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Healthy correction no surprise The Nasdaq has just had the most powerful six-month run in its 15-year history. It is normal for stocks to have price corrections of up to 50 percent after running up 100 percent in only six months. However, this is extremely difficult to stomach when it is happening to the entire Nasdaq Index. For example, Bloomberg’s index of e-commerce companies has halved since its December 1999 peak of 157.53, erasing about $84 billion in market value. Mix this dizzying roller coaster ride with the phenomenon of bifurcation, namely the movement in opposing directions of “old economy” blue chips and “new economy” start-ups and technology stocks, and even veteran market watchers are left feeling a little confused. The tried-and-true business models are being challenged on a daily basis by new models and faster delivery systems, namely the Internet. 
Our statistical analysis indicated that the Nasdaq market was due for a correction. Since
interest rates are expected to increase approximately 50 basis points over the next three
months, we believe this combination will create a choppy market bottom. Earnings continue to
be healthy and robust, which has many long-term benefits for patient investors. Remember
earnings drive the market over the long term. Fads may come and go, while bottom-line, consistent
and rising earnings are what sustain bull markets and winning stocks.
I am enthusiastic about the positive changes created by the Internet and believe that it will provide opportunities for intelligent investing. The Internet will also be the channel through which old business models are destroyed. Many investors who play the Internet game on margin – and have little or no understanding of the difference between “business-to-consumer” (B2C) and “business-to-business” (B2B) Internet delivery models – have been wiped out by margin calls. Prudent mutual fund investors, however, who diversify and invest regularly will continue to reap the benefits over time of their consistent investing in both up and down markets. That is why you need a good investment team working for you to separate the gems from the gravel. Diversify with the ABC Investment Plan.® As enticing as double and even triple-digit returns can be, chasing hot sectors is dangerous. That’s why we continue to advocate a disciplined approach to investing by diversifying your investments into different asset classes and building your equity by investing regularly. It is impossible to accurately and consistently guess the peak in interest rates, the bottom of the stock market, or the revenue of a company. As the table shows, there are only three sectors in the last twenty years when a hot sector outperformed in the following year. However, it is possible to navigate through this uncertainty by using the ABC Investment Plan® and diversifying your investment classes.(1) Positives abroad and in technology We’ve been on the road quite a lot lately, talking to executives representing various industries, overseas economies and political persuasions, all in an attempt to gauge investment strategies and bring you, our shareholders, the information you need to make informed decisions. On page 4 of this Report, you’ll find our “China Special Report” prepared by China Region Opportunity Fund portfolio team members. They acted as our “eyes and ears” on a fact-finding trip to China and Southeast Asia, and they have compiled some fascinating insights.(2) Because key developing economies of the world have not previously been in a position to introduce the Internet and high-speed communications technologies, they are starting out with the latest and best technology available. These regions, including Eastern Europe and the China/Southeast Asia markets, are being flooded with capital as the U.S. and other developed economies flock to these emerging markets. In the rush to make themselves attractive to their new partners, these regional economies are installing the latest sophisticated hardware and communications infrastructure. Information technology, especially legacy systems, are a virtual dinosaur. Business transactions of all types are moving to the Internet, and companies are transforming the way they conduct business to meet customers’ heightened expectations of immediacy in everything. We’ve also taken stock of the technology developments transpiring worldwide, not just as they apply to potential investments for our funds but also as they apply to the way we work to support our shareholders’ financial goals. After all, our bottom line states, “We passionately believe that our ability to deliver superior performance is the key to attracting assets and creating prosperity for everyone.” U.S. Global is getting out in front of this new Internet-based model. We are restructuring internally to bring you better, faster customer-oriented products and services, delivered via the Internet to your computer. Stay tuned, as we bring you word of ongoing developments. As this Shareholder Report goes to press, we are putting the finishing touches on applications that will allow you to make purchases online. Remain bullish on U.S. It appears that the market is fearful of inflation and the uncertainty caused by not knowing when interest rates will peak. Add to this the disruptions caused by new technologies imposed on old business methods, and you have a very volatile market. Nevertheless, and more importantly, the U.S. is still the same robust global economic engine and continues to lead in innovation and conservative government spending policies. So, long term, we remain bullish on the U.S. and its contributions to global prosperity. We expect choppiness over the next six months, which should provide a great opportunity to invest in leading, growing companies. We also believe this is a healthy correction in the Nasdaq, because it is removing the speculative fever in overvalued Internet stocks. We remain focused on companies that demonstrate growth in earnings but are undervalued relative to their peer groups. This strategic model will guide us through these downdrafts in the marketplace. So, long term, stay bullish, stay diversified, and invest regularly and consistently and you will increase your opportunity to build wealth for a happy retirement future. |
Sincerely,
Frank Holmes Chairman & CEO |
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(1) A program of regular investing
doesn’t assure a profit or protect
against loss in a declining market.
You should evaluate your ability to
continue in such a program in view of
the possibility that you may have to
redeem fund shares in periods of
declining share prices as well as in
periods of rising prices.
(2) Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. |
