May 2008
» Energy and Commodities Trends—Sustainable or Speculative?
» Challenges Await Russia’s New President
» Energy Exuberance
» Financial regulators need to catch up to the industry
» Has Copper Topped?
» In Defense of Gold
May 14, 2008
Energy and Commodities Trends—Sustainable or Speculative?
It’s no secret that the world is hungry for resources—you see that every time you drive past a gas station. But it’s not just energy that’s soaring. Crop prices have also shot up despite more acreage being planted than ever before.
Should we blame short-term profiteers or long-term global trends? Are we on a course that may lead to $200 oil and $7 gas, or is today’s price merely a bubble soon to pop?
For insights into these important questions and more, join us on May 21 for our exclusive webcast Energy and Commodities Trends— Sustainable or Speculative?
Frank Holmes, CEO and chief investment officer, will be joined on the webcast by Brian Hicks, co-manager of the Global Resources Fund (PSPFX), and John Derrick, co-manager of the Global MegaTrends Fund (MEGAX).
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.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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.
May 13, 2008
Challenges Await Russia’s New President
The handpicked successor of former Russian President Vladimir Putin has taken his place at the Kremlin. The question now is whether Dmitry Medvedev can sustain the progress made under Putin’s leadership.
During those eight years, Russia used windfall oil profits to erase foreign debt and build up some of the world’s largest currency reserves. But while Russia’s standing has improved dramatically, Medvedev will have to address looming threats to the economy.
Foremost among them is inflation. Russia’s inflation rate exceeds 14 percent year over year, making it the highest by far among the BRIC countries: Brazil, Russia, India and China. In contrast, Brazil’s inflation rate is below 5 percent.
Another challenge facing Medvedev is stepping up private investment, particularly in the energy sector. The Russian oil industry is feeling the effects of years of underinvestment, but Medvedev has indicated that he would support greater private investment.
Despite the challenges, there are many reasons to be optimistic about Russia. The country boasts strong fundamentals, including budget and current account surpluses and substantial foreign reserves. And the installation of Medvedev as Putin’s successor—as well as Putin’s decision to stay on in the role of prime minister—has helped to eliminate political uncertainty. Russia’s economy is expected to grow by about 7 percent this year.
In perhaps one sign of Russia’s growing influence, Medvedev’s inauguration last week coincided with state-run natural gas producer OAO Gazprom becoming the world’s third-largest company by market value. In doing so, it surpassed China Mobile Ltd. and General Electric Co. Only Exxon Mobil Corp. and PetroChina Co. are bigger.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the commentary were held by one or more of U.S. Global Investors family of funds as of March 31, 2008: OAO Gazprom, China Mobile Ltd., General Electric, PetroChina Co.
May 12, 2008
Energy Exuberance
Commentary from Frank Holmes, CEO and chief investment officer
Oscillators allow our investment team the ability to track the movement of a stock or commodity through price and time and are based on the concept that prices move in waves.
The high and the low movements of the oscillator signify the overbought and oversold levels of stocks and/or commodities over different time periods. This helps investment professionals manage risks and opportunities and as we like to say simply “better manage expectations with a probability model.”
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
May 8, 2008
Financial regulators need to catch up to the industry
I saw an interesting commentary this week in the Financial Times that addresses a subject that’s on everyone’s mind these days but few are actually talking about publicly: how best to regulate the financial sector in the aftermath of the subprime debt crisis and the resulting credit squeeze that has damaged so many banks, brokerages, hedge funds and other instititutions.
FT columnist Martin Wolf says rightly that the current regulatory schemes have been left in the dust by the advances in complex financial derivatives, exposing both institutional and individual investors to high levels of systemic risk. Failure to fix this growing problem will only amplify that risk in the future.
He proposes a list that he dubbed “the seven C’s”. That list is below, along with a brief quote from his column for each one:
- Coverage—“Regulatory coverage must be complete. All leveraged institutions above a certain size must be inside the net.”
- Cushions—“Capital requirements must be the same across the entire financial system, against any given class of risks. But there must also be greater attention to the adequacy of that other cushion: liquidity.”
- Commitment—“Originators do not care sufficiently about the quality of loans they plan to offload on to others. … Originators should be required, therefore, to hold equity portions of securitised loans.”
- Cyclicality—“Existing rules are pro-cyclical. Capital evaporates in bad times, as a result of write-offs, thereby forcing contraction of lending, worsening the economic slowdown and further impairing assets.”
- Clarity—“A big challenge is to generate as much clarity as is possible. One issue is the calamitous recent role of the rating agencies and the conflicts of interest under which they operate.”
- Complexity—“Excessive complexity is a significant source of lack of clarity…One possibility then is to insist that all derivatives be traded on exchanges.”
- Compensation—“There are enormous rewards for successful trades and for loan originators. The mantra of aligning incentives seems to be lost in the failure to impose symmetrical losses.”
Whether or not regulators should sail forward on Mr. Wolf’s “Seven C’s” is open to debate, but his proposal is thoughtful and if nothing else a good place to start a broader conversation about what should be done to protect investors in the future.
Click here for the full article
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
May 7, 2008
Has Copper Topped?
Brian Hicks, co-manager of the Global Resources Fund (PSPFX), appeared this week on CNBC’s “Street Signs” to discuss copper with host Erin Burnett and Emcor CEO Frank MacInnis.
During the interview, Hicks was asked whether Chinese demand for the red metal might wane as inflation depresses the country’s construction market:
“The first quarter was quite strong for Chinese restocking of Shanghai inventories, but we think they may be on the sidelines here for the second quarter. We see that seasonally. We think in the second half of the year, we’ll see them start to restock once again as it looks like demand is still quite strong.”
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.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Holdings in the Global Resources Fund as a percentage of net assets as of 3/31/07: Emcor (0.00%).
May 2, 2008
In Defense of Gold
Commentary from Frank Holmes, CEO and chief investment officer, and John Derrick, director of research.
The price of gold has corrected by close to 20 percent since peaking on March 17. If you have been listening to the popular press and business TV, you may be convinced that the gold and commodity “bubbles” have popped.
Once you back away from the day-to-day noise and put things into perspective, this correction in gold, while painful in the short term, we believe is just another pause in a long-term secular bull market. As it has been said, bull markets climb a wall of worry.
Over the past year, gold bottomed around $640 per ounce in late June. As the financial crisis unfolded, it staged a spectacular rally, surging more than 60 percent to $1,032. Gold has since pulled back, but given that the long-term fundamentals remain intact, we believe it is setting the stage for the next leg up.
Here are some of the reasons why:
Negative real interest rates
The macro environment for gold is still supportive based on negative real interest rates. The one-year Treasury bill is offering just 2 percent, while the official inflation rate is around 4 percent.
Negative interest rates make gold look more attractive compared with other safe investment alternatives, such as T-bills and certificates of deposit.
We believe the Federal Reserve will keep interest rates below the rate of nominal economic growth in order to support a fragile economy in an election year.
Negative real rates between mid-2001 and spring 2005 powered gold’s biggest bull run in decades, with prices rising from $255 to $455 per ounce.
Real inflation is underreported
The official inflation rate is around 4 percent, but when you include the rapidly rising prices for food and energy and understated housing costs, the real inflation rate is even higher.
One of the best ways to protect yourself against inflation is to participate in it by investing in commodities such as oil and agricultural products. Historically, gold also has proven to be a viable hedge against rising inflation because it maintains its purchasing power.
We agree with those who estimate that the actual inflation rate is close to double digits due to the Fed’s massive injection of new money into the economy to avert a recession. MZM (money zero maturity), the amount of money in the economy that’s easily accessible for spending, is up 15 percent compared with the same time last year.
ETF redemptions
The current correction in gold has been led by sizable ETF redemptions.
The StreetTracks Gold Shares ETF (ticker GLD) lost 1.3 million ounces of gold over the past two weeks, with nearly a third of that amount being redeemed this Tuesday alone. This may mark the first-ever ETF-led gold correction.
This correction is not surprising, given the strong acceleration in the first quarter of 2008 and typical seasonal trends. Some short-term profit-taking is likely, along with speculation that prospects have improved in financials and technology.
But in our opinion, this move out of gold is not indicative of the smart money, as momentum investors chased performance on the way up. The price action appears to be signaling a rotation from weak gold holders, perhaps back into the broader equity market.
Other factors
On top of the factors above, there are other fundamental factors that we believe will drive the price of gold higher over the longer term.
Declining output from existing mines, particularly in South Africa, and a virtual absence of large new discoveries will reduce the supply of gold available in the market.
At the same time that gold supply is falling, demand is increasing due to rising wealth levels in China, India and other nations with cultural affinity for gold.
In addition, history suggests that jewelry demand, which fell off when gold surpassed the $1,000 mark, is likely to pick up again during a gold-price retrenchment.
It’s easy for investors to get swept up in the emotion of a strong rally or a significant correction. In these volatile times, we suggest that investors protect themselves from suboptimal decision-making by not losing sight of their long-term asset allocation strategy.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Diversification does not protect an investor from market risks and does not assure a profit.
The following security mentioned in the commentary was held by one or more of U.S. Global Investors family of funds as of March 31: StreetTracks Gold Trust.
April 2008
» Capital Expenditures Support Long-Term Commodities Trend
» China Rocketing Into Cyberspace
» Frank Talk blows out 1st birthday candle
» The Crude Cost of Gas
» How safe is your morning commute?
» Negativity Doesn’t Tell the Whole Story
» Investment Insights Snatched From The Headlines
» Global Infrastructure Remains a Powerful Theme
» America’s $480 billion water bill
» Disciplined Investing Brings Success
» Interesting Times for Commodities
» Lost Value
» Divergence Creates Opportunity
» Beyond the Barriers, India’s Future Looks Bright
» Emerging Middle Class Underpinning Demand for Commodities
» A Global Forecast for the 21st Century
April 29, 2008
Capital Expenditures Support Long-Term Commodities Trend
Commentary from Frank Holmes, CEO and chief investment officer, and John Derrick, director of research.
Many factors support long-term commodity prices and the current secular bull market in commodities. This is true across the commodity spectrum, from energy and metals to agricultural products.
According to the United Nations, the proportion of the world’s population living in urban areas will reach 50 percent this year. That urban population will be larger than the entire world population in 1965.
Growing cities will be a major driver for infrastructure creation. According to Booz Allen Hamilton, modernizing and enlarging water, electricity and transportation systems for all of the world’s cities would cost more than $40 trillion between 2005 and 2030.
Even as this urbanization has increased demand for commodities, supply is not keeping up. Copper prices have soared over the past few years; yet, actual new mine production has fallen well short of expectations. Global production of gold has fallen, despite rising prices.
Costs have increased. So have production lead times, due to power supply and regulatory issues. RBC Capital Markets analysts see “no end in sight for capital cost inflation.” Estimated capital costs have climbed at an annualized rate of more than 55 percent.
Mining companies operating in South Africa bear witness to these margin-squeezing trends. Since the beginning of the year, South Africa has been unable to meet demand for electricity. Companies now are operating at 95 percent of capacity; many have been forced to abandon some operations. Similar power shortages are taking shape in Chile and becoming a constraint on future development of projects.
Another example can be found in the Democratic Republic of Congo, as capital cost projections for the Tenke project have nearly doubled to $1.9 billion, up from the $1 billion that was initially budgeted.
In Canada, a stronger currency and “frictional barriers to new capacity” are cited by Citigroup analysts as reasons for increasing capitals costs and slow progress. One company originally budgeted $2 billion in capex for its Galore Creek project. The project ballooned to over $5 billion in a “capex blowout,” forcing the company to halt operations there and question the viability of other earlier stage projects.
Lower ore grades, difficult geology and the fact that many new deposits are in “unfriendly” places make significant supply increases unlikely for most commodities.
Even as companies have mobilized to meet the world’s growing need for commodities, these delays and disappointments have constrained supply. And increased capital expenditures have not necessarily translated into oversupply.
As Americans, we must be aware that 95 percent of the world’s population lives outside of North America and is striving for the same modern luxuries that we often take for granted—amenities such as heating and air conditioning, reliable electricity and efficient transportation. A global land grab is under way as countries like China and India shore up their commodity supplies, often in countries the United States has shunned. As resource prices rise, so has countries’ desire to take a bigger share of resource production, either through renegotiation or outright nationalism.
Frank recently traveled through Europe and witnessed first-hand the high cost of food and gasoline there. Paying between $9 and $11 a gallon for gasoline is the norm, even as the Euro has appreciated significantly. Europeans have adapted to these high costs, which suggests that, if necessary, Americans will be able to do the same.
The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the commentary were held by one or more of U.S. Global Investors family of funds as of March 31, 2008: Citigroup Inc.
April 28, 2008
China Rocketing Into Cyberspace
China is growing ever more connected to the rest of the world.
With 221 million Chinese online at the end of February, the country boasts the world’s largest number of Internet users, according to the latest government figures cited by the Xinhua news agency. China surpassed the United States to claim the top spot.
And if estimates bear out, another 60 million Chinese could be online by year-end.
China also has the world’s biggest population of wireless phone users. The government estimated that number at 540 million late last year.
The ranks of Chinese Internet users have plenty of room to grow: Sixteen percent of China’s total population is online, compared with a worldwide average of 19.1 percent, according to Xinhua.
Internet use is much higher in the United States, where an estimated 75 percent of adults are online. The rate for American teenagers is even higher.
The same growth potential exists for the wireless phone sector. China now has roughly one mobile phone in use for every 2.4 residents. That market penetration is only half that of the United States, where there’s one wireless phone for every 1.2 people.
These trends have enormous implications for China’s efforts to build out its infrastructure. As demand grows for the Internet and cell phones, China will have to expand its communications networks, and this will create investment opportunities.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
April 25, 2008
Frank Talk blows out 1st birthday candle
Investor education has long been a priority at U.S. Global Investors. We value the access we have to investors to talk about the opportunities and risks of investing in emerging markets and resources.
With that in mind, we created the Frank Talk blog a year ago. That’s a little hard to believe because the year has gone by so quickly.
Through Frank Talk, we reach out to investors and share our views on the markets, offer first-hand observations from our travels and pull back the curtain to show you how we think about investing.
Frank Talk, which won a STAR Award from the Mutual Fund Education Alliance just six months after its first posting, has ranged far and wide in its first year.
- It featured the “Letters from India” series, which detailed my first trip to India in a decade.
- From London, the managers of our Eastern European Fund (EUROX) provided insight into pivotal events in Russia and Turkey, including timely commentary on what was in store for Russia after Vladimir Putin’s presidency.
- Members of our portfolio team recounted trips to far-flung destinations that included Brazil, Germany and the Middle East, describing how their travels would benefit their investment processes.
- And we showed you what $1 million in gold looks like, discussed how the “Wisdom of Crowds” helps explain gold’s price climb and even tested your Traveler IQ.
Hopefully we’ve given you some insight into the often turbulent but always fascinating global marketplace. I hope that you’ll continue to visit Frank Talk in Year 2, and as always, feel free to send us your thoughts.
Click Here to Send Us Your Feedback
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.
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. 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.
April 23, 2008
The Crude Cost of Gas
Click on Image to view larger
Every gallon of gasoline sold at the pumps creates several revenue streams, and in these times of record prices, those streams have changed course from recent years.
Last month, the average gallon of gas sold for $3.24, and the accompanying graphic shows the breakdown of where that money goes. According to the federal Energy Information Administration, nearly 72 percent ($2.32) was needed just to cover the cost of the crude oil to make a gallon of gasoline, while 12 percent (40 cents) went to the various state and federal taxes and 8 percent (26 cents) each to the refiner as gross margin and for marketing/distribution. Benchmark crude oil averaged more than $105 per barrel (42 gallons) in March, so it’s little surprise that it was the dominant cost factor.
This is vastly different from March 2007, when the average gasoline price was $2.56 per gallon. At that time, the price of crude oil accounted for a little more than half of the per-gallon cost at the pump and nearly a quarter went to the refiners. Crude costs were far lower in the spring of 2007 and the gasoline market was extremely tight, creating a boon for refiners because there was a very wide spread between the cost for crude and the retail price of gasoline. This year’s skinnier margins have hammered the shares of refining companies that soared beginning in 2004.
And if you go back to March 2002, when the average gasoline price was $1.25 per gallon, crude oil was about 41 percent of the cost input and more than a third of each gallon went to the taxman. Because gasoline taxes are assessed at a fixed dollar amount, they have declined as a percentage as the retail gas price has skyrocketed.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
April 22, 2008
How safe is your morning commute?
We’ve discussed the infrastructure build-out taking place in Chindia and other emerging markets, but what about our own infrastructure? The U.S. went on a building boom from about 1900 to 1960 but those bridges, highways and waterworks are rapidly aging.
The latest issue of Popular Mechanics magazine includes a special report, called “Rebuilding America”, that focuses on the many leaks, cracks and potholes dotting America’s infrastructure landscape.
The report highlights ten projects to fix right away:
- O’Hare International Airport in Chicago — The hub to Midwest air travel had the most late departures during the first half of 2007 and it was also among the worst in near-misses on the runway.
- Sacramento River levees in California — The Army Corps of Engineers says many of the country’s riskiest levees are along the Sacramento River.
- Wolf Creek Dam in Kentucky — The limestone foundation of this mile-long dam is rapidly dissolving, threatening Nashville and other downstream communities.
- Dover Bridge in Idaho — This bridge in the Idaho Panhandle scored an abysmal 2 points out of a possible 100 in a recent inspection. That doesn’t stop some 5,000 vehicles from crossing it daily.
- Lake Okeechobee in Florida — An important dike could fail at any time. If it happens, 40,000 homes would be flooded and South Florida’s water supply contaminated.
- Alaskan Way Viaduct in Seattle — Nearly 110,000 vehicles travel the elevated roadway along Puget Sound each day despite earthquake damage to the road’s supports.
- Water System in Atlanta — Aging pipes leaked nearly 18 percent of the city’s supply last year.
- Industrial Canal Lock in New Orleans — Cargo ships use the lock to move between the Mississippi River with the Gulf Intracoastal Waterway. Repairs and improvements are expected to take 12 years and cost $800 million.
- Brooklyn Bridge in New York — America’s oldest suspension bridge needs repairs to its deteriorating road decks and cables.
- Circle Interchange in Chicago — A collection of curved ramps and converging highways is one of the nation’s worst traffic bottlenecks, responsible for an estimated 25 million hours in delays each year.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
April 21, 2008
Negativity Doesn’t Tell the Whole Story
Commentary from John Derrick, director of research
Economic news from this past month has been anything but optimistic. Negativity abounds; many experts have stated that the economy already is in a recession. At the very least, they say we are on the cusp of recession and things are about to get worse. Sentiment has been very poor, with numerous surveys of businesses or consumers hitting new lows—some even falling to multidecade lows. The media have fanned these flames, creating a self-reinforcing feedback loop that has impacted the psychology of the U.S. population as a whole.
With all of this negative news, it would be easy to assume that the stock market has not fared well over the past month. But that is not the case. The collapse of Bear Stearns occurred almost exactly one month ago, and that is also when the market bottomed. While it has been a volatile ride, the market has risen by 8.9 percent since March 17. In two of the past three weeks, the S&P 500 has risen by more than 4 percent.
How has the market been able to rally as gloom and doom fills the airwaves and newspapers? As we have discussed in this forum in recent weeks, the Federal Reserve and policymakers have pulled out all the stops to avert a financial crisis and economic recession. The chart titled, “M3 Money Supply”, illustrates how the Fed has aggressively pumped money into the financial system. This is a global phenomenon, as the chart titled “Global Broad Money” shows. In simple terms, as money supply grows, it needs to find a “home.” In the current environment, bond yields are relatively unattractive, and real estate still faces many uncertainties. Therefore, stocks and commodities look like better “homes,” when it comes to earning a reasonable return on those dollars.
I’ve already touched on sentiment, and that also has played a significant role in the current market rally. A Washington Post/ABC News survey released this week found that almost nine in 10 people questioned had a negative view of the economy. A Reuters/University of Michigan poll a couple weeks ago saw similar results. My point is that the pessimism likely has reached an extreme. We saw this with earnings results this week. Several large financial companies reported and missed earnings estimates and took billions of dollars in charges, but the stocks rallied in the face of what appeared to be very negative news. The market had just become too negative in its outlook and was expecting even worse news, so it took the actual results in stride.
Additionally, the global growth story that has been so powerful over the last several years remains intact. China’s first-quarter gross domestic product advanced 10.6 percent, and many of the positive comments from companies reporting this week centered on strong international growth. These comments came from a diverse group of companies that included General Electric, Caterpillar, Google and Coca-Cola, just to mention a few.
We often talk about the opportunities that present themselves when markets move to extremes. The current example is more qualitative than we normally would discuss, but it appears a sentiment reversal is in the works.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The following securities mentioned in the commentary were held by one or more of U.S. Global Investors family of funds as of March 31, 2008: General Electric.
April 18, 2008
Investment Insights Snatched From The Headlines
A couple of oil stories in the Wall Street Journal this week provide great context to discuss investing from both the top down and the bottom up.
One of the stories was headlined “Russian Oil Slump Stirs Supply Jitters,” and it went on to say that Russia’s oil production was down in the first quarter of 2008 compared to a year earlier, and that the country’s natural resources minister thinks production for the full year could also be lower than 2007. Russia’s case illustrates a wider problem—non-OPEC oil production is flat since 2005 despite crude’s hasty ascent above $100 a barrel.
We’ve long talked about the fundamental macro challenge for the oil industry—new supply is not keeping up with new demand, most of it from China, India and other rapidly growing economies in Asia and the Middle East.
A massive build-out of infrastructure in these emerging nations is a key component of this demand for oil, metals, cement and other industrial materials. And ironically, one of the factors cited for Russia’s declining oil production is inadequate infrastructure in areas where large, untapped reservoirs may lie.
Russia’s oil production may rebound, but that doesn’t change the global supply-demand imbalance that looms in the not-too-distant future. This imbalance also pertains to other commodities, including agriculture, and it gives us confidence that the secular bull market for natural resources will endure.
The second WSJ story, “Petrobras Reports Major Offshore Oil Find,” provides some early details of a deepwater discovery off the Brazilian coast that could contain as much as 33 billion barrels. At that size, it would be the equivalent of nearly three Prudhoe Bays.
Sure, such a huge source of new crude could help offset declining production elsewhere around the world. I mention it, however, for another reason. While the Russia story related to “top-down” macro concerns (the world’s largest oil-producing nation is dealing with lower output), the Petrobras story shows the importance of “bottom-up” stock picking.
Petrobras (ticker PBR) is mostly owned by the Brazilian government, and it has long been a core holding of U.S. Global Investors’ high-performing Global Resources Fund (ticker PSPFX).
Petrobras appeals to us because it fits the “return on capital” model—it has attractive per-share growth in reserves (this is its second big discovery in as many years), production and cash flow.
We view this return on capital model as critical in selecting natural resource stocks. In the case of oil, high prices are generally good for the industry, but not all companies are created equal. Companies with superior return on capital compared to peers provide greater value to investors, and to be a top-performing fund, it’s crucial to find these superior stocks. This is where a good active manager has the opportunity to add value for fund shareholders.
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.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Holdings in the Global Resources Fund as a percentage of net assets as of 3-31-08: Petrobras 3.23%.
April 17, 2008
Global Infrastructure Remains a Powerful Theme
Julian Mayo, co-manager of U.S. Global Investors’ Eastern European Fund (EUROX), appeared this week on CNBC’s “Street Signs” to discuss infrastructure in emerging markets with host Erin Burnett.
During the interview, Julian cited the Middle East to highlight the strong connection between infrastructure needs and increased foreign reserves for emerging economies:
“In the Middle East…you’ve got an economy which as a composite has a GDP around $700 or $800 billion and yet you’ve got foreign exchange reserves over one trillion dollars. So the infrastructure spending plans, which … are also somewhere around 700 or 800 billion dollars, they could write a check today for their entire infrastructure spending for the next three or four years…That’s going to basically mean that you’re going to see huge infrastructure spending…huge continued demand for steel for the construction industry.”
We’ve written in Frank Talk about the infrastructure build-out in Dubai, Qatar and elsewhere in the Middle East.
And here’s a link to our research report on global infrastructure, which we see as one of the dominant drivers in the global growth story.
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.
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. 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.
April 16, 2008
America’s $480 billion water bill
Water is easy to take for granted: You turn on the tap, and there it is.
But it takes extensive infrastructure to deliver drinking water to homes. And those drinking-water systems are badly in need of repair.
The Environmental Protection Agency puts the cost of those repairs at more than $277 billion over the next two decades. Water industry engineers believe the cost will be much higher: $480 billion.
A spokesman for the American Water Works Association recently told the Associated Press that, while the problem hasn’t reached crisis stage, “each year the problem is put on the back burner, the price tag is going to go up.”
Already, water rates are rising nationwide to help pay for repairs. And some projects have begun. New York, for example, began digging a new $6 billion tunnel decades ago. When it is completed in 2020, it will create an alternative source of water delivery.
According to the American Water Works Association, 92 percent of the cities surveyed by the industry group planned to make major capital investments in water infrastructure between 2005 and 2009.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
April 11, 2008
Disciplined Investing Brings Success
We’ve been recognized once again for the outstanding performance of our funds.
Two of our funds received 2008 Lipper Fund Awards this week at a ceremony in New York City. You can find details of these latest achievements here.
I believe that our investment culture deserves much of the credit for these and other honors that we’ve received. We rely not on individual superstars but on a team approach to investing. Our team is disciplined, monitoring macro drivers and micro factors for stock selection while using statistical models to manage emotions.
We strive to capture opportunities while navigating the many risks associated with global investing. We cannot control the markets; what we can control is how consistently we execute our investment processes every day.
We’re seeing a lot of skepticism and negative sentiment in the market right now. Some are questioning just how strong the global demand for commodities is. We don’t share that skepticism, and we continue to see powerful demand from Chindia and other emerging markets.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
April 10, 2008
Interesting Times for Commodities
We’ve just published the spring 2008 edition of our Shareholder Report. In it, our enduring themes—the rise of emerging markets and the secular bull market for commodities—are connected to our newest focus: global infrastructure.
I make the connections in my letter to shareholders. Our global strategist, Jack Dzierwa, also contributed an article, “The Case for Infrastructure,” that describes the crumbling state of the world’s infrastructure in more detail and explores investment opportunities that may arise as a result. Another article, “Resources and Emerging Markets in ’08,” offers a recap of 2007 and a preview of what’s to come this year.
You can find this and other editions by going to the Shareholder Report link on our homepage.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
April 9, 2008Feeling the pinch of higher prices at the gas pump and the grocery store? Take note: It could be a lot worse.
The current issue of Condé Nast Portfolio magazine offers an overview of six world currencies that have been “inflated beyond reason.”
Zimbabwe has seen its inflation rate surpass 100,000 percent this year. Compare that with the United States, where inflation in excess of 4 percent is cause for concern. Zimbabwe’s newly released 10-million-dollar note is worth about $3.90 in the U.S., according to the magazine.
A U.S. embargo in the early 1980s led to price controls and the printing of excess currency in Vietnam, where a 500,000-dong note has a U.S. value of $31.37. And, in Indonesia, the rupiah lost 80 percent of its value during the 1997 Asian financial crisis. A 100,000-rupiah note is worth $11.05 in the U.S.
Other countries that made Portfolio’s list: Iran, São Tomé and Príncipe, and Guinea.
Click here to view the slideshow on Portfolio’s Web site
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
April 7, 2008
Divergence Creates Opportunity
Commentary from Evan Smith, co-manager of the Global Resources Fund (PSPFX).
Savvy investors have profited for several years from rising commodities prices by investing in the companies that explore for, develop, and produce valuable resources such as oil, copper, gold and coal.
Yet, during the first quarter of 2008, we witnessed a breakdown of the strong correlation between natural resources stocks and the prices of the underlying commodities. As the chart below illustrates, the major commodities all gained during the quarter while the natural resources stocks gained at a slower pace or even dropped in price.
The greatest equity underperformance was for coal stocks—the price of spot coal rocketed up 46 percent, but coal stocks as a whole fell nearly 10 percent in the quarter. The same trend was seen for natural gas, industrial metals and precious metals. Crude oil was up about 6 percent, but the related stocks fell better than 6 percent.
Natural resources stocks have some of the best earnings growth and the lowest valuations in the entire stock market. So what’s the problem? Why are the stocks not enjoying the commodity price gains?
The Financial Times ran a story in late March that shed some light on the issue. The story said that investors worldwide pulled close to $100 billion out of equity funds in the first three months of 2008. To raise cash for those redemptions, fund managers had to sell resources stocks despite rising commodity prices and better earnings prospects. The scale of these sales drove down stock prices.
Basically, instead of seeing their value reflect high commodity prices, the resources stocks behaved more like the broad stock market, which as we all know is enduring the weight of the many challenges facing the economy.
We see this divergence between commodity prices and resources stocks as a temporary scenario, though one can’t know how long it will last. What we do know is that the long-term demand drivers for higher commodities prices remain intact, largely due to rapid economic growth in developing countries like China and India.
The value of resources equities will eventually catch up to the underlying commodities, so we believe this divergence creates an excellent opportunity for investors to acquire natural resources stocks at bargain prices.
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.
Past performance is no guarantee of future results. Index performance cited is not indicative of the performance of any specific investment.
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. The Bloomberg United States Coal Index is a capitalization-weighted index of the leading coal stocks in the United States. The ISE-REVERE Natural Gas Index consists of securities that derive a substantial portion of their revenues from the exploration and production of natural gas. The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the TSX. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. 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 Oil Service HOLDRS Index is a per-share value of the securities underlying one share of Oil Service HOLDRS, which trades on the AMEX under the symbol OIH. It includes companies that provide drilling, well-site management and related products and services.
April 4, 2008
Beyond the Barriers, India’s Future Looks Bright
Jack Dzierwa, global strategist for U.S. Global Investors, recently visited the Indian cities of Delhi and Mumbai for the four-day Citi India Conference 2008. Here are some of his observations:
India has tremendous promise, but it must rise above many challenges to reach its potential.
The numbers tell the story: India’s middle and upper classes comprise an estimated 350 million people—a number that already exceeds the entire U.S. population and continues to grow. That’s the good news. The bad news is that there are more than 400 million Indians who can’t read or write.
That dichotomy is apparent everywhere you look. The conference hotel in Mumbai was the equal of any on Park Avenue in Manhattan. But immediately outside its doors were scenes of unimaginable poverty.
An advantage that India will have going forward is its entrepreneurial spirit. India’s people and companies are well-represented among the titans of the business world. Lakshmi Mittal heads up ArcelorMittal, the world’s largest steel company, while Mumbai-area native Vikram Pandit was recently named CEO of Citigroup. Tata, Infosys Technologies and Reliance Industries are among the ranks of multinational companies based in India.
If India builds up infrastructure and finds an effective process for alleviating poverty, I believe it will present vast opportunities for investment.
Click here to read the rest of Jack Dzierwa’s observations
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of Dec. 31, 2007: Citigroup.
April 3, 2008
Emerging Middle Class Underpinning Demand for Commodities
Jack Dzierwa, global strategist, recently appeared on CNBC’s “Power Lunch” to discuss second quarter outlook for emerging markets with the hosts and Joyce Chang, head of emerging markets research at JP Morgan. During the interview, Jack discusses political events occurring in countries like Russia and Colombia that could benefit the economies of each.
Jack also explains the significance of India’s middle class for commodities:
“What we are seeing…in India, is the growth of the middle class that is underpinning the domestic demand for commodities, but also for the [consumer durable] goods…and we are seeing the growth in auto loans in countries like Brazil—which is linked to the growth in car sales.”
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. None of U.S. Global Investors family of funds held any of the securities mentioned in this commentary as of Dec. 31, 2007.
April 2, 2008
A Global Forecast for the 21st Century
I recently read an enlightening article in Time magazine’s online edition called “Common Wealth” that offers a number of dramatic predictions of how the global economy may change in the 21st century.
The well-known economist and writer Jeffrey Sachs, who teaches at Columbia University, identifies a number of “earth-changing trends unprecedented in human history” that will mark the current century:
- The world is getting much richer in terms of average income per person, and that the developing world is rapidly gaining on the developed world. That said, extreme poverty will continue to afflict many millions.
- Global population growth will drive up output at a pace such that total economic production will rise several-fold by 2050.
- The same population increase and corresponding rise in consumption will also profoundly alter the environment. Climate change will be part of the impact, along with more crowding in habitable areas.
We have often discussed the same global trends—the huge population and dynamic growth in Asia. China and India alone comprise nearly 40 percent of humanity, and they are growing their economies at or near double-digit annual rates. Professor Sachs foresees Asia overtaking the North Atlantic region (North America and Western Europe) as the world’s economic center.
The challenges and the opportunities are many as this global shift takes place.
Click here to read Professor Sachs’ article
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
March 2008
» Fed Policies Are Aimed at Deflationary Risks
» Needed: More Hands on Deck (And In The Engine Room)
» Palladium’s Time to Shine?
» Chindia’s Growing Global Footprint
» Commodities Bull Still Running
» Wall Street’s Wild Week
» Russia After Putin: Does the Growth Continue?
» Geologist shortage creates rocky road for miners
» Balancing a Portfolio with Commodities
» Pakistan Has Potential Amid Many Challenges
» Bullion At $1,000, But What About Gold Stocks?
» The New Oil Consumers
» Africa’s Economic Engine Overheats
» Feeding the Petroleum Engineering Pipeline
March 31, 2008
Fed Policies Are Aimed at Deflationary Risks
Commentary from John Derrick, director of research at U.S. Global Investors.
Shortly after the 9/11 attacks in 2001, when fear reigned over Wall Street and the broader U.S. economy, the Federal Reserve used the discount window to provide low-interest liquidity to keep things from grinding to a halt.
The move proved a big hit with the risk-averse financial sector—nearly $12 billion was borrowed in a single week, and in short order the economy started rebounding.
The Fed has thrown open the discount window again in response to the current financial turmoil arising from the subprime mortgage crisis. This time around, the borrowings are even greater.
In the week ended March 19, nearly $29 billion was loaned, and in the latest week, another $8.6 billion was handed through the discount window.
We hear much about the inflationary risks now facing the economy—anyone who goes grocery shopping or fills up a car at the gas pump sees how much prices have risen in recent months. Some have criticized the Fed for loosening money supply, saying it will further contribute to inflationary pressures.
But the discount window actions make clear that the Fed is more concerned about the risk of deflation. The latest reports indicate that real estate prices will continue to tumble across the country and housing-related derivatives have lost much of their value, costing banks and brokerages billions in losses and in some cases threatening their very survival.
These reports are among the data pointing toward a deflationary scenario of the sort that has mired the once-galloping economy of Japan for most of the past two decades. The government is working hard to keep that dire scenario from coming true on this side of the Pacific.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
March 28, 2008
Needed: More Hands on Deck (And In The Engine Room)
We’ve recently noted that there’s a shortage of geologists and petroleum engineers. Add another human constraint on the commodities trade: cargo ships without enough officers and engineers.
Shippers worldwide have scrambled in recent years to expand their fleets to meet demand for transporting iron ore, copper, coal and other bulk materials.
A shipbuilding frenzy is under way, but according to a Financial Times story this week, the industry is having trouble finding enough senior seafarers to command them and keep their engines running smoothly. The unmet need for masters and engineers could number in the tens of thousands.
In the Financial Times article, an official with a maritime group in The Philippines succinctly summarizes the problem: “It takes 10 years to build a captain; it takes only two years to build a ship.”
As in the case of geologists and reservoir engineers, the limited talent pool is driving up salaries.
The Financial Times story refers to one employer in Manila offering $6,000+ per month for a ship master or chief engineer. A first mate can make up to $4,500 monthly—that’s close to the median income for a Filipino family for a year.
We often talk about the many factors that can slow down the development of new natural resource projects—construction delays, complicated permitting processes, property disputes, environmental worries and more.
A lack of ship officers is yet another supply-side obstacle that could support high commodity prices.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
March 27, 2008
Palladium’s Time to Shine?
Platinum has long been considered the desirable one in the family. But the world is getting better acquainted with the sensible sister, palladium.
At about $450 an ounce, palladium is a cheap date compared with platinum, which costs more than four times as much. And palladium isn’t bad-looking, either.
The world’s largest producers of the metal announced this month that they’re planning to market palladium jewelry in the United States and China. A similar campaign for platinum has been around since 1975.
It wouldn’t be the first time jewelers have turned to palladium. During World War II, platinum was declared a strategic metal and reserved for military use. As a result, it wasn’t uncommon to see palladium rings used in wartime weddings.
But designs were limited because palladium couldn’t be cast effectively at that time, so jewelry designers went back to using platinum after the restrictions were lifted.
Casting techniques for palladium have improved in recent years. But the metal hit another snag: Platinum group metals are used in catalytic converters, which reduce pollution from automobile emissions, and U.S. automakers turned to palladium as a cheaper alternative to platinum during the late 1990s.
That, coupled with supply disruptions, pushed the price of an ounce of palladium up to nearly $1,100 in late 2000. Even before it hit that peak, Professional Jeweler Magazine asserted that the price run-up made palladium “totally impractical for use in jewelry.”
But with platinum’s price so lofty—and gold quite costly as well—at many a wedding this year, the deal will be sealed with palladium.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
March 26, 2008
Chindia’s Growing Global Footprint
Frank Holmes was recently interviewed for Barron’s online video on key factors driving the global infrastructure buildout. In the interview, Frank discusses the demand 6.5 billion people will generate for natural resources and how Chindia is changing the resources landscape:
“China and India…are experiencing this phenomenal growth and to create jobs, they are building infrastructure. So steel, cement, power plants need copper...65 percent of the world’s copper demand is going for power plants in China, not for cars and houses as the housing market slows down here…It’s booming in Chindia.”
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
March 25, 2008
Commodities Bull Still Running
As we have discussed in recent weeks, gold and the dollar were both due for a reversal. Last week, we got that reversal.
Is the commodities “bubble” over? We hear these types of questions on any abrupt pullback in commodity markets. We heard the same questions in the spring of 2006, but the commodity supercycle continued.
We continue to believe that we are in the midst of a secular bull market for commodities. But, as with any bull market, this one is not immune from sharp countertrend reversals such as the one seen this past week.
The foundation for this supercycle was laid in the 1990s as capital moved to technology, media, telecom and the Internet. In retrospect, we can see that the technology-media-telecom – or TMT – space enjoyed too much access to capital, while the commodity space suffered underinvestment. As a result, supply cannot be brought online quickly today, even as demand continues to grow.
With the commodity markets roughly in balance, any supply delay, project disappointment or logistical disruption causes prices to move higher.
The demand driver behind this enormous appetite for commodities from China, India, Russia, Brazil, the Middle East and many other developing economies is the massive infrastructure build-out that is taking place worldwide.
In regards to when this cycle might end, we are not seeing changes today. We experienced exaggerated volatility last week, but the long-term fundamental outlook for gold, oil and other commodities remains strong.
For the full commentary, click here
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
March 20, 2008
Wall Street’s Wild Week
Commentary from John Derrick, director of research at U.S. Global Investors:
Despite having been cut short by a Friday holiday, this trading week was particularly action-packed.
The tumult began before the markets opened for the week. On Sunday, JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for $236 million, or $2 a share—less than one-tenth of Bear Stearns’ market value at the close of the prior week. Bear Stearns had unraveled rapidly that week as its liquidity evaporated.
Benchmark indices saw a large rally on Tuesday. They began climbing on news of higher-than-expected profits at Goldman Sachs and Lehman Brothers and continued their ascent after the Fed slashed the federal funds rate by three-quarters of a percentage point.
Wednesday was particularly eventful. Shares of Visa Inc. made their stock market debut after the credit card company’s IPO. Also that day, a federal regulator eased a major restriction on Fannie Mae and Freddie Mac. And a number of dollar-denominated commodities—including gold and oil—plummeted Wednesday and continued to fall on Thursday. Investors had flocked to commodities as the dollar weakened, but recent Fed actions seem to have stabilized the dollar.
Long before commodities’ slide this week, we had highlighted that both gold and the dollar were extended and due for a reversal. We believe that what happened Wednesday and Thursday with gold and oil was a normal and healthy correction, of the sort that takes place during long-term bull markets.
For the full commentary from John Derrick, click here
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. None of U.S. Global Investors family of funds held any of the securities mentioned in this commentary as of Dec. 31, 2007.
March 19, 2008
Russia After Putin: Does the Growth Continue?
Julian Mayo, co-manager of the Eastern European Fund (EUROX), hosted a March 5 webcast “Russia After Putin” to discuss what lies ahead for a country bidding farewell to a widely popular leader and saying hello to his handpicked successor. On the call, Mayo addressed many key issues:
On Russia’s Oil-Rich Economy
“If the oil price even goes down to $45, $50, Russia would still have a surplus, so the Russian economy is in that respect pretty bulletproof from a global perspective.”
On Embracing Small Business
“What I think they’ll do will be to try to reduce the red tape that’s always been, let’s face it, in most emerging countries and allow businesses to flourish and to be able to get on with the business of business rather than the business of filling in complex bureaucratic obligations.”
On Russia’s Democratic Process
“However flawed the democratic process may be in Russia, it's certainly a good deal better than anything they've had in the history of the country and a good deal better than they have in many other countries in the world.”
Click here to view the entire presentation
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.
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.
March 19, 2008
Geologist shortage creates rocky road for miners
Tight capital, permitting delays, high development costs—these are among the factors that can create big challenges for mining companies. Add to that list a shortage of geologists.
A recent Bloomberg story said that newly minted geologists are making nearly $100,000 right out of school, up nearly 50 percent from 2004.
The future looks even brighter for geologists with mining experience—they’re pulling down close to the $115,000 salary that the average Harvard MBA receives out of school.
And with Wall Street being squeezed by the current financial crisis, new Ivy League MBAs may find a tougher job market than a new rock jock.
Bloomberg quotes the U.S. Labor Department as predicting that the number of geologist jobs will increase by 22 percent by 2016, a growth rate that’s double the average of all occupations.
Canada expects to have 1,200 geology graduates in 2008, according to the government, well short of the 9,000 skilled positions to be filled. That gap may widen further, given that a number of mining companies are expecting many workers to retire in the near term.
Australia’s mining employment is up around 60 percent in the past five years, and an industry group anticipates that 70,000 additional workers will be needed by 2015.
It’s not just geologists that are in high demand—there’s also a dearth of mining engineers and other skilled professionals, and they too are seeing higher wages as a result.
Last year, with the prices of hard commodities at or near record levels, global mining companies announced more than 1,000 new projects with an estimated value exceeding $300 billion, according to an industry analyst quoted by Bloomberg.
What a difference from the 1990s, when the prices of commodities were beaten down, most new projects didn’t make economic sense and job opportunities were virtually non-existent.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
March 18, 2008
Balancing a Portfolio with Commodities
With all of the volatility we’re seeing in 2008, this is one of those times when investors really value assets that are not correlated to the broader markets.
That explains much of the current interest in commodities—investors are looking for ways to protect themselves through diversification. Investments in commodities are expected to exceed $200 billion this year, according to Barclays Capital. That compares with $178 billion in 2007.
A recent survey found that about a third of institutional investors plan to have more than 10 percent of their portfolios in commodities in the next three years, despite today’s prices that are at or near record levels. That number is up from about 20 percent in 2007.
More than half of these institutional investors say portfolio diversification is their main interest in commodities.
For the full commentary from Frank Holmes, click here
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of December 31, 2007.
March 17, 2008
Pakistan Has Potential Amid Many Challenges
Jack Dzierwa, global strategist for U.S. Global Investors, was in Mumbai, India, on March 10 for the Citi Pakistan Investor Day 2008. Here are some of his observations from the conference:
Just months after the assassination of Benazir Bhutto stunned the country, optimism about Pakistan’s future is growing.
Many at Citi Pakistan Investor Day 2008 were encouraged by the results of elections held last month. Pakistan’s two main opposition parties routed allies of President Pervez Musharraf. There are hopes that the coalition government will strengthen democracy.
Pakistan’s gross domestic product has grown at a five-year compound annual growth rate of 7.5 percent. The country’s markets are driven largely by local retail investors, which account for 60 percent of daily volume.
Advertising revenue has grown by 30 percent in each of the past four years as telecom and other companies seek to tap Pakistan’s growing middle class.
Power shortages are emerging as a challenge; Pakistan’s installed capacity is insufficient by 15 percent. Investment in this area is likely. Another concern is food inflation, which has lifted overall inflation to 8 percent.
One critical question about Pakistan’s future is whether the army will promote modernization or stifle it. It has been said that most countries own their armies, but in Pakistan, the army owns the country.
It’s also important to remember that, despite the recent elections, Pakistan’s road to democracy will be challenging. We were reminded of this when, a day after the Citi conference, two dozen people were killed when bombs exploded in the city of Lahore.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following security mentioned in the commentary was held by one or more of U.S. Global Investors family of funds as of Dec. 31, 2007: Citigroup Inc.
March 13, 2008
Bullion At $1,000, But What About Gold Stocks?
Frank Holmes recently spoke with Resource Investor on key factors driving gold. During the interview, Frank discusses how deflation may be a greater threat than inflation, the evolution of commodities as an asset class, and how high energy costs and the subprime crisis have hampered gold stocks despite bullion’s climb to $1,000 an ounce.
He also discusses the possibility of industry consolidation in the near future:
“As the bifurcation gets greater between those that are producers, big cap versus mid cap, mid cap versus small cap, you’re going to get the Pac-Man. The big cap’s going to buy the mid cap, so my price-to-book is at a high level. Then I’m going to buy a mid cap because it’s cheaper and safer to buy another company than it is to explore or develop resources. That mid cap is going to run out and buy a junior, and the junior’s going to buy a developer.”
To listen to the interview or read a full transcript, click here
U.S. Global has also created an interactive presentation “What’s Driving Gold,” which identifies the factors that can lead to higher gold prices. Click here to see that presentation.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
March 11, 2008
The New Oil Consumers
Global oil demand continues to grow, but the United States is no longer the reason.
Total U.S. oil use was essentially flat for 2007, rising just 0.05 percent, according to the latest numbers from the Energy Information Administration. That follows a decline in 2006, when oil consumption decreased by 0.6 percent.
Worldwide numbers aren’t yet available for 2007. But global oil demand grew steadily in each of the prior 10 years.
These days, growth is seen in Asia and the Middle East. China’s oil consumption exceeded 7.4 million barrels per day in 2006, double its level from a decade earlier, according to the EIA. In the same time frame, oil demand increased by 30 percent in the Asia-Pacific region and by 36 percent in the Middle East.
U.S. oil consumption grew by 12 percent during that decade.
The U.S. remains the world’s leading per capita oil consumer, using 25 barrels of oil per person per day. By comparison, China uses two barrels per person per day.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
March 6, 2008
Africa’s Economic Engine Overheats
John Derrick and Jack Dzierwa, co-managers of the Global MegaTrends Fund (MEGAX), recently attended the 13th annual Mining Investment in Africa Indaba in Cape Town, South Africa, weeks after the country experienced severe power outages. Here are some observations from their trip:
Q: Was there any sign of the power outages that have plagued South Africa recently?
Derrick: I didn’t see any firsthand; I think the most significant outages occurred a couple weeks before we arrived. But it was obviously a topic in the news. Everyone was talking about it. By the time we got there, they already had shut down some mines and other big power users and were managing the problem better. Still, it sounds like a situation that won’t get resolved anytime soon. The takeaway is that it’s probably negative for the South African rand and positive for precious metals prices. I think gold and platinum prices will be impacted, and potentially prices for coal and diamonds.
To read the rest of the interview with Mr. Derrick and Mr. Dzierwa, please click here
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.
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.
March 5, 2008
Feeding the Petroleum Engineering Pipeline
Low oil prices for most of the past two decades have created a shortage of skilled engineers during this time of $100 crude.
More than half of the petroleum engineers in the United States are in their mid-40s and older, according to Society of Petroleum Engineers statistics.
With half of their intellectual capital likely to walk out the door in the next 15 years, oil companies fear a knowledge gap at a time when experience really matters. Finding and extracting new sources of crude is more difficult and more technically complex, and mistakes can be very expensive.
This supply-demand imbalance is good news for today’s petroleum engineering graduates, some of whom are pulling down six-figure salaries right out of school. Compare that to the starting salaries for computer science grads ($56,000) and those with finance degrees ($47,000).
The problem in the oil patch dates back to the mid-1980s, a time of falling prices and massive industry layoffs. Interest in petroleum engineering fell off abruptly—from a peak of 11,000 P.E. students in 1983 to a low of around 1,400 just seven years later, according to research from Raymond James. Today, the P.E. enrollment is about 3,700, more than double the bottom but 66 percent down from the top.
While a rising student count will help in the long term, the steep learning curve of petroleum engineers complicates short-term solutions. It takes five to 10 years to learn the job, so this year’s crop of graduates won’t hit their stride for some time to come.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
February 2008 Frank Talk
» CalPERS Is Talking Up Commodities
» U.S. Global Investors webcast: Russia after Putin
» A Sign of Strength Coming from Emerging Markets
» Energy and Natural Resources Power Portfolio
» Hedge funds amplify market volatility
» Bond Yields Revert to the Mean
» Asia’s $2 Trillion Infrastructure Play
» Kung Hei Fat Choy—Year of the Rat
» “Wisdom of Crowds” helps explain gold’s price climb
» G.E. Harnessing India's Brainpower
February 29, 2008
CalPERS Is Talking Up Commodities
The nation’s largest pension fund is talking up commodities, and others in that industry are probably listening closely.
The $240 billion California Public Employees’ Retirement System, which first invested in commodities in a small way last year, now says it may increase its exposure to as much as $7.2 billion through 2010.
The reason? CalPERS cites fast-growing demand in emerging markets and the need for better infrastructure for production and distribution of energy worldwide.
CalPERS offers some of the same evidence that we’ve been highlighting for years. It points to the significant disparity in oil consumption between developed and emerging nations. As countries like China and India develop, their oil consumption will rise.
It also takes notice that worldwide investment in energy infrastructure has been “perilously” low since the early 1980s, which affects the ability to bring on new supply. About $20 trillion in new capital expenditure on energy infrastructure is needed between now and 2025.
CalPERS has a long track record for being a trendsetter among pension funds, so other multibillion-dollar funds are likely paying attention to CalPERS’ words and deeds.
Having an organization of CalPERS’ size and stature making the bullish case for commodities—it applies not just to energy, but also metals and soft commodities—adds a booming voice to the choir.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
February 28, 2008
U.S. Global Investors webcast: Russia after Putin
What will happen in Russia after Vladimir Putin gives up the presidency? Will the country’s remarkable growth continue? Where will the investment opportunities be?
Julian Mayo, co-manager of the Eastern European Fund (EUROX), appeared on CNBC’s “Street Signs” this week to discuss the economic impact of Russia’s presidential election, scheduled for March 2. Dmitri Medvedev, Putin’s hand-picked successor, is expected to win in a landslide.
Here’s Julian’s take:
“Relative to other emerging markets for 2007, it was a bit of a laggard for a change. And I think that’s partly because of re-election worries. Now it’s pretty clear that Medvedev—he’s the anointed successor—he’s going to win a handsome majority in the election this weekend. And I think the political uncertainty’s going to be off from this weekend, and I think that Russia has a very good chance of a substantial rally for the next 12 months.”
Julian will lead a post-election webcast on Wednesday, March 5, to speak in greater detail about Russia after Putin. Register for this exclusive U.S. Global Investors presentation below:
To see Julian’s CNBC appearance on Russia, click here
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.
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.
February 26, 2008
A Sign of Strength Coming from Emerging Markets
Recession fears have been front-page news for several months now, and they have been especially intense over the past few weeks. Housing remains under pressure, subprime problems continue to spread and there is a general pessimism about the future direction of the economy.
Economic data have deteriorated in recent months and the Fed has aggressively cut interest rates, but there are signs of strength that should not be dismissed. Our view remains that strength in emerging economies will continue to power global growth and keep the U.S. and the rest of the world out of a recession.
The chart to the right illustrates recent strength in copper prices. Copper hit an 18-month high this week, and it is not far from the all-time high set in 2005. Additionally, it was announced Monday that Japanese and Korean steelmakers had agreed to a 65 percent price increase for iron ore from Brazil. Oil prices rose above $100 this week, hitting an all-time high. This strong price action in commodities is not consistent with a slowing global economy.
If the economy is sliding into a recession, why are these core economic building blocks seeing such strength? The charts below tell the story. Infrastructure spending in China is growing by about 50 percent; in India, it’s growing by about 60 percent. The rest of Asia also is growing briskly. This chart does not even include the infrastructure booms that are taking place in the Middle East and Russia.
The U.S. economy has slowed in recent months. But, contrary to what you hear in the media, we believe odds of a recession are much lower than is commonly believed. Emerging markets are a significant driver of global growth that is much less dependent on the U.S. consumer than many realize.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
February 25, 2008Energy and Natural Resources Power Portfolio
Evan Smith, co-manager of the Global Resources Fund (PSPFX), recently appeared on CNBC’s “The Call” to discuss his top picks within the energy and natural resources sector.
To view a replay of the appearance click here
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.
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.
February 21, 2008
Hedge funds amplify market volatility
If it wasn’t clear to you just how big and powerful the hedge fund industry has become, consider this: a single hedge fund company accounts for 5 percent of all U.S. equity trading.
This is from a Bloomberg story, which cites statistics from the Connecticut-based consulting firm Greenwich Associates.
Citadel Investment Group, headquartered in Chicago, is identified as generating 5 percent of all equity trades in 2007. D.E. Shaw, a hedge fund in New York, accounted for up to 2 percent of trades on the New York Stock Exchange.
The U.S. stock market has struggled in 2008, but that apparently hasn’t dented the trading volume. The value of shares traded in the U.S. in January was a record for any month, according to the Bloomberg story.
Some market watchers say a big part of the reason is the growth of hedge funds, most of which take both long and short positions, so they can make money in bull or bear markets.
Bloomberg quoted the head of the NYSE Euronext exchange as saying “a large part of the participants right now don’t really care whether the market is going up or down.”
This opportunistic trading earns money for the brokerages, many of which are suffering from subprime-related issues, but it adds more volatility to markets that are already being whipsawed.
Volatility is not by definition bad—it can create opportunities for investors who act with conviction. It’s important, however, that investors have a well-thought-out system and the discipline to manage their emotions. This helps raise their “margin of safety”, as Warren Buffett puts it, and improves their chances of making money in turbulent markets.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
February 19, 2008
Bond Yields Revert to the Mean
When change comes, it often comes quickly—the volatility of the past six months has reminded investors that you can’t become complacent.
At U.S. Global Investors, we work to manage this volatility by using tools that quantify the magnitude of price moves, which helps manage our emotions. We have shared some of these tools with you in recent weeks, and now is a good time to review.
Three weeks ago, we highlighted the situation in the Treasury market in which the yields on the 10-year Treasury had fallen two standard deviations based on a 60-day rate of change. We used the chart on the upper-right to illustrate just how far the yields had slid.
At that time, the market had rallied strongly and appeared to have reached an extreme, indicating caution was in order. Since that time, bond yields have risen 22 basis points even as the Fed cut interest rates by 50 basis points in late January, placing them in “neutral” territory, as you can see on the chart on the lower-right.
We’re not revisiting this topic in order to pat ourselves on the back, but rather to show investors that volatility is not necessarily to be feared. Volatility creates opportunities for investors who understand history and therefore can act with conviction when opportunities arise.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
February 13, 2008
Asia’s $2 Trillion Infrastructure Play
Over the next five years, Asia’s infrastructure spending will exceed $2 trillion, according to CLSA Asia-Pacific Markets, Asia’s leading independent brokerage and investment group. The U.S. Global Accolade Global MegaTrends Fund (MEGAX) is focused on the worldwide infrastructure boom. Jack Dzierwa, one of the fund’s managers, recently attended the CLSA Asia Investors’ Forum in Las Vegas.
Q: Why are Asian governments accelerating infrastructure creation?
A: Top politicians are becoming more and more aware that better infrastructure is an absolute must in order to continue economic growth. How can you have growth if you do not have airports or ports that can handle the traffic coming in and out of the country? How can you have growth if you do not have roads that can transport goods and services? India’s finance minister recently said that the country must ramp up infrastructure spending to sustain its 9 percent annual growth.
To read the rest of the interview with Mr. Dzierwa, please click here
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.
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.
February 8, 2008
Kung Hei Fat Choy—Year of the Rat
Are you a charismatic leader? A forward thinker? An energetic charmer?
These are among the qualities ascribed to those born in the Year of the Rat, the first year of the Chinese zodiac, which started this week.
Rats include former president Jimmy Carter, wanted-to-be president Al Gore and still-wants-to-be president John McCain, not to mention singer/activist Bono and actor/director/activist Robert Redford, and the late civil rights activist Rosa Parks.
Victoria Harbor, Hong Kong
China kicked off a 15-day celebration of its new year with firecrackers and massive parades - the photo below shows the pyrotechnics show over Victoria Harbor, with Hong Kong’s skyscraping downtown as the backdrop.
This is not just any old Year of the Rat—it’s the Year of the Earth Rat. Earth is one of five basic elements—along with gold, water, wood and fire—that further define expectations in the year to come. The last time the Year of the Earth Rat rolled around was six decades ago—the Dow was under 200, Harry Truman was in the White House, and both Europe and Asia were both early in their recovery from the ravages of World War II.
We don’t issue horoscopes, but here are some thoughts from CLSA Asia-Pacific Markets on the Year of the Earth Rat:
The Year of the Earth Rat symbolizes a new beginning. Hence, it is an appropriate time to start new ventures, new ideas and new plans as there will be an abundance of chances for achievement and success. Although it may not generally be spectacular, 2008 will be a year of possibilities and a time of progress. People with risk appetite could be disappointed—nevertheless, everyone should add some new essentials to their life.
Here are some fun facts about the Chinese New Year:
- The Year of the Rat is formally known as “Wu Zi.”
- Chinese refrain from using knives or scissors on New Year’s Day to prevent them from cutting off their fortune.
- The tradition of popping fireworks at the stroke of midnight is said to welcome in the New Year by sending the past year away.
- The fifth day of celebration, Po Woo, is an homage to the God of Wealth. Visiting family or friends on this day is said to bring them bad luck.
The Chinese are, of course, hoping for a prosperous year highlighted by the Summer Olympic Games in Beijing. Calendar year 2008 may be off to a rough start for investors, but it’s still early. We remain confident that the dramatic Chinese growth story will continue in the coming year.
Xin nian kuai le (Happy New Year)
This commentary was also published in U.S. Global Investors “Weekly Investor Alert.” We encourage Frank Talk readers to sign up here for this free newsletter. Click here to read this week’s edition.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
February 7, 2008
“Wisdom of Crowds” helps explain gold’s price climb
The recent climb in gold prices reminds me of an enlightening book I read a few years ago called “The Wisdom of Crowds.” The book’s basic premise is that “large groups of people are smarter than an elite few.”
The book identifies the following four factors that create the “wise crowd.” The current activity in gold fits well with these factors.
Diversity of opinion: There are many plausible ways to explain why gold is an attractive investment in the current environment: gold’s positive correlation to the price of oil, its inverse relationship to the dollar, rising wealth and demand in emerging markets, the unknown depth of the escalating derivative crisis, prospects of a U.S. recession, and more. Then there’s the question of whether to buy bullion, gold stocks, gold funds and gold ETFs. With so many variables, investors can believe in gold and still have differences of opinion on the “why” and the “how.”
Independence: Believing in gold does not derive from a fixed formula and it is not a managed process. Investors acting in their own best interests take in what they see as relevant information from a variety of sources and analyze it to arrive at an individual viewpoint that they can act on. This independence minimizes the chances of crowd madness.
Decentralization: One doesn’t have to show up at a designated place to get information about gold or to buy it. Gold believers are scattered around the world, and along with the readily available information in print and online, they can make local observations that add to their knowledge base. Someone in Nevada can note that a local gold mine is hiring more workers, while someone else in Mumbai can see if more people are patronizing the local gold jewelry shops.
Aggregation: Once information is gathered and analyzed by a wide range of self-interested investors located across the continents, global markets present a venue for both believers and non-believers to act. So do local gold-coin shops and jewelers.
To read the full commentary explaining how
“The Wisdom of Crowds” helps explain gold’s price climb,
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Frank Holmes recently traveled to India for the first time in 10 years. This is a six-part series offering some of his thoughts and experiences.
February 1, 2008
G.E. Harnessing India's Brainpower
One of the main reasons for my trip to India was to visit the Jack Welch Technology Center in Bangalore. The center is the worldwide hub of technology and innovation for the General Electric Co.
Dr. Guillermo Wille, born in Bolivia and raised in Germany, is the center’s managing director. Dr. Wille is the only non-Indian working at the center.
For the first time in GE’s history, it will sell more internationally than in the U.S. GE is growing revenue at $17 billion per year through its six business lines: industrial, infrastructure, healthcare, commercial finance, NBC and GE Money. Annual revenue in India alone is approaching $3 billion.
GE’s history in India dates back more than a century. It built India’s first hydroelectric project in Karnataka in 1902 and built the nation’s first nuclear power plants in the 1960s.
So why choose India to be the base for the company’s research and development? The research and development potential in India is massive and less expensive than operating in the U.S. or Europe. The cost of employing a quality scientist or engineer in India is only one-third to one-fourth of the cost in the U.S.
GE invested $120 million to build the 7.6-million-square-foot facility that spans 50 acres and houses 3,500 scientists, engineers and researchers. Sixty percent of the scientists have advanced degrees, and 20 percent have global experience. Since 2000, more than 600 patents have been filed by the Bangalore center alone.
One project I found interesting is a new high-energy-absorbing material called Pedestrian Safety Bumpers. Developed for European and Japanese automakers, the material would allow a pedestrian to walk away after being hit at 40 mph.
GE also has made it a point to give back to the community. The company has a large number of volunteers and has adopted eight local schools. They reach 1,000 kids per day all around the campus.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. As mentioned in the commentary, the following securities were held by one or more of U.S. Global Investors’ clients as of December 31, 2007: General Electric Co.