped $2.00 per pound this week. This possibly points to a bottom in uranium prices..
Weakness
- According to a release by US Energy Information Administration (EIA), U.S. petroleum consumption is projected to decline substantially in 2008. Consumption is expected to average 19.6 million barrels per day (bbl/d), down 1.1 million bbl/d, or 5.4 percent, from the 2007 average. This marks the first time since 1980 that annual petroleum consumption is expected to decline by more than 1 million bbl/d. In 2009, consumption is projected to sink by an additional 250,000 bbl/d, or 1.3 percent.
- Codelco, the largest global copper producer, cut the surcharge on sales to Japan and South Korea by more than 30 percent to a six-year low, signaling further demand weakness.
- Chinese industrial production for October increased 8.2 percent year-over-year, the slowest month since November 2001.
- Provisional Chinese trade data shows exports of steel products dropped to 4.620 metric tonnes (mt) in October, compared with 6.835mt in September and a peak of 8,212mt in August.
Opportunity
- OPEC probably needs to cut oil supplies by another 1.5 million barrels per day at a meeting on November 29 due to falling demand and oil prices, according to an OPEC delegate.
- The International Energy Agency sees a real risk of a global oil supply crunch over the next few years as reserves may not be exploited fast enough to keep up with global oil demand growth. The IEA estimates that 30 million barrels of production per day of new capacity is needed by 2015.
- Government-controlled State Grid Corp. of China which is the primary supplier of electricity in China has announced that it intends to spend approximately $170 billion over the next three years to stimulate the Chinese economy.
- Marathon Oil's chief financial officer said she expects smaller U.S. natural gas companies to turn to consolidation.
Threat
- Venezuela President Hugo Chavez has stepped up his re-election campaign and has threatened to use force if opposition leaders interfere in the election process. Further, Russia’s President Dmitry Medvedev, will visit Venezuela on November 26 to discuss arms, as well as closer ties between the two oil exporting countries.
Global Emerging Markets Fund - GEMFX
Emerging Markets: China Region
Strength
- China announced a $586 billion stimulus package to boost low-income housing and infrastructure spending through 2010, raise food purchase prices for farmers, overhaul corporate value-added tax system and officially changed its monetary policy stance to “relatively loose”.
- China’s consumer price inflation decelerated further to 4 percent in October from 4.6 percent in September, thanks to continued moderation in both food and nonfood prices. Retail sales growth continued at the healthy pace of 22 percent.
Weakness
- Fitch downgraded the long-term foreign currency credit outlook for South Korean financial institutions to “negative” from “stable” citing the risk of higher credit costs.
- China’s industrial production growth fell to 8.2 percent in October, the slowest in 7 years, reflecting falling exports and deteriorating property investment.
- Hong Kong’s GDP declined 0.5 percent in the third quarter from the previous quarter, sending the city into the first recession since 2003. Domestic consumption was hurt by weakness in exports and the financial service sector.
Opportunity
Following the Asian Financial Crisis, bank loans were tapped as a significant source of funding for China’s stimulus plan in 1998, when bank lending grew more than twice as fast as nominal GDP. If history repeats itself, the latest $586 billion stimulus package should benefit participating banks because, aside from rapid loan growth ahead, the credit risk profile for government-sponsored projects is superior to that of corporate lending to small and medium enterprises.
Threat
- The October decline of China’s electric power generation, widely watched as a proxy for its economic activity, was even worse than during the Asian Financial Crisis. With recent production cutbacks at power-consuming industrial companies besides energy and environmental conservation mandates, electricity usage could remain sluggish in the near term.
Leaders and Laggards
The tables show the performance of major equity and commodity market benchmarks of our family of funds.
| Weekly Performance | |||
| Index | Close | Weekly Change($) | Weekly Change(%) |
| DJIA | 8,497.31 | -446.50 | -4.99 % |
| S&P 500 | 873.29 | -57.70 | -6.20 % |
| S&P BARRA Value | 434.87 | -33.61 | -7.17 % |
| S&P BARRA Growth | 433.34 | -24.37 | -5.32 % |
| S&P Energy | 378.65 | -14.26 | -3.63 % |
| S&P Basic Materials | 135.66 | -13.92 | -9.31 % |
| Nasdaq | 1,516.85 | -130.55 | -7.92 % |
| Russell 2000 | 456.52 | -49.27 | -9.74 % |
| Hang Seng Composite Index | 1,844.14 | -62.06 | -3.26 % |
| Korean KOSPI Index | 1,088.26 | -46.23 | -4.07 % |
| S&P/TSX Canadian Gold Index | 193.22 | -6.96 | -3.48 % |
| XAU | 80.20 | -4.96 | -5.82 % |
| Gold Futures | 740.70 | +6.50 | +0.89 % |
| Oil Futures | 56.38 | -4.66 | -7.63 % |
| Natural Gas Futures | 6.32 | -0.44 | -6.53 % |
| 10-Yr Treasury Bond | 3.74 | -0.06 | -1.53 % |
| Monthly Performance | |||
| Index | Close | Monthly Change($) | Monthly Change(%) |
| DJIA | 8,497.31 | -813.68 | -8.74 % |
| S&P 500 | 873.29 | -124.72 | -12.50 % |
| S&P BARRA Value | 434.87 | -73.26 | -14.42 % |
| S&P BARRA Growth | 433.34 | -52.19 | -10.75 % |
| S&P Energy | 378.65 | -22.18 | -5.53 % |
| S&P Basic Materials | 135.66 | -32.98 | -19.56 % |
| Nasdaq | 1,516.85 | -262.16 | -14.74 % |
| Russell 2000 | 456.52 | -98.13 | -17.69 % |
| Hang Seng Composite Index | 1,844.14 | -332.01 | -14.83 % |
| Korean KOSPI Index | 1,088.26 | -279.43 | -20.43 % |
| S&P/TSX Canadian Gold Index | 193.22 | -46.86 | -19.52 % |
| XAU | 80.20 | -27.15 | -25.29 % |
| Gold Futures | 740.70 | -98.80 | -11.77 % |
| Oil Futures | 56.38 | -22.25 | -28.30 % |
| Natural Gas Futures | 6.32 | -0.41 | -6.11 % |
| 10-Yr Treasury Bond | 3.74 | -0.34 | -8.38 % |
| Quarterly Performance | |||
| Index | Close | Quarterly Change($) | Quarterly Change(%) |
| DJIA | 8,497.31 | -3,118.62 | -26.85 % |
| S&P 500 | 873.29 | -419.64 | -32.46 % |
| S&P BARRA Value | 434.87 | -210.78 | -32.65 % |
| S&P BARRA Growth | 433.34 | -206.50 | -32.27 % |
| S&P Energy | 378.65 | -163.05 | -30.10 % |
| S&P Basic Materials | 135.66 | -106.00 | -43.86 % |
| Nasdaq | 1,516.85 | -936.82 | -38.18 % |
| Russell 2000 | 456.52 | -297.86 | -39.48 % |
| Hang Seng Composite Index | 1,844.14 | -1,094.16 | -37.24 % |
| Korean KOSPI Index | 1,088.26 | -483.93 | -30.78 % |
| S&P/TSX Canadian Gold Index | 193.22 | -75.39 | -28.07 % |
| XAU | 80.20 | -62.42 | -43.77 % |
| Gold Futures | 740.70 | -73.80 | -9.06 % |
| Oil Futures | 56.38 | -58.63 | -50.98 % |
| Natural Gas Futures | 6.32 | -1.82 | -22.37 % |
| 10-Yr Treasury Bond | 3.74 | -0.15 | -3.96 % |
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. Investing in small- and mid-cap stocks may be more risky and more volatile than investing in large-cap 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. 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 9/30/08:
JP Morgan Chase: All American Equity Fund (4.09%)
Archer-Daniels-Midland Co: (0.00%)
Sunoco Inc: (0.00%)
ProLogis: (0.00%)
Sprint Nextel Corp: (0.00%)
SPDR Gold Trust: Gold & Precious Metals Fund (4.37%), World Precious Minerals Fund (1.45%), Gold Resources Fund (0.09%), China Region Opportunity Fund (0.25%), All American Equity Fund (0.14%)
Morgan Stanley: (0.00%)
Marathon Oil: (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 Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.
(11) 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.
(12) The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
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 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
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